10-Q 1 sji-33115x10q.htm SJI 3.31.15 10-Q SJI-3.31.15-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to __________________

Commission File Number 1-6364

SOUTH JERSEY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New Jersey
 
22-1901645
(State of incorporation)
 
(IRS employer identification no.)
1 South Jersey Plaza, Folsom, NJ 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant’s telephone number, including area code)
 
Common Stock
 
 
($1.25 par value per share)
 
New York Stock Exchange
(Title of each class)
 
(Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x   No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   x
 
Accelerated filer      o
Non-accelerated filer     o (Do not check if a smaller reporting company)
 
Smaller reporting company      o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
As of May 1, 2015 there were 34,228,382 shares of the registrant’s common stock outstanding.




TABLE OF CONTENTS
 
 
PageNo.
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1.
Item 1A.
Item 6.
 
 
 



Item 1. Unaudited Condensed Consolidated Financial Statements
 
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
 
Three Months Ended
March 31,
 
2015
 
2014
Operating Revenues:
 
 
 
Utility
$
266,530

 
$
210,329

Nonutility
116,422

 
139,872

Total Operating Revenues
382,952

 
350,201

Operating Expenses:
 

 
 

Cost of Sales - (Excluding depreciation)
 

 
 

 - Utility
144,974

 
103,077

 - Nonutility
96,733

 
125,061

Operations
41,861

 
39,350

Maintenance
3,998

 
3,259

Depreciation
16,819

 
14,991

Energy and Other Taxes
2,196

 
1,953

Total Operating Expenses
306,581

 
287,691

Operating Income
76,371

 
62,510

 
 
 
 
Other Income and Expense
2,241

 
2,368

Interest Charges
(8,601
)
 
(7,084
)
Income Before Income Taxes
70,011

 
57,794

Income Taxes
(16,613
)
 
(11,869
)
Equity in Earnings of Affiliated Companies
455

 
2,286

Income from Continuing Operations
53,853

 
48,211

Loss from Discontinued Operations - (Net of tax benefit)
(276
)
 
(313
)
Net Income
$
53,577

 
$
47,898

 
 
 
 
Basic Earnings Per Common Share:
 

 
 

Continuing Operations
$
0.79

 
$
0.74

Discontinued Operations

 
(0.01
)
Basic Earnings Per Common Share
$
0.79

 
$
0.73

 
 
 
 
Average Shares of Common Stock Outstanding - Basic
68,397

 
65,530

 
 
 
 
Diluted Earnings Per Common Share:
 

 
 

Continuing Operations
$
0.79

 
$
0.74

Discontinued Operations

 
(0.01
)
Diluted Earnings Per Common Share
$
0.79

 
$
0.73

 
 
 
 
Average Shares of Common Stock Outstanding - Diluted
68,618

 
65,684

 
 
 
 
Dividends Declared Per Common Share
$
0.25

 
$
0.24


The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. All share and per share amounts were adjusted for the 2-for-1 stock split, effected in the form of a stock dividend, effective on May 8, 2015. See Note 1.
 
 
 
 

1


SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
 
 
Three Months Ended
March 31,
 
2015
 
2014
Net Income
$
53,577

 
$
47,898

 
 
 
 
Other Comprehensive Income, Net of Tax:*
 

 
 

 
 
 
 
Unrealized Gain on Available-for-Sale Securities
88

 
62

Unrealized Gain on Derivatives - Other
8

 
66

Other Comprehensive Loss of Affiliated Companies
(95
)
 
(18
)
 
 
 
 
Other Comprehensive Income - Net of Tax*
1

 
110

 
 
 
 
Comprehensive Income
$
53,578

 
$
48,008

 
 
 
 

* For 2015, determined using a combined average statutory tax rate of 40%. For 2014, determined using a combined statutory tax rate of 41%.

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

2


SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
 
 
Three Months Ended
March 31,
 
2015
 
2014
Net Cash Provided by Operating Activities
$
34,936

 
$
49,232

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Capital Expenditures
(54,307
)
 
(60,254
)
Net Proceeds from Sale of Restricted Investments in Margin Account
4,829

 
7,444

Purchase of Available-for-Sale Securities
(6,059
)
 

Investment in Long-Term Receivables
(4,658
)
 
(2,053
)
Proceeds from Long-Term Receivables
1,808

 
1,981

Purchase of Company Owned Life Insurance
(356
)
 
(230
)
Investment in Affiliate
(717
)
 

Advances on Notes Receivable - Affiliate
(1,265
)
 
(342
)
Repayment of Notes Receivable - Affiliate
275

 
3,228

 
 
 
 
Net Cash Used in Investing Activities
(60,450
)
 
(50,226
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net Borrowings from (Repayments of) Short-Term Credit Facilities
26,700

 
(29,600
)
Proceeds from Issuance of Long-Term Debt

 
30,000

Payments for Issuance of Long-Term Debt

 
(210
)
Proceeds from Sale of Common Stock
1,857

 
5,157

 
 
 
 
Net Cash Provided by Financing Activities
28,557

 
5,347

 
 
 
 
Net Increase in Cash and Cash Equivalents
3,043

 
4,353

Cash and Cash Equivalents at Beginning of Period
4,171

 
3,818

 
 
 
 
Cash and Cash Equivalents at End of Period
$
7,214

 
$
8,171


The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

3


SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
Property, Plant and Equipment:
 
 
 
Utility Plant, at original cost
$
2,042,333

 
$
2,002,966

Accumulated Depreciation
(419,223
)
 
(413,597
)
Nonutility Property and Equipment, at cost
626,875

 
622,079

Accumulated Depreciation
(84,524
)
 
(77,345
)
 
 
 
 
Property, Plant and Equipment - Net
2,165,461

 
2,134,103

 
 
 
 
Investments:
 

 
 

Available-for-Sale Securities
15,245

 
8,922

Restricted
60,623

 
65,451

Investment in Affiliates
67,754

 
68,351

 
 
 
 
Total Investments
143,622

 
142,724

 
 
 
 
Current Assets:
 

 
 

Cash and Cash Equivalents
7,214

 
4,171

Accounts Receivable
322,803

 
251,892

Unbilled Revenues
63,547

 
62,608

Provision for Uncollectibles
(9,383
)
 
(7,910
)
Notes Receivable - Affiliate
15,921

 
14,657

Natural Gas in Storage, average cost
38,925

 
63,246

Materials and Supplies, average cost
2,112

 
2,125

Deferred Income Taxes - Net
56,696

 
57,748

Prepaid Taxes
4,429

 
14,106

Derivatives - Energy Related Assets
52,441

 
85,368

Other Prepayments and Current Assets
25,453

 
18,686

 
 
 
 
Total Current Assets
580,158

 
566,697

 
 
 
 
Regulatory and Other Noncurrent Assets:
 

 
 

Regulatory Assets
335,009

 
357,160

Derivatives - Energy Related Assets
15,402

 
13,905

Unamortized Debt Issuance Costs
9,449

 
9,795

Notes Receivable - Affiliate
36,525

 
36,799

Contract Receivables
21,607

 
19,236

Notes Receivable
7,882

 
7,882

Other
61,607

 
61,124

 
 
 
 
Total Regulatory and Other Noncurrent Assets
487,481

 
505,901

 
 
 
 
Total Assets
$
3,376,722

 
$
3,349,425

 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

4


SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
March 31,
2015
 
December 31,
2014
Capitalization and Liabilities
 
 
 
Equity:
 
 
 
Common Stock
$
85,530

 
$
85,418

Premium on Common Stock
440,882

 
438,384

Treasury Stock (at par)
(284
)
 
(330
)
Accumulated Other Comprehensive Loss
(30,257
)
 
(30,258
)
Retained Earnings
475,614

 
439,218

 
 
 
 
Total Equity
971,485

 
932,432

 
 
 
 
Long-Term Debt
859,491

 
859,491

 
 
 
 
Total Capitalization
1,830,976

 
1,791,923

 
 
 
 
Current Liabilities:
 

 
 

Notes Payable
272,400

 
245,700

Current Portion of Long-Term Debt
149,909

 
149,909

Accounts Payable
221,230

 
272,998

Customer Deposits and Credit Balances
16,052

 
17,958

Environmental Remediation Costs
38,186

 
30,430

Taxes Accrued
9,197

 
2,328

Derivatives - Energy Related Liabilities
81,779

 
109,744

Dividends Payable
17,191

 

Interest Accrued
6,578

 
7,088

Pension Benefits
1,515

 
1,550

Other Current Liabilities
7,584

 
12,480

 
 
 
 
Total Current Liabilities
821,621

 
850,185

 
 
 
 
Deferred Credits and Other Noncurrent Liabilities:
 

 
 

Deferred Income Taxes - Net
356,380

 
344,520

Investment Tax Credits
111

 
149

Pension and Other Postretirement Benefits
98,232

 
115,373

Environmental Remediation Costs
90,159

 
97,742

Asset Retirement Obligations
42,599

 
42,502

Derivatives - Energy Related Liabilities
24,522

 
19,926

Derivatives - Other
12,036

 
10,732

Regulatory Liabilities
66,526

 
41,899

Finance Obligation
19,420

 
19,659

Other
14,140

 
14,815

 
 
 
 
Total Deferred Credits and Other Noncurrent Liabilities
724,125

 
707,317

 
 
 
 
Commitments and Contingencies  (Note 11)


 


 
 
 
 
Total Capitalization and Liabilities
$
3,376,722

 
$
3,349,425

 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

5


 Notes to Unaudited Condensed Consolidated Financial Statements

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

GENERAL - South Jersey Industries, Inc. (SJI or the Company) currently provides a variety of energy related products and services primarily through the following subsidiaries:

South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG distributes natural gas in the seven southernmost counties of New Jersey.

South Jersey Energy Company (SJE) acquires and markets natural gas and electricity to retail end users and provides total energy management services to commercial and industrial customers.

