Attached files

file filename
EX-31.2 - EXHIBIT 31.2 - SOUTH JERSEY GAS Coex31_2.htm
EX-32.1 - EXHIBIT 32.1 - SOUTH JERSEY GAS Coex32_1.htm
EX-32.2 - EXHIBIT 32.2 - SOUTH JERSEY GAS Coex32_2.htm
EX-31.1 - EXHIBIT 31.1 - SOUTH JERSEY GAS Coex31_1.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, 2009

OR
 
¨
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 ¨

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 ¨      No ¨

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
£
Accelerated filer
£
Non-accelerated filer
S (Do not check if a smaller reporting company)
Smaller reporting company
£
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes £      No S
 
As of November 2, 2009 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. 
 


 
SJG-1

 
 
PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements — See Pages 3 through 24

SJG-2

 
SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)

   
Three Months Ended
 
   
September 30,
 
   
2009
   
2008
 
             
             
Operating Revenues
  $ 56,305     $ 64,563  
                 
Operating Expenses:
               
Cost of Sales (Excluding depreciation)
    31,726       41,201  
Operations
    13,839       12,488  
Maintenance
    2,301       1,925  
Depreciation
    6,791       6,409  
Energy and Other Taxes
    1,416       1,356  
                 
Total Operating Expenses
    56,073       63,379  
                 
Operating Income
    232       1,184  
                 
Other Income and Expense
    107       242  
                 
Interest Charges
    (4,085 )     (4,586 )
                 
Loss Before Income Taxes
    (3,746 )     (3,160 )
                 
Income Taxes
    1,666       1,306  
                 
Net Loss
  $ (2,080 )   $ (1,854 )

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

 
SJG-3

 
 
SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)

   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
             
             
Operating Revenues
  $ 364,253     $ 396,038  
                 
Operating Expenses:
               
Cost of Sales (Excluding depreciation)
    227,608       264,381  
Operations
    47,206       41,144  
Maintenance
    6,162       5,412  
Depreciation
    19,973       19,064  
Energy and Other Taxes
    7,783       7,424  
                 
Total Operating Expenses
    308,732       337,425  
                 
Operating Income
    55,521       58,613  
                 
Other Income and Expense
    789       869  
                 
Interest Charges
    (12,334 )     (14,179 )
                 
Income Before Income Taxes
    43,976       45,303  
                 
Income Taxes
    (18,051 )     (18,706 )
                 
Net Income
  $ 25,925     $ 26,597  
 
The accompanying notes are an integral part of the unaudited condensed financial statements.

 
SJG-4

 
 
SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)

   
Three Months Ended
 
   
September 30,
 
   
2009
   
2008
 
             
             
             
Net Loss
  $ (2,080 )   $ (1,854 )
                 
Other Comprehensive Income  - Net of Tax:
               
                 
Unrealized Gain (Loss) on Available-for-Sale Securities
    344       (355 )
Unrealized Gain on Derivatives - Other
    7       7  
                 
Other Comprehensive Gain (Loss) - Net of Tax *
    351       (348 )
                 
Comprehensive Loss
  $ (1,729 )   $ (2,202 )

       
   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
             
Net Income
  $ 25,925     $ 26,597  
                 
Other Comprehensive Income  - Net of Tax:
               
                 
Unrealized Gain (Loss) on Available-for-Sale Securities
    441       (635 )
Unrealized Gain on Derivatives - Other
    20       385  
                 
Other Comprehensive Gain (Loss) - Net of Tax *
    461       (250 )
                 
Comprehensive Income
  $ 26,386     $ 26,347  

* Determined using a combined statutory tax rate of 41.08%

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

 
SJG-5

 
 
SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)

   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
             
             
Net Cash Provided by Operating Activities
  $ 86,313     $ 35,773  
                 
Cash Flows from Investing Activities:
               
Capital Expenditures
    (54,921 )     (37,271 )
Investment in Long-Term Receivables
    (3,486 )     (2,857 )
Proceeds from Long-Term Receivables
    3,633       2,923  
Purchase of Restricted Investments with Escrowed Loan Proceeds
    -       (36 )
                 
Net Cash Used in Investing Activities
    (54,774 )     (37,241 )
                 
Cash Flows from Financing Activities:
               
Net (Repayments) Borrowing of Lines of Credit
    (28,050 )     10,285  
Principal Repayments of Long-Term Debt
    (17 )     (25,000 )
Proceeds from Issuance of Long-Term Debt
    -       25,000  
Payments for Issuance of Long-Term Debt
    (95 )     (247 )
Dividends on Common Stock
    (5,001 )     (9,866 )
Excess Tax Benefit from Restricted Stock Plan
    -       236  
                 
