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SJI > SEC Filings for SJI > Form 10-Q on 7-May-2012All Recent SEC Filings

Show all filings for SOUTH JERSEY INDUSTRIES INC

Form 10-Q for SOUTH JERSEY INDUSTRIES INC


7-May-2012

Quarterly Report


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

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 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, suppliers or business partners to fulfill their contractual obligations; and changes in business strategies.

A discussion of these and other risks and uncertainties may be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 and in other filings made by us with the Securities and Exchange Commission (SEC). 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 South Jersey Industries, Inc. (SJI or the Company) 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, SJI 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 consolidated financial statements and related disclosures. Actual results could differ from those estimates. Five types of transactions presented in our condensed consolidated financial statements require a significant amount of judgment and estimation. These relate to regulatory accounting, derivatives, environmental remediation costs, pension and other postretirement employee benefit costs, and revenue recognition. A discussion of these estimates and assumptions may be found in our Form 10-K for the year ended December 31, 2011.

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

Regulatory Actions -Other than the changes discussed in Note 7 to the condensed consolidated financial statements, there have been no significant regulatory actions since December 31, 2011. See detailed discussion concerning Regulatory Actions in Note 10 to the Consolidated Financial Statements in Item 8 of SJI's Annual Report on Form 10-K as of December 31, 2011.

Environmental Remediation -There have been no significant changes to the status of the Company's environmental remediation efforts since December 31, 2011. See detailed discussion concerning Environmental Remediation in Note 15 to the Consolidated Financial Statements in Item 8 of SJI's Annual Report on Form 10-K as of December 31, 2011.

RESULTS OF OPERATIONS:

SJI operates in several different reportable operating segments. Gas Utility Operations (SJG) consists primarily of natural gas distribution to residential, commercial and industrial customers. Wholesale Energy Operations include the activities of South Jersey Resources Group, LLC (SJRG) and South Jersey Exploration, LLC (SJEX). South Jersey Energy Company (SJE) is involved in both retail gas and retail electric activities. Retail Gas and Other Operations include natural gas acquisition and transportation service business lines. Retail Electric Operations consist of electricity acquisition and transportation to commercial and industrial customers. On-Site Energy Production consists of Marina Energy, LLC ("Marina's") thermal energy facility and other energy-related projects. Appliance Service Operations includes South Jersey Energy Service Plus, LLC (SJESP's) servicing of appliances under warranty via a subcontractor arrangement as well as on a time and materials basis, and the installation of residential and small commercial HVAC systems. The Retail Energy Operations caption includes Retail Gas and Other, Retail Electric, On-Site Energy Production and Appliance Service Operations.


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Net Income for the three months ended March 31, 2012 increased $2.6 million to $54.1 million compared to the three months ended March 31, 2011 primarily as a result of the following:

The income contribution from SJG for the three months ended March 31, 2012 increased $2.7 million to $35.0 million due to an increase in CIRT-related earnings along with an increase in residential customers at SJG.

The income contribution from Marina for the three months ended March 31, 2012 increased $1.3 million to net income of $10.3 million due primarily to the timing of the investment tax credit available on renewable energy facilities as compared to the prior year.

The income contribution from SJESP for the three months ended March 31, 2012 decreased $1.7 million to a net loss of $0.2 million due primarily to proceeds received in the first quarter of 2011 from a provider of homeowner assistance services in accordance with an agreement with the Company that gives them the exclusive right to renew the home appliance repair contracts at SJESP.

A significant portion of the volatility in operating results is due to the impact of the accounting methods associated with SJI's derivative activities. The Company uses derivatives to limit its exposure to market risk on transactions to buy, sell, transport and store natural gas and to buy and sell retail electricity. The Company also uses derivatives to limit its exposure to increasing interest rates on variable-rate debt.

The types of transactions that cause the most significant volatility in operating results are as follows:

            SJRG purchases and holds natural gas in storage to earn a profit
             margin from its ultimate sale in the future. SJRG uses derivatives
             to mitigate commodity price risk in order to substantially lock-in
             the profit margin that will ultimately be realized. However, gas
             stored in inventory is accounted for at the lower of average cost or
             market; the derivatives used to reduce the risk associated with a
             change in the value of the inventory are accounted for at fair
             value, with changes in fair value recorded in operating results in
             the period of change. As a result, earnings are subject to
             volatility as the market price of derivatives change, even when the
             underlying hedged value of the inventory is unchanged. Additionally,
             volatility in earnings is created when realized gains and losses on
             derivatives used to mitigate commodity price risk on expected future
             purchases of gas in storage are recognized in earnings when the
             derivatives settle, but the cost of the related gas in storage is
             not recognized in earnings until the period of withdrawal. This
             volatility can be significant from period to period. Over time,
             gains or losses on sale of gas in storage will be offset by losses
             or gains on the derivatives, resulting in the realization of the
             profit margin expected when the transactions were initiated.



