Page 1 of 28
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 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 November 5, 1999, there were 11,150,336 shares of the registrant's common
stock outstanding.
Exhibit Index on page 28
- Title Page -
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 14
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
September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating Revenues:
Utility $49,287 $43,432
Nonutility 9,878 88,067
---------- ----------
Total Operating Revenues 59,165 131,499
---------- ----------
Operating Expenses:
Gas Purchased for Resale 32,421 26,220
Utility Operations 9,861 10,625
Nonutility Operations 10,028 86,469
Maintenance 1,289 1,120
Depreciation 4,781 4,324
Income Taxes (2,544) (1,697)
Other Taxes 1,531 1,603
---------- ----------
Total Operating Expenses 57,367 128,664
---------- ----------
Operating Income 1,798 2,835
Interest Charges:
Long-Term Debt 3,802 3,646
Short-Term Debt and Other 1,381 1,392
---------- ----------
Total Interest Charges 5,183 5,038
---------- ----------
Preferred Dividend Requirements of Subsidiary 769 771
---------- ----------
Loss from Continuing Operations (4,154) (2,974)
Loss from Discontinued Operations - Net (37) (91)
---------- ----------
Net Loss Applicable to Common Stock ($4,191) ($3,065)
========== ==========
Average Shares of Common Stock Outstanding 10,975 10,776
========== ==========
Earnings Per Common Share:
Continuing Operations ($0.38) ($0.27)
Discontinued Operations - Net 0.00 (0.01)
---------- ----------
Earnings Per Common Share ($0.38) ($0.28)
========== ==========
Dividends Declared Per Common Share $0.36 $0.36
========== ==========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJI-3
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating Revenues:
Utility $249,878 $203,865
Nonutility 32,716 122,145
---------- ----------
Total Operating Revenues 282,594 326,010
---------- ----------
Operating Expenses:
Gas Purchased for Resale 153,146 117,528
Utility Operations 29,539 31,033
Nonutility Operations 32,182 121,712
Maintenance 3,890 3,991
Depreciation 14,102 12,757
Income Taxes 10,627 7,277
Other Taxes 7,900 7,566
---------- ----------
Total Operating Expenses 251,386 301,864
---------- ----------
Operating Income 31,208 24,146
Interest Charges:
Long-Term Debt 11,826 11,210
Short-Term Debt and Other 3,322 2,792
---------- ----------
Total Interest Charges 15,148 14,002
---------- ----------
Preferred Dividend Requirements of Subsidiary 2,313 2,317
---------- ----------
Income from Continuing Operations 13,747 7,827
Loss from Discontinued Operations - Net (160) (2,686)
---------- ----------
Net Income Applicable to Common Stock $13,587 $5,141
========== ==========
Average Shares of Common Stock Outstanding 10,846 10,775
========== ==========
Earnings Per Common Share:
Continuing Operations $1.27 $0.73
Discontinued Operations - Net (0.02) (0.25)
---------- ----------
Earnings Per Common Share $1.25 $0.48
========== ==========
Dividends Declared Per Common Share $1.08 $1.08
========== ==========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJI-4
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
(Unaudited)
September 30, December 31,
---------------------- -------------
1999 1998 1998
---------- ---------- -------------
<S> <C> <C> <C>
Assets
- ------
Property, Plant and Equipment:
Utility Plant, at original cost $713,117 $656,830 $681,848
Accumulated Depreciation (188,898) (176,367) (179,605)
Nonutility Property and Equipment, at cost 3,118 2,988 2,981
Accumulated Depreciation (906) (968) (965)
---------- ---------- -------------
Property, Plant and Equipment - Net 526,431 482,483 504,259
---------- ---------- -------------
Investments:
Available-for-Sale Securities 1,392 711 931
Investment in Affiliate 2,087 1,253 1,440
---------- ---------- -------------
