-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KRMO8L6udyaHCMyR/YuYjRiSkoov1myldsa6haTbfggtlPKZfx/YHNARgAl9HzRH PGv4e4FPGREcu1fl1eCgpg== 0000091928-98-000005.txt : 19980330 0000091928-98-000005.hdr.sgml : 19980330 ACCESSION NUMBER: 0000091928-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTH JERSEY INDUSTRIES INC CENTRAL INDEX KEY: 0000091928 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 221901645 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06364 FILM NUMBER: 98575100 BUSINESS ADDRESS: STREET 1: 1 SO JERSEY PLZ STREET 2: RTE 54 CITY: FOLSOM STATE: NJ ZIP: 08037 BUSINESS PHONE: 6095619000 MAIL ADDRESS: STREET 1: 1 SO JERSEY PLZ STREET 2: RTE 54 CITY: FOLSOM STATE: NJ ZIP: 08037 FORMER COMPANY: FORMER CONFORMED NAME: SOUTH JERSEY GAS CO DATE OF NAME CHANGE: 19700507 FORMER COMPANY: FORMER CONFORMED NAME: ATLANTIC CITY GAS CO DATE OF NAME CHANGE: 19680301 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 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.) Number One South Jersey Plaza, Route 54, Folsom, New Jersey 08037 (Address of principal executive offices, including zip code) (609) 561-9000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock New York Stock Exchange ($1.25 par value per share) Philadelphia Stock Exchange (Title of each class) (Name of exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of approximately 9,209,759 shares of voting stock held by non-affiliates of the registrant as of March 2, 1998 was $276,294,000. As of March 2, 1998, there were 10,773,888 shares of the registrant's common stock outstanding. Documents Incorporated by Reference: In Part I of Form 10-K: Pages 11, 18, 20, 21, 23 and 25 of 1997 Annual Report to Shareholders In Part II of Form 10-K: Page 1 and Pages 10 through 24 of 1997 Annual Report to Shareholders In Part III of Form 10-K: Pages 2 through 6, 8 and 10 of the Proxy Statement dated March 13, 1998 for the 1998 Annual Meeting of Shareholders - Title Page - PART I Item 1. Business General The registrant, South Jersey Industries, Inc. (the Company), a New Jersey corporation, was formed in 1969 for the purpose of owning and holding all of the outstanding common stock of South Jersey Gas Company (South Jersey Gas or SJG), a public utility, and acquiring and developing nonutility lines of business. South Jersey Energy Company (SJE), a wholly-owned subsidiary of the Company, provides services for the acquisition and transportation of natural gas and electricity for commercial, industrial and residential users. SJ EnerTrade, Inc. (EnerTrade), a wholly-owned subsidiary of the Company formed in 1997, provides services for the sale of natural gas to energy marketers, electric and gas utilities, and other wholesale users in the mid-Atlantic and southern regions of the country. Energy & Minerals, Inc. (EMI), a wholly-owned subsidiary of the Company, principally manages temporary cash investments and owns the stock of South Jersey Fuel, Inc. (SJF), an inactive nonutility subsidiary. Financial Information About Industry Segments Information regarding Industry Segments is incorporated by reference to Note 7 on page 21 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 which is attached to this report. See Item 14(c)(13). Description of Business The Company is engaged in the business of operating, through subsidiaries, various business enterprises. The Company's most significant subsidiary is SJG. South Jersey Gas Company, a New Jersey corporation, is an operating public utility company engaged in the purchase, transmission and sale of natural gas for residential, commercial and industrial use in an area of approximately 2,500 square miles in the southern part of New Jersey. SJG also makes off-system sales of natural gas on a wholesale basis to various customers on the interstate pipeline system and transports natural gas purchased directly from producers or suppliers by some of its customers. SJG's service territory includes 112 municipalities throughout Atlantic, Cape May, Cumberland and Salem Counties and portions of Burlington, Camden and Gloucester Counties, with an estimated permanent population of 1.1 million. SJG serves 260,567 residential, commercial and industrial customers (at December 31, 1997) in southern New Jersey. Gas sales and transportation for 1997 amounted to approximately 73,574,000 Mcf (thousand cubic feet), of which approximately 50,181,000 Mcf was firm sales and transportation, 8,931,000 Mcf was interruptible sales and transportation and 14,462,000 Mcf was off-system sales. The breakdown of firm sales includes 39.8% residential, 16.1% commercial, 2.5% cogeneration and electric generation, 1.4% industrial and 40.2% transportation. At year-end 1997, SJG served 242,132 residential customers, 18,037 commercial customers and 398 industrial customers. This includes 1997 net additions of 6,124 residential customers, 568 commercial customers and one industrial customer. Under an agreement with Atlantic Electric, an electric utility serving southern New Jersey, SJG supplies natural gas to several electric generation facilities. This gas service is provided under the terms of a firm electric service tariff approved by the New Jersey Board of Public Utilities (BPU) on a demand/commodity basis. In 1997, 1.97 Bcf (billion cubic feet) was delivered under this agreement. SJI-2 SJG serviced 7 cogeneration facilities in 1997. Combined sales and transportation of natural gas to such customers amounted to approximately 9.5 Bcf in 1997. SJG makes wholesale gas sales for resale to gas marketers for ultimate delivery to end users. These "off-system" sales are made possible through the issuance by the Federal Energy Regulatory Commission (FERC) of Orders No. 547 and 636. Order No. 547 issued a blanket certificate of public convenience and necessity authorizing all parties, which are not interstate pipelines, to make FERC jurisdictional gas sales for resale at negotiated rates, while Order No. 636 allowed SJG to deliver gas at delivery points on the interstate pipeline system other than its own city gate stations and release excess pipeline capacity to third parties. During 1997, off-system sales amounted to 14.5 Bcf. Also in 1997, capacity release and storage throughput amounted to 36.4 Bcf. Supplies of natural gas available to SJG that are in excess of the quantity required by those customers who use gas as their sole source of fuel (firm customers) make possible the sale and transportation of gas on an interruptible basis to commercial and industrial customers whose equipment is capable of using natural gas or other fuels, such as fuel oil and propane. The term "interruptible" is used in the sense that deliveries of natural gas may be terminated by SJG at any time if this action is necessary to meet the needs of higher priority customers as described in SJG's tariffs. Usage by interruptible customers, excluding off-system customers, in 1997 amounted to approximately 8.9 Bcf, approximately 8.1 percent of the total throughput. No material part of SJG's business is dependent upon a single customer or a few customers. Service Territory The majority of the SJG's residential customers reside in the northern and western portions of its service territory in Burlington, Camden, Salem and Gloucester counties. A majority of new customers reside in this section of the service territory, which includes the residential suburbs of Wilmington and Philadelphia. The franchise area to the east is centered on Atlantic City and the neighboring resort communities in Atlantic and Cape May counties, which experience large population increases in the summer months. The impact of the casino gaming industry on the Atlantic City area has resulted in the creation of new jobs and the expansion of the residential and commercial infrastructure necessary to support a developing year-round economy. Atlantic City is experiencing a second wave of development as a result of casino gaming. The centerpiece of this development is the recently completed multipurpose convention center, accompanied by planned major hotel and entertainment complexes. These facilities will be used to attract large conventions as well as making Atlantic City into a family resort on a year-round basis. Manufacturers or processors of sand, glass, farm products, paints, chemicals and petroleum products are located in the western and southern sectors of the service territory. New commercial establishments and high technology industrial parks and complexes are part of the economic growth of this area. SJG's service area includes parts of the Pinelands region, a largely undeveloped area in the heart of southern New Jersey. Future construction in this area is expected to be limited by statute and by a master plan adopted by the New Jersey Pinelands Commission; however, in terms of potential growth, significant portions of SJG's service area are not affected by these limitations. Rates and Regulation As a public utility, SJG is subject to regulation by the BPU. Additionally, the Natural Gas Policy Act, which was enacted in November 1978, contains provisions for Federal regulation of certain aspects of SJG's business. SJG is affected by Federal regulation with respect to transportation and pricing policies applicable to its pipeline capacity from Transcontinental Gas Pipeline Corporation (Transco), SJG's major supplier, Columbia Gas Transmission Corporation (Columbia), CNG Transmission Corporation (CNG) and Equitrans, Inc. (Equitrans), since such services are provided under rates and terms established under the jurisdiction of the FERC. SJI-3 Retail sales by SJG are made under rate schedules within a tariff filed with and subject to the jurisdiction of the BPU. These rate schedules provide primarily for either block rates or demand/commodity rate structures. The tariff contains provisions permitting SJG to pass on to customers increases and decreases in the cost of purchased gas supplies. The tariff also contains provisions permitting the recovery of environmental remediation costs associated with former manufactured gas plant sites and for the adjustment of revenues due to the impact of "temperature" fluctuations as prescribed in SJG's tariff. In August 1997, SJG initiated its BPU approved pilot program to give residential customers a choice of gas supplier. The program includes approximately 13,000 residential customers. SJG continues to deliver the natural gas through its distribution system with no loss of margins. Revenue requirements for ratemaking purposes are established on the basis of firm sales projections. On January 27, 1997, the BPU granted SJG a rate increase of $6.0 million based on an overall rate of return of 9.62% including an 11.25% return on equity. The majority of this increase impacted residential and small commercial customers. In addition, part of the increase will be recovered from customers through new service fees which charge specific customers for costs which they cause SJG to incur. Also, as part of this rate increase, SJG is allowed to retain the first $5.5 million of pre-tax margins generated by interruptible and off-system sales and transportation and 20% of pre-tax margins generated by such sales above that level. In 1997 and 1998, this $5.5 million threshold will be increased by the annual revenue requirement associated with specified major construction projects. These sharing formula improvements are expected to result in additional rate relief of approximately $0.3 million in 1998 and $1.8 million in 1999. In 1997, SJG filed to recover additional post-retirement benefit costs of approximately $1.3 million annually and this recovery was approved effective January 1, 1998. Additional information on regulatory affairs is incorporated by reference to Note 1 on page 18, Note 6 on page 20, Note 9 on page 21 and Note 13 on page 23 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 which is attached to this report. See Item 14(c)(13). SJE, a New Jersey corporation, is a wholly owned non-regulated subsidiary of the Company and is engaged in providing services for the acquisition and transportation of natural gas and electricity for industrial, commercial and residential users. SJE is also engaged in trading activities in the electric wholesale market. EMI, a New Jersey corporation, is a holding company that owns all of the outstanding common stock of SJF. SJF became inactive in 1997 and its business of providing wholesale energy services was continued by SJ EnerTrade, a new subsidiary established by the Company in 1997. EnerTrade, a New Jersey corporation, is a wholly owned non-regulated subsidiary of the Company and is engaged in providing services for the sale of natural gas to energy marketers, electric and gas utilities and other wholesale users in the mid-Atlantic and southern regions of the country. R&T Group, Inc. (R&T), a New Jersey corporation, was a holding company that owned all the common stock of several construction subsidiaries. Operations of the construction companies ended in 1997, or prior thereto, and the subsidiaries were merged into R&T. The financial statements include R&T as a discontinued operation (see Note 2 on page 18 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 which is attached to this report). See Item 14(c)(13). In 1997, the Company made no public announcement of, or otherwise made public information about, a new product or industry segment that would require the investment of a material amount of the assets of the Company or which otherwise was material. SJI-4 Raw Materials South Jersey Gas Supply Contracts and Storage SJG has direct connections to two interstate pipeline companies, Transco and Columbia. It also secures firm transportation and other long term services from four additional pipelines upstream of the Transco and Columbia systems. They include: Columbia Gulf Transmission Company (Columbia Gulf), CNG, Texas Gas Transmission Corporation (Texas Gas) and Equitrans. Services provided by these upstream pipelines are utilized to deliver gas into either the Transco or Columbia systems for ultimate delivery to SJG. Services provided by all of the above mentioned pipelines are subject to changes as directed by FERC Order No. 636. Transco Transco is SJG's largest supplier of long term gas transmission services. These services include five year-round and one seasonal firm transportation (FT) service arrangement. When combined, these services enable SJG to purchase from third parties and have delivered to its city gate stations by Transco a total of 163,741 Thousand Cubic Feet of gas per day ("Mcf/d"). The terms of the year-round agreements extend for various periods from 2002 to 2010 while the term of the seasonal agreement extends to 2011. SJG also has seven long-term gas storage service agreements with Transco that, when combined, are capable of storing approximately 10.1 Bcf. Through these services, SJG can inject gas into storage during periods of low demand and withdraw gas at a rate of up to 86,972 Mcf per day during periods of high demand. The terms of the storage service agreements extend for various periods from 1998 to 2008. Transco renders a merchant service to SJG under its Rate Schedule FS (defined below). Williams Energy Services Company (WESCO), an affiliate of Transco, has assumed Transco's natural gas merchant function under which the maximum purchase quantity amounts to 51,769 Mcf per day. FS is a no-notice swing service which allows SJG to take between zero and its full contract quantities (51,769 Mcf/d) on any day of the year. This flexibility enables SJG to respond to changes in its requirements for gas due to weather and market conditions. The initial term of the FS agreement extends through March 31, 2001. In addition to FS service, SJG has also secured a second merchant service from Transco under Transco's Rate Schedule NS. NS service is also provided by WESCO acting as agent for Transco. Under this service, SJG can purchase up to 30,000 Mcf per day of NS gas with 24 hours advance notice. SJG has a long term gas purchase agreement with Vastar Gas Marketing (Vastar) which provides for the delivery of up to 14,618 Mcf/d to SJG's service area on a year round basis by way of Transco FT service. The initial term of the gas purchase agreement with Vastar extends through March 31, 2000. SJG also has a winter season firm transportation service on the Transco system which is available for the period December 1 through the last day of February of each year. SJG's maximum entitlement under this service is 2,900 Mcf/d. SJG has contracted with Amerada Hess Corporation (Hess) to provide the gas supply to fill this transportation capacity during each winter season through October 31, 2007. SJG may deliver up to 24,700 Mcf per day of gas under a firm transportation agreement as part of Transco's Texas Gas-CNG-Transco FT project. This project was developed to provide additional firm pipeline capacity which would deliver gas to the US Northeast via a bundled service provided by Transco under its Rate Schedule FT-NT. SJG has also contracted with Hess for a 15 year gas supply service to fill this capacity which extends through October 31, 2007. SJI-5 CNG SJG has entered into separate gas sales and capacity management agreements with CNG Energy Services Corporation (CNGES), a non-jurisdictional affiliate of CNG, through which SJG has assigned to CNGES its pipeline FT and storage entitlements on the CNG system to provide SJG with up to 9,662 Mcf per day of gas during the period November 16 through March 31 of each year. Columbia SJG has three firm transportation agreements with Columbia which, when combined, provide for 43,500 Mcf/d of firm deliverability. SJG has four long term gas purchase agreements, for periods ranging from 1999 to 2003, with major non-jurisdictional producer/suppliers for gas delivered into the Columbia pipeline system which, in aggregate, provide SJG with up to 43,500 Mcf/d via the Columbia pipeline system during the winter season. Such agreements also provide for delivery in non-winter months at lower quantities. SJG also subscribes to a firm storage service from Columbia, to March 31, 2009, which provides a maximum withdrawal quantity of 19,807 Mcf/d during the winter season with an associated 1,121,095 Mcf of storage capacity. As part of addressing future winter season requirements, SJG has entered into an agreement with Columbia to subscribe to an incremental 31,296 Mcf per day of storage deliverability with an additional 2,234,482 Mcf of storage capacity to become available April 1, 1998. The term of the agreement expires October 31, 2013. The FERC has approved Columbia's arrangements to provide such services. Equitrans SJG has a long term storage service provided by Equitrans, to April 1, 2002, under which up to 500,000 Mcf of gas may be stored during the summer season and up to 4,783 Mcf/d may be withdrawn during the winter season. The gas is delivered to SJG under firm transportation agreements with Equitrans, CNG and Transco. Supplemental Gas Supplies SJG has a long term LNG purchase agreement with Distrigas of Massachusetts Corporation (DOMAC) which extends through October 31, 2000. For the 1997-98 contract year, SJG's annual contract quantity under the DOMAC agreement is 186,047 Mcf. LNG purchases from DOMAC are transported to SJG's LNG storage facility in McKee City, New Jersey via over-the-road trucks. SJG operates peaking facilities which can store and vaporize both LNG and propane for injection into its distribution system. SJG's LNG facility has a storage capacity equivalent to 404,000 Mcf of natural gas and has an installed capacity to vaporize up to 90,000 Mcf of LNG per day for injection into its distribution system. SJG also maintains two propane-air plants that are located in Middle Township and Ocean City, New Jersey. The combined maximum storage capacity of these plants is 150,000 gallons of liquefied propane or the equivalent of approximately 11,364 Mcf of natural gas. SJG also operates a high pressure pipe storage field at its McKee City facility which is capable of storing 12,000 Mcf of gas and injecting up to 10,000 Mcf of gas per day into SJG's distribution system. SJG has a LNG peaking service agreement with the Philadelphia Gas Works (PGW) which provides up to 250,000 Mcf per year of peaking service gas on a firm basis at a rate of up to 25,000 Mcf per day when taken as vapor and delivered through the Transco pipeline system or up to twelve truckloads per day SJI-6 (approximately 10,200 Mcf) when taken as liquid and trucked to SJG's LNG storage facility in McKee City, New Jersey. The term of this agreement extends through the 1998-99 winter season, however it may be extended by mutual agreement of the parties. Peak-Day Supply SJG plans for a winter season peak-day demand on the basis of an average daily temperature of 2 degrees F. Gas demand on such a design day was estimated for the 1997-98 winter season to be 387,293 Mcf versus a design day supply of 416,308 Mcf. On January 19, 1994, SJG experienced its highest peak-day demand of 370,582 Mcf with an average temperature of 2.68 degrees F. In 1997, SJG experienced a peak-day demand of 352,259 Mcf with an average temperature of 12.5 degrees F. Gas Prices During 1997, SJG purchased and had delivered approximately 46.8 Bcf of natural gas for distribution to both on-system and off-system customers. Of this total, 31.9 Bcf was transported on the Transco pipeline system and 14.9 Bcf was transported on the Columbia pipeline system. SJG's average commodity cost of gas purchased in 1997 was $2.60 per Mcf. EnerTrade and SJE Access to gas suppliers and cost of gas are significant to EnerTrade's and SJE's operations. No material part of the business of these companies is dependent upon a single customer or a few customers. Patents and Franchises SJG holds nonexclusive franchises granted by municipalities in the seven county area of southern New Jersey that it serves. No other natural gas public utility presently serves the territory covered by SJG's franchises. Otherwise, patents, trademarks, licenses, franchises and concessions are not material to the business of the Company or any of its subsidiaries. Seasonal Aspects SJG experiences seasonal fluctuations in sales when selling natural gas for heating purposes. SJG meets this seasonal fluctuation in demand from its firm customers by buying and storing gas during the summer months, and by drawing from storage and purchasing supplemental supplies during the heating season. As a result of this seasonality, SJG experiences reductions of revenues and net income during the second and third quarters of the year. Working Capital Practices As stated under Seasonal Aspects, SJG buys and stores natural gas during the summer months. These purchases are financed by short-term loans which are substantially paid down during the winter months when gas revenues are higher. Reference is also made to "Liquidity" on page 11 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 which is attached to this report. See Item 14(c)(13). Customers No material part of the Company's business or that of any of its subsidiaries is dependent upon a single customer or a few customers, the loss of which would have a material adverse effect on any such business. See pages 3 and 7. SJI-7 Backlog Backlog is not material to an understanding of the Company's business or that of any of its subsidiaries. Government Contracts No material portion of the business of the Company or any of its subsidiaries is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any government. Competition SJG's franchises are non-exclusive, however, currently no other utility is providing service within its territory. SJG competes with oil, propane and electricity suppliers for residential, commercial and industrial users. The market for natural gas sales is subject to competition as a result of deregulation. Through its tariff, SJG has promoted competition while maintaining its margins. Substantially all of SJG's profits are from the transportation rather than the sale of the commodity. SJG believes it has been a leader in addressing the changing marketplace. It maintains its focus on being a low-cost provider of natural gas and energy services. EnerTrade and SJE compete with a number of other marketers/brokers in the selling of wholesale natural gas and electricity, respectively. Competition includes SJG, other utilities and alliances which include other utility companies. Research During the last three fiscal years, neither the Company nor any of its subsidiaries engaged in research activities to any material extent. Environmental Matters Information on environmental matters for SJI and its subsidiaries is incorporated by reference to Note 2 on page 18 and Note 13 on page 23 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 which is attached to this report. See Item 14(c)(13). Employees The Company and its subsidiaries had a total of 675 employees as of December 31, 1997. Financial Information About Foreign and Domestic Operations and Export Sales The Company has no foreign operations and export sales have not been a significant part of the Company's business. Item 2. Properties The principal property of SJG consists of its gas transmission and distribution systems that include mains, service connections and meters. The transmission facilities carry the gas from the connections with Transco and Columbia to SJG's distribution systems for delivery to customers. As of December 31, 1997, there were approximately 343 miles of mains in the transmission systems and 4,652 miles of mains in the distribution systems. SJG owns office and service buildings, including its corporate headquarters, at eight locations in the territory, a liquefied natural gas storage and vaporization facility, and two propane-air vaporization plants. SJI-8 As of December 31, 1997, the SJG utility plant had a gross book value of $619,489,213 and a net book value, after accumulated depreciation, of $452,313,245. In 1997, $48,533,132 was spent on additions to utility plant and there were retirements of property having an aggregate gross book cost of $6,347,794. SJG construction and remediation expenditures for 1998 are currently expected to approximate $61.8 million. Virtually all of the SJG transmission pipeline, distribution mains and service connections are in streets or highways or on the property of others. The SJG transmission and distribution systems are maintained under franchises or permits or rights-of-way, many of which are perpetual. The SJG properties (other than property specifically excluded) are subject to a lien of mortgage under which its first mortgage bonds are outstanding. Such properties are well maintained and in good operating condition. EMI owns commercial real estate in Millville, New Jersey and 235 acres of land in Vineland, New Jersey. SJE, an inactive subsidiary, owns real estate in Deptford Township and Upper Township, New Jersey. R&T, an inactive subsidiary, owns land and buildings in Vineland, New Jersey and real estate in Pleasantville, New Jersey. The Company owns approximately 139 acres of land in Folsom, New Jersey and approximately 9.29 acres of land in Linwood, New Jersey. Item 3. Legal Proceedings The Company is subject to claims which arise in the ordinary course of its business and other legal proceedings. Included therewith, a group of Atlantic City casinos have filed a petition with the BPU alleging overcharges of over $10 million, including interest. Management of the Company believes that any pending or potential legal proceedings will not materially affect its operations, consolidated financial position or cash flow. Reference is made under Commitments and Contingencies in Note 13 on page 23 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 which is attached to this report. See Item 14(c)(13). Item 4. Submission Of Matters To A Vote of Security Holders No matter was submitted to a vote of security holders during the fourth quarter of the 1997 fiscal year. Item 4-A. Executive Officers (Other Than Directors) of the Registrant Name Age Positions with the Company Charles Biscieglia 53 Vice President David A. Kindlick 43 Vice President Joseph E. McCullough 55 Vice President George L. Baulig 56 Secretary and Treasurer There is no family relationship among the officers of the registrant. Charles Biscieglia was elected Assistant Vice President of SJG effective May 1, 1981, Vice President effective November 1, 1983, Senior Vice President effective May 1, 1987, Executive Vice President, Chief Operating Officer effective May 1, 1991 and President effective March 20, 1998. Mr. Biscieglia was elected Vice President of the Company effective April 17, 1997. SJI-9 David A. Kindlick was elected Assistant Vice President, Revenue Requirements of SJG effective October 1, 1989, Vice President, Revenue Requirements effective April 23, 1992 and Vice President, Rates and Budgeting effective April 20, 1995. Mr. Kindlick was elected Vice President of the Company effective June 20, 1997. Joseph E. McCullough was elected Vice President, Marketing and Public Affairs of SJG effective November 1, 1984, Senior Vice President, Marketing, Corporate Affairs and Employee Relations effective May 1, 1987, Senior Vice President, Marketing effective April 22, 1993 and Senior Vice President effective April 20, 1995. Mr. McCullough was elected President of SJE effective October 1, 1986. Mr. McCullough was elected Vice President of the Company effective June 20, 1997. George L. Baulig was elected Secretary and Assistant Treasurer of the Company, SJG and EMI effective November 1, 1980. Mr. Baulig also serves as Secretary of R&T and SJE, effective October 1989 to date. Mr. Baulig was elected Treasurer of the Company, effective October 1, 1996. Executive officers of the Company are elected annually and serve at the pleasure of the Board of Directors. SJI-10 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters Information required by this item is incorporated by reference to Note 4 on page 19 and the bottom of page 24 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 which is attached to this report. See Item 14(c)(13). Item 6. Selected Financial Data Information required by this item is incorporated by reference to page 1 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 which is attached to this report. See Item 14(c)(13). Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Information required by this item is incorporated by reference to pages 10, 11, 12 and 13 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 which is attached to this report. See Item 14(c)(13). Item 8. Financial Statements and Supplementary Data Information required by this item is incorporated by reference to pages 13 through 23 and the top of page 24 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 which is attached to this report. See Item 14(c)(13). Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. SJI-11 PART III Item 10. Directors and Executive Officers of the Registrant Information required by this item relating to the directors of the Company is incorporated by reference to pages 2 through 6 of the Company's definitive Proxy Statement, dated March 13, 1998, filed with the Commission, File number 1-6364, in connection with the Company's 1998 Annual Meeting of Shareholders. Information required by this item relating to the executive officers (other than Directors) of the Company is set forth in Item 4-A of this report. Item 11. Executive Compensation Information required by this item is incorporated by reference to pages 8 through 10 of the Company's definitive Proxy Statement, dated March 13, 1998, filed with the Commission, File number 1-6364, in connection with the Company's 1998 Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management Information required by this item is incorporated by reference to pages 2 through 5 of the Company's definitive Proxy Statement, dated March 13, 1998, filed with the Commission, File number 1-6364, in connection with the Company's 1998 Annual Meeting of Shareholders. Item 13. Certain Relationships and Related Transactions Information required by this item is incorporated by reference to page 6 of the company's definitive Proxy Statement, dated March 13, 1998, filed with the Commission, File number 1-6364, in connection with the Company's 1998 Annual Meeting of Shareholders. SJI-12 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (a) Listed below are all financial statements and schedules filed as part of this report: 1 - The consolidated financial statements and notes to consolidated financial statements together with the report thereon of Deloitte & Touche LLP, dated February 18, 1998, are incorporated herein by reference to pages 13 through 23 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 which is attached to this report. See Item 14(c)(13). 2 - Supplementary Financial Information Information regarding selected quarterly financial data is incorporated herein by reference to page 24 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 which is attached to this report. See Item 14(c)(13). Supplemental Schedules as of December 31, 1997, 1996 and 1995 and for the three years ended December 31, 1997, 1996, and 1995: The Independent Auditors' Report of Deloitte & Touche LLP, Auditors of the Company (page 21) Schedule II - Valuation and Qualifying Accounts (page 22) (All Schedules, other than that listed above, are omitted because the information called for is included in the financial statements filed or because they are not applicable or are not required. Separate financial statements are not presented because all consolidated subsidiaries are wholly-owned.) 3 - See Item 14(c)(13) (b) Reports on Form 8-K - None. (c) List of Exhibits (Exhibit Number is in Accordance with the Exhibit Table in Item 601 of Regulation S-K) Exhibit Number ------- (3)(a)(i) Certificate of Incorporation of the Company, as amended through April 19, 1984. Incorporated by reference from Exhibit (4)(a) of Form S-2 (2-91515). (3)(a)(ii) Amendment to Certificate of Incorporation relating to two-for-one stock split effective as of April 28, 1987. Incorporated by reference from Exhibit (4)(e)(1) of Form S-3 (33-1320). (3)(a)(iii) Amendment to Certificate of Incorporation relating to director and officer liability. Incorporated by reference from Exhibit (4)(e)(2) of Form S-3 (33-1320). (3)(b) Bylaws of the Company as amended and restated through December 30, 1997 (filed herewith). (4)(a) Form of Stock Certificate for common stock. Incorporated by reference from Exhibit (4)(a) of Form 10-K for 1985 (1-6364). SJI-13 Exhibit Number ------- (4)(a)(i) Rights Agreement dated as of September 20, 1996 between South Jersey Industries, Inc. and The Farmers & Merchants National Bank of Bridgeton. Incorporated by reference from Exhibit 99.1 of Form 8-A filed April 9, 1996 (1-6364). (4)(b)(i) First Mortgage Indenture dated October 1, 1947. Incorporated by reference from Exhibit (4)(b)(i) of Form 10-K for 1987 (1-6364). (4)(b)(x) Twelfth Supplemental Indenture dated as of June 1, 1980. Incorporated by reference from Exhibit 5(b) of Form S-7 (2-68038). (4)(b)(xiv) Sixteenth Supplemental Indenture dated as of April 1, 1988, 10 1/4% Series due 2008. Incorporated by reference from Exhibit (4)(b)(xv) of Form 10-Q for the quarter ended March 31, 1988 (1-6364). (4)(b)(xv) Seventeenth Supplemental Indenture dated as of May 1, 1989. Incorporated by reference from Exhibit (4)(b)(xv) of Form 10-K for 1989 (1-6364). (4)(b)(xvi) Eighteenth Supplemental Indenture dated as of March 1, 1990. Incorporated by reference from Exhibit (4)(e) of Form S-3 (33-36581). (4)(b)(xvii) Nineteenth Supplemental Indenture dated as of April 1, 1992. Incorporated by reference from Exhibit (4)(b)(xvii) of Form 10-K for 1992 (1-6364). (4)(b)(xviii) Twentieth Supplemental Indenture dated as of June 1, 1993. Incorporated by reference from Exhibit (4)(b)(xviii) of Form 10-K for 1993(1-6364). (4)(b)(xviv) Twenty-First Supplemental Indenture dated as of March 1, 1997 (filed herewith). (4)(c) Indenture dated as of January 31, 1995; 8.60% Debenture Notes due February 1, 2010. Incorporated by reference from Exhibit (4)(c) of Form 10-K for 1994 (1-6364). (4)(d) Certificate of Trust for SJG Capital Trust. Incorporated by reference from Exhibit 3(a) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(d)(i) Trust Agreement of SJG Capital Trust. Incorporated by reference from Exhibit 3(b) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(d)(ii) Form of Amended and Restated Trust Agreement for SJG Capital Trust. Incorporated by reference from Exhibit 3(c) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). SJI-14 Exhibit Number ------- (4)(d)(iii) Form of Preferred Security for SJG Capital Trust. Incorporated by reference from Exhibit 4(a) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(d)(iv) Form of Deferrable Interest Subordinated Debenture. Incorporated by reference from Exhibit 4(b) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(d)(v) Form of Deferrable Interest Subordinated Debenture. Incorporated by reference from Exhibit 4(c) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(d)(vi) Form of Guaranty Agreement between South Jersey Gas Company and SJG Capital Trust. Incorporated by reference from Exhibit 4(d) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (9) None (10)(d) Gas storage agreement (GSS) between South Jersey Gas Company and Transco dated October 1, 1993. Incorporated by reference from Exhibit (10)(d) of Form 10-K for 1993 (1-6364). (10)(e) Gas storage agreement (S-2) between South Jersey Gas Company and Transco dated December 16, 1953. Incorporated by reference from Exhibit (5)(h) of Form S-7 (2-56223). (10)(f) Gas storage agreement (LG-A) between South Jersey Gas Company and Transco dated June 3, 1974. Incorporated by reference from Exhibit (5)(f) of Form S-7 (2-56223). (10)(h) Gas storage agreement (WSS) between South Jersey Gas Company and Transco dated August 1, 1991. Incorporated by reference from Exhibit (10)(h) of Form 10-K for 1991 (1-6364). (10)(i) Gas storage agreement (LSS) between South Jersey Gas Company and Transco dated October 1, 1993. Incorporated by reference from Exhibit (10)(i) of Form 10-K for 1993 (1-6364). (10)(i)(a) Gas storage agreement (SS-1) between South Jersey Gas Company and Transco dated May 10, 1987 (effective April 1, 1988). Incorporated by reference from Exhibit (10)(i)(a) of Form 10-K for 1988 (1-6364). (10)(i)(b) Gas storage agreement (ESS) between South Jersey Gas Company and Transco dated November 1, 1993. Incorporated by reference from Exhibit (10)(i)(b) of Form 10-K for 1993 (1-6364). SJI-15 Exhibit Number ------- (10)(i)(c) Gas transportation service agreement between South Jersey Gas Company and Transco dated April 1, 1986. Incorporated by reference from Exhibit (10)(i)(c) of Form 10-K for 1989 (1-6364). (10)(i)(e) Service agreement (FS) between South Jersey Gas Company and Transco dated August 1, 1991. Incorporated by reference from Exhibit (10)(i)(e) of Form 10-K for 1991 (1-6364). (10)(i)(f) Service agreement (FT) between South Jersey Gas Company and Transco dated February 1, 1992. Incorporated by reference from Exhibit (10)(i)(f) of Form 10-K for 1991 (1-6364). (10)(i)(g) Service agreement (Incremental FT) between South Jersey Gas Company and Transco dated August 1, 1991. Incorporated by reference from Exhibit (10)(i)(g) of Form 10-K for 1991 (1-6364). (10)(i)(i) Gas storage agreement (SS-2) between South Jersey Gas Company and Transco dated July 25, 1990. Incorporated by reference from Exhibit (10)(i)(i) of Form 10-K for 1991 (1-6364). (10)(i)(j) Gas transportation service agreement between South Jersey Gas Company and Transco dated December 20, 1991. Incorporated by reference from Exhibit (10)(i)(j) of Form 10-K for 1993 (1-6364). (10)(i)(k) Amendment to gas transportation agreement dated December 20, 1991 between South Jersey Gas Company and Transco dated October 5, 1993. Incorporated by reference from Exhibit (10)(i)(k) of Form 10-K for 1993 (1-6364). (10)(j)(a) Gas transportation service agreement (FTS) between South Jersey Gas Company and Equitable Gas Company dated November 1, 1986. Incorporated by reference from Exhibit (10)(j)(a) of Form 10-K for 1989 (1-6364). (10)(k)(h) Gas transportation service agreement (TF) between South Jersey Gas Company and CNG Transmission Corporation dated October 1, 1993. Incorporated by reference from Exhibit (10)(k)(h) of Form 10-K for 1993 (1-6364). (10)(k)(i) Gas purchase agreement between South Jersey Gas Company and ARCO Gas Marketing, Inc. dated March 5, 1990. Incorporated by reference from Exhibit (10)(k)(i) of Form 10-K for 1989 (1-6364). (10)(k)(k) Gas transportation service agreement (FTS-1) between South Jersey Gas Company and Columbia Gulf Transmission Company dated November 1, 1993. Incorporated by reference from Exhibit (10)(k)(k) of Form 10-K for 1993 (1-6364). (10)(k)(l) Assignment agreement capacity and service rights (FTS-2) between South Jersey Gas Company and Columbia Gulf Transmission Company dated November 1, 1993. Incorporated by reference from Exhibit (10)(k)(i) of Form 10-K for 1993 (1-6364). SJI-16 Exhibit Number ------- (10)(k)(m) FTS Service Agreement No. 39556 between South Jersey Gas Company and Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated by reference from Exhibit (10)(k)(m) of Form 10-K for 1993 (1-6364). (10)(k)(n) FTS Service Agreement No. 38099 between South Jersey Gas Company and Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated by reference from Exhibit (10)(k)(n) of Form 10-K for 1993 (1-6364). (10)(k)(o) NTS Service Agreement No. 39305 between South Jersey Gas Company and Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated by reference from Exhibit (10)(k)(o) of Form 10-K for 1993 (1-6364). (10)(k)(p) FSS Service Agreement No. 38130 between South Jersey Gas Company and Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated by reference from Exhibit (10)(k)(p) of Form 10-K for 1993 (1-6364). (10)(k)(q) SST Service Agreement No. 38086 between South Jersey Gas Company and Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated by reference from Exhibit (10)(k)(q) of Form 10-K for 1993 (1-6364). (10)(k)(r) NS (Negotiated Sales) Service Agreement dated December 1, 1994 between South Jersey Gas Company and Transco Gas Marketing Company as agent for Transcontinental Gas Pipeline. Incorporated by reference from Exhibit (10)(k)(r) of Form 10-K for 1994 (1-6364). (10)(l) Deferred Payment Plan for Directors of South Jersey Industries, Inc., South Jersey Gas Company, Energy & Minerals, Inc., R&T Group, Inc. and South Jersey Energy Company as amended and restated October 21, 1994. Incorporated by reference from Exhibit (10)(l) of Form 10-K for 1994 (1-6364). (10)(l)(a) Form of Deferred Compensation Agreement between the Company and/or a subsidiary and seven of its officers. Incorporated by reference from Exhibit (10)(j)(a) of Form 10-K for 1980 (1-6364). (10)(l)(b) Schedule of Deferred Compensation Agreements (filed herewith). (10)(l)(d) Form of Officer Employment Agreement between certain officers and either the Company or its subsidiaries. Incorporated by reference from Exhibit (10)(l)(d) of Form 10-K for 1994 (1-6364). (10)(l)(e) Schedule of Officer Employment Agreements (filed herewith). (10)(l)(f) Officer Severance Benefit Program for all officers. Incorporated by reference from Exhibit (10)(l)(g) of Form 10-K for 1985 (1-6364). SJI-17 Exhibit Number ------- (10)(l)(g) Discretionary Incentive Bonus Program for all officers and management employees. Incorporated by reference from Exhibit (10)(l)(h) of Form 10-K for 1985 (1-6364). (10)(l)(h) The 1987 Stock Option and Stock Appreciation Rights Plan including Form of Agreement. Incorporated by reference from Exhibit (10)(l)(i) of Form 10-K for 1987 (1-6364). (10)(l)(i) Supplemental Executive Retirement Program, as amended and restated effective July 1, 1997, and Form of Agreement between certain Company or subsidiary Company officers (filed herewith). (10)(l)(j) 1997 Stock Option and Stock Appreciation Rights Plan (filed herewith). (11) Not applicable. (12) Calculation of Ratio of Earnings to Fixed Charges (Before Federal Income Taxes) (filed herewith). (13) The Annual Report to Shareholders of the Company for the year ended December 31, 1997 is filed as an exhibit hereto solely to the extent portions are specifically incorporated by reference herein (filed herewith). (16) Not applicable. (18) Not applicable. (21) Subsidiaries of the Registrant (filed herewith). (22) None. (23) Independent Auditors' Consent (filed herewith). (24) Power of Attorney (filed herewith). (27) Financial Data Schedule (submitted only in electronic format to the Securities and Exchange Commission). (99) None. SJI-18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. BY: /s/ David A. Kindlick David A. Kindlick, Vice President Date March 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Richard L. Dunham Chairman of the Board and March 27, 1998 (Richard L. Dunham) Acting Chief Executive Officer /s/ David A. Kindlick Vice President March 27, 1998 (David A. Kindlick) (Principal Financial Officer) /s/ William J. Smethurst, Jr. Assistant Secretary and March 27, 1998 (William J. Smethurst, Jr.) Assistant Treasurer (Principal Accounting Officer) /s/ George L. Baulig Secretary and Treasurer March 27, 1998 (George L. Baulig) /s/ Anthony G. Dickson Director March 27, 1998 (Anthony G. Dickson) /s/ W. Cary Edwards Director March 27, 1998 (W. Cary Edwards) /s/ Thomas L. Glenn, Jr. Director March 27, 1998 (Thomas L. Glenn, Jr.) SJI-19 Signature Title Date /s/ Herman D. James Director March 27, 1998 (Herman D. James) /s/ Clarence D. McCormick Director March 27, 1998 (Clarence D. McCormick) Director March 27, 1998 (Peter M. Mitchell) /s/ Frederick R. Raring Director March 27, 1998 (Federick R. Raring) /s/ Shirli M. Vioni Director March 27, 1998 (Shirli M. Vioni) SJI-20 INDEPENDENT AUDITORS' REPORT South Jersey Industries, Inc.: We have audited the consolidated financial statements of South Jersey Industries, Inc. and its subsidiaries as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 and have issued our report thereon dated February 18, 1998. Such financial statements and report are included in your 1997 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of South Jersey Industries, Inc. and its subsidiaries, listed in Item 14(a). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania February 18, 1998 SJI-21 SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Col. A Col. B Col. C Col. D Col. E - --------------------------------------------------------------------------------------------------------- Additions ----------------------------- (1) (2) Balance at Charged to Charged to Balance at Beginning Costs and Other Accounts - Deductions - End Classification of Period Expenses Describe (a) Describe (b) of Period - --------------------------------------------------------------------------------------------------------- Provision for Uncollectible Accounts for the Year Ended December 31, 1997 $1,425,062 $1,351,360 $623,647 $1,870,558 $1,529,511 Provision for Uncollectible Accounts for the Year Ended December 31, 1996 $982,031 $2,143,518 $376,919 $2,077,406 (c) $1,425,062 Provision for Uncollectible Accounts for the Year Ended December 31, 1995 $991,128 $1,264,897 $502,173 $1,776,167 $982,031 (a) Recoveries of accounts previously written off and minor adjustments. (b) Uncollectible accounts written off. (c) Includes $379,297 reduction in provision resulting from the sale of The Morie Company, Inc. in 1996.