Net Cash (Used in) Provided by Financing Activities
    (33,163 )     408  
                 
Net Decrease in Cash and Cash Equivalents
    (1,624 )     (1,060 )
Cash and Cash Equivalents at Beginning of Period
    2,228       3,230  
                 
Cash and Cash Equivalents at End of Period
  $ 604     $ 2,170  

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

 
SJG-6

 
 
SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)

   
September 30,
   
December 31,
 
   
2009
   
2008
 
Assets
           
             
Property, Plant and Equipment:
           
Utility Plant, at original cost
  $ 1,224,350     $ 1,172,014  
Accumulated Depreciation
    (309,473 )     (295,432 )
                 
Property, Plant and Equipment - Net
    914,877       876,582  
                 
Investments:
               
Available-for-Sale Securities
    5,695       4,841  
Restricted Investments
    132       132  
                 
Total Investments
    5,827       4,973  
                 
Current Assets:
               
Cash and Cash Equivalents
    604       2,228  
Accounts Receivable
    51,005       47,787  
Accounts Receivable - Related Parties
    1,019       624  
Unbilled Revenues
    9,466       48,225  
Provision for Uncollectibles
    (4,535 )     (3,628 )
Natural Gas in Storage, average cost
    34,615       65,252  
Materials and Supplies, average cost
    12,255       11,247  
Prepaid Taxes
    17,722       11,860  
Derivatives - Energy Related Assets
    2,241       380  
Other Prepayments and Current Assets
    2,623       2,416  
                 
Total Current Assets
    127,015       186,391  
                 
Regulatory and Other Noncurrent Assets:
               
Regulatory Assets
    246,791       270,434  
Unamortized Debt Issuance Costs
    5,870       6,147  
Long-Term Receivables
    7,183       7,081  
Derivatives - Energy Related Assets
    979       15  
Other
    2,527       2,392  
                 
Total Regulatory and Other Noncurrent Assets
    263,350       286,069  
                 
Total Assets
  $ 1,311,069     $ 1,354,015  

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

 
SJG-7

 
 
SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands, except per share amounts)

   
September 30,
   
December 31,
 
   
2009
   
2008
 
             
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
    200,663       200,663  
Accumulated Other Comprehensive Loss
    (6,414 )     (6,875 )
Retained Earnings
    220,527       202,103  
 
               
Total Common Equity
    420,624       401,739  
                 
Long-Term Debt
    269,856       269,873  
                 
Total Capitalization
    690,480       671,612  
                 
Current Liabilities:
               
Notes Payable
    86,500       114,550  
Current Portion of Long-Term Debt
    25,000       25,000  
Accounts Payable - Commodity
    7,449       36,587  
Accounts Payable - Other
    12,952       12,051  
Accounts Payable - Related Parties
    10,804       16,744  
Derivatives - Energy Related Liabilities
    14,309       26,698  
Deferred Income Taxes - Net
    10,167       12,475  
Customer Deposits and Credit Balances
    19,572       14,219  
Environmental Remediation Costs
    16,713       13,117  
Taxes Accrued
    3,746       2,291  
Pension Benefits
    991       991  
Interest Accrued
    4,582       6,244  
Dividends Declared
    2,501       -  
Other Current Liabilities
    4,528       6,449  
                 
Total Current Liabilities
    219,814       287,416  
                 
Regulatory and Other Noncurrent Liabilities:
               
Regulatory Liabilities
    50,950       50,447  
Deferred Income Taxes - Net
    202,268       187,050  
Environmental Remediation Costs
    48,966       50,976  
Asset Retirement Obligations
    22,782       22,299  
Pension and Other Postretirement Benefits
    64,766       67,566  
Investment Tax Credits
    1,596       1,832  
Derivatives - Energy Related Liabilities
    1,213       2,667  
Derivatives - Other
    3,682       7,578  
Other
    4,552       4,572  
                 
Total Regulatory and Other Noncurrent Liabilities
    400,775       394,987  
                 
   Commitments and Contingencies (Note 9)
               
                 
Total Capitalization and Liabilities
  $ 1,311,069     $ 1,354,015  

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

 
SJG-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), 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 2008 Form 10-K for a more complete discussion of our accounting policies and certain other information.

The Company evaluated subsequent events through November 6, 2009, the date on which this Quarterly Report on Form 10-Q was filed with the Securities and Exchange Commission.

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 $1.0 million and $0.9 million for the three months ended  September 30, 2009 and 2008, respectively, and $6.3 million and $5.9 million for the nine months ended September 30, 2009 and 2008, respectively.

