Page 1 of 32
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 June 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.)
Number One South Jersey Plaza, Route 54, 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 August 5, 1998, there were 10,775,697 shares of the
registrant's common stock outstanding.
Exhibit Index on page 32
- Cover Page -
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements - See Pages 3 through 16
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
June 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING REVENUES:
Utility $52,088 $58,326
Nonutility 19,590 3,986
------------ ------------
Total Operating Revenues 71,678 62,312
------------ ------------
OPERATING EXPENSES:
Gas Purchased for Resale 30,266 31,939
Utility Operations 10,452 9,967
Nonutility Operations 20,157 4,319
Maintenance 1,275 1,537
Depreciation 4,261 3,971
Federal Income Taxes (520) 337
State, Local and Other Taxes 2,093 5,306
------------ ------------
Total Operating Expenses 67,984 57,376
------------ ------------
OPERATING INCOME 3,694 4,936
------------ ------------
INTEREST CHARGES:
Long-Term Debt 3,711 3,920
Short-Term Debt 645 404
Other 120 96
------------ ------------
Total Interest Charges 4,476 4,420
------------ ------------
PREFERRED DIVIDEND REQUIREMENTS OF SUBSIDIARY 772 514
------------ ------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (1,554) 2
LOSS FROM DISCONTINUED OPERATIONS - NET (2,368) (173)
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK ($3,922) ($171)
============ ============
AVERAGE SHARES OF COMMON STOCK OUTSTANDING 10,774 10,762
============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Continuing Operations ($0.14) $0.00
Discontinued Operations - Net (0.22) (0.02)
------------ ------------
Earnings (Loss) Per Common Share ($0.36) ($0.02)
============ ============
DIVIDENDS DECLARED PER COMMON SHARE $0.36 $0.36
============ ============
<FN>
The accompanying notes to the financial statements are an integral part
of these 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>
Six Months Ended
June 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING REVENUES:
Utility $160,432 $184,908
Nonutility 34,093 8,808
------------ ------------
Total Operating Revenues 194,525 193,716
------------ ------------
OPERATING EXPENSES:
Gas Purchased for Resale 91,308 101,809
Utility Operations 20,408 19,777
Nonutility Operations 35,258 9,205
Maintenance 2,870 3,008
Depreciation 8,433 7,860
Federal Income Taxes 6,497 8,712
State, Local and Other Taxes 8,441 18,485
------------ ------------
Total Operating Expenses 173,215 168,856
------------ ------------
OPERATING INCOME 21,310 24,860
------------ ------------
INTEREST CHARGES:
Long-Term Debt 7,563 7,295
Short-Term Debt 1,187 1,777
Other 213 181
------------ ------------
Total Interest Charges 8,963 9,253
------------ ------------
PREFERRED DIVIDEND REQUIREMENTS OF SUBSIDIARY 1,545 557
------------ ------------
INCOME FROM CONTINUING OPERATIONS 10,802 15,050
DISCONTINUED OPERATIONS:
Loss from Discontinued Operations - Net (2,596) (197)
Loss on the Disposal of Discontinued Operations - Net 0 (123)
------------ ------------
NET INCOME APPLICABLE TO COMMON STOCK $8,206 $14,730
============ ============
AVERAGE SHARES OF COMMON STOCK OUTSTANDING 10,774 10,761
============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Continuing Operations $1.00 $1.40
Discontinued Operations - Net (0.24) (0.03)
------------ ------------
Earnings Per Common Share $0.76 $1.37
============ ============
DIVIDENDS DECLARED PER COMMON SHARE $0.72 $0.72
============ ============
<FN>
The accompanying notes to the financial statements are an integral part
of these statements.
