Attached files
file | filename |
---|---|
EX-3.B - EXHIBIT 3(B) - SOUTH JERSEY GAS Co | ex3.htm |
EX-31.2 - EXHIBIT 31.2 - SOUTH JERSEY GAS Co | ex31_2.htm |
EX-32.1 - EXHIBIT 32.1 - SOUTH JERSEY GAS Co | ex32_1.htm |
EX-31.1 - EXHIBIT 31.1 - SOUTH JERSEY GAS Co | ex31_1.htm |
EX-32.2 - EXHIBIT 32.2 - SOUTH JERSEY GAS Co | ex32_2.htm |
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, 2011
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 000-22211
SOUTH JERSEY GAS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey
|
21-0398330
|
|
(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)
Securities registered pursuant to Section 12(b) of the Act: None
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 o 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 o
|
Accelerated filer o
|
Non-accelerated filer x (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 2, 2011 there were 2,339,139 shares of the registrant’s common stock outstanding. All common shares are owned by South Jersey Industries, Inc., the parent company of South Jersey Gas Company.
TABLE OF CONTENTS
Page No.
|
||
PART I
|
FINANCIAL INFORMATION
|
3
|
Item 1.
|
3
|
|
Item 2.
|
16
|
|
Item 3.
|
23
|
|
Item 4.
|
24
|
|
PART II
|
OTHER INFORMATION
|
25
|
Item 1.
|
25
|
|
Item 1A.
|
25
|
|
Item 6.
|
25
|
|
25
|
Three Months Ended
|
||||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
Operating Revenues
|
$ | 180,323 | $ | 196,716 | ||||
Operating Expenses:
|
||||||||
Cost of Sales (Excluding depreciation)
|
88,574 | 116,875 | ||||||
Operations
|
18,273 | 17,807 | ||||||
Maintenance
|
3,009 | 2,816 | ||||||
Depreciation
|
7,460 | 7,079 | ||||||
Energy and Other Taxes
|
4,514 | 4,348 | ||||||
Total Operating Expenses
|
121,830 | 148,925 | ||||||
Operating Income
|
58,493 | 47,791 | ||||||
Other Income and Expense
|
878 | 233 | ||||||
Interest Charges
|
(5,029 | ) | (4,015 | ) | ||||
Income Before Income Taxes
|
54,342 | 44,009 | ||||||
Income Taxes
|
(22,046 | ) | (18,139 | ) | ||||
Net Income
|
$ | 32,296 | $ | 25,870 |
The accompanying notes are an integral part of the unaudited condensed financial statements.
SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
Three Months Ended
|
||||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
Net Income
|
$ | 32,296 | $ | 25,870 | ||||
Other Comprehensive (Loss) Gain - Net of Tax:
|
||||||||
Unrealized (Loss) Gain on Available-for-Sale Securities
|
(154 | ) | 144 | |||||
Unrealized Gain on Derivatives - Other
|
7 | 7 | ||||||
Other Comprehensive (Loss) Gain - Net of Tax *
|
(147 | ) | 151 | |||||
Comprehensive Income
|
$ | 32,149 | $ | 26,021 |
* Determined using a combined statutory tax rate of 41% .
The accompanying notes are an integral part of the unaudited condensed financial statements.
SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Three Months Ended
|
||||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
Net Cash Provided by Operating Activities
|
$ | 64,707 | $ | 72,204 | ||||
Cash Flows from Investing Activities:
|
||||||||
Capital Expenditures
|
(25,605 | ) | (37,414 | ) | ||||
Purchase of Restricted Investments in Margin Accounts
|
(211 | ) | - | |||||
Investment in Long-Term Receivables
|
(1,492 | ) | (910 | ) | ||||
Proceeds from Long-Term Receivables
|
1,691 | 609 | ||||||
Net Cash Used in Investing Activities
|
(25,617 | ) | (37,715 | ) | ||||
Cash Flows from Financing Activities:
|
||||||||
Net Repayments of Lines of Credit
|
(38,650 | ) | (47,400 | ) | ||||
Proceeds from Issuance of Long-Term Debt
|
- | 15,000 | ||||||
Payments for Issuance of Long-Term Debt
|
(10 | ) | (559 | ) | ||||
Net Cash Used in Financing Activities
|
(38,660 | ) | (32,959 | ) | ||||
Net Increase in Cash and Cash Equivalents
|
430 | 1,530 | ||||||
Cash and Cash Equivalents at Beginning of Period
|
2,030 | 1,993 | ||||||
Cash and Cash Equivalents at End of Period
|
$ | 2,460 | $ | 3,523 |
The accompanying notes are an integral part of the unaudited condensed financial statements.
SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)
March 31,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Assets
|
||||||||
Property, Plant and Equipment:
|
||||||||
Utility Plant, at original cost
|
$ | 1,403,985 | $ | 1,384,797 | ||||
Accumulated Depreciation
|
(344,365 | ) | (337,993 | ) | ||||
|
||||||||
Property, Plant and Equipment - Net
|
1,059,620 | 1,046,804 | ||||||
Investments:
|
||||||||
Available-for-Sale Securities
|
7,015 | 6,700 | ||||||
Restricted Investments
|
4,512 | 4,301 | ||||||
Total Investments
|
11,527 | 11,001 | ||||||
Current Assets:
|
||||||||
Cash and Cash Equivalents
|
2,460 | 2,030 | ||||||
Accounts Receivable
|
74,112 | 37,619 | ||||||
Accounts Receivable - Related Parties
|
3,700 | 4,885 | ||||||
Unbilled Revenues
|
35,167 | 58,197 | ||||||
Provision for Uncollectibles
|
(3,823 | ) | (4,577 | ) | ||||
Natural Gas in Storage, average cost
|
6,010 | 20,109 | ||||||
Materials and Supplies, average cost
|
2,764 | 2,511 | ||||||
Prepaid Taxes
|
- | 15,907 | ||||||
Derivatives - Energy Related Assets
|
2,488 | 5,864 | ||||||
Other Prepayments and Current Assets
|
2,470 | 2,353 | ||||||
Total Current Assets
|
125,348 | 144,898 | ||||||
Regulatory and Other Noncurrent Assets:
|
||||||||
Regulatory Assets
|
239,436 | 248,413 | ||||||
Unamortized Debt Issuance Costs
|
6,539 | 6,718 | ||||||
Long-Term Receivables
|
7,402 | 7,285 | ||||||
Derivatives - Energy Related Assets
|
195 | 1,005 | ||||||
Other
|
2,415 | 2,511 | ||||||
Total Regulatory and Other Noncurrent Assets
|
255,987 | 265,932 | ||||||
Total Assets
|
$ | 1,452,482 | $ | 1,468,635 |
The accompanying notes are an integral part of the unaudited condensed financial statements.
SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands, except per share amounts)
March 31,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Capitalization and Liabilities
|
||||||||
Common Equity:
|
||||||||
Common Stock, Par Value $2.50 per share:
|
||||||||
Authorized - 4,000,000 shares
|
||||||||
Outstanding - 2,339,139 shares
|
$ | 5,848 | $ | 5,848 | ||||
Other Paid-In Capital and Premium on Common Stock
|
200,841 | 200,841 | ||||||
Accumulated Other Comprehensive Loss
|
(9,267 | ) | (9,120 | ) | ||||
Retained Earnings
|
261,612 | 229,316 | ||||||
|
||||||||
Total Common Equity
|
459,034 | 426,885 | ||||||
Long-Term Debt
|
340,000 | 340,000 | ||||||
Total Capitalization
|
799,034 | 766,885 | ||||||
Current Liabilities:
|
||||||||
Notes Payable
|
20,250 | 58,900 | ||||||
Current Portion of Long-Term Debt
|
50,000 | 50,000 | ||||||
Accounts Payable - Commodity
|
17,655 | 26,915 | ||||||
Accounts Payable - Other
|
20,613 | 19,628 | ||||||
Accounts Payable - Related Parties
|
9,476 | 10,830 | ||||||
Derivatives - Energy Related Liabilities
|
5,796 | 11,406 | ||||||
Deferred Income Taxes - Net
|
3,721 | 4,982 | ||||||
Customer Deposits and Credit Balances
|
10,150 | 10,525 | ||||||
Environmental Remediation Costs
|
19,697 | 25,662 | ||||||
Taxes Accrued
|
13,191 | 1,915 | ||||||
Pension Benefits
|
1,182 | 1,182 | ||||||
Interest Accrued
|
5,110 | 7,011 | ||||||
Other Current Liabilities
|
3,962 | 5,156 | ||||||
Total Current Liabilities
|
180,803 | 234,112 | ||||||
Regulatory and Other Noncurrent Liabilities:
|
||||||||
Regulatory Liabilities
|
61,146 | 69,248 | ||||||
Deferred Income Taxes - Net
|
250,809 | 239,648 | ||||||
Environmental Remediation Costs
|
63,248 | 61,731 | ||||||
Asset Retirement Obligations
|
28,214 | 27,925 | ||||||
Pension and Other Postretirement Benefits
|
61,178 | 59,754 | ||||||
Investment Tax Credits
|
1,132 | 1,207 | ||||||
Derivatives - Energy Related Liabilities
|
134 | 430 | ||||||
Derivatives - Other
|
2,630 | 3,150 | ||||||
Other
|
4,154 | 4,545 | ||||||
Total Regulatory and Other Noncurrent Liabilities
|
472,645 | 467,638 | ||||||
Commitments and Contingencies (Note 9)
|
||||||||
Total Capitalization and Liabilities
|
$ | 1,452,482 | $ | 1,468,635 |
The accompanying notes are an integral part of the unaudited condensed financial statements.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|
THE ENTITY - South Jersey Industries, Inc. (SJI) owns all of the outstanding common stock of South Jersey Gas Company (SJG), a regulated natural gas utility. SJG distributes natural gas in the seven southern most counties of New Jersey. In our opinion, the condensed financial statements reflect all normal and recurring adjustments needed to fairly present our financial position and operating results at the dates and for the periods presented. SJG’s business is 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, the accompanying condensed financial statements contain certain condensed financial information and exclude certain note disclosures normally included in annual audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These condensed financial statements should be read in conjunction with SJG’s 2010 Form 10-K for a more complete discussion of our accounting policies and certain other information.
REVENUE BASED TAXES - SJG collects certain revenue-based energy taxes from its customers. Such taxes include New Jersey State Sales Tax, Transitional Energy Facility Assessment (TEFA) 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. TEFA and PUA are included in both revenues and cost of sales, and totaled $3.9 million and $3.8 million for the three months ended March 31, 2011 and 2010, respectively.
NEW ACCOUNTING PRONOUNCEMENTS — No new accounting pronouncement issued or effective during 2011 and 2010 had, or is expected to have, a material impact on the condensed financial statements.
2.
|
STOCK-BASED COMPENSATION PLANS:
|
The following table summarizes the SJI nonvested restricted stock awards pertaining to SJG outstanding at March 31, 2011, 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
|
||||||||||||
Jan. 2009
|
8,318
|
$
|
39.350
|
28.6
|
%
|
1.20
|
%
|
|||||||||
Jan. 2010
|
10,024
|
$
|
39.020
|
29.0
|
%
|
1.65
|
%
|
|||||||||
Jan. 2011
|
7,544
|
$
|
50.940
|
27.5
|
%
|
1.01
|
%
|
Expected volatility is based on the actual volatility of SJI’s share price over the preceding 3-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 3-year term of the restricted shares. As notional dividend equivalents are credited to the holders, which are reinvested during the 3-year service period, no reduction to the fair value of the award is required.
The cost for restricted stock awards during 2011 and 2010 is approximately $0.1 million per quarter.
As of March 31, 2011, there was $0.7 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the restricted stock plans. That cost is expected to be recognized over a weighted average period of 2.2 years.
The following table summarizes information regarding restricted stock award activity during the three months ended March 31, 2011, excluding accrued dividend equivalents:
Shares
|
Weighted
Average
Grant Date
Fair Value
|
|||||||
Nonvested Shares Outstanding, January 1, 2011
|
18,342
|
$
|
39.170
|
|||||
Granted
|
7,544
|
$
|
50.940
|
|||||
Nonvested Shares Outstanding, March 31, 2011
|
25,886
|
$
|
42.600
|
During March 2011, SJG awarded 15,186 shares that had vested at December 31, 2010, to its officers at a market value of $0.8 million. During March 2010, SJG awarded 14,400 shares at a market value of $0.5 million. SJG has a policy of making cash payments to SJI to satisfy its obligations under this plan. Cash payments to SJI during both the three months ended March 31, 2011 and 2010 were approximately $0.3 million relating to stock awards. Additionally, a change in control could result in the nonvested shares becoming nonforfeitable or immediately payable in cash.
3.
|
RATES AND REGULATORY ACTIONS:
|
SJG is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU). The Company made a filing with the BPU in October 2010 requesting an extension of the Capital Investment Recovery Tracker (CIRT). The BPU approved the extension on March 29, 2011, allowing the Company to accelerate an additional $60.3 million of capital spending into 2011 and 2012. Under the CIRT, the Company will earn a return of, and return on, investment as the capital is spent.
On March 29, 2011, SJG credited the accounts of our Basic Gas Supply Service (BGSS) customers with refunds totaling $21.1 million due to gas costs that were lower than projected during the winter season. There have been no other significant regulatory actions or changes to SJG’s rate structure since December 31, 2010. See Note 3 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2010.
4.
|
REGULATORY ASSETS AND LIABILITIES:
|
There have been no significant changes to the nature of SJG’s regulatory assets and liabilities since December 31, 2010, which are described in Notes 3 and 4 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2010.
