Notes to Unaudited Condensed Consolidated Financial Statements
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1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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GENERAL - South Jersey Industries, Inc. (SJI or the Company) currently provides a variety of energy-related products and services primarily through the following wholly-owned subsidiaries:
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▪
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South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG distributes natural gas in the
seven
southernmost counties of New Jersey.
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▪
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South Jersey Energy Company (SJE) acquires and markets natural gas and electricity to retail end users and provides total energy management services to commercial, industrial and residential customers.
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▪
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South Jersey Resources Group, LLC (SJRG) markets natural gas storage, commodity and transportation assets along with fuel management services on a wholesale basis in the mid-Atlantic, Appalachian and southern states.
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▪
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South Jersey Exploration, LLC (SJEX) owns oil, gas and mineral rights in the Marcellus Shale region of Pennsylvania.
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▪
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Marina Energy, LLC (Marina) develops and operates on-site energy-related projects. The following entities are wholly-owned subsidiaries of Marina as of December 31, 2015 (see Note 3):
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•
ACB Energy Partners, LLC (ACB) owns and operates a natural gas fueled combined heating, cooling and power facility located in Atlantic City, New Jersey.
•
AC Landfill Energy. LLC (ACLE), BC Landfill Energy, LLC (BCLE), SC Landfill Energy, LLC (SCLE) and SX Landfill Energy, LLC (SXLE) own and operate landfill gas-fired electric production facilities in Atlantic, Burlington, Salem and Sussex Counties located in New Jersey.
•
MCS Energy Partners, LLC (MCS), NBS Energy Partners, LLC (NBS) and SBS Energy Partners, LLC (SBS) own and operate solar-generation sites located in New Jersey.
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▪
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South Jersey Energy Service Plus, LLC (SJESP) services residential and small commercial HVAC systems, installs small commercial HVAC systems, provides plumbing services and services appliances under warranty via a subcontractor arrangement as well as on a time and materials basis.
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▪
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SJI Midstream, LLC was formed in 2014 to invest in infrastructure and other midstream projects, including a current project to build a
100
-mile natural gas pipeline in Pennsylvania and New Jersey.
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BASIS OF PRESENTATION — The condensed consolidated financial statements include the accounts of SJI, its wholly-owned subsidiaries and subsidiaries in which SJI has a controlling interest. SJI eliminates all significant intercompany accounts and transactions. In management’s opinion, the condensed consolidated financial statements reflect all normal and recurring adjustments needed to fairly present SJI’s financial position, operating results and cash flows at the dates and for the periods presented. SJI’s businesses are 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 (SEC), the accompanying unaudited condensed consolidated financial statements contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These financial statements should be read in conjunction with SJI’s
2015
Annual Report on Form 10-K for a more complete discussion of the Company’s accounting policies and certain other information.
Certain reclassifications have been made to the prior period's condensed consolidated balance sheets, as well as the prior period's long-term debt carrying value and prior period's segment disclosures in Notes 5 and 6, respectively, to conform to the current period presentation. The unamortized debt issuance costs previously included in "Regulatory and Other Noncurrent Assets" on the condensed consolidated balance sheets were reclassified to Long-Term Debt to conform to ASU 2015-03, which is described below under "New Accounting Pronouncements." This reclassification caused the prior period long-term debt carrying value in Note 5 to be adjusted, along with the prior period unamortized debt issuance costs recorded as Identifiable Assets in the Gas Utility Operations, On-Site Energy Production and Corporate and Services segments in Note 6 to be removed.
REVENUE-BASED TAXES — SJG collects certain revenue-based energy taxes from its customers. Such taxes include the 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 utility revenue and energy and other taxes and totaled
$0.2 million
for both the three months ended
June 30, 2016
and
2015
, and
$0.5 million
and
$0.8 million
for the six months ended
June 30, 2016
and
2015
, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS - SJI reviews the carrying amount of long-lived assets for possible impairment whenever events or changes in circumstances indicate that such amounts may not be recoverable. For the
six
months ended
June 30, 2016
and
2015
,
no
impairments were identified.
GAS EXPLORATION AND DEVELOPMENT - The Company capitalizes all costs associated with gas property acquisition, exploration and development activities under the full cost method of accounting. Capitalized costs include costs related to unproved properties, which are not amortized until proved reserves are found or it is determined that the unproved properties are impaired. All costs related to unproved properties are reviewed quarterly to determine if impairment has occurred.
No
impairment charges were recorded during the
six
months ended
June 30, 2016
or
2015
. As of
June 30, 2016
and
December 31, 2015
,
$8.8 million
and
$8.9 million
, respectively, related to interests in proved and unproved properties in Pennsylvania, net of amortization, is included with Nonutility Property and Equipment and Other Noncurrent Assets on the condensed consolidated balance sheets.
TREASURY STOCK – SJI uses the par value method of accounting for treasury stock. As of
June 30, 2016
and
December 31, 2015
, SJI held
207,573
and
236,571
shares of treasury stock, respectively. These shares are related to deferred compensation arrangements where the amounts earned are held in the stock of SJI.
INCOME TAXES — Deferred income taxes are provided for all significant temporary differences between the book and taxable bases of assets and liabilities in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740 - “Income Taxes”. A valuation allowance is established when it is determined that it is more likely than not that a deferred tax asset will not be realized. Investment tax credits related to renewable energy facilities of Marina are recognized on the flow-through method, which may result in variations in the customary relationship between income taxes and pre-tax income for interim periods.
GOODWILL - Goodwill was acquired as part of the acquisition of Energenic projects discussed in Note 3 and is a part of the on-site energy production segment. Goodwill represents the excess of the consideration paid over the fair value of identifiable net assets acquired. Goodwill is not amortized, but instead is subject to impairment testing on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. No such events have occurred during the
six
months ended
June 30, 2016
. Goodwill totaled
$8.1 million
and
$8.9 million
on the condensed consolidated balance sheets as of
June 30, 2016
and
December 31, 2015
, respectively.
The following table summarizes the changes in Goodwill for the
six
months ended
June 30, 2016
(in thousands):
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2016
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Beginning Balance, January 1
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$
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8,880
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Fair Value Adjustments During Measurement Period (See Note 3)
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(741
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)
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Ending Balance, June 30
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$
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8,139
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NEW ACCOUNTING PRONOUNCEMENTS — Other than as described below, no new accounting pronouncement issued or effective during
2016
or
2015
had, or are expected to have, a material impact on the condensed consolidated financial statements.
In May 2014, the 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 years, beginning after December 15, 2017. Management has formed an implementation team that is currently inventorying the contracts with customers and evaluating the impact that adoption of this guidance will have on the Company's financial statement results, as well as the transition method the Company will elect to adopt the guidance.
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. The Company does not expect this standard to have an impact on its consolidated financial statements upon adoption.
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. Adoption of this guidance did not have an impact on the Company's results of operations; however, balance sheet presentations were modified to conform to this guidance.
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.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
, which enhances the reporting model for financial instruments and includes amendments to address aspects of recognition, measurement, presentation and disclosure. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted for only certain portions of the new guidance. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.
In March 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which establishes a new lease accounting model for lessees. The new standard requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The accounting for leases by the lessor remains relatively the same. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, 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 March 2016, the FASB issued ASU 2016-05,
Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
. The amendments in this guidance clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016, 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 March 2016, the FASB issued ASU 2016-07,
Investments- Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting,
which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016, 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 March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
. This standard amends ASU 2014-09 (discussed above), to improve the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis. This standard will have the same effective date and transition requirements as ASU 2014-09. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.
In March 2016, the FASB issued ASU 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which simplifies various aspects of accounting for share-based payment arrangements. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016, 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 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
. This standard amends ASU 2014-09 (discussed above) to clarify identifying performance obligations and the licensing implementation guidance. This standard will have the same effective date and transition requirements as ASU 2014-09. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.
In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
. This standard amends ASU 2014-09 (discussed above) to provide additional guidance on (a) the objective of the collectibility criterion, (b) the presentation of sales tax collected from customers, (c) the measurement date of non-cash consideration received, (d) practical expedients in respect of contract modifications and completed contracts at transition, and (5) disclosure of the effects of the accounting change in the period of adoption. This standard will have the same effective date and transition requirements as ASU 2014-09. Management is currently determining the impact that adoption of this guidance will have on the Company's financial statement results.
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2.
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STOCK-BASED COMPENSATION PLAN:
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On April 30, 2015, the shareholders of SJI approved the adoption of the Company's 2015 Omnibus Equity Compensation Plan (Plan), replacing the Amended and Restated 1997 Stock-Based Compensation Plan that had terminated on January 26, 2015. Under the Plan, shares may be issued to SJI’s officers (Officers), non-employee directors (Directors) and other key employees.
No
options were granted or outstanding during the
six
months ended
June 30, 2016
and
2015
.
No
stock appreciation rights have been issued under the plans. During the
six
months ended
June 30, 2016
and
2015
, SJI granted
193,184
and
159,416
restricted shares, respectively, to Officers and other key employees under the plans. Performance-based restricted shares vest over a
three
-year period and are subject to SJI achieving certain market and earnings-based performance targets, which can cause the actual amount of shares that ultimately vest to range from
0%
to
200%
of the original share units granted.
