Page 1 of 30
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 March 31, 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 May 7, 1998, there were 10,774,750 shares of the
registrant's common stock outstanding.
Exhibit Index on page 30
- Cover Page -
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 15
SJI-2
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(In Thousands Except for Share Data)
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating Revenues:
Utility $108,464 $126,582
Nonutility 14,319 4,821
------------ ------------
Total Operating Revenues 122,783 131,403
------------ ------------
Operating Expenses:
Gas Purchased for Resale 61,163 69,870
Operations - Utility 9,948 9,810
Nonutility 14,925 4,887
Maintenance 1,595 1,471
Depreciation 4,172 3,888
Federal Income Taxes 7,018 8,374
State, Local & Other Taxes 6,347 13,179
------------ ------------
Total Operating Expenses 105,168 111,479
------------ ------------
Operating Income 17,615 19,924
Interest Charges:
Long-Term Debt 3,852 3,374
Short-Term Debt 541 1,374
Other 93 85
------------ ------------
Total Interest Charges 4,486 4,833
Preferred Dividend Requirements of Subsidiary 773 43
------------ ------------
Income from Continuing Operations 12,356 15,048
Discontinued Operations:
Loss from Discontinued Operations - Net (228) (24)
Loss on the Disposal of Discontinued Operations - Net 0 (123)
------------ ------------
Net Income Applicable to Common Stock $12,128 $14,901
============ ============
Average Shares of Common Stock Outstanding 10,773,759 10,759,713
============ ============
Earnings(Loss) Per Common Share:
Continuing Operations $1.15 $1.39
Discontinued Operations - Net (0.02) (0.01)
------------ ------------
Earnings Per Common Share $1.13 $1.38
============ ============
Dividends Declared Per Common Share $0.36 $0.36
============ ============
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
SJI-3
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
<CAPTION>
(Unaudited)
March 31, December 31,
------------------------- -------------
1998 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Property, Plant and Equipment:
Utility Plant, at original cost $630,337 $589,255 $621,415
Accumulated Depreciation (170,483) (160,755) (167,176)
Nonutility Property and Equipment, at cost 3,337 3,326 3,332
Accumulated Depreciation (1,037) (1,048) (1,033)
------------ ------------ -------------
Property, Plant and Equipment - Net 462,154 430,778 456,538
------------ ------------ -------------
Investment in Affiliate 812 1,267 849
------------ ------------ -------------
Current Assets:
Cash and Cash Equivalents 15,004 13,852 13,089
Notes Receivable - Affiliate 800 1,500 4,561
Accounts Receivable 51,431 55,638 35,947
Unbilled Revenues 10,445 13,052 17,263
Provision for Uncollectibles (1,253) (1,555) (1,530)
Natural Gas in Storage, average cost 10,451 6,403 23,877
Materials and Supplies, average cost 4,410 4,069 4,509
Assets of Discontinued Businesses Held
for Disposal 616 2,999 622
Prepaid Gross Receipts & Franchise Taxes 0 0 566
Prepayments and Other Current Assets 1,692 1,376 1,862
------------ ------------ -------------
Total Current Assets 93,596 97,334 100,766
------------ ------------ -------------
Accounts Receivable - Merchandise 2,153 1,804 1,998
------------ ------------ -------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 20,939 15,864 21,041
Liability for Future Expenditures 52,400 41,700 52,400
Gross Receipts & Franchise Taxes 3,917 4,361 4,028
Income Taxes - Flowthrough Depreciation 13,754 14,732 13,999
Deferred Fuel Costs - Net 0 0 3,674
Deferred Postretirement Benefit Costs 5,988 5,354 6,150
Other 8,270 8,056 9,158
------------ ------------ -------------
Total Regulatory and Other Non-Current Assets 105,268 90,067 110,450
------------ ------------ -------------
Total Assets $663,983 $621,250 $670,601
============ ============ =============
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
SJI-4
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
<CAPTION>
(Unaudited)
March 31, December 31,
------------------------- -------------
1998 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
Common Equity:
Common Stock $13,468 $13,453 $13,464
Premium on Common Stock 111,111 110,687 110,997
Retained Earnings 57,288 59,770 49,038
------------ ------------ -------------
Total Common Equity 181,867 183,910 173,499
------------ ------------ -------------
Preferred Stock and Securities of Subsidiary:
Redeemable Cumulative Preferred Stock:
South Jersey Gas Company, Par Value $100 per share
Authorized - 47,304, 48,204 and 47,304 shares
Outstanding Shares:
Series A, 4.70%--3,000, 3,900 and 3,000 shares 300 390 300
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 0 35,000
------------ ------------ -------------
Total Preferred Stock and Securities of Subsidiary 37,224 2,314 37,224
------------ ------------ -------------
Long-Term Debt 174,212 182,548 176,360
------------ ------------ -------------
Current Liabilities:
Notes Payable 32,100 37,200 45,900
Current Maturities of Long-Term Debt 9,012 6,603 8,994
Accounts Payable 40,023 30,287 49,142
Customer Deposits 5,988 5,932 5,871
Environmental Remediation Costs 15,749 9,377 16,511
Federal Income Taxes Accrued 5,342 5,365 884
State & Local Taxes Accrued 7,605 12,028 470
Interest Accrued and Other Current Liabilities 8,709 8,206 12,007
------------ ------------ -------------
Total Current Liabilities 124,528 114,998 139,779
------------ ------------ -------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 80,372 76,395 78,631
Investment Tax Credits 5,533 5,926 5,632
Deferred Revenues - Net 981 3,391 0
Pension and Other Postretirement Benefits 11,883 10,991 11,747
Environmental Remediation Costs 41,149 34,327 40,511
Other 6,234 6,450 7,218
------------ ------------ -------------
Total Deferred Credits and Other Non-Current
Liabilities 146,152 137,480 143,739
------------ ------------ -------------
Commitments and Contingencies (Note 6)
Total Capitalization and Liabilities $663,983 $621,250 $670,601
============ ============ =============
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
SJI-5
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED
CASH FLOWS (UNAUDITED)
(In Thousands)
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $12,128 $14,901
Adjustments to Reconcile Net Income to Cash
Flows Provided by Operating Activities:
Depreciation and Amortization 4,649 4,567
Provision for Losses on Accounts Receivable 243 195
Revenues and Fuel Costs Deferred - Net 4,655 3,795
Deferred and Non-Current Federal Income Taxes
and Credits - Net 2,302 748
Environmental Remediation Costs - Net (22) (298)
Changes in:
Accounts Receivable (9,186) (11,991)
Inventories 13,525 16,280
Prepayments and Other Current Assets 170 397
State and Local Taxes - Net 7,701 10,205
Accounts Payable and Other Accrued Liabilities (7,842) (11,439)
Other - Net (490) 912
------------ ------------
Net Cash Provided by Operating Activities 27,833 28,272
------------ ------------
Cash Flows from Investing Activities:
Payment of Loan to Affiliate 3,761 1,300
Proceeds from the Sale of Assets - Net 0 1,165
Taxes Paid on the Sale of Assets - Net 0 (9,807)
Capital Expenditures, Cost of Removal and Salvage (9,966) (11,239)
------------ ------------
Net Cash Used in Investing Activities (6,205) (18,581)
------------ ------------
Cash Flows from Financing Activities:
Net Repayments of Lines of Credit (13,800) (71,100)
Proceeds from Issuance of Long-Term Debt 58 35,000
Principal Repayments of Long-Term Debt (2,188) (2,188)
Dividends on Common Stock (3,879) (3,874)
Proceeds from Sale of Common Stock 96 114
Payments for Issuance of Long-Term Debt and
Preferred Securities 0 (696)
------------ ------------
Net Cash Used in Financing Activities (19,713) (42,744)
------------ ------------
Net Increase(Decrease) in Cash and Cash Equivalents 1,915 (33,053)
Cash and Cash Equivalents at Beginning of Period 13,089 46,905
------------ ------------
Cash and Cash Equivalents at End of Period $15,004 $13,852
============ ============
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
SJI-6
Notes to Condensed Consolidated
Financial Statements (Unaudited)
Note 1. Significant Accounting Practices:
Consolidation - The condensed consolidated financial
statements include the accounts of South Jersey Industries, Inc.
