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EX-32.1 - EXHIBIT 32.1 - SOUTH JERSEY GAS Coex32_1.htm
EX-31.2 - EXHIBIT 31.2 - SOUTH JERSEY GAS Coex31_2.htm
EX-31.1 - EXHIBIT 31.1 - SOUTH JERSEY GAS Coex31_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)
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission File Number 000-22211

SOUTH JERSEY GAS COMPANY
(Exact name of registrant as specified in its charter)

New Jersey
21-0398330
(State of incorporation)
(IRS employer identification no.)

1 South Jersey Plaza, Folsom, NJ 08037
(Address of principal executive offices, including zip code)

(609) 561-9000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes T       No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
£
Accelerated filer
£
Non-accelerated filer
T (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 o     No o

As of August 2, 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
3
     
Item 1.
3
     
Item 2.
17
     
Item 3.
25
     
Item 4.
27
     
PART II
27
     
Item 1.
27
     
Item 1A.
27
     
Item 6.
27
     
  28

 
SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)

   
Three Months Ended
 
   
June 30,
 
   
2010
   
2009
 
             
             
Operating Revenues
  $ 61,344     $ 64,835  
                 
Operating Expenses:
               
Cost of Sales (Excluding depreciation)
    23,941       29,905  
Operations
    16,485       16,007  
Maintenance
    2,785       1,705  
Depreciation
    7,319       6,549  
Energy and Other Taxes
    1,590       1,746  
                 
Total Operating Expenses
    52,120       55,912  
                 
Operating Income
    9,224       8,923  
                 
Other Income and Expense
    240       358  
                 
Interest Charges
    (4,163 )     (4,152 )
                 
Income Before Income Taxes
    5,301       5,129  
                 
Income Taxes
    (2,125 )     (2,102 )
                 
Net Income
  $ 3,176     $ 3,027  

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

 
SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)

   
Six Months Ended
 
   
June 30,
 
   
2010
   
2009
 
             
             
Operating Revenues
  $ 258,060     $ 307,948  
                 
Operating Expenses:
               
Cost of Sales (Excluding depreciation)
    140,816       195,882  
Operations
    34,292       33,367  
Maintenance
    5,601       3,861  
Depreciation
    14,398       13,182  
Energy and Other Taxes
    5,938       6,367  
                 
Total Operating Expenses
    201,045       252,659  
                 
Operating Income
    57,015       55,289  
                 
Other Income and Expense
    473       682  
                 
Interest Charges
    (8,178 )     (8,249 )
                 
Income Before Income Taxes
    49,310       47,722  
                 
Income Taxes
    (20,264 )     (19,717 )
                 
Net Income
  $ 29,046     $ 28,005  

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
 
   
June 30,
 
   
2010
   
2009
 
             
             
             
Net Income
  $ 3,176     $ 3,027  
                 
Other Comprehensive Income  - Net of Tax:
               
                 
Unrealized (Loss) Gain on Available-for-Sale Securities
    (265 )     266  
Unrealized Gain on Derivatives - Other
    7       7  
                 
Other Comprehensive (Loss) Income - Net of Tax *
    (258 )     273  
                 
Comprehensive Income
  $ 2,918     $ 3,300  


   
Six Months Ended
 
   
June 30,
 
   
2010
   
2009
 
             
Net Income
  $ 29,046     $ 28,005  
                 
Other Comprehensive Income  - Net of Tax:
               
                 
Unrealized (Loss) Gain on Available-for-Sale Securities
    (121 )     96  
Unrealized Gain on Derivatives - Other
    14       14  
                 
Other Comprehensive (Loss) Income - Net of Tax *
    (107 )     110  
                 
Comprehensive Income
  $ 28,939     $ 28,115  

* 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)

   
Six Months Ended
 
   
June 30,
 
   
2010
   
2009
 
             
             
Net Cash Provided by Operating Activities
  $ 63,574     $ 59,993  
                 
Cash Flows from Investing Activities:
               
