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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, 2005
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 6, 2005, there were 13,976,730 shares of the registrant's common stock
outstanding.
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SJI-1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 25
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,
-------------------------
2005 2004
----------- -----------
Operating Revenues:
Utility $ 212,167 $ 197,414
Nonutility 116,403 110,196
----------- -----------
Total Operating Revenues 328,570 307,610
----------- -----------
Operating Expenses:
Cost of Sales - Utility 141,975 132,250
Cost of Sales - Nonutility 103,141 100,989
Operations 20,197 16,101
Maintenance 1,493 1,345
Depreciation 5,873 6,600
Energy and Other Taxes 5,158 4,872
----------- -----------
Total Operating Expenses 277,837 262,157
----------- -----------
Operating Income 50,733 45,453
Other Income and Expense 384 721
Interest Charges 5,305 4,960
----------- -----------
Income Before Income Taxes 45,812 41,214
Income Taxes 19,114 16,911
Equity in Affiliated Companies 194 156
----------- -----------
Income from Continuing Operations 26,892 24,459
Loss from Discontinued Operations - Net (144) (140)
----------- -----------
Net Income $ 26,748 $ 24,319
=========== ===========
Basic Earnings Per Common Share:
Continuing Operations $ 1.93 $ 1.83
Discontinued Operations - Net (0.01) (0.01)
----------- -----------
Basic Earnings Per Common Share $ 1.92 $ 1.82
=========== ===========
Average Shares of Common Stock Outstanding - Basic 13,900 13,392
Diluted Earnings Per Common Share:
Continuing Operations $ 1.92 $ 1.82
Discontinued Operations - Net (0.01) (0.01)
----------- -----------
Diluted Earnings Per Common Share $ 1.91 $ 1.81
=========== ===========
Average Shares of Common Stock Outstanding - Diluted 14,000 13,461
Dividends Declared per Common Share $ 0.425 $ 0.405
=========== ===========
The accompanying footnotes are an integral part of the financial statements.
SJI-3
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Continued)
(In Thousands Except for Per Share Data)
Three Months Ended
March 31,
------------------------
2005 2004
----------- -----------
Pro Forma Earnings Per Share
Based on Approved Stock Split (See Note 3):
Basic Earnings Per Common Share:
Continuing Operations $ 0.967 $ 0.913
Discontinued Operations - Net (0.005) (0.005)
----------- -----------
Basic Earnings Per Common Share $ 0.962 $ 0.908
=========== ===========
Average Shares of Common Stock Outstanding - Basic 27,800 26,784
Diluted Earnings Per Common Share:
Continuing Operations $ 0.960 $ 0.908
Discontinued Operations - Net (0.005) (0.005)
----------- -----------
Diluted Earnings Per Common Share $ 0.955 $ 0.903
=========== ===========
Average Shares of Common Stock Outstanding - Diluted 28,000 26,922
Dividends Declared per Common Share $ 0.213 $ 0.203
=========== ===========
The accompanying footnotes are an integral part of the financial statements.
SJI-4
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
Three Months Ended
March 31,
----------------------
2005 2004
---------- -----------
Net Income $ 26,748 $ 24,319
---------- ----------
Other Comprehensive (Loss) Income, Net of Tax:*
Change in Fair Value of Investments (43) (275)
Change in Fair Value of Derivatives - Other 385 (253)
Change in Fair Value of Derivatives - Energy Related (43) 90
---------- ----------
Other Comprehensive Income (Loss) - Net of Tax* 299 (438)
---------- ----------
Comprehensive Income $ 27,047 $ 23,881
========== ==========
* Determined using a combined statutory tax rate of 40.85%.
The accompanying footnotes are an integral part of the financial statements.
SJI-5
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Three Months Ended
March 31,
----------------------
2005 2004
---------- ----------
Cash Flows from Operating Activities:
Net Income $ 26,748 $ 24,319
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 6,585 7,220
Unrealized Gain on Derivatives - Energy Related (4,143) (1,958)
Provision for Losses on Accounts Receivable 2,313 335
Revenues and Fuel Costs Deferred - Net 442 10,916
Deferred and Non-Current Income Taxes and Credits - Net 5,501 4,511
Environmental Remediation Costs - Net (370) (219)
Gas Plant Cost of Removal (165) (178)
Changes in:
Accounts Receivable (33,592) (39,480)
Inventories 64,627 48,899
Other Prepayments and Current Assets (10) 1,805
Prepaid and Accrued Taxes - Net 21,864 18,063
Accounts Payable and Other Accrued Liabilities (4,503) 22,807
Other Assets 4,300 898
Other Liabilities 2,112 (8,085)
---------- ----------
Net Cash Provided by Operating Activities 91,709 89,853
---------- ----------
Cash Flows from Investing Activities:
Return of Investment in Affiliate 6 44
Affiliate Repayment of Loan 195 370
Proceeds from Minority Interest 6 -
Proceeds from Sale of Restricted Investments 13,379 4,022
Capital Expenditures (17,528) (12,096)
---------- ----------
Net Cash Used in Investing Activities (3,942) (7,660)
---------- ----------
Cash Flows from Financing Activities:
Net Repayments of Lines of Credit (59,900) (68,700)
Principal Repayments of Long-Term Debt (10,500) (4,500)
Dividends on Common Stock (6,176) (5,488)
Proceeds from Sale of Common Stock 735 12,970
Payments for Issuance of Long-Term Debt (51) (43)
Premium for Early Retirement of Debt (184) -
---------- ----------
Net Cash Used in Financing Activities (76,076) (65,761)
---------- ----------
Net Increase in Cash and Cash Equivalents 11,691 16,432
Cash and Cash Equivalents at Beginning of Period 5,272 4,364
---------- ----------
Cash and Cash Equivalents at End of Period $ 16,963 $ 20,796
========== ==========
The accompanying footnotes are an integral part of the financial statements.
SJI-6
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
March 31, December 31,
-----------------------------
2005 2004
------------- -------------
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $ 967,469 $ 957,287
Accumulated Depreciation (227,870) (224,506)
Nonutility Property and Equipment, at cost 76,348 71,129
Accumulated Depreciation (4,535) (4,040)
------------- -------------
Property, Plant and Equipment - Net 811,412 799,870
------------- -------------
Investments:
Available-for-Sale Securities 5,235 5,310
Restricted 218 13,597
Investment in Affiliates 1,936 1,942
------------- -------------
Total Investments 7,389 20,849
------------- -------------
Current Assets:
Cash and Cash Equivalents 16,963 5,272
Accounts Receivable 156,452 113,778
Unbilled Revenues 36,183 45,857
Provision for Uncollectibles (5,216) (3,495)
Natural Gas in Storage, average cost 14,588 79,281
Materials and Supplies, average cost 5,423 5,357
Prepaid Taxes 217 6,104
Derivatives - Energy Related Assets 23,901 25,677
Derivatives - Other 5,931 1,549
Other Prepayments and Current Assets 4,481 4,491
------------- -------------
Total Current Assets 258,923 283,871
------------- -------------
Regulatory and Other Non-Current Assets:
Regulatory Assets 71,790 72,635
Prepaid Pension 27,574 28,589
Derivatives - Energy Related Assets 3,037 5,230
Derivatives - Other 58 197
Unamortized Debt Discount and Expense 8,967 8,894
Contract Receivables 15,538 16,153
Other 6,927 7,046
------------- -------------
Total Regulatory and Other Non-Current Assets 133,891 138,744
------------- -------------
Total Assets $ 1,211,615 $ 1,243,334
============= =============
The accompanying footnotes are an integral part of the financial statements.
SJI-7
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
March 31, December 31,
----------------------------
2005 2004
------------- -------------
Capitalization and Liabilities
Common Equity:
Common Stock $ 17,414 $ 17,350
Premium on Common Stock 214,836 212,212
Accumulated Other Comprehensive Income 3,752 3,453
Retained Earnings 131,969 111,397
------------- -------------
Total Common Equity 367,971 344,412
Preferred Stock of Subsidiary 1,690 1,690
Long-Term Debt 321,414 328,914
------------- -------------
Total Capitalization 691,075 675,016
------------- -------------
Minority Interest 232 227
------------- -------------
Current Liabilities:
Notes Payable 32,400 92,300
Current Maturities of Long-Term Debt 2,348 5,348
Accounts Payable 107,628 118,836
Customer Deposits 9,128 8,846
Environmental Remediation Costs 16,601 13,810
Taxes Accrued 21,396 5,419
Derivatives - Energy Related Liabilities 5,793 18,233
Derivatives - Other 8,257 1,393
Deferred Income Taxes - Net 10,069 7,082
Interest Accrued and Other Current Liabilities 20,670 14,052
------------- -------------
Total Current Liabilities 234,290 285,319
------------- -------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 145,671 143,068
Investment Tax Credits 3,046 3,129
Pension and Other Postretirement Benefits 12,976 13,103
Environmental Remediation Costs 39,810 41,181
Derivatives - Energy Related Liabilities 2,022 3,637
Derivatives - Other 738 1,540
Regulatory Liabilities 70,259 63,836
Other 11,496 13,278
------------- -------------
Total Deferred Credits
and Other Non-Current Liabilities 286,018 282,772
------------- -------------
Commitments and Contingencies (Note 11)
Total Capitalization and Liabilities $ 1,211,615 $ 1,243,334
============= =============
The accompanying footnotes are an integral part of the financial statements.