CAPITALIZED INTEREST - SJG capitalizes interest on construction at the rate of return on rate base utilized by the New Jersey Board of Public Utilities (BPU) to set rates in our last base rate proceeding.   See Note 2 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2008.  Capitalized interest is included in Utility Plant on the condensed balance sheets. Interest Charges are presented net of capitalized interest on the condensed statements of income.   The amount of interest capitalized by SJG for the three and nine months ended September 30, 2009 and 2008 was not significant.

 
SJG-9

 
 
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, swap agreements, options contracts and futures contracts. As of September 30, 2009, SJG had outstanding derivative contracts intended to limit the exposure to market risk on 15.0 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 September 30, 2009 and December 31, 2008, SJG had $12.3 million and $29.0 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, 2008 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, 2008. Management believes that, 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.
 
 
SJG-10

 
 
The fair values of all derivative instruments, as reflected in the condensed balance sheets as of September 30, 2009 and December 31, 2008, are as follows (in thousands):
 
 
Fair Values of Derivative Instruments
   
 
Asset Derivatives
   
 
September 30, 2009
 
December 31, 2008
 
                 
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
                     
Derivatives not designated as hedging instruments under GAAP
                   
                     
Energy related commodity contracts
Derivatives – Energy Related Assets-Current
 
$
2,241
 
Derivatives - Energy Related Assets-Current
 
$
380
 
                     
 
Noncurrent
   
979
 
Noncurrent
   
15
 
                     
Total asset derivatives
   
$
3,220
     
$
395
 

 
Liability Derivatives
 
         
 
September 30, 2009
 
December 31, 2008
 
                 
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
                 
Derivatives not designated as hedging instruments under GAAP
                   
                     
Energy related commodity contracts
Derivatives - Energy Related Liabilities-Current
 
$
14,309
 
Derivatives - Energy Related Liabilities-Current
 
$
26,698
 
                     
 
Noncurrent
   
1,213
 
Noncurrent
   
 2,667
 
                     
Interest rate contracts
Derivatives – Other
   
3,682
 
Derivatives - Other
   
 7,578
 
                     
Total liability derivatives
   
$
19,204
     
$
36,943
 
 
Net realized losses associated with SJG’s energy related financial commodity contracts were $12.5 million and $45.2 million for the three and nine months ended September 30, 2009, respectively.  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.

STOCK-BASED COMPENSATION PLANS - The following table summarizes the SJI nonvested restricted stock awards pertaining to SJG outstanding at September 30, 2009, 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. 2007
   
9,045
   
$
29.210
     
18.5
%
   
4.9
%
Jan. 2008
   
9,238
   
$
34.030
     
21.7
%
   
2.9
%
Jan. 2009
   
8,318
   
$
39.350
     
28.6
%
   
1.2
%
 
 
SJG-11

 
 
Expected volatility is based on the actual daily 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 per quarter for restricted stock awards during 2009 and 2008 is approximately $74,200 and $64,600, respectively.

As of September 30, 2009, there was $0.4 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 1.8 years.

The following table summarizes information regarding restricted stock award activity during the nine months ended September 30, 2009, excluding accrued dividend equivalents:
 
   
Shares
   
Weighted Average
Grant Date
Fair Value
 
Nonvested Shares Outstanding, January 1, 2009
   
18,283
   
$
31.645
 
                 
Granted
   
8,318
     
39.350
 
                 
Nonvested Shares Outstanding, September 30, 2009
   
26,601
   
$
34.055
 
 
During March 2009, SJG awarded 13,640 shares that had vested at December 31, 2008, to its officers at a market value of $0.5 million. During March 2008, SJG awarded 12,299 shares at a market value of $0.4 million. SJG has a policy of making cash payments to SJI to satisfy its obligations under this plan. Cash payments to SJI during March 2009 and 2008 were approximately $0.2 million and $0.6 million, respectively, relating to stock awards and include obligations for services previously rendered by officers that are currently employed by affiliates as a result of a January 1, 2006 corporate restructuring by SJI. Additionally, a change in control could result in the nonvested shares becoming nonforfeitable or immediately payable in cash.

 
SJG-12

 
 
NEW ACCOUNTING PRONOUNCEMENTS — In September 2006, the FASB issued new accounting guidance which defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements. In October 2008, the FASB issued additional guidance to provide clarification in a market that is not active and to provide an example to illustrate key considerations in determining the fair value of a financial asset in such a non-active market. This guidance was effective in fiscal years beginning after November 15, 2007. However, for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, this guidance was effective in fiscal years beginning after November 15, 2008.  The adoption of this guidance did not have a material effect on the Company’s condensed financial statements.