Regulatory Assets consisted of the following items (in thousands):
March 31,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Environmental Remediation Costs:
|
||||||||
Expended - Net
|
$
|
40,818
|
$
|
39,056
|
||||
Liability for Future Expenditures
|
82,945
|
87,393
|
||||||
Income Taxes - Flowthrough Depreciation
|
529
|
774
|
||||||
Deferred Asset Retirement Obligation Costs
|
24,485
|
24,247
|
||||||
Deferred Pension and Other Postretirement Benefit Costs
|
68,922
|
69,017
|
||||||
Conservation Incentive Program Receivable
|
4,416
|
12,291
|
||||||
Societal Benefit Costs Receivable
|
5,199
|
4,216
|
||||||
Premium for Early Retirement of Debt
|
659
|
699
|
||||||
Other Regulatory Assets
|
11,463
|
10,720
|
||||||
Total Regulatory Assets
|
$
|
239,436
|
$
|
248,413
|
Regulatory Liabilities consisted of the following items (in thousands):
March 31,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Excess Plant Removal Costs
|
$
|
48,170
|
$
|
48,409
|
||||
Deferred Revenues - Net
|
9,591
|
20,179
|
||||||
Other Regulatory Liabilities
|
3,385
|
660
|
||||||
Total Regulatory Liabilities
|
$
|
61,146
|
$
|
69,248
|
DEFERRED REVENUES – NET – Over/under collections of gas costs are monitored through SJG’s 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 BGSS decreased from a $20.2 million regulatory liability at December 31, 2010 to a $9.6 million regulatory liability at March 31, 2011 primarily due to the BGSS refund to customers discussed above in Note 3, partially offset by gas costs recovered from customers exceeding the actual cost of the commodity incurred during the first three months of 2011 as a result of natural gas prices remaining at very low levels.
5.
|
RELATED PARTY TRANSACTIONS:
|
There have been no significant changes in the nature of SJG’s related party transactions since December 31, 2010. See Note 5 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2010 for a detailed description of such transactions.
A summary of related party transactions, excluding pass-through items, included in Operating Revenues were as follows, (in thousands):
Three Months Ended
March 31,
|
||||||||
2011
|
2010
|
|||||||
Operating Revenues/Affiliates:
|
||||||||
SJRG
|
$
|
5,875
|
$
|
563
|
||||
Other
|
317
|
127
|
||||||
Total Operating Revenues/Affiliates
|
$
|
6,192
|
$
|
690
|
Related party transactions, excluding pass-through items, included in Operating Expenses were as follows, (in thousands):
Three Months Ended
March 31,
|
||||||||
2011
|
2010
|
|||||||
Costs of Sales/Affiliates (Excluding depreciation):
|
||||||||
SJRG
|
$
|
5,244
|
$
|
14,582
|
||||
Energy-Related Derivative Losses *
|
||||||||
SJRG
|
$
|
4,601
|
$
|
4,047
|
* Contracts used to hedge natural gas purchases. Included in Cost of Sales on the Condensed Statement of Income.
Operations Expense/Affiliates
|
||||||||
SJI
|
$
|
2,496
|
$
|
1,928
|
||||
SJIS
|
1,142
|
1,503
|
||||||
Millennium
|
731
|
688
|
||||||
Other
|
(97
|
)
|
(54
|
)
|
||||
Total Operations Expense/Affiliates
|
$
|
4,272
|
$
|
4,065
|
6.
|
FINANCIAL INSTRUMENTS:
|
Restricted Investments - In accordance with the terms of our tax-exempt first mortgage bonds, unused proceeds are required to be escrowed pending approved construction expenditures. As of both March 31, 2011 and December 31, 2010, the escrowed proceeds, including interest earned, totaled $0.1 million. The carrying amounts of the Restricted Investments approximate their fair value at March 31, 2011 and December 31, 2010. Beginning in the third quarter of 2010, SJG established a margin account with SJRG in conjunction with SJG's risk management activities as detailed in Note 11. The funds provided by SJG will increase or decrease as the number and value of outstanding energy-related contracts held with SJRG changes. As of March 31, 2011 and December 31, 2010, the balance held with SJRG totaled $4.4 million and $4.2 million, respectively.
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 $10.6 million and $10.4 million as of March 31, 2011 and December 31, 2010, respectively. The current portion of these receivables is reflected in Accounts Receivable and the non-current portion is reflected in Long-Term Receivables on the balance sheet. The carrying amounts noted above are net of unamortized discounts resulting from imputed interest in the amount of $1.2 million as of both March 31, 2011 and December 31, 2010. The annual amortization to interest is not material to SJG’s financial statements. The carrying amounts of these receivables approximate their fair value at March 31, 2011 and December 31, 2010.
Long-Term Debt – SJG did not issue any long-term debt during the first three months of 2011. During the first three months of 2010, SJG issued $15.0 million aggregate principal amount of its Medium Term Notes in a private placement due 2026. As of both March 31, 2011 and December 31, 2010, $35.0 million remained available under this $150.0 million Medium Term Note program that was approved by the BPU in September 2009.
The estimated fair values of SJG’s long-term debt, including current maturities, as of March 31, 2011 and December 31, 2010, were $449.0 million and $455.5 million, respectively. We based the estimates on interest rates available to SJG at the end of each period for debt with similar terms and maturities. Carrying amounts as of both March 31, 2011 and December 31, 2010, were $390.0 million. We retire debt when it is cost effective as permitted by the debt agreements. Our long-term debt agreements contain no financial covenants.
7.
|
UNUSED LINES OF CREDIT:
|
Credit facilities and available liquidity as of March 31, 2011 were as follows (in thousands):
Total Facility
|
Usage
|
Available Liquidity
|
Expiration Date
|
||||||||||
Revolving Credit Facility
|
$
|
100,000
|
$
|
14,550
|
$
|
85,450
|
August 2011 (A)
|
||||||
Line of Credit
|
40,000
|
—
|
40,000
|
August 2011 (A)
|
|||||||||
Uncommitted Bank Lines
|
40,000
|
5,700
|
34,300
|
Various
|
|||||||||
Total
|
$
|
180,000
|
$
|
20,250
|
$
|
159,750
|
(A) See Note 12
Average borrowings outstanding under these credit facilities during the three months ended March 31, 2011 and 2010 was $38.6 million and $87.8 million, respectively. The maximum amount outstanding under these credit facilities during the three months ended March 31, 2011 and 2010 was $61.8 million and $112.5 million, respectively.
All committed facilities contain one financial covenant regarding the ratio of total debt to total capitalization, measured on a quarterly basis. SJG was in compliance with these covenants as of March 31, 2011. Based upon the existing credit facilities and a regular dialogue with our banks, we believe that there will continue to be sufficient credit available to meet our business’ future liquidity needs. Borrowings under these credit facilities are at market rates. The weighted average borrowing cost, which changes daily, was 0.76% and 0.87% at March 31, 2011 and 2010, respectively.