Beginning in 2015, SJI grants time-based shares of restricted stock, one-third of which vest annually over a
three
-year period and is limited to a
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, payout is solely contingent upon the service requirement being met in years two and three of the grant. During the
six
months ended
June 30, 2016
and
2015
, Officers and other key employees were granted
57,955
and
47,824
shares of time-based restricted stock, which are included in the shares noted above.
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 growth rate per share (EGR) relative to a peer group to measure performance. In 2015, earning-based performance targets included pre-defined EGR and return on equity (ROE) goals to measure performance. Beginning in 2016, performance targets include pre-defined compounded earnings annual growth rate (CEGR) for SJI. As EGR-based, ROE-based and CEGR-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.
During the
six
months ended
June 30, 2016
and
2015
, SJI granted
35,197
and
25,398
restricted shares, respectively, to Directors. Shares issued to Directors vest over
twelve months
and contain no performance conditions. As a result,
100%
of the shares granted generally vest.
The following table summarizes the nonvested restricted stock awards outstanding at
June 30, 2016
and the assumptions used to estimate the fair value of the awards:
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Grants
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Shares Outstanding
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Fair Value Per Share
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Expected Volatility
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Risk-Free Interest Rate
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Officers & Key Employees -
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2014 - TSR
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50,712
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$
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21.31
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|
20.0
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%
|
|
0.80
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%
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2014 - EGR
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50,712
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$
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27.22
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|
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N/A
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|
|
N/A
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2015 - TSR
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33,930
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|
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$
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26.31
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16.0
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%
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1.10
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%
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2015 - EGR, ROE, Time
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74,075
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$
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29.47
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N/A
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N/A
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2016 - TSR
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66,397
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$
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22.53
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18.1
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%
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1.31
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%
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2016 - CEGR, Time
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123,309
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$
|
23.52
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N/A
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N/A
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Directors -
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2016
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35,197
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$
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23.88
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N/A
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N/A
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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 Officers’ and other key employees’ 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. As the Directors’ restricted stock awards contain no performance conditions and dividends are paid or credited to the holder during the requisite service period, the fair value of these awards are equal to the market value of the shares on the date of grant.
The following table summarizes the total stock-based compensation cost for the
three and six
months ended
June 30, 2016
and
2015
(in thousands):
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2016
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2015
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2016
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2015
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Officers & Key Employees
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$
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798
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$
|
511
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$
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1,615
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|
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$
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1,310
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Directors
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227
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186
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420
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372
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Total Cost
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1,025
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697
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2,035
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1,682
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Capitalized
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(106
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)
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(87
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)
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(212
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)
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(178
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)
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Net Expense
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$
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919
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$
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610
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$
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1,823
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$
|
1,504
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As of
June 30, 2016
, there was
$6.1 million
of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under the plans. That cost is expected to be recognized over a weighted average period of
2.0
years.
The following table summarizes information regarding restricted stock award activity during the
six
months ended
June 30, 2016
, excluding accrued dividend equivalents:
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Officers &Other Key Employees
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Directors
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Weighted
Average
Fair Value
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Nonvested Shares Outstanding, January 1, 2016
|
226,191
|
|
|
26,338
|
|
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$
|
26.89
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|
Granted
|
193,184
|
|
|
35,197
|
|
|
$
|
23.28
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Cancelled/Forfeited
|
(6,993
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)
|
|
—
|
|
|
$
|
25.10
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Vested
|
(13,247
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)
|
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(26,338
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)
|
|
$
|
29.30
|
|
Nonvested Shares Outstanding, June 30, 2016
|
399,135
|
|
|
35,197
|
|
|
$
|
24.80
|
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Performance targets during the
three
-year vesting period were not attained for the 2012 or 2013 Officer and other key employee grants that vested at December 31, 2014 and 2015, respectively. As a result,
no
shares were awarded in 2015 or 2016 associated with those grants. However, the initial performance hurdle for the 2015 time-based grant was met. As a result,
13,247
shares were awarded to Officers and other key employees during the
six
months ended
June 30, 2016
at a market value of
$0.3 million
. During the
six
months ended
June 30, 2016
and
2015
, SJI granted
35,197
and
25,398
shares to its Directors at a market value of
$0.8 million
and
$0.7 million
, respectively. The Company has a policy of issuing new shares to satisfy its obligations under the Plan; therefore, there are no cash payment requirements resulting from the normal operation of the Plan. However, a change in control could result in such shares becoming nonforfeitable or immediately payable in cash. At the discretion of the Officers, Directors and other key employees, the receipt of vested shares can be deferred until future periods. These deferred shares are included in Treasury Stock on the condensed consolidated balance sheets.
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3.
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AFFILIATIONS AND DISCONTINUED OPERATIONS:
|
AFFILIATIONS — The following affiliated entities are accounted for under the equity method:
Energenic – US, LLC (Energenic) - Marina and a joint venture partner formed Energenic, in which Marina has a
50%
equity interest. Energenic develops and operates on-site, self-contained, energy-related projects.
On December 31, 2015, Energenic, Marina and its joint venture partner entered into
two
Equity Distribution and Purchase Agreements (the "Transaction"), pursuant to which Marina became the sole owner of
eight
of the Energenic projects ("Marina Projects") and its joint venture partner became the sole owner of
seven
other Energenic projects ("Partner Projects"). The Transaction has been accounted for as a distribution of member interests by Energenic to its owners and a business combination through the exchange of member interests in various projects between Marina and its joint venture partner. In connection with the exchange, the joint venture partner provided a
$19.5 million
note payable to Marina. The note and other existing obligations of the joint venture partner to Marina are included in Notes Receivable on the condensed consolidated balance sheets, with approximately
$1.8 million
being included as a current asset as of
June 30, 2016
, as it is due within one year. This note is collateralized by security interests in various energy project assets owned by the joint venture partner, as well as personal guarantees from its principals.
As part of the transaction, each party is relieved of any guarantees related to the Projects in which it no longer has an ownership interest.
The projects that are now wholly-owned by Marina are ACB, ACLE, BCLE, SCLE, SXLE, MCS, NBS and SBS.
Through December 31, 2015, Marina’s investment in Energenic was accounted for under the equity method of accounting. As such, Marina’s share of the equity value of the projects was included within Investment in Affiliates on the condensed consolidated balance sheets and Marina’s share of the loss or earnings from the projects for the six months ended June 30, 2015 was included within Equity in Earnings (Losses) of Affiliated Companies on the condensed consolidated statements of income. As of December 31, 2015, the assets and liabilities of the projects that are now wholly-owned by Marina are consolidated into the condensed consolidated balance sheets. Beginning in 2016, the respective results from operations and cash flows of the projects that are now wholly-owned by Marina are consolidated into the condensed consolidated statements of income and cash flows. The results of the acquired projects are included in the On-Site Energy Production segment.
The following table summarizes the preliminary purchase price allocation and reflects
100%
of the fair values of the assets acquired and the liabilities assumed by the Company in connection with the Transaction. The Company is still awaiting final valuation reports supporting the allocation of the purchase price to certain identifiable intangibles. Total consideration for the step acquisition of the remaining interest in the Marina Projects was
$46.0 million
, which represents the fair value of the Company’s interest in the Partner Projects exchanged (
$31.5 million
) as well as the existing value of the Marina Projects immediately prior to the exchange (
$14.5 million
) (in thousands):
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Current assets (excluding inventory)
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$
|
7,804
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Inventory
|
3,154
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Note Receivable Received
|
19,504
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Fixed Assets
|
46,460
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Intangible Assets:
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Identifiable Intangibles
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16,950
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Goodwill
|
8,139
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Non-Current Assets
|
1,873
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Current Liabilities
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(8,196
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)
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Note Payable - Affiliate
|
(16,986
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)
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Long-Term Debt, including current portion
|
(21,642
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)
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Capital Lease Payable
|
(10,458
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)
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Other Non-Current Liabilities
|
(572
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)
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Fair Value of Consolidated Assets and Liabilities of Acquired Projects
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$
|
46,030
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|
The recorded amounts for assets and liabilities represent the Company's best estimate as of June 30, 2016. The measurement period adjustments recorded during the six months ended June 30, 2016 did not have a significant impact on the Company's condensed consolidated balance sheet. The pro forma impact of this transaction on the operations of the Company is not significant.
Potato Creek, LLC (Potato Creek) - SJI and a joint venture partner formed Potato Creek, in which SJI has a
30%
equity interest. Potato Creek owns and manages the oil, gas and mineral rights of certain real estate in Pennsylvania.
PennEast Pipeline Company, LLC (PennEast) - Midstream has a
20%
investment in PennEast, which is planning to construct an approximately
100
-mile natural gas pipeline that will extend from Northeastern Pennsylvania into New Jersey, with a target completion of 2018.
During the first
six
months of
2016
and 2015, the Company made net investments in unconsolidated affiliates of
$4.6 million
and
$1.3 million
, respectively. As of
June 30, 2016
and
December 31, 2015
, the outstanding balance of Notes Receivable – Affiliate was
$15.1 million
and
$16.4 million
, respectively. As of
June 30, 2016
, approximately
$13.6 million
of these notes are secured by property, plant and equipment of the affiliates, accrue interest at
7.5%
and are to be repaid through
2025
. The remaining
$1.5 million
of these notes are unsecured and accrue interest at variable rates.
