Page 1 of 31
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1997
Commission File Number 1-6364
SOUTH JERSEY INDUSTRIES, INC.
- ------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-1901645
- ------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer's
incorporation of organization) Identification No.)
Number One South Jersey Plaza, Route 54, Folsom, NJ 08037
- ------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(609) 561-9000
- ------------------------------------------------------------------
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------
Former name, former address, and former fiscal year, if changed
since last report
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
----- -----
As of August 14, 1997, there were 10,763,450 shares of the
registrant's common stock outstanding.
Exhibit Index on page 31
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 16
- 2 -
<PAGE>
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
- -------------------------------------------------------------------------------
(In Thousands Except for Share Date)
<CAPTION>
Three Months Ended
June 30,
-------------------------
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues:
Utility . . . . . . . . . . . . . . . . . . . . . $58,326 $53,532
Nonutility. . . . . . . . . . . . . . . . . . . . 3,988 5,793
----------- -----------
Total Operating Revenues. . . . . . . . . . . 62,314 59,325
----------- -----------
Operating Expenses:
Gas Purchased for Resale. . . . . . . . . . . . . 31,939 30,268
Operations - Utility. . . . . . . . . . . . . . . 9,966 10,230
Nonutility . . . . . . . . . . . . . 4,455 6,067
Maintenance . . . . . . . . . . . . . . . . . . . 1,537 1,316
Depreciation. . . . . . . . . . . . . . . . . . . 3,971 3,687
Federal Income Taxes. . . . . . . . . . . . . . . 296 (935)
Gross Receipts & Franchise Taxes. . . . . . . . . 4,646 4,897
Other Taxes . . . . . . . . . . . . . . . . . . . 644 649
----------- -----------
Total Operating Expenses. . . . . . . . . . . 57,454 56,179
----------- -----------
Operating Income. . . . . . . . . . . . . . . . . . 4,860 3,146
Interest and Other Charges. . . . . . . . . . . . . 4,934 5,070
----------- -----------
Loss from Continuing Operations . . . . . . . . . . (74) (1,924)
(Loss)Income from Discontinued Operations - Net . . (97) 1,157
----------- -----------
Net Loss Applicable to Common Stock . . . . . . . . ($171) ($767)
=========== ===========
Average Shares of Common Stock Outstanding. . . . . 10,762,298 10,728,294
=========== ===========
(Loss)Earnings Per Common Share:
Continuing Operations . . . . . . . . . . . . . . ($0.01) ($0.18)
Discontinued Operations - Net . . . . . . . . . . (0.01) 0.11
----------- -----------
Loss Per Common Share. . . . . . . . . . . . . ($0.02) ($0.07)
=========== ===========
Dividends Declared Per Common Share . . . . . . . . $0.36 $0.36
=========== ===========
See notes to condensed consolidated financial statements.
- 3 -
<PAGE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
- -------------------------------------------------------------------------------
(In Thousands Except for Share Data)
<CAPTION>
Six Months Ended
June 30
-------------------------
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues:
Utility . . . . . . . . . . . . . . . . . . . . . $184,908 $192,880
Nonutility. . . . . . . . . . . . . . . . . . . . 8,813 16,404
----------- -----------
Total Operating Revenues. . . . . . . . . . . 193,721 209,284
----------- -----------
Operating Expenses:
Gas Purchased for Resale. . . . . . . . . . . . . 101,809 109,035
Operations - Utility. . . . . . . . . . . . . . . 19,777 19,848
Nonutility . . . . . . . . . . . . . 9,439 16,524
Maintenance . . . . . . . . . . . . . . . . . . . 3,008 2,578
Depreciation. . . . . . . . . . . . . . . . . . . 7,860 7,320
Federal Income Taxes. . . . . . . . . . . . . . . 8,641 8,245
Gross Receipts & Franchise Taxes. . . . . . . . . 17,025 19,370
Other Taxes . . . . . . . . . . . . . . . . . . . 1,434 1,466
----------- -----------
Total Operating Expenses. . . . . . . . . . . 168,993 184,386
----------- -----------
Operating Income. . . . . . . . . . . . . . . . . . 24,728 24,898
Interest and Other Charges. . . . . . . . . . . . . 9,809 10,011
----------- -----------
Income from Continuing Operations . . . . . . . . . 14,919 14,887
----------- -----------
Discontinued Operations, Net of Taxes:
(Loss)Income from Discontinued Operations - Net . (66) 296
Net Loss on the Disposal of
Discontinued Operations . . . . . . . . . . . . (123) (724)
----------- -----------
Net Income Applicable to Common Stock . . . . . . . $14,730 $14,459
=========== ===========
Average Shares of Common Stock Outstanding. . . . . 10,761,006 10,726,346
=========== ===========
Earnings(Loss) Per Common Share:
Continuing Operations . . . . . . . . . . . . . . $1.39 $1.39
Discontinued Operations - Net . . . . . . . . . . (0.02) (0.04)
----------- -----------
Earnings Per Common Share. . . . . . . . . . . $1.37 $1.35
=========== ===========
Dividends Declared Per Common Share . . . . . . . . $0.72 $0.72
=========== ===========
See notes to condensed consolidated financial statements.
- 4 -
<PAGE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS) (Unaudited)
<CAPTION>
June 30, December 31,
--------------------------------------
1997 1996 1996
- --------------------------------------------------------------------------------- ------------
<S> <C> <C> <C>
ASSETS
- ------
Property, Plant & Equipment:
Utility Plant, at original cost . . . . . . . . . . . $600,264 $557,944 $579,304
Accumulated Depreciation. . . . . . . . . . . . . . (163,267) (151,536) (157,682)
Nonutility Property & Equipment, at cost. . . . . . . 3,425 13,975 3,342
Accumulated Depreciation & Depletion. . . . . . . . (1,036) (5,625) (1,060)
----------- ----------- ------------
Property, Plant & Equipment - Net . . . . . . . 439,386 414,758 423,904
----------- ----------- ------------
Investment in Affiliate . . . . . . . . . . . . . . . . 1,208 1,034 1,286
----------- ----------- ------------
Current Assets:
Cash and Cash Equivalents . . . . . . . . . . . . . . 11,080 2,218 46,905
Notes Receivable - Affiliate. . . . . . . . . . . . . 2,700 0 2,800
Accounts Receivable . . . . . . . . . . . . . . . . . 34,146 40,043 38,714
Unbilled Revenues . . . . . . . . . . . . . . . . . . 3,552 3,629 17,855
Provision for Uncollectibles. . . . . . . . . . . . . (1,557) (1,102) (1,425)
Natural Gas in Storage, average cost. . . . . . . . . 15,038 11,581 22,638
Materials and Supplies, average cost. . . . . . . . . 4,046 3,935 4,114
Assets of Discontinued Businesses Held for Disposal . 637 28,811 4,966
Prepaid Gross Receipts & Franchise Taxes. . . . . . . 10,980 13,217 1,602
Prepayments and Other Current Assets. . . . . . . . . 2,131 3,163 1,773
----------- ----------- ------------
Total Current Assets. . . . . . . . . . . . . . 82,753 105,495 139,942
----------- ----------- ------------
Accounts Receivable - Merchandise . . . . . . . . . . . 2,373 2,296 1,999
----------- ----------- ------------
Deferred Debits:
Environmental Remediation Costs:
Expended - Net. . . . . . . . . . . . . . . . . . . 17,060 13,516 15,566
Liability for Future Expenditures . . . . . . . . . 52,400 23,099 41,700
Gross Receipts & Franchise Taxes. . . . . . . . . . . 4,250 4,668 4,468
Income Taxes - Flowthrough Depreciation . . . . . . . 14,488 15,466 14,977
Deferred Postretirement Benefit Costs . . . . . . . . 5,705 5,000 5,153
Other . . . . . . . . . . . . . . . . . . . . . . . . 8,422 9,162 9,386
----------- ----------- ------------
Total Deferred Debits . . . . . . . . . . . . . 102,325 70,911 91,250
----------- ----------- ------------
Total Assets. . . . . . . . . . . . . . . $628,045 $594,494 $658,381
=========== =========== ============
See notes to condensed consolidated financial statements.
- 5 -
<PAGE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS) (Unaudited)
<CAPTION>
June 30, December 31,
--------------------------------------
1996 1995 1995
- --------------------------------------------------------------------------------- ------------
<S> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
- ------------------------------
Common Equity:
Common Stock. . . . . . . . . . . . . . . . . . . . . $13,454 $13,413 $13,446
Premium on Common Stock . . . . . . . . . . . . . . . 110,750 110,358 110,542
Retained Earnings . . . . . . . . . . . . . . . . . . 55,725 40,441 48,743
----------- ----------- ------------
Total Common Equity . . . . . . . . . . . . . . 179,929 164,212 172,731
----------- ----------- ------------
Preferred Stock and Securities of Subsidiary:
Redeemable Cumulative Preferred Stock -
Par Value $100 per share:
Authorized - 47,304, 48,204 and 48,204 Shares
Outstanding -
Series A, 4.70% -- 3,000, 3,900
and 3,900 Shares. . . . . . . . . . . . . . 300 390 390
Series B, 8.00% -- 19,242 shares. . . . . . . 1,924 1,924 1,924
Company-Obligated Manditorily Redeemable
Preferred Securities of Subsidiary Trust
Par Value $25 per share, 1,400,000 shares
Authorized and Outstanding . . . . . . . . . . . . 35,000 0 0
----------- ----------- ------------
Total Preferred Stock and
Securities of Subsidiary. . . . . . . . . . . 37,224 2,314 2,314
----------- ----------- ------------
Long-Term Debt. . . . . . . . . . . . . . . . . . . . . 178,403 150,733 149,736
----------- ----------- ------------
Current Liabilities:
Notes Payable to Banks. . . . . . . . . . . . . . . . 14,500 92,775 108,300
Current Maturities of Long-Term Debt. . . . . . . . . 8,960 20,276 6,603
Accounts Payable. . . . . . . . . . . . . . . . . . . 28,480 25,543 50,301
Customer Deposits . . . . . . . . . . . . . . . . . . 5,918 5,545 6,050
Environmental Remediation Costs . . . . . . . . . . . 7,735 6,999 9,377
Federal Income Taxes Accrued. . . . . . . . . . . . . 2,878 5,374 4,417
Interest Accrued and Other Current Liabilities. . . . 9,788 6,616 13,693
----------- ----------- ------------
Total Current Liabilities . . . . . . . . . . . 78,259 163,128 198,741
----------- ----------- ------------
Deferred Credits and Other Non-Current Liabilities:
Accumulated Deferred Income Taxes - Net . . . . . . . 77,030 69,217 75,821
Investment Tax Credits. . . . . . . . . . . . . . . . 5,827 6,222 6,025
Deferred Revenues - Net . . . . . . . . . . . . . . . 6,125 6,636 0
Pension and Other Postretirement Benefits . . . . . . 11,693 9,487 10,218
Environmental Remediation Costs . . . . . . . . . . . 46,655 16,103 34,353
Other . . . . . . . . . . . . . . . . . . . . . . . . 6,900 6,442 8,442
----------- ----------- ------------
Total Deferred Credits
and Other Non-Current Liabilities . . . . . . 154,230 114,107 134,859
----------- ----------- ------------
Commitments and Contingencies (Note 5)
Total Capitalization and Liabilities. . . $628,045 $594,494 $658,381
=========== =========== ============
See notes to condensed consolidated financial statements.
- 6 -
<PAGE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------------
(In Thousands)
<CAPTION>
Six Months Ended
June 30,
-------------------
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock. . . . . . . . . . . . $14,730 $14,459
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation, Depletion and Amortization . . . . . . . . . 9,025 9,592
Provision for Losses on Accounts Receivable. . . . . . . . 425 665
Revenues and Fuel Costs Deferred - Net . . . . . . . . . . 6,529 (679)
Deferred and Non-Current Federal Income Taxes
and Credits - Net . . . . . . . . . . . . . . . . . . . . 1,624 517
Environmental Remediation Costs - Net. . . . . . . . . . . (1,494) (1,747)
Net Pre-Tax Loss on the Disposal
of Discontinued Operations. . . . . . . . . . . . . . . . 189 1,291
Changes in:
Accounts Receivable. . . . . . . . . . . . . . . . . . . 18,578 16,498
Inventories. . . . . . . . . . . . . . . . . . . . . . . 7,668 3,103
Prepayments and Other Current Assets . . . . . . . . . . (358) (1,371)
Prepaid Gross Receipts & Franchise Taxes . . . . . . . . (9,378) (9,568)
Accounts Payable and Other Accrued Liabilities . . . . . (27,397) (14,876)
Other - Net. . . . . . . . . . . . . . . . . . . . . . . . (388) 300
-------- --------
Net Cash Provided by Operating Activities . . . . . . . . . . . 19,753 18,184
-------- --------
Cash Flows from Investing Activities:
Investment in Affiliate. . . . . . . . . . . . . . . . . . . 0 (1,034)
Repayments of Loan to Affiliate. . . . . . . . . . . . . . . 100 0
Proceeds from the Sale of Assets . . . . . . . . . . . . . . 3,487 0
Proceeds from Sale of Available-for-Sale Securities. . . . . 0 795
Capital Expenditures, Cost of Removal and Salvage. . . . . . (23,691) (17,590)
-------- --------
Net Cash Used in Investing Activities . . . . . . . . . . . . . (20,104) (17,829)
-------- --------
Cash Flows from Financing Activities:
Net (Repayments of)Borrowings from Lines of Credit . . . . . (93,800) 16,475
Proceeds from Issuance of Long-Term Debt . . . . . . . . . . 35,485 0
Principal Repayments of Long-Term Debt . . . . . . . . . . . (4,461) (12,565)
Dividends on Common Stock. . . . . . . . . . . . . . . . . . (7,748) (7,723)
Proceeds from Sale of Common Stock . . . . . . . . . . . . . 140 179
Proceeds from the Issuance of Preferred Securities . . . . . 35,000 0
Repurchase of Preferred Stock. . . . . . . . . . . . . . . . (90) (90)
-------- --------
Net Cash Used in Financing Activities . . . . . . . . . . . . . (35,474) (3,724)
-------- --------
Net Decrease in Cash and Cash Equivalents . . . . . . . . . . . (35,825) (3,369)
Cash and Cash Equivalents at Beginning of Period. . . . . . . . 46,905 5,587
-------- --------
Cash and Cash Equivalents at End of Period. . . . . . . . . . . $11,080 $2,218
======== ========
See notes to condensed consolidated financial statements.
- 7 -
</TABLE>
<PAGE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Significant Accounting Practices:
Consolidation -- The condensed consolidated financial
statements include the accounts of South Jersey Industries,
Inc. (the Company or SJI) and all of its subsidiaries.
Certain intercompany transactions, amounting to approximately
$.1 million and $1.6 million for the three-month periods and
$1.9 million and $2.6 million for the six month-periods ended
June 30, 1997 and 1996, respectively, were not required to be
eliminated. Those amounts were capitalized to utility plant
or environmental remediation costs on the South Jersey Gas
Company (SJG) books of account and are recoverable by SJG
through the rate-making process (See Note 5). All other
significant intercompany accounts and transactions have been
eliminated. Certain reclassifications have been made of
previously reported amounts to conform with classifications
used in the current year. In the opinion of management, the
condensed consolidated financial statements reflect all
adjustments necessary for a fair presentation of the
financial position and operating results of the Company at
the dates and for the periods presented. The businesses of
the Company are subject to seasonal fluctuations and,
accordingly, this interim financial information should not be
considered a basis for estimating the results of operations
for the full year.
Estimates and Assumptions -- The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the
financial statements and related disclosures and, therefore,
actual results could differ from those estimates.
In February 1997, the Financial Accounting Standards
Board (FASB) issued FASB No. 128, "Earnings per Share", which
is effective for financial statements for periods ending
after December 15, 1997. FASB No. 128 supersedes previous
reporting requirements on Earnings per Share (EPS) and
replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic
and diluted EPS on the face of the income statement for all
entities with a complex capital structure. The adoption of
FASB No. 128 is not expected to have a material impact on the
Company's EPS.
- 8 -
<PAGE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Note 2. Divestitures:
On December 3, 1996, Energy & Minerals, Inc. (EMI), a
subsidiary of SJI, sold the common stock of The Morie
Company, Inc. (Morie), its sand mining and processing
subsidiary, in a cash transaction for approximately $55.3
million. The net book value of assets sold was approximately
$27.9 million. Cash, certain real estate and other
miscellaneous assets, along with certain liabilities,
remaining after the sale were transferred to the books of
EMI.
In December 1996, the Company developed a formal plan to
discontinue the operations of its construction and
environmental services operations, R & T Group, Inc. (R & T)
and its five subsidiaries. In two separate sales on January
9, 1997, and on April 4, 1997, R & T sold all of its
operating assets, except certain real estate. The aggregate
proceeds from these sales, approximately $3.5 million,
approximated the net book value of the assets at the date of
sale. Associated disposal costs of $189,500, or $123,200
after taxes, are included in the condensed statement of
consolidated income for the six months ended June 30, 1997
under the caption "Net Loss on the Disposal of Discontinued
Operations".
Summarized operating results of the discontinued
operations were (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
Operating Revenues:
Sand Mining $ 0 $ 9,327 $ 0 $ 15,855
Construction 1,199 4,134 4,354 7,293
-------- -------- -------- --------
Total Operating
Revenues $ 1,199 $ 13,461 $ 4,354 $ 23,148
======== ======== ======== ========
(Loss)Income before
Income Taxes:
Sand Mining $ (36) $ 1,638 $ (11) $ 846
Construction (103) 52 (100) (531)
- 9 -
<PAGE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Note 2. Divestitures: (Continued)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
Income Tax
Credits(Expense) 42 (533) 45 (19)
-------- -------- -------- --------
Income(Loss) from
Discontinued
Operations $ (97) $ 1,157 $ (66) $ 296
======== ======== ======== ========
Income(Loss) per
Common Share from
Discontinued
Operations $ 0.01 $ 0.11 $ (0.01) $ 0.03
======== ======== ======== ========
The 1996 results of operations have been restated to reflect
the accounting for these segments as Discontinued Operations.
Note 3. Common Stock:
The Company has 20,000,000 shares of Common Stock
authorized of which the following shares were issued and
outstanding:
1997 1996
---- ----
Beginning Balance January 1, 10,756,679 10,722,171
Issued during period:
Employees' Stock Ownership Plan 3,771 4,601
Stock Option & Stock
Appreciation Rights Plan 3,060 4,060
---------- ----------
Ending Balance June 30, 10,763,450 10,730,832
========== ==========
The par value ($1.25 per share) of the stock issued in
1997 and 1996 has been credited to common stock and the net
excess over par value of $169,523 and $169,114 for the six
months ended June 30, 1997 and 1996, respectively, has been
credited to Premium on Common Stock.
Effective January 1, 1996, the Company adopted FASB No.
123, "Accounting for Stock-Based Compensation". This
statement defines a fair value based method of accounting for
stock-based compensation. However, the Company has elected,
as permitted by the statement, to continue to measure
- 10 -
<PAGE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Note 3. Common Stock (Continued):
compensation costs using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Accordingly, there was no impact
from the adoption of FASB No. 123 on the Company's financial
statements. The Company has determined that the pro forma
effect of adoption of the fair value based method of
accounting on net income and earnings per share would be
immaterial for the three and six month periods ended June 30,
1997 and 1996.
Stock Option and Stock Appreciation Rights Plan - Under
this plan, not more than 306,000 shares in the aggregate may
be issued to officers and other key employees of the Company
and its subsidiaries. No options or stock appreciation rights
may be granted under the Plan after January 23, 2007. At
June 30, 1997 and 1996, the Company had 31,930 and 45,480
options outstanding, respectively, exercisable at prices from
$17.16 to $24.69 per share. During the six-month period ended
June 30, 1997 and 1996, 3,060 and 4,060 options were
exercised, respectively, at a price of $17.89 per share. No
options were granted in 1997 or 1996. No stock appreciation
rights have been issued under the plan. The stock options
outstanding at June 30, 1997 and 1996, did not have a
material effect on the earnings per share calculations.
Dividend Reinvestment and Stock Purchase Plan (DRP) and
Employees' Stock Ownership Plan (ESOP) - Shares of common
stock offered through the DRP are currently purchased in the
open market. All shares offered through the ESOP are issued
directly by the Company. As of June 30, 1997, 239,483 and
36,430 shares of authorized, but unissued, Common Stock were
reserved for future issuance to the DRP and ESOP,
respectively.
Directors' Restricted Stock Plan - On September 20,
1996, the Board of Directors adopted a restricted stock plan.
Under this plan, an initial award of 13,800 shares was
granted on December 4, 1996, at a market value of $24.00 per
share. The plan also provides for annual awards and, on
December 5, 1996, 600 additional shares were granted at a
market value of $24.125 per share. There have been no awards
in 1997. Initial awards will vest over a five-year period,
with 20 percent of such awards vesting per year. Annual
awards will vest on the third anniversary of each award.
Shares issued as restricted stock are held by the Company
until the attached restrictions lapse. The market value of
the stock on the date granted is recorded as compensation
expense over the applicable vesting period.
- 11 -
<PAGE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Note 3. Common Stock (Continued):
Shareholder Rights Plan - On September 20, 1996, the
Board of Directors adopted a shareholder rights plan that
provides for the distribution of one right for each share of
common stock outstanding on October 11, 1996. Each right
entitles its holder to purchase 1/1000 of one share of Series
A Stock at an exercise price of $90.
The rights plan provides that when a person or group
acquires 10 percent or more of the Company's common stock,
each of the rights (except for those held by the 10 percent
holder) becomes the right upon payment of the exercise price
to receive that number of shares of the Company's common
stock, or common stock of the acquiring company, which have a
market value equal to two times the exercise price.
The rights may be redeemed by the Company for $.001 per
right at any time prior to the time the acquiring person or
group reaches the 10 percent threshold. If the rights are not
exercised or redeemed by September 20, 2006, they will
expire.
Note 4. Retained Earnings:
There are certain restrictions under various loan
agreements as to the amount of cash dividends or other
distributions that may be paid on the Common Stock of SJG.
The Company's aggregate equity in its subsidiaries' retained
earnings which is free of these restrictions was
approximately $53.8 million as of June 30, 1997.
Note 5. Commitments and Contingencies:
Gas Supply Contracts - SJG, in the normal course of
conducting business, has entered into long-term contracts for
natural gas supplies, firm transportation, and gas storage
service. The earliest expiration of any of the gas supply
contracts is 1998. All of the transportation and storage
service agreements between SJG and its interstate pipeline
suppliers are provided under Federal Energy Regulatory
Commission (FERC) approved tariffs. SJG's cumulative
obligation for demand charges paid to its suppliers for all
of these services is approximately $5.1 million per month
which is recovered on a current basis through the LGAC.
- 12 -
<PAGE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Note 5. Commitments and Contingencies (Continued)
Pending Litigation - The Company is subject to claims
which arise in the ordinary course of its business and other
legal proceedings. A group of Atlantic City casinos filed a
petition with the BPU on January 16, 1996, alleging
overcharges of over $10.0 million, including interest.
Management believes that charges to the casinos were based on
applicable tariffs and that the casinos were not qualified
under less expensive rate schedules, as claimed. Management
believes that the ultimate impact of these actions will not
materially affect SJI's financial position, results of
operations or liquidity.
Environmental Remediation Costs - The Company has
incurred and recorded certain costs for environmental
remediation of sites where SJG or predecessor companies
operated gas manufacturing plants. Manufactured gas
operations were terminated at all SJG sites more than 30
years ago. Certain of SJI's nonutility subsidiaries have also
recorded costs for environmental remediation of sites where
SJF previously operated a fuel oil business and Morie
maintained equipment fueling stations and storage.
Since the early 1980s, the Company has recorded
environmental remediation costs of $87.4 million, of which
$33.0 million has been expended as of June 30, 1997. SJG,
with the assistance of an outside consulting firm, estimates
that total future expenditures to remediate SJG's sites will
range from $52.4 million to $165.6 million. The lower end of
this range has been recorded as a liability and is reflected
on the condensed consolidated balance sheet under the
captions "Current Liabilities" and "Deferred Credits and
Other Non-Current Liabilities". Recorded environmental
remediation costs of SJG do not directly affect earnings
because those costs are deferred and, when expended,
recovered through rates over 7-year amortization periods as
authorized by the BPU. Amounts accrued for future
expenditures have not been adjusted for future insurance
recoveries, which management is pursuing. SJG has received
$4.2 million of insurance recoveries as of June 30, 1997.
These proceeds were first used to offset legal fees incurred
in connection with those recoveries and the excess was used
to reduce the balance of deferred environmental remediation
costs. Recorded amounts include estimated costs to be
incurred based on projected investigation and remediation
work plans using existing technologies. Actual expenditures
could differ from the estimates due to the long-term nature
of the projects and changing technology, government
regulations and site specific requirements.
- 13 -
<PAGE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Note 5. Commitments and Contingencies (Continued)
The major portion of the recorded environmental
remediation costs relate to the remediation of SJG's former
gas manufacturing sites. SJG has recorded $84.6 million for
the remediation of these sites, of which $32.2 million has
been expended through June 30, 1997. As a result of the
7-year recovery mechanism, SJG does not expense environmental
costs for former gas manufacturing sites when incurred and
defers costs to be recovered. SJG has two regulatory assets
associated with environmental cost. The first regulatory
asset is titled "Environmental Remediation Cost: Expended -
Net". These expenditures represent actual cost incurred to
remediate former gas manufacturing plant sites. These costs
meet the requirements of FASB No. 71, "Accounting for the
Effects of Certain Types of Regulation". The BPU has allowed
recovery of these expenditures through July 1995 and
petitions to recover these costs through July 1997 are
pending before the BPU.
The other regulatory asset titled "Environmental
Remediation Cost: Liability for Future Expenditures" relates
to estimated future expenditures determined under the
guidance of FASB No. 5, "Accounting for Contingencies". This
amount, which relates to former manufactured gas plant sites
has been recorded as a deferred debit with the corresponding
amount reflected in Current Liabilities and Deferred Credits
and Other Non-Current Liabilities, as appropriate. The
deferred debit is a regulatory asset under FASB No. 71
because the BPU's intent, as evidenced by its current
practice, is to provide recovery sufficient in amount to
recover the deferred costs after they have been expended.
SJG makes annual filings with the BPU to recover these
costs in rates. The BPU has consistently allowed the full
recovery over such 7-year periods, and SJG believes the BPU
will continue to do so. As of June 30, 1997, SJG has
unamortized remediation expenditures of $17.1 million which
are reflected on the balance sheet under the caption
"Deferred Debits". Since BPU approval of the RAC mechanism
in August 1992, SJG has recovered $10.9 million through rates
as of June 30, 1997.
With Morie's sale, EMI assumed responsibility for
environmental liabilities which are estimated to range
between $2.0 million and $4.0 million. The information
available on these sites was sufficient only to establish a
range of probable liability and no point within the range is
more likely than any other, therefore, EMI accrued the lower
end of the range.
- 14 -
<PAGE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Note 6. Recent Regulatory Action:
On January 27, 1997, the BPU granted SJG a rate increase
of $6.0 million based on a 9.62 percent rate of return on
rate base, which included an 11.25 percent return on equity.
Revenue requirements for ratemaking purposes are established
on the basis of firm and interruptible sales projections.
The majority of this increase will come from residential and
small commercial customers. In addition, part of the increase
will be recovered from customers through new service fees
which charge specific customers for costs which they cause
SJG to incur. As part of this rate increase, SJG is allowed
to retain the first $5.4 million of pre-tax margins generated
by interruptible and off-system sales and transportation and
20 percent of pre-tax margins above that level. In 1997 and
1998, this $5.4 million threshold will be increased by the
annual revenue requirement associated with specified major
construction projects. These sharing formula improvements
are expected to result in additional rate relief of
approximately $0.2 million in 1997 and $1.8 million in 1998.
In 1997, SJG filed to recover additional post-retirement
benefit costs of approximately $1.2 million annually. This
recovery is expected to begin in 1998.
In addition to the rate increase, the BPU approved a
revenue reduction in SJG's Temperature Adjustment Clause, a
mechanism designed to reduce the impact of extreme
fluctuations in temperatures on SJG and its customers. For
the period ended May 31, 1996, weather in SJG's service area
was significantly colder than the 20-year average, resulting
in a $2.5 million credit due to customers' bills which is
reflected in the 1996 results of operations.
As part of the tariff changes approved, SJG initiated
its BPU approved pilot program in April 1997 to give
residential customers a choice of gas supplier. During the
enrollment period which ended June 30, 1997, approximately
13,000 residential customers applied for this service.
Transportation of gas for these customers began on August 1,
1997 and will continue until June 30, 1998, or later if
approved by the BPU. Under the applicable rate schedule,
amounts billed to participants in the program will be reduced
for cost of gas charges and applicable gross receipts taxes.
This decrease in revenues will be offset by a corresponding
decrease in SJG's gas costs and taxes under SJG's BPU-
approved fuel clause. Accordingly, SJG believes that the
program will not affect its net income, financial condition
or margins. In addition, because the program affects only 5%
of SJG's residential customers, and not all of those
- 15 -
<PAGE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Note 6. Recent Regulatory Action (Continued):
customers may elect to purchase gas from other suppliers, SJG
believes that any reduction in revenue will not be material.
SJG further expanded the choices available to commercial and
industrial customers.
Note 7. Financing Activities:
On March 21, 1997, SJG sold $35.0 million of its First
Mortgage Bonds, 7.7% Series due 2027.
On May 2, 1997, SJG's wholly owned statutory trust
subsidiary, SJG Capital Trust (Trust), established in the
State of Delaware on March 24, 1997, sold $35.0 million of
8.35% SJG-obligated Mandatorily Redeemable Preferred
Securities. The Trust solely holds as an asset the 8.35%
Deferrable Interest Subordinated Debentures issued by SJG
which mature on April 30, 2037, the maturity date of the
Preferred Securities. The Debentures and Preferred
Securities are redeemable at the option of SJG at a
redemption price equal to 100% of the principal amount
thereof at any time on or after April 30, 2002.
Note 8. Subsequent Event:
On July 14, 1997, legislation reforming the taxation of
energy in New Jersey was adopted. The new law eliminates the
Gross Receipts and Franchise Taxes (approximately 13 percent
of utility revenue) and replaces it with a combination of
taxes. Beginning January 1, 1998, retail sales of natural
gas and electricity and utility services will be subject to
the 6 percent State Sales and Use Tax. Utilities will also
be subject to the 9 percent State Corporate Business Tax on
new income. To bridge the revenue gap created by the new tax
law, the State will impose a Transitional Energy Facilities
Assessment (TEFA) on gas and electric facilities. the TEFA
will be phased out over a five-year period beginning January
1, 1999 and ending January 1, 2003. It is expected that the
revised tax policy will eliminate tax disparities between
utility and non-utility suppliers, thereby providing fair
competition and lower energy costs for the consumer. The
adoption of the new legislation will not materially affect
the Company's financial position or results of operations.
- 16 -
<PAGE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Overview
The wholly owned operating subsidiaries of South Jersey
Industries include South Jersey Gas Company (SJG), Energy &
Minerals, Inc. (EMI) and South Jersey Energy Company (SJE).
SJG is a natural gas distribution company serving 257,400
customers at June 30, 1997, compared with 250,700 customers at
June 30, 1996. Seasonal aspects affect SJG's reported revenues,
inventories, receivables, operating expenses and cash flows, which
are usually greater during the first and fourth quarters of the
year. EMI is a holding company engaged in the wholesale marketing
of natural gas through its energy service subsidiary, South Jersey
Fuel, Inc. (SJF). SJE provides services for the acquisition and
transportation of natural gas for retail end users.
Competition
SJG franchises are non-exclusive. However, currently no other
utility is providing retail gas distribution services 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. The market for natural gas sales is subject to competition
as a result of deregulation. SJG has enhanced its competitive
position while maintaining its margins through its initiative in
obtaining an unbundled tariff which isolates the variable cost of
the gas commodity component within SJG's rate structure. Under this
tariff, substantially all of SJG's profits are derived from the
transportation rather than the sale of the commodity since SJG does
not generally add a profit mark-up to the cost of the commodity.
Therefore, SJG is able to offer its commercial and industrial
customers flexibility regarding choice of gas supply while SJG
continues to recover its cost of service and fixed gas costs while
providing and charging for transportation service. In April 1997,
SJG initiated its BPU-approved pilot program to give certain of its
residential customers a choice of gas suppliers (See "Pilot Program
- - Choice of Gas Supplier"). In all of these respects, SJG has been
a leader in addressing the changing marketplace while maintaining
its focus on being a low-cost provider of natural gas and energy
services. SJE and SJF are also active participants in arranging
energy services designed to provide low-cost energy supplies. It is
the intent of the SJI companies to develop creative initiatives and
propose meaningful regulatory and tax reforms designed to benefit
its customers and shareholders.
Pilot Program - Choice of Gas Supplier
In April 1997, SJG initiated its BPU approved pilot program
to give residential customers a choice of gas supplier. During
the enrollment period which ended June 30, 1997, approximately
13,000 residential customers applied for this service.
Transportation of gas for these customers began on August 1, 1997
- 17 -
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Pilot Program - Choice of Gas Supplier (Continued)
and will continue until June 30, 1998, or later if approved by the
BPU. Under the applicable rate schedule, amounts billed to
participants in the program will be reduced for cost of gas
charges and applicable gross receipts taxes. The resulting
decrease in revenues will be offset by a corresponding decrease in
SJG's gas costs and taxes under SJG's BPU-approved fuel clause.
Accordingly, SJG believes that the program will not affect its net
income, financial condition or margins. In addition, because the
program affects only 5% of SJG's residential customers, and not
all of those customers may elect to purchase gas from other
suppliers, SJG believes that any reduction in revenue will not be
material.
Energy Adjustment Clauses
SJG's tariff includes a Levelized Gas Adjustment Clause
("LGAC"), a Temperature Adjustment Clause ("TAC"), a Remediation
Adjustment Clause ("RAC") and a Demand Side Management Clause
("DSMC"). Such clauses are designed to permit adjustments for
changes in gas supply costs, reduce the impact of extreme
fluctuations in temperatures on SJG and its customers, recover
costs incurred in the remediation of former gas manufacturing
plants and recover costs associated with its conservation plan.
The BPU approved LGAC, RAC and DSMC adjustments do not directly
affect earnings because revenues are adjusted to match costs. The
Company's base rates are designed based on twenty-year normal
temperatures. When actual temperatures are colder than the
twenty-year average, the Company sells more gas than was
anticipated generating higher revenues and net income.
Conversely, when actual temperatures are warmer than normal, the
Company sells less gas and revenues and net income are lower than
projected. The TAC dampens the effect of these peaks and valleys
(and thus moderates the effect of weather extremes on SJG's
revenues) by giving customers a credit against higher usage in
colder weather and giving SJG a surcharge on lower usage in warmer
weather. TAC adjustments therefore affect revenue, income and
cash flows.
Results of Operations - Three and Six Months Ended June 30, 1997
Compared to Three and Six Months Ended June 30, 1996
Operating Revenues - Utility
The following is a summary of changes in operating revenue
and throughput by major category for 1997 compared with 1996
[before the elimination of intersegment sales]:
- 18 -
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Operating Revenues - Utility (Continued)
Period Ended June 30,
------------------------------
Three Months Six Months
1997 vs. 1996 1997 vs. 1996
------------- --------------
Operating Revenues (Thousands):
Firm
Residential $ 1,380 $ (877)
Commercial (412) (2,792)
Industrial (573) (1,107)
Cogeneration & Electric
Generation (3,509) (6,799)
Firm Transportation 550 1,022
------------ ------------
Total Firm (2,564) (10,553)
Interruptible (1,266) (725)
Interruptible Transportation 107 520
Off-System 7,492 (913)
Capacity Release & Storage 856 2,559
Other Revenues 132 250
------------ ------------
Total Operating Revenues $ 4,757 $ (8,862)
============ ============
Throughput (MMcf):
Firm
Residential 11 (1,409)
Commercial (94) (943)
Industrial (128) (247)
Cogeneration & Electric
Generation (1,230) (2,334)
Firm Transportation 1,972 3,541
------------ ------------
Total Firm Throughput 531 (1,392)
Interruptible (305) (211)
Interruptible Transportation 397 1,173
Off-System 3,093 1,497
Capacity Release & Storage 3,195 10,258
------------ ------------
Total Throughput 6,911 11,325
============ ============
Firm revenues in both 1997 periods were negatively impacted
by the effects of warmer temperatures, partially offset by
increases in rates for residential and commercial customers.
Increased off-system sales and increased revenues from capacity
release and storage programs benefitted each 1997 period.
Operating Revenues - Nonutility
Nonutility revenues decreased $1.8 and $7.6 million in the
three and six month periods ended June 30, 1997 compared to the
same period in 1996, principally due to lower commodity sales.
- 19 -
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Gas Purchased for Resale
Gas purchased for resale increased $1.7 million in the second
quarter of 1997 compared with the 1996 quarter, principally due to
increased off-system sales, partially offset by decreased
cogeneration and electric generation unit sales. Gas purchased
for resale decreased by $7.2 million for the six months ended June
30, 1997, compared with 1996, principally due to lower firm sales.
Sources of gas supply include both contract and open-market
purchases. SJG is responsible for securing and maintaining its
own gas supplies to serve its customers.
SJG has entered into long-term contracts for natural gas
supplies, firm transportation, and firm gas storage service. The
earliest expiration of any of these contracts is 1998. All of the
transportation and storage service agreements between SJG and its
interstate pipeline suppliers are provided under tariffs approved
by the Federal Energy Regulatory Commission. SJG's cumulative
obligation for demand charges for all of these services is
approximately $5.1 million per month which is recovered on a
current basis through its LGAC.
Operations
A summary of net changes in utility operations for 1997
compared with 1996 is as follows (in thousands):
Period Ended June 30,
------------------------------
Three Months Six Months
1997 vs. 1996 1997 vs. 1996
------------- -------------
Other Production Expense $ (6) $ (25)
Transmission (2) (9)
Distribution 126 180
Customer Accounts and Services (367) (347)
Sales 1 51
Administration and General 65 246
Other (81) (167)
------ ------
$ (264) $ (71)
====== ======
Customer Accounts and Service costs decreased in both periods
principally due to a charge in 1996 to increase the Company's
reserve for uncollectible accounts and lower salary costs.
Administrative and General costs increased in 1997 principally due
to increased salary and employee benefit costs, partially offset
by decreases in insurance and outside service costs.
Nonutility operations decreased $1.6 and $7.1 million,
respectively, in the three and six month periods ended June 30,
1997 compared to the same periods in 1996, principally due to
decreased commodity sales.
- 20 -
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Other Operating Expenses
A summary of principal changes in other expenses for 1997
compared with 1996 is as follows (in thousands):
Period Ended June 30,
------------------------------
Three Months Six Months
1997 vs. 1996 1997 vs. 1996
------------- -------------
Maintenance $ 221 $ 430
Depreciation 284 540
Federal Income Taxes - Net 1,231 396
Gross Receipts & Franchise
and Other Taxes (256) (2,377)
The increase in maintenance expense is principally due to
increased utility production plant maintenance, which includes the
amortization of increased environmental remediation costs (such
increases are offset by an equal amount of revenue recovery under
SJG's RAC). Depreciation is higher in 1997 principally due to
increased investment in property, plant and equipment by SJG.
Federal Income Tax changes reflect the impact of changes in pre-
tax income. The changes in Gross Receipts & Franchise Taxes in
1997 are due to changes in volumes of gas sold, which are subject
to those taxes, in addition to lower tax rates applicable to
certain customer classes in 1997.
Interest and Other Charges
Interest charges decreased $136,000 and $202,000 in the 1997
three and six month periods, respectively, principally due to the
effects of lower levels of short-term debt outstanding. Utility
long-term interest increased in each 1997 period due to increased
levels of long-term debt outstanding including the issuance by SJG
of $35.0 million of first mortgage bonds in March 1997, and the
issuance, in May 1997, of $35 million of Manditorily Redeemable
Preferred Securities (See "Capital Resources").
Discontinued Operations
Loss from discontinued operations amounted to $97,000 for the
three months ended June 30, 1997 compared to income of $1,157,000
for the same period in 1996. Loss from discontinued operations
amounted to $66,000 for the six months ended June 30, 1997
compared to income of $296,000 in 1996. The income in 1996
principally reflect the operating results of The Morie Company,
Inc., the Company's sand mining subsidiary which was sold in
December 1996 (See Note 2, Divestitures). Also, the net loss on
the sale of discontinued operations decreased from $724,000 in
1996 to $123,000 in 1997. This change principally reflects a
write-down of goodwill in 1996.
- 21 -
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Net Income Applicable to Common Stock
Net Income (in thousands) and earnings per common shares
reflect the following changes:
Period Ended June 30,
-----------------------------
Three Months Six Months
1997 vs. 1996 1997 vs. 1996
------------- -------------
Income from Continuing Operations $ 1,850 $ 32
Loss from Discontinued Operations (1,254) (362)
Net Gain on Disposal of Discontinued
Operations 0 601
------------ ------------
Net Income Increase $ 596 $ 271
============ ============
Earnings per Common Share
Continuing Operations $ 0.17 $ 0.00
Discontinued Operations (Loss) (0.12) 0.02
------------ ------------
Earnings per Share Increase $ 0.05 $ 0.02
============ ============
The details affecting the increase in net income and earnings
per share are discussed under the appropriate captions above. The
increases in net income and earnings per share principally reflect
increased utility operating income in the 1997 periods resulting
from increased residential rates and increased off-system and
capacity release and storage revenues.
Liquidity
The seasonal nature of gas operations, the timing of
construction and remediation expenditures and related permanent
financing, as well as mandated tax and sinking fund payment dates
require large short-term cash requirements. These are generally
met by cash from operations and short-term lines of credit. The
Company maintains short-term lines of credit with a number of
banks, aggregating $135.0 million of which $120.5 million was
available at June 30, 1997. The credit lines are uncommitted and
unsecured with interest rates below the prime rate.
The changes in cash flows from operating activities for the
six months ended June 30, 1997, compared with the same period in
1996, are as follows (in thousands):
- 22 -
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Liquidity (Continued)
Six Months Ended
June 30,
----------------
1997 vs. 1996
----------------
Increases/(Decreases):
Net Income $ 271
Depreciation, Depletion and Amortization (567)
Revenues and Fuel Costs Deferred - Net 7,208
Deferred and Non-Current Federal
Income Taxes - Net 1,107
Environmental Remediation Costs-Net 253
Net Pre-Tax Loss on the Disposal of
Discontinued Operations (1,102)
Accounts Receivable 2,080
Inventories 4,565
Prepayments and Other Current Assets 1,013
Prepaid Gross Receipts & Franchise Taxes 190
Accounts Payable and Other Accrued
Liabilities (12,521)
Other - Net (928)
--------
Increase in Net Cash Provided by
Operating Activities $ 1,569
========
Depreciation and Amortization are non-cash charges to income
and do not impact cash flow. Changes in depreciation cost reflect
the effect of additions and reductions to fixed assets.
Increases in Revenues and Fuel Costs Deferred - Net reflect
the impact of overcollection of fuel costs or the recovery of
previously deferred fuel costs. Decreases reflect the impact of
payments or credits to customers for amounts previously
overcollected or the undercollection of fuel costs resulting from
increases in natural gas costs.
Increases in Deferred and Non-Current Federal Income Taxes
and Credits - Net represent the excess of taxes accrued over
amounts paid. Decreases reflect the impact of taxes paid in
excess of amounts accrued. Generally, deferred income taxes
related to deferred fuel costs will be paid in the next year.
Changes in Environmental Remediation Costs - Net represent
the difference between amounts collected under the RAC and through
insurance recoveries and remediation expenditures.
Changes in Accounts Receivable are generally weather and
price related. Increases generate cash flows when collected in
subsequent periods.
Changes in Inventory reflect the impact of seasonal
requirements, temperatures and price changes.
- 23 -
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Liquidity (Continued)
Changes in Prepaid Gross Receipts & Franchise Taxes reflect
the impact of the excess of taxes paid over taxes accrued.
However, there are significant timing differences in cash flows
during the year since SJG must pay the full year's tax on April 1
of each year and amortize any prepaid tax over the remainder of
the year, on the basis of gas volumes sold. SJG uses short-term
borrowings to make these tax payments and, accordingly, this
results in a temporary increase in the short-term debt level. The
carrying costs for these timing differences are recognized in base
utility rates. As stated in Note 8 on page 16, on January 1, 1998,
the gross receipts and franchise taxes are being replaced with a 6
percent State Sales and Use Tax, a 9 percent State Corporation
Business Tax on net income and a Transitional Energy Facilities
Assessment (TEFA) on gas facilities. TEFA will be phased out over
five years beginning January 1, 1999. Approximately fifty percent
of the new taxes will be paid in monthly installments during the
first six months of the year and the principal portion of the
remaining taxes will be paid on May 15 of each year. SJG is
required to file a petition with the BPU, on or before September 14,
1997, to reflect the impact of this tax change on base rates.
Changes in Accounts Payable and Other Accrued Liabilities
reflect the impact of timing differences between the accrual and
payment of costs.
Cash flows from nonutility operations are generally retained
by those companies with amounts in excess of cash requirements
being passed up to SJI either as dividends or as temporary short-
term loans. Nonutility operations are service oriented and do not
require significant investment in capital facilities, inventories
or personnel. Such operations are not considered material to the
financial statements.
EMI has assumed responsibility for the environmental
liabilities of The Morie Company, Inc. (Morie), a subsidiary which
was sold in 1996. The environmental liabilities are estimated to
range between $2.0 million and $4.0 million. EMI has accrued the
lower end of the range under the guidance of FAS 5 "Accounting for
Contingencies" (See Note 5 on page 14).
Regulatory Matters
On January 27, 1997, the BPU granted SJG a rate increase of
$6.0 million based on a 9.62 percent rate of return on rate base,
which included an 11.25 percent return on equity. Revenue
requirements for ratemaking purposes are established on the basis of
firm and interruptible sales projections. The majority of this
increase will come from residential and small commercial customers.
In addition, part of the increase will be recovered from customers
through new service fees which charge specific customers for costs
which they cause SJG to incur. As part of this rate increase, SJG
is allowed to retain the first $5.4 million of pre-tax margins
generated by interruptible and off-system sales and transportation
and 20 percent of pre-tax margins above that level. In 1997 and
- 24 -
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Regulatory Matters (Continued)
1998, this $5.4 million threshold will be increased by the annual
revenue requirement associated with specified major construction
projects. These sharing formula improvements are expected to result
in additional rate relief of approximately $0.2 million in 1997 and
$1.8 million in 1998.
Rates of return are calculated by weighting SJG's individual
capital cost rates by the proportion of each respective type of
capital. This requires the selection of appropriate capital
structure ratios and a determination of the cost rate for each
capital component which are determined in each rate proceeding.
In setting a rate of return, the BPU must provide a utility and
its investors with a return that is commensurate with the risk to
which the invested capital is exposed so that the utility has access
to the capital required to meet its public service responsibility.
Also on January 27, 1997, the BPU approved SJG's request for a
$2.5 million revenue reduction through the TAC, which is the
standard BPU procedure used to credit customers with excess
revenues, previously collected from customers, which were in excess
of allowed revenues determined under the TAC (See "Energy Adjustment
Clauses"). This revenue reduction reflects the normal operation of
the TAC, as does the BPU's confirmation of the decrease.
In April 1996, SJG received BPU approval to increase its rates
to recover approximately $8.0 million of increased natural gas costs
through the LGAC. On August 31, 1996, SJG made its 1996-97 LGAC
filing to reduce rates to reflect a decrease of $1.4 million in
natural gas costs, which is pending at the BPU.
The adoption of FASB No. 109, "Accounting for Income Taxes" in
1993 primarily resulted in the creation of a regulatory asset and a
deferred income tax liability. As a result of positions taken in
the 1994 rate case, the amortization of the asset is being recovered
through rates over an 18-year period which began in December 1994.
Also, FASB No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", adopted by SJG in 1993, requires an
accrual basis of accounting for retiree benefit payments during the
years of employment. SJG has elected to recognize the unfunded
transition obligation over a 20-year period which began in 1993.
SJG had previously recovered these costs through rates on a pay-as-
you-go basis. A December 1994 BPU order provided for partial
recovery of costs associated with FASB No. 106 and prescribes
continued deferral of unrecovered costs. SJG was initially seeking
recovery of this asset in its recently completed rate proceeding;
however, the BPU initiated a generic proceeding to address the
recovery of these costs by all utilities in the State. Phase I of
the generic proceeding was completed in January 1997 and SJG, in May
1997, has made a prescribed filing with the BPU to recover
additional postretirement benefit costs of approximately $1.2
million annually, beginning in 1998. Also, beginning in 1995, an
external trust was established towards funding postretirement
benefit costs for the purpose of contributing costs recovered from
- 25 -
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Regulatory Matters (Continued)
ratepayers as authorized by the BPU. Rate recovery in excess of
SJG's pay-as-you-go requirement is contributed to the trust and
provides no operating benefit to SJG except to the extent that trust
income would reduce future net periodic cost. Contributions to the
trust amounted to $2.1 million in 1996. The balance of this
regulatory asset amounted to $5.7 million at June 30, 1997.
SJG has incurred and recorded certain costs for environmental
remediation of sites where SJG or predecessor companies operated gas
manufacturing plants. Manufactured gas operations were terminated
at all SJG sites more than 30 years ago.
Since the early 1980's, the Company has recorded environmental
remediation costs of $87.4 million, of which $33.0 million has been
expended as of June 30, 1997. SJG, with the assistance of an
outside consulting firm, estimates that total future expenditures to
remediate the sites will range from $52.4 million to $165.6 million.
The lower end of this range has been recorded as a liability and is
reflected on the balance sheet under the captions "Current
Liabilities" and "Deferred Credits and Other Non-Current
Liabilities". Recorded environmental remediation costs of SJG do
not directly affect earnings because those costs are deferred and,
when expended, recovered through rates over 7-year amortization
periods as authorized by the BPU. Amounts accrued for future
expenditures have not been adjusted for future insurance recoveries,
which management is pursuing. SJG has received $4.2 million of
insurance recoveries as of June 30, 1997. These proceeds were first
used to offset legal fees incurred in connection with those
recoveries and the excess was used to reduce the balance of deferred
environmental remediation costs. Recorded amounts include estimated
costs to be incurred based on projected investigation and
remediation work plans using existing technologies. Actual
expenditures could differ from the estimates due to the long-term
nature of the projects and changing technology, government
regulations and site specific requirements.
The major portion of the recorded environmental remediation
costs relate to the remediation of SJG's former gas manufacturing
sites. SJG has recorded $84.6 million for the remediation of these
sites, of which $32.2 million has been expended through June 30,
1997. As a result of the 7-year recovery mechanism, SJG does not
expense environmental costs for former gas manufacturing sites when
incurred and defers costs to be recovered. SJG has two regulatory
assets associated with environmental cost. The first regulatory
asset is titled "Environmental Remediation Cost: Expended - Net".
These expenditures represent actual costs incurred to remediate
former gas manufacturing plant sites. These costs meet the
requirements of FASB No. 71, "Accounting for the Effects of Certain
Types of Regulation". The BPU has allowed recovery of these
expenditures through July 1995 and petitions to recover these costs
through July 1997 are pending before the BPU.
The other regulatory asset titled "Environmental Remediation
Cost: Liability for Future Expenditures" relates to estimated future
- 26 -
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Regulatory Matters (Continued)
expenditures determined under the guidance of FAS 5 "Accounting for
Contingencies". This amount, which relates to former manufactured
gas plant sites has been recorded as a deferred debit with the
corresponding amount reflected in Current Liabilities and Deferred
Credits and Other Non-Current Liabilities, as appropriate. The
deferred debit is a regulatory asset under FAS 71 because the BPU's
intent, as evidenced by its current practice, is to provide recovery
sufficient in amount to recover the deferred costs after they have
been expended.
SJG makes annual filings with the BPU to recover expended
remediation costs in rates. The BPU has consistently allowed the
full recovery over such seven-year periods, and SJG believes the BPU
will continue to do so. As of June 30, 1997, SJG has unamortized
remediation expenditures of $17.1 million which are reflected on the
balance sheet under the caption "Deferred Debits." Since BPU
approval of the RAC mechanism in August 1992, SJG has recovered
$10.9 million through rates as of June 30, 1997.
On July 31, 1997, SJG made a filing with the BPU requesting an
increase in the level of its annual recoveries through the RAC of $1.5
million. This increase primarily reflects costs incurred pursuant
to agreements with the NJDEP for cleanup of such sites during the
period of August 1996 through July 1997. The amount sought to be
recovered during the 1997-1998 Recovery Year, $3.9 million, consists
of the amortization of Remediation Costs incurred during the 1996-
1997 Remediation Year of $0.9 million and the amortization of
Remediation Costs incurred prior to the 1996-1997 Remediation year
of $3.2 million. It also consists of a credit for carrying costs on
Deferred Tax Benefits of $0.7 million and the addition of an
underrecovery from the 1996-1997 Recovery Year of $0.5 million.
SJG is subject to claims which arise in the ordinary course of
its business and other legal proceedings. A group of Atlantic City
casinos filed a petition with the BPU on January 16, 1996 alleging
overcharges of over $10.0 million, including interest. Management
believes that charges to the casinos were based on applicable
tariffs and that the casinos were not qualified under less expensive
rate schedules as claimed. Management believes that the ultimate
impact of these actions will not materially affect SJG's financial
position or results of operations.
Capital Resources
SJG has a continuing need for cash resources and capital,
primarily to invest in new and replacement facilities and equipment
for the remediation of former coal gas manufacturing sites. Total
construction and remediation expenditures for 1997 are estimated at
$58.5 million, of which $26.7 million was expended through June 30,
1997. The costs for 1998 and 1999 are estimated at approximately
$55.4 million and $61.6 million, respectively. These investments
are expected to be funded from several sources, which may include
cash generated by operations, temporary use of short-term debt, sale
of first mortgage bonds and capital leases.
- 27 -
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Capital Resources (Continued)
On March 21, 1997, SJG sold $35.0 million of its First Mortgage
Bonds, 7.7% Series due 2027.
On May 2, 1997, SJG's Delaware statutory trust subsidiary, SJG
Capital Trust, sold $35.0 million of 8.35% SJG-obligated Mandatorily
Redeemable Preferred Securities. The Trust solely holds as an asset
the 8.35% Deferrable Interest Subordinated Debentures issued by SJG
which mature on April 30, 2037. The Debentures and Preferred
Securities are redeemable at the option of SJG at a redemption price
equal to 100% of the principal amount thereof at any time on or
after April 30, 2002.
In January 1996, SJG redeemed a total of $5,258,000 of its
8-1/4% Series First Mortgage Bonds maturing in 1996 and 1998. In
April 1996, SJG redeemed the remaining balance of its 9.2% Series
First Mortgage Bonds due 1998 amounting to $2,667,000.
Shareholder Rights Plan - On September 20, 1996, the Board of
Directors adopted a shareholder rights plan that provides for the
distribution of one right for each share of common stock outstanding
on October 11, 1996. Each right entitles its holder to purchase
1/1000 of one share of Series A Stock at an exercise price of $90.
The rights plan provides that when a person or group acquires
10 percent or more of the Company's common stock, each of the rights
(except for those held by the 10 percent holder) becomes the right
upon payment of the exercise price to receive that number of shares
of the Company's common stock, or common stock of the acquiring
company, which have a market value equal to two times the exercise
price.
The rights may be redeemed by the Company for $.001 per right
at any time prior to the time the acquiring person or group reaches
the 10 percent threshold. If the rights are not exercised or
redeemed by September 20, 2006, they will expire.
Inflation
The ratemaking process provides that only the original cost of
utility plant is recoverable in revenues as depreciation.
Therefore, the excess cost of utility plant, stated in terms of
current cost over the original cost of utility plant, is not
presently recoverable. While the ratemaking process gives no
recognition to the current cost of replacing utility plant, based on
past practices, SJG believes it will be allowed to earn on the
increased cost of its net investment as replacement of facilities
actually occurs.
Summary
The company is confident it will have sufficient cash flow to
meet its operating, capital and dividend needs and is taking and
will take such actions necessary to employ its resources
effectively.
- 28 -
<PAGE>
PART II -- OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by
reference to Part I, Item 1, Note 5, on pages 12 through 14,
excluding the first paragraph of the Note, regarding
contingencies, including pending litigation and the
remediation and clean-up of certain sites which included
manufactured gas operations.
Item 6. Exhibits and Reports on Form 8-K
b. No reports on Form 8-K were filed during the quarter for
which this report is filed.
- 29 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SOUTH JERSEY INDUSTRIES, INC.
(Registrant)
Dated: August 14, 1997 By: /s/ George L. Baulig
George L. Baulig
Secretary & Treasurer
Dated: August 14, 1997 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Assistant Secretary & Assistant
Treasurer
- 30 -
<PAGE>
SOUTH JERSEY INDUSTRIES, INC.
Index to Exhibits
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
(Submitted only in electronic format to the
Securities and Exchange Commission).
- 31 -
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 436,997
<OTHER-PROPERTY-AND-INVEST> 2,389
<TOTAL-CURRENT-ASSETS> 82,753
<TOTAL-DEFERRED-CHARGES> 102,325
<OTHER-ASSETS> 3,581
<TOTAL-ASSETS> 628,045
<COMMON> 13,454
<CAPITAL-SURPLUS-PAID-IN> 110,750
<RETAINED-EARNINGS> 55,725
<TOTAL-COMMON-STOCKHOLDERS-EQ> 179,929
35,000
2,224
<LONG-TERM-DEBT-NET> 178,403
<SHORT-TERM-NOTES> 14,500
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 8,960
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 209,029
<TOT-CAPITALIZATION-AND-LIAB> 628,045
<GROSS-OPERATING-REVENUE> 193,721
<INCOME-TAX-EXPENSE> 8,641
<OTHER-OPERATING-EXPENSES> 160,352
<TOTAL-OPERATING-EXPENSES> 168,993
<OPERATING-INCOME-LOSS> 24,728
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 24,728
<TOTAL-INTEREST-EXPENSE> 9,809
<NET-INCOME> 14,919
0
<EARNINGS-AVAILABLE-FOR-COMM> 14,730
<COMMON-STOCK-DIVIDENDS> 7,748
<TOTAL-INTEREST-ON-BONDS> 7,290
<CASH-FLOW-OPERATIONS> 19,753
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
</TABLE>
