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EXCEL - IDEA: XBRL DOCUMENT - SOUTH JERSEY GAS CoFinancial_Report.xls
EX-31.1 - EXHIBIT 31.1 - SOUTH JERSEY GAS Cosjg-93014ex311.htm
EX-31.2 - EXHIBIT 31.2 - SOUTH JERSEY GAS Cosjg-93014ex312.htm
EX-32.2 - EXHIBIT 32.2 - SOUTH JERSEY GAS Cosjg-93014ex322.htm
EX-32.1 - EXHIBIT 32.1 - SOUTH JERSEY GAS Cosjg-93014ex321.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 September 30, 2014

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 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 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 November 3, 2014 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
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.
 
 
 
  

2




SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)

 
 
Three Months Ended
 
September 30,
 
2014
 
2013
Operating Revenues
$
60,952

 
$
59,674

 
 
 
 
Operating Expenses:
 

 
 

Cost of Sales (Excluding depreciation)
23,400

 
24,717

Operations
20,769

 
18,613

Maintenance
3,275

 
3,353

Depreciation
9,342

 
8,654

Energy and Other Taxes
798

 
1,052

 
 
 
 
Total Operating Expenses
57,584

 
56,389

 
 
 
 
Operating Income
3,368

 
3,285

 
 
 
 
Other Income and Expense
2,186

 
764

 
 
 
 
Interest Charges
(4,046
)
 
(2,629
)
 
 
 
 
Income Before Income Taxes
1,508

 
1,420

 
 
 
 
Income Taxes
(534
)
 
(471
)
 
 
 
 
Net Income
$
974

 
$
949

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



3




SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)


 
Nine Months Ended
 
September 30,
 
2014
 
2013
Operating Revenues
$
340,656

 
$
300,308

 
 
 
 
Operating Expenses:
 

 
 

Cost of Sales (Excluding depreciation)
151,572

 
128,427

Operations
73,181

 
62,132

Maintenance
9,715

 
10,140

Depreciation
27,562

 
25,128

Energy and Other Taxes
2,813

 
5,332

 
 
 
 
Total Operating Expenses
264,843

 
231,159

 
 
 
 
Operating Income
75,813

 
69,149

 
 
 
 
Other Income and Expense
4,749

 
3,024

 
 
 
 
Interest Charges
(12,680
)
 
(8,379
)
 
 
 
 
Income Before Income Taxes
67,882

 
63,794

 
 
 
 
Income Taxes
(25,440
)
 
(23,511
)
 
 
 
 
Net Income
$
42,442

 
$
40,283

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



4


SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
 
 
Three Months Ended
 
September 30,
 
2014
 
2013
Net Income
$
974

 
$
949

 
 
 
 
Other Comprehensive (Loss) Gain - Net of Tax: *
 

 
 

 
 
 
 
Unrealized (Loss) Gain on Available-for-Sale Securities
(613
)
 
221

Unrealized Gain on Derivatives - Other
6

 
7

 
 
 
 
Other Comprehensive (Loss) Gain - Net of Tax *
(607
)
 
228

 
 
 
 
Comprehensive Income
$
367

 
$
1,177

 
 
 
 

 
 
 
 
 
Nine Months Ended
 
September 30,
 
2014
 
2013
Net Income
$
42,442

 
$
40,283

 
 
 
 
Other Comprehensive Loss - Net of Tax: *
 

 
 
 
 
 
 
Unrealized Loss on Available-for-Sale Securities
(397
)
 
(76
)
Unrealized Gain on Derivatives - Other
21

 
21

 
 
 
 
Other Comprehensive Loss - Net of Tax *
(376
)
 
(55
)
 
 
 
 
Comprehensive Income
$
42,066

 
$
40,228

 
 
 
 
* Determined using a combined statutory tax rate of 41% .
 
The accompanying notes are an integral part of the unaudited condensed financial statements.

5


SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
 
 
Nine Months Ended
 
September 30,
 
2014
 
2013
Net Cash Provided by Operating Activities
$
55,242

 
$
109,974

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Capital Expenditures
(139,393
)
 
(118,383
)
Net Purchase of Restricted Investments in Margin Accounts
(1,391
)
 
(809
)
Investment in Long-Term Receivables
(4,881
)
 
(5,012
)
Proceeds from Long-Term Receivables
5,075

 
5,376

 
 
 
 
Net Cash Used in Investing Activities
(140,590
)
 
(118,828
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net (Repayments of)/Borrowings from Short-Term Credit Facilities
(6,200
)
 
7,900

Proceeds from Issuance of Long-Term Debt
89,000

 

Principal Repayments of Long-Term Debt
(21,000
)
 
(25,000
)
Payments for Issuance of Long-Term Debt
(627
)
 
(30
)
Additional Investment by Shareholder
25,000

 
25,000

 
 
 
 
Net Cash Provided by Financing Activities
86,173

 
7,870

 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
825

 
(984
)
Cash and Cash Equivalents at Beginning of Period
2,020

 
2,678

 
 
 
 
Cash and Cash Equivalents at End of Period
$
2,845

 
$
1,694

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

6


SOUTH JERSEY GAS COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Property, Plant and Equipment:
 
 
 
Utility Plant, at original cost
$
1,955,876

 
$
1,816,804

Accumulated Depreciation
(410,413
)
 
(392,029
)
 
 
 
 
Property, Plant and Equipment - Net
1,545,463

 
1,424,775

 
 
 
 
Investments:
 

 
 

Available-for-Sale Securities
8,990

 
8,696

Restricted Investments
2,071

 
680

 
 
 
 
Total Investments
11,061

 
9,376

 
 
 
 
Current Assets:
 

 
 

Cash and Cash Equivalents
2,845

 
2,020

Accounts Receivable
55,301

 
60,317

Accounts Receivable - Related Parties
810

 
968

Unbilled Revenues
7,820

 
41,510

Provision for Uncollectibles
(6,004
)
 
