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EX-31.2 - EXHIBIT 31.2 - SOUTH JERSEY GAS Coex31_2.htm
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EX-32.1 - EXHIBIT 32.1 - SOUTH JERSEY GAS Coex32_1.htm
EX-32.2 - EXHIBIT 32.2 - SOUTH JERSEY GAS Coex32_2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
 
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

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 £   NoS
 
As of May 3, 2010 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

 

TABLE OF CONTENTS

 
Page No.
 
 
PART I
FINANCIAL INFORMATION
 
     
Item 1.
  3
     
Item 2.
15
     
Item 3.
22
     
Item 4.
23
     
PART II
OTHER INFORMATION
 
     
Item 1.
24
     
Item 1A.
24
     
Item 6.
24
 
 
 
24


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)

   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
             
             
Operating Revenues
  $ 196,716     $ 243,113  
                 
Operating Expenses:
               
Cost of Sales (Excluding depreciation)
    116,875       165,977  
Operations
    17,807       17,360  
Maintenance
    2,816       2,156  
Depreciation
    7,079       6,633  
Energy and Other Taxes
    4,348       4,621  
                 
Total Operating Expenses
    148,925       196,747  
                 
Operating Income
    47,791       46,366  
                 
Other Income and Expense
    233       324  
                 
Interest Charges
    (4,015 )     (4,097 )
                 
Income Before Income Taxes
    44,009       42,593  
                 
Income Taxes
    (18,139 )     (17,615 )
                 
Net Income
  $ 25,870     $ 24,978  

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


SOUTH JERSEY GAS COMPANY

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

   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
             
             
             
Net Income
  $ 25,870     $ 24,978  
                 
Other Comprehensive Gain  (Loss)  - Net of Tax:
               
                 
Unrealized Gain (Loss) on Available-for-Sale Securities
    144       (170 )
Unrealized Gain on Derivatives - Other
    7       7  
                 
Other Comprehensive Gain (Loss) - Net of Tax *
    151       (163 )
                 
Comprehensive Income
  $ 26,021     $ 24,815  

* Determined using a combined statutory tax rate of 41.08%

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


SOUTH JERSEY GAS COMPANY

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

   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
             
             
Net Cash Provided by Operating Activities
  $ 72,204     $ 51,274  
                 
Cash Flows from Investing Activities:
               
Capital Expenditures
    (37,414 )     (15,676 )
Investment in Long-Term Receivables
    (910 )     (2,044 )
Proceeds from Long-Term Receivables
    609       2,869  
                 
Net Cash Used in Investing Activities
    (37,715 )     (14,851 )
                 
Cash Flows from Financing Activities:
               
Net Repayments of Lines of Credit
    (47,400 )     (32,975 )
Principal Repayments of Long-Term Debt
    -       (10 )
Proceeds from Issuance of Long-Term Debt
    15,000       -  
Payments for Issuance of Long-Term Debt
    (559 )     -  
                 
Net Cash Used in Financing Activities
    (32,959 )     (32,985 )
                 
Net Increase in Cash and Cash Equivalents
    1,530       3,438  
Cash and Cash Equivalents at Beginning of Period
    1,993       2,228  
                 
Cash and Cash Equivalents at End of Period
  $ 3,523     $ 5,666  

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


SOUTH JERSEY GAS COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)

   
March 31,
   
December 31,
 
   
2010
   
2009
 
Assets
           
             
Property, Plant and Equipment:
           
Utility Plant, at original cost
  $ 1,306,746     $ 1,275,792  
Accumulated Depreciation
    (320,781 )     (314,627 )
 
               
Property, Plant and Equipment - Net
    985,965       961,165  
                 
Investments:
               
Available-for-Sale Securities
    6,195       5,941  
Restricted Investments
    132       132  
                 
Total Investments
    6,327       6,073  
                 
Current Assets:
               
Cash and Cash Equivalents
    3,523       1,993  
Accounts Receivable
    102,729       41,392  
Accounts Receivable - Related Parties
    732       974  
Unbilled Revenues
    25,587       47,333  
Provision for Uncollectibles
    (3,847 )     (3,915 )
Natural Gas in Storage, average cost
    9,626       23,711  
Materials and Supplies, average cost
    2,867       4,854  
Prepaid Taxes
    -       13,796  
Derivatives - Energy Related Assets
    11       797  
Other Prepayments and Current Assets
    2,214       2,248  
                 
Total Current Assets
    143,442       133,183  
                 
Regulatory and Other Noncurrent Assets:
               
Regulatory Assets
    231,355       240,462  
Unamortized Debt Issuance Costs
    6,263       5,829  
Long-Term Receivables
    7,393       7,693  
Derivatives - Energy Related Assets
    108       333  
Other
    2,349       2,324  
                 
Total Regulatory and Other Noncurrent Assets
    247,468       256,641  
                 
Total Assets
  $ 1,383,202     $ 1,357,062  

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


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

   
March 31,
   
December 31,
 
   
2010
   
2009
 
             
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
    200,716       200,716  
Accumulated Other Comprehensive Loss
    (6,179 )     (6,330 )
Retained Earnings
    254,665       231,296  
 
               
Total Common Equity
    455,050       431,530  
                 
Long-Term Debt
    265,000       250,000  
                 
Total Capitalization
    720,050       681,530  
                 
Current Liabilities:
               