8.
|
PENSION AND OTHER POSTRETIREMENT BENEFITS:
|
For the three months ended March 31, 2011 and 2010, 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
|
Other Postretirement Benefits
|
|||||||||||||||
Three Months Ended
March 31,
|
Three Months Ended
March 31,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Service Cost
|
$
|
785
|
$
|
662
|
$
|
215
|
$
|
199
|
||||||||
Interest Cost
|
1,826
|
1,744
|
619
|
686
|
||||||||||||
Expected Return on Plan Assets
|
(1,815
|
)
|
(1,498
|
)
|
(446
|
)
|
(338
|
)
|
||||||||
Amortizations:
|
||||||||||||||||
Prior Service Cost (Credits)
|
52
|
47
|
(71
|
)
|
(74
|
)
|
||||||||||
Actuarial Loss
|
1,009
|
1,062
|
312
|
382
|
||||||||||||
Net Periodic Benefit Cost
|
1,857
|
2,017
|
629
|
855
|
||||||||||||
Capitalized Benefit Costs
|
(910
|
)
|
(988
|
)
|
(308
|
)
|
(419
|
)
|
||||||||
Total Net Periodic Benefit Expense
|
$
|
947
|
$
|
1,029
|
$
|
321
|
$
|
436
|
Capitalized benefit costs reflected in the table above relate to our construction program.
No contributions were made to the pension plans during the three-month periods ending March 31, 2011 and 2010. We expect to make no contributions to our pension plans in 2011; however, changes in future investment performance and discount rates may ultimately result in a contribution. We also have a regulatory obligation to contribute approximately $3.6 million annually to our other postretirement benefit plans’ trusts, less costs incurred directly by us.
See Note 11 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2010 for additional information related to SJG’s pension and other postretirement benefits.
9.
|
COMMITMENTS AND CONTINGENCIES:
|
STANDBY LETTER OF CREDIT - SJG provided a $25.2 million letter of credit, under a separate credit facility from those it borrows under to provide liquidity support for the remarketing of variable-rate demand bonds issued through the NJEDA. The bonds were used to finance the expansion of SJG’s natural gas distribution system. This letter of credit expires in August 2011.
ENVIRONMENTAL REMEDIATION COSTS - SJG 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. There have been no changes to the status of SJG’s environmental remediation efforts since December 31, 2010, as described in Note 12 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2010.
GAS SUPPLY RELATED CONTRACTS - In the normal course of conducting business, we have entered into long-term contracts for natural gas supplies, firm transportation and gas storage service. The earliest that any of these contracts expire is October 2012. The transportation and storage service agreements between us and our interstate pipeline suppliers were made under FERC approved tariffs. Our cumulative obligation for demand charges and reservation fees paid to suppliers for these services is approximately $3.6 million per month and is recovered on a current basis through the BGSS.
PENDING LITIGATION - We are subject to claims arising in the ordinary course of business and other legal proceedings. 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. Management does not currently anticipate the disposition of any known claims to have a material adverse effect on our financial position, results of operations or liquidity.
COLLECTIVE BARGAINING AGREEMENTS - Unionized personnel represent approximately 65% of our workforce at March 31, 2011. The Company has collective bargaining agreements with two unions who represent these employees: the International Brotherhood of Electrical Workers (IBEW) that operates under a collective bargaining agreement that runs through February 2013, with the option to extend until February 2014 at the union’s election, and the International Association of Machinists and Aerospace Workers (IAM) that operates under a collective bargaining agreement that runs through August 2014.
10.
|
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.
|
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, 2011
|
||||||||||||||||
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Assets -
|
||||||||||||||||
Available-for-Sale Securities (A)
|
$
|
7,015
|
$
|
-
|
$
|
7,015
|
$
|
-
|
||||||||
Derivatives – Energy Related Assets (B)
|
2,683
|
1,333
|
1,350
|
-
|
||||||||||||
$
|
9,698
|
$
|
1,333
|
$
|
8,365
|
$
|
-
|
|||||||||
Liabilities -
|
||||||||||||||||
Derivatives – Energy Related Liabilities (B)
|
$
|
5,930
|
$
|
5,625
|
$
|
305
|
$
|
-
|
||||||||
Derivatives – Other (C)
|
2,630
|
-
|
2,630
|
-
|
||||||||||||
$
|
8,560
|
$
|
5,625
|
$
|
2,935
|
$
|
-
|
As of December 31, 2010
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Available-for-Sale Securities (A)
|
|
$
|
6,700
|
|
|
$
|
6,700
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivatives – Energy Related Assets (B)
|
|
|
6,869
|
|
|
|
784
|
|
|
|
6,085
|
|
|
|
-
|
|
|
|
$
|
13,569
|
|
|
$
|
7,484
|
|
|
$
|
6,085
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives – Energy Related Liabilities (B)
|
|
$
|
11,836
|
|
|
$
|
10,614
|
|
$
|
1,222
|
|
|
$
|
-
|
|
|
Derivatives – Other (C)
|
|
|
3,150
|
|
|
|
-
|
|
|
|
3,150
|
|
|
|
-
|
|
|
|
$
|
14,986
|
|
|
$
|
10,614
|
|
|
$
|
4,372
|
|
|
$
|
-
|
|
(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. 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, include interest rate swaps that 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.
11.
|
DERIVATIVE INSTRUMENTS:
|
SJG is involved in buying, selling, transporting and storing natural gas and is subject to market risk on expected future purchases and sales due to commodity price fluctuations. The Company, through its affiliate South Jersey Resources Group (SJRG), 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, futures contracts, swap agreements and options contracts. As of March 31, 2011, SJG had outstanding derivative contracts intended to limit the exposure to market risk on 18.1 MMdts of expected future purchases of natural gas. These contracts, which do not qualify for the normal purchase and sale exemption and 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 balance sheets. The costs or benefits of these short-term contracts are recoverable through SJG’s Basic Gas Supply Service (BGSS) clause, subject to BPU approval. As a result, the net unrealized pre-tax gains and losses for these energy related commodity contracts are included with realized gains and losses in Regulatory Assets or Regulatory Liabilities on the condensed balance sheets. As of March 31, 2011 and December 31, 2010, SJG had $3.2 million and $5.0 million of unrealized losses, respectively, included in its BGSS related to open financial contracts.
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, which have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives-Other on the condensed balance sheets. The fair value represents the amount SJG would have to pay the counterparty to terminate these contracts as of those dates. There have been no significant changes to the Company’s active interest rate swaps since December 31, 2010 which are described in Note 1 to the Financial Statements in Item 8 of SJG’s Annual Report on Form 10-K as of December 31, 2010. Subject to BPU approval, the market value upon termination of these interest rate derivatives can be recovered in rates and therefore these unrealized losses have been included in Regulatory Assets on the condensed balance sheets.
We previously used derivative transactions known as “Treasury Locks” to hedge against the impact on our cash flows of possible interest rate increases on debt issued in September 2005. The initial $1.4 million cost of the Treasury Locks has been included in Accumulated Other Comprehensive Loss and is being amortized over the 30 year life of the associated debt issue. As of March 31, 2011 and December 31, 2010, the unamortized balance was approximately $1.1 million.
