Rooted
Growing
2003 Annual Report to Shareholders
-Cover-
Contents
1 Financial Highlights
2 Chairman's Letter to Shareholders
12 Management's Discussion
19 Consolidated Financial Statements
24 Notes to Consolidated Financial Statements
34 Quarterly Financial Data
35 Comparative Operating Statistics
36 SJI Directors and Officers
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
Wachovia Equity Services Group
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
Toll-free: 1-888-SJI-3100
sharehld@sjindustries.com
Investor Relations
Stephen H. Clark, Treasurer
609-561-9000 ext. 4260
investorrelations@sjindustries.com
Annual Meeting Information
The Annual Meeting of Shareholders will be held Thursday, April 29, 2004 at
10:00 a.m. at Renault Winery, 72 North Bremen Avenue, Egg Harbor/Galloway, NJ
-Inside Cover-
2003 Highlights
Five-Year Summary of Selected Financial Data
(In Thousands Where Applicable)
South Jersey Industries, Inc. and Subsidiaries
Year Ended December 31,
2003 2002 2001 2000 1999
Operating Results:
Operating Revenues $ 696,820 $ 505,126 $ 545,986 $ 512,616 $ 389,454
------------ ------------ ------------ ------------ ------------
Operating Income $ 77,843 $ 69,075 $ 68,544 $ 65,464 $ 60,228
------------ ------------ ------------ ------------ ------------
Income Applicable to Common Stock:
Continuing Operations $ 34,553 $ 29,412 $ 26,869 $ 24,741 $ 21,962
Discontinued Operations-- Net (1) (774) (424) (455) (557) (274)
Cumulative Effect of a Change
in Accounting Principle-- Net (426) -- 148 -- --
------------ ------------ ------------ ------------ -------------
Net Income Applicable to
Common Stock $ 33,353 $ 28,988 $ 26,562 $ 24,184 $ 21,688
------------ ------------ ------------ ------------ -------------
Total Assets $ 1,126,203 $ 1,053,834 $ 1,026,479 $ 903,878 $ 797,890
------------ ------------ ------------ ------------ -------------
Capitalization:
Common Equity $ 297,961 $ 237,792 $ 220,286 $ 201,739 $ 185,275
Preferred Stock 1,690 1,690 1,690 1,804 2,044
Long-Term Debt 308,781 274,099 295,329 241,063 219,643
------------ ------------ ------------ ------------ -------------
Total Capitalization $ 608,432 $ 513,581 $ 517,305 $ 444,606 $ 406,962
------------ ------------ ------------ ------------ -------------
Ratio of Operating Income to Fixed Charges 3.8 3.3 2.9 2.7 2.5
------------ ------------ ------------ ------------ -------------
Diluted Earnings Per Common Share
(Based on Average Diluted Shares Outstanding):
Continuing Operations $ 2.73 $ 2.43 $ 2.29 $ 2.17 $ 2.01
Discontinued Operations-- Net (1) (0.06) (0.04) (0.04) (0.05) (0.02)
Cumulative Effect of a Change
in Accounting Principle-- Net (0.03) -- 0.01 -- --
------------ ------------ ------------ ------------ -------------
Diluted Earnings Per Common Share $ 2.64 $ 2.39 $ 2.26 $ 2.12 $ 1.99
------------ ------------ ------------ ------------ -------------
Return on Average Common Equity (2) 12.9% 12.8% 12.7% 12.8% 12.4%
------------ ------------ ------------ ------------ -------------
Share Data:
Number of Shareholders of Record 8.3 8.4 8.7 9.1 9.7
Average Common Shares 12,559 12,038 11,716 11,401 10,922
Common Shares Outstanding at Year End 13,229 12,206 11,861 11,500 11,152
Dividend Reinvestment Plan:
Number of Shareholders 5.1 5.1 5.0 5.0 5.4
Number of Participating Shares 1,375 1,304 1,280 1,273 2,518
Book Value at Year End $ 22.52 $ 19.48 $ 18.57 $ 17.54 $ 16.61
Dividends Declared $ 1.56 $ 1.51 $ 1.48 $ 1.46 $ 1.44
Market Price at Year End $ 40.50 $ 33.02 $ 32.60 $ 29.75 $ 28.44
Dividend Payout (3):
From Continuing Operations 57.1% 60.9% 63.9% 66.6% 71.0%
From Total Net Income 59.1% 61.8% 64.6% 68.1% 71.9%
Market-to-Book 1.8 1.7 1.8 1.7 1.7
Price Earnings Ratio (2) 14.7 13.5 14.2 13.7 14.1
<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, discontinued in 1986 (See Note 3 to Consolidated Financial
Statements).
(2) Calculated based on Income from Continuing Operations.
(3) Prior to 2002, dividends declared for the fourth quarter were paid in early
January of the following year. However, in 2002, the dividend declared for
the fourth quarter was paid in December, resulting in five quarterly
dividends paid in 2002. For comparability, the payout ratios for 2002 are
based on the first four quarterly dividends paid in 2002.
</FN>
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It's been nearly a century since we entered into the energy business. In that
time, we've seen many changes in the industry, the economy and the world. We've
weathered them all because we understood the need to adapt in any kind of
business climate. Building on our deep roots, our senior management group
restructured five years ago and planted the seeds that would produce a stronger,
healthier and more prolific company. With this approach, South Jersey Industries
has thrived. Today, SJI stands tall, strong and stable in an ever-changing
business landscape.
A well-planned growth strategy has resulted in SJI achieving record net income
and earnings per share from continuing operations for a fifth consecutive year.
Consolidated net income from continuing operations reached $34.6 million
compared with $29.4 million in 2002, nearly an 18% increase. Earnings per share
from continuing operations grew to $2.73, a 12% increase over 2002's EPS of
$2.43. SJI produced a one-year total shareholder return of 28% for 2003. Since
1999, strong, consistent performance has enabled us to achieve an outstanding
total shareholder return of over 97%, which equates to an annualized compound
return of 14.5%. In comparison, the S&P utility index and S&P 500 index produced
negative returns for that same period.
Structural Integrity
Our 10-member board, comprised of nine independent directors in addition to me,
possesses the acumen, experience and integrity the market demands. Key
committees -- corporate governance, auditing and compensation/pension -- are
made up entirely of independent business and industry leaders with the
demonstrated expertise and competencies needed to direct the corporation's
affairs. Annually, directors and senior managers revisit our goals and
strategies and refine them to profit from current business opportunities. As an
investor, you can be confident that future growth is rooted in competent,
qualified leadership and well-planned strategies.
One such strategy is the development and implementation of a CEO succession
plan. My retirement intentions and this plan were in progress for three years.
With great forethought and prudence, we implemented the succession plan to
ensure a seamless transition in 2004. Our well-respected management team will
remain in place and will continue to support our new CEO, Edward Graham, at the
same level they've always supported me. Ed's appointment is a natural
succession. He played a key role in the senior management group that developed
SJI's strategy and his knowledge of the company, industry expertise and
leadership qualities make him ideally suited for the challenges ahead. While I'm
retiring as CEO, I will remain on the SJI board and continue to be a part of
SJI's future. With a clear vision, strong resolve and a consistent strategic
direction, I'm confident that Ed and the talented team we've assembled, will
expertly guide the growth which is SJI's hallmark.
Deep-rooted Stability
Increasing shareholder value is evident in the successful strategies we employ.
In early 2003, we established a long-term goal of producing 6 to 7% annualized
EPS growth. This year, we exceeded that goal, delivering 12% growth. Recognizing
outstanding current performance and expecting strong future earnings growth, the
board announced a dividend policy for annual dividend growth of 3 to 6% and
increased SJI's annual dividend by $0.08 to $1.62 per share. 2003 became the
52nd consecutive year in which SJI paid dividends while we further improved our
dividend payout ratio.
We're committed to providing you with a secure, growing dividend by operating
from a low- to moderate-risk platform. Whether it's our stable, low-risk utility
or our moderate-risk non-regulated businesses, SJI remains focused on its core
competency -- energy. We maximize shareholder returns by capitalizing on our
strong, highly recognizable regional presence and by providing quality products
and services to our growing number of satisfied customers. Our actions continue
to be guided by the knowledge that many of you rely on SJI for stable income and
we're focused on investing in only those projects that are compatible with our
corporate risk profile.
This past year, our success was supported by solid performances by our utility
and non-regulated businesses. For South Jersey Gas, the combination of weather,
strong customer growth, favorable interest rates and continued attention to
operational efficiencies contributed to its profitability. Overall, SJG
surpassed its 2002 earnings, contributing 77% of SJI's net income from
continuing operations.
On the non-regulated side, South Jersey Energy continues to excel in the retail
natural gas sales market with an impressive 93,409 customers, an increase of 23%
over 2002. Effective management of its gas storage and pipeline portfolio led to
an outstanding year for South Jersey Resources Group while the opening of
Atlantic City's Borgata Hotel Casino & Spa enhanced Marina Energy's performance.
Millennium Account Services made gains with increased meter reads and net income
in 2003.
SJI's earnings continued to benefit from the management team's attention to the
costs of doing business. For example, we took advantage of low interest rates,
calling SJG's 8.35% Preferred Securities as well as its 6.95% and 10.25% First
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Mortgage Bonds and issuing $110 million in new debt at lower rates. These
actions, which produced a 16% reduction in the weighted average cost of
long-term debt, translate into lower expenses and an improved bottom line.
Enduring Legacy
When we planted the seeds of change five years ago, this management team knew
that success must ultimately be measured in terms of SJI's value to
shareholders. Building a tradition of consistent, predictable profitability was
key to that success. Since then, we've more than doubled our EPS, increased our
dividend five times, and seen significant improvement in our stock's market
price. We've provided compelling evidence that SJI is and will remain a source
of stable, reliable income despite fluctuating economic conditions. As to
enhancing shareholder value, we've set meaningful objectives and have
consistently achieved them.
To assure continued growth, we nurture customer relationships. We know satisfied
customers lead to greater opportunities for SJI and its shareholders. Our
employees are an integral part of the team and share this vision. In business
groups and service functions throughout the enterprise, in growing numbers,
employees understand and work vigilantly to advance investor value. Ed and I are
proud to be part of the team that is making the vision of being the energy
company of first choice a reality.
For their great support and commitment throughout my 35 years of service, I
sincerely thank SJI's employees. I extend my deepest gratitude to my fellow
board members for their support and commend them on their exemplary work on
behalf of our company. I wish Clarence McCormick the very best in his future
endeavors as he steps down from the board after 25 years of outstanding service.
As the longest tenured member of our current board, his experience and insight
will be missed.
During my own tenure as CEO, I've had the privilege and honor to work with many
wonderful community-based organizations. For the life-changing work they do, I
applaud the American Heart Association, United Way, Special Olympics and the
many others who have given me the opportunity to serve. Finally, I thank you,
the investor, for the confidence and support you have shown me in my long tenure
with the company and particularly, in my years as SJI's CEO. As I leave this
leadership role, and venture into more community-oriented projects, please know
that my commitment to our company's success remains as strong and deeply rooted
as ever. Moreover, I'm confident that SJI will stand tall, strong and stable in
an ever-changing business landscape, remaining a leader and innovator in our
industry and region.
Charles Biscieglia
Chairman
South Jersey Industries
February 18, 2004
Edward J. Graham
President and CEO
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Growth
SJI's Goals and Strategies
SJI's success is predicated on achieving three key goals for our shareholders:
Generate annualized earnings per share growth of at least 6 to 7% per
year
Maintain a consistent, sustainable dividend policy -- SJI's board of
directors established a policy in November 2003 for 3 to 6% annual
dividend improvements
Execute from a low- to moderate-risk platform
The strategies we've developed to achieve these goals are simple and
straightforward:
Focus on energy
Capitalize on a strong regional presence and solid reputation
Exceed customers' expectations with value-added products and
services
Maintain our current risk profile
Consistent execution of this strategy has delivered record earnings for five
consecutive years while dramatically improving our dividend payout ratio. During
this period, our entrepreneurial, non-regulated companies grew earnings from
continuing operations from $1.5 million to $7.9 million.
The business model that guides us is a natural extension of our core utility
business, South Jersey Gas. At a time when many energy companies were further
diversifying into fields where they had little if any experience, we divested
ourselves of non-energy related businesses and concentrated on what we know
best. That approach has served us and our investors well. Conversely, we see
many energy companies returning to their core energy businesses as their
diversification efforts failed to meet their expectations.
Despite many changes in the industry, South Jersey Industries and its family of
companies flourished in 2003. An unbending commitment to our shareholders keeps
us rooted while our energy expertise and commitment to customers is a formula
for strong growth. Nurturing the seeds of change planted five years ago, we've
cultivated a strategy that promises continued success for investors of today and
tomorrow.
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Our Business Model at Work
SJRG acquires natural gas in front of the city gate; SJG delivers the commodity
from the city gate to homes and businesses; SJE sells the commodity and provides
energy services; Marina develops gas-fired on-site production projects; our
appliance service business line installs and repairs heating/cooling equipment
and provides warranty contracts to homes and businesses; Millennium provides
meter reading services
SJRG
Gas Acquisition
City Gate
SJG
Transmission System
SJE
Commodity
MARINA
ENERGY
Gas-Fired On-Site Production
Home/
Business
SJE ENERGY SERVICES
Lighting Retrofitting
MILLENNIUM
Meter Reading
APPLIANCE SERVICE BUSINESS
South Jersey Gas
SJG, our utility business, generated 77% of SJI's earnings from continuing
operations in 2003. SJG delivers natural gas to residential, commercial and
industrial customers in a 7-county area of southern New Jersey through its gas
infrastructure as a regulated local distribution company. Bolstered by a strong
regional economy, employment and housing opportunities, and a quality of life
envied by many, our service area remains our most valuable corporate asset.
New Customers -- A Milestone Reached and Great Potential for Further Growth
In 2003, SJG reached a major milestone adding its 300,000th customer and ending
the year 304,562 customers strong. Both the company's five year (1999-2003)
growth rate of 2.7% and its 2003 growth rate of 2.8% remain above the national
average of 1.8%.
Southern New Jersey benefits from its proximity to metropolitan Philadelphia
and the rapid growth engine that is the casino industry in Atlantic City. Our
western region, consisting of the outer suburbs of Philadelphia and Wilmington,
accounts for about 49% of our customer growth. Our eastern region, which
includes Atlantic City and the shore communities, represents 51% of customer
growth. We expect this steady growth in our customer base to continue
into the foreseeable future. With 54% of 523,000 households in our service area
as current SJG customers, we have significant conversion prospects from other
fuels. We're concentrating our market research and sales efforts to capture this
opportunity.
A growing population and New Jersey's commitment to improve educational
facilities have spurred new school construction that translates into increased
natural gas demand for SJG. Presently, at least 15 new schools are underway in
our service area and nearly 70 more are expanding or upgrading their facilities.
In New Jersey, $8.6 billion is committed for new school construction, additions
and upgrades with a significant portion of those dollars to be spent in our
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region. SJG is heavily promoting energy design for these facilities that
includes non-traditional natural gas equipment such as absorption chillers and
desiccant cooling and dehumidification. Our efforts to increase market share by
incorporating non-peak, natural gas summer usage with the typical winter heating
load, resulted in six new projects in 2003. Strong growth in the educational
segment is projected to continue through 2008.
We're experiencing solid commercial growth throughout the service area with the
addition of strip malls and large retail stores such as Home Depot, Lowe's,
Giant, BJ's, Bed, Bath & Beyond and AC Moore. Institutional growth has also
been strong with the installation and startup of an 850-ton absorption chiller
at the new South Jersey Healthcare Regional Medical Center as an example. By
using natural gas to fuel its chiller, SJH will realize substantial long-term
energy savings. As a bonus to the project's economics, with SJG's assistance,
SJH obtained a New Jersey Clean Energy Program rebate and incentive of almost
$260,000 for installing this equipment.
Our industrial segment shows great promise as well with the continued, steady
growth of industrial parks and several major projects in the offing. One such
project is Millville Hydroponics, a 60-acre under glass greenhouse that will
yield premium, high quality tomatoes. Waste heat from a natural gas-fired
cogeneration plant will be used to keep the facility warm at night.
With nearly $2.0 billion in expansion or new construction projects planned or
currently underway, the casino industry is fueling growth in all sectors of our
regional economy. According to a 2003 Rutgers University study, the casino
industry stillhas room to grow. The study, sponsored by SJI, indicates that:
Gaming revenues will increase from $4.3 billion in 2000 to an estimated $5.0
billion in 2008.
The number of hotel rooms will grow from 11,361 in 2000 to an estimated
15,330 by 2008.
Employment is expected to increase from 47,246 in 2000 to an estimated
50,911 in 2008.
The number of visitors to Atlantic City will increase from 33 million in
2000 to an estimated 36 million in 2008.
Casino growth will continue to be a catalyst for broader economic development,
creating new opportunities for SJI's subsidiaries.