Notes Payable
    62,000       109,400  
Current Portion of Long-Term Debt
    35,000       35,000  
Accounts Payable - Commodity
    17,418       19,630  
Accounts Payable - Other
    21,948       21,947  
Accounts Payable - Related Parties
    11,736       12,120  
Derivatives - Energy Related Liabilities
    22,254       9,799  
Deferred Income Taxes - Net
    7,893       11,642  
Customer Deposits and Credit Balances
    15,197       13,542  
Environmental Remediation Costs
    25,160       22,499  
Taxes Accrued
    25,678       8,548  
Pension Benefits
    1,066       1,066  
Interest Accrued
    4,467       5,979  
Dividends Declared
    2,501       -  
Other Current Liabilities
    6,655       7,839  
                 
Total Current Liabilities
    258,973       279,011  
                 
Regulatory and Other Noncurrent Liabilities:
               
Regulatory Liabilities
    54,824       50,193  
Deferred Income Taxes - Net
    214,020       210,925  
Environmental Remediation Costs
    43,361       46,557  
Asset Retirement Obligations
    23,115       22,960  
Pension and Other Postretirement Benefits
    59,078       57,699  
Investment Tax Credits
    1,440       1,517  
Derivatives - Energy Related Liabilities
    2,108       504  
Derivatives - Other
    2,017       1,956  
Other
    4,216       4,210  
                 
Total Regulatory and Other Noncurrent Liabilities
    404,179       396,521  
                 
Commitments and Contingencies (Note 9)
               
                 
Total Capitalization and Liabilities
  $ 1,383,202     $ 1,357,062  

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


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

THE ENTITY - South Jersey Industries, Inc. (SJI) owns all of the outstanding common stock of South Jersey Gas Company (SJG), a regulated natural gas utility. SJG distributes natural gas in the seven southern most counties of New Jersey. In our opinion, the condensed financial statements reflect all normal and recurring adjustments needed to fairly present our financial position and operating results at the dates and for the periods presented. SJG’s business is subject to seasonal fluctuations and accordingly, this interim financial information should not be the basis for estimating the full year’s operating results. As permitted by the rules and regulations of the Securities and Exchange Commission, the accompanying condensed financial statements contain certain condensed financial information and exclude certain note disclosures normally included in annual audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These condensed financial statements should be read in conjunction with SJG’s 2009 Form 10-K for a more complete discussion of our accounting policies and certain other information.

REVENUE BASED TAXES - SJG collects certain revenue-based energy taxes from its customers. Such taxes include New Jersey State Sales Tax, Transitional Energy Facility Assessment (TEFA) and Public Utilities Assessment (PUA). State sales tax is recorded as a liability when billed to customers and is not included in revenue or operating expenses. TEFA and PUA are included in both revenues and cost of sales, and totaled $3.8 million and $4.1 million for the three months ended March 31, 2010 and 2009, 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, 2009.  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 months ended March 31, 2010 and 2009 was not significant.

 DERIVATIVE INSTRUMENTS — SJG is involved in buying, selling, transporting and storing natural gas and is subject to market risk on expected future purchases and sales due to commodity price fluctuations. The Company, through its affiliate South Jersey Resources Group (SJRG), uses a variety of derivative instruments to limit this exposure to market risk in accordance with strict corporate guidelines. These derivative instruments include forward contracts, futures contracts, swap agreements and options contracts. As of March 31, 2010, SJG had outstanding derivative contracts intended to limit the exposure to market risk on 28.6 MMdts of expected future purchases of natural gas. These contracts, which do not qualify for the normal purchase and sale exemption and have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives —Energy Related Assets or Derivatives — Energy Related Liabilities on the condensed balance sheets. The costs or benefits of these short-term contracts are recoverable through SJG’s Basic Gas Supply Service (BGSS) clause, subject to BPU approval. As a result, the net unrealized pre-tax gains and losses for these energy related commodity contracts are included with realized gains and losses in Regulatory Assets or Regulatory Liabilities on the condensed balance sheets. As of March 31, 2010 and December 31, 2009, SJG had $24.2 million and $9.2 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, 2009 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, 2009. 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.


The fair values of all derivative instruments, as reflected in the condensed balance sheets as of March 31, 2010 and December 31, 2009, are as follows (in thousands):

Derivatives not designated as hedging instruments under GAAP
 
March 31, 2010
 
 
December 31, 2009
 
 
 
Assets
   
Liabilities
 
 
Assets
 
 
Liabilities
 
Energy related commodity contracts:
 
 
 
 
 
 
 
 
 
 
 
 
                         
Derivatives – Energy Related – Current
 
$
11
 
 
$
22,254
 
 
$
797
 
 
$
9,799
 
                                 
Derivatives – Energy Related – Non-Current
 
 
108
 
 
 
2,108
 
 
 
333
 
 
 
504
 
                                 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                 
Derivatives – Other
 
 
-
 
 
 
2,017
 
 
 
-
 
 
 
1,956
 
                                 
Total derivatives not designated as hedging instruments under GAAP
 
$
119
 
 
$
26,379
 
 
 
1,130
 
 
 
12,259
 

The effect of derivative instruments on the condensed statements of income for the three months ended March 31, 2010, and 2009 are as follows (in thousands):

   
Three months ended March 31,
Derivatives in Cash Flow Hedging Relationships
 
2010
 
 
2009
 
Interest Rate Contracts:
 
 
 
 
 
 
Losses reclassified from accumulated OCI into income (a)
 
$
(12
)
 
$
(12
)

(a) Included in Interest Charges

 Net realized losses associated with SJG’s energy related financial commodity contracts of $4.0 million and $16.9 million for the three months ended March 31, 2010 and 2009 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 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 March 31, 2010, 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. 2008
   
9,238
   
$
34.030
     
21.7
%
   
2.9
%
Jan. 2009
   
8,318
   
$
39.350
     
28.6
%
   
1.2
%
Jan. 2010
   
10,024
   
$
39.020
     
29.0
%
   
1.65
%

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 of restricted stock awards during the three months ended March 31, 2010 and 2009 approximated $85,900 and $74,200, respectively.


