Page 1 of 27
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, 2000 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 5, 2000, there were 11,361,060 shares of the registrant's common
stock outstanding.
Exhibit Index on page 27
- Title Page -
PART I FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 15
SJI-2
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
Three Months Ended
March 31,
----------------------
2000 1999
---------- ----------
Operating Revenues:
Utility $146,118 $134,694
Nonutility 21,320 12,038
---------- ----------
Total Operating Revenues 167,438 146,732
---------- ----------
Operating Expenses:
Cost of Gas Sold - Utility 87,915 78,221
Cost of Sales - Nonutility 18,377 11,331
Operations 10,516 10,345
Maintenance 2,776 1,287
Depreciation 4,944 4,620
Income Taxes 13,626 12,701
Other Taxes 4,383 4,497
---------- ----------
Total Operating Expenses 142,537 123,002
---------- ----------
Operating Income 24,901 23,730
Interest Charges:
Long-Term Debt 3,833 4,107
Short-Term Debt and Other 1,226 948
---------- ----------
Total Interest Charges 5,059 5,055
---------- ----------
Preferred Dividend Requirements of Subsidiary 771 772
---------- ----------
Income from Continuing Operations 19,071 17,903
Loss from Discontinued Operations - Net (90) (64)
---------- ----------
Net Income Applicable to Common Stock $18,981 $17,839
========== ==========
Average Shares of Common Stock Outstanding 11,284 10,780
========== ==========
Earnings Per Common Share:
Continuing Operations $1.69 $1.66
Discontinued Operations - Net (0.01) 0.00
---------- ----------
Earnings Per Common Share $1.68 $1.66
========== ==========
Dividends Declared Per Common Share $0.365 $0.360
========== ==========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-3
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
March 31, December 31,
---------------------- -------------
2000 1999 1999
---------- ---------- -------------
Assets
- ------
Property, Plant and Equipment:
Utility Plant, at original cost $731,658 $693,501 $723,114
Accumulated Depreciation (195,958) (183,041) (192,240)
Nonutility Property and Equipment, at cost 3,487 2,986 3,423
Accumulated Depreciation (960) (974) (951)
---------- ---------- -------------
Property, Plant and Equipment - Net 538,227 512,472 533,346
---------- ---------- -------------
Investments:
Available-for-Sale Securities 1,747 931 1,707
Investment in Affiliate 2,313 1,500 2,251
---------- ---------- -------------
Total Investments 4,060 2,431 3,958
---------- ---------- -------------
Current Assets:
Cash and Cash Equivalents 9,061 5,685 5,634
Notes Receivable - Affiliate 2,165 4,050 2,650
Accounts Receivable 67,619 59,934 43,130
Unbilled Revenues 16,590 17,496 22,328
Provision for Uncollectibles (1,034) (1,183) (1,117)
Natural Gas in Storage, average cost 10,227 11,864 27,066
Materials and Supplies, average cost 3,952 3,821 4,085
Prepaid Taxes - - 4,069
Prepayments and Other Current Assets 3,149 3,094 3,203
---------- ---------- -------------
Total Current Assets 111,729 104,761 111,048
---------- ---------- -------------
Accounts Receivable - Merchandise 987 1,434 1,108
---------- ---------- -------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 17,840 21,679 25,702
Liability for Future Expenditures 51,029 52,939 51,029
Gross Receipts & Franchise Taxes 3,030 3,474 3,141
Income Taxes - Flowthrough Depreciation 11,286 12,264 11,531
Deferred Fuel Costs - Net 6,517 - 13,174
Deferred Postretirement Benefit Costs 4,820 5,365 4,914
Other 6,791 8,658 7,974
---------- ---------- -------------
Total Regulatory and Other Non-Current Assets 101,313 104,379 117,465
---------- ---------- -------------
Total Assets $756,316 $725,477 $766,925
========== ========== =============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-4
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
March 31, December 31,
---------------------- -------------
2000 1999 1999
---------- ---------- -------------
Capitalization and Liabilities
- ------------------------------
Common Equity:
Common Stock $14,105 $13,477 $13,940