Capital Expenditures
    (66,206 )     (34,318 )
Investment in Long-Term Receivables
    (1,529 )     (2,791 )
Proceeds from Long-Term Receivables
    1,047       3,341  
                 
Net Cash Used in Investing Activities
    (66,688 )     (33,768 )
                 
Cash Flows from Financing Activities:
               
Net Repayments of Lines of Credit
    (53,900 )     (23,150 )
Principal Repayments of Long-Term Debt
    -       (17 )
Proceeds from Issuance of Long-Term Debt
    60,000       -  
Payments for Issuance of Long-Term Debt
    (623 )     -  
Dividend on Common Stock
    (2,500 )     (2,500 )
                 
Net Cash Provided by (Used in) Financing Activities
    2,977       (25,667 )
                 
Net (Decrease) Increase in Cash and Cash Equivalents
    (137 )     558  
Cash and Cash Equivalents at Beginning of Period
    1,993       2,228  
                 
Cash and Cash Equivalents at End of Period
  $ 1,856     $ 2,786  

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


SOUTH JERSEY GAS COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)

   
June 30,
   
December 31,
 
   
2010
   
2009
 
Assets
           
             
Property, Plant and Equipment:
           
Utility Plant, at original cost
  $ 1,331,907     $ 1,275,792  
Accumulated Depreciation
    (326,326 )     (314,627 )
                 
Property, Plant and Equipment - Net
    1,005,581       961,165  
                 
Investments:
               
Available-for-Sale Securities
    5,771       5,941  
Restricted Investments
    132       132  
                 
Total Investments
    5,903       6,073  
                 
Current Assets:
               
Cash and Cash Equivalents
    1,856       1,993  
Accounts Receivable
    67,333       41,392  
Accounts Receivable - Related Parties
    1,060       974  
Unbilled Revenues
    7,097       47,333  
Provision for Uncollectibles
    (4,067 )     (3,915 )
Natural Gas in Storage, average cost
    19,807       23,711  
Materials and Supplies, average cost
    3,068       4,854  
Prepaid Taxes
    21,143       13,796  
Derivatives - Energy Related Assets
    1,332       797  
Other Prepayments and Current Assets
    3,171       2,248  
                 
Total Current Assets
    121,800       133,183  
                 
Regulatory and Other Noncurrent Assets:
               
Regulatory Assets
    236,573       240,462  
Unamortized Debt Issuance Costs
    6,203       5,829  
Long-Term Receivables
    7,302       7,693  
Derivatives - Energy Related Assets
    298       333  
Other
    2,338       2,324  
                 
Total Regulatory and Other Noncurrent Assets
    252,714       256,641  
                 
Total Assets
  $ 1,385,998     $ 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)

   
June 30,
   
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
    (6,437 )     (6,330 )
Retained Earnings
    255,340       231,296  
                 
Total Common Equity
    455,467       431,530  
                 
Long-Term Debt
    310,000       250,000  
                 
Total Capitalization
    765,467       681,530  
                 
Current Liabilities:
               
Notes Payable
    55,500       109,400  
Current Portion of Long-Term Debt
    35,000       35,000  
Accounts Payable - Commodity
    15,654       19,630  
Accounts Payable - Other
    17,836       21,947  
Accounts Payable - Related Parties
    7,038       12,120  
Derivatives - Energy Related Liabilities
    14,028       9,799  
Deferred Income Taxes - Net
    7,070       11,642  
Customer Deposits and Credit Balances
    17,145       13,542  
Environmental Remediation Costs
    23,198       22,499  
Taxes Accrued
    7,536       8,548  
Pension Benefits
    1,066       1,066  
Interest Accrued
    6,126       5,979  
Dividends Declared
    2,501       -  
Other Current Liabilities
    3,510       7,839  
                 
Total Current Liabilities
    213,208       279,011  
                 
Regulatory and Other Noncurrent Liabilities:
               
