Page 1 of 26
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, 1999 Commission File Number 1-6364
SOUTH JERSEY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-1901645
(State of incorporation) (IRS employer identification no.)
1 South Jersey Plaza, Folsom, NJ 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 7, 1999, there were 10,781,236 shares of the registrant's common stock
outstanding.
Exhibit Index on page 26
- Title Page -
PART I FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 13
SJI-2
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating Revenues:
Utility $134,694 $108,344
Nonutility 12,038 14,503
---------- ----------
Total Operating Revenues 146,732 122,847
---------- ----------
Operating Expenses:
Gas Purchased for Resale 78,221 61,043
Utility Operations 9,530 9,957
Nonutility Operations 12,147 15,100
Maintenance 1,287 1,595
Depreciation 4,620 4,172
Income Taxes 12,701 9,436
Other Taxes 4,496 3,928
---------- ----------
Total Operating Expenses 123,002 105,231
---------- ----------
Operating Income 23,730 17,616
Interest Charges:
Long-Term Debt 4,107 3,852
Short-Term Debt and Other 948 635
---------- ----------
Total Interest Charges 5,055 4,487
---------- ----------
Preferred Dividend Requirements of Subsidiary 772 773
---------- ----------
Income from Continuing Operations 17,903 12,356
Loss from Discontinued Operations - Net (64) (228)
---------- ----------
Net Income Applicable to Common Stock $17,839 $12,128
========== ==========
Average Shares of Common Stock Outstanding 10,780 10,774
========== ==========
Earnings Per Common Share:
Continuing Operations $1.66 $1.15
Discontinued Operations - Net 0.00 (0.02)
---------- ----------
Earnings Per Common Share $1.66 $1.13
========== ==========
Dividends Declared Per Common Share $0.36 $0.36
========== ==========
<FN>
The accompanying footnotes are an integral part of the
financial statements.
</FN>
</TABLE>
SJI-3
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
(Unaudited)
March 31, December 31,
------------------------ ------------
1999 1998 1998
----------- ----------- ------------
<S> <C> <C> <C>
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $693,501 $630,337 $681,848
Accumulated Depreciation (183,041) (170,483) (179,605)
Nonutility Property and Equipment, at cost 2,986 3,337 2,981
Accumulated Depreciation (974) (1,037) (965)
----------- ----------- ------------
Property, Plant and Equipment - Net 512,472 462,154 504,259
----------- ----------- ------------
Investments:
Available-for-Sale Securities 931 42 931
Investment in Affiliate 1,500 811 1,440
----------- ----------- ------------
Total Investments 2,431 853 2,371
----------- ----------- ------------
Current Assets:
Cash and Cash Equivalents 5,685 14,356 5,992
Notes Receivable - Affiliate 4,050 800 4,350
Accounts Receivable 59,934 51,431 42,600
Unbilled Revenues 17,496 10,445 19,489
Provision for Uncollectibles (1,183) (1,253) (1,283)
Natural Gas in Storage, average cost 11,864 10,451 27,619
Materials and Supplies, average cost 3,821 4,410 4,051
Prepaid Taxes - - 13,850
Prepayments and Other Current Assets 3,094 2,915 3,418
----------- ----------- ------------
Total Current Assets 104,761 93,555 120,086
----------- ----------- ------------
Accounts Receivable - Merchandise 1,434 2,153 1,554
----------- ----------- ------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 18,824 20,939 25,191
Liability for Future Expenditures 52,939 52,400 52,900
Gross Receipts & Franchise Taxes 3,474 3,917 3,585
Income Taxes - Flowthrough Depreciation 12,264 13,754 13,021
Deferred Fuel Costs - Net - - 7,857
Deferred Postretirement Benefit Costs 5,365 5,988 5,522
Other 8,658 8,270 11,749
----------- ----------- ------------
Total Regulatory and Other Non-Current
Assets 101,524 105,268 119,825
----------- ----------- ------------
Total Assets $722,622 $663,983 $748,095
=========== =========== ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJI-4
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
(Unaudited)
March 31, December 31,
------------------------ ------------
1999 1998 1998
----------- ----------- ------------
<S> <C> <C> <C>
Capitalization and Liabilities
Common Equity:
Common Stock $13,477 $13,468 $13,474
Premium on Common Stock 111,321 111,111 111,253
Retained Earnings 58,465 57,288 44,507
----------- ----------- ------------
Total Common Equity 183,263 181,867 169,234
----------- ----------- ------------
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 46,404 shares
Outstanding Shares:
Series A, 4.70% -- 2,100, 3,000 and 2,100 shares 210 300 210
Series B, 8.00% -- 19,242 shares 1,924 1,924 1,924
Company-Guaranteed Manditorily 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 37,134
----------- ----------- ------------
Long-Term Debt 192,523 174,212 194,710
----------- ----------- ------------
Total Capitalization 412,920 393,303 401,078
----------- ----------- ------------
Current Liabilities:
Notes Payable 59,000 32,100 97,000
Current Maturities of Long-Term Debt 8,876 9,012 8,876
