Page 1 of 30
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2001 Commission File Number 1-6364
SOUTH JERSEY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-1901645
(State of incorporation) (IRS employer identification no.)
1 South Jersey Plaza, Folsom, NJ 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 2, 2001, there were 11,812,101 shares of the registrant's common
stock outstanding.
- Cover Page -
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 17
SJI-2
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands, Except for Per Share Data)
Three Months Ended
September 30,
--------------------------
2001 2000
------------ ------------
Operating Revenues:
Utility $55,616 $58,885
Nonutility 52,319 16,923
------------ ------------
Total Operating Revenues 107,935 75,808
------------ ------------
Operating Expenses:
Cost of Gas Sold - Utility 37,971 41,404
Cost of Sales - Nonutility 50,810 15,924
Operations 11,079 10,757
Maintenance 1,554 1,355
Depreciation 5,330 5,074
Income Taxes (2,393) (2,560)
Energy and Other Taxes 1,446 1,701
------------ ------------
Total Operating Expenses 105,797 73,655
------------ ------------
Operating Income 2,138 2,153
------------ ------------
Unrealized Gain on Energy Trading (Note 1) 50 -
------------ ------------
Interest Charges:
Long-Term Debt 4,545 4,268
Short-Term Debt and Other 663 1,127
------------ ------------
Total Interest Charges 5,208 5,395
------------ ------------
Preferred Dividend Requirements of Subsidiary 764 766
------------ ------------
Loss from Continuing Operations (3,784) (4,008)
Loss from Discontinued Operations - Net (28) (110)
------------ ------------
Net Loss Applicable to Common Stock ($3,812) ($4,118)
------------ ------------
Average Shares of Common Stock Outstanding 11,769 11,462
============ ============
Earnings Per Common Share:
Continuing Operations ($0.32) ($0.35)
Discontinued Operations - Net 0.00 (0.01)
------------ ------------
Earnings Per Common Share ($0.32) ($0.36)
============ ============
Dividends Declared Per Common Share $0.370 $0.365
============ ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-3
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands, Except for Per Share Data)
Nine Months Ended
September 30,
--------------------------
2001 2000
------------ ------------
Operating Revenues:
Utility $338,444 $278,202
Nonutility 330,672 54,556
------------ ------------
Total Operating Revenues 669,116 332,758
------------ ------------
Operating Expenses:
Cost of Gas Sold - Utility 239,494 178,816
Cost of Sales - Nonutility 321,316 48,478
Operations 32,342 32,389
Maintenance 6,227 5,857
Depreciation 15,801 15,042
Income Taxes 13,149 11,314
Energy and Other Taxes 7,830 8,161
------------ ------------
Total Operating Expenses 636,159 300,057
------------ ------------
Operating Income 32,957 32,701
------------ ------------
Unrealized Gain on Energy Trading (Note 1) 2,651 -
------------ ------------
Interest Charges:
Long-Term Debt 12,869 11,787
Short-Term Debt and Other 2,745 3,553
------------ ------------
Total Interest Charges 15,614 15,340
------------ ------------
Preferred Dividend Requirements of Subsidiary 2,297 2,307
------------ ------------
Income from Continuing Operations 17,697 15,054
Loss from Discontinued Operations - Net (215) (327)
Cumulative Effect of Accounting Change - Net (Note 1) 148 -
------------ ------------
Net Income Applicable to Common Stock $17,630 $14,727
============ ============
Average Shares of Common Stock Outstanding 11,674 11,369
============ ============
Earnings Per Common Share:
Continuing Operations $1.52 $1.32
Discontinued Operations - Net (0.02) (0.03)
Cumulative Effect of Accounting Change - Net (Note 1) 0.01 0.00
------------ ------------
Earnings Per Common Share $1.51 $1.29
============ ============
Dividends Declared Per Common Share $1.105 $1.095
============ ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-4
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
September 30, December 31,
-------------------------- ------------
2001 2000 2000
------------ ------------ ------------
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $793,471 $752,218 $765,561
Accumulated Depreciation (218,422) (203,969) (208,292)
Nonutility Property and Equipment, at cost 17,038 3,203 6,042
Accumulated Depreciation (1,031) (965) (988)
------------ ------------ ------------
Property, Plant and Equipment - Net 591,056 550,487 562,323
------------ ------------ ------------
Investments:
Available-for-Sale Securities 3,008 2,341 2,540
Investment in Affiliate 1,810 4,451 4,451
------------ ------------ ------------
Total Investments 4,818 6,792 6,991
------------ ------------ ------------
Current Assets:
Cash and Cash Equivalents 36,201 7,668 7,227
Notes Receivable - Affiliate 295 205 1,055
Accounts Receivable 57,203 38,211 80,480
Unbilled Revenues 8,095 7,733 45,022
Provision for Uncollectibles (2,247) (1,033) (2,043)
Natural Gas in Storage, average cost 63,758 55,777 31,957
Materials and Supplies, average cost 4,033 3,807 4,037
Prepaid Taxes 13,355 8,665 3,960
Energy Trading Assets 53,668 - -
Prepayments and Other Current Assets 3,614 3,453 3,128
------------ ------------ ------------
Total Current Assets 237,975 124,486 174,823
------------ ------------ ------------
Accounts Receivable - Merchandise 294 869 705
------------ ------------ ------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 12,352 14,527 18,474
Liability for Future Expenditures 51,029 51,029 51,029
Gross Receipts & Franchise Taxes 2,365 2,809 2,698
Income Taxes - Flowthrough Depreciation 9,819 10,797 10,553
Deferred Fuel Costs - Net 44,409 23,811 28,810