Total Investments 3,479 1,964 2,371
---------- ---------- -------------
Current Assets:
Cash and Cash Equivalents 3,060 5,584 5,991
Notes Receivable - Affiliate 4,550 4,350 4,350
Accounts Receivable 24,975 23,468 42,600
Unbilled Revenues 5,112 4,163 19,489
Provision for Uncollectibles (1,187) (1,234) (1,283)
Natural Gas in Storage, average cost 30,662 28,195 27,619
Materials and Supplies, average cost 4,006 3,973 4,051
Prepaid Taxes 8,845 13,599 13,850
Prepayments and Other Current Assets 4,272 3,654 3,419
---------- ---------- -------------
Total Current Assets 84,295 85,752 120,086
---------- ---------- -------------
Accounts Receivable - Merchandise 1,133 1,687 1,554
---------- ---------- -------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 25,818 23,177 27,500
Liability for Future Expenditures 52,939 50,697 52,939
Gross Receipts & Franchise Taxes 3,252 3,696 3,585
Income Taxes - Flowthrough Depreciation 11,775 13,265 13,021
Deferred Fuel Costs - Net 7,953 2,723 5,509
Deferred Postretirement Benefit Costs 5,050 5,679 5,522
Other 8,019 7,707 11,749
---------- ---------- -------------
Total Regulatory and Other Non-Current Assets 114,806 106,944 119,825
---------- ---------- -------------
Total Assets $730,144 $678,830 $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 CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
(Unaudited)
September 30, December 31,
---------------------- -------------
1999 1998 1998
---------- ---------- -------------
<S> <C> <C> <C>
Capitalization and Liabilities
- ------------------------------
Common Equity:
Common Stock $13,937 $13,472 $13,474
Premium on Common Stock 120,938 111,234 111,253
Capital Stock Expense (51) - -
Retained Earnings 46,381 42,542 44,507
---------- ---------- -------------
Total Common Equity 181,205 167,248 169,234
---------- ---------- -------------
Preferred Stock and Securities of Subsidiary:
Redeemable Cumulative Preferred Stock:
South Jersey Gas Company, Par Value $100 per share
Authorized - 45,504, 46,404 and 46,404 shares
Outstanding Shares:
Series A, 4.70% -- 1,200, 2,100 and 2,100 shares 120 210 210
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 37,044 37,134 37,134
---------- ---------- -------------
Long-Term Debt 185,704 166,853 194,710
---------- ---------- -------------
Total Capitalization 403,953 371,235 401,078
---------- ---------- -------------
Current Liabilities:
Notes Payable 95,375 94,800 97,000
Current Maturities of Long-Term Debt 8,876 8,876 8,876
Accounts Payable 39,332 30,293 51,960
Customer Deposits 5,305 5,552 5,576
Environmental Remediation Costs 10,110 18,644 9,668
Taxes Accrued 1,424 1,175 1,531
Interest Accrued and Other Current Liabilities 8,343 9,542 14,010
---------- ---------- -------------
Total Current Liabilities 168,765 168,882 188,621
---------- ---------- -------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 84,521 77,859 84,827
Investment Tax Credits 4,946 5,335 5,239
Pension and Other Postretirement Benefits 14,413 12,281 14,227
Environmental Remediation Costs 47,263 36,949 47,925
Other 6,283 6,289 6,178
---------- ---------- -------------
Total Deferred Credits
and Other Non-Current Liabilities 157,426 138,713 158,396
---------- ---------- -------------
Commitments and Contingencies
Total Capitalization and Liabilities $730,144 $678,830 $748,095
========== ========== =============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJI-6
<TABLE>
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In Thousands)
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $13,587 $5,141
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 16,256 14,247
Provision for Losses on Accounts Receivable 678 950
Revenues and Fuel Costs Deferred - Net (2,444) 284
Loss on Disposal of Property - 26
Deferred and Non-Current Income Taxes and Credits - Net 291 3,160
Environmental Remediation Costs - Net 1,462 (1,195)