(the Company or SJI) and all of its subsidiaries. Certain
intercompany transactions, amounting to approximately $1.8
million for the three-month period ended March 31, 1997, were
not required to be eliminated. Those amounts were capitalized
to utility plant or environmental remediation costs on the South
Jersey Gas Company (SJG) books of account and are recoverable by
SJG through the rate-making process (See Note 7). All other
significant intercompany accounts and transactions have been
eliminated. Certain reclassifications have been made of
previously reported amounts to conform with classifications used
in the current year. In the opinion of management, the
condensed consolidated financial statements reflect all
adjustments necessary for a fair presentation of the financial
position and operating results of the Company at the dates and
for the periods presented. The businesses of the Company are
subject to seasonal fluctuations and, accordingly, this interim
financial information should not be considered a basis for
estimating the results of operations for the full year.
Estimates and Assumptions - The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
related disclosures. Therefore, actual results could differ
from those estimates.
New Accounting Pronouncements - In June 1997, the FASB
issued FASB No. 130, "Reporting Comprehensive Income". This
statement, which establishes standards for reporting and
disclosure of comprehensive income, is effective for annual
periods beginning after December 15, 1997. The Company currently
has no additional items qualifying as other comprehensive income
under FASB No. 130 and, therefore, its adoption does not have any
impact on the Company's financial statements.
In June 1997, the FASB also 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 the reporting of selected information about operating
segments in the Company's interim and annual financial
statements. The Company is evaluating whether the adoption of
this statement will result in any change to its presentation of
financial information. The Company adopted FASB No. 131
effective January 1, 1998; however, as permitted by this
statement, segment information will not be reported in interim
financial statements until 1999.
SJI-7
State and Local Taxes - Legislation reforming the taxation
of energy in New Jersey was adopted effective July 14, 1997. The
new law eliminates the Gross Receipts and Franchise Tax (GRAFT) which
was equivalent to approximately 13 percent of utility revenue and
replaces it with a combination of taxes. Beginning January 1,
1998, retail sales of natural gas and electricity and utility
services, including transportation, are subject to the 6 percent
State Sales and Use Tax. Gas and electric utilities are also
subject to the 9 percent 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 a 5-year period beginning January
1, 1999 and ending January 1, 2003. It is expected that the
revised tax policy will eliminate tax disparities between
utility and nonutility suppliers, providing fair competition and
lower energy costs for the consumer. The adoption of the new
legislation does not materially affect the Company's financial
position, results of operations, or liquidity. However, since
the Sales and Use Tax is not included in reported utility
revenues or tax expense as GRAFT had been previously, equal
reductions in these line items on the Condensed Statements of
Consolidated Income will result.
Note 2. Divestitures:
In December 1996, Energy & Minerals, Inc. (EMI), a
subsidiary of SJI, sold the common stock of The Morie Company,
Inc. (Morie), its sand mining and processing subsidiary. The
sale price was subject to customary post-closing adjustments
resulting in a downward adjustment of $0.6 million which were
recorded in December 1997.
In December 1996, the Company developed a formal plan to
discontinue the operations of its construction and environmental
services operations, R & T Group, Inc. (R & T) and its five
subsidiaries. As a result, the Company 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
certain real estate. The aggregate proceeds from these sales,
approximately $3.5 million, approximated the net book value of
the assets at the date of sale. Associated disposal costs of
$189,500, or $123,200 after taxes, are included in the Condensed
Statement of Consolidated Income for the three months ended
March 31, 1997 under the caption "Loss on the Disposal of
Discontinued Operations - Net".
In 1997, the Company performed additional testing to arrive
at an estimate of the cost to perform environmental cleanup and
remediation of properties owned by South Jersey Fuel, Inc.
(SJF), a subsidiary of EMI, arising from its previously operated
fuel oil business. Also in 1997, SJ EnerTrade, Inc. (EnerTrade)
was created as a direct subsidiary of SJI 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; the environmental
remediation activity related to properties used in the
previously operated fuel oil business are reported as part of
SJI-8
discontinued operations consistent with the reporting in
previous years of other costs related to the discontinued fuel
oil business (See also Note 7).
Summarized operating results of all discontinued operations
for the three months ended March 31, 1998 and 1997 were (in
thousands):
1998 1997
------------ ------------
Operating Revenues:
Construction $25 $3,154
============ ============
(Loss) Income before Income Taxes:
Sand Mining ($293) $23
Construction (71) 25
Fuel Oil (13) (96)
Income Tax Credits 149 24
------------ ------------
Loss from Discontinued Operations ($228) ($24)
============ ============
Loss per Common Share from
Discontinued Operations ($0.02) $0.00
============ ============
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 1,865 2,559
Stock Option & Stock Appreciation
Rights Plan 1,472 3,060
------------ ------------
Ending Balance, March 31, 10,774,750 10,762,298
============ ============
The par value ($1.25 per share) of the stock issued in 1998
and 1997 was credited to common stock and the net excess over par
value of $114,457 and $144,856, for the three months ended March
SJI-9
31, 1998 and 1997, respectively, was credited to Premium on
Common Stock.