Accounts Payable 40,080 40,023 51,960
Customer Deposits 5,506 5,988 5,576
Environmental Remediation Costs 9,996 15,749 9,668
Taxes Accrued 14,135 12,947 1,531
Interest Accrued and Other Current Liabilities 9,371 8,709 14,010
----------- ----------- ------------
Total Current Liabilities 146,964 124,528 188,621
----------- ----------- ------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 84,799 80,372 84,827
Investment Tax Credits 5,141 5,533 5,239
Deferred Revenues - Net 4,650 981 -
Pension and Other Postretirement Benefits 14,751 11,883 14,227
Environmental Remediation Costs 47,566 41,149 47,925
Other 5,831 6,234 6,178
----------- ----------- ------------
Total Deferred Credits
and Other Non-Current Liabilities 162,738 146,152 158,396
----------- ----------- ------------
Commitments and Contingencies
Total Capitalization and Liabilities $722,622 $663,983 $748,095
=========== =========== ============
<FN>
The accompanying footnotes are an integral part of the 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,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $17,839 $12,128
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 5,019 4,649
Provision for Losses on Accounts Receivable 63 243
Revenues and Fuel Costs Deferred - Net 12,507 4,655
Deferred and Non-Current Income Taxes and
Credits - Net 97 2,302
Environmental Remediation Costs - Net 6,297 (22)
Changes in:
Accounts Receivable (15,514) (9,186)
Inventories 15,985 13,525
Prepayments and Other Current Assets 313 169
Prepaid and Accrued Taxes - Net 26,454 12,159
Accounts Payable and Other Accrued Liabilities (16,589) (12,300)
Other - Net 4,043 (395)
------------ ------------
Net Cash Provided by Operating Activities 56,514 27,927
------------ ------------
Cash Flows from Investing Activities:
Investment in Affiliate (60) (37)
Loan to Affiliate 300 3,761
Capital Expenditures, Cost of Removal and Salvage (13,048) (9,966)
------------ ------------
Net Cash Used in Investing Activities (12,808) (6,242)
------------ ------------
Cash Flows from Financing Activities:
Net Repayments of Lines of Credit (38,000) (13,800)
Principal Repayments of Long-Term Debt (2,187) (2,188)
Dividends on Common Stock (3,881) (3,879)
Proceeds from Sale of Common Stock 55 96
------------ ------------
Net Cash Used in Financing Activities (44,013) (19,771)
------------ ------------
Net (Decrease) Increase in Cash and Cash Equivalents (307) 1,914
Cash and Cash Equivalents at Beginning of Period 5,992 12,442
------------ ------------
Cash and Cash Equivalents at End of Period $5,685 $14,356
============ ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJI-6
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Significant Accounting Practices:
Consolidation - The consolidated financial statements include the accounts
of South Jersey Industries, Inc. (SJI) and its subsidiaries. All significant
intercompany accounts and transactions were eliminated. SJI reclassified some
previously reported amounts to conform with current year classifications. 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 - Our financial statements are prepared to
conform with generally accepted accounting principles. Management makes
estimates and assumptions that affect the amounts reported in the financial
statements and related disclosures. Therefore, actual results could differ
from those estimates.
New Accounting Pronouncement - In June 1998, the FASB issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
effective for our fiscal year ending December 31, 2000. This statement
establishes accounting and reporting standards for derivative instruments,
including those embedded in other contracts, and for hedging activities.
It requires recognizing derivatives as assets or liabilities at fair value on
the balance sheet. We are currently evaluating the effects of FASB No. 133 on
SJI's financial condition and results of operations, which will vary based on
our use of derivative instruments at the time of adoption.
Note 2. Discontinued Operations and Affiliations:
Discontinued Operations - Summarized operating results of the discontinued
operations for the three months ended March 31, 1999 and 1998 were (in
thousands):
1999 1998
-------- --------
Loss before Income Taxes:
Sand Mining $ (83) $ (293)
Construction (12) (71)
Fuel Oil (11) (13)
Income Tax Credits 42 149
------- -------
Loss from Discontinued Operations - Net $ (64) $ (228)
======= =======
Earnings per Common Share
from Discontinued Operations $(0.00) $(0.02)
======= =======
SJI-7
Affiliations - In April 1999, South Jersey Energy Company, Inc. (SJE, a
wholly-owned subsidiary of SJI) and Energy East Solutions, Inc. (a subsidiary
of Energy East Corporation) entered into an agreement to form a jointly-owned
limited liability company (LLC) to market retail electricity and energy
management services. The LLC is expected to create significant efficiencies
and expand service capabilities for both companies in the advent of electric
utility restructuring legislation.