South Jersey Resources Group, LLC (SJRG) markets natural gas storage, commodity and transportation assets on a wholesale basis in the mid-Atlantic, Appalachian and southern states.

South Jersey Exploration, LLC (SJEX) owns oil, gas and mineral rights in the Marcellus Shale region of Pennsylvania.

Marina Energy, LLC (Marina) develops and operates on-site energy-related projects.

South Jersey Energy Service Plus, LLC (SJESP) services residential and small commercial HVAC systems, installs small commercial HVAC systems, provides plumbing services and services appliances under warranty via a subcontractor arrangement as well as on a time and materials basis.

SJI Midstream, LLC was formed in 2014 to invest in a project to build a 100-mile natural gas pipeline in Pennsylvania and New Jersey.

BASIS OF PRESENTATION — The condensed consolidated financial statements include the accounts of SJI, its wholly-owned subsidiaries and subsidiaries in which SJI has a controlling interest. SJI eliminates all significant intercompany accounts and transactions. In management’s opinion, the condensed consolidated financial statements reflect all normal and recurring adjustments needed to fairly present SJI’s financial position, operating results and cash flows at the dates and for the periods presented. SJI’s businesses are subject to seasonal fluctuations and, accordingly, this interim financial information should not be the basis for estimating the full year’s operating results. As permitted by the rules and regulations of the Securities and Exchange Commission (SEC), the accompanying unaudited condensed consolidated financial statements contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These financial statements should be read in conjunction with SJI’s 2014 Annual Report on Form 10-K for a more complete discussion of the Company’s accounting policies and certain other information.

On February 26, 2015, the Board of Directors approved an amendment to SJI's Certificate of Incorporation to increase the authorized number of shares of common stock from 60,000,000 shares to 120,000,000 shares. The principal purpose of the increase is to permit a two-for-one split of all the issued shares of SJI's common stock, to be effected pursuant to a stock dividend of one share of common stock for each outstanding share of common stock, payable May 8, 2015 to shareholders of record at the close of business on April 17, 2015. All references to number of shares and per share information in the condensed consolidated financial statements and related notes have been retroactively adjusted to reflect this stock split.

REVENUE AND THROUGHPUT-BASED TAXES — SJG collects certain revenue-based energy taxes from its customers. Such taxes include New Jersey State Sales Tax and Public Utilities Assessment (PUA). State sales tax is recorded as a liability when billed to customers and is not included in revenue or operating expenses. The PUA is included in both utility revenue and energy and other taxes and totaled $0.6 million and $0.4 million for the three months ended March 31, 2015 and 2014, respectively.
 
IMPAIRMENT OF LONG-LIVED ASSETS - SJI reviews the carrying amount of long-lived assets for possible impairment whenever events or changes in circumstances indicate that such amounts may not be recoverable. For the three months ended March 31, 2015 and 2014, no impairments were identified.


6


GAS EXPLORATION AND DEVELOPMENT - The Company capitalizes all costs associated with gas property acquisition, exploration and development activities under the full cost method of accounting. Capitalized costs include costs related to unproved properties, which are not amortized until proved reserves are found or it is determined that the unproved properties are impaired. All costs related to unproved properties are reviewed quarterly to determine if impairment has occurred. No impairment charges were recorded during the three months ended March 31, 2015 or 2014. As of both March 31, 2015 and December 31, 2014, $8.9 million related to interests in proved and unproved properties in Pennsylvania, net of amortization, is included with Nonutility Property and Equipment and Other Noncurrent Assets on the condensed consolidated balance sheets.
 
TREASURY STOCK – SJI uses the par value method of accounting for treasury stock. As of March 31, 2015 and December 31, 2014, SJI held 227,432 and 263,578 shares of treasury stock, respectively. These shares are related to deferred compensation arrangements where the amounts earned are held in the stock of SJI.

INCOME TAXES — Deferred income taxes are provided for all significant temporary differences between the book and taxable bases of assets and liabilities in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740 - “Income Taxes”.  A valuation allowance is established when it is determined that it is more likely than not that a deferred tax asset will not be realized. Investment tax credits related to renewable energy facilities of Marina are recognized on the flow through method, which may result in variations in the customary relationship between income taxes and pre-tax income for interim periods.

NEW ACCOUNTING PRONOUNCEMENTS — Other than as described below, no new accounting pronouncement issued or effective during 2015 or 2014 had, or is expected to have, a material impact on the condensed consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the presentation of discontinued operations on the statements of income and other requirements for reporting discontinued operations. Under the new standard, only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results should be reported as a discontinued operation. This ASU also requires additional disclosures about discontinued operations and disposal of an individually significant component of an entity that does not qualify for discontinued operations. The new accounting guidance is effective prospectively to all disposals or classifications as held for sale of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The revised guidance should not be applied to a component of an entity or a business that is classified as held for sale before the effective date. As such, the adoption of this guidance did not have an impact on the Company's financial statement results.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), This ASU supersedes the revenue recognition requirements in FASB ASC 605, Revenue Recognition, and in most industry-specific topics. The new guidance identifies how and when entities should recognize revenue. The new rules establish a core principle requiring the recognition of revenue to depict the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The new guidance requires management of a company to evaluate whether there is substantial doubt about the company's ability to continue as a going concern. This ASU is effective for the annual reporting period ending after December 15, 2016, and for interim and annual reporting periods thereafter, with early adoption permitted. The Company does not expect this standard to have an impact on its consolidated financial statements upon adoption.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810)—Amendments to the Consolidation Analysis, which changes the analysis to be performed in determining whether certain types of legal entities should be consolidated. Specifically, the standard amends the evaluation of whether (a) fees paid to a decision maker or a service provider represent a variable interest, (b) a limited partnership or similar entity has the characteristics of a Variable Interest Entity ("VIE") and (c) a reporting entity is the primary beneficiary of a VIE. The standard is effective for annual periods beginning after December 15, 2015 and interim periods therein, with early adoption permitted. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.


7


In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The standard is effective for annual periods beginning after December 15, 2015 and interim periods therein. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

2.
STOCK-BASED COMPENSATION PLAN:

Under the Amended and Restated 1997 Stock-Based Compensation Plan (Plan), shares may be issued to SJI’s officers (Officers), non-employee directors (Directors) and other key employees. This plan terminated on January 26, 2015. On January 23, 2015, the Board of Directors approved a new stock-based compensation plan. The new plan was approved by shareholders on April 30, 2015. No options were granted or outstanding during the three months ended March 31, 2015 and 2014.  No stock appreciation rights have been issued under the plan. During the three months ended March 31, 2015 and 2014, SJI granted 151,354 and 136,526 restricted shares, respectively, to Officers and other key employees under the 1997 plan prior to its termination.  Performance-based restricted shares vest over a three-year period and are subject to SJI achieving certain market and earnings-based performance targets as compared to a peer group average, which can cause the actual amount of shares that ultimately vest to range from between 0% to 200% of the original share units granted. In 2015, SJI also granted time-based shares of restricted stock, one-third of which vests annually over a three-year period and is limited to 100% payout if the service requirement is met. In January 2015, Officers and other key employees were granted 45,406 shares of time-based restricted stock, which are included in the shares noted above.

Grants containing market-based performance targets use SJI's total shareholder return (TSR) relative to a peer group to measure performance. As TSR-based grants are contingent upon market and service conditions, SJI is required to measure and recognize stock-based compensation expense based on the fair value at the date of grant on a straight-line basis over the requisite three-year period of each award. In addition, SJI identifies specific forfeitures of share-based awards, and compensation expense is adjusted accordingly over the requisite service period. Compensation expense is not adjusted based on the actual achievement of performance goals. The fair value of TSR-based restricted stock awards on the date of grant is estimated using a Monte Carlo simulation model.

Through 2014, grants containing earnings-based targets were based on SJI's earnings per share (EPS) growth rate relative to a peer group to measure performance. Beginning in 2015, earning-based performance targets include predefined EPS and return on equity (ROE) goals to measure performance. As EPS-based and ROE-based grants are contingent upon performance and service conditions, SJI is required to measure and recognize stock-based compensation expense based on the fair value at the date of grant over the requisite three-year period of each award. The fair value is measured as the market price at the date of grant. The initial accruals of compensation expense are based on the estimated number of shares expected to vest, assuming the requisite service is rendered and probable outcome of the performance condition is achieved. That estimate is revised if subsequent information indicates that the actual number of shares is likely to differ from previous estimates. Compensation expense is ultimately adjusted based on the actual achievement of service and performance targets.

During the three months ended March 31, 2015 and 2014, SJI granted 25,398 and 23,220 restricted shares, respectively, to Directors.  Shares issued to Directors vest over twelve months and contain no performance conditions. As a result, 100% of the shares granted generally vest.


8


The following table summarizes the nonvested restricted stock awards outstanding at March 31, 2015 and the assumptions used to estimate the fair value of the awards:

 
Grant Date
 
Shares Outstanding
 
Fair Value Per Share
 
Expected Volatility
 
Risk-Free Interest Rate
Officers & Key Employees -
Jan. 2013 - TSR
 
49,514

 
$
22.19

 
21.1
%
 
0.40
%
 
Jan. 2013 - EPS
 
49,514

 
$
25.59

 
N/A

 
N/A

 
Jan. 2014 - TSR
 
62,192

 
$
21.31

 
20.0
%
 
0.80
%
 
Jan. 2014 - EPS
 
62,192

 
$
27.22

 
N/A

 
N/A

 
Jan. 2015 - TSR
 
42,378

 
$
26.31

 
16.0
%
 
1.10
%
 
Jan. 2015 - EPS, ROE, Time
 
108,976

 
$
29.47

 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
Directors -
Jan. 2015
 
25,398

 
$
29.34

 
N/A

 
N/A

 

 


 


 


 



Expected volatility is based on the actual volatility of SJI’s share price over the preceding three-year period as of the valuation date. The risk-free interest rate is based on the zero-coupon U.S. Treasury Bond, with a term equal to the three-year term of the Officers’ and other key employees’ restricted shares. As notional dividend equivalents are credited to the holders during the three-year service period, no reduction to the fair value of the award is required. As the Directors’ restricted stock awards contain no performance conditions and dividends are paid or credited to the holder during the requisite service period, the fair value of these awards are equal to the market value of the shares on the date of grant.

