Exhibit 13
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South Jersey Industries
2001 Annual Report to Shareholders
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Safe.
Strong.
Dependable.
Rock Solid.
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South Jersey Industries
"Where we put all of our energy"
- Front Cover -
Company Profile.
South Jersey Industries (NYSE: SJI) is an energy services holding company
for South Jersey Gas, South Jersey Energy, South Jersey Resources Group, LLC
and Marina Energy LLC. South Jersey Gas provides natural gas utility service to
residential, commercial and industrial customers in the seven southern counties
of New Jersey. The company also sells natural gas to wholesale customers in the
interstate market. SJG provides HVAC and appliance repair service and warranty
programs. South Jersey Energy is a licensed, deregulated energy 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 real-time environmental air
monitoring system used during environmental clean ups. South Jersey Resources
Group provides wholesale natural gas trading, sales, storage management,
peaking services, transportation capacity and natural gas portfolio
management. Marina Energy develops energy-related projects in New Jersey.
Currently, the company is constructing a $50 million thermal energy plant in
Atlantic City, N.J. to serve the needs of new casino expansion projects.
To learn more about SJI and its subsidiaries, please visit
www.sjindustries.com.
Table of Contents
Financial Highlights . . . . . . . . . . . . . . . . . . . . 1
Chairman's Letter to Shareholders . . . . . . . . . . . . . .2
Management's Discussion . . . . . . . . . . . . . . . . . . .12
Consolidated Financial Statements . . . . . . . . . . . . . .16
Notes to Consolidated Financial Statements . . . . . . . . . 20
Quarterly Financial Data . . . . . . . . . . . . . . . . . . 26
Comparative Operating Statistics . . . . . . . . . . . . . . 27
SJI Directors and Officers . . . . . . . . . . . . . . . . . 28
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
E-mail: sharehld@sjindustries.com
Investor Relations
Stephen H. Clark, Director
609-561-9000 ext. 4260
sclark@sjindustries.com
Annual Meeting Information
The Annual Meeting of Shareholders will be held Thursday, April 18, 2002 at
10:00 a.m. at Renault Winery, 72 North Bremen Avenue, Egg Harbor/Galloway, N.J.
- Inside Front Cover -
2001 HIGHLIGHTS
Five-Year Summary of Selected Financial Data
(In Thousands Where Applicable)
South Jersey Industries, Inc. and Subsidiaries
Year Ended December 31,
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
<s> <c> <c> <c> <c> <c>
Operating Results:
Operating Revenues $ 837,341 $ 513,947 $ 391,078 $ 331,317 $ 348,160
Operating Income $ 69,061 $ 66,482 $ 61,559 $ 46,958 $ 49,871
Income Applicable to Common Stock:
Continuing Operations $ 26,869 $ 24,741 $ 21,962 $ 13,506 $ 18,460
Discontinued Operations - Net (1) (455) (557) (274) (2,520) (2,664)
Cumulative Effect of a Change in Accounting Principle - Net 148 - - - -
Net Income Applicable to Common Stock $ 26,562 $ 24,184 $ 21,688 $ 10,986 $ 15,796
Total Assets $ 987,845 $ 869,979 $ 766,925 $ 748,095 $ 670,601
Capitalization:
Common Equity $ 220,286 $ 201,739 $ 185,275 $ 169,234 $ 173,499
Preferred Stock and Securities of Subsidiary 36,690 36,804 37,044 37,134 37,224
Long-Term Debt 259,247 204,981 183,561 194,710 176,360
Total Capitalization $ 516,223 $ 443,524 $ 405,880 $ 401,078 $ 387,083
Ratio of Operating Income to Fixed Charges 2.9 2.7 2.6 2.1 2.5
Earnings Applicable to Common Stock (Based on Average Shares):
Continuing Operations $ 2.29 $ 2.17 $ 2.01 $ 1.25 $ 1.72
Discontinued Operations - Net (1) (0.03) (0.05) (0.02) (0.23) (0.25)
Cumulative Effect of a Change in Accounting Principle - Net 0.01 - - - -
Earnings per Common Share $ 2.27 $ 2.12 $ 1.99 $ 1.02 $ 1.47
Return on Average Common Equity (2) 12.7% 12.8% 12.4% 7.9% 10.7%
Share Data:
Number of Shareholders of Record 8.7 9.1 9.7 10.4 11.4
Average Common Shares 11,716 11,401 10,922 10,776 10,763
Common Shares Outstanding at Year End 11,861 11,500 11,152 10,779 10,771
Dividend Reinvestment Plan:
Number of Shareholders 5.0 5.0 5.4 5.5 6.0
Number of Participating Shares 1,280 1,273 2,518 1,371 1,440
Book Value at Year End $ 18.57 $ 17.54 $ 16.61 $ 15.70 $ 16.11
Dividends Declared $ 1.48 $ 1.46 $ 1.44 $ 1.44 $ 1.44
Market Price at Year End $ 32.60 $ 29.75 $ 28.44 $ 26.19 $ 30.31
Dividend Payout:
From Continuing Operations 63.9% 66.6% 71.0% 114.9% 83.9%
From Total Net Income 64.6% 68.1% 71.9% 141.2% 98.1%
Market-to-Book 1.8 1.7 1.7 1.7 1.9
Price Earnings Ratio (2) 14.2 13.7 14.1 20.9 17.7
<FN>
(1) Represents discontinued business segments: merchandising operations discontinued in 2001, 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>
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Safe. Strong. Dependable.
Dear Shareholders,
We're very pleased to announce that our company, South Jersey Industries,
reached an important milestone that few companies have achieved. In 2001, we
marked our 50th consecutive year of paying dividends either in cash or in
stock. Thanks to hard work and adherence to our strategy, shareholders enjoyed
a total return on their investment of almost 15 percent this year, including
dividends and appreciation.
SJI achieved record net income and earnings per share from continuing
operations for the third consecutive year. Consolidated net income from
continuing operations reached $26.9 million compared with $24.7 million in
2000, nearly a 9 percent increase. Earnings per share from continuing
operations rose to $2.29 from $2.17 in 2000. In 1998, we set a goal to exceed
the projected 5-6 percent industry annual growth predictions and we're proud to
have achieved that goal in each of the past three years.
While South Jersey Gas' results were slightly lower than last year, the
earnings consistency of our regulated distribution operations offers a solid
platform for SJI's earnings year after year. Despite November and December of
2001 being about 18 percent warmer than normal, the Temperature Adjustment
Clause helped to stabilize earnings and insulate the company from the full
impact of warmer weather.
In 2001, outstanding performance by our non-regulated companies exceeded
our earnings expectations by 58 percent and contributed 20 percent to SJI's
bottom line. The non-regulated companies under the SJI umbrella generated
higher profits with the largest earnings contributions coming from South Jersey
Energy and South Jersey Resources Group, LLC. Energy services and wholesale and
retail gas marketing activities, as well as other diversified energy projects,
kept us at the forefront as a valued energy partner to the region's key
businesses and industries.
SJI -- Safe, Strong, Dependable.
In a year in which our country experienced one of history's worst national
tragedies, pushing a faltering domestic economy into recession, many companies
and entire industries reported depressed earnings and lower market values for
their common stock. As stock prices spiraled downward, SJI stock rose to $32.60
at year end, compared with $29.75 at year end 2000. As interest rates rapidly
declined, we continued to be a preferred investment for shareholders seeking
stable income with an element of proven and consistent growth. For the 5-year
period ending 2001, SJI produced compounded annual growth of 11.8 percent,
beating the Standard & Poor's 500 Index of 10.7 percent and the 7.7 percent
reported for S&P's Utility Index. In a market which severely tested investor
resolve and the underlying strength of even the most respected blue chip
corporations, SJI proved to be an investment you can count on.
For us, success in growing earnings is linked to the way we mix and
balance our investments in traditional and nontraditional market opportunities.
Many of you invest in SJI for its regulated utility component and through SJG
this stable low risk source of earnings continues to provide the lion's share
of SJI's bottom line. But in recent years, we've also demonstrated an ability
to deliver added shareholder value by engaging in moderate risk, growth-
oriented opportunities within our region and in our field of recognized
- 2 -
expertise -- energy. In 1999, our non-regulated companies' contribution to
earnings totaled about 5 percent. At the close of 2001, that contribution
reached 20 percent, far surpassing our expectations.
Assessing our approach, A.G. Edwards said, "We must credit SJI management
for doing a fine job of planning and executing a solid growth strategy based on
optimizing a fast growing utility growth market while profitably growing modest
non-regulated contributions."
A Rock Solid Future for SJG
For South Jersey Gas, 2001 marked a year of strategic development -- both
internally and externally. We added customers, expanded services, identified
new markets and strengthened business resources and infrastructure. SJG is
ready for continued growth in 2002 and beyond.
At SJI, our utility remains the cornerstone of our corporation. Built on a
foundation of "people first and foremost," SJG's long-standing commitment to
delivery of safe, reliable natural gas has resulted in strong allegiances with
our residential, commercial and industrial customers. The specific needs of
those customers may be satisfied through our wholesale gas business segment,
through customer-oriented partnerships or by our appliance repair service team.
Representing 80 percent of SJI's earnings, SJG services a geographic area
which continues to see extraordinary growth fueled by Atlantic City's casino
industry. A catalyst for employment, housing, ancillary business growth and
incubator commercial ventures, the casino industry in Atlantic City posted 2001
revenues which exceeded those of its Las Vegas counterpart. In one of the most
difficult years for tourism in the last half century, for the 23rd consecutive
year the city's casinos still managed an increase in earnings. With the new
Borgata resort and several casino expansion projects well underway, New
Jersey's gaming industry will continue to stimulate development and growth in
the southern counties for the foreseeable future. For SJG, this service area
provides the kind of potential envied by many other utilities around the
nation.
The ongoing construction of new homes in the eastern corridor of SJG's
service territory means new natural gas customers. The National Association of
Home Builders reported that, nationwide, 2001 construction permits were 20
percent higher than the prior year. That report accurately depicts the housing
market trend in southern New Jersey. Housing starts in Atlantic County's
Townships of Galloway, Egg Harbor and Hamilton increased by a healthy 37
percent in 2001. Population growth in Cape May County, especially in the
mainland areas of Middle, Upper and Dennis Townships, bodes well for the future
of the distribution and appliance service business segments. In the western
portion of our service area, Gloucester and Salem counties had a residential
housing increase of nearly 17 percent over 2000.
In 2001, SJG added 6,658 customers, a growth rate of 2.4 percent which
exceeds the industry average. Although 2001 was largely marked by unfavorable
economic indicators, SJG's conversion rates were only slightly less than last
year. Conversions in 2001 totaled 1,861 compared with 2,128 in 2000. Moreover,
we exceeded our expectations for new commercial sales volumes adding
approximately 766,000 decatherms to annual throughput.
New home and conversion customers increased SJG's customer base to 288,008
at year end. Through extensive reorganization and operational redesign, we're
better positioned to capture a greater share of this market and have targeted
3,500 new conversion customers for 2002.
With the expected residential growth in the service territory in 2002,
we've likewise projected increased growth in the commercial sector. Already,
the construction of residential housing near major highways has prompted the
development of many new commercial enterprises serving those consumers.
Our 2002 forecast for both large commercial and industrial markets
predicts moderate but steady growth. Over the past three to five years, we've
successfully maintained a high market share and increased sales by adding new
customers as they were identified. Having reached a high level of saturation in
these markets, SJG's ability to grow sales here will be directly correlated to
the growth in these markets themselves. In 2002 and beyond, we do expect to see
additional revenues from the adaptation of newer technologies such as desiccant
cooling, natural gas vehicles, cogeneration and fuel cells.
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Customer Focused.
Looking ahead to the region's future energy requirements, we expect
electric generation and cogeneration to play important roles in meeting those
needs and natural gas to be the fuel of choice for all future generation
projects. By mid-2002, one large client should be up and operating an 8.5
megawatt plant using natural gas supplied by us. This plant and others like it
in various stages of planning and design will have a positive, recurring impact
on revenues and earnings.
With a rock solid base of long-term customers and a history of steady
growth and dependability, SJG's role as SJI's foundation for the future is well
secured.
Proactive Sales Force
To better capitalize on known opportunities in our service area, we've
reengineered SJG's sales function with help from an outside firm specializing
in sales organizations. This extensive 8-month effort, which involved many
disciplines from within the company, was finalized and fully implemented in
January 2002. First, we'll become more assertive in securing new customers by
tying pay to bottom line results, appropriately incenting our new sales force.
Next, we streamlined the process itself. We now target a 2-week period
between the customer's initial request for gas service and final installation.
That's an 8-week reduction from the sale-to-delivery timeline under the old
process. Eliminating steps from the former process will improve our ability to
serve customers without negatively impacting operations.
Lastly, we automated the sale-to-delivery process ensuring efficiency and
improving customer responsiveness. Customized software, designed specifically
to meet the needs of SJG's sales operations, will enable us to eliminate time-
consuming and duplicative processes and accelerate an informed decision-making
process.