As of March 31, 2010, there was $0.6 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the restricted stock plans. That cost is expected to be recognized over a weighted average period of 2.2 years.

The following table summarizes information regarding restricted stock award activity during the three months ended March 31, 2010, excluding accrued dividend equivalents:
 
 
 
 
Shares
 
 
Weighted Average
Grant Date
Fair Value
 
Nonvested Shares Outstanding, January 1, 2010
 
 
17,556
 
 
$
36.551
 
 
 
 
 
 
 
 
 
 
Granted
 
 
10,024
 
 
 
39.020
 
 
 
 
 
 
 
 
 
 
Nonvested Shares Outstanding, March 31, 2010
 
 
27,580
 
 
$
37.448
 
 
 
During the three months ended March 31, 2010, SJG awarded 14,400 shares that had vested at December 31, 2008, to its officers at a market value of $0.5 million. During the three months ended March 2009, SJG awarded 13,640 shares at a market value of $0.5 million. SJG has a policy of making cash payments to SJI to satisfy its obligations under this plan. Cash payments to SJI during the three months ended March 31, 2010 and 2009 were approximately $0.3 million and $0.2 million, respectively, relating to stock awards. Additionally, a change in control could result in the nonvested shares becoming nonforfeitable or immediately payable in cash.

NEW ACCOUNTING PRONOUNCEMENTS — No new accounting pronouncement issued or effective during 2009 and 2010 had, or is expected to have, a material impact on the condensed financial statements.
 
HEALTH CARE LEGISLATION – In March 2010, the President of the United States signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (HR 3590) and the Health Care Education and Affordability Reconciliation Act (HR 4872) (the “Acts”).  The Acts contain provisions which could impact our accounting for retiree medical benefits in future periods.  However, the extent of that impact, if any, cannot be determined until regulations are promulgated under the Acts and additional interpretations of the Acts become available.  Based on the analysis to date of the provisions in the Acts in which the impacts are reasonably determinable, a re-measurement of our Other Postretirement Benefits liability is not required at this time.  See Note 10 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2009 for additional information related to SJG’s pension and other postretirement benefits.

2.
RATES AND REGULATORY ACTIONS:

SJG is subject to the rules and regulations of the BPU.  In November 2009, the Company filed its annual CIRT petition, seeking an increase in revenue of $9.9 million over 2009.  The CIRT rate increase was provisionally approved by the BPU effective January 1, 2010.  On January 15, 2010, SJG filed a petition for an increase in the Company’s base rates.  As of SJG’s last base rate case, and through December 31, 2010, it is expected that $465.2 million will be invested in utility plant in service.  The filing requested incremental revenue of $35.9 million, or a 7.1% increase.  In addition, the petition seeks approval for a new tracker mechanism, the Reliability Tracker. This petition is still pending. The base rate petition also seeks various other modifications to SJG’s tariff. There have been no other significant regulatory actions or changes to SJG’s rate structure since December 31, 2009. See Note 2 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2009.

3.
REGULATORY ASSETS AND LIABILITIES:

There have been no significant changes to the nature of SJG’s regulatory assets and liabilities since December 31, 2009, 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, 2009.


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

 
 
March 31,
 
 
December 31,
 
 
 
2010
 
 
2009
 
Environmental Remediation Costs:
 
 
 
 
 
 
 
 
Expended - Net
 
$
40,788
 
 
$
42,924
 
Liability for Future Expenditures
 
 
68,521
 
 
 
69,056
 
Income Taxes - Flowthrough Depreciation
 
 
1,507
 
 
 
1,752
 
Deferred Asset Retirement Obligation Costs
 
 
22,562
 
 
 
22,438
 
Deferred Pension and Other Postretirement Benefit Costs
 
 
71,098
 
 
 
71,192
 
Deferred Gas Costs - Net
 
 
567
 
 
 
6,519
 
Conservation Incentive Program Receivable
 
 
15,378
 
 
 
16,672
 
Societal Benefit Costs Receivable
 
 
2,082
 
 
 
1,872
 
Premium for Early Retirement of Debt
 
 
1,005
 
 
 
1,046
 
Other Regulatory Assets
 
 
7,847
 
 
 
6,991
 
 
 
 
 
 
 
 
 
 
Total Regulatory Assets
 
$
231,355
 
 
$
240,462
 

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

 
 
March 31,
 
 
December 31,
 
 
 
2010
 
 
2009
 
Excess Plant Removal Costs
 
$
48,731
 
 
$
48,715
 
Other Regulatory Liabilities
 
 
6,093
 
 
 
1,478
 
 
 
 
 
 
 
 
 
 
Total Regulatory Liabilities
 
$
54,824
 
 
$
50,193
 
 
 
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 $6.5 million regulatory asset at December 31, 2009 to a $0.6 million regulatory asset at March 31, 2010 primarily as a result of gas costs recovered from customers exceeding the actual cost of the commodity incurred during the first quarter.  Gas cost recoveries are typically very high in the first and fourth quarters of the year as customer consumption is at its highest point during the winter months.    This was partially offset by a change in the fair value of energy related derivatives, resulting primarily from a decrease in the average future NYMEX prices which offset $15.1 million of the decrease.