The following table summarizes the total stock-based compensation cost for the three months ended March 31, 2015 and 2014 (in thousands):

 
Three Months Ended
March 31,
 
2015
2014
Officers & Key Employees
$
799

$
581

Directors
186

158

Total Cost
985

739

 
 
 
Capitalized
(91
)
(70
)
Net Expense
$
894

$
669


As of March 31, 2015, there was $6.8 million of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under the Plan. That cost is expected to be recognized over a weighted average period of 2.1 years.

The following table summarizes information regarding restricted stock award activity during the three months ended March 31, 2015, excluding accrued dividend equivalents:

 
Officers &Other Key Employees
 
Directors
 
Weighted
Average
Fair Value
Nonvested Shares Outstanding, January 1, 2015
223,876

 
23,220

 
$
24.40

  Granted
151,354

 
25,398

 
$
28.69

  Cancelled/Forfeited
(464
)
 

 
$
24.13

  Vested

 
(23,220
)
 
$
27.26

Nonvested Shares Outstanding, March 31, 2015
374,766

 
25,398

 
$
26.13



9


Performance targets during the three-year vesting period were not attained for the January 2011 grant that vested at December 31, 2013 or the January 2012 grant that vested at December 31, 2014. As a result, no shares were awarded in 2014 or 2015. During the three months ended March 31, 2015 and 2014, SJI granted 25,398 and 23,220 shares to its Directors at a market value of $0.7 million and $0.6 million, respectively. The Company has a policy of issuing new shares to satisfy its obligations under the Plan; therefore, there are no cash payment requirements resulting from the normal operation of the Plan. However, a change in control could result in such shares becoming nonforfeitable or immediately payable in cash.  At the discretion of the Officers, Directors and other key employees, the receipt of vested shares can be deferred until future periods.  These deferred shares are included in Treasury Stock on the condensed consolidated balance sheets.

3.
DISCONTINUED OPERATIONS AND AFFILATIONS:

Discontinued Operations consist of the environmental remediation activities related to the properties of South Jersey Fuel, Inc. (SJF) and the product liability litigation and environmental remediation activities related to the prior business of The Morie Company, Inc. (Morie). SJF is a subsidiary of Energy & Minerals, Inc. (EMI), an SJI subsidiary, which previously operated a fuel oil business. Morie is the former sand mining and processing subsidiary of EMI. EMI sold the common stock of Morie in 1996.

SJI conducts tests annually to estimate the environmental remediation costs for these properties.

Summarized operating results of the discontinued operations for the three months ended March 31, 2015 and 2014, were (in thousands, except per share amounts):

 
Three Months Ended
March 31,
 
2015
 
2014
Loss Before Income Taxes:
 
 
 
Sand Mining
$
(347
)
 
$
(380
)
Fuel Oil
(66
)
 
(102
)
Income Tax Benefits
137

 
169

Loss from Discontinued Operations — Net
$
(276
)
 
$
(313
)
Earnings (Loss) Per Common Share from
 
 
 
Discontinued Operations — Net:
 
 
 
Basic and Diluted
$

 
$
(0.01
)

AFFILIATIONS — The following affiliated entities are accounted for under the equity method:

Energenic – US, LLC (Energenic) - Marina and a joint venture partner formed Energenic, in which Marina has a 50% equity interest. Energenic develops and operates on-site, self-contained, energy-related projects.

Potato Creek, LLC (Potato Creek) - SJI and a joint venture partner formed Potato Creek, in which SJI has a 30% equity interest.  Potato Creek owns and manages the oil, gas and mineral rights of certain real estate in Pennsylvania.

During the first three months of 2015, the Company made investments in, and provided net advances to, unconsolidated affiliates of $1.7 million. During the first three months of 2014, the Company received net repayments from unconsolidated affiliates of $2.9 million.  As of March 31, 2015 and December 31, 2014, the outstanding balance on these Notes Receivable – Affiliate was $52.4 million and $51.5 million, respectively. Approximately $39.4 million of these notes are secured by property, plant and equipment of the affiliates, accrue interest at 7.5% and are to be repaid through 2025. The remaining $13.0 million of these notes are unsecured and accrue interest at variable rates.

SJI holds significant variable interests in these entities but is not the primary beneficiary. Consequently, these entities are accounted for under the equity method because SJI does not have both (a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity. As of March 31, 2015, the Company had a net asset of approximately $66.9 million included in Investment in Affiliates and Other Noncurrent Liabilities on the condensed consolidated balance sheets related to equity method investees, in addition to Notes Receivable – Affiliate as discussed above. SJI’s maximum exposure to loss from these entities as of March 31, 2015 is limited to its combined equity contributions and the Notes Receivable-Affiliate in the amount of $120.2 million plus the guarantees discussed in Note 11.

10



4.
COMMON STOCK:

The following shares were issued and outstanding:

 
2015
Beginning Balance, January 1 (See Note 1)
68,334,860

New Issues During the Period:
 

Dividend Reinvestment Plan
63,690

Stock-Based Compensation Plan
25,398

Ending Balance, March 31
68,423,948


The par value ($1.25 per share) of stock issued was recorded in Common Stock and the net excess over par value of approximately $2.6 million was recorded in Premium on Common Stock.

EARNINGS PER COMMON SHARE (EPS) — Basic EPS is based on the weighted-average number of common shares outstanding.  The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 220,762 and 154,448 for the three months ended March 31, 2015 and 2014, respectively. These shares relate to SJI's restricted stock as discussed in Note 2.

DIVIDEND REINVESTMENT PLAN (DRP) —The Company offers a DRP which allows participating shareholders to purchase shares of SJI common stock by automatic reinvestment of dividends or optional purchases. Shares of common stock offered by the DRP have been issued directly by SJI from its authorized but unissued shares of common stock. The Company raised $1.9 million and $5.2 million of equity capital through the DRP during the three months ended March 31, 2015 and 2014, respectively.

5.
FINANCIAL INSTRUMENTS:

RESTRICTED INVESTMENTS — In accordance with the terms of certain Marina and SJG loan agreements, unused proceeds are required to be escrowed pending approval of construction expenditures. As of both March 31, 2015 and December 31, 2014, the escrowed proceeds, including interest earned, totaled $1.7 million.

The Company maintains margin accounts with selected counterparties to support its risk management activities. The balances required to be held in these margin accounts increase as the net value of the outstanding energy-related contracts with the respective counterparties decrease. As of March 31, 2015 and December 31, 2014, the balances in these accounts totaled $58.9 million and $63.7 million, respectively. The carrying amounts of the Restricted Investments approximate their fair values at March 31, 2015 and December 31, 2014, which would be included in Level 1 of the fair value hierarchy (See Note 13 - Fair Value of Financial Assets and Financial Liabilities).

INVESTMENT IN AFFILIATES - During 2011, subsidiaries of Energenic, in which Marina has a 50% equity interest, entered into 20-year contracts to build, own and operate a central energy center and energy distribution system for a new hotel, casino and entertainment complex in Atlantic City, New Jersey. The complex commenced operations in April 2012, and as a result, Energenic subsidiaries began providing full energy services to the complex. 

In June 2014 the parent company of the hotel, casino and entertainment complex filed petitions in U. S. Bankruptcy Court to facilitate a sale of substantially all of its assets. The complex ceased normal business operations in September 2014. Energenic subsidiaries continued to provide limited energy services to the complex during the shutdown period under a temporary agreement with the trustee. The hotel, casino and entertainment complex was sold in April 2015. The Energenic subsidiaries are currently providing limited services to the complex under a short-term agreement with the new owner.
As a result, Management has evaluated the carrying value of the investment in this project and a related note receivable. Based on the current situation, and considering that the Energenic subsidiaries have reserved for a portion of the receivables from the complex, Management believes the estimated fair value of this investment continues to be in excess of the respective carrying values as of March 31, 2015. Estimating the fair value of an investment is highly judgmental and involves the use of significant estimates and assumptions. Actual results may differ significantly from those used to develop Management’s estimate.


11


As of March 31, 2015, the Company, through its investment in Energenic, had a remaining net asset of approximately $15.1 million included in Investment in Affiliates on the condensed consolidated balance sheets related to this project. In addition, the Company had approximately $13.9 million included in Notes Receivable - Affiliate on the condensed consolidated balance sheets, due from an Energenic subsidiary, which is secured by certain assets of the central energy center. This note is subject to a reimbursement agreement that secures reimbursement for the Company, from its joint venture partner, of a proportionate share of any amounts that are not repaid.

Management will continue to monitor the situation surrounding the complex, including the status of a permanent or long-term energy services agreement between the Energenic subsidiary and the complex, and will evaluate the carrying value of the investment and the note receivable as future events occur.

LONG-TERM RECEIVABLES — SJG provides financing to customers for the purpose of attracting conversions to natural gas heating systems from competing fuel sources.  The terms of these loans call for customers to make monthly payments over a period of up to five years with no interest.  The carrying amounts of such loans were $14.9 million and $15.0 million as of March 31, 2015 and December 31, 2014, respectively. The current portion of these receivables is reflected in Accounts Receivable and the non-current portion is reflected in Contract Receivables on the condensed consolidated balance sheets. The carrying amounts noted above are net of unamortized discounts resulting from imputed interest in the amount of $1.2 million and $1.3 million as of March 31, 2015 and December 31, 2014, respectively.  The annualized amortization to interest is not material to the Company’s condensed consolidated financial statements.  The carrying amounts of these receivables approximate their fair value at March 31, 2015 and December 31, 2014, which would be included in Level 2 of the fair value hierarchy (See Note 13 - Fair Value of Financial Assets and Financial Liabilities).