In March 2008, the FASB issued new accounting guidance on disclosures about derivative instruments and hedging activities. This guidance requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This guidance was effective for fiscal years beginning after November 15, 2008. The adoption of this guidance did not have a material effect on the Company’s condensed financial statements.  See disclosures in Note 1.

In December 2008, the FASB issued new accounting guidance on employers’ disclosures about postretirement benefit plan assets. This guidance requires more detailed disclosures about employers’ plan assets, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. This guidance is effective for reporting periods ending after December 15, 2009. Management is currently evaluating the impact that the adoption of this guidance will have on the Company’s condensed financial statements.

In December 2008, the Emerging Issue Task Force issued new accounting guidance on issuer’s accounting for liabilities measured at fair value with a third-party credit enhancement.  The Task Force reached a consensus that an issuer of a liability with a third-party credit enhancement that is inseparable from the liability must treat the liability and the credit enhancement as two units of accounting. Under the guidance, the fair value measurement of the liability does not include the effect of the third-party credit enhancement; therefore, changes in the issuer’s credit standing without the support of the credit enhancement affect the fair value measurement of the issuer’s liability. Entities will need to disclose the existence of any third-party credit enhancements related to their liabilities that are within the scope of this guidance (i.e., that are measured at fair value). This guidance was effective in the first reporting period beginning on or after December 15, 2008. The adoption of this guidance did not have a material effect on the Company’s condensed financial statements.

 
SJG-13

 
 
In April 2009, the FASB issued new accounting guidance on interim disclosures about fair value of financial instruments. This guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance also requires those disclosures in summarized financial information at interim reporting periods. This guidance was effective for interim reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material effect on the Company’s condensed financial statements.

In April 2009, the FASB issued new accounting guidance on the recognition and presentation of other-than-temporary impairments. This guidance amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance requires management to assert (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis.  Declines in fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are to be reflected in earnings as realized losses to the extent the impairment is related to credit losses.  This guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This new guidance was effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material effect on the Company’s condensed financial statements.

In April 2009, the FASB issued new accounting guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. This guidance was effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The adoption of this guidance did not have a material effect on the Company’s condensed financial statements.

 
SJG-14

 
 
In May 2009, the FASB issued new accounting guidance on management’s assessment of subsequent events. Historically, management had relied on U.S. auditing literature for guidance on assessing and disclosing subsequent events. This new guidance represents the inclusion of specific guidance on subsequent events in U.S. GAAP and is directed specifically to management. The new guidance clarifies that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date “through the date that the financial statements are issued or are available to be issued.” The new guidance was effective for interim or annual financial periods ending after June 15, 2009. Management must perform its assessment for both interim and annual periods. The adoption of this guidance did not have a material effect on the Company’s condensed financial statements.

In June 2009, the FASB issued new accounting guidance on The FASB Accounting Standards Codification™ (the “Codification”) which will become the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles. The current GAAP hierarchy consists of four levels of authoritative accounting and reporting guidance. The Codification eliminates this hierarchy and replaces current GAAP (other than rules and interpretive releases of the SEC) as used by all nongovernmental entities, with just two levels of literature: authoritative and nonauthoritative. The Codification was effective for interim and annual periods ending after September 15, 2009. Calendar year-end companies are required to initially apply the Codification to their third-quarter interim financial statements. The application of the Codification did not have a material effect on the Company’s condensed financial statements.
 
In August 2009 the FASB issued new accounting guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or (iii) another valuation technique that is consistent with existing principles, such as an income approach or market approach. The new accounting guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This guidance will be effective for the period ending December 31, 2009 and is not expected to have a significant impact on the Company’s condensed financial statements.

 
SJG-15

 
 
2.
RATES AND REGULATORY ACTIONS:

SJG is subject to the rules and regulations of the BPU.  In January 2009, SJG filed a petition with the BPU for approval of an accelerated infrastructure investment program and an associated rate tracker, which will allow the Company to accelerate $103.0 million of capital spending into 2009 and 2010.  The petition requested the Company earn a return of, and return on, investment as the capital is spent. The petition was approved by the BPU in April 2009 and also ordered SJG to file a base rate case with the BPU no later than April 2011. Also in January 2009, SJG filed a petition requesting approval of an energy efficiency program to invest $17.0 million over 2 years in energy efficiency programs for residential, commercial and industrial customers. The petition was approved by the BPU in July 2009. In June 2009, SJG filed its annual BGSS petition with the BPU requesting a 13.3% reduction in rates, in addition to proposing a $20.0 million refund to customers in October 2009. The BGSS rate reduction was approved provisionally by the BPU in September 2009, and the refund was credited to the accounts of BGSS customers in October. There have been no other significant regulatory actions or changes to SJG’s rate structure since December 31, 2008. See Note 2 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2008.

