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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File Number 1-6364
SOUTH JERSEY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-1901645
(State of incorporation) (IRS employer
identification no.)
1 South Jersey Plaza, Folsom, NJ 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of November 1, 2002, there were 12,166,729 shares of the registrant's common
stock outstanding.
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements-- See Pages 3 through 18
SJI-2
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
Three Months Ended
September 30,
---------------------------------------
2002 2001
------------------ ------------------
Operating Revenues:
Utility $ 48,939 $ 55,400
Nonutility 20,127 19,585
------------------ ------------------
Total Operating Revenues 69,066 74,985
------------------ ------------------
Operating Expenses:
Cost of Gas Sold - Utility 31,584 37,971
Cost of Sales - Nonutility 18,202 18,148
Operations 11,004 10,732
Maintenance 1,537 1,554
Depreciation 5,650 5,331
Energy and Other Taxes 1,446 1,446
------------------ ------------------
Total Operating Expenses 69,423 75,182
------------------ ------------------
Operating Loss (357) (197)
Other Income and Expense:
Equity in Affiliated Companies 287 72
Other (54) (67)
------------------ --------------
Total Other Income and Expense 233 5
Interest Charges 4,397 5,207
Preferred Dividend Requirements of Subsidiary 764 764
------------------ ------------------
Loss Before Income Tax Benefit (5,285) (6,163)
Income Tax Benefit (2,063) (2,387)
------------------ ------------------
Loss from Continuing Operations (3,222) (3,776)
Discontinued Operations - Net (18) (36)
------------------ ------------------
Net Loss Applicable to Common Stock $ (3,240) $ (3,812)
================== ==================
Basic Earnings Per Common Share:
Continuing Operations $ (0.27) $ (0.32)
Discontinued Operations - Net 0.00 0.00
------------------- -----------------
Basic Earnings Per Common Share $ (0.27) $ (0.32)
=================== =================
Average Shares of Common Stock Outstanding - Basic 12,084 11,769
Diluted Earnings Per Common Share:
Continuing Operations $ (0.27) $ (0.32)
Discontinued Operations - Net 0.00 0.00
------------------- -----------------
Diluted Earnings Per Common Share $ (0.27) $ (0.32)
=================== =================
Average Shares of Common Stock Outstanding - Diluted 12,084 11,769
Dividends Declared per Common Share $ 0.375 $ 0.370
================== ==================
The accompanying footnotes are an integral part of the financial statements.
SJI-3
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
Nine Months Ended
September 30,
---------------------------------------
2002 2001
------------------ ------------------
Operating Revenues:
Utility $ 253,897 $ 337,342
Nonutility 76,400 78,776
------------------ ------------------
Total Operating Revenues 330,297 416,118
------------------ ------------------
Operating Expenses:
Cost of Gas Sold - Utility 157,902 239,494
Cost of Sales - Nonutility 66,896 68,163
Operations 32,675 31,015
Maintenance 4,627 6,227
Depreciation 16,731 15,802
Energy and Other Taxes 7,408 7,829
------------------ ------------------
Total Operating Expenses 286,239 368,530
------------------ ------------------
Operating Income 44,058 47,588
Other Income and Expense:
Equity in Affiliated Companies 653 895
Other 556 452
------------------ --------------
Total Other Income and Expense 1,209 1,347
Interest Charges 13,436 15,614
Preferred Dividend Requirements of Subsidiary 2,293 2,297
------------------ ------------------
Income Before Income Taxes 29,538 31,024
Income Taxes 12,321 13,222
------------------ ------------------
Income from Continuing Operations 17,217 17,802
Discontinued Operations - Net (168) (320)
Cumulative Effect of a Change in Accounting Principle - Net 0 148
------------------ ------------------
Net Income Applicable to Common Stock $ 17,049 $ 17,630
================== ==================
Basic Earnings Per Common Share:
Continuing Operations $ 1.44 $ 1.53
Discontinued Operations - Net (0.02) (0.03)
Cumulative Effect of a Change in Accounting Principle - Net 0.00 0.01
------------------- ------------------
Basic Earnings Per Common Share $ 1.42 $ 1.51
=================== ==================
Average Shares of Common Stock Outstanding - Basic 11,996 11,674
Diluted Earnings Per Common Share:
Continuing Operations $ 1.43 $ 1.52
Discontinued Operations - Net (0.02) (0.03)
Cumulative Effect of a Change in Accounting Principle - Net 0.00 0.01
------------------- ------------------
Diluted Earnings Per Common Share $ 1.41 $ 1.50
=================== ==================
Average Shares of Common Stock Outstanding - Diluted 12,068 11,710
Dividends Declared per Common Share $ 1.125 $ 1.105
================== ==================
The accompanying footnotes are an integral part of the financial statements.
SJI-4
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
September 30, December 31,
--------------------------------------------------------
2002 2001 2001
---------------- ---------------- ----------------
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $ 833,060 $ 793,471 $ 805,440
Accumulated Depreciation (232,685) (218,422) (221,457)
Nonutility Property and Equipment, at cost 50,834 17,038 24,118
Accumulated Depreciation (1,119) (1,031) (1,058)
---------------- ---------------- ----------------
Property, Plant and Equipment - Net 650,090 591,056 607,043
---------------- ---------------- ----------------
Investments:
Available-for-Sale Securities 3,475 3,008 3,139
Restricted 4,763 32,215 22,962
Investment in Affiliate 1,812 1,810 1,369
---------------- ---------------- ----------------
Total Investments 10,050 37,033 27,470
---------------- ---------------- ----------------
Current Assets:
Cash and Cash Equivalents 4,867 3,986 3,965
Accounts Receivable 52,122 57,497 66,750
Unbilled Revenues 7,504 8,095 34,981
Provision for Uncollectibles (2,262) (2,247) (2,661)
Natural Gas in Storage, average cost 53,739 63,758 59,778
Materials and Supplies, average cost 3,737 4,033 3,818
Prepaid Taxes 13,938 13,355 4,650
Energy Trading Assets 25,286 53,668 47,187
Prepayments and Other Current Assets 6,584 3,909 3,616
---------------- ---------------- ----------------
Total Current Assets 165,515 206,054 222,084
---------------- ---------------- ----------------
Regulatory and Other Non-Current Assets:
Deferred Fuel Costs - Net 44,967 44,513 36,798
Other Regulatory Assets 75,522 82,020 79,994
Energy Trading Assets 4,356 4,214 3,554
Derivatives - - 509
Other 11,716 7,164 10,393
---------------- ---------------- ----------------
Total Regulatory and Other Non-Current Assets 136,561 137,911 131,248
---------------- ---------------- ----------------
Total Assets $ 962,216 $ 972,054 $ 987,845
================ ================ ================
The accompanying footnotes are an integral part of the financial statements.