An important tool SJG uses to capture a greater market share of throughput is
the New Jersey Clean Energy Program. New Jersey's energy utilities implement
this statewide energy-efficiency program, which is approved and monitored by the
New Jersey Board of Public Utilities. Through this program, commercial customers
can maximize energy efficiency, save money, enhance comfort and improve outdoor
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and indoor air quality of commercial and industrial facilities. By incorporating
energy efficient equipment design into various heating and cooling projects, SJG
secured $3.0 million in rebates in 2003 for hospitals, educational institutions,
hotels, condominiums and other commercial buildings.
Preparing for Future Growth
SJG continues to invest in new utility plant to ensure safe and reliable service
for existing and future customers. In 2003, we invested over $53.0 million in
new construction and system improvements. Over the past seven years the company
spent $300.0 million in infrastructure improvements and expansion needed to
serve our growing customer base that increased by 50,688 or 20% since 1997. In
August 2003, SJG filed with the New Jersey Board of Public Utilities to earn a
return on that $300.0 million investment.
Through vigilant cost controls, productivity improvements and revenue growth,
SJG has avoided a rate increase for the past seven years. Lower interest rates
funding capital improvements and the earnings contributions from Off-System
Sales also helped to delay the request for a rate increase.
Off-System Sales
SJG's OSS division provides a valuable revenue stream to the utility. OSS staff
members expertly use pipeline capacity and storage, selling gas in interstate
markets for incremental profits when supplies are not needed to serve our
utility customers. In 2003, OSS produced net income of $6.7 million. Since 1993,
OSS has operated in the highly competitive wholesale natural gas market and,
year after year, has provided shareholders with consistent earnings while using
available natural gas assets to mitigate increases in gas costs to consumers.
Through a sharing formula under which SJG splits the proceeds of its off-system
sales with customers, we returned $11.0 million to our customers in 2003.
Cost Control and Productivity Improvements
While we properly emphasize revenue growth, we also recognize the need for
increased efficiency and productivity in all of our businesses. Workforce
flexibility continues to be a key to improving productivity and controlling
costs.
As an example, productivity in our Customer Care Center improved with the
implementation of an Interactive Voice Response system. With the new system,
customers can access account information and perform transactions by telephone
24 hours a day, seven days a week. This customer self-service option yields fast
and accurate responses to many basic informational-type inquiries, leaving our
customer service representatives to address more complex customer service and
billing issues. Customer Care implemented other measures to improve customer
service including expanded Internet capabilities. Through the Internet,
customers can now access account-specific information without a customer service
representative. These around-the-clock services have reduced incoming calls
requiring personal contact by 20%. In 2004, we will implement software to better
match staff scheduling to customers' needs to further improve efficiency. With
the IVR, web-based self service and proper resource allocation, Customer Care
will advance its goal of excellent service.
Other cost control measures adopted include market-based compensation packages
and restructured benefit plans which help to mitigate health care and pension
costs while maintaining quality benefits for our employees. Our future success
in managing costs will continue to hinge on a healthy balance of improved
systems and technology; workforce learning and development; labor-management
understanding and cooperation; and clear and achievable cost control objectives.
South Jersey Energy
SJE produced earnings of $3.2 million exceeding 2002 earnings by 28%. SJE has
two distinct business segments, Retail Energy and Energy Services. Retail Energy
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competes with other retail marketing companies to provide residential,
commercial and industrial customers with reliable, competitively priced natural
gas and electricity. This business segment complements SJI's other business
lines by profiting from commodity sales and by promoting the use of natural gas
at every opportunity. Our Energy Services group competes with large and small
independent energy services companies and local mechanical contractors to
provide commercial and industrial customers with high quality, competitively
priced, energy-related services. Those services involve lighting retrofits,
chiller and boiler improvements, steam systems, air handlers, compressed air
systems, energy management controls and distributed generation.
In 2003, SJE exceeded its targeted growth rate of 13% due to exceptional
customer growth in the Retail Energy segment and penetration into key markets in
the Energy Services segment. Starting the year with 76,219 retail natural gas
customers, aggressive and diverse marketing efforts pushed the tally to 93,409
at year end, a 23% increase. SJE's results in advancing deregulation in New
Jersey have far surpassed that of every other marketer in the state, proving
that a competitive energy market can work as envisioned throughout the state.
A highlight of SJE's successful year was winning the bid to supply electricity
through May 2005 to over 400 school districts located in central and northern
New Jersey. The contract represents a win for both taxpayers and public schools.
Participating schools will apply the $5.9 million in savings to enhance
educational experiences and opportunities for our children.
Going forward, small commercial and residential markets present the greatest
near-term growth opportunity for SJE in the Retail Energy segment.
As New Jersey's most successful Energy Services company, SJE has leveraged its
existing strong sales relationships and SJI's brand equity to develop a
competitively superior understanding of our customers' needs. The results are a
steady growth in income and a deeper penetration into key markets such as
Atlantic City. Our brand is well recognized and respected for the quality of our
work and the cost savings we've generated for clients.
One of our more unique Energy Services ventures in 2003 was a fuel cell provided
and installed by SJE at Richard Stockton College of New Jersey. This unit, the
first large fuel cell of its kind installed in the region, serves as a
demonstration site for Stockton students, visiting students and industry
officials. Stockton received a rebate check for $710,000 from the New Jersey
Clean Energy Program and will save over $80,000 annually in energy costs.
Other 2003 projects included lighting audits performed for several casino
properties. Following each audit, SJE presented proposals to retrofit lighting
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and reduce energy costs. We've also found success in the condominium market,
performing major boiler and controls replacement for three large complexes along
the Jersey shoreline.
SJE's prospects for future success in the energy services segment are excellent
with the casino, food processing, industrial, health care, condominium and
commercial markets leading the way.
South Jersey Resources Group, LLC
SJRG, our wholesale gas and risk management business, supplies natural gas to
retail marketers, utility businesses and electricity generators in the
mid-Atlantic and southern regions of the country. In 2003, SJRG improved its
earnings over 2002 by 19%. More storage assets, increased gas volumes marketed
and favorable market conditions contributed to higher earnings.
We're excited about a new contract to provide fuel management services to
Florida Power & Light's 750-megawatt cogeneration facility over a 5-year period.
In late 2004, SJRG will begin supplying up to 80,000 dekatherms of natural gas
daily and over 29,000,000 dekatherms annually. The natural gas provided by SJRG
is equivalent to the demand created by about 292,000 homes, only slightly less
than the total number of customers our utility now serves.
Marina Energy LLC
Marina develops cost-effective and energy-efficient production facilities for
the commercial and industrial market. Its largest and most visible project, the
thermal plant in Atlantic City, became fully operational in July 2003. The plant
provides heating and chilling to Borgata Hotel Casino & Spa, a 2,000 room
complex. The facility's performance surpassed our expectations both
operationally and financially in 2003. While already serving as Borgata's total
energy supplier until 2023, we envision expanding the thermal plant to maximize
the existing site's value. Opportunities are presented by Borgata's announcement
to expand its Atlantic City facilities, a potential MGM/Mirage casino and the
other casino/hotel facilities located in the Renaissance Pointe area.
Marina continues to pursue opportunities for additional thermal and/or electric
generation facilities, primarily in New Jersey. These efforts resulted in
Marina's design and construction of a cogeneration unit at Johnson Matthey's
plant in Gloucester County. The cogen plant's operating efficiencies will save
this customer about 25% a year in energy-related costs. Also, in early January
2004, Marina purchased and began operating a cogeneration facility at Mannington
Mills and continues to design, build, operate and provide maintenance services
for Resorts Hotel/Casino in Atlantic City.
Marina is in various stages of assorted cogeneration and distributed generation
projects for various businesses including hospitals, food processors and
casinos. In the aggregate, this represents over 50 megawatts of electric power
across and beyond southern New Jersey.
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Appliance Service Business
SJG's highly successful appliance service business services gas heaters, central
air conditioners, ranges, dryers, water heaters and other gas burning appliances
and offers Service Sentry warranty and preventive maintenance contracts. During
2004, we anticipate moving this competitive business outside of the utility to
have greater operating flexibility. Although the name will change and we'll
offer expanded services, the new company will maintain the same commitment to
service with the same experienced technicians and high level of quality our
customers have come to expect.
One significant change we're making to expand this business is the addition of a
heating and air conditioning equipment installation and replacement service.
With over 40 technicians, the new company will be one of the largest local
appliance service and installation businesses in the South Jersey area.
2003 was a profitable year for ASB. We saw an increase in the number of
appliances covered by Service Sentry contracts from 134,193 in 2002 to 142,054
in 2003, a 6% increase. The number of preventive maintenance contracts increased
by 57%.
In 2004 and beyond, we expect strong growth for this company as the new
installation segment and unregulated status will provide a platform to grow
revenues and profits.
Millennium Account Services, LLC
Millennium, a company formed as a partnership with Conectiv Solutions, LLC
provides meter reading and related services in southern New Jersey. In business
since 1999, our share of Millennium's net income has grown each year since its
inception.
We attribute the earnings improvement to increased productivity and expansion of
services. Performance results with both utility customers increased in each of
the past three years with Millennium's meter readers exceeding the standards
each year. Their combined read rate of 87.7% in 1999 rose to 97.3% in
2003 largely due to improved technology, resource application and more
structured orientation and training.
Millennium's management continues to seek out new business opportunities, such
as consulting services. In this capacity, Millennium's professionals offer
proven methods for achieving improved meter reader and supervisory productivity.
Commitment to Shareholders
Capital Structure/Balance Sheet
During 2003, we took advantage of the low interest rate environment to lower the
cost of debt in our capital structure. Through a series of debt redemptions and
new issues, SJI lowered its average interest rate on long-term debt from 7.89%
to 6.60%. We achieved the reduction primarily by issuing $110.0 million of
Medium Term Notes in July and September of 2003 at an average interest rate of
4.98% with an average maturity of 17 years. We used this low-cost debt to redeem
$75.0 million of higher interest rate securities with coupons at 8.35%, 10.25%,
8.6% and 6.95%.
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SJI also used its Dividend Reinvestment Plan to enhance the company's equity
position by raising $36.0 million during the year. This action underscores our
commitment to maintaining the strength and stability of SJI's balance sheet.
Corporate Governance
We take the responsibility of corporate governance very seriously and always
have. We applaud Sarbanes-Oxley and SEC initiatives and believe they are an
important step in restoring investor confidence. Much of what is included in
these initiatives was already in place or underway at SJI. During 2003, we
improved our level of documentation and formalized certain processes to comply
with the significant level of documentation required for internal controls and
financial reporting.
Our SJI board of directors continues to take steps that ensure current and
ongoing compliance with all governing rules and regulations. Key board
committees are comprised solely of independent board members. The audit
committee meets separately with our internal and external auditors and the
committee chairman reviews, in consultation with outside auditors, all financial
statements and quarterly reports prior to public release. We communicate our
financial results through news releases, public conference calls and webcasts.
A leading provider of proxy voting and corporate governance services,
Institutional Shareholder Services, rated SJI's corporate governance performance
above 97.8% of the companies in the Russell 3000 Index and 90.1% of the
companies in the utilities group. ISS stated, "A substantial majority of SJI's
board members are independent outsiders. We commend the company for its high
degree of board independence. We support the independent nature of the key board
committees, which include no insiders or affiliated outsiders."
Community Involvement-- A culture and tradition at SJI
SJI's past, present and future financial success is based not only on our
commitment to shareholders, customers and employees, but our strategy and
culture recognize the importance of the community as well. Through community
relations initiatives, our employees work hard to improve the social and
economic well being of our region. Our community support takes many forms as we
offer our talents and dedicate our resources.
One example is our newest community endeavor. The School Counts! check-off
campaign helps qualifying high school students in Cumberland County earn much
needed scholarships to Cumberland County College. Through School Counts!
students learn the job and life skills they need to enter the workforce and
employers benefit with better-educated, skilled workers. We are working to
expand this opportunity through the other community colleges in our service
area.
We strongly support corporate and employee involvement in over 200 charitable,
social and business organizations. Our commitment encompasses health and human
services organizations, institutions of higher learning, youth groups,
environmental groups, economic development organizations, chambers of commerce,
and arts and cultural entities.
As we look to the future, we know that SJI's success is rooted in our knowledge,
our experience and in our commitment to providing you, our shareholders, with a
stable, reliable investment.
The depth and strength of these roots will enable us to grow and reach for the
many opportunities that are and will remain available to us. As we nurture the
relationships important to us, a respect for the past and an understanding of
the present will guide the growth and prosperity you as a shareholder should
expect for the future.
-11-
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview -- South Jersey Industries, Inc. (SJI) is an energy services holding
company that provides a variety of products and services through the following
wholly owned subsidiaries:
1) South Jersey Gas Company (SJG) is a regulated natural gas utility.
SJG distributed natural gas in the seven southernmost
counties of New Jersey to 304,562 customers at December 31, 2003 compared with
296,374 customers at December 31, 2002. SJG also:
- - sells natural gas and pipeline transportation capacity (off-system sales) on a
wholesale basis to various customers on the interstate pipeline system;
- - transports natural gas purchased directly from producers or suppliers for its
own sales and for some of its customers; and
- - services appliances via the sale of appliance warranty programs as well as on
a time and materials basis.
2) South Jersey Energy Company (SJE) acquires and markets natural gas
and electricity to retail end users and provides total energy management
services to commercial and industrial customers. SJE also markets an air quality
monitoring system through AirLogics, LLC. SJE and GZA GeoEnvironmental, Inc., an
environmental consulting firm, each have a 50% equity interest in AirLogics.
3) South Jersey Resources Group, LLC (SJRG) markets wholesale natural
gas storage, commodity and transportation in the mid-Atlantic and southern
states. SJRG also conducts price-risk management activities.
4) Marina Energy LLC (Marina) develops and operates energy-related
projects in southern New Jersey. Marina's largest project, the development of a
facility to provide cooling, heating and hot water to Borgata Hotel Casino & Spa
in Atlantic City, began commercial operations in July 2003.
SJI also has a joint venture investment with Conectiv Solutions, LLC in
Millennium Account Services, LLC (Millennium). Millennium provides meter reading
services to SJG and Conectiv Power Delivery in southern New Jersey.
Forward-Looking Statements -- This report contains certain forward-looking
statements concerning projected financial and operating performance, future
plans and courses of action and future economic conditions. All statements in
this report other than statements of historical fact are forward-looking
statements. These forward-looking statements are made based upon management's
expectations and beliefs concerning future events impacting the company and
involve a number of risks and uncertainties. We caution that forward-looking
statements are not guarantees and actual results could differ materially from
those expressed or implied in the forward-looking statements. Also, in making
forward-looking statements, we assume no duty to update these statements should
expectations change or actual results and events differ from current
expectations.
A number of factors could cause our actual results to differ materially from
those anticipated including, but not limited to, the following: general economic
conditions on an international, national, state and local level; weather
conditions in our marketing areas; changes in commodity costs; changes in the
availability of natural gas; regulatory and court decisions; competition in our
utility and nonutility activities; the availability and cost of capital; our
ability to maintain existing joint ventures to take advantage of marketing
opportunities; costs and effects of legal proceedings and environmental
liabilities; the failure of customers or suppliers to fulfill their contractual
obligations; and changes in business strategies.
Critical Accounting Policies --
Estimates and Assumptions: 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. Five 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, environmental remediation costs, postretirement employee benefit
costs and unbilled revenues.
The New Jersey Board of Public Utilities (BPU) has reviewed and approved,
through specific orders, most of the items shown as regulatory assets. Other
items represent costs that were not yet approved by the BPU for recovery, but
are the subject of current filings. In recording these costs as regulatory
assets, management believes the costs are probable of recovery under existing
rate-making concepts that are embodied in current rate orders received by SJG.
However, ultimate recovery is subject to BPU approval.
SJI recognizes assets or liabilities for the energy-related contracts entered
into by its non-regulated subsidiary, SJRG, when it executes contracts. 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 contracts maturing in two years or less. Very few
of our contracts extend beyond two years.
An outside consulting firm assists us in estimating future costs for
environmental remediation activities. We estimate future costs based on
projected investigation and work plans using existing technologies. Developing a
single reliable estimation point is not feasible because of the amount of
uncertainty involved in the nature of projected remediation efforts and the long
period over which remediation efforts will continue. Therefore, we estimate the
range of future costs at $54.9 million to $176.8 million. In preparing financial
statements, SJI records liabilities for future costs using the lower end of the
range. We update estimates each year to take into account past efforts, changes
in work plans and remediation technologies.
The costs of providing postretirement employee benefits are impacted by actual
plan experience as well as assumptions of future experience. Employee
demographics, plan contributions, investment performance, and actuarial
assumptions concerning return on plan assets, discount rates and health care
cost trends all have a significant impact on determining our projected benefit
obligations. We evaluate actuarial assumptions annually with the assistance of
our investment manager and actuary and we adjust them accordingly. These
adjustments could result in significant changes to the net periodic benefit cost
of providing such benefits and the related liability recognized by SJI.