3.
REGULATORY ASSETS AND LIABILITIES:

There have been no significant changes to the nature of SJG’s regulatory assets and liabilities since December 31, 2008, which are described in Notes 2 and 3 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2008.

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

   
September 30,
   
December 31,
 
   
2009
   
2008
 
Environmental Remediation Costs:
               
Expended - Net
 
$
48,944
   
$
48,143
 
Liability for Future Expenditures
   
65,679
     
64,093
 
Income Taxes - Flowthrough Depreciation
   
1,996
     
2,729
 
Deferred Asset Retirement Obligation Costs
   
22,299
     
21,901
 
Deferred Pension and Other Postretirement Benefit Costs
   
79,879
     
80,162
 
Deferred Gas Costs - Net
   
4,587
     
18,406
 
Conservation Incentive Program Receivable
   
14,535
     
22,048
 
Societal Benefit Costs Receivable
   
625
     
1,753
 
Premium for Early Retirement of Debt
   
1,086
     
1,208
 
Other Regulatory Assets
   
7,161
     
9,991
 
                 
Total Regulatory Assets
 
$
246,791
   
$
270,434
 
 
 
SJG-16

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

   
September 30,
   
December 31,
 
   
2009
   
2008
 
Excess Plant Removal Costs
 
$
48,689
   
$
48,820
 
Other Regulatory Liabilities
   
2,261
     
1,627
 
                 
Total Regulatory Liabilities
 
$
50,950
   
$
50,447
 
 
DEFERRED GAS COSTS – NET – Over/under collections of gas costs are monitored through SJG’s Basic Gas Supply Service Clause (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 $18.4 million regulatory asset at December 31, 2008 to a $4.6 million regulatory asset at September 30, 2009.  A change in the fair value of energy related derivatives resulting primarily from a decrease in the average future NYMEX prices accounted for $16.7 million of the fluctuation.

4.
RELATED PARTY TRANSACTIONS:

There have been no significant changes in the nature of SJG’s related party transactions since December 31, 2008. See Note 4 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2008 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,
 
   
2009
   
2008
   
2009
   
2008
 
Operating Revenues/Affiliates:
                       
SJRG
 
$
285
   
$
840
   
$
3,490
   
$
2,585
 
Other
   
93
     
81
     
338
     
315
 
Total Operating Revenues/Affiliates
 
$
378
   
$
921
   
$
3,828
   
$
2,900
 
 
 
SJG-17

 
 
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,
 
   
2009
   
2008
   
2009
   
2008
 
Costs of Sales/Affiliates:
                       
SJRG
 
$
1,860
   
$
2,624
   
$
33,321
   
$
18,396
 
Total Cost of Sales/Affiliates
 
$
1,860
   
$
2,624
   
$
33,321
   
$
18,396
 
   
Derivative Losses (Gains) (See Note 1): *
               
SJRG
 
$
12,478
   
$
(5,375
 
$
44,290
   
$
(12,723
)
 
* Contracts used to hedge natural gas purchases. Included in Cost of Sales on the Condensed Statement of Income.

Operations Expense/Affiliates
                       
SJI
 
$
1,655
   
$
1,450
   
$
5,832
   
$
4,873
 
SJIS
   
1,261
     
1,073
     
3,596
     
3,183
 
Millennium
   
737
     
735
     
2,178
     
2,245
 
Other
   
(70
)
   
(58
)
   
(228
)
   
(160
)
Total Operations Expense/Affiliates
 
$
3,583
   
$
3,200
   
$
11,378
   
$
10,141
 
 

5.
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, 2009 and December 31, 2008, the escrowed proceeds, including interest earned, totaled $0.1 million.

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 $10.2 million and $10.1 million as of September 30, 2009 and December 31, 2008, 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 amounts of $1.3 million and $1.2 million as of September 30, 2009 and December 31, 2008, respectively.  The annual amortization to interest is not material to SJG’s financial statements.

 
SJG-18

 
 
Other Financial Instruments -   The estimated fair values of SJG’s long-term debt, including current maturities, as of September 30, 2009 and December 31, 2008, were $353.6 million and $326.1 million, respectively.  Carrying amounts as of both September 30, 2009 and December 31, 2008, were $294.9 million.  We based the estimates on interest rates available to SJG at the end of each period for debt with similar terms and maturities.  The carrying amounts of SJG’s other financial instruments approximate their fair values at September 30, 2009 and December 31, 2008.

