10-Q 1 i10q902.txt SOUTH JERSEY INDUSTRIES FORM 10Q P/E 9/30/02 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to __________________ Commission File Number 1-6364 SOUTH JERSEY INDUSTRIES, INC. (Exact name of registrant as specified in its charter) New Jersey 22-1901645 (State of incorporation) (IRS employer identification no.) 1 South Jersey Plaza, Folsom, NJ 08037 (Address of principal executive offices, including zip code) (609) 561-9000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 1, 2002, there were 12,166,729 shares of the registrant's common stock outstanding. ================================================================================ PART I -- FINANCIAL INFORMATION Item 1. Financial Statements-- See Pages 3 through 18 SJI-2 SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In Thousands Except for Per Share Data)
Three Months Ended September 30, --------------------------------------- 2002 2001 ------------------ ------------------ Operating Revenues: Utility $ 48,939 $ 55,400 Nonutility 20,127 19,585 ------------------ ------------------ Total Operating Revenues 69,066 74,985 ------------------ ------------------ Operating Expenses: Cost of Gas Sold - Utility 31,584 37,971 Cost of Sales - Nonutility 18,202 18,148 Operations 11,004 10,732 Maintenance 1,537 1,554 Depreciation 5,650 5,331 Energy and Other Taxes 1,446 1,446 ------------------ ------------------ Total Operating Expenses 69,423 75,182 ------------------ ------------------ Operating Loss (357) (197) Other Income and Expense: Equity in Affiliated Companies 287 72 Other (54) (67) ------------------ -------------- Total Other Income and Expense 233 5 Interest Charges 4,397 5,207 Preferred Dividend Requirements of Subsidiary 764 764 ------------------ ------------------ Loss Before Income Tax Benefit (5,285) (6,163) Income Tax Benefit (2,063) (2,387) ------------------ ------------------ Loss from Continuing Operations (3,222) (3,776) Discontinued Operations - Net (18) (36) ------------------ ------------------ Net Loss Applicable to Common Stock $ (3,240) $ (3,812) ================== ================== Basic Earnings Per Common Share: Continuing Operations $ (0.27) $ (0.32) Discontinued Operations - Net 0.00 0.00 ------------------- ----------------- Basic Earnings Per Common Share $ (0.27) $ (0.32) =================== ================= Average Shares of Common Stock Outstanding - Basic 12,084 11,769 Diluted Earnings Per Common Share: Continuing Operations $ (0.27) $ (0.32) Discontinued Operations - Net 0.00 0.00 ------------------- ----------------- Diluted Earnings Per Common Share $ (0.27) $ (0.32) =================== ================= Average Shares of Common Stock Outstanding - Diluted 12,084 11,769 Dividends Declared per Common Share $ 0.375 $ 0.370 ================== ================== The accompanying footnotes are an integral part of the financial statements.
SJI-3 SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In Thousands Except for Per Share Data)
Nine Months Ended September 30, --------------------------------------- 2002 2001 ------------------ ------------------ Operating Revenues: Utility $ 253,897 $ 337,342 Nonutility 76,400 78,776 ------------------ ------------------ Total Operating Revenues 330,297 416,118 ------------------ ------------------ Operating Expenses: Cost of Gas Sold - Utility 157,902 239,494 Cost of Sales - Nonutility 66,896 68,163 Operations 32,675 31,015 Maintenance 4,627 6,227 Depreciation 16,731 15,802 Energy and Other Taxes 7,408 7,829 ------------------ ------------------ Total Operating Expenses 286,239 368,530 ------------------ ------------------ Operating Income 44,058 47,588 Other Income and Expense: Equity in Affiliated Companies 653 895 Other 556 452 ------------------ -------------- Total Other Income and Expense 1,209 1,347 Interest Charges 13,436 15,614 Preferred Dividend Requirements of Subsidiary 2,293 2,297 ------------------ ------------------ Income Before Income Taxes 29,538 31,024 Income Taxes 12,321 13,222 ------------------ ------------------ Income from Continuing Operations 17,217 17,802 Discontinued Operations - Net (168) (320) Cumulative Effect of a Change in Accounting Principle - Net 0 148 ------------------ ------------------ Net Income Applicable to Common Stock $ 17,049 $ 17,630 ================== ================== Basic Earnings Per Common Share: Continuing Operations $ 1.44 $ 1.53 Discontinued Operations - Net (0.02) (0.03) Cumulative Effect of a Change in Accounting Principle - Net 0.00 0.01 ------------------- ------------------ Basic Earnings Per Common Share $ 1.42 $ 1.51 =================== ================== Average Shares of Common Stock Outstanding - Basic 11,996 11,674 Diluted Earnings Per Common Share: Continuing Operations $ 1.43 $ 1.52 Discontinued Operations - Net (0.02) (0.03) Cumulative Effect of a Change in Accounting Principle - Net 0.00 0.01 ------------------- ------------------ Diluted Earnings Per Common Share $ 1.41 $ 1.50 =================== ================== Average Shares of Common Stock Outstanding - Diluted 12,068 11,710 Dividends Declared per Common Share $ 1.125 $ 1.105 ================== ================== The accompanying footnotes are an integral part of the financial statements.
SJI-4 SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands)
(Unaudited) September 30, December 31, -------------------------------------------------------- 2002 2001 2001 ---------------- ---------------- ---------------- Assets Property, Plant and Equipment: Utility Plant, at original cost $ 833,060 $ 793,471 $ 805,440 Accumulated Depreciation (232,685) (218,422) (221,457) Nonutility Property and Equipment, at cost 50,834 17,038 24,118 Accumulated Depreciation (1,119) (1,031) (1,058) ---------------- ---------------- ---------------- Property, Plant and Equipment - Net 650,090 591,056 607,043 ---------------- ---------------- ---------------- Investments: Available-for-Sale Securities 3,475 3,008 3,139 Restricted 4,763 32,215 22,962 Investment in Affiliate 1,812 1,810 1,369 ---------------- ---------------- ---------------- Total Investments 10,050 37,033 27,470 ---------------- ---------------- ---------------- Current Assets: Cash and Cash Equivalents 4,867 3,986 3,965 Accounts Receivable 52,122 57,497 66,750 Unbilled Revenues 7,504 8,095 34,981 Provision for Uncollectibles (2,262) (2,247) (2,661) Natural Gas in Storage, average cost 53,739 63,758 59,778 Materials and Supplies, average cost 3,737 4,033 3,818 Prepaid Taxes 13,938 13,355 4,650 Energy Trading Assets 25,286 53,668 47,187 Prepayments and Other Current Assets 6,584 3,909 3,616 ---------------- ---------------- ---------------- Total Current Assets 165,515 206,054 222,084 ---------------- ---------------- ---------------- Regulatory and Other Non-Current Assets: Deferred Fuel Costs - Net 44,967 44,513 36,798 Other Regulatory Assets 75,522 82,020 79,994 Energy Trading Assets 4,356 4,214 3,554 Derivatives - - 509 Other 11,716 7,164 10,393 ---------------- ---------------- ---------------- Total Regulatory and Other Non-Current Assets 136,561 137,911 131,248 ---------------- ---------------- ---------------- Total Assets $ 962,216 $ 972,054 $ 987,845 ================ ================ ================ The accompanying footnotes are an integral part of the financial statements.