This initiative has allowed us to confidently increase our sales
projections from new and conversion customers, thereby providing a valuable,
near-term return on the resources invested.
Wholesale Gas Sales
A strong contributor to SJG's success, our wholesale gas marketing
operation exceeded management's expectations by reporting significant growth
in 2001. Since its inception in 1993, the off-system sales division, which
manages our pipeline assets and storage capacity, has consistently produced
high returns at low levels of risk for investors. Taking advantage of market
price fluctuations and skillfully managing the accumulated energy assets at
their disposal, our expert traders pursue and capitalize on available
opportunities in the wholesale marketplace. In 2001, we executed profitable
transactions which produced pre-tax, pre-sharing earnings of $19.8 million, a
22 percent increase over the prior year's results.
Powerful Partnerships
An excellent example of a low-risk, high-return opportunity is SJI's joint
venture with Conectiv Solutions, LLC -- Millennium Account Services, LLC. 2001
marked the third straight year of improved profitability for the company with
the partners sharing pre-tax earnings of $1.1 million.
- 4 -
For SJG, one of Millennium's utility customers, attention to quality
control this year paid off in outstanding results for the utility. Millennium
earned performance bonuses from the utility by producing meter read rates among
the highest ever recorded for SJG. Moreover, since it's inception in January
1999, SJG saved over $1 million in operational costs while improving service to
our customers. To ensure that customers continue receiving the highest quality
service, we will upgrade our meter reading technology in early 2002 with
innovative Itron hardware and software.
To support that investment, Millennium recently negotiated new 5-year
agreements with its customers. By improving our efficiency, we were able to
offer customers extraordinarily attractive rates while ensuring our long-term
revenue stream. Building on our recent successes with business partners, SJI
allied itself with Measurement Solutions International - Northeast, LLC for
metering and measurement services. Our partnership with MSI-NE financially
benefits us on two levels. First, as a customer, SJG realizes a cost savings
from having MSI-NE provide measurement and metering services to us. Their size,
experience and scope allow them to better manage and deliver shop, sampling and
analysis services as well as optimize purchasing and inventory functions.
Secondly, as a minority equity partner in MSI-NE, SJI has a vested
interest in the operation's profitability. Over time, we believe this
partnership with MSI-NE will prove to be the kind of win-win relationship we
strive to achieve.
Customized Appliance Repair Services
For over 50 years, South Jersey homeowners have relied on SJG to keep
their household appliances operating safely and efficiently. Continued demand
for our expert appliance repair services translates into additional
profitability for SJG. As the needs of our customers change and the demand for
specialized services grows, we modify and revamp our offers and operations to
keep pace. By recognizing customers' needs and responding to their wishes, we
improve customer satisfaction, increase our own productivity and create the
conditions necessary to improve this business line's earnings.
This attention to the consumer gained us a larger share of the appliance
service warranty market. In 2001, we added 2,083 new Service Sentry warranty
customers. To remain competitive, we've diversified product lines, centralized
our parts distribution and inventory function and created a separate call
center and dispatch service to better meet the needs of consumers.
A strong 2002 for this business segment is predicted. Using advanced
research data, we developed a marketing strategy targeted to cross-sell
appliance repair services with other complementary services to residential
customers. We've identified and segmented customer groups with a higher
propensity to purchase these services and designed a series of direct mail
campaigns specifically for this audience. We forecast a high rate of response
to these targeted initiatives.
Consumer Confidence and Satisfaction
Keeping consumer confidence and satisfaction at the forefront of our
corporate thinking, we implemented several initiatives in our Customer Care
Center during the past two years to better assist those who rely upon us for
prompt, reliable gas service.
Through collective bargaining in 2000, we negotiated a part-time
employment agreement with the collective bargaining agent enabling CCC to
expand available resources in a cost-efficient manner. Next, we extended CCC's
hours of operation to better serve our growing customer base. Lastly, we added
new menu options to more efficiently direct incoming telephone calls and reduce
wait times.
Additional initiatives are slated for 2002 to further advance our level of
customer service. One initiative is the outsourcing of our collections
department. This initiative will help us improve our response time as we'll
reassign collection representatives to the customer service function. Operating
efficiencies will result and customers' needs will be better attended. A second
initiative calls for an interactive telephone voice response system and
expanded website capabilities that allow for around-the-clock self-service for
our customers' convenience. Finally, we'll conduct a comprehensive study of our
consumers to determine the level of service they anticipate so that future
initiatives will be guided by customer expectations.
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Innovative.
Non-Regulated Companies -- A Piece Of The Rock
Energy industry restructuring has provided a myriad of opportunities for
SJI's non-regulated companies for a number of years and will continue to do so.
Creating market opportunities and capitalizing on them, South Jersey Energy,
Marina Energy LLC and South Jersey Resources Group, LLC have greatly enhanced
SJI's ability to provide greater value to shareholders. Wherever possible, our
companies employ a team approach to fill the needs of all types of consumers in
the southern New Jersey region from individual homeowners to large businesses.
Comprehensive Energy Solutions
The energy industry has become more challenging and complex with each
passing year. We see more companies, even entire industries, seeking outside
specialists to address their evolving energy needs. Our holistic approach to
energy management coupled with our expertise and reputation puts SJI in a
unique position to fill this demand in our region.
The recent trend of companies seeking a comprehensive solution for their
energy needs bodes well for SJI. We're ready, willing and able to provide
customers with the level of service they want and need. If needed, we can
completely manage all aspects of a business' energy activities. Customers find
this appealing because many lack the time and staff to effectively manage the
related energy functions. Importantly, engaging SJI as their energy partner
helps clients dedicate their time and talents to their core business
activities. This improves their profitability while we deliver the best energy
solutions and value to them.
This customer-focused strategy and the results we've delivered for
customers have propelled SJI to the forefront of the energy industry in
southern New Jersey and set us apart from our competition. It involves a
noteworthy shift away from the traditional one-size-fits-all utility approach
to a mindset where individual customer needs and the desire for a long-term
partnership drives each proposal. We have the talent, the relationships,
strategic partners and an unwavering commitment to our region's customers.
Other energy providers would be hard pressed to duplicate what we've created.
Many examples exist of the success SJI has enjoyed from our energy
management strategy. What follows is an overview of some key projects that
demonstrate that strategy at work.
Marina Energy Groundbreaking
No project better illustrates our corporate philosophy of teamwork than
the Marina Energy Thermal project. In mid-October, we officially broke ground
on the thermal facility, located in Atlantic City's burgeoning Renaissance
Pointe area. A new $50 million plant will soon provide hot and chilled water
necessary for all of The Borgata Resort's heating, cooling and domestic hot
water needs. The project requires the involvement of three wholly-owned SJI
subsidiaries and creates multiple income streams for decades to come. The new
facility will use natural gas supplied by SJE and delivered by SJG. Marina
Energy, who will own and operate the plant, was also awarded a 20-year contract
to supply the casino resort's electricity.
- 6 -
In September 2001, Marina Energy issued $29 million of taxable and tax-
exempt bonds through the New Jersey Economic Development Authority. The
interest rate environment has resulted in financing costs substantially below
initial projections. Through timely financing, we were able to improve the
economics of a project that already offered an attractive return.
Revenue from the project will total hundreds of millions of dollars over
the contract term. More importantly, this project will generate positive income
for SJI in 2003, its first year of operation.
We anticipate significant additional business as further development plans
for the marina district materialize, providing our companies with viable
prospects for the future.
The Borgata contract and others like it support our financial objective
for 2003 and thereafter, with non-regulated businesses generating at least 20
percent of SJI's earnings.
The 26,000 square-foot Marina Thermal facility project and the contract
with The Borgata illustrate another significant element of our corporate
philosophy -- building strong and enduring relationships with business allies,
customers and the communities where we live and work. We're all very excited
about the bricks and mortar and the technology we'll employ to ensure the
highest quality of service at the facility. But for SJI, the greatest value
comes in the partnership we've built with the fine people at The Borgata and
the relationships we hope to build with those that will help further develop
the Renaissance Pointe area in the years ahead.
Kevin Sullivan, vice president of planning and project manager for The
Borgata, expressed his feelings about SJI's energy management philosophy. "We
thought it was best to pick one experienced company to provide all of our
energy. It allows us to focus on what we know best, which is providing an
entertaining gaming and hotel experience. We don't have to worry about the
energy at all."
Are there opportunities beyond the gaming industry for projects of this
magnitude? We believe there are. As business and industry continue to expand in
our region, the benefits of centralized services with a single energy partner
should become apparent. One solution is to optimize a core energy facility
like the Marina Thermal project by having it serve the energy needs of several
large customers. Developers are beginning to understand that an off-site plant
can result in a much more efficient use of space and business capital. Relying
on SJI as their energy expert can help large customers mitigate their financial
exposure in a volatile energy market and maximize the efficiency of the energy
they use regardless of market conditions. This approach can relieve clients of
significant and complex tasks, allowing customers to concentrate on their core
businesses.
- 7 -
Solutions Oriented.
Energy Management at Work
A cooler Sands Casino Hotel was made possible thanks to major energy
improvements by SJE. This project demonstrates our span of capabilities and
comprehensive approach to energy management. We're completing an overhaul of
the Sands' cooling units and internal lighting systems by replacing them with
new, high-efficiency units. As a result, the resort improves its bottom line,
reduces its energy demand and decreases harmful emissions to the environment.
The project called for SJE to replace three 600-ton chillers and three
cooling towers, upgrade the hotel's domestic hot water system and replace or
retrofit approximately 10,000 lighting fixtures. Through these energy
efficiency improvements, the Sands saves about $680,000 a year in energy costs
while reducing emissions contributing to acid rain, smog and greenhouse gases
by an estimated 72 million pounds.
With energy representing a significant cost of doing business, enterprises
like the Sands are looking for ways to reduce or control both their energy
bills and related equipment costs. By assessing various alternative approaches
to achieve those ends, a combination of actions produced a single creative
solution for this casino operator.
Natural Gas Sales -- Commercial/Industrial
Following a competitive bidding process, SJE was awarded a 2-year contract
by the State of New Jersey to supply natural gas for government facilities
statewide. We will supply firm and interruptible natural gas for state
government and state-affiliated agencies, such as hospitals, transit
facilities and prisons. This contract, our largest to date, will generate $20
million in revenue.
The fact that we've been awarded such a large statewide contract is an
indication of our reputation for reliability and service quality. Moreover, it
marks a tremendous growth opportunity as we partner with our home state. This
contract is just the latest good news for SJE. We were also the successful
bidder for several other energy supplier contracts in the second half of the
year. These contracts and others like it help SJE and SJI achieve our financial
objectives as we build upon each success and add to a stable foundation of
customers and partners.
Residential Natural Gas Sales
Through New Jersey Energy Choice, we market natural gas supplies to
residential customers at a savings versus the utility's price-to-compare. To
maximize opportunities in New Jersey's deregulated residential market, SJE
created the Community Rewards Program which teams SJE with community
organizations.
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Benefits are threefold as customers win with lower natural gas bills,
community organizations win by earning money to support their projects and SJE
wins by adding a profitable retail customer at a reasonable acquisition cost.
For the customer, the process is seamless with SJE providing the natural
gas and SJG continuing to deliver the gas to the premises. The customer
continues to receive one monthly bill and write one check for all services
rendered.
After a hiatus in 2000, when market prices were significantly higher than
the utility's regulated rate, SJE's return to the burgeoning residential
natural gas market has been very successful. On the strength of the Community
Rewards Program and other marketing efforts, we've built a residential
customer base of over 32,000. Each new customer added has a direct and positive
impact on our bottom line and we're just beginning to tap the potential of over
268,000 residential gas customers living in the southern part of our state.
SJE's Future Growth
SJE's strategy of comprehensive, team-oriented energy solutions, along
with our geographic location, provides us with a powerful platform for growth
with housing and attendant retail commercial development remaining strong.
Atlantic City, already a prime area for SJE's commercial ventures, is
within driving distance for over 30 million adults. According to the Atlantic
City Convention and Visitor's Bureau, over 33 million people visited the city
in 2000. Atlantic City's market extends 200 miles and encompasses some of the
nation's major metropolitan areas, including New York City, Philadelphia,
Baltimore and Washington D.C. The entertainment and gaming industry is expected
to grow in Atlantic City, particularly in the Renaissance Pointe area, which
will clearly mean additional opportunities for us.
Approximately 18 million people live within a 150-mile radius of our
Folsom, N.J. headquarters. We've selectively set our sights beyond southern New
Jersey into neighboring Pennsylvania. The Pennsylvania Public Utility
Commission has granted us license to provide retail electricity throughout the
Commonwealth. Deregulation, a large population and the presence of the
Pennsylvania, New Jersey, Maryland Interconnection combine to make our
expansion into the area favorable at this time.
Wholesale Gas Marketing
Stepping beyond New Jersey's borders, SJI's wholesale natural gas
marketing arm, South Jersey Resources Group serves a growing number of
customers in the northeast and mid-Atlantic regions. Operating under stringent
guidelines to manage associated risks, SJRG produced excellent results in 2001.