SJI holds significant variable interests in these entities but is not the primary beneficiary. Consequently, these entities are accounted for under the equity method because SJI does not have both a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity. As of
June 30, 2016
, the Company had a net asset of approximately
$22.2 million
included in Investment in Affiliates on the condensed consolidated balance sheets related to equity method investees, in addition to Notes Receivable – Affiliate as discussed above. SJI’s maximum exposure to loss from these entities as of
June 30, 2016
, is limited to its combined equity contributions and the Notes Receivable-Affiliate in the aggregate amount of
$37.3 million
.
DISCONTINUED OPERATIONS - Discontinued Operations consist of the environmental remediation activities related to the properties of South Jersey Fuel, Inc. (SJF) and the product liability litigation and environmental remediation activities related to the prior business of The Morie Company, Inc. (Morie). SJF is a subsidiary of Energy & Minerals, Inc. (EMI), an SJI subsidiary, which previously operated a fuel oil business. Morie is the former sand mining and processing subsidiary of EMI. EMI sold the common stock of Morie in 1996.
SJI conducts tests annually to estimate the environmental remediation costs for these properties.
Summarized operating results of the discontinued operations for the
three and six
months ended
June 30, 2016
and
2015
, were (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Loss before Income Taxes:
|
|
|
|
|
|
|
|
Sand Mining
|
$
|
(18
|
)
|
|
$
|
(17
|
)
|
|
(164
|
)
|
|
(364
|
)
|
Fuel Oil
|
(27
|
)
|
|
(97
|
)
|
|
(62
|
)
|
|
(163
|
)
|
Income Tax Benefits
|
16
|
|
|
40
|
|
|
79
|
|
|
177
|
|
Loss from Discontinued Operations — Net
|
$
|
(29
|
)
|
|
$
|
(74
|
)
|
|
$
|
(147
|
)
|
|
$
|
(350
|
)
|
Earnings Per Common Share from
|
|
|
|
|
|
|
|
|
Discontinued Operations — Net:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The following shares were issued and outstanding:
|
|
|
|
|
2016
|
Beginning Balance, January 1
|
70,965,622
|
|
New Issuances During the Period:
|
|
|
Dividend Reinvestment Plan
|
416,862
|
|
Stock-Based Compensation Plan
|
45,338
|
|
Public Equity Offering
|
8,050,000
|
|
Ending Balance, June 30
|
79,477,822
|
|
The par value (
$1.25
per share) of stock issued was recorded in Common Stock and the net excess over par value of approximately
$205.6 million
was recorded in Premium on Common Stock.
In May 2016, the Company issued and sold
8,050,000
shares of its common stock, par value
$1.25
per share at a public offering, raising net proceeds of approximately
$203.6 million
. The net proceeds from this offering were or will be used for capital expenditures, primarily for regulated businesses, including infrastructure investments at its utility business.
EARNINGS PER COMMON SHARE (EPS) - Basic EPS is based on the weighted-average number of common shares outstanding. The incremental shares required for inclusion in the denominator for the diluted EPS calculation were
186,147
for the three months ended June 30, 2015 and
292,782
and
203,455
for the
six
months ended
June 30, 2016
and
2015
, respectively. For the three months ended June 30, 2016, incremental shares of
297,061
were not included in the denominator for the diluted EPS calculation because they would have an antidilutive effect on EPS. These additional shares relate to SJI's restricted stock as discussed in Note 2.
DIVIDEND REINVESTMENT PLAN (DRP) - The Company offers a DRP which allows participating shareholders to purchase shares of SJI common stock by automatic reinvestment of dividends or optional purchases. Shares of common stock offered by the DRP have been issued directly by SJI from its authorized but unissued shares of common stock. The Company raised
$10.8 million
and
$3.6 million
of equity capital through the DRP during the
six
months ended
June 30, 2016
and
2015
, respectively. SJI does not intend to issue any more new equity capital via the DRP in 2016. Effective May 1, 2016, SJI switched to purchasing shares on the open market to fund share purchases by DRP participants.
|
|
5.
|
FINANCIAL INSTRUMENTS:
|
RESTRICTED INVESTMENTS — Marina is required to maintain escrow accounts related to ongoing capital projects as well as unused loan proceeds pending approval of construction expenditures. As of
June 30, 2016
and
December 31, 2015
, the escrowed funds, including interest earned, totaled
$2.3 million
and
$3.4 million
, respectively.
The Company maintains margin accounts with selected counterparties to support its risk management activities. The balances required to be held in these margin accounts increase as the net value of the outstanding energy-related contracts with the respective counterparties decrease. As of
June 30, 2016
and
December 31, 2015
, the balances in these accounts totaled
$35.9 million
and
$43.7 million
, respectively.
As of December 31, 2015, in accordance with an outstanding loan agreement which ACB had with a third party, ACB was required to maintain control accounts which included a debt service reserve of
$1.7 million
. In January 2016, the remaining debt on the loan agreement was paid (see Note 14); as such, there was
no
reserve as of
June 30, 2016
.
The carrying amounts of the Restricted Investments approximate their fair values at
June 30, 2016
and
December 31, 2015
, which would be included in Level 1 of the fair value hierarchy (see Note 13).
INVESTMENT IN AFFILIATES - During 2011, subsidiaries of Energenic, in which Marina has a
50%
equity interest, entered into
20
-year contracts to build, own and operate a central energy center and energy distribution system for a new hotel, casino and entertainment complex in Atlantic City, New Jersey. The complex commenced operations in April 2012, and as a result, Energenic subsidiaries began providing full energy services to the complex.
In June 2014, the parent company of the hotel, casino and entertainment complex filed petitions in U.S. Bankruptcy Court to facilitate a sale of substantially all of its assets. The complex ceased normal business operations in September 2014. Energenic subsidiaries continued to provide limited energy services to the complex during the shutdown period under a temporary agreement with the trustee. The hotel, casino and entertainment complex was sold in April 2015. As of December 31, 2015, the Energenic subsidiaries were providing limited services to the complex under a short-term agreement with the new owner. However, the Energenic subsidiaries had not been able to secure a permanent or long-term energy services agreement with the new owner.
In 2015 management of the Company and Energenic evaluated the carrying value of the investment in this project and a related note receivable. Based on the inability of the Energenic subsidiaries to secure a permanent or long-term energy services agreement, the Company recorded a
$7.7 million
(net of tax) non-cash charge to earnings during the second quarter of 2015 due to the reduction in the carrying value of the investment in this project recorded by Energenic. This charge was included in Equity in Loss of Affiliated Companies during the second quarter of 2015 on the condensed consolidated statements of income.
The central energy center and energy distribution system owned by the Energenic subsidiaries was financed in part by the issuance of bonds during 2011. These bonds were collateralized primarily by certain assets of the central energy center and revenue from the energy services agreement with the hotel, casino and entertainment complex. During 2015, due to the cessation of normal business operations of the complex and the inability of the Energenic subsidiaries to meet its obligations under the bonds, the trustee for the bondholders filed suit to foreclose on certain assets of the central energy center. In November 2015 during settlement discussions, the bondholders alleged, among other things, that they were entitled to recover from Energenic itself, any amounts owed under the bonds that were not covered by the collateral, including principal, interest and attorney’s fees. The bondholders’ assertion was based on inconsistent language in the bond documents. In January 2016, Energenic and certain subsidiaries reached a multi-party settlement with the bondholders. This agreement resolves all outstanding litigation and transfers ownership of the bondholders’ collateral to the owners of the entertainment complex. The Company’s share of this settlement was
$7.5 million
, which was accrued by Energenic as of December 31, 2015 and paid in 2016. The Company entered into agreements with its insurance carrier and external legal advisors to recover, net of legal costs, approximately
$7.0 million
of costs associated with the bondholder settlement discussed above,
$2.1 million
of which has been received as of June 30, 2016 and included in Other Income on the condensed consolidated statements of income. The remaining
$4.9 million
is expected to be received and recognized into income prior to the end of the year.
As of
June 30, 2016
, the Company, through its investment in Energenic, had a remaining net asset of approximately
$1.1 million
included in Investment in Affiliates on the condensed consolidated balance sheets related to cogeneration assets for this project. In addition, the Company had approximately
$13.6 million
included in Notes Receivable - Affiliate on the condensed consolidated balance sheets, due from Energenic, which is secured by those cogeneration assets. This note is subject to a reimbursement agreement that secures reimbursement for the Company, from its joint venture partner, of a proportionate share of any amounts that are not repaid.
Management will continue to monitor the situation surrounding the complex and will evaluate the carrying value of the investment and the note receivable as future events occur.
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
1.0%
for an initial term of
six
months, with the borrower’s option to extend the term for
two
additional terms of
three
months each. In December 2015 and February 2016, the borrower exercised each option, respectively. SJG holds a first lien security interest on land in Atlantic City as collateral against this note. The carrying amount of this receivable approximates its fair value at
June 30, 2016
and
December 31, 2015
, which would be included in Level 2 of the fair value hierarchy (see Note 13). In July 2016, the note was repaid in full (see Note 16).
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
to
ten
years with no interest. The carrying amounts of such loans were
$11.0 million
and
$12.9 million
as of
June 30, 2016
and
December 31, 2015
, respectively. The current portion of these receivables is reflected in Accounts Receivable and the non-current portion is reflected in Contract Receivables on the condensed consolidated 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, 2016
and
December 31, 2015
, respectively. The annualized amortization to interest is not material to the Company’s condensed consolidated financial statements. The carrying amounts of these receivables approximate their fair value at
June 30, 2016
and
December 31, 2015
, which would be included in Level 2 of the fair value hierarchy (see Note 13).
