-----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, V9X1Q8aMfb6kHag85T9vaeW86v9QPCdg8kKTUUcUjGvFjRA8kJVcZfAdYdNBTF61 uHWH0aJ/7uhrenQ9QFntsg== 0000091928-03-000006.txt : 20030314 0000091928-03-000006.hdr.sgml : 20030314 20030314165917 ACCESSION NUMBER: 0000091928-03-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030314 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: 1934 Act SEC FILE NUMBER: 001-06364 FILM NUMBER: 03604571 BUSINESS ADDRESS: STREET 1: 1 SOUTH JERSEY PLAZA STREET 2: ROUTE 54 CITY: FOLSOM STATE: NJ ZIP: 08037 BUSINESS PHONE: 609-561-9000 MAIL ADDRESS: STREET 1: 1 SOUTH JERSEY PLAZA STREET 2: ROUTE 54 CITY: FOLSOM STATE: NJ ZIP: 08037 FORMER COMPANY: FORMER CONFORMED NAME: ATLANTIC CITY GAS CO DATE OF NAME CHANGE: 19680301 FORMER COMPANY: FORMER CONFORMED NAME: SOUTH JERSEY GAS CO DATE OF NAME CHANGE: 19700507 10-K 1 i10k02.txt SOUTH JERSEY INDUSTRIES FORM 10-K P/E 12/31/02 =============================================================================== 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, 2002 Commission File Number 1-6364 SOUTH JERSEY INDUSTRIES, INC. (Exact name of registrant as specified in its charter) New Jersey 22-1901645 (State of incorporation) (IRS employer identification no.) 1 South Jersey Plaza, Folsom, 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 ($1.25 par value per share) New York 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. [ ] The aggregate market value of approximately 10,847,600 shares of voting stock held by non-affiliates of the registrant as of February 27, 2003 was $347,448,628. As of February 27, 2003, there were 12,241,272 shares of the registrant's common stock outstanding. Documents Incorporated by Reference: In Part I of Form 10-K: Pages 15, 16, 22, and 25 through 29 of 2002 Annual Report to Shareholders In Part II of Form 10-K: Pages 1 and 12 through 30 of 2002 Annual Report to Shareholders In Part III of Form 10-K: Pages 1 through 6 and 10 through 13 of the Proxy Statement dated March 14, 2003 for the 2003 Annual Meeting of Shareholders ================================================================================ - Title Page - PART I Item 1. Business General The registrant, South Jersey Industries, Inc. (SJI), 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 (SJG), a public utility, and acquiring and developing non-utility lines of business. SJI currently provides a variety of energy related products and services through the following wholly owned subsidiaries: South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG distributes natural gas in the seven southernmost counties of New Jersey. SJG also: * sells natural gas and pipeline transportation capacity (off-system sales) on a wholesale basis to various customers on the interstate pipeline system; * transports natural gas purchased directly from producers or suppliers for its own sales and for some of its customers; and * services appliances via the sale of appliance warranty programs as well as on a time and materials basis. South Jersey Energy Company (SJE) acquires and markets natural gas and electricity to retail end users and provides total energy management services to commercial and industrial customers. SJE has one subsidiary, SJ EnerTrade (EnerTrade), that primarily provides services for the sale of natural gas to the casino industry in Atlantic City, N.J. SJE also markets an air quality monitoring system through AirLogics, LLC. SJE and GZA GeoEnvironmental, Inc., an environmental consulting firm, each have a 50% equity interest in AirLogics. South Jersey Resources Group, LLC (SJRG) markets wholesale natural gas storage, commodity and transportation in the mid-Atlantic and southern states. SJRG also conducts price-risk management activities. SJRG became a wholly owned subsidiary on January 1, 2001 when SJI acquired the 50% ownership interest in SJRG formerly owned by UPR Energy Marketing. Prior to then, SJI held a 50% ownership interest in the company. Marina Energy LLC (Marina) develops and operates energy-related projects in southern New Jersey. Marina's largest project, the development of a facility to provide cooling, heating and hot water to The Borgata Resort in Atlantic City, is scheduled to be fully operational by summer 2003. SJI also has a joint venture investment with Conectiv Solutions, LLC in Millennium Account Services, LLC (Millennium). Millennium provides meter reading services to SJG and Conectiv Power Delivery in southern New Jersey. Energy & Minerals, Inc. (EMI) principally manages liabilities associated with discontinued operations of non-utility subsidiaries. Forward Looking Statements This report contains certain forward-looking statements concerning projected financial and operating performance, future plans and courses of action, and future economic conditions. All statements in this report other than statements of historical fact are forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and actual results could differ materially from those expressed or implied in the forward-looking statements. Also, in making forward-looking statements, we assume no duty to update these statements should expectations change or actual results and events differ from current expectations. SJI-2 A number of factors could cause our actual results to differ materially from those anticipated, including, but not limited to, the following: general economic conditions on an international, national, state and local level; weather conditions in our marketing areas; changes in commodity costs; regulatory and court decisions; competition in our utility and non-utility activities; the availability and cost of capital; our ability to maintain existing joint ventures to take advantage of marketing opportunities; costs and effects of legal proceedings and environmental liabilities; the failure of customers or suppliers to fulfill their contractual obligations; and changes in business strategies. Financial Information About Industry Segments Information regarding Industry Segments is incorporated by reference to Note 7 on page 26 of SJI's Annual Report to Shareholders for the year ended December 31, 2002 which is attached to this report. See Item 15(c)(13). Description of Business SJI is engaged in the business of operating, through subsidiaries, various business enterprises. SJI's most significant subsidiary is SJG. South Jersey Gas Company Background SJG, 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 sells natural gas and pipeline transportation capacity (off-system sales) 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 1.2 million. SJG serves 296,374 residential, commercial and industrial customers (at December 31, 2002) in southern New Jersey. Gas sales, transportation and capacity release for 2002 amounted to approximately 120,865 MMcf (million cubic feet), of which approximately 49,450 MMcf was firm sales and transportation, 3,387 MMcf was interruptible sales and transportation and 68,028 MMcf was off-system sales and capacity release. The breakdown of firm sales includes 31.4% residential, 10.7% commercial, 4.0% cogeneration and electric generation, ..4% industrial and 53.5% transportation. At year-end 2002, SJG served 275,979 residential customers, 19,966 commercial customers and 429 industrial customers. This includes 2002 net additions of 7,933 residential customers, 424 commercial customers and 9 industrial customers. Under an agreement with Conectiv Inc., 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 2002, 2.1 Bcf (billion cubic feet) was delivered under this agreement. SJG serviced 5 cogeneration facilities in 2002. Combined sales and transportation of natural gas to such customers amounted to approximately 4.1 Bcf in 2002. 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 of the Federal Energy Regulatory Commission (FERC) Orders No. 547 and 636. Order No. 547 issued a blanket certificate of public convenience and SJI-3 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 2002, off-system sales amounted to 30.0 Bcf. Also in 2002, capacity release and storage throughput amounted to 38.0 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 2002 amounted to approximately 3.4 Bcf, approximately 2.8% 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 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. Construction is nearing completion on the first new casino/hotel in 13 years, marking the beginning of another round of development in the city. 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 New Jersey Board of Public Utilities (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, SJG's major supplier, Columbia Gas Transmission Corporation and Dominion Transmission, Inc., since such services are provided under rates and terms established under the jurisdiction of the FERC. 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 the recovery of environmental remediation costs associated with former manufactured gas plant sites, energy efficiency and renewable energy program costs, consumer education program costs and low income program costs. These costs are recovered through SJG's Societal Benefits Clause. The tariff also allows for the adjustment of revenues due to the impact of "temperature" fluctuations. In addition, the tariff contains provisions permitting SJG to pass on to customers increases and decreases in the cost of purchased gas supplies. The cost of gas purchased from the utility by consumers has historically been set annually by the BPU under a Levelized Gas Adjustment Clause (LGAC) within SJG's tariff. As recently approved by the BPU, in the SJI-4 future gas costs will be recovered through Basic Gas Supply Service ("BGSS"). When actual gas costs experienced by SJG are less than those charged to customers under the LGAC, customer bills in the subsequent LGAC period(s) are adjusted to provide credits for the overrecovery with interest. When actual gas costs are more than is recovered through rates, SJG is permitted to charge customers more for gas in future periods for the underrecovery. In February, 1999, the Electric Discount and Energy Competition Act (the Act) was signed into law in New Jersey. This bill created the framework and necessary time schedules for the restructuring of the state's electric and natural gas utilities. The Act established unbundling, where redesigned utility rate structures allow natural gas and electric consumers to choose their energy supplier. It also established time frames for instituting competitive services for customer account functions and for determining whether basic gas supply services should become competitive. In January 2000, the BPU approved full unbundling of SJG's system. This allows all natural gas consumers to select their natural gas supplier. Customers choosing to purchase natural gas from providers other than the utility are charged for the cost of gas by the marketer, not the utility. The resulting decrease in SJG's revenues is offset by a corresponding decrease in gas costs. While customer choice can reduce utility revenues, it does not negatively affect SJG's net income or financial condition. The BPU continues to allow for full recovery of natural gas costs. In December 2002, the BPU approved the Basic Gas Supply Service price structure. BGSS is the gas supply service being provided by the natural gas utility. Upon implementation of BGSS in 2003, customers should have the ability to make more informed decisions regarding their choices of an alternate supplier by having a utility price structure that is more consistent with market conditions. Further, BGSS will provide SJG with more pricing flexibility, through automatic rate changes, resulting in the reduction or elimination of over/under-recoveries. Although the BGSS approved price structure will replace the current pricing structure in the LGAC, all other LGAC mechanisms, such as, but not limited to, deferred accounting treatment and the allowance for full recovery of natural gas costs, will remain in place under BGSS. The Act also contains numerous provisions requiring the BPU to promulgate and adopt a variety of standards related to implementing the Act. These required standards address fair competition, affiliate relations, accounting, competitive services, supplier licensing, consumer protection and aggregation. In March 2000, the BPU issued Interim Standards in response to the Act. The BPU has undertaken an extensive comment, meeting and audit process to address the concerns of all impacted parties. SJG actively participated in the process, and as such we believe that to date the final standards have not had, nor will they have in the future, a material adverse affect on the company. In August 2002, SJG filed a petition with the BPU seeking to transfer its appliance service business from the regulated utility into a newly created unregulated, limited liability company. If approved, the newly created company would have the flexibility to be more responsive to competition and its customers and further its service offerings in an unregulated environment. Additional information on regulatory affairs is incorporated by reference to Notes 1, 5, 9, 11 and 14 of SJI's Annual Report to Shareholders for the year ended December 31, 2002 which is attached to this report. See Item 15(c)(13). South Jersey Energy Company SJE, a New Jersey corporation established by SJI in 1973, is a wholly owned non-utility subsidiary of SJI and provides services for the acquisition and transportation of natural gas for retail and end users, markets total energy management services, and markets an air quality monitoring system. As of December 31, 2002, SJE marketed natural gas to 76,219 customers, of which 72,902 were residential customers. All of SJE's residential gas customers and most of its commercial and industrial customers are located within southern New Jersey. SJI-5 In 2002, SJE was profitable and contributed approximately 8.7% on a consolidated basis to SJI's net income. The majority of this contribution was derived from retail gas marketing. South Jersey Resources Group SJRG is a wholly owned non-utility subsidiary of SJI, formed in 1996. SJRG markets natural gas storage, commodity and transportation assets on a wholesale basis. Customers include energy marketers, electric and gas utilities and natural gas producers. SJRG's marketing activities occur mainly in the mid-Atlantic and southern regions of the country. SJRG also provides commodity risk management services to other SJI subsidiaries. In 2002, SJRG transacted 49.5 Bcf of natural gas. SJRG contributed approximately 8.7% on a consolidated basis to SJI's net income. Marina Energy Marina's largest project is an energy plant that will provide for the thermal needs of The Borgata Resort in Atlantic City. The facility consists of a production facility and a distribution and interconnection system to be located in the area of Atlantic City referred to as Renaissance Point. The Marina Thermal Facility is located on an approximate 3/4-acre site off of Route 30 (Absecon Blvd.) and between Tennessee and New York Avenues in Atlantic City. The production facility will consist of hot and chilled water production equipment, emergency electric generating equipment and related equipment. The facility is located adjacent to the Borgata site and in close proximity to other potential customer sites. The distribution system will consist of both hot and chilled water piping, manholes, valves, heat exchangers, controls and electrical devices. The system will commence within the Marina Thermal Facility and will run throughout the Renaissance Point area and terminate at various customer facilities. With construction of the thermal facility expected to be completed on budget and ahead of schedule, Marina is already providing heat for the remainder of the Borgata's construction work. The plant is scheduled to be fully operational for the Borgata's summer of 2003 opening. The Marina Thermal Facility will have the capacity to produce and distribute 20,000 tons of chilled water and 300 million British Thermal Units per hour of hot water to customers in the Renaissance Point area of the City. The Marina Thermal Facility is capable of serving multiple customers within the Renaissance Point area. Raw Materials South Jersey Gas Company Transportation and Storage Agreements SJG has direct connections to two interstate pipeline companies, Transcontinental Gas Pipeline Corporation (Transco) and Columbia Gas Transmission Corporation (Columbia). During 2002, SJG purchased and had delivered approximately 54.9 Bcf of natural gas for distribution to both on-system and off-system customers. Of this total, 42.0 Bcf was transported on the Transco pipeline system and 12.9 Bcf was transported on the Columbia pipeline system. SJG 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), Sempra Energy Trading Corp. (Sempra), Texas Gas Transmission Corporation (Texas Gas) and Dominion Transmission Inc. 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 four year-round and one seasonal firm transportation (FT) service arrangements. When combined, these services enable SJG to purchase from third parties and have delivered to its city gate stations by Transco a total of SJI-6 164,089 Thousand Cubic Feet of gas per day ("Mcf/d"). The terms of the year-round agreements extend for various periods from 2003 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 market area storage during periods of low demand and withdraw gas at a rate of up to 86,973 Mcf per day during periods of high demand. The terms of the storage service agreements extend for various periods from 2003 to 2008. Sempra: SJG has separate gas sales and capacity management agreements with Sempra, which provide SJG with up to 9,662 Mcf per day of gas during the period November 16 through March 31 of each year. This contract provides management services for storage and pipeline capacity held by SJG on the Dominion Transmission System. Effective April 1, 2003, this service agreement terminates and the storage and transportation assets revert back to SJG. Columbia: SJG has two firm transportation agreements with Columbia which, when combined, provide for 43,500 Mcf/d of firm deliverability. SJG also subscribes to a firm storage service from Columbia, to March 31, 2009, which provides a maximum withdrawal quantity of 51,102 Mcf/d during the winter season with an associated 3,355,557 Mcf of storage capacity. South Jersey Resources Group: SJG has a one year storage capacity contract with South Jersey Resources Group which expires March 31, 2003. There is a maximum withdrawal capacity of 4,831 Mcf per day and total storage capacity of 504,831 Mcf. Gas is delivered through the Transco pipeline system. Gas Supplies SJG has several long-term gas supply agreements with various producers and marketers that expire between 2003 and 2006. Under these agreements, SJG can purchase up to 17,350,098 Mcf of natural gas per year. When advantageous, SJG can purchase spot supplies of natural gas in place of or in addition to those volumes reserved under long-term agreements. In recent years, SJG has replaced long-term gas supply contracts with short-term agreements. The short-term agreements are typically for several months in duration. Supplemental Gas Supplies SJG entered into a Liquified Natural Gas (LNG) purchase agreement with a third party provider which extends through October 31, 2003. For the 2002-2003 contract year, SJG's annual contract quantity under the agreement is 186,047 Mcf. LNG purchases are transported to SJG's McKee City, New Jersey LNG storage facility by truck. SJG operates peaking facilities which can store and vaporize LNG 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 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/d of gas per day into SJG's distribution system. SJI-7 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 2002-2003 winter season to be 485,476 Mcf. SJG projects that it has adequate supplies and interstate pipeline entitlements to meet its design requirements. On December 3, 2002, SJG experienced its highest peak-day demand for the year of 343,572 Mcf with an average temperature of 22.45 degrees F. Commodity Prices SJG's average commodity cost of gas purchased in 2002, 2001 and 2000 was $4.46 per Mcf, $6.80 per Mcf and $5.68 per Mcf, respectively. South Jersey Energy Company Transportation and Storage Agreements Access to gas suppliers and cost of gas are significant to the operations of SJE and its subsidiary, EnerTrade. No material part of the business of SJE is dependent upon a single customer or a few customers. SJE purchases delivered gas only, primarily from SJRG. Consequently, SJE maintains no transportation or storage agreements. South Jersey Resources Group Transportation and Storage Agreements National Fuel Gas Supply Corporation: SJRG has a long-term storage service agreement with National Fuel Gas Supply Corporation (National Fuel) with a primary term which extends through March 31, 2005, under which up to 1,207,729 Mcf of gas may be stored during the summer season and up to 9,684 Mcf/d may be withdrawn during the winter season. SJRG also has a long-term firm transportation agreement with National Fuel associated with the above mentioned storage service, with a primary term which extends through March 31, 2005. Under this agreement, National Fuel will provide SJRG with a maximum daily injection transportation quantity of 7,344 Mcf with primary receipt points on Tennessee Gas Pipeline and National Fuel's system storage. The agreement also provides for a maximum daily withdrawal transportation quantity of 9,684 Mcf with primary delivery points on Transcontinental Gas Pipe Line and National Fuel's system storage. SJRG also has a long-term capacity assignment of firm pipeline capacity on the Columbia Gulf System. This agreement expires in October 2004. Patents and Franchises South Jersey Gas Company 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 SJG. South Jersey Energy Company AirLogics, LLC received a patent from the United States Patent Office on its perimeter air monitoring system in September of 2000. SJI-8 Seasonal Aspects South Jersey Gas Company 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's revenues and net income are significantly higher during the first and fourth quarters than during the second and third quarters of the year. Non-Utility Companies Among SJI's non-utility activities, retail gas marketing has a seasonal pattern similar to SJG's. Other activities, such as wholesale gas marketing, air monitoring and energy services, do not follow seasonal patterns. However, these activities are not yet significant enough to materially alter SJI's historical earnings pattern. Working Capital Practices Reference is made to "Liquidity and Capital Resources" on pages 15 and 16 of the SJI's Annual Report to Shareholders for the year ended December 31, 2002 which is attached to this report. 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. Backlog Backlog is not material to an understanding of SJI's business or that of any of its subsidiaries. Government Contracts No material portion of the business of SJI or any of its subsidiaries is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any government. Competition South Jersey Gas Company 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 commodity 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 has maintained its focus on being a low-cost provider of natural gas and energy services. SJG also competes with other marketers/brokers in the selling of wholesale natural gas services. Non-Utility Companies SJE competes with a number of other marketers/brokers in selling retail natural gas. SJE competes successfully based upon a combination of effective customer acquisition efforts and pricing. Competition includes SJG, other utilities, and alliances which include other utility companies. SJRG competes SJI-9 with other wholesale gas marketers based upon a combination of familiarity with the markets we serve and price. Research During the last three fiscal years, neither SJI 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 14 on pages 28 and 29 of the SJI Annual Report to Shareholders for the year ended December 31, 2002 which is attached to this report. Employees SJI and its subsidiaries had a total of 638 employees as of December 31, 2002. Of that total, 387 employees are unionized and are covered under collective bargaining agreements that expire in January 2005. Financial Information About Foreign and Domestic Operations and Export Sales SJI has no foreign operations and export sales have not been a significant part of SJI's business. Item 2. Properties The principal property of SJI consists of SJG's 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, 2002, there were approximately 92 miles of mains in the transmission systems and 5,279 miles of mains in the distribution systems. SJG owns office and service buildings, including its corporate headquarters, at seven locations in the territory. There is also a liquefied natural gas storage and vaporization facility at one of these locations. As of December 31, 2002, SJG's utility plant had a gross book value of $846.9 million and a net book value, after accumulated depreciation, of $610.1 million. In 2002, $49.6 million was spent on additions to utility plant and there were retirements of property having an aggregate gross book cost of $6.9 million. SJG's construction and remediation expenditures for 2003 are currently expected to approximate $55.2 million. SJI's total construction and remediation expenditures for 2003 are expected to total $57.8 million. Virtually all of SJG's transmission pipeline, distribution mains and service connections are in streets or highways or on the property of others. The transmission and distribution systems are maintained under franchises or permits or rights-of-way, many of which are perpetual. SJG's properties (other than property specifically excluded) are subject to a lien of mortgage under which its first mortgage bonds are outstanding. We believe these properties are well maintained and in good operating condition. Non-utility property and equipment totaling $56.5 million consists primarily of Marina's thermal energy plant in Atlantic City, N.J. EMI owns 235 acres of land in Vineland, New Jersey. SJI-10 South Jersey Fuel, Inc., an inactive subsidiary, owns real estate in Deptford Township and Upper Township, New Jersey. R&T Castellini, Inc., an inactive subsidiary, owns land and buildings in Vineland, New Jersey. SJI 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 SJI is subject to claims arising in the ordinary course of its business and other legal proceedings. We accrue liabilities related to these claims when we can determine the amount or range of amounts of likely settlement costs for these claims. Among other actions, SJI was named in certain product liability claims related to our former sand mining subsidiary. Management does not currently anticipate the disposition of any known claims to have a material adverse effect on SJI's financial position, results of operations or liquidity. 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 2002 fiscal year. Item 4-A. Executive Officers of the Registrant Name Age Positions with SJI Charles Biscieglia 58 Chairman of the Board, President and Chief Executive Officer Edward J. Graham 45 Executive Vice President & Chief Operating Officer David A. Kindlick 48 Vice President, Treasurer & Chief Financial Officer Albert V. Ruggiero 54 Vice President Richard H. Walker, Jr. 52 Corporate Secretary & Corporate Counsel Charles Biscieglia was elected Assistant Vice President, Commercial Operations of SJG in May 1981, Vice President, Commercial Operations in November 1983, Senior Vice President, Operations in April 1987, Executive Vice President and Chief Operating Officer in April 1991 and President and Chief Executive Officer in March 1998. Mr. Biscieglia was elected Vice President of SJI in April 1997, President and Chief Executive Officer in October 1998 and Chairman, President and Chief Executive Officer in January 2000. Mr. Biscieglia relinquished the role of President in January 2003. Edward J. Graham was elected Vice President & Controller of SJG in June 1994, Vice President, Gas Management in April 1995, and Senior Vice President, Energy Management in April 1998. Mr. Graham was elected President of SJ EnerTrade in October 1997 and President of SJE in October 1998. Mr. Graham was elected Vice President of SJI in June 1998, and Executive Vice President and Chief Operating Officer in January 2002. Mr. Graham was elected President & Chief Operating Officer in January 2003. David A. Kindlick was elected Assistant Vice President, Revenue Requirements of SJG in October 1989, Vice President, Revenue Requirements in April 1992, Vice President, Rates and Budgeting in April 1995, Senior Vice President, Finance and Rates in April 1998, and Executive Vice President and Chief Financial Officer in January 2002. Mr. Kindlick was elected Vice President SJI-11 of SJI in June 1997, Vice President and Treasurer in April 2001, and Vice President, Treasurer and Chief Financial Officer in January 2002. Albert V. Ruggiero was elected Vice President, Human Resources of SJG in April 1990, Vice President, Human Resources & External Affairs in April 1995, Senior Vice President, Corporate Development in April 1998, and Executive Vice President and Chief Administrative Officer in January 2002. Mr. Ruggiero was elected Vice President of SJI in October 1998. Richard H. Walker, Jr. was elected Assistant Secretary of SJI and SJG in April 1998, and Corporate Secretary & Corporate Counsel in April 2002. Executive officers of SJI are elected annually and serve at the pleasure of the Board of Directors. SJI-12 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 25 of SJI's Annual Report to Shareholders for the year ended December 31, 2002 which is attached to this report. Item 6. Selected Financial Data Information required by this item is incorporated by reference to page 1 of SJI's Annual Report to Shareholders for the year ended December 31, 2002 which is attached to this report. 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 12 through 17 of SJI's Annual Report to Shareholders for the year ended December 31, 2002 which is attached to this report. Item 7A. Quantitative and Qualitative Disclosures about Market Risks Information required by this item is incorporated by reference to the section entitled "Market Risks" on pages 16 and 17 of SJI's Annual Report to Shareholders for the year ended December 31, 2002, which is attached to this report. Item 8. Financial Statements and Supplementary Data Information required by this item is incorporated by reference to pages 18 through 29 and the top of page 30 of SJI's Annual Report to Shareholders for the year ended December 31, 2002 which is attached to this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None SJI-13 PART III Item 10. Directors and Executive Officers of the Registrant Information required by this item relating to the directors of SJI is incorporated by reference to pages 1 through 4 of SJI's definitive Proxy Statement, dated March 14, 2003, filed in connection with SJI's 2003 Annual Meeting of Shareholders. Information required by this item relating to the executive officers of SJI 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 10 through 13 of SJI's definitive Proxy Statement, dated March 14, 2003, filed in connection with SJI's 2003 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 5 and 6 of SJI's definitive Proxy Statement, dated March 14, 2003, filed in connection with SJI's 2003 Annual Meeting of Shareholders. Item 13. Certain Relationships and Related Transactions None Item 14. Controls and Procedures SJI management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. SJI-14 PART IV Item 15. 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 19, 2003, are incorporated herein by reference to pages 17 through 29 of SJI's Annual Report to Shareholders for the year ended December 31, 2002 which is attached to this report. 2 - Supplementary Financial Information Information regarding selected quarterly financial data is incorporated herein by reference to page 30 of SJI's Annual Report to Shareholders for the year ended December 31, 2002 which is attached to this report. Supplemental Schedules as of December 31, 2002, 2001 and 2000 and for the three years ended December 31, 2002, 2001, and 2000: The Independent Auditors' Report of Deloitte & Touche LLP, Auditors of SJI (page 25). Schedule I - Statement of Income, Statement of Comprehensive Income, Statement of Retained Earnings, Statement of Cash Flows and Balance Sheet of SJI (pages 26, 27 and 28). Schedule II - Valuation and Qualifying Accounts (page 29). 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. 3 - See Item 15(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 Description Reference Number (3)(a)(i) Certificate of Incorporation of Incorporated by reference from South Jersey Industries, Inc., as Exhibit (4)(a) of Form S-2 amended through April 19, 1984. (2-91515). (3)(a)(ii) Amendment to Certificate of Incorporated by reference from Incorporation relating to Exhibit (4)(e)(1) of Form S-3 two-for-one stock split effective (33-1320). as of April 28, 1987. (3)(a)(iii) Amendment to Certificate of Incorporated by reference from Incorporation relating to director Exhibit (4)(e)(2) of Form S-3 and officer liability. (33-1320). (3)(ii) Bylaws of South Jersey Industries, Incorporated by reference from Inc. as amended and restated Exhibit (3)(ii) of Form 10-K for through November 17, 2000. 2000 (1-6364).