The Company determined that the pro forma effect of adoption
of the fair value based method of accounting on net income and
earnings per share pursuant to FASB No. 123 would be immaterial
for the three months ended March 31, 1998 and 1997.
Stock Option and Stock Appreciation Rights Plan - Under this
plan, not more than 306,000 shares in the aggregate may be
issued to officers and other key employees of the Company and
its subsidiaries. No options or stock appreciation rights may
be granted under the Plan after January 23, 2007. At March 31,
1998 and 1997, the Company had 6,530 and 31,930 options
outstanding, respectively, exercisable at prices from $17.89 to
$24.69. During the three month period ended March 31, 1997,
3,060 options were exercised at $17.89 per share. In addition,
during 1998, 6,530 options were surrendered for the issuance of
1,472 shares. No options were granted in 1998. No stock
appreciation rights were issued under the plan. The stock
options outstanding at March 31, 1998 and 1997, did not have an
effect on the earnings per share calculations.
Dividend Reinvestment and Stock Purchase Plan (DRP) and
Employees' Stock Ownership Plan (ESOP) - Shares of common stock
offered through the DRP are currently purchased in the open
market. All shares offered through the ESOP are issued directly
by the Company. As of March 31, 1998, 162,335 and 33,506 shares
of authorized, but unissued, Common Stock were reserved for
future issuance to the DRP and ESOP, respectively.
Directors' Restricted Stock Plan - On September 20, 1996,
the Board of Directors adopted a restricted stock plan. Under
this plan, an initial award of 13,800 shares was granted on
December 4, 1996, at a market value of $24.00 per share. The
plan also provides for annual awards and, in December 1997 and
1996, respectively, 450 and 600 additional shares were granted.
Initial awards will vest over a 5-year period, with 20 percent
of such awards vesting per year. Annual awards will vest on the
third anniversary of each award. Shares issued as restricted
stock are held by the Company until the attached restrictions
lapse. The market value of the stock on the date granted is
recorded as compensation expense over the applicable vesting
period.
Shareholder Rights Plan - On September 20, 1996, the Board
of Directors adopted a shareholder rights plan that provides for
the distribution of one right for each share of common stock
outstanding on October 11, 1996. Each entitles its holder to
purchase 1/1000 of one share of Series A Stock at an exercise
price of $90.
The rights plan provides that when a person or group
acquires 10 percent or more of the Company's common stock, each
of the rights (except for those held by the 10 percent holder)
becomes the right upon payment of the exercise price to receive
that number of shares of the Company's common stock, or common
stock of the acquiring company, which have a market value equal
to two times the exercise price.
SJI-10
The rights may be redeemed by the Company for $.001 per
right at any time prior to the time the acquiring person or group
reaches the 10 percent threshold. If the rights are not
exercised or redeemed by September 20, 2006, they will expire.
Note 4. Retained Earnings:
There are certain restrictions under various loan agreements
as to the amount of cash dividends or other distributions that
may be paid on the Common Stock of SJG. The Company's aggregate
equity in its subsidiaries' retained earnings which is free of
these restrictions was approximately $55.4 million as of March
31, 1998.
Note 5. Recent Regulatory Actions:
On July 31, 1996 and 1997, SJG made its annual filings with
the Board of Public Utilities (BPU) to recover remediation costs
expended during the period of 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 base rate
increase of $6.0 million based on a 9.62 percent rate of return
on rate base, which included an 11.25 percent return on 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
is now allowed to retain the first $5.5 million of pre-tax
margins generated by interruptible and off-system sales and
transportation and 20 percent of pre-tax margins above that
level. In 1998, this $5.5 million threshold will increase by
the annual revenue requirement associated with specified major
construction projects. These sharing formula improvements are
expected to result in additional rate relief of approximately
$0.3 million in 1998 and $1.9 million in 1999.
