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EX-31.1 - EXHIBIT 31.1 - SOUTH JERSEY GAS Cosjg-63015ex311.htm
EX-31.2 - EXHIBIT 31.2 - SOUTH JERSEY GAS Cosjg-63015ex312.htm
EX-32.2 - EXHIBIT 32.2 - SOUTH JERSEY GAS Cosjg-63015ex322.htm
EX-32.1 - EXHIBIT 32.1 - SOUTH JERSEY GAS Cosjg-63015ex321.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 June 30, 2015

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)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x      No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x      No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x
  
As of August 3, 2015 there were 2,339,139 shares of the registrant’s common stock outstanding. All common shares are owned by South Jersey Industries, Inc., the parent company of South Jersey Gas Company.



TABLE OF CONTENTS

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

2




SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)

 
 
Three Months Ended
 
June 30,
 
2015
 
2014
Operating Revenues
$
75,812

 
$
69,159

 
 
 
 
Operating Expenses:
 

 
 

Cost of Sales (Excluding depreciation)
25,419

 
24,879

Operations
23,939

 
22,100

Maintenance
3,928

 
3,181

Depreciation
9,711

 
9,164

Energy and Other Taxes
854

 
830

 
 
 
 
Total Operating Expenses
63,851

 
60,154

 
 
 
 
Operating Income
11,961

 
9,005

 
 
 
 
Other Income and Expense
1,670

 
1,477

 
 
 
 
Interest Charges
(5,113
)
 
(4,292
)
 
 
 
 
Income Before Income Taxes
8,518

 
6,190

 
 
 
 
Income Taxes
(3,292
)
 
(2,379
)
 
 
 
 
Net Income
$
5,226

 
$
3,811

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





3



 
 
 
 
 
Six Months Ended
 
June 30,
 
2015
 
2014
Operating Revenues
$
343,470

 
$
279,704

 
 
 
 
Operating Expenses:
 

 
 

Cost of Sales (Excluding depreciation)
171,521

 
128,172

Operations
57,297

 
52,412

Maintenance
7,926

 
6,440

Depreciation
19,302

 
18,220

Energy and Other Taxes
2,274

 
2,015

 
 
 
 
Total Operating Expenses
258,320

 
207,259

 
 
 
 
Operating Income
85,150

 
72,445

 
 
 
 
Other Income and Expense
2,430

 
2,563

 
 
 
 
Interest Charges
(10,303
)
 
(8,634
)
 
 
 
 
Income Before Income Taxes
77,277

 
66,374

 
 
 
 
Income Taxes
(29,464
)
 
(24,906
)
 
 
 
 
Net Income
$
47,813

 
$
41,468


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


4


SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
 
 
Three Months Ended
 
June 30,
 
2015
 
2014
Net Income
$
5,226

 
$
3,811

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

 
 

 
 
 
 
Unrealized (Loss) Gain on Available-for-Sale Securities
(37
)
 
154

Unrealized Gain on Derivatives - Other
7

 
7

 
 
 
 
Other Comprehensive (Loss) Gain - Net of Tax *
(30
)
 
161

 
 
 
 
Comprehensive Income
$
5,196

 
$
3,972

 
 
 
 

 
 
 
 
 
Six Months Ended
 
June 30,
 
2015
 
2014
Net Income
$
47,813

 
$
41,468

 
 
 
 
Other Comprehensive Gain - Net of Tax: *
 

 
 
 
 
 
 
Unrealized Gain on Available-for-Sale Securities
17

 
216

Unrealized Gain on Derivatives - Other
9

 
15

 
 
 
 
Other Comprehensive Gain - Net of Tax *
26

 
231

 
 
 
 
Comprehensive Income
$
47,839

 
$
41,699

 
 
 
 
* Determined using a combined average statutory tax rate of 40% and 41% in 2015 and 2014, respectively.
 
The accompanying notes are an integral part of the unaudited condensed financial statements.

5


SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
 
 
Six Months Ended
 
June 30,
 
2015
 
2014
Net Cash Provided by Operating Activities
$
89,031

 
$
33,638

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Capital Expenditures
(95,861
)
 
(88,668
)
Note Receivable
(9,887
)
 

Net Purchase of Restricted Investments in Margin Accounts
1,969

 
(818
)
Investment in Long-Term Receivables
(3,381
)
 
(3,410
)
Proceeds from Long-Term Receivables
2,040

 
3,536

 
 
 
 
Net Cash Used in Investing Activities
(105,120
)
 
(89,360
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net Borrowings from (Repayments of) Short-Term Credit Facilities
26,200

 
(55,500
)
Proceeds from Issuance of Long-Term Debt

 
89,000

Payments for Issuance of Long-Term Debt

 
(581
)
Dividends on Common Stock
(9,891
)
 

Additional Investment by Shareholder

 
25,000

 
 
 
 
Net Cash Provided by Financing Activities
16,309

 
57,919

 
 
 
 
Net Increase in Cash and Cash Equivalents
220

 
2,197

Cash and Cash Equivalents at Beginning of Period
1,778

 
2,020

 
 
 
 
Cash and Cash Equivalents at End of Period
$
1,998

 
$
4,217

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

6


SOUTH JERSEY GAS COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
 
June 30,
2015
 
December 31,
2014
Assets
 
 
 
Property, Plant and Equipment:
 
 
 
Utility Plant, at original cost
$
2,101,634

 
$
2,002,966

Accumulated Depreciation
(426,190
)
 
(413,597
)
 
 
 
 
Property, Plant and Equipment - Net
1,675,444

 
1,589,369

 
 
 
 
Investments:
 

 
 

Available-for-Sale Securities
8,974

 
8,894

Restricted Investments
5,992

 
7,961

 
 
 
 
Total Investments
14,966

 
16,855

 
 
 
 
Current Assets:
 

 
 

Cash and Cash Equivalents
1,998

 
1,778

Note Receivable
9,887

 

Accounts Receivable
117,457

 
60,535

Accounts Receivable - Related Parties
995

 
1,157

Unbilled Revenues
10,374

 
49,910

Provision for Uncollectibles
(9,402
)
 
(6,601
)
Natural Gas in Storage, average cost
11,356

 
25,325

Materials and Supplies, average cost
1,112

 
1,104

Deferred Income Taxes - Net
35,487

 
44,064

Prepaid Taxes
20,577

 
13,601

Derivatives - Energy Related Assets
158

 
2,051

Other Prepayments and Current Assets
11,126

 
3,688

 
 
 
 
Total Current Assets
211,125

 
196,612

 
 
 
 
Regulatory and Other Noncurrent Assets:
 

 
 

Regulatory Assets
335,182

 
357,160

Unamortized Debt Issuance Costs
6,991

 
7,382

Long-Term Receivables
19,744

 
15,223

Derivatives - Energy Related Assets
127

 

Other
2,654

 
3,071

 
 
 
 
Total Regulatory and Other Noncurrent Assets
364,698

 
382,836

 
 
 
 
Total Assets
$
2,266,233

 
$
2,185,672

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

7


SOUTH JERSEY GAS COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands, except per share amounts)
 
 
June 30,
2015
 
December 31,
2014
Capitalization and Liabilities
 
 
 