Premium on Common Stock 124,400 111,321 120,868
Retained Earnings 65,330 58,465 50,467
---------- ---------- -------------
Total Common Equity 203,835 183,263 185,275
---------- ---------- -------------
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 45,404 shares
Outstanding Shares:
Series A, 4.70% -- 1,200, 2,100 and 1,200 shares 120 210 120
Series B, 8.00% -- 19,242 shares 1,924 1,924 1,924
South Jersey Gas 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 37,044
---------- ---------- -------------
Long-Term Debt 181,373 192,523 183,561
---------- ---------- -------------
Total Capitalization 422,252 412,920 405,880
---------- ---------- -------------
Current Liabilities:
Notes Payable 82,000 59,000 119,950
Current Maturities of Long-Term Debt 8,876 8,876 8,876
Accounts Payable 34,114 40,080 40,273
Customer Deposits 5,462 5,506 5,386
Environmental Remediation Costs 13,965 9,996 14,027
Taxes Accrued 16,683 14,135 563
Interest Accrued and Other Current Liabilities 13,839 9,371 14,112
---------- ---------- -------------
Total Current Liabilities 174,939 146,964 203,187
---------- ---------- -------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 92,091 84,799 91,167
Investment Tax Credits 4,757 5,141 4,849
Deferred Revenues - Net - 7,505 -
Pension and Other Postretirement Benefits 13,791 14,751 13,342
Environmental Remediation Costs 41,354 47,566 41,354
Other 7,132 5,831 7,146
---------- ---------- -------------
Total Deferred Credits
and Other Non-Current Liabilities 159,125 165,593 157,858
---------- ---------- -------------
Commitments and Contingencies
Total Capitalization and Liabilities $756,316 $725,477 $766,925
========== ========== =============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-5
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In Thousands)
Three Months Ended
March 31,
-----------------------
2000 1999
---------- ----------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $18,981 $17,839
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 5,860 5,019
Provision for Losses on Accounts Receivable 61 63
Revenues and Fuel Costs Deferred - Net 6,657 12,507
Deferred and Non-Current Income Taxes and Credits - Net 1,029 97
Environmental Remediation Costs - Net 7,800 6,297
Changes in:
Accounts Receivable (18,895) (15,514)
Inventories 16,972 15,985
Prepayments and Other Current Assets 54 313
Prepaid and Accrued Taxes - Net 20,189 26,454
Accounts Payable and Other Accrued Liabilities (6,356) (16,589)
Other - Net 1,438 4,044
---------- ----------
Net Cash Provided by Operating Activities 53,790 56,515
---------- ----------
Cash Flows from Investing Activities:
Investment in Affiliate (63) (60)
Loan to Affiliate 485 300
Purchase of Available-For-Sale Securities (39) -
Capital Expenditures, Cost of Removal and Salvage (10,177) (13,048)
---------- ----------
Net Cash Used in Investing Activities (9,794) (12,808)
---------- ----------
Cash Flows from Financing Activities:
Net Repayments of Lines of Credit (37,950) (38,000)
Principal Repayments of Long-Term Debt (2,188) (2,187)
Dividends on Common Stock (4,117) (3,881)
Proceeds from Sale of Common Stock 3,686 55
---------- ----------
Net Cash Used in Financing Activities (40,569) (44,013)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 3,427 (306)
Cash and Cash Equivalents at Beginning of Period 5,634 5,991
---------- ----------
Cash and Cash Equivalents at End of Period $9,061 $5,685
========== ==========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Summary of Significant Accounting Policies:
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.
Equity-Based Investments in Affiliates - SJI, either directly or
through its wholly-owned subsidiaries, currently holds a 50% non-
controlling interest in several affiliated companies and accounts for
the investments under the equity method. The operations of these
affiliated companies are not material to the accompanying condensed
consolidated financial statements.
New Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board (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.