Deferred Postretirement Benefit Costs 4,252 4,630 4,536
Energy Trading Assets 4,214 - -
Other 9,471 8,474 9,037
------------ ------------ ------------
Total Regulatory and Other Non-Current Assets 137,911 116,077 125,137
------------ ------------ ------------
Total Assets $972,054 $798,711 $869,979
============ ============ ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-5
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
September 30, December 31,
-------------------------- ------------
2001 2000 2000
------------ ------------ ------------
Capitalization and Liabilities
Common Equity:
Common Stock $14,712 $14,328 $14,375
Premium on Common Stock 137,302 128,898 129,360
Retained Earnings 62,675 52,744 58,004
------------ ------------ ------------
Total Common Equity 214,689 195,970 201,739
------------ ------------ ------------
Preferred Stock and Securities of Subsidiary:
Redeemable Cumulative Preferred Stock:
South Jersey Gas Company, Par Value $100 per share
Authorized - 41,966, 43,104 and 43,104 shares
Outstanding Shares:
Series A, 4.7% -- 0, 300 and 300 shares - 30 30
Series B, 8% -- 16,904, 17,742 and 17,742 shares 1,690 1,774 1,774
South Jersey Gas Company-Guaranteed Manditorily Redeemable
Preferred Securities of Subsidiary Trust:
Par Value $25 per share, 1,400,000 shares
Authorized and Outstanding 35,000 35,000 35,000
------------ ------------ ------------
Total Preferred Stock and Securities of Subsidiary 36,690 36,804 36,804
------------ ------------ ------------
Long-Term Debt 259,247 207,123 204,981
------------ ------------ ------------
Total Capitalization 510,626 439,897 443,524
------------ ------------ ------------
Current Liabilities:
Notes Payable - Banks 140,405 93,800 121,200
Notes Payable - Affiliate 400 0 0
Current Maturities of Long-Term Debt 11,876 11,876 11,876
Accounts Payable 41,347 55,620 84,004
Customer Deposits 5,646 5,284 5,366
Environmental Remediation Costs 17,247 13,818 17,286
Taxes Accrued 3,045 3,367 1,479
Energy Trading Liabilities 47,106 - -
Interest Accrued and Other Current Liabilities 13,826 13,618 15,816
------------ ------------ ------------
Total Current Liabilities 280,898 197,383 257,027
------------ ------------ ------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 112,671 93,927 105,037
Investment Tax Credits 4,253 4,595 4,513
Pension and Other Postretirement Benefits 12,811 12,577 13,394
Environmental Remediation Costs 37,884 41,354 37,886
Energy Trading Liabilities 3,680 - -
Other 9,231 8,978 8,598
------------ ------------ ------------
Total Deferred Credits
and Other Non-Current Liabilities 180,530 161,431 169,428
------------ ------------ ------------
Commitments and Contingencies (Note 7)
Total Capitalization and Liabilities $972,054 $798,711 $869,979
============ ============ ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-6
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Nine Months Ended
September 30,
---------------------------
2001 2000
------------ ------------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $17,630 $14,727
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 17,548 17,286
Unrealized Gain on Energy Trading (2,651) -
Provision for Losses on Accounts Receivable 1,046 729
Revenues and Fuel Costs Deferred - Net (15,599) (10,637)
Deferred and Non-Current Income Taxes and Credits - Net 7,972 3,107
Environmental Remediation Costs - Net 6,081 10,966
Changes in:
Accounts Receivable 59,362 18,701
Inventories (31,797) (28,433)
Prepayments and Other Current Assets (486) (250)
Prepaid and Accrued Taxes - Net (7,829) (1,792)
Accounts Payable and Other Accrued Liabilities (44,367) 14,751
Other - Net (3,455) 2,202
------------ ------------
Net Cash Provided by Operating Activities 3,455 41,357
------------ ------------
Cash Flows from Investing Activities:
Investment in Affiliate 2,641 (2,201)
Purchase of Available-For-Sale Securities (571) (633)
Capital Expenditures, Cost of Removal and Salvage (45,303) (33,643)
------------ ------------
Net Cash Used in Investing Activities (43,233) (36,477)
------------ ------------
Cash Flows from Financing Activities:
Net Proceeds from (Repayments of) Lines of Credit 19,205 (26,150)
Proceeds from Issuance of Long-Term Debt 64,000 35,000
Principal Repayments of Long-Term Debt (9,734) (8,438)
Repayment of Loan to Affiliate 1,160 2,445
Dividends on Common Stock (12,958) (12,450)
Proceeds from Sale of Common Stock 8,234 8,377
Repurchase of Preferred Stock (114) (240)
Payments for Issuance of Long-Term Debt and Preferred Securities (1,041) (1,390)
------------ ------------
Net Cash Provided by (Used in) Financing Activities 68,752 (2,846)
------------ ------------
Net Increase in Cash and Cash Equivalents 28,974 2,034
Cash and Cash Equivalents at Beginning of Period 7,227 5,634
------------ ------------
Cash and Cash Equivalents at End of Period $36,201 $7,668
============ ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-7
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies:
Consolidation - The consolidated financial statements include the accounts
of South Jersey Industries, Inc. (SJI) and its subsidiaries. All significant
intercompany accounts and transactions were eliminated. SJI reclassified some
previously reported amounts to conform with current year classifications. In
our opinion, the condensed consolidated financial statements reflect all
adjustments needed to fairly present SJI's financial position and operating
results at the dates and for the periods presented. Our businesses are subject
to seasonal fluctuations and, accordingly, this interim financial information
should not be the basis for estimating the full year's operating results.