SJI-15
Exhibit Number Description Reference (4)(a) Form of Stock Certificate for Incorporated by reference from common stock. Exhibit (4)(a) of Form 10-K for 1985 (1-6364). (4)(a)(i) Rights Agreement dated as of Incorporated by reference from September 20, 1996 between South Exhibit 99.1 of Form 8-A filed Jersey Industries, Inc. and The April 9, 1996 (1-6364). Farmers & Merchants National Bank of Bridgeton. (4)(b)(i) First Mortgage Indenture dated Incorporated by reference from October 1, 1947. Exhibit (4)(b)(i) of Form 10-K for 1987 (1-6364). (4)(b)(x) Twelfth Supplemental Indenture Incorporated by reference from dated as of June 1, 1980. Exhibit 5(b) of Form S-7 (2-68038). (4)(b)(xiv) Sixteenth Supplemental Indenture Incorporated by reference from dated as of April 1, 1988, 10 1/4% Exhibit (4)(b)(xv) of Form 10-Q Series due 2008. for the quarter ended March 31, 1988 (1-6364). (4)(b)(xv) Seventeenth Supplemental Indenture Incorporated by reference from dated as of May 1, 1989. Exhibit (4)(b)(xv) of Form 10-K for 1989 (1-6364). (4)(b)(xvi) Eighteenth Supplemental Indenture Incorporated by reference from dated as of March 1, 1990. Exhibit (4)(e) of Form S-3 (33-36581). (4)(b)(xvii) Nineteenth Supplemental Indenture Incorporated by reference from dated as of April 1, 1992. Exhibit (4)(b)(xvii) of Form 10-K for 1992 (1-6364). (4)(b)(xviii) Twentieth Supplemental Indenture Incorporated by reference from dated as of June 1, 1993. Exhibit (4)(b)(xviii) of Form 10-K for 1993(1-6364). (4)(b)(xix) Twenty-First Supplemental Incorporated by reference from Indenture dated as of March 1, Exhibit (4)(b)(xviv) of Form 10-K 1997. for 1997(1-6364). (4)(b)(xx) Twenty-Second Supplemental Incorporated by reference from Indenture dated as of October 1, Exhibit (4)(b)(ix) of Form S-3 1998. (333-62019). (4)(b)(xxi) Twenty-Third Supplemental Incorporated by reference from Indenture dated as of September Exhibit (4)(b)(x) of Form S-3 1, 2002. (333-98411). (4)(c) Indenture dated as of January 31, Incorporated by reference from 1995; 8.60% Debenture Notes due Exhibit (4)(c) of Form 10-K for February 1, 2010. 1994 (1-6364). (4)(d) Certificate of Trust for SJG Incorporated by reference from Capital Trust. 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 Incorporated by reference from Trust. 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).
SJI-16
Exhibit Number Description Reference (4)(d)(ii) Form of Amended and Restated Trust Incorporated by reference from Agreement for SJG Capital Trust. 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 Incorporated by reference from Capital Trust. 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 Incorporated by reference from Subordinated Debenture. 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 Incorporated by reference from Subordinated Debenture. 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 Incorporated by reference from South Jersey Gas Company and SJG Exhibit 4(d) of Form S-3 - SJG Capital Trust. Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(e) Medium Term Note Indenture of Incorporated by reference from Trust dated October 1, 1998. Exhibit 4(e) of Form S-3 (333-62019). (9) None (10)(d) Gas storage agreement (GSS) Incorporated by reference from between South Jersey Gas Company Exhibit (10)(d) of Form 10-K for and Transco dated October 1, 1993. 1993 (1-6364). (10)(e) Gas storage agreement (S-2) Incorporated by reference from between South Jersey Gas Company Exhibit (5)(h) of Form S-7 and Transco dated December 16, (2-56223). 1953. (10)(f) Gas storage agreement (LG-A) Incorporated by reference from between South Jersey Gas Company Exhibit (5)(f) of Form S-7 and Transco dated June 3, 1974. (2-56223). (10)(h) Gas storage agreement (WSS) Incorporated by reference from between South Jersey Gas Company Exhibit (10)(h) of Form 10-K for and Transco dated August 1, 1991. 1991 (1-6364). (10)(i) Gas storage agreement (LSS) between Incorporated by reference from South Jersey Gas Company and Transco Exhibit (10)(i) of Form 10-K dated October 1, 1993. for 1993 (1-6364).
SJI-17
Exhibit Number Description Reference (10)(i)(a) Gas storage agreement (SS-1) Incorporated by reference from between South Jersey Gas Company Exhibit (10)(i)(a) of Form 10-K and Transco dated May 10, 1987 for 1988 (1-6364). (effective April 1, 1988). (10)(i)(b) Gas storage agreement (ESS) Incorporated by reference from between South Jersey Gas Company Exhibit (10)(i)(b) of Form 10-K and Transco dated November 1, 1993. for 1993 (1-6364). (10)(i)(c) Gas transportation service Incorporated by reference from agreement between South Jersey Gas Exhibit (10)(i)(c) of Form 10-K Company and Transco dated April 1, for 1989 (1-6364). 1986. (10)(i)(e) Service agreement (FS) between Incorporated by reference from South Jersey Gas Company and Exhibit (10)(i)(e) of Form 10-K Transco dated August 1, 1991. for 1991 (1-6364). (10)(i)(f) Service agreement (FT) between Incorporated by reference from South Jersey Gas Company and Exhibit (10)(i)(f) of Form 10-K Transco dated February 1, 1992. for 1991 (1-6364). (10)(i)(g) Service agreement (Incremental FT) Incorporated by reference from between South Jersey Gas Company Exhibit (10)(i)(g) of Form 10-K and Transco dated August 1, 1991. for 1991 (1-6364). (10)(i)(i) Gas storage agreement (SS-2) Incorporated by reference from between South Jersey Gas Company Exhibit (10)(i)(i) of Form 10-K and Transco dated July 25, 1990. for 1991 (1-6364). (10)(i)(j) Gas transportation service Incorporated by reference from agreement between South Jersey Gas Exhibit (10)(i)(j) of Form 10-K Company and Transco dated December for 1993 (1-6364). 20, 1991. (10)(i)(k) Amendment to gas transportation Incorporated by reference from agreement dated December 20, 1991 Exhibit (10)(i)(k) of Form 10-K between South Jersey Gas Company for 1993 (1-6364). and Transco dated October 5, 1993. (10)(j)(a) Gas transportation service Incorporated by reference from agreement (FTS) between South Exhibit (10)(j)(a) of Form 10-K Jersey Gas Company and Equitable for 1989 (1-6364). Gas Company dated November 1, 1986. (10)(k)(h) Gas transportation service Incorporated by reference from agreement (TF) between South Exhibit (10)(k)(h) of Form 10-K Jersey Gas Company and CNG for 1993 (1-6364). Transmission Corporation dated October 1, 1993. (10)(k)(i) Gas purchase agreement between Incorporated by reference from South Jersey Gas Company and ARCO Exhibit (10)(k)(i) of Form 10-K Gas Marketing, Inc. dated March 5, for 1989 (1-6364). 1990.
SJI-18
Exhibit Number Description Reference (10)(k)(k) Gas transportation service Incorporated by reference from agreement (FTS-1) between South Exhibit (10)(k)(k) of Form 10-K Jersey Gas Company and Columbia for 1993 (1-6364). Gulf Transmission Company dated November 1, 1993. (10)(k)(l) Assignment agreement capacity and Incorporated by reference from service rights (FTS-2) between Exhibit (10)(k)(i) of Form 10-K South Jersey Gas Company and for 1993 (1-6364). Columbia Gulf Transmission Company dated November 1, 1993. (10)(k)(m) FTS Service Agreement No. 39556 Incorporated by reference from between South Jersey Gas Company Exhibit (10)(k)(m) of Form 10-K and Columbia Gas Transmission for 1993 (1-6364). Corporation dated November 1, 1993. (10)(k)(n) FTS Service Agreement No. 38099 Incorporated by reference from between South Jersey Gas Company Exhibit (10)(k)(n) of Form 10-K and Columbia Gas Transmission for 1993 (1-6364). Corporation dated November 1, 1993. (10)(k)(o) NTS Service Agreement No. 39305 Incorporated by reference from between South Jersey Gas Company Exhibit (10)(k)(o) of Form 10-K and Columbia Gas Transmission for 1993 (1-6364). Corporation dated November 1, 1993. (10)(k)(p) FSS Service Agreement No. 38130 Incorporated by reference from between South Jersey Gas Company Exhibit (10)(k)(p) of Form 10-K and Columbia Gas Transmission for 1993 (1-6364). Corporation dated November 1, 1993. (10)(k)(q) SST Service Agreement No. 38086 Incorporated by reference from between South Jersey Gas Company Exhibit (10)(k)(q) of Form 10-K and Columbia Gas Transmission for 1993 (1-6364). Corporation dated November 1, 1993. (10)(k)(r) NS (Negotiated Sales) Service Incorporated by reference from Agreement dated December 1, 1994 Exhibit (10)(k)(r) of Form 10-K between South Jersey Gas Company for 1994 (1-6364). and Transco Gas Marketing Company as agent for Transcontinental Gas Pipeline. (10)(l)* Deferred Payment Plan for Incorporated by reference from Directors of South Jersey Exhibit (10)(l) of Form 10-K for Industries, Inc., South Jersey Gas 1994 (1-6364). Company, Energy & Minerals, Inc., R&T Group, Inc. and South Jersey Energy Company as amended and restated October 21, 1994. (10)(l)(a)* Form of Deferred Compensation Incorporated by reference from Agreement between South Jersey Exhibit (10)(j)(a) of Form 10-K Industries, Inc. and/or a for 1980 (1-6364). subsidiary and seven of its officers. (10)(l)(b)* Schedule of Deferred Compensation Incorporated by reference from Agreements. Exhibit (10)(l)(b) of Form 10-K for 1997 (1-6364).
SJI-19
Exhibit Number Description Reference (10)(l)(d)* Form of Officer Employment Incorporated by reference from Agreement between certain officers Exhibit (10)(l)(d) of Form 10-K and either South Jersey for 1999 (1-6364). Industries, Inc. or its subsidiaries. (10)(l)(e)* Schedule of Officer Employment Incorporated by reference from Agreements. Exhibit (10)(l)(e) of Form 10-K for 1999 (1-6364). (10)(l)(f)* Officer Severance Benefit Program Incorporated by reference from for all officers. Exhibit (10)(l)(g) of Form 10-K for 1985 (1-6364). (10)(l)(g)* Discretionary Incentive Bonus Incorporated by reference from Program for all officers and Exhibit (10)(l)(h) of Form 10-K management employees. for 1985 (1-6364). (10)(l)(h)* The 1987 Stock Option and Stock Incorporated by reference from Appreciation Rights Plan including Exhibit (10)(l)(i) of Form 10-K Form of Agreement. for 1987 (1-6364). (10)(l)(i)* Supplemental Executive Retirement Incorporated by reference from Program, as amended and restated Exhibit (10)(l)(i) of Form 10-K effective July 1, 1997, and Form for 1997 (1-6364). of Agreement between certain SJI or subsidiary officers. (10)(l)(j)* 1997 Stock Option and Stock Incorporated by reference from Appreciation Rights Plan. Exhibit (10)(l)(j) of Form 10-K for 1999 (1-6364). (12) Calculation of Ratio of Earnings to Fixed Charges (Before Federal Income Taxes) (filed herewith). (13) The Annual Report to Shareholders of SJI for the year ended December 31, 2002 is filed as an exhibit hereto solely to the extent portions are specifically incorporated by reference herein (filed herewith). (18) Preferability Letter from Independent Auditors' Re: Pension Measurement Date (filed herewith). (21) Subsidiaries of the Registrant (filed herewith). (23) Independent Auditors' Consent (filed herewith). (24) Power of Attorney (filed herewith). (99.1) Chief Executive Officer Certification Pursuant to the Sarbanes-Oxley Act of 2002 (filed herewith). (99.2) Chief Financial Officer Certification Pursuant to the Sarbanes-Oxley Act of 2002 (filed herewith). * Constitutes a management contract or a compensatory plan or arrangement.
SJI-20 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, Treasurer & Chief Financial Officer Date: March 13, 2003 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/ Charles Biscieglia Chairman of the Board & Chief March 13, 2003 - ----------------------------- Executive Officer (Charles Biscieglia) /s/ David A. Kindlick Vice President, Treasurer & March 13, 2003 - ----------------------------- Chief Financial Officer (David A. Kindlick) (Principal Financial Officer) /s/ Richard H. Walker, Jr. Corporate Secretary & Corporate March 13, 2003 - ----------------------------- Counsel (Richard H. Walker, Jr.) /s/ Shirli M. Billings Director March 13, 2003 - ----------------------------- (Shirli M. Billings) /s/ Keith S. Campbell Director March 13, 2003 - ----------------------------- (Keith S. Campbell) /s/ Sheila Hartnett-Devlin Director March 13, 2003 - ----------------------------- (Sheila Hartnett-Devlin) SJI-21 Signature Title Date /s/ W. Cary Edwards Director March 13, 2003 - ---------------------------- (W. Cary Edwards) /s/ Herman D. James Director March 13, 2003 - ---------------------------- (Herman D. James) /s/ Clarence D. McCormick Director March 13, 2003 - ---------------------------- (Clarence D. McCormick) /s/ Frederick R. Raring Director March 13, 2003 - ---------------------------- (Frederick R. Raring) /s/ William J. Hughes Director March 13, 2003 - ---------------------------- (William J. Hughes) SJI-22 CERTIFICATIONS I, Charles Biscieglia, certify that: 1. I have reviewed this annual report on Form 10-K of South Jersey Industries, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 13, 2003 /s/ Charles Biscieglia Charles Biscieglia Chairman of the Board & Chief Executive Officer SJI-23 I, David A. Kindlick, certify that: 1. I have reviewed this annual report on Form 10-K of South Jersey Industries, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 13, 2003 /s/ David A. Kindlick David A. Kindlick Vice President, Treasurer & Chief Financial Officer SJI-24 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of South Jersey Industries, Inc.: We have audited the consolidated financial statements of South Jersey Industries, Inc. and its subsidiaries as of December 31, 2002 and 2001, and for each of the three years in the period ended December 31, 2002, and have issued our report thereon dated February 19, 2003 (which expresses an unqualified opinion and includes an explanatory paragraph concerning the Company's change in method of presenting revenues and expenses from trading in physical power contracts); such financial statements and report are included in your 2002 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules of South Jersey Industries, Inc. and its subsidiaries, listed in Item 14(a) 2. These financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, 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 19, 2003 SJI-25 SCHEDULE I - SOUTH JERSEY INDUSTRIES, INC. STATEMENT OF INCOME (In Thousands)
2002 2001 2000 -------------- -------------- -------------- Operating Revenues $1,483 $2,111 $1,345 Operating Expenses: Operations 1,901 1,549 1,341 Maintenance 0 0 15 Depreciation 60 57 27 Energy and Other Taxes 175 154 96 -------------- -------------- -------------- Total Operating Expenses 2,136 1,760 1,479 Operating (Loss) Income (653) 351 (134) -------------- -------------- -------------- Other Income: Equity in Affiliated Companies 746 566 437 Equity in Earnings of Subs 28,658 26,743 24,431 Other 718 261 700 -------------- -------------- -------------- Total Other Income 30,122 27,570 25,568 -------------- -------------- -------------- Interest Charges 519 716 463 Income Taxes (462) 188 230 -------------- -------------- -------------- Income from Continuing Operations 29,412 27,017 24,741 Equity in Undistributed Earnings of Discontinued Subsidiaries (424) (455) (557) -------------- -------------- -------------- Net Income Applicable to Common Stock $28,988 $26,562 $24,184 ============== ============== ============== See South Jersey Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements incorporated by reference in Part II, Item 8.
SCHEDULE I - SOUTH JERSEY INDUSTRIES, INC. Statement of Comprehensive Income (In Thousands)
2002 2001 2000 -------------- -------------- -------------- Net Income Applicable to Common Stock $28,988 $26,562 $24,184 -------------- -------------- -------------- Other Comprehensive Loss: Minimum Pension Liability Adjustment - Net (771) (32) 0 -------------- -------------- -------------- Total Other Comprehensive Loss (771) (32) 0 -------------- -------------- -------------- Comprehensive Income $28,217 $26,530 $24,184 ============== ============== ============== See South Jersey Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements incorporated by reference in Part II, Item 8.
SCHEDULE I - SOUTH JERSEY INDUSTRIES, INC. Statement of Retained Earnings (In Thousands)
2002 2001 2000 -------------- -------------- -------------- Retained Earnings - Beginning $67,218 $58,004 $0 Net Income Applicable to Common Stock 28,988 26,562 24,184 -------------- -------------- -------------- 96,206 84,566 24,184 Dividends Declared - Common Stock (18,204) (17,348) (16,647) -------------- -------------- -------------- Retained Earnings - Ending $78,002 $67,218 $7,537 ============== ============== ============== See South Jersey Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements incorporated by reference in Part II, Item 8.
SJI-26 SCHEDULE I - SOUTH JERSEY INDUSTRIES, INC. STATEMENT OF CASH FLOWS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
2002 2001 2000 ------------ ------------ ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income Applicable to Common Stock $28,988 $26,562 $24,184 ------------ ------------ ---------------- Adjustments to Reconcile Net Income to Cash Flows Provided by Operating Activities: Equity in Earnings of Subsidiaries (28,234) (26,288) (23,874) Depreciation 66 63 32 Deferred and Non-Current Income Taxes and Credits - Net 329 557 38 Environmental Remedition Costs - Net (11) (5) (74) Changes in: Accounts Receivable (17) 4,369 (297) Receivables with Associated Companies - Net (103) (218) (549) Prepayments and Other Current Assets (8) 35 (67) Prepaid and Accrued Taxes - Net (511) (488) 41 Accounts Payables & Other Current Liabilities (5,389) (867) (199) Other - Net (507) 32 339 ------------ ------------ ---------------- Total Cash (Used In) Provided by Operating Activities (5,397) 3,752 (426) ------------ ------------ ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: (Investment in) Return of Investment Affiliates (286) 53 (637) Capital Expenditures (125) (134) (152) Dividends from Subsidiaries 10,700 17,501 16,800 Equity Infusion To Subsidiaries (2,500) (8,500) (10,000) ------------ ------------ ---------------- Net Cash Provided by Investing Activities 7,789 8,920 6,011 ------------ ------------ ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Borrowings (Repayments) of Associated Companies 9,528 (17,602) (2,814) Net (Repayments) Borrowings from Lines of Credits (4,260) 9,560 6,250 Dividends on Common Stock (18,204) (17,347) (16,647) Proceeds from Sale of Common Stock 10,926 10,953 8,857 ------------ ------------ ---------------- Net Cash Used in Financing Activities (2,010) (14,436) (4,354) ------------ ------------ ---------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 382 (1,764) 1,231 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 139 1,903 672 ------------ ------------ ---------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $521 $139 $1,903 ============ ============ ================ See South Jersey Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements incorporated by reference in Part II, Item 8.
SJI-27 SCHEDULE I - SOUTH JERSEY INDUSTRIES, INC. BALANCE SHEET (In Thousands)
2002 2001 ---------------- -------------- Assets Property Plant and Equipment: Nonutility Property, Plant and Equipment, at cost $1,249 $1,828 Accumulated Depreciation (204) (153) ---------------- -------------- Property, Plant and Equipment - Net 1,045 1,675 ---------------- -------------- Investments: Investments in Subsidiaries 242,279 222,244 Available-for-Sale Securities 55 46 Investment in Affiliates 1,128 843 ---------------- -------------- Total Investments 243,462 223,133 ---------------- -------------- Current Assets: Cash and Cash Equivalents 521 139 Notes Receivable - Associated Companies 31,390 24,323 Accounts Receivable 30 13 Accounts Receivable - Associated Companies 1,604 1,753 Other 475 69 ---------------- -------------- Total Current Assets 34,020 26,297 ---------------- -------------- Other Non-Current Assets 618 483 ---------------- -------------- Total Assets $279,145 $251,588 ================ ============== Capitalization and Liabilities Common Equity: Common Stock SJI Par Value $1.25 a share Authorized - 20,000,000 shares Outstanding - 12,206,474 shares and 11,860,990 $15,258 $14,826 Premium on Common Stock 150,434 139,929 Accumulated Other Comprehensive Income (803) (32) Retained Earnings 78,002 67,218 ---------------- -------------- Total Common Equity 242,891 221,941 ---------------- -------------- Current Liabilities: Notes Payable - Banks 12,600 16,860 Notes Payable - Associated Companies 21,480 4,885 Accounts Payable 786 687 Accounts Payable to Associated Companies 282 534 Taxes Accrued (870) (376) Dividends Declared 0 4,389 Other Current Liabilities 151 1,271 ---------------- -------------- Total Current Liabilities 34,429 28,250 ---------------- -------------- Other Non-Current Liabilities 1,825 1,397 ---------------- -------------- Total Capitalization and Liabilities $279,145 $251,588 ================ ============== See South Jersey Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements incorporated by reference in Part II, Item 8.