(4,553
)
Natural Gas in Storage, average cost
31,420

 
20,811

Materials and Supplies, average cost
1,195

 
1,798

Deferred Income Taxes - Net
30,434

 
23,309

Prepaid Taxes
20,838

 
7,683

Derivatives - Energy Related Assets
360

 
1,222

Other Prepayments and Current Assets
4,233

 
3,819

 
 
 
 
Total Current Assets
149,252

 
158,904

 
 
 
 
Regulatory and Other Noncurrent Assets:
 

 
 

Regulatory Assets
332,243

 
296,081

Unamortized Debt Issuance Costs
7,578

 
6,523

Long-Term Receivables
10,076

 
10,252

Derivatives - Energy Related Assets
47

 
278

Other
2,884

 
2,937

 
 
 
 
Total Regulatory and Other Noncurrent Assets
352,828

 
316,071

 
 
 
 
Total Assets
$
2,058,604

 
$
1,909,126

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

7


SOUTH JERSEY GAS COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands, except per share amounts)
 
 
September 30,
2014
 
December 31,
2013
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
250,972

 
225,972

Accumulated Other Comprehensive Loss
(11,245
)
 
(10,869
)
Retained Earnings
432,460

 
390,018

 
 
 
 
Total Common Equity
678,035

 
610,969

 
 
 
 
Long-Term Debt
533,000

 
454,000

 
 
 
 
Total Capitalization
1,211,035

 
1,064,969

 
 
 
 
Current Liabilities:
 

 
 

Notes Payable
59,300

 
65,500

Current Portion of Long-Term Debt
10,000

 
21,000

Accounts Payable - Commodity
11,479

 
24,232

Accounts Payable - Other
40,210

 
32,072

Accounts Payable - Related Parties
3,646

 
6,638

Derivatives - Energy Related Liabilities
3,069

 
711

Customer Deposits and Credit Balances
20,173

 
15,089

Environmental Remediation Costs
21,429

 
15,422

Taxes Accrued
1,650

 
1,767

Pension Benefits
1,241

 
1,241

Interest Accrued
5,060

 
6,039

Other Current Liabilities
4,145

 
5,629

 
 
 
 
Total Current Liabilities
181,402

 
195,340

 
 
 
 
Regulatory and Other Noncurrent Liabilities:
 

 
 

Regulatory Liabilities
46,104

 
60,949

Deferred Income Taxes - Net
414,681

 
380,975

Environmental Remediation Costs
98,435

 
104,070

Asset Retirement Obligations
41,842

 
41,178

Pension and Other Postretirement Benefits
50,926

 
48,197

Investment Tax Credits
201

 
360

Derivatives - Energy Related Liabilities
199

 
48

Derivatives - Other
5,778

 
3,735

Other
8,001

 
9,305

 
 
 
 
Total Regulatory and Other Noncurrent Liabilities
666,167

 
648,817

 
 
 
 
Commitments and Contingencies (Note 9)


 


 
 
 
 
Total Capitalization and Liabilities
$
2,058,604

 
$
1,909,126

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

8


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 or the Company), 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 Annual Report on Form 10-K for the year ended December 31, 2013 for a more complete discussion of our accounting policies and certain other information.

Certain reclassifications have been made to the prior periods regulatory assets disclosure to conform to the current period presentation. The deferred pipeline integrity cost and allowance for funds used during construction (AFUDC) - equity related deferrals previously included in "Other Regulatory Assets" were reclassified to the line items "Pipeline Integrity Cost" and "AFUDC - Equity Related Deferrals", respectively, in the regulatory asset table disclosed in Note 4.

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 revenues and cost of sales, and totaled $0.2 million and $0.1 million for the three months ended September 30, 2014 and 2013, respectively and $0.8 million and $0.6 million for the nine months ended September 30, 2014 and 2013, respectively. In prior years, SJG collected a throughput-based energy tax from customers in the form of a Transitional Energy Facility Assessment (TEFA). The TEFA was eliminated effective January 1, 2014.

NEW ACCOUNTING PRONOUNCEMENTS — Other than as described below, no new accounting pronouncement issued or effective during 2014 or 2013 had, or is expected to have, a material impact on the condensed financial statements.

In July 2013, the FASB issued Accounting Standard Update (ASU) 2013-11, Balance Sheet Presentation of an Unrecognized Income Tax Benefit for a Net Operating Loss or Tax Credit Carryforward. This ASU provides that a liability related to an unrecognized tax benefit should be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. 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 service 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. Management does not expect this standard to have an impact on the Company's financial statements upon adoption.


9


2.
STOCK-BASED COMPENSATION PLANS:

Officers and other key employees of SJG participate in the Stock-Based Compensation Plan (Plan) of SJI. Restricted shares issued under the Plan vest over a three-year period and are subject to SJI achieving certain market or 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 150% of the original share units granted. Grants containing market-based performance targets use SJI's total shareholder return (TSR) relative to a peer group to measure performance. Grants containing earnings-based targets are based on SJI's earnings per share (EPS) growth rate relative to a peer group to measure performance.

See Note 2 to the Financial Statements in Item 8 of SJG's Annual Report on Form 10-K as of December 31, 2013 for the related accounting policy.

The following table summarizes the SJI nonvested restricted stock awards pertaining to SJG outstanding at September 30, 2014, 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. 2012 - TSR
 
3,533

 
$
51.23

 
22.5
%
 
0.43
%
Jan. 2012 - EPS
 
3,533

 
$
56.93

 
n/a

 
n/a

Jan. 2013 - TSR
 
4,001

 
$
44.38

 
21.1
%
 
0.40
%
Jan. 2013 - EPS
 
4,001

 
$
51.18

 
n/a

 
n/a

Jan. 2014 - TSR
 
5,197

 
$
44.32

 
20.0
%
 
0.80
%
Jan. 2014 - EPS
 
5,197

 
$
54.44

 
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 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.