Common Equity:
 
 
 
Common Stock, Par Value $2.50 per share:
 
 
 
Authorized - 4,000,000 shares
 
 
 
Outstanding - 2,339,139 shares
$
5,848

 
$
5,848

Other Paid-In Capital and Premium on Common Stock
250,899

 
250,899

Accumulated Other Comprehensive Loss
(14,453
)
 
(14,479
)
Retained Earnings
476,222

 
438,300

 
 
 
 
Total Common Equity
718,516

 
680,568

 
 
 
 
Long-Term Debt
507,091

 
507,091

 
 
 
 
Total Capitalization
1,225,607

 
1,187,659

 
 
 
 
Current Liabilities:
 

 
 

Notes Payable
127,600

 
101,400

Current Portion of Long-Term Debt
35,909

 
35,909

Accounts Payable - Commodity
13,237

 
22,359

Accounts Payable - Other
34,659

 
32,711

Accounts Payable - Related Parties
9,635

 
11,249

Derivatives - Energy Related Liabilities
5,217

 
6,305

Customer Deposits and Credit Balances
18,633

 
17,626

Environmental Remediation Costs
40,134

 
28,480

Taxes Accrued
1,692

 
1,177

Pension Benefits
1,515

 
1,515

Interest Accrued
6,122

 
6,099

Other Current Liabilities
3,030

 
6,580

 
 
 
 
Total Current Liabilities
297,383

 
271,410

 
 
 
 
Regulatory and Other Noncurrent Liabilities:
 

 
 

Regulatory Liabilities
64,655

 
41,899

Deferred Income Taxes - Net
452,160

 
435,022

Environmental Remediation Costs
85,631

 
95,828

Asset Retirement Obligations
42,292

 
41,976

Pension and Other Postretirement Benefits
84,362

 
95,241

Investment Tax Credits
74

 
149

Derivatives - Energy Related Liabilities
353

 
1,298

Derivatives - Other
6,615

 
7,325

Other
7,101

 
7,865

 
 
 
 
Total Regulatory and Other Noncurrent Liabilities
743,243

 
726,603

 
 
 
 
Commitments and Contingencies (Note 9)


 


 
 
 
 
Total Capitalization and Liabilities
$
2,266,233

 
$
2,185,672

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

8


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

THE ENTITY - South Jersey Industries, Inc. (SJI) owns all of the outstanding common stock of South Jersey Gas Company (SJG or the Company), a regulated natural gas utility. SJG distributes natural gas in the seven southern most counties of New Jersey. In our opinion, the condensed financial statements reflect all normal and recurring adjustments needed to fairly present our financial position and operating results at the dates and for the periods presented. SJG’s business is subject to seasonal fluctuations and accordingly, this interim financial information should not be the basis for estimating the full year’s operating results. As permitted by the rules and regulations of the Securities and Exchange Commission, the accompanying condensed financial statements contain certain condensed financial information and exclude certain note disclosures normally included in annual audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These condensed financial statements should be read in conjunction with SJG’s Annual Report on Form 10-K for the year ended December 31, 2014 for a more complete discussion of our accounting policies and certain other information.

REVENUE AND THROUGHPUT - BASED TAXES - SJG collects certain revenue-based energy taxes from its customers. Such taxes include New Jersey State Sales Tax and Public Utilities Assessment (PUA). State sales tax is recorded as a liability when billed to customers and is not included in revenue or operating expenses. The PUA is included in both revenues and energy and other taxes, and totaled $0.2 million for each of the three month-periods ended June 30, 2015 and 2014, and $0.8 million and $0.6 million for the six months ended June 30, 2015 and 2014, respectively.

NEW ACCOUNTING PRONOUNCEMENTS — Other than as described below, no new accounting pronouncement issued or effective during 2015 or 2014 had, or is expected to have, a material impact on the condensed financial statements.

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in FASB ASC 605, Revenue Recognition, and in most industry-specific topics. The new guidance identifies how and when entities should recognize revenue. The new rules establish a core principle requiring the recognition of revenue to depict the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. The new guidance is effective for fiscal years, and interim periods within those annual periods, beginning after December 15, 2017. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The new guidance requires management of a company to evaluate whether there is substantial doubt about the company's ability to continue as a going concern. This ASU is effective for the annual reporting period ending after December 15, 2016, and for interim and annual reporting periods thereafter, with early adoption permitted. Management does not expect this standard to have an impact on the Company's financial statements upon adoption.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810)—Amendments to the Consolidation Analysis, which changes the analysis to be performed in determining whether certain types of legal entities should be consolidated. Specifically, the standard amends the evaluation of whether (a) fees paid to a decision maker or service providers represent a variable interest, (b) a limited partnership or similar entity has the characteristics of a Variable Interest Entity ("VIE") and (c) a reporting entity is the primary beneficiary of a VIE. The standard is effective for annual periods beginning after December 15, 2015 and interim periods therein, with early adoption permitted. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

Also in April 2015, the FASB issued ASU 2015-5, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40). This ASU provides guidance to customers (1) in determining whether a cloud computing arrangement includes a software license, and (2) on how the arrangement should be accounted for, depending on whether or not it includes a software license. The amended guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.

9



In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU states that inventory for which cost is determined using a method other than last-in, first-out (LIFO) or the retail method should be subsequently measured at the lower of cost or net realizable value (NRV), rather than at the lower of cost or market. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.


2.
STOCK-BASED COMPENSATION PLANS:

Officers and other key employees of SJG participate in the Stock-Based Compensation Plan (Plan) of SJI. Restricted performance-based shares issued under the Plan vest over a three-year period and are subject to SJI achieving certain market or earnings-based performance targets as compared to a peer group average, which can cause the actual amount of shares that ultimately vest to range from between 0% to 200% of the original share units granted. In 2015, SJI also granted time-based shares of restricted stock, one-third of which vests annually over a three-year period and is limited to 100% payout. Vesting of time-based grants is contingent upon SJI achieving a return on equity (ROE) of at least 7% during the initial year of the grant and meeting the service requirement. Provided that the 7% ROE requirement is met in the initial year, payment is solely contingent upon the service requirement being met in years two and three of the grant. In 2015, SJG officers and other key employees were granted 7,912 shares of time-based restricted stock.

Grants containing market-based performance targets use SJI's total shareholder return (TSR) relative to a peer group to measure performance. As TSR-based grants are contingent upon market and service conditions, SJI is required to measure and recognize stock-based compensation expense based on the fair value at the date of grant on a straight-line basis over the requisite three-year period of each award. In addition, SJI identifies specific forfeitures of share-based awards, and compensation expense is adjusted accordingly over the requisite service period. Compensation expense is not adjusted based on the actual achievement of performance goals. The fair value of TSR-based restricted stock awards on the date of grant is estimated using a Monte Carlo simulation model.

Through 2014, grants containing earnings-based targets were based on SJI's earnings per share (EPS) growth rate relative to a peer group to measure performance. Beginning in 2015, earning-based performance targets include predefined EPS and return on equity (ROE) goals to measure performance. As EPS-based and ROE-based grants are contingent upon performance and service conditions, SJI is required to measure and recognize stock-based compensation expense based on the fair value at the date of grant over the requisite three-year period of each award. The fair value is measured as the market price at the date of grant. The initial accruals of compensation expense are based on the estimated number of shares expected to vest, assuming the requisite service is rendered and probable outcome of the performance condition is achieved. That estimate is revised if subsequent information indicates that the actual number of shares is likely to differ from previous estimates. Compensation expense is ultimately adjusted based on the actual achievement of service and performance targets.