Through effective management of its gas portfolio, SJRG far exceeded
management's expectations in 2001 by contributing nearly $2.8 million to SJI's
bottom line.
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Rock Solid.
A Commitment to Community
Strong companies need strong communities to thrive. Not suprisingly,
community service has been an integral part of our history and mission for over
90 years. Through our community service initiatives, we work to improve the
social and economic well-being of our region which has a direct impact on the
quality of life in our area.
Our role as a community partner takes many forms. We provide financial
support to a large number of charitable, social, educational and business
organizations. We serve as volunteers, often in leadership roles on boards and
committees, other times in direct service to those in need.
Throughout the years, we've encouraged and supported community involvement
by our employees who, today, take part in over 200 community groups from
planning boards to youth athletic clubs. One partnership of which we're
particularly proud is our employees' long history of generous support for the
United Way agencies in southern New Jersey. This year, I had the honor of
serving as Campaign Chair of the United Way of Atlantic County. It was very
gratifying to know that I represented SJI employees, for whom community
service is a way of life, not just something that they do in their spare time.
We're also especially proud of our employees' quick response to the
September 11th tragedy. Through their efforts, thousands of dollars were
donated and much needed supplies provided to the relief effort. Additionally,
they conducted fundraisers and organized events to aid victims' families.
A culture and tradition of community involvement culminated in SJI winning
The Press of Atlantic City's Bailey Award in 2001. Named for George Bailey, the
central character of the classic Christmas movie "It's a Wonderful Life," the
award is presented annually by The Press to a local business that contributes
generously to the community. We were honored and humbled to receive this
prestigious award. This recognition is truly a tribute to our selfless
employees who work hard not only at their jobs, but at helping others.
A Unified Vision
Over the years, SJI has experienced success and faced difficult
challenges. While we're proud of our accomplishments, we also recognize that
the path to future success will be paved with change. Shareholders will
continue to expect improving financial results and customers will demand higher
levels of service. We intend to meet those challenges. In doing so, we'll
concentrate on improving our productivity and testing our business creativity
each and every day. At SJI, we know that each of us must make adjustments in
the way we work, the way we think and the methods we employ if our company is
to continue to prosper in a complex and changing business environment. To help
us maintain and advance our competitive position and create the agility needed
to meet aggressive business objectives, we recently began a culture change
initiative by retaining a change-management firm to assist us in the effort.
With The Davies Consulting Group facilitating the process, we've gathered
employee perspectives and created a team to lead the company toward a
collectively defined vision of the SJI of tomorrow. Made up of employees from
all levels of the company, union leaders and senior management, these
- 10 -
dedicated men and women have defined the characteristics needed to create the
desired corporate culture and developed a unified vision for the years ahead.
We've already met with our 650 SJI employees in small groups to share our
plans, solicit their input and ideas and give them a sense as to how we'll
proceed. In 2002, we'll create a plan of action and move forward.
As we grow and change, we look forward to becoming an even stronger
company that you as shareholders and every other key stakeholder can count on.
SJI will always strive to be best-in-class as a reliable investment, energy
partner and corporate citizen.
We greatly appreciate your support and would like to acknowledge two
important individuals who played key roles in our success and who will be
leaving those roles in 2002. Richard L. Dunham has served as a director since
1984. In 1998, during an important period of transition for SJI, at the request
of the Board of Directors, Dick stepped out of retirement and into service as
Chief Executive Officer. His leadership, guidance and friendship will long be
remembered by his fellow Board members and the company's senior management.
George L. Baulig, SJI's vice president and corporate secretary, will be
retiring in 2002. Starting as an operations clerk in 1960, George has dedicated
nearly 42 years to ensuring the success of our company. While these gentlemen
are retiring from active service, they will always remain a part of the SJI
family. We appreciate their unwavering commitment to the growth and prosperity
of our company and wish them well in the years ahead.
As always, we thank you for your continued support and for sharing our
vision of a rock solid future.
Sincerely,
Charles Biscieglia
Chairman, President and CEO
South Jersey Industries
February 13, 2002
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Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview -- South Jersey Industries, Inc. (SJI) is an energy services
holding company that provides a variety of products and services through the
following wholly owned subsidiaries:
South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG
distributed natural gas in the seven southernmost counties of New Jersey to
288,008 customers at December 31, 2001 compared with 281,350 customers at
December 31, 2000. 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; and
. services appliances via the sale of appliance warranty programs
as well as on a time and materials basis.
South Jersey Energy Company (SJE) acquires and markets natural gas and
electricity to retail end users and provides total energy management services
to commercial and industrial customers. SJE has one subsidiary, SJ EnerTrade
(EnerTrade), that primarily sells natural gas to the casino industry in
Atlantic City, N.J. SJE operates South Jersey Energy Solutions, LLC, 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 and GZA GeoEnvironmental, Inc., an environmental consulting firm, each
have a 50% equity interest in AirLogics.
South Jersey Resources Group, LLC (SJRG) markets wholesale natural gas
storage, commodity and transportation in the mid-Atlantic and southern states.
Marina Energy LLC (Marina) develops and plans to operate energy-related
projects in southern New Jersey. Marina's initial project, the development of a
facility to provide cooling, heating and hot water to The Borgata Resort in
Atlantic City, is currently under construction.
SJI also has a joint venture investment with Conectiv Solutions, LLC in
Millennium Account Services, LLC (Millennium). Millennium provides meter
reading services to SJG and Conectiv Power Delivery in southern New Jersey.
As described in the footnotes to our consolidated financial statements,
management must make estimates and assumptions that affect the amounts reported
in the financial statements and related disclosures. Actual results could
differ from those estimates.
Three types of transactions presented in our consolidated financial
statements require a significant amount of judgment and estimation. These
relate to regulatory assets, energy trading activities and environmental
remediation costs.
The New Jersey Board of Public Utilities (BPU) has reviewed and approved
most of the items shown as regulatory assets through specific orders. Other
items represent costs which were not yet BPU-approved for recovery, but are the
subject of current or future filings. In recording these costs as regulatory
assets, management believes the costs will be allowable under existing rate-
making concepts that are embodied in current rate orders received by SJG.
However, ultimate recovery is subject to BPU approval.
Beginning January 1, 2001, SJI recognizes assets or liabilities for the
energy-related contracts entered into by its non-regulated subsidiary, SJRG,
when the contracts are executed. We record contracts at their fair value in
accordance with FASB Statement No. 133. We adjust the fair value of the
contracts each reporting period for changes in the market. We derive the fair
value for most of the energy-related contracts from markets where the contracts
are actively traded and quoted. For other contracts, SJI uses published market
surveys and in certain cases, independent parties to obtain quotes concerning
the contracts' current value. Market quotes tend to be more plentiful for those
contracts maturing in two years or less. The vast majority of our contracts do
not extend beyond two years.
An outside consulting firm assists us in estimating future costs for
environmental remediation activities. We estimate future costs based on
projected investigation and work plans using existing technologies. Developing
a single reliable estimation point is not feasible because of the amount of
uncertainty involved in the nature of projected remediation efforts and the
long period over which remediation efforts will continue. Therefore, we
estimate a range of future costs. In preparing financial statements, SJI
records liabilities for future costs using the lower end of the range. We
update estimates each year to take into account past efforts, changes in work
plans and remediation technologies.
Forward-Looking Statements -- This report contains certain forward-looking
statements concerning projected financial and operating performance, future
plans and courses of action and future economic conditions. All statements in
this report other than statements of historical fact are forward-looking
statements. These forward-looking statements are made based upon management's
expectations and beliefs concerning future events impacting the company and
involve a number of risks and uncertainties. We caution that forward-looking
statements are not guarantees and actual results could differ materially from
those expressed or implied in the forward-looking statements. Also, in making
forward-looking statements, we assume no duty to update these statements
should expectations change or actual results and events differ from current
expectations.
A number of factors could cause our actual results to differ materially
from those anticipated including, but not limited to, the following: general
economic conditions on an international, national, state and local level;
weather conditions in our marketing areas; changes in commodity costs;
regulatory and court decisions; competition in our utility and non-utility
activities; the availability and cost of capital; our ability to maintain
existing joint ventures to take advantage of marketing opportunities; costs
and effects of legal proceedings and environmental liabilities; the failure of
customers or suppliers to fulfill their contractual obligations; and changes
in business strategies.
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 due to 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). SJE,
EnerTrade, SJRG and Marina actively arrange energy services and provide low-
cost energy supplies in a highly competitive marketplace. Competitors of SJI's
non-utility businesses are often much larger companies with substantially
greater resources. SJI's subsidiaries successfully compete by focusing on
providing services where we have a high level of expertise in geographic areas
with which we are very familiar.
Customer Choice Legislation -- Effective January 10, 2000, all residential
natural gas customers in New Jersey can choose their gas supplier under the
terms of the Electric Discount and Energy Competition Act of 1999. Commercial
and industrial customers have had the ability to choose gas suppliers since
1987. As of December 31, 2001, 39,998 SJG residential customers chose a natural
gas supplier other than the utility, an increase from 35,657 at December 31,
2000. The number of customers buying natural gas from third party marketers
fell to 31,395 in May 2001 as marketers were unable to offer natural gas at
prices competitive with those available under regulated utility tariffs. During
Spring 2001, the market price of natural gas became comparable to SJG's prices
and decreased further as the year progressed. Consequently, third party
marketers increased customer acquisition efforts and their number of customers
rebounded. 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. SJI has benefited from customer choice legislation as SJE has
successfully competed for and profited from gas commodity customers it has
obtained.
Temperature Adjustment Clause -- SJG's BPU-approved Temperature Adjustment
Clause (TAC) increased net earnings by $2.0 million in 2001. In 2000, the TAC
reduced net income by $0.9 million and in 1999, the TAC increased net earnings
by $2.0 million. While we record the revenue and income impact of TAC
adjustments as incurred, cash inflows or outflows directly attributable to TAC
adjustments generally occur the next TAC year beginning October 1.
- 12 -
Operating Revenues - Utility -- Revenues increased $14.0 million in 2001
compared with the prior year. The increase was primarily due to higher rates
resulting from an increase in the Levelized Gas Adjustment Clause (LGAC) that
reflected higher gas costs, the return of residential customers to firm gas
sales from transportation and 6,658 additional customers. Early in the year, a
large number of residential customers who purchased natural gas from other
providers resumed purchasing natural gas from SJG as marketers were unable to
offer competitive prices. These increases offset a decrease in off-system
revenues. The decrease was due to lower average prices for natural gas sold
during the year. Significantly lower gas prices experienced during the third
and fourth quarters essentially offset the higher natural gas prices
experienced during the first six months. The volume of gas sold off-system was
also lower in 2001 than in 2000.
In 2000, revenues increased $87.3 million versus 1999. This was due
primarily to higher off-system sales, 7,451 additional customers and higher
LGAC rates 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 we
derive profits from transporting gas, not selling the commodity. Consequently,
the switch to firm transportation reduced revenues but did not impact
profitability.
As a result of SJG's TAC, revenues from utility ratepayers are closely
tied to 20-year normal temperatures calculated under the TAC and not actual
weather conditions. However, as a general rule, revenues continue to be
positively impacted by colder weather and negatively impacted by warmer
weather. Weather in 2001 was 9.0% warmer than in 2000. Weather was also 5.3%
warmer for the year than the 20-year TAC average. Revenues in 2001 were
negatively impacted by the weather. 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.
Total gas throughput decreased 17.8% to 108,935 million cubic feet (MMcf)
in 2001. Throughput in 2000 rose 5.3% to 132,528 MMcf compared with 1999.
Results in 2001 were due to decreased capacity release, off-system sales,
transportation and residential activity. Off-system and capacity release
throughput declined primarily because we canceled a high volume, low margin
supply and storage contract effective April 2001. The throughput rise in 2000
was primarily due to colder weather.
Operating Revenues - Nonutility -- Nonutility operating revenues increased
by $309.4 million to $391.7 million in 2001 compared with $82.3 million in
2000. Most of the increase, $296.8 million, 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, SJI recorded only its share of
SJRG's net income under the equity method of accounting. Had SJRG been fully
consolidated in 2000 and 1999, we would have reported nonutility revenues of
$229.3 million and $122.0 million, respectively. Higher natural gas prices for
SJE also contributed to the increase compared with 2000.
Revenues increased by $35.5 million in 2000 compared with 1999. That
increase was due to higher wholesale gas sales, retail gas sales to residential
customers and Atlantic City casinos as well as sales of our air monitoring
products and services.
Cost of Gas Sold - Utility -- Cost of gas sold - utility increased $17.6
million in 2001 compared with 2000. Higher gas costs for both local
distribution and off-system sales were responsible for the increase, which were
partially offset by lower volumes sold. SJG's gas cost during 2001 averaged
$4.78 per decatherm (dt) compared with $4.18/dt in 2000 and $2.38/dt in 1999.
SJG was able to pass a portion of higher gas costs on to local distribution
customers through BPU-approved increases in our LGAC rates. 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 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. We do
not anticipate any difficulty renewing or replacing expiring contracts under
substantially similar terms and conditions.