4.
RELATED PARTY TRANSACTIONS:

There have been no significant changes in the nature of SJG’s related party transactions since December 31, 2009. See Note 4 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2009 for a detailed description of such transactions.

A summary of related party transactions, excluding pass-through items, included in Operating Revenues were as follows, (in thousands):

 
 
Three Months Ended
March 31,
 
 
 
2010
 
 
2009
 
Operating Revenues/Affiliates:
 
 
 
 
 
 
SJRG
 
$
563
 
 
$
2,892
 
Other
 
 
127
 
 
 
146
 
Total Operating Revenues/Affiliates
 
$
690
 
 
$
3,038
 



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

 
 
Three Months Ended
March 31,
 
 
 
2010
 
 
2009
 
Costs of Sales/Affiliates (Excluding depreciation):
 
 
 
 
 
 
SJRG
 
$
14,582
 
 
$
26,726
 
Derivative Losses (See Note 1): *
               
SJRG
 
$
4,047
 
 
$
16,910
 
 
 
* Contracts used to hedge natural gas purchases. Included in Cost of Sales on the Condensed Statement of Income.

Operations Expense/Affiliates
 
 
 
 
 
 
SJI
 
$
1,928
 
 
$
1,772
 
SJIS
 
 
1,503
 
 
 
1,283
 
Millennium
 
 
688
 
 
 
713
 
Other
 
 
(54
)
 
 
(74
)
Total Operations Expense/Affiliates
 
$
4,065
 
 
$
3,694
 

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 March 31, 2010 and December 31, 2009, the escrowed proceeds, including interest earned, totaled $0.1 million.  The carrying amounts of the Restricted Investments approximate their fair value at March 31, 2010 and December 31, 2009.

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 $10.4 million and $10.8 million as of March 31, 2010 and December 31, 2009, 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 March 31, 2010 and December 31, 2009, respectively.  The annual amortization to interest is not material to SJG’s financial statements.  The carrying amounts of these receivables approximate their fair value at March 31, 2010 and December 31, 2009.

Long-Term Debt – In March 2010, SJG issued in a private placement, $15.0 million aggregate principal amount of its Medium Term Notes. These notes bear interest at 4.84%, are secured by a first mortgage lien on substantially all utility plant and are due in 2026. The estimated fair values of SJG’s long-term debt, including current maturities, as of March 31, 2010 and December 31, 2009, were $355.1 million and $331.5 million, respectively. We based the estimates on interest rates available to SJG at the end of each period for debt with similar terms and maturities. Carrying amounts as of March 31, 2010 and December 31, 2009, were $300.0 million and $285.0 million, respectively. We retire debt when it is cost effective as permitted by the debt agreements.


6.
UNUSED LINES OF CREDIT:

Credit facilities and available liquidity as of March 31, 2010 were as follows (in thousands):

 
 
Total Facility
 
 
Usage
 
 
Available Liquidity
 
Expiration Date
 
 
 
 
 
 
 
 
 
 
 
Revolving Credit Facility
 
$
100,000
 
 
$
40,000
 
 
$
60,000
 
August 2011
Line of Credit
 
 
40,000
 
 
 
 
 
 
40,000
 
December 2010 (A)
Uncommitted Bank Lines
 
 
55,000
 
 
 
22,000
 
 
 
33,000
 
Various
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
195,000
 
 
$
62,000
 
 
$
133,000
 
 

(A)  SJG anticipates extending this line of credit during the fourth quarter of 2010.

All committed facilities contain one financial covenant regarding the ratio of total debt to total capitalization, measured on a quarterly basis.  SJG was in compliance with these covenants as of March 31, 2010.  Borrowings under these credit facilities are at market rates.  The weighted average borrowing cost, which changes daily, was 0.87% and 1.12% at March 31, 2010 and 2009, 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 $455.1 million at March 31, 2010.

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 March 31, 2010, 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 months ended  March 31, 2010 and 2009, net periodic benefit cost related to the employee and officer pension and other postretirement benefit plans consisted of the following components (in thousands):
 
 
 
Pension Benefits
Other Postretirement Benefits
 
 
 
Three Months Ended
March 31,
 
 
Three Months Ended
March 31,
 
 
 
2010
 
 
2009
 
 
2010
 
 
2009
 
Service Cost
 
$
662
 
 
$
692
 
 
$
199
 
 
$
210
 
Interest Cost
 
 
1,744
 
 
 
1,707
 
 
 
686
 
 
 
599
 
Expected Return on Plan Assets
 
 
(1,498
)
 
 
(1,508
)
 
 
(338
)
 
 
(304
)
Amortizations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior Service Cost (Credits)
 
 
47
 
 
 
55
 
 
 
(74
)
 
 
(69
)
Actuarial Loss
 
 
1,062
 
 
 
1,079
 
 
 
382
 
 
 
356
 
Net Periodic Benefit Cost
 
 
2,017
 
 
 
2,025
 
 
 
855
 
 
 
792
 
Capitalized Benefit Costs
 
 
(988
)
 
 
(992
)
 
 
(419
)
 
 
(388
)
Total Net Periodic Benefit Expense
 
$
1,029
 
 
$
1,033
 
 
$
436
 
 
$
404
 

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

No contributions were made to the pension plans during the three-month periods ended March 31, 2010 and 2009.  However, SJG expects to make a contribution of approximately $6.4 million during the second quarter in order to improve the funded status of the plans and partially offset the increase in expense caused by the amortization of losses realized on plan assets during 2008.