SJI-5 SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands)
(Unaudited) September 30, December 31, -------------------------------------------- 2002 2001 2001 -------------- ----------- ---------- Capitalization and Liabilities Common Equity: Common Stock $ 15,135 $ 14,712 $ 14,826 Premium on Common Stock 147,513 137,302 139,929 Accumulated Other Comprehensive Loss (1,581) - (1,687) Retained Earnings 70,752 62,675 67,218 ------------ ----------- ---------- Total Common Equity 231,819 214,689 220,286 ------------ ----------- ---------- Preferred Stock and Securities of Subsidiary: Redeemable Cumulative Preferred Stock: South Jersey Gas Company, Par Value $100 per share Authorized - 41,966 shares; Outstanding - 16,904 shares 8% Series 1,690 1,690 1,690 South Jersey Gas Company-Guaranteed Manditorily Redeemable Preferred Securities of Subsidiary Trust: Par Value $25 per share, 1,400,000 shares Authorized and Outstanding 35,000 35,000 35,000 ------------ ----------- ---------- Total Preferred Stock and Securities of Subsidiary 36,690 36,690 36,690 ------------ ----------- ---------- Long-Term Debt 253,364 259,247 259,247 ------------- ----------- ---------- Total Capitalization 521,873 510,626 516,223 ------------- ----------- ---------- Current Liabilities: Notes Payable 133,550 140,405 152,360 Current Maturities of Long-Term Debt 12,883 11,876 9,733 Accounts Payable 42,535 41,347 48,239 Customer Deposits 6,575 5,646 5,976 Environmental Remediation Costs 11,261 17,247 11,319 Taxes Accrued 2,917 3,045 2,743 Energy Trading Liabilities 16,353 47,106 38,991 Derivatives 238 - - Deferred Income Taxes - Net 27,443 26,774 26,629 Interest Accrued and Other Current Liabilities 12,831 14,226 14,154 ------------- ----------- ---------- Total Current Liabilities 266,586 307,672 310,144 ------------- ----------- ---------- Deferred Credits and Other Non-Current Liabilities: Deferred Income Taxes - Net 93,518 85,897 84,717 Investment Tax Credits 3,906 4,253 4,166 Pension and Other Postretirement Benefits 17,405 12,811 19,313 Environmental Remediation Costs 41,423 37,884 41,423 Energy Trading Liabilities 3,335 3,680 2,947 Derivatives 2,584 - - Other 11,586 9,231 8,912 ------------- ----------- ---------- Total Deferred Credits and Other Non-Current Liabilities 173,757 153,756 161,478 ------------- ----------- ---------- Commitments and Contingencies (Note 9) Total Capitalization and Liabilities $ 962,216 $ 972,054 $ 987,845 ============ =========== ========== The accompanying footnotes are an integral part of the financial statements.
SJI-6 SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In Thousands)
Nine Months Ended September 30, -------------------------------- 2002 2001 -------------- -------------- Cash Flows from Operating Activities: Net Income Applicable to Common Stock $ 17,049 $ 17,630 Adjustments to Reconcile Net Income to Cash Flows Provided by Operating Activities: Depreciation and Amortization 18,470 17,548 Unrealized Loss (Gain) on Energy Trading 71 (2,651) Provision for Losses on Accounts Receivable 1,469 1,046 Revenues and Fuel Costs Deferred - Net (8,169) (15,494) Deferred and Non-Current Income Taxes and Credits - Net 9,881 7,972 Environmental Remediation Costs - Net 5,882 5,976 Changes in: Accounts Receivable 40,237 59,362 Inventories 6,120 (31,797) Prepayments and Other Current Assets (2,968) (486) Prepaid and Accrued Taxes - Net (9,114) (7,829) Accounts Payable and Other Accrued Liabilities (6,428) (44,367) Other - Net 18 (3,455) -------------- -------------- Net Cash Provided by Operating Activities 72,518 3,455 -------------- -------------- Cash Flows from Investing Activities: (Investment in) Return of Investment from Affiliate (443) 2,641 Repayment of Loan to Affiliate 130 1,160 Purchase of Available-For-Sale Securities (440) (571) Proceeds from Sale (Purchase) of Restricted Investments 18,199 (32,215) Capital Expenditures, Cost of Removal and Salvage (61,787) (45,303) -------------- -------------- Net Cash Used in Investing Activities (44,341) (74,288) -------------- -------------- Cash Flows from Financing Activities: Net (Repayments of) Borrowings from Lines of Credit (18,810) 19,205 Proceeds from Issuance of Long-Term Debt 10,000 64,000 Principal Repayments of Long-Term Debt (12,733) (9,734) Dividends on Common Stock (13,515) (12,958) Proceeds from Sale of Common Stock 7,842 8,234 Repurchase of Preferred Stock - (114) Payments for Issuance of Long-Term Debt (59) (1,041) -------------- -------------- Net Cash (Used in) Provided by Financing Activities (27,275) 67,592 -------------- -------------- Net Increase (Decrease) in Cash and Cash Equivalents 902 (3,241) Cash and Cash Equivalents at Beginning of Period 3,965 7,227 -------------- -------------- Cash and Cash Equivalents at End of Period $ 4,867 $ 3,986 ============== ============== The accompanying footnotes are an integral part of the financial statements.
SJI-7 Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Summary of Significant Accounting Policies: Consolidation -- The condensed consolidated financial statements include the accounts of South Jersey Industries, Inc. (SJI) and its subsidiaries. All significant intercompany accounts and transactions were eliminated. SJI reclassified some previously reported amounts to conform with current year classifications. In our opinion, the condensed consolidated financial statements reflect all adjustments needed to fairly present SJI's financial position and operating results at the dates and for the periods presented. Our 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. These financial statements should be read in conjunction with SJI's 2001 Form 10K and annual report. Equity-Based Investments in Affiliates -- SJI, either directly or through its wholly-owned subsidiaries, currently holds a 50% non-controlling interest in several affiliated companies and accounts for the investments under the equity method. The operations of these affiliated companies are included in the statements of condensed consolidated income under the caption, Equity in Affiliated Companies. Estimates and Assumptions -- Our financial statements are prepared to conform with generally accepted accounting principles. Management makes estimates and assumptions that affect the amounts reported in the financial statements and related disclosures. Therefore, actual results could differ from those estimates. Regulation -- South Jersey Gas Company (SJG) is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU). They maintain their accounts according to the BPU's prescribed Uniform System of Accounts (See Note 7). SJG follows the accounting for regulated enterprises prescribed by the Financial Accounting Standards Board (FASB) Statement No. 71, "Accounting for the Effects of Certain Types of Regulation." In general, Statement No. 71 allows deferral of certain costs and obligations when it is probable that such items will be recovered from or refunded to customers in future periods. Energy Trading Activities & Derivative Instruments -- South Jersey Resources Group, LLC (SJRG) manages its portfolio purchases and sales, as well as natural gas in storage, using a variety of instruments that include forward contracts, swap agreements, option contracts and futures contracts. SJRG accounts for these contracts at fair value under EITF Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," or FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. Under this method of accounting, SJRG measures the difference between the price and the fair value of the contracts and records these as Energy Trading Assets or Energy Trading Liabilities on our condensed consolidated balance sheets. For the three months ended September 30, 2002 and 2001, the net unrealized pre-tax (loss) gain on energy trading was $(0.9) million and $.05 million, respectively. For the nine months ended September 30, 2002 and 2001, the net unrealized pre-tax (loss) gain on energy trading was $(0.1) million and $2.7 million, respectively. These (losses) gains SJI-8 are included in Operating Revenues - Nonutility. The Cumulative Effect of a Change in Accounting Principle - Net of $148,000 for the nine months ended September 30, 2001 relates to the adoption of Statement No. 133 on January 1, 2001. SJI's approach to transacting various aspects of its unregulated energy business is to offset purchases and sales and have minimal open positions at any one time. Consistent with this approach, SJI will designate certain energy related contracts as cash flow or fair value hedges. SJRG also provides price risk management for certain South Jersey Energy (SJE) sales commitments. SJRG enters into future and basis contracts to effectively provide price risk management for SJE's firm commitments for sales of gas and forecasted purchases of gas. The SJRG energy related contracts that are used to hedge SJE's forecasted purchases of gas have been designated as cash flow hedges. The gains and losses on derivative contracts designated as cash flow hedges are recorded in Accumulated Other Comprehensive Loss and recorded to the Income Statement when the hedged transactions are completed. SJE's firm commitments for sales of gas