The fair values of all derivative instruments, as reflected in the condensed balance sheets as of March 31, 2011 and December 31, 2010, are as follows (in thousands):
Derivatives not designated as hedging instruments under GAAP
|
March 31, 2011
|
December 31, 2010
|
||||||||||||||
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|||||||||||||
Energy related commodity contracts:
|
||||||||||||||||
Derivatives – Energy Related – Current
|
$
|
2,488
|
$
|
5,796
|
$
|
5,864
|
$
|
11,406
|
||||||||
Derivatives – Energy Related – Non-Current
|
195
|
134
|
1,005
|
430
|
||||||||||||
Interest rate contracts:
|
||||||||||||||||
Derivatives – Other
|
-
|
2,630
|
-
|
3,150
|
||||||||||||
Total derivatives not designated as hedging instruments under GAAP
|
$
|
2,683
|
$
|
8,560
|
$
|
6,869
|
$
|
14,986
|
The effect of derivative instruments on the condensed statements of income for the three months ended March 31, 2011 and 2010 are as follows (in thousands):
Three months ended March 31,
|
||||||||
Derivatives in Cash Flow Hedging Relationships Interest Rate Contracts:
|
2011
|
2010
|
||||||
Losses reclassified from accumulated OCI into income (a)
|
$
|
(12
|
)
|
$
|
(12
|
)
|
(a) Included in Interest Charges
Net realized losses associated with SJG’s energy-related financial commodity contracts of $4.6 million and $4.0 million for the three months ended March 31, 2011 and 2010 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 and there is no impact to earnings.
12.
|
SUBSEQUENT EVENT:
|
A new revolving credit facility was established by SJG in May 2011. The facility is a $200.0 million, four-year facility, provided by a syndicate of banks and contains one financial covenant limiting the ratio of indebtedness to total capitalization to not more than 0.65 to 1. This facility replaces SJG’s $100.0 million revolving credit facility and $40.0 million committed line of credit, both expiring in August of 2011.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
OVERVIEW:
Organization - We are an operating public utility company engaged in the purchase, transmission and sale of natural gas for residential, commercial and industrial use. We also sell natural gas and pipeline transportation capacity (off-system sales) on a wholesale basis to various customers on the interstate pipeline system and transport natural gas purchased directly from producers or suppliers to their customers. We served 349,096 customers at March 31, 2011 compared with 345,350 customers at March 31, 2010.
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 by the Company 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 or suppliers to fulfill their contractual obligations; and changes in business strategies.
A discussion of these and other risks and uncertainties may be found in SJG’s Form 10-K for the year ended December 31, 2010 and in other filings made by us with the Securities and Exchange Commission. 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 SJG 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, SJG 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 financial statements and related disclosures. Actual results could differ from those estimates. Five types of transactions presented in our condensed financial statements require a significant amount of judgment and estimation. These relate to regulatory accounting, derivatives, environmental remediation costs, pension and other postretirement benefit costs, and revenue recognition. A discussion of these estimates and assumptions may be found in SJG’s Form 10-K for the year ended December 31, 2010.
New Accounting Pronouncements - No new accounting pronouncement issued or effective during 2011 and 2010 had, or is expected to have, a material impact on the condensed financial statements.
Regulatory Actions – Other than the changes discussed in Note 3 to the condensed financial statements, there have been no significant regulatory actions since December 31, 2010. See detailed discussions concerning Regulatory Actions in Note 3 to the Financial Statements in item 8 of SJG’s Form 10-K for the year ended December 31, 2010.
Environmental Remediation –There have been no significant changes to the status of SJG’s environmental remediation efforts since December 31, 2010. See detailed discussion concerning Environmental Remediation in Note 12 to the Financial Statements in Item 8 of SJG’s Form 10-K for the year ended December 31, 2010.
Competition - See detailed discussion concerning competition in SJG’s Form 10-K for the year ended December 31, 2010.
Customer Choice Legislation - All residential natural gas customers in New Jersey can choose their natural gas commodity supplier under the terms of the “Electric Discount and Energy Competition Act of 1999.” This bill created the framework and necessary time schedules for the restructuring of the state’s electric and natural gas utilities. The Act established unbundling, under which redesigned utility rate structures allow natural gas and electric consumers to choose their energy supplier. Customers purchasing natural gas from a provider other than the local utility (marketer) are charged for the gas costs by the marketer and charged for the transportation costs by the utility. The number of customers purchasing their natural gas from marketers was 36,789 and 28,398 at March 31, 2011 and 2010, respectively.
RESULTS OF OPERATIONS:
The following table summarizes the composition of selected gas utility data for the three months ended March 31, (in thousands, except for degree day data):
Three Months Ended
|
||||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
Throughput – dth:
|
||||||||
Firm Sales -
|
||||||||
Residential
|
11,241
|
11,431
|
||||||
Commercial
|
2,795
|
2,694
|
||||||
Industrial
|
155
|
148
|
||||||
Cogeneration & Electric Generation
|
120
|
44
|
||||||
Firm Transportation -
|
||||||||
Residential
|
1,253
|
982
|
||||||
Commercial
|
2,759
|
2,641
|
||||||
Industrial
|
3,445
|
3,089
|
||||||
Cogeneration & Electric Generation
|
2,401
|
2,193
|
||||||
Total Firm Throughput
|
24,169
|
23,222
|
||||||
Interruptible Sales
|
3
|
3
|
||||||
Interruptible Transportation
|
692
|
586
|
||||||
Off-System
|
1,904
|
1,116
|
||||||
Capacity Release
|
10,155
|
10,189
|
||||||
Total Throughput
|
36,923
|
35,116
|
Three Months Ended
|
||||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
Utility Operating Revenues:
|
||||||||
Firm Sales -
|
||||||||
Residential
|
$
|
114,852
|
$
|
137,515
|
||||
Commercial
|
26,800
|
29,623
|
||||||
Industrial
|
1,720
|
1,795
|
||||||
Cogeneration & Electric Generation
|
809
|
411
|
||||||
Firm Transportation -
|
||||||||
Residential
|
6,550
|
4,454
|
||||||
Commercial
|
9,705
|
8,599
|
||||||
Industrial
|
4,395
|
3,976
|
||||||
Cogeneration & Electric Generation
|
1,742
|
2,009
|
||||||
Total Firm Revenues
|
166,573
|
188,382
|
||||||
Interruptible Sales
|
54
|
48
|
||||||
Interruptible Transportation
|
634
|
607
|
||||||
Off-System
|
10,134
|
6,924
|
||||||
Capacity Release
|
2,671
|
518
|
||||||
Other
|
257
|
237
|
||||||
Total Utility Operating Revenues
|
180,323
|
196,716
|
||||||
Less:
|
||||||||
Cost of Sales
|
88,574
|
116,875
|
||||||
Conservation Recoveries*
|
3,255
|
3,119
|
||||||
RAC Recoveries*
|
1,591
|
1,741
|
||||||
EET Recoveries*
|
509
|
179
|
||||||
Revenue Taxes
|
3,873
|
3,752
|
||||||
Utility Margin
|
$
|
82,521
|
$
|
71,050
|
Margin:
|
||||||||
Residential
|
$
|
58,799
|
$
|
45,300
|
||||
Commercial and Industrial
|
21,327
|
14,958
|
||||||
Cogeneration and Electric Generation
|
775
|
709
|
||||||
Interruptible
|
48
|
38
|
||||||
Off-system & Capacity Release
|
695
|
309
|
||||||
Other Revenues
|
256
|
236
|
||||||
Margin Before Weather Normalization & Decoupling
|
81,900
|
61,550
|
||||||
CIRT Mechanism
|
566
|
2,024
|
||||||
CIP Mechanism
|
(26
|
)
|
7,442
|
|||||
EET Mechanism
|
81
|
34
|
||||||
Utility Margin
|
$
|
82,521
|
$
|
71,050
|
||||
Degree Days:
|
2,495
|
2,433
|
*Represents expenses for which there is a corresponding credit in operating revenues. Therefore, such recoveries have no impact on our financial results.