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.
Equity-Based Investments in Affiliates - SJI, either directly or through
its wholly-owned subsidiaries, currently holds a 50% non-controlling interest
in several affiliated companies and accounts for the investments under the
equity method. The operations of these affiliated companies are not material
to the accompanying condensed consolidated financial statements.
Energy Trading Activities & Derivative Instruments - The regulated and
unregulated subsidiaries of SJI are involved in the buying, selling,
transporting and storing of natural gas and buying and selling of retail
electricity for their own accounts as well as managing these activities for
others. As such, these subsidiaries are subject to market risk due to
fluctuations in price. To manage this risk, the Company enters into a variety
of physical and financial transactions including forward cont racts, swaps,
futures, and options agreements.
SJI has structured its subsidiaries such that South Jersey Gas Company
(SJG) and South Jersey Energy Company (SJE) transact commodities on a physical
basis only and enter into no financially-settling positions directly. South
Jersey Resources Group, LLC (SJRG) performs this function for these entities
and enters into the types of transactions noted above. Management takes an
active role in the risk management process and has developed policies and
procedures that require specific administrative and business functions to
assist in the identification, assessment and control of various risks.
Management reviews any open positions in accordance with strict policies in
order to limit exposure to market risk.
SJI-8
Effective January 1, 2001, SJI adopted Financial Accounting Standards
Board (FASB) Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of
the derivative are recorded in other comprehensive income and recognized in the
income statement when the hedged item affects earnings. Ineffective portions
of changes in the fair value of cash flow hedges are recognized in earnings.
SJI has elected to not designate any derivative instruments as fair value or
cash flow hedges.
None of the activities of SJG and SJE are considered subject to the fair
value recognition requirements of FASB No. 133.
SJRG manages its portfolio purchases and sales, as well as natural gas in
storage, using a variety of instruments that include forward contracts, swap
agreements, option contracts and futures contracts. Beginning in April 2001,
the Company determined that it would be more appropriate to account for
the current activities of SJRG (its financially-settled transactions, natural
gas in storage and other physically-settled transactions) in accordance with
guidance provided by Emerging Issues Task Force No. 98-10, which requires that
such items be accounted for pursuant to the mark-to-market method of
accounting. Under the mark-to-market method of accounting, such items are
reflected at fair value in Energy Trading Assets or Energy Trading Liabilities
on our condensed consolidated balance sheets, while incremental changes in the
fair value of such items are reflected in the condensed statements of
consolidated income as a component of Unrealized Gain on Energy Trading. For
the three and nine months ended September 30, 2001, the change in the fair
value of financially-settled energy trading contracts was a gain of $.05
million and $2.7 million, respectively. The cumulative effect of a change
in accounting principle of $148,000, originally reported in the March 31, 2001
Form 10-Q, relates to the adoption of FASB No. 133 on January 1, 2001 and is
not impacted by the application of EITF No. 98-10, because such guidance also
requires all applicable transactions to be recorded at fair value.
Fair value of the derivative investments is determined by reference to
quoted market prices of listed contracts, published quotations or quotations
from independent parties.
SJI implemented FASB No. 133 and EITF No. 98-10 based on current rules and
guidance in place as of January 1, 2001 and through September 30, 2001.
However, if such guidance is altered, this may impact subsequent reported
operating results.
SJI-9
New Accounting Pronouncements - In June 2001, the FASB issued Statement
No. 141, "Business Combinations," FASB No. 142, "Goodwill and Other Tangible
Assets" and FASB No. 143, "Accounting for Asset Retirement Obligations." FASB
No. 141 requires that all business combinations initiated after June 30, 2001
be accounted for under the purchase method and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. FASB No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. FASB No. 142 provides that intangible assets with finite useful
lives be amortized and that goodwill and intangible assets with indefinite
lives will not be amortized, but will rather be tested at least annually for
impairment. FASB No. 143 establishes accounting and reporting standards for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SJI expects to adopt FASB Nos. 141 and
142 for its fiscal year beginning January 1, 2002 and FASB 143 for its fiscal
year beginning January 1, 2003. We are currently evaluating the effects of
these pronouncements; however, they are not expected to have a material impact
on SJI's financial condition or results of operations.
Note 2. Discontinued Operations and Affiliations:
Discontinued Operations - Summarized operating results of the discontinued
operations were (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
------ ------ ------ ------
(Loss)Income before Income Taxes:
Sand Mining $ (31) $ (63) $ 779 $(126)
Construction 2 5 97 7
Fuel Oil (18) (20) (57) (68)
Wholesale Electric - (99) (1,177) (347)
Income Tax Credits 19 67 143 207
------ ------ ------ ------
Loss from Discontinued
Operations - Net $ (28) $(110) $(215) $(327)
====== ====== ====== ======
Earnings per Common Share
from Discontinued Operations $0.00 $(0.01) $(0.02) $(0.03)
====== ======= ======= =======
Affiliations - SJRG was formed to provide natural gas storage, peaking
services and transportation capacity for wholesale customers in New Jersey and
surrounding states. Prior to January 1, 2001, SJRG was owned by SJ EnerTrade,
Inc., a wholly-owned subsidiary of SJE, and UPR Energy Marketing, Inc. (UPR)
which each held a 50% non-controlling interest. In January 2001, SJRG became a
wholly-owned subsidiary of SJI when UPR redeemed its 50% interest in SJRG for
the book value of its investment.
SJI-10
In 2001, the operations of SJRG are included on a consolidated basis.