6.
UNUSED LINES OF CREDIT:

Credit facilities and available liquidity as of September 30, 2009 were as follows (in thousands):

   
Total Facility
   
Usage (A)
   
Available Liquidity
 
Expiration Date
                     
Revolving Credit Facility
 
$
100,000
   
$
80,100
   
$
19,900
 
August 2011
Line of Credit
   
40,000
     
     
40,000
 
December 2009 (B)
Uncommitted Bank Lines
   
45,000
     
6,500
     
38,500
 
Various
                           
Total
 
$
185,000
   
$
86,600
   
$
98,400
   

(A)  Includes letter of credit in the amount of $0.1 million.
(B)  SJG anticipates extending this line of credit during the fourth quarter of 2009.

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 September 30, 2009.  Borrowings under these credit facilities are at market rates.  The weighted average borrowing cost, which changes daily, was 0.64% and 3.66% at September 30, 2009 and 2008, respectively.

7. 
RETAINED EARNINGS:

SJG is restricted as to the amount of cash dividends or other distributions that may be paid on its common stock by an order issued by the BPU in July 2004 that granted SJG an increase in base rates. Per the order, SJG is required to maintain total common equity of no less than $289.2 million. SJG’s total common equity balance was $420.6 million at September 30, 2009.

 
SJG-19

 
 
Various loan agreements also contain potential restrictions regarding the amount of cash dividends or other distributions that SJG may pay on its common stock. As of September 30, 2009, these loan restrictions did not affect the amount that may be distributed from SJG’s retained earnings.

8.
PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three and nine months ended  September 30, 2009 and 2008, net periodic benefit cost related to the employee and officer pension and other postretirement benefit plans consisted of the following components (in thousands):
 
 
Pension Benefits
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Service Cost
 
$
622
   
$
572
   
$
1,866
   
$
1,715
 
Interest Cost
   
1,676
     
1,488
     
5,029
     
4,462
 
Expected Return on Plan Assets
   
(1,457
)
   
(1,863
)
   
(4,370
)
   
(5,587
)
Amortizations:
                               
Prior Service Cost
   
54
     
52
     
161
     
157
 
Actuarial Loss
   
1,043
     
288
     
3,127
     
862
 
Net Periodic Benefit Cost
   
1,938
     
537
     
5,813
     
1,609
 
Capitalized Benefit Costs
   
(949
)
   
(263
)
   
(2,848
)
   
(788
)
Total Net Periodic Benefit Expense
 
$
989
   
$
274
   
$
2,965
   
$
821
 

 
Other Postretirement Benefits
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Service Cost
 
$
155
   
$
175
   
$
466
   
$
524
 
Interest Cost
   
678
     
534
     
2,034
     
1,600
 
Expected Return on Plan Assets
   
(351
)
   
(396
)
   
(1,054
)
   
(1,188
)
Amortizations:
                               
Prior Service Credits
   
(63
)
   
(64
)
   
(190
)
   
(192
)
Actuarial Loss
   
562
     
135
     
1,310
     
403
 
Net Periodic Benefit Cost
   
981
     
384
     
2,566
     
1,147
 
Capitalized Benefit Costs
   
(480
)
   
(188
)
   
(1,257
)
   
(562
)
Total Net Periodic Benefit Expense
 
$
501
   
$
196
   
$
1,309
   
$
585
 

Capitalized benefit costs reflected in the table above relate to our construction program. During the nine months ended September 30, 2009 and 2008, SJG contributed $8.2 million and $4.8 million to its pension plans, respectively.     See Note 11 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2008, for additional information related to SJG’s pension and other postretirement benefits.

 
SJG-20

 
 
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 2010.

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, 2008,  as described in Note 12 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2008.

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. SJG expects to renew each of these contracts under renewal provisions as provided in each contract. 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 $4.3 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. 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 65% of our workforce at September 30, 2009. The Company has collective bargaining agreements with two unions who represent these employees: the International Brotherhood of Electrical Workers (“IBEW”) and the International Association of Machinists and Aerospace Workers (“IAM”).  The Company and the IBEW have recently agreed to a new 4-year contract that runs through February 2013.    The Company and the IAM recently agreed to a new contract that runs through August 2014.

