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Page 1 of 30
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2002 Commission File Number 1-6364
SOUTH JERSEY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-1901645
(State of incorporation) (IRS employer
identification no.)
1 South Jersey Plaza, Folsom, NJ 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of August 1, 2002, there were 12,080,588 shares of the registrant's common
stock outstanding.
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements-- See Pages 3 through 17
SJI-2
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
Three Months Ended
June 30,
-----------------------------------
2002 2001
---------------- ----------------
Operating Revenues:
Utility $ 62,776 $ 79,818
Nonutility 43,092 137,733
---------------- ----------------
Total Operating Revenues 105,868 217,551
---------------- ----------------
Operating Expenses:
Cost of Gas Sold - Utility 38,875 57,182
Cost of Sales - Nonutility 41,014 136,184
Operations 11,278 10,211
Maintenance 1,673 1,788
Depreciation 5,582 5,270
Energy and Other Taxes 2,120 1,908
---------------- ----------------
Total Operating Expenses 100,542 212,543
---------------- ----------------
Operating Income 5,326 5,008
Other Income and Expense:
Equity in Affiliated Companies 203 310
Other 683 147
---------------- ----------------
Total Other Income and Expense 886 457
---------------- ----------------
Interest Charges 4,392 4,727
Preferred Dividend Requirements of Subsidiary 764 766
---------------- ----------------
Income (Loss) Before Income Taxes 1,056 (28)
Income Taxes 335 128
---------------- ----------------
Income (Loss) from Continuing Operations 721 (156)
Discontinued Operations - Net (118) (84)
---------------- ----------------
Net Income (Loss) Applicable to Common Stock $ 603 $ (240)
================ ================
Basic Earnings Per Common Share:
Continuing Operations $ 0.06 $ (0.01)
Discontinued Operations - Net (0.01) (0.01)
---------------- ----------------
Basic Earnings Per Common Share $ 0.05 $ (0.02)
================ ================
Average Shares of Common Stock Outstanding - Basic 11,990 11,670
Diluted Earnings Per Common Share:
Continuing Operations $ 0.06 $ (0.01)
Discontinued Operations - Net (0.01) (0.01)
---------------- ----------------
Diluted Earnings Per Common Share $ 0.05 $ (0.02)
================ ================
Average Shares of Common Stock Outstanding - Diluted 12,073 11,714
Dividends Declared per Common Share $ 0.375 $ 0.370
================ ================
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-3
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
Six Months Ended
June 30,
-----------------------------------
2002 2001
---------------- ----------------
Operating Revenues:
Utility $ 204,958 $ 281,942
Nonutility 114,228 277,081
---------------- ----------------
Total Operating Revenues 319,186 559,023
---------------- ----------------
Operating Expenses:
Cost of Gas Sold - Utility 126,318 201,523
Cost of Sales - Nonutility 106,648 267,905
Operations 21,671 20,284
Maintenance 3,090 4,673
Depreciation 11,081 10,471
Energy and Other Taxes 5,962 6,383
---------------- ----------------
Total Operating Expenses 274,770 511,239
---------------- ----------------
Operating Income 44,416 47,784
Other Income and Expense:
Equity in Affiliated Companies 366 823
Other 609 519
---------------- ----------------
Total Other Income and Expense 975 1,342
Interest Charges 9,039 10,406
Preferred Dividend Requirements of Subsidiary 1,529 1,533
---------------- ----------------
Income Before Income Taxes 34,823 37,187
Income Taxes 14,384 15,609
---------------- ----------------
Income from Continuing Operations 20,439 21,578
Discontinued Operations - Net (150) (284)
Cumulative Effect of a Change in Accounting
Principle - Net - 148
---------------- ----------------
Net Income Applicable to Common Stock $ 20,289 $ 21,442
================ ================
Basic Earnings Per Common Share:
Continuing Operations $ 1.71 $ 1.85
Discontinued Operations - Net (0.01) (0.02)
Cumulative Effect of a Change in Accounting
Principle - Net 0.00 0.01
---------------- ----------------
Basic Earnings Per Common Share $ 1.70 $ 1.84
================ ================
Average Shares of Common Stock Outstanding - Basic 11,952 11,626
Diluted Earnings Per Common Share:
Continuing Operations $ 1.70 $ 1.85
Discontinued Operations - Net (0.01) (0.02)
Cumulative Effect of a Change in Accounting
Principle - Net 0.00 0.01
---------------- ----------------
Diluted Earnings Per Common Share $ 1.69 $ 1.84
================ ================
Average Shares of Common Stock Outstanding - Diluted 12,011 11,653
Dividends Declared per Common Share $ 0.750 $ 0.735
================ ================
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-4
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
June 30, December 31,
------------------------- ------------
2002 2001 2001
--------- --------- ------------
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $ 822,053 $ 783,349 $ 805,440
Accumulated Depreciation (229,078) (215,428) (221,457)
Nonutility Property and Equipment, at cost 42,452 9,597 24,118
Accumulated Depreciation (1,100) (1,013) (1,058)
--------- --------- ---------
Property, Plant and Equipment - Net 634,327 576,505 607,043
--------- --------- ---------
Investments:
Available-for-Sale Securities 3,330 2,734 3,139
Restricted 7,026 -- 22,962
Investment in Affiliates 1,775 1,738 1,369
--------- --------- ---------
Total Investments 12,131 4,472 27,470
--------- --------- ---------
Current Assets:
Cash and Cash Equivalents 6,599 14,154 3,965
Accounts Receivable 61,811 85,484 66,750
Unbilled Revenues 9,849 11,241 34,981
Provision for Uncollectibles (2,275) (2,019) (2,661)
Natural Gas in Storage, average cost 40,214 41,502 59,778
Materials and Supplies, average cost 3,755 4,061 3,818
Prepaid Taxes 11,621 13,872 4,650
Energy Trading Assets 21,969 33,117 47,187
Prepayments and Other Current Assets 5,849 5,361 3,616
--------- --------- ---------
Total Current Assets 159,392 206,773 222,084
--------- --------- ---------
Regulatory and Other Non-Current Assets:
Deferred Fuel Costs - Net 37,414 37,480 36,798
Other Regulatory Assets 76,369 81,460 79,994
Energy Trading Assets 5,070 3,181 3,554
Derivatives -- -- 509
Other 11,568 6,687 10,393
--------- --------- ---------
