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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 March 31, 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 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 May 1, 2003, there were 12,391,861 shares of the registrant's common stock
outstanding.
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- Cover -
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
March 31,
---------------------------------------------
2003 2002
--------------------- ---------------------
Operating Revenues:
Utility $ 216,139 $ 142,181
Nonutility 63,686 34,850
--------------------- ---------------------
Total Operating Revenues 279,825 177,031
--------------------- ---------------------
Operating Expenses:
Cost of Gas Sold - Utility 155,068 87,443
Cost of Sales - Nonutility 56,216 29,348
Operations 12,241 10,393
Maintenance 1,458 1,417
Depreciation 5,834 5,498
Energy and Other Taxes 5,114 3,843
--------------------- ---------------------
Total Operating Expenses 235,931 137,942
--------------------- ---------------------
Operating Income 43,894 39,089
Other Income and Expense:
Equity in Affiliated Companies 187 164
Other (116) (74)
--------------------- -----------------
Total Other Income and Expense 71 90
Interest Charges 3,985 4,648
Preferred Dividend Requirements of Subsidiary 764 764
--------------------- ---------------------
Income Before Income Taxes 39,216 33,767
Income Taxes 16,379 14,049
--------------------- ---------------------
Income from Continuing Operations 22,837 19,718
Discontinued Operations - Net (149) (32)
Cumulative Effect of a Change in Accounting Principle - Net (426) 0
--------------------- ---------------------
Net Income Applicable to Common Stock $ 22,262 $ 19,686
===================== =====================
Basic Earnings Per Common Share:
Continuing Operations $ 1.86 $ 1.65
Discontinued Operations - Net (0.01) (0.00)
Cumulative Effect of a Change in Accounting Principle - Net (0.03) 0.00
--------------------- ---------------------
Basic Earnings Per Common Share $ 1.82 $ 1.65
===================== =====================
Average Shares of Common Stock Outstanding - Basic 12,245 11,914
Diluted Earnings Per Common Share:
Continuing Operations $ 1.85 $ 1.65
Discontinued Operations - Net (0.01) (0.00)
Cumulative Effect of a Change in Accounting Principle - Net (0.03) 0.00
--------------------- ---------------------
Diluted Earnings Per Common Share $ 1.81 $ 1.65
===================== =====================
Average Shares of Common Stock Outstanding - Diluted 12,327 11,949
Dividends Declared per Common Share $ 0.385 $ 0.370
===================== =====================
The accompanying footnotes are an integral part of the financial statements.
SJI-3
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
March 31, December 31,
-------------------------------------------------------
2003 2002 2002
-------------------------------------------------------
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $ 857,218 $ 812,198 $ 846,865
Accumulated Depreciation (241,254) (225,476) (236,813)
Nonutility Property and Equipment, at cost 61,515 31,645 57,950
Accumulated Depreciation (1,433) (1,086) (1,428)
-------------------------------------------------------
Property, Plant and Equipment - Net 676,046 617,281 666,574
-------------------------------------------------------
Investments:
Available-for-Sale Securities 3,386 3,119 3,462
Restricted 960 9,129 2,080
Investment in Affiliate 2,037 1,573 1,849
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Total Investments 6,383 13,821 7,391
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Current Assets:
Cash and Cash Equivalents 15,424 12,315 4,291
Accounts Receivable 158,344 99,636 94,105
Unbilled Revenues 22,097 25,637 33,537
Provision for Uncollectibles (3,392) (2,353) (3,170)
Natural Gas in Storage, average cost 10,458 34,885 41,490
Materials and Supplies, average cost 3,677 3,442 4,156
Energy Trading and Related Assets 21,423 23,575 29,089
Prepaid Taxes - - 2,440
Derivatives 110 - -
Other Prepayments and Current Assets 4,800 3,848 6,761
-------------------------------------------------------
Total Current Assets 232,941 200,985 212,699
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Regulatory and Other Non-Current Assets:
Deferred Fuel Costs - Net 17,964 19,433 31,594
Other Regulatory Assets 70,908 79,213 73,710
Energy Trading and Related Assets 1,928 4,129 2,767
Derivatives 12 731 -
Unamortized Debt Discount and Expense 6,460 6,688 7,086
Other 10,646 5,231 9,939
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Total Regulatory and Other Non-Current Assets 107,918 115,425 125,096