SJI-5
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
September 30, December 31,
--------------------------------------------
2002 2001 2001
-------------- ----------- ----------
Capitalization and Liabilities
Common Equity:
Common Stock $ 15,135 $ 14,712 $ 14,826
Premium on Common Stock 147,513 137,302 139,929
Accumulated Other Comprehensive Loss (1,581) - (1,687)
Retained Earnings 70,752 62,675 67,218
------------ ----------- ----------
Total Common Equity 231,819 214,689 220,286
------------ ----------- ----------
Preferred Stock and Securities of Subsidiary:
Redeemable Cumulative Preferred Stock:
South Jersey Gas Company, Par Value $100 per share
Authorized - 41,966 shares; Outstanding - 16,904 shares 8% Series 1,690 1,690 1,690
South Jersey Gas Company-Guaranteed Manditorily Redeemable
Preferred Securities of Subsidiary Trust:
Par Value $25 per share, 1,400,000 shares
Authorized and Outstanding 35,000 35,000 35,000
------------ ----------- ----------
Total Preferred Stock and Securities of Subsidiary 36,690 36,690 36,690
------------ ----------- ----------
Long-Term Debt 253,364 259,247 259,247
------------- ----------- ----------
Total Capitalization 521,873 510,626 516,223
------------- ----------- ----------
Current Liabilities:
Notes Payable 133,550 140,405 152,360
Current Maturities of Long-Term Debt 12,883 11,876 9,733
Accounts Payable 42,535 41,347 48,239
Customer Deposits 6,575 5,646 5,976
Environmental Remediation Costs 11,261 17,247 11,319
Taxes Accrued 2,917 3,045 2,743
Energy Trading Liabilities 16,353 47,106 38,991
Derivatives 238 - -
Deferred Income Taxes - Net 27,443 26,774 26,629
Interest Accrued and Other Current Liabilities 12,831 14,226 14,154
------------- ----------- ----------
Total Current Liabilities 266,586 307,672 310,144
------------- ----------- ----------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 93,518 85,897 84,717
Investment Tax Credits 3,906 4,253 4,166
Pension and Other Postretirement Benefits 17,405 12,811 19,313
Environmental Remediation Costs 41,423 37,884 41,423
Energy Trading Liabilities 3,335 3,680 2,947
Derivatives 2,584 - -
Other 11,586 9,231 8,912
------------- ----------- ----------
Total Deferred Credits
and Other Non-Current Liabilities 173,757 153,756 161,478
------------- ----------- ----------
Commitments and Contingencies (Note 9)
Total Capitalization and Liabilities $ 962,216 $ 972,054 $ 987,845
============ =========== ==========
The accompanying footnotes are an integral part of the financial statements.
SJI-6
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Nine Months Ended
September 30,
--------------------------------
2002 2001
-------------- --------------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 17,049 $ 17,630
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 18,470 17,548
Unrealized Loss (Gain) on Energy Trading 71 (2,651)
Provision for Losses on Accounts Receivable 1,469 1,046
Revenues and Fuel Costs Deferred - Net (8,169) (15,494)
Deferred and Non-Current Income Taxes and Credits - Net 9,881 7,972
Environmental Remediation Costs - Net 5,882 5,976
Changes in:
Accounts Receivable 40,237 59,362
Inventories 6,120 (31,797)
Prepayments and Other Current Assets (2,968) (486)
Prepaid and Accrued Taxes - Net (9,114) (7,829)
Accounts Payable and Other Accrued Liabilities (6,428) (44,367)
Other - Net 18 (3,455)
-------------- --------------
Net Cash Provided by Operating Activities 72,518 3,455
-------------- --------------
Cash Flows from Investing Activities:
(Investment in) Return of Investment from Affiliate (443) 2,641
Repayment of Loan to Affiliate 130 1,160
Purchase of Available-For-Sale Securities (440) (571)
Proceeds from Sale (Purchase) of Restricted Investments 18,199 (32,215)
Capital Expenditures, Cost of Removal and Salvage (61,787) (45,303)
-------------- --------------
Net Cash Used in Investing Activities (44,341) (74,288)
-------------- --------------
Cash Flows from Financing Activities:
Net (Repayments of) Borrowings from Lines of Credit (18,810) 19,205
Proceeds from Issuance of Long-Term Debt 10,000 64,000
Principal Repayments of Long-Term Debt (12,733) (9,734)
Dividends on Common Stock (13,515) (12,958)
Proceeds from Sale of Common Stock 7,842 8,234
Repurchase of Preferred Stock - (114)
Payments for Issuance of Long-Term Debt (59) (1,041)
-------------- --------------
Net Cash (Used in) Provided by Financing Activities (27,275) 67,592
-------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents 902 (3,241)
Cash and Cash Equivalents at Beginning of Period 3,965 7,227
-------------- --------------
Cash and Cash Equivalents at End of Period $ 4,867 $ 3,986
============== ==============
The accompanying footnotes are an integral part of the financial statements.
SJI-7
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies:
Consolidation -- The condensed consolidated financial statements include
the accounts of South Jersey Industries, Inc. (SJI) and its subsidiaries. All
significant intercompany accounts and transactions were eliminated. SJI
reclassified some previously reported amounts to conform with current year
classifications. In our opinion, the condensed consolidated financial statements
reflect all adjustments needed to fairly present SJI's financial position and
operating results at the dates and for the periods presented. Our businesses are
subject to seasonal fluctuations and, accordingly, this interim financial
information should not be the basis for estimating the full year's operating
results. These financial statements should be read in conjunction with SJI's
2001 Form 10K and annual report.
Equity-Based Investments in Affiliates -- SJI, either directly or through
its wholly-owned subsidiaries, currently holds a 50% non-controlling interest in
several affiliated companies and accounts for the investments under the equity
method. The operations of these affiliated companies are included in the
statements of condensed consolidated income under the caption, Equity in
Affiliated Companies.
Estimates and Assumptions -- Our financial statements are prepared to
conform with generally accepted accounting principles. Management makes
estimates and assumptions that affect the amounts reported in the financial
statements and related disclosures. Therefore, actual results could differ from
those estimates.
Regulation -- South Jersey Gas Company (SJG) is subject to the rules and
regulations of the New Jersey Board of Public Utilities (BPU). They maintain
their accounts according to the BPU's prescribed Uniform System of Accounts (See
Note 7). SJG follows the accounting for regulated enterprises prescribed by the
Financial Accounting Standards Board (FASB) Statement No. 71, "Accounting for
the Effects of Certain Types of Regulation." In general, Statement No. 71 allows
deferral of certain costs and obligations when it is probable that such items
will be recovered from or refunded to customers in future periods.
Energy Trading Activities & Derivative Instruments -- South Jersey
Resources Group, LLC (SJRG) manages its portfolio purchases and sales, as well
as natural gas in storage, using a variety of instruments that include forward
contracts, swap agreements, option contracts and futures contracts. SJRG
accounts for these contracts at fair value under EITF Issue No. 98-10,
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities," or FASB Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended. Under this method of accounting, SJRG
measures the difference between the price and the fair value of the contracts
and records these as Energy Trading Assets or Energy Trading Liabilities on our
condensed consolidated balance sheets. For the three months ended September 30,
2002 and 2001, the net unrealized pre-tax (loss) gain on energy trading was
$(0.9) million and $.05 million, respectively. For the nine months ended
September 30, 2002 and 2001, the net unrealized pre-tax (loss) gain on energy
trading was $(0.1) million and $2.7 million, respectively. These (losses) gains
SJI-8
are included in Operating Revenues - Nonutility. The Cumulative Effect of a
Change in Accounting Principle - Net of $148,000 for the nine months ended
September 30, 2001 relates to the adoption of Statement No. 133 on January 1,
2001.
SJI's approach to transacting various aspects of its unregulated energy
business is to offset purchases and sales and have minimal open positions at any
one time. Consistent with this approach, SJI will designate certain energy
related contracts as cash flow or fair value hedges.
SJRG also provides price risk management for certain South Jersey Energy
(SJE) sales commitments. SJRG enters into future and basis contracts to
effectively provide price risk management for SJE's firm commitments for sales
of gas and forecasted purchases of gas. The SJRG energy related contracts that
are used to hedge SJE's forecasted purchases of gas have been designated as cash
flow hedges. The gains and losses on derivative contracts designated as cash
flow hedges are recorded in Accumulated Other Comprehensive Loss and recorded to
the Income Statement when the hedged transactions are completed. SJE's firm
commitments for sales of gas are marked to market and reflected in the
consolidating statements of income.
In November 2001, we entered into two interest rate swap contracts. The
first swap effectively provides us with a fixed interest rate of 4.08% on Marina
Energy LLC's (Marina) tax-exempt Series A variable rate bonds for a 10-year
period. The second swap effectively fixes the interest rate of Marina's taxable
Series B variable rate bonds at 4.55% for a 6-year period. The notional amount
of this second swap decreases by $3.0 million per year beginning in December
2005.