SJI-22 South Jersey Industries, Inc. One South Jersey Plaza, Route 54 Folsom, NJ 08037 Form 10-K FYE 12/31/97 EXHIBIT INDEX Exhibit Number - ----------- (3)(a)(i) Certificate of Incorporation of the Company, as amended through April 19, 1984. Incorporated by reference from Exhibit (4)(a) of Form S-2 (2-91515). (3)(a)(ii) Amendment to Certificate of Incorporation relating to two-for-one stock split effective as of April 28, 1987. Incorporated by reference from Exhibit (4)(e)(1) of Form S-3 (33-1320). (3)(a)(iii) Amendment to Certificate of Incorporation relating to director and officer liability. Incorporated by reference from Exhibit (4)(e)(2) of Form S-3 (33-1320). (3)(b) Bylaws of the Company as amended and restated through December 30, 1997 (filed herewith). (4)(a) Form of Stock Certificate for common stock. Incorporated by reference from Exhibit (4)(a) of Form 10-K for 1985 (1-6364). (4)(a)(i) Rights Agreement dated as of September 20, 1996 between South Jersey Industries, Inc. and The Farmers & Merchants National Bank of Bridgeton. Incorporated by reference from Exhibit 99.1 of Form 8-A filed April 9, 1996 (1-6364). (4)(b)(i) First Mortgage Indenture dated October 1, 1947. Incorporated by reference from Exhibit (4)(b)(i) of Form 10-K for 1987 (1-6364). (4)(b)(x) Twelfth Supplemental Indenture dated as of June 1, 1980. Incorporated by reference from Exhibit 5(b) of Form S-7 (2-68038). (4)(b)(xiv) Sixteenth Supplemental Indenture dated as of April 1, 1988, 10 1/4% Series due 2008. Incorporated by reference from Exhibit (4)(b)(xv) of Form 10-Q for the quarter ended March 31, 1988 (1-6364). (4)(b)(xv) Seventeenth Supplemental Indenture dated as of May 1, 1989. Incorporated by reference from Exhibit (4)(b)(xv) of Form 10-K for 1989 (1-6364). (4)(b)(xvi) Eighteenth Supplemental Indenture dated as of March 1, 1990. Incorporated by reference from Exhibit (4)(e) of Form S-3 (33-36581). (4)(b)(xvii) Nineteenth Supplemental Indenture dated as of April 1, 1992. Incorporated by reference from Exhibit (4)(b)(xvii) of Form 10-K for 1992 (1-6364). (4)(b)(xviii) Twentieth Supplemental Indenture dated as of June 1, 1993. Incorporated by reference from Exhibit (4)(b)(xviii) of Form 10-K for 1993(1-6364). (4)(b)(xviv) Twenty-First Supplemental Indenture dated as of March 1, 1997 (filed herewith). (4)(c) Indenture dated as of January 31, 1995; 8.60% Debenture Notes due February 1, 2010. Incorporated by reference from Exhibit (4)(c) of Form 10-K for 1994 (1-6364). SJI-23 South Jersey Industries, Inc. One South Jersey Plaza, Route 54 Folsom, NJ 08037 Form 10-K FYE 12/31/97 EXHIBIT INDEX Exhibit Number - ----------- (4)(d) Certificate of Trust for SJG Capital Trust. Incorporated by reference from Exhibit (3)(a) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(d)(i) Trust Agreement of SJG Capital Trust. Incorporated by reference from Exhibit (3)(b) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(d)(ii) Form of Amended and Restated Trust Agreement for SJG Capital Trust. Incorporated by reference from Exhibit (3)(c) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(d)(iii) Form of Preferred Security for SJG Capital Trust. Incorporated by reference from Exhibit (4)(a) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(d)(iv) Form of Deferrable Interest Subordinated Debenture. Incorporated by reference from Exhibit (4)(b) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(d)(v) Form of Deferrable Interest Subordinated Debenture. Incorporated by reference from Exhibit (4)(c) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(d)(vi) Form of Guaranty Agreement between South Jersey Gas Company and SJG Capital Trust. Incorporated by reference from Exhibit (4)(d) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (9) None (10)(d) Gas storage agreement (GSS) between South Jersey Gas Company and Transco dated October 1, 1993. Incorporated by reference from Exhibit (10)(d) of Form 10-K for 1993 (1-6364). SJI-24 South Jersey Industries, Inc. One South Jersey Plaza, Route 54 Folsom, NJ 08037 Form 10-K FYE 12/31/97 EXHIBIT INDEX Exhibit Number - ----------- (10)(e) Gas storage agreement (S-2) between South Jersey Gas Company and Transco dated December 16, 1953. Incorporated by reference from Exhibit (5)(h) of Form S-7 (2-56223). (10)(f) Gas storage agreement (LG-A) between South Jersey Gas Company and Transco dated June 3, 1974. Incorporated by reference from Exhibit (5)(f) of Form S-7 (2-56223). (10)(h) Gas storage agreement (WSS) between South Jersey Gas Company and Transco dated August 1, 1991. Incorporated by reference from Exhibit (10)(h) of Form 10-K for 1991 (1-6364). (10)(i) Gas storage agreement (LSS) between South Jersey Gas Company and Transco dated October 1, 1993. Incorporated by reference from Exhibit (10)(i) of Form 10-K for 1993 (1-6364). (10)(i)(a) Gas storage agreement (SS-1) between South Jersey Gas Company and Transco dated May 10, 1987 (effective April 1, 1988). Incorporated by reference from Exhibit (10)(i)(a) of Form 10-K for 1988 (1-6364). (10)(i)(b) Gas storage agreement (ESS) between South Jersey Gas Company and Transco dated November 1, 1993. Incorporated by reference from Exhibit (10)(i)(b) of Form 10-K for 1993 (1-6364). (10)(i)(c) Gas transportation service agreement between South Jersey Gas Company and Transco dated April 1, 1986. Incorporated by reference from Exhibit (10)(i)(c) of Form 10-K for 1989 (1-6364). (10)(i)(e) Service agreement (FS) between South Jersey Gas Company and Transco dated August 1, 1991. Incorporated by reference from Exhibit (10)(i)(e) of Form 10-K for 1991 (1-6364). (10)(i)(f) Service agreement (FT) between South Jersey Gas Company and Transco dated February 1, 1992. Incorporated by reference from Exhibit (10)(i)(f) of Form 10-K for 1991 (1-6364). (10)(i)(g) Service agreement (Incremental FT) between South Jersey Gas Company and Transco dated August 1, 1991. Incorporated by reference from Exhibit (10)(i)(g) of Form 10-K for 1991 (1-6364). (10)(i)(i) Gas storage agreement (SS-2) between South Jersey Gas Company and Transco dated July 25, 1990. Incorporated by reference from Exhibit (10)(i)(i) of Form 10-K for 1991 (1-6364). (10)(i)(j) Gas transportation service agreement between South Jersey Gas Company and Transco dated December 20, 1991. Incorporated by reference from Exhibit (10)(i)(j) of Form 10-K for 1993 (1-6364). SJI-25 South Jersey Industries, Inc. One South Jersey Plaza, Route 54 Folsom, NJ 08037 Form 10-K FYE 12/31/97 EXHIBIT INDEX Exhibit Number - ----------- (10)(i)(k) Amendment to gas transportation agreement dated December 20, 1991 between South Jersey Gas Company and Transco dated October 5, 1993. Incorporated by reference from Exhibit (10)(i)(k) of Form 10-K for 1993 (1-6364). (10)(j)(a) Gas transportation service agreement (FTS) between South Jersey Gas Company and Equitable Gas Company dated November 1, 1986. Incorporated by reference from Exhibit (10)(j)(a) of Form 10-K for 1989 (1-6364). (10)(k)(h) Gas transportation service agreement (TF) between South Jersey Gas Company and CNG Transmission Corporation dated October 1, 1993. Incorporated by reference from Exhibit (10)(k)(h) of Form 10-K for 1993 (1-6364). (10)(k)(i) Gas purchase agreement between South Jersey Gas Company and ARCO Gas Marketing, Inc. dated March 5, 1990. Incorporated by reference from Exhibit (10)(k)(i) of Form 10-K for 1989 (1-6364). (10)(k)(k) Gas transportation service agreement (FTS-1) between South Jersey Gas Company and Columbia Gulf Transmission Company dated November 1, 1993. Incorporated by reference from Exhibit (10)(k)(k) of Form 10-K for 1993 (1-6364). (10)(k)(l) Assignment agreement capacity and service rights (FTS-2) between South Jersey Gas Company and Columbia Gulf Transmission Company dated November 1, 1993. Incorporated by reference from Exhibit (10)(k)(i) of Form 10-K for 1993 (1-6364). (10)(k)(m) FTS Service Agreement No. 39556 between South Jersey Gas Company and Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated by reference from Exhibit (10)(k)(m) of Form 10-K for 1993 (1-6364). (10)(k)(n) FTS Service Agreement No. 38099 between South Jersey Gas Company and Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated by reference from Exhibit (10)(k)(n) of Form 10-K for 1993 (1-6364). (10)(k)(o) NTS Service Agreement No. 39305 between South Jersey Gas Company and Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated by reference from Exhibit (10)(k)(o) of Form 10-K for 1993 (1-6364). (10)(k)(p) FSS Service Agreement No. 38130 between South Jersey Gas Company and Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated by reference from Exhibit (10)(k)(p) of Form 10-K for 1993 (1-6364). SJI-26 South Jersey Industries, Inc. One South Jersey Plaza, Route 54 Folsom, NJ 08037 Form 10-K FYE 12/31/97 EXHIBIT INDEX Exhibit Number - ----------- (10)(k)(q) SST Service Agreement No. 38086 between South Jersey Gas Company and Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated by reference from Exhibit (10)(k)(q) of Form 10-K for 1993 (1-6364). (10)(k)(r) NS (Negotiated Sales) Service Agreement dated December 1, 1994 between South Jersey Gas Company and Transco Gas Marketing Company as agent for Transcontinental Gas Pipeline. Incorporated by reference from Exhibit (10)(k)(r) of Form 10-K for 1994 (1-6364). (10)(l) Deferred Payment Plan for Directors of South Jersey Industries, Inc., South Jersey Gas Company, Energy & Minerals, Inc., R&T Group, Inc. and South Jersey Energy Company as amended and restated October 21, 1994. Incorporated by reference from Exhibit (10)(l) of Form 10-K for 1994 (1-6364). (10)(l)(a) Form of Deferred Compensation Agreement between the Company and/or a subsidiary and seven of its officers. Incorporated by reference from Exhibit (10)(j)(a) of Form 10-K for 1980 (1-6364). (10)(l)(b) Schedule of Deferred Compensation Agreements (filed herewith). (10)(l)(d) Form of Officer Employment Agreement between certain officers and either the Company or its subsidiaries. Incorporated by reference from Exhibit (10)(l)(d) of Form 10-K for 1994 (1-6364). (10)(l)(e) Schedule of Officer Employment Agreements (filed herewith). (10)(l)(f) Officer Severance Benefit Program for all officers. Incorporated by reference from Exhibit (10)(l)(g) of Form 10-K for 1985 (1-6364). (10)(l)(g) Discretionary Incentive Bonus Program for all officers and management employees. Incorporated by reference from Exhibit (10)(l)(h) of Form 10-K for 1985 (1-6364). (10)(l)(h) The 1987 Stock Option and Stock Appreciation Rights Plan including Form of Agreement. Incorporated by reference from Exhibit (10)(l)(i) of Form 10-K for 1987 (1-6364). (10)(l)(i) Supplemental Executive Retirement Program, as amended and restated effective July 1, 1997, and Form of Agreement between certain Company or subsidiary Company officers (filed herewith). (10)(l)(j) 1997 Stock Option and Stock Appreciation Rights Plan (filed herewith). SJI-27 South Jersey Industries, Inc. One South Jersey Plaza, Route 54 Folsom, NJ 08037 Form 10-K FYE 12/31/97 EXHIBIT INDEX Exhibit Number - ----------- (11) Not applicable. (12) Calculation of Ratio of Earnings to Fixed Charges (Before Federal Income Taxes) (filed herewith). (13) The Annual Report to Shareholders of the Company for the year ended December 31, 1997 is filed as an exhibit hereto solely to the extent portions are specifically incorporated by reference herein (filed herewith). (16) Not applicable. (18) Not applicable. (21) Subsidiaries of the Registrant (filed herewith). (22) None. (23) Independent Auditors' Consent (filed herewith). (24) Power of Attorney (filed herewith). (27) Financial Data Schedule (submitted only in electronic format to the Securities and Exchange Commission). (99) None. SJI-28 EX-3.B 2 Exhibit (3)(b) -------------- BYLAWS (AMENDED AND RESTATED THROUGH DECEMBER 30, 1997) SOUTH JERSEY INDUSTRIES, INC. ARTICLE I SHAREHOLDERS 1.1 Place of Meetings. Meetings of the shareholders shall be held at such place as may be designated by the Board of Directors in the notice of meeting. 1.2 Annual Meeting. An annual meeting of the shareholders for the election of Directors and for other business shall be held on the next to the last Thursday in April of each year, if not a legal holiday, and if a legal holiday, then on the first day following which is not a legal holiday, or on such other day as may be designated by the Board of Directors. 1.3 Special Meetings. Special meetings of the shareholders may be called at any time by the President or by action of a majority of the Board of Directors. Upon the application of the holder or holders of not less than 10% of all shares entitled to vote at a meeting, the Superior Court, in an action in which the court may proceed in a summary manner, for good cause shown, may order a special meeting of the shareholder to be called and held at such time and place, upon such notice and for the transaction of such business as may be designated in such order. 1.4 Notice. Written notice of the time, place and purpose of every meeting of shareholders shall be given not less than ten nor more than 60 days before such meeting, either personally or by mail, by or at the direction of the Chairman of the Board and Chief Executive Officer, the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at the meeting. 1.5 Quorum. At all meetings of shareholders, a majority of the outstanding shares of capital stock entitled to vote, represented by shareholders in person or by proxy, shall constitute a quorum for the transaction of business. In the absence of a quorum, the shareholders present in person or by proxy by majority vote may adjourn the meeting from time to time without notice other than by oral announcement at the meeting, until a quorum shall be present. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the original meeting. 1.6 Business at Meetings of Shareholders. Except as otherwise provided by law, or in these Bylaws, the business which shall be conducted at any meeting of the shareholders shall (a) have been specified in the written notice of the meeting (or any supplement thereto) given by the Company, or (b) be brought before the meeting at the direction of the Board of Directors or the President, or (c) be brought before the meeting by the presiding officer of the meeting - 1 - unless either a majority of the Directors then in office or the President object to such business being conducted at the meeting, or (d) have been specified in a written notice given to the Secretary of the Company, by or on behalf of any shareholder entitled to vote at the meeting (the "Shareholder Notice"), in accordance with all of the following requirements: (1) Each Shareholder Notice must be delivered to, or mailed and received at, the principal executive offices of the Company (i) in the case of an annual meeting that is called for a date that is within 30 days before or after the anniversary date of the immediately preceding annual meeting of shareholders, not less than 60 days nor more than 90 days prior to such anniversary date, (ii) in the case of an annual meeting that is called for a date that is not within 30 days before or after the anniversary date of the immediately preceding annual meeting, not later than the close of business on the tenth day following the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever comes first, and (iii) in the case of any special meeting of the shareholders, not less than 60 days nor more than 90 days prior to the date of such meeting; and (2) Each such Shareholder Notice must set forth with particularity (i) the names and business addresses of the shareholder submitting the proposal (the "Proponent") and all persons acting in concert with the Proponent; (ii) the name and address of the Proponent and the persons identified in clause (i), as they appear on the Company's books (if they so appear); (iii) the class and number of shares of the Company beneficially owned by the Proponent and the persons identified in clause (i); (iv) a description of the Shareholder Proposal containing all material information relating thereto; (v) a representation that the Proponent is a holder of record of the stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to bring the business specified in the notice before the meeting; and (vi) such other information as the Board of Directors reasonably determines is necessary or appropriate to enable the Board of Directors and the shareholders of the Company to consider the shareholder proposal. The presiding officer at any shareholders meeting may determine, in his or her sole discretion, that any shareholder proposal was not made in accordance with the procedures prescribed in these Bylaws or is otherwise not in accordance with law, and if such officer should so determine, such officer shall so declare at the meeting and the shareholder proposal shall be disregarded. ARTICLE II DIRECTORS 2.1 Powers, Number, Classification and Election. The business and affairs of the Company shall be conducted and managed by its Board of Directors, which shall have all the powers of the Company except such as are by statute, by the Certificate of Incorporation, or by these Bylaws conferred upon or reserved to the shareholders. The number of Directors constituting the entire Board of Directors shall be 9. The members of the Board of Directors shall be divided into classes in the manner provided by Article SEVENTH of the Company's Certificate of Incorporation and shall be elected and serve for such terms of office as are provided therein. - 2 - 2.2 Meetings. (a) Place of Meetings. Meetings of the Board of Directors shall be held at such place as may be designated by the Board or in the notice of the meeting. (b) Regular Meetings. Regular meetings of the Board of Directors shall be held on such dates as may be fixed, from time to time, by a majority of the Directors at a meeting or in writing without a meeting. (c) Special Meetings. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board and Chief Executive Officer or by a majority of the Board of Directors at a meeting or in writing without a meeting. (d) Notice. Notice of the time and place of every meeting, which need not be in writing, shall be given to each Director at least two days before the meeting. (e) Quorum. At all meetings of the Board of Directors, or any committee thereof, a majority of the total number of the members shall constitute a quorum for the transaction of business, provided that a quorum shall never be less than two persons. Except in cases in which it is by law, by the Certificate of Incorporation, or by these Bylaws otherwise provided, a majority of members present at a meeting of the full Board or of a committee at which a quorum is present shall decide any questions that may come before the meeting. In the absence of a quorum, the members present by majority vote may adjourn the meeting from time to time without notice other than by oral announcement at the meeting, until a quorum shall be present. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. 2.3 Newly Created Directorships and Vacancies. Newly created Directorships resulting from an increase in the number of Directors and vacancies occurring in the Board of Directors for any reason may be filled by vote of a majority of the Directors then in office, although less than a quorum, or by a sole remaining director, at any meeting of the Board of Directors. Newly created Directorships shall be assigned by the Board of Directors to one of the classes described in Article SEVENTH of the Company's Certificate of Incorporation in the manner provided in such Article. The person so elected by the Board of Directors to fill a newly created Directorship or a vacancy shall be elected to hold office until the next succeeding annual meeting of shareholders and until his successor shall be duly elected and qualified or until his earlier death, resignation or removal. 2.4 Committees. The Board of Directors may by resolution adopted by a majority of the whole Board designate one or more committees, each committee to consist of three or more Directors, one of whom shall be designated by the Board as Chairman, and such alternate members (also Directors) as may be designated by the Board. The Chairman of the Board and Chief Executive Officer of the Company shall be ex officio a member of each such committee unless the Board shall otherwise direct. The Board may provide by resolution for compensation and payment of expenses to committee members and alternate members. Any such committee, to the extent permitted by law and provided in such resolution, shall have and exercise the authority of the Board of Directors in the management of the business and affairs of the Company, and shall have power to fix its own rules of - 3 - procedure. In the absence or disqualification of any member of a committee or other person authorized to act as such, the member or members thereof present and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another Director to act at the meeting in the place of any such absent or disqualified member. 2.5 Removal. No member of the Board of Directors may be removed except for cause. 2.6 Nominations by Shareholders. Notwithstanding the provisions of Section 2.1, nominations for the election of the Directors may be made at any annual meeting or any special meeting of shareholders at which Directors are to be elected by any shareholder of record entitled to vote at such meeting; provided, however, that such shareholder must provide timely written notice (the "Nomination Notice") to the Secretary of the Company in accordance with the following requirements: (1) Each Nomination Notice must be delivered to, or mailed or received at, the principal executive offices of the Company (i) in the case of an annual meeting that is called for a date that is within 30 days before or after the anniversary date of the immediately preceding annual meeting of shareholders, not less than 60 days nor more than 90 days prior to such anniversary date, and (ii) in the case of an annual meeting that is called for a date that is not within 30 days before or after the anniversary date of the immediately preceding annual meeting, not later than the close of business on the tenth day following the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever comes first; and (iii) in the case of any special meeting of the shareholders, not less than 60 days nor more than 90 days prior to the date of such meeting; and (2) Each Nomination Notice must set forth: (i) as to each individual nominated, (A) the name, date of birth, business address and residence address of such individual; (B) the business experience during the past five years of such nominee, including his or her principal occupations and employment during such period, the name and principal business of any corporation or other organization in which such occupations and employment were carried on, and such other information as to the nature of his or her responsibilities and level of professional competence as may be sufficient to permit assessment of his or her prior business experience; (C) whether the nominee is or has ever been at any time a director, officer or owner of 5% or more of any class of capital stock, partnership interests or other equity interest of any corporation, partnership or other entity; (D) any directorships held by such nominee in any company with a class of securities registered pursuant to section 12 of the Securities Exchange Act of 1934, as amended, or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940, as amended; (E) whether, in the last five years, such nominee has been convicted in a criminal proceeding or has been subject to a judgement, order, finding, decree of any federal, state or other governmental entity, concerning any violation of federal, state or other law, or any proceeding in bankruptcy, which conviction, order, finding, decree or proceeding may be material to an evaluation of the ability or integrity of the nominee; (F) a description of all arrangements or understandings between the nominating shareholder (the "Nominating Shareholder") and each nominee and any other person or persons (naming - 4 - such person or persons) pursuant to which the nomination or nominations are to be made by the Nominating Shareholder; (G) such other information regarding each nominee as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (H) the consent of each nominee to serve as a Director of the Company if so elected; and (ii) as to the Nominating Shareholder and any person acting in concert with the Nominating Shareholder, (x) the names and business addresses of such Nominating Shareholder and the persons identified in clause (ii); (ii) the name and address of such Nominating Shareholder and the persons identified in clause (ii), as they appear on the Company's books (if they so appear); (iii) the class and number of shares of the Company beneficially owned by such Nominating Shareholder and the persons identified in clause (ii). The presiding officer at any shareholders meeting may determine, in his or her sole discretion, that any nomination of any person was not made in accordance with the procedures prescribed in these Bylaws or is otherwise not in accordance with law, and if such officer should so determine, such officer shall so declare at the meeting and the nomination shall be disregarded. ARTICLE III OFFICERS 3.1 Executive Officers. The Executive officers of the Company shall be a President (who may be designated by resolution of the Board as the Chief Executive Officer), one or more Vice Presidents (one or more of whom may be designated as Executive Vice President or Senior Vice President), a Secretary and a Treasurer. The Chairman of the Board may also be elected as an Executive Officer and if so designated by the Board of Directors, shall be the Chief Executive Officer in which case the President shall then be the Chief Operating Officer. The Executive officers shall be elected annually by the Board of Directors following the annual meeting of the shareholders and each such officer shall hold office until the corresponding meeting in the next year and until his successor shall have been duly chosen and qualified, or until he shall have resigned or shall have been removed. Any vacancy in any of the above-mentioned offices may be filled for the unexpired term by the Board of Directors at any regular or special meeting. 3.2 Authority, Duties and Compensation. The Executive officers shall have such authority, perform such duties and serve for such compensation as shall be provided in these Bylaws or as may be determined by resolution of the Board of Directors. The Chairman of the Board and Chief Executive Officer shall preside at all meetings of the Board of Directors and the shareholders at which he is present, shall carry out policies adopted or approved by the Board of Directors, shall have general charge and supervision of the business of the Company, subject to the control of the Board of Directors, and may perform any act and execute any instrument in the conduct of the business of the Company. The other Executive Officers shall have the duties and powers usually related to their offices, except as the Board of Directors or the Chairman of the Board and Chief Executive Officer shall otherwise determine from time to time. - 5 - 3.3 Assistant and Subordinate Officers. The Board of Directors may choose one or more Assistant Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such subordinate Officers as it may deem desirable. Each Assistant and subordinate Officer, if any, shall hold office for such period, shall have such authority and perform such duties, and shall receive such compensation as the Board of Directors or the Chairman of the Board and Chief Executive Officer, or such other Officer as the Board shall so authorize, may prescribe. 3.4 Officers Holding Two or More Offices. Any two of the above- mentioned offices may be held by the same person, but no officers shall execute, acknowledge, or verify any instrument in more than one capacity, if such instrument be required by statute, by the Certificate of Incorporation, or by these Bylaws, to be executed, acknowledged, or verified by any two or more officers. ARTICLE IV INDEMNIFICATION 4.1 Right to Indemnification. The Company shall indemnify any corporate agent against his expenses and liabilities in connection with any proceedings involving the corporate agent by reason of his being or having been such a corporate agent to the extent that (a) such corporate agent is not otherwise indemnified; and (b) the power to do so has been or may be granted by statute; and for this purpose the Board of Directors may, and on request of any such corporate agent shall be required to, determine in each case whether or not the applicable standards in any such statute have been met, or such determination shall be made by independent legal counsel if the Board so directs or if the Board is not empowered by statute to make such determination. 4.2 Prepayment of Expenses. To the extent that the power to do so has been or may be granted by statute, the Company shall pay expenses incurred by a corporate agent in connection with a proceeding in advance of the final disposition of the proceeding upon receipt of an undertaking by or on behalf of such corporate agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified as provided by statute. 4.3 Indemnification Not Exclusive. This indemnification shall not be exclusive of any other rights to which a corporate agent may be entitled, both as to any action in his official capacity or as to any action in another capacity while holding such office, and shall inure to the benefits of the heirs, executors or administrators of any such corporate agent. 4.4 Insurance and Other Indemnification. The Board of Directors shall have the power to (a) purchase and maintain, at the Company's expense, insurance on behalf of the Company and on behalf of others to the extent that power to do so has been or may be granted by statute and (b) give other indemnification to the extent permitted by law. 4.5 Definitions. As used in this Article, (a) "corporate agent" means any person who is or was a Director, officer, employee or agent of the Company and any person who is or was a Director, officer, trustee, employee or agent - 6 - of any other enterprise, serving as such at the request of the Company, or the legal representative of any such Director, officer, trustee, employee or agent; (b) "other enterprise" means any domestic or foreign corporation, other than the Company, and any partnership, joint venture, sole proprietorship, trust or other enterprise whether or not for profit, served by a corporate agent; (c) "expenses" means reasonable costs, disbursements and counsel fees; (d) "liabilities" means amounts paid or incurred in satisfaction of settlements, judgments, fines and penalties; (e) "proceedings" means any pending, threatened or completed civil, criminal, administrative or arbitrative action, suit or proceeding, and any appeal therein and any inquiry or investigation which could lead to such action, suit or proceeding. ARTICLE V SHARE CERTIFICATES AND UNCERTIFICATED SHARES 5.1 Share Certificates. Except as provided in Section 5.4, every shareholder of record shall be entitled to a share certificate representing the shares held by him and such certificates shall conform to all applicable provisions of law. 5.2 Transfer of Shares. The Board of Directors shall have power and authority to make all such rules and regulations as it may deem expedient and in accordance with law concerning the issue, transfer, and registration of share certificates. 5.3 Mutilated, Lost or Destroyed Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Company alleged to have been mutilated, lost or destroyed. When authorizing such issue of a new certificate, the Board of Directors, in its discretion and as a condition precedent to the issuance thereof, may prescribe such terms and conditions as it deems expedient, and may require such indemnities as it deems adequate, to protect the Company from any claim that may be made against it with respect to any such certificate alleged to have been lost or destroyed. 5.4 Uncertificated Shares. The Board of Directors may provide that some or all of the shares of any class or series of stock of the Company shall be represented by uncertificated shares. Within 20 days after the issuance or transfer of uncertificated shares, the Company shall send to the registered owner thereof a written notice stating that the Company is organized under the laws of New Jersey, the name of the person to whom the shares were issued, the number and class, and the designation of the series, if any, of such shares, and containing any other information required by law or deemed advisable by the Company to be included in such notice. Except as otherwise expressly provided by law, the rights and obligations of the holders of uncertificated shares and the rights and obligations of the holders of certificates representing shares of the same class and series shall be identical. - 7 - ARTICLE VI MISCELLANEOUS 6.1 Fiscal Year. The fiscal year of the Company shall be the calendar year, unless otherwise provided by the Board of Directors. 