-----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, Mebhm852CuKf6P1U9y6tYfvtDV3GunQyvPt56dZ5nMKtS5oUs6o3Iyg5R7KyM52j e280QAI4XmZw/EKgxlamjA== 0000091928-05-000021.txt : 20050309 0000091928-05-000021.hdr.sgml : 20050309 20050309121141 ACCESSION NUMBER: 0000091928-05-000021 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050309 DATE AS OF CHANGE: 20050309 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: 05668593 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: SOUTH JERSEY GAS CO DATE OF NAME CHANGE: 19700507 FORMER COMPANY: FORMER CONFORMED NAME: ATLANTIC CITY GAS CO DATE OF NAME CHANGE: 19680301 10-K 1 sji10k.txt SOUTH JERSEY INDUSTRIES FORM 10-K P/E 12/31/04 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________to ______________. Commission File Number 1-6364 SOUTH JERSEY INDUSTRIES, INC. (Exact name of registrant as specified in its charter) New Jersey 22-1901645 (State of incorporation) (IRS employer identification no.) 1 South Jersey Plaza, Folsom, 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ] The aggregate market value of approximately 12,434,700 shares of voting stock held by non-affiliates of the registrant as of March 1, 2005 was $696,716,200. As of March 1, 2005, there were 13,931,308 shares of the registrant's common stock outstanding. Cover Page Documents Incorporated by Reference: In Part I of Form 10-K: Pages 18, 27 through 30, and 32 through 37 of 2004 Annual Report to Shareholders In Part II of Form 10-K: Pages 1 and 12 through 38 of 2004 Annual Report to Shareholders In Part III of Form 10-K: Portions of the registrant's proxy statement filed within 120 days of the close of the registrant's fiscal year in connection with the registrant's 2005 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K. ================================================================================ SJI-2 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. The company's Internet address is www.sjindustries.com. We make available free of charge on or through our website SJI's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). The SEC maintains an Internet site that contains these reports at http://www.sec.gov. The content on any web site referred to in this filing is not incorporated by reference into this filing unless expressly noted otherwise. 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: o sells natural gas and pipeline transportation capacity (off-system sales) on a wholesale basis to various customers on the interstate pipeline system; o transports natural gas purchased directly from producers or suppliers for its own sales and for some of its customers; and o serviced appliances via the sale of appliance service programs as well as on a time and materials basis through September 1, 2004, at which time the business line was transferred out of SJG and into South Jersey Energy Service Plus, LLC. South Jersey Energy Company (SJE) acquires and markets natural gas and electricity to retail end users and provides total energy management services to commercial and industrial customers. SJE also markets an air quality monitoring system through AirLogics, LLC. SJE and GZA GeoEnvironmental, Inc., an environmental consulting firm, each have a 50% equity interest in AirLogics. South Jersey Resources Group, LLC (SJRG) markets wholesale natural gas storage, commodity and transportation in the mid-Atlantic and southern states. SJRG also conducts price-risk management activities by entering into a variety of physical and financial transactions including forward contracts, swap agreements, option contracts and futures contracts. Marina Energy LLC (Marina) develops and operates energy-related projects. Marina's largest project, the development of a facility to provide cooling, heating and hot water to the Borgata Hotel Casino and Spa in Atlantic City, began commercial operations in July 2003. Marina also owns a 51% equity interest in AC Landfill Energy, LLC (ACLE). ACLE was formed with DCO Energy, LLC to develop and install a 1,400 kilowatt methane-to-electric power generation system at a county-owned landfill in Egg Harbor Township, NJ. Commercial operation of the plant is targeted for early 2005. South Jersey Energy Service Plus, LLC (SJESP) installs residential and small commercial HVAC systems and services appliances via the sale of appliance service programs, as well as on a time and materials basis in southern New Jersey. SJI also has a joint venture investment with Conectiv Solutions, LLC in Millennium Account Services, LLC (Millennium). Millennium provides meter reading services to SJG and Conectiv Power Delivery in southern New Jersey. SJI-3 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. A number of factors could cause our actual results to differ materially from those anticipated, including, but not limited to, the following: general economic conditions on an international, national, state and local level; weather conditions in our marketing areas; changes in commodity costs; changes in the availability of natural gas; regulatory and court decisions; competition in our utility and 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 8 on pages 32 and 33 of SJI's Annual Report to Shareholders for the year ended December 31, 2004 which is attached to this report. See Item 15(b)(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. 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 contributed approximately 74.4% on a consolidated basis to SJI's net income. SJG's service territory covers approximately 2,500 square miles in the southern part of New Jersey. It 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 benefits from its proximity to Philadelphia and Wilmington on the western side of its service territory and Atlantic City and the burgeoning shore communities on the eastern side. Economic development and housing growth had long been driven by the development of the Philadelphia metropolitan area. In recent years, however, housing growth in the eastern portion of the service territory has increased substantially and now accounts for approximately half of SJG's annual customer growth. The foundation for growth in Atlantic City and the surrounding region rests primarily with new gaming and non-gaming investments that emphasize destination style attractions. The casino industry is expected to remain a significant source of regional economic development going forward. The ripple effect from Atlantic City continues to produce new housing, commercial SJI-4 and industrial construction. Combining with the gaming industry catalyst is the ongoing conversion of southern New Jersey's oceanfront communities from seasonal resorts to year round economies. New and expanded hospitals, schools, and large scale retail developments throughout the service territory have contributed to SJG's growth. Presently, SJG serves approximately 58% of households within its territory with natural gas. SJG also serves southern New Jersey's diversified industrial base that includes processors of petroleum and agricultural products; chemical, glass and consumer goods manufacturers; and high technology industrial parks. SJG serves 313,579 residential, commercial and industrial customers (at December 31, 2004) in southern New Jersey. Gas sales, transportation and capacity release for 2004 amounted to 132,847 MMcf (million cubic feet), of which 54,333 MMcf was firm sales and transportation, 2,635 MMcf was interruptible sales and transportation and 75,879 MMcf was off-system sales and capacity release. The breakdown of firm sales includes 27.1% residential, 9.6% commercial, 2.0% cogeneration and electric generation, .3% industrial and 61.0% transportation. At year-end 2004, SJG served 292,185 residential customers, 20,939 commercial customers and 455 industrial customers. This includes 2004 net additions of 8,463 residential customers, 534 commercial customers and 20 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 2004, 1.38 Bcf (billion cubic feet) was delivered under this agreement. SJG serviced 6 cogeneration facilities in 2004. Combined sales and transportation of natural gas to such customers amounted to approximately 3.6 Bcf in 2004. 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 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 2004, off-system sales amounted to 21.3 Bcf. Also in 2004, capacity release and storage throughput amounted to 54.6 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 2004 amounted to approximately 2.6 Bcf, approximately 2.0% of the total throughput. No material part of SJG's business is dependent upon a single customer or a few customers. 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, Columbia Gulf Transmission Company, Dominion Transmission, Inc., and Texas Gas Transmission Corporation, 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 SJI-5 allows for the adjustment of revenues when temperatures are higher or lower than normal, thereby stabilizing SJG's income. In years which are warmer or colder than normal, SJG increases or decreases its revenue, respectively, to a level equivalent with that of normal temperatures. The tariff also 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. 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 is set annually by the BPU through a Basic Gas Supply Service ("BGSS") within SJG's tariff. When actual gas costs experienced by SJG are less than those charged to customers under BGSS, customer bills in the subsequent BGSS period(s) are reduced by returning 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 BGSS price structure. BGSS is the gas supply service being provided by the natural gas utility. Upon implementation of BGSS in 2003, customers 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 provides SJG with more pricing flexibility, through automatic rate changes, conceptually resulting in the reduction of over/under-recoveries. Although the BGSS price structure replaced the pricing structure in the previous rate clause, all other mechanisms from the previous clause, such as, but not limited to, deferred accounting treatment and the allowance for full recovery of natural gas costs, remain in place under BGSS. In July 2004, the BPU approved SJG's August 2002 petition and related agreements to transfer its appliance service business from the regulated utility. SJI had previously formed South Jersey Energy Service Plus (SJESP) to accommodate the transfer. SJESP purchased certain assets and assumed certain liabilities of the appliance service business for the net book value of $1.2 million. SJESP paid an additional $1.5 million for certain intangible assets and that amount was credited by SJG to its customers through the Remediation Adjustment Clause. In January 1997, the BPU granted SJG rate relief, which was predicated in part upon a 9.62% rate of return on rate base that included an 11.25% return on common equity. This rate relief provided for the recovery of cost-of-service recovery, including deferred costs, through base rates. Additionally, SJG's threshold for sharing pre-tax margins generated by interruptible and off-system sales and transportation had increased. As a result of this case, SJG kept 100% of pre-tax margins up to the threshold level of $7.8 million. The next $750,000 was credited to customers through the BGSS clause. Thereafter, SJG kept 20% of the pre-tax margins as it had historically. On July 7, 2004, the BPU granted SJG a base rate increase of $20.0 million, which was predicated in part upon a 7.97% rate of return on rate base that included a 10.0% return on common equity. The increase was effective July 8, 2004 and designed to provide an incremental $8.5 million on an annualized basis to net income. SJG was also permitted recovery of regulatory assets contained in its petition and a reduction in its composite depreciation rate from 2.9% to 2.4%. SJI-6 Included in the base rate increase was a change to the sharing of pre-tax margins on interruptible and off-system sales and transportation. SJG now recovers through its base rates the $7.8 million that it had previously recovered through the sharing of pre-tax margins. As a result, the sharing of pre-tax margins now begins from dollar one, with SJG retaining 20%. Moreover, SJG now shares pre-tax margins from on-system capacity release sales, in addition to the interruptible and off-system sales and transportation. Effective July 1, 2006, the 20% retained by SJG will decrease to 15% of such margins. As part of the overall settlement effective July 8, 2004, SJG is providing customers with an offsetting $38.9 million in rate reductions. These reductions are being provided to customers through the reduction and elimination of rates associated with SJG's various clauses and did not negatively impact SJG's net income. Under those clauses, costs incurred by SJG were being billed to customers on a dollar-for-dollar basis and these reductions do not negatively impact SJG's net income. Additional information on regulatory affairs is incorporated by reference to Notes 1, 6, 9, 10,11 and 13 of SJI's Annual Report to Shareholders for the year ended December 31, 2004 which is attached to this report. See Item 15(b)(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 and electricity for retail end users, markets total energy management services, and markets an air quality monitoring system. As of December 31, 2004, SJE marketed natural gas to 76,424 customers, of which 73,424 were residential customers. All of SJE's residential gas customers and most of its commercial and industrial customers are located within southern New Jersey. In 2004, SJE was profitable and contributed approximately 12.5% 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 natural gas commodity risk management services to other SJI subsidiaries. In 2004, SJRG transacted 78.5 Bcf of natural gas. SJRG contributed approximately 7.7% on a consolidated basis to SJI's net income. Marina Energy Marina Energy LLC is a limited liability company formed in New Jersey in 2000 and is wholly owned by SJI. Marina develops and operates energy-related projects. Marina's largest project is an energy plant that provides for the thermal needs of the Borgata Hotel Casino and Spa in Atlantic City. The facility consists of a production facility and a distribution and interconnection system located in the area of Atlantic City referred to as Renaissance Point. The production facility consists of hot and chilled water production equipment, emergency electric generating equipment and related equipment. The facility is located adjacent to the Borgata and in close proximity to other potential customer sites. The distribution system consists of both hot and chilled water piping, manholes, valves, heat exchangers, controls and electrical devices. The system commences within the Marina Thermal Facility and connects to the Borgata via underground pipes and electric distribution lines. The plant became fully operational for the Borgata's July 2003 opening. The Marina Thermal Facility has 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. SJI-7 Other than the Borgata thermal facility, Marina had completed three smaller energy projects and was in the process of developing two additional projects as of December 31, 2004. Marina contributed approximately 6.0% on a consolidated basis to SJI's net income. South Jersey Energy Service Plus South Jersey Energy Service Plus, LLC (SJESP) is a limited liability company formed in New Jersey in 2003 and is wholly owned by SJI. SJESP installs residential and small commercial HVAC systems and services appliances via the sale of appliance service programs as well as on a time and material basis. SJESP serves southern New Jersey where it is the largest local appliance service company with 50 experienced technicians and installers. As of December 31, 2004, SJESP had 76,757 appliance service contracts for the repair and maintenance of major appliances, such as house heaters, gas ranges, and electric central air conditioning units. SJESP contributed approximately 1.1% on a consolidated basis to SJI's net income. 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 2004, SJG purchased and had delivered approximately 43.2 Bcf of natural gas for distribution to both on-system and off-system customers. Of this total, 31.5 Bcf was transported on the Transco pipeline system and 11.7 Bcf was transported on the Columbia pipeline system. SJG also secures firm transportation and other long term services from three additional pipelines upstream of the Transco and Columbia systems. They include: Columbia Gulf Transmission Company (Columbia Gulf), Texas Gas Transmission Corporation (Texas Gas) and Dominion Transmission Inc. (Dominion). 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 the jurisdiction of the Federal Energy Regulatory Commission (FERC). Transco: Transco is SJG's largest supplier of long-term gas transmission services. These services include five year-round and one seasonal firm transportation (FT) service 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 169,589 Thousand Cubic Feet of gas per day ("Mcf/d"). The terms of the year-round agreements extend for various periods from 2005 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 2005 to 2017. Dominion: SJG has a storage service with Dominion which provides a maximum withdrawal capacity of 9,662 Mcf per day during the period between November 16 and March 31 of winter season with 408,696 Mcf of storage capacity. Gas is delivered through both the Dominion and Transco pipeline systems. SJI-8 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. Gas Supplies SJG has two long-term gas supply agreements with a single producer and marketer that expire in 2006. Under these agreements, SJG can purchase up to 6,798,628 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 During 2004 SJG entered into a Liquefied Natural Gas (LNG) liquefaction service agreement with a third party provider which extends through March 31, 2005. SJG's contract quantity under the agreement is 232,744 Mcf. LNG supplied by this vendor is transported to SJG's 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 New Jersey LNG 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. 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 2004-2005 winter season to be 511,363 Mcf. SJG projects that it has adequate supplies and interstate pipeline entitlements to meet its design requirements. On January 10, 2004, SJG experienced its highest peak-day demand for the year of 407,207 Mcf with an average temperature of 11.51 degrees F. Natural Gas Prices SJG's average cost of natural gas purchased and delivered in 2004, 2003 and 2002, including demand charges, was $7.39 per Mcf, $6.74 per Mcf and $4.46 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. 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. SJI-9 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, 2006, under which up to 2,716,000 Mcf of gas may be stored during the summer season and up to 23,200 Mcf per day may be withdrawn during the winter season. SJRG has entered into a new 3-year contract with National Fuel for an additional 2,030,000 Mcf of similar storage capacity as of April 1, 2005. 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, 2006. Under this agreement, National Fuel will provide SJRG with a maximum daily injection transportation quantity of 18,500 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 23,200 Mcf with primary delivery points on Transcontinental Gas Pipe Line and National Fuel's system storage. 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. 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. Activities such as wholesale gas marketing, air monitoring, energy services, and energy project development do not follow seasonal patterns. Other activities such as retail electric marketing and appliance service can have seasonal earnings patterns that are different from the utility. While growth in the earnings contributions from non-utility operations has improved SJI's second and third quarter net income levels, the first and fourth quarters remain the periods where most of SJI's revenues and net income is produced. SJI-10 Working Capital Practices Reference is made to "Liquidity and Capital Resources" on page 18 of the SJI's Annual Report to Shareholders for the year ended December 31, 2004 which is attached to this report. Customers No material part of the Company's business is dependent upon a single customer or a few customers, the loss of which would have a material adverse effect on SJI performance on a consolidated basis. One of SJI's subsidiaries, Marina Energy, does currently receive the majority of its revenues and income from one customer. However, that customer is under long-term contract through 2023. 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, no other utility provides natural gas service within its territory. SJG does not expect any other utilities to do so in the foreseeable future because of the extensive investment required for utility plant and related costs. SJG competes with oil, propane and electricity suppliers for residential, commercial and industrial users. SJG competes with alternative fuel source providers based upon price, convenience and environmental factors. 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. 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 and electricity. SJE competes based upon a combination of effective customer acquisition efforts and pricing. Retail natural gas competition includes SJG, other utilities, and alliances which include other utility companies and independent marketers. Retail electric competition is similar to that of retail natural gas, excluding SJG. SJRG competes with other wholesale gas marketers based upon a combination of familiarity with the markets we serve and price. Marina competes with other energy project development companies on specific projects. That competition is based upon reputation, service, and price. SJESP competes with numerous other companies, both large and small, that service appliances and install HVAC systems based upon reputation, service, and price. Research During the last three fiscal years, neither SJI nor any of its subsidiaries engaged in research activities to any material extent. SJI-11 Environmental Matters Information on environmental matters for SJI and its subsidiaries is incorporated by reference to Note 13 on page 37 of the SJI Annual Report to Shareholders for the year ended December 31, 2004 which is attached to this report. Employees SJI and its subsidiaries had a total of 633 employees as of December 31, 2004. Of that total, 375 employees are unionized. Employees totaling 329 and 46 unionized employees are covered under collective bargaining agreements that expire in January 2009 and January 2008, respectively. We consider relations with employees to be good. 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, 2004, there were approximately 92 miles of mains in the transmission systems and 5,478 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, 2004, SJG's utility plant had a gross book value of $957.3 million and a net book value, after accumulated depreciation, of $732.8 million. In 2004, $68.6 million was spent on additions to utility plant and there were retirements of property having an aggregate gross book cost of $5.9 million. SJI's total construction and remediation expenditures for 2005 are expected to total $87.2 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 $67.1 million consists primarily of Marina's energy projects, in particular the thermal energy plant in Atlantic City, N.J. EMI owns 235 acres of land in Vineland, New Jersey. South Jersey Fuel, Inc., an inactive subsidiary, owns land and a building in Deptford Township and owns real estate in Upper Township, New Jersey. R&T Castellini, Inc., an inactive subsidiary, owns land and buildings in Vineland, New Jersey. SJI owned approximately 139 acres of land in Folsom, New Jersey, and approximately 3.41 acres of land in Linwood, New Jersey as of December 31, 2004. SJI sold the Linwood property in February 2005 for $600,000. SJI-12 Item 3. Legal Proceedings 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 these claims. Among other actions, SJI is 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 2004 fiscal year. Item 4-A. Executive Officers of the Registrant Name Age Positions with SJI Edward J. Graham 47 President & Chief Executive Officer David A. Kindlick 50 Vice President & Chief Financial Officer Jeffrey E. DuBois 46 Vice President Richard J. Jackson 55 Vice President Michael J. Renna 37 Vice President Albert V. Ruggiero 56 Vice President Richard H. Walker, Jr. 54 Vice President, Corporate Counsel & Corporate Secretary 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 and CEO in February 2004. Mr. Graham relinquished the role of COO in February 2004. 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 of SJI in June 1997, Vice President and Treasurer in April 2001, and Vice President, Treasurer and Chief Financial Officer in January 2002. Mr. Kindlick relinquished the role of Treasurer in January 2004. Jeffrey E. DuBois was elected Assistant Vice President, Gas Supply and Off-System Sales of SJG in January 2002. Mr. DuBois was elected Senior Vice President, Gas Supply and Delivery of SJG and Vice President of SJI in January 2004. Richard J. Jackson was elected Assistant Vice President, Division Operations of SJG in October 1989, Vice President, Division Operations in April 1992, Vice President, Production & Transmission in July 1993, Senior Vice President, Operations in April 1998, and Executive Vice President and Chief Operating Officer in March 2002. Mr. Jackson was elected as Vice President of SJI in January 2004. Michael J. Renna was elected Assistant Vice President of SJI in January 2002 and Vice President in January 2004. Mr. Renna was elected Vice President of SJE in January 2002 and President in January 2004. SI-13 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 Counsel & Corporate Secretary in April 2002. Mr. Walker was elected Vice President, Corporate Counsel and Corporate Secretary in May 2003. Executive officers of SJI are elected annually and serve at the pleasure of the Board of Directors. SJI-14 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 pages 30 and 31 of SJI's Annual Report to Shareholders for the year ended December 31, 2004 which is attached to this report. In December 2004, non-employee members of SJI's Board of Directors received an aggregate of 2,610 shares of unregistered stock, valued at that time at $130,265, as part of their compensation for serving on the Board. 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, 2004 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 21 of SJI's Annual Report to Shareholders for the year ended December 31, 2004 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 19 and 20 of SJI's Annual Report to Shareholders for the year ended December 31, 2004, which is attached to this report. Item 8. Financial Statements and Supplementary Data Information required by this item is incorporated by reference to pages 22 through 38 of SJI's Annual Report to Shareholders for the year ended December 31, 2004 which is attached to this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures - Management has established controls and procedures to ensure that material information relating to SJI, including its consolidated subsidiaries, is made known to the officers who certify its financial reports and to other members of senior management and the Board of Directors. Based upon their evaluation as of December 31, 2004, the principal executive officer and the principal financial officer of SJI have concluded that SJI-15 the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) employed at SJI are effective to ensure that the information required to be disclosed by SJI in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. No change in SJI's internal control over financial reporting occurred during SJI's fourth fiscal quarter. Management's Report on Internal Control Over Financial Reporting - Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commision. Based on our evaluation under that framework, management concluded that our internal control over financial reporting was effective as of December 31, 2004. Management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is incorporated by reference. Item 9B. Other Information None SJI-16 PART III Item 10. Directors and Executive Officers of the Registrant Information concerning Directors may be found under the captions "Director Elections," "Nominees," "Directors Continuing in Office," and "Security Ownership" in our definitive proxy statement for our 2005 Annual Meeting of Shareholders (the "2005 Proxy Statement"), which will be filed within the Commission within 120 days after the close of our fiscal year. Such information is incorporated herein by reference. Information required by this item relating to the executive officers of SJI is set forth in Item 4-A of this report. Code of Ethics The Company has adopted a Code of Ethics for its Principal Executive, Financial and Accounting Officers. It is available on SJI's website, www.sjindustries.com by clicking "Investors" and then "Corporate Governance." We will post any amendment to or waiver of the Code to our website. Item 11. Executive Compensation Information concerning executive compensation may be found under the captions "Compensation/Pension Committee Report on Executive Compensation" and "Executive Compensation" of our 2005 Proxy Statement. Such information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information in our 2005 Proxy Statement set forth under the caption "Security Ownership" is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information in our 2005 Proxy Statement set forth under the caption "The Board of Directors" and the subcaption "Certain Relationships" is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information in our 2005 Proxy Statement set forth under the caption "Ratification of Appointment of Independent Registered Public Accounting Firm" is incorporated herein by reference. SJI-17 PART IV Item 15. Exhibits and Financial Statement Schedule (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 March 2, 2005, are incorporated herein by reference to pages 21 through 37 of SJI's Annual Report to Shareholders for the year ended December 31, 2004 which is attached to this report. 2 - Supplementary Financial Information Information regarding selected quarterly financial data is incorporated herein by reference to page 38 of SJI's Annual Report to Shareholders for the year ended December 31, 2004 which is attached to this report. Supplemental Schedules as of December 31, 2004 and 2003 and for the three years ended December 31, 2004, 2003, and 2002: Report of Independent Registered Public Accounting Firm of Deloitte & Touche LLP, Auditors of SJI (page 24). Schedule I - Statements of Income, Statements of Comprehensive Income, Statements of Retained Earnings, Statements of Cash Flows and Balance Sheets of SJI (pages 27-29). Schedule II - Valuation and Qualifying Accounts (page 30). 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(b)(13) (b) List of Exhibits (Exhibit Number is in Accordance with the Exhibit Table i Item 601 of Regulation S-K). Exhibit Description Reference Number
(3)(a)(i) Certificate of Incorporation of South Jersey Incorporated by reference from Exhibit (4)(a) Industries, Inc., as amended through April of Form S-2 (2-91515). 19, 1984. (3)(a)(ii) Amendment to Certificate of Incorporation Incorporated by reference from Exhibit relating to two-for-one stock split effective (4)(e)(1) of Form S-3 (33-1320). as of April 28, 1987. (3)(a)(iii) Amendment to Certificate of Incorporation Incorporated by reference from Exhibit relating to director and officer liability. (4)(e)(2) of Form S-3 (33-1320). SJI-18 Exhibit Description Reference Number (3)(ii) Bylaws of South Jersey Industries, Inc. as Incorporated by reference from Exhibit amended and restated through November 17, (3)(ii) of Form 10-K for 2000 (1-6364). 2000. (4)(a) Form of Stock Certificate for common stock. Incorporated by reference from Exhibit (4)(a) of Form 10-K for 1985 (1-6364). (4)(a)(i) Rights Agreement dated as of September 20, Incorporated by reference from Exhibit 99.1 1996 between South Jersey Industries, Inc. of Form 8-A filed April 9, 1996 (1-6364). and The Farmers & Merchants National Bank of Bridgeton. (4)(b)(i) First Mortgage Indenture dated October 1, Incorporated by reference from Exhibit 1947. (4)(b)(i) of Form 10-K for 1987 (1-6364). (4)(b)(x) Twelfth Supplemental Indenture dated as of Incorporated by reference from Exhibit 5(b) June 1, 1980. of Form S-7 (2-68038). (4)(b)(xv) Seventeenth Supplemental Indenture dated as Incorporated by reference from Exhibit of May 1, 1989. (4)(b)(xv) of Form 10-K for 1989 (1-6364). (4)(b)(xvii) Nineteenth Supplemental Indenture dated as of Incorporated by reference from Exhibit April 1, 1992. (4)(b)(xvii) of Form 10-K for 1992 (1-6364). (4)(b)(xix) Twenty-First Supplemental Indenture dated as Incorporated by reference from Exhibit of March 1, 1997. (4)(b)(xviv) of Form 10-K for 1997(1-6364). (4)(b)(xx) Twenty-Second Supplemental Indenture dated as Incorporated by reference from Exhibit of October 1, 1998. (4)(b)(ix) of Form S-3 (333-62019). (4)(b)(xxi) Twenty-Third Supplemental Indenture dated as Incorporated by reference from Exhibit of September 1, 2002. (4)(b)(x) of Form S-3 (333-98411). (4)(c) Indenture dated as of January 31, 1995; 8.60% Incorporated by reference from Exhibit (4)(c) Debenture Notes due February 1, 2010. of Form 10-K for 1994 (1-6364). (4)(e) Medium Term Note Indenture of Trust dated Incorporated by reference from Exhibit 4(e) October 1, 1998. of Form S-3 (333-62019). (4)(f) Medium Term Note Indenture of Trust, as Incorporated by reference from Exhibit 4(e) amended, dated December 16, 2002. of Form S-3 (333-98411) (10)(d) Gas storage agreement (GSS) between South Incorporated by reference from Exhibit Jersey Gas Company and Transco dated October (10)(d) of Form 10-K for 1993 (1-6364). 1, 1993. (10)(e) Gas storage agreement (S-2) between South Incorporated by reference from Exhibit (5)(h) Jersey Gas Company and Transco dated December of Form S-7 (2-56223). 16, 1953. SJI-19 Exhibit Description Reference Number (10)(f) Gas storage agreement (LG-A) between South Incorporated by reference from Exhibit (5)(f) Jersey Gas Company and Transco dated June 3, of Form S-7 (2-56223). 1974. (10)(h) Gas storage agreement (WSS) between South Incorporated by reference from Exhibit Jersey Gas Company and Transco dated August (10)(h) of Form 10-K for 1991 (1-6364). 1, 1991. (10)(i) Gas storage agreement (LSS) between South Incorporated by reference from Exhibit Jersey Gas Company and Transco dated October (10)(i) of Form 10-K for 1993 (1-6364). 1, 1993. (10)(i)(a) Gas storage agreement (SS-1) between South Incorporated by reference from Exhibit Jersey Gas Company and Transco dated May 10, (10)(i)(a) of Form 10-K for 1988 (1-6364). 1987 (effective April 1, 1988). (10)(i)(c) Gas transportation service agreement between Incorporated by reference from Exhibit South Jersey Gas Company and Transco dated (10)(i)(c) of Form 10-K for 1989 (1-6364). April 1, 1986. (10)(i)(f) Service agreement (FT) between South Jersey Incorporated by reference from Exhibit Gas Company and Transco dated February 1, (10)(i)(f) of Form 10-K for 1991 (1-6364). 1992. (10)(i)(g) Service agreement (Incremental FT) between Incorporated by reference from Exhibit South Jersey Gas Company and Transco dated (10)(i)(g) of Form 10-K for 1991 (1-6364). August 1, 1991. (10)(i)(i) Gas storage agreement (SS-2) between South Incorporated by reference from Exhibit Jersey Gas Company and Transco dated July 25, (10)(i)(i) of Form 10-K for 1991 (1-6364). 1990. (10)(i)(j) Gas transportation service agreement between Incorporated by reference from Exhibit South Jersey Gas Company and Transco dated (10)(i)(j) of Form 10-K for 1993 (1-6364). December 20, 1991. (10)(i)(k) Amendment to gas transportation agreement Incorporated by reference from Exhibit dated December 20, 1991 between South Jersey (10)(i)(k) of Form 10-K for 1993 (1-6364). Gas Company and Transco dated October 5, 1993. (10)(k)(h) Gas transportation service agreement (TF) Incorporated by reference from Exhibit between South Jersey Gas Company and CNG (10)(k)(h) of Form 10-K for 1993 (1-6364). Transmission Corporation dated October 1, 1993. (10)(k)(k) Gas transportation service agreement (FTS-1) Incorporated by reference from Exhibit between South Jersey Gas Company and Columbia (10)(k)(k) of Form 10-K for 1993 (1-6364). Gulf Transmission Company dated November 1, 1993. SJI-20 Exhibit Description Reference Number (10)(k)(l) Assignment agreement capacity and service Incorporated by reference from Exhibit rights (FTS-2) between South Jersey Gas (10)(k)(i) of Form 10-K for 1993 (1-6364). Company and Columbia Gulf Transmission Company dated November 1, 1993. (10)(k)(m) FTS Service Agreement No. 39556 between South Incorporated by reference from Exhibit Jersey Gas Company and Columbia Gas (10)(k)(m) of Form 10-K for 1993 (1-6364). Transmission Corporation dated November 1, 1993. (10)(k)(n) FTS Service Agreement No. 38099 between South Incorporated by reference from Exhibit Jersey Gas Company and Columbia Gas (10)(k)(n) of Form 10-K for 1993 (1-6364). Transmission Corporation dated November 1, 1993. (10)(k)(o) NTS Service Agreement No. 39305 between South Incorporated by reference from Exhibit Jersey Gas Company and Columbia Gas (10)(k)(o) of Form 10-K for 1993 (1-6364). Transmission Corporation dated November 1, 1993. (10)(k)(p) FSS Service Agreement No. 38130 between South Incorporated by reference from Exhibit Jersey Gas Company and Columbia Gas (10)(k)(p) of Form 10-K for 1993 (1-6364). Transmission Corporation dated November 1, 1993. (10)(k)(q) SST Service Agreement No. 38086 between South Incorporated by reference from Exhibit Jersey Gas Company and Columbia Gas (10)(k)(q) of Form 10-K for 1993 (1-6364). Transmission Corporation dated November 1, 1993. (10)(l)* Deferred Payment Plan for Directors of South Incorporated by reference from Exhibit Jersey Industries, Inc., South Jersey Gas (10)(l) of Form 10-K for 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 Agreement Incorporated by reference from Exhibit between South Jersey Industries, Inc. and/or (10)(j)(a) of Form 10-K for 1980 (1-6364). a subsidiary and seven of its officers. (10)(l)(b)* Schedule of Deferred Compensation Agreements. Incorporated by reference from Exhibit (10)(l)(b) of Form 10-K for 1997 (1-6364). (10)(l)(d)* Form of Officer Employment Agreement between Incorporated by reference from Exhibit certain officers and either South Jersey (10)(l)(d) of Form 10-K for 1999 (1-6364). Industries, Inc. or its subsidiaries. (10)(l)(e)* Schedule of Officer Employment Agreements. Incorporated by reference from Exhibit (10)(l)(e) of Form 10-K of SJI for 2003. (10)(l)(f)* Officer Severance Benefit Program for all Incorporated by reference from Exhibit officers. (10)(l)(g) of Form 10-K for 1985 (1-6364). SJI-21 Exhibit Description Reference Number (10)(l)(i)* Supplemental Executive Retirement Program, as Incorporated by reference from Exhibit amended and restated effective July 1, 1997, (10)(l)(i) of Form 10-K for 1997 (1-6364). and Form of Agreement between certain SJI or subsidiary officers. (10)(l)(j)* South Jersey Industries, Inc. 1997 Incorporated by reference from Exhibit Stock-Based Compensation Plan (As Amended and (10)(l)(j) of Form 10-K for 1999 (1-6364). Restated Effective January 1, 1999). (10)(m) Three-year Revolving Credit Agreement for SJI Incorporated by reference from Exhibit 10.1 of Form 10-Q of SJI as filed November 9, 2004. (10)(n)(a) Three-year Revolving Credit Agreement for SJG Incorporated by reference from Exhibit 10.2 of Form 10-Q of SJI as filed on November 14, 2003. (10)(n)(b) First Amendment to Three Year Revolving Incorporated by reference from Exhibit 10.2 Credit Agreement of Form 10-Q of SJI as filed on November 9, 2004. (10)(o)(a) Amended and Restated Letter of Credit and Reimbursement Agreement (filed herewith) (10)(o)(b) First Amendment To Amended and Restated Letter of Credit and Reimbursement Agreement (filed herewith) (10)(o)(c) Second Amendment To Amended and Restated Letter of Credit and Reimbursement Agreement (filed herewith) (10)(o)(d) Third Amendment To Amended and Restated Letter of Credit and Reimbursement Agreement (filed herewith) (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, 2004 is filed as an exhibit hereto solely to the extent portions are specifically incorporated by reference herein (filed herewith). (14) Code of Ethics. Incorporated by reference from Exhibit (14) of Form 10-K of SJI as filed for 2003. SJI-22 Exhibit Description Reference Number (18) Preferability Letter from Independent Incorporated by reference from Exhibit (18) Auditors' Re: Pension Measurement of Form 10-K of SJI as filed for 2003. Date. (21) Subsidiaries of the Registrant (filed herewith). (23) Independent Registered Public Accounting Firm's Consent (filed herewith). (31.1) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). (31.2) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). (32.1) Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). (32.2) Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). * Constitutes a management contract or a compensatory plan or arrangement.
SJI-23 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 & Chief Financial Officer Date March 7, 2005 ----------------- 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/ Edward J. Graham President, Chief Executive Officer March 7, 2005 - -------------------------- and Director (Edward J. Graham) (Principal Executive Officer) /s/ David A. Kindlick Vice President & Chief March 7, 2005 - -------------------------- Financial Officer (David A. Kindlick) (Principal Financial and Accounting Officer) /s/ Richard H. Walker, Jr. Vice President, Corporate Counsel March 7, 2005 - -------------------------- and Corporate Secretary (Richard H. Walker, Jr.) /s/ Charles Biscieglia Chairman of the Board March 7, 2005 - -------------------------- (Charles Biscieglia) /s/ Shirli M. Billings Director March 7, 2005 - -------------------------- (Shirli M. Billings) /s/ Helen R. Bosley Director March 7, 2005 - -------------------------- (Helen R. Bosley) SJI-24 Signature Title Date /s/ Thomas A. Bracken Director March 7, 2005 - ------------------------- (Thomas A. Bracken) /s/ Keith S. Campbell Director March 7, 2005 - -------------------------- (Keith S. Campbell) /s/ Sheila Hartnett-Devlin Director March 7, 2005 - --------------------------- (Sheila Hartnett-Devlin) /s/ W. Cary Edwards Director March 7, 2005 - -------------------------- (W. Cary Edwards) /s/ William J. Hughes Director March 7, 2005 - -------------------------- (William J. Hughes) /s/ Herman D. James Director March 7, 2005 - -------------------------- (Herman D. James) /s/ Frederick R. Raring Director March 7, 2005 - -------------------------- (Frederick R. Raring) SJI-25 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 subsidiaries (the "Company") as of December 31, 2004 and 2003, and for each of the three years in the period ended December 31, 2004, management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, and the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, and have issued our reports thereon dated March 2, 2005; such consolidated financial statements and reports are included in your 2004 Annual Report to Shareholders and are incorporated herein by reference. Our report on the Company's consolidated financial statements expresses an unqualified opinion and includes explanatory paragraphs with respect to the restatement of the 2003 balance sheet for the classification of prepaid pension assets from current assets to noncurrent assets and the change in the method of accounting for energy-related contracts to conform with the rescission of EITF 98-10 "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" in 2003. Our audits also included the consolidated financial statement schedules of the Company listed in Item 15(a)2. These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 2, 2005 SJI-26 SCHEDULE I - SOUTH JERSEY INDUSTRIES, INC. STATEMENTS OF INCOME (In Thousands) 2004 2003 2002 ----------- ------------ ------------ Operating Revenues $ 2,491 $ 2,216 $ 1,483 Operating Expenses: Operations 4,146 3,176 1,901 Depreciation 102 80 60 Energy and Other Taxes 391 295 175 ----------- ------------ ------------ Total Operating Expenses 4,639 3,551 2,136 Operating Loss (2,148) (1,335) (653) ----------- ------------ ------------ Other Income: Equity in Earnings of Subs 43,038 33,643 28,658 Other 417 478 718 ----------- ------------ ------------ Total Other Income 43,455 34,121 29,376 ----------- ------------ ------------ Interest Charges 619 497 519 Income Taxes (1,519) (1,084) (462) Equity in Affiliated Companies (766) (754) (746) ----------- ------------ ------------ Income from Continuing Operations 42,973 $ 34,127 $ 29,412 Discontinued Operations - Net - (275) - Equity in Undistributed Earnings of Discontinued Subsidiaries (680) (499) (424) ----------- ------------ ------------ Net Income Applicable to Common Stock $ 42,293 $ 33,353 $ 28,988 =========== ============ ============ 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. Statements of Comprehensive Income (In Thousands) 2004 2003 2002 ----------- ------------ ------------ Net Income Applicable to Common Stock $ 42,293 $ 33,353 $ 28,988 ----------- ------------ ------------ Other Comprehensive Income (Loss): Minimum Pension Liability Adjustment - Net - 803 (771) ----------- ------------ ------------ Total Other Comprehensive Income (Loss) - 803 (771) ----------- ------------ ------------ Comprehensive Income $ 42,293 $ 34,156 $ 28,217 =========== ============ ============ 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) 2004 2003 2002 ----------- ------------ ------------ Retained Earnings - Beginning $ 91,638 $ 78,002 $ 67,218 Net Income Applicable to Common Stock 42,293 33,353 28,988 ----------- ------------ ------------ 133,931 111,355 96,206 Dividends Declared - Common Stock (22,534) (19,717) (18,204) ----------- ------------ ------------ Retained Earnings - Ending $ 111,397 $ 91,638 $ 78,002 =========== ============ ============ 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. STATEMENTS OF CASH FLOWS FOR THE TWELVE MONTHS ENDED DECEMBER 31, (In Thousands) 2004 2003 2002 -------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES: Net Income Applicable to Common Stock $ 42,293 $ 33,353 $ 28,988 -------------- -------------- -------------- Adjustments to Reconcile Net Income to Cash Flows Provided by Operating Activities: Equity in Earnings of Subsidiaries (42,358) (33,144) (28,234) Depreciation 102 83 66 Deferred and Non-Current Income Taxes and Credits - Net (89) 300 329 Environmental Remedition Costs - Net - (61) (11) Additional Pension Contribution (1,126) (468) (750) Changes in: Accounts Receivable 99 (80) (17) Receivables with Associated Companies - Net (257) (196) (103) Prepayments and Other Current Assets (68) (47) (8) Prepaid and Accrued Taxes - Net (1,175) 482 (511) Accounts Payables & Other Current Liabilities 659 549 (5,389) Other - Assets 47 864 (104) Other - Liabilities 718 (443) 347 -------------- -------------- -------------- Total Cash (Used In) Provided by Operating Activities (1,155) 1,192 (5,397) -------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Return of Investment (Investment in) Affiliates 134 (254) (286) Capital Expenditures (82) (153) (125) Dividends from Subsidiaries 9,123 10,500 10,700 Equity Infusion To Subsidiaries (19,000) (30,700) (2,500) -------------- -------------- -------------- Net Cash (Used In) Provided by Investing Activities (9,825) (20,607) 7,789 -------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (Repayments) Borrowings of Associated Companies (6,648) (10,970) 9,528 Net Borrowings (Repayments) from Lines of Credits 13,700 13,000 (4,260) Dividends on Common Stock (22,534) (19,717) (18,204) Proceeds from Sale of Common Stock 26,662 37,170 10,926 -------------- -------------- -------------- Net Cash Provided by (Used In) Financing Activities 11,180 19,483 (2,010) -------------- -------------- -------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 200 68 382 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 589 521 139 -------------- -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 789 $ 589 $ 521 ============== ============== ============== See South Jersey Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements incorporated by reference in Part II, Item 8.
SJI-28 SCHEDULE I - SOUTH JERSEY INDUSTRIES, INC. BALANCE SHEETS (In Thousands) 2004 2003 ------------- -------------- Assets Property Plant and Equipment: Nonutility Property, Plant and Equipment, at cost $ 1,337 $ 1,340 Accumulated Depreciation (278) (253) -------------- -------------- Property, Plant and Equipment - Net 1,059 1,087 -------------- -------------- Investments: Investments in Subsidiaries 347,858 295,623 Available-for-Sale Securities 14 53 Investment in Affiliates 1,249 1,382 -------------- -------------- Total Investments 349,121 297,058 -------------- -------------- - - Current Assets: Cash and Cash Equivalents 789 589 Notes Receivable - Associated Companies 33,448 26,645 Accounts Receivable 11 110 Accounts Receivable - Associated Companies 2,288 2,132 Other 213 132 -------------- -------------- Total Current Assets 36,749 29,608 -------------- -------------- Other Noncurrent Assets 2,808 1,347 -------------- -------------- Total Assets $ 389,737 $ 329,100 ============= ============== Capitalization and Liabilities Common Equity: Common Stock SJI Par Value $1.25 a share Authorized - 20,000,000 shares Outstanding - 13,879,968 shares and 13,229,001 $ 17,350 $ 16,536 Premium on Common Stock 212,211 186,316 Retained Earnings 111,397 91,638 -------------- -------------- Total Common Equity 340,958 294,490 -------------- -------------- Current Liabilities: Notes Payable - Banks 39,300 25,600 Notes Payable - Associated Companies 5,920 5,765 Accounts Payable 1,535 1,247 Accounts Payable to Associated Companies 512 614 Taxes Accrued (1,580) (406) Other Current Liabilities 660 264 -------------- -------------- Total Current Liabilities 46,347 33,084 -------------- -------------- Other Noncurrent Liabilities 2,432 1,526 -------------- -------------- Total Capitalization and Liabilities $ 389,737 $ 329,100 ============== ============== See South Jersey Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements incorporated by reference in Part II, Item 8. SJI-29 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, 2004 $3,565 $1,171 $1,716 $2,957 $3,495 Provision for Uncollectible Accounts for the Year Ended December 31, 2003 $3,612 $3,245 $596 $3,888 $3,565 Provision for Uncollectible Accounts for the Year Ended December 31, 2002 $2,661 $4,148 $298 $3,495 $3,612 (a) Recoveries of accounts previously written off and minor adjustments. (b) Uncollectible accounts written off.