CREDIT RISK - As of
June 30, 2016
, approximately
$6.1 million
, or
10.8%
, of the current and noncurrent Derivatives – Energy Related Assets are transacted with two counterparties. One counterparty has contracts with a large number of diverse customers which minimizes the concentration of this risk. A portion of these contracts may be assigned to SJI in the event of default by the counterparty. The second counterparty is investment-grade rated.
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 SJI's financial instruments approximate their fair values at
June 30, 2016
and
December 31, 2015
, 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 SJI at the end of each period for debt with similar terms and maturities (Level 2 in the fair value hierarchy, see Note 13). The estimated fair values of SJI's long-term debt, including current maturities, as of
June 30, 2016
and
December 31, 2015
, were
$1,154.2 million
and
$1,079.0 million
, respectively. The carrying amounts of SJI's long-term debt, including current maturities, as of
June 30, 2016
and
December 31, 2015
, were
$1,075.7 million
and
$1,026.9 million
, respectively. The carrying amounts as of
June 30, 2016
and
December 31, 2015
are net of unamortized debt issuance costs of
$8.1 million
and
$9.0 million
, respectively (see Note 1).
|
OTHER FINANCIAL INSTRUMENTS - The carrying amounts of SJI's other financial instruments approximate their fair values at
June 30, 2016
and
December 31, 2015
.
SJI operates in several different reportable operating segments which reflect the financial information regularly evaluated by the chief operating decision maker. These segments are as follows:
|
|
•
|
Gas utility operations (SJG) consist primarily of natural gas distribution to residential, commercial and industrial customers.
|
|
|
•
|
Wholesale energy operations include the activities of SJRG and SJEX.
|
|
|
•
|
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, industrial and residential customers.
|
|
|
•
|
On-site energy production consists of Marina's thermal energy facility and other energy-related projects. Also included in this segment are the activities of ACB, ACLE, BCLE, SCLE, SXLE, MCS, NBS and SBS. These entities became wholly-owned subsidiaries of Marina on December 31, 2015 (see Note 3).
|
|
|
•
|
Appliance service operations includes SJESP’s servicing of appliances under warranty via a subcontractor arrangement as well as on a time and materials basis.
|
|
|
•
|
The activities of Midstream are a part of the Corporate and Services segment.
|
SJI groups its nonutility operations into two categories: Energy Group and Energy Services. Energy Group includes wholesale energy, retail gas and other, and retail electric operations. Energy Services includes on-site energy production and appliance service operations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are treated as if the sales or transfers were to third parties at current market prices.
Information about SJI’s operations in different reportable operating segments is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Operating Revenues:
|
|
|
|
|
|
|
|
Gas Utility Operations
|
$
|
68,762
|
|
|
$
|
75,812
|
|
|
$
|
256,528
|
|
|
$
|
343,470
|
|
Energy Group:
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
(1,309
|
)
|
|
33,276
|
|
|
63,765
|
|
|
68,621
|
|
Retail Gas and Other Operations
|
22,305
|
|
|
18,065
|
|
|
52,038
|
|
|
56,143
|
|
Retail Electric Operations
|
43,065
|
|
|
36,186
|
|
|
82,556
|
|
|
65,963
|
|
Subtotal Energy Group
|
64,061
|
|
|
87,527
|
|
|
198,359
|
|
|
190,727
|
|
Energy Services:
|
|
|
|
|
|
|
|
On-Site Energy Production
|
23,043
|
|
|
15,136
|
|
|
39,364
|
|
|
28,708
|
|
Appliance Service Operations
|
2,050
|
|
|
2,699
|
|
|
3,938
|
|
|
5,056
|
|
Subtotal Energy Services
|
25,093
|
|
|
17,835
|
|
|
43,302
|
|
|
33,764
|
|
Corporate and Services
|
8,417
|
|
|
7,765
|
|
|
17,293
|
|
|
16,851
|
|
Subtotal
|
166,333
|
|
|
188,939
|
|
|
515,482
|
|
|
584,812
|
|
Intersegment Sales
|
(11,931
|
)
|
|
(11,229
|
)
|
|
(28,045
|
)
|
|
(24,150
|
)
|
Total Operating Revenues
|
$
|
154,402
|
|
|
$
|
177,710
|
|
|
$
|
487,437
|
|
|
$
|
560,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Operating (Loss) Income:
|
|
|
|
|
|
|
|
|
|
Gas Utility Operations
|
$
|
9,931
|
|
|
$
|
11,961
|
|
|
$
|
85,704
|
|
|
$
|
85,150
|
|
Energy Group:
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
(31,149
|
)
|
|
15,158
|
|
|
7,095
|
|
|
15,488
|
|
Retail Gas and Other Operations
|
6,250
|
|
|
153
|
|
|
5,491
|
|
|
3,240
|
|
Retail Electric Operations
|
2,277
|
|
|
174
|
|
|
2,862
|
|
|
(8
|
)
|
Subtotal Energy Group
|
(22,622
|
)
|
|
15,485
|
|
|
15,448
|
|
|
18,720
|
|
Energy Services:
|
|
|
|
|
|
|
|
On-Site Energy Production
|
4,561
|
|
|
2,177
|
|
|
4,472
|
|
|
1,695
|
|
Appliance Service Operations
|
258
|
|
|
247
|
|
|
302
|
|
|
195
|
|
Subtotal Energy Services
|
4,819
|
|
|
2,424
|
|
|
4,774
|
|
|
1,890
|
|
Corporate and Services
|
(114
|
)
|
|
470
|
|
|
341
|
|
|
951
|
|
Total Operating (Loss) Income
|
$
|
(7,986
|
)
|
|
$
|
30,340
|
|
|
$
|
106,267
|
|
|
$
|
106,711
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
Gas Utility Operations
|
$
|
15,788
|
|
|
$
|
14,239
|
|
|
$
|
31,414
|
|
|
$
|
28,406
|
|
Energy Group:
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
204
|
|
|
15
|
|
|
408
|
|
|
47
|
|
Retail Gas and Other Operations
|
83
|
|
|
20
|
|
|
168
|
|
|
40
|
|
Subtotal Energy Group
|
287
|
|
|
35
|
|
|
576
|
|
|
87
|
|
Energy Services:
|
|
|
|
|
|
|
|
On-Site Energy Production
|
10,895
|
|
|
7,457
|
|
|
20,814
|
|
|
14,508
|
|
Appliance Service Operations
|
91
|
|
|
73
|
|
|
175
|
|
|
147
|
|
Subtotal Energy Services
|
10,986
|
|
|
7,530
|
|
|
20,989
|
|
|
14,655
|
|
Corporate and Services
|
260
|
|
|
458
|
|
|
483
|
|
|
700
|
|
Total Depreciation and Amortization
|
$
|
27,321
|
|
|
$
|
22,262
|
|
|
$
|
53,462
|
|
|
$
|
43,848
|
|
|
|
|
|
|
|
|
|
Interest Charges:
|
|
|
|
|
|
|
|
|
|
Gas Utility Operations
|
$
|
4,552
|
|
|
$
|
5,113
|
|
|
$
|
9,339
|
|
|
$
|
10,303
|
|
Energy Group:
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
1
|
|
|
(112
|
)
|
|
65
|
|
|
130
|
|
Retail Gas and Other Operations
|
78
|
|
|
47
|
|
|
210
|
|
|
120
|
|
Subtotal Energy Group
|
79
|
|
|
(65
|
)
|
|
275
|
|
|
250
|
|
Energy Services:
|
|
|
|
|
|
|
|
On-Site Energy Production
|
3,442
|
|
|
1,661
|
|
|
6,904
|
|
|
3,976
|
|
Corporate and Services
|
2,858
|
|
|
2,939
|
|
|
6,310
|
|
|
5,927
|
|
Subtotal
|
10,931
|
|
|
9,648
|
|
|
22,828
|
|
|
20,456
|
|
Intersegment Borrowings
|
(2,702
|
)
|
|
(2,174
|
)
|
|
(5,439
|
)
|
|
(4,381
|
)
|
Total Interest Charges
|
$
|
8,229
|
|
|
$
|
7,474
|
|
|
$
|
17,389
|
|
|
$
|
16,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Income Taxes:
|
|
|
|
|
|
|
|
|
|
Gas Utility Operations
|
$
|
1,415
|
|
|
$
|
3,292
|
|
|
$
|
28,819
|
|
|
$
|
29,464
|
|
Energy Group:
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
(12,258
|
)
|
|
5,986
|
|
|
2,479
|
|
|
6,853
|
|
Retail Gas and Other Operations
|
2,450
|
|
|
92
|
|
|
2,282
|
|
|
1,668
|
|
Retail Electric Operations
|
931
|
|
|
71
|
|
|
1,170
|
|
|
(3
|
)
|
Subtotal Energy Group
|
(8,877
|
)
|
|
6,149
|
|
|
5,931
|
|
|
8,518
|
|
Energy Services:
|
|
|
|
|
|
|
|
On-Site Energy Production
|
110
|
|
|
(12,861
|
)
|
|
(2,902
|
)
|
|
(24,908
|
)
|
Appliance Service Operations
|
126
|
|
|
105
|
|
|
152
|
|
|
97
|
|
Subtotal Energy Services
|
236
|
|
|
(12,756
|
)
|
|
(2,750
|
)
|
|
(24,811
|
)
|
Corporate and Services
|
37
|
|
|
36
|
|
|
78
|
|
|
163
|
|
Total Income Taxes
|
$
|
(7,189
|
)
|
|
$
|
(3,279
|
)
|
|
$
|
32,078
|
|
|
$
|
13,334
|
|
|
|
|
|
|
|
|
|
Property Additions:
|
|
|
|
|
|
|
|
Gas Utility Operations
|
$
|
50,133
|
|
|
$
|
62,175
|
|
|
$
|
101,503
|
|
|
$
|
105,501
|
|
Energy Group:
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
1
|
|
|
375
|
|
|
7
|
|
|
379
|
|
Retail Gas and Other Operations
|
354
|
|
|
392
|
|
|
725
|
|
|
1,121
|
|
Subtotal Energy Group
|
355
|
|
|
767
|
|
|
732
|
|
|
1,500
|
|
Energy Services:
|
|
|
|
|
|
|
|
On-Site Energy Production
|
2,665
|
|
|
26,040
|
|
|
5,316
|
|
|
30,421
|
|
Appliance Service Operations
|
251
|
|
|
212
|
|
|
352
|
|
|
328
|
|
Subtotal Energy Services
|
2,916
|
|
|
26,252
|
|
|
5,668
|
|
|
30,749
|
|
Corporate and Services
|
564
|
|
|
537
|
|
|
727
|
|
|
1,601
|
|
Total Property Additions
|
$
|
53,968
|
|
|
$
|
89,731
|
|
|
$
|
108,630
|
|
|
$
|
139,351
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Identifiable Assets (See Note 1):
|
|
|
|
Gas Utility Operations
|
$
|
2,410,522
|
|
|
$
|
2,281,576
|
|
Energy Group:
|
|
|
|
Wholesale Energy Operations
|
179,809
|
|
|
231,660
|
|
Retail Gas and Other Operations
|
40,581
|
|
|
55,111
|
|
Retail Electric Operations
|
44,958
|
|
|
55,528
|
|
Subtotal Energy Group
|
265,348
|
|
|
342,299
|
|
Energy Services:
|
|
|
|
On-Site Energy Production
|
776,907
|
|
|
790,231
|
|
Appliance Service Operations
|
3,492
|
|
|
4,885
|
|
Subtotal Energy Services
|
780,399
|
|
|
795,116
|
|
Discontinued Operations
|
1,776
|
|
|
1,545
|
|
Corporate and Services
|
633,685
|
|
|
652,325
|
|
Intersegment Assets
|
(569,149
|
)
|
|
(600,928
|
)
|
Total Identifiable Assets
|
$
|
3,522,581
|
|
|
$
|
3,471,933
|
|
|
|
7.
