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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File Number 1-6364
SOUTH JERSEY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-1901645
(State of incorporation) (IRS employer identification no.)
1 South Jersey Plaza, Folsom, NJ 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of May 4, 2004, there were 13,731,784 shares of the registrant's common stock
outstanding.
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Cover Page
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements-- See Pages 3 through 21
SJI-2
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
Three Months Ended
March 31,
-----------------------------
2004 2003
------------- -------------
Operating Revenues:
Utility $ 195,278 $ 216,139
Nonutility 110,196 63,686
------------- -------------
Total Operating Revenues 305,474 279,825
------------- -------------
Operating Expenses:
Cost of Gas Sold - Utility 131,391 155,068
Cost of Sales - Nonutility 100,989 56,216
Operations 14,824 12,241
Maintenance 1,345 1,458
Depreciation 6,600 5,834
Energy and Other Taxes 4,872 5,114
------------- -------------
Total Operating Expenses 260,021 235,931
------------- -------------
Operating Income 45,453 43,894
Other Income and Expense:
Equity in Affiliated Companies 156 187
Other 721 (116)
------------- -------------
Total Other Income and Expense 877 71
------------- -------------
Interest Charges 4,961 4,749
------------- -------------
Income Before Income Taxes 41,369 39,216
Income Taxes 16,910 16,379
------------- -------------
Income from Continuing Operations 24,459 22,837
Discontinued Operations - Net (140) (149)
Cumulative Effect of a Change in Accounting Principle - Net - (426)
------------- -------------
Net Income Applicable to Common Stock $ 24,319 $ 22,262
============= =============
Basic Earnings Per Common Share:
Continuing Operations $ 1.83 $ 1.86
Discontinued Operations - Net (0.01) (0.01)
Cumulative Effect of a Change in Accounting Principle - Net - (0.03)
------------- -------------
Basic Earnings Per Common Share $ 1.82 $ 1.82
============= =============
Average Shares of Common Stock Outstanding - Basic 13,392 12,245
Diluted Earnings Per Common Share:
Continuing Operations $ 1.82 $ 1.85
Discontinued Operations - Net (0.01) (0.01)
Cumulative Effect of a Change in Accounting Principle - Net - (0.03)
------------- -------------
Diluted Earnings Per Common Share $ 1.81 $ 1.81
============= =============
Average Shares of Common Stock Outstanding - Diluted 13,461 12,327
Dividends Declared per Common Share $ 0.405 $ 0.385
============= =============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-3
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
Three Months Ended
March 31,
-------------------------------
2004 2003
-------------- --------------
Net Income Applicable to Common Stock $ 24,319 $ 22,262
-------------- --------------
Other Comprehensive (Loss) Income, Net of Tax:*
Change in Fair Value of Investments (275) (40)
Change in Fair Value of Derivatives - Other (253) 104
Change in Fair Value of Derivatives - Energy Related 90 (1,828)
-------------- --------------
Other Comprehensive Loss - Net of Tax* (438) (1,764)
-------------- --------------
Comprehensive Income $ 23,881 $ 20,498
============== ==============
<FN>
* Determined using a combined statutory tax rate of 40.85%
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-4
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Three Months Ended
March 31,
----------------------------------
2004 2003
--------------- ---------------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 24,319 $ 22,262
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 7,220 6,427
Unrealized Gain on Derivatives - Energy Related (1,958) (1,493)
Provision for Losses on Accounts Receivable 335 489
Revenues and Fuel Costs Deferred - Net 10,916 13,630
Deferred and Non-Current Income Taxes and Credits - Net 4,511 874
Environmental Remediation Costs - Net (219) 2,800
Changes in:
Accounts Receivable (39,480) (53,066)
Inventories 48,899 31,511
Other Prepayments and Current Assets 1,805 (1,961)
Prepaid and Accrued Taxes - Net 18,063 25,104
Accounts Payable and Other Accrued Liabilities 22,807 57,383
Other - Net (7,187) (97)
--------------- ---------------
Net Cash Provided by Operating Activities 90,031 103,863
--------------- ---------------
Cash Flows from Investing Activities:
Return of Investment in (Investment in) Affiliate 44 (188)
Affiliate Repayment of Loan 370 390
Proceeds from Sale of Restricted Investments 4,022 1,120
Capital Expenditures, Cost of Removal and Salvage (12,274) (15,547)
--------------- ---------------
Net Cash Used in Investing Activities (7,838) (14,225)
--------------- ---------------
Cash Flows from Financing Activities:
Net Repayments of Lines of Credit (68,700) (80,900)
Proceeds from Issuance of Long-Term Debt - 6,000
Principal Repayments of Long-Term Debt (4,500) (6,000)
Dividends on Common Stock (5,488) -
Proceeds from Sale of Common Stock 12,970 2,448
Payments for Issuance of Long-Term Debt (43) (53)
--------------- ---------------
Net Cash Used in Financing Activities (65,761) (78,505)
--------------- ---------------
Net Increase in Cash and Cash Equivalents 16,432 11,133
Cash and Cash Equivalents at Beginning of Period 4,364 4,291
--------------- ---------------
Cash and Cash Equivalents at End of Period $ 20,796 $ 15,424
=============== ===============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-5
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
March 31, December 31,
---------------------------------- ---------------
2004 2003 2003
--------------- ---------------- ---------------
Property, Plant and Equipment:
Utility Plant, at original cost $ 904,761 $ 857,218 $ 894,654
Accumulated Depreciation (214,044) ( 198,893) (209,831)
Nonutility Property and Equipment, at cost 66,775 61,659 65,768