See Note 10 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2009 for additional information related to SJG’s pension and other postretirement benefits.


9.
COMMITMENTS AND CONTINGENCIES:

STANDBY LETTER OF CREDIT -    SJG provided a $25.2 million letter of credit, under a separate credit facility from those it borrows under to provide liquidity support for the remarketing of variable-rate demand bonds issued through the NJEDA. The bonds were used to finance the expansion of SJG’s natural gas distribution system.  This letter of credit expires in August 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, 2009, as described in Note 11 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2009.

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 $4.0 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 approximately 66% of our workforce at March 31, 2010. 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 operate under a collective bargaining agreement that runs through February 2013.   Unionized employees represented by the IAM operate under a collective bargaining agreement that expires in August 2014.

10.
FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:

GAAP establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques.  The levels of the hierarchy are described below:
 
 
·
Level 1:  Observable inputs such as quoted prices in active markets for identical assets or liabilities.
 
 
·
Level 2:  Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 
·
Level 3:  Unobservable inputs that reflect the reporting entity’s own assumptions.
 
Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy.


For financial assets and financial liabilities measured at fair value on a recurring basis, information about the fair value measurements for each major category as of March 31, 2010 is as follows (in thousands):

 
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Assets -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale Securities (A)
 
$
6,195
 
 
$
6,195
 
 
$
-
 
 
$
-
 
Derivatives – Energy Related Assets (B)
 
 
119
 
 
 
70
 
 
 
49
 
 
 
-
 
 
 
$
6,314
 
 
$
6,265
 
 
$
49
 
 
$
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives – Energy Related Liabilities (B)
 
$
24,362
 
 
$
21,005
 
 
$
3,357
 
 
$
-
 
Derivatives – Other (C)
 
 
2,017
 
 
 
-
 
 
 
2,017
 
 
 
-
 
 
 
$
26,379
 
 
$
21,005
 
 
$
5,374
 
 
$
-
 

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

(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.
 
 
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 345,350 customers at March 31, 2010 compared with 341,896 customers at March 31, 2009.

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, 2009 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, 2009.
 
New Accounting Pronouncements -   No new accounting pronouncement issued or effective during 2009 and 2010 had, or is expected to have, a material impact on the condensed financial statements.

Regulatory Actions – Other than the changes discussed in Note 2 to the condensed financial statements, there have been no significant regulatory actions since December 31, 2009. 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, 2009.

Environmental Remediation –There have been no significant changes to the status of SJG’s environmental remediation efforts since December 31, 2009. 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, 2009.

Competition - See detailed discussion concerning competition in SJG’s Form 10-K for the year ended December 31, 2009.

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 28,398 and 28,054 at March 31, 2010 and 2009, respectively.


RESULTS OF OPERATIONS:

The following table summarizes the composition of selected gas utility data for the three months ended March 31, (in thousands, except for degree day data):

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2010
 
 
2009
 
Throughput – dth:
 
 
 
 
 
 
Firm Sales -
 
 
 
 
 
 
Residential
 
 
11,431
      11,517
 
Commercial
 
 
2,694
     
2,877
 
Industrial
 
 
148
     
149
 
Cogeneration & Electric Generation
 
 
44
 
 
 
14
 
Firm Transportation -
 
 
 
 
 
 
 
 
Residential
 
 
982
 
 
 
1,007
 
Commercial
 
 
2,641
 
 
 
2,571
 
Industrial
 
 
3,089
 
 
 
3,052
 
Cogeneration & Electric Generation
 
 
2,193
 
 
 
433
 
Total Firm Throughput
 
 
23,222
     
21,620
 
 
 
 
 
 
 
 
 
 
Interruptible Sales
 
 
3
 
 
 
2
 
Interruptible Transportation
 
 
586
     
636
 
Off-System
 
 
1,116
     
2,694
 
Capacity Release
 
 
10,189
     
8,449
 
Total Throughput
 
 
35,116
     
33,451
 

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2010
 
 
2009
 
Utility Operating Revenues:
 
 
 
 
 
 
Firm Sales -
 
 
 
 
 
 
Residential
 
$
137,515
 
 
$
168,638
 
Commercial
 
 
29,623
 
 
 
36,526
 
Industrial
 
 
1,795
 
 
 
1,811
 
Cogeneration & Electric Generation
 
 
411
 
 
 
273
 
Firm Transportation -
 
 
 
 
 
 
 
 
Residential
 
 
4,454
     
4,695
 
Commercial
 
 
8,599
     
7,914
 
Industrial
 
 
3,976
     
3,587
 
Cogeneration & Electric Generation
 
 
2,009
     
459
 
Total Firm Revenues
 
 
188,382
     
223,903
 
 
 
 
 
 
 
 
 
 
Interruptible Sales
 
 
48
 
 
 
40
 
Interruptible Transportation
 
 
607
 
 
 
557
 
Off-System
 
 
6,924
 
 
 
16,902
 
Capacity Release
 
 
518
 
 
 
1,440
 
Other
 
 
237
 
 
 
271
 
Total Utility Operating Revenues
 
 
196,716
     
243,113
 
 
 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
 
Cost of Sales
 
 
116,875
 
 
 
165,977
 
Conservation Recoveries*
 
 
3,119
 
 
 
3,265
 
RAC Recoveries*
 
 
1,741
 
 
 
1,209
 
EET Recoveries*
 
 
179
 
 
 
-
 
Revenue Taxes
 
 
3,752
 
 
 
4,071
 
Utility Margin
 
$
71,050
 
 
$
68,591
 

 
Margin:
 
 
 