A majority of SJG and SJE customers have their meters read on a cycle basis
throughout the month. As a result, recognized revenues include estimates as
described below.
-12-
Revenue Recognition: SJG and SJRG bill customers monthly for gas delivered and
recognize those revenues during the month. SJE bills customers monthly for gas
and electricity deliveries. For SJG and SJE retail customers that are not billed
at the end of each month, we make an accrual to recognize revenues for gas
delivered from the date of the last meter reading to the end of the month. We
bill SJG customers at rates approved by the BPU. SJE and SJRG customers are
billed at rates negotiated between the parties.
We defer and recognize revenues related to SJG's appliance warranty contracts
over the full 12-month term of the contract as earned.
The BPU allows SJG to recover gas costs in rates through the Basic Gas Supply
Service (BGSS) price structure (formerly known as the Levelized Gas Adjustment
Clause). SJG defers over/under-recoveries of gas costs and includes them in
subsequent adjustments to the BGSS rate or other similar rate recovery
mechanism. These adjustments result in over/under-recoveries of gas costs being
included in rates during future periods. As a result of these deferrals, utility
revenue recognition does not directly translate to profitability. While we
realize profits on gas sales during the month of providing the utility service,
significant shifts in revenue recognition may result from the various recovery
clauses approved by the BPU (See Recent Regulatory Actions) without shifting
profits between periods, as these clauses provide for recovery of costs on a
dollar-for-dollar basis.
New Accounting Pronouncements: See detailed discussions concerning New
Accounting Pronouncements and their impact on SJI in Note 1 to the Consolidated
Financial Statements.
Temperature Adjustment Clause: A Board of Public Utilities approved Temperature
Adjustment Clause (TAC) decreased SJG's net income by $1.7 million in 2003. The
TAC increased net income by $2.3 million and $2.0 million in 2002 and 2001,
respectively. The clause is designed to mitigate the effect of variations in
heating season temperatures from historical norms. While we record the revenue
and income impacts of TAC adjustments as incurred, cash inflows or outflows
directly attributable to TAC adjustments generally do not begin until the next
clause year. Each TAC year begins October 1.
Recent Regulatory Actions: In November 2001, SJG filed for a $2.7 million rate
increase to recover the cash related to a prior net deficiency in the
Temperature Adjustment Clause (TAC). Additionally, in September 2002, SJG filed
for an $8.6 million rate increase to recover the cash related to a TAC
deficiency resulting from warmer-than-normal weather for the 2001-2002 winter.
As a result of the colder-than-normal 2002-2003 winter, the cumulative TAC
deficiency decreased to $5.7 million. In August 2003, the BPU approved the
recovery of the $5.7 million TAC deficiency, effective September 1, 2003.
During 2002, the BPU convened a gas policy group to address Basic Gas Supply
Service (BGSS), which is the gas supply service being provided by the natural
gas utility. In December 2002, the BPU approved the proposed BGSS price
structure. The BGSS-approved price structure replaced the Levelized Gas
Adjustment Clause (LGAC) pricing structure. The LGAC was structured to reset gas
charges to consumers once per year. The BGSS resets gas prices monthly for
larger customers, and for smaller customers permits multiple resets each year,
if certain conditions are met. With the implementation of BGSS in March 2003,
customers can make more informed decisions about choosing an alternate supplier
by having a utility pricing structure that more currently reflects market
conditions. Further, BGSS provides SJG with more pricing flexibility, through
self-implementing rate changes under certain conditions and limitations,
conceptually resulting in the reduction of over/under-recoveries. LGAC-related
mechanisms, such as deferred accounting treatment, the sharing of pre-tax
margins generated by interruptible and off-system sales and transportation, and
the allowance for full recovery of prudently incurred natural gas costs, remain
in place under BGSS.
In August 2002, SJG filed for a Societal Benefits Clause (SBC) rate increase.
The SBC recovers costs related to BPU-mandated programs and environmental
remediation costs that are recovered through SJG's Remediation Adjustment
Clause; energy efficiency and renewable energy program costs that are recovered
through SJG's New Jersey Clean Energy Programs; consumer education program
costs; and the interim low income program costs. In August 2003, the BPU
approved a $6.7 million increase to SJG's SBC, effective September 1, 2003. This
approval increases the current annual recovery level of $6.7 million to $13.4
million.
Also in August 2002, SJG filed a petition with the BPU to transfer its appliance
service business from the regulated utility into a newly created unregulated
company. As filed, the newly created company would have the flexibility to be
more responsive to competition and customer needs by expanding and modifying its
service offerings in an unregulated environment.
In September 2002, SJG filed with the BPU to maintain its current BGSS rate
through October 2003. However, due to price increases in the wholesale market,
in February 2003, SJG filed an amendment to the September 2002 filing. In April
2003, the BPU approved a $16.6 million increase to SJG's annual gas cost
revenues.
In March 2003, the BPU approved a statewide Universal Service Fund (USF) Program
on a permanent basis. In June 2003, the BPU established a statewide program
through which funds for the USF and Lifeline Credit and Tenants Assistance
(Lifeline) Programs would be collected from customers of all electric and gas
utilities in the state. The BPU ordered that utility rates be set to recover a
total statewide USF budget of $33.0 million, and a total Lifeline budget of
$72.0 million. Recovery rates for both programs were implemented on August 1,
2003.
In July 2003, SJG made its annual BGSS filing, as amended, with the BPU. Due to
further price increases in the wholesale market, SJG filed for a $24.0 million
increase to its annual gas cost revenues. In August 2003, the BPU approved SJG's
price increase on a provisional basis, subject to refund with interest,
effective September 1, 2003.
In August 2003, SJG filed a base rate case with the BPU to increase its base
rate to obtain a certain level of return on its investment of capital. SJG
expects the rate case to be concluded during 2004. SJG has not sought a base
rate increase from the BPU since implementing its base rate case approval in
January 1997.
Filings and petitions described above are still pending unless otherwise
indicated. Additional discussion concerning Regulatory Actions can be found in
Note 9 to the Consolidated Financial Statements.
Environmental Remediation: SJI incurred and recorded costs for environmental
cleanup 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 cleanup 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 until 2024
at 10 sites and until 2029 at one site.
-13-
We believe that all costs incurred net of insurance recoveries relating to SJG's
MGP sites will be recovered through rates under SJG's Remediation Adjustment
Clause (RAC). The RAC currently permits SJG to recover incurred costs in equal
installments over 7-year periods with carrying costs. As of December 31, 2003,
SJG has $4.1 million of remediation costs not yet recovered through rates.
Other matters are incorporated by reference to Note 13 to the Consolidated
Financial Statements included as part of this report.
Customer Choice Legislation -- All residential natural gas customers in New
Jersey can choose their gas supplier under the terms of the Electric Discount
and Energy Competition Act of 1999. As of December 31, 2003, 102,563 SJG
residential customers chose a natural gas commodity supplier other than the
utility. This number increased from 88,219 at December 31, 2002 as marketers
were able to offer natural gas at prices competitive with those available under
regulated utility tariffs. Customers purchasing natural gas from providers other
than SJG are charged for gas costs by the marketer, not SJG. The resulting
decrease in SJG's revenues is offset by a corresponding decrease in SJG's gas
costs. While customer choice can reduce utility revenues, it does not negatively
affect SJG's net income or financial condition. The BPU continues to allow for
full recovery of prudently incurred natural gas costs through the Basic Gas
Supply Service clause as well as other costs of service including deferred
costs, through tariffs. SJI has benefited from customer choice legislation as
SJE has successfully competed for and profited from its gas commodity customers.
Results of Operations --
Operating Revenues -- Utility: Revenues increased $101.6 million compared with
the prior year. This increase was primarily due to four factors. First, weather
was 12.5% colder than last year. Second, Off-System Sales revenues increased
significantly as a direct result of higher prices for natural gas sold in 2003
than in the prior year. Third, SJG added 8,188 customers in 2003. Finally, the
BPU approved two increases in SJG's Basic Gas Supply Service Clause to address
the recovery of the increasing prices of natural gas sold in 2003 and an
increase in SJG's Societal Benefits Clause recoveries to fund State sponsored
programs (See Recent Regulatory Actions). Partially offsetting the effect of
these factors was a 16.3% increase in the number of residential customers
purchasing their gas from a source other than SJG. The decline in customers who
purchased their natural gas from SJG directly impacted utility revenues.
However, since gas costs are passed on directly to customers without any profit
margin added by SJG, the increased customer usage of gas marketers did not
impact SJG's profitability.
Revenues decreased $59.1 million in 2002 compared with 2001. The decrease was
primarily due to the migration of residential customers from firm gas sales to
transportation, lower revenue from Off-System Sales and weather in 2002 that was
2.6% warmer than 2001. These factors more than offset the revenue increase
derived from adding 8,366 customers in 2002, the largest increase in more than a
decade. During 2002, the number of residential customers who purchased natural
gas from third-party marketers increased by 121% as those marketers were able to
offer competitive gas prices in 2002 compared with SJG's prices.
As a result of SJG's Temperature Adjustment Clause (TAC), revenues from utility
ratepayers are closely tied to 20-year normal temperatures calculated under the
clause and not actual temperatures. While the clause significantly reduces
fluctuations in revenues related to temperature, as a general rule, revenues
continue to be positively impacted by colder weather and negatively impacted by
warmer weather. Weather in 2003 was 12.5% colder than in 2002 and 3.8% colder
than the 20-year TAC average. Weather in 2002 was 2.6% warmer than 2001 and 7.8%
warmer for the year than the 20-year TAC average.
Total gas throughput increased 3.4% to 125.0 billion cubic feet (Bcf) in 2003.
The higher throughput was primarily due to the addition of 8,188 customers and
colder weather experienced in 2003. Total gas throughput increased 11.0% to
120.9 Bcf in 2002. The higher throughput was almost entirely due to increased
capacity release throughput. Warm weather in 2002 resulted in reduced demand for
natural gas and the need for pipeline capacity to transport that gas.
Consequently, SJG had more capacity available to sell in 2002 than 2001.
Operating Revenues -- Nonutility: Nonutility operating revenues increased by
$90.1 million in 2003 compared with 2002. Most of the increase was due to
continued customer growth experienced by SJE, evidenced by the addition of over
14,800 residential and 2,200 commercial natural gas customers in 2003, higher
natural gas prices and significantly colder weather. SJE's revenues from the
sale of retail electricity increased by $12.2 million in 2003 compared with
2002. SJE was the successful bidder on a contract to supply retail electricity
to over 400 school districts located throughout the state of New Jersey
beginning in November 2003. Also contributing to this increase was $9.1 million
in revenues recognized by Marina from sales of thermal energy to Borgata Hotel
Casino & Spa which began in July 2003. SJRG's revenues increased $5.6 million in
2003 compared with 2002 mainly due to new accounting requirements which require
the sales of inventory to be reported "gross" in 2003 (See New Accounting
Pronouncements in Note 1 to the Consolidated Financial Statements). SJRG's
volume growth and higher natural gas prices also contributed to the increase.
Revenues increased by $18.2 million in 2002 compared with 2001. Most of the
increase was due to the significant customer growth experienced by SJE, which
included the addition of over 45,000 residential and 2,100 commercial natural
gas customers during 2002.
Cost of Gas Sold -- Utility: Gas purchased for resale increased $89.1 million in
2003 compared with 2002 due principally to a significant increase in costs for
both local distribution and Off-System Sales. SJG's gas cost during 2003
averaged $6.46 per decatherm (dt) compared with $4.29/dt in 2002 and $4.78/dt in
2001. 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.
We defer fluctuations in gas costs to ratepayers not reflected in current rates
to future periods under a BPU-approved Basic Gas Supply Service (BGSS) price
structure, formerly known as the Levelized Gas Adjustment Clause. As described
under Recent Regulatory Actions, the BPU approved two increases to SJG's BGSS
clause during 2003 resulting in higher cost of gas sold and related revenue.
SJG's cost of gas sold decreased $62.2 million in 2002 compared with 2001. Lower
gas costs and sales volumes for both local distribution and Off-System Sales
were responsible for the decrease. SJG passed lower gas costs on to local
distribution customers through a $17.6 million refund in 2002. Warmer weather
and the migration of customer gas purchases from the utility to third-party
marketers were the main causes of lower sales volumes.
Gas supply sources include contract and open-market purchases. SJG secures and
maintains its own gas supplies to serve its sales customers. We do not
anticipate any difficulty renewing or replacing expiring contracts under
substantially similar terms and conditions.
-14-
Cost of Sales -- Nonutility: Cost of sales -- nonutility increased $79.8 million
in 2003 compared with 2002 due mainly to SJE's customer growth, colder
temperatures, higher gas prices and Marina's operations as described in the
Operating Revenues -- Nonutility section. Cost of sales -- nonutility increased
$17.1 million in 2002 compared with 2001 due mainly to SJE's customer growth,
also described in the Operating Revenues -- Nonutility section.
Operations Expense: A summary of net changes in operations expense
(in thousands):
2003 vs. 2002 2002 vs. 2001
Utility:
Other Production Expense $ 36 $ 47
Transmission 59 30
Distribution (114) 590
Customer Accounts and Services 1,427 1,889
Sales 139 90
Administration and General 4,218 382
------------ ------------
Total Utility 5,765 3,028
------------ ------------
Nonutility:
Wholesale Gas 329 (810)
Retail Gas and Other 2,050 1,212
On-Site Energy Production 2,354 425
------------ ------------
Total Nonutility 4,733 827
------------ ------------
Corporate 560 134
------------ ------------
Total Operations $ 11,058 $ 3,989
============ ============
Distribution expenses decreased in 2003 as internal labor costs were directed
more toward capital improvement activities as compared with last year.
Distribution expenses increased in 2002 as the cost to maintain the utility
distribution system, inclusive of implementation of new federally mandated
training programs, increased over 2001.
Customer Accounts and Services expense increased significantly in 2003 as a
result of the BPU-approved increase in SJG's Societal Benefits Clause (SBC) in
August 2003 (See Recent Regulatory Actions). With this approval, recoveries and
a corresponding charge to expense for previously deferred costs under SJG's New
Jersey Clean Energy Programs increased by $1.8 million in 2003 when compared
with 2002. The BPU-approved SBC clause allows for full recovery of these
deferred costs including carrying costs and, as a result, the increase in
expense has no impact on SJG's net income. This increase was partially offset by
lower bad debt expense in 2003 as SJG's reserve for bad debts did not require an
increase as it had in 2002.
Customer Accounts and Services expense increased significantly in 2002 primarily
due to higher bad debt expense as customer account write-offs rose and SJG
increased its reserve for bad debts. The higher write-off level was attributable
to the unusually cold 2000-2001 winter season. In addition, the colder start to
the 2002-2003 winter season resulted in the need to increase the reserve for
future uncollectible account balances.
Administrative and General (A&G) expenses increased in 2003 compared with 2002
primarily because of increasing health care and pension costs, higher insurance
expense, higher stock compensation expense and bank fees. Health care and
pension costs increased nearly $1.7 million from 2002 to 2003 as the cost of
providing such benefits continues to increase at alarming rates. Additionally,
declines in long-term interest rates resulted in an unfavorable movement in
actuarially determined benefit costs (See Note 10 to the Consolidated Financial
Statements). Insurance expense was reduced by $0.9 million in 2002 by lowering
SJG's reserve for outstanding claims following a period of favorable
settlements. Finally, SJG had incurred higher annual expense associated with
stock compensation awards (See Note 4 to the Consolidated Financial Statements)
and additional expense associated with establishing committed bank facilities in
2003 (See Liquidity and Capital Resources). A&G expenses also increased in 2002
compared with 2001 primarily as a result of increasing health care and pension
costs. These increases were partially offset by the decrease in SJG's insurance
claims reserve as previously discussed.
Nonutility Retail Gas and Other operations expense rose in both 2003 and 2002
primarily due to increased staffing levels and higher customer acquisition costs
resulting from continued growth in SJE's customer base. Increases in On-Site
Energy Production Operations expense increased in 2003 related to the start of
commercial operations for Marina's thermal energy plant in July 2003. Wholesale
Gas Operations expense was lower in 2002 mainly attributable to the recovery of
a large accounts receivable write-off from 2001.
Corporate operations expense increased in 2003 due mainly to higher salaries
directed to corporate initiatives, increased employee benefit costs and higher
bank fees related to SJI's revolving credit lines.
Other Operating Expenses: A summary of principal changes in other consolidated
operating expenses (in thousands):
2003 vs. 2002 2002 vs. 2001
Maintenance $ (423) $ (1,670)
Depreciation 2,195 1,242
Energy and Other Taxes 1,224 201
Maintenance expense decreased in both 2003 and 2002 primarily due to lower
levels of Remediation Adjustment Clause (RAC) amortization. RAC-related expenses
do not affect earnings as we recognize an offsetting amount in revenues.
Depreciation was higher due to SJG's and Marina's increased investment in
property, plant and equipment. Depreciation on Marina's thermal plant began with
the start of commercial operations in July 2003 and totaled $747,000 in 2003.
