Exhibit 13
South Jersey Industries
2000 Annual Report to Shareholders
YOU
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WHERE WE PUT ALL OF OUR ENERGY
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2 Chairman's Letter to Shareholders
4 SJI Reports Record Earnings
SJI Hits Jackpot with Borgata Contract
5 The Lowdown on the High Cost of Gas
6 Energy Choice Now Available to All NJ Residents
7 SJG Expands Warranty Program
Meter Reading Partnership a Success
Cold Snap Prompts Record Natural Gas Use
SJG Experiences Work Stoppage
8 Emerging Markets Opening New Doors
9 Region's Growth Fuels Customer Additions
10 AirLogics, LLC Creates Profits for SJE
11 SJE Shines from Retrofit Profits
Financial Highlights
12 Management's Discussion
16 Consolidated Financial Statements
20 Notes to Consolidated Financial Statements
26 Quarterly Financial Data
27 Comparative Operating Statistics
28 SJI Directors and Officers
South Jersey Industries is an energy services holding company for South Jersey
Gas and South Jersey Energy. South Jersey Gas provides natural gas utility
service to residential, commercial and industrial customers in New Jersey's
seven southern counties. The company also sells natural gas to wholesale
customers in the interstate market. SJG provides residential HVAC and appliance
repair service and warranty programs, and sells natural gas appliances and
equipment at its retail Natural Gas Advantage Stores. South Jersey Energy is a
licensed natural gas and electricity supplier for residential, commercial and
industrial customers; provides energy consultation services to help commercial
and industrial facilities reduce their overall energy costs; and provides
companies with a new, real-time environmental air monitoring system used during
environmental cleanups. To learn more about SJI and its subsidiaries, please
visit www.sjindustries.com.
2000 Highlights
Five-Year Summary of Selected Financial Data
(in Thousands Where Applicable)
South Jersey Industries, Inc. and Subsidiaries
Year Ended December 31,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Operating Results:
Operating Revenues $515,928 $393,212 $333,010 $348,567 $355,458
======== ======== ======== ======== ========
Operating Income $ 49,031 $ 45,887 $ 35,713 $ 38,642 $ 38,559
======== ======== ======== ======== ========
Income Applicable to Common Stock:
Continuing Operations $ 24,665 $ 21,977 $ 13,444 $ 18,429 $ 18,265
Discontinued Operations - Net (1) (481) (289) (2,458) (2,633) 12,233
-------- -------- -------- -------- --------
Net Income Applicable to Common Stock $ 24,184 $ 21,688 $ 10,986 $ 15,796 $ 30,498
======== ======== ======== ======== ========
Total Assets $869,979 $766,925 $748,095 $670,601 $658,381
======== ======== ======== ======== ========
Capitalization:
Common Equity $201,739 $185,275 $169,234 $173,499 $172,731
Preferred Stock and Securities of Subsidiary 36,804 37,044 37,134 37,224 2,314
Long-Term Debt 204,981 183,561 194,710 176,360 149,736
-------- -------- -------- -------- --------
Total Capitalization $443,524 $405,880 $401,078 $387,083 $324,781
======== ======== ======== ======== ========
Ratio of Income from Continuing Operations (Before Income
Taxes & Fixed Charges) to Fixed Charges 2.8 2.6 2.1 2.4 2.4
======== ======== ======== ======== ========
Earnings Applicable to Common Stock
(Based on Average Shares):
Continuing Operations $ 2.16 $ 2.01 $ 1.25 $ 1.71 $ 1.70
Discontinued Operations - Net (1) (0.04) (0.02) (0.23) (0.24) 1.14
-------- -------- -------- -------- --------
Earnings per Common Share $ 2.12 $ 1.99 $ 1.02 $ 1.47 $ 2.84
======== ======== ======== ======== ========
Return on Average Common Equity (2) 12.7% 12.4% 7.9% 10.7% 11.1%
======== ======== ======== ======== ========
Share Data:
Number of Shareholders 9.1 9.7 10.4 11.4 12.1
Average Common Shares 11,401 10,922 10,776 10,763 10,732
Common Shares Outstanding at Year End 11,500 11,152 10,779 10,771 10,757
Dividend Reinvestment Plan:
Number of Shareholders 5.0 5.4 5.5 6.0 6.1
Number of Participating Shares 1,273 2,518 1,371 1,440 2,845
Book Value at Year End $ 17.54 $ 16.61 $ 15.70 $ 16.11 $ 16.06
Dividends Declared $ 1.46 $ 1.44 $ 1.44 $ 1.44 $ 1.44
Market Price at Year End $ 29.75 $ 28.44 $ 26.19 $ 30.31 $ 24.38
Dividend Payout:
From Continuing Operations 66.8% 71.0% 115.4% 84.1% 84.6%
From Total Net Income 68.1% 71.9% 141.2% 98.1% 50.7%
Market-to-Book 1.7 1.7 1.7 1.9 1.5
Price Earnings Ratio (2) 13.8 14.1 21.0 17.7 14.3
<FN>
(1) Represents discontinued business segments: wholesale electric operations discontinued in 1999, construction operations sold in
1997, sand mining and distribution operations sold in 1996, and fuel oil operations with related environmental liabilities in
1986 (See Note 3 to Consolidated Financial Statements).
(2) Calculated based on Income from Continuing Operations.
</FN>
- 1 -
Letter to Shareholders
Dear Fellow Shareholders:
Three years ago, we reached a pivotal point in South Jersey Industries' history
as our new management team wrestled with the implications of the imminent
deregulation of New Jersey's residential energy market. The SJI of the future
had to be market sensitive and customer centered to realize our goal of
consistent improvement to shareholder value. Policies, practices,
organizational approaches, management style and corporate culture needed to
change to conform to, and complement, an array of energy-related products and
services either in development or already being offered to customers. Today, as
we begin a new millennium, I am pleased with the strides we've made and proud
of the new image and corporate identity we've established.
The results of this corporate renovation were record earnings in consecutive
years, outpacing our annual objectives and the financial community's
expectations. Indicating its confidence in the company's ability to sustain
performance, SJI's board increased the dividend in January 2000, and again in
January 2001. Our new tag line, "Where we put all of our energy," pertains not
just to the region we serve, but also to the groups of people that contribute
to our success -- our shareholders, business partners, customers, and
employees. For SJI, long-term prosperity is truly centered around the
communities we serve. This year's annual report, presented in magazine format,
- 2 -
intends to give the reader a sense of the variety and diversity of activities
that now contribute to bottom line performance.
As you read each article and consider what today's SJI family of companies has
to offer, we hope you will conclude as we have, that the tried and true natural
gas utility of the past has emerged as the region's full service energy company
for the future.
Reaching Wall Street
Our campaign to increase shareholder return delivered both record earnings (see
SJI Reports Record Earnings) and Wall Street attention. In a year which was the
worst for stocks since 1981, and the first negative year for the major stock
market averages since 1990, SJI produced total shareholder return of 10.14
percent. Earnings from continuing operations exceeded the financial community's
estimates by $0.07 per share or 3.3 percent. By year's end, six brokerage
houses covered SJI stock as Edward D. Jones and A.G. Edwards joined our list of
analysts. To help us reach institutional buyers, we've teamed with Christensen
& Associates, an investor relations consultant with energy industry expertise.
Partnering for Progress
Sound business partnerships can open new opportunities for growth and profit.
"AirLogics, LLC Creates Profits for SJE," tells how SJE's relationship with GZA
GeoEnvironmental, Inc. resulted in the formation of AirLogics and a patent for
its real-time air monitoring technology.
"Meter Reading Partnership a Success" talks about another profitable venture.
In its first full year, Millennium Account Services, LLC provided significant
cost savings to its utility customers while exceeding profit expectations by
some 87 percent. Another new partnership being created in 2001, Measurement
Solutions International - Northeast, LLC, will provide a full range of metering
and measurement services to utilities and energy service providers in the
Northeast.
Connecting with Customers
We continued to set the stage for long-term customer relationships by putting
their needs first and foremost in our business approach. For residential
consumers, we extended the service hours where they can still have their
problems solved with a human rather than a machine. We now offer a wider
variety of heater and appliance warranty plans (see "SJG Expands Warranty
Program"). And we've begun providing more specialized services to commercial
clients. "SJI Hits Jackpot with Borgata Contract" discusses a model, real-world
execution of SJI's strategy for the future. Here, three SJI companies will
provide a broad array of energy services for the next 20 years with outstanding
prospects for expansion and a return exceeding that of our utility business.
The article, "Emerging Markets Opening New Doors," tells how unconventional
uses for gas are increasing gas load and paving the way to new profits. And,
"SJE Shines from Retrofit Profits" shows how helping customers cut their energy
costs can create a win-win scenario and instant credibility for future energy
deals.
Positioning ourselves through strong marketing, client satisfaction and a
favorable image allows SJI to expand with South Jersey's economy and
population. "Region's Growth Fuels Customer Additions" reveals the prospects
associated with the planned and expected economic development in the region
served by SJG. The company added 7,451 customers in 2000, an annual customer
growth rate of 2.7 percent. Targeted promotions to increase natural gas use by
existing customers are ongoing, as significant opportunities still exist in
this market.
Our Future is You
Accepting change is rarely easy. In today's information age, acceptance is no
longer an option and anticipation is a requisite for survival and success. The
last two years are but the beginning of what we know will be continued success
for the company and its shareholders. We thank you for giving us the
opportunity to establish SJI as a company that knows its customers, its
community and its plan for the future. For that very reason, we'll continue
putting all of our focus on you.
Sincerely,
Charles Biscieglia
Chairman & CEO
South Jersey Industries, Inc.
February 14, 2001
- 3 -
SJI Hits Jackpot
With Borgata Contract
SJI subsidiary, Marina Energy LLC, reached high roller status when it signed a
20-year contract for heating, hot water, and cooling for Atlantic City's
newest casino, The Borgata Resort. The $1 billion casino also awarded Marina
Energy a 20-year contract to supply its electricity, which Marina will
purchase from SJI's non-regulated supplier, South Jersey Energy. South Jersey
Gas will deliver the natural gas to this facility. This is believed to be the
largest energy contract ever executed in the casino industry and one of the
largest ever in South Jersey.
The Borgata contract opens the doors to major growth and earnings potential for
SJI and its subsidiaries. Slated to open in 2003, the 4-million-square-foot
resort is located in the Marina District's 150-acre hotbed of casino growth
called the H-Tract. With other casino developers looking to build in the
H-Tract, SJI stands to gain new gaming clients in the next five years.
To serve The Borgata, Marina Energy is building a $40 million district heating
and chilling plant on a 40-acre site adjacent to the casino's property. The
plant will use natural gas to generate 12,850 gallons per minute of chilled
water for cooling and 5,000 gallons per minute of hot water for heating and
commercial use. With three of its subsidiaries profiting from the deal, SJI
expects a significant 20-year revenue stream from the contract.
According to SJI President Charles Biscieglia, the plant's revenue generation
could accelerate. He said Marina Energy is currently in discussions with
Harrah's and neighboring casinos for similar services. In November, MGM/Mirage
also announced plans to begin developing a casino on the H-Tract.
So that it can accommodate the energy needs of future casinos, Marina Energy
designed the heating and chilling plant for easy expansion. Biscieglia added
the company could even extend its options and provide other energy-related
services to meet its customer's needs.
"Once this plant is finished, we only need to make marginal revisions to serve
new clients," Biscieglia explained. "If this happens, we could actually triple
Marina Energy's revenues. Beyond 2003, SJI projects earnings growth to exceed
10 percent per year. Additional contracts with H-Tract casino properties could
double our profits from that site and boost our annual contribution from
non-regulated businesses to 20 percent."
SJI Reports Record Earnings
South Jersey Industries set record earnings for the second year in a row.
Earnings from continuing operations in 2000 reached $24.7 million, compared
with $22 million in 1999. The record earnings resulted from strong performance
from both non-regulated and regulated operations. South Jersey Energy
contributed $2.5 million to net income in 2000, more than double what it
contributed last year, which was a record earnings year for SJE. This
outstanding performance resulted from the wholesale and retail natural gas and
electric business segments, as well as the air monitoring business.
South Jersey Gas reported net income of $21.8 million in 2000, compared with
$20.4 million in the previous year. SJG had higher income from off-system sales
and 7,451 additional customers.
SJI's earnings per share from continuing operations reached a record $2.16 in
2000, compared with $2.01 in 1999, a 7.5 percent improvement. In January 2000,
the board of directors raised the annual dividend to $1.46 per share reflecting
the company's commitment to improving total shareholder value. The market
recognized SJI's performance, providing investors in SJI's stock with a total
return, including reinvested dividends, of 10.14 percent. In January 2001,
SJI's Board of Directors again increased the annual dividend to $1.48 per
share, reflecting its commitment to consistent and sustainable dividend growth.
A combination of planning, strong business lines and a focus on a common vision
produced the record performance and positions SJI to set a new earnings record
every year.
- 4 -
The Lowdown on the High Cost of Gas
THIS YEAR'S BIG STORY was the record-breaking market price of the natural gas
commodity. In less than a year, wellhead prices skyrocketed from under $2/Mcf
to over $9/Mcf. By November, the increase in wellhead prices forced local
distribution companies throughout the nation to raise their rates as much as
50 percent.
South Jersey Gas increased its Levelized Gas Adjustment Clause rates in
November and December to initiate recovery of these costs. The New Jersey Board
of Public Utilities is considering further increases to fully pass through
these costs to consumers. The LGAC does not directly impact earnings since SJG
only passes along gas costs to customers and doesn't profit from the natural
gas it sells.