Changes in:
Accounts Receivable 31,228 24,333
Inventories (2,998) (3,782)
Prepayments and Other Current Assets (888) (270)
Prepaid and Accrued Taxes - Net 4,898 (13,212)
Accounts Payable and Other Accrued Liabilities (18,566) (21,633)
Other - Net 4,158 (2,021)
---------- ----------
Net Cash Provided by Operating Activities 47,662 6,028
---------- ----------
Cash Flows from Investing Activities:
Investment in Affiliate (647) (404)
(Loan to) Repayment of Affiliate (200) 211
Proceeds from the Sale of Assets - Net - 2
Purchase of Available-for-Sale Securities (461) (669)
Capital Expenditures, Cost of Removal and Salvage (36,899) (39,596)
---------- ----------
Net Cash Used in Investing Activities (38,207) (40,456)
---------- ----------
Cash Flows from Financing Activities:
Net (Repayments of) Borrowings from Lines of Credit (1,625) 48,900
Principal Repayments of Long-Term Debt (9,006) (9,625)
Dividends on Common Stock (11,713) (11,637)
Proceeds from Sale of Common Stock 10,048 160
Repurchase of Preferred Stock (90) (90)
Payments for Issuance of Long-Term Debt and Preferred
Securities - (138)
---------- ----------
Net Cash (Used in) Provided by Financing Activities (12,386) 27,570
---------- ----------
Net Decrease in Cash and Cash Equivalents (2,931) (6,858)
Cash and Cash Equivalents at Beginning of Period 5,991 12,442
---------- ----------
Cash and Cash Equivalents at End of Period $3,060 $5,584
========== ==========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJI-7
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. 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, 2001. 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 were (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- ----------------
1999 1998 1999 1998
------ ------ ------ -------
Loss before Income Taxes:
Sand Mining $ (40) $ (51) $ (181) $(3,566)
Construction (3) (77) (27) (530)
Fuel Oil (17) (12) (55) (36)
Income Tax Credits 23 49 103 1,446
------ ------ ------ -------
Loss from Discontinued
Operations - Net $ (37) $ (91) $ (160) $(2,686)
====== ====== ====== =======
Earnings per Common Share
from Discontinued Operations $ 0.00 $(0.01) $(0.02) $(0.25)
====== ====== ====== ======
SJI-8
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) formed South Jersey Energy Solutions, LLC, a
jointly-owned limited liability company (LLC) 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.
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:
Dividend Reinvestment and
Stock Purchase Plan 366,610 -
Employees' Stock Ownership Plan 4,144 3,875
Stock Option & Stock Appreciation
Rights Plan 31 1,952
---------- ----------
Ending Balance, September 30 11,149,775 10,777,240
========== ==========
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 $9,685,618 and $238,072
respectively, was credited to Premium on Common Stock for the nine months ended
September 30, 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 September 30, 1999 and 1998, SJI had
4,500 and 5,000 options outstanding, respectively, all exercisable at prices
from $17.89 to $24.69 per share. During the nine months ended September 30,
1999 and 1998, 500 and 8,060 options were surrendered for the issuance of 31
and 1,952 shares, respectively. No options were granted in 1999 and 1998. No
stock appreciation rights were issued under the Plan. Stock options
outstanding at September 30, 1999 and 1998, had no effect on EPS.
Dividend Reinvestment and Stock Purchase Plan (DRP) and Employees' Stock
Ownership Plan (ESOP) - Effective June 1999, newly issued shares of common
stock offered through the DRP are issued directly by SJI. All shares offered
through the ESOP continue to be issued directly by SJI. As of September 30,
1999, SJI reserved 695,473 and 27,352 shares of authorized, but unissued,
common stock for future issuance to the DRP and ESOP, respectively.
