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| SJI > SEC Filings for SJI > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
Forward-Looking Statements and Risk Factors - Certain statements contained in this Quarterly Report may qualify as "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report should be considered forward-looking statements made in good faith and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Words such as "anticipate", "believe", "expect", "estimate", "forecast", "goal", "intend", "objective", "plan", "project", "seek", "strategy" and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements. These risks and uncertainties include, but are not limited to, the following: general economic conditions on an international, national, state and local level; weather conditions in our marketing areas; changes in commodity costs; changes in the availability of natural gas; "non-routine" or "extraordinary" disruptions in our distribution system; regulatory, legislative and court decisions; competition; the availability and cost of capital; costs and effects of legal proceedings and environmental liabilities; the failure of customers, suppliers or business partners to fulfill their contractual obligations; and changes in business strategies.
A discussion of these and other risks and uncertainties may be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 and in other filings made by us with the Securities and Exchange Commission. These cautionary statements should not be construed by you to be exhaustive and they are made only as of the date of this Quarterly Report on Form 10-Q, or in any document incorporated by reference, at the date of such document. While SJI believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, SJI undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise.
Critical Accounting Policies - Estimates and Assumptions - Management must make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. Actual results could differ from those estimates. Five types of transactions presented in our condensed consolidated financial statements require a significant amount of judgment and estimation. These relate to regulatory accounting, derivatives, environmental remediation costs, pension and other postretirement employee benefit costs, and revenue recognition. A discussion of these estimates and assumptions may be found in our Form 10-K for the year ended December 31, 2008.
New Accounting Pronouncements - See detailed discussions concerning New Accounting Pronouncements and their impact on SJI in Note 1 to the condensed consolidated financial statements.
Regulatory Actions -Other than the changes discussed in Note 7 to the condensed consolidated financial statements, there have been no significant regulatory actions since December 31, 2008. See detailed discussion concerning Regulatory Actions in Note 9 to the Consolidated Financial Statements in Item 8 of SJI's Annual Report on Form 10-K as of December 31, 2008.
Environmental Remediation -Other than the changes discussed in Note 12 to the condensed consolidated financial statements, there have been no significant changes to the status of the Company's environmental remediation efforts since December 31, 2008. See detailed discussion concerning Environmental Remediation in Note 14 to the Consolidated Financial Statements in Item 8 of SJI's Annual Report on Form 10-K as of December 31, 2008.
RESULTS OF OPERATIONS:
SJI operates in several different reportable operating segments. Gas Utility Operations (SJG) consists primarily of natural gas distribution to residential, commercial and industrial customers. Wholesale Gas Operations include SJRG's activities. SJE is involved in both retail gas and retail electric activities. Retail Gas and Other Operations include natural gas acquisition and transportation service business lines. Retail Electric Operations consist of electricity acquisition and transportation to commercial and industrial customers. On-Site Energy Production consists of Marina's thermal energy facility and other energy-related projects. Appliance Service Operations includes SJESP's servicing of appliances via the sale of appliance service programs as well as on a time and materials basis, and the installation of residential and small commercial HVAC systems.
A significant portion of the volatility in operating results is due to the impact of the accounting methods associated with SJRG's storage activities. SJRG purchases and holds natural gas in storage to earn a profit margin from its ultimate sale in the future. SJRG uses derivatives to mitigate commodity price risk in order to substantially lock-in the profit margin that will ultimately be realized. However, gas stored in inventory is accounted for at the lower of average cost or market; the derivatives used to reduce the risk associated with a change in the value of the inventory are accounted for at fair value, with changes in fair value recorded in operating results in the period of change. As a result, earnings are subject to volatility as the market prices of derivatives change, even when the underlying hedged value of the inventory is unchanged. This volatility can be significant from period to period. Over time, gains or losses on the sale of gas in storage will be offset by losses or gains on the derivatives, resulting in the realization of the profit margin expected when the transactions were initiated.
Net Income attributable to SJI for the three months ended March 31, 2009 increased $6.9 million, or 28% to net income of $31.6 million compared to the three months ended March 31, 2008. This increase is primarily due to the change in unrealized losses on derivatives used by SJRG to mitigate commodity price risk, as discussed above. These changes are also discussed in more detail below.
The following tables summarize the composition of selected SJG data for the three months ended March 31 (in thousands, except for degree day data):
Three Months Ended
March 31,
2009 2008
Utility Throughput - dth:
Firm Sales -
Residential 11,517 10,183
Commercial 2,877 2,584
Industrial 149 75
Cogeneration & Electric Generation 14 16
Firm Transportation -
Residential 1,007 952
Commercial 2,571 2,460
Industrial 3,052 3,280
Cogeneration & Electric Generation 433 352
Total Firm Throughput 21,620 19,902
Interruptible Sales 2 2
Interruptible Transportation 636 912
Off-System 2,694 4,239
Capacity Release 8,499 11,230
Total Throughput - Utility 33,451 36,292
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SJI - 23
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Three Months Ended
March 31,
2009 2008
Utility Operating Revenues:
Firm Sales -
Residential $ 168,638 $ 143,468
Commercial 36,526 31,186
Industrial 1,811 3,555
Cogeneration & Electric Generation 273 327
Firm Transportation -
Residential 4,695 4,469
Commercial 7,914 7,653
Industrial 3,587 3,192
Cogeneration & Electric Generation 459 322
Total Firm Revenues 223,903 194,172
Interruptible Sales 40 125
Interruptible Transportation 557 596
Off-System 16,902 39,990
Capacity Release 1,440 2,800
Other 271 221
243,113 237,904
Less: Intercompany Sales 3,004 1,492
Total Utility Operating Revenues 240,109 236,412
Less:
Cost of Sales $ 162,973 $ 161,425
Conservation Recoveries* 3,265 3,065
RAC Recoveries* 1,209 695
Revenue Taxes 4,071 3,790
Utility Margin $ 68,591 $ 67,437
Margin:
Residential $ 45,590 $ 40,982
Commercial and Industrial 15,429 14,318
Cogeneration and Electric Generation 340 289
Interruptible 46 65
Off-system & Capacity Release 702 1,081
Other Revenues 270 220
Margin Before Weather Normalization & Decoupling 62,377 56,955
CIP Mechanism 6,214 10,482
Utility Margin $ 68,591 $ 67,437
Degree Days: 2,518 2,264
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*Represents revenues for which there is a corresponding charge in operating expenses. Therefore, such recoveries have no impact on our financial results.
Throughput - Total gas throughput decreased 2.8 MMdts, or 7.8%, for the three months ended March 31, 2009, compared with the same period in 2008. Off-System sales (OSS) and capacity release volume decreased substantially as SJG's portfolio of assets available for such activities has been reduced under the Conservation Incentive Program, as discussed under "Rates and Regulation" in Item 7 of SJI's Annual Report on Form 10-K as of December 31, 2008. First quarter firm throughput increased in both the residential and commercial markets as a result of 11.2% colder weather, as reflected by the degree day data in the table above, and the addition of 4,441 customers during the 12-month period ended March 31, 2009.
SJI - 24
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Conservation Incentive Program (CIP) - The effects of the CIP on SJG's net
income for the three months ended March 31, 2009 and 2008 and the associated
weather comparisons were as follows ($'s in millions):
Three Months Ended
March 31,
2009 2008
Net Income Benefit:
CIP - Weather Related $ (0.6 ) $ 1.6
CIP - Usage Related 4.3 4.6
Total Net Income Benefit $ 3.7 $ 6.2
Weather Compared to 20-Year Average 3.7% colder 6.8% warmer
Weather Compared to Prior Year 11.2% colder 6.4% warmer
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Operating Revenues - Utility - Revenues increased $3.7 million, or 1.6%, during the three months ended March 31, 2009 compared to the same period in the prior year. Firm sales revenue increased $29.7 million, or 15.3%. This increase was driven by several factors including 11.2% colder weather, the addition of 4,441 customers over the last twelve months, and a higher Basic Gas Supply Service (BGSS) rate. During the first quarter of 2009, the BGSS rate was 11.1% higher than the rate in effect during the same time last year. This increase was necessary to fully recover higher gas costs incurred through most of 2008. However, as the Company does not profit from the sale of the commodity, the BGSS rate increase did not have an impact on Company profitability. Partially offsetting the increase in firm sales was a substantial decrease in off-system sales (OSS) and capacity release revenue, which decreased by $23.1 million and $1.4 million, respectively, before eliminating intercompany transactions. These decreases were primarily related to a reduction of SJG's portfolio of assets available for such activities under the provisions of the CIP, as noted above under "Throughput." Further, for those OSS transacted during the first quarter of 2009, the average cost per unit sold had dropped considerably, thus resulting in an additional decline in revenues during the period.
Operating Revenues - Nonutility - Combined revenues for SJI's nonutility businesses, net of intercompany transactions, increased by $10.4 million, or 9.3% in the three months ended March 31, 2009 compared with the same period in 2008.
SJE's revenues from retail gas, net of intercompany transactions, decreased by $18.6 million or 33.3% in the three months ended March 31, 2009 compared with the same period in 2008 due mainly to a 39.1% decrease in the average monthly NYMEX settle price during the quarter ended March 31, 2009 compared with the same period in 2008. The majority of SJE's natural gas customer contracts are market-priced. In addition, as of March 31, 2009, SJE was serving 9,891 residential customers compared with 12,754 as of March 31, 2008. Market conditions continue to make it difficult to be competitive in this market. SJE's commercial customer count also declined from 1,361 as of March 31, 2008 to 1,039 as of March 31, 2009, driven mainly by the expiration of a large municipal bid early in the fourth quarter of 2008. We continue to focus our marketing efforts on the pursuit of non-heat-sensitive commercial customers in an effort to mitigate price volatility and weather risk.
SJE's revenues from retail electricity, net of intercompany transactions, decreased $7.7 million in the three months ended March 31, 2009, compared with the same period in 2008. Excluding the impact of the net change in unrealized losses recorded on forward financial contracts of $2.0 million due to price volatility, SJE's revenues from retail electricity decreased $5.7 million or 41.4% due mainly to a 67% decrease in the average monthly Locational Marginal Price (LMP) per megawatt hour in the quarter ended March 31, 2009 compared with the same period in 2008. Essentially all of SJE's retail electric customer contracts are market-priced.
SJRG's revenues, net of intercompany transactions, increased $37.5 million in the three months ended March 31, 2009 compared with the same period in 2008. Excluding the impact of the net change in unrealized gains and losses recorded on forward financial contracts of $(12.2) million due to price volatility, SJRG's revenues increased $25.3 million. A summary of SJRG's revenue for the three months ended March 31 is as follows (in millions):
2009 2008 Change
SJRG Revenue $ 63.6 $ 26.1 $ 37.5
Add: Unrealized losses 14.2 26.4 (12.2 )
SJRG Revenue, Excluding unrealized losses $ 77.8 $ 52.5 $ 25.3
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This increase in revenues is mainly attributable to a 32.8% increase in sales of storage volumes in the first three months of 2009 compared with the same period in 2008. As discussed in Note 1 to the Consolidated Financial Statements in Item 8 of SJI's Annual Report on Form 10-K as of December 31, 2008, revenues and expenses related to the energy trading activities of SJRG are presented on a net basis in Operating Revenues - Nonutility.
Revenues for Marina decreased $0.8 million or 7.0% in the three months ended March 31, 2009 compared with the same period in 2008 due mainly to lower rates on chilled and hot water. Lower rates were driven by lower underlying commodity prices. Volumetric hot water production increased 13.2% and chilled water production decreased 5.3% in the quarter ended March 31, 2009 compared with the same period in 2008, respectively. Additional production was mainly attributable to the opening of Borgata's new Water Club tower in June 2008 and offset by lower demand at Borgata's other facilities mainly driven by the impact of current economic conditions on resort occupancy.
Revenues for SJESP remained relatively unchanged in the three months ended March 31, 2009 compared with the same period in 2008. However, SJESP did recognize revenues from a large commercial HVAC job that for the most part offset a decline in revenues from time and materials (T&M) and installation jobs. T&M and installation revenues were negatively impacted by current depressed economic conditions.
Margin (pre-tax) - Utility- SJG's margin is defined as natural gas revenues less natural gas costs; volumetric and revenue based energy taxes; and regulatory rider expenses. We believe that margin provides a more meaningful basis for evaluating utility operations than revenues since natural gas costs, energy taxes and regulatory rider expenses are passed through to customers, and therefore, have no effect on margin. Natural gas costs are charged to operating expenses on the basis of therm sales at the prices approved by the New Jersey Board of Public Utilities through the BGSS tariff.
Total margin increased $1.2 million, or 1.7%, for the three months ended March 31, 2009 compared with the same period in 2008 due to customer additions as noted above. Partially offsetting these increases were lower margins from OSS and capacity release resulting from decreased volumes as discussed above under "Throughput" and "Operating Revenues - Utility". The CIP protected $6.2 million of pre-tax margin in the first three months of 2009 that would have been lost due to lower customer usage, compared to $10.5 million in the same period last year. Of these amounts, $(1.1) million and $2.7 million were related to weather variations and $7.3 million and $7.8 million were related to other customer usage variations in 2009 and 2008, respectively.
Gross Margin - Nonutility - Gross margin for the nonutility businesses is defined as revenue less all costs that are directly related to the production, selling and delivery of the company's products and services. These costs primarily include natural gas and electric commodity costs as well as certain payroll and related benefits. On the statements of condensed consolidated income, revenue is reflected in Operating Revenues - Nonutility and the costs are reflected in Cost of Sales - Nonutility.
As discussed in Note 1 to the Consolidated Financial Statements in Item 8 of SJI's Annual Report on Form 10-K as of December 31, 2008, revenues and expenses related to the energy trading activities of SJRG are presented on a net basis in Operating Revenues - Nonutility.
For the three months ended March 31, 2009 combined gross margins for the nonutility businesses, net of intercompany transactions, increased $13.2 million to $19.5 million compared with the same period in 2008. This increase is primarily due to the following:
· Gross margin for SJRG increased $16.4 million in the three months ended March 31, 2009 compared with the same period in 2008. Excluding the impact of the net change in unrealized gains and losses recorded on forward financial contracts as discussed above, gross margin for SJRG increased $4.2 million in the three months ended March 31, 2009 compared with the same period in 2008. Operationally, margins increased significantly in 2009 due primarily to favorable seasonal time spreads on storage and transportation asset positions that were locked in and/or improved upon. Storage assets allow SJRG to lock in the differential between purchasing natural gas at low current prices and selling equivalent quantities at higher future prices. Gross margin is generated via seasonal pricing differentials. Similar to storage, transportation assets allow us to lock in the differential of transporting natural gas from one delivery point to another. Future margins could fluctuate significantly due to the volatile nature of wholesale gas prices.
· Gross margin for Marina decreased $0.1 million in the three months ended March 31, 2009 compared with the same period in 2008. Gross margin as a percentage of Operating Revenues increased 3.0 percentage points in the quarter ended March 31, 2009 compared with the same period in 2008 due mainly to the lower rates on low-margin electric sales to Borgata.
· Gross margin from SJE's retail gas sales decreased $1.0 million in the three months ended March 31, 2009 compared with the same period in 2008. Gross margin as a percentage of Operating Revenues did not change significantly for the quarter ended March 31, 2009 compared with the same period in 2008. However, two main factors essentially offset each other. First, during the first quarter of 2008, SJE partially recovered losses from a full requirements customer in the commercial market that were recognized in 2006. Second, the 2009 margin reflects the impact of our efforts to reduce our exposure to changes in customer usage patterns.
· Gross margin from SJE's retail electricity sales decreased $2.1 million in the three months ended March 31, 2009 compared with the same period in 2008. Excluding the impact of a $2.0 million increase in unrealized losses recorded on forward financial contracts, gross margin decreased $0.1 million in the three months ended March 31, 2009 compared with the same period in 2008. Gross margin as a percentage of Operating Revenues increased 2.5 percentage points in the quarter ended March 31, 2009 compared with the same period in 2008 as the LMP rate is a pass through to our customers while our margin is based on volumetric and transmission components of the customer contracts.
· Gross margin for SJESP did not change significantly in the three months ended March 31, 2009 compared with the same period in 2008. Gross margin as a percentage of Operating Revenues also did not change significantly for the quarter ended March 31, 2009 compared with the same period in 2008. Commercial margins essentially offset T&M and installation margins as discussed in Operating Revenues - Nonutility.
Operations Expense - A summary of net changes in operations expense, for the three months ended March 31, follows (in thousands):
Three Months Ended
March 31,
2009 vs. 2008
Utility $ 2,235
Nonutility:
Wholesale Gas 45
Retail Gas and Other 149
Retail Electricity 11
On-Site Energy Production 155
Appliance Service 281
Total Nonutility 641
Intercompany Eliminations and Other 43
Total Operations $ 2,919
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Utility operations expense increased $2.2 million for the three months ended March 31, 2009, as compared with the same period in 2008. The increase is primarily due to the cost of providing pension and other postretirement benefit plans which increased by $1.0 million as a result of significant losses in the assets of those plans during 2008. The company also experienced moderate increases in governance, compliance, employee compensation costs and expenses associated with uncollectible customer accounts as a result of normal fluctuations in customer account receivable balances due to colder weather in 2009.
Nonutility operations expense increased $0.6 million in the three months ended March 31, 2009 compared with the same period in 2008 due mainly to increases in governance, compliance and employee compensation costs.
Other changes in operations expense during 2009 were not significant.
Other Operating Expenses -Changes in other consolidated operating expenses which consist of Maintenance, Depreciation, and Energy and Other Taxes for the three months ended March 31, 2009 compared with the same period in 2008, were not significant.
Equity in Earnings of Affiliated Companies - Pre-tax earnings from subsidiaries accounted for under the equity method has decreased by approximately $2.7 million for the three months ended March 31, 2009 compared with the same period in 2008. This decrease is primarily attributable to debt service costs incurred by LVE Energy Partners, LLC. A significant portion of these costs were previously being capitalized to the cost of the project during the construction period. As discussed further under "Commitments and Contingencies", LVE has suspended its construction activities and as a result, all current period debt service costs have been recognized in earnings.
Interest Charges - Interest charges decreased by $1.1 million for the three-month period ended March 31, 2009 compared with the same period in 2008, due primarily to significantly lower interest rates on short-term debt during 2009.
Discontinued Operations- The losses are primarily comprised of environmental remediation and product liability litigation associated with previously disposed of businesses.
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity needs are driven by factors that include natural gas commodity prices; the impact of weather on customer bills; lags in fully collecting gas costs from customers under the Basic Gas Supply Service charge; working capital needs of our energy trading and marketing activities; the timing of construction and remediation expenditures and related permanent financings; the timing of equity . . .
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