"Regardless of what the market brings, we're doing everything we can to
insulate our customers -- and shareholders -- from the sticker shock the nation
is facing," explained Dave Kindlick, senior vice president, finance and rates.
IT'S ABOUT SUPPLY & DEMAND So what caused gas prices to jump? The situation
was precipitated by the basic laws of supply and demand.
In 1998-99, huge reserves of natural gas existed because of warmer winter
weather. This condition forced gas prices to extreme lows. In response,
producers cut back on drilling because low wholesale prices affected their
ability to profit from production. Meanwhile, homes, businesses, factories and
electric generation facilities increased their consumption and supplies
tightened. In a very short time, prices quadrupled.
With the more attractive wholesale price, producers increased their efforts and
the number of rigs drilling for natural gas more than doubled since last
spring. The American Gas Association reports the industry is looking at the
largest number of natural gas well completions in the last 15 years. There is,
however, a historic time lag between increased drilling and price response.
Traditional natural gas market dynamics are unable to explain wholesale market
prices in the $9 range, and the economics of production don't support prices
that dipped below $2 in 1998 and 1999.
In the meantime, SJG continues to tightly manage its gas portfolio to guard
against steeper rates.
"In a market this volatile, the adjustable LGAC mechanism will allow us to
respond to price changes as they occur," Kindlick said. "As natural gas prices
drop and we recover our costs, we'll file to reduce our LGAC rate and pass the
savings onto our customers."
- 5 -
Energy Choice
Now Available to All NJ Residents
In New Jersey, 2000 marked the first full year of energy choice for residential
consumers. South Jersey Gas encouraged customers to shop for a supplier through
advertising and public relations outreach. Participating in the statewide NJ
EnergyChoice Consumer Education Program, SJG contributed to the campaign's
success in reaching education goals set by the New Jersey Board of Public
Utilities. The campaign focused on informing residential and small business
consumers about their ability to shop for an energy supplier, as well as how to
shop. SJG supplemented the statewide initiative with its own local program
geared toward reaching minority, elderly and low-income consumers.
"Gas commodity costs are a pass-through to customers, therefore, we don't make
a profit on gas sales," explained Dave Kindlick, SJG senior vice president,
finance and rates. "We want our customers to understand that our earnings
aren't impacted if they choose another supplier and it's in their best
interest to shop for the best price," he added.
SJE REAPS BENEFITS South Jersey Energy reaped the benefits of NJ EnergyChoice
early in the year, taking advantage of a larger target market for both natural
gas and electricity customers. Relying on a well-recognized brand and its
success in SJG's natural gas pilot choice program, SJE succeeded in enrolling
approximately 9,000 additional electricity customers in 2000.
In the first five months of the year, SJE experienced 30 percent growth in the
residential natural gas market. In the second half of the year, market prices
increased well beyond the utility price structure, which was not adjusted
upward until November. "During times of market volatility, SJE has to be
flexible enough to advise and work with customers to help them find the best
energy alternative," said Ed Graham, president of SJE. "Sometimes that
alternative is SJE and at other times it's the utility. As utility rates
reflect market conditions we will provide an opportunity for savings and
aggressively pursue new residential customers," Graham explained.
SJE continued to win many competitive bids to supply natural gas to large
customers. In May, the Bridgeton Housing Authority awarded SJE a gas supply
contract. "Our local expertise in the natural gas market enabled us to submit a
very competitive bid, yielding savings for the housing authority and ultimately
taxpayers," said Graham. Also, SJE was awarded natural gas contracts by the
Atlantic County Utilities Authority, Rowan University and for State facilities
in South Jersey. Service begins in January 2001.
SJE is the leader in several key market segments, serving over 50 percent of
the heavy industrial customers in South Jersey and all of the casinos through
its subsidiary, SJ Enertrade. The company also achieved strong growth in the
light industrial, food processing and healthcare markets.
- 6 -
SJG Expands
Warranty Program
Sporting a new logo and a new marketing strategy, SJG's Repair Team stands
ready to provide satisfaction guaranteed, around-the-clock service for Service
Sentry warranty customers, and others needing appliance repairs. "With several
new, trained technicians increasing our workforce to 54 employees, we can now
provide faster service with expanded capability," said Rich Jackson, senior
vice president, operations.
In 2000, SJG introduced a new warranty program that protects customers against
costly repairs for internal gas piping in their home. Using a low-cost
approach, in just seven months the company enrolled 7,896 new customers in the
PipeCare plan.
The company expanded its Service Sentry offerings with two new plans this year
entering the electric and propane water heater repair markets for the first
time. The new plans follow last year's success in repairing electric air
conditioners.
The marketing strategy for service contracts was more focused this year. Using
telemarketing and targeted direct mail campaigns, the company added 8,304 new
Service Sentry customers, a 9 percent increase. "We're pleased with warranty
plan renewals and upgrades by existing customers this year," Jackson said.
"The numbers reflect a high degree of customer satisfaction and loyalty."
Cold Snap
Prompts Record Natural Gas Use
With temperatures averaging 12.9 degrees Fahrenheit, South Jersey Gas broke its
peak-day sendout record January 17, 2000. The century's first cold snap
prompted area customers to use a total of 387,792 dekatherms of natural gas,
breaking the company's January 19, 1999 record.
November and December of 2000 was the nation's coldest November-December period
in over 100 years, according to the National Weather Service. SJG's customers
used 15 percent more gas in those months compared with last year. However, in
spite of this cold period, January's single-day record sendout continued to
hold.
SJG Experiences Work Stoppage
SJG's union employees in five locations initiated a work stoppage November 9
with the sixth location joining the strike December 13. In several areas of
compensation and working conditions the company was out of step with the
utility industry and the local labor market. SJG's proposals sought to address
these concerns. In negotiating a settlement, which was reached January 13, the
company believes it properly balanced its obligations to shareholders,
customers and employees.
Meter Reading Partnership a Success
What could be better than a business endeavor that reduces operating costs,
adds profits and improves productivity? Those goals, set when South Jersey
Industries and Conectiv Solutions, LLC partnered to read gas and electric
meters, were met during Millennium Account Services' first full year of
operation. As a matter of fact, Millennium has been profitable from day one and
in 2000 far exceeded management's expectations with $437,000 in pretax
earnings.
"We're extremely pleased with the financial results and also the efficiency of
our meter readers who are consistently meeting goals for the percentage of
meters read each month, while the service area has experienced significant
growth," said SJI Vice President, Al Ruggiero. "Also, we've received positive
feedback from customers on having their gas and electric meters read by the
same person," he added.
According to Ruggiero, Millennium has been successful in recruiting a strong
team with backgrounds in utility metering as well as managerial expertise. Most
of the 74 utility meter readers originally from South Jersey Gas and Conectiv
Power Delivery have returned to utility jobs, with only 18 leased employees
remaining. No employee lost a job from either utility because of the
partnership.
Future plans for Millennium include expanding services to other utilities in
the region. As New Jersey continues to deregulate, the company will take
advantage of emerging opportunities.
Millennium operates out of four geographic locations to serve SJG and
Conectiv's customers throughout southern New Jersey.
- 7 -
Emerging Markets Opening New Doors
Increasing natural gas use is paramount to SJG's future success. Working
closely with clients, the company finds innovative ways to save them money and
improve their efficiency while increasing gas load. Two nontraditional uses for
natural gas are paying off for Gloucester Township and the Philadelphia
Flyers.
GLOUCESTER TWP. BUYS NGVs Using natural gas for its municipal vehicles is more
than an economic decision for Gloucester Township -- it's an environmental
statement. "There's more than just savings here," said Guido Clementi,
supervisor, Gloucester Twp. Public Works. "It's our way of cleaning up the
environment."
In September, Gloucester Twp. became SJG's first municipal client to install a
natural gas vehicle fueling facility. A slow-fill station at their public works
building fuels the fledgling NGV fleet.
The township started looking into NGVs three years ago. After carefully
researching its options, they decided to buy two new natural gas vans. This
purchase provided some financial incentives, as well, including $7,000 in
rebates from the EPA's Clean Cities program. Township officials also shaved
another $8,500 from the sticker price of each van by purchasing them through
state contracts.
Since buying the NGVs, the township found the vans run the same as their
gasoline counterparts, need refueling only once a week, plus they're much
cleaner. "When people ask me how bad the fumes are, I ask them how bad the
fumes are in their home when they cook on their stove," said Clementi. "NGVs
have virtually no pollution emissions."
The township hopes this is the first step in converting their fleet of 50
public works vehicles and is currently researching installing a fast-fill
fueling station which could be used by surrounding municipalities.
PHILLY FLYERS GAS UP Believe it or not, natural gas makes a great sheet of
ice. That's why the Philadelphia Flyers organization uses natural gas to keep
their Skate Zones in Voorhees and Atlantic City dry and smooth. Thanks to the
rinks' natural gas-powered Zambonis and desiccant systems, SJG's gas perfects
the very ice on which the Flyers and Phantoms train.
"Natural gas is cleaner, more efficient and usually more economical than
electricity or liquid propane," said Janet Nickels, SJG's senior vice
president, marketing and customer services. "As a result, both facilities use
natural gas not only to fuel their Zambonis and dehumidify their rinks, but
also to generate heating and hot water."
It's hard to imagine natural gas creating a perfect sheet of ice. But, the
rink's desiccant system uses heat generated by natural gas to remove moisture
from the air. Humidity is a rink's biggest enemy, causing slushy ice, fog,
condensation, and musty odors.
When it came to fueling the Zambonis, natural gas was the logical choice.
"Natural gas-powered Zambonis are ideal for indoor use. They require no storage
tanks and create almost no emissions," Nickels explained.
SJG also provides gas to rinks in Gibbsboro and Sewell. With ice hockey growing
in popularity, more rinks in SJG's territory are likely. "Who knows, we could
be fueling rinks that spawn future Stanley Cup players," Nickels said.
- 8 -
Region's Growth Fuels Customer Additions
What does southern New Jersey have in common with the Energizer Bunny? It just
keeps growing and growing! While you're busy groaning at the pun, South Jersey
Gas is taking advantage of the spectacular opportunities provided by a
thriving, regional economy. In 2000, SJG added 7,451 customers compared with
6,834 in 1999, a growth rate of 2.7 percent, which is nearly double the
national average for natural gas utilities. At year end, SJG served a total of
281,350 customers.
"The outlook for the next several years in terms of the region's economic
development is quite good and we expect it to support our growth strategy,"
said Janet Nickels, senior vice president, marketing and customer services.
"The next wave of casino development began this year with groundbreaking by
The Borgata, and several other casinos are looking at development in Atlantic
City over the next five years. Currently, Harrah's has a 450-room addition
underway," Nickels added.
Another large-scale project in Atlantic City, the renovation of its Historic
Boardwalk Convention Hall, should be completed in September 2001, turning it
into a major entertainment venue, which will significantly increase gas use.
Moving further south, the new Wildwood Convention Center, a New Jersey Sports
and Expo property, will be completed in the summer of 2001. Also, in Cape May
County, the U.S. Coast Guard is in phase one of converting a total of 97
buildings to natural gas heat from oil. The initial phase involves 27
buildings, with the remainder to be converted during phase two.
Other significant opportunities to increase gas load exist throughout the
service area. Industrial parks in Cumberland and Gloucester counties are adding
sizable tenants including a french bakery and an online grocery store
distribution center. Several large high schools and elementary schools are
planned, and numerous school systems are expanding existing facilities.
Small businesses and new residential housing continue to sprout in the western
counties of Gloucester, Camden and Burlington and in Atlantic and Cape May
counties in the southeastern part of SJG's service area. Natural gas remains
the fuel of choice for most of these new projects.
CRANKIN' OUT CONVERSIONS Natural gas costs may be temporarily rising, but
they're still cheaper than electricity and competitive with oil. As a result,
SJG is busy converting area residences from other fuels. "We've worked with
many individuals and neighborhoods this year to add them to our system," said
Nickels.
Using a sophisticated marketing database, SJG embarked on a direct-mail
campaign targeting customers living close to its natural gas mains for
conversions. "We focus on these potential customers because it's the most cost
effective way to add customers," said Nickels. SJG commissioned a research
study of customers who already converted and potential customers, to define
what facilitates a conversion, as well as the best marketing methods for this
audience. Conversions in 2000 totaled 2,128 compared with 2,024 in 1999, a 5.1
percent increase.
An example of a satisfied customer who made the switch is Lisa Mack. She is
among 17 homeowners in her Ocean City neighborhood switching from electricity
to gas. Mack petitioned SJG for a main extension into her community when she
and her family moved into their new home.
"When we moved into our home we asked about electricity costs," Mack said. "Our
neighbors told us that when the winter winds came across the bay, their
electric bills were high and the heating system wasn't warming their homes. We
immediately started asking all of our neighbors if they'd be interested in
switching to gas."
After a town meeting and several petitions, enough customers signed with SJG to
extend the main into Mack's neighborhood. "I was so happy when I found out that
I ran around to each of my neighbors to tell them. Everyone is really excited."
- 9 -
Air Logics, LLC
Creates Profits for SJE
It's been two years since South Jersey Energy and its partner GZA
GeoEnvironmental unveiled the air monitoring system at SJI's 1998 annual
meeting. Since then, the partners formed AirLogics, LLC to market the
innovative technology which helped secure several new clients that
significantly contributed to SJE's earnings.
To expand the market for the air monitoring system, SJE and GZA partnered with
GTI, a recognized utility research and development organization. Acknowledgment
by an industry leader such as GTI provides immediate "best in class" status, as
well as access to utilities nationwide.
"AirLogics is gaining recognition as a provider of the premiere risk management
technique in manufactured gas plant remediation by site owners, contractors,
regulators and the public," said GZA Senior Vice President James A. Cleveland.