            SJE uses forward contracts to mitigate commodity price risk on fixed
             price electric contracts with customers. In accordance with
             accounting principles generally accepted in the United States of
             America (GAAP), the forward contracts are recorded at fair value,
             with changes in fair value recorded in earnings in the period of
             change. Several related customer contracts are not considered
             derivatives and therefore are not recorded in earnings until the
             electricity is delivered. As a result, earnings are subject to
             volatility as the market price of the forward contracts change, even
             when the underlying hedged value of the customer contract is
             unchanged. Over time, gains or losses on the sale of the fixed price
             electric under contract will be offset by losses or gains on the
             forward contracts, resulting in the realization of the profit margin
             expected when the transactions were initiated.

As a result, management also uses the non-generally accepted accounting principles ("non-GAAP") financial measures of Economic Earnings, Economic Earnings per share, Non-Utility Economic Earnings, Wholesale Energy Economic Earnings and Retail Energy Economic Earnings when evaluating the results of operations for its nonutility operations. These non-GAAP financial measures should not be considered as an alternative to GAAP measures, such as net income, operating income, earnings per share from continuing operations or any other GAAP measure of liquidity or financial performance.

We define Economic Earnings as: Income from continuing operations, (1) less the change in unrealized gains and plus the change in unrealized losses, as applicable and in each case after tax, on all commodity derivative transactions and the ineffective portion of interest rate derivative transactions that we are marking to market, and (2) less realized gains and plus realized losses, as applicable and in each case after tax, on all commodity derivative transactions attributed to expected purchases of gas in storage to match the recognition of these gains and losses with the recognition of the related cost of the gas in storage in the period of withdrawal.


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Economic Earnings is a significant performance metric used by our management to indicate the amount and timing of income from continuing operations that we expect to earn after taking into account the impact of derivative instruments on the related transactions. Specifically, we believe that this financial measure indicates to investors the profitability of the entire derivative related transaction and not just the portion that is subject to mark-to-market valuation under GAAP. Considering only the change in market value on the derivative side of the transaction can produce a false sense as to the ultimate profitability of the total transaction as no change in value is reflected for the non-derivative portion of the transaction.

Economic Earnings for the three months ended March 31, 2012 increased $1.2 million to $50.0 million compared with the same period in 2011, primarily as a result of the following:

The income contribution from SJG for the three months ended March 31, 2012 increased $2.7 million to $35.0 million due to an increase in CIRT-related earnings along with an increase in residential customers at SJG.

The income contribution from Marina for the three months ended March 31, 2012 increased $1.7 million to $10.3 million due primarily to the timing of the investment tax credit available on renewable energy facilities as compared to the prior year.

The income contribution from SJESP for the three months ended March 31, 2012 decreased $1.7 million to a net loss of $0.2 million due primarily to proceeds received in the first quarter of 2011 from a provider of homeowner assistance services in accordance with an agreement with the Company that gives them the exclusive right to renew the home appliance repair contracts at SJESP.


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The following table presents a reconciliation of our income from continuing operations and earnings per share from continuing operations to Economic Earnings and Economic Earnings per share for the three months ended March 31 (in thousands except per share data):

                                                      Three months ended
                                                           March 31,
                                                      2012          2011
Income from Continuing Operations                  $  54,211     $ 51,831
Minus/Plus:
Unrealized Mark-to-Market Gains on Derivatives        (4,198 )     (3,117 )
Realized Losses on Inventory Injection Hedges             24          172
Economic Earnings                                  $  50,037     $ 48,886

Earnings per Share from Continuing Operations      $    1.79     $   1.73
Minus/Plus:
Unrealized Mark-to-Market Gains on Derivatives         (0.14 )      (0.10 )
Realized Losses on Inventory Injection Hedges           0.00         0.00
Economic Earnings per Share                        $    1.65     $   1.63

Non-Utility Income from Continuing Operations      $  19,173     $ 19,535
Minus/Plus:
Unrealized Mark-to-Market Gains on Derivatives        (4,198 )     (3,117 )
Realized Losses on Inventory Injection Hedges             24          172
Non-Utility Economic Earnings                      $  14,999     $ 16,590