 
SJG-21

 
 
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 as of September 30, 2009 is as follows (in thousands):

   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets -
                       
                                 
Available-for-Sale Securities (A)
 
$
5,695
   
$
5,695
   
$
-
   
$
-
 
Derivatives – Energy Related Assets (B)
   
3,220
     
2,579
     
641
     
-
 
   
$
8,915
   
$
8,274
   
$
641
   
$
-
 
                                 
Liabilities -
                               
                                 
Derivatives – Energy Related Liabilities (B)
 
$
15,522
   
$
14,221
   
$
1,301
   
$
-
 
Derivatives – Other (C)
   
3,682
     
-
     
3,682
     
-
 
   
$
19,204
   
$
14,221
   
$
4,983
   
$
-
 

(A) Available-for-Sale Securities are valued using the quoted principal market close prices that are provided by the trustees of these securities.

 
SJG-22

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

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

11.
AVAILABLE–FOR–SALE SECURITIES:

SJG's portfolio of investments consists of five highly diversified funds which are not used for working capital purposes. These funds are in an unrealized loss position as of September 30, 2009. Due to the nature of the underlying securities, these funds as a whole are susceptible to changes in the economy and have been adversely affected by the economic slowdown, particularly during the fourth quarter of 2008 when SJG’s investments became impaired. SJG has evaluated the near-term prospects of the overall funds in relation to the severity and duration of the impairment. Based on that evaluation, SJG recorded an insignificant impairment loss during the fourth quarter of 2008. SJG does not intend to sell the remaining funds, and it is more likely than not it will not have to sell the remaining funds before recovery of its cost basis. SJG does not consider these remaining investments to be other-than-temporarily impaired at September 30, 2009.

 
SJG-23

 
 
The following table shows the gross unrealized losses and fair value of the SJG's Available-for-Sale Securities with unrealized losses that are not deemed to be other-than-temporarily impaired (in thousands), aggregated by length of time that the individual funds have been in a continuous unrealized loss position at September 30, 2009.

   
Less than 12 Months
   
Greater Than 12 Months
   
Total
 
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
Marketable Equity Securities
 
$
-
   
$
-
   
$
4,245
   
$
655
   
$
4,245
   
$
655
 
  
As of September 30, 2009 and December 31, 2008, the total losses for securities with net losses included in Accumulated Other Comprehensive Loss was $0.4 million and $0.7 million, respectively.  As of September 30, 2009 and December 31, 2008, securities with net gains included in Accumulated Other Comprehensive Loss was $0.1 million and zero, respectively.

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

OVERVIEW:

Organization - SJG is an operating public utility company engaged in the purchase, transmission and sale of natural gas for residential, commercial and industrial use. SJG also sells natural gas and pipeline transportation capacity (off-system sales) on a wholesale basis to various customers on the interstate pipeline system and transports natural gas purchased directly from producers or suppliers to their customers. SJG served 339,894 customers at September 30, 2009 compared with 336,004 customers at September 30, 2008.

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.

 
SJG-24

 
 
A discussion of these and other risks and uncertainties may be found in SJG’s Form 10-K for the year ended December 31, 2008 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, 2008.
 
New Accounting Pronouncements - See detailed discussions concerning New Accounting Pronouncements and their impact in Note 1 to the condensed financial statements.

 
SJG-25

 
 
Regulatory Actions – Other than the changes discussed in Note 2 to the condensed financial statements, there have been no significant regulatory actions since December 31, 2008. See detailed discussions concerning Regulatory Actions in Note 2 to the Financial Statements in item 8 of SJG’s Form 10-K for the year ended December 31, 2008.

Environmental Remediation –There have been no significant changes to the status of SJG’s environmental remediation efforts since December 31, 2008. 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, 2008.

Competition - See detailed discussion concerning competition in SJG’s Form 10-K for the year ended December 31, 2008.

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 29,019 and 28,210 at September 30, 2009 and 2008, respectively.
 
 
SJG-26

 
 
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
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Throughput – dth:
                       
Firm Sales -
                       
Residential
   
1,706
     
1,559
     
16,070
     
14,490
 
Commercial
   
673
     
652
     
4,319
     
4,065
 
Industrial
   
26
     
13
     
231
     
103
 
Cogeneration & Electric Generation
   
176
     
156
     
278
     
528
 
Firm Transportation -
                               
Residential
   
139
     
136
     
1,410
     
1,351
 
Commercial
   
647
     
598
     
4,132
     
3,927
 
Industrial
   
2,906
     
3,095
     
8,875
     
9,542
 
Cogeneration & Electric Generation
   
799
     
1,115
     
1,518
     
2,040
 
                                 
Total Firm Throughput
   
7,072
     
7,324
     
36,833
     
36,046
 
                                 
Interruptible Sales
   
-
     
1
     
4
     
28
 
Interruptible Transportation
   
492
     
509
     
1,700
     
2,034
 
Off-System
   
544
     
1,458
     
4,309
     
7,330
 
Capacity Release
   
10,560
     
20,196
     
28,023
     
47,253
 
                                 
Total Throughput
   
18,668
     
29,488
     
70,869
     
92,691
 

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Utility Operating Revenues:
                       