"We are very excited about the growth potential for this technology. Some of
our clients are leasing this technology for a second or third site. Two of our
clients have opted to purchase systems to support long-term remediation
programs."
In September, the U.S. Patent and Trademark Office issued a patent for the
real-time air monitoring technology. "Securing a patent is a significant
milestone for this innovative technology," said SJI Vice President George
Baulig. "Protecting this intellectual property is key to the product's value
as the future standard for field monitoring."
A UNIQUE SOLUTION The air monitoring system protects public health and limits
corporate liability by constantly analyzing for potentially hazardous
substances. What makes the technology unique is its ability to provide real-
time, continuous air monitoring around an entire environmental cleanup site.
SJE and GZA originally developed the system in response to SJG's need during
its cleanup of former manufactured gas plant sites. Since then, SJE locked in
profitable contracts with major utility companies in the mid-Atlantic region
and another utility in Wisconsin. Currently, six environmental sites are using
the system.
FLEXIBILITY KEY TO PROFITS According to Baulig, utilities are not the only
clients that could benefit from the air monitoring system. Its flexible design
also lends itself to other types of air monitoring. Additional applications
could include hazardous waste sites, landfills, chemical manufacturing
facilities and mines.
There's no question the air monitoring system has revolutionized safety
practices at MGP remediations. Thanks to SJE and GZA, utilities can now monitor
hazardous emissions -- protecting the environment and public health.
- 10 -
SJE Shines
from Retrofit Profits
South Jersey Energy profits from helping clients cut costs with yet another
energy saving service -- light retrofitting. This energy-efficient approach
affords clients the dual benefit of better lighting and decreased energy
consumption.
"Light retrofitting is one of the easiest strategies for clients to understand
and implement," explained SJE President Ed Graham. "By just retrofitting their
existing facility lighting to energy-efficient fixtures, clients can easily
save 40 percent or more on lighting costs."
HOW RETROFITTING WORKS Light retrofitting consists of replacing a client's
existing lighting fixtures with new, highly energy efficient bulbs and
ballasts. To further enhance light output and longevity, SJE often replaces
the lights' old white paint fixtures with specular aluminum reflectors which
outperform the old fixtures by as much as 17 percent. In older fixtures, these
reflectors often improve light output by 60 percent. Graham said the
advantages of added energy savings and extended lamp life quickly offset the
client's initial investment. In most cases, these retrofits have fast paybacks
- -- less than three years. Over a 10-year period, return on investment often
exceeds 40 percent.
REBATE REAPS CLIENTS Many of SJE's retrofit clients aren't just saving money
on their energy bills. With Conectiv's Smart Start Building Program, area
businesses can receive rebates for investing in energy-saving solutions.
Conectiv began offering the rebate program in 1999 to businesses which show
significant reductions in power consumption. Since then, SJE has installed
light retrofits for 14 local businesses and schools.
One client, Shore Memorial Hospital, received a $113,000 rebate from Conectiv
for installing a light retrofit system while saving $160,000 a year in
electricity costs. According to Graham, this combination of rebate and savings
allows the hospital to recover costs in less than two years. Over the next 10
years, the hospital will save $1.6 million in energy costs plus an additional
$57,000 in maintenance expense.
SJG hopped aboard the retrofit wagon as well, replacing lighting in all of its
buildings. By retrofitting its light systems the company expects to save up to
$110,000 annually in operating costs. "Light retrofitting is a win-win service
for everyone and has produced an estimated $2 million in revenue for SJI,"
Graham added.
- 11 -
Management's Discussion and Analysis of Results
of Operations and Financial Condition
Overview -- South Jersey Industries, Inc. (SJI) has three operating
subsidiaries, South Jersey Gas Company (SJG), South Jersey Energy Company (SJE)
and Marina Energy LLC (Marina Energy).
SJG is a regulated natural gas distribution company serving 281,350 customers
at December 31, 2000, compared with 273,899 customers at December 31, 1999. SJG
also makes off-system sales of natural gas on a wholesale basis to various
customers on the interstate pipeline system. In addition, SJG transports
natural gas purchased directly from producers or suppliers for our own sales
and for some of our customers.
SJE provides services for the acquisition and transportation of natural gas for
retail end users and markets total energy management services. SJE also markets
an air quality monitoring system that provides around-the-clock, real-time
monitoring for hazardous airborne substances around a site or facility. The
monitoring system is marketed through AirLogics, LLC, of which SJE has a 50%
equity interest. SJE markets retail electricity in New Jersey through South
Jersey Energy Solutions, a limited liability company equally owned with Energy
East Solutions, Inc. SJE has one subsidiary, SJEnerTrade (EnerTrade), that
provides services for the sale of natural gas to energy marketers, electric and
gas utilities, and other wholesale users in mid-Atlantic and southern states.
These activities have been conducted by EnerTrade and South Jersey Resources
Group, LLC (SJRG), a joint venture with UPR Energy Marketing, Inc. (UPR). As of
January 1, 2001, the partnership with UPR was terminated and SJRG became a
wholly owned subsidiary of EnerTrade.
Marina Energy was established in 2000 to develop energy-related projects in
Atlantic City, N.J.
SJI and Conectiv Solutions, LLC, have equal investments in Millennium Account
Services, LLC (Millennium). Millennium provides meter reading services to SJG
and Conectiv Power Delivery in southern New Jersey.
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; commodity costs; regulatory and
court decisions; competition in our regulated and deregulated activities; the
availability and cost of capital; our ability to maintain existing and/or
establish successful new alliances and joint ventures to take advantage of
marketing opportunities; costs and effects of legal proceedings and
environmental liabilities; and changes in business strategies.
Competition -- SJG's franchises are non-exclusive. Currently, no other utility
provides retail gas distribution services within our territory. We do not
expect any other utilities to do so in the foreseeable future because of the
extensive investment required for utility plant and related costs. SJG competes
with oil, propane and electricity suppliers for residential, commercial and
industrial users. The market for natural gas sales is subject to competition as
a result of deregulation. We enhanced SJG's competitive position while
maintaining margins by using an unbundled tariff. This tariff allows full cost-
of-service recovery, except for the variable cost of the gas commodity, when
transporting gas for our customers. Under this tariff, SJG profits from
transporting, rather than selling, the commodity. SJG's residential, commercial
and industrial customers can choose their supplier while we recover the cost of
service through transportation service (see Customer Choice Legislation). We
believe SJG is a leader in addressing the changing marketplace, while focusing
on being a low-cost provider of natural gas and energy services. SJE, EnerTrade
and Marina Energy actively arrange energy services, providing low-cost energy
supplies in a highly competitive marketplace.
Customer Choice Legislation -- Effective January 1, 2000, all residential
natural gas customers in New Jersey are able to choose their gas supplier under
the terms of the Electric Discount and Energy Competition Act of February 1999.
Commercial and industrial customers had the ability to choose gas suppliers
since 1987. SJG's residential customers were able to choose a gas supplier
since April of 1997 under a pilot program. As of December 31, 2000, 35,657 SJG
residential customers participated in the program. Customers' bills are
reduced for cost of gas charges and applicable taxes. The resulting decrease in
SJG's revenues is offset by a corresponding decrease in gas costs and taxes.
While customer choice can reduce utility revenues, it does not negatively
affect SJG's net income or financial condition.
Energy Adjustment Clauses -- SJG's Temperature Adjustment Clause (TAC),
approved by the Board of Public Utilities (BPU), had the following impacts on
2000 and 1999 fourth quarter and 12-month net earnings:
2000 1999
TAC Adjustment (Decrease) Increase to
Net Income ($ in thousands)
Quarter Ended 12/31 $(2,201) $ 642
12 Months Ended 12/31 $ (852) $1,980
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 $86.6 million in 2000,
compared with the prior year. The primary reason for the increase was greater
off-system sales, 7,451 additional customers and higher rates resulting from an
increase in the Levelized Gas Adjustment Clause (LGAC) to recover increased
gas costs at SJG. These factors more than offset revenue reductions due to the
continued migration of firm gas sales to firm transportation. Note, however,
that SJG's tariffs are structured so that profits are derived from the
transportation of gas, not commodity sales. Consequently, the switch to firm
transportation reduced revenues but did not impact profitability.
In 1999, revenues increased $47.7 million versus 1998, due primarily to higher
off-system sales and 6,834 additional customers at SJG. Results also benefited
significantly from the revised TAC. These factors more than offset revenue
reductions due to the continued migration of firm gas sales to firm
transportation.
Weather in 2000 was 10.6% colder than the prior year. Weather was also 4.1%
colder in 2000 than the approved 20-year TAC average. Weather in 1999 was 8.7%
colder than in 1998, but was 4.2% warmer than the 20-year average. As a result
of the TAC, revenues from utility ratepayers for 2000 and 1999 were closely
tied to the 20-year normal temperatures and not actual weather conditions.
Total gas throughput increased 5.2% to 132,528 MMcf in 2000. Throughput in 1999
rose 16.6% to 125,818 MMcf compared with 1998. Results in 2000 were due to
increased residential, commercial and capacity release activity. The 1999
increase was due to higher off-system sales.
Operating Revenues - Nonutility -- Nonutility operating revenues increased by
$36.1 million and $12.5 million in 2000 and 1999, respectively. The increases
were due to higher wholesale gas sales, retail gas sales to residential
customers and casinos in Atlantic City and sales of our air monitoring
products and services.
- 12 -
Cost of Gas Sold - Utility -- Cost of gas sold - utility increased $81.0
million in 2000, compared with 1999, due principally to increased gas costs,
particularly on off-system sales. SJG's gas cost during 2000 averaged $4.18/dt
compared with $2.38/dt in 1999 and $2.35/dt in 1998. A $33.2 million increase
in 1999 compared with 1998, was due mostly to increased sales volumes,
particularly to off-system customers. 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 LGAC. Higher gas costs in 2000 began to be reflected
in rates via an LGAC increase in November.
Gas supply sources include contract and open-market purchases. SJG secures and
maintains its own gas supplies to serve its customers. The next contract
expiration is in March 2001. We do not anticipate any difficulty renewing or
replacing expiring contracts under substantially similar terms and conditions.
SJG's cumulative obligation for demand charges and reservation fees paid to
suppliers for these services is approximately $4.8 million per month, recovered
on a current basis through the LGAC.
Cost of Sales - Nonutility -- Cost of sales - nonutility rose $32.5 million in
2000, and $9.9 million in 1999, due to increased costs related to higher sales
of retail gas and air monitoring products and services.
Operations -- A summary of net changes in Operations (in thousands):
2000 vs. 1999 1999 vs. 1998
------------- -------------
Utility:
Other Production Expense $ (2) $ 9
Transmission (59) (47)
Distribution (818) (238)
Appliance Service - Net (414) 6
Customer Accounts and Services 1,084 (349)
Sales (67) (72)
Administration and General 608 (487)
Other (168) 23
Nonutility 291 50
------- -------
Total Operations $ 455 $(1,105)
======= =======
Distribution expenses decreased in 2000, primarily due to a work stoppage among
SJG's unionized employees beginning November 9, 2000, and continuing until
January 17, 2001. During the work stoppage, payroll levels were reduced as
functions critical to maintaining gas system safety and reliability, as well
as new revenue generation, were performed mostly by non-union personnel.
Customer Accounts and Services costs increased in 2000, primarily due to higher
bad debt expense. Most of this expense results from an increase in reserves for
bad debts. Higher customer bills due to increased gas costs could adversely
impact collections in 2001.
Administrative and General costs increased from 1999 levels principally due to
a variety of higher strike-related expenses that were partially offset by lower
employee welfare and pension costs.
Other Operating Expenses - A summary of principal changes in other operating
expenses (in thousands):
2000 vs. 1999 1999 vs. 1998
------------- -------------
Maintenance $1,743 $ 782
Depreciation 1,200 1,828
Income Taxes 2,230 4,769
Energy and Other Taxes 476 685
Maintenance rose in 2000, due to higher levels of Remediation Adjustment Clause
(RAC) amortization during the first half of the year. This additional
amortization expense is recovered during the current period through rates (See
Note 13 to the Consolidated Financial Statements). Maintenance increased in
1999, due primarily to higher levels of amortization of previously deferred
environmental remediation expenses. These expenses were offset by higher
revenue recovery via the RAC and were, therefore, earnings neutral.
Depreciation rose due to increased investment in property, plant and equipment
by SJG. Income Tax increases reflect the impact of changes in pre-tax income.
Interest Charges - Interest charges were higher in 2000, compared with 1999.
Increased debt outstanding and higher interest rates in 2000 were mostly offset
by recoveries of carrying costs associated with unrecovered RAC and purchased
gas costs. The long-term debt was incurred primarily to support the expansion
and upgrade of SJG's gas transmission and distribution system. Significant
increases in gas acquisition costs in 2000 resulted in increased usage of
short-term debt and additional interest expense.
Discontinued Operations - Loss from discontinued operations increased in 2000,
primarily due to legal expenses incurred in relation to a complaint in
bankruptcy court against SJE filed by Power Company of America Liquidating
Trust (PCA). PCA was a wholesale electricity trading company with whom SJE did
business. PCA filed for bankruptcy protection under Chapter 11 of the
Bankruptcy Code. The 1999 loss was due primarily to environmental cleanup
expenses.
Net Income Applicable to Common Stock - Net income (in thousands) and earnings
per common share reflect the following changes:
2000 vs. 1999 1999 vs. 1998
------------- -------------
Income from Continuing Operations $ 2,688 $ 8,533
Loss from Discontinued Operations - Net (192) 2,169
------- -------
Net Income Increase $ 2,496 $10,702
======= =======
Earnings per Common Share:
Continuing Operations $ 0.15 $ 0.76
Discontinued Operations - Net (0.02) 0.21
------- -------
Earnings per Share Increase $ 0.13 $ 0.97
======= =======
The details affecting the changes in net income and earnings per share are
discussed under the appropriate captions above.