Also in April 1999, SJE was awarded its first environmental air quality
monitoring contract along with its partner in the contract, GZA
GeoEnvironmental, Inc. (GZA). This project introduces a jointly-developed air
monitoring system which was designed to assist companies involved in
environmental clean up. The alliance between SJE and GZA currently exists on a
contract-by-contract basis.
Note 3. Common Stock:
SJI has 20,000,000 shares of authorized Common Stock. The following
shares were issued and outstanding:
1999 1998
---------- ----------
Beginning Balance, January 1 10,778,990 10,771,413
New Issues During Period:
Employees' Stock Ownership Plan 2,215 1,865
Stock Option & Stock Appreciation
Rights Plan 31 1,472
---------- ----------
Ending Balance, March 31 10,781,236 10,774,750
========== ==========
The par value ($1.25 per share) of stock issued in 1999 and 1998 was
credited to Common Stock. Net excess over par value of $68,552 and $114,457,
respectively, was credited to Premium on Common Stock for the three months
ended March 31, 1999 and 1998, respectively.
Stock Option and Stock Appreciation Rights Plan - Under this plan, not
more than 306,000 shares in the aggregate may be issued to SJI's officers and
other key employees. No options or stock appreciation rights may be granted
under the Plan after January 23, 2007. At March 31, 1999 and 1998, SJI had
4,500 and 6,530 options outstanding, respectively, all exercisable at prices
from $17.89 to $24.69 per share. During the three months ended March 31, 1999
and 1998, 500 and 6,530 options were surrendered for the issuance of 31 and
1,472 shares, respectively. No options were granted in 1999 and 1998. No
stock appreciation rights were issued under the Plan. Stock options
outstanding at March 31, 1999 and 1998, had no effect on EPS.
SJI-8
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 SJI. As of March 31, 1999, SJI reserved 63,093 and
29,281 shares of authorized, but unissued, common stock for future issuance to
the DRP and ESOP, respectively.
Note 4. Income Taxes:
The significant components of federal and state income taxes reflected in
the condensed statements of consolidated income for the three months ended
March 31, 1999 and 1998 are as follows (in thousands):
1999 1998
---------- ----------
Current:
Federal $ 9,295 $ 4,715
State 3,309 2,181
---------- ----------
Total Current 12,604 6,896
Deferred:
Federal 326 2,401
State (131) 238
---------- ----------
Total Deferred 195 2,639
Investment Tax Credit (98) (99)
---------- ----------
Income Taxes as reported on the Condensed
Statements of Consolidated Income 12,701 9,436
Tax Associated with Discontinued
Operations (42) (149)
---------- ----------
Net Income Taxes $12,659 $ 9,287
========== ==========
Note 5. Recent Regulatory Actions:
SJG began a pilot program in April 1997, giving residential customers a
choice of gas supplier. During the initial enrollment period in 1997, nearly
13,000 residential customers applied for and received this service. In June
1998, the BPU expanded the number of potential participants to 25,000. There
were 20,906 participants as of March 31, 1999. Participants' bills are reduced
for cost of gas charges and applicable taxes. The resulting decrease in
SJI-9
revenues is offset by a corresponding decrease in gas costs and taxes under
SJG's BPU-approved fuel clause. While the program reduces utility revenues, it
does not affect SJI's net income, financial condition or margins.
In September 1998, SJG filed its annual LGAC, TAC and DSMC with the BPU.
The LGAC and DSMC cover the period November 1 through October 31 of each year.
The TAC period runs from October 1 through May 31. This current LGAC filing,
which includes the results of the previous two LGAC filings, was updated in
January 1999 and requests an increase in rates of $7.1 million. These filings
contain no material TAC or DSMC recovery issues at this time. All filings are
still pending at the BPU. We believe the ultimate settlement of these filings
will not adversely affect SJG's financial position, results of operations or
liquidity.
In April 1999, the BPU approved new appliance service rates which SJG
implemented in that same month. The new rates are competitive with those of
other service providers in New Jersey and are designed to increase earnings and
cash flows.
Note 6. Segments of Business:
Information about SJI's operations for the three months ended March 31,
1999 and 1998 in different industry segments is presented below (in thousands):
1999 1998
---------- ----------
Operating Revenues:
Gas Utility Operations $135,081 $108,484
Other Industries 12,360 14,736
---------- ----------
Subtotal 147,441 123,220
Intersegment Sales (709) (373)
---------- ----------
Total Operating Revenues $146,732 $122,847
========== ==========
The increase in operating revenues from Other Industries is due primarily
to SJE's wholesale electricity sales which began and ended in 1998 (See
Note 2).