SJI-28 SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
Col. A Col. B Col. C Col. D Col. E - ------------------------------------------------------------------------------------------------------------- Additions ------------------------------ 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, 2002 $2,661 $3,706 $298 $3,495 $3,170 Provision for Uncollectible Accounts for the Year Ended December 31, 2001 $2,043 $2,667 $387 $2,436 $2,661 Provision for Uncollectible Accounts for the Year Ended December 31, 2000 $1,117 $2,280 $231 $1,585 $2,043 (a) Recoveries of accounts previously written off and minor adjustments. (b) Uncollectible accounts written off.
SJI-29 EX-12 3 iex12.txt SJI CALC OF RATIO TO FIXED EARNINGS Exhibit 12 SOUTH JERSEY INDUSTRIES, INC. Calculation of Ratio of Earnings from Continuing Operations to Fixed Charges (Before Income Taxes) (IN THOUSANDS) Fiscal Year Ended December 31, -------------------------------------------------------- 2002 2001 2000 1999 1998 -------------------------------------------------------- Net Income* $ 29,412 $ 26,869 $ 24,741 $ 21,962 $ 13,506 Income Taxes 20,404 19,295 18,711 16,418 11,703 Fixed Charges** 22,675 24,101 24,392 24,300 22,436 Capitalized Interest (1,941) (500) (26) (390) (167) -------------------------------------------------------- Total Available $ 70,550 $ 69,765 $ 67,818 $ 62,290 $ 47,478 ======================================================== Total Available - ------------------- 3.1x 2.9x 2.8x 2.6x 2.1x Fixed Charges * Net Income before Discontinued Operations. ** Includes interest and preferred securities dividend requirements of a subsidiary. EX-13 4 iex13.txt SJI 2002 ANNUAL REPORT Exhibit 13 SJI today 2002 Annual Report to Shareholders Defining SJI's Family of Companies page 5 What's Ahead for SJI page 6 Still Rock Solid. South Jersey Industries Where we put all of our energy - Cover - SJI Corporate Headquarters 1 South Jersey Plaza Folsom, NJ 08037-9917 609-561-9000 TDD only 1-800-547-9085 www.sjindustries.com Transfer Agent and Registrar Wachovia Equity Services Group Corporate Trust Client Services NC 1153 1525 West W. T. Harris Blvd. 3C3 Charlotte, NC 28288-1153 Dividend, Dividend Reinvestment and Other Shareholder Inquiries South Jersey Industries Shareholder Records Department Toll-free 1-888-SJI-3100 sharehld@sjindustries.com Investor Relations Stephen H. Clark, Director 609-561-9000 ext. 4260 investorrelations@sjindustries.com Annual Meeting Information The Annual Meeting of Shareholders will be held Thursday, April 17, 2003 at 10:00 a.m. at Renault Winery, 72 North Bremen Avenue, Egg Harbor/Galloway, NJ. Table of Contents 1 Financial Highlights 2 Chairman's Letter to Shareholders 12 Management's Discussion 18 Consolidated Financial Statements 22 Notes to Consolidated Financial Statements 30 Quarterly Financial Data 31 Comparative Operating Statistics 32 SJI Directors and Officers - Inside Cover - 2002 Highlights Five-Year Summary of Selected Financial Data (In Thousands Where Applicable)
South Jersey Industries, Inc. and Subsidiaries Year Ended December 31, 2002 2001 2000 1999 1998 ---------- ---------- ---------- --------- ---------- Operating Results: Operating Revenues $ 505,126 $ 545,986 $ 512,616 $ 389,454 $ 330,649 ========== ========== ========== ========= ========== Operating Income $ 69,075 $ 68,544 $ 65,464 $ 60,228 $ 46,634 ========== ========== ========== ========= ========== Income Applicable to Common Stock: Continuing Operations $ 29,412 $ 26,869 $ 24,741 $ 21,962 $ 13,506 Discontinued Operations-- Net (1) (424) (455) (557) (274) (2,520) Cumulative Effect of a Change in Accounting Principle-- Net -- 148 -- -- -- ---------- ---------- ---------- --------- ---------- Net Income Applicable to Common Stock $ 28,988 $ 26,562 $ 24,184 $ 21,688 $ 10,986 ========== ========== ========== ========= ========== Total Assets $1,011,760 $ 989,429 $ 869,979 $ 766,925 $ 748,095 ========== ========== ========== ========= ========== Capitalization: Common Equity $ 237,792 $ 220,286 $ 201,739 $ 185,275 $ 169,234 Preferred Stock and Securities of Subsidiary 36,690 36,690 36,804 37,044 37,134 Long-Term Debt 238,016 259,247 204,981 183,561 194,710 ---------- ---------- ---------- --------- ---------- Total Capitalization $ 512,498 $ 516,223 $ 443,524 $ 405,880 $ 401,078 ========== ========== ========== ========= ========== Ratio of Operating Income to Fixed Charges 3.3 2.9 2.7 2.5 2.0 ========== ========== ========== ========= ========== Earnings Applicable to Common Stock -- Basic (Based on Average Shares): Continuing Operations $ 2.44 $ 2.29 $ 2.17 $ 2.01 $ 1.25 Discontinued Operations-- Net (1) (0.03) (0.03) (0.05) (0.02) (0.23) Cumulative Effect of a Change in Accounting Principle -- Net -- 0.01 -- -- -- ---------- ---------- ---------- --------- ---------- Basic Earnings per Common Share $ 2.41 $ 2.27 $ 2.12 $ 1.99 $ 1.02 ========== ========== ========== ========= ========== Return on Average Common Equity (2) 12.8% 12.7% 12.8% 12.4% 7.9% ========== ========== ========== ========= ========== Share Data: Number of Shareholders of Record 8.4 8.7 9.1 9.7 10.4 Average Common Shares 12,038 11,716 11,401 10,922 10,776 Common Shares Outstanding at Year End 12,206 11,861 11,500 11,152 10,779 Dividend Reinvestment Plan: Number of Shareholders 5.1 5.0 5.0 5.4 5.5 Number of Participating Shares 1,304 1,280 1,273 2,518 1,371 Book Value at Year End $ 19.48 $ 18.57 $ 17.54 $ 16.61 $ 15.70 Dividends Declared $ 1.51 $ 1.48 $ 1.46 $ 1.44 $ 1.44 Market Price at Year End $ 33.02 $ 32.60 $ 29.75 $ 28.44 $ 26.19 Dividend Payout (3): From Continuing Operations 60.9% 63.9% 66.6% 71.0% 114.9% From Total Net Income 61.8% 64.6% 68.1% 71.9% 141.2% Market-to-Book 1.7 1.8 1.7 1.7 1.7 Price Earnings Ratio (2) 13.5 14.2 13.7 14.1 20.9 (1) Represents discontinued business segments: appliance merchandising operations discontinued in 2001, wholesale electric operations discontinued in 1999, construction operations sold in 1997, sand mining and distribution operations sold in 1996 and fuel oil operations with related environmental liabilities in 1986 (See Note 3 to Consolidated Financial Statements). (2) Calculated based on Income from Continuing Operations. (3) Dividends declared for the fourth quarter are typically paid in early January of the following year. However, in 2002, the dividend declared for the fourth quarter was paid in December, resulting in five quarterly dividends paid in 2002. For comparability, the payout ratios for 2002 are based on the first four quarterly dividends paid in 2002.
- 1 - Dear Shareholders, "SJI is a small investment gem. With a combination of strong management, a well-run utility and a thoughtful and effective mix of unregulated businesses, it fits our portfolio very well. The company also understands the importance of the dividend and appears committed to an annual increase. This enhances its ability to provide total return to its investors." Kathleen Vuchetich, Vice President, W. H. Reaves & Company, Inc. We are strong. We're extremely pleased to report that South Jersey Industries achieved record net income and earnings per share from continuing operations for the fourth consecutive year. Consolidated net income from continuing operations reached $29.4 million compared with $26.9 million in 2001, a 9.5 percent increase. Earnings per share from continuing operations rose to $2.44 from $2.29 in 2001, delivering 6.6 percent EPS growth. Exceptional performance by our utility and non-regulated businesses made our success possible. South Jersey Gas surpassed its 2001 earnings, contributing 79 percent to SJI's net income. Our non-regulated businesses outperformed our expectations exceeding last year's performance by 16 percent, contributing 21 percent to SJI's bottom line. The key drivers for our utility's earnings improvement -- customer growth, off-system natural gas sales and strong performance by our appliance service business line -- propelled SJG to exceed last year's earnings despite a weak national economy and a year that was warmer than normal. Lower interest expense and cost savings initiatives also positively impacted SJG's net income. On the non-regulated side, South Jersey Energy continued to dominate the competition in residential retail natural gas sales adding 40,581 customers in 2002 for a total of 72,902 customers, which is a remarkable 125 percent increase in the 12-month period. Wholesale natural gas sales continued to be strong for South Jersey Resources Group and increased meter reads at a lower cost enabled Millennium Account Services to excel this year. Return on Investment On top of our earnings achievements, the underlying strength of SJI's stock price was confirmed amidst the unnerving turmoil in the stock market. With the Dow Jones Industrial Average suffering through its third year of decline in another down year for equities, SJI's stock held its own finishing at $33.02. This was our fifth consecutive year of improvement in year-end price. SJI remained a highly preferred investment for shareholders seeking stable income with an element of proven and consistent growth. Thanks to the creativity and work ethic of our employees and strict adherence to our strategy, shareholders realized a total return of 6 percent in 2002 that exceeded both the Standard & Poors utility average, which lost 30 percent, and the S&P 500 average, which lost 22 percent. For the past five years, SJI's compounded total return of 7 percent compared favorably with the loss on the S&P utility average of 4 percent and the loss on the S&P 500 average of 1 percent. Shareholders and analysts stress the importance of SJI's dividend and we clearly hear this message. We're proud to report that 2002 was SJI's 51st consecutive year of paying dividends and the fourth consecutive year of increasing the dividend. At the same time, we reduced our dividend payout ratio. Based on our confidence in our future performance, in November, we increased the dividend by 4 cents per share. The dividend increase not only underscores our strong performance over the past few years and our confidence in our potential, but also reinforces our future expectations of 6 to 7 percent annualized earnings per share growth. Our Strategy at Work During the American Gas Association's financial forum held in the spring, industry analysts praised SJI's management for our strategy -- to focus on delivery of complementary energy-related products and services within acceptable risk parameters, to customers and prospects. When we adopted this strategy in 1998, we envisioned a steadily growing company from core utility operations with complementary non-utility earnings streams to enhance profits and create value for you, our shareholders. We attribute our success over the past four years to: * Following a consistent strategy that relies on SJI's intrinsic strengths; * Conducting business in markets we understand; * Targeting areas where we have broad name recognition; - 2 - * Strengthening customer relationships; * Reassessing business lines and introducing products and services our customers want while maintaining a moderate risk profile; * Revising the Temperature Adjustment Clause to ensure earnings stability regardless of weather conditions; * Using demonstrated in-house expertise or obtaining that expertise very cost effectively through long-established business relationships for every product or service we offer; and * Contributing to our communities. After four years of record earnings and four dividend increases, it's clear we're a different company, our strategy is working, and we have great potential to continue growing the company using a strategy that will ensure SJI remains a rock solid investment you can count on. What's Ahead We realize many of you rely on SJI for stable income and we will continue protecting your investment by maintaining the delicate balance we've achieved between the stable, low-risk utility and our moderate risk non-regulated businesses. We accept a moderate level of risk because we can control it through the types of investments we make. It's important to note that we invest in tangible assets and facilities and those investments are predicated upon long-term contracts with secure long-term returns -- that is what distinguishes us from many other companies. No project better illustrates our strategy than the Marina Energy thermal facility in Atlantic City, which is providing hot and chilled water for The Borgata Resort's heating, cooling and domestic hot water needs. The thermal plant affords four of SJI's subsidiaries an opportunity to fulfill the casino's energy needs for the next 20 years. Marina owns and operates the facility, SJE provides the commodity, SJG delivers the natural gas and SJRG provides the risk management services for the commodity purchase and delivery. We want to ensure you understand that when it comes to taking on and managing risk our corporate philosophy remains unchanged. This past year, investor confidence in public corporations was affected by a few visible large companies that engaged in clearly unethical behavior causing billions of dollars in investor losses. With SJI's 10-member board being comprised of nine independent directors in addition to me, you can be confident in the board's oversight of your company. Rest assured that SJI's management conducts its business guided by the highest set of principles with honesty and integrity at the forefront of every decision we make, and that the information being presented to you is correct and accurately represents the company's financial position. We know who we are; we know what we do well. Our strategy is focused on the goal of maximizing shareholder returns from a low to moderate risk platform. We believe we achieve this through the dedication of our resources in our region, southern New Jersey, and by staying within our field of expertise and competency - -- energy. We see no reason to change this strategy. We thank you for your continued faith in our ability to grow your company and our employees for their innovative thinking and willingness to embrace the changes necessary to continue being a Rock Solid investment for many years to come. On behalf of the SJI family, we wish to express our sadness at the passing of Thomas L. Glenn, Jr., who for nearly 16 years served on SJI's board of directors with true compassion and endless enthusiasm. We're deeply grateful for Tom's expert guidance. Selfless in his giving, untiring in his spirit, Tom will forever be remembered as a leader, a friend and a gentleman. Sincerely, Charles Biscieglia Chairman, President and CEO, South Jersey Industries February 19, 2003 - 3 - South Jersey Gas South Jersey South Jersey Resources Group Energy Marina Energy Millennium Account Services - 4 - Defining SJI Consistent with our strategy, each of SJI's companies continues to be a positive contributor to earnings while providing superior products and services to customers. Each company successfully markets to customers who recognize and value our brand; and each seeks to identify profitable opportunities where customers can benefit from our total energy management approach. Before we describe their achievements and outlook for the future, we want to provide a glimpse of the broad array of high quality, energy-related services that make SJI the energy company of first choice for consumers, shareholders and employees. We are dependable. South Jersey Gas The regulated utility remains the core and foundation of SJI's business. SJG safely and reliably delivers natural gas to an ever-expanding customer base that reached nearly 300,000 residential, commercial and industrial customers in N.J.'s seven southern counties in 2002. Through its Gas Supply and Off-System Sales functions, SJG sells natural gas to wholesale customers in the interstate market and manages our pipeline and storage assets. SJG and its core utility customers share the earnings from off-system sales. A growing business line within SJG, the Appliance Service Business provides quality repair work on household and commercial appliances at competitive prices and also offers warranty and preventive maintenance programs under the Service Sentry brand. This year, the ASB established relationships with several reputable vendors with whom we can now offer duct cleaning and water heater replacements to a growing list of valued customers. South Jersey Energy SJE is a licensed, deregulated energy supplier for residential, commercial and industrial customers. Through N.J.'s Energy Choice Program, SJE markets retail gas supplies at a savings versus the utility's price. To enhance SJE's marketing efforts, its Community Rewards Program enables community organizations to earn money to support their projects in exchange for providing SJE with profitable retail customers. A full service energy consultant, SJE offers energy management services, energy efficiency audits, lighting upgrades and retrofits, and energy-efficient HVAC design and construction. This helps businesses save money and focus their valuable time and resources on their own customers. SJE also sells natural gas to Atlantic City casinos and owns a 50 percent interest in AirLogics, LLC, which provides companies with a patented real-time environmental air monitoring system. South Jersey Resources Group SJRG is a wholly owned non-utility subsidiary of SJI. Formed in 1996, SJRG provides wholesale natural gas trading, sales, storage management, peaking services, transportation capacity and natural gas portfolio management. SJRG also provides commodity risk management services to other SJI subsidiaries. Energy marketers, electric and gas utilities and natural gas producers are included in an extensive customer base. SJRG competes with other marketers/brokers in the sale of wholesale natural gas services mainly in the mid-Atlantic and southern regions of the country. Marina Energy Marina is in the business of developing energy-related projects in southern N.J. To date, Marina's largest project is the development and operation of a thermal facility to provide cooling, heating, hot water and electricity to The Borgata Resort in Atlantic City. The resort, scheduled to open in summer 2003, has contracted with Marina for the next 20 years. The thermal facility is capable of supporting future development in the Renaissance Pointe area of Atlantic City, which remains the most attractive area in the city for future casino resort development. Having many of the same attributes as a utility, Marina's investments are in tangible assets and facilities, with revenue streams supported by long-term contracts with secured returns. Other Marina projects include a cogeneration facility in southern N.J. and the ownership and operation of a heating and cooling plant within an existing commercial facility. Millennium Account Services SJI has a joint venture investment with Conectiv Solutions, LLC in Millennium Account Services, LLC. Millennium provides meter-reading services to SJG and Conectiv Power Delivery, the electricity provider in much of southern N.J. Economies of scale derived from this venture have resulted in significant cost savings to the utilities while at the same time improving productivity, accuracy and customer satisfaction. - 5 - SJI In-depth In describing our strategy, it's important to recognize our utility, SJG, as our core line of business. SJG represents the basis of our experience and expertise, and generates nearly 80 percent of our earnings. As we've embarked upon new businesses, offered new services and created new sources for earnings growth, we've effectively drawn upon that experience to add value, year after year, for our shareholders. We are rock solid. For each product or service we provide, we either possess an internal, demonstrated expertise or have carefully established relationships with businesses that have a proven track record of superior products or services. Importantly, our principal markets are geographically located in an area where our name is recognized and valued. We've kept South Jersey in our name for a reason -- it's the area we know and the area where we're known and respected. Market Growth Growth Potential in Region is Our Greatest Asset Bolstered by a strong regional economy, consistent increases in employment opportunities and available land for development, the seven-county area in southern N.J. continues to be our most valuable corporate asset. While many parts of the country and many industries felt the economic crunch during 2002, the relative strength of our regional economy set the stage for our companies to add customers and expand our businesses. Geographically, South Jersey benefits considerably from its proximity to the metropolitan centers of Philadelphia and Atlantic City. Portions of our western region, considered part of the Greater Philadelphia Metropolitan area, are targeted growth areas for housing developments and new businesses. Manufacturers or purveyors of sand, glass, farm products, paints, chemicals and petroleum products are prevalent in the western and southern sectors of the service territory. New commercial establishments and high technology industrial parks and complexes are part of this area's economic growth as well. A modest increase in housing was also experienced in the western region of our service area in 2002. The ongoing construction of new homes in the eastern corridor of our region continues to be fueled by the Atlantic City casino industry. In the same way that Gloucester County in the west benefits from its proximity to Philadelphia, Atlantic and Cape May Counties directly benefit from the employment, housing, business and commercial ventures fostered by the gaming industry. In 2002, housing starts in the eastern portion of our service area increased by 3 percent. With several casino expansions underway and more slated for 2003 and beyond, gaming presents a strong and steady catalyst for growth and development in our eastern region for the foreseeable future. Our utility business is preparing for future growth by investing in new underground assets and improving the existing natural gas infrastructure. Ongoing improvements to these natural gas facilities, needed for safe and adequate service to SJG's customers, will provide SJI's companies with future projects and prospects in southern N.J. Beyond this extremely attractive South Jersey market, northern N.J., Pa. and Del. offer tremendous opportunities for future wholesale and retail gas sales and energy services. SJI's Market Segments Residential and Small Commercial -- Cultivating Growth, Promoting Synergy The residential and small commercial market represents about 83 percent of SJG's sales margins and 78 percent of SJE's sales margins. New construction represents 81 percent of residential customer growth for SJG and each new gas customer is a new prospect for SJE as well as for SJI's other companies. - 6 - Using this strategy we've found an effective way to increase SJI's revenue. Overall, in areas where natural gas facilities were available, about 95 percent of new homes constructed in 2002 selected natural gas for heating and other residential applications. This obvious preference for natural gas translated into customer additions of 8,366 this year, a growth rate of 2.9 percent, which exceeds the national average and made SJG the fastest growing gas utility in N.J. Beyond new construction, the conversion market continues to represent a meaningful growth opportunity. This year, about 19 percent of SJG's growth came from conversions from other fuels. Propelled by a re-engineered sales function, an aggressive no-money-down financing campaign and successful alliances with independent HVAC contractors, SJG added 1,802 conversion customers in 2002. Capitalizing on these strengths we're prepared to reach our target of 2,500 new conversion customers in 2003. New and conversion customers together increased SJG's customer base to 296,374 at year-end. In a region of 550,000 households, SJG has a saturation rate of 54 percent, placing us in an enviable position to capture a greater market share. SJG will also reach an important milestone in 2003, when we add our 300,000th natural gas customer. The strong and steady residential growth in our service area provides a platform for growth in the small commercial market sector. Construction of residential housing promotes the development of many new commercial enterprises serving those consumers. In 2002, we exceeded our expectations for new commercial sales volumes, adding approximately 683,700 decatherms to annual throughput. SJE, our state's first and most successful non-utility energy marketer, significantly increased its residential customer base capturing a record 40,581 new customers in 2002, an extraordinary 125 percent increase over 2001. At year-end, nearly 73,000 residential customers had chosen SJE as their natural gas supplier. SJE's success resulted from a broad strategy including mass marketing techniques for the residential and small commercial markets; several direct marketing networks selling face-to-face; and telemarketing. Successfully applying these varied approaches, SJE more than quadrupled its commercial customer base during 2002. With more homes and businesses using natural gas as their fuel of choice and a yet-to-be captured market of over 200,000 homes, SJE has ample opportunity to grow for years to come. Large Commercial and Industrial -- Building Relationships, Fostering Opportunities Following the re-engineering of our sales function, we witnessed substantial returns on our investment in 2002. The sales force renewed its focus on forging new relationships and bolstering existing alliances. In doing so, we made significant inroads into the large commercial and industrial sectors. Casinos With deregulation, advancing technologies, new market entrants and a myriad of energy services from which to choose, the energy industry is increasingly complex. To navigate through these choices many companies and, in some cases, entire industries are hiring specialists to evaluate and design optimal energy solutions. SJI's approach to total energy management, coupled with our expertise and reputation, places us in a unique position to fill this role in our region. No better example of this trend exists than the Atlantic City casino industry. With nearly $1.4 billion in expansion or new construction projects planned or currently underway, the casino industry is fueling growth in all sectors of our regional economy. As the industry continues to make substantial investments in bricks and mortar, it fuels broader economic development, creating new opportunities for SJI. The casinos themselves are valued clients of one or more of SJI's companies, - 7 - and several are looking to us as their energy specialists and partners. The following projects highlight the products and services we provide and the relationships we have with key players in the Atlantic City gaming industry. Marina provided a new and different investment opportunity for SJI in supplying The Borgata Resort with a comprehensive solution to meet its energy needs. Reliability, efficiency and The Borgata's desire to use every square foot of its facility advantageously were critical elements as we considered their needs. Our solution was an off-site thermal plant fueled by natural gas that would also house back-up electric generation to be built and managed by Marina. This facility is already providing heat to The Borgata as the interiors of the resort are well underway to meeting a scheduled grand opening in the summer of 2003. Joining Marina to deliver the total energy management solution needed by this important customer are three other SJI companies, all dedicated to serving the customer's needs in a well-integrated and transparent manner. The Marina thermal facility, designed for expansion, will be able to serve the expected development at Atlantic City's Renaissance Pointe. Marina has been in discussions with MGM for a new casino resort facility planned in the Renaissance Pointe area. Preliminary designs announced by MGM indicate a facility at least equal in size to The Borgata. Beyond MGM, an additional parcel of land zoned for casino development is available to support a new gaming house or the expansion of an existing property. Resorts International, Inc. is a new energy services client for Marina. Under a 20-year agreement, we provide heating, cooling, and customer comfort systems for its Atlantic City-based casino hotel. Marina now operates the steam and chilled water production facilities at Resorts after upgrading the production facilities and equipment to improve their efficiency. At Resorts, SJE also has a 5-year commodity contract and SJRG provides the risk-management of the facility's long-term natural gas supplies. Engaging SJI as its energy partner enables customers like Resorts to better apply their human resources to their primary business activities while we deliver the best energy solutions and value to them. Expansion projects at the Tropicana, Resorts and Showboat casinos are valued at $440 million. Each translates directly into additional natural gas load and potential new business for SJI's companies. This growth leads indirectly to new jobs, new employees, new housing and new commercial services - -- an economic multiplier effect we've previously experienced. Cogeneration An 8-megawatt plant