Liquidity - Gas purchasing activities; the timing of construction and
remediation expenditures and related permanent financing; as well as mandated
tax and sinking fund payment dates require large, short-term cash
requirements. These requirements are generally met by cash from operations and
short-term lines of credit. We maintain short-term lines of credit with a
number of banks, totaling $175 million, of which $53.8 million was available
at December 31, 2000. The credit lines are uncommitted and unsecured with
interest rates typically available based upon the Federal Funds Rates or
London Interbank Offered Rates (LIBOR).
The changes in cash flows from operating activities (in thousands):
2000 vs. 1999 1999 vs. 1998
------------- -------------
Increases/(Decreases):
Net Income Applicable to Common Stock $ 2,496 $10,702
Depreciation and Amortization 1,339 2,702
Provision for Losses on Accounts
Receivable 1,328 (525)
Revenues and Fuel Costs Deferred - Net (7,971) (5,163)
Deferred and Non-Current Income Taxes
and Credits - Net 6,733 (613)
Environmental Remediation Costs - Net 5,523 7,256
Accounts Receivable (56,911) 6,116
Inventories (5,362) 3,803
Prepayments and Other Current Assets (141) 257
Prepaid and Accrued Taxes - Net (7,788) 21,920
Accounts Payable and Other
Accrued Liabilities 57,190 (16,301)
Other - Net (425) 4,165
------- -------
Net Cash Provided by Operating
Activities $(3,989) $34,319
======= =======
- 13 -
Depreciation and Amortization are non-cash charges to income and do not impact
cash flow. Changes in depreciation cost reflect the effect of additions and
reductions to fixed assets.
Changes in Provision for Losses on Accounts Receivable reflect management's
expectations regarding the collectability of customer billings. The sudden and
rapid increase in natural gas prices could adversely impact collection of
accounts receivable. Decreases in Revenues and Fuel Costs Deferred - Net
reflect the impact of payments or credits to customers for amounts previously
overcollected and the undercollection of fuel costs resulting from increases in
natural gas costs. Increases reflect the impact of overcollection of fuel costs
or the recovery of previously deferred fuel costs.
Changes in Deferred and Non-Current Income Taxes and Credits - Net represent
the differences between taxes accrued and amounts paid. Generally, deferred
income taxes related to deferred fuel costs are paid in the next year.
Changes in Environmental Remediation Costs - Net represent the differences
between amounts expended for environmental remediation compared with amounts
collected under the RAC and insurance recoveries.
Changes in Accounts Receivable are primarily due to changes in off-system sales
activity and sales volumes of SJG and SJE. Weather and commodity prices are the
variables that impact these sales. Changes impact cash flows when receivables
are collected in subsequent periods.
Changes in Inventories reflect the impact of natural gas price changes and
weather-related changes in customer gas usage patterns.
Changes in Prepaid and Accrued Taxes - Net reflect the impact of differences
between taxes paid and taxes accrued. Significant timing differences exist in
cash flows during the year. Approximately 50% of SJG's taxes are paid in
installments during the first half of the year and the remaining 50% are paid
on May 15 of each year. SJG uses short-term borrowings to pay taxes, resulting
in a temporary increase in the short-term debt level. The carrying costs of
timing differences are recognized in base utility rates.
Changes in Accounts Payable and Other Current Liabilities reflect the impact of
timing differences between the accrual and payment of costs.
Changes in Other - Net reflect numerous changes in noncurrent assets and
liabilities, including accrued deferred income taxes.
Regulatory Matters --
Rate Actions
In February 1999, the Electric Discount and Energy Competition Act (the Act)
was signed into law in New Jersey. This bill created the framework and
necessary time schedules for restructuring the state's electric and natural gas
utilities. The Act established unbundling, where redesigned utility rate
structures allow natural gas and electric consumers to choose their energy
supplier. It also established time frames for instituting competitive services
for customer accounting functions and to determine whether basic gas supply
services should become competitive.
SJG received BPU approval of its unbundling proposal in January 2000. In
addition to allowing all customers to select their own gas supplier, the
approval provided incentives for customers to choose a supplier other than SJG
with a Market Development Credit (MDC). This credit is available to customers
through December 2001. The credit, approximately $2.5 million plus carrying
costs, appears on SJG's books as a Deferred Credit. Therefore, the MDC will
not materially impact future periods.
The Act also contains numerous provisions requiring the BPU to promulgate and
adopt a variety of standards related to implementing the Act. These required
standards address fair competition, affiliate relations, accounting,
competitive services, supplier licensing, consumer protection and aggregation.
In March 1999, the BPU issued Draft Interim Standards in response to the Act.
In its Order, the BPU stated that the Draft Interim Standards "do not
necessarily represent the final views of the Board on these matters." The BPU
has undertaken an extensive comment, meeting and audit process to address the
concerns of all impacted parties. SJG actively participated in this process,
and we believe the final standards will not have a material adverse effect on
the company.
SJG has operated under its current TAC since October 1998. Under this
temperature adjustment clause, revenues from utility ratepayers are tied to a
20-year average temperature calculation. Warmer-than-normal weather results in
the utility recognizing revenues for which cash won't be received from
ratepayers until the following TAC year. Colder-than-normal weather requires
SJG to defer revenues in excess of the 20-year norm, with ratepayers receiving
credits to their bills for the overage in the following TAC year. Each TAC year
runs from October 1 through May 31.
In November 2000, SJG received approval to increase its LGAC. The impact of
this increase is approximately 19.0% to a typical residential heating customer.
The BPU also approved the creation of a Flexible Pricing Mechanism, allowing
for two additional 2.0% increases effective for December 2000 and January
2001. The mechanism further allows for three additional 2.0% increases for
February, March and April of 2001, subject to BPU approval. The unprecedented
rise in natural gas prices during 2000 is the reason for both the size of the
initial increase and the creation of the flex mechanism. Despite the size of
this LGAC increase, additional increases in the LGAC are likely to be necessary
to fully pass through gas costs that have continued to spiral upwards to our
ratepayers. Increased gas costs as well as resulting LGAC underrecoveries and
associated interest costs remain the subject of hearings before the BPU.
Environmental Remediation
We successfully entered into settlements with all of SJG's historic
comprehensive general liability carriers regarding environmental remediation
expenditures at former manufactured gas plant sites. As part of these
settlements, SJG purchased an insurance policy that caps its remediation
expenditures at 11 of these sites. The insurance policy is in force for 25
years at 10 sites and 30 years at one site.
In September 1999, the BPU approved SJG's request to recover remediation costs
at former manufactured gas plant sites as permitted under the RAC. SJG's RAC
level increased from $0.0032 per therm to $0.0107 per therm to include all
RAC-related expenditures made between 1993 and 1998. Consequently, SJG expects
to recover an additional $4.5 million per year through 2006.
Other Regulatory Asset Recovery
Adopting FASB No. 109, "Accounting for Income Taxes," in 1993 primarily
resulted in creating a $17.6 million regulatory asset. SJG is recovering the
amortization of this asset through rates over 18 years which began in December
1994. Also, SJI adopted FASB No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," in 1993. The BPU allowed partial recovery of
costs associated with FASB No. 106 and prescribed continued deferral of
unrecovered costs until 1998. Beginning January 1998, the BPU approved full
recovery of the net periodic benefit cost and recovery through 2013 of the
regulatory asset, amounting to $4.5 million at December 31, 2000.
Litigation - SJI is subject to claims arising in the ordinary course of
business and other legal proceedings. We set up reserves when these claims
become apparent. SJI also maintains insurance and records probable insurance
recoveries relating to out standing claims.
In November 1999, Goldin Associates LLC, Trustee for the Power Company of
America Liquidating Trust (PCA), filed a complaint in bankruptcy court against
SJE seeking damages and attorneys' fees. PCA was a wholesale electricity
trading company with whom SJE did business. PCA filed for bankruptcy
protection under Chapter 11 of the Bankruptcy Code. We believe SJE acted
prudently, responsibly and in accordance with contractual obligations in its
transactions with PCA. SJE entered into a settlement agreement in principle
with PCA to resolve all issues related to this complaint, avoiding protracted
litigation. We believe the ultimate settlement agreement will not materially
affect SJI's financial position, results of operations or liquidity.
Financial Risk Management - SJI's regulated and unregulated natural gas
businesses are subject to market risk due to fluctuations in natural gas
prices. To limit exposure to fluctuations, SJI and its subsidiaries have at
times entered into forward contracts. SJG recovers gas costs through the LGAC,
and protects against price fluctuations by using forward contracts. SJE and
EnerTrade enter fixed-price contracts to sell natural gas to customers, but
limit risks on these transactions through matching forward physical purchases.
SJE engaged in wholesale electric trading activities during 1998, but ceased
actively trading and fully offset all remaining open positions as of December
31, 1998. The net profits realized from those activities are reflected on
SJI's financial statements as Discontinued Operations. The last wholesale
electric trading contract expired in the fourth quarter of 1999. SJRG enters
into forward transactions to balance storage management and fixed-price sales
transactions. To manage these transactions, SJI has a well-defined risk
management policy that includes volumetric and monetary limits. All derivative
activities described above are entered into for risk management, not trading,
purposes.
Our exposure to interest rate risk relates primarily to short-term, variable
rate borrowings. A hypothetical 10% increase in interest rates on $121.2
million of variable rate debt outstanding at December 31, 2000 would result in
a $536,000 increase in our interest expense net of tax. Our high point for
variable rate borrowings typically occurs around year-end. Our long-term debt
is all issued at fixed rates and, consequently, interest expense to the company
is not impacted by changes in market interest rates. Our debt has typically
been issued with provisions that do not permit us to retire debt early to take
advantage of changes in interest rates. We do not currently use any derivatives
to hedge interest rates.
Capital Resources - 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 2000 amounted to $43.8 million. The net costs for 2001, 2002 and 2003 are
estimated at approximately $58.6 million, $71.2 million and $60.7 million,
respectively. We expect to fund these expenditures from several sources, which
may include cash generated by operations, temporary use of short-term debt,
sale of medium-term notes, capital leases, RAC recoveries, insurance
recoveries and equity issuance.
In July 2000, SJG issued a total of $35 million of senior secured debt under
its $100 million Medium Term Note Program (MTN). Notes totaling $15 million
were issued at 7.70%, maturing in 2015; $10 million were issued at 7.97%,
maturing in 2018; and $10 million were issued at 7.90%, maturing in 2030. The
net proceeds of these note issuances were used to retire short-term debt. The
MTN had $35 million of availability remaining at December 31, 2000 and remains
effective through December 31, 2001.
In October 1998, SJG issued $30 million of debt under the MTN. Notes totaling
$10 million were issued at 6.12%, maturing in 2010, and $20 million of notes
were issued at 7.125%, maturing in 2018. The net proceeds of these note
issuances were used to retire short-term debt and to fund capital expenditures.
Effective June 1999, SJI changed the way shares were purchased by participants
in its Dividend Reinvestment Plan (DRP). Since 1994, our DRP purchased shares
for participants on the open market. Now plan participants are receiving 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. SJI raised $9.1 million of equity capital by issuing 335,427
shares under our DRP in 2000. We raised an additional $2.4 million of equity
capital from 82,309 shares issued under the DRP in January 2001.
Effective April 2000, SJI's dividend rate was increased by $0.02 per share to
$1.46 annually. In January 2001, an additional $0.02 per share increase was
announced, payable April 3, 2001, increasing our annual dividend rate to $1.48
per share.
Other Events - In April 2000, SJE and GZA GeoEnvironmental, Inc. formed
AirLogics, LLC to market a jointly developed air monitoring system designed to
assist companies involved in environmental cleanup activities.
Marina Energy, was formed by SJI in October 2000 to develop energy-related
projects in Atlantic City, N.J. In December 2000, Marina Energy entered into a
20-year contract with Marina District Development Corporation to supply heat,
hot water and cooling to The Borgata Resort. Marina Energy will develop,
construct and operate a $40 million thermal energy plant to meet the needs of
The Borgata. The plant is scheduled for completion in July 2003. We expect that
Marina Energy will be well positioned to provide similar services to existing
and future casino hotels developed in the area near The Borgata.
SJI provided a $17 million standby letter of credit to Marina District
Development Corporation in support of Marina Energy's contractual obligations
to construct the thermal energy plant and to supply heat, hot water and cooling
to The Borgata Resort.
SJG employs 401 workers who are members of two separate unions. Following the
expiration of a labor contract, the 354 members of our largest union commenced
a work stoppage on November 9, 2000. The remaining 47 unionized employees
walked out on December 13, 2000. SJG's unionized employees returned to work on
January 17, 2001, agreeing to a new 4-year contract. Key elements of the
contract include employee contributions toward healthcare costs, revised wage
structures for new employees and revisions to sick-time policies. During the
work stoppage, operation critical work was conducted mostly by SJI's non-union
personnel. As a result of the nature of SJG's operations, the work stoppage did
not materially effect the operational or financial condition of SJG or SJI.