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Total Assets $ 1,023,288 $ 947,512 $ 1,011,760
=======================================================
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)
March 31, December 31,
-------------------------------------------------------
2003 2002 2002
-------------------------------------------------------
Capitalization and Liabilities
Common Equity:
Common Stock $ 15,358 $ 14,902 $ 15,258
Premium on Common Stock 152,800 141,776 150,434
Accumulated Other Comprehensive Loss (7,666) (1,556) (5,902)
Retained Earnings 95,534 82,433 78,002
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Total Common Equity 256,026 237,555 237,792
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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
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Total Preferred Stock and Securities of Subsidiary 36,690 36,690 36,690
-------------------------------------------------------
Long-Term Debt 238,016 261,060 238,016
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Total Capitalization 530,732 535,305 512,498
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Current Liabilities:
Notes Payable 85,600 93,200 166,500
Current Maturities of Long-Term Debt 10,696 9,733 10,696
Accounts Payable 128,263 50,038 76,657
Customer Deposits 7,284 6,363 6,924
Environmental Remediation Costs 5,090 11,308 5,104
Taxes Accrued 23,556 19,878 892
Energy Trading and Related Liabilities 10,567 16,289 15,565
Derivatives 72 - 142
Deferred Income Taxes - Net 21,194 24,280 24,818
Interest Accrued and Other Current Liabilities 14,751 13,682 9,334
-------------------------------------------------------
Total Current Liabilities 307,073 244,771 316,632
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Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 100,689 87,100 97,890
Investment Tax Credits 3,732 4,079 3,819
Pension and Other Postretirement Benefits 17,008 20,014 15,828
Environmental Remediation Costs 47,051 41,423 47,051
Energy Trading and Related Liabilities 1,937 3,294 2,095
Derivatives 2,396 - 2,431
Other 12,670 11,526 13,516
-------------------------------------------------------
Total Deferred Credits
and Other Non-Current Liabilities 185,483 167,436 182,630
-------------------------------------------------------
Commitments and Contingencies (Note 9)
Total Capitalization and Liabilities $ 1,023,288 $ 947,512 $ 1,011,760
=======================================================
The accompanying footnotes are an integral part of the financial statements.
SJI-5
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Three Months Ended
March 31,
----------------------------------------------
2003 2002
--------------------- ---------------------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 22,262 $ 19,686
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 6,427 6,117
Unrealized Gain on Energy Trading and Related Contracts (1,493) (1,658)
Provision for Losses on Accounts Receivable 489 662
Revenues and Fuel Costs Deferred - Net 13,630 19,435
Deferred and Non-Current Income Taxes and Credits - Net 874 2,532
Environmental Remediation Costs - Net 2,800 1,561
Changes in:
Accounts Receivable (53,066) (24,802)
Inventories 31,511 25,269
Prepayments and Other Current Assets (1,961) 172
Prepaid and Accrued Taxes - Net 25,104 21,785
Accounts Payable and Other Accrued Liabilities 57,383 1,714
Other - Net (97) (641)
--------------------- ---------------------
Net Cash Provided by Operating Activities 103,863 71,832
--------------------- ---------------------
Cash Flows from Investing Activities:
Investment in Affiliate (188) (204)
Repayment of Loan to Affiliate 390 100
Proceeds from Sale of Restricted Investments 1,120 13,833
Capital Expenditures, Cost of Removal and Salvage (15,547) (17,273)
--------------------- ---------------------
Net Cash Used in Investing Activities (14,225) (3,544)
--------------------- ---------------------
Cash Flows from Financing Activities:
Net Repayments of Lines of Credit (80,900) (59,160)
Proceeds from Issuance of Long-Term Debt 6,000 10,000
Principal Repayments of Long-Term Debt (6,000) (8,187)
Dividends on Common Stock - (4,471)
Proceeds from Sale of Common Stock 2,448 1,906
Payments for Issuance of Long-Term Debt (53) (26)
--------------------- ---------------------
Net Cash Used in Financing Activities (78,505) (59,938)
--------------------- ---------------------
Net Increase in Cash and Cash Equivalents 11,133 8,350
Cash and Cash Equivalents at Beginning of Period 4,291 3,965
--------------------- ---------------------
Cash and Cash Equivalents at End of Period $ 15,424 $ 12,315
===================== =====================
The accompanying footnotes are an integral part of the financial statements.