CREDIT RISK - As of March 31, 2015, approximately $11.6 million, or 17.3%, of the current and noncurrent Derivatives – Energy Related Assets are transacted with one counterparty. This counterparty has contracts with a large number of diverse customers which minimizes the concentration of this risk. A portion of these contracts may be assigned to SJI in the event of default by the counterparty.

FINANCE OBLIGATION - During 2010, ACB Energy Partners LLC (ACB), a wholly-owned subsidiary of Energenic, of which Marina has a 50% equity interest, completed construction of a combined heat and power generating facility to serve, under an energy services agreement, a thermal plant owned by Marina. Construction period financing was provided by Marina. As substantially all of the costs of constructing the facility were funded by the financing provided by Marina, Marina was considered the owner of the facility for accounting purposes during the construction period. When an entity is considered the accounting owner during the construction period, a sale of the asset effectively occurs when construction of the asset is completed. However, due to its continuing involvement in the facility through its equity interest in Energenic, Marina continues to be considered the owner of the facility for accounting purposes under ASC Topic 360 Property, Plant and Equipment. As a result, the transaction is being accounted for as a financing arrangement under ASC Topic 840 Leases and, therefore, the Company has included costs to construct the facility within Nonutility Property, Plant and Equipment on the condensed consolidated balance sheets of $23.7 million as of both March 31, 2015 and December 31, 2014. In addition, the Company included repayments from ACB to Marina on the construction loan within the Finance Obligation on the condensed consolidated balance sheets. Marina does not have a fixed payment obligation to ACB; as a result, the Finance Obligation is classified as a noncurrent liability on the condensed consolidated balance sheets. The costs to construct the facility and the repayments of the construction loan are amortized over the term of the energy services agreement. The impact on the condensed consolidated statements of income is not significant. As a result, the Company recorded $19.4 million and $19.7 million, net of amortization, within Finance Obligation on the condensed consolidated balance sheets at March 31, 2015 and December 31, 2014, respectively.

FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE - The fair value of a financial instrument is the market price to sell an asset or transfer a liability at the measurement date. The carrying amounts of SJI's financial instruments approximate their fair values at March 31, 2015 and December 31, 2014, except as noted below.
For Long-Term Debt, in estimating the fair value, we use the present value of remaining cash flows at the balance sheet date. We based the estimates on interest rates available to SJI at the end of each period for debt with similar terms and maturities (Level 2 in the fair value hierarchy, see Note 13 - Fair Value of Financial Assets and Financial Liabilities). The estimated fair values of SJI's long-term debt, including current maturities, as of March 31, 2015 and December 31, 2014, were $1,068.9 million and $1,058.5 million, respectively.  The carrying amounts of SJI's long-term debt, including current maturities, as of both March 31, 2015 and December 31, 2014, were $1,009.4 million.


12


6.
SEGMENTS OF BUSINESS:

SJI operates in several different reportable operating segments which reflect the financial information regularly evaluated by the chief operating decision maker. These segments are as follows:

Gas utility operations (SJG) consists primarily of natural gas distribution to residential, commercial and industrial customers.
Wholesale energy operations include the activities of SJRG and SJEX.
SJE is involved in both retail gas and retail electric activities.
Retail gas and other operations include natural gas acquisition and transportation service business lines.
Retail electric operations consist of electricity acquisition and transportation to commercial and industrial customers.
On-site energy production consists of Marina's thermal energy facility and other energy-related projects.
Appliance service operations includes SJESP’s servicing of appliances under warranty via a subcontractor arrangement as well as on a time and materials basis. 
 
SJI groups its non-utility operations into two categories: Energy Group and Energy Services. Energy Group includes wholesale energy, retail gas and other, and retail electric operations. Energy Services includes on-site energy production and appliance service operations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are treated as if the sales or transfers were to third parties at current market prices.

Information about SJI’s operations in different reportable operating segments is presented below (in thousands):

 
Three Months Ended
March 31,
 
2015
 
2014
Operating Revenues:
 
 
 
Gas Utility Operations
$
267,658

 
$
210,545

Energy Group:
 
 
 
     Wholesale Energy Operations
35,345

 
35,372

Retail Gas and Other Operations
38,078

 
51,506

Retail Electric Operations
29,777

 
40,393

     Subtotal Energy Group
103,200

 
127,271

Energy Services:
 
 
 
On-Site Energy Production
13,572

 
11,346

Appliance Service Operations
2,357

 
2,654

Subtotal Energy Services
15,929

 
14,000

Corporate & Services
9,086

 
7,871

Subtotal
395,873

 
359,687

Intersegment Sales
(12,921
)
 
(9,486
)
Total Operating Revenues
$
382,952

 
$
350,201


13



 
Three Months Ended
March 31,
 
2015
 
2014
Operating Income (Loss):
 

 
 

Gas Utility Operations
$
73,189

 
$
63,440

Energy Group:
 
 
 
     Wholesale Energy Operations
330

 
(1,655
)
Retail Gas and Other Operations
3,087

 
1,968

Retail Electric Operations
(182
)
 
(54
)
     Subtotal Energy Group
3,235

 
259

Energy Services:
 
 
 
On-Site Energy Production
(482
)
 
(1,260
)
Appliance Service Operations
(52
)
 
(95
)
  Subtotal Energy Services
(534
)
 
(1,355
)
Corporate and Services
481

 
166

Total Operating Income
$
76,371

 
$
62,510


 
 
 
Depreciation and Amortization:
 

 
 

Gas Utility Operations
$
14,167

 
$
12,676

Energy Group:
 
 
 
     Wholesale Energy Operations
32

 
40

Retail Gas and Other Operations
20

 
22

     Subtotal Energy Group
52

 
62

Energy Services:
 
 
 
On-Site Energy Production
7,051

 
5,775

Appliance Service Operations
74

 
67

  Subtotal Energy Services
7,125

 
5,842

Corporate and Services
242

 
219

Total Depreciation and Amortization
$
21,586

 
$
18,799


 
 
 
Interest Charges:
 

 
 

Gas Utility Operations
$
5,190

 
$
4,342

Energy Group:
 
 
 
     Wholesale Energy Operations
242

 
121

Retail Gas and Other Operations
73

 
126

     Subtotal Energy Group
315

 
247

Energy Services:
 
 
 
On-Site Energy Production
2,315

 
2,128

Corporate and Services
2,988

 
1,850

Subtotal
10,808

 
8,567

Intersegment Borrowings
(2,207
)
 
(1,483
)
Total Interest Charges
$
8,601

 
$
7,084



14


 
Three Months Ended
March 31,
 
2015
 
2014
Income Taxes:
 

 
 

Gas Utility Operations
$
26,172

 
$
22,527

Energy Group:
 
 
 
     Wholesale Energy Operations
867

 
(553
)
Retail Gas and Other Operations
1,576

 
936

Retail Electric Operations
(74
)
 
(22
)
     Subtotal Energy Group
2,369

 
361

Energy Services:
 
 
 
On-Site Energy Production
(12,047
)
 
(11,025
)
Appliance Service Operations
(8
)
 
(23
)
  Subtotal Energy Services
(12,055
)
 
(11,048
)
Corporate and Services
127

 
29

Total Income Taxes
$
16,613

 
$
11,869

 
 
 
 
Property Additions:
 
 
 
Gas Utility Operations
$
43,326

 
$
32,531

Energy Group:
 
 
 
     Wholesale Energy Operations
4

 
2

Retail Gas and Other Operations
729

 
168

     Subtotal Energy Group
733

 
170

Energy Services:
 
 
 
On-Site Energy Production
4,381

 
9,149

Appliance Service Operations
116

 

  Subtotal Energy Services
4,497

 
9,149

Corporate and Services
1,064

 
778

Total Property Additions
$
49,620

 
$
42,628


 
March 31, 2015
 
December 31, 2014
Identifiable Assets:
 
 
 
Gas Utility Operations
$
2,291,920

 
$
2,185,672

Energy Group:
 
 
 
     Wholesale Energy Operations
294,484

 
366,119

Retail Gas and Other Operations
52,195

 
53,073

Retail Electric Operations
25,311

 
23,682

     Subtotal Energy Group
371,990

 
442,874

Energy Services:
 
 
 
On-Site Energy Production
661,485

 
675,937

Appliance Service Operations
3,265

 
3,105

Subtotal Energy Services
664,750

 
679,042

Discontinued Operations
1,755

 
1,758

Corporate and Services
563,649

 
527,691

Intersegment Assets
(517,342
)
 
(487,612
)
Total Identifiable Assets
$
3,376,722

 
$
3,349,425



15


7.
RATES AND REGULATORY ACTIONS:

SJG is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU).

Effective October 1, 2014, the BPU granted SJG a base rate increase of $20.0 million, which was predicated in part upon a 7.10% rate of return on rate base that included a 9.75% return on common equity. The $20.0 million base rate increase includes approximately $7.5 million associated with previously approved Accelerated Infrastructure Replacement Program (AIRP) investments that were rolled into rate base. SJG was also permitted to recover regulatory assets contained in its petition and reduce its composite depreciation rate from 2.4% to 2.1%.

In January 2015, SJG filed a petition with the BPU seeking to continue offering energy efficiency programs through June 2018 with a proposed budget of $56.0 million and with the same rate recovery mechanism that exists for its current energy efficiency programs.

There have been no other significant regulatory actions or changes to SJG's rate structure since December 31, 2014. See Note 10 to the Consolidated Financial Statements in Item 8 of SJI's Annual Report on Form 10-K for the year ended December 31, 2014.