SJI-7
Note 2. Discontinued Operations and Affiliations:
Discontinued Operations - Summarized operating results of the
discontinued operations for the three months ended March 31, 2000 and
1999 were (in thousands):
2000 1999
------- -------
Loss before Income Taxes:
Sand Mining $ (32) $ (83)
Construction (1) (12)
Fuel Oil (20) (11)
Wholesale Electric (95) -
Income Tax Credits 58 42
------- -------
Loss from Discontinued
Operations - Net $ (90) $ (64)
======= =======
Earnings per Common Share
from Discontinued Operations $ (0.01) $ (0.00)
======= =======
Affiliations - SJI, through its wholly-owned subsidiary,
SJEnerTrade (EnerTrade), and UPR Energy Marketing, Inc., jointly own
South Jersey Resources Group, LLC (SJRG). SJRG provides natural gas
storage, peaking services and transportation capacity f or wholesale
customers in New Jersey and surrounding states.
In January 1999, SJI and Conectiv Solutions, LLC, formed
Millennium Account Services, LLC, to provide meter reading services in
southern New Jersey.
In June 1999, SJE and Energy East Solutions, Inc. formed South
Jersey Energy Solutions, LLC (SJES) to market retail electricity and
energy management services. SJES began supplying retail electric in
March of 2000.
SJE and GZA GeoEnvironmental, Inc. (GZA) market a jointly-
developed air monitoring system designed to assist companies involved
in environmental cleanup activities. In April 2000, SJE and GZA formed
AirLogics, LLC to continue the marketing of this air monitoring system
which had previously been managed as a joint venture between the two
companies on a contract-by-contract basis.
SJI-8
Note 3. Common Stock:
SJI has 20,000,000 shares of authorized Common Stock. The
following shares were issued and outstanding:
2000 1999
---------- -----------
Beginning Balance,
January 1 11,152,175 10,778,990
New Issues During Year:
Dividend Reinvestment Plan 124,427 -
Employees' Stock
Ownership Plan 1,837 2,215
Stock Option, Stock
Appreciation Rights, and
Restricted Stock Award Plan 5,545 31
Directors' Restricted
Stock Plan 180 -
---------- ----------
Ending Balance, March 31 11,284,164 10,781,236
========== ==========
The par value ($1.25 per share) of stock issued in 2000 and 1999
was credited to Common Stock. Net excess over par value of
approximately $3.5 million, and $70,000, respectively, was credited to
Premium on Common Stock for the three months ended March 31, 2000 and
1999, respectively.
Dividend Reinvestment 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. Prior to this date,
these shares were purchased in the open market. All shares offered
through the ESOP continue to be issued directly by SJI. As of March 31,
2000, SJI reserved 569,154 and 26,395 shares of authorized, but
unissued, common stock for future issuance to the DRP and ESOP,
respectively.
Stock Option, Stock Appreciation Rights, and Restricted Stock
Award Plan -Under this plan, no more than 306,000 shares of common
stock 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, 2000 and 1999, SJI
had 4,500 options outstanding, all exercisable at $24.69 per share.
During the three months ended March 31, 1999, 500 options were
surrendered for the issuance of 31 shares of common stock. No options
and no stock appreciation rights were granted or issued in 2000 and
1999. In 1999, the Plan was amended to include restricted stock awards.
In January 2000, a total of 35,070 shares of common stock were granted
under the provisions of the restricted stock award plan at a market
value of $28.4375 per share. An aggregate of 29,525 shares vest over 3
years beginning January 2000. The stock's market value on the grant
date is recorded as compensation over the vesting period. There were
no vesting restrictions placed on the remaining 5,545 shares which were
issued in March 2000. Stock options outstanding and unvested
restricted stock awards at March 31, 2000 and 1999 had no effect on
EPS.
