-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U0T0dd2T1bd2Y6BZg4J9nolgQOEqkk0RBjypVLMtloRoS3a15hLc/CdTOFQN0soR 0ry9tTTtIIMJNQ2+1HH4wg== 0001035216-03-000013.txt : 20030814 0001035216-03-000013.hdr.sgml : 20030814 20030814114850 ACCESSION NUMBER: 0001035216-03-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTH JERSEY INDUSTRIES INC CENTRAL INDEX KEY: 0000091928 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 221901645 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06364 FILM NUMBER: 03844571 BUSINESS ADDRESS: STREET 1: 1 SOUTH JERSEY PLAZA STREET 2: ROUTE 54 CITY: FOLSOM STATE: NJ ZIP: 08037 BUSINESS PHONE: 609-561-9000 MAIL ADDRESS: STREET 1: 1 SOUTH JERSEY PLAZA STREET 2: ROUTE 54 CITY: FOLSOM STATE: NJ ZIP: 08037 FORMER COMPANY: FORMER CONFORMED NAME: SOUTH JERSEY GAS CO DATE OF NAME CHANGE: 19700507 FORMER COMPANY: FORMER CONFORMED NAME: ATLANTIC CITY GAS CO DATE OF NAME CHANGE: 19680301 10-Q 1 sji10q0603c.txt SOUTH JERSEY INDUSTRIES FORM 10Q FOR PERIOD ENDING QUARTER 6/30/03 ================================================================================ 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 June 30, 2003 ----------------------- 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 employeridentification 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 August 1, 2003, there were 12,570,161 shares of the registrant's common stock outstanding. =============================================================================== PART I -- FINANCIAL INFORMATION Item 1. Financial Statements-- See Pages 3 through 20 SJI-2 SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In Thousands Except for Per Share Data) Three Months Ended June 30, ------------------ 2003 2002 -------- -------- Operating Revenues: Utility $ 68,164 $ 62,777 Nonutility 38,051 21,423 -------- -------- Total Operating Revenues 106,215 84,200 -------- -------- Operating Expenses: Cost of Gas Sold - Utility 41,965 38,875 Cost of Sales - Nonutility 34,682 19,345 Operations 12,425 11,278 Maintenance 1,482 1,673 Depreciation 5,932 5,582 Energy and Other Taxes 2,207 2,120 -------- -------- Total Operating Expenses 98,693 78,873 Operating Income 7,522 5,327 Other Income and Expense: Equity in Affiliated Companies 192 203 Other 20 682 -------- -------- Total Other Income and Expense 212 885 Interest Charges 3,721 4,392 Preferred Dividend Requirements of Subsidiary 764 764 -------- -------- Income Before Income Taxes 3,249 1,056 Income Taxes 1,293 335 -------- -------- Income from Continuing Operations 1,956 721 Discontinued Operations - Net (154) (118) Cumulative Effect of a Change in Accounting Principle - Net - - -------- -------- Net Income Applicable to Common Stock $ 1,802 $ 603 ======== ======== Basic Earnings Per Common Share: Continuing Operations $ 0.16 $4 0.06 Discontinued Operations - Net (0.01) (0.01) Cumulative Effect of a Change in Accounting Principle - Net - - -------- -------- Basic Earnings Per Common Share $ 0.15 $ 0.05 ======== ======== Average Shares of Common Stock Outstanding - Basic 12,387 11,990 Diluted Earnings Per Common Share: Continuing Operations $ 0.16 $ 0.06 Discontinued Operations - Net (0.01) (0.01) Cumulative Effect of a Change in Accounting Principle - Net - - -------- -------- Diluted Earnings Per Common Share $ 0.15 $ 0.05 ======== ======== Average Shares of Common Stock Outstanding - Diluted 12,489 12,073 Dividends Declared per Common Share $ 0.385 $ 0.375 ======== ======== 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)

SJI-4 SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands)

SJI-5 SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands)

SJI-6 SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In Thousands)

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. We eliminated all significant intercompany accounts and transactions. 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 2002 Form 10K and annual report. Equity Investments - We classify equity investments purchased as long-term investments as Available-for-Sale Securities on our condensed consolidated balance sheets and carry them at their estimated fair value with any changes in unrealized gains or losses included in Other Comprehensive Income. SJI, either directly or through its wholly owned subsidiaries, currently holds a 50% non-controlling interest in two affiliated companies and accounts for these investments under the equity method. We include the operations of these affiliated companies in the statements of condensed consolidated income under the caption, Equity in Affiliated Companies. Estimates and Assumptions - We prepare our financial statements 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. Energy Trading Activities & Derivative Instruments - South Jersey Resources Group, LLC (SJRG) manages its portfolio of purchases and sales, as SJI-8 well as natural gas in storage, using a variety of instruments that include forward contracts, swap agreements, option contracts and futures contracts. Because SJRG's transactions will not necessarily settle physically, SJRG accounted for these contracts at fair value under Emerging Issues Task Force (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 contract price and the fair value of the contracts and records these as Energy Trading and Related Assets or Energy Trading and Related Liabilities on our condensed consolidated balance sheets. For the three months ended June 30, 2003 and 2002, we recorded net unrealized pre-tax losses of $(.8) million and $(.9) million, respectively. For the six months ended June 30, 2003 and 2002, we recorded net unrealized pre-tax gains of $.8 million and $.8 million, respectively. These unrealized gains and losses on energy trading and related contracts determined under the mark-to-market method are included in Operating Revenues - Nonutility. Beginning with the third quarter of 2002, SJI began presenting revenues and expenses related to SJRG's physical power contracts and energy-related derivative contracts on a net basis in our condensed consolidated statements of income consistent with EITF Issue No. 02-03, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities." Consequently, we reclassified Operating Revenues - Nonutility and Cost of Sales - Nonutility for the three and six months ended June 30, 2002 to conform with this presentation. Because of the difficulty in obtaining certain information, we determined this presentation by netting the energy contract related revenue and expense transactions of SJRG. As a result, we based certain nonutility costs of sales on the transfer prices between SJRG and South Jersey Energy Company (SJE). These transfer prices are generally 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 being recognized in the quarter beginning January 1, 2003. As a result of the recision, SJI only marks-to-market those energy-related contracts that meet the definition of a derivative in Statement No. 133. Energy-related contracts that do not meet the definition of a derivative are accounted for using the accrual basis of accounting. The effect of this change in accounting resulted in a net charge of $426,338 shown as a Cumulative Effect of a Change in Accounting Principle - Net. Furthermore, management has designated any contract entered into after December 31, 2002 to hedge physical gas in storage as cash flow hedges and accounts for them accordingly. We include these balances on the condensed consolidated balance sheets under the caption Derivatives. As of June 30, 2003, we calculated these hedges to be highly effective; therefore, we record the offset, net of taxes, in Accumulated Other Comprehensive Loss. 