Accumulated Depreciation (2,750) (1,485) (2,326)
--------------- ---------------- ---------------
Property, Plant and Equipment - Net 754,742 718,499 748,265
--------------- ---------------- ---------------
Investments:
Available-for-Sale Securities 4,686 3,386 4,550
Restricted - 960 4,022
Investment in Affiliates 2,147 3,119 2,191
--------------- ---------------- ---------------
Total Investments 6,833 7,465 10,763
--------------- ---------------- ---------------
Current Assets:
Cash and Cash Equivalents 20,796 15,424 4,364
Accounts Receivable 149,407 158,344 98,221
Unbilled Revenues 30,594 22,097 42,892
Provision for Uncollectibles (3,308) (3,392) (3,565)
Natural Gas in Storage, average cost 20,336 10,458 69,596
Materials and Supplies, average cost 3,973 3,677 3,612
Prepaid Taxes - - 2,661
Prepaid Pension 18,868 - 19,690
Derivatives - Energy Related Assets 19,642 21,423 23,472
Derivatives - Other 369 110 565
Other Prepayments and Current Assets 3,285 4,800 4,268
--------------- ---------------- ---------------
Total Current Assets 263,962 232,941 265,776
--------------- ---------------- ---------------
Regulatory and Other Non-Current Assets:
Other Regulatory Assets 72,288 88,872 75,780
Derivatives - Energy Related Assets 2,368 1,928 4,212
Derivatives - Other - 12 -
Unamortized Debt Discount and Expense 7,180 6,460 7,298
Other 17,330 10,646 14,109
--------------- ---------------- ---------------
Total Regulatory and Other Non-Current Assets 99,166 107,918 101,399
--------------- ---------------- ---------------
Total Assets $ 1,124,703 $ 1,066,823 $ 1,126,203
=============== ================ ===============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-6
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
March 31, December 31,
---------------------------------- ---------------
2004 2003 2003
--------------- ---------------- ---------------
Capitalization and Liabilities
Common Equity:
Common Stock $ 16,937 $ 15,358 $ 16,536
Premium on Common Stock 198,903 152,800 186,316
Accumulated Other Comprehensive Income (Loss) 3,033 (7,666) 3,471
Retained Earnings 110,469 95,534 91,638
--------------- ---------------- ---------------
Total Common Equity 329,342 256,026 297,961
--------------- ---------------- ---------------
Preferred Stock of Subsidiary 1,690 1,690 1,690
--------------- ---------------- ---------------
Long-Term Debt 304,281 274,099 308,781
--------------- ---------------- ---------------
Total Capitalization 635,313 531,815 608,432
--------------- ---------------- ---------------
Current Liabilities:
Notes Payable 44,100 85,600 112,800
Current Maturities of Long-Term Debt 5,273 10,696 5,273
Accounts Payable 93,032 128,263 80,254
Customer Deposits 8,371 7,284 7,957
Environmental Remediation Costs 7,862 5,090 7,865
Taxes Accrued 27,342 23,556 11,940
Derivatives - Energy Related Liabilities 6,675 10,567 18,809
Derivatives - Other 594 72 1,505
Deferred Income Taxes - Net 11,569 21,194 11,537
Interest Accrued and Other Current Liabilities 20,126 14,465 10,511
--------------- ---------------- ---------------
Total Current Liabilities 224,944 306,787 268,451
--------------- ---------------- ---------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 125,964 100,689 121,922
Investment Tax Credits 3,386 3,732 3,471
Pension and Other Postretirement Benefits 12,542 17,008 12,431
Environmental Remediation Costs 47,000 47,051 47,001
Derivatives - Energy Related Liabilities 1,162 1,937 1,875
Derivatives - Other 2,237 2,396 1,853
Regulatory Liabilities 62,528 46,080 49,970
Other 9,627 9,328 10,797
--------------- ---------------- ---------------
Total Deferred Credits
and Other Non-Current Liabilities 264,446 228,221 249,320
--------------- ---------------- ---------------
Commitments and Contingencies (Note 9)
Total Capitalization and Liabilities $ 1,124,703 $ 1,066,823 $ 1,126,203
=============== ================ ===============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-7
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies:
Consolidation - The condensed consolidated financial statements include
the accounts of South Jersey Industries, Inc. (SJI) and its subsidiaries. We
eliminated all significant intercompany accounts and transactions. SJI
reclassified some previously reported amounts to conform with current year
classifications. In our opinion, the condensed consolidated financial statements
reflect all adjustments needed to fairly present SJI's financial position and
operating results at the dates and for the periods presented. Our businesses are
subject to seasonal fluctuations and, accordingly, this interim financial
information should not be the basis for estimating the full year's operating
results. These financial statements should be read in conjunction with SJI's
2003 Form 10K and annual report.
Equity Investments - We classify equity investments purchased as
long-term investments as Available-for-Sale Securities on our condensed
consolidated balance sheets and carry them at their estimated 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 condensed
consolidated income under the caption, Equity in Affiliated Companies.
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. 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.
Capitalized Interest - SJG capitalizes interest on construction at its
BPU-approved rate of return on rate base. SJG's capitalized interest totaled
$0.2 million in each of the three months ended March 31, 2004 and 2003. 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 $1.2 million for the three months ended March 31,
2003. SJG's amounts are included in Utility Plant and Marina's amounts are
included in Nonutility Property and Equipment on the condensed consolidated
balance sheets. All capitalized interest is reflected on the condensed
consolidated statements of income as a reduction of Interest Charges.