SJI-6
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 several 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
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 March 31, 2003 and 2002, we included the net
unrealized pre-tax gain of $1.5 million and $1.7 million, respectively, on
energy trading contracts determined under the mark-to-market method, in
Operating Revenues - Nonutility.
Beginning with the third quarter of 2002, SJI began presenting revenues
and expenses from trading in physical power contracts and from energy-related
derivative contracts on a net basis in our condensed consolidated statements of
income consistent with recent changes in 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
SJI-7
reclassified Operating Revenues - Nonutility and Cost of Sales - Nonutility for
the three months ended March 31, 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).
Management believes 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. As of March 31, 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.
Also in April 2002, South Jersey Gas Company (SJG) entered into two
interest rate swap contracts that effectively fixed the interest rate at 3.57%
through March 15, 2003 on $40.0 million of SJG's debt outstanding under its bank
lines. The swap contracts expired as scheduled and borrowings under SJG's bank
lines are currently unhedged.
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 March 31, 2003 and
2002, the market value of these swaps was $(2.4) and $0.7 million, respectively,
which represents the amount we would have to pay/be paid by 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 March
31, 2003 and 2002, we calculated the swaps to be highly effective; therefore, we
SJI-8
record the offset to the hedge asset, 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 March 31, 2003, SJG had
accrued amounts in excess of actual removal costs incurred totaling $42.5
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. SJI's policy is to account for this
compensation using the intrinsic value method. The provisions of this statement
currently have no impact on SJI's financial statements.
Other Regulatory Assets - Other Regulatory Assets consisted of the
following items (in thousands):
SJI-9
Years March 31 March 31 December 31
Remaining 2003 2002 2002
- -----------------------------------------------------------------------------------------------------------------
Environmental Remediation Costs:
Expended - Net 7 $ 3,656 $ 11,259 $ 6,470
Liability for Future Expenditures - 48,211 48,790 48,211
Income Taxes - Flowthrough
Depreciation 8.5 8,352 9,330 8,597
Postretirement Benefit Costs 9.7 3,686 4,064 3,780
Gross Receipts and Franchise Taxes 3.8 1,700 2,143 1,811
Other - 5,303 3,627 4,841
-------------------------- -----------
Total Other Regulatory Assets $ 70,908 $ 79,213 $ 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 $3.3 million and $2.1 million, including interest,
as of March 31, 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.
Summarized operating results of the discontinued operations for the
three months ending March 31 were (in thousands):
SJI-10
2003 2002
--------------------------
Loss before Income Taxes:
Sand Mining $ (210) $ (31)
Construction (8) (6)
Fuel Oil (11) (15)
Income Taxes 80 20
--------------------------
Loss from Discontinued Operations - Net $ (149) $ (32)
==========================
Earnings Per Common Share from
Discontinued Operations - Net $ (0.01) $ (0.00)
==========================
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 Air Logics,
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 is scheduled for completion 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-11
2003 2002
----------------------------
Beginning Balance, January 1 12,206,474 11,860,990
New Issues During Year:
Dividend Reinvestment Plan 48,417 59,716
Employees' Stock Ownership Plan 0 857
Stock Option, Stock Appreciation Rights
and Restricted Stock Award Plan 32,005 0
----------------------------
Ending Balance, March 31 12,286,896 11,921,563
============================
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
$2.4 million and $1.8 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 82,100 and 34,673 shares for the three months ended March 31, 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 March 31, 2003 and
2002, SJI had -0- and 2,000 options outstanding, respectively, all exercisable
at $24.69 per share. No options were granted in 2003 or 2002. When granted, SJI
values stock options to employees using the intrinsic value method. 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 March 31, 2003, SJI reserved 1,117,290 and 15,566 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 March 31,
2003 and 2002, these residual proceeds totaled $1.0 and $9.1 million,
respectively.