Prior to January 1, 2001, SJI's investment in SJRG was accounted for on
the equity method. Had the activity of SJRG been fully consolidated in 2000,
Nonutility Revenues would have been reported as $42.6 million and $179.7
million, and Cost of Sales - Nonutility would have been reported as $41.3
million and $173.7 million for the three months and nine months ending
September 30, 2000, respectively.
In January 1999, SJI and Conectiv Solutions, LLC, formed Millennium
Account Services, LLC to provide meter reading services in southern New Jersey.
In June 1999, SJE and Energy East Solutions, Inc. 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. (GZA) 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 (Marina), 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.
Note 3. Common Stock:
SJI has 20,000,000 shares of authorized Common Stock. The following
shares were issued and outstanding:
2001 2000
---------- ----------
Beginning Balance, January 1 11,499,701 11,152,175
New Issues During Period:
Dividend Reinvestment Plan 266,432 301,451
Employees' Stock Ownership Plan 2,805 2,949
Stock Option, Stock Appreciation
Rights, and Restricted Stock
Award Plan 346 5,545
Directors' Restricted Stock Plan - 180
Ending Balance, September 30 11,769,284 11,462,300
The par value ($1.25 per share) of stock issued in 2001 and 2000 was
credited to Common Stock. Net excess over par value of approximately $7.9
million and $8.0 million was credited to Premium on Common Stock for the nine
months ended September 30, 2001 and 2000, respectively.
SJI-11
Dividend Reinvestment Plan (DRP) and Employees' Stock Ownership Plan
(ESOP) - All shares offered through the DRP and ESOP are issued directly by
SJI. As of September 30, 2001, SJI reserved 1,592,602 and 20,630 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 both
September 30, 2001 and 2000, SJI had 3,000 and 4,500 options outstanding,
respectively, all exercisable at $24.69 per share. No options and no stock
appreciation rights were granted in 2001 or 2000. In 1999, the Plan was
amended to include restricted stock awards. As of September 30, 2001, 59,528
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 September 30, 2001 and 2000, do not dilute our EPS as
calculated in accordance with FASB No. 128, "Earnings Per Share."
Note 4. Regulatory Actions:
In January 1997, the New Jersey Board of Public Utilities (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 $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 Temperature Adjustment Clause
(TAC). The revision credits the first $750,000 above the current threshold
level to the Levelized Gas Adjustment Clause (LGAC) customers. Thereafter, SJG
keeps 20% of the pre-tax margins as it has historically.
In September 1999, the BPU approved an annual recovery level of $6.5
million for remediation costs expended from August 1995 through July 1998. In
January 2000, the BPU approved the recovery of carrying costs on unrecovered
remediation costs and a proposal by SJG to keep its current Remediation
Adjustment Clause (RAC) rate in effect through October 2002. However, due to
substantial RAC insurance recoveries, in October 2001, SJG filed for a RAC rate
decrease. This proposal would reduce the annual recovery level to $4.2
million, if approved.
Effective January 10, 2000, the BPU approved full unbundling of SJG's
system. This allows all natural gas consumers to select their natural gas
supplier. As of September 30, 2001, 36,393 of SJG's residential customers were
purchasing 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
SJI-12
applicable taxes. The resulting decrease in revenues is offset by a
corresponding decrease in gas costs and taxes under SJG's BPU-approved fuel
clause. SJG's net income and financial condition 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 two-year period beginning
January 2000, and will approximate $2.5 million plus carrying costs through
December 2001. 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 a modification to SJG's LGAC whereby underrecovered gas
costs of $11.9 million as of October 31, 1999, and carrying costs thereon, are
being recovered over a three-year period beginning January 2000.
On November 16, 2000, SJG received approval to increase its LGAC in
response to unprecedented natural gas price run-ups during 2000. The impact of
this initial increase was approximately 19.0% to a typical residential heating
customer. The BPU also approved the creation of a flexible pricing mechanism,
allowing additional 2.0% increases each month from December 2000 through July
2001. In addition, the ruling permits SJG to recover unrecovered gas costs as
of October 31, 2001 with interest at 5.5% or 5.75% over a three-year period,
beginning December 1, 2001. The higher interest rate is applicable if SJG does
not seek an LGAC rate increase for the next LGAC year. Recoverable interest
costs began accruing on April 1, 2001.