Firm Sales -
                       
Residential
 
$
33,929
   
$
26,587
   
$
243,212
   
$
214,098
 
Commercial
   
9,129
     
9,650
     
53,663
     
53,449
 
Industrial
   
309
     
874
     
2,637
     
6,051
 
Cogeneration & Electric Generation
   
1,267
     
2,166
     
2,312
     
7,453
 
Firm Transportation -
                               
Residential
   
1,090
     
1,081
     
7,413
     
7,161
 
Commercial
   
2,449
     
2,124
     
13,435
     
12,532
 
Industrial
   
3,638
     
2,974
     
10,841
     
9,247
 
Cogeneration & Electric Generation
   
681
     
599
     
1,474
     
1,356
 
                                 
Total Firm Revenues
   
52,492
     
46,055
     
334,987
     
311,347
 
                                 
Interruptible Sales
   
(16
)
   
22
     
79
     
304
 
Interruptible Transportation
   
465
     
334
     
1,551
     
1,301
 
Off-System
   
1,904
     
14,403
     
23,154
     
72,989
 
Capacity Release
   
1,171
     
3,512
     
3,594
     
9,265
 
Other
   
289
     
237
     
888
     
832
 
                                 
Total Utility Operating Revenues
   
56,305
     
64,563
     
364,253
     
396,038
 
                                 
Less:
                               
Cost of Sales
   
31,726
     
41,201
     
227,608
     
264,381
 
Conservation Recoveries*
   
1,247
     
1,116
     
6,636
     
6,149
 
RAC Recoveries*
   
1,210
     
695
     
3,627
     
2,084
 
EET Recoveries*
   
81
     
-
     
81
     
-
 
Revenue Taxes
   
921
     
870
     
6,263
     
5,912
 
Utility Margin
 
$
21,120
   
$
20,681
   
$
120,038
   
$
117,512
 
                                 
Margin:
                               
Residential
 
$
12,699
   
$
12,094
   
$
74,836
   
$
69,230
 
Commercial and Industrial
   
6,325
     
6,185
     
28,779
     
27,334
 
Cogeneration and Electric Generation
   
875
     
641
     
1,750
     
1,540
 
Interruptible
   
8
     
11
     
96
     
92
 
Off-system & Capacity Release
   
208
     
572
     
1,108
     
2,160
 
Other Revenues
   
859
     
1,085
     
2,075
     
1,868
 
Margin Before Weather Normalization & Decoupling
   
20,974
     
20,588
     
108,644
     
102,224
 
CIRT Mechanism
   
551
     
-
     
926
     
-
 
CIP Mechanism
   
(409
)
   
93
     
10,464
     
15,288
 
EET Mechanism
   
4
     
-
     
4
     
-
 
Utility Margin
 
$
21,120
   
$
20,681
   
$
120,038
   
$
117,512
 
                                 
Degree Days:
   
34
     
18
     
3,033
     
2,753
 
 
*Represents expenses for which there is a corresponding credit in operating revenues.  Therefore, such recoveries have no impact on our financial results.
 
 
SJG-27

 
 
Throughput - Total gas throughput decreased 10.8 MMdts or 36.7%, and 21.8 MMdts, or 23.5%, for the three and nine months ended September 30, 2009, compared with the same periods in 2008, respectively.  Off-System sales (OSS) and capacity release volume decreased substantially as SJG’s portfolio of assets available for such activities has been reduced under the Conservation Incentive Program, as discussed under “Rates and Regulation” in Item 7 of SJG’s Form 10-K for the year ended December 31, 2008.  As the majority of profits from OSS and capacity release are returned to the ratepayers via a BPU-approved sharing formula, the decrease in such activities had a negligible impact on SJG earnings as reflected in the margin table above.  Firm throughput increased in the residential market, primarily on a year-to-date basis, as a result of 10.2% colder weather, as reflected by the degree day data in the table above, and the addition of 3,672 residential customers during the 12-month period ended September 30, 2009.  Changes in throughput in other customer categories were not significant.

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
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net Income Benefit: 
                       
CIP – Weather Related
 
$
-
   
$
-
   
$
(0.1
)
 
$
1.6
 
CIP – Usage Related
   
(0.2
)
   
0.1
     
6.3
     
7.4
 
Total Net Income Benefit
 
$
(0.2
)
 
$
0.1
   
$
6.2
   
$
9.0