SJI-12
Margin Account - SJRG maintains a margin account with a national
investment firm to support its energy trading activities. As of March 31, 2003
and 2002, the account reflected a $1.7 million and $0.2 million 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 months ended March 31 is presented below (in thousands):
2003 2002
--------------------------------
Operating Revenues:
Gas Utility Operations $ 239,936 $ 154,183
Wholesale Gas Operations 4,366 2,974
Retail Gas and Other Operations 58,731 32,411
On-Site Energy Production 1,019 7
--------------------------------
Subtotal 304,052 189,575
Intersegment Sales (24,227) (12,544)
--------------------------------
Total Operating Revenues $ 279,825 $ 177,031
================================
Operating Income:
Gas Utility Operations $ 38,307 $ 34,452
Wholesale Gas Operations 1,903 2,748
Retail Gas and Other Operations 3,720 1,799
On-Site Energy Production 209 7
General Corporate (245) 83
--------------------------------
Total Operating Income $ 43,894 $ 39,089
================================
Depreciation and Amortization:
Gas Utility Operations $ 6,371 $ 6,087
Wholesale Gas Operations 3 3
Retail Gas and Other Operations 23 20
On-Site Energy Production 23 -
Discontinued Operations 7 7
--------------------------------
Total Depreciation and Amortization $ 6,427 $ 6,117
================================
SJI-13
Property Additions:
Gas Utility Operations $ 11,704 $ 9,570
Wholesale Gas Operations - -
Retail Gas and Other Operations 47 3
On-Site Energy Production 3,675 7,523
Discontinued Operations - 1
--------------------------------
Total Property Additions $ 15,426 $ 17,097
================================
Identifiable Assets:
Gas Utility Operations $ 870,727 $ 836,960
Wholesale Gas Operations 76,269 52,551
Retail Gas and Other Operations 48,726 26,211
On-Site Energy Production 64,269 41,870
Discontinued Operations 2,317 2,369
--------------------------------
Subtotal 1,062,308 959,961
Corporate Assets 41,164 26,225
Intersegment Assets (80,184) (38,674)
--------------------------------
Total Identifiable Assets $1,023,288 $ 947,512
================================
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 months ended March
31 are as follows (in thousands):
SJI-14
2003 2002
----------------------
Net Income Applicable to Common Stock $ 22,262 $ 19,686
======================
Other Comprehensive (Loss) Income:
Change in Fair Value of Investments - Net * (40) -
Change in Fair Value of Energy Trading and Related
Assets / Liabilities - Net * (1,828) -
Change in Fair Value of Interest Rate
Swaps - - Net * 104 131
----------------------
Total Other Comprehensive (Loss) Income (1,764) 131
----------------------
Comprehensive Income $ 20,498 $ 19,817
======================
* Determined using an effective tax rate of 40.85%.
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") charge. 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 March 31, 2003, 92,897 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 as well as other costs of
service, including deferred costs, through tariffs.
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 $7.5 million as of March 31, 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. We are also recovering interest for the
SJI-15
3-year amortization period at a rate of 5.75%. As of March 31, 2003, the
remaining deferred underrecovered balance totaled $25.2 million.
During 2002, the BPU convened a gas policy group to address Basic Gas
Supply Service (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 which was submitted by the gas policy group. 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. 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.
In September 2002, SJG filed with the BPU to maintain its current BGSS
rate through October 2003. However, due to recent price increases in the
wholesale market, in February 2003 SJG filed an amendment to the September 2002
filing. The filing proposed an $11.6 million increase to SJG's annual gas costs
revenues.
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.
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 $93.9 million as of March 31, 2003.
SJI-16
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.
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 March 31, 2003, SJI had issued $100.1 million of parental guarantees on
behalf of its subsidiaries. Of this total, $69.2 million expire within one year,
$71.3 million expire within two years and $28.8 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 March 31, 2003, these guarantees support $26.6 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 March 31, 2003.