Note 5. Segments of Business:
Information about SJI's operations in different industry segments is
presented below (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Operating Revenues:
Gas Utility Operations $ 57,808 $ 63,835 $358,904 $287,498
Wholesale Gas Operations 45,009 - 308,389 -
Retail Gas and
Other Nonutility Operations 19,600 17,221 76,446 55,521
-------- -------- -------- --------
Subtotal 122,417 81,056 743,739 343,019
Intersegment Sales (14,482) (5,248) (74,623) (10,261)
-------- -------- -------- --------
Total Operating Revenues $107,935 $ 75,808 $669,116 $332,758
======== ======== ======== ========
SJI-13
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Operating Income:
Gas Utility Operations $ (779) $ (550) $ 39,072 $ 40,077
Wholesale Gas Operations 297 - 2,055 -
Retail Gas and
Other Nonutility Operations 143 290 4,525 3,875
-------- -------- -------- --------
Subtotal (339) (260) 45,652 43,952
Income Taxes 2,394 2,560 (13,148) (11,314)
General Corporate 83 (147) 453 63
-------- -------- -------- --------
Total Operating Income $ 2,138 $ 2,153 $ 32,957 $ 32,701
======== ======== ======== ========
Depreciation and Amortization:
Gas Utility Operations $ 5,878 $ 5,677 $ 17,464 $ 17,192
Wholesale Gas Operations 5 - 5 -
Retail Gas and
Other Nonutility Operations 17 19 58 80
Discontinued Operations 7 4 21 14
-------- -------- -------- --------
Total $ 5,907 $ 5,700 $ 17,548 $ 17,286
======== ======== ======== ========
Property Additions:
Gas Utility Operations $ 12,495 $ 11,611 $ 33,669 $ 32,822
Wholesale Gas Operations 3 - 56 -
Retail Gas and
Other Nonutility Operations 7,454 111 11,003 420
-------- -------- -------- --------
Total $ 19,952 $ 11,722 $ 44,728 $ 33,242
======== ======== ======== ========
Identifiable Assets:
Gas Utility Operations $837,355 $780,674
Wholesale Gas Operations 88,343 -
Retail Gas and
Other Nonutility Operations 46,793 11,847
Discontinued Operations 2,234 2,370
-------- --------
Subtotal 974,725 794,891
Corporate Assets 34,593 13,431
Intersegment Assets (37,264) (9,611)
-------- --------
Total Assets $972,054 $798,711
======== ========
SJI-14
Gas Utility Operations consist primarily of natural gas distribution to
residential, commercial and industrial customers. Wholesale Gas Operations
include the activities of SJRG. Retail Gas and Other Nonutility Operations
include the natural gas and electric acquisition and transportation service
companies.
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 condensed consolidated statements of income and not shown
above.
Note 6. Retained Earnings:
Restrictions exist under various loan agreements regarding the amount of
cash dividends or other distributions that SJG may pay on its common stock.
SJI's total equity in its subsidiaries' retained earnings, which is free of
these restrictions, was $60.8 million as of September 30, 2001.
Note 7. Commitments and Contingencies:
Construction and Environmental - SJI's estimated cost of construction and
environmental remediation programs for 2001 totals $61.3 million. Commitments
were made regarding some of these programs.
Pending Litigation - SJI is subject to claims arising in the ordinary
course of business and other legal proceedings. We accrue liabilities when
these claims become apparent for amounts we believe these claims may be
settled. We also maintain insurance and record probable insurance recoveries
relating to outstanding claims.
Standby Letter of Credit - SJI had provided a $17 million standby letter
of credit to Marina District Development Corporation in support of Marina's
contractual obligations to construct the thermal energy plant and to supply
heat, hot water and cooling to The Borgata Resort. With the achievement of
certain construction milestones, the standby letter of credit has been reduced
to $14.3 million as of September 30, 2001.
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 South Jersey Fuel, Inc. (SJF) previously operated a fuel
oil business and The Morie Company (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
SJI-15
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.
Since the early 1980s, SJI accrued environmental remediation costs of
$133.5 million, of which $78.4 million was spent as of September 30, 2001.
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
2001 condensed consolidated balance sheets under the captions Current
Liabilities and Deferred Credits and Other Non-Current Liabilities. 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 $126.8 million for the
remediation of these sites and spent $75.8 million through September 30, 2001.
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 2001 are pending.
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 condensed consolidated
balance sheets under the captions, Current Liabilities and Deferred Credits and
Other Non-Current Liabilities. The deferred debit is a regulatory asset under
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 September 30, 2001, SJG's unamortized
remediation costs of $12.3 million are reflected on the condensed consolidated
balance sheets under the caption, Regulatory and Other Non-Current Assets.
Since implementing the RAC in 1992, SJG recovered $28.0 million through rates
as of September 30, 2001.
SJI-16
With Morie's sale, Energy and Minerals, Inc. (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 condensed consolidated statements of
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 2001 condensed consolidated balance sheets under Current
Liabilities and Deferred Credits and Other Non-Current Liabilities as of
September 30, 2001.
Note 8. Long-Term Debt:
In July 2001, SJG issued the remaining $35 million of debt under its
Medium Term Note Program. Notes totaling $10 million were issued at 6.74%,
maturing in 2011; notes totaling $15 million were issued at 6.57%, maturing in
2011; and notes totaling $10 million were issued at 6.50%, maturing in 2016.
On September 19, 2001, Marina sold $20.0 million of tax-exempt Thermal
Energy Facilities Revenue Bonds Series A (Series A) and $9.0 million of taxable
Thermal Energy Facilities Revenues Bonds Series B (Series B) issued by the New
Jersey Economic Development Authority. Marina is authorized to issue up to an
additional $16.0 million in Series B bonds. The proceeds of these bonds will
be used to construct the thermal energy plant referred to in Note 2. The
maturity of the Series A and Series B bonds are 30 and 20 years, respectively.
Both Series A and Series B bear interest at a floating rate, reset weekly.
SJI-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
South Jersey Industries (SJI) is an energy services holding company which
provides a variety of products and services through the following subsidiaries:
1) South Jersey Gas Company (SJG) is a regulated natural gas utility.
SJG distributes natural gas to approximately 284,240 customers in the seven
southernmost counties of New Jersey. SJG also:
. makes off-system sales of natural gas on a wholesale basis to
various customers on the interstate pipeline system;
. transports natural gas purchased directly from producers or
suppliers for its own sales and for some of its customers;
. services appliances via the sale of appliance warranty programs, as
well as on a time and materials basis.
2) South Jersey Energy Company (SJE) acquires and markets natural gas to
retail end users and provides total energy management services to commercial
and industrial customers. SJE has one subsidiary, SJ EnerTrade (EnerTrade),
that primarily provides services for the sale of natural gas to the casino
industry in Atlantic City, New Jersey. SJE operates South Jersey Energy
Solutions, a limited liability corporation equally owned with Energy East
Solutions, Inc., which markets retail electricity in New Jersey. SJE also
markets an air quality monitoring system through AirLogics, LLC. SJE has a 50%
equity interest in AirLogics. GZA GeoEnvironmental, Inc., an environmental
consulting firm, also has a 50% equity interest in AirLogics.