Operating Income:
Gas Utility Operations $ 36,528 $ 27,710
Other Industries 430 (167)
---------- ----------
Subtotal 36,958 27,543
Income Taxes (12,701) (9,436)
General Corporate Expense (527) (491)
---------- ----------
Total Operating Income $ 23,730 $ 17,616
========== ==========
SJI-10
Depreciation and Amortization:
Gas Utility Operations $ 5,001 $ 4,639
Other Industries 10 5
Discontinued Operations 8 5
---------- ----------
Total $ 5,019 $ 4,649
========== ==========
Property Additions:
Gas Utility Operations $ 12,812 $ 9,737
Other Industries 4 5
Discontinued Operations - -
---------- ----------
Total $ 12,816 $ 9,742
========== ==========
Identifiable Assets:
Gas Utility Operations $702,590 $642,907
Other Industries 15,163 11,027
Discontinued Operations 2,529 1,882
---------- ----------
Subtotal 720,282 655,816
Corporate Assets 23,867 20,142
Intersegment Assets (21,527) (11,975)
---------- ----------
Total Assets $722,622 $663,983
========== ==========
SJI's interest expense relates primarily to SJG's borrowing and financing
activities. Interest income is essentially derived from borrowings between the
subsidiaries and is eliminated during consolidation. These amounts are
included in our condensed statements of consolidated income and not shown
above.
Gas Utility Operations consist primarily of natural gas distribution to
residential, commercial and industrial customers. Other Industries include the
natural gas and electric acquisition and transportation service companies (See
Note 2).
Total Operating Revenues by industry segment include both sales to
unaffiliated customers, as reported in SJI's condensed statements of
consolidated income, and intercompany sales, which are accounted for at the
fair market value of the goods or services rendered.
Operating Income is total revenues less operating expenses, income taxes
and general corporate expenses, as shown on the condensed statements of
consolidated income.
SJI-11
Identifiable Assets are those used in each segment of SJI's operations.
Corporate assets are principally cash and cash equivalents, land, buildings and
equipment held for corporate use.
Note 7. Retained Earnings:
Restrictions exist under various loan agreements regarding the amount of
cash dividends or other distributions that we may pay on SJG's common stock.
SJI's total equity in its subsidiaries' retained earnings, which is free of
these restrictions, was approximately $56.6 million as of March 31, 1999.
Note 8. Commitments and Contingencies:
Construction Commitments - SJI's estimated cost of construction and
environmental remediation programs for 1999 totals $53.2 million. Commitments
were made regarding these programs.
Pending Litigation - SJI is subject to claims arising in the ordinary
course of business and other legal proceedings. We set up reserves when these
claims become apparent. We also maintain insurance and record probable
insurance recoveries relating to outstanding claims.
Environmental Remediation Costs - SJI incurred and recorded costs for
environmental clean up of sites where SJG or its predecessors operated gas
manufacturing plants. SJG stopped manufacturing gas over 35 years ago. SJI
and some of its nonutility subsidiaries also recorded costs for environmental
clean up of sites where South Jersey Fuel Company (SJF) previously operated a
fuel oil business and Morie maintained equipment, fueling stations and storage.
Since the early 1980s, SJI recorded environmental remediation costs of
$107.7 million, of which $50.2 million was spent as of March 31, 1999. With
the assistance of an outside consulting firm, we estimate that future costs to
clean up SJG's sites will range from $52.9 million to $160.3 million. We
recorded the lower end of this range as a liability. It is reflected on the
1999 condensed consolidated balance sheet under the captions Current
Liabilities and Deferred Credits and Other Non-Current Liabilities. SJG did
not adjust the accrued liability for future insurance recoveries, which
management is pursuing. We use insurance proceeds to offset related legal fees
and to reduce the balance of deferred environmental remediation costs.
Recorded amounts include estimated costs based on projected investigation and
remediation work plans using existing technologies. Actual costs could differ
from the estimates due to the long-term nature of the projects, changing
technology, government regulations and site specific requirements.
The major portion of recorded environmental costs relate to the cleanup of
SJG's former gas manufacturing sites. SJG recorded $101.0 million for the
remediation of these sites and spent $48.1 million through March 31, 1999.
SJI-12
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
Statement No. 71, "Accounting for the Effects of Certain Types of Regulation."
The BPU allowed SJG to recover expenditures through July 1996 and petitions to
recover 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 Statement No. 5, "Accounting for
Contingencies." This amount, which relates to former manufactured gas plant
sites, was recorded as a deferred debit with the corresponding amount
reflected on the condensed consolidated balance sheet under the captions,
Current Liabilities and Deferred Credits and Other Non-Current Liabilities.