Regulatory Liabilities
    56,324       50,193  
Deferred Income Taxes - Net
    219,913       210,925  
Environmental Remediation Costs
    43,867       46,557  
Asset Retirement Obligations
    23,275       22,960  
Pension and Other Postretirement Benefits
    52,712       57,699  
Investment Tax Credits
    1,362       1,517  
Derivatives - Energy Related Liabilities
    1,328       504  
Derivatives - Other
    4,424       1,956  
Other
    4,118       4,210  
                 
Total Regulatory and Other Noncurrent Liabilities
    407,323       396,521  
                 
Commitments and Contingencies (Note 9)
               
                 
Total Capitalization and Liabilities
  $ 1,385,998     $ 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 $1.1 million and $1.3 million for the three months ended June 30, 2010 and 2009, and $4.8 million and $5.3 million for the six months ended June 30, 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 and six months ended June 30, 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 June 30, 2010, SJG had outstanding derivative contracts intended to limit the exposure to market risk on 28.8 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 June 30, 2010 and December 31, 2009, SJG had $13.7 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.

We previously used derivative transactions known as “Treasury Locks” to hedge against the impact on our cash flows of possible interest rate increases on debt issued in September 2005.  The initial $1.4 million cost of the Treasury Locks has been included in Accumulated Other Comprehensive Loss and is being amortized over the 30 year life of the associated debt issue.  As of June 30, 2010 and 2009, the unamortized balance was approximately $1.2 million.


The fair values of all derivative instruments, as reflected in the condensed balance sheets as of June 30, 2010 and December 31, 2009, are as follows (in thousands):

Derivatives not designated as hedging instruments under GAAP
 
June 30, 2010
   
December 31, 2009
 
   
Assets
   
Liabilities
   
Assets
   
Liabilities
 
Energy related commodity contracts:
                       
                         
Derivatives – Energy Related – Current
 
$
1,332
   
$
14,028
   
$
797
   
$
9,799
 
                                 
Derivatives – Energy Related – Non-Current
   
298
     
1,328
     
333
     
504
 
                                 
Interest rate contracts:
                               
                                 
Derivatives – Other
   
-
     
4,424
     
-
     
1,956
 
                                 
Total derivatives not designated as hedging instruments under GAAP
 
$
1,630
   
$
19,780
     
1,130
     
12,259
 

The effect of derivative instruments on the condensed statements of income for the three and six months ended June 30, 2010, and 2009 are as follows (in thousands):

   
Three months ended
June 30,
 
Six months ended
June 30,
 
Derivatives in Cash Flow Hedging Relationships Interest Rate Contracts:
 
2010
   
2009
 
2010
 
2009
 
                         
Losses reclassified from accumulated OCI into income (a)
  $ (12 )   $ (12 )   $ (24 )   $ (24 )

(a) Included in Interest Charges

Net realized losses associated with SJG’s energy related financial commodity contracts of $8.2 million and $12.6 million for the three months ended June 30, 2010 and 2009 and $12.3 million and $29.5 million for the six months ended June 30, 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 June 30, 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
%
   
2.90
%
Jan. 2009
   
8,318
   
$
39.350
     
28.6
%
   
1.20
%
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 per quarter for restricted stock awards during 2010 and 2009 is approximately $84,000 and $74,200, respectively.

As of June 30, 2010, there was $0.5 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 2.0 years.

 
SJG-10


The following table summarizes information regarding restricted stock award activity during the six months ended June 30, 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, June 30, 2010
   
27,580
   
$
37.448
 

During the six months ended June 30, 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 six months ended June 30, 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 six months ended June 30, 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. In May, the Company filed its BGSS petition with the BPU requesting a 10.6% reduction in rates to be effective October 1, 2010.  Also in May, the Company filed its Conservation Incentive Program (CIP) petition with the BPU requesting a 0.3% increase in rates to be effective October 1, 2010.  In July, the Company filed its Energy Efficiency Tracker petition requesting a 0.4% increase.  These matters are still pending.  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.