We are allocated a portion of SJI's compensation cost during the vesting period.  We accrue a liability and record compensation cost over the requisite three-year service period based on the grant date fair value as described above for each type of grant. Upon vesting, we make a cash payment to SJI equal to the amounts accrued as compensation cost during the vesting period. Since the inception of the Plan, our expense recognition policy has been consistent with the expense recognition policy at SJI.

The following table summarizes the SJI nonvested restricted stock awards pertaining to SJG outstanding at June 30, 2015, and the assumptions used to estimate the fair value of the awards:

Grants
 
Shares
Outstanding
 
Fair Value
Per Share
 
Expected
Volatility
 
Risk-Free
Interest Rate
2013 - TSR
 
7,945

 
$
22.19

 
21.1
%
 
0.40
%
2013 - EPS
 
7,945

 
$
25.59

 
n/a

 
n/a

2014 - TSR
 
10,261

 
$
21.31

 
20.0
%
 
0.80
%
2014 - EPS
 
10,261

 
$
27.22

 
n/a

 
n/a

2015 - TSR
 
7,267

 
$
26.31

 
16.0
%
 
1.10
%
2015 - EPS, ROE, Time
 
18,693

 
$
29.47

 
n/a

 
n/a

 

10


Expected volatility is based on the actual volatility of SJI’s share price over the preceding three-year period as of the valuation date. The risk-free interest rate is based on the zero-coupon U.S. Treasury Bond, with a term equal to the three-year term of the restricted shares. As notional dividend equivalents are credited to the holders during the three-year service period, no reduction to the fair value of the award is required.

The cost for restricted stock awards during 2015 and 2014 is approximately $0.1 million per quarter. Of these costs, approximately one half was capitalized to Utility Plant.

As of June 30, 2015, there was $0.9 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the Plan. That cost is expected to be recognized over a weighted average period of 2.1 years.

The following table summarizes information regarding restricted stock award activity during the six months ended June 30, 2015, excluding accrued dividend equivalents:

 
Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested Shares Outstanding, January 1, 2015
36,794

 
$
24.10

 
 
 
 
Granted
26,378

 
$
28.58

Canceled / Forfeited
(800
)
 
$
26.47

 
 
 
 
Nonvested Shares Outstanding, June 30, 2015
62,372

 
$
25.97


Performance targets during the three-year vesting periods were not attained for the January 2011 grant that vested at December 31, 2013, or the January 2012 grant that vested at December 31, 2014. As a result, no shares were awarded in 2014 or 2015. SJG has a policy of making cash payments to SJI to satisfy its obligations under the Plan. Cash payments to SJI during the six months ended June 30, 2015 and 2014 were approximately $0.2 million and $0.4 million, respectively, relating to stock awards. Additionally, a change in control could result in the nonvested shares becoming nonforfeitable or immediately payable in cash.


3.
RATES AND REGULATORY ACTIONS:

SJG is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU).

In January 2015, SJG filed a petition with the BPU seeking to continue offering energy efficiency programs through June 2018 with a proposed total budget of $56 million and with the same rate recovery mechanism that exists for its current energy efficiency programs. This petition is currently pending.

In April 2015, SJG filed a petition requesting to increase annual revenues from base rates by $4.6 million to reflect the roll-in of investments made through June 2015 under its Storm Hardening and Reliability Program (“SHARP”), with rates to become effective on October 1, 2015. This petition is currently pending.

In May 2015, the BPU approved an $18.2 million decrease in annual revenues collected from customers through the Societal Benefits Clause ("SBC") charge and the Transportation Initiation Clause ("TIC") charge, comprised of a $6.2 million decrease in revenues from the Remediation Adjustment Clause (“RAC”) component of the SBC, an $11.5 million decrease in revenues from the Clean Energy Program (“CLEP”) component of the SBC and a $0.5 million decrease in TIC revenues, effective June 1, 2015. The decreases in the RAC and CLEP components of the SBC are primarily driven by the accumulation of prior year over-recoveries, as rate recovery exceeded program costs. The decrease in the TIC is being caused by a decrease in costs. The SBC and TIC allow SJG to recover costs associated with certain State-mandated programs.


11


In June 2015, SJG filed its annual Basic Gas Supply Service (“BGSS”) and Conservation Incentive Program (“CIP”) rate adjustment petition, requesting a $39.7 million decrease in annual revenues to be implemented on October 1, 2015, comprised of a $28.4 million decrease in BGSS revenues and an $11.3 million decrease in CIP revenues. The level of BGSS revenues is based on forecasted gas costs and customer usage information for the upcoming BGSS/CIP year, which runs from October to September. SJG’s request is based on decreases in forecasted gas commodity costs for the upcoming BGSS/CIP year. The decrease in CIP revenues is caused primarily by higher than normal customer usage caused by weather that was 10.4% colder than normal during the 2014-2015 winter season. This petition is currently pending.

Also in June 2015, SJG filed its annual Energy Efficiency Tracker (“EET”) rate adjustment petition, requesting a $7.6 million decrease in revenues to continue recovering the costs of, and the allowed return on, prior investments associated with energy efficiency programs ("EEPs"). SJG's original EEPs, approved by the BPU in 2009, and its EEP extension, approved by the BPU in 2013, ended in July 2013 and June 2015, respectively. The revenue requirements associated with these prior investments decrease over time as they are amortized and recovered. Also contributing to the revenue decrease is the forecasted October 2015 over-recovery of $1.7 million, which further reduces the revenue requirement for the upcoming EET year. This petition is currently pending.

The various revenue decreases noted above do not impact SJG's earnings. They represent decreases in the cash requirements of the Company corresponding to lower costs and/or the return of previously over-recovered costs associated with each respective mechanism.

There have been no other significant regulatory actions or changes to SJG's rate structure since December 31, 2014. See Note 3 to the Financial Statements in Item 8 of SJG's Form 10-K for the year ended December 31, 2014.

 
4.
REGULATORY ASSETS AND LIABILITIES:

There have been no significant changes to the nature of SJG’s regulatory assets and liabilities since December 31, 2014, which are described in Notes 3 and 4 to the Financial Statements in Item 8 of SJG’s Form 10-K for the year ended December 31, 2014.