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 fixed 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 fixed the interest rate on these bonds at 4.62% for a 4-year period. The notional amount of this swap decreases to $8.0 million in December 2003, then to $3.9 million in December 2004, and terminates in December 2005. In May 2003, SJG entered into an interest rate swap contract that effectively fixed the interest rate at 2.24% through May 20, 2004 on $20.0 million of SJG's debt outstanding under its bank lines. We entered into interest rate swap agreements to hedge the exposure to increasing 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 is recognized as an adjustment to interest expense. We account for these interest rate swaps as cash flow hedges. As of June 30, 2003 and 2002, SJI-9 the market value of these swaps was $(2.9) and $(0.9) million, respectively, which represents the amount we would have to pay the counterparty to terminate these contracts as of those dates. We include these balances on the condensed consolidated balance sheets under the caption Derivatives. As of June 30, 2003 and 2002, we calculated the swaps to be highly effective; therefore, we record the offset to the hedge, net of taxes, in Accumulated Other Comprehensive Loss. We determined the fair value of derivative instruments by reference to quoted market prices of listed contracts, published quotations or quotations from independent parties. New Accounting Pronouncements - In January 2003, SJI adopted FASB Statement No. 143, "Accounting for Asset Retirement Obligations," which establishes accounting and reporting standards for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SJG has certain easements and right-of-way agreements that qualify as legal obligations under Statement No. 143. However, it is our intent to maintain these agreements in perpetuity; therefore, no change in SJG's current accounting practices is required at this time. SJG recovers certain asset retirement costs through rates charged to customers as an approved component of depreciation expense. When we retire depreciable properties, we charge the original cost thereof, plus cost of removal less salvage, to accumulated depreciation. As of June 30, 2003, SJG had accrued amounts in excess of actual removal costs incurred totaling $43.5 million which is included in utility plant accumulated depreciation. The adoption of this statement did not materially affect SJI's financial condition or results of operations. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which was effective for SJI's 2002 annual financial statements and subsequent interim financial reporting. This statement provides alternate methods of transitioning for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, it requires prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Effective April 1, 2003, SJI adopted the policy of accounting for this compensation using the fair value based method on a prospective basis. This method calls for the expensing of the difference between the estimated fair value of a stock option and the amount, if any, that the employee must pay for the option. The provisions of this statement currently have no impact on SJI's financial statements. In January 2003, the FASB issued FASB Interpretation No. ("FIN") 46, "Consolidation of Variable Interest Entities." The Interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Management has evaluated the impact of the adoption of FIN 46 and has determined that SJG's Capital Trust, which was established for the sole purpose of issuing $35 million of mandatorily redeemable preferred securities, will no longer be consolidated into the financial statements of SJI effective July 1, 2003. The impact of this deconsolidation will cause SJI to report the investment in SJG's Capital Trust as a separate $1.1 million investment in an unconsolidated entity, the original equity investment amount in the SJG Capital Trust. SJI will also report the $36.1 million subordinate debenture to the SJG Capital Trust as debt on its balance sheet rather than the $35 million of mandatorily redeemable preferred securities that it had previously reported. The adoption of FIN 46 is not expected to have a material impact on SJI's net income or retained earnings for the periods reported. In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which is effective for certain contracts entered into or modified and for hedging relationships designated after June 30, 2003. The amendments set forth in Statement No. 149 require that certain contracts with comparable characteristics be accounted for similarly. We expect no impact on our financial statements from the provisions of this statement. In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." Statement No. 150 requires that certain types of financial instruments be reported as liabilities by their issuers. With the adoption of FIN 46, we expect Statement No. 150 to have no impact on our financial statements. SJI-10 Other Regulatory Assets - Other Regulatory Assets consisted of the following items (in thousands): Years June 30 June 30 December 31 Remaining 2003 2002 2002 - ------------------------------------------------------------------------------ Environmental Remedation Costs: Expended - Net 7 $ 3,375 $ 7,016 $ 6,470 Liability for Future Expenditures - 48,211 48,790 48,211 Income Taxes - Flowthrough Depreciation 8.3 8,108 9,086 8,597 Postretirement Benefit Costs 9.5 3,591 3,969 3,780 Gross Receipts and Franchise Taxes 3.6 1,589 2,032 1,811 Other - 7,038 5,476 4,841 ------------------------------------ Total Other Regulatory Assets $ 71,912 $ 76,369 $ 73,710 ==================================== Each item separately identified is being recovered through utility rate charges without a return on investment over the period indicated. The majority of the assets reflected above under the caption "Other" are currently subject to filings with the New Jersey Board of Public Utilities (BPU) requesting recovery. Management believes that all such deferred costs are probable of recovery from ratepayers through future utility rates. In addition, SJG has one significant regulatory liability for overcollected taxes totaling $3.8 million and $2.3 million, including interest, as of June 30, 2003 and 2002, respectively. We include these amounts in the caption "Other" under the heading Deferred Credits and Other Non-Current Liabilities and they are subject to being returned to ratepayers in future rate proceedings. Note 2. Divestitures and Affiliations: Divestitures - In 1996, Energy & Minerals, Inc. (EMI), an SJI subsidiary, sold the common stock of The Morie Company, Inc. (Morie), its sand mining and processing subsidiary. In 1997, R&T Group, Inc., SJI's construction subsidiary, sold all its operating assets, except some real estate. SJI conducts tests annually to estimate the environmental remediation costs for properties owned by South Jersey Fuel, Inc. (SJF), an EMI subsidiary, from its previously operated fuel oil business. SJI reports the environmental remediation activity related to these properties as discontinued operations. This reporting is consistent with previous years. SJG operated two retail stores which sold natural gas appliances. The stores were intended to provide gas customers with access to and choice among natural gas appliances. In 2001, SJG formally discontinued this merchandising segment of its operations as those appliances are readily available from other retailers. SJI-11 Summarized operating results of the discontinued operations for the three and six months ending June 30 were (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ----------------------------------------- Loss before Income Taxes: Sand Mining $ (219) $ (175) $ (429) $ (206) Construction (8) (6) (16) (12) Fuel Oil (10) (16) (21) (31) Income Taxes 83 79 164 99 ---------------------------------------- Loss from Discontinued Operations - Net $ (154) $ (118) $ (302) $ (150) ======================================== Earnings Per Common Share from Discontinued Operations - Net $ (0.01) $ (0.01) $(0.03) $(0.01) ======================================== Losses from sand mining are mainly comprised of environmental remediation and product liability litigation associated with Morie's prior activities. 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, SJE and Energy East Solutions, Inc. (EES) formed South Jersey Energy Solutions, LLC (SJES) to market retail electricity and energy management services. SJES began supplying retail electric during 2000, and ceased active operations in May 2002. In January 2003, SJES became a wholly owned subsidiary of SJE when EES redeemed its 50% interest in SJES for the book value of its investment of $54,686. In April 2000, SJE and GZA GeoEnvironmental, Inc. formed AirLogics, LLC to market a jointly developed air monitoring system designed to assist companies involved in environmental cleanup activities. In October 2000, SJI formed Marina, a wholly owned subsidiary, to develop, construct and operate a $56.6 million thermal energy plant. In December 2000, Marina entered into a 20-year contract with Marina District Development Corporation to supply heat, hot water and cooling to The Borgata Resort. The plant began commercial operations in July 2003. Note 3. Common Stock: SJI has 20,000,000 shares of authorized Common Stock. The following shares were issued and outstanding: SJI-12 2003 2002 ---------------------------- Beginning Balance, January 1 12,206,474 11,860,990 New Issues During Year: Dividend Reinvestment Plan 173,240 148,033 Employees' Stock Ownership Plan 832 1,731 Stock Option, Stock Appreciation Rights and Restricted Stock Award Plan 32,005 590 ---------------------------- Ending Balance, June 30 12,412,551 12,011,344 ============================ We credited the par value ($1.25 per share) of stock issued in 2003 and 2002 to Common Stock. We credited the net excess over par value of approximately $6.3 million and $4.6 million, respectively, to Premium on Common Stock. Earnings Per Common Share - We present basic EPS based on the weighted-average number of common shares outstanding. 