|
RATES AND REGULATORY ACTIONS:
|
SJG is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU).
In January 2016, SJG provided a Basic Gas Supply Service (BGSS) bill credit of approximately
$20.0 million
to its residential and small commercial customers. This credit is in addition to an overall rate reduction of
10.3%
that was approved by the BPU and took effect in October 2015. SJG’s ability to offer the BGSS bill credit is a direct result of lower wholesale natural gas prices and the overall management of its gas supply portfolio. The BGSS clause serves as a method to pass along increases or decreases in gas costs to customers; therefore, SJG’s income is not affected by BGSS rate adjustments or bill credits.
In February 2016, SJG filed a petition with the BPU for approval to continue its Accelerated Infrastructure Replacement Program (AIRP), which will expire at the end of 2016. In its petition, SJG has requested approval to continue its AIRP for an additional
seven
years, with program investments totaling approximately
$500.0 million
, to retire and replace bare steel and cast iron mains, bare steel services, and other aging infrastructure. The petition proposes to recover the costs of, and a return on, future AIRP investments through annual base rate adjustments. The petition also includes a request to reflect in base rates approximately
$76.0 million
of AIRP investments that will have been made since the conclusion of SJG’s last base rate case in October 2014 through the end 2016. This petition is currently pending.
In February 2016, the BPU approved a
$7.9 million
revenue decrease to SJG’s Energy Efficiency Tracker (EET), which recovers the cost of, and an allowed return on, investments in Energy Efficiency Programs (EEP). SJG’s original EEPs and its first EEP Extension, approved by the BPU in 2009 and 2013, respectively, ended in July 2013 and August 2015, respectively. The revenue requirements associated with these prior investments decrease over time as they are amortized and recovered. SJG is continuing to make energy efficiency investments under its most recent EEP Extension, which was approved by the BPU in August 2015, and is recovering the costs, and the allowed return on, those investments through the EET.
In April 2016, the BPU approved a
$2.6 million
net decrease, including taxes, in annual revenues collected from SJG customers through the Societal Benefits Clause (SBC) charge and the Transportation Initiation Clause (TIC) charge, comprised of a
$5.2 million
increase in revenues from the Remediation Adjustment Clause (RAC) component of the SBC, a
$7.1 million
decrease in revenues from the Clean Energy Program (CLEP) component of the SBC, and a
$0.7 million
decrease in TIC revenues, effective May 7, 2016. The increase in the RAC is driven by an increase in costs associated with the remediation of former Manufactured Gas Plants. The decrease in the CLEP component of the SBC is primarily driven by the accumulation of prior year over-recoveries. The decrease in the TIC is driven by a decrease in costs. The SBC and TIC allow SJG to recover costs associated with certain State-mandated programs. SJG does not earn any profit from these charges.
Also in April 2016, SJG filed a petition requesting to increase annual revenues from base rates by
$4.4 million
, including taxes, to reflect the roll-in of investments made through June 2016 under its Storm Hardening and Reliability Program (“SHARP”), with rates to become effective on October 1, 2016. This petition is currently pending.
In June 2016, SJG filed its annual BGSS and Conservation Incentive Program (CIP) rate adjustment petition, requesting a
$0.6 million
net decrease in annual revenues to be implemented on October 1, 2016, comprised of a
$47.1 million
decrease in BGSS revenues and a
$46.5 million
increase in CIP revenues, both including taxes. The level of BGSS revenues requested in annual BGSS filings 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 for a decrease of BGSS revenues is caused primarily by decreases in forecasted gas commodity costs for the upcoming BGSS/CIP year of October 2016 to September 2017. The level of CIP revenues requested in annual CIP filings is based on historical customer usage information, comparing prior CIP year customer usage to normal customer usage. SJG’s request for an increase in CIP revenues is caused primarily by lower than normal customer usage caused by weather that was
16.4%
warmer than normal during the 2015-2016 winter. This petition is currently pending.
Also in June 2016, SJG filed its annual EET rate adjustment petition, requesting a
$0.8 million
decrease in revenues to continue recovering the costs of, and the allowed return on, prior investments associated with energy efficiency programs (EEPs). The EET rate recovers the forecasted revenue requirements for the upcoming EET year of October 2016 to September 2017. The requested revenue decrease is the result of the investments associated with SJG's original EEPs, approved by the BPU in 2009, and its EEP extension, approved by the BPU in 2013, which ended in July 2013 and August 2015, respectively. The revenue requirements associated with these prior investments decreases over time as they are amortized. This petition is currently pending.
There have been no other significant regulatory actions or changes to SJG's rate structure since
December 31, 2015
. See Note 10 to the Consolidated Financial Statements in Item 8 of SJI's Annual Report on Form 10-K for the year ended
December 31, 2015
.
|
|
8.
|
REGULATORY ASSETS AND REGULATORY LIABILITIES:
|
There have been no significant changes to the nature of the Company’s regulatory assets and liabilities since
December 31, 2015
, which are described in Note 11 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
Regulatory Assets consisted of the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Environmental Remediation Costs:
|
|
|
|
Expended - Net
|
$
|
50,650
|
|
|
$
|
42,032
|
|
Liability for Future Expenditures
|
152,349
|
|
|
123,194
|
|
Deferred Asset Retirement Obligation Costs
|
42,912
|
|
|
42,430
|
|
Deferred Pension and Other Postretirement Benefit Costs
|
79,779
|
|
|
79,779
|
|
Deferred Gas Costs - Net
|
—
|
|
|
2,701
|
|
Conservation Incentive Program Receivable
|
21,766
|
|
|
2,624
|
|
Deferred Interest Rate Contracts
|
10,363
|
|
|
7,631
|
|
Energy Efficiency Tracker
|
—
|
|
|
496
|
|
Pipeline Supplier Service Charges
|
2,943
|
|
|
3,776
|
|
Pipeline Integrity Cost
|
4,447
|
|
|
4,596
|
|
AFUDC - Equity Related Deferrals
|
11,938
|
|
|
11,423
|
|
Other Regulatory Assets
|
3,217
|
|
|
2,752
|
|
|
|
|
|
Total Regulatory Assets
|
$
|
380,364
|
|
|
$
|
323,434
|
|
ENVIRONMENTAL REMEDIATION COSTS - SJG has
two
regulatory assets associated with environmental costs related to the cleanup of
12
sites where SJG or its predecessors previously operated gas manufacturing plants. The first asset, "Environmental Remediation Cost: Expended - Net," represents what was actually spent to clean up the sites, less recoveries through the Remediation Adjustment Clause (RAC) and insurance carriers. These costs meet the deferral requirements of GAAP, as the BPU allows SJG to recover such expenditures through the RAC. The other asset, "Environmental Remediation Cost: Liability for Future Expenditures," relates to estimated future expenditures required to complete the remediation of these sites. SJG recorded this estimated amount as a regulatory asset with the corresponding current and noncurrent liabilities on the balance sheets under the captions "Current Liabilities" and "Deferred Credits and Other Noncurrent Liabilities." The BPU allows SJG to recover the deferred costs over
seven
-year periods after they are spent. The increase from December 31, 2015 is a result of expenditures made during the first six months of 2016 and an increase in the expected future expenditures for remediation activities, primarily due to an increase in the scope of the remediation at a site related to additional contamination being discovered.