are marked to market and reflected in the consolidating statements of income. In November 2001, we entered into two interest rate swap contracts. The first swap effectively provides us with a fixed interest rate of 4.08% on Marina Energy LLC's (Marina) tax-exempt Series A variable rate bonds for a 10-year period. The second swap effectively fixes the interest rate of Marina's taxable Series B variable rate bonds at 4.55% for a 6-year period. The notional amount of this second swap decreases by $3.0 million per year beginning in December 2005. In January 2002, Marina issued an additional $10.0 million of taxable Series B variable rate bonds. In April 2002, we entered into an interest rate swap contract that effectively fixes the interest rate on these bonds at 4.62% for a four-year period. The notional amount of this swap decreases to $8 million in December 2003, then to $3.9 million in December 2004, and terminates in December 2005. Also in April 2002, SJG entered into an interest rate swap contract that effectively fixes the interest rate at 3.57% through March 15, 2003 on $40 million of SJG's debt outstanding under its bank lines. We entered into interest rate swap agreements to hedge the exposure to an increase in interest rates with respect to our variable rate debt. The differential to be paid or received as a result of these swap agreements is accrued as interest rates change and recognized as an adjustment to interest expense. These interest rate swaps are accounted for as cash flow hedges. As of September 30, 2002, the market value of these swaps was $(2,703,462), which represents the amount we would pay to terminate these contracts as of that date. This balance is included on the 2002 condensed consolidated balance sheet under the caption Derivatives. As of September 30, 2002, we calculated the swaps to be highly effective; therefore, the offset to the hedge asset is recorded, net of taxes, in Accumulated Other Comprehensive Loss. SJI-9 Fair value of the derivative investments and energy related contracts is determined by reference to quoted market prices of listed contracts, published quotations or quotations from independent parties. New Accounting Pronouncements -- In June 2001, the FASB issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 141 applies to all business combinations initiated after June 30, 2001 and has no impact on SJI at this time. Statement No. 142 provides that intangible assets with finite useful lives should be amortized and that goodwill and intangible assets with indefinite lives should not be amortized but will be tested at least annually for impairment. In 1983, SJG acquired certain gas distribution and operating facilities with an excess of purchase price over net book value of $2.9 million, which was being amortized over 40 years. This acquisition adjustment is deemed to have an indefinite useful life because the associated plant is expected to generate sufficient cash flow indefinitely. Accordingly, SJG ceased amortizing the premium on January 1, 2002, leaving a carrying amount of $1.6 million, which is reflected in the caption Utility Plant on the condensed consolidated balance sheets. In 2001, the premium amortization approximated $75,000. Also in June 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations." Statement No. 143 establishes accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SJI expects to adopt Statement No. 143 in 2003. We are currently evaluating the effects of Statement No. 143; however, it is not expected to materially impact SJI's financial condition or results of operations. In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which was effective in 2002. This statement prescribes that a single accounting model be used for valuing long-lived assets to be disposed of and broadens the presentation of discontinued operations. The adoption of Statement No. 144 did not have a material impact on SJI's financial condition or results of operation. In July 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with the exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Beginning in the third quarter of 2002, SJI has decided to present realized gains and losses from trading in physical power contracts on a net basis in our condensed consolidated statements of income as permitted by Emerging Issues Task Force (EITF) Issue No. 98-10. Consequently, Operating Revenues - Nonutility and Cost of Sales - Nonutility for the three and nine months ended September 30, 2001 have been reclassified to be in conformity with this presentation. Because of the difficulty in obtaining certain information, this presentation was determined by netting the energy contract related revenue and expense transactions of South Jersey Resources Group (SJRG). As a result, certain cost SJI-10 of sales - nonutility is based on the transfer price between SJRG and South Jersey Energy. Management believes these transfer prices are generally at market, but has had no policy that they be at market. There is no effect on operating income or net income from the above changes in presentation. On October 25, 2002, the EITF rescinded its consensus in Issue No. 98-10 effective for transactions entered into after that date, with a cumulative effect adjustment for previously existing transactions to be recognized in the quarter beginning January 1, 2003. As a result of the rescission, SJI will only mark-to-market those energy-related contracts that meet the definition of a derivative in FASB No. 133. Energy-related contracts that do not meet the definition of a derivative would be accounted for using the accrual basis of accounting. Management is currently evaluating the effect of the recent EITF decision. It appears that many energy related contracts that are currently accounted for at fair value will meet the definition of a derivative, except for inventory, including gas storage rights. But, SJI is awaiting further guidance and information on the matter. Other Regulatory Assets -- Other Regulatory Assets consisted of the following items (in thousands):
Years Remaining as of September 30, December 31, Sept. 30, 2002 2002 2001 2001 -------------- --------------------------------------------- Environmental Remediation Costs: Expended - Net 7 $ 6,891 $ 12,248 $ 12,831 Liability for Future Expenditures - 48,790 51,029 48,790 Income Taxes - Flowthrough Depreciation 9 8,841 9,819 9,575 Postretirement Benefit Costs 10.3 3,874 4,252 4,158 Gross Receipts and Franchise Taxes 4.3 1,922 2,365 2,254 Other - 5,204 2,307 2,386 ----------------------------------------- Total Regulatory Assets $ 75,522 $ 82,020 $ 79,994 =========================================
Each item that is separately identified is being recovered through utility rate charges without a return on investments over the period indicated. The majority of the assets reflected above under the caption "Other" are currently subject to filings with the BPU requesting recovery. Management believes that all such deferred costs will be permitted to be recovered from ratepayers through future utility rates. In addition, SJG has one significant regulatory liability for overcollected taxes totaling $2.4 million, including interest, as of September 30, 2002. This amount is included on the condensed consolidated balance sheet in the caption "Other" under the heading Deferred Credits and Other Non-Current Liabilities and is subject to being returned to ratepayers in future rate proceedings. SJI-11 Note 2. Discontinued Operations and Affiliations: Discontinued Operations -- Summarized operating results of discontinued operations for the three and nine months ending September 30 (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 -------------------------------------------------- Operating Revenues - Merchandising $ - $ 217 $ 26 $ 773 ================================================== (Loss) Income before Income Taxes: Sand Mining $ (16) $ (31) $ (222) $ 779 Construction (2) 2 (14) 97 Fuel Oil (12) (18) (43) (57) Wholesale Electric - - - (1,177) Merchandising - (14) - (178) Income Tax Credits 12 25 111 216 -------------------------------------------------- Loss from Discontinued Operations - Net $ (18) $ (36) $ (168) $ (320) ================================================== Earnings Per Common Share from Discontinued Operations - Net $ 0.00 $ 0.00 $ (0.02) $ (0.03) ==================================================