 
SJG-11


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):

   
June 30,
   
December 31,
 
   
2010
   
2009
 
Environmental Remediation Costs:
               
Expended - Net
 
$
40,515
   
$
42,924
 
Liability for Future Expenditures
   
67,065
     
69,056
 
Income Taxes - Flowthrough Depreciation
   
1,262
     
1,752
 
Deferred Asset Retirement Obligation Costs
   
22,691
     
22,438
 
Deferred Pension and Other Postretirement Benefit Costs
   
70,143
     
71,192
 
Deferred Gas Costs - Net
   
-
     
6,519
 
Conservation Incentive Program Receivable
   
20,101
     
16,672
 
Societal Benefit Costs Receivable
   
2,833
     
1,872
 
Premium for Early Retirement of Debt
   
965
     
1,046
 
Other Regulatory Assets
   
10,998
     
6,991
 
                 
Total Regulatory Assets
 
$
236,573
   
$
240,462
 

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

   
June 30,
   
December 31,
 
   
2010
   
2009
 
Excess Plant Removal Costs
 
$
48,666
   
$
48,715
 
Deferred Gas Costs and Revenues - Net
   
2,940
     
-
 
Other Regulatory Liabilities
   
4,718
     
1,478
 
                 
Total Regulatory Liabilities
 
$
56,324
   
$
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 $2.9 million regulatory liability at June 30, 2010 primarily as a result of gas costs recovered from customers exceeding the actual cost of the commodity incurred during the first half of 2010 as a result of natural gas prices remaining at very low levels.    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 $4.6 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.

 
SJG-12


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

 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
 
2010
 
 
2009
 
 
2010
 
 
2009
 
Operating Revenues/Affiliates:
 
 
 
 
 
 
 
 
 
 
 
 
SJRG
 
$
82
 
 
$
313
 
 
$
645
 
 
$
3,205
 
Other
 
 
109
 
 
 
99
 
 
 
235
 
 
 
245
 
Total Operating Revenue/Affiliates
 
$
191
 
 
$
412
 
 
$
880
 
 
$
3,450
 

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

 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
 
2010
 
 
2009
 
 
2010
 
 
2009
 
Costs of Sales/Affiliates:
 
 
 
 
 
 
 
 
 
 
 
 
SJRG
 
$
-
 
 
$
4,735
 
 
$
14,582
 
 
$
31,461
 
Total Cost of Sales/Affiliates:
 
$
-
 
 
$
4,735
 
 
$
14,582
 
 
$
31,461
 


Derivative Losses (Gains) (See Note 1): *
 
 
 
 
 
 
 
 
SJRG
 
$
8,249
 
 
$
12,600
 
 
$
12,296
 
 
$
29,510
 

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

Operations Expense/Affiliates
 
 
 
 
 
 
 
 
 
 
 
 
SJI
 
$
2,453
 
 
$
2,405
 
 
$
4,381
 
 
$
4,177
 
SJIS
 
 
959
 
 
 
1,051
 
 
 
2,462
 
 
 
2,335
 
Millennium
 
 
764
 
 
 
728
 
 
 
1,452
 
 
 
1,441
 
Other
 
 
(64
)
 
 
(84
)
 
 
(118
)
 
 
(158
)
Total Operations Expense/Affiliates
 
$
4,112
 
 
$
4,100
 
 
$
8,177
 
 
$
7,795
 

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 June 30, 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 June 30, 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 $10.3 million and $10.8 million as of June 30, 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 amount of approximately $1.2 million as of both June 30, 2010 and December 31, 2009.  The annual amortization to interest is not material to SJG’s financial statements.  The carrying amounts of these receivables approximate their fair value at June 30, 2010 and December 31, 2009.