The cost for restricted stock awards during 2014 and 2013 is approximately $0.1 million per quarter.

As of September 30, 2014, there was $0.6 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.9 years.

The following table summarizes information regarding restricted stock award activity during the nine months ended September 30, 2014, excluding accrued dividend equivalents:

 
Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested Shares Outstanding, January 1, 2014
15,068

 
$
50.73

 
 
 
 
Granted
10,394

 
$
49.38

 
 
 
 
Nonvested Shares Outstanding, September 30, 2014
25,462

 
$
50.18


Performance targets during the three-year vesting period were not attained for the January 2011 grant that vested at December 31, 2013. As a result, no shares were awarded in 2014. During the nine months ended September 30, 2013, SJI awarded 12,901 shares that had vested at December 31, 2012, to SJG's officers and other key employees at a market value of $0.6 million. SJG has a policy of making cash payments to SJI to satisfy its obligations under the Plan. Cash payments to SJI during each of the nine months ended September 30, 2014 and 2013 were approximately $0.4 million relating to stock awards. Additionally, a change in control could result in the nonvested shares becoming nonforfeitable or immediately payable in cash.


10


3.
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 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 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 May 2014, SJG filed its annual Energy Efficiency Tracker (EET) petition requesting a 0.19% increase in rates to recover the costs of, and the allowed return on, prior investments associated with energy efficiency programs. The petition is currently pending. Effective October 1, 2014, the BPU approved a revenue increase of $2.2 million associated with prior annual EET filings.

Also effective October 1, 2014, the BPU approved a $6.4 million decrease in revenues associated with the Company’s Societal Benefits Program.

In May 2014, SJG received BPU approval to continue the Conservation Incentive Program (CIP), with certain modifications.

Also in May 2014, SJG filed its annual Basic Gas Supply Service (BGSS) and CIP petition, requesting a $4.9 million increase in annual revenues. The Petition proposes to recover over a two-year period higher than normal gas costs caused by colder than normal weather. The Petition also proposes to return to customers, through a reduction to the current CIP rate, excess margin recoveries caused by colder than normal weather. Provisional rates were approved by the BPU effective October 1, 2014.

In September 2014, the BPU approved the statewide Universal Service Fund (USF) budget of $71.8 million for all the State’s gas utilities.  The Company’s portion of the total is approximately $7.9 million. Effective October 1, 2014, the BPU approved a $2.6 million increase to the Company’s USF recoveries.

In August 2014, the BPU approved SJG’s Storm Hardening and Reliability Program (SHARP), authorizing SJG to invest $103.5 million over three years for system hardening on barrier islands.  SJG will earn on a return on these investments as they are made and will reflect the investments in base rates through annual rate adjustments.

In January 2014, SJG credited the accounts of our periodic BGSS customers with refunds totaling $11.2 million based on a projected over collection, at that time, due to lower gas costs.

There have been no other significant regulatory actions or changes to SJG's rate structure since December 31, 2013. See Note 3 to the Financial Statements in Item 8 of SJG's Form 10-K as of December 31, 2013.

 

11


4.
REGULATORY ASSETS AND LIABILITIES:

There have been no significant changes to the nature of SJG’s regulatory assets and liabilities since December 31, 2013, 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, 2013.

Regulatory Assets consisted of the following items (in thousands):
 
September 30, 2014
 
December 31, 2013
Environmental Remediation Costs:
 
 
 
Expended - Net
$
28,520

 
$
29,945

Liability for Future Expenditures
119,864

 
119,492

Deferred Asset Retirement Obligation Costs
31,598

 
31,142

Deferred Pension and Other Postretirement Benefit Costs
59,284

 
59,284

Deferred Gas Costs - Net
47,008

 

Conservation Incentive Program Receivable

 
10,526

Societal Benefit Costs Receivable
1,974

 
10,408

Premium for Early Retirement of Debt

 
955

Deferred Interest Rate Contracts (Note 11)
5,778

 
3,735

Energy Efficiency Tracker
15,906

 
10,420

Pipeline Supplier Service Charges
5,857

 
7,106

Pipeline Integrity Cost
3,342

 
2,902

AFUDC - Equity Related Deferrals
10,657

 
7,810

Other Regulatory Assets
2,455

 
2,356

 
 
 
 
Total Regulatory Assets
$
332,243

 
$
296,081


DEFERRED GAS COSTS - 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 change from a $19.1 million regulatory liability at December 31, 2013 to a $47.0 million regulatory asset at September 30, 2014 was due to the actual cost of the commodity incurred during the first nine months of 2014 exceeding the gas costs recovered from the customers as a result of higher prices.

CONSERVATION INCENTIVE PROGRAM (CIP) RECEIVABLE – 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 the first nine months of 2014 resulting in a payable that is recorded in the table below as a regulatory liability. The change from a receivable to a related payable is primarily the result of colder weather experienced in the region during the first and second quarters of 2014.

SOCIETAL BENEFIT COSTS RECEIVABLE - This regulatory asset primarily represents the deferred expenses under the New Jersey Clean Energy Program which is a mechanism designed to recover costs associated with energy efficiency and renewable energy programs. The decrease in the asset is due to colder weather experienced in the region during the first half of 2014 resulting in increased recoveries of the deferred expense.



12


Regulatory Liabilities consisted of the following items (in thousands):
 
September 30, 2014
 
December 31, 2013
Excess Plant Removal Costs
$
37,405

 
$
40,029

Deferred Revenues-Net

 
19,067

Conservation Incentive Program Payable
7,899

 

Other Regulatory Liabilities
800

 
1,853

 


 


Total Regulatory Liabilities
$
46,104

 
$
60,949


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 our September 2010 base rate increase, and an increase in retirement activity related to the AIRP projects.

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. See "Deferred Gas -Costs - Net" above.