8.
REGULATORY ASSETS & REGULATORY LIABILITIES:

There have been no significant changes to the nature of the Company’s regulatory assets and liabilities since December 31, 2014 which are described in Note 11 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2014.

Regulatory Assets consisted of the following items (in thousands):

 
March 31, 2015
 
December 31, 2014
Environmental Remediation Costs:
 
 
 
Expended - Net
$
28,057

 
$
29,540

Liability for Future Expenditures
124,761

 
124,308

Deferred Asset Retirement Obligation Costs
31,604

 
31,584

Deferred Pension and Other Postretirement Benefit Costs
99,040

 
99,040

Deferred Gas Costs - Net
20,291

 
32,202

Societal Benefit Costs Receivable

 
385

Deferred Interest Rate Contracts
8,330

 
7,325

Energy Efficiency Tracker
1,782

 
11,247

Pipeline Supplier Service Charges
5,025

 
5,441

Pipeline Integrity Cost
3,439

 
3,431

AFUDC - Equity Related Deferrals
10,987

 
10,781

Other Regulatory Assets
1,693

 
1,876

 
 
 
 
Total Regulatory Assets
$
335,009

 
$
357,160


DEFERRED GAS COSTS - NET - Over/under collections of gas costs are monitored through SJG's Basic Gas Supply Service (BGSS) mechanism. Net undercollected gas costs are classified as a regulatory asset and net overcollected gas costs are classified as a regulatory liability. Derivative contracts used to hedge natural gas purchases are also included in the BGSS, subject to BPU approval. The reduction in deferred gas costs from December 31, 2014 was due to gas costs recovered from customers exceeding the actual cost of the commodity incurred during the first three months of 2015 as a result of more normal gas prices. SJG's BGSS mechanism is designed to over-collect gas costs during the winter season when usage is highest.


16


ENERGY EFFICIENCY TRACKER - This regulatory asset primarily represents energy efficiency measures installed in customer homes and businesses. The decrease from December 31, 2014 is due to higher recoveries in the first three months of 2015 due to high level of recoveries resulting from extremely cold weather.

Regulatory Liabilities consisted of the following items (in thousands):

 
March 31, 2015
 
December 31, 2014
Excess Plant Removal Costs
$
35,762

 
$
35,940

Conservation Incentive Program Payable
21,825

 
4,700

Societal Benefit Costs
8,939

 

Other Regulatory Liabilities

 
1,259

 
 
 
 
Total Regulatory Liabilities
$
66,526

 
$
41,899

 
EXCESS PLANT REMOVAL COSTS - Represents amounts accrued in excess of actual utility plant removal costs incurred to date. The decrease in the balance from year end is due to an amortization as a credit to depreciation expense as required as part of SJG's September 2014 base rate increase.

CONSERVATION INCENTIVE PROGRAM (CIP) PAYABLE – The CIP tracking mechanism adjusts earnings when actual usage per customer experienced during the period varies from an established baseline usage per customer. Actual usage per customer was greater than the established baseline during 2014 and more notably during the first three months of 2015 resulting in a payable. This is primarily the result of extremely cold weather experienced in the region.  

SOCIETAL BENEFIT COSTS (SBC) - This regulatory liability primarily represents the excess recoveries over the expenses incurred under the New Jersey Clean Energy Program which is a mechanism designed to recover costs associated with energy efficiency and renewable energy programs. The change from a $0.4 million regulatory asset to a $8.9 million regulatory liability is due to current SBC rates which are producing revenue greater than SBC expenses. In July 2014, SJG made its annual 2014-2015 SBC filing requesting a decrease in SBC revenues, in part, to avoid this liability. The petition is currently pending.

9.
PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three months ended March 31, 2015 and 2014, net periodic benefit cost related to the employee and officer pension and other postretirement benefit plans consisted of the following components (in thousands):
 
Pension Benefits
 
Three Months Ended
March 31,
 
2015

2014
Service Cost
$
1,443

 
$
1,285

Interest Cost
2,770

 
2,695

Expected Return on Plan Assets
(3,699
)
 
(3,265
)
Amortizations:
 
 
 

Prior Service Cost
53

 
43

Actuarial Loss
2,656

 
1,426

Net Periodic Benefit Cost
3,223

 
2,184

Capitalized Benefit Costs
(1,239
)
 
(854
)
Total Net Periodic Benefit Expense
$
1,984

 
$
1,330



17


 
Other Postretirement Benefits
 
Three Months Ended
March 31,
 
2015

2014
Service Cost
$
327

 
$
250

Interest Cost
771

 
740

Expected Return on Plan Assets
(748
)
 
(687
)
Amortizations:
 
 
 

Prior Service Cost
152

 
38

Actuarial Loss
384

 
243

Net Periodic Benefit Cost
886

 
584

Capitalized Benefit Costs
(256
)
 
(209
)
Total Net Periodic Benefit Expense
$
630

 
$
375


Capitalized benefit costs reflected in the table above relate to SJG’s construction program.

SJI contributed $15.0 million to the pension plans in January 2015. No contributions were made to the pension plans during 2014. Payments related to the unfunded supplemental executive retirement plan (SERP) are expected to approximate $1.5 million in 2015. SJG also has a regulatory obligation to contribute approximately $3.6 million annually to the other postretirement benefit plans’ trusts, less direct costs incurred. See Note 12 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2014, for additional information related to SJI’s pension and other postretirement benefits.

10.
LINES OF CREDIT:
 
Credit facilities and available liquidity as of March 31, 2015 were as follows (in thousands):

Company
 
Total Facility
 
Usage
 
Available Liquidity
 
Expiration Date
SJG:
 
 
 
 
 
 
 
 
Commercial Paper Program/Revolving Credit Facility
 
$
200,000

 
$
129,600

 
$
70,400

 
May 2018
Uncommitted Bank Lines
 
10,000

 

 
10,000

 
August 2015
 
 
 
 
 
 
 
 
 
Total SJG
 
210,000

 
129,600

 
80,400

 
 
 
 
 
 
 
 
 
 
 
SJI:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revolving Credit Facility
 
400,000

 
156,400

 
243,600

 
February 2018 (A)
 
 
 
 
 
 
 
 
 
Total SJI
 
400,000

 
156,400

 
243,600

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
610,000

 
$
286,000

 
$
324,000

 
 

(A) Includes letters of credit outstanding in the amount of $13.6 million.

The SJG facilities are restricted as to use and availability specifically to SJG; however, if necessary, the SJI facilities can also be used to support SJG’s liquidity needs. Borrowings under these credit facilities are at market rates. The weighted average interest rate on these borrowings, which changes daily, was 0.88% and 1.06% at March 31, 2015 and 2014, respectively. Average borrowings outstanding under these credit facilities, not including letters of credit, during the three months ended March 31, 2015 and 2014 were $274.1 million and $332.2 million, respectively. The maximum amounts outstanding under these credit facilities, not including letters of credit, during the three months ended March 31, 2015 and 2014 were $329.4 million and $390.7 million, respectively.

18



The SJI and SJG facilities are provided by a syndicate of banks and contain one financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective credit agreements) to not more than 0.65 to 1, measured at the end of each fiscal quarter. SJI and SJG were in compliance with this covenant as of March 31, 2015.

SJG manages a commercial paper program under which SJG may issue short-term, unsecured promissory notes to qualified investors up to a maximum aggregate amount outstanding at any time of $200.0 million.  The notes have fixed maturities which vary by note, but may not exceed 270 days from the date of issue. Proceeds from the notes are used for general corporate purposes.  SJG uses the commercial paper program in tandem with its $200.0 million revolving credit facility and does not expect the principal amount of borrowings outstanding under the commercial paper program and the credit facility at any time to exceed an aggregate of $200.0 million.

11.
COMMITMENTS AND CONTINGENCIES:

GUARANTEES — The Company has recorded a liability of $0.6 million which is included in Other Noncurrent Liabilities with a corresponding increase in Investment in Affiliates on the condensed consolidated balance sheets as of March 31, 2015 for the fair value of the following guarantees:

SJI has guaranteed certain obligations of WC Landfill Energy, LLC (WCLE) and BC Landfill Energy, LLC (BCLE), unconsolidated joint ventures in which Marina has a 50% equity interest through Energenic. WCLE and BCLE have entered into agreements through 2018 and 2027, respectively, with the respective county governments to lease and operate facilities that will produce electricity from landfill methane gas.  Although unlikely, the maximum amount that SJI could be obligated for, in the event that WCLE and BCLE do not meet minimum specified levels of operating performance and no mitigating action is taken, or are unable to meet certain financial obligations as they become due, is approximately $4.2 million each year.  SJI and its partner in these joint ventures have entered into reimbursement agreements that secure reimbursement for SJI of a proportionate share of any payments made by SJI on these guarantees.  SJI holds variable interests in WCLE and BCLE but is not the primary beneficiary.

In December 2013, SJI entered into agreements to guarantee certain obligations of WCLE, SC Landfill Energy, LLC, SX Landfill Energy, LLC, FC Landfill Energy, LLC, and AC Landfill Energy, LLC (collectively, the "Landfills"), unconsolidated joint ventures in which Marina has a 50% equity interest through Energenic. The Landfills have entered into long-term debt agreements which run through 2020. Although unlikely, SJI could be liable through the guarantees for 50% of the outstanding debt along with any interest related to the debt in the event the Landfills do not meet minimum specified levels of operating performance and no mitigating action is taken, or the Landfills are unable to meet certain financial obligations as they become due. As of March 31, 2015, 50% of the currently outstanding debt is $8.6 million.