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 101,782 and 82,634 shares for the three months ended, and 91,941 and 58,654 shares for the six months ended June 30, 2003 and 2002, respectively. These shares relate to restricted stock and stock options and were calculated using the treasury stock method. 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 June 30, 2003 and 2002, SJI had no options outstanding. No options were granted in 2003 or 2002. Prior to 2003, SJI valued stock options to employees using the intrinsic value method. Effective in 2003, SJI adopted the policy of accounting for this compensation using the fair value based method on a prospective basis. No stock appreciation rights were issued under the Plan. In 1999, we amended the Plan to include restricted stock awards. In 2003 and 2002, we granted 30,810 and 23,839 restricted shares, respectively. These restricted shares vest over a 3-year period and are subject to SJI achieving certain performance targets. 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 June 30, 2003, SJI reserved 992,467 and 14,734 shares of authorized, but unissued, common stock for future issuance to the DRP and ESOP, respectively. 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 June 30, 2003 and 2002, these residual proceeds totaled $.7 and $6.9 million, respectively. SJI-13 Margin Account - SJRG maintains a margin account with a national investment firm to support its energy trading activities. As of June 30, 2003 and 2002, the account reflected a $2.7 million and $68.0 thousand balance due to changes in the market value of outstanding contracts. Note 5. Segments of Business: Information about SJI's operations in different industry segments for the three and six months ended June 30 is presented below (in thousands):

SJI-14 Identifiable Assets: Gas Utility Operations $ 851,598 $ 831,024 Wholesale Gas Operations 64,059 37,396 Retail Gas and Other Operations 31,359 24,982 On-Site Energy Production 68,697 48,733 Discontinued Operations 2,313 2,359 --------------------------- Subtotal 1,018,026 944,494 Corporate Assets 29,959 27,276 Intersegment Assets (45,195) (33,627) --------------------------- Total Identifiable Assets $ 1,002,790 $ 938,143 ===========================

Gas Utility Operations consists primarily of natural gas distribution to residential, commercial and industrial customers. Wholesale Gas Operations include SJRG'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 and is eliminated during consolidation. Note 6. Comprehensive Income: The components of comprehensive income for the three and six months ended June 30 are as follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ----------------------------------------------------- Net Income Applicable to Common Stock $ 1,802 $ 603 $ 24,065 $ 20,289 Other Comprehensive Income (Loss): Change in Fair Value of Investments - Net * 193 - 153 - Change in Fair Value of Energy Trading and Related Assets / Liabilities - Net * 1,643 865 (186) 865 Change in Fair Value of Interest Rate Swaps - Net * (323) (941) (218) (810) ----------------------------------------------------- Total Other Comprehensive Income (Loss) 1,513 (76) (251) 55 ----------------------------------------------------- Comprehensive Income $ 3,315 $ 527 $ 23,814 $ 20,344 ===================================================== * Determined using an effective tax rate of 40.85%.
SJI-15 Note 7. Regulatory Actions: In January 1997, the BPU granted SJG a 9.62% rate of return on rate base, which included an 11.25% return on common equity. Additionally, our 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 customers through the Basic Gas Supply Service ("BGSS") clause. 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 commodity supplier. As of June 30, 2003, 95,410 of SJG's residential 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 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 BGSS. Other costs of service, including deferred costs, are recovered through base rates. In November 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 resulting from warmer-than-normal weather for the 2001-2002 winter. As a result of the colder-than-normal 2002-2003 winter, the cumulative TAC deficiency has decreased to $5.7 million as of June 30, 2003. Also in November 2001, SJG filed for a $17.6 million reduction to the Levelized Gas Adjustment Clause (LGAC). The LGAC was the predecessor clause to the BGSS. The BPU approved the LGAC reduction effective December 1, 2001 and concurrently approved recovery of SJG's October 31, 2001 underrecovered gas cost balance. As a result, SJG began recovering $48.9 million over three years plus interest accrued since April 1, 2001. SJG is also recovering interest for the 3-year amortization period at a rate of 5.75%. As of June 30, 2003, the remaining deferred underrecovered balance totaled $21.4 million. During 2002, the BPU convened a gas policy group to address BGSS, which is the gas supply service being provided by the natural gas utility. On December 18, 2002, the BPU approved the proposed BGSS price structure. The BGSS approved price structure replaced the Levelized Gas Adjustment Clause (LGAC) pricing structure that was in place prior to March 2003. The LGAC was structured to reset gas charges to consumers once per year. The BGSS permits multiple resets each year, if certain conditions are met. With the implementation of BGSS in March 2003, customers are able to make more informed decisions about choosing an alternate supplier by having a utility price structure that more currently reflects market conditions. Further, BGSS provides SJG with more pricing flexibility, through automatic rate changes under certain conditions and under certain limitations, resulting in the reduction of over/under-recoveries. LGAC related mechanisms, such as deferred accounting treatment, the sharing of pre-tax margins generated by interruptible and off-system sales and transportation, and the allowance for full recovery of natural gas costs, remain in place under BGSS. SJI-16 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 SJG's Remediation Adjustment Clause (RAC); energy efficiency and renewable energy program costs that are recovered through SJG's New Jersey Clean Energy Programs; consumer education program costs; and low income program costs. If approved, the rate increase filed would provide for an annual recovery level of $13.7 million, representing an annual increase of approximately $7.0 million over the $6.7 million recovery currently included in rates. Also in August 2002, SJG filed a petition with the BPU to transfer its appliance service business from the regulated utility into a newly created unregulated company. As filed, the newly created company would have the flexibility to be more responsive to competition and customer needs by expanding and modifying its service offerings in an unregulated environment. In September 2002, SJG filed with the BPU to maintain its current BGSS rate through October 2003. However, due to price increases in the wholesale market, in February 2003 SJG filed an amendment to the September 2002 filing. In April 2003, the BPU approved a $16.6 million increase to SJG's annual gas cost revenues. In July 2003, SJG made its annual BGSS filing, as amended, with the BPU. Due to further price increases in the wholesale market, SJG filed for a $24.0 million increase to its annual gas cost revenues. Filings and petitions described above are still pending unless otherwise indicated. 