SJI-9
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, 2000 and 1999 are as follows (in
thousands):
2000 1999
-------- --------
Current:
Federal $ 9,484 $ 9,295
State 3,114 3,309
-------- --------
Total Current 12,598 12,604
-------- --------
Deferred:
Federal 984 326
State 136 (131)
-------- --------
Total Deferred 1,120 195
-------- --------
Investment Tax Credits (92) (98)
Income Taxes -
Continuing Operations 13,626 12,701
Income Taxes -
Discontinued Operations (58) (42)
-------- --------
Net Income Taxes $ 13,568 $ 12,659
======== ========
Note 5. Recent Regulatory Actions:
In January 1997, the Board of Public Utilities (BPU) granted SJG a
total rate increase of $10.3 million. The $6.0 million base rate
portion of the increase was based on a 9.62% rate of return on rate
base, which included an 11.25% return on common equity. Additionally,
SJG's threshold for sharing pre-tax margins generated by interruptible
and off-system sales and transportation (Sharing Formula) increased
from $4.0 million to $5.0 million. With the completion of major
construction projects, this $5.0 million threshold increased by $2.8
million to a total of $7.8 million. SJG keeps 100% of pre-tax margins
up to the threshold level and 20% of such margins above that level. In
October 1998, the BPU approved a revision to the Sharing Formula as
part of an agreement to modify SJG's Temperature Adjustment Clause
(TAC). The revision credits the first $750,000 above the current
threshold level to the Levelized Gas Adjustment Clause (LGAC)
customers. Thereafter, SJG keeps 20% of the pre-tax margins as it has
historically.
Effective January 10, 2000, the BPU approved full unbundling of
SJG's system. This allows all natural gas consumers to select their
natural gas supplier. As of March 31, 2000, 47,281 of SJG's
residential customers had elected to purchase their gas commodity from
someone other than us. The bills of those using a gas supplier other
than SJG are reduced for cost of gas charges and applicable taxes. The
resulting decrease in our revenues is offset by a corresponding
SJI-10
decrease in gas costs and taxes under SJG's BPU-approved fuel clause.
SJI's net income, financial condition and margins are not affected.
In June 1998, SJG filed a petition with the BPU requesting a change
to the TAC. The request was granted in October 1998. As a result, SJG
experiences reduced fluctuations in income when weather is warmer or
colder than normal.
In August 1998, SJG filed with the BPU to recover increased
remediation costs expended from August 1995 through July 1998. In
September 1999, the BPU approved the requested 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 requesting recovery of carrying
costs on unrecovered remediation costs and proposed no change in the
current RAC r ate for the next 3 years. In January 2000, the BPU
approved the recovery of carrying costs on unrecovered remediation
costs and SJG's proposal to keep its current RAC rate in effect through
October 2002.
In September 1998, SJG filed its annual LGAC, TAC and Demand Side
Management Clause (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. In May 1999, the BPU approved a $7.1
million increase in rates as part of this filing, which included the
results of the previous two annual filings. In April 2000, SJG made a
TAC and LGAC filing and anticipates making TAC, LGAC and DSMC filings
during the summer of 2000.
In February 1999, the Electric Discount and Energy Competition Act
became law. This law established unbundling, where redesigned utility
rate structures allow natural gas and electric consumers to choose their
energy supplier. SJG filed its unbundling proposal in April 1999 and
received BPU approval of its settlement in January 2000.
In addition to allowing all customers to select their own supplier
effective January 10, 2000, the unbundling settlement also created an
incentive to customers to select a supplier, other than SJG, in the
form of a Market Development Credit (MD C). This credit will be
provided to customers over the next two years and will approximate $2.5
million plus carrying costs through December 2001. The majority of this
credit was provided for on SJG's books as a Deferred Credit. Therefore,
the MDC will not materially impact future periods.
Also included in the settlement was the approved recovery of
carrying costs on the RAC, as previously discussed, and a modification
to SJG's LGAC. Under-recovered gas costs of $11.9 million as of
October 31, 1999, and carrying costs thereon, w ill be recovered over 3
years. The LGAC for the period starting November 1999, will continue to
operate as it has in the past.