The increase in Energy and Other Taxes relate primarily to increases in volumes
of gas sold and transported by SJG as reflected under the caption, "Operating
Revenues -- Utility."
Interest Charges: Interest charges decreased in both 2003 and 2002 compared with
the prior year due primarily to reductions in short-term rates on line of credit
borrowings and the refunding of higher priced, fixed rate, long-term debt with
lower cost debt. These refundings were financed during the second half of 2003
with long-term debt issuances under our Medium Term Note program at
significantly lower interest rates compared with the previous long-term interest
rates. We have incurred debt primarily to expand and upgrade SJG's gas
transmission and distribution system, to construct the Marina Energy thermal
plant, and to support seasonal working capital needs related to gas inventories
and customer receivables. The decrease in interest expense in 2003 compared with
2002 was partially offset by interest incurred by Marina that was previously
permitted to be capitalized during the construction phase of their thermal
energy plant (See Note 1 to the Consolidated Financial Statements).
Discontinued Operations: Loss from discontinued operations increased in 2003 due
mainly to product liability litigation associated with previously disposed of
businesses, coupled with the sale of property in 2003. In 2002, losses were
primarily comprised of environmental remediation and product liability
litigation associated with previously disposed of businesses.
-15-
Cumulative Effect of a Change in Accounting Principle -- Net: On October 25,
2002, the Emerging Issues Task Force rescinded its consensus in Issue No. 98-10
effective for transactions entered into after that date, with a cumulative
effect adjustment for previously existing transactions to be recognized in the
quarter beginning January 1, 2003. As a result of the rescission, SJI only
marks-to-market those energy-related contracts that meet the definition of a
derivative in Statement No. 133. Energy-related contracts that do not meet the
definition of a derivative are accounted for using the accrual basis of
accounting. The effect of this change in accounting resulted in a net charge of
$426,338 shown as a Cumulative Effect of a Change in Accounting Principle --
Net. Furthermore, management has designated any contract entered into after
December 31, 2002 to hedge physical gas in storage as a cash flow hedge and
accounts for them accordingly. At inception, and as of December 31, 2003, we
calculated these hedges to be highly effective; therefore, we record the offset,
net of taxes, in Accumulated Other Comprehensive Income (Loss).
Net Income Applicable to Common Stock: Net income increased $4.4 million, or
15.1%, to $33.4 million in 2003 as compared with $29.0 million in 2002. Net
income in 2002 increased $2.4 million, or 9.1%, as compared with $26.6 million
in 2001. Reasons for the increases in net income in 2003 and 2002 are discussed
in detail above.
Liquidity and Capital Resources -- Liquidity needs at SJI are driven by factors
that include natural gas commodity prices; the impact of weather on customer
bills; lags in fully collecting gas costs from customers under the Basic Gas
Supply Service charge; working capital needs of our energy trading and marketing
activities; the timing of construction and remediation expenditures and related
permanent financings; mandated tax payment dates; and both discretionary and
required repayments of long-term debt.
We first seek to meet liquidity needs with net cash provided by operating
activities. Net cash provided by operating activities varies from year to year
primarily due to the impact of weather on customer demand and related gas
purchases, inventory utilization and gas cost recoveries. We utilize short-term
borrowings under lines of credit from commercial banks to supplement cash from
operations when necessary.
Bank credit available to SJI totaled $226.0 million at December 31, 2003, of
which $124.7 million was used. Those bank facilities consist of a $100.0
million, 3-year revolving credit and $76.0 million of uncommitted bank lines
available to SJG as well as a $40.0 million, 364-day revolving credit and $10.0
million of uncommitted bank lines available to SJI. In January 2004, SJI
increased its uncommitted bank lines to $20.0 million. We established the
revolving credits in August 2003 with a syndicate of banks to enhance the
liquidity positions of both companies. Based upon the existing credit facilities
and a regular dialogue with our banks, we believe that there will continue to be
sufficient credit available to meet our business' future liquidity needs.
SJI supplements its operating cash flow and credit lines with both debt and
equity capital. Over the years, SJG has used long-term debt, primarily in the
form of First Mortgage Bonds, to finance its long-term borrowing needs. These
needs are primarily capital expenditures for property, plant and equipment.
Since 1998, SJG has financed these needs via a 3-year Medium Term Note (MTN)
program, secured in similar fashion to the First Mortgage Bonds. SJG's
registration of a $150.0 million MTN program with the Securities and Exchange
Commission became effective in December 2002. This program replaced the previous
$100.0 million MTN program that was fully used in 2001. In July 2003, SJG issued
$85.5 million of long-term debt under the program. In September, SJG issued an
additional $24.5 million of MTNs. Consequently, $40.0 million of the MTN program
remains available for future debt issuances. We used proceeds of the July and
September issues to refinance short-term debt outstanding under commercial bank
lines and for the redemption of certain high-rate First Mortgage Bonds. Current
maturities on long-term debt over the next five years are $5.3 million per year
in 2004 through 2007 and $3.0 million in 2008.
Between September 2001 and January 2003, Marina issued $20.0 million of
tax-exempt and $25.0 million of taxable variable rate demand bonds (VRDB's)
through the New Jersey Economic Development Authority. The tax-exempt and
taxable bonds mature in 2031 and 2021, respectively. Investors in the bonds
receive liquidity and credit support via a letter of credit provided by a
syndicate of four commercial banks. The underlying letter of credit that
provides liquidity support for the weekly remarketing of the VRDB's extends to
September 2005. We used the proceeds of these bond issuances to fund project
development and construction costs for the thermal energy plant constructed by
Marina to serve Borgata Hotel Casino & Spa which opened in July 2003.
SJI has raised equity capital over the past three years through its Dividend
Reinvestment Plan (DRP). Participants in SJI's DRP receive newly issued shares.
We offer a 2% discount on DRP investments because it is the most cost-effective
way for us to raise equity capital in the quantities we are seeking. Through the
DRP, SJI raised $36.2 million of equity capital by issuing 986,731 shares in
2003 and $10.7 million of equity capital by issuing 338,518 shares in 2002. We
anticipate raising additional equity capital through the DRP in 2004.
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 2003 amounted to $60.2 million. We estimate the net costs for 2004, 2005 and
2006 at approximately $68.1 million, $57.2 million and $52.1 million,
respectively.
Commitments and Contingencies: SJI made certain commitments to Borgata Hotel
Casino & Spa relating to the development of Marina's thermal energy project. In
the event that certain construction milestones were not met, SJI was obligated
to make specific payments to Borgata, per the construction contract. As
construction was completed and commercial operations began in July 2003, SJI's
obligation under the contract was reduced to $5.0 million as of December 31,
2003. This financial obligation is equally supported by a standby letter of
credit and an SJI parental guarantee, both reducing to zero in July 2004.
SJI is obligated on the letters of credit supporting the variable rate demand
bonds issued through the New Jersey Economic Development Authority by Marina. A
syndicate of four commercial banks has issued $46.0 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,
2003.
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,
2003 average $45.0 million annually and total $251.6 million over the contracts'
-16-
lives. Approximately 14% of the financial commitment under these contracts
expires during the next five years. We expect to renew each of these contracts
under renewal provisions as provided in each contract. SJG recovers all
prudently incurred fees through rates via the Basic Gas Supply Service clause.
SJG's long-term, senior secured debt is rated "A" and "Baa1" by Standard &
Poor's and Moody's Investor Services, respectively. These ratings have not
changed in the past five years.
The following table summarizes our contractual cash obligations and their
applicable payment due dates (in thousands):
Up to 1 - 3 3 - 5 More than
Contractual Obligations Total 1 Year Years Years 5 Years
Long-Term Debt $ 314,054 $ 5,273 $ 10,546 $ 8,270 $ 289,965
Operating Leases 984 429 439 85 31
Construction Obligations 5,155 5,155 -- -- --
Commodity Supply Purchase Obligations 554,077 306,712 120,965 70,400 56,000
Other Purchase
Obligations 1,785 1,082 703 -- --
----------- ---------- ---------- ---------- -----------
Total Contractual
Cash Obligations $ 876,055 $ 318,651 $ 132,653 $ 78,755 $ 345,996
=========== ========== ========== ========== ===========
Expected environmental remediation costs are not included in the table above due
to the subjective nature of such costs and time of anticipated payments.
In 2002, the FASB released Interpretation No. 45 (FIN 45) "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires companies to disclose the
nature of its guarantees or indemnification agreements for interim and year-end
financial statements ending after December 15, 2002. As of December 31, 2003,
SJI hadissued $147.6 million of parental guarantees on behalf of its
subsidiaries. Of this total, $107.0 million expire within one year, $10.0
million expire in 2005 and $30.6 million have no expiration date. The vast
majority of these guarantees was issued as guarantees of payment to third
parties with whom our subsidiaries have commodity supply contracts. As of
December 31, 2003, these guarantees support $36.7 million of the Accounts
Payable recorded on our consolidated balance sheet. As part of our risk
management policy, we also require parental guarantees from trading
counterparties as applicable. These arrangements are typical in our industry.
SJI has also issued two parental guarantees totaling $6.6 million related to
Marina's construction activity.
Marina was the successful bidder on a contract with Mannington Mills, Inc. and,
on January 5, 2004, executed a sale-leaseback contract related to Mannington's
co-generation facility located in Salem County, NJ. On that same date, Marina
paid $2.7 million to Mannington and will lease back the facility to Mannington
over an 8-year lease. Marina also entered into an 8-year operating contract to
operate and manage the facility.
SJI is subject to claims arising in the ordinary course of business and other
legal proceedings. We accrue liabilities related to claims when we can determine
the amount or range of amounts of likely settlement costs for those claims.
Among other actions, SJI was named in certain product liability claims related
to our former sand mining subsidiary. Management does not currently anticipate
the disposition of any known claims to have a material adverse effect on SJI's
financial position, results of operations or liquidity.
Market Risks --
Commodity Market Risks: Certain regulated and unregulated SJI subsidiaries are
involved in buying, selling, transporting and storing natural gas for their own
accounts as well as managing these activities for others. These subsidiaries are
subject to market risk due to price fluctuations. To hedge against this risk, we
enter into a variety of physical and financial transactions including forward
contracts, swaps, futures and options agreements. To manage these transactions,
SJI has a well-defined risk management policy approved by our board of directors
that includes volumetric and monetary limits. Management reviews reports
detailing activity daily. Generally, we enter into derivative activities
described above for risk management, not trading, purposes.
SJG and SJE transact commodities on a physical basis only and do not enter into
financial derivative positions directly. SJRG manages risk for these entities as
well as for its own portfolio by entering into the types of transactions noted
above. It is management's policy, to the extent practical, within predetermined
risk management policy guidelines, to have limited unmatched positions on a deal
or portfolio basis while conducting these activities. As a result of holding
open positions to a minimal level, the financial impact to SJRG of changes in
value of a particular transaction is substantially offset by an opposite change
in the related hedge transaction. As of December 31, 2003, SJRG had $18.2
million of accounts receivable under sales contracts. Of that total, 70% were
with companies rated investment-grade, or were guaranteed by an
investment-grade-rated parent or were with companies where we have a collateral
arrangement. The remainder of the accounts receivable were within approved
credit limits.
SJRG and SJE entered into certain contracts to purchase, sell,
and transport natural gas. For 2003, 2002 and 2001, we recorded a net unrealized
pre-tax gain (loss) on these energy-related derivative contracts of $2.3
million, $(0.5) million and $3.4 million, respectively, and they are included as
a component of Revenues -- Nonutility. SJRG's and SJE's contracts are typically
less than 12 months long. The fair value of these contracts determined under the
mark-to-market method as of December 31, 2003 is as follows (in thousands):
Assets Maturity Maturity
Source of Fair Value < 1 Year 1 - 3 Years Total
Prices Actively Quoted NYMEX $ 13,544 $ 2,831 $ 16,375
Other External Sources Basis 9,928 1,381 11,309
---------- --------- ---------
Total $ 23,472 $ 4,212 $ 27,684
========== ========= =========
Liabilities Maturity Maturity
Source of Fair Value < 1 Year 1 - 3 Years Total
Prices Actively Quoted NYMEX $ 12,029 $ 1,144 $ 13,173
Other External Sources Basis 6,780 731 7,511
---------- --------- ---------
Total $ 18,809 $ 1,875 $ 20,684
========== ========= =========
NYMEX (New York Mercantile Exchange) is the primary national commodities
exchange on which natural gas is traded. Basis represents the price of a NYMEX
natural gas futures contract adjusted for the difference in price for delivering
the gas at another location. A reconciliation of SJI's estimated net fair value
of energy-related derivatives follows (in thousands):
Net Derivatives-- Energy Related Assets, January 1, 2003 $ 14,196
Contracts Settled During 2003, Net (2,776)
Other Changes in Fair Value from Continuing
and New Contracts, Net (4,420)
---------
Net Derivatives-- Energy Related Assets, December 31, 2003 $ 7,000
=========
-17-
Interest Rate Risk: Our exposure to interest-rate risk relates primarily to
short-term, variable rate borrowings. Our short-term, variable rate debt
outstanding at December 31, 2003 was $112.8 million and averaged $100.4 million
during 2003. The months where average outstanding variable rate debt was at its
highest and lowest points were January at $150.6 million and September at $62.5
million. A hypothetical 100 basis point (1%) increase in interest rates on our
average variable rate debt outstanding would result in a $592,000 increase in
our annual interest expense, net of tax. We chose the 100 basis point increase
for illustrative purposes, as it provides a simple basis for calculating the
impact of interest rate changes under a variety of interest rate scenarios. Over
the past five years, the change in basis points (b.p.) of our average monthly
interest rates from the beginning to end of each year was as follows: 2003 -- 28
b.p. decrease; 2002 -- 74 b.p. decrease; 2001 -- 383 b.p. decrease; 2000 -- 83
b.p. increase; and 1999 -- 81 b.p. increase. For December 2003, our average
interest rate on variable rate debt was 1.88%. Consequently, the interest rate
reduction experienced since the beginning of 2001 cannot be duplicated.
To reduce exposure to an interest rate increase on our variable rate debt, SJG
entered into an interest rate swap agreement that became effective in June 2003,
which fixed the rate on $20.0 million of variable rate debt through May 2004 at
2.24%. SJG primarily issues long-term debt at fixed rates and, consequently,
interest expense on existing debt is not significantly impacted by changes in
market interest rates. SJG prepaid, at par, $3.0 million of 8.6% debenture notes
in February 2003. In May 2003, SJG redeemed an additional $5.1 million of 10.25%
First Mortgage Bonds prior to scheduled maturity. SJG paid a premium of $110,000
to redeem that issue. In October 2003, SJG redeemed in full its 6.95% First
Mortgage Bonds prior to scheduled maturity. To redeem the $31.9 million of
outstanding bonds, SJG paid a premium of $1.0 million. The only other debt
outstanding, exclusive of that issued by the utility, consists of the New Jersey
Economic Development Authority bonds used to finance the construction of
Marina's thermal energy plant. Those bonds were issued at floating rates that
reset weekly. Subsequent to issuance, we entered into interest rate swap
contracts that effectively fixed the rate on $20.0 million of tax-exempt debt at
4.08% through 2011 and $19.0 million of taxable debt at 4.59% through 2007. The
amount of the swap on the taxable debt reduces annually, commencing with a $2.0
million reduction in December 2003.
Independent Auditors' Report
To the Shareholders and
Board of Directors of
South Jersey Industries, Inc.:
We have audited the consolidated balance sheets of South Jersey Industries, Inc.
and subsidiaries as of December 31, 2003 and 2002, and the related statements of
consolidated income, consolidated common equity and comprehensive income and
consolidated cash flows for each of the three years in the period ended December
31, 2003. 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for energy-related contracts to conform with the rescission
of EITF Issue No. 98-10 "Accounting for Contracts Involved in Energy Trading and
Risk Management Activities."