SJI-8
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), its wholly owned
subsidiaries and a subsidiary in which we have a controlling interest. We
eliminated all significant intercompany accounts and transactions. 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 2004 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 fair value with any
unrealized gains or losses included in Accumulated Other Comprehensive Income.
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 on a pre-tax basis in the statements of condensed
consolidated income under 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. Significant estimates include amounts related to regulatory
accounting, energy derivatives, environmental remediation costs, pension and
other postretirement benefit costs, and revenue recognition.
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.
Revenues -- Gas and electric revenues are recognized in the period the
commodity is delivered and customers are billed monthly. For SJG and South
Jersey Energy (SJE) retail customers not billed at the end of each month, we
record an estimate to recognize unbilled revenues for gas and electricity
delivered from the date of the last meter reading to the end of the month. We
defer and recognize revenues related to South Jersey Energy Service Plus, LLC
(SJESP) appliance service contracts seasonally over the full 12-month term of
the contract.
SJI-9
Marina Energy LLC (Marina) recognizes revenue on a monthly basis as
services are provided and for on-site energy production that is delivered to its
customers.
The BPU allows SJG to recover all prudently incurred gas costs through
the Basic Gas Supply Service (BGSS) clause. We collect these costs on a
forecasted basis upon BPU order. SJG defers over/under-recoveries of gas costs
and includes them in the following year's BGSS or other similar recovery
mechanism. We pay interest on overcollected BGSS balances at the rate of return
on rate base utilized by the BPU to set rates in its last base rate proceeding.
SJG's tariff also includes a Temperature Adjustment Clause (TAC), a
Remediation Adjustment Clause (RAC), a New Jersey Clean Energy Program (NJCEP)
and a Universal Service Fund (USF) program. Our TAC reduces the impact of
temperature fluctuations on SJG and its customers. The RAC recovers
environmental remediation costs of former gas manufacturing plants and the NJCEP
recovers costs associated with our energy efficiency and renewable energy
programs. The USF is a statewide customer assistance program that utilizes
utilities as a collection agent. TAC adjustments affect revenue, income and cash
flows since colder-than-normal weather can generate credits to customers, while
warmer-than-normal weather can result in additional billings. RAC adjustments do
not directly affect earnings because we defer and recover related costs through
rates over 7-year amortization periods. NJCEP and USF adjustments are also
deferred and do not affect earnings, as related costs and customer credits are
recovered through rates on an ongoing basis.
Accounts Receivable and Provision for Uncollectible Accounts --
Accounts receivable are carried at the amount owed by customers. A provision for
uncollectible accounts was established based on our collection experience and an
assessment of the collectibility of specific accounts.
Property, Plant and Equipment -- For regulatory purposes, utility plant
is stated at original cost, which may be different than SJG's cost if the assets
were acquired from another regulated entity. Nonutility plant is stated at cost.
The cost of adding, replacing and renewing property is charged to the
appropriate plant account.
Depreciation -- We depreciate utility plant on a straight-line basis
over the estimated remaining lives of the various property classes. These
estimates are periodically reviewed and adjusted as required after BPU approval.
Except for extraordinary retirements, accumulated depreciation is charged with
the cost of depreciable utility property retired less salvage (See Asset
Retirement Costs). Nonutility property depreciation is computed on a
straight-line basis over the estimated useful lives of the property, ranging up
to 50 years. Gain or loss on the disposition of nonutility property is
recognized in net income.
Capitalized Interest -- SJG capitalizes interest on construction at the
rate of return on rate base utilized by the BPU to set rates in its last base
rate proceeding. SJG capitalized interest of $0.3 million and $0.2 million in
the three months ended March 31, 2005 and 2004, respectively. These amounts are
included in Utility Plant on the condensed consolidated balance sheets. All
capitalized interest is reflected on the statements of condensed consolidated
income as a reduction of Interest Charges.
SJI-10
Impairment of Long-Lived Assets -- We review the carrying amount of an
asset for possible impairment whenever events or changes in circumstances
indicate that such amount may not be recoverable. For the three months ended
March 31, 2005 and the year ended December 31, 2004, we did not identify any
significant impairments.
Energy Trading Activities and Derivative Instruments -- Certain SJI
subsidiaries are involved in buying, selling, transporting and storing natural
gas and buying and selling retail electricity for their own accounts as well as
managing these activities for others. These subsidiaries are subject to market
risk due to price fluctuations. To manage this risk, our companies enter into a
variety of physical and financial transactions including forward contracts, swap
agreements, option contracts and futures contracts.
SJI structured its subsidiaries so that SJG and SJE transact
commodities on a physical basis and typically do not directly enter into
positions that financially settle. South Jersey Resources Group (SJRG) performs
this risk management function for these entities and enters into the types of
financial transactions noted above. As part of its gas purchasing strategy, SJG
occasionally uses financial contracts to hedge against forward price risk. The
costs or benefits of these short-term contracts are recoverable through SJG's
BGSS, subject to BPU approval. As of March 31, 2005 and December 31, 2004, SJG
had $(4.9) million and $0.5 million of (benefits) costs, respectively, included
in its BGSS related to open financial contracts (See Caption Regulatory Assets &
Regulatory Liabilities). Management takes an active role in the risk management
process and has developed policies and procedures that require specific
administrative and business functions to assist in identifying, assessing and
controlling various risks. Management reviews any open positions in accordance
with strict policies to limit exposure to market risk.
SJI accounts for derivative instruments in accordance with FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. We record all derivatives, whether designated in
hedging relationships or not, on the condensed consolidated balance sheets at
fair value unless the derivative contracts qualify for the normal purchase and
sale exemption. If the derivative is designated as a fair value hedge, we
recognize the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk in earnings. We currently have no fair value
hedges. If the derivative is designated as a cash flow hedge, we record the
effective portion of the hedge in Accumulated Other Comprehensive Income and
recognize it in the income statement when the hedged item affects earnings. We
recognize ineffective portions of the cash flow hedges immediately in earnings.
For the three months ended March 31, 2005, the ineffective portions of the
derivatives designated as cash flow hedges were $1.0 million and recorded in
Operating Revenues - Nonutility. We formally document all relationships between
hedging instruments and hedged items, as well as our risk management objectives,
strategies for undertaking various hedge transactions and our methods for
assessing and testing correlation and hedge ineffectiveness. All hedging
instruments are linked to the hedged asset, liability, firm commitment or
forecasted transaction. We also assess whether these derivatives are highly
effective in offsetting changes in cash flows or fair values of the hedged
items. We discontinue hedge accounting prospectively if we decide to discontinue
the hedging relationship; determine that the anticipated transaction is no
longer likely to occur; or if we determine that a derivative is no longer highly
effective as a hedge. In the event that hedge accounting is discontinued, we
will continue to carry the derivative on the balance sheet at its current fair
value and recognize subsequent changes in fair value in current period earnings.
SJI-11
Unrealized gains and losses on the discontinued hedges that were previously
included in Accumulated Other Comprehensive Income will be reclassified into
earnings. As permitted under Statement No. 133, SJI has elected to designate
certain energy-related derivative instruments as cash flow hedges which protect
against the price variability of our forecasted sales and purchases of natural
gas. Based on the amount recorded in Accumulated Other Comprehensive Income at
March 31, 2005, we expect $7.3 million to be recorded as an increase in revenues
in the next twelve months. As of March 31, 2005, hedges for future forecasted
transactions exist into 2006.
SJRG manages its portfolio of 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. SJI 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 those derivatives not designated as hedges, we recorded the
net unrealized pre-tax gain of $4.1 million and $2.0 million in earnings during
the three months ended March 31, 2005 and 2004, respectively, which are included
with realized gains and losses in Operating Revenues -- Nonutility.
SJI presents revenues and expenses related to its trading derivatives
on a net basis in Operating Revenues -- Nonutility in our condensed consolidated
statements of income consistent with Emerging Issues Task Force (EITF) Issue No.
02-03, "Issues Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities." There is no effect on operating income or net income from the above
presentation.
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 through the New Jersey Economic Development
Authority. 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 decreased to $3.9 million in December 2004, and terminates in December
2005.
In November 2004, we entered into two additional interest rate swap
contracts against Marina's taxable Series B variable rate bonds for a 10-year
period. The swaps effectively provide us with a fixed interest rate of 4.80% on
$3.9 million and 4.78% on $8.0 million of the bonds, respectively.
From time to time we enter into interest rate swap agreements to hedge
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
Charges. We account for these interest rate swaps as cash flow hedges. In
November 2004, we entered into a derivative transaction known as a "Treasury
SJI-12
Lock" to hedge against the impact of possible interest rate increases on a $10.0
million, 30-year debt issuance by SJG planned for July 2005. As of March 31,
2005 and December 31, 2004, the market value of these swaps was $(1.2) million
and $(1.9) million, respectively, which represents the amount we would have to
pay the counterparty to terminate these contracts as of those dates. We include
these balances on the condensed consolidated balance sheets under
Derivatives -- Other. As of March 31, 2005 and December 31, 2004, we
calculated the swaps to be highly effective as defined under Statement No. 133,
therefore; we record the changes in fair value of the swaps, net of taxes, in
Accumulated Other Comprehensive Income.