SJI-9
Note 4. Income Taxes:
The significant components of federal and state income taxes reflected in
the condensed statements of consolidated income are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
Current:
Federal $(2,147) $ 533 $ 7,237 $ 2,448
State (494) (300) 3,099 1,669
------- ------- ------- -------
Total Current (2,641) 233 10,336 4,117
Deferred:
Federal 326 (1,721) 977 3,059
State (131) (110) (393) 398
------- ------- ------- -------
Total Deferred 195 (1,831) 584 3,457
Investment Tax Credit (98) (99) (293) (297)
------- ------- ------- -------
Income Taxes as reported on the
Condensed Statements of
Consolidated Income (2,544) (1,697) 10,627 7,277
Tax Associated with Discontinued
Operations (23) (49) (103) (1,446)
------- ------- ------- -------
Net Income Taxes $(2,567) $(1,746) $10,524 $ 5,831
======= ======= ======= =======
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. The BPU
subsequently expanded the number of potential participants to 50,000 and, as
of September 30, 1999, enrollment totaled 28,623. In January 2000, all of
SJG's customers will become eligible to choose a gas supplier. Participants'
bills are reduced for cost of gas charges and applicable taxes. The resulting
decrease in revenues is offset by a corresponding decrease in gas costs and
taxes under SJG's BPU-approved fuel clause. While the program reduces utility
revenues, it does not affect SJG'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. On May 12, 1999, the BPU
approved a $7.1 million increase in rates as part of the current filing, which
SJI-10
included the results of the previous two annual filings. We are currently in
the process of preparing the 1999 annual filing which should be filed with the
BPU during the fourth quarter.
In April 1999, the BPU approved new hourly appliance service rates which
SJG implemented in that same month. On June 30, 1999, SJG filed a proposal to
implement several new service contract plans and to expand its existing service
contract plans to include appliances not presently covered. Subsequently, SJG
increased the price of its existing service contract plans effective August 1,
1999. The new rates and plans are competitive with those of other service
providers in New Jersey and are designed to increase earnings and cash flows.
In August 1998, SJG filed with the BPU to recover increased remediation
costs expended from August 1995 through July 1998. On September 30, 1999, the
BPU approved the filed annual recovery level of $6.5 million. This represents
an annual increase of approximately $4.5 million over the recovery previously
included in rates. In July 1999, SJG filed its annual RAC with the BPU
proposing no change in the current level of recovery. This filing is still
pending at the BPU.
Note 6. Segments of Business:
Information about SJI's operations in different industry segments is
presented below (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Operating Revenues:
Gas Utility Operations $ 51,694 $ 43,480 $253,425 $204,221
Other Industries 11,654 88,329 35,138 122,848
-------- -------- -------- --------
Subtotal 63,348 131,809 288,563 327,069
Intersegment Sales (4,183) (310) (5,969) (1,059)
-------- -------- -------- --------
Total Operating Revenues $ 59,165 $131,499 $282,594 $326,010
======== ======== ======== ========
The decrease in operating revenues from Other Industries is due primarily
to SJE's wholesale electricity sales which began and ended in 1998.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Operating Income:
Gas Utility Operations $ (2,104) $ (414) $ 39,770 $ 31,152
Other Industries 134 1,955 1,482 1,655
-------- -------- -------- --------
Subtotal (1,970) 1,541 41,252 32,807
SJI-11
Income Taxes 2,544 1,697 (10,627) (7,276)
General Corporate 1,224 (403) 583 (1,385)
-------- -------- -------- --------
Total Operating Income $ 1,798 $ 2,835 $ 31,208 $ 24,146
======== ======== ======== ========
Depreciation and Amortization:
Gas Utility Operations $ 5,454 $ 4,823 $ 16,194 $ 14,211
Other Industries 18 7 39 19
Discontinued Operations 8 6 23 17
-------- -------- -------- --------
Total $ 5,480 $ 4,836 $ 16,256 $ 14,247
======== ======== ======== ========
Property Additions:
Gas Utility Operations $ 10,958 $ 13,625 $ 35,992 $ 38,879
Other Industries 181 8 229 78
-------- -------- -------- --------
Total $ 11,139 $ 13,633 $ 36,221 $ 38,957
======== ======== ======== ========
Identifiable Assets:
Gas Utility Operations $712,814 $653,019
Other Industries 13,316 20,357
Discontinued Operations 2,376 1,690
-------- --------
Subtotal 728,506 675,066
Corporate Assets 14,090 23,577
Intersegment Assets (12,452) (19,813)
-------- --------
Total Assets $730,144 $678,830
======== ========
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.
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-12
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 $44.6 million as of September 30, 1999.