SJI-8
Energy Trading Activities and Derivative Instruments - South Jersey
Resources Group, LLC (SJRG) manages its portfolio purchases and sales, as well
as natural gas in storage, using a variety of instruments that include forward
contracts, swap agreements, option contracts and futures contracts. SJRG's
contracts are accounted for at fair value under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended.
Under this method of accounting, SJRG measures the fair value of the contracts
and records these as Derivatives - Energy Related Assets or Derivatives - Energy
Related Liabilities on our condensed consolidated balance sheets. For the three
months ended March 31, 2004 and 2003, we recorded the net unrealized pre-tax
gain of $2.0 million and $1.5 million, respectively. These unrealized gains on
energy-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).
On October 25, 2002, the Emerging Issues Task Force (EITF) rescinded
its consensus in Issue No. 98-10, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities," 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. We include these balances on
the condensed consolidated balance sheet under the caption Derivatives - Other.
At inception, and as of March 31, 2004, 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. As of March 31, 2004
and 2003, the market value of these swaps was $(2.2) million and $(2.4) million,
SJI-9
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 condensed consolidated balance sheets under the caption Derivatives - Other.
As of March 31, 2004 and 2003, 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 March 31, 2004
and 2003, SJG had accrued amounts in excess of actual removal costs incurred
totaling $46.3 million and $42.5 million, respectively, which, in accordance
with Statement No. 143, are recorded as Regulatory Liabilities on the condensed
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 adopted FIN 46 and accordingly
SJI-10
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 our condensed 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. SJI is not a party to any variable
interest entities covered by FIN 46.
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.
In December 2003, the FASB revised Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This revised
statement requires certain interim period disclosures about pension and other
postretirement benefit plans.
Other Regulatory Assets & Regulatory Liabilities - Other Regulatory
Assets consisted of the following items (in thousands):
Years Remaining
As of March 31, December 31
March 31, 2004 2004 2003 2003
-----------------------------------------------------------
Environmental Remediation Costs:
Expended - Net Various $ 4,362 $ 3,656 $ 4,147
Liability for Future Expenditures - 50,983 48,211 50,983
Income Taxes - Flowthrough
Depreciation 8 7,375 8,352 7,619
Deferred Fuel Costs - Net Various - 16,414 -
Postretirement Benefit Costs 9 3,307 3,685 3,402
Gross Receipts and Franchise
Taxes 3 1,256 1,700 1,367
Societal Benefit Charges Various 4,212 6,331 7,529
Other - 793 523 733
------------------------------------------
Total Other Regulatory Assets $ 72,288 $ 88,872 $ 75,780
==========================================
Each item separately identified above is being recovered through
utility rate charges without a return on investment over the period indicated.
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.
SJI-11
Regulatory Liabilities consisted of the following items (in thousands):
March 31, December 31,
2004 2003 2003
------------------------------------------
Deferred Revenues - Net $ 10,916 $ - $ -
Excess Plant Removal Costs 46,296 42,453 45,241
Overcollected State Taxes 5,030 3,341 4,353
Other 286 286 376
------------------------------------------
Total Regulatory Liabilities $ 62,528 $ 46,080 $ 49,970
==========================================
Deferred Revenues - Net reflects the overrecovery of gas costs from
ratepayers under SJG's gas cost clauses (See Note 6 - Regulatory Actions).
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 Cash Flows - For purposes of reporting cash flows, highly
liquid investments with original maturities of three months or less are
considered cash equivalents.
Note 2. Divestitures and Affilications:
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.
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.
Summarized operating results of the discontinued operations for the
three months ended March 31 were (in thousands):
2004 2003
-------------------------------
Loss before Income Taxes:
Sand Mining $ (213) $ (210)
Construction - (8)
Fuel Oil (3) (11)
Income Tax Credits 76 80
-------------------------------
Loss from Discontinued Operations - Net $ (140) $ (149)
===============================
Earnings Per Common Share from
Discontinued Operations - Net $ (0.01) $ (0.01)
===============================
Losses from sand mining are mainly comprised of environmental
remediation and product liability litigation associated with Morie's prior
activities.
SJI-12
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.
Note 3. Common Stock:
SJI has 20,000,000 shares of authorized Common Stock. The following
shares were issued and outstanding:
2004 2003
----------------------------
Beginning Balance, January 1 13,229,001 12,206,474
New Issues During Year:
Dividend Reinvestment Plan 288,792 48,417
Rights and Restricted Stock
Award Plan 32,056 32,005
----------------------------
Ending Balance, March 31 13,549,849 12,286,896
============================
We credited the par value ($1.25 per share) of stock issued in 2004
and 2003 to Common Stock. We credited the net excess over par value of
approximately $12.6 million and $2.4 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 68,938 and 82,100 shares for the three months ended March 31, 2004 and
2003, respectively. These shares relate to 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 March 31, 2004 and
2003, SJI had no options outstanding. No options were granted in 2004 or 2003.
No stock appreciation rights were issued under the Plan. In the first quarter of
2004 and 2003, we granted 21,899 and 30,810 restricted shares, respectively.
These restricted shares vest over a 3-year period and are subject to SJI
achieving certain performance targets.