Wholesale Energy Income from Continuing Operations $   5,797     $  6,027
Minus/Plus:
Unrealized Mark-to-Market (Gains) on Derivatives      (1,881 )       (828 )
Realized Losses on Inventory Injection Hedges             24          172
Wholesale Energy Economic Earnings                 $   3,940     $  5,371

Retail Energy Income from Continuing Operations    $  13,376     $ 13,508
Minus/Plus:
Unrealized Mark-to-Market (Gains) on Derivatives      (2,317 )     (2,289 )
Retail Energy Economic Earnings                    $  11,059     $ 11,219


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The effect of derivative instruments not designated as hedging instruments under GAAP in the condensed consolidated statements of income (see Note 12 to the condensed consolidated financial statements) is as follows (gains (losses) in thousands):

                                                                 Three months ended
                                                                      March 31,
                                                                 2012           2011
        Gains (losses) on energy related commodity contracts $    6,971      $   4,475
        Gains (losses) on interest rate contracts                   136            261
             Total before income taxes                            7,107          4,736
             Income taxes (A)                                    (2,914 )       (1,942 )
           Total after income taxes                               4,193          2,794
  Unrealized mark-to-market gains (losses) on derivatives
  held by affiliated companies, net of tax (A)                        5            323
  Total unrealized mark-to-market gains (losses) on
derivatives                                                       4,198          3,117
  Realized gains (losses) on inventory injection hedges, net
of tax (A)                                                          (24 )         (172 )
  Total reconciling items between income from continuing
  operations and economic earnings                           $    4,174      $   2,945

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


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The following tables summarize the composition of selected SJG data for the three months ended March 31 (in thousands, except for degree day data):

                                      Three Months Ended
                                           March 31,
                                        2012          2011
Utility Throughput - dt:
Firm Sales -
Residential                            8,595         11,241
Commercial                             1,979          2,795
Industrial                               126            155
Cogeneration & Electric Generation        76            120
Firm Transportation -
Residential                              966          1,253
Commercial                             2,245          2,759
Industrial                             3,430          3,445
Cogeneration & Electric Generation     2,162          2,401

Total Firm Throughput                 19,579         24,169

Interruptible Sales                        -              3
Interruptible Transportation             424            692
Off-System                             4,471          1,904
Capacity Release                      16,967         10,155

Total Throughput - Utility            41,441         36,923




                                      Three Months Ended
                                          March 31,
                                      2012          2011
Utility Operating Revenues:
Firm Sales -
Residential                        $  113,629    $ 114,852
Commercial                             22,062       26,800
Industrial                              1,253        1,720
Cogeneration & Electric Generation        403          809
Firm Transportation -
Residential                             5,923        6,550
Commercial                              9,113        9,705
Industrial                              5,420        4,395
Cogeneration & Electric Generation      2,001        1,742


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                                                    Three Months Ended
                                                        March 31,
                                                    2012          2011

Total Firm Revenues                                159,804      166,573

Interruptible Sales                                      8           54
Interruptible Transportation                           478          634
Off-System                                          15,829       10,134
Capacity Release                                     3,059        2,671
Other                                                  258          257
                                                   179,436      180,323
Less: Intercompany Sales                              (234 )     (5,934 )
Total Utility Operating Revenues                   179,202      174,389
Less:
Cost of Sales                                       86,265       82,640
Conservation Recoveries*                             3,302        3,255
RAC Recoveries*                                      1,912        1,591
EET Recoveries*                                        712          509
Revenue Taxes                                        2,491        3,873
Utility Margin                                   $  84,520     $ 82,521

Margin:
Residential                                      $  46,893     $ 58,799
Commercial and Industrial                           17,588       21,327
Cogeneration and Electric Generation                   964          775
Interruptible                                           31           48
Off-system & Capacity Release                          900          695
Other Revenues                                         257          256
Margin Before Weather Normalization & Decoupling    66,633       81,900
CIRT Mechanism                                         767          566
CIP Mechanism                                       17,021          (26 )
EET Mechanism                                           99           81
Utility Margin                                   $  84,520     $ 82,521

Degree Days:                                         1,930        2,495

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

Throughput - Utility - Total gas throughput increased 4.5 MMdts, or 12.2%, for the three months ended March 31, 2012, compared with the same period in 2011. This increase was realized primarily in the Capacity Release and Off-System Sales (OSS) markets. Capacity Release and OSS increased 6.8 MMdts and 2.6 MMdts, respectively, during the three months ended March 31, 2012, as compared with the same period in 2011. Due to unusually warm weather experienced in the region during the first quarter of 2012, SJG experienced a lower demand by its firm customers, thereby creating greater opportunity for both Capacity Release and OSS sales. Firm throughput decreased 4.6 MMdts, or 19.0%, during the three months ended March 31, 2012, compared to the same period in 2011. This was primarily the result of weather that was 22.7% warmer for the three months ended March 31, 2012, as compared with the same period last year, partially offset by customer growth. The Company added 4,660 customers over the twelve month period ended March 31, 2012, which represents a growth rate of 1.3%.