Note 8. Commitments and Contingencies:
Construction Commitments - SJI's estimated cost of construction and
environmental remediation programs for 1999 totals $54.6 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
$117.2 million, of which $59.8 million was spent as of September 30, 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 $110.5 million for the
remediation of these sites and spent $57.6 million through September 30, 1999.
SJI-13
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 1998 and petitions to
recover costs through July 1999 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 September 30, 1999, SJG's unamortized
remediation costs of $25.8 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 $20.6 million through rates as
of September 30, 1999.
With Morie's sale, Energy & Minerals, Inc. (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 September 30, 1999.
SJI-14
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 270,692 customers at
September 30, 1999, compared with 263,883 customers at September 30, 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. SJE also markets an air quality monitoring system that provides
around-the-clock, real time monitoring for airborne substances around a site or
facility. 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 began marketing retail electricity in New Jersey in November
1999 through a limited liability company, jointly owned with EES. 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.
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, environmental liabilities and Year 2000 related costs or operating
problems; and changes in business strategies.
SJI-15
Pilot Program - Choice of Gas Supplier
SJG operates a New Jersey Board of Public Utilities (BPU) approved pilot
program giving residential customers a choice of gas supplier. Currently the
program is open to 50,000 potential participants and, as of September 30, 1999,
enrollment totaled 28,623. In January 2000, all of SJG's customers will become
eligible to choose a gas supplier. 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 had the following impacts on
1999 and 1998 third quarter and nine month net earnings:
1999 1998
------ ------
TAC Adjustment Increase to Net Income
($ in thousands)
Quarter Ended 9/30 $0 $0
Nine Months Ended 9/30 $1,232 $247
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 100% of affected programming code as of June 1, 1999. We
believe that 98% of all, and 100% of our mission critical, embedded technology
is Y2K ready. We have tested all revisions on an as completed basis and will
continue to test through the end of this year.
SJI-16
As of November 12, 1999, SJG's SCADA software, which monitors natural gas
flow throughout our distribution system, was replaced with an updated, Y2K
ready version. SJG's gas distribution system is designed to provide
uninterrupted gas flow and has regularly tested back-up procedures in place to
ensure gas flow in the event of hardware, software, electrical or SCADA
failures. This function had previously been identified in the June 1999 Form
10-Q as not being Y2K ready.
In June 1998, all vendors were notified by letter requesting verification
of their Y2K readiness. Since then, follow-up requests for information have
been made on an on going basis to those vendors who did not reply. A current
analysis of this process indicates that 73% of all product and service vendors
and 100% of our mission critical vendors have responded and are Y2K ready. A
review of the vendors that have not replied has been conducted to assess the
impact that the potential loss of their products and services will have on the
company's supply chain and our ability to conduct business after January 1,
2000. Based upon this review and verification from our critical suppliers
regarding their Y2K readiness, we believe that there will be no disruptions
in SJI's supply chain on or after January 1, 2000 which will impede
our ability to conduct business as usual.
Year 2000 Costs
We project Y2K costs to total $0.54 million, with $0.44 million having
been spent through September 30, 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 have prepared contingency plans for use in the event
that they are not ready. We continually update our contingency plans to
address potential Y2K related problems. All contingency plans for high
priority items such as service continuation, safety and revenues have been
completed.
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 within the company should be immaterial to our financial
position or operating results.
SJI-17
Results of Operations - Three and Nine Months Ended September 30, 1999
Compared to Three and Nine Months Ended September 30, 1998
Operating Revenues - Utility
Revenues increased $5.9 million in the third quarter and $46.0 million in
the first nine months of 1999 compared with the prior year periods. The
primary reasons for the increases were increased off-system sales and 6,809
additional customers at SJG. Nine month results also benefited significantly
from the revised TAC. 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 third quarter and first nine months of 1999 was 65.0% and
14.5% colder, respectively, than the prior year periods. Weather was 29.8%
colder and 3.42% warmer for the third quarter and first nine months,
respectively, 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 significantly reduced the
weather related volatility in SJI's utility revenues. However, comparisons for
the first two quarters of 1999 to the prior year periods continued to show
volatility as 1998 revenues were heavily influenced by weather. Weather
experienced during the third quarter of the year historically has had a minimal
impact on SJG's earnings as heating requirements are at their seasonal low
point during July, August and September in our service territory. 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 and nine month periods ended September 30, 1999 vs. the same periods
ended September 30, 1998.