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. As of June 30, 2003, SJG's restrictions do not affect the amount that may be distributed from SJI's retained earnings. Note 9. Commitments and Contingencies: Construction and Environmental - SJI's estimated net cost of construction and environmental remediation programs for 2003 totals $57.8 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 related to these claims when we can determine the amount or range of amounts of likely settlement costs for those claims. Among other actions, SJI has been named in certain product liability claims related to our former sand mining subsidiary. Management does not currently anticipate the disposition of any known claims to have a material adverse effect on SJI's financial position, results of operations or liquidity. SJI-17 Parental Guarantees - In 2002, the FASB released Interpretation No. 45 (FIN 45) "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires companies to disclose the nature of its guarantees or indemnification agreements for interim and year-end financial statements ending after December 15, 2002. As of June 30, 2003, SJI had issued $113.1 million of parental guarantees on behalf of its subsidiaries. Of this total, $76.5 million expire within one year, $83.8 million expire within two years and $29.3 million presently have no expiration date. The vast majority of these guarantees were issued as guarantees of payment to third parties with whom our subsidiaries have commodity supply contracts. As of June 30, 2003, these guarantees support $25.5 million of the Accounts Payable recorded on our condensed consolidated balance sheet. As part of our risk management policy, we also require parental guarantees from trading counterparties as applicable. These arrangements are typical in our industry. SJI has also issued two parental guarantees totaling $7.3 million related to Marina's construction activity. 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 $6.4 million as of June 30, 2003. As of June 30, 2003, SJI also provided $46 million of standby letters of credit by commercial banks supporting the variable rate demand bonds issued through the New Jersey Economic Development Authority were used to finance 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 clean up of sites where SJF previously operated a fuel oil business and 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 minimum future cost estimate discussed below is not reduced by projected insurance recoveries from the Cleanup Cost Cap Insurance Policy. Since the early 1980s, SJI accrued environmental remediation costs of $139.1 million, of which $87.0 million has been spent as of June 30, 2003. With the assistance of a consulting firm, we estimate that future costs to clean up SJG's sites will range from $48.2 million to $143.9 million. We recorded the lower end of this range as a liability. It is reflected on the 2003 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 technology, 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. SJI-18 SJG has two regulatory assets associated with environmental costs. The first asset is titled Environmental Remediation Cost: Expended - Net. These expenditures represent what was actually spent to clean up former gas manufacturing plant sites. These costs meet the requirements of Statement No. 71. The BPU allows SJG to recover expenditures through the 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 sheets 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 over 7-year periods after they are spent. As of June 30, 2003, we reflected SJG's unamortized remediation costs of $3.4 million on the condensed consolidated balance sheet under the caption Regulatory Assets. Since implementing the RAC in 1992, SJG has recovered $38.7 million through rates. With Morie's sale, 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 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 $0.3 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 condensed consolidated balance sheet under Current Liabilities and Deferred Credits and Other Non-Current Liabilities as of June 30, 2003. Note 10. Subsequent Event: On July 16, 2003, SJG made settlement on $85.5 million of debt under its Medium Term Note Program established in 2002. A remainder of $64.5 million is authorized to be issued under this program through July 31, 2005. The debt issued has maturities of 10, 11, 13, 14 and 30 years, with a weighted-average maturity of 19 years and a weighted-average interest rate of 4.95%. Proceeds were used to refinance short-term borrowings under commercial bank lines. SJI-19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview South Jersey Industries, Inc. (SJI) is an energy services holding company that provides a variety of products and services through the following wholly owned subsidiaries: 1) South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG distributed natural gas in the seven southernmost counties of New Jersey to 298,877 customers at June 30, 2003 compared with 291,691 customers at June 30, 2002. SJG also: o sells natural gas and pipeline transportation capacity off-system sales) on a wholesale basis to various customers on the interstate pipeline system; o transports natural gas purchased directly from producers or suppliers for its own sales and for some of its customers; and o 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 formerly provided services for natural gas sales to the casino industry in Atlantic City, N.J. and is now inactive. SJE also markets an air quality monitoring system through AirLogics, LLC. SJE and GZA GeoEnvironmental, Inc., an environmental consulting firm, each have a 50% equity interest in AirLogics. 3) South Jersey Resources Group, LLC (SJRG) markets wholesale 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) develops and operates energy-related projects in southern New Jersey. Marina's largest project, the development of a facility to provide cooling, heating and hot water to The Borgata Resort in Atlantic City, began commercial operations in July 2003. SJI also has a joint venture investment with Conectiv Solutions, LLC in Millennium Account Services, LLC (Millennium). Millennium provides meter reading services to SJG and Conectiv Power Delivery in southern New Jersey. Estimates and Assumptions - As described in the footnotes to our condensed consolidated financial statements, management must make estimates and assumptions that affect the amounts reported in the financial statements and related disclosures. Actual results could differ from those estimates. Three SJI-20 types of transactions presented in our condensed consolidated financial statements require a significant amount of judgment and estimation. These relate to regulatory assets, energy trading activities and environmental remediation costs. The New Jersey Board of Public Utilities (BPU) has reviewed and approved, through specific orders, most of the items shown as regulatory assets. Other items represent costs that were not yet approved by the BPU for recovery, but are the subject of current or future filings. In recording these costs as regulatory assets, management believes the costs are probable of recovery under existing rate-making concepts that are embodied in current rate orders received by SJG. However, ultimate recovery is subject to BPU approval. Beginning January 1, 2001, SJI recognizes assets or liabilities for the energy-related contracts entered into by its non-regulated subsidiary, SJRG, when the contracts are executed. We record contracts at their fair value in accordance with FASB Statement No. 133. We adjust the fair value of the contracts each reporting period for changes in the market. We derive the fair value for most of the energy-related contracts from markets where the contracts are actively traded and quoted. For other contracts, SJI uses published market surveys and in certain cases, independent parties to obtain quotes concerning the contracts' current value. Market quotes tend to be more plentiful for contracts maturing in two years or less. Very few of our contracts extend beyond two years. An outside consulting firm assists us in estimating future costs for environmental remediation activities. We estimate future costs based on projected investigation and work plans using existing technologies. Developing a single reliable estimation point is not feasible because of the amount of uncertainty involved in the nature of projected remediation efforts and the long period over which remediation efforts will continue. Therefore, we estimate the range of future costs at $52.1 million to $157.9 million. In preparing financial statements, SJI records liabilities for future costs using the lower end of the range. We