Total Regulatory and Other Non-Current Assets 130,421 128,808 131,248
--------- --------- ---------
Total Assets $ 936,271 $ 916,558 $ 987,845
========= ========= =========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-5
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
June 30, December 31,
------------------------- ------------
2002 2001 2001
--------- --------- ------------
Capitalization and Liabilities
Common Equity:
Common Stock $ 15,014 $ 14,587 $ 14,826
Premium on Common Stock 144,557 134,466 139,929
Accumulated Other Comprehensive Loss (1,632) -- (1,687)
Retained Earnings 78,532 70,842 67,218
--------- --------- ---------
Total Common Equity 236,471 219,895 220,286
--------- --------- ---------
Preferred Stock and Securities of Subsidiary:
Redeemable Cumulative Preferred Stock:
South Jersey Gas Company, Par Value $100 per share
Authorized - 41,966 shares
Outstanding Shares:
Series B, 8% -- 16,904 shares 1,690 1,690 1,690
South Jersey Gas Company-Guaranteed Manditorily Redeemable
Preferred Securities of Subsidiary Trust:
Par Value $25 per share, 1,400,000 shares
Authorized and Outstanding 35,000 35,000 35,000
--------- --------- ---------
Total Preferred Stock and Securities of Subsidiary 36,690 36,690 36,690
--------- --------- ---------
Long-Term Debt 256,514 195,247 259,247
--------- --------- ---------
Total Capitalization 529,675 451,832 516,223
--------- --------- ---------
Current Liabilities:
Notes Payable 107,750 149,850 152,360
Current Maturities of Long-Term Debt 9,733 11,876 9,733
Accounts Payable 43,042 55,761 48,239
Customer Deposits 6,484 5,516 5,976
Environmental Remediation Costs 11,293 17,252 11,319
Taxes Accrued 4,415 2,569 2,743
Energy Trading Liabilities 14,899 28,614 38,991
Derivatives 243 -- --
Deferred Income Taxes - Net 27,117 24,681 26,629
Interest Accrued and Other Current Liabilities 14,919 14,017 14,154
--------- --------- ---------
Total Current Liabilities 239,895 310,136 310,144
--------- --------- ---------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 90,967 89,849 84,717
Investment Tax Credits 3,992 4,340 4,166
Pension and Other Postretirement Benefits 16,347 12,122 19,313
Environmental Remediation Costs 41,423 37,886 41,423
Energy Trading Liabilities 3,938 2,177 2,947
Derivatives 618 -- --
Other 9,416 8,216 8,912
--------- --------- ---------
Total Deferred Credits
and Other Non-Current Liabilities 166,701 154,590 161,478
--------- --------- ---------
Commitments and Contingencies (Note 9)
Total Capitalization and Liabilities $ 936,271 $ 916,558 $ 987,845
========= ========= =========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-6
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Six Months Ended
June 30,
--------------------------------
2002 2001
-------------- --------------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 20,289 $ 21,442
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 12,269 11,641
Unrealized Gain on Energy Trading (782) (2,601)
Provision for Losses on Accounts Receivable 860 680
Revenues and Fuel Costs Deferred - Net (616) (8,670)
Deferred and Non-Current Income Taxes and Credits - Net 6,925 9,719
Environmental Remediation Costs - Net 5,789 7,153
Changes in:
Accounts Receivable 28,825 28,538
Inventories 19,627 (9,569)
Prepayments and Other Current Assets (2,233) (588)
Prepaid and Accrued Taxes - Net (5,299) (8,822)
Accounts Payable and Other Accrued Liabilities (3,924) (29,892)
Other - Net (3,055) (4,299)
-------------- --------------
Net Cash Provided by Operating Activities 78,675 14,732
-------------- --------------
Cash Flows from Investing Activities:
(Investment in) Return of Investment in Affiliate (406) 2,713
Repayment of Loan from (Loan to) Affiliate 350 (590)
Purchase of Available-For-Sale Securities (229) (252)
Proceeds from Sale of Restricted Investments 15,936 -
Capital Expenditures, Cost of Removal and Salvage (40,126) (25,162)
-------------- --------------
Net Cash Used in Investing Activities (24,475) (23,291)
-------------- --------------
Cash Flows from Financing Activities:
Net (Repayments of) Borrowings from Lines of Credit (44,610) 28,650
Proceeds from Issuance of Long-Term Debt 10,000 -
Principal Repayments of Long-Term Debt (12,733) (9,734)
Dividends on Common Stock (8,975) (8,604)
Proceeds from Sale of Common Stock 4,782 5,288
Payments for Issuance of Long-Term Debt (30) (114)
-------------- --------------
Net Cash (Used in) Provided by Financing Activities (51,566) 15,486
-------------- --------------
Net Increase in Cash and Cash Equivalents 2,634 6,927
Cash and Cash Equivalents at Beginning of Period 3,965 7,227
-------------- --------------
Cash and Cash Equivalents at End of Period $ 6,599 $ 14,154
============== ==============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-7
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies:
Consolidation -- The condensed consolidated financial statements
include the accounts of South Jersey Industries, Inc. (SJI) and its
subsidiaries. All significant intercompany accounts and transactions were
eliminated. SJI reclassified some previously reported amounts to conform with
current year classifications. In our opinion, the condensed consolidated
financial statements reflect all adjustments needed to fairly present SJI's
financial position and operating results at the dates and for the periods
presented. Our businesses are subject to seasonal fluctuations and, accordingly,
this interim financial information should not be the basis for estimating the
full year's operating results. These financial statements should be read in
conjunction with SJI's 2001 Form 10K and annual report.
Equity-Based Investments in Affiliates -- SJI, either directly or
through its wholly-owned subsidiaries, currently holds a 50% non-controlling
interest in several affiliated companies and accounts for the investments under
the equity method. The operations of these affiliated companies are included in
the statements of condensed consolidated income under the caption, Equity in
Affiliated Companies.
Estimates and Assumptions -- Our financial statements are prepared to
conform with generally accepted accounting principles. Management makes
estimates and assumptions that affect the amounts reported in the financial
statements and related disclosures. Therefore, actual results could differ from
those estimates.