Cost of Sales - Nonutility -- Cost of sales - nonutility increased $306.3
million in 2001 compared with $75.6 million in 2000 due to consolidation of
SJRG's expenses, described in the Operating Revenues - Nonutility section, and
higher natural gas costs for the period. SJRG's expenses, primarily purchased
natural gas, totaled $293.9 million. Had SJRG been fully consolidated in 2000
and 1999, we would have reported nonutility cost of sales of $221.0 million and
$116.2 million, respectively. Cost of sales - nonutility rose $32.5 million in
2000 due to increased costs related to higher retail gas sales and air
monitoring products and services. Cost of sales - nonutility were reduced by
the unrealized pre-tax gain in energy trading contracts of $3.4 million as of
December 31, 2001. No adjustments of this type were made in years prior to
2001. See the Market Risks section for additional detail regarding these
contracts.
Operations -- A summary of net changes in operations (in thousands):
2001 vs. 2000 2000 vs. 1999
Utility:
Other Production Expense $ (9) $ (2)
Transmission 30 (59)
Distribution 283 (818)
Customer Accounts and Services 492 1,084
Sales 18 (67)
Administration and General (2,345) 608
Other 195 22
Nonutility 1,697 291
--------- ---------
Total Operations $ 361 $ 1,059
========= =========
Distribution expenses decreased significantly in 2000 as we avoided costs
related to our unionized workforce in late 2000. The decrease resulted from a
work stoppage that ran from November 8, 2000 to January 17, 2001. We
recognized expenses related to performing critical operational functions
during the work stoppage under Administration and General. Offsetting these
expenses in the Administration and General account in 2000 was a reallocation
of costs among other expense categories. The reallocation was BPU-mandated
through New Jersey's energy deregulation process. Approximately two-thirds of
the Administration and General account's decline in 2001 was work stoppage
related. The remainder was due to a reallocation of benefits to individual
cost centers. Customer Accounts and Services expenses rose in 2001 due to the
absence of almost two months of payroll expenses in 2000 as a result of the
work stoppage. Also contributing to the rise were higher meter reading costs
resulting from customer additions and fewer estimated meter reads. The change
in 2000 related to increased bad debt reserves anticipating account collection
difficulties in 2001 as a direct result of rising gas costs. Nonutility
expenses rose primarily due to recognition of SJRG's activities on a
consolidated basis. Last year, we recognized these activities under the equity
method of accounting.
Other Operating Expenses -- A summary of principal changes in other
consolidated operating expenses (in thousands):
2001 vs. 2000 2000 vs. 1999
Maintenance $ (49) $ 1,743
Depreciation $ 1,041 $ 1,200
Energy and Other Taxes $ (1,008) $ 476
Maintenance expense increased in 2000 primarily due to higher levels of
Remediation Adjustment Clause (RAC) amortization. RAC-related expenses do not
affect earnings as an offsetting amount is recognized in revenues. Depreciation
was higher due to SJG's increased investment in property, plant and equipment.
Changes in Energy and Other Taxes relate primarily to changes in volumes of gas
sold and transported by SJG.
Interest Charges -- Interest charges were lower in 2001 compared with the
prior year due primarily to reductions in short-term rates on line of credit
borrowings experienced during 2001. Lower interest rates and recoveries of
carrying costs associated with the unrecovered RAC and purchased gas costs
more than offset interest on higher levels of short- and long-term debt
outstanding. We incurred the debt primarily to support expanding and upgrading
SJG's gas transmission and distribution system as well as higher levels of
unrecovered gas costs and receivables resulting from increased gas prices.
Interest expense was higher in 2000 than in 1999 due primarily to higher levels
of debt outstanding and interest rates.
Discontinued Operations -- Loss from discontinued operations decreased in
2001 primarily due to the settlement of a lawsuit with an insurance carrier to
recover previously incurred costs at an operation we sold in 1996. This was
offset by the settlement of a complaint in bankruptcy court against SJE filed
by Power Company of America Liquidating Trust (PCA). PCA was a wholesale
- 13 -
electricity trading company with which SJE did business. Also included in the
loss were costs associated with discontinuing SJG's appliance merchandising
activities. The higher loss in 2000 compared with 1999 was due primarily to
legal expenses related to PCA.
Net Income Applicable to Common Stock -- Net income for 2001 was $26.6
million, or $2.27 per share, as compared with $24.2 million, or $2.12 per
share and $21.7 million, or $1.99 per share in 2000 and 1999, respectively.
Reasons for the increases in net income in 2001 and 2000 are discussed in
detail above.
Regulatory Matters --
Rate Actions: In response to a dramatic rise in gas prices during 2000 and
early 2001, the BPU granted SJG a series of increases in its LGAC between
November 2000 and July 2001. The total bill for a typical residential heating
customer rose 19% in November 2000 and an additional 2% per month between
December 2000 and July 2001 as a result of the LGAC increases. Despite the rate
increases, SJG's underrecovered gas costs totaled $48.5 million by March 2001.
On March 30, 2001, the BPU issued an order establishing a new Gas Cost
Underrecovery Adjustment Clause (GCUA) to recover the balance as of October 31,
2001 of underrecovered gas costs over three years commencing December 1, 2001.
The GCUA is an additional component of the LGAC. The GCUA balance as of
October 31, 2001 totaled $48.9 million. In addition, the BPU permitted SJG to
recover interest carrying costs on the underrecovered balance. Interest costs
were recovered at a rate of 5.5% between April 1, 2001 and November 30, 2001.
The recoverable interest rate on the GCUA balance rose to 5.75% effective
December 1, 2001.
In the second half of 2001, gas costs softened sufficiently for SJG in
November to file for a 5.6% LGAC decrease. The filing was approved and
implemented effective December 1, 2001. The LGAC decrease offset the 5.2% GCUA
rate increase that also became effective on December 1, 2001.
SJG has operated under its current TAC since October 1998. Under this
Temperature Adjustment Clause, revenues from utility ratepayers are closely,
but not exactly, 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. Because
of warmer-than-normal weather experienced during the 2000-2001 TAC year, SJG
filed in November 2001 to recover $2.7 million under the TAC. The BPU has not
yet acted on that filing.
Environmental Remediation: SJI incurred and recorded costs for
environmental clean up of sites where SJG or its predecessors operated
manufactured gas plants (MGP). SJG stopped manufacturing gas in the 1950s. SJI
and some of its nonutility subsidiaries also recorded costs for environmental
clean up of sites where we previously operated a fuel oil business and also
where we maintained equipment, fueling stations and storage. We successfully
entered into settlements with all of SJG's historic comprehensive general
liability carriers regarding environmental remediation expenditures at former
MGP 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.
We believe that all costs incurred net of insurance recoveries relating to
SJG's MGP sites will be recovered through rates under SJG's RAC. The RAC
currently permits SJG to recover incurred costs in equal installments over
7-year periods with carrying costs. As of December 31, 2001, SJG has $12.8
million of remediation costs not yet reflected in rates.
Other matters are incorporated by reference to Note 14 to the consolidated
financial statements included as part of this report.
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. SJI also maintains insurance and records probable insurance
recoveries relating to outstanding claims. In our opinion these claims will
not materially adversely affect SJI.
Liquidity and Capital Resources -- Liquidity needs at SJI are driven by
factors that include natural gas commodity prices; lags in fully collecting gas
costs from customers under the LGAC clause; working capital needs of our energy
trading activities; the timing of construction and remediation expenditures
and related permanent financings; mandated tax payment dates; and requirements
to repay long-term debt.
We first seek to meet liquidity needs with cash from operations. Net cash
provided by operating activities totaled $10.7 million, $37.7 million and $41.7
million in 2001, 2000 and 1999, respectively. The majority of the 2001 change
resulted from significantly higher-cost gas placed into inventory during the
year. We utilize short-term borrowings under lines of credit from commercial
banks to supplement cash from operations where necessary.
Lines of credit available to SJI totaled $195.0 million at December 31,
2001, of which $152.4 million was utilized. All but $10 million of these lines
are made available through five commercial banks on an uncommitted basis. The
banks and SJI review and renew the lines annually. The $10 million line is
extended on a committed basis, maturing May 2003, by a sixth commercial bank.
$175 million of these lines were exclusively for SJG's use. SJI has long-
standing relationships with all of these banks and we believe, based upon
ongoing dialogue, that there will continue to be sufficient credit available to
meet our business' future liquidity needs.
SJI supplements its operating cash flow and credit lines with both debt
and equity capital. Over the years, SJG has utilized long-term debt, primarily
in the form of First Mortgage Bonds, to finance its long-term needs. These
needs are primarily capital expenditures for property, plant and equipment.
Since 1998, SJG has financed these needs via a Medium Term Note (MTN) program,
secured in similar fashion to the First Mortgage Bonds. In July 2001, SJG
issued the final $35 million of notes available under that program in three
transactions: $10 million at 6.74% maturing 2011; $15 million at 6.57% maturing
2011; and $10 million at 6.50% maturing 2016. We used note proceeds to retire
short-term debt. We anticipate establishing a new MTN program during 2002.
Current maturities on long-term debt over the next five years are as follows:
$9.7 million in 2002; $12.9 million per year in 2003 through 2005; and $11.2
million in 2006.
In September 2001, Marina issued $20 million of tax-exempt and $9 million
of taxable variable rate demand bonds through the New Jersey Economic
Development Authority (EDA). The tax-exempt and taxable bonds mature in 2031
and 2021, respectively. Marina has EDA approval to issue up to an additional
$16 million of taxable bonds and, in fact, issued an additional $10 million of
taxable bonds in January 2002. Investors in the bonds receive liquidity and
credit support via a letter of credit provided by a commercial bank. We are
using the proceeds of this bond issuance to fund project development and
construction costs for the thermal energy plant being constructed by Marina to
serve The Borgata Resort which is scheduled to open in Summer 2003.
Construction of the thermal plant is currently ahead of schedule.
In November, we took advantage of attractive long-term interest rates and
executed interest rate swaps to fix the rates on the $29 million of Marina
bonds then outstanding. Our cost on the tax-exempt bonds is 5.03% for 10 years
and 5.65% on the taxable bonds for six years.
SJI has raised equity capital over the past three years through its
Dividend Reinvestment Plan (DRP). Participants in SJI's DRP receive newly
issued shares. We offer a 2% discount on DRP investments because it is the most
cost-effective way for us to raise equity capital in the quantities we are
seeking. Through the DRP, SJI raised $9.6 million of equity capital by issuing
354,809 shares in 2001 and $9.1 million of equity capital by issuing 335,427 in
2000. We anticipate raising approximately $10 million of equity capital through
the DRP in 2002.
Capital Expenditures, Commitments and Contingencies --
Capital Expenditures: SJI has a continuing need for cash resources and
capital, primarily to invest in new and replacement facilities and equipment
and for environmental remediation costs. Net construction and remediation
expenditures for 2001 amounted to $61.4 million. We estimate the net costs for
2002, 2003 and 2004 at approximately $91.5 million, $70.2 million and $59.2
million, respectively. Increases in expenditure estimates in 2002 and 2003,
compared with 2001 and 2004, reflect construction costs associated with the
Marina Energy Thermal Plant.
Commitments and Contingencies: SJI made certain commitments to The Borgata
Resort relating to the development of the Marina Thermal Energy Project. In the
event that certain construction milestones are not met, SJI is obligated to
make specific payments to The Borgata, per the the construction contract. As
of December 31, 2001, SJI's financial obligation to The Borgata under this
contract totaled $28.6 million, of which 50% was supported by a standby letter
of credit. To date, construction is proceeding ahead of schedule as outlined in
- 14 -
the contract and we do not anticipate problems in meeting any scheduled
construction milestones. SJI's obligation under the contract will total $5
million by mid-2003.
SJI is obligated on the letters of credit supporting the variable rate
demand bonds issued through the EDA by Marina. A commercial bank has committed
to issuing up to $46 million of annually renewing letters of credit to support
the development of Marina's thermal plant project. The letter of credit
agreement contains certain financial covenants measured on a quarterly basis.
SJI was in compliance with these covenants as of December 31, 2001.
SJG has certain commitments for both pipeline capacity and gas supply for
which it pays fees regardless of usage. Those commitments as of December 31,
2001 average $51.2 million annually and total $335.7 million over the
contracts' lives. Approximately 70% of the financial commitment under these
contracts expires during the next five years. SJG recovers all prudently
incurred fees through rates via the LGAC.
From time to time, SJI enters into operating leases to finance the use of
a variety of assets, including vehicles, telecommunications equipment and
copiers. SJI's operating lease obligations for the next five years are:
$526,000 in 2002; $470,000 in 2003; $347,000 in 2004; $189,000 in 2005; and
$38,000 in 2006.
SJI has provided credit support for SJRG in certain circumstances.