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 18, 2004
-18-
Statements of Consolidated Income
(In Thousands Except for Per Share Data)
South Jersey Industries, Inc. and Subsidiaries
Year Ended December 31,
2003 2002 2001
Operating Revenues:
Utility (Notes 1, 8 & 9) $ 487,678 $ 386,120 $ 445,204
Nonutility (Notes 1 & 8) 209,142 119,006 100,782
---------- ---------- ----------
Total Operating Revenues 696,820 505,126 545,986
---------- ---------- ----------
Operating Expenses:
Cost of Gas Sold-- Utility 332,463 243,341 305,587
Cost of Sales-- Nonutility (Note 1) 184,992 105,242 88,149
Operations 59,168 48,110 44,121
Maintenance 5,678 6,101 7,771
Depreciation (Note 1) 24,646 22,451 21,209
Energy and Other Taxes 12,030 10,806 10,605
---------- ---------- ----------
Total Operating Expenses 618,977 436,051 477,442
---------- ---------- ----------
Operating Income 77,843 69,075 68,544
Other Income and Expense:
Equity in Affiliated Companies
(Notes 1 & 3) 786 941 704
Other 136 534 517
Total Other Income ---------- ---------- ----------
and Expense 922 1,475 1,221
---------- ---------- ----------
Interest Charges (1) 20,616 20,734 23,601
---------- ---------- ----------
Income Before Income Taxes 58,149 49,816 46,164
Income Taxes (Notes 1, 5 & 6) 23,596 20,404 19,295
---------- ---------- ----------
Income from Continuing Operations 34,553 29,412 26,869
Loss from Discontinued Operations--
Net (Note 3) (774) (424) (455)
Cumulative Effect of a Change in
Accounting Principle-- Net (Note 1) (426) -- 148
---------- ---------- ----------
Net Income Applicable to
Common Stock $ 33,353 $ 28,988 $ 26,562
========= ========== ==========
Basic Earnings Per Common Share: (Note 4)
Continuing Operations $ 2.75 $ 2.44 $ 2.29
Discontinued Operations (0.06) (0.03) (0.03)
Cumulative Effect of a Change in
Accounting Principle-- Net (0.03) -- 0.01
---------- ---------- ----------
Basic Earnings Per
Common Share $ 2.66 $ 2.41 $ 2.27
========== ========== ==========
Average Shares of Common Stock
Outstanding-- Basic 12,559 12,038 11,716
Diluted Earnings Per Common Share: (Note 4)
Continuing Operations $ 2.73 $ 2.43 $ 2.29
Discontinued Operations (0.06) (0.04) (0.04)
Cumulative Effect of a Change in
Accounting Principle-- Net (0.03) -- 0.01
---------- ---------- ----------
Diluted Earnings Per
Common Share $ 2.64 $ 2.39 $ 2.26
========== ========== ==========
Average Shares of Common Stock
Outstanding-- Diluted 12,658 12,116 11,750
Dividends Declared Per Common Share $ 1.56 $ 1.51 $ 1.48
========== ========== ==========
The accompanying footnotes are an integral part of the financial statements.
-19-
Statements of Consolidated Cash Flows
(In Thousands) South Jersey Industries, Inc.
and Subsidiaries
Year Ended December 31,
2003 2002 2001
Cash Flows from Operating Activities:
Net Income Applicable to
Common Stock $ 33,353 $ 28,988 $ 26,562
Adjustments to Reconcile Net Income
to Cash Flows Provided by
Operating Activities:
Depreciation and
Amortization 27,640 24,864 23,446
Unrealized (Gain) Loss on
Derivatives-- Energy Related (2,332) 514 (3,429)
Provision for Losses on
Accounts Receivable 3,245 3,706 2,667
Revenues and Fuel Costs
Deferred-- Net 30,075 8,396 (9,202)
Deferred and Non-Current Income
Taxes and Credits-- Net 4,274 14,343 7,310
Environmental Remediation
Costs-- Net* 2,262 6,354 5,452
Additional Pension
Contributions (5,731) (17,091) (327)
Changes in:
Accounts Receivable (16,762) (29,101) 22,427
Inventories (27,562) 17,950 (27,602)
Other Prepayments
and Current Assets 2,493 (3,145) (233)
Prepaid and Accrued
Taxes-- Net 10,827 359 574
Accounts Payable and
Other Accrued
Liabilities 6,093 24,546 (36,817)
Other-- Net 6,021 (1,221) (99)
---------- ---------- ----------
Net Cash Provided by Operating Activities 73,896 79,462 10,729
---------- ---------- ----------
Cash Flows from Investing Activities:
Return of Investment in
(Investment in) Affiliates 741 (481) 164
Affiliate Repayment of Loan 85 120 800
Purchase of Available-for-Sale
Securities (339) (693) (766)
(Purchase) Proceeds from Sale of
Restricted Investments (1,942) 20,882 (22,962)
Capital Expenditures, Cost of
Removal and Salvage (62,488) (84,740) (66,859)
---------- ---------- ----------
Net Cash Used in Investing Activities (63,943) (64,912) (89,623)
---------- ---------- ----------
Cash Flows from Financing Activities:
Net (Repayments of) Borrowings from
Lines of Credit (53,700) 14,140 31,160
Proceeds from Issuance of
Long-Term Debt 116,000 10,000 64,000
Principal Repayments of
Long-Term Debt (86,740) (30,268) (11,877)
Dividends on Common Stock (19,717) (18,204) (17,348)
Proceeds from Sale of Common Stock 37,170 10,926 10,953
Repurchase of Preferred Stock -- -- (114)
Premium for Early Retirement of Debt (1,048) (617) --
Payments for Issuance of Long-Term Debt (1,845) (201) (1,142)
---------- ---------- ----------
Net Cash (Used in) Provided by Financing
Activities (9,880) (14,224) 75,632
---------- ---------- ----------
Net Increase (Decrease) in Cash and
Cash Equivalents 73 326 (3,262)
Cash and Cash Equivalents at Beginning of Year 4,291 3,965 7,227
---------- ---------- ----------
Cash and Cash Equivalents at End of Year $ 4,364 $ 4,291 $ 3,965
========== ========== ==========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest (Net of Amounts
Capitalized) $ 21,056 $ 23,966 $ 26,723
Income Taxes (Net of
Refunds) $ 8,699 $ 8,433 $ 6,480
*Notes 9 and 13 contain additional information relating to environmental
remediation costs.
The accompanying footnotes are an integral part of the financial statements.
-20-
Consolidated Balance Sheets
(In Thousands)
South Jersey Industries, Inc.
and Subsidiaries
December 31,
2003 2002
Assets
Property, Plant and Equipment: (Notes 1 & 8)
Utility Plant, at original cost $ 894,654 $ 846,865
Accumulated Depreciation (209,831) (195,379)
Nonutility Property and Equipment,
at cost 65,768 57,950
Accumulated Depreciation (2,326) (1,428)
------------ -------------
Property, Plant and
Equipment-- Net 748,265 708,008
------------ -------------
Investments:
Available-for-Sale Securities (Note 1) 4,550 3,462
Restricted (Note 7) 4,022 2,080
Investments in Affiliates (Notes 1 & 3) 2,191 2,932
------------ -------------
Total Investments 10,763 8,474
------------ -------------
Current Assets:
Cash and Cash Equivalents (Notes 1 & 12) 4,364 4,291
Accounts Receivable 98,221 94,105
Unbilled Revenues (Note 1) 42,892 33,537
Provision for Uncollectibles (3,565) (3,612)
Natural Gas in Storage, average cost 69,596 41,490
Materials and Supplies, average cost 3,612 4,156
Prepaid Taxes 2,661 2,440
Prepaid Pension (Note 10) 19,690 --
Derivatives-- Energy Related Assets
(Note 1) 23,472 29,089
Derivatives-- Other (Note 1) 565 --
Other Prepayments and Current Assets 4,268 6,761
------------ -------------
Total Current Assets 265,776 212,257
------------ -------------
Regulatory and Other Non-Current Assets: (Note 1)
Deferred Fuel Costs-- Net (Note 9) -- 29,985
Other Regulatory Assets 75,780 75,318
Derivatives-- Energy Related
Assets (Note 1) 4,212 2,767
Unamortized Debt Discount and Expense 7,298 7,086
Other 14,109 9,939
------------ -------------
Total Regulatory and Other
Non-Current Assets 101,399 125,095
------------ -------------
Total Assets $ 1,126,203 $ 1,053,834
============ =============
Capitalization and Liabilities
Capitalization:
Common Equity (Notes 4 & 11) $ 297,961 $ 237,792
Preferred Stock (Note 2) 1,690 1,690
Long-Term Debt (Note 7) 308,781 274,099
------------ -------------
Total Capitalization 608,432 513,581
------------ -------------
Current Liabilities:
Notes Payable (Note 12) 112,800 166,500
Current Maturities of
Long-Term Debt (Note 7) 5,273 10,696
Accounts Payable 80,254 76,656
Customer Deposits 7,957 6,924
Environmental Remediation Costs (Note 13) 7,865 5,104
Taxes Accrued 11,940 892
Derivatives-- Energy Related
Liabilities (Note 1) 18,809 15,565
Derivatives-- Other (Note 1) 1,505 142
Deferred Income Taxes-- Net (Note 5) 11,537 24,818
Interest Accrued and
Other Current Liabilities 10,511 9,049
------------ -------------
Total Current Liabilities 268,451 316,346
------------ -------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes-- Net (Note 5) 121,922 97,890
Investment Tax Credits (Note 6) 3,471 3,819
Pension and Other Postretirement
Benefits (Note 10) 12,431 15,828
Environmental Remediation Costs (Note 13) 47,001 47,051
Derivatives-- Energy Related
Liabilities (Note 1) 1,875 2,095
Derivatives-- Other (Note 1) 1,853 2,431
Asset Retirement Obligation (Note 1) -- 41,434
Regulatory Liabilities (Note 1) 49,970 3,133
Other 10,797 10,226
------------ -------------
Total Deferred Credits and Other
Non-Current Liabilities 249,320 223,907
------------ -------------
Commitments and Contingencies (Note 13)
Total Capitalization and
Liabilities $ 1,126,203 $ 1,053,834
============ =============
The accompanying footnotes are an integral part of the financial statements.
-21-
Schedules of Consolidated Capitalization
(In Thousands Except for Share Data)
South Jersey Industries, Inc.
and Subsidiaries
December 31,
2003 2002
Common Equity: (Notes 4 & 11)
Common Stock: Par Value $1.25 per share;
Authorized 20,000,000 shares;
Outstanding Shares: 13,229,001 (2003)
and 12,206,474 (2002)
Balance at Beginning of Year $ 15,258 $ 14,826
Stock Plans 1,278 432
Balance at End of Year 16,536 15,258
------------ -------------
Premium on Common Stock 186,316 150,434
Accumulated Other
Comprehensive Income (Loss) 3,471 (5,902)
Retained Earnings 91,638 78,002
------------ -------------
Total Common Equity 297,961 237,792
------------ -------------
Preferred Stock: (Note 2)
South Jersey Gas Company-- 8% Redeemable
Cumulative Preferred Stock:
Par Value $100 per share;
Authorized 41,966 Shares;
Outstanding 16,904 Shares 1,690 1,690
------------ -------------
Long-Term Debt: (A)
South Jersey Gas Company:
First Mortgage Bonds: (B)
8.19% Series due 2007 9,089 11,362
10.25% Series due 2008 (C) -- 7,385
6.12% Series due 2010 10,000 10,000
6.74% Series due 2011 10,000 10,000
6.57% Series due 2011 15,000 15,000
6.95% Series due 2013 (C) -- 35,000
7.7% Series due 2015 15,000 15,000
6.50% Series due 2016 9,965 9,965
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
4.46% Series due 2013 (D) 10,500 --
5.027% Series due 2013 (D) 14,500 --
4.52% Series due 2014 (D) 11,000 --
5.115% Series due 2014 (D) 10,000 --
4.60% Series due 2016 (D) 17,000 --
4.657% Series due 2017 (D) 15,000 --
5.55% Series due 2033 (D) 32,000 --
Unsecured Notes:
Debenture Notes, 8.6%
due 2010 15,000 21,000
Debenture Notes, 8.35%
due 2037 (C) -- 36,083
Marina Energy LLC: (E)
Series A Bonds at
variable rates due 2031 20,000 20,000
Series B Bonds at
variable rates due 2021 25,000 19,000
------------ -------------
Total Long-Term
Debt Outstanding 314,054 284,795
Less Current Maturities 5,273 10,696
------------ -------------
Total Long-Term Debt 308,781 274,099
------------ -------------
Total Capitalization $ 608,432 $ 513,581
============ =============
(A) The long-term debt maturities and sinking fund requirements for the
succeeding five years are as follows: 2004, $5,273; 2005, $5,273; 2006,
$5,273; 2007, $5,270; and 2008, $3,000.
(B) SJG's First Mortgage dated October 1, 1947, as supplemented, securing the
First Mortgage Bonds (FMB) constitutes a direct first mortgage lien on
substantially all utility plant.
(C) On May 1, 2003, SJG redeemed its 10.25% Series FMB due 2008. The premium
associated with the redemption was approximately $0.1 million.
On October 14,2003, SJG redeemed its 6.95% Series FMB due 2013. The premium
associated with the redemption was approximately $1.0 million.
On November 5, 2003, SJG redeemed its 8.35% Debenture Notes due 2037, at
par. SJG is seeking BPU approval to amortize the premiums and recover them
from ratepayers over the terms of the newbond issues in accordance with the
BPU's uniform system of accounts.
(D) On July 16, 2003, SJG issued $85.5 million of debt under its Medium Term
Note program established in 2002. On September 17, 2003, SJG issued an
additional $24.5 million of Medium Term Notes. A remainder of $40.0 million
is authorized to be issued under this program through July 31, 2005.
(E) In September 2001, January 2002 and January 2003, Marina issued $29.0
million, $10.0 million and $6.0 million, respectively, of variable rate
revenue bonds through the New Jersey Economic Development Authority. The
variable rates at December 31, 2003 for the Series A and Series B bonds were
1.25% and 1.20%, respectively.
The accompanying footnotes are an integral part of the financial statements.
-22-
Consolidated Statements of Common Equity
and Comprehensive Income
(In Thousands)
South Jersey Industries, Inc. and Subsidiaries
Accumulated
Other
Common Premium on Comprehensive Retained
Stock Common Stock (Loss) Income Earnings Total
Balance at December 31, 2000 $ 14,375 $ 129,360 $ -- $ 58,004 $ 201,739
Net Income Applicable to Common Stock 26,562 26,562
Other Comprehensive (Loss) Income, Net of Tax:*
Minimum Pension Liability Adjustment (1,988) (1,988)
Unrealized Gain on Derivatives-- Other 301 301
Other Comprehensive Loss, Net of Tax* (1,687)
Comprehensive Income 24,875
Common Stock Issued Under Stock Plans 451 10,569 11,020
Cash Dividends Declared-- Common Stock (17,348) (17,348)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 14,826 139,929 (1,687) 67,218 220,286
Net Income Applicable to Common Stock 28,988 28,988
Other Comprehensive (Loss) Income, Net of Tax:*
Minimum Pension Liability Adjustment (7,271) (7,271)
Unrealized Loss on Equity Investments (149) (149)
Unrealized Gain on Derivatives-- Energy Related 5,027 5,027
Unrealized Loss on Derivatives-- Other (1,822) (1,822)
Other Comprehensive Loss, Net of Tax* (4,215)
Comprehensive Income 24,773
Common Stock Issued Under Stock Plans 432 10,505 10,937
Cash Dividends Declared-- Common Stock (18,204) (18,204)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2002 15,258 150,434 (5,902) 78,002 237,792
Net Income Applicable to Common Stock 33,353 33,353
Other Comprehensive Income (Loss), Net of Tax:*
Minimum Pension Liability Adjustment 9,259 9,259
Unrealized Gain on Equity Investments 432 432
Unrealized Loss on Derivatives-- Energy Related (765) (765)
Unrealized Gain on Derivatives-- Other 447 447
Other Comprehensive Income, Net of Tax* 9,373
Comprehensive Income 42,726
Common Stock Issued Under Stock Plans 1,278 35,882 37,160
Cash Dividends Declared-- Common Stock (19,717) (19,717)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003 $ 16,536 $ 186,316 $ 3,471 $ 91,638 $ 297,961
========== ========== ========== ========== ==========
<FN>
*Determined using a combined statutory tax rate of 40.85%.
</FN>
The accompanying footnotes are an integral part of the financial statements.
-23-
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. We eliminated all
significant intercompany accounts and transactions. SJI reclassified some
previously reported amounts to conform with current year classifications.
Equity Investments -- We classify equity investments purchased as long-term
investments as Available-for-Sale Securities on our consolidated balance sheets
and carry them at their fair value with any changes in unrealized gains or
losses included in Accumulated Other Comprehensive Income (Loss). SJI, either
directly or through its wholly owned subsidiaries, currently holds a 50%
non-controlling interest in two affiliated companies and accounts for the
investments under the equity method. We include the operations of these
affiliated companies in the statements of consolidated income under the caption,
Equity in Affiliated Companies (See Note 3).
Estimates and Assumptions -- We prepare our financial statements to conform with
generally accepted accounting principles. Management makes estimates and
assumptions that affect the amounts reported in the financial statements and
related disclosures. Therefore, actual results could differ from those
estimates.
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
9). SJG follows the accounting for regulated enterprises prescribed by the
Financial Accounting Standards Board (FASB) Statement No. 71, "Accounting for
the Effects of Certain Types of Regulation." In general, Statement No. 71 allows
deferral of certain costs and creation of certain obligations when it is
probable that these items will be recovered from or refunded to customers in
future periods.