Regulatory Assets consisted of the following items (in thousands):
 
June 30, 2015
 
December 31, 2014
Environmental Remediation Costs:
 
 
 
Expended - Net
$
29,145

 
$
29,540

Liability for Future Expenditures
125,769

 
124,308

Deferred Asset Retirement Obligation Costs
31,799

 
31,584

Deferred Pension and Other Postretirement Benefit Costs
99,040

 
99,040

Deferred Gas Costs - Net
20,194

 
32,202

Societal Benefit Costs Receivable

 
385

Deferred Interest Rate Contracts (Note 11)
6,615

 
7,325

Energy Efficiency Tracker
852

 
11,247

Pipeline Supplier Service Charges
4,608

 
5,441

Pipeline Integrity Cost
3,851

 
3,431

AFUDC - Equity Related Deferrals
11,330

 
10,781

Other Regulatory Assets
1,979

 
1,876

 
 
 
 
Total Regulatory Assets
$
335,182

 
$
357,160


DEFERRED GAS COSTS - NET - Over/under collections of gas costs are monitored through SJG's Basic Gas Supply Service (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 reduction in deferred gas costs from December 31, 2014 was due to gas costs recovered from customers exceeding the actual cost of the commodity incurred during the first six months of 2015 as a result of lower natural gas prices. SJG's BGSS mechanism is designed to over-collect gas costs during the winter season when usage is highest.

12



ENERGY EFFICIENCY TRACKER - This regulatory asset primarily represents energy efficiency measures installed in customer homes and businesses. The decrease from December 31, 2014 is due to higher recoveries in the first six months of 2015 resulting from extremely cold weather.

Regulatory Liabilities consisted of the following items (in thousands):
 
June 30, 2015
 
December 31, 2014
Excess Plant Removal Costs
$
34,701

 
$
35,940

Conservation Incentive Program Payable
17,255

 
4,700

Societal Benefit Costs
12,699

 

Other Regulatory Liabilities

 
1,259

 


 


Total Regulatory Liabilities
$
64,655

 
$
41,899


EXCESS PLANT REMOVAL COSTS - Represents amounts accrued in excess of actual utility plant removal costs incurred to date. The decrease in the balance from year end is due to an amortization as a credit to depreciation expense, as required as part of our September 2014 base rate increase.

CONSERVATION INCENTIVE PROGRAM (CIP) PAYABLE – The CIP tracking mechanism adjusts earnings when actual usage per customer experienced during the period varies from an established baseline usage per customer. Actual usage per customer was greater than the established baseline during 2014 and more notably during the first six months of 2015, resulting in a payable. This is primarily the result of extremely cold weather experienced in the region.

SOCIETAL BENEFIT COSTS (SBC) - This regulatory liability primarily represents the excess recoveries over the expenses incurred under the New Jersey Clean Energy Program which is a mechanism designed to recover costs associated with energy efficiency and renewable energy programs. The change from a $0.4 million regulatory asset to a $12.7 million regulatory liability is due to current SBC rates, which are producing revenue greater than SBC expenses. In July 2014, SJG made its annual 2014-2015 SBC filing requesting a decrease in SBC revenues, in part, to avoid this liability. The petition was approved and new rates went into effect on June 1, 2015.


5.
RELATED-PARTY TRANSACTIONS:

There have been no significant changes in the nature of SJG’s related-party transactions since December 31, 2014. See Note 5 to the Financial Statements in Item 8 of SJG’s Form 10-K for the year ended December 31, 2014 for a detailed description of the related parties and their associated transactions.

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,
 
2015
 
2014
 
2015
 
2014
Operating Revenues/Affiliates:
 
 
 
 
 
 
 
SJRG
$
479

 
$
225

 
$
1,531

 
$
383

Marina
135

 
303

 
367

 
636

Total Operating Revenue/Affiliates
$
614

 
$
528

 
$
1,898

 
$
1,019



13


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,
 
2015
 
2014
 
2015
 
2014
Costs of Sales/Affiliates (Excluding depreciation)
 
 
 
 
 
 
 
SJRG
$
1,508

 
$
1,442

 
$
20,531

 
$
6,926

Energy-Related Derivative Losses / (Gains) *
 
 
 
 
 
 
 
SJRG
$
69

 
$
(490
)
 
$
65

 
$
(1,520
)

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

Operations Expense/Affiliates
 
 
 
 
 
 
 
SJI
$
3,364

 
$
3,148

 
$
7,281

 
$
7,178

Millennium
693

 
687

 
1,353

 
1,295

Other
(108
)
 
(112
)
 
(217
)
 
(216
)
Total Operations Expense/Affiliates
$
3,949

 
$
3,723

 
$
8,417

 
$
8,257





6.
FINANCIAL INSTRUMENTS:

RESTRICTED INVESTMENTS - In accordance with the terms of our tax-exempt first mortgage bonds, unused proceeds are required to be escrowed pending approved construction expenditures. As of both June 30, 2015 and December 31, 2014, the escrowed proceeds, including interest earned, totaled $0.1 million. SJG maintains a margin account with a counterparty in conjunction with SJG's risk management activities as detailed in Note 11. The funds provided by SJG will increase or decrease as the number and value of outstanding energy-related contracts held with this counterparty change. As of June 30, 2015 and December 31, 2014, the balance held with this counterparty totaled $5.9 million and 7.8 million, respectively. The carrying amounts of the Restricted Investments approximate their fair value at June 30, 2015 and December 31, 2014, which would be included in Level 1 of the fair value hierarchy. (See Note 10 - Fair Value of Financial Assets and Financial Liabilities.)

NOTE RECEIVABLE - In June 2015, SJG advanced $10.0 million to a not-for-profit organization formed to spur economic development in Atlantic City, New Jersey. The Note bears interest at 1% for an initial term of six months, with the borrower’s option to extend the term for two additional terms of three months each. SJG holds a first lien security interest on land in Atlantic City as collateral against this note.
LONG-TERM RECEIVABLES – SJG provides financing to customers for the purpose of attracting conversions to natural gas heating systems from competing fuel sources. The terms of these loans call for customers to make monthly payments over a period of up to five years with no interest. The carrying amounts of such loans were $14.0 million and $15.0 million as of June 30, 2015 and December 31, 2014, respectively. The current portion of these receivables is reflected in Accounts Receivable and the non-current portion is reflected in Long-Term Receivables on the condensed balance sheets. The carrying amounts noted above are net of unamortized discounts resulting from imputed interest in the amount of $1.1 million and $1.3 million as of June 30, 2015 and December 31, 2014, respectively. The annualized amortization to interest is not material to SJG’s financial statements. The carrying amounts of these receivables approximate their fair value at June 30, 2015 and December 31, 2014, which would be included in Level 2 of the fair value hierarchy. (See Note 10 - Fair Value of Financial Assets and Financial Liabilities.)
 
FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE - The fair value of a financial instrument is the market price to sell an asset or transfer a liability at the measurement date. The carrying amounts of SJG's financial instruments approximate their fair values at June 30, 2015 and December 31, 2014, except as noted below.
For Long-Term Debt, in estimating the fair value, we use the present value of remaining cash flows at the balance sheet date. We based the estimates on interest rates available to SJG at the end of each period for debt with similar terms and maturities (Level 2 in the fair value hierarchy. See Note 10 - Fair Value of Financial Assets and Financial Liabilities). The estimated fair values of SJG's long-term debt, including current maturities, as of June 30, 2015 and December 31, 2014, were $579.1 million and $587.3 million, respectively. The carrying amount of SJG's long-term debt, including current maturities, as of both June 30, 2015 and December 31, 2014 was $543.0 million.