3) South Jersey Resources Group, LLC (SJRG) is a marketer of natural gas
storage, commodity and transportation in the mid-Atlantic and southern states.
4) Marina Energy LLC (Marina Energy) is a wholly owned subsidiary
established in 2000 to develop energy related projects in southern New Jersey.
SJI also invested in a joint venture with Conectiv Solutions, LLC, forming
Millennium Account Services, LLC (Millennium). Millennium provides meter
reading services to SJG and Conectiv Power Delivery in southern New Jersey.
SJI-18
Forward Looking Statements
This report contains certain forward-looking statements concerning
projected financial and operating performance, future plans and courses of
action and future economic conditions. All statements in this report other
than statements of historical fact are forward-looking statements. These
forward-looking statements are made based upon management's expectations and
beliefs concerning future events impacting the company and involve a number of
risks and uncertainties. We caution that forward-looking statements are not
guarantees and actual results could differ materially from those expressed or
implied in the forward-looking statements. Also, in making forward-looking
statements, we assume no duty to update these statements should expectations
change or actual results and events differ from current expectations.
A number of factors could cause our actual results to differ materially
from those anticipated, including, but not limited to the following: general
economic conditions on an international, national, state and local level;
weather conditions in our marketing areas; changes in commodity costs;
regulatory and court decisions; competition in our 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.
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 have had the ability to choose gas suppliers since 1987.
SJG's residential customers have been able to choose a gas supplier since April
1997 under a pilot program. As of September 30, 2001, 36,393 SJG residential
customers chose a natural gas supplier other than the utility. This number
decreased from 44,863 at September 30, 2000 as third party marketers were
unable to offer natural gas at prices competitive with those available to
consumers under regulated utility tariffs. During the spring of 2001, the
market price of natural gas became comparable to utility prices. Consequently,
third party marketers increased customer acquisition efforts. The bills of
customers choosing to purchase natural gas from providers other than the
utility 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 Board of Public Utilities (BPU) approved Temperature Adjustment
Clause (TAC) had the following impact on 2001 and 2000 third quarter and nine
month net earnings:
SJI-19
2001 2000
-------- --------
TAC Adjustment Increase to Net Income
($ in thousands)
Quarter Ended September 30 $0 $0
Nine Months Ended September 30 $132 $1,349
While the revenue and income impact 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.
Results of Operations - Three and Nine Months Ended September 30, 2001
Compared to Three and Nine Months Ended September 30, 2000
Operating Revenues - Utility
Revenues decreased $3.3 million in the third quarter, but increased $60.2
million in the first nine months of 2001 compared with the prior year periods.
Both periods were positively impacted by increased rates resulting from an
increase in the Levelized Gas Adjustment Clause (LGAC) that reflects higher gas
costs, the return of residential customers to firm gas sales from
transportation and 5,745 additional customers. A large number of residential
customers resumed purchasing natural gas from SJG as third party gas marketers
were unable to offer competitive prices. Increased off-system sales also had a
significant positive impact on nine month results. The increase in off-system
revenues was due to higher prices for natural gas sold during the first half of
the year. Significantly lower gas prices experienced during the third quarter
completely offset the positive factors discussed previously, causing the
revenue decline for the three month period. Total volumes of gas sold
off-system were lower in the first three quarters of 2001 than in the prior
year.
Weather in the third quarter of 2001 was 2.3% warmer than the prior year
period. Weather for the nine-month period was 3.8% colder than in 2000.
Weather was 82.6% colder and 0.1% warmer for the third quarter and the first
nine months, respectively, than the 20-year averages. Even large percentage
changes in weather experienced during the third quarter typically have a
minimal impact on revenues. The number of degree days experienced during the
period is very small, rarely sufficient for our customers to use their heaters.
Revenues for 2001 will be more closely tied to the 20-year normal temperatures
than actual weather conditions due to our TAC.
SJI-20
The following is a comparison of operating revenue and throughput for the
three- and nine-month periods ended September 30, 2001 and the same periods
ended September 30, 2000.
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Operating Revenues (Thousands):
Firm
Residential $18,243 $14,911 $143,067 $107,808
Commercial 6,922 4,404 58,447 25,895
Industrial 497 559 2,999 3,576
Cogeneration & Electric Generation 3,929 3,894 6,586 10,093
Firm Transportation 5,363 6,077 19,822 27,952
-------- -------- -------- --------
Total Firm Operating Revenues 34,954 29,845 230,921 175,324
Interruptible 236 308 1,173 1,140
Interruptible Transportation 284 309 881 1,154
Off-System 20,530 32,015 119,203 104,290
Capacity Release & Storage 1,130 568 3,978 2,996
Other 674 790 2,748 2,594
Intercompany Sales (2,192) (4,950) (20,460) (9,296)
-------- -------- -------- --------
Total Operating Revenues $55,616 $58,885 $338,444 $278,202
======== ======== ======== ========
Throughput (MMcf):
Firm
Residential 1,259 1,331 12,631 12,114
Commercial 617 514 5,922 3,314
Industrial 13 25 186 181
Cogeneration & Electric Generation 1,021 707 1,397 1,958
Firm Transportation 5,353 5,135 15,939 19,949
-------- -------- -------- --------
Total Firm Throughput 8,263 7,712 36,075 37,516
Interruptible 41 29 157 134
Interruptible Transportation 611 661 1,841 2,238
Off-System 6,257 6,948 21,880 28,375
Capacity Release & Storage 7,321 9,627 19,048 29,561
-------- -------- -------- --------
Total Throughput 22,493 24,977 79,001 97,824
======== ======== ======== ========
SJI-21
Operating Revenues - Nonutility
Nonutility operating revenues increased by $35.4 million and $276.1
million for the third quarter and first nine months of 2001 compared to the
comparable prior year periods. The majority of the increase was due to SJRG
becoming a wholly-owned subsidiary of SJI as of January 1, 2001. Results at
SJRG are now consolidated into SJI. Prior to this year, only SJRG's net income
was recorded by SJI under the equity method of accounting. Higher natural gas
prices also contributed to the increase for the nine-month period.