constructed by floor-covering giant Mannington Mills became the fifth cogeneration facility being served by SJI. The unit doubles the natural gas used by the flooring manufacturer and provides an efficient energy solution to meet its needs. SJE, with commodity management support from SJRG, is supplying the gas needed to operate the plant, which generated $1.1 million in revenue in 2002. Pharmaceutical materials manufacturer Johnson Matthey finalized plans with Marina for the design and construction of a $9 million cogeneration facility at its West Deptford, N.J. plant. The cogen unit will produce six megawatts of electricity and 10,000 lbs. per hour of steam. In addition, a 1,200-horsepower boiler will be installed to meet the plant's growing needs. Marina will also manage this facility, which is expected to be fully operational in 2003. Hospitals An example of our successful conversion efforts includes South Jersey Health System's planned regional medical center. SJHS, a long-time user of oil as its primary fuel source, was impressed with our commitment to help them save money. By using natural gas, SJHS will realize substantial long-term savings. Our assistance in securing a N.J. energy rebate on their behalf, which exceeded $150,000 for an 850-ton natural gas absorption chiller, helped finalize the negotiation of a 6-year contract with SJG. The building project, currently under construction in Cumberland County, is slated for a 2004 opening. The entire health-care sector remains a fertile market for SJE's services as well in 2003 and beyond. As we capitalize on those opportunities, the new projects that emerge will add long-term value to SJI. - 8 - Educational Facilities Successful relationship building is evident in the number of educational facilities choosing natural gas as their preferred fuel and SJI as their energy partner. In 2002, four schools in our service area switched from electric air conditioning systems to natural gas-fired cooling equipment. Another, located in an oil-dominated section of Cumberland County, converted to natural gas to satisfy its energy needs. These conversions translated into significant energy savings for the schools and substantial rebates, which exceeded $234,000, from the statewide N.J. Clean Energy Program. In September 2002, Richard Stockton College of New Jersey awarded SJE with a $1.3 million contract to install a 200-kilowatt fuel cell at its campus. When completed, this exciting and innovative technology will save the college approximately $80,000 annually. As an added bonus, Stockton received a $710,000 rebate under N.J.'s Customer Sited Clean Generation Program, a statewide energy-efficiency program approved by the N.J. Board of Public Utilities. Educational facilities such as these and numerous others to be constructed, renovated or expanded in our region will generate increased natural gas demand for SJG and opportunities for SJE to provide lighting retrofit and other energy services. Food Processing We continue to make inroads into the food processing industry. Representing a key targeted growth market for both SJG and SJE, food-processing plants are recognizing the value and cost savings realized with natural gas. Zelke Greenhouses and Cumberland Dairy are two new gas customers in this viable market. As our family of companies solidifies already strong alliances with targeted industries and customers, our broad portfolio of products and services continues to help them manage their energy needs and control their energy costs. With the opportunity to grow our business lines in energy supply and delivery, energy consulting and long-term energy management services, SJI's forecast of annual earnings growth of 6 to 7 percent is achievable. - 9 - Other Accomplishments Off-System Sales In 2002, Off-System Sales produced earnings of $6.2 million. Since 1993, OSS has operated in the highly competitive wholesale natural gas market and, year after year, has provided shareholders with consistent quality earnings. Through a formula approved by the N.J. Board of Public Utilities, SJG's customers have shared in this success with a credit against gas costs of over $50 million. Cost Control While we strongly focus on growing revenues, we also recognize the need to continually increase efficiency and productivity in all of our businesses to control costs. In 2002, many U.S. companies experienced significant increases in pension, health care and insurance costs. To mitigate these increases we continue to evaluate and change methods, processes and policy in ways that reduce or contain operating costs. A recent example is the installation of service lines to new customers. During 2002, our SJG employee-crews began to install services that previously were performed by outside contractors, saving the company almost $2 million. We accomplished this by applying our existing human resources more effectively while ensuring that we are completing other required services. Our future success in managing costs will continue to hinge on a healthy balance of improved systems and technology; workforce learning and development; labor-management understanding and cooperation; and clear and achievable cost control objectives. Customer Service Improvements According to a Customer Care Satisfaction Survey conducted in May 2002 by an independent agency, the great majority of surveyed SJG customers indicated they're completely satisfied with their experience with our Customer Care Center. The report found that CCC's experience and commitment to high quality customer service clearly resulted in positive perceptions of our professionalism and service. The research produced high marks for SJG across all the measured variables. The survey's purpose was twofold. First, we wanted to measure the overall satisfaction of the call center experience. Second, we wanted feedback on the automated systems currently in use and those we're reviewing for the future. Although the survey found our customers comfortable with current wait times, we continue to work at further reducing these times. To further improve response rates, SJG assessed the desirability and prospective impact of offering new customer self-service options via telephone and Internet. By April 2003, an Interactive Voice Response system will enable customers to access account information and perform transactions by telephone 24 hours a day, seven days a week. This customer self-service option will yield fast and accurate responses to many of the basic informational-type inquiries. We can then more effectively address the complex customer service and billing issues requiring a live agent. We anticipate measurable productivity gains by implementing this system. This new system represents another piece of a planned e-commerce solution designed to meet the needs of and match our customers' changing communication habits. As envisioned, the solution will enable customer access via the Internet for account information, electronic bill payment and other transactions. Air Monitoring AirLogics was born of a partnership with GZA GeoEnvironmental to market an innovative, real-time perimeter air monitoring system. SJI and GZA professionals initially developed the system for use at former coal gasification cleanup sites. At year-end, three major N.J. utilities were using our air monitoring system, along with eight other utilities and/or corporations from N.Y. to Wis. These contracts represent nearly $2 million in revenues. AirLogics already has commitments to operate our system at six environmental remediation sites - 10 - throughout the country in 2003. With interest in environmental protection growing, the opportunities for customized applications are expanding. Meter Reading For Millennium, increased earnings, impressive read rates and cutting-edge technology marked 2002. A consistent contributor to SJI since its formation in 1999, Millennium achieved its fourth straight year of improved earnings in 2002. Millennium consistently exceeded a total read rate of 97 percent for gas and electric in 2002. We expect to maintain these high performance standards, in part, through new technology that we purchased and installed during the year. Using Itron Inc.'s most current technology, Millennium will have the capability to electronically collect gas, electric and, prospectively, water meter data via improved handheld devices. Appliance Service Business A targeted marketing strategy, increased productivity and additional service offerings catapulted the Appliance Service Business into its best year for customer growth and financial results. To accommodate the growing needs of consumers, we altered promotional offers, further revamped operations and introduced diversified services in 2002. We saw the results, in part, in the number of appliances under Service Sentry warranty, which increased by 28 percent, from 104,492 in 2001 to 134,193 in 2002. These numbers include 8,346 preventive maintenance contracts, a new service in 2002. Warranty contracts, time and materials work and other services produced net income of $956,000 for 2002 compared with net income of $89,000 in 2001. Formed to satisfy the needs of SJG's customers, the appliance service business line has grown and evolved beyond its original intent and purpose. These services are not part of SJG's core utility function and we've managed and accounted for them as a separate business for several years. Consistent with the intent of N.J. law, the company has petitioned the N.J. Board of Public Utilities requesting that this business be setup as a separate entity. That petition is currently pending before the BPU. For 2003, we predict strong growth for this business segment. Continued demand for customized warranty coverage, preventive maintenance service work and specialized services translate into greater profitability for the ASB. The Value of Cultivating Change In late 2001, SJI began a culture change initiative to advance our competitive position in the complex and changing energy market. A year later, the initiative's results are unmistakable -- higher productivity, improved customer service and cost savings. One clear-cut example stems from a newfound collaboration between labor and management. Working together, representatives from each side set out specific goals to address and satisfy both parties' needs. The union wanted to preserve jobs; management wanted increased efficiency and productivity. The alliance uncovered and implemented dozens of improvements that preserved work for the bargaining units and delivered enhanced productivity to SJI. Each success serves as a springboard for future projects requiring cooperation between labor and management as well as between individual departments and divisions. This open, results-oriented approach is helping to transform a workforce steeped in tradition to one that is both receptive to, and supportive of, nontraditional solutions. Our goal remains the creation of informed and empowered employees focused on a single vision of solid performance and long-term success. We commend our employees for their openness, innovative thinking, demonstrated flexibility and commitment to this ongoing process. Community Involvement As a company that serves a large region of N.J., our obligation to the community goes well beyond simply providing energy services. SJI's involvement in community activities is as diverse as the people who make up the region where our employees live and work. We believe that it's important to be both a partner and a catalyst for positive change whenever possible. That's why we will continue to strongly support both corporate involvement and employee participation in charitable, social and business organizations throughout the region. Proudly, our efforts and the selfless work of our employees were honored by the Family Service Association with the presentation of the 2002 Henry West Leeds Corporate Award for strengthening the community. The award honors a southern N.J. corporation whose employees donate their time, talents and leadership abilities to nonprofit agencies in our region. The FSA advocates that the efforts of good corporate citizens, like SJI, strengthen the community and inspire others to make a difference. We couldn't agree more. As the SJI family of companies enters into 2003, we approach the future with a confidence, strength and wisdom born of experience. We know who we are, we know where we're going and we know we will remain a Rock Solid investment for the investors of today and tomorrow. - 11 - Management's Discussion and Analysis of Financial Condition and Results of Operations Overview -- South Jersey Industries, Inc. (SJI) is an energy services holding company that provides a variety of products and services through the following wholly owned subsidiaries: 1) South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG distributed natural gas in the seven southernmost counties of New Jersey to 296,374 customers at December 31, 2002 compared with 288,008 customers at December 31, 2001. SJG also: * sells natural gas and pipeline transportation capacity (off-system sales) on a wholesale basis to various customers on the interstate pipeline system; * transports natural gas purchased directly from producers or suppliers for its own sales and for some of its customers; and * services appliances via the sale of appliance warranty programs, as well as on a time and materials basis. 2) South Jersey Energy Company (SJE) acquires and markets natural gas to retail end users and provides total energy management services to commercial and industrial customers. SJE has one subsidiary, SJ EnerTrade (EnerTrade), that primarily provides services for natural gas sales to the casino industry in Atlantic City, N.J. SJE also markets an air quality monitoring system through AirLogics, LLC. SJE and GZA GeoEnvironmental, Inc., an environmental consulting firm, each have a 50% equity interest in AirLogics. 3) South Jersey Resources Group, LLC (SJRG) markets wholesale gas storage, commodity and transportation in the mid-Atlantic and southern states. SJRG also conducts price-risk management activities. 4) Marina Energy LLC (Marina) develops and operates energy-related projects in southern New Jersey. Marina's largest project, the development of a facility to provide cooling, heating and hot water to The Borgata Resort in Atlantic City, is scheduled to be fully operational by the summer of 2003. SJI also has a joint venture investment with Conectiv Solutions, LLC in Millennium Account Services, LLC (Millennium). Millennium provides meter reading services to SJG and Conectiv Power Delivery in southern New Jersey. Estimates and Assumptions -- As described in the footnotes to our consolidated financial statements, management must make estimates and assumptions that affect the amounts reported in the financial statements and related disclosures. Actual results could differ from those estimates. Three types of transactions presented in our consolidated financial statements require a significant amount of judgment and estimation. These relate to regulatory assets, energy trading activities and environmental remediation costs. The New Jersey Board of Public Utilities (BPU) has reviewed and approved most of the items shown as regulatory assets through specific orders. Other items represent costs that were not yet approved by the BPU for recovery, but are the subject of current or future filings. In recording these costs as regulatory assets, management believes the costs will be allowable under existing rate-making concepts that are embodied in current rate orders received by SJG. However, ultimate recovery is subject to BPU approval. Beginning January 1, 2001, SJI recognizes assets or liabilities for the energy-related contracts entered into by its non-regulated subsidiary, SJRG, when the contracts are executed. We record contracts at their fair value in accordance with either Emerging Issues Task Force Issue Number 98-10 or FASB Statement No. 133. We adjust the fair value of the contracts each reporting period for changes in the market. We derive the fair value for most of the energy-related contracts from markets where the contracts are actively traded and quoted. For other contracts, SJI uses published market surveys and in certain cases, independent parties to obtain quotes concerning the contracts' current value. Market quotes tend to be more plentiful for contracts maturing in two years or less. Very few of our contracts extend beyond two years. An outside consulting firm assists us in estimating future costs for environmental remediation activities. We estimate future costs based on projected investigation and work plans using existing technologies. Developing a single reliable estimation point is not feasible because of the amount of uncertainty involved in the nature of projected remediation efforts and the long period over which remediation efforts will continue. Therefore, we estimate the range of future costs at $52.1 million to $157.9 million. In preparing financial statements, SJI records liabilities for future costs using the lower end of the range. We update estimates each year to take into account past efforts, changes in work plans and remediation technologies. Revenue Recognition -- SJG, SJE and SJRG bill customers monthly for gas delivered and recognize those revenues during the month. For SJG and SJE retail customers we do not bill at the end of each month; we make an accrual to recognize revenues for gas delivered from the date of the last bill to the end of the month. We bill SJG customers at rates approved by the BPU. SJE and SJRG customers are billed at rates negotiated between the parties. We defer and recognize revenues related to SJG's appliance warranty contracts over the full 12-month term of the contract as earned. The BPU allows SJG to recover the excess cost of gas sold over the cost included in base rates through the Levelized Gas Adjustment Clause (LGAC). SJG defers over/under-recoveries of gas costs and includes them in the following year's LGAC rate or other similar rate recovery mechanism. As a result of these deferrals, utility revenue recognition does not directly translate to profitability. While we realize profits on gas sales during the month of providing the utility service, significant shifts in revenue recognition may result from the various recovery clauses approved by the BPU (See Regulatory Matters) without shifting profits between periods. New Accounting Pronouncements -- In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets" and Statement No. 143, "Accounting for Asset Retirement Obligations." Statement No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. It provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. The adoption of this statement did not materially affect SJI's financial condition or results of operations. Statement No. 143, which will be adopted in 2003, establishes accounting and reporting standards for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SJG has certain easements and right-of-way agreements that qualify as legal obligations under Statement No. 143. However, we intend to maintain these agreements in perpetuity; therefore, no change in SJG's current accounting practices is required at this time. SJG recovers certain asset retirement costs through rates charged to customers as an approved component of depreciation expense. When we retire depreciable properties, we charge the original cost thereof, plus cost of removal less salvage, to accumulated depreciation. As of December 31, 2002, SJG had accrued amounts in excess of actual removal costs incurred totaling $41.4 million which is included in utility plant accumulated depreciation. We do not expect the adoption of this statement to materially affect SJI's financial condition or results of operations. In August 2001, the FASB also issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which became effective in 2002. This statement prescribes that a single accounting model be used for valuing long-lived assets to be disposed of and broadens the presentation of - 12 - discontinued operations. The adoption of this statement did not affect SJI's financial condition or results of operations, nor do we expect its ongoing application to materially affect SJI's financial statements. In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities initiated after December 31, 2002. We do not expect the adoption of this statement to materially affect SJI's financial condition or results of operations. In November 2002, the FASB released Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." For a detailed discussion, see the section on Parental Guarantees under Note 14 to the consolidated financial statements included in this report. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," which is effective for SJI's 2002 annual financial statements and subsequent interim financial reporting. This statement provides alternate methods of transitioning for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, it requires prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions for this statement currently have no impact on SJI's financial statements. Forward-Looking Statements -- This report contains certain forward-looking statements concerning projected financial and operating performance, future plans and courses of action and future economic conditions. All statements in this report other than statements of historical fact are forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and actual results could differ materially from those expressed or implied in the forward-looking statements. Also, in making forward-looking statements, we assume no duty to update these statements should expectations change or actual results and events differ from current expectations. A number of factors could cause our actual results to differ materially from those anticipated including, but not limited to, the following: general economic conditions on an international, national, state and local level; weather conditions in our marketing areas; changes in commodity costs; regulatory and court decisions; competition in our utility and nonutility activities; the availability and cost of capital; our ability to maintain existing joint ventures to take advantage of marketing opportunities; costs and effects of legal proceedings and environmental liabilities; the failure of customers or suppliers to fulfill their contractual obligations; and changes in business strategies. Competition -- SJG's franchises are non-exclusive. Currently, no other utility provides retail gas distribution services within our territory. We do not expect any other utilities to do so in the foreseeable future because of the extensive investment required for utility plant and related costs. SJG competes with oil, propane and electricity suppliers for residential, commercial and industrial users. The market for natural gas sales is subject to competition due to deregulation. We enhanced SJG's competitive position while maintaining margins by using an unbundled tariff. This tariff allows full cost-of-service recovery, except for the variable cost of the gas commodity, when transporting gas for our customers. Under this tariff, SJG profits from transporting, rather than selling, the commodity. SJG's residential, commercial and industrial customers can choose their supplier while we recover the cost of service through transportation service (see Customer Choice Legislation). SJE, EnerTrade, SJRG and Marina actively arrange energy services and provide low-cost energy supplies in a highly competitive marketplace. Competitors of SJI's nonutility businesses are often much larger companies with substantially greater resources. SJI's subsidiaries successfully compete by focusing on providing services where we have a high level of expertise in geographic areas with which we are very familiar. Mandatorily Redeemable Preferred Securities -- SJG's statutory trust subsidiary, SJG Capital Trust, currently has $35 million of 8.35% SJG-Guaranteed Mandatorily Redeemable Preferred Securities outstanding. SJG may redeem these securities at a price equal to 100% of the principal amount at any time. The securities currently trade on the New York Stock Exchange under the symbol SJI.T. Customer Choice Legislation -- All residential natural gas customers in New Jersey can choose their gas supplier under the terms of the Electric Discount and Energy Competition Act of 1999. As of December 31, 2002, 88,219 SJG residential customers chose a natural gas supplier other than the utility. This number increased from 39,998 at December 31, 2001 as marketers were able to offer natural gas at prices competitive with those available under regulated utility tariffs. Customers purchasing natural gas from providers other than the utility are charged for gas costs by the marketer, not the utility. The resulting decrease in SJG's revenues is offset by a corresponding decrease in gas costs. While customer choice can reduce utility revenues, it does not negatively affect SJG's net income or financial condition. The BPU continues to allow for full recovery of natural gas costs through the LGAC as well as other costs of service including deferred costs, through tariffs. SJI has benefited from customer choice legislation as SJE has successfully competed for and profited from its gas commodity customers. Temperature Adjustment Clause -- A BPU-approved Temperature Adjustment Clause (TAC) increased SJG's net earnings by $2.3 million in 2002. In 2001, the TAC increased net income by $2.0 million and in 2000, the TAC decreased net earnings by $0.9 million. The clause is designed to mitigate the effect of variations in heating season temperatures from historical norms. While we record the revenue and income impacts of TAC adjustments as incurred, cash inflows or outflows directly attributable to TAC adjustments generally do not begin until the next clause year. Each TAC year begins October 1. Operating Revenues - Utility -- Revenues decreased $59.1 million in 2002 compared with the prior year. The decrease was primarily due to the migration of residential customers from firm gas sales to transportation, lower revenue from off-system sales and weather that was 2.6% warmer than last year. These factors more than offset the revenue increase derived from adding 8,366 customers in 2002, the largest increase in more than a decade. During 2002, the number of residential customers who purchased natural gas from gas marketers increased by 121% as those marketers were able to offer competitive gas prices in 2002 compared with SJG's prices. The corresponding decline in customers who purchased their natural gas from the utility directly impacted utility revenues. However, since gas costs are passed on directly to customers without any profit margin added by New Jersey utilities, the increased customer usage of gas marketers did not impact SJG's profitability. SJG also experienced a significant decrease in off-system revenues due to lower average prices for gas sold in 2002. The volume of gas sold off-system was slightly lower in 2002; however, due to the higher margins per unit sold, off-system sales activity contributed more to earnings this year compared with 2001. Revenues increased $14.0 million in 2001 compared with the prior year. The increase was primarily due to higher rates resulting from an increase in the LGAC that reflected higher gas costs, the return of residential customers to firm gas sales from transportation and 6,658 additional customers. Early in 2001, a large number of residential customers who purchased natural gas from other providers resumed purchasing natural gas from SJG as marketers were unable to offer competitive prices. These increases offset a decrease in off-system revenues. The decrease was due to lower average prices for natural gas sold during 2001 compared with 2000. The volume of gas sold off-system was also lower in 2001 than in 2000. - 13 - As a result of SJG's TAC, revenues from utility ratepayers are closely tied to 20-year normal temperatures calculated under the clause and not actual temperatures. While the clause significantly reduces fluctuations in revenues related to temperature, as a general rule, revenues continue to be positively impacted by colder weather and negatively impacted by warmer weather. Weather in 2002 was 2.6% warmer than in 2001 and 7.8% warmer for the year than the 20-year TAC average. Revenues in 2001 were also negatively impacted by the weather. Weather in 2001 was 9.0% warmer than in 2000 and was also 5.3% warmer in 2001 than the 20-year TAC average. Total gas throughput increased 11.0% to 120.9 billion cubic feet (Bcf) in 2002. The higher throughput was almost entirely due to increased capacity release throughput. Warm weather resulted in reduced demand for natural gas and the need for pipeline capacity to transport that gas. Consequently, SJG had more capacity available to sell in 2002 than 2001. In 2001, total gas throughput decreased 17.8% to 108.9 Bcf. Results in 2001 were due to decreased capacity release, off-system sales, transportation and residential activity. Off-system and capacity release throughput declined primarily because we canceled a high-volume, low-margin supply and storage contract. Operating Revenues - Nonutility -- Nonutility operating revenues increased by $18.2 million in 2002 compared