Market Risks --
Commodity Market Risks: Certain regulated and unregulated SJI subsidiaries
are involved in buying, selling, transporting and storing natural gas for
their own accounts as well as managing these activities for others. As such,
these subsidiaries are subject to market risk due to price fluctuations. To
hedge against this risk, we enter into a variety of physical and financial
transactions including forward contracts, swaps, futures and options
agreements. To manage these transactions, SJI has a well-defined risk
management policy approved by our Board of Directors that includes volumetric
and monetary limits. Management reviews reports detailing trading activity
daily. All derivative activities described above are entered into for risk
management, not trading, purposes.
SJI's subsidiaries are structured so that SJG and SJE transact commodities
on a physical basis only and enter into no financial derivative positions
directly. SJRG manages risk for these entities as well as for its own portfolio
by entering into the types of transactions noted above. It is management's
policy, to the extent that is practical, to have no unmatched positions on a
deal or portfolio basis while conducting these activities. As a result of
holding open positions to a minimal level, the financial impact to SJRG of
changes in value of a particular transaction is substantially offset by an
opposite change in the related hedge transaction. As of December 31, 2001, 42%
of the counterparties with which SJRG had unsettled sales contracts carried
investment grade ratings. The remaining counterparties carried no external
ratings, however, over half had corporate parents with investment grade
ratings.
SJRG has entered into certain contracts for the purchase, sale, storage
and transportation of natural gas. The net unrealized pre-tax gain on these
contracts on January 1, 2001 was $250,742. The net unrealized pre-tax gain on
the energy trading contracts of $3.4 million at December 31, 2001 primarily is
derived from contracts entered into during 2001 and is included as a reduction
to cost of gas - nonutility. SJRG's contracts are typically less than 12 months
long. The fair value of these contracts determined under the mark-to-market
method as of December 31, 2001 is as follows:
Assets
Maturity Maturity
Source of Fair Value < 1 Year 1-3 Years Total
- --------------------------------- ------------ ------------ ------------
Prices Actively Quoted NYMEX $ 31,057,446 $ 1,882,866 $ 32,940,312
Other External Sources Basis 9,143,208 1,580,871 10,724,079
Other Methods Inventory 6,986,589 89,681 7,076,270
------------ ------------ ------------
Total $ 47,187,243 $ 3,553,418 $ 50,740,661
============ ============ ============
Liabilities
Maturity Maturity
Source of Fair Value < 1 Year 1-3 Years Total
- --------------------------------- ------------ ------------ ------------
Prices Actively Quoted NYMEX $(29,994,124) $ (2,093,706) $(32,087,830)
Other External Sources Basis (7,153,782) (853,272) (8,007,054)
Other Methods Inventory (1,843,064) (1,843,064)
------------ ------------ ------------
Total $(38,990,970) $ (2,946,978) $(41,937,948)
============ ============ ============
NYMEX (New York Mercantile Exchange) is the primary national commodities
exchange on which natural gas is traded. Basis represents the price of a NYMEX
natural gas futures contract adjusted for the difference in price for
delivering the gas at another location. Inventory represents the market value
of natural gas held in storage determined through a combination of the NYMEX
and Basis methods. Contracts valued under the inventory method in the preceding
chart include gas inventory with a cost of $5.1 million.
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 $152.4 million of variable rate debt outstanding
at December 31, 2001 would result in an $899,000 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. Other than the newly issued Marina bonds,
our debt was issued with provisions that do not permit us to pre-pay a material
amount of such debt during the next 12 months to take advantage of changes in
interest rates.
Independent Auditors' Report
To the Shareholders and Board of Directors of
South Jersey Industries, Inc.:
We have audited the consolidated balance sheets and statements of
consolidated capitalization of South Jersey Industries, Inc. and subsidiaries
as of December 31, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 13, 2002
- 15 -
Statements of Consolidated Income
(In Thousands Except for Per Share Data)
South Jersey Industries, Inc.
and Subsidiaries
Year Ended December 31,
2001 2000 1999
--------- --------- ---------
<s> <c> <c> <c>
Operating Revenues:
Utility (Notes 1 & 10) $ 445,660 $ 431,641 $ 344,307
Nonutility (Note 3) 391,681 82,306 46,771
--------- --------- ---------
Total Operating Revenues 837,341 513,947 391,078
--------- --------- ---------
Operating Expenses:
Cost of Gas Sold - Utility 305,587 288,002 207,047
Cost of Sales - Nonutility (Notes 1 & 3) 378,477 75,592 43,079
Operations 44,631 44,270 43,211
Maintenance 7,771 7,820 6,077
Depreciation (Note 1) 21,209 20,168 18,968
Energy and Other Taxes 10,605 11,613 11,137
--------- --------- ---------
Total Operating Expenses 768,280 447,465 329,519
--------- --------- ---------
Operating Income 69,061 66,482 61,559
--------- --------- ---------
Equity in Affiliated Companies
(Notes 1 & 3) 704 1,336 731
--------- --------- ---------
Interest Charges:
Long-Term Debt 17,519 16,124 15,721
Short-Term Debt and Other 3,020 5,168 5,105
--------- --------- ---------
Total Interest Charges 20,539 21,292 20,826
--------- --------- ---------
Preferred Dividend Requirements of
Subsidiary (Note 2) 3,062 3,074 3,084
--------- --------- ---------
Income Before Income Taxes 46,164 43,452 38,380
Income Taxes (Notes 1, 5 & 6) 19,295 18,711 16,418
--------- --------- ---------
Income from Continuing Operations 26,869 24,741 21,962
Loss from Discontinued Operations - Net
(Note 3) (455) (557) (274)
Cumulative Effect of a Change in
Accounting Principle - Net (Note 1) 148 - -
--------- --------- ---------
Net Income Applicable to Common
Stock $ 26,562 $ 24,184 $ 21,688
========= ========= =========
Average Shares of Common Stock Outstanding
(Note 4) 11,716 11,401 10,922
========= ========= =========
Earnings Per Common Share:
(Notes 1, 3 & 4)
Continuing Operations $ 2.29 $ 2.17 $ 2.01
Discontinued Operations - Net (0.03) (0.05) (0.02)
Cumulative Effect of a Change in
Accounting Principle - Net 0.01 - -
--------- --------- ---------
Earnings Per Common Share $ 2.27 $ 2.12 $ 1.99
========= ========= =========
Dividends Declared Per Common Share $ 1.48 $ 1.46 $ 1.44
========= ========= =========
Statements of Consolidated Retained Earnings
(In Thousands)
South Jersey Industries, Inc.
and Subsidiaries
Year Ended December 31,
2001 2000 1999
--------- --------- ---------
<s> <c> <c> <c>
Balance at Beginning of Year $ 58,004 $ 50,467 $ 44,507
Net Income Applicable to Common Stock 26,562 24,184 21,688
Dividends Declared - Common Stock (17,348) (16,647) (15,728)
--------- --------- ---------
Balance at End of Year (Note 12) $ 67,218 $ 58,004 $ 50,467
========= ========= =========
<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,
2001 2000 1999
--------- --------- ---------
<s> <c> <c> <c>
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 26,562 $ 24,184 $ 21,688
Adjustments to Reconcile Net Income to
Cash Flows Provided by Operating
Activities:
Depreciation and Amortization 23,446 23,104 21,765
Unrealized Gain on Energy Trading (3,429) - -
Provision for Losses on Accounts
Receivable 2,667 2,280 952
Revenues and Fuel Costs Deferred - Net (7,988) (15,636) (7,665)
Deferred and Non-Current Income Taxes
and Credits - Net 7,310 13,845 7,112
Environmental Remediation Costs - Net* 5,452 7,019 1,496
Changes in:
Accounts Receivable 22,427 (60,995) (4,041)
Inventories (27,602) (4,843) 519
Prepayments and Other Current Assets (233) 75 216
Prepaid and Accrued Taxes - Net 574 1,025 8,813
Accounts Payable and Other Accrued
Liabilities (36,817) 45,415 (11,775)
Other - Net (1,640) 2,216 2,598
--------- --------- ---------
Net Cash Provided by Operating Activities 10,729 37,689 41,678
--------- --------- ---------
Cash Flows from Investing Activities:
Return of Investment in (Investment in)
Affiliates 164 (2,201) (811)
Repayment of Loan from Affiliate 800 1,595 1,700
Proceeds from the Sale of Assets - Net - - 594
Purchase of Available-for-Sale Securities (766) (832) (776)
Purchase of Restricted Investments (22,962) - -
Capital Expenditures, Cost of Removal
and Salvage (66,859) (50,834) (48,736)
--------- --------- ---------
Net Cash Used in Investing Activities (89,623) (52,272) (48,029)
--------- --------- ---------
Cash Flows from Financing Activities:
Net Borrowings from Lines of Credit 31,160 1,250 22,950
Proceeds from Issuance of Long-Term Debt 64,000 35,000 -
Principal Repayments of Long-Term Debt (11,877) (10,580) (11,149)
Dividends on Common Stock (17,348) (16,647) (15,728)
Proceeds from Sale of Common Stock 10,953 8,857 10,011
Repurchase of Preferred Stock (114) (240) (90)
Payments for Issuance of Long-Term Debt (1,142) (1,464) -
--------- --------- ---------
Net Cash Provided by Financing Activities 75,632 16,176 5,994
--------- --------- ---------
Net (Decrease) Increase in Cash and Cash
Equivalents (3,262) 1,593 (357)
Cash and Cash Equivalents at Beginning of
Year 7,227 5,634 5,991
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 3,965 $ 7,227 $ 5,634
========= ========= =========
Supplemental Disclosures of Cash Flow
Information
Cash paid during the year for:
Interest (Net of Amounts Capitalized) $ 20,662 $ 24,219 $ 25,264
Income Taxes (Net of Refunds) $ 6,480 $ 4,838 $ 4,423
<FN>
* Notes 10 and 14 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,
2001 2000
--------- ---------
<s> <c> <c>
Assets
Property, Plant and Equipment: (Note 1)
Utility Plant, at original cost $ 805,440 $ 765,561
Accumulated Depreciation (221,457) (208,292)
Nonutility Property and Equipment, at cost 24,118 6,042
Accumulated Depreciation (1,058) (988)
--------- ---------
Property, Plant and Equipment - Net 607,043 562,323
--------- ---------
Investments:
Available-for-Sale Securities (Note 7) 3,139 2,540
Restricted (Note 7) 22,962 -
Investments in Affiliates (Note 3) 1,369 4,451
--------- ---------
Total Investments 27,470 6,991
--------- ---------
Current Assets:
Cash and Cash Equivalents (Notes 1 & 13) 3,965 7,227
Accounts Receivable 66,750 81,185
Unbilled Revenues (Note 1) 34,981 45,022
Provision for Uncollectibles (2,661) (2,043)
Natural Gas in Storage, average cost 59,778 31,957
Materials and Supplies, average cost 3,818 4,037
Prepaid Taxes 4,650 3,960
Energy Trading Assets (Note 1) 47,187 -
Prepayments and Other Current Assets 3,616 4,183
--------- ---------
Total Current Assets 222,084 175,528
--------- ---------
Regulatory and Other Non-Current Assets: (Note 1)
Deferred Fuel Costs - Net (Note 10) 36,798 28,810
Other Regulatory Assets 79,994 89,275
Energy Trading Assets 3,554 -
Derivatives 509 -
Other 10,393 7,052
--------- ---------
Total Regulatory and Other Non-Current
Assets 131,248 125,137
--------- ---------
Total Assets $ 987,845 $ 869,979
========= =========
Capitalization and Liabilities
Capitalization:
Common Equity (Notes 4 & 12) $ 220,286 $ 201,739
Preferred Stock and Securities of Subsidiary
(Note 2) 36,690 36,804
Long-Term Debt (Note 7) 259,247 204,981
--------- ---------
Total Capitalization 516,223 443,524
--------- ---------
Current Liabilities:
Notes Payable (Note 13) 152,360 121,200
Current Maturities of Long-Term Debt (Note 7) 9,733 11,876
Accounts Payable 48,239 84,004
Customer Deposits 5,976 5,366
Environmental Remediation Costs (Note 14) 11,319 17,286
Taxes Accrued 2,743 1,479
Energy Trading Liabilities (Note 1) 38,991 -
Deferred Income Taxes - Net (Note 5) 26,629 24,450
Interest Accrued and Other Current
Liabilities 14,154 15,816
--------- ---------
Total Current Liabilities 310,144 281,477
--------- ---------
Deferred Credits and Other Non-Current
Liabilities:
Deferred Income Taxes - Net (Note 5) 84,717 80,587
Investment Tax Credits (Note 6) 4,166 4,513
Pension and Other Postretirement Benefits
(Note 11) 19,313 13,394
Environmental Remediation Costs (Note 14) 41,423 37,886
Energy Trading Liabilities (Note 1) 2,947 -
Other 8,912 8,598
--------- ---------
Total Deferred Credits and Other
Non-Current Liabilities 161,478 144,978
--------- ---------
Commitments and Contingencies (Note 14)
Total Capitalization and Liabilities $ 987,845 $ 869,979
========= =========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
- 18 -
Statements of Consolidated Capitalization
(In Thousands Except for Per Share Data)
South Jersey Industries, Inc.