Revenues -- SJG and South Jersey Resources Group, LLC (SJRG) bill customers
monthly for gas deliveries. South Jersey Energy Company (SJE) bills customers
monthly for gas and electricity deliveries. For SJG and SJE retail customers not
billed at the end of each month, we make an accrual to recognize unbilled
revenues from the date of the last meter reading to the end of the month. We
defer and recognize revenues related to SJG's appliance service contracts over
the full 12-month term of the contract as earned. The BPU allows SJG to recover
gas costs through the Basic Gas Supply Service (BGSS) clause. The BGSS-approved
price structure replaced the Levelized Gas Adjustment Clause (LGAC) pricing
structure. We collect these costs on a forecasted basis upon BPU order. SJG
defers over/under-recoveries of gas costs and includes them in the following
year's BGSS or other similar recovery mechanism. We pay interest on
overcollected BGSS balances based on SJG's approved return on rate base (See
Note 9).
SJG's tariff also includes a Temperature Adjustment Clause (TAC), a Remediation
Adjustment Clause (RAC) and a New Jersey Clean Energy Program (CLEP). 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 CLEP
recovers costs associated with our energy efficiency and renewable energy
programs. 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 related costs through
rates over 7-year amortization periods (See Notes 9 & 13). CLEP adjustments are
also deferred and do not affect earnings, as related costs are recovered through
rates on an ongoing basis.
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
2.9% in both 2003 and 2002, and 2.8% in 2001. Except for extraordinary
retirements, accumulated depreciation is charged with the cost of depreciable
utility property retired less salvage (See New Accounting Pronouncements).
Nonutility property depreciation is computed on a straight-line basis over the
estimated useful lives of the property, ranging up to 50 years. Gain or loss on
the disposition of nonutility property is recognized in net income.
Capitalized Interest -- SJG capitalizes interest on construction at its
BPU-approved rate of return on rate base (See Note 9). SJG's capitalized
interest totaled $0.6 million in 2003, $0.4 million in 2002 and $0.2 million in
2001. Marina Energy LLC (Marina) also capitalized interest during the
construction of its thermal energy facility based on the actual cost of borrowed
funds. Marina's capitalized interest totaled $1.8 million in 2003, $1.6 million
in 2002 and $0.3 million in 2001. SJG's amounts are included in Utility Plant
and Marina's amounts are included in Nonutility Property and Equipment on the
consolidated balance sheets. All capitalized interest is reflected on the
statements of consolidated income as a reduction of Interest Charges.
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 2003, 2002 and 2001, no
such circumstances were identified.
Energy Trading Activities and Derivative Instruments -- SJI's regulated and
unregulated subsidiaries are involved in the buying, selling, transporting and
storing of natural gas and buying and selling of retail electricity for their
own accounts as well as managing these activities for others. These subsidiaries
are subject to market risk due to price fluctuations. To manage this risk, our
companies enter into a variety of physical and financial transactions including
forward contracts, swap agreements, option contracts and futures contracts.
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. 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
-24-
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 FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. We record all
derivatives, whether designated in hedging relationships or not, on the balance
sheet at fair value unless the derivatives contracts qualify for the normal
purchase and sale exemption. If the derivative is designated as a fair value
hedge, we recognize the changes in the fair value of the derivative and of the
hedged item attributable to the hedged risk in earnings. If the derivative is
designated as a cash flow hedge, we record the effective portion of changes in
the fair value of the derivative in Accumulated Other Comprehensive Income
(Loss) and recognize it in the income statement when the hedged item affects
earnings. We recognize ineffective portions of changes in the fair value of cash
flow hedges in earnings. As permitted under Statement No. 133, SJI has elected
to designate certain energy-related derivative instruments as cash flow hedges.
No commodity related activities of SJG are considered subject to the fair value
recognition requirements of Statement No. 133, as amended.
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, SJRG accounted for these contracts at
fair value under Emerging Issues Task Force (EITF) Issue No. 98-10, "Accounting
for Contracts Involved in Energy Trading and Risk Management Activities" (prior
to 2003) or Statement No. 133. Under this method of accounting, SJRG measures
the difference between the contract price and the fair value of the contracts
and records these as Derivatives -- Energy Related Assets or Derivatives --
Energy Related Liabilities on our consolidated balance sheets. For the years
ended December 31, 2003, 2002 and 2001, we recorded the net unrealized pre-tax
gain (loss) of $2.3 million, $(0.5) million and $3.4 million, respectively.
These unrealized gains and losses on energy trading and related contracts,
determined under the mark-to-market method, are included in Operating Revenues
- -- Nonutility, except to the extent that they are designated cash flow hedges
and are recorded through Accumulated Other Comprehensive Income (Loss). The
Cumulative Effect of a Change in Accounting Principle -- Net of $148,000 relates
to the initial adoption of Statement No. 133 on January 1, 2001.
Beginning in 2002, SJI began presenting revenues and expenses related to SJRG's
physical power contracts and energy-related derivative contracts on a net basis
in our consolidated statements of income consistent with EITF Issue No. 02-03,
"Issues Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities." Because of the difficulty in obtaining certain information, we
determined this presentation by netting the energy contract-related revenue and
expense transactions of SJRG. As a result, we based certain nonutility costs of
sales on the transfer prices between SJRG and SJE. These transfer prices are
generally at market. There is no effect on operating income or net income from
the above changes in presentation.
On October 25, 2002, the EITF rescinded its consensus in Issue No. 98-10
effective for transactions entered into after that date, with a cumulative
effect adjustment for previously existing transactions to be recognized in the
quarter beginning January 1, 2003. As a result of the rescission, SJI only
marks-to-market those energy-related contracts that meet the definition of a
derivative in Statement No. 133. Energy-related contracts that do not meet the
definition of a derivative are accounted for using the accrual basis of
accounting. The effect of this change in accounting resulted in a net charge of
$426,338 shown as a Cumulative Effect of a Change in Accounting Principle -- Net
in 2003. Furthermore, management has designated any contract entered into after
December 31, 2002 to hedge physical gas in storage as a cash flow hedge and
accounts for them accordingly. We include these balances on the consolidated
balance sheet under the caption Derivatives -- Other. At inception, and as of
December 31, 2003, we calculated these hedges to be highly effective; therefore,
we record the offset, net of taxes, in Accumulated Other Comprehensive Income
(Loss).
In November 2001, we entered into two interest rate swap contracts. The
first swap effectively provides us with a fixed interest rate of 4.08% on
Marina's tax-exempt Series A variable rate bonds for a 10-year period. The
second swap effectively fixed the interest rate of Marina's taxable Series B
variable rate bonds at 4.55% for a 6-year period. The notional amount of this
second swap decreases by $3.0 million per year beginning in December 2005.
In January 2002, Marina issued an additional $10.0 million of taxable Series B
variable rate bonds. In April 2002, we entered into an interest rate swap
contract that effectively fixed the interest rate on these bonds at 4.62% for a
4-year period. The notional amount of this swap decreased to $8.0 million in
December 2003, then decreases to $3.9 million in December 2004, and terminates
in December 2005.
In May 2003, SJG entered into an interest rate swap contract that effectively
fixed the interest rate at 2.24% through May 20, 2004 on $20.0 million of
SJG's debt outstanding under its bank credit agreements.
We entered into interest rate swap agreements to hedge the exposure to
increasing rates with respect to our variable rate debt. The differential to be
paid or received as a result of these swap agreements is accrued as interest
rates change and is recognized as an adjustment to interest expense. These
interest rate swaps are accounted for as cash flow hedges. At inception, and as
of December 31, 2003 and 2002, the market value of these swaps was $(1.8)
million and $(2.6) million, respectively, which represents the amount we would
have to pay the counterparty to terminate these contracts as of those dates.
These balances are included on the consolidated balance sheets under the caption
Derivatives -- Other. As of December 31, 2003 and 2002, we calculated the swaps
to be highly effective; therefore, we record the offset to the hedge, net of
taxes, in Accumulated Other Comprehensive Income (Loss).
We determined the fair value of derivative investments by reference to quoted
market prices of listed contracts, published quotations or quotations from
independent parties.
Stock Compensation -- Prior to 2003, SJI valued stock options to employees using
the intrinsic value method. Effective in 2003, SJI adopted the policy of
accounting for this compensation using the fair value based method on a
prospective basis. At this time, SJI has no stock options outstanding.
New Accounting Pronouncements -- In January 2003, SJI adopted FASB Statement No.
143, "Accounting for Asset Retirement Obligations," which establishes accounting
and reporting standards for legal obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SJG has
certain easements and right-of-way agreements that qualify as legal obligations
under Statement No. 143. However, it is our intent to maintain these agreements
in perpetuity; therefore, no change in SJG's current accounting practices is
required related to these agreements.
SJG recovers certain asset retirement costs through rates charged to customers
as an approved component of depreciation expense. As of December 31, 2002, SJG
had accrued amounts in excess of actual removal costs incurred totaling $41.4
million, which we reclassified from Utility Plant Accumulated Depreciation to
Asset Retirement Obligation on the consolidated balance sheets. As of
December 31, 2003, SJG had accrued amounts in excess of actual removal costs
-25-
incurred totaling $45.2 million, which in accordance with Statement No. 143, we
reclassified to Regulatory Liabilities on the consolidated balance sheets. The
adoption of this statement did not materially affect SJI's financial condition
or results of operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which was effective for SJI's 2002
annual financial statements. Effective April 1, 2003, SJI adopted the policy of
accounting for this compensation using the fair value based method on a
prospective basis. This method calls for expensing the estimated fair value of
a stock option. The provisions of this statement currently have no impact on
SJI's financial statements.
In January 2003, the FASB issued Interpretation No. (FIN) 46, "Consolidation of
Variable Interest Entities." FIN 46 clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to certain
entities in which equity investors do not have the characteristics of
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. Management has evaluated the impact of adopting FIN
46 and has determined that SJG Capital Trust, which was established for the sole
purpose of issuing $35.0 million of mandatorily redeemable preferred securities,
could no longer be consolidated into SJI's financial statements effective July
1, 2003. These securities were redeemed in November 2003. Prior periods were
restated to report the original equity investment amount in SJG Capital Trust as
a separate $1.1 million investment in an affiliate and the $36.1 million
subordinated debenture to SJG Capital Trust as debt on its consolidated balance
sheet rather than the $35.0 million of mandatorily redeemable preferred
securities as previously reported. The adoption of FIN 46, inclusive of
revisions released by FASB in December 2003, did not impact SJI's net income or
retained earnings for the periods reported.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which is effective for certain
contracts entered into or modified and for hedging relationships designated
after June 30, 2003. The amendments set forth in Statement No. 149 require that
certain contracts with comparable characteristics be accounted for similarly. We
have determined there is no impact on our financial statements from the
provisions of this statement.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
Statement No. 150 requires that certain types of financial instruments be
reported as liabilities by their issuers. We adopted Statement No. 150 effective
June 1, 2003. The adoption of this statement had no impact on our financial
position or results of operation.
In August 2003, the EITF reached a consensus on Issue No. 03-11, which provides
guidance on whether to report realized gains or losses on physically settled
derivative contracts not held for trading purposes on a gross basis, and
realized gains or losses on derivative contracts that net settle on a net basis.
The new guidance is applicable for financial statement periods after September
30, 2003. Management believes the portion of SJRG's operations that are not
currently being presented on a gross basis meet the definition of "trading" in
accordance with EITF No. 02-03, and are, therefore, reported net. There was no
impact to our financial statements as a result of adopting EITF No. 03-11
effective October 1, 2003.
Income Taxes -- Deferred income taxes are provided for all significant temporary
differences between book and taxable basis of assets and liabilities (See Notes
5 & 6).
Other Regulatory Assets & Regulatory Liabilities -- Other Regulatory Assets at
December 31, 2003 and 2002 consisted of the following items:
Years Remaining
as of Thousands of Dollars
Dec. 31, 2003 2003 2002
Environmental Remediation Costs:
(Notes 9 & 13)
Expended-- Net 7 $ 4,147 $ 6,470
Liability for Future Expenditures -- 50,983 48,211
Income Taxes-- Flowthrough
Depreciation (Note 6) 8 7,619 8,597
Postretirement Benefit Costs (Note 10) 9 3,402 3,780
Gross Receipts and Franchise Taxes (Note 6) 3 1,367 1,811
Societal Benefit Charges (Note 9) Various 7,529 5,956
Other -- 733 493
------------------------
Total Other Regulatory Assets $ 75,780 $ 75,318
========================
Each item separately identified above is being recovered through utility rate
charges without a return on investment over the period indicated (See Note 9).
All assets reflected within the above caption "Other" are currently being
recovered or are subject to filings with the BPU requesting recovery. Management
believes that all such deferred costs are probable of recovery from ratepayers
through future utility rates.
Regulatory Liabilities at December 31, 2003 and 2002 consisted of the following
items:
Thousands of Dollars
2003 2002
Excess Plant Removal Costs $ 45,241 $ --
Overcollected State Taxes 4,353 2,847
Other 376 286
----------------------------
Total Regulatory Liabilities $ 49,970 $ 3,133
============================
Excess Plant Removal Costs represent amounts accrued in excess of actual utility
plant removal costs incurred to date (See New Accounting Pronouncements). All
other amounts are subject to being returned to ratepayers in future rate
proceedings.
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:
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. 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).
-26-
3. DIVESTITURES AND AFFILIATIONS:
Divestitures -- In 1996, Energy & Minerals, Inc. (EMI), an SJI subsidiary, sold
the common stock of The Morie Company, Inc. (Morie), its sand mining and
processing subsidiary (See Note 13).
In 1997, R&T Group, Inc., SJI's construction subsidiary, sold all 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 13).
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.
SJG operated two retail stores which sold natural gas appliances. The
stores were intended to provide gas customers with access to and choice among
natural gas appliances. In 2001, SJG
formally discontinued this merchandising segment of its operations as such
appliances are readily available from other retailers. Summarized operating
results of the discontinued operations were:
Thousands of Dollars
2003 2002 2001
Operating Revenues-- Merchandising $ -- $ 26 $ 1,016
-------- ------- ---------
(Loss) Income before Income Taxes:
Sand Mining $ (705) $ (467) $ 719
Construction (32) (17) 78
Fuel Oil (495) (122) (113)
Wholesale Electric -- -- (1,150)
Merchandising -- (50) (351)
Income Tax Credits 458 232 362
-------- ------- ---------
Loss from Discontinued Operations-- Net $ (774) $ (424) $ (455)
======== ======= =========
Earnings Per Common Share from
Discontinued Operations-- Net $ (0.06) $(0.03) $ (0.03)
======== ======= =========
Losses from sand mining are mainly comprised of environmental remediation and
product liability litigation associated with Morie's prior activities. Positive
results from sand mining operations in 2001 reflect a settlement with our
insurance carrier for previously incurred costs. Losses from fuel oil in 2003
are mainly attributable to a property sale. Wholesale Electric losses in 2001
were due to the settlement of a creditor claim in bankruptcy.
Affiliations -- In January 1999, SJI and Conectiv Solutions, LLC formed
Millennium Account Services, LLC to provide meter reading services in southern
New Jersey.
In June 1999, SJE and Energy East Solutions, Inc. (EES) formed South Jersey
Energy Solutions, LLC (SJES) to market retail electricity and energy management
services. SJES began supplying retail electricity during 2000, and ceased active
operations in May 2002. In January 2003, SJES became a wholly owned subsidiary
of SJE when EES redeemed its 50% interest upon payment of $54,686, their capital
deficit balance, to SJES.
In April 2000, SJE and GZA GeoEnvironmental, Inc. formed AirLogics, LLC to
market a jointly developed air monitoring system designed to assist companies
involved in environmental cleanup activities.
4. COMMON STOCK:
SJI has 20,000,000 shares of authorized Common Stock. The following shares were
issued and outstanding:
2003 2002 2001
Beginning of Year 12,206,474 11,860,990 11,499,701
New Issues During Year:
Dividend Reinvestment Plan 986,731 338,518 354,809
Employees' Stock Ownership Plan 1,511 4,162 3,707
Stock Option, Stock Appreciation
Rights and Restricted Stock
Award Plan 32,005 590 604
Directors' Restricted Stock 2,280 2,214 2,169
----------------------------------
End of Year 13,229,001 12,206,474 11,860,990
==================================
We credited the par value ($1.25 per share) of stock issued in 2003, 2002 and
2001 to Common Stock. We credited the net excess over par value of approximately
$35.9 million, $10.5 million and $10.6 million, respectively, to Premium on
Common Stock.
Earnings Per Common Share -- We present basic EPS based on the weighted-average
number of common shares outstanding. EPS are presented in accordance with FASB
Statement No. 128, "Earnings Per Share," which establishes standards for
computing and presenting basic and diluted EPS. The incremental shares required
for inclusion in the denominator for the diluted EPS calculation were 99,649,
77,866 and 34,254 shares for the years ended December 31, 2003, 2002 and 2001,
respectively. These shares relate to stock options and restricted stock and were
calculated using the treasury stock method.
Stock Option, Stock Appreciation Rights and Restricted Stock Award Plan -- Under
this plan, no more than 306,000 shares in the aggregate may be issued to SJI's
officers and other key employees. No options or stock appreciation rights may be
granted under the Plan after November 22, 2006. At December 31, 2003, 2002 and
2001, SJI had -0-, -0- and 2,000 options outstanding, respectively, all
exercisable at $24.69 per share. No options were granted in 2003, 2002 or 2001.