Throughput – Total gas throughput increased 1.8 MMdts, or 5.1%, for the three months ended March 31, 2011, compared with the same period in 2010. This increase was realized in the firm and Off-System Sales (OSS) markets. Firm throughput increased 0.9 MMdts, or 4.1%, primarily as a result of 2.6% colder weather during the first quarter of 2011, compared with the first quarter of 2010. In addition, the Company added 3,746 customers over the twelve month period ended March 31, 2011, which represents a growth rate of 1.1%. OSS increased 0.8 MMdts, or 70.6%, as a result of increased capacity for such sales. Additional capacity became available during the latter part of 2010 as capacity previously transferred out of SJG under the provisions of the Conservation Incentive Program (CIP) was returned to the utility.
Conservation Incentive Program (CIP) - The effects of the CIP on our net income and the associated weather comparisons were as follows ($’s in millions):
Three Months Ended
March 31,
|
||||||||
2011
|
2010
|
|||||||
Net Income Benefit:
|
||||||||
CIP – Weather Related
|
$
|
(0.6
|
)
|
$
|
0.4
|
|||
CIP – Usage Related
|
0.6
|
4.0
|
||||||
Total Net Income Benefit
|
$
|
0.0
|
$
|
4.4
|
||||
Weather Compared to 20-Year Average
|
1.6% colder
|
0.2% colder
|
||||||
Weather Compared to Prior Year
|
2.6% colder
|
3.4% warmer
|
Operating Revenues – Revenues decreased $16.4 million, or 8.3%, during the three months ended March 31, 2011 compared with the same period in the prior year. Firm sales revenue decreased $21.8 million, or 11.6%, during the first quarter of 2011 versus the first quarter of 2010, as the result of lower natural gas costs experienced during the first quarter of 2011. The average cost of natural gas purchased during the first quarter of 2011 was $6.45 per dt, representing an 11.1% decrease relative to the average cost of $7.26 per dt during the same period in 2010.
While changes in gas costs and BGSS recoveries may fluctuate from period to period, SJG does not profit from the sale of the commodity. Therefore, corresponding fluctuations in Operating Revenue or Cost of Sales have no impact on Company profitability, as further discussed under “Margin.”
OSS revenue and capacity release revenue increased $3.2 million and $2.2 million, respectively, during the first quarter of 2011 versus the first quarter of 2010, as both sales volume and capacity release unit prices increased. As previously stated under “Throughput,” this was made possible when additional capacity became available during the latter part of 2010, as capacity previously transferred out of SJG under the CIP was returned to SJG. As reflected in the Margin table above, the impact of the higher OSS did not have a material impact on the earnings of the Company, as SJG is required to share 85% of the profits of such activity with the ratepayers.
Margin (pre-tax) - SJG’s margin is defined as natural gas revenues less natural gas costs, regulatory rider expenses and related volumetric and revenue based energy taxes. SJG believes that margin provides a more meaningful basis for evaluating utility operations than revenues since natural gas costs, regulatory rider expenses and related energy expenses are passed through to customers, and therefore, they have no effect on margin. Natural gas costs are charged to operating expenses on the basis of therm sales at the prices approved by the New Jersey Board of Public Utilities through SJG’s BGSS tariff.
Total margin increased $11.5 million, or 16.1%, for the three months ended March 31, 2011, compared with the same period in 2010 primarily due to the base rate increase granted in September 2010 and customer additions. Certain revenues previously recovered through the CIRT and the CIP were rolled into base rates resulting in decreased recoveries under these programs in 2011.
Under the CIP, higher customer usage resulting from weather that was 2.6% colder than last year generated pre-tax margin of approximately $1.0 million that offset the margin that would have been lost due to lower non-weather related customer usage. In the first quarter of 2010, the CIP protected $7.4 million of pre-tax margin that would have been lost due to lower customer usage. Of this amount, $0.7 million was related to weather variations and $6.7 million was related to other customer usage variations.
Operating Expenses - A summary of changes in operating expenses (in thousands):
Three Months Ended
March 31,
|
||||
2011 vs. 2010
|
||||
Operations
|
$
|
466
|
||
Maintenance
|
193
|
|||
Depreciation
|
381
|
|||
Energy and Other Taxes
|
166
|
Operations – Operations expense increased $0.5 million for the three months ended March 31, 2011, as compared with the same period in 2010. The increase is primarily due to increased spending under the New Jersey Clean Energy Program and Energy Efficiency Programs, which experienced a net increase of $0.5 million for the first quarter of 2011 as compared to 2010. Such costs are recovered on a dollar-for-dollar basis; therefore, SJG experienced an offsetting increase in revenues during the period. SJG also recognized $0.3 million in amortization of previously deferred regulatory expenses, the recovery of which was approved in the Company’s September 2010 rate case settlement. As a result of this settlement, such cost recognition is offset by a corresponding increase in revenue. Finally, the Company experienced increases in various other areas including general compensation increases and corporate support, governance and compliance costs, primarily attributable to our parent, SJI. Partially offsetting the expense increases noted above were lower expenses associated with the reserve for uncollectible customer accounts, which decreased $(0.7) million for the three months ended March 31, 2011 compared with the same period last year. Changes in the uncollectible reserve are the result of fluctuations in levels of customer account receivable balances, which were lower than one year ago due to a lower BGSS rate in effect, as discussed previously under “Operating Revenues,” and a March 2011 customer refund of $21.1 million.