Energy Trading Activities & Derivative Instruments -- South Jersey
Resources Group, LLC (SJRG) manages its portfolio purchases and sales, as well
as natural gas in storage, using a variety of instruments that include forward
contracts, swap agreements, option contracts and futures contracts. Because
SJRG's transactions will not necessarily settle physically, Financial Accounting
Standards Board (FASB) Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, requires that certain transactions not
designated as hedges be accounted for at fair value. Under this method of
accounting, SJRG measures the difference between the price and the fair value of
the contracts and records these as Energy Trading Assets or Energy Trading
Liabilities on our condensed consolidated balance sheets. For the six months
ended June 30, 2002 and 2001, the net unrealized pre-tax gain on energy trading
was $.8 million and $2.6 million, respectively. For the three months ended June
30, 2002 and 2001, the net unrealized pre-tax loss on energy trading was $(1.3)
million and $(.2) million, respectively. These gains (losses) are 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.
SJI-8
SJI's approach to transacting various aspects of its unregulated energy
business is to offset purchases and sales and have minimal open positions at any
one time. Consistent with this approach, SJI will designate certain energy
related contracts as cash flow or fair value hedges.
SJRG also provides price risk management for certain South Jersey
Energy (SJE) sales commitments. SJRG enters into future and basis contracts to
effectively provide the physical gas needed to fulfill SJE's firm commitments
for sales of gas and forecasted purchases of gas. The SJRG energy related
contracts that are used to hedge SJE's forecasted purchases of gas have been
designated as cash flow hedges. The gains and losses on derivative contracts
designated as cash flow hedges are recorded in Accumulated Other Comprehensive
Loss and recorded to the Income Statement when the hedged transactions are
completed. SJE's firm commitments for sales of gas are marked to market through
earnings.
In November 2001, we entered into two interest rate swap contracts. The
first swap effectively provides us with a fixed interest rate of 4.08% on Marina
Energy LLC's (Marina) tax-exempt Series A variable rate bonds for a 10-year
period. The second swap effectively fixes the interest rate of Marina's taxable
Series B variable rate bonds at 4.55% for a 6-year period. The notional amount
of this second swap decreases by $3.0 million per year beginning in December
2005.
In January 2002, Marina issued an additional $10.0 million of taxable
Series B variable rate bonds. In April 2002, we entered into an interest rate
swap contract that effectively fixes the interest rate on these bonds at 4.62%
for a four-year period. The notional amount of this swap decreases to $8 million
in December 2003, then to $3.9 million in December 2004, and terminates in
December 2005.
Also in April 2002, SJG entered into an interest rate swap contract
that effectively fixes the interest rate at 3.57% through March 15, 2003 on $40
million of SJG's debt outstanding under its bank lines.
We entered into interest rate swap agreements to hedge the exposure to
an increase in interest rates with respect to our variable rate debt. The
differential to be paid or received as a result of these swap agreements is
accrued as interest rates change and recognized as an adjustment to interest
expense. These interest rate swaps are accounted for as cash flow hedges. As of
June 30, 2002, the market value of these swaps was $(860,394), which represents
the amount we would pay to terminate these contracts as of that date. This
balance is included on the 2002 condensed consolidated balance sheet under the
caption Derivatives. As of June 30, 2002, we calculated the swaps to be highly
effective; therefore, the offset to the hedge asset is recorded, net of taxes,
in Accumulated Other Comprehensive Loss.
Fair value of the derivative investments is determined by reference to
quoted market prices of listed contracts, published quotations or quotations
from independent parties.
SJI-9
New Accounting Pronouncements -- In June 2001, the FASB issued
Statement No. 143, "Accounting for Asset Retirement Obligations." Statement No.
143 establishes accounting and reporting standards for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SJI expects to adopt Statement No. 143 in 2003.
In August 2001, the FASB 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.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with the exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002.
Beginning in the third quarter of 2002, SJI will be required to adopt
Emerging Issues Task Force Issue No. 02-03 which will require realized gains and
losses from trading in physical power contracts to be recorded net in our
condensed consolidated statements of income.
We are currently evaluating the effects of these statements; however,
they are not expected to materially impact SJI's financial condition or results
of operations.
Other Regulatory Assets -- Other Regulatory Assets consisted of the
following items (in thousands):
June 30, December 31,
2002 2001 2001
--------------------------------
Environmental Remediation Costs:
Expended - Net $ 7,016 $11,287 $12,831
Liability for Future Expenditures 48,790 51,029 48,790
Income Taxes - Flowthrough Depreciation 9,086 10,064 9,575
Postretirement Benefit Costs 3,969 4,347 4,158
Gross Receipts and Franchise Taxes 2,032 2,476 2,254
Other 5,476 2,257 2,386
------------------------------
Total Regulatory Assets $76,369 $81,460 $79,994
==============================
SJI-10
Note 2. Discontinued Operations and Affiliations:
Discontinued Operations -- Summarized operating results of discontinued
operations for the three and six months ending June 30 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------------------------------------------------
Operating Revenues - Merchandising $ 26 $ 383 $ 26 $ 556
=================================================
Income (Loss) before Income Taxes:
Sand Mining $ (175) $ (134) $ (206) $ 810
Construction (6) 92 (12) 95
Fuel Oil (16) (19) (31) (39)
Wholesale Electric - - - (1,177)
Merchandising - (78) - (164)
Income Tax Credits 79 55 99 191
--------------------------------------------------
Loss from Discontinued Operations - Net $ (118) $ (84) $ (150) $ (284)
==================================================
Earnings Per Common Share from
Discontinued Operations - Net $ (0.01) $ (0.01) $ (0.01) $ (0.02)
==================================================
Affiliations -- In January 1999, SJI and Conectiv Solutions, LLC,
formed Millennium Account Services, LLC to provide meter reading services in
Southern New Jersey.
In June 1999, SJE and Energy East Solutions, Inc. formed South Jersey
Energy Solutions, LLC (SJES) to market retail electricity and energy management
services. SJES began supplying retail electric during the first quarter of 2000.
In April 2000, SJE and GZA GeoEnvironmental, Inc. formed Air Logics,
LLC to market a jointly-developed air monitoring system designed to assist
companies involved in environmental cleanup activities.