update estimates each year to take into account past efforts, changes in work plans and remediation technologies. Revenue Recognition - SJG, SJE and SJRG bill customers monthly for gas delivered and recognize those revenues during the month. For SJG and SJE retail customers we do not bill at the end of each month; we make an accrual to recognize revenues for gas delivered from the date of the last meter reading to the end of the month. We bill SJG customers at rates approved by the BPU. SJE and SJRG customers are billed at rates negotiated between the parties. We defer and recognize revenues related to SJG's appliance warranty contracts over the full 12-month term of the contract as earned. The BPU allows SJG to recover the excess cost of gas sold over the cost included in rates through the Basic Gas Supply Service (BGSS) price structure (formerly known as the Levelized Gas Adjustment Clause). SJG defers over/under-recoveries of gas costs and includes them in subsequent adjustments to the BGSS rate or other similar rate recovery mechanism. These adjustments result in over/under-recoveries of gas costs being included in rates during future periods. As a result of these deferrals, utility revenue recognition does not directly translate to profitability. While we realize profits on gas sales during the month of providing the utility service, significant shifts in revenue SJI-21 recognition may result from the various recovery clauses approved by the BPU (See Regulatory Matters) without shifting profits between periods, as these clauses provide for recovery of costs on a dollar-for-dollar basis. New Accounting Pronouncements - In January 2003, SJI adopted Statement No. 143, "Accounting for Asset Retirement Obligations," which establishes accounting and reporting standards for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SJG has certain easements and right-of-way agreements that qualify as legal obligations under Statement No. 143. However, SJG intends to maintain these agreements in perpetuity; therefore, no change in its current accounting practices is required at this time. SJG recovers certain asset retirement costs through rates charged to customers as an approved component of depreciation expense. When SJG retires depreciable properties, we charge the original cost thereof, plus cost of removal less salvage, to accumulated depreciation. As of June 30, 2003, SJG had accrued amounts in excess of actual removal costs incurred totaling $43.5 million which is included in utility plant accumulated depreciation. We do not expect the adoption of this statement to materially affect SJI's financial condition or results of operations. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," which is effective for SJI's 2002 annual financial statements and subsequent interim financial reporting. This statement provides alternate methods of transitioning for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, it requires prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of this statement currently have no impact on SJI's financial statements. In January 2003, the FASB issued FASB Interpretation No. ("FIN") 46, "Consolidation of Variable Interest Entities." The Interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Management has evaluated the impact of the adoption of FIN 46 and has determined that SJG's Capital Trust, which was established for the sole purpose of issuing $35 million of mandatorily redeemable preferred securities, will no longer be consolidated into the financial statements of SJI effective July 1, 2003. The impact of this deconsolidation will cause SJI to report the investment in SJG's Capital Trust as a separate $1.1 million investment in an unconsolidated entity, the original equity investment amount in the SJG Capital Trust. SJI will also report the $36.1 million subordinate debenture to the SJG Capital Trust as debt on its balance sheet rather than the $35 million of mandatorily redeemable preferred securities that it had previously reported. The adoption of FIN 46 is not expected to have a material impact on SJI's net income or retained earnings for the periods reported. In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which is effective for certain contracts entered into or modified and for hedging relationships designated after June 30, 2003. The amendments set forth in Statement No. 149 require that certain contracts with comparable characteristics be accounted for similarly. We expect no impact on our financial statements from the provisions of this statement. In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." Statement No. 150 requires that certain types of financial instruments be reported as liabilities by their issuers. With the adoption of FIN 46, we expect Statement No. 150 to have no impact on our financial statements. 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 SJI-22 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; changes in the availability of natural gas; regulatory and court decisions; competition in our utility and nonutility 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. SJG may redeem these securities 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. As noted above, these securities will be reflected as liabilities effective July 1, 2003. Customer Choice Legislation - All residential natural gas customers in New Jersey can choose their gas supplier under the terms of the Electric Discount and Energy Competition Act of 1999. As of June 30, 2003, 95,410 SJG residential customers chose a natural gas commodity supplier other than the utility. This number increased from 63,682 at June 30, 2002 as marketers were able to offer natural gas at prices competitive with those available under regulated utility tariffs. Customers purchasing natural gas from providers other than SJG are charged for gas costs by the marketer, not SJG. The resulting decrease in SJG's revenues is offset by a corresponding decrease in SJG's 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 Basic Gas Supply Service as well as other costs of service including deferred costs, through tariffs. SJI has benefited from customer choice legislation as SJE has successfully competed for and profited from its gas commodity customers. Temperature Adjustment Clause - SJG's Board of Public Utilities approved Temperature Adjustment Clause (TAC) had the following impacts on 2003 and 2002 second quarter and six months net earnings: 2003 2002 ------------ ------------ TAC Adjustment (Decrease) Increase to Net Income (in thousands) Quarter Ended June 30 $ (1,022) $ 247 Six Months Ended June 30 $ (2,377) $ 3,249 SJI-23 The clause is designed to mitigate the effect of variations in heating season temperatures from historical norms for both SJG and its customers. While the revenue and income impacts of TAC adjustments are recorded as incurred, cash inflows or outflows directly attributable to TAC adjustments generally do not begin until the next TAC year. Each TAC year begins October 1. Operating Revenues - Utility - Revenues increased $5.4 million and $79.3 million in the second quarter and for the six months ended June 30, 2003, respectively, compared with the prior year periods. These increases were primarily due to three factors. First, weather in the second quarter and for the six months ended June 30, 2003 was 41.9% and 30.3% colder than the respective prior year periods. Second, off-system sales revenues increased due to higher prices for natural gas sold in 2003 than in the prior year. Third, SJG's total customers increased from 291,691 as of June 30, 2002 to 298,877 as of June 30, 2003. Partially offsetting the effect of these factors was a 50% increase in the number of residential customers purchasing their gas from a source other than SJG. The decline in customers who purchased their natural gas from SJG directly impacted utility revenues. However, since gas costs are passed on directly to customers without any profit margin added by SJG, the increased customer usage of gas marketers did not impact SJG's profitability. 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 in the second quarter of 2003 was 41.9% colder than in 2002 and 28.9 % colder than the 20-year TAC average. During the six months ended June 30, 2003, weather was 30.3% colder than in 2002 and 10.1% colder than the 20-year TAC average. The following is a comparison of operating revenue and throughput for the three and six month periods ended June 30, 2003 vs. the same periods ended June 30, 2002.
Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 --------------------------------------------------- Operating Revenues (Thousands): Firm Residential $ 25,699 $ 25,133 $ 115,007 $ 101,232 Commercial 7,287 6,111 34,717 28,655 Industrial 973 838 3,340 2,547 Cogeneration & Electric Generation 1,969 2,963 3,291 3,579 Firm Transportation 13,142 8,394 41,202 22,658 --------------------------------------------------- Total Firm Operating Revenues 49,070 43,439 197,557 158,671 --------------------------------------------------- Interruptible 558 307 1,049 546 Interruptible Transportation 300 327 495 802 Off-System 22,985 18,908 111,715 54,661 Capacity Release & Storage 1,510 1,136 2,813 2,830 Other 1,124 890 1,854 1,680 Intercompany Sales (7,383) (2,230) (31,179) (14,233) --------------------------------------------------- Total Operating Revenues $ 68,164 $ 62,777 $284,304 $209,957 =================================================== Throughput (MMcf): Firm Residential 2,449 2,229 10,504 9,371 Commercial 793 684 3,522 3,018 Industrial 43 24 148 115 Cogeneration & Electric Generation 240 635 348 722 Firm Transportation 6,427 5,311 17,490 12,794 --------------------------------------------------- Total Firm Throughput 9,952 8,883 32,012 26,020 --------------------------------------------------- Interruptible 96 55 132 103 Interruptible Transportation 547 683 958 1,640 Off-System 3,744 4,940 15,474 16,243 Capacity Release & Storage 10,402 10,498 16,395 17,144 --------------------------------------------------- Total Throughput 27,741 25,059 64,971 61,150 ===================================================
SJI-24 Total gas throughput increased 10.7% % to 27.7 billion cubic feet (Bcf) in the second quarter and 6.2% to 65.0 Bcf for the six months ended June 30, 2003 compared with the respective prior year periods. The higher throughput was primarily due to colder temperatures experienced in 2003. The increase in firm transportation throughput reflected the increasing number of households purchasing their gas from suppliers other than SJG. Operating Revenues - Nonutility - Nonutility operating revenues increased by $16.6 million and $45.5 million for the second quarter and first six months of 2003, respectively, compared to the same periods of 2002. Most of the increase was due to the significant customer growth experienced by SJE, evidenced by the addition of over 32,500 residential and 2,300 commercial natural gas customers over the last twelve months. Higher natural gas prices and significantly colder weather primarily in the first quarter also contributed to this increase. Cost of Gas Sold - Utility - Gas purchased for resale increased $3.1 million and $70.7 million for the second quarter and for the six months ended June 30, 2003, respectively, compared with the same periods in 2002 due principally to an increase in firm gas sales volume and higher gas costs for off-system sales. Colder weather was the main cause of the increase in firm gas sales volume; however, this was partially offset by the migration of firm gas sales customers to transportation service. SJG's gas cost during the second quarter of 2003 averaged $7.05 per decatherm (dt) compared with $3.79/dt in 2002. During the six months ended June 30, 2003, gas costs averaged $6.64/dt compared with $4.01/dt in 2002. Unlike gas costs associated with off-system sales, changes in the unit cost of gas sold to utility ratepayers do not directly affect cost of gas sold. We defer fluctuations in gas costs to ratepayers not reflected in current rates in future periods under a BPU- approved Basic Gas Supply Service price structure, formerly known as the Levelized Gas Adjustment Clause. Gas supply sources include contract and SJI-25 open-market purchases. SJG secures and maintains its own gas supplies to serve its sales customers. We do not anticipate any difficulty renewing or replacing expiring contracts under substantially similar terms and conditions. Cost of Sales - Nonutility - Cost of sales - nonutility increased $15.3 million and $42.2 million for the second quarter and six months ended June 30, 2003 compared to the same periods of 2002 due mainly to SJE's customer growth, colder temperatures and higher gas prices as described in the Operating Revenues - - Nonutility section. Operations - A summary of net changes in operations (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2003 vs. 2002 2003 vs. 2002 ------------------------------------ Utility: Other Production Expense $ 9 $ 32 Transmission 13 44 Distribution 73 294 Customer Accounts and Services (59) (186) Sales 87 85 Administration and General 224 949 Nonutility 800 1,777 --------------------------------- Total Operations $ 1,147 $ 2,995 ================================= Distribution expenses increased for both the three and six months ended June 30, 2003 compared with the respective periods in 2002. The increase during the six month period was primarily due to severe weather conditions experienced during the first quarter of 2003 that resulted in a significant increase in overtime hours. The weather created operating issues that ranged from snow removal, to water intrusion in gas lines in oceanfront communities, to higher shut-off for non-payment activity. Customer Accounts and Services expenses includes bad debt expense from customer account write-offs. The collectibility of delinquent customer accounts is generally determined during the winter season following the one where the customer's account became delinquent - as temperatures drop, many customers with delinquent balances will begin making payments in order to have their heat restored. As the 2001-2002 winter season was one of the warmest winters on record, many of our customers with delinquent balances from the prior winter did not make payments to have their heat restored as would normally be expected. As such, our bad debt expense was unusually high during the first half of 2002. However, as the 2002-2003 winter season was colder-than-normal, customers with delinquent balances from the year before did make payments as expected to have their heat restored. This resulted in a much lower bad debt expense in the first half of 2003, as compared with 2002. Administrative and General expenses increased in both the three and six months ended June 30, 2003 compared with the same periods in 2002 primarily because of increasing healthcare, pension and insurance costs. SJI-26 Nonutility expenses in 2003 rose primarily due to higher customer acquisition costs resulting from substantial growth in SJE's customer base and activity associated with Marina's energy projects. Other Operating Expenses - A summary of principal changes in other consolidated operating expenses (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2003 vs. 2002 2003 vs. 2002 -------------- ------------- Maintenance $ (191) $ (150) Depreciation 350 686 Energy and Other Taxes 87 1,359 Depreciation was higher due to SJG's increased investment in property, plant and equipment. The increase in Energy and Other Taxes relate primarily to increases in volumes of gas sold and transported by SJG as reflected under the caption, "Operating Revenues - Utility". Interest Charges - Interest charges were lower in the second quarter and first six months of 2003 compared with the same periods of 2002 due primarily to reductions in short-term rates on line of credit borrowings and the refunding of higher priced, fixed rate, long-term debt with lower cost, floating rate, and short-term debt. These refundings were refinanced in July 2003 with long-term debt issuances under our Medium Term Note program at significantly lower interest rates compared to the previous long-term interest rates (See Note 10 - Subsequent Event). Discontinued Operations - Loss from discontinued operations increased in 2003 due mainly to product liability litigation associated with previously disposed of businesses. Cumulative Effect of a Change in Accounting Principle - Net - 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 only marks-to-market those energy-related contracts that meet the definition of a derivative in Statement No. 133. Energy-related contracts that do not meet the definition of a derivative are accounted for using the accrual basis of accounting. The effect of this change in accounting