In May 2012, UMM Energy Partners, LLC (UMM), a wholly-owned subsidiary of Energenic, in which Marina has a 50% equity interest, entered into a 30-year contract with a public university to build, own and operate a combined heating, cooling and power system for its main campus in New Jersey. The system commenced commercial operations in September 2013. SJI has guaranteed certain obligations of UMM under the operating and lease agreements between UMM and the university, for the terms of the agreements, commencing with the first year of operations. As of March 31, 2015, SJI has guaranteed up to $2.4 million. This amount is adjusted each year based upon the Consumer Price Index. SJI and its partner in this joint venture have entered into reimbursement agreements that secure reimbursement for SJI of a proportionate share of any payments made by SJI on these guarantees. SJI holds variable interests in UMM but is not the primary beneficiary.

As of March 31, 2015, SJI had issued $7.2 million of parental guarantees on behalf of an unconsolidated subsidiary. These guarantees generally expire within the next two years and were issued to enable our subsidiary to market retail natural gas.

COLLECTIVE BARGAINING AGREEMENTS — Unionized personnel represent approximately 45.0% of our workforce at March 31, 2015. The Company has collective bargaining agreements with two unions that represent these employees: the International Brotherhood of Electrical Workers (IBEW) Local 1293 and the International Association of Machinists and Aerospace Workers (IAM) Local 76.  SJG and SJESP employees represented by the IBEW operate under collective bargaining agreements that run through February 2017. The remaining unionized employees are represented by the IAM and operate under collective bargaining agreements that run through August 2017.


19


STANDBY LETTERS OF CREDIT — As of March 31, 2015, SJI provided $13.6 million of standby letters of credit through its revolving credit facility to enable SJE to market retail electricity and for various construction and operating activities. The Company has also provided $87.6 million of additional letters of credit under separate facilities outside of the revolving credit facility to support variable-rate demand bonds issued through the New Jersey Economic Development Authority (NJEDA) to finance the expansion of SJG’s natural gas distribution system and to finance Marina's initial thermal plant project.  

PENDING LITIGATION — The Company is subject to claims arising in the ordinary course of business and other legal proceedings. The Company has been named in, among other actions, certain product liability claims related to our former sand mining subsidiary. We accrue liabilities related to these claims when we can reasonably estimate the amount or range of amounts of probable settlement costs or other charges for these claims. The Company has accrued approximately $3.2 million and $2.9 million related to all claims in the aggregate as of March 31, 2015 and December 31, 2014, respectively. Management does not believe that it is reasonably possible that there will be a material change in the Company's estimated liability in the near term and does not currently anticipate the disposition of any known claims that would have a material effect on the Company's financial position, results of operations or cash flows.

ENVIRONMENTAL REMEDIATION COSTS — SJI incurred and recorded costs for environmental cleanup of 12 sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s. SJI and some of its nonutility subsidiaries also recorded costs for environmental cleanup of sites where SJF previously operated a fuel oil business and Morie maintained equipment, fueling stations and storage. There have been no changes to the status of the Company’s environmental remediation efforts since December 31, 2014 as described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2014.

12.
DERIVATIVE INSTRUMENTS:

Certain SJI subsidiaries are involved in buying, selling, transporting and storing natural gas and buying and selling retail electricity for their own accounts as well as managing these activities for third parties. These subsidiaries are subject to market risk on expected future purchases and sales due to commodity price fluctuations. The Company uses a variety of derivative instruments to limit this exposure to market risk in accordance with strict corporate guidelines.  These derivative instruments include forward contracts, swap agreements, options contracts and futures contracts. As of March 31, 2015, the Company had outstanding derivative contracts intended to limit the exposure to market risk on 55.9 MMdts (1 MMdts = one million decatherms) of expected future purchases of natural gas, 45.7 MMdts of expected future sales of natural gas, 2.7 MMmwh (1 MMmwh = one million megawatt hours) of expected future purchases of electricity and 2.7 MMmwh of expected future sales of electricity. In addition to these derivative contracts, the Company has basis and index related purchase and sales contracts totaling 315.3 MMdts.  These contracts, which have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives — Energy Related Assets or Derivatives — Energy Related Liabilities on the condensed consolidated balance sheets. The net unrealized pre-tax gains and losses for these energy-related commodity contracts are included with realized gains and losses in Operating Revenues – Nonutility.

The Company has also entered into interest rate derivatives to hedge exposure to increasing interest rates and the impact of those rates on cash flows of variable-rate debt. These interest rate derivatives, some of which have been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives - Other on the condensed consolidated balance sheets. Beginning in July 2012, hedge accounting was discontinued for these derivatives. As a result, unrealized gains and losses on these derivatives, that were previously included in Accumulated Other Comprehensive Loss (AOCL) on the consolidated balance sheets, will be reclassified into earnings over the remaining life of the derivative. These derivatives are expected to mature in 2026.

There have been no significant changes to the Company’s active interest rate swaps since December 31, 2014 which are described in Note 16 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2014.


20


The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014, are as follows (in thousands):

Derivatives not designated as hedging instruments under GAAP
 
March 31, 2015
 
December 31, 2014
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Energy related commodity contracts:
 
 
 
 
 
 
 
 
Derivatives – Energy Related – Current
 
$
52,441

 
$
81,779

 
$
85,368

 
$
109,744

Derivatives – Energy Related – Non-Current
 
15,402

 
24,522

 
13,905

 
19,926

Interest rate contracts:
 
 
 
 
 
 

 
 

Derivatives - Other
 

 
12,036

 

 
10,732

Total derivatives not designated as hedging instruments under GAAP
 
67,843

 
118,337

 
99,273

 
140,402

 
 
 
 
 
 
 
 
 
Total Derivatives
 
$
67,843

 
$
118,337

 
$
99,273

 
$
140,402


The Company enters into derivative contracts with counterparties, some of which are subject to master netting arrangements, which allow net settlements under certain conditions. The Company presents derivatives at gross fair values on the condensed consolidated balance sheets. As of March 31, 2015 and December 31, 2014, information related to these offsetting arrangements were as follows (in thousands):
As of March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Description
 
Gross amounts of recognized assets/liabilities
 
Gross amount offset in the balance sheet
 
Net amounts of assets/liabilities in balance sheet
 
Gross amounts not offset in the balance sheet
 
Net amount
 
 
 
 
Financial Instruments
 
Cash Collateral Posted
 
Derivatives - Energy Related Assets
 
$
67,843

 
$

 
$
67,843

 
$
(24,796
)
(A)
$

 
$
43,047

Derivatives - Energy Related Liabilities
 
$
(106,301
)
 
$

 
$
(106,301
)
 
$
24,796

(B)
$
42,770

 
$
(38,735
)
Derivatives - Other
 
$
(12,036
)
 
$

 
$
(12,036
)
 
$

 
$

 
$
(12,036
)

As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Description
 
Gross amounts of recognized assets/liabilities
 
Gross amount offset in the balance sheet
 
Net amounts of assets/liabilities in balance sheet
 
Gross amounts not offset in the balance sheet
 
Net amount
 
 
 
 
Financial Instruments
 
Cash Collateral Posted
 
Derivatives - Energy Related Assets
 
$
99,273

 
$

 
$
99,273

 
$
(39,747
)
(A)
$

 
$
59,526

Derivatives - Energy Related Liabilities
 
$
(129,670
)
 
$

 
$
(129,670
)
 
$
39,747

(B)
$
53,897

 
$
(36,026
)
Derivatives - Other
 
$
(10,732
)
 
$

 
$
(10,732
)
 
$

 
$

 
$
(10,732
)

(A) The balances at March 31, 2015 and December 31, 2014 were related to derivative liabilities which can be net settled against derivative assets.

(B) The balances at March 31, 2015 and December 31, 2014 were related to derivative assets which can be net settled against derivative liabilities.


21


The effect of derivative instruments on the condensed consolidated statements of income for the three months ended March 31, 2015 and 2014 are as follows (in thousands):

 
 
Three Months Ended
March 31,
Derivatives in Cash Flow Hedging Relationships under GAAP
 
2015
 
2014
Interest Rate Contracts:
 
 
 
 
Losses recognized in AOCL on effective portion
 
$

 
$

Losses reclassified from AOCL into income (a)
 
$
(23
)
 
$
(112
)
Gains (losses) recognized in income on ineffective portion (a)
 
$

 
$


(a) Included in Interest Charges

 
 
Three Months Ended
March 31,
Derivatives Not Designated as Hedging Instruments under GAAP
 
2015
 
2014
Losses on energy related commodity contracts (a)
 
$
(6,707
)
 
$
(28,601
)
Losses on interest rate contracts (b)
 
(298
)
 
(214
)
 
 
 
 
 
Total
 
$
(7,005
)
 
$
(28,815
)

(a)  Included in Operating Revenues - Non Utility
(b)  Included in Interest Charges

Net realized loss of $2.6 million and net realized gain of $2.4 million associated with SJG's energy-related financial commodity contracts for the three months ended March 31, 2015 and 2014, respectively, are not included in the above table. These contracts are part of SJG’s regulated risk management activities that serve to mitigate BGSS costs passed on to its customers. As these transactions are entered into pursuant to, and recoverable through, regulatory riders, any changes in the value of SJG’s energy-related financial commodity contracts are deferred in Regulatory Assets or Liabilities, as applicable, and there is no impact to earnings.

Certain of the Company’s derivative instruments contain provisions that require immediate payment or demand immediate and ongoing collateralization on derivative instruments in net liability positions in the event of a material adverse change in the credit standing of the Company. The aggregate fair value of all derivative instruments with credit risk-related contingent features that are in a liability position on March 31, 2015, is $36.3 million.  If the credit risk-related contingent features underlying these agreements were triggered on March 31, 2015, the Company would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $30.2 million after offsetting asset positions with the same counterparties under master netting arrangements.

13.
FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:

GAAP establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques.  The levels of the hierarchy are described below:

Level 1:  Observable inputs such as quoted prices in active markets for identical assets or liabilities.

Level 2:  Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3:  Unobservable inputs that reflect the reporting entity’s own assumptions.