Note 3. Common Stock:
SJI has 20,000,000 shares of authorized Common Stock. The following
shares were issued and outstanding:
2002 2001
-------------------------
Beginning, January 1 11,860,990 11,499,701
New Issues During Year:
Dividend Reinvestment Plan 148,033 168,281
Employees' Stock Ownership Plan 1,731 1,900
Stock Option, Stock Appreciation Rights
And Restricted Stock Award Plan 590 --
-------------------------
Ending Balance, June 30 12,011,344 11,669,882
=========================
SJI-11
We credited the par value ($1.25 per share) of stock issued in 2002 and
2001 to Common Stock. We credited the net excess over par value of approximately
$4.6 million and $5.1 million, respectively, to Premium on Common Stock.
Dividend Reinvestment Plan (DRP) and Employees' Stock Ownership Plan
(ESOP) -- Newly issued shares of common stock offered through the DRP are issued
directly by SJI. All shares offered through the ESOP are also issued directly by
SJI. As of June 30, 2002, SJI reserved 1,303,968 and 17,198 shares of
authorized, but unissued, common stock for future issuance to the DRP and ESOP,
respectively.
Stock Option, Stock Appreciation Rights and Restricted Stock Award Plan
- -- Under this plan, no more than 306,000 shares in the aggregate may be issued
to SJI's officers and other key employees. No options or stock appreciation
rights may be granted under the Plan after November 22, 2006. At June 30, 2002
and 2001, SJI had -0- and 4,500 options outstanding, respectively, all
exercisable at $24.69 per share. No options were granted in 2002 or 2001. No
stock appreciation rights were issued under the Plan. As of June 30, 2002,
80,980 restricted shares were granted and will be issued upon satisfaction of
time and performance contingencies.
Earnings Per Common Share -- We present basic EPS based on the
weighted-average number of common shares outstanding. Our EPS are presented in
accordance with FASB Statement No. 128, "Earnings Per Share" which establishes
standards for computing and presenting basic and diluted EPS. The incremental
shares required for inclusion in the denominator for the diluted EPS calculation
were 82,632 and 43,611 shares for the three months ended, and 58,764 and 26,739
shares for the six months ended June 30, 2002 and 2001, respectively. These
shares relate to stock options and restricted stock and were calculated using
the treasury stock method.
Note 4. Financial Instruments:
Restricted Investments -- In accordance with the terms of Marina's bond
agreements, we are required to invest unused proceeds in high-quality,
highly-liquid investments pending approved construction expenditures. As of June
30, 2002, the net proceeds remaining totaled $6.9 million.
SJRG maintains a margin account with a national investment firm to
support its energy trading activities. As of June 30, 2002, SJRG's margin
account balance approximated $68,000.
SJI-12
Note 5. Comprehensive Income:
The components of comprehensive income are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
--------------------------------------
Net Income Applicable to Common Stock $ 603 $ 20,289
Other Comprehensive (Loss) Income:
Change in Fair Value of Derivatives:
Interest Rate Swaps (941) (810)
Energy Trading Contracts 865 865
--------------------------------------
Comprehensive Income $ 527 $ 20,344
======================================
Note 6. Segments of Business:
Information about SJI's operations in different industry segments for
the three and six months ended June 30 is presented below (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------------------------------------------------------------
Operating Revenues:
Gas Utility Operations $ 65,646 $ 81,071 $ 219,829 $ 300,210
Wholesale Gas Operations 35,526 132,707 98,790 263,099
Retail Gas and Other Operations 20,708 21,525 53,126 55,855
--------------------------------------------------------------
Subtotal 121,880 235,303 371,745 619,164
Intersegment Sales (16,012) (17,752) (52,559) (60,141)
--------------------------------------------------------------
Total Operating Revenues $ 105,868 $ 217,551 $ 319,186 $ 559,023
==============================================================
Operating Income:
Gas Utility Operations $ 4,822 $ 4,148 $ 39,274 $ 39,944
Wholesale Gas Operations 593 465 3,341 4,078
Retail Gas and Other Operations 798 501 2,604 3,921
General Corporate (887) (106) (803) (159)
--------------------------------------------------------------
Total Operating Income $ 5,326 $ 5,008 $ 44,416 $ 47,784
==============================================================
SJI-13
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------------------------------------------------------------
Depreciation and Amortization:
Gas Utility Operations $ 6,117 $ 5,817 $ 12,204 $ 11,586
Wholesale Gas Operations 3 - 6 -
Retail Gas and Other Operations 22 26 42 41
Discontinued Operations 10 7 17 14
--------------------------------------------------------------
Total Depreciation and
Amortization $ 6,152 $ 5,850 $ 12,269 $ 11,641
==============================================================
Property Additions:
Gas Utility Operations $ 11,797 $ 11,899 $ 21,367 $ 21,174
Wholesale Gas Operations - 53 - 53
Retail Gas and Other Operations 52 86 55 134
Thermal Energy Operations 10,775 2,587 18,298 3,415
--------------------------------------------------------------
Total Property Additions $ 22,624 $ 14,625 $ 39,720 $ 24,776
==============================================================
Identifiable Assets:
Gas Utility Operations $ 829,152 $ 830,324
Wholesale Gas Operations 37,396 66,856
Retail Gas and Other Operations 24,982 13,843
Thermal Energy Operations 48,733 6,300
Discontinued Operations 2,359 2,242
-----------------------------
Subtotal 942,622 919,565
Corporate Assets 27,276 29,686
Intersegment Assets (33,627) (32,693)
-----------------------------
Total Identifiable Assets $ 936,271 $ 916,558
=============================
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
and electricity acquisition and transportation service companies. Thermal Energy
Operations consist of Marina's construction and related financing activities.
SJI's interest expense relates primarily to SJG's borrowing and
financing activities. Interest income is essentially derived from borrowings
between the subsidiaries which is eliminated during consolidation.
Note 7. Regulatory Actions:
In January 1997, the New Jersey Board of Public Utilities (BPU) granted
SJG a 9.62% rate of return on rate base, which included an 11.25% return on
common equity. Additionally, SJG's threshold for sharing pre-tax margins
generated by interruptible and off-system sales and transportation (Sharing
SJI-14
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 Levelized Gas Adjustment Clause (LGAC) customers. Thereafter, SJG
keeps 20% of the pre-tax margins as it has historically. In September 1999, the
BPU approved an annual recovery level of $6.5 million for remediation costs
expended from August 1995 through July 1998. 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 Remediation
Adjustment Clause (RAC) rate in effect through October 2002. However, due to
substantial RAC insurance recoveries, in October 2001, SJG filed for a RAC rate
decrease. This proposal would reduce the annual recovery level to $4.2 million,
if approved.