DEFERRED GAS COSTS - NET - See discussion under "Deferred Revenues - Net" below.
CONSERVATION INCENTIVE PROGRAM (CIP) RECEIVABLE – 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 less than the established baseline during the 2015 - 2016 winter season and, more notably, during the first six months of 2016, resulting in an increase in the receivable. This is primarily the result of warm weather experienced in the region.
Regulatory Liabilities consisted of the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Excess Plant Removal Costs
|
$
|
31,078
|
|
|
$
|
32,644
|
|
Deferred Revenues - Net
|
18,631
|
|
|
—
|
|
Societal Benefit Costs
|
8,233
|
|
|
10,197
|
|
Energy Efficiency Tracker
|
2,068
|
|
|
—
|
|
|
|
|
|
Total Regulatory Liabilities
|
$
|
60,010
|
|
|
$
|
42,841
|
|
DEFERRED REVENUES - NET - Over/under collections of gas costs are monitored through SJG's BGSS mechanism. Net under collected gas costs are classified as a regulatory asset and net over collected gas costs are classified as a regulatory liability. Derivative contracts used to hedge natural gas purchases are also included in the BGSS, subject to BPU approval. The BGSS changed from a
$2.7 million
regulatory asset at December 31, 2015 to a
$18.6 million
regulatory liability at June 30, 2016 primarily due to the gas costs recovered from customers exceeding the actual cost of the commodity.
ENERGY EFFICIENCY TRACKER (EET) - This regulatory liability primarily represents energy efficiency measures installed in customer homes and businesses. The change from a
$0.5 million
regulatory asset at December 31, 2015 to a
$2.1 million
regulatory liability at June 30, 2016 is due to recoveries being greater than the cost of, and allowed return on, investments in the Energy Efficiency Programs. In February 2016, the BPU approved a
$7.9 million
revenue decrease to SJG’s EET (see Note 7).
|
|
9.
|
PENSION AND OTHER POSTRETIREMENT BENEFITS:
|
For the
three and six
months ended
June 30, 2016
and
2015
, net periodic benefit cost related to the employee and officer pension and other postretirement benefit plans consisted of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service Cost
|
$
|
1,106
|
|
|
$
|
1,225
|
|
|
$
|
2,421
|
|
|
$
|
2,668
|
|
Interest Cost
|
3,062
|
|
|
2,814
|
|
|
6,062
|
|
|
5,584
|
|
Expected Return on Plan Assets
|
(3,374
|
)
|
|
(3,695
|
)
|
|
(6,754
|
)
|
|
(7,394
|
)
|
Amortizations:
|
|
|
|
|
|
|
|
|
Prior Service Cost
|
53
|
|
|
53
|
|
|
106
|
|
|
106
|
|
Actuarial Loss
|
2,388
|
|
|
2,648
|
|
|
4,697
|
|
|
5,304
|
|
Net Periodic Benefit Cost
|
3,235
|
|
|
3,045
|
|
|
6,532
|
|
|
6,268
|
|
Capitalized Benefit Cost
|
(1,213
|
)
|
|
(1,194
|
)
|
|
(2,400
|
)
|
|
(2,433
|
)
|
Deferred Benefit Cost
|
(161
|
)
|
|
(325
|
)
|
|
(322
|
)
|
|
(325
|
)
|
Total Net Periodic Benefit Expense
|
$
|
1,861
|
|
|
$
|
1,526
|
|
|
$
|
3,810
|
|
|
$
|
3,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service Cost
|
$
|
195
|
|
|
$
|
231
|
|
|
$
|
425
|
|
|
$
|
558
|
|
Interest Cost
|
654
|
|
|
715
|
|
|
1,307
|
|
|
1,487
|
|
Expected Return on Plan Assets
|
(776
|
)
|
|
(749
|
)
|
|
(1,552
|
)
|
|
(1,497
|
)
|
Amortizations:
|
|
|
|
|
|
|
|
|
Prior Service Cost
|
(86
|
)
|
|
152
|
|
|
(172
|
)
|
|
304
|
|
Actuarial Loss
|
261
|
|
|
287
|
|
|
555
|
|
|
671
|
|
Net Periodic Benefit Cost
|
248
|
|
|
636
|
|
|
563
|
|
|
1,523
|
|
Capitalized Benefit Cost
|
(45
|
)
|
|
(271
|
)
|
|
(146
|
)
|
|
(528
|
)
|
Deferred Benefit Cost
|
—
|
|
|
(79
|
)
|
|
—
|
|
|
(79
|
)
|
Total Net Periodic Benefit Expense
|
$
|
203
|
|
|
$
|
286
|
|
|
$
|
417
|
|
|
$
|
916
|
|
Capitalized benefit costs reflected in the table above relate to SJG’s construction program. Deferred benefit costs relate to SJG's deferral of incremental expense associated with the adoption of new mortality tables effective December 31, 2014 and 2015. Deferred benefit costs are expected to be recovered through rates as part of SJG's next base rate case.
SJI contributed
$15.0 million
to the pension plans in January 2015.
No
contributions were made to the pension plans during the six months ended
June 30, 2016
. SJI does not expect to make any contributions to the pension plans in 2016; however, changes in future investment performance and discount rates may ultimately result in a contribution. Payments related to the unfunded supplemental executive retirement plan (SERP) are expected to approximate
$2.3 million
in
2016
. SJG also has a regulatory obligation to contribute approximately
$3.6 million
annually to the other postretirement benefit plans’ trusts, less direct costs incurred.
See Note 12 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended
December 31, 2015
, for additional information related to SJI’s pension and other postretirement benefits.
Credit facilities and available liquidity as of
June 30, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Total Facility
|
|
Usage
|
|
Available Liquidity
|
|
Expiration Date
|
|
SJG:
|
|
|
|
|
|
|
|
|
|
Commercial Paper Program/Revolving Credit Facility
|
|
$
|
200,000
|
|
|
$
|
14,100
|
|
(A)
|
$
|
185,900
|
|
|
May 2018
|
|
Uncommitted Bank Line
|
|
10,000
|
|
|
—
|
|
|
10,000
|
|
|
August 2016
|
(C)
|
|
|
|
|
|
|
|
|
|
|
Total SJG
|
|
210,000
|
|
|
14,100
|
|
|
195,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SJI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility
|
|
400,000
|
|
|
134,900
|
|
(B)
|
265,100
|
|
|
February 2018
|
|
|
|
|
|
|
|
|
|
|
|
Total SJI
|
|
400,000
|
|
|
134,900
|
|
|
265,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
610,000
|
|
|
$
|
149,000
|
|
|
$
|
461,000
|
|
|
|
|
(A) Includes letters of credit outstanding in the amount of
$0.8 million
.
(B) Includes letters of credit outstanding in the amount of
$2.8 million
.
(C) SJG anticipates renewing the Uncommitted Bank Line prior to expiration.
The SJG facilities are restricted as to use and availability specifically to SJG; however, if necessary, the SJI facilities can also be used to support SJG’s liquidity needs. Borrowings under these credit facilities are at market rates. The weighted average interest rate on these borrowings, which changes daily, was
1.43%
and
0.96%
at
June 30, 2016
and
2015
, respectively. Average borrowings outstanding under these credit facilities, not including letters of credit, during the
six
months ended
June 30, 2016
and
2015
were
$325.5 million
and
$274.3 million
, respectively. The maximum amounts outstanding under these credit facilities, not including letters of credit, during the
six
months ended
June 30, 2016
and
2015
were
$467.7 million
and
$368.1 million
, respectively.
The SJI and SJG facilities are provided by a syndicate of banks and contain one financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective credit agreements) to not more than
0.65
to 1, measured at the end of each fiscal quarter. SJI and SJG were in compliance with this covenant as of
June 30, 2016
.
SJG has 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 its
$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
.
|
|
11.
|
COMMITMENTS AND CONTINGENCIES:
|
GUARANTEES — As part of the Transaction involving the Energenic projects (see Note 3), the Company is relieved of any guarantees from prior periods related to the projects in which it no longer has an ownership interest.
As of
June 30, 2016
, SJI had issued
$5.9 million
of parental guarantees on behalf of an unconsolidated subsidiary. These guarantees generally expire within the next
two
years and were issued to enable our subsidiary to market retail natural gas.
COLLECTIVE BARGAINING AGREEMENTS
— Unionized personnel represent approximately
45%
of our workforce at
June 30, 2016
. The Company has collective bargaining agreements with
two
unions that represent these employees: the International Brotherhood of Electrical Workers (IBEW) Local 1293 and the International Association of Machinists and Aerospace Workers (IAM) Local 76. SJG and SJESP employees represented by the IBEW operate under collective bargaining agreements that run through February 2017. The remaining unionized employees are represented by the IAM and operate under collective bargaining agreements that run through August 2017.