The deferred debit is a regulatory asset under FASB No. 71. The BPU's intent,
evidenced by current practice, is to allow SJG to recover the deferred costs
after they are spent.
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, 1999, SJG's unamortized
remediation costs of $18.8 million are reflected on the condensed consolidated
balance sheet under the caption Regulatory and Other Non-Current Assets. Since
BPU approval of the RAC in 1992, SJG recovered $18.0 million through rates as
of March 31, 1999.
With Morie's sale, EMI assumed responsibility for environmental
liabilities which we estimate to range between $3.1 million and $9.7 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.
Changes in the accrual are included in the condensed statements of consolidated
income under the caption, Loss from Discontinued Operations - Net.
SJI and SJF estimated their potential exposure for the future remediation
of four sites where fuel oil operations existed years ago. Estimates for SJI's
site range between $0.3 million and $0.9 million, while SJF's estimated
liability ranges from $1.3 million to $4.8 million for its three sites. The
lower ends of these ranges were recorded and are reflected on the condensed
consolidated balance sheet under Current Liabilities and Deferred Credits and
Other Non-Current Liabilities as of March 31, 1999.
SJI-13
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Overview
South Jersey Industries, Inc. (SJI) has two operating subsidiaries, South
Jersey Gas Company (SJG) and South Jersey Energy Company (SJE). SJG is a
regulated natural gas distribution company serving 269,108 customers at March
31, 1999, compared with 262,315 customers at March 31, 1998. SJG also makes
off-system sales of natural gas on a wholesale basis to various customers on
the interstate pipeline system and transports natural gas purchased directly
from producers or suppliers for our own sales and for some of our customers.
SJE provides services for the acquisition and transportation of natural gas for
retail end users and markets total energy management services. In 1998, SJE
bought and sold electricity in the wholesale market. However, as a result of
an alliance with Energy East Solutions, Inc. (EES, a subsidiary of Energy East
Corporation), SJE ceased buying and selling wholesale electricity. SJE has one
operating subsidiary, SJ EnerTrade (EnerTrade). EnerTrade, formed in October
1997, provides services for the sale of natural gas to energy marketers,
electric and gas utilities, and other wholesale users in the mid-Atlantic and
southern regions of the country. The results of non-regulated energy service
companies, SJE and EnerTrade, do not contribute materially to SJI's financial
statements at this time.
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
involve a number of risks and uncertainties. We caution that forward-looking
statements are not guarantees and actual results could differ materially from
those expressed or implied in the forward-looking statements.
A number of factors could cause our actual results to differ materially
from those anticipated, including, but not limited to the following: general
economic conditions on an international, federal, state and local level;
weather conditions in the company's marketing areas; regulatory and court
decisions; competition in the company's regulated and deregulated activities;
the availability and cost of capital; the company's ability to maintain
existing and/or establish successful new alliances and joint ventures to take
advantage of marketing opportunities; costs and effects of unanticipated legal
proceedings; Year 2000 related costs or operating problems and environmental
liabilities; and changes in business strategies.
Pilot Program - Choice of Gas Supplier
In April 1997, SJG began its New Jersey Board of Public Utilities (BPU)
approved pilot program giving residential customers a choice of gas supplier.
During the initial enrollment period in 1997, approximately 13,000 residential
SJI-14
customers applied for and received this service. In June 1998, the BPU
expanded the number of potential participants to 25,000. There were 20,906
participants as of March 31, 1999. Participants' bills are reduced for cost of
gas charges and applicable taxes. The resulting decrease in SJG's revenues is
offset by a corresponding decrease in gas costs and taxes under a BPU-approved
fuel clause. While the program reduces utility revenues, it does not affect
SJG's net income, financial condition or margins.
Energy Adjustment Clauses
In 1998, the BPU approved a revised Temperature Adjustment Clause (TAC)
for SJG, effective October 1998. TAC adjustments during the first quarter of
1999 increased revenue and net income by $2.16 million and $1.28 million,
respectively. TAC adjustments for the same period in 1998 were immaterial.
While the revenue and income impacts of TAC adjustments are recorded as
incurred, cash inflows or outflows directly attributable to TAC adjustments do
not begin until the next TAC year. Each TAC year begins October 1.
Status of Year 2000 Conversion
State of Readiness
We prepared a Year 2000 Impact and Assessment Study and developed a
detailed plan to enable SJI to be ready for year 2000. Ready means that
mission critical software, hardware, devices, systems, facilities and business
relationships are prepared to operate satisfactorily through the end of 1999
and beyond.
SJI revised approximately 91% of effected programming code as of March 31,
1999. We have scheduled all revisions to be complete by July 1999. We believe
that 90% of all, and 100% of our mission critical, embedded technology is Y2K
ready. We have been testing all revisions on an as completed basis and will
continue to test through the end of this year.