 
 
 
 
 
Residential
 
$
45,300
 
 
$
45,590
 
Commercial and Industrial
 
 
14,958
 
 
 
15,429
 
Cogeneration and Electric Generation
 
 
709
 
 
 
340
 
Interruptible
 
 
38
 
 
 
46
 
Off-system & Capacity Release
 
 
309
 
 
 
702
 
Other Revenues
 
 
236
 
 
 
270
 
Margin Before Weather Normalization & Decoupling
 
 
61,550
 
 
 
62,377
 
CIRT Mechanism
 
 
2,024
 
 
 
-
 
CIP Mechanism
 
 
7,442
 
 
 
6,214
 
EET Mechanism
 
 
34
 
 
 
-
 
Utility Margin
 
$
71,050
 
 
$
68,591
 
 
 
 
 
 
 
 
 
 
Degree Days:
 
 
2,433
 
 
 
2,518
 

 *Represents expenses for which there is a corresponding credit in operating revenues.  Therefore, such recoveries have no impact on our financial results.

Throughput - Total gas throughput increased 1.7 MMdts, or 5.0%, for the three months ended March 31, 2010, compared with the same period in 2009.    This increase was realized in the cogeneration market as a single customer increased its contract significantly during the winter season to shift supply from its pipeline supplier to SJG.  With the exception of cogeneration throughput, firm throughput in all other categories remained consistent between the two quarters.  While the Company was successful in adding approximately 3,100 firm sales customers over the twelve month period ended March 31, 2010, representing a 1% increase, 3.4% warmer weather negated the impact on throughput from those customers.

Conservation Incentive Program (CIP) - The effects of the CIP on our net income and the associated weather comparisons were as follows ($’s in millions):

 
 
Three Months Ended
March 31,
 
 
 
2010
 
 
2009
 
Net Income Benefit:
 
 
 
 
 
 
CIP – Weather Related
 
$
0.4
 
 
$
(0.6
)
CIP – Usage Related
 
 
4.0
 
 
 
4.3
 
Total Net Income Benefit
 
$
4.4
 
 
$
3.7
 
 
 
 
 
 
 
 
 
 
Weather Compared to 20-Year Average
 
0.2% colder
 
 
3.7% colder
 
Weather Compared to Prior Year
 
3.4% warmer
 
 
11.2% colder
 

Operating Revenues  - Revenues decreased $46.4 million during the three months ended  March 31, 2010 compared with the same period in the prior year.  Firm revenues decreased $35.5 million, or 15.9%, primarily as a result of a lower Basic Gas Supply Service (BGSS) rate in effect during the first quarter of 2010.  The BGSS rate had been reduced 21% in October 2009 to address lower natural gas costs in 2009 and forecasted through 2010.  While changes in gas costs and BGSS recoveries may fluctuate from period to period, SJG does not profit from the sale of the commodity.  Therefore, corresponding fluctuations in Operating Revenue or Cost of Sales have no impact on Company profitability, as further discussed under “Margin.”  There was also a $10.0 million decrease in off-system sales (OSS) during the first quarter of 2010 versus 2009.  This decrease was primarily related to a reduction in SJG’s portfolio of assets available for such activities under the provisions of the CIP, as discussed under “Rates and Regulation” in Item 7 of SJG’s Form 10-K for the year ended December 31, 2009.  As reflected in the Margin table above, the impact of lower OSS did not have a material impact on the earnings of the Company, as SJG is required to share 85% of the profits of such activity with the rate payers.

Margin (pre-tax) - SJG’s margin is defined as natural gas revenues less natural gas costs; volumetric and revenue based energy taxes; and regulatory rider expenses. SJG believes that margin provides a more meaningful basis for evaluating utility operations than revenues since natural gas costs, energy taxes and regulatory rider expenses are passed through to customers, and therefore, they have no effect on margin. Natural gas costs are charged to operating expenses on the basis of therm sales at the prices approved by the New Jersey Board of Public Utilities through SJG’s BGSS tariff.


Total margin increased $2.5 million, or 3.6%, for the three months ended March 31, 2010 compared with the same period in 2009 due to customer additions, as noted above, and profits earned through the Company’s Capital Investment Recovery Tracker (CIRT).   The CIRT was approved by the BPU in April 2009 and allows the Company to accelerate certain capital spending and also earn a return of, and a return on, investment at the time the investment is made. The CIRT added $2.0 million of pre-tax margin in the first quarter of 2010.

The CIP protected $7.4 million of pre-tax margin in the first quarter of 2010 that would have been lost due to lower customer usage, compared to $6.2 million in the same period last year.  Of these amounts, $0.7 million and $(1.1) million were related to weather variations and $6.7 million and $7.3 million were related to other customer usage variations in 2010 and 2009, respectively.

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

 
 
Three Months
Ended
March 31,
 
 
 
2010 vs. 2009
 
 
 
 
 
Operations
 
$
447
 
Maintenance
 
 
660
 
Depreciation
 
 
446
 
Energy and Other Taxes
 
 
(273
 )

Operations – Operations expense increased $0.4 million for the three months ended March 31, 2010 as compared with the same period in 2009.  The increase is primarily comprised of the following factors:

First, bank fees increased $0.4 million to support credit availability and the Company’s variable-rate debt.  Second, insurance costs increased $0.2 million to address the changing value of claims outstanding.  The Company also offered a voluntary separation program to its unionized workforce in an effort to reduce future labor costs.  The cost of the program approximated $0.2 million for the three months ended March 31, 2010.  Finally, the Company experienced increases in various other areas including general compensation increases and corporate support, governance and compliance costs, primarily attributable to our parent, SJI. Partially offsetting the expense increases noted above were lower expenses associated with the reserve for uncollectible customer accounts, which decreased $(0.5) million for the three months ended  March 31, 2010 compared with the same period last year.   Changes in the uncollectible reserve are the result of fluctuations in levels of customer account receivable balances, which were higher one year ago due to colder weather and a higher BGSS rate in effect, as discussed previously under “Operating Revenues.”   A milder 2009-2010 winter, lower BGSS rates and an October 2009 customer refund of $20.4 million all contributed to a lower customer accounts receivable balance at March 31, 2010 versus March 31, 2009, which, in turn, resulted in a lower reserve requirement.