6.2 Amendments. These Bylaws may be amended or repealed (i) by action of a majority of the Board of Directors at any regular or special meeting of the Board of Directors, provided notice of any such alteration, amendment, or repeal shall be given in the notice of any such meeting, (ii) or except as otherwise provided in Article TENTH of the Certificate of Incorporation of the Company, as amended, by action of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote generally in the election of Directors, considered for this purpose as one class. - 8 - AMENDMENTS Article I Section 1.2 Amended March 19, 1970 Article I Section 1.2 Amended April 16, 1970 Article II Section 2.1 Amended February l8, 1971 Article II Section 2.1 Amended June 22, 1972 Article II Section 2.1 Amended August 23, 1973 Article II Section 2.1 Amended February 20, 1975 Article II Section 2.1 Amended February 19, 1976 Article II Section 2.1 Amended February 17, 1977 Article II Section 2.1 Amended February 16, 1978 Article II Section 2.1 Amended February 15, 1979 Article II Section 2.1 Amended August 23, 1979 Article I Section 1.3 Amended November 16, 1979 Article I Section 1.4 Amended November 16, 1979 Article II Section 2.2 (c) Amended November 16, 1979 Article II Section 2.4 Amended November 16, 1979 Article III Section 3.1 Amended November 16, 1979 Article III Section 3.2 Amended November 16, 1979 Article III Section 3.3 Amended November 16, 1979 Article III Section 3.4 Amended November 16, 1979 Article V Section 5.1 Amended November 16, 1979 Article II Section 2.4 Amended October 24, 1980 Article II Section 2.1 Amended April 22, 1981 (Special Mtg.) Article II Section 2.1 Amended October 23, 1981 Article III Section 3.1, 3.2, and 3.3 Amended October 23, 1981 Article II Section 2.1, 2.3 Amended January 21, 1983 Article II Section 2.5 Amended by including new section Jan. 21, 1983 Article IV Section 6.2 Amended January 21, 1983 Article II Section 2.1 Amended January 24, 1986 Article I Section 1.3 Amended April 18, 1989, eff. April 19, 1989 (Spl.Mtg.) Article I Section 1.4 Amended April 18, 1989, eff. April 19, 1989 (Spl.Mtg.) Article II Section 2.1 Amended April 18, 1989, eff. April 19, 1989 (Spl.Mtg.) Article II Section 2.2 Amended April 18, 1989, eff. April 19, 1989 (Spl.Mtg.) Article III Section 3.1 Amended April 18, 1989, eff. April 19, 1989 (Spl.Mtg.) Article III Section 3.2 Amended April 18, 1989, eff. April 19, 1989 (Spl.Mtg.) Article V Section 5.1 Amended April 18, 1989, eff. April 19, 1989 (Spl.Mtg.) Article V Section 5.1 Amended November 17, 1989 Article V Section 5.4 Amended by including new section November 17, 1989 Article II Section 2.1 Amended October 1, 1990. Article II Section 2.1 Amended April 23, 1992. Article II Section 2.1 Amended April 22, 1993. Article II Section 2.1 Amended September 1, 1993. Article II Section 2.1 Amended April 21, 1994. Article II Section 2.1 Amended February 17, 1995. Article I Section 1.3 and 1.4 Amended April 20, 1995. Article II Section 2.2 (c) and 2.4 Amended April 20, 1995. Article III Section 3.1, 3.2, and 3.3 Amended April 20, 1995. Article II Section 2.1 Amended August 23, 1996. Article II Section 2.1 Amended April 17, 1997. Article I Section 1.3 Amended October 24, 1997. Article I Section 1.6 Amended by adding new section October 24, 1997. Article II Section 2.6 Amended by adding new section October 24, 1997. Article II Section 2.1 Amended December 30, 1997. Article III Section 3.1 Amended December 30, 1997. - 9 - EX-4.B.XVIV 3 Exhibit (4)(b)(xviv) -------------------- This instrument was prepared by /s/ George W. Patrick -------------------------------- George W. Patrick, Esquire MORTGAGE ------------------------------------------------------------ SOUTH JERSEY GAS COMPANY TO THE BANK OF NEW YORK, Trustee ------------------------------ TWENTY-FIRST SUPPLEMENTAL INDENTURE Dated as of March 1, 1997 ------------------------------ Providing for the Issuance of First Mortgage Bonds, 7.70% Series due 2027 and Further Supplementing and Amending the Indenture of Mortgage Dated October 1, 1947 ------------------------------ (This Instrument Contains After-Acquired Property Provisions) ------------------------------------------------------------ THIS TWENTY-FIRST SUPPLEMENTAL INDENTURE dated as of March 1, 1997 between SOUTH JERSEY GAS COMPANY, a New Jersey corporation, with principal offices at Number One South Jersey Plaza, Route 54, Folsom, New Jersey 08037, party of the first part, hereinafter called the "Company," and The Bank of New York (successor trustee to Guarantee Bank), a New York banking corporation with a corporate trust office at 385 Rifle Camp Road, West Paterson, New Jersey 07424, party of the second part, hereinafter called "Trustee," as Trustee under the Indenture of Mortgage hereinafter mentioned, Witnesseth that: Whereas, the Company has heretofore duly executed, acknowledged and delivered to Guarantee Bank and Trust Company (name later changed to Guarantee Bank), as Trustee, a certain Indenture of Mortgage dated October 1, 1947 (hereinafter called the "Original Indenture") to provide for the issuance of, and to secure, its First Mortgage Bonds (the "Bonds"), issuable in series and without limit as to aggregate principal amount (except as provided under Article III of the Original Indenture), and by the Original Indenture granted and conveyed unto the Trustee, upon the trusts and for the uses and purposes therein specifically set forth, certain real estate, franchises and other property therein described or which might be thereafter acquired by it, to secure the payment of the principal of and interest on the Bonds from time to time issued thereunder, and pursuant to which the Company provided for the creation of an initial series of First Mortgage Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 4 1/8% Series due 1977" (herein and in the Original Indenture sometimes called the "Bonds of the Initial Series"); and Whereas, the Original Indenture provides that Bonds may be issued thereunder from time to time and in one or more series, upon conditions therein fully provided, the Bonds of each series to be substantially in the forms therein recited for the Bonds of the Initial Series but with such omissions, variations and insertions as are authorized or permitted by the Original Indenture and determined and specified by the Board of Directors of the Company; and Whereas, the Company has heretofore duly executed, acknowledged and delivered to the Trustee a First Supplemental Indenture dated as of October 1, 1952, a Second Supplemental Indenture dated as of February 1, 1961, a Third Supplemental Indenture dated as of July 1, 1963, a Fourth Supplemental Indenture dated as of August 1, 1966, a Fifth Supplemental Indenture dated as of September 1, 1968, a Sixth Supplemental Indenture dated as of July 1, 1969. a Seventh Supplemental Indenture dated as of July 1, 1971, an Eighth Supplemental Indenture dated as of June 1, 1973, a Ninth Supplemental Indenture dated as of July 1, 1974, a Tenth Supplemental Indenture dated as of November 10, 1976, an Eleventh Supplemental Indenture dated as of December 1, 1979, a Twelfth Supplemental Indenture dated as of June 1, 1980, a Thirteenth Supplemental Indenture dated as of August 1, 1981 a Fourteenth Supplemental Indenture dated as of August 1, 1984, a Fifteenth Supplemental Indenture dated as of July 1, 1986, a Sixteenth Supplemental Indenture dated as of April 1, 1988, a Seventeenth Supplemental Indenture dated of as May 1, 1989, an Eighteenth Supplemental Indenture dated of March 1, 1990, a Nineteenth Supplemental Indenture dated as of April 1, 1992 and a Twentieth Supplemental Indenture dated as of June 1, 1993 - 2 - (hereinafter called, respectively, the "First Supplement," the "Second Supplement," the "Third Supplement," the "Fourth Supplement," the "Fifth Supplement," the "Sixth Supplement," the "Seventh Supplement," the "Eighth Supplement," the "Ninth Supplement," the "Tenth Supplement," the "Eleventh Supplement," the "Twelfth Supplement," the "Thirteenth Supplement," the "Fourteenth Supplement," the "Fifteenth Supplement," the "Sixteenth Supplement," the "Seventeenth Supplement," the "Eighteenth Supplement," the "Nineteenth Supplement" and the "Twentieth Supplement") (the Original Indenture, all such supplemental indentures and the Twenty-First Supplemental Indenture being hereinafter collectively referred to as the "Indenture"), pursuant to which the Company provided for the creation of a second series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 3 7/8% Series due 1977" (herein and in the First Supplement sometimes called the "Bonds of the Second Series"), a third series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 5% Series due 1986" (herein and in the Second Supplement sometimes called the "Bonds of the Third Series"), a fourth series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 4 1/2% Series due 1988" (herein and in the Third Supplement sometimes called the "Bonds of the Fourth Series"), a fifth series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 5.70% Series due 1991" (herein and in the Fourth Supplement sometimes called the "Bonds of the Fifth Series"), a sixth series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 7% Series due 1993" (herein and in the Fifth Supplement sometimes called the "Bonds of the Sixth Series"), a seventh series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 7 7/8% Series due 1994" (herein and in the Sixth Supplement sometimes called the "Bonds of the Seventh Series"), an eighth series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 8 1/4% Series due 1996" (herein and in the Seventh Supplement sometimes called the "Bonds of the Eighth Series"), a ninth series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 8 1/4% Series due 1998" (herein and in the Eighth Supplement sometimes called the "Bonds of the Ninth Series"), a tenth series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 9 1/2% Series due 1989" (herein and in the Ninth Supplement sometimes called the "Bonds of the Tenth Series"), an eleventh series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 8% Series due 1995" (herein and in the Twelfth Supplement sometimes called the "Bonds of the Eleventh Series"), a twelfth series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 15 3/4% Series due 1996" (herein and in the Thirteenth Supplement sometimes called the "Bonds of the Twelfth Series"), a thirteenth series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 14 3/8% Series due 1996" (herein and in the Fourteenth Supplement sometimes called the "Bonds of the Thirteenth Series"), a fourteenth series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 9.20% Series due 1998" (herein and in the Fifteenth Supplement sometimes called the "Bonds of the Fourteenth Series"), a fifteenth series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 10 1/4% Series due 2008" (herein and in the Sixteenth Supplement sometimes called the "Bonds of the Fifteenth Series"), a sixteenth series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 9% Series due 2010" (herein and in the Eighteenth Supplement sometimes called the "Bonds of the Sixteenth Series"), a seventeenth series of Bonds designated as "South Jersey Gas Company First Mortgage Bonds, 8.19% Series due 2007" - 3 - (herein and in the Nineteenth Supplement sometimes called the "Bonds of the Seventeenth Series") and an eighteenth series of Bonds due 2013 (herein and in the Twentieth Supplement sometimes called the "Bonds of the Eighteenth Series"); and Whereas, pursuant to the Indenture there have been executed, authenticated and issued, and there are outstanding as of the date of execution hereof by the Company, First Mortgage Bonds of series and in principal amounts as follows:
Series Issued Now Outstanding - ------------------------------- ---------- --------------- Bonds of the Initial Series $4,000,000 -0- Bonds of the Second Series $4,500,000 -0- Bonds of the Third Series $4,500,000 -0- Bonds of the Fourth Series $5,000,000 -0- Bonds of the Fifth Series $5,000,000 -0- Bonds of the Sixth Series $6,000,000 -0- Bonds of the Seventh Series $6,000,000 -0- Bonds of the Eighth Series $4,000,000 -0- Bonds of the Ninth Series $6,000,000 -0- Bonds of the Tenth Series $6,000,000 -0- Bonds of the Eleventh Series $1,000,000 -0- Bonds of the Twelfth Series $20,000,000 -0- Bonds of the Thirteenth Series $10,000,000 -0- Bonds of the Fourteenth Series $20,000,000 -0- Bonds of the Fifteenth Series $25,000,000 $25,000,000 Bonds of the Sixteenth Series $35,000,000 $28,437,500 Bonds of the Seventeenth Series $25,000,000 $25,000,000 Bonds of the Eighteenth Series $35,000,000 $35,000,000
; and Whereas, said Bonds of the Fifteenth Series, Bonds of the Sixteenth Series, Bonds of the Seventeenth Series and Bonds of the Eighteenth Series constitute the only Bonds outstanding under the Indenture; and Whereas, the Company, by appropriate resolutions adopted by its Board of Directors pursuant to the terms of the Original Indenture, has duly determined to create a new series of Bonds to be issued under the Indenture, including this Twenty-First Supplemental Indenture dated as of March 1, 1997 (hereinafter called the "Twenty-First Supplement"), to be designated as "South Jersey Gas Company First Mortgage Bonds, 7.70% Series due 2027 (hereinafter sometimes called the "Bonds of the Nineteenth Series"), and has duly determined that the terms and form of the Bonds of the Nineteenth Series, which will be fully registered bonds, and the form of the Trustee's Certificate of Authentication to be set forth on the Bonds of the Nineteenth Series, shall be substantially as follows respectively: - 4 - [FORM OF BOND] THIS BOND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). BY ITS ACCEPTANCE OF THIS BOND, THE HOLDER OF THIS BOND REPRESENTS THAT (1) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" OR A "QUALIFIED INSTITUTIONAL BUYER" AS SUCH TERMS ARE DEFINED UNDER RULE 501(a) AND RULE 144A OF THE SECURITIES ACT, RESPECTIVELY, AND (2) THIS BOND IS BEING ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, EXCEPT IN THE CASE OF RESALES PURSUANT TO RULE 144A OF THE SECURITIES ACT. PRIOR TO THE DATE WHICH IS TWO YEARS AFTER THE ORIGINAL ISSUE DATE OF THIS BOND ("SECOND ANNIVERSARY OF ISSUANCE"), NEITHER THIS BOND NOR ANY INTEREST HEREIN MAY BE SOLD, OFFERED FOR SALE OR OTHERWISE TRANSFERRED WITHOUT REGISTRATION UNDER THE SECURITIES ACT EXCEPT (A) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS SUCH A "QUALIFIED INSTITUTIONAL BUYER" IN A TRANSACTION COMPLYING WITH THE REQUIREMENTS OF RULE 144A, OR (B) PURSUANT TO ANOTHER APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, AND IN THE CASE OF EITHER (A) OR (B) ABOVE, UNDER CIRCUMSTANCES WHICH WOULD NOT RESULT IN A VIOLATION OF THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. PROSPECTIVE PURCHASERS ARE HEREBY NOTIFIED THAT THE SELLER OF THIS BOND MAY BE RELYING ON THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A. THE ISSUER OF THIS BOND HAS AGREED THAT UNTIL THE SECOND ANNIVERSARY OF ISSUANCE IT WILL FURNISH THE HOLDER OF THIS BOND AND PROSPECTIVE PURCHASERS DESIGNATED BY THE HOLDER WITH THE INFORMATION ABOUT THE ISSUER REQUIRED BY RULE 144(d) (4). UNLESS THIS CERTIFICATE IF PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO SOUTH JERSEY GAS COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. No. $ - 5 - SOUTH JERSEY GAS COMPANY FIRST MORTGAGE BOND, 7.70% SERIES DUE 2027 South Jersey Gas Company, a New Jersey corporation (hereinafter called the "Company"), for value received, promises to pay on April 1, 2027, to _____________________, or registered assigns, on the surrender hereof, the principal sum of ___________ Dollars, and to pay interest thereon from the date hereof, at the rate of 7.70% per annum (computed on the basis of a 360-day year of twelve 30-day months) until payment of said principal sum, such interest to be payable April 1 and October 1 in each year, commencing October 1, 1997, and to pay on demand interest at the rate of 7.70% per annum (computed on the basis of a 360-day year of twelve 30-day months) on any overdue principal and, to the extent permitted by applicable law, on any overdue interest, from the due date thereof until the obligation of the Company with respect to the payment thereof shall be discharged. All payments of principal (which term as used in this Bond includes the Redemption Price below referred to if this Bond is called for redemption) hereof and interest hereon shall be paid at the corporate trust office of the Bank of New York (hereinafter called the "Trustee"), or its successor as Trustee under the indenture below mentioned, or at such other places as the Company may agree pursuant to Section 2.7 of the Twenty-First Supplement (as hereinafter defined), in such coin or currency of the United States of America as at the time of payment shall constitute legal tender for the payment of public and private debts. This Bond is one of an authorized issue of Bonds of the Company, designated as its First Mortgage Bonds, without specified limit as to aggregate authorized principal amount and issuable in one or more series (each of which is hereinafter referred to as a "Series"), all issued or to be issued under and (except in respect of any sinking, replacement, purchase, or other analogous fund provided in said indenture or in any supplement thereto for any one or more particular series of Bonds) equally and ratably secured by an indenture dated October 1, 1947 (hereinafter called the "Original Indenture") between the Company and Guarantee Bank and Trust Company, as predecessor trustee, as supplemented by indentures supplemental thereto, including a Twenty-First Supplemental Indenture dated as of March 1, 1997 (hereinafter called the "Twenty-First Supplement"), duly executed by the Company to the Trustee, to which Original Indenture and all indentures supplemental thereto (herein sometimes collectively called the "Indenture") reference is hereby made for a description of the property mortgaged and pledged and the respective rights of the Company, the Trustee, and the Bondholders in respect thereof, and for a specification of the principal amount of said Bonds from time to time issuable thereunder and the conditions upon which said Bonds may be issued and shall be secured. The Bonds of the 7.70% Series due 2027, of which this Bond is one, are of similar tenor hereto, and are limited to the aggregate authorized principal amount of $35,000,000, except as - 6 - provided in Section 2.11 of the Original Indenture (relating to replacement of mutilated, lost, destroyed or stolen Bonds). The Bonds of this Series are entitled to the benefit of the sinking fund provided for in Article II of the Twenty-First Supplement, and all Bonds of all Series are entitled to the benefit of the replacement fund provided for in the Indenture. As more fully provided in the Indenture, the Bonds of this Series are subject to redemption, either as a whole or in part from time to time, on not more than 60 nor less than 30 days' written notice in advance of the date fixed for redemption (a) after February 29, 2012, and subject to any required approval of the Board of Regulatory Commissioners of New Jersey, or any successor agency, at the election of the Company upon payment of an amount equal to the applicable percentage of the principal amount thereof set forth in the tabulation below under the heading "Redemption Price" during the respective periods set forth in said tabulation:
Twelve Months' Period Beginning April 1 Redemption Price --------------------- ---------------- 2012 102.00% 2013 101.60% 2014 101.20% 2015 100.80% 2016 100.40% 2017-27 100.00%
together with accrued interest to the date fixed for redemption, (b) after February 29, 2012 by operation of said sinking fund (as provided in Article II of the Twenty-First Supplement) upon payment of the principal amount thereof together with accrued interest to the date fixed for redemption, (c) through the application of proceeds from the condemnation of property subject to the lien of the Indenture, or proceeds of sale of such property to a governmental body or agency having the power of eminent domain made as the result of the threat (evidenced in writing by such body or agency) of condemnation of such property, but not through the application of funds from any other source, upon payment of the principal amount thereof together with accrued interest to the date fixed for redemption, or (d) by any combination of (a), (b) and (c). Except as set forth in this paragraph, the Bonds of this Series are not subject to redemption. On certain defaults by the Company, as provided in the Indenture, the principal of said Bonds may become payable in advance of the expressed maturity thereof. Bonds of this Series are issuable in denominations of $100,000 and any integral multiple of $1,000 larger than $100,000, except that such Bonds may be issued in denominations of less than $100,000 when necessary after a partial redemption. - 7 - As more fully provided in the Indenture, any Bonds of this Series, upon payment of the charges specified in the Indenture and upon surrender at the corporate trust office of the Trustee, may be exchanged for an equal aggregate principal amount of Bonds of this Series of any of the authorized denominations. As more fully provided in the Indenture, any of the provisions of the Indenture or any Bonds issued pursuant thereto may be altered, amended, or eliminated, or additional provisions added, with the consent of the holders or registered owners (evidenced as in the Indenture provided) of at least 66 2/3% in principal amount of the Bonds issued thereunder and then outstanding, or, if such change pertains only to the Bonds of one or more Series but less than all Series of Bonds outstanding, the holders of registered owners of at least 66 2/3% in principal amount of the then outstanding Bonds of each Series to which such change pertains; provided, however, that none of the provisions of any Bond with respect to the time, terms, manner, or amount of any payment of the principal thereof or interest thereon shall be changed without the consent of the holder or registered owner of such Bond nor shall there be reduced the percentage of Bonds the holders of which are required to consent to the execution of any supplemental indenture. No recourse under or upon any obligation, covenant or agreement contained in the Indenture or in any indenture supplemental thereto, or in any Bond issued under the Indenture or coupon thereby secured or because of any indebtedness thereby secured, shall be had against any incorporator, or against any past, present or future stockholder, officer or director, as such, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, under any rule or law, statue or constitutional provision or by the enforcement of any assessment or by any legal equitable proceeding or otherwise, it being expressly agreed and understood that the Indenture and any indenture supplemental thereto, and the obligations thereby secured, are solely corporate obligations, and that no personal liability whatever shall attach to, or be incurred by, such incorporators, stockholders, officers or directors, as such, of the Company, or of any successor corporation, or any of them, because of the incurring of the indebtedness thereby authorized, or under or by reason of any of the obligations, covenants or agreements contained in the Indenture or in any indenture supplemental thereto, or in any of the Bonds or coupons thereby secured, or implied therefrom. The execution by the Trustee, or by its successor in trust under the Indenture, of the Trustee's certificate of authentication set forth hereon is essential to the validity of this Bond. This Bond is transferable, but only as provided in the Indenture and on payment of charges therein specified upon surrender hereof, by the registered owner in person or by attorney duly authorized in writing, at the corporate trust office of the Trustee; upon any such transfer a new Bond similar hereto will be issued to the transferee. The Company, the Trustee and any paying agent may deem and treat the person in whose name this Bond is registered as the absolute owner hereof for the purpose of receiving payment of or on account of the principal and the interest on this Bond and for all other - 8 - purposes; and neither the Company nor the Trustee nor any paying agent shall be affected by any notice to the contrary. IN WITNESS WHEREOF, SOUTH JERSEY GAS COMPANY has caused this Bond to be duly executed by the manual or facsimile signatures of its proper officers under its corporate seal or a facsimile thereof. Dated: _________, ______ SOUTH JERSEY GAS COMPANY By: __________________________ President [CORPORATE SEAL] Attest: ______________________________ Secretary - 9 - [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] The within Bond is one of the Bonds of the Series designated therein, which are described or provided for in the within-mentioned Indenture. The Bank of New York, Trustee By ________________________ Authorized Signatory ; and WHEREAS, the Company deems it advisable and has determined pursuant to the provisions of the Original Indenture, to convey, transfer and assign to the Trustee and to subject to the lien of the Indenture with the same effect as though included in the granting clauses of the Original Indenture certain additional property now owned by the Company; and WHEREAS, the execution and delivery of the Twenty-First Supplement have been duly authorized by the Board of Directors of the Company at a meeting duly called and held according to the law; and WHEREAS, all acts and things prescribed by law, by the charter and bylaws of the Company and by the Indenture necessary to make the Bonds of the Nineteenth Series, when executed by the Company and authenticated by the Trustee as in the Indenture provided, valid, binding and legal obligations of the Company, and to make the Twenty-First Supplement a valid, binding and legal instrument in accordance with its terms, have been done, performed and fulfilled, and the execution and delivery hereof have been in all respects duly authorized; NOW, THEREFORE, THIS TWENTY-FIRST SUPPLEMENT WITNESSETH, that by way of further assurance and in consideration of the premises and of the acceptance by the Trustee of the trusts hereby created, and in order to secure further the payment of the principal of, the premium, if any, and the interest on all Bonds at any time issued and outstanding under the Indenture, according to their tenor and effect, and the performance and observance by the Company of the covenants and conditions contained in the Indenture and in said Bonds, the Company has executed and delivered the Twenty-First Supplement, and has granted, bargained, sold, conveyed, aliened, enfeoffed, mortgaged, pledged, released, confirmed, assigned, transferred and set over, and by these presents does grant, bargain, sell, convey, alien, enfeoff, mortgage, pledge, release, confirm, assign, transfer and set over unto the Trustee, its successors in the trust and its and their assigns, the following described property: - 10 - 1. All and singular its lands, real estate and any and every interest in lands or real estate wheresoever situate. 2. All buildings, structures, machinery, apparatus and equipment situate upon the premises referred to above or appurtenant thereto or used in connection therewith, and all property of the Company used or useful in and about the business of manufacturing, transmitting and disposing of gas for light, heat, power or other purposes and consisting of, inter alia, gas works and plants, engines, furnaces, boilers, generators, machinery, shafting, belting, retorts, tanks, condensers, pumps, steam holders, gas holders, purifiers, scrubbers, tar extractors, separators, dehydrators, pressure regulators, blowers, compressors, motors, exhausters, tracks and sidings, oil-gas generators, expansions tanks, gas mains, pipes, gas transmissions systems, gas distribution systems, tunnels, service pipes, pipe line fittings, gates, valves, connections, implements, gas meters, lamps and all other appliances, instruments, equipment, stores, repair parts and the like, now owned by the Company, and all other property for similar uses hereafter in any way acquired by the Company or to which it may hereafter be entitled, it being hereby expressly agreed that any and all personal property covered by the foregoing description, whether or not located in or upon the real property of the Company, shall be considered as fixtures and appurtenances constituting part of the real property of the Company. 3. All easements, rights of way, rights, franchises, contracts, permits, leases, licenses, privileges and appurtenances belonging or in any way appertaining to the premises and property hereinbefore referred to, or to any other property now owned by the Company or hereafter acquired by it, and every part thereof, or derived or acquired by the Company in any manner whatsoever; and all the reversions, remainders, revenues, rents, issues, and profits of all property at any time subject hereto and all the estate, right, title, interest, property, possession, claim, and demand whatsoever, as well at law as in equity, of the Company, of, in, and to the same and every part thereof. 4. All other property of whatever kind and description, whether real or personal, now owned or which may at any time hereafter be acquired by the Company, and whether or not specifically described or referred to herein, excepting, however, all materials and supplies consumable in the operation of the properties of the Company, all merchandise and products acquired, manufactured, produced, or held for sale in the usual course of business, all automobiles and motor vehicles, and all cash, accounts receivable, stocks, bonds, notes, and other securities which are neither specifically pledged with the Trustee nor required by any provision of the Indenture to be pledged with the Trustee. 5. All money, securities, or property of any kind which may at any time be paid, conveyed, assigned, transferred or delivered to the Trustee by the Company or any other person, to be held hereunder as additional security for all the Bonds, which money, securities, or property the Trustee is hereby authorized to receive and accept. - 11 - UNDER AND SUBJECT to any excepted encumbrances of the character defined in Subdivision A of Section 3.04 of the Original Indenture. TO HAVE AND TO HOLD the same unto the Trustee, its successors and assigns, forever. IN TRUST, nevertheless, for the benefit of the Trustee in respect of all reasonable compensation due it hereunder and all expenses and liabilities incurred by it pursuant hereto without negligence or bad faith, and for the equal and ratable benefit and security of the holders, present and future, of all Bonds at any time issued and outstanding under the Indenture, and for the enforcement of the payment thereof, when payable, and the performance and observance of the covenants and conditions contained in the Indenture, without preference, priority or distinction (except as otherwise herein specifically provided), of any one of such Bonds over any other of such Bonds by reason of priority in issue or acquisition or otherwise, so that, except as aforesaid, the principal (which term as used in this Twenty-First Supplement where the context requires includes the Redemption Price contained in the form of Bond hereinbefore set forth in the recitals contained in the Twenty-First Supplement if the Bond is called for redemption) of and interest on each Bond at any time issued and outstanding under the Indenture shall be equally and ratably secured hereby, as if all of such Bonds had been executed, authenticated, delivered, sold, and negotiated simultaneously with the execution and delivery hereof; and it is hereby covenanted and declared that all Bonds at any time issued and outstanding under the Indenture are to be issued, authenticated, and delivered, and that the mortgaged property is to be held by the Trustee, upon and subject to the covenants, conditions, uses and trusts as in the Original Indenture and in any supplemental indenture, including the Twenty-First Supplement, contained; PROVIDED, HOWEVER, and these presents are upon the condition that if the Company, its successors or assigns, shall pay or cause to be paid the principal of and interest on all said Bonds, together with the premium, if any, payable on such of said Bonds as may have been called for redemption prior to maturity, or shall provide, as permitted by the Indenture, for the payment thereof by depositing with the Trustee the entire amount due or to become due thereon for principal, interest and premium, if any, and if the Company shall also pay or cause to be paid all other sums payable under the Indenture by it, then the Indenture, including the Twenty-First Supplement, and the estate and rights thereby granted shall cease, determine and be void, otherwise to be and remain in full force and effect. IT IS HEREBY FURTHER COVENANTED, DECLARED AND AGREED by and between the Company and the Trustee for the benefit of those who shall hold Bonds of the Nineteenth Series, or any of them, as follows: - 12 - ARTICLE I DESCRIPTION OF BONDS OF THE NINETEENTH SERIES The Bonds of the Nineteenth Series shall be designated as "South Jersey Gas Company First Mortgage Bonds, 7.70% Series due 2027," and shall be issuable as fully registered Bonds, substantially in the form hereinbefore recited, but they may bear and contain such legends and modifications as may be required by law or as may be necessary to comply with requirements of any stock exchange or of any regulatory board, body or official. Except as provided in Section 2.11 of the Original Indenture, the aggregate principal amount of Bonds authorized by the Twenty-First Supplement is limited to $35,000,000, and except as aforesaid, and except for exchanges and transfers, the Company shall not execute and the Trustee shall not authenticate or deliver Bonds of the Nineteenth Series in excess of such aggregate principal amount. Except as otherwise provided in Section 2.11 of the Original Indenture, Bonds of the Nineteenth Series shall be dated and shall bear interest from the April 1 or October 1 next preceding the date of authentication thereof by the Trustee, except that if the authentication date is an interest payment date, such Bonds shall be dated, and shall bear interest from, the authentication date; provided, however, that if upon authentication of any Bonds of the Nineteenth Series upon the transfer or in exchange for other such Bonds or under Section 2.6 of the Twenty-First Supplement, interest on the Bonds of the Nineteenth Series shall be in default, the date from which such Bond shall bear interest shall be the date to which interest shall have been paid upon the Bonds transferred or surrendered in exchange for the Bond so authenticated; and provided further, however, that in the case of the authentication of Bonds of the Nineteenth Series upon an original issue hereunder, such Bonds may be dated the date of authentication thereof and in such case shall bear interest from such date of authentication. Bonds of the Nineteenth Series shall mature April 1, 2027, and shall bear interest on the unpaid principal amount thereof at the rate of 7.70% per annum (computed on the basis of a 360-day year of twelve 30-day months), payable on April 1 and October 1 in each year, commencing October 1, 1997, and shall bear interest payable on demand at the rate of 7.70% per annum (computed on the basis of a 360-day year of twelve 30-day months) on any overdue principal and, to the extent permitted by applicable law, on any overdue interest, from the due date thereof, until the obligation of the Company with respect to the payment thereof shall be discharged. All payments of principal and interest shall be made at the corporate trust office of The Bank of New York or its successor as Trustee under the Indenture, or at such other places as the Company may agree pursuant to Section 2.7 of the Twenty-First Supplement, in such coin or currency of the United States of America as at the time of payment shall constitute legal tender for the payment of public and private debts. Bonds of the Nineteenth Series shall be issuable in denominations of $100,000 and in any integral multiple of $1,000 larger than $100,000; provided, however, that such Bonds may be - 13 - issued in denominations of less than $100,000 when necessary to satisfy the requirements of Section 2.6 of the Twenty-First Supplement. Each Bond of such Series, and each of the authorized denominations, shall bear such appropriate distinguishing