Affiliations -- In January 1999, SJI and Conectiv Solutions, LLC, formed Millennium Account Services, LLC to provide meter reading services in Southern New Jersey. In June 1999, South Jersey Energy and Energy East Solutions, Inc. formed South Jersey Energy Solutions, LLC (SJES) to market retail electricity and energy management services. SJES began supplying retail electric during the first quarter of 2000 and ceased this activity in the second quarter of 2002. In April 2000, SJE and GZA GeoEnvironmental, Inc. formed Air Logics, LLC to market a jointly-developed air monitoring system designed to assist companies involved in environmental cleanup activities. Note 3. Common Stock: SJI has 20,000,000 shares of authorized Common Stock. The following shares were issued and outstanding: 2002 2001 --------------------------- Beginning Balance, January 1 11,860,990 11,499,701 New Issues During Year: Dividend Reinvestment Plan 243,544 266,432 Employees' Stock Ownership Plan 2,530 2,805 Stock Option, Stock Appreciation Rights And Restricted Stock Award Plan 590 346 --------------------------- Ending Balance, September 30 12,107,654 11,769,284 =========================== SJI-12 We credited the par value ($1.25 per share) of stock issued in 2002 and 2001 to Common Stock. We credited the net excess over par value of approximately $7.6 million and $7.9 million, respectively, to Premium on Common Stock. Dividend Reinvestment Plan (DRP) and Employees' Stock Ownership Plan (ESOP) -- Newly issued shares of common stock offered through the DRP are issued directly by SJI. All shares offered through the ESOP are also issued directly by SJI. As of September 30, 2002, SJI reserved 1,260,681 and 17,198 shares of authorized, but unissued, common stock for future issuance to the DRP and ESOP, respectively. Stock Option, Stock Appreciation Rights and Restricted Stock Award Plan -- Under this plan, no more than 306,000 shares in the aggregate may be issued to SJI's officers and other key employees. No options or stock appreciation rights may be granted under the Plan after November 22, 2006. At September 30, 2002 and 2001, SJI had -0- and 4,500 options outstanding, respectively, all exercisable at $24.69 per share. No options were granted in 2002 or 2001. No stock appreciation rights were issued under the Plan. As of September 30, 2002, 80,980 restricted shares were granted and will be issued upon satisfaction of time and performance contingencies. Earnings Per Common Share -- We present basic EPS based on the weighted-average number of common shares outstanding. Our EPS are presented in accordance with FASB Statement No. 128, "Earnings Per Share" which establishes standards for computing and presenting basic and diluted EPS. The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 71,861 and 36,030 shares for the nine months ended September 30, 2002 and 2001, respectively. Because they would have an antidilutive effect on EPS, incremental shares of 98,277 and 49,012 for the three months ended September 30, 2002 and 2001, respectively, were not included in the denominator for a diluted EPS calculation. These shares relate to stock options and restricted stock and were calculated using the treasury stock method. Note 4. Financial Instruments: Restricted Investments -- In accordance with the terms of Marina's bond agreements, we are required to invest unused proceeds in high-quality, highly-liquid investments pending approved construction expenditures. As of September 30, 2002, the net proceeds remaining totaled $4.8 million. South Jersey Resources Group (SJRG) -- SJRG maintains a margin account with a national investment firm to support its energy trading activities. As of September 30, 2002, SJRG's margin account had a $497,000 credit balance due to changes in the market value of outstanding contracts. SJI-13 Note 5. Comprehensive Income: The components of comprehensive income are as follows (in thousands):
Three Months Ended Nine Months Ended September 30, 2002 September 30, 2002 ----------------------------------------- Net (Loss) Income Applicable to Common Stock $ (3,240) $ 17,049 Other Comprehensive (Loss) Income: Change in Fair Value of Derivatives: Interest Rate Swaps (1,161) (1,970) Energy Trading Contracts 1,212 2,077 --------------------------------- Comprehensive (Loss) Income $ (3,189) $ 17,156 =================================
Note 6. Segments of Business: Information about SJI's operations in different industry segments for the three and nine months ended September 30 is presented below (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 -------------------------------------------------------------- Operating Revenues: Gas Utility Operations $ 51,765 $ 57,592 $ 270,954 $ 357,802 Wholesale Gas Operations 561 544 4,061 4,980 Retail Gas and Other Operations 20,055 19,506 73,181 75,361 -------------------------------------------------------------- Subtotal 72,381 77,642 348,196 438,143 Intersegment Sales (3,315) (2,657) (17,899) (22,025) -------------------------------------------------------------- Total Operating Revenues $ 69,066 $ 74,985 $ 330,297 $ 416,118 ============================================================== Operating Income: Gas Utility Operations $ (992) $ (647) $ 37,643 $ 39,297 Wholesale Gas Operations 323 319 3,663 4,397 Retail Gas and Other Operations 465 165 3,069 4,086 General Corporate (153) (34) (317) (192) -------------------------------------------------------------- Total Operating (Loss) Income $ (357) $ (197) $ 44,058 $ 47,588 ============================================================== Depreciation and Amortization: Gas Utility Operations $ 6,162 $ 5,878 $ 18,366 $ 17,464 Wholesale Gas Operations 3 5 9 5 Retail Gas and Other Operations 26 17 68 58 Discontinued Operations 10 7 27 21 -------------------------------------------------------------- Total Depreciation and Amortization $ 6,201 $ 5,907 $ 18,470 $ 17,548 ==============================================================
SJI-14
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ------------------------------------------------------------- Property Additions: Gas Utility Operations $ 12,947 $ 12,495 $ 34,314 $ 33,669 Wholesale Gas Operations - 3 - 56 Retail Gas and Other Operations 8 29 63 163 On-Site Energy Production 8,416 7,425 26,714 10,840 -------------------------------------------------------------- Total Property Additions $ 21,371 $ 19,952 $ 61,091 $ 44,728 ============================================================== Identifiable Assets: Gas Utility Operations $ 849,159 $ 837,355 Wholesale Gas Operations 42,436 88,343 Retail Gas and Other Operations 26,971 15,193 On-Site Energy Production 55,690 31,600 Discontinued Operations 2,350 2,234 ----------------------------- Subtotal 976,606 974,725 Corporate Assets 34,214 34,593 Intersegment Assets (48,604) (37,264) ----------------------------- Total Identifiable Assets $ 962,216 $ 972,054 =============================
Gas Utility Operations consist primarily of natural gas distribution to residential, commercial and industrial customers. Wholesale Gas Operations include South Jersey Resources Group's activities. Retail Gas and Other Operations include natural gas and electricity acquisition and transportation service companies. On-Site Energy Production consists of Marina's construction and related financing activities. SJI's interest expense relates primarily to SJG's borrowing and financing activities. Interest income is essentially derived from borrowings between the subsidiaries which is eliminated during consolidation. Note 7. Regulatory Actions: In January 1997, the New Jersey Board of Public Utilities (BPU) granted SJG a 9.62% rate of return on rate base, which included an 11.25% return on common equity. Additionally, SJG's threshold for sharing pre-tax margins generated by interruptible and off-system sales and transportation increased. Currently, SJG keeps 100% of pre-tax margins up to the threshold level of $7.8 million. The next $750,000 is credited to the Levelized Gas Adjustment Clause (LGAC). Thereafter, SJG keeps 20% of the pre-tax margins as it has historically. Effective January 10, 2000, the BPU approved full unbundling of SJG's system. This allows all natural gas consumers to select their natural gas supplier. As of September 30, 2002, 79,969 of SJG's customers were purchasing their gas commodity from someone other than SJG. Customers choosing to purchase natural gas from providers other than the utility are charged for the cost of SJI-15 gas by the marketer, not the utility. The resulting decrease in SJG's revenues is offset by a corresponding decrease in gas costs. While customer choice can reduce utility revenues, it does not negatively affect SJG's net income or financial condition. The BPU continues to allow for full recovery of natural gas costs through the LGAC, as well as other costs of service, including deferred costs, through tariffs. In August 2002, SJG filed for a Societal Benefits Clause (SBC) rate increase. The SBC recovers costs related to BPU mandated programs, including environmental remediation costs that are recovered through its Remediation Adjustment Clause (RAC), energy efficiency and renewable energy program costs that are recovered through its Comprehensive Resource Analysis (CRA) clause, consumer education program costs and low income program costs. The requested rate increase would provide for an annual recovery level of $13.7 million which would represent an annual increase of approximately $7.0 million over the $6.7 million recovery currently included in rates. As approved by the BPU, SJG is allowed recovery of interest on any SBC underrecovered balance. On November 15, 2001, SJG filed for a $17.6 million reduction to its Levelized Gas Adjustment Clause (LGAC). The BPU approved the LGAC reduction effective December 1, 2001. Also on December 1, 2001, SJG implemented recovery of its October 31, 2001 underrecovered gas costs. SJG will recover $48.9 