As of March 31, 2003, SJI also provided $45 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 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
SJI-17
to make at 11 of its sites. This Policy will be in force until 2024 at 10 sites
and until 2029 at one site.
Since the early 1980s, SJI accrued environmental remediation costs of
$138.1 million, of which $86.0 million has been spent as of March 31, 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.
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 after they are spent over 7-year
periods.
As of March 31, 2003, we reflected SJG's unamortized remediation costs
of $3.7 million on the condensed consolidated balance sheet under the caption
Regulatory Assets. Since implementing the RAC in 1992, SJG has recovered $37.4
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 March 31, 2003.
SJI-18
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
298,767 customers at March 31, 2003 compared with 290,604 customers at March 31,
2002. 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 its own sales and for some of its customers; and
* 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 natural gas sales to the casino industry in
Atlantic City, N.J. 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, is scheduled to be fully operational by the summer of 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
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.
SJI-19
The New Jersey Board of Public Utilities (BPU) has reviewed and
approved most of the items shown as regulatory assets through specific orders.
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 either Emerging Issues Task Force Issue Number 98-10 or 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 bill 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 base 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 can
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 recognition may result from the various recovery clauses approved by the
BPU (See Regulatory Matters) without shifting profits between periods.
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
SJI-20
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 March 31, 2003, SJG had
accrued amounts in excess of actual removal costs incurred totaling $42.5
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.
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; 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 $35 million of 8.35% SJG-Guaranteed
Mandatorily Redeemable Preferred Securities outstanding. SJG may redeem these
securities at a price equal to 100% of the principal amount at any time. The
securities currently trade on the New York Stock Exchange under the symbol
SJI.T.
SJI-21
Customer Choice Legislation - All residential natural gas customers in
New Jersey can choose their gas supplier under the terms of the Electric
Discount and Energy Competition Act of 1999. As of March 31, 2003, 92,897 SJG
residential customers chose a natural gas commodity supplier other than the
utility. This number increased from 52,802 at March 31, 2002 as marketers were
able to offer natural gas at prices competitive with those available under
regulated utility tariffs. Customers purchasing natural gas from providers other
than the utility are charged for gas costs by the marketer, not the utility. The
resulting decrease in SJG's revenues is offset by a corresponding decrease in
SJG's gas costs. While customer choice can reduce utility revenues, it does not
negatively affect SJG's net income or financial condition. The BPU continues to
allow for full recovery of natural gas costs through the Basic Gas Supply
Service as well as other costs of service including deferred costs, through
tariffs. SJI has benefited from customer choice legislation as SJE has
successfully competed for and profited from its gas commodity customers.
Temperature Adjustment Clause -
SJG's Board of Public Utilities approved Temperature Adjustment Clause
(TAC) had the following impacts on 2003 and 2002 first quarter net earnings:
2003 2002
---------- ----------
TAC Adjustment (Decrease) Increase to
Net Income ($ in thousands)
Quarter Ended 3/31 $ (1,400) $ 3,000
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 $74.0 million in the
first quarter of 2003 compared with the prior year period. The increase was
primarily due to three factors. First, weather in the first quarter of 2003 was
27.7% colder than the prior year period. Second, off-system sales revenues
increased due to higher prices for natural gas sold and slightly higher unit
sales volume in 2003 than in the prior year. Third, SJG's total customers
increased from 290,604 as of March 31, 2002 to 298,767 as of March 31, 2003.
Partially offsetting the effect of these factors was a 76% increase in the
number of residential customers purchasing their gas from a source other than
the utility. The decline in customers who purchased their natural gas from the
utility 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
SJI-22
impacted by warmer weather. Weather in the first quarter of 2003 was 27.7%
colder than in 2002 and 6.3% colder for the year than the 20-year TAC average.
The following is a comparison of operating revenue and throughput for
the three month period ended March 31, 2003 vs. the same period ended March 31,
2002.