In January 2002, Marina issued an additional $10.0 million of taxable
Series B variable rate bonds. In April 2002, we entered into an interest rate
swap contract that effectively fixes the interest rate on these bonds at 4.62%
for a four-year period. The notional amount of this swap decreases to $8 million
in December 2003, then to $3.9 million in December 2004, and terminates in
December 2005.
Also in April 2002, SJG entered into an interest rate swap contract that
effectively fixes the interest rate at 3.57% through March 15, 2003 on $40
million of SJG's debt outstanding under its bank lines.
We entered into interest rate swap agreements to hedge the exposure to an
increase in interest rates with respect to our variable rate debt. The
differential to be paid or received as a result of these swap agreements is
accrued as interest rates change and recognized as an adjustment to interest
expense. These interest rate swaps are accounted for as cash flow hedges. As of
September 30, 2002, the market value of these swaps was $(2,703,462), which
represents the amount we would pay to terminate these contracts as of that date.
This balance is included on the 2002 condensed consolidated balance sheet under
the caption Derivatives. As of September 30, 2002, we calculated the swaps to be
highly effective; therefore, the offset to the hedge asset is recorded, net of
taxes, in Accumulated Other Comprehensive Loss.
SJI-9
Fair value of the derivative investments and energy related contracts is
determined by reference to quoted market prices of listed contracts, published
quotations or quotations from independent parties.
New Accounting Pronouncements -- In June 2001, the FASB issued Statement
No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 141 applies to all business combinations
initiated after June 30, 2001 and has no impact on SJI at this time.
Statement No. 142 provides that intangible assets with finite useful lives
should be amortized and that goodwill and intangible assets with indefinite
lives should not be amortized but will be tested at least annually for
impairment. In 1983, SJG acquired certain gas distribution and operating
facilities with an excess of purchase price over net book value of $2.9 million,
which was being amortized over 40 years. This acquisition adjustment is deemed
to have an indefinite useful life because the associated plant is expected to
generate sufficient cash flow indefinitely. Accordingly, SJG ceased amortizing
the premium on January 1, 2002, leaving a carrying amount of $1.6 million, which
is reflected in the caption Utility Plant on the condensed consolidated balance
sheets. In 2001, the premium amortization approximated $75,000.
Also in June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." Statement No. 143 establishes accounting and reporting
standards for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SJI expects to adopt Statement
No. 143 in 2003. We are currently evaluating the effects of Statement No. 143;
however, it is not expected to materially impact SJI's financial condition or
results of operations.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which was effective in 2002. This
statement prescribes that a single accounting model be used for valuing
long-lived assets to be disposed of and broadens the presentation of
discontinued operations. The adoption of Statement No. 144 did not have a
material impact on SJI's financial condition or results of operation.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with the exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002.
Beginning in the third quarter of 2002, SJI has decided to present realized
gains and losses from trading in physical power contracts on a net basis in our
condensed consolidated statements of income as permitted by Emerging Issues Task
Force (EITF) Issue No. 98-10. Consequently, Operating Revenues - Nonutility and
Cost of Sales - Nonutility for the three and nine months ended September 30,
2001 have been reclassified to be in conformity with this presentation. Because
of the difficulty in obtaining certain information, this presentation was
determined by netting the energy contract related revenue and expense
transactions of South Jersey Resources Group (SJRG). As a result, certain cost
SJI-10
of sales - nonutility is based on the transfer price between SJRG and South
Jersey Energy. Management believes these transfer prices are generally at
market, but has had no policy that they be at market. There is no effect on
operating income or net income from the above changes in presentation.
On October 25, 2002, the EITF rescinded its consensus in Issue No. 98-10
effective for transactions entered into after that date, with a cumulative
effect adjustment for previously existing transactions to be recognized in the
quarter beginning January 1, 2003. As a result of the rescission, SJI will only
mark-to-market those energy-related contracts that meet the definition of a
derivative in FASB No. 133. Energy-related contracts that do not meet the
definition of a derivative would be accounted for using the accrual basis of
accounting. Management is currently evaluating the effect of the recent EITF
decision. It appears that many energy related contracts that are currently
accounted for at fair value will meet the definition of a derivative, except for
inventory, including gas storage rights. But, SJI is awaiting further
guidance and information on the matter.
Other Regulatory Assets -- Other Regulatory Assets consisted of the
following items (in thousands):
Years Remaining
as of September 30, December 31,
Sept. 30, 2002 2002 2001 2001
-------------- ---------------------------------------------
Environmental Remediation Costs:
Expended - Net 7 $ 6,891 $ 12,248 $ 12,831
Liability for Future Expenditures - 48,790 51,029 48,790
Income Taxes - Flowthrough Depreciation 9 8,841 9,819 9,575
Postretirement Benefit Costs 10.3 3,874 4,252 4,158
Gross Receipts and Franchise Taxes 4.3 1,922 2,365 2,254
Other - 5,204 2,307 2,386
-----------------------------------------
Total Regulatory Assets $ 75,522 $ 82,020 $ 79,994
=========================================
Each item that is separately identified is being recovered through utility
rate charges without a return on investments over the period indicated. The
majority of the assets reflected above under the caption "Other" are currently
subject to filings with the BPU requesting recovery. Management believes that
all such deferred costs will be permitted to be recovered from ratepayers
through future utility rates.
In addition, SJG has one significant regulatory liability for overcollected
taxes totaling $2.4 million, including interest, as of September 30, 2002. This
amount is included on the condensed consolidated balance sheet in the caption
"Other" under the heading Deferred Credits and Other Non-Current Liabilities and
is subject to being returned to ratepayers in future rate proceedings.
SJI-11
Note 2. Discontinued Operations and Affiliations:
Discontinued Operations -- Summarized operating results of discontinued
operations for the three and nine months ending September 30 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------------------------------------------
Operating Revenues - Merchandising $ - $ 217 $ 26 $ 773
==================================================
(Loss) Income before Income Taxes:
Sand Mining $ (16) $ (31) $ (222) $ 779
Construction (2) 2 (14) 97
Fuel Oil (12) (18) (43) (57)
Wholesale Electric - - - (1,177)
Merchandising - (14) - (178)
Income Tax Credits 12 25 111 216
--------------------------------------------------
Loss from Discontinued Operations - Net $ (18) $ (36) $ (168) $ (320)
==================================================
Earnings Per Common Share from
Discontinued Operations - Net $ 0.00 $ 0.00 $ (0.02) $ (0.03)
==================================================
Affiliations -- In January 1999, SJI and Conectiv Solutions, LLC, formed
Millennium Account Services, LLC to provide meter reading services in Southern
New Jersey.
In June 1999, South Jersey Energy and Energy East Solutions, Inc. formed
South Jersey Energy Solutions, LLC (SJES) to market retail electricity and
energy management services. SJES began supplying retail electric during the
first quarter of 2000 and ceased this activity in the second quarter of 2002.
In April 2000, SJE and GZA GeoEnvironmental, Inc. formed Air Logics, LLC to
market a jointly-developed air monitoring system designed to assist companies
involved in environmental cleanup activities.
Note 3. Common Stock:
SJI has 20,000,000 shares of authorized Common Stock. The following shares
were issued and outstanding:
2002 2001
---------------------------
Beginning Balance, January 1 11,860,990 11,499,701
New Issues During Year:
Dividend Reinvestment Plan 243,544 266,432
Employees' Stock Ownership Plan 2,530 2,805
Stock Option, Stock Appreciation Rights
And Restricted Stock Award Plan 590 346
---------------------------
Ending Balance, September 30 12,107,654 11,769,284
===========================
SJI-12
We credited the par value ($1.25 per share) of stock issued in 2002 and
2001 to Common Stock. We credited the net excess over par value of approximately
$7.6 million and $7.9 million, respectively, to Premium on Common Stock.