SJI-13
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 March 31, 2004, SJI reserved 1,390,184 shares of authorized, but
unissued, common stock for future issuance to the DRP. As of October 1, 2003,
the ESOP was terminated.
Note 4. 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 March 31,
2004 and 2003, these residual proceeds totaled $-0- and $1.0 million,
respectively.
SJRG maintains a margin account with a national investment firm to
support its energy trading activities. As of March 31, 2004, the balance of this
account was $5.0 million due to changes in the market value of outstanding
contracts.
Note 5. Segments of Business:
Information about SJI's operations in different industry segments for
the three months ended March 31 is presented below (in thousands):
2004 2003
-------------------------------
Operating Revenues:
Gas Utility Operations $ 200,123 $ 239,936
Wholesale Gas Operations 5,711 4,366
Retail Gas and Other Operations 83,518 57,968
Retail Electric Operations 17,081 763
On-Site Energy Production 6,112 1,019
-------------------------------
Subtotal 312,545 304,052
Intersegment Sales (7,071) (24,227)
-------------------------------
Total Operating Revenues $ 305,474 $ 279,825
===============================
Operating Income:
Gas Utility Operations $ 39,142 $ 38,307
Wholesale Gas Operations 89 1,903
Retail Gas and Other Operations 4,142 3,741
Retail Electric Operations 614 (21)
On-Site Energy Production 1,594 209
General Corporate (128) (245)
-------------------------------
Total Operating Income $ 45,453 $ 43,894
===============================
SJI-14
Depreciation and Amortization:
Gas Utility Operations $ 5,728 $ 6,371
Wholesale Gas Operations 4 3
Retail Gas and Other Operations 32 23
Retail Electric Operations - -
On-Site Energy Production 401 23
Discontinued Operations - 7
-------------------------------
Total Depreciation and
Amortization $ 6,165 $ 6,427
===============================
Property Additions:
Gas Utility Operations $ 11,065 $ 11,704
Wholesale Gas Operations 15 -
Retail Gas and Other Operations 40 47
Retail Electric Operations - -
On-Site Energy Production 981 3,675
-------------------------------
Total Property Additions $ 12,101 $ 15,426
===============================
Identifiable Assets:
Gas Utility Operations $ 933,127 $ 914,262
Wholesale Gas Operations 66,626 76,269
Retail Gas and Other Operations 60,678 48,054
Retail Electric Operations 10,573 672
On-Site Energy Production 75,908 64,269
Discontinued Operations 2,350 2,317
-------------------------------
Subtotal 1,149,262 1,105,843
Corporate Assets 41,233 41,164
Intersegment Assets (65,792) (80,184)
-------------------------------
Total Identifiable Assets $ 1,124,703 $ 1,066,823
===============================
Gas Utility Operations consist primarily of natural gas distribution to
residential, commercial and industrial customers. Wholesale Gas Operations
consist of SJRG's activities. Retail Gas and Other Operations include natural
gas acquisition and transportation service companies. Given the recent growth of
SJE's retail electric operations, which include SJE's electricity acquisition
and transportation to retail commercial and industrial customers, management now
considers this a separate reporting segment. 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.
Note 6. 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 that 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, SJG's 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
SJI-15
through the Basic Gas Supply Service (BGSS) clause. Thereafter, SJG keeps 20% of
the pre-tax margins as it has 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 March 31, 2004, 106,620 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
certain 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. As of March 31, 2004, the remaining
deferred TAC deficiency totaled $1.1 million.
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 March 31, 2004, the remaining deferred
underrecovered balance totaled $5.6 million.
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 our Remediation
Adjustment Clause; energy efficiency and renewable energy program costs that are
SJI-16
recovered through our 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 increased the 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. On April 1, 2004, SJG made its annual USF filing,
along with the state's other electric and gas utilities, proposing a statewide
USF budget of $105.5 million. Approximately $20.0 million of this amount is due
to the estimated statewide underrecovery for the current year program costs.
Another $9.0 million of the total was estimated in order to provide for the
March 4, 2004 Board-Ordered Arrearage Payment Program, which is being
implemented to provide customers with the opportunity to eliminate their
arrearage balances.
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 rates to obtain a certain level of return on its invested 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.
In February 2004, SJG filed notice with the BPU to reduce its gas cost
revenues by approximately $5.0 million, via a rate reduction, in addition to
providing for an approximate $21.8 million bill credit to customers. Both the
rate reduction and bill credit were approved and implemented in March 2004.
Filings and petitions described above are still pending unless
otherwise indicated.
SJI-17
Note 7. 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.
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 for the three months ended March 31, 2004 and
2003 related to the pension and other postretirement benefit insurance plans
consisted of the following components (in thousands):
Pension Benefits Other Benefits
2004 2003 2004 2003
--------------------------------------------
Service Cost $ 735 $ 632 $ 377 $ 319
Interest Cost 1,425 1,314 629 523
Expected Return on Plan Assets (1,774) (1,354) (350) (221)
Amortization of
Transition Obligation - 18 193 193
Amortization of Loss and Other 444 438 44 46
--------------------------------------------
Net Periodic Benefit Cost $ 830 $ 1,048 $ 893 $ 860
============================================
Contributions - SJI expects to make no contributions to its pension
plan and contribute approximately $3.6 million in equal quarterly installments
to its other postretirement benefit plans in 2004.
Note 8. Retained Earnings:
Restrictions exist under various loan agreements regarding the amount
of cash dividends or other distributions that SJG may pay on its common stock.
