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 June 30, 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 August 7, 2000, there were 11,461,887 shares of the registrant's common
stock outstanding.
Exhibit Index on page 27
- Cover Page -
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 16
SJI-2
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands, Except for Per Share Data)
Three Months Ended
June 30,
------------------------
2000 1999
----------- -----------
Operating Revenues:
Utility $73,199 $65,897
Nonutility 16,109 10,800
----------- -----------
Total Operating Revenues 89,308 76,697
----------- -----------
Operating Expenses:
Cost of Gas Sold - Utility 49,497 42,505
Cost of Sales - Nonutility 14,177 9,522
Operations 10,911 10,633
Maintenance 1,726 1,314
Depreciation 5,024 4,701
Income Taxes 248 470
Other Taxes 2,078 1,872
----------- -----------
Total Operating Expenses 83,661 71,017
----------- -----------
Operating Income 5,647 5,680
----------- -----------
Interest Charges:
Long-Term Debt 3,686 3,917
Short-Term Debt and Other 1,200 993
----------- -----------
Total Interest Charges 4,886 4,910
----------- -----------
Preferred Dividend Requirements of Subsidiary 770 772
----------- -----------
Loss from Continuing Operations (9) (2)
Loss from Discontinued Operations - Net (127) (59)
----------- -----------
Net Loss Applicable to Common Stock ($136) ($61)
=========== ===========
Average Shares of Common Stock Outstanding 11,361 10,781
=========== ===========
Earnings Per Common Share:
Continuing Operations ($0.00) ($0.00)
Discontinued Operations - Net (0.01) (0.01)
----------- -----------
Earnings Per Common Share ($0.01) ($0.01)
=========== ===========
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 STATEMENTS OF INCOME (UNAUDITED)
(In Thousands, Except for Per Share Data)
Six Months Ended
June 30,
------------------------
2000 1999
----------- -----------
Operating Revenues:
Utility $219,317 $200,591
Nonutility 37,429 22,838
----------- -----------
Total Operating Revenues 256,746 223,429
----------- -----------
Operating Expenses:
Cost of Gas Sold - Utility 137,412 120,725
Cost of Sales - Nonutility 32,554 20,853
Operations 21,427 20,979
Maintenance 4,502 2,601
Depreciation 9,968 9,321
Income Taxes 13,874 13,171
Other Taxes 6,461 6,369
----------- -----------
Total Operating Expenses 226,198 194,019
----------- -----------
Operating Income 30,548 29,410
----------- -----------
Interest Charges:
Long-Term Debt 7,519 8,024
Short-Term Debt and Other 2,426 1,941
----------- -----------
Total Interest Charges 9,945 9,965
----------- -----------
Preferred Dividend Requirements of Subsidiary 1,541 1,544
----------- -----------
Income from Continuing Operations 19,062 17,901
Loss from Discontinued Operations - Net (217) (123)
----------- -----------
Net Income Applicable to Common Stock $18,845 $17,778
=========== ===========
Average Shares of Common Stock Outstanding 11,322 10,781
=========== ===========
Earnings Per Common Share:
Continuing Operations $1.68 $1.66
Discontinued Operations - Net (0.02) (0.01)
----------- -----------
Earnings Per Common Share $1.66 $1.65
=========== ===========
Dividends Declared Per Common Share $0.73 $0.72
=========== ===========
<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)
June 30, December 31,
------------------------ ------------
2000 1999 1999
----------- ----------- ------------
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $742,003 $703,929 $723,114
Accumulated Depreciation (200,076) (185,898) (192,240)
Nonutility Property and Equipment, at cost 3,384 3,029 3,423
Accumulated Depreciation (979) (983) (951)
----------- ----------- ------------
Property, Plant and Equipment - Net 544,332 520,077 533,346
----------- ----------- ------------
Investments:
Available-for-Sale Securities 2,001 1,077 1,707
Investment in Affiliate 3,526 2,131 2,251
----------- ----------- ------------
Total Investments 5,527 3,208 3,958
----------- ----------- ------------
Current Assets:
Cash and Cash Equivalents 17,166 11,135 5,634
Notes Receivable - Affiliate 200 4,050 2,650
Accounts Receivable 51,882 36,678 43,130
Unbilled Revenues 5,353 6,970 22,328
Provision for Uncollectibles (1,033) (1,191) (1,117)
Natural Gas in Storage, average cost 24,649 20,121 27,066
Materials and Supplies, average cost 4,023 3,962 4,085
Prepaid Taxes 9,569 10,009 4,069
Prepayments and Other Current Assets 3,653 5,054 3,203
----------- ----------- ------------
Total Current Assets 115,462 96,788 111,048
----------- ----------- ------------
Accounts Receivable - Merchandise 1,046 1,344 1,108
----------- ----------- ------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 18,386 24,503 25,702
Liability for Future Expenditures 51,029 52,939 51,029
Gross Receipts & Franchise Taxes 2,919 3,363 3,141