Maintenance - Maintenance expense increased during the three months ended March 31, 2011, compared with the same period in 2010, primarily due to the BPU-approved amortization and recovery of previously deferred maintenance costs, primarily those associated with a federally mandated pipeline integrity management program. Such amortizations, which are being recovered through an offsetting amount in revenues beginning in September 2010, totaled $0.3 million during the first quarter of 2011. Partially offsetting these increases are lower levels of Remediation Adjustment Clause (RAC) amortization. RAC-related expenses do not affect earnings either, as we recognize an offsetting amount in revenues.
Depreciation - Depreciation expense increased during the three months ended March 31, 2011, as compared with the same period in 2010, due mainly to SJG’s continuing investment in utility plant.
Energy and Other Taxes - Energy and Other Taxes increased during the three months ended March 31, 2011, compared with the same period in 2010, primarily due to higher taxable firm throughput in 2011 resulting from 2.6% colder weather and a 1.1% increase in the number of customers served over the twelve month period ended March 31, 2011.
Other Income and Expense - Other Income and Expense reflects an increase during the three months ended March 31, 2011, compared with the same period in 2010, primarily due to the sale of certain available-for-sale securities at a gain of $0.6 million.
Interest Charges – Interest Charges increased $1.0 million during the three months ended March 31, 2011, compared with the same period in 2010, due to the issuance of $115.0 million aggregate principal long-term debt issued during 2010 at higher interest rates than the short-term debt previously used to finance our capital program.
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity needs are driven by factors that include natural gas commodity prices; the impact of weather on customer bills; lags in fully collecting gas costs from customers under the Basic Gas Supply Service charge; the timing of construction and remediation expenditures and related permanent financings; mandated tax payment dates; both discretionary and required repayments of long-term debt; and the amounts and timing of dividend payments.
Cash Flows from Operating Activities - Liquidity needs are first met with net cash provided by operating activities. Net cash provided by operating activities totaled $64.7 million and $72.2 million in the first three months of 2011 and 2010, respectively. Net cash provided by operating activities varies from year-to-year primarily due to the impact of weather on customer demand and related gas purchases, customer usage factors related to conversion efforts and the price of the natural gas commodity, inventory utilization, and gas cost recoveries. Higher cash collections of both customer receivable balances and regulatory clauses positively impacted net cash provided by operating activities in the first three months of 2011. This benefit was offset by higher spending on environmental remediation during the first quarter.
Cash Flows from Investing Activities - SJG has a continuing need for cash resources for capital purchases, primarily to invest in new and replacement facilities and equipment. Cash used for capital purchases was $25.6 million and $37.4 million during the first three months of 2011 and 2010, respectively. We estimate the net cash outflows for construction projects for fiscal years 2011, 2012 and 2013 to be approximately $121.1 million, $73.8 million and $56.0 million, respectively. For capital expenditures, including those under the CIRT, SJG will use short-term borrowings under lines of credit from commercial banks to finance capital expenditures as incurred. From time to time, the Company will refinance the short-term debt incurred to support capital expenditures with long-term debt.
Cash Flows from Financing Activities - SJG uses short-term borrowings under lines of credit from commercial banks to supplement cash from operations, to support working capital needs and to finance capital expenditures as incurred. From time to time, the Company refinances short-term debt incurred to finance capital expenditures with long-term debt. Debt is incurred primarily to expand and upgrade our gas transmission and distribution system and to support seasonal working capital needs related to inventories and customer receivables.
Credit facilities and available liquidity as of March 31, 2011 were as follows (in thousands):
Total Facility
|
Usage
|
Available Liquidity
|
Expiration Date
|
||||||||||
Revolving Credit Facility
|
$
|
100,000
|
$
|
14,550
|
$
|
85,450
|
August 2011 (A)
|
||||||
Line of Credit
|
40,000
|
—
|
40,000
|
August 2011 (A)
|
|||||||||
Uncommitted Bank Lines
|
40,000
|
5,700
|
34,300
|
Various
|
|||||||||
Total
|
$
|
180,000
|
$
|
20,250
|
$
|
159,750
|
(A) See Note 12 to the condensed financial statements.
Average borrowings outstanding under these credit facilities during the three months ended March 31, 2011 and 2010 was $38.6 million and $87.8 million, respectively. The maximum amount outstanding under these credit facilities during the three months ended March 31, 2011 and 2010 was $61.8 million and $112.5 million, respectively.
Based upon the existing credit facilities and a regular dialogue with our banks, we believe there will continue to be sufficient credit available to meet our future liquidity needs.
SJG supplements its operating cash flow and credit lines with both debt and equity capital. Over the years, SJG has used long-term debt, primarily in the form of First Mortgage Bonds and Medium Term Notes (MTN), secured by the same pool of utility assets, to finance our long-term borrowing needs. These needs are primarily capital expenditures for property, plant and equipment. In March 2010, SJG issued $15.0 million aggregate principal amount of its MTNs under private placements. No other long-term debt was issued during the first three months of 2011 or 2010.
SJG’s capital structure was as follows:
As of
March 31,
2011
|
As of
December 31,
2010
|
|||||||
Common Equity
|
52.8
|
%
|
48.8
|
%
|
||||
Long-Term Debt
|
44.9
|
44.5
|
||||||
Short-Term Debt
|
2.3
|
6.7
|
||||||
Total
|
100.0
|
%
|
100.0
|
%
|
COMMITMENTS AND CONTINGENCIES:
SJG has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment, working capital, and for environmental remediation costs. Cash outflows for capital expenditures for the first three months of 2011 amounted to $25.6 million. Management estimates net cash outflows for construction projects for 2011, 2012 and 2013, to be approximately $121.1 million, $73.8 million and $56.0 million, respectively. Costs for remediation projects, net of insurance reimbursements, for the first three months of 2011 amounted to net cash outflows of $3.4 million. Total cash outflows for remediation projects are expected to be $18.2 million, $11.4 million and $8.9 million for 2011, 2012, and 2013, respectively. As discussed in Notes 4 and 12 to the Financial Statements in Item 8 of SJG’s 10-K as of December 31, 2010, environmental remediation costs are subject to recovery from insurance carriers and ratepayers.
SJG provided a $25.2 million letter of credit, outside of the revolving credit facility, to support variable-rate demand bonds issued through the NJEDA to finance the expansion of SJG's natural gas distribution system. This letter of credit expires in August 2011.
SJG has certain commitments for both pipeline capacity and gas supply for which it pays fees regardless of usage. Those commitments as of March 31, 2011, average $43.3 million annually and total $175.2 million over the contracts’ lives. Approximately 20% of the financial commitments under these contracts expire during the next five years. SJG expects to renew each of these contracts under renewal provisions as provided in each contract. SJG recovers all prudently incurred fees through rates via the Basic Gas Supply Service clause.
Contractual Cash Obligations – Details concerning contractual cash obligations may be found in SJG’s Form 10-K for the year ended December 31, 2010. There were no significant changes to SJG’s contractual cash obligation in 2011.
Off-Balance Sheet Arrangements - We have no off-balance sheet arrangements.