SJI-30 EX-10 2 locreimburseagree.txt SJI AMENDED AND RESTATED LETTER OF CREDIT DATED 9/19/02 AMENDED AND RESTATED LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT Dated as of September 19, 2002 among SOUTH JERSEY INDUSTRIES, INC. and MARINA ENERGY LLC, as Obligors and THE PARTICIPATING BANKS LISTED ON THE SIGNATURE PAGES HERETO and WACHOVIA BANK, NATIONAL ASSOCIATION, as Fronting Bank and Administrative Agent Arranged by: WACHOVIA SECURITIES, INC., Sole Lead Arranger and Book Manager Cover Page TABLE OF CONTENTS Table of Contents ARTICLE I DEFINITIONS.....................................................5 SECTION 1.01. Certain Defined Terms..............................5 SECTION 1.02. Computation of Time Periods.......................18 . 18 SECTION 1.03. Accounting Terms..................................18 SECTION 1.04. Internal References...............................18 ARTICLE II AMOUNT AND TERMS OF THE LETTER OF CREDIT......................18 SECTION 2.01. The Letters of Credit.............................19 SECTION 2.02. Extension of the Letters of Credit................19 SECTION 2.03. Commissions and Fees..............................19 SECTION 2.04. Reimbursement On Demand...........................20 SECTION 2.05. Tender Advances; Interest Rates...................20 SECTION 2.06. Additional Interest on LIBOR Rate Advances........21 SECTION 2.07. Interest Rate Determination.......................21 SECTION 2.08. Voluntary Conversion of Tender Advances...........22 SECTION 2.09. Prepayments of Advances...........................22 SECTION 2.10. Increased Costs...................................23 SECTION 2.11. Illegality........................................24 SECTION 2.12. Payments and Computations.........................24 SECTION 2.13. Non-Business Days.................................24 SECTION 2.14. Source of Funds...................................24 SECTION 2.15. Extension of the Stated Expiration Date...........24 SECTION 2.16. Amendments Upon Extension.........................25 SECTION 2.17. Evidence of Debt..................................25 SECTION 2.18. Obligations Absolute..............................25 SECTION 2.19. Net of Taxes, Etc.................................26 SECTION 2.20. Participation by Banks in Letters of Credit.......27 ARTICLE III CONDITIONS PRECEDENT.........................................31 SECTION 3.01. Conditions Precedent to the Execution and Delivery of this Agreement........................31 SECTION 3.02. Additional Conditions Precedent...................33 SECTION 3.03. Conditions Precedent to Each Tender Advance.......34 SECTION 3.04. Condition Precedent to each Conversion............34 SECTION 3.05. Reliance on Certificates..........................34 ARTICLE IV...............................................................35 Page 1 REPRESENTATIONS AND WARRANTIES...........................................35 SECTION 4.01. Representations and Warranties of the Obligors....35 ARTICLE V COVENANTS OF THE COMPANY.......................................38 SECTION 5.01. Affirmative Covenants.............................38 SECTION 5.02. Negative Covenants................................39 SECTION 5.03. Reporting Requirements............................41 SECTION 5.04. Financial Covenants...............................43 ARTICLE VI EVENTS OF DEFAULT.............................................43 SECTION 6.01. Events of Default.................................43 SECTION 6.02. Upon an Event of Default..........................45 ARTICLE VII THE PLEDGED BONDS............................................46 SECTION 7.01. Pledge............................................46 SECTION 7.02. Interest on the Bonds.............................46 SECTION 7.03. Rights with respect to Pledged Bonds..............47 SECTION 7.04. No Disposition of Pledged Bonds by Obligors.......47 SECTION 7.05. Disposition of Pledged Bonds by Administrative Agent..............................47 SECTION 7.06. Valid Perfected First Lien........................47 SECTION 7.07. Release of Pledged Bonds..........................48 ARTICLE VIII THE ADMINISTRATIVE AGENT AND FRONTING BANK..................48 SECTION 8.01. Appointment.......................................48 SECTION 8.02. Delegation of Duties..............................48 SECTION 8,03. Exculpatory Provisions............................48 SECTION 8.04. Reliance by Administrative Agent..................49 SECTION 8.05. Notice of Default.................................49 SECTION 8.06. Non-Reliance on Administrative Agent and Other Banks...................................49 SECTION 8.07. Indemnification...................................50 SECTION 8.08. Administrative Agent in Its Individual Capacity...50 SECTION 8.09. Successor Administrative Agent....................50 SECTION 8.10. Fronting Bank.....................................51 SECTION 8.11. Notices; Actions Under Related Documents..........51 ARTICLE IX MISCELLANEOUS.................................................51 SECTION 9.01. Amendments, Etc...................................51 SECTION 9.02. Notices, Etc......................................51 SECTION 9.03. No Waiver; Remedies...............................53 SECTION 9.04. Set-off...........................................53 SECTION 9.05. Indemnification...................................53 SECTION 9.06. Liability of the Banks............................54 SECTION 9.07. Costs, Expenses and Taxes.........................55 SECTION 9.08. Binding Effect....................................55 Page 2 SECTION 9.09. Assignments and Participation.....................56 SECTION 9.10. Severability......................................58 SECTION 9.11. Joint and Several Obligations.....................59 SECTION 9.13. Headings..........................................59 SECTION 9.14. Submission To Jurisdiction; Waivers...............59 SECTION 9.15. Acknowledgments...................................59 SECTION 9.16. Waivers of jury trial.............................60 SECTION 9.17. Execution in Counterparts.........................60 EXHIBITS Exhibit A-1 2001A Letter of Credit Exhibit A-2 2001B Letter of Credit Exhibit B Assignment and Acceptance Exhibit C Notice of Conversion Exhibit D Opinion of Counsel to the Obligors Exhibit E Form of Amendment to 2001A Letter of Credit Exhibit F Form of Amendment to 2001B Letter of Credit SCHEDULES Schedule I Commitments Schedule II Ownership Page 3 AMENDED AND RESTATED LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT AMENDED AND RESTATED LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT, dated as of September 19, 2002 among: (i) SOUTH JERSEY INDUSTRIES, INC., a New Jersey corporation ("South Jersey"); (ii) MARINA ENERGY LLC, a New Jersey limited liability company ("Marina Energy"; and together with South Jersey, collectively, the "Obligors"); (iii) the participating banks listed on the signature pages hereto (the "Banks"); and (iv) WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States of America ("Wachovia"), as Fronting Bank and Administrative Agent (in such capacities, together with its successors and permitted assigns in such capacities, respectively, the "Fronting Bank" and the "Administrative Agent"). PRELIMINARY STATEMENTS (1) The New Jersey Economic Development Authority (the "Issuer") has issued, pursuant to a Trust Indenture dated as of September 1, 2001 (as amended from time to time in accordance with the terms thereof, the "Indenture"), between the Issuer and Commerce Bank, National Association, as trustee, $20,000,000 aggregate principal amount of its Thermal Energy Facilities Revenue Bonds (Marina Energy LLC - 2001 Project), Series A (the "2001A Bonds") and $19,000,000 aggregate principal amount of its Thermal Energy Facilities Federally Taxable Revenue Bonds (Marina Energy LLC - 2001 Project), Series B (the "2001B Bonds" and, collectively with the 2001A Bonds, the "Bonds"); (2) On the date the 2001A Bonds were initially issued, the Fronting Bank, at the request of the Obligors, issued its irrevocable, transferable, direct pay letter of credit, in substantially the form of Exhibit A-1 hereto (such letter of credit, as it may from time to time be extended or amended pursuant to the terms of this Agreement, being the "2001A Letter of Credit") in the amount of $20,295,890.41, of which (i) $20,000,000 supports the payment of principal of the 2001A Bonds, and (ii) $295,890.41 supports up to 45 days' interest on the principal amount of the Bonds computed at a maximum interest rate of 12% per annum; (3) On the date the 2001B Bonds were initially issued, the Fronting Bank, at the request of the Obligors, issued its irrevocable, transferable, direct pay letter of credit, as amended on January 17, 2002, in substantially the form of Exhibit A-2 hereto, which reflects such amendment (such letter of credit, as it may from time to time be extended or amended pursuant to the terms of this Agreement, being the "2001B Letter of Credit" and collectively with the 2001A Letter of Credit, the "Letters of Credit"), in the amount of $19,351,369.87, of which (i) $19,000,000 shall support the payment of principal Page 4 of the 2001B Bonds, and (ii) $351,369.87 shall support up to 45 days' interest on the principal amount of the Bonds computed at a maximum interest rate of 15% per annum; (4) The Letters of Credit were issued in accordance with Letter of Credit and Reimbursement Agreement dated as of September 20, 2001 (the "Existing Reimbursement Agreement") among the Obligors, Wachovia and the participating banks listed therein; (5) The Obligors have requested that Wachovia extend the term of the Letters of Credit and Wachovia and the Banks have agreed to a two-year extension of the Letters of Credit under the terms of this Agreement; NOW, THEREFORE, in consideration of the premises and in order to induce the Fronting Bank to extend the Letters of Credit and the Banks to participate therein and to make Demand Loans and Tender Advances (as defined below) as provided herein, the parties hereto agree that the Existing Reimbursement Agreement is hereby amended and restated as follows: ARTICLE I DEFINITIONS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Administrative Agent" has the meaning assigned to that term in the preamble hereto. "Advance" means any advance of funds by the Fronting Bank or any Bank in accordance with the terms of this Agreement and the Letters of Credit. Each Bank's participation in a drawing, a Demand Loan or a Term Advance shall be considered an "Advance" by such Bank. "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control another entity if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such entity, whether through the ownership of voting securities, by contract, or otherwise. "Agreement" means this Amended and Restated Letter of Credit and Reimbursement Agreement as it may be amended, supplemented or otherwise modified in accordance with the terms hereof at any time and from time to time. "Applicable Lending Office" means, with respect to each Bank, such Bank's Domestic Lending Office, in the case of Base Rate Advances, and such Bank's LIBOR Lending Office, in the case of LIBOR Rate Advances. "Applicable Law" means all applicable laws, statutes, treaties, rules, codes, ordinances, regulations, permits, certificates, orders, interpretations, licenses, and permits of any Governmental Authority and judgments, decrees, injunctions, writs, orders or like action of any court, arbitrator or other judicial or quasi-judicial tribunal (including, without limitation, those pertaining to health, safety, the environment or otherwise). Page 5 "Applicable Margin" means on any date, the rate per annum set forth below, determined by reference to the Senior Debt Ratings:
-------------------------- ---------------------- -------------------------- --------------------------- BASIS FOR PRICING LEVEL 1 LEVEL 2 LEVEL 3 ------- ------- ------- If Senior Debt Rating If Senior Debt Ratings is If Senior Debt Ratings is at least BBB+ by S&P less than Level 1 but at less than Level 2 least Baa1 by Moody's least BBB by S&P or at least Baa2 by Moody's -------------------------- ---------------------- -------------------------- --------------------------- Applicable Libor Rate 0.875% 1.000% 1.250% Margin -------------------------- ---------------------- -------------------------- --------------------------- Applicable Unused Fee 0.150% 0.175% 0.225% -------------------------- ---------------------- -------------------------- --------------------------- Applicable Letter of Credit Fee 0.875% 1.000% 1.250% -------------------------- ---------------------- -------------------------- ---------------------------
Any change in the Applicable Margin will be effective as of the date on which S&P or Moody's, as the case may be, announces the applicable change in the Senior Debt Ratings. The Obligors shall notify the Administrative Agent in writing promptly after becoming aware of any change in the Senior Debt Ratings. For purposes of the foregoing, (i) if either Moody's or S&P shall not have in effect a Senior Debt Ratings (other than by reason of the circumstances referred to in the last sentence of this definition), then such Rating Agency shall be deemed to have established a rating less than BBB, in the case of S&P, and less than Baa2, in the case of Moody's; (ii) if the Senior Debt Ratings established or deemed to have been established by Moody's and S&P shall fall within different "Levels" and the ratings differential is one level, the higher rating will apply; (iii) if the Senior Debt Ratings established or deemed to have been established by Moody's and S&P shall fall within different "Levels" and the ratings differential is two levels or more, the level one above the lowest of the two ratings will apply; and (iv) if the rating system of Moody's or S&P shall change, or if Moody's or S&P shall cease to be in the business of rating corporate debt obligations, the Obligors, the Administrative Agent and the Banks shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from Moody's or S&P, and, pending the effectiveness of any such amendment, the Senior Debt Ratings shall be determined by reference to the Senior Debt Ratings most recently in effect prior to such change or cessation. "Applicable Rate" means: (a) in the case of each Base Rate Advance, a rate per annum equal at all times to the sum of the Base Rate in effect from time to time in effect from time to time; and (b) in the case of each LIBOR Rate Advance comprising part of the same Tender Advance, a rate per annum during each Interest Period equal at all times to the sum of the LIBOR Rate for such Interest Period plus the Applicable Margin in effect from time to time during such Interest Period. "Application" means an application, in the form specified by the Administrative Agent from time to time, requesting the Fronting Bank to amend a Letter of Credit. Page 6 "Average Quarterly Outstanding 2001B Amount" means, with respect to any quarter, the sum of (A) the face amount of the issued and outstanding 2001B Letter of Credit and (B) the aggregate principal amount of Demand Loans and Term Advances relating to the 2001B Letter of Credit, in each case outstanding at the end of each day for each day of the quarter in question, and by dividing such sum by the number of days in such quarter. "Bankruptcy Code" means Title 11 of the United States Code, as now constituted or hereafter amended. "Banks" has the meaning assigned to that term in the preamble hereto, and includes their respective successors and permitted assigns. "Base Rate" means, for any period, a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall at all times be equal to the higher of (i) the rate of interest announced publicly by Administrative Agent in Charlotte, North Carolina, from time to time, as Administrative Agent's Prime Rate; and (ii) 1/2 of one percent per annum above the Federal Funds Rate in effect from time to time. "Base Rate Advance" means an Advance that bears interest as provided in Section 2.05(b)(i). "Benefitted Bank" has the meaning assigned to that term in Section 9.04(b). "Bonds" has the meaning assigned to that term in the recitals to this Agreement. "Business Day" means a day of the year on which (i) banks are not required or authorized to close in Charlotte, North Carolina or any state in which the principal office of the Trustee or the Paying Agent for the Bonds, (ii) the New York Stock Exchange is not closed, and (iii) with respect to any borrowing, payment or rate selection of LIBOR Advances, banks are not required or authorized to close in Charlotte, North Carolina and on which dealings in Dollars are carried out in the London interbank market. "Cancellation Date" has the meaning assigned to that term in each Letter of Credit. "Capital Stock" means, with respect to any Person, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any preferred interest, any limited or general partnership interest and any limited liability company membership interest. "Change in Control" means the occurrence of either of the following: (i) any entity, person (within the meaning of Section 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) which theretofore was beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of less than 20% of South Jersey's then outstanding common stock either (x) acquires shares of common stock of South Jersey in a transaction or series of transactions that results in such entity, person or group directly or indirectly owning beneficially 20% or more of the outstanding common stock of South Jersey, Page 7 or (y) acquires, by proxy or otherwise, the right to vote for the election of directors, for any merger, combination or consolidation of the Obligors or any of its direct or indirect subsidiaries, or, for any other matter or question, more than 20% of the then outstanding voting securities of South Jersey; or (ii) the election or appointment of persons to South Jersey's board of directors who were not directors of South Jersey on the date hereof, and whose election or appointment was not approved by a majority of those persons who were directors at the beginning of such period, where such newly elected or appointed directors constitute 20% or more of the directors of the board of directors of South Jersey. "Closing Date" means September 19, 2002. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "Commitment" means, with respect to each Bank, such Bank's 2001A Commitment and the 2001B Commitment. "Commitments" means the total of the Banks' 2001A Commitments and the 2001B Commitments. "Consolidated" means, when used with reference to any accounting term, the amount described by such accounting term, determined on a consolidated basis in accordance with GAAP, after elimination of intercompany items. "Consolidated EBIT" means, with respect to South Jersey and its Consolidated Subsidiaries, for any period, an amount equal to: (i) net income for such period, plus (ii) amounts deducted in the computation thereof for (a) interest expense and (b) federal, state and local income taxes, (iii) gains or losses from the sale of assets in the ordinary course of business, and plus or minus, as the case may be, and (iv) extraordinary non-cash gains or losses for such period. "Consolidated Interest Expense" means, with respect to South Jersey and its Consolidated Subsidiaries, for any period, an amount equal to (i) all interest in respect of Indebtedness accrued during such period (whether or not actually paid during such period), plus (ii) the net amount payable (or minus the net amount receivable) under any hedging agreement with respect to such Indebtedness accrued during such period (whether or not actually paid or received during such period). "Consolidated Total Capitalization" means the sum of (i) Indebtedness of South Jersey and its Consolidated Subsidiaries, plus (ii) the sum of the capital stock (excluding treasury stock and capital stock subscribed for and unissued) and surplus (including earned surplus, capital surplus, translation adjustment and the balance of the current profit and loss account not transferred to surplus) accounts of South Jersey and its Consolidated Subsidiaries appearing on a consolidated balance sheet of South Jersey and its Consolidated Subsidiaries, in each case prepared as of the date of determination in accordance with GAAP consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e), after eliminating all intercompany transactions and all amounts properly attributable to minority interests, if any, in the stock and surplus of Subsidiaries. "Convert", "Conversion" and "Converted" each refers to a conversion of a Tender Advance of one Type into a Tender Advance of another Type pursuant to Section 2.08 or the selection of a new, or the renewal of the same, Interest Period for a LIBOR Rate Advance pursuant to Section 2.08. Page 8 "Date of Issuance" means the date of issuance of each Letter of Credit. "Default" means any event or condition that would constitute an Event of Default but for the requirement that notice be given or time elapse or both. "Default Rate" means a per annum rate 2% greater than the rate which would otherwise be applicable (or if no rate is applicable, whether in respect of interest, fees or other amounts, then the Base Rate plus 2%). "Demand Loan" has the meaning specified in Section 2.04(a). "Disbursement Date" has the meaning specified in Section 2.20(d)(ii). "Disclosure Documents" means South Jersey's Annual Report on Form 10-K for the year ended December 31, 2001, its Quarterly Report on Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002, and any Current Report on Form 8-K delivered to the Banks at least three (3) Business Days prior to the date of this Agreement. "Dollar" or "$" means dollars in lawful currency of the United States of America. "Domestic Lending Office" means, with respect to any Bank, the office of such Bank specified as such opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Bank, or such other office of such Bank as such Bank may from time to time specify to the Obligors and the Administrative Agent. "Environmental Laws" means any federal, state or local laws, ordinances or codes, rules, orders, or regulations relating to pollution or protection of the environment, including, without limitation, laws relating to hazardous substances, laws relating to reclamation of land and waterways and laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollution, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any Person which for purposes of Title IV of ERISA is a member of an Obligor's controlled group, or under common control with the Obligors, within the meaning of Section 414 of the Code, and the regulations promulgated and rulings issued thereunder. "ERISA Event" means (i) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, unless the 30-day notice requirement with respect thereto has been waived by the PBGC; (ii) the provision by the administrator of any Plan of a notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 404l(e) of ERISA); (iii) the cessation of Page 9 operations at a facility in the circumstances described in Section 4062(e) of ERISA; (iv) the withdrawal by the Obligors or an ERISA Affiliate from a Multiemployer Plan during a plan year for which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (v) the failure by the Obligors or any ERISA Affiliate to make a payment to a Plan required under Section 302 of ERISA, which results in a lien pursuant to Section 302(f) of ERISA; (vi) the adoption of an amendment to a Plan requiring the provision of security to such Plan, pursuant to Section 307 of ERISA; or (vii) the institution by the PBGC of proceedings to terminate a Plan, pursuant to Section 4042 of ERISA, or the occurrence of any event or condition which might reasonably constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, a Plan by the PBGC. "Eurocurrency Liabilities" has the meaning specified in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Event of Default" has the meaning assigned to that term in Section 6.01. "Existing Reimbursement Agreement" has the meaning assigned to that term in the preamble hereto. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fronting Bank" has the meaning assigned to that term in the preamble hereto. "GAAP" means generally accepted United States accounting principles as in effect on the date hereof. "Governmental Action" means all authorizations, consents, approvals, waivers, exceptions, variances, orders, licenses, exemptions, publications, filings, notices to and declarations of or with any Governmental Authority, other than routine reporting requirements the failure to comply with which will not affect the validity or enforceability of this Agreement or any Related Documents or have a material adverse effect on the transactions contemplated by this Agreement or any Related Document. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Hazardous Materials" means any petrochemical or petroleum products, any flammable materials, explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances, or related or similar materials, asbestos or any material containing asbestos, or any other substance or material as so defined and regulated by any Federal, state or local environmental law, ordinance, rule, or regulation including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of Page 10 1980, as amended (42 U.S.C. Sections 9601, et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.), and the Resource Conservation and Recovery Act, as amended (42 U.S.C. Sections 6901, et seq.), and the regulations adopted and publications promulgated pursuant thereto. "Indebtedness" means, for any Person, all obligations of such Person which in accordance with GAAP should be classified on a balance sheet of such Person as liabilities of such Person, and in any event shall include, without duplication, all (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations to pay the deferred purchase price of property or services, (iv) obligations as lessee under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases, (v) obligations as lessee under operating leases which shall have been recorded as off-balance sheet liabilities, (vi) reimbursement obligations (contingent or otherwise) in respect of outstanding letters of credit, (vii) indebtedness of the type referred to in clauses (i) through (v) above secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any lien or encumbrance on, or security interest in, property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness, and (viii) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (vi) above. "Indenture" has the meaning assigned to that term in the preamble hereto. "Interest Period" means, for each LIBOR Rate Advance made as part of the same Tender Advance, the period commencing on the date of such LIBOR Rate Advance or the date of the Conversion of any Tender Advance into a LIBOR Rate Advance and ending on the last day of the period selected by the Obligors pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Obligors pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months, as the Obligors may, upon notice received by the Administrative Agent not later than 11:00 a.m., Charlotte, North Carolina time, on the third Business Day prior to the first day of such Interest Period, select; provided, however, that: (i) the Obligors may not select any Interest Period that ends after the Termination Date; (ii) Interest Periods commencing on the same date for LIBOR Rate Advances comprising part of the same Tender Advance shall be of the same duration; (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; Page 11 (iv) if any Interest Period begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month; and (v) no more than three (3) Interest Periods may be in effect at any time. "Issuer" has the meaning assigned to that term in the preamble hereto. "Letters of Credit" has the meaning assigned to that term in the preamble hereto. "Letter of Credit Fee" has the meaning specified in Section 2.03(a). "LIBOR Lending Office" means, with respect to any Bank, the office of such Bank specified as such opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Bank (or, if no such office is specified, its Domestic Lending Office), or such other office of such Bank as such Bank may from time to time specify to the Obligors and the Administrative Agent. "LIBOR Rate" means with respect to each day during each Interest Period pertaining to a LIBOR Rate Advance, the rate appearing on Page 3750 of the Dow Jones Markets Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to Dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for Dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBOR Rate" with respect to such LIBOR Loan for such Interest Period shall be the rate per annum equal to the rate at which the principal London office of the Administrative Agent offers to place Dollar deposits at or about 11:00 a.m., London time, two Business Days prior to the beginning of such Interest Period with first-class banks in the London interbank market for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its LIBOR Rate Advance to be outstanding during such Interest Period. "LIBOR Rate Advance" means a Tender Advance that bears interest as provided in Section 2.05(b)(ii). "LIBOR Rate Reserve Percentage" of any Bank for each Interest Period for each LIBOR Rate Advance means the reserve percentage contemplated in Section 2.06 applicable to such Bank during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under Regulation D or other regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) then applicable to such Bank with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. Page 12 "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, a Person or any of its Subsidiaries shall be deemed to own, subject to a Lien, any asset that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan Agreement" means the Loan Agreement dated as of September 1, 2001 between Marina Energy and the Issuer relating to the Bonds, as the same may be amended, supplemented or otherwise modified in accordance with its terms at any time and from time to time. "Marina Energy" has the meaning assigned to that term in the preamble hereto. "Material Adverse Change" means (a) a materially adverse change in the business, assets, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects of South Jersey and its Subsidiaries, taken as a whole or individually, (b) any material impairment of the ability of any Obligor to perform any of its respective Obligations under this Agreement or any Related Document or (c) any material impairment of the rights of, or benefits available to, the Administrative Agent, the Fronting Bank or the Banks under this Agreement or any of the Related Documents. "Moody's" means Moody's Investors Service, Inc., or any successor thereto. "Multiemployer Plan" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, which is subject to Title IV of ERISA and to which the Obligors or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions, such plan being maintained pursuant to one or more collective bargaining agreements. "Multiple Employer Plan" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, which is subject to Title IV of ERISA and which (i) is maintained for employees of the Obligors or an ERISA Affiliate and at least one Person other than the Obligors and its ERISA Affiliates or (ii) was so maintained and in respect of which the Obligors or an ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. "Notice of Conversion" has the meaning specified in Section 2.08. "Notice of Extension" has the meaning specified in Section 2.15. "Obligations" means the Demand Loans, the Tender Advances, fees relating to the Letters of Credit, any and all obligations of the Obligors to reimburse the Banks for any drawings under the Letters of Credit, and all other obligations of the Obligors to the Banks arising under or in relation to this Agreement and the Letters of Credit. "Obligors" has the meaning assigned to that term in the preamble hereto. "Official Statement" means the Official Statement, dated on or about September 20, 2001, relating to the Bonds, together with the documents incorporated therein by reference and any supplements or amendments thereto. Page 13 "Paying Agent" means the Person serving as such with respect to each series of Bonds in the applicable Indenture. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. "Percentage" means, for any Bank on any date of determination, the percentage obtained by dividing such Bank's Commitment on such day by the total of the Commitments on such date. "Permitted Indebtedness" means any of the following: (1) Indebtedness under this Agreement; (2) Indebtedness (other than the type described in clauses (3) and (4) below) in an aggregate principal amount not to exceed $86,000,000 (inclusive of the type described in clause (1) above) at any time outstanding; (3) With respect to South Jersey Gas Company and its Subsidiaries, any Indebtedness so long as before and after the incurrence of such Indebtedness, South Jersey is in compliance with Section 5.04; and (4) Indebtedness under interest rate protection agreements covering the interest rate portion of the outstanding Bonds in a notional amount not to exceed the face amount of the outstanding Bonds. "Permitted Liens" means, with respect to any Person, any of the following: (1) Liens for taxes, assessments or governmental charges not delinquent or being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with GAAP are maintained on such Person's books; (2) Liens arising out of deposits in connection with workers' compensation, unemployment insurance, old age pensions or other social security or retirement benefits legislation; (3) deposits or pledges to secure bids, tenders, contracts (other than contracts for the payment of money), leases, statutory obligations, surety and appeal bonds, and other obligations of like nature arising in the ordinary course of such Person's business; (4) Liens imposed by law, such as mechanics', workers', materialmen's, carriers' or other like liens (excluding, however, any statutory or other Lien in favor of a landlord under a written or oral lease) arising in the ordinary course of such Person's business which secure the payment of obligations which are not past due or which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP are maintained on such Person's books; (5) rights of way, zoning restrictions, easements and similar Page 14 encumbrances affecting such Person's real property which do not materially interfere with the use of such property; (6) Liens securing Indebtedness not in excess of $2,000,000 in the aggregate of the type described in clause (2) of the definition of "Permitted Indebtedness"; (7) with respect to Marina Energy, Liens on the real property owned by Marina Energy securing the Bonds; (8) purchase money security interests for the purchase of equipment to be used in the Borrower's business, encumbering only the equipment so purchased, and which secures only the purchase-money Indebtedness incurred to acquire the equipment so purchased, which Indebtedness qualifies as Permitted Indebtedness and which Indebtedness is not in excess of $2,000,000; and (9) Liens securing Indebtedness of the type described in clause (3) of "Permitted Indebtedness" above. "Person" means an individual, partnership, corporation (including, without limitation, a business trust), joint stock company, limited liability company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "Plan" means a Single Employer Plan or a Multiple Employer Plan. "Pledge Agreement" means the Pledge Agreement dated as of September 1, 2001 between Marina Energy and First Union National Bank (now known as Wachovia). "Pledged Bonds" has the meaning specified in Section 7.01. "Prime Rate" means a rate per annum equal to the Administrative Agent's index or base rate of interest announced from time to time by the Administrative Agent (which is not necessarily the lowest rate charged to any customer), changing when and as such base rate changes. "Purchase Agreement" means the Bond Purchase Agreement dated September 1, 2001 between the Issuer and the Underwriter identified therein relating to the Bonds and any other agreement relating to the purchase of Bonds. "Rated Entity" means South Jersey Industries, Inc. or any of its subsidiaries which maintain senior unsecured, non-credit enhanced debt ratings by both Moody's and S&P. If more than one such Person exists, the Rated Entity shall be South Jersey Industries, Inc. or any of its subsidiaries which maintains the lowest senior unsecured, non-credit enhanced debt rating by either Moody's or S&P. "Register" has the meaning specified in Section 9.09(c). "Related Documents" means the Bonds, the Indenture, the Loan Agreement, the Purchase Agreement, the Remarketing Agreement, the Pledge Agreement, the Tender Agency Agreement and the Official Statement. Page 15 "Remarketing Agent" means UBS PaineWebber Inc., its successors and assigns, and any other Person serving as such with respect to any Bonds under the applicable Remarketing Agreement. "Remarketing Agreement" means the Remarketing Agreement dated as of September 1, 2001, between Marina Energy and the Remarketing Agent relating to the Bonds and any agreement or other arrangement pursuant to which a Remarketing Agent has agreed to act as such pursuant to the applicable Indenture for any Bonds. "Required Banks" means Banks whose aggregate Percentages aggregate more than 50%. "S&P" means Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc., or any successor thereto. "Senior Debt Ratings" means the ratings assigned to the senior unsecured, non-credit enhanced debt of the Rated Entity by Moody's and S&P. "Shared Fees" has the meaning specified in Section 2.20(e). "Significant Subsidiary" means, with respect to any Person, a Subsidiary which meets any of the following conditions: (i) such Person's and its other Subsidiaries' investments in and advances to the Subsidiary exceed 10% of the total assets of such Person and its Consolidated Subsidiaries as of the end of the most recently completed Fiscal Quarter; (ii) such Person's and its other Subsidiaries' proportionate share of the total assets (after intercompany eliminations) of the Subsidiary exceeds 10% of the total assets of such Person and its Consolidated Subsidiaries as of the end of the most recently completed Fiscal Quarter; (iii) such Person's and its other Subsidiaries' equity in the income from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles of the Subsidiary exceeds 10% of such income of such Person and its Consolidated Subsidiaries for the most recently completed Fiscal Quarter; or (iv) with respect to South Jersey, such Subsidiary is Marina Energy or South Jersey Gas Company. "Single Employer Plan" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, which is subject to Title IV of ERISA and which (i) is maintained for employees of the Obligors or an ERISA Affiliate and no Page 16 Person other than the Obligors and its ERISA Affiliates or (ii) was so maintained and in respect of which the Obligors or an ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated. "Solvent" means, with respect to any Person, that such Person (a) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage and is able to pay its debts as they mature, (b) owns property having a value, both at fair valuation and at present fair saleable value, greater than the amount required to pay its probable liabilities (including contingencies), and (c) does not believe that it will incur debts or liabilities beyond its ability to pay such debts or liabilities as they mature. "South Jersey" has the meaning assigned to that term in the preamble hereto. "Stated Expiration Date" means the Termination Date or such later date to which the Termination Date may be extended from time to time pursuant to the terms of each Letter of Credit and Section 2.15 of this Agreement by the Fronting Bank and the Banks in their sole and absolute discretion. "Subsidiary" means, with respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether at the time capital stock (or comparable interest) of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by said Person (whether directly or through one of more other Subsidiaries). In the case of an unincorporated entity, a Person shall be deemed to have more than 50% of interests having ordinary voting power only if such Person's vote in respect of such interests comprises more than 50% of the total voting power of all such interests in the unincorporated entity. "Taxes" has the meaning assigned to that term in Section 2.20. "Tender Advance" has the meaning assigned to that term in Section 2.05(a). "Tender Agent" has the meaning assigned to that term in the Indenture. "Tender Agency Agreement" means the Tender Agency Agreement dated as of September 1, 2001 between Marina Energy and the Trustee. "Tendered Bonds" means Bonds tendered or deemed tendered for purchase, the purchase price of which was paid by a draw under a Letter of Credit. "Tender Drawing" means any drawing under a Letter of Credit to pay the purchase price of Bonds tendered pursuant to an Indenture. "Termination Date" means September 19, 2004, or such later date to which the Termination Date may be extended from time to time pursuant to the terms of Section 2.15 of this Agreement by the Fronting Bank and the Banks in their sole and absolute discretion. "Trustee" means Commerce Bank, National Association, its successors and assigns, as trustee for the Bonds and any Person serving as such under an Indenture with respect to any additional Bonds. Page 17 "2001A Bonds" has the meaning assigned to that term in the recitals to this Agreement. "2001A Commitment" means, as to any Bank, the amount set forth opposite such Bank's name on Schedule I hereto (as such amount may be amended in connection with an assignment pursuant to Section 9.09). "2001A Commitments" means the total of the Banks' 2001A Commitments hereunder. "2001A Letter of Credit" has the meaning assigned to that term in the recitals to this Agreement. "2001B Bonds" has the meaning assigned to that term in the recitals to this Agreement. "2001B Commitment" means, as to any Bank, the amount set forth opposite such Bank's name on Schedule I hereto (as such amount may be amended in connection with an assignment pursuant to Section 9.09). "2001B Commitments" means the total of the Banks' 2001B Commitments hereunder. "2001B Letter of Credit" has the meaning assigned to that term in the recitals to this Agreement. "Type" means a type of Tender Advance, being either an LIBOR Rate Advance or a Base Rate Advance, as applicable. "Underwriter" means UBS PaineWebber Inc., its successors and assigns, and any other Person serving as such with respect to any Bonds. "Unused Fee" has the meaning assigned to that term in Section 2.03(b). "Wachovia" has the meaning assigned to that term in the preamble hereto. SECTION 1.02. Computation of Time Periods. In this Agreement, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". SECTION 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP, except as otherwise stated herein. SECTION 1.04. Internal References. The words "herein", "hereof' and "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any provision of this Agreement, and "Article", "Section", "subsection", "paragraph", "Exhibit", "Schedule" and respective references are to this Agreement unless otherwise specified. References herein or in any Related Document to any agreement or other document shall, unless otherwise specified herein or therein, be deemed to be references to such agreement or document as it may be amended, modified or supplemented after the date hereof from time to time in accordance with the terms hereof or of such Related Document, as the case may be. Page 18 ARTICLE II AMOUNT AND TERMS OF THE LETTER OF CREDIT SECTION 2.01 The Letters of Credit. (a) The Fronting Bank agrees, on the terms and conditions hereinafter set forth, to extend the Letters of Credit to the Stated Expiration Date by way of an amendment to each of the Letters of Credit in the form of Exhibit E and Exhibit F attached hereto. This Agreement shall be deemed to apply to the Letters of Credit from the Date of Issuance. (b) Upon receipt of an Application by the Obligors and subject to the conditions set forth in Section 3.02, the Fronting Bank will amend the 2001B Letter of Credit to increase the coverage under the 2001B Letter of Credit up to, but not in excess of the lesser of (i) the Banks' 2001B Commitments and (ii) the aggregate amount of the issued 2001B Bonds, upon the issuance of additional 2001B Bonds. SECTION 2.02. Extension of the Letters of Credit. (a) The Letters of Credit shall be extended on the Closing Date. After the extension of the Letters of Credit, the Fronting Bank will promptly notify the Banks of the extension of the Letters of Credit or the amendment to the 2001B Letter of Credit, as the case may be, and provide them with a copy of each amendment. (b) The Fronting Bank shall have no obligation to amend a Letter of Credit if the amendment to such Letter of Credit would cause (x) the sum of (i) the aggregate face amount of the issued and outstanding Letters of Credit and (ii) the aggregate principal amount of Demand Loans and Term Advances relating to the Letters of Credit then outstanding to exceed at any time the Commitments; (y) the sum of (i) the face amount of the issued and outstanding 2001A Letter of Credit and (ii) the aggregate principal amount of Demand Loans and Term Advances relating to the 2001A Letter of Credit then outstanding to exceed at any time the 2001A Commitments; or (z) the sum of (i) the face amount of the issued and outstanding 2001B Letter of Credit and (ii) the aggregate principal amount of Demand Loans and Term Advances relating to the 2001B Letter of Credit then outstanding to exceed at any time the 2001B Commitments. SECTION 2.03. Commissions and Fees. (a) The Obligors hereby agree to pay to the Administrative Agent, for the ratable account of each Bank, a letter of credit fee (the "Letter of Credit Fee") equal to the total aggregate face amount of the Letters of Credit multiplied by a rate per annum equal to the "Applicable Letter of Credit Fee" under the definition of Applicable Margin from the date hereof to the Stated Expiration Date, payable quarterly in arrears on the first day of each March, June, September and December, commencing December 1, 2002, and on the Stated Expiration Date. (b) The Obligors hereby agree to pay to the Administrative Agent, for the ratable account of each Bank, an unused fee (the "Unused Fee") equal to (i) the total aggregate amount of the Banks' 2001B Commitments minus (ii) the Average Quarterly Outstanding 2001B Amount multiplied by a rate per annum equal to the "Applicable Unused Fee" under the definition of Applicable Margin from the date hereof to the Stated Expiration Date, payable quarterly in arrears on the first day of each March, June, September and December, commencing December 1, 2002, and on the Stated Expiration Date. (c) The Obligors hereby agree to pay all normal costs and expenses of the Fronting Bank in connection with the transfer, amendment or other administration of the Letters of Credit, including, a drawing fee in an amount Page 19 equal to $100.00 for each drawing under a Letter of Credit. Such drawing fee shall be added to the drawing under such Letter of Credit and repaid by the Obligors as part of such drawing; provided, however, if such drawing fee would cause the total drawing to exceed the total aggregate amount of such Letter of Credit, the drawing fee shall be paid on the day of such drawing to the Administrative Agent by wire transfer. (d) The Obligors hereby agree to pay to the Administrative Agent and the Fronting Bank, such other fees as are specified in the fee letter agreement dated August 14, 2002, among the Obligors, Wachovia and Wachovia Securities, Inc. SECTION 2.04. Reimbursement On Demand. (a) Except as otherwise specified in Section 2.05 (and provided that the conditions precedent specified therein have been fulfilled), if the Fronting Bank shall make any payment under a Letter of Credit in response to a Tender Drawing, such payment (including, without limitation, amounts in respect of any reinstatement of interest on the Bonds at the election of the Banks notwithstanding any failure by the Obligors to reimburse the Banks for any previous drawing to pay interest on the Bonds) shall constitute a demand loan (each, a "Demand Loan") made by the Banks to the Obligors on the date of such payment by the Fronting Bank under such Letter of Credit. (b) The Obligors agree to pay or cause to have paid to the Administrative Agent, for the account of the Banks, after the honoring by the Fronting Bank of any drawing under the Letters of Credit giving rise to such Demand Loan, each such Demand Loan no later than 3:00 p.m. (Charlotte, North Carolina time) on the date of its making. Any such Demand Loan (or any portion thereof) not so paid on such date shall bear interest from the date of making of such Demand Loan until payment in full, at a fluctuating interest rate per annum equal to the Base Rate plus 2%. The principal amount of each Demand Loan and all interest thereon shall be due and payable on demand, and if not sooner paid or demanded, on the Termination Date. SECTION 2.05. Tender Advances; Interest Rates. (a) If the Fronting Bank shall make any payment under a Letter of Credit in response to a Tender Drawing and, on the date of such payment, the conditions precedent set forth in Section 3.03 shall have been fulfilled, that portion of such payment equal to the principal amount of the Bonds purchased with the proceeds of such Tender Drawing shall be deemed to constitute an advance made by the Banks to the Obligors on the date and in the amount of such principal amount (each such advance being a "Tender Advance"). Each Tender Advance shall bear interest, initially at the Base Rate and shall be deemed to be a Base Rate Advance, and thereafter at the Base Rate or the LIBOR Rate, as selected by the Obligors in accordance with Section 2.08, and subject to the terms of Section 2.05(b). The principal amount thereof and all interest thereon shall be due and payable in accordance with Section 2.05(b) below and on the earliest to occur of (i) the Termination Date, (ii) the date on which the Pledged Bonds are redeemed or cancelled, (iii) the date on which any Pledged Bonds are remarketed and (iv) the date on which the applicable Letter of Credit is replaced by a substitute letter of credit. To the extent that the Administrative Agent receives interest payable on account of any Pledged Bonds such interest received shall be applied and credited against accrued and unpaid interest on the Tender Advances that financed the Tender Drawing in respect of which such Pledged Bonds were purchased. (b) The Obligors shall pay interest on the unpaid principal amount of each Tender Advance, at the Obligors' option, as follows: Page 20 (i) Base Rate Advances. If such Tender Advance is a Base Rate Advance, interest thereon shall be payable quarterly in arrears on the first day of each March, June, September and December, on the date of any Conversion of such Base Rate Advance and on the date such Base Rate Advance shall become due and payable or otherwise shall be paid in full; provided that at any time an Event of Default shall have occurred and be continuing, thereafter each Base Rate Advance shall bear interest, payable on demand, at the Default Rate; or (ii) LIBOR Rate Advances. If such Tender Advance is a LIBOR Rate Advance, interest thereon shall be payable on the last day of the Interest Period for such Advance (and, in the case of any Interest Period of six months, on the last day of the third month of such Interest Period); provided that at any time an Event of Default shall have occurred and be continuing, thereafter each LIBOR Rate Advance shall bear interest, payable on demand, at the Default Rate. (c) Notwithstanding any provision to the contrary herein except as set forth in Section 2.04(b), the Obligors shall pay interest on all past-due amounts of principal and (to the fullest extent permitted by law) interest, costs, fees and expenses hereunder, from the date when such amounts became due until paid in full, payable on demand, at the Default Rate in effect from time to time. SECTION 2.06 Additional Interest on LIBOR Rate Advances. The Obligors shall pay to each Bank, so long as such Bank shall be required under regulations of the Board of Governors of the Federal Reserve System to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities and which are not required on the date of this Agreement, additional interest on the unpaid principal amount of each LIBOR Rate Advance of such Bank, from the date of such LIBOR Rate Advance until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the LIBOR Rate for the Interest Period for such LIBOR Rate Advance from (ii) the rate obtained by dividing such LIBOR Rate by a percentage equal to 100% minus the LIBOR Rate Reserve Percentage of such Bank for such Interest Period, payable on each date on which interest is payable on such LIBOR Rate Advance. Such additional interest shall be determined by such Bank and notified to the Obligors through the Administrative Agent. SECTION 2.07. Interest Rate Determination. (a) The Administrative Agent shall give prompt notice to the Obligors and the Banks of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.04 and 2.05. (b) If, with respect to any LIBOR Rate Advances, (i) the Required Banks notify the Administrative Agent that the LIBOR Rate for any Interest Period for such LIBOR Rate Advances will not adequately reflect the cost to such Required Banks of making, funding or maintaining their respective LIBOR Rate Advances for such Interest Period or (ii) the Required Banks notify the Administrative Page 21 Agent or the Administrative Agent determines that adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of LIBOR Rate, the Administrative Agent shall forthwith so notify the Obligors and the Banks, whereupon: (1) each LIBOR Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance, and (2) the obligation of the Banks to make, or to Convert Base Rate Advances into, LIBOR Rate Advances shall be suspended until the Administrative Agent (based on notice from the Required Lenders) shall notify the Obligors and the Banks that the circumstances causing such suspension no longer exist. (c) If the Obligors shall fail to (i) select the duration of any Interest Period for any LIBOR Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01, (ii) provide a Notice of Conversion with respect to any LIBOR Rate Advances on or prior to 11:00 a.m., Charlotte, North Carolina time, on the third Business Day prior to the last day of the Interest Period applicable thereto, in the case of a Conversion to or in respect of LIBOR Rate Advances or (iii) satisfy the conditions set forth in Section 2.08 with respect to a Conversion, the Administrative Agent will forthwith so notify the Obligors and the Banks and such LIBOR Rate Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances. SECTION 2.08. Voluntary Conversion of Tender Advances. The Obligors may on any Business Day, by delivering an irrevocable Notice of Conversion (a "Notice of Conversion") in the form of Exhibit C hereto to the Administrative Agent not later than 11:00 a.m., Charlotte, North Carolina time, on the third Business Day prior to the date of the proposed Conversion, and subject to the provisions of Sections 2.07, 2.11 and 3.04, Convert all Tender Advances of one Type made simultaneously into Tender Advances of the other Type; provided, however, that any Conversion of any LIBOR Rate Advances into Base Rate Advances shall be made on, and only on, the last day of an Interest Period for such LIBOR Rate Advances. SECTION 2.09. Prepayments of Advances. (a) The Obligors may, upon at least three (3) Business Days' notice, in the case of LIBOR Rate Advances, and upon same Business Day notice prior to 11:00 a.m., Charlotte, North Carolina time, on such Business Day, in the case of Base Rate Advances, to the Administrative Agent, prepay without premium or penalty the outstanding amount of any Tender Advance in whole or in part with accrued interest to the date of such prepayment on the amount prepaid; provided, however, that (x) each partial prepayment shall be in an aggregate principal amount not less than $5,000,000 (or, if lower, the principal amount outstanding hereunder on the date of such prepayment) or an integral multiple of $1,000,000 in excess thereof and (y) in the case of any such prepayment of a LIBOR Rate Advance on a day other than the last day of an Interest Period for such LIBOR Rate Advance, the Obligors shall be obligated to reimburse the Banks in respect thereof pursuant to Section 9.07(b). (b) Prior to or simultaneously with the receipt of proceeds related to the remarketing of Bonds purchased pursuant to one or more Tender Drawings, the Obligors shall directly, or through the Remarketing Agent or the Tender Agent on behalf of the Obligors, repay or prepay (as the case may be) the then-outstanding Demand Loans and Tender Advances (in the order in which they Page 22 were made) by paying to the Administrative Agent for the pro rata share of the Banks an amount equal to the sum of (i) the aggregate principal amount of the Bonds remarketed plus (ii) all accrued interest on the principal amount of Demand Loans and/or Tender Advances so repaid or prepaid plus (iii) in the case of prepayments of LIBOR Rate Advances, any amount payable to the Banks in respect thereof pursuant to Section 9.07(b). (c) On the date of any termination or reduction of the Commitments, the Obligors shall pay or prepay for the ratable accounts of the Banks so much of the principal amount outstanding under this Agreement as shall be necessary in order that the sum of (i) the principal amount outstanding (after giving effect to such prepayment) and (ii) the face amount of the Letters of Credit then issued and outstanding will not exceed the amount of the Commitments following such termination or reduction, together with (i) accrued interest to the date of such prepayment on the principal amount repaid or prepaid and (ii) in the case of prepayments of LIBOR Rate Advances, any amount payable to the Banks pursuant to Section 9.07(b). (d) On the Termination Date, the Obligors shall pay for the ratable accounts of the Banks the principal amount outstanding under this Agreement, together with (i) accrued interest to the date of such payment on the principal amount repaid and (ii) in the case of prepayments of LIBOR Rate Advances, any amount payable to the Banks pursuant to Section 9.07(b). SECTION 2.10. Increased Costs. (a) If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements, in the case of LIBOR Rate Advances, included in the LIBOR Rate Reserve Percentage) in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), in any case, promulgated, implemented or occurring on or after the date hereof, there shall be any increase in the cost to any Bank of agreeing to make or making, funding or maintaining LIBOR Rate Advances, then the Obligors shall from time to time, upon demand by such Bank (with a copy of such demand to the Administrative Agent), pay to such Bank additional amounts sufficient to compensate such Bank for such increased cost. Each Bank agrees to notify the Obligors of any such increased costs as soon as reasonably practicable after determining that such increased cost is applicable to LIBOR Rate Advances hereunder. A certificate as to the amount of such increased cost, submitted to the Obligors and the Administrative Agent by such Bank, shall be conclusive and binding for all purposes, absent manifest error. (b) If the Fronting Bank or any Bank determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law), in any case promulgated, implemented or occurring on or after the date hereof, affects or would affect the amount of capital required or expected to be maintained by the Fronting Bank or any such Bank or any corporation controlling the Fronting Bank or any such Bank and that the amount of such capital is increased by or based upon the existence of the Fronting Bank's or any such Bank's Commitment hereunder and other Commitments of this Type, then, upon demand by the Fronting Bank or any such Bank, as the case may be (with a copy of such demand to the Administrative Agent), the Obligors shall immediately pay to the Fronting Bank or any such Bank, as the case may be, from time to time as specified by the Fronting Bank or such Bank, additional amounts sufficient to compensate the Fronting Bank or such Bank, as the case may be, or such corporation in the light of such circumstances, for any difference in the rate of return of the Fronting Page 23 Bank or any such Bank to the extent that the Fronting Bank or such Bank, as the case may be, reasonably determines such increase in capital to be allocable to the existence of the Fronting Bank's or such Bank's Commitment hereunder, as the case may be. The Fronting Bank and each Bank agrees to notify the Obligors of any such additional amount as soon as reasonably practicable after the Fronting Bank or any Bank makes such determination. A certificate as to such amounts submitted to the Obligors and the Administrative Agent by the Fronting Bank or such Bank shall be conclusive and binding for all purposes, absent manifest error. SECTION 2.11. Illegality. Notwithstanding any other provision of this Agreement, if any Bank shall notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for any Bank or its LIBOR Lending Office to perform its obligations hereunder to make LIBOR Rate Advances or to fund or maintain LIBOR Rate Advances hereunder, (i) the obligation of the Banks to make, or to Convert Base Rate Advances into, LIBOR Rate Advances shall be suspended until the Administrative Agent (based on notice from the affected Bank) shall notify the Obligors and the Banks that the circumstances causing such suspension no longer exist and (ii) the Obligors shall pay (x) on the last day of the applicable Interest Period, or (y) if the failure to prepay immediately would cause any Bank to be in violation of such law or regulation, immediately, in full all LIBOR Rate Advances of all Banks then outstanding, together with interest accrued thereon, unless, in either case, the Obligors, within five Business Days of notice from the Administrative Agent (or such shorter, maximum period of time, specified by the Administrative Agent, as may be legally allowable), Converts all LIBOR Rate Advances of all Banks then outstanding into Base Rate Advances in accordance with Section 2.08. SECTION 2.12. Payments and Computations. Other than payments made pursuant to Section 2.04, the Obligors shall make each payment hereunder not later than 12:00 noon (Charlotte, North Carolina time) on the day when due in lawful money of the United States of America to the Administrative Agent at its address referred to in Section 9.02 in same day funds. Computations of the Base Rate (when based on the Federal Funds Rate), the LIBOR Rate, the Default Rate (when based on the Federal Funds Rate) and fees under Section 2.03 shall be made by the Administrative Agent on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) elapsed, and computations of the Base Rate (when based on the Prime Rate) and the Default Rate (when based on the Prime Rate) shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, for the actual number of days (including the first day but excluding the last day) elapsed. SECTION 2.13. Non-Business Days. Except as otherwise specified in the definition of "Interest Period", whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be. SECTION 2.14. Source of Funds. All payments made by the Fronting Bank pursuant to the Letters of Credit shall be made from funds of the Fronting Bank and not from funds obtained from any other Person. SECTION 2.15. Extension of the Stated Expiration Date. Unless each Letter of Credit outstanding pursuant hereto shall have expired in accordance with its terms on the Cancellation Date, at least ninety (90) days before the Page 24 Stated Expiration Date of any Letter of Credit, the Obligors may request the Fronting Bank with the consent of all the Banks, by notice to the Administrative Agent in writing (each such request being irrevocable) to extend the Stated Expiration Date for such Letter of Credit. If the Obligors shall make such a request the Administrative Agent shall promptly notify the Banks thereof, and if the Fronting Bank and the Banks, in their sole discretion, elect to so extend the Stated Expiration Date for such Letter of Credit then in effect, the Administrative Agent shall deliver to the Obligors a notice (herein referred to as a "Notice of Extension") designating the date to which the Stated Expiration Date for such Letter of Credit will be extended and the conditions of such consent (including, without limitation, conditions relating to legal documentation and the consent of the Trustee). If all such conditions are satisfied and such extension of the Stated Expiration Date for such Letter of Credit shall be effective, thereafter all references in this Agreement to the Stated Expiration Date for such Letter of Credit shall be deemed to be references to the amended date designated as such in such legal documentation. Any date to which the Stated Expiration Date for such Letter of Credit has been extended in accordance with this Section 2.15 may be extended in like manner. Failure of the Administrative Agent to deliver a Notice of Extension as herein provided within thirty (30) days of a request by the Obligors to extend such Stated Expiration Date for such Letter of Credit shall constitute an election by the Fronting Bank and the Banks not to extend the Stated Expiration Date for such Letter of Credit. In the event the Stated Expiration Date is extended beyond the Termination Date, the Termination Date shall automatically be extended to the new Stated Expiration Date. SECTION 2.16. Amendments Upon Extension. Upon any extension of a Stated Expiration Date pursuant to Section 2.15 of this Agreement, the Fronting Bank and the Banks reserve the right to renegotiate any provision hereof. SECTION 2.17. Evidence of Debt. The Fronting Bank and each Bank shall maintain, in accordance with its usual practice, an account or accounts evidencing the indebtedness of the Obligors resulting from each drawing under the Letters of Credit, from each Demand Loan and from each Tender Advance made from time to time hereunder and the amounts of principal and interest payable and paid from time to time hereunder. In any legal action or proceeding in respect of this Agreement, the entries made in such account or accounts shall, in the absence of manifest error, be conclusive evidence of the existence and amounts of the Obligations of the Obligors therein recorded. SECTION 2.18. Obligations Absolute. The payment obligations of the Obligors under this Agreement shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: (a) any lack of validity or enforceability of the Letters of Credit, this Agreement, any Related Document or any other agreement or instrument relating thereto; (b) any amendment or waiver of or any consent to departure from all or any of this Agreement or any Related Document; (c) the existence of any claim, set-off, defense or other right which the Obligors may have at any time against the Trustee or any other beneficiary, or any transferee, of the Letters of Credit (or Page 25 any persons or entities for whom the Trustee, any such beneficiary or any such transferee may be acting), the Fronting Bank, or any other person or entity, whether in connection with this Agreement, the transactions contemplated herein or in the Related Documents, or any unrelated transaction; (d) any statement or any other document presented under the Letters of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (e) payment by the Fronting Bank under the Letters of Credit against presentation of a certificate which does not comply with the terms of the Letters of Credit; or (f) any other circumstance or happening whatsoever, including, without limitation, any other circumstance which might otherwise constitute a defense available to or discharge of the Obligors, whether or not similar to any of the foregoing. Nothing in this Section 2.18 is intended to limit any liability of the Fronting Bank pursuant to Section 9.06 in respect of its willful misconduct or gross negligence. SECTION 2.19. Net of Taxes, Etc. (a) All payments made by the Obligors under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding, in the case of the Administrative Agent, the Fronting Bank and each Bank, taxes imposed on its overall net income, and franchise taxes imposed on it by the jurisdiction under the laws of which the Administrative Agent, the Fronting Bank or such Bank (as the case may be) is organized or any political subdivision thereof and, in the case of each Bank, taxes imposed on its overall net income, and franchise taxes imposed on it by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If any Taxes are required to be withheld from any amounts payable to the Administrative Agent, the Fronting Bank or any Bank hereunder, the amounts so payable to the Administrative Agent, the Fronting Bank or such Bank shall be increased to the extent necessary to yield to the Administrative Agent, the Fronting Bank or such Bank (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement. Whenever any Taxes are payable by the Obligors, as promptly as possible thereafter the Obligors shall send to the Administrative Agent for its own account or for the account of the Fronting Bank or such Bank, as the case may be, a certified copy of an original official receipt received by the Obligors showing payment thereof. If the Obligors fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Obligors shall indemnify the Administrative Agent, the Fronting Bank and the Banks for any incremental taxes, interest or penalties that may become payable by the Administrative Agent, the Fronting Bank or any Bank as a result of any such failure. The agreements in this Section shall survive the termination of this Agreement and the payment of the obligations hereunder and all other amounts payable hereunder. Page 26 (b) Each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to the Obligors and the Administrative Agent on or before the latter of the date hereof and the date such Bank becomes a Bank (i) two duly completed copies of United States Internal Revenue Service Form W-8BEN or W-8ECI or successor applicable form, as the case may be. Each such Bank also agrees to deliver to the Obligors and the Administrative Agent two further copies of said Form W-8BEN or W-8ECI, or successor applicable forms or other manner of certification, as the case may be, on or before the date that any such form previously delivered expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Obligors, and such extensions or renewals thereof as may reasonably be requested by the Obligors or the Administrative Agent, unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank so advises the Obligors and the Administrative Agent. Such Bank shall certify that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes and that it is entitled to an exemption from United States backup withholding tax. (c) If any Bank shall request compensation for costs pursuant to this Section 2.19, (i) such Bank shall make reasonable efforts (which shall not require such Bank to incur a loss or unreimbursed cost or otherwise suffer any disadvantage deemed by it to be significant) to make within thirty (30) days an assignment of its rights and delegation and transfer of its obligations hereunder to another of its offices, branches or affiliates, if such assignment would reduce such costs in the future, (ii) the Obligors may with the consent of the Required Banks and the Fronting Bank, which consent shall not be unreasonably withheld, secure a substitute bank to replace such Bank which substitute bank shall, upon execution of a counterpart of this Agreement and payment to such Bank of any and all amounts due under this Agreement, be deemed to be a Bank hereunder (any such substitution referred to in clause (ii) shall be accompanied by an amount equal to any loss or reasonable expense incurred by such Bank as a result of such substitution); provided that this Section 2.19(c) shall not be construed as limiting the liability of the Obligors to indemnify or reimburse such Bank for any costs or expenses the Obligors is required hereunder to indemnify or reimburse. SECTION 2.20. Participation by Banks in Letters of Credit. (a) The Fronting Bank irrevocably agrees to grant and hereby grants, without recourse, to each Bank, and to induce the Fronting Bank to issue the Letters of Credit hereunder, each Bank irrevocably agrees to accept and purchase and hereby accepts and purchases, without recourse, on the terms and conditions hereinafter stated, for such Bank's own account and risk an undivided interest equal to such Bank's Percentage in the Fronting Bank's obligations and rights under the Letters of Credit and the amount of each drawing paid by the Fronting Bank thereunder. (b) Upon receipt of written notice of a drawing under a Letter of Credit (other than a drawing for a regularly scheduled payment under the Bonds), the Fronting Bank shall notify the Administrative Agent, who in turn shall notify each Bank promptly by telex, telecopier or telephone (such telephonic notice to be confirmed in writing) of such drawing under the Letter of Credit. Page 27 In the event that such drawing is actually paid by the Fronting Bank and the Fronting Bank has not been reimbursed in full therefor by the Obligors by 3:00 p.m. (Charlotte, North Carolina time) on the day such drawing is paid by the Fronting Bank, the Administrative Agent shall notify promptly each Bank thereof. Upon receipt of such notice, each Bank shall make available to the Administrative Agent such Bank's Percentage of the Demand Loans or the Tender Advance resulting from such drawing, in immediately available funds, by 12:00 noon (Charlotte, North Carolina time) on the next succeeding Business Day after the date of such notice. (c) Upon receipt by the Administrative Agent of any payment of, or whenever the Administrative Agent makes an application of funds in respect of, the principal portion of any Obligations in respect of which a Bank has fulfilled its obligations hereunder, the Administrative Agent shall promptly pay over to such Bank, so long as such Bank is not in default of any of its obligations hereunder, in the same funds which the Administrative Agent receives in respect thereof, such Bank's Percentage of the amount of such payment or application. (d) (i) Upon receipt by the Administrative Agent of any payment of, or whenever the Administrative Agent makes an application of funds in respect of, the interest portion of any Obligations as to which a Bank has fulfilled its obligations hereunder, the Administrative Agent shall promptly pay over to such Bank, so long as such Bank is not in default of any of such Bank's obligations hereunder, in the same funds which the Administrative Agent receives in respect thereof, such Bank's Percentage of the amount of such payment or application; but subject to the provisions of clause (ii) of this Section 2.20(d). (ii) If a Bank does not make available to the Administrative Agent such Bank's Percentage of any Demand Loan or Tender Advance on any date on which the related payment is required to be made hereunder (a "Disbursement Date"), such Bank shall be required to pay interest to the Administrative Agent for the account of the Fronting Bank on its Percentage of such Demand Loan or Tender Advance at the Federal Funds Rate from such Disbursement Date until (but excluding) the date such amount is received by the Fronting Bank. If the Fronting Bank receives a Bank's Percentage of any Demand Loan or Tender Advance on the related Disbursement Date or if the Fronting Bank receives interest on any late payment from such Bank in accordance with the provisions of the preceding sentence and such late payment is received within five (5) Business Days of the related Disbursement Date such Bank shall receive interest on its pro rata share of such Demand Loan or Tender Advance in accordance with clause (i) of this Section 2.20(d) from such Disbursement Date. If the Fronting Bank does not receive a Bank's Percentage of any Demand Loan or Tender Advance on the Disbursement Date therefor and does not receive interest on any such late payment together with such late payment within five Business Days from such Disbursement Date from such Bank in accordance with the provisions of this paragraph, such Bank shall receive interest on its Percentage of such Demand Loan or Tender Advance in accordance with clause (i) of this Section 2.20(d) only from the date, if any, on which such Bank's payment is received by the Fronting Bank. (e) Upon receipt by the Administrative Agent of any payment of, or whenever the Administrative Agent makes an application of funds in respect of, the fees payable pursuant to Section 2.03(a) hereof (the "Shared Fees"), the Administrative Agent shall promptly pay over to each Bank, so long as such Bank is not in default of any of such Bank's obligations hereunder, in the same funds which the Administrative Agent receives in respect thereof, such Bank's pro rata Page 28 share of the amount of such payment or application, which share shall be based on such Bank's Percentage of the Shared Fees applicable. (f) Upon receipt by the Administrative Agent of any payment of, or whenever the Administrative Agent makes an application of funds in respect of, any amount owed to any Bank pursuant to Section 2.10 or 2.19, the Administrative Agent shall promptly pay over to such Bank, so long as such Bank is not in default of any of such Bank's obligations hereunder, in the same funds which the Administrative Agent receives in respect thereof, the amount of such payment or application. (g) Upon receipt by the Fronting Bank from time to time of any amount pursuant to the terms of any Related Document (other than pursuant to the terms of this Agreement), the Fronting Bank shall promptly deliver to the Administrative Agent any such amount. Upon receipt by the Administrative Agent of any such amount, the Administrative Agent shall distribute such amounts as follows: First: To the Fronting Bank in an amount equal to any draw under the Letters of Credit not reimbursed in full by the Obligors pursuant to Section 2.04 hereof on the date of such distribution; Second: To the Fronting Bank (for its own account), the Administrative Agent (for its own account) and the Banks, pro rata, in an amount equal to the commissions and fees due and payable hereunder to the Fronting Bank, the Administrative Agent and the Banks on the date of such distribution; Third: To the Banks, pro rata, in an amount equal to the interest due and payable on any Demand Loan or Tender Advance outstanding hereunder on the date of such distribution; Fourth: To the Banks, pro rata, in an amount equal to the principal due and payable to the Banks hereunder on the date of such distribution; Fifth: To the Fronting Bank and the Administrative Agent, in an amount equal to any amount due and payable to the Fronting Bank and the Administrative Agent in their capacities as such pursuant to Section 9.07 hereof on the date of such distribution; Sixth: To the Banks, pro rata, in an amount equal to any amount due and payable to the Banks pursuant to Section 9.07 hereof on the date of such distribution; and Seventh: To the Fronting Bank (for its own account), the Administrative Agent (for its own account) and the Banks, pro rata, for any other amounts not described above due and payable hereunder to such Persons on the date of such distribution. (h) If all or any part of any payment made to the Administrative Agent with respect to the Obligations and paid over by the Administrative Agent to any Bank pursuant to the terms hereof is thereafter recovered or returned from or by the Administrative Agent for any reason, then such Bank shall pay to the Administrative Agent such Bank's pro rata share thereof (based upon the amount such Bank has received in respect thereof) upon the Administrative Agent's demand therefor (together with interest thereon to the extent that the Administrative Agent is required to pay interest on the amount so recovered or returned). Page 29 (i) Each Bank shall indemnify and hold harmless the Fronting Bank from and against any and all liabilities (including liabilities for penalties), actions, suits, judgments, demands, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) resulting from any failure on such Bank's part to provide, or from any delay in providing, any payment required by such Bank under subsection (b) of this Section 2.20. If any Bank fails to make any payments under subsection (b) of this Section 2.20 within five Business Days of the due date therefor, then the Fronting Bank may acquire, or transfer to an assignee, in exchange for the unpaid sum or sums due from such Bank, such Bank's unfunded portion of its Percentage of the Obligations and the Letters of Credit without, however, relieving such Bank from any liability for damages, costs and expenses suffered by the Fronting Bank as a result of such failure. The purchaser of any such interest (including the Fronting Bank) shall be deemed to have acquired an interest senior to such Bank's remaining interest hereunder (if any), and accordingly, such purchaser shall be entitled to receive all subsequent payments allocable to such Bank's interest hereunder which the Administrative Agent would otherwise have made to such Bank until such time as the purchaser shall have obtained recovery of the amount it paid for its interest, with interest at the Default Rate. After any such transfer, such Bank shall have no further obligations hereunder (except for any liability for damages, costs and expenses as aforesaid) and shall not be entitled to its Percentage of any fees or commissions accruing after the effective date of such transfer. (j) Each Bank hereby irrevocably authorizes the Fronting Bank to pay drawings under the Letters of Credit, and authorizes the Administrative Agent to receive from the Obligors payment of all fees, costs, expenses, charges, principal and interest and to take such action on such Bank's behalf hereunder and the Related Documents and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Administrative Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. (k) Each Bank hereby acknowledges and agrees that such Bank's obligation to participate in the Letters of Credit and to make, maintain and Convert Tender Advances and such Bank's obligation to pay to the Administrative Agent on the dates specified herein amounts equal to such Bank's Percentage of drawings paid by the Fronting Bank under the Letters of Credit, the Tender Advances and the Demand Loans made hereunder shall be at all times and in all events absolute, irrevocable and unconditional obligations, and that such obligations shall not be affected in any way by any intervening circumstances occurring after the payment of any drawing under the Letters of Credit or the making of any Tender Advances or Demand Loans including, without limitation: (i) the existence of any claim, set-off, defense or other right that the Obligors may have against the Administrative Agent, the Fronting Bank, any Bank or any other party; or (ii) any certificate or any other document presented under the Letters of Credit proving to have been forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect except in the case of the gross negligence or willful misconduct of the Fronting Bank; or Page 30 (iii) any other act or omission to act of any kind by the Fronting Bank, the Administrative Agent or the Obligors or any Person providing security or guarantees in connection with this Agreement or the Letters of Credit except in the case of the gross negligence or willful misconduct of the Fronting Bank; or (iv) the existence of any Event of Default, Default or other default hereunder; or (v) any change of any kind whatsoever in the financial position or creditworthiness of the Obligors, any guarantor or any other Person. (l) Each Bank agrees to indemnify the Fronting Bank for such Bank's Percentage of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against it in any way relating to or arising out of the Obligations, the Related Documents or the transactions contemplated hereby or thereby or the enforcement of any of the terms thereof (including, without limitation, reasonable fees and disbursements of counsel) provided that no Bank shall be liable for any of the foregoing to the extent they arise from the Fronting Bank's gross negligence or willful misconduct or to the extent the Fronting Bank has been indemnified or reimbursed by the Obligors. This indemnity shall survive the termination of this Agreement. ARTICLE III CONDITIONS PRECEDENT SECTION 3.01. Conditions Precedent to the Execution and Delivery of this Agreement. The obligation of the Fronting Bank to execute and deliver this Agreement and to extend each Letter of Credit is subject to the conditions precedent that the Administrative Agent shall have received on or before the Closing Date, the following, each dated such date, in form and substance satisfactory to the Administrative Agent and the Banks, with copies for each Bank: (a) Agreements. Counterparts of this Agreement, duly executed by South Jersey, Marina Energy, the Administrative Agent, the Fronting Bank and the Banks; (b) Secretary's Certificate. Receipt by the Administrative Agent of (A) a certificate of the secretary or assistant secretary of each of the Obligors, as applicable, dated the Closing Date and certifying with respect to each applicable Obligor, (1) that attached thereto is a true and complete copy of the articles of incorporation or articles of formation, as applicable, and all amendments thereto of such Obligor, certified as of a recent date by the appropriate Governmental Authority in its jurisdiction of organization, (2) that attached thereto is a true and complete copy of the operating Page 31 agreement, by-laws or equivalent document, as applicable, of such Obligor in effect on the Closing Date and at all times since a date prior to the date of the resolutions described in clause (3) below, (3) that attached thereto is a true and complete copy of resolutions or consents, as applicable, duly adopted by the respective governing board of such Obligor authorizing, as applicable, the execution, delivery and performance of this Agreement and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (4) that the organizational documents of such Obligor have not been amended since the date of the last amendment thereto shown on the certificate of good standing attached thereto, (5) as to the incumbency and specimen signature of each officer of such Obligor executing this Agreement and any other document delivered in connection herewith on its behalf and (6) that there has been no change to the Related Documents since the Date of Issuance; and (B) a certificate of another officer as to the incumbency and specimen signature of such secretary or assistant secretary executing the certificate pursuant to (A) above; (c) Officer's Certificate. Receipt by the Administrative Agent of a certificate from the chief executive officer or chief financial officer of each Obligor, as applicable, in form and substance satisfactory to the Administrative Agent, to the effect that, as of the Closing Date, all representations and warranties of such Obligor contained in this Agreement and the other Related Documents are true, correct and complete; that such Obligor is not in violation of any of the covenants contained in this Agreement and the other Related Documents; that, after giving effect to the transactions contemplated by this Agreement, no Default or Event of Default has occurred and is continuing; and that such Obligor has satisfied each of the conditions precedent set forth in this Section 3.01; (d) Consents. Receipt by the Administrative Agent of a written representation from each Obligor that (i) all governmental, shareholder, member, partner and third party consents and approvals necessary or, in the reasonable opinion of the Administrative Agent, desirable, in connection with the transactions contemplated hereby have been received and are in full force and effect and (ii) no condition or requirement of law exists which could reasonably be likely to restrain, prevent or impose any material adverse condition on the transactions contemplated hereby; (e) Proceedings. A certificate from each of the Obligors certifying that no action, proceeding, investigation, regulation or legislation has been instituted, threatened or proposed before any court, government agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement or the other Related Documents or the consummation of the transactions contemplated hereby or thereby or which, in the Administrative Agent's reasonable determination, would prohibit the extension of Letters of Credit or could reasonably be expected to result in any such prohibition or a Material Adverse Change; (f) Financial Statements. Receipt by the Administrative Agent of the Disclosure Documents, which demonstrate, in the Administrative Agent's reasonable judgment, together with all other information then available to the Administrative Agent, that each Obligor can repay its debts and satisfy its other obligations as and when they become due, and can comply with the financial covenants contained in this Agreement; (g) Good Standing Certificates. Receipt by the Administrative Agent of a certificate of good standing for each Obligor, as applicable, dated on or immediately prior to the Closing Date, Page 32 from the Secretary of State of the state of organization of each Obligor and from all states in which each Obligor is required to obtain a certificate of good standing or like certificate due to the nature of its operations in such state; (h) Fees. Receipt by the Administrative Agent and the Banks of the fees set forth or referenced in this Agreement and any other accrued and unpaid fees, expenses or commissions due hereunder and under the Existing Reimbursement Agreement (including, without limitation, legal fees and expenses of counsel to the Administrative Agent), and to any other Person such amount as may be due thereto in connection with the transactions contemplated hereby, including all taxes, fees and other charges related to the Related Documents; (i) Certificate required by Section 3.02(a). Receipt by the Administrative Agent of the certificate required under Section 3.02(a). (j) Opinions. Opinions of Cozen O'Connor, counsel to the Obligors, in substantially the form of Exhibit D hereto, and as to such other matters as the Administrative Agent may reasonably request addressed to the Administrative Agent, the Fronting Bank and the Banks; and (j) Other. Receipt by the Administrative Agent of all other opinions, certificates and instruments in connection with the transactions contemplated by this Agreement satisfactory in form and substance to the Required Banks. SECTION 3.02. Additional Conditions Precedent. The obligation of the Fronting Bank to extend, amend or modify, including, the extension of the Letters of Credit on the Closing Date, the Letters of Credit upon Application therefor, shall be subject to the further conditions precedent that on the date of such amendment, modification or extension, as the case may be: (a) The following statements shall be true, and the Administrative Agent shall have received a certificate signed by duly authorized officer of the Obligors, dated such date, stating that: (i) The representations and warranties of the Obligors contained in Section 4.01 of this Agreement and in the Related Documents are true and correct on and as of such date as though made on and as of such date (except to the extent such representations and warranties relate solely to a specified earlier date, in which case such representations and warranties were true and correct on and as of such earlier date); (ii) Since December 31, 2001, there has been no Material Adverse Change; and (iii) No event has occurred and is continuing, or would result from the extension of, or an Page 33 amendment of, such Letter of Credit, as the case may be, which constitutes a Default or an Event of Default; and (b) With respect to an amendment to the 2001B Letter of Credit pursuant to Section 2.01(b), a duly executed amendment to the 2001B Letter of Credit; and (c) The Administrative Agent shall have received such other approvals, opinions or documents as the Administrative Agent may reasonably request. SECTION 3.03. Conditions Precedent to Each Tender Advance. The obligation of the Banks to make each Tender Advance shall be subject to the condition precedent that, on the date of such Tender Advance, the following statements shall be true: (a) The representations and warranties contained in Section 4.01 of this Agreement are true and correct on and as of the date of such Tender Advance as though made on and as of such date, both before and after giving effect to such Tender Advance and to the application of the proceeds thereof; (b) The Bonds to be purchased with the proceeds of the Tender Drawing relating to such Tender Advance shall simultaneously be pledged in accordance with the Indenture, the Pledge Agreement and Article VII hereof; (c) Since December 31, 2001, there has been no Material Adverse Change; and (d) No event has occurred and is continuing, or would result from such Tender Advance or the application of the proceeds thereof, which constitutes a Default or an Event of Default. Unless the Obligors shall have previously advised the Administrative Agent in writing that one or more of the statements contained in clauses (a) through (d) above are not true the Obligors shall be deemed to have represented and warranted, on the date of any Tender Advance made by the Banks hereunder, that on the date of such Tender Advance the above statements are true. SECTION 3.04. Condition Precedent to each Conversion. The obligation of each Bank to permit the Obligors to Convert a Tender Advance from a Base Rate Advance into a LIBOR Rate Advance or from a LIBOR Rate Advance into another LIBOR Rate Advance shall be subject to the satisfaction of the conditions precedent set forth in Section 3.02(a), on and as of the date of such Conversion. SECTION 3.05 Reliance on Certificates. The Banks and the Administrative Agent shall be entitled to rely conclusively upon the certificates delivered from time to time by officers of the Obligors as to the names, incumbency, authority and signatures of the respective Persons named therein until such time as the Administrative Agent may receive a replacement certificate, in form acceptable to the Administrative Agent, from an officer of the Obligors identified to the Administrative Agent as having authority to deliver such certificate, setting forth the names and true signatures of the officers and other representatives of the Obligors thereafter authorized to act on its behalf. Page 34 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Obligors. The Obligors hereby represent and warrant as follows: (a) Each Obligor and each of its respective Subsidiaries is a corporation or a limited liability company, as applicable, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, as applicable and is duly qualified to do business in, and is in good standing in, all other jurisdictions where the nature of its business or the nature of property owned or used by it makes such qualification necessary. Each Obligor and each of its respective Subsidiaries has all requisite corporate (or other applicable) powers and authority to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted. (b) The execution, delivery and performance by the Obligors of this Agreement and each Related Document to which it is a party are within each Obligor's corporate (or other applicable) powers, have been duly authorized by all necessary corporate (or other applicable) action, do not contravene (i) the South Jersey's articles of incorporation or by-laws or Marina Energy's articles of organization or operating agreement, (ii) any law, rule or regulation applicable to an Obligor or (iii) any contractual or legal restriction binding on or affecting an Obligor, and will not result in or require the imposition of any lien or encumbrance on, or security interest in, any property (including, without limitation, accounts or contract rights) of an Obligor, except as provided in this Agreement and Related Documents. (c) No Governmental Action is required for the execution or delivery by the Obligors of this Agreement or any Related Document to which either is a party or for the performance by the Obligors of their respective obligations under this Agreement or any such Related Document other than those which have previously been duly obtained, are in full force and effect, are not subject to any pending or, to the knowledge of the Obligors, threatened appeal or other proceeding seeking reconsideration and as to which all applicable periods of time for review, rehearing or appeal with respect thereto have expired. (d) This Agreement and each Related Document to which an Obligor is a party is a legal, valid and binding obligation of the Obligor party thereto, enforceable against such Obligor in accordance with its terms subject to the effect of bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and other similar laws of general application affecting rights and remedies of creditors generally. (e) Except as disclosed in the Disclosure Documents, there is no pending or threatened action or proceeding (including, without limitation, any proceeding relating to or arising out of Environmental Laws) affecting any Obligor or any of its respective Subsidiaries before any court, governmental agency or arbitrator, that has a reasonable possibility of resulting in a Material Adverse Change. (f) The audited consolidated balance sheet of South Jersey and its Consolidated Subsidiaries, as at December 31, 2001, and the related consolidated statements of income, retained earnings and cash flows of South Jersey and its Page 35 Consolidated Subsidiaries for the fiscal year then ended, and the unaudited consolidated balance sheet of South Jersey and its Consolidated Subsidiaries as at June 30, 2002, and the related consolidated statements of income, retained earnings and cash flows of South Jersey and its Consolidated Subsidiaries for the six (6) months then ended, copies of which have been furnished to the Administrative Agent and each Bank, fairly present the financial condition of South Jersey and its Consolidated Subsidiaries as at such dates and the results of the operations of South Jersey and its Consolidated Subsidiaries for the periods ended on such dates, all in accordance with GAAP consistently applied. Since December 31, 2001, there has been no Material Adverse Change, or material adverse change in the facts and information regarding such entities as represented to the Closing Date. (g) The issuance of, and the existence of, the Letters of Credit and the use of the proceeds thereof will comply with all provisions of applicable law and regulation in all material respects. (h) No Obligors and no Subsidiary of an Obligor are an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (i) South Jersey is a "holding company" exempt from registration under Section 5 of the Public Utility Holding Company Act of 1935, as amended, pursuant to Section 3(a)(2) of such Act. Marina Energy is not a "holding company" under Section 5 of the Public Utility Holding Company Act. (j) No Obligor is engaged in the business of extending credit for the purpose of buying or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any drawing on the Letters of Credit or Tender Advance will be used to buy or carry any margin stock or to extend credit to others for the purpose of buying or carrying any margin stock. (k) No ERISA Event has occurred or is reasonably expected to occur with respect to any Plan which reasonably could be expected to result in a Material Adverse Change. Since the actuarial valuation date specified in the most recent Schedule B (Actuarial Information) to the annual report of Plans maintained by the Obligors (Form 5500 Series), if any, (i) there has been no Material Adverse Change in the funding status of the Plans referred to therein and (ii) no "prohibited transaction" has occurred with respect thereto. Neither the Obligors nor any of their respective ERISA Affiliates has incurred nor reasonably expects to incur any material withdrawal liability under ERISA to any Multiemployer Plan. (l) Each of the Obligors and its respective Subsidiaries are in compliance in all material respects with all applicable Federal, state and local statutes, rules, regulations, orders and other provisions of law relating to Hazardous Materials, air emissions, water discharge, noise emission and liquid disposal, and other environmental, health and safety matters, other than those the non-compliance with which would not result in a Material Adverse Change (taking into consideration all fines, penalties and sanctions that may be imposed because of such non-compliance) or on the ability of the Obligors to perform their respective obligations under this Agreement or any Related Document to which an Obligor is a party. Except as set forth in the Disclosure Documents, neither the Obligors nor any of their respective Subsidiaries has Page 36 received from any Governmental Authority any notice of any material violation of any such statute, rule, regulation, order or provision. (m) Each of the Obligors and its respective Subsidiaries has filed all tax returns (Federal, state and local) required to be filed and paid all taxes shown thereon to be due, including interest and penalties, except to the extent that an Obligor or any such Subsidiary is diligently contesting any such taxes in good faith and by appropriate proceedings, and for which adequate reserves for payment thereof have been established. (n) The Bonds have been duly authorized, authenticated and issued and delivered, and are the legal, valid and binding obligations of the Issuer, and are not in default. (o) The performance of this Agreement and the transactions contemplated herein will not affect the status of the interest on the 2001A Bonds as exempt from Federal income tax. (p) No event has occurred or is continuing which constitutes a "Default" or an "Event of Default", or which constitutes, or which with the passage of time or giving of notice or both would constitute, a default or event of default by any Obligor or Subsidiary thereof under any material agreement or contract, judgment, decree or order by which any Obligor or any of its respective properties may be bound or which would require an Obligor or Subsidiary thereof to make any payment thereunder prior to the scheduled maturity date therefore, where such default could reasonably be expected to result in a Material Adverse Change. (q) As of the Closing Date, and after giving effect to each amendment to a Letter of Credit, South Jersey and its Subsidiaries will be Solvent. (r) The capitalization of the Obligors and each Significant Subsidiary of the Obligors consists of the Capital Stock, authorized, issued and outstanding, of such classes and series, with or without par value, described on Schedule II hereto. All such outstanding Capital Stock has been duly authorized and validly issued and are fully paid and nonassessable. There are no outstanding warrants, subscriptions, options, securities, instruments or other rights of any type or nature whatsoever, which are convertible into, exchangeable for or otherwise provide for or permit the issuance of, Capital Stock of any Obligor or any Subsidiary of any Obligor or are otherwise exercisable by any Person. (s) Each Obligor and each Subsidiary of each Obligor has good and marketable title to all assets and other property purported to be owned by it. (t) None of the properties or assets of any Obligor is subject to any Lien, except Permitted Liens. (u) All written information, reports and other papers and data produced by or on behalf of each Obligor and furnished to the Administrative Agent and the Banks were, at the time the same were so furnished, complete and correct in all material respects. No document furnished or written statement made to the Administrative Agent or the Banks by any Obligor in connection with the negotiation, preparation or execution of this Agreement or any of the Related Documents contains or will contain any untrue statement of a fact material to the creditworthiness of any Obligor or its respective Subsidiaries or omits or will omit to state a fact necessary in order to make the statements contained therein not misleading. Page 37 ARTICLE V COVENANTS OF THE COMPANY SECTION 5.01 Affirmative Covenants. So long as a drawing is available under any Letter of Credit or any Bank shall have any Commitment hereunder or the Obligors shall have any obligation to pay any amount to the Administrative Agent or any Bank hereunder, each Obligor will, unless the Required Banks shall otherwise consent in writing: (a) Preservation of Existence, Etc. Preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its corporate or company, as applicable, existence, material rights (statutory and otherwise) and franchises, and take such other action as may be necessary or advisable to preserve and maintain its right to conduct its business in the states where it shall be conducting its business, except where failure to do so does not result in, or could not reasonably be expected to have, a Material Adverse Change. (b) Maintenance of Properties, Etc. Maintain, and cause each of its Subsidiaries to maintain, good and marketable title to all of its properties which are used or useful in the conduct of its business, and preserve, maintain, develop and operate, and cause each of its Subsidiaries to preserve, maintain, develop and operate, in substantial conformity with all laws and material contractual obligations, all such properties in good working order and condition, ordinary wear and tear excepted. (c) Ownership. Cause South Jersey to own, at all times 100% of the Capital Stock of Marina Energy and 100% of the Capital Stock having voting rights of South Jersey Gas Company. (d) Compliance with Material Contractual Obligations, Laws, Etc. Comply, and cause each of its Subsidiaries to comply, with the requirements of all material contractual obligations and all applicable laws, rules, regulations and orders, the failure to comply with which could reasonably be expected to result in a Material Adverse Change, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property except to the extent diligently contested in good faith and by appropriate proceedings and for which adequate reserves for the payment thereof have been established, and complying with the requirements of all applicable Federal, state and local statutes, rules, regulations, orders and other provisions of law relating to Hazardous Materials, air emissions, water discharge, noise emission and liquid disposal, and other environmental, health and safety matters. (e) Insurance. Maintain, and cause each of its Subsidiaries to maintain, insurance with financially sound and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in the same or similar businesses and similarly situated. (f) Visitation Rights; Keeping of Books. At any reasonable time and from time to time, upon reasonable advance notice, permit the Administrative Agent or any of the Banks or any agents or representatives thereof, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, such Obligor and any of its Subsidiaries, and to Page 38 discuss the affairs, finances and accounts of such Obligor and any of its Subsidiaries with any of their respective officers or directors and with their respective independent certified public accountants and keep proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and liabilities of such Obligor in accordance with GAAP consistent with those applied in the preparation of the financial statements referred to in Section 4.01(f) hereof. (g) Transactions with Affiliates. Conduct, and cause each of its Subsidiaries to conduct, all transactions otherwise permitted under this Agreement with any of its respective Affiliates on terms that are fair and reasonable and no less favorable to such Obligor or such Subsidiary than it would obtain in a comparable arm's-length transaction with a Person not an Affiliate. (h) Use of Letters of Credit. Use the Letters of Credit, the Demand Loans and the Tender Advances solely for corporate purposes. (i) Redemption or Defeasance of Bonds. Use its best efforts to cause the applicable Letter of Credit to be surrendered for cancellation to the Fronting Bank upon redemption or defeasance of all of a particular series of Bonds for which such Letter of Credit was issued. (j) Registration of Bonds. Cause all Bonds which it acquires, or which it has had acquired for its account, to be registered forthwith in accordance with the Indenture, the Pledge Agreement and Article VII hereof. (k) Related Documents. Perform and comply in all material respects with each of the provisions of each Related Document to which it is a party. (l) Further Assurances. At the expense of the Obligors, promptly execute and deliver, or cause to be promptly executed and delivered, all further instruments and documents, and take and cause to be taken all further actions, that may be necessary or that the Required Banks through the Administrative Agent may reasonably request, to enable the Banks and the Administrative Agent to enforce the terms and provisions of this Agreement and the Related Documents and to exercise their rights and remedies hereunder. In addition, the Obligors will use all reasonable efforts to duly obtain Governmental Actions required from time to time on or prior to such date as the same may become legally required, and thereafter to maintain all such Governmental Actions in full force and effect. SECTION 5.02. Negative Covenants. So long as a drawing is available under any Letters of Credit or the Fronting Bank or any Bank shall have any Commitment hereunder or the Obligors shall have any obligation to pay any amount to the Administrative Agent or the Banks hereunder, each Obligor will not, without the written consent of the Required Banks: (a) Liens, Etc. Except as permitted in Section 5.02(c), create, incur, assume, or suffer to exist, or permit any of its Subsidiaries to create, incur, assume, or suffer to exist, any Lien other than Permitted Liens. (b) Indebtedness. Create or suffer, or permit any Subsidiary to create or suffer, to exist any Indebtedness except for Permitted Indebtedness. (c) Obligation to Ratably Secure. Except as permitted by Section 5.02(a), create or suffer to exist, or permit any of its Page 39 Subsidiaries to create or suffer to exist, any Lien other than a Permitted Lien, in each case to secure or provide for the payment of Indebtedness, unless, on or prior to the date thereof, such Obligor shall have (i) pursuant to documentation satisfactory to the Administrative Agent and Required Banks, equally and ratably secured the Obligations of such Obligor under this Agreement by a Lien acceptable to the Administrative Agent and Required Banks, and (ii) caused the creditor or creditors, as the case may be, in respect of such Indebtedness to have entered into an intercreditor agreement in form, scope and substance satisfactory to the Administrative Agent and the Required Banks (d) Mergers, Etc. Merge or consolidate with or into any Person, or permit any of its Subsidiaries to do so, except that (i) any Subsidiary of South Jersey (other than Marina Energy) may merge or consolidate with or into, any other Subsidiary of South Jersey and (ii) any Subsidiary of South Jersey (other than Marina Energy) may merge or consolidate with and into South Jersey, provided that South Jersey is the surviving corporation; provided in each case that, immediately after giving effect to such proposed transaction, no Event of Default or Default would exist. (e) Sale of Assets, Etc. Sell, transfer, lease, assign or otherwise convey or dispose, or permit any Subsidiary to sell, transfer, lease, assign or otherwise convey or dispose, of assets (whether now owned or hereafter acquired), in any single transaction or series of transactions, whether or not related having an aggregate book value in excess of 10% of the Consolidated Assets of South Jersey and its Consolidated Subsidiaries, except for dispositions of current assets in the ordinary course of business as presently conducted. (f) Restricted Investments. (i) With respect to Marina Energy only, make or permit to exist any loans or advances to, or any other investment in, any Person except for investments in Permitted Investments (as defined in the Related Documents on the date hereof). (ii) With respect to Marina Energy only, acquire any assets or property of any other Person other than in the ordinary course of business consistent with past practices. (g) New Business. Permit any Marina Energy or South Jersey Gas Company Subsidiary to enter into, any business which is not substantially similar to that existing on the Closing Date. (h) Distributions. Pay any dividends on or make any other distributions in respect of any Capital Stock or redeem or otherwise acquire any such Capital Stock without in each instance obtaining the prior written consent of the Required Lenders; provided, however, that (i) any Subsidiary of South Jersey (other than Marina Energy) may pay regularly scheduled dividends or make other distributions to South Jersey, (ii) if no Default or Event of Default exists or would result therefrom, Marina Energy may pay regularly scheduled dividends or make other distributions to South Jersey; and (iii) if no Default or Event of Default exists or would result therefrom, South Jersey may pay cash distributions, free of any Lien. (i) Lease Obligations. Permit the aggregate obligations of South Jersey and its Subsidiaries that are due and payable during any fiscal year under leases or agreements to lease (other than obligations under Capital Leases) to exceed $2,000,000. Page 40 (j) Compliance with ERISA. (i) Permit to exist any "accumulated funding deficiency" (as defined in Section 412(a) of the Code), unless such deficiency exists with respect to a Multiple Employer Plan or Multiemployer Plan and no Obligor has control over the reduction or elimination of such deficiency, (ii) terminate, or permit any ERISA Affiliate to terminate, any Plan of an Obligor or such ERISA Affiliate so as to result in any material liability of an Obligor or ERISA Affiliate to the PBGC, or (iii) permit to exist any occurrence of any reportable event (within the meaning of Section 4043 of ERISA), or any other event or condition, which presents a material risk of a termination by the PBGC of any Plan of an Obligor or such ERISA Affiliate and such a material liability of an Obligor or ERISA Affiliate to the PBGC. (k) Constituent Documents, Etc. Change in any material respect the nature of its articles of incorporation, articles of formation, by-laws, operating agreement, or other similar documents, or accounting policies or accounting practices (except as required or permitted by the Financial Accounting Standards Board or GAAP. (l) Certain Tax Matters. Invest, or cause the investment of, the proceeds of the 2001A Bonds secured by a Letter of Credit in any way that would violate the Code or cause such 2001A Bonds to be "arbitrage bonds" or knowingly take any action or omit to take any action if such action or omission would adversely affect the exclusion of interest on such 2001A Bonds from the gross income of the holders thereof for federal income tax purposes. SECTION 5.03. Reporting Requirements. So long as a drawing is available under any Letter of Credit or any Bank shall have any Commitment hereunder or the Obligors shall have any obligation to pay any amount to the Administrative Agent or any Bank hereunder, the Obligors will, unless the Required Banks shall otherwise consent in writing, provide to the Administrative Agent: (a) as soon as available and in any event within sixty (60) days after the end of each of the first three quarters of each fiscal year of South Jersey, a consolidated and consolidating balance sheet of South Jersey and its Consolidated Subsidiaries as at the end of such quarter and consolidated and consolidating statements of income, retained earnings and cash flows of South Jersey and its Consolidated Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and duly certified by the chief financial officer or the treasurer of South Jersey as fairly presenting the financial condition of South Jersey and its Consolidated Subsidiaries as at such date and the results of operations of South Jersey and its Consolidated Subsidiaries for the periods ended on such date, all in accordance with GAAP consistently applied, together with a certificate of the chief financial officer or the treasurer of South Jersey (A) demonstrating and certifying compliance by South Jersey with the covenants set forth in Sections 5.04(a) and (b) and (B) stating that no Event of Default or Default has occurred and is continuing or, if an Event of Default or Default has occurred and is continuing, a statement as to the nature thereof and the action which the Obligors has taken and proposes to take with respect thereto; (b) as soon as available and in any event within one hundred five (105) days after the end of each fiscal year of South Jersey, a copy of the annual report for such year for South Jersey and its Page 41 Consolidated Subsidiaries, containing consolidated and consolidating financial statements for such year certified by independent public accountants acceptable to the Administrative Agent, together with a certificate of the chief financial officer or the treasurer of South Jersey (A) demonstrating and certifying compliance by South Jersey with the covenants set forth in Sections 5.04(a) and (b) and (B) stating that no Event of Default or Default has occurred and is continuing or, if an Event of Default or Default has occurred and is continuing, a statement as to the nature thereof and the action which the Obligors has taken and proposes to take with respect thereto; (c) as soon as available and in any event within sixty (60) days after the end of each of the first three quarters of each fiscal year of South Jersey Gas Company, a consolidated balance sheet of South Jersey Gas Company and its Consolidated Subsidiaries as at the end of such quarter and consolidated statements of income, retained earnings and cash flows of South Jersey Gas Company and its Consolidated Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and duly certified by the chief financial officer or the treasurer of South Jersey Gas Company as fairly presenting the financial condition of South Jersey Gas and its Consolidated Subsidiaries as at such date and the results of operations of South Jersey Gas Company and its Consolidated Subsidiaries for the periods ended on such date, all in accordance with GAAP consistently applied (for purposes hereof delivery of South Jersey Gas Company's appropriately completed Form 10-Q will be sufficient in lieu of delivery of such consolidated balance sheet and consolidated statements of income, retained earnings and cash flows); (d) as soon as available and in any event within one hundred five (105) days after the end of each fiscal year of South Jersey Gas Company, a copy of the annual report for such year for South Jersey Gas Company and its Consolidated Subsidiaries, containing financial statements for such year certified by independent public accountants acceptable to the Administrative Agent (for purposes hereof, delivery of South Jersey Gas Company's appropriately completed Form 10-K will be sufficient in lieu of delivery of such financial statements); (e) as soon as possible and in any event within five (5) days after the occurrence of each Event of Default and each Default, a statement of the chief financial officer of the Obligors setting forth details of such Event of Default or Default and the action which the Obligors have taken and propose to take with respect thereto; (f) as soon as possible and in any event within five (5) days after receipt thereof by an Obligor or any of its ERISA Affiliates from the PBGC copies of each notice received by such Obligor or such ERISA Affiliate of the PBGC's intention to terminate any Plan of such Obligor or such ERISA Affiliate or to have a trustee appointed to administer any such Plan; (g) as soon as possible and in any event within five (5) days after receipt thereof by an Obligor or any ERISA Affiliate from a Multiemployer Plan sponsor, a copy of each notice received by an Obligor or such ERISA Affiliate concerning the imposition of withdrawal liability in the amount of at least $1,000,000 pursuant to Section 4202 Page 42 of ERISA in respect of which such Obligor or such ERISA Affiliate is reasonably expected to be liable; (h) as soon as possible and in any event within five (5) days after an Obligor becomes aware of the occurrence thereof, notice of all actions, suits, proceedings or other events (A) of the type described in Section 4.01(e) or (B) for which the Administrative Agent or the Banks will be entitled to indemnity under Section 9.05; (i) as soon as possible and in any event within five (5) days after the sending or filing thereof, copies of all material reports that an Obligor sends to any of its security holders, and copies of all reports and registration statements which an Obligor or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange; (j) as soon as possible and in any event within five (5) days after requested, such other information respecting the business, properties, assets, liabilities (actual or contingent), results of operations, prospects, condition or operations, financial or otherwise, of the Obligors, South Jersey Gas Company, or any Subsidiary of South Jersey as any Bank through the Administrative Agent may from time to time reasonably request; and (k) as soon as possible and in any event within fifteen (15) days after the occurrence of each ERISA Event, a statement of the chief financial officer of the Obligors setting forth details of such ERISA Event and the action which the Obligors have taken and propose to take with respect thereto. SECTION 5.04. Financial Covenants. So long as a drawing is available under any Letter of Credit or any Bank shall have any Commitment hereunder or the Obligors shall have any obligation to pay any amount to the Administrative Agent or any Bank hereunder, South Jersey will, unless the Required Banks shall otherwise consent in writing: (a) Consolidated Indebtedness to Consolidated Total Capitalization. Maintain at the end of each Fiscal Quarter a ratio of Indebtedness to Consolidated Total Capitalization of South Jersey and its Consolidated Subsidiaries of not more that 0.65 to 1.0. (b) Consolidated EBIT to Consolidated Interest Expense. Maintain at the end of each Fiscal Quarter a ratio of Consolidated EBIT to Consolidated Interest Expense of South Jersey and its Consolidated Subsidiaries of not less than 2.0:1.0. ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events (each an "Event of Default") shall occur and be continuing: (a) The Obligors shall fail to pay (i) any amount of principal when the same becomes due and payable or (ii) any interest, fees or any other amount payable hereunder within five (5) Business Days of when the same becomes due and payable; or Page 43 (b) Any representation or warranty made by or on behalf of the Obligors in any Agreement or Related Document or by or on behalf of the Obligors (or any of their officers) in connection with any Agreement or Related Document shall prove to have been incorrect in any material respect when made or deemed made; or (c) (i) The Obligors shall fail to perform or observe any term, covenant or agreement contained in Section 5.01(a), (c), (e), (g), (h), (i) or (j), Section 5.02(a), (b), (c), (d), (e), (f), (g) or (h), Section 5.03 or Section 5.04, or (ii) the Obligors shall fail to perform or observe any other term, covenant or agreement contained in this Agreement (other than obligations specifically set forth elsewhere in this Section 6.01) on their part to be performed or observed if the failure to perform or observe such other term, covenant or agreement, shall remain unremedied for thirty (30) days after written notice thereof shall have been given to the Obligors by the Administrative Agent or any Bank; or (d) Any Obligor or any Significant Subsidiary thereof shall fail to pay any principal of or premium or interest on any Indebtedness (other than Indebtedness incurred under this Agreement) thereof in the aggregate (for all such Persons) in excess of $5,000,000, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Indebtedness and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (e) Any Obligor or any Significant Subsidiary thereof shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against an Obligor or a Significant Subsidiary thereof seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), such proceeding shall remain undismissed or unstayed for a period of forty-five (45) days, any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur or an Obligor or a Significant Subsidiary thereof shall consent to or acquiesce in any such proceeding; or an Obligor or a Significant Subsidiary thereof shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or (f) Any judgment or order for the payment of money in excess of $5,000,000 (in the aggregate) shall be rendered against an Obligor or any Significant Subsidiary thereof and either (i) enforcement proceedings shall have Page 44 been commenced by any creditor upon such judgment or order or (ii) there shall be any period of ten (10) consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) The obligations of an Obligor under this Agreement or any Related Document shall become unenforceable, or an Obligor, or any court or governmental or regulatory body having jurisdiction over an Obligor, shall so assert in writing or an Obligor or any of its Affiliates shall contest in any manner the validity or enforceability thereof; or (h) Any ERISA Event shall have occurred with respect to a Plan and, thirty (30) days after notice thereof shall have been given to an Obligor by the Administrative Agent or any Bank, (i) such ERISA Event shall still exist and (ii) such ERISA Event is reasonably likely to result in a liability or lien in excess of $5,000,000 against an Obligor or any ERISA Affiliate, or (i) An Obligor or any Affiliate thereof as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount exceeding $5,000,000; or (j) Any Governmental Approval shall be rescinded, revoked, otherwise terminated, or amended or modified in any manner which is materially adverse to the interests of the Banks and the Administrative Agent; or (k) Any "Event of Default" under and as defined in the Indenture or the Loan Agreement shall have occurred and be continuing; or (l) South Jersey shall fail to own at any time 100% of the Capital Stock of Marina Energy and 100% of the Capital Stock having voting rights of South Jersey Gas Company; or (m) A Change in Control shall occur. SECTION 6.02. Upon an Event of Default. If any Event of Default shall have occurred and be continuing, the Fronting Bank (in the case of clauses 6.02(i) and (ii)) and the Administrative Agent may, or if requested by the Required Banks, the Administrative Agent shall (i) by notice to the Obligors, declare the obligation of the Fronting Bank to extend or amend the Letters of Credit to be terminated, whereupon the same shall forthwith terminate, (ii) give notice (or, in the case of the Administrative Agent, cause the Fronting Bank to give notice) to the Trustee (A) that the interest component of the Letters of Credit will not be reinstated, and/or (B) as provided in the Indenture to declare the principal of all Bonds then outstanding to be immediately due and payable, (iii) declare the principal amount of all Demand Loans and Tender Advances hereunder, all interest thereon and all other amounts payable hereunder or in respect hereof to be forthwith due and payable, whereupon all such principal, interest and all such other amounts shall become and be forthwith due and payable, without presentment, demand, protest, or further notice of any kind, all of which are hereby expressly waived by the Obligors, (iv) in addition to other rights and remedies provided for herein or otherwise available to any of them, as holder of the Pledged Bonds or otherwise, exercise all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of New York at that time; provided that, if an Event of Default described in Section 6.01(e) shall have occurred with respect to the Page 45 Obligors then, automatically, (x) the obligation of the Fronting Bank hereunder to extend or amend the Letters of Credit shall terminate, (y) any Demand Loans and Tender Advances, all interest thereon and all other amounts payable hereunder or in respect hereof shall become and be forthwith due and payable, without presentment, demand, protest, or further notice of any kind, all of which are hereby expressly waived by the Obligors and (z) the Fronting Bank shall give the notice to the Trustee referred to in clauses (ii)(A) and (B) above. ARTICLE VII THE PLEDGED BONDS SECTION 7.01. Pledge. The Obligors hereby pledge, assign, hypothecate and transfer to the Administrative Agent for the benefit of the Banks all of the Obligors' right, title and interest in and to all Tendered Bonds as delivered from time to time by the holders thereof which were not remarketed on the applicable date the Tendered Bonds were tendered by the holders thereof and a Tender Drawing was made by the Fronting Bank for which it was not reimbursed for under Section 2.04 ("Pledged Bonds"), and hereby grants to the Administrative Agent for the benefit of the Banks a first lien on, and security interest in, its right, title and interest in and to each of the Pledged Bonds, the interest thereon and all proceeds thereof, as collateral security for the prompt and complete payment when due from time to time by the Obligors (by acceleration, at stated maturity or otherwise) of all obligations to the Administrative Agent, the Fronting Bank and the Banks hereunder. The Obligors hereby authorize the Tender Agent for such Pledged Bonds to deliver or cause to be delivered to the Administrative Agent or its designated agent, and registered in the name of the Tender Agent, or such other Person as the Administrative Agent shall elect, as pledgee, all Pledged Bonds. The Pledged Bonds shall upon payment of the related Demand Loan or Tender Advance in accordance with this Agreement be released and delivered to the Tender Agent as provided in the Indenture, the Pledge Agreement and the Tender Agency Agreement, and the Administrative Agent shall take all actions necessary to effectuate such release and delivery. The Pledged Bonds and the proceeds thereof shall serve as security for the payment and performance when due of the Obligors' reimbursement obligations under this Agreement. The Obligors shall deliver, or cause to be delivered, the Pledged Bonds to the Tender Agent or to another pledge agent designated by the Administrative Agent immediately upon receipt thereof or, in the case of Pledged Bonds held under a book-entry system administered by The Depository Trust Company, New York, New York (or any other clearing corporation), the Obligors shall cause the Pledged Bonds to be reflected on the records of the Depository Trust Company (or such other clearing corporation) as a position held by the Administrative Agent (or a pledge agent acceptable to the Administrative Agent) as a Depository Trust Company participant (or a participant in such other clearing corporation) and the Administrative Agent (or its pledge agent) shall reflect on its records that the Pledged Bonds are owned beneficially by the Obligors subject to the pledge in favor of the Administrative Agent. SECTION 7.02. Interest on the Bonds If, while the Administrative Agent or its designated agent holds Pledged Bonds, the Obligors shall receive any interest payment in respect of such Pledged Bonds, the Obligors agree to accept Page 46 the same as agent for the Administrative Agent and to hold the same in trust on behalf of the Administrative Agent and to deliver the same forthwith to the Administrative Agent. All sums of money so paid in respect of such Pledged Bonds that are received by the Obligors and paid to the Administrative Agent, or that shall be received directly by the Administrative Agent (or its designated agent), shall be credited as provided in Section 2.20(g). SECTION 7.03. Rights with respect to Pledged Bonds. The Administrative Agent shall not be liable for failure to realize upon the Pledged Bonds or any collateral security or guarantee therefor, or any part thereof, or for any delay in so doing, nor shall it be under any obligation to take any action whatsoever with regard thereto. If an "Event of Default" has occurred and is continuing under the Indenture under which the Pledged Bonds were issued, the Administrative Agent may (or shall at the request of the Required Banks) thereafter without notice exercise all rights, privileges or options pertaining to any Pledged Bonds as if it were the absolute owner thereof, upon such terms and conditions as it may determine, all without liability except to account to the Obligors for property actually received by it. In addition to the rights and remedies granted to it in this Agreement and in any other instrument or agreement securing, evidencing or relating to any of the reimbursement obligations hereunder, the Administrative Agent or its designated agent shall be entitled to exercise all the rights and remedies of a secured party under the Uniform Commercial Code of the State of New York. The Obligors shall be liable for the deficiency if the proceeds of any sale or other disposition of the Pledged Bonds and collateral security granted to the Administrative Agent in connection herewith are insufficient to pay all amounts to which the Administrative Agent, the Fronting Bank and the Bank are entitled, and for the reasonable fees of any attorneys employed by the Administrative Agent to collect such deficiency. If the Pledged Bonds are sold or otherwise disposed of and after such disposition the Letter of Credit will not be reinstated, then the purchasers of such Pledged Bonds will acknowledge that the Bonds being purchased will not be entitled to the benefit of the Letter of Credit and will be unrated. The Administrative Agent shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing. SECTION 7.04. No Disposition of Pledged Bonds by Obligors. Except as contemplated herein, without the prior written consent of the Administrative Agent, the Obligors agree that they will not sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Pledged Bonds, nor will they create, incur or permit to exist any pledge, lien, mortgage, hypothecation, security interest, charge, option or any other encumbrance with respect to any of the Pledged Bonds, or any interest therein, or any proceeds thereof, except for the lien and security interest provided for by this Agreement and the Indenture under which the Pledged Bonds were issued. SECTION 7.05. Disposition of Pledged Bonds by Administrative Agent. The Obligors further agree to do or cause to be done all such other reasonable acts and things as may be necessary to make any disposition or sale of any portion or all of the Pledged Bonds by the Administrative Agent permitted by this Agreement valid and binding and in compliance with applicable law, all at the Obligors' expense. SECTION 7.06. Valid Perfected First Lien. The Obligors covenant that the pledge, assignment and delivery of the Pledged Bonds under this Agreement Page 47 will create a valid, perfected, first priority security interest in all right, title or interest of the Obligors in or to such Pledged Bonds and the proceeds thereof, subject to no prior pledge, lien, mortgage, hypothecation, security interest, charge, option or encumbrance or to any agreement purporting to grant to any third party a security interest in the property or assets of the Obligors which would include the Pledged Bonds and the proceeds thereof. The Obligors covenant and agree that they will defend the Administrative Agent's right, title and security interest in and to the Pledged Bonds and the proceeds thereof against the claims and demands of all persons whomsoever. SECTION 7.07. Release of Pledged Bonds. Pledged Bonds, or such portion thereof, shall be released from the security interest created under this Agreement to the extent of, and upon satisfaction of the Obligors' reimbursement obligations under, this Agreement with respect to such Pledged Bonds. ARTICLE VIII THE ADMINISTRATIVE AGENT AND FRONTING BANK SECTION 8.01. Appointment. Each Bank and the Fronting Bank hereby irrevocably designates and appoints Wachovia as the Administrative Agent of such Bank and the Fronting Bank under this Agreement and the other Related Documents, and each such Bank and the Fronting Bank irrevocably authorizes Wachovia, as the Administrative Agent for such Bank and the Fronting Bank, to take such action on its behalf under the provisions of this Agreement and the other Related Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Related Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein and in the Related Documents, or any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Related Document or otherwise exist against the Administrative Agent. SECTION 8.02. Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement, any Letter of Credit and the other Related Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. SECTION 8,03. Exculpatory Provisions. Neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Related Document (except in the case of gross negligence or willful misconduct as determined by a court of competent jurisdiction) or (ii) responsible in any manner to any of the Banks for any recitals, statements, representations or warranties made by the Obligors or any officer thereof contained in this Agreement or any Related Document or in any certificate, report, statement or other document referred to or provided for in, or received Page 48 by the Administrative Agent under or in connection with, this Agreement or any Related Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the Letters of Credit or any Related Document or for any failure of the Obligors to perform their respective obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any Related Document, or to inspect the properties, books or records of the Obligors. SECTION 8.04. Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Obligors), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any evidence of indebtedness in respect of any Demand Loans, Tender Advances, or other indebtedness hereunder as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement, any Letter of Credit or any Related Document unless it shall first receive such advice or concurrence of the Required Banks (unless all of the Banks' action is required hereunder) as it deems appropriate or it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the Related Documents in accordance with a request of the Required Banks (unless all of the Banks' action is required hereunder), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Banks. SECTION 8.05. Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default hereunder unless the Administrative Agent has received notice from a Bank or the Obligors referring to this Agreement, describing such Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Banks. The Administrative Agent shall take such action with respect to such Event of Default as shall be reasonably directed by the Required Banks; provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Event of Default as it shall deem advisable in the best interests of the Fronting Bank and the Banks. SECTION 8.06. Non-Reliance on Administrative Agent and Other Banks. Each Bank expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of the Obligors, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Bank. Each Bank represents to the Administrative Page 49 Agent that it has, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Obligors and made its own decision to enter into this Agreement. Each Bank also represents that it will, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the Related Documents and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Obligors. Except for notices, reports and other documents expressly required to be furnished to the Banks by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Obligors which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. SECTION 8.07. Indemnification. The Banks agree to indemnify the Administrative Agent in its capacity as such (to the extent not reimbursed by the Obligors and without limiting the obligation of the Obligors to do so), ratably according to the respective amounts of their Commitments, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the termination of the Letters of Credit) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of this Agreement, the Letters of Credit, any of the other Related Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing; provided that no Bank shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or willful misconduct. The agreements in this Section shall survive the termination of this Agreement, the Letters of Credit and the payment of all amounts payable hereunder. SECTION 8.08. Administrative Agent in Its Individual Capacity. The Administrative Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with, the Obligors as though the Administrative Agent was not the Administrative Agent hereunder. With respect to its interest in the Demand Loans and any other amounts owed to it hereunder, the Administrative Agent shall have the same rights and powers under this Agreement as any Bank and may exercise the same as though it were not the Administrative Agent, and the terms "Bank" and "Banks" shall include the Administrative Agent in its individual capacity. SECTION 8.09. Successor Administrative Agent. The Administrative Agent may resign as Administrative Agent upon ten (10) days' notice to the Banks. If the Administrative Agent shall resign as Administrative Agent under this Agreement, then the Required Banks, with the consent of the Obligors, shall appoint from among the Banks a successor agent for the Banks, whereupon such successor agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term "Administrative Agent" shall mean such Page 50 successor agent effective upon its appointment, and the former Administrative Agent's rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement. After any retiring Administrative Agent's resignation as Administrative Agent, the provisions of this Section shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. SECTION 8.10. Fronting Bank. Each Bank hereby acknowledges that the provisions of this Article VIII shall apply to the Fronting Bank in its capacity as such, in the same manner as such provisions are expressly stated to apply to the Administrative Agent. SECTION 8.11. Notices; Actions Under Related Documents. All notices received by the Fronting Bank pursuant to this Agreement or any Related Document shall be promptly delivered by the receiving party to the Administrative Agent, for distribution to the Banks, and any notices, reports or other documents received by the Administrative Agent pursuant to this Agreement shall be promptly delivered to the Fronting Bank and the Banks. The Fronting Bank hereby agrees not to amend or waive any provision or consent to the amendment or waiver of any Related Document without the consent of the Required Banks (or, to the extent required pursuant to Section 9.01, all of the Banks). ARTICLE IX MISCELLANEOUS SECTION 9.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Obligors therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Banks, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver and no such amendment, supplement or modification shall without the written consent of all the Banks (a) extend the Stated Expiration Date, the Termination Date or the maturity of any Tender Advance or unreimbursed drawing, or reduce the rate or extend the time of payment of interest in respect thereof, or reduce any fee payable to any Bank hereunder or extend the time for the payment thereof or change the amount of any Bank's Commitment, in each case without the written consent of all the Banks, (b) amend, modify or waive any provision of this Section 9.01 or reduce the percentage specified in the definition of Required Banks, or consent to the assignment or transfer by the Obligors of any of their respective rights and obligations under this Agreement, in each case without the written consent of all the Banks, (c) amend, modify or waive any provision of Article VII or Article VIII without the written consent of the Administrative Agent and Fronting Bank, (d) waive, modify or eliminate any of the conditions precedent specified in Article III, in each case without the written consent of all the Banks, (e) forgive principal, interest, fees or other amounts payable hereunder, or (f) release the Pledged Bonds or any portions thereof except in accordance with the terms of Article VII, or waive any requirement for the release of collateral. SECTION 9.02. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telegraphic communication) and mailed, telecopied, telegraphed or delivered as follows: Page 51 The Obligors: Marina Energy LLC 1 South Jersey Street Folsom, New Jersey 08037 Attention: Stephen H. Clark Telecopy No.: (609) 561-8225 With a copy to: Cozen O'Connor The Atrium 1900 Market Street Philadelphia, Pennsylvania 19103 Attention: Alan Wohlstetter, Esq. Telecopy No.: (215) 665-2013 The Administrative Agent or the Fronting Bank: Wachovia Bank, National Association 301 South College Street One Wachovia Center Charlotte, North Carolina 28288-0251 Attention: D. Mitch Wilson Telecopy No.: (704) 374-2570 With a copy to: Wachovia Bank, National Association 201 South College Street Charlotte, North Carolina 28288-0680 Attention: Agency Services Telecopy No.: (704) 383-0288 With a copy to: Parker, Poe, Adams & Bernstein L.L.P. Three Wachovia Center 401 South Tryon Street Suite 3000 Charlotte, North Carolina 28202 Attention: Paul S. Donohue, Esq. Telecopy No.: (704) 334-4706 and if to any Bank, at its address or telecopy number set forth on Schedule I hereto; or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, be effective three (3) days after being Pagd 52 deposited in the mails or when sent by telecopy or telex or delivered to the telegraph company, respectively, addressed as aforesaid. SECTION 9.03. No Waiver; Remedies. No failure on the part of the Administrative Agent, the Fronting Bank or any Bank to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 9.04. Set-off. (a) Upon the occurrence and during the continuance of any Event of Default, the Administrative Agent and each Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Administrative Agent or such Bank to or for the credit or the account of the Obligors against any and all of the obligations of the Obligors now or hereafter existing under this Agreement, irrespective of whether or not the Administrative Agent or such Bank shall have made any demand hereunder and although such obligations may be contingent or unmatured. (b) If any Bank (a "Benefitted Bank") shall at any time receive any payment of all or part of the Demand Loans, Tender Advances or other obligations of the Obligors to it hereunder (such Bank's "Obligor Obligations"), or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 6.01(e), or otherwise), in a greater proportion than any such payment to or collateral received by any other Bank, if any, in respect of such other Bank's Obligor Obligations, or interest thereon, such Benefitted Bank shall purchase for cash from the other Banks such portion of each such other Bank's Obligor Obligations, or shall provide such other Banks with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Bank to share the excess payment or benefits of such collateral or proceeds ratably with each of the Banks; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefitted Bank, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Obligors agree that each Bank so purchasing a portion of another Bank's Obligor Obligations may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Bank were the direct holder of such portion. (c) The Administrative Agent and each Bank agree promptly to notify the Obligors after any such set-off and application referred to in subsection (a) above; provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Administrative Agent and each Bank under this Section 9.04 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Administrative Agent and each Bank may have. SECTION 9.05. Indemnification. The Obligors hereby indemnify and hold the Fronting Bank, the Administrative Agent and each Bank harmless from and against any and all claims, damages, losses, liabilities, costs and expenses Page 53 which such party may incur or which may be claimed against such party by any Person: (a) by reason of any inaccuracy or alleged inaccuracy in any material respect, or any untrue statement or alleged untrue statement of any material fact, or by reason of the omission or alleged omission to state therein a material fact necessary to make such statements, in the light of the circumstances under which they were made, not misleading; or (b) by reason of or in connection with the execution, delivery or performance of this Agreement or the Related Documents, or any transaction contemplated by this Agreement or the Related Documents, other than as specified in subsection (c) below; or (c) by reason of or in connection with the execution and delivery or transfer of, or payment or failure to make payment under this Agreement, the Letters of Credit or any other Related Document; provided, however, that the Obligors shall not be required to indemnify any such party pursuant to this Section 9.05(c) for any claims, damages, losses, liabilities, costs or expenses to the extent caused by (i) the Fronting Bank's willful misconduct or gross negligence in determining whether documents presented under the Letters of Credit comply with terms of the Letters of Credit or (ii) the Fronting Bank's willful or grossly negligent failure to make lawful payment under the Letters of Credit after the presentation to it of a certificate strictly complying with the terms and conditions of the Letters of Credit. Nothing in this Section 9.05 is intended to limit the Obligors' obligations contained in Article II. Without prejudice to the survival of any other obligation of the Obligors hereunder, the indemnities and obligations of the Obligors contained in this Section 9.05 shall survive the payment in full of amounts payable pursuant to Article II and the termination of the Letters of Credit. SECTION 9.06. Liability of the Banks. The Obligors assume all risks of the acts or omissions of each beneficiary or transferee of the Letters of Credit with respect to their use of the Letters of Credit. None of the Fronting Bank, the Administrative Agent, the Banks nor any of their respective officers or directors shall be liable or responsible for: (a) the use which may be made of the Letters of Credit or any acts or omissions of each beneficiary or transferee in connection therewith; (b) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (c) payment by the Fronting Bank against presentation of documents which do not comply with the terms of the Letters of Credit, including failure of any documents to bear any reference or adequate reference to the Letters of Credit; or (d) any other circumstances whatsoever in making or failing to make payment under the Letters of Credit, except that the Obligors shall have a claim against the Fronting Bank and the Fronting Bank shall be liable to the Obligors, to the extent of any direct, as opposed to consequential, damages suffered by the Obligors which the Obligors prove were caused by (i) the Fronting Bank's willful misconduct or gross negligence in determining whether documents presented under the Letters of Credit are genuine or comply with the terms of the Letters of Credit or (ii) the Fronting Bank's willful or grossly negligent failure, as Page 54 determined by a court of competent jurisdiction, to make lawful payment under the Letters of Credit after the presentation to it of a certificate strictly complying with the terms and conditions of the Letters of Credit. In furtherance and not in limitation of the foregoing, the Fronting Bank may accept original or facsimile (including telecopy) certificates presented under the Letters of Credit that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. SECTION 9.07. Costs, Expenses and Taxes. (a) The Obligors agree to pay on demand all costs and expenses in connection with the preparation, issuance, delivery, filing, recording, and administration of this Agreement, the Letters of Credit and any other documents which may be delivered in connection with this Agreement, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent and the Fronting Bank incurred in connection with the preparation and negotiation of this Agreement, the Letters of Credit and any document delivered in connection therewith and all costs and expenses incurred by the Administrative Agent (and, in the case of clause (iii) or (iv) below, any Bank) (including reasonable fees and out of pocket expenses of counsel) in connection with (i) the transfer, drawing upon, change in terms, maintenance, renewal or cancellation of the Letters of Credit, (ii) any and all amounts which the Administrative Agent or any Bank has paid relative to the Administrative Agent's or such Bank's curing of any Event of Default resulting from the acts or omissions of the Obligors under this Agreement or any Related Document, (iii) the enforcement of, or protection of rights under, this Agreement or any Related Document (whether through negotiations, legal proceedings or otherwise), (iv) any action or proceeding relating to a court order, injunction, or other process or decree restraining or seeking to restrain the Fronting Bank from paying any amount under the Letters of Credit or (v) any waivers or consents or amendments to or in respect of this Agreement or the Letters of Credit requested by the Obligors. In addition, the Obligors shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement, the Letter of Credit or any of such other documents, and agree to save the Fronting Bank, the Administrative Agent and the Banks harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. (b) If any payment of principal of, or Conversion of, any LIBOR Rate Advance is made other than on the last day of the Interest Period for such LIBOR Rate Advance, as a result of a payment or Conversion or acceleration of the maturity of the Bonds pursuant to Section 6.02 or for any other reason, the Obligors shall, upon demand by any Bank (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Bank any amounts required to compensate such Bank for any additional losses, costs or expenses which it may reasonably incur as a result of such payment or Conversion, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Bank to fund or maintain such LIBOR Rate Advance. SECTION 9.08. Binding Effect. This Agreement shall become effective when it shall have been executed and delivered by the Obligors and the Fronting Bank, the Administrative Agent and the Banks and thereafter shall (a) be binding upon the Obligors, its successors and assigns, and (b) inure to the benefit of Page 55 and be enforceable by the Banks and each of their respective successors, transferees and assigns; provided that the Obligors may not assign all or any part of its rights or obligations under this Agreement without the prior written consent of the Banks. SECTION 9.09. Assignments and Participation. (a) Each Bank may assign to one or more banks, financial institutions or other entities all or a portion of its rights and obligations under this Agreement and the Related Documents (including, without limitation, all or a portion of its Commitment and the Tender Advances and Demand Loans owing to it); provided, however, that (i) the Obligors (unless an Event of Default shall have occurred and be continuing) and the Fronting Bank shall have consented to such assignment (such consent not to be unreasonably withheld or delayed) by signing the Assignment and Acceptance referred to in clause (iii) below, (ii) each such assignment shall be in a minimum amount of $5,000,000 and be of a constant, and not a varying, percentage of all of the assigning Bank's rights and obligations under this Agreement and the Related Documents and (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register (as defined in Section 9.09(c)), an Assignment and Acceptance, together with a processing and recordation fee of $3,500, payable by the assigning Bank or the assignee, as agreed upon by such parties. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (y) the Bank assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). Notwithstanding anything to the contrary contained in this Agreement, any Bank may at any time assign all or any portion of the Demand Loans owing to it to any Affiliate of such Bank. No such assignment referred to in the preceding sentence, other than to an Affiliate of such Bank consented to by the Obligors (such consent not to be unreasonably withheld or delayed), shall release the assigning Bank from its obligations hereunder. Nothing contained in this Section 9.09 shall be construed to relieve the Fronting Bank of any of its obligations under the Letters of Credit. (b) By executing and delivering an Assignment and Acceptance, the Bank assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or any Related Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any Related Document or any other instrument or document furnished pursuant hereto; (ii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Obligors or the performance or observance by the Obligors of any of their respective obligations under this Agreement or any Related Document or any other instrument or document furnished pursuant hereto or thereto; (iii) such assignee confirms that it has received a Page 56 copy of this Agreement, together with copies of the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such assigning Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to them by the terms hereof, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Bank. (c) The Administrative Agent shall maintain at its address referred to in Section 9.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Commitment of, and principal amount of the Demand Loans and unreimbursed drawings owing to, each Bank from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Obligors, the Administrative Agent, the Fronting Bank and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Obligors or any Bank at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and an assignee, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit B hereto, and has been signed by the Obligors (if the Obligors' consent is required), (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice of such recordation to the Obligors. (e) Each Bank may sell participations to one or more banks, financial institutions or other entities in all or a portion of its rights and obligations under this Agreement and the Related Documents (including, without limitation, all or a portion of its Commitment and the Demand Loans owing to it); provided, however, that (i) such Bank's obligations under this Agreement (including, without limitation, its Commitment to the Obligors hereunder) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, and (iii) the Obligors, the Administrative Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Obligors hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement which would (a) waive, modify or eliminate any of the conditions precedent specified in Article III, (b) increase or extend the Commitments of the Banks or subject the Banks to any additional obligations, (c) forgive principal, interest, fees or other amounts payable hereunder or reduce the rate at which interest or any fee is calculated, (d) postpone any Page 57 date fixed for any payment of principal, interest, fees or other amounts payable hereunder, (e) change the percentage of the Commitments or the number of Banks which shall be required for the Banks or any of them to take any action hereunder, (f) release the Pledged Bonds or any portions thereof except in accordance with the terms thereof, or waive any requirement for the release of collateral, or (g) amend this Section 9.09(e). (f) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.09, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Obligors furnished to such Bank by or on behalf of the Obligors; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential information relating to the Obligors received by it from such Bank. (g) Anything in this Section 9.09 to the contrary notwithstanding, any Bank may assign and pledge all or any portion of its Commitment and the Demand Loans, Tender Advances and other obligations owing to it to any Federal Reserve Bank (and its transferees) as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Bank from its obligations hereunder. (h) If any Bank (or any bank, financial institution, or other entity to which such Bank has sold a participation) shall make any demand for payment under Section 2.10 or Section 2.11, then within thirty (30) days after any such demand, the Obligors may, with the approval of the Administrative Agent (which approval shall not be unreasonably withheld) and provided that no Event of Default or Default shall then have occurred and be continuing, demand that such Bank assign in accordance with this Section 9.09 to one or more assignees designated by the Obligors all (but not less than all) of such Bank's Commitment and the Demand Loans, Tender Advances and other obligations owing to it within the period ending on such 30th day. If any such assignee designated by the Obligors shall fail to consummate such assignment on terms acceptable to such Bank, or if the Obligors shall fail to designate any such assignees for all or part of such Bank's Commitment, Demand Loans or Tender Advances, then such demand by the Obligors shall become ineffective; it being understood for purposes of this subsection (h) that such assignment shall be conclusively deemed to be on terms acceptable to such Bank, and such Bank shall be compelled to consummate such assignment to an assignee designated by the Obligors, if such assignee (i) shall agree to such assignment by entering into an Assignment and Acceptance in substantially the form of Exhibit B hereto with such Bank and (ii) shall offer compensation to such Bank in an amount equal to all amounts then owing by the Obligors to such Bank hereunder, whether for principal, interest, fees, costs or expenses (other than the demanded payment referred to above and payable by the Obligors as a condition to the Obligors' right to demand such assignment), or otherwise. SECTION 9.10. Severability. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. Page 58 SECTION 9.11. Joint and Several Obligations. Each of the Obligors hereby acknowledges and agrees that all obligations of the Obligors (including, without limitation, payment obligations) are joint and several. SECTION 9.12. Governing Law. This agreement shall be governed by, and construed in accordance with, the laws of the state of New York. SECTION 9.13. Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. SECTION 9.14. Submission To Jurisdiction; Waivers. Each Obligor hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Related Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of North Carolina, the courts of the United States of America for the Western District of North Carolina, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Obligors at their address set forth in Section 9.02 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; and (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction. This Section 9.13 shall not be construed to confer a benefit upon, or grant a right or privilege to, any Person other than the parties hereto. SECTION 9.15. Acknowledgments. Each Obligor hereby acknowledges: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and other Related Documents; (b) Neither the Administrative Agent, the Fronting Bank nor any Bank has a fiduciary relationship to the Obligors, and the relationship between the Administrative Agent, the Fronting Bank and any Bank, on the one hand, and the Obligors on the other hand, is solely that of debtor and creditor; and Page 59 (c) no joint venture exists between the Obligors and the Administrative Agent, the Fronting Bank or any Bank. SECTION 9.16. Waivers of jury trial. Each obligor, the administrative agent, the fronting bank and each bank hereby irrevocably and unconditionally waive trial by jury in any legal action or proceeding relating to this agreement or any related document and for any counterclaim therein. This section 9.16 shall not be construed to confer a benefit upon, or grant a right or privilege to, any person other than the parties hereto. SECTION 9.17. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. [SIGNATURE PAGES ATTACHED] Page 60 IN WITNESS WHEREOF, the parties hereto have caused his Agreement to be duly executed and delivered by their respective duly authorized officers as of the date first above written. THE OBLIGORS: SOUTH JERSEY INDUSTRIES, INC. By: /s/ DAVID A. KINDLICK ------------------------------------- David A. Kindlick Vice President, Treasurer & Chief Financial Officer MARINA ENERGY LLC By: South Jersey Industries, Inc. Its: Sole Member By: /s/ DAVID A. KINDLICK ------------------------------------- David A. Kindlick Vice President, Treasurer & Chief Financial Officer Counterpart signature page to the Amended and Restated Letter of Credit and Reimbursement Agreement dated as of September 19, 2002 among South Jersey Industries, Inc., Marina Energy LLC, Wachovia Bank, National Association and the participating banks a party thereto Page S1 WACHOVIA BANK, NATIONAL ASSOCIATION, as Administrative Agent, as Fronting Bank and as a Bank By: /s/ D. MITCH WILSON -------------------------------------- D. Mitch Wilson Vice President Counterpart signature page to the Amended and Restated Letter of Credit and Reimbursement Agreement dated as of September 19, 2002 among South Jersey Industries, Inc., Marina Energy LLC, Wachovia Bank, National Association and the participating banks a party thereto Page S2 The Banks: HUDSON UNITED BANK By: /s/ ANTHONY S. FEDELI -------------------------------------- Name: Anthony S. Fedeli --------------------------------- Title: Senior Vice President --------------------------------- Counterpart signature page to the Amended and Restated Letter of Credit and Reimbursement Agreement dated as of September 19, 2002 among South Jersey Industries, Inc., Marina Energy LLC, Wachovia Bank, National Association and the participating banks a party thereto Page S3 COMMERCE BANK, N.A. By: /s/ GERARD L. GRADY -------------------------------------- Name: Gerard L. Grady Title: Senior Vice President -------------------------------- Counterpart signature page to the Amended and Restated Letter of Credit and Reimbursement Agreement dated as of September 19, 2002 among South Jersey Industries, Inc., Marina Energy LLC, Wachovia Bank, National Association and the participating banks a party thereto Page S4 SCHEDULE I BANKS, APPLICABLE BOOKING OFFICES, COMMITMENTS AND PERCENTAGES Bank and Applicable Booking Office Commitments Booking Office 2001A Commitment Percentages & 2001B Commitment Wachovia Bank, National Association $35,758,219.18 78.15% Domestic Lending Office and LIBOR Lending Office: One Wachovia Center 201 South College Street Charlotte, North Carolina 28288 Attn: Agency Services Telephone: (704) 374-2698 Facsimile: (704) 383-0835 Hudson United Bank $10,000,000.00 21.85% 2055 Hamburg Turnpike, 2nd Floor Wayne, New Jersey 07470 Attn: Lawrence Nachman, Senior VP Telephone: (973) 283-4000 Facsimile: (973) 839-6426 SCHEDULE II Ownership Entity Name Owner Ownership IPO Price Classification Interest of Interest South Jersey Public 100% N/A Common Equity Industries, Inc. Marina Energy LLC SJI 100% N/A Membership Interest South Jersey Gas Company SJI 100% N/A Common Equity South Jersey Energy SJI 100% N/A Common Equity Company South Jersey Resources SJI 100% N/A Membership Interest Group, LLC EXHIBIT A-1FORM OF 2001A LETTER OF CREDIT IRREVOCABLE TRANSFERABLE LETTER OF CREDIT NO. SM418226C September 20, 2001 Commerce Bank, National Association, not individually but solely as Trustee 336 Route 70 East Marlton, New Jersey 08053 Attention: Corporate Trust Department Dear Sir or Madam: We hereby issue our Irrevocable Letter of Credit No. SM418226C, at the request and for the account of South Jersey Industries, Inc. and Marina Energy LLC (collectively, the "Obligors"), pursuant to that certain Letter of Credit and Reimbursement Agreement, dated as of September 20, 2001, among the Obligors, certain banks and Wachovia Bank, National Association, as Administrative Agent and Fronting Bank (as amended, supplemented or otherwise modified from time to time, the "Reimbursement Agreement"), in your favor, as trustee (the "Trustee") under the Trust Indenture, dated as of September 1, 2001 (the "Indenture"), between you and the New Jersey Economic Development Authority (the "Issuer"), pursuant to which $20,000,000 in aggregate principal amount of the Issuer's Thermal Energy Facilities Revenue Bonds (Marina Energy LLC - 2001 Project), Series A (the "2001A Bonds") were issued. This Letter of Credit is in the total amount of $20,295,890.41 (Twenty Million Two Hundred Ninety-Five Thousand Eight Hundred Ninety and 41/100ths dollars) (subject to adjustment as provided below). This Letter of Credit shall be effective immediately and shall expire upon the earliest to occur of (i) September 19, 2002, unless such date has been extended in accordance with the terms of the Reimbursement Agreement and this Letter of Credit, (ii) ten business days following your receipt of written notice from us of the occurrence and continuance of an Event of Default under the Reimbursement Agreement, (iii) the date on which we receive a written and completed certificate signed by you in the form of Exhibit 5 attached hereto, and (iv) the date on which we receive a written and completed certificate signed by you in the form of Exhibit 1, Exhibit 2 or Exhibit 3 attached hereto, stating that the drawing thereunder is the final drawing under the Letter of Credit (such earliest date being the "Cancellation Date"). The aggregate amount which may be drawn under this Letter of Credit, subject to reductions in amount and reinstatement as provided below, is $20,295,890.41 (Twenty Million Two Hundred Ninety-Five Thousand Eight Hundred Ninety and 41/100ths dollars), of which the aggregate amounts set forth below may be drawn as indicated. (i) An aggregate amount not exceeding $20,000,000 (Twenty Million and 00/100ths dollars), as such amount may be reduced and restored as provided below, may be drawn in respect of payment of principal of the 2001A Bonds (or the portion of the purchase price of 2001A Bonds corresponding to principal) (the "Principal Component"). (ii) An aggregate amount not exceeding $295,890.41 (Two Hundred Ninety-Five Thousand Eight Hundred Ninety and 41/100ths dollars), as such amount may be reduced and restored as provided below, may be drawn in respect of the payment of up to 45 days' interest on the principal amount of the 2001A Bonds computed at a maximum rate of 12% per annum (or the portion of the purchase price of 2001A Bonds corresponding thereto)(the "Interest Component"). The Principal Component and the Interest Component shall be reduced effective upon our receipt of a certificate in the form of Exhibit 4 attached hereto completed in strict compliance with the terms hereof. The Principal Component and the Interest Component shall be reduced immediately following our honoring of any certificate requesting a drawing hereunder, in each case by an amount equal to the respective component of the amount specified in such certificate. The presentation of a certificate requesting a drawing hereunder, in strict compliance with the terms hereof shall be a "Drawing"; a Drawing in respect of a regularly scheduled interest payment or payment of principal of and interest on the 2001A Bonds upon scheduled or accelerated maturity shall be a "Regular Drawing"; a Drawing to pay principal of and interest on 2001A Bonds upon redemption of the 2001A Bonds in whole or in part shall be a "Redemption Drawing"; and a Drawing to pay the purchase price of 2001A Bonds in accordance with Section 3.01(a) and (b) of the Indenture shall be a "Tender Drawing". On the tenth day after a Drawing hereunder against the Interest Component (other than the amount drawn pursuant to a Redemption Drawing in respect of the payment of interest accrued on the 2001A Bonds) the amount so drawn shall be automatically restored to the Interest Component, unless you shall have received written notice from us prior to such tenth day that we have not been reimbursed for a Drawing hereunder and that we will not reinstate the Letter of Credit in the amount of such Drawing. Promptly upon our having been reimbursed by or for the account of the Obligors in respect of any Tender Drawing, together with interest, if any, owing thereon pursuant to the Reimbursement Agreement, the Principal Component and the Interest Component, respectively, shall be restored in the same proportion as the applicable Tender Drawing. Upon your telephone request, we will confirm reinstatement pursuant to this paragraph. Funds under this Letter of Credit are available to you against the appropriate certificate specified below, duly executed by you and appropriately completed. Exhibit Setting Forth Type of Drawing Form of Certificate Required - --------------- ---------------------------- Regular Drawing Exhibit 1 --------- Tender Drawing Exhibit 2 --------- Redemption Drawing Exhibit 3 --------- Drawing certificates and other certificates hereunder shall be dated the date of presentation and shall be presented on a business day (as hereinafter defined) by hand delivery at our office located at 8739 Research Drive, URP4, Charlotte, North Carolina 28262, Attention: International Division, Standby Letter of Credit Supervisor NC0742 (or at any other office in the State of North Carolina which may be designated by us by written notice delivered to you at least three Business Days prior to a date on which interest is payable on the 2001A Bonds) (the "Bank's Office"). The certificates you are required to submit to us may be submitted to us by facsimile transmission to the following number: (704) 593-7937 subsequently confirmed in writing, which you agree to send by overnight courier for next day delivery. If we receive your certificate(s) at such office, all in strict conformity with the terms and conditions of this Letter of Credit, with respect to any Drawing, at or before 11:00 a.m. (Charlotte, North Carolina time), on a business day on or before the Cancellation Date, we will honor such Drawing(s) at or before 2:00 p.m. (Charlotte, North Carolina time), on the same business day. If we receive your certificate(s) at such office, all in strict conformity with the terms and conditions of this Letter of Credit, after 11:00 a.m. (Charlotte, North Carolina time), in the case of a Drawing on any business day on or before the Cancellation Date, we will honor such certificate(s) at or before 2:00 p.m. (Charlotte, North Carolina time) on the next succeeding business day. Payment under this Letter of Credit will be made by wire transfer of Federal Funds to your account with any bank that is a member of the Federal Reserve System. All payments made by us under this Letter of Credit will be made with our own funds and not with any funds of the Obligors, their respective affiliates or the Issuer. As used herein, "business day" shall mean any day on which banks are not required or authorized by law to close in Charlotte, North Carolina or in the city in which the principal corporate trust office of the Trustee is located. This Letter of Credit is transferable in its entirety, but not in part, to any transferee who has succeeded you as Trustee under the Indenture and may be successively so transferred. Transfer of the available balance under this Letter of Credit to such transferee shall be effected by the presentation to us of this Letter of Credit accompanied by a certificate in form set forth in Exhibit 6. To the extent not inconsistent with the express terms hereof, this Letter of Credit shall be governed by, and construed in accordance with, the International Standby Practices (1998) of the Institute of International Banking Law & Practice, International Chamber of Commerce Publication No. 590 ("ISP98"). As to matters not governed by ISP98, this Letter of Credit shall be governed by and construed in accordance with the laws of the State of New York. The liability of all persons constituting the Obligors under this Agreement shall be joint and several. This Letter of Credit sets forth in full our undertaking, and such undertaking shall not in any way be modified, amended, amplified or limited by reference to any document, instrument or agreement referred to herein (including, without limitation, the 2001A Bonds and the Indenture), except only the certificates referred to herein; and any such reference shall not be deemed to incorporate herein by reference any document, instrument or agreement except for such certificates. Whenever and wherever the terms of this Letter of Credit shall refer to the purpose of a Drawing hereunder, or the provisions of any agreement or document pursuant to which such Drawing may be made hereunder, such purpose or provisions shall be conclusively determined by reference to the statements made in the certificate accompanying such Drawing. Very truly yours, FIRST UNION NATIONAL BANK By: ________________________________ Its: ________________________________ EXHIBIT 1 REGULAR DRAWING CERTIFICATE The undersigned, a duly authorized officer of COMMERCE BANK, NATIONAL ASSOCIATION (the "Trustee"), hereby certifies as follows to FIRST UNION NATIONAL BANK (the "Fronting Bank"), with reference to Irrevocable Letter of Credit No. SM418226C (the "Letter of Credit"), issued by the Fronting Bank in favor of the Trustee. Terms defined in the Letter of Credit and used but not defined herein shall have the meanings given them in the Letter of Credit. (1) The Trustee is the Trustee under the Indenture for the holders of the 2001A Bonds. (2) The respective amounts of principal of and interest on the 2001A Bonds, which do not exceed the Principal Component and Interest Component, respectively, under the Letter of Credit, which are due and payable (or which have been declared to be due and payable) and with respect to the payment of which the Trustee is presenting this Certificate, are as follows: Principal: $__________________ Interest: $__________________ (3) The respective portions of the amount of this Certificate in respect of payment of principal of and interest on the 2001A Bonds have been computed in accordance with (and this Certificate complies with) the terms and conditions of the 2001A Bonds and the Indenture. (4) Please send the payment requested hereunder by wire transfer to [insert wire transfer instructions] . [(5) This Certificate is being presented upon the [scheduled maturity of the 2001A Bonds] [accelerated maturity of the 2001A Bonds pursuant to the Indenture] and is the final amount to be drawn under the Letter of Credit in respect of principal of and interest on the 2001A Bonds. Upon the honoring of this Certificate, the Letter of Credit will expire in accordance with its terms.]** IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the _____ day of ______________________________, 20___. COMMERCE BANK, NATIONAL ASSOCIATION, as Trustee By: ___________________________________ Name: _____________________________ Title: ______________________________ _________________ ** To be used upon scheduled or accelerated maturity of the 2001A Bonds. EXHIBIT 2 TENDER DRAWING CERTIFICATE The undersigned, a duly authorized officer of COMMERCE BANK, NATIONAL ASSOCIATION (the "Trustee"), hereby certifies as follows to FIRST UNION NATIONAL BANK (the "Fronting Bank"), with reference to Irrevocable Letter of Credit No. SM418226C (the "Letter of Credit"), issued by the Fronting Bank in favor of the Trustee. Terms defined in the Letter of Credit and used but not defined herein shall have the meanings given them in the Letter of Credit. (1) The Trustee is the Trustee under the Indenture for the holders of the 2001A Bonds. (2) The amount of the Tender Drawing under this Certificate from the Principal Component is $___________________. (3) The amount of the Tender Drawing under this Certificate from the Interest Component is $____________________. (4) The total amount of the Tender Drawings under this Certificate is $_______________. (5) The respective portions of the total amount of this Certificate have been computed in accordance with (and this Certificate complies with) the terms and conditions of the 2001A Bonds and the Indenture. (6) Please send the payment requested hereunder by wire transfer to [insert wire transfer instructions]. [(7) This Certificate is being presented upon the occurrence of a mandatory purchase under the Indenture and is the final amount to be drawn under the Letter of Credit. Upon the honoring of this Certificate, the Letter of Credit will expire in accordance with its terms.] *** IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the_____ day of _______________, 20____________ COMMERCE BANK, NATIONAL ASSOCIATION, as Trustee By: ___________________________________ Name: _____________________________ Title: ______________________________ __________________ *** To be included if Certificate is being presented in connection with a mandatory purchase of the 2001A Bonds under of the Indenture. EXHIBIT 3 REDEMPTION DRAWING CERTIFICATE The undersigned, a duly authorized officer of COMMERCE BANK, NATIONAL ASSOCIATION (the "Trustee"), hereby certifies as follows to FIRST UNION NATIONAL BANK (the "Fronting Bank"), with reference to Irrevocable Letter of Credit No. SM418226C (the "Letter of Credit"), issued by the Fronting Bank in favor of the Trustee. Terms defined in the Letter of Credit and used but not defined herein shall have the meanings given them in the Letter of Credit. (1) The Trustee is the Trustee under the Indenture for the holders of the 2001A Bonds. (2) The amount of the Redemption Drawing under this Certificate from the Principal Component is $___________________. (3) The amount of the Redemption Drawing under this Certificate from the Interest Component is $___________________. (4) The total amount of the Redemption Drawing under this Certificate is $______________. (5) The respective portions of the total amount of this Certificate have been computed in accordance with (and this Certificate complies with) the terms and conditions of the 2001A Bonds and the Indenture. (6) Please send the payment requested hereunder by wire transfer to (insert wire transfer instructions). [(7) This Certificate is the final Drawing under the Letter of Credit and, upon the honoring of such Certificate, the Letter of Credit will expire in accordance with its terms.]*** IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the_____ day of _______________, 20____________ COMMERCE BANK, NATIONAL ASSOCIATION, as Trustee By: ___________________________________ Name: _____________________________ Title: ______________________________ _____________________ *** To be used upon optional or mandatory redemption of the 2001A Bonds in full. EXHIBIT 4 REDUCTION CERTIFICATE The undersigned, a duly authorized officer of COMMERCE BANK, NATIONAL ASSOCIATION (the "Trustee"), hereby certifies as follows to FIRST UNION NATIONAL BANK (the "Fronting Bank"), with reference to Irrevocable Letter of Credit No. SM418226C (the "Letter of Credit"), issued by the Fronting Bank in favor of the Trustee. Terms defined in the Letter of Credit and used but not defined herein shall have the meanings given them in the Letter of Credit. (1) The Trustee is the Trustee under the Indenture for the holders of the 2001A Bonds. (2) The aggregate principal amount of the 2001A Bonds outstanding (as defined in the Indenture) has been reduced to $----------. (3) The Principal Component is hereby correspondingly reduced to $_________________. (4) The Interest Component is hereby reduced to $_____________ to reflect the amount of interest allocable to the reduced amount of principal set forth in paragraph (2) hereof. IN WITNESS WHEREOF, the Trustee has executed this Certificate as of the _______ day of _____________, 20___. COMMERCE BANK, NATIONAL ASSOCIATION, as Trustee By: ___________________________________ Name: _____________________________ Title: ______________________________ EXHIBIT 5 TERMINATION CERTIFICATE The undersigned, a duly authorized officer of COMMERCE BANK, NATIONAL ASSOCIATION (the "Trustee"), hereby certifies to FIRST UNION NATIONAL BANK (the "Fronting Bank"), with reference to Irrevocable Letter of Credit No. SM418226C (the "Letter of Credit", the terms defined therein and not otherwise defined herein being used herein as therein defined) issued by the Fronting Bank in favor of the Trustee, as follows: (1) The Trustee is the Trustee under the Indenture for the holders of the 2001A Bonds. (2) The conditions to termination of the Letter of Credit set forth in the Indenture have been satisfied.***** IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the _______ day of __________, 20___. COMMERCE BANK, NATIONAL ASSOCIATION, as Trustee By: ___________________________________ Name: _____________________________ Title: ______________________________ ____________________ ***** To be used upon cancellation due to the Trustee's acceptance of an Alternate Credit Facility pursuant to Section 6.03 of the Indenture or upon cancellation pursuant to Section 6.02 of the Indenture. EXHIBIT 6 INSTRUCTIONS TO TRANSFER _______________, 20___ Re: First Union National Bank Irrevocable Letter of Credit No. SM418226C Gentlemen: The undersigned, as Trustee under the Trust Indenture, dated as of September ____, 2001, between the New Jersey Economic Development Authority and Commerce Bank, National Association, the initial trustee, is named as beneficiary in the Letter of Credit referred to above (the "Letter of Credit"). The Transferee named below has succeeded the undersigned as Trustee under such Indenture. ------------------------------ (Name of Transferee) ------------------------------ (Address) Therefore, for value received, the undersigned hereby irrevocably instructs you to transfer to such Transferee all rights of the undersigned to draw under the Letter of Credit. By this transfer, all rights of the undersigned in the Letter of Credit are transferred to such Transferee and such Transferee shall hereafter have the sole rights as beneficiary under the Letter of Credit; provided, however, that no rights shall be deemed to have been transferred to such Transferee until such transfer complies with the requirements of the Letter of Credit pertaining to transfers. IN WITNESS WHEREOF, the undersigned has executed and delivered this Certificate as of the ___ day of _________________, 20___. COMMERCE BANK, NATIONAL ASSOCIATION, as Trustee By: ___________________________________ Name: _____________________________ Title: ______________________________ EXHIBIT A-2 FORM OF 2001B LETTER OF CREDIT IRREVOCABLE TRANSFERABLE LETTER OF CREDIT NO. SM418227C Commerce Bank, National Association, not individually but solely as Trustee 336 Route 70 East Marlton, New Jersey 08053 Attention: Corporate Trust Department Dear Sir or Madam: We hereby issue our Irrevocable Letter of Credit No. SM418227C, at the request and for the account of South Jersey Industries, Inc. and Marina Energy LLC (collectively, the "Obligors"), pursuant to that certain Letter of Credit and Reimbursement Agreement, dated as of September 20, 2001, among the Obligors, certain banks and First Union National Bank, as Administrative Agent and Fronting Bank (as amended, supplemented or otherwise modified from time to time, the "Reimbursement Agreement"), in your favor, as trustee (the "Trustee") under the Trust Indenture, dated as of September 1, 2001 (the "Indenture"), between you and the New Jersey Economic Development Authority (the "Issuer"), pursuant to which $19,000,000 in aggregate principal amount of the Issuer's Thermal Energy Facilities Federally Taxable Revenue (Marina Energy LLC - 2001 Project), Series B (the "2001B Bonds") were issued. This Letter of Credit is in the total amount of $19,351,369.87 (Nineteen Million Three Hundred Fifty-One Thousand Three Hundred Sixty-Nine and 87/100ths dollars) (subject to adjustment as provided below). This Letter of Credit shall be effective immediately and shall expire upon the earliest to occur of (i) September 19, 2002, unless such date has been extended in accordance with the terms of the Reimbursement Agreement and this Letter of Credit, (ii) ten business days following your receipt of written notice from us of the occurrence and continuance of an Event of Default under the Reimbursement Agreement, (iii) the date on which we receive a written and completed certificate signed by you in the form of Exhibit 5 attached hereto, and (iv) the date on which we receive a written and completed certificate signed by you in the form of Exhibit 1, Exhibit 2 or Exhibit 3 attached hereto, stating that the drawing thereunder is the final drawing under the Letter of Credit (such earliest date being the "Cancellation Date"). The aggregate amount which may be drawn under this Letter of Credit, subject to reductions in amount and reinstatement as provided below, is $19,351,369.87 (Nineteen Million Three Hundred Fifty-One Thousand Three Hundred Sixty-Nine and 87/100ths dollars), of which the aggregate amounts set forth below may be drawn as indicated. (i) An aggregate amount not exceeding $19,000,000 (Nineteen Million and 00/100ths dollars), as such amount may be reduced and restored as provided below, may be drawn in respect of payment of principal of the 2001B Bonds (or the portion of the purchase price of 2001B Bonds corresponding to principal) (the "Principal Component"). (ii) An aggregate amount not exceeding $351,369.87 (Three Hundred Fifty-One Thousand Three Hundred Sixty-Nine and 87/100ths dollars), as such amount may be reduced and restored as provided below, may be drawn in respect of the payment of up to 45 days' interest on the principal amount of the 2001B Bonds computed at a maximum rate of 15% per annum (or the portion of the purchase price of 2001B Bonds corresponding thereto) (the "Interest Component"). The Principal Component and the Interest Component shall be reduced effective upon our receipt of a certificate in the form of Exhibit 4 attached hereto completed in strict compliance with the terms hereof. The Principal Component and the Interest Component shall be reduced immediately following our honoring of any certificate requesting a drawing hereunder, in each case by an amount equal to the respective component of the amount specified in such certificate. The presentation of a certificate requesting a drawing hereunder, in strict compliance with the terms hereof shall be a "Drawing"; a Drawing in respect of a regularly scheduled interest payment or payment of principal of and interest on the 2001B Bonds upon scheduled or accelerated maturity shall be a "Regular Drawing"; a Drawing to pay principal of and interest on 2001B Bonds upon redemption of the 2001B Bonds in whole or in part shall be a "Redemption Drawing"; and a Drawing to pay the purchase price of 2001B Bonds in accordance with Section 3.01(a) and (b) of the Indenture shall be a "Tender Drawing". On the tenth day after a Drawing hereunder against the Interest Component (other than the amount drawn pursuant to a Redemption Drawing in respect of the payment of interest accrued on the 2001B Bonds) the amount so drawn shall be automatically restored to the Interest Component, unless you shall have received written notice from us prior to such tenth day that we have not been reimbursed for a Drawing hereunder and that we will not reinstate the Letter of Credit in the amount of such Drawing. Promptly upon our having been reimbursed by or for the account of the Obligors in respect of any Tender Drawing, together with interest, if any, owing thereon pursuant to the Reimbursement Agreement, the Principal Component and the Interest Component, respectively, shall be restored in the same proportion as the applicable Tender Drawing. Upon your telephone request, we will confirm reinstatement pursuant to this paragraph. Funds under this Letter of Credit are available to you against the appropriate certificate specified below, duly executed by you and appropriately completed. Exhibit Setting Forth Type of Drawing Form of Certificate Required - --------------- ---------------------------- Regular Drawing Exhibit 1 --------- Tender Drawing Exhibit 2 --------- Redemption Drawing Exhibit 3 --------- Drawing certificates and other certificates hereunder shall be dated the date of presentation and shall be presented on a business day (as hereinafter defined) by hand delivery at our office located at 8739 Research Drive, URP4, Charlotte, North Carolina 28262, Attention: International Division, Standby Letter of Credit Supervisor NC0742 (or at any other office in the State of North Carolina which may be designated by us by written notice delivered to you at least three Business Days prior to a date on which interest is payable on the 2001B Bonds) (the "Bank's Office"). The certificates you are required to submit to us may be submitted to us by facsimile transmission to the following number: (704) 593-7937 subsequently confirmed in writing, which you agree to send by overnight courier for next day delivery. If we receive your certificate(s) at such office, all in strict conformity with the terms and conditions of this Letter of Credit, with respect to any Drawing, at or before 11:00 a.m. (Charlotte, North Carolina time), on a business day on or before the Cancellation Date, we will honor such Drawing(s) at or before 2:00 p.m. (Charlotte, North Carolina time), on the same business day. If we receive your certificate(s) at such office, all in strict conformity with the terms and conditions of this Letter of Credit, after 11:00 a.m. (Charlotte, North Carolina time), in the case of a Drawing on any business day on or before the Cancellation Date, we will honor such certificate(s) at or before 2:00 p.m. (Charlotte, North Carolina time) on the next succeeding business day. Payment under this Letter of Credit will be made by wire transfer of Federal Funds to your account with any bank that is a member of the Federal Reserve System. All payments made by us under this Letter of Credit will be made with our own funds and not with any funds of the Obligors, their respective affiliates or the Issuer. As used herein, "business day" shall mean any day on which banks are not required or authorized by law to close in Charlotte, North Carolina or in the city in which the principal corporate trust office of the Trustee is located. This Letter of Credit is transferable in its entirety, but not in part, to any transferee who has succeeded you as Trustee under the Indenture and may be successively so transferred. Transfer of the available balance under this Letter of Credit to such transferee shall be effected by the presentation to us of this Letter of Credit accompanied by a certificate in form set forth in Exhibit 6. To the extent not inconsistent with the express terms hereof, this Letter of Credit shall be governed by, and construed in accordance with, the International Standby Practices (1998) of the Institute of International Banking Law & Practice, International Chamber of Commerce Publication No. 590 ("ISP98"). As to matters not governed by ISP98, this Letter of Credit shall be governed by and construed in accordance with the laws of the State of New York. The liability of all persons constituting the Obligors under this Agreement shall be joint and several. This Letter of Credit sets forth in full our undertaking, and such undertaking shall not in any way be modified, amended, amplified or limited by reference to any document, instrument or agreement referred to herein (including, without limitation, the 2001B Bonds and the Indenture), except only the certificates referred to herein; and any such reference shall not be deemed to incorporate herein by reference any document, instrument or agreement except for such certificates. Whenever and wherever the terms of this Letter of Credit shall refer to the purpose of a Drawing hereunder, or the provisions of any agreement or document pursuant to which such Drawing may be made hereunder, such purpose or provisions shall be conclusively determined by reference to the statements made in the certificate accompanying such Drawing. Very truly yours, FIRST UNION NATIONAL BANK By: ________________________________ Its: ________________________________ EXHIBIT 1 REGULAR DRAWING CERTIFICATE The undersigned, a duly authorized officer of COMMERCE BANK, NATIONAL ASSOCIATION (the "Trustee"), hereby certifies as follows to FIRST UNION NATIONAL BANK (the "Fronting Bank"), with reference to Irrevocable Letter of Credit No. SM418227C (the "Letter of Credit"), issued by the Fronting Bank in favor of the Trustee. Terms defined in the Letter of Credit and used but not defined herein shall have the meanings given them in the Letter of Credit. (1) The Trustee is the Trustee under the Indenture for the holders of the 2001B Bonds. (2) The respective amounts of principal of and interest on the 2001B Bonds, which do not exceed the Principal Component and Interest Component, respectively, under the Letter of Credit, which are due and payable (or which have been declared to be due and payable) and with respect to the payment of which the Trustee is presenting this Certificate, are as follows: Principal: $__________________ Interest: $__________________ (3) The respective portions of the amount of this Certificate in respect of payment of principal of and interest on the 2001B Bonds have been computed in accordance with (and this Certificate complies with) the terms and conditions of the 2001B Bonds and the Indenture. (4) Please send the payment requested hereunder by wire transfer to [insert wire transfer instructions] . [(5) This Certificate is being presented upon the [scheduled maturity of the 2001B Bonds] [accelerated maturity of the 2001B Bonds pursuant to the Indenture] and is the final amount to be drawn under the Letter of Credit in respect of principal of and interest on the 2001B Bonds. Upon the honoring of this Certificate, the Letter of Credit will expire in accordance with its terms.]** IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the _____ day of ______________________________, 20___. COMMERCE BANK, NATIONAL ASSOCIATION, as Trustee By: ___________________________________ Name: _____________________________ Title: ______________________________ __________________ ** To be used upon scheduled or accelerated maturity of the 2001B Bonds. EXHIBIT 2 TENDER DRAWING CERTIFICATE The undersigned, a duly authorized officer of COMMERCE BANK, NATIONAL ASSOCIATION (the "Trustee"), hereby certifies as follows to FIRST UNION NATIONAL BANK (the "Fronting Bank"), with reference to Irrevocable Letter of Credit No. SM418227C (the "Letter of Credit"), issued by the Fronting Bank in favor of the Trustee. Terms defined in the Letter of Credit and used but not defined herein shall have the meanings given them in the Letter of Credit. (1) The Trustee is the Trustee under the Indenture for the holders of the 2001B Bonds. (2) The amount of the Tender Drawing under this Certificate from the Principal Component is $___________________. (3) The amount of the Tender Drawing under this Certificate from the Interest Component is $____________________. (4) The total amount of the Tender Drawings under this Certificate is $_______________. (5) The respective portions of the total amount of this Certificate have been computed in accordance with (and this Certificate complies with) the terms and conditions of the 2001B Bonds and the Indenture. (6) Please send the payment requested hereunder by wire transfer to [insert wire transfer instructions]. [(7) This Certificate is being presented upon the occurrence of a mandatory purchase under either Section 5.01(b)(ii) or (iii) of the Indenture and is the final amount to be drawn under the Letter of Credit. Upon the honoring of this Certificate, the Letter of Credit will expire in accordance with its terms.]*** IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the ____________ day of _______________, 20___. COMMERCE BANK, NATIONAL ASSOCIATION, as Trustee By: ___________________________________ Name: _____________________________ Title: ______________________________ ____________________ *** To be included if Certificate is being presented in connection with a mandatory purchase of the 2001B Bonds under either Section 5.01(b)(ii) or (iii) of the Indenture EXHIBIT 3 REDEMPTION DRAWING CERTIFICATE The undersigned, a duly authorized officer of COMMERCE BANK, NATIONAL ASSOCIATION (the "Trustee"), hereby certifies as follows to FIRST UNION NATIONAL BANK (the "Fronting Bank"), with reference to Irrevocable Letter of Credit No. SM418227C (the "Letter of Credit"), issued by the Fronting Bank in favor of the Trustee. Terms defined in the Letter of Credit and used but not defined herein shall have the meanings given them in the Letter of Credit. (1) The Trustee is the Trustee under the Indenture for the holders of the 2001B Bonds. (2) The amount of the Redemption Drawing under this Certificate from the Principal Component is $___________________. (3) The amount of the Redemption Drawing under this Certificate from the Interest Component is $___________________. (4) The total amount of the Redemption Drawing under this Certificate is $______________. (5) The respective portions of the total amount of this Certificate have been computed in accordance with (and this Certificate complies with) the terms and conditions of the 2001B Bonds and the Indenture. (6) Please send the payment requested hereunder by wire transfer to (insert wire transfer instructions). [(7) This Certificate is the final Drawing under the Letter of Credit and, upon the honoring of such Certificate, the Letter of Credit will expire in accordance with its terms.]**** IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the _____ day of ______________________________, 20___. COMMERCE BANK, NATIONAL ASSOCIATION, as Trustee By: ___________________________________ Name: _____________________________ Title: ______________________________ ______________________ **** To be used upon optional or mandatory redemption of the 2001B Bond in full. EXHIBIT 4 REDUCTION CERTIFICATE The undersigned, a duly authorized officer of COMMERCE BANK, NATIONAL ASSOCIATION (the "Trustee"), hereby certifies as follows to FIRST UNION NATIONAL BANK (the "Fronting Bank"), with reference to Irrevocable Letter of Credit No. SM418227C (the "Letter of Credit"), issued by the Fronting Bank in favor of the Trustee. Terms defined in the Letter of Credit and used but not defined herein shall have the meanings given them in the Letter of Credit. (1) The Trustee is the Trustee under the Indenture for the holders of the 2001B Bonds. (2) The aggregate principal amount of the 2001B Bonds outstanding (as defined in the Indenture) has been reduced to $______________. (3) The Principal Component is hereby correspondingly reduced to $_________________. (4) The Interest Component is hereby reduced to $_____________ to reflect the amount of interest allocable to the reduced amount of principal set forth in paragraph (2) hereof. IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the _____ day of ______________________________, 20___. COMMERCE BANK, NATIONAL ASSOCIATION, as Trustee By: ___________________________________ Name: _____________________________ Title: ______________________________ EXHIBIT 5 TERMINATION CERTIFICATE The undersigned, a duly authorized officer of COMMERCE BANK, NATIONAL ASSOCIATION (the "Trustee"), hereby certifies to FIRST UNION NATIONAL BANK (the "Fronting Bank"), with reference to Irrevocable Letter of Credit No. SM418227C (the "Letter of Credit", the terms defined therein and not otherwise defined herein being used herein as therein defined) issued by the Fronting Bank in favor of the Trustee, as follows: (1) The Trustee is the Trustee under the Indenture for the holders of the 2001B Bonds. (2) The conditions to termination of the Letter of Credit set forth in the Indenture have been satisfied.***** IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the _____ day of ______________________________, 20___. COMMERCE BANK, NATIONAL ASSOCIATION, as Trustee By: ___________________________________ Name: _____________________________ Title: ______________________________ _____________________ ***** To be used upon cancellation due to the Trustee's acceptance of an Alternate Credit Facility pursuant to Section 6.03 of the Indenture or upon cancellation pursuant to Section 6.02 of the Indenture. EXHIBIT 6 INSTRUCTIONS TO TRANSFER Re: First Union National Bank Irrevocable Letter of Credit No. SM418227C Gentlemen: The undersigned, as Trustee under the Trust Indenture, dated as of September ___, 2001, between the New Jersey Economic Development Authority and Commerce Bank, National Association, the initial trustee, is named as beneficiary in the Letter of Credit referred to above (the "Letter of Credit"). The Transferee named below has succeeded the undersigned as Trustee under such Indenture. ------------------------------ (Name of Transferee) ------------------------------ (Address) Therefore, for value received, the undersigned hereby irrevocably instructs you to transfer to such Transferee all rights of the undersigned to draw under the Letter of Credit. By this transfer, all rights of the undersigned in the Letter of Credit are transferred to such Transferee and such Transferee shall hereafter have the sole rights as beneficiary under the Letter of Credit; provided, however, that no rights shall be deemed to have been transferred to such Transferee until such transfer complies with the requirements of the Letter of Credit pertaining to transfers. IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the _____ day of __________________, 20___. COMMERCE BANK, NATIONAL ASSOCIATION, as Trustee By: ___________________________________ Name: _____________________________ Title: ______________________________ EXHIBIT B FORM OF ASSIGNMENT AND ACCEPTANCE Dated , 20___ Reference is made to the Amended and Restated Letter of Credit and Reimbursement Agreement, dated as of September 19, 2002 (said Agreement, as it may hereafter be amended or otherwise modified from time to time, being the "Reimbursement Agreement"; unless otherwise defined herein terms defined in the Reimbursement Agreement are used herein with the same meaning), among South Jersey Industries, Inc. and Marina Energy LLC (collectively, the "Obligors"), Wachovia Bank, National Association, as Fronting Bank (the "Fronting Bank") and Administrative Agent (the "Adminstrative Agent"), and the Banks named therein and from time to time parties thereto, relating to the [Name of Bonds]. Pursuant to the Reimbursement Agreement, ______________ (the "Assignor") has purchased a participation from the Fronting Bank in and to the Letters of Credit and the Fronting Bank's obligations and rights, and the amount of each drawing paid by the Fronting Bank, thereunder. The Assignor and (the "Assignee") agree as follows: 1. The Assignor hereby sells and assigns, without recourse, to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, without recourse to the Assignor and on the Effective Date (as hereinafter defined), a portion of the Assignor's rights and obligations under the Reimbursement Agreement (the "Assigned Interest"), including, without limitation, the participation purchased by the Assignor pursuant to Section 2.20 of the Reimbursement Agreement in respect of the Letters of Credit, and all demand loans and Tender Advances owing to the Assignor pursuant to the Reimbursement Agreement. Such Assigned Interest represents the percentage interest specified in Section 1(b) of Schedule 1 attached hereto of all outstanding rights and obligations of the Banks under the Reimbursement Agreement, and, after giving effect to such sale and assignment, the Assignee's and Assignor's Percentages will be as set forth in Sections 1(b) and 1(c), respectively, of Schedule 1 attached hereto. The effective date of this sale and assignment shall be the date specified in Section 2 of Schedule 1 attached hereto (the "Effective Date"). 2. On the Effective Date, the Assignee will pay to the Assignor, in same day funds, at such address and account as the Assignor shall advise the Assignee, an amount equal to the product of (i) the aggregate amount of unreimbursed Letters of Credit payments, Tender Advances and demand loans outstanding times (ii) the Assigned Interest. From and after the Effective Date, the Assignor agrees that the Assignee shall be entitled to all rights, powers and privileges of the Assignor under the Reimbursement Agreement to the extent of the Assigned Interest, including, without limitation, (A) the right to receive all payments in respect of the Assigned Interest for the period from and after the Effective Date, whether on account of reimbursements, principal, interest, fees, indemnities in respect of claims arising after the Effective Date, increased costs, additional amounts or otherwise; (B) the right to vote and to instruct the Administrative Agent and the Fronting Bank under the Reimbursement Agreement based on the Assigned Interest; (C) the right to set-off and to appropriate and apply deposits of the Obligors as set forth in the Reimbursement Agreement; and (D) the right to receive notices, requests, demands and other communications. The Assignor agrees that it will promptly remit to the Assignee any amount received by it in respect of the Assigned Interest (whether from the Obligors, the Administrative Agent or otherwise) in the same funds in which such amount is received by the Assignor. 3. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Reimbursement Agreement or the Related Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Reimbursement Agreement, the Related Documents or any other instrument or document furnished pursuant thereto; [and] (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Obligors or the performance or observance by the Obligors of any of their respective obligations under the Reimbursement Agreement, the Related Documents or any other instrument or document furnished pursuant thereto[; and (iv) confirms that it has paid the processing and recordation fee referred to in Section 9.09(a) of the Reimbursement Agreement]. 4. The Assignee (i) confirms that it has received a copy of the Reimbursement Agreement, together with copies of the financial statements referred to in Section 4.01(e) thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Fronting Bank, the Assignor or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Reimbursement Agreement and the Related Documents; (iii) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Reimbursement Agreement as are delegated to them by the terms thereof, together with such powers as are reasonably incidental thereto; [and] (iv) agrees that it will perform in accordance with its terms all of the obligations which by the terms of the Reimbursement Agreement are required to be performed by it as a Bank[; and (v) confirms that it has paid the processing and recordation fee referred to in Section 9.09(a) of the Reimbursement Agreement]. 5. Following the execution of this Assignment and Acceptance, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. Upon such acceptance and recording and receipt of the consent of the Obligors and the Fronting Bank to the extent required pursuant to Section 9.09 of the Reimbursement Agreement (which shall be evidenced by the Obligors' and the Fronting Bank's execution of this Assignment and Acceptance on the appropriate space on Schedule 1 attached hereto), as of the Effective Date, (i) the Assignee shall be a party to the Reimbursement Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Bank thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Reimbursement Agreement. 6. Upon such acceptance, recording and consent, from and after the Effective Date, the Administrative Agent shall make all payments under the Reimbursement Agreement in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and fees with respect thereto) to the Assignee at its address set forth on Schedule 1 hereto. The Assignor and Assignee shall make all appropriate adjustments in payments under the Reimbursement Agreement for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York. 8. This Assignment and Acceptance may be executed in counterparts by the parties hereto, each of which counterpart when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto. SCHEDULE 1 TO ASSIGNMENT AND ACCEPTANCE Dated ____________, 20___ Section 1. (a) Assignor's Participation Percentage (immediately prior to the effectiveness of this Assignment and Acceptance)1 .............% (b) Assignee's Participation Percentage2 (upon the effectiveness of this Assignment and Acceptance) .............% (c) Assignor's Participation Percentage (upon the effectiveness of this Assignment and Acceptance) .............% Section 2. Effective Date:3 ____________________, ____ [NAME OF ASSIGNOR] By:_____________________________________ Name: ______________________________ Title: ______________________________ _______________________ 1 All percentages to be specified to no more than 8 decimal places. 2 The sum of the Percentages set forth in Section 1(b) and 1 (c) shall equal the percentage set forth in Section (a). 3 Such date shall be at least 5 Business Days after the execution of this Assignment and Acceptance. [NAME OF ASSIGNEE] By:_______________________________________ Title:_________________________________ [Address] Telecopier No:____________________________ Attention:________________________________ The Assignee's Applicable Booking Office is as follows: [SAME] CONSENTED to this ____ day of ____________________, 20____ WACHOVIA BANK, NATIONAL ASSOCIATION, as Fronting Bank By:___________________________ Name:______________________ Title:_____________________ SOUTH JERSEY INDUSTRIES, INC.4 By:___________________________ Name:______________________ Title:_____________________ MARINA ENERGY LLC4 By:___________________________ Name:______________________ Title:_____________________ __________________________ 4 The consent of the company is not required upon the occurrence and during the continuance of an Event of Default. ACCEPTED this __________ day of ____________________, 20 WACHOVIA BANK, NATIONAL ASSOCIATION, as Administrative Agent By:___________________________ Name:______________________ Title:_____________________ EXHIBIT C FORM OF NOTICE OF CONVERSION [Date] Wachovia Bank, National Association, as Administrative Agent for the Banks parties to the Letter of Credit and Reimbursement Agreement referred to below Attention:_____________________________ Gentlemen: The undersigned, MARINA ENERGY LLC, on its own behalf and on behalf of SOUTH JERSEY INDUSTRIES, INC., refers to the Amended and Restated Letter of Credit and Reimbursement Agreement, dated as of September 19, 2002 (as amended, modified or supplemented from time to time, the "Reimbursement Agreement", the terms defined therein being used herein as therein defined), among the undersigned, Wachovia Bank, National Association and the banks parties thereto, and hereby gives you notice, irrevocably, pursuant to Section 2.08 of the Reimbursement Agreement that the undersigned hereby requests a Conversion under the Reimbursement Agreement, and in that connection sets forth below the information relating to such Conversion (the "Proposed Conversion") as required by Section 2.08 of the Reimbursement Agreement: (i) The Business Day of the Proposed Conversion is ___________, _____ (ii) The Type of Advances comprising the Proposed Conversion is [Base Rate Advances] [Eurodollar Rate Advances). (iii) The aggregate amount of the Proposed Conversion is $ ____________ (iv) The Type of Advances to which such Advances are proposed to be Converted is [Base Rate Advances] [Eurodollar Rate Advances]. (v) [The Interest Period for each Eurodollar Rate Advance made as part of the Proposed Conversion is _____ month(s).]1 In connection with the Proposed Conversion, the undersigned hereby certifies that no event has occurred and is continuing, or would result from such Proposed Conversion or from the application of the proceeds there from, which constitutes an Event of Default or a Default. Very truly yours, MARINA ENERGY LLC By:_____________________________ Name:________________________ Title:_______________________ _____________ 1 Delete for Base Rate Advances EXHIBIT D FORM OF OPINION OF COUNSEL TO THE OBLIGORS September 19 2002 To the Banks party to the within-mentioned Reimbursement Agreement and to Wachovia Bank, National Association, as Fronting Bank and Administrative Agent under such Reimbursement Agreement Ladies and Gentlemen: We are counsel to South Jersey Industries, Inc. ("South Jersey") and Marina Energy LLC ("Marina Energy" and collectively with South Jersey, the "Obligors"), and have acted as counsel to the Obligors in connection with the preparation, execution and delivery of the Amended and Restated Letter of Credit and Reimbursement Agreement dated as of September 19, 2002 among the Obligors, the participating banks named therein and Wachovia Bank, National Association, as Fronting Bank and Administrative Agent (the "Reimbursement Agreement"; unless otherwise defined herein, the terms defined therein being used herein as therein defined). In such capacity, we have examined, among other things, (i) the Reimbursement Agreement, the 2001A Letter of Credit, the 2001B Letter of Credit and the other Related Documents, (ii) the corporate proceedings of the Obligors for the execution and delivery of the Reimbursement Agreement and (iii) such other documents, and have satisfied ourselves as to such other matters, as we have deemed necessary in order to enable us to render this opinion. In our examination of the documents referred to above, we have assumed the execution of such documents by the parties thereto (other than their execution by the Obligors), the authenticity of all documents submitted to me as originals and the conformity to the original documents of all documents submitted to us as certified or photostatic copies. As to any facts material to our opinion, we have, when relevant facts were not independently established, relied upon the aforesaid documents and papers. Based upon the foregoing, we are of the opinion that: 1. South Jersey is a corporation duly incorporated, validly existing and in good standing under the laws of the State of New Jersey and each other state in which the ownership of its properties or the conduct of its business makes such qualification necessary except where the failure to be so qualified would not have a Material Adverse Effect, and has all corporate powers and, except as disclosed under the Reimbursement Agreement, all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 2. Marina Energy is a limited liability company duly and validly existing and in good standing under the laws of the State of New Jersey and each other state in which the ownership of its properties or the conduct of its business makes such qualification necessary except where the failure to be so qualified would not have a Material Adverse Effect, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 3. The Reimbursement Agreement and the Related Documents to which each is a party are legal, valid and binding obligations of the Obligors, enforceable against the Obligors in accordance with their respective terms, except as limited (a) by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting the enforcement of creditors' rights generally, (b) by the application of general equitable principles (regardless of whether enforceability is considered in a proceeding in equity or at law), (c) by an implied covenant of good faith and fair dealing and (d) by principles of public policy insofar as the indemnification provisions of the Reimbursement Agreement are concerned. 4. The execution, delivery and performance by the Obligors of the Reimbursement Agreement and each Related Document to which each is a party are within the Obligors' respective corporate powers, have been duly authorized by all necessary corporate action on the part of the Obligors and did not, do not, and will not, require the consent or approval of South Jersey shareholders, or any trustee or holder of any Indebtedness or other obligation of the Obligors, other than such consents and approvals as have been, or on or before the Closing Date, will have been, duly obtained, given or accomplished. 5. Neither the execution, delivery or performance by the Obligors of the Reimbursement Agreement or any Related Document to which each is a party nor the consummation by the Obligors of the transactions contemplated thereby, nor compliance by the Obligors with the provisions thereof, conflicts or will conflict with, or results or will result in a breach or contravention of any of the provisions of South Jersey's charter or Code of Regulations, Marina Energy's Articles of Organization or operating agreement or any Applicable Law of the United States, the State of New Jersey, the State of New York, or any indenture, mortgage, lease or any other agreement or instrument to which it or any of its Affiliates is party or by which its property or the property of any of its Affiliates is bound, or results or will result in the creation or imposition of any Lien (other than liens expressly permitted by the Reimbursement Agreement) upon any of its property or the property of any of its Affiliates. There is no provision of South Jersey's charter or Code of Regulations, Marina Energy's Articles of Organization or operating agreement or any Applicable Law of the State of New Jersey, or any such indenture, mortgage, lease or other agreement or instrument that materially adversely affects, or in the future is likely to materially adversely affect, the business, operations, affairs, condition, properties or assets of the Obligors, or their ability to perform their respective obligations under the Reimbursement Agreement or any Related Document to which they are a party. 6. No Governmental Action, or any other Applicable Law related to energy or nuclear matters, public utilities, the environment or health and safety matters is or will be required in connection with the execution, delivery or performance by the Obligors of, or the consummation by the Obligors of the transactions contemplated by, the Reimbursement Agreement or any Related Document to which each is a party, except such Governmental Actions (i) as have been duly obtained, given or accomplished or (ii) as may be required by Applicable Law not now in effect. None of the Governmental Actions referred to in clause (i) of the first sentence of this Paragraph 5 is the subject of appeal or reconsideration or other review, and the time in which to make an appeal or request the review or reconsideration of any such Governmental Action has expired. 7. Assuming that the Administrative Agent holds the Pledged Bonds as provided in the Reimbursement Agreement, the Reimbursement Agreement creates a valid and perfected security interest in the Pledged Bonds. 8. To the best of our knowledge, there is no pending or threatened action, investigation or proceeding before any court, governmental agency or arbitrator against or affecting the Obligors or any of their Subsidiaries which (i) purports to affect the legality, validity or enforceability of the Reimbursement Agreement or any Related Document or (ii) may have a Material Adverse Effect or a material adverse effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Obligors or any of their Subsidiaries, taken as a whole, except (with respect to this clause (ii) only) as is disclosed in the Official Statement. 9. We believe that a New York court would give effect to any provision of the Reimbursement Agreement or the Related Documents that states that such document is to be construed in accordance with New York law. The opinion set forth herein is rendered only to you, and is solely for your benefit, in connection with the above transaction. The opinion set forth herein may not be relied upon by you for any other purpose, or relied upon by any other person for any purpose, without my prior written consent. Our consent is specifically given to Parker, Poe, Adams & Bernstein L.L.P. in connection with their opinions to you of even date. Respectfully submitted, EXHIBIT E FORM OF AMENDMENT TO THE 2001A LETTER OF CREDIT AMENDMENT NUMBER ONE TO IRREVOCABLE LETTER OF CREDIT NO. SM418226C September 19, 2002 Commerce Bank, National Association, not individually but solely as Trustee 336 Route 70 East Marlton, New Jersey 08053 Attention: Corporate Trust Department Ladies and Gentlemen: In connection with our Irrevocable Letter of Credit No. SM418226C, dated September 20, 2001 (the "Letter of Credit"), previously issued by us at the request and for the account of South Jersey Industries, Inc. and Marina Energy LLC (collectively, the "Obligors"), and established in your favor, as trustee (the "Trustee") under the Trust Indenture, dated as of September 1, 2001 (the "Indenture"), between you and the New Jersey Economic Development Authority (the "Issuer") pursuant to which $20,000,000 in aggregate principal amount of the Issuer's Thermal Energy Facilities Revenue Bonds (Marina Energy LLC - 2001 Project), Series A were issued, we hereby amend the Letter of Credit as follows: 1. All references to "First Union National Bank" shall mean "Wachovia Bank, National Association"; 2. All references to the "Reimbursement Agreement" shall mean the Amended and Restated Letter of Credit and Reimbursement Agreement, dated as of September 19, 2002, among the Obligors, certain participating banks a party thereto and Wachovia Bank, National Association, as Administrative Agent and Fronting Bank, as may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof; 3. The reference in the second paragraph of the Letter of Credit to "September 19, 2002" is amended to read "September 19, 2004"; 4. The reference in the eighth paragraph of the Letter of Credit to the location of delivery of drawing certificates and other certificates delivered under the Letter of Credit is amended to read "401 Linden Street, Winston-Salem, North Carolina 27101, Attention: Standby Letter of Credit Department;" and 5. The reference in the eighth paragraph of the Letter of Credit to the facsimile number is amended to read "(336) 735-0952 or (336) 735-0953." As an accommodation and not as a condition, you will endeavor to give us telephonic notice that a draft has been submitted at 1-800-776-3862. All other terms and conditions of the Letter of Credit shall remain in full force and effect. This Amendment Number One to Irrevocable Letter of Credit No. SM418226C (this "Amendment") is made a part of the Letter of Credit and the Trustee shall physically attach this Amendment to the Letter of Credit. This Amendment shall be governed by and construed in accordance with the International Standby Practices (1998) of the Institute of International Banking Law & Practice, International Chamber of Commerce Publication No. 590 ("ISP98"), and, to the extent not inconsistent therewith, the laws of the State of New York. Very truly yours, WACHOVIA BANK, NATIONAL ASSOCIATION (formerly known as First Union National Bank) ___________________________________ EXHIBIT F FORM OF AMENDMENT TO THE 2001B LETTER OF CREDIT AMENDMENT NUMBER TWO TO IRREVOCABLE LETTER OF CREDIT NO. SM418227C September 19, 2002 Commerce Bank, National Association, not individually but solely as Trustee 336 Route 70 East Marlton, New Jersey 08053 Attention: Corporate Trust Department Ladies and Gentlemen: In connection with our Irrevocable Letter of Credit No. SM418227C, dated September 20, 2001, as amended by Amendment Number One dated January 17, 2002 (the "Letter of Credit"), previously issued by us at the request and for the account of South Jersey Industries, Inc. and Marina Energy LLC (collectively, the "Obligors"), and established in your favor, as trustee (the "Trustee") under the Trust Indenture, dated as of September 1, 2001 (the "Indenture"), between you and the New Jersey Economic Development Authority (the "Issuer") pursuant to which $19,000,000 in aggregate principal amount of the Issuer's Thermal Energy Facilities Federally Taxable Revenue Bonds (Marina Energy LLC - 2001 Project), Series B were issued, we hereby amend the Letter of Credit as follows: 1. All references to "First Union National Bank" shall mean "Wachovia Bank, National Association"; 2. All references to the "Reimbursement Agreement" shall mean the Amended and Restated Letter of Credit and Reimbursement Agreement, dated as of September 19, 2002, among the Obligors, certain participating banks a party thereto and Wachovia Bank, National Association, as Administrative Agent and Fronting Bank, as may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof; 3. The reference in the second paragraph of the Letter of Credit to "September 19, 2002" is amended to read "September 19, 2004"; 4. The reference in the eighth paragraph of the Letter of Credit to the location of delivery of drawing certificates and other certificates delivered under the Letter of Credit is amended to read "401 Linden Street, Winston-Salem, North Carolina 27101, Attention: Standby Letter of Credit Department;" 5. The reference in the eighth paragraph of the Letter of Credit to the facsimile number is amended to read "(336) 735-0952 or (336) 735-0953." As an accommodation and not as a condition, you will endeavor to give us telephonic notice that a draft has been submitted at 1-800-776-3862. All other terms and conditions of the Letter of Credit shall remain in full force and effect. This Amendment Number Two to Irrevocable Letter of Credit No. SM418227C (this "Amendment") is made a part of the Letter of Credit and the Trustee shall physically attach this Amendment to the Letter of Credit. This Amendment shall be governed by and construed in accordance with the International Standby Practices (1998) of the Institute of International Banking Law & Practice, International Chamber of Commerce Publication No. 590 ("ISP98"), and, to the extent not inconsistent therewith, the laws of the State of New York. Very truly yours, WACHOVIA BANK, NATIONAL ASSOCIATION (formerly known as First Union National Bank) ________________________________ EX-10 3 locfirstamend.txt SJI FIRST AMENDMENT TO AMENDED AND RESTATED LOC FIRST AMENDMENT TO AMENDED AND RESTATED LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT THIS First Amendment to Amended and Restated Letter of Credit and Reimbursement Agreement (this "First Amendment") is made as of the 21st day of August, 2003, among SOUTH JERSEY INDUSTRIES, INC., a New Jersey corporation ("South Jersey"), MARINA ENERGY LLC, a New Jersey limited liability company ("Marina Energy"; and together with South Jersey, collectively, the "Obligors"),WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association having its principal offices in Charlotte, North Carolina ("Wachovia"), as the Fronting Bank (the "Fronting Bank"), WACHOVIA, as the Administrative Agent (the "Administrative Agent") and the participating banks listed on the signature pages hereto (the "Banks"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to them in the Reimbursement Agreement (as defined below). WITNESSETH: WHEREAS, the undersigned are parties to that certain Amended and Restated Letter of Credit and Reimbursement Agreement dated as of September 19, 2002 (the "Reimbursement Agreement"); WHEREAS, the Company has requested that the Administrative Agent and the Banks amend certain provisions of the Reimbursement Agreement in order to further coincide with certain provisions set forth in (1) the 364-Day Revolving Credit Agreement between Wachovia, South Jersey and the several lenders from time to time party thereto, and (2) Three-Year Revolving Credit Agreement between Wachovia, South Jersey Gas Company and the several lenders from time to time party thereto; and WHEREAS, the parties to the Reimbursement Agreement wish to amend the Reimbursement Agreement in accordance with the terms set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the premises set forth above (which are incorporated herein by this reference) and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, each of the undersigned agrees as follows: 1. Amendments to Reimbursement Agreement. The Reimbursement Agreement is amended as follows: (a) Section 1.01 (i) Section 1.01 of the Reimbursement Agreement is amended by adding the following definitions in alphabetical order: Page 1 "Continuing Director" means, with respect to any Person as of any date of determination, any member of the board of directors of such Person who (a) was a member of such board of directors on the Closing Date, or (b) was nominated for election or elected to such board of directors with the approval of a majority of the Continuing Directors who were members of such board at the time of such nomination or election. "First Mortgage Notes" means those First Mortgage Notes identified on Schedule I attached hereto, and subsequent First Mortgage Notes issued in accordance with this Agreement. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under any interest rate or currency swap agreement, interest rate or currency future agreement, interest rate collar agreement, swap agreement (as defined in 11 U.S.C. ss. 101), interest rate or currency hedge agreement, and any put, call or other agreement or arrangement designed to protect such Person against fluctuations in interest rates or currency exchange rates. "South Jersey Gas Company" means South Jersey Gas Company, a New Jersey corporation. (ii) The following definitions in Section 1.01 of the Reimbursement Agreement are amended to read in their entirety as follows: "Change in Control" means the occurrence of either of the following: (i) any entity, person (within the meaning of Section 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) which theretofore was beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of less than 20% of the South Jersey's then outstanding common stock either (x) acquires shares of common stock of the South Jersey in a transaction or series of transactions that results in such entity, person or group directly or indirectly owning beneficially 20% or more of the outstanding common stock of South Jersey, or (y) acquires, by proxy or otherwise, the right to vote for the election of directors, for any merger, combination or consolidation of the Obligors or any of its direct or indirect Subsidiaries, or, for any other matter or question, more than 20% of the then outstanding voting securities of South Jersey; or (ii) 20% or more of the directors of the board of directors of South Jersey fail to consist of Continuing Directors. "Consolidated EBIT" means, with respect to South Jersey and its Consolidated Subsidiaries, for any period, an amount equal to: (i) Consolidated Net Income for such period, plus (ii) amounts deducted in the computation thereof for (a) Consolidated Interest Expense and (b) federal, state and local income taxes. "Consolidated Interest Expense" means, with respect to South Jersey and its Consolidated Subsidiaries, for any Page 2 period, an amount equal to (i) all interest in respect of Indebtedness accrued during such period (whether or not actually paid during such period), plus (ii) the net amount payable (or minus the net amount receivable) under any Hedging Obligation with respect to such Indebtedness accrued during such period (whether or not actually paid or received during such period). "Consolidated Net Income" means the net income of South Jersey and its Consolidated Subsidiaries, as determined on a consolidated basis in accordance with GAAP and as adjusted to exclude (i) net after-tax extraordinary or non-recurring gains or losses (whether cash or non-cash gains or losses), (ii) net after-tax gains or losses attributable to any sale of capital assets, (iii) the net income of any Consolidated Subsidiary to the extent that dividends or distributions of such net income are not at the date of determination permitted by the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or other regulation and (iv) the cumulative effect of any changes in GAAP. "Indebtedness" means, for any Person, all obligations of such Person which in accordance with GAAP should be classified on a balance sheet of such Person as liabilities of such Person, and in any event shall include, without duplication, all (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations to pay the deferred purchase price of property or services, (iv) obligations as lessee under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases, (v) obligations as lessee under operating leases which have been recorded as off-balance sheet liabilities, (vi) obligations under Hedging Obligations, (vii) reimbursement obligations (contingent or otherwise) in respect of outstanding letters of credit, (viii) indebtedness of the type referred to in clauses (i) through (vi) above secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any lien or encumbrance on, or security interest in, property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness, and (ix) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (vii) above. Notwithstanding anything to the contrary set forth above, Capital Stock, including Capital Stock having a preferred interest, shall not constitute Indebtedness for purposes of this Agreement. "Material Adverse Change" means (a) a materially adverse change in the business, assets, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects of (i) South Jersey or (ii) South Jersey and its Subsidiaries, taken as a whole, (b) any material impairment of the ability of any Obligor to perform any of its respective Obligations under this Agreement or any Related Document or (c) any material impairment of the rights of, or benefits Page 3 available to, the Administrative Agent, the Fronting Bank or the Banks under this Agreement or any of the Related Documents. "Permitted Indebtedness" means any of the following: (1) Indebtedness under this Agreement; (2) Indebtedness of South Jersey (other than the type described in clauses (3), (4) and (5) below) in an aggregate principal amount not to exceed $100,000,000 (inclusive of the type described in clause (1) above) at any time outstanding; (3) Indebtedness of South Jersey Gas Company under the First Mortgage Notes existing as of the Closing Date and as identified on Schedule I attached hereto, and subsequent First Mortgage Notes, so long as before and immediately after the incurrence of such Indebtedness, South Jersey is in compliance with Section 5.04; (4) With respect to South Jersey Gas Company and its Subsidiaries, any Indebtedness so long as before and immediately after the incurrence of such Indebtedness, South Jersey is in compliance with Section 5.04; and (5) Indebtedness of the Obligors or South Jersey Gas Company under Hedging Obligations covering a notional amount not to exceed the face amount of the outstanding Indebtedness. "Permitted Liens" means, with respect to any Person, any of the following: (1) Liens for taxes, assessments or governmental charges not delinquent or being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with GAAP are maintained on such Person's books; (2) Liens arising out of deposits in connection with workers' compensation, unemployment insurance, old age pensions or other social security or retirement benefits legislation; (3) Deposits or pledges to secure bids, tenders, contracts (other than contracts for the payment of money), leases, statutory obligations, surety and appeal bonds, and other obligations of like nature arising in the ordinary course of such Person's business; (4) Liens imposed by law, such as mechanics', workers', materialmen's, carriers' or other like liens arising in the ordinary course of such Person's business which secure the payment of obligations which are not past due or which are being diligently contested in good faith by appropriate Page 4 proceedings and for which adequate reserves in accordance with GAAP are maintained on such Person's books; (5) Rights of way, zoning restrictions, easements and similar encumbrances affecting such Person's real property which do not materially interfere with the use of such property; (6) With respect to South Jersey, Liens securing Permitted Indebtedness, described in clause (2) of the definition of "Permitted Indebtedness", not in excess of $5,000,000 in the aggregate; (7) With respect to South Jersey Gas Company, Liens securing Permitted Indebtedness, described in clause (4) of the definition of "Permitted Indebtedness", not in excess of $5,000,000 in the aggregate; (8) With respect to Marina Energy, Liens on the real property owned by Marina Energy securing the Bonds; (9) Purchase money security interests for the purchase of equipment to be used in the Obligors' or South Jersey Gas Company's business, encumbering only the equipment so purchased, and which secures only the purchase-money Indebtedness incurred to acquire the equipment so purchased, which Indebtedness qualifies as Permitted Indebtedness and which Indebtedness is not in excess of $5,000,000; (10) With respect to South Jersey Gas Company, Liens securing Permitted Indebtedness of the type described in clause (3) of "Permitted Indebtedness". "Rated Entity" means South Jersey or any of its subsidiaries which maintain senior unsecured, non-credit enhanced debt ratings by both Moody's and S&P. If more than one such Person exists, the Rated Entity shall be South Jersey or any of its Subsidiaries which maintains the lowest senior unsecured, non-credit enhanced debt rating by either Moody's or S&P. (b) Section 5.01(b) of the Reimbursement Agreement is amended to read as follows: (b) Maintenance of Properties, Etc. Maintain, and cause each of its Subsidiaries to maintain, good and marketable title to all of its properties which are used or useful in the conduct of its business, and preserve, maintain, develop and operate, and cause each of its Subsidiaries to preserve, maintain, develop and operate, in substantial conformity with all laws and material contractual obligations, all such properties in good working order and condition, ordinary wear and tear excepted, except where such failure would not result in a Material Adverse Change. Page 5 (c) Section 5.01(l) of the Reimbursement Agreement is amended to read as follows: (l) Further Assurances. At the expense of the Obligors, promptly execute and deliver, or cause to be promptly executed and delivered, all further instruments and documents, and take and cause to be taken all further actions, that may be reasonably necessary or that the Required Banks through the Administrative Agent may reasonably request, to enable the Banks and the Administrative Agent to enforce the terms and provisions of this Agreement and the Related Documents and to exercise their rights and remedies hereunder. In addition, the Obligors will use all reasonable efforts to duly obtain Governmental Actions required from time to time on or prior to such date as the same may become legally required, and thereafter to maintain all such Governmental Actions in full force and effect, except where such failure would not result in a Material Adverse Change. (d) Section 5.02(e) of the Reimbursement Agreement is amended to read as follows: (e) Sale of Assets, Etc. Sell, transfer, lease, assign or otherwise convey or dispose, or permit any Subsidiary to sell, transfer, lease, assign or otherwise convey or dispose, of assets (whether now owned or hereafter acquired), in any single transaction or series of transactions, whether or not related having an aggregate book value in excess of 10% of the Consolidated assets of South Jersey and its Consolidated Subsidiaries, except for dispositions of capital assets in the ordinary course of business as presently conducted (e) Section 5.02(f) of the Reimbursement Agreement is amended to read as follows: (f) Restricted Investments. Other than in the ordinary course of business (i) make or permit to exist any loans or advances to, or any other investment in, any Person except for investments in Permitted Investments, or (ii) acquire any assets or property of any other Person. (f) Section 5.02(h) of the Reimbursement Agreement is amended to read as follows: (h) Distributions. Pay any dividends on or make any other distributions in respect of any Capital Stock or redeem or otherwise acquire any such Capital Stock without in each instance obtaining the prior written consent of the Required Lenders; provided, that (i) any Subsidiary of South Jersey (other than Marina Energy) may pay regularly scheduled dividends or make other distributions to South Jersey; and (ii) if no Default or Event of Default exists or would result therefrom, South Jersey may pay distributions or dividends in either cash or Capital Stock or may redeem or otherwise acquire Capital Stock. (g) Section 5.02(i) of the Reimbursement Agreement is amended to read as follows: Page 6 (i) Lease Obligations. Permit the aggregate obligations of South Jersey and its Subsidiaries that are due and payable during any fiscal year under leases or agreements to lease (other than obligations under Capital Leases) to exceed $5,000,000. (h) Section 5.03(e) of the Reimbursement Agreement is amended to read as follows: (e) as soon as possible and in any event within five (5) days after the occurrence of each Event of Default and each Default known to any of the Obligors, a statement of the chief financial officer of the Obligors setting forth details of such Event of Default or Default and the action which the Obligors have taken and propose to take with respect thereto; (i) Section 5.04(b) of the Reimbursement Agreement is amended to read as follows: (b) Consolidated EBIT to Consolidated Interest Expense. Maintain at the end of each fiscal quarter, for the four consecutive fiscal quarters then ending, a ratio of Consolidated EBIT to Consolidated Interest Expense of the Borrower and its Consolidated Subsidiaries of not less than 2.0 to 1.0. (j) Section 6.02 of the Reimbursement Agreement is amended to add the following sentence to the end of such Section 6.02: "Nevertheless, any acceleration of Bonds, Demand Loans and Tender Advances under this Section 6.02 shall not require the acceleration of any Hedging Obligations, which shall be governed by the terms and conditions of the documents controlling such Hedging Obligations." (k) Section 9.05(a) of the Reimbursement Agreement is amended to read as follows: (a) by reason of any inaccuracy or alleged inaccuracy in any material respect, or any untrue statement or alleged untrue statement of any material fact, or by reason of the omission or alleged omission to state therein a material fact necessary to make such statements, in the light of the circumstances under which they were made, not misleading, in each case relating to this Agreement or any of the Related Documents and the transactions contemplated thereby, or in any manner, whether direct or indirect, related to this Agreement. 2. Representations and Warranties. The Obligors hereby represent and warrant that (A) all of the representations and warranties contained in Section 4.01 of the Reimbursement Agreement are true, correct and complete as of the date hereof, and (B) no Default or Event of Default has occurred and is continuing on the date hereof before or after giving effect to this First Amendment. 3. Successors and Assigns. This First Amendment shall be binding upon and inureto the benefit of each of the parties hereto and its Page 7 respective successors and assigns. The successor and assigns of such entities shall include, without limitation, their respective receivers, trustees, or debtors-in-possession. 4. Further Assurances. The Obligors hereby agree from time to time, as and when requested by the Fronting Bank, to execute and deliver or cause to be executed and delivered, all such documents, instruments and agreements and to take or cause to be taken such further or other action as the Fronting Bank may reasonably deem necessary in order to carry out the intent and purposes of this First Amendment. 5. Fees and Expenses. The Obligors hereby agree to pay all costs, fees and expenses (including reasonable attorneys' fees) incurred by the Fronting Bank indrafting this First Amendment and documents related thereto and in collecting or enforcing the undersigned's obligations under this First Amendment. 6. Definitions. All references to the singular shall be deemed to include the plural and vice versa where the context so requires. 7. Governing Law. THIS FIRST AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO NEW YORK CHOICE OF LAW PRINCIPLES. 8. Severability. Wherever possible, each provision of this First Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this First Amendment shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this First Amendment. 9. Execution in Counterparts. This First Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 10. Section Headings. The section headings herein are for convenience of reference only, and shall not affect in any way the interpretation of any of the provisions hereof. 11. No Amendment. Except as expressly and specifically amended hereby and by the First Amendment, the Reimbursement Agreement remain unmodified and in full force and effect. [Signature Pages Follow] Page 8 IN WITNESS WHEREOF, this First Amendment has been duly executed by each of the undersigned as of the day and year first set forth above. THE OBLIGORS: SOUTH JERSEY INDUSTRIES, INC. By: /s/ DAVID A. KINDLICK -------------------------------------- David A. Kindlick Vice President, Treasurer & Chief Financial Officer MARINA ENERGY LLC By: South Jersey Industries, Inc. Its: Sole Member By:/s/ DAVID A. KINDLICK -------------------------------------- David A. Kindlick Vice President, Treasurer & Chief Financial Officer Counterpart signature page to the First Amendment to the Amended and Restated Letter of Credit and Reimbursement Agreement dated as of August 21, 2003 among South Jersey Industries, Inc., Marina Energy LLC, Wachovia Bank, National Association and the participating banks a party thereto. Page S1 WACHOVIA BANK, NATIONAL ASSOCIATION, as Administrative Agent, as Fronting Bank and as a Bank By:/s/ LAWRENCE P. SULLIVAN -------------------------------------- Lawrence P. Sullivan Vice President Counterpart signature page to the First Amendment to the Amended and Restated Letter of Credit and Reimbursement Agreement dated as of August 21, 2003 among South Jersey Industries, Inc., Marina Energy LLC, Wachovia Bank, National Association and the participating banks a party thereto. Page S2 The Banks: HUDSON UNITED BANK By: /s/ ANTHONY S. FEDELI -------------------------------------- Name: Anthony S. Fedeli --------------------------------- Title: Senior Vice President --------------------------------- Counterpart signature page to the First Amendment to the Amended and Restated Letter of Credit and Reimbursement Agreement dated as of August 21, 2003 among South Jersey Industries, Inc., Marina Energy LLC, Wachovia Bank, National Association and the participating banks a party thereto. Page S3 COMMERCE BANK, N.A. By: /s/ GERARD L. GRADY -------------------------------------- Name: Gerard L. Grady -------------------------------------- Title: Senior Vice President -------------------------------------- Counterpart signature page to the First Amendment to the Amended and Restated Letter of Credit and Reimbursement Agreement dated as of August 21, 2003 among South Jersey Industries, Inc., Marina Energy LLC, Wachovia Bank, National Association and the participating banks a party thereto. Page S4 SUN NATIONAL BANK By: /s/ PETER VILLA -------------------------------------- Name: Peter Villa ---------------------------------- Title: Vice President ---------------------------------- Counterpart signature page to the First Amendment to the Amended and Restated Letter of Credit and Reimbursement Agreement dated as of August 21, 2003 among South Jersey Industries, Inc., Marina Energy LLC, Wachovia Bank, National Association and the participating banks a party thereto. Page S5 SCHEDULE I First Mortgage Notes Series Outstanding Bonds of the Seventeenth Series $9,089,000 Bonds of the Eighteenth Series $31,850,000 Bonds of the Nineteenth Series $35,000,000 Bonds of the Twentieth Series $99,965,000 Bonds of the Twenty-First Series $85,500,000 Page I1 EX-10 4 locsecondamend.txt SJI SECOND AMEND. TO AMENDED AND RESTATED LOC SECOND AMENDMENT TO AMENDED AND RESTATED LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT This SECOND AMENDMENT TO AMENDED AND RESTATED LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT (this "Second Amendment") is made as of the 21st day of January, 2004, among SOUTH JERSEY INDUSTRIES, INC., a New Jersey corporation ("South Jersey"); MARINA ENERGY LLC, a New Jersey limited liability company ("Marina Energy"; and together with South Jersey, collectively, the "Obligors"); WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association having its principal offices in Charlotte, North Carolina ("Wachovia"), as the Fronting Bank (the "Fronting Bank"); WACHOVIA, as the Administrative Agent (the "Administrative Agent"); and the participating banks listed on the signature pages hereto (collectively, the "Banks"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to them in the Reimbursement Agreement (as defined below). WITNESSETH: WHEREAS, the undersigned are parties to that certain Amended and Restated Letter of Credit and Reimbursement Agreement dated as of September 19, 2002 (as amended by that certain First Amendment to Amended and Restated Letter of Credit and Reimbursement Agreement dated as of August 21, 2003, the "Reimbursement Agreement"); and WHEREAS, the Obligors have requested that the Administrative Agent, the Fronting Bank and the Banks agree (i) to extend the Stated Expiration Date of each Letter of Credit currently in effect, pursuant to the terms and conditions of Section 2.15 of the Reimbursement Agreement, and (ii) to make certain modifications to the terms of the Reimbursement Agreement, including without limitation, an amendment to the definition of "Permitted Indebtedness" set forth therein, and the Administrative Agent, the Fronting Bank and the Banks have agreed to grant such extension and to make such modifications, on the terms and conditions set forth in this Second Amendment. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the premises set forth above (which are incorporated herein by this reference) and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the undersigned agree as follows: 1. Extension of the Stated Expiration Date of each Letter of Credit. Pursuant to the provisions of Section 2.15 of the Reimbursement Agreement, the undersigned agree as follows: a. By notice to the Administrative Agent, given more than ninety (90) days before the Stated Expiration Date of each Letter of Page 1 Credit currently in effect, the Obligors have requested the Fronting Bank, with the consent of all of the Banks, to extend the Stated Expiration Date of each such Letter of Credit to September 19, 2005. b. The Fronting Bank and the Banks have elected to so extend the Stated Expiration Date for each such Letter of Credit currently in effect and have requested that the Administrative Agent deliver to the Obligors a Notice of Extension designating the date to which the Stated Expiration Date for each such Letter of Credit shall be extended and the conditions for the consent of the Fronting Bank and the Banks. c. Upon satisfaction of all conditions set forth in the Notice of Extension, all references in the Reimbursement Agreement to the Stated Expiration Date as to each such Letter of Credit currently in effect shall be deemed to be references to the date of September 19, 2005, as such date may be further extended in accordance with Section 2.15 of the Reimbursement Agreement. 2. Amendments to Reimbursement Agreement. The Reimbursement Agreement is amended as follows: (a) Section 1.01 of the Reimbursement Agreement is amended by deleting the reference to the amount of "$100,000,000" in item (2) of the definition of "Permitted Indebtedness" and replacing it with a reference to the amount of "$120,000,000." 3. Representations and Warranties. The Obligors hereby represent and warrant that (a) all of the representations and warranties contained in Article IV of the Reimbursement Agreement are true, correct and complete as of the date hereof as if made on and as of the date hereof, and (b) no Default or Event of Default has occurred and is continuing on the date hereof before or after giving effect to this Second Amendment. 4. Conditions Precedent. This Second Amendment shall become effective as of the date hereof, upon the satisfaction of the following conditions precedent: a. Execution By All Parties. This Second Amendment shall have been executed and delivered by each of the parties hereto. b. Other Documents. The Administrative Agent shall have received such other documents, approvals and opinions as the Administrative Agent, the Fronting Bank and the Banks may reasonably request. c. Fees. The Administrative Agent shall have received (for its own account and the account of the Banks, as applicable) all of the fees required to be received in connection with this Second Amendment, including, without limitation, the fees set forth in that certain Fee Arrangement Letter dated December 19, 2003, among the Administrative Agent, Wachovia Capital Markets, LLC, and the Obligors. 5. Expenses. The Obligors shall pay (a) all out-of-pocket expenses of the Administrative Agent (including reasonable fees and disbursements of counsel for the Administrative Agent) in connection with the Page 2 preparation of this Second Amendment and any other instruments or documents to be delivered hereunder, any waiver or consent hereunder or thereunder or any amendment hereof or thereof; and (b) if an Event of Default occurs, all out-of-pocket expenses incurred by the Administrative Agent and each of the Banks, including fees and disbursements of counsel for the Administrative Agent and each of the Banks, in connection with such Event of Default and collection and other enforcement proceedings resulting therefrom, including out-of-pocket expenses incurred in enforcing the Reimbursement Agreement as amended by this Amendment, and each Related Document. 6. Successors and Assigns. This Second Amendment shall be binding upon and inure to the benefit of each of the parties hereto and its respective successors and assigns. The successor and assigns of such entities shall include, without limitation, their respective receivers, trustees, or debtors-in-possession. 7. Further Assurances. The Obligors hereby agree from time to time, as and when requested by the Administrative Agent, to execute and deliver or cause to be executed and delivered, all such documents, instruments and agreements and to take or cause to be taken such further or other action as the Administrative Agent may reasonably deem necessary in order to carry out the intent and purposes of this Second Amendment. 8. Ratification. Except as herein provided, the Reimbursement Agreement shall remain unchanged and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects. It is the intention and understanding of the parties hereto that this Second Amendment shall act as an amendment to the Reimbursement Agreement and shall not act as a novation of the indebtedness evidenced by the Reimbursement Agreement. 9. General. References (i) in the Reimbursement Agreement to "this Agreement" (and indirect references such as "hereunder," "hereof" and words of like import referring to the Reimbursement Agreement), and (ii) in the Related Documents to "the Reimbursement Agreement" (and indirect references such as "thereunder," "thereof" and words of like import referring to the Reimbursement Agreement) shall be deemed to be references to the Reimbursement Agreement as amended by this Second Amendment. 10. Definitions. All references to the singular shall be deemed to include the plural and vice versa where the context so requires. 11. Governing Law. THIS SECOND AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO NEW YORK CHOICE OF LAW PRINCIPLES. 12. Severability. Wherever possible, each provision of this Second Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Second Amendment shall be prohibited by or invalid under such law, then such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Second Amendment. Page 3 13. Execution in Counterparts. This Second Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 14. Section Headings. The section headings herein are for convenience of reference only, and shall not affect in any way the interpretation of any of the provisions hereof. [SIGNATURE PAGES FOLLOW] Page 4 IN WITNESS WHEREOF, this Second Amendment has been duly executed by each of the undersigned as of the day and year first set forth above. SOUTH JERSEY INDUSTRIES, INC. By: /s/ DAVID A. KINDLICK ___________________________________ David A. Kindlick Vice President, Treasurer & Chief Financial Officer MARINA ENERGY LLC By: South Jersey Industries, Inc. Its: Sole Member By: /s/ DAVID A. KINDLICK __________________________________ David A. Kindlick Vice President, Treasurer & Chief Financial Officer Second Amendment to Amended and Restated Letter of Credit and Reimbursement Agreement Page S1 WACHOVIA BANK, NATIONAL ASSOCIATION, as Administrative Agent, as Fronting Bank and as a Bank By:/s/ LAWRENCE P. SULLIVAN ------------------------------------ Lawrence P. Sullivan Vice President Second Amendment to Amended and Restated Letter of Credit and Reimbursement Agreement Page S2 HUDSON UNITED BANK, as a Bank By: /s/ ANTHONY S. FEDELI ------------------------------------- Name: Anthony S. Fedeli ------------------------------------- Title: Senior Vice President ------------------------------------- Second Amendment to Amended and Restated Letter of Credit and Reimbursement Agreement Page S3 COMMERCE BANK, N.A., as a Bank By: /s/ GERARD L. GRADY -------------------------------------- Name: Gerard L. Grady ----------------------------------- Title: Senior Vice President ----------------------------------- Second Amendment to Amended and Restated Letter of Credit and Reimbursement Agreement Page S4 SUN NATIONAL BANK, as a Bank By: /s/ PETER VILLA -------------------------------------- Name: Peter Villa ----------------------------------- Title: Vice President ----------------------------------- Second Amendment to Amended and Restated Letter of Credit and Reimbursement Agreement Page S5 EX-10 5 locthirdamend.txt SJI THIRD AMENDMENT TO AMENDED AND RESTATED LOC THIRD AMENDMENT TO AMENDED AND RESTATED LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT This THIRD AMENDMENT TO AMENDED AND RESTATED LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT (this "Third Amendment") is made as of the 5th day of August, 2004, among SOUTH JERSEY INDUSTRIES, INC., a New Jersey corporation ("South Jersey"); MARINA ENERGY LLC, a New Jersey limited liability company ("Marina Energy"; and together with South Jersey, collectively, the "Obligors"); WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association having its principal offices in Charlotte, North Carolina ("Wachovia"), as the Fronting Bank (the "Fronting Bank"); WACHOVIA, as the Administrative Agent (the "Administrative Agent"); and the participating banks listed on the signature pages hereto (collectively, the "Banks"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to them in the Reimbursement Agreement (as defined below). WITNESSETH: WHEREAS, the undersigned are parties to that certain Amended and Restated Letter of Credit and Reimbursement Agreement dated as of September 19, 2002 (as previously amended, the "Reimbursement Agreement"); and WHEREAS, the Obligors have requested that the Administrative Agent, the Fronting Bank and the Banks agree (i) to extend the Stated Expiration Date of each Letter of Credit currently in effect, pursuant to the terms and conditions of Section 2.15 of the Reimbursement Agreement, and (ii) to make certain modifications to the terms of the Reimbursement Agreement, and the Administrative Agent, the Fronting Bank and the Banks have agreed to grant such extension and to make such modifications, on the terms and conditions set forth in this Third Amendment. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the premises set forth above (which are incorporated herein by this reference) and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the undersigned agree as follows: 1. Extension of the Stated Expiration Date of each Letter of Credit. Pursuant to the provisions of Section 2.15 of the Reimbursement Agreement, the undersigned agree as follows: a. By notice to the Administrative Agent, given more than ninety (90) days before the Stated Expiration Date of each Letter of Credit currently in effect, the Obligors have requested the Fronting Bank, with the consent of all of the Banks, to extend the Stated Expiration Date of each such Letter of Credit to September 19, 2007. Page 1 b. The Fronting Bank and the Banks have elected to so extend the Stated Expiration Date for each such Letter of Credit currently in effect and have requested that the Administrative Agent deliver to the Obligors a Notice of Extension designating the date to which the Stated Expiration Date for each such Letter of Credit shall be extended and the conditions for the consent of the Fronting Bank and the Banks. c. Upon satisfaction of all conditions set forth in the Notice of Extension, all references in the Reimbursement Agreement to the Stated Expiration Date as to each such Letter of Credit currently in effect shall be deemed to be references to the date of September 19, 2007, as such date may be further extended in accordance with Section 2.15 of the Reimbursement Agreement. 2. Amendments to Reimbursement Agreement. The Reimbursement Agreement is amended as follows: a. In Section 1.01 of the Reimbursement Agreement, the definition of "Applicable Margin" is amended by deleting the pricing grid set forth therein in its entirety and replacing it with the following: - -------- ---------------------------- -------------- ------------- ------------- Applicable Applicable Basis for Pricing - LIBOR Rate Applicable Letter of Level Senior Debt Rating Margin Unused Fee Credit Fee - -------- ---------------------------- -------------- ------------- ------------- 1 Greater than or equal to 0.750% 0.125% 0.750% A-/A3 - -------- ---------------------------- -------------- ------------- ------------- 2 Less than Level 1, but at 0.875% 0.150% 0.875% least BBB+/Baa1 - -------- ---------------------------- -------------- ------------- ------------- 3 Less than Level 2, but at 1.000% 0.175% 1.000% least BBB/Baa2 - -------- ---------------------------- -------------- ------------- ------------- 4 Less than Level 3 1.250% 0.225% 1.250% - -------- ---------------------------- -------------- ------------- ------------- b. In Section 1.01 of the Reimbursement Agreement, the definition of "Permitted Indebtedness" is amended by deleting the reference to the amount of "$120,000,000" in item (2) of said definition and replacing it with a reference to the amount of "$150,000,000." c. In Section 1.01 of the Reimbursement Agreement, the definition of "Permitted Liens" is amended by deleting the reference to the amount of "$5,000,000" in item (6) of said definition and replacing it with a reference to the amount of $10,000,000." d. The following new Section (m) is added at the end of Section 5.01 of the Reimbursement Agreement: Page 2 (m) OFAC Compliance. Comply with any obligations that it may have under the laws of the United States of America, including without limitation, the USA Patriot Act, all laws and executive orders administered by the Office of Foreign Asset Control, Department of the Treasury ("OFAC") and all regulations promulgated and executive orders having the force of law issued pursuant thereto, as amended or supplemented from time to time (collectively, "AML and Anti-Terrorist Acts"). In the event that any Obligor becomes aware that it is not in compliance with any applicable AML and Anti-Terrorist Acts, then such Obligor shall notify the Administrative Agent and diligently take all actions required thereunder to become compliant. Each Obligor represents and warrants to the Administrative Agent that such Obligor is not listed on the specially Designated Nationals and Blocked Persons List maintained by OFAC pursuant to Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001), and/or any other list maintained pursuant to any of the rules and regulations of OFAC or pursuant to any other applicable Executive Orders or otherwise subject to sanction under an OFAC implemented regulation. 3. Representations and Warranties. The Obligors hereby represent and warrant that: a. They have taken all necessary action to authorize the execution, delivery and performance of this Third Amendment. b. The representations and warranties contained in Article IV of the Reimbursement Agreement are true, correct and complete as of the date hereof as if made on and as of the date hereof and as if each reference in said Article IV to "this Agreement" includes a reference to this Third Amendment and to the Reimbursement Agreement, as amended by this Third Amendment. c. No Default or Event of Default has occurred and is continuing on the date hereof, before or after giving effect to this Third Amendment. 4. Conditions Precedent. This Third Amendment shall become effective as of the date hereof, upon the satisfaction of the following conditions precedent: a. Execution By All Parties. This Third Amendment shall have been executed and delivered by each of the parties hereto. b. Existence and Authority Documents. The Administrative Agent and the Banks shall have received all documentation that they may reasonably request relating to the existence of each of the Obligors, the company or corporate, as applicable, authority for and the validity of this Third Amendment, the Reimbursement Agreement as amended hereby, and any other matters relevant hereto, all in form and substance satisfactory to the Administrative Agent, the Fronting Bank and the Banks, including without limitation a certificate of incumbency of each of the Obligors, signed by a Secretary or an Assistant Secretary, certifying as to the names, true signatures and incumbency of the officers authorized to Page 3 execute and deliver this Third Amendment and each other document to be executed, delivered by each of the Obligors from time to time in connection with the Reimbursement Agreement as amended hereby, and certified copies of the following items with respect to each of the Obligors: (i) Articles of Organization or Incorporation, as applicable (or, in the alternative, a certification that none of such documents have been modified since delivery thereof in connection with the execution and delivery of the Reimbursement Agreement), (ii) Operating Agreement or By-laws, as applicable (or, in the alternative, a certification that none of such documents have been modified since delivery thereof in connection with the execution and delivery of the Reimbursement Agreement), (iii) a Good Standing Certificate issued by the Department of Treasury of the State of New Jersey, and (iv) the resolutions adopted by the members or board of directors, as applicable, authorizing the execution, delivery and performance of this Third Amendment and each other document to be executed, delivered and performed by such Obligor from time to time in connection with the Reimbursement Agreement as amended hereby. c. Opinion of Counsel. The Administrative Agent shall have received an opinion letter of Cozen O'Conner, counsel to the Obligors, as to such matters as the Administrative Agent shall reasonably request, addressed to the Administrative Agent, the Fronting Bank and the Banks. d. Other Documents. The Administrative Agent shall have received such other documents, approvals and opinions as the Administrative Agent, the Fronting Bank and the Banks may reasonably request. e. Fees. The Administrative Agent shall have received (for its own account and the account of the Banks, as applicable) all of the fees required to be received in connection with this Third Amendment, including, without limitation, the fees set forth in that certain Fee Arrangement Letter dated July 7, 2004, among the Administrative Agent, Wachovia Capital Markets, LLC, and the Obligors. 5. Expenses. The Obligors shall pay (a) all out-of-pocket expenses of the Administrative Agent (including reasonable fees and disbursements of counsel for the Administrative Agent) in connection with the preparation of this Third Amendment and any other instruments or documents to be delivered hereunder, any waiver or consent hereunder or thereunder or any amendment hereof or thereof; and (b) if an Event of Default occurs, all out-of-pocket expenses incurred by the Administrative Agent and each of the Banks, including fees and disbursements of counsel for the Administrative Agent and each of the Banks, in connection with such Event of Default and collection and other enforcement proceedings resulting therefrom, including out-of-pocket expenses incurred in enforcing the Reimbursement Agreement as amended by this Third Amendment, and each Related Document. 6. Successors and Assigns. This Third Amendment shall be binding upon and inure to the benefit of each of the parties hereto and its respective successors and assigns. The successor and assigns of such entities shall include, without limitation, their respective receivers, trustees, or debtors-in-possession. Page 4 7. Further Assurances. The Obligors hereby agree from time to time, as and when requested by the Administrative Agent, to execute and deliver or cause to be executed and delivered, all such documents, instruments and agreements and to take or cause to be taken such further or other action as the Administrative Agent may reasonably deem necessary in order to carry out the intent and purposes of this Third Amendment. 8. Ratification. Except as herein provided, the Reimbursement Agreement shall remain unchanged and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects. It is the intention and understanding of the parties hereto that this Third Amendment shall act as an amendment to the Reimbursement Agreement and shall not act as a novation of the indebtedness evidenced by the Reimbursement Agreement. 9. General. References (i) in the Reimbursement Agreement to "this Agreement" (and indirect references such as "hereunder," "hereof" and words of like import referring to the Reimbursement Agreement), and (ii) in the Related Documents to "the Reimbursement Agreement" (and indirect references such as "thereunder," "thereof" and words of like import referring to the Reimbursement Agreement) shall be deemed to be references to the Reimbursement Agreement as amended by this Third Amendment. 10. Definitions. All references to the singular shall be deemed to include the plural and vice versa where the context so requires. 11. Governing Law. THIS THIRD AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO NEW YORK CHOICE OF LAW PRINCIPLES. 12. Severability. Wherever possible, each provision of this Third Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Third Amendment shall be prohibited by or invalid under such law, then such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Third Amendment. 13. Execution in Counterparts. This Third Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 14. Section Headings. The section headings herein are for convenience of reference only, and shall not affect in any way the interpretation of any of the provisions hereof. [SIGNATURE PAGES FOLLOW] Page 5 IN WITNESS WHEREOF, this Third Amendment has been duly executied by each of the undersigned as of the day and year first set forth above. SOUTH JERSEY INDUSTRIES, INC. By:/s/ DAVID A. KINDLICK ------------------------------ Name: David A. Kindlick Title: Vice President, Treasurer and Chief Financial Officer MARINA ENERGY By: South Jersey Industries, Inc. Its: Sole Member By:/s/ DAVID A. KINDLICK ------------------------------ Name: David A. Kindlick Title: Vice President, Treasurer and Chief Financial Officer WACHOVIA BANK, NATIONAL ASSOCIATION, as Administrative Agent, as Fronting Bank and as a Bank By: /s/ LAWRENCE P. SULLIVAN ----------------------------- Name: Lawrence P. Sullivan Title: Director HUDSON UNITED BANK, as a Bank By: /s/ ANTHONY S. FEDELI ------------------------------ Name: Anthony S. Fedeli Title: Senior Vice President COMMERCE BANK, N.A., as a Bank By: /s/ GERARD L. GRADY ------------------------------ Name: Gerard L. Grady Title: Vice President SUN NATIONAL BANK, as a Bank By: /s/ PETER J. VILLA ------------------------------- Name: Peter J. Villa Title: Vice President EX-12 6 exhibit12.txt SJI CALC. OF RATIO OF EARNINGS TO FIXED CHARGES 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, -------------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 1999 -------------------------------------------------------------------------------------- Net Income* $42,973 $34,553 $29,412 $26,869 $24,741 $21,962 Income Taxes 29,079 23,596 20,404 19,295 18,711 16,418 Fixed Charges** 21,273 23,016 22,675 24,101 24,392 24,300 Capitalized Interest (700) (2,400) (1,941) (500) (26) (390) -------------------------------------------------------------------------------------- Total Available $92,625 $78,765 $70,550 $69,765 $67,818 $62,290 ====================================================================================== Total Available 4.4x 3.4x 3.1x 2.9x 2.8x 2.6x - -------------------------- Fixed Charges * Net Income from Continuing Operations. ** Includes interest and preferred dividend requirement of a subsidiary. Preferred dividend requirement totalled $135,000 in 2004 (rentals are not material).
EX-13 7 sjiannualrpt.txt SJI 2004 ANNUAL REPORT Standing Out From the Crowd 2004 Annual Report to Shareholders Cover Page Corporate Headquarters 1 South Jersey Plaza Folsom, NJ 08037-9917 609-561-9000 www.sjindustries.com Transfer Agent and Registrar Wachovia Equity Services Group Corporate Trust Client Services NC 1153 1525 West W. T. Harris Blvd. 3C3 Charlotte, NC 28288-1153 Dividend, Dividend Reinvestment and Other Shareholder Inquiries South Jersey Industries Shareholder Records Department Toll-free: 1-888-SJI-3100 sharehld@sjindustries.com Investor Relations Stephen H. Clark, Treasurer 609-561-9000 ext. 4260 investorrelations@sjindustries.com Annual Meeting Information The Annual Meeting of Shareholders will be held Thursday, April 21, 2005 at 10:00 a.m. at Renault Winery, 72 North Bremen Avenue, Egg Harbor/Galloway, NJ On the cover: South Jersey Gas employee John Kolibaba, Street Foreman Special, exemplifies dedication. Known as a "living, breathing encyclopedia of SJG operations," and dubbed "the professor" by his co-workers, John has boundless energy and an amazingly accurate memory which serves as a resource to those who work with him. During the 53 years that John has worked for SJG, he's witnessed and adjusted to many changes and continues to be a valuable asset and an extremely productive employee. John is one example why SJI continues to "Stand Out from the Crowd." Inside Front Cover 2004 Highlights Five-Year Summary of Selected Financial Data (In Thousands Where Applicable) South Jersey Industries, Inc. and Subsidiaries Year Ended December 31,
2004 2003 2002 2001 2000 Operating Results: Operating Revenues $ 819,076 $ 705,196 $ 511,890 $ 551,974 $ 517,070 Operating Income $ 90,739 $ 77,843 $ 69,075 $ 68,544 $ 65,464 Income Applicable to Common Stock: Continuing Operations $ 42,973 $ 34,553 $ 29,412 $ 26,869 $ 24,741 Discontinued Operations -- Net (1) (680) (774) (424) (455) (557) Cumulative Effect of a Change in Accounting Principle -- Net -- (426) -- 148 -- Net Income Applicable to Common Stock $ 42,293 $ 33,353 $ 28,988 $ 26,562 $ 24,184 Total Assets $ 1,243,334 $ 1,126,203 $ 1,053,834 $ 1,026,479 $ 903,878 Capitalization: Common Equity $ 344,412 $ 297,961 $ 237,792 $ 220,286 $ 201,739 Preferred Stock 1,690 1,690 1,690 1,690 1,804 Long-Term Debt 328,914 308,781 274,099 295,329 241,063 Total Capitalization $ 675,016 $ 608,432 $ 513,581 $ 517,305 $ 444,606 Ratio of Operating Income to Fixed Charges 4.4x 3.8x 3.3x 2.9x 2.7x Diluted Earnings Per Common Share (Based on Average Diluted Shares Outstanding): Continuing Operations $ 3.11 $ 2.73 $ 2.43 $ 2.29 $ 2.17 Discontinued Operations -- Net (1) (0.05) (0.06) (0.04) (0.04) (0.05) Cumulative Effect of a Change in Accounting Principle -- Net -- (0.03) -- 0.01 -- Diluted Earnings Per Common Share $ 3.06 $ 2.64 $ 2.39 $ 2.26 $ 2.12 Return on Average Common Equity (2) 13.4% 12.9% 12.8% 12.7% 12.8% Share Data: Number of Shareholders of Record 8.1 8.3 8.4 8.7 9.1 Average Common Shares 13,691 12,559 12,038 11,716 11,401 Common Shares Outstanding at Year End 13,880 13,229 12,206 11,861 11,500 Dividend Reinvestment Plan: Number of Shareholders 5.2 5.1 5.1 5.0 5.0 Number of Participating Shares 1,382 1,375 1,304 1,280 1,273 Book Value at Year End $ 24.80 $ 22.52 $ 19.48 $ 18.57 $ 17.54 Dividends Declared $ 1.64 $ 1.56 $ 1.51 $ 1.48 $ 1.46 Market Price at Year End $ 52.56 $ 40.50 $ 33.02 $ 32.60 $ 29.75 Dividend Payout (3): From Continuing Operations 52.4% 57.0% 60.9% 63.9% 66.6% From Total Net Income 53.3% 59.1% 61.8% 64.6% 68.1% Market-to-Book Ratio 2.1x 1.8x 1.7x 1.8x 1.7x Price Earnings Ratio (2) 16.9x 14.8x 13.6x 14.2x 13.7x (1) Represents discontinued business segments: merchandising operations discontinued in 2001, wholesale electric operations discontinued in 1999, construction operations sold in 1997, sand mining and distribution operations sold in 1996 and fuel oil operations with related environmental liabilities 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- Outstanding! Dear Shareholders, For the sixth consecutive year, we are very pleased to deliver to you record net income and earnings per share from continuing operations. In 2004, SJI's consolidated net income from continuing operations rose to $43.0 million compared with $34.6 million in 2003, a 24% profit improvement. Earnings per share from continuing operations reached $3.11 from $2.73, representing a 14% increase. EPS results also reflect equity issued to further strengthen our balance sheet. Our record earnings were driven by impressive results from both our utility and non-regulated businesses with 73% of net income coming from the utility and 27% from our non-regulated companies. Our successful year resulted in an outstanding total annual shareholder return of 34%. Through strong, consistent performance since 2000, SJI provided a 5-year total shareholder return of 131%, which equates to an annualized compound return of 18.2%. In comparison, the S&P 500 index produced negative returns and the S&P utilities index provided a 3.7% return for the same period. Based on SJI's stellar performance and positive forecast, our board of directors increased our annual dividend by $.08 cents per share, to $1.70 per share. We continued to improve our payout ratio while achieving our 53rd consecutive year of paying dividends. In growing numbers, investors are recognizing our success and the number of satisfied SJI shareholders continues to increase. In fact, institutional investments now represent 46% of our shares outstanding, more than twice the 1998 level. SJI's ability to sustain such strong earnings and dividend growth over a 6-year period is evidence that the goals and strategies developed by our senior management team and board of directors have been well planned and effectively implemented. As we look ahead, we recognize great potential to continue delivering exceptional performance. Standing Out from the Crowd While other utility-based companies are still defining who they are and what they do, SJI's focus remains clear and consistent. Our vision is to be the energy company of first choice for investors, customers and employees. Achieving this vision begins with our employees - a leadership team that develops goals and strategies that are realistic and attainable, yet make the workforce stretch and grow each year; managers and supervisors who can translate the goals and strategies into tasks that their employees can understand and accomplish; and a workforce that is empowered, innovative and committed to continually improving their performance. SJI stands out among other energy providers thanks to outstanding efforts by our employees, a few of whom are highlighted in this report. Their hard work, expertise and commitment to shareholder value set them apart in an environment where long-term employment is rare and life-time job commitment even more rare. The energy of our employees is equaled by that of our management team and our combined strength continues to translate into positive, measurable results for shareholders. Ensuring Continued Success In 2004, our success was supported by accomplishments that position SJI for a future of consistent, predictable profitability. For example, all of SJI's bargaining unit employees extended their contracts for at least another three -2- years - well before the contractual expiration dates. The early resolution of these contracts indicates a strong relationship between union and management, forged with the best interests of all parties involved. This significant achievement in cooperation, which is a win-win situation for employees, shareholders and customers alike, will enable us to control costs and continue to provide competitive compensation and benefits going forward. Working closely with the New Jersey Board of Public Utilities staff and the Division of the Ratepayer Advocate, South Jersey Gas restructured its rates in 2004, which produced a decrease in customers' gas bills while allowing the company to earn an incremental $8.5 million annually on investments made in its pipeline facilities. We're extremely pleased with this innovative structure as both customers and shareholders reap the benefits. The BPU also approved the transfer of SJG's appliance service business into a new, non-regulated subsidiary, South Jersey Energy Service Plus. This repositioning significantly enhances the company's ability to address customers' needs, adapt to changing market conditions and add shareholder value. Capitalizing on our strong brand recognition and positive reputation as a cost effective and efficient business partner, SJI has taken advantage of opportunities to grow in areas that include cogeneration, retail marketing, and industrial customer energy portfolio management and administration. South Jersey Energy continues to excel with retail energy sales, particularly in the larger commercial and industrial markets, with further expansion into central and northern New Jersey. SJE's successful energy services segment remains focused on key markets such as the casino industry and regional supermarket chains. Growth opportunities abound for Marina Energy with the Borgata Hotel Casino & Spa's expansion projects and several on-site cogeneration projects planned or underway. Effective gas storage and pipeline portfolio management as well as the startup of Florida Power & Light's cogeneration facility in Pennsylvania enhanced South Jersey Resources Group's performance; and additional profit opportunities will result from incremental storage capacity. These and other energy-related activities will fuel SJI's future non-regulated growth and success. Looking ahead we are excited about the tremendous potential we see. We remain committed to developing the talents and expertise of our entire workforce, to assure that our company continues to grow and prosper. Guided by a strong and engaged board of directors and senior management team guarding SJI's high standards, we will conduct our business with honesty and integrity as our hallmarks. Rest assured that every member of your SJI team is committed to top performance. At SJI, we are confident that our people and our achievements will keep us standing out from the crowd. Charles Biscieglia Chairman Edward J. Graham President and CEO March 2, 2005 -3- What Separates Us? Reliable Integrity, honesty and dependability are the hallmarks of our company. Guided by the highest set of principles, our time-honored team prescribes to a straight, consistent set of strategies to promote sustainable growth and solid dividends. Recognized as a stalwart of the community, we make a pledge of quality performance to our shareholders, customers and employees. As the company's tagline, "Where we put all of our energy," indicates, SJI focuses on creating opportunities surrounding energy. SJI's vision has been consistent for the past seven years - to be the energy company of first choice for customers, shareholders and employees. The goals we established and continue to follow to achieve that vision are: generate annualized earnings per share growth of at least 6 to 7%; provide 3 to 6% annual dividend growth; and deliver on these goals from a low- to moderate-risk platform. SJI has successfully accomplished its goals for the past six years by: remaining focused on energy; capitalizing on our strong regional presence and solid reputation; exceeding our customers' expectations with high quality products and services; and maintaining our current risk profile. Going forward we expect these strategies to serve us well, enabling us to stretch and grow to meet our goals and achieve our vision. Business Model The business model that drives SJI's performance is a natural extension of its core utility business, South Jersey Gas. Focusing on core competencies, rather than diversifying into areas where we have little experience, separates SJI from many other energy companies. South Jersey Resources Group, our wholesale natural gas and risk management business, acquires gas and delivers it to South Jersey Gas' city gate stations, which are the entry points of the utility's transmission and distribution system. SJG delivers the natural gas to homes and businesses in southern New Jersey. Millennium Account Services provides meter reading services to both SJG and Conectiv Power Delivery. South Jersey Energy sells retail natural gas and electricity and provides energy services to large and small businesses. South Jersey Energy Service Plus repairs and provides service plans for gas and electric appliances, and installs heating and cooling equipment. Marina Energy develops gas-fired, on-site energy production projects for large consumers. SJI stands out among other energy providers due to the hard work, expertise and commitment of our employees. The photos in our report provide a sampling of some employees who exemplified excellence in 2004. As the veritable link between our company and new and prospective customers, SJG Sales is integral to our success and growth. Vicki Molloy, manager of major accounts and commercial sales, created sales campaigns and value models for a variety of new gas technologies, and developed a series of seminars promoting SJG product lines to prospective customer groups. These efforts resulted in additional throughput and enhanced branding. Ray Daley, builder's representative, is a proactive customer advocate and innovator in using computer skills and industry knowledge to assist his clients in delivering completed homes on schedule while optimizing natural gas throughput. A team player, Ray also cross trains and mentors existing and new employees. -4- How will SJI continue to stand out from the crowd? Dedicated Built on a strong foundation of "people first and foremost," we are committed to providing quality service. Evidenced by our history of long-tenure, our team takes pride in its work and eagerly contributes new ideas to advance our success. Deeply rooted in our local communities, we strive to make our region a better place to work and live. South Jersey Gas Customer Growth SJG's future performance will be driven heavily by its ability to grow. Strong customer growth will be the key factor supporting revenue growth. In 2004, SJG added 9,017 customers for a total of 313,579 customers at year end. These additions resulted in an exceptional growth rate of 3%, which far exceeds the national average. Southern New Jersey continues to experience strong housing and economic growth due to its location between Philadelphia and the dramatically changing landscape of Atlantic City. The foundation for renewed growth in Atlantic City and the surrounding region rests primarily with new gaming and non-gaming investments that emphasize destination-style attractions and increased penetration into the densely populated market of adults within a 150-mile radius. The casino industry is expected to remain a positive and powerful engine of regional and economic development with many opportunities for SJI's companies. The ripple effect from Atlantic City continues to provide new housing, commercial and industrial construction into neighboring counties as well. Where natural gas is available, this premier fuel is by far the energy of choice for heating, water heating, clothes drying, cooking, gas fireplaces and even pool and patio heaters for new home construction. With SJG serving just over 58% of area households with natural gas, a significant potential exists for conversions from other fuels. SJG added over 2,295 customers from conversions in 2004 and we expect conversions to contribute about 20 to 25% of SJG's future customer growth. In the commercial sector, new natural gas driven technologies have helped SJG broaden its opportunities to serve new and existing customers. Temporary heating equipment is becoming more widely used by construction firms to climate-proof their building season. Schools, supermarkets and hospitals are just a few establishments taking advantage of natural gas powered desiccant systems to control humidity. During 2004, SJG's sales team placed greater emphasis on explaining the benefits of this type of equipment to its larger customers. While beneficial to the customer, SJG also wins as these systems increase summer usage of natural gas. By increasing the flow of gas when usage is typically low, SJG benefits both operationally and financially. Cogeneration and onsite power generation are other proven technologies receiving increased attention and acceptance within the industrial sector. SJG's reputation as a leading resource A top priority for SJG is to ensure reliable and safe natural gas service for new and existing customers. Chris Castronova, general manager of system integrity (right,) led a cross-functional team in the development and implementation of the company's pipeline integrity management program, which assesses and validates the existing condition and integrity of the company's 92-mile transmission pipeline system. John Eichinger, 1st class field measurement employee (background left), and Tony Cook, pipeline measurement employee, represent SJG's pipeline department employees who successfully perform the work required to maintain pipeline integrity. -5- for new and advanced energy technologies will continue to help us foster stronger relationships and open doors in the economically viable commercial market now and in the future. With so many growth opportunities on the horizon SJG must continue to invest heavily in new utility plant to not only accommodate the growth but to ensure reliable and safe service for new and existing customers. In 2004, SJG invested $64.7 million in new construction and system improvements. From 1997 through 2003, SJG spent $359 million in infrastructure improvements and expansion needed to serve the growing customer base. In 2003, SJG filed a base rate case with the New Jersey Board of Public Utilities to earn a return on this investment. Completion of Rate Case The completion of SJG's rate case in July 2004, another key driver for future performance, was a win-win situation for the company and its customers. By combining the base rate increase with a reduction in several rate clauses that have no impact on SJG's earnings, customers received a net reduction of $18.9 million in their rates while SJG's net income increased by $8.5 million a year. As part of the settlement, the BPU approved a capital structure that reflects the company's efforts to strengthen its balance sheet. This structure includes increased equity levels and lower-cost debt resulting from refinancings. Additionally, the BPU approved an innovative rate structure that is facilitating the installation of natural gas fired distributed generation plants in SJG's service area. Distributed generation is the placement of small-scale power generation units at or near a site where large electricity users have their operations. This type of energy production is environmentally friendly and provides improved economics and reliability for the region. Customers can also use gas-driven engines and commercial refrigeration under the new rate structure, offering opportunities to shed expensive electric load. Union Contract Settlement Another significant event and key driver for performance in the years ahead is the extension of our union contracts in 2004. The contract with our largest bargaining unit was recently extended for four years and was accomplished two months ahead of contract expiration with a nearly unanimous vote. By educating the workforce on difficult issues pertaining to health care and pensions, our employees gained a greater appreciation for the high quality benefits SJI offers and the solutions the company needed to continue offering those high quality benefits in the future. Working together, management and union officials modified the contracts to provide security and certainty of health care and retiree benefits while providing market-based competitive wage increases over the four years. Key elements of the agreement that will enable the company to successfully control costs are: o An early retirement incentive program that will provide certain employees considering retirement with an enhanced benefits program; o Mechanisms to better control both health care and post retirement benefits; o An incentive compensation plan that directly aligns employee performance with corporate and departmental objectives; o Changes to pension plans that reflect market-based benefits trends. These contract changes are a win-win situation for both parties. The primary concerns of employees were addressed as well as significant issues facing corporations today. The initiatives in the contracts will offset the rising cost of health care and pensions not only in 2005 but will position us favorably for the next four years. Customer Satisfaction and Productivity Improvements In 2004 process improvements and technology investments were critical to enhancing SJG's performance and customer satisfaction levels. Our Customer Care -6- Center implemented a Virtual Hold System that gives customers the choice of waiting for a representative or having their call returned when a representative is available. This system, which handles about 24% of the Customer Care Center's incoming calls, has resulted in higher customer satisfaction levels and improved employee productivity. An Internet-based customer service and electronic bill payment and presentment system is another major technological improvement for Customer Care. The system, designed in 2004 and implemented in February 2005, provides customers with a third choice of transacting their business with SJG. In addition to the automated telephone response system and speaking directly with a customer service representative, now customers can use the Internet to receive and pay their bill, access account information, and accomplish various other transactions 24 hours a day, seven days a week. Implementation of this system will provide quick access to information and answers, while freeing customer service representatives to handle more complex inquiries and requests. To effectively measure customer satisfaction levels, SJG hired an independent consultant to perform a random sample survey in December 2004. We are pleased to report the findings showed that nearly 92% of the customers surveyed said SJG meets their service expectations either all or most of the time. Marina Energy Marina's future performance will be driven by several factors. The largest and most visible is the 20-year contract with the Borgata Hotel Casino & Spa, which will provide a stable revenue stream through at least 2023. Marina has attractive growth opportunities just serving the Borgata's growing energy needs as the resort's management announced plans to build a $200 million, 500,000-square-foot expansion beginning in 2005 with expected completion in 2006. In 2007, the Borgata will add a 45-story tower to the property. The new facilities will include a larger casino, additional hotel rooms, more restaurants, nightclubs, spa treatment rooms and retail shops. The Borgata is not Marina's only growth opportunity. Interest in on-site cogeneration facilities remains strong and Marina is currently involved in two such projects. In a joint venture, Marina and DCO Energy created AC Landfill Energy, which has developed and installed a 1.4 megawatt methane-to-electric power generation system at the Atlantic County Utilities Authority landfill in New Jersey. This facility goes online in early 2005. Because the plant is fueled by methane gas produced at the landfill, it is considered green power. With this technology, enough gas will be produced to generate 700,000 megawatt hours of electricity a year, which could power up 700 homes for one year. The electricity With an eye to the future, SJI successfully negotiated a 4-year contract extension with its largest barganing unit. Kathy Casella, supervisor of compensation and HRIS (standing) and Jacqui Tate, human resources generalist - employment, provided assistance during this critical process which lays the foundation for the next steps in SJI's strategic plan. Consistent with our company's commitment to its current and future employees, Kathy and Jacqui also played key roles in implementing the company's new performance management system. Customers are the lifeblood of our company. With the ever-changing energy environment, meeting and exceeding customer expectations in the most efficient manner is critical to the success of SJI's companies. Providing bilingual skills, Myrna Santiago, customer service representative (seated), helps the company broaden its services to a growing Spanish-speaking population in the region. Anne Seguin, customer relations specialist, helped implement customer service initiatives that resulted in improved customer satisfaction in 2004. Jannie Foxworth, supervisor of credit & collections (standing), helps the company balance its financial objectives with customers' needs. -7- generated will be used to power the authority's recycling center and other facilities. The balance of the unused power will be sold to help satisfy the region's electricity needs. Building upon its growing reputation as a leading developer of energy-related projects for the casino industry, Marina signed an agreement in 2004 with Seneca Niagara Falls Gaming to develop a cogeneration facility. Marina and its partner, DCO Energy, are providing design and management oversight for a combined heat and power system being installed as part of a central energy plant. The plant will provide heating, and cooling, and generate electricity for Seneca Niagara's casino hotel and gaming complex, which is under construction. Marina will also oversee the purchase of key equipment for the system. The plant is expected to be operational by June 2005 and Phase I of the hotel/casino is scheduled for completion in August 2005. The 26-story hotel and gaming complex will feature 600 rooms, restaurants, gaming facilities and a full-service spa. South Jersey Energy While retail natural gas sales to southern New Jersey's residential and small commercial segment have been a huge factor in SJE's success, market conditions slowed our progress in adding customers toward year's end. With higher natural gas prices, SJE prudently placed its marketing efforts on hold; however, we expect to actively reinstate our acquisition strategies when market conditions improve. Importantly, the recent surge in natural gas prices has not impacted profitability as we carefully manage risk to avoid exposure to gas price volatility. SJE's gas supply position is fully hedged well into 2005, ensuring that profitability is locked in. SJE continues to advance its standing and was extremely successful with retail energy sales in the larger commercial and industrial markets. In 2004, SJE provided reliable, competitively priced natural gas and electricity to several Fortune 500 companies and over 400 school districts in central and northern New Jersey. Our success in energy services enjoys equal recognition. Despite competition from various-sized energy services companies and mechanical contractors, SJE consistently penetrates key markets in this segment. A prime example is SJE adding its third and fourth casino customers to its Atlantic City portfolio. In 2004, SJE ranked fourth out of 32 regional marketers in a North American survey on customer satisfaction. The survey included interviews with industrial end-users, local distribution companies, electricity generators and others. It Leaders can be found at every level and in every department of our company. SJE's Johnna Tomasello, supervisor of billing, is just one example. Instead of hiring an outside company to build a customer information system, Johnna took charge and created it herself. She then set her sights on revising and executing a new billing procedure that ensures SJE fully complies with Sarbanes- Oxley testing. Employees, like Johnna, help SJI stand out from the crowd. Customers have expressed a high level of satisfaction with our new appliance installation company, South Jersey Energy Service Plus. Pete Dempsey (right), installation manager, provided the leadership and oversight required to get this new business up and running. Rick Arlotta (left), a NATE-certified appliance service technician, posted the highest number of leads for both Service Sentry plans and equipment installation sales among the technician group. Angela Grockenberger, customer service/dispatch representative, posted the highest number of leads for Service Sentry enrollments in the customer service department. -8- polled participants on gas supply reliability, account management consistency, integrity and price competitiveness. SJE is the only energy marketer in the Northeast named in the top five. This significant accomplishment validates that our relationship-based, consultative approach works and most importantly, has helped improve the competitiveness of our customer base through more cost effective and efficient energy use. Key drivers for SJE's future performance will continue to be retail natural gas and electricity sales as well as energy services. Efforts to capture new business in the large commercial, industrial and institutional markets throughout New Jersey are already underway. In the energy services sector, SJE remains focused on Atlantic City's casino industry and regional supermarket chains while exploring service opportunities to health care institutions and condominium complexes. As the complexities of the energy industry grow, more companies such as those polled in the marketers survey will look to outside energy experts to meet their evolving energy needs. SJE is favorably positioned to meet those needs. South Jersey Resources Group SJRG's future success will come from its role in supplying wholesale natural gas to retail marketers in New Jersey; in managing fuel for Florida Power & Light's cogeneration facility and other fuel management opportunities; and in optimizing storage capacity. SJRG has produced consistent profits for SJI through its gas supply transactions with retail gas marketers, utilities and electricity generators and it expects that to continue. We project modest growth for SJRG with the opportunity to overachieve as its role as fuel manager expands for electricity generators and retail marketers. In 2005, SJRG will complete its first full year of providing fuel management services to FP&L's 750-megawatt cogeneration facility in Marcus Hook, PA. The 5-year contract that began in June 2004 generated higher margins than anticipated in 2004. Additional profit opportunities will come from the addition of incremental storage capacity. In 2004 SJRG added 750,000 decatherms of storage and has contracted to add 2 bcf in 2005, bringing total storage capacity under contract to 4.7 bcf. Adaptable In an ever-changing business climate, SJI remains solid and strong, yet very resilient. Our team has consistently demonstrated the flexibility needed to compete and succeed. Recognizing the value of opportunities imparted by change, our board of directors and senior management annually revisit our goals and strategies and refine them to profit from current market conditions. South Jersey Energy Service Plus In September 2004, SJI transferred SJG's appliance service business from the utility to SJESP, a non-regulated SJI subsidiary. The repositioning will significantly improve this company's ability to address customer needs and adapt to changing market conditions. With 50 experienced service technicians and installers, SJESP is the area's largest local appliance service and installation company. Activities at SJESP range from servicing gas heaters, central air conditioners, ranges, dryers, water heaters and other gas burning appliances to installing and replacing heating and air conditioning equipment and providing repair service plans. SJESP's future performance will be driven by equipment installation, maintaining a high quality workforce and sales of appliance service plans. Customers expressed a high level of satisfaction with the new installation business in 2004 as over 93% of customers said the work performed either completely met or exceeded their expectations. We attribute their satisfaction to the quality of -9- our workforce. In 2004, 35 of SJESP's field employees voluntarily became North American Technician Excellence certified. NATE is the national standard certification for heating and air conditioning technicians. Many equipment manufacturers and consumer reports recommend that consumers use NATE-certified technicians for heating and air conditioning installation and service. Of those who took the NATE test, 83% passed, which far exceeds the national average of 60%. SJESP also distinguished itself in 2004 by qualifying as a Bryant Factory Authorized Dealer. Less than 5% of heating and cooling contractors in the country receive this distinction. To qualify, dealers must meet Bryant's rigid criteria, not only for technical expertise, but also for business practices and customer service quality. Bryant provides a 100% satisfaction and service guarantee to customers that applies to all new product installations made by their factory authorized dealers. In the repair portion of SJESP's business, sales of the popular Service Sentry appliance service plans were strong in 2004 with 131,000 appliances under warranty at year end. In addition, 14,400 appliances were under contract for preventive maintenance at the end of 2004. All of SJESP's achievements in 2004 position this company for a bright and prosperous future. Creative Innovation plays a lead role in propelling a company to the forefront of the industry. At SJI, this is certainly a key component of our strategy for growth. Recognizing their ability to increase efficiencies and productivity, members of our dynamic workforce use their expertise and in-depth knowledge to improve procedures, processes and, ultimately, results. Millennium Account Services Millennium's future growth opportunities will come from expansion of meter-related and consulting services and increased productivity. In 2005, Millennium has contracts to perform two meter-related surveys and is pursing other consulting opportunities related to its business experience. Performance relating to meter reading has exceeded the standards set each year by both SJG and Conectiv since the company's inception in 1999. Millennium achieved a combined read rate of 96.9% in 2004. The number of meters read annually and revenues increased in 2004 as well. South Jersey Industries Balance Sheet and Corporate Governance During 2004, SJI built upon efforts begun in 2003 to improve its balance sheet by adding over $25 million of new equity. The combination of strong earnings and additional equity improved SJI's equity to total capitalization ratio to 44.6% at December 31, 2004 from 41.0% at the same time last year and 34.4% at the end of 2002. We also took advantage of the historically low interest rate environment to lock in low, fixed rates on long-term debt wherever possible. By improving the balance sheet we enhanced SJI's risk profile and mitigated the future impact on earnings from rising interest rates. Most importantly, these Like a strong balance sheet, solid employees can be a leading indicator of a company's current and future performance. Nancy DeFrancesco, manager of financial reporting, and Greg Nuzzo, supervisor of nonutility accounting, are two assets in our Accounting department that truly understand the bottom line. Nancy is a key driver in implementing a next generation accounting system that provides for effective, comprehensive management of utility cost centers. Greg is taking the lead in improving systems and efficiencies for the nonutility businesses. -10- actions enable us to take advantage of future growth opportunities while remaining the safe, dependable investment that our shareholders expect. Management is committed to keeping SJI's capital structure at the new level, an average annualized range of 46 to 50%, in the future. Honesty, integrity and transparency describe SJI's actions regarding corporate governance. Our entire organization is fully committed to meeting and exceeding the requirements set forth in the Sarbanes-Oxley Act of 2002. Our control environment is comprehensive and involves employees at all levels of the company as well as our board of directors and its audit committee. As a result of extensive testing by management, we are pleased to report that our internal control over financial reporting is effective and we have received an unqualified opinion from our independent registered public accounting firm (see the report from management on page 20 and the report of independent registered public accounting firm on page 21). Community Involvement As the southern New Jersey region grows, so does the need for community and health services. SJI's companies, in addition to providing support in the form of energy-related services, have a long-standing history of providing human and financial resources to numerous organizations, but with a strong focus on health care. Our contributions to capital campaigns for several hospital systems in the region have helped provide the physical infrastructure that allows these organizations to expand their health care services used by our families, friends and neighbors. In 2004, Bacharach Hospital unveiled its new Aquatic Center that provides aquatic therapy as part of its comprehensive rehabilitation services. Shore Memorial Hospital Cancer Center began providing cancer treatment to residents in the region using the best available technology, experts and services. South Jersey Health System Regional Medical Center opened its doors offering cutting edge medicine and using the latest technology in providing a level of care and convenience previously unavailable to its patients. Virtua Health's William G. Rohrer Center for Health Fitness offers members an 82,000-square-foot facility blanketed with state-of-the-art fitness equipment. SJI's financial support of these new facilities underscores its commitment to improving quality of life for everyone living in southern New Jersey. Standing Out From the Crowd Standout performance begins with a well-planned strategy but also demands the corporation, its management and its workforce be dedicated, reliable, creative and adaptive to change. At SJI, we recognize the importance of these characteristics and embrace them as our own. With our foundation for success strong and our position well-defined, we are confident in providing our shareholders with sustained future growth, our customers with quality services and our region with healthier, more prosperous communities. At SJI, we believe that in standing out from the crowd, we can and will be the energy company of first choice for investors, customers and employees. Helping to bring the SJI story to life are the words and images carefully crafted and designed by our Corporate Communications team. Paul Wolcott, supervisor of creative services and Michele Lamb, communications specialist, dedicate their creative talents to promoting SJI and to marketing the revenue-generating services of the subsidiaries. With award-winning writing and design to their credit, Paul and Michele translate corporate goals and objectives into visually-rich messages that support the successes of our business lines. -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 313,579 customers at December 31, 2004 compared with 304,562 customers at December 31, 2003. SJG also: * sells natural gas and pipeline transportation capacity (off-system sales) on a wholesale basis to various customers on the interstate pipeline system; * transports natural gas purchased directly from producers or suppliers for its own sales and for some of its customers; and * serviced appliances via the sale of appliance service programs as well as on a time and materials basis through September 1, 2004, at which time the business line was transferred out of SJG and into South Jersey Energy Service Plus, LLC. 2) South Jersey Energy Company (SJE) acquires and markets natural gas and electricity to retail end users and provides total energy management services to commercial and industrial customers. SJE also markets an air quality monitoring system through AirLogics, LLC. SJE and GZA GeoEnvironmental, Inc., an environmental consulting firm, each have a 50% equity interest in AirLogics. 3) South Jersey Resources Group, LLC (SJRG) markets wholesale natural gas storage, commodity and transportation in the mid-Atlantic and southern states. SJRG also conducts price-risk management activities by entering into a variety of physical and financial transactions including forward contracts, swap agreements, option contracts and futures contracts. SJRG performs this risk management function for SJG and SJE and enters into the types of financial transactions noted above. 4) Marina Energy LLC (Marina) develops and operates energy-related projects. Marina's largest project, the development of a facility to provide cooling, heating and hot water to the Borgata Hotel Casino & Spa in Atlantic City, began commercial operations in July 2003. Marina also owns a 51% equity interest in AC Landfill Energy, LLC (ACLE). ACLE was formed with DCO Energy, LLC to develop and install a 1,400 kilowatt methane-to-electric power generation system at a county-owned landfill in Egg Harbor Township, NJ. Commercial operation of the plant is targeted for early 2005. 5) South Jersey Energy Service Plus, LLC (SJESP) installs residential and small commercial HVAC systems and services appliances via the sale of appliance service programs as well as on a time and materials basis in southern New Jersey. SJI also has a joint venture investment with Conectiv Solutions, LLC in Millennium Account Services, LLC (Millennium). Millennium provides meter reading services to SJG and Conectiv Power Delivery in southern New Jersey. SJI's stated long-term goals are to: 1) Grow earnings per share from continuing operations by an average of 6 to 7% per year; 2) Increase the dividend on common stock by 3 to 6% annually and; 3) Maintain a low- to moderate-risk profile. Management established those goals in conjunction with its Board of Directors based upon a number of different internal and external factors that characterize and influence SJI's activities currently, and are expected to do so in the future. The following is a summary of the primary factors we expect to have the greatest impact on SJI's performance and its ability to achieve its long-term goals going forward: Business Model -- In developing SJI's current business model, our focus has been on our core utility and natural extensions of that business. That focus enables us to concentrate on business activities that match our core competencies. We have no plans to become involved in business opportunities that do not fit this model. Customer Growth -- The vibrancy of the economic development in and adjacent to southern New Jersey, our primary area of operations, and related strong demand for new housing has enabled our utility to grow its customer count at an average rate of 2.75% over the past five years. That growth rate increased to 3.0% in 2004. While housing growth most significantly benefits utility performance, it also translates into additional opportunities to market the retail products and services of our non-utility businesses. Regulatory Environment -- SJG is primarily regulated by the New Jersey Board of Public Utilities (BPU). The BPU sets the rates that SJG can charge its rate-regulated customers for services provided and establishes the terms of service under which SJG operates. We expect the BPU to continue to set rates and establish terms of service that will enable SJG to obtain a fair and reasonable return on capital invested. The BPU approved a change in base rates in July 2004 that will provide a significant earnings benefit in 2005 compared with 2004. Weather Conditions -- SJG's earnings are largely protected from fluctuations in temperatures by a BPU-approved Temperature Adjustment Clause. This clause has a stabilizing effect on utility income as SJG recognizes and records earnings based upon an average of temperatures over a 20-year period, and not actual temperatures experienced during a given year. However, SJG's earnings are not protected from changes in the natural gas usage patterns of our customers. Usage patterns can be affected by a number of factors, such as wind, precipitation and temperature extremes. Our non-utility gas retail marketing business is directly affected by weather conditions, as it does not have accounting mechanisms that address weather volatility. Note that the impact of different weather conditions on the earnings of our non-utility businesses is dependent on a range of different factors. Consequently, weather may impact the earnings of SJI's various subsidiaries in different, or even opposite, ways. Further, the profitability of individual subsidiaries may vary from year to year despite experiencing substantially similar weather conditions. Changes in Natural Gas Prices -- In recent years, prices for natural gas have become increasingly volatile. The utility's gas costs are passed on directly to customers without any profit margin added by SJG. The price the utility charges customers is set annually, with a regulatory mechanism in place to make limited adjustments to that price during the course of a year. High prices can make it more difficult for our customers to pay their bills and may result in elevated levels of bad-debt expense. Among our non-utility activities, the one most likely to be impacted by changes in natural gas prices is our retail gas marketing business. Our ability to add and retain customers is affected by the relationship between the price that the utility charges customers for gas and the cost of gas available in the market at specific points in time. Energy Project Development -- Marina Energy, SJI's energy project development business, focuses on designing, building, owning and/or operating energy production facilities on, or adjacent to, customer sites. That business is currently involved with five projects that are either operating, or are under development. Based upon our experience to date, market issues that impact the reliability and price of electricity supplied by utilities, and discussions that we are having regarding additional projects, we expect to continue to expand this business. However, the price of natural gas has a direct effect on the economics of these projects. -12- Changes in Interest Rates -- SJI has operated in a relatively low interest rate environment over the past several years. Rising interest rates would raise the expense associated with existing variable rate debt and all issuances of new debt. We have sought to mitigate the impact of a potential rising rate environment by fixing the costs on all long-term debt, either by directly issuing fixed-rate debt or by entering into derivative transactions to hedge against rising interest rates. Labor and Benefit Costs -- Labor and benefit costs have a significant impact on SJI's profitability. Benefit costs, especially those related to health care, have risen in recent years. We sought to manage these costs by revising health care plans offered to existing employees, capping post-retirement health care benefits and changing health care and pension packages offered to new hires. Our workforce totaled 633 employees at the end of 2004, with 61% of that total being unionized. During 2004, we agreed to new contracts with all of our bargaining units that encompass the changes mentioned above. The contracts run through at least January 2008, with the largest bargaining units signed through January 2009. We expect cost benefits from these changes to gradually increase as new hires replace retiring employees. Balance Sheet Strength -- In 2003 and 2004, SJI took significant steps to enhance the quality of its balance sheet. Through the issuance of new equity and strong earnings performance, SJI's equity to capitalization ratio, inclusive of short-term debt, improved from 41.0% at the end of 2003 to 44.6% at the end of 2004. We expect SJI's average, annualized equity to capitalization ratio to range between 46.0% and 50.0% going forward. A strong balance sheet permits us to maintain the financial flexibility necessary to take advantage of the many growth opportunities present at SJI's utility and non-utility operations. Forward-Looking Statements -- This report contains certain forward-looking statements concerning projected financial and operating performance, future plans and courses of action and future economic conditions. All statements in this report other than statements of historical fact are forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and actual results could differ materially from those expressed or implied in the forward-looking statements. Also, in making forward-looking statements, we assume no duty to update these statements should expectations change or actual results and events differ from current expectations. A number of factors could cause our actual results to differ materially from those anticipated including, but not limited to, the following: general economic conditions on an international, national, state and local level; weather conditions in our marketing areas; changes in commodity costs; changes in the availability of natural gas; legislative, regulatory and court decisions; competition in our utility and nonutility activities; the availability and cost of capital; our ability to maintain existing joint ventures to take advantage of marketing opportunities; costs and effects of legal proceedings and environmental liabilities; the failure of customers or suppliers to fulfill their contractual obligations; and changes in business strategies. CRITICAL ACCOUNTING POLICIES -- ESTIMATES AND ASSUMPTIONS: As described in the footnotes to our consolidated financial statements, management must make estimates and assumptions that affect the amounts reported in the financial statements and related disclosures. Actual results could differ from those estimates. Five types of transactions presented in our consolidated financial statements require a significant amount of judgment and estimation. These relate to regulatory accounting, energy derivatives, environmental remediation costs, pension and other postretirement employee benefit costs, and revenue recognition. Regulatory Accounting -- SJI's largest subsidiary, SJG, maintains its accounts according to the Uniform System of Accounts as prescribed by the New Jersey Board of Public Utilities (BPU). As a result of the ratemaking process, SJG is required to follow Financial Accounting Standards Board (FASB) Statement No. 71, "Accounting for the Effects of Certain Types of Regulation" and, consequently, the accounting principles applied by SJG differ in certain respects from those applied by SJI's businesses not regulated by the BPU. SJG is required under Statement No. 71 to recognize the impact of regulatory decisions on its financial statements. SJG is required under its Basic Gas Supply Service clause (BGSS) to forecast its natural gas costs in setting its rates and provides the ability, subject to BPU approval, to recover or refund the difference between gas cost recoveries and the actual costs of gas through a BGSS charge to customers. We record any underrecovery or overrecovery as a Regulatory Asset or Liability on the consolidated balance sheets and reflect it in the BGSS in subsequent years. SJG also enters into derivatives that are used to hedge natural gas purchases, and we record the offset to the resulting derivative assets or liabilities as a Regulatory Asset or Liability on the consolidated balance sheets. In addition to the BGSS, other regulatory assets consist primarily of remediation costs associated with manufactured gas plant sites, which we discuss below under Environmental Remediation Costs, and several other assets as detailed in Note 1 to the consolidated financial statements. If changes occur in future regulatory positions that indicate the recovery of such regulatory assets is not probable, we would charge the related cost to income. However, currently there are no such anticipated changes at the BPU. Energy Derivatives -- SJI recognizes assets or liabilities for the energy-related contracts that qualify as derivatives that are entered into by its subsidiaries when contracts are executed. We record contracts at their fair value in accordance with FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. We record changes in the fair value of the effective portion of derivatives qualifying as cash flow hedges, net of tax, in Accumulated Other Comprehensive Income and recognize such changes in the income statement when the hedged item affects earnings. Derivatives not designated as hedges are recorded in earnings in the current period. SJG enters into derivatives to hedge against forward price risk. The costs of these contracts are recoverable through SJG's BGSS, subject to BPU approval (See Regulatory Actions). 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. Environmental Remediation Costs -- 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. The estimated future costs range from $55.0 million to $206.6 million. In preparing financial statements, SJI records liabilities for future costs using the lower end of the range because a single reliable estimation point is not feasible due to the amount of uncertainty involved in the nature of projected remediation efforts and the long period over which remediation efforts will continue. We update estimates each year to take into account past efforts, changes in work plans and remediation technologies (See section under Environmental Remediation later in this discussion). -13- Pension and Other Postretirement Benefit Costs -- The costs of providing pension and other postretirement employee benefits are impacted by actual plan experience as well as assumptions of future experience. Employee demographics, plan contributions, investment performance, and assumptions concerning return on plan assets, discount rates and health care cost trends all have a significant impact on determining our projected benefit obligations. We evaluate these assumptions annually with the assistance of our investment manager and actuary and we adjust them accordingly. These adjustments could result in significant changes to the net periodic benefit costs of providing such benefits and the related liabilities recognized by SJI. Revenue Recognition -- Gas and electricity revenues are recognized in the period the commodity is delivered. SJG, SJRG and SJE bill customers monthly. A majority of SJG and SJE customers have their meters read on a cycle basis throughout the month. For SJG and SJE retail customers that are not billed at the end of each month, we record an estimate to recognize unbilled revenues for gas/electricity delivered from the date of the last meter reading to the end of the month. SJG's and SJE's unbilled revenue for natural gas is estimated each month based on monthly deliveries into the system; unaccounted for natural gas based on historical results; customer-specific use factors, when available; actual temperatures during the period; and applicable customer rates. SJE's unbilled revenue for retail electricity is based on customer-specific use factors and applicable customer rates. 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 SJESP's appliance service contracts seasonally over the full 12-month term of the contract. Marina recognizes revenue on a monthly basis as services are provided and for thermal energy that is delivered to its customers. The BPU allows SJG to recover gas costs in rates through the Basic Gas Supply Service (BGSS) price structure. SJG defers over/underrecoveries of gas costs and includes them in subsequent adjustments to the BGSS rate or other similar rate recovery mechanism. These adjustments result in over/underrecoveries of gas costs being included in rates during future periods. As a result of these deferrals, utility revenue recognition does not directly translate to profitability. While SJG realizes profits on gas sales during the month of providing the utility service, significant shifts in revenue recognition may result from the various recovery clauses approved by the BPU without shifting profits between periods, as these clauses provide for cost recovery on a dollar-for-dollar basis (See Regulatory Actions). NEW ACCOUNTING PRONOUNCEMENTS -- See detailed discussions concerning New Accounting Pronouncements and their impact on SJI in Note 1 to the consolidated financial statements. TEMPERATURE ADJUSTMENT CLAUSE -- A BPU-approved Temperature Adjustment Clause (TAC) increased (decreased) SJG's net income by $0.2 million, $(1.7) million and $2.3 million in 2004, 2003 and 2002, respectively. The clause mitigates the effect of variations in heating season temperatures from historical norms. While we record the revenue and income impacts of TAC adjustments as incurred, cash inflows or outflows directly attributable to TAC adjustments generally do not begin until the next clause year. Each TAC year begins October 1. REGULATORY ACTIONS: Base Rates -- In January 1997, the BPU granted SJG rate relief, which was predicated in part upon a 9.62% rate of return on rate base that included an 11.25% return on common equity. This rate relief provided for cost-of-service recovery, including deferred costs, through base rates. Additionally, SJG's threshold for sharing pre-tax margins generated by interruptible and off-system sales and transportation increased. As a result of this case, SJG kept 100% of pre-tax margins up to the threshold level of $7.8 million. The next $750,000 was credited to customers through the Basic Gas Supply Service clause (BGSS). Thereafter, SJG kept 20% of the pre-tax margins as it had historically. On July 7, 2004, the BPU granted SJG a base rate increase of $20.0 million, which was predicated in part upon a 7.97% rate of return on rate base that included a 10.0% return on common equity. The increase, effective July 8, 2004, was designed to provide an incremental $8.5 million on an annualized basis to net income. SJG was also permitted to recover regulatory assets contained in its petition and to reduce its composite depreciation rate from 2.9 to 2.4%. Included in the base rate increase was a change to the sharing of pre-tax margins on interruptible and off-system sales and transportation. SJG now recovers through its base rates the $7.8 million that it had previously recovered through the sharing of pre-tax margins. As a result, the sharing of pre-tax margins now begins from dollar one, with SJG retaining 20%. Moreover, SJG now shares pre-tax margins from on-system capacity release sales, in addition to the interruptible and off-system sales and transportation. Effective July 1, 2006, the 20% retained by SJG will decrease to 15% of such margins. As part of the overall settlement effective July 8, 2004, SJG reduced rates in several rate clauses that were no longer needed by SJG to recover costs. SJG was either no longer incurring or had already recovered the specific costs that these clauses were designed to recover. Since revenues raised under these clauses were for cost recovery only and had no profit margin built in, their elimination has no impact on SJG's net income. However, SJG's customers' bills are estimated to decline by $38.9 million annually due to the elimination of these clauses, more than offsetting the base rate increase awarded. Pending Audits -- The BPU issued an order under which it will perform a competitive services audit and a management audit that includes a focused review of SJG's gas supply and purchasing practices. The audits, which commenced in October 2004, are mandated by statute to be conducted at predetermined intervals. Management does not currently anticipate the outcome of these audits to materially affect SJI's financial position, results of operations or liquidity. Appliance Service Business -- On July 23, 2004, the BPU approved SJG's petition and related agreements to transfer its appliance service business from the regulated utility. In anticipation of this transfer, SJI formed South Jersey Energy Service Plus, LLC (SJESP) to perform appliance repair services after BPU approval of the transfer. SJESP purchased certain assets and assumed certain liabilities required to perform these repair services from SJG for the net book value of $1.2 million on September 1, 2004. The agreements also called for SJESP to pay an additional $1.5 million to SJG. SJG credited this $1.5 million to customers through the Remediation Adjustment Clause (RAC), which had no earnings impact on SJG. The $1.5 million is considered an intangible asset by SJESP and is being amortized on a straight-line basis over a 12-year period, which commenced as of the transfer date. The amortization period was based on a study performed by an independent consultant. The study results indicate the benefit period is linked to residential homeowner moving rates based on U.S. Census Bureau and regional information. This newly created company now has the flexibility to be more responsive to competition and customer needs in an unregulated environment. Furthermore, the transfer has had no effect on the provision of safety-related or emergency-related services to the public since the transferred services include only non-safety related, competitive appliance services. Other Regulatory Matters -- Effective January 10, 2000, the BPU approved full unbundling of SJG's system. This allows all natural gas consumers to select -14- their natural gas commodity supplier. As of December 31, 2004, 87,645 of SJG's residential customers were purchasing their gas commodity from someone other than SJG. Customers choosing to purchase natural gas from providers other than the utility are charged for the cost of gas by the marketer, not the utility. The resulting decrease in SJG's revenues is offset by a corresponding decrease in gas costs. While customer choice can reduce utility revenues, it does not negatively affect SJG's net income or financial condition. The BPU continues to allow for full recovery of prudently incurred natural gas costs through the BGSS. Unbundling did not change the fact that SJG still recovers cost of service, including deferred costs, through base rates. In December 2001, the BPU approved recovery of SJG's October 31, 2001 underrecovered gas cost balance of $48.9 million plus accrued interest since April 1, 2001 at a rate of 5.75%. SJG finished recovering this balance upon settlement of its rate case in July 2004. 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 recovered through SJG's RAC; energy efficiency and renewable energy program costs recovered through SJG's New Jersey Clean Energy Programs; consumer education program costs; and low income program costs recovered through the Universal Service Fund. In August 2003, the BPU approved a $6.7 million increase to SJG's SBC, effective September 1, 2003. In September 2004, SJG filed for a $2.6 million reduction to its current SBC annual recovery level of $17.5 million. In September 2002, SJG filed for an $8.6 million rate increase to recover the cash related to a Temperature Adjustment Clause (TAC) deficiency resulting from warmer-than-normal weather for the 2001-2002 winter. As a result of the colder-than-normal 2002-2003 winter, the cumulative TAC deficiency decreased to $5.7 million. In August 2003, the BPU approved the recovery of the $5.7 million TAC deficiency, effective September 1, 2003. SJG has fully recovered the $5.7 million. In September 2004, SJG filed for a $1.2 million increase to recover the cash related to the TAC deficiency resulting from the 2003-2004 winter, which was warmer than normal. Also in September 2002, SJG filed with the BPU to maintain its current BGSS rat through October 2003. However, due to price increases in the wholesale market, in February 2003, SJG filed an amendment to the September 2002 filing. In April 2003, the BPU approved a $16.6 million increase to SJG's annual gas costs recoveries. In March 2003, the BPU approved a statewide Universal Service Fund (USF) program on a permanent basis. In June 2003, the BPU established a statewide program through which funds for the USF and Lifeline Credit and Tenants Assistance (Lifeline) Programs would be collected from customers of all New Jersey electric and gas utilities. The BPU ordered that utility rates be set to recover a total statewide USF budget of $33.0 million, and a total Lifeline budget of $72.0 million. Recovery rates for both programs were implemented in August 2003. In April 2004, SJG made its annual USF filing, along with the state's other electric and gas utilities, proposing a statewide USF budget of $105.5 million. The proposed statewide budget was updated to $113.0 million and filed with the BPU in May 2004. In June 2004, the BPU approved the statewide budget of $113.0 million and the increased rates were implemented effective July 1, 2004, resulting in a $3.9 million increase to SJG's annual USF recoveries. In July 2003, SJG made its annual BGSS filing, as amended, with the BPU. Due to further price increases in the wholesale market, SJG filed for a $24.0 million increase to its annual gas cost revenues. In August 2003, the BPU approved SJG's price increase on a provisional basis, subject to refund with interest, effective September 1, 2003. In October 2004, the provisional rate increase was made final with no refund required. In February 2004, SJG filed notice with the BPU to reduce its gas cost revenues by approximately $5.0 million, via a rate reduction, in addition to a $20.8 million bill credit to customers. Both the rate reduction and bill credit were approved and implemented in March 2004. In June 2004, SJG made its annual BGSS filing with the BPU requesting a $4.9 million increase in gas cost recoveries. In October 2004, the requested increase was approved on a provisional basis. Filings and petitions described above are still pending unless otherwise indicated. ENVIRONMENTAL REMEDIATION -- SJI incurred and recorded costs for environmental cleanup of 12 sites where SJG or its predecessors operated manufactured gas plants (MGP). SJG stopped manufacturing gas in the 1950s. SJI and some of its nonutility subsidiaries also recorded costs for environmental cleanup of sites where we previously operated a fuel oil business and also where we maintained equipment, fueling stations and storage. We successfully entered into settlements with all of SJG's historic comprehensive general liability carriers regarding environmental remediation expenditures at former MGP sites. As part of these settlements, SJG purchased an insurance policy that caps its remediation expenditures at 11 of these sites. The insurance policy is in force until 2024 at 10 sites and until 2029 at one site. We believe that all costs incurred net of insurance recoveries relating to SJG's MGP sites will be recovered through rates under SJG's Remediation Adjustment Clause (RAC). The RAC currently permits SJG to recover incurred costs in equal installments over 7-year periods with carrying costs. As of December 31, 2004, SJG has $5.3 million of remediation costs not yet recovered through rates. Other matters are discussed in Note 13 to the consolidated financial statements included as part of this report. COMPETITION -- SJG's franchises are non-exclusive. Currently, no other utility provides retail gas distribution services within SJG's territory. SJG does not expect any other utilities to do so in the foreseeable future because of the extensive investment required for utility plant and related costs. SJG competes with oil, propane and electricity suppliers for residential, commercial and industrial users. The market for natural gas sales is subject to competition due to deregulation. We enhanced SJG's competitive position while maintaining 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 competes with other third-party marketers to sell the unregulated natural gas and electricity commodity to customers. Marketers compete largely on price which is driven by the commodity market. SJE is exposed to market risk associated with commodity supply and with credit risk of suppliers. SJRG competes with other wholesalers that sell natural gas. SJRG is also subject to the same price and credit risks as SJE. Marina competes with other on-site energy production companies. Marina faces competition from customers' preference for alternative technologies for energy production including those customers that address such needs internally. 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, 2004, 87,645 SJG residential customers chose a natural gas commodity supplier other than the utility. This number fell from 102,563 at December 31, 2003 as marketers were -15- unable to offer natural gas at prices competitive with those available under regulated utility tariffs. Customers purchasing natural gas from providers other than SJG are charged for gas costs by the marketer, not SJG. The resulting decrease in SJG's revenues is offset by a corresponding decrease in SJG's gas costs. While customer choice can reduce utility revenues, it does not negatively affect SJG's net income or financial condition. The BPU continues to allow for full recovery of prudently incurred natural gas costs through the Basic Gas Supply Service clause as well as other costs of service including deferred costs, through tariffs. SJI has benefited from customer choice legislation as SJE has successfully competed for and profited from its gas commodity customers. RESULTS OF OPERATIONS: Operating Revenues -- Utility -- Revenues, net of intercompany transactions, decreased $1.1 million compared with the prior year. The net decrease was primarily due to several large offsetting factors. Revenues decreased as a result of lower Off-System Sales (OSS) revenues due to lower sales volume in 2004 compared with 2003. A second factor was weather that was 5.8% warmer than the prior year resulting in lower utility sales. Offsetting these factors were the addition of 9,017 customers in 2004 and a $5.7 million increase in recoveries for previously deferred costs under SJG's New Jersey Clean Energy Program (See discussion under Operations Expense). Revenues, net of intercompany transactions, increased $103.2 million in 2003 compared with 2002. This increase was primarily due to four factors. First, weather was 12.5% colder in 2003 than in 2002. Second, OSS revenues increased significantly as a direct result of higher prices for natural gas sold in 2003 than in the prior year. Third, SJG added 8,188 customers in 2003. Finally, the BPU approved two increases to SJG's Basic Gas Supply Service Clause to address the recovery of the increasing prices of natural gas sold in 2003 and an increase in SJG's Societal Benefits Clause recoveries to fund State-sponsored programs (See Regulatory Actions). Partially offsetting the effect of these factors was a 16.3% increase in the number of residential customers purchasing their gas from a source other than SJG. The decline in customers who purchased their natural gas from SJG directly impacted utility revenues. However, since gas costs are passed on directly to customers without any profit margin added by SJG, the increased customer usage of gas marketers did not impact SJG's profitability. As a result of SJG's Temperature Adjustment Clause (TAC), revenues from utility ratepayers are closely tied to 20-year normal temperatures calculated under the clause and not actual temperatures. While the clause significantly reduces fluctuations in revenues related to temperature, as a general rule, revenues continue to be positively impacted by colder weather and negatively impacted by warmer weather. Weather in 2004 was 5.8% warmer than in 2003, and 1.0% warmer than the 20-year TAC average. Weather in 2003 was 12.5% colder than 2002, and 5.1% colder for the year than the 20-year TAC average. Total gas throughput increased 6.3% to 132.8 billion cubic feet (Bcf) in 2004. The higher throughput was primarily due to a significant increase in capacity release activity during the year. While revenues from such activities are not as high as those including the actual sale of commodity, contributions to margins are still comparable. Total gas throughput increased 3.4% to 125.0 Bcf from 2002 to 2003. The higher throughput was primarily due to the addition of 8,188 customers and colder weather experienced in 2003. Operating Revenues -- Nonutility -- Revenues, net of intercompany transactions, increased by $115.0 million in 2004 compared with 2003. Most of the increase was due to SJE's revenues from the sale of retail electricity which increased by $57.1 million in 2004 compared with 2003. SJE was the successful bidder on a contract to supply retail electricity to over 400 school districts located throughout the state of New Jersey beginning in November 2003. Sales of retail gas by SJE increased $38.3 million in 2004 compared with 2003. This increase was due mainly to higher gas prices and lower temperatures in the first quarter of 2004. The increase was partially offset by a decrease of over 14,300 residential and 2,600 commercial customers due to unfavorable market conditions experienced during 2004. Marina's revenues increased $8.1 million in 2004 compared with 2003. This increase resulted from sales of thermal energy to the Borgata Hotel Casino & Spa, which opened in July 2003, and other on-site energy production projects. SJRG's revenues increased $6.5 million in 2004 compared with 2003 due mainly to sales volume growth, highlighted by additional storage capacity, and higher gas prices. Revenues, net of intercompany transactions, increased by $90.1 million in 2003 compared with 2002. Most of the increase was due to continued customer growth experienced by SJE, evidenced by the addition of over 14,800 residential and 2,200 commercial natural gas customers in 2003, higher natural gas prices and significantly colder weather. SJE's revenues from the sale of retail electricity increased by $12.2 million in 2003 compared with 2002 mainly due to the school bid. Also contributing to this increase was $9.1 million in revenues recognized by Marina from sales of thermal energy to the Borgata. SJRG's revenues increased $5.6 million in 2003 compared with 2002 mainly due to new accounting requirements which require the sales of inventory to be reported "gross" in 2003 (See Energy Trading Activities and Derivative Instruments in Note 1 to the Consolidated Financial Statements). SJRG's volume growth and higher natural gas prices also contributed to the increase. Cost of Sales -- Utility -- Cost of sales, net of intercompany transactions, decreased $8.4 million in 2004 compared with 2003 due principally to a significant decrease in sales volumes, primarily in the Off-System Sales (OSS) market. Unlike gas costs associated with OSS, changes in the unit cost of gas sold to utility ratepayers do not always directly affect cost of sales. We defer fluctuations in gas costs to ratepayers not reflected in current rates to future periods under a BPU-approved Basic Gas Supply Service (BGSS) price structure. Primarily as a result of the impact of warmer weather, firm sales volume in the residential and commercial markets decreased by 6.0% for the year 2004 compared with the prior year. Cost of sales, net of intercompany transactions, increased $89.3 million in 2003 compared with 2002 due principally to a significant increase in costs for both local distribution and OSS. SJG's gas cost during 2003 averaged $6.74 per decatherm (dt) compared with $4.46 per dt in 2002. Additionally, as described under Regulatory Actions, the BPU approved two increases to SJG's BGSS clause during 2003 resulting in higher cost of gas sold and related revenue. Gas supply sources include contract and open-market purchases. SJG secures and maintains its own gas supplies to serve its sales customers. We do not anticipate any difficulty renewing or replacing expiring contracts under substantially similar terms and conditions. Cost of Sales -- Nonutility -- Cost of sales, net of intercompany transactions, increased $102.7 million in 2004 compared with 2003 due mainly to SJE's electric customer growth, higher gas costs and Marina's operations as described in the Operating Revenues -- Nonutility section. Cost of sales, net of intercompany transactions, increased $79.8 million in 2003 compared with 2002 due mainly to SJE's customer growth, lower temperatures, higher gas prices and Marina's operations as described in the Operating Revenues -- Nonutility section. -16- Operations Expense -- A summary of net changes in operations expense, net of intercompany transactions, (in thousands): 2004 vs. 2003 2003 vs. 2002 Utility $ 1,970 $ 7,207 Nonutility: Wholesale Gas 215 329 Retail Gas and Other (1,573) 2,050 On-Site Energy Production 1,813 2,354 Appliance Service 2,885 -- Total Nonutility 3,340 4,733 Corporate 1,093 560 Total Operations $ 6,403 $ 12,500 Utility Operations expense increased in 2004 primarily because of the BPU-approved increase in SJG's Societal Benefits Clause (SBC) in August 2003 (See Regulatory Actions). With this approval, recoveries and a corresponding charge to expense for previously deferred costs under SJG's New Jersey Clean Energy Programs (NJCEP) increased by $5.7 million for the year 2004 when compared with 2003. The BPU-approved SBC clause allows for full recovery of these deferred costs including carrying costs and, as a result, the increase in expense has no impact on SJG's net income. SJG's administrative and general (A&G) expenses also increased in 2004 compared with 2003 primarily as a result of deferred cost amortizations approved as part of SJG's July 2004 rate case settlement. The resulting amortizations of approximately $0.5 million in 2004 were included in rate recovery from its customers and had no impact on SJG's net income. In addition, SJG incurred significant expense during the year to improve controls to ensure compliance with both SEC and BPU rules and regulations. Lower bad-debt expense during 2004 significantly offset the previously noted increases for the year. A March 2004 BGSS refund improved SJG's accounts receivable aging significantly in 2004. As a result, SJG benefited from lower uncollectible account write-offs during 2004. In addition, operating expenses related to SJG's appliance service operations decreased $1.9 million as a result of the September 1, 2004 transfer of this function out of the utility (See Regulatory Actions). Utility Operations expense increased significantly in 2003 as a result of the BPU-approved increase in SJG's SBC in August 2003, as previously discussed. With this approval, recoveries and a corresponding charge to expense for previously deferred costs under SJG's NJCEP increased by $1.8 million in 2003 when compared with 2002. In addition, A&G expenses increased in 2003 compared with 2002 primarily because of increasing health care and pension costs, higher insurance expense, higher stock compensation expense and bank fees. Health care and pension costs increased as the cost of providing these benefits continued to increase. Additionally, declines in long-term interest rates resulted in an unfavorable movement in actuarially determined benefit costs (See Note 10 to the Consolidated Financial Statements). Insurance expense was reduced by $0.9 million in 2002 by lowering SJG's reserve for outstanding claims following a period of favorable settlements. SJG also incurred a higher annual expense for stock compensation awards (See Note 4 to the Consolidated Financial Statements) and additional expense related to establishing committed bank facilities in 2003 (See Liquidity and Capital Resources). Finally, the SJG appliance service operations expense increased as its operations grew compared with the prior year. Nonutility Retail Gas and Other Operations expenses decreased in 2004 compared with 2003 due mainly to a significant reduction in SJE's customer acquisition costs. On-Site Energy Production Operations expenses increased in 2004 compared with 2003 due to 12 months of operations at Marina's thermal plant and costs of a cogeneration project that came on line early in 2004. Appliance Service Operations expenses increased as the business began independent operations in September 2004. Corporate Operations expenses increased in 2004 compared with 2003 due to higher salaries directed to corporate initiatives, higher bank fees related to SJI's revolving credit facilities and higher SEC compliance costs. Nonutility Retail Gas and Other Operations expenses increased in 2003 compared with 2002 primarily due to increased staffing levels and higher customer acquisition costs resulting from continued growth in SJE's customer base. Increases in On-Site Energy Production Operations expenses in 2003 compared with 2002 related to the start of commercial operations for Marina's thermal energy plant in July 2003. Corporate Operations expenses increased in 2003 due mainly to higher salaries directed to corporate initiatives, increased employee benefit costs and higher bank fees related to SJI's revolving credit facilities. Other Operating Expenses -- A summary of principal changes in other consolidated operating expenses (in thousands): 2004 vs. 2003 2003 vs. 2002 Maintenance $ 94 $ (423) Depreciation 242 2,195 Energy and Other Taxes (31) 1,224 Maintenance expense decreased in 2003 compared with 2002 primarily due to lower levels of Remediation Adjustment Clause (RAC) amortization. RAC-related expenses do not affect earnings as we recognize an offsetting amount in revenues. Depreciation increased in 2004 compared with 2003 due mainly to Marina's increased investment in property, plant and equipment. This increase was largely offset by a reduction in SJG's depreciation expense resulting from lower depreciation rates approved by the BPU as part of its recent rate case settlement. SJG's composite depreciation rate was reduced from 2.9% to 2.4% effective July 2004. Depreciation was higher in 2003 compared with 2002 due to SJG's and Marina's increased investment in property, plant and equipment. Depreciation on Marina's thermal plant began with the start of commercial operations in July 2003 and totaled $1.5 million and $0.7 million in 2004 and 2003, respectively. The increase in Energy and Other Taxes in 2003 compared with 2002 relates primarily to increases in taxable volumes of gas sold and transported by SJG and higher revenue-based taxes as reflected under the caption, "Operating Revenues - -- Utility." Interest Charges -- Interest charges decreased in 2004 compared with 2003 due primarily to the refunding of higher priced, fixed rate, long-term debt securities with lower-cost debt. These refundings occurred primarily during 2003, with a smaller portion occurring in 2004, and were accomplished with long-term, fixed rate debt issuances under SJG's Medium Term Note Program. The actions taken have resulted in the weighted-average interest rate on our long-term debt decreasing from 7.62% at the end of 2002 to 6.23% as of December 31, 2004. We also benefited in 2004 from lower levels of short-term bank debt outstanding as compared with 2003. These benefits were partially offset by higher average short-term interest rates experienced on bank debt during 2004. Interest charges decreased in 2003 compared with 2002 due to lower interest rates incurred on short- term borrowings in 2003 and the refunding of high-rate, long-term debt described above. These benefits in 2003 were partially offset by interest incurred on debt issued to finance Marina's thermal plant that was being capitalized prior to the facility's July 2003 start-up. Debt is incurred primarily to expand and upgrade SJG's gas transmission and distribution system, to support seasonal working capital needs related to inventories and customer receivables, and to develop energy projects. -17- Discontinued Operations -- The losses are primarily comprised of environmental remediation and product liability litigation associated with previously disposed of businesses. In 2003, the loss also included the sale of property. Cumulative Effect of a Change in Accounting Principle -- Net -- On October 25, 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 02-03, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities" that rescinded EITF Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," and changed the accounting for certain energy contracts 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 EITF Issue No. 02-03, SJI only marks-to-market those energy-related contracts that meet the definition of a derivative in Statement No. 133. Energy-related contracts that do not meet the definition of a derivative are accounted for using the accrual basis of accounting. The effect of this change in accounting resulted in a net charge of $426,338 shown as a Cumulative Effect of a Change in Accounting Principle -- Net in 2003. Net Income Applicable to Common Stock -- Net income increased $8.9 million, or 26.8%, to $42.3 million in 2004 as compared with $33.4 million in 2003. Net income in 2003 increased $4.4 million, or 15.1%, as compared with $29.0 million in 2002. We discuss the reasons for the increases in net income in 2004 and 2003 in detail above. LIQUIDITY AND CAPITAL RESOURCES -- Liquidity needs at SJI are driven by factors that include natural gas commodity prices; the impact of weather on customer bills; lags in fully collecting gas costs from customers under the Basic Gas Supply Service charge; working capital needs of our energy trading and marketing activities; the timing of construction and remediation expenditures and related permanent financings; mandated tax payment dates; and both discretionary and required repayments of long-term debt. Liquidity needs are first met with net cash provided by operating activities. Net cash provided by operating activities varies from year to year primarily due to the impact of weather on customer demand and related gas purchases, inventory utilization and gas cost recoveries. We use short-term borrowings under lines of credit from commercial banks to supplement cash from operations, to support working capital needs and to finance capital expenditures as incurred. From time to time, we refinance short-term debt incurred to finance capital expenditures with long-term debt. Bank credit available to SJI totaled $266.0 million at December 31, 2004, of which $98.7 million, inclusive of $6.4 million of letters of credit, was used. Those bank facilities consist of a $100.0 million revolving credit facility that expires in August 2006, $76.0 million of uncommitted bank lines available to SJG, a $60.0 million revolving credit facility that expires in August 2007, and $30.0 million of uncommitted bank lines available to SJI. The amount of the revolving credit available to SJI was increased by $20.0 million and the expiration date was extended to 2007 in August 2004. We increased the SJI revolving credit in anticipation of greater working capital needs due to anticipated growth at our nonutility operations over the next two years. The revolving credit facilities contain certain financial covenants measured on a quarterly basis. SJI and SJG were in compliance with these covenants as of December 31, 2004. Based upon the existing credit facilities and a regular dialogue with our banks, we believe there will continue to be sufficient credit available to meet our business' future liquidity needs. SJI supplements its operating cash flow and credit lines with both debt and equity capital. Over the years, SJG has used long-term debt, primarily in the form of First Mortgage Bonds and Medium Term Notes (MTN), secured by the same pool of utility assets, to finance its long-term borrowing needs. These needs are primarily capital expenditures for property, plant and equipment. Under a $150.0 million MTN program established in December 2002, SJG issued $110.0 million of long-term debt in 2003. SJG issued the remaining $40.0 million of notes under the MTN program in August 2004 at an average interest rate of 5.66% and an average maturity of 17 years. We used the proceeds of all of the issues to refinance short-term debt outstanding to commercial banks and to redeem certain high interest bearing securities. During 2004, maturities of long-term debt totaled $6.8 million. In addition, SJG redeemed $15.0 million of its 7.7% MTN in July 2004. We anticipate establishing a new MTN program during the first half of 2005. Between September 2001 and January 2003, Marina issued $20.0 million of tax-exempt and $25.0 million of taxable variable rate demand bonds (VRDBs) through the New Jersey Economic Development Authority. The tax-exempt and taxable bonds mature in 2031 and 2021, respectively. Investors in the bonds receive liquidity and credit support via letters of credit provided by a syndicate of four commercial banks. The expiration dates of the underlying letters of credit that provide liquidity support for the weekly remarketing of the VRDBs were extended from September 2005 to September 2007 in August 2004. We used the proceeds of these bond issuances to fund project development and construction costs for the thermal energy plant constructed by Marina to serve the Borgata Hotel Casino & Spa which opened in July 2003. SJI has raised equity capital over the past three years through its Dividend Reinvestment Plan (DRP). Participants in SJI's DRP receive newly issued shares. We offer a 2% discount on DRP investments as it is the most cost-effective way to raise equity capital in the quantities we are seeking. Through the DRP, SJI raised $25.4 million of equity capital by issuing 616,301 shares in 2004 and $36.2 million of equity capital by issuing 986,731 shares in 2003. We anticipate raising additional equity capital through the DRP in 2005 in amounts necessary to maintain SJI's ratio of equity to total capitalization at its current level. SJI's capital structure, excluding preferred stock which was immaterial, was as follows: As of December 31, 2004 2003 Common Equity 45% 41% Long-Term Debt 42% 43% Short-Term Debt 13% 16% Total 100% 100% SJG's long-term, senior secured debt is rated "A" and "Baa1" by Standard & Poor's and Moody's Investor Services, respectively. These ratings have not changed in the past five years. 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 2004 amounted to $76.7 million. We estimate the net costs for 2005, 2006 and 2007 at approximately $87.2 million, $48.4 million and $46.0 million, respectively. Commitments and Contingencies -- SJI is obligated on the letters of credit supporting the VRDBs issued through the New Jersey Economic Development Authority by Marina. A syndicate of four commercial banks has issued $46.0 million of renewing letters of credit to support the development of Marina's thermal plant project. The letter of credit agreement contains certain financial -18- covenants measured on a quarterly basis. SJI was in compliance with these covenants as of December 31, 2004. SJG has certain commitments for both pipeline capacity and gas supply for which it pays fees regardless of usage. Those commitments as of December 31, 2004 average $44.5 million annually and total $209.7 million over the contracts' lives. Approximately 30% of the financial commitment under these contracts expires during the next five years. We expect to renew each of these contracts under renewal provisions as provided in each contract. SJG recovers all prudently incurred fees through rates via the Basic Gas Supply Service clause. The following table summarizes our contractual cash obligations and their applicable payment due dates (in thousands): Up to Years Years More than Contractual Obligations Total 1 Year 2 & 3 4 & 5 5 Years Long-Term Debt $ 334,262 $ 5,348 $ 10,737 $ 1,720 $ 316,457 Interest on Long-Term Debt 300,751 20,214 39,081 37,972 203,484 Operating Leases 900 321 512 51 16 Construction Obligations 5,133 5,133 -- -- -- Commodity Supply Purchase Obligations 430,098 245,389 92,247 66,167 26,295 Other Purchase Obligations 3,509 3,446 63 -- -- Total Contractual Cash Obligations $1,074,653 $ 279,851 $ 142,640 $ 105,910 $ 546,252 Expected environmental remediation costs are not included in the table above due to the subjective nature of these costs and the timing of anticipated payments. SJG's regulatory obligation to contribute $3.6 million annually to its postretirement benefit plans, less costs incurred directly, is not included as the duration is indefinite. As a result, the total obligation cannot be calculated. SJI does not expect to make a pension contribution in 2005 and future contributions cannot be determined at this time (See Note 10 to the consolidated financial statements). Off-Balance Sheet Arrangements -- SJI has no off-balance sheet financing arrangements. Parental Guarantees -- As of December 31, 2004, SJI had issued $196.6 million of parental guarantees on behalf of its subsidiaries. Of this total, $159.6 million expire within one year, $0.2 million expire in 2006 and $36.8 million have no expiration date. The vast majority of these guarantees were issued as guarantees of payment to third parties with whom our subsidiaries have commodity supply contracts. These contracts contain netting provisions which permit us to net the ultimate cash payment for monthly buys and sells from/to counterparties. As of December 31, 2004, these guarantees support future firm commitments and $56.1 million of the Accounts Payable recorded on our consolidated balance sheet. As part of our risk management policy, we also require parental guarantees from trading counterparties as applicable. These arrangements are typical in our industry. SJI has also issued two parental guarantees totaling $6.3 million related to Marina's construction activity. Sale Leaseback -- On January 5, 2004, Marina paid $2.7 million to purchase a cogeneration facility in Salem County, NJ and is leasing the facility back to a large manufacturer located on the same site over an 8-year lease. Marina also entered into an 8-year operating contract to operate and manage the facility. Pending Litigation -- SJI is subject to claims arising in the ordinary course of business and other legal proceedings. We accrue liabilities related to claims when we can determine the amount or range of amounts of likely settlement costs for those claims. SJI has been named in, among other actions, certain product liability claims related to our former sand mining subsidiary. Management does not currently anticipate the disposition of any known claims to have a material adverse effect on SJI's financial position, results of operations or liquidity. CONTRACT MODIFICATIONS -- On September 27, 2004, Marina signed an agreement with the Borgata to amend the terms of the original contract dated December 12, 2000. As provided under this new agreement, Marina paid the Borgata $3.5 million on September 28, 2004 to remove the liquidating damages provision from the Energy Services Agreement and eliminate the requirement for a Letter of Credit from the Operations Agreement. The payment of $3.5 million is being amortized on a straight-line basis over the remaining term of the original 20-year contract. On October 1, 2004, SJG and a large utility customer executed an agreement for the buy-out of the customer's long-term energy contract. This settlement contributed approximately $1.6 million to net income in the fourth quarter of 2004. On November 5, 2004, SJG's largest bargaining unit voted to ratify a new, 4-year contract. The contract will cover the period from the old contract's expiration on January 15, 2005 through January 14, 2009. Terms of the deal include wage increases ranging from 3 to 3.5% over the contract's life, health care plan redesign, the establishment of caps on payments for post-retirement medical benefits, and the implementation of separate wage and benefit packages for new hires. With this agreement, all of SJG's unionized personnel, which represent 61% of our workforce at December 31, 2004, are operating under agreements that run through at least January 2008. MARKET RISKS: Commodity Market Risks -- Certain regulated and unregulated SJI subsidiaries are involved in buying, selling, transporting and storing natural gas and buying and selling retail electricity for their own accounts as well as managing these activities for others. These subsidiaries are subject to market risk due to price fluctuations. To hedge against this risk, we enter into a variety of physical and financial transactions including forward contracts, swaps, futures and options agreements. To manage these transactions, SJI has a well-defined risk management policy approved by our board of directors that includes volumetric and monetary limits. Management reviews reports detailing activity daily. Generally, the derivative activities described above are entered into for risk management purposes. SJG and SJE transact commodities on a physical basis and typically do not enter into financial derivative positions directly. SJRG manages risk for these entities as well as for its own portfolio by entering into the types of transactions noted above. As part of its gas purchasing strategy, SJG occasionally uses financial contracts to hedge against forward price risk. These contracts are recoverable through SJG's BGSS, subject to BPU approval. It is management's policy, to the extent practical, within predetermined risk management policy guidelines, to have limited unmatched positions on a deal or portfolio basis while conducting these activities. As a result of holding open positions to a minimal level, the financial impact to SJRG of changes in value of a particular transaction is substantially offset by an opposite change in the related hedge transaction. As of December 31, 2004, SJRG had $30.7 million of Accounts Receivable under sales contracts. Of that total, 91% were with companies rated investment-grade, were guaranteed by an investment-grade-rated parent or were with companies where we have a collateral arrangement. The remainder of the accounts receivable were within approved credit limits. -19- SJRG and SJE entered into certain contracts to purchase, sell, and transport natural gas. For those derivatives not designated as hedges, we recorded the net unrealized pre-tax (loss) gain of $(1.0) million, $2.3 million and $(0.5) million in earnings during the years ended December 31, 2004, 2003 and 2002, respectively, which are included with realized gains and losses in Operating Revenues -- Nonutility. SJRG's and SJE's contracts are typically less than 12 months long. SJE entered into two longer-term gas supply contracts with two of its larger customers. These contracts were reviewed and approved by SJI's Risk Management Committee after being satisfied that our exposure to price and credit risk had been sufficiently mitigated. The fair value and maturity of all these energy trading and hedging contracts determined under the mark-to-market method as of December 31, 2004 is as follows (in thousands): Assets Source of Maturity Maturity Beyond Fair Value < 1 Year 1 - 3 Years 3 Years Total Prices Actively Quoted NYMEX: Trading $ 7,379 $ 829 $ 412 $ 8,260 Hedging 5,690 254 -- 5,944 Subtotal 13,069 1,083 412 14,564 Other External Sources Basis: Trading 10,072 2,750 109 12,931 Hedging 2,536 876 -- 3,412 Subtotal 12,608 3,626 109 16,343 Total $ 25,677 $ 4,709 $ 521 $ 30,907 Liabilities Source of Maturity Maturity Beyond Fair Value < 1 Year 1 - 3 Years 3 Years Total Prices Actively Quoted NYMEX: Trading $ 7,748 $ 872 $ 384 $ 9,004 Hedging 1,573 92 -- 1,665 Subtotal 9,321 964 384 10,669 Other External Sources Basis: Trading 8,015 2,145 65 10,225 Hedging 897 79 -- 976 Subtotal 8,912 2,224 65 11,201 Total $ 18,233 $ 3,188 $ 449 $ 21,870 NYMEX (New York Mercantile Exchange) is the primary national commodities exchange on which natural gas is traded. Basis represents the price of a NYMEX natural gas futures contract adjusted for the difference in price for delivering the gas at another location. A reconciliation of SJI's estimated net fair value of energy-related derivatives, including energy trading and hedging contracts, follows (in thousands): Net Derivatives -- Energy Related Assets, January 1, 2004 $ 7,000 Contracts Settled During 2004, Net (6,672) Other Changes in Fair Value from Continuing and New Contracts, Net 8,709 Net Derivatives -- Energy Related Assets, December 31, 2004 $ 9,037 Interest Rate Risk -- Our exposure to interest-rate risk relates primarily to short-term, variable rate borrowings. Short-term, variable rate debt outstanding at December 31, 2004 was $92.3 million and averaged $53.6 million during 2004. The months where average outstanding variable rate debt was at its highest and lowest levels were January, at $95.1 million, and May, at $22.7 million. A hypothetical 100 basis point (1%) increase in interest rates on our average variable rate debt outstanding would result in a $316,200 increase in our annual interest expense, net of tax. The 100 basis point increase was chosen for illustrative purposes, as it provides a simple basis for calculating the impact of interest rate changes under a variety of interest rate scenarios. Over the past five years, the change in basis points (b.p.) of our average monthly interest rates from the beginning to end of each year was as follows: 2004 -- 115 b.p. increase; 2003 -- 28 b.p. decrease; 2002 -- 74 b.p. decrease; 2001 -- 383 b.p. decrease; and 2000 -- 83 b.p. increase. For December 2004, our average interest rate on variable rate debt was 3.02%. SJG primarily issues long-term debt at fixed rates and, consequently, interest expense on existing debt is not significantly impacted by changes in market interest rates. SJG redeemed, at par, $4.5 million of 8.6% debenture notes in February 2004 and $15.0 million of 7.7% Medium Term Notes in July 2004. In November 2004, SJG entered into a derivative transaction known as a "Treasury Lock" to hedge against the impact of possible interest rate increases on a $10.0 million, 30-year debt issuance by SJG planned for July 2005. The only other long-term debt outstanding, exclusive of that issued by the utility, consists of the New Jersey Economic Development Authority bonds used to finance the construction of Marina's thermal energy plant and long-term bank loans used to finance the construction of a landfill gas cogeneration project. The bonds for the thermal plant were issued at floating rates that reset weekly. Subsequent to issuance, we entered into interest rate swap contracts that, as of December 31, 2004, effectively fixed the rate on $20.0 million of tax-exempt debt at 4.08% through 2011; and fixed the rates on $9.0 million, $3.9 million, $8.0 million and $3.9 million of taxable debt at 4.55%, 4.62%, 4.80% and 4.78%, respectively. The swaps on the taxable debt expire at various times between 2005 and 2014. The long-term debt for the landfill gas cogeneration project totaled $2.0 million and amortizes over 15 years at fixed rates. Controls and Procedures -- Evaluation of Disclosure Controls and Procedures -- Management has established controls and procedures to ensure that material information relating to SJI, including its consolidated subsidiaries, is made known to the officers who certify its financial reports and to other members of senior management and the Board of Directors. Based upon their evaluation as of December 31, 2004, the principal executive officer and the principal financial officer of SJI have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) employed at SJI are effective to ensure that the information required to be disclosed by SJI in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Management's Report on Internal Control Over Financial Reporting -- Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commision. Based on our evaluation under that framework, management concluded that our internal control over financial reporting was effective as of December 31, 2004. Management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein. -20- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of South Jersey Industries, Inc. We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that South Jersey Industries, Inc. and subsidiaries (the "Company") maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and statement of consolidated capitalization as of December 31, 2004, and the related consolidated statements of income, common equity and comprehensive income, and cash flows of the Company for the year then ended and our report dated March 2, 2005 expressed an unqualified opinion on those financial statements. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 2, 2005 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of South Jersey Industries, Inc. We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization of South Jersey Industries, Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in common stock equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1, the accompanying 2003 balance sheet has been restated for the classification of prepaid pension assets from current assets to noncurrent assets. As discussed in Note 1 to the financial statements, the Company changed its method of accounting for energy-related contracts to conform with the recission of EITF Issue No. 98-10 "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" in 2003. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 2, 2005 -21- Statements of Consolidated Income (In Thousands Except for Per Share Data) South Jersey Industries, Inc. and Subsidiaries Year Ended December 31, 2004 2003 2002 Operating Revenues: Utility (Notes 1, 8 & 9) $ 494,948 $ 496,054 $ 392,884 Nonutility (Notes 1 & 8) 324,128 209,142 119,006 Total Operating Revenues 819,076 705,196 511,890 Operating Expenses: Cost of Sales -- Utility (Note 1) 326,981 335,427 246,135 Cost of Sales -- Nonutility (Note 1) 287,714 184,992 105,242 Operations 70,983 64,580 52,080 Maintenance 5,772 5,678 6,101 Depreciation (Note 1) 24,888 24,646 22,451 Energy and Other Taxes 11,999 12,030 10,806 Total Operating Expenses 728,337 627,353 442,815 Operating Income 90,739 77,843 69,075 Other Income and Expense 985 136 534 Interest Charges (Note 1) 20,573 20,616 20,734 Income Before Income Taxes 71,151 57,363 48,875 Income Taxes (Notes 1, 5 & 6) 29,079 23,596 20,404 Equity in Affiliated Companies (Notes 1 & 3) 901 786 941 Income from Continuing Operations 42,973 34,553 29,412 Loss from Discontinued Operations -- Net (Note 3) (680) (774) (424) Cumulative Effect of a Change in Accounting Principle -- Net (Note 1) -- (426) -- Net Income Applicable to Common Stock $ 42,293 $ 33,353 $ 28,988 Basic Earnings Per Common Share: (Note 4) Continuing Operations $ 3.14 $ 2.75 $ 2.44 Discontinued Operations (0.05) (0.06) (0.03) Cumulative Effect of a Change in Accounting Principle -- Net -- (0.03) -- Basic Earnings Per Common Share $ 3.09 $ 2.66 $ 2.41 Average Shares of Common Stock Outstanding -- Basic 13,691 12,559 12,038 Diluted Earnings Per Common Share: (Note 4) Continuing Operations $ 3.11 $ 2.73 $ 2.43 Discontinued Operations (0.05) (0.06) (0.04) Cumulative Effect of a Change in Accounting Principle -- Net -- (0.03) -- Diluted Earnings Per Common Share $ 3.06 $ 2.64 $ 2.39 Average Shares of Common Stock Outstanding -- Diluted 13,798 12,658 12,116 Dividends Declared Per Common Share $ 1.64 $ 1.56 $ 1.51 The accompanying footnotes are an integral part of the financial statements. -22- Statements of Consolidated Cash Flows (In Thousands) South Jersey Industries, Inc. and Subsidiaries Year Ended December 31, 2004 2003 2002 Cash Flows from Operating Activities: Net Income Applicable to Common Stock $ 42,293 $ 33,353 $ 28,988 Adjustments to Reconcile Net Income to Cash Flows Provided by Operating Activities: Depreciation and Amortization 27,720 27,640 24,864 Unrealized Loss (Gain) on Derivatives -- Energy Related 967 (2,332) 514 Provision for Losses on Accounts Receivable 1,171 3,245 3,706 Revenues and Fuel Costs Deferred -- Net 14,582 30,075 6,788 Deferred and Noncurrent Income Taxes and Credits -- Net 14,930 4,275 14,343 Environmental Remediation Costs -- Net (2,572) 2,262 6,354 Additional Pension Contributions (9,681) (5,731) (17,091) Gas Plant Cost of Removal (1,107) (925) (1,147) Changes in: Accounts Receivable (19,763) (16,762) (29,139) Inventories (11,430) (27,562) 17,949 Other Prepayments and Current Assets (223) 2,493 (3,194) Prepaid and Accrued Taxes -- Net (9,964) 10,827 359 Accounts Payable and Other Accrued Liabilities 43,366 6,093 24,546 Other Assets (6,326) (2,598) (5,017) Other Liabilities (3,213) 8,628 5,481 Net Cash Provided by Operating Activities 80,750 72,981 78,304 Cash Flows from Investing Activities: Return of Investment in (Investment in) Affiliates 249 741 (481) Affiliate Repayment of Loan 245 85 120 Proceeds from Minority Interest 227 -- -- Purchase of Available-for-Sale Securities (338) (339) (693) Net (Purchase) Proceeds from Sale of Restricted Investments (9,575) (1,942) 20,882 Capital Expenditures (74,148) (61,563) (83,593) Net Cash Used in Investing Activities (83,340) (63,018) (63,765) Cash Flows from Financing Activities: Net (Repayments of) Borrowings from Lines of Credit (20,500) (53,700) 14,140 Proceeds from Issuance of Long-Term Debt 41,981 116,000 10,000 Principal Repayments of Long-Term Debt (21,773) (86,740) (30,268) Dividends on Common Stock (22,534) (19,717) (18,204) Proceeds from Sale of Common Stock 26,710 37,160 10,937 Premium for Early Retirement of Debt -- (1,048) (617) Payments for Issuance of Long-Term Debt (386) (1,845) (201) Net Cash Provided by (Used in) Financing Activities 3,498 (9,890) (14,213) Net Increase in Cash and Cash Equivalents 908 73 326 Cash and Cash Equivalents at Beginning of Year 4,364 4,291 3,965 Cash and Cash Equivalents at End of Year $ 5,272 $ 4,364 $ 4,291 Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Interest (Net of Amounts Capitalized) $ 20,084 $ 21,056 $ 23,966 Income Taxes (Net of Refunds) $ 17,551 $ 8,699 $ 8,433 The accompanying footnotes are an integral part of the financial statements. -23- Consolidated Balance Sheets (In Thousands) South Jersey Industries, Inc. and Subsidiaries Year Ended December 31, 2004 2003(1) Assets Property, Plant and Equipment: (Notes 1 & 8) Utility Plant, at original cost $ 957,287 $ 894,654 Accumulated Depreciation (224,506) (209,831) Nonutility Property and Equipment, at cost 71,129 65,768 Accumulated Depreciation (4,040) (2,326) Property, Plant and Equipment -- Net 799,870 748,265 Investments: Available-for-Sale Securities (Note 1) 5,310 4,550 Restricted (Note 7) 13,597 4,022 Investments in Affiliates (Notes 1 & 3) 1,942 2,191 Total Investments 20,849 10,763 Current Assets: Cash and Cash Equivalents (Notes 1 & 12) 5,272 4,364 Accounts Receivable (Note 1) 113,778 98,221 Unbilled Revenues (Note 1) 45,857 42,892 Provision for Uncollectibles (Note 1) (3,495) (3,565) Natural Gas in Storage, average cost 79,281 69,596 Materials and Supplies, average cost 5,357 3,612 Prepaid Taxes 6,104 2,661 Derivatives -- Energy Related Assets (Note 1) 25,677 23,472 Derivatives -- Other (Note 1) 1,549 565 Other Prepayments and Current Assets 4,491 4,268 Total Current Assets 283,871 246,086 Regulatory and Other Noncurrent Assets: Regulatory Assets (Note 1) 72,635 75,780 Prepaid Pension (Notes 1 & 10) 28,589 19,690 Derivatives -- Energy Related Assets (Note 1) 5,230 4,212 Derivatives -- Other (Note 1) 197 -- Unamortized Debt Discount and Expense 8,894 9,037 Contract Receivables 16,153 11,290 Other 7,046 1,080 Total Regulatory and Other Noncurrent Assets 138,744 121,089 Total Assets $ 1,243,334 $ 1,126,203 Capitalization and Liabilities Capitalization: Common Equity (Notes 4 & 11) $ 344,412 $ 297,961 Preferred Stock (Note 2) 1,690 1,690 Long-Term Debt (Note 7) 328,914 308,781 Total Capitalization 675,016 608,432 Minority Interest 227 -- Current Liabilities: Notes Payable (Note 12) 92,300 112,800 Current Maturities of Long-Term Debt 5,348 5,273 Accounts Payable 118,836 80,254 Customer Deposits 8,846 7,957 Environmental Remediation Costs (Note 13) 13,810 7,865 Taxes Accrued 5,419 11,940 Derivatives -- Energy Related Liabilities (Note 1) 18,233 18,809 Derivatives -- Other (Note 1) 1,393 1,505 Deferred Income Taxes -- Net (Note 5) 7,082 11,537 Interest Accrued and Other Current Liabilities 14,052 10,167 Total Current Liabilities 285,319 268,107 Deferred Credits and Other Noncurrent Liabilities: Deferred Income Taxes - Net (Note 5) 143,068 121,922 Investment Tax Credits (Note 6) 3,129 3,471 Pension and Other Postretirement Benefits (Note 10) 13,103 12,431 Environmental Remediation Costs (Note 13) 41,181 47,001 Derivatives -- Energy Related Liabilities (Note 1) 3,637 1,875 Derivatives -- Other (Note 1) 1,540 1,853 Regulatory Liabilities (Note 1) 63,836 49,970 Other 13,278 11,141 Total Deferred Credits and Other Noncurrent Liabilities 282,772 249,664 Commitments and Contingencies (Note 13) Total Capitalization and Liabilities $ 1,243,334 $ 1,126,203 (1) Restated (Note 1) The accompanying footnotes are an integral part of the financial statements. -24- Statements of Consolidated Capitalization (In Thousands Except for Share Data) South Jersey Industries, Inc. and Subsidiaries Year Ended December 31, 2004 2003 Common Equity: (Notes 4 & 11) Common Stock: Par Value $1.25 per share; Authorized 20,000,000 shares; Outstanding Shares: 13,879,968 (2004) and 13,229,001 (2003) Balance at Beginning of Year $ 16,536 $ 15,258 Common Stock Issued Under Stock Plans 814 1,278 Balance at End of Year 17,350 16,536 Premium on Common Stock 212,212 186,316 Accumulated Other Comprehensive Income 3,453 3,471 Retained Earnings 111,397 91,638 Total Common Equity 344,412 297,961 Preferred Stock: (Note 2) South Jersey Gas Company - 8% Redeemable Cumulative Preferred Stock: Par Value $100 per share; 41,966 Shares Authorized; 16,904 Outstanding 1,690 1,690 Long-Term Debt: (A) South Jersey Gas Company: First Mortgage Bonds: (B) 8.19% Series due 2007 6,816 9,089 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 4.46% Series due 2013 10,500 10,500 5.027% Series due 2013 14,500 14,500 4.52% Series due 2014 11,000 11,000 5.115% Series due 2014 10,000 10,000 7.7% Series due 2015 (C) -- 15,000 6.50% Series due 2016 9,965 9,965 4.60% Series due 2016 17,000 17,000 4.657% Series due 2017 15,000 15,000 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 5.55% Series due 2033 32,000 32,000 5.387% Series due 2015 (D) 10,000 -- 5.437% Series due 2016 (D) 10,000 -- 5.587% Series due 2019 (D) 10,000 -- 6.213% Series due 2034 (D) 10,000 -- Unsecured Notes: Debenture Notes, 8.6% due 2010 10,500 15,000 Marina Energy LLC: (E) Series A Bonds at variable rates due 2031 20,000 20,000 Series B Bonds at variable rates due 2021 25,000 25,000 AC Landfill Energy, LLC: (F) Bank Term Loan, 6% due 2014 800 -- Mortgage Bond, 4.19% due 2019 1,181 -- Total Long-Term Debt Outstanding 334,262 314,054 Less Current Maturities 5,348 5,273 Total Long-Term Debt 328,914 308,781 Total Capitalization $ 675,016 $ 608,432 (A) The long-term debt maturities and sinking fund requirements for the succeeding five years are as follows: 2005, $5,348; 2006, $5,367; 2007, $5,373; 2008, $1,607; and 2009, $113. (B) SJG's First Mortgage dated October 1, 1947, as supplemented, securing the First Mortgage Bonds (FMB) constitutes a direct first mortgage lien on substantially all utility plant. (C) On July 15, 2004, SJG redeemed its 7.7% Series due 2015 at par. (D) On August 4, 2004, SJG issued $40 million of debt under its Medium Term Note program established in 2002. (E) Marina has issued $29 million, $10 million and $6 million, respectively, of variable rate revenue bonds through the New Jersey Economic Development Authority. The variable rates at December 31, 2004 for the Series A and Series B bonds were 1.97% and 2.51%, respectively. (F) On October 5, 2004, ACLE entered into a $0.8 million fixed rate term loan with a commercial bank and concurrently issued a fixed interest bond through the New Jersey Economic Development Authority in the amount of $1.18 million. The accompanying footnotes are an integral part of the financial statements. -25- Consolidated Statements of Changes in Common Equity and Comprehensive Income (In Thousands) South Jersey Industries, Inc. and Subsidiaries Years Ended December 31, 2002, 2003 & 2004 Accumulated Other Common Premium on Comprehensive Retained Stock Common Stock (Loss) Income Earnings Total
Balance at December 31, 2001 $ 14,826 $ 139,929 $ (1,687) $ 67,218 $ 220,286 Net Income Applicable to Common Stock 28,988 28,988 Changes in Other Comprehensive (Loss) Income, Net of Tax:* Minimum Pension Liability Adjustment (7,271) (7,271) Unrealized Loss on Equity Investments (149) (149) Unrealized Gain on Derivatives 3,205 3,205 Reclassification Adjustment for Amounts Included in Net Income -- -- Comprehensive Income 24,773 Common Stock Issued Under Stock Plans 432 10,505 10,937 Cash Dividends Declared -- Common Stock (18,204) (18,204) Balance at December 31, 2002 15,258 150,434 (5,902) 78,002 237,792 Net Income Applicable to Common Stock 33,353 33,353 Changes in Other Comprehensive Income (Loss), Net of Tax:* Minimum Pension Liability Adjustment 9,259 9,259 Unrealized Gain on Equity Investments 432 432 Unrealized Gain on Derivatives 4,582 4,582 Reclassification Adjustment for Amounts Included in Net Income (4,900) (4,900) Comprehensive Income 42,726 Common Stock Issued Under Stock Plans 1,278 35,882 37,160 Cash Dividends Declared -- Common Stock (19,717) (19,717) Balance at December 31, 2003 16,536 186,316 3,471 91,638 297,961 Net Income Applicable to Common Stock 42,293 42,293 Changes in Other Comprehensive (Loss) Income, Net of Tax:* Unrealized Loss on Equity Investments (192) (192) Unrealized Gain on Derivatives 3,445 3,445 Reclassification Adjustment for Amounts Included in Net Income (3,271) (3,271) Comprehensive Income 42,275 Common Stock Issued Under Stock Plans 814 25,896 26,710 Cash Dividends Declared -- Common Stock (22,534) (22,534) Balance at December 31, 2004 $ 17,350 $ 212,212 $ 3,453 $ 111,397 $ 344,412
Disclosure of Changes in Accumulated Other Comprehensive (Loss) Income Balances * (In Thousands) Unrealized Accumulated Mimimum (Loss) Gain Unrealized Other Pension Liability on Equity Gain (Loss) on Comprehensive Adjustment Investments Derivatives (Loss) Income
Balance at December 31, 2001 $ (1,988) $ -- $ 301 $ (1,687) Changes During Year (7,271) (149) 3,205 (4,215) Balance at December 31, 2002 (9,259) (149) 3,506 (5,902) Changes During Year 9,259 432 (318) 9,373 Balance at December 31, 2003 -- 283 3,188 3,471 Changes During Year -- (192) 174 (18) Balance at December 31, 2004 $ -- $ 91 $ 3,362 $ 3,453 *Determined using a combined statutory tax rate of 40.85%. The accompanying footnotes are an integral part of the financial statements.
-26- 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), its wholly owned subsidiaries and a subsidiary in which we have a controlling interest. We eliminated all significant intercompany accounts and transactions. RESTATEMENT -- Subsequent to the issuance of consolidated financial statements for the year ended December 31, 2003, SJI determined that its prepaid pension asset of approximately $19.7 million classified as a current asset should have been classified as a noncurrent asset. As a result, the December 31, 2003 consolidated balance sheet was restated to reclassify the $19.7 million from current assets to noncurrent assets. This restatement had no impact on total assets, common equity, the statement of consolidated income, or the statement of consolidated cash flows. EQUITY INVESTMENTS -- We classify equity investments purchased as long-term investments as Available-for-Sale Securities on our consolidated balance sheets and carry them at their fair value with any unrealized gains or losses included in Accumulated Other Comprehensive Income. SJI, either directly or through its wholly owned subsidiaries, currently holds a 50% non-controlling interest in two affiliated companies and accounts for the investments under the equity method. We include the operations of these affiliated companies on a pre-tax basis in the statements of consolidated income under 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. Significant estimates include amounts related to regulatory accounting, energy derivatives, environmental remediation costs, pension and other postretirement benefit costs, and revenue recognition. REGULATION -- South Jersey Gas Company (SJG) is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU). We maintain our accounts according to the BPU's prescribed Uniform System of Accounts (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 -- Gas and electric revenues are recognized in the period the commodity is delivered and customers are billed monthly. For SJG and SJE retail customers not billed at the end of each month, we record an estimate to recognize unbilled revenues for gas and electricity delivered from the date of the last meter reading to the end of the month. We defer and recognize revenues related to South Jersey Energy Service Plus, LLC (SJESP) appliance service contracts seasonally over the full 12-month term of the contract. Marina Energy LLC (Marina) recognizes revenue on a monthly basis as services are provided and for on-site energy production that is delivered to its customers. The BPU allows SJG to recover gas costs through the Basic Gas Supply Service (BGSS) clause. We collect these costs on a forecasted basis upon BPU order. SJG defers over/under-recoveries of gas costs and includes them in the following year's BGSS or other similar recovery mechanism. We pay interest on overcollected BGSS balances at the rate of return on rate base utilized by the BPU to set rates in its last base rate proceeding (See Note 9). SJG's tariff also includes a Temperature Adjustment Clause (TAC), a Remediation Adjustment Clause (RAC), a New Jersey Clean Energy Program (NJCEP) and a Universal Service Fund (USF) program. Our TAC reduces the impact of temperature fluctuations on SJG and its customers. The RAC recovers environmental remediation costs of former gas manufacturing plants and the NJCEP recovers costs associated with our energy efficiency and renewable energy programs. The USF is a statewide customer assistance program that utilizes utilities as a collection agent. TAC adjustments affect revenue, income and cash flows since colder-than-normal weather can generate credits to customers, while warmer-than-normal weather can result in additional billings. RAC adjustments do not directly affect earnings because we defer and recover related costs through rates over 7-year amortization periods (See Notes 9 & 13). NJCEP and USF adjustments are also deferred and do not affect earnings, as related costs and customer credits are recovered through rates on an ongoing basis (See Note 9). ACCOUNTS RECEIVABLE AND PROVISION FOR UNCOLLECTIBLE ACCOUNTS -- Accounts receivable are carried at the amount owed by customers. A provision for uncollectible accounts was established based on our collection experience and an assessment of the collectibility of specific accounts. PROPERTY, PLANT AND EQUIPMENT -- For regulatory purposes, utility plant is stated at original cost, which may be different than SJG's cost if the assets were acquired from another regulated entity. Nonutility plant is stated at cost. The cost of adding, replacing and renewing property is charged to the appropriate plant account. DEPRECIATION -- We depreciate utility plant on a straight-line basis over the estimated remaining lives of the various property classes. These estimates are periodically reviewed and adjusted as required after BPU approval. The composite annual rate for all depreciable utility property was approximately 2.9% in both 2003 and 2002. As a result of SJG's recent rate case settlement, its composite depreciation rate was reduced from 2.9% to 2.4% effective July 8, 2004 (See Note 9). Except for extraordinary retirements, accumulated depreciation is charged with the cost of depreciable utility property retired less salvage (See Asset Retirement Costs). Nonutility property depreciation is computed on a straight-line basis over the estimated useful lives of the property, ranging up to 50 years. Gain or loss on the disposition of nonutility property is recognized in net income. CAPITALIZED INTEREST -- SJG capitalizes interest on construction at the rate of return on rate base utilized by the BPU to set rates in its last base rate proceeding (See Note 9). SJG capitalized interest of $0.7 million in 2004, $0.6 million in 2003 and $0.4 million in 2002. Marina also capitalized interest during the construction of its thermal energy facility based on the actual cost of borrowed funds. Marina capitalized interest of $1.8 million in 2003 and $1.6 million in 2002. Marina did not capitalize any interest during 2004. SJG's amounts are included in Utility Plant and Marina's amounts are included in Nonutility Property and Equipment on the consolidated balance sheets. All capitalized interest is reflected on the statements of consolidated income as a reduction of Interest Charges. -27- 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 2004, 2003 and 2002, we did not identify any significant impairments. ENERGY TRADING ACTIVITIES AND DERIVATIVE INSTRUMENTS -- Certain SJI subsidiaries are involved in buying, selling, transporting and storing natural gas and buying and selling retail electricity for their own accounts as well as managing these activities for others. These subsidiaries are subject to market risk due to price fluctuations. To manage this risk, our companies enter into a variety of physical and financial transactions including forward contracts, swap agreements, option contracts and futures contracts. SJI structured its subsidiaries so that SJG and SJE transact commodities on a physical basis and typically do not directly enter into positions that financially settle. SJRG performs this risk management function for these entities and enters into the types of financial transactions noted above. As part of its gas purchasing strategy, SJG occasionally uses financial contracts to hedge against forward price risk. The costs of these short-term contracts are recoverable through SJG's BGSS, subject to BPU approval. As of December 31, 2004 and 2003, SJG has $0.5 million and $(1.8) million of cost (cost reductions), respectively, included in its BGSS related to these contracts (See caption Regulatory Assets & Regulatory Liabilities). Management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in identifying, assessing and controlling various risks. Management reviews any open positions in accordance with strict policies to limit exposure to market risk. SJI accounts for derivative instruments in accordance with FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. We record all derivatives, whether designated in hedging relationships or not, on the consolidated balance sheets at fair value unless the derivative contracts qualify for the normal purchase and sale exemption. If the derivative is designated as a fair value hedge, we recognize the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk in earnings. We currently have no fair value hedges. If the derivative is designated as a cash flow hedge, we record the effective portion of the hedge in Accumulated Other Comprehensive Income and recognize it in the income statement when the hedged item affects earnings. We recognize ineffective portions of the cash flow hedges immediately in earnings. For the years ended December 31, 2004, 2003 and 2002, the ineffective portions of the derivatives designated as cash flow hedges were not material. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives, strategies for undertaking various hedge transactions and our methods for assessing and testing correlation and hedge ineffectiveness. All hedging instruments are linked to the hedged asset, liability, firm commitment or forecasted transaction. We also assess whether these derivatives are highly effective in offsetting changes in cash flows or fair values of the hedged items. We discontinue hedge accounting prospectively if we decide to discontinue the hedging relationship; determine that the anticipated transaction is no longer likely to occur; or if we determine that a derivative is no longer highly effective as a hedge. In the event that hedge accounting is discontinued, we will continue to carry the derivative on the balance sheet at its current fair value and recognize subsequent changes in fair value in current period earnings. Unrealized gains and losses on the discontinued hedges that were previously included in Accumulated Other Comprehensive Income will be reclassified into earnings. During 2004, $0.7 million of unrealized gain on derivatives previously designated as cash flow hedges, was reclassified into Operating Revenues - Nonutility because we determined that the anticipated hedged transaction was no longer likely to occur. As permitted under Statement No. 133, SJI has elected to designate certain energy-related derivative instruments as cash flow hedges which protect against the price variability of our forecasted sales and purchases of natural gas. Based on the amount recorded in Accumulated Other Comprehensive Income at December 31, 2004, we expect $6.4 million to be recorded as an increase in revenues in 2005. As of December 31, 2004, hedges for future forecasted transactions exist into 2006. SJRG manages its portfolio of purchases and sales, as well as natural gas in storage, using a variety of instruments that include forward contracts, swap agreements, option contracts and futures contracts. SJI measures the fair value of the contracts and records these as Derivatives -- Energy Related Assets or Derivatives -- Energy Related Liabilities on our consolidated balance sheets. For those derivatives not designated as hedges, we recorded the net unrealized pre-tax (loss) gain of $(1.0) million, $2.3 million and $(0.5) million in earnings during the years ended December 31, 2004, 2003 and 2002, respectively, which are included with realized gains and losses in Operating Revenues -- Nonutility. SJI presents revenues and expenses related to its trading derivatives on a net basis in Operating Revenues -- Nonutility in our consolidated statements of income consistent with Emerging Issues Task Force (EITF) Issue No. 02-03, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities." There is no effect on operating income or net income from the above presentation. On October 25, 2002, the EITF reached a consensus on Issue No. 02-03 that rescinded EITF Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," and changed the accounting for certain energy contracts 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 EITF Issue No. 02-03, SJI only marks-to-market those energy-related contracts that meet the definition of a derivative in Statement No. 133. Energy-related contracts that do not meet the definition of a derivative are accounted for using the accrual basis of accounting. The effect of this change in accounting resulted in the net charge of $426,338 shown as a Cumulative Effect of a Change in Accounting Principle -- Net in 2003. In November 2001, we entered into two interest rate swap contracts. The first swap effectively provides us with a fixed interest rate of 4.08% on Marina's tax-exempt Series A variable rate bonds for a 10-year period. The second swap effectively fixed the interest rate of Marina's taxable Series B variable rate bonds at 4.55% for a 6-year period. The notional amount of this second swap decreases by $3.0 million per year beginning in December 2005. In January 2002, Marina issued an additional $10.0 million of taxable Series B variable rate bonds through the New Jersey Economic Development Authority. In April 2002, we entered into an interest rate swap contract that effectively fixed the interest rate on these bonds at 4.62% for a 4-year period. The notional amount of this swap decreased to $8.0 million in December 2003, then decreased to $3.9 million in December 2004, and terminates in December 2005. In November 2004, we entered into two additional interest rate swap contracts against Marina's taxable Series B variable rate bonds for a 10-year period. The swaps effectively provide us with a fixed interest rate of 4.80% on $3.9 million and 4.78% on $8.0 million of the bonds, respectively. -28- Also in November 2004, we entered into a derivative transaction known as a "Treasury Lock" to hedge against the impact of possible interest rate increases on a $10.0 million, 30-year debt issuance by SJG planned for July 2005. 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. At inception, and as of December 31, 2004 and 2003, the market value of these swaps was $(1.9) million and $(1.8) million, respectively, which represents the amount we would have to pay the counterparty to terminate these contracts as of those dates. We include these balances on the consolidated balance sheets under Derivatives -- Other. As of December 31, 2004 and 2003, we calculated the swaps to be highly effective; therefore, we record the changes in fair value of the swaps, net of taxes, in Accumulated Other Comprehensive Income. We determined the fair value of derivative instruments by reference to quoted market prices of listed contracts, published quotations or quotations from independent parties. STOCK COMPENSATION -- Prior to 2003, SJI valued stock options to employees using the intrinsic value method. Effective in 2003, SJI adopted the policy of accounting for this compensation using the fair value based method on a prospective basis. At this time, SJI has no stock options outstanding. ASSET RETIREMENT COSTS -- In January 2003, SJI adopted FASB Statement No. 143, "Accounting for Asset Retirement Obligations," which establishes accounting and reporting standards for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SJG has certain easements and right-of-way agreements that qualify as legal obligations under Statement No. 143. However, it is our intent to maintain these agreements in perpetuity; therefore, no change in SJG's current accounting practices is required related to these agreements. SJG recovers certain asset retirement costs through rates charged to customers. As of December 31, 2004 and 2003, SJG had accrued amounts in excess of actual removal costs incurred totaling $47.3 million and $45.2 million, respectively, which in accordance with Statement No. 143, we recorded as Regulatory Liabilities on the consolidated balance sheets. The adoption of this statement did not materially affect SJI's financial condition or results of operations. NEW ACCOUNTING PRONOUNCEMENTS -- In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," which was effective for SJI's 2002 annual financial statements. Effective in 2003, SJI adopted the policy of accounting for this compensation using the fair value based method on a prospective basis. This method calls for expensing the estimated fair value of a stock option. The provisions of this statement currently have no impact on SJI's financial statements. In addition, the FASB issued Statement No. 123(R), "Share-Based Payment" in December 2004. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. While this statement is not effective until reporting periods beginning after June 15, 2005, SJI has completed its assessment of Statement No. 123(R) and has determined that it does not have any impact on our accounting for share-based payments. In December 2003, the FASB revised Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46R), which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." This interpretation provides guidance on the identification and consolidation of variable interest entities (VIEs), whereby consolidation is achieved through means other than through control. SJI has completed its assessment of FIN 46R and has determined that it does not have any interest in VIEs. Also in December 2003, the FASB revised Statement No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." This statement revises employers' disclosures about pension and other post-retirement benefit plans, including new interim reporting requirements. SJI has complied with new disclosure requirements (See Note 10). In November 2004, the FASB issued Statement No. 151, "Inventory Costs." This statement requires that abnormal amounts of idle facility expense, freight, handling costs and spoilage be charged to income as a current period expense rather than capitalized as inventory costs. The effective date of this statement is January 1, 2006; however, we do not expect it to impact SJI based on its current lines of business. In December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary Assets, an amendment to APB Opinion No. 29, Accounting for Nonmonetary Transactions." This statement redefines the types of nonmonetary exchanges that require fair value measurement. Statement No. 153 is effective for nonmonetary transactions entered into on and after July 1, 2005. SJI is currently evaluating the effect of this standard, but we do not anticipate the adoption of this statement will materially affect SJI's consolidated financial statements. INCOME TAXES -- Deferred income taxes are provided for all significant temporary differences between book and taxable basis of assets and liabilities (See Notes 5 & 6). REGULATORY ASSETS & REGULATORY LIABILITIES -- Regulatory Assets at December 31, 2004 and 2003 consisted of the following items: Years Remaining as of Thousands of Dollars Dec. 31, 2004 2004 2003 Environmental Remediation Costs: (Notes 9 & 13) Expended -- Net Various $ 5,281 $ 4,147 Liability for Future Expenditures -- 51,046 50,983 Income Taxes -- Flowthrough Depreciation (Note 6) 7 6,641 7,619 Postretirement Benefit Costs (Note 10) 8 3,024 3,402 Gross Receipts and Franchise Taxes (Note 6) 2 924 1,367 Societal Benefit Charges (Note 9) Various 4,562 7,529 Other -- 1,157 733 Total Regulatory Assets $ 72,635 $ 75,780 Each item separately identified above is being recovered through utility rate charges. SJG is currently permitted to recover interest on its Environmental Remediation and Societal Benefit costs while the other assets are being recovered without a return on investment over the period indicated (See Note 9). Most of the assets reflected within the above caption "Other" are currently being recovered from ratepayers as approved by the BPU (See Note 9). Management believes that all deferred costs are probable of recovery from ratepayers through future utility rates. -29- Regulatory Liabilities at December 31, 2004 and 2003 consisted of the following items: Thousands of Dollars 2004 2003 Deferred Gas Revenues -- Net $ 12,334 $ 90 Excess Plant Removal Costs 47,345 45,241 Overcollected State Taxes 3,871 4,353 Other 286 286 Total Regulatory Liabilities $ 63,836 $ 49,970 Deferred Gas Revenues - Net represent SJG's net overcollected gas costs and are monitored through SJG's BGSS mechanism. As of December 31, 2003, SJG carried an offsetting underrecovery of gas costs in the amount of $16.1 million representing the remaining balance of a $38.9 million underrecovery originating in 2001. We collected this 2001 underrecovery from customers over three years. We collected the remaining balance during 2004 (See previous discussion of Revenues and Note 9). Derivatives used to hedge SJG's natural gas purchases are recoverable through its BGSS, subject to BPU approval. We record the offset to the change in fair value of these contracts as a Regulatory Asset or Regulatory Liability accordingly. Excess Plant Removal Costs represent amounts accrued in excess of actual utility plant removal costs incurred to date (See Asset Retirement Costs). All other amounts are subject to being returned to ratepayers in future rate proceedings. CASH AND CASH EQUIVALENTS -- For purposes of reporting cash flows, highly liquid investments with original maturities of three months or less are considered cash equivalents. RECLASSIFICATIONS -- SJI reclassified some previously reported amounts to conform with current year classifications. Such reclassifications include the move of $8.4 million and $6.8 million of certain operating expenses previously included in Utility Revenue to Cost of Sales - Utility and Operations Expense for 2003 and 2002, respectively. These amounts are considered immaterial to the overall presentation of SJI's consolidated financial statements. 2. PREFERRED STOCK: REDEEMABLE CUMULATIVE PREFERRED STOCK -- Annually, SJG is required to offer to purchase 1,500 shares of its Cumulative Preferred Stock, Series B at par value, plus accrued dividends. SJG may not declare or pay dividends or make distributions on its common stock if preferred stock dividends are in arrears. Preferred shareholders may elect a majority of SJG's directors if four or more quarterly dividends are in arrears. SJI has 2,500,000 authorized shares of Preference Stock, no par value, which has not been issued. SJI has authorized, 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 13). SJI conducts tests annually to estimate the environmental remediation costs for properties owned by South Jersey Fuel, Inc. (SJF), an EMI subsidiary, from its previously operated fuel oil business. SJI reports the environmental remediation activity related to these properties as discontinued operations. Summarized operating results of the discontinued operations were: Thousands of Dollars 2004 2003 2002 Loss before Income Taxes: Sand Mining $ (863) $ (705) $ (467) Fuel Oil (183) (495) (122) Other -- (32) (67) Income Tax Credits 366 458 232 Loss from Discontinued Operations -- Net $ (680) $ (774) $ (424) Earnings Per Common Share from Discontinued Operations -- Net: Basic $ (0.05) $ (0.06) $ (0.03) Diluted $ (0.05) $ (0.06) $ (0.04) Losses from sand mining are mainly comprised of environmental remediation and product liability litigation associated with Morie's prior activities. Losses from fuel oil in 2003 are mainly attributable to a property sale. The caption "Other" represents construction and merchandising activities that were discontinued in 1997 and 2001, respectively. AFFILIATIONS -- SJI and Conectiv Solutions, LLC formed Millennium Account Services, LLC to provide meter reading services in southern New Jersey. SJE and GZA GeoEnvironmental, Inc. formed AirLogics, LLC to market a jointly developed air monitoring system designed to assist companies involved in environmental cleanup activities. In April 2004, Marina and DCO Energy, LLC formed AC Landfill Energy, LLC (ACLE) to develop and install a 1,400-kilowatt methane-to-electric power generation system at a county-owned landfill in Egg Harbor Township, NJ. Marina owns a 51% interest in ACLE and consolidates ACLE's balance sheet and results of operation accordingly, as applicable. Commercial operation of the plant is targeted for early 2005. 4. COMMON STOCK: SJI has 20,000,000 shares of authorized Common Stock. The following shares were issued and outstanding: 2004 2003 2002 Beginning of Year 13,229,001 12,206,474 11,860,990 New Issues During Year: Dividend Reinvestment Plan 616,301 986,731 338,518 Employees' Stock Ownership Plan -- 1,511 4,162 Stock Option, Stock Appreciation Rights and Restricted Stock Award Plan 32,056 32,005 590 Directors' Restricted Stock 2,610 2,280 2,214 End of Year 13,879,968 13,229,001 12,206,474 -30- We credited the par value ($1.25 per share) of stock issued in 2004, 2003 and 2002 to Common Stock. We credited the net excess over par value of approximately $25.9 million, $35.9 million and $10.5 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 is presented in accordance with FASB Statement No. 128, "Earnings Per Share," which establishes standards for computing and presenting basic and diluted EPS. The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 106,762, 99,649 and 77,866 shares for the years ended December 31, 2004, 2003 and 2002, respectively. These shares relate to SJI's restricted stock as discussed below. 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. No options were granted or outstanding during the three years ended December 31, 2004, 2003 and 2002. No stock appreciation rights have been issued under the plan. In 2004, 2003 and 2002, we granted 21,899, 30,810 and 26,034 restricted shares, respectively. These restricted shares vest over a 3-year period and are subject to SJI achieving certain performance targets. The annual expense associated with these awards was approximately $2.1 million, $1.0 million and $0.6 million in 2004, 2003 and 2002, respectively. DIVIDEND REINVESTMENT PLAN (DRP) AND EMPLOYEES' STOCK OWNERSHIP PLAN (ESOP) -- Newly issued shares of common stock offered through the DRP are issued directly by SJI. All shares previously offered through the ESOP, which was terminated as of October 1, 2003, were also issued directly by SJI. As of December 31, 2004, SJI reserved 1,062,675 shares of authorized, but unissued, common stock for future issuance to the DRP. 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 $82,826, $80,255 and $67,242 in 2004, 2003 and 2002, respectively. SHAREHOLDER RIGHTS PLAN -- In 1996, the board of directors adopted a shareholder rights plan providing for the distribution of one right for each share of common stock outstanding on and after October 11, 1996. Each right entitles its holder to purchase 1/1000 of one share of Series A Preferred Stock at an exercise price of $90 (See Note 2). The rights will not be exercisable until after a person or group acquires 10% or more of SJI's common stock and will expire if not exercised or redeemed by September 20, 2006. 5. INCOME TAXES: SJI files a consolidated federal income tax return. State income tax returns are filed on a separate company basis in states where SJI has operations and/or a requirement to file. 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 2004 2003 2002 Tax at Statutory Rate $ 25,218 $ 20,352 $ 17,436 Increase (Decrease) Resulting from: State Income Taxes 4,383 3,659 3,143 ESOP (766) (723) (489) Amortization of Investment Tax Credit (Note 6) (342) (347) (347) Amortization of Flowthrough Depreciation (Note 6) 664 664 664 Other -- Net (78) (9) (3) Income Taxes: Continuing Operations 29,079 23,596 20,404 Discontinued Operations (366) (458) (232) Cumulative Effect of a Change in Accounting Principle -- (294) -- Net Income Taxes $ 28,713 $ 22,844 $ 20,172 The provision for Income Taxes is comprised of the following: Thousands of Dollars 2004 2003 2002 Current: Federal $ 8,270 $ 12,402 $ 3,044 State 5,879 6,919 3,017 Total Current 14,149 19,321 6,061 Deferred: Federal: Excess of Tax Depreciation Over Book Depreciation -- Net 16,102 12,339 10,960 Deferred Fuel Costs -- Net (3,548) (10,446) (3,728) Environmental Costs -- Net 826 (162) (1,490) Alternative Minimum Tax -- 2,181 (495) Prepaid Pension 3,038 1,647 5,743 Deferred Regulatory Costs (883) 750 1,543 Other -- Net (1,188) (397) 339 State 925 (1,290) 1,818 Total Deferred 15,272 4,622 14,690 Investment Tax Credit (342) (347) (347) Income Taxes: Continuing Operations 29,079 23,596 20,404 Discontinued Operations (366) (458) (232) Cumulative Effect of a Change in Accounting Principle -- (294) -- Net Income Taxes $ 28,713 $ 22,844 $ 20,172 -31- 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 2004 2003 Current: Deferred Fuel Costs -- Net $ 2,774 $ 7,235 Derivatives / Unrealized Gain 4,518 4,868 Other (210) (566) Current Deferred Tax Liability -- Net $ 7,082 $ 11,537 Noncurrent: Book versus Tax Basis of Property $ 130,788 $ 116,504 Prepaid Pension 12,842 7,616 Environmental 1,709 694 Deferred Regulatory Costs 3,242 4,687 Deferred State Tax (2,706) (2,358) Investment Tax Credit Basis Gross-Up (1,612) (1,891) Other (1,195) (3,330) Noncurrent Deferred Tax Liability -- Net $ 143,068 $ 121,922 6. FEDERAL AND OTHER REGULATORY TAX ASSETS AND DEFERRED CREDITS: The primary asset created by adopting FASB Statement No. 109, "Accounting for Income Taxes," was Income Taxes -- Flowthrough Depreciation in the amount of $17.6 million as of January 1, 1993. This amount represented excess tax depreciation over book depreciation on utility plant because of temporary differences for which, prior to Statement No. 109, deferred taxes previously were not provided. SJG previously passed these tax benefits through to ratepayers. SJG is recovering the amortization of the regulatory asset through rates over 18 years which began in December 1994 (See Note 1). 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 (See Note 5). 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 to operations over 30 years beginning that same year. We accelerated this amortization slightly as a result of a subsequent rate making proceeding (See Note 1 - Regulatory Assets). 7. FINANCIAL INSTRUMENTS: RESTRICTED INVESTMENTS -- In accordance with the terms of ACLE's loan agreements, we were required to escrow unused proceeds pending approved construction expenditures. As of December 31, 2004, the escrowed proceeds totaled $553,000. SJRG maintains a margin account with a national investment firm to support its risk management activities. As of December 31, 2004 and 2003, the balance of this account was $13.0 million and $4.0 million, respectively, due to changes in the market value of outstanding contracts. LONG-TERM DEBT -- We estimate the fair values of SJI's long-term debt, including current maturities, as of December 31, 2004 and 2003, to be $350.2 million and $338.6 million, respectively. Carrying amounts are $334.3 million and $314.1 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, 2004 and 2003. 8. SEGMENTS OF BUSINESS: Information about SJI's operations in different industry segments is presented below: Thousands of Dollars 2004 2003 2002 Operating Revenues: Gas Utility Operations $ 502,465 $ 526,846 $ 415,640 Wholesale Gas Operations 18,059 10,560 4,998 Retail Gas and Other Operations 213,786 175,512 112,002 Retail Electric Operations 72,852 14,868 2,704 On-Site Energy Production 20,866 12,736 852 Appliance Service Operations 12,733 9,596 8,386 Subtotal 840,761 750,118 544,582 Intersegment Sales (21,685) (44,922) (32,692) Total Operating Revenues $ 819,076 $ 705,196 $ 511,890 Operating Income: Gas Utility Operations $ 70,455 $ 64,200 $ 59,252 Wholesale Gas Operations 5,400 4,998 4,280 Retail Gas and Other Operations 7,366 5,447 4,201 Retail Electric Operations 1,612 153 (42) On-Site Energy Production 5,756 3,122 416 Appliance Service Operations 1,780 1,220 1,622 General Corporate (1,630) (1,297) (654) Total Operating Income $ 90,739 $ 77,843 $ 69,075 Depreciation and Amortization: Gas Utility Operations $ 25,831 $ 26,627 $ 24,730 Wholesale Gas Operations 15 13 12 Retail Gas and Other Operations 113 106 84 Retail Electric Operations -- -- -- On-Site Energy Production 1,680 866 10 Appliance Service Operations 81 -- -- Discontinued Operations -- 28 28 Total Depreciation and Amortization $ 27,720 $ 27,640 $ 24,864 Property Additions: Gas Utility Operations $ 68,656 $ 53,238 $ 49,646 Wholesale Gas Operations 15 6 -- Retail Gas and Other Operations 90 245 138 Retail Electric Operations -- -- -- On-Site Energy Production 5,314 8,137 33,925 Appliance Service Operations 97 -- -- Total Property Additions $ 74,172 $ 61,626 $ 83,709 Identifiable Assets: Gas Utility Operations $1,007,587 $ 937,732 Wholesale Gas Operations 103,689 70,156 Retail Gas and Other Operations 53,880 51,405 Retail Electric Operations 12,580 8,801 On-Site Energy Production 84,616 72,896 Appliance Service Operations 11,640 6,830 Discontinued Operations 413 2,358 Subtotal 1,274,405 1,150,178 Corporate Assets 46,674 36,755 Intersegment Assets (77,745) (60,730) Total Identifiable Assets $1,243,334 $1,126,203 -32- Gas Utility Operations consist primarily of natural gas distribution to residential, commercial and industrial customers. Wholesale Gas Operations include SJRG's activities. Retail Gas and Other Operations include natural gas acquisition and transportation service companies. Retail Electric Operations consist of electricity acquisition and transportation to retail, commercial and industrial customers. On-Site Energy Production consists of Marina's thermal energy facility and other energy-related projects. Appliance Service Operations include the servicing of appliances via the sale of appliance service programs as well as on a time and materials basis and the installation of residential and small commercial HVAC systems. SJI's interest expense relates primarily to SJG's and Marina's borrowing and financing activities. Interest income is essentially derived from borrowings between the subsidiaries and is eliminated during consolidation. 9. REGULATORY ACTIONS: BASE RATES -- In January 1997, the BPU granted SJG rate relief, which was predicated in part upon a 9.62% rate of return on rate base that included an 11.25% return on common equity. This rate relief provided for cost-of-service recovery, including deferred costs, through base rates. Additionally, SJG's threshold for sharing pre-tax margins generated by interruptible and off-system sales and transportation increased. As a result of this case, SJG kept 100% of pre-tax margins up to the threshold level of $7.8 million. The next $750,000 was credited to customers through the Basic Gas Supply Service (BGSS) clause. Thereafter, SJG kept 20% of the pre-tax margins as it had historically. On July 7, 2004, the BPU granted SJG a base rate increase of $20.0 million, which was predicated in part upon a 7.97% rate of return on rate base that included a 10.0% return on common equity. The increase, effective July 8, 2004, was designed to provide an incremental $8.5 million on an annualized basis to net income. SJG was also permitted to recover regulatory assets contained in its petition and to reduce its composite depreciation rate from 2.9% to 2.4%. Included in the base rate increase was a change to the sharing of pre-tax margins on interruptible and off-system sales and transportation. SJG now recovers through its base rates the $7.8 million that it had previously recovered through the sharing of pre-tax margins. As a result, the sharing of pre-tax margins now begins from dollar one, with SJG retaining 20%. Moreover, SJG now shares pre-tax margins from on-system capacity release sales, in addition to the interruptible and off-system sales and transportation. Effective July 1, 2006, the 20% retained by SJG will decrease to 15% of such margins. As part of the overall settlement effective July 8, 2004, SJG reduced rates in several rate clauses that were no longer needed by SJG to recover costs. SJG was either no longer incurring or had already recovered the specific costs that these clauses were designed to recover. Since revenues raised under these clauses were for cost recovery only and had no profit margin built in, their elimination has no impact on SJG's net income. However, SJG's customers' bills are estimated to decline by $38.9 million annually due to the elimination of these clauses, more than offsetting the base rate increase awarded. PENDING AUDITS -- The BPU issued an order under which it will perform a competitive services audit and a management audit that includes a focused review of SJG's gas supply and purchasing practices. The audits, which commenced in October 2004, are mandated by statute to be conducted at predetermined intervals. Management does not currently anticipate the outcome of these audits to materially affect SJI's financial position, results of operations or liquidity. APPLIANCE SERVICE BUSINESS -- On July 23, 2004, the BPU approved SJG's petition and related agreements to transfer its appliance service business from the regulated utility. In anticipation of this transfer, SJI formed South Jersey Energy Service Plus, LLC (SJESP) to perform appliance repair services after BPU approval of the transfer. SJESP purchased certain assets and assumed certain liabilities required to perform these repair services from SJG for the net book value of $1.2 million on September 1, 2004. The agreements also called for SJESP to pay an additional $1.5 million to SJG. SJG credited this $1.5 million to customers through the Remediation Adjustment Clause (RAC), which had no earnings impact on SJG. The $1.5 million is considered an intangible asset by SJESP and is being amortized on a straight-line basis over a 12-year period, which commenced as of the transfer date. The amortization period was based on a study performed by an independent consultant. The study results indicate the benefit period is linked to residential homeowner moving rates based on U.S. Census Bureau and regional information. OTHER REGULATORY MATTERS -- Effective January 10, 2000, the BPU approved full unbundling of SJG's system. This allows all natural gas consumers to select their natural gas commodity supplier. As of December 31, 2004, 87,645 of SJG's residential customers were purchasing their gas commodity from someone other than SJG. Customers choosing to purchase natural gas from providers other than the utility are charged for the cost of gas by the marketer, not the utility. The resulting decrease in SJG's revenues is offset by a corresponding decrease in gas costs. While customer choice can reduce utility revenues, it does not negatively affect SJG's net income or financial condition. The BPU continues to allow for full recovery of prudently incurred natural gas costs through the BGSS. Unbundling did not change the fact that SJG still recovers cost of service, including deferred costs, through base rates. In December 2001, the BPU approved recovery of SJG's October 31, 2001 underrecovered gas cost balance of $48.9 million plus accrued interest since April 1, 2001 at a rate of 5.75%. SJG finished recovering this balance upon the settlement of its rate case in July 2004. In 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 recovered through SJG's RAC; energy efficiency and renewable energy program costs recovered through SJG's New Jersey Clean Energy Programs; consumer education program costs; and low income program costs recovered through the Universal Service Fund. In August 2003, the BPU approved a $6.7 million increase to SJG's SBC, effective September 1, 2003. In September 2004, SJG filed for a $2.6 million reduction to its current SBC annual recovery level of $17.5 million. In September 2002, SJG filed for an $8.6 million rate increase to recover the cash related to a Temperature Adjustment Clause (TAC) deficiency resulting from warmer-than-normal weather for the 2001-2002 winter. As a result of the colder-than-normal 2002-2003 winter, the cumulative TAC deficiency decreased to $5.7 million. In August 2003, the BPU approved the recovery of the $5.7 million TAC deficiency, effective September 1, 2003. SJG has fully recovered the $5.7 million. In September 2004, SJG filed for a $1.2 million increase to recover the cash related to the TAC deficiency resulting from the 2003-2004 winter, which was warmer than normal. Also, in September 2002, SJG filed with the BPU to maintain its current BGSS rate through October 2003. However, due to price increases in the wholesale market, in February 2003, SJG filed an amendment to the September 2002 filing. In April 2003, the BPU approved a $16.6 million increase to SJG's annual gas costs recoveries. -33- In March 2003, the BPU approved a statewide Universal Service Fund (USF) program on a permanent basis. In June 2003, the BPU established a statewide program through which funds for the USF and Lifeline Credit and Tenants Assistance (Lifeline) Programs would be collected from customers of all New Jersey electric and gas utilities. The BPU ordered that utility rates be set to recover a total statewide USF budget of $33.0 million, and a total Lifeline budget of $72.0 million. Recovery rates for both programs were implemented in August 2003. In April 2004, SJG made its annual USF filing, along with the state's other electric and gas utilities, proposing a statewide USF budget of $105.5 million. The proposed statewide budget was updated to $113.0 million and filed with the BPU in May 2004. In June 2004, the BPU approved the statewide budget of $113.0 million and the increased rates were implemented effective July 1, 2004, resulting in a $3.9 million increase to SJG's annual USF recoveries. In July 2003, SJG made its annual BGSS filing, as amended, with the BPU. Due to further price increases in the wholesale market, SJG filed for a $24.0 million increase to its annual gas cost revenues. In August 2003, the BPU approved SJG's price increase on a provisional basis, subject to refund with interest, effective September 1, 2003. In October 2004, the provisional rate increase was made final with no refund required. In February 2004, SJG filed notice with the BPU to reduce its gas cost revenues by approximately $5.0 million, via a rate reduction, in addition to a $20.8 million bill credit to customers. Both the rate reduction and bill credit were approved and implemented in March 2004. In June 2004, SJG made its annual BGSS filing with the BPU requesting a $4.9 million increase in gas cost recoveries. In October 2004, the requested increase was approved on a provisional basis. Filings and petitions described above are still pending unless otherwise indicated. 10. EMPLOYEE BENEFIT PLANS: PENSIONS & OTHER POSTRETIREMENT BENEFIT PLANS -- SJI has several defined benefit pension plans and other postretirement benefit plans. The pension plans provide annuity payments to the majority of full-time, regular employees upon retirement. Newly hired employees in certain classifications and companies do not qualify for participation in the defined benefit pension plans. The other postretirement benefit plans provide health care and life insurance benefits to some retirees. 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 $3.0 million at December 31, 2004 is recoverable in rates. We are amortizing this amount over 15 years which started January 1998. On December 8, 2003, the President signed into law the Medicare Prescription Drug, Improvement and Modernization Act (the "Act") of 2003. In accordance with FASB Staff Position No. 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," issued in December 2003, management elected to defer any financial impact resulting from the Act pending the availability of more information. In 2004, with the assistance of SJI's actuary, management has determined that the Act has no impact on SJI's postretirement benefits plans. Net periodic benefit cost related to the pension and other postretirement benefit plans consisted of the following components: Thousands of Dollars Pension Benefits Other Postretirement Benefits 2004 2003 2002 2004 2003 2002
Service Cost $ 2,939 $ 2,574 $ 2,237 $ 1,402 $ 1,551 $ 1,131 Interest Cost 5,699 5,353 5,029 2,412 2,545 2,355 Expected Return on Plan Assets (7,094) (5,514) (4,567) (1,402) 1,078) (1,046) Amortization of Transition Obligation -- 72 72 643 772 772 Amortization of Loss and Other 1,774 1,784 838 133 396 73 Net Periodic Benefit Cost 3,318 4,269 3,609 3,188 4,186 3,285 ERIP Cost 814 -- -- 160 -- -- Total Net Periodic Benefit Cost $ 4,132 $ 4,269 $ 3,609 $ 3,348 $ 4,186 $ 3,285
The table above includes benefit costs capitalized by SJG related to its construction program. Capitalized pension benefit costs totaled $1.0 million, $1.3 million and $1.1 million in 2004, 2003 and 2002, respectively. Capitalized other postretirement benefit costs totaled $1.0 million, $1.3 million and $1.0 million in 2004, 2003 and 2002, respectively. The ERIP costs reflected in the table above relate to an early retirement plan offered during 2004. Additional monetary incentives not reflected in the table above totaled $405,000, which will be funded outside of SJI's retirement plans. 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 Other Postretirement Pension Benefits Benefits 2004 2003 2004 2003
Change in Benefit Obligations: Benefit Obligation at Beginning of Year $ 91,036 $ 81,106 $ 44,926 $ 30,973 Service Cost 2,939 2,574 1,402 1,551 Interest Cost 5,699 5,353 2,412 2,545 Plan Amendments 492 -- (10,085) -- Actuarial Loss and Other 11,324 6,054 1,580 11,239 Benefits Paid (4,032) (4,051) (1,751) (1,382) Benefit Obligation at End of Year $ 107,458 $ 91,036 $ 38,484 $ 44,926 Change in Plan Assets: Fair Value of Plan Assets at Beginning of Year $ 83,145 $ 63,112 $ 19,095 $ 13,835 Actual Return on Plan Assets 8,411 14,084 1,740 3,336 Employer Contributions 13,000 10,000 3,226 3,306 Benefits Paid (4,032) (4,051) (1,751) (1,382) Fair Value of Plan Assets at End of Year $ 100,524 $ 83,145 $ 22,310 $ 19,095 Funded Status: $ (6,934) $ (7,890) $ (16,174) $(25,831) Unrecognized Prior Service Cost 2,941 2,823 (4,229) (809) Unrecognized Net Obligation Assets from Transition -- -- -- 6,946 Unrecognized Net Loss and Other 32,582 24,757 12,317 11,731 Prepaid (Accrued) Net Benefit Cost at End of Year $ 28,589 $ 19,690 $ (8,086) $ (7,963)
-34- The accumulated benefit obligation of SJI's pension plans at December 31, 2004 and 2003 was $93.6 million and $76.6 million, respectively. In 2003, SJI had a decrease in its minimum pension liability included in Accumulated Other Comprehensive Income amounting to $9.3 million. As of December 31, 2004, no minimum pension liability adjustment was required. As of November 2004, SJI has implemented caps on the amount of the premium we pay for all employees eligible for postretirement health care. Employees are responsible for those costs which exceed the premium caps. Subsequently, we were able to reduce our 2004 postretirement benefit costs other than pension by a total of $383,400 for the months of November and December 2004. On an ongoing basis, we will experience reduced postretirement benefit costs other than pension due to this plan change. 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, 2004 and 2003 was $4.9 million and $4.3 million, respectively. The weighted-average assumptions used to determine benefit obligations at December 31 were: Other Postretirement Pension Benefits Benefits 2004 2003 2004 2003 Discount Rate 5.75% 6.25% 5.75% 6.25% Rate of Compensation Increase 3.60% 3.60% -- -- The weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 were: Other Postretirement Pension Benefits Benefits 2004 2003 2002 2004 2003 2002 Discount Rate 6.25% 6.75% 7.25% 6.25% 6.75% 7.25% Expected Long-Term Return on Plan Assets 8.75% 9.00% 9.00% 7.25% 7.50% 7.50% Rate of Compensation Increase 3.60% 3.60% 4.10% -- -- -- The expected long-term return on plan assets was based on return projections prepared by our investment manager using SJI's current investment mix as described under Plan Assets below. The assumed health care cost trend rates at December 31 were: 2004 2003 Post-65 Medical Care Cost Trend Rate Assumed for Next Year 6.5% 7.0% Pre-65 Medical Care Cost Trend Rate Assumed for Next Year 11.0% 11.5% Dental Care Cost Trend Rate Assumed for Next Year 6.5% 7.0% Rate to which Cost Trend Rates are Assumed to Decline (the Ultimate Trend Rate) 5.0% 5.0% Year that the Rate Reaches the Ultimate Trend Rate 2016 2016 Assumed health care cost trend rates have a significant effect on the amounts reported for SJI's postretirement health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects: Thousands of Dollars 1-Percentage- 1-Percentage- Point Increase Point Decrease Effect on the Total of Service and Interest Cost $ 88 $ (76) Effect on Postretirement Benefit Obligation $ 1,174 $ (1,127) Plan Assets -- SJI's weighted-average asset allocations at December 31, 2004 and 2003, by asset category are as follows: Other Postretirement Pension Benefits Benefits 2004 2003 2004 2003 Asset Category U.S. Equity Securities 52% 47% 48% 47% International Equity Securities 16 13 16 13 Fixed Income 32 40 36 40 Total 100% 100% 100% 100% Based on the investment objectives and risk tolerances stated in SJI's current pension and other postretirement benefit plans' investment policy and guidelines, the long-term asset mix target considered appropriate for SJI is within the range of 58 to 68% equity and 32 to 42% fixed-income investments. Historical performance results and future expectations suggest that equities will provide higher total investment returns than fixed-income securities over a long-term investment horizon. The policy recognizes that risk and volatility are present to some degree with all types of investments. We seek to avoid high levels of risk at the total fund level through diversification by asset class, style of manager, and sector and industry limits. Specifically prohibited investments include, but are not limited to, venture capital, margin trading, commodities and securities of companies with less than $250.0 million capitalization (except in the small-cap portion of the fund where capitalization levels as low as $50.0 million are permissible). FUTURE BENEFIT PAYMENTS -- The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the following years: Thousands of Dollars Other Postretirement Pension Benefits Benefits 2005 $ 4,209 $ 1,522 2006 4,397 1,737 2007 4,621 1,970 2008 4,898 2,187 2009 5,205 2,386 2010-2014 32,748 13,837 -35- CONTRIBUTIONS -- SJI expects to make no contributions to its pension plan and contribute approximately $3.0 million to its other postretirement benefit plan in 2005. DEFINED CONTRIBUTION PLAN -- SJI offers an Employees' Retirement Savings Plan (Savings Plan) to eligible employees. SJI matches 50% of participants' contributions up to 6% of base compensation. For newly hired employees who are not eligible for participation in SJI's defined benefit plan, we match 50% of participants' contributions up to 8% of base compensation. We also contribute a year-end contribution of $500 for employees with fewer than 10 years of service and $1,000 for employees with 10 years or more of service. The amount expensed and contributed for the matching provision of the Savings Plan approximated $1.0 million in each of the years 2004, 2003 and 2002. 11. RETAINED EARNINGS: Restrictions exist under various loan agreements regarding the amount of cash dividends or other distributions that SJG may pay on its common stock. As of December 31, 2004, SJG's loan restrictions did not affect the amount that may be distributed from either SJG's or SJI's retained earnings. SJG is restricted as to the amount of cash dividends or other distributions that may be paid on its common stock by an order issued by the BPU in July 2004, that granted SJG an increase in base rates. Per the order, SJG is required to maintain total common equity of no less than $289.0 million. SJG's total common equity balance was $306.7 million at December 31, 2004. 12. UNUSED LINES OF CREDIT AND COMPENSATING BALANCES: Bank credit available to SJI totaled $266.0 million at December 31, 2004, of which $98.7 million, inclusive of $6.4 million of letters of credit, was used. Those bank facilities consist of a $100.0 million revolving credit facility that expires in August 2006 and $76.0 million of uncommitted bank lines available to SJG; and a $60.0 million revolving credit facility that expires in August 2007, and $30.0 million of uncommitted bank lines available to SJI. The amount of the revolving credit to SJI was increased by $20.0 million and the expiration date was extended to 2007 in August 2004. The revolving credit facilities contain certain financial covenants measured on a quarterly basis. SJI and SJG were in compliance with these covenants as of December 31, 2004. Borrowings under these lines of credit are at market rates. The weighted borrowing cost, which changes daily, was 3.02% and 1.87% at December 31, 2004 and 2003, respectively. We maintain demand deposits with lending banks on an informal basis and they do not constitute compensating balances. 13. COMMITMENTS AND CONTINGENCIES: CONTRACTUAL CASH OBLIGATIONS -- The following table summarizes our contractual cash obligations and their applicable payment due dates (in thousands): Contractual Up to Years Years More than Obligations Total 1 Year 2 & 3 4 & 5 5 Years Long-Term Debt $ 334,262 $ 5,348 $ 10,737 $ 1,720 $ 316,457 Interest on Long-Term Debt 300,751 20,214 39,081 37,972 203,484 Operating Leases 900 321 512 51 16 Construction Obligations 5,133 5,133 -- -- -- Commodity Supply Purchase Obligations 430,098 245,389 92,247 66,167 26,295 Other Purchase Obligations 3,509 3,446 63 -- -- Total Contractual Cash Obligations $1,074,653 $ 279,851 $ 142,640 $ 105,910 $ 546,252 Expected environmental remediation costs are not included in the table above due to the subjective nature of such costs and the timing of anticipated payments. SJG's regulatory obligation to contribute $3.6 million annually to its postretirement benefit plans, less costs incurred directly, is not included as the duration is indefinite. As a result, the total obligation cannot be calculated. SJI does not expect to make a pension contribution in 2005 and future contributions cannot be determined at this time (See Note 10). CONSTRUCTION AND ENVIRONMENTAL -- SJI's estimated net cost of construction and environmental remediation programs for 2005 totals $87.2 million. Commitments were made regarding some of these programs. GAS SUPPLY CONTRACTS -- SJG, in the normal course of business, has entered into long-term contracts for natural gas supplies, firm transportation and gas storage service. The earliest that any of these contracts expires is 2005. 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 $4.5 million per month, recovered on a current basis through the BGSS. PENDING LITIGATION -- SJI is subject to claims arising in the ordinary course of business and other legal proceedings. We accrue liabilities related to these claims when we can determine the amount or range of amounts of likely settlement costs for those claims. SJI has been named in, among other actions, certain product liability claims related to our former sand mining subsidiary. Management does not currently anticipate the disposition of any known claims to have a material adverse effect on SJI's financial position, results of operations or liquidity. -36- PARENTAL GUARANTEES --As of December 31, 2004, SJI had issued $196.6 million of parental guarantees on behalf of its subsidiaries. Of this total, $159.6 million expire within one year, $0.2 million expire in 2006 and $36.8 million have no expiration date. The vast majority of these guarantees were issued to guarantee payment to third parties with whom our subsidiaries have commodity supply contracts. These contracts contain netting provisions which permit us to net the ultimate cash payment for monthly buys and sells from/to counterparties. As of December 31, 2004, these guarantees support future firm commitments and $56.1 million of the Accounts Payable recorded on our consolidated balance sheet. As part of our risk management policy, we also require parental guarantees from trading counterparties as applicable. These arrangements are typical in our industry. SJI has also issued two parental guarantees totaling $6.3 million related to Marina's construction activity. STANDBY LETTERS OF CREDIT -- As of December 31, 2004, SJI provided $46.0 million of standby letters of credit from four commercial banks supporting the variable rate demand bonds issued through the New Jersey Economic Development Authority to finance Marina's thermal plant project. The letter of credit agreement contains certain financial covenants measured on a quarterly basis. SJI was in compliance with these covenants as of December 31, 2004. Also, as of December 31, 2004, SJI has issued four letters of credit totaling $6.4 million. Three of these letters were posted to two different utilities to enable SJE to market retail electricity within the respective utilities' service territories. The remaining letter was posted related to the construction activity of AC Landfill Energy, LLC. SALE LEASEBACK -- On January 5, 2004, Marina paid $2.7 million to purchase a cogeneration facility in Salem County, NJ and is leasing the facility back to a large manufacturer located on the same site over an 8-year lease. Marina also entered into an 8-year operating contract to operate and manage the facility. ENVIRONMENTAL REMEDIATION COSTS -- SJI incurred and recorded costs for environmental cleanup of 12 sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s. SJI and some of its nonutility subsidiaries also recorded costs for environmental cleanup of sites where SJF previously operated a fuel oil business and Morie maintained equipment, fueling stations and storage. SJI successfully entered into settlements with all of its historic comprehensive general liability carriers regarding the environmental remediation expenditures at the SJG sites. Also, SJG purchased a Cleanup Cost Cap Insurance Policy limiting the amount of remediation expenditures that SJG will be required to make at 11 of its sites. This Policy will be in force until 2024 at 10 sites and until 2029 at one site. The future cost estimates discussed hereafter are not reduced by projected insurance recoveries from the Cleanup Cost Cap Insurance Policy. Since the early 1980s, SJI accrued environmental remediation costs of $153.5 million, of which $98.5 million was spent as of December 31, 2004. With the assistance of a consulting firm, we estimate that undiscounted future costs to clean up SJG's sites will range from $51.0 million to $192.8 million. We recorded the lower end of this range as a liability because a single reliable estimation point is not feasible due to the amount of uncertainty involved in the nature of projected remediation efforts and the long period over which remediation efforts will continue. It is reflected on the 2004 consolidated balance sheet under Current Liabilities and Deferred Credits and Other Noncurrent Liabilities. Recorded amounts include estimated costs based on projected investigation and remediation work plans using existing technologies. Actual costs could differ from the estimates due to the long-term nature of the projects, changing technology, government regulations and site-specific requirements. The major portion of accrued environmental costs relate to the cleanup of SJG's former gas manufacturing sites. SJG has two regulatory assets associated with environmental costs (See Note 1). The first asset, Environmental Remediation Cost: Expended -- Net, represents what was actually spent to clean up former gas manufacturing plant sites. These costs meet the requirements of Statement No. 71. The BPU allows SJG to recover expenditures through the RAC (See Note 9). The other asset, Environmental Remediation Cost: Liability for Future Expenditures, relates to estimated future expenditures determined under the guidance of FASB Statement No. 5, "Accounting for Contingencies." We recorded this amount, which relates to former manufactured gas plant sites, as a regulatory asset under Statement No. 71 with the corresponding amount reflected on the consolidated balance sheet under Current Liabilities and Deferred Credits and Other Noncurrent Liabilities. The BPU's intent, evidenced by current practice, is to allow SJG to recover the deferred costs after they are spent over 7-year periods. As of December 31, 2004, we reflected SJG's unamortized remediation costs of $5.3 million on the consolidated balance sheet under Regulatory Assets. Since implementing the RAC in 1992, SJG has recovered $43.9 million through rates (See Note 9). With Morie's sale, EMI assumed responsibility for environmental liabilities estimated between $2.8 million and $8.8 million. The information available on these sites is sufficient only to establish a range of probable liability and no point within the range is more likely than any other. Therefore, EMI has accrued the lower end of the range. Changes in the accrual are included in the statements of consolidated income under Loss from Discontinued Operations -- Net. SJI and SJF estimated their potential exposure for the future remediation of four sites where fuel oil operations existed years ago. Estimates for these sites range from $1.2 million to $5.0 million. We recorded the lower ends of these ranges on the 2004 consolidated balance sheet under Current Liabilities and Deferred Credits and Other Noncurrent Liabilities as of December 31, 2004. End to Notes to Consolidated Financial Statements -37- Quarterly Financial Data (Unaudited) (Summarized quarterly results of SJI's operations, in thousands except for per share amounts) 2004 Quarter Ended 2003 Quarter Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
Operating Revenues $ 307,610 $ 136,555 $ 129,449 $ 245,462 $ 281,844 $ 108,073 $ 92,034 $ 223,245 Expenses: Cost of Sales 233,239 99,056 99,448 182,952 212,113 77,219 65,870 165,216 Operation and Maintenance Including Fixed Charges 29,007 29,305 28,091 35,812 25,472 25,656 27,871 36,522 Income Taxes 16,910 2,590 152 9,428 16,379 1,293 (1,327) 7,251 Energy and Other Taxes 4,872 2,088 1,772 3,267 5,114 2,207 1,414 3,295 Total Expenses 284,028 133,039 129,463 231,459 259,078 106,375 93,828 212,284 Other Income and Expense 877 404 452 153 71 258 176 417 Income (Loss) from Continuing Operations 24,459 3,920 438 14,156 22,837 1,956 (1,618) 11,378 Discontinued Operations -- Net (140) (142) (184) (214) (149) (154) (426) (45) Cumulative Effect of a Change in Accounting Principle -- Net -- -- -- -- (426) -- -- -- Net Income (Loss) Applicable to Common Stock $ 24,319 $ 3,778 $ 254 $ 13,942 $ 22,262 $ 1,802 $ (2,044) $ 11,333 Basic Earnings Per Common Share* (Based on Average Basic Shares Outstanding): Continuing Operations $ 1.83 $ 0.29 $ 0.03 $ 1.02 $ 1.86 $ 0.16 $ (0.13) $ 0.87 Discontinued Operations -- Net (0.01) (0.01) (0.01) (0.02) (0.01) (0.01) (0.03) -- Cumulative Effect of a Change in Accounting Principle -- Net -- -- -- -- (0.03) -- -- -- Basic Earnings Per Common Share $ 1.82 $ 0.28 $ 0.02 $ 1.00 $ 1.82 $ 0.15 $ (0.16) $ 0.87 Average Shares Outstanding -- Basic 13,392 13,730 13,795 13,847 12,245 12,387 12,604 13,000 Diluted Earnings Per Common Share* (Based on Average Diluted Shares Outstanding): Continuing Operations $ 1.82 $ 0.28 $ 0.03 $ 1.01 $ 1.85 $ 0.16 $ (0.13) $ 0.87 Discontinued Operations -- Net (0.01) (0.01) (0.01) (0.02) (0.01) (0.01) (0.03) (0.01) Cumulative Effect of a Change in Accounting Principle -- Net -- -- -- -- (0.03) -- -- -- Diluted Earnings Per Common Share $ 1.81 $ 0.27 $ 0.02 $ 0.99 $ 1.81 $ 0.15 $ (0.16) $ 0.86 Average Shares Outstanding -- Diluted 13,461 13,848 13,914 13,968 12,327 12,489 12,604 13,109 *The sum of the quarters for 2004 and 2003 do not equal the year's total due to rounding. NOTE: Because of the seasonal nature of the business, statements for the 3-month periods are not indicative of the results for a full year.
Market Price of Common Stock and Related Information Quarter Ended Market Price Per Share Dividends Declared Quarter Ended Market Price Per Share Dividends Declared 2004 High Low Per Share 2003 High Low Per Share
March 31 $ 42.30 $ 39.36 $ 0.405 March 31 $ 33.75 $ 30.55 $ 0.385 June 30 $ 44.45 $ 39.97 $ 0.405 June 30 $ 39.00 $ 31.54 $ 0.385 September 30 $ 48.00 $ 42.95 $ 0.405 September 30 $ 39.25 $ 36.60 $ 0.385 December 31 $ 53.10 $ 46.22 $ 0.425 December 31 $ 40.70 $ 37.77 $ 0.405 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, 2004, the latest available date, our records indicate that there were 8,129 shareholders.
-38- South Jersey Gas Company Comparative Operating Statistics 2004 2003 2002 2001 2000
Operating Revenues (Thousands): Firm Residential $ 182,826 $ 193,725 $ 174,252 $ 201,531 $ 172,418 Commercial 57,826 58,749 52,300 76,416 49,669 Industrial 5,223 5,635 4,512 4,250 5,265 Cogeneration & Electric Generation 9,496 6,513 9,363 7,405 11,016 Firm Transportation 80,572 74,080 49,436 29,565 38,213 Total Firm Revenues 335,943 338,702 289,863 319,167 276,581 Interruptible 1,641 1,682 1,142 1,485 1,695 Interruptible Transportation 1,462 1,121 1,567 1,268 1,531 Off-System 151,161 176,555 115,714 145,530 160,208 Capacity Release & Storage 10,157 6,686 5,365 5,596 4,411 Appliance Service 6,362 9,596 8,386 6,136 5,002 Other 2,101 2,099 1,989 2,268 844 Intercompany Sales (13,879) (40,387) (31,142) (30,257) (14,662) Total Operating Revenues $ 494,948 $ 496,054 $ 392,884 $ 451,193 $ 435,610 Throughput (MMcf): Firm Residential 14,723 15,843 15,519 17,390 19,124 Commercial 5,198 5,351 5,273 7,544 6,191 Industrial 187 212 202 248 282 Cogeneration & Electric Generation 1,095 777 1,986 1,519 2,046 Firm Transportation 33,130 32,214 26,470 22,085 26,114 Total Firm Throughput 54,333 54,397 49,450 48,786 53,757 Interruptible 172 220 198 207 207 Interruptible Transportation 2,463 2,247 3,189 2,638 3,022 Off-System 21,294 27,041 29,980 30,117 38,097 Capacity Release & Storage 54,585 41,119 38,048 27,187 37,445 Total Throughput 132,847 125,024 120,865 108,935 132,528 Number of Customers at Year End: Residential 292,185 283,722 275,979 268,046 261,621 Commercial 20,939 20,405 19,966 19,542 19,319 Industrial 455 435 429 420 410 Total Customers 313,579 304,562 296,374 288,008 281,350 Maximum Daily Sendout (MMcf) 428 422 344 326 375 Annual Degree Days* 4,641 4,929 4,380 4,495 4,942 * Average degree days recorded in SJG's service territory during the 20-year period ended June 30, 1996, as approved in its Temperature Adjustment Clause, are 4,688.
-39- South Jersey Industries Board of Directors Shirli M. Billings, Ph.D. Director since 1983, Age 64 2,4,5*,6 President, Billings & Company, New Albany, OH Charles Biscieglia Director since 1998, Age 60 3,4*,6 Chairman, South Jersey Industries Helen R. Bosley, CFA Director since 2004, Age 57 1,2 President, Corporate Financial Management, Inc., Yardley, PA Thomas A. Bracken Director since 2004, Age 57 1,2 President and CEO, Sun Bancorp. Inc., Vineland, NJ Keith S. Campbell Director since 2000, Age 50 3,5,6 Chairman, Mannington Mills, Salem NJ W. Cary Edwards Director from April 1990 to January 1993 and September 1993 to present, Age 60 2*,3,4,6 Chairman, New Jersey State Commission on Investigation Senior Attorney, law firm of Edwards & Caldwell, Hawthorne, NJ Edward J. Graham Director since 2004, Age 47 3,4,6* President and CEO, South Jersey Industries and South Jersey Gas Sheila Hartnett-Devlin, CFA Director since 1999, Age 46 1,2,5 Former Executive Vice President, Fiduciary Trust Company International, New York, NY William J. Hughes Director since 2001, Age 72 1,5 Of Counsel, law firm of Riker, Danzig, Scherer, Hyland & Perretti, Trenton, NJ; Former Ambassador to Panama and former member of the United States House of Representatives Herman D. James, Ph.D. Director since 1990, Age 61 1*,2,4,6 Distinguished Professor, Rowan University, Glassboro, NJ Frederick R. Raring Director since 1995, Age 67 1,3*,4,5 President, Seashore Supply Company, Ocean City, NJ 1 Audit Committee 2 Compensation/Pension Committee 3 Environmental Committee 4 Executive Committee 5 Nominating Committee 6 Management Development Committee * Committee Chair -40- South Jersey Industries Officers Edward J. Graham President and CEO Jeffrey E. DuBois Vice President Richard J. Jackson Vice President David A. Kindlick Vice President and CFO Michael J. Renna Vice President Albert V. Ruggiero Vice President Richard J. Walker, Jr., Esq. Vice President, Corporate Counsel and Corporate Secretary Stephen H. Clark Treasurer Jane F. Kelly, Esq. Assistant Vice President, Assistant Corporate Counsel and Assistant Corporate Secretary Dividend Reinvestment Plan SJI's Dividend Reinvestment Plan provides record shareholders of SJI's common stock with a way to increase their investment in the company without payment of any brokerage commission or service charge. Shareholders participating in the Plan may purchase shares of common stock by the automatic reinvestment of dividends and optional purchases. The Plan is now available to any person who, upon enrollment, agrees to become a shareholder by purchasing at least $100 of SJI common stock. Optional purchases may be made up to a maximum of $100,000 in any calendar year, as prescribed in the Plan. Shares of common stock offered through the Plan are either newly issued or treasury common stock that the Plan acquires directly from SJI currently at a 2 percent discount. The price will be 98 percent of the average of the high and low sale prices for SJI's common stock for each of the last 12 days the common stock was traded prior to the purchase date. The offer and sale of shares under the Plan will be made only through a Prospectus, obtainable by contacting the Shareholder Records Department. Direct Deposit of Dividends (Electronic Funds Transfer) Stockholders of record can have immediate access to dividend funds. Your dividend funds can be deposited directly into your checking or savings account. Confirmation of dividend receipts will appear on your monthly bank statement. 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. Certifications South Jersey Industries has included as Exhibit 31 to its Annual Report on Form 10-K for fiscal year 2004 filed with the Securities and Exchange Commission certificates of the company's Chief Executive Officer and Chief Financial Officer certifying the quality of the company's public disclosure, and the company has submitted to the New York Stock Exchange a certificate of the Chief Executive Officer of the company certifying that he is not aware of any violation by the company of New York Stock Exchange corporate governance listing standards. -41- EX-21 8 exhibit21.txt SJI SUBSIDIARIES OF REGISTRANT Exhibit 21 SOUTH JERSEY INDUSTRIES, INC. SUBSIDIARIES OF REGISTRANT AS OF DECEMBER 31, 2004
Percentage of Voting Securities State of Owned by Parent Relationship Incorporation ----------------------------------------------------------- South Jersey Industries, Inc. Registrant Parent New Jersey South Jersey Gas Company (5) 99.28 (1) New Jersey Marina Energy LLC (5) 100 (1) New Jersey South Jersey Energy Company (5) 100 (1) New Jersey South Jersey Resources Group, LLC (5) 100 (1) Delaware South Jersey Energy Service Plus, LLC (5) 100 (1) New Jersey SJ EnerTrade, Inc. (5) 100 (2) New Jersey Energy & Minerals, Inc. (5) 100 (1) New Jersey R&T Group, Inc. (5) 100 (1) New Jersey South Jersey Fuel, Inc. (5) 100 (3) New Jersey AC Landfill Energy, LLC (5) 51 (4) New Jersey (1) Subsidiary of South Jersey Industries, Inc. (2) Subsidiary of South JerseyEnergy Company (3) Subsidiary of Energy & Minerals, Inc. (4) Subsidiary of Marina Energy LLC (5) Subsidiary included in financial statements
EX-23 9 exhibit23.txt SJI CONSENT OF INDEPEND. REGISTERED PUBLIC ACCT. FIRM EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 33-27132 and 33-58349 on Forms S-8 and Registration Statement No. 33-53127 on Form S-3 of our reports dated March 2, 2005 related to the consolidated financial statements (which report expresses an unqualified opinion and includes explanatory paragraphs relating to the restatement of the 2003 balance sheet for the classification of prepaid pension assets from current assets to noncurrent assets and the change in the method of accounting for energy-related contracts to conform with the recession of EITF 98-10 "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" in 2003), consolidated financial statement schedules and management's report on the effectiveness of internal control over financial reporting of South Jersey Industries, Inc. and subsidiaries appearing in and incorporated by reference in the Annual Report on Form 10-K of South Jersey Industries, Inc. for the year ended December 31, 2004. DELOITTE & TOUCHE Philadelphia, Pennsylvania March 9, 2005 EX-31.1 10 exhibit311.txt SJI CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 CERTIFICATION I, Edward J. Graham, certify that: 1. I have reviewed this report on Form 10-K for the period ended December 31, 2004, of South Jersey Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15 d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 7, 2005 /s/ EDWARD J. GRAHAM ------------------------------------------- Edward J. Graham President & Chief Executive Officer EX-31.2 11 exhibit312.txt SJI CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 CERTIFICATION I, David A. Kindlick, certify that: 1. I have reviewed this report on Form 10-K for the period ended December 31, 2004, of South Jersey Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15 d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 7, 2005 /s/ DAVID A. KINDLICK ------------------------------------------ David A. Kindlick Vice President & Chief Financial Officer EX-32.1 12 exhibit321.txt SJI CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Annual Report on Form 10-K of South Jersey Industries, Inc. (the "Company") for the period ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward J. Graham, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Edward J. Graham - -------------------------------- Name: Edward J. Graham Title: Chief Executive Officer March 7, 2005 EX-32.2 13 exhibit322.txt SJI CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Annual Report on Form 10-K of South Jersey Industries, Inc. (the "Company") for the period ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David A. Kindlick, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ David A. Kindlick - ----------------------------------- Name: David A. Kindlick Title: Chief Financial Officer March 7, 2005 -----END PRIVACY-ENHANCED MESSAGE-----