We determined the fair value of derivative instruments 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.
Asset Retirement Costs -- SJG has certain easements and right-of-way
agreements that qualify as legal obligations under FASB Statement No. 143,
"Accounting for Asset Retirement Obligations." However, as it is our intent to
maintain these agreements in perpetuity, we have not recorded any liabilities
associated with these agreements. SJG recovers certain asset retirement costs
through rates charged to customers. As of March 31, 2005 and December 31, 2004,
SJG had accrued amounts in excess of actual removal costs incurred totaling
$47.5 million and $47.3 million, respectively, which in accordance with
Statement No. 143, we recorded as Regulatory Liabilities on the condensed
consolidated balance sheets.
New Accounting Pronouncements --Effective in 2003, SJI adopted the
policy of accounting for share-based compensation using the fair value based
method on a prospective basis. This method calls for expensing the estimated
fair value of a stock option. In December 2004, the FASB issued Statement No.
123(R), "Share-Based Payment" which establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. While this statement is not effective until reporting periods
beginning after January 1, 2006, SJI has completed its assessment of Statement
No. 123(R) and has determined that it does not have any impact on our accounting
for share-based payments.
In December 2004, the FASB issued Statement No. 153, "Exchanges of
Nonmonetary Assets, an amendment to APB Opinion No. 29, Accounting for
Nonmonetary Transactions." This statement redefines the types of nonmonetary
exchanges that require fair value measurement. Statement No. 153 is effective
for nonmonetary transactions entered into on and after July 1, 2005; however, we
do not expect it to have any impact on SJI's consolidated financial statements.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations." This interpretation clarifies the
term "conditional asset retirement obligation" as used in FASB Statement No.
143, "Accounting for Asset Retirement Obligations," and is effective for fiscal
years ending after December 15, 2005. Management is currently evaluating the
effect of this standard, but does not anticipate the adoption of this
interpretation to have a material effect on our consolidated financial
statements.
SJI-13
Regulatory Assets & Regulatory Liabilities -- Regulatory Assets at
March 31, 2005 and December 31, 2004 consisted of the following items (in
thousands):
Years Remaining
As of March 31, December 31,
March 31, 2005 2005 2004
---------------------------------------
Environmental Remediation Costs:
Expended - Net Various $ 5,644 $ 5,281
Liability for Future Expenditures - 52,473 51,046
Income Taxes - Flowthrough
Depreciation 6 6,397 6,641
Postretirement Benefit Costs 8 2,929 3,024
Gross Receipts and Franchise
Taxes 2 813 924
Societal Benefit Charges Various 2,084 4,562
Other - 1,450 1,157
----------------------
Total Regulatory Assets $ 71,790 $ 72,635
======================
Each item separately identified above is being recovered through
utility rate charges. SJG is currently permitted to recover interest on its
Environmental Remediation and Societal Benefit Costs while the other assets are
being recovered without a return on investment over the period indicated. Some
of the assets reflected within the above caption "Other" are currently being
recovered from ratepayers as approved by the BPU. Management believes that the
remaining deferred costs are probable of recovery from ratepayers through future
utility rates.
Regulatory Liabilities at March 31, 2005 and December 31, 2004
consisted of the following items (in thousands):
March 31, December 31,
2005 2004
-----------------------------
Deferred Gas Revenues - Net $ 18,235 $ 12,334
Excess Plant Removal Costs 47,542 47,345
Overcollected State Taxes 3,910 3,871
Other 572 286
-----------------------------
Total Regulatory Liabilities $ 70,259 $ 63,836
=============================
Deferred Gas Revenues - Net represent SJG's net overcollected gas costs
and are monitored through SJG's BGSS mechanism.
Derivatives used to hedge SJG's natural gas purchases are recoverable
through its BGSS, subject to BPU approval. We record the offset to the change in
fair value of these contracts as a Regulatory Asset or Regulatory Liability
accordingly.
SJI-14
Excess Plant Removal Costs represent amounts accrued in excess of
actual utility plant removal costs incurred to date. All other amounts are
subject to being returned to ratepayers in future rate proceedings.
Cash and Cash Equivalents -- For purposes of reporting cash flows,
highly liquid investments with original maturities of three months or less are
considered cash equivalents.
Reclassifications -- SJI reclassified some previously reported amounts
to conform with current year classifications. Such reclassifications include the
move of $2.1 million of certain operating expenses previously included in
Utility Revenue to Cost of Sales - Utility and Operations Expense for the three
months ended March 31, 2004. These amounts are considered immaterial to the
overall presentation of SJI's condensed consolidated statements of income.
Note 2. Divestitures and Affiliations:
Divestitures -- In 1996, Energy & Minerals, Inc. (EMI), an SJI
subsidiary, sold the common stock of The Morie Company, Inc. (Morie), its sand
mining and processing subsidiary.
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.
Summarized operating results of the discontinued operations for the
three months ended March 31 were (in thousands):
2005 2004
------------------------------
Loss before Income Taxes:
Sand Mining $ (212) $ (213)
Fuel Oil (10) (3)
Income Tax Credits 78 76
------------------------------
Loss from Discontinued Operations - Net $ (144) $ (140)
==============================
Basic and Diluted 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.
Affiliations -- SJI and Conectiv Solutions, LLC formed Millennium
Account Services, LLC to provide meter reading services in southern New Jersey.
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.
SJI-15
In April 2004, Marina and DCO Energy, LLC (DCO) formed AC Landfill
Energy, LLC (ACLE) to develop and install a 1,400 kilowatt methane-to-electric
power generation system at a county-owned landfill in Egg Harbor Township, NJ.
Marina owns a 51% interest in ACLE and consolidates ACLE's balance sheet and
results of operations accordingly. Commercial operation of the plant began in
March 2005.
In March 2005, Marina and DCO formed WC Landfill Energy, LLC (WCLE) to
develop and install a 3,800 kilowatt methane-to-electric power generation system
at a county-owned landfill in White Township, NJ. Marina owns a 51% interest in
WCLE and consolidates WCLE's balance sheet and results of operations
accordingly, as applicable. Commercial operation of the plant is targeted for
the end of 2005.
Note 3. Common Stock:
Amendment to the Certificate of Incorporation to Increase the Number of
Authorized Shares -- On March 3, 2005, the Board of Directors authorized an
amendment to SJI's Certificate of Incorporation to increase the authorized
number of shares of Common Stock from 20,000,000 shares to 60,000,000 shares.
This amendment was approved by SJI's shareholders at SJI's annual meeting of
shareholders held on April 21, 2005. The principal purpose of the increase is to
permit a two-for-one split of all the issued shares of SJI's Common Stock with a
record date of June 10, 2005. Share-related information is reported on a pro
forma basis on the condensed consolidated income statement reflecting the stock
split. All other share-related information contained in this report is presented
on a pre-split basis.
SJI has 20,000,000 shares of authorized Common Stock. The following
shares were issued and outstanding:
March 31, December 31,
2005 2004
--------------- ---------------
Beginning Balance, January 1 13,879,968 Beginning Balance, January 1 13,229,001
New Issues During Year: New Issues During Year:
Dividend Reinvestment Plan 14,053 Dividend Reinvestment Plan 616,301
Stock-Based Compensation Plan 37,287 Stock-Based Compensation Plan 32,056
Directors' Restricted Stock - Directors' Restricted Stock 2,610
--------------- ---------------
Ending Balance, March 31 13,931,308 Ending Balance, December 31 13,879,968
=============== ===============
We credited the par value ($1.25 per share) of stock issued during the
three months ended March 31, 2005 and the year ended December 31, 2004 to Common
Stock. We credited the net excess over par value of approximately $2.6 million
for the three months ended March 31, 2005 and $25.9 million for the year ended
December 31, 2004 to Premium on Common Stock.
Earnings Per Common Share -- We present basic EPS based on the
weighted-average number of common shares outstanding. EPS is presented in
accordance with FASB Statement No. 128, "Earnings Per Share," which establishes
standards for computing and presenting basic and diluted EPS. The incremental
SJI-16
shares required for inclusion in the denominator for the diluted EPS calculation
were 112,707 and 68,938 shares for the three months ended March 31, 2005 and
2004, respectively. These shares relate to SJI's restricted stock as discussed
below.
Stock-Based Compensation Plan -- Under the Amended and Restated 1997
Stock-Based Compensation Plan as recently amended and restated by our Board of
Directors and approved by our shareholders on April 21, 2005, no more than
1,000,000 shares in the aggregate may be issued to SJI's officers, non-employee
directors and other key employees. The plan will terminate on January 26, 2015
unless terminated earlier by the Board of Directors. No options were granted or
outstanding during the three months ended March 31, 2005 and 2004. No stock
appreciation rights have been issued under the plan. In the first quarter of
2005 and 2004, we granted 19,158 and 21,899 restricted shares, respectively.
These restricted shares vest over a 3-year period and are subject to SJI
achieving certain performance targets.