Pending Litigation - We are subject to claims arising in the ordinary course of business and other legal proceedings. We accrue liabilities related to claims when we can determine the amount or range of amounts of probable settlement costs. Management does not currently anticipate the disposition of any known claims to have a material adverse effect on our financial position, results of operations or liquidity.
Ratio of Earnings to Fixed Charges - Our ratio of earnings to fixed charges for each of the periods indicated is as follows:
Twelve Months
Ended Mar. 31,
|
Year Ended December 31,
|
||||||||||||||||||||
2011
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
5.4x
|
5.1x
|
4.9x
|
4.4x
|
4.1x
|
3.7x
|
The ratio of earnings to fixed charges represents, on a pre-tax basis, the number of times earnings covers fixed charges. Earnings consist of net income, to which has been added fixed charges and taxes. Fixed charges consist of interest charges (rentals are not material).
Item 3. Quantitative and Qualitative Disclosures about Market Risks
MARKET RISKS:
Commodity Market Risks - We are involved in buying, selling, transporting and storing natural gas and are subject to market risk due to price fluctuations. To hedge against this risk, we enter into a variety of physical and financial transactions including forward contracts, futures and options agreements. To manage these transactions, we have a well-defined risk management policy approved by our Board of Directors that includes volumetric and monetary limits. Management reviews reports detailing activity daily. Generally, the derivative activities described above are entered into for risk management purposes.
We transact commodities on a physical basis and typically do not enter into financial derivative positions directly. South Jersey Resources Group, LLC (SJRG), an affiliate by common ownership, manages our risk by entering into the types of transactions noted above. As part of our gas purchasing strategy, we use financial contracts through SJRG to hedge against forward price risk. These contracts are recoverable through our BGSS, subject to BPU approval. It is management’s policy, to the extent practical, within predetermined risk management policy guidelines, to have limited unmatched positions on a deal or portfolio basis while conducting these activities. As a result of holding open positions to a minimal level, the economic impact of changes in value of a particular transaction is substantially offset by an opposite change in the related hedge transaction. The majority of our contracts are typically less than 12-months long. The fair value and maturity of all these energy trading and hedging contracts determined using mark-to-market accounting as of March 31, 2011 is as follows (in thousands):
Assets
|
||||||||||||
Source of Fair Value
|
Maturity
< 1 Year
|
Maturity
1 - 3 Years
|
Total
|
|||||||||
Prices Actively Quoted (NYMEX)
|
$
|
1,138
|
$
|
195
|
$
|
1,333
|
||||||
Prices Provided by Other
|
1,350
|
-
|
1,350
|
|||||||||
Total
|
$
|
2,488
|
$
|
195
|
$
|
2,683
|
Liabilities
|
||||||||||||
Maturity
|
Maturity
|
|||||||||||
Source of Fair Value
|
< 1 Year
|
1 - 3 Years
|
Total
|
|||||||||
Prices Actively Quoted (NYMEX)
|
$
|
5,491
|
$
|
134
|
$
|
5,625
|
||||||
Prices Provided by Other External Sources (Basis)
|
305
|
-
|
305
|
|||||||||
Total
|
$
|
5,796
|
$
|
134
|
$
|
5,930
|
NYMEX (New York Mercantile Exchange) is the primary national commodities exchange on which natural gas is traded. Basis represents the price of a NYMEX natural gas futures contract adjusted for the difference in price for delivering the gas at another location. Contracted volumes of our NYMEX contracts are 11.8 MMDth with a weighted-average settlement price of $4.99 per dth. Contracted volumes of our Basis contracts are 6.3 MMDth with a weighted average settlement price of $0.36 per dth.
A reconciliation of our estimated net fair value of energy-related derivatives follows (in thousands):
Net Derivatives — Energy Related Liability, January 1, 2011
|
$
|
(4,967
|
)
|
|
Contracts Settled During the Three Months ended March 31, 2011, Net
|
1,349
|
|||
Other Changes in Fair Value from Continuing and New Contracts, Net
|
371
|
|||
Net Derivatives — Energy Related Liability, March 31, 2011
|
$
|
(3,247
|
)
|
Interest Rate Risk - Our exposure to interest rate risk relates primarily to short-term, variable-rate borrowings. Short-term, variable-rate debt outstanding at March 31, 2011, was $20.3 million and averaged $38.6 million during the first three months of 2011. A hypothetical 100 basis point (1%) increase in interest rates on our average variable-rate debt outstanding would result in a $0.2 million increase in our annual interest expense, net of tax. The 100 basis point increase was chosen for illustrative purposes, as it provides a simple basis for calculating the impact of interest rate changes under a variety of interest rate scenarios. Over the past five years, the change in basis points (b.p.) of our average monthly interest rates from the beginning to end of each year was as follows: 2010 – 5 b.p. increase; 2009 – 29 b.p. decrease; 2008 - 317 b.p. decrease; 2007 - 36 b.p. decrease; and 2006 - 72 b.p. increase. As of March 31, 2011, our average borrowing cost, which changes daily, was 0.76%.
We issue long-term debt either at fixed rates or use interest rate derivatives to limit our exposure to changes in interest rates on variable-rate, long-term debt. As of March 31, 2011, the interest costs on all of our long-term debt was either at a fixed-rate or hedged via an interest rate derivative. Consequently, interest expense on existing long-term debt is not significantly impacted by changes in market interest rates.
As of March 31, 2011, SJG’s active interest rate swaps were as follows:
Amount
|
Fixed
Interest Rate
|
Start Date
|
Maturity
|
Type
|
|||||||
$
|
12,500,000
|
3.430
|
%
|
12/01/2006
|
02/01/2036
|
Tax-exempt
|
|||||
$
|
12,500,000
|
3.430
|
%
|
12/01/2006
|
02/01/2036
|
Tax-exempt
|
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
SJG’s management, with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of SJG’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2011. Based on that evaluation, SJG’s chief executive officer and chief financial officer concluded that the disclosure controls and procedures employed at SJG are effective.
Changes in Internal Control Over Financial Reporting
There has not been any change in SJG’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the fiscal quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, SJG’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part I, Item 2, Pending Litigation, beginning on page 22.
Item 1A. Risk Factors
There have been no material changes to our risk factors from those disclosed in Part I, Item 1A of SJG’s Annual Report on Form 10-K for the year ended December 31, 2010:
Item 6. Exhibits
(a) Exhibits
Exhibit No.
|
Description
|
|
Bylaws of South Jersey Gas Company, as amended and restated through April 28, 2011 (filed herewith)
|
||
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
|
||
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
|
||
Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).
|
||
Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SOUTH JERSEY GAS COMPANY
(Registrant)
Dated: May 9, 2011
|
By:
|
/s/ Edward J. Graham
|
|
|
Edward J. Graham
|
|
|
President & Chief Executive Officer
|
|
|
|
|
|
|
Dated: May 9, 2011
|
By:
|
/s/ David A. Kindlick
|
|
|
David A. Kindlick
|
|
|
Senior Vice President & Chief Financial Officer
|
25