SJI-11
Note 6. Segments of Business:
Information about SJI's operations for the three months ended
March 31, 2000 and 1999 in different industry segments is presented
below (in thousands):
2000 1999
-------- --------
Operating Revenues:
Gas Utility Operations $147,002 $135,081
Other Industries 21,762 12,360
-------- --------
Subtotal 168,764 147,441
Intersegment Sales (1,326) (709)
-------- --------
Total Operating Revenues $167,438 $146,732
======== ========
Operating Income:
Gas Utility Operations $ 36,000 $ 36,528
Other Industries 2,438 430
-------- --------
Subtotal 38,438 36,958
Income Taxes (13,626) (12,701)
General Corporate 89 (527)
-------- --------
Total Operating Income $ 24,901 $ 23,730
======== ========
Depreciation and Amortization:
Gas Utility Operations $ 5,829 $ 5,001
Other Industries 26 10
Discontinued Operations 5 8
-------- --------
Total Depreciation
and Amortization $ 5,860 $ 5,019
======== ========
Property Additions:
Gas Utility Operations $ 9,770 $ 12,812
Other Industries 240 4
Discontinued Operations - -
-------- --------
Total Property Additions $ 10,010 $ 12,816
======== ========
SJI-12
2000 1999
-------- --------
Identifiable Assets:
Gas Utility Operations $732,229 $705,445
Other Industries 15,020 15,163
Discontinued Operations 2,296 2,529
-------- --------
Subtotal 749,545 723,137
Corporate Assets 18,213 23,867
Intersegment Assets (11,442) (21,527)
-------- --------
Total Identifiable Assets $756,316 $725,477
======== ========
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.
SJI's interest expense relates primarily to SJG's borrowing and
financing activities. These amounts are included in our condensed
statements of consolidated income and not shown above. Interest income
is essentially derived from borrowings between the subsidiaries and is
eliminated during consolidation.
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 $59.2
million as of March 31, 2000.
Note 8. Commitments and Contingencies:
Construction and Environmental - SJI's estimated net cost of
construction and environmental remediation programs for 2000 totals
$51.6 million. Commitments were made regarding some of these programs.
Pending Litigation - SJI is subject to claims arising from the
ordinary course of business and other legal proceedings. In November
1999, Goldin Associates LLC, Trustee for the Power Company of America
Liquidating Trust (PCA), filed a complaint in bankruptcy court against
SJE seeking damages of $11 million plus interest and attorneys' fees.
PCA was a wholesale electricity trading company with whom SJE did
business. PCA filed for bankruptcy protection under Chapter 11 of the
Bankruptcy Code. We believe SJE acted prudently, responsibly and in
accordance with contractual obligations in its transactions with PCA.
We believe the ultimate impact of these actions will not materially
affect SJI's financial position, results of operations or liquidity.
SJI-13
Environmental Remediation Costs - SJI incurred and recorded costs
for environmental cleanup of sites where SJG or its predecessors
operated gas manufacturing plants. SJG stopped manufacturing gas in the
1950s. SJI and some of its nonutility subsidiaries also recorded costs
for environmental cleanup of sites where SJF previously operated a fuel
oil business and Morie maintained equipment, fueling stations and
storage.
Since the early 1980s, SJI recorded environmental remediation
costs of $115.8 million, of which $60.5 million was spent as of March
31, 2000. With the assistance of an outside consulting firm, we
estimate that future costs to clean up SJG's sites will range from
$51.0 million to $161.3 million. We recorded the lower end of this
range as a liability. It is reflected on the 2000 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 we have
been successful in pursuing. We used these proceeds to offset related
legal fees and to reduce the balance of deferred environmental
remediation costs . Recorded amounts include estimated costs based on
projected investigation and remediation work plans using existing
technologies. Actual costs could differ from the estimates due to the
long-term nature of the projects, changing technology, government
regulations and site-specific requirements.
The major portion of recorded environmental costs relate to the
cleanup of SJG's former gas manufacturing sites. SJG recorded $109.1
million for the remediation of these sites and spent $58.1 million
through March 31, 2000.
SJG has two regulatory assets associated with environmental cost.
The first asset is titled Environmental Remediation Cost: Expended -
Net. These expenditures represent what was actually spent to clean up
former gas manufacturing plant sites. These costs meet the requirements
of FASB No. 71, "Accounting for the Effects of Certain Types of
Regulation." The BPU allows SJG to recover expenditures through July
1998 and petitions to recover costs through July 1999 are pending.