with 2001. Most of the increase was due to the significant customer growth experienced by SJE, which included the addition of over 45,000 residential and 2,100 commercial natural gas customers during 2002. Revenues increased by $19.3 million in 2001 compared with 2000. This increase was mainly due to higher gas prices on increased volumes experienced by SJE and the inclusion of SJRG as a wholly owned subsidiary of SJI as of January 1, 2001. As of that date, we are consolidating SJRG's results into SJI. Prior to 2001, SJI recorded only its share of SJRG's net income under the equity method of accounting. SJI has presented SJRG's revenues and expenses from trading in energy related contracts on a net basis (see Note 1 from Notes to Consolidated Financial Statements). Cost of Gas Sold - Utility -- Cost of gas sold - utility decreased $62.2 million in 2002 compared with 2001. Lower gas costs and sales volumes for both local distribution and off-system sales were responsible for the decrease. SJG's gas cost during 2002 averaged $4.29 per decatherm (dt) compared with $4.78/dt in 2001 and $4.18/dt in 2000. SJG passed lower gas costs on to local distribution customers through a $17.6 million refund in 2002. Warmer weather and the migration of customer gas purchases from the utility to gas marketers were the main causes of lower sales volumes. In 2001, cost of gas sold - utility increased $17.6 million compared with 2000 as a result of higher gas costs for both local distribution and off-system sales, partially offset by lower volumes sold. Unlike gas costs associated with off-system sales, changes in the unit cost of gas sold to utility ratepayers do not directly affect cost of gas sold - utility. We defer and address fluctuations in gas costs to ratepayers not reflected in current rates in future periods under a BPU-approved Levelized Gas Adjustment Clause. Gas supply sources include contract and open-market purchases. SJG secures and maintains its own gas supplies to serve its sales customers. We do not anticipate any difficulty renewing or replacing expiring contracts under substantially similar terms and conditions. Cost of Sales - Nonutility -- Cost of sales - nonutility increased $17.1 million in 2002 compared with 2001 due mainly to SJE's customer growth, described in the Operating Revenues - Nonutility section. Cost of sales - nonutility increased by $12.6 million in 2001 compared with 2000. This increase was due mainly to higher natural gas prices as also described in the Operating Revenues - Nonutility section. Operations -- A summary of net changes in operations (in thousands): 2002 vs. 2001 2001 vs. 2000 Utility: Other Production Expense $ 47 $ (9) Transmission 30 30 Distribution 590 283 Customer Accounts and Services 1,889 492 Sales 90 18 Administration and General 398 (2,345) Nonutility 945 1,697 ------- ------- Total Operations $ 3,989 $ 166 ======= ======= Distribution expenses increased in 2002 as the cost to maintain the utility distribution system, inclusive of implementation of new federally mandated training programs, continues to increase. Customer Accounts and Services expense increased significantly in 2002 primarily due to higher bad debt expense as customer account write-offs rose and SJG increased its reserve for bad debts. The higher level of write-offs was attributable to the unusually cold 2000-2001 winter season. In addition, the colder start to the 2002-2003 winter season resulted in the need to increase the reserve for future uncollectible account balances. The increase in Customer Accounts and Services in 2001 compared with 2000 resulted from the absence of almost two months of payroll expense in 2000 due to a work stoppage in that year. Administrative and General (A&G) expenses increased in 2002 primarily because of increasing healthcare and pension costs. Approximately two-thirds of the A&G decline in 2001 was work-stoppage related. The remainder was due to a reallocation of benefits to individual cost centers mandated by the BPU as part of New Jersey's energy deregulation process. Nonutility expenses in 2002 rose primarily due to higher customer acquisition costs resulting from substantial growth in SJE's customer base. The 2001 increase resulted from recognition of SJRG's activities on a consolidated basis beginning in 2001. Prior to 2001, we recognized these activities under the equity method of accounting. Other Operating Expenses -- A summary of principal changes in other consolidated operating expenses (in thousands): 2002 vs. 2001 2001 vs. 2000 Maintenance $ (1,670) $ (50) Depreciation 1,242 1,041 Energy and Other Taxes 201 (1,009) Maintenance expense decreased in 2002 primarily due to lower levels of Remediation Adjustment Clause (RAC) amortization. RAC-related expenses do not affect earnings as an offsetting amount is recognized in revenues. Depreciation was higher due to SJG's increased investment in property, plant and equipment. Changes in Energy and Other Taxes relate primarily to changes in volumes of gas sold and transported by SJG. Interest Charges -- Interest charges decreased in both 2002 and 2001 compared with the prior year due primarily to reductions in short-term rates on line of credit borrowings and recoveries of carrying costs associated with unrecovered RAC and purchased gas costs. We incurred debt primarily to expand and upgrade SJG's gas transmission and distribution system, to construct the Marina Energy thermal plant, and to support seasonal working capital needs related to gas inventories and customer receivables. We are capitalizing interest incurred on the construction debt of the thermal plant during the construction period. Capitalized interest will be amortized and we will expense current interest when the project becomes fully operational in mid-2003. Discontinued Operations -- Loss from discontinued operations decreased in 2002 and 2001. In 2002, these losses were primarily comprised of environmental - 14 - remediation and product liability litigation associated with previously disposed of businesses. The 2001 loss was primarily due to the settlement of a complaint in bankruptcy court against SJE filed by Power Company of America Liquidating Trust (PCA). PCA was a wholesale electricity trading company with which SJE did business. This was offset by the settlement of a lawsuit with an insurance carrier to recover previously incurred costs at an operation we sold in 1996. Net Income Applicable to Common Stock -- Net income for 2002 was $29.0 million, or $2.41 per share, compared with $26.6 million, or $2.27 per share and $24.2 million, or $2.12 per share in 2001 and 2000, respectively. Reasons for the increases in net income are detailed above. Regulatory Matters -- Rate Actions: In January 1997, the BPU granted SJG a 9.62% rate of return on rate base, which included an 11.25% return on common equity. Additionally, SJG's threshold for sharing pre-tax margins generated by interruptible and off-system sales and transportation increased. Currently, SJG keeps 100% of pre-tax margins up to the threshold level of $7.8 million. The next $750,000 is credited to the Levelized Gas Adjustment Clause (LGAC). Thereafter, SJG keeps 20% of the pre-tax margins as it has historically. In November 2001, SJG filed for a $2.7 million rate increase to recover the cash related to a 3-year net deficiency in the TAC. Additionally, in September 2002, SJG filed for an $8.6 million rate increase to recover the cash related to a TAC deficiency resulting from warmer-than-normal weather for the 2001-2002 winter. Also in November 2001, SJG filed for a $17.6 million reduction to its LGAC. The BPU approved the LGAC reduction effective December 1, 2001 and concurrently approved recovery of SJG's October 31, 2001 underrecovered gas cost balance. As a result, SJG is recovering $48.9 million over three years plus interest accrued since April 1, 2001. SJG is also recovering interest for the 3-year amortization period at a rate of 5.75%. In May 2002, SJG received approval from the BPU to reduce its overcollected LGAC balance by another $17.6 million through a customer refund. This refund did not affect SJG's net income or financial condition. In September 2002, SJG filed with the BPU to maintain its current LGAC rate through October 2003. During 2002, the BPU convened a gas policy group to address Basic Gas Supply Service (BGSS), which is the gas supply service being provided by the natural gas utility. In December 2002, the BPU approved the proposed BGSS price structure which was submitted by the gas policy group. When implemented in 2003, customers will be able to make more informed decisions about choosing an alternate supplier by having a utility price structure that more currently reflects market conditions. Further, BGSS will provide SJG with more pricing flexibility, through automatic rate changes, resulting in the reduction of over/under-recoveries. The BGSS-approved price structure will replace the current LGAC pricing structure. However, other LGAC related mechanisms, such as deferred accounting treatment, the sharing of pre-tax margins generated by interruptible and off-system sales and transportation, and the allowance for full recovery of natural gas costs, will remain in place under BGSS. In August 2002, SJG filed for a Societal Benefits Clause (SBC) rate increase. The SBC recovers costs related to BPU-mandated programs, including environmental remediation costs that are recovered through its Remediation Adjustment Clause (RAC); energy efficiency and renewable energy program costs that are recovered through its Comprehensive Resource Analysis Clause (renamed in December 2002 as the New Jersey Clean Energy Programs); consumer education program costs; and low income program costs. If approved, the rate increase filed would provide for annual recovery of $13.7 million, representing an annual increase of approximately $7.0 million over the $6.7 million recovery currently included in rates. Also in August 2002, SJG filed a petition with the BPU to transfer its appliance service business from the regulated utility into a newly created unregulated company. As filed, the newly created company would have the flexibility to be more responsive to competition and customer needs by expanding and modifying its service offerings in an unregulated environment. Filings and petitions described above are still pending unless otherwise indicated. Environmental Remediation: SJI incurred and recorded costs for environmental clean up of sites where SJG or its predecessors operated manufactured gas plants (MGP). SJG stopped manufacturing gas in the 1950s. SJI and some of its nonutility subsidiaries also recorded costs for environmental clean up of sites where we previously operated a fuel oil business and also where we maintained equipment, fueling stations and storage. We successfully entered into settlements with all of SJG's historic comprehensive general liability carriers regarding environmental remediation expenditures at former MGP sites. As part of these settlements, SJG purchased an insurance policy that caps its remediation expenditures at 11 of these sites. The insurance policy is in force until 2024 at 10 sites and until 2029 at one site. We believe that all costs incurred net of insurance recoveries relating to SJG's MGP sites will be recovered through rates under SJG's RAC. The RAC currently permits SJG to recover incurred costs in equal installments over 7-year periods with carrying costs. As of December 31, 2002, SJG has $6.5 million of remediation costs not yet recovered through rates. Other matters are incorporated by reference to Note 14 to the consolidated financial statements included in this report. Liquidity and Capital Resources -- Liquidity needs at SJI are driven by factors that include natural gas commodity prices; the impact of weather on customer bills; lags in fully collecting gas costs from customers under the LGAC; working capital needs of our energy trading activities; the timing of construction and remediation expenditures and related permanent financings; mandated tax payment dates; and both discretionary and required repayments of long-term debt. We first seek to meet liquidity needs with net cash provided by operating activities. Net cash provided by operating activities totaled $79.5 million, $10.7 million and $37.7 million in 2002, 2001 and 2000, respectively. The wide swing in our net cash provided by operating activities between 2002 and 2001 was primarily due to the impact of cold weather in November and December of 2002 compared with warm weather experienced at the same time in 2001. Consequently, inventories were lower than at December 31, 2001 due to high levels of gas consumption by customers in late 2002. The majority of the 2001 change resulted from significantly higher-cost gas placed into inventory during the year. Very high gas prices combined with cold weather experienced during November and December of 2000 resulted in much higher receivables and payables and much lower inventories at year end 2000 compared with December 31, 2001 when weather conditions at year end were warmer than normal. We use short-term borrowings under lines of credit from commercial banks to supplement cash from operations where necessary. Lines of credit available to SJI totaled $197.0 million at December 31, 2002, of which $166.5 million was used. All but $10 million of these lines are available through five commercial banks on an uncommitted basis. The banks and SJI review and renew the lines annually. The $10 million line is extended on a committed basis, maturing May 2003, by a sixth commercial bank. $172 million of these lines were exclusively for SJG's use. SJI has long-standing relationships with all of these banks and we believe, based upon ongoing dialogue, that there will continue to be sufficient credit available to meet our business' future liquidity needs. SJI supplements its operating cash flow and credit lines with both debt and equity capital. Over the years, SJG has used long-term debt, primarily in the form of First Mortgage Bonds, to finance its long-term needs. These needs are primarily capital expenditures for property, plant and equipment. Since 1998, SJG has financed these needs via a Medium Term Note (MTN) program, secured in similar fashion to the First Mortgage Bonds. SJG's registration of a new $150 - 15 - million MTN program with the Securities and Exchange Commission became effective in December 2002. This program replaces a previous $100 million, 3-year MTN program that was fully used in 2001. Current maturities on long-term debt over the next five years are as follows: $10.7 million per year in 2003 through 2005; $9.0 million in 2006; and $8.4 million in 2007. Since September 2001, Marina issued $20 million of tax-exempt and $25 million of taxable variable rate demand bonds through the New Jersey Economic Development Authority, the last $6 million of which was issued in January 2003. The tax-exempt and taxable bonds mature in 2031 and 2021, respectively. Investors in the bonds receive liquidity and credit support via a letter of credit provided by a syndicate of commercial banks. We are using the proceeds of this bond issuance to fund project development and construction costs for the thermal energy plant being constructed by Marina to serve The Borgata Resort which is scheduled to open in summer 2003. SJI has raised equity capital over the past three years through its Dividend Reinvestment Plan (DRP). Participants in SJI's DRP receive newly issued shares. We offer a 2% discount on DRP investments because it is the most cost-effective way for us to raise equity capital in the quantities we are seeking. Through the DRP, SJI raised $10.7 million of equity capital by issuing 338,518 shares in 2002 and $9.6 million of equity capital by issuing 354,809 shares in 2001. We anticipate raising approximately $16 million of equity capital through the DRP in 2003. Capital Expenditures, Commitments and Contingencies -- Capital Expenditures: SJI has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment and for environmental remediation costs. Net construction and remediation expenditures for 2002 amounted to $78.4 million. We estimate the net costs for 2003, 2004 and 2005 at approximately $57.8 million, $50.4 million and $50.3 million, respectively. Decreases in expenditure estimates in 2003 through 2005 reflect the anticipated completion of the Marina Energy Thermal Plant in 2003. Commitments and Contingencies: SJI made certain commitments to The Borgata Resort relating to the development of Marina's thermal energy project. In the event that certain construction milestones are not met, SJI is obligated to make specific payments to The Borgata, per the construction contract. As of December 31, 2002, SJI's financial obligation to The Borgata under this contract was reduced to $12.9 million from a total of $31.4 million at the beginning of the project. Half of that financial obligation was supported by a standby letter of credit. To date, construction is proceeding ahead of schedule as outlined in the contract and we do not anticipate problems in meeting any scheduled construction milestones. In fact, on November 1, 2002, the thermal plant began providing The Borgata with heat and hot water for use during the completion of the resort's construction. SJI's obligation under the contract is projected to total $5 million by mid-2003 and reduce to zero by mid-2004. SJI is obligated on the letters of credit supporting the variable rate demand bonds issued through the New Jersey Economic Development Authority by Marina. A syndicate of commercial banks issued $46 million of annually renewing letters of credit to support the development of Marina's thermal plant project. The letter of credit agreement contains certain financial covenants measured on a quarterly basis. SJI was in compliance with these covenants as of December 31, 2002. SJG has certain commitments for both pipeline capacity and gas supply for which it pays fees regardless of usage. Those commitments as of December 31, 2002 average $44.1 million annually and total $293.5 million over the contracts' lives. Approximately 15% of the financial commitment under these contracts expires during the next five years. We expect to renew each of these contracts under renewal provisions provided in each contract. SJG recovers all prudently incurred fees through rates via the LGAC. Occasionally, SJI enters into operating leases to finance the use of a variety of assets, including vehicles, telecommunications equipment and copiers. SJI's operating lease obligations for the next five years are: $502,000 in 2003; $356,000 in 2004; $190,000 in 2005; $35,000 in 2006; and a total of $62,000 in 2007 and beyond. SJI provides credit support for SJRG in relation to establishing contracts to purchase natural gas on a physical or a financial basis. SJI is subject to claims arising in the ordinary course of business and other legal proceedings. We accrue liabilities related to claims when we can determine the amount or range of amounts of likely settlement costs for those claims. Among other actions, SJI was named in certain product liability claims related to our former sand mining subsidiary. Management does not currently anticipate the disposition of any known claims to have a material adverse effect on SJI's financial position, results of operations or liquidity. Market Risks -- Commodity Market Risks: Certain regulated and unregulated SJI subsidiaries are involved in buying, selling, transporting and storing natural gas for their own accounts as well as managing these activities for others. These subsidiaries are subject to market risk due to price fluctuations. To hedge against this risk, we enter into a variety of physical and financial transactions including forward contracts, swaps, futures and options agreements. To manage these transactions, SJI has a well-defined risk management policy approved by our board of directors that includes volumetric and monetary limits. Management reviews reports detailing trading activity daily. Generally, we enter into derivative activities described above for risk management, not trading, purposes. SJG and SJE transact commodities on a physical basis only and do not enter into financial derivative positions directly. SJRG manages risk for these entities as well as for its own portfolio by entering into the types of transactions noted above. It is management's policy, to the extent practical, within predetermined risk management policy guidelines, to have limited unmatched positions on a deal or portfolio basis while conducting these activities. As a result of holding open positions to a minimal level, the financial impact to SJRG of changes in value of a particular transaction is substantially offset by an opposite change in the related hedge transaction. As of December 31, 2002, SJRG had $15.7 million of accounts receivable under sales contracts. Of that total, 88% were with companies rated investment-grade, or were guaranteed by an investment-grade-rated parent or were with companies where we have a collateral arrangement. SJRG and SJE entered into certain contracts to purchase, sell, store and transport natural gas. The net unrealized pre-tax gain on these contracts on January 1, 2001 was $250,742. We derive the net unrealized pre-tax (loss) gain on the energy trading contracts of $(0.5) million and $3.4 million at December 31, 2002 and 2001, respectively, primarily from contracts entered into during 2002 and 2001 and it is included as a component of revenues - nonutility. SJRG's and SJE's contracts are typically less than 12 months long. The fair value of these contracts determined under the mark-to-market method as of December 31, 2002 is as follows (in thousands): Assets Maturity Maturity Source of Fair Value < 1 Year 1-3 Years Total Prices Actively Quoted NYMEX $ 19,025 $ 835 $ 19,860 Other External Sources Basis 7,075 1,870 8,945 Other Methods Gas Inventory 2,989 62 3,051 -------- ------- -------- Total $ 29,089 $ 2,767 $ 31,856 ======== ======= ======== Liabilities Maturity Maturity Source of Fair Value < 1 Year 1-3 Years Total Prices Actively Quoted NYMEX $ 9,296 $ 798 $ 10,094 Other External Sources Basis 4,280 1,238 5,518 Other Methods Gas Inventory 1,989 59 2,048 -------- ------- -------- Total $ 15,565 $ 2,095 $ 17,660 ======== ======= ======== - 16 - NYMEX (New York Mercantile Exchange) is the primary national commodities exchange on which natural gas is traded. Basis represents the price of a NYMEX natural gas futures contract adjusted for the difference in price for delivering the gas at another location. Inventory represents the market value of natural gas held in storage determined through a combination of the NYMEX and Basis methods. Contracts valued under the inventory method in the preceding chart include gas inventory with a cost of $0.9 million. A reconciliation of SJI's estimated net fair value of energy trading contracts follows (in thousands): Net Energy Trading Assets, January 1, 2002 $ 8,803 Contracts Settled During 2002, Net (3,527) Other Changes in Fair Value from Continuing and New Contracts, Net 8,921 ------- Net Energy Trading Assets, December 31, 2002 $14,197 ======= Interest Rate Risk: Our exposure to interest rate risk relates primarily to short-term, variable rate borrowings. Our short-term, variable rate debt outstanding at December 31, 2002 was $166.5 million and averaged $125.2 million for the entire year. The months where average outstanding variable rate debt was at its highest and lowest points were November at $166.1 million and May at $86.8 million, respectively. A hypothetical 100 basis point (1%) increase in interest rates on our average variable rate debt outstanding would result in a $739,000 increase in our interest expense net of tax on an annual basis. We chose the 100 basis point increase for illustrative purposes, as it provides a simple basis for calculating the impact of interest rate changes under a variety of interest rate scenarios. Over the past five years, the change in basis points (b.p.) of our average monthly interest rates from the beginning to end of each year was as follows: 2002 -- 74 b.p. decrease; 2001 -- 383 b.p. decrease; 2000 - -- 83 b.p. increase; 1999 -- 81b.p. increase; and 1998 -- 38 b.p. decrease. For December 2002, our average interest rate on variable rate debt was 2.22%. Consequently, the interest rate reduction experienced since the beginning of 2001 cannot be duplicated. To reduce exposure to an interest rate increase on our variable rate debt, SJG entered into two interest rate swap agreements. The swaps fixed the rate on $40 million of variable rate debt from April 2002 to March 2003 at 3.57%. SJG primarily issues long-term debt at fixed rates and, consequently, interest expense is not significantly impacted by changes in market interest rates. SJG prepaid $17.5 million of 9% first mortgage bonds in October 2002. SJG paid a premium of $566,000 to bondholders in conjunction with that redemption. Given current interest rate levels, we anticipate redeeming an additional $8.1 million of first mortgage bonds prior to scheduled maturity during the next 12 months. The only long-term debt outstanding other than that issued by the utility consists of the New Jersey Economic Development Authority bonds used to finance the construction of Marina's thermal plant. They were issued at floating rates that reset weekly. Subsequent to issuance, we entered into interest rate swap contracts that effectively fixed the rate on $20 million of tax-exempt debt at 4.08% through 2011 and $19 million of taxable debt at 4.59% through 2007. The amount of the swap on the taxable debt reduces annually commencing December 2003. Independent Auditors' Report To the Shareholders and Board of Directors of South Jersey Industries, Inc.: We have audited the consolidated balance sheets of South Jersey Industries, Inc. and subsidiaries as of December 31, 2002 and 2001, 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, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of South Jersey Industries, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of presenting revenues and expenses from trading in physical power contracts. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Philadelphia, Pennsylvania February 19, 2003 - 17 - Statements of Consolidated Income (In Thousands Except for Per Share Data)
South Jersey Industries, Inc. and Subsidiaries Year Ended December 31, 2002 2001 2000 --------- --------- --------- Operating Revenues: Utility (Notes 1 & 9) $ 386,120 $ 445,204 $ 431,156 Nonutility (Notes 1 & 3) 119,006 100,782 81,460 --------- --------- --------- Total Operating Revenues 505,126 545,986 512,616 --------- --------- --------- Operating Expenses: Cost of Gas Sold -- Utility 243,341 305,587 288,002 Cost of Sales -- Nonutility (Notes 1 & 3) 105,242 88,149 75,592 Operations 48,110 44,121 43,955 Maintenance 6,101 7,771 7,821 Depreciation (Note 1) 22,451 21,209 20,168 Energy and Other Taxes 10,806 10,605 11,614 --------- --------- --------- Total Operating Expenses 436,051 477,442 447,152 --------- --------- --------- Operating Income 69,075 68,544 65,464 Other Income and Expense: Equity in Affiliated Companies (Notes 1 & 3) 941 704 1,336 Other 534 517 1,016 --------- --------- --------- Total Other Income and Expense 1,475 1,221 2,352 --------- --------- --------- Interest Charges 17,676 20,539 21,292 Preferred Dividend Requirements of Subsidiary (Note 2) 3,058 3,062 3,074 --------- --------- --------- Income Before Income Taxes 49,816 46,164 43,450 Income Taxes (Notes 1, 5 & 13) 20,404 19,295 18,709 --------- --------- --------- Income from Continuing Operations 29,412 26,869 24,741 Loss from Discontinued Operations -- Net (Note 3) (424) (455) (557) Cumulative Effect of a Change in Accounting Principle -- Net (Note 1) -- 148 -- --------- --------- --------- Net Income Applicable to Common Stock $ 28,988 $ 26,562 $ 24,184 ========= ========= ========= Basic Earnings Per Common Share: (Note 4) Continuing Operations $ 2.44 $ 2.29 $ 2.17 Discontinued Operations (0.03) (0.03) (0.05) Cumulative Effect of a Change in Accounting Principle -- Net -- 0.01 -- --------- --------- --------- Basic Earnings Per Common Share $ 2.41 $ 2.27 $ 2.12 ========= ========= ========= Average Shares of Common Stock Outstanding -- Basic 12,038 11,716 11,401 Diluted Earnings Per Common Share: (Note 4) Continuing Operations $ 2.43 $ 2.29 $ 2.17 Discontinued Operations (0.04) (0.04) (0.05) Cumulative Effect of a Change in Accounting Principle -- Net -- 0.01 -- --------- --------- --------- Diluted Earnings Per Common Share $ 2.39 $ 2.26 $ 2.12 ========= ========= ========= Average Shares of Common Stock Outstanding -- Diluted 12,116 11,750 11,411 Dividends Declared Per Common Share $ 1.51 $ 1.48 $ 1.46 ========= ========= =========
Statements of Consolidated Retained Earnings (In Thousands)
South Jersey Industries, Inc. and Subsidiaries Year Ended December 31, 2002 2001 2000 --------- --------- --------- Balance at Beginning of Year $ 67,218 $ 58,004 $ 50,467 Net Income Applicable to Common Stock 28,988 26,562 24,184 Dividends Declared-- Common Stock (18,204) (17,348) (16,647) --------- --------- --------- Balance at End of Year (Note 12) $ 78,002 $ 67,218 $ 58,004 ========= ========= ========= The accompanying footnotes are an integral part of the financial statements.