Maintenance - Maintenance expense increased during the three months ended March 31, 2010, compared with the same period in 2009, primarily due to higher levels of Remediation Adjustment Clause (RAC) amortization.  RAC-related expenses do not affect earnings as we recognize an offsetting amount in revenues.

Depreciation - Depreciation expense increased during the three months ended March 31, 2010, as compared with the same period in 2009, due mainly to SJG’s continuing investment in utility plant.

Energy and Other Taxes - Energy and Other Taxes decreased during the three months ended March 31, 2010, compared with the same period in 2009, primarily due to a $0.2 million credit against a prior year’s energy-related taxes. Lower taxable firm throughput in 2010 resulting from warmer weather  in the first quarter of 2010 also contributed to the decrease.

Interest Charges – Interest Charges decreased by $0.1 million during the three months ended March 31, 2010, compared with the same period in 2009.   The decrease was the result of significantly lower average short-term interest rates and lower average debt levels during the first three months of 2010.


LIQUIDITY AND CAPITAL RESOURCES:

Liquidity needs are driven by factors that include natural gas commodity prices; the impact of weather on customer bills; lags in fully collecting gas costs from customers under the Basic Gas Supply Service charge; the timing of construction and remediation expenditures and related permanent financings; mandated tax payment dates; both discretionary and required repayments of long-term debt; and the amounts and timing of dividend payments.

Cash Flows from Operating Activities -    Liquidity needs are first met with net cash provided by operating activities.  Net cash provided by operating activities totaled $72.2 million and $51.3 million in the first quarter of 2010 and 2009, respectively.  Net cash provided by operating activities varies from year-to-year primarily due to the impact of weather on customer demand and related gas purchases, customer usage factors related to conversion efforts and the price of the natural gas commodity, inventory utilization, and gas cost recoveries.  Net cash provided by operating activities in the first quarter of 2010 was positively impacted by lower unit gas costs which resulted in lower natural gas inventory balances and customer receivable balances. SJG also ends each calendar year in a prepaid tax position due to mandatory prepayment requirements on certain state taxes.  Such prepayments are credited against amounts otherwise due during the first quarter of the subsequent year; improving first quarter liquidity.

Cash Flows from Investing Activities - SJG has a continuing need for cash resources for capital purchases, primarily to invest in new and replacement facilities and equipment. Cash used for capital purchases was $31.7 million and $15.7 million during the first quarter of 2010 and 2009, respectively.   We estimate the net cash outflows for construction projects for fiscal years 2010, 2011 and 2012 to be approximately $131.4 million, $57.1 million and $57.5 million, respectively.

Cash Flows from Financing Activities - SJG uses short-term borrowings under lines of credit from commercial banks to supplement cash from operations, to support working capital needs and to finance capital expenditures as incurred. From time to time, the Company refinances short-term debt incurred to finance capital expenditures with long-term debt. Debt is incurred primarily to expand and upgrade our gas transmission and distribution system and to support seasonal working capital needs related to inventories and customer receivables.

Credit facilities and available liquidity as of March 31, 2010 were as follows (in thousands):

 
 
Total Facility
 
 
Usage
 
 
Available Liquidity
 
Expiration Date
 
 
 
 
 
 
 
 
 
 
 
Revolving Credit Facility
 
$
100,000
 
 
$
40,000
 
 
$
60,000
 
August 2011
Line of Credit
 
 
40,000
 
 
 
 
 
 
40,000
 
December 2010 (A)
Uncommitted Bank Lines
 
 
55,000
 
 
 
22,000
 
 
 
33,000
 
Various
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
195,000
 
 
$
62,000
 
 
$
133,000
 
 

(A)  SJG anticipates extending this line of credit during the fourth quarter of 2009.
 
Based upon the existing credit facilities and a regular dialogue with our banks, we believe there will continue to be sufficient credit available to meet our future liquidity needs.

SJG supplements its operating cash flow and credit lines with both debt and equity capital. Over the years, SJG has used long-term debt, primarily in the form of First Mortgage Bonds and Medium Term Notes (MTN), secured by the same pool of utility assets, to finance our long-term borrowing needs. These needs are primarily capital expenditures for property, plant and equipment. In July 2009, SJG filed a petition with the New Jersey Board of Public Utilities requesting approval to issue up to $150.0 million of MTN's through September 2011. In March 2010 SJG issued in a private placement, $15.0 million aggregate principal amount of its MTN's.  SJG has also committed to issue an additional $45.0 million of MTN’s, also under a private placement, by June 30, 2010. No other long-term debt was issued during 2009 or 2010.