</FN>
</TABLE>
SJI-4
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
<CAPTION>
(Unaudited)
June 30, December 31,
------------------------- -------------
1998 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT:
Utility Plant, at original cost $644,734 $600,264 $621,415
Accumulated Depreciation (173,614) (163,267) (167,176)
Nonutility Property and Equipment, at cost 3,010 3,425 3,332
Accumulated Depreciation (991) (1,036) (1,033)
------------ ------------ -------------
Property, Plant and Equipment - Net 473,139 439,386 456,538
------------ ------------ -------------
INVESTMENT IN AFFILIATE 943 1,208 849
------------ ------------ -------------
CURRENT ASSETS:
Cash and Cash Equivalents 8,717 11,080 13,089
Notes Receivable - Affiliate 2,550 2,700 4,561
Accounts Receivable 38,619 34,146 35,947
Unbilled Revenues 3,102 3,552 17,263
Provision for Uncollectibles (1,257) (1,557) (1,530)
Natural Gas in Storage, average cost 19,827 15,038 23,877
Materials and Supplies, average cost 4,244 4,046 4,509
Assets of Discontinued Businesses Held for Disposal 936 637 622
Prepaid State and Local Taxes 15,344 10,980 566
Prepayments and Other Current Assets 2,696 2,131 1,862
------------ ------------ -------------
Total Current Assets 94,778 82,753 100,766
------------ ------------ -------------
ACCOUNTS RECEIVABLE - MERCHANDISE 2,080 2,373 1,998
------------ ------------ -------------
REGULATORY AND OTHER NON-CURRENT ASSETS:
Environmental Remediation Costs:
Expended - Net 21,301 17,060 21,041
Liability for Future Expenditures 50,697 52,400 52,400
Gross Receipts & Franchise Taxes 3,806 4,250 4,028
Income Taxes - Flowthrough Depreciation 13,510 14,488 13,999
Deferred Fuel Costs - Net 0 0 3,674
Deferred Postretirement Benefit Costs 5,837 5,705 6,150
Other 8,188 8,422 9,158
------------ ------------ -------------
Total Regulatory and Other Non-Current Assets 103,339 102,325 110,450
------------ ------------ -------------
TOTAL ASSETS $674,279 $628,045 $670,601
============ ============ =============
<FN>
The accompanying notes to the financial statements are an integral part of these statements.
</FN>
</TABLE>
SJI-5
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
<CAPTION>
(Unaudited)
June 30, December 31,
------------------------- -------------
1998 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
COMMON EQUITY:
Common Stock $13,469 $13,454 $13,464
Premium on Common Stock 111,179 110,750 110,997
Retained Earnings 49,487 55,725 49,038
------------ ------------ -------------
Total Common Equity 174,135 179,929 173,499
------------ ------------ -------------
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 166,853 178,403 176,360
------------ ------------ -------------
CURRENT LIABILITIES:
Notes Payable 72,675 14,500 45,900
Current Maturities of Long-Term Debt 8,876 8,960 8,994
Accounts Payable 34,774 28,480 49,142
Customer Deposits 5,815 5,918 5,871
Environmental Remediation Costs 17,837 7,735 16,511
Federal Income Taxes Accrued (582) 2,928 884
State and Local Taxes Accrued 1,652 1,276 470
Interest Accrued and Other Current Liabilities 10,532 8,462 12,007
------------ ------------ -------------
Total Current Liabilities 151,579 78,259 139,779
------------ ------------ -------------
DEFERRED CREDITS AND OTHER NON-CURRENT
LIABILITIES:
Deferred Income Taxes - Net 82,686 77,030 78,631
Investment Tax Credits 5,434 5,827 5,632
Deferred Revenues - Net 979 6,125 0
Pension and Other Postretirement Benefits 11,535 11,694 11,747
Environmental Remediation Costs 37,871 46,655 40,511
Other 6,073 6,899 7,218
------------ ------------ -------------
Total Deferred Credits and Other Non-Current
Liabilities 144,578 154,230 143,739
------------ ------------ -------------
COMMITMENTS AND CONTINGENCIES
TOTAL CAPITALIZATION AND LIABILITIES $674,279 $628,045 $670,601
============ ============ =============
<FN>
The accompanying notes to the financial statements are an integral part of these statements.