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Conservation Incentive Program (CIP) - Utility - The effects of the CIP on SJG's net income for the three months ended March 31, 2012 and 2011 and the associated weather comparisons were as follows ($'s in millions):

                                              Three Months Ended
                                                  March 31,
                                            2012                2011
Net Income Benefit:
CIP - Weather Related               $         6.5          $        (0.6 )
CIP - Usage Related                           3.6                    0.6
Total Net Income Benefit            $        10.1          $           -

Weather Compared to 20-Year Average  21.4% warmer            1.6% colder
Weather Compared to Prior Year       22.7% warmer            2.6% colder

Operating Revenues - Utility - Revenues increased $4.8 million, or 2.8%, during the three months ended March 31, 2012, compared with the same period in the prior year after eliminating intercompany transactions. Firm sales revenue decreased $6.8 million, or 4.1%, during the first quarter of 2012 versus the same period in 2011, as the result of lower firm throughput, as reflected in the Throughput table above. This was the result of weather that was 22.7% warmer than last year and among the warmest winter seasons on record. While the impact of the warmer weather can readily be seen in the throughput table above, the impact on firm revenue is not as evident in the revenue table above. As SJG provided firm customers with a $21.1 million refund in March 2011 due to lower gas costs, revenues during the first quarter of 2011 were also lower than normal.

OSS revenue and capacity release revenue increased $5.7 million and $0.4 million, respectively, during the first quarter of 2012 versus the same period in 2011, as both sales and capacity release volume increased. As previously stated under "Throughput-Utility," this was made possible by the extremely warm weather in the region which freed up supplies for such sales. As reflected in the Margin table above, the impact of the higher OSS and capacity release activity 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.

While changes in gas costs and Basic Gas Supply Service (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-Utility."

Operating Revenues - Nonutility - Combined revenues for SJI's nonutility businesses, net of intercompany transactions, decreased by $61.9 million, or 39.3% for the three months ended March 31, 2012 compared with the same period in 2011.
SJE's revenues from retail gas operations, net of intercompany transactions, decreased by $18.8 million, or $50.9%, for the three months ended March 31, 2012, compared with the same period in 2011. Excluding the change in unrealized gains and losses recorded on forward financial contracts of $(0.2) million, revenues decreased $19.0 million. The decrease was mainly due to a 33.4% decrease in the average monthly New York Mercantile Exchange (NYMEX) settle price and a 27.9% decrease in sales volumes for the comparative three-month period. The decrease in sales volumes was mainly due to SJE's exit from the residential market in October 2011 and the significantly warmer weather experienced during the first quarter of 2012 as compared with the same period in 2011.

As of March 31, SJE was serving the following number of retail gas customers:

2012 2011 Residential - 6,598 Commercial & Large Volume 1,647 915


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Sales volumes for the comparative periods were as follows (in dekatherms):

Three Months Ended March 31, 2012 2011 Residential - 286,768 Commercial & Large Volume 4,282,402 5,655,167

Market conditions continue to make it difficult to be competitive in the small commercial market. We continue to focus our marketing efforts on the pursuit of non-heat-sensitive commercial customers in an effort to mitigate price volatility and weather risk.

SJE's revenues from retail electric operations, net of intercompany transactions, decreased $9.5 million, or 16.2%, for the three months ended March 31, 2012, compared with the same period in 2011. Excluding the impact of the net change in unrealized gains and losses recorded on forward financial contracts due to price volatility of $(0.4) million, revenues decreased $9.9 million for the three months ended March 31, 2012, compared with the same period in 2011.

A summary of SJE's revenues from retail electricity is as follows (in millions):

                                                              Three Months Ended
                                                                   March 31,
                                                       2012          2011         Change
SJE Retail Electric Revenue                         $    48.8     $    58.3     $    (9.5 )
Add: Unrealized Losses (Subtract: Unrealized Gains)      (3.7 )        (3.3 )        (0.4 )
. . .
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