and Subsidiaries
Year Ended December 31,
2001 2000
--------- ---------
<s> <c> <c>
Common Equity: (Notes 4 & 12)
Common Stock: Par Value $1.25 per share; Authorized 20,000,000 shares;
Outstanding Shares: 11,860,990 (2001) and 11,499,701 (2000)
Balance at Beginning of Year $ 14,375 $ 13,940
Stock Plans 451 435
--------- ---------
Balance at End of Year 14,826 14,375
Premium on Common Stock 139,929 129,360
Accumulated Other Comprehensive Loss (Note 8) (1,687) -
Retained Earnings 67,218 58,004
--------- ---------
Total Common Equity 220,286 201,739
--------- ---------
Preferred Stock and Securities of Subsidiary: (Note 2)
Redeemable Cumulative Preferred Stock:
South Jersey Gas Company, Par Value $100 per share
Authorized Shares: 41,966 (2001) and 43,104 (2000)
Outstanding Shares: Series A, 4.7% - 0 (2001) and 300 (2000) - 30
Series B, 8% - 16,904 (2001) and 17,742 (2000) 1,690 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
--------- ---------
Total Preferred Stock and Securities of Subsidiary 36,690 36,804
--------- ---------
Long-Term Debt: (A)
South Jersey Gas Company:
First Mortgage Bonds: (B)
8.19% Series due 2007 13,635 15,908
10.25% Series due 2008 9,658 11,931
9% Series due 2010 19,687 21,875
6.12% Series due 2010 10,000 10,000
6.74% Series due 2011 (C) 10,000 -
6.57% Series due 2011 (C) 15,000 -
6.95% Series due 2013 35,000 35,000
7.7% Series due 2015 15,000 15,000
6.50% Series due 2016 (C) 10,000 -
7.97% Series due 2018 10,000 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 10,000 10,000
Unsecured Notes:
Term Note, 8.47% due 2001 - 2,143
Debenture Notes, 8.6% due 2010 27,000 30,000
Marina Energy LLC: (D)
Series A Bonds at variable rates due 2031 20,000 -
Series B Bonds at variable rates due 2021 9,000 -
--------- ---------
Total Long-Term Debt Outstanding 268,980 216,857
Less Current Maturities 9,733 11,876
--------- ---------
Total Long-Term Debt 259,247 204,981
--------- ---------
Total Capitalization $ 516,223 $ 443,524
========= =========
<FN>
(A) The long-term debt maturities and sinking fund requirements for the succeeding five years are as follows:
2002, $9,733; 2003, $12,884; 2004, $12,884; 2005, $12,884; and 2006, $11,177.
(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 2001, SJG issued the remaining $35 million of debt under its Medium Term Note Program established
in 1998.
(D) In September 2001, Marina issued $29 million of variable rate revenue bonds through the New Jersey Economic
Development Authority. The variable rates at December 31, 2001 for the Series A and Series B bonds were 1.40%
and 2.00%, respectively. In January 2002, Marina issued an additional $10,000,000 of taxable Series B variable
rate bonds. Marina will use the proceeds for construction of its thermal energy plant (Notes 1 & 3).
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. All
significant intercompany accounts and transactions were eliminated. SJI
reclassified some previously reported amounts to conform with current year
classifications.
Equity-Based Investments in Affiliates -- SJI, either directly or through
its wholly-owned subsidiaries, currently holds a 50% non-controlling interest
in several affiliated companies and accounts for the investments under the
equity method. The operations of these affiliated companies are included in the
statements of consolidated income under the caption, Equity in Affiliated
Companies (See Note 3).
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
10).
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 or
other similar recovery mechanism. We pay interest on overcollected LGAC
balances based on SJG's approved return on rate base (See Note 10).
SJG's tariff also includes a Temperature Adjustment Clause (TAC), a
Remediation Adjustment Clause (RAC) and a Comprehensive Resource Analysis
Clause (CRA). 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 CRA 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
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 10 & 14). CRA adjustments are not significant
and do not affect earnings.
Property, Plant and 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 2001, 2000 and 1999. Except for
extraordinary retirements, accumulated depreciation is charged with the cost of
depreciable utility property retired and removal costs le ss salvage.
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.
Impairment of Long-Lived Assets -- We review the carrying amount of an
asset for possible impairment whenever events or changes in circumstances
indicate that such amount may not be recoverable. For the years ended 2001,
2000 and 1999, no such circumstances were identified.
Energy Trading Activities and Derivative Instruments -- SJI's regulated
and unregulated subsidiaries are involved in buying, selling, transporting and
storing natural gas and buying and selling 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, our companies enter into a variety of physical and financial
transactions including forward contracts, swaps, futures and options
agreements.
SJI structured its subsidiaries so that SJG and SJE transact commodities
on a physical basis only and do not directly enter into financially-settling
positions. South Jersey Resources Group, LLC (SJRG) performs this risk
management 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 identifying,
assessing and controlling various risks. Management reviews any open positions
in accordance with strict policies to limit exposure to market risk.
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, must 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 portion 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. As permitted under
Statement No. 133, SJI has elected not to designate any energy-related
derivative instruments as fair value or cash flow hedges.
No activities of SJG and SJE are considered subject to the fair value
recognition requirements of Statement 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. Because SJRG's transactions
will not necessarily settle physically, Statement No. 133 requires that such
transactions be accounted for pursuant to the mark-to-market method of
accounting. Under this method of accounting, SJRG measures the difference
between the contract price and the fair value of the contracts and records
these as Energy Trading Assets or Energy Trading Liabilities on our
consolidated balance sheets. As of December 31, 2001, the net unrealized
pre-tax gain of $3.4 million on energy trading contracts, determined under the
mark-to-market method, is included in Cost of Sales -- Nonutility. The
Cumulative Effect of a Change in Accounting Principle -- Net of $148,000
relates to the adoption of Statement No. 133 on January 1, 2001.
In November 2001, we entered into two interest rate swap contracts. The
first swap effectively provides us with a fixed interest rate of 4.08% on
Marina Energy LLC's (Marina) tax-exempt Series A variable rate bonds for a
10-year period. The second swap effectively fixes the interest rate of
Marina's taxable Series B variable rate bonds at 4.55% for a 6-year period. The
notional amount of this second swap decreases by $3.0 million per year
beginning in December 2005.
We entered into interest rate swap agreements to hedge the exposure to
increasing rates with respect to our variable rate debt. The differential to be
paid or received as a result of these swap agreements is accrued as interest
rates change and recognized as an adjustment to interest expense. These
- 20 -
interest rate swaps are accounted for as cash flow hedges. As of December 31,
2001, the market value of these swaps was $508,679, which represents the amount
we would have to pay the counterparty to terminate these contracts as of that
date. This balance is included on the 2001 consolidated balance sheet under the
caption Derivatives. As of December 31, 2001, we calculated the swaps to be
highly effective; therefore, the offset to the hedge asset is recorded, net of
taxes, in Accumulated Other Comprehensive Loss (See Note 8).
Fair value of the derivative investments is determined by reference to
quoted market prices of listed contracts, published quotations or quotations
from independent parties.
New Accounting Pronouncements -- In June 2001, the FASB issued Statement
No. 141, "Business Combinations", Statement No. 142, "Goodwill and Other
Intangible Assets" and Statement No. 143, "Accounting for Asset Retirement
Obligations." Statement No. 141 applies to all business combinations initiated
after June 30, 2001. Statement 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. Statement 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. Statement No. 143 establishes accounting and reporting
standards for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SJI expects to adopt
Statement Nos. 141 and 142 in 2002 and Statement No. 143 in 2003.
In August 2001, the FASB also issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", which is effective in 2003.
This statement prescribes that a single accounting model be used for valuing
long-lived assets to be disposed of and broadens the presentation of
discontinued operations.
We are currently evaluating the effects of these pronouncements; however,
they are not expected to materially impact SJI's financial condition or results
of operations.
Income Taxes -- Deferred income taxes are provided for all significant
temporary differences between book and taxable income (See Notes 5 & 6).
Other Regulatory Assets -- Other Regulatory Assets at December 31, 2001
and 2000 consisted of the following items:
Thousands of Dollars
2001 2000
-------- --------
Environmental Remediation Costs: (Notes 10 & 14)
Expended - Net $ 12,831 $ 18,474
Liability for Future Expenditures 48,790 51,029
Income Taxes - Flowthrough Depreciation (Note 6) 9,575 10,553
Postretirement Benefit Costs (Note 11) 4,158 4,536
Gross Receipts and Franchise Taxes (Note 6) 2,254 2,698
Other 2,386 1,985
-------- --------
Total Regulatory Assets $ 79,994 $ 89,275
======== ========
Statements of Consolidated Cash Flows -- For purposes of reporting cash
flows, highly liquid investments with original maturities of three 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 1,500 shares of its Cumulative Preferred Stock, Series B at
par value, plus accrued dividends. SJG may not declare or pay dividends or make
distributions on its common stock if preferred stock dividends are in arrears.
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 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 14).
In 1997, R&T Group, Inc., SJI's construction subsidiary, sold all its
operating assets, except some real estate.
SJI conducts tests annually to estimate the environmental remediation
costs for properties owned by South Jersey Fuel, Inc. (SJF), an EMI subsidiary,
from its previously operated fuel oil business. SJI reports the environmental
remediation activity related to these properties as discontinued operations.
This reporting is consistent with previous years (See Note 14).
In 1998, SJE actively traded electricity in the wholesale market, but
ceased this activity later that same year and formally exited this segment in
1999.
In 2001, SJG formally discontinued the merchandising segment of its
operations. We have accrued and reflected a liability for anticipated future
period expenses of $108,000 in the 2001 amounts in the table below.
Summarized operating results of the discontinued operations were:
Thousands of Dollars
2001 2000 1999
------- ------- -------
Operating Revenues - Merchandising $ 1,016 $ 1,193 $ 1,536
======= ======= =======
Income (Loss) before Income Taxes:
Sand Mining $ 719 $ (155) $ (216)
Construction 78 8 (195)
Fuel Oil (113) (123) (89)
Wholesale Electric (1,150) (488) (8)
Merchandising (351) (128) 25
Income Tax Credits 362 329 209
------- ------- -------
Loss from Discontinued Operations - Net $ (455) $ (557) $ (274)
======= ======= =======
Earnings Per Common Share from
Discontinued Operations - Net $ (0.03) $ (0.05) $ (0.02)
======= ======= =======
Positive results from sand mining operations in 2001 reflect a settlement
with our insurance carrier for previously incurred costs. Wholesale Electric
losses increased in 2001 due to the settlement of a creditor claim in
bankruptcy.
Affiliations -- In 1996, we formed SJRG to provide natural gas storage,
peaking services and transportation capacity for wholesale customers in New
Jersey and surrounding states. Prior to January 1, 2001, SJ EnerTrade, Inc., a
wholly owned subsidiary of SJE, and UPR Energy Marketing, Inc. (UPR) each held
a 50% non-controlling interest in SJRG. 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 of $2.9 million.
In 2001, SJRG's operations 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 and 1999, we
would have reported Nonutility Revenues as $229.3 million and $122.0 million,
respectively. We would have reported Cost of Sales - Nonutility as $221.0
million and $116.2 million, respectively.
In January 1999, SJI and Conectiv Solutions, LLC, formed Millenium Account
Services, LLC to provide meter reading services in southern New Jersey.
- 21 -
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 electricity 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 clean-up activities.
In October 2000, SJI formed Marina, a wholly owned subsidiary, to develop,
construct and operate a $50 million thermal energy plant. In December 2000,
Marina entered into a 20-year contract with Marina District Development
Corporation to supply heat, hot water and cooling to The Borgata Resort. The
plant is scheduled for completion in Summer 2003.
4. Common Stock:
SJI has 20,000,000 shares of authorized Common Stock. The following shares
were issued and outstanding:
2001 2000 1999
---------- ---------- ----------
Beginning of Year 11,499,701 11,152,175 10,778,990
New Issues During Year:
Dividend Reinvestment Plan 354,809 335,427 367,622
Employees' Stock Ownership Plan 3,707 3,917 4,144
Stock Option, Stock Appreciation Rights
and Restricted Stock Award Plan 604 5,545 31
Directors' Restricted Stock 2,169 2,637 1,388
---------- ---------- ----------
End of Year 11,860,990 11,499,701 11,152,175
========== ========== ==========
We credited the par value ($1.25 per share) of stock issued in 2001, 2000
and 1999 to Common Stock. We credited the net excess over par value of
approximately $10.6 million, $8.5 million and $9.6 million, respectively, 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 less than
$0.01 per share for 2001, 2000 and 1999.
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, 2001, SJI reserved 1,504,225
and 19,728 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, 2001,
2000 and 1999, SJI had 2,000, 4,500 and 4,500 options outstanding,
respectively, all exercisable at $24.69 per share. No options were granted in
2001, 2000 or 1999. No stock appreciation rights were issued under the Plan.
In 1999, we amended the Plan to include restricted stock awards. In 1999, we
granted 5,545 restricted shares and subsequently issued them in 2000. In 2001
and 2000, we granted 44,384 and 10,267 restricted shares, respectively.