CONSERVATION INCENTIVE PROGRAM PAYABLE – The CIP tracking mechanism adjusts earnings when actual usage per customer experienced during the period varies from an established baseline usage per customer. See "Conservation Incentive Program (CIP) Receivable" above.


5.
RELATED-PARTY TRANSACTIONS:

There have been no significant changes in the nature of SJG’s related-party transactions since December 31, 2013. See Note 5 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2013 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
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Operating Revenues/Affiliates:
 
 
 
 
 
 
 
SJRG
$
169

 
$
344

 
$
552

 
$
1,194

Marina
278

 
335

 
914

 
973

Other

 

 

 
1

Total Operating Revenue/Affiliates
$
447

 
$
679

 
$
1,466

 
$
2,168


Related-party transactions, excluding pass-through items, included in Operating Expenses were as follows (in thousands):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Costs of Sales/Affiliates (Excluding depreciation):
 
 
 
 
 
 
 
SJRG
$
1,686

 
$
5,436

 
$
8,612

 
$
11,105

Energy-Related Derivative (Gains) / Losses *
 
 
 
 
 
 
 
SJRG
$
(92
)
 
$
389

 
$
(1,612
)
 
$
568


* Contracts used to hedge natural gas purchases. Included in Cost of Sales on the Condensed Statement of Income.

13



Operations Expense/Affiliates
 
 
 
 
 
 
 
SJI
$
2,901

 
$
2,737

 
$
10,079

 
$
8,613

SJIS**

 
1,330

 

 
4,264

Millennium
687

 
665

 
1,982

 
2,014

Other
(111
)
 
(103
)
 
(327
)
 
(336
)
Total Operations Expense/Affiliates
$
3,477

 
$
4,629

 
$
11,734

 
$
14,555


** SJIS was dissolved effective January 1, 2014. All services previously provided by SJIS are currently being provided by SJI.

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 September 30, 2014 and December 31, 2013, the escrowed proceeds, including interest earned, totaled $0.1 million. 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 September 30, 2014 and December 31, 2013, the balance held with SJRG totaled $0.1 million and $0.5 million, respectively. SJG also established a margin account with another counterparty 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 this counterparty changes. As of September 30, 2014, the balance held with this counterparty totaled $1.8 million. There was no balance held with this counterparty as of December 31, 2013. The carrying amounts of the Restricted Investments approximate their fair value at September 30, 2014 and December 31, 2013, which would be included in Level 1 of the fair value hierarchy. (See Note 10 - Fair Value of Financial Assets and Financial Liabilities.)

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 September 30, 2014 and December 31, 2013, 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 condensed balance sheets.  The carrying amounts noted above are net of unamortized discounts resulting from imputed interest in the amount of $1.2 million as of both September 30, 2014 and December 31, 2013.  The annualized amortization to interest is not material to SJG’s financial statements.  The carrying amounts of these receivables approximate their fair value at September 30, 2014 and December 31, 2013, which would be included in Level 2 of the fair value hierarchy. (See Note 10 - Fair Value of Financial Assets and Financial Liabilities.)
 
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 SJG's financial instruments approximate their fair values at September 30, 2014 and December 31, 2013, 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 SJG at the end of each period for debt with similar terms and maturities (Level 2 in the fair value hierarchy. See Note 10 - Fair Value of Financial Assets and Financial Liabilities.) The estimated fair values of SJG's long-term debt, including current maturities, as of September 30, 2014 and December 31, 2013, were $572.2 million and $486.5 million, respectively.  The carrying amounts of SJG's long-term debt, including current maturities, as of September 30, 2014 and December 31, 2013 were $543.0 million and $475.0 million, respectively.


14


7.
LINES OF CREDIT:

Credit facilities and available liquidity as of September 30, 2014 were as follows (in thousands):
 
 
Total Facility
 
Usage
 
Available Liquidity
 
Expiration Date
Commercial Paper Program/ Revolving Credit Facility
$
200,000

 
$
59,300

 
$
140,700

 
May 2018
Uncommitted Bank Lines
10,000

 

 
10,000

 
Various
 
 
 
 
 
 
 
 
Total
$
210,000

 
$
59,300

 
$
150,700

 
 

The SJG revolving credit facility is provided by a syndicate of banks and contains one financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the credit agreement) to not more than 0.65 to 1 measured at the end of each fiscal quarter.  SJG was in compliance with this covenant as of September 30, 2014.

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 the $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.

Average borrowings outstanding under these credit facilities during the nine months ended September 30, 2014 and 2013 were $40.9 million and $90.5 million, respectively.  The maximum amount outstanding under these credit facilities during the nine months ended September 30, 2014 and 2013 were $70.1 million and $119.9 million, respectively.

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 interest rate on these borrowings, which changes daily, was 0.26% and 0.34% at September 30, 2014 and 2013, respectively.


8.
PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three and nine months ended  September 30, 2014 and 2013, 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
 
Pension Benefits
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Service Cost
$
536

 
$
1,040

 
$
2,468

 
$
3,120

Interest Cost
1,819

 
1,811

 
5,873

 
5,434

Expected Return on Plan Assets
(2,233
)
 
(2,286
)
 
(7,143
)
 
(6,859
)
Amortizations:
 
 
 
 
 
 
 
Prior Service Cost
30

 
48

 
96

 
144

Actuarial Loss
957

 
1,729

 
3,101

 
5,185

Net Periodic Benefit Cost
1,109

 
2,342

 
4,395

 
7,024

Capitalized Benefit Costs
(577
)
 
(1,218
)
 
(2,285
)
 
(3,653
)
Total Net Periodic Benefit Expense
$
532

 
$
1,124

 
$
2,110

 
$
3,371


15


 
Other Postretirement Benefits
 
Other Postretirement Benefits
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Service Cost
$
28

 
$
212

 
$
372

 
$
637

Interest Cost
171

 
509

 
1,191

 
1,526

Expected Return on Plan Assets
(202
)
 
(443
)
 
(1,148
)
 
(1,329
)
Amortizations:

 


 

 

Prior Service Cost (Credits)
11

 
(53
)
 
63

 
(159
)
Actuarial Loss
73

 
324

 
407

 
972

Net Periodic Benefit Cost
81

 
549

 
885

 
1,647

Capitalized Benefit Costs
(42
)
 
(285
)
 
(460
)
 
(856
)
Total Net Periodic Benefit Expense
$
39

 
$
264

 
$
425

 
$
791


Capitalized benefit costs reflected in the table above relate to our construction program.