Effective January 10, 2000, the BPU approved full unbundling of SJG's
system. This allows all natural gas consumers to select their natural gas
supplier. As of June 30, 2002, 66,758 of SJG's 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.
On November 15, 2001, SJG filed for a $17.6 million rate reduction to
its LGAC and for recovery of a 3-year net deficiency in the Temperature
Adjustment Clause (TAC) amounting to $2.7 million. The BPU approved the LGAC
rate reduction effective December 1, 2001, but has yet to approve the TAC
adjustment. Also on December 1, 2001, SJG implemented recovery of its October
31, 2001 underrecovered gas costs through its Gas Cost Underrecovery Adjustment
Clause. SJG will recover $48.9 million over three years including interest
accrued since April 1, 2001. SJG will also recover interest for the 3-year
amortization period at a rate of 5.75%.
In May 2002, SJG received approval from the BPU to reduce its
overcollected LGAC balance by $17.6 million. The BPU order approved the
company's request to issue credits on customer bills proportionate with each
customer's contribution to the overcollection. This refund did not affect SJG's
net income or financial condition.
Note 8. Retained Earnings:
Restrictions exist under various loan agreements regarding the amount
of cash dividends or other distributions that SJG may pay on its common stock.
SJI's total equity in its subsidiaries' retained earnings, which is free of
these restrictions, was $76.8 million as of June 30, 2002.
Note 9. Commitments and Contingencies:
Construction and Environmental -- SJI's estimated net cost of
construction and environmental remediation programs for 2002 totals $91.5
million. Commitments were made regarding some of these programs.
SJI-15
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 June 30, 2002.
As of June 30, 2002, SJI also provided $39 million of standby letters
of credit supporting the variable rate demand bonds issued through the New
Jersey Economic Development Authority by Marina. 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 cleanup of
sites where South Jersey Fuel (SJF) previously operated a fuel oil business and
The Morie Company (Morie) maintained equipment, fueling stations and storage.
SJI successfully entered into settlements with all of its historic
comprehensive general liability carriers regarding the environmental remediation
expenditures at the SJG sites. Also, SJG purchased a Cleanup Cost Cap Insurance
Policy limiting the amount of remediation expenditures that SJG will be required
to make at 11 of its sites. This Policy will be in force until 2024 at 10 sites
and until 2029 at one site. The following future cost estimates have been
reduced by projected insurance recoveries from the Cleanup Cost Cap Insurance
Policy.
Since the early 1980s, SJI accrued estimated environmental remediation
costs of $135.1 million, of which $82.4 million was spent as of June 30, 2002.
With the assistance of a consulting firm, we estimate that future costs to clean
up SJG's sites will range from $48.8 million to $143.5 million. We recorded the
lower end of this range as a liability. It is reflected on the 2002 condensed
consolidated balance sheet under the captions Current Liabilities and Deferred
Credits and Other Non-Current Liabilities. Recorded amounts include estimated
costs based on projected investigation and remediation work plans using existing
technologies. Actual costs could differ from the estimates due to the long-term
nature of the projects, changing remediation technology, government regulations
and site-specific requirements. The major portion of accrued environmental costs
relate to the clean up of SJG's former gas manufacturing sites.
SJG has two regulatory assets associated with environmental costs (see
Note 1 under Other Regulatory Assets). The first asset is titled Environmental
Remediation Cost: Expended - Net. This asset represents what was actually spent
to clean up former gas manufacturing plant sites, net of recoveries. These costs
SJI-16
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.
The other asset titled Environmental Remediation Cost: Liability for
Future Expenditures relates to estimated future expenditures determined under
the guidance of FASB Statement No. 5, "Accounting for Contingencies." We
recorded this amount, which relates to former manufactured gas plant sites, as a
deferred debit with the corresponding amount reflected on the condensed
consolidated balance sheet under the captions Current Liabilities and Deferred
Credits and Other Non-Current Liabilities. The deferred debit is a regulatory
asset under Statement No. 71. The BPU's intent, evidenced by current practice,
is to allow SJG to recover the deferred costs after they are spent over 7-year
periods.
As of June 30, 2002, we reflected SJG's unamortized remediation costs
of $7.0 million on the condensed consolidated balance sheet under the caption
Regulatory Assets. Since implementing the RAC in 1992, SJG recovered $32.4
million through rates.
With Morie's sale, Energy & Minerals, Inc. (EMI) assumed responsibility
for environmental liabilities estimated between $2.7 million and $8.8 million.
The information available on these sites is sufficient only to establish a range
of probable liability and no point within the range is more likely than any
other. Therefore, EMI continues to accrue the lower end of the range. Changes in
the accrual are included in the statements of condensed consolidated income
under the caption Loss from Discontinued Operations - Net.
SJI and SJF estimated their potential exposure for the future
remediation of four sites where fuel oil operations existed years ago. Estimates
for SJI's site range between $0.1 million and $0.4 million, while SJF's
estimated liability ranges from $1.1 million to $4.9 million for its three
sites. We recorded the lower ends of these ranges on the 2002 condensed
consolidated balance sheet under Current Liabilities and Deferred Credits and
Other Non-Current Liabilities as of June 30, 2002.
SJI-17
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
South Jersey Industries (SJI) is an energy services holding company
which provides a variety of products and services through the following
subsidiaries:
1) South Jersey Gas Company (SJG) is a regulated natural gas utility.
SJG distributes natural gas to 291,691 customers in the seven southernmost
counties of New Jersey. SJG also:
- makes off-system sales of natural gas on a wholesale basis to various
customers on the interstate pipeline system;
- transports natural gas purchased directly from producers or suppliers
for our own sales and for some of our customers;
- services appliances via the sale of appliance warranty programs, as
well as on a time and materials basis.