SJI-18
3rd Quarter Year to Date
---------------- ------------------
1999 1998 1999 1998
------- ------- -------- --------
Operating Revenues (Thousands):
Firm
Residential $12,986 $14,834 $110,547 $102,180
Commercial 3,306 4,126 24,508 25,942
Industrial 921 523 3,645 3,072
Cogeneration & Electric
Generation 4,259 3,815 7,062 7,234
Firm Transportation 5,209 4,428 22,171 16,736
------- ------- -------- --------
Total Firm Operating
Revenues 26,681 27,726 167,933 155,164
Interruptible 277 373 1,270 2,024
Interruptible Transportation 305 518 1,200 1,954
Off-System 22,704 12,479 77,747 36,704
Capacity Release & Storage 870 1,351 2,600 5,041
Other 856 1,070 2,675 3,334
Intercompany Sales (2,406) (85) (3,547) (356)
------- ------- -------- --------
Total Utility Operating
Revenues $49,287 $43,432 $249,878 $203,865
======= ======= ======== ========
Throughput (MMcf):
Firm
Residential 1,260 1,308 12,839 11,710
Commercial 403 485 3,240 3,457
Industrial 26 43 185 273
Cogeneration & Electric
Generation 1,297 1,336 2,047 2,229
Firm Transportation 5,704 5,345 18,368 16,629
------- ------- -------- --------
Total Firm Throughput 8,690 8,517 36,679 34,298
Interruptible 63 101 307 562
Interruptible Transportation 711 1,224 2,645 4,622
Off-System 8,277 5,539 33,052 15,415
Capacity Release & Storage 8,149 8,253 19,508 22,391
------- ------- -------- --------
Total Throughput 25,890 23,634 92,191 77,288
======= ======= ======== ========
Operating Revenues - Nonutility
Nonutility operating revenues decreased by $78.2 million and $89.4 million
for the third quarter and nine month periods of 1999, respectively, almost
entirely 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.
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Gas Purchased for Resale
Gas purchased for resale increased $6.2 million and $35.6 million for the
third quarter and nine month periods of 1999, respectively, compared with the
same periods in 1998 due principally to increased sales volumes, particularly
to off-system customers. These increases were partially offset by SJG's
ability to buy gas during the first nine months of 1999 at an average cost of
$2.28/dt compared with $2.30/dt in 1998. 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 Nine Months Ended
September 30, September 30,
1999 vs. 1998 1999 vs. 1998
------------- -------------
Other Production Expense $3 $13
Transmission 30 75
Distribution (509) (710)
Customer Accounts and Services (61) (401)
Sales (21) (39)
Administration and General (197) (472)
Other (9) 40
------- -------
$(764) $(1,494)
======= =======
Distribution expenses declined due to improvements in operating practices.
These improvements included the implementation of an automated dispatch system
and home based reporting of service personal. 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 during the first
six months. We began to read meters on a monthly basis again during the third
quarter but continued to reduce expenses by completing the outsourcing of the
meter reading function to Millenium Services, LLP. Millenium is a joint
venture, equally owned by SJI and Conectiv, Inc. Administrative and General
costs decreased for the three and nine month periods from 1998 levels
principally due to a decline in amortized regulatory expenses.
SJI-20
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses
(in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 vs. 1998 1999 vs. 1998
------------- -------------
Nonutility Operations $(76,441) $(89,530)
Maintenance 169 (101)
Depreciation 457 1,345
Income Taxes (847) 3,350
Other Taxes (72) 334
Decreases in nonutility expenses almost entirely 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. 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 for the first nine months
because of higher sales volumes due primarily 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 due to the effect of increased short
and long-term debt outstanding, partially offset by lower interest rates
experienced during the first nine months of this year. 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 $2.5 million for the first
nine months of 1999 principally due to a product liability settlement recorded
in June 1998 and decreased environmental remediation costs.