 
SJG-13


Long-Term Debt – In March 2010, SJG issued $15.0 million aggregate principal amount of its Medium Term Notes in a private placement. These notes bear interest at 4.84%, are secured by a first mortgage lien on substantially all utility plant and are due in 2026.  In June 2010, SJG issued an additional $45.0 million aggregate principal of its Medium Term notes in a private placement.  These notes bear interest at 4.93%, are secured by a first mortgage lien on substantially all utility plant and are also due in 2026.  The estimated fair values of SJG’s long-term debt, including current maturities, as of June 30, 2010 and December 31, 2009, were $421.4 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 June 30, 2010 and December 31, 2009, were $345.0 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 June 30, 2010 were as follows (in thousands):

   
Total Facility
   
Usage
   
Available Liquidity
 
Expiration Date
                     
Revolving Credit Facility
 
$
100,000
   
$
55,500
   
$
44,500
 
August 2011
Line of Credit
   
40,000
     
     
40,000
 
December 2010 (A)
Uncommitted Bank Lines
   
55,000
     
     
55,000
 
Various
                           
Total
 
$
195,000
   
$
55,500
   
$
139,500
   

(A)  SJG anticipates extending this line of credit during the third 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 June 30, 2010.  Borrowings under these credit facilities are at market rates.  The weighted average borrowing cost, which changes daily, was 0.70% and 0.81% at June 30, 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 $455.5 million at June 30, 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 June 30, 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   June 30, 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
 
 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
 
2010
 
 
2009
 
 
2010
 
 
2009
 
Service Cost
 
$
664
 
 
$
552
 
 
$
1,326
 
 
$
1,244
 
Interest Cost
 
 
1,815
 
 
 
1,646
 
 
 
3,559
 
 
 
3,353
 
Expected Return on Plan Assets
 
 
(1,753
)
 
 
(1,405
)
 
 
(3,251
)
 
 
(2,913
)
Amortizations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior Service Cost
 
 
61
 
 
 
52
 
 
 
108
 
 
 
107
 
Actuarial Loss
 
 
776
 
 
 
1,005
 
 
 
1,838
 
 
 
2,084
 
Net Periodic Benefit Cost
 
 
1,563
 
 
 
1,850
 
 
 
3,580
 
 
 
3,875
 
Capitalized Benefit Costs
 
 
(766
)
 
 
(907
)
 
 
(1,754
)
 
 
(1,899
)
Total Net Periodic Benefit Expense
 
$
797
 
 
$
943
 
 
$
1,826
 
 
$
1,976
 

 
SJG-14


 
Other Postretirement Benefits
 
 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
 
2010
 
 
2009
 
 
2010
 
 
2009
 
Service Cost
 
$
166
 
 
$
210
 
 
$
365
 
 
$
421
 
Interest Cost
 
 
611
 
 
 
599
 
 
 
1,297
 
 
 
1,199
 
Expected Return on Plan Assets
 
 
(431
)
 
 
(304
)
 
 
(769
)
 
 
(609
)
Amortizations:
 
 
   
 
 
 
 
 
 
   
 
 
 
 
Prior Service Credits
 
 
(67
)
 
 
(69
)
 
 
(141
)
 
 
(138
)
Actuarial Loss
 
 
211
 
 
 
356
 
 
 
593
 
 
 
712
 
Net Periodic Benefit Cost
 
 
490
 
 
 
792
 
 
 
1,345
 
 
 
1,585
 
Capitalized Benefit Costs
 
 
(240
)
 
 
(388
)
 
 
(659
)
 
 
(777
)
Total Net Periodic Benefit Expense
 
$
250
 
 
$
404
 
 
$
686
 
 
$
808
 

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

During May 2010 and 2009, SJG contributed $6.4 million and $8.2 million to its pension plans, respectively.  No additional contributions are anticipated for the remainder of the year.

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 June 30, 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.