2) South Jersey Energy Company (SJE) acquires and markets natural gas
to retail end users and provides total energy management services to commercial
and industrial customers. SJE has one subsidiary, SJ EnerTrade (EnerTrade), that
primarily provides services for the sale of natural gas to the casino industry
in Atlantic City, New Jersey. SJE operates South Jersey Energy Solutions, a
limited liability corporation equally owned with Energy East Solutions, Inc.,
which markets retail electricity in New Jersey. SJE also markets an air quality
monitoring system through AirLogics, LLC. SJE has a 50% equity interest in
AirLogics. GZA GeoEnvironmental, Inc., an environmental consulting firm, also
has a 50% equity interest in AirLogics.
3) South Jersey Resources Group, LLC (SJRG) is a wholesale marketer of
natural gas storage, commodity and transportation in the mid-Atlantic and
southern states. SJRG also conducts price-risk-management activities.
4) Marina Energy LLC (Marina Energy) is a developer of energy-related
projects in southern New Jersey.
SJI also has an equal investment with Conectiv Solutions, LLC, in a
joint venture forming Millennium Account Services, LLC (Millennium). Millennium
provides meter reading services to SJG and Conectiv Power Delivery in southern
New Jersey.
SJI-18
Forward Looking Statements
This report contains certain forward-looking statements concerning
projected financial and operating performance, future plans and courses of
action and future economic conditions. All statements in this report other than
statements of historical fact are forward-looking statements. These
forward-looking statements are made based upon management's expectations and
beliefs concerning future events impacting the company and involve a number of
risks and uncertainties. We caution that forward-looking statements are not
guarantees and actual results could differ materially from those expressed or
implied in the forward-looking statements. Also, in making forward-looking
statements, we assume no duty to update these statements should expectations
change or actual results and events differ from current expectations.
A number of factors could cause our actual results to differ materially
from those anticipated, including, but not limited to the following: general
economic conditions on an international, national, state and local level;
weather conditions in our marketing areas; changes in commodity costs;
regulatory and court decisions; competition in our 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.
Customer Choice Legislation
All residential natural gas customers in New Jersey are able to choose
their gas supplier. As of June 30, 2002, 66,758 SJG customers chose a natural
gas supplier other than the utility. This number increased from 33,520 at June
30, 2001 as third party marketers were able to offer natural gas at prices
competitive with those available to consumers under regulated utility tariffs.
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 Board of Public Utilities approved Temperature Adjustment Clause
(TAC) had the following impacts on 2002 and 2001 second quarter and six months
net earnings:
SJI-19
2002 2001
--------------------------
TAC Adjustment (Decrease) Increase to
Net Income ($ in thousands)
Quarter Ended June 30 $ 247 $ 272
Six Months Ended June 30 $ 3,249 $ 132
While the revenue and income impacts of TAC adjustments are recorded as
incurred, cash inflows or outflows directly attributable to TAC adjustments
generally do not begin until the next TAC year. Each TAC year begins October 1.
Results of Operations - Three and Six Months Ended June 30, 2002
Compared to Three and Six Months Ended June 30, 2001
Operating Revenues - Utility
Revenues decreased $17.0 million and $77.0 million in the second
quarter and first six months of 2002 compared with the prior year periods. The
decreases were primarily due to three factors. First, weather in the second
quarter 2002 was 1.4% warmer and 14.5% warmer for the first six months than the
prior year periods. Second, a significantly higher number of residential
customers utilized a third party marketer instead of SJG as their gas supplier.
Third, off-system sales revenues decreased for the second quarter and the first
six months of 2002 primarily due to lower prices for natural gas sold. Lower
off-system sales volumes in the second quarter of 2002 contributed to the
decrease in sales revenues over last year, however, year-to-date volumes are
slightly higher. Partially offsetting the effect of these factors was an
additional 7,711 customers compared to same time last year.
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
temperatures. While the TAC significantly reduces fluctuations in revenues
related to temperature, as a general rule, revenues continue to be positively
impacted by colder weather and negatively impacted by warmer weather. Weather
was 9.2% warmer and 15.5% warmer for the second quarter and first six months of
2002, respectively, than the 20-year average. In comparison, weather for the
second quarter and first six months of 2001 was 7.9% warmer and 1.2% warmer,
respectively, than the 20-year average.
The following is a comparison of operating revenue and throughput for
the three and six month periods ended June 30, 2002 vs. the same periods ended
June 30, 2001.
SJI-20
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-----------------------------------------------------------
Utility Operating Revenues (Thousands):
Firm
Residential $ 25,133 $ 28,464 $ 101,232 $ 124,823
Commercial 6,111 11,692 28,655 51,525
Industrial 838 555 2,547 2,503
Cogeneration & Electric Generation 2,963 2,009 3,579 2,657
Firm Transportation 8,394 5,027 22,658 14,459
-----------------------------------------------------------
Total Firm Utility Operating Revenues 43,439 47,747 158,671 195,967
Interruptible 307 251 546 937
Interruptible Transportation 327 285 802 597
Off-System 18,908 31,478 54,661 98,673
Capacity Release & Storage 1,136 1,022 2,830 2,848
Other 890 288 1,680 1,188
Intercompany Sales (2,231) (1,253) (14,232) (18,268)
-----------------------------------------------------------
Total Utility Operating Revenues $ 62,776 $ 79,818 $ 204,958 $ 281,942
===========================================================
Throughput (MMcf):
Firm
Residential 2,229 2,215 9,371 11,372
Commercial 684 1,091 3,018 5,305
Industrial 24 25 115 173
Cogeneration & Electric Generation 635 352 722 376
Firm Transportation 5,311 4,802 12,794 10,586
-----------------------------------------------------------
Total Firm Throughput 8,883 8,485 26,020 27,812
Interruptible 55 57 103 116
Interruptible Transportation 683 609 1,640 1,230
Off-System 4,940 6,153 16,243 15,623
Capacity Release and Other 10,498 5,673 17,144 11,727
-----------------------------------------------------------
Total Throughput 25,059 20,977 61,150 56,508
===========================================================
SJI-21
Operating Revenues - Nonutility
Nonutility operating revenues decreased by $94.6 million and $162.9
million for the second quarter and first six months of 2002, respectively,
compared to the comparable prior year periods. The decrease was due to lower
natural gas prices experienced by SJE and SJRG, and warmer weather which reduced
actual gas volumes sold.