numbers and letters as may be adopted by the Company. Except as provided below, Bonds of the Nineteenth Series shall be transferable and exchangeable as to denominations and registered name upon the same terms and conditions as are applicable under Section 2.10 of the Original Indenture to fully registered Bonds of the Initial Series. The Bonds of the Nineteenth Series may be presented to the Trustee in exchange for a global Bond in an aggregate principal amount equal to the aggregate principal amount of all outstanding Bonds of the Nineteenth Series (a "Global Bond"), to be registered in the name of a depository (the "Depository") which may include The Depository Trust Company, or its nominee, and delivered by the Trustee to the Depository for crediting to the accounts of its participants pursuant to the instructions of the Trustee. The Company upon any such presentation shall execute a Global Bond in such aggregate principal amount and deliver the same to the Trustee for authentication and delivery in accordance with the Original Indenture and this Twenty-First Supplemental Indenture. Payments on the Bonds of the Nineteenth Series issued as a Global Bond will be made to the Depository. A Global Bond may be transferred, in whole but not in part, only to another nominee of the Depository, or to a successor Depository selected or approved by the Company or to a nominee of such successor Depository. If at any time the Depository notifies the Company that it is unwilling or unable to continue as Depository or if any time the Depository for such series shall no longer be registered or in good standing under the Securities Exchange Act of 1934, as amended, or other applicable statute or regulation, and a successor Depository for such series is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such condition as the case may be, the Company will execute, and the Trustee, upon written notice from the Company, will authenticate and deliver the Bonds of the Nineteenth Series in definitive registered form without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Bond in exchange for such Global Bond. In addition, the Company may at any time determine that the Bonds of the Nineteenth Series shall no longer be represented by a Global Bond. In such a event the Company will execute, and the Trustee, upon receipt of an Officer's Certificate evidencing such determination by the Company, will authenticate and deliver the Bonds of the Nineteenth Series in definitive registered form without coupons, in authorized denominations, and in aggregate principal amount equal to the principal amount of the Global Bond in exchange for such Global Bond. Upon the exchange of the Global Bond for such Bonds of the Nineteenth Series in definitive registered form without coupons, in authorized denominations, the Global Bond shall be canceled by the Trustee. Such Bonds of the Nineteenth Series in definitive registered form issued in - 14 - exchange for the Global Bond shall be registered in such name and in such authorized denominations as the Depository, pursuant to instructions from its direct or indirect participants or otherwise, shall in writing, instruct the Trustee. The Trustee shall deliver such Bonds to the Depository for delivery to the persons in whose names such Bonds are so registered. ARTICLE II REDEMPTION OF AND SINKING FUND FOR BONDS OF THE NINETEENTH SERIES SECTION 2.1. Bonds of the Nineteenth Series shall be subject to redemption, either as a whole or in part from time to time: (a) after February 29, 2012, and subject to any required approval of the Board of Public Utilities of New Jersey (the "New Jersey BPU"), or any successor agency, at the election of the Company upon payment of an amount equal to the applicable percentage of the principal amount thereof specified under the heading "Redemption Price" in the tabulation contained in the form of Bond hereinbefore set forth in the recitals in the Twenty-First Supplement; (b) after February 29, 2012, upon payment of the principal amount thereof, through the operation of the sinking fund for the Bonds of the Nineteenth Series provided for in Section 2.2 of the Twenty-First Supplement; (c) upon payment of the principal amount thereof through the application pursuant to Subdivision C of Section 6.07 of the Original Indenture of proceeds from the condemnation of property subject to the lien of the Indenture, or proceeds of sale of such property to a governmental body or agency having the power of eminent domain made as a result of the threat (evidenced in writing by such body or agency) or condemnation of such property, but not through the application of money from any other source; or (d) by any combination of clauses (a), (b) and (c); together in each case with accrued interest to the date fixed for redemption. Except as set forth in this Section 2.1, the Bonds of the Nineteenth Series are not subject to redemption. SECTION 2.2. As further security for the Bonds of the Nineteenth Series and to create and maintain a sinking fund (herein referred to as the "sinking fund") for the benefit thereof, the Company covenants to pay in cash, so long as any of the Bonds of the Nineteenth Series remain outstanding, to the Trustee, on or before April 1 of each year, commencing April 1, - 15 - 2012, and continuing to and including April 1, 2026, the sum of $2,187,500. For purposes of this Section 2.2, any redemption of less than all of the Bonds of the Nineteenth Series pursuant to Section 2.1 of the Twenty-First Supplement shall be applied to principal payments in inverse order of their scheduled maturity. The Trustee shall select for redemption, in the manner set forth in Section 2.5 of the Twenty-First Supplement, such principal amount of Bonds of the Nineteenth Series as the amount of such sinking fund payment to be paid in cash on or before the next succeeding April 1 shall be sufficient to redeem. The Trustee shall certify to the Company the numbers of the Bonds selected and the portion of the principal amount of each Bond that is to be redeemed. The Trustee shall, not more than 60 nor less than 30 days in advance of such April 1, give, in the name of the Company, written notice that Bonds of the Nineteenth Series bearing the serial number specified have been called for redemption through the sinking fund, that they will be due and payable on such April 1 at the corporate trust office of the Trustee at a stated amount which shall be the principal amount thereof, together with accrued interest to said date, and that all interest thereon will cease to accrue after said date (unless the Company shall default in making such payment on said date). Such notice of redemption shall be given to the registered owners of Bonds which, or portions of which, are to be redeemed by mailing the same to such registered owners, at their respective addresses as the same appear on the registry books kept in accordance with Section 2.10 of the Original Indenture. SECTION 2.3. The election of the Company to redeem any of the Bonds of the Nineteenth Series, other than through the sinking fund above provided for, shall be evidenced by a resolution of its Board of Directors calling all or a stated principal amount thereof for redemption on a stated date. At least 40 days prior to such redemption date (or at such later time as shall be satisfactory to the Trustee), the Company shall file with the Trustee a certified copy of such resolution. The Company shall on or before such redemption date deposit with the Trustee the total redemption price of all Bonds so called, with accrued interest thereon to the redemption date. If the Company elects to redeem less than all of the Bonds of the Nineteenth Series, the particular Bonds to be redeemed shall be selected by the Trustee in the manner set forth in Section 2.5 of the Twenty-First Supplement from the Bonds of the Nineteenth Series then outstanding. The Trustee shall certify to the Company the numbers of the Bonds selected and the portion of the principal amount of each Bond that is to be redeemed. The Trustee shall, not more than 60 nor less than 30 days in advance of such redemption date, give, in the name of the Company, written notice that Bonds of the Nineteenth Series bearing the serial numbers specified have been called for redemption, that they will be due and payable on such redemption date at the corporate trust office of the Trustee at a stated amount (which shall be the applicable redemption price), and that all interest thereon will cease to accrue after said date (unless the Company shall default in payment of the amount necessary to effect such redemption). If all the Bonds of the - 16 - Nineteenth Series be called, the notice shall so state and may omit the numbers thereof. The notice shall state that the Bonds will be payable at the stated redemption price, plus accrued interest to the redemption date. If the redemption date is an interest payment date, the notice may state that the interest payment due on such date will be paid in the usual manner. Such notice of redemption shall be given to the registered owners of Bonds which, or portions of which, are to be redeemed by mailing the same to such registered owners, at their respective addresses as the same appear on the aforementioned registry books. Before any money shall be applied by the Trustee to the redemption of Bonds under this Section, the Company shall deliver to the Trustee a certificate of the President or a Vice President of the Company stating that all conditions precedent provided for herein (including compliance with all applicable covenants) relating to such redemption have been complied with. SECTION 2.4. Each Bond so called for redemption under either Section 2.2 or Section 2.3 shall be due and payable at the places and price and on the date specified in such notice. Subject to any agreement entered into pursuant to Section 2.7, beginning on the date when each Bond shall be due and payable as aforesaid, the holder thereof may present the same for redemption, in negotiable form, and the Trustee shall, out of the money deposited with it under the provisions of this Article, cause the same to be paid and redeemed; after said date (unless upon such presentation on or after the due date the Trustee shall have refused or failed to make such payment) all further interest shall cease to accrue thereon. In any case where the redemption date is an interest payment date, the interest payment due on such date on Bonds called for redemption may be paid in the usual manner. SECTION 2.5. Whenever less than all of the outstanding Bonds of the Nineteenth Series are to be redeemed, the principal amount of Bonds of the Nineteenth Series to be redeemed, shall be prorated among the holders of the Bonds of the Nineteenth Series in the proportion, as nearly as practicable, that their respective holdings bear to the aggregate principal amount of Bonds of the Nineteenth Series outstanding on the date of selection. In making any proration pursuant to this provision, the Trustee may make such adjustment as it may determine, with the approval of the Company, to the end that the principal amount prorated to each holder of Bonds shall be in each instance $1,000 or an integral multiple thereof. SECTION 2.6. If only a part of any fully registered Bond shall be selected by the Trustee in the manner set forth in Section 2.5 of the Twenty-First Supplement, the notice of redemption hereinbefore provided for shall specify the distinctive number of such Bond and the portion of the principal amount thereof to be redeemed. Upon surrender of such Bond for partial redemption and upon payment of the portion so called for redemption, a new Bond or Bonds of the Nineteenth Series, in aggregate principal amount equal to the unredeemed portion of such surrendered Bond, shall be executed by the Company, authenticated by the Trustee, and delivered to the registered owner thereof, without expense to such holder. - 17 - SECTION 2.7. The Company may enter into an agreement with the registered owners of any Bond of the Nineteenth Series (or prospective registered owner of any such Bond) providing for the payment without the surrender of such Bond to such registered owner (or to such prospective registered owner, upon becoming a registered owner of any such Bond) of the principal of and the premium, if any, and interest on such Bond or any part thereof at a place other than the offices or agencies therein specified, and for the making of notation as to principal payments, if any, on such Bond by such registered owner or by any agent of the Company or of the Trustee. A copy of any such agreement shall be filed with the Trustee. The Trustee is authorized to approve any such agreement, and shall thereafter make all payments on such Bond as provided in such agreement. The Trustee shall not be liable for any act or omission to act on the part of the Company, any such registered owner or any agent of the Company in connection with any such agreement. SECTION 2.8. So long as any of the Bonds of the Nineteenth Series shall remain outstanding, upon any application by the Trustee of funds from sources described in Section 2.1 (c) of the Twenty-First Supplement to the redemption of Bonds pursuant to Subdivision C of Section 6.07 of the Original Indenture, if less than all Bonds of all Series then outstanding are to be redeemed, a principal amount of Bonds of the Nineteenth Series shall be redeemed by the application of a portion of such funds, such portion to be determined by multiplying the total amount of such funds so to be applied by a fraction the numerator of which shall be the aggregate amount required for the redemption, pursuant to Subdivision C of Section 6.07 (exclusive of accrued interest, if any), of all of the Bonds of the Nineteenth Series outstanding on the date of the selection for such redemption and the denominator of which shall be the aggregate amount required for the redemption, pursuant to such Subdivision C of Section 6.07 (exclusive of accrued interest, if any), of all of the Bonds of all Series outstanding on such date; provided, however, that nothing in this Section 2.8 shall restrict the manner (pro rata, by lot or otherwise) by which the remaining balance of such funds shall be applied to the redemption of Bonds of any Series other than the Nineteenth Series. SECTION 2.9. Bonds paid or retired by the use of any money subject to the lien of the Indenture, or by the operation of the sinking fund provided for in this Article II, or by the operation of any replacement, purchase, or other analogous fund, or made the basis of a credit against the obligations of the Company under any sinking, replacement, purchase, or other analogous fund, may thereafter be made the basis of the authentication of a like principal amount of Bonds of any Series under the provisions of Section 3.06 of the Original Indenture. SECTION 2.10. To the extent the Company shall elect to include the same, the principal amount of Bonds redeemed by the operation of the sinking fund provided for in this Article II (whether through mandatory sinking fund payments or voluntary sinking fund payments) shall be included among the Bonds purchased, paid or otherwise acquired or retired by the Company specified in Section 5.19(A)(3) of the Original Indenture. - 18 - ARTICLE III ADDITIONAL COVENANTS OF THE COMPANY SECTION 3.1. So long as any Bonds of the Nineteenth Series shall remain outstanding, the Company will not declare or pay any dividend on any shares of its Common Stock (other than dividends payable in shares of its Common Stock) or make any distribution on such shares, or purchase or otherwise acquire any such shares (except shares acquired without cost to the Company), or advance any amount to or invest any amount in the property, securities or indebtedness of, or guarantee any indebtedness of, any subsidiary if, after giving effect to such action, the sum of the aggregate amounts so declared, paid, distributed, purchased, acquired, advanced, invested or guaranteed after December 31, 1996 would exceed the aggregate net income of the Company available for dividends on its Common Stock earned after such date plus the sum of $51,000,000. For the purposes of this Section 3.1, "subsidiary" shall mean any corporation directly or indirectly controlled by or under common control with the Company. For the purpose of calculating the requirements of this Section, the net income of the Company available for dividends on its Common Stock shall be determined in accordance with such system of accounts as may be prescribed by any governmental authority having jurisdiction in the premises or in the absence thereof in accordance with generally accepted accounting principles as in effect at such time; provided, however, that (a) the deductions for depreciation or renewal or replacement reserves in respect of each year shall be the amount taken therefor on the accounts of the Company or the amount required to be stated in item (1) of the Replacement Fund Certificate to be filed under Section 5.19 of the Original Indenture with respect to the period ending at the close of such year, whichever be greater, and (b) no deduction or adjustment shall be made from gross income for or in respect of (i) expenses in connection with the redemption or retirement of any securities issued by the Company, including any amount paid in excess of the principal or par or stated value of securities redeemed or retired, and, if such redemption or retirement is effected with the proceeds of sale of other securities of the Company, interest on the securities redeemed or retired from the date on which the funds required for such redemption or retirement shall be deposited in trust for such purpose to the date of such redemption or retirement, (ii) profits or losses from sales of capital assets or taxes in respect of such profits, (iii) any adjustments to retained earnings (including tax adjustments) applicable to any period prior to January 1, 1997, (iv) charges for the write-off of unamortized debt discount and expense carried on the books of the Company at December 31, 1996, or (v) charges for the write-off or write-down of the amount at which any property of the Company was carried on its books at December 31, 1996, to the extent that the same shall be approved by, or be made pursuant to any rule, regulation, or order of, any governmental authority having jurisdiction in the premises and shall not be required by such authority to be charged against earnings accumulated after December 31, 1996. SECTION 3.2. So long as any Bonds of the Nineteenth Series shall remain outstanding, the Company will satisfy its obligations under the Replacement Fund provided for in Section - 19 - 5.19 of the Original Indenture first through the use of all available property additions and retired Bonds of any Series and then, if and only to the extent that said property additions and retired Bonds are not sufficient to satisfy such obligations, through the use of cash. SECTION 3.3. So long as any Bonds of the Nineteenth Series shall remain outstanding, in the event that the Company shall consolidate or merge with or into any corporation or corporations, or the Company shall transfer all of its property and franchises to any other corporation, the corporation formed by any such consolidation, or into which the Company shall be so merged, or which shall acquire such property of the Company, shall be a corporation incorporated under the laws of the United States, any State or the District of Columbia. SECTION 3.4. So long as any Bonds of the Nineteenth Series shall remain outstanding, no owner of any portion of the mortgaged property will be entitled to any credit against interest payable on any Bonds by reason of the payment of any tax on such property. ARTICLE IV ISSUE AND AUTHENTICATION OF BONDS OF THE NINETEENTH SERIES Upon compliance by the Company with the requirements of the Indenture, including the Twenty-First Supplement, for the issuance of additional Bonds, Bonds of the Nineteenth Series up to an aggregate principal amount of $35,000,000 may forthwith, or from time to time, be executed by the Company and delivered to the Trustee, and the Trustee shall thereupon authenticate and deliver said Bonds in accordance with the provisions of Article III of the Original Indenture. The signature of the officers of the Company on Bonds of the Nineteenth Series may be by facsimile if so authorized by the Company's Board of Directors. ARTICLE V AMENDMENT TO THE ORIGINAL INDENTURE SECTION 5.1. Section 3.06. of the Original Indenture shall be amended to delete paragraph (2) of subsection A thereof, so that such Section shall thereafter read in full as follows: "SECTION 3.06. ADDITIONAL BONDS CONDITIONS FOR AUTHENTICATION ACQUISITION OR REFUNDING OF BONDS ISSUED HEREUNDER. Whenever any Bonds shall have been acquired, paid, or retired by the - 20 - Company, or whenever the Company shall have made provision for the payment of any Bonds (as such provision for payment is defined in Article I), or shall surrender any Bonds to the Trustee, thereupon or at any time thereafter additional Bonds shall be authenticated and delivered by the Trustee in a principal amount not exceeding the principal amount of the Bonds so acquired, paid, retired, surrendered, or for the payment of which such provision shall have been made, upon application by the Company and upon compliance with the following conditions, in addition to those specified in Section 3.03: A. Any Bonds so acquired, paid, retired or surrendered, or for which payment shall have been so provided, may, when deposited with the Trustee as below provided in Subdivision B, be uncancelled or may have been cancelled; provided, however, that in respect of any which shall have been cancelled prior to or concurrently with the application for such authentication (and, for the purposes of this Subdivision A, in case payment shall have been so provided for such Bonds, the same shall be deemed to have been cancelled upon the date of such provision for payment) no Bond shall have been authenticated in lieu thereof or in exchange therefor or by virtue of the acquisition, payment, retirement, cancellation, or such provision for payment thereof; nor shall any money have been withdrawn hereunder by virtue of such acquisition, payment, retirement, cancellation, or provision. B. There shall be delivered to the Trustee the following documents: (1) The Bonds so acquired, paid, retired, or surrendered. Any of such Bonds which shall be uncancelled shall be in negotiable form or accompanied by proper instruments of assignment and transfer, and shall be accompanied by all unmatured coupons, if any, appertaining thereto. In the case of any Bonds for which payment shall have been so provided, such Bonds shall not then be required to be deposited, but in lieu thereof the Company shall deliver to the Trustee a statement describing the same; thereafter, upon payment of such Bonds, the same shall forthwith be delivered to the Trustee for cancellation. In the case of any Bonds which shall have been paid or retired or surrendered and which shall have theretofore been cancelled and cremated by the Trustee, such Bonds shall not be required to be deposited, but in lieu thereof the Company shall deliver to the Trustee a statement describing the same and specifying the date upon which the same were paid or retired or surrendered and were cancelled and cremated. (2) If the Bonds so deposited shall be cancelled Bonds, or if in lieu of such deposit of Bonds a statement by the Company shall be delivered as provided in subparagraph (1) of this Subdivision B, a certificate by the President or a Vice-President of the Company, stating such facts in connection - 21 - therewith as may reasonably be required to show compliance with the conditions specified in Subdivision A. C. If the Bonds so acquired, paid, retired, surrendered, or the payment of which has been so provided for, shall not at any time theretofore have been bona fide issued by the Company, and if they shall bear interest at a lower rate per annum than the new Bonds the authentication of which is then applied for, the net earnings condition specified in Subdivision C of Section 3.04 shall be complied with, and the Company shall deliver to the Trustee (i) a net earnings certificate, conforming to the provision of Subdivision E (3) of Section 3.04, showing the fixed charges and net earnings of the Company in such reasonable detail as may be required to show compliance with said condition, (ii) an opinion of counsel conforming to the provisions of Subdivision E (4) (b) of Section 3.04, and (iii) a certificate by the trustee or mortgagee of each prior lien conforming to the provisions of Subdivision E (5) of Section 3.04" SECTION 5.2. The foregoing amendment to Section 3.06 of the Original Indenture shall become effective upon the earlier to occur of the following: (a) the date as of which no Bonds remain outstanding that where part of a series of Bonds initially issued prior to the issuance of Bonds of the Nineteenth Series; (b) the date as of which a supplemental indenture to the Indenture is executed by the Company and the Trustee setting forth the foregoing amendment to Section 3.06 of the Original Indenture, after the holders of at least 66 2/3% of the Bonds then outstanding have consented to and approved the execution of such supplemental indenture, all in accordance with Article X and the other relevant provisions of the Original Indenture. SECTION 5.3. Each holder of any Bonds of the Nineteenth Series, by the acceptance by such holder of such Bonds, (a) consents to and approves the foregoing amendment to Section 3.06 of the Original Indenture, and consents to and approves the execution by the Company and the Trustee of a supplemental indenture to the Indenture setting forth such amendment, and (b) agrees to execute such instrument or instruments as may be requested by the Company or the Trustee to evidence such consent and approval in accordance with Section 10.02 of the Original Indenture. ARTICLE VI CONCERNING THE TRUSTEE SECTION 6.1. The Trustee, for itself and its successors in said trusts, hereby accepts the trust hereby provided and agrees to perform the same upon the terms and conditions contained in - 22 - the Indenture, including the Twenty-First Supplement. The Trustee shall not be responsible in any manner whatsoever for the recitals in the Twenty-First Supplement. SECTION 6.2. So long as any Bonds of the Nineteenth Series shall remain outstanding, any successor trustee to the Trustee shall at all times be a corporation which shall have at all times a combined capital and surplus of not less than $100,000,000. If any such successor trustee publishes reports of condition annually, pursuant to law or to the requirements of a supervising or examining authority, the combined capital and surplus of such successor trustee at any time for the purposes of this Section shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. ARTICLE VII CONCERNING EVENTS OF DEFAULT SECTION 7.1. So long as any Bonds of the Nineteenth Series shall remain outstanding, the following shall constitute events of default within the meaning of Section 9.02 of the Original Indenture (in addition to the events of default set forth in Section 9.02 of the Original Indenture): (a) If the Company shall default in the payment of any portion of the principal of any Bond of the Nineteenth Series, as and when the same shall have made due, whether at the stated maturity thereof or upon proceedings for redemption (pursuant to the provisions of any sinking, replacement, purchase or other analogous fund established in the Original Indenture or in the Twenty-First Supplement or pursuant to any optional or other redemption) or otherwise; provided, however, that in the event the Company and the Trustee shall have taken all action required to be taken so that each such payment of principal by means of wire transfer could reasonably be expected to be effective on the due date thereof, but nevertheless, any such transfer shall not have been credited to the account of a registered owner of Bonds of the Nineteenth Series to whom such payment is required to be made effective as of the due date, the Company shall not be deemed to have defaulted upon the obligation to make such payment until the expiration of five days following said due date; (b) if the Company shall default in the payment of any installment of interest due on any Bond of the Nineteenth Series and such default shall continue for a period of 10 days; or (c) if the Company shall default in the performance of or compliance with any covenant, condition or term contained in the - 23 - Indenture, including the Twenty-First Supplement, and such default shall continue for 30 days after the Company shall have knowledge thereof. SECTION 7.2. So long as any Bonds of the Nineteenth Series shall remain outstanding, the Company covenants that if at any time or times or from time to time an event of default referred to in Section 7.1 of the Twenty-First Supplement shall occur, the Company will, on demand of the Trustee, forthwith pay to the Trustee, for the benefit of all holders of Bonds then outstanding under the Indenture, a sum equal to the total amount then due for principal and interest on all Bonds then outstanding under the Indenture, with interest thereon (to the extent that payment of such interest is enforceable under applicable law) in accordance with the terms of the respective Bonds. Should said sum not be so paid to the Trustee, it shall be entitled, at any time or times and from time to time, in its own name and as Trustee of an express trust and without the possession or production of any Bonds of any Series or coupons, to recover judgment for the same against the Company or any other obligor upon such Bonds. ARTICLE VIII MISCELLANEOUS SECTION 8.1. As supplemented and amended by the Twenty-First Supplement, the Indenture is in all respects ratified and confirmed, and the Indenture, including the Twenty-First Supplement, shall be read as one instrument. All terms used in the Twenty-First Supplement shall have the same meaning as used elsewhere in the Indenture except where the context clearly indicates otherwise. SECTION 8.2. The Twenty-First Supplement has been dated as of March 1, 1997 for convenience. The date of actual execution hereof by each of the parties is the date shown by the acknowledgment of execution hereof by its officers. SECTION 8.3. The Twenty-First Supplement may be executed in several counterparts, each of which shall be considered an original and all collectively as but one instrument. SECTION 8.4. The approval of the New Jersey BPU of the execution and delivery of these presents, and of the issue of any Bonds of the Nineteenth Series, shall not be construed as approval of said New Jersey BPU of any other act, matter or thing which requires approval of said New Jersey BPU under the laws of the States of New Jersey; nor shall the approval of said New Jersey BPU of the issue of any such Bonds bind said New Jersey BPU or any other public body or authority of the State of New Jersey having jurisdiction in the premises in any future application for the issuance of Bonds under the Indenture. - 24 - IN WITNESS WHEREOF, the Company and the Trustee have caused these presents to be duly executed under the respective corporate seals by their respective proper officers, all duly authorized thereunto, and have caused these presents to be dated as of the day and year first above written. SOUTH JERSEY GAS COMPANY By: /s/ William F. Ryan William F. Ryan President ATTEST: [SEAL] /s/ G. L. Baulig G. L. Baulig Secretary THE BANK OF NEW YORK By: /s/ Bruce C. Vecchio ATTEST: [SEAL] /s/ Alison R. Migliaccio - 25 - STATE OF NEW JERSEY : : ss: COUNTY OF ATLANTIC : Be it remembered, that on this March 18, before me, a Notary Public of New Jersey, personally appeared William F. Ryan, who, I am satisfied, is President of South Jersey Gas Company, one of the corporations named in the foregoing deed or instrument, and I having first made known to him the contents thereof, he acknowledged that he had signed the same as such officer for and on behalf of such corporation, that the same was made by such corporation as its voluntary act and deed, and sealed with its corporate seal, by virtue of authority of its board of directors, and that he has received, without charge, a true copy of said foregoing deed or instrument. All of which is hereby certified. Eleanor Merighi /s/ Eleanor Merighi Notary Public Notary Public of New Jersey New Jersey My Commission Expires: May 2, 1999 STATE OF NEW JERSEY : : ss COUNTY OF MERCER : Be it remembered, that on this ___________, before me, a Notary Public of New Jersey, personally appeared, who, I am satisfied, is an Assistant Vice President of The Bank of New York, one of the corporations named in the foregoing deed or instrument, and I have first made known to him the contents thereof, he acknowledged that he had signed the same as such officer for and on behalf of such corporation, that the same was made by such corporation as its voluntary act and deed, and sealed with its corporate seal, by virtue of authority of its board of directors. All of which is hereby certified. /s/ Serina L. Pedano Notary Public of New Jersey My Commission Expires: SERINA L. PEDANO Notary Public, State of New Jersey No. 2192036 Qualified in Passaic County Commission Expires July 31, 2001 - 26 - The within Twenty-First Supplemental Indenture has been recorded and filed as follows: Date of County Recordation Book Page New Jersey: Atlantic Burlington Camden Cape May Cumberland Gloucester Salem EX-10.L.B 4 Exhibit (10)(l)(b) ------------------ SOUTH JERSEY INDUSTRIES, INC. DEFERRED COMPENSATION AGREEMENTS Pursuant to the instructions to Item 601 to Regulation S-K, the following schedule sets forth the materials details which differ in the Deferred Compensation Agreements, the form of which was filed as Exhibit (10)(j)(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1980, which exhibit is incorporated by reference into the Company's Annual Report on Form 10-K for the year ended December 31, 1997 as Exhibit (10)(l)(a).
AMOUNT PAYABLE IN CONTRACTING 60 MONTHLY NAME TITLE PARTY INSTALLMENTS - ------------------- ------------------------- ----------- ------------ C. Biscieglia President Gas Company $75,000 G. S. Levitt Executive Vice President Gas Company 75,000 S. A. Pignatelli Vice President Gas Company 75,000 W. M. Weis Vice President Gas Company 75,000 G. L. Baulig Secretary Gas Company 75,000 W. J. Smethurst, Jr. Vice President & Treasurer Gas Company 75,000 J. J. Bodrog Assistant Vice President Industries 75,000
EX-10.L.E 5 Exhibit (10)(l)(e) ----------------- SOUTH JERSEY INDUSTRIES, INC. SCHEDULE OF OFFICER AGREEMENTS Pursuant to Rule 12b-31, the following sets forth the materials details which differ in the Executive Employment Agreements, the form of which is filed herewith as Exhibit (10)(l)(d).