million over three years plus interest accrued since April 1, 2001. SJG will also recover interest for the 3-year amortization period at a rate of 5.75%. In May 2002, SJG received approval from the BPU of SJG's request to reduce its overcollected LGAC balance by $17.6 million. This refund did not affect SJG's net income or financial condition. In September 2002, SJG filed with the BPU to maintain its current LGAC rate through October 2003. On November 15, 2001, SJG filed for a $2.7 million rate increase to recover the cash related to a 3-year net deficiency in the Temperature Adjustment Clause (TAC). Additionally, in September 2002, SJG filed for an $8.6 million rate increase to recover the cash related to a TAC deficiency representing warmer than normal weather for the 2001-2002 winter. In August 2002, SJG filed a petition with the BPU seeking to transfer its appliance service business from the regulated utility into a newly created unregulated, limited liability company. The newly created company will then have the flexibility to be more responsive to competition and its customers and further its service offerings in an unregulated environment. Note 8. Retained Earnings: Restrictions exist under various loan agreements regarding the amount of cash dividends or other distributions that SJG may pay on its common stock. SJI's total equity in its subsidiaries' retained earnings, which is free of these restrictions, was $69.0 million as of September 30, 2002. SJI-16 Note 9. Commitments and Contingencies: Construction and Environmental -- SJI's estimated net cost of construction and environmental remediation programs for 2002 totals $91.5 million. Commitments were made regarding some of these programs. Pending Litigation -- SJI is subject to claims arising in the ordinary course of business and other legal proceedings. We accrue liabilities when these claims become apparent for amounts we believe these claims may be settled. We also maintain insurance and record probable insurance recoveries relating to outstanding claims. In management's opinion, the ultimate disposition of these claims will not have a material adverse effect on SJI's financial position, results of operations or liquidity. Standby Letters of Credit -- SJI provided a $17 million standby letter of credit to Marina District Development Corporation in support of Marina's contractual obligations to construct the thermal energy plant and to supply heat, hot water and cooling to The Borgata Resort. This letter of credit was reduced to $13.6 million as of September 30, 2002. As of September 30, 2002, SJI also provided $39 million of standby letters of credit supporting the variable rate demand bonds issued through the New Jersey Economic Development Authority by Marina. Commercial banks have committed to issue up to $46 million of annually renewing letters of credit to support development of Marina's thermal plant project. Environmental Remediation Costs -- SJI incurred and recorded costs for environmental clean up of 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 South Jersey Fuel (SJF) previously operated a fuel oil business and The Morie Company (Morie) maintained equipment, fueling stations and storage. SJI successfully entered into settlements with all of its historic comprehensive general liability carriers regarding the environmental remediation expenditures at the SJG sites. Also, SJG purchased a Cleanup Cost Cap Insurance Policy limiting the amount of remediation expenditures that SJG will be required to make at 11 of its sites. This Policy will be in force until 2024 at 10 sites and until 2029 at one site. The following future cost estimates have been reduced by projected insurance recoveries from the Cleanup Cost Cap Insurance Policy. Since the early 1980s, SJI accrued estimated environmental remediation costs of $130.1 million, of which $81.3 million was spent as of September 30, 2002. With the assistance of a consulting firm, we estimate that future costs to clean up SJG's sites will range from $48.8 million to $143.5 million. We recorded the lower end of this range as a liability. It is reflected on the 2002 condensed consolidated balance sheet under the captions Current Liabilities and Deferred Credits and Other Non-Current Liabilities. Recorded amounts include estimated costs based on projected investigation and remediation work plans using existing technologies. Actual costs could differ from the estimates due to the long-term nature of the projects, changing remediation technology, SJI-17 government regulations and site-specific requirements. The major portion of accrued environmental costs relate to the clean up of SJG's former gas manufacturing sites. SJG has two regulatory assets associated with environmental costs (see Note 1 under Other Regulatory Assets). The first asset is titled Environmental Remediation Cost: Expended - Net. This asset represents what was actually spent to clean up former gas manufacturing plant sites, net of recoveries. These costs meet the requirements of FASB Statement No. 71, "Accounting for the Effects of Certain Types of Regulation." The BPU allows SJG to recover expenditures through the Remediation Adjustment Clause (RAC). The other asset titled Environmental Remediation Cost: Liability for Future Expenditures relates to estimated future expenditures determined under the guidance of FASB Statement No. 5, "Accounting for Contingencies." We recorded this amount, which relates to former manufactured gas plant sites, as a deferred debit with the corresponding amount reflected on the condensed consolidated balance sheet under the captions Current Liabilities and Deferred Credits and Other Non-Current Liabilities. The deferred debit is a regulatory asset under Statement No. 71. The BPU's intent, evidenced by current practice, is to allow SJG to recover the deferred costs after they are spent over 7-year periods. As of September 30, 2002, we reflected SJG's unamortized remediation costs of $6.9 million on the condensed consolidated balance sheet under the caption Regulatory Assets. Since implementing the RAC in 1992, SJG has recovered $33.3 million through rates. With Morie's sale, Energy & Minerals, Inc. (EMI) assumed responsibility for environmental liabilities estimated between $2.7 million and $8.8 million. The information available on these sites is sufficient only to establish a range of probable liability and no point within the range is more likely than any other. Therefore, EMI continues to accrue the lower end of the range. Changes in the accrual are included in the statements of condensed consolidated income under the caption Loss from Discontinued Operations - Net. SJI and SJF have estimated their potential exposure for the future remediation of four sites where fuel oil operations existed years ago. Estimates for SJI's site range between $0.1 million and $0.4 million, while SJF's estimated liability ranges from $1.1 million to $4.9 million for its three sites. We recorded the lower ends of these ranges on the 2002 condensed consolidated balance sheet under Current Liabilities and Deferred Credits and Other Non-Current Liabilities as of September 30, 2002. Note 10. Subsequent Event: On October 7, 2002, SJG made total redemption of its 9% Series First Mortgage Bonds due 2010 in the amount of $17.5 million. The premium associated with the redemption was approximately $0.6 million. SJG will seek BPU approval to amortize the premium over the remaining term of this bond issue in accordance with the BPU's uniform system of accounts. SJI-18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview South Jersey Industries (SJI) is an energy services holding company which provides a variety of products and services through the following subsidiaries: 1) South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG distributes natural gas to 291,733 customers in the seven southernmost counties of New Jersey. SJG also: * sells natural gas and pipeline transportation capacity (off-system sales) on a wholesale basis to various customers on the interstate pipeline system; * transports natural gas purchased directly from producers or suppliers for our own sales and for some of our customers; * services appliances via the sale of appliance warranty programs, as well as on a time and materials basis. 2) South Jersey Energy Company (SJE) acquires and markets natural gas to retail end users and provides total energy management services to commercial and industrial customers. SJE has one subsidiary, SJ EnerTrade (EnerTrade), that primarily provides services for the sale of natural gas to the casino industry in Atlantic City, New Jersey. SJE also markets an air quality monitoring system through AirLogics, LLC. SJE has a 50% equity interest in AirLogics. GZA GeoEnvironmental, Inc., an environmental consulting firm, also has a 50% equity interest in AirLogics. 3) South Jersey Resources Group, LLC (SJRG) is a wholesale marketer of natural gas storage, commodity and transportation in the mid-Atlantic and southern states. SJRG also conducts price-risk-management activities. 