Dividend Reinvestment Plan (DRP)-- Newly issued shares of common stock
offered through the DRP are issued directly by SJI. As of March 31, 2005, SJI
reserved 1,048,622 shares of authorized, but unissued, common stock for future
issuance to the DRP.
Note 4. Preferred Stock:
On March 30, 2005, SJG provided notice of its intent to redeem its
Redeemable Cumulative Preferred 8% Series of preferred stock. The total amount
outstanding as of the May 1, 2005 redemption date was $1.69 million.
Note 5. Financial Instruments:
Restricted Investments -- In accordance with the terms of ACLE's loan
agreements, we were required to escrow unused proceeds pending approved
construction expenditures. As of March 31, 2005, the escrowed proceeds totaled
$218,000.
SJRG maintains a margin account with a national investment firm to
support its risk management activities. As of March 31, 2005, SJRG had a payable
balance of $3.1 million in this account due to changes in the market value of
outstanding contracts. This balance is reflected under the caption Accounts
Payable on the condensed consolidated balance sheet. As of December 31, 2004,
the balance of this account was $13.0 million.
Note 6. Segments of Business:
Information about SJI's operations in different industry segments for
the three months ended March 31 is presented below (in thousands):
2005 2004
-------------------------------
Operating Revenues:
Gas Utility Operations $ 214,537 $ 199,791
Wholesale Gas Operations 11,560 5,711
Retail Gas and Other Operations 75,027 83,518
Retail Electric Operations 22,698 17,081
On-Site Energy Production 5,370 6,112
Appliance Service Operations 3,425 2,468
-------------------------------
SJI-17
Subtotal 332,617 314,681
Intersegment Sales (4,047) (7,071)
-------------------------------
Total Operating Revenues $ 328,570 $ 307,610
===============================
Operating Income:
Gas Utility Operations $ 43,160 $ 38,810
Wholesale Gas Operations 4,700 89
Retail Gas and Other Operations 303 4,142
Retail Electric Operations 434 614
On-Site Energy Production 1,624 1,594
Appliance Service Operations 698 332
General Corporate (186) (128)
-------------------------------
Total Operating Income $ 50,733 $ 45,453
===============================
Depreciation and Amortization:
Gas Utility Operations $ 6,069 $ 6,783
Wholesale Gas Operations 4 4
Retail Gas and Other Operations 30 32
Retail Electric Operations - -
On-Site Energy Production 446 401
Appliance Service Operations 36 -
Discontinued Operations - -
-------------------------------
Total Depreciation and Amortization $ 6,585 $ 7,220
===============================
Property Additions:
Gas Utility Operations $ 12,110 $ 11,065
Wholesale Gas Operations - 15
Retail Gas and Other Operations 8 40
Retail Electric Operations - -
On-Site Energy Production 5,391 981
Appliance Service Operations 27 -
-------------------------------
Total Property Additions $ 17,536 $ 12,101
===============================
March 31, December 31,
2005 2004
-------------------------------
Identifiable Assets:
Gas Utility Operations $ 1,001,756 $ 1,007,587
Wholesale Gas Operations 77,528 103,689
Retail Gas and Other Operations 57,653 53,880
Retail Electric Operations 13,692 12,580
On-Site Energy Production 89,382 84,616
Appliance Service Operations 11,708 11,640
Discontinued Operations 411 413
------------------------------
Subtotal 1,252,130 1,274,405
SJI-18
Corporate Assets 43,612 46,674
Intersegment Assets (84,127) (77,745)
-------------------------------
Total Identifiable Assets $ 1,211,615 $ 1,243,334
===============================
Gas Utility Operations consist primarily of natural gas distribution to
residential, commercial and industrial customers. Wholesale Gas Operations
include SJRG's activities. Retail Gas and Other Operations include natural gas
acquisition and transportation service companies. Retail Electric Operations
consist of electricity acquisition and transportation to retail, commercial and
industrial customers. On-Site Energy Production consists of Marina's thermal
energy facility and other energy-related projects. Appliance Service Operations
include the servicing of appliances via the sale of appliance service programs
as well as on a time and materials basis and the installation of residential and
small commercial HVAC systems.
SJI's interest expense relates primarily to SJG's and Marina's
borrowing and financing activities. Interest income is essentially derived from
borrowings between the subsidiaries and is eliminated during consolidation.
Note 7. Regulatory Actions:
Base Rates -- 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 provided for cost-of-service
recovery, 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. As a result of this case, SJG kept 100% of
pre-tax margins up to the threshold level of $7.8 million. The next $750,000 was
credited to customers through the Basic Gas Supply Service (BGSS) clause.
Thereafter, SJG kept 20% of the pre-tax margins as it had historically.
On July 7, 2004, the BPU granted SJG a base rate increase of $20.0
million, which was predicated in part upon a 7.97% rate of return on rate base
that included a 10.0% return on common equity. The increase, effective July 8,
2004, was designed to provide an incremental $8.5 million on an annualized basis
to net income. SJG was also permitted to recover regulatory assets contained in
its petition and to reduce its composite depreciation rate from 2.9% to 2.4%.
Included in the base rate increase was a change to the sharing of
pre-tax margins on interruptible and off-system sales and transportation. SJG
now recovers through its base rates the $7.8 million that it had previously
recovered through the sharing of pre-tax margins. As a result, the sharing of
pre-tax margins now begins from dollar one, with SJG retaining 20%. Moreover,
SJG now shares pre-tax margins from on-system capacity release sales, in
addition to the interruptible and off-system sales and transportation. Effective
July 1, 2006, the 20% retained by SJG will decrease to 15% of such margins.
As part of the overall settlement effective July 8, 2004, SJG reduced
rates in several rate clauses that were no longer needed by SJG to recover
costs. SJG was either no longer incurring or had already recovered the specific
costs that these clauses were designed to recover. Since revenues raised under
these clauses were for cost recovery only and had no profit margin built in,
SJI-19
their elimination has no impact on SJG's net income. However, SJG's customers'
bills are estimated to decline by $38.9 million annually due to the elimination
of these clauses, more than offsetting the base rate increase awarded.
Pending Audits -- The BPU issued an order under which it will perform a
competitive services audit and a management audit that includes a focused review
of SJG's gas supply and purchasing practices. The audits, which commenced in
October 2004, are mandated by statute to be conducted at predetermined
intervals. Management does not currently anticipate the outcome of these audits,
which are nearing completion, to materially affect SJI's financial position,
results of operations or liquidity.
Appliance Service Business -- On July 23, 2004, the BPU approved SJG's
petition and related agreements to transfer its appliance service business from
the regulated utility. In anticipation of this transfer, SJI formed South Jersey
Energy Service Plus, LLC (SJESP) to perform appliance repair services after BPU
approval of the transfer. SJESP purchased certain assets and assumed certain
liabilities required to perform these repair services from SJG for the net book
value of $1.2 million on September 1, 2004. The agreements also called for SJESP
to pay an additional $1.5 million to SJG. SJG credited this $1.5 million to
customers through the Remediation Adjustment Clause (RAC), which had no earnings
impact on SJG. The $1.5 million is considered an intangible asset by SJESP and
is being amortized on a straight-line basis over a 12-year period, which
commenced as of the transfer date. The amortization period was based on a study
performed by an independent consultant. The study results indicate the benefit
period is linked to residential homeowner moving rates based on U.S. Census
Bureau and regional information.
Other Regulatory Matters -- 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, 2005, 85,207 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. Unbundling
did not change the fact that SJG still recovers cost of service, including
deferred costs, through base rates.
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%. SJG finished recovering this balance upon the
settlement of its rate case in July 2004.
In March 2003, the BPU approved a statewide Universal Service Fund
(USF) program through which funds for the USF and Lifeline Credit and Tenants
Assistance (Lifeline) Programs would be collected from customers of all New
Jersey electric and gas utilities. In April 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, which was later updated to $113.0. In
June 2004, the BPU approved the statewide budget of $113.0 million and the
increased rates were implemented effective July 1, 2004, resulting in a $3.9
million increase to SJG's annual USF recoveries. In April 2005, SJG made its
annual USF filing, along with the state's other electric and gas utilities,
proposing a statewide USF budget of $129.0 million.
SJI-20
In February 2004, SJG filed notice with the BPU to reduce its gas cost
revenues collected under the BGSS by approximately $5.0 million, via a rate
reduction, in addition to a $20.8 million bill credit to customers. Both the
rate reduction and bill credit were approved and implemented in March 2004.
In June 2004, SJG made its annual BGSS filing with the BPU requesting a
$4.9 million increase in gas cost recoveries. In October 2004, the requested
increase was approved on a provisional basis. In February 2005, SJG filed notice
with the BPU to provide for an $11.4 million bill credit to customers. The bill
credit was implemented in March 2005.
In September 2004, SJG filed for a $2.6 million reduction to its annual
Societal Benefits Clause (SBC) recovery level. The SBC recovers costs related to
BPU-mandated programs, including environmental remediation costs recovered
through SJG's RAC; energy efficiency and renewable energy program costs
recovered through SJG's New Jersey Clean Energy Programs (NJCEP); consumer
education program costs; and low income program costs recovered through the
Universal Service Fund.