Minimum Date of Base Name Capacities in Which Served Agreement Salary - ----------------------- --------------------------- --------- -------- George L. Baulig Secretary & Treasurer, South 10/1/96 $125,000 Jersey Industries, Inc.; Secretary, South Jersey Gas Company. Charles Biscieglia President, South Jersey Gas 10/1/96 167,000 Company; Vice President, South Jersey Industries, Inc. Julius J. Bodrog President, Energy & 10/1/96 104,000 Minerals, Inc.; Assistant Vice President, South Jersey Gas Company; President, R&T Group, Inc. Edward J. Graham President, South Jersey 8/1/96 110,000 Fuel, Inc.; Vice President, South Jersey Gas Company David A. Kindlick Vice President, South Jersey 10/1/96 115,000 Gas Company Gerald S. Levitt Executive Vice President, 1/1/97 167,000 South Jersey Gas Company. Joseph E. McCullough President, South Jersey 8/1/96 127,500 Energy Company; Vice President, South Jersey Gas Company. Albert V. Ruggiero Vice President, South Jersey 10/1/96 120,000 Gas Company William J. Smethurst, Jr. Assistant Secretary & 10/1/96 105,000 Assistant Treasurer, South Jersey Industries, Inc. and Energy & Minerals, Inc.; Vice President & Treasurer, South Jersey Gas Company; Treasurer, South Jersey Energy Company
EX-10.L.I 6 Exhibit (10)(l)(i) ----------------- SOUTH JERSEY INDUSTRIES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PROGRAM EFFECTIVE: October 1, 1983 AMENDED and RESTATED: July 1, 1997 - Title Page - SOUTH JERSEY INDUSTRIES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PROGRAM TABLE OF CONTENTS Item Description Page(s) I Purpose 1 II Definitions 1 III Program Retirement Income 2 IV Protection of Confidential Information: Non-competition 4 V Miscellaneous 5 ATTACHMENT A Individual Agreement 8 ATTACHMENT B Sample Calculation 10 ATTACHMENT C Projected Officer Benefits as of January 1, 1997 11 - Table of Contents - SOUTH JERSEY INDUSTRIES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PROGRAM I. PURPOSE. South Jersey Industries, Inc., and its subsidiary companies as defined in Section II (e), hereby establish this Program, effective October 1, 1983, amended and restated effective January 1, 1989, September 1, 1991, and July 1, 1997 for the purpose of providing retirement income benefits to designated officers of the Companies. II. DEFINITIONS. (a) "Accrued Benefit" shall mean a vested right to benefits under the Program which shall commence upon the Officer's attaining age 50 while still in the service of the Company; or death after attaining age 50 and while employed by the Company. The "accrued benefit" shall be equivalent to 2% per year of service (inclusive of both the qualified plan and the SERP) up to the maximum stipulated in Section III (a)(1), plus an additional 5% of Final Average Compensation. (b) "Actuarial Equivalent" shall mean that all benefit forms payable under this Program shall be the actuarial equivalent of a Life Annuity with six years guaranteed. The actuarial factors used in making those determinations shall be the applicable actuarial factors specified in the Plan, as defined in Section 2(i). (c) "Board of Directors" shall mean the Board of Directors of South Jersey Industries, Inc. (d) "Committee" shall mean the Compensation/Pension Committee as appointed by the Board of Directors to administer the Program pursuant to Section 5(a) hereunder. (e) "Company" shall mean South Jersey Industries, Inc.; South Jersey Gas Company; Energy & Minerals, Inc; South Jersey Energy Company; South Jersey Fuel Company and R & T Group, Inc. (f) "Effective Date" shall mean October 1, 1983. The effective date of this Amendment and Restatement is July 1, 1997. (g) "Final Average Compensation" shall mean the Officer's average total cash compensation (salary plus annual incentive bonus earned and paid) for the highest 36 consecutive calendar months of the final 60 months prior to the earliest of the Officer's actual retirement, death or disability. - 1 - (h) "Officer" shall mean Chief Executive Officer, President, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Assistant Vice Presidents, Secretary, Assistant Secretaries, Treasurer, Assistant Treasurers, Controller and Assistant Controllers of the Company, or Officer as prescribed by the Bylaws of the Company from time to time, who have attained the age of 50. (i) "Plan" shall mean the qualified Retirement Plan for non- union employees of South Jersey Industries, and its subsidiary companies as identified in the Plan Document. (j) "Program" or "SERP" shall mean the Supplemental Executive Retirement Program of the Company as set forth in this document, including any and all amendments hereto and restatements hereof. (k) "Primary Social Security" shall mean the primary benefit paid to an Officer under the Federal Social Security Act, as amended from time to time. (l) "Year of Service" shall have the same meaning as the definition given under Section 3.03(a) of the Plan. (m) "Change in Control" for the exclusive purposes of this plan, shall mean any of the following: (1) approval by the shareholders of the Company without the recommendation and approval of the Board of Directors of the Company of any plan or proposal for the consolidation, merger, liquidation, dissolution or acquisition of the Company or all or substantially all of its assets; (2) election to the Board of Directors of the Company of directors who constitute a majority of the directors, different from the individuals who at the effective date of this amendment and restatement of the SERP constituted the entire Board of Directors of the Company, unless those individuals were recommended for election as directors by a majority of the original Board of Directors, or by successor directors recommended by the original Board of Directors; or (3) the acquisition by any person of 20% or more of the stock of the Company having general voting rights in the election of directors (for purposes of this clause (3), the term "person" shall include any individual or entity or any combination of two or more individuals or entities acting as a group within the meaning of Section 13(d) of the Securities Exchange Act of 1934 for the purpose of acquiring, holding or disposing of stock of the Company). III. PROGRAM RETIREMENT INCOME. The Company agrees to pay a Program benefit to an Officer under the following circumstances and conditions: (a) Retirement Benefit. The benefit payable to an Officer eligible under this plan upon retirement at the age of 60, or upon early retirement as defined in Section III(b) shall be as follows: - 2 - (1) A benefit of 2% of the Officer's final average compensation as defined under Section 2(g), multiplied by the Officer's years of service (not to exceed 30 years), inclusive of the qualified Pension Plan Benefit; except in the instance where the qualified Pension Plan Benefit yields a percentage of final average compensation calculated on the basis of a Life Annuity with six years guaranteed in excess of 60%, whereas, in such case, the higher qualified Plan benefit shall be payable, plus, (2) an additional 5% of the Final Average Compensation as defined under Section 2(g), and pursuant to the provisions of Section II (a). (3) The amount payable shall commence on the first day of the month immediately following the Officer's retirement. The benefit shall be payable in any form elected by the officer from among the benefit forms available under the Plan. The benefit under the program shall be the Actuarial Equivalent of a Life Annuity with six years guaranteed. However, the SERP shall provide for a 50% joint annuitant option for the spouse of the Officer without any actuarial reduction, for both the SERP and the "Plan". (See Attachment "B") (4) The benefit payable under Section 3(a)(1) shall be supplemented to the extent necessary to ensure that the Officer receives a benefit under this Program which is at least equal to the benefit that would have been paid to the Officer under the Plan had that benefit been determined without regard to the limit on compensation taken into account under the Plan imposed by section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code") and without regard to the limit on benefits payable under the Plan imposed by section 415 of the Code. (b) Early Retirement Benefit. If the Officer has attained the age of 55 while in the service of the Company, the Officer may, upon written application to retire made to the Company, and upon receipt of the Company's written consent to such early retirement, receive an annual benefit equal to the normal retirement benefit, as calculated under Section 3(a) of this Program, multiplied by 100% minus 1/6% (one-sixth of one percent) for each month by which the Officer's retirement date precedes the Officer's 60th birthday. The amount payable shall commence on the first day of the month following the Officer's retirement. The benefit shall be payable in any form elected by the officer from among the benefit forms available under the Plan. The benefit under the Program shall be the Actuarial Equivalent of a Life Annuity with six years guaranteed with a 50% joint annuitant option provided as indicated in Section 3(a)(3). Further, the Board of Directors at the recommendation of the Committee may waive all or a portion of the early retirement penalty stipulated in this paragraph. Further, the CEO and eligible Officer may agree to a retirement age between 58 and 60 years of age. In such instances, when the Board has either waived early retirement penalties or the CEO and eligible officer have agreed to a retirement date between 58 and 60, all early - 3 - retirement penalties shall be eliminated under the SERP and the Plan and the Officer shall be made whole through the SERP. In such instances, when the Board has waived the early retirement reduction, or the CEO and the eligible Officer have agreed to a retirement date between 58 and 60, all early retirement reductions shall be eliminated under the SERP. The offset for Plan benefits will, however, be net of any applicable reductions. (c) Disability Benefit. If the Officer receives disability benefits under insurance provided by the Company, the Officer shall continue to accumulate service for purposes of the Program benefit as calculated under Section 3(a). The benefit shall be based on Final Average Compensation determined to the date of disability. The amount payable shall commence at the same time and in the same form as the benefit under the Plan. The benefit under the Program shall be the Actuarial Equivalent of a Life Annuity with six years guaranteed, with a 50% joint annuitant option provided as indicated in Section 3(a)(3). (d) Death Benefit. If an Officer dies after attaining age 50 while employed by the Company, the Officer's spouse shall be entitled to an annual survivor pension equal to one-half of the Officer's Accrued Benefit calculated in accordance with Section 3(a), and without the application of any early retirement penalty (reduction). IV. PROTECTION OF CONFIDENTIAL INFORMATION: NONCOMPETITION. In view of the fact that the Officer's work with the Company brings him in close contact with many confidential affairs of the Company, including matters of a business nature such as information about costs, profits, markets, sales, plans for future development and other information not readily available to the public, the Officer who agrees to participate in the Program also agrees: (1) to keep confidential during and after the Officer's employment by the Company all matters of and information relating to the Company, and not to disclose them to anyone outside of the Company under any circumstances, or to anyone within the Company who is not in a position where he needs to know such information; (2) to deliver promptly to the Company on termination of the Officer's employment, or at any time that the Company may so request, all memoranda, notes, records, reports and other documents (and all copies thereof) relating to the business of the Company which he may then possess or have under the Officer's control; and (3) during the term of the Officer's employment and for a period of ten (10) years thereafter, not directly or indirectly to (a) enter the employ of, or render any - 4 - services to, any person, firm or corporation engaged in any business competitive with the business of the Company in any area serviced by the Company or in which the Company does business; (b) engage in such business for the Officer's own account; or (c) become interested in any such business as an individual, partner, director, Officer, principal, agent, employee, trustee, consultant or in any other relationship or capacity. Anything to the contrary herein notwithstanding, the Officer may be retained as an independent advisor and consultant to the President of the Company as to such matters as the President of the Company may from time to time request. V. MISCELLANEOUS. (a) Administration of Program. The Program shall be administered by the Compensation/Pension committee appointed by the Board of Directors. The Committee shall have full power, discretion and authority to recommend interpretation, construction and administration of the Program and any part thereof to the Board of Directors. The Committee may recommend to the Board of Directors employment of legal counsel, consultants, actuaries and agents, as it deems desirable, in the administration of the Program, and may rely on the opinion(s) of such counsel, the advice of such consultants, and the computations of such actuary(ies). The Committee shall have such rights, duties and privileges under the Program as are allocated to the administrative committee under the Plan. The Board of Directors shall designate the President and Chief Executive Officer as Program Administrator. (b) Arbitration. Any controversy or claim arising out of or related to this Program, including any rights to benefits which have accrued under this Program, or the interpretation, construction or administration of the Program, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the Arbitrators is binding and may be entered in any Court having jurisdiction thereof. (1) The arbitration panel shall consist of three arbitrators, one appointed by each party, and a third, neutral arbitrator appointed by the first two arbitrators. (2) Each party shall appoint its arbitrator within fourteen days after the filing of the Demand for Arbitration, and the third arbitrator shall be appointed within ten days thereafter. (3) The third, neutral arbitrator, shall serve as chairman of the Arbitration Panel. (4) All decisions of the Arbitration Panel, including the award, must: be by at least a majority. - 5 - (c) Amendment, Suspension and Termination. The Program may be amended, suspended, or terminated in whole or in part at any time and from time to time by the Board of Directors. No such amendment, suspension or termination shall retroactively impair or otherwise adversely affect the rights of any person to benefits under this Program that have accrued prior to that date. (d) Change of Control. Upon a Change of Control, the Company shall, as soon as possible, but in no event longer than 45 days following the Change of Control, as defined herein, make an irrevocable contribution to a Rabbi Trust or, other comparable funding vehicle in an amount that is equal to 120% of the amount necessary to pay each program participant or beneficiary the benefits accrued for the program participants and their beneficiaries under the terms of the program on the date of the Change in Control, determined using the same actuarial assumptions and methods as are used in funding the Plan. (e) Proof of Date of Birth. In order to be eligible to receive payments under this Program, the Officer, or the Officer's surviving spouse seeking benefits under Section 3(d) of this Program shall provide written proof of the date of birth of the Officer to the Committee. (f) Notices. Each Officer or surviving spouse or their authorized designee shall be responsible for furnishing the Committee with the current and proper address for the mailing of notices, reports and benefit payments. Any notice required or permitted to be given shall be deemed given if directed to the person to whom addressed at such address and mailed by regular United States mail, first-class and prepaid. If any check mailed to such address is returned as undeliverable to the addressee, mailing of checks will be suspended until the Officer or surviving spouse furnishes proper address. (g) Nonalienation of Benefits. None of the payments, benefits or rights of any Officer or surviving spouse shall be subject to any claim or any creditor, and, in particular, to the fullest extent permitted by law, all such payments, benefits and rights shall be free from attachments, garnishment, trustee's process, or any other legal or equitable process available to any creditor of such Officer or surviving spouse. (h) Reliance on Data. The Company, the Committee and all other persons associated with the Program's operation shall have the right to rely on the veracity and accuracy of any required written data provided by the Officer or the surviving spouse including representation of age, health and marital status. (i) No Contract of Employment. Neither the establishment of the Program, nor any modification thereof, nor the payment of any benefits shall be construed as giving any Officer the right to be retained in the service of any entity const ituting the Company, and all officers shall remain subject to discharge to the same extent as if the Program had never been adopted. - 6 - (j) Severability of Provisions. If any provision of this Program shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Program shall be construed and forced as if such provisions had not been included. (k) Controlling Law. This Program shall be construed and enforced according to the laws of the State of New Jersey, to the extent not preempted by Federal law, which shall otherwise control. (l) Effect-on Other Plans. Any benefit payable under the Program shall not be deemed salary or other compensation for the purpose of computing benefits under any employee benefit plans or other arrangement of the Company for the benefit of its employees. - 7 - ATTACHMENT "A" SOUTH JERSEY INDUSTRIES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT This Agreement dated ______________________ between South Jersey Industries, Inc., a New Jersey Corporation, (hereinafter Referred to as the "Company"'), and __________________________________________, an Officer of the Company who resides at ______________________________________________. WITNESSETH: In consideration of the Officer's employment by the Company hereinafter and of the covenants hereinafter set forth, it is mutually agreed as follows: 1. OFFICER'S SERVICES. The OFFICER shall faithfully, and to the best of the Officer's ability, devote all of the Officer's working time exclusively to the performance of such services for the COMPANY as may be assigned to him from time to time under written employment agreements or otherwise and the OFFICER shall not, for remuneration or profit, directly or indirectly render any service to, or undertake any employment for, any other person, firm or corporation, without first obtaining the written consent of the President and Chief Executive Officer of the COMPANY. - 8 - 2. PROGRAM RETIREMENT INCOME. The COMPANY agrees to provide the OFFICER with a Supplemental Executive Retirement Program as outlined in the Plan documents attached as Exhibit "A". 3. ASSIGNABILITY. This Agreement shall inure to the benefit of any assignee of the COMPANY, and the OFFICER specifically agrees, on demand, to execute any and all necessary documents reasonably requested in connection therewith. 4. ENTIRE AGREEMENT. This Agreement (including Exhibit A) constitutes the entire understanding between the parties hereto with reference to the subject matter hereof and shall not be changed or modified except by a written instrument signed by both parties. This agreement amends and restates all prior agreements between the COMPANY and the OFFICER relating to the Supplemental Executive Retirement Program. Otherwise, all existing contracts of employment between the COMPANY and the OFFICER shall survive the making of this Agreement and, except to the extent amended hereby, remain in full force and effect. IN WITNESS WHEREOF, the COMPANY has caused this Agreement to be executed in duplicate by a proper and duly authorized representative thereof, and the OFFICER has signed this Agreement in duplicate, as of the day and year first above written. SOUTH JERSEY INDUSTRIES, INC. OFFICER By_______________________________ By________________________________ Title_____________________________ Title_____________________________ - 9 - EX-10.L.J 7 Exhibit (10)(l)(j) ----------------- SOUTH JERSEY INDUSTRIES, INC. 1997 Stock Option and Stock Appreciation Rights Plan 1. Purpose Of Plan The purpose of the Plan is to assist the Company in retaining the employment of valued employees by offering them a greater stake in the Company's success and a closer identity with it, and to aid in obtaining the services of individuals whos e employment would be helpful to the Company and would contribute to its success. 2. Definitions (a) "Board" means the board of directors of the Parent Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Committee" means the committee described in Paragraph 5. (d) "Company" means South Jersey Industries, Inc. and each of its Subsidiary Companies. (e) Date of Grant" means the date on which an Option or SAR is granted. (f) "Fair Market Value" means on any given date the mean between the highest and lowest prices of actual sales of Shares on the principal national securities exchange on which the Shares are listed on such date or, if there are no such sales on such date, the mean between the closing bid and asked prices of the Shares on such exchange on such date. (g) "Holder" means a person to whom an SAR has been granted under the Plan, which SAR has not been exercised and has not expired or terminated. (h) "Incentive Stock Option" means an Option granted under the Plan, designated by the Committee at the time of such grant as an Incentive Stock Option and containing the terms specified herein for Incentive Stock Options. (i) "Non-Qualified Option" means an Option granted under the Plan, designated by the Committee at the time of such grant as a Non-Qualified Option and containing the terms specified herein for Non-Qualified Options. (j) "Option" means any stock option granted under the Plan and described either in Paragraph 3(a) or 3(b). - 1 - (k) "Optionee" means a person to whom an Option has been granted under the Plan, which Option has not been exercised and has not expired or terminated. (l) "Parent Company" means South Jersey Industries, Inc. (m) "SAR" means a stock appreciation right granted under the Plan and described in Paragraph 3(c). (n) "Share" or "Shares" means a share or shares of Common Stock of the Parent Company. (o) "Subsidiary Companies" means all corporations that, at the time in question, are subsidiary corporations of the Parent Company within the meaning of section 425(f) of the Code. (p) "Ten Percent Shareholder" means a person who on the Date of Grant owns, either directly or within the meaning of the attribution rules contained in section 425(d) of the Code, stock possessing more than ten percent of the total combined voting power of all classes of stock of his or her employer corporation or of its parent or subsidiary corporations, as defined respectively in sections 425(e) and (f) of the Code. (q) "Value" of an SAR means the excess of the Fair Market Value of a Share on the date of exercise of such SAR over the Fair Market Value of a Share on the Date of Grant of such SAR. 3. Rights To Be Granted Rights that may be granted under the Plan are: (a) Incentive Stock Options, which give the Optionee the right for a specified time period to purchase a specified number of Shares for a price not less than their Fair Market Value on the Date of Grant; (b) Non-Qualified Options, which give the Optionee the right for a specified time period to purchase a specified number of Shares for a price determined by the Committee on the Date of Grant; and (c) SARs, which give the Holder the right for a specified time period, without payment to the Company, to receive the Value of such SARS, to be paid in cash or Shares or a combination of cash and Shares, the number and amount of which shall be determined pursuant to Paragraph 8(e) below. - 2 - 4. Stock Subject To Plan Not more than 266,777 Shares in the aggregate may be delivered pursuant to the Plan upon exercise of Options or SARs. The Shares so delivered may, at the option of the Company, be either treasury Shares or Shares originally issued for such p urpose. If an Option or an SAR covering Shares terminates or expires without having been exercised in whole or in part, other Options or SARs may be granted covering the Shares as to which the Option or SAR was not exercised. 5. Administration Of Plan The Plan shall be administered by a committee of the Board, which may be a standing committee of the Board and which shall be composed of not less than three directors of the Parent Company, appointed by the Board, none of whom shall be eligi ble (or shall have been eligible within one year prior to the date of his or her appointment) to be granted Options or SARs under the Plan or to be selected as a participant under any other discretionary plan of the Company or any of its affiliates e ntitling him or her to acquire stock, stock options or stock appreciation rights of the Company or any of its affiliates. 6. Grant of Rights The Committee may grant Options or SARs or both to eligible employees of the Company. 7. Eligibility (a) Eligible employees to whom Options and SARs may be granted shall be officers and other key employees of the Company, including employees who are also directors. Directors who are not employees of the Company shall not be eligible. (b) An Incentive Stock Option shall not be granted to a Ten Percent Shareholder except on such terms concerning the option price and period of exercise as are provided in Paragraphs 8(a) and 8(f) with respect to such a person. A Non-Qualified Option shall not be granted to a Ten Percent Shareholder. 8. Option and SAR Agreements and Terms All Options and SARs shall be granted within ten years from January 23, 1997 and be evidenced by Option agreements or SAR agreements which shall be executed on behalf of the Parent Company and by the respective Optionees or Holders. The term s of each such agreement shall be determined from time to time by the Committee, consistent, however, with the following: - 3 - (a) Option Price. The option price per Share shall be determined by the Committee but, in the case of Incentive Stock Option, shall not be less than 100% of the Fair Market Value of such Share on the Date of Grant. With respect to any Incentive Stock Option granted to a Ten Percent Shareholder, the option price per Share shall not be less than 110% of the Fair Market Value of such Share on the Date of Grant. (b) Restrictions on Transferability. No Option or SAR shall be transferable otherwise than by will or the laws of descent and distribution and, during the lifetime of the Optionee or Holder, shall be exercisable only by him or her. Upon the death of an Optionee or Holder, the person to whom the rights shall have passed by will or by the laws of descent and distribution may exercise any Options or SARs only in accordance with the provisions of Paragraph 8(f). (c) Payment Upon Exercise of Options. Full payment for Shares purchased upon the exercise of an Option shall be made in cash or, at the election of the Optionee and as the Committee may, in its sole discretion, approve, either (1) by surrendering Shares with an aggregate Fair Market Value equal to the aggregate option price, (2) by delivering such combination of Shares and cash as the Committee may, in its sole discretion, approve or (3) at the election of the Optionee, and if the C ommittee, in its sole discretion approves, by surrendering the Option in exchange for issuance of a number of shares equal to the difference between the exercise price of the Option and the Fair Market Value of the Shares subject to the Option. (d) Issuance of Certificates Upon Exercise of Options; Payment of Cash. Only whole Shares shall be issuable upon exercise of Options. Any right to a fractional Share shall be satisfied in cash. Upon payment of the option price, a certificate for the number of whole Shares and a check for the Fair Market Value on the date of exercise of any fractional Share to which the Optionee is entitled shall be delivered to such Optionee by the Parent Company, provided, however, that in the ca se of the exercise of a Non- Qualified Option, the Optionee has remitted to his employer an amount, determined by such employer, necessary to satisfy applicable federal, state or local tax-withholding requirements, or made other arrangements with his or her employer for the satisfaction of such tax-withholding requirements. The Parent Company shall not be obligated to deliver any certificates for Shares until such Shares have been listed (or authorized for listing upon official notice of issuanc e) upon each stock exchange upon which outstanding Shares of such class at the time are listed nor until there has been compliance with such laws or regulations as the Parent Company may deem applicable. The Parent Company shall use its best efforts to effect such listing and compliance. - 4 - (e) Issuance of Certificates Upon Exercise of SARS; Payment of Cash. Upon exercise of an SAR, its Value shall be payable in cash, Shares, or in such combination of cash and Shares as is selected by the Holder and approved by the Committee in its sole discretion. Any Shares due upon exercise of an SAR shall be delivered to the Holder by the Parent Company and any payment of cash shall be made by the employer of the Holder. The employer of the Holder shall deduct from the amount of any cash so payable an amount necessary to satisfy applicable federal, state, or local tax-withholding requirements. If no cash is payable (or if the amount of cash payable is insufficient to satisfy applicable tax- withholding requirements), no Shar es shall be delivered by the Parent Company to the Holder until the Holder remits to his or her employer an amount, determined by such employer, necessary to satisfy applicable federal, state, or local tax-withholding requirements or makes other arra ngements for the satisfaction of such tax-withholding requirements. The Parent Company shall not be obligated to deliver any certificates for Shares until such Shares have been listed (or authorized for listing upon official notice of issuance) upon each stock exchange upon which outstanding Shares of such class at the time are listed nor until there has been compliance with such laws or regulations as the Parent Company may deem applicable. The Parent Company shall use its best efforts to eff ect such listing and compliance. (f) Periods of Exercise Of Options and SARs. An Option or SAR shall be exercisable in whole or in part at such time as may be determined by the Committee and stated in the Option or SAR agreement, provided, however, that, unless otherwise determined by the Committee, no Option or SAR shall be exercisable before one year or after five years from the Date of Grant in the case of an Option or SAR granted to a Ten Percent Shareholder, or before one year or after ten years from the Date of Grant in all other cases, except as provided below: (i) In the event that an Optionee or Holder ceases to be employed by the Company for any reason other than retirement, disability or death, any Option or SAR held by such Optionee or Holder shall not be exercisable after the date the Optionee or Holder ceases to be employed by the Company unless otherwise determined by the Committee and set forth in the Option or SAR agreement or a written amendment thereto; provided, however, that in no event shall an Option or SAR be exerci sable after five years from the Date of Grant in the case of a Ten Percent Shareholder or after ten years from the Date of Grant in all other cases; (ii) If an Optionee or Holder ceases to be employed by the Company, and if such cessation of employment is due to the disability (as determined by the Committee) or the retirement of the Optionee or Holder, he or she shall have the right to exercise his or her Options or SARs until the last day of the sixth month following cessation of employment, or such longer period as the Committee may - 5 - determine and set out in writing, even if the date of exercise is within any time period prescribed by the Plan prior to which such Option or SAR shall not be exercisable; provided, however, that in no event shall an Option or SAR be exercisable after five years from the Date of Grant in the case of a Ten Percent Shareholder or after te n years from the Date of Grant in all other cases; (iii) In the event that an Optionee or Holder ceases to be employed by the Company by reason of his or her death, any Incentive Stock Option, Non-Qualified Option or SAR held by such Optionee or Holder shall be exercisable, the pers on to whom the rights of the Optionee shall be passed by will or by the laws of descent and distribution until the last day of the twelfth month folowing the date of the Optionee's or Holder's death, or such longer period as the Committee may determi ne and set out in writing, even if the date of exercise is within any time period prescribed by the Plan prior to which such Option or SAR shall not be exercisable; provided, however, that in no event shall an Option or SAR be exercisable after five years from the Date of Grant in the case of a Ten Percent Shareholder or after ten years from the Date of Grant in all other cases. (g) Date of Exercise. The date of exercise of an Option or SAR shall be the date on which written notice of exercise, addressed to the Parent Company at its main office to the attention of its Secretary, is hand delivered, telecopied or mailed, first class postage prepaid; provided, however, that the Parent Company shall not be obligated to deliver any certificates for Shares pursuant to the exercise of an Option or SAR until the Optionee shall have made payment in full of the optio n price for such Shares. Each such exercise shall be irrevocable when given. Each notice of exercise must (i) specify the Incentive Stock Option, Non- Qualified Option, SAR, or combination thereof, being exercised; (ii) must, in the case of the exer cise of an Option, include a statement of preference (which shall not be binding on the Committee) as to the manner in which payment to the Parent Company shall be made (Shares or cash or a combination of Shares and cash); and (iii) must, in the case of the exercise of an SAR, include a statement of preference (which shall not be binding on the Committee) as to the manner in which payment to the Holder shall be made (Shares or cash or a combination of Shares and cash). (h) Termination of Employment. For purposes of the Plan, a transfer of an employee between two employers, each of which is a Company, shall not be deemed a termination of employment. - 6 - (i) Multiple Grants of Incentive Stock Options, Non-Qualified Options and SARs. The grant, exercise, termination or expiration of any Incentive Stock Option, Non-Qualified Option or SAR shall have no effect upon any other Incentive Stock Option, Non-Qualified Option or SAR held by the same Optionee or Holder; provided, however, that the Committee may, in its sole discretion, provide in the Option agreement or SAR agreement that the exercise of a certain number of SARs is conditioned upon the exercise of a certain number of Options or provide that an SAR shall otherwise be attached to Options granted under the Plan. All SARs which are attached to Options shall be subject to the following terms: (A) such SAR shall expire no later than the Option to which it is attached, (B) such SAR shall be for an amount no more than the excess of the Fair Market Value of the Shares subject to the attached Option on the date such SAR is exercised over the option price of such Option, (C) such SAR shall be subject to the same restrictions on transferability as the Option to which it is attached, (D) such SAR shall be exercisable only when the Option to which it is attached is eligible to be exercised, (E) such SAR shall be exercisable only when the Fair Market Value of the Shares subject to the attached Option exceeds the option price of such Option, and (F) such SAR shall expire upon the exercise of the Option to which it is attached. Upon exercise of an SAR which is attached to an Option, the Option to which the SAR is attached shall expire. 9. Limitation on Grant of Incentive Stock Options The aggregate Fair Market Value (determined as of the time options are granted) of the shares for which any employee may be granted incentive stock options that first become exercisable in any one calendar year under the Plan and any other pl an of his employer corporation and its parent and subsidiary corporations, as defined respectively in sections 425(e) and (f) of the Code, shall not exceed $100,000. - 7 - 10. Rights As Shareholders Neither an Optionee nor a Holder shall have any right as a shareholder with respect to any Shares subject to his or her Options or SARs until the date of the issuance of a stock certificate to him or her for such Shares. 11. Changes in Capitalization In the event of a stock dividend, stock split, recapitalization, combination, subdivision, issuance of rights, or other similar corporate change, the Board shall make full anti-dilution adjustments in the aggregate number of Shares that may b e covered by Options issued pursuant to the Plan, the aggregate number of SARs that may be granted, the number of Shares subject to, and the option price of, each then-outstanding Option, the number of then-outstanding SARs and the Fair Market Value of Shares upon which the Value of such SARs is based. 12. Mergers, Dispositions and Certain Other Transactions If, during the term of any Option or SAR, the Parent Company or any of the Subsidiary Companies shall be merged into or consolidated with or otherwise combined with or acquired by another person or entity, or there is a divisive reorganizatio n or a liquidation or partial liquidation of the Parent Company, the Parent Company may choose to take no action with regard to the Options or SARs outstanding or, notwithstanding any other provision of the Plan, to take any of the following courses of action: (a) Not less than 15 days or more than 60 days prior to any such transaction, all Optionees and Holders shall be notified that their Options and SARs shall expire on the 15th day after the date of such notice, in which event all Optionees and Holders shall have the right to exercise all of their Options and SARs prior to such new expiration date; or (b) The Parent Company shall provide in any agreement with respect to any such merger, consolidation, combination or acquisition that the surviving, new or acquiring corporation shall grant options and stock appreciation rights to the Optionees and Holders to acquire shares, or stock appreciation rights in shares in such corporation with respect to which the excess of the fair market value of the shares of such corporation immediately after the consummation of such merger, consolidat ion, combination or acquisition over the option price, or the value of such stock appreciation rights, shall not be greater than the excess of the Fair Market Value of the Shares over the option price of Options (or, in the case of an SAR, the Value of such SAR), immediately prior to the consummation of such merger, consolidation, combination or acquisition; or - 8 - (c) The Parent Company shall take such other action as the Board shall determine to be reasonable under the circumstances in order to permit Optionees and Holders to realize the value of rights granted to them under the Plan. 13. Plan Not To Affect Employment Neither the Plan nor any Option or SAR shall confer upon any employee of the Company any right to continue in the employment of the Company. 14. Interpretation The Committee shall have the power to interpret the Plan and to make and amend rules for putting it into effect and administering it. It is intended that the Incentive Stock Options granted under the Plan shall constitute incentive stock opt ions within the meaning of section 422A of the Code, that the Non-Qualified Options shall constitute property subject to federal income tax pursuant to the provisions of section 83 of the Code and that the Plan shall qualify for the exemption availab le under Rule 16b-3 (or any similar rule) of the Securities and Exchange Commission. The provisions of the Plan shall be interpreted and applied insofar as possible to carry out such intent. 15. Amendments The Plan may be amended by the Board, but any amendment that increases the aggregate number of Shares that may be issued pursuant to the Plan upon exercise of Options or SARs (otherwise than pursuant to Paragraph 11), that changes the class of eligible employees, or that otherwise requires the approval of the shareholders of the Parent Company in order to maintain the exemption available under Rule 16b-3 (or any similar rule) of the Securities and Exchange Commission, shall require the approval of the holders of such portion of the shares of the capital s tock of the Parent Company present and entitled to vote on such amendment as is required by applicable state law and the terms of the Parent Company's Articles of Incorporation, as then in effect, to make the amendment effective. No outstanding Opti on or SAR shall be affected by any such amendment without the written consent of the Optionee, Holder or other person then entitled to exercise such Option or SAR. 16. Securities Laws The Committee shall have the power to make each grant under the Plan subject to such conditions as it deems necessary or appropriate to comply with the then-existing requirements of the Securities Act of 1933 or the Securities Exchange Act of 1934, including Rule 16b-3 (or any similar rule) of the Securities and Exchange Commission. - 9 - 17. Effective Date and Term of Plan The Plan shall become effective on the date on which the Plan is adopted by the Board, and shall expire no later than 10 years from Board adoption, unless sooner terminated by the Board. The Board shall submit the Plan to the shareholders of the Parent Company for their approval within 12 months of the grant of any Option intended to be an Incentive Stock Option. Any Incentive Stock Option granted before the approval of the Plan by the Parent Company's shareholders shall be expressly co nditioned upon, and shall not be exercisable until, such approval. 18. General Each Option or SAR shall be evidenced by a written instrument containing such terms and conditions not inconsistent with the Plan as the Committee may determine. The issuance of Shares on the exercise of an Option or SAR shall be subject to all of the applicable requirements of the New Jersey Business Corporation Act and other applicable laws, including federal or state securities laws, and all Shares issued under the Plan shall be subject to the terms and restrictions contained in the Articles of Incorporation of the Parent Company, as amended from time to time. Among other things, the Optionee or Holder may be required to deliver an investment representation to the Company in connection with any exercise of such Option or SAR or to agree to refrain from selling or otherwise disposing of the Shares required for a specified period of time or on specified terms. - 10 - EX-12 8 Exhibit 12 ---------- SOUTH JERSEY INDUSTRIES, INC. Calculation of Ratio of Earnings from Continuing Operations to Fixed Charges (Before Federal Income Taxes) (IN THOUSANDS)
Fiscal Year Ended December 31, ------------------------------------------------------------ 1997 1996 1995 1994 1993 ------------------------------------------------------------ Net Income* $18,429 $18,265 $14,874 $10,209 $14,455 Federal Income Taxes, 10,716 10,155 8,753 5,400 7,282 Fixed Charges** 20,320 20,408 20,442 15,402 14,906 Capitalized Interest (107) (114) (98) (120) (191) ------------------------------------------------------------ Total Available $49,358 $48,714 $43,971 $30,891 $36,452 ============================================================ Total Available 2.4x 2.4x 2.2x 2.0x 2.5x - --------------------- Fixed Charges * Net Income before Discontinued Operations and Cumulative Effect of a Change in Accounting Principle. ** Includes interest and preferred securities dividend requirements of a subsidiary.
EX-13 9 Exhibit 13 ---------- Front Cover - Outside 1997 ANNUAL REPORT TO SHAREHOLDERS South Jersey Industries, Inc. INSERT: Three photographs side by side. First photo shows people in discussion behind the South Jersey Energy Company sign. Second photo shows gentleman wearing South Jersey Gas Company hard hat. Third photo shows people in discussion around a PC with EnerTrade insignia on PC screen. Below the three photographs is a group of people indicating various walks of life. First Page of Report Table of Contents Financial Highlights 1 Letter to Shareholders 2 1997 Highlights 4 Increased Value Through Growth 6 Management's Discussion 10 Consolidated Financial Statements 14 Notes to Consolidated Financial Statements 18 Quarterly Financial Data 24 Comparative Operating Statistics 25 SJI Directors and Officers 26 Company Profile South Jersey Industries, Inc. is an energy services holding company. South Jersey Gas Company, SJI's principal subsidiary, is a regulated natural gas distribution utility supplying natural gas and transportation services to residential, commercial and industrial customers in southern New Jersey. Gas Company also sells natural gas to wholesale customers in the interstate market. South Jersey Energy Company markets natural gas and total energy management services, including energy consulting, to residential, commercial and industrial customers in New Jersey and surrounding states. Energy Company also trades wholesale electricity. SJ EnerTrade, Inc. is a wholesale natural gas asset manager and marketer serving the mid-Atlantic and southern regions of the country. This report contains certain forward-looking statements concerning projected future financial performance, future operating performance, future plans and courses of action and future economic conditions. All statements in this report other than statements of historical fact are forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of risks and uncertainties. Management cautions that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. There are a number of factors that could cause the company's actual results to differ materially from those anticipated, which include, but are not limited to the following: general economic conditions on an international, federal, state and local level; weather conditions in the company's marketing areas; regulatory and court decisions; competition in the company's regulated and deregulated activities; the availability and cost of capital; the company's ability to maintain existing and/or establish successful new alliances and joint ventures to take advantage of marketing opportunities; costs and effects of unanticipated legal proceedings and environmental liabilities; and changes in business strategies. INSERT: Map of South Jersey Gas Company Service Area. Shows location of Main Office, SJG Divisions, and SJG Gas Advantage Stores. (first page) In Memory Of William F. Ryan Dear Shareholder, On December 28, 1997, William F. Ryan, chairman, president and CEO of your company, passed away suddenly at the age of 63. His passing is a sad occasion for the South Jersey Industries, Inc. family of companies. As members of the Board of Directors, we deeply regret the loss of Bill Ryan, our friend and colleague. The Board and I are committed to implementing the strategic direction we recently finalized in conjunction with the company's senior management. At the time of Bill Ryan's passing, he had just completed his message to the shareholders for this report. Out of respect for him, we have printed his message on pages 2 and 3 as he would have wished it to appear. Bill spent 32 years with our company, joining South Jersey Gas Company in 1965 as Manager, Systems and Applications and steadily rising to the company's top position. In 1966, he was elected Assistant Treasurer of Gas Company. The Board elected Bill to the position of Assistant Vice President of Operations of Gas Company in 1967 and then Vice President of Operations in the same year. He became Executive Vice President of Gas Company in 1972 and 5 years later was elected President and COO. In 1981, Bill was elected President and CEO of both Gas Company and SJI. He became Gas Company's Chairman of the Board in 1989 and SJI's Chairman of the Board in 1995. During his career at SJI, Bill's leadership enabled the company to achieve many significant milestones. From the time Bill became CEO, SJI's consolidated net income rose from $8.7 million in 1981 to $18.4 million from continuing operations in 1997. In 1983, Gas Company added 27,000 customers in Cape May County through the acquisition of New Jersey Natural Gas Company's southern division, which is now the Cape May Division. In 1988, Gas Company developed some of the most innovative and flexible rates in the industry allowing large commercial and industrial customers to purchase gas supplies directly from producers. This resulted in customer savings without negatively impacting SJI's net income. Gas Company was the first natural gas utility in New Jersey to offer these unbundled rates. Capitalizing on Gas Company's initiative, SJI restructured South Jersey Energy Company in 1987 to assist large commercial and industrial customers to acquire and transport natural gas in the deregulated marketplace. Energy Company was one of the first natural gas marketing companies to serve utility customers in New Jersey. Bill's philosophy of lean staffing enabled the company to downsize through attrition where many other utility companies resorted to layoffs in reaction to competition and the need to lower costs. Under Bill's leadership, Gas Company's operating and maintenance expenses per customer were historically lower than its peers. And, this year, Energy Company became certified to buy and sell electricity nationwide and established a power marketing group to trade wholesale electricity on the Pennsylvania-New Jersey-Maryland grid. Also, SJI formed SJ EnerTrade, Inc. to sell natural gas to energy marketers, electric and natural gas utilities and other wholesale users in the mid-Atlantic and southern regions of the country. EnerTrade's creative alliance with Union Pacific Fuels, Inc. continues to benefit both parties and generate new opportunities for innovative energy solutions. My own experience as an SJI Board member since 1984 has helped to facilitate my transition to a new capacity. In accepting this new role, I am confident that we will advance our corporate objectives and achieve greater shareholder value. Richard L. Dunham Chairman of the Board and Acting CEO of SJI February 18, 1998 (second page) 1997 Highlights Five-Year Summary of Selected Financial Data (In Thousands Where Applicable)
South Jersey Industries, Inc. and Subsidiaries Year Ended December 31, - ----------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------- Operating Results: Operating Revenues $348,567 $355,458 $304,163 $329,722 $ 293,492 ======== ======== ======== ======== ========= Operating Income $ 38,642 $ 38,559 $ 35,218 $ 27,766 $ 29,170 ======== ======== ======== ======== ========= Income Applicable to Common Stock: Continuing Operations (1) $ 18,429 $ 18,265 $ 14,874 $ 10,209 $ 14,455 Discontinued Operations - Net (2) (2,633) 12,233 2,769 2,170 516 Cumulative Effect of a Change in Accounting Principle (3) - - - - 382 -------- -------- -------- -------- -------- Net Income Applicable to Common Stock $ 15,796 $ 30,498 $ 17,643 $ 12,379 $ 15,353 ======== ======== ======== ======== ========= Total Assets $670,601 $658,381 $604,309 $571,095 $531,778 ======== ======== ======== ======== ========= Capitalization: Common Equity $173,499 $172,731 $157,297 $154,972 $140,526 Preferred Stock and Securities of Subsidiary 37,224 2,314 2,404 2,494 2,584 Long-Term Debt 176,360 149,736 168,721 153,086 144,305 -------- -------- -------- -------- -------- Total Capitalization $387,083 $324,781 $328,422 $310,552 $287,415 ======== ======== ======== ======== ========= Ratio of Income from Continuing Operations to Fixed Charges (Before Federal Income Taxes) 2.44 2.40 2.16 2.02 2.48 ======== ======== ======== ======== ========= Earnings Applicable to Common Stock (Based on Average Shares): Continuing Operations (1) $ 1.71 $ 1.70 $ 1.39 $ 1.00 $ 1.50 Discontinued Operations - Net (2) (0.24) 1.14 0.26 0.21 0.05 Cumulative Effect of a Change in Accounting Principle (3) - - - - 0.04 -------- -------- -------- -------- -------- Earnings per Common Share $ 1.47 $ 2.84 $ 1.65 $ 1.21 $ 1.59 ======== ======== ======== ======== ========= Return on Average Common Equity (4) 10.65% 11.07% 9.53% 6.91% 10.61% ======== ======== ======== ======== ========= Share Data: Number of Shareholders 11.4 12.1 12.9 14.0 13.1 Average Common Shares 10,763 10,732 10,720 10,258 9,680 Common Shares Outstanding at Year End 10,771 10,757 10,722 10,715 9,805 Dividend Reinvestment and Stock Purchase Plan: Number of Shareholders 6.0 6.1 6.5 6.6 5.7 Number of Participating Shares 1,440 2,845 2,932 2,941 2,716 Book Value at Year End $ 16.11 $ 16.06 $ 14.67 $ 14.46 $ 14.33 Cash Dividends Declared $ 1.440 $ 1.440 $ 1.440 $ 1.440 $ 1.433 Market Price at Year End 30 5/16 24 3/8 23 1/8 18 1/8 23 3/4 Dividend Payout: From Continuing Operations 84.1% 84.6% 103.8% 141.5% 94.8% From Total Net Income 98.1% 50.7% 87.5% 116.7% 89.2% Market Price to Book Value 188.2% 151.8% 157.6% 125.3% 165.7% Price Earnings Ratio (4) 17.73 14.34 16.64 18.13 15.83 Certain restatements of previously reported amounts were required as a result of discontinued business segments during the current year. (1) Included in 1994 is the negative impact of a $3.5 million Customer Refund Obligation ordered by the BPU which reduced 1994 earnings by $2.3 million, or $0.22 per share. (2) Represents discontinued business segments: sand mining and distribution operations which were sold in 1996, construction operations which were sold in 1997 and fuel oil operations with related environmental liabilities in 1997 (See Note 2 to Consolidated Financial Statements). (3) Included in 1993 is the Cumulative Effect of a Change in Accounting Principle for Income Taxes. (4) Calculated based on Income from Continuing Operations.