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, 2001, 2000 and 1999 do not dilute our EPS as
calculated in accordance with FASB No. 128, "Earnings Per Share."
Directors' Restricted Stock Plan -- Under this Plan, SJI grants annual
awards to outside directors which vest over three years. SJI holds shares
issued as restricted stock until the attached restrictions lapse. We record the
stock's market value on the grant date 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
10% or more of SJI's common stock and expire if not exercised or redeemed by
September 20, 2006.
5. 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
2001 2000 1999
---------- ---------- ----------
Tax at Statutory Rate $ 14,667 $ 13,555 $ 12,082
Increase (Decrease) Resulting from:
State Income Taxes 4,391 4,873 3,893
Amortization of ITC (347) (335) (390)
Tax Depreciation Under Book
Depreciation on Utility Plant 664 664 664
Other - Net (80) (46) 169
---------- ---------- ----------
Income Taxes:
Continuing Operations 19,295 18,711 16,418
Discontinued Operations (362) (329) (209)
Cumulative Effect of a Change
in Accounting Principle 103 - -
---------- ---------- ----------
Net Income Taxes $ 19,036 $ 18,382 $ 16,209
========== ========== ==========
The provision for Income Taxes is comprised of the following:
Thousands of Dollars
2001 2000 1999
---------- ---------- ----------
Current:
Federal $ 8,306 $ 2,801 $ 6,143
State 3,678 2,052 3,216
---------- ---------- ----------
Total Current 11,984 4,853 9,359
---------- ---------- ----------
Deferred:
Federal:
Excess of Tax Depreciation Over
Book Depreciation - Net 4,668 5,220 5,496
Deferred Fuel Costs 794 12,157 1,909
Environmental Costs - Net (1,850) (2,504) (1,058)
Alternative Minimum Tax 2,851 (1,694) 676
Benefit of State Tax 251 (984) (236)
Other - Net 226 (823) (15)
State 718 2,821 677
---------- ---------- ----------
Total Deferred 7,658 14,193 7,449
---------- ---------- ----------
ITC (347) (335) (390)
---------- ---------- ----------
Income Taxes:
Continuing Operations 19,295 18,711 16,418
Discontinued Operations (362) (329) (209)
Cumulative Effect of a Change
in Accounting Principle 103 - -
---------- ---------- ----------
Net Income Taxes $ 19,036 $ 18,382 $ 16,209
========== ========== ==========
- 22 -
The net tax effect of temporary differences between the carrying amounts
of assets and liabilities for financial reporting and income tax purposes
resulted in the following deferred tax liabilities at December 31:
Thousands of Dollars
2001 2000
-------- --------
Current:
Deferred Fuel Costs $ 25,054 $ 24,519
Derivatives / Unrealized Gain 1,435 -
Other 140 (69)
-------- --------
Current Deferred Tax Liability - Net $ 26,629 $ 24,450
======== ========
Non-Current:
Book versus Tax Basis of Property 85,569 81,715
Environmental 2,761 5,144
Excess Protected 3,225 3,290
Deferred Regulatory Costs 1,660 1,387
Minimum Pension Liability (1,382) -
Deferred State Tax (2,126) (1,925)
ITC Basis Gross Up (2,249) (2,428)
Alternative Minimum Tax (1,080) (4,895)
Other (1,661) (1,701)
-------- --------
Non-Current Deferred Tax Liability - Net $ 84,717 $ 80,587
======== ========
6. Federal and Other Regulatory Tax Assets and Deferred Credits:
The primary asset created by adopting FASB Statement 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 Statement No. 109, deferred taxes previously
were not provided. SJG previously passed 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 the Gross Receipts & Franchise Tax in 1978 and is amortizing it on a
straight-line basis to operations over 30 years beginning that same year.
7. Financial Instruments:
Restricted Investments -- In accordance with the terms of Marina's bond
agreements, we are required to invest unused proceeds in high-quality, highly-
liquid investments pending approved construction expenditures. As of December
31, 2001, these proceeds totalled $14.4 million.
SJRG maintains a margin account with a national investment firm to support
its energy trading activities. As of December 31, 2001, the account balance
approximated $8.6 million.
Long-Term Debt -- We estimate the fair values of SJI's long-term debt,
including current maturities, as of December 31, 2001 and 2000, to be $288.0
and $219.1 million, respectively. Carrying amounts are $269.0 and $216.9
million, respectively. We base the estimates on 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, 2001 and
2000.
8. Comprehensive Income:
The components of comprehensive income are as follows:
Thousands of Dollars
2001 2000 1999
---------- ---------- ----------
Net Income Applicable to Common Stock $ 26,562 $ 24,184 $ 21,688
---------- ---------- ----------
Other Comprehensive (Loss) Income:
Minimum Pension Liability
Adjustment - Net (1,988) - -
Change in Fair Value of
Derivatives - Net 301 - -
---------- ---------- ----------
Total Other Comprehensive Loss (1,687) - -
---------- ---------- ----------
Comprehensive Income $ 24,875 $ 24,184 $ 21,688
========== ========== ==========
9. Segments of Business:
Information about SJI's operations in different industry segments is
presented below:
Thousands of Dollars
2001 2000 1999
---------- ---------- ----------
Operating Revenues:
Gas Utility Operations $ 475,918 $ 446,303 $ 349,518
Wholesale Gas Operations 367,086 - -
Retail Gas and Other Operations 97,174 83,607 48,920
---------- ---------- ----------
Subtotal 940,178 529,910 398,438
Intersegment Sales (102,837) (15,963) (7,360)
---------- ---------- ----------
Total Operating Revenues $ 837,341 $ 513,947 $ 391,078
========== ========== ==========
Operating Income:
Gas Utility Operations $ 60,409 $ 62,789 $ 59,455
Wholesale Gas Operations 4,778 - -
Retail Gas and Other Operations 3,984 3,488 1,360
General Corporate (110) 205 744
---------- ---------- ----------
Total Operating Income $ 69,061 $ 66,482 $ 61,559
========== ========== ==========
Depreciation and Amortization:
Gas Utility Operations $ 23,332 $ 22,986 $ 21,676
Wholesale Gas Operations 8 - -
Retail Gas and Other Operations 78 99 59
Discontinued Operations 28 19 30
---------- ---------- ----------
Total Depreciation and
Amortization $ 23,446 $ 23,104 $ 21,765
========== ========== ==========
Property Additions:
Gas Utility Operations $ 47,799 $ 47,116 $ 47,390
Wholesale Gas Operations 61 - -
Retail Gas and Other Operations 163 275 390
Thermal Energy Operations 17,915 2,985 -
---------- ---------- ----------
Total Property Additions $ 65,938 $ 50,376 $ 47,780
========== ========== ==========
Identifiable Assets:
Gas Utility Operations $ 858,002 $ 842,082 $ 750,239
Wholesale Gas Operations 82,596 - -
Retail Gas and Other Operations 19,092 22,138 14,049
Thermal Energy Operations 35,672 2,985 -
Discontinued Operations 2,182 2,243 2,326
---------- ---------- ----------
Subtotal 997,544 869,448 766,614
Corporate Assets 33,505 20,338 15,744
Intersegment Assets (43,204) (19,807) (15,433)
---------- ---------- ----------
Total Identifiable Assets $ 987,845 $ 869,979 $ 766,925
========== ========== ==========
Gas Utility Operations consist primarily of natural gas distribution to
residential, commercial and industrial customers. Wholesale Gas Operations
include SJRG's activities. Retail Gas and Other Operations include natural gas
- 23 -
and electricity acquisition and transportation service companies. Thermal
Energy Operations consist of Marina's construction and related financing
activities (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.
10. Regulatory Actions:
In January 1997, the BPU granted SJG a 9.62% rate of return on rate base,
which included an 11.25% return on common equity. Additionally, SJG's threshold
for sharing pre-tax margins generated by interruptible and off-system sales and
transportation (Sharing Formula) increased. SJG keeps 100% of pre-tax margins
up to the threshold level of $7.8 million and 20% of margins above that level.
In 1998, the BPU revised the Sharing Formula to credit 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 September 1999, the BPU approved an annual recovery level of $6.5
million for remediation costs expended from August 1995 through July 1998. This
represents an annual increase of approximately $4.5 million over the recovery
previously included in rates. In January 2000, the BPU approved the recovery
of carrying costs on unrecovered remediation costs and a proposal by SJG to
keep its current 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 December 31, 2001, 39,998 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
applicable taxes. SJG's net income, financial condition and margins are not
affected as a result of the unbundling.
The BPU approved a modification to SJG's LGAC whereby under-recovered gas
costs of $11.9 million as of October 31, 1999, and carrying costs thereon, are
being recovered over three years beginning January 2000.
On November 16, 2000, the BPU approved an increase in SJG's LGAC in
response to unprecedented natural gas price run-ups during 2000. The impact of
the initial increase was approximately 19% to a typical residential heating
customer. The BPU also approved the creation of a flexible pricing mechanism,
allowing additional 2% increases each month from December 2000 through July
2001.
On November 15, 2001, SJG filed for a $17.6 million reduction to its LGAC
and for recovery of a 3-year net deficiency in the TAC amounting to $2.7
million. The BPU approved the LGAC reduction effective December 1, 2001. Also
on December 1, 2001, SJG implemented recovery of its October 31, 2001 under-
recovered gas costs. We will recover $48.9 million over three years including
interest accrued since April 1, 2001. We will also recover interest for the
3-year amortization period at a rate of 5.7 5%.
11. 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
Statement No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions." We deferred amounts accrued prior to that authorization and
are amortizing them as allowed by the BPU. The unamortized balance of $4.2
million at December 31, 2001 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
2001 2000 1999 2001 2000 1999
------- ------- ------- ------- ------- -------
Service Cost $ 2,120 $ 1,988 $ 2,245 $ 1,063 $ 996 $ 1,098
Interest Cost 4,923 4,577 4,211 1,898 1,746 1,593
Expected Return on
Plan Assets (5,314) (4,790) (4,280) (895) (726) (675)
Amortization of
Transition Obligation 72 72 72 772 772 772
Amortization of Loss
(Gain) and Other 372 320 436 (3) (78) -
------- ------- ------- ------- ------- -------
Net Periodic
Benefit Cost $ 2,173 $ 2,167 $ 2,684 $ 2,835 $ 2,710 $ 2,788
======= ======= ======= ======= ======= =======
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
2001 2000 2001 2000
-------- -------- -------- --------
Change in Benefit Obligations:
Benefit Obligation at Beginning
of Year $ 64,086 $ 59,530 $ 24,807 $ 22,841
Service Cost 2,120 1,988 1,063 996
Interest Cost 4,923 4,577 1,898 1,746
Actuarial Loss and Other 4,606 991 1,606 311
Benefits Paid (3,195) (3,000) (745) (1,087)
-------- -------- -------- --------
Benefit Obligation at End of Year $ 72,540 $ 64,086 $ 28,629 $ 24,807
======== ======== ======== ========
Change in Plan Assets:
Fair Value of Plan Assets at
Beginning of Year $ 60,084 $ 53,320 $ 11,970 $ 9,472
Actual Return on Plan Assets (9,031) 7,261 (619) 652
Employer Contributions 2,500 2,503 2,859 2,933
Benefits Paid (3,195) (3,000) (745) (1,087)
-------- -------- -------- --------
Fair Value of Plan Assets at
End of Year $ 50,358 $ 60,084 $ 13,465 $ 11,970
======== ======== ======== ========
Funded Status $(22,182) $ (4,002) $(15,164) $(12,837)
Unrecognized Prior Service Cost 3,536 3,082 - -
Unrecognized Net Obligation
Assets from Transition 143 215 8,489 9,261
Unrecognized Net Loss (Gain)
and Other 15,609 (2,516) (63) (3,186)
-------- -------- -------- --------
Accrued Net Benefit Cost at
End of Year $ (2,894) $ (3,221) $ (6,738) $ (6,762)
======== ======== ======== ========
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets as of December 31, 2001 were $38.1 million, $32.0
million and $27.9 million, respectively. As of December 31, 2000, the
accumulated benefit obligations did not exceed plan assets.
Assumptions used in the accounting for these plans were:
Pension Benefits Other Benefits
2001 2000 2001 2000
-------- -------- -------- --------
Discount Rate 7.25% 7.75% 7.25% 7.75%
Expected Return on Plan Assets 9.00% 9.00% 7.50% 7.50%
Rate of Compensation Increase 4.10% 4.60% - -
- 24 -
The assumed health-care cost trend rates used in measuring the accumulated
postretirement benefit obligation as of December 31, 2001 are: Medical and
Drug -- 5.5% in 2001 for participants age 65 or older, remaining level
thereafter; and 6.5% in 2001 for participants under age 65, grading to 5.5% in
2005; Dental -- 6.5% in 2001, 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 2001 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)
12. 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 $65.4 million as of December 31, 2001.
13. Unused Lines of Credit and Compensating Balances:
Unused lines of credit available at December 31, 2001 were $42.6 million.