Dividend Reinvestment Plan (DRP) and Employees' Stock Ownership Plan
(ESOP) -- Newly issued shares of common stock offered through the DRP are issued
directly by SJI. All shares offered through the ESOP are also issued directly by
SJI. As of September 30, 2002, SJI reserved 1,260,681 and 17,198 shares of
authorized, but unissued, common stock for future issuance to the DRP and ESOP,
respectively.
Stock Option, Stock Appreciation Rights and Restricted Stock Award Plan --
Under this plan, no more than 306,000 shares in the aggregate may be issued to
SJI's officers and other key employees. No options or stock appreciation rights
may be granted under the Plan after November 22, 2006. At September 30, 2002 and
2001, SJI had -0- and 4,500 options outstanding, respectively, all exercisable
at $24.69 per share. No options were granted in 2002 or 2001. No stock
appreciation rights were issued under the Plan. As of September 30, 2002, 80,980
restricted shares were granted and will be issued upon satisfaction of time and
performance contingencies.
Earnings Per Common Share -- We present basic EPS based on the
weighted-average number of common shares outstanding. Our EPS are presented in
accordance with FASB Statement No. 128, "Earnings Per Share" which establishes
standards for computing and presenting basic and diluted EPS. The incremental
shares required for inclusion in the denominator for the diluted EPS calculation
were 71,861 and 36,030 shares for the nine months ended September 30, 2002 and
2001, respectively. Because they would have an antidilutive effect on EPS,
incremental shares of 98,277 and 49,012 for the three months ended September 30,
2002 and 2001, respectively, were not included in the denominator for a diluted
EPS calculation. These shares relate to stock options and restricted stock and
were calculated using the treasury stock method.
Note 4. Financial Instruments:
Restricted Investments -- In accordance with the terms of Marina's bond
agreements, we are required to invest unused proceeds in high-quality,
highly-liquid investments pending approved construction expenditures. As of
September 30, 2002, the net proceeds remaining totaled $4.8 million.
South Jersey Resources Group (SJRG) -- SJRG maintains a margin account with
a national investment firm to support its energy trading activities. As of
September 30, 2002, SJRG's margin account had a $497,000 credit balance due to
changes in the market value of outstanding contracts.
SJI-13
Note 5. Comprehensive Income:
The components of comprehensive income are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
-----------------------------------------
Net (Loss) Income Applicable to Common Stock $ (3,240) $ 17,049
Other Comprehensive (Loss) Income:
Change in Fair Value of Derivatives:
Interest Rate Swaps (1,161) (1,970)
Energy Trading Contracts 1,212 2,077
---------------------------------
Comprehensive (Loss) Income $ (3,189) $ 17,156
=================================
Note 6. Segments of Business:
Information about SJI's operations in different industry segments for the
three and nine months ended September 30 is presented below (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------------------------------------------------------
Operating Revenues:
Gas Utility Operations $ 51,765 $ 57,592 $ 270,954 $ 357,802
Wholesale Gas Operations 561 544 4,061 4,980
Retail Gas and Other Operations 20,055 19,506 73,181 75,361
--------------------------------------------------------------
Subtotal 72,381 77,642 348,196 438,143
Intersegment Sales (3,315) (2,657) (17,899) (22,025)
--------------------------------------------------------------
Total Operating Revenues $ 69,066 $ 74,985 $ 330,297 $ 416,118
==============================================================
Operating Income:
Gas Utility Operations $ (992) $ (647) $ 37,643 $ 39,297
Wholesale Gas Operations 323 319 3,663 4,397
Retail Gas and Other Operations 465 165 3,069 4,086
General Corporate (153) (34) (317) (192)
--------------------------------------------------------------
Total Operating (Loss) Income $ (357) $ (197) $ 44,058 $ 47,588
==============================================================
Depreciation and Amortization:
Gas Utility Operations $ 6,162 $ 5,878 $ 18,366 $ 17,464
Wholesale Gas Operations 3 5 9 5
Retail Gas and Other Operations 26 17 68 58
Discontinued Operations 10 7 27 21
--------------------------------------------------------------
Total Depreciation and Amortization $ 6,201 $ 5,907 $ 18,470 $ 17,548
==============================================================
SJI-14
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------------------------------------------------------------
Property Additions:
Gas Utility Operations $ 12,947 $ 12,495 $ 34,314 $ 33,669
Wholesale Gas Operations - 3 - 56
Retail Gas and Other Operations 8 29 63 163
On-Site Energy Production 8,416 7,425 26,714 10,840
--------------------------------------------------------------
Total Property Additions $ 21,371 $ 19,952 $ 61,091 $ 44,728
==============================================================
Identifiable Assets:
Gas Utility Operations $ 849,159 $ 837,355
Wholesale Gas Operations 42,436 88,343
Retail Gas and Other Operations 26,971 15,193
On-Site Energy Production 55,690 31,600
Discontinued Operations 2,350 2,234
-----------------------------
Subtotal 976,606 974,725
Corporate Assets 34,214 34,593
Intersegment Assets (48,604) (37,264)
-----------------------------
Total Identifiable Assets $ 962,216 $ 972,054
=============================
Gas Utility Operations consist primarily of natural gas distribution to
residential, commercial and industrial customers. Wholesale Gas Operations
include South Jersey Resources Group's activities. Retail Gas and Other
Operations include natural gas and electricity acquisition and transportation
service companies. On-Site Energy Production consists of Marina's construction
and related financing activities.
SJI's interest expense relates primarily to SJG's borrowing and financing
activities. Interest income is essentially derived from borrowings between the
subsidiaries which is eliminated during consolidation.
Note 7. Regulatory Actions:
In January 1997, the New Jersey Board of Public Utilities (BPU) granted SJG
a 9.62% rate of return on rate base, which included an 11.25% return on common
equity. Additionally, SJG's threshold for sharing pre-tax margins generated by
interruptible and off-system sales and transportation increased. Currently, SJG
keeps 100% of pre-tax margins up to the threshold level of $7.8 million. The
next $750,000 is credited to the Levelized Gas Adjustment Clause (LGAC).
Thereafter, SJG keeps 20% of the pre-tax margins as it has historically.
Effective January 10, 2000, the BPU approved full unbundling of SJG's
system. This allows all natural gas consumers to select their natural gas
supplier. As of September 30, 2002, 79,969 of SJG's customers were purchasing
their gas commodity from someone other than SJG. Customers choosing to purchase
natural gas from providers other than the utility are charged for the cost of
SJI-15
gas by the marketer, not the utility. The resulting decrease in SJG's revenues
is offset by a corresponding decrease in gas costs. While customer choice can
reduce utility revenues, it does not negatively affect SJG's net income or
financial condition. The BPU continues to allow for full recovery of natural gas
costs through the LGAC, as well as other costs of service, including deferred
costs, through tariffs.
In August 2002, SJG filed for a Societal Benefits Clause (SBC) rate
increase. The SBC recovers costs related to BPU mandated programs, including
environmental remediation costs that are recovered through its Remediation
Adjustment Clause (RAC), energy efficiency and renewable energy program costs
that are recovered through its Comprehensive Resource Analysis (CRA) clause,
consumer education program costs and low income program costs. The requested
rate increase would provide for an annual recovery level of $13.7 million which
would represent an annual increase of approximately $7.0 million over the $6.7
million recovery currently included in rates. As approved by the BPU, SJG is
allowed recovery of interest on any SBC underrecovered balance.
On November 15, 2001, SJG filed for a $17.6 million reduction to its
Levelized Gas Adjustment Clause (LGAC). The BPU approved the LGAC reduction
effective December 1, 2001. Also on December 1, 2001, SJG implemented recovery
of its October 31, 2001 underrecovered gas costs. SJG will recover $48.9 million
over three years plus interest accrued since April 1, 2001. SJG will also
recover interest for the 3-year amortization period at a rate of 5.75%. In May
2002, SJG received approval from the BPU of SJG's request to reduce its
overcollected LGAC balance by $17.6 million. This refund did not affect SJG's
net income or financial condition. In September 2002, SJG filed with the BPU to
maintain its current LGAC rate through October 2003.