Income Taxes - Flowthrough Depreciation 11,042 12,020 11,531
Deferred Fuel Costs - Net 13,615 - 13,174
Deferred Postretirement Benefit Costs 4,725 5,207 4,914
Other 6,997 8,127 7,974
----------- ----------- ------------
Total Regulatory and Other Non-Current Assets 108,713 106,159 117,465
----------- ----------- ------------
Total Assets $775,080 $727,576 $766,925
=========== =========== ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-5
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
June 30, December 31,
------------------------ ------------
2000 1999 1999
----------- ----------- ------------
Capitalization and Liabilities
Common Equity:
Common Stock $14,202 $13,719 $13,940
Premium on Common Stock 126,410 116,375 120,868
Retained Earnings 61,046 54,523 50,467
----------- ----------- ------------
Total Common Equity 201,658 184,617 185,275
----------- ----------- ------------
Preferred Stock and Securities of Subsidiary:
Redeemable Cumulative Preferred Stock:
South Jersey Gas Company, Par Value $100 per share
Authorized - 43,104, 45,504 and 45,504 shares
Outstanding Shares:
Series A, 4.70% -- 300, 1,200 and 1,200 shares 30 120 120
Series B, 8.00% -- 17,742, 19,242 and 19,242 shares 1,774 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 36,804 37,044 37,044
----------- ----------- ------------
Long-Term Debt 172,123 185,704 183,561
----------- ----------- ------------
Total Capitalization 410,585 407,365 405,880
----------- ----------- ------------
Current Liabilities:
Notes Payable 107,700 82,300 119,950
Current Maturities of Long-Term Debt 11,876 8,876 8,876
Accounts Payable 46,583 38,049 40,273
Customer Deposits 5,367 5,373 5,386
Environmental Remediation Costs 13,872 10,173 14,027
Taxes Accrued 6,262 6,697 563
Interest Accrued and Other Current Liabilities 13,458 7,706 14,112
----------- ----------- ------------
Total Current Liabilities 205,118 159,174 203,187
----------- ----------- ------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 93,009 84,660 91,167
Investment Tax Credits 4,676 5,044 4,849
Deferred Revenues - Net - 3,777 -
Pension and Other Postretirement Benefits 12,459 14,171 13,342
Environmental Remediation Costs 41,354 47,263 41,354
Other 7,879 6,122 7,146
----------- ----------- ------------
Total Deferred Credits and Other Non-Current
Liabilities 159,377 161,037 157,858
----------- ----------- ------------
Commitments and Contingencies
Total Capitalization and Liabilities $775,080 $727,576 $766,925
=========== =========== ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-6
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Six Months Ended
June 30,
-------------------------
2000 1999
----------- -----------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $18,845 $17,778
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 11,586 10,777
Provision for Losses on Accounts Receivable 441 267
Revenues and Fuel Costs Deferred - Net (441) 9,286
Deferred and Non-Current Income Taxes and Credits - Net 2,068 194
Environmental Remediation Costs - Net 7,161 2,840
Changes in:
Accounts Receivable 7,698 18,082
Inventories 2,479 7,587
Prepayments and Other Current Assets (450) (1,659)
Prepaid and Accrued Taxes - Net 199 9,007
Accounts Payable and Other Accrued Liabilities 5,637 (20,418)
Other - Net 780 3,725
----------- -----------
Net Cash Provided by Operating Activities 56,003 57,466
----------- -----------
Cash Flows from Investing Activities:
Investment in Affiliate (1,276) (692)
Repayment of Loan to Affiliate 2,450 300
Purchase of Available-For-Sale Securities (293) (145)
Capital Expenditures, Cost of Removal and Salvage (21,936) (25,561)
----------- -----------
Net Cash Used in Investing Activities (21,055) (26,098)
----------- -----------
Cash Flows from Financing Activities:
Net Repayments of Lines of Credit (12,250) (14,700)
Principal Repayments of Long-Term Debt (8,438) (9,006)
Dividends on Common Stock (8,266) (7,762)
Proceeds from Sale of Common Stock 5,778 5,334
Repurchase of Preferred Stock (240) (90)
----------- -----------
Net Cash Used in Financing Activities (23,416) (26,224)
----------- -----------
Net Increase in Cash and Cash Equivalents 11,532 5,144
Cash and Cash Equivalents at Beginning of Period 5,634 5,991
----------- -----------
Cash and Cash Equivalents at End of Period $17,166 $11,135
=========== ===========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-7
Notes to Condensed 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. We reclassified some
previously reported amounts to conform with current year classifications. In
our 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. Our 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 our financial condition and results
of operations, which will vary based on our use of derivative instruments at
the time of adoption.