SJG contributed $9.1 million to the pension plans in January 2013. No contributions have been made or are expected to be made to the pension plans during 2014. Payments related to the unfunded Supplemental Executive Retirement Plan (SERP) are expected to approximate $1.2 million in 2014. We also have a regulatory obligation to contribute approximately $3.6 million annually to the other postretirement benefit plans’ trusts, less direct costs incurred.

See Note 11 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2013 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 facility outside of its 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. 

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 significant changes to the status of SJG’s environmental remediation efforts since December 31, 2013, as described in Note 12 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2013.

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 date at which any of the primary terms of these contracts expire is March 2015. The transportation and storage agreements entered into between us and each of our interstate pipeline service providers were done so in accordance with their respective FERC-approved tariff. Our cumulative obligation for gas supply related demand charges and reservation fees paid for these services averages approximately $3.9 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. The Company has accrued approximately $0.5 million related to all claims in the aggregate as of both September 30, 2014 and December 31, 2013. 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.

COLLECTIVE BARGAINING AGREEMENTS - Unionized personnel represent approximately 60% of our workforce at September 30, 2014. The Company has collective bargaining agreements with two unions who represent these employees: the International Brotherhood of Electrical Workers (IBEW) operates under a collective bargaining agreement that runs through February 2017; and the International Association of Machinists and Aerospace Workers (IAM) operates under a collective bargaining agreement that was renegotiated this year and expires in August 2017.



16


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 September 30, 2014
 
 
 
 
 
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Available-for-Sale Securities (A)
$
8,990

 
$
8,990

 
$

 
$

Derivatives – Energy Related Assets (B)
407

 
405

 
2

 

 
$
9,397

 
$
9,395

 
$
2

 
$

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Derivatives – Energy Related Liabilities (B)
$
3,268

 
$
1,287

 
$
1,981

 
$

Derivatives – Other (C)
5,778

 

 
5,778

 

 
$
9,046

 
$
1,287

 
$
7,759

 
$


As of December 31, 2013
 
 
 
 
 
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Available-for-Sale Securities (A)
$
8,696

 
$
8,696

 
$

 
$

Derivatives - Energy Related Assets (B)
1,500

 
1,409

 
91

 

 
$
10,196

 
$
10,105

 
$
91

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives - Energy Related Liabilities (B)
$
759

 
$
155

 
$
604

 
$

Derivatives - Other (C)
3,735

 

 
3,735

 

 
$
4,494

 
$
155

 
$
4,339

 
$


(A)  Available-for-Sale Securities include securities that are traded in active markets.  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.


17


(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) and another counterparty, 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 September 30, 2014, SJG had outstanding derivative contracts intended to limit the exposure to market risk on 8.6 million decatherms (MMdts) of expected future purchases of natural gas and 0.3 MMdts of expected future sales of natural gas. In addition to these derivative contracts, SJG had basis and index related purchase and sales contracts totaling 3.9 MMdts. 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 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 September 30, 2014 and December 31, 2013, SJG had $2.5 million of unrealized losses and $0.7 million of unrealized gains, 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, 2013, 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, 2013. 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 both September 30, 2014 and December 31, 2013, the unamortized balance was approximately $1.0 million .


18


The fair values of all derivative instruments, as reflected in the condensed balance sheets as of September 30, 2014 and December 31, 2013, are as follows (in thousands):

Derivatives not designated as hedging instruments under GAAP
 
September 30, 2014
 
December 31, 2013
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Energy related commodity contracts:
 
 
 
 
 
 
 
 
Derivatives – Energy Related – Current
 
$
360

 
$
3,069

 
$
1,222

 
$
711

Derivatives – Energy Related – Non-Current
 
47

 
199

 
278

 
48

Interest rate contracts:
 
 
 
 
 
 
 
 
Derivatives – Other
 

 
5,778

 

 
3,735

Total derivatives not designated as hedging instruments under GAAP
 
407

 
9,046

 
1,500

 
4,494

Total Derivatives
 
$
407

 
$
9,046

 
$
1,500

 
$
4,494

 

For derivative instruments disclosed in the table above, information as to the presentation on the condensed balance sheets is as follows (in thousands):

As of September 30, 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
 
$
407

 
$

 
$
407

 
$
(405
)
(A)
$

 
$
2

Derivatives - Energy Related Liabilities
 
(3,268
)
 

 
(3,268
)
 
405

(B)
882

 
(1,981
)
Derivatives - Other
 
(5,778
)
 

 
(5,778
)
 

 

 
(5,778
)

As of December 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
1,500

 
$

 
$
1,500

 
$
(155
)
(A)
$
(498
)
 
$
847

Derivatives - Energy Related Liabilities
 
(759
)
 

 
(759
)
 
155

(B)

 
(604
)
Derivatives - Other
 
(3,735
)
 

 
(3,735
)
 

 

 
(3,735
)

(A) The balances at September 30, 2014 and December 31, 2013 were related to derivative liabilities which can be net settled against derivative assets.

(B) The balances at September 30, 2014 and December 31, 2013 were related to derivative assets which can be net settled against derivative liabilities.