The most significant areas that are not as of yet Y2K ready are SJG's
SCADA software, which monitors natural gas flow throughout our distribution
system, and our cash processing equipment. SJG has contracted with a vendor to
replace the SCADA software with a version that is Y2K compliant, with
installation and testing to be completed by the end of the third quarter.
SJG's gas distribution system is designed to provide uninterrupted gas flow and
has long-standing, repeatedly tested back-up procedures in place to ensure gas
flow in the event of hardware, software, electrical or SCADA failures.
Regarding cash processing, we are currently considering options that include
outsourcing the function, purchasing Y2K compliant equipment and modifying the
existing equipment. Back-up cash processing procedures are in place.
We surveyed all of our vendors regarding their Y2K readiness. All vendors
providing third party software have indicated their products used by us are Y2K
ready. Of product and service vendors surveyed, 72% of all and 96% of mission
critical vendors have indicated Y2K readiness. We are actively pursuing
assurances that the remainder of our vendors will be Y2K ready.
SJI-15
Year 2000 Costs
We project Y2K costs to total $0.58 million, with $0.41 having been spent
through March 31, 1999.
Year 2000 Risks and Contingency Plans
The worst case scenario that concerns us the most is a temporary
disruption of service to our gas customers. As a contingency, our gas
distribution system can be operated manually. We have received assurances from
our two direct connect gas supply pipelines that they are Y2K ready. We are
seeking assurances from the companies that supply gas to our system that they
will be Y2K ready. We are preparing contingency plans for use in the event
that they are not ready. Contingency plans have been or are being prepared to
address Y2K related problems. All contingency plans for high priority items
such as service continuation, safety and revenues are scheduled to be completed
by July 1999.
Y2K Summary
If some key systems and devices are not ready for the Year 2000, in
particular at pipeline, telecommunication, electricity or banking service
vendors, there will likely be adverse effects on the company's business,
results of operations and financial condition.
While unexpected Y2K problems can occur, we do not anticipate any material
difficulty in achieving Y2K readiness based upon the nature of SJI's operating
and information systems and the state of planning and remediation. Any
problems that arise should be immaterial to our financial position or operating
results.
Results of Operations - First Quarter Ended March 31, 1999
Compared to First Quarter Ended March 31, 1998
Operating Revenues - Utility
Revenues increased $26.4 million in the first three months of 1999
compared with the prior year period. The primary reasons for the increase were
increased off-system sales, the effects of the revised TAC and 6,793 additional
customers at SJG. These factors more than offset revenue reductions due to the
continued migration of firm gas sales to firm transportation. Note, however,
that SJG's tariffs are structured so that profits are derived from the
transportation of gas, not the sale of the commodity. Consequently, the switch
to firm transportation reduced revenues but did not impact profitability.
Weather in the first three months of 1999 was 15.5% colder than the prior
year period, but 3.9% warmer than the 20-year average. Previously, changes in
temperatures were typically the single most important factor in explaining
revenue fluctuations for comparative periods in SJI's utility operations.
Revisions to SJG's TAC that became effective in October 1998 will significantly
reduce the weather related volatility in SJI's utility revenues. However,
SJI-16
comparisons for the first two quarters of 1999 to the prior year periods will
continue to show volatility as 1998 revenues were heavily influenced by
weather. Revenues for 1999 will be closely tied to the 20-year normal
temperatures and not actual weather conditions.
The following is a comparison of operating revenue and throughput for the
three month period ended March 31, 1999 vs. the three month period ended March
31, 1998.
1999 1998
---------- ----------
Utility Operating Revenues (Thousands):
Firm
Residential $72,536 $63,852
Commercial 16,185 15,917
Industrial 1,811 1,815
Cogeneration & Electric Generation 667 961
Firm Transportation 10,831 7,582
---------- ----------
Total Firm 102,030 90,127
Interruptible 340 1,037
Interruptible Transportation 533 895
Off-System 30,486 13,174
Capacity Release & Storage 874 2,262
Other 819 990
Intercompany Sales (388) (141)
---------- ----------
Total Utility Operating Revenues $134,694 $108,344
========== ==========
Throughput (Mmcf):
Firm
Residential 8,883 7,922
Commercial 2,216 2,235
Industrial 122 172
Cogeneration & Electric Generation 71 91
Firm Transportation 6,789 6,397
---------- ----------
Total Firm Throughput 18,081 16,817
Interruptible 107 283
Interruptible Transportation 1,103 2,118
Off-System 14,314 5,306
Capacity Release & Storage 3,321 6,485
---------- ----------
Total Throughput 36,926 31,009
========== ==========
SJI-17
Operating Revenues - Nonutility
Nonutility operating revenues decreased by $2.5 million primarily due to
the discontinuation of SJE's wholesale electric trading activities. The loss
of these revenues was partially offset by increased levels of retail gas sales
to residential customers and casinos in Atlantic City.