 
SJG-15


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 June 30, 2010 is as follows (in thousands):

   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets -
                       
                                 
Available-for-Sale Securities (A)
 
$
5,771
   
$
5,771
   
$
-
   
$
-
 
Derivatives – Energy Related Assets (B)
   
1,630
     
1,002
     
628
     
-
 
   
$
7,401
   
$
6,773
   
$
628
   
$
-
 
                                 
Liabilities -
                               
                                 
Derivatives – Energy Related Liabilities (B)
 
$
15,356
   
$
11,762
   
$
3,594
   
$
-
 
Derivatives – Other (C)
   
4,424
     
-
     
4,424
     
-
 
   
$
19,780
   
$
11,762
   
$
8,018
   
$
-
 

(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.

 
SJG-16


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 June 30, 2010. 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 certain 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 June 30, 2010.

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 June 30, 2010.

   
Less than 12 Months
   
Greater Than 12 Months
   
Total
 
                                   
 
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
Marketable Equity Securities
 
$
-
   
$
-
   
$
2,751
   
$
810
   
$
2,751
   
$
810
 

As of June 30, 2010 and December 31, 2009, the total losses for securities with net losses included in Accumulated Other Comprehensive Loss was $0.5 million and $0.3 million, respectively.  As of June 30, 2010 and December 31, 2009, securities with net gains included in Accumulated Other Comprehensive Loss was $0.2 million and $0.1 million, respectively.


Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
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 344,752 customers at June 30, 2010 compared with 340,767 customers at June 30, 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.

 
SJG-17


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 28,830 and 28,457 at June 30, 2010 and 2009, respectively.

 
SJG-18


RESULTS OF OPERATIONS:

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

 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2010
   
2009
   
2010
   
2009
 
Utility Throughput – dth:
 
                   
 
Firm Sales -
 
                   
 
Residential
 
 
2,309
     
2,847
     
13,740
     
14,364
 
Commercial
 
 
634
     
769
     
3,328
     
3,646
 
Industrial
 
 
24
     
56
     
172
     
205
 
Cogeneration & Electric Generation
 
 
356
     
88
     
400
     
102
 
Firm Transportation -
 
                           
 
Residential
 
 
207
     
264
     
1,189
     
1,271
 
Commercial
 
 
809
     
914
     
3,450
     
3,485
 
Industrial
 
 
3,254
     
2,917
     
6,343
     
5,969
 
Cogeneration & Electric Generation
 
 
803
     
286
     
2,996
     
719
 
 
 
                           
 
Total Firm Throughput
 
 
8,396
     
8,141
     
31,618
     
29,761
 
 
 
                           
 
Interruptible Sales
 
 
40
     
2
     
43
     
4
 
Interruptible Transportation
 
 
268
     
572
     
854
     
1,208
 
Off-System
 
 
1,921
     
1,071
     
3,037
     
3,765
 
Capacity Release
 
 
9,203
     
8,964
     
19,392
     
17,463
 
 
 
                           
 
Total Throughput - Utility
 
 
19,828
     
18,750
     
54,944
     
52,201
 

 
SJG-19


 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
June 30,
 
 
June 30,
 
 
 
2010
 
 
2009
 
 
2010
 
 
2009
 
Utility Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Firm Sales -
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
31,845
 
 
$
40,645
 
 
$
169,360
 
 
$
209,283
 
Commercial
 
 
6,862
 
 
 
8,008
 
 
 
36,485
 
 
 
44,534
 
Industrial
 
 
206
 
 
 
517
 
 
 
2,001
 
 
 
2,328
 
Cogeneration & Electric Generation
 
 
2,273
 
 
 
772
 
 
 
2,684
 
 
 
1,045
 
Firm Transportation -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
 
1,502
 
 
 
1,628
 
 
 
5,956
 
 
 
6,323
 
Commercial
 
 
3,244
 
 
 
3,072
 
 
 
11,843
 
 
 
10,986
 
Industrial
 
 
4,675
 
 
 
3,616
 
 
 
8,651
 
 
 
7,203
 
Cogeneration & Electric Generation
 
 
709
 
 
 
334
 
 
 
2,718
 
 
 
793
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Firm Revenues
 
 
51,316
 
 
 
58,592
 
 
 
239,698
 
 
 