As of March 31, 2004, SJG's restrictions do not affect the amount that may be
distributed from SJI's retained earnings.
Note 9. Commitments and Contingencies:
Construction and Environmental - SJI's estimated net cost of
construction and environmental remediation programs for 2004 totals $69.1
SJI-18
million. Commitments were made regarding some of these programs. (See
Contractual Obligations table in Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
Gas Supply Contracts - SJG, in the normal course of conducting
business, has entered into long-term contracts for natural gas supplies, firm
transportation and gas storage service. The earliest that any of these contracts
expires is 2004. The transportation and storage service agreements between SJG
and our 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 -As of March 31, 2004, SJI had issued $157.2
million of parental guarantees on behalf of its subsidiaries. Of this total,
$80.9 million expire within one year, $42.2 million expire in 2005 and $34.1
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 March 31, 2004, these guarantees support
$37.2 million of the Accounts Payable recorded on our condensed 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
$6.8 million related to Marina's construction activity.
Standby Letters of Credit - SJI provided a 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, the letter of credit
totaled $2.5 million as of March 31, 2004 and will remain in place until July
2004.
As of March 31, 2004, 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 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 March 31, 2004.
Also, as of March 31, 2004, SJI has issued four letters of credit
totaling $10.7 million to two different utilities. These letters were posted to
enable SJE to market retail electricity and retail gas 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
SJI-19
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
$145.1 million, of which $90.2 million has been spent as of March 31, 2004. 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 2004 condensed
consolidated balance sheet under the captions Current Liabilities and Deferred
Credits and Other Non-Current Liabilities. Recorded amounts include estimated
costs based on projected investigation and remediation work plans using existing
technologies. Actual costs could differ from the estimates due to the long-term
nature of the projects, changing 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. 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 6).
The other asset titled Environmental Remediation Cost: Liability for
Future Expenditures relates to estimated future expenditures determined under
the guidance of FASB Statement No. 5, "Accounting for Contingencies." We
recorded this amount, which relates to former manufactured gas plant sites, as a
deferred debit with the corresponding amount reflected on the condensed
consolidated balance sheet under the captions Current Liabilities and Deferred
Credits and Other Non-Current Liabilities. The recorded 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 those costs are
spent over 7-year periods. As of March 31, 2004, we reflected SJG's unamortized
remediation costs of $4.4 million on the condensed consolidated balance sheets
under the caption Other Regulatory Assets. Since implementing the RAC in 1992,
SJG has recovered $40.5 million through rates.
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 condensed consolidated income under
the caption Loss from Discontinued Operations - Net.
SJI-20
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 condensed consolidated balance
sheet under Current Liabilities and Deferred Credits and Other Non-Current
Liabilities as of March 31, 2004.
SJI-21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Unaudited)
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
307,044 customers at March 31, 2004 compared with 298,767 customers at March 31,
2003. 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. 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.
5) South Jersey Energy Service Plus, LLC (Service Plus) installs
residential and small commercial HVAC systems in Southern New Jersey. Service
Plus began commercial operations in May 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.
SJI-22
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; legislative, 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
condensed 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 condensed 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.
SJI-23
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.
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/electricity 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 (which replaced 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 SJG
realizes 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 condensed
consolidated financial statements.
SJI-24
Temperature Adjustment Clause - A Board of Public Utilities approved
Temperature Adjustment Clause (TAC) decreased SJG's net income by $0.7 million
and $1.4 million for the three months ended March 31, 2004 and 2003,
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. As of
March 31, 2004, the remaining deferred TAC deficiency totaled $1.1 million.
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 increased the 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 Basic
Gas Supply Service (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 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. On April 1, 2004, SJG made its annual USF filing,
along with the state's other electric and gas utilities, proposing a statewide
USF budget of $105.5 million. Approximately $20.0 million of this amount is due
to the estimated statewide underrecovery for the current year program costs.
Another $9.0 million of the total was estimated in order to provide for the
March 4, 2004 Board-Ordered Arrearage Payment Program, which is being
implemented to provide customers with the opportunity to eliminate their
arrearage balances.
SJI-25
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.
In February 2004, SJG filed notice with the BPU to reduce its gas cost
revenues by approximately $5.0 million, via a rate reduction, in addition to
providing for an approximate $21.8 million bill credit to customers. Both the
rate reduction and bill credit were implemented in March 2004.
Filings and petitions described above are still pending unless
otherwise indicated. Additional discussions concerning Regulatory Actions can be
found in Note 6 to the condensed 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.
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 March 31,
2004, SJG has $4.4 million of remediation costs not yet recovered through rates.
Other matters are incorporated by reference to Note 9 to the condensed
consolidated financial statements included as part of this report.
Competition
SJG's franchises are non-exclusive. Currently, no other utility
provides retail gas distribution services within SJG's territory. SJG does not
expect any other utilities to do so in the foreseeable future because of the
extensive investment required for utility plant and related costs. SJG competes
with oil, propane and electricity suppliers for residential, commercial and
industrial users. The market for natural gas sales is subject to competition due
to deregulation. We enhanced SJG's competitive position while maintaining
SJI-26
margins by using an unbundled tariff. This tariff allows full cost-of-service
recovery, except for the variable cost of the gas commodity, when transporting
gas for our customers. Under this tariff, SJG profits from transporting, rather
than selling, the commodity. SJG's residential, commercial and industrial
customers can choose their supplier while we recover the cost of service through
transportation service (see Customer Choice Legislation).