As part of the tariff changes approved in the rate case, SJG
initiated 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. Transportation of gas for
these customers began on August 1, 1997. Participant's 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. In addition, because
the program affects only 5 percent of SJG's residential
customers, any reduction in revenue is not material. Also, SJG
further expanded the choices available to commercial and
industrial customers, including a new transportation tariff
providing savings to qualified customers.
On September 9, 1997, SJG filed with the BPU to adjust rates
by replacing the current State Gross Receipts and Franchise Tax
components with a Sales and Use Tax, a Corporation Business Tax
SJI-11
and a Transitional Energy Facilities Assessment. The new rates
became effective January 1, 1998 on an interim basis subject to
refund upon final BPU order which is expected in the second
quarter of 1998 (See Note 1).
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 projections
of 1996-1997 LGAC year results were rolled into the 1997-1998
LGAC year and filed with the BPU.
On September 12, 1997, SJG made its annual LGAC, Temperature
Adjustment Clause (TAC) and Demand Side Management Clause (DSMC)
filings with the BPU for the period November 1997 through
October 1998. In this filing, SJG requested an increase in the
annual level of LGAC recovery of $4.7 million which is inclusive
of the 1996-1997 LGAC year results referred to above. This amount was
updated to $7.5 million in May 1998. It also requested that the
1996-1997 filing be resolved simultaneously with this filing. Both
filings are still pending at the BPU.
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 and an electric
air conditioning repair charge by an order issued orally April
1, 1998 and in writing on April 29, 1998.
Note 6. State, Local and Other Taxes:
The aggregate amounts for state, local and other taxes as
reflected in the Condensed Statements of Consolidated Income for
the three months ended March 31, 1998 and 1997 are shown below
(in thousands):
1998 1997
------- -------
CBT - Net $ 2,421 $25
TEFA 3,213 0
GRAFT (207) 12,183
Other Taxes 920 971
------- -------
Total State, Local and Other Taxes $ 6,347 $13,179
======= =======
SJI-12
During the three months ended March 31, 1998, SJG recorded
an additional $5.0 million for State Sales and Use Tax 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 of SJI and
its subsidiaries for the year 1998 aggregates $70.9 million and,
in connection therewith, certain commitments have been made.
Gas Supply Contracts - SJG, in the normal course of
conducting business, has entered into long-term contracts for
natural gas supplies, firm transportation, and gas storage
service. The earliest expiration of any of the gas supply
contracts is 1999. All of the transportation and storage service
agreements between SJG and its interstate pipeline suppliers are
provided under Federal Energy Regulatory Commission (FERC)
approved tariffs. SJG's cumulative obligation for demand charges
and reservation fees paid to its suppliers for all of these
services is approximately $4.9 million per month which is
recovered on a current basis through the LGAC.
Pending Litigation - 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 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.
Environmental Remediation Costs - 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. SJI and certain of its nonutility
subsidiaries have also recorded costs for environmental
remediation of sites where SJF previously operated a fuel oil
business and Morie maintained equipment, fueling stations and
storage.
Since the early 1980s, the Company has recorded
environmental remediation costs of $97.2 million, of which $40.3
million was expended as of March 31, 1998. The Company, with the
assistance of an outside consulting firm, estimates that total
future expenditures to remediate SJG's sites will range from
$52.4 million to $165.6 million. The lower end of this range was
recorded as a liability and is reflected on the Condensed Consolidated
Balance Sheet under the captions "Current Liabilities" and
SJI-13
"Deferred Credits and Other Non-Current Liabilities". Recorded
environmental remediation costs of SJG do not directly affect
earnings because those costs are deferred and, when expended,
recovered through rates over 7-year amortization periods as
authorized by the BPU. Amounts accrued for future expenditures
were not adjusted for future insurance recoveries, which
management is pursuing. SJG received $4.2 million of insurance
recoveries as of March 31, 1998. SJG first used these proceeds
to offset legal fees incurred in connection with those
recoveries and used the excess 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 expenditures
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 $91.1 million for the remediation of these sites, of
which $38.7 million was expended through March 31, 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 cost. The first regulatory asset is titled
"Environmental Remediation Cost: Expended - Net". These
expenditures represent actual cost incurred to remediate former
gas manufacturing plant sites. These costs meet the
requirements of FASB No. 71, "Accounting for the Effects of
Certain Types of Regulation". The BPU allowed recovery of 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, 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.