The other asset titled Environmental Remediation Cost: Liability
for Future Expenditures relates to estimated future expenditures
determined under the guidance of FASB No. 5, "Accounting for
Contingencies." This amount, which relates to former manufactured gas
plant sites, was recorded as a deferred debit with the corresponding
amount reflected on the 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, 2000,
SJG's unamortized remediation costs of $17.8 million are reflected on
the condensed consolidated balance sheet under the caption, Regulatory
and Other Non-Current Assets. Since implementing the RAC in 1992, SJG
recovered $22.5 million through rates as of March 31, 2000.
SJI-14
With Morie's sale, EMI assumed responsibility for environmental
liabilities estimated between $2.8 million and $9.0 million. The
information available on these sites is sufficient only to establish a
range of probable liability, and no point within t he 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 $0.1 million and $0.2 million,
while SJF's estimated liability ranges from $1.2 million to $4.5
million for its three sites. Amounts sufficient to cover the lower ends
of these ranges were recorded and are reflected on the 2000 condensed
consolidated balance sheet under Current Liabilities and Deferred
Credits and Other Non-Current Liabilities as of March 31, 2000.
SJI-15
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 276,088 customers at
March 31, 2000, compared with 269,108 customers at March 31, 1999. SJG also
makes off-system sales of natural gas on a wholesale basis to various customers
on the interstate pipeline system. In addition, SJG 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 hazardous airborne substances around
a site or facility. SJE began marketing retail electricity in New Jersey in
November 1999 through South Jersey Energy Solutions, a limited liability
company equally owned with Energy East Solutions, Inc. SJE has one subsidiary,
SJEnerTrade (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 mid-Atlantic and southern states. These
activities are conducted by EnerTrade and South Jersey Resources Group, LLC
(SJRG), a joint venture with UPR Energy Marketing, Inc. SJI also invested in a
joint venture with Conectiv Solutions, LLC , forming Millennium Account
Services, LLC (Millennium). Millennium provides meter reading services to SJG
and Conectiv Power Delivery in southern New Jersey.
Forward Looking Statements
This report contains certain forward-looking statements concerning
projected financial and 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. Also, in making forward-looking
statements, we assume no duty to update these statements should expectations
change or actual results and events differ from current expectations.
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 legal proceedings
and environmental liabilities; and changes in business strategies.
SJI-16
Customer Choice Legislation
Effective January 1, 2000, all residential natural gas customers in New
Jersey are able to choose their gas supplier under the terms of the Electric
Discount and Energy Competition Act of February 1999. Commercial and
industrial customers have had the ability to choose gas suppliers since 1987.
SJG's residential customers have been able to choose a gas supplier since April
of 1997 under a pilot program. As of March 31, 2000, 47,281 SJG residential
customers participated in the program . Customers' 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. While customer
choice can reduce utility revenues, it does not negatively affect SJG's net
income, financial condition or margins.
Energy Adjustment Clauses
SJG's BPU approved Temperature Adjustment Clause (TAC) had the following
impacts on 2000 and 1999 first quarter net earnings:
2000 1999
-------- --------
TAC Adjustment Increase to Net Income
($ in thousands)
Quarter Ended 3/31 $1,290 $1,276
While the revenue and income impacts of TAC adjustments are recorded as
incurred, cash inflows or outflows directly attributable to TAC adjustments
generally do not begin until the next TAC year. Each TAC year begins
October 1.
Results of Operations - Three Months Ended March 31, 2000
Compared to Three Months Ended March 31, 1999
- ---------------------------------------------
Operating Revenues - Utility
Revenues increased $11.4 million in the first quarter of 2000 compared
with the prior year period. The primary reasons for the increase were
increased off-system sales and 6,980 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.
SJI-17
Weather in the first quarter of 2000 was 1.1% warmer than the prior year
period. Weather was also 7.3% warmer for the first quarter than the 20-year
average. Revisions to SJG's TAC that became effective in October 1998
significantly reduced the weather related volatility in SJI's utility revenues.
Revenues for 2000 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, 2000 vs. the same period ended
March 31, 1999.