22


Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy.

For financial assets and financial liabilities measured at fair value on a recurring basis, information about the fair value measurements for each major category is as follows (in thousands):

As of March 31, 2015
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Available-for-Sale Securities (A)
$
15,245

 
$
9,816

 
$
5,429

 
$

Derivatives – Energy Related Assets (B)
67,843

 
12,154

 
29,681

 
26,008

 
$
83,088

 
$
21,970

 
$
35,110

 
$
26,008

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives – Energy Related Liabilities (B)
$
106,301

 
$
37,798

 
$
25,184

 
$
43,319

Derivatives – Other (C)
12,036

 

 
12,036

 

 
$
118,337

 
$
37,798

 
$
37,220

 
$
43,319


As of December 31, 2014
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Available-for-Sale Securities (A)
$
8,922

 
$
5,952

 
$
2,970

 
$

Derivatives – Energy Related Assets (B)
99,273

 
21,675

 
43,093

 
34,505

 
$
108,195

 
$
27,627

 
$
46,063

 
$
34,505

 
 
 
 
 
 
 
 
 Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives – Energy Related Liabilities (B)
$
129,670

 
$
49,009

 
$
40,548

 
$
40,113

Derivatives – Other (C)
10,732

 

 
10,732

 

 
$
140,402

 
$
49,009

 
$
51,280

 
$
40,113


(A) Available-for-Sale Securities include securities that are traded in active markets and securities that are not traded publicly. The securities traded in active markets are valued using the quoted principal market close prices that are provided by the trustees and are categorized in Level 1 in the fair value hierarchy. The remaining securities consist of funds that are not publicly traded. These funds, which consist of stocks and bonds that are traded individually in active markets, are valued using quoted prices for similar assets and are categorized in Level 2 in the fair value hierarchy.

(B) Derivatives – Energy Related Assets and Liabilities are traded in both exchange-based and non-exchange-based markets. Exchange-based contracts are valued using unadjusted quoted market sources in active markets and are categorized in Level 1 in the fair value hierarchy. Certain non-exchange-based contracts are valued using indicative price quotations available through brokers or over-the-counter, on-line exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask mid-point prices and are obtained from sources that management believes provide the most liquid market. For non-exchange-based derivatives that trade in less liquid markets with limited pricing information, model inputs generally would include both observable and unobservable inputs. In instances where observable data is unavailable, management considers the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 as the model inputs generally are not observable.


23


Significant Unobservable Inputs - Management uses the discounted cash flow model to value Level 3 physical and financial forwards, which calculates mark-to-market valuations based on forward market prices, original transaction prices, volumes, risk-free rate of return and credit spreads. Inputs to the valuation model are reviewed and revised as needed, based on historical information, updated market data, market liquidity and relationships, and changes in third party pricing sources. The validity of the mark-to-market valuations and changes in mark-to-market valuations from period to period are examined and qualified against historical expectations by the risk management function. If any discrepancies are identified during this process, the mark-to-market valuations or the market pricing information is evaluated further and adjusted, if necessary.

Level 3 valuation methods for natural gas derivative contracts include utilizing another location in close proximity adjusted for certain pipeline charges to derive a basis value. The significant unobservable inputs used in the fair value measurement of certain natural gas contracts consist of forward prices developed based on industry standard methodologies. Significant increases (decreases) in these forward prices for purchases of natural gas would result in a directionally similar impact to the fair value measurement and for sales of natural gas would result in a directionally opposite impact to the fair value measurement. Level 3 valuation methods for electric represent the value of the contract marked to the forward wholesale curve, as provided by daily exchange quotes for delivered electricity. The significant unobservable inputs used in the fair value measurement of electric contracts consist of fixed contracted electric load profiles; therefore no change in unobservable inputs would occur. Unobservable inputs are updated daily using industry standard techniques. Management reviews and corroborates the price quotations to ensure the prices are observable which includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration.

(C) Derivatives – Other are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.

The following table provides quantitative information regarding significant unobservable inputs in Level 3 fair value measurements (in thousands):

Type
Fair Value at March 31, 2015
Valuation Technique
Significant Unobservable Input
Range [Weighted Average]
 
Assets
Liabilities
 
 
 
Forward Contract - Natural Gas
$19,557
$38,607
Discounted Cash Flow
Forward price (per dt)

$(1.61) - $7.25 [$(0.28)]
Forward Contract - Electric


$6,451
$4,712
Discounted Cash Flow
Fixed electric load profile (on-peak)
8.06% - 100.00% [56.75%]
Fixed electric load profile (off-peak)
0.00% - 91.94% [43.25%]

Type
Fair Value at December 31, 2014
Valuation Technique
Significant Unobservable Input
Range [Weighted Average]
 
Assets
Liabilities
 
 
 
Forward Contract - Natural Gas
$
26,485

$
33,882

Discounted Cash Flow
Forward price (per dt)

$(2.04) - $7.83 [$(0.30)]
Forward Contract - Electric


$
8,020

$
6,231

Discounted Cash Flow
Fixed electric load profile (on-peak)
8.06% - 100.00% [55.97%]
Fixed electric load profile (off-peak)
0.00% - 91.94% [44.03%]


24


The changes in fair value measurements of Derivatives – Energy Related Assets and Liabilities for the three months ended March 31, 2015 and 2014, using significant unobservable inputs (Level 3), are as follows (in thousands):

 
Three Months Ended
March 31, 2015
 
Three Months Ended March 31,2014
Balance at beginning of period
$
(5,608
)
 
$
8,095

Other changes in fair value from continuing and new contracts, net
(16,438
)
 
(12,124
)
Settlements
4,735

 
(942
)
 
 
 
 
Balance at end of period
$
(17,311
)
 
$
(4,971
)

Total losses for 2015 included in earnings for the three months ended March 31, 2015 that are attributable to the change in unrealized losses relating to those assets and liabilities included in Level 3 still held as of March 31, 2015, are $16.4 million.  These losses are included in Operating Revenues-Nonutility on the condensed consolidated statements of income.

14.
LONG-TERM DEBT:
The Company did not issue or retire any long-term debt during the three months ended March 31, 2015.

15.
ACCUMULATED OTHER COMPREHENSIVE LOSS:

The following tables summarize the changes in accumulated other comprehensive loss (AOCL) for the three months ended March 31, 2015 (in thousands):

 
 
 
 
 
 
 
Postretirement Liability Adjustment
Unrealized Gain (Loss) on Derivatives-Other
Unrealized Gain (Loss) on Available-for-Sale Securities
Other Comprehensive Income (Loss) of Affiliated Companies
Total
Balance at January 1, 2015 (a)
$
(27,663
)
$
(2,450
)
$
(75
)
$
(70
)
$
(30,258
)
   Other comprehensive income before reclassifications


92


92

   Amounts reclassified from AOCL (b)

8

(4
)
(95
)
(91
)
Net current period other comprehensive income (loss)

8

88

(95
)
1

Balance at March 31, 2015 (a)
$
(27,663
)
$
(2,442
)
$
13

$
(165
)
$
(30,257
)
 
 
 
 
 
 
 
 
 
 

(a) For 2015, determined using a combined average statutory tax rate of 40%. For 2014, determined using a combined statutory tax rate of 41%.

(b) See table below.


25


The following table provides details about reclassifications out of AOCL for the three months ended March 31, 2015:

 
Amounts Reclassified from AOCL (in thousands)
Affected Line Item in the Condensed Consolidated Statements of Income
Three Months Ended
March 31, 2015
 
Unrealized Gain on Derivatives-Other - interest rate contracts designated as cash flow hedges
$
23

 
Interest Charges
   Income Taxes
(15
)
 
Income Taxes (a)
 
$
8

 
 
 
 
 
 
Unrealized Loss on Available-for-Sale Securities
$
(7
)
 
Other Income
   Income Taxes
3

 
Income Taxes (a)
 
$
(4
)
 
 
 
 
 
 
Loss of Affiliated Companies
$
(153
)
 
Equity in Loss of Affiliated Companies
   Income Taxes
58

 
Income Taxes (a)
 
$
(95
)
 
 
 
 
 
 
Losses from reclassifications for the period net of tax
$
(91
)
 
 



26


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements and Risk Factors — Certain statements contained in this Quarterly Report may qualify as “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report should be considered forward-looking statements made in good faith and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Words such as “anticipate”, “believe”, “expect”, “estimate”, “forecast”, “goal”, “intend”, “objective”, “plan”, “project”, “seek”, “strategy” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements. These risks and uncertainties include, but are not limited to, the following: general economic conditions on an international, national, state and local level; weather conditions in our marketing areas; changes in commodity costs; changes in the availability of natural gas; “non-routine” or “extraordinary” disruptions in our distribution system; regulatory, legislative and court decisions; competition; the availability and cost of capital; costs and effects of legal proceedings and environmental liabilities; the failure of customers, suppliers or business partners to fulfill their contractual obligations; and changes in business strategies.

A discussion of these and other risks and uncertainties may be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and in other filings made by us with the Securities and Exchange Commission (SEC). These cautionary statements should not be construed by you to be exhaustive and they are made only as of the date of this Quarterly Report on Form 10-Q, or in any document incorporated by reference, at the date of such document. While South Jersey Industries, Inc. (SJI or the Company) believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, SJI undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies — Estimates and Assumptions — Management must make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. Actual results could differ from those estimates. Five types of transactions presented in our condensed consolidated financial statements require a significant amount of judgment and estimation. These relate to regulatory accounting, derivatives, environmental remediation costs, pension and other postretirement employee benefit costs, and revenue recognition. A discussion of these estimates and assumptions may be found in SJI's Annual Report on Form 10-K for the year ended December 31, 2014.

New Accounting Pronouncements — See detailed discussions concerning New Accounting Pronouncements and their impact on SJI in Note 1 to the condensed consolidated financial statements.