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Net Income Applicable to Common Stock
Net income (in thousands) and earnings per common share reflect the
following changes:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 vs. 1998 1999 vs. 1998
------------- -------------
(Loss) Income from Continuing
Operations $(1,180) $5,920
Loss from Discontinued Operations
- Net 54 2,526
------- -------
Net (Loss) Income Increase $(1,126) $8,446
======= =======
(Loss) Earnings per Common Share:
Continuing Operations $(0.11) $0.54
Discontinued Operations - Net 0.01 0.23
------- -------
(Loss) Earnings per Share
Increase $(0.10) $0.77
======= =======
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 $144.0 million, of which $48.6 million was available at
September 30, 1999. The credit lines are uncommitted and unsecured with
interest rates typically available based upon the Federal Funds Rates or London
Interbank Offered Rates (LIBOR).
SJI-22
The changes in cash flows from operating activities (in thousands):
Nine Months Ended
September 30,
1999 vs. 1998
-------------
Increases/(Decreases):
Net Income Applicable to Common Stock $ 8,446
Depreciation and Amortization 2,009
Provision for Losses on Accounts Receivable (272)
Revenues and Fuel Costs Deferred - Net (2,728)
Loss on Disposal of Property (26)
Deferred and Non-Current Income Taxes and
Credits - Net (2,869)
Environmental Remediation Costs-Net 2,657
Accounts Receivable 6,895
Inventories 784
Prepayments and Other Current Assets (618)
Prepaid and Accrued Taxes - Net 18,110
Accounts Payable and Other Accrued Liabilities 3,067
Other - Net 6,179
-------
Net Cash Provided by Operating Activities $41,634
=======
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.
Decreases in Revenues and Fuel Costs Deferred - Net 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.
Increases reflect the impact of overcollection of fuel costs or the recovery of
previously deferred fuel 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 the discontinuation of
wholesale electricity sales by SJE. This cash source was partially offset by
higher off-system sales and the impact of colder weather on SJG's sales
volumes. Weather and commodity prices also impact this line item. Changes
impact cash flows when receivables are collected in subsequent periods.
SJI-23
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.
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 have not required significant investment in capital
facilities, inventories or personnel.
Regulatory Matters
In September 1999, the BPU approved SJG's filed request to recover costs
incurred to remediate environmental problems at former manufactured gas plant
sites as permitted under a previously approved Remediation Adjustment Clause
(RAC) in our tariff. SJG's RAC level increased from $0.0032 per therm to
$0.0107 per therm to include all RAC related expenditures made between 1993 and
1998. Consequently, SJG will recover via the RAC an additional $4.5 million
per year for the next seven years as a result of this ruling.
On February 9, 1999, the "Electric Discount and Energy Competition 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
SJI-24
parties. SJG has been actively participating in this process, and management
believes the final standards will not have a material adverse effect on the
company.
Other matters are incorporated by reference to Note 5 to the condensed
consolidated financial statements included as part of this report.
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
nine months of 1999 amounted to $35.4 million. The costs for 1999, 2000 and
2001 are estimated at approximately $54.6 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.
Effective June 1999, SJI changed the way that shares were purchased by
participants in the company's Dividend Reinvestment Plan (DRP). Since 1994,
our DRP purchased shares for participants on the open market. Now plan
participants are receiving newly issued shares. On September 30, the DRP
participants received a total of 172,983 newly issued shares at a discounted
price of $27.1541 per share. We chose to offer a 2% discount on DRP
investments because it was the most cost effective way to raise equity capital
in the quantities that we are seeking. The revised DRP has provided SJI with
$9.96 million of equity capital through September 30 and we expect to raise an
additional $8 million to $12 million via this method by December 2000.
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. A second contract was obtained in September.
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-25
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 13 and 14, 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-26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTH JERSEY INDUSTRIES, INC.
(Registrant)
Dated: November 15, 1999 By: /s/ David A. Kindlick
David A. Kindlick
Vice President, Financial Operations
Dated: November 15, 1999 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Treasurer
SJI-27
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-28
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