No stock appreciation rights were issued under the Plan. In 2003, 2002 and 2001,
we granted 30,810, 26,034 and 44,384 restricted shares, respectively. These
restricted shares vest over a 3-year period and are subject to SJI achieving
certain performance targets. The annual expense associated with these awards was
$970,400, $579,900 and $61,300 in 2003, 2002 and 2001, respectively.
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 were also issued directly by SJI. As
of December 31, 2003, SJI reserved 1,678,976 shares of authorized, but unissued,
common stock for future issuance to the DRP. As of October 1, 2003, the ESOP was
terminated.
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. The annual expense associated with this plan was $80,255,
$67,242 and $66,843 in 2003, 2002 and 2001, respectively.
-27-
Shareholder Rights Plan -- In 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 will expire if not
exercised or redeemed by September 20, 2006.
5. INCOME TAXES:
Total income taxes applicable to operations differ 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
2003 2002 2001
Tax at Statutory Rate $ 20,352 $ 17,436 $ 16,157
Increase (Decrease) Resulting from:
State Income Taxes 3,659 3,143 2,857
ESOP (723) (489) --
Amortization of Investment Tax Credit (347) (347) (347)
Tax Depreciation Under Book
Depreciation on Utility Plant 664 664 664
Other-- Net (9) (3) (36)
Income Taxes:
Continuing Operations 23,596 20,404 19,295
Discontinued Operations (458) (232) (362)
Cumulative Effect of a Change
in Accounting Principle (294) -- 103
--------------------------------
Net Income Taxes $ 22,844 $ 20,172 $ 19,036
================================
The provision for Income Taxes is comprised of the following:
Thousands of Dollars
2003 2002 2001
Current:
Federal $ 12,402 $ 3,044 $ 8,306
State 6,919 3,017 3,678
Total Current 19,321 6,061 11,984
Deferred:
Federal:
Excess of Tax Depreciation Over
Book Depreciation-- Net 12,339 10,960 4,668
Deferred Fuel Costs-- Net (10,446) (3,728) 794
Environmental Costs-- Net (162) (1,490) (1,850)
Alternative Minimum Tax 2,181 (495) 2,851
Prepaid Pension 1,647 5,743 --
Deferred Regulatory Costs 750 1,543 175
Other-- Net (397) 339 302
State (1,290) 1,818 718
Total Deferred 4,622 14,690 7,658
Investment Tax Credit (347) (347) (347)
Income Taxes:
Continuing Operations 23,596 20,404 19,295
Discontinued Operations (458) (232) (362)
Cumulative Effect of a Change
in Accounting Principle (294) -- 103
---------------------------------
Net Income Taxes $ 22,844 $ 20,172 $ 19,036
=================================
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
2003 2002
Current:
Deferred Fuel Costs-- Net $ 7,235 $ 20,368
Derivatives / Unrealized Gain 4,868 3,595
Other (566) 855
----------------------
Current Deferred Tax Liability-- Net $ 11,537 $ 24,818
======================
Non-Current:
Book versus Tax Basis of Property 116,504 101,999
Prepaid Pension 7,616 7,117
Environmental 694 878
Deferred Regulatory Costs 4,687 3,873
Minimum Pension Liability -- (6,395)
Deferred State Tax (2,358) (2,678)
Investment Tax Credit Basis Gross Up (1,891) (2,070)
Alternative Minimum Tax -- (2,089)
Other (3,330) (2,745)
----------------------
Non-Current Deferred Tax Liability-- Net $ 121,922 $ 97,890
======================
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 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 were required to invest unused proceeds in high-quality, highly
liquid investments pending approved construction expenditures. As of December
31, 2003 and 2002, these residual proceeds totaled $-0- and $2.1 million,
respectively.
SJRG maintains a margin account with a national investment firm to support its
energy-trading activities. As of December 31, 2003, the balance of this account
was $4.0 million due to changes in the market value of outstanding contracts.
-28-
Long-Term Debt -- We estimate the fair values of SJI's long-term debt, including
current maturities, as of December 31, 2003 and 2002, to be $338.6 million and
$336.0 million, respectively. Carrying amounts are $314.1 million and $284.8
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, 2003 and 2002.
8. SEGMENTS OF BUSINESS:
Information about SJI's operations in different industry segments is presented
below:
Thousands of Dollars
2003 2002 2001
Operating Revenues:
Gas Utility Operations $ 528,066 $ 417,262 $ 475,462
Wholesale Gas Operations 10,560 4,998 6,144
Retail Gas and Other Operations 190,380 114,706 96,752
On-Site Energy Production 12,736 852 --
Subtotal 714,742 537,818 578,358
Intersegment Sales (44,922) (32,692) (32,372)
-----------------------------------
Total Operating Revenues $ 696,820 $ 505,126 $ 545,986
===================================
Operating Income:
Gas Utility Operations $ 65,420 $ 60,874 $ 60,463
Wholesale Gas Operations 4,998 4,280 4,628
Retail Gas and Other Operations 5,600 4,159 3,824
On-Site Energy Production 3,122 416 --
General Corporate (1,297) (654) (371)
-----------------------------------
Total Operating Income $ 77,843 $ 69,075 $ 68,544
===================================
Depreciation and Amortization:
Gas Utility Operations $ 26,627 $ 24,730 $ 23,332
Wholesale Gas Operations 13 12 8
Retail Gas and Other Operations 106 84 78
On-Site Energy Production 866 10 --
Discontinued Operations 28 28 28
-----------------------------------
Total Depreciation and
Amortization $ 27,640 $ 24,864 $ 23,446
===================================
Property Additions:
Gas Utility Operations $ 53,238 $ 49,646 $ 47,799
Wholesale Gas Operations 6 -- 61
Retail Gas and Other Operations 245 138 163
On-Site Energy Production 8,137 33,925 17,915
-----------------------------------
Total Property Additions $ 61,626 $ 83,709 $ 65,938
===================================
Identifiable Assets:
Gas Utility Operations $ 944,562 $ 914,791
Wholesale Gas Operations 70,156 62,568
Retail Gas and Other Operations 60,206 44,732
On-Site Energy Production 72,896 60,916
Discontinued Operations 2,358 2,335
-------------------------
Subtotal 1,150,178 1,085,342
Corporate Assets 36,755 40,783
Intersegment Assets (60,730) (72,291)
-------------------------
Total Identifiable Assets $ 1,126,203 $ 1,053,834
=========================
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. On-Site Energy
Production consists of Marina's energy-related projects.
SJI's interest expense relates primarily to SJG's and Marina's borrowing and
financing activities. Interest income is essentially derived from borrowings
between the subsidiaries and is eliminated during consolidation.
9. REGULATORY ACTIONS:
In January 1997, the BPU granted SJG rate relief, which was predicated in part,
upon a 9.62% rate of return on rate base, which included an 11.25% return on
common equity. This rate relief provides for the recovery of cost of service,
including deferred costs, through base rates. Additionally, our threshold for
sharing pre-tax margins generated by interruptible and off-system sales and
transportation increased. Currently, SJG keeps 100% of pre-tax margins up to the
threshold level of $7.8 million. The next $750,000 is credited to customers
through the Basic Gas Supply Service (BGSS) clause. Thereafter, SJG keeps 20% of
the pre-tax margins as we have historically.
Effective January 10, 2000, the BPU approved full unbundling of SJG's system.
This allows all natural gas consumers to select their natural gas commodity
supplier. As of December 31, 2003, 102,563 of SJG's residential customers were
purchasing their gas commodity from someone other than SJG. Customers choosing
to purchase natural gas from providers other than the utility are charged for
the cost of gas by the marketer, not the utility. The resulting decrease in
SJG's revenues is offset by a corresponding decrease in gas costs. While
customer choice can reduce utility revenues, it does not negatively affect SJG's
net income or financial condition. The BPU continues to allow for full recovery
of prudently incurred natural gas costs through the BGSS. Unbundling did not
change the fact that SJG still recovers cost of service, including deferred
costs, through base rates.
In November 2001, SJG filed for a $2.7 million rate increase to recover the
cash related to a prior net deficiency in the Temperature Adjustment Clause
(TAC). Additionally, in September 2002, SJG filed for an $8.6 million rate
increase to recover the cash related to a TAC deficiency resulting from
warmer-than-normal weather for the 2001-2002 winter. As a result of the
colder-than-normal 2002-2003 winter, the cumulative TAC deficiency decreased to
$5.7 million. In August 2003, the BPU approved the recovery of the $5.7 million
TAC deficiency, effective September 1, 2003.
In December 2001, the BPU approved recovery of SJG's October 31, 2001
underrecovered gas cost balance of $48.9 million plus accrued interest since
April 1, 2001 at a rate of 5.75%. As of December 31, 2003, the remaining
deferred underrecovered balance totaled $16.1 million.
During 2002, the BPU convened a gas policy group to address BGSS, which is the
gas supply service being provided by the natural gas utility. In December 2002,
the BPU approved the proposed BGSS price structure. The BGSS-approved price
structure replaced the Levelized Gas Adjustment Clause (LGAC) pricing structure.
The LGAC was structured to reset gas charges to consumers once per year. The
BGSS resets gas prices monthly for larger customers, and for smaller customers
permits multiple resets each year, if certain conditions are met. With the
-29-
implementation of BGSS in March 2003, customers can make more informed decisions
about choosing an alternate supplier by having a utility pricing structure that
more currently reflects market conditions. Further, BGSS provides SJG with more
pricing flexibility, through self-implementing rate changes under certain
conditions and limitations, conceptually resulting in the reduction of
over/under-recoveries. LGAC-related mechanisms, such as deferred accounting
treatment, the sharing of pre-tax margins generated by interruptible and
off-system sales and transportation, and the allowance for full recovery of
prudently incurred natural gas costs, remain in place under BGSS.
In August 2002, SJG filed for a Societal Benefits Clause (SBC) rate increase.
The SBC recovers costs related to BPU-mandated programs and environmental
remediation costs that are recovered through SJG's Remediation Adjustment
Clause; energy efficiency and renewable energy program costs that are recovered
through SJG's New Jersey Clean Energy Programs; consumer education program
costs; and the interim low income program costs. In August 2003, the BPU
approved a $6.7 million increase to SJG's SBC, effective September 1, 2003.
This approval increases the current annual recovery level of $6.7 million to
$13.4 million.
Also in August 2002, SJG filed a petition with the BPU to transfer its appliance
service business from the regulated utility into a newly created unregulated
company. As filed, the newly created company would have the flexibility to be
more responsive to competition and customer needs by expanding and modifying its
service offerings in an unregulated environment.
In September 2002, SJG filed with the BPU to maintain its current BGSS rate
through October 2003. However, due to price increases in the wholesale market,
in February 2003, SJG filed an amendment to the September 2002 filing. In April
2003, the BPU approved a $16.6 million increase to SJG's annual gas costs
recoveries.
In March 2003, the BPU approved a statewide Universal Service Fund (USF) program
on a permanent basis. In June 2003, the BPU established a statewide program
through which funds for the USF and Lifeline Credit and Tenants Assistance
(Lifeline) Programs would be collected from customers of all electric and gas
utilities in the state. The BPU ordered that utility rates be set to recover a
total statewide USF budget of $33.0 million, and a total Lifeline budget of
$72.0 million. Recovery rates for both programs were implemented on August 1,
2003.
In July 2003, SJG made its annual BGSS filing, as amended, with the BPU.
Due to further price increases in the wholesale market, SJG filed for a $24.0
million increase to its annual gas cost revenues. In August 2003, the BPU
approved SJG's price increase on a provisional basis, subject to refund with
interest, effective September 1, 2003.
In August 2003, SJG filed a base rate case with the BPU to increase its base
rate to obtain a certain level of return on its investment of capital. SJG
expects the rate case to be concluded during 2004. SJG has not sought a base
rate increase from the BPU since the implementation of its base rate case
approval in January 1997.
Filings and petitions described above are still pending unless otherwise
indicated.
10. PENSIONS & OTHER POSTRETIREMENT BENEFITS:
SJI has several defined benefit pension plans and other postretirement benefit
plans. The pension plans provide annuity payments to the majority of full-time,
regular employees upon retirement. Newly hired employees in certain
classifications and companies do not qualify for participation in the defined
benefit pension plan. The other postretirement benefit plans provide health care
and life insurance benefits to some retirees.
In 2002, we changed the actuarial valuation measurement date for our pension
plans from September 30 to December 31 to conform to the measurement date used
for our postretirement health care plans and to better reflect the actual
pension balances as of SJI's balance sheet dates. This change had no significant
effect on 2002 or prior years' pension expense.
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 $3.4 million
at December 31, 2003 is recoverable in rates. We are amortizing this amount
over 15 years which started January 1998.
On December 8, 2003, the President signed into law the Medicare Prescription
Drug, Improvement and Modernization Act (the "Act") of 2003. In accordance with
FASB Staff Position No. 106-1, "Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,"
issued in December 2003, management has elected to defer any financial impact
resulting from the Act pending the availability of more information. As such,
measures of the accumulated projected benefit obligation or net periodic
postretirement benefit cost in the financial statements or accompanying notes do
not reflect the effects of the Act on the plan. Furthermore, specific
authoritative guidance on the accounting for the federal subsidy is pending and
that guidance, when issued, could require changes to previously reported
information.
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
2003 2002 2001 2003 2002 2001
Service Cost $ 2,574 $ 2,237 $ 2,120 $ 1,551 $ 1,131 $ 1,063
Interest Cost 5,353 5,029 4,923 2,545 2,355 1,898
Expected Return on
Plan Assets (5,514) (4,567) (5,314) (1,078) (1,046) (895)
Amortization of
Transition Obligation 72 72 72 772 772 772
Amortization of Loss
(Gain) and Other 1,784 838 372 396 73 (3)
----------------------------------------------------------------------------
Net Periodic
Benefit Cost $ 4,269 $ 3,609 $ 2,173 $ 4,186 $ 3,285 $ 2,835
============================================================================
-30-
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
2003 2002 2003 2002
Change in Benefit Obligations:
Benefit Obligation at Beginning
of Year $ 81,106 $ 72,540 $ 30,973 $ 28,629
Service Cost 2,574 2,237 1,551 1,131
Interest Cost 5,353 5,029 2,545 2,355
Actuarial Loss (Gain) and Other 6,054 5,738 11,239 (103)
Benefits Paid (4,051) (4,438) (1,382) (1,039)
----------------------------------------
Benefit Obligation at End of Year $ 91,036 $ 81,106 $ 44,926 $ 30,973
========================================
Change in Plan Assets:
Fair Value of Plan Assets at
Beginning of Year $ 63,112 $ 50,358 $ 13,835 $ 13,465
Actual Return on Plan Assets 14,084 (3,508) 3,336 (1,529)
Employer Contributions 10,000 20,700 3,306 2,939
Benefits Paid (4,051) (4,438) (1,382) (1,040)
----------------------------------------
Fair Value of Plan Assets at
End of Year $ 83,145 $ 63,112 $ 19,095 $ 13,835
========================================
Funded Status: $ (7,890) $(17,994) $(25,831) $(17,138)
Unrecognized Prior Service Cost 2,823 3,165 (809) --
Unrecognized Net Obligation
Assets from Transition -- 72 6,946 7,718
Unrecognized Net Loss
and Other 24,757 28,955 11,731 2,337
----------------------------------------
Prepaid (Accrued) Net Benefit Cost at
End of Year $ 19,690 $ 14,198 $ (7,963) $ (7,083)
========================================
Amounts Recognized in the Statement
of Financial Position Consist of:
Prepaid Benefit Cost $ 19,690 $ -- $ -- $ --
Accrued Benefit Liability -- (4,693) (7,963) (7,083)
Intangible Asset -- 3,237 -- --
Accumulated Other
Comprehensive Income -- 15,654 -- --
----------------------------------------
Net Amount Recognized
at End of Year $ 19,690 $ 14,198 $ (7,963) $ (7,083)
========================================
The accumulated benefit obligation of SJI's pension plans at December 31, 2003
and 2002, was $76.6 million and $67.8 million, respectively.
At December 31, 2002, SJI recorded an additional minimum pension liability of
$18.9 million which is reflected in the consolidated balance sheet under the
caption Pension and Other Postretirement Benefits. This liability adjustment
resulted from decreases in the fair value of plan assets, which were due to the
declining stock market, and increases in the benefit obligation due to decreases
in the discount rates over the prior two years.
SJI also has unqualified pension plans provided to certain officers and outside
directors which are unfunded. The aggregate accrued net benefit obligation of
such plans as of December 31, 2003 and 2002 was $4.3 million and $3.9 million,
respectively.