On November 15, 2001, SJG filed for a $2.7 million rate increase to recover
the cash related to a 3-year net deficiency in the Temperature Adjustment Clause
(TAC). Additionally, in September 2002, SJG filed for an $8.6 million rate
increase to recover the cash related to a TAC deficiency representing warmer
than normal weather for the 2001-2002 winter.
In August 2002, SJG filed a petition with the BPU seeking to transfer its
appliance service business from the regulated utility into a newly created
unregulated, limited liability company. The newly created company will then have
the flexibility to be more responsive to competition and its customers and
further its service offerings in an unregulated environment.
Note 8. Retained Earnings:
Restrictions exist under various loan agreements regarding the amount of
cash dividends or other distributions that SJG may pay on its common stock.
SJI's total equity in its subsidiaries' retained earnings, which is free of
these restrictions, was $69.0 million as of September 30, 2002.
SJI-16
Note 9. Commitments and Contingencies:
Construction and Environmental -- SJI's estimated net cost of construction
and environmental remediation programs for 2002 totals $91.5 million.
Commitments were made regarding some of these programs.
Pending Litigation -- SJI is subject to claims arising in the ordinary
course of business and other legal proceedings. We accrue liabilities when these
claims become apparent for amounts we believe these claims may be settled. We
also maintain insurance and record probable insurance recoveries relating to
outstanding claims. In management's opinion, the ultimate disposition of these
claims will not have a material adverse effect on SJI's financial position,
results of operations or liquidity.
Standby Letters of Credit -- SJI provided a $17 million standby letter of
credit to Marina District Development Corporation in support of Marina's
contractual obligations to construct the thermal energy plant and to supply
heat, hot water and cooling to The Borgata Resort. This letter of credit was
reduced to $13.6 million as of September 30, 2002.
As of September 30, 2002, SJI also provided $39 million of standby letters
of credit supporting the variable rate demand bonds issued through the New
Jersey Economic Development Authority by Marina. Commercial banks have committed
to issue up to $46 million of annually renewing letters of credit to support
development of Marina's thermal plant project.
Environmental Remediation Costs -- SJI incurred and recorded costs for
environmental clean up of sites where SJG or its predecessors operated gas
manufacturing plants. SJG stopped manufacturing gas in the 1950s. SJI and some
of its nonutility subsidiaries also recorded costs for environmental cleanup of
sites where South Jersey Fuel (SJF) previously operated a fuel oil business and
The Morie Company (Morie) maintained equipment, fueling stations and storage.
SJI successfully entered into settlements with all of its historic
comprehensive general liability carriers regarding the environmental remediation
expenditures at the SJG sites. Also, SJG purchased a Cleanup Cost Cap Insurance
Policy limiting the amount of remediation expenditures that SJG will be required
to make at 11 of its sites. This Policy will be in force until 2024 at 10 sites
and until 2029 at one site. The following future cost estimates have been
reduced by projected insurance recoveries from the Cleanup Cost Cap Insurance
Policy.
Since the early 1980s, SJI accrued estimated environmental remediation
costs of $130.1 million, of which $81.3 million was spent as of September 30,
2002. With the assistance of a consulting firm, we estimate that future costs to
clean up SJG's sites will range from $48.8 million to $143.5 million. We
recorded the lower end of this range as a liability. It is reflected on the 2002
condensed consolidated balance sheet under the captions Current Liabilities and
Deferred Credits and Other Non-Current Liabilities. Recorded amounts include
estimated costs based on projected investigation and remediation work plans
using existing technologies. Actual costs could differ from the estimates due to
the long-term nature of the projects, changing remediation technology,
SJI-17
government regulations and site-specific requirements. The major portion of
accrued environmental costs relate to the clean up of SJG's former gas
manufacturing sites.
SJG has two regulatory assets associated with environmental costs (see
Note 1 under Other Regulatory Assets). The first asset is titled Environmental
Remediation Cost: Expended - Net. This asset represents what was actually spent
to clean up former gas manufacturing plant sites, net of recoveries. These costs
meet the requirements of FASB Statement No. 71, "Accounting for the Effects of
Certain Types of Regulation." The BPU allows SJG to recover expenditures through
the Remediation Adjustment Clause (RAC).
The other asset titled Environmental Remediation Cost: Liability for Future
Expenditures relates to estimated future expenditures determined under the
guidance of FASB Statement No. 5, "Accounting for Contingencies." We recorded
this amount, which relates to former manufactured gas plant sites, as a deferred
debit with the corresponding amount reflected on the condensed consolidated
balance sheet under the captions Current Liabilities and Deferred Credits and
Other Non-Current Liabilities. The deferred debit is a regulatory asset under
Statement No. 71. The BPU's intent, evidenced by current practice, is to allow
SJG to recover the deferred costs after they are spent over 7-year periods.
As of September 30, 2002, we reflected SJG's unamortized remediation costs
of $6.9 million on the condensed consolidated balance sheet under the caption
Regulatory Assets. Since implementing the RAC in 1992, SJG has recovered $33.3
million through rates.
With Morie's sale, Energy & Minerals, Inc. (EMI) assumed responsibility for
environmental liabilities estimated between $2.7 million and $8.8 million. The
information available on these sites is sufficient only to establish a range of
probable liability and no point within the range is more likely than any other.
Therefore, EMI continues to accrue the lower end of the range. Changes in the
accrual are included in the statements of condensed consolidated income under
the caption Loss from Discontinued Operations - Net.
SJI and SJF have estimated their potential exposure for the future
remediation of four sites where fuel oil operations existed years ago. Estimates
for SJI's site range between $0.1 million and $0.4 million, while SJF's
estimated liability ranges from $1.1 million to $4.9 million for its three
sites. We recorded the lower ends of these ranges on the 2002 condensed
consolidated balance sheet under Current Liabilities and Deferred Credits and
Other Non-Current Liabilities as of September 30, 2002.
Note 10. Subsequent Event:
On October 7, 2002, SJG made total redemption of its 9% Series First
Mortgage Bonds due 2010 in the amount of $17.5 million. The premium associated
with the redemption was approximately $0.6 million. SJG will seek BPU approval
to amortize the premium over the remaining term of this bond issue in accordance
with the BPU's uniform system of accounts.
SJI-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
South Jersey Industries (SJI) is an energy services holding company which
provides a variety of products and services through the following subsidiaries:
1) South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG
distributes natural gas to 291,733 customers in the seven southernmost counties
of New Jersey. SJG also:
* sells natural gas and pipeline transportation capacity (off-system
sales) on a wholesale basis to various customers on the interstate
pipeline system;
* transports natural gas purchased directly from producers or suppliers
for our own sales and for some of our customers;
* services appliances via the sale of appliance warranty programs, as well
as on a time and materials basis.
2) South Jersey Energy Company (SJE) acquires and markets natural gas to
retail end users and provides total energy management services to commercial and
industrial customers. SJE has one subsidiary, SJ EnerTrade (EnerTrade), that
primarily provides services for the sale of natural gas to the casino industry
in Atlantic City, New Jersey. SJE also markets an air quality monitoring system
through AirLogics, LLC. SJE has a 50% equity interest in AirLogics. GZA
GeoEnvironmental, Inc., an environmental consulting firm, also has a 50% equity
interest in AirLogics.
3) South Jersey Resources Group, LLC (SJRG) is a wholesale marketer of
natural gas storage, commodity and transportation in the mid-Atlantic and
southern states. SJRG also conducts price-risk-management activities.
4) Marina Energy LLC (Marina Energy) is a developer of energy-related
projects in southern New Jersey.
SJI also has an equal investment with Conectiv Solutions, LLC, in a joint
venture forming Millennium Account Services, LLC (Millennium). Millennium
provides meter reading services to SJG and Conectiv Power Delivery in southern
New Jersey.