Cost of Gas Sold - Utility
Cost of gas sold - utility decreased $3.4 million and increased $60.7
million for the third quarter and first nine months of 2001 compared with the
same periods in 2000. Higher gas costs for both local distribution and off-
system sales were responsible for the nine-month comparison. However, the cost
of gas sold off-system was comparatively lower in the third quarter of 2001.
SJG's gas cost during the first nine months of 2001 averaged $5.25/dt compared
with $3.61/dt in the first nine months of 2000. Unlike gas costs associated
with off-system sales, changes in the unit cost of gas sold to utility
ratepayers do not directly affect Cost of Gas Sold - Utility. Fluctuations in
gas costs to ratepayers not reflected in current rates are deferred and
addressed in future periods under a BPU approved Levelized Gas Adjustment
Clause (LGAC). Under the LGAC, fluctuations in gas costs not covered currently
are reflected in future customer rates. Gas supply sources include contract
and open-market purchases. SJG secures and maintains its own gas supplies to
serve its customers.
Cost of Sales - Nonutility
Cost of sales - nonutility decreased $34.9 million and $272.8 million for
the third quarter and first nine months of 2001 compared to prior year periods
due to the consolidation of SJRG's expenses, described in the Operating
Revenues - Nonutility section of this report, and higher natural gas costs for
the nine-month period.
Operations
A summary of net changes in Operations (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2001 vs. 2000 2001 vs. 2000
------------- -------------
Utility:
Other Production Expense ($9) ($29)
Transmission (10) (26)
Distribution (17) (515)
Appliance Service - Net 190 114
Customer Accounts and Services 208 474
Sales 29 (42)
Administration and General (147) (398)
Other (79) 39
Nonutility 157 336
------ ------
Total Operations $322 ($47)
====== ======
SJI-22
Distribution expenses decreased in the first quarter of 2001 as costs
related to our unionized workforce were avoided as a result of a work stoppage
that ended on January 17, 2001. Expenses related to performing critical
operational functions during the work stoppage were recognized under
Administration and General. Offsetting these expenses in the Administration
and General account was a reallocation of costs among other expense categories.
The reallocation was BPU mandated as part of the energy deregulation process in
New Jersey. Customer Accounts and Services rose due to a third quarter
increase to the allowance for uncollectible accounts. Higher meter reading
costs resulting from customer additions and fewer estimated meter reads
were factors for the nine-month period. Nonutility expenses rose in both
periods primarily due to the recognition of the activities of SJRG on a
consolidated basis. Last year, the activities of SJRG were recognized under
the equity method of accounting.
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses
(in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2001 vs. 2000 2001 vs. 2000
------------- -------------
Maintenance $199 $370
Depreciation 256 759
Income Taxes 167 1,835
Energy and Other Taxes (255) (331)
Maintenance expense increased during both periods primarily due to the
deferral last year of expenses associated with the Remediation Adjustment
Clause (RAC). Higher levels of RAC recoveries this year eliminated the need to
defer these expenses. RAC related expenses do not affect earnings, as an
offsetting amount is recognized in revenues. Depreciation was higher due to
increased investment in property, plant and equipment by SJG. Income Tax
changes reflect the impact of changes in pre-tax income.
Unrealized Gain on Energy Trading
Unrealized gain on energy trading was new for the first quarter of 2001
and is the result of adopting FASB No. 133 and EITF No. 98-10, effective
January 1, 2001. See Note 1 for a full discussion of FASB No. 133 and EITF
No. 98-10.
SJI-23
Interest Charges
Interest charges were lower in the third quarter of 2001 compared with the
prior year period. Increased debt outstanding was offset by lower interest
rates and recoveries of carrying costs associated with the unrecovered RAC and
purchased gas costs. The debt was incurred primarily to support the expansion
and upgrade of SJG's gas transmission and distribution system, as well as
higher levels of unrecovered gas costs. Interest expense for the nine month
period was higher than the same period in 2000 mostly due to expenses
associated with higher levels of unrecovered gas costs.
Net Income Applicable to Common Stock
Net income (in thousands) and earnings per common share reflect the
following changes:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 vs. 2000 2001 vs. 2000
------------- -------------
Income from Continuing Operations $224 $2,643
Loss from Discontinued
Operations - Net 82 112
Cumulative Effect of Accounting
Change - Net 0 148
-------- --------
Net Income Increase $306 $2,903
======== ========
Earnings per Common Share:
Continuing Operations $0.03 $0.20
Discontinued Operations - Net 0.01 0.01
Cumulative Effect of Accounting
Change - Net 0.00 0.01
Earnings per Common Share -------- --------
Increase $0.04 $0.22
======== ========
The details affecting the changes in net income and earnings per share are
discussed under the appropriate captions above.