Additional disclosure relating to the minimum pension liability adjustments at
December 31 were:
Thousands of Dollars
Pension Benefits Other Benefits
2003 2002 2003 2002
The (Decrease) Increase in Minimum
Liability Included in Other
Comprehensive Income $(9,259) $7,271 N/A N/A
The weighted-average assumptions used to determine benefit obligations at
December 31 were:
Pension Benefits Other Benefits
2003 2002 2003 2002
Discount Rate 6.25% 6.75% 6.25% 6.75%
Rate of Compensation Increase 3.60% 3.60% -- --
The weighted-average assumptions used to determine net periodic benefit cost for
years ended December 31 were:
Pension Benefits Other Benefits
2003 2002 2003 2002
Discount Rate 6.75% 7.25% 6.75% 7.25%
Expected Long-Term Return
on Plan Assets 9.00% 9.00% 7.50% 7.50%
Rate of Compensation Increase 3.60% 4.10% -- --
The expected long-term return on plan assets was based on return projections
prepared by our investment manager using SJI's current investment mix as
described under Plan Assets below.
The assumed health care cost trend rates at December 31 were:
2003 2002
Post-65 Medical Care Cost Trend Rate Assumed for Next Year 7.0% 7.5%
Pre-65 Medical Care Cost Trend Rate Assumed for Next Year 11.5% 12.0%
Dental Care Cost Trend Rate Assumed for Next Year 7.0% 7.5%
Rate to which Cost Trend Rates are Assumed to Decline
(the Ultimate Trend Rate) 5.0% 5.0%
Year that the Rate Reaches the Ultimate Trend Rate 2016 2016
Assumed health care cost trend rates have a significant effect on the amounts
reported for SJI's postretirement health care plans. A one-percentage-point
change in assumed health care cost trend rates in 2003 would have the following
effects:
Thousands of Dollars
1-Percentage- 1-Percentage-
Point Increase Point Decrease
------------------------------
Effect on the Total of Service and Interest Cost $ 637 $ (523)
Effect on Postretirement Benefit Obligation 6,319 (5,226)
-31-
Plan Assets -- SJI's weighted-average asset allocations at December 31, 2003,
and 2002, by asset category are as follows:
Pension Benefits Other Benefits
2003 2002 2003 2002
Asset Category
U.S. Equity Securities 47% 24% 47% 11%
International Equity Securities 13 12 13 11
Fixed Income 40 64 40 78
----------------------------------------------
Total 100% 100% 100% 100%
==============================================
Based on the investment objectives and risk tolerances stated in SJI's current
pension and other postretirement benefit plans' investment policy and guidelines
(the "Policy"), the long-term asset mix target considered appropriate for SJI is
60% equity and 40% fixed-income investments. Historical performance results and
future expectations suggest that equities will provide higher total investment
returns than fixed-income securities over a long-term investment horizon.
The Policy recognizes that risk and volatility are present to some degree with
all types of investments. However, high levels of risk are to be avoided at the
total fund level. This is to be accomplished through diversification by asset
class, style of manager, and sector and industry limits. Specifically prohibited
investments include, but are not limited to, securities of companies with less
than $250 million capitalization (except in the small-cap portion of the fund
where capitalization levels as low as $50 million are permissible), venture
capital, margin trading and commodities.
Contributions -- SJI expects to make no contributions to its pension plan and
contribute approximately $3 million to its other postretirement benefit plan in
2004.
11. 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. As of
December 31, 2003, SJG's restrictions do not affect the amount that may be
distributed from SJI's retained earnings.
12. UNUSED LINES OF CREDIT AND COMPENSATING BALANCES:
Bank credit available to SJI totaled $226.0 million at December 31, 2003, of
which $124.7 million was used. Those bank facilities consist of a $100.0
million, 3-year revolving credit and $76.0 million of uncommitted bank lines
available to SJG as well as a $40.0 million, 364-day revolving credit and $10.0
million of uncommitted bank lines available to SJI. Borrowings under these lines
of credit are at market rates. The weighted borrowing cost, which changes daily,
was 1.87% and 2.28% at December 31, 2003 and 2002, respectively. We maintain
demand deposits with lending banks on an informal basis and they do not
constitute compensating balances.
13. COMMITMENTS AND CONTINGENCIES:
Construction and Environmental -- SJI's estimated net cost of construction and
environmental remediation programs for 2004 totals $68.1 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 2004. 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 $4.2 million per month,
recovered on a current basis through the BGSS.
Pending Litigation -- SJI is subject to claims arising in the ordinary course of
business and other legal proceedings. We accrue liabilities related to these
claims when we can determine the amount or range of amounts of likely settlement
costs for those claims. Among other actions, SJI was named in certain product
liability claims related to our former sand mining subsidiary. Management does
not currently anticipate the disposition of any known claims to have a material
adverse effect on SJI's financial position, results of operations or liquidity.
Parental Guarantees -- In 2002, the FASB released Interpretation No. 45 (FIN 45)
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires companies to
disclose the nature of its guarantees or indemnification agreements for interim
and year-end financial statements ending after December 15, 2002. As of December
31, 2003, SJI had issued $147.6 million of parental guarantees on behalf of its
subsidiaries. Of this total, $107.0 million expire within one year, $10.0
million expire in 2005 and $30.6 million have no expiration date. The vast
majority of these guarantees were issued as a guarantee of payment to third
parties with whom our subsidiaries have commodity supply contracts. As of
December 31, 2003, these guarantees support $36.7 million of the Accounts
Payable recorded on our consolidated balance sheet. As part of our risk
management policy, we also require parental guarantees from trading
counterparties as applicable. These arrangements are typical in our industry.
SJI has also issued two parental guarantees totaling $6.6 million related to
Marina's construction activity.
Standby Letters of Credit -- SJI provided a $17.0 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 Borgata Hotel Casino & Spa. The plant began
commercial operations in July 2003. Accordingly, as called for in the contract,
this letter of credit was reduced to $2.5 million as of December 31, 2003 and
will remain in place until July 2004.
-32-
As of December 31, 2003, SJI also provided $46.0 million of standby letters of
credit from four commercial banks supporting the variable rate demand bonds
issued through the New Jersey Economic Development Authority used to finance
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, 2003.
Also, as of December 31, 2003, SJI has issued five letters of credit totaling
$11.9 million to two different utilities. These letters were posted to enable
SJE to market retail electricity within the respective utilities' service
territories.
Environmental Remediation Costs -- SJI incurred and recorded costs for
environmental cleanup of sites where SJG or its predecessors operated gas
manufacturing plants. SJG stopped manufacturing gas in the 1950s. SJI and some
of its nonutility subsidiaries also recorded costs for environmental cleanup of
sites where SJF previously operated a fuel oil business and Morie maintained
equipment, fueling stations and storage.
SJI 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 minimum future cost estimate discussed below is not
reduced by projected insurance recoveries from the Cleanup Cost Cap Insurance
Policy.
Since the early 1980s, SJI accrued environmental remediation costs of $144.2
million, of which $89.3 million has been spent as of December 31, 2003. With the
assistance of a consulting firm, we estimate that future costs to clean up SJG's
sites will range from $51.0 million to $162.3 million. We recorded the lower end
of this range as a liability. It is reflected on the 2003 consolidated balance
sheets 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
cleanup 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 Statement
No. 71. The BPU allows SJG to recover expenditures through the RAC (See Note 9).
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, 2003, we reflected SJG's unamortized remediation costs of
$4.1 million on the consolidated balance sheets under the caption Other
Regulatory Assets. Since implementing the RAC in 1992, SJG has recovered
$39.8 million through rates (See Note 9).
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 $13,800 and $77,200, 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 2003 consolidated balance sheet under Current Liabilities
and Deferred Credits and Other Non-Current Liabilities as of December 31, 2003.
14. SUBSEQUENT EVENT:
On January 5, 2004, Marina entered into multiple agreements with Mannington
Mills, Inc. related to Mannington's cogeneration facility located in Salem
County, NJ. On that date, Marina entered into a sale agreement to purchase the
cogeneration facility for $2.7 million. Also, on that date, Marina entered into
a license agreement with Mannington to permit the use of the facility and its
output for eight years. Finally, on that date Marina entered into an operating
and maintenance agreement to operate and manage the facility for eight years.
-33-
Quarterly Financial Data (Unaudited)
(Summarized quarterly results of SJI's operations, in thousands except for per
share amounts:)
2003 Quarter Ended 2002 Quarter Ended
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
Operating Revenues $ 279,825 $ 106,215 $ 90,135 $ 220,645 $ 177,031 $ 84,200 $ 69,066 $ 174,829
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
Expenses:
Operation and Maintenance
Including Fixed
Charges 235,566 101,017 91,842 199,138 139,512 81,911 73,138 151,418
Income Taxes 16,379 1,293 (1,327) 7,251 14,049 334 (2,063) 8,084
Energy and Other Taxes 5,114 2,207 1,414 3,295 3,842 2,120 1,446 3,398
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
Total Expenses 257,059 104,517 91,929 209,684 157,403 84,365 72,521 162,900
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
Other Income and Expense 71 258 176 417 90 886 233 266
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
Income (Loss) from
Continuing Operations 22,837 1,956 (1,618) 11,378 19,718 721 (3,222) 12,195
Discontinued Operations--Net (149) (154) (426) (45) (32) (118) (18) (256)
Cumulative Effect of a Change
n Accounting Principle-- Net (426) -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
Net Income (Loss) Applicable
to Common Stock $ 22,262 $ 1,802 $ (2,044) $ 11,333 $ 19,686 $ 603 $ (3,240) $ 11,939
=========== =========== =========== =========== =========== =========== =========== ==========
Diluted Earnings Per Common Share*
(Based on Average Diluted
Shares Outstanding):
Continuing Operations $ 1.85 $ 0.16 $ (0.13) $ 0.87 $ 1.65 $ 0.06 $ (0.27) $ 0.99
Discontinued
Operations-- Net (0.01) (0.01) (0.03) (0.01) 0.00 (0.01) 0.00 (0.02)
Cumulative Effect of
a Change in Accounting
Principle--Net (0.03) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
Diluted Earnings
Per Common Share $ 1.81 $ 0.15 $ (0.16) $ 0.86 $ 1.65 $ 0.05 $ (0.27) $ 0.97
=========== =========== =========== =========== =========== =========== =========== ==========
Average Shares
Outstanding-- Diluted 12,327 12,489 12,604 13,109 11,949 12,073 12,084 12,261
<FN>
*The sum of the quarters for 2003 and 2002 do 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
2003 High Low Per Share 2002 High Low Per Share
March 31 $ 3.75 $ 30.55 $ 0.385 March 31 $ 32.79 $ 29.95 $ 0.375
June 30 $ 39.00 $ 31.54 $ 0.385 June 30 $ 36.65 $ 31.70 $ 0.375
September 30 $ 39.25 $ 36.60 $ 0.385 September 30 $ 36.05 $ 28.20 $ 0.375
December 31 $ 40.70 $ 37.77 $ 0.405 December 31 $ 33.65 $ 31.40 $ 0.385
<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, 2003, the latest available date, our records
indicate that there were 8,309 shareholders.
</FN>
-34-
South Jersey Gas Company Comparative Operating Statistics
2003 2002 2001 2000 1999
Operating Revenues (Thousands):
Firm
Residential $ 193,725 $ 174,252 $ 201,531 $ 172,418 $ 152,946
Commercial 58,749 52,300 76,416 49,669 35,064
Industrial 5,635 4,512 4,250 5,265 4,879
Cogeneration & Electric Generation 6,513 9,363 7,405 11,016 8,496
Firm Transportation 74,080 49,436 29,565 38,213 33,125
---------- ---------- ---------- ---------- ----------
Total Firm Revenues 338,702 289,863 319,167 276,581 234,510
Interruptible 1,682 1,142 1,485 1,695 1,645
Interruptible Transportation 1,121 1,567 1,268 1,531 1,724
Off-System 176,555 115,714 145,530 160,208 104,142
Capacity Release & Storage 6,686 5,365 5,596 4,411 4,193
Other 3,319 3,611 2,415 1,392 1,860
Intercompany Sales (40,387) (31,142) (30,257) (14,662) (5,211)
---------- ---------- ---------- ---------- ----------
Total Operating Revenues $ 487,678 $ 386,120 $ 445,204 $ 431,156 $ 342,863
========== ========== ========== ========== ==========
Throughput (MMcf):
Firm
Residential 15,843 15,519 17,390 19,124 17,741
Commercial 5,351 5,273 7,544 6,191 4,634
Industrial 212 202 248 282 246
Cogeneration & Electric Generation 777 1,986 1,519 2,046 2,316
Firm Transportation 32,214 26,470 22,085 26,114 25,143
---------- ---------- ---------- ---------- ----------
Total Firm Throughput 54,397 49,450 48,786 53,757 50,080
---------- ---------- ---------- ---------- ----------
Interruptible 220 198 207 207 383
Interruptible Transportation 2,247 3,189 2,638 3,022 3,628
Off-System 27,041 29,980 30,117 38,097 42,480
Capacity Release & Storage 41,119 38,048 27,187 37,445 29,247
---------- ---------- ---------- ---------- ----------
Total Throughput 125,024 120,865 108,935 132,528 125,818
========== ========== ========== ========== ==========
Number of Customers at Year End:
Residential 283,722 275,979 268,046 261,621 254,601
Commercial 20,405 19,966 19,542 19,319 18,894
Industrial 435 429 420 410 404
---------- ---------- ---------- ---------- ----------
Total Customers 304,562 296,374 288,008 281,350 273,899
========== ========== ========== ========== ==========
Maximum Daily Sendout (MMcf) 422 344 326 375 324
========== ========== ========== ========== ==========
Annual Degree Days 4,929 4,380 4,495 4,942 4,468
========== ========== ========== ========== ==========
Normal Degree Days* 4,613 4,625 4,625 4,639 4,664
========== ========== ========== ========== ==========
<FN>
*Average degree days recorded in SJG's service territory during 20-year period
ended June 30 of prior year.
</FN>
-35-
As of February 18, 2004
South Jersey Industries
Board of Directors
Shirli M. Billings, Ph.D.
Director since 1983, Age 63 2, 4, 5*, 6
President, Billings-Vioni Management Associates, New Albany, OH
Charles Biscieglia
Director since 1998, Age 59 3, 4*, 5, 6
Chairman, South Jersey Industries
Helen R. Bosley, CFA
Director since February 1, 2004, Age 56 1,2
President, Corporate Financial Management, Inc., Yardley, PA
Thomas A. Bracken
Director since February 1, 2004, Age 56 1,2
President and CEO, Sun Bancorp. Inc., Vineland, N.J.
Keith S. Campbell
Director since 2000, Age 49 3, 5, 6
Chairman, Mannington Mills, Salem, N.J.
W. Cary Edwards
Director from April 1990 to January 1993 and September 1993 to present,
Age 59 2*, 3, 4, 6
Managing Partner, law firm of Edwards & Caldwell, Hawthorne, N.J.
Edward J. Graham
Director since February 1, 2004, Age 46 3, 4, 6
President and CEO, South Jersey Industries and South Jersey Gas
Sheila Hartnett-Devlin, CFA
Director since 1999, Age 45 1, 2, 5
Former Executive Vice President, Fiduciary Trust Company International,
New York, N.Y.
William J. Hughes
Director since 2001, Age 71 1, 5
Of Counsel, law firm of Riker, Danzig, Scherer, Hyland & Perretti,
Trenton, N.J.; Former Ambassador to Panama and former member of the United
States House of Representatives
Herman D. James, Ph.D.
Director since 1990, Age 60 1*, 2, 4, 6
Distinguished Professor, Rowan University, Glassboro, N.J.
Clarence D. McCormick
Director since 1979, Age 74 2, 4, 5
Retired Chairman and CEO, The Farmers and Merchants National Bank,
Bridgeton, N.J.; and Retired Chairman and President, Southern Jersey Bancorp of
Delaware, Bridgeton, N.J.
Frederick R. Raring
Director since 1995, Age 66 1, 3*, 5
President, Seashore Supply Company, Ocean City, N. J.
1 Audit Committee
2 Compensation/Pension Committee
3 Environmental Committee
4 Executive Committee
5 Nominating Committee
6 Management Development Committee
* Committee Chair
+ Ex Officio
-36-
As of February 18, 2004
South Jersey Industries
Officers
Charles Biscieglia
Chairman and CEO (retired as CEO January 31, 2004)
Edward J. Graham
President and CEO
Jeffrey E. DuBois
Vice President
Richard J. Jackson
Vice President
David A. Kindlick
Vice President and CFO
Michael J. Renna
Vice President
Albert V. Ruggiero
Vice President
Richard H. Walker, Jr., Esq.
Vice President, Corporate Counsel and Corporate Secretary
Stephen H. Clark
Treasurer
Jane F. Kelly, Esq.
Assistant Vice President, Assistant Corporate Counsel and
Assistant Corporate 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 either newly issued or
treasury common stock that the Plan acquires directly from SJI currently at a
2 percent discount. The price will be 98 percent of the average of the high and
low sale prices for SJI's common stock for each of the last 12 days the common
stock was traded prior to the purchase date. 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.
-37-
1 South Jersey Plaza
Folsom, NJ 08037-9917
www.sjindustries.com
609-561-9000
-Back Cover-