Independent Auditors' Report
To the Shareholders and
Board of Directors of
South Jersey Industries, Inc.:
We have audited the consolidated balance sheets of South Jersey Industries,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
statements of consolidated income, consolidated retained earnings and
consolidated cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of South Jersey Industries, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted
in the United States of America.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 14, 2001
- 15 -
Statements of Consolidated Income
(In Thousands Except for Per Share Data)
South Jersey Industries, Inc.
and Subsidiaries
Year Ended December 31,
2000 1999 1998
-------- -------- --------
Operating Revenues:
Utility (Notes 1 & 7) $432,286 $345,710 $298,038
Nonutility 83,642 47,502 34,972
-------- -------- --------
Total Operating Revenues 515,928 393,212 333,010
-------- -------- --------
Operating Expenses:
Cost of Gas Sold - Utility 288,002 207,047 173,824
Cost of Sales - Nonutility 75,592 43,079 33,233
Operations 45,044 44,589 45,694
Maintenance 7,820 6,077 5,295
Depreciation (Note 1) 20,168 18,968 17,140
Income Taxes (Notes 1, 5 & 6) 18,658 16,428 11,659
Energy and Other Taxes (Note 1) 11,613 11,137 10,452
-------- -------- --------
Total Operating Expenses 466,897 347,325 297,297
-------- -------- --------
Operating Income 49,031 45,887 35,713
-------- -------- --------
Interest Charges:
Long-Term Debt 16,124 15,721 15,246
Short-Term Debt and Other 5,168 5,105 3,935
-------- -------- --------
Total Interest Charges 21,292 20,826 19,181
-------- -------- --------
Preferred Dividend Requirements of
Subsidiary (Note 2) 3,074 3,084 3,088
-------- -------- --------
Income from Continuing Operations 24,665 21,977 13,444
Loss from Discontinued Operations -
Net (Note 3) (481) (289) (2,458)
-------- -------- --------
Net Income Applicable to Common
Stock $ 24,184 $ 21,688 $ 10,986
======== ======== ========
Average Shares of Common Stock
Outstanding (Note 4) 11,401 10,922 10,776
======== ======== ========
Earnings Per Common Share: (Notes 3 & 4)
Continuing Operations $ 2.16 $ 2.01 $ 1.25
Discontinued Operations - Net (0.04) (0.02) (0.23)
-------- -------- --------
Earnings Per Common Share $ 2.12 $ 1.99 $ 1.02
======== ======== ========
Dividends Declared Per Common Share $ 1.46 $ 1.44 $ 1.44
======== ======== ========
Statements of Consolidated
Retained Earnings
(In Thousands)
South Jersey Industries, Inc.
and Subsidiaries
Year Ended December 31,
2000 1999 1998
-------- -------- --------
Balance at Beginning of Year $ 50,467 $ 44,507 $ 49,038
Net Income Applicable to Common Stock 24,184 21,688 10,986
Dividends Declared - Common Stock (16,647) (15,728) (15,517)
-------- -------- --------
Balance at End of Year (Note 10) $ 58,004 $ 50,467 $ 44,507
======== ======== ========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
- 16 -
Statements of Consolidated Cash Flows
(In Thousands)
South Jersey Industries, Inc.
and Subsidiaries
Year Ended December 31,
2000 1999 1998
-------- -------- --------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 24,184 $ 21,688 $ 10,986
Adjustments to Reconcile Net Income to
Cash Flows Provided by Operating
Activities:
Depreciation and Amortization 23,104 21,765 19,063
Provision for Losses on Accounts
Receivable 2,280 952 1,477
Revenues and Fuel Costs Deferred -
Net (15,636) (7,665) (2,502)
Deferred and Non-Current Income Taxes
and Credits - Net 13,845 7,112 7,725
Environmental Remediation Costs - Net* 7,019 1,496 (5,760)
Changes in:
Accounts Receivable (61,398) (4,487) (10,603)
Inventories (4,843) 519 (3,284)
Prepayments and Other Current Assets 75 216 (41)
Prepaid and Accrued Taxes - Net 1,025 8,813 (13,107)
Accounts Payable and Other Accrued
Liabilities 45,415 (11,775) 4,526
Other - Net 2,619 3,044 (1,121)
-------- -------- --------
Net Cash Provided by Operating Activities 37,689 41,678 7,359
-------- -------- --------
Cash Flows from Investing Activities:
Investment in Affiliates (2,201) (811) (591)
Loan to Affiliates 1,595 1,700 211
Proceeds from the Sale of Assets-Net - 594 -
Purchase of Available-for-Sale
Securities (832) (776) (889)
Capital Expenditures, Cost of Removal
and Salvage (50,834) (48,736) (65,869)
-------- -------- --------
Net Cash Used in Investing Activities (52,272) (48,029) (67,138)
-------- -------- --------
Cash Flows from Financing Activities:
Net Borrowings from Lines of Credit 1,250 22,950 51,100
Proceeds from Issuance of Long-Term Debt 35,000 - 30,000
Principal Repayments of Long-Term Debt (10,580) (11,149) (11,768)
Dividends on Common Stock (16,647) (15,728) (15,517)
Proceeds from Sale of Common Stock 8,857 10,011 160
Repurchase of Preferred Stock (240) (90) (90)
Payments for Issuance of Long-Term Debt (1,464) - (557)
-------- -------- --------
Net Cash Provided by Financing Activities 16,176 5,994 53,328
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents 1,593 (357) (6,451)
Cash and Cash Equivalents at Beginning of
Year 5,634 5,991 12,442
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 7,227 $ 5,634 $ 5,991
======== ======== ========
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the year for:
Interest (Net of Amounts Capitalized) $ 24,219 $ 25,264 $ 21,651
Income Taxes (Net of Refunds) $ 4,838 $ 4,423 $ 11,099
<FN>
* Notes 7 and 13 contain additional information relating to environmental
remediation costs.
The accompanying footnotes are an integral part of the financial statements.
</FN>
- 17 -
Consolidated Balance Sheets
(In Thousands)
South Jersey Industries, Inc.
and Subsidiaries
Year Ended December 31,
2000 1999
--------- ---------
Assets
Property, Plant and Equipment: (Note 1)
Utility Plant, at original cost $ 763,860 $ 721,338
Accumulated Depreciation (208,292) (192,240)
Gas Plant Acquisition Adjustment - Net 1,701 1,776
Nonutility Property and Equipment, at cost 6,042 3,423
Accumulated Depreciation (988) (951)
--------- ---------
Property, Plant and Equipment - Net 562,323 533,346
--------- ---------
Investments:
Available-for-Sale Securities (Note 8) 2,540 1,707
Investments in Affiliates (Note 3) 4,451 2,251
--------- ---------
Total Investments 6,991 3,958
--------- ---------
Current Assets:
Cash and Cash Equivalents (Notes 1 & 9) 7,227 5,634
Notes Receivable - Affiliates 1,055 2,650
Accounts Receivable 80,480 43,130
Unbilled Revenues (Note 1) 45,022 22,328
Provision for Uncollectibles (2,043) (1,117)
Natural Gas in Storage, average cost 31,957 27,066
Materials and Supplies, average cost 4,037 4,085
Prepaid Taxes (Note 1) 3,960 4,069
Prepayments and Other Current Assets 3,128 3,203
--------- ---------
Total Current Assets 174,823 111,048
--------- ---------
Accounts Receivable - Merchandise 705 1,108
--------- ---------
Regulatory and Other Non-Current Assets: (Note 1)
Environmental Remediation Costs: (Notes 7 & 13)
Expended - Net 18,474 25,702
Liability for Future Expenditures 51,029 51,029
Gross Receipts & Franchise Taxes (Note 5) 2,698 3,141
Income Taxes - Flowthrough Depreciation (Note 5) 10,553 11,531
Deferred Fuel Costs - Net (Note 7) 28,810 13,174
Deferred Postretirement Benefit Costs (Note 12) 4,536 4,914
Other 9,037 7,974
--------- ---------
Total Regulatory and Other Non-Current Assets 125,137 117,465
--------- ---------
Total Assets $ 869,979 $ 766,925
========= =========
Capitalization and Liabilities
Capitalization:
Common Equity (Notes 4 & 10) $ 201,739 $ 185,275
Preferred Stock and Securities of Subsidiary
(Note 2) 36,804 37,044
Long-Term Debt (Note 8) 204,981 183,561
--------- ---------
Total Capitalization 443,524 405,880
--------- ---------
Current Liabilities:
Notes Payable (Note 9) 121,200 119,950
Current Maturities of Long-Term Debt (Note 8) 11,876 8,876
Accounts Payable 84,004 40,273
Customer Deposits 5,366 5,386
Environmental Remediation Costs (Note 13) 17,286 14,027
Taxes Accrued 1,479 563
Interest Accrued and Other Current Liabilities 15,816 14,112
--------- ---------
Total Current Liabilities 257,027 203,187
--------- ---------
Deferred Credits and Other Non-Current Liabilities:
(Note 1)
Deferred Income Taxes - Net (Note 6) 105,037 91,167
Investment Tax Credits (Note 5) 4,513 4,849
Pension and Other Postretirement Benefits (Note 12) 13,394 13,342
Environmental Remediation Costs (Note 13) 37,886 41,354
Other 8,598 7,146
--------- ---------
Total Deferred Credits and Other Non-Current
Liabilities 169,428 157,858
--------- ---------
Commitments and Contingencies (Note 13)
Total Capitalization and Liabilities $ 869,979 $ 766,925
========= =========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
- 18 -
Schedules of Consolidated Capitalization
(In Thousands Except for Share Data)
South Jersey Industries, Inc.
and Subsidiaries
Year Ended December 31,
2000 1999
--------- ---------
Common Equity: (Notes 4 & 10)
Common Stock: Par Value $1.25 per share;
Authorized 20,000,000 shares;
Outstanding Shares: 11,499,701 (2000) and
11,152,175 (1999)
Balance at Beginning of Year $ 13,940 $ 13,474
Stock Plans 435 466
--------- ---------
Balance at End of Year 14,375 13,940
Premium on Common Stock 129,360 120,868
Retained Earnings 58,004 50,467
--------- ---------
Total Common Equity 201,739 185,275
--------- ---------
Preferred Stock and Securities of Subsidiary: (Note 2)
Redeemable Cumulative Preferred Stock:
South Jersey Gas Company, Par Value $100 per share
Authorized Shares: 43,104 (2000) and
45,504 (1999)
Outstanding Shares: Series A, 4.7% - 300 (2000)
and 1,200 (1999) 30 120
Series B, 8% - 17,742 (2000)
and 19,242 (1999) 1,774 1,924
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
--------- ---------
Total Preferred Stock and Securities of
Subsidiary 36,804 37,044
--------- ---------
Long-Term Debt: (A)
South Jersey Gas Company:
First Mortgage Bonds (B):
8.19% Series due 2007 15,908 18,181
10.25% Series due 2008 11,931 15,908
9% Series due 2010 21,875 24,062
6.12% Series due 2010 10,000 10,000
6.95% Series due 2013 35,000 35,000
7.7% Series due 2015 (C) 15,000 -
7.97% Series due 2018 (C) 10,000 -
7.125% Series due 2018 20,000 20,000
7.7% Series due 2027 35,000 35,000
7.9% Series due 2030 (C) 10,000 -
Unsecured Notes:
Term Note, 8.47% due 2001 2,143 4,286
Debenture Notes, 8.6% due 2010 30,000 30,000
--------- ---------
Total Long-Term Debt Outstanding 216,857 192,437
Less Current Maturities 11,876 8,876
--------- ---------
Total Long-Term Debt 204,981 183,561
--------- ---------
Total Capitalization $ 443,524 $ 405,880
========= =========
<FN>
(A) The long-term debt maturities and sinking fund requirements for the
succeeding 5 years are as follows: 2001, $11,876; 2002, $9,734; 2003,
$12,884; 2004, $12,884; and 2005, $12,884.
(B) SJG's First Mortgage dated October 1, 1947, as supplemented,
securing the First Mortgage Bonds constitutes a direct first mortgage
lien on substantially all utility plant.
(C) In July 2000, SJG issued $35 million of debt under a Medium Term Note
Program established October 5, 1998. A remainder of $35 million is
authorized to be issued under this program through December 2001.
The accompanying footnotes are an integral part of the financial statements.
</FN>
- 19 -
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Consolidation - The consolidated financial statements include the accounts of
South Jersey Industries, Inc. (SJI) and its subsidiaries. Investments in
affiliated companies with a 20% or greater ownership interest are accounted for
on an equity basis and, accordingly, consolidated income includes SJI's share
of their income. All significant intercompany accounts and transactions were
eliminated. SJI reclassified some previously reported amounts to conform with
current year classifications.
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). We maintain our
accounts according to the BPU's prescribed Uniform System of Accounts
(See Note 7).
Revenues - SJG and South Jersey Energy Company (SJE) bill customers monthly.
For customers not billed at the end of each month, an accrual is made to
recognize unbilled revenues from the date of the last bill to the end of the
month.
The BPU allows SJG to recover the excess cost of gas sold over the cost
included in base rates through the Levelized Gas Adjustment Clause (LGAC). We
collect these costs on a forecasted basis upon BPU order. SJG defers under- or
over-recoveries of gas costs and includes them in the following year's LGAC.
We pay interest on overcollected LGAC balances based on SJG's return on rate
base determined in base rate proceedings (See Note 7).
SJG's tariff also includes a Temperature Adjustment Clause (TAC), a Remediation
Adjustment Clause (RAC) and a Demand Side Management Clause (DSMC). Our TAC
reduces the impact of temperature fluctuations on SJG and its customers. The
RAC recovers remediation costs of former gas manufacturing plants and the DSMC
recovers costs associated with our conservation plan. TAC adjustments affect
revenue, income and cash flows since colder-than-normal weather can generate
credits to customers, while warmer-than-normal weather during the winter
season can result in additional billings. RAC adjustments do not directly
affect earnings because we defer and recover these costs through rates over
7-year amortization periods (See Notes 7 & 13). DSMC adjustments are not
significant and do not affect earnings.