-1- TO OUR SHAREHOLDERS South Jersey Industries, Inc. achieved improved financial results in 1997, setting a new record for earnings from continuing operations. Consolidated net income reached $18.4 million compared with $18.3 million in 1996. Earnings applicable to common stock from continuing operations rose to $1.71 in 1997, compared with $1.70 in 1996. Our financial results reflect improved net income from South Jersey Gas Company in a year when weather was approximately 7 percent warmer than last year. Increased sales margins from rate relief granted in January 1997 heavily contributed to our successful year. Improved revenue, in part, resulted from an expanding customer base which continues to be a valuable, inherent asset. Key to this growth is the economic development occurring in Atlantic City which has positively affected growth throughout our entire service area. We are pleased to announce that during 1997, SJI's management team updated our long-term strategic plan, which defines our role in the energy marketplace and provides challenging, yet achievable, goals and objectives for SJI's companies. An inspiring road map now exists to guide us toward success in a highly competitive industry and we are avidly following its path. This process helped us identify skills and core competencies inherent in our companies and we are capitalizing on those management skills by applying them to exciting new prospects in the natural gas and electric sectors. Our number one priority is to position SJI as an attractive energy investment while creating a sound foundation for improved shareholder value. Accepting this challenge means finding and taking advantage of niches and windows of opportunity as the energy market evolves. Our plan not only recognizes, but anticipates, both shareholder and market expectations in a deregulated environment. To meet those expectations, we need to offer greater returns from innovative, new activities than we can reasonably expect from the regulated arena. Success in these activities will lead to sustainable growth in market price and dividend yield. To sustain that growth component, SJI is investing in moderate risk activities and projects in the deregulated energy marketplace and will reinvest earnings of its non-utility subsidiaries to fuel their growth. Designing and offering competitively priced, innovative and quality energy products, services and solutions will be important to our success. We are proud of Gas Company's history as a low-cost natural gas provider and maintaining that position is a key conclusion of our planning process. Historically, our efforts to control costs and maintain efficiency and productivity resulted in lower operating and maintenance expenses than our peer companies. Although we must maintain our vigilance in this area, we realize that to further improve earnings we must have realistic and achievable objectives designed to generate new revenues. Gas Company's service area growth is unprecedented in its history and our capital expenditure program has anticipated this growth. We are well prepared and eager to add and serve new customers ranging from the expanding Atlantic City casino marketplace to the steadily growing suburban communities of Philadelphia. New customer growth is just one area of focus for additional revenue generation. We are ardently working on aggressive new programs for existing customers that will result in increased use of our products and services. Complementing our utility business, the non-regulated companies now offer a broader range of products and services to traditional customers, as well as new markets. Our planning efforts have refocused our approach. Now, we offer not only the energy commodity but also viable energy solutions to commercial and industrial customers. By managing the total energy needs of our customers we help them become efficient and informed energy consumers. In the past, we profited from our natural gas industry expertise. Today, we are seizing opportunities made available by electric deregulation. In an historic move for our company, we received certification from the Federal Energy Regulatory Commission to buy and sell electricity. We then established a power marketing group and began trading wholesale electricity. Also, we changed SJI's corporate structure by creating a new subsidiary, SJ EnerTrade, Inc., to assume our wholesale marketing and natural gas management functions. This restructuring increases our recognition and presence not only in our region but in the industry as well. -2- During the year we worked hard at improving our financial profile, consistent with our long-term objectives. Our financing activities, which included a preferred security offering, were very well received by the investment community. In addition to increasing our investment in Gas Company, the company funded select entrepreneurial activities of our non-regulated businesses. SJI's capital structure was significantly improved with a decrease in the debt portion, including current debt, by 12.6 per cent. We are pleased that improvements to our key financial ratios were acknowledged by brokers, analysts and the financial community. Our road map for success is clear and the outlook for SJI is exciting. We defined our role in the evolving energy marketplace and are committed to our goals and objectives. The prudent investment of our capital, time and talent in both the regulated and deregulated arenas will improve shareholder value, maintain dividend stability and provide an essential growth component. Pleased with the progress we have made and confident in achieving a new vision, we thank our shareholders and employees for the interest, loyalty and support they have shown for SJI's plans for the future. December 22, 1997 * The numbers highlighted in bold italic were placed into the text in January 1998. INSERT: Photograph - William F. Ryan -3- 1997 Highlights INSERT: Photograph on the left side of page 4. Service trucks laying gas lines in a local neighborhood. SOUTH JERSEY INDUSTRIES, INC. . Updated the strategic plan to maximize long-term shareholder value in the face of regulatory and competitive environments undergoing significant change. Key objectives of the plan include: . Achieving earnings growth which will improve the dividend payout ratio enabling a future pattern of regular, sustainable dividend increases; . Developing a growth component for SJI stock by exploiting opportunities within Gas Company's dynamic service territory and prudently investing capital in SJI's non-regulated businesses; . Focusing the company's activities exclusively on energy and energy services. . Formalized the Investor Relations function to provide the investment community with an increased awareness of the company's activities and opportunities. Securities analysts at PaineWebber, Prudential Securities and Value Line are currently following the company. . Sold R&T Group, Inc.'s remaining assets in April, marking SJI's exit from the utility construction and general contracting business. . Formed SJ EnerTrade, Inc., a non-regulated subsidiary to assume the marketing activities of South Jersey Fuel, Inc. in selling natural gas to energy marketers, electric and gas utilities and other wholesale users throughout the mid-Atlantic and southern regions of the country. . Achieved a 31.9 percent total return on investment for the full year of 1997 for an SJI investor who reinvested dividends. -4- SOUTH JERSEY GAS COMPANY . Added approximately 6,700 customers, bringing total customers to approximately 260,600 and completed approximately $44.0 million in pipeline system expansion and upgrades. . Recorded the highest number of conversions from other fuels in the last 7 years. Conversions in 1997 were up over 10 percent from 1996. . Concluded a rate case with the New Jersey Board of Public Utilities in January 1997. The major components include: . $10.3 million increase in revenues; . $6 million increase in base rates and an 11.25 percent return on common equity; . Improved the formula to share profits between stockholders and customers for off-system and interruptible sales and transportation; . Established rates, service fees and unbundled services on a cost- causation basis. . Developed and successfully implemented an innovative pilot program allowing nearly 13,000 residential customers a choice in their natural gas supplier. . Implemented a natural gas purchasing strategy which generated savings of $4.3 million for customers during the 1996-97 winter season. . Executed off-system sales or released pipeline capacity and storage totaling 51 Bcf which is approximately 46 percent of Gas Company's total throughput. Off-system throughput increased approximately 49 percent in 1997 over 1996. . Produced pre-tax profits of $16.1 million from off-system and interruptible sales. After applying the improved sharing formula, these activities generated $5.3 million in net income or approximately 27 percent of Gas Company's earnings. . Addressed capital needs to build new facilities by selling $35.0 million of 8.35% Preferred Securities through the creation of the SJG Capital Trust. Gas Company sold $35.0 million principal amount of First Mortgage Bonds and also received a $25.6 million equity infusion from SJI. . Negotiated long-term labor contracts with the company's three bargaining units and restructured the work force to address competitive market realities. . Created new programs to generate additional revenues for Gas Company, while continuing cost reduction initiatives. . Implemented the Automated Dispatch System to allow Gas Company to dispatch service crews via a computer network. SOUTH JERSEY ENERGY COMPANY . Received a $2.0 million equity infusion from SJI to develop market initiatives for natural gas, electricity and related energy services. . Signed a long-term agreement with Mid-Atlantic Recycling Technologies to supply natural gas to its Vineland, N.J. soil remediation facility. Energy Company also assisted in financing the pipeline extension for the project. . Formed a power marketing group to buy and sell electricity on the wholesale market after receiving a license from the Federal Energy Regulatory Commission. . Signed seven long-term agreements of between 5 and 10 years to provide natural gas and electricity requirements for large residential complexes. SJ ENERTRADE, INC. . Through its formal alliance with Union Pacific Fuels, Inc., South Jersey Resources Group, LLC: . Managed natural gas storage for several large natural gas utilities in the mid-Atlantic region; . Managed the entire gas supply portfolio for a natural gas local distribution company; . Expanded commitments for management services to be provided to customers in 1998. INSERT: Photograph across the bottom of pages 4 & 5. Two gentlemen standing in front of storage tanks -5- INCREASED VALUE THROUGH GROWTH South Jersey Industries, Inc.'s management updated our long-term strategic plan in 1997 to ensure our continued success as the energy industry further evolves. During this process, we asked ourselves, "what do we do best and how can we use those strengths and skills to create and offer energy products and services that fill our customers' needs?" In answering those questions we fashioned objectives for each subsidiary which contribute to fulfilling our primary goal of maximizing shareholder value. SOUTH JERSEY GAS COMPANY Serving as the foundation for South Jersey Gas Company's objectives are customer growth, revenue generation from new or enhanced services and continued cost control. Homeowners in Gas Company's service area continue to show an overwhelming preference for natural gas heat, as almost all of the new homes built with access to our mains use natural gas for heating. As evidence of this preference, we recorded the highest number of conversions from other fuels in the last 7 years. Conversions in 1997 increased by 10 percent over last year. In 1997, we added approximately 6,700 customers, boosting our total number of customers to approximately 260,600 at year end. Our earnings potential has grown through the net addition of over 31,400 customers during the last 5 years and residential and small-commercial customers account for nearly 87 percent of our total sales margin. These customer groups provide earnings stability and insulation from market risk. Fueling future growth is the second wave of Atlantic City casino expansion which is still in its infancy. Leading the continuing revitalization effort, the new convention center and the Sheraton Hotel, Atlantic City's first deluxe non- casino hotel, form the beginning of a grand entrance corridor linking the convention center with the world-famous boardwalk and casino area. In the next 5 to 6 years, we expect the number of first-class hotel rooms in the city to triple, with new tourist attractions, housing and small businesses augmenting the renaissance of the city and the surrounding areas. Throughout Gas Company's service area, homes and small businesses are sprouting up at a rapid pace. With Atlantic City serving as a catalyst, we anticipate our already impressive current annual growth rate of 2.6 percent will increase an additional 1 to 1.5 percent during the next 5 years. Conversions to natural gas from other fuels remain an important part of our growth, accounting for nearly one-third of Gas Company's new customers each year. And, a large conversion market remains to be tapped. To identify and target potential customers, we are introducing an aggressive new conversion program in the commercial and residential markets during 1998. Delivering natural gas in southern New Jersey will continue to be SJI's primary business in the foreseeable future, and we intend to invest significantly in that business to serve current and prospective customers effectively. Our commitment to this business is evidenced by our plans to spend approximately $150 million from 1997 through 1999 to improve our existing pipeline network and install new mains and services. INSERT: Photograph in the center of page 6 - Laser-filled lighthouse INSERT: Passage under photograph - A laser-filled lighthouse illuminates Atlantic City's grand entrance corridor linking the convention center with the boardwalk. -6- Our planning process also generated ideas for new services and products that our customers want and need, that are cost-effective to implement and have significant revenue and income enhancement prospects. During 1997, Gas Company developed and implemented a targeted campaign to persuade existing customers to upgrade their electric water heaters to more efficient and less costly natural gas units. Our goal is to convert a minimum of 4,500 water heaters to natural gas over the next 5 years. In 1998, we will introduce an expanded Service Sentry program to customers through a multi-faceted marketing campaign. Changes to this appliance service contract program were driven by customer demand and our desire to increase revenues by capturing a larger share of the heating, air conditioning and appliance repair INSERT: Bar chart at lower left hand corner of page 7 listing the following information: SJI - Earnings Per Common Share from Continuing Operations and Dividends Declared (Dollars) INSERT: Photograph on right hand side of page 7 showing man working at meter station. -7- INSERT: Photograph on left hand side of page 8 of power lines. market. By participating in this program, customers will have more service contract choices and the benefit of Gas Company's long-standing expertise in the appliance repair business. We plan to increase our market penetration for this program from almost 7 percent to about 38 percent over the next 5 years. SOUTH JERSEY ENERGY COMPANY South Jersey Energy Company's new objectives expand its focus from solely providing a commodity to offering customers viable energy solutions. Innovative steps taken by Energy Company in 1997 resulted in new service and product offerings, including INSERT: Line chart at bottom of page 8 listing the following information: SJI - Consolidated Net Income Applicable to Common Shareholders ($ millions). Information provides Total Consolidated Net Income; Continuing Operations; and Discontinued Operations. -8- financing for commercial conversions to natural gas, electric lighting retrofitting and wholesale electricity trading. Becoming a total energy manager for commercial and industrial customers is another key to Energy Company's growth. Through Energy Company's "Gatekeeper" program, we can guide customers at all points in their energy decision-making process from system design to equipment selection to price-based commodity selection. An alliance with another energy services management company has enabled Energy Company to offer Gatekeeper services to the long-term health care industry, including lighting retrofits , heating system conversions and natural gas and electricity sales. During the year, in a bold step, Energy Company acquired certification from the Federal Energy Regulatory Commission to buy and sell electric power nationwide and established a power marketing group to trade electricity on the Pennsylvania-New Jersey-Maryland grid. In this capacity, Energy Company arranges for bulk, power transactions among municipal and regional electric utilities and energy marketers. When the electric industry is further deregulated, we will add electricity sales to the Gatekeeper package of retail services. This exciting new venture brings us one step closer to the vision of establishing Energy Company as the preferred total energy supplier in our region. Energy Company's core business, natural gas sales to residential, commercial and industrial customers, is slated to grow significantly over the next 5 years. This growth assumes that natural gas prices will remain reasonably competitive with natural gas utility rate structures and that the New Jersey Board of Public Utilities opens the retail marketing programs to more residential customers. In 1997, Energy Company successfully participated in Gas Company's pilot residential marketing program capturing approximately 50 percent of the eligible customers while competing with five other companies. An alliance with an outside marketing organization provided Energy Company with an innovative way to use a large sales force for the project, contributing to the program's success. SJ ENERTRADE, INC. In 1997, SJI formed SJ EnerTrade, Inc. to separate the wholesale energy marketing and asset management operations from South Jersey Fuel, Inc.'s previous business activities. EnerTrade assumed Fuel Company's function of selling natural gas to energy marketers, electric and natural gas utilities and other wholesale users in the mid-Atlantic and southern regions of the country. Also, EnerTrade acquired Fuel Company's 50 percent share in South Jersey Resources Group, LLC, a company formed through an alliance with Union Pacific Fuels, Inc. Through SJRG, EnerTrade actively manages and profits from its own portfolio of natural gas assets including storage and the assets of several large, natural gas utilities. Positioning EnerTrade as a viable wholesale gas marketer and asset manager on its own, as well as creating new services and expanding market share with Union Pacific Fuels, are fundamental to its ongoing success. For 1998, we have secured commitments from several, large utilities to re new, and in some cases expand, our services which places EnerTrade on target to meet earnings projections. We are enthusiastic about the opportunities brought about by natural gas and electric deregulation. We have prepared and repositioned ourselves based on the needs and demands of increasingly aware energy consumers and a rapidly evolving market. Be assured that all our activities are designed and carried out with particular attention to our primary objective - improving the value of your investment. INSERT: Photograph upper right hand corner of page 9 - Caesars' Centurion Tower. INSERT: Passage - Caesars' Centurion tower, which added 620 rooms, is just one example of the dramatic growth occurring in Atlantic City. -9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Overview - South Jersey Industries, Inc. (SJI) has three operating subsidiaries, South Jersey Gas Company (SJG); South Jersey Energy Company (SJE); and SJ EnerTrade, Inc. (EnerTrade). SJG is a natural gas distribution company serving 260,567 customers at December 31, 1997, compared with 253,874 customers at December 31, 1996. EnerTrade, formed in October 1997, provides services for the sale of natural gas to energy marketers, electric and gas utilities, and other wholesale users in the mid-Atlantic and southern regions of the country. SJE provides services for the acquisition and transportation of natural gas for retail end users and also markets total energy management services. The results of operations of the Company's non-regulated energy service companies are not material to the Company's financial statements taken as a whole. See "Sale of Capital and Income from Discontinued Operations" for details related to discontinued operations. Competition - SJG franchises are non-exclusive. Currently, no other utility provides retail gas distribution services within its territory. SJG does not expect other utilities to do so in the foreseeable future because of the extensive investment required for utility plant and related costs. SJG competes with oil, propane and electricity suppliers for residential, commercial and industrial users. The market for natural gas sales is subject to competition as a result of deregulation. SJG has enhanced its competitive position while maintaining its margins by using an unbundled tariff which isolates the variable cost of the commodity within SJG's rate structure. Under this tariff, SJG derives substantially all of its profits from the transportation rather than the sale of the commodity. SJG's commercial and industrial customers can choose their supplier while SJG recovers its cost of service and fixed gas costs primarily through its transportation service. In April 1997, SJG initiated its New Jersey Board of Public Utilities (BPU) approved pilot program giving some residential customers a choice of gas suppliers (See "Pilot Program - Choice of Gas Supplier"). SJG believes it has been a leader in addressing the changing marketplace, while maintaining its focus on being a low-cost provider of natural gas and energy services. SJE and EnerTrade also actively arrange energy services designed to provide low-cost energy supplies in a highly competitive marketplace. SJI's companies intend to develop creative initiatives and propose meaningful regulatory and tax reforms designed to benefit its customers and shareholders. Pilot Program -- Choice of Gas Supplier - In April 1997, SJG initiated its BPU- approved pilot program giving residential customers a choice of gas supplier. During the enrollment period, which ended June 30, 1997, nearly 13,000 residential customers applied for this service. Transportation of gas for these customers began on August 1, 1997. Participants' bills are reduced for certain cost of gas charges and applicable taxes. The resulting decrease in revenues is offset by a corresponding decrease in SJG's gas costs and taxes under SJG's BPU- approved fuel clause. The program does not affect its net income, financial condition or margins. Energy Adjustment Clauses - SJG's tariff includes a Levelized Gas Adjustment Clause (LGAC), a Temperature Adjustment Clause (TAC), a Remediation Adjustment Clause (RAC) and a Demand Side Management Clause (DSMC). These clauses permit adjustments for changes in gas supply costs, reduce the impact of extreme fluctuations in temperatures on SJG and its customers, recover costs for the remediation of former gas manufacturing plants and recover costs associated with its conservation plan, respectively. The BPU-approved LGAC, RAC and DSMC adjustments are made to match revenues and expenses. TAC adjustments do affect revenue, income and cash flows since extremely cold weather can generate credits to customers, while extremely warm weather during t he winter season can result in additional billings to customers. Status of Year 2000 Conversion - The Company prepared a Year 2000 Impact and Assessment study and developed a plan for program modification. An outside service was used to identify both informational and logic date variables within the programming codes. This service was completed and expensed in 1997. Presently, the Company is revising affected programming code. As of December 31, 1997, approximately 20 percent of the programming code was revised. All revisions are scheduled to be completed by early 1999, providing the remainder of 1999 for testing. Total conversion costs are estimated at $0.4 million of which approximately $0.1 million was spent as of December 31, 1997. Vendors who provide third party software and support services are being contacted to establish Year 2000 compliance. The Company is also in the process of securing written verification from its key product and service vendors to ensure their compliance. Operating Revenues -- Utility - In 1997, revenues decreased $1.8 million from 1996. Revenues increased $49.1 million when comparing 1996 with 1995. In 1997, the revenue decrease is due to lower firm sales resulting from weather which was 6.7 percent warmer than 1996 and increased firm transportation service replacing firm sales. These results were partially offset by the settlement of the base rate case and customer growth. The revenue from transportation excludes commodity costs (See Competition), and SJG's profits are from the transportation rather than the sale of commodity. Therefore, the migration to firm transportation does not lower SJG's margin. Total sales margin was higher in 1997 due to the impact of a rate increase effective January 27, 1997 (See Regulatory Matters), the addition of 6,700 new customers, increased off-system sales (nonjurisdictional sales) and increased capacity release revenues. The revenue and sales margin increase in 1996 was primarily due to greater firm sales resulting from weather which was 6.4 percent colder than 1995 and a net increase of approximately 5,900 customers. The net customer increase in 1995 was approximately 6,600. Operating Revenues -- Nonutility - Revenues decreased $5.1 million in 1997 compared with 1996 and increased $2.2 million in 1996 compared with 1995. The 1997 decrease was principally due to lower commodity sales. The 1996 increase resulted from higher volume sales and the effect of increased prices resulting from higher commodity costs. Gas Purchased for Resale - Gas purchased for resale decreased $4.0 million in 1997 compared with 1996 principally due to decreased unit sales. Gas purchased for resale increased by $41.4 million for 1996 compared with 1995, principally due to increased unit sales. Sources of gas supply include both contract and open-market purchases. SJG is responsible for securing and maintaining its own gas supplies to serve its customers. SJG has entered into long-term contracts for natural gas supplies, firm transportation, and firm gas storage service. The earliest expiration of any of these contracts is 1999. All of the transportation and storage service agreements between SJG and its interstate pipeline suppliers are provided under tariffs approved by the Federal Energy Regulatory Commission. SJG's cumulative obligation for demand charges and reservation fees for all of these services is approximately $4.6 million per month, which is recovered on a current basis through its LGAC. Operation and Maintenance -- Utility - A summary of net changes in utility operations and maintenance cost is as follows (in thousands):
1997 vs. 1996 1996 vs. 1995 ----------------------------- Other Production Expense $ 123 $ 171 Transmission (35) 83 Distribution (179) 474 Customer Accounts and Services (322) 186 Sales 126 (32) Administration and General 3,216 (994) Other (433) (243) --------------------------- $ 2,496 $ (355) ===========================
Customer Accounts and Service costs decreased in 1997 principally due to a charge in 1996 to increase the Company's reserve for uncollectible accounts and lower payroll costs. Administrative and General costs increased in 1997 principally due to increased payroll, employee benefits (including a $1.5 million death-benefit liability which became payable upon the death of the Company's president in December 1997) and regulatory costs. -10- Distribution costs increased in 1996 principally due to greater markout and leak survey activities. The 1996 reduction in administrative and general costs was principally due to decreased data processing, employee welfare and regulatory costs. Other Operating Expenses - A summary of principal changes in other consolidated expenses for December 31, 1997 and 1996, is as follows (in thousands):
1997 vs. 1996 1996 vs. 1995 ----------------------------- Operation and Maintenance - Nonutility $ (3,625) $ 2,312 Depreciation 1,114 1,016 Federal Income Taxes 561 1,402 Gross Receipts & Franchise and Other Taxes (3,499) 2,229
Changes in nonutility expenses principally reflect the impact of unit sales and commodity costs. Depreciation is higher in each period principally due to increased investment in property, plant and equipment by SJG. Federal Income Tax changes reflect the impact of changes in pre-tax income. The changes in Gross Receipts & Franchise Taxes are due to changes in volumes of gas sold, which are subject to those taxes. In addition, lower tax rates applied to certain customer classes in 1997. Interest Charges - Interest charges decreased in 1997 and 1996. The decrease in 1997 was due to the effect of lower short-term interest resulting from lower levels of short-term debt outstanding. Short-term debt levels were reduced in March 1997 by using proceeds from the sale of $35.0 million of first mortgage bonds by SJG; the application of a $25.6 million cash equity infusion to SJG from SJI; and the application of the net proceeds from the sale of the Mandatorily Redeemable Preferred Securities in May 1997. Utility long-term interest increased in 1997 due to increased levels of long-term debt outstanding. Preferred Dividend Requirements of Subsidiary - Preferred Dividends increased in 1997 due to the issuance of $35.0 million of 8.35% SJG-guaranteed Mandatorily Redeemable Preferred Securities (See Capital Resources). Sale of Capital Assets and Income from Discontinued Operations - In 1996, Energy & Minerals, Inc. (EMI) sold The Morie Company, Inc.'s (Morie) common stock for approximately $55.3 million. The underlying book value was approximately $27.9 million and the net gain on the transaction amounted to $15.0 million, after deducting income taxes of $11.3 million and selling costs of $1.1 million (See Note 2). A portion of the sale proceeds was used to redeem subsidiary debt, including $9.0 million of 9.6 6% Senior Notes and a bank note of approximately $2.0 million. Also, the Company sold the assets of certain R&T Group, Inc. (R&T) subsidiaries in early 1997 for approximately $3.5 million, which approximated the net book value of the assets sold. In connection with a plan to discontinue or sell the R&T companies, R&T's recorded value was reduced in 1996 to estimated net realizable value (net of income taxes). The profit or loss and the write down to net realizable value, net of income taxes, are included under the caption Net (Loss) Gain on the Disposal of Discontinued Operations (See Note 2). The sale of assets in 1996, as described above, impacts the comparative financial information for 1997 and 1996. Also, in 1997, the Company recorded additional costs of approximately $2.6 million related to environmental remediation expenditures for the previously operated fuel oil business of South Jersey Fuel, Inc. (SJF) and for Morie (See Note 2). The 1997 decrease in income from discontinued operations is principally due to the recording of liabilities for anticipated environmental remediation expenditures. The 1996 decrease in income from discontinued operations is principally due to recording a liability for anticipated environmental remediation expenses, insurance claims and termination costs. Net Income Applicable to Common Stock - Net income (in thousands) and earnings per common share reflect the following changes:
1997 vs. 1996 1996 vs. 1995 ----------------------------- Income from Continuing Operations $ 164 $ 3,391 Loss from Discontinued Operations (1,459) (3,176) Net (Loss) Gain on Disposal of Discontinued Operations (13,407) 12,640 --------------------------- Net Income (Decrease) Increase $ (14,702) $ 12,855 =========================== Earnings per Common Share Continuing Operations $ .01 $ 0.31 Discontinued Operations (1.38) 0.88 --------------------------- Earnings per Share (Decrease) Increase $ (1.37) $ 1.19 ===========================
The details affecting the increase in net income and earnings per share are discussed under the appropriate captions above. Liquidity - The seasonal nature of gas operations, the timing of construction and remediation expenditures and related permanent financing, as well as mandated tax and sinking fund payment dates require large short-term cash requirements. These are generally met by cash from operations and short-term lines of credit. The Company maintains short-term lines of credit with a number of banks, aggregating $130.0 million of which $84.1 million was available at December 31, 1997. The credit lines are uncommitted and unsecured with interest rates below the prime rate. The changes in cash flows from operating activities are as follows (in thousands):
1997 vs. 1996 1996 vs. 1995 ----------------------------- Increases/(Decreases): Net Income $ (14,702) $ 12,855 Depreciation, Depletion and Amortization (3,350) 740 Provision for Losses on Accounts Receivable (792) 878 Revenues and Fuel Costs Deferred - Net 4,449 (2,196) Deferred and Non-Current Federal Income Taxes - Net (4,365) 5,397 Environmental Remediation Costs - Net (1,112) (3,315) Net Pre-Tax Loss (Gain) on the Disposal of Discontinued Operations 23,465 (22,620) Accounts Receivable 44 18,745 Inventories 6,732 (10,663) Prepayments and Other Current Assets (973) 1,367 Prepaid Gross Receipts & Franchise Taxes (1,011) 5,892 Accounts Payable and Other Accrued Liabilities (13,184) 8,453 Other - Net 2,865 (9,087) ------------------------ Net Cash from Operating Activities $ (1,934) $ 6,446 ========================
Depreciation and Amortization are non-cash charges to income and do not impact cash flow. Changes in depreciation cost reflect the effect of additions and reductions to fixed assets. Increases in Revenues and Fuel Costs Deferred - Net reflect the impact of overcollection of fuel costs or the recovery of previously deferred fuel costs. Decreases reflect the impact of payments or credits to customers for amounts previously overcollected and the undercollection of fuel costs resulting from increases in natural gas costs. Increases in Deferred and Non-Current Federal Income Taxes and Credits - Net represent the excess of taxes accrued over amounts paid. Decreases reflect the impact of taxes paid in excess of amounts accrued. Generally, deferred income taxes related to deferred fuel costs will be paid in the next year. Changes in Environmental Remediation Costs - Net represent the difference between remediation expenditures and amounts collected under the RAC and insurance recoveries. -11- Changes in Accounts Receivable are generally weather and price related. Changes impact cash flows when collected in subsequent periods. Changes in Inventory reflect the impact of seasonal requirements, temperatures and price changes. Changes in Prepaid Gross Receipts & Franchise Taxes reflect the impact of excess taxes paid over taxes accrued. However, significant timing differences exist in cash flows during the year since SJG must pay the full year's tax on April 1 of each year and amortize any prepaid tax over the remainder of the year, on the basis of gas volumes sold. SJG uses short-term borrowings to make these tax payments which result in a temporary increase in the short-term debt level. The carrying costs of timing differences are recognized in base utility rates. As stated in Note 1, on January 1, 1998, the Gross Receipts & Franchise Taxes were being replaced with a 6 percent State Sales and Use Tax, a 9 percent State Corporation Business Tax on income before taxes and a Transitional Energy Facilities Assessment (TEFA) on volumes of gas sold and transported. The TEFA will be phased out over 5 years beginning January 1, 1999. Approximately 50 percent of the new taxes will be paid in monthly installments during the first 6 months of the year and the principal portion of the remaining taxes will be paid on June 25, 1998, and on May 15 of each year thereafter. New rates became effective on January 1, 1998, and are subject to change following BPU approval which is expected in early 1998. Changes in Accounts Payable and Other Current Liabilities reflect the impact of timing differences between the accrual and payment of costs. Cash flow from nonutility operations is generally retained by those companies with amounts in excess of cash requirements passed up to SJI either as dividends or as temporary short-term loans. Nonutility operations are service oriented and do not require significant investment in capital facilities, inventories or personnel. These operations are not considered material to the financial statements. EMI has assumed responsibility for the environmental liabilities of Morie, which was sold in 1996. The environmental liabilities are estimated to range between $3.1 million and $15.5 million. EMI has accrued the lower end of the range under the guidance of FASB No. 5 "Accounting for Contingencies" (See Note 13). As a result of additional testing performed during 1997, both SJI and SJF's discontinued operations have also estimated their potential exposure for the future environmental remediation of four sites where fuel oil operations were conducted years ago. Estimates for SJI's site range between $0.3 million and $1.1 million while the estimated liability for SJF's discontinued operations ranges from $1.5 million to $4.2 million for the remaining three sites. The lower end of these ranges have been accrued. SJI's charge is included in the consolidated income statement as operating expense while SJF's charge is reflected under the caption "(Loss) Income from Discontinued Operations - Net" (See Note 2). Regulatory Matters - On January 27, 1997, the BPU granted SJG a base rate increase of $6.0 million based on a 9.62 percent rate of return on rate base, which included an 11.25 percent return on common equity. The majority of this increase comes from residential and small commercial customers. Part of the increase is recovered from new service fees which charge specific customers for costs they cause SJG to incur. Additionally, SJG is now allowed to retain the first $5.5 million of pre-tax margins generated by interruptible and off-system sales and transportation and 20 percent of pre-tax margins above that level. In 1998 and 1999, this $5.5 million threshold will increase by the annual revenue requirement associated with specified major construction projects. These sharing formula improvements are expected to result in additional rate relief of approximately $0.3 million in 1998 and $1.8 million in 1999. Rates of return are calculated by weighting SJG's individual capital cost rates by the proportion of each respective type of capital. This requires selecting appropriate capital structure ratios and determining the cost rate for each capital component as determined in each rate proceeding. In setting a rate of return, the BPU must provide a utility and its investors with a return that is commensurate with the risk to which the invested capital is exposed so that the utility has access to the capital required to meet its public service responsibility. Also on January 27, 1997, the BPU approved SJG's request for a $2.5 million revenue reduction through the TAC. This is the standard BPU procedure used to credit customers with previously collected revenues, which were in excess of those allowed by the TAC (See "Energy Adjustment Clauses"). This revenue reduction reflects the TAC's normal operation, as does the BPU's confirmation of the decrease. In April 1996, SJG received BPU approval to increase its rates to recover approximately $8.0 million of increased natural gas costs through the LGAC. In September 1996, SJG filed to reduce its rates through its 1996-97 LGAC reflecting a $1.4 million decrease in natural gas costs. Updated projections of the 1996-97 LGAC year results were rolled into the 1997-98 LGAC year and filed with the BPU on September 12, 1997. The 1997-98 LGAC filing requested a rate increase to reflect an increase of $4.7 million in natural gas costs, inclusive of the $1.4 million reduction related to the 1996-97 LGAC filing. Both filings are still pending at the BPU. The adoption of FASB No. 109, "Accounting for Income Taxes" in 1993 primarily resulted in creating a regulatory asset and a deferred income tax liability. As a result of positions taken in the 1994 rate case, the amortization of the asset is being recovered through rates over an 18-year period which began in December 1994. Also, FASB No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", adopted by the Company in 1993, requires an accrual basis of accounting for retiree benefit payments during the years of employment. The Company elected to recognize the unfunded transition obligation over a 20-year period beginning in 1993. The majority of the postretirement benefit costs apply to SJG, which previously recovered these costs through rates on a pay-as-you-go basis. A December 1994 BPU order provided for partial recovery of costs associated with FASB No. 106 and prescribed continued deferral of unrecovered costs. Also, beginning in 1995, an external trust was established towards funding postretirement benefit costs. Rate recovery in excess of SJG's pay-as- you-go requirement is contributed to the trust and provides no operating benefit to SJG except to the extent that trust income reduces future net periodic cost. Gross contributions to the trust amounted to $2.0 million in 1997 and the balance of the regulatory asset amounted to $6.1 million at December 31, 1997. This amount will be recovered from ratepayers over a 15-year period beginning January 1, 1998, as approved by the BPU in December 1997. In addition, the BPU approved full recovery of the net periodic benefit cost. The Company incurred and recorded certain costs for environmental remediation of sites where SJG or predecessor companies operated gas manufacturing plants. SJG terminated manufactured gas operations at all sites more than 35 years ago. Since the early 1980s, the Company has recorded environmental remediation costs of $96.2 million, of which $39.2 million was expended as of December 31, 1997. The Company, with the assistance of an outside consulting firm, estimates that total future expenditures to remediate SJG sites will range from $52.4 million to $165.6 million. The lower end of this range was recorded as a liability and is reflected on the balance sheet under the captions "Current Liabilities" and "Deferred Credits and Other Non-Current Liabilities". Recorded environmental remediation costs of SJG do not directly affect earnings because those costs are deferred and, when expended, recovered through rates over 7-year amortization periods as authorized by the BPU. Amounts accrued for future expenditures were not adjusted for future insurance recoveries, which management is pursuing. SJG received $4.2 million of insurance recoveries as of December 31, 1997. SJG used these proceeds first to offset legal fees incurred in connection with those recoveries and used the excess to reduce the balance of deferred environmental remediation costs. Recorded amounts include estimated costs based on projected investigation and remediation work plans using existing technologies. Actual expenditures 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 recorded environmental costs relate to the cleanup of SJG's former gas manufacturing sites. SJG recorded $90.2 million for -12- the remediation of these sites, of which $37.8 million was expended through December 31, 1997. As a result of the 7-year recovery mechanism, SJG does not expense environmental remediation costs when incurred and defers costs to be recovered. SJG has two regulatory assets associated with environmental cost. The first regulatory asset is titled "Environmental Remediation Cost: Expended - Net". These expenditures represent actual costs incurred to remediate former gas manufacturing plant sites net of rate and insurance recoveries. These costs meet the requirements of FASB No. 71, "Accounting for the Effects of Certain Types of Regulation". The BPU allowed recovery of these expenditures through July 1995 and petitions to recover these costs through July 1997 are pending. The other regulatory asset titled "Environmental Remediation Cost: Liability for Future Expenditures" relates to estimated future expenditures determined under the guidance of FASB No. 5, "Accounting for Contingencies". This amount, which relates to former manufactured gas plant sites was recorded as a deferred debit with the corresponding amount reflected in Current Liabilities and Deferred Credits and Other Non-Current Liabilities, as appropriate. The deferred debit is a regulatory asset under FASB No. 71, because the BPU's intent, as evidenced by its current practice, is to provide recovery sufficient to recover the deferred costs after they are expended. Annually, SJG files with the BPU to recover expended remediation costs in rates. The BPU has consistently allowed the full recovery over 7-year periods, and SJG believes this will continue. As of December 31, 1997, SJG's unamortized remediation expenditures of $21.0 million are reflected on the balance sheet under the caption "Regulatory and Other Non-Current Assets." Since BPU approval of the RAC mechanism in August 1992, SJG recovered $12.6 million as of December 31, 1997. On July 31, 1996 and 1997, SJG made its annual filings with the BPU to recover remediation costs expended during the period of August 1995 through July 1997 totaling $1.6 million. Both filings were subsequently updated and are still pending at the BPU. On September 9, 1997, SJG filed with the BPU to adjust rates by replacing the current State Gross Receipts & Franchise Tax components with a Sales and Use Tax, a Corporation Business Tax and a Transitional Energy Facilities Assessment (See "Liquidity"). On May 5, 1997, SJG filed with the BPU to update rates related to appliance service charges, including a profit margin. The new rates are competitive with other service providers in New Jersey and are designed to increase earnings and cash flows to SJG over the current rates. This filing is pending. The Company is subject to claims which arise in the ordinary course of its business and other legal proceedings. A group of Atlantic City casinos filed a petition with the BPU on January 16, 1996, alleging overcharges of over $10.0 million, including interest. Management believes that charges to the casinos were based on applicable tariffs and that the casinos were not qualified under less expensive rate schedules, as claimed. Management believes that the ultimate impact of these actions will not materially affect the Company's financial position, results of operations or liquidity. Capital Resources - The Company has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities, equipment and for environmental cleanup costs. Total construction and remediation expenditures for 1997 amounted to $58.7 million. The costs for 1998, 1999 and 2000 are estimated at approximately $63.9 million, $60.2 million and $48.7 million, respectively. These investments are expected to be funded from several sources, which may include cash generated by operations, temporary use of short-term debt, sale of first mortgage bonds, capital leases and RAC recoveries. On March 21, 1997, SJG sold $35.0 million of its First Mortgage Bonds, 7.7% Series due 2027. On May 2, 1997, SJG's Delaware statutory trust subsidiary, SJG Capital Trust, sold $35.0 million of 8.35% SJG-guaranteed Mandatorily Redeemable Preferred Securities. The Trust holds as its sole asset the 8.35% Deferrable Interest Subordinated Debentures issued by SJG maturing April 30, 2037. The Debentures and Preferred Securities are redeemable at the option of SJG at a redemption price equal to 100 percent of the principal amount at any time on or after April 30, 2002. In January 1996, SJG redeemed a total of $5,258,000 of its 8-1/4% Series First Mortgage Bonds maturing in 1996 and 1998. In April 1996, SJG redeemed the remaining balance of its 9.2% Series First Mortgage Bonds due 1998 amounting to $2,667,000. A shareholder rights plan is in effect beginning September 20, 1996, extending through September 20, 2006 (See Note 4). Inflation - The ratemaking process provides that only the original cost of utility plant is recoverable in revenues as depreciation. Therefore, the excess cost of utility plant, stated in terms of current cost over the original cost of utility plant, is not presently recoverable. While the ratemaking process gives no recognition to the current cost of replacing utility plant, based on past practices, SJG believes it will be allowed to earn on the increased cost of its net investment as replacement of facilities actually occurs. Summary - The company is confident it will have sufficient cash flow to meet its operating, capital and dividend needs and is taking and will take such actions necessary to employ its resources effectively. INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of South Jersey Industries, Inc.: We have audited the consolidated balance sheet of South Jersey Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related statements of consolidated income, consolidated retained earnings and consolidated cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of South Jersey Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Philadelphia, Pennsylvania February 18, 1998 -13- STATEMENTS OF CONSOLIDATED INCOME (In Thousands Except for Per Share Data)
South Jersey Industries, Inc. and Subsidiaries Year Ended December 31, 1997 1996 1995 ---------------------------- Operating Revenues: Utility (Notes 1 & 6) $327,477 $329,295 $280,233 Nonutility 21,090 26,163 23,930 ---------------------------- Total Operating Revenues 348,567 355,458 304,163 ---------------------------- Operating Expenses: Gas Purchased for Resale 181,117 185,138 143,788 Operation and Maintenance - Utility (Note 9) 48,519 46,023 46,378 Nonutility 23,154 26,779 24,467 Depreciation (Note 1) 15,978 14,864 13,848 Federal Income Taxes (Notes 1, 5 & 8) 10,716 10,155 8,753 Gross Receipts & Franchise Taxes and Other Taxes (Note 8) 30,441 33,940 31,711 ---------------------------- Total Operating Expenses 309,925 316,899 268,945 ---------------------------- Operating Income 38,642 38,559 35,218 ---------------------------- Interest Charges: Long-Term Debt 15,197 14,117 15,022 Short-Term Debt 2,550 5,533 3,489 Other 364 470 1,655 ---------------------------- Total Interest Charges 18,111 20,120 20,166 ---------------------------- Preferred Dividend Requirements of Subsidiary (Note 3) 2,102 174 178 ---------------------------- Income from Continuing Operations 18,429 18,265 14,874 Discontinued Operations (Note 2): (Loss) Income from Discontinued Operations - Net (1,866) (407) 2,769 Net (Loss) Gain on the Disposal of Discontinued Operations (767) 12,640 - ---------------------------- Net Income Applicable to Common Stock $ 15,796 $ 30,498 $ 17,643 ============================ Average Shares of Common Stock Outstanding (Note 4) 10,763 10,732 10,720 ============================ Earnings Per Common Share: (Notes 2 & 4) Continuing Operations $ 1.71 $ 1.70 $ 1.39 Discontinued Operations - Net (0.24) 1.14 0.26 ---------------------------- Earnings Per Common Share $ 1.47 $ 2.84 $ 1.65 ============================ Cash Dividends Declared Per Common Share $ 1.44 $ 1.44 $ 1.44 ============================
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS (In Thousands)
Year Ended December 31, 1997 1996 1995 ---------------------------- Balance at Beginning of Year $ 48,743 $ 33,705 $ 31,497 Net Income Applicable to Common Stock 15,796 30,498 17,643 Cash Dividends Declared - Common Stock (15,501) (15,460) (15,435) ---------------------------- Balance at End of Year (Note 12) $ 49,038 $ 48,743 $ 33,705 ============================ The accompanying schedule and footnotes are an integral part of the financial statements.