Cost of Gas Sold - Utility
Cost of gas sold - utility decreased $18.3 million and $75.2 million
for the second quarter and first six months of 2002 compared with the same
periods in 2001. The second quarter decrease was due principally to lower gas
costs for off-system sales. The first six months decrease was also due to lower
gas costs for off-system sales as well as lower firm gas sales volume. Warmer
weather and the migration of firm gas sales customers to transportation service
were the main causes of the decrease in firm gas sales volume. SJG's gas cost
during the first six months of 2002 averaged $4.60/dt compared with $5.91/dt in
2001. Unlike gas costs associated with off-system sales, changes in the cost of
gas sold to utility ratepayers are not reflected in Cost of Gas Sold - Utility
as incurred. Fluctuations in gas costs to ratepayers not reflected in current
rates are deferred and addressed in future periods under the Levelized Gas
Adjustment Clause (LGAC) embedded in the utility rate structure. Gas supply
sources include contract and open-market purchases. SJG secures and maintains
its own gas supplies to serve its customers.
Cost of Sales - Nonutility
Cost of sales - nonutility decreased $95.2 million and $161.3 million
for the second quarter and first six months of 2002 due to warmer weather which
reduced actual volumes purchased and lower natural gas prices.
Operations
A summary of net changes in Operations (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 vs. 2001 2002 vs. 2001
----------------------------------------
Utility:
Other Production Expense $ 4 $ 29
Transmission 3 11
Distribution (71) 18
Customer Accounts and Services 496 786
Sales 23 11
Administration and General 547 249
Nonutility 65 283
------------------------------
Total Operations $ 1,067 $ 1,387
==============================
SJI-22
Customer Accounts and Services Costs increased primarily due to higher
bad debt expense as accounts previously shut off for nonpayment were determined
to be uncollectible. Administration and General Costs were higher due to
increases in pension and employee welfare expenses primarily resulting from
effects of the continuing poor performance of financial markets on retirement
plan assets and increasing health care costs.
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 vs. 2001 2002 vs. 2001
---------------------------------------
Maintenance $ (115) $(1,583)
Depreciation $ 312 $ 610
Energy and Other Taxes $ 212 $ (421)
Maintenance expense decreased in the first six months of 2002 primarily
due to lower levels of Remediation Adjustment Clause (RAC) amortization
recognized during the first quarter. RAC-related expenses do not affect earnings
as an offsetting amount is recognized in revenues. Depreciation is higher due to
increased investment in property, plant and equipment by SJG. Changes in Energy
and Other Taxes relate primarily to changes in SJG's firm and interruptible
throughput of gas.
Other Income and Expense
Other income and expense was higher in the second quarter and the first
six months of 2002 compared with the prior year periods due to a pre-tax gain of
$686,000 on the sale of stock received as a result of the demutualization of
Prudential's mutual life insurance company. During the first six months of 2001,
we recognized $250,000 as other income resulting from a favorable insurance case
settlement.
Interest Charges
Interest charges were lower in the second quarter and the first six
months of 2002 compared with the prior year periods due primarily to reductions
in short-term rates on line of credit borrowings. The effect of lower rates was
partially offset by an increased level of average total debt outstanding during
2002. The debt was incurred primarily to support the expansion and upgrade of
SJG's gas transmission and distribution system.
SJI-23
Net Income Applicable to Common Stock
Net income (in thousands) and earnings per common share reflect the
following changes:
Three Months Ended Six Months Ended
June 30, June 30,
2002 vs. 2001 2002 vs. 2001
--------------------------------------
Income from Continuing Operations $ 877 $ (1,139)
Loss from Discontinued Operations - Net (34) 134
Cumulative Effect of Accounting Change - Net - (148)
---------------------------------
Net Income Increase(Decrease) $ 843 $ (1,153)
=================================
Earnings per Common Share:
Continuing Operations $ 0.07 $ (0.14)
Discontinued Operations - Net 0.00 0.01
Cumulative Effect of Accounting Change - Net 0.00 (0.01)
---------------------------------
Earnings per Share Increase(Decrease) $ 0.07 $ (0.14)
=================================
The details affecting the changes in net income and earnings per share
are discussed under the appropriate captions above.
Liquidity and Capital Resources
Liquidity needs at SJI are driven by factors that include natural gas
commodity prices; 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. 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 $152.0 million at June 30,
2002, of which $107.8 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.
$120 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-24
SJI supplements its operating cash flow and credit lines with both debt
and equity capital. Over the years, SJG has utilized long-term debt, primarily
in the form of First Mortgage Bonds, to finance its long-term needs. These needs
are primarily capital expenditures for property, plant and equipment. Since
1998, SJG has financed these needs via a Medium Term Note (MTN) program, secured
in similar fashion to the First Mortgage Bonds. We anticipate establishing a new
MTN program during the third quarter of 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.
Since September 2001, Marina issued $20 million of tax-exempt and $19
million of taxable variable rate demand bonds through the New Jersey Economic
Development Authority (EDA). The tax-exempt and taxable bonds mature in 2031 and
2021, respectively. Marina has EDA approval to issue up to an additional $6
million of taxable bonds. Investors in the bonds receive liquidity and credit
support via a letter of credit provided by a commercial bank. We are using the
proceeds of this bond issuance to fund project development and construction
costs for the thermal energy plant being constructed by Marina to serve The
Borgata Resort which is scheduled to open in Summer 2003. Construction of the
thermal plant is currently ahead of schedule.
SJI has raised equity capital over the past three years through its
Dividend Reinvestment Plan (DRP). Participants in SJI's DRP receive newly issued
shares. We offer a 2% discount on DRP investments because it is the most
cost-effective way for us to raise equity capital in the quantities we are
seeking. Through the DRP, SJI raised $4.9 million of equity capital by issuing
148,033 shares in the first six months of 2002 as compared to $5.4 million of
equity capital by issuing 168,281 shares in the first six months of 2001. We
anticipate raising approximately $10 million of equity capital through the DRP
in 2002.
Capital Expenditures, Commitments and Contingencies
Capital Expenditures
SJI has a continuing need for cash resources and capital, primarily to
invest in new and replacement facilities and equipment and for environmental
remediation costs. Net construction and remediation expenditures for the first
six months of 2002 amounted to $34.3 million. We estimate the 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
SJG has certain commitments for both pipeline capacity and gas supply
for which it pays fees regardless of usage. Those commitments 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.