SJI-19
Forward-Looking Statements
This report contains certain forward-looking statements concerning
projected financial and operating performance, future plans and courses of
action and future economic conditions. All statements in this report other than
statements of historical fact are forward-looking statements. These
forward-looking statements are made based upon management's expectations and
beliefs concerning future events impacting the company and involve a number of
risks and uncertainties. We caution that forward-looking statements are not
guarantees and actual results could differ materially from those expressed or
implied in the forward-looking statements. Also, in making forward-looking
statements, we assume no duty to update these statements should expectations
change or actual results and events differ from current expectations.
A number of factors could cause our actual results to differ materially
from those anticipated, including, but not limited to the following: general
economic conditions on an international, national, state and local level;
weather conditions in our marketing areas; changes in commodity costs;
regulatory and court decisions; competition in our utility and non-utility
activities; the availability and cost of capital; our ability to maintain
existing joint ventures to take advantage of marketing opportunities; costs and
effects of legal proceedings and environmental liabilities; the failure of
customers or suppliers to fulfill their contractual obligations; and changes in
business strategies.
Mandatorily Redeemable Preferred Securities
SJG's statutory trust subsidiary, SJG Capital Trust, currently has $35
million of 8.35% SJG-Guaranteed Mandatorily Redeemable Preferred Securities
outstanding. These securities are redeemable by SJG at a price equal to 100% of
the principal amount at any time. The securities currently trade on the New York
Stock Exchange under the symbol SJI.T.
Customer Choice Legislation
All residential natural gas customers in New Jersey are able to choose
their gas supplier. As of September 30, 2002, 79,969 SJG customers chose a
natural gas supplier other than the utility. This number increased from 36,393
at September 30, 2001 as third party marketers were able to offer natural gas at
prices competitive with those available to consumers under regulated utility
tariffs. Customers choosing to purchase natural gas from providers other than
the utility are charged for the cost of gas by the marketer, not the utility.
The resulting decrease in SJG's revenues is offset by a corresponding decrease
in gas costs. While customer choice can reduce utility revenues, it does not
negatively affect SJG's net income or financial condition. The New Jersey Board
of Public Utilities continues to allow for full recovery of natural gas costs
through a Levelized Gas Adjustment Clause, as well as other costs of service,
including deferred costs, through tariffs. SJI has benefited from Customer
Choice Legislation as South Jersey Energy has successfully competed for, and
profited from, gas commodity customers it has obtained.
SJI-20
Temperature Adjustment Clause
SJG's Board of Public Utilities approved Temperature Adjustment Clause
(TAC) had the following impacts on 2002 and 2001 third quarter and nine months
net earnings:
2002 2001
--------------------------
TAC Adjustment Increase to
Net Income ($ in thousands)
Quarter Ended September 30 $ - $ -
Nine Months Ended September 30 $ 3,249 $ 132
The clause is designed to mitigate the effect of variations in heating
season temperatures from historical norms. While the revenue and income impacts
of adjustments made under this clause are recorded as incurred, cash inflows or
outflows directly attributable to the adjustments generally do not begin until
the next clause year. Each Temperature Adjustment Clause year begins October 1.
Results of Operations - Three and Nine Months Ended September 30, 2002
Compared to Three and Nine Months Ended September 30, 2001
Operating Revenues - Utility
Revenues decreased $6.5 million and $83.4 million in the third quarter and
first nine months of 2002, respectively, compared with the prior year periods.
The decreases were primarily due to three factors. First, weather was 16.5%
warmer for the first nine months than the prior year period. Weather was not a
material factor on third quarter performance as heating needs of our customers
are typically minimal for that period. Second, a significantly higher number of
residential customers utilized a third party marketer instead of SJG as their
gas supplier. Third, off-system sales revenues decreased for the third quarter
and the first nine months of 2002 primarily due to lower prices for natural gas
sold and lower off-system sales volumes. Partially offsetting the effect of
these factors was an additional 7,493 customers compared to same time last year.
As a result of SJG's Temperature Adjustment Clause, revenues from utility
ratepayers are closely tied to 20-year normal temperatures calculated under the
clause and not actual temperatures. While the clause significantly reduces
fluctuations in revenues related to temperature, as a general rule, revenues
continue to be positively impacted by colder weather and negatively impacted by
warmer weather. Weather was 16.5% warmer for the first nine months of 2002 than
the 20-year average. In comparison, weather for the first nine months of 2001
was approximately the same as the 20-year average.
SJI-21
The following is a comparison of operating revenue and throughput for the
three and nine month periods ended September 30, 2002 compared with the same
periods ended September 30, 2001.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-----------------------------------------------------------
Utility Operating Revenues (Thousands):
Firm
Residential $ 13,612 $ 18,243 $ 114,844 $ 143,067
Commercial 5,560 6,922 34,215 58,447
Industrial 535 497 3,081 2,999
Cogeneration & Electric Generation 4,136 3,929 7,715 6,586
Firm Transportation 7,274 5,363 29,933 19,822
----------------------------------------------------------
Total Firm Utility Operating Revenues 31,117 34,954 189,788 230,921
Interruptible 207 236 753 1,173
Interruptible Transportation 298 284 1,100 881
Off-System 18,131 20,530 72,792 119,203
Capacity Release & Storage 1,213 1,130 4,043 3,978
Other 798 458 2,478 1,646
Intercompany Sales (2,825) (2,192) (17,057) (20,460)
-----------------------------------------------------------
Total Utility Operating Revenues $ 48,939 $ 55,400 $ 253,897 $ 337,342
===========================================================
Throughput (MMcf):
Firm
Residential 891 1,259 10,262 12,631
Commercial 478 617 3,496 5,922
Industrial 17 13 132 186
Cogeneration & Electric Generation 1,000 1,021 1,722 1,397
Firm Transportation 5,138 5,353 17,932 15,939
-----------------------------------------------------------
Total Firm Throughput 7,524 8,263 33,544 36,075
Interruptible 37 41 140 157
Interruptible Transportation 619 611 2,259 1,841
Off-System 5,227 6,257 21,470 21,880
Capacity Release and Other 12,640 7,321 29,784 19,048
-----------------------------------------------------------
Total Throughput 26,047 22,493 87,197 79,001
===========================================================
SJI-22
Operating Revenues - Nonutility
Nonutility operating revenues increased by $.5 million and decreased by
$2.4 million for the third quarter and first nine months of 2002, respectively,
compared to the comparable prior year periods. The nine month decrease was due
to lower natural gas prices experienced by South Jersey Energy, and warmer
weather which reduced actual gas volumes sold.
Cost of Gas Sold - Utility
Cost of gas sold - utility decreased $6.4 million and $81.6 million for the
third quarter and first nine months of 2002 compared with the same periods in
2001. The first nine months decrease was due to lower gas costs for off-system
sales as well as lower firm gas sales volume. Warmer weather and the migration
of firm gas sales customers to transportation service were the main causes of
the decrease in firm gas sales volume. SJG's gas cost during the first nine
months of 2002 averaged $4.59/dt compared with $6.14/dt in 2001. Unlike gas
costs associated with off-system sales, changes in the cost of gas sold to
utility ratepayers are not reflected in Cost of Gas Sold - Utility as incurred.
Fluctuations in gas costs to ratepayers not reflected in current rates are
deferred and addressed in future periods under the Levelized Gas Adjustment
Clause embedded in the utility rate structure. Gas supply sources include
contract and open-market purchases. SJG secures and maintains its own gas
supplies to serve its customers.
Cost of Sales - Nonutility
Cost of sales - nonutility increased $54,000 and decreased $1.3 million for
the third quarter and first nine months of 2002, respectively, compared to the
same periods in 2001 due to warmer weather which reduced actual volumes
purchased and lower natural gas prices.