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 March 31, 2004, 106,620 SJG
residential customers chose a natural gas commodity supplier other than the
utility. This number increased from 92,897 at March 31, 2003 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 decreased $20.9 million during
the first quarter of 2004 compared with the same period in 2003. This decrease
was primarily due to three factors. First, weather was 2.6% warmer than last
year, which resulted in a reduction in utility sales volumes. Second, Off-System
Sales revenues decreased significantly as a direct result of lower sales volumes
and prices for natural gas sold in the first quarter of 2004 compared with the
same period in 2003. Third, there was a 14.8% 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. Partially offsetting the effect
of these factors were 8,277 customer additions over the last 12 months. In
addition, the BPU approved two rate increases in SJG's Basic Gas Supply Service
clause to address the recovery of the increasing price of natural gas sold
after March 31, 2003 and an increase in SJG's Societal Benefits Clause
recoveries to fund state sponsored programs (See Recent Regulatory Actions).
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 the first quarter 2004 was 2.6% warmer
than the same period in 2003 and 3.4% colder than the 20-year TAC average.
SJI-27
The following is a comparison of operating revenue and throughput for
the three months ended March 31:
2004 2003
------ ------
Operating Revenues (Thousands):
Firm
Residential $ 81,141 $ 89,308
Commercial 23,966 27,430
Industrial 2,317 2,367
Cogeneration & Electric Generation 419 1,322
Firm Transportation 32,869 28,060
------------- -------------
Total Firm Operating Revenues 140,712 148,487
------------- -------------
Interruptible 288 491
Interruptible Transportation 295 195
Off-System 55,352 88,730
Capacity Release & Storage 2,727 1,303
Other 750 730
Intercompany Sales (4,846) (23,797)
------------- -------------
Total Operating Revenues $ 195,278 $ 216,139
============= =============
Throughput (MMcf):
Firm
Residential 7,488 8,055
Commercial 2,431 2,729
Industrial 92 105
Cogeneration & Electric Generation 25 108
Firm Transportation 12,212 11,063
------------- -------------
Total Firm Throughput 22,248 22,060
Interruptible 34 36
Interruptible Transportation 576 411
Off-System 7,833 11,730
Capacity Release & Storage 11,662 5,993
------------- -------------
Total Throughput 42,353 40,230
============= =============
Operating Revenues - Nonutility - Nonutility operating revenues
increased by $46.5 million in the first quarter of 2004 compared with the first
quarter of 2003. Most of the increase was due to continued customer growth
experienced by SJE, evidenced by the addition of over 9,800 residential and
1,400 commercial natural gas customers over the last twelve months. SJE's
revenues from the sale of retail electricity increased by $15.1 million for the
three months ended March 31, 2004 compared with the three months ended March 31,
2003. SJE was the successful bidder on a contract to supply retail electricity
SJI-28
to over 400 school districts located throughout the state of New Jersey
beginning in November 2003. Also contributing to this increase was $5.1 million
in revenues recognized by Marina from sales of thermal energy to Borgata Hotel
Casino & Spa, which opened in July 2003, and other on-site energy production
projects.
Cost of Gas Sold - Utility - Gas purchased for resale decreased $23.7
million for the first quarter of 2004 compared with the same period in 2003 due
principally to a significant decrease in sales volumes and lower gas costs for
Off-System Sales. SJG's gas cost during the first quarter of 2004 averaged $6.74
per decatherm (dt) compared with $6.80/dt for the first quarter of 2003. 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. SJG also experienced a
decrease in gas costs as a result of the continued migration of customers from
sales to transportation services as described under Operating Revenues -
Utility. As a result of this migration and the impact of warmer weather, firm
sales volume decreased by 8.7% compared to the same period last year.
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.
Cost of Sales - Nonutility - Cost of sales - nonutility increased $44.8
million in the quarter ended March 31, 2004 compared with the quarter ended
March 2003 due mainly to SJE's gas and electric customer growth and Marina's
operations as described in the Operating Revenues - Nonutility section.
Operations Expense - A summary of net changes in operations expenses
(in thousands):
Three Months Ended
March 31,
2004 vs. 2003
Utility:
Other Production Expense $ 2
Transmission 35
Distribution (97)
Customer Accounts and Services 2,831
Sales 22
Administration and General (777)
-----------
Total Utility 2,016
-----------
Nonutility:
Wholesale Gas 132
Retail Gas and Other (97)
On-Site Energy Production 733
-----------
Total Nonutility 768
-----------
Corporate (201)
-----------
Total Operations $ 2,583
============
SJI-29
Customer Accounts and Services expense increased significantly in 2004
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 $3.0 million in the first quarter
of 2004 when compared with the same period in 2003. 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 2004 as a result of a
March 2004 BGSS refund improving SJG's accounts receivable aging (See Recent
Regulatory Actions).
Administrative and General expenses decreased in the first quarter of
2004 compared with the same period of 2003 primarily because of lower pension
expense, lower insurance expense and cost control measures implemented
throughout the company. Pension expense decreased $207,000 from 2003 to 2004 as
a result of SJG making a $9.1 million pension plan contribution in December 2003
as well as an improvement in investment returns throughout 2003 (See Note 7 to
the condensed consolidated financial statements). Insurance expense was reduced
by $340,000 in 2004 by lowering SJG's reserve for outstanding claims following a
period of favorable settlements that were not appealed as anticipated.