March 31,
2003 2002
------------- -------------
Operating Revenues (Thousands):
Firm
Residential $ 89,308 $ 76,099
Commercial 27,430 22,544
Industrial 2,367 1,709
Cogeneration & Electric Generation 1,322 616
Firm Transportation 28,060 14,264
------------- -------------
Total Firm Operating Revenues 148,487 115,232
------------- -------------
Interruptible 491 239
Interruptible Transportation 195 475
Off-System 88,730 35,753
Capacity Release & Storage 1,303 1,694
Other 730 790
Intercompany Sales (23,797) (12,002)
------------- -------------
Total Operating Revenues $ 216,139 $ 142,181
============= =============
Throughput (MMcf):
Firm
Residential 8,055 7,142
Commercial 2,729 2,334
Industrial 105 91
Cogeneration & Electric Generation 108 87
Firm Transportation 11,063 7,483
------------- -------------
Total Firm Throughput 22,060 17,137
Interruptible 36 48
Interruptible Transportation 411 957
Off-System 11,730 11,303
Capacity Release & Storage 5,993 6,646
------------- -------------
Total Throughput 40,230 36,091
============= =============
SJI-23
Total gas throughput increased 11.5% to 40.2 billion cubic feet (Bcf)
in the first quarter of 2003. 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 $28.8 million for the first quarter of 2003 compared to the first
quarter of 2002. Most of the increase was due to the significant customer growth
experienced by SJE, evidenced by the addition of over 33,000 residential and
2,100 commercial natural gas customers over the last twelve months. Higher
natural gas prices and significantly colder weather also contributed to this
increase.
Cost of Gas Sold - Utility - Cost of gas sold - utility increased $67.6
million for the first quarter of 2003 compared with the same period in 2002 due
principally to a 29% 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 first
quarter of 2003 averaged $6.80 per decatherm (dt) compared with $4.56/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 -
utility. We defer and address 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 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 $26.9
million in the quarter ended March 31, 2003 compared to the quarter ended March
31, 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
March 31,
2003 vs. 2002
------------------
Utility:
Other Production Expense $ 23
Transmission 31
Distribution 221
Customer Accounts and Services (127)
Sales (2)
Administration and General 725
Nonutility 977
----------
Total Operations $ 1,848
==========
SJI-24
Distribution expenses increased 11.5% in the first quarter of 2003
compared with the same period in 2002. This 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 quarter 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
quarter of 2003, as compared with 2002.
Administrative and General (A&G) expenses increased in the first
quarter of 2003 compared with the same period in 2002 because of increasing
healthcare, pension and insurance costs.
Nonutility expenses in 2003 rose primarily due to higher customer
acquisition costs resulting from substantial growth in SJE's customer base.
Other Operating Expenses - A summary of principal changes in other
consolidated operating expenses (in thousands):
Three Months Ended
March 31,
2003 vs. 2002
------------------
Maintenance $ 41
Depreciation 336
Energy and Other Taxes 1,271
Depreciation was higher due to SJG's increased investment in property,
plant and equipment. Changes in Energy and Other Taxes relate primarily to
changes in volumes of gas sold and transported by SJG.
Interest Charges - Interest charges were lower in the first quarter of
2003 compared with the prior year period 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, short-term
debt. We expect to refinance these refundings during 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.
SJI-25
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 March 31, 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 for the quarter
ended March 31, 2003 was $22.3 million, or $1.82 per share, compared with $19.7
million, or $1.65 per share for the quarter ended March 31, 2002. Reasons for
the increases in net income are detailed above.
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") charge. Thereafter, SJG keeps 20% of the pre-tax margins as we have
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 March 31, 2003, 92,897 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 as well as other costs of
service, including deferred costs, through tariffs.
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 $7.5 million as of March 31, 2003.
SJI-26
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. We are also recovering interest for the
3-year amortization period at a rate of 5.75%. As of March 31, 2003, the
remaining deferred underrecovered balance totaled $25.2 million.
During 2002, the BPU convened a gas policy group to address Basic Gas
Supply Service (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 which was submitted by the gas policy group. 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. 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.
In September 2002, SJG filed with the BPU to maintain its current BGSS
rate through October 2003. However, due to recent price increases in the
wholesale market, in February 2003 SJG filed an amendment to the September 2002
filing. The filing proposed an $11.6 million increase to SJG's annual gas costs
revenues, and was approved by the BPU in April 2003.
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.