19



The effect of derivative instruments on the condensed statements of income for the three and nine months ended September 30, 2014 and 2013 are as follows (in thousands):
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
Derivatives in Cash Flow Hedging Relationships
 
2014
 
2013
 
2014
 
2013
Interest Rate Contracts:
 
 
 
 
 
 
 
 
Losses reclassified from Accumulated Other Comprehensive Loss into income (a)
 
$
(12
)
 
$
(12
)
 
$
(36
)
 
$
(36
)
(a) Included in Interest Charges

Net realized loss of $1.2 million and $0.4 million associated with SJG's energy related financial commodity contracts for the three months ended September 30, 2014 and 2013, and gain of $2.4 million and loss of $0.6 million for the nine month ended September 30, 2014 and 2013, 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.


12.
LONG-TERM DEBT:

In January 2014, SJG issued $30.0 million aggregate principal amount of 4.23% Medium Term Notes (MTN's) due January 2030.

In June 2014, SJG entered into a $200.0 million multiple-draw term facility offered by a syndicate of banks which expires in June, 2017. SJG can draw under this facility through June, 2016 and this facility bears interest at a floating rate based on LIBOR plus a spread determined by SJG's credit ratings. As of September 30, 2014, SJG had borrowed an aggregate $59.0 million under this facility and the proceeds were used to pay down short-term debt.

In July 2014, SJG retired $11.0 million aggregate principal amount of 4.52% MTN's at maturity. In September 2014, SJG retired $10.0 million aggregate principal amount of 5.115% MTN's at maturity.

We retire debt when it is cost effective as permitted by the debt agreements.  


13.    ACCUMULATED OTHER COMPREHENSIVE LOSS:

The changes in Accumulated Other Comprehensive Loss (AOCL) for the three and nine months ended September 30, 2014 are as follows (in thousands):
 
Postretirement Liability Adjustment
 
Unrealized Gain (Loss) on Derivatives-Other
 
Unrealized Gain (Loss) on Available-for-Sale Securities
 
Total
Balance at July 1, 2014 (a)
$
(10,672
)
 
$
(579
)
 
$
613

 
$
(10,638
)
Other comprehensive loss before reclassifications

 

 
(53
)
 
(53
)
   Amounts reclassified from AOCL (b)

 
6

 
(560
)
 
(554
)
Net current period other comprehensive income (loss)

 
6

 
(613
)
 
(607
)
Balance at September 30, 2014 (a)
$
(10,672
)
 
$
(573
)
 
$

 
$
(11,245
)


20


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Postretirement Liability Adjustment
 
Unrealized Gain (Loss) on Derivatives-Other
 
Unrealized Gain (Loss) on Available-for-Sale Securities
 
Total
Balance at January 1, 2014 (a)
$
(10,672
)
 
$
(594
)
 
$
397

 
$
(10,869
)
Other comprehensive income before reclassifications

 

 
163

 
163

   Amounts reclassified from AOCL (b)

 
21

 
(560
)
 
(539
)
Net current period other comprehensive income (loss)

 
21

 
(397
)
 
(376
)
Balance at September 30, 2014 (a)
$
(10,672
)
 
$
(573
)
 
$

 
$
(11,245
)

(a) Determined using a combined statutory tax rate of 41%.
(b) See table below.


The reclassifications out of AOCL during the three and nine months ended September 30, 2014 are as follows (in thousands):
Components of AOCL
Amounts Reclassified from AOCL (in thousands)
 
Affected Line Item in the Condensed Statements of Income
Three Months Ended
September 30, 2014
 
Nine Months Ended
September 30, 2014
 
Unrealized Gain on Derivatives-Other - Interest Rate Contracts designated as cash flow hedges
$
12

 
$
36

 
Interest Charges
Unrealized Loss on Available-for-Sale Securities
(946
)
 
(946
)
 
Other Income & Expense
 
(934
)
 
(910
)
 
Income Before Income Taxes
Income Taxes (a)
(380
)
 
(371
)
 
Income Taxes (a)
Losses from reclassifications for the period net of tax
$
(554
)
 
$
(539
)
 
 

(a) Determined using a combined statutory tax rate of 41%.



21



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 362,914 customers at September 30, 2014 compared with 359,273 customers at September 30, 2013.

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, 2013 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, 2013.

New Accounting Pronouncements -    See detailed discussions concerning New Accounting Pronouncements and their impact on SJG in Note 1 to 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, 2013. 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, 2013.

Environmental Remediation –There have been no significant changes to the status of SJG’s environmental remediation efforts since December 31, 2013. 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, 2013.

Competition - See detailed discussion concerning competition in SJG’s Form 10-K for the year ended December 31, 2013.


22


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 39,577 and 47,494 at September 30, 2014 and 2013, respectively.


RESULTS OF OPERATIONS:

The following table summarizes the composition of selected gas utility data for the three and nine months ended September 30, (in thousands, except for degree day data):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Utility Throughput – decatherms(dt):
 
 
 
 
 
 
 
Firm Sales -
 
 
 
 
 
 
 
Residential
1,407

 
1,290

 
17,425

 
15,165

Commercial
544

 
507

 
4,026

 
3,694

Industrial
18

 
21

 
208

 
204

Cogeneration & Electric Generation
273

 
781

 
828

 
1,346

Firm Transportation -
 
 
 
 
 
 
 
Residential
169

 
200

 
2,463

 
2,275

Commercial
643

 
621

 
5,175

 
4,685

Industrial
3,105

 
2,983

 
9,774

 
9,711

Cogeneration & Electric Generation
4,143

 
2,392

 
7,332

 
6,166

 
 
 
 
 
 
 
 
Total Firm Throughput
10,302

 
8,795

 
47,231

 
43,246

 
 
 
 
 
 
 
 
Interruptible Sales

 

 

 
14

Interruptible Transportation
258

 
275

 
964

 
1,014

Off-System Sales
2,489

 
2,931

 
6,007

 
6,098

Capacity Release
11,958

 
8,554

 
42,617

 
29,515

 
 
 
 
 
 
 
 