SJG’s capital structure was as follows:

 
 
As of
March 31,
2010
 
 
As of
December 31,
2009
 
 
 
 
 
 
 
 
Common Equity
 
 
55.7
%
 
 
52.2
%
Long-Term Debt
 
 
36.7
 
 
 
30.3
 
Short-Term Debt
 
 
7.6
 
 
 
17.5
 
 
 
 
 
 
 
 
 
 
Total
 
 
100.0
%
 
 
100.0
%

SJG’s long-term, senior secured debt is rated “A” and “A2” by Standard & Poor’s and Moody’s Investor Services, respectively. Moody’s Investor Service raised SJG’s senior secured rating to “A3” from “Baal” in February of 2009, and then raised it again to “A2” in August 2009.  Moody’s also assigned an Issuer Rating of “Baa1” to SJG in August 2009.

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 $455.1 million at March 31, 2010.

COMMITMENTS AND CONTINGENCIES:

SJG has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment, working capital, and for environmental remediation costs. Cash outflows for capital expenditures for the first three months of 2010 amounted to $37.4 million. Management estimates net cash outflows for construction projects for 2010, 2011 and 2012, to be approximately $131.4 million, $57.1 million and $57.5 million, respectively.  Costs for remediation projects, net of insurance reimbursements, for the first three months of 2010 amounted to net cash inflows of $0.2 million.  Total cash outflows for remediation projects are expected to be $15.6 million, $16.9 million and $7.6 million for 2010, 2011, and 2012, respectively.  As discussed in Notes 2 and 12 to the Financial Statements in Item 8 of SJG’s 10-K as of December 31, 2009, environmental remediation costs are subject to recovery from insurance carriers and ratepayers.

SJG provided a $25.2 million letter of credit, outside of the revolving credit facility, to support variable-rate demand bonds issued through the NJEDA to finance the expansion of SJG's natural gas distribution system.  This letter of credit expires in August 2010.

SJG has certain commitments for both pipeline capacity and gas supply for which it pays fees regardless of usage. Those commitments as of March 31, 2010, average $44.1 million annually and total $172.2 million over the contracts’ lives. Approximately 28% of the financial commitments under these contracts expire during the next five years. SJG expects to renew each of these contracts under renewal provisions as provided in each contract. SJG recovers all prudently incurred fees through rates via the Basic Gas Supply Service clause.
 
Contractual Cash Obligations –   Details concerning contractual cash obligations may be found in SJG’s Form 10-K for the year ended December 31, 2009.  There were no significant changes to SJG’s contractual cash obligations except for the principal and interest obligations related to the $15.0 million of long-term debt issued in March 2010 (Note 5).

Off-Balance Sheet Arrangements - We have no off-balance sheet arrangements.

Pending Litigation - We are subject to claims arising in the ordinary course of business and other legal proceedings. We accrue liabilities related to claims when we can determine the amount or range of amounts of probable settlement costs. Management does not currently anticipate the disposition of any known claims to have a material adverse effect on our financial position, results of operations or liquidity.


Ratio of Earnings to Fixed Charges - Our ratio of earnings to fixed charges for each of the periods indicated is as follows:

Twelve Months
Ended Mar. 31,
 
 
Year Ended December 31,
 
2010
 
 
2009
 
 
2008
 
 
2007
 
 
2006
 
 
2005
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5.1x
 
 
 
4.9x
 
 
 
4.4x
 
 
 
4.1x
 
 
 
3.7x
 
 
 
4.0x
 

The ratio of earnings to fixed charges represents, on a pre-tax basis, the number of times earnings covers fixed charges. Earnings consist of net income, to which has been added fixed charges and taxes. Fixed charges consist of interest charges, preferred securities dividend requirements that existed through 2005, and an interest factor in rentals.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

MARKET RISKS:
 
Commodity Market Risks - We are involved in buying, selling, transporting and storing natural gas and are subject to market risk due to price fluctuations. To hedge against this risk, we enter into a variety of physical and financial transactions including forward contracts, futures and options agreements. To manage these transactions, we have a well-defined risk management policy approved by our Board of Directors that includes volumetric and monetary limits. Management reviews reports detailing activity daily. Generally, the derivative activities described above are entered into for risk management purposes.

We transact commodities on a physical basis and typically do not enter into financial derivative positions directly. South Jersey Resources Group, LLC (SJRG), an affiliate by common ownership, manages our risk by entering into the types of transactions noted above. As part of our gas purchasing strategy, we use financial contracts to hedge against forward price risk. These contracts are recoverable through our BGSS, subject to BPU approval. It is management’s policy, to the extent practical, within predetermined risk management policy guidelines, to have limited unmatched positions on a deal or portfolio basis while conducting these activities. As a result of holding open positions to a minimal level, the economic impact of changes in value of a particular transaction is substantially offset by an opposite change in the related hedge transaction. The majority of our contracts are typically less than 12-months long. The fair value and maturity of all these energy trading and hedging contracts determined using mark-to-market accounting as of March 31, 2010 is as follows (in thousands):

Assets
 
 
 
 
 
 
 
 
 
Source of Fair Value
 
Maturity
< 1 Year
 
 
Maturity
1 - 3 Years
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
Prices Actively Quoted (NYMEX)
 
$
-
 
 
$
70
 
 
$
70
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prices Provided by Other
 
 
11
 
 
 
38
 
 
 
49
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
11
 
 
$
108
 
 
$
119
 

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Maturity
 
 
Maturity
 
 
 
 
Source of Fair Value
 
< 1 Year
 
 
1 - 3 Years
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
Prices Actively Quoted (NYMEX)
 
$
19,063
 
 
$
1,942
 
 
$
21,005
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prices Provided by Other External Sources (Basis)
 
 
3,191
 
 
 
166
 
 
 
3,357