-14- STATEMENTS OF CONSOLIDATED CASH FLOWS (In Thousands)
South Jersey Industries, Inc. and Subsidiaries Year Ended December 31, 1997 1996 1995 ---------------------------- Cash Flows from Operating Activities: Net Income Applicable to Common Stock $ 15,796 $ 30,498 $ 17,643 Adjustments to Reconcile Net Income to Cash Flows Provided by Operating Activities: Depreciation, Depletion and Amortization 18,112 21,462 20,722 Provision for Losses on Accounts Receivable 1,351 2,143 1,265 Revenues and Fuel Costs Deferred - Net (3,270) (7,719) (5,523) Deferred and Non-Current Federal Income Taxes and Credits - Net 5,358 9,723 4,326 Net Pre-Tax Loss (Gain) on the Disposal of Discontinued Operations 845 (22,620) - Environmental Remediation Costs - Net* (2,883) (1,771) 1,544 Changes in: Accounts Receivable 2,113 2,069 (16,676) Inventories (1,634) (8,366) 2,297 Prepayments and Other Current Assets (89) 884 (483) Prepaid Gross Receipts & Franchise Taxes - Net 1,036 2,047 (3,845) Accounts Payable and Other Accrued Liabilities 3,720 16,904 8,451 Other - Net (502) (3,367) 5,720 ---------------------------- Net Cash Provided by Operating Activities 39,953 41,887 35,441 ---------------------------- Cash Flows from Investing Activities: Investment in Affiliate - (1,000) - Loan to Affiliate (1,761) (2,800) - Proceeds from the Sale of Assets - Net 3,488 56,056 - Taxes Paid on the Sale of Assets - Net (9,807) - - Proceeds from the Sale of Available-for-Sale Securities - 795 - Capital Expenditures, Cost of Removal and Salvage (49,604) (43,218) (44,607) ---------------------------- Net Cash (Used in) Provided by Investing Activities (57,684) 9,833 (44,607) ---------------------------- Cash Flows from Financing Activities: Net (Repayments of) Borrowings from Lines of Credit (62,400) 32,000 (3,900) Proceeds from Issuance of Long-Term Debt 35,618 - 30,000 Principal Repayments of Long-Term Debt (6,603) (27,235) (9,500) Dividends on Common Stock (15,501) (15,460) (15,435) Proceeds from Sale of Common Stock 320 383 117 Proceeds from the Issuance of Preferred Securities 35,000 - - Repurchase of Preferred Stock (90) (90) (90) Payments for Issuance of Long-Term Debt and Preferred Securities (2,429) - (647) ---------------------------- Net Cash (Used In) Provided by Financing Activities (16,085) (10,402) 545 ---------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (33,816) 41,318 (8,621) Cash and Cash Equivalents at Beginning of Year 46,905 5,587 14,208 ---------------------------- Cash and Cash Equivalents at End of Year $ 13,089 $ 46,905 $ 5,587 ============================ Supplemental Disclosures of Cash Flow Info Cash paid during the year for: Interest (Net of Amounts Applicable to LGAC Overcollections and Amounts Capitalized) $ 18,303 $ 21,879 $ 18,409 Income Taxes (Net of Refunds) $ 12,129 $ 2,858 $ 6,907 * Note 13 contains additional information relating to environmental remediation costs. The accompanying schedule and footnotes are an integral part of the financial statements.
-15- CONSOLIDATED BALANCE SHEET (In Thousands)
South Jersey Industries, Inc. and Subsidiaries December 31, ------------------------ 1997 1996 ---------- --------- Assets Property, Plant and Equipment: (Note 1) Utility Plant, at original cost $ 619,489 $ 577,304 Accumulated Depreciation (167,176) (157,682) Gas Plant Acquisition Adjustment - Net 1,926 2,000 Nonutility Property and Equipment, at cost 3,332 3,342 Accumulated Depreciation (1,033) (1,060) ------------------------ Property, Plant and Equipment - Net 456,538 423,904 ------------------------ Investment in Affiliate (Note 2) 849 1,286 ------------------------ Current Assets: Cash and Cash Equivalents (Notes 1 & 11) 13,089 46,905 Notes Receivable - Affiliate 4,561 2,800 Accounts Receivable 35,947 38,714 Unbilled Revenues (Note 1) 17,263 17,855 Provision for Uncollectibles (1,530) (1,425) Natural Gas in Storage, average cost 23,877 22,638 Materials and Supplies, average cost 4,509 4,114 Assets of Discontinued Businesses Held for Disposal 622 4,966 Prepaid Gross Receipts & Franchise Taxes 566 1,602 Prepayments and Other Current Assets 1,862 1,773 ------------------------ Total Current Assets 100,766 139,942 ------------------------ Accounts Receivable - Merchandise 1,998 1,999 ------------------------ Regulatory and Other Non-Current Assets (Note 1) Environmental Remediation Costs: (Note 13) Expended - Net 21,041 15,566 Liability for Future Expenditures 52,400 41,700 Gross Receipts & Franchise Taxes (Note 8) 4,028 4,468 Income Taxes - Flowthrough Depreciation (Note 8) 13,999 14,977 Deferred Fuel Costs - Net 3,674 404 Deferred Postretirement Benefit Costs (Notes 6 & 9) 6,150 5,153 Other 9,158 8,982 ------------------------ Total Regulatory and Other Non-Current Assets 110,450 91,250 ------------------------ Total Assets $ 670,601 $ 658,381 ======================== Capitalization and Liabilities Capitalization: (see Schedule) Common Equity (Notes 4 & 12) $ 173,499 $ 172,731 Preferred Stock and Securities of Subsidiary (Note 3) 37,224 2,314 Long-Term Debt 176,360 149,736 ------------------------ Total Capitalization 387,083 324,781 ------------------------ Current Liabilities: Notes Payable (Note 11) 45,900 108,300 Current Maturities of Long-Term Debt 8,994 6,603 Accounts Payable 49,142 50,301 Customer Deposits 5,871 6,050 Environmental Remediation Costs (Note 13) 16,511 9,377 Federal Income Taxes Accrued 884 4,417 Interest Accrued and Other Current Liabilities 12,477 13,693 ------------------------ Total Current Liabilities 139,779 198,741 ------------------------ Deferred Credits and Other Non-Current Liabilities: (Note 1) Deferred Income Taxes - Net (Note 5) 78,631 75,821 Investment Tax Credits 5,632 6,025 Pension and Other Postretirement Benefits (Note 9) 11,747 10,218 Environmental Remediation Costs (Note 13) 40,511 34,353 Other 7,218 8,442 ------------------------ Total Deferred Credits and Other Non-Current Liabilities 143,739 134,859 ------------------------ Commitments and Contingencies (Note 13) Total Capitalization and Liabilities $ 670,601 $ 658,381 ======================== The accompanying schedule and footnotes are an integral part of the financial statements.
-16- SCHEDULE OF CONSOLIDATED CAPITALIZATION (In Thousands Except for Share Data)
South Jersey Industries, Inc. and Subsidiaries December 31, 1997 1996 ------------------------ Common Equity: (Notes 4 & 12) Common Stock: Par Value $1.25 per share; Authorized 20,000,000 shares; Outstanding Shares: 10,771,413 (1997) and 10,756,679 (1996) $ 13,464 $ 13,446 Premium on Common Stock 110,997 110,542 Retained Earnings 49,038 48,743 ------------------------ Total Common Equity 173,499 172,731 ------------------------ Preferred Stock and Securities of Subsidiary:(Note 3) Redeemable Cumulative Preferred Stock: South Jersey Gas Company, Par Value $100 per share Authorized Shares: 47,304 (1997) and 48,204 (1996) Outstanding Shares: Series A, 4.70% - 3,000 (1997) and 3,900 (1996) 300 390 Series B, 8.00% - 19,242 1,924 1,924 Company-Guaranteed Manditorily Redeemable Preferred Securities of Subsidiary Trust: Par Value $25 per share, 1,400,000 shares Authorized and Outstanding 35,000 - ------------------------ Total Preferred Stock and Securities of Subsidiary $ 37,224 $ 2,314 ======================== Long-Term Debt: (A) South Jersey Gas Company: First Mortgage Bonds (B): 8.19% Series due 2007 22,727 25,000 10 1/4% Series due 2008 25,000 25,000 9% Series due 2010 28,438 30,625 6.95% Series due 2013 35,000 35,000 7.7% Series due 2027 (C) 35,000 - Unsecured Notes: Term Note, 8.47% due 2001 (D) 8,571 10,714 Debenture Notes, 8.6% due 2010 30,000 30,000 South Jersey Energy Company: Promissory Notes (E) 618 - ------------------------ Total Long-Term Debt Outstanding 185,354 156,339 Less Current Maturities 8,994 6,603 ------------------------ Total Long-Term Debt 176,360 149,736 ------------------------ Total Capitalization $ 387,083 $ 324,781 ======================== (A) The long-term debt maturities and sinking fund requirements for the succeeding 5 years are as follows: 1998, $8,994,176; 1999, $9,005,064; 2000, $9,016,888; 2001, $12,029,829; and 2002, $9,810,873. (B) SJG's First Mortgage dated October 1, 1947, as supplemented, securing the First Mortgage Bonds constitutes a direct first mortgage lien on substantially all utility plant. (C) On March 21, 1997, SJG sold $35,000,000 of its First Mortgage Bonds, 7.7% Series due 2027. (D) An additional $5,000,000 revolving credit facility was available under the terms of this agreement which expired December 31, 1997. (E) SJE has several unsecured notes at interest rates ranging from 8.75% to 9.0% and an average term of 5 years. SJE has a $1,000,000 line of credit against which these notes are drawn.
-17- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Practices: Consolidation - The consolidated financial statements include the accounts of South Jersey Industries, Inc. (SJI or the Company) and all of its subsidiaries. Certain intercompany transactions, amounting to approximately $1.9 million, $7.3 million, and $6.9 million, respectively, in 1997, 1996 and 1995, were not required to be eliminated. Those amounts were capitalized to utility plant or environmental remediation costs on the South Jersey Gas Company (SJG) books of account and are recoverable by SJG through the rate-making process (See Note 13). All other significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made of previously reported amounts to conform with classifications used in the current year. Estimates and Assumptions - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related disclosures. Therefore, actual results could differ from those estimates. Regulation - SJG is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU) and maintains its accounts in accordance with the prescribed Uniform System of Accounts of that Board (See Note 6). Utility Revenues - SJG bills most of its customers on a monthly cycle basis, although certain commercial and industrial customers are billed at or near the end of each month. An accrual is made to recognize the unbilled revenues from the date of the last bill to the end of period. In accordance with a BPU order, SJG is allowed to recover the excess cost of gas sold over the cost included in base rates through the Levelized Gas Adjustment Clause (LGAC). This collection is made on a forecasted basis upon BPU order. Under-recoveries and over-recoveries of gas costs are deferred and included in the determination of the following year's LGAC. Interest is paid on overcollected LGAC balances based on SJG's return on rate base as determined in its base rate proceedings. SJG's tariff also includes a Temperature Adjustment Clause (TAC) and a Remediation Adjustment Clause (RAC). These clauses are designed to reduce the impact of extreme fluctuations in temperatures on SJG and its customers, and recover costs incurred in the remediation of former gas manufacturing plants, respectively. TAC adjustments affect revenue, income and cash flows since extremely cold weather can generate credits to customers, while extremely warm weather during the winter season can result in additional billings to customers. RAC adjustments do not directly affect earnings because costs are deferred and recovered through rates over 7-year amortization periods (See Note 13). Property, Plant & Equipment - Utility plant is stated at original cost as defined for regulatory purposes; nonutility plant is stated at cost. The cost of additions, replacements and renewals of property is charged to the appropriate plant account. New Accounting Pronouncements - In March 1995, the Financial Accounting Standards Board (FASB) issued FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company adopted this statement in 1996. It requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The resultant impairment was included in discontinued operations. See Note 4 for discussion of FASB No. 123 which also became effective in 1996. In February 1997, the FASB issued FASB No. 128, "Earnings per Share", which is effective for financial statements for periods ending after December 15, 1997. FASB No. 128 supersedes previous reporting requirements on Earnings per Share (EPS) and replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with a complex capital structure when those amounts are different. The adoption of FASB No. 128 did not have an impact on the Company's EPS (See Note 4). In June 1997, the FASB issued FASB No. 130, "Reporting Comprehensive Income". This statement, which establishes standards for reporting and disclosure of comprehensive income, is effective for annual periods beginning after December 15, 1997. The Company currently has no additional items qualifying as other comprehensive income under FASB No. 130 and, therefore, believes its adoption will not have any impact on the Company's financial position on results of operations. In June 1997, the FASB also issued FASB No. 131, "Disclosures about Segments of an Enterprise and Related Information", which is also effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the reporting of selected information about operating segments in the Company's interim and annual financial statements. The Company is evaluating whether the adoption of this statement will result in any change to its presentation of financial information. The Company expects to adopt FASB No. 131 effective January 1, 1998; however, as permitted by this statement, segment information will not be reported in interim financial statements until 1999. Depreciation and Amortization - Depreciation of utility plant is provided on a straight-line basis over the estimated remaining lives of the various classes of property. These estimates are periodically reviewed and adjustments are made as required after BPU approval. The composite rate per annum for all depreciable utility property was approximately 2.8 percent in 1997, 1996 and 1995. Generally, with the exception of extraordinary retirements, accumulated depreciation is charged with the cost of depreciable utility property retired, together with removal costs less salvage. The gas plant acquisition adjustment is being amortized on a straight-line basis over a 40-year period. The unamortized balance amounting to $1.9 million at December 31, 1997, is not included in rate base. Depreciation of nonutility property is computed generally on a straight-line basis over the estimated useful lives of the property, ranging up to 35 years. Any gain or loss realized upon the disposition of nonutility property is recognized in determining net income. Federal Income and Other Taxes - Deferred Income Taxes are provided for all significant temporary differences between book and taxable income (See Notes 5 & 8). On July 14, 1997, legislation reforming energy taxation in New Jersey was adopted. The new law eliminates the Gross Receipts & Franchise Tax (equivalent to approximately 13 percent of utility revenue) and replaces it with a combination of taxes. Beginning January 1, 1998, retail sales of natural gas and electricity and utility services, including transportation, will be subject to the 6 percent State Sales and Use Tax. Utilities will also be subject to the 9 percent State Corporation Business Tax on income before taxes. To bridge the revenue gap created by the new tax law, the State will impose a Transitional Energy Facilities Assessment (TEFA) on volumes of gas sold and transported. The TEFA will be phased out over a 5-year period beginning January 1, 1999 and ending January 1, 2003. It is expected that the revised tax policy will eliminate tax disparities between utility and non-utility suppliers, providing fair competition and lower energy costs for the consumer. The adoption of the new legislation will not materially affect the Company's financial position, results of operations or liquidity (See Note 6). Statements of Cash Flows - For purposes of reporting cash flows, all highly liquid investments with original maturities of three months or less are considered cash equivalents. 2. Divestitures and Affiliations: Divestitures - On December 3, 1996, Energy & Minerals, Inc. (EMI), a subsidiary of SJI, sold the common stock of The Morie Company, Inc. (Morie), its sand mining and processing subsidiary, in a cash transaction for approximately $55.3 million. The net book value of assets sold was approximately $27.9 million. Cash, certain real estate and other miscellaneous assets, along with certain liabilities, remaining after the sale were transferred -18- Notes to Consolidated Financial Statements, Continued to the books of EMI (See Note 13). The 1996 gain on the sale of $15.0 million, net of applicable income taxes of $11.3 million and selling costs of $1.1 million, is included in the consolidated income statement under the caption "Net (Loss) Gain on the Disposal of Discontinued Operations". The sale price was subject to customary post-closing entries resulting in a downward adjustment of $0.6 million which was recorded in 1997. In December 1996, the Company developed a formal plan to discontinue the operations of its construction and environmental services operations, R & T Group, Inc. (R & T) and its five subsidiaries. As a result, the Company recognized a net loss of $2.4 million, net of applicable income tax credits of $1.3 million, on the planned disposition of R & T's assets. Additionally, in two separate sales on January 9, 1997, and on April 4, 1997, R & T sold all of its operating assets, except certain real estate. The aggregate proceeds from these sales, approximately $3.5 million, approximated the net book value of the assets at the date of sale. Associated disposal costs of $189,500, or $123,200 after taxes, are included in the consolidated income statement for 1997. These losses are reflected in the consolidated income statement under the caption "Net (Loss) Gain on the Disposal of Discontinued Operations". In 1997, the Company performed additional testing to arrive at an estimate of the cost to perform environmental cleanup and remediation of properties owned by South Jersey Fuel, Inc. (SJF), a subsidiary of EMI, as part of its previously operated fuel oil business. Also in 1997, SJ EnerTrade, Inc. (EnerTrade) was created as a direct subsidiary of SJI to assume SJF's gas marketing activity, including its affiliation with South Jersey Resources Group, LLC (SJRG). The gas marketing activities are shown as part of continuing operations; the environmental remediation activity related to properties used in the previously operated fuel oil business are reported as part of discontinued operations consistent with the reporting in previous years of other costs related to the discontinued fuel oil business (See also Note 13). Summarized operating results of the discontinued operations were:
Thousands of Dollars 1997 1996 1995 ---------------------------- Operating Revenues: Sand Mining $ - $ 30,054 $ 32,249 Construction 4,928 17,081 18,335 ---------------------------- Total Operating Revenues $ 4,928 $ 47,135 $ 50,584 ============================ (Loss) Income before Income Taxes: Sand Mining $ (1,257) $ 68 $ 3,592 Construction 39 (1,348) 11 Fuel Oil (See Note 13) (1,725) - - Income Tax Credits (Expense) 1,077 873 (834) ---------------------------- (Loss) Income from Discontinued Operations $ (1,866) $ (407) $ 2,769 ============================ (Loss) Income per Common Share from Discontinued Operations $ (0.17) $ (0.04) $ 0.26 ============================
The 1995 results of operations were restated to reflect the accounting for these segments as Discontinued Operations. Affiliations - On April 1, 1996, SJF and Union Pacific Fuels, Inc. joined efforts in the formation of SJRG, to provide natural gas storage, peaking services and transportation capacity for wholesale customers in New Jersey and surrounding states. EnerTrade currently holds a 50 percent non-controlling interest in this affiliation and, accordingly, accounts for the investment under the equity method. 3. Preferred Stock and Securities of Subsidiary: Redeemable Cumulative Preferred Stock - SJG is required to offer annually to purchase 900 and 1,500 shares of its Cumulative Preferred Stock, Series A and Series B, respectively, at par value, plus accrued dividends. If preferred stock dividends are in arrears, no dividends may be declared or paid, or other distribution made on the SJG Common Stock. If four or more quarterly dividends are in arrears, the Preferred Shareholders may elect a majority of SJG's directors. Mandatorily Redeemable Preferred Securities - On May 2, 1997, SJG's statutory trust subsidiary, SJG Capital Trust (Trust), established in the State of Delaware on March 24, 1997, sold $35.0 million of 8.35 percent SJG-guaranteed Mandatorily Redeemable Preferred Securities. The Trust holds as its only asset the 8.35 percent Deferrable Interest Subordinated Debentures issued by SJG which mature on April 30, 2037, which is also the maturity date of the Preferred Securities. The Debentures and Preferred Securities are redeemable at the option of SJG at a redemption price equal to 100 percent of the principal amount thereof at any time on or after April 30, 2002. The Company has 2,500,000 authorized shares of Preference Stock, no par value, none of which has been issued. The Company has registered and reserved for the issuance of 15,000 shares of Series A Junior Participating Cumulative Preferred Stock (Series A Stock) in connection with the adoption of the Company's Shareholder Rights Plan (See Note 4). 4. Common Stock: The Company has 20,000,000 shares of Common Stock authorized of which the following shares were issued and outstanding:
1997 1996 1995 ---------------------------------------- Beginning of Year 10,756,679 10,722,171 10,715,211 New Issues During Year: Employees' Stock Ownership Plan 4,770 5,945 6,960 Stock Option & Stock Appreciation Rights Plan 9,514 14,163 - Directors' Restricted Stock Plan 450 14,400 - ---------------------------------------- End of Year 10,771,413 10,756,679 10,722,171 ========================================
The par value ($1.25 per share) of the stock issued in 1997, 1996 and 1995 was credited to common stock and the net excess over par value of approximately $0.5 million, $0.4 million, and $0.1 million, respectively, was credited to Premium on Common Stock. Effective January 1, 1996, the Company adopted FASB No. 123, "Accounting for Stock-Based Compensation". This statement defines a fair value based method of accounting for stock-based compensation. However, the Company has elected, as permitted by the statement, to continue to measure compensation costs using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, there was no impact from the adoption of FASB No. 123 on the Company's financial statements. The Company determined that the pro forma effect of adoption of the fair value based method of accounting on net income and earnings per share would be immaterial for the years ended December 31, 1997, 1996 and 1995. Stock Option and Stock Appreciation Rights Plan - Under this plan, not more than 306,000 shares in the aggregate may be issued to officers and other key employees of the Company and its subsidiaries. No options or stock appreciation rights may be granted under the Plan after January 23, 2007. At December 31, 1997, the Company had 13,060 options outstanding exercisable at prices from $17.89 to $24.69 per share and at December 31, 1996, the Company had 34,990 options outstanding exercisable at prices from $17.16 to $24.69 per share. During 1997 and 1996, 4,311 and 14,550 options were exercised respectively, at prices from $17.16 to $17.89 per share. In addition, during 1997, 17,619 options were surrendered for the issuance of 5,203 shares. No options were exercised in 1995. No options were granted in 1997, 1996 or 1995. No stock appreciation rights were issued under the plan. The stock options outstanding at December 31, 1997, 1996, and 1995, did not have an effect on the earnings per share calculations (See Note 1). Dividend Reinvestment and Stock Purchase Plan (DRP) and Employees' Stock Ownership Plan (ESOP) - Shares of common stock offered through the DRP are currently purchased in the open market. All shares offered through the ESOP are issued directly by the Company. As of December 31, 1997, 208,647 and 35,371 shares of authorized, but unissued, Common Stock were reserved for future issuance to the DRP and ESOP, respectively. -19- Notes to Consolidated Financial Statements, Continued Directors' Restricted Stock Plan - On September 20, 1996, the Board of Directors adopted a restricted stock plan. Under this plan, an initial award of 13,800 shares was granted on December 4, 1996, at a market value of $24.00 per share. The plan also provides for annual awards and, in December 1997 and 1996, respectively, 450 and 600 additional shares were granted. Initial awards will vest over a 5-year period, with 20 percent of such awards vesting per year. Annual awards will vest on the third anniversary of each award. Shares issued as restricted stock are held by the Company until the attached restrictions lapse. The market value of the stock on the date granted is recorded as compensation expense over the applicable vesting period. Shareholder Rights Plan - On September 20, 1996, the Board of Directors adopted a shareholder rights plan that provides for the distribution of one right for each share of common stock outstanding on October 11, 1996. Each entitles its holder to purchase 1/1000 of one share of Series A Stock at an exercise price of $90 (See Note 3). The rights plan provides that when a person or group acquires 10 percent or more of the Company's common stock, each of the rights (except for those held by the 10 percent holder) becomes the right upon payment of the exercise price to receive that number of shares of the Company's common stock, or common stock of the acquiring company, which have a market value equal to two times the exercise price. The rights may be redeemed by the Company for $.001 per right at any time prior to the time the acquiring person or group reaches the 10 percent threshold. If the rights are not exercised or redeemed by September 20, 2006, they will expire. 5. Federal Income Taxes: Income tax expense applicable to operations differs from the tax that would have resulted by applying the statutory rate to income from operations before Federal Income Tax for the following reasons:
Thousands of Dollars 1997 1996 1995 ---------------------------- Tax at Statutory Rate $ 10,260 $ 9,947 $ 8,269 Increase (Decrease) Resulting from: Amortization of Investment Tax Credits (ITC) (393) (390) (390) Liberalized Depreciation Under Book Depreciation on Utility Plant 664 664 664 Other - Net 185 (66) 210 ---------------------------- Federal Income Taxes as reported on the Statements of Consolidated Income 10,716 10,155 8,753 Tax Associated with Discontinued Operations (674) 5,887 621 ---------------------------- Net Federal Income Taxes $ 10,042 $ 16,042 $ 9,374 ============================
The provision for Federal Income Taxes is comprised of the following:
Thousands of Dollars 1997 1996 1995 ---------------------------- Current $ 4,964 $ (709) $ 4,506 Deferred: Excess of Tax Depreciation Over Book Depreciation - Net 4,162 4,610 4,059 Deferred Fuel Costs 349 3,340 1,380 Environmental Remediation Costs - Net 1,903 1,214 (556) Amortization of Gross Receipts Taxes (140) (140) (136) Alternative Minimum Tax (304) 2,939 - Other - Net 175 (709) (110) ---------------------------- Total Deferred 6,145 11,254 4,637 ---------------------------- ITC (393) (390) (390) Federal Income Taxes as reported on the Statements of Consolidated Income 10,716 10,155 8,753 Tax Associated with Discontinued Operations (674) 5,887 621 ---------------------------- Net Federal Income Taxes $ 10,042 $ 16,042 $ 9,374 ============================
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax liability at December 31, 1997 and 1996, are as follows:
Thousands of Dollars 1997 1996 ----------------------- Deferred Tax Liabilities: Tax Depreciation Over Book Depreciation $ 62,945 $ 60,527 Difference Between Book and Tax Basis of Property 5,579 5,215 Deferred Fuel Costs 5,078 4,720 Deferred Regulatory Costs 996 1,189 Environmental Remediation Costs 7,463 5,332 Excess Protected 3,485 3,550 Gross Receipts Taxes 1,424 1,564 Other 1,204 2,351 ----------------------- Total Deferred Tax Liabilities 88,174 84,448 ----------------------- Deferred Tax Assets: Alternative Minimum Tax 1,542 1,102 ITC Basis Gross Up 3,004 3,207 Other 4,997 4,318 ----------------------- Total Deferred Tax Assets $ 9,543 $ 8,627 ----------------------- Net Deferred Tax Liability $ 78,631 $ 75,821 =======================
6. Recent Regulatory Actions: On April 10, 1996, SJG received approval from the BPU to increase its rates by approximately $8.0 million, or 2.9 percent, through its LGAC. The primary reason for the LGAC increase was higher natural gas costs incurred by the Company during November and December 1995 due to weather that was colder than normal. On June 20, 1996, SJG received approval from the BPU to recover environmental remediation costs incurred during the 2-year period ended July 31, 1995, totaling $1.5 million, net of insurance recoveries. On July 31, 1996 and 1997, SJG made its annual filings with the BPU to recover remediation costs expended during the period of August 1995 through July 1997 totaling $1.6 million. Both filings were subsequently updated and are still pending at the BPU (See Note 13). On September 6, 1996, SJG made its annual LGAC and TAC filings with the BPU proposing a decrease to the LGAC of $1.4 million and a credit resulting from the TAC of $2.5 million. The TAC credit resulted from significantly colder weather in SJG's service area during the TAC period running from October 1, 1995 through May 31, 1996. The BPU approved the revenue reduction for the TAC credit on January 27, 1997. While customers received the credit in their bills during 1997, the earnings impact was reflected in the 1996 results of operations. On January 27, 1997, the BPU granted SJG a base rate increase of $6.0 million based on a 9.62 percent rate of return on rate base, which included an 11.25 percent return on common equity. The majority of this increase comes from residential and small commercial customers. Part of the increase is recovered from new miscellaneous service fees which charge specific customers for costs they cause SJG to incur. Additionally, SJG is now allowed to retain the first $5.5 million of pre-tax margins generated by interruptible and off-system sales and transportation and 20 percent of pre-tax margins above that level. In 1998, this $5.5 million threshold will increase by the annual revenue requirement associated with specified major construction projects. These sharing formula improvements are expected to result in additional rate relief of approximately $0.3 million in 1998 and $1.8 million in 1999. As part of the tariff changes approved in the rate case, SJG initiated its pilot program in April 1997, giving residential customers a choice of gas supplier. During the enrollment period, which ended June 30, 1997, nearly 13,000 residential customers applied for this service. Transportation of gas for these customers began on August 1, 1997. Participant's bills are reduced for certain cost of gas charges and applicable taxes. The resulting decrease in revenues is offset by a corresponding decrease in SJG's gas costs and taxes under SJG's BPU- approved fuel clause. The program does not affect its net income, financial condition or margins. In addition, because the program affects only -20- Notes to Consolidated Financial Statements, Continued 5 percent of SJG's residential customers, any reduction in revenue is not material. Also, SJG further expanded the choices available to commercial and industrial customers, including a new transportation tariff providing savings to qualified customers. On May 5, 1997, SJG filed with the BPU to update rates related to appliance service charges, including a profit margin. The new rates are competitive with other service providers in New Jersey and are designed to increase earnings and cash flows to SJG over the current rates. The filing is pending. On May 13, 1997, SJG filed to recover additional post-retirement benefit costs of approximately $1.3 million annually. This recovery was approved on December 17, 1997, and began January 1, 1998 (See Note 9). On September 9, 1997, SJG filed with the BPU to adjust rates by replacing the current State Gross Receipts and Franchise Tax components with a Sales and Use Tax, a Corporation Business Tax and a Transitional Energy Facilities Assessment. The new rates became effective January 1, 1998, on an interim basis subject to refund upon final BPU order which is expected in early 1998. On September 12, 1997, SJG made its annual LGAC, TAC and Demand Side Management Clause (DSMC) filings with the BPU for the period November 1997 through October 1998. In this filing, SJG requested an increase in the annual level of LGAC recovery of $4.7 million which is inclusive of the $1.4 million proposed decrease filed in 1996. It also requested that the 1996-1997 filing be resolved simultaneously with this filing. Both filings are still pending at the BPU. 7. Segments of Business: Information about the Company's operations in different industry segments is presented below:
Thousands of Dollars 1997 1996 1995 ---------------------------- Operating Revenues: Gas Utility Operations $327,548 $330,334 $282,719 Other Industries 22,083 27,237 23,982 ---------------------------- Total 349,631 357,571 306,701 Intersegment Sales (1,064) (2,113) (2,538) ---------------------------- Consolidated Operating Revenues $348,567 $355,458 $304,163 ============================ Operating Income: Gas Utility Operations $ 51,555 $ 49,476 $ 44,716 Other Industries (942) 327 556 ---------------------------- Total 50,613 49,803 45,272 Federal Income Taxes (10,716) (10,155) (8,753) General Corporate Expense (1,255) (1,089) (1,301) ---------------------------- Total Operating Income $ 38,642 $ 38,559 $ 35,218 ============================ Depreciation, Depletion and Amortization: Gas Utility Operations $ 17,867 $ 17,540 $ 16,672 Other Industries 18 35 40 Discontinued Operations 227 3,887 4,010 ---------------------------- Total $ 18,112 $ 21,462 $ 20,722 ============================ Property Additions: Gas Utility Operations $ 48,533 $ 39,384 $ 40,078 Other Industries 141 6 1 Discontinued Operations 1 2,841 3,628 ---------------------------- Total $ 48,675 $ 42,231 $ 43,707 ============================ Identifiable Assets: Gas Utility Operations $649,113 $599,926 $549,458 Other Industries 11,322 8,041 5,703 Discontinued Operations 2,993 9,341 52,821 ---------------------------- Total 663,428 617,308 607,982 Corporate Assets 23,664 67,018 11,981 Intersegment Assets (16,491) (25,945) (15,654) ---------------------------- Total Assets $670,601 $658,381 $604,309 ============================
Gas utility operations consist primarily of natural gas distribution to residential, commercial and industrial customers. Other industries include the natural gas and electric acquisition and transportation service companies (See Note 2). Total operating revenues by industry segment include both sales to unaffiliated customers, as reported in the Company's statements of consolidated income, and intercompany sales, which are accounted for at the fair market value of the goods or services rendered. Operating income is total revenues less operating expenses, Federal Income Taxes, and general corporate expenses, as shown on the statements of consolidated income. Identifiable assets are those assets that are used in each segment of the Company's operations. Corporate assets are principally cash and cash equivalents, land, buildings and equipment held for corporate use. 8. Regulatory Assets and Deferred Credits - Federal and Other Taxes: The primary asset created as a result of adopting FASB No. 109, "Accounting for Income Taxes", was income taxes - flowthrough depreciation in the amount of $17.6 million as of January 1, 1993. This amount represented the recording of the net tax effect of excess liberalized depreciation over book depreciation on utility plant because of temporary differences for which, prior to FASB No. 109, deferred taxes had not previously been provided. These tax benefits were previously flowed through in rates. As a result of positions taken in the 1994 rate case, the amortization of the regulatory asset is being recovered through rates over an 18-year period which began in December 1994. The ITC attributable to SJG was deferred and continues to be amortized at the annual rate of 3 percent, which approximates the life of the related assets. Effective March 1, 1978, SJG began and continued to accrue through 1991 for Gross Receipts and Franchise Taxes (GRAFT) on current revenues rather than on the previous basis of prior period revenues. The one-time increase resulting from this change has been deferred and is being amortized on a straight-line basis to operations over a 30-year period. In June 1991, New Jersey adopted GRAFT legislation accelerating tax payments, the carrying costs on which are being recovered from ratepayers. The legislation also changed the basis of the tax to gas volumes rather than percentage of revenue (See Note 1). 9. Retirement Benefit Plans & Other: Pensions - SJI and its subsidiaries have several defined benefit retirement plans that provide annuity payments to substantially all full-time regular employees upon retirement. The companies pay the entire cost of the plans. Approximately 53 percent of the plans' assets are invested in securities which provide for fixed income and a return of principal. The remaining assets are invested in professionally managed common stock portfolios. Net periodic pension cost, including the amortization of the cost of past service benefits over a period of approximately 30 years, included the following components:
Thousands of Dollars 1997 1996 1995 ------------------------------------- Service cost - benefits earned during the period $ 1,960 $ 1,916 $ 1,736 Interest cost on projected benefit obligation 3,820 3,481 3,183 Actual return on plan assets (6,103) (3,336) (3,245) Net amortization and deferral 3,157 525 730 ------------------------------------- Net periodic pension cost $ 2,834 $ 2,586 $ 2,404 ===================================== Assumptions as of December 31 were: Discount rate 7.25% 7.25%-7.50% 7.25%-7.50% Rate of increase in compensation levels 4.1% 4.6% 4.6% Expected long term rate of return on assets 8.5% 8.5% 8.5%
Due to the positive performance of the capital markets in 1997, the actual return on plan assets increased significantly compared with prior years. In accordance with FASB No. 87, "Employers' Accounting for Pensions", the amounts in excess of the expected return of 8.5 percent is deferred and will be recognized over future periods. -21- Notes to Consolidated Financial Statements, Continued A reconciliation of the funded status of the plans to the amounts recognized in the consolidated balance sheets is presented below:
Thousands of Dollars 1997 1996 ------------------------ Actuarial present value of plan benefits Vested benefits $ (44,885) $ (39,078) Non-vested benefits (291) (314) Impact of estimated future compensation changes (11,577) (11,343) ------------------------ Projected plan benefits (56,753) (50,735) Plan assets at fair value 46,875 40,335 ------------------------ Projected plan benefits in excess of plan assets (9,878) (10,400) Unrecognized net loss 3,312 5,297 Unrecognized prior service costs 3,514 2,113 Unrecognized net obligation at January 1 430 502 ------------------------ Net Pension liability recognized in the consolidated balance sheet $ (2,622) $ (2,488) ========================
Postretirement Benefits Other Than Pensions - The Company and its subsidiaries provide postretirement health care and life insurance benefits to certain retired employees. Effective January 1, 1993, the Company adopted FASB No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". This statement requires the Company to accrue the estimated cost of retiree benefit payments during the years the employee provides services. The Company previously expensed the cost of these benefits, which are principally health care, on a pay-as-you-go (PAYGO) basis. The Company elected to recognize the unfunded transition obligation over a 20-year period. The majority of the Company's costs apply to SJG, which previously recovered these costs on a PAYGO basis through its rates. As part of SJG's 1994 base rate case settlement, SJG was granted full recovery of the current service cost component of the annual cost in addition to continued recovery of PAYGO costs. The BPU also approved recovery of previously deferred 1993 and 1994 service costs over a 5-year period beginning in December 1994. Beginning in 1995, an external trust was established to fund a portion of the obligation recovered from ratepayers as a part of the BPU settlement. Gross contributions to this trust totaled $2.0 million in 1997 and $2.1 million in both 1996 and 1995. However, due to the timing of 1995 contributions, the return stated in the table below does not reflect a full year's return. SJG was also authorized to continue recording a regulatory asset for the amount by which the cost exceeded the level recovered in rates. The balance of this regulatory asset, which amounted to approximately $6.1 million at December 31, 1997, will be recovered from ratepayers over a 15-year period beginning January 1, 1998, as approved by the BPU in December 1997. At that time, the BPU also approved full recovery of the net periodic benefit costs. The additional annual recovery of approximately $1.3 million will be contributed to the external trust and provides no operating benefit to SJG except to the extent that trust income would reduce future net postretirement benefit costs (See Note 6). A reconciliation of the accumulated postretirement benefit obligation to the amounts recognized in the Consolidated Balance Sheet is presented below:
Thousands of Dollars 1997 1996 1995 ---------------------------- Service cost - benefits earned during the period $ 994 $ 930 $ 878 Actual return on plan assets (272) (164) (26) Interest cost on accumulated postretirement benefit obligation 1,579 1,432 1,320 Amortization of transition obligation 796 796 796 ---------------------------- Subtotal 3,097 2,994 2,968 Other Adjustments - - (2,690) ---------------------------- Net postretirement benefit costs as reported in the consolidated Financial Statements $ 3,097 $ 2,994 $ 278 ============================
The amounts expensed in 1997, 1996 and 1995 were $1.5 million, $1.7 million and $1.7 million, respectively. The following table sets forth the life and health care plans' funded status at December 31, 1997 and 1996. Actuarial present value of accumulated postretirement benefit obligations:
Thousands of Dollars 1997 1996 ----------------------- Retirees $ (5,631) $ (4,933) Other active plan participants (18,393) (16,744) ----------------------- Accumulated postretirement benefit obligation (24,024) (21,677) Fair value of plan assets 4,403 2,835 ----------------------- Accumulated postretirement benefit obligation in excess of plan assets (19,621) (18,842) Unrecognized net loss 701 242 Unrecognized transition obligation 11,947 12,743 ----------------------- Postretirement benefit liability recognized in the consolidated balance sheet $ (6,973) $ (5,857) =======================
In 1995, the Company recalculated the net postretirement benefit cost and present value of accumulated postretirement benefit for the years 1994 and 1993 utilizing assumptions based on corrected data. The effects of the recalculation were recorded in 1995 since the changes did not materially affect previously reported net income or retained earnings. The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation as of December 31, 1997, are as follows: Medical and Drug - 7.4 percent for participants age 65 or older and 10.15 percent for participants under age 65 in 1997, both grading to 5.75 percent in 2008. Dental - 7.42 percent in 1997, grading to 5.75 percent in 2003. If the health care cost trend rate assumptions were increased by 1 percent, the accumulated postretirement benefit obligation as of December 31, 1997, would be increased by $3.4 million. The effect of this change on the sum of the service cost and interest cost would be an increase of $0.5 million. An assumed discount rate of 7.25 percent in 1997 and 7.5 percent in 1996, and an expected return on plan assets of 8.5 percent were used in determining the accumulated postretirement benefit obligation as of December 31, 1997 and 1996. Employment Contracts - With the death of the Company's president, certain benefits became payable under the provisions of his employment contract. The total of these benefits, approximately $1.5 million, has been accrued as of December 31, 1997. Under a separate contract, life insurance proceeds of approximately $0.2 million payable to the Company were also recorded. The benefit expense is reflected in the statement of consolidated income for the year 1997 under the caption "Operation and Maintenance - Utility". 10. Financial Instruments: Long-Term Debt - The fair values of the Company's long-term debt, including current maturities, as of December 31, 1997 and 1996, are estimated to be $205.8 million and $166.6 million, respectively (carrying amounts $185.4 million and $156.3 million, respectively). They are estimated based on the interest rates available to the Company at each respective year end for debt with similar terms and remaining maturities. The Company retires higher cost debt whenever it is cost effective to do so with in the constraints of the respective debt covenants. Other Financial Instruments - The carrying amounts of the Company's other financial instruments approximate their fair values at December 31, 1997 and 1996. 11. Unused Lines of Credit and Compensating Balances: Unused lines of credit available at December 31, 1997, were approximately $84.1 million. Borrowings under these lines of credit are at market rates. The weighted cost of such borrowings, which usually changes each business day, approximated 6.06 and 5.85 percent at December 31, 1997 and 1996, respectively. Demand deposits are maintained with lending banks on an informal basis and do not constitute compensating balances. -22- Notes to Consolidated Financial Statements, Continued 12. Retained Earnings: There are certain restrictions under various loan agreements as to the amount of cash dividends or other distributions that may be paid on the Common Stock of SJG. The Company's aggregate equity in its subsidiaries' retained earnings which is free of these restrictions was approximately $47.1 million as of December 31, 1997. 13. Commitments and Contingencies: Construction Commitments - The estimated cost of construction and environmental remediation programs of SJI and its subsidiaries for the year 1998 aggregates $63.9 million and, in connection therewith, certain commitments have been made. Gas Supply Contracts - SJG, in the normal course of conducting business, has entered into long-term contracts for natural gas supplies, firm transportation, and gas storage service. The earliest expiration of any of the gas supply contracts is 1999. All of the transportation and storage service agreements between SJG and its interstate pipeline suppliers are provided under Federal Energy Regulatory Commission (FERC) approved tariffs. SJG's cumulative obligation for demand charges and reservation fees paid to its suppliers for all of these services is approximately $4.6 million per month which is recovered on a current basis through the LGAC. Pending Litigation - The Company is subject to claims which arise in the ordinary course of its business and other legal proceedings. A group of Atlantic City casinos filed a petition with the BPU on January 16, 1996, alleging overcharges of over $10.0 million, including interest. Management believes that charges to the casinos were based on applicable tariffs and that the casinos were not qualified under less expensive rate schedules, as claimed. Management believes that the ultimate impact of these actions will not materially affect the Company's financial position, results of operations or liquidity. Environmental Remediation Costs - The Company incurred and recorded certain costs for environmental remediation of sites where SJG or predecessor companies operated gas manufacturing plants. SJG terminated manufactured gas operations at all sites more than 35 years ago. SJI and certain of its nonutility subsidiaries have also recorded costs for environmental remediation of sites where SJF previously operated a fuel oil business and Morie maintained equipment, fueling stations and storage. Since the early 1980s, the Company has recorded environmental remediation costs of $96.2 million, of which $39.2 million was expended as of December 31, 1997. The Company, with the assistance of an outside consulting firm, estimates that total future expenditures to remediate SJG's sites will range from $52.4 million to $165.6 million. The lower end of this range was recorded as a liability and is reflected on the consolidated balance sheet under the captions "Current Liabilities" and "Deferred Credits and Other Non-Current Liabilities". Recorded environmental remediation costs of SJG do not directly affect earnings because those costs are deferred and, when expended, recovered through rates over 7-year amortization periods as authorized by the BPU. Amounts accrued for future expenditures were not adjusted for future insurance recoveries, which management is pursuing. SJG received $4.2 million of insurance recoveries as of December 31, 1997. SJG first used these proceeds to offset legal fees incurred in connection with those recoveries and used the excess to reduce the balance of deferred environmental remediation costs. Recorded amounts include estimated costs based on projected investigation and remediation work plans using existing technologies. Actual expenditures 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 recorded environmental costs relate to the cleanup of SJG's former gas manufacturing sites. SJG recorded $90.2 million for the remediation of these sites, of which $37.8 million was expended through December 31, 1997. As a result of the 7-year RAC recovery mechanism, SJG does not expense environmental remediation costs when incurred and defers costs to be recovered. SJG has two regulatory assets associated with environmental cost. The first regulatory asset is titled "Environmental Remediation Cost: Expended - Net". These expenditures represent actual cost incurred to remediate former gas manufacturing plant sites. These costs meet the requirements of FASB No. 71, "Accounting for the Effects of Certain Types of Regulation". The BPU allowed recovery of these expenditures through July 1995 and petitions to recover these costs through July 1997 are pending (See Note 6). The other regulatory asset titled "Environmental Remediation Cost: Liability for Future Expenditures" relates to estimated future expenditures determined under the guidance of FASB No. 5, "Accounting for Contingencies". This amount, which relates to former manufactured gas plant sites was recorded as a deferred debit with the corresponding amount reflected in Current Liabilities and Deferred Credits and Other Non-Current Liabilities, as appropriate. The deferred debit is a regulatory asset under FASB No. 71, because the BPU's intent, as evidenced by its current practice, is to provide recovery sufficient to recover the deferred costs after they are expended. SJG files with the BPU to recover these costs in rates through its RAC. The BPU has consistently allowed the full recovery over 7-year periods, and SJG believes this will continue. As of December 31, 1997, SJG's unamortized remediation expenditures of $21.0 million are reflected on the balance sheet under the caption "Regulatory and Other Non-Current Assets". Since BPU approval of the RAC mechanism in August 1992, SJG recovered $12.6 million through rates as of December 31, 1997 (See Note 6). With Morie's sale, EMI assumed responsibility for environmental liabilities which are currently estimated to range between $2.8 million and $15.5 million. The information available on these sites is sufficient only to establish a range of probable liability and no point within the range is more likely than any other, therefore, EMI continues to accrue the lower end of the range. The 1997 increase in the accrual of $0.8 million, $0.5 million after taxes, is included in the consolidated income statement under the caption "(Loss) Income from Discontinued Operations - Net". As a result of additional testing performed during 1997, both SJI and the discontinued operations of SJF have also estimated their potential exposure for the future environmental remediation of four sites where fuel oil operations were conducted years ago. Estimates for SJI's site range between $0.3 million and $1.1 million while SJF's estimated liability ranges from $1.5 million to $4.2 million for the remaining three sites. The lower end of these ranges were recorded and are reflected in Current Liabilities and Deferred Credits and Other Non-Current Liabilities as of December 31, 1997. SJI's charge is included in the statement of consolidated income as operating expense while SJF's charge is reflected under the caption "(Loss) Income from Discontinued Operations - Net" (See Note 2). MANAGEMENT'S RESPONSIBILITIES FOR FINANCIAL STATEMENTS The management of South Jersey Industries, Inc. is responsible for the integrity and objectivity of the Company's financial statements and related disclosures. These statements and disclosures were prepared using management's best judgment and are in conformity with generally accepted accounting principles. The Board of Directors, acting through its Audit Committee, which is composed of outside directors, oversees management's responsibilities for accounting, internal control and financial reporting. The Audit Committee meets periodically with management and the internal and independent auditors to discuss auditing and financial matters, and to assure that each is carrying out its responsibilities. The internal auditors and independent auditors have access to the members of the Audit Committee at any time. -23- QUARTERLY FINANCIAL DATA The summarized quarterly results of operations of the Company, in thousands except for per share amounts, for 1997 and 1996 are presented below:
1997 Quarter Ended 1996 Quarter Ended -------------------------------------- -------------------------------------- March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 -------------------------------------- -------------------------------------- Operating Revenues: $131,403 $ 62,312 $ 54,151 $100,701 $149,960 $ 59,325 $ 44,856 $101,317 -------------------------------------- -------------------------------------- Operating Expenses: Operation and Maintenance Including Fixed Charges 94,802 56,666 57,532 79,981 108,678 56,638 47,326 80,456 Federal Income Taxes 8,374 338 (2,071) 4,075 9,180 (935) (2,021) 3,931 Gross Receipts & Franchise and Other Taxes 13,179 5,306 3,173 8,783 15,291 5,546 3,437 9,666 -------------------------------------- -------------------------------------- Income (Loss) from Continuing Operations 15,048 2 (4,483) 7,862 16,811 (1,924) (3,886) 7,264 Discontinued Operations - Net (147) (173) (284) (2,029) (1,585) 1,157 1,532 11,129 -------------------------------------- -------------------------------------- Net Income (Loss) Applicable to Common Stock $ 14,901 $ (171) $ (4,767) $ 5,833 $ 15,226 $ (767) $ (2,354) $ 18,393 ====================================== ====================================== Earnings (Loss) Per Common Share (Based on Average Shares Outstand.):(1) Continuing Operations $ 1.39 $ 0.00 $ (0.42) $ 0.73 $ 1.57 $ (0.18) $ (0.36) $ 0.67 Discontinued Operations (0.01) (0.02) (0.02) (0.19) (0.15) 0.11 0.14 1.04 -------------------------------------- -------------------------------------- Earnings (Loss) Per Common Share $ 1.38 $ (0.02) $ (0.44) $ 0.54 $ 1.42 $ (0.07) $ (0.22) $ 1.71 ====================================== ====================================== Average Shares Outstanding 10,760 10,762 10,763 10,767 10,724 10,728 10,732 10,745 (1) The sum of the quarters for 1997 does not equal the year's total due to rounding. NOTE: Because of the seasonal nature of the business, statements for the 3-month periods are not indicative of the results for a full year.
MARKET PRICE OF COMMON STOCK AND RELATED INFORMATION
Market Price Market Price Per Share Dividends Per Share Dividends Quarter Ended ---------------- Declared Quarter Ended ---------------- Declared 1997 High Low Per Share 1996 High Low Per Share - ------------- ------- ------- --------- ------------- ------- ------- --------- March 31 24 7/8 21 3/8 $0.36 March 31 23 1/2 20 7/8 $0.36 June 30 23 3/8 21 $0.36 June 30 23 3/4 21 1/4 $0.36 Sept. 30 25 3/16 22 3/8 $0.36 Sept. 30 24 20 1/8 $0.36 Dec. 31 30 1/2 24 5/16 $0.36 Dec. 31 24 5/8 23 $0.36 These quotations are based on the list of composite transactions of the New York Stock Exchange. The Company's stock is traded on the New York and Philadelphia stock exchanges and the ticker symbol is SJI. The Company has declared and expects to continue to declare regular quarterly cash dividends. As of December 10, 1997, the latest available date, the stock records indicate that there were 11,429 shareholders.
-24- SOUTH JERSEY GAS COMPANY COMPARATIVE OPERATING STATISTICS
1997 1996 1995 1994 1993 ------------------------------------------------ Operating Revenues (Thousands): (1) Firm Residential $176,717 $177,673 $151,720 $151,857 $142,409 Commercial 60,418 70,755 58,135 61,848 57,392 Industrial 5,535 7,540 6,014 8,349 13,609 Cogeneration & Electric Generation 5,249 16,173 15,725 19,301 23,726 Firm Transportation 15,966 10,473 13,930 18,092 13,746 ------------------------------------------------ Total Firm 263,885 282,614 245,524 259,447 250,882 Interruptible 6,085 7,256 6,786 6,610 11,299 Interruptible Transportation 3,507 2,630 2,778 2,985 2,412 Off-System 39,403 28,236 20,360 38,161 8,788 Capacity Release & Storage 8,533 4,349 3,374 2 - Other 6,135 5,249 3,897 4,254 4,200 ------------------------------------------------ Total Operating Revenues $327,548 $330,334 $ 282,719 $311,459 $277,581 ================================================ Throughput (MMcf): Firm Residential 19,955 21,699 19,573 19,543 19,368 Commercial 8,067 10,117 8,945 9,276 9,182 Industrial 733 1,238 1,016 1,364 2,599 Cogeneration & Electric Generation 1,230 5,180 4,860 5,384 6,741 Firm Transportation 20,196 12,969 14,417 14,401 10,194 ------------------------------------------------ Total Firm Throughput 50,181 51,203 48,811 49,968 48,084 Interruptible 1,345 1,618 1,843 1,810 3,105 Interruptible Transportation 7,586 5,422 5,888 5,424 4,328 Off-System 14,462 8,571 9,590 16,840 3,563 Capacity Release & Storage 36,382 25,460 25,915 46 - ------------------------------------------------ Total Throughput 109,956 92,274 92,047 74,088 59,080 ================================================ Number of Customers at Year End: (2) Residential 242,132 236,008 230,446 224,394 218,484 Commercial 18,037 17,469 17,179 16,615 16,206 Industrial 398 397 397 397 377 ------------------------------------------------ Total Customers 260,567 253,874 248,022 241,406 235,067 ================================================ Maximum Daily Sendout (MMcf) 355 325 335 370 318 ================================================ Annual Degree Days 4,829 5,175 4,865 4,820 4,953 ================================================ Normal Degree Days (3) 4,953 4,928 4,936 4,911 4,895 ================================================ (1) Before the elimination of intercompany sales. (2) 1996 has been restated. (3) Average degree days recorded in SJG service territory during 20-year period ended June 30 of prior year.
-25- South Jersey Industries, Inc. Board Of Directors Anthony G. Dickson Director since 1995, Age 49 3, 4, 6 President, New Jersey Manufacturers Insurance Company and New Jersey Re-Insurance Company, West Trenton, N.J. Richard L. Dunham Director since 1984, Age 68 3, 5* Chairman of the Board and Acting Chief Executive Officer of SJI; former Chairman of Zinder Companies, Inc., an economic and regulatory consulting firm, Washington, D.C.; former Chairman of the Federal Power Commission (now the Federal Energy Regulatory Commission), Washington, D.C. W. Cary Edwards Director from April 1990 to January 1993 and September 1993 to present, Age 53 2, 4 Partner, law firm of Edwards, Caldwell & Poff, Hawthorne, N.J. Thomas L. Glenn, Jr. Director since 1986, Age 63 3, 4*, 5, 6 Chairman, Glenn Insurance, Inc., Absecon, N.J. Herman D. James, Ph.D. Director since 1990, Age 54 1, 6 President, Rowan University, Glassboro, N.J. Clarence D. McCormick Director since 1979, Age 68 2*, 3*, 5 Chairman and CEO of The Farmers and Merchants National Bank of Bridgeton, N.J. and Chairman and President of Southern Jersey Bancorp of Delaware, Bridgeton, N.J. Peter M. Mitchell, Ph.D. Director since 1981, Age 63 1, 2, 5, 6* President, Massachusetts Maritime Academy, Buzzards Bay, Mass. Frederick R. Raring Director since 1995, Age 60 1, 4 President, Seashore Supply Company, Atlantic City, N. J. Shirli M. Vioni, Ph.D. Director since 1983, Age 57 1*, 2 President, Billings-Vioni Management Associates, Gahanna, Ohio 1 Audit Committee 2 Compensation/Pension Committee 3 Corporate Development Committee 4 Environmental Committee 5 Executive Committee 6 Nominating Committee * Committee Chair South Jersey Industries, Inc. Officers Richard L. Dunham Chairman of the Board and Acting Chief Executive Officer Charles Biscieglia Vice President David A. Kindlick Vice President Joseph E. McCullough Vice President George L. Baulig Secretary and Treasurer William J. Smethurst, Jr. Assistant Secretary and Assistant Treasurer -26- Back Cover - Inside SJI Corporate Headquarters 1 South Jersey Plaza Folsom, NJ 08037-9917 (609) 561-9000 TDD only 1-800-547-9085 www.sjindustries.com Transfer Agent and Registrar First Union National Bank of North Carolina Corporate Trust Client Services NC 1153 1525 West W. T. Harris Blvd. 3C3 Charlotte, NC 28288-1153 Dividend, Dividend Reinvestment and Other Shareholder Inquiries South Jersey Industries, Inc. Shareholder Records Department 609-561-9000 ext. 4238 or 4321 Investor Relations Stephen H. Clark, Manager 609-561-9000 ext. 4260 www.sjindustries.com Annual Meeting Information The Annual Meeting of Shareholders will be held Thursday, April 23, 1998, at 10 a.m. at the company's corporate headquarters. South Jersey Industries, Inc. stock is traded on the New York and Philadelphia stock exchanges under the trading symbol, SJI. The information contained herein is not given in connection with any sale or offer of, or solicitation of an offer to buy, any securities. Dividend Reinvestment and Stock Purchase Plan SJI's Dividend Reinvestment and Stock Purchase Plan provides record shareholders of the company's common stock with a way to increase their investment in the company without payment of any brokerage commission or service charge. Shareholders who participate in the Plan may purchase shares of common stock by the automatic reinvestment of dividends. Optional purchases are permitted each quarter up to a maximum of $100,000 in any calendar year as prescribed in the Plan. Shares of common stock offered through the Plan are currently purchased in the open market. The price of shares purchased under the Plan will be determined by dividing the total cost of all shares purchased during the investment period by the number of shares purchased. The offer and sale of shares under the Plan will be made only through a Prospectus, which may be obtained by contacting the Shareholder Records Department (address and phone listed above). Back cover - Outside South Jersey Industries, Inc. 1 South Jersey Plaza Folsom, New Jersey 08037-9917 EX-21 10 Exhibit 21 ---------- SOUTH JERSEY INDUSTRIES, INC. SUBSIDIARIES OF REGISTRANT AS OF DECEMBER 31, 1997
Percentage of Voting Securities State of Owned by Parent Relationship Incorporation -------------------------------------------------- South Jersey Industries, Inc. Registrant Parent New Jersey South Jersey Gas Company (3) 99.06 (1) New Jersey Energy & Minerals, Inc. (3) 100 (1) New Jersey South Jersey Energy Company (3) 100 (1) New Jersey SJ EnerTrade, Inc. (3) 100 (1) New Jersey R&T Group, Inc. (3) 100 (1) New Jersey South Jersey Fuel, Inc. (3) 100 (2) New Jersey (1) Subsidiary of South Jersey Industries, Inc. (2) Subsidiary of Energy & Minerals, Inc. (3) Subsidiary included in financial statements
EX-23 11 Exhibit 23 ---------- INDEPENDENT AUDITORS' CONSENT South Jersey Industries, Inc.: We consent to the incorporation by reference in Registration Statement Nos. 33-27132 and 33-58349 on Forms S-8 and Registration Statement No. 33-53127, as amended, on Form S-3 of our reports dated February 18, 1998 appearing in and incorporated by reference in the Annual Report on Form 10-K of South Jersey Industries, Inc. for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 27, 1998 EX-24 12 Exhibit 24 ---------- SOUTH JERSEY INDUSTRIES, INC. POWER OF ATTORNEY Each of the undersigned, in his capacity as an officer or director, or both, as the case may be, of South Jersey Industries, Inc., a New Jersey corporation, does hereby appoint Richard L. Dunham, Charles Biscieglia, David A. Kindlick and George L. Baulig, and each of them, severally, as his or her true and lawful attorneys or attorney to execute in his or her name, place and stead, in his or her capacity as a director or officer, or both, as the case may be, of said corporation, its Annual Report for the fiscal year ended December 31, 1997 on Form 10-K, pursuant to Section 13 of the Securities Exchange Act of 1934, and any and all amendments thereto and instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission; and does hereby provide that each of said attorneys shall have power to act hereunder with or without the other said attorneys, and shall have full power of substitution and resubstitution and that each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever required to be done in the premises, as fully and to all intents and purposes as he or she might or could do in person, hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned have executed this instrument, this 27th day of March 1998. /s/ Richard L. Dunham Richard L. Dunham, Chairman of the Board and Acting Chief Executive Officer /s/ Anthony G. Dickson Anthony G. Dickson, Director /s/ W. Cary Edwards W. Cary Edwards, Director /s/ Thomas L. Glenn Thomas L. Glenn, Jr., Director /s/ Herman D. James Herman D. James, Director Exhibit 24 Power of Attorney -- 10-K Page 2 of 2 /s/ Clarence D. McCormick Clarence D. McCormick, Director Peter M. Mitchell, Director /s/ Frederick R. Raring Frederick R. Raring, Director /s/ Shirli M. Vioni Shirli M. Vioni, Director /s/ Charles Biscieglia Charles Biscieglia, Vice President /s/ David A. Kindlick David A. Kindlick, Vice President /s/ George L. Baulig George L. Baulig, Secretary and Treasurer EX-27 13 SJI EXHIBIT 27
UT 1,000 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK 454,239 2,299 100,766 110,450 2,847 670,601 13,464 110,997 49,038 173,499 35,000 2,224 176,360 45,900 0 0 8,994 0 0 0 228,624 670,601 348,567 10,716 299,209 309,925 38,642 0 38,642 18,111 15,796 2,102 15,796 15,501 15,197 39,953 1.47 1.47
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