Operations
A summary of net changes in Operations (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 vs. 2001 2002 vs. 2001
-----------------------------------
Utility:
Other Production Expense $ 3 $ 32
Transmission 6 17
Distribution (339) (321)
Customer Accounts and Services (149) 637
Sales 50 61
Administration and General 279 528
Nonutility 422 706
--------------------------------
Total Operations $ 272 $ 1,660
================================
SJI-23
Distribution Costs decreased as a result of higher cost recovery levels
experienced through appliance repair services. Customer Accounts and Services
Costs increased during the nine months ended September 30, 2002 as compared to
the same period in 2001 primarily due to higher bad debt expense as accounts
previously shut off for nonpayment were determined to be uncollectible.
Administration and General Costs were higher due to increases in pension and
employee welfare expenses primarily resulting from effects of the continuing
poor performance of financial markets on retirement plan assets and increasing
health care costs. Nonutility Costs increased primarily due to higher customer
acquisitions costs incurred by South Jersey Energy.
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 vs. 2001 2002 vs. 2001
----------------------------------
Maintenance $ (17) $ (1,600)
Depreciation $ 319 $ 929
Energy and Other Taxes $ - $ (421)
Maintenance expense decreased in the first nine months of 2002 primarily
due to lower levels of Remediation Adjustment Clause (RAC) amortization
recognized during the first quarter. RAC-related expenses do not affect earnings
as an offsetting amount is recognized in revenues. Depreciation is higher due to
increased investment in property, plant and equipment by SJG. Changes in Energy
and Other Taxes relate primarily to changes in SJG's firm and interruptible
throughput of gas.
Other Income and Expense
Other income and expense was higher in the first nine months of 2002
compared with the prior year due to a pre-tax gain of $686,000 on the sale of
stock received as a result of the demutualization of Prudential's mutual life
insurance company. During the first nine months of 2001, we recognized $250,000
as other income resulting from a favorable insurance case settlement.
Interest Charges
Interest charges were lower in the third quarter and the first nine months
of 2002 compared with the prior year periods due primarily to reductions in
short-term rates on line of credit borrowings. The effect of lower short-term
rates was partially offset by the interest expense associated with higher levels
of long-term debt outstanding in the first nine months of 2002. The long-term
debt was incurred in the third quarter of 2001 primarily to support the
expansion and upgrade of SJG's gas transmission and distribution system.
SJI-24
Net Income Applicable to Common Stock
Net income (in thousands) and earnings per common share reflect the
following changes:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 vs. 2001 2002 vs. 2001
---------------------------------
Income from Continuing Operations $ 554 $ (585)
Loss from Discontinued Operations - Net 18 152
Cumulative Effect of Accounting
Change - Net - (148)
------------------------------
Net Income Increase(Decrease) $ 572 $ (581)
==============================
Earnings per Common Share:
Continuing Operations $ 0.05 $ (0.09)
Discontinued Operations - Net 0.00 0.01
Cumulative Effect of Accounting
Change - Net 0.00 (0.01)
------------------------------
Earnings per Share Increase
(Decrease) $ 0.05 $ (0.09)
==============================
The details affecting the changes in net income and earnings per share are
discussed under the appropriate captions above.
Liquidity and Capital Resources
Liquidity needs at SJI are driven by factors that include natural gas
commodity prices; the impact of weather on customer bills and inventory levels;
lags in fully collecting gas costs from customers under the Levelized Gas
Adjustment Clause; working capital needs of our energy trading activities; the
timing of construction and remediation expenditures and related permanent
financings; mandated tax payment dates; and requirements to repay long-term
debt. The wide swing in our net cash provided by operating activities between
the nine months ended September 30, 2002 and the same period in 2001 was
primarily due to the impact of very cold weather, which resulted in high levels
of gas consumption by customers, and very high gas prices experienced during
November and December of 2000. Consequently, receivables and payables were much
higher and inventories were much lower at year end 2000 as compared to December
31, 2001 when weather conditions had been warmer than normal. Receivable,
payable and inventory levels for SJI at September 30, 2001 and 2002 were much
more comparable as the impact of weather on customer gas usage is minimal at
that point in time.
We first seek to meet liquidity needs with net cash provided by operating
activities. We utilize short-term borrowings under lines of credit from
commercial banks to supplement cash from operations where necessary.
Lines of credit available to SJI totaled $162.0 million at September 30,
2002, of which $133.6 million was utilized. All but $10 million of these lines
are made available through five commercial banks on an uncommitted basis. The
banks and SJI review and renew the lines annually. The $10 million line is
SJI-25
extended on a committed basis, maturing May 2003, by a sixth commercial bank.
$137 million of these lines were exclusively for SJG's use. SJI has
long-standing relationships with all of these banks and we believe, based upon
ongoing dialogue, that there will continue to be sufficient credit available to
meet our business' future liquidity needs.
SJI supplements its operating cash flow and credit lines with both debt and
equity capital. Over the years, SJG has utilized long-term debt, primarily in
the form of First Mortgage Bonds, to finance its long-term needs. These needs
are primarily capital expenditures for property, plant and equipment. Since
1998, SJG has financed these needs via a Medium Term Note (MTN) program, secured
in similar fashion to the First Mortgage Bonds. We filed with the SEC to
establish a new MTN program during the third quarter of 2002. We expect that
process to be completed during the fourth quarter of 2002. Current maturities on
long-term debt through 2006 are expected to total as follows: $9.7 million in
2002; $12.9 million per year in 2003 through 2005; and $11.2 million in 2006.
Since September 2001, Marina issued $20 million of tax-exempt and $19
million of taxable variable rate demand bonds through the New Jersey Economic
Development Authority (EDA). The tax-exempt and taxable bonds mature in 2031 and
2021, respectively. Marina has EDA approval to issue up to an additional $6
million of taxable bonds. Investors in the bonds receive liquidity and credit
support via a letter of credit provided by a commercial bank. We are using the
proceeds of this bond issuance to fund project development and construction
costs for the thermal energy plant being constructed by Marina to serve The
Borgata Resort which is scheduled to open in Summer 2003. Construction of the
thermal plant is currently ahead of schedule.
SJI has raised equity capital over the past three years through its
Dividend Reinvestment Plan (DRP). Participants in SJI's DRP receive newly issued
shares. We offer a 2% discount on DRP investments because it is the most
cost-effective way for us to raise equity capital in the quantities we are
seeking. Through the DRP, SJI raised $7.9 million of equity capital by issuing
243,544 shares in the first nine months of 2002 as compared to $7.8 million of
equity capital by issuing 266,432 shares in the first nine months of 2001. We
anticipate raising approximately $10 million of equity capital through the DRP
in 2002.
Capital Expenditures, Commitments and Contingencies
Capital Expenditures
SJI has a continuing need for cash resources and capital, primarily to
invest in new and replacement facilities and equipment and for environmental
remediation costs. Net construction and remediation expenditures for the first
nine months of 2002 amounted to $55.9 million. We estimate the costs for 2002,
2003 and 2004 at $91.5 million, $70.2 million and $59.2 million, respectively.
Increases in expenditure estimates in 2002 and 2003, compared with 2001 and
2004, reflect construction costs associated with the Marina Energy Thermal
Plant.
SJI-26
Commitments and Contingencies
SJG has certain commitments for both pipeline capacity and gas supply for
which it pays fees regardless of usage. Those commitments average $45.7 million
annually and total $278.5 million over the contracts' lives. Approximately 70%
of the financial commitment under these contracts expires during the next five
years. However, we expect to renew each of these contracts under renewal
provisions as provided in each contract. SJG recovers all prudently incurred
fees through rates via the Levelized Gas Adjustment Clause.