282,495
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interruptible Sales
 
 
590
 
 
 
55
 
 
 
638
 
 
 
95
 
Interruptible Transportation
 
 
291
 
 
 
529
 
 
 
898
 
 
 
1,086
 
Off-System
 
 
8,622
 
 
 
4,348
 
 
 
15,546
 
 
 
21,250
 
Capacity Release
 
 
212
 
 
 
983
 
 
 
730
 
 
 
2,423
 
Other
 
 
313
 
 
 
328
 
 
 
550
 
 
 
599
 
                                 
Total Utility Operating Revenues
 
 
61,344
 
 
 
64,835
 
 
 
258,060
 
 
 
307,948
 
                         
Less:
 
 
 
 
 
 
 
 
 
 
 
 
Cost of Sales
 
 
23,941
 
 
 
29,905
 
 
 
140,816
 
 
 
195,882
 
Conservation Recoveries*
 
 
1,254
 
 
 
2,124
 
 
 
4,373
 
 
 
5,389
 
RAC Recoveries*
 
 
1,740
 
 
 
1,208
 
 
 
3,481
 
 
 
2,417
 
EET Recoveries*
   
359
     
-
     
538
     
-
 
Revenue Taxes
 
 
1,094
 
 
 
1,271
 
 
 
4,846
 
 
 
5,342
 
Utility Margin
 
$
32,956
 
 
$
30,327
 
 
$
104,006
 
 
$
98,918
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
14,783
 
 
$
16,548
 
 
$
60,083
 
 
$
62,138
 
Commercial and Industrial
 
 
6,764
 
 
 
7,025
 
 
 
21,722
 
 
 
22,454
 
Cogeneration and Electric Generation
 
 
679
 
 
 
535
 
 
 
1,388
 
 
 
875
 
Interruptible
 
 
76
 
 
 
42
 
 
 
114
 
 
 
88
 
Off-system & Capacity Release
 
 
68
 
 
 
198
 
 
 
377
 
 
 
900
 
Other Revenues
 
 
755
 
 
 
945
 
 
 
991
 
 
 
1,215
 
Margin Before Weather Normalization & Decoupling
 
 
23,125
 
 
 
25,293
 
 
 
84,675
 
 
 
87,670
 
CIRT Mechanism
 
 
2,538
 
 
 
375
 
 
 
4,562
 
 
 
375
 
CIP Mechanism
 
 
7,250
 
 
 
4,659
 
 
 
14,692
 
 
 
10,873
 
EET Mechanism
   
43
     
-
     
77
     
-
 
Utility Margin
 
$
32,956
 
 
$
30,327
 
 
$
104,006
 
 
$
98,918
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Degree Days:
 
 
346
 
 
 
481
 
 
 
2,779
 
 
 
2,999
 

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

 
SJG-20


Throughput – Total gas throughput increased 1.1 MMdts, or 5.7%, for the three months ended June 30, 2010, compared with the same period in 2009.  The majority of the increase is attributable to higher Off-System sales (OSS), which increased by 0.9 MMdts during the second quarter of 2010, as reflected in the table above.  OSS are sales of gas for resale off the interstate pipelines as opposed to sales within our utility service territory.  This increase was made possible by additional volume made available to OSS as SJG delayed inventory injections originally planned during the quarter.  In addition, warmer weather during the period resulted in higher cogeneration and electric generation sales and transportation throughput.  As June 2010 was the warmest June on record, higher electric consumption for air conditioning drove the demand for greater natural gas consumption by the region’s electric utility. Firm throughput in nearly all other categories fell slightly as a result of the warmer weather despite adding approximately 4,000 customers over the twelve month period ended June 30, 2010.