14


7.
LINES OF CREDIT:

Credit facilities and available liquidity as of June 30, 2015 were as follows (in thousands):
 
 
Total Facility
 
Usage
 
Available Liquidity
 
Expiration Date
Commercial Paper Program/ Revolving Credit Facility
$
200,000

 
$
127,600

 
$
72,400

 
May 2018
Uncommitted Bank Lines
10,000

 

 
10,000

 
Various
 
 
 
 
 
 
 
 
Total
$
210,000

 
$
127,600

 
$
82,400

 
 

The SJG revolving credit facility is provided by a syndicate of banks and contains one financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the credit agreement) to not more than 0.65 to 1 measured at the end of each fiscal quarter.  SJG was in compliance with this covenant as of June 30, 2015.

SJG manages a commercial paper program under which SJG may issue short-term, unsecured promissory notes to qualified investors up to a maximum aggregate amount outstanding at any time of $200.0 million.  The notes  have fixed maturities which vary by note, but may not exceed 270 days from the date of issue. Proceeds from the notes are used for general corporate purposes.  SJG uses the commercial paper program in tandem with the $200.0 million revolving credit facility and does not expect the principal amount of borrowings outstanding under the commercial paper program and the credit facility at any time to exceed an aggregate of $200.0 million.

Average borrowings outstanding under these credit facilities during the six months ended June 30, 2015 and 2014 were $112.0 million and $43.3 million, respectively.  The maximum amount outstanding under these credit facilities during the six months ended June 30, 2015 and 2014 were $139.1 million and $70.1 million, respectively.

Borrowings under these credit facilities are at market rates.  The weighted average interest rate on these borrowings, which changes daily, was 0.45% and 0.25% at June 30, 2015 and 2014, respectively.


8.
PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three and six months ended  June 30, 2015 and 2014, net periodic benefit cost related to the employee and officer pension and other postretirement benefit plans consisted of the following components (in thousands):
 
Pension Benefits
 
Pension Benefits
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Service Cost
$
925

 
$
966

 
$
1,992

 
$
1,932

Interest Cost
2,120

 
2,027

 
4,168

 
4,054

Expected Return on Plan Assets
(2,784
)
 
(2,455
)
 
(5,519
)
 
(4,910
)
Amortizations:
 
 
 
 
 
 
 
Prior Service Cost
40

 
33

 
79

 
66

Actuarial Loss
1,995

 
1,072

 
3,959

 
2,144

Net Periodic Benefit Cost
2,296

 
1,643

 
4,679

 
3,286

Capitalized Benefit Cost
(1,194
)
 
(854
)
 
(2,433
)
 
(1,708
)
Deferred Benefit Cost
(325
)
 

 
(325
)
 

Total Net Periodic Benefit Expense
$
777

 
$
789

 
$
1,921

 
$
1,578


15


 
Other Postretirement Benefits
 
Other Postretirement Benefits
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2015
 
2014
 
2015
 
2014
 
Service Cost
$
190

 
$
172

 
$
372

 
$
344

 
Interest Cost
561

 
510

 
991

 
1,020

 
Expected Return on Plan Assets
(581
)
 
(473
)
 
(997
)
 
(946
)
 
Amortizations:

 


 

 

 
Prior Service Cost
118

 
26

 
202

 
52

 
Actuarial Loss
233

 
167

 
447

 
334

 
Net Periodic Benefit Cost
521

 
402

 
1,015

 
804

 
Capitalized Benefit Cost
(271
)
 
(209
)
 
(528
)
 
(418
)
 
Deferred Benefit Cost
(79
)
 

 
(79
)
 

 
Total Net Periodic Benefit Expense
$
171

 
$
193

 
408

 
386

 

Capitalized benefit cost reflected in the table above relate to our construction program. Deferred benefit costs relate to the deferral of incremental expenses associated with the adoption of new mortality tables (RP-2014 base table with MP-2014 generational projection scale) in 2015. Deferred costs are expected to be recovered through rates as part of our next base rate case.

SJG contributed $12.0 million to the pension plans in January 2015. No contributions were made to the pension plans during 2014. Payments related to the unfunded Supplemental Executive Retirement Plan (SERP) are expected to approximate $1.5 million in 2015. We also have a regulatory obligation to contribute approximately $3.6 million annually to the other postretirement benefit plans’ trusts, less direct costs incurred.

See Note 11 to the Financial Statements in Item 8 of SJG’s Form 10-K for the year ended December 31, 2014 for additional information related to SJG’s pension and other postretirement benefits.

9.
COMMITMENTS AND CONTINGENCIES:

STANDBY LETTER OF CREDIT - SJG provided a $25.2 million letter of credit under a separate facility outside of its revolving credit facility to support variable-rate demand bonds issued through the New Jersey Economic Development Authority (NJEDA) to finance the expansion of SJG’s natural gas distribution system. 

ENVIRONMENTAL REMEDIATION COSTS - SJG incurred and recorded costs for environmental cleanup of 12 sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s. There have been no significant changes to the status of SJG’s environmental remediation efforts since December 31, 2014, as described in Note 12 to the Financial Statements in Item 8 of SJG’s Form 10-K for the year ended December 31, 2014.

GAS SUPPLY RELATED CONTRACTS - In the normal course of conducting business, we have entered into long-term contracts for natural gas supplies, firm transportation and gas storage service. The earliest date at which any of the primary terms of these contracts expire is October 2017. The transportation and storage agreements entered into between us and each of our interstate pipeline service providers were done so in accordance with their respective FERC-approved tariff. Our cumulative obligation for gas supply-related demand charges and reservation fees paid for these services averages approximately $4.6 million per month and is recovered on a current basis through the BGSS.

PENDING LITIGATION - We are subject to claims arising in the ordinary course of business and other legal proceedings. We accrue liabilities related to these claims when we can reasonably estimate the amount or range of amounts of probable settlement costs or other charges for these claims. The Company has accrued approximately $0.6 million and $0.5 million related to all claims in the aggregate as of June 30, 2015 and December 31, 2014, respectively. Management does not believe that it is reasonably possible that there will be a material change in the Company's estimated liability in the near term and does not currently anticipate the disposition of any known claims that would have a material effect on the Company's financial position, results of operations or cash flows.

16



COLLECTIVE BARGAINING AGREEMENTS - Unionized personnel represent approximately 61% of our workforce at June 30, 2015. The Company has collective bargaining agreements with two unions who represent these employees: the International Brotherhood of Electrical Workers (IBEW) operates under a collective bargaining agreement that runs through February 2017; and the International Association of Machinists and Aerospace Workers (IAM) operates under a collective bargaining agreement that expires in August 2017.

10.
FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:

GAAP establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques.  The levels of the hierarchy are described below:

Level 1:  Observable inputs such as quoted prices in active markets for identical assets or liabilities.

Level 2:  Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3:  Unobservable inputs that reflect the reporting entity’s own assumptions.

Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy.