</FN>
</TABLE>
SJI-6
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In Thousands)
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income Applicable to Common Stock $8,206 $14,730
Adjustments to Reconcile Net Income to Cash Flows Provided by
Operating Activities:
Depreciation and Amortization 9,411 9,025
Provision for Losses on Accounts Receivable 466 425
Revenues and Fuel Costs Deferred - Net 4,653 6,529
Deferred and Non-Current Federal Income Taxes and Credits - Net 4,582 1,624
Environmental Remediation Costs - Net 129 (1,494)
Net Pre-Tax Loss on the Disposal of Discontinued Operations 0 189
Changes in:
Accounts Receivable 10,668 18,578
Inventories 4,315 7,668
Prepayments and Other Current Assets (834) (358)
State and Local Taxes - Net (13,596) (11,527)
Accounts Payable and Other Accrued Liabilities (17,365) (25,248)
Other - Net (683) 1,827
------------ ------------
Net Cash Provided by Operating Activities 9,952 21,968
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment of Loan to Affiliate 2,011 100
Proceeds from the Sale of Assets - Net 0 3,487
Capital Expenditures, Cost of Removal and Salvage (25,733) (23,691)
------------ ------------
Net Cash Used in Investing Activities (23,722) (20,104)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings from (Repayments of) Lines of Credit 26,775 (93,800)
Proceeds from Issuance of Long-Term Debt 0 35,485
Principal Repayments of Long-Term Debt (9,625) (4,461)
Dividends on Common Stock (7,757) (7,748)
Repurchase of Preferred Stock (90) (90)
Proceeds from Sale of Common Stock 122 140
Proceeds from the Issuance of Preferred Securities 0 35,000
Payments for Issuance of Long-Term Debt and Preferred Securities (27) (2,215)
------------ ------------
Net Cash Provided by (Used in) Financing Activities 9,398 (37,689)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,372) (35,825)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,089 46,905
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $8,717 $11,080
============ ============
<FN>
The accompanying notes to the financial statements are an integral part of these 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 million for the three month period and $1.9 million for the
six month period ended June 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. Some
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 also effective for
fiscal years beginning after December 15, 1997. This statement
establishes standards for reporting selected information about
operating segments in SJI'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.
State and Local Taxes
New Jersey adopted legislation reforming energy taxation
effective July 14, 1997. The new law eliminates the Gross
Receipts & Franchise Tax (GRAFT), amounting to approximately 13%
SJI-8
of utility revenue, and replaces it with a combination of taxes.
Beginning January 1, 1998, retail sales of natural gas and
electricity and utility services, including transportation, 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. Adopting the
new legislation does not materially affect the company's
financial position, operating results or liquidity. 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 six
months ended June 30, 1997 under the caption "Loss on the
Disposal of Discontinued Operations - Net."
In 1997 and 1998, additional testing was done to estimate the
cost of environmental cleanup of 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). 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 Six Months Ended
June 30, June 30,
-------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- --------
Operating Revenues:
Construction $17 $1,199 $42 $4,354
========= ========= ========= ========
(Loss) Income before Income
Taxes:
Sand Mining ($3,222) ($36) ($3,515) ($11)
Construction (383) (103) (454) (100)
Fuel Oil (11) (136) (24) (232)
Income Tax Credits 1,248 102 1,397 146
--------- --------- --------- --------
Loss from Discontinued
Operations ($2,368) ($173) ($2,596) ($197)
========= ========= ========= ========
Loss per Common Share from
Discontinued Operations ($0.22) ($0.02) ($0.24) ($0.02)
========= ========= ========= ========
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 2,812 3,711
Stock Option and Stock Appreciation
Rights Plan 1,472 3,060
---------- ----------
Ending Balance, June 30, 10,775,697 10,763,450
========== ==========
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 $182,419 and $207,658 for the six
months ended June 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 six months
ended June 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
June 30, 1998 and 1997, SJI had 6,530 and 31,930 options
outstanding, respectively, exercisable at prices from $17.89 to
$24.69. During the six months ended June 30, 1997, employees
exercised 3,060 options at $17.89 per share. In addition,
during 1998, employees surrendered 6,530 options for 1,472
shares. SJI did not grant any options in 1998 and no stock
appreciation rights were issued under the plan. The stock
options outstanding at June 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 June 30, 1998, SJI reserved
139,772 and 32,559 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.
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
SJI-11
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 $47.6 million as of June 30, 1998.
Note 5. Regulatory Matters:
On July 31, 1996 and 1997, SJG filed with the BPU to recover
remediation costs expended from August 1995 through July 1997
totaling $1.6 million. Both filings were subsequently updated
and are still pending at the BPU (See Note 7).
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 was increased from $4.0
million to $5.0 million. SJG keeps 100% of pre-tax margins up
to this 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. In late 1998, this $5.5 million threshold will
increase by another $1.9 million, also representative of the
annual revenue requirement associated with major construction
projects.