Borrowings under these lines of credit are at market rates. The weighted
borrowing cost, which changes daily, was 3.08% and 7.37% at December 31, 2001
and 2000, respectively. We maintain demand deposits with lending banks on an
informal basis and they do not constitute compensating balances.
14. Commitments and Contingencies:
Construction and Environmental -- SJI's estimated net cost of construction
and environmental remediation programs for 2002 totals $91.5 million.
Commitments were made regarding some of these programs.
Gas Supply Contracts -- SJG, in the normal course of 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 2002. 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 $4.6
million per month, recovered on a current basis through the LGAC.
Pending Litigation -- SJI is subject to claims arising in the ordinary
course of business and other legal proceedings. We accrue liabilities when
these claims become apparent for amounts we believe these claims may be
settled. We also maintain insurance and record probable insurance recoveries
relating to outstanding claims. In management's opinion, the ultimate
disposition of these claims will not have a material adverse effect on SJI's
financial position, results of operations or liquidity.
Standby Letters of Credit -- SJI provided a $17 million standby letter of
credit to Marina District Development Corporation in support of Marina's
contractual obligations to construct the thermal energy plant and to supply
heat, hot water and cooling to The Borgata Resort. This letter of credit was
reduced to $14.3 million as of December 31, 2001.
As of December 31, 2001, SJI also provided $29 million of standby letters
of credit supporting the variable rate demand bonds issued through the New
Jersey Economic Development Authority by Marina. A commercial bank has
committed to issuing up to $46 million of annually renewing letters of credit
to support development of Marina's thermal plant project.
Environmental Remediation Costs -- SJI incurred and recorded costs for
environmental clean up of sites where SJG or its predecessors operated gas
manufacturing plants. SJG stopped manufacturing gas in the 1950s. SJI and some
of its nonutility subsidiaries also recorded costs for environmental clean up
of sites where SJF previously operated a fuel oil business and Morie maintained
equipment, fueling stations and storage.
SJI successfully entered into settlements with all of its historic
comprehensive general liability carriers regarding the environmental
remediation expenditures at the SJG sites. Also, SJG purchased a Cleanup Cost
Cap Insurance Policy limiting the amount of remediation expenditures that SJG
will be required 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 were reduced by projected insurance recoveries from the
Cleanup Cost Cap Insurance Policy.
Since the early 1980s, SJI accrued environmental remediation costs of
$132.9 million, of which $80.1 million was spent as of December 31, 2001. With
the assistance of a consulting firm, we estimate that future costs to clean up
SJG's sites will range from $48.8 million to $143.5 million. We recorded the
lower end of this range as a liability. It is reflected on the 2001
consolidated balance sheet under the captions Current Liabilities and Deferred
Credits and Other Non-Current Liabilities. Recorded amounts include estimated
costs based on projected investigation and remediation work plans using
existing technologies. Actual costs could differ from the estimates due to the
long-term nature of the projects, changing technology, government regulations
and site-specific requirements. The major portion of accrued environmental
costs relate to the clean up of SJG's former gas manufacturing sites.
SJG has two regulatory assets associated with environmental costs (See
Note 1). 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
Statement No. 71, "Accounting for the Effects of Certain Types of Regulation."
The BPU allows SJG to recover expenditures through the RAC (See Note 10).
The other asset titled Environmental Remediation Cost: Liability for
Future Expenditures relates to estimated future expenditures determined under
the guidance of FASB Statement No. 5, "Accounting for Contingencies." We
recorded this amount, which relates to former manufactured gas plant sites, as
a deferred debit with the corresponding amount reflected on the consolidated
balance sheet under the captions Current Liabilities and Deferred Credits and
Other Non-Current Liabilities. The deferred debit is a regulatory asset under
Statement No. 71. The BPU's intent, evidenced by current practice, is to allow
SJG to recover the deferred costs after they are spent over 7-year periods.
As of December 31, 2001, we reflected SJG's unamortized remediation costs
of $12.8 million on the consolidated balance sheet under the caption Regulatory
Assets. Since implementing the RAC in 1992, SJG has recovered $29.2 million
through rates (See Note 10).
With Morie's sale, EMI assumed responsibility for environmental
liabilities estimated between $2.7 million and $8.8 million. The information
available on these sites is sufficient only to establish a range of probable
liability and no point within the range is more likely than any other.
Therefore, EMI continues to accrue the lower end of the range. Changes in the
accrual are included in the statements of 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 $0.4 million, while SJF's estimated
liability ranges from $1.1 million to $4.9 million for its three sites. We
recorded the lower ends of these ranges on the 2001 consolidated balance sheet
under Current Liabilities and Deferred Credits and Other Non-Current
Liabilities as of December 31, 2001.
- 25 -
Quarterly Financial Data
(Unaudited)
Summarized quarterly results of SJI's operations, in thousands except for per share amounts:
2001 Quarter Ended 2000 Quarter Ended
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- --------- --------- --------- --------- ---------
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Operating Revenues $ 341,939 $ 217,863 $ 107,646 $ 169,893 $ 167,189 $ 88,150 $ 75,069 $ 183,539
--------- --------- --------- --------- --------- --------- --------- ---------
Expenses:
Operation and Maintenance
Including Fixed Charges 300,760 216,294 112,435 151,787 130,153 86,710 80,309 163,046
Income Taxes 15,482 127 (2,387) 6,073 13,634 242 (2,545) 7,380
Energy and Other Taxes 4,476 1,908 1,446 2,775 4,383 2,078 1,700 3,452
--------- --------- --------- --------- --------- --------- --------- ---------
Total Expenses 320,718 218,329 111,494 160,635 148,170 89,030 79,464 173,878
--------- --------- --------- --------- --------- --------- --------- ---------
Other Income 513 310 72 (191) 63 863 410 -
--------- --------- --------- --------- --------- --------- --------- ---------
Income (Loss) from
Continuing Operations 21,734 (156) (3,776) 9,067 19,082 (17) (3,985) 9,661
Discontinued Operations - Net (200) (84) (36) (135) (101) (119) (133) (204)
Cumulative Effect of a Change in
Accounting Principle - Net 148 - - - - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) Applicable
to Common Stock $ 21,682 $ (240) $ (3,812) $ 8,932 $ 18,981 $ (136) $ (4,118) $ 9,457
========= ========= ========= ========= ========= ========= ========= =========
Earnings Per Common Share (1)
(Based on Average Shares
Outstanding):
Continuing Operations 1.88 (0.01) (0.32) 0.76 1.69 - (0.35) 0.84
Discontinued Operations - Net (0.02) (0.01) - (0.01) (0.01) (0.01) (0.01) (0.02)
Cumulative Effect of a Change in
Accounting Principle - Net 0.01 - - - - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings Per Common Share $ 1.87 $ (0.02) $ (0.32) $ 0.75 $ 1.68 $ (0.01) $ (0.36) $ 0.82
========= ========= ========= ========= ========= ========= ========= =========
Average Shares Outstanding 11,583 11,670 11,769 11,841 11,284 11,361 11,462 11,498
<FN>
(1) The sum of the quarters for 2001 and 2000 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
2001 High Low Per Share 2000 High Low Per Share
<s> <c> <c> <c> <s> <c> <c> <c>
March 31 $ 32.25 $ 27.60 $ 0.370 March 31 $ 29.63 $ 27.56 $ 0.365
June 30 $ 31.55 $ 29.05 $ 0.370 June 30 $ 28.81 $ 24.50 $ 0.365
Sept. 30 $ 32.96 $ 29.30 $ 0.370 Sept. 30 $ 29.25 $ 26.06 $ 0.365
Dec. 31 $ 34.10 $ 30.41 $ 0.370 Dec. 31 $ 30.13 $ 28.25 $ 0.365
<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 31, 2001, the latest available date, our records indicate
that there were 8,663 shareholders.
</FN>
- 26 -
South Jersey Gas Company
Comparative Operating Statistics
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
<s> <c> <c> <c> <c> <c>
Operating Revenues (Thousands):
Firm
Residential $ 201,531 $ 172,418 $ 152,946 $ 147,274 $ 176,717
Commercial 76,416 49,669 35,064 36,328 60,418
Industrial 4,250 5,265 4,879 4,175 5,535
Cogeneration & Electric Generation 7,405 11,016 8,496 8,119 5,249
Firm Transportation 29,565 38,213 33,125 24,893 15,966
--------- --------- --------- --------- ---------
Total Firm Revenues 319,167 276,581 234,510 220,789 263,885
Interruptible 1,485 1,695 1,645 2,506 6,085
Interruptible Transportation 1,268 1,531 1,724 2,598 3,507
Off-System 145,530 160,208 104,142 62,578 39,403
Capacity Release & Storage 5,596 4,411 4,193 6,031 8,533
Other 2,871 1,877 3,304 3,395 5,291
Intercompany Sales (30,257) (14,662) (5,211) (1,032) (71)
--------- --------- --------- --------- ---------
Total Operating Revenues $ 445,660 $ 431,641 $ 344,307 $ 296,865 $ 326,633
========= ========= ========= ========= =========
Throughput (MMcf):
Firm
Residential 17,390 19,124 17,741 16,979 19,955
Commercial 7,544 6,191 4,634 4,826 8,067
Industrial 248 282 246 348 733
Cogeneration & Electric Generation 1,519 2,046 2,316 2,373 1,230
Firm Transportation 22,085 26,114 25,143 22,336 20,196
--------- --------- --------- --------- ---------
Total Firm Throughput 48,786 53,757 50,080 46,862 50,181
--------- --------- --------- --------- ---------
Interruptible 207 207 383 694 1,345
Interruptible Transportation 2,638 3,022 3,628 6,049 7,586
Off-System 30,117 38,097 42,480 26,916 14,462
Capacity Release & Storage 27,187 37,445 29,247 27,319 36,382
--------- --------- --------- --------- ---------
Total Throughput 108,935 132,528 125,818 107,840 109,956
========= ========= ========= ========= =========
Number of Customers at Year End:
Residential 268,046 261,621 254,601 248,210 242,132
Commercial 19,542 19,319 18,894 18,457 18,037
Industrial 420 410 404 398 398
--------- --------- --------- --------- ---------
Total Customers 288,008 281,350 273,899 267,065 260,567
========= ========= ========= ========= =========
Maximum Daily Sendout (MMcf) 326 375 324 314 355
========= ========= ========= ========= =========
Annual Degree Days 4,495 4,942 4,468 4,110 4,829
========= ========= ========= ========= =========
Normal Degree Days * 4,625 4,639 4,664 4,708 4,728
========= ========= ========= ========= =========
<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 61 (1, 4, 5*)
President, Leadership Learning Academy, Lakeland, Fla.
Charles Biscieglia
Director since 1998, Age 57 (3+, 4*, 5+)
Chairman, President and CEO of South Jersey Industries and
President and CEO of South Jersey Gas, Folsom, N.J.
Sheila Hartnett-Devlin
Director since 1999, Age 43 (1, 2)
Executive Vice President of Fiduciary Trust Company International,
New York, N.Y.
Richard L. Dunham
Director since 1984, Age 72 (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 57 (2, 3, 4)
Managing Partner, law firm of Edwards & Caldwell, Hawthorne, N.J.
Thomas L. Glenn, Jr.
Director since 1986, Age 67 (1, 3*, 4)
Co-Chairman and Treasurer, Glenn Insurance, Inc., Absecon, N.J.
Herman D. James, Ph.D.
Director since 1990, Age 58 (1*, 2, 5)
Distinguished Professor, Rowan University, Glassboro, N.J.
Clarence D. McCormick
Director since 1979, Age 72 (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 64 (1, 3, 5)
President, Seashore Supply Company, Ocean City, N.J.
Keith S. Campbell
Director since 2000, Age 47 (3, 5)
Chairman, Mannington Mills, Salem, 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 and Corporate Secretary
Edward J. Graham
Vice President
David A. Kindlick
Vice President and Treasurer
Albert V. Ruggiero
Vice President
Richard H. Walker, Jr.
Assistant Secretary
- 28 -
South Jersey Gas Officers.
Charles Biscieglia
President and CEO
George L. Baulig
Sr. Vice President & Corporate Secretary
Richard J. Jackson
Sr. Vice President, Operations
David A. Kindlick
Sr. Vice President, Finance & Treasurer
Janet T. Nickels
Sr. Vice President, Gas Sales & Customer Services
Albert V. Ruggiero
Sr. Vice President, Corporate Development
Julius J. Bodrog
Vice President, Risk Management
Patrick T. Finnigan
Vice President, Information Systems
Samuel A. Pignatelli
Vice President, Data Processing & Materials Management
Earl H. Siegman
Vice President, Economic Development
Charles F. Dippo
Assistant Vice President, Engineering Services
Anthony M. Tetto
Assistant Vice President, Distribution Operations
Richard H. Walker, Jr.
Assistant Secretary
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 and optional purchases. 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 may be made 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 closing
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.
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.
- Inside Back Cover -
1 South Jersey Plaza
Folsom, New Jersey 08037-9917
www.sjindustries.com
609-561-9000
- Back Cover -