Gas Purchased for Resale
Gas purchased for resale increased $17.2 million in 1999 compared with
1998 due principally to increased sales volumes, particularly to off-system
customers. Gas supply sources include contract and open-market purchases. SJG
secures and maintains its own gas supplies to serve its customers.
Utility Operations
A summary of net changes in Utility Operations (in thousands):
Three Months Ended
March 31,
1999 vs. 1998
------------------
Other Production Expense $13
Transmission 26
Distribution 94
Customer Accounts and Services (225)
Sales (27)
Administration and General (312)
Other 4
---------
$(427)
=========
Customer Accounts and Services costs decreased in 1999 principally due to
a decrease in reserves for uncollectible accounts and reduced meter reading
expenses. Meter reading expenses declined due to a change to bimonthly meter
reading. Administrative and General costs decreased from 1998 levels
principally due to an emphasis on cost cutting in general.
SJI-18
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses
(in thousands):
Three Months Ended
March 31,
1999 vs. 1998
------------------
Nonutility Operations $(2,953)
Maintenance (308)
Depreciation 448
Income Taxes 3,265
Other Taxes 568
Changes in nonutility expenses principally reflect the discontinuation of
SJE's wholesale electricity trading activities, partially offset by increased
levels of retail gas sales to residential customers and casinos in Atlantic
City. The decrease in maintenance expense is principally due to reduced
overtime charges and fewer occurrences of distribution system leaks.
Depreciation is higher due to increased investment in property, plant and
equipment by SJG. Income Tax changes reflect the impact of changes in pre-tax
income. Other taxes increased because of higher sales volumes due to lower
temperatures in the first quarter of 1999 and adjustments recorded in 1998
related to the Energy Tax Reform Act implemented January 1998.
Interest Charges
Interest charges increased in 1999 principally due to the effect of
increased short and long-term debt outstanding. The debt was incurred
primarily to support the expansion and upgrade of SJG's gas transmission and
distribution system.
Discontinued Operations
Loss from discontinued operations decreased $164,000 in 1999 principally
due to decreased environmental remediation costs.
SJI-19
Net Income Applicable to Common Stock
Net income (in thousands) and earnings per common share reflect the
following changes:
Three Months Ended
March 31,
1999 vs. 1998
------------------
Income from Continuing Operations $5,547
Loss from Discontinued Operations - Net 164
---------
Net Income Increase $5,711
=========
Earnings per Common Share:
Continuing Operations $0.51
Discontinued Operations - Net 0.02
---------
Earnings per Share Increase $0.53
=========
The details affecting the changes in net income and earnings per share are
discussed under the appropriate captions above.
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 requirements are generally met by cash from operations and short-term
lines of credit. We maintain short-term lines of credit with a number of
banks, totaling $135.0 million, of which $76.0 million was available at March
31, 1999. The credit lines are uncommitted and unsecured with interest rates
at or below the prime rate.
SJI-20
The changes in cash flows from operating activities (in thousands):
Three Months Ended
March 31,
1999 vs. 1998
------------------
Increases/(Decreases):
Net Income $5,711
Depreciation and Amortization 370
Provision for Losses on Accounts Receivable (180)
Revenues and Fuel Costs Deferred - Net 7,852
Deferred and Non-Current Income Taxes and
Credits - Net (2,205)
Environmental Remediation Costs-Net 6,319
Accounts Receivable (6,328)
Inventories 2,460
Prepayments and Other Current Assets 144
Prepaid and Accrued Taxes - Net 14,295
Accounts Payable and Other Accrued Liabilities (4,289)
Other - Net 4,438
---------
Net Cash Provided by Operating Activities $28,587
=========
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 and the undercollection of fuel costs resulting from
increases in natural gas costs.
Changes in Deferred and Non-Current Income Taxes and Credits - Net
represent the differences between taxes accrued and amounts paid. Generally,
deferred income taxes related to deferred fuel costs will be paid in the next
year.
Changes in Environmental Remediation Costs - Net represent the differences
between amounts expended for environmental remediation compared with amounts
collected under the RAC and insurance recoveries.
Changes in Accounts Receivable are primarily due to higher off-system
sales and the impact of colder weather on SJG's sales volumes. These cash uses
were partially offset by the discontinuation of wholesale electricity sales by
SJE. Weather and commodity prices also impact this line item. Changes impact
cash flows when receivables are collected in subsequent periods.
SJI-21
Changes in Inventories reflect the impact of seasonal requirements,
temperatures and price changes.