In December 2004, the BPU approved the statewide funding of the NJCEP
of $745.0 million for the years 2005 through 2008. Of this amount, SJG will be
responsible for approximately $25.4 million over the four year period. Amounts
not yet expended have been included in the Contractual Cash Obligations table
included in Note 11.
Filings and petitions described above are still pending unless
otherwise indicated.
Note 8. Pension & 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 do not
qualify for participation in the defined benefit pension plans. New hires are
eligible to receive an enhanced version of the Company's defined contribution
plan (401-K). The other postretirement benefit plans provide health care and
life insurance benefits to some retirees.
Net periodic benefit cost for the three months ended March 31, 2005 and
2004 related to the pension and other postretirement benefit plans consisted of
the following components (in thousands):
Other Postretirement
Pension Benefits Benefits
2005 2004 2005 2004
-----------------------------------------------
Service Cost $ 998 $ 735 $ 409 $ 377
Interest Cost 1,953 1,425 704 629
Expected Return on Plan Assets (2,741) (1,774) (409) (350)
Amortization of
Transition Obligation - - - 193
Amortization of Loss and Other 704 444 38 44
----------------------------------------------
Net Periodic Benefit Cost $ 914 $ 830 $ 742 $ 893
==============================================
SJI-21
The table above includes benefit costs capitalized by SJG related to
its construction program. Capitalized pension benefit costs totaled $386,300 and
$275,500 for the three months ended March 31, 2005 and 2004, respectively.
Capitalized other postretirement benefit costs totaled $247,900 and $258,300 for
the three months ended March 31, 2005 and 2004, respectively.
As of November 2004, SJI implemented caps on the amount of the premium
we pay for all employees eligible for postretirement health care. Employees are
responsible for those costs which exceed the premium caps. As a result of these
caps, we were able to reduce our postretirement benefit costs other than
pension.
Future Benefit Payments -- The following benefit payments, which
reflect expected future service, as appropriate, are expected to be paid during
the following years (in thousands):
Other
Pension Benefits Postretirement Benefits
2005 $ 4,209 $ 1,522
2006 4,397 1,737
2007 4,621 1,970
2008 4,898 2,187
2009 5,205 2,386
2010-2014 32,748 13,837
Contributions -- SJI expects to make no contributions to its pension
plan in 2005; however, unfavorable changes in investment performance and
discount rates during the year may ultimately result in a contribution at the
end of the year. SJG also has a regulatory obligation to contribute $3.6 million
annually to its other post retirement benefit plans, less costs incurred
directly by the company.
Note 9. 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, 2005 and December 31, 2004, SJG's loan restrictions did not
affect the amount that may be distributed from either SJG's or SJI's retained
earnings.
SJG is restricted as to the amount of cash dividends or other
distributions that may be paid on its common stock by an order issued by the BPU
in July 2004, that granted SJG an increase in base rates. Per the order, SJG is
required to maintain total common equity of no less than $289.0 million. SJG's
total common equity balance was $323.5 million at March 31, 2005.
Note 10. Unused Lines of Credit and Compensating Balances:
Bank credit lines available to SJI totaled $266.0 million at March 31,
2005, of which $38.8 million, inclusive of $6.4 million of letters of credit,
was used. Those bank facilities consist of a $100.0 million revolving credit
facility that expires in August 2006 and $76.0 million of uncommitted bank lines
available to SJG; and a $60.0 million revolving credit facility that expires in
August 2007, and $30.0 million of uncommitted bank lines available to SJI. The
SJI-22
amount of the revolving credit to SJI was increased by $20.0 million and the
expiration date was extended to 2007 in August 2004. The revolving credit
facilities contain certain financial covenants measured on a quarterly basis.
SJI and SJG were in compliance with these covenants as of March 31, 2005.
Borrowings under these lines of credit are at market rates. The weighted
borrowing cost, which changes daily, was 3.33% and 3.02% at March 31, 2005 and
December 31, 2004, respectively. We maintain demand deposits with lending banks
on an informal basis and they do not constitute compensating balances.
Note 11. Commitments and Contingencies:
Contractual Cash Obligations -- The following table summarizes our
contractual cash obligations and their applicable payment due dates as of March
31, 2005 (in thousands):
Up to Years Years More than
Contractual Obligations Total 1 Year 2 & 3 4 & 5 5 Years
--------------------------------------------------------------------
Long-Term Debt $ 323,762 $ 2,348 $ 4,737 $ 220 $ 316,457
Interest on Long-Term Debt 298,776 19,440 38,307 37,907 203,122
Operating Leases 727 332 337 42 16
Construction Obligations 22,341 22,341 -- -- --
Commodity Supply
Purchase Obligations 348,494 168,827 88,224 67,076 24,367
New Jersey Clean Energy
Program (Note 7) 22,971 4,573 12,649 5,749 --
Other Purchase
Obligations 3,213 3,150 63 -- --
-------------------------------------------------------------------
Total Contractual
Cash Obligations $ 1,020,284 $ 221,011 $ 144,317 $ 110,994 $ 543,962
===================================================================
Expected environmental remediation costs are not included in the table
above due to the subjective nature of such costs and the timing of anticipated
payments. SJG's regulatory obligation to contribute $3.6 million annually to its
postretirement benefit plans other than pensions, less costs incurred directly
by the company, is not included as the duration is indefinite. As a result, the
total obligation cannot be calculated. As discussed in Note 8 - Contributions,
SJI does not currently expect to make a pension contribution in 2005.
Furthermore, future pension contributions beyond 2005 cannot be determined at
this time.
Construction and Environmental -- SJI's estimated net cost of
construction and environmental remediation programs for 2005 totals $87.2
million. Commitments were made regarding some of these programs.
Gas Supply Contracts -- SJG, in the normal course of business, has
entered into long-term contracts for natural gas supplies, firm transportation
and gas storage service. The earliest that any of these contracts expires is
March 2006. The transportation and storage service agreements between SJG and
SJI-23
its interstate pipeline suppliers were made under Federal Energy Regulatory
Commission approved tariffs. SJG's cumulative obligation for demand charges and
reservation fees paid to suppliers for these services is approximately $4.1
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. SJI has been named in, among other actions,
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, 2005, SJI had issued $226.0
million of parental guarantees on behalf of its subsidiaries. Of this total,
$167.2 million expire within one year, $1.0 million expire between one and two
years and $57.8 million have no expiration date. The vast majority of these
guarantees were issued to guarantee payment to third parties with whom our
subsidiaries have commodity supply contracts. These contracts contain netting
provisions which permit us to net the ultimate cash payment for monthly buys and
sells from/to counterparties. As of March 31, 2005, these guarantees support
future firm commitments and $49.1 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 five parental guarantees totaling $30.2 million
related to Marina's construction and operating activities.
Standby Letters of Credit -- As of March 31, 2005, SJI 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, 2005.
Also, as of March 31, 2005, SJI has issued four letters of credit
totaling $6.4 million. Three of these letters were posted to two different
utilities to enable SJE to market retail electricity within the respective
utilities' service territories. The remaining letter was posted related to the
construction activity of ACLE.
Environmental Remediation Costs -- SJI incurred and recorded costs for
environmental cleanup of 12 sites where SJG or its predecessors operated gas
manufacturing plants. SJG stopped manufacturing gas in the 1950s. SJI and some
of its nonutility subsidiaries also recorded costs for environmental cleanup of
sites where SJF previously operated a fuel oil business and Morie maintained
equipment, fueling stations and storage.
SJI successfully entered into settlements with all of its historic
comprehensive general liability carriers regarding the environmental remediation
expenditures at the SJG sites. Also, SJG purchased a Cleanup Cost Cap Insurance
Policy limiting the amount of remediation expenditures that SJG will be required
to make at 11 of its sites. This Policy will be in force until 2024 at 10 sites
and until 2029 at one site. The new future cost estimates discussed hereafter
are not reduced by projected insurance recoveries from the Cleanup Cost Cap
Insurance Policy.
SJI-24
Since the early 1980s, SJI accrued environmental remediation costs of
$155.9 million, of which $99.5 million was spent as of March 31, 2005. With the
assistance of a consulting firm, we estimate that undiscounted future costs to
clean up SJG's sites will range from $51.9 million to $191.4 million. We
recorded the lower end of this range as a liability because a single reliable
estimation point is not feasible due to the amount of uncertainty involved in
the nature of projected remediation efforts and the long period over which
remediation efforts will continue. It is reflected on the March 31, 2005
condensed consolidated balance sheet under Current Liabilities and Deferred
Credits and Other Noncurrent 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, Environmental Remediation Cost: Expended -- Net, represents 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.
The other asset, 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
regulatory asset under Statement No. 71 with the corresponding amount reflected
on the condensed consolidated balance sheet under Current Liabilities and
Deferred Credits and Other Noncurrent Liabilities. The BPU's intent, evidenced
by current practice, is to allow SJG to recover the deferred costs after they
are spent over 7-year periods. As of March 31, 2005, we reflected SJG's
unamortized remediation costs of $5.6 million on the condensed consolidated
balance sheet under Regulatory Assets. Since implementing the RAC in 1992, SJG
has recovered $44.5 million through rates.