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

As of June 30, 2015
 
 
 
 
 
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Available-for-Sale Securities (A)
$
8,974

 
$
5,335

 
$
3,639

 
$

Derivatives – Energy Related Assets (B)
285

 
285

 

 

 
$
9,259

 
$
5,620

 
$
3,639

 
$

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Derivatives – Energy Related Liabilities (B)
$
5,570

 
$
4,655

 
$
331

 
$
584

Derivatives – Other (C)
6,615

 

 
6,615

 

 
$
12,185

 
$
4,655

 
$
6,946

 
$
584


As of December 31, 2014
 
 
 
 
 
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Available-for-Sale Securities (A)
$
8,894

 
$
5,924

 
$
2,970

 
$

Derivatives - Energy Related Assets (B)
2,051

 
2

 
2,049

 

 
$
10,945

 
$
5,926

 
$
5,019

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives - Energy Related Liabilities (B)
$
7,603

 
$
7,254

 
$
349

 
$

Derivatives - Other (C)
7,325

 

 
7,325

 

 
$
14,928

 
$
7,254

 
$
7,674

 
$



17


(A)  Available-for-Sale Securities include securities that are traded in active markets and securities that are not traded publicly.  The securities traded in active markets are valued using the quoted principal market close prices that are provided by the trustees and are categorized in Level 1 in the fair value hierarchy. The remaining securities consist of funds that are not publicly traded. These funds, which consist of stocks and bonds that are traded individually in active markets, are valued using quoted prices for similar assets and are categorized in Level 2 in the fair value hierarchy.

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

Significant Unobservable Inputs - Management uses the discounted cash flow model to value Level 3 physical and financial forwards, which calculates mark-to-market valuations based on forward market prices, original transaction prices, volumes, risk-free rate of return and credit spreads. Inputs to the valuation model are reviewed and revised as needed, based on historical information, updated market data, market liquidity and relationships, and changes in third party pricing sources. The validity of the mark-to-market valuations and changes in mark-to-market valuations from period to period are examined and qualified against historical expectations by the risk management function. If any discrepancies are identified during this process, the mark-to-market valuations or the market pricing information is evaluated further and adjusted, if necessary.

Level 3 valuation methods for natural gas derivative contracts include utilizing another location in close proximity adjusted for certain pipeline charges to derive a basis value. The significant unobservable inputs used in the fair value measurement of certain natural gas contracts consist of forward prices developed based on industry-standard methodologies. Significant increases (decreases) in these forward prices for purchases of natural gas would result in a directionally similar impact to the fair value measurement and for sales of natural gas would result in a directionally opposite impact to the fair value measurement.

(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.

The following table provides quantitative information regarding significant unobservable inputs in Level 3 fair value measurements (in thousands):

Type
Fair Value at June 30, 2015
Valuation Technique
Significant Unobservable Input
Range [Weighted Average]
 
Assets
Liabilities
 
 
 
Forward Contract - Natural Gas
$—
$584
Discounted Cash Flow
Forward price (per dt)

$1.21 - $7.51 [$4.28]
 
 
 
 
 
 


18


The changes in fair value measurements of Derivatives - Energy Related Assets and Liabilities for the three and six months ended June 30, 2015 and 2014, using significant unobservable inputs (Level 3), are as follows (in thousands):
 
Three Months
Ended
June 30, 2015
 
Six Months Ended
June 30, 2015
Balance at beginning of period
$

 
$

Total unrealized losses included in Regulatory Liabilities (see note 4)
(584
)
 
(584
)
 
 
 
 
Balance at end of period
(584
)
 
(584
)

 
Three Months
Ended
June 30, 2014
 
Six Months Ended
June 30, 2014
Balance at beginning of period
$

 
$

Total unrealized losses included in Regulatory Liabilities (see note 4)
(8
)
 
(8
)
 
 
 
 
Balance at end of period
(8
)
 
(8
)


11.
DERIVATIVE INSTRUMENTS:

SJG is involved in buying, selling, transporting and storing natural gas and is subject to market risk on expected future purchases and sales due to commodity price fluctuations. The Company, through a counterparty, uses a variety of derivative instruments to limit this exposure to market risk in accordance with strict corporate guidelines. These derivative instruments include forward contracts, futures contracts, swap agreements and options contracts. As of June 30, 2015, SJG had outstanding derivative contracts intended to limit the exposure to market risk on 10.1 million decatherms (MMdts) of expected future purchases of natural gas and 0.65 MMdts of expected future sales of natural gas. In addition to these derivative contracts, SJG had basis and index related purchase and sales contracts totaling 1.0 MMdts. These contracts, which do not qualify for the normal purchase and sale exemption and have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives — Energy Related Assets or Derivatives — Energy Related Liabilities on the condensed balance sheets. The costs or benefits of these short-term contracts are recoverable through SJG’s BGSS clause, subject to BPU approval. As a result, the net unrealized pre-tax gains and losses for these energy-related commodity contracts are included with realized gains and losses in Regulatory Assets or Regulatory Liabilities on the condensed balance sheets. As of June 30, 2015 and December 31, 2014, SJG had $5.3 million and $5.6 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, 2014, which are described in Note 1 to the Financial Statements in Item 8 of SJG’s Annual Report on Form 10-K for the year ended December 31, 2014. 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, 2015 and December 31, 2014, the unamortized balance was approximately $0.9 million, and $1.0 million, respectively.


19


The fair values of all derivative instruments, as reflected in the condensed balance sheets as of June 30, 2015 and December 31, 2014, are as follows (in thousands):

Derivatives not designated as hedging instruments under GAAP
 
June 30, 2015
 
December 31, 2014
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Energy related commodity contracts:
 
 
 
 
 
 
 
 
Derivatives – Energy Related – Current
 
$
158

 
$
5,217

 
$
2,051

 
$
6,305

Derivatives – Energy Related – Non-Current
 
127

 
353

 

 
1,298

Interest rate contracts:
 
 
 
 
 
 
 
 
Derivatives – Other
 

 
6,615

 

 
7,325

Total derivatives not designated as hedging instruments under GAAP
 
285

 
12,185

 
2,051

 
14,928

Total Derivatives
 
$
285

 
$
12,185

 
$
2,051

 
$
14,928

 

The Company enters into derivative contracts with counterparties, some of which are subject to master netting arrangements, which allow net settlements under certain conditions. The Company presents derivatives at gross fair values on the condensed balance sheets. As of June 30, 2015, and December 31, 2014, information related to these offsetting arrangements were as follows (in thousands):

As of June 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
Description
 
Gross amounts of recognized assets/liabilities
 
Gross amount offset in the balance sheet
 
Net amounts of assets/liabilities in balance sheet
 
Gross amounts not offset in the balance sheet
 
Net amount
 
 
 
 
Financial Instruments
 
Cash Collateral Posted
 
Derivatives - Energy Related Assets
 
$
285

 
$

 
$
285

 
$
(285
)
(A)
$

 
$

Derivatives - Energy Related Liabilities
 
(5,570
)
 

 
(5,570
)
 
285

(B)
4,370

 
(915
)
Derivatives - Other
 
(6,615
)
 

 
(6,615
)
 

 

 
(6,615
)

As of December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
Description
 
Gross amounts of recognized assets/liabilities
 
Gross amount offset in the balance sheet
 
Net amounts of assets/liabilities in balance sheet
 
Gross amounts not offset in the balance sheet
 
Net amount
 
 
 
 
Financial Instruments
 
Cash Collateral Posted
 
Derivatives - Energy Related Assets
 
$
2,051

 
$

 
$
2,051

 
$
(2
)
(A)
$

 
$
2,049

Derivatives - Energy Related Liabilities
 
(7,603
)
 

 
(7,603
)
 
2

(B)
7,253

 
(348
)
Derivatives - Other
 
(7,325
)
 

 
(7,325
)
 

 

 
(7,325
)

(A) The balances at June 30, 2015 and December 31, 2014 were related to derivative liabilities which can be net settled against derivative assets.