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 March 31, 1998, SJG's unamortized remediation
expenditures of $20.9 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 $13.6 million through rates as of March 31, 1998.
With Morie's sale, EMI assumed responsibility for
environmental liabilities which are currently estimated to range
between $2.8 million and $15.5 million. The information
available on these sites is sufficient only to establish a range
SJI-14
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.
As a result of additional testing performed during 1997,
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
had been conducted years ago. Estimates for SJI's site range
between $0.3 million and $1.1 million while SJF's estimated
liability ranges from $1.5 million to $4.2 million for the
remaining three sites. The lower end of these ranges have been
recorded and are reflected in Current Liabilities and Deferred
Credits and Other Non-Current Liabilities as of March 31, 1998.
SJI-15
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 262,315 customers
at March 31, 1998, compared with 255,912 customers at March 31,
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 the Company's non-regulated energy service
companies are not material to the Company's financial statements
taken as a whole.
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 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 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
SJI-16
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 also actively arrange energy
services designed to provide low-cost energy supplies in a
highly competitive marketplace. SJI's companies intend to
develop creative initiatives and propose meaningful regulatory
and tax reforms designed to benefit its customers and
shareholders.
Pilot Program - Choice of Gas Supplier
In April 1997, SJG initiated its BPU-approved pilot
program 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.
Transportation of gas for these customers began on August 1,
1997. 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 are not expected to
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 March 31, 1998,
approximately 27% of the programming code is revised. All
revisions are scheduled to be completed by early 1999, providing
the remainder of 1999 for testing. Total conversion costs are
SJI-17
estimated at $0.4 million of which approximately $0.1 million
was spent as of March 31, 1998. Vendors who provide third
party software and support services are being contacted to
establish Year 2000 compliance. The Company is also in the
process of securing written verification from its key product
and service vendors to ensure their compliance.
Results of Operations - First Quarter Ended March 31, 1998
Compared to First Quarter Ended March 31, 1997
Operating Revenues - Utility
In 1998, revenues decreased $18.1 million principally due
to lower firm sales resulting from weather which was 12.0 percent
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). Also, increased firm transportation
service replaced firm sales. These results were partially offset by
increased off-system sales, the settlement of the base rate case on
January 27, 1997 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 firm sales volumes
and decreased margins on off-system sales, partially offset by the
effect of the addition of 6,400 new customers since the end of the
first quarter of 1997.
Operating Revenues - Nonutility
Nonutility operating revenues increased $9.5 million in
1998 compared with 1997 principally due to increased gas
commodity sales and from initial sales of electricity in the
wholesale market.
Gas Purchased for Resale
Gas purchased for resale decreased $8.7 million in 1998
principally due to 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 1999. All
of the transportation and storage service agreements between SJG
and its interstate pipeline suppliers are provided under tariffs
approved by the Federal Energy Regulatory Commission. SJG's
cumulative obligation for demand charges 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):
SJI-18
1998 vs. 1997
---------------
Other Production Expense ($4)
Transmission 13
Distribution (145)
Customer Accounts and Services 161
Sales (13)
Administration and General 199
Other (73)
---------------
$138
===============
Distribution costs decreased in 1998 principally due to
increased service contract revenue. Customer Accounts and
Service costs increased in 1998 principally due to an increase
in uncollectible accounts expense and increased collection
costs. Administrative and General costs increased in 1998
principally due to increased employee benefits and regulatory
costs.
Other Operating Expenses
A summary of principal changes in other consolidated
operating expenses for 1998 compared with 1997 is as follows (in
thousands):
1998 vs. 1997
---------------
Nonutility Operations $10,038
Maintenance 124
Depreciation 284
Federal Income Taxes - Net (1,356)
State, Local and Other Taxes (6,832)
Changes in nonutility expenses principally reflect the
impact of sales volumes and commodity costs, including, in 1998,
sales of electricity in the wholesale market. The increase in
maintenance expense is principally due to utility production
plant maintenance, which includes the amortization of increased
environmental remediation costs (such increases are offset by
revenue recovery under SJG's RAC). Depreciation is higher
principally due to increased investment in property, plant and
equipment by SJG. Federal Income Tax changes reflect the impact
of changes in pre-tax income. State, Local and Other Taxes
decreased because of the energy tax reform legislation discussed
under Operating Revenues - Utility.