4) Marina Energy LLC (Marina Energy) is a developer of energy-related projects in southern New Jersey. SJI also has an equal investment with Conectiv Solutions, LLC, in a joint venture forming Millennium Account Services, LLC (Millennium). Millennium provides meter reading services to SJG and Conectiv Power Delivery in southern New Jersey. SJI-19 Forward-Looking Statements This report contains certain forward-looking statements concerning projected financial and operating performance, future plans and courses of action and future economic conditions. All statements in this report other than statements of historical fact are forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and actual results could differ materially from those expressed or implied in the forward-looking statements. Also, in making forward-looking statements, we assume no duty to update these statements should expectations change or actual results and events differ from current expectations. A number of factors could cause our actual results to differ materially from those anticipated, including, but not limited to the following: general economic conditions on an international, national, state and local level; weather conditions in our marketing areas; changes in commodity costs; regulatory and court decisions; competition in our utility and non-utility activities; the availability and cost of capital; our ability to maintain existing joint ventures to take advantage of marketing opportunities; costs and effects of legal proceedings and environmental liabilities; the failure of customers or suppliers to fulfill their contractual obligations; and changes in business strategies. Mandatorily Redeemable Preferred Securities SJG's statutory trust subsidiary, SJG Capital Trust, currently has $35 million of 8.35% SJG-Guaranteed Mandatorily Redeemable Preferred Securities outstanding. These securities are redeemable by SJG at a price equal to 100% of the principal amount at any time. The securities currently trade on the New York Stock Exchange under the symbol SJI.T. Customer Choice Legislation All residential natural gas customers in New Jersey are able to choose their gas supplier. As of September 30, 2002, 79,969 SJG customers chose a natural gas supplier other than the utility. This number increased from 36,393 at September 30, 2001 as third party marketers were able to offer natural gas at prices competitive with those available to consumers under regulated utility tariffs. Customers choosing to purchase natural gas from providers other than the utility are charged for the cost of gas by the marketer, not the utility. The resulting decrease in SJG's revenues is offset by a corresponding decrease in gas costs. While customer choice can reduce utility revenues, it does not negatively affect SJG's net income or financial condition. The New Jersey Board of Public Utilities continues to allow for full recovery of natural gas costs through a Levelized Gas Adjustment Clause, as well as other costs of service, including deferred costs, through tariffs. SJI has benefited from Customer Choice Legislation as South Jersey Energy has successfully competed for, and profited from, gas commodity customers it has obtained. SJI-20 Temperature Adjustment Clause SJG's Board of Public Utilities approved Temperature Adjustment Clause (TAC) had the following impacts on 2002 and 2001 third quarter and nine months net earnings: 2002 2001 -------------------------- TAC Adjustment Increase to Net Income ($ in thousands) Quarter Ended September 30 $ - $ - Nine Months Ended September 30 $ 3,249 $ 132 The clause is designed to mitigate the effect of variations in heating season temperatures from historical norms. While the revenue and income impacts of adjustments made under this clause are recorded as incurred, cash inflows or outflows directly attributable to the adjustments generally do not begin until the next clause year. Each Temperature Adjustment Clause year begins October 1. Results of Operations - Three and Nine Months Ended September 30, 2002 Compared to Three and Nine Months Ended September 30, 2001 Operating Revenues - Utility Revenues decreased $6.5 million and $83.4 million in the third quarter and first nine months of 2002, respectively, compared with the prior year periods. The decreases were primarily due to three factors. First, weather was 16.5% warmer for the first nine months than the prior year period. Weather was not a material factor on third quarter performance as heating needs of our customers are typically minimal for that period. Second, a significantly higher number of residential customers utilized a third party marketer instead of SJG as their gas supplier. Third, off-system sales revenues decreased for the third quarter and the first nine months of 2002 primarily due to lower prices for natural gas sold and lower off-system sales volumes. Partially offsetting the effect of these factors was an additional 7,493 customers compared to same time last year. As a result of SJG's Temperature Adjustment Clause, revenues from utility ratepayers are closely tied to 20-year normal temperatures calculated under the clause and not actual temperatures. While the clause significantly reduces fluctuations in revenues related to temperature, as a general rule, revenues continue to be positively impacted by colder weather and negatively impacted by warmer weather. Weather was 16.5% warmer for the first nine months of 2002 than the 20-year average. In comparison, weather for the first nine months of 2001 was approximately the same as the 20-year average. SJI-21 The following is a comparison of operating revenue and throughput for the three and nine month periods ended September 30, 2002 compared with the same periods ended September 30, 2001.
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ----------------------------------------------------------- Utility Operating Revenues (Thousands): Firm Residential $ 13,612 $ 18,243 $ 114,844 $ 143,067 Commercial 5,560 6,922 34,215 58,447 Industrial 535 497 3,081 2,999 Cogeneration & Electric Generation 4,136 3,929 7,715 6,586 Firm Transportation 7,274 5,363 29,933 19,822 ---------------------------------------------------------- Total Firm Utility Operating Revenues 31,117 34,954 189,788 230,921 Interruptible 207 236 753 1,173 Interruptible Transportation 298 284 1,100 881 Off-System 18,131 20,530 72,792 119,203 Capacity Release & Storage 1,213 1,130 4,043 3,978 Other 798 458 2,478 1,646 Intercompany Sales (2,825) (2,192) (17,057) (20,460) ----------------------------------------------------------- Total Utility Operating Revenues $ 48,939 $ 55,400 $ 253,897 $ 337,342 =========================================================== Throughput (MMcf): Firm Residential 891 1,259 10,262 12,631 Commercial 478 617 3,496 5,922 Industrial 17 13 132 186 Cogeneration & Electric Generation 1,000 1,021 1,722 1,397 Firm Transportation 5,138 5,353 17,932 15,939 ----------------------------------------------------------- Total Firm Throughput 7,524 8,263 33,544 36,075 Interruptible 37 41 140 157 Interruptible Transportation 619 611 2,259 1,841 Off-System 5,227 6,257 21,470 21,880 Capacity Release and Other 12,640 7,321 29,784 19,048 ----------------------------------------------------------- Total Throughput 26,047 22,493 87,197 79,001 ===========================================================
SJI-22 Operating Revenues - Nonutility Nonutility operating revenues increased by $.5 million and decreased by $2.4 million for the third quarter and first nine months of 2002, respectively, compared to the comparable prior year periods. The nine month decrease was due to lower natural gas prices experienced by South Jersey Energy, and warmer weather which reduced actual gas volumes sold. Cost of Gas Sold - Utility Cost of gas sold - utility decreased $6.4 million and $81.6 million for the third quarter and first nine months of 2002 compared with the same periods in 2001. The first nine months decrease was due to lower gas costs for off-system sales as well as lower firm gas sales volume. Warmer weather and the migration of firm gas sales customers to transportation service were the main causes of the decrease in firm gas sales volume. SJG's gas cost during the first nine months of 2002 averaged $4.59/dt compared with $6.14/dt in 2001. Unlike gas costs associated with off-system sales, changes in the cost of gas sold to utility ratepayers are not reflected in Cost of Gas Sold - Utility as incurred. Fluctuations in gas costs to ratepayers not reflected in current rates are deferred and addressed in future periods under the Levelized Gas Adjustment Clause embedded in the utility rate structure. Gas supply sources include contract and open-market purchases. SJG secures and maintains its own gas supplies to serve its customers. Cost of Sales - Nonutility Cost of sales - nonutility increased $54,000 and decreased $1.3 million for the third quarter and first nine months of 2002, respectively, compared to the same periods in 2001 due to warmer weather which reduced actual volumes purchased and lower natural gas prices. Operations A summary of net changes in Operations (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2002 vs. 2001 2002 vs. 2001 ----------------------------------- Utility: Other Production Expense $ 3 $ 32 Transmission 6 17 Distribution (339) (321) Customer Accounts and Services (149) 637 Sales 50 61 Administration and General 279 528 Nonutility 422 706 -------------------------------- Total Operations $ 272 $ 1,660 ================================ SJI-23 Distribution Costs decreased as a result of higher cost recovery levels experienced through appliance repair services. Customer Accounts and Services Costs increased during the nine months ended September 30, 2002 as compared to the same period in 2001 primarily due to higher bad debt expense as accounts previously shut off for nonpayment were determined to be uncollectible. Administration and General Costs were higher due to increases in pension and employee welfare expenses primarily resulting from effects of the continuing poor performance of financial markets on retirement plan assets and increasing health care costs. Nonutility Costs increased primarily due to higher customer acquisitions costs incurred by South Jersey Energy. Other Operating Expenses A summary of principal changes in other consolidated operating expenses (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2002 vs. 2001 2002 vs. 2001 ---------------------------------- Maintenance $ (17) $ (1,600) Depreciation $ 319 $ 929 Energy and Other Taxes $ - $ (421) Maintenance expense decreased in the first nine months of 2002 primarily due to lower levels of Remediation Adjustment Clause (RAC) amortization recognized during the first quarter. RAC-related expenses do not affect earnings as an offsetting amount is recognized in revenues. Depreciation is higher due to increased investment in property, plant and equipment by SJG. Changes in Energy and Other Taxes relate primarily to changes in SJG's firm and interruptible throughput of gas. Other Income and Expense Other income and expense was higher in the first nine months of 2002 compared with the prior year due to a pre-tax gain of $686,000 on the sale of stock received as a result of the demutualization of Prudential's mutual life insurance company. During the first nine months of 2001, we recognized $250,000 as other income resulting from a favorable insurance case settlement. Interest Charges Interest charges were lower in the third quarter and the first nine months of 2002 compared with the prior year periods due primarily to reductions in short-term rates on line of credit borrowings. The effect of lower short-term rates was partially offset by the interest expense associated with higher levels of long-term debt outstanding in the first nine months of 2002. The long-term debt was incurred in the third quarter of 2001 primarily to support the expansion and upgrade of SJG's gas transmission and distribution system. SJI-24 Net Income Applicable to Common Stock Net income (in thousands) and earnings per common share reflect the following changes: Three Months Ended Nine Months Ended September 30, September 30, 2002 vs. 2001 2002 vs. 2001 --------------------------------- Income from Continuing Operations $ 554 $ (585) Loss from Discontinued Operations - Net 18 152 Cumulative Effect of Accounting Change - Net - (148) ------------------------------ Net Income Increase(Decrease) $ 572 $ (581) ============================== Earnings per Common Share: Continuing Operations $ 0.05 $ (0.09) Discontinued Operations - Net 0.00 0.01 Cumulative Effect of Accounting Change - Net 0.00 (0.01) ------------------------------ Earnings per Share Increase (Decrease) $ 0.05 $ (0.09) ============================== The details affecting the changes in net income and earnings per share are discussed under the appropriate captions above. Liquidity and Capital Resources Liquidity needs at SJI are driven by factors that include natural gas commodity prices; the impact of weather on customer bills and inventory levels; lags in fully collecting gas costs from customers under the Levelized Gas Adjustment Clause; working capital needs of our energy trading activities; the timing of construction and remediation expenditures and related permanent financings; mandated tax payment dates; and requirements to repay long-term debt. The wide swing in our net cash provided by operating activities between the nine months ended September 30, 2002 and the same period in 2001 was primarily due to the impact of very cold weather, which resulted in high levels of gas consumption by customers, and very high gas prices experienced during November and December of 2000. Consequently, receivables and payables were much higher and inventories were much lower at year end 2000 as compared to December 31, 2001 when weather conditions had been warmer than normal. Receivable, payable and inventory levels for SJI at September 30, 2001 and 2002 were much more comparable as the impact of weather on customer gas usage is minimal at that point in time. We first seek to meet liquidity needs with net cash provided by operating activities. We utilize short-term borrowings under lines of credit from commercial banks to supplement cash from operations where necessary. Lines of credit available to SJI totaled $162.0 million at September 30, 2002, of which $133.6 million was utilized. All but $10 million of these lines are made available through five commercial banks on an uncommitted basis. The banks and SJI review and renew the lines annually. The $10 million line is SJI-25 extended on a committed basis, maturing May 2003, by a sixth commercial bank. $137 million of these lines were exclusively for SJG's use. SJI has long-standing relationships with all of these banks and we believe, based upon ongoing dialogue, that there will continue to be sufficient credit available to meet our business' future liquidity needs. SJI supplements its operating cash flow and credit lines with both debt and equity capital. Over the years, SJG has utilized long-term debt, primarily in the form of First Mortgage Bonds, to finance its long-term needs. These needs are primarily capital expenditures for property, plant and equipment. Since 1998, SJG has financed these needs via a Medium Term Note (MTN) program, secured in similar fashion to the First Mortgage Bonds. We filed with the SEC to establish a new MTN program during the third quarter of 2002. We expect that process to be completed during the fourth quarter of 2002. Current maturities on long-term debt through 2006 are expected to total as follows: $9.7 million in 2002; $12.9 million per year in 2003 through 2005; and $11.2 million in 2006. Since September 2001, Marina issued $20 million of tax-exempt and $19 million of taxable variable rate demand bonds through the New Jersey Economic Development Authority (EDA). The tax-exempt and taxable bonds mature in 2031 and 2021, respectively. Marina has EDA approval to issue up to an additional $6 million of taxable bonds. Investors in the bonds receive liquidity and credit support via a letter of credit provided by a commercial bank. We are using the proceeds of this bond issuance to fund project development and construction costs for the thermal energy plant being constructed by Marina to serve The Borgata Resort which is scheduled to open in Summer 2003. Construction of the thermal plant is currently ahead of schedule. SJI has raised equity capital over the past three years through its Dividend Reinvestment Plan (DRP). Participants in SJI's DRP receive newly issued shares. We offer a 2% discount on DRP investments because it is the most cost-effective way for us to raise equity capital in the quantities we are seeking. Through the DRP, SJI raised $7.9 million of equity capital by issuing 243,544 shares in the first nine months of 2002 as compared to $7.8 million of equity capital by issuing 266,432 shares in the first nine months of 2001. We anticipate raising approximately $10 million of equity capital through the DRP in 2002. Capital Expenditures, Commitments and Contingencies Capital Expenditures SJI has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment and for environmental remediation costs. Net construction and remediation expenditures for the first nine months of 2002 amounted to $55.9 million. We estimate the costs for 2002, 2003 and 2004 at $91.5 million, $70.2 million and $59.2 million, respectively. Increases in expenditure estimates in 2002 and 2003, compared with 2001 and 2004, reflect construction costs associated with the Marina Energy Thermal Plant. SJI-26 Commitments and Contingencies SJG has certain commitments for both pipeline capacity and gas supply for which it pays fees regardless of usage. Those commitments average $45.7 million annually and total $278.5 million over the contracts' lives. Approximately 70% of the financial commitment under these contracts expires during the next five years. However, we expect to renew each of these contracts under renewal provisions as provided in each contract. SJG recovers all prudently incurred fees through rates via the Levelized Gas Adjustment Clause. Regulatory Matters Rate Actions On November 15, 2001, SJG filed for a $17.6 million reduction to its Levelized Gas Adjustment Clause (LGAC). The BPU approved the LGAC reduction effective December 1, 