Total gas throughput increased 2.7 MMdts, or 5.3%, for the six months ended June 30, 2010, compared with the same period in 2009.  The majority of the increase is attributable to higher capacity release, which increased by 1.9 MMdts during 2010, as reflected in the table above.  Higher capacity release throughput was the result of increased efforts to market the excess capacity made available during the first quarter of 2010 when the weather was 3.4% warmer than the same period in 2009. In addition, cogeneration and electric generation sales and transportation throughput increased on a year-to-date basis.  As June 2010 was the warmest June on record, higher electric consumption for air conditioning drove the demand for greater natural gas consumption by the region’s electric utility.  In the cogeneration market, a significant increase in transportation throughput was realized as a single customer increased its contract significantly during the winter season to shift supply from its pipeline supplier to SJG.

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
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net Income Benefit:
                       
CIP – Weather Related
  $ 1.9     $ 0.8     $ 2.3     $ (0.1 )
CIP – Usage Related
    2.4       1.9       6.4       6.5  
Total Net Income Benefit
  $ 4.3     $ 2.7     $ 8.7     $ 6.4  
                                 
Weather Compared to 20-Year Average
 
37.0% warmer
   
12.4% warmer
   
6.7% warmer
   
0.7% colder
 
Weather Compared to Prior Year
 
28.1% warmer
   
2.1% colder
   
7.3% warmer
   
9.7% colder
 

Operating Revenues – Revenues decreased $3.5 million during the three months ended June 30, 2010 compared with the same period in the prior year.  Firm revenues decreased $7.3 million, or 12.4%, primarily as a result of a lower Basic Gas Supply Service (BGSS) rate in effect during 2010.  The BGSS rate had been reduced 21% in October 2009 to address lower natural gas costs experienced 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.” This was partially offset by a $4.3 million increase in OSS during the second quarter of 2010 versus the second quarter of 2009.  As previously discussed under “Throughput,” this increase was made possible by additional volume made available to OSS as SJG delayed inventory injections originally planned during the quarter.  As reflected in the Margin table above, the impact of the higher OSS did not have a material impact on the earnings of the Company, as SJG is required to share 85% of the profits of such activity with the ratepayers.

Revenues decreased $49.9 million during the six months ended June 30, 2010 compared with the same period in the prior year.  Firm revenues decreased $42.8 million, or 15.1%, primarily as a result of a lower BGSS rate in effect during 2010. As discussed above, such changes in gas costs and BGSS recoveries have no impact on Company profitability. There was also a $5.7 million decrease in OSS during the first six months 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 ratepayers.

 
SJG-21


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 $2.6 million, or 8.7%, for the three months ended June 30, 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 $2.5 million of pre-tax margin in the second quarter of 2010, compared with $0.4 million in the same period of 2009.

The CIP protected $7.3 million of pre-tax margin in the second quarter of 2010 that would have been lost due to lower customer usage, compared with $4.7 million in the same period last year.  Of these amounts, $3.2 million and $1.4 million were related to weather variations and $4.1 million and $3.3 million were related to other customer usage variations in 2010 and 2009, respectively.

Total margin increased $5.1 million, or 5.1% for the six months ended June 30, 2010 compared with the same period in 2009 primarily due to customer additions and profits earned through the Company’s CIRT, as noted above.  The CIRT added $4.6 million of pre-tax margin in the first half of 2010, compared with $0.4 million in the same period last year.  Partially offsetting these increases were lower margins from OSS and capacity release, primarily in the first quarter of 2010.

The CIP protected $14.7 million of pre-tax margin in the first half of 2010 that would have been lost due to lower customer usage, compared with $10.9 million in the same period last year.  Of these amounts, $3.9 and $(0.2) million were related to weather variations and $10.8 and $11.1 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
June 30,
   
Six Months Ended
June 30,
 
   
2010 vs. 2009
   
2010 vs. 2009
 
   
 
   
 
 
Operations
  $ 478     $ 925  
Maintenance
    1,080       1,740  
Depreciation
    770       1,216  
Energy and Other Taxes
    (156 )     (429 )

Operations – Operations expense increased $0.5 million and $0.9 million for the three and six months ended June 30, 2010, respectively, as compared with the same periods in 2009.  The increases are due to several factors as follows: