Page 1 of 34
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1998 Commission File Number 1-6364
SOUTH JERSEY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-1901645
(State of incorporation) (IRS employer identification no.)
1 South Jersey Plaza, Folsom, NJ 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of November 5, 1998, there were 10,777,240 shares of the
registrant's common stock outstanding.
Exhibit Index on page 34
- Cover Page -
PART I FINANCIAL INFORMATION
Item 1. Financial Statements See Pages 3 through 17
SJI-2
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED LOSS (UNAUDITED)
(In Thousands Except for Per Share Data)
<CAPTION>
Three Months Ended
September 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating Revenues:
Utility $43,432 $50,080
Nonutility 88,067 4,071
------------ ------------
Total Operating Revenues 131,499 54,151
------------ ------------
Operating Expenses:
Gas Purchased for Resale 26,220 31,465
Utility Operations 10,625 10,574
Nonutility Operations 86,469 4,772
Maintenance 1,120 1,555
Depreciation 4,324 4,031
Federal and State Income Taxes (1,697) (2,024)
Other Taxes 1,603 3,126
------------ ------------
Total Operating Expenses 128,664 53,499
------------ ------------
Operating Income 2,835 652
------------ ------------
Interest Charges:
Long-Term Debt 3,646 3,983
Short-Term Debt 1,277 285
Other 115 94
------------ ------------
Total Interest Charges 5,038 4,362
------------ ------------
Preferred Dividend Requirements of Subsidiary 771 773
------------ ------------
Loss from Continuing Operations (2,974) (4,483)
Loss from Discontinued Operations - Net (91) (284)
------------ ------------
Net Loss Applicable to Common Stock ($3,065) ($4,767)
============ ============
Average Shares of Common Stock Outstanding 10,776 10,763
============ ============
Earnings Per Common Share:
Continuing Operations ($0.27) ($0.42)
Discontinued Operations - Net (0.01) (0.02)
------------ ------------
Earnings Per Common Share ($0.28) ($0.44)
============ ============
Dividends Declared Per Common Share $0.36 $0.36
============ ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJI-3
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating Revenues:
Utility $203,865 $234,988
Nonutility 122,145 12,879
------------ ------------
Total Operating Revenues 326,010 247,867
------------ ------------
Operating Expenses:
Gas Purchased for Resale 117,528 133,275
Utility Operations 31,033 30,351
Nonutility Operations 121,712 13,977
Maintenance 3,991 4,563
Depreciation 12,757 11,890
Federal and State Income Taxes 7,277 6,671
Other Taxes 7,566 21,628
------------ ------------
Total Operating Expenses 301,864 222,355
------------ ------------
Operating Income 24,146 25,512
------------ ------------
Interest Charges:
Long-Term Debt 11,210 11,278
Short-Term Debt 2,427 2,062
Other 365 275
------------ ------------
Total Interest Charges 14,002 13,615
------------ ------------
Preferred Dividend Requirements of Subsidiary 2,317 1,329
------------ ------------
Income from Continuing Operations 7,827 10,568
Discontinued Operations:
Loss from Discontinued Operations - Net (2,686) (482)
Loss on the Disposal of Discontinued
Operations - Net 0 (123)
------------ ------------
Net Income Applicable to Common Stock $5,141 $9,963
============ ============
Average Shares of Common Stock Outstanding 10,775 10,762
============ ============
Earnings Per Common Share:
Continuing Operations $0.73 $0.98
Discontinued Operations - Net (0.25) (0.05)
------------ ------------
Earnings Per Common Share $0.48 $0.93
============ ============
Dividends Declared Per Common Share $1.08 $1.08
============ ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJI-4
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
(Unaudited)
September 30, December 31,
------------------------- -------------
1998 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $654,961 $607,395 $619,489
Accumulated Depreciation (176,367) (164,700) (167,176)
Gas Plant Acquisition Adjustment - Net 1,869 1,944 1,926
Nonutility Property and Equipment, at cost 2,988 3,440 3,332
Accumulated Depreciation (968) (1,039) (1,033)
------------ ------------ -------------
Property, Plant and Equipment - Net 482,483 447,040 456,538
------------ ------------ -------------
Investments:
Available-for-Sale Securities 711 42 42
Investment in Affiliate 1,253 1,013 849
------------ ------------ -------------
Total Investments 1,964 1,055 891
------------ ------------ -------------
Current Assets:
Cash and Cash Equivalents 6,231 9,029 13,089
Notes Receivable - Affiliate 4,350 3,950 4,561
Accounts Receivable 23,468 23,355 35,947
Unbilled Revenues 4,163 4,220 17,263
Provision for Uncollectibles (1,234) (1,526) (1,530)
Natural Gas in Storage, average cost 28,195 26,600 23,877
Materials and Supplies, average cost 3,973 3,954 4,509
Assets of Discontinued Businesses Held for
Disposal 917 630 622
Prepaid Taxes 13,599 8,513 566
Prepayments and Other Current Assets 2,090 2,513 1,820
------------ ------------ -------------
Total Current Assets 85,752 81,238 100,724
------------ ------------ -------------
Accounts Receivable - Merchandise 1,687 2,189 1,998
------------ ------------ -------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 21,345 17,805 21,041
Liability for Future Expenditures 50,697 52,400 52,400
Gross Receipts & Franchise Taxes 3,696 4,139 4,028
Income Taxes - Flowthrough Depreciation 13,265 14,243 13,999
Deferred Fuel Costs - Net 4,555 493 3,674
Deferred Postretirement Benefit Costs 5,679 5,871 6,150
Other 7,707 8,341 9,158
------------ ------------ -------------
Total Regulatory and Other Non-Current Assets 106,944 103,292 110,450
------------ ------------ -------------
Total Assets $678,830 $634,814 $670,601
============ ============ =============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJI-5
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
(Unaudited)
September 30, December 31,
------------------------- -------------
1998 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
Capitalization and Liabilities
Common Equity:
Common Stock $13,471 $13,456 $13,464
Premium on Common Stock 111,235 110,813 110,997
Retained Earnings 42,542 47,082 49,038
------------ ------------ -------------
Total Common Equity 167,248 171,351 173,499
------------ ------------ -------------
Preferred Stock and Securities of Subsidiary:
Redeemable Cumulative Preferred Stock:
South Jersey Gas Company, Par Value $100 per share
Authorized - 46,404, 47,304 and 47,304 shares
Outstanding Shares:
Series A, 4.70%--2,100, 3,000 and 3,000 shares 210 300 300
Series B, 8.00%--19,242 shares 1,924 1,924 1,924
Company-Guaranteed Mandatorily Redeemable
Preferred Securities of Subsidiary Trust:
Par Value $25 per share, 1,400,000 shares
Authorized and Outstanding 35,000 35,000 35,000
------------ ------------ -------------
Total Preferred Stock and Securities of
Subsidiary 37,134 37,224 37,224
------------ ------------ -------------
Long-Term Debt 166,853 178,479 176,360
------------ ------------ -------------
Total Capitalization 371,235 387,054 387,083
------------ ------------ -------------
Current Liabilities:
Notes Payable 94,800 28,600 45,900
Current Maturities of Long-Term Debt 8,876 8,981 8,994
Accounts Payable 30,293 40,874 49,142
Customer Deposits 5,552 5,795 5,871
Environmental Remediation Costs 18,644 7,735 16,511
Taxes Accrued 1,175 310 1,354
Interest Accrued and Other Current Liabilities 9,542 7,292 12,007
------------ ------------ -------------
Total Current Liabilities 168,882 99,587 139,779
------------ ------------ -------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 77,859 77,653 78,631
Investment Tax Credits 5,335 5,728 5,632
Pension and Other Postretirement Benefits 12,281 11,363 11,747
Environmental Remediation Costs 36,949 46,606 40,511
Other 6,289 6,823 7,218
------------ ------------ -------------
Total Deferred Credits and Other Non-Current
Liabilities 138,713 148,173 143,739
------------ ------------ -------------
Commitments and Contingencies
Total Capitalization and Liabilities $678,830 $634,814 $670,601
============ ============ =============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJI-6
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In Thousands)
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $5,141 $9,963
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 14,247 13,549
Provision for Losses on Accounts Receivable 950 925
Revenues and Fuel Costs Deferred - Net (881) (89)
Loss on Disposal of Property 26 0
Deferred and Non-Current Income Taxes and Credits - Net 3,160 2,500
Net Pre-Tax Loss on the Disposal of Discontinued
Operations 0 189
Environmental Remediation Costs - Net (30) (2,328)
Changes in:
Accounts Receivable 24,333 28,171
Inventories (3,782) (3,802)
Prepayments and Other Current Assets (270) (782)
Prepaid and Accrued Taxes - Net (13,212) (14,443)
Accounts Payable and Other Accrued Liabilities (21,633) (12,658)
Other - Net (2,021) 1,838
------------ ------------
Net Cash Provided by Operating Activities 6,028 23,033
------------ ------------
Cash Flows from Investing Activities:
Investment in Affiliate (404) 0
Repayment of (Loan to) Affiliate 211 (1,150)
Proceeds from the Sale of Assets - Net 2 3,487
Purchase of Available-for-Sale Securities (669) 0
Capital Expenditures, Cost of Removal and Salvage (39,596) (35,718)
------------ ------------
Net Cash Used in Investing Activities (40,456) (33,381)
------------ ------------
Cash Flows from Financing Activities:
Net Borrowings from (Repayments of) Lines of Credit 48,900 (79,700)
Proceeds from Issuance of Long-Term Debt 0 35,611
Principal Repayments of Long-Term Debt (9,625) (4,490)
Dividends on Common Stock (11,637) (11,623)
Proceeds from Sale of Common Stock 160 166
Proceeds from the Issuance of Preferred Securities 0 35,000
Repurchase of Preferred Stock (90) (90)
Payments for Issuance of Long-Term Debt and Preferred
Securities (138) (2,402)
------------ ------------
Net Cash Provided by (Used in) Financing Activities 27,570 (27,528)
------------ ------------
Net Decrease in Cash and Cash Equivalents (6,858) (37,876)
Cash and Cash Equivalents at Beginning of Period 13,089 46,905
------------ ------------
Cash and Cash Equivalents at End of Period $6,231 $9,029
============ ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJI-7
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Practices:
Consolidation
The condensed consolidated financial statements include the
accounts of South Jersey Industries, Inc. (SJI) and all of its
subsidiaries. Some intercompany transactions of approximately
$1.9 million for the nine month period ended September 30, 1997
were not required to be eliminated. Those amounts were
capitalized to utility plant or environmental remediation costs
on South Jersey Gas Company's (SJG) books of account. SJG
recovers those amounts through the rate-making process (See Note
7). SJI eliminated all other significant intercompany accounts
and transactions. Certain reclassifications of previously
reported amounts were made to conform with classifications for
the current year. In the company's opinion, the condensed
consolidated financial statements reflect all adjustments needed
to fairly present SJI's financial position and operating results
at the dates and for the periods presented. SJI's businesses
are subject to seasonal fluctuations and, accordingly, this
interim financial information should not be the basis for
estimating the full year's operating results.
Estimates and Assumptions
SJI prepares its financial statements to conform with generally
accepted accounting principles. This requires the company to
make estimates and assumptions affecting the amounts reported in
the financial statements and related disclosures. Therefore,
actual results may differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB)
issued FASB No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This statement
establishes standards for reporting selected information about
operating segments in the company's interim and annual financial
statements. SJI is evaluating whether adopting this statement
will change the company's presentation of financial information.
SJI adopted FASB No. 131 effective January 1, 1998; however, as
permitted by this statement, the company will not report segment
information in interim financial statements until 1999.
Energy Tax Reform
New Jersey adopted legislation reforming energy taxation
effective July 14, 1997. The new law eliminated the Gross
Receipts & Franchise Tax (GRAFT), amounting to approximately 13%
SJI-8
of utility revenue, and replaced it with a combination of taxes.
Beginning January 1, 1998, retail sales of natural gas and
electricity and utility services, including transportation, are
subject to the 6% State Sales and Use Tax (SUT). Gas and
electric utilities are also subject to the 9% State Corporation
Business Tax (CBT) on income before taxes. To bridge the
revenue gap created by the new tax law, the state imposed a
Transitional Energy Facilities Assessment (TEFA) on volumes of
gas sold and transported. The TEFA will be phased out over five
years beginning January 1, 1999 and ending January 1, 2003. The
revised tax policy is expected to eliminate tax differences
between utility and nonutility suppliers, providing fair
competition and lower energy costs for consumers. The new
legislation does not materially affect the company's financial
position, operating results or liquidity (See Note 5). However,
since the SUT is not included in reported utility revenues or
tax expense as GRAFT was previously, there are equal reductions
in these line items on the Condensed Statements of Consolidated
Income.
Note 2. Divestitures:
In December 1996, Energy & Minerals, Inc. (EMI), an SJI
subsidiary, 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 sale price was
subject to usual post-closing adjustments which were recorded in
December 1997. This resulted in a downward adjustment of $0.6
million.
In December 1996, SJI developed a formal plan to discontinue
the operations of its construction and environmental services
business, R&T Group, Inc. (R&T) and its five subsidiaries. As a
result, SJI recognized a net loss of $2.4 million, net of
applicable income tax credits of $1.3 million, on the planned
disposition of R&T's assets. Additionally, in two separate
sales on January 9, 1997 and on April 4, 1997, R&T sold all of
its operating assets, except some real estate. Total proceeds
from these sales, approximately $3.5 million, approximated the
net book value of the assets at the sale date. SJI included
associated disposal costs of $189,500, or $123,200 after taxes,
in the Condensed Statements of Consolidated Income for the nine
months ended September 30, 1997 under the caption "Loss on the
Disposal of Discontinued Operations - Net."
In 1997 and 1998, additional testing was done to estimate the
environmental remediation costs for properties owned by South
Jersey Fuel, Inc. (SJF), a subsidiary of EMI, from its
previously operated fuel oil business. Also in 1997, SJI
created SJ EnerTrade, Inc. (EnerTrade) as a SJI subsidiary to
assume SJF's gas marketing activity, including its affiliation
with South Jersey Resources Group, LLC (SJRG). On July 1, 1998,
EnerTrade became a subsidiary of South Jersey Energy Company
(SJE), a subsidiary of SJI. The gas marketing activities are
shown as part of continuing operations. SJI reports the
environmental remediation activity related to properties used in
the previously operated fuel oil business as part of
discontinued operations. This is consistent with the reporting
in previous years of other costs related to the discontinued
fuel oil business (See Note 7).
SJI-9
Summarized operating results of all discontinued operations were (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1998 1997 1998 1997
-------- -------- -------- --------
Operating Revenues:
Construction $6 $551 $47 $4,905
======== ======== ======== ========
(Loss) Income before Income Taxes:
Sand Mining ($51) ($455) ($3,566) ($466)
Construction (77) 29 (530) (78)
Fuel Oil (12) (50) (36) (283)
Income Tax Credits 49 192 1,446 345
-------- -------- -------- --------
Loss from Discontinued Operations ($91) ($284) ($2,686) ($482)
======== ======== ======== ========
Earnings per Common Share from
Discontinued Operations ($0.01) ($0.02) ($0.25) ($0.04)
======== ======== ======== ========
Note 3. Common Stock:
The company has 20,000,000 shares of common stock authorized of
which the following shares were issued and outstanding:
1998 1997
----------- -----------
Beginning Balance, January 1 10,771,413 10,756,679
Issued During Period:
Employees' Stock Ownership Plan 3,875 4,770
Stock Option and Stock Appreciation
Rights Plan 1,952 3,060
----------- -----------
Ending Balance, September 30, 10,777,240 10,764,509
=========== ===========
SJI credited the par value ($1.25 per share) of the stock
issued in 1998 and 1997 to common stock and credited the net
excess over par value of $238,072 and $270,440 for the nine
months ended September 30, 1998 and 1997, respectively, to
Premium on Common Stock.
SJI-10
The pro forma effect of adopting the fair value based method of
accounting on net income and earnings per share according to
FASB No. 123 would be immaterial for the three and nine months
ended September 30, 1998 and 1997.
Stock Option and Stock Appreciation Rights Plan
Under this plan, SJI may not issue more than 306,000 total
shares to officers and other key employees of the company and
its subsidiaries. SJI will not grant options or stock
appreciation rights under the plan after January 23, 2007. At
September 30, 1998 and 1997, SJI had 5,000 and 31,930 options
outstanding, respectively, exercisable at prices from $17.89 to
$24.69. During the nine months ended September 30, 1997,
employees exercised 3,060 options at $17.89 per share. In
addition, during 1998, employees surrendered 8,060 options for
1,952 shares. SJI did not grant any options in 1998 and no
stock appreciation rights were issued under the plan. The stock
options outstanding at September 30, 1998 and 1997 did not
effect the earnings per share calculations.
Dividend Reinvestment and Stock Purchase Plan (DRP) and
Employees' Stock Ownership Plan (ESOP)
Currently, SJI purchases shares of common stock offered through
the DRP in the open market. SJI directly issues all shares
offered through the ESOP. As of September 30, 1998, SJI
reserved 114,039 and 31,496 shares of authorized, but unissued,
common stock for future issue to the DRP and ESOP, respectively.
Directors' Restricted Stock Plan
On September 20, 1996, SJI's board of directors adopted a
restricted stock plan. Under this plan, SJI granted an initial
award of 13,800 shares on December 4, 1996, at a market value of
$24.00 per share. The plan also provides annual awards and, in
December 1997 and 1996, respectively, the company granted 450
and 600 additional shares. Initial awards will vest over five
years, with 20% of those awards vesting each year. Annual
awards will vest on the third anniversary of each award. Shares
issued as restricted stock are held by SJI until the attached
restrictions lapse. The market value of the stock on the date
granted is recorded as compensation expense over the applicable
vesting period.
Shareholder Rights Plan
On September 20, 1996, SJI's board of directors adopted a
shareholder rights plan providing for the distribution of one
right for each share of common stock outstanding on October 11,
1996. Each entitles its holder to purchase 1/1000 of one share
of Series A Stock at an exercise price of $90.
SJI-11
When a person or group acquires 10% or more of SJI's common
stock, each of the rights (except for those held by the 10%
holder) entitles the holder to purchase that number of shares of
the company's common stock, or common stock of the acquiring
company at a market value equal to two times the exercise price.
SJI may redeem the rights for $.001 per right at any time prior
to the time the acquiring person or group reaches the 10%
threshold. The rights will expire if not exercised or redeemed
by September 20, 2006.
Note 4. Retained Earnings:
Some restrictions exist under various loan agreements regarding
the amount of cash dividends or other distributions that may be
paid on SJG's common stock. SJI's total equity in its
subsidiaries' retained earnings which is free of these
restrictions was approximately $40.7 million as of September 30,
1998.
Note 5. Regulatory Matters:
On July 31, 1996, 1997 and 1998, SJG filed with the BPU to
recover an increase in remediation costs expended from August
1995 through July 1998 totaling $4.5 million. The BPU approved
the 1996-1997 Remediation Adjustment Clause filing on October 9,
1998. The 1997-1998 RAC filing has been updated and the results
were included in the 1998-1999 RAC filing. Both filings are
still pending at the BPU.
On January 27, 1997, the BPU granted SJG a total rate increase
of $10.3 million. The $6.0 million base rate portion of the
increase was based on a 9.62% rate of return on rate base, which
included an 11.25% return on common equity. The majority of
this increase comes from residential and small commercial
customers. Part of the increase is recovered from new
miscellaneous service fees which charge specific customers for
costs they cause SJG to incur. Additionally, SJG's threshold
for sharing pre-tax margins generated by interruptible and
off-system sales and transportation (Sharing Formula) was
increased from $4.0 million to $5.0 million. SJG keeps 100% of
pre-tax margins up to the threshold level and 20% of such
margins above that level. Later in 1997, the $5.0 million
threshold was increased by $500,000 which is the annual revenue
requirement associated with the completion of construction on a
specified pipeline interconnection. At the beginning of 1999,
this $5.5 million threshold will increase by another $2.3
million, also representative of the annual revenue requirement
associated with major construction projects. On October 9,
1998, the BPU approved a revision to the Sharing Formula as part
of an agreement to modify SJG's Temperature Adjustment Clause
(TAC). The revision credits the first $750,000 above the
applicable threshold level to the Levelized Gas Adjustment
Clause (LGAC) customers. Thereafter, SJG keeps 20% of the
pre-tax margins as it has historically.
As part of the tariff changes approved in the rate case,
SJG began its pilot program in April 1997, giving residential
customers a choice of gas supplier. During the initial
SJI-12
enrollment period, which ended June 30, 1997, nearly 13,000
residential customers applied for this service. SJG began
transporting gas for these customers on August 1, 1997. On June
26, 1998, the BPU expanded the number of potential participants
to 25,000. There were 14,841 participants as of September 30,
1998. Participant's bills are reduced for cost of gas charges
and applicable taxes. The resulting decrease in revenues is
offset by a corresponding decrease in gas costs and taxes under
SJG's BPU-approved fuel clause. While the program results in
a reduction in utility revenues, it does not affect the
company's net income, financial condition or margins. As part
of the tariff changes approved in the rate case, SJG further
expanded the choices available to commercial and industrial
customers, including a new transportation tariff providing
savings to qualified customers.
On May 13, 1997, SJG filed to recover additional
postretirement benefit costs of approximately $1.3 million
annually. This recovery was approved on December 17, 1997 and
began January 1, 1998.
On September 9, 1997, SJG filed with the BPU to adjust rates
by replacing the GRAFT with SUT, CBT and TEFA components (See
Note 1). The new rates became effective January 1, 1998 on an
interim basis and were made final effective July 13, 1998.
In September 1996, SJG filed to reduce rates through the
1996-1997 LGAC reflecting a $1.4 million decrease in natural gas
costs. Updated 1996-1997 LGAC year results were rolled into the
1997-1998 LGAC which was filed with the BPU in September 1997.
On September 12, 1997 and September 8, 1998, SJG made its
annual LGAC, TAC and Demand Side Management Clause (DSMC)
filings with the BPU. The LGAC and DSMC cover the period
November 1 through October 31 of each year. The TAC period runs
from October 1 through May 31. In the 1997-1998 filing, the
company requested a $4.7 million increase in the annual LGAC
recovery which includes the 1996-1997 LGAC year results referred
to above. SJG updated this amount to $7.0 million in August
1998 and included this amount in its 1998-1999 LGAC filing. The
1998-1999 LGAC filing requested a decrease in rates of $414,000.
The company also requested resolution of prior year filings
along with the 1998-1999 filing. All filings are still pending
at the BPU.
On March 5, 1998, the BPU approved new appliance service
rates. The new rates are competitive with those of other
service providers in New Jersey and are designed to increase
earnings and cash flows to SJG over the current rates. In April
1998, the BPU also authorized SJG to offer new appliance service
contract plans and to service electric air conditioners.
On June 8, 1998, SJG filed a petition with the BPU requesting
a change in the way in which the TAC operates. The request was
SJI-13
granted on October 9, 1998. As a result, SJG will experience
reduced fluctuations in income when temperatures are warmer or
colder than normal.
Note 6. Income and Other Taxes:
The significant components of federal and state income taxes
reflected in the Condensed Statements of Consolidated Income for
the three and nine months ended September 30, 1998 and 1997 are
shown below (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Federal:
Current $533 ($2,947) $2,448 $4,142
Deferred (1,721) 975 3,059 2,796
Investment Tax Credits (99) (99) (297) (297)
State:
Current (300) 47 1,669 30
Deferred (110) 0 398 0
----------- ----------- ----------- -----------
Total Federal and State
Income Taxes ($1,697) ($2,024) $7,277 $6,671
=========== =========== =========== ===========
The significant components of other taxes reflected in the
Condensed Statements of Consolidated Income for the three and
nine months ended September 30, 1998 and 1997 are shown below
(in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
TEFA $918 $0 $5,278 $0
GRAFT 110 2,577 13 19,304
Other Taxes 575 549 2,275 2,324
----------- ----------- ----------- -----------
Total Other Taxes $1,603 $3,126 $7,566 $21,628
=========== =========== =========== ===========
During the three and nine months ended September 30, 1998,
SJG recorded an additional $1.4 million and $9.0 million,
respectively, for SUT on utility services through its Condensed
Consolidated Balance Sheet. Such amounts are not included in
reported revenues or tax expense as SJG only acts as agent for
the collection of SUT (See Note 1).
SJI-14
Note 7. Commitments and Contingencies:
Construction Commitments
The estimated cost of construction and environmental
remediation programs for the company and its subsidiaries in
1998 will total $73.4 million. SJI has made certain commitments
regarding these programs.
Gas Supply Contracts
SJG has entered into long-term contracts for natural gas
supplies, firm transportation, and firm gas storage service.
The earliest that any of these contracts expires is October
2000. All of the transportation and storage service agreements
between SJG and its interstate pipeline suppliers were made
under Federal Energy Regulatory Commission (FERC) approved
tariffs. SJG's cumulative obligation for demand charges and
reservation fees paid to its suppliers for all of these services
is approximately $4.9 million per month, which SJG recovers on a
current basis through the LGAC.
Pending Litigation
SJI is subject to claims which arise in the ordinary course
of business and other legal proceedings. The company sets up
reserves when these claims become apparent. SJI also maintains
insurance and records probable insurance recoveries relating to
outstanding claims.
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. A settlement has been arrived at in this
litigation, under which SJG will make no payments. The group of
casinos have issued general releases to SJG, and on September 4,
1998 the petition was withdrawn.
Environmental Remediation Costs
SJI incurred and recorded costs for environmental clean up of
sites where SJG or predecessor companies operated gas
manufacturing plants. SJG terminated manufactured gas
operations at all sites more than 35 years ago. SJI and some of
its nonutility subsidiaries also recorded costs for
environmental clean up of sites where SJF previously operated a
fuel oil business and Morie maintained equipment, fueling
stations and storage.
Since the early 1980s, SJI has recorded environmental
remediation costs of $98.5 million. The company has spent $42.9
million as of September 30, 1998. SJG, with the assistance of
an outside consulting firm, estimates that future costs to clean
SJI-15
up the sites will range from $50.7 million to $150.6 million.
The company recorded the lower end of this range as a liability.
It is reflected on the Condensed Consolidated Balance Sheet
under the captions "Current Liabilities" and "Deferred Credits
and Other Non-Current Liabilities." SJG's recorded
environmental remediation costs do not directly affect earnings
because those costs are deferred and recovered through rates
over 7-year amortization periods as allowed by the BPU. SJG did
not adjust the accrued liability for future insurance
recoveries, which the company is pursuing. SJG received $4.2
million of insurance recoveries as of September 30, 1998. SJG
used these proceeds to offset related legal fees and to reduce
the balance of deferred environmental remediation costs.
Recorded amounts include estimated costs based on projected
investigation and remediation work plans using existing
technologies. Actual 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 recorded environmental remediation costs
relate to the clean up of SJG's former gas manufacturing sites.
SJG recorded $91.8 million for the remediation of these sites
and spent $41.1 million through September 30, 1998.
As a result of the 7-year Remediation Adjustment Clause (RAC)
recovery mechanism, SJG does not expense environmental
remediation costs when incurred and defers costs to be
recovered. SJG has two regulatory assets associated with
environmental costs. The first regulatory asset is titled
"Environmental Remediation Cost: Expended - Net." These
expenditures represent what was actually spent to clean up
former gas manufacturing plant sites. These costs meet the
requirements of FASB No. 71, "Accounting for the Effects of
Certain Types of Regulation." The BPU allowed SJG to recover
these expenditures through July 1996 and petitions to recover
these costs through July 1998 are pending (See Note 5).
The other regulatory asset titled "Environmental Remediation
Cost: Liability for Future Expenditures" relates to estimated
future expenditures determined under the guidance of FASB No. 5,
"Accounting for Contingencies." This amount, which relates to
former manufactured gas plant sites, was recorded as a deferred
debit with the corresponding amount reflected on the balance
sheet under the captions "Current Liabilities" and "Deferred
Credits and Other Non-Current Liabilities." The deferred debit
is a regulatory asset under FASB No. 71 because the BPU's
intent, as evidenced by its current practice, is to allow SJG to
recover the deferred costs after they are expended.
SJG files with the BPU to recover these costs in rates through
its RAC. The BPU has consistently allowed the full recovery
over 7-year periods, and SJG believes this will continue. As of
September 30, 1998, SJG's unamortized remediation costs of $21.3
million are reflected on the balance sheet under the caption
"Regulatory and Other Non-Current Assets." Since BPU approval
of the RAC in August 1992, SJG recovered $15.6 million through
rates as of September 30, 1998 (See Note 5).
SJI-16
With Morie's sale, EMI assumed responsibility for environmental
liabilities which the company estimates range between $3.3
million and $19.9 million. The information available on these
sites is sufficient only to establish a range of probable
liability and no point within the range is more likely than any
other. Therefore, EMI continues to accrue the lower end of the
range.
Based on testing performed in 1997 and 1998, SJF, whose
operations were discontinued, and SJI have estimated their
potential exposure for the future remediation of four sites
where fuel oil operations existed years ago. Estimates for
SJI's site range between $0.3 million and $1.0 million while
SJF's estimated liability ranges from $1.3 million to $3.7
million for its three sites. The lower end of these ranges were
recorded and are reflected on the balance sheet under Current
Liabilities and Deferred Credits and Other Non-Current
Liabilities as of September 30, 1998.
Note 8. Subsequent Events:
On October 14, 1998, SJI and Energy East Corporation announced
plans for the formation of a jointly owned limited liability
company that will market retail electricity and energy
management services. This strategic move is intended to create
significant efficiencies and expand service capabilities for
both companies in the advent of electric utility restructuring
legislation. The new venture also completes SJI's plans to
shift its focus away from the wholesale electric trading
business and toward the retail sector.
Also on October 14, 1998, SJI and Conectiv announced plans for
a joint customer account services venture that will begin to
provide meter reading services in southern New Jersey by the end
of the year. The new venture will allow both companies to
capitalize on the synergies that exist because their companies'
territories overlap. Customers should benefit from the
companies' collective ability to reduce meter reading costs.
On October 21, 1998, SJG issued $30.0 million of debt under a
Medium Term Note Program established October 5, 1998. Under
this program, $10.0 million of notes were issued at 6.12%,
maturing in 2010, and $20.0 million of notes were issued at
7.125%, maturing in 2018.
SJI-17
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Overview
South Jersey Industries, Inc. (SJI) has two operating
subsidiaries, South Jersey Gas Company (SJG) and South Jersey
Energy Company (SJE). SJG is a natural gas distribution company
serving 263,883 customers at September 30, 1998, compared with
257,587 customers at September 30, 1997. SJE provides services
for the acquisition and transportation of natural gas for retail
end users, buys and sells electricity in the wholesale market
and markets total energy management services. However, as a
result of an alliance with Energy East Corporation, SJE has
ceased buying and selling wholesale electricity. SJE has one
operating subsidiary, SJ EnerTrade (EnerTrade). EnerTrade,
formed in October 1997, provides services for the sale of
natural gas to energy marketers, electric and gas utilities, and
other wholesale users in the mid-Atlantic and southern regions
of the country. The results of operations of SJI's
non-regulated energy service companies, SJE and EnerTrade, are
not material to its financial statements taken as a whole.
Forward-Looking Statements
This report contains certain forward-looking statements
concerning projected future financial performance, future
operating performance, future plans and courses of action and
future economic conditions. All statements in this report other
than statements of historical fact are forward-looking
statements. These forward-looking statements are made based
upon management's expectations and beliefs concerning future
events impacting the company and therefore involve a number of
risks and uncertainties. Management cautions that
forward-looking statements are not guarantees and that actual
results could differ materially from those expressed or implied
in the forward-looking statements.
There are a number of factors that could cause the company's
actual results to differ materially from those anticipated,
which include, but are not limited to, the following: general
economic conditions on an international, federal, state and
local level; weather conditions in the company's marketing
areas; regulatory and court decisions; competition in the
company's regulated and deregulated activities; the availability
and cost of capital; the company's ability to maintain existing
and/or establish successful new alliances and joint ventures to
take advantage of marketing opportunities; costs and effects of
unanticipated legal proceedings, Year 2000 related costs or
operating problems and environmental liabilities; and changes in
business strategies.
Competition
SJG's franchises are non-exclusive. Currently no other utility
provides 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
SJI-18
for utility plant and related costs. SJG competes with oil,
propane and electricity suppliers for residential, commercial
and industrial users. The market for natural gas sales is
subject to competition as a result of deregulation. SJG has
enhanced its competitive position while maintaining its margins
by using an unbundled tariff which allows the company to recover
its full cost of service, except for the variable cost of the
gas commodity, when engaging in the transportation of gas for
its customers. Under this tariff, SJG derives substantially all
of its profits from the transportation rather than the sale of
the commodity. SJG's commercial and industrial customers can
choose their supplier while SJG recovers its cost of service and
fixed gas costs primarily through its transportation service.
In April 1997, SJG initiated its New Jersey Board of Public
Utilities (BPU) approved pilot program giving some residential
customers a choice of gas suppliers (See "Pilot Program - Choice
of Gas Supplier"). SJG believes it has been a leader in
addressing the changing marketplace, while maintaining its focus
on being a low-cost provider of natural gas and energy services.
SJE and EnerTrade actively arrange energy services designed to
provide low-cost energy supplies in a highly competitive
marketplace.
Pilot Program - Choice of Gas Supplier
In April 1997, SJG began its BPU-approved pilot program giving
residential customers a choice of gas supplier. During the
initial enrollment period, which ended June 30, 1997, nearly
13,000 residential customers applied for this service. SJG
began transporting gas for these customers on August 1, 1997.
On June 26, 1998, the BPU expanded the number of potential
participants to 25,000. There were 14,841 participants as of
September 30, 1998. Participants' bills are reduced for cost of
gas charges and applicable taxes. The resulting decrease in
revenues is offset by a corresponding decrease in gas costs and
taxes under SJG's BPU-approved fuel clause. While the program
results in a reduction in utility revenues, it does not affect
SJG's net income, financial condition or margins. Also, SJG
further expanded the choices available to commercial and
industrial customers, including a new transportation tariff
providing savings to qualified customers.
Energy Adjustment Clauses
SJG's tariff includes a Levelized Gas Adjustment Clause (LGAC),
a Temperature Adjustment Clause (TAC), a Remediation Adjustment
Clause (RAC) and a Demand Side Management Clause (DSMC). These
clauses permit adjustments for changes in gas supply costs,
reduce the impact of extreme fluctuations in temperatures on SJG
and its customers, recover costs for the remediation of former
gas manufacturing plants and recover costs associated with its
conservation plan, respectively. The BPU-approved LGAC, RAC and
DSMC adjustments are made to match revenues and expenses. TAC
adjustments do affect revenue, income and cash flows since
colder than normal weather can generate credits to customers,
while warmer than normal weather can result in additional
billings to customers. TAC adjustments related to the 1997-1998
TAC year did not materially impact the financial statements for
1998.
SJI-19
Status of Year 2000 Conversion
The company prepared a Year 2000 Impact and Assessment study
and developed a plan for program modification for software and
embedded technology. An outside service was used to identify both
informational and logic date variables within the programming codes.
This service was completed and expensed in 1997. Presently, the
company is revising the affected programming codes. As of September
30, 1998, approximately 64% of the programming code has been
revised. All revisions are scheduled to be completed by early
1999, providing the remainder of 1999 for testing. The company
believes that all embedded technology relating to its distribution
systems is Y2K compliant. The conversion costs are estimated at
$0.4 million of which approximately $.28 million was spent as of
September 30, 1998. Vendors who provide third party software have
been contacted and 28 of 31 have indicated that they are now
compliant. The company is also in the process of securing written
verification from its key product and service vendors to ensure
their compliance. Approximately 50% of all product and service
vendors and 80% of those vendors deemed key suppliers have to date
verified that they will be compliant. Of the company's two principal
gas suppliers, one has indicated Y2K compliance and the other has
yet to respond.
The worst case scenarios facing SJI involve the impact on
the company's distribution system and general office activities
of the loss of telecommunications and or electrical power as a
result of a Y2K problem with the provider's system. These events
in themselves do not pose a problem if the duration of loss is
less than 72 hours. All company sites have electrical generation
backup and utilize two phone carriers should one fail due to a
Y2K problem. The company also has both a private voice and data
radio systems which allow it to monitor remote stations manually.
Based upon the nature of SJI's operating and information
systems and the current advanced state of planning and
remediation, the company does not anticipate any material
difficulty in completing full year 2000 compliance and that any
problems that do arise are expected to be immaterial or
insignificant.
Results of Operations - Three and Nine Months Ended September 30, 1998
Compared to Three and Nine Months Ended September 30, 1997
Operating Revenues - Utility
Revenues decreased $6.6 million for the third quarter of 1998
as compared to the same period in 1997. The decrease for the
third quarter comparison was primarily due to state tax reform
effective January 1998 which lowered the tax component contained
in reported revenue and by customers using increased levels of
firm transportation service in lieu of firm gas sales. The
revenue from transportation excludes commodity costs. This
decrease was partially offset by customer growth.
The lower tax component in reported revenue was offset by a
reduction in Other Taxes (See Notes 1 and 6). South Jersey Gas'
tariffs are structured such that profits are derived from
transportation, not from the sale of the commodity.
Consequently, while both the tax reform and the switch to firm
transportation reduced total revenues, neither impacted
profitability.
SJI-20
Revenues decreased $31.1 million for the first nine months of
1998, as compared to the prior year period, primarily due to
lower firm sales resulting from weather that was 16.8% warmer.
Revenues were also impacted by the same factors that effected
the quarterly results.
Operating Revenues - Nonutility
Nonutility operating revenues increased $84.0 million and
$109.3 million for the three and nine month periods ending
September 30, 1998, respectively, compared with the comparable
1997 periods principally due to increased sales of electricity
in the wholesale market and gas commodity sales.
Gas Purchased for Resale
Gas purchased for resale decreased $5.2 million and $15.7
million for the three and nine month periods ending September
30, 1998 compared with the comparable 1997 periods. The nine
month decrease was principally due to weather related decreased
sales volumes. Increased levels of firm transportation versus
firm gas sales accounted for a portion of the decrease in both
periods. 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 that any of these contracts expire is October 2000.
All of the transportation and storage service agreements
between SJG and its interstate pipeline suppliers were made
under Federal Energy Regulatory Commission (FERC) approved
tariffs. SJG's cumulative obligation for demand charges and
reservation fees paid to its suppliers for all of these services
is approximately $4.9 million per month, which SJG recovers on a
current basis through the LGAC.
Operations
A summary of net changes in utility operations for 1998
compared with 1997 is as follows (in thousands):
Period Ended September 30,
---------------------------------
Three Months Nine Months
1998 vs. 1997 1998 vs. 1997
--------------- ---------------
Other Production Expense $1 $4
Transmission 33 52
Distribution (130) (337)
Appliance Service 316 543
Customer Accounts and Services (3) 282
Sales (24) (34)
Administration and General (135) 216
Other (7) (44)
--------------- ---------------
$51 $682
=============== ===============
SJI-21
Distribution costs decreased for both periods in 1998
principally due to decreased meter exchange activity. The
majority of the increase in Appliance Service expense comparisons
was due to expenditures on advertising. Customer Accounts
and Services costs increased in the first nine months of 1998
principally due to an increase in payroll expense. The payroll
expense increase was offset in the third quarter by a reduction
in bad debt expense. Administrative and General costs increased
for the first nine months of 1998 principally due to increased
employee benefits costs, however, these costs were more than offset
during the third quarter by reductions in expenses for
consultants and regulatory activities.
Other Operating Expenses
A summary of principal changes in other consolidated operating
expenses for 1998 compared with 1997 is as follows (in thousands):
Period Ended September 30,
---------------------------------
Three Months Nine Months
1998 vs. 1997 1998 vs. 1997
--------------- ---------------
Nonutility Operations $81,697 $107,735
Maintenance (435) (572)
Depreciation 293 867
Federal and State Income Taxes 327 606
Other Taxes (1,523) (14,062)
Changes in nonutility operations principally reflect the impact
of sales volumes and commodity costs, associated in 1998 with
sales of electricity in the wholesale market. The decrease in
maintenance expense is principally due to utility production
plant maintenance, which includes the amortization of
environmental remediation costs (such decreases are offset by
lower revenue recovery under SJG's RAC). Depreciation is higher
principally due to increased investment in property, plant and
equipment. Federal and State Income Tax changes reflect the
impact of changes in pre-tax income and the impact of energy tax
reform legislation discussed under Operating Revenues - Utility.
Other Taxes decreased because of the energy tax reform
legislation.
Interest Charges
Interest charges increased for the three and nine month periods
of 1998 versus the comparable 1997 period as higher levels of
short-term debt were not completely offset by reductions of
long-term debt.
SJI-22
Preferred Dividend Requirements of Subsidiary
Preferred Dividends increased in 1998 due to the issuance of
$35.0 million of 8.35% SJG-guaranteed Mandatorily Redeemable
Preferred Securities in May 1997 (See "Capital Resources").
Discontinued Operations
Loss from discontinued operations decreased $.2 million in the
third quarter and losses from discontinued operations increased
$2.1 million for the first nine months of 1998 compared to
comparable periods in 1997 principally due to a product
liability settlement and increased remediation costs.
Net Income Applicable to Common Stock
Net income (in thousands) and earnings per common share reflect
the following changes:
Period Ended September 30,
---------------------------------
Three Months Nine Months
1998 vs. 1997 1998 vs. 1997
--------------- ---------------
Income from Continuing Operations
(Decrease) $1,509 ($2,741)
Loss from Discontinued Operations - Net 193 (2,204)
Reduction in Loss on Disposal of
Discontinued Operations 0 123
--------------- ---------------
Net Income/(Decrease) $1,702 ($4,822)
=============== ===============
Earnings per Common Share:
Continuing Operations $0.15 ($0.25)
Discontinued Operations - Net 0.01 (0.20)
--------------- ---------------
Earnings per Share Increase/(Decrease) $0.16 ($0.45)
=============== ===============
The details affecting the changes in net income and earnings
per share are discussed under the appropriate captions above.
The per common share amounts were also impacted by an increase
in average shares of common stock outstanding.
SJI-23
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 $40.2
million was available at September 30, 1998. The credit lines
are uncommitted and unsecured with interest rates at or below
the prime rate.
The changes in cash flows from operating activities are as
follows (in thousands):
Nine Months Ended
September 30,
1998 vs. 1997
---------------
Increases/(Decreases):
Net Income ($4,822)
Depreciation and Amortization 698
Provision for Losses on Accounts Receivable 25
Revenues and Fuel Costs Deferred - Net (792)
Loss on Disposal of Property 26
Deferred and Non-Current Income Taxes and
Credits - Net 660
Net Pre-Tax Loss on the Disposal of Discontinued
Operations (189)
Environmental Remediation Costs - Net 2,298
Accounts Receivable (3,838)
Inventories 20
Prepayments and Other Current Assets 512
Prepaid and Accrued Taxes - Net 1,231
Accounts Payable and Other Accrued Liabilities (8,975)
Other - Net (3,859)
---------------
Decrease in Net Cash from Operating Activities ($17,005)
===============
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
SJI-24
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 remediation expenditures and amounts
collected under the RAC and insurance recoveries.
Changes in Accounts Receivable are generally weather and price
related. Changes impact cash flows when collected in subsequent
periods.
Changes in Inventories reflect the impact of seasonal
requirements, temperatures and price changes.
Changes in Prepaid and Accrued Taxes - Net reflect the impact
of changes between taxes paid and taxes accrued. However,
significant timing differences exist in cash flows during the
year. In 1997, SJG paid the full year's Gross Receipts &
Franchise Tax (GRAFT) on April 1 and amortized the remaining
prepaid tax over the remainder of the year on the basis of gas
volumes sold.
As stated in Note 1, on January 1, 1998, the GRAFT was replaced
with a 6% State Sales and Use Tax (SUT), a 9% State Corporate
Business Tax (CBT) on income before taxes and a Transitional
Energy Facilities Assessment (TEFA) on volumes of gas sold and
transported. The TEFA will be phased out over five years
beginning January 1, 1999. Approximately 50% of the new taxes
are paid in monthly installments during the first six months of
the year and the principal portion of the remaining taxes were
paid on June 25, 1998, and will be paid on May 15 of each year
thereafter. SJG uses short-term borrowings to make these tax
payments which result in a temporary increase in the short-term
debt level.
Changes in Accounts Payable and Other Current Liabilities
primarily reflect a change in gas inventory purchasing practices
as mandated by the BPU and the impact of timing differences
between the accrual and payment of costs.
Cash flow from nonutility operations is generally retained by
those companies with amounts in excess of cash requirements
passed up to SJI either as dividends or as temporary short-term
loans. Nonutility operations are service oriented and do not
require significant investment in capital facilities,
inventories or personnel. These cash flow and net income
impacts of nonutility operations are not considered material to
the financial statements.
EMI has assumed responsibility for the environmental
liabilities of Morie, which was sold in 1996. The environmental
liabilities are estimated to range between $3.3 million and
SJI-25
$19.9 million. EMI has accrued the lower end of the range under
the guidance of FASB No. 5 "Accounting for Contingencies" (See
Note 7).
Based on testing performed in 1997 and 1998, SJF, whose
operations were discontinued, and SJI have estimated their
potential exposure for the future remediation of four sites
where fuel oil operations existed years ago. Estimates for
SJI's site range between $0.3 million and $1.0 million while
SJF's estimated liability ranges from $1.3 million to $3.7
million for its three sites. The lower end of these ranges have
been accrued.
Regulatory Matters
Rate Actions
On January 27, 1997, the BPU granted SJG a total rate increase
of $10.3 million. The $6.0 million base rate portion of the
increase was based on a 9.62% rate of return on rate base, which
included an 11.25% return on common equity. The majority of
this increase comes from residential and small commercial
customers. Part of the increase is recovered from new
miscellaneous service fees which charge specific customers for
costs they cause SJG to incur. Additionally, SJG's threshold
for sharing pre-tax margins generated by interruptible and
off-system sales and transportation (Sharing Formula) was
increased from $4.0 million to $5.0 million. SJG keeps 100% of
pre-tax margins up to the threshold level and 20% of such
margins above that level. Later in 1997, the $5.0 million
threshold was increased by $500,000 which is the annual revenue
requirement associated with the completion of construction on a
specified pipeline interconnection. At the beginning of 1999,
this $5.5 million threshold will increase by another $2.3
million, also representative of the annual revenue requirement
associated with major construction projects. On October 9,
1998, the BPU approved a revision to the Sharing Formula as part
of an agreement to modify SJG's Temperature Adjustment Clause
(TAC). The revision credits the first $750,000 above the
applicable threshold level to the Levelized Gas Adjustment
Clause (LGAC) customers. Thereafter, SJG keeps 20% of the
pre-tax margins as it has historically.
Rates of return are calculated by weighting SJG's individual
capital cost rates by the proportion of each respective type of
capital. This requires selecting appropriate capital structure
ratios and determining the cost rate for each capital component
as determined in each rate proceeding.
In setting a rate of return, the BPU must provide a utility and
its investors with a return that is commensurate with the risk
to which the invested capital is exposed so that the utility has
access to the capital required to meet its public service
responsibility.
Also on January 27, 1997, the BPU approved SJG's request for a
$2.5 million revenue reduction through the TAC. This is the
standard BPU procedure used to credit customers with previously
collected revenues which were in excess of those allowed by the
TAC (See "Energy Adjustment Clauses"). This revenue reduction
reflects the TAC's normal operation, as does the BPU's
confirmation of the decrease.
SJI-26
On September 9, 1997, SJG filed with the BPU to adjust rates by
replacing the GRAFT with SUT, CBT and TEFA components (See
"Liquidity"). The new rates became effective January 1, 1998 on
an interim basis and were made final effective July 13, 1998.
In September 1996, SJG filed to reduce rates through the
1996-1997 LGAC reflecting a $1.4 million decrease in natural gas
costs. Updated 1996-1997 LGAC year results were rolled into the
1997-1998 LGAC which was filed with the BPU in September 1997.
On September 12, 1997 and September 8, 1998, SJG made its
annual LGAC, TAC and DSMC filings with the BPU. The LGAC and
DSMC cover the period November 1 through October 31 of each
year. The TAC period runs from October 1 through May 31. In
the 1997-1998 filing, the company requested a $4.7 million
increase in the annual LGAC recovery which includes the
1996-1997 LGAC year results referred to above. SJG updated this
amount to $7.0 million in August 1998 and included this amount
in its 1998-1999 LGAC filing. The 1998-1999 LGAC filing
requested a decrease in rates of $414,000. The company also
requested resolution of prior year filings along with the
1998-1999 filing. All filings are still pending at the BPU.
On March 5, 1998, the BPU approved new appliance service rates.
The new rates are competitive with those of other service
providers in New Jersey and are designed to increase earnings
and cash flows to SJG over the current rates. In April 1998,
the BPU also authorized SJG to offer new appliance service
contract plans and to service electric air conditioners.
On June 8, 1998, SJG filed a petition with the BPU requesting a
change in the way in which the TAC operates. The request was
granted on October 9, 1998. As a result, SJG will experience
reduced fluctuations in income when temperatures are warmer or
colder than normal.
On July 31, 1998, SJG filed a motion to further unbundle
natural gas service. The BPU's Order of June 26, 1998, which
expanded the current residential transportation pilot program,
directed SJG to file a proposal in which full residential
unbundling would take place on or before January 1, 1999. Many
of the issues related to residential unbundling also relate to
the commercial and industrial transportation program.
Therefore, the motion encompasses all issues surrounding both
programs. A proposal to completely unbundle natural gas service
on SJG's system is expected to be filed with the BPU in November
1998.
Environmental Remediation
SJI incurred and recorded costs for environmental clean up of
sites where SJG or predecessor companies operated gas
manufacturing plants. SJG terminated manufactured gas
operations at all sites more than 35 years ago. SJI and some of
its nonutility subsidiaries also recorded costs for
environmental clean up of sites where SJF previously operated a
fuel oil business and Morie maintained equipment, fueling
stations and storage.
SJI-27
Since the early 1980s, SJI has recorded environmental
remediation costs of $98.5 million. The company has spent $42.9
million as of September 30, 1998. SJG, with the assistance of
an outside consulting firm, estimates that future costs to clean
up the sites will range from $50.7 million to $150.6 million.
The company recorded the lower end of this range as a liability.
It is reflected on the Condensed Consolidated Balance Sheet
under the captions "Current Liabilities" and "Deferred Credits
and Other Non-Current Liabilities." SJG's recorded
environmental remediation costs do not directly affect earnings
because those costs are deferred and recovered through rates
over 7-year amortization periods as allowed by the BPU. SJG did
not adjust the accrued liability for future insurance
recoveries, which the company is pursuing. SJG received $4.2
million of insurance recoveries as of September 30, 1998. SJG
used these proceeds to offset related legal fees and to reduce
the balance of deferred environmental remediation costs.
Recorded amounts include estimated costs based on projected
investigation and remediation work plans using existing
technologies. Actual 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 recorded environmental remediation costs
relate to the clean up of SJG's former gas manufacturing sites.
SJG recorded $91.8 million for the remediation of these sites
and spent $41.1 million through September 30, 1998.
As a result of the 7-year Remediation Adjustment Clause (RAC)
recovery mechanism, SJG does not expense environmental
remediation costs when incurred and defers costs to be
recovered. SJG has two regulatory assets associated with
environmental costs. The first regulatory asset is titled
"Environmental Remediation Cost: Expended - Net." These
expenditures represent what was actually spent to clean up
former gas manufacturing plant sites. These costs meet the
requirements of FASB No. 71, "Accounting for the Effects of
Certain Types of Regulation." The BPU allowed SJG to recover
these expenditures through July 1996 and petitions to recover
these costs through July 1998 are pending.
The other regulatory asset titled "Environmental Remediation
Cost: Liability for Future Expenditures" relates to estimated
future expenditures determined under the guidance of FASB No. 5,
"Accounting for Contingencies." This amount, which relates to
former manufactured gas plant sites, was recorded as a deferred
debit with the corresponding amount reflected on the balance
sheet under the captions "Current Liabilities" and "Deferred
Credits and Other Non-Current Liabilities." The deferred debit
is a regulatory asset under FASB No. 71, because the BPU's
intent, as evidenced by its current practice, is to allow SJG to
recover the deferred costs after they are expended.
SJG files with the BPU to recover these costs in rates through
its RAC. The BPU has consistently allowed the full recovery
over 7-year periods, and SJG believes this will continue. As of
September 30, 1998, SJG's unamortized remediation costs of $21.3
million are reflected on the balance sheet under the caption
"Regulatory and Other Non-Current Assets." Since BPU approval
of the RAC in August 1992, SJG has recovered $15.6 million
through rates as of September 30, 1998.
SJI-28
On July 31, 1996, 1997 and 1998, SJG filed with the BPU to
recover an increase in remediation costs expended from August
1995 through July 1998 totaling $4.5 million. The BPU approved
the 1996-1997 RAC filing on October 9, 1998. The 1997-1998 RAC
filing has been updated and the results were included in the
1998-1999 RAC filing. Both filings are still pending at the BPU.
With Morie's sale, EMI assumed responsibility for environmental
liabilities which the company estimates range between $3.3
million and $19.9 million. The information available on these
sites is sufficient only to establish a range of probable
liability and no point within the range is more likely than any
other. Therefore, EMI continues to accrue the lower end of the
range.
Based on testing performed in 1997 and 1998, SJF, whose
operations were discontinued, and SJI have also estimated their
potential exposure for the future remediation of four sites
where fuel oil operations existed years ago. Estimates for
SJI's site range between $0.3 million and $1.0 million while
SJF's estimated liability ranges from $1.3 million to $3.7
million for its three sites. The lower end of these ranges were
recorded and are reflected on the balance sheet under Current
Liabilities and Deferred Credits and Other Non-Current
Liabilities as of September 30, 1998.
Other Regulatory Asset Recovery
The adoption of FASB No. 109, "Accounting for Income Taxes," in
1993 primarily resulted in creating a regulatory asset and a
deferred income tax liability. As a result of positions taken
in the 1994 rate case, the amortization of the asset is being
recovered through rates over an 18-year period which began in
December 1994. Also, FASB No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," adopted by the
company in 1993, requires an accrual basis of accounting for
retiree benefit payments during the years of employment. The
company elected to recognize the unfunded transition obligation
over a 20-year period beginning in 1993. The majority of the
postretirement benefit costs were previously recoverable by SJG
through rates on a pay-as-you-go basis. A December 1994 BPU
order provided for partial recovery of costs associated with
FASB No. 106 and prescribed continued deferral of unrecovered
costs. Beginning January 1, 1998, the BPU approved full
recovery of the net periodic benefit cost as well as recovery of
the regulatory asset over a 15-year period. In 1995, an
external trust was established towards funding postretirement
benefit costs. Rate recovery in excess of SJG's pay-as-you-go
requirement is contributed to the trust and provides no
operating benefit to SJG except to the extent that trust income
reduces future net periodic cost. Gross contributions to the
trust amounted to $.9 million and $2.7 million for the three and
nine month periods ended September 30, 1998, respectively. The
balance of the regulatory asset amounted to $95.7 million at
September 30, 1998.
SJI-29
Other
SJI is subject to claims which arise in the ordinary course of
its business and other legal proceedings. The company sets up
reserves when these claims become apparent. SJI also maintains
insurance and records probable insurance recoveries relating to
outstanding claims.
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. A settlement has been arrived at in this
litigation, under which SJG will make no payments. The group of
casinos have issued general releases to SJG, and on September 4,
1998 the petition was withdrawn.
Capital Resources
The company 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 the first nine
months of 1998 amounted to $39.6 million. The costs for 1998,
1999 and 2000 are estimated at approximately $73.4 million,
$58.4 million and $50.1 million, respectively. These
investments are expected to be funded from several sources,
which may include cash generated by operations, temporary use of
short-term debt, sale of first mortgage bonds, capital leases
and RAC recoveries.
On March 21, 1997, SJG sold $35.0 million of its First Mortgage
Bonds, 7.7% Series due 2027.
On May 2, 1997, SJG's Delaware statutory trust subsidiary, SJG
Capital Trust, sold $35.0 million of 8.35% SJG-Guaranteed
Mandatorily Redeemable Preferred Securities. The Trust holds as
its sole asset the 8.35% Deferrable Interest Subordinated
Debentures issued by SJG maturing April 30, 2037. The
Debentures and Preferred Securities are redeemable at the option
of SJG at a redemption price equal to 100% of the principal
amount at any time on or after April 30, 2002.
On October 21, 1998, SJG issued $30.0 million of debt under a
Medium Term Note Program established October 5, 1998. Notes
totaling $10.0 million were issued at a 6.12% rate, maturing in
2010, and $20.0 million of notes were issued at a 7.125% rate,
maturing in 2018. The net proceeds of these note issuances were
used to retire short-term debt and to fund capital expenditures.
Other Events
On October 14, 1998, SJI and Energy East Corporation announced
plans for the formation of a jointly owned limited liability
company that will market retail electricity and energy
management services. This strategic move is intended to create
significant efficiencies and expand service capabilities for
both companies in the advent of electric utility restructuring
legislation. The new venture also completes SJI's plans to
shift its focus away from the wholesale electric trading
business and toward the retail sector.
SJI-30
Also on October 14, 1998, SJI and Conectiv announced plans for
a joint customer account services venture that will begin to
provide meter reading services in southern New Jersey by the end
of the year. The new venture will allow both companies to
capitalize on the synergies that exist because their companies'
territories overlap. Customers should benefit from the
companies' collective ability to reduce meter reading costs.
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.
SJI-31
PART II OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference
to Part I, Item 1, Note 7, on pages 15, 16 and 17, excluding the
first two paragraphs of the Note, regarding contingencies,
including pending litigation and matters related to
environmental remediation.
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.
SJI-32
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: November 13, 1998 By: /s/ David A. Kindlick
David A. Kindlick
Vice President, Financial Operations
Dated: November 13, 1998 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Assistant Secretary & Assistant Treasurer
SJI-33
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).
SJI-34
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 480,463
<OTHER-PROPERTY-AND-INVEST> 2,020
<TOTAL-CURRENT-ASSETS> 85,752
<TOTAL-DEFERRED-CHARGES> 106,944
<OTHER-ASSETS> 1,687
<TOTAL-ASSETS> 678,830
<COMMON> 13,471
<CAPITAL-SURPLUS-PAID-IN> 111,235
<RETAINED-EARNINGS> 42,542
<TOTAL-COMMON-STOCKHOLDERS-EQ> 167,248
35,000
2,134
<LONG-TERM-DEBT-NET> 166,853
<SHORT-TERM-NOTES> 94,800
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 8,876
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 203,919
<TOT-CAPITALIZATION-AND-LIAB> 678,830
<GROSS-OPERATING-REVENUE> 326,010
<INCOME-TAX-EXPENSE> 7,277
<OTHER-OPERATING-EXPENSES> 294,587
<TOTAL-OPERATING-EXPENSES> 301,864
<OPERATING-INCOME-LOSS> 24,146
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 24,146
<TOTAL-INTEREST-EXPENSE> 14,002
<NET-INCOME> 5,141
2,317
<EARNINGS-AVAILABLE-FOR-COMM> 5,141
<COMMON-STOCK-DIVIDENDS> 11,637
<TOTAL-INTEREST-ON-BONDS> 11,210
<CASH-FLOW-OPERATIONS> 6,028
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