With Morie's sale, EMI assumed responsibility for environmental
liabilities estimated between $2.8 million and $8.8 million. The information
available on these sites is sufficient only to establish a range of probable
liability and no point within the range is more likely than any other.
Therefore, EMI has accrued the lower end of the range. Changes in the accrual
are included in the statements of condensed consolidated income under Loss from
Discontinued Operations -- Net.
SJI and SJF estimated their potential exposure for the future
remediation of four sites where fuel oil operations existed years ago. Estimates
for these sites range from $1.2 million to $5.0 million. We recorded the lower
ends of these ranges on the 2005 condensed consolidated balance sheet under
Current Liabilities and Deferred Credits and Other Noncurrent Liabilities as of
March 31, 2005.
`
SJI-25
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
316,094 customers at March 31, 2005 compared with 307,044 customers at March 31,
2004. 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
* serviced appliances via the sale of appliance service programs, as
well as on a time and materials basis through September 1, 2004,
at which time the business line was transferred out of SJG and
into South Jersey Energy Service Plus, LLC.
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 by entering into a
variety of physical and financial transactions including forward contracts, swap
agreements, option contracts and futures contracts. SJRG performs this risk
management function for SJG and SJE and enters into the types of financial
transactions noted above.
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 the Borgata Hotel Casino & Spa in Atlantic
City, began commercial operations in July 2003. Marina also owns a 51% equity
interest in AC Landfill Energy, LLC (ACLE). ACLE was formed with DCO Energy, LLC
(DCO) to develop and install a 1,400 kilowatt methane-to-electric power
generation system at a county-owned landfill in Egg Harbor Township, NJ.
Commercial operation of the plant began in March 2005. Marina also owns a 51%
equity interest in WC Landfill Energy, LLC (WCLE). WCLE was formed with DCO to
develop and install a 3,800 kilowatt methane-to-electric power generation system
at a county-owned landfill in White Township, NJ. Commercial operation of the
plant is targeted for the end of 2005.
SJI-26
5) South Jersey Energy Service Plus, LLC (SJESP) installs residential
and small commercial HVAC systems and services appliances via the sale of
appliance service programs as well as on a time and materials basis in southern
New Jersey.
SJI also has a joint venture investment with Conectiv Solutions, LLC in
Millennium Account Services, LLC (Millennium). Millennium provides meter reading
services to SJG and Conectiv Power Delivery in southern New Jersey.
Forward-Looking Statement and Risk Factors:
Certain statements contained in this Quarterly Report on Form 10-Q may
qualify as "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
All statements other than statements of historical fact included in this Report
should be considered forward-looking statements made in good faith by the
Company and are intended to qualify for the safe harbor from liability
established by the Private Securities Litigation Reform Act of 1995. When used
in this Report, or any other of the Company's documents or oral presentations,
words such as "anticipate", "believe", "expect", "estimate", "forecast", "goal",
"intend", "objective", "plan", "project", "seek", "strategy" and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed or implied in the
statements. These risks and uncertainties include, but are not limited to, the
following: general economic conditions on an international, national, state and
local level; weather conditions in our marketing areas; changes in commodity
costs; changes in the availability of natural gas; regulatory and court
decisions; competition; the availability and cost of capital; 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.
A discussion of these risks and uncertainties may be found in the
Company's Form 10-K for the year ended December 31, 2004. Accordingly, while the
Company believes these forward-looking statements to be reasonable, there can be
no assurance that they will approximate actual experience or that the
expectations derived from them will be realized. Further, the Company undertakes
no obligation to update or revise any of its forward-looking statements whether
as a result of new information, future events or otherwise.
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. SJI's
Form 10-K for the year ended December 31, 2004 describes five critical
accounting policies within the section Management's Discussion and Analysis that
require a significant amount of judgment and estimation. These relate to
regulatory accounting, energy derivatives, environmental remediation costs,
pension and other postretirement employee benefit costs, and revenue
recognition.
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-27
Temperature Adjustment Clause -- A BPU-approved Temperature Adjustment
Clause (TAC) decreased SJG's net income by $0.9 million and $0.7 million for the
three months ended March 31, 2005 and 2004, respectively, due to lower than
normal temperatures. The clause mitigates 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 -- See detailed discussion concerning Recent
Regulatory Actions in Note 7 to the condensed consolidated financial statements.
Environmental Remediation -- SJI incurred and recorded costs for
environmental cleanup of 12 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,
2005, SJG has $5.6 million of remediation costs not yet recovered through rates.
Other matters are discussed in Note 11 to the condensed consolidated
financial statements included as part of this report.
Results of Operations
Operating Revenues -- Utility -- Revenues, net of intercompany
transactions, increased $14.8 million during the first quarter of 2005 compared
with the same period last year primarily due to two factors. First, SJG added
9,050 customers during the 12-month period ended March 31, 2005, which
represents a 2.9% increase in total customers. Second, 20% of the residential
customers purchasing their gas from a source other than SJG migrated back to
utility sales service. The number of residential transportation customers
decreased from 106,620 at March 31, 2004, to 85,207 at March 31, 2005 as third
party marketers are finding it difficult to compete with the utility under
current market conditions. This migration of customers from transportation
service back to sales service has a direct impact on utility revenues as charges
for gas costs are included in sales revenues and not in transportation revenues.
However, since gas costs are passed on directly to customers without any profit
margin added by SJG, the change in customer utilization of gas marketers did not
impact SJG's profitability.
Partially offsetting these factors were lower customer utilization
rates combined with 1.5% warmer weather in the first quarter of 2005 compared
with the same period in 2004, a $6.4 million decrease in Off-System Sales (OSS)
SJI-28
revenues, and the impact of the July 2004 rate case settlement on revenues. The
decrease in the OSS revenues was the direct impact of lower sales volume. This
was partially offset by an increase in capacity release activity during the
period. Capacity release allows SJG to sell any unused capacity for a profit,
but the revenues from such activities are much lower than those from OSS since
no commodity is included in the sale. Finally, SJG's revenues were lower due to
the impact of the July 2004 settlement of several matters before the BPU. This
settlement increased SJG's base rates and at the same time SJG reduced rates in
several clauses that were no longer needed to recover costs. SJG was either no
longer incurring or had already recovered the specific costs that these clauses
were designed to recover. Since revenues raised under these clauses were for
cost recovery only and had no profit margin built in, their elimination has no
impact on SJG's net income.
The base rate increase discussed above, and in greater detail in Note 7
to the condensed consolidated financial statements, had the impact of increasing
utility margins (revenues less gas costs and associated energy taxes) by
approximately $3.9 million during the first quarter of 2005 compared with the
same period last year.
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 during the first three months of 2005 was
1.5% warmer than in 2004, and 5.9% colder than the 20-year TAC average.
Total gas throughput increased 10.9% to 47.0 billion cubic feet (Bcf)
from March 31, 2004 to March 31, 2005. The higher throughput was primarily due
to a significant increase in capacity release activity during the first quarter
of 2005. While revenues from such activities are not as high as those including
the actual sale of commodity, contributions to margins are still comparable.
The following is a comparison of operating revenue and throughput for
the three months ended March 31:
2005 2004
------ ------
Operating Revenues (thousands):
Firm
Residential $ 97,171 $ 81,141
Commercial 35,204 23,966
Industrial 2,055 2,317
Cogeneration & Electric Generation 849 419
Firm Transportation 24,757 32,869
-------------- --------------
Total Firm Operating Revenues 160,036 140,712
-------------- --------------
Interruptible 415 288
Interruptible Transportation 599 295
Off-System 48,905 55,352
Capacity Release & Storage 4,192 2,727
Appliance Service - 2,136
Other 390 750
Intercompany Sales (2,370) (4,846)
-------------- --------------
SJI-29
Total Operating Revenues $ 212,167 $ 197,414
============== ==============
Throughput (MMcf):
Firm
Residential 8,304 7,488
Commercial 3,353 2,431
Industrial 100 92
Cogeneration & Electric Generation 65 25
Firm Transportation 10,233 12,212
-------------- --------------
Total Firm Throughput 22,055 22,248
-------------- --------------
Interruptible 38 34
Interruptible Transportation 855 576
Off-System 6,663 7,833
Capacity Release & Storage 17,354 11,662
-------------- --------------
Total Throughput 46,965 42,353
============== ==============
Operating Revenues -- Nonutility -- Revenues, net of intercompany
transactions, increased by $6.2 million for the first quarter 2005 compared with
the first quarter of 2004. Most of the increase was due to a $5.5 million
increase in SJRG's revenues for the quarter ended March 31, 2005 compared with
the quarter ended March 31, 2004 due mainly to sales volume growth, highlighted
by additional storage capacity, and higher gas prices.
SJESP's revenues increased $2.8 million for the quarter ended March 31,
2005 compared with the quarter ended March 31, 2004 due mainly to the transfer
of SJG's appliance service business in September 2004.
SJE's revenues from retail gas decreased by $7.4 million due mainly to
the decrease of over 16,300 residential and 3,100 commercial gas customers
resulting from unfavorable market conditions experienced over the preceding
twelve months. The market price for gas has been above the price charged by SJG
to its customers, causing SJE to currently suspend its gas marketing efforts.