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
activities; the timing of
SJI-27
construction and remediation expenditures and related permanent financings;
mandated tax payment dates; and both discretionary and required repayments of
long-term debt.
Lines of credit available to SJI totaled $182.0 million at March 31,
2003, of which $85.6 million was used. All but $10 million of these lines are
available through five commercial banks on an uncommitted basis. The banks and
SJI review and renew the lines annually. The $10 million line is extended on a
committed basis, maturing May 2003 by a sixth commercial bank. $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.
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. Current maturities on long-term debt over
the next five years are as follows: $10.7 million per year in 2003 through 2005;
$9.0 million in 2006; and $8.4 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 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.
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 $1.5 million of equity capital by issuing
48,417 shares for the quarter ended March 31, 2003 and $2.0 million of equity
capital by issuing 59,716 shares for the quarter ended March 31, 2002. We
anticipate raising approximately $16 million of equity capital through the DRP
in 2003.
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.
Those commitments as of March 31, 2003 average $44.1 million annually and total
SJI-28
$292.6 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
Market Risks
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 March 31, 20032, SJRG had $12.8 million of accounts receivable under sales
contracts. Of that total, 93% 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. We derived a net unrealized pre-tax gain on these energy
trading and related contracts of $1.5 million and $1.7 million at March 31, 2003
and 2002, respectively, 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 March 31, 20032 is as
follows (in thousands):
Assets
Maturity Maturity
Source of Fair Value < 1 Year 1-3 Years Total
-------------------- ----------- ----------- -----------
Prices Actively Quoted NYMEX $ 16,153 $ 1,183 $ 17,336
Other External Sources Basis 5,270 745 6,015
----------- ----------- -----------
Total $ 21,423 $ 1,928 $ 23,351
=========== =========== ===========
SJI-29
Liabilities
Maturity Maturity
Source of Fair Value < 1 Year 1-3 Years Total
-------------------- ----------- ----------- -----------
Prices Actively Quoted NYMEX $ 8,528 $ 1,150 $ 9,678
Other External Sources Basis 2,039 787 2,826
----------- ----------- -----------
Total $ 10,567 $ 1,937 $ 12,504
=========== =========== ===========
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 Quarter Ended March 31, 2003, Net (392)
Other Changes in Fair Value from Continuing and
New Contracts, Net (2,957)
-------------
Net Energy Trading and Related Assets, March 31, 2003 $ 10,847
=============
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 March 31, 2003 was $85.6 million and averaged $120.5 million
for the first quarter. A hypothetical 100 basis point (1%) increase in interest
rates on our average variable rate debt outstanding would result in a $711,000
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 March
2003, our average interest rate on variable rate debt was 2.13%.
To reduce exposure to an interest rate increase on our variable rate
debt, SJG entered into two interest rate swap agreements. The swaps fixed the
rate on $40 million of variable rate debt from April 2002 to March 2003 at
3.57%. The swap contracts expired as scheduled in March and borrowings under our
bank lines are currently unhedged. 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. SJG also redeemed an additional $5.1 million
of 10.25% first mortgage bonds prior to scheduled maturity in May 2003. 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 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.
SJI-30
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-31
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
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.
SJI-32
(b) Form 8-K
Dated April 16, 2003 South Jersey Industries issued a press
release providing an earnings report for
the first quarter of 2003, ending March 31.
Item 5, "Other Events"
Item 9, "Regulation FD Disclosure"
Item 12, "Disclosure of Results of
Operations and Financial Conditions"
Dated May 5, 2003 South Jersey Industries issued a press
release setting forth 2003 earnings per
share expectations.
Item 9, "Regulation FD Disclosure"
SJI-33
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: May 14, 2003 By: /s/ Charles Biscieglia
-------------------------------------
Charles Biscieglia
Dated: May 14, 2003 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-34
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: May 14, 2003 /s/ Charles Biscieglia
-------------------------------------------
Charles Biscieglia
Chairman 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;
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:
SJI-35
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: May 14, 2003 /s/ David A. Kindlick
-------------------------------------------
David A. Kindlick
Vice President, Chief Financial Officer and
Treasurer
SJI-36