- 18 - Statements of Consolidated Cash Flows (In Thousands)
South Jersey Industries, Inc. and Subsidiaries Year Ended December 31, 2002 2001 2000 -------- -------- -------- Cash Flows from Operating Activities: Net Income Applicable to Common Stock $ 28,988 $ 26,562 $ 24,184 Adjustments to Reconcile Net Income to Cash Flows Provided by Operating Activities: Depreciation and Amortization 24,864 23,446 23,104 Unrealized Loss (Gain) on Energy Trading Contracts 514 (3,429) -- Provision for Losses on Accounts Receivable 3,706 2,667 2,280 Revenues and Fuel Costs Deferred -- Net 6,787 (9,202) (16,006) Deferred and Non-Current Income Taxes and Credits -- Net 14,343 7,310 13,845 Environmental Remediation Costs -- Net* 6,354 5,452 7,019 Additional Pension Contributions (17,091) (327) (336) Changes in: Accounts Receivable (29,139) 22,427 (60,995) Inventories 17,950 (27,602) (4,843) Prepayments and Other Current Assets (3,145) (233) 75 Prepaid and Accrued Taxes -- Net 359 574 1,025 Accounts Payable and Other Accrued Liabilities 24,546 (36,817) 45,415 Other -- Net 426 (99) 2,922 -------- -------- -------- Net Cash Provided by Operating Activities 79,462 10,729 37,689 -------- -------- -------- Cash Flows from Investing Activities: (Investment in) Return of Investment in Affiliates (481) 164 (2,201) Repayment of Loan to Affiliate 120 800 1,595 Purchase of Available-for-Sale Securities (693) (766) (832) Proceeds from Sale (Purchase) of Restricted Investments 20,882 (22,962) -- Capital Expenditures, Cost of Removal and Salvage (84,740) (66,859) (50,834) -------- -------- -------- Net Cash Used in Investing Activities (64,912) (89,623) (52,272) -------- -------- -------- Cash Flows from Financing Activities: Net Borrowings from Lines of Credit 14,140 31,160 1,250 Proceeds from Issuance of Long-Term Debt 10,000 64,000 35,000 Principal Repayments of Long-Term Debt (30,268) (11,877) (10,580) Dividends on Common Stock (18,204) (17,348) (16,647) Proceeds from Sale of Common Stock 10,926 10,953 8,857 Repurchase of Preferred Stock -- (114) (240) Premium for Early Retirement of Debt (617) -- -- Payments for Issuance of Long-Term Debt (201) (1,142) (1,464) -------- -------- -------- Net Cash (Used in) Provided by Financing Activities (14,224) 75,632 16,176 -------- -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 326 (3,262) 1,593 Cash and Cash Equivalents at Beginning of Year 3,965 7,227 5,634 -------- -------- -------- Cash and Cash Equivalents at End of Year $ 4,291 $ 3,965 $ 7,227 ======== ======== ======== Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Interest (Net of Amounts Capitalized) $ 17,811 $ 20,662 $ 24,219 Income Taxes (Net of Refunds) $ 8,433 $ 6,480 $ 4,838 * Notes 9 and 14 contain additional information relating to environmental remediation costs. The accompanying footnotes are an integral part of the financial statements.
- 19 - Consolidated Balance Sheets (In Thousands)
South Jersey Industries, Inc. and Subsidiaries Year Ended December 31, 2002 2001 ----------- ----------- Assets Property, Plant and Equipment: (Note 1) Utility Plant, at original cost $ 846,865 $ 805,440 Accumulated Depreciation (236,813) (221,457) Nonutility Property and Equipment, at cost 57,950 24,118 Accumulated Depreciation (1,428) (1,058) ----------- ----------- Property, Plant and Equipment -- Net 666,574 607,043 ----------- ----------- Investments: Available-for-Sale Securities (Notes 1 & 6) 3,462 3,139 Restricted (Note 6) 2,080 22,962 Investments in Affiliates (Notes 1 & 3) 1,849 1,369 ----------- ----------- Total Investments 7,391 27,470 ----------- ----------- Current Assets: Cash and Cash Equivalents (Notes 1 & 10) 4,291 3,965 Accounts Receivable 94,105 66,719 Unbilled Revenues (Note 1) 33,537 34,981 Provision for Uncollectibles (3,170) (2,661) Natural Gas in Storage, average cost 41,490 59,778 Materials and Supplies, average cost 4,156 3,818 Energy Trading Assets (Note 1) 29,089 47,187 Prepaid Taxes 2,440 4,650 Prepayments and Other Current Assets 6,761 3,616 ----------- ----------- Total Current Assets 212,699 222,053 ----------- ----------- Regulatory and Other Non-Current Assets: (Note 1) Deferred Fuel Costs -- Net (Note 9) 31,594 38,381 Other Regulatory Assets 73,710 79,994 Energy Trading Assets 2,767 3,554 Derivatives -- 509 Unamortized Debt Discount and Expense 7,086 6,636 Other 9,939 3,789 ----------- ----------- Total Regulatory and Other Non-Current Assets 125,096 132,863 ----------- ----------- Total Assets $ 1,011,760 $ 989,429 =========== =========== Capitalization and Liabilities Capitalization: Common Equity (Notes 4 & 12) $ 237,792 $ 220,286 Preferred Stock and Securities of Subsidiary (Note 2) 36,690 36,690 Long-Term Debt (Note 6) 238,016 259,247 ----------- ----------- Total Capitalization 512,498 516,223 ----------- ----------- Current Liabilities: Notes Payable (Note 10) 166,500 152,360 Current Maturities of Long-Term Debt (Note 6) 10,696 9,733 Accounts Payable 76,657 48,239 Customer Deposits 6,924 5,976 Environmental Remediation Costs (Note 14) 5,104 11,319 Taxes Accrued 892 2,743 Energy Trading Liabilities (Note 1) 15,565 38,991 Derivatives (Note 1) 142 -- Deferred Income Taxes -- Net (Note 13) 24,818 26,629 Interest Accrued and Other Current Liabilities 9,334 14,154 ----------- ----------- Total Current Liabilities 316,632 310,144 ----------- ----------- Deferred Credits and Other Non-Current Liabilities: Deferred Income Taxes -- Net (Note 13) 97,890 84,717 Investment Tax Credits (Note 5) 3,819 4,166 Pension and Other Postretirement Benefits (Note 11) 15,828 19,313 Environmental Remediation Costs (Note 14) 47,051 41,423 Energy Trading Liabilities (Note 1) 2,095 2,947 Derivatives (Note 1) 2,431 -- Other 13,516 10,496 ----------- ----------- Total Deferred Credits and Other Non-Current Liabilities 182,630 163,062 ----------- ----------- Commitments and Contingencies (Note 14) Total Capitalization and Liabilities $ 1,011,760 $ 989,429 =========== =========== The accompanying footnotes are an integral part of the financial statements.
- 20 - Schedules of Consolidated Capitalization (In Thousands Except for Per Share Data)
South Jersey Industries, Inc. and Subsidiaries Year Ended December 31, 2002 2001 ---------- ---------- Common Equity: (Notes 4 & 12) Common Stock: Par Value $1.25 per share; Authorized 20,000,000 shares; Outstanding Shares: 12,206,474 (2002) and 11,860,990 (2001) Balance at Beginning of Year $ 14,826 $ 14,375 Stock Plans 432 451 ---------- ---------- Balance at End of Year 15,258 14,826 Premium on Common Stock 150,434 139,929 Accumulated Other Comprehensive Loss (Note 8) (5,902) (1,687) Retained Earnings 78,002 67,218 ---------- ---------- Total Common Equity 237,792 220,286 ---------- ---------- Preferred Stock and Securities of Subsidiary: (Note 2) South Jersey Gas Company -- Redeemable Cumulative Preferred Stock: Par Value $100 per share, 41,966 Shares Authorized Outstanding Shares: Series 8% -- 16,904 1,690 1,690 South Jersey Gas Company -- Guaranteed Manditorily Redeemable Preferred Securities of Subsidiary Trust: Par Value $25 per share, 1,400,000 shares Authorized and Outstanding 35,000 35,000 ---------- ---------- Total Preferred Stock and Securities of Subsidiary 36,690 36,690 ---------- ---------- Long-Term Debt: (A) South Jersey Gas Company: First Mortgage Bonds: (B) 8.19% Series due 2007 11,362 13,635 10.25% Series due 2008 7,385 9,658 9% Series due 2010 (C) -- 19,687 6.12% Series due 2010 10,000 10,000 6.74% Series due 2011 10,000 10,000 6.57% Series due 2011 15,000 15,000 6.95% Series due 2013 35,000 35,000 7.7% Series due 2015 15,000 15,000 6.5% Series due 2016 9,965 10,000 7.97% Series due 2018 10,000 10,000 7.125% Series due 2018 20,000 20,000 7.7% Series due 2027 35,000 35,000 7.9% Series due 2030 10,000 10,000 Unsecured Notes: Debenture Notes, 8.6% due 2010 21,000 27,000 Marina Energy LLC: (D) Series A Bonds at variable rates due 2031 20,000 20,000 Series B Bonds at variable rates due 2021 19,000 9,000 ---------- ---------- Total Long-Term Debt Outstanding 248,712 268,980 Less Current Maturities 10,696 9,733 ---------- ---------- Total Long-Term Debt 238,016 259,247 ---------- ---------- Total Capitalization $ 512,498 $ 516,223 ========== ========== (A) The long-term debt maturities and sinking fund requirements for the succeeding 5 years are as follows: 2003, $10,696; 2004, $10,696; 2005, $10,696; 2006, $8,989; and 2007, $8,420. (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 October 7, 2002, SJG redeemed its 9% Series First Mortgage Bonds due 2010. The premium associated with the redemption was approximately $0.6 million. SJG will seek BPU approval to amortize the premium over the remaining term of this bond issue in accordance with the BPU's uniform system of accounts. (D) In September 2001 and January 2002, Marina issued $29 million and $10 million, respectively, of variable rate revenue bonds through the New Jersey Economic Development Authority. The variable rates at December 31, 2002 for the Series A and Series B bonds were both 1.55%. In January 2003, Marina issued an additional $6.0 million of taxable Series B variable rate bonds. The accompanying footnotes are an integral part of the financial statements.
- 21 - Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies: Consolidation -- The consolidated financial statements include the accounts of South Jersey Industries, Inc. (SJI) and its subsidiaries. We eliminated all significant intercompany accounts and transactions. SJI reclassified some previously reported amounts to conform with current year classifications. Equity Investments -- We classify equity investments purchased as long-term investments as Available-for-Sale Securities on our consolidated balance sheets and/or carry them at their estimated fair value with any changes in unrealized gains or losses included in Other Comprehensive Income (See Note 8). SJI, either directly or through its wholly owned subsidiaries, currently holds a 50% non-controlling interest in several affiliated companies and accounts for the investments under the equity method. We include the operations of these affiliated companies in the statements of consolidated income under the caption, Equity in Affiliated Companies (See Note 3). Estimates and Assumptions -- We prepare our financial statements to conform with generally accepted accounting principles. Management makes estimates and assumptions that affect the amounts reported in the financial statements and related disclosures. Therefore, actual results could differ from those estimates. Regulation -- South Jersey Gas Company (SJG) is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU). We maintain our accounts according to the BPU's prescribed Uniform System of Accounts (See Note 9). SJG follows the accounting for regulated enterprises prescribed by the Financial Accounting Standards Board (FASB) Statement No. 71, "Accounting for the Effects of Certain Types of Regulation." In general, Statement No. 71 allows deferral of certain costs and creation of certain obligations when it is probable that these items will be recovered from or refunded to customers in future periods. Revenues -- SJG, South Jersey Energy Company (SJE) and South Jersey Resources Group, LLC (SJRG) bill customers monthly for gas deliveries. For SJG and SJE retail customers not billed at the end of each month, we make an accrual to recognize unbilled revenues from the date of the last bill to the end of the month. We defer and recognize revenues related to SJG's appliance warranty contracts over the full 12-month term of the contract as earned. The BPU allows SJG to recover the excess cost of gas sold over the cost included in base rates through the Levelized Gas Adjustment Clause (LGAC). We collect these costs on a forecasted basis upon BPU order. SJG defers over/under-recoveries of gas costs and includes them in the following year's LGAC or other similar recovery mechanism. We pay interest on overcollected LGAC balances based on SJG's approved return on rate base (See Note 9). SJG's tariff also includes a Temperature Adjustment Clause (TAC), a Remediation Adjustment Clause (RAC) and a Comprehensive Resource Analysis Clause (CRA). Our TAC reduces the impact of temperature fluctuations on SJG and its customers. The RAC recovers remediation costs of former gas manufacturing plants and the CRA recovers costs associated with our conservation plan. TAC adjustments affect revenue, income and cash flows since colder-than-normal weather can generate credits to customers, while warmer-than-normal weather can result in additional billings. RAC adjustments do not directly affect earnings because we defer and recover these costs through rates over 7-year amortization periods (See Notes 9 & 14). CRA adjustments are also deferred and do not affect earnings, as these costs are recovered through rates on an ongoing basis. Property, Plant and Equipment -- For regulatory purposes, utility plant is stated at original cost. Nonutility plant is stated at cost. The cost of adding, replacing and renewing property is charged to the appropriate plant account. Depreciation and Amortization -- We depreciate utility plant on a straight-line basis over the estimated remaining lives of the various property classes. We periodically review and adjust these estimates as required after BPU approval. The composite annual rate for all depreciable utility property was approximately 2.9% in 2002 and 2.8% in 2001 and 2000. Except for extraordinary retirements, accumulated depreciation is charged with the cost of depreciable utility property retired and removal costs less salvage. We compute nonutility property depreciation on a straight-line basis over the estimated useful lives of the property, ranging up to 20 years. We recognize gain or loss on the disposition of nonutility property in net income. Impairment of Long-Lived Assets -- We review the carrying amount of an asset for possible impairment whenever events or changes in circumstances indicate that such amount may not be recoverable. For the years ended 2002, 2001 and 2000, no such circumstances were identified. Energy Trading Activities and Derivative Instruments -- SJI's regulated and unregulated subsidiaries are involved in buying, selling, transporting and storing natural gas and buying and selling retail electricity for their own accounts as well as managing these activities for others. These subsidiaries are subject to market risk due to price fluctuations. To manage this risk, our companies enter into a variety of physical and financial transactions including forward contracts, swap agreements, option contracts and futures contracts. SJI structured its subsidiaries so that SJG and SJE transact commodities on a physical basis only and do not directly enter into financially settling positions. SJRG performs this risk management function for these entities and enters into the types of transactions noted above. Management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in identifying, assessing and controlling various risks. Management reviews any open positions in accordance with strict policies to limit exposure to market risk. Effective January 1, 2001, SJI adopted FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. We must record all derivatives, whether designated in hedging relationships or not, on the balance sheet at fair value. If the derivative is designated as a fair value hedge, we recognize the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk in earnings. If the derivative is designated as a cash flow hedge, we record the effective portion of changes in the fair value of the derivative in other comprehensive income and recognize it in the income statement when the hedged item affects earnings. We recognize ineffective portions of changes in the fair value of cash flow hedges in earnings. As permitted under Statement No. 133, SJI has elected to designate certain energy-related derivative instruments as cash flow hedges. SJRG manages its portfolio of purchases and sales, as well as natural gas in storage, using a variety of instruments that include forward contracts, swap agreements, option contracts and futures contracts. Because SJRG's transactions will not necessarily settle physically, SJRG accounts for these contracts at fair value under Emerging Issues Task Force (EITF) Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" or - 22 - Statement No. 133. Under this method of accounting, SJRG measures the difference between the contract price and the fair value of the contracts and records these as Energy Trading Assets or Energy Trading Liabilities on our consolidated balance sheets. For the years ended December 31, 2002 and 2001, we included the net unrealized pre-tax (loss) gain of $(0.5) million and $3.4 million, respectively, on energy trading contracts determined under the mark-to-market method, in Operating Revenues -- Nonutility. The Cumulative Effect of a Change in Accounting Principle -- Net of $148,000 relates to the adoption of Statement No. 133 on January 1, 2001. Beginning in 2002, SJI has presented revenues and expenses from trading in physical power contracts on a net basis in our consolidated statements of income consistent with recent changes in EITF Issue No. 02-03. Consequently, we reclassified Operating Revenues -- Nonutility and Cost of Sales -- Nonutility for the year ended December 31, 2001 to conform with this presentation. Because of the difficulty in obtaining certain information, we determined this presentation by netting the energy contract related revenue and expense transactions of SJRG. As a result, we based certain nonutility costs of sales on the transfer prices between SJRG and SJE. Management believes these transfer prices are generally at market, but has had no policy that they be at market. There is no effect on operating income or net income from the above changes in presentation. On October 25, 2002, the EITF rescinded its consensus in Issue No. 98-10 effective for transactions entered into after that date, with a cumulative effect adjustment for previously existing transactions to be recognized in the quarter beginning January 1, 2003. As a result of the recision, SJI will only mark-to-market those energy-related contracts that meet the definition of a derivative in Statement No. 133. Energy-related contracts that do not meet the definition of a derivative would be accounted for using the accrual basis of accounting. The effect of this change in accounting will result in a net charge of $426,338 shown as a cumulative effect adjustment effective January 1, 2003. Furthermore, management will designate any contract entered into after December 31, 2002 to hedge physical gas in storage as a cash flow hedge and will account for them accordingly. In November 2001, we entered into two interest rate swap contracts. The first swap effectively provides us with a fixed interest rate of 4.08% on Marina Energy LLC's (Marina) tax-exempt Series A variable rate bonds for a 10-year period. The second swap effectively fixes the interest rate of Marina's taxable Series B variable rate bonds at 4.55% for a 6-year period. The notional amount of this second swap decreases by $3.0 million per year beginning in December 2005. In January 2002, Marina issued an additional $10.0 million of taxable Series B variable rate bonds. In April 2002, we entered into an interest rate swap contract that effectively fixes the interest rate on these bonds at 4.62% for a 4-year period. The notional amount of this swap decreases to $8.0 million in December 2003, then to $3.9 million in December 2004, and terminates in December 2005. Also in April 2002, SJG entered into two interest rate swap contracts that effectively fix the interest rate at 3.57% through March 15, 2003 on $40.0 million of SJG's debt outstanding under its bank lines. We entered into interest rate swap agreements to hedge the exposure to increasing rates with respect to our variable rate debt. The differential to be paid or received as a result of these swap agreements is accrued as interest rates change and is recognized as an adjustment to interest expense. We account for these interest rate swaps as cash flow hedges. As of December 31, 2002 and 2001, the market value of these swaps was $(2.6) and $0.5 million, respectively, which represents the amount we would have to pay/be paid by the counterparty to terminate these contracts as of those dates. We include these balances on the 2002 and 2001 consolidated balance sheets under the caption Derivatives. As of December 31, 2002 and 2001, we calculated the swaps to be highly effective; therefore, we record the offset to the hedge asset, net of taxes, in Accumulated Other Comprehensive Loss (See Note 8). We determined the fair value of derivative instruments by reference to quoted market prices of listed contracts, published quotations or quotations from independent parties. New Accounting Pronouncements -- In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets" and Statement No. 143, "Accounting for Asset Retirement Obligations." Statement No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. It provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. In 1983, SJG acquired certain gas distribution and operating facilities with an excess of purchase price over net book value of $2.9 million, which was being amortized over 40 years. This acquisition adjustment is deemed to have an indefinite useful life. Accordingly, SJG ceased amortizing the premium on January 1, 2002 upon adoption of Statement No. 142, leaving a carrying amount of $1.6 million, which we reflect in the caption Utility Plant on the consolidated balance sheets. The premium amortization approximated $75,000 in 2001 and 2000. Statement No. 143, which we will adopt in 2003, establishes accounting and reporting standards for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SJG has certain easements and right-of-way agreements that qualify as legal obligations under Statement No. 143. However, it is our intent to maintain these agreements in perpetuity; therefore, no change in SJG's current accounting practices is required at this time. SJG recovers certain asset retirement costs through rates charged to customers as an approved component of depreciation expense. When we retire depreciable properties, we charge the original cost thereof, plus cost of removal less salvage, to accumulated depreciation. As of December 31, 2002, SJG accrued amounts in excess of actual removal costs incurred totaling $41.4 million which is included in utility plant accumulated depreciation. We do not expect the adoption of this statement to materially affect SJI's financial condition or results of operations. In August 2001, the FASB also issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which became effective in 2002. This statement prescribes that a single accounting model be used for valuing long-lived assets to be disposed of and broadens the presentation of discontinued operations. The adoption of this statement did not affect SJI's financial condition or results of operations nor do we expect its ongoing application to materially affect SJI's financial statements. In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities initiated after December 31, 2002. We do not expect the adoption of this statement to materially affect SJI's financial condition or results of operations. In November 2002, the FASB released Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." See section on Parental Guarantees under Note 14, Commitments and Contingencies, for discussion. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," which is effective for SJI's 2002 annual financial statements and subsequent interim financial reporting. This statement provides alternate methods of transitioning for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, it requires prominent disclosures about the - 23 - method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of this statement currently have no impact on SJI's financial statements (See Note 4). Income Taxes -- Deferred income taxes are provided for all significant temporary differences between book and taxable income (See Notes 5 & 13). Other Regulatory Assets -- Other Regulatory Assets at December 31, 2002 and 2001 consisted of the following items: Years Thousands of Dollars Remaining 2002 2001 Environmental Remediation Costs: (Notes 9 & 14) Expended -- Net 7 $ 6,470 $ 12,831 Liability for Future Expenditures -- 48,211 48,790 Income Taxes -- Flowthrough Depreciation (Note 5) 9 8,597 9,575 Postretirement Benefit Costs (Note 11) 10 3,780 4,158 Gross Receipts and Franchise Taxes (Note 5) 4 1,811 2,254 Other -- 4,841 2,386 --------- --------- Total Other Regulatory Assets $ 73,710 $ 79,994 ========= ========= Each item separately identified is being recovered through utility rate charges without a return on investment over the period indicated. The majority of the assets reflected above under the caption "Other" is currently subject to filings with the BPU requesting recovery. Management believes that all such deferred costs will be permitted to be recovered from ratepayers through future utility rates. In addition, SJG has one significant regulatory liability for overcollected taxes totaling $2.8 million and $1.6 million, including interest, as of December 31, 2002 and 2001, respectively. We include these amounts in the caption "Other" under the heading Deferred Credits and Other Non-Current Liabilities and they are subject to being returned to ratepayers in future rate proceedings. Statements of Consolidated Cash Flows -- For purposes of reporting cash flows, highly liquid investments with original maturities of three months or less are considered cash equivalents. 