Nonutility Retail Gas and Other Operations expense declined for the
quarter ended March 31, 2004 compared to the quarter ended March 31, 2003
primarily due to lower customer acquisition costs. Increases in On-Site Energy
Production Operations expense increased in the first quarter 2004 related to the
start of commercial operations for Marina's thermal energy plant in July 2003.
Other Operating Expenses - A summary of principal changes in other
consolidated operating expenses for the three months ended March 31 (in
thousands):
2004 vs. 2003
Maintenance $ (113)
Depreciation 766
Energy and Other Taxes (242)
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. The decrease in Energy and
Other Taxes relate primarily to decreases in taxable volumes of gas sold and
transported by SJG and lower revenue-based taxes (See table under the caption,
"Operating Revenues - Utility").
Other Income and Expense - Other income and expense was higher in the
first quarter of 2004 compared with the first quarter of 2003 due to a pre-tax
gain of $686,000 on SJG's postretirement healthcare plan trust. The movement of
plan assets to a new investment manager triggered the recognition of gains on
investments.
SJI-30
Interest Charges - Interest charges increased in the first quarter of
2004 compared with the prior year quarter due primarily to interest incurred by
Marina that was previously permitted to be capitalized during the construction
phase of their thermal energy plant. The increase was partially offset by
reductions in short-term rates on line of credit borrowings, the refunding of
higher priced, fixed rate, long-term debt with lower cost debt, and a lower
total debt level. These refundings occurred primarily during the second half of
2003 and were financed with long-term debt issuances under SJG's 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
nventories and customer receivables.
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 March 31, 2004,
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 $2.1
million, or 9.2%, to $24.3 million for the quarter ended March 31, 2004 as
compared with $22.3 million for the quarter ended March 31, 2003. Reasons for
the increase in net income in the first quarter of 2004 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 credit facilities provided by commercial banks to
supplement cash from operations where necessary.
Bank credit available to SJI totaled $236.0 million at March 31, 2004,
of which $54.8 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 $20.0
SJI-31
million of uncommitted bank lines available to SJI. 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 and Medium Term Notes (MTN), secured by the
same pool of assets as the First Mortgage Bonds, to finance its long-term
borrowing needs. These needs are primarily capital expenditures for property,
plant and equipment. SJG's registration of a $150.0 million MTN program with the
Securities and Exchange Commission became effective in December 2002. In July
2003, SJG issued $85.5 million of long-term debt under the program. In September
2003, 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 to commercial banks 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 million of
tax-exempt and $25 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 $11.7 million of equity capital by issuing
288,792 shares for the quarter ended March 31, 2004 and $1.5 million of equity
capital by issuing 48,417 shares for the quarter ended March 31, 2003. We
anticipate raising approximately $25 million of equity capital through the DRP
in 2004.
SJI's capital structure was as follows:
As of As of
March 31, December 31,
2004 2003 2003
------ ------ -----
Common and Preferred Stock Equity 49% 41% 41%
Long-Term Debt 44% 44% 43%
Short-Term Debt 7% 15% 16%
--- ---- ----
Total 100% 100% 100%
==== ==== ====
SJI-32
SJI typically experiences seasonal fluctuations in leverage as
short-term debt has historically peaked in the November to January period in
support of high inventory and receivable levels. The seasonal low point for
short-term debt incurred in support of working capital usually occurs between
the end of March and the end of May each year. The ratios presented in the chart
above reflect a conscious effort by management to increase the percentage of
equity in SJI's capital structure over the past year.
Capital Expenditures, Commitments and Contingencies
Capital Expenditures - SJI has a continuing need for cash resources and
capital, primarily to invest in new and replacement facilities and equipment and
for environmental remediation costs. Net construction and remediation
expenditures for the first quarter of 2004 amounted to $12.5 million. We
estimate the net costs for 2004, 2005 and 2006 at approximately $69.1 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 and remained at
that level as of March 31, 2004. 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 letters
of credit to provide liquidity for these bonds. The letter of credit agreement
contains certain financial covenants measured on a quarterly basis. SJI was in
compliance with these covenants as of March 31, 2004.
SJG has certain commitments for both pipeline capacity and gas supply
for which it pays fees regardless of usage. Those commitments as of March 31,
2004 averaged $44.8 million annually and totaled $244.2 million over the
contracts' lives. 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.
SJI-33
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 $ 309,554 $ 5,273 $ 10,546 $ 8,270 $ 285,465
Operating Leases 876 405 377 67 27
Construction Obligations 9,262 9,262 - - -
Commodity Supply Purchase Obligations:
Utility 244,200 44,400 81,200 70,600 48,000
Nonutility 169,955 154,160 15,795 - -
Other Purchase Obligations 3,181 2,478 703 - -
----------- ----------- ----------- ----------- -----------
Total Contractual Cash Obligations $ 737,028 $ 215,978 $ 108,621 $ 78,937 $ 333,492
=========== =========== =========== =========== ===========
Expected environmental remediation costs are not included in the table
above due to the subjective nature of such costs and time of anticipated
payments.
SJI expects to make no contributions to its pension plan and contribute
approximately $3.6 million in equal quarterly installments to its other
postretirement benefit plans in 2004.