Property, Plant & Equipment - For regulatory purposes, utility plant is stated
at original cost. Nonutility plant is stated at cost. The cost of adding,
replacing and renewing property is charged to the appropriate plant account.
Depreciation and Amortization - We depreciate utility plant on a straight-line
basis over the estimated remaining lives of the various property classes. These
estimates are periodically reviewed and adjusted as required after BPU
approval. The composite annual rate for all depreciable utility property was
approximately 2.8% in 2000, 1999 and 1998. Except for extraordinary
retirements, accumulated depreciation is charged with the cost of depreciable
utility property retired, and removal costs less salvage. The gas plant
acquisition adjustment is amortized on a straight-line basis over 40 years. The
unamortized balance of $1.7 million at December 31, 2000, is not included in
rate base. Nonutility property depreciation is computed on a straight-line
basis over the estimated useful lives of the property, ranging up to 35 years.
Gain or loss on the disposition of nonutility property is recognized in net
income.
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and in June 2000, FASB issued Statement
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." Both are effective for our fiscal year beginning January 2001.
These statements establish accounting and reporting standards for derivative
instruments, including those embedded in other contracts, and for hedging
activities. It requires recognizing derivatives as assets or liabilities at
fair value on the balance sheet. SJI has identified financial instruments that
qualify as derivatives as of January 1, 2001. Management believes, based on
its interpretation of guidance issued, that the derivative contracts qualify
for the normal purchases and normal sales exception and, therefore, no
additional disclosure is required. Subsequent guidance from FASB or the
Derivative Implementation Group could affect the accounting for such
transactions in 2001 and beyond.
Income, Energy and Other Taxes - Deferred income taxes are provided for all
significant temporary differences between book and taxable income (See Notes 5
& 6).
New Jersey adopted legislation reforming energy taxation in 1997. The law
eliminated the Gross Receipts & Franchise Tax (GRAFT) of approximately 13% of
utility revenue, replacing it with a combination of taxes including a 6% State
Sales and Use Tax, a 9% State Corporation Business Tax, and a State-imposed
Transitional Energy Facilities Assessment (TEFA). The TEFA, a tax on gas
volumes sold and transported, is being phased out over 5 years beginning
January 1, 1999. The revised tax policy is ultimately expected to eliminate
tax differences between utility and nonutility energy suppliers, providing fair
competition and lower energy costs for consumers.
Statements of Consolidated Cash Flows - For purposes of reporting cash flows,
highly liquid investments with original maturities of 3 months or less are
considered cash equivalents.
2. Preferred Stock and Securities of Subsidiary:
Redeemable Cumulative Preferred Stock - Annually, SJG is required to offer to
purchase 900 and 1,500 shares of its Cumulative Preferred Stock, Series A and
Series B, respectively, at par value, plus accrued dividends.
If preferred stock dividends are in arrears, SJG may not declare or pay
dividends or make distributions on its common stock. Preferred shareholders may
elect a majority of SJG's directors if four or more quarterly dividends are in
arrears.
Mandatorily Redeemable Preferred Securities - In 1997, SJG's statutory trust
subsidiary, SJG Capital Trust (Trust), sold $35 million of 8.35%
SJG-Guaranteed Mandatorily Redeemable Preferred Securities. The Trust's only
assets are the 8.35% Deferrable Interest Subordinated Debentures issued by SJG
maturing April 2037. This is also the maturity date of the Preferred
Securities. The Debentures and Preferred Securities are redeemable at SJG's
option at a price equal to 100% of the principal amount at any time on or
after April 30, 2002.
SJI has 2,500,000 authorized shares of Preference Stock, no par value, which
has not been issued. SJI has registered and reserved for issuance 15,000 shares
of Series A Junior Participating Cumulative Preferred Stock (Series A Preferred
Stock) connected with adopting its Shareholder Rights Plan (See Note 4).
3. 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 (See Note 13).
In 1997, R&T Group, Inc., SJI's construction subsidiary, sold all of its
operating assets, except some real estate.
- 20 -
Annually, SJI conducts tests to estimate the environmental remediation costs
for properties owned by South Jersey Fuel, Inc. (SJF), a subsidiary of EMI,
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 (See Note 13).
In 1998, SJE actively traded electricity in the wholesale market, but ceased
its trading activities later that same year. Upon expiration of SJE's last
wholesale electric contract in December 1999, SJE formally exited this segment
of operations. Summarized operating results of the discontinued operations
were:
Thousands of Dollars
2000 1999 1998
--------- --------- ---------
Operating Revenues -
Wholesale Electric $ - $ - $ 117,236
========= ========= =========
(Loss) Income before Income Taxes:
Sand Mining $ (155) $ (216) $ (3,697)
Construction 8 (195) (587)
Fuel Oil (123) (89) (72)
Wholesale Electric (488) (8) 573
Income Tax Credits 277 219 1,325
--------- --------- ---------
Loss from Discontinued
Operations - Net $ (481) $ (289) $ (2,458)
========= ========= =========
Earnings per Common Share
from Discontinued Operations $ (0.04) $ (0.02) $ (0.23)
========= ========= =========
Affiliations - In 1996, South Jersey Resources Group, LLC (SJRG) was formed to
provide natural gas storage, peaking services and transportation capacity for
wholesale customers in New Jersey and surrounding states. SJ EnerTrade, Inc.
(EnerTrade), a wholly owned subsidiary of SJE, and UPR Energy Marketing, Inc.
(UPR) each held a 50% non-controlling interest in this affiliation and
accounted for the investment under the equity method. On January 1, 2001, SJRG
redeemed UPR's 50% interest making EnerTrade the 100% owner of SJRG.
In January 1999, SJI and Conectiv Solutions, LLC, formed Millennium Account
Services, LLC to provide meter reading services in southern New Jersey and
reduce meter reading costs resulting from synergies that exist because of
overlapping territories. In June 1999, SJE 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.
In April 2000, SJE and GZA GeoEnvironmental, Inc. formed AirLogics, LLC to
market a jointly developed air monitoring system designed to assist companies
involved in environmental cleanup activities.
In October 2000, SJI formed Marina Energy LLC, a wholly owned subsidiary, to
develop, construct and operate a $40 million thermal energy plant. In December
2000, Marina Energy 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.
4. Common Stock:
SJI has 20,000,000 shares of authorized Common Stock. The following shares were
issued and outstanding:
2000 1999 1998
---------- ---------- ----------
Beginning of Year 11,152,175 10,778,990 10,771,413
New Issues During Year:
Dividend Reinvestment Plan 335,427 367,622 -
Employees' Stock Ownership Plan 3,917 4,144 3,875
Stock Option, Stock Appreciation
Rights, and Restricted Stock
Award Plan 5,545 31 1,952
Directors' Restricted Stock Plan 2,637 1,388 1,750
---------- ---------- ----------
End of Year 11,499,701 11,152,175 10,778,990
========== ========== ==========
The par value ($1.25 per share) of stock issued in 2000, 1999 and 1998 was
credited to Common Stock. Net excess over par value of approximately $8.5
million, $9.6 million, and $0.3 million, respectively, was credited to Premium
on Common Stock.
Effective 1996, SJI adopted FASB No. 123, "Accounting for Stock-Based
Compensation." This statement defines a fair value based method of accounting
for stock-based compensation. As permitted by the statement, we elect to
continue measuring compensation costs using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The pro forma effect of adopting the fair value based method of
accounting on net income and Earnings Per Share (EPS) is immaterial for the
2000, 1999 and 1998 fiscal years.
Dividend Reinvestment Plan (DRP) and Employees' Stock Ownership Plan (ESOP) -
Effective June 1999, newly issued shares of common stock offered through the
DRP are issued directly by SJI. Prior to this date, these shares were purchased
in the open market. All shares offered through the ESOP continue to be issued
directly by SJI. As of December 31, 2000, SJI reserved 359,034 and 23,435
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 December 31, 2000,
1999, and 1998, SJI had 4,500, 4,500, and 5,000 options outstanding,
respectively, all exercisable at $24.69 per share. In addition, during 1999 and
1998, 500 and 8,060 options were surrendered for the issuance of 31 and 1,952
shares, respectively. No options were granted in 2000, 1999, or 1998. No stock
appreciation rights were issued under the Plan. In 1999, the Plan was amended
to include restricted stock awards. As of December 31, 2000, 36,665 restricted
shares were granted.
Earnings Per Common Share - We present basic EPS based on the weighted-average
number of common shares outstanding. Our stock options and restricted stock
outstanding at December 31, 2000, 1999 and 1998, do not dilute our EPS as
calculated in accordance with FASB No. 128, "Earnings Per Share".
Directors' Restricted Stock Plan - Under this Plan, SJI granted an initial
award of 13,800 shares to outside directors in December 1996, at a market value
of $24.00 per share. The Plan also provides for annual awards (see table).
Initial awards vest over 5 years, with 20% of those awards vesting annually.
Annual awards vest on their third anniversary. SJI holds shares issued as
restricted stock until the attached restrictions lapse. The stock's market
value on the grant date is recorded as compensation expense over the
applicable vesting period.
Shareholder Rights Plan - In September 1996, the board of directors adopted a
shareholder rights plan providing for the distribution of one right for each
share of common stock outstanding on and after October 11, 1996. Each right
entitles its holder to purchase 1/1000 of one share of Series A Preferred
Stock at an exercise price of $90 (See Note 2).
The rights will not be exercisable until after a person or group acquires or
obtains the right to acquire the beneficial ownership of 10% or more of SJI's
common stock. Each of the rights (except for those held by the 10% holder)
entitles the holder to purchase that number of shares of SJI's common stock, or
common stock of the acquiring company, at a market value equal to two times the
purchase price.
SJI may redeem the rights in whole, but not in part, for $.001 per right at any
time until 10 days following the time the acquiring person or group reached the
10% threshold. The rights expire if not exercised or redeemed by September 20,
2006.
- 21 -
5. Regulatory Assets and Deferred Credits - Federal and Other Taxes:
The primary asset created by adopting FASB No. 109, "Accounting for Income
Taxes," was Income Taxes - Flowthrough Depreciation in the amount of $17.6
million as of January 1, 1993. This amount represented excess tax depreciation
over book depreciation on utility plant because of temporary differences for
which, prior to FASB No. 109, deferred taxes previously were not provided. SJG
previously flowed these tax benefits through to ratepayers. SJG is recovering
the amortization of the regulatory asset through rates over 18 years which
began in December 1994.
The Investment Tax Credit (ITC) attributable to SJG was deferred and continues
to be amortized at the annual rate of 3%, which approximates the life of
related assets.
SJG deferred $11.8 million resulting from a change in the basis for accruing
GRAFT in 1978, and is amortizing it on a straight-line basis to operations over
30 years beginning that same year.
6. Income Taxes:
Total income taxes applicable to operations differs from the tax that would
have resulted by applying the statutory Federal Income Tax rate to pre-tax
income for the following reasons:
Thousands of Dollars
2000 1999 1998
--------- --------- ---------
Tax at Statutory Rate $ 13,514 $ 12,090 $ 7,676
Increase (Decrease) Resulting from:
State Income Taxes 4,861 3,895 3,170
Amortization of ITC (335) (390) (393)
Tax Depreciation Under Book
Depreciation on Utility Plant 664 664 664
Other - Net (46) 169 542
--------- --------- ---------
Income Taxes -
Continuing Operations 18,658 16,428 11,659
Income Taxes -
Discontinued Operations (277) (219) (1,325)
--------- --------- ---------
Net Income Taxes $ 18,381 $ 16,209 $ 10,334
========= ========= =========
The provision for Income Taxes is comprised of the following:
Thousands of Dollars
2000 1999 1998
--------- --------- ---------
Current:
Federal $ 2,760 $ 6,151 $ 2,024
State 2,040 3,218 2,227
--------- --------- ---------
Total Current 4,800 9,369 4,251
--------- --------- ---------
Deferred:
Federal -
Excess of Tax Depreciation Over
Book Depreciation - Net 5,220 5,496 5,308
Deferred Fuel Costs 12,157 1,909 1,397
Environmental Costs - Net (2,504) (1,058) 1,990
Alternative Minimum Tax (1,694) 676 (1,750)
Benefit of State Tax (984) (236) (177)
Other - Net (823) (15) 90
State 2,821 677 943
--------- --------- ---------
Total Deferred 14,193 7,449 7,801
--------- --------- ---------
ITC (335) (390) (393)
--------- --------- ---------
Income Taxes -
Continuing Operations 18,658 16,428 11,659
Income Taxes -
Discontinued Operations (277) (219) (1,325)
--------- --------- ---------
Net Income Taxes $ 18,381 $ 16,209 $ 10,334
========= ========= =========
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Significant components of SJI's net deferred tax
liability at December 31 are:
Thousands of Dollars
2000 1999
--------- ---------
Deferred Tax Liabilities:
Tax Depreciation Over Book Depreciation $ 74,697 $ 70,362
Difference Between Book and Tax Basis of Property 7,018 6,478
Deferred Fuel Costs 24,519 9,235
Deferred Regulatory Costs 1,387 1,301
Environmental Remediation Costs 5,144 7,295
Excess Protected 3,290 3,355
GRAFT 866 1,022
Other 972 929
--------- ---------
Total Deferred Tax Liabilities 117,893 99,977
--------- ---------
Deferred Tax Assets:
Alternative Minimum Tax 4,895 2,327
ITC Basis Gross Up 2,428 2,601
Deferred State Tax 1,925 674
Other 3,608 3,208
--------- ---------
Total Deferred Tax Assets 12,856 8,810
--------- ---------
Net Deferred Tax Liability $ 105,037 $ 91,167
========= =========
7. Regulatory Actions:
In January 1997, the BPU granted SJG a total rate increase of $10.3 million.