2. Preferred Stock and Securities of Subsidiary: Redeemable Cumulative Preferred Stock -- Annually, SJG is required to offer to purchase 1,500 shares of its Cumulative Preferred Stock, Series B at par value, plus accrued dividends. SJG may not declare or pay dividends or make distributions on its common stock if preferred stock dividends are in arrears. Preferred shareholders may elect a majority of SJG's directors if four or more quarterly dividends are in arrears. Mandatorily Redeemable Preferred Securities -- In 1997, SJG's statutory trust subsidiary, SJG Capital Trust (Trust), sold $35 million of 8.35% SJG-Guaranteed Mandatorily Redeemable Preferred Securities. The Trust's only assets are the 8.35% Deferrable Interest Subordinated Debentures issued by SJG maturing April 2037. This is also the maturity date of the Preferred Securities. The Debentures and Preferred Securities are redeemable at SJG's option at a price equal to 100% of the principal amount. SJI has 2,500,000 authorized shares of Preferred Stock, no par value, which has not been issued. SJI has registered and reserved for issuance 15,000 shares of Series A Junior Participating Cumulative Preferred Stock (Series A Preferred Stock) connected with its Shareholder Rights Plan (See Note 4). 3. Divestitures and Affiliations: Divestitures -- In 1996, Energy & Minerals, Inc. (EMI), an SJI subsidiary, sold the common stock of The Morie Company, Inc. (Morie), its sand mining and processing subsidiary (See Note 14). In 1997, R&T Group, Inc., SJI's construction subsidiary, sold all its operating assets, except some real estate. SJI conducts tests annually to estimate the environmental remediation costs for properties owned by South Jersey Fuel, Inc. (SJF), an EMI subsidiary, from its previously operated fuel oil business. SJI reports the environmental remediation activity related to these properties as discontinued operations. This reporting is consistent with previous years (See Note 14). In 1998, SJE actively traded electricity in the wholesale market, but ceased this activity later that same year and formally exited this segment in 1999. SJG operated two retail stores which sold natural gas appliances. The stores were intended to provide gas customers with access to and choice among natural gas appliances. In 2001, SJG formally discontinued this merchandising segment of its operations as those appliances are readily available from other retailers. Summarized operating results of the discontinued operations were: Thousands of Dollars 2002 2001 2000 Operating Revenues -- Merchandising $ 26 $ 1,016 $ 1,193 ======= ======= ======= (Loss) Income before Income Taxes: Sand Mining $ (467) $ 719 $ (155) Construction (17) 78 8 Fuel Oil (122) (113) (123) Electric -- (1,150) (488) Merchandising (50) (351) (128) Income Taxes 232 362 329 ------- ------- ------- Loss from Discontinued Operations -- Net $ (424) $ (455) $ (557) ======= ======= ======= Earnings Per Common Share from Discontinued Operations -- Net $ (0.03) $ (0.03) $ (0.05) ======= ======= ======= Losses from sand mining are mainly comprised of environmental remediation and product liability litigation associated with Morie's prior activities. Positive results from sand mining operations in 2001 reflect a settlement with our insurance carrier for previously incurred costs. Wholesale Electric losses increased in 2001 due to the settlement of a creditor claim in bankruptcy. Affiliations -- In 1996, we formed SJRG to provide natural gas storage, peaking services and transportation capacity for wholesale customers in New Jersey and surrounding states. Prior to January 1, 2001, SJ EnerTrade, Inc., an SJE subsidiary, and UPR Energy Marketing, Inc. (UPR) each held a 50% non-controlling interest in SJRG. In January 2001, SJRG became a wholly owned SJI subsidiary when UPR redeemed its 50% interest in SJRG for the book value of its investment of $2.9 million. In 2001, we included SJRG's operations on a consolidated basis. Prior to January 1, 2001, we accounted for SJI's investment in SJRG on the equity method. In January 1999, SJI and Conectiv Solutions, LLC formed Millennium Account Services, LLC to provide meter reading services in southern New Jersey. In June 1999, SJE and Energy East Solutions, Inc. (EES) formed South Jersey Energy Solutions, LLC (SJES) to market retail electricity and energy management - 24 - services. SJES began supplying retail electricity during 2000, and ceased active operations in May 2002. In April 2000, SJE and GZA GeoEnvironmental, Inc. formed Air Logics, LLC to market a jointly developed air monitoring system designed to assist companies involved in environmental cleanup activities. In October 2000, SJI formed Marina, a wholly owned subsidiary, to develop, construct and operate a $56.6 million thermal energy plant. In December 2000, Marina entered into a 20-year contract with Marina District Development Corporation to supply heat, hot water and cooling to The Borgata Resort. The plant is scheduled for completion in July 2003. 4. Common Stock: SJI has 20,000,000 shares of authorized Common Stock. The following shares were issued and outstanding: 2002 2001 2000 Beginning of Year 11,860,990 11,499,701 11,152,175 New Issues During Year: Dividend Reinvestment Plan 338,518 354,809 335,427 Employees' Stock Ownership Plan 4,162 3,707 3,917 Stock Option, Stock Appreciation Rights and Restricted Stock Award Plan 590 604 5,545 Directors' Restricted Stock 2,214 2,169 2,637 ---------- ---------- ---------- End of Year 12,206,474 11,860,990 11,499,701 ========== ========== ========== We credited the par value ($1.25 per share) of stock issued in 2002, 2001 and 2000 to Common Stock. We credited the net excess over par value of approximately $10.5 million, $10.6 million and $8.5 million, respectively, to Premium on Common Stock. Earnings Per Common Share -- We present basic EPS based on the weighted-average number of common shares outstanding. EPS are presented in accordance with FASB Statement No. 128, "Earnings Per Share," which establishes standards for computing and presenting basic and diluted EPS. The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 77,866, 34,254 and 9,664 shares for the years ended December 31, 2002, 2001 and 2000, respectively. These shares relate to restricted stock and stock options and were calculated using the treasury stock method. Stock Option, Stock Appreciation Rights and Restricted Stock Award Plan -- Under this plan, no more than 306,000 shares in the aggregate may be issued to SJI's officers and other key employees. No options or stock appreciation rights may be granted under the Plan after November 22, 2006. At December 31, 2002, 2001 and 2000, SJI had -0-, 2,000 and 4,500 options outstanding, respectively, all exercisable at $24.69 per share. No options were granted in 2002, 2001 or 2000. When granted, SJI values stock options to employees using the intrinsic value method. No stock appreciation rights were issued under the Plan. In 1999, we amended the Plan to include restricted stock awards. In 2002, 2001 and 2000, we granted 26,034, 44,384 and 10,267 restricted shares, respectively. These restricted shares vest over a 3-year period and, with the exception of the 2000 award, are subject to SJI achieving certain performance targets. The annual expense associated with these awards was $579,900 in 2002 and $61,300 in both 2001 and 2000. Dividend Reinvestment Plan (DRP) and Employees' Stock Ownership Plan (ESOP) -- Newly issued shares of common stock offered through the DRP are issued directly by SJI. All shares offered through the ESOP are also issued directly by SJI. As of December 31, 2002, SJI reserved 1,165,707 and 15,566 shares of authorized, but unissued, common stock for future issuance to the DRP and ESOP, respectively. Directors' Restricted Stock Plan -- Under this Plan, SJI grants annual awards to outside directors which vest over three years. SJI holds shares issued as restricted stock until the attached restrictions lapse. We record the stock's market value on the grant date as compensation expense over the applicable vesting period. The annual expense associated with this plan was approximately $67,000 for each of the past three years. Shareholder Rights Plan -- In 1996, the board of directors adopted a shareholder rights plan providing for the distribution of one right for each share of common stock outstanding on and after October 11, 1996. Each right entitles its holder to purchase 1/1000 of one share of Series A Preferred Stock at an exercise price of $90 (See Note 2). The rights will not be exercisable until after a person or group acquires 10% or more of SJI's common stock and will expire if not exercised or redeemed by September 20, 2006. 5. Federal and Other Regulatory Tax Assets and Deferred Credits: The primary asset created by adopting FASB Statement No. 109, "Accounting for Income Taxes," was Income Taxes -- Flowthrough Depreciation in the amount of $17.6 million as of January 1, 1993. This amount represented excess tax depreciation over book depreciation on utility plant because of temporary differences for which, prior to Statement No. 109, deferred taxes previously were not provided. SJG previously passed these tax benefits through to ratepayers. SJG is recovering the amortization of the regulatory asset through rates over 18 years which began in December 1994. The Investment Tax Credit attributable to SJG was deferred and continues to be amortized at the annual rate of 3%, which approximates the life of related assets. SJG deferred $11.8 million resulting from a change in the basis for accruing the Gross Receipts & Franchise Tax in 1978 and is amortizing it on a straight-line basis to operations over 30 years beginning that same year. 6. Financial Instruments: Restricted Investments -- In accordance with the terms of Marina's bond agreements, we are required to invest unused proceeds in high-quality, highly liquid investments pending approved construction expenditures. As of December 31, 2002 and 2001, these residual proceeds totaled $2.1 and $14.4 million, respectively. SJRG maintains a margin account with a national investment firm to support its energy trading activities. As of December 31, 2002, the account reflected a $2.4 million balance due to changes in the market value of outstanding contracts. The balance approximated $8.6 million as of December 31, 2001. Long-Term Debt -- We estimate the fair values of SJI's long-term debt, including current maturities, as of December 31, 2002 and 2001, to be $291.4 and $288.0 million, respectively. Carrying amounts are $248.7 and $269.0 million, respectively. We base the estimates on interest rates available to SJI at the end of each year for debt with similar terms and maturities. SJI retires debt when it is cost effective as permitted by the debt agreements. Other Financial Instruments -- The carrying amounts of SJI's other financial instruments approximate their fair values at December 31, 2002 and 2001. - 25 - 7. Segments of Business: Information about SJI's operations in different industry segments is presented below:
Thousands of Dollars 2002 2001 2000 Operating Revenues: Gas Utility Operations $ 417,262 $ 475,462 $ 445,818 Wholesale Gas Operations 4,998 6,144 -- Retail Gas and Other Operations 114,706 96,752 82,761 On-Site Energy Production 852 -- -- ----------- ----------- ----------- Subtotal 537,818 578,358 528,579 Intersegment Sales (32,692) (32,372) (15,963) ----------- ----------- ----------- Total Operating Revenues $ 505,126 $ 545,986 $ 512,616 =========== =========== =========== Operating Income: Gas Utility Operations $ 60,874 $ 60,463 $ 62,618 Wholesale Gas Operations 4,280 4,628 -- Retail Gas and Other Operations 4,159 3,824 3,352 On-Site Energy Production 416 -- -- General Corporate (654) (371) (506) ----------- ----------- ----------- Total Operating Income $ 69,075 $ 68,544 $ 65,464 =========== =========== =========== Depreciation and Amortization: Gas Utility Operations $ 24,730 $ 23,332 $ 22,986 Wholesale Gas Operations 12 8 -- Retail Gas and Other Operations 84 78 99 On-Site Energy Production 10 -- -- Discontinued Operations 28 28 19 ----------- ----------- ----------- Total Depreciation and Amortization $ 24,864 $ 23,446 $ 23,104 =========== =========== =========== Property Additions: Gas Utility Operations $ 49,646 $ 47,799 $ 47,116 Wholesale Gas Operations -- 61 -- Retail Gas and Other Operations 138 163 275 On-Site Energy Production 33,925 17,915 2,985 ----------- ----------- ----------- Total Property Additions $ 83,709 $ 65,938 $ 50,376 =========== =========== =========== Identifiable Assets Gas Utility Operations $ 872,716 $ 859,586 $ 842,082 Wholesale Gas Operations 62,569 82,596 -- Retail Gas and Other Operations 44,732 19,092 22,138 On-Site Energy Production 60,916 35,672 2,985 Discontinued Operations 2,335 2,182 2,243 ----------- ----------- ----------- Subtotal 1,043,268 999,128 869,448 Corporate Assets 40,783 33,505 20,338 Intersegment Assets (72,291) (43,204) (19,807) ----------- ----------- ----------- Total Identifiable Assets $ 1,011,760 $ 989,429 $ 869,979 =========== =========== ===========
Gas Utility Operations consists primarily of natural gas distribution to residential, commercial and industrial customers. Wholesale Gas Operations include SJRG's activities. Retail Gas and Other Operations include natural gas and electricity acquisition and transportation service companies. On-Site Energy Production consists of Marina's construction and related financing activities (See Note 3). SJI's interest expense relates primarily to SJG's borrowing and financing activities. Interest income is essentially derived from borrowings between the subsidiaries and is eliminated during consolidation. 8. Comprehensive Income: The components of comprehensive income are as follows: Thousands of Dollars 2002 2001 2000 Net Income Applicable to Common Stock $ 28,988 $ 26,562 $ 24,184 ======== ======== ======== Other Comprehensive (Loss) Income: Minimum Pension Liability Adjustment -- Net* (7,271) (1,988) -- Change in Fair Value of Investments -- Net* (149) -- -- Change in Fair Value of Energy Trading Assets/Liabilities -- Net* 5,027 -- -- Change in Fair Value of Other Derivatives -- Net* (1,822) 301 -- -------- -------- -------- Total Other Comprehensive Loss (4,215) (1,687) -- -------- -------- -------- Comprehensive Income $ 24,773 $ 24,875 $ 24,184 ======== ======== ======== * Determined using an effective tax rate of 40.85% 9. Regulatory Actions: In January 1997, the BPU granted SJG a 9.62% rate of return on rate base, which included an 11.25% return on common equity. Additionally, SJG's threshold for sharing pre-tax margins generated by interruptible and off-system sales and transportation increased. Currently, SJG keeps 100% of pre-tax margins up to the threshold level of $7.8 million. The next $750,000 is credited to the LGAC. Thereafter, SJG keeps 20% of the pre-tax margins as it has historically. Effective January 10, 2000, the BPU approved full unbundling of SJG's system. This allows all natural gas consumers to select their natural gas supplier. As of December 31, 2002, 92,543 of SJG's customers were purchasing their gas commodity from someone other than SJG. Customers choosing to purchase natural gas from providers other than the utility are charged for the cost of gas by the marketer, not the utility. The resulting decrease in SJG's revenues is offset by a corresponding decrease in gas costs. While customer choice can reduce utility revenues, it does not negatively affect SJG's net income or financial condition. The BPU continues to allow for full recovery of natural gas costs through the LGAC as well as other costs of service, including deferred costs, through tariffs. In November 2001, SJG filed for a $2.7 million rate increase to recover the cash related to a 3-year net deficiency in the TAC. Additionally, in September 2002, SJG filed for an $8.6 million rate increase to recover the cash related to a TAC deficiency resulting from warmer-than-normal weather for the 2001-2002 winter. Also in November 2001, SJG filed for a $17.6 million reduction to its LGAC. The BPU approved the LGAC reduction effective December 1, 2001 and concurrently approved recovery of SJG's October 31, 2001 underrecovered gas cost balance. As a result, SJG will recover $48.9 million over three years plus interest accrued since April 1, 2001. SJG will also recover interest for the 3-year amortization period at a rate of 5.75%. In May 2002, SJG received approval from the BPU to reduce its overcollected LGAC balance by another $17.6 million through a customer refund. This refund did not affect SJG's net income or financial condition. In September 2002, SJG filed with the BPU to maintain its current LGAC rate through October 2003. During 2002, the BPU convened a gas policy group to address Basic Gas Supply Service (BGSS), which is the gas supply service being provided by the natural gas utility. On December 18, 2002, the BPU approved the proposed BGSS price structure which was submitted by the gas policy group. When the BGSS is - 26 - implemented in 2003, customers will be able to make more informed decisions about choosing an alternate supplier by having a utility price structure that more currently reflects market conditions. Further, BGSS will provide SJG with more pricing flexibility, through automatic rate changes, resulting in the reduction of over/under-recoveries. The BGSS-approved price structure will replace the current LGAC pricing structure. However, other LGAC-related mechanisms, such as deferred accounting treatment, the sharing of pre-tax margins generated by interruptible and off-system sales and transportation, and the allowance for full recovery of natural gas costs, will remain in place under BGSS. In August 2002, SJG filed for a Societal Benefits Clause (SBC) rate increase. The SBC recovers costs related to BPU-mandated programs, including environmental remediation costs that are recovered through its RAC; energy efficiency and renewable energy program costs recovered through its CRA clause (renamed in December 2002 as the New Jersey Clean Energy Programs); consumer education program costs; and low income program costs. If approved, the rate increase filed would provide an annual recovery of $13.7 million, representing an annual increase of approximately $7.0 million over the $6.7 million recovery currently included in rates. Also in August 2002, SJG filed a petition with the BPU to transfer its appliance service business from the regulated utility into a newly created unregulated company. As filed, the newly created company would have the flexibility to be more responsive to competition and customer needs by expanding and modifying its service offerings in an unregulated environment. 10. Unused Lines of Credit and Compensating Balances: Unused lines of credit available at December 31, 2002 were $30.5 million. Borrowings under these lines of credit are at market rates. The weighted borrowing cost, which changes daily, was 2.28% and 3.08% at December 31, 2002 and 2001, respectively. We maintain demand deposits with lending banks on an informal basis and they do not constitute compensating balances. 11. Pensions & Other Postretirement Benefits: SJI has several defined benefit pension plans and other postretirement benefit plans. The pension plans provide annuity payments to substantially all full-time, regular employees upon retirement. The other postretirement benefit plans provide health care and life insurance benefits to some retirees. In 2002, we changed the actuarial valuation measurement date for our pension plans from September 30 to December 31 to conform to the measurement date used for our postretirement health care plans and to better reflect the actual pension balances as of SJI's balance sheet dates. This change had no significant effect on 2002 or prior years' pension expense. The BPU authorized SJG to recover costs related to postretirement benefits other than pensions under the accrual method of accounting consistent with FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." We deferred amounts accrued prior to that authorization and are amortizing them as allowed by the BPU. The unamortized balance of $3.8 million at December 31, 2002 is recoverable in rates. We are amortizing this amount over 15 years which started January 1998. Net periodic benefit cost related to the pension and other postretirement benefit insurance plans consisted of the following components: Thousands of Dollars Pension Benefits Other Benefits 2002 2001 2000 2002 2001 2000 Service Cost $ 2,237 $ 2,120 $ 1,988 $ 1,131 $ 1,063 $ 996 Interest Cost 5,029 4,923 4,577 2,355 1,898 1,746 Expected Return on Plan Assets (4,567) (5,314) (4,790) (1,046) (895) (726) Amortization of Transition Obligation 72 72 72 772 772 772 Amortization of Loss (Gain) and Other 838 372 320 73 (3) (78) ------- ------- ------- ------- ------- ------- Net Periodic Benefit Cost $ 3,609 $ 2,173 $ 2,167 $ 3,285 $ 2,835 $ 2,710 ======= ======= ======= ======= ======= ======= A reconciliation of the plans' benefit obligations, fair value of plan assets, funded status and amounts recognized in SJI's consolidated balance sheets follows:
Thousands of Dollars Pension Benefits Other Benefits 2002 2001 2002 2001 Change in Benefit Obligations: Benefit Obligation at Beginning of Year $ 72,540 $ 64,086 $ 28,629 $ 24,807 Service Cost 2,237 2,120 1,131 1,063 Interest Cost 5,029 4,923 2,355 1,898 Actuarial Loss (Gain) and Other 5,738 4,606 (103) 1,606 Benefits Paid (4,438) (3,195) (1,039) (745) -------- -------- -------- -------- Benefit Obligation at End of Year $ 81,106 $ 72,540 $ 30,973 $ 28,629 ======== ======== ======== ======== Change in Plan Assets: Fair Value of Plan Assets at Beginning of Year $ 50,358 $ 60,084 $ 13,465 $ 11,970 Actual Return on Plan Assets (3,508) (9,031) (1,529) (619) Employer Contributions 20,700 2,500 2,939 2,859 Benefits Paid (4,438) (3,195) (1,040) (745) -------- -------- -------- -------- Fair Value of Plan Assets at End of Year $ 63,112 $ 50,358 $ 13,835 $ 13,465 ======== ======== ======== ======== Funded Status: $(17,994) $(22,182) $(17,138) $(15,164) Unrecognized Prior Service Cost 3,165 3,536 -- -- Unrecognized Net Transition Obligation 72 143 7,718 8,489 Unrecognized Net Loss (Gain) and Other 28,955 15,609 2,337 (63) -------- -------- -------- -------- Accrued Net Benefit Cost at End of Year $ 14,198 $ (2,894) $ (7,083) $ (6,738) ======== ======== ======== ======== Amounts Recognized in the Statement of Financial Position Consist of: Accrued Benefit Liability $ (4,693) $ (8,785) $ (7,083) $ (6,738) Intangible Asset 3,237 2,521 -- -- Accumulated Other Comprehensive Income 15,654 3,370 -- -- -------- -------- -------- -------- Net Amount Recognized at End of Year $ 14,198 $ (2,894) $ (7,083) $ (6,738) ======== ======== ======== ========