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 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. 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. On June 26, 1998, the BPU expanded the number of
participants to 25,000. The program results in a reduction in
Utility Revenues. However, the program does not affect the
company'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.
SJI-12
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. 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 its rates through its
1996-1997 Levelized Gas Adjustment Clause (LGAC) reflecting a
$1.4 million decrease in natural gas costs. Updated results
from the 1996-1997 LGAC year were rolled into the 1997-1998 LGAC
which was filed with the BPU in September 1997.
On September 12, 1997, SJG made its annual LGAC, Temperature
Adjustment Clause (TAC) and Demand Side Management Clause (DSMC)
filings with the BPU. The LGAC and the DSMC cover the period
November 1997 through October 1998. The TAC period runs from
October 1 through May 31. In this 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 $7.5 million in May 1998 due to increased
actual gas costs as compared to original projections filed with
the BPU. The company also requested resolution of the 1996-1997
filing along with this filing. Both filings are still pending
at the BPU.
On March 5, 1998, the BPU approved new rates related to
appliance service, including a profit margin. 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. The BPU also authorized SJG to institute new
appliance service contract plans and an electric air
conditioning repair charge in April 1998.
Note 6. State, Local and Other Taxes:
The total expense for state, local and other taxes reflected in
the Condensed Statements of Consolidated Income for the three
and six months ended June 30, 1998 and 1997 are shown below (in
thousands):
SJI-13
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ---------------------
1998 1997 1998 1997
----------- ----------- ---------- ----------
CBT - Net $72 $0 $2,493 $25
TEFA 1,148 0 4,361 0
GRAFT 110 4,544 (97) 16,727
Other Taxes 763 762 1,684 1,733
----------- ----------- ---------- ----------
Total State, Local and
Other Taxes $2,093 $5,306 $8,441 $18,485
=========== =========== ========== ==========
During the three and six months ended June 30, 1998, SJG
recorded an additional $2.6 million and $7.6 million,
respectively, for SUT on utility services through its Condensed
Consolidated Balance Sheet which does not impact reported
revenues or tax expense (See Note 1).
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 gas storage service. The
earliest that any of the gas supply contracts expires is 1999.
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. SJG recovers this 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.
SJI-14
A group of Atlantic City casinos filed a petition with the BPU
in 1996 alleging overcharges of over $10.0 million, including
interest. Management believes that charges to the casinos were
based on applicable SJG tariffs and that the casinos were not
qualified under less expensive rate schedules, as claimed.
Management believes that the ultimate impact of these actions
will not materially affect the company's financial position,
operating results or liquidity.
Environmental Remediation Costs
SJI incurred and recorded costs for environmental cleanup 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 cleanup 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 cleanup
costs of $97.5 million. The company has spent $41.8 million as
of June 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
cleanup 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 June 30, 1998. SJG used these proceeds to
offset related legal fees and to reduce the balance of deferred
environmental cleanup 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 costs relate to the
cleanup of SJG's former gas manufacturing sites. SJG recorded
$90.8 million for the remediation of these sites and spent $40.1
million through June 30, 1998.
As a result of the 7-year Remediation Adjustment Clause (RAC)
recovery mechanism, SJG does not expense environmental cleanup
costs when incurred. Rather, costs to be recovered are
deferred. SJG has two regulatory assets associated with
environmental cost. 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
SJI-15
these expenditures through July 1995 and petitions to recover
these costs through July 1997 are pending.
The other regulatory asset titled "Environmental Remediation
Cost: Liability for Future Expenditures" relates to estimated
future expenditures determined under the guidance of FASB No. 5,
"Accounting for Contingencies." This amount, which relates to
former manufactured gas plant sites, was recorded as a deferred
debit with the corresponding amount reflected in Current
Liabilities and Deferred Credits and Other Non-Current
Liabilities. 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 the company believes this will
continue. As of June 30, 1998, SJG's unamortized cleanup 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 $14.6 million
through rates as of June 30, 1998.
With Morie's sale, EMI assumed responsibility for environmental
liabilities which the company estimates range between $3.4
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 cleanup 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.
They are reflected in Current Liabilities and Deferred Credits
and Other Non-Current Liabilities as of June 30, 1998.
Note 8. Subsequent Event:
On July 10, 1998, SJG filed a petition with the BPU requesting
authority to establish a Medium Term Note (MTN) program. The
petition requests authority to issue $100 million of MTN's
through December 2001. The net proceeds of this MTN program
will be used to retire short-term debt and to fund capital
expenditures.
SJI-16
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Overview
South Jersey Industries, Inc. (SJI) has three operating
subsidiaries, South Jersey Gas Company (SJG); South Jersey
Energy Company (SJE); and SJ EnerTrade, Inc. (EnerTrade). SJG
is a natural gas distribution company serving 263,678 customers
at June 30, 1998, compared with 257,449 customers at June 30,
1997. EnerTrade, formed in October 1997, provides services for
the sale of natural gas to energy marketers, electric and gas
utilities, and other wholesale users in the mid-Atlantic and
southern regions of the country. SJE provides services for the
acquisition and transportation of natural gas for retail end
users, buys and sells electricity in the wholesale market and
markets total energy management services. 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 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
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
SJI-17
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 initiated its BPU-approved pilot program
giving residential customers a choice of gas supplier. During
the enrollment period, which ended June 30, 1997, nearly 13,000
residential customers applied to be supplied with gas by third
party gas marketers. In June 1998, the duration of the pilot
program was extended to July 31, 1999 and the scope was
approximately doubled to 25,000 customers (See Regulatory
Matters). Participants' bills are reduced for certain cost of
gas charges and applicable taxes. The resulting decrease in
revenues is offset by a corresponding decrease in SJG's gas costs
and taxes under SJG's BPU-approved fuel clause. The program does
not affect its net income, financial condition or margins.
Energy Adjustment Clauses
SJG's tariff includes a Levelized Gas Adjustment Clause (LGAC),
a Temperature Adjustment Clause (TAC), a Remediation Adjustment
Clause (RAC) and a Demand Side Management Clause (DSMC). These
clauses permit adjustments for changes in gas supply costs,
reduce the impact of extreme fluctuations in temperatures on SJG
and its customers, recover costs for the remediation of former
gas manufacturing plants and recover costs associated with its
conservation plan, respectively. The BPU-approved LGAC, RAC and
DSMC adjustments are made to match revenues and expenses. TAC
adjustments do affect revenue, income and cash flows since
extremely cold weather can generate credits to customers, while
extremely warm weather during the winter season 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.
Status of Year 2000 Conversion
The company prepared a Year 2000 Impact and Assessment study
and developed a plan for program modification. An outside
service was used to identify both informational and logic date
variables within the programming codes. This service was
completed and expensed in 1997. Presently, the company is
revising the affected programming codes. As of June 30, 1998,
SJI-18
approximately 38% of the programming code is revised. All
revisions are scheduled to be completed by early 1999, providing
the remainder of 1999 for testing. The conversion costs are
estimated at $0.4 million of which approximately $0.15 million
was spent as of June 30, 1998. Vendors who provide third
party software have been contacted and 26 of 35 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. 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 Six Months Ended June 30, 1998
Compared to Three and Six Months Ended June 30, 1997
Operating Revenues - Utility
Revenues decreased $6.2 million for the second quarter and
$24.5 million for the first six months of 1998 as compared to
the same periods in 1997. These decreases were primarily due to
lower firm sales resulting from weather which was warmer than
1997 and state tax reform which lowered the tax component
contained in reported revenue, effective January 1, 1998, with
an offsetting reduction in State, Local and Other Taxes (See
Notes 1 and 6). Weather in 1998 was 29.1% and 16.0% warmer for
the three and six month periods, respectively, compared with the
prior year periods. Also, increased firm transportation service
replaced firm sales. These results were partially offset by
increased off-system sales and customer growth. The revenue
from transportation excludes commodity costs (See Competition).
As SJG's profits are from the transportation rather than the
sale of commodity, the migration of customers to firm
transportation does not lower SJG's margin. Total sales margin
decreased in 1998 due to lower sales volumes and decreased
margins on off-system sales, partially offset by the effect of
the addition of 6,200 new customers since the end of the second
quarter of 1997.
Operating Revenues - Nonutility
Nonutility operating revenues increased $15.6 million and $25.3
million for the three and six month periods ending June 30,
1998, respectively, compared with the comparable 1997 periods
principally due to increased gas commodity sales and sales of
electricity in the wholesale market.
Gas Purchased for Resale
Gas purchased for resale decreased $1.7 million and $10.5
million for the three and six month periods ending June 30, 1998
compared with the comparable 1997 periods principally due to
weather related decreased sales volumes. 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 October
1998. SJG does not intend to renew that contract. All of the
SJI-19
transportation and storage service agreements between SJG and
its interstate pipeline suppliers are provided under tariffs
approved by the Federal Energy Regulatory Commission. SJG's
cumulative obligation for demand charges and reservation fees
for all of these services is approximately $4.9 million per
month, which is recovered on a current basis through its LGAC.
Operations
A summary of net changes in utility operations for 1998
compared with 1997 is as follows (in thousands):
Period Ended June 30,
-----------------------------
Three Months Six Months
1998 vs. 1997 1998 vs. 1997
------------- -------------
Other Production Expense $7 $3
Transmission 6 19
Distribution (78) (209)
Appliance Service 244 228
Customer Accounts and Services 124 285
Sales 4 (9)
Administration and General 150 351
Other 28 (37)
------------- -------------
$485 $631
============= =============
Distribution costs decreased for both comparative periods in
1998 principally due to decreased meter exchange activity.
Appliance Service expenses increased in the comparisons due to
expenditures on advertising. Customer Accounts and Services
costs increased in 1998 principally due to an increase in
payroll expense. Administrative and General costs increased in
1998 principally due to increased employee benefits costs.
Other Operating Expenses
A summary of principal changes in other consolidated operating
expenses for 1998 compared with 1997 is as follows (in
thousands):
SJI-20
Period Ended June 30,
-----------------------------
Three Months Six Months
1998 vs. 1997 1998 vs. 1997
------------- -------------
Nonutility Operations $15,838 $26,053
Maintenance (262) (138)
Depreciation 290 573
Federal Income Taxes (857) (2,215)
State, Local and Other Taxes (3,213) (10,044)
Changes in nonutility operations principally reflect the impact
of sales volumes and commodity costs, including, in 1998, 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 Income Tax changes reflect the impact of
changes in pre-tax income. State, Local and Other Taxes
decreased because of the energy tax reform legislation discussed
under Operating Revenues - Utility.
Interest Charges
Interest charges increased slightly in the second quarter of
1998 versus the comparable 1997 period as higher levels of
short-term debt were not completely offset by reductions of
long-term debt. Interest charges for the six month period of
1998 decreased compared to 1997 as lower average levels of
short-term debt carried throughout the period did not offset
higher average levels of long-term debt outstanding throughout
the period.
Preferred Dividend Requirements of Subsidiary
Preferred Dividends increased in 1997 due to the issuance of
$35.0 million of 8.35% SJG-guaranteed Mandatorily Redeemable
Preferred Securities in May 1997 (See Capital Resources).
Discontinued Operations
Loss from discontinued operations increased $2.2 million in the
second quarter and $2.4 million for the first six months of 1998
compared to comparable periods in 1997 principally due to a
product liability settlement and increased remediation costs.
SJI-21
Net Income Applicable to Common Stock
Net Income (in thousands) and earnings per common share reflect
the following changes:
Period Ended June 30,
-----------------------------
Three Months Six Months
1998 vs. 1997 1998 vs. 1997
------------- -------------
Income from Continuing Operations
(Decrease) ($1,556) ($4,248)
Loss from Discontinued Operations - Net (2,195) (2,399)
Reduction in Loss on Disposal of
Discontinued Operations 0 123
------------- -------------
Net Income Decrease ($3,751) ($6,524)
============= =============
Earnings per Common Share:
Continuing Operations ($0.14) ($0.40)
Discontinued Operations - Net (0.20) (0.21)
------------- -------------
Earnings per Share Decrease ($0.34) ($0.61)
============= =============
The details affecting the decrease 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.
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 $115.0 million of which $42.7
million was available at June 30, 1998. The credit lines are
uncommitted and unsecured with interest rates below the prime
rate.
The changes in cash flows from operating activities are as
follows (in thousands):
SJI-22
Six Months Ended
June 30,
1998 vs. 1997
-------------
Increases/(Decreases):
Net Income ($6,524)
Depreciation and Amortization 386
Provision for Losses on Accts Receivable 41
Revenues and Fuel Costs Deferred - Net (1,876)
Deferred and Non-Current Federal
Income Taxes and Credits - Net 2,958
Environmental Remediation Costs - Net 1,623
Net Pre-Tax Loss on the Disposal of
Discontinued Operations (189)
Accounts Receivable (7,910)
Inventories (3,353)
Prepayments and Other Current Assets (476)
State and Local Taxes Accrued (2,069)
Accounts Payable and Other Accrued
Liabilities 7,883
Other - Net (2,510)
-------------
Decrease in Net Cash from Operating
Activities ($12,016)
=============
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 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.
SJI-23
Changes in Inventories reflect the impact of seasonal
requirements, temperatures and price changes.
Changes in State and Local Taxes Accrued 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 are
paid on June 25, 1998, and 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 $3.4 million and
$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).
As a result of additional testing performed during 1997 and
1998, SJF, whose operations have been discontinued, and SJI have
also estimated their potential exposure for the future
environmental remediation of four sites where fuel oil
operations were conducted years ago. Estimates for SJI's site
range between $0.3 million and $1.0 million while the estimated
liability for SJF's discontinued operations ranges from $1.3
million to $3.7 million for the remaining three sites. The
lower end of these ranges have been accrued.
SJI-24
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 was increased from $4.0
million to $5.0 million. SJG keeps 100% of pre-tax margins up
to this 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. In late 1998, this $5.5 million threshold will
increase by another $1.9 million, also representative of the
annual revenue requirement associated with major construction
projects.
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.
On September 9, 1997, SJG filed with the BPU to adjust rates by
replacing the current 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 its rates through its
1996-1997 LGAC reflecting a $1.4 million decrease in natural gas
costs. Updated results from the 1996-1997 LGAC year were rolled
into the 1997-1998 LGAC which was filed with the BPU in
September 1997.
The 1997-1998 LGAC filing requested a rate increase to reflect
an increase of $4.7 million in natural gas costs, inclusive of
the 1996-1997 LGAC filing. This amount was updated to $7.5
million in May 1998. Both filings are still pending at the BPU.
SJI-25
On September 12, 1997, SJG also filed its 1997-1998 TAC with
the BPU. For the TAC period ended May 31, 1997, temperatures
were within the TAC range and no adjustment to customers' bills
was required. SJG experienced warmer than normal weather during
the TAC period running from October 1, 1997 through May 31, 1998.
The warmer weather decreased net income in 1998 by approximately
$3.7 million. SJG anticipates filing its 1998-1999 TAC with the
BPU in August 1998. SJG will seek recovery of approximately
$416,000 of revenues from its firm customers resulting from
warmer than normal temperatures. In addition, SJG filed a
petition with the BPU on June 8, 1998 requesting a change in the
way in which the TAC operates. If the request is granted, SJG
will not experience significant fluctuations in income when
temperatures are warmer or colder than normal.
On March 5, 1998, the BPU approved new rates related to
appliance service charges, including a profit margin. 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. The BPU also authorized SJG to
institute new appliance service contract plans effective April
1, 1998, including electric air conditioning repairs within its
service territory.
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.
Environmental Remediation
The company incurred and recorded certain costs for
environmental remediation of sites where SJG or predecessor
companies operated gas manufacturing plants. SJG terminated
manufactured gas operations at all sites more than 35 years ago.
Since the early 1980s, SJI has recorded environmental cleanup
costs of $97.5 million. The company has spent $41.8 million as
of June 30, 1998. SJG, with the assistance of an outside
consulting firm, estimates that future costs to clean up SJG's
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
cleanup 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 June 30, 1998. SJG used these proceeds to
offset related legal fees and to reduce the balance of deferred
environmental cleanup 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.
SJI-26
The major portion of recorded environmental costs relate to the
cleanup of SJG's former gas manufacturing sites. SJG recorded
$90.8 million for the remediation of these sites, of which $40.1
million was expended through June 30, 1998.
As a result of the 7-year recovery mechanism, SJG does not
expense environmental remediation costs when incurred and defers
costs to be recovered. SJG has two regulatory assets associated
with environmental cost. The first regulatory asset is titled
"Environmental Remediation Cost: Expended - Net." These
expenditures represent actual costs incurred to remediate former
gas manufacturing plant sites net of rate and insurance
recoveries. These costs meet the requirements of FASB No. 71,
"Accounting for the Effects of Certain Types of Regulation."
The BPU allowed recovery of these expenditures through July 1995
and petitions to recover these costs through July 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 in Current
Liabilities and Deferred Credits and Other Non-Current
Liabilities, as appropriate. The deferred debit is a regulatory
asset under FASB No. 71, because the BPU's intent, as evidenced
by its current practice, is to provide recovery sufficient to
recover the deferred costs after they are expended.
Annually, SJG files with the BPU to recover expended
remediation costs in rates. The BPU has consistently allowed
the full recovery over 7-year periods, and SJG believes this
will continue. As of June 30, 1998, SJG's unamortized
remediation expenditures 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 mechanism in
August 1992, SJG recovered $14.6 million as of June 30, 1998.
On July 31, 1996, 1997 and 1998, SJG made its annual filings
with the BPU to recover remediation costs expended during the
period of August 1995 through July 1998. In 1998, the company
requested an increase in the level of its annual recoveries of
$4.5 million. This increase represents combined changes for
three years since SJG's last two proceedings remain unresolved.
With Morie's sale, EMI assumed responsibility for environmental
liabilities which the company estimates range between $3.4
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 cleanup 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.
SJI-27
They are reflected in Current Liabilities and Deferred Credits
and Other Non-Current Liabilities as of June 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 $8.2 million and the balance of the regulatory
asset amounted to $5.8 million at June 30, 1998.
Other
The company is subject to claims which arise in the ordinary
course of its business and other legal proceedings. As such,
reserves are set up when these claims become apparent. The
company 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. Management believes that charges to the
casinos were based on applicable SJG tariffs and that the
casinos were not qualified under less expensive rate schedules
as claimed. Management believes that the ultimate impact of
these actions will not materially affect the company's financial
position, results of operations or liquidity.
Capital Resources
The company has a continuing need for cash resources and capital,
primarily to invest in new and replacement facilities and equipment
and for environmental cleanup costs. Net construction and remediation
expenditures for the first six months of 1998 amounted to $25.6
million. The costs for 1998, 1999 and 2000 are estimated at
approximately $73.4 million, $58.3 million and $50.0 million,
respectively. These investments are expected to be funded from
SJI-28
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 July 10, 1998, SJG filed a petition with the BPU requesting
authority to establish a Medium Term Note (MTN) program. The
petition requests authority to issue $100 million of MTN's
through December 2001. The net proceeds of this MTN program
will be used to retire short-term debt and to fund capital
expenditures.
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-29
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 14, 15 and 16, 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-30
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 12, 1998 By: /s/ David A. Kindlick
David A. Kindlick
Vice President, Financial
Operations
Dated: August 12, 1998 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Assistant Secretary & Assistant
Treasurer
SJI-31
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-32
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 471,120
<OTHER-PROPERTY-AND-INVEST> 2,019
<TOTAL-CURRENT-ASSETS> 94,778
<TOTAL-DEFERRED-CHARGES> 103,339
<OTHER-ASSETS> 2,080
<TOTAL-ASSETS> 674,279
<COMMON> 13,469
<CAPITAL-SURPLUS-PAID-IN> 111,179
<RETAINED-EARNINGS> 49,487
<TOTAL-COMMON-STOCKHOLDERS-EQ> 174,135
35,000
2,134
<LONG-TERM-DEBT-NET> 166,853
<SHORT-TERM-NOTES> 72,675
<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> 214,606
<TOT-CAPITALIZATION-AND-LIAB> 674,279
<GROSS-OPERATING-REVENUE> 194,525
<INCOME-TAX-EXPENSE> 8,974
<OTHER-OPERATING-EXPENSES> 164,241
<TOTAL-OPERATING-EXPENSES> 173,215
<OPERATING-INCOME-LOSS> 21,310
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 21,310
<TOTAL-INTEREST-EXPENSE> 8,963
<NET-INCOME> 8,206
1,545
<EARNINGS-AVAILABLE-FOR-COMM> 8,206
<COMMON-STOCK-DIVIDENDS> 7,757
<TOTAL-INTEREST-ON-BONDS> 7,563
<CASH-FLOW-OPERATIONS> 9,952
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.76
</TABLE>