resulted in a net charge of $426,338 shown as a Cumulative Effect of a Change in Accounting Principle - Net. Furthermore, management has designated any contract entered into after December 31, 2002 to hedge physical gas in storage as a cash flow hedge and accounts for them accordingly. As of June 30, 2003, we calculated these hedges to be highly effective; therefore, we record the offset, net of taxes, in Accumulated Other Comprehensive Loss. Net Income Applicable to Common Stock - Net income (in thousands) and earnings per common share reflect the following changes: SJI-27 Three Months Ended Six Months Ended June 30, June 30, 2003 vs. 2002 2003 vs. 2002 ----------------------------------- Income from Continuing Operations $ 1,235 $ 4,354 Loss from Discontinued Operations - Net (36) (152) Cumulative Effect of Accounting Change - Net - (426) --------------------------------- Net Income Increase $ 1,199 $ 3,776 ================================= Earnings per Common Share: Continuing Operations $ 0.10 $ 0.30 Discontinued Operations - Net 0.00 (0.02) Cumulative Effect of Accounting Change - Net 0.00 (0.03) -------------------------------- Earnings per Share Increase $ 0.10 $ 0.25 ================================ Regulatory Matters - In January 1997, the BPU granted SJG a 9.62% rate of return on rate base, which included an 11.25% return on common equity. Additionally, our 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 customers through the Basic Gas Supply Service ("BGSS") clause. 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 commodity supplier. As of June 30, 2003, 95,410 of SJG's residential 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 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 BGSS. Other costs of service, including deferred costs, are recovered through base rates. In November 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 resulting from warmer-than-normal weather for the 2001-2002 winter. As a result of the colder-than-normal 2002-2003 winter, the cumulative TAC deficiency has decreased to $5.7 million as of June 30, 2003. Also in November 2001, SJG filed for a $17.6 million reduction to the Levelized Gas Adjustment Clause (LGAC) The LGAC was the predecessor clause to the BGSS. The BPU approved the LGAC reduction effective December 1, 2001 and concurrently approved recovery of SJG's October 31, 2001 underrecovered gas cost balance. As a result, SJG began recovering $48.9 million over three years plus interest accrued since April 1, 2001. SJG is also recovering interest for the 3-year amortization period at a rate of 5.75%. As of June 30, 2003, the remaining deferred underrecovered balance totaled $21.4 million. SJI-28 During 2002, the BPU convened a gas policy group to address BGSS, which is the gas supply service being provided by the natural gas utility. On December 18, 2002, the BPU approved the proposed BGSS price structure. The BGSS approved price structure replaced the Levelized Gas Adjustment Clause (LGAC) pricing structure that was in place prior to March 2003. The LGAC was structured to reset gas charges to consumers once per year. The BGSS permits multiple resets each year, if certain conditions are met. With the implementation of BGSS in March 2003, customers are able to make more informed decisions about choosing an alternate supplier by having a utility price structure that more currently reflects market conditions. Further, BGSS provides SJG with more pricing flexibility, through self-implementing rate changes under certain conditions and under certain limitations, resulting in the reduction of over/under-recoveries. LGAC related mechanisms, such as deferred accounting treatment, the sharing of pre-tax margins generated by interruptible and off-system sales and transportation, and the allowance for full recovery of natural gas costs, remain in place under BGSS. 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 SJG's Remediation Adjustment Clause (RAC); energy efficiency and renewable energy program costs that are recovered through SJG's New Jersey Clean Energy Programs; consumer education program costs; and low income program costs. If approved, the rate increase filed would provide for an annual recovery level of $13.7 million, representing an annual increase of approximately $7.0 million over the $6.7 million recovery currently included in rates. Also in August 2002, SJG filed a petition with the BPU to transfer its appliance service business from the regulated utility into a newly created unregulated company. As filed, the newly created company would have the flexibility to be more responsive to competition and customer needs by expanding and modifying its service offerings in an unregulated environment. In September 2002, SJG filed with the BPU to maintain its current BGSS rate through October 2003. However, due to price increases in the wholesale market, in February 2003 SJG filed an amendment to the September 2002 filing. In April 2003, the BPU approved a $16.6 million increase to SJG's annual gas cost revenues. In July 2003, SJG made its annual BGSS filing, as amended, with the BPU. Due to further price increases in the wholesale market, SJG filed for a $24.0 million increase to its annual gas cost revenues. Filings and petitions described above are still pending unless otherwise indicated. 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; lags in fully collecting gas costs from customers under the Basic Gas Supply Service charge; working capital needs of our energy trading and marketing activities; the timing of construction and remediation expenditures and related permanent financings; mandated tax payment dates; and both discretionary and required repayments of long-term debt. SJI-29 Lines of credit available to SJI totaled $182.0 million at June 30, 2003, of which $125.2 million was used. These lines are available through seven commercial banks on an uncommitted basis. The banks and SJI review and renew the lines annually. $157 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. However, SJI has begun the process of obtaining up to $140 million of committed bank facilities to enhance our liquidity position. We anticipate having committed facilities in place during the third quarter. SJI supplements its operating cash flow and credit lines with both debt and equity capital. Over the years, SJG has used 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. SJG's registration of a new $150 million MTN program with the Securities and Exchange Commission became effective in December 2002. This program replaces a previous $100 million, 3-year MTN program that was fully used in 2001. In July 2003, SJG issued $85.5 million of long-term debt under the program. Consequently, $64.5 million of the MTN program remains available for future debt issuances. Proceeds of the July issues were used to refinance short-term debt outstanding under commercial bank lines. Current maturities on long-term debt over the next five years are as follows, $8.4 million per year in 2003 through 2006 and $4.7 million in 2007. Since September 2001, Marina issued $20 million of tax-exempt and $25 million of taxable variable rate demand bonds through the New Jersey Economic Development Authority. The tax-exempt and taxable bonds mature in 2031 and 2021, respectively. Investors in the bonds receive liquidity and credit support via a letter of credit provided by a syndicate of commercial banks. We used the proceeds of this bond issuance to fund project development and construction costs for the thermal energy plant constructed by Marina to serve The Borgata Resort which opened in July 2003. 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 $5.65 million of equity capital by issuing 173,240 shares for the six months ended June 30, 2003 and $4.9 million of equity capital by issuing 148,033 shares for the six months ended June 30, 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. We estimate the net costs for 2003, 2004 and 2005 at approximately $58.2 million, $64.0 million and $55.7 million, respectively. Commitments and Contingencies - SJG has certain commitments for both pipeline capacity and gas supply for which it pays fees regardless of usage. SJI-30 Those commitments as of June 30, 2003 average $46.2 million annually and total $277.1 million over the contracts' lives. Approximately 15% of the financial commitment under these contracts expires during the next five years. We expect to renew each of these contracts under renewal provisions provided in each contract. SJG recovers all prudently incurred fees through rates via the BGSS. 