Revenues from retail electric increased $6.5 million due to the addition of
several industrial customers and higher commodity prices for the quarter ended
March 31, 2005.
Cost of Sales -- Utility -- Cost of sales, net of intercompany
transactions, increased $9.7 million during the first quarter of 2005 compared
with the same period in 2004 due principally to the increase in SJG's total
customer base and the impact of the migration of customers from transportation
service back to sales service as discussed in detail under Operating Revenues -
Utility. This increase was partially offset by lower Off-System Sales (OSS)
volume. While changes in gas costs associated with OSS directly impact cost of
sales, changes in the unit cost of gas sold to utility ratepayers do not always
directly affect cost of sales. 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.
SJI-30
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, net of intercompany
transactions, increased $2.2 million for the first quarter of 2005 compared with
the first quarter of 2004 due mainly to SJRG's growth and higher electric costs
as described in the Operating Revenues -- Nonutility section.
Operations Expense -- A summary of increases in operations expense, net
of intercompany transactions for the three months ended March 31 follows (in
thousands):
2005 vs. 2004
-------------
Utility $ 1,540
-------------
Nonutility:
Wholesale Gas 42
Retail Gas and Other 1,098
On-Site Energy Production 83
Appliance Service 1,088
-------------
Total Nonutility 2,311
Corporate 245
-------------
Total Operations $ 4,096
=============
Utility Operations expense increased $1.5 million during the first
quarter of 2005 compared to the same period in 2004 primarily as a result of
higher bad debt expense which increased by $0.9 million. During the first
quarter of 2005, SJG increased its reserve for uncollectible accounts by $0.7
million to address the increase in the accounts receivable balances at March 31,
2005 compared with March 31, 2004. During the first quarter of 2004, the BPU
approved a BGSS refund of $20.8 million which improved our accounts receivable
aging significantly, resulting in a reduction in SJG's reserve of approximately
$0.1 million in that period. SJG provided customers with an additional BGSS
refund in March 2005 in the amount of $11.3 million. While this refund also
improved the accounts receivable aging at March 31, 2005, it was significantly
less than the prior year refund. In addition, the month of March 2005 was 24%
colder than March 2004. As collection on March sales is recovered on a cycle
basis, a large portion is not recovered until April; therefore, the increase in
billed sales in March 2005 directly impacts the amount outstanding as of the end
of the quarter.
The remaining increase in operations expense primarily resulted from
higher administrative and general expenses (A&G). A&G increased as a result of
higher employee benefit costs; increased regulatory expenses resulting from
amortizations approved in the July 2004 rate case settlement; and a 2004
reduction of SJG's reserve for outstanding claims in the amount of $0.3 million
following a period of favorable claims settlements. It should be noted that the
amortizations of approximately $0.1 million resulting from the rate case
settlement were included in rate recovery from its customers and had no impact
on net income.
Nonutility Retail Gas and Other Operations expenses increased for the
quarter ended March 31, 2005 compared with the quarter ended March 31, 2004 due
SJI-31
mainly to a significant uncollectible reserve adjustment following a bankruptcy
declaration by one of SJE's industrial gas customers. Appliance Service
Operations expenses increased as the business began independent operations in
September 2004.
Other Operating Expenses -- A summary of principal changes in other
consolidated operating expenses for the three months ended March 31 (in
thousands):
2005 vs. 2004
-------------
Maintenance $ 148
Depreciation (727)
Energy and Other Taxes 286
Depreciation decreased for the three months ended March 31, 2005
compared with the three months ended March 31, 2004 due mainly to a reduction in
SJG's depreciation expense resulting from lower depreciation rates approved by
the BPU as part of its recent rate case settlement. SJG's composite depreciation
rate was reduced from 2.9% to 2.4% effective July 2004.
The increase in Energy and Other Taxes for the three months ended March
31, 2005 compared with the three months ended March 31, 2004 relates primarily
to increases in taxable volumes of gas sold and transported by SJG and higher
revenue-based taxes as reflected under the caption, "Operating Revenues --
Utility."
Interest Charges -- Interest charges increased for the quarter ended
March 31, 2005 compared to the quarter ended March 31, 2004 primarily due to
higher average interest rates on short-term bank debt and higher levels of
long-term fixed rate debt. The impact of these factors was partially mitigated
by lower levels of short-term bank debt outstanding during the 2005 quarter.
Debt is incurred primarily to expand and upgrade SJG's gas transmission
and distribution system, to support seasonal working capital needs related to
inventories and customer receivables, and to develop energy projects.
Discontinued Operations -- The losses are primarily comprised of
environmental remediation and product liability litigation associated with
previously disposed businesses.
Net Income -- Net income increased $2.4 million, or 10.0%, to $26.7
million for the quarter ended March 31, 2005 as compared with $24.3 million for
the quarter ended March 31, 2004. We discuss the reasons for the increases in
net income 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.
SJI-32
Liquidity needs are first met 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.
In addition to annual fluctuations, SJI's operations are also subject
to seasonal fluctuations. Significant changes in the balances of current assets
and current liabilities can occur from the end of one reporting period to
another as evidenced by the changes on the condensed consolidated balance
sheets. Cash inflows generally increase during the first quarter as a result of
collections on winter season accounts receivable and the increased use of gas in
storage to serve customers. Much of this cash is used to pay down short-term
notes payable to banks and cover dividend requirements. SJI also ends each
calendar year in a prepaid tax position due to mandatory prepayment requirements
on all state taxes. Such prepayments are credited against amounts otherwise due
during the first quarter; thus, further improving first quarter liquidity.
Sales during the first quarter historically exceed any other quarter
during the year. As a result, accounts receivable is generally at its highest as
of March 31 as compared to any other quarter end. Unlike billed sales, customer
receivables associated with unbilled revenue will track temperatures during the
last month of the reporting period. As such, unbilled revenues will generally be
highest at the end of the fourth quarter as weather is colder in the month of
December compared with March, June, and September.
We use short-term borrowings under lines of credit from commercial
banks to supplement cash from operations, to support working capital needs and
to finance capital expenditures as incurred. From time to time, we refinance
short-term debt incurred to finance capital expenditures with long-term debt.
Bank credit lines available to SJI totaled $266.0 million at March 31, 2005, of
which $38.8 million, inclusive of $6.4 million of letters of credit, was used.
Those bank facilities consist of a $100.0 million revolving credit facility that
expires in August 2006, and $76.0 million of uncommitted bank lines available to
SJG; and a $60.0 million revolving credit facility that expires in August 2007,
and $30.0 million of uncommitted bank lines available to SJI. The amount of the
revolving credit available to SJI was increased by $20.0 million and the
expiration date was extended to 2007 in August 2004. We increased the SJI
revolving credit in anticipation of greater working capital needs due to
anticipated growth at our nonutility operations over the next two years. The
revolving credit facilities contain certain financial covenants measured on a
quarterly basis. SJI and SJG were in compliance with these covenants as of March
31, 2005. Based upon the existing credit facilities and a regular dialogue with
our banks, we believe 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 utility assets, to finance its long-term borrowing needs. These
needs are primarily capital expenditures for property, plant and equipment.
Under a $150.0 million MTN program established in December 2002, SJG issued
SJI-33
$110.0 million of long-term debt in 2003. SJG issued the remaining $40.0 million
of notes under the MTN program in August 2004 at an average interest rate of
5.66% and an average maturity of 17 years. We used the proceeds of all of the
issues to refinance short-term debt outstanding to commercial banks and to
redeem certain high interest bearing securities. In addition, SJG redeemed $15.0
million of its 7.7% MTN in July 2004. We anticipate establishing a new MTN
program by mid-2005.
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 as it is the most
cost-effective way to raise equity capital in the quantities we are seeking.
Through the DRP, SJI raised $0.7 million of equity capital by issuing 14,053
shares for the three months ended March 31, 2005 and $36.2 million of equity
capital by issuing 616,301 shares for the twelve months ended December 31, 2004.
We anticipate raising a total of approximately $15.0 million of equity capital
through the DRP in 2005.
On March 30, 2005, SJG provided notice of its intent to redeem its
Redeemable Cumulative Preferred 8% Series of preferred stock. The total amount
outstanding as of the May 1, 2005 redemption date was $1.69 million.
On March 3, 2005, the Board of Directors authorized an amendment to
SJI's Certificate of Incorporation to increase the authorized number of shares
of Common Stock from 20,000,000 shares to 60,000,000 shares. This authorization
was approved by SJI's shareholders vote at SJI's annual meeting of shareholders
held on April 21, 2005. The principal purpose of the increase is to permit a
two-for-one split of all the issued shares of SJI's Common Stock with a record
date of June 10, 2005. As the market price of SJI's shares of Common Stock has
increased, our Board believes that a stock split would result in a market price
for the Common Stock that would be more attractive to a broader spectrum of
investors and, therefore, would benefit both SJI and our existing stockholders
through greater liquidity in the market. SJI's Board of Directors also believes
that it is advisable and in our best interest to have available additional
authorized but unissued shares of Common Stock in an amount adequate to provide
for our future needs. Our Board believes that the availability of additional
authorized shares will enable it to act with flexibility when and as the need
arises to issue additional shares in the future without the delays necessitated
by having to obtain shareholder approval at that time. For further discussion on
the approved stock split, see Note 3 to the condensed consolidated financial
statements.