Regulatory Actions — Other than the changes discussed in Note 7 to the condensed consolidated financial statements, there have been no significant regulatory actions since December 31, 2014. See detailed discussion concerning Regulatory Actions in Note 10 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2014.

Environmental Remediation —There have been no significant changes to the status of the Company’s environmental remediation efforts since December 31, 2014. See detailed discussion concerning Environmental Remediation Costs in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2014.


27



RESULTS OF OPERATIONS:

SJI operates in several different reportable operating segments. These segments are as follows:

Gas utility operations (SJG) consist primarily of natural gas distribution to residential, commercial and industrial customers.
Wholesale energy operations include the activities of South Jersey Resources Group, LLC (SJRG) and South Jersey Exploration, LLC (SJEX).
South Jersey Energy Company (SJE) is involved in both retail gas and retail electric activities.
Retail gas and other operations include natural gas acquisition and transportation service business lines.
Retail electric operations consist of electricity acquisition and transportation to commercial and industrial customers.
On-site energy production consists of Marina Energy, LLC ("Marina's") thermal energy facility and other energy-related projects.
Appliance service operations includes South Jersey Energy Service Plus, LLC (SJESP’s) servicing of appliances under warranty via a subcontractor arrangement as well as on a time and materials basis. 
 
SJI groups its non-utility operations into two categories: Energy Group and Energy Services. Energy Group includes wholesale energy, retail gas and other, and retail electric operations. Energy Services includes on-site energy production and appliance service operations.

Net Income for the three months ended March 31, 2015 increased $5.7 million to $53.6 million compared with the same period in 2014, primarily as a result of the following:

The income contribution from the gas utility operations at SJG for the three months ended March 31, 2015 increased $4.9 million to $42.6 million due primarily to the settlement of SJG's base rate case, continued investment in SJG's accelerated infrastructure programs and customer growth over the prior year.

The income contribution from the wholesale energy operations at SJRG for the three months ended March 31, 2015 increased $1.2 million to $0.1 million due primarily to an approximately $12.7 million increase resulting from the change in unrealized gains and losses on derivatives used by the wholesale energy operations to mitigate natural gas commodity price risk, as discussed under Operating Revenues - Energy Group below, partially offset by an approximately $11.5 million decrease related to lower daily trading margins and lower storage volumes sold as discussed under "Gross Margin - Energy Group" below.

The income contribution from on-site energy production at Marina for the three months ended March 31, 2015 decreased $2.5 million to $7.6 million due primarily to the impact of reduced operations and a reserve for uncollectible accounts established at one of Energenic's operating subsidiaries, of which Marina has a 50% equity interest (see Note 5 to the condensed consolidated financial statements).

A significant portion of the volatility in operating results is due to the impact of the accounting methods associated with SJI’s derivative activities. The Company uses derivatives to limit its exposure to market risk on transactions to buy, sell, transport and store natural gas and to buy and sell retail electricity. The Company also uses derivatives to limit its exposure to increasing interest rates on variable-rate debt.
 

28



The types of transactions that cause the most significant volatility in operating results are as follows:

The wholesale energy operations at SJRG purchases and holds natural gas in storage to earn a profit margin from its ultimate sale in the future. The wholesale energy operations uses derivatives to mitigate commodity price risk in order to substantially lock-in the profit margin that will ultimately be realized. However, gas stored in inventory is accounted for at the lower of average cost or market; the derivatives used to reduce the risk associated with a change in the value of the inventory are accounted for at fair value, with changes in fair value recorded in operating results in the period of change. As a result, earnings are subject to volatility as the market price of derivatives change, even when the underlying hedged value of the inventory is unchanged. Additionally, volatility in earnings is created when realized gains and losses on derivatives used to mitigate commodity price risk on expected future purchases of gas injected into storage are recognized in earnings when the derivatives settle, but the cost of the related gas in storage is not recognized in earnings until the period of withdrawal. This volatility can be significant from period to period. Over time, gains or losses on the sale of gas in storage will be offset by losses or gains on the derivatives, resulting in the realization of the profit margin expected when the transactions were initiated.

The retail electric operations at SJE uses forward contracts to mitigate commodity price risk on fixed price electric contracts with customers. In accordance with GAAP, the forward contracts are recorded at fair value, with changes in fair value recorded in earnings in the period of change. Several related customer contracts are not considered derivatives and therefore are not recorded in earnings until the electricity is delivered. As a result, earnings are subject to volatility as the market price of the forward contracts change, even when the underlying hedged value of the customer contract is unchanged. Over time, gains or losses on the sale of the fixed price electric under contract will be offset by losses or gains on the forward contracts, resulting in the realization of the profit margin expected when the transactions were initiated.

As a result, management also uses the non-generally accepted accounting principles (“non-GAAP”) financial measures of Economic Earnings and Economic Earnings per share when evaluating the results of operations for its nonutility operations. These non-GAAP financial measures should not be considered as an alternative to GAAP measures, such as net income, operating income, earnings per share from continuing operations or any other GAAP measure of liquidity or financial performance.

We define Economic Earnings as: Income from continuing operations, (1) less the change in unrealized gains and plus the change in unrealized losses, as applicable and in each case after tax, on all derivative transactions, and (2) less realized gains and plus realized losses, as applicable and in each case after tax, on all commodity derivative transactions attributed to expected purchases of gas in storage to match the recognition of these gains and losses with the recognition of the related cost of the gas in storage in the period of withdrawal, and (3) less the impact of transactions or contractual arrangements where the true economic impact will be realized in a future period. With respect to the third part of the definition of Economic Earnings:

For the three months ended March 31, 2015 and 2014, Economic Earnings includes additional depreciation expense on a solar generating facility. During 2012 an impairment charge was recorded within Income from Continuing Operations on a solar generating facility which reduced its depreciable basis and recurring depreciation expense. This impairment charge was excluded from Economic Earnings and, therefore, the related reduction in depreciation expense is being added back.

For the three months ended March 31, 2015, Economic Earnings excludes a $0.7 million loss (net of tax) from affiliated companies. This adjustment is the result of a reserve for uncollectible accounts recorded by an Energenic subsidiary that owns and operates a central energy center and energy distribution system for a hotel, casino and entertainment complex in Atlantic City, New Jersey (see Note 5 to the condensed consolidated financial statements). This charge is being excluded from Economic Earnings until the total economic impact of the proceedings are realized. Energenic management expects the proceedings to be concluded during 2015.


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Economic Earnings is a significant performance metric used by our management to indicate the amount and timing of income from continuing operations that we expect to earn after taking into account the impact of derivative instruments on the related transactions and transactions or contractual arrangements where the true economic impact will be realized in a future period. Specifically, we believe that this financial measure indicates to investors the profitability of the entire derivative related transaction and not just the portion that is subject to mark-to-market valuation under GAAP. Considering only the change in market value on the derivative side of the transaction can produce a false sense as to the ultimate profitability of the total transaction as no change in value is reflected for the non-derivative portion of the transaction.

Economic Earnings for the three months ended March 31, 2015 decreased $7.3 million to $58.9 million compared with the same period in 2014 primarily as a result of the following:

Economic Earnings from the wholesale energy operations at SJRG for the three months ended March 31, 2015 decreased $11.5 million to $5.0 million due primarily to lower daily trading margins and lower storage volumes sold as discussed under "Gross Margin - Energy Group" below.

Economic Earnings from on-site energy production at Marina for the three months ended March 31, 2015 decreased $1.7 million to $8.5 million due primarily to reduced operations at one of Energenic's operating subsidiaries, of which Marina has a 50% equity interest (see Note 5 to the condensed consolidated financial statements).

Economic Earnings from the gas utility operations at SJG for the three months ended March 31, 2015 increased $4.9 million to $42.6 million due primarily to the settlement of SJG's base rate case, continued investment in SJG's accelerated infrastructure programs and customer growth over the prior year.

The following table presents a reconciliation of our income from continuing operations and earnings per share from continuing operations to Economic Earnings and Economic Earnings per share for the three months ended March 31 (in thousands except per share data):
 
Three Months Ended
March 31,
 
2015
 
2014
Income from Continuing Operations
$
53,853

 
$
48,211

Minus/Plus:
 
 
 
Unrealized Mark-to-Market (Gains)/Losses on Derivatives
4,310

 
17,658

Realized (Gains)/Losses on Inventory Injection Hedges
30

 
322

Net Loss from Affiliated Companies (A)
742

 

Other (B)
(25
)
 
(25
)
Economic Earnings
$
58,910

 
$
66,166

 
 
 
 
Earnings per Share from Continuing Operations (C)
$
0.79

 
$
0.74

Minus/Plus:
 
 
 
Unrealized Mark-to-Market (Gains)/Losses on Derivatives
0.06

 
0.27

Net Loss from Affiliated Companies (A)
0.01

 

Economic Earnings per Share
$
0.86

 
$
1.01



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The effect of derivative instruments not designated as hedging instruments under GAAP in the condensed consolidated statements of income (see Note 12 to the condensed consolidated financial statements) is as follows (gains (losses) in thousands):

 
Three Months Ended
March 31,
 
2015
 
2014
Losses on energy related commodity contracts
$
(6,707
)
 
$
(28,601
)
Losses on interest rate contracts
(298
)
 
(214
)
                         Total before income taxes
(7,005
)
 
(28,815
)
                         Income taxes (D)
2,802

 
11,771

                     Total after income taxes
(4,203
)
 
(17,044
)
  Unrealized mark-to-market losses on derivatives
   held by affiliated companies, net of tax (D)
(107
)
 
(614
)
   Total unrealized mark-to-market losses on derivatives
(4,310
)
 
(17,658
)
   Realized losses on inventory injection hedges, net of tax (D)
(30
)
 
(322
)
Net Loss from Affiliated Companies (A)
(742
)
 

   Other (B)
25