As of March 31, 2004, SJI had issued $157.2 million of parental
guarantees on behalf of its subsidiaries. Of this total, $80.9 million expire
within one year, $42.2 million expire in 2005 and $34.1 million have no
expiration date. The vast majority of these guarantees were issued as guarantees
of payment to third parties with whom our subsidiaries have commodity supply
contracts. As of March 31, 2004, these guarantees support $37.2 million of the
Accounts Payable recorded on our condensed 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 $6.8 million related to
Marina's construction activity.
On January 5, 2004, Marina paid $2.7 million to purchase a cogeneration
facility in Salem County, NJ and will lease back the facility to a large
manufacturer located on the same site 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.
SJI-34
Item 3. Quantitative and Qualitative Disclosures About
Market Risks of the Company (Unaudited)
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 complete commodity transactions 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 March 31, 2004, SJRG had $17.3 million of accounts receivable under sales
contracts. Of that total, 73% 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. We recorded a net unrealized pre-tax gain on these energy
related derivative contracts of $2.0 million and $1.5 million for the quarters
ended March 31, 2004 and 2003, respectively, and they are included as a
component of Operating 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 March 31, 2004 is as follows
(in thousands):
Assets
Maturity Maturity
Source of Fair Value < 1 Year 1-3 Years Total
---------- --------- ----------
Prices Actively Quoted NYMEX $ 14,104 $ 1,567 $ 15,671
Other External Sources Basis 5,538 801 6,339
---------- --------- ----------
Total $ 19,642 $ 2,368 $ 22,010
========== ========= ==========
Liabilities
Maturity Maturity
Source of Fair Value < 1 Year 1-3 Years Total
---------- --------- ----------
Prices Actively Quoted NYMEX $ 4,622 $ 1,081 $ 5,703
Other External Sources Basis 2,053 81 2,134
---------- --------- ----------
Total $ 6,675 $ 1,162 $ 7,837
========== ========= ==========
SJI-35
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, 2004 $ 7,000
Contracts Settled During Quarter Ended March 31, 2004, Net 2,591
Other Changes in Fair Value from Continuing and
New Contracts, Net 4,582
--------------
Net Derivatives - Energy Related Assets, March 31, 2004 $ 14,173
==============
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 March 31, 2004 was $44.1 million and averaged $71.8 million
for the first quarter. A hypothetical 100 basis point (b.p.), or 1%, increase in
interest rates on our average variable rate debt outstanding would result in a
$424,000 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 March
2004, our average interest rate on variable rate debt was 1.87%.
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, $1.5 million of 8.6%
debenture notes in February 2004. 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 as of March 31,
2004 effectively fixed the rate on $20.0 million of tax-exempt debt at 4.08%
through 2011 and $17.0 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 and an additional $3.1 million reduction in December
2004.
SJI-36
Item 4. Controls and Procedures
SJI management, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
No change in SJI's internal control over financial reporting occurred
during SJI's first fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
SJI-37
PART II -- OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part
I, Item 1, Note 9, beginning on page 18.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
31.1 Certification of Chief Executive
Officer Pursuant to Rule 13a-14(a) of
the Exchange Act.
31.2 Certification of Chief Financial
Officer Pursuant to Rule 13a-14(a) of
the Exchange Act.
32.1 Certification of Chief Executive
Officer Pursuant to Rule 13a-14(b) of
the Exchange Act as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002 (subsections (a) and (b) of
Section 1350, Chapter 63 of Title 18,
United States Code).
32.2 Certification of Chief Financial
Officer Pursuant to Rule 13a-14(b) of
the Exchange Act as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002 (subsections (a) and (b) of
Section 1350, Chapter 63 of Title 18,
United States Code).
(b) Form 8-K
Dated January 29, 2004 South Jersey Industries issued a press
release providing an earnings report
for the year ended December 31, 2003
under Item 9 and 12.
SJI-38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTH JERSEY INDUSTRIES, INC.
(Registrant)
Dated: May 10, 2004 By: /s/ Edward J. Graham
-----------------------------
Edward J. Graham
President & Chief Executive Officer
Dated: May 10, 2004 By: /s/ David A. Kindlick
-------------------------------
David A. Kindlick
Vice President & Chief Financial Officer
SJI-39
Exhibit 31.1
CERTIFICATION
I, Edward J. Graham, certify that:
1. I have reviewed this report on Form 10-Q for the period ended March 31, 2004,
of South Jersey Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: May 10, 2004 /s/ Edward J. Graham
--------------------------------------
Edward J. Graham
President & Chief Executive Officer
SJI-40
Exhibit 31.2
CERTIFICATION
I, David A. Kindlick, certify that:
1. I have reviewed this report on Form 10-Q for the period ended March 31, 2004,
of South Jersey Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: May 10, 2004 /s/ David A. Kindlick
---------------------------------------
David A. Kindlick
Vice President & Chief Financial Officer
SJI-41
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q of
South Jersey Industries, Inc. (the "Company") for the period ended March 31,
2004, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Edward J. Graham, Chief Executive Officer of the Company,
hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my
knowledge:
(1) The Report fully complies with the requirements of
Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Edward J. Graham
- --------------------------------
Name: Edward J. Graham
Title: Chief Executive Officer
May 10, 2004
SJI-42
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q of
South Jersey Industries, Inc. (the "Company") for the period ended March 31,
2004, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, David A. Kindlick, Chief Financial Officer of the Company,
hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my
knowledge:
(1) The Report fully complies with the requirements of
Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ David A. Kindlick
- -------------------------------------
Name: David A. Kindlick
Title: Chief Financial Officer
May 10, 2004
SJI-43