The $6.0 million base rate portion of the increase was based on 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 (Sharing Formula)
increased from $4.0 million to $5.0 million. With the completion of major
construction projects, this $5.0 million threshold increased to $7.8 million.
SJG keeps 100% of pre-tax margins up to the threshold level and 20% of margins
above that level. In October 1998, the BPU approved a revision to the Sharing
Formula as part of an agreement to modify SJG's TAC. The revision credits the
first $750,000 above the current threshold level to the LGAC customers.
Thereafter, SJG keeps 20% of the pre-tax margins as it has historically.
In August 1998, SJG filed with the BPU to recover increased remediation costs
expended from August 1995 through July 1998. In September 1999, the BPU
approved the requested annual recovery level of $6.5 million. This represents
an annual increase of approximately $4.5 million over the recovery previously
included in rates. In July 1999, SJG filed its annual RAC with the BPU
requesting recovery of carrying costs on unrecovered remediation costs and
proposed no change in the current RAC rate for the next 3 years. In January
2000, the BPU approved the recovery of carrying costs on unrecovered
remediation costs and SJG's proposal to keep its current RAC rate in effect
through October 2002.
In September 1998, SJG filed its annual LGAC, TAC and DSMC with the BPU. The
LGAC and DSMC cover the period November 1 through October 31 of each year. The
TAC period runs from October 1 through May 31. In May 1999, the BPU approved a
$7.1 million increase in rates as part of this filing, which included the
results of the previous two annual filings.
In February 1999, the Electric Discount and Energy Competition Act became law.
This law established unbundling, where redesigned utility rate structures allow
natural gas and electric consumers to choose their energy supplier.
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 December 31, 2000, 35,657 of SJG's residential customers had elected to
purchase their gas commodity from someone other than SJG. The bills of those
using a gas supplier other than SJG are reduced for cost of gas charges and
applicable taxes. The resulting decrease in revenues is offset by a
- 22 -
corresponding decrease in gas costs and taxes under SJG's BPU-approved fuel
clause. SJI's net income, financial condition and margins are not affected as
a result of the unbundling.
In addition to allowing all customers to select their own supplier, the
unbundling settlement also created an incentive to customers to select a
supplier, other than SJG, in the form of a Market Development Credit (MDC).
This credit is being provided to customers over a 2-year period beginning
January 2000, and will approximate $2.5 million plus carrying costs through
December 2001. The majority of this credit was provided for on SJG's books as
a Deferred Credit. Therefore, the impact of the MDC will not materially impact
future periods.
Also approved was the recovery of carrying costs on the RAC, as previously
discussed, and a modification to SJG's LGAC. Under-recovered gas costs of $11.9
million as of October 31, 1999, and carrying costs thereon, are being recovered
over a 3-year period beginning January 2000.
In April 2000, the BPU approved an appliance service filing to modify SJG's
existing Service Sentry Plans, implement three new Service Sentry Plans and to
implement flat-rate pricing for its appliance service business.
Effective June 2000, SJG implemented price increases for its appliance service
business. The new rates are competitive with those of other service providers
in New Jersey.
In August 2000, SJG filed its annual LGAC and TAC for 2000-2001. The filing
requested a $35.0 million increase to its LGAC. However, due to unprecedented
natural gas price run-ups, SJG filed for an additional increase in October
2000.
On November 16, 2000, SJG received approval to increase its LGAC. The impact of
this increase will be approximately 19.0% to a typical residential heating
customer. The BPU also approved the creation of a Flexible Pricing Mechanism,
allowing for two additional 2.0% increases effective in December 2000 and
January 2001, and three additional 2.0% increases for February, March and April
of 2001, subject to BPU approval.
8. Financial Instruments:
Long-Term Debt - The fair values of SJI's long-term debt, including current
maturities, as of December 31, 2000 and 1999, are estimated to be $219.1 and
$190.1 million, respectively. Carrying amounts are $216.9 and $192.4 million,
respectively. The estimates are based on the interest rates available to SJI
at the end of each year for debt with similar terms and maturities. SJI retires
debt when it is cost effective as permitted by the debt agreements.
Other Financial Instruments - The carrying amounts of SJI's other financial
instruments approximate their fair values at December 31, 2000 and 1999.
9. Unused Lines of Credit and Compensating Balances:
Unused lines of credit available at December 31, 2000, were $53.8 million.
Borrowings under these lines of credit are at market rates. The weighted
borrowing costs, which changed daily, were 7.37% and 6.45% at December 31, 2000
and 1999, respectively. Demand deposits are maintained with lending banks on
an informal basis and do not constitute compensating balances.
10. Retained Earnings:
Restrictions exist under various loan agreements regarding the amount of cash
dividends or other distributions that we may pay on SJG's common stock. SJI's
total equity in its subsidiaries' retained earnings, which is free of these
restrictions, was $56.2 million as of December 31, 2000.
11. Segments of Business:
Information about SJI's operations in different industry segments is presented
below:
Thousands of Dollars
2000 1999 1998
--------- --------- ---------
Operating Revenues:
Gas Utility Operations $ 446,948 $ 350,921 $ 299,070
Nonutility Operations 84,943 49,651 35,955
--------- --------- ---------
Subtotal 531,891 400,572 335,025
Intersegment Sales (15,963) (7,360) (2,015)
--------- --------- ---------
Total Operating Revenues $ 515,928 $ 393,212 $ 333,010
========= ========= =========
Operating Income:
Gas Utility Operations $ 62,660 $ 59,480 $ 49,234
Nonutility Operations 4,387 1,911 67
--------- --------- ---------
Subtotal 67,047 61,391 49,301
Income Taxes (18,658) (16,428) (11,659)
General Corporate 642 924 (1,929)
--------- --------- ---------
Total Operating Income $ 49,031 $ 45,887 $ 35,713
========= ========= =========
Depreciation and Amortization:
Gas Utility Operations $ 22,986 $ 21,676 $ 19,014
Nonutility Operations 99 59 26
Discontinued Operations 19 30 23
--------- --------- ---------
Total Depreciation and
Amortization $ 23,104 $ 21,765 $ 19,063
========= ========= =========
Property Additions:
Gas Utility Operations $ 47,116 $ 47,390 $ 64,862
Nonutility Operations 3,260 390 67
--------- --------- ---------
Total Property Additions $ 50,376 $ 47,780 $ 64,929
========= ========= =========
Identifiable Assets:
Gas Utility Operations $ 842,082 $ 750,239 $ 720,137
Nonutility Operations 25,123 14,049 14,185
Discontinued Operations 2,243 2,326 9,562
--------- --------- ---------
Subtotal 869,448 766,614 743,884
Corporate Assets 20,338 15,744 25,251
Intersegment Assets (19,807) (15,433) (21,040)
--------- --------- ---------
Total Identifiable Assets $ 869,979 $ 766,925 $ 748,095
========= ========= =========
Gas Utility Operations consist primarily of natural gas distribution to
residential, commercial and industrial customers. Nonutility Operations include
the natural gas and electric acquisition and transportation service companies
(See Note 3).
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. These amounts are
included in our statements of consolidated income and not shown above.
12. Pensions & Other Postretirement Benefits:
SJI has several defined benefit pension plans and other postretirement benefit
plans. The pension plans provide annuity payments to substantially all
full-time, regular employees upon retirement. The other postretirement benefit
plans provide health care and life insurance benefits to some retirees.
The BPU authorized SJG to recover costs related to postretirement benefits
other than pensions under the accrual method of accounting consistent with FASB
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." Amounts accrued prior to that authorization were deferred and are
being amortized as allowed by the BPU. The unamortized balance amounting to
- 23 -
$4.5 million at December 31, 2000, is recoverable in rates. We are amortizing
this amount over 15 years which started January 1998.
Net periodic benefit cost related to the pension and other postretirement
benefit insurance plans, consisted of the following components:
Thousands of Dollars
Pension Benefits Other Benefits
------------------------- -------------------------
2000 1999 1998 2000 1999 1998
------- ------- ------- ------- ------- -------
Service cost $ 1,988 $ 2,245 $ 1,912 $ 996 $ 1,098 $ 903
Interest cost 4,577 4,211 3,973 1,746 1,593 1,494
Expected return on
plan assets (4,790) (4,280) (3,894) (726) (675) (417)
Amortization of
transition obligation 72 72 72 772 772 796
Amortization of loss
(gain) and other 320 436 292 (78) - (14)
------- ------- ------- ------- ------- -------
Net periodic
benefit cost $ 2,167 $ 2,684 $ 2,355 $ 2,710 $ 2,788 $ 2,762
------- ------- ------- ------- ------- -------
A reconciliation of the Plans' benefit obligations, fair value of plan assets,
funded status and amounts recognized in SJI's consolidated balance sheets
follows:
Thousands of Dollars
Pension Benefits Other Benefits
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Change in Benefit Obligation:
Benefit obligation at beginning
of year $ 59,530 $ 64,035 $ 22,841 $ 24,248
Service cost 1,988 2,245 996 1,098
Interest cost 4,577 4,211 1,746 1,593
Actuarial loss (gain) and other 991 (8,260) 311 (3,405)
Benefits paid (3,000) (2,701) (1,087) (693)
-------- -------- -------- --------
Benefit obligation at end of year $ 64,086 $ 59,530 $ 24,807 $ 22,841
-------- -------- -------- --------
Change in Plan Assets:
Fair value of plan assets at
beginning of year $ 53,320 $ 47,976 $ 9,472 $ 6,972
Actual return on plan assets 7,261 5,541 652 392
Employer contributions 2,503 2,504 2,933 2,801
Benefits paid (3,000) (2,701) (1,087) (693)
-------- -------- -------- --------
Fair value of plan assets at
end of year $ 60,084 $ 53,320 $ 11,970 $ 9,472
-------- -------- -------- --------
Funded status $ (4,002) $ (6,210) $(12,837) $(13,369)
Unrecognized prior service cost 3,082 2,930 - -
Unrecognized net obligation
assets from transition 215 287 9,261 10,033
Unrecognized net gain
and other (2,516) (564) (3,186) (3,649)
-------- -------- -------- --------
Accrued net benefit cost at
end of year $ (3,221) $ (3,557) $ (6,762) $ (6,985)
-------- -------- -------- --------
Assumptions used in the accounting for these plans were:
Thousands of Dollars
Pension Benefits Other Benefits
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Discount rate 7.75% 7.75% 7.75% 7.75%
Expected return on plan assets 9.00% 9.00% 7.50% 7.50%
Rate of compensation increase 4.60% 4.60% - -
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation as of December 31, 2000, are: Medical and
Drug - 5.75% in 2000 for participants age 65 or older, grading to 5.5% in 2001;
and 7.0% in 2000 for participants under age 65, grading to 5.5% in 2005.
Dental - 6.75% in 2000, grading to 5.5% in 2005.
A 1% change in the assumed health care cost trend rates for SJI's
postretirement health care plans in 2000 would have the following effects:
Thousands of Dollars
1% Increase 1% Decrease
----------- -----------
Effect on the aggregate of the service
and interest cost components $ 404 $ (331)
Effect on the postretirement benefit obligation $ 3,182 $(2,642)
13. Commitments and Contingencies:
Construction and Environmental - SJI's estimated net cost of construction and
environmental remediation programs for 2001 totals $58.6 million. Commitments
were made regarding some of these programs.
Gas Supply Contracts - SJG, in the normal course of conducting business, has
entered into long-term contracts for natural gas supplies, firm transportation
and gas storage service. The earliest that any of these contracts expires is
2001. The transportation and storage service agreements between SJG and its
interstate pipeline suppliers were made under Federal Energy Regulatory
Commission approved tariffs. SJG's cumulative obligation for demand charges and
reservation fees paid to suppliers for these services is approximately $4.8
million per month, recovered on a current basis through the LGAC.
Pending Litigation - SJI is subject to claims arising from the ordinary course
of business and other legal proceedings. In November 1999, Goldin Associates
LLC, Trustee for the Power Company of America Liquidating Trust (PCA), filed a
complaint in bankruptcy court against SJE seeking damages and attorneys' fees.
PCA was a wholesale electricity trading company with whom SJE did business. SJE
formally exited the wholesale electric business in 1999, and all activity is
recorded as discontinued operations. We believe SJE acted prudently,
responsibly and in accordance with contractual obligations in its transactions
with PCA. However, to avoid protracted litigation, SJE recently entered into a
settlement agreement in principle with PCA to resolve all issues related to
this litigation. We believe the ultimate settlement agreement will not
materially affect SJI's financial position, results of operations or liquidity.
Standby Letter of Credit - SJI has provided a $17 million standby letter of
credit to Marina District Development Corporation in support of Marina Energy's
contractual obligations to construct the thermal energy plant and to supply
heat, hot water and cooling to The Borgata Resort (see note 3).
Environmental Remediation Costs - SJI incurred and recorded costs for
environmental cleanup 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 SJF previously operated a fuel oil business and Morie maintained
equipment, fueling stations and storage.
SJI has successfully entered into settlements with all of its historic
comprehensive general liability carriers regarding the environmental
remediation expenditures at the SJG sites. In addition, SJG has purchased a
Cleanup Cost Cap Insurance Policy which limits the amount of remediation
expenditures that SJG will be required to make at 11 of its sites. This Policy
will be in force for a 25-year period at 10 sites and for a 30-year period at
one site. The following future cost estimates have not been reduced by any
insurance recoveries from settlements or the Cleanup Cost Cap Insurance Policy.