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. 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, we enter into derivative activities described above for risk management, not trading, purposes. SJG and SJE transact commodities on a physical basis only and do not enter into 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 practical, 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 June 30, 2003, SJRG had $15.5 million of accounts receivable under sales contracts. Of that total, 85% were with companies rated investment-grade, or were guaranteed by an investment-grade-rated parent or were with companies where we have a collateral arrangement. SJRG and SJE entered into certain contracts to purchase, sell, and transport natural gas. For the quarters ended June 30, 2003 and 2002, we recorded net unrealized pre-tax losses on these energy trading and related contracts of $(.8) million and $(.9) million, respectively. For the six months ended June 30, 2003 and 2002, we recorded net unrealized pre-tax gains on these energy and related contracts of $.8 million and $.8 million, respectively. These losses and gains were derived primarily from contracts entered into during 2003 and 2002 and it is included as a component of 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 June 30, 2003 is as follows (in thousands): Assets Maturity Maturity Source of Fair Value < 1 Year 1-3 Years Total -------------------- ----------- ----------- ----------- Prices Actively Quoted NYMEX $ 14,633 $ 3,541 $ 18,174 Other External Sources Basis 5,988 616 6,604 ----------- ----------- ----------- Total $ 20,621 $ 4,157 $ 24,778 =========== =========== =========== SJI-31 Liabilities Maturity Maturity Source of Fair Value < 1 Year 1-3 Years Total -------------------- ---------- ----------- ----------- Prices Actively Quoted NYMEX $ 7,715 $ 1,348 $ 9,063 Other External Sources Basis 3,288 560 3,848 ---------- ----------- ----------- Total $ 11,003 $ 1,908 $ 12,911 ========== =========== =========== 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. A reconciliation of SJI's estimated net fair value of energy trading and related contracts follows (in thousands): Net Energy Trading and Related Assets, January 1, 2003 $ 14,196 Contracts Settled During the Six Months Ended June 30, 2003, Net (2,113) Other Changes in Fair Value from Continuing and New Contracts, Net (216) ---------- Net Energy Trading and Related Assets, June 30, 2003 $ 11,867 ========== Interest Rate Risk Our exposure to interest rate risk relates primarily to short-term, variable rate borrowings. Our short-term, variable rate debt outstanding at June 30, 2003 was $125.2 million and averaged $110.4 million for the first six months of 2003. A hypothetical 100 basis point (1%) increase in interest rates on our average variable rate debt outstanding would result in a $651,000 increase in our interest expense, net of tax, on an annual basis. We chose the 100 basis point increase for illustrative purposes, as it provides a simple basis for calculating the impact of interest rate changes under a variety of interest rate scenarios. Over the past five years, the change in basis points (b.p.) of our average monthly interest rates from the beginning to end of each year was as follows: 2002 -- 74 b.p. decrease; 2001 -- 383 b.p. decrease; 2000 -- 83 b.p. increase; 1999 -- 81 b.p. increase; and 1998 -- 38 b.p. decrease. For June 2003, our average interest rate on variable rate debt was 2.05%. To reduce exposure to an interest rate increase on our variable rate debt, SJG entered into an interest rate swap agreement that became effective in June 2003 which fixed the rate on $20.0 million of variable rate debt through May 2004 at 2.24%.. SJG primarily issues long-term debt at fixed rates and, consequently, interest expense is not significantly impacted by changes in market interest rates. SJG prepaid, at par, $3.0 million of 8.6% debenture notes in February 2003. In May 2003, SJG also redeemed an additional $5.1 million of 10.25% first mortgage bonds prior to scheduled maturity. SJG paid a premium of $110,000 to redeem that issue. The only long-term debt outstanding other than that issued by the utility consists of the New Jersey Economic Development Authority bonds used to finance the construction of Marina's thermal plant. They were issued at floating rates that reset weekly. Subsequent to issuance, we SJI-32 entered into interest rate swap contracts that effectively fixed the rate on $20 million of tax-exempt debt at 4.08% through 2011 and $19 million of taxable debt at 4.59% through 2007. The amount of the swap on the taxable debt reduces annually commencing December 2003. Item 4. Controls and Procedures SJI management, including the Chief Executive Officer and Chief Financial Officer, has 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. SJI-33 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 4. Submission of Matters to a Vote of Security Holders (a) Our annual meeting of shareholders was held on April 17, 2003. (c) Three Class II directors (with a term expiring 2006) were elected as follows: For Withheld ---------- ---------- Shirli M. Billings 10,851,252 209,452 Sheila Hartnett-Devlin 10,792,194 268,510 Frederick R. Raring 10,880,885 179,819 One Class III director (with a term expiring in 2004) Clarence D. McCormick 10,853,941 206,763 Class I directors (with a term expiring in 2005) continuing in office are: Charles Biscieglia, Keith S. Campbell, and W. Cary Edwards Class III directors (with a term expiring in 2004) continuing in office are: Herman D. James and William J. Hughes The appointment of Deloitte & Touche LLP as our independent accountants for the year ending December 2003 was approved by a vote of 10,945,035 for the appointment and 58,242 against, with 57,427 abstentions. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a). 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a). SJI-34 32 Certification Pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code). (b) Form 8-K Dated July 29, 2003 South Jersey Industries issued a press release providing an earnings report for the second quarter of 2003, ending June 30. Item 9, "Regulation FD Disclosure" Item 12, "Disclosure of Results of Operations and Financial Conditions" 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: August 13, 2003 By: /s/ Charles Biscieglia -------------------------------------- Charles Biscieglia Chief Executive Officer Dated: August 13, 2003 By: /s/ David A. Kindlick -------------------------------------- David A. Kindlick Vice President, Treasurer & Chief Financial Officer SJI-35 CERTIFICATION Exhibit 31.1 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; 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. SJI-36 Date: August 13, 2003 /s/ Charles Biscieglia --------------------------------------------- Charles Biscieglia Chairman and Chief Executive Officer SJI-37 CERTIFICATION Exhibit 31.2 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; 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. SJI-38 Date: August 13, 2003 /s/ David A. Kindlick -------------------------------------------- David A. Kindlick Vice President, Chief Financial Officer and Treasurer SJI-39 CERTIFICATION Exhibit 32 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of South Jersey Industries, Inc., a New Jersey Corporation (the "Company"), does hereby certify, to such officer's knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. SJI-39 Dated: August 13, 2003 By: /s/ Charles Biscieglia ------------------------------------- Charles Biscieglia Chairman and Chief Executive Officer Dated: August 13, 2003 By: /s/ David A. Kindlick -------------------------------------- David A. Kindlick Vice President, Treasurer & Chief Financial Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to South Jersey Industries, Inc. and will be retained by South Jersey Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. SJI-40 ~~-----END PRIVACY-ENHANCED MESSAGE-----~~