SJI-8
Note 2. Discontinued Operations and Affiliations:
Discontinued Operations - Summarized operating results of the discontinued
operations were (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
(Loss)Income before Income Taxes:
Sand Mining $ (31) $ (58) $ (63) $ (141)
Construction 3 (11) 2 (23)
Fuel Oil (28) (27) (48) (38)
Wholesale Electric (153) - (248) -
Income Tax Credits 82 37 140 79
------ ------ ------ ------
Loss from Discontinued
Operations - Net $ (127) $ (59) $ (217) $ (123)
====== ====== ====== ======
Earnings per Common Share
from Discontinued Operations $(0.01) $(0.01) $(0.02) $(0.01)
====== ====== ====== ======
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 for 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-9
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 199,908 192,675
Employees' Stock Ownership Plan 3,721 3,175
Stock Option, Stock Appreciation
Rights, and Restricted Stock
Award Plan 5,545 31
Directors' Restricted Stock Plan 180 -
---------- ----------
Ending Balance, June 30 11,361,529 10,974,871
========== ==========
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 $5.5
million, and $5.2 million, respectively, was credited to Premium on Common
Stock for the six months ended June 30, 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 June 30, 2000, SJI reserved
492,748 and 25,436 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, up to an aggregate of 306,000 shares of common stock 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
June 30, 2000 and 1999, SJI had 4,500 options outstanding, all exercisable at
$24.69 per share. During the six months ended June 30, 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 June 30, 2000 and 1999 had no effect on
EPS.
SJI-10
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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
Current:
Federal $ (789) $ (9) $ 8,695 $ 9,384
State (2) 381 3,111 3,592
------- ------- ------- -------
Total Current (791) 372 11,806 12,976
Deferred:
Federal 984 326 1,968 652
State 136 (131) 273 (262)
------- ------- ------- -------
Total Deferred 1,120 195 2,241 390
------- ------- ------- -------
Investment Tax Credit (81) (97) (173) (195)
------- ------- ------- -------
Income Taxes -
Continuing Operations 248 470 13,874 13,171
Income Taxes -
Discontinued Operations (82) (37) (140) (79)
------- ------- ------- -------
Net Income Taxes $ 166 $ 433 $13,734 $13,092
======= ======= ======= =======
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.
SJI-11
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 Remediation Adjustment
Clause (RAC) with the BPU requesting recovery of carrying costs on unrecovered
remediation costs and proposed no change in the current RAC rate 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 its 1999-2000 TAC and LGAC filings and
anticipates making its 2000-2001 TAC, LGAC, RAC 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 final
BPU approval in January 2000.
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 June 30, 2000, 52,056 of SJG's residential customers had
elected to purchase their gas commodity from someone other than SJG. 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 revenues is offset by
a corresponding decrease in gas costs and taxes under SJG's BPU-approved fuel
clause. SJI's net income, financial condition and margins are not affected as
a result of the unbundling.
In addition to allowing all customers to select their own supplier, the
unbundling settlement also created an incentive to customers to select a
supplier, other than SJG, in the form of a Market Development Credit (MDC).
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 impact of the MDC will not materially impact future periods.
Also included in the proposal 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, will be recovered over 3 years. The LGAC for the period starting
November 1999, will continue to operate as it has in the past.
SJI-12
In June 1999, SJG made an appliance service filing with the BPU to modify
SJG's existing service sentry plans, implement three new service sentry plans
and to implement flat rate pricing for its appliance service business. On
April 27, 2000, the BPU approved SJG's filing.
Effective June 9, 2000, SJG implemented price increases for its appliance
service business. The new rates are competitive with those of other service
providers in New Jersey.
Note 6. Segments of Business:
Information about SJI's operations in different industry segments is
presented below (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
Operating Revenues:
Gas Utility Operations $ 76,661 $ 66,650 $223,663 $201,732
Other Industries 16,538 11,123 38,300 23,483
-------- -------- -------- --------
Subtotal 93,199 77,773 261,963 225,215
Intersegment Sales (3,891) (1,076) (5,217) (1,786)
-------- -------- -------- --------
Total Operating Revenues $ 89,308 $ 76,697 $256,746 $223,429
======== ======== ======== ========
Operating Income:
Gas Utility Operations $ 4,627 $ 5,345 $ 40,627 $ 41,873
Other Industries 1,147 919 3,585 1,348
-------- -------- -------- --------
Subtotal 5,774 6,264 44,212 43,221
Income Taxes (248) (470) (13,874) (13,171)
General Corporate 121 (114) 210 (640)
-------- -------- -------- --------
Total Operating Income $ 5,647 $ 5,680 $ 30,548 $ 29,410
======== ======== ======== ========
Depreciation and Amortization:
Gas Utility Operations $ 5,686 $ 5,739 $ 11,515 $ 10,740
Other Industries 35 11 61 21
Discontinued Operations 5 8 10 16
-------- -------- -------- --------
Total $ 5,726 $ 5,758 $ 11,586 $ 10,777
======== ======== ======== ========
SJI-13
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
Property Additions:
Gas Utility Operations $ 11,441 $ 12,222 $ 21,211 $ 25,034
Other Industries 69 44 309 48
-------- -------- -------- --------
Total $ 11,510 $ 12,266 $ 21,520 $ 25,082
======== ======== ======== ========
Identifiable Assets:
Gas Utility Operations $756,534 $709,020
Other Industries 12,325 14,668
Discontinued Operations 2,325 2,537
-------- --------
Subