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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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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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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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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South Jersey Exploration, LLC (SJEX) owns oil, gas and mineral rights in the Marcellus Shale region of Pennsylvania.
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Marina Energy, LLC (Marina) develops and operates on-site energy-related projects. The significant wholly-owned subsidiaries of Marina are:
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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.
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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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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. In May 2017, SJESP entered into an agreement to sell certain assets of its residential and small commercial HVAC and plumbing business to a third party. This transaction, which is expected to be completed by August 31, 2017, is not expected to have a material impact on the consolidated financial statements.
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SJI Midstream, LLC (Midstream) invests in infrastructure and other midstream projects, including a current project to build an approximately
118
-mile natural gas pipeline in Pennsylvania and New Jersey.
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BASIS OF PRESENTATION - SJI's condensed consolidated financial statements include the accounts of SJI, its wholly-owned subsidiaries (including SJG) and subsidiaries in which SJI has a controlling interest. SJI eliminates all significant intercompany accounts and transactions. In management’s opinion, the unaudited condensed consolidated financial statements of SJI and SJG reflect all normal and recurring adjustments needed to fairly present their respective financial positions, operating results and cash flows at the dates and for the periods presented. SJI’s and SJG'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 of SJI and SJG 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 and SJG's Annual Reports on Form 10-K for the year ended
December 31, 2016
for a more complete discussion of the accounting policies and certain other information.
Certain reclassifications have been made to SJI's and SJG's prior period condensed consolidated statements of cash flows to conform to the current period presentation. Restricted cash is now combined with cash and cash equivalents when reconciling the beginning and end of period balances on the condensed consolidated statements of cash flows of SJI, as well as the condensed statements of cash flows for SJG, to conform to ASU 2016-18, which is described below under "New Accounting Pronouncements." This combination of restricted cash and cash and cash equivalents caused Cash Flows from Investing Activities for both SJI and SJG to be adjusted in order to remove items relating to capital expenditures and proceeds from restricted investments (SJI only), as well as the sale of restricted investments in a margin account (SJI and SJG).
Certain reclassifications have been made to SJI's prior period condensed consolidated statements of cash flows to conform to the current period presentation. Cash paid by an employer when directly withholding shares for tax-withholding purposes is now classified as a financing activity in the condensed consolidated statements of cash flows to conform to ASU 2016-09, which is described below under "New Accounting Pronouncements." This caused SJI's prior period Cash Flows Provided by Operating Activities to increase by
$0.4 million
and Net Cash Flows from Financing Activities to decrease by the same amount. Adoption of this guidance did not effect SJG's condensed statements of cash flows.
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, 2017 and 2016, and
$0.6 million
and
$0.5 million
for the six months ended June 30, 2017 and 2016, respectively
.
IMPAIRMENT OF LONG-LIVED ASSETS - SJI and SJG review 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, 2017
, SJI recorded an impairment charge of
$0.3 million
within Operating Expenses on the condensed consolidated statements of income due to a reduction in the expected cash flows to be received from a solar generating facility within the on-site energy production segment.
No
impairments were identified at SJI for the three months ended
June 30, 2017
or at SJG for the three and
six
months ended
June 30, 2017
. For the three and
six
months ended
June 30, 2016
,
no
impairments were identified at SJI or SJG.
GAS EXPLORATION AND DEVELOPMENT - SJI 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 three and
six
months ended
June 30, 2017
or
2016
. As of
June 30, 2017
and
December 31, 2016
,
$8.7 million
and
$8.8 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 SJI's condensed consolidated balance sheets.
TREASURY STOCK - SJI uses the par value method of accounting for treasury stock. As of
June 30, 2017
and
December 31, 2016
, SJI held
211,217
and
212,617
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 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 three and
six
months ended
June 30, 2017
. Goodwill totaled
$4.8 million
on the condensed consolidated balance sheets of SJI as of both
June 30, 2017
and
December 31, 2016
.
NEW ACCOUNTING PRONOUNCEMENTS - Other than as described below, no new accounting pronouncement issued or effective during
2017
or
2016
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. In connection with this new standard, the FASB has issued several amendments to ASU 2014-09, as follows:
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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 improves the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis.
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In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
. This standard clarifies identifying performance obligations and the licensing implementation guidance.
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In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
. This standard provides 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 (e) disclosure of the effects of the accounting change in the period of adoption.
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In December 2016, the FASB issued ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
, which amends certain narrow aspects of the guidance, including the disclosure of remaining performance obligations and prior-period performance obligations, as well as other amendments to the guidance on loan guarantee fees, contract costs, refund liabilities, advertising costs and the clarification of certain examples.
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The new guidance in ASU 2014-09, as well as all amendments discussed above, 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 evaluating the impact that adoption of this guidance will have on the financial statements of SJI and SJG. We are in the process of assessing the impact of the guidance on our contracts in all our revenue streams by reviewing current accounting policies and practices to identify potential differences that would result from applying the new requirements to our revenue contracts. We expect that the majority of SJI and SJG revenue streams will be in scope of the new guidance, which includes SJG’s regulated revenue under tariffs, for which no change in current revenue recognition practices is expected. Revenues from contracts that SJI and SJG have with customers are currently recorded as gas or electricity is delivered to the customer, which is consistent with the new guidance under ASC 606. As a result, based on the review of customer contracts to date, SJI is not anticipating this guidance to have a material impact to SJI's or SJG's statements of consolidated income, cash flows or consolidated balance sheets upon adoption. The ASU does include expanded disclosure requirements, which we continue to analyze. We do not anticipate any significant changes to our business processes, systems or internal controls over financial reporting needed to support recognition and disclosure under the new guidance. We are continuing with our implementation plan and expect to transition to the new guidance beginning in 2018 using the modified retrospective approach.
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 financial statements of SJI and SJG.
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 has formed an implementation team that is inventorying leases and evaluating the impact that adoption of this guidance will have on SJI's and SJG's financial statements, as well as the transition method that will be elected to adopt the guidance.
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 was effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016, with early adoption permitted. Adoption of this guidance did not have a material impact on the financial statement results of SJI or SJG; however, cash flow presentation was modified for SJI to conform to this guidance, as described under “Basis of Presentation” above.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. This standard requires recognition of the current and deferred income tax effects of an intra-entity asset transfer, other than inventory, when the transfer occurs, as opposed to current GAAP, which requires companies to defer the income tax effects of intra-entity asset transfers until the asset has been sold to an outside party. The income tax effects of intra-entity inventory transfers will continue to be deferred until the inventory is sold. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, with early adoption permitted. The standard is required to be adopted on a modified retrospective basis with a cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. This standard is intended to reduce diversity in practice in the classification and presentation of changes in restricted cash on the statement of cash flows. This ASU requires that the statement of cash flows explain the change in total cash and cash equivalents and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. This ASU also requires a reconciliation between the total of cash and cash equivalents and restricted cash presented on the statement of cash flows and the cash and cash equivalents balance presented on the balance sheets. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. Both SJI and SJG early adopted this ASU in the first quarter of 2017. Accordingly, cash flow presentations were modified for both entities to conform to this guidance, as described under “Basis of Presentation” above.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. This new standard provides amended and clarifying guidance regarding whether an integrated set of assets and activities acquired is deemed the acquisition of a business (and, thus, accounted for as a business combination) or the acquisition of assets. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. The amendments in this update are effective for annual and any interim impairment tests performed in periods beginning after December 31, 2019. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.
In March 2017, the FASB issued ASU 2017-07,
Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
This ASU is designed to improve guidance related to the presentation of defined benefit costs in the income statement. In particular, this ASU requires an employer to report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
. This ASU clarifies and reduces both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, to a change to the terms and conditions of a share-based payment award.
This standard is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods,
with early adoption permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date.
Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.
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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 SJI'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, 2017
and
2016
.
No
stock appreciation rights have been issued under the plans. During the
six
months ended
June 30, 2017
and
2016
, SJI granted
167,444
and
193,184
restricted shares, respectively, to Officers and other key employees under the Plan. 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 shares granted.
In 2015, SJI began granting time-based shares of restricted stock, one-third of which vest annually over a
three
-year period and which are 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, 2017
and
2016
, Officers and other key employees were granted
52,971
and
57,955
shares of time-based restricted stock, respectively, 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, earnings-based performance targets included pre-defined EGR and 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, 2017
and
2016
, SJI granted
30,394
and
35,197
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 for SJI at
June 30, 2017
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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2015 - TSR
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33,537
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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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61,586
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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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66,101
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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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103,650
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$
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23.52
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N/A
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N/A
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2017 - TSR
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57,237
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$
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32.17
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20.8
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%
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1.47
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%
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2017 - CEGR, Time
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110,207
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$
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33.69
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N/A
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N/A
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Directors -
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2017
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30,394
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$
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33.64
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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 to SJI for the
three and six
months ended
June 30, 2017
and
2016
(in thousands):
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2017
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2016
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2017
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2016
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Officers & Key Employees
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$
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1,117
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$
|
798
|
|
|
$
|
2,187
|
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$
|
1,615
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Directors
|
256
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227
|
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512
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420
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Total Cost
|
1,373
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|
1,025
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2,699
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2,035
|
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Capitalized
|
(104
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)
|
(106
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)
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(192
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)
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(212
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)
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Net Expense
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$
|
1,269
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|
$
|
919
|
|
|
$
|
2,507
|
|
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$
|
1,823
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As of
June 30, 2017
, there was
$7.9 million
of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under the plans. That cost is expected to be recognized over a weighted average period of
2.0
years.
The following table summarizes information regarding restricted stock award activity for SJI during the
six
months ended
June 30, 2017
, excluding accrued dividend equivalents:
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Officers &Other Key Employees
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Directors
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Weighted
Average
Fair Value
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Nonvested Shares Outstanding, January 1, 2017
|
295,515
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35,197
|
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$
|
24.96
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Granted
|
167,444
|
|
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30,394
|
|
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$
|
33.24
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Vested
|
(30,641
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)
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(35,197
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)
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$
|
24.75
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Nonvested Shares Outstanding, June 30, 2017
|
432,318
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30,394
|
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$
|
28.53
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During the
six
months ended
June 30, 2017
and
2016
, SJI awarded
65,628
shares to its Officers and other key employees at a market value of
$2.2 million
, and
13,247
shares at a market value of
$0.3 million
, respectively. During the
six
months ended
June 30, 2017
and
2016
, SJI also granted
30,394
and
35,197
shares to its Directors at a market value of
$1.0 million
and
$0.8 million
, respectively.
SJI 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.
South Jersey Gas Company - Officers and other key employees of SJG participate in the stock-based compensation plans of SJI. During the
six
months ended
June 30, 2017
and
2016
, SJG officers and other key employees were granted
24,001
and
32,732
shares of SJI restricted stock, respectively. The cost of outstanding stock awards for SJG during the six months ended
June 30, 2017
and
2016
was
$0.3 million
and
$0.2 million
, respectively. Approximately one-half of these costs were capitalized on SJG's condensed balance sheets to Utility Plant.
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3.
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AFFILIATIONS, DISCONTINUED OPERATIONS AND RELATED-PARTY TRANSACTIONS:
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AFFILIATIONS — The following affiliated entities are accounted for under the equity method:
PennEast Pipeline Company, LLC (PennEast) - Midstream has a
20%
investment in PennEast, which is planning to construct an approximately
118
-mile natural gas pipeline that will extend from Northeastern Pennsylvania into New Jersey, with construction to begin in 2018.
Energenic – US, LLC (Energenic) - Marina and a joint venture partner formed Energenic, in which Marina has a
50%
equity interest. Energenic developed and operated on-site, self-contained, energy-related projects.
Millennium Account Services, LLC (Millennium) - SJI and a joint venture partner formed Millennium, in which SJI has a
50%
equity interest. Millennium reads utility customers’ meters on a monthly basis for a fee.
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.
During the first
six
months of
2017
and
2016
, SJI made net investments in unconsolidated affiliates of
$19.2 million
and
$4.6 million
, respectively. As of
June 30, 2017
and
December 31, 2016
, the outstanding balance of Notes Receivable – Affiliate was
$15.5 million
and
$15.7 million
, respectively. As of
June 30, 2017
,
$13.7 million
of these notes were secured by property, plant and equipment of the affiliates, accrue interest at
7.5%
and are to be repaid through
2025
. The remaining
$1.8 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, 2017
, SJI had a net asset of approximately
$50.0 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, 2017
, is limited to its combined equity contributions and the Notes Receivable-Affiliate in the aggregate amount of
$65.5 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 (see Note 11).
Summarized operating results of the discontinued operations for the
three and six
months ended
June 30, 2017
and
2016
, were (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Loss before Income Taxes:
|
|
|
|
|
|
|
|
Sand Mining
|
$
|
(15
|
)
|
|
$
|
(18
|
)
|
|
$
|
(32
|
)
|
|
$
|
(164
|
)
|
Fuel Oil
|
(57
|
)
|
|
(27
|
)
|
|
(86
|
)
|
|
(62
|
)
|
Income Tax Benefits
|
25
|
|
|
16
|
|
|
41
|
|
|
79
|
|
Loss from Discontinued Operations — Net
|
$
|
(47
|
)
|
|
$
|
(29
|
)
|
|
$
|
(77
|
)
|
|
$
|
(147
|
)
|
Earnings Per Common Share from
|
|
|
|
|
|
|
|
|
Discontinued Operations — Net:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
SJG RELATED-PARTY TRANSACTIONS - There have been no significant changes in the nature of SJG’s related-party transactions since
December 31, 2016
. See Note 5 to the Financial Statements in Item 8 of SJG’s Form 10-K for the year ended
December 31, 2016
for a detailed description of the related parties and their associated transactions.
A summary of related party transactions involving SJG, excluding pass-through items, included in SJG's Operating Revenues were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Operating Revenues/Affiliates:
|
|
|
|
|
|
|
|
SJRG
|
$
|
1,248
|
|
|
$
|
421
|
|
|
$
|
2,211
|
|
|
$
|
4,422
|
|
Marina
|
65
|
|
|
68
|
|
|
147
|
|
|
164
|
|
Other
|
21
|
|
|
21
|
|
|
42
|
|
|
42
|
|
Total Operating Revenue/Affiliates
|
$
|
1,334
|
|
|
$
|
510
|
|
|
$
|
2,400
|
|
|
$
|
4,628
|
|
Related-party transactions involving SJG, excluding pass-through items, included in SJG's Cost of Sales and Operating Expenses were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Costs of Sales/Affiliates (Excluding depreciation)
|
|
|
|
|
|
|
|
SJRG
|
$
|
496
|
|
|
$
|
1,514
|
|
|
$
|
10,946
|
|
|
$
|
9,503
|
|
|
|
|
|
|
|
|
|
Operations Expense/Affiliates:
|
|
|
|
|
|
|
|
SJI
|
$
|
4,988
|
|
|
$
|
5,315
|
|
|
$
|
11,038
|
|
|
$
|
9,870
|
|
Millennium
|
712
|
|
|
701
|
|
|
1,420
|
|
|
1,395
|
|
Other
|
(41
|
)
|
|
(49
|
)
|
|
(80
|
)
|
|
(106
|
)
|
Total Operations Expense/Affiliates
|
$
|
5,659
|
|
|
$
|
5,967
|
|
|
$
|
12,378
|
|
|
$
|
11,159
|
|
The following shares were issued and outstanding for SJI:
|
|
|
|
|
2017
|
Beginning Balance, January 1
|
79,478,055
|
|
New Issuances During the Period:
|
|
|
Stock-Based Compensation Plan
|
70,959
|
|
Ending Balance, June 30
|
79,549,014
|
|
The par value (
$1.25
per share) of stock issued was recorded in Common Stock and the net excess over par value of approximately
$1.1 million
was recorded in Premium on Common Stock.
In May 2016, SJI issued and sold
8,050,000
shares of its common stock, par value
$1.25
per share pursuant to 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.
There were
2,339,139
shares of SJG's common stock (par value
$2.50
per share) outstanding as of
June 30, 2017
. SJG did not issue any new shares during the period. SJI owns all of the outstanding common stock of SJG.
SJI's EARNINGS PER COMMON SHARE (EPS) - SJI's 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
136,332
and
292,782
for the six months ended June 30, 2017 and 2016, respectively
. For the three months ended
June 30, 2017
and 2016, incremental shares of
150,852
and
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) - SJI offers a DRP which allows participating shareholders to purchase shares of SJI common stock by automatic reinvestment of dividends or optional purchases. Prior to May 1, 2016 shares of common stock offered by the DRP had been issued directly by SJI from its authorized but unissued shares of common stock. SJI raised
$10.8 million
of equity capital through the DRP during the
six
months ended
June 30, 2016
. Effective May 1, 2016, SJI switched to purchasing shares on the open market to fund share purchases by DRP participants. SJI does not intend to issue any new equity capital via the DRP in 2017.
|
|
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, 2017
and
December 31, 2016
, the escrowed funds, including interest earned, totaled
$0.3 million
and
$1.9 million
, respectively, which are recorded in Restricted Investments on the condensed consolidated balance sheets.
SJI and SJG maintain margin accounts with selected counterparties to support their 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, 2017
, SJI's balances in these accounts totaled
$1.5 million
held by the counterparty, which is recorded in Restricted Investments on the condensed consolidated balance sheets, and
$2.8 million
held by SJI as collateral, which is recorded in Other Current Liabilities on the condensed consolidated balance sheets. As of
December 31, 2016
, SJI's balances in these accounts totaled
$11.7 million
held by the counterparty and was recorded in Restricted Investments on the condensed consolidated balance sheets. As of
June 30, 2017
, SJG's balance held by the counterparty totaled
$1.5 million
and was recorded in Restricted Investments on the condensed balance sheets. As of
December 31, 2016
, SJG's balance held by SJG as collateral was
$3.6 million
which was recorded in Accounts Payable - Other on the condensed balance sheets.
The carrying amounts of the Restricted Investments for both SJI and SJG approximate their fair values at
June 30, 2017
and
December 31, 2016
, which would be included in Level 1 of the fair value hierarchy (see Note 13).
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
Balance Sheet Line Item
|
|
SJI
|
SJG
|
Cash and Cash Equivalents
|
|
$
|
10,122
|
|
$
|
1,096
|
|
Restricted Investments
|
|
1,842
|
|
1,542
|
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
|
|
$
|
11,964
|
|
$
|
2,638
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
Balance Sheet Line Item
|
|
SJI
|
SJG
|
Cash and Cash Equivalents
|
|
$
|
18,282
|
|
$
|
1,359
|
|
Restricted Investments
|
|
13,628
|
|
32
|
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
|
|
$
|
31,910
|
|
$
|
1,391
|
|
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.
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. The Company received
$2.1 million
in the second quarter of 2016, which is included in Other Income on the statements of consolidated income for the year ended December 31, 2016, and
$5.3 million
was received in the third quarter of 2016 and is included in Equity in Earnings of Affiliated Companies on the statements of consolidated income for the year ended December 31, 2016, as the loss recorded in the prior year was included in this line item on the statements of consolidated income for the year ended December 31, 2015.
As of
June 30, 2017
, SJI had approximately
$13.7 million
included in Notes Receivable - Affiliate on the condensed consolidated balance sheets, due from Energenic, which is secured by its cogeneration assets for energy service projects. This note is subject to a reimbursement agreement that secures reimbursement for SJI, 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 cogeneration assets and will evaluate the carrying value of the investment and the note receivable as future events occur.
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 periods ranging from
five
to
ten
years, with no interest. The carrying amounts of such loans were
$8.1 million
and
$9.5 million
as of
June 30, 2017
and
December 31, 2016
, 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
$0.8 million
and
$0.9 million
as of
June 30, 2017
and
December 31, 2016
, respectively. The annualized amortization to interest is not material to SJI’s or SJG's condensed consolidated financial statements. The carrying amounts of these receivables approximate their fair value at
June 30, 2017
and
December 31, 2016
, which would be included in Level 2 of the fair value hierarchy (see Note 13).
CREDIT RISK - As of
June 30, 2017
, SJI had approximately
$9.2 million
, or
17.1%
, of the current and noncurrent Derivatives – Energy Related Assets 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 with a rating of Baa1.
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 and SJG's financial instruments approximate their fair values at
June 30, 2017
and
December 31, 2016
, except as noted below.
|
|
•
|
For Long-Term Debt, in estimating the fair value, SJI and SJG use the present value of remaining cash flows at the balance sheet date. SJI and SJG based the estimates on interest rates available 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 (which includes SJG and all consolidated subsidiaries), including current maturities, as of
June 30, 2017
and
December 31, 2016
, were
$1,106.7 million
and
$1,080.8 million
, respectively. The carrying amounts of SJI's long-term debt, including current maturities, as of
June 30, 2017
and
December 31, 2016
, were
$1,082.6 million
and
$1,039.9 million
, respectively. SJI's carrying amounts as of
June 30, 2017
and
December 31, 2016
are net of unamortized debt issuance costs of
$8.5 million
and
$7.6 million
, respectively.
|
|
|
•
|
The estimated fair values of SJG's long-term debt, including current maturities, as of
June 30, 2017
and
December 31, 2016
, were
$777.1 million
and
$673.1 million
, respectively. The carrying amount of SJG's long-term debt, including current maturities, as of
June 30, 2017
and
December 31, 2016
, was
$758.4 million
and
$639.1 million
, respectively. The carrying amounts as of
June 30, 2017
and
December 31, 2016
are net of unamortized debt issuance costs of
$7.6 million
and
$6.0 million
, respectively.
|
OTHER FINANCIAL INSTRUMENTS - The carrying amounts of SJI's and SJG's other financial instruments approximate their fair values at
June 30, 2017
and
December 31, 2016
.
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. The result of SJG are only included in this operating segment.
|
|
|
•
|
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.
|
|
|
•
|
Appliance service operations includes SJESP, which 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. In May 2017, SJESP entered into an agreement to sell certain assets of its residential and small commercial HVAC and plumbing business to a third party. This transaction is expected to be completed by August 31, 2017.
|
|
|
•
|
Midstream was formed to invest in infrastructure and other midstream projects, including a current project to build a natural gas pipeline in Pennsylvania and New Jersey. 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,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Operating Revenues:
|
|
|
|
|
|
|
|
Gas Utility Operations
|
$
|
83,251
|
|
|
$
|
68,762
|
|
|
$
|
280,065
|
|
|
$
|
256,528
|
|
Energy Group:
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
76,409
|
|
|
(1,309
|
)
|
|
203,926
|
|
|
63,765
|
|
Retail Gas and Other Operations
|
21,759
|
|
|
22,305
|
|
|
58,637
|
|
|
52,038
|
|
Retail Electric Operations
|
42,620
|
|
|
43,065
|
|
|
91,577
|
|
|
82,556
|
|
Subtotal Energy Group
|
140,788
|
|
|
64,061
|
|
|
354,140
|
|
|
198,359
|
|
Energy Services:
|
|
|
|
|
|
|
|
On-Site Energy Production
|
25,135
|
|
|
23,043
|
|
|
44,747
|
|
|
39,364
|
|
Appliance Service Operations
|
1,980
|
|
|
2,050
|
|
|
3,638
|
|
|
3,938
|
|
Subtotal Energy Services
|
27,115
|
|
|
25,093
|
|
|
48,385
|
|
|
43,302
|
|
Corporate and Services
|
11,013
|
|
|
8,417
|
|
|
22,609
|
|
|
17,293
|
|
Subtotal
|
262,167
|
|
|
166,333
|
|
|
705,199
|
|
|
515,482
|
|
Intersegment Sales
|
(17,793
|
)
|
|
(11,931
|
)
|
|
(34,996
|
)
|
|
(28,045
|
)
|
Total Operating Revenues
|
$
|
244,374
|
|
|
$
|
154,402
|
|
|
$
|
670,203
|
|
|
$
|
487,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Operating (Loss) Income:
|
|
|
|
|
|
|
|
|
|
Gas Utility Operations
|
$
|
8,156
|
|
|
$
|
9,931
|
|
|
$
|
88,802
|
|
|
$
|
85,704
|
|
Energy Group:
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
(18,191
|
)
|
|
(31,149
|
)
|
|
(29,817
|
)
|
|
7,095
|
|
Retail Gas and Other Operations
|
(1,560
|
)
|
|
6,250
|
|
|
(3,227
|
)
|
|
5,491
|
|
Retail Electric Operations
|
1,155
|
|
|
2,277
|
|
|
2,461
|
|
|
2,862
|
|
Subtotal Energy Group
|
(18,596
|
)
|
|
(22,622
|
)
|
|
(30,583
|
)
|
|
15,448
|
|
Energy Services:
|
|
|
|
|
|
|
|
On-Site Energy Production
|
5,104
|
|
|
4,561
|
|
|
3,135
|
|
|
4,472
|
|
Appliance Service Operations
|
66
|
|
|
258
|
|
|
(6
|
)
|
|
302
|
|
Subtotal Energy Services
|
5,170
|
|
|
4,819
|
|
|
3,129
|
|
|
4,774
|
|
Corporate and Services
|
706
|
|
|
(114
|
)
|
|
1,774
|
|
|
341
|
|
Total Operating (Loss) Income
|
$
|
(4,564
|
)
|
|
$
|
(7,986
|
)
|
|
$
|
63,122
|
|
|
$
|
106,267
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
Gas Utility Operations
|
$
|
17,446
|
|
|
$
|
15,788
|
|
|
$
|
34,808
|
|
|
$
|
31,414
|
|
Energy Group:
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
33
|
|
|
204
|
|
|
61
|
|
|
408
|
|
Retail Gas and Other Operations
|
84
|
|
|
83
|
|
|
167
|
|
|
168
|
|
Subtotal Energy Group
|
117
|
|
|
287
|
|
|
228
|
|
|
576
|
|
Energy Services:
|
|
|
|
|
|
|
|
On-Site Energy Production
|
11,674
|
|
|
10,895
|
|
|
23,267
|
|
|
20,814
|
|
Appliance Service Operations
|
56
|
|
|
91
|
|
|
110
|
|
|
175
|
|
Subtotal Energy Services
|
11,730
|
|
|
10,986
|
|
|
23,377
|
|
|
20,989
|
|
Corporate and Services
|
418
|
|
|
260
|
|
|
819
|
|
|
483
|
|
Total Depreciation and Amortization
|
$
|
29,711
|
|
|
$
|
27,321
|
|
|
$
|
59,232
|
|
|
$
|
53,462
|
|
|
|
|
|
|
|
|
|
Interest Charges:
|
|
|
|
|
|
|
|
|
|
Gas Utility Operations
|
$
|
6,077
|
|
|
$
|
4,552
|
|
|
$
|
11,955
|
|
|
$
|
9,339
|
|
Energy Group:
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
134
|
|
|
1
|
|
|
3,193
|
|
|
65
|
|
Retail Gas and Other Operations
|
64
|
|
|
78
|
|
|
149
|
|
|
210
|
|
Subtotal Energy Group
|
198
|
|
|
79
|
|
|
3,342
|
|
|
275
|
|
Energy Services:
|
|
|
|
|
|
|
|
On-Site Energy Production
|
3,877
|
|
|
3,442
|
|
|
9,691
|
|
|
6,904
|
|
Corporate and Services
|
4,941
|
|
|
2,858
|
|
|
10,182
|
|
|
6,310
|
|
Subtotal
|
15,093
|
|
|
10,931
|
|
|
35,170
|
|
|
22,828
|
|
Intersegment Borrowings
|
(4,114
|
)
|
|
(2,702
|
)
|
|
(7,446
|
)
|
|
(5,439
|
)
|
Total Interest Charges
|
$
|
10,979
|
|
|
$
|
8,229
|
|
|
$
|
27,724
|
|
|
$
|
17,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income Taxes:
|
|
|
|
|
|
|
|
|
|
Gas Utility Operations
|
$
|
1,431
|
|
|
$
|
1,415
|
|
|
$
|
31,342
|
|
|
$
|
28,819
|
|
Energy Group:
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
(6,384
|
)
|
|
(12,258
|
)
|
|
(12,703
|
)
|
|
2,479
|
|
Retail Gas and Other Operations
|
(593
|
)
|
|
2,450
|
|
|
(1,040
|
)
|
|
2,282
|
|
Retail Electric Operations
|
472
|
|
|
931
|
|
|
1,007
|
|
|
1,170
|
|
Subtotal Energy Group
|
(6,505
|
)
|
|
(8,877
|
)
|
|
(12,736
|
)
|
|
5,931
|
|
Energy Services:
|
|
|
|
|
|
|
|
On-Site Energy Production
|
219
|
|
|
110
|
|
|
(2,850
|
)
|
|
(2,902
|
)
|
Appliance Service Operations
|
36
|
|
|
126
|
|
|
19
|
|
|
152
|
|
Subtotal Energy Services
|
255
|
|
|
236
|
|
|
(2,831
|
)
|
|
(2,750
|
)
|
Corporate and Services
|
(725
|
)
|
|
37
|
|
|
551
|
|
|
78
|
|
Total Income Taxes
|
$
|
(5,544
|
)
|
|
$
|
(7,189
|
)
|
|
$
|
16,326
|
|
|
$
|
32,078
|
|
|
|
|
|
|
|
|
|
Property Additions:
|
|
|
|
|
|
|
|
Gas Utility Operations
|
$
|
66,128
|
|
|
$
|
50,133
|
|
|
$
|
128,408
|
|
|
$
|
101,503
|
|
Energy Group:
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
4
|
|
|
1
|
|
|
7
|
|
|
7
|
|
Retail Gas and Other Operations
|
133
|
|
|
354
|
|
|
428
|
|
|
725
|
|
Subtotal Energy Group
|
137
|
|
|
355
|
|
|
435
|
|
|
732
|
|
Energy Services:
|
|
|
|
|
|
|
|
On-Site Energy Production
|
2,917
|
|
|
2,665
|
|
|
10,266
|
|
|
5,316
|
|
Appliance Service Operations
|
254
|
|
|
251
|
|
|
260
|
|
|
352
|
|
Subtotal Energy Services
|
3,171
|
|
|
2,916
|
|
|
10,526
|
|
|
5,668
|
|
Corporate and Services
|
839
|
|
|
564
|
|
|
1,084
|
|
|
727
|
|
Total Property Additions
|
$
|
70,275
|
|
|
$
|
53,968
|
|
|
$
|
140,453
|
|
|
$
|
108,630
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Identifiable Assets:
|
|
|
|
Gas Utility Operations
|
$
|
2,673,743
|
|
|
$
|
2,551,923
|
|
Energy Group:
|
|
|
|
Wholesale Energy Operations
|
165,932
|
|
|
233,019
|
|
Retail Gas and Other Operations
|
36,954
|
|
|
52,729
|
|
Retail Electric Operations
|
34,480
|
|
|
41,280
|
|
Subtotal Energy Group
|
237,366
|
|
|
327,028
|
|
Energy Services:
|
|
|
|
On-Site Energy Production
|
719,556
|
|
|
767,710
|
|
Appliance Service Operations
|
2,571
|
|
|
2,879
|
|
Subtotal Energy Services
|
722,127
|
|
|
770,589
|
|
Discontinued Operations
|
1,778
|
|
|
1,756
|
|
Corporate and Services
|
708,131
|
|
|
649,795
|
|
Intersegment Assets
|
(601,285
|
)
|
|
(570,524
|
)
|
Total Identifiable Assets
|
$
|
3,741,860
|
|
|
$
|
3,730,567
|
|
|
|
7.
|
RATES AND REGULATORY ACTIONS:
|
SJG is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU).
In January 2017, SJG filed a base rate case with the BPU to increase its base rates in order to obtain a return on new capital investments made by SJG since the settlement of its last base rate case in 2014. SJG expects the base rate case to be concluded during 2017.
Also in January 2017, the BPU issued an order approving SJG’s request to extend the expiration date of its Energy Efficiency Programs (EEPs) from August 2017 to December 2018, without any modification to the programs or the amount of the previously authorized budget of
$36.3 million
, inclusive of operation and maintenance expenses.
There have been no other significant regulatory actions or changes to SJG's rate structure since
December 31, 2016
. 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, 2016
and Note 3 to the Financial Statements in Item 8 of SJG’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
|
|
8.
|
REGULATORY ASSETS AND REGULATORY LIABILITIES:
|
There have been no significant changes to the nature of SJG’s regulatory assets and liabilities since
December 31, 2016
, 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, 2016
and Note 4 to the Financial Statements in Item 8 of SJG’s Annual Report on Form 10-K for the year ended
December 31, 2016
. SJI has no regulatory assets or regulatory liabilities other than those of SJG.
SJI's and SJG's Regulatory Assets consisted of the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Environmental Remediation Costs:
|
|
|
|
Expended - Net
|
$
|
89,873
|
|
|
$
|
71,997
|
|
Liability for Future Expenditures
|
161,681
|
|
|
153,047
|
|
Deferred Asset Retirement Obligation Costs
|
42,716
|
|
|
43,014
|
|
Deferred Pension and Other Postretirement Benefit Costs
|
85,693
|
|
|
85,693
|
|
Deferred Gas Costs - Net
|
3,598
|
|
|
—
|
|
Conservation Incentive Program Receivable
|
31,933
|
|
|
27,567
|
|
Societal Benefit Costs Receivable
|
443
|
|
|
—
|
|
Deferred Interest Rate Contracts
|
7,298
|
|
|
7,365
|
|
Energy Efficiency Tracker
|
511
|
|
|
219
|
|
Pipeline Supplier Service Charges
|
1,355
|
|
|
2,122
|
|
Pipeline Integrity Cost
|
5,061
|
|
|
4,810
|
|
AFUDC - Equity Related Deferrals
|
12,422
|
|
|
12,434
|
|
Other Regulatory Assets
|
2,728
|
|
|
2,478
|
|
|
|
|
|
Total Regulatory Assets
|
$
|
445,312
|
|
|
$
|
410,746
|
|
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" (both SJI and SJG), "Deferred Credits and Other Noncurrent Liabilities" (SJI) and "Regulatory and Other Noncurrent Liabilities" (SJG). The BPU allows SJG to recover the deferred costs over
seven
-year periods after they are spent. The increase from December 31, 2016 is a result of expenditures made during the first six months of 2017 and an increase in the expected future expenditures for remediation activities, primarily due to an increase in contractor costs at
two
of the sites currently under remediation.
DEFERRED GAS COSTS - NET - Over/Under collections of gas costs are monitored through SJG's Basic Gas Supply Service (BGSS) mechanism. Net undercollected gas costs are classified as a regulatory asset, and net overcollected gas costs are classified as a regulatory liability. Derivative contracts used to hedge natural gas purchases are also included in the BGSS, subject to BPU approval. The change in the BGSS from a
$17.8 million
regulatory liability at December 31, 2016 to a
$3.6 million
regulatory asset at June 30, 2017 was primarily due to an unfavorable court ruling related to a pricing dispute between SJG and a supplier (See Notes 11 and 16).
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 first six months of 2017, resulting in an increase in the receivable. This is primarily the result of warm weather experienced in the region.
SJI's and SJG's Regulatory Liabilities consisted of the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Excess Plant Removal Costs
|
$
|
24,655
|
|
|
$
|
28,226
|
|
Deferred Revenues - Net
|
—
|
|
|
17,800
|
|
Societal Benefit Costs
|
—
|
|
|
3,095
|
|
|
|
|
|
Total Regulatory Liabilities
|
$
|
24,655
|
|
|
$
|
49,121
|
|
DEFERRED REVENUES - NET - See discussion under "Deferred Gas Costs - Net" above.
SOCIETAL BENEFIT COSTS (SBC) - This regulatory asset primarily represents the deferred expenses incurred under the New Jersey Clean Energy Program, which is a mechanism designed to recover costs associated with energy efficiency and renewable energy programs. Previous SBC rates produced recoveries greater than SBC costs, which resulted in the regulatory liability. The decrease in the liability from
December 31, 2016
is due to an increase in rates.
|
|
9.
|
PENSION AND OTHER POSTRETIREMENT BENEFITS:
|
For the
three and six
months ended
June 30, 2017
and
2016
, net periodic benefit cost related to the employee and officer pension and other postretirement benefit plans for SJI consisted of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service Cost
|
$
|
1,112
|
|
|
$
|
1,106
|
|
|
$
|
2,494
|
|
|
$
|
2,421
|
|
Interest Cost
|
2,931
|
|
|
3,062
|
|
|
5,886
|
|
|
6,062
|
|
Expected Return on Plan Assets
|
(3,529
|
)
|
|
(3,374
|
)
|
|
(7,053
|
)
|
|
(6,754
|
)
|
Amortizations:
|
|
|
|
|
|
|
|
|
Prior Service Cost
|
33
|
|
|
53
|
|
|
66
|
|
|
106
|
|
Actuarial Loss
|
2,528
|
|
|
2,388
|
|
|
5,141
|
|
|
4,697
|
|
Net Periodic Benefit Cost
|
3,075
|
|
|
3,235
|
|
|
6,534
|
|
|
6,532
|
|
Capitalized Benefit Cost
|
(1,129
|
)
|
|
(1,213
|
)
|
|
(2,400
|
)
|
|
(2,400
|
)
|
Deferred Benefit Cost
|
(139
|
)
|
|
(161
|
)
|
|
(300
|
)
|
|
(322
|
)
|
Total Net Periodic Benefit Expense
|
$
|
1,807
|
|
|
$
|
1,861
|
|
|
$
|
3,834
|
|
|
$
|
3,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service Cost
|
$
|
208
|
|
|
$
|
195
|
|
|
$
|
455
|
|
|
$
|
425
|
|
Interest Cost
|
609
|
|
|
654
|
|
|
1,209
|
|
|
1,307
|
|
Expected Return on Plan Assets
|
(853
|
)
|
|
(776
|
)
|
|
(1,705
|
)
|
|
(1,552
|
)
|
Amortizations:
|
|
|
|
|
|
|
|
|
Prior Service Cost
|
(86
|
)
|
|
(86
|
)
|
|
(172
|
)
|
|
(172
|
)
|
Actuarial Loss
|
307
|
|
|
261
|
|
|
619
|
|
|
555
|
|
Net Periodic Benefit Cost
|
185
|
|
|
248
|
|
|
406
|
|
|
563
|
|
Capitalized Benefit Cost
|
(46
|
)
|
|
(45
|
)
|
|
(101
|
)
|
|
(146
|
)
|
Total Net Periodic Benefit Expense
|
$
|
139
|
|
|
$
|
203
|
|
|
$
|
305
|
|
|
$
|
417
|
|
The Pension Benefits Net Periodic Benefit Cost incurred by SJG was approximately
$2.3 million
of the totals presented in the table above for both the three months ended June 30, 2017 and 2016, and
$4.8 million
of the totals presented in the table above for both the six months ended June 30, 2017 and 2016.
The Other Postretirement Benefits Net Periodic Benefit Cost incurred by SJG was approximately
$0.1 million
of the totals presented in the table above for both the three months ended June 30, 2017 and 2016, and
$0.2 million
and
$0.3 million
of the totals presented in the table above
for the six months ended June 30, 2017 and 2016, respectively
.
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 subsequent adjustments thereto in both 2015 and 2016. Deferred benefit costs are expected to be recovered through rates as part of SJG's next base rate case.
SJI contributed
$10.0 million
to the pension plans, of which SJG contributed
$8.0 million
, in January 2017.
No
contributions were made to the pension plans by either SJI or SJG during the
six
months ended
June 30, 2016
. SJI and SJG do not expect to make any additional contributions to the pension plans in 2017; 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 be approximately
$2.5 million
in
2017
. 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, 2016
for additional information related to SJI’s pension and other postretirement benefits and Note 11 to the Financial Statements in Item 8 of SJG’s Form 10-K for the year ended
December 31, 2016
for additional information related to SJG’s pension and other postretirement benefits.
Credit facilities and available liquidity as of
June 30, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Total Facility
|
|
Usage
|
|
Available Liquidity
|
|
Expiration Date
|
|
SJI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facilities
|
|
$
|
450,000
|
|
|
$
|
303,300
|
|
(A)
|
$
|
146,700
|
|
|
August 2017; February 2018
|
(C)
|
|
|
|
|
|
|
|
|
|
|
Total SJI
|
|
450,000
|
|
|
303,300
|
|
|
146,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SJG:
|
|
|
|
|
|
|
|
|
|
Commercial Paper Program/Revolving Credit Facility
|
|
200,000
|
|
|
3,600
|
|
(B)
|
196,400
|
|
|
May 2018
|
|
Uncommitted Bank Line
|
|
10,000
|
|
|
—
|
|
|
10,000
|
|
|
August 2017
|
(C)
|
|
|
|
|
|
|
|
|
|
|
Total SJG
|
|
210,000
|
|
|
3,600
|
|
|
206,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
660,000
|
|
|
$
|
306,900
|
|
|
$
|
353,100
|
|
|
|
|
(A) Includes letters of credit outstanding in the amount of
$9.8 million
.
(B) Includes letters of credit outstanding in the amount of
$0.8 million
.
(C) SJI and SJG anticipate that the credit facilities expiring in August 2017 will be renewed for a multi-year period.
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. SJI's weighted average interest rate on these borrowings, which changes daily, was
2.21%
and
1.43%
at
June 30, 2017
and
2016
, respectively. SJG's weighted average interest rate on these borrowings, which changes daily, was
1.36%
and
0.67%
at
June 30, 2017
and
2016
, respectively.
SJI's average borrowings outstanding under these credit facilities (which includes SJG), not including letters of credit, during the
six
months ended
June 30, 2017
and
2016
were
$272.4 million
and
$325.5 million
, respectively. The maximum amounts outstanding under these credit facilities, not including letters of credit, during the
six
months ended
June 30, 2017
and
2016
were
$354.1 million
and
$467.7 million
, respectively.
SJG's average borrowings outstanding under its credit facilities during the
six
months ended
June 30, 2017
and
2016
were
$20.2 million
and
$73.7 million
, respectively. The maximum amounts outstanding under its credit facilities during the
six
months ended
June 30, 2017
and
2016
were
$110.1 million
and
$141.7 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, 2017
.
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 of
June 30, 2017
, SJI had issued
$6.1 million
of parental guarantees on behalf of an unconsolidated subsidiary. These guarantees generally expire within the next
two
years and were issued to enable the subsidiary to market retail natural gas.
GAS SUPPLY CONTRACTS - In the normal course of business, SJG and SJRG have entered into long-term contracts for natural gas supplies, firm transportation and gas storage service. The earliest date at which any of the primary terms of these contracts expire is October 2017. The transportation and storage service agreements with interstate pipeline suppliers were made under Federal Energy Regulatory Commission (FERC) approved tariffs. SJG's cumulative obligation for gas supply-related demand charges and reservation fees paid to suppliers for these services averages approximately
$5.1 million
per month and is recovered on a current basis through the BGSS. SJRG's cumulative obligation for demand charges and reservation fees paid to suppliers for these services is approximately
$0.5 million
per month. SJRG has also committed to purchase a minimum of
635,000
dts/d and up to
901,500
dts/d of natural gas, from various suppliers, for terms ranging from
3
to
10
years at index-based prices.
COLLECTIVE BARGAINING AGREEMENTS
— Unionized personnel represent approximately
42%
and
59%
of SJI's and SJG's workforce at
June 30, 2017
, respectively. SJI 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 2018. SJG's remaining unionized employees are represented by the IAM and operate under collective bargaining agreements that run through August 2017. This agreement is currently under negotiation.
STANDBY LETTERS OF CREDIT — As of
June 30, 2017
, SJI provided
$9.8 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. SJG has provided
$25.2 million
of additional letters of credit under a separate facility outside of the revolving credit facility to support variable-rate demand bonds issued through the New Jersey Economic Development Authority (NJEDA) to finance the expansion of SJG’s natural gas distribution system. In May 2017, Marina redeemed its variable-rate demand bonds (see Note 14) and the related letters of credit reimbursement agreements, which totaled
$62.3 million
, were terminated.
PENDING LITIGATION — SJI and SJG are subject to claims arising in the ordinary course of business and other legal proceedings. SJI 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.
SJI is currently involved in a pricing dispute related to
two
long-term gas supply contracts. On May 8, 2017, a jury from the United States District Court for the District of Colorado returned a verdict in favor of the supplier. On July 21, 2017, the Court entered Final Judgment against SJG and SJRG. As a result of this ruling, SJG and SJRG have accrued
$16.7 million
and
$45.0 million
, respectively, through
June 30, 2017
. We believe that the amount to be paid by SJG reflects a gas cost and will be recovered from SJG’s customers through adjusted rates. As such, this amount was recorded as both an Accounts Payable and a reduction of Regulatory Liabilities on the condensed consolidated balance sheets of both SJI and SJG as of
June 30, 2017
. The amount associated with SJRG was also recorded as an Accounts Payable on the condensed consolidated balance sheets of SJI as of
June 30, 2017
, with charges of
$0.4 million
and
$41.0 million
to Cost of Sales - Nonutility and
$0.6 million
and
$4.0 million
to Interest Charges on the condensed consolidated statements of income of SJI for the three and six months ended
June 30, 2017
, respectively. SJI intends to appeal this judgment. During the pendency of the appeal, SJI continues to dispute the supplier invoices received, and has created a reserve to reflect the difference between the invoiced and paid amounts.
SJI was involved in a dispute in the Court of Common Pleas of Philadelphia related to a
three
-year capacity management contract with a counterparty whereby SJI is the manager. The counterparty is claiming that it is owed approximately
$13.3 million
, plus interest, from SJRG under a sharing credit within the contract. SJI has accrued
$9.5 million
as of June 30, 2017 in anticipation of a potential settlement of this matter.
Liabilities related to claims are accrued when the amount or range of amounts of probable settlement costs or other charges for these claims can be reasonably estimated. For matters other than the pricing dispute related to
two
long-term gas supply contracts, as well as the dispute related to a
three
-year capacity management contract, both noted above, SJI has accrued approximately
$3.0 million
and $
3.1 million
related to all claims in the aggregate as of
June 30, 2017
and
December 31, 2016
, respectively, of which SJG has accrued approximately
$0.7 million
and
$0.6 million
as of
June 30, 2017
and
December 31, 2016
, respectively. Although SJI and SJG do not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, SJI and SJG can provide no assurance regarding the outcome of litigation.
ENVIRONMENTAL REMEDIATION COSTS — SJG incurred and recorded costs for environmental cleanup of
12
sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s. 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 SJI’s environmental remediation efforts since
December 31, 2016
, 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, 2016
and in Note 12 to the Financial Statements in Item 8 of SJG’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
|
|
12.
|
DERIVATIVE INSTRUMENTS:
|
Certain SJI subsidiaries, including SJG, 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. SJI and SJG use 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, 2017
, SJI had outstanding derivative contracts as follows (1 MMdts = one million decatherms; 1 MMmWh = one million megawatt hours):
|
|
|
|
|
|
|
SJI Consolidated
|
SJG
|
Derivative contracts intended to limit exposure to market risk to:
|
|
|
Expected future purchases of natural gas (in MMdts)
|
50.9
|
|
10.8
|
|
Expected future sales of natural gas (in MMdts)
|
46.7
|
|
0.1
|
|
Expected future purchases of electricity (in MMmWh)
|
2.7
|
|
—
|
|
Expected future sales of electricity (in MMmWh)
|
2.3
|
|
—
|
|
|
|
|
Basis and Index related net purchase (sales) contracts (in MMdts)
|
92.2
|
|
1.1
|
|
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 of SJI and SJG. For SJE and SJRG contracts, the net unrealized pre-tax gains (losses) for these energy-related commodity contracts are included with realized gains (losses) in Operating Revenues – Nonutility on the condensed consolidated statements of income for SJI. These gains (losses) were
$(7.9) million
and
$(21.4) million
for the three months ended June 30, 2017 and 2016, respectively
, and
$6.8 million
and
$(2.7) million
for the six months ended June 30, 2017 and 2016, respectively
. For SJG's contracts, the costs or benefits are recoverable through the BGSS clause, subject to BPU approval. As a result, the net unrealized pre-tax gains and losses for these energy-related commodity contracts are included with realized gains and losses in Regulatory Assets or Regulatory Liabilities on the condensed consolidated balance sheets of both SJI and SJG. As of
June 30, 2017
and
December 31, 2016
, SJG had
$5.8 million
of unrealized gains and
$4.4 million
of unrealized losses, respectively, along with a net realized gain of
$1.3 million
and a net realized loss of
$2.8 million
, respectively, included in its BGSS related to energy-related commodity contracts.
SJI, including SJG, 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 prospectively for these derivatives. As a result, any 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.
In March 2017, SJI entered into a new interest rate derivative and amended the existing interest rate derivative linked to unrealized losses previously recorded in AOCL. SJI reclassified
$2.4 million
of pre-tax unrealized loss in AOCL to Interest Charges on the condensed consolidated statements of income as a result of the prior hedged transactions being deemed probable of not occurring.
For SJG interest rate derivatives, the fair value represents the amount SJG would have to pay the counterparty to terminate these contracts as of those dates.
SJG previously used derivative transactions known as “Treasury Locks” to hedge against the impact on its cash flows of possible interest rate increases on debt issued in September 2005. The initial
$1.4 million
cost of the Treasury Locks has been included in AOCL and is being amortized over the
30
-year life of the associated debt issue. As of
June 30, 2017
and
December 31, 2016
, the unamortized balance was approximately
$0.8 million
and
$0.9 million
, respectively.
As of
June 30, 2017
, SJI’s active interest rate swaps were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Fixed Interest Rate
|
|
Start Date
|
|
Maturity
|
|
Obligor
|
$
|
20,000,000
|
|
|
3.049%
|
|
3/15/2017
|
|
3/15/2027
|
|
SJI
|
$
|
20,000,000
|
|
|
3.049%
|
|
3/15/2017
|
|
3/15/2027
|
|
SJI
|
$
|
10,000,000
|
|
|
3.049%
|
|
3/15/2017
|
|
3/15/2027
|
|
SJI
|
$
|
12,500,000
|
|
|
3.530%
|
|
12/1/2006
|
|
2/1/2036
|
|
SJG
|
$
|
12,500,000
|
|
|
3.430%
|
|
12/1/2006
|
|
2/1/2036
|
|
SJG
|
The unrealized gains and losses on interest rate derivatives that are not designated as cash flow hedges are included in Interest Charges in the condensed consolidated statements of income. However, for selected interest rate derivatives at SJG, management believes that, subject to BPU approval, the market value upon termination can be recovered in rates and, therefore, these unrealized losses have been included in Other Regulatory Assets in the condensed balance sheets.
The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of
June 30, 2017
and
December 31, 2016
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under GAAP
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Energy-related commodity contracts:
|
|
|
|
|
|
|
|
|
Derivatives - Energy Related - Current
|
|
$
|
46,361
|
|
|
$
|
23,082
|
|
|
$
|
72,391
|
|
|
$
|
60,082
|
|
Derivatives - Energy Related - Non-Current
|
|
7,248
|
|
|
4,660
|
|
|
8,502
|
|
|
4,540
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
Derivatives - Other - Current
|
|
—
|
|
|
787
|
|
|
—
|
|
|
681
|
|
Derivatives - Other - Noncurrent
|
|
—
|
|
|
10,559
|
|
|
—
|
|
|
9,349
|
|
Total derivatives not designated as hedging instruments under GAAP
|
|
$
|
53,609
|
|
|
$
|
39,088
|
|
|
$
|
80,893
|
|
|
$
|
74,652
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
$
|
53,609
|
|
|
$
|
39,088
|
|
|
$
|
80,893
|
|
|
$
|
74,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SJG:
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under GAAP
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Energy-related commodity contracts:
|
|
|
|
|
|
|
|
|
Derivatives – Energy Related – Current
|
|
$
|
7,998
|
|
|
$
|
1,881
|
|
|
$
|
5,434
|
|
|
$
|
1,372
|
|
Derivatives – Energy Related – Non-Current
|
|
—
|
|
|
297
|
|
|
373
|
|
|
—
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
Derivatives – Other Current
|
|
—
|
|
|
382
|
|
|
—
|
|
|
386
|
|
Derivatives – Other Noncurrent
|
|
—
|
|
|
6,915
|
|
|
—
|
|
|
6,979
|
|
Total derivatives not designated as hedging instruments under GAAP
|
|
$
|
7,998
|
|
|
$
|
9,475
|
|
|
$
|
5,807
|
|
|
$
|
8,737
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
$
|
7,998
|
|
|
$
|
9,475
|
|
|
$
|
5,807
|
|
|
$
|
8,737
|
|
SJI and SJG enter into derivative contracts with counterparties, some of which are subject to master netting arrangements, which allow net settlements under certain conditions. These derivatives are presented at gross fair values on the condensed consolidated balance sheets.
As of
June 30, 2017
and
December 31, 2016
, information related to these offsetting arrangements were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
SJI (includes SJG and all other consolidated subsidiaries):
|
Derivatives - Energy Related Assets
|
|
$
|
53,609
|
|
|
$
|
—
|
|
|
$
|
53,609
|
|
|
$
|
(13,958
|
)
|
(A)
|
$
|
(2,674
|
)
|
|
$
|
36,977
|
|
Derivatives - Energy Related Liabilities
|
|
$
|
(27,742
|
)
|
|
$
|
—
|
|
|
$
|
(27,742
|
)
|
|
$
|
13,958
|
|
(B)
|
$
|
—
|
|
|
$
|
(13,784
|
)
|
Derivatives - Other
|
|
$
|
(11,346
|
)
|
|
$
|
—
|
|
|
$
|
(11,346
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(11,346
|
)
|
SJG:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives - Energy Related Assets
|
|
$
|
7,998
|
|
|
$
|
—
|
|
|
$
|
7,998
|
|
|
$
|
(711
|
)
|
(A)
|
$
|
(151
|
)
|
|
$
|
7,136
|
|
Derivatives - Energy Related Liabilities
|
|
$
|
(2,178
|
)
|
|
$
|
—
|
|
|
$
|
(2,178
|
)
|
|
$
|
711
|
|
(B)
|
$
|
—
|
|
|
$
|
(1,467
|
)
|
Derivatives - Other
|
|
$
|
(7,297
|
)
|
|
$
|
—
|
|
|
$
|
(7,297
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(7,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 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
|
|
SJI (includes SJG and all other consolidated subsidiaries):
|
Derivatives - Energy Related Assets
|
|
$
|
80,893
|
|
|
$
|
—
|
|
|
$
|
80,893
|
|
|
$
|
(38,809
|
)
|
(A)
|
$
|
(3,474
|
)
|
|
$
|
38,610
|
|
Derivatives - Energy Related Liabilities
|
|
$
|
(64,622
|
)
|
|
$
|
—
|
|
|
$
|
(64,622
|
)
|
|
$
|
38,809
|
|
(B)
|
$
|
—
|
|
|
$
|
(25,813
|
)
|
Derivatives - Other
|
|
$
|
(10,030
|
)
|
|
$
|
—
|
|
|
$
|
(10,030
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(10,030
|
)
|
SJG:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives - Energy Related Assets
|
|
$
|
5,807
|
|
|
$
|
—
|
|
|
$
|
5,807
|
|
|
$
|
(6
|
)
|
(A)
|
$
|
(3,587
|
)
|
|
$
|
2,214
|
|
Derivatives - Energy Related Liabilities
|
|
$
|
(1,372
|
)
|
|
$
|
—
|
|
|
$
|
(1,372
|
)
|
|
$
|
6
|
|
(B)
|
$
|
—
|
|
|
$
|
(1,366
|
)
|
Derivatives - Other
|
|
$
|
(7,365
|
)
|
|
$
|
—
|
|
|
$
|
(7,365
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(7,365
|
)
|
(A) The balances at
June 30, 2017
and
December 31, 2016
were related to derivative liabilities which can be net settled against derivative assets.
(B) The balances at
June 30, 2017
and
December 31, 2016
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, 2017
and
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
Derivatives in Cash Flow Hedging Relationships under GAAP
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
|
|
|
|
Interest Rate Contracts:
|
|
|
|
|
|
|
|
|
Losses reclassified from AOCL into income (a)
|
|
$
|
(12
|
)
|
|
$
|
(82
|
)
|
|
$
|
(2,499
|
)
|
|
$
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
SJG:
|
|
|
|
|
|
|
|
|
Interest Rate Contracts:
|
|
|
|
|
|
|
|
|
Losses reclassified from AOCL into income (a)
|
|
$
|
(12
|
)
|
|
$
|
(12
|
)
|
|
(24
|
)
|
|
(24
|
)
|
(a) Included in Interest Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
Derivatives Not Designated as Hedging Instruments under GAAP
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
|
|
|
|
(Losses) gains on energy-related commodity contracts (a)
|
|
$
|
(7,855
|
)
|
|
$
|
(21,371
|
)
|
|
$
|
6,832
|
|
|
$
|
(2,716
|
)
|
Losses on interest rate contracts (b)
|
|
(379
|
)
|
|
(229
|
)
|
|
(1,384
|
)
|
|
(656
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(8,234
|
)
|
|
$
|
(21,600
|
)
|
|
$
|
5,448
|
|
|
$
|
(3,372
|
)
|
(a) Included in Operating Revenues - Nonutility
(b) Included in Interest Charges
Certain of SJI’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 SJI. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on
June 30, 2017
, is
$4.4 million
. If the credit-risk-related contingent features underlying these agreements were triggered on
June 30, 2017
, SJI would have been required to settle the instruments immediately or post collateral to its counterparties of approximately
$3.6 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, 2017
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Available-for-Sale Securities (A)
|
$
|
32
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivatives – Energy Related Assets (B)
|
53,609
|
|
|
6,499
|
|
|
18,985
|
|
|
28,125
|
|
|
$
|
53,641
|
|
|
$
|
6,531
|
|
|
$
|
18,985
|
|
|
$
|
28,125
|
|
SJG:
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Derivatives – Energy Related Assets (B)
|
$
|
7,998
|
|
|
$
|
711
|
|
|
$
|
46
|
|
|
$
|
7,241
|
|
|
$
|
7,998
|
|
|
$
|
711
|
|
|
$
|
46
|
|
|
$
|
7,241
|
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivatives – Energy Related Liabilities (B)
|
$
|
27,742
|
|
|
$
|
4,256
|
|
|
$
|
12,762
|
|
|
$
|
10,724
|
|
Derivatives – Other (C)
|
11,346
|
|
|
—
|
|
|
11,346
|
|
|
—
|
|
|
$
|
39,088
|
|
|
$
|
4,256
|
|
|
$
|
24,108
|
|
|
$
|
10,724
|
|
SJG:
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivatives – Energy Related Liabilities (B)
|
$
|
2,178
|
|
|
$
|
862
|
|
|
$
|
1,008
|
|
|
$
|
308
|
|
Derivatives – Other (C)
|
7,297
|
|
|
—
|
|
|
7,297
|
|
|
—
|
|
|
$
|
9,475
|
|
|
$
|
862
|
|
|
$
|
8,305
|
|
|
$
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Available-for-Sale Securities (A)
|
$
|
32
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivatives – Energy Related Assets (B)
|
80,893
|
|
|
33,994
|
|
|
11,814
|
|
|
35,085
|
|
|
$
|
80,925
|
|
|
$
|
34,026
|
|
|
$
|
11,814
|
|
|
$
|
35,085
|
|
SJG:
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Derivatives – Energy Related Assets (B)
|
$
|
5,807
|
|
|
$
|
4,767
|
|
|
$
|
—
|
|
|
$
|
1,040
|
|
|
$
|
5,807
|
|
|
$
|
4,767
|
|
|
$
|
—
|
|
|
$
|
1,040
|
|
|
|
|
|
|
|
|
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivatives – Energy Related Liabilities (B)
|
$
|
64,622
|
|
|
$
|
16,502
|
|
|
$
|
22,070
|
|
|
$
|
26,050
|
|
Derivatives – Other (C)
|
10,030
|
|
|
—
|
|
|
10,030
|
|
|
—
|
|
|
$
|
74,652
|
|
|
$
|
16,502
|
|
|
$
|
32,100
|
|
|
$
|
26,050
|
|
SJG:
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivatives – Energy Related Liabilities (B)
|
$
|
1,372
|
|
|
$
|
6
|
|
|
$
|
1,252
|
|
|
$
|
114
|
|
Derivatives – Other (C)
|
7,365
|
|
|
—
|
|
|
7,365
|
|
|
—
|
|
|
$
|
8,737
|
|
|
$
|
6
|
|
|
$
|
8,617
|
|
|
$
|
114
|
|
(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.
(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):
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
|
|
|
Type
|
Fair Value at June 30, 2017
|
Valuation Technique
|
Significant Unobservable Input
|
Range
[Weighted Average]
|
|
|
Assets
|
Liabilities
|
|
|
|
|
Forward Contract - Natural Gas
|
$19,782
|
$6,180
|
Discounted Cash Flow
|
Forward price (per dt)
|
$1.68 - $8.94 [$2.62]
|
(A)
|
Forward Contract - Electric
|
$8,343
|
$4,544
|
Discounted Cash Flow
|
Fixed electric load profile (on-peak)
|
36.36% - 100.00% [53.18%]
|
(B)
|
Fixed electric load profile (off-peak)
|
0.00% - 63.64% [46.82%]
|
(B)
|
|
|
|
|
|
|
|
|
Type
|
Fair Value at December 31, 2016
|
Valuation Technique
|
Significant Unobservable Input
|
Range
[Weighted Average]
|
|
|
Assets
|
Liabilities
|
|
|
|
|
Forward Contract - Natural Gas
|
$23,301
|
$18,109
|
Discounted Cash Flow
|
Forward price (per dt)
|
$1.03 - $11.33 [$2.71]
|
(A)
|
Forward Contract - Electric
|
$11,784
|
$7,941
|
Discounted Cash Flow
|
Fixed electric load profile (on-peak)
|
21.43% - 100.00% [55.14%]
|
(B)
|
Fixed electric load profile (off-peak)
|
0.00% - 78.57% [44.86%]
|
(B)
|
SJG:
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Fair Value at June 30, 2017
|
Valuation Technique
|
Significant Unobservable Input
|
Range
[Weighted Average]
|
|
|
Assets
|
Liabilities
|
|
|
|
|
Forward Contract - Natural Gas
|
$
|
7,241
|
|
$
|
308
|
|
Discounted Cash Flow
|
|
$1.77 - $6.66 [$4.41]
|
(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Fair Value at December 31, 2016
|
Valuation Technique
|
Significant Unobservable Input
|
Range
[Weighted Average]
|
|
|
Assets
|
Liabilities
|
|
|
|
|
Forward Contract - Natural Gas
|
$
|
1,040
|
|
$
|
114
|
|
Discounted Cash Flow
|
Forward price (per dt)
|
$3.25 - $6.33 [$5.09]
|
(A)
|
(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, 2017
and
2016
, using significant unobservable inputs (Level 3), are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2017
|
|
Six Months Ended
June 30, 2017
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
Balance at beginning of period
|
$
|
16,234
|
|
|
$
|
9,035
|
|
Other Changes in Fair Value from Continuing and New Contracts, Net
|
7,982
|
|
|
6,994
|
|
Transfers out of Level 3 (A)
|
(748
|
)
|
|
(748
|
)
|
Settlements
|
(6,067
|
)
|
|
2,120
|
|
|
|
|
|
Balance at end of period
|
$
|
17,401
|
|
|
$
|
17,401
|
|
|
|
|
|
SJG:
|
|
|
|
Balance at beginning of period
|
$
|
511
|
|
|
$
|
926
|
|
Other Changes in Fair Value from Continuing and New Contracts, Net
|
6,422
|
|
|
6,933
|
|
Settlements
|
—
|
|
|
(926
|
)
|
|
|
|
|
Balance at end of period
|
$
|
6,933
|
|
|
$
|
6,933
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2016
|
|
Six Months Ended
June 30, 2016
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
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
|
)
|
|
|
|
|
SJG:
|
|
|
|
Balance at beginning of period
|
$
|
(4
|
)
|
|
$
|
183
|
|
Other Changes in Fair Value from Continuing and New Contracts, Net
|
(220
|
)
|
|
(224
|
)
|
Settlements
|
—
|
|
|
(183
|
)
|
|
|
|
|
Balance at end of period
|
$
|
(224
|
)
|
|
$
|
(224
|
)
|
(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, 2017
,
$0.7 million
of SJI's net derivative assets were transferred from Level 3 to Level 2, due to increased observability of market data.
Total gains included in earnings for SJI for the
three and six
months ended
June 30, 2017
that are attributable to the change in unrealized gains relating to those assets and liabilities included in Level 3 still held as of
June 30, 2017
, are
$8.0 million
and
$7.0 million
, respectively. These gains are included in Operating Revenues-Nonutility on the condensed consolidated statements of income.
In January 2017, SJG issued
$200.0 million
aggregate principal amount of Medium Term Notes (MTN's), Series E, 2017, due January 2047, with principal payments beginning in 2025. The MTN's bear interest at an annual rate of
3.0%
, payable semiannually. Proceeds were used to pay down SJG's
$200.0 million
multiple-draw term facility which was set to expire in June 2017.
In January 2017, SJG entered into an unsecured,
$200.0 million
multiple-draw term loan credit agreement (Credit Agreement), which is syndicated among
seven
banks. Term loans under the Credit Agreement bear interest at a variable base rate or a variable LIBOR rate, at SJG's election. Under the Credit Agreement, SJG can borrow up to an aggregate of
$200.0 million
until July 2018, of which SJG borrowed
$121.0 million
during the
six
months ended
June 30, 2017
. All loans under the Credit Agreement become due in January 2019.
In May 2017, Marina voluntarily redeemed bonds issued by NJEDA in an aggregate principal amount of
$61.4 million
, as follows: Thermal Energy Facilities Revenue Bonds (Marina Energy LLC - 2001 Project) Series A (
$20.0 million
); Thermal Energy Facilities Federally Taxable Revenue Bonds (Marina Energy LLC - 2001 Project) Series B (
$25.0 million
); and Thermal Energy Facilities Revenue Bonds (Marina Energy LLC Project) Series 2006A (
$16.4 million
). In connection with the redemptions, separate related letter of credit reimbursement agreements were terminated (see Note 11).
In June 2017, SJI redeemed at maturity
$16.0 million
of
2.71%
Senior Unsecured Notes.
SJI and SJG did not issue or retire any other long-term debt during the
six
months ended
June 30, 2017
.
|
|
15.
|
ACCUMULATED OTHER COMPREHENSIVE LOSS:
|
The following table summarizes the changes in SJI's accumulated other comprehensive loss (AOCL) for the
three and six
months ended
June 30, 2017
(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, 2017 (a)
|
$
|
(25,342
|
)
|
$
|
(417
|
)
|
$
|
(10
|
)
|
$
|
(97
|
)
|
$
|
(25,866
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Amounts reclassified from AOCL (b)
|
—
|
|
7
|
|
—
|
|
—
|
|
7
|
|
Net current period other comprehensive income
|
—
|
|
7
|
|
—
|
|
—
|
|
7
|
|
Balance at June 30, 2017 (a)
|
$
|
(25,342
|
)
|
$
|
(410
|
)
|
$
|
(10
|
)
|
$
|
(97
|
)
|
$
|
(25,859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2017 (a)
|
$
|
(25,342
|
)
|
$
|
(1,932
|
)
|
$
|
(10
|
)
|
$
|
(97
|
)
|
$
|
(27,381
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Amounts reclassified from AOCL (b)
|
—
|
|
1,522
|
|
—
|
|
—
|
|
1,522
|
|
Net current period other comprehensive income
|
—
|
|
1,522
|
|
—
|
|
—
|
|
1,522
|
|
Balance at June 30, 2017 (a)
|
$
|
(25,342
|
)
|
$
|
(410
|
)
|
$
|
(10
|
)
|
$
|
(97
|
)
|
$
|
(25,859
|
)
|
(a) Determined using a combined average statutory tax rate of
40%
.
(b) See table below.
The following table provides details about reclassifications out of SJI's AOCL for the
three and six
months ended
June 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of AOCL
|
Amounts Reclassified from AOCL
|
|
Affected Line Item in the Condensed Consolidated Statements of Income
|
Three Months Ended
June 30, 2017
|
|
Six Months Ended
June 30, 2017
|
|
Unrealized Loss on Derivatives-Other - interest rate contracts designated as cash flow hedges
|
$
|
12
|
|
|
$
|
2,499
|
|
|
Interest Charges
|
Income Taxes
|
(5
|
)
|
|
(977
|
)
|
|
Income Taxes (a)
|
Losses from reclassifications for the period net of tax
|
$
|
7
|
|
|
$
|
1,522
|
|
|
|
(a) Determined using a combined average statutory tax rate of
40%
.
The following table summarizes the changes in SJG's AOCL for the
three and six
months ended
June 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Liability Adjustment
|
|
Unrealized Gain (Loss) on Derivatives-Other
|
|
Total
|
Balance at April 1, 2017 (a)
|
$
|
(14,417
|
)
|
|
$
|
(510
|
)
|
|
$
|
(14,927
|
)
|
Other comprehensive loss before reclassifications
|
—
|
|
|
—
|
|
|
—
|
|
Amounts reclassified from AOCL (b)
|
—
|
|
|
7
|
|
|
7
|
|
Net current period other comprehensive income
|
—
|
|
|
7
|
|
|
7
|
|
Balance at June 30, 2017 (a)
|
$
|
(14,417
|
)
|
|
$
|
(503
|
)
|
|
$
|
(14,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Liability Adjustment
|
|
Unrealized Gain (Loss) on Derivatives-Other
|
|
Total
|
Balance at January 1, 2017 (a)
|
$
|
(14,417
|
)
|
|
$
|
(517
|
)
|
|
$
|
(14,934
|
)
|
Other comprehensive loss before reclassifications
|
—
|
|
|
—
|
|
|
—
|
|
Amounts reclassified from AOCL (b)
|
—
|
|
|
14
|
|
|
14
|
|
Net current period other comprehensive income (loss)
|
—
|
|
|
14
|
|
|
14
|
|
Balance at June 30, 2017 (a)
|
$
|
(14,417
|
)
|
|
$
|
(503
|
)
|
|
$
|
(14,920
|
)
|
(a) Determined using a combined average statutory tax rate of
40%
.
(b) See table below.
The reclassifications out of SJG's AOCL during the
three and six
months ended
June 30, 2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of AOCL
|
|
Amounts Reclassified from AOCL
|
|
Affected Line Item in the Condensed Statements of Income
|
|
Three Months Ended
June 30, 2017
|
|
Six Months Ended
June 30, 2017
|
|
Unrealized Loss in on Derivatives - Other - Interest Rate Contracts designated as cash flow hedges
|
|
$
|
12
|
|
|
$
|
24
|
|
|
Interest Charges
|
Income Taxes
|
|
(5
|
)
|
|
(10
|
)
|
|
Income Taxes (a)
|
Losses from reclassifications for the period net of tax
|
|
$
|
7
|
|
|
$
|
14
|
|
|
|
(a) Determined using a combined average statutory tax rate of
40%
.