Total Throughput - Utility
25,007

 
20,555

 
96,819

 
79,887


23


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Utility Operating Revenues:
 
 
 
 
 
 
 
Firm Sales -
 
 
 
 
 
 
 
Residential
$
24,149

 
$
22,477

 
$
184,436

 
$
164,399

Commercial
7,489

 
7,404

 
44,939

 
38,806

Industrial
278

 
312

 
2,945

 
2,469

Cogeneration & Electric Generation
1,487

 
3,759

 
5,148

 
6,922

Firm Transportation -
 
 
 
 
 
 
 
Residential
1,886

 
2,343

 
14,741

 
14,707

Commercial
3,577

 
3,401

 
21,540

 
18,763

Industrial
6,240

 
5,765

 
19,214

 
17,083

Cogeneration & Electric Generation
3,350

 
1,581

 
6,924

 
5,186

 
 
 
 
 
 
 
 
Total Firm Revenues
48,456

 
47,042

 
299,887

 
268,335

 
 
 
 
 
 
 
 
Interruptible Sales

 

 
2

 
339

Interruptible Transportation
311

 
360

 
1,170

 
1,275

Off-System Sales
10,032

 
10,728

 
33,998

 
23,983

Capacity Release
1,840

 
1,291

 
4,688

 
5,665

Other
313

 
253

 
911

 
711

 
 
 
 
 
 
 
 
Total Utility Operating Revenues
60,952

 
59,674

 
340,656

 
300,308

 
 
 
 
 
 
 
 
Less:
 

 
 

 
 

 
 

Cost of Sales (Excluding depreciation)
23,400

 
24,717

 
151,572

 
128,427

Conservation Recoveries*
3,453

 
2,374

 
19,171

 
10,446

RAC Recoveries*
2,021

 
2,178

 
6,064

 
6,533

EET Recoveries*
1,128

 
1,245

 
3,179

 
3,436

Revenue and Throughput Taxes
154

 
478

 
765

 
3,417

Utility Margin**
$
30,796

 
$
28,682

 
$
159,905

 
$
148,049

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Margin:
 

 
 

 
 

 
 

Residential
$
15,462

 
$
14,513

 
$
111,533

 
$
95,649

Commercial and Industrial
9,529

 
8,143

 
46,986

 
39,067

Cogeneration and Electric Generation
1,566

 
1,390

 
4,013

 
3,828

Interruptible
9

 
11

 
43

 
91

Off-System Sales & Capacity Release
625

 
352

 
1,745

 
1,269

Other Revenues
609

 
518

 
1,720

 
1,283

Margin Before Weather Normalization & Decoupling
27,800

 
24,927

 
166,040

 
141,187

CIRT Mechanism

 
728

 

 
2,204

CIP Mechanism
2,721

 
2,901

 
(6,698
)
 
4,278

EET Mechanism
275

 
126

 
563

 
380

Utility Margin**
$
30,796

 
$
28,682

 
$
159,905

 
$
148,049

 
 
 
 
 
 
 
 
Degree Days:
26

 
68

 
3,288

 
3,020

 
*Represents expenses for which there is a corresponding credit in operating revenues.  Therefore, such recoveries have no impact on our financial results.
**Utility Margin is further defined under the caption "Margin (pre-tax)" below.

24


Throughput Total gas throughput increased 4.5 million decatherm (MMdts), or 21.7%, during the three months ended September 30, 2014, compared with the same period in 2013, primarily due to higher capacity release. Capacity release increased 3.4 MMdts as a result of the expiration of an Asset Management Agreement (AMA) that was in effect during 2013. Volumes released under AMA's are not included in the throughput table above. The capacity previously committed under the expired AMA was available to be released during 2014. While capacity release can create significant volatility in throughput, it has little impact on revenue and margin generated from such activity. Firm throughput increased 1.5 MMdts, or 17.1%, during the third quarter of 2014 as a result of alternate supply disruptions at a cogeneration facility in our territory during the third quarter. That customer was being supplied directly by an interstate pipeline. However, with the disruption, SJG has been transporting a significant volume of commodity to this cogeneration facility to meet its needs. Partially offsetting these increases was a 0.5MMdts reduction in electric generation firm sales to a regional electric generation customer. This resulted from lower weather-driven demand for electric generation during the 2014 summer season as weather was not as hot as in the previous summer.

Total gas throughput increased 16.9 MMdts, or 21.1%, during the nine months ended September 30, 2014, compared with the same period in 2013. Firm throughput increased 4.0 MMdts, or 9.2%, during the first nine months of 2014 as a result of weather that was 8.9% colder than the same period last year. As discussed above, an alternate supply disruption at a cogeneration facility in our territory provided an opportunity for SJG to transport more commodity. Also contributing to higher throughput was the addition of 3,641 customers over the last 12 months, representing 1.0% customer growth. Capacity Release throughput increased 13.1 MMdts during the first nine months of 2014. The increase in capacity release was related to the expiration of the AMA that was in effect during 2013. As discussed above, the capacity previously committed under the AMA was available to be released during the first nine months of 2014.

 Operating RevenuesRevenues increased $1.3 million, or 2.1%, during the three months ended September 30, 2014, compared with the same period in 2013. As discussed under "Margin (pre-tax)", the roll in of certain capital investments into base rates effective October 1, 2013, increased revenue by approximately $1.7 million during the third quarter of 2014, compared with the same period last year. Adding to the revenue increase was new transportation service to a cogeneration facility in our territory that was previously provided directly by an interstate pipeline, as discussed above under "Throughput". Partially offsetting these increases was a $2.2 million reduction in firm sales to a regional electric generation customer, as discussed above.