STANDBY LETTERS OF CREDIT — As of
June 30, 2016
, SJI provided
$2.8 million
of standby letters of credit through its revolving credit facility to enable SJE to market retail electricity and for various construction and operating activities. SJG provided a
$0.8 million
letter of credit under its revolving credit facility to support the remediation of environmental conditions at certain locations in SJG's service territory. The Company has also provided
$87.5 million
of additional letters of credit under separate facilities outside of the revolving credit facilities 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 and to finance Marina's initial thermal plant project.
PENDING LITIGATION — The Company is subject to claims arising in the ordinary course of business and other legal proceedings. The Company has been named in, among other actions, certain gas supply and capacity management contract disputes and certain product liability claims related to our former sand mining subsidiary. 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
$3.1 million
and $
3.2 million
related to all claims in the aggregate as of
June 30, 2016
and
December 31, 2015
, 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.
ENVIRONMENTAL REMEDIATION COSTS — SJI 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. SJI and some of its nonutility subsidiaries also recorded costs for environmental cleanup of sites where SJF previously operated a fuel oil business and Morie maintained equipment, fueling stations and storage. Other than the changes discussed in Note 8 to the condensed consolidated financial statements, there have been no changes to the status of the Company’s environmental remediation efforts since
December 31, 2015
, as described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
|
|
12.
|
DERIVATIVE INSTRUMENTS:
|
Certain SJI subsidiaries are involved in buying, selling, transporting and storing natural gas and buying and selling retail electricity for their own accounts as well as managing these activities for third parties. These subsidiaries are subject to market risk on expected future purchases and sales due to commodity price fluctuations. The Company uses a variety of derivative instruments to limit this exposure to market risk in accordance with strict corporate guidelines. These derivative instruments include forward contracts, swap agreements, options contracts and futures contracts. As of
June 30, 2016
, the Company had outstanding derivative contracts intended to limit the exposure to market risk on
64.2
MMdts (1 MMdts = one million decatherms) of expected future purchases of natural gas,
71.5
MMdts of expected future sales of natural gas,
2.6
MMmwh (1 MMmwh = one million megawatt hours) of expected future purchases of electricity and
2.4
MMmwh of expected future sales of electricity. In addition to these derivative contracts, the Company has basis and index related purchase and sales contracts totaling
148.7
MMdts. These contracts, which 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 consolidated balance sheets. The net unrealized pre-tax gains and losses for these energy-related commodity contracts are included with realized gains and losses in Operating Revenues – Nonutility.
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, some of which had been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives - Other on the condensed consolidated balance sheets. Hedge accounting has been discontinued for these derivatives. As a result, unrealized gains and losses on these derivatives, that were previously included in Accumulated Other Comprehensive Loss (AOCL) on the condensed consolidated balance sheets, are being recorded in earnings over the remaining life of the derivative. These derivatives are expected to mature in 2026.
As of
June 30, 2016
, SJI’s active interest rate swaps were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Fixed Interest Rate
|
|
Start Date
|
|
Maturity
|
|
Type
|
|
Obligor
|
$
|
14,500,000
|
|
|
3.905%
|
|
3/17/2006
|
|
1/15/2026
|
|
Tax-exempt
|
|
Marina
|
$
|
500,000
|
|
|
3.905%
|
|
3/17/2006
|
|
1/15/2026
|
|
Tax-exempt
|
|
Marina
|
$
|
330,000
|
|
|
3.905%
|
|
3/17/2006
|
|
1/15/2026
|
|
Tax-exempt
|
|
Marina
|
$
|
12,500,000
|
|
|
3.530%
|
|
12/1/2006
|
|
2/1/2036
|
|
Tax-exempt
|
|
SJG
|
$
|
12,500,000
|
|
|
3.430%
|
|
12/1/2006
|
|
2/1/2036
|
|
Tax-exempt
|
|
SJG
|
The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of
June 30, 2016
and
December 31, 2015
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under GAAP
|
|
June 30, 2016
|
|
December 31, 2015
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Energy-related commodity contracts:
|
|
|
|
|
|
|
|
|
Derivatives – Energy Related – Current
|
|
$
|
45,112
|
|
|
$
|
66,444
|
|
|
$
|
83,093
|
|
|
$
|
90,708
|
|
Derivatives – Energy Related – Non-Current
|
|
11,929
|
|
|
8,371
|
|
|
16,238
|
|
|
21,697
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
Derivatives - Other - Current
|
|
—
|
|
|
945
|
|
|
—
|
|
|
—
|
|
Derivatives - Other - Noncurrent
|
|
—
|
|
|
13,386
|
|
|
—
|
|
|
10,943
|
|
Total derivatives not designated as hedging instruments under GAAP
|
|
$
|
57,041
|
|
|
$
|
89,146
|
|
|
$
|
99,331
|
|
|
$
|
123,348
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
$
|
57,041
|
|
|
$
|
89,146
|
|
|
$
|
99,331
|
|
|
$
|
123,348
|
|
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 consolidated balance sheets. As of
June 30, 2016
and
December 31, 2015
, information related to these offsetting arrangements were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
57,041
|
|
|
$
|
—
|
|
|
$
|
57,041
|
|
|
$
|
(26,263
|
)
|
(A)
|
$
|
—
|
|
|
$
|
30,778
|
|
Derivatives - Energy Related Liabilities
|
|
$
|
(74,815
|
)
|
|
$
|
—
|
|
|
$
|
(74,815
|
)
|
|
$
|
26,263
|
|
(B)
|
$
|
12,854
|
|
|
$
|
(35,698
|
)
|
Derivatives - Other
|
|
$
|
(14,331
|
)
|
|
$
|
—
|
|
|
$
|
(14,331
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(14,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 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
|
|
$
|
99,331
|
|
|
$
|
—
|
|
|
$
|
99,331
|
|
|
$
|
(35,491
|
)
|
(A)
|
$
|
—
|
|
|
$
|
63,840
|
|
Derivatives - Energy Related Liabilities
|
|
$
|
(112,405
|
)
|
|
$
|
—
|
|
|
$
|
(112,405
|
)
|
|
$
|
35,491
|
|
(B)
|
$
|
23,045
|
|
|
$
|
(53,869
|
)
|
Derivatives - Other
|
|
$
|
(10,943
|
)
|
|
$
|
—
|
|
|
$
|
(10,943
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(10,943
|
)
|
(A) The balances at
June 30, 2016
and
December 31, 2015
were related to derivative liabilities which can be net settled against derivative assets.
(B) The balances at
June 30, 2016
and
December 31, 2015
were related to derivative assets which can be net settled against derivative liabilities.
The effect of derivative instruments on the condensed consolidated statements of income for the
three and six
months ended
June 30, 2016
and
2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
Derivatives in Cash Flow Hedging Relationships under GAAP
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Interest Rate Contracts:
|
|
|
|
|
|
|
|
|
Losses recognized in AOCL on effective portion
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Losses reclassified from AOCL into income (a)
|
|
$
|
(82
|
)
|
|
$
|
(187
|
)
|
|
$
|
(168
|
)
|
|
$
|
(210
|
)
|
Gains (losses) recognized in income on ineffective portion (a)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(a) Included in Interest Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
Derivatives Not Designated as Hedging Instruments under GAAP
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
(Losses) gains on energy-related commodity contracts (a)
|
|
$
|
(21,371
|
)
|
|
$
|
14,685
|
|
|
$
|
(2,716
|
)
|
|
$
|
7,978
|
|
(Losses) gains on interest rate contracts (b)
|
|
(229
|
)
|
|
541
|
|
|
(656
|
)
|
|
243
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(21,600
|
)
|
|
$
|
15,226
|
|
|
$
|
(3,372
|
)
|
|
$
|
8,221
|
|
(a) Included in Operating Revenues - Nonutility
(b) Included in Interest Charges
Net realized loss of
$1.6 million
and
$2.1 million
for the three months ended
June 30, 2016
and
2015
, respectively, and a net realized loss of
$4.4 million
and
$4.8 million
for the six months ended June 30, 2016 and 2015, respectively, associated with SJG's energy-related financial commodity contracts 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.
Certain of the Company’s derivative instruments contain provisions that require immediate payment or demand immediate and ongoing collateralization on derivative instruments in net liability positions in the event of a material adverse change in the credit standing of the Company. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on
June 30, 2016
, is
$22.1 million
. If the credit-risk-related contingent features underlying these agreements were triggered on
June 30, 2016
, the Company would have been required to settle the instruments immediately or post collateral to its counterparties of approximately
$20.1 million
after offsetting asset positions with the same counterparties under master netting arrangements.
|
|
13.
|
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, 2016
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
Available-for-Sale Securities (A)
|
$
|
15,160
|
|
|
$
|
2,985
|
|
|
$
|
12,175
|
|
|
$
|
—
|
|
Derivatives – Energy Related Assets (B)
|
57,041
|
|
|
18,379
|
|
|
7,145
|
|
|
31,517
|
|
|
$
|
72,201
|
|
|
$
|
21,364
|
|
|
$
|
19,320
|
|
|
$
|
31,517
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives – Energy Related Liabilities (B)
|
$
|
74,815
|
|
|
$
|
16,589
|
|
|
$
|
24,613
|
|
|
$
|
33,613
|
|
Derivatives – Other (C)
|
14,331
|
|
|
—
|
|
|
14,331
|
|
|
—
|
|
|
$
|
89,146
|
|
|
$
|
16,589
|
|
|
$
|
38,944
|
|
|
$
|
33,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
Available-for-Sale Securities (A)
|
$
|
14,810
|
|
|
$
|
2,925
|
|
|
$
|
11,885
|
|
|
$
|
—
|
|
Derivatives – Energy Related Assets (B)
|
99,331
|
|
|
16,006
|
|
|
24,730
|
|
|
58,595
|
|
|
$
|
114,141
|
|
|
$
|
18,931
|
|
|
$
|
36,615
|
|
|
$
|
58,595
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives – Energy Related Liabilities (B)
|
$
|
112,405
|
|
|
$
|
42,170
|
|
|
$
|
11,008
|
|
|
$
|
59,227
|
|
Derivatives – Other (C)
|
10,943
|
|
|
—
|
|
|
10,943
|
|
|
—
|
|
|
$
|
123,348
|
|
|
$
|
42,170
|
|
|
$
|
21,951
|
|
|
$
|
59,227
|
|
(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 forward contracts, 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. Level 3 valuation methods for electric represent the value of the contract marked to the forward wholesale curve, as provided by daily exchange quotes for delivered electricity. The significant unobservable inputs used in the fair value measurement of electric contracts consist of fixed contracted electric load profiles; therefore, no change in unobservable inputs would occur. Unobservable inputs are updated daily using industry-standard techniques. Management reviews and corroborates the price quotations to ensure the prices are observable which includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration.