1st Quarter
2000 1999
---------- ----------
Utility Operating Revenues (Thousands):
Firm
Residential $70,673 72,536
Commercial 16,280 16,185
Industrial 2,000 1,811
Cogeneration & Electric Generation 1,222 667
Firm Transportation 14,012 10,831
---------- ----------
Total Firm Utility Operating Revenues 104,187 102,030
Interruptible 499 340
Interruptible Transportation 484 533
Off-System 39,226 30,486
Capacity Release & Storage 1,861 874
Other 745 819
Intercompany Sales (884) (388)
---------- ----------
Total Utility Operating Revenues $146,118 $134,694
========== ==========
Throughput (MMcf):
Firm
Residential 8,481 8,883
Commercial 2,166 2,216
Industrial 106 122
Cogeneration & Electric Generation 138 71
Firm Transportation 8,465 6,789
---------- ----------
Total Firm Throughput 19,356 18,081
Interruptible 49 107
Interruptible Transportation 840 1,103
Off-System 12,070 14,314
Capacity Release & Storage 10,539 3,321
---------- ----------
Total Throughput 42,854 36,926
========== ==========
SJI-18
Operating Revenues - Nonutility
Nonutility operating revenues increased by $9.3 million for the first
quarter of 2000 due to increased levels of retail gas sales to residential
customers and casinos in Atlantic City and sales of our air monitoring products
and services.
Cost of Gas Sold - Utility
Cost of gas sold - utility increased $9.7 million for the first quarter
of 2000 compared with the same period in 1999 due principally to increased
sales volumes, particularly to off-system customers. SJG's gas cost during the
first quarter of 2000 averaged $2.87/dt compared with $1.96/dt in 1999.
However, changes in gas costs do not directly affect Cost of Gas Sold -
Utility. Fluctuations in gas costs not reflected in current rates are deferred
and addressed in future periods under a BPU approved Levelized Gas Adjustment
Clause (LGAC). Under the LGAC, fluctuations in gas costs not covered currently
are reflected in future customer rates. Gas supply sources include contract
and open-market purchases. SJG secures and maintains its own gas supplies to
serve its customers.
Cost of Sales - Nonutility
Cost of sales - nonutility increased $7.0 million for the first quarter
of 2000 due to increased costs attributable to higher sales of retail gas and
air monitoring products and services.
Operations
A summary of net changes in Operations (in thousands):
Three Months Ended
March 31,
2000 vs. 1999
-------------
Utility:
Other Production Expense $ 1
Transmission (10)
Distribution 139
Customer Accounts and Services 285
Sales 20
Administration and General (68)
Other (22)
Nonutility (174)
-------
Total Operations $ 171
=======
SJI-19
Customer Accounts and Services costs increased in the first quarter of
2000 due to temporarily increased staffing levels necessary to handle high call
volumes related to the deregulation process in New Jersey and higher bad debt
expense.
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses
(in thousands):
Three Months Ended
March 31,
2000 vs. 1999
-------------
Maintenance $1,489
Depreciation 324
Income Taxes 925
Other Taxes (114)
Maintenance is higher due to higher levels of Remediation Adjustment
Clause (RAC) amortization. This additional amortization expense is recovered
during the current period through rates (See Regulatory Matters). 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.
Interest Charges
Interest charges were flat in the first quarter of 2000 compared with
the prior year period. Increased debt outstanding and higher interest rates
in 2000 were offset by recoveries of carrying costs associated with the
unrecovered RAC and purchased gas costs. The debt was incurred primarily to
support the expansion and upgrade of SJG's gas transmission and distribution
system.