SJI-25
Regulatory Matters
Rate Actions
In November 2001, SJG filed for a $17.6 million rate reduction to its
LGAC and for recovery of a 3-year net deficiency in its TAC amounting to $2.7
million. The BPU approved the LGAC rate reduction effective December 1, 2001 but
has yet to approve the TAC adjustment. Also on December 1, 2001, SJG implemented
recovery of its October 31, 2001 underrecovered gas costs. SJG was authorized to
recover $48.9 million over three years including interest accrued since April 1,
2001. SJG recovered $9.8 million as of June 30, 2002. SJG will also recover
interest for the 3-year amortization period at a rate of 5.75%.
In May 2002, SJG received approval from the BPU to reduce its
overcollected LGAC balance by $17.6 million. The BPU order approved the
company's request to issue credits on customer bills coincident with each
customer's contribution to the overcollection. This refund did not affect SJG's
net income or financial condition.
Other matters are incorporated by reference to Note 7 to the condensed
consolidated financial statements included as part of this report.
SJI-26
Item 3. Quantitative and Qualitative Disclosures About
Market Risks of the Company
Commodity Market Risks - Certain regulated and unregulated SJI
subsidiaries are involved in buying, selling, transporting and storing natural
gas for their own accounts as well as managing these activities for others. As
such, these subsidiaries are subject to market risk due to price fluctuations.
To hedge against this risk, we enter into a variety of physical and financial
transactions including forward contracts, swaps, futures, and options
agreements. To manage these transactions, SJI has a well-defined risk management
policy approved by our board of directors that includes volumetric and monetary
limits. Management reviews reports detailing trading activity daily. Generally,
derivative activities described above are entered into for risk management, not
trading, purposes.
SJI's subsidiaries are structured so that SJG and SJE transact
commodities on a physical basis only and enter into no financial derivative
positions directly. SJRG manages risk for these entities as well as for its own
portfolio by entering into the types of transactions noted above. It is
management's policy, to the extent that it is practical and within predetermined
risk management policy guidelines, to have limited unmatched positions on a deal
or portfolio basis while conducting these activities. As a result of holding
open positions to a minimal level, the financial impact to SJRG of changes in
value of a particular transaction is substantially offset by an opposite change
in the related hedge transaction. As of June 30, 2002, 42% of the counterparties
with which SJRG has unsettled sales contracts carry investment-grade ratings.
The remaining counterparties carried no external ratings, however, two-thirds
had corporate parents with investment-grade ratings, not all of which provided
SJI with parental guarantees.
SJRG and SJE have entered into certain contracts for the purchase,
sale, storage and transportation of natural gas. The net unrealized pre-tax gain
on energy trading contracts of $0.8 million at June 30, 2002 primarily is
derived from contracts entered into during the preceding 12 months and it is
included as a reduction to cost of gas - nonutility. SJRG's and SJE's contracts
are typically less than 12 months long. The fair value of these contracts
determined under the mark-to-market method as of June 30, 2002 is as follows (in
thousands):
Assets
Maturity Maturity
Source of Fair Value < 1 Year 1-3 Years Total
- --------------------------------------------------------------------------------------------------------------
Prices Actively Quoted NYMEX $ 9,635 $ 2,958 $ 12,593
Other External Sources Basis 8,328 2,112 10,440
Other Methods Inventory 4,006 - 4,006
--------------------------------------------------
Total $ 21,969 $ 5,070 $ 27,039
==================================================
SJI-27
Liabilities
Maturity Maturity
Source of Fair Value < 1 Year 1-3 Years Total
- --------------------------------------------------------------------------------------------------------------
Prices Actively Quoted NYMEX $ 8,304 $ 2,092 $ 10,396
Other External Sources Basis 4,918 1,846 6,764
Other Methods Inventory 1,677 - 1,677
--------------------------------------------------
Total $ 14,899 $ 3,938 $ 18,837
==================================================
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 $2.3 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 $107.8 million of variable rate debt
outstanding at June 30, 2002 would result in a $636,000 increase in our interest
expense, net of tax, on an annual basis. In order to reduce exposure to an
increase in interest rates on our variable rate debt, SJG entered into two
interest rate swap agreements. The swaps effectively fixed the rate on $40
million of variable rate debt from April 2002 to March of 2003 at 3.57%. Our
long-term debt at SJG is issued at fixed rates and, consequently, interest
expense to the company is not significantly impacted by changes in market
interest rates. Long-term debt issued to finance the construction of Marina
Energy's thermal plant was initially issued as floating rate debt and
subsequently swapped to a blended fixed rate of 4.59%. The Marina bonds are
prepayable on a monthly basis. SJG also has $17.5 million of 9% first mortgage
bonds that are prepayable at a premium beginning in September 2002. It is likely
that these bonds will be prepaid and replaced with a debt issuance under a new
medium term note program. Otherwise, our debt was issued with provisions that do
not permit us to prepay a material amount of such debt during the next 12 months
to take advantage of changes in interest rates.
SJI-28
PART II -- OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part
I, Item 1, Note 9, beginning on page 15.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Our annual meeting of shareholders was held on April 18, 2002.
(c) Three Class I directors (with a term expiring 2005) were elected
as follows:
For Withheld
Charles Biscieglia 9,808,062 1,029,390
Keith S. Campbell 10,540,647 296,805
W. Cary Edwards 10,642,352 195,100
One Class III director (with a term expiring in 2004) was
elected as follows:
For Withheld
William J. Hughes 10,605,227 232,225
Class II directors (with a term expiring in 2003) continuing in
office are: Shirli M. Billings, Sheila Hartnett-Devlin and
Clarence D. McCormick.
Class III directors (with a term expiring in 2004) continuing in
office are: Thomas L. Glenn, Jr., Herman D. James and
Frederick R. Raring.
The appointment of Deloitte & Touche LLP as our independent
accountants for the year ending December 2002 was approved by a
vote of 10,697,235 for the appointment and 75,591 against, with
64,626 abstentions.
Item 6. Exhibits and Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTH JERSEY INDUSTRIES, INC.
(Registrant)
Dated: August 13, 2002 By: /s/ Charles Biscieglia
-----------------------------------------------
Charles Biscieglia
Chairman, President & Chief Executive
Officer
Dated: August 13, 2002 By: /s/ David A. Kindlick
-----------------------------------------------
David A. Kindlick
Vice President, Treasurer & Chief
Financial Officer
SJI-30