(B) The balances at June 30, 2015 and December 31, 2014 were related to derivative assets which can be net settled against derivative liabilities.


20


The effect of derivative instruments on the condensed statements of income for the three and six months ended June 30, 2015 and 2014 are as follows (in thousands):
 
 
Three months ended
June 30,
 
Six months ended
June 30,
Derivatives in Cash Flow Hedging Relationships
 
2015
 
2014
 
2015
 
2014
Interest Rate Contracts:
 
 
 
 
 
 
 
 
Losses reclassified from Accumulated Other Comprehensive Loss into income (a)
 
$
(12
)
 
$
(12
)
 
$
(24
)
 
$
(24
)
(a) Included in Interest Charges

Net realized loss of $2.1 million and gain of $1.2 million associated with SJG's energy-related financial commodity contracts for the three months ended June 30, 2015 and 2014, and loss of $4.8 million and gain of $3.6 million for the six month ended June 30, 2015 and 2014, respectively, are not included in the above table.  These contracts are part of SJG’s regulated risk management activities that serve to mitigate BGSS costs passed on to its customers. As these transactions are entered into pursuant to, and recoverable through, regulatory riders, any changes in the value of SJG’s energy-related financial commodity contracts are deferred in Regulatory Assets or Liabilities, as applicable, and there is no impact to earnings.


12.
LONG-TERM DEBT:

The Company did not issue or retire any long-term debt during the three and six months ended June 30, 2015. We retire debt when it is cost effective as permitted by the debt agreements.  


21



13.    ACCUMULATED OTHER COMPREHENSIVE LOSS:

The changes in Accumulated Other Comprehensive Loss (AOCL) for the three and six months ended June 30, 2015 are as follows (in thousands):
 
 
 
 
 
 
 
 
 
Postretirement Liability Adjustment
 
Unrealized Gain (Loss) on Derivatives-Other
 
Unrealized Gain (Loss) on Available-for-Sale Securities
 
Total
Balance at April 1, 2015 (a)
$
(13,837
)
 
$
(565
)
 
$
(21
)
 
$
(14,423
)
Other comprehensive loss before reclassifications

 

 
(43
)
 
(43
)
   Amounts reclassified from AOCL (b)

 
7

 
6

 
13

Net current period other comprehensive income (loss)

 
7

 
(37
)
 
(30
)
Balance at June 30, 2015 (a)
$
(13,837
)
 
$
(558
)
 
$
(58
)
 
$
(14,453
)
 
Postretirement Liability Adjustment
 
Unrealized Gain (Loss) on Derivatives-Other
 
Unrealized Gain (Loss) on Available-for-Sale Securities
 
Total
Balance at January 1, 2015 (a)
$
(13,837
)
 
$
(567
)
 
$
(75
)
 
$
(14,479
)
Other comprehensive income before reclassifications

 

 
49

 
49

   Amounts reclassified from AOCL (b)

 
9

 
(32
)
 
(23
)
Net current period other comprehensive income

 
9

 
17

 
26

Balance at June 30, 2015 (a)
$
(13,837
)
 
$
(558
)
 
$
(58
)
 
$
(14,453
)

(a) Determined using a combined average statutory tax rate of 40%.
(b) See table below.

The reclassifications out of AOCL during the three and six months ended June 30, 2015 are as follows (in thousands):
Components of AOCL
Amounts Reclassified from AOCL (in thousands)
 
Affected Line Item in the Condensed Statements of Income
Three Months Ended
June 30, 2015
 
Six Months Ended
June 30, 2015
 
Unrealized Loss in on Derivatives-Other - Interest Rate Contracts designated as cash flow hedges
$
12

 
$
23

 
Interest Charges
Unrealized Loss(Gain) on Available-for-Sale Securities
10

 
(54
)
 
Other Income & Expense
 
22

 
(31
)
 
Loss(Income) Before Income Taxes
Income Taxes (a)
(9
)
 
8

 
Income Taxes
Losses(Gains) from reclassifications for the period net of tax
$
13

 
$
(23
)
 
 

(a) Determined using a combined average statutory tax rate of 40%.

22



14.    SUBSEQUENT EVENTS:

On July 1, 2015, the Board of Directors of SJG declared a cash dividend of $9,891,000 payable to SJI. The dividend was paid on July 2, 2015.


23



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

OVERVIEW:

Organization - We are an operating public utility company engaged in the purchase, transmission and sale of natural gas for residential, commercial and industrial use. We also sell natural gas and pipeline transportation capacity (off-system sales) on a wholesale basis to various customers on the interstate pipeline system and transport natural gas purchased directly from producers or suppliers to their customers. We served 369,888 customers at June 30, 2015 compared with 363,483 customers at June 30, 2014.

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, 2014 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, 2014.

New Accounting Pronouncements -    See detailed discussions concerning New Accounting Pronouncements and their impact on SJG in Note 1 to the condensed financial statements.

Regulatory Actions Other than the changes discussed in Note 3 to the condensed financial statements, there have been no significant regulatory actions since December 31, 2014. See detailed discussions concerning Regulatory Actions in Note 3 to the Financial Statements in item 8 of SJG’s Form 10-K for the year ended December 31, 2014.

Environmental Remediation There have been no significant changes to the status of SJG’s environmental remediation efforts since December 31, 2014. See detailed discussion concerning Environmental Remediation Costs in Note 12 to the Financial Statements in Item 8 of SJG’s Form 10-K for the year ended December 31, 2014.

Competition - See detailed discussion concerning competition in SJG’s Form 10-K for the year ended December 31, 2014.


24


Customer Choice Legislation - All residential natural gas customers in New Jersey can choose their natural gas commodity supplier under the terms of the “Electric Discount and Energy Competition Act of 1999.” This bill created the framework and necessary time schedules for the restructuring of the state’s electric and natural gas utilities. The Act established unbundling, under which redesigned utility rate structures allow natural gas and electric consumers to choose their energy supplier. Customers purchasing natural gas from a provider other than the local utility (marketer) are charged for the gas costs by the marketer and charged for the transportation costs by the utility. The number of customers purchasing their natural gas from marketers was 36,139 and 41,130 at June 30, 2015 and 2014, respectively.