Regulatory Matters
Rate Actions
On November 15, 2001, SJG filed for a $17.6 million reduction to its
Levelized Gas Adjustment Clause (LGAC). The BPU approved the LGAC reduction
effective December 1, 2001. Also on December 1, 2001, SJG implemented recovery
of its October 31, 2001 underrecovered gas costs of $48.9 million over three
years plus interest accrued since April 1, 2001. SJG has recovered $10.6 million
as of September 30, 2002. SJG will also recover interest for the 3-year
amortization period at a rate of 5.75%. In September 2002, SJG filed with the
BPU to maintain its current LGAC rate through October 2003.
On November 15, 2001, SJG filed for a $2.7 million rate increase to recover
the cash related to a 3-year net deficiency in the Temperature Adjustment Clause
(TAC). Additionally, in September 2002, SJG filed for an $8.6 million rate
increase to recover the cash related to a TAC deficiency representing warmer
than normal temperatures for the 2001-2002 winter.
In August 2002, SJG filed for a Societal Benefits Clause (SBC) rate
increase. The SBC recovers costs related to BPU mandated programs, including
environmental remediation costs that are recovered through its Remediation
Adjustment Clause (RAC), energy efficiency and renewable energy program costs
that are recovered through its Comprehensive Resource Analysis (CRA) clause,
consumer education program costs and low income program costs. The requested
rate increase will provide for an annual recovery level of $13.7 million. This
represents an annual increase of approximately $7.0 million over the $6.7
million recovery currently included in rates. As approved by the BPU, SJG is
allowed recovery of interest on any SBC underrecovered balance.
In August 2002, SJG filed a Petition with the BPU seeking to transfer its
appliance service business from the regulated utility into a newly created
unregulated, limited liability company. The newly created company will then have
the flexibility to be more responsive to competition and its customers and
further its service offerings in an unregulated environment.
Other matters are incorporated by reference to Note 7 to the condensed
consolidated financial statements included as part of this report.
SJI-27
Item 3. Quantitative and Qualitative Disclosures About
Market Risks of the Company
Commodity Market Risks - Certain regulated and unregulated SJI subsidiaries
are involved in buying, selling, transporting and storing natural gas for their
own accounts as well as managing these activities for others. As such, these
subsidiaries are subject to market risk due to price fluctuations. To hedge
against this risk, we enter into a variety of physical and financial
transactions including forward contracts, swaps, futures, and options
agreements. To manage these transactions, SJI has a well-defined risk management
policy approved by our board of directors that includes volumetric and monetary
limits. Management reviews reports detailing trading activity daily. Generally,
derivative activities described above are entered into for risk management, not
trading, purposes.
SJI's subsidiaries are structured so that SJG and SJE transact commodities
on a physical basis only and enter into no financial derivative positions
directly. SJRG manages risk for these entities as well as for its own portfolio
by entering into the types of transactions noted above. It is management's
policy, to the extent that it is practical and within predetermined risk
management policy guidelines, to have limited unmatched positions on a deal or
portfolio basis while conducting these activities. As a result of holding open
positions to a minimal level, the financial impact to SJRG of changes in value
of a particular transaction is substantially offset by an opposite change in the
related hedge transaction. As of September 30, 2002, 30% of the counterparties
with which SJRG has unsettled sales contracts carry investment-grade ratings.
The remaining counterparties carried no external ratings, however,
three-quarters had corporate parents with investment-grade ratings, not all of
which provided SJI with parental guarantees.
SJRG and SJE have entered into certain contracts for the purchase, sale,
storage and transportation of natural gas. The net unrealized pre-tax loss on
energy trading contracts of $0.1 million for the nine months ended September 30,
2002 primarily is derived from contracts entered into during the preceding 12
months and it is included as a reduction to operating revenues - nonutility.
SJRG's and SJE's contracts are typically less than 12 months long. The fair
value of these contracts determined under the mark-to-market method as of
September 30, 2002 is as follows (in thousands):
Assets
Maturity Maturity
Source of Fair Value < 1 Year 1-3 Years Total
- -------------------------------------------------- --------------------------------------------------
Prices Actively Quoted NYMEX $ 11,809 $ 1,461 $ 13,270
Other External Sources Basis 10,000 2,893 12,893
Other Methods Inventory 3,477 2 3,479
--------------------------------------------------
Total $ 25,286 $ 4,356 $ 29,642
==================================================
SJI-28
Liabilities
Maturity Maturity
Source of Fair Value < 1 Year 1-3 Years Total
- -------------------------------------------------- --------------------------------------------------
Prices Actively Quoted NYMEX $ 7,848 $ 973 $ 8,821
Other External Sources Basis 6,943 2,360 9,303
Other Methods Inventory 1,562 2 1,564
--------------------------------------------------
Total $ 16,353 $ 3,335 $ 19,688
==================================================
NYMEX (New York Mercantile Exchange) is the primary national commodities
exchange on which natural gas is traded. Basis represents the price of a NYMEX
natural gas futures contract adjusted for the difference in price for delivering
the gas at another location. Inventory represents the market value of natural
gas held in storage determined through a combination of the NYMEX and Basis
methods. Contracts valued under the inventory method in the preceding chart
include gas inventory with a cost of $1.9 million.
A reconciliation of SJI's estimated net fair value of energy trading
contracts follows (in thousands):
Net Energy Trading Assets/Liabilities, January 1, 2002 $ 8,803
Contracts Realized During 2002, Net (2,127)
Other Changes in Fair Value, Net 3,278
---------
Net Energy Trading Assets/Liabilities, September 30, 2002 $ 9,954
=========
Interest Rate Risk - Our exposure to interest rate risk relates primarily
to short-term, variable rate borrowings. A hypothetical 100 basis point increase
in interest rates on $133.6 million of variable rate debt outstanding at
September 30, 2002 would result in a $788,000 increase in our interest expense,
net of tax, on an annual basis. In order to reduce exposure to an increase in
interest rates on our variable rate debt, SJG entered into two interest rate
swap agreements. The swaps effectively fixed the rate on $40 million of variable
rate debt from April 2002 to March 2003 at 3.57%. Our long-term debt at SJG is
issued at fixed rates and, consequently, interest expense is not significantly
impacted by changes in market interest rates. Long-term debt issued to finance
the construction of Marina Energy's thermal plant was initially issued as
floating rate debt and subsequently swapped to a blended fixed rate of 4.59%.
The Marina bonds are prepayable on a monthly basis. SJG prepaid $17.5 million of
9% first mortgage bonds in October 2002. SJG paid a premium of $566,000 to
bondholders in conjunction with that redemption. Given current interest rate
levels, we anticipate redeeming an additional $8.1 million of first mortgage
bonds prior to scheduled maturity during the next 12 months.
SJI-29
Item 4. Controls and Procedures
SJI management, including the Chief Executive Officer and Chief Financial
Officer, have conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this quarterly report has been made
known to them in a timely fashion. There have been no significant changes in
internal controls, or in factors that could significantly affect internal
controls, subsequent to the date the Chief Executive Officer and Chief Financial
Officer completed their evaluation.
PART II -- OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part I,
Item 1, Note 9, beginning on page 17.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
99.1 Certification pursuant to 18 U.S.C.
99.2 Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Form 8-K
None.
SJI-30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTH JERSEY INDUSTRIES, INC.
(Registrant)
Dated: November 13, 2002 By: /s/ Charles Biscieglia
-----------------------------------------------
Charles Biscieglia
Chairman, President & Chief Executive Officer
Dated: November 13, 2002 By: /s/ David A. Kindlick
-----------------------------------------------
David A. Kindlick
Vice President, Treasurer & Chief
Financial Officer
CERTIFICATIONS
I, Charles Biscieglia, certify that:
1. I have reviewed this quarterly report on Form 10-Q of South Jersey
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
SJI-31
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Charles Biscieglia
---------------------------------------
Charles Biscieglia
Chairman, President and Chief Executive
Officer
I, David A. Kindlick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of South Jersey
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
SJI-32
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ David A. Kindlick
-----------------------------------
David A. Kindlick
Vice President, Chief Financial Officer and
Treasurer
SJI-33