The accumulated benefit obligation of SJI's pension plans at December 31, 2002 and 2001 was $67.8 million and $59.1 million, respectively. - 27 - At December 31, 2002 and 2001, SJI recorded additional minimum pension liabilities of $18.9 million and $5.9 million, respectively, which we reflected in the consolidated balance sheets under the caption Pension and Other Postretirement Benefits. These liability adjustments resulted from decreases in the fair value of plan assets, which were due to the declining stock market, and decreases in the discount rates over the past two years. SJI also has unqualified pension plans provided to certain officers and outside directors which are unfunded. The aggregate accrued net benefit obligation of such plans as of December 31, 2002 and 2001 was $3.9 million and $3.7 million, respectively. Assumptions used in the accounting for these plans were: Pension Benefits Other Benefits 2002 2001 2002 2001 Discount Rate 6.75% 7.25% 6.75% 7.25% Expected Return on Plan Assets 9.00% 9.00% 7.50% 7.50% Rate of Compensation Increase 3.60% 4.10% -- -- The assumed health-care cost trend rates used in measuring the accumulated postretirement benefit obligation as of December 31, 2002 are: Medical and Drug - -- 7.5% in 2002 for participants age 65 or older; and 12.0% in 2002 for participants under age 65; Dental -- 7.5% in 2002. All three of these rates grade to 5.0% in 2016 and remain level thereafter. A 1% change in the assumed health-care cost trend rates for SJI's postretirement health care plans in 2002 would have the following effects: Thousands of Dollars 1% Increase 1% Decrease Effect on the aggregate of the service and interest cost components $ 515 $ (423) Effect on the postretirement benefit obligation $ 4,670 $ (4,836) 12. Retained Earnings: Restrictions exist under various loan agreements regarding the amount of cash dividends or other distributions that SJG may pay on its common stock. SJI's total equity in its subsidiaries' retained earnings, which is free of these restrictions, was $76.2 million as of December 31, 2002. 13. Income Taxes: Total income taxes applicable to operations differ from the tax that would have resulted by applying the statutory Federal Income Tax rate to pre-tax income for the following reasons: Thousands of Dollars 2002 2001 2000 Tax at Statutory Rate $ 17,436 $ 16,157 $ 15,208 Increase (Decrease) Resulting from: State Income Taxes 3,143 2,857 3,167 ESOP (489) -- -- Amortization of Investment Tax Credit (347) (347) (335) Tax Depreciation Under Book Depreciation on Utility Plant 664 664 664 Other -- Net (3) (36) 5 -------- -------- -------- Income Taxes: Continuing Operations 20,404 19,295 18,709 Discontinued Operations (232) (362) (329) Cumulative Effect of a Change in Accounting Principle -- 103 -- -------- -------- -------- Net Income Taxes $ 20,172 $ 19,036 $ 18,380 ======== ======== ======== The provision for Income Taxes is comprised of the following: Thousands of Dollars 2002 2001 2000 Current: Federal $ 3,044 $ 8,306 $ 2,801 State 3,017 3,678 2,052 -------- -------- -------- Total Current 6,061 11,984 4,853 -------- -------- -------- Deferred: Federal: Excess of Tax Depreciation Over Book Depreciation -- Net 10,960 4,668 5,220 Deferred Fuel Costs (3,728) 794 12,157 Environmental Costs -- Net (1,490) (1,850) (2,504) Alternative Minimum Tax (495) 2,851 (1,694) Benefit of State Tax 636 251 (984) Prepaid Pension 5,743 -- -- Deferred Regulatory Costs 1,543 175 69 Other -- Net (297) 51 (894) State 1,818 718 2,821 -------- -------- -------- Total Deferred 14,690 7,658 14,191 -------- -------- -------- Investment Tax Credit (347) (347) (335) -------- -------- -------- Income Taxes: Continuing Operations 20,404 19,295 18,709 Discontinued Operations (232) (362) (329) Cumulative Effect of a Change in Accounting Principle -- 103 -- -------- -------- -------- Net Income Taxes $ 20,172 $ 19,036 $ 18,380 ======== ======== ======== The net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes resulted in the following deferred tax liabilities at December 31: Thousands of Dollars 2002 2001 Current: Deferred Fuel Costs $ 20,368 $ 25,054 Derivatives / Unrealized Gain 3,595 1,435 Other 855 140 -------- -------- Current Deferred Tax Liability -- Net $ 24,818 $ 26,629 ======== ======== Non-Current: Book versus Tax Basis of Property 98,839 85,569 Prepaid Pension 7,117 -- Environmental 878 2,761 Excess Protected 3,160 3,225 Deferred Regulatory Costs 3,873 1,660 Minimum Pension Liability (6,395) (1,382) Deferred State Tax (2,678) (2,126) Investment Tax Credit Basis Gross Up (2,070) (2,249) Alternative Minimum Tax (2,089) (1,080) Other (2,745) (1,661) -------- -------- Non-Current Deferred Tax Liability -- Net $ 97,890 $ 84,717 ======== ======== 14. Commitments and Contingencies: Construction and Environmental -- SJI's estimated net cost of construction and environmental remediation programs for 2003 totals $57.8 million. Commitments were made regarding some of these programs. Gas Supply Contracts -- SJG, in the normal course of business, has entered into long-term contracts for natural gas supplies, firm transportation and gas - 28 - storage service. The earliest that any of these contracts expires is 2003. The transportation and storage service agreements between SJG and its interstate pipeline suppliers were made under Federal Energy Regulatory Commission approved tariffs. SJG's cumulative obligation for demand charges and reservation fees paid to suppliers for these services is approximately $4.0 million per month, recovered on a current basis through the LGAC. Pending Litigation -- SJI is subject to claims arising in the ordinary course of business and other legal proceedings. We accrue liabilities related to these claims when we can determine the amount or range of amounts of likely settlement costs for those claims. Among other actions, SJI was named in certain product liability claims related to our former sand mining subsidiary. Management does not currently anticipate the disposition of any known claims to have a material adverse effect on SJI's financial position, results of operations or liquidity. Parental Guarantees -- In 2002, the FASB released Interpretation No. 45 (FIN 45) "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires companies to disclose the nature of its guarantees or indemnification agreements for interim and year-end financial statements ending after December 15, 2002. As of December 31, 2002, SJI had issued $96.6 million of parental guarantees on behalf of its subsidiaries. Nearly two-thirds of these guarantees expire within one year with the remainder having no expiration date. The vast majority of these guarantees was issued as a guarantee of payment to third parties with whom our subsidiaries have commodity supply contracts. As of December 31, 2002, these guarantees support $13.5 million of the Accounts Payable recorded on our consolidated balance sheet. As part of our risk management policy, we also require parental guarantees from trading counterparties as applicable. These arrangements are typical in our industry. SJI has also issued two parental guarantees totaling $7.1 million related to Marina's construction activity. Standby Letters of Credit -- SJI provided a $17 million standby letter of credit to Marina District Development Corporation in support of Marina's contractual obligations to construct the thermal energy plant and to supply heat, hot water and cooling to The Borgata Resort. This letter of credit was reduced to $6.4 million as of December 31, 2002. As of December 31, 2002, SJI also provided $39 million of standby letters of credit supporting the variable rate demand bonds issued through the New Jersey Economic Development Authority by Marina. Commercial banks have committed to issue up to $46 million of annually renewing letters of credit to support development of Marina's thermal plant project. Environmental Remediation Costs -- SJI incurred and recorded costs for environmental clean up of sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s. SJI and some of its nonutility subsidiaries also recorded costs for environmental clean up of sites where SJF previously operated a fuel oil business and Morie maintained equipment, fueling stations and storage. SJI successfully entered into settlements with all of its historic comprehensive general liability carriers regarding the environmental remediation expenditures at the SJG sites. Also, SJG purchased a Cleanup Cost Cap Insurance Policy limiting the amount of remediation expenditures that SJG will be required to make at 11 of its sites. This policy will be in force until 2024 at 10 sites and until 2029 at one site. Since the early 1980s, SJI accrued environmental remediation costs of $137.2 million, of which $85.1 million has been spent as of December 31, 2002. With the assistance of a consulting firm, we estimate that future costs to clean up SJG's sites will range from $48.2 million to $143.9 million. We recorded the lower end of this range as a liability. It is reflected on the 2002 consolidated balance sheet under the captions Current Liabilities and Deferred Credits and Other Non-Current Liabilities. Recorded amounts include estimated costs based on projected investigation and remediation work plans using existing technologies. Actual costs could differ from the estimates due to the long-term nature of the projects, changing technology, government regulations and site-specific requirements. The major portion of accrued environmental costs relate to the clean up of SJG's former gas manufacturing sites. SJG has two regulatory assets associated with environmental costs (See Note 1). The first asset is titled Environmental Remediation Cost: Expended -- Net. These expenditures represent what was actually spent to clean up former gas manufacturing plant sites. These costs meet the requirements of Statement No. 71. The BPU allows SJG to recover expenditures through the RAC (See Note 9). The other asset titled Environmental Remediation Cost: Liability for Future Expenditures relates to estimated future expenditures determined under the guidance of FASB Statement No. 5, "Accounting for Contingencies." We recorded this amount, which relates to former manufactured gas plant sites, as a deferred debit with the corresponding amount reflected on the consolidated balance sheets under the captions Current Liabilities and Deferred Credits and Other Non-Current Liabilities. The deferred debit is a regulatory asset under Statement No. 71. The BPU's intent, evidenced by current practice, is to allow SJG to recover the deferred costs after they are spent over 7-year periods. As of December 31, 2002, we reflected SJG's unamortized remediation costs of $6.5 million on the consolidated balance sheet under the caption Regulatory Assets. Since implementing the RAC in 1992, SJG has recovered $34.8 million through rates (See Note 9). With Morie's sale, EMI assumed responsibility for environmental liabilities estimated between $2.7 million and $8.8 million. The information available on these sites is sufficient only to establish a range of probable liability and no point within the range is more likely than any other. Therefore, EMI continues to accrue the lower end of the range. Changes in the accrual are included in the statements of consolidated income under the caption Loss from Discontinued Operations -- Net. SJI and SJF estimated their potential exposure for the future remediation of four sites where fuel oil operations existed years ago. Estimates for SJI's site range between $0.1 million and $0.3 million, while SJF's estimated liability ranges from $1.1 million to $4.9 million for its three sites. We recorded the lower ends of these ranges on the consolidated balance sheet under Current Liabilities and Deferred Credits and Other Non-Current Liabilities as of December 31, 2002. - 29 - Quarterly Financial Data (Unaudited) Summarized quarterly results of SJI's operations, in thousands except for per share amounts:
2002 Quarter Ended 2001 Quarter Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 --------- --------- --------- --------- --------- --------- --------- --------- Operating Revenues $ 177,031 $ 84,200 $ 69,066 $ 174,829 $ 239,725 $ 101,409 $ 74,985 $ 129,867 --------- --------- --------- --------- --------- --------- --------- --------- Expenses: Operation and Maintenance Including Fixed Charges 139,512 81,911 73,138 151,418 198,918 99,987 79,707 111,826 Income Taxes 14,049 334 (2,063) 8,084 15,482 127 (2,387) 6,073 Energy and Other Taxes 3,842 2,120 1,446 3,398 4,476 1,908 1,446 2,775 --------- --------- --------- --------- --------- --------- --------- --------- Total Expenses 157,403 84,365 72,521 162,900 218,876 102,022 78,766 120,674 --------- --------- --------- --------- --------- --------- --------- --------- Other Income and Expense 90 886 233 266 885 457 5 (126) --------- --------- --------- --------- --------- --------- --------- --------- Income (Loss) from Continuing Operations 19,718 721 (3,222) 12,195 21,734 (156) (3,776) 9,067 Discontinued Operations -- Net (32) (118) (18) (256) (200) (84) (36) (135) Cumulative Effect of a Change in Accounting Principle -- Net -- -- -- -- 148 -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- Net Income (Loss) Applicable to Common Stock $ 19,686 $ 603 $ (3,240) $ 11,939 $ 21,682 $ (240) (3,812) $ 8,932 ========= ========= ========= ========= ========= ========= ========= ========= Basic Earnings Per Common Share (1) (Based on Average Shares Outstanding): Continuing Operations $ 1.65 $ 0.06 $ (0.27) $ 1.00 & 1.88 $ (0.01) $ (0.32) $ 0.76 Discontinued Operations -- Net -- (0.01) -- (0.02) (0.02) (0.01) -- (0.01) Cumulative Effect of a Change in Accounting Principle -- Net -- -- -- -- 0.01 -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- Basic Earnings Per Common Share $ 1.65 $ 0.05 $ (0.27) $ 0.98 $ 1.87 $ (0.02) $ (0.32) $ 0.75 ========= ========= ========= ========= ========= ========= ========= ========= Average Shares Outstanding 11,914 11,990 12,084 12,165 11,583 11,670 11,769 11,841 (1) The sum of the quarters for 2001 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
Quarter Ended Market Price Per Share Dividends Declared Quarter Ended Market Price Per Share Dividends Declared 2002 High Low Per Share 2001 High Low Per Share March 31 $ 32.79 $ 29.95 $ 0.375 March 31 $ 32.25 $ 27.60 $ 0.370 June 30 $ 36.65 $ 31.70 $ 0.375 June 30 $ 31.55 $ 29.05 $ 0.370 September 30 $ 36.05 $ 28.20 $ 0.375 September 30 $ 32.96 $ 29.30 $ 0.370 December 31 $ 33.65 $ 31.40 $ 0.385 December 31 $ 34.10 $ 30.41 $ 0.370 These quotations are based on the list of composite transactions of the New York Stock Exchange. Our stock is traded on the New York Stock Exchange under the symbol SJI. We have declared and expect to continue to declare regular quarterly cash dividends. As of December 31, 2002, the latest available date, our records indicate that there were 8,399 shareholders.
- 30 - South Jersey Gas Company Comparative Operating Statistics
2002 2001 2000 1999 1998 Operating Revenues (Thousands): Firm Residential $ 174,252 $ 201,531 $ 172,418 $ 152,946 $ 147,274 Commercial 52,300 76,416 49,669 35,064 36,328 Industrial 4,512 4,250 5,265 4,879 4,175 Cogeneration & Electric Generation 9,363 7,405 11,016 8,496 8,119 Firm Transportation 49,436 29,565 38,213 33,125 24,893 --------- --------- --------- --------- --------- Total Firm Revenues 289,863 319,167 276,581 234,510 220,789 Interruptible 1,142 1,485 1,695 1,645 2,506 Interruptible Transportation 1,567 1,268 1,531 1,724 2,598 Off-System 115,714 145,530 160,208 104,142 62,578 Capacity Release & Storage 5,365 5,596 4,411 4,193 6,031 Other 3,611 2,415 1,392 1,860 2,998 Intercompany Sales (31,142) (30,257) (14,662) (5,211) (1,032) --------- --------- --------- --------- --------- Total Operating Revenues $ 386,120 $ 445,204 $ 431,156 $ 342,863 $ 296,468 ========= ========= ========= ========= ========= Throughput (MMcf): Firm Residential 15,519 17,390 19,124 17,741 16,979 Commercial 5,273 7,544 6,191 4,634 4,826 Industrial 202 248 282 246 348 Cogeneration & Electric Generation 1,986 1,519 2,046 2,316 2,373 Firm Transportation 26,470 22,085 26,114 25,143 22,336 --------- --------- --------- --------- --------- Total Firm Throughput 49,450 48,786 53,757 50,080 46,862 --------- --------- --------- --------- --------- Interruptible 198 207 207 383 694 Interruptible Transportation 3,189 2,638 3,022 3,628 6,049 Off-System 29,980 30,117 38,097 42,480 26,916 Capacity Release & Storage 38,048 27,187 37,445 29,247 27,319 --------- --------- --------- --------- --------- Total Throughput 120,865 108,935 132,528 125,818 107,840 ========= ========= ========= ========= ========= Number of Customers at Year End: Residential 275,979 268,046 261,621 254,601 248,210 Commercial 19,966 19,542 19,319 18,894 18,457 Industrial 429 420 410 404 398 --------- --------- --------- --------- --------- Total Customers 296,374 288,008 281,350 73,899 267,065 ========= ========= ========= ========= ========= Maximum Daily Sendout (MMcf) 344 326 375 324 314 ========= ========= ========= ========= ========= Annual Degree Days 4,380 4,495 4,942 4,468 4,110 ========= ========= ========= ========= ========= Normal Degree Days * 4,625 4,625 4,639 4,664 4,708 ========= ========= ========= ========= ========= * Average degree days recorded in SJG's service territory during 20-year period ended June 30 of prior year.
- 31 - South Jersey Industries Board of Directors Shirli M. Billings, Ph.D. Director since 1983, Age 62, 2, 4, 5*, 6 President, Billings-Vioni Management Associates, Lakeland, Fla. Charles Biscieglia Director since 1998, Age 58, 3+, 4*, 5+, 6 Chairman, President and CEO of South Jersey Industries and President and CEO of South Jersey Gas Keith S. Campbell Director since 2000, Age 48, 3, 5, 6 Chairman, Mannington Mills, Salem, N.J. W. Cary Edwards Director from April 1990 to January 1993 and September 1993 to present, Age 58, 2, 3, 4, 6 Managing Partner, law firm of Edwards & Caldwell, Hawthorne, N.J. Thomas L. Glenn, Jr. Director since 1986, Age 68, 1, 3*, 4 Co-Chairman and Treasurer, Glenn Insurance, Inc., Absecon, N.J. Sheila Hartnett-Devlin Director since 1999, Age 44, 1, 2, 5 Executive Vice President of Fiduciary Trust Company International, New York, N.Y. William J. Hughes Director since 2001, Age 70, 1, 5 Of Counsel, law firm of Riker, Danzig, Scherer, Hyland & Perretti, Trenton, N.J.; Former Ambassador to Panama and former member of the United States House of Representatives Herman D. James, Ph.D. Director since 1990, Age 59, 1*, 2, 4, 6 Distinguished Professor, Rowan University, Glassboro, N.J. Clarence D. McCormick Director since 1979, Age 73, 2*, 4, 5 Retired Chairman and CEO of The Farmers and Merchants National Bank of Bridgeton, N.J. and Retired Chairman and President of Southern Jersey Bancorp of Delaware, Bridgeton, N.J. Frederick R. Raring Director since 1995, Age 65, 1, 3, 5 President, Seashore Supply Company, Ocean City, N.J. 1 Audit Committee 2 Compensation/Pension Committee 3 Environmental Committee 4 Executive Committee 5 Nominating Committee 6 Management Development Committee * Committee Chair + Ex Officio South Jersey Industries Officers Charles Biscieglia Chairman, President and Chief Executive Officer Edward J. Graham Executive Vice President and Chief Operating Officer David A. Kindlick Vice President, Treasurer and Chief Financial Officer Albert V. Ruggiero Vice President Richard H. Walker, Jr., Esq. Corporate Secretary and Corporate Counsel Michael J. Renna Assistant Vice President Jane F. Kelly, Esq. Assistant Corporate Secretary and Assistant Counsel - 32 - South Jersey Gas Officers Charles Biscieglia President and Chief Executive Officer Richard J. Jackson Executive Vice President and Chief Operating Officer David A. Kindlick Executive Vice President and Chief Financial Officer Albert V. Ruggiero Executive Vice President and Chief Administrative Officer Janet T. Nickels Senior Vice President, Customer Services and External Affairs Richard H. Walker, Jr. Esq. Corporate Secretary and Corporate Counsel Charles F. Dippo Vice President, Engineering Services Patrick T. Finnigan Vice President, Information Systems Samuel A. Pignatelli Vice President, Rates and Regulatory Affairs Stephen H. Clark Treasurer Thomas S. Kavanaugh Controller Bonnie J. Bornstein Assistant Vice President, Customer Services Jeffrey E. DuBois Assistant Vice President, Gas Supply and Off System Sales Anthony M. Tetto Assistant Vice President, Distribution Operations South Jersey Energy Officers Edward J. Graham President Michael J. Renna Vice President Jane F. Kelly, Esq. Corporate Secretary David Robbins, Jr. Treasurer Joseph A. Rodio Assistant Vice President Dividend Reinvestment Plan SJI's Dividend Reinvestment Plan provides record shareholders of SJI's common stock with a way to increase their investment in the company without payment of any brokerage commission or service charge. Shareholders participating in the Plan may purchase shares of common stock by the automatic reinvestment of dividends and optional purchases. The Plan is now available to any person who, upon enrollment, agrees to become a shareholder by purchasing at least $100 of SJI common stock. Optional purchases may be made up to a maximum of $100,000 in any calendar year, as prescribed in the Plan. Shares of common stock offered through the Plan are newly issued or treasury common stock that the Plan acquires directly from SJI currently at a 2 percent discount. The price will be 98 percent of the average of the closing sale prices for SJI's common stock for each of the last 12 days the common stock was traded prior to the purchase date, as published in The Wall Street Journal. The offer and sale of shares under the Plan will be made only through a Prospectus, obtainable by contacting the Shareholder Records Department. Direct Deposit of Dividends (Electronic Funds Transfer) Stockholders of record can have immediate access to dividend funds. Your dividend funds can be deposited directly into your checking or savings account. Confirmation of dividend receipts will appear on your monthly bank statements. South Jersey Industries stock is traded on the New York Stock Exchange under the trading symbol SJI. The information contained herein is not given in connection with any sale or offer of, or solicitation of an offer to buy, any securities. - Inside Back Cover - South Jersey Industries 1 South Jersey Plaza Folsom, NJ 08037-9917 www.sjindustries.com 609-561-9000 - Back Cover - EX-18 5 iex18.txt SJI INDEPENDENT AUDITORS' LETTER EXHIBIT 18 South Jersey Industries, Inc. Number One South Jersey Plaza Folsom, New Jersey 08037 Dear Sirs/Madams: We have audited the financial statements of South Jersey Industries, Inc. as of December 31, 2002 and 2001, and for each of the three years in the period ended December 31, 2002, included in your Annual Report on Form 10-K to the Securities and Exchange Commission and have issued our report thereon dated February 19, 2003, which expresses an unqualified opinion and includes an explanatory paragraph concerning the Company's change in method of presenting revenues and expenses from trading in physical power contracts. Note 11 to such financial statements contains a description of your change in measurement dates used to account for your pensions from September 30, to December 31, to conform to the measurement date used for your postretirement health care plans and to reflect the pension balances as of your balance sheet date. In our judgment, such change is to an alternative accounting principle that is preferable under the circumstances. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania February 19, 2003 EX-21 6 iex21.txt SJI SUBSIDIARIES OF REGISTRANT Exhibit 21 SOUTH JERSEY INDUSTRIES, INC. SUBSIDIARIES OF REGISTRANT AS OF DECEMBER 31, 2002 Percentage of Voting Securities State of Owned by Parent Relationship Incorporation ----------------------------------------------- South Jersey Industries, Inc. Registrant Parent New Jersey South Jersey Gas Company (4) 99.28 (1) New Jersey Marina Energy LLC (4) 100 (1) New Jersey South Jersey Energy Company (4) 100 (1) New Jersey South Jersey Resources Group, LLC (4) 100 (1) Delaware SJ EnerTrade, Inc. (4) 100 (2) New Jersey Energy & Minerals, Inc. (4) 100 (1) New Jersey R&T Group, Inc. (4) 100 (1) New Jersey South Jersey Fuel, Inc. (4) 100 (3) New Jersey (1) Subsidiary of South Jersey Industries, Inc. (2) Subsidiary of South Jersey Energy Company (3) Subsidiary of Energy & Minerals, Inc. (4) Subsidiary included in financial statements EX-23 7 iex23.txt SJI INDEPENDENT AUDITORS' CONSENT Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-27132 and 33-58349 on Form S-8 and Registration Statement No. 33-53127, as amended, on Form S-3 of South Jersey Industries, Inc. of our reports dated February 19, 2003 (which express an unqualified opinion and includes an explanatory paragraph concerning the Company's change in method of presenting revenues and expenses from trading in physical power contracts), appearing in and incorporated by reference in this Annual Report on Form 10-K of South Jersey Industries, Inc. for the year ended December 31, 2002. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 13, 2003 EX-24 8 iex24.txt SJI POWER OF ATTORNEY 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 Charles Biscieglia, David A. Kindlick and Richard H. Walker, Jr., 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, 2002 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 13th day of March 2003. /s/ Charles Biscieglia - -------------------------------------------- Charles Biscieglia, Chairman of the Board & Chief Executive Officer /s/ Shirli M. Billings - -------------------------------------------- Shirli M. Billings, Director /s/ Keith S. Campbell - -------------------------------------------- Keith S. Campbell, Director /s/ Sheila Hartnett-Devlin - -------------------------------------------- Sheila Hartnett-Devlin, Director /s/ W. Cary Edwards - -------------------------------------------- W. Cary Edwards, Director Exhibit 24 Power of Attorney -- 10-K Page 2 of 2 /s/ Herman D. James - -------------------------------------------- Herman D. James, Director /s/ Clarence D. McCormick - -------------------------------------------- Clarence D. McCormick, Director /s/ Frederick R. Raring - -------------------------------------------- Frederick R. Raring, Director /s/ William J. Hughes - -------------------------------------------- William J. Hughes, Director /s/ Richard H. Walker, Jr. - -------------------------------------------- Richard H. Walker, Jr., Corporate Secretary & Corporate Counsel /s/ David A. Kindlick - -------------------------------------------- David A. Kindlick, Vice President, Treasurer & Chief Financial Officer EX-99.1 9 iex99-1.txt SJI CEO CERTIFICATE PURSUANT TO SARBANES-OXLEY ACT Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Annual Report on Form 10-K of South Jersey Industries, Inc. (the "Company") for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Charles Biscieglia, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Charles Biscieglia - ----------------------------------- Name: Charles Biscieglia Title: Chief Executive Officer March 13, 2003 EX-99.2 10 iex99-2.txt SJI CFO CERTIFICATE PURSUANT TO SARBANES-OXLEY ACT Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Annual Report on Form 10-K of South Jersey Industries, Inc. (the "Company") for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David A. Kindlick, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ David A. Kindlick - ----------------------------------- Name: David A. Kindlick Title: Chief Financial Officer March 13, 2003 -----END PRIVACY-ENHANCED MESSAGE-----