RESULTS OF OPERATIONS:

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Utility Throughput – decatherms(dt):
 
 
 
 
 
 
 
Firm Sales -
 
 
 
 
 
 
 
Residential
2,535

 
2,830

 
17,289

 
16,018

Commercial
673

 
747

 
4,351

 
3,482

Industrial
37

 
33

 
265

 
190

Cogeneration & Electric Generation
402

 
245

 
496

 
555

Firm Transportation -
 
 
 
 
 
 
 
Residential
265

 
392

 
1,792

 
2,294

Commercial
967

 
1,081

 
4,372

 
4,532

Industrial
3,069

 
3,159

 
6,017

 
6,669

Cogeneration & Electric Generation
1,710

 
1,229

 
3,078

 
3,189

 
 
 
 
 
 
 
 
Total Firm Throughput
9,658

 
9,716

 
37,660

 
36,929

 
 
 
 
 
 
 
 
Interruptible Sales
17

 

 
20

 

Interruptible Transportation
319

 
338

 
652

 
706

Off-System Sales
2,157

 
1,088

 
6,621

 
3,518

Capacity Release
13,945

 
14,477

 
28,990

 
30,659

 
 
 
 
 
 
 
 
Total Throughput - Utility
26,096

 
25,619

 
73,943

 
71,812


25


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Utility Operating Revenues:
 
 
 
 
 
 
 
Firm Sales -
 
 
 
 
 
 
 
Residential
$
42,376

 
$
35,099

 
$
212,585

 
$
160,287

Commercial
9,701

 
9,119

 
47,110

 
37,450

Industrial
435

 
586

 
3,122

 
2,667

Cogeneration & Electric Generation
1,483

 
1,581

 
2,288

 
3,661

Firm Transportation -
 
 
 
 
 
 
 
Residential
2,350

 
2,697

 
10,827

 
12,855

Commercial
4,716

 
4,509

 
18,477

 
17,963

Industrial
5,269

 
6,184

 
11,600

 
12,974

Cogeneration & Electric Generation
1,088

 
1,248

 
2,996

 
3,574

 
 
 
 
 
 
 
 
Total Firm Revenues
67,418

 
61,023

 
309,005

 
251,431

 
 
 
 
 
 
 
 
Interruptible Sales
242

 

 
298

 
2

Interruptible Transportation
354

 
411

 
764

 
859

Off-System Sales
6,108

 
5,415

 
30,096

 
23,966

Capacity Release
1,350

 
1,952

 
2,658

 
2,848

Other
340

 
358

 
649

 
598

 
 
 
 
 
 
 
 
Total Utility Operating Revenues
75,812

 
69,159

 
343,470

 
279,704

 
 
 
 
 
 
 
 
Less:
 

 
 

 
 

 
 

Cost of Sales (Excluding depreciation)
25,419

 
24,879

 
171,521

 
128,172

Conservation Recoveries*
4,861

 
4,951

 
17,124

 
15,718

RAC Recoveries*
2,280

 
2,022

 
4,561

 
4,043

EET Recoveries*
998

 
992

 
2,047

 
2,051

Revenue Taxes
208

 
175

 
787

 
611

Utility Margin**
$
42,046

 
$
36,140

 
$
147,430

 
$
129,109

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Margin:
 

 
 

 
 

 
 

Residential
$
23,419

 
$
22,477

 
$
114,103

 
$
96,071

Commercial and Industrial
12,268

 
11,430

 
44,982

 
37,457

Cogeneration and Electric Generation
1,187

 
1,100

 
2,380

 
2,447

Interruptible
29

 
16

 
84

 
34

Off-System Sales & Capacity Release
507

 
467

 
2,078

 
1,120

Other Revenues
947

 
872

 
1,255

 
1,111

Margin Before Weather Normalization & Decoupling
38,357

 
36,362

 
164,882

 
138,240

CIP Mechanism
3,185

 
(409
)
 
(18,396
)
 
(9,419
)
EET Mechanism
504

 
187

 
944

 
288

Utility Margin**
$
42,046

 
$
36,140

 
$
147,430

 
$
129,109

 
 
 
 
 
 
 
 
Degree Days:
415

 
476

 
3,340

 
3,262

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


26



Throughput Total gas throughput increased 0.5 MMdts and 2.1 MMdts during the three and six months ended June 30, 2015, respectively, compared with the same periods in 2014. Firm throughput increased 0.7 MMdts, or 2.0%, during the first six months of 2015 as a result of weather that was 2.4% colder than the same period in the prior year. Also contributing to higher throughput was the addition of 6,405 customers over the last 12 months, representing 1.8% customer growth. Firm throughput was relatively flat during the second quarter of 2015 verses the same period in 2014, which is typical during the spring and summer months in the absence of heating demand. Off-System Sales (OSS) throughput increased 1.1 MMdts and 3.1 MMdts during the three and six months ended June 30, 2015, respectively. The increase in OSS was primarily related to opportunities created on the interstate pipeline as a result of extremely cold weather in the northeast region of the country during the first quarter of 2015. The increases in throughput noted above were offset by lower capacity release activity during the three and six months ended June 30, 2015, compared to the same period in the prior year, as higher demand for bundled OSS partially displaced the demand for only pipeline capacity.

Operating Revenues Revenues increased $6.7 million and $63.8 million during the three and six months ended June 30, 2015, respectively, compared with the same periods in 2014, due to higher firm sales and OSS. Total firm revenue increased $6.4 million and $57.6 million in the three and six months ended June 30, 2015, respectively, as a result of the settlement of a base rate case and a 22.1% increase in SJG's rate for natural gas recoveries, both effective October 1, 2014. These two events increased revenue by approximately $4.9 million and $3.7 million, respectively, during the three months ended June 30, 2015, versus the same period in 2014; and by approximately $15.8 million and $34.9 million, respectively, during the six months ended June 30, 2015, versus the same period in 2014. While changes in the gas costs and Basic Gas Supply Service ("BGSS") recoveries fluctuate from period to period, SJG does not profit from the sale of the commodity. Therefore, fluctuations in Operating Revenue and Cost of Sales, such as those caused by the recovery of an incremental $34.9 million in gas costs during 2015, have no impact on SJG's profitability, as further discussed below under the caption "Margin (pre-tax)". Also contributing to higher revenue were 2.4% colder weather and 6,405 additional customers compared with the same period in 2014, as previously discussed under "Throughput." While colder weather increased firm sales revenue significantly, the revenue increase has little impact on Company profitability under the operation of the Conservation Incentive Program, as discussed below under the captions "Conservation Incentive Program (CIP)" and "Margin (pre-tax)."

Higher OSS unit sales volume, partially offset by lower unit prices, resulted in a $0.7 million and $6.1 million increase in OSS revenues during the three and six months ended June 30, 2015, respectively, compared with the same periods in 2014. Extremely cold weather in the northeast region of the country led to greater demand during the first quarter of 2015, creating opportunity for the Company to increase revenue from such sales. However, the impact of changes in OSS activity does not have a material impact on the earnings of SJG, as the Company is required to return 85% of the profits of such activity to our ratepayers. Earnings from OSS can be seen in the "Margin" table above.

Conservation Incentive Program (CIP) - The effects of the CIP on our net income and the associated weather comparisons are as follows ($’s in millions):
 
Three Months Ended
June 30,
Six Months Ended
June 30,
 
2015
 
2014
2015
 
2014
Net Income Impact:
 
 
 
 
 
 
CIP – Weather Related
$
1.7

 
$
0.4

$
(7.3
)
 
$
(5.7
)
CIP – Usage Related
0.2

 
(0.7
)
(3.6
)
 
0.1

Total Net Income Impact
$
1.9

 
$
(0.3
)
$
(10.9
)
 
$
(5.6
)
 
 
 
 
 
 
 
Weather Compared to 20-Year Average
20.7% Warmer
 
0.1% Warmer
14.7% Colder
 
13.4% Colder