(C) Derivatives – Other are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.
The following table provides quantitative information regarding significant unobservable inputs in Level 3 fair value measurements (in thousands):
|
|
|
|
|
|
|
|
Type
|
Fair Value at June 30, 2016
|
Valuation Technique
|
Significant Unobservable Input
|
Range
[Weighted Average]
|
|
|
Assets
|
Liabilities
|
|
|
|
|
Forward Contract - Natural Gas
|
$15,413
|
$20,012
|
Discounted Cash Flow
|
Forward price (per dt)
|
$ 1.56 - $10.34 [$2.37]
|
(A)
|
Forward Contract - Electric
|
$16,104
|
$13,601
|
Discounted Cash Flow
|
Fixed electric load profile (on-peak)
|
21.43% - 100.00% [56.08%]
|
(B)
|
Fixed electric load profile (off-peak)
|
0.00% - 78.57% [43.92%]
|
(B)
|
|
|
|
|
|
|
|
|
Type
|
Fair Value at December 31, 2015
|
Valuation Technique
|
Significant Unobservable Input
|
Range
[Weighted Average]
|
|
|
Assets
|
Liabilities
|
|
|
|
|
Forward Contract - Natural Gas
|
$29,459
|
$31,733
|
Discounted Cash Flow
|
Forward price (per dt)
|
$(0.77) - $10.00 [$(2.15)]
|
(A)
|
Forward Contract - Electric
|
$29,136
|
$27,494
|
Discounted Cash Flow
|
Fixed electric load profile (on-peak)
|
8.47% - 100.00% [56.20%]
|
(B)
|
Fixed electric load profile (off-peak)
|
0.00% - 91.53% [43.80%]
|
(B)
|
(A) Represents the range, along with the weighted average, of forward prices for the sale and purchase of natural gas.
(B) Represents the range, along with the weighted average, of the percentage of contracted usage that is loaded during on-peak hours versus off-peak.
The changes in fair value measurements of Derivatives – Energy Related Assets and Liabilities for the
three and six
months ended
June 30, 2016
and
2015
, using significant unobservable inputs (Level 3), are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2016
|
|
Six Months Ended
June 30, 2016
|
Balance at beginning of period
|
$
|
13,241
|
|
|
$
|
(632
|
)
|
Other changes in fair value from continuing and new contracts, net
|
(12,073
|
)
|
|
(2,058
|
)
|
Settlements
|
(3,264
|
)
|
|
594
|
|
|
|
|
|
Balance at end of period
|
$
|
(2,096
|
)
|
|
$
|
(2,096
|
)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2015
|
|
Six Months Ended
June 30, 2015
|
Balance at beginning of period
|
$
|
(17,311
|
)
|
|
$
|
(5,608
|
)
|
Other changes in fair value from continuing and new contracts, net
|
14,376
|
|
|
(2,062
|
)
|
Transfers in/(out) of Level 3 (A)
|
2,054
|
|
|
2,054
|
|
Settlements
|
(1,663
|
)
|
|
3,072
|
|
|
|
|
|
Balance at end of period
|
$
|
(2,544
|
)
|
|
$
|
(2,544
|
)
|
(A) Transfers between different levels of the fair value hierarchy may occur based on the level of observable inputs used to value the instruments from period to period. During the three and six months ended June 30, 2015,
$2.1 million
of net derivative assets were transferred from Level 2 to Level 3, due to decreased observability of market data.
Total losses included in earnings for the three and six months ended
June 30, 2016
that are attributable to the change in unrealized losses relating to those assets and liabilities included in Level 3 still held as of
June 30, 2016
, are
$12.1 million
and
$2.1 million
, respectively. These losses are included in Operating Revenues-Nonutility on the condensed consolidated statements of income.
In January 2016, the Company paid
$12.7 million
to retire outstanding debt for ACB.
In January 2016, SJG issued
$61.0 million
of long-term debt at an average interest rate of
1.37%
under a
$200.0 million
aggregate syndicated bank term facility. The facility is now fully drawn. The total outstanding amount under this facility as of
June 30, 2016
is
$200.0 million
, which was reclassified to current portion of long-term debt on the condensed consolidated balance sheets as it is due within one year. SJG is evaluating alternatives, including refinancing or renewing the facility.
As of June 30, 2016,
$16.0 million
of aggregate principal amount of
2.71%
Senior Notes, due June 2017 were reclassified to current portion of long-term debt on the condensed consolidated balance sheets. At this time, the Company plans to pay off this debt at maturity.
The Company did not issue or retire any other long-term debt during the
six
months ended
June 30, 2016
.
|
|
15.
|
ACCUMULATED OTHER COMPREHENSIVE LOSS:
|
The following tables summarize the changes in accumulated other comprehensive loss (AOCL) for the
three and six
months ended
June 30, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Liability Adjustment
|
|
Unrealized Gain (Loss) on Derivatives-Other
|
|
Unrealized Gain (Loss) on Available-for-Sale Securities
|
|
Other Comprehensive Income (Loss) of Affiliated Companies
|
|
Total
|
Balance at April 1, 2016 (a)
|
$
|
(22,145
|
)
|
|
$
|
(2,078
|
)
|
|
$
|
(79
|
)
|
|
$
|
(97
|
)
|
|
$
|
(24,399
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
|
—
|
|
|
73
|
|
|
—
|
|
|
73
|
|
Amounts reclassified from AOCL (b)
|
—
|
|
|
49
|
|
|
(18
|
)
|
|
—
|
|
|
31
|
|
Net current period other comprehensive income (loss)
|
—
|
|
|
49
|
|
|
55
|
|
|
—
|
|
|
104
|
|
Balance at June 30, 2016 (a)
|
$
|
(22,145
|
)
|
|
$
|
(2,029
|
)
|
|
$
|
(24
|
)
|
|
$
|
(97
|
)
|
|
$
|
(24,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Liability Adjustment
|
Unrealized Gain (Loss) on Derivatives-Other
|
Unrealized Gain (Loss) on Available-for-Sale Securities
|
Other Comprehensive Income (Loss) of Affiliated Companies
|
Total
|
Balance at January 1, 2016 (a)
|
$
|
(22,145
|
)
|
$
|
(2,129
|
)
|
$
|
(128
|
)
|
$
|
(97
|
)
|
$
|
(24,499
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
—
|
|
136
|
|
—
|
|
136
|
|
Amounts reclassified from AOCL (b)
|
—
|
|
100
|
|
(32
|
)
|
—
|
|
68
|
|
Net current period other comprehensive income (loss)
|
—
|
|
100
|
|
104
|
|
—
|
|
204
|
|
Balance at June 30, 2016 (a)
|
$
|
(22,145
|
)
|
$
|
(2,029
|
)
|
$
|
(24
|
)
|
$
|
(97
|
)
|
$
|
(24,295
|
)
|
(a) Determined using a combined average statutory tax rate of
40%
.
(b) See table below.
The following table provides details about reclassifications out of AOCL for the
three and six
months ended
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from AOCL (in thousands)
|
|
Affected Line Item in the Condensed Consolidated Statements of Income
|
Three Months Ended
June 30, 2016
|
|
Six Months Ended
June 30, 2016
|
|
Unrealized Loss on Derivatives-Other - interest rate contracts designated as cash flow hedges
|
$
|
82
|
|
|
$
|
168
|
|
|
Interest Charges
|
Income Taxes
|
(33
|
)
|
|
(68
|
)
|
|
Income Taxes (a)
|
|
$
|
49
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
Unrealized Gain on Available-for-Sale Securities
|
$
|
(33
|
)
|
|
$
|
(57
|
)
|
|
Other Income
|
Income Taxes
|
15
|
|
|
25
|
|
|
Income Taxes (a)
|
|
$
|
(18
|
)
|
|
$
|
(32
|
)
|
|
|
|
|
|
|
|
|
Losses from reclassifications for the period net of tax
|
$
|
31
|
|
|
$
|
68
|
|
|
|
(a) Determined using a combined average statutory tax rate of
40%
.
In July 2016, the
$10.0 million
note receivable as of June 30, 2016 from a not-for-profit organization formed to spur economic development in Atlantic City, New Jersey (see Note 5), was repaid in full, including interest.