2001. Also on December 1, 2001, SJG implemented recovery of its October 31, 2001 underrecovered gas costs of $48.9 million over three years plus interest accrued since April 1, 2001. SJG has recovered $10.6 million as of September 30, 2002. SJG will also recover interest for the 3-year amortization period at a rate of 5.75%. In September 2002, SJG filed with the BPU to maintain its current LGAC rate through October 2003. On November 15, 2001, SJG filed for a $2.7 million rate increase to recover the cash related to a 3-year net deficiency in the Temperature Adjustment Clause (TAC). Additionally, in September 2002, SJG filed for an $8.6 million rate increase to recover the cash related to a TAC deficiency representing warmer than normal temperatures for the 2001-2002 winter. In August 2002, SJG filed for a Societal Benefits Clause (SBC) rate increase. The SBC recovers costs related to BPU mandated programs, including environmental remediation costs that are recovered through its Remediation Adjustment Clause (RAC), energy efficiency and renewable energy program costs that are recovered through its Comprehensive Resource Analysis (CRA) clause, consumer education program costs and low income program costs. The requested rate increase will provide for an annual recovery level of $13.7 million. This represents an annual increase of approximately $7.0 million over the $6.7 million recovery currently included in rates. As approved by the BPU, SJG is allowed recovery of interest on any SBC underrecovered balance. In August 2002, SJG filed a Petition with the BPU seeking to transfer its appliance service business from the regulated utility into a newly created unregulated, limited liability company. The newly created company will then have the flexibility to be more responsive to competition and its customers and further its service offerings in an unregulated environment. Other matters are incorporated by reference to Note 7 to the condensed consolidated financial statements included as part of this report. SJI-27 Item 3. Quantitative and Qualitative Disclosures About Market Risks of the Company Commodity Market Risks - Certain regulated and unregulated SJI subsidiaries are involved in buying, selling, transporting and storing natural gas for their own accounts as well as managing these activities for others. As such, these subsidiaries are subject to market risk due to price fluctuations. To hedge against this risk, we enter into a variety of physical and financial transactions including forward contracts, swaps, futures, and options agreements. To manage these transactions, SJI has a well-defined risk management policy approved by our board of directors that includes volumetric and monetary limits. Management reviews reports detailing trading activity daily. Generally, derivative activities described above are entered into for risk management, not trading, purposes. SJI's subsidiaries are structured so that SJG and SJE transact commodities on a physical basis only and enter into no financial derivative positions directly. SJRG manages risk for these entities as well as for its own portfolio by entering into the types of transactions noted above. It is management's policy, to the extent that it is practical and within predetermined risk management policy guidelines, to have limited unmatched positions on a deal or portfolio basis while conducting these activities. As a result of holding open positions to a minimal level, the financial impact to SJRG of changes in value of a particular transaction is substantially offset by an opposite change in the related hedge transaction. As of September 30, 2002, 30% of the counterparties with which SJRG has unsettled sales contracts carry investment-grade ratings. The remaining counterparties carried no external ratings, however, three-quarters had corporate parents with investment-grade ratings, not all of which provided SJI with parental guarantees. SJRG and SJE have entered into certain contracts for the purchase, sale, storage and transportation of natural gas. The net unrealized pre-tax loss on energy trading contracts of $0.1 million for the nine months ended September 30, 2002 primarily is derived from contracts entered into during the preceding 12 months and it is included as a reduction to operating revenues - nonutility. SJRG's and SJE's contracts are typically less than 12 months long. The fair value of these contracts determined under the mark-to-market method as of September 30, 2002 is as follows (in thousands):
Assets Maturity Maturity Source of Fair Value < 1 Year 1-3 Years Total -------------------------------------------------- -------------------------------------------------- Prices Actively Quoted NYMEX $ 11,809 $ 1,461 $ 13,270 Other External Sources Basis 10,000 2,893 12,893 Other Methods Inventory 3,477 2 3,479 -------------------------------------------------- Total $ 25,286 $ 4,356 $ 29,642 ==================================================
SJI-28
Liabilities Maturity Maturity Source of Fair Value < 1 Year 1-3 Years Total -------------------------------------------------- -------------------------------------------------- Prices Actively Quoted NYMEX $ 7,848 $ 973 $ 8,821 Other External Sources Basis 6,943 2,360 9,303 Other Methods Inventory 1,562 2 1,564 -------------------------------------------------- Total $ 16,353 $ 3,335 $ 19,688 ==================================================
NYMEX (New York Mercantile Exchange) is the primary national commodities exchange on which natural gas is traded. Basis represents the price of a NYMEX natural gas futures contract adjusted for the difference in price for delivering the gas at another location. Inventory represents the market value of natural gas held in storage determined through a combination of the NYMEX and Basis methods. Contracts valued under the inventory method in the preceding chart include gas inventory with a cost of $1.9 million. A reconciliation of SJI's estimated net fair value of energy trading contracts follows (in thousands): Net Energy Trading Assets/Liabilities, January 1, 2002 $ 8,803 Contracts Realized During 2002, Net (2,127) Other Changes in Fair Value, Net 3,278 --------- Net Energy Trading Assets/Liabilities, September 30, 2002 $ 9,954 ========= Interest Rate Risk - Our exposure to interest rate risk relates primarily to short-term, variable rate borrowings. A hypothetical 100 basis point increase in interest rates on $133.6 million of variable rate debt outstanding at September 30, 2002 would result in a $788,000 increase in our interest expense, net of tax, on an annual basis. In order to reduce exposure to an increase in interest rates on our variable rate debt, SJG entered into two interest rate swap agreements. The swaps effectively fixed the rate on $40 million of variable rate debt from April 2002 to March 2003 at 3.57%. Our long-term debt at SJG is issued at fixed rates and, consequently, interest expense is not significantly impacted by changes in market interest rates. Long-term debt issued to finance the construction of Marina Energy's thermal plant was initially issued as floating rate debt and subsequently swapped to a blended fixed rate of 4.59%. The Marina bonds are prepayable on a monthly basis. SJG prepaid $17.5 million of 9% first mortgage bonds in October 2002. SJG paid a premium of $566,000 to bondholders in conjunction with that redemption. Given current interest rate levels, we anticipate redeeming an additional $8.1 million of first mortgage bonds prior to scheduled maturity during the next 12 months. SJI-29 Item 4. Controls and Procedures SJI management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. PART II -- OTHER INFORMATION Item l. Legal Proceedings Information required by this Item is incorporated by reference to Part I, Item 1, Note 9, beginning on page 17. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description ----------- ----------- 99.1 Certification pursuant to 18 U.S.C. 99.2 Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Form 8-K None. SJI-30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTH JERSEY INDUSTRIES, INC. (Registrant) Dated: November 13, 2002 By: /s/ Charles Biscieglia ----------------------------------------------- Charles Biscieglia Chairman, President & Chief Executive Officer Dated: November 13, 2002 By: /s/ David A. Kindlick ----------------------------------------------- David A. Kindlick Vice President, Treasurer & Chief Financial Officer CERTIFICATIONS I, Charles Biscieglia, certify that: 1. I have reviewed this quarterly report on Form 10-Q of South Jersey Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; SJI-31 b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Charles Biscieglia --------------------------------------- Charles Biscieglia Chairman, President and Chief Executive Officer I, David A. Kindlick, certify that: 1. I have reviewed this quarterly report on Form 10-Q of South Jersey Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; SJI-32 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ David A. Kindlick ----------------------------------- David A. Kindlick Vice President, Chief Financial Officer and Treasurer SJI-33