- 24 -
Since the early 1980s, SJI accrued environmental remediation costs of $123.8
million, of which $68.6 million was spent as of December 31, 2000. With the
assistance of an outside consulting firm, we estimate that future costs to
clean up SJG's sites will range from $51.0 million to $148.5 million. We
recorded the lower end of this range as a liability. It is reflected on the
2000 consolidated balance sheet under the captions Current Liabilities and
Deferred Credits and Other Non-Current Liabilities (See Note 1). SJG did not
adjust the accrued liability for future insurance recoveries, which we were
successful in pursuing. We used these proceeds to offset related legal fees and
to reduce the balance of deferred environmental remediation costs. 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 cleanup of SJG's
former gas manufacturing sites. SJG recorded $117.1 million for the remediation
of these sites and spent $66.0 million through December 31, 2000.
SJG has two regulatory assets associated with environmental cost. 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 FASB No. 71,
"Accounting for the Effects of Certain Types of Regulation." The BPU allows SJG
to recover expenditures through the RAC. SJG's current recovery level includes
remediation costs expended through July 1998, and petitions to recover costs
through July 2000 are pending (See Note 7).
The other asset titled Environmental Remediation Cost: Liability for Future
Expenditures relates to estimated future expenditures determined under the
guidance of FASB No. 5, "Accounting for Contingencies." This amount, which
relates to former manufactured gas plant sites, was recorded as a deferred
debit with the corresponding amount reflected on the consolidated balance
sheet under the captions, Current Liabilities and Deferred Credits and Other
Non-Current Liabilities. The deferred debit is a regulatory asset under FASB
No. 71. The BPU's intent, evidenced by current practice, is to allow SJG to
recover the deferred costs after they are spent.
SJG files with the BPU to recover these costs in rates through its RAC. The BPU
has consistently allowed the full recovery over 7-year periods, and SJG
believes this will continue. As of December 31, 2000, SJG's unamortized
remediation costs of $18.5 million are reflected on the consolidated balance
sheet under the caption, Regulatory and Other Non-Current Assets. Since
implementing the RAC in 1992, SJG recovered $23.6 million through rates as of
December 31, 2000 (See Note 7).
With Morie's sale, EMI assumed responsibility for environmental liabilities
estimated between $2.8 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 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 $0.2 million, while SJF's estimated
liability ranges from $1.1 million to $3.1 million for its three sites.
Amounts sufficient to cover the lower ends of these ranges were recorded and
are reflected on the 2000 consolidated balance sheet under Current Liabilities
and Deferred Credits and Other Non-Current Liabilities as of December 31,
2000.
Management's Responsibilities for
Financial Statements
South Jersey Industries' management is responsible for the integrity and
objectivity of SJI's financial statements and related disclosures. These
statements and disclosures were prepared using management's best judgment and
conform with accounting principles generally accepted in the United States of
America.
The board of directors, acting through its audit committee, which is composed
of outside directors, oversees managment's responsibilities for accounting,
internal control and financial reporting. The audit committee meets
periodically with managment and the internal and independent auditors to
discuss auditing and financial matters, and to assure that each is carrying out
its responsibilities. The internal auditors and independent auditors have
access to the members of the audit committee at any time.
- 25 -
Quarterly Financial Data
(Unaudited)
Summarized quarterly results of SJI's operations, in thousands except for per
share amounts:
2000 Quarter Ended 1999 Quarter Ended
-------------------------------------- --------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- -------- -------- -------- -------- --------
Operating Revenues $167,522 $ 89,428 $ 75,808 $183,170 $146,732 $ 76,697 $ 59,750 $110,033
-------- -------- -------- -------- -------- -------- -------- --------
Operating Expenses:
Operation and Maintenance
Including Fixed Charges 130,442 87,111 80,676 162,763 111,631 74,357 64,917 92,765
Income Taxes 13,626 248 (2,560) 7,344 12,701 470 (2,544) 5,801
Energy and Other Taxes 4,383 2,078 1,700 3,452 4,497 1,872 1,531 3,237
-------- -------- -------- -------- -------- -------- -------- --------
Income (Loss) from
Continuing Operations 19,071 (9) (4,008) 9,611 17,903 (2) (4,154) 8,230
Discontinued Operations - Net (90) (127) (110) (154) (64) (59) (37) (129)
-------- -------- -------- -------- -------- -------- -------- --------
Net Income (Loss) Applicable
to Common Stock $ 18,981 $ (136) $ (4,118) $ 9,457 $ 17,839 $ (61) $ (4,191) $ 8,101
======== ======== ======== ======== ======== ======== ======== ========
Earnings Per Common Share
(Based on Average
Shares Outstanding): (1)
Continuing Operations $ 1.69 $ 0.00 $ (0.35) $ 0.83 $ 1.66 $ 0.00 $ (0.38) $ 0.74
Discontinued Operations - Net (0.01) (0.01) (0.01) (0.01) 0.00 (0.01) 0.00 (0.01)
-------- -------- -------- -------- -------- -------- -------- --------
Earnings Per Common Share $ 1.68 $ (0.01) $ (0.36) $ 0.82 $ 1.66 $ (0.01) $ (0.38) $ 0.73
======== ======== ======== ======== ======== ======== ======== ========
Average Shares Outstanding 11,284 11,361 11,462 11,498 10,780 10,781 10,975 11,151
<FN>
(1) The sum of the quarters for 2000 and 1999 does not equal the year's total
due to rounding.
NOTE: Because of the seasonal nature of the business, statements for the
3-month periods are not indicative of the results for a full year.
</FN>
Market Price of Common
Stock and Related Information
Quarter Ended Market Price Per Share Dividends Declared Quarter Ended Market Price Per Share Dividends Declared
2000 High Low Per Share 1999 High Low Per Share
- ------------- ------ ------ ------------------ ------------- ------ ------ ------------------
March 31 $29.63 $27.56 $0.365 March 31 $26.69 $21.50 $0.360
June 30 $28.81 $24.50 $0.365 June 30 $30.00 $21.63 $0.360
Sept. 30 $29.25 $26.06 $0.365 Sept. 30 $30.75 $26.06 $0.360
Dec. 31 $30.13 $28.25 $0.365 Dec. 31 $30.25 $25.50 $0.360
<FN>
These quotations are based on the list of composite transactions of the New
York Stock Exchange. Our stock is traded on the New York Stock Exchange under
the symbol SJI. We have declared and expect to continue to declare regular
quarterly cash dividends. As of December 29, 2000, the latest available date,
our stock records indicate that there were 9,076 shareholders.
</FN>
- 26 -
South Jersey Gas Company
Comparative Operating Statistics
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Operating Revenues (Thousands):
Firm
Residential $ 172,418 $ 152,946 $ 147,274 $ 176,717 $ 177,673
Commercial 49,669 35,064 36,328 60,418 70,755
Industrial 5,265 4,879 4,175 5,535 7,540
Cogeneration & Electric Generation 11,016 8,496 8,119 5,249 16,173
Firm Transportation 38,213 33,125 24,893 15,966 10,473
--------- --------- --------- --------- ---------
Total Firm Revenues 276,581 234,510 220,789 263,885 282,614
Interruptible 1,645 1,645 2,506 6,085 7,256
Interruptible Transportation 1,531 1,724 2,598 3,507 2,630
Off-System 160,208 104,142 62,578 39,403 28,236
Capacity Release & Storage 4,411 4,193 6,031 8,533 4,349
Other 2,522 4,707 4,568 6,135 5,249
Intercompany Sales (14,612) (5,211) (1,032) (71) (1,039)
--------- --------- --------- --------- ---------
Total Operating Revenues $ 432,286 $ 345,710 $ 298,038 $ 327,477 $ 329,295
========= ========= ========= ========= =========
Throughput (MMcf):
Firm
Residential 19,124 17,741 16,979 19,955 21,699
Commercial 6,191 4,634 4,826 8,067 10,117
Industrial 282 246 348 733 1,238
Cogeneration & Electric Generation 2,046 2,316 2,373 1,230 5,180
Firm Transportation 26,114 25,143 22,336 20,196 12,969
--------- --------- --------- --------- ---------
Total Firm Throughput 53,757 50,080 46,862 50,181 51,203
--------- --------- --------- --------- ---------
Interruptible 207 383 694 1,345 1,618
Interruptible Transportation 3,022 3,628 6,049 7,586 5,422
Off-System 38,097 42,480 26,916 14,462 8,571
Capacity Release & Storage 37,445 29,247 27,319 36,382 25,460
--------- --------- --------- --------- ---------
Total Throughput 132,528 125,818 107,840 109,956 92,274
========= ========= ========= ========= =========
Number of Customers at Year End:
Residential 261,621 254,601 248,210 242,132 236,008
Commercial 19,319 18,894 18,457 18,037 17,469
Industrial 410 404 398 398 397
--------- --------- --------- --------- ---------
Total Customers 281,350 273,899 267,065 260,567 253,874
========= ========= ========= ========= =========
Maximum Daily Sendout (MMcf) 375 324 314 355 325
========= ========= ========= ========= =========
Annual Degree Days 4,942 4,468 4,110 4,829 5,175
========= ========= ========= ========= =========
Normal Degree Days * 4,639 4,664 4,708 4,728 4,689
========= ========= ========= ========= =========
<FN>
* Average degree days recorded in SJG's service territory during 20-year period
ended June 30 of prior year.
</FN>
- 27 -
South Jersey Industries
Board of Directors
Shirli M. Billings, Ph.D.
Director since 1983, Age 60 1, 4, 5*
President, Leadership Learning Academy,
Lakeland, Fla.
Charles Biscieglia
Director since 1998, Age 56 3+, 4*, 5+
Chairman, President and CEO of
South Jersey Industries and
President and CEO of South Jersey Gas
Keith S. Campbell
Director since 2000, Age 46 3, 5
Chairman, Mannington Mills, Salem, N.J.
Sheila Hartnett-Devlin
Director since 1999, Age 42 1, 2
Executive Vice President of Fiduciary Trust Company
International, New York, N.Y.
Richard L. Dunham
Director since 1984, Age 71 2, 4, 5
Former Chairman of the Board, now retired
Former Chairman of the Federal Power
Commission (now the Federal Energy Regulatory
Commission), Washington, D.C.
W. Cary Edwards
Director from April 1990 to January 1993
and September 1993 to present, Age 56 2, 3, 4
Managing Partner, law firm of Edwards & Caldwell,
Hawthorne, N.J.
Thomas L. Glenn, Jr.
Director since 1986, Age 66 1, 3*, 4
Chairman, Glenn Insurance, Inc., Absecon, N.J.
Herman D. James, Ph.D.
Director since 1990, Age 57 1*, 2, 5
Distinguished Professor, Rowan University
Clarence D. McCormick
Director since 1979, Age 71 2*, 4, 5
Retired Chairman and CEO of
The Farmers and Merchants National Bank
of Bridgeton, N.J. and
Retired Chairman and President of Southern Jersey
Bancorp of Delaware, Bridgeton, N.J.
Frederick R. Raring
Director since 1995, Age 63 1, 3, 5
President, Seashore Supply Company, Atlantic City, N.J.
1 Audit Committee
2 Compensation/Pension Committee
3 Environmental Committee
4 Executive Committee
5 Nominating Committee
* Committee Chair
+ Ex Officio
South Jersey Industries
Officers
Charles Biscieglia
Chairman, President and CEO
George L. Baulig
Vice President & Corporate Secretary
Edward J. Graham
Vice President
David A. Kindlick
Vice President
Albert V. Ruggiero
Vice President
William J. Smethurst, Jr.
Treasurer
Richard H. Walker, Jr.
Assistant Secretary
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SJI Corporate Headquarters
1 South Jersey Plaza
Folsom, NJ 08037-9917
(609) 561-9000
TDD only 1-800-547-9085
www.sjindustries.com
Transfer Agent and Registrar
First Union National Bank
Corporate Trust Client Services NC 1153
1525 West W. T. Harris Blvd. 3C3
Charlotte, NC 28288-1153
Dividend, Dividend Reinvestment and Other Shareholder Inquiries
South Jersey Industries
Shareholder Records Department
Call toll-free: 1-888-SJI-3100
Investor Relations
Stephen H. Clark, Director
609-561-9000 ext. 4260
sclark@sjindustries.com
Dividend Reinvestment Plan
SJI's Dividend Reinvestment Plan provides record shareholders of SJI's common
stock with a way to increase their investment in the company without payment of
any brokerage commission or service charge.
Shareholders participating in the Plan may purchase shares of common stock by
the automatic reinvestment of dividends. The Plan is now available to any
person who, upon enrollment, agrees to become a shareholder by purchasing at
least $100 of SJI common stock. Optional purchases are permitted each quarter
up to a maximum of $100,000 in any calendar year as prescribed in the Plan.
Shares of common stock offered through the Plan are newly issued or treasury
common stock that the Plan acquires directly from SJI currently at a 2 percent
discount. The price will be 98 percent of the average of the high and low sale
prices for SJI's common stock for each of the last 12 days the common stock
was traded prior to the purchase date, as published in The Wall Street Journal.
The offer and sale of shares under the Plan will be made only through a
Prospectus, obtainable by contacting the Shareholder Records Department.
Direct Deposit of Dividends (Electronic Funds Transfer)
Stockholders of record can have immediate access to dividend funds. Your
dividend funds can be deposited directly into your checking or savings account.
Confirmation of dividend receipts will appear on your monthly bank statements.
Annual Meeting Information
The Annual Meeting of Shareholders will be held Thursday, April 19, 2001 at
10 a.m. at Renault Winery, 72 North Bremen Avenue, Egg Harbor/Galloway, NJ.
South Jersey Industries stock is traded on the New York Stock Exchange under
the trading symbol SJI. The information contained herein is not given in
connection with any sale or offer of, or solicitation of an offer to buy, any
securities.