SJI's capital structure, excluding preferred stock which was
immaterial, was as follows:
As of As of
March 31, December 31,
2005 2004
------ -----
Common Equity 51% 45%
Long-Term Debt 44% 42%
Short-Term Debt 5% 13%
----- ----
Total 100% 100%
===== ====
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-34
SJG is restricted as to the amount of cash dividends or other
distributions that may be paid on its common stock by an order issued by the BPU
in July 2004, that granted SJG an increase in base rates. Per the order, SJG is
required to maintain total common equity of no less than $289.0 million. SJG's
total common equity balance was $323.5 million at March 31, 2005.
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. Construction and remediation
expenditures for the three months ended March 31, 2005 amounted to $16.1
million. We estimate the net costs for 2005, 2006 and 2007 at approximately
$87.2 million, $48.4 million and $46.0 million, respectively.
Commitments and Contingencies -- 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 credit support for
those bonds, the proceeds of which were used for the development of Marina's
thermal plant project. The letter of credit agreement contains certain financial
covenants measured on a quarterly basis. SJI was in compliance with these
covenants as of March 31, 2005.
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,
2005 average $43.9 million annually and total $200.9 million over the contracts'
lives. Approximately 24% of the financial commitment under these contracts
expires during the next five years. We expect to renew each of these contracts
under renewal provisions as provided in each contract. SJG recovers all
prudently incurred fees through rates via the Basic Gas Supply Service clause.
Also, as of March 31, 2005, SJI has issued four letters of credit
totaling $6.4 million. Three of these letters were posted to two different
utilities to enable SJE to market retail electricity within the respective
utilities' service territories. The remaining letter was posted related to the
construction activity of AC Landfill Energy, LLC.
Off-Balance Sheet Arrangements -- SJI has no off-balance sheet
financing arrangements.
Parental Guarantees -- As of March 31, 2005, SJI had issued $226.0
million of parental guarantees on behalf of its subsidiaries. Of this total,
$167.2 million expire within one year, $1.0 million expire between one and two
years and $57.8 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. These contracts contain netting
provisions which permit us to net the ultimate cash payment for monthly buys and
sells from/to counterparties. As of March 31, 2005, these guarantees support
future firm commitments and $49.1 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 five
parental guarantees totaling $30.2 million related to Marina's construction and
operating activities.
SJI-35
Pending Litigation -- 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. SJI has been named in, among other actions, 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.
Contract Modifications -- On September 27, 2004, Marina signed an
agreement with the Borgata to amend the terms of the original contract dated
December 12, 2000. As provided under this new agreement, Marina paid the Borgata
$3.5 million on September 28, 2004 to remove the liquidating damages provision
from the Energy Services Agreement and eliminate the requirement for a Letter of
Credit from the Operations Agreement. The payment of $3.5 million is being
amortized on a straight-line basis over the remaining term of the original
20-year contract.
Prompted by its most recent expansion project, Borgata extended its
agreement with Marina to provide increased energy services to its growing
Atlantic City resort. The new 20-year contract covers service to both the
existing and new facilities and significantly increases the demand for energy
services provided by Marina. Borgata's 500,000 square foot expansion is expected
to open by mid-2006. Marina expects to spend approximately $23.0 million to
expand its Atlantic City, NJ thermal plant to serve the expanded resort.
SJI-36
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 and buying and selling retail electricity for their own accounts as well as
managing these activities for others. These subsidiaries are subject to market
risk due to price fluctuations. To 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, the derivative activities described above are entered
into for risk management purposes.
SJG and SJE transact commodities on a physical basis and typically 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. As part of its gas purchasing strategy, SJG
occasionally uses financial contracts to hedge against forward price risk. These
contracts are recoverable through SJG's BGSS, subject to BPU approval. 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, 2005, SJRG had $23.8 million of
Accounts Receivable under sales contracts. Of that total, 83% were with
companies rated investment-grade, were guaranteed by an investment-grade-rated
parent or were with companies where we have a collateral arrangement. The
remainder of the accounts receivable were within approved credit limits.
SJRG and SJE entered into certain contracts to purchase, sell, and
transport natural gas. For those derivatives not designated as hedges, we
recorded the net unrealized pre-tax gain of $4.1 million and $2.0 million in
earnings during the three months ended March 31, 2005 and 2004, respectively,
which are included with realized gains and losses in Operating Revenues --
Nonutility. SJRG's and SJE's contracts are typically less than 12 months long.
SJE entered into two longer-term gas supply contracts with two of its larger
customers. These contracts were reviewed and approved by SJI's Risk Management
Committee after being satisfied that our exposure to price and credit risk had
been sufficiently mitigated. The fair value and maturity of all these energy
trading and hedging contracts determined under the mark-to-market method as of
March 31, 2005 is as follows (in thousands):
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Assets Maturity Maturity Beyond
Source of Fair Value < 1 Year 1 - 3 Years 3 Years Total
----------- ----------- ---------- -----------
Prices Actively Quoted NYMEX:
Trading $ 6,350 $ 1,424 $ 323 $ 8,097
Hedging 8,713 143 -- 8,856
---------------------------------------------------
Subtotal 15,063 1,567 323 16,953
---------------------------------------------------
Other External Sources Basis:
Trading 8,312 1,043 104 9,459
Hedging 526 -- -- 526
---------------------------------------------------
Subtotal 8,838 1,043 104 9,985
---------------------------------------------------
Total $ 23,901 $ 2,610 $ 427 $ 26,938
===================================================
Liabilities Maturity Maturity Beyond
Source of Fair Value < 1 Year 1 - 3 Years 3 Years Total
-------- ------------ ---------- -----------
Prices Actively Quoted NYMEX:
Trading $ 2,440 $ 1,406 $ 298 $ 4,144
Hedging 3 -- -- 3
---------------------------------------------------
Subtotal 2,443 1,406 298 4,147
---------------------------------------------------
Other External Sources Basis:
Trading 3,241 289 29 3,559
Hedging 109 -- -- 109
---------------------------------------------------
Subtotal 3,350 289 29 3,668
---------------------------------------------------
Total $ 5,793 $ 1,695 $ 327 $ 7,815
===================================================
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, including energy trading and hedging contracts, follows (in
thousands):
Net Derivatives -- Energy Related Assets, January 1, 2005 $ 9,037
Contracts Settled During Quarter Ended March 31, 2005, Net 1,918
Other Changes in Fair Value from Continuing
and New Contracts, Net 8,168
-----------
Net Derivatives -- Energy Related Assets, March 31, 2005 $ 19,123
===========
Interest Rate Risk -- Our exposure to interest-rate risk relates
primarily to short-term, variable rate borrowings. Short-term, variable rate
debt outstanding at March 31, 2005 was $32.4 million and averaged $30.7 million
during the first quarter of 2005. A hypothetical 100 basis point (1%) increase
in interest rates on our average variable rate debt outstanding would result in
a $181,100 increase in our annual interest expense, net of tax. The 100 basis
point increase was chosen 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: 2004 -- 115 b.p. increase; 2003 -- 28 b.p. decrease; 2002
- -- 74 b.p. decrease; 2001 -- 383 b.p. decrease; and 2000 -- 83 b.p. increase.
For March 2005, our average interest rate on variable rate debt was 3.30%.
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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 redeemed, at par, $7.5 million of 8.6% debenture
notes in February 2005. In November 2004, SJG entered into a derivative
transaction known as a "Treasury Lock" to hedge against the impact of possible
interest rate increases on a $10.0 million, 30-year debt issuance by SJG planned
for July 2005. The only other long-term 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 and
long-term bank loans used to finance the construction of a landfill gas
cogeneration project. The bonds for the thermal plant were issued at floating
rates that reset weekly. Subsequent to issuance, we entered into interest rate
swap contracts that, as of March 31, 2005, effectively fixed the rate on $20.0
million of tax-exempt debt at 4.08% through 2011; and fixed the rates on $9.0
million, $3.9 million, $8.0 million and $3.9 million of taxable debt at 4.55%,
4.62%, 4.80% and 4.78%, respectively. The swaps on the taxable debt expire at
various times between 2005 and 2014. The long-term debt for the landfill gas
cogeneration project totaled $2.0 million and amortizes over 15 years at fixed
rates.
SJI-39
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-15. 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.
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.
PART II -- OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part
I, Item 1, Note 11, beginning on page 23.
Item 6. Exhibits
(a) Exhibits
Exhibit No. Description
3 South Jersey Industries Certificate of Amendment of
the Certificate of Incorporation, dated May 5, 2005.
10 South Jersey Industries, Inc. 1997 Stock-Based
Compensation Plan (as amended and restated effective
April 21, 2005).
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) of the Exchange Act.
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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).
SJI-41
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, 2005 By: /s/ Edward J. Graham
----------------------------------------------
Edward J. Graham
Chairman, President & Chief Executive Officer
Dated: May 10, 2005 By: /s/ David A. Kindlick
----------------------------------------------
David A. Kindlick
Vice President & Chief Financial Officer
SJI-42