SJI-19
Interest Charges
Interest charges decreased in 1998 principally due to the
effect of lower short-term interest resulting from lower levels
of short-term debt outstanding. Short-term debt levels were
reduced in March 1997 by using proceeds from the sale of $35.0
million of first mortgage bonds by SJG; the application of a
$25.6 million cash equity infusion to SJG from SJI and the
application of the net proceeds from the sale of the Mandatorily
Redeemable Preferred Securities in May 1997. Utility long-term
interest increased in 1998 due to increased levels of long-term
debt outstanding.
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 $204,000 in
1998 principally due to increased remediation costs.
Net Income Applicable to Common Stock
Net Income (in thousands) and earnings per common share
reflect the following changes:
1998 vs. 1997
---------------
Income from Continuing Operations
(Decrease) ($2,692)
Loss from Discontinued Operations - Net (204)
Reduction in Loss on Disposal of
Discontinued Operations 123
---------------
Net Income Decrease ($2,773)
===============
Earnings per Common Share:
Continuing Operations ($0.24)
Discontinued Operations - Net (0.01)
---------------
Earnings per Share Decrease ($0.25)
===============
SJI-20
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 $130.0 million of which $97.9
million was available at March 31, 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):
1998 vs. 1997
---------------
Increases/(Decreases):
Net Income ($2,773)
Depreciation & Amortization 82
Provision for Losses on Accts Receivable 48
Revenues and Fuel Costs Deferred - Net 860
Deferred and Non-Current Federal
Income Taxes - Net 1,554
Environmental Remediation Costs - Net 276
Accounts Receivable 2,805
Inventories (2,755)
Prepayments and Other Current Assets (227)
State and Local Taxes - Net (2,504)
Accounts Payable and Other Accrued
Liabilities 3,597
Other - Net (1,402)
---------------
Decrease in Net Cash Provided by
Operating Activities ($439)
===============
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.
SJI-21
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.
Changes in Inventory reflect the impact of seasonal
requirements, temperatures and price changes.
Changes in State, Local and Other Taxes 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 Taxes 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 Gross
Receipts & Franchise Taxes were replaced with a 6 percent State
Sales and Use Tax, a 9 percent State Corporation Business Tax 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 5 years beginning January 1, 1999.
Approximately 50 percent of the new taxes will be paid in
monthly installments during the first 6 months of the year and
the principal portion of the remaining taxes is to be 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. The new
rates are subject to change following BPU approval which is
expected by July 1, 1998.
Changes in Accounts Payable and Other Current Liabilities
reflect 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 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 $2.8 million and
SJI-22
$15.5 million. EMI has accrued the lower end of the range under
the guidance of FASB No. 5 "Accounting for Contingencies" (See
Note 6).
As a result of additional testing performed during 1997,
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 $1.1 million while the estimated liability for
SJF's discontinued operations ranges from $1.5 million to $4.2
million for the remaining three sites. The lower end of these
ranges have been accrued.
Regulatory Matters
On January 27, 1997, the BPU granted SJG a base rate
increase of $6.0 million based on a 9.62 percent rate of return
on rate base, which included an 11.25 percent return on common
equity. The majority of this increase comes from residential and
small commercial customers. Part of the increase results from
new service fees to customers for costs they cause SJG to incur.
Additionally, SJG is now allowed to retain the first $5.5
million of pre-tax margins generated by interruptible and
off-system sales and transportation and 20 percent of pre-tax
margins above that level. In 1998 and 1999, this $5.5 million
threshold will increase by the annual revenue requirement
associated with specified major construction projects. These
sharing formula improvements are expected to result in
additional rate relief of approximately $0.3 million in 1998 and
$1.9 million in 1999.
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.
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
SJI-23
postretirement benefit costs apply to SJG, which previously
recovered these costs through rates on a pay-as-you-go basis. A
December 1994 BPU order provided for partial recovery of costs
associated with FASB No. 106 and prescribed continued deferral
of unrecovered costs. Also, beginning 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 $7.1 million and the balance of the regulatory
asset amounted to $6.0 million at March 31, 1998. As approved
by the BPU, this amount is being recovered from ratepayers over
a 15-year period beginning January 1, 1998. In addition, the
BPU approved full recovery of the net periodic benefit cost.
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, the Company has recorded
environmental remediation costs of $97.2 million, of which $40.3
million was expended as of March 31, 1998. The Company, with the
assistance of an outside consulting firm, estimates that total
future expenditures to remediate SJG sites will range from $52.4
million to $165.6 million. The lower end of this range was
recorded as a liability and is reflected on the balance sheet
under the captions "Current Liabilities" and "Deferred Credits
and Other Non-Current Liabilities". Recorded environmental
remediation costs of SJG do not directly affect earnings because
those costs are deferred and, when expended, recovered through
rates over 7-year amortization periods as authorized by the BPU.
Amounts accrued for future expenditures were not adjusted for
future insurance recoveries, which management is pursuing. SJG
received $4.2 million of insurance recoveries as of March 31,
1998. SJG used these proceeds first to offset legal fees
incurred in connection with those recoveries and used the excess
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 expenditures 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 $91.1 million for the remediation of these sites, of
which $38.7 million was expended through March 31, 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 1997 are
pending.
SJI-24
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 March 31, 1998, SJG's unamortized
remediation expenditures of $20.9 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 $13.6 million as of March 31, 1998.
On July 31, 1996 and 1997, SJG made its annual filings
with the BPU to recover remediation costs expended during the
period of August 1995 through July 1997 totaling $1.6 million.
Both filings were subsequently updated and are still pending at
the BPU.
On September 9, 1997, SJG filed with the BPU to adjust
rates by replacing the current State Gross Receipts and Franchise
Tax components with a Sales and Use Tax, a Corporation Business
Tax and a Transitional Energy Facilities Assessment (See
"Liquidity"). Interim rates reflecting this change became
effective January 1, 1998. The BPU is expected to approve final
rates by July 1, 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 projections of 1996-1997 LGAC year results
were rolled into the 1997-1998 LGAC year and filed with the BPU.
On September 12, 1997, updated projections of the 1996-1997
LGAC year results were rolled into the 1997-1998 LGAC year and
filed with the BPU. 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.
FASB No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", requires an accrual basis of
accounting for retiree benefit payments during the years of
employment. A December 1994 BPU order provided for partial
recovery of costs associated with FASB No. 106 and prescribed
continued deferral of unrecovered costs. Also, beginning 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. Deferred
SJI-25
postretirement benefit costs will be recovered from ratepayers
over a 15 year period beginning January 1, 1998, as approved by
the BPU.
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.
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 three months
ended March 31, 1998 amounted to $10.0 million. The costs for
1998, 1999 and 2000 are estimated at approximately $70.9
million, $56.2 million and $48.7 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 percent of the
principal amount at any time on or after April 30, 2002.
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
SJI-26
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-27
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Information required by this Item is incorporated by
reference to Part I, Item 1, Note 7, on pages 13, 14 and 15,
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-28
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: May 12, 1998 By: /s/ David A. Kindlick
David A. Kindlick
Vice President, Financial
Operations
Dated: May 12, 1998 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Assistant Secretary & Assistant
Treasurer
SJI-29
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-30
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 459,854
<OTHER-PROPERTY-AND-INVEST> 2,300
<TOTAL-CURRENT-ASSETS> 93,596
<TOTAL-DEFERRED-CHARGES> 105,268
<OTHER-ASSETS> 2,153
<TOTAL-ASSETS> 663,983
<COMMON> 13,468
<CAPITAL-SURPLUS-PAID-IN> 111,111
<RETAINED-EARNINGS> 57,288
<TOTAL-COMMON-STOCKHOLDERS-EQ> 181,867
35,000
2,224
<LONG-TERM-DEBT-NET> 174,212
<SHORT-TERM-NOTES> 32,100
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 9,012
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 229,568
<TOT-CAPITALIZATION-AND-LIAB> 663,983
<GROSS-OPERATING-REVENUE> 122,783
<INCOME-TAX-EXPENSE> 9,425
<OTHER-OPERATING-EXPENSES> 95,743
<TOTAL-OPERATING-EXPENSES> 105,168
<OPERATING-INCOME-LOSS> 17,615
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 17,615
<TOTAL-INTEREST-EXPENSE> 4,486
<NET-INCOME> 12,128
773
<EARNINGS-AVAILABLE-FOR-COMM> 12,128
<COMMON-STOCK-DIVIDENDS> 3,879
<TOTAL-INTEREST-ON-BONDS> 3,839
<CASH-FLOW-OPERATIONS> 27,833
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.13
</TABLE>