Liquidity
The seasonal nature of gas operations; 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 $195.0 million, of which $54.6 million was available at
SJI-24
September 30, 2001. 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):
Nine Months Ended
September 30,
2001 vs. 2000
-------------
Increases/(Decreases):
Net Income Applicable to Common Stock $2,903
Depreciation and Amortization 262
Unrealized Gain on Energy Trading (2,651)
Provision for Losses on Accounts Receivable 317
Revenues and Fuel Costs Deferred - Net (4,962)
Deferred and Non-Current Income Taxes and
Credits - Net 4,865
Environmental Remediation Costs-Net (4,885)
Accounts Receivable 40,661
Inventories (3,364)
Prepayments and Other Current Assets (236)
Prepaid and Accrued Taxes - Net (6,037)
Accounts Payable and Other Accrued Liabilities (59,118)
Other - Net (5,657)
--------
Net Cash Provided by Operating Activities ($37,902)
========
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.
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.
Unrealized Gain on Energy Trading is a non-cash credit to income and does
not impact cash flows until the underlying positions are settled. Changes
reflect movement in the fair market value of our energy trading assets and the
recognition of realized gains and losses on settled positions.
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 will be paid in the next
year.
SJI-25
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 seasonal requirements,
temperatures and price changes.
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
On November 16, 2000, SJG received approval to increase its LGAC. The
impact of this increase was approximately 19.0% to a typical residential
heating customer. The BPU also approved the creation of a flexible pricing
mechanism, allowing for five additional 2.0% increases effective for December
2000 and January, February, March and April of 2001. In March 2001, the BPU
approved additional LGAC rate increases for SJG using a flexible pricing
mechanism. Additional rate increases of 2% in May, June and July 2001 were
approved. In addition, the ruling permits SJG to recover unrecovered gas costs
as of October 31, 2001 with interest at 5.5% or 5.75% over a three-year period,
beginning December 1, 2001. The higher interest rate becomes effective only if
SJG does not file for an increase in the LGAC rate for the next LGAC year.
Recoverable interest costs began accruing on April 1, 2001.
Other matters are incorporated by reference to Note 4 to the condensed
consolidated financial statements included as part of this report.
SJI-26
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 the first
nine months of 2001 amounted to $39.2 million. The costs for 2001, 2002 and
2003 are estimated at approximately $61.3 million, $78.4 million and $72.9
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, sale of taxable and tax exempt
bonds, capital leases, RAC recoveries, insurance recoveries and the issuance of
equity.
SJI raised $2.4 million of equity capital via the issuance of 79,265
shares under our Dividend Reinvestment Plan (DRP) in October 2001.
In July 2001, SJG issued a total of $35 million under its Medium Term Note
program (MTN). Notes totaling $10 million were issued at 6.74%, maturing in
2011; notes totaling $15 million were issued at 6.57%, maturing in 2011; and
notes totaling $10 million were issued at 6.50%, maturing in 2016. The net
proceeds of these note issuances were used to retire short-term debt.
In September, Marina Energy issued $29 million of variable rate demand
bonds through the New Jersey Economic Development Authority (NJEDA). Of the
bonds, $20 million were issued on a tax-exempt basis and $9 million were issued
on a taxable basis. Marina has been authorized to issue an additional $16
million of taxable bonds through the NJEDA. The net proceeds are being used to
fund the development of a thermal energy plant in Atlantic City, New Jersey.
The plant will provide heat, hot water and cooling for the Borgata Resort. The
new casino/resort is scheduled to open in July 2003.
SJI-27
Item 3. Quantitative and Qualitative Disclosures About
Market Risks of the Company
Commodity Market Risks - The regulated and unregulated subsidiaries of
South Jersey Industries are involved in the buying, selling, transporting and
storing of natural gas for their own accounts as well as managing these
activities for others. As such, these subsidiaries are subject to market risk
due to fluctuations in price. To hedge against this risk, we enter into a
variety of physical and financial transactions including forward contracts,
swaps, futures, and options agreements.
SJI's subsidiaries are structured such that South Jersey Gas Company
and South Jersey Energy Company transact commodities on a physical basis only
and enter into no financial derivative positions directly. South Jersey
Resources Group, LLC (SJRG) performs this function for these entities and
enters into the types of transactions noted above. It is management's policy,
to the extent that is practical, to have no open positions while conducting
these activities. As a result of holding open positions to a minimal level,
the financial impact to SJRG of changes in value of a particular transaction is
substantially offset by an opposite change in the related hedge transaction.
Interest Rate Risk - Our exposure to interest rate risk relates
primarily to short-term, variable rate borrowings. A hypothetical 100 basis
point increase in interest rates on $140.6 million of variable rate debt
outstanding at September 30, 2001 would result in a $828,000 increase in our
interest expense net of tax. Our long-term debt is primarily issued at fixed
rates and, consequently, interest expense to the company is not significantly
impacted by changes in market interest rates. Our debt has been issued with
provisions that do not permit us during the next 12 months to prepay a
material amount of such debt to take advantage of changes in interest rates.
We do not currently use any derivatives to hedge interest rates. However, we
are currently considering utilizing derivatives to hedge interest rates on the
variable rate demand bonds issued through the NJEDA in September.
SJI-28
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
None
SJI-29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTH JERSEY INDUSTRIES, INC.
(Registrant)
Dated: November 13, 2001 By: /s/ David A. Kindlick
David A. Kindlick
Vice President and Treasurer
Dated: November 13, 2001 By: /s/ George L. Baulig
George L. Baulig
Vice President & Corporate Secretary
SJI-30