SJI-20
Net Income Applicable to Common Stock
Net income (in thousands) and earnings per common share reflect the
following changes:
Three Months Ended
March 31,
2000 vs. 1999
-------------
Income from Continuing Operations $1,168
Loss from Discontinued Operations - Net (26)
-------
Net Income Increase $1,142
=======
Earnings per Common Share:
Continuing Operations $0.03
Discontinued Operations - Net (0.01)
-------
Earnings per Share Increase $0.02
=======
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 $145.0 million, of which $63.0 million was available at
March 31, 2000. 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-21
The changes in cash flows from operating activities (in thousands):
Three Months Ended
March 31,
2000 vs. 1999
-------------
Increases/(Decreases):
Net Income Applicable to Common Stock $1,142
Depreciation and Amortization 841
Provision for Losses on Accounts Receivable (2)
Revenues and Fuel Costs Deferred - Net (5,850)
Deferred and Non-Current Income Taxes and
Credits - Net 932
Environmental Remediation Costs-Net 1,503
Accounts Receivable (3,381)
Inventories 987
Prepayments and Other Current Assets (259)
Prepaid and Accrued Taxes - Net (6,265)
Accounts Payable and Other Accrued
Liabilities 10,233
Other - Net (2,606)
--------
Net Cash Provided by Operating
Activities ($2,725)
========
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 changes in off-system
sales activity and sales volumes of SJG and SJE. Weather and commodity prices
are the variables that impact these sales. Changes impact cash flows when
receivables are collected in subsequent periods.
Changes in Inventories reflect the impact of seasonal requirements,
tempeatures and price changes.
SJI-22
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 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
Rate Actions
In February 1999, the Electric Discount and Energy Competition Act (the
Act) was signed into law in New Jersey. This bill created the framework and
necessary time schedules for the restructuring of the state's electric and
natural gas utilities. The Act established unbundling, where redesigned
utility rate structures allow natural gas and electric consumers to choose
their energy supplier. It also established time frames for instituting
competitive services for customer accounting functions and to determine
whether basic gas supply services should become competitive.
SJG received BPU approval of its unbundling settlement in January 2000.
In addition to allowing all customers to select their own gas supplier, the
approval incented customers to choose a supplier other than SJG with a Market
Development Credit (MDC). This credit is available to customers through
December 2001. The credit, approximately $2.5 million plus carrying costs,
appears on our books as a Deferred Credit. Therefore, the MDC will not
materially impact future periods.
The unbundling settlement also provided SJG with the ability to recover
carrying costs on unrecovered remediation costs under the RAC, while holding
the current RAC rate in effect through October 2002. Our RAC rate last changed
in September 1999. SJG's LGAC was also modified by the unbundling process.
Under-recovered gas costs of $11.9 million as of October 31, 1999, and related
carrying costs, will be recovered over 3 years. The LGAC for the period
starting November 1999, continues to operate as it has in the past.
The Act also contains numerous provisions requiring the BPU to
promulgate and adopt a variety of standards related to implementing the Act.
These required standards address fair competition, affiliate relations,
SJI-23
accounting, competitive servi ces, supplier licensing, consumer protection and
aggregation. In March 2000, the BPU issued Interim Standards in response to
the Act. We believe the final standards will not have a material adverse
affect 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
quarter of 2000 amounted to $2.4 million. The costs for 2000, 2001 and 2002
are estimated at approximately $51.6 million, $46.7 million and $53.1 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.
SJI raised $3.5 million of equity capital via the issuance of 124,427
shares under our Dividend Reinvestment Plan (DRP) in the first quarter. SJI
raised an additional $2.1 million on 75,481 shares issued through the DRP in
April 2000.
Other Events
SJE and GZA GeoEnvironmental, Inc. (GZA) announced the formation of
AirLogics, LLC. The joint venture will market 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 was previously conducted on a
contract-by-contract basis.
SJI-24
PART II OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part I,
Item 1, Note 8, beginning on page 13.
Item 3. Quantitative and Qualitative Disclosures About Market Risks of the
Company
The company has interest rate risk exposure related to short-term debt.
Additionally, the company's subsidiary, South Jersey Energy Company, has
commodity price risk exposure related to gas marketing activities. For
information regarding the company's exposure related to these risks, see Item
7A in the company's most recently filed Form 10-K. The company's risk
associated with interest rates and commodity prices has not materially changed
from December 31, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule (submitted only in
electronic format to the Securities and
Exchange Commission).
SJI-25
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 15, 2000 By: /s/ David A. Kindlick
David A. Kindlick
Vice President, Financial Operations
Dated: May 15, 2000 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Treasurer
SJI-26
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-27