Revenues increased $40.3 million, or 13.4%, during the nine months ended September 30, 2014, compared with the same period in 2013, due to higher firm sales and Off-System Sales (OSS). Total firm revenue increased $31.6 million, or 11.8%, in the first nine months of 2014 as a result of 8.9% colder weather and 3,641 additional customers compared with the same period in 2013, as previously discussed under "Throughput." While colder weather increased firm sales revenue significantly, the revenue increase has little impact on Company profitability under the operation of the Conservation Incentive Program, as discussed below under the captions "Conservation Incentive Program (CIP)" and "Margin (pre-tax)." As further discussed under "Margin (pre-tax)", the roll in of certain capital investments into base rates effective October 1, 2013, increased revenue by approximately $10.4 million during the first nine months of 2014.

Higher OSS unit prices resulted in a $10.0 million, or 41.8%, increase in OSS revenues during the nine months ended September 30, 2014, compared with the same period in 2013. Colder weather led to greater demand during the first quarter of 2014, allowing the Company to increase revenue from such sales. However, the impact of changes in OSS activity does not have a material impact on the earnings of SJG, as the Company is required to return 85% of the profits of such activity to our ratepayers. Earnings from OSS can be seen in the "Margin" table above.

Conservation Incentive Program (CIP) - The effects of the CIP on our net income and the associated weather comparisons are as follows ($’s in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Net Income Impact:
 
 
 
 
 
 
 
CIP – Weather Related
$

 
$

 
$
(5.7
)
 
$
(0.7
)
CIP – Usage Related
1.6

 
1.7

 
1.7

 
3.2

Total Net Income Impact
$
1.6

 
$
1.7

 
$
(4.0
)
 
$
2.5

 
 
 
 
 
 
 
 
Weather Compared to 20-Year Average
n/a
 
n/a
 
13.4% Colder
 
1.8% Colder
Weather Compared to Prior Year
n/a
 
n/a
 
8.9% Colder
 
29.7% Colder

25




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. Management believes that margin provides a more meaningful basis for evaluating utility operations than revenues since natural gas costs, regulatory rider expenses and related energy taxes are passed through to customers and, therefore, 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 (BPU) through SJG’s BGSS clause.

Total margin increased $2.1 million, or 7.4% for the three-month period ended September 30, 2014, compared with the same period in 2013, primarily due to Capital Investment Recovery Tracker (CIRT) investments that rolled into base rates effective October 1, 2013. Those CIRT investments contributed approximately $1.7 million in additional margin during the third quarter of 2014. In addition, SJG added 3,641 customers over the 12-month period ended September 30, 2014, contributing approximately $0.3 million in additional margin during the third quarter 2014, compared with the third quarter of 2013.

Total margin increased $11.9 million, or 8.0%, for the nine-month period ended September 30, 2014, compared with the same period in 2013, primarily due to CIRT investments that rolled into base rates effective October 1, 2013. Those CIRT investments contributed approximately $10.4 million in additional margin during the first nine months of 2014. In addition, SJG added 3,641 customers over the 12-month period ended September 30, 2014, contributing approximately $2.3 million in additional margin during the first nine months of 2014.

The CIP tracking mechanism adjusts earnings when actual usage per customer experienced during the period varies from an established baseline usage per customer. As reflected in the margin table and the CIP table above, the CIP mechanism reduced margin by $6.7 million, or $4.0 million after taxes, during the nine month period ended September 30, 2014, primarily due to weather that was colder than normal. The CIP protected $4.3 million, or $2.5 million after taxes, of margin during the same period in 2013 that would have been lost due to lower customer usage. The impact of the CIP on net income for the three month periods ended September 30, 2014 and 2013 was not material.

Operating Expenses - A summary of changes in operating expenses (in thousands):

 
Three Months Ended
September 30,
2014 vs. 2013
 
Nine Months Ended
September 30,
2014 vs. 2013
Operations
$
2,156

 
$
11,049

Maintenance
$
(78
)
 
$
(425
)
Depreciation
$
688

 
$
2,434

Energy and Other Taxes
$
(254
)
 
$
(2,519
)

Operations  – Operations expense increased $2.2 million and $11.0 million for the three and nine month periods ended September 30, 2014, as compared with the same periods in 2013, respectively.  The increases are primarily due to the spending under the New Jersey Clean Energy Program and Energy Efficiency Programs which increased $1.0 million and $8.5 million for the three and nine month periods ended September 30, 2014, as compared to the same periods in 2013. Such costs are recovered on a dollar-for-dollar basis; therefore, SJG experienced an offsetting increase in revenues during the periods. Other increases include compensation increases, cost of increased collection efforts and damage prevention activities.

Maintenance -   Changes in maintenance expense for the three and nine months ended September 30, 2014, compared with the same periods in 2013, were not significant.

Depreciation - Depreciation expense increased $0.7 million and $2.4 million during the three and nine month periods ended September 30, 2014, compared with the same periods in 2013, respectively, due mainly to our continuing investment in property, plant and equipment.

Energy and Other Taxes - Energy and Other Taxes decreased $0.3 million and $2.5 million during the three and nine month periods ended September 30, 2014, compared with the same periods in 2013, respectively. This was primarily due to the elimination of the Company's primary energy tax, the Transitional Energy Facilities Assessment, effective January 1, 2014.


26


Other Income and Expense - Other income and expense increased $1.4 million and $1.7 million during the three and nine month periods ended September 30, 2014, compared with the same periods in 2013, respectively, primarily due to a realized gain of $0.9 million on the sale of available-for-sale securities during the third quarter of 2014. There were no such sales in 2013.

Interest Charges –  Interest Charges increased $1.4 million and $4.3 million during the three and nine month periods ended September 30, 2014, compared with the same periods in 2013, respectively, due to lower capitalization of interest costs on construction during 2014. This was a result of the roll-in of capital investments under the Company's CIRT into base rates effective October 1, 2013, and weather-related construction delays during the first quarter of 2014. CIRT investments were approved by the BPU to accrue interest on construction until such time they were rolled into base rates. Also contributing to the increase is an incremental $118.0 million of higher priced, long-term debt outstanding. 

Income Taxes