Changes in Prepaid and Accrued Taxes - Net reflect the impact of
differences between taxes paid and taxes accrued. Significant timing
differences exist in cash flows during the year. Approximately 50% of SJG's
taxes are paid in installments during the first half of the year and the
remaining 50% are paid on May 15 of each year. SJG uses short-term borrowings
to pay taxes, resulting in a temporary increase in the short-term debt level.
The carrying costs of timing differences are recognized in base utility rates.
Utilization of prepaid tax balances resulted in minimal cash outflows in the
first quarter of 1999.
Changes in Accounts Payable and Other Current Liabilities reflect the
impact of timing differences between the accrual and payment of costs.
Changes in Other - Net reflect numerous changes in noncurrent assets and
liabilities, including a settlement of an eminent domain proceeding and accrued
deferred income taxes.
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.
Regulatory Matters
On February 9, 1999, the "Electric Discount and Energy Computation Act"
P.L. 1999, c. 23 (the Act) was signed into law in New Jersey. This bill
establishes the framework and necessary time schedules for the deregulation and
restructuring of the electric and natural gas utilities in the state. As to
natural gas utilities, the Act completes the "unbundling" rate process,
establishes a time frame for the institution of competitive services for
customer accounting functions and also sets forth a time frame for a
determination as to whether basic gas supply services should become
competitive.
The Act also contains numerous provisions which require the BPU to
promulgate and adopt a variety of standards related to the implementation of
the Act. These required standards address fair competition, affiliate
relations, accounting, competitive services, supplier licensing, consumer
protection and aggregation. On March 31, 1999, the BPU issued Draft Interim
Standards in response to the Act. In issuing its Order, the BPU stated that
the Draft Interim Standards ". . . do not necessarily represent the final views
of the Board on these matters. . ." As such, the BPU has undertaken an
extensive comment and meeting process to address the concerns of all impacted
parties. The company has been actively participating in this process, and
management believes the final standards will be reasonable for all parties.
Other matters are incorporated by reference to Note 5 to the condensed
consolidated financial statements included as part of this report.
SJI-22
Capital Resources
SJI has a continuing need for cash resources and capital, primarily to
invest in new and replacement facilities and equipment and for environmental
remediation costs. Net construction and remediation expenditures for the first
quarter of 1999 amounted to $6.8 million. The costs for 1999, 2000 and 2001
are estimated at approximately $53.2 million, $57.8 million and $56.7 million,
respectively. We will fund these expenditures from several sources, which may
include cash generated by operations, temporary use of short-term debt, sale
of medium-term notes, capital leases, RAC recoveries, insurance recoveries and
the issuance of equity.
Other Events
In April 1999, SJE and EES completed the formation of a jointly owned
limited liability company to market retail electricity and energy management
services. The LLC is intended to create significant efficiencies and expand
service capabilities for both companies upon the completion of proceedings to
implement the electric utility restructuring legislation.
SJE and GZA GeoEnvironmental, Inc. (GZA) have begun marketing a jointly-
developed air monitoring system which is designed to assist companies involved
in environmental clean-up. The partners were awarded their first contract to
install the system in April 1999. The relationship between SJE and GZA
currently exists on a contract-by-contract basis.
Summary
SJI 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-23
PART II OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part I,
Item 1, Note 8, on pages 12 and 13, 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-24
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 14, 1999 By: /s/ David A. Kindlick
David A. Kindlick
Vice President, Financial Operations
Dated: May 14, 1999 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Treasurer
SJI-25
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-26
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<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 510,460
<OTHER-PROPERTY-AND-INVEST> 4,443
<TOTAL-CURRENT-ASSETS> 104,761
<TOTAL-DEFERRED-CHARGES> 101,524
<OTHER-ASSETS> 1,434
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<COMMON> 13,477
<CAPITAL-SURPLUS-PAID-IN> 111,321
<RETAINED-EARNINGS> 58,465
<TOTAL-COMMON-STOCKHOLDERS-EQ> 183,263
35,000
2,134
<LONG-TERM-DEBT-NET> 192,523
<SHORT-TERM-NOTES> 59,000
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 241,826
<TOT-CAPITALIZATION-AND-LIAB> 722,622
<GROSS-OPERATING-REVENUE> 146,732
<INCOME-TAX-EXPENSE> 12,701
<OTHER-OPERATING-EXPENSES> 110,301
<TOTAL-OPERATING-EXPENSES> 123,002
<OPERATING-INCOME-LOSS> 23,730
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 23,730
<TOTAL-INTEREST-EXPENSE> 5,055
<NET-INCOME> 17,839
772
<EARNINGS-AVAILABLE-FOR-COMM> 17,839
<COMMON-STOCK-DIVIDENDS> 3,881
<TOTAL-INTEREST-ON-BONDS> 4,107
<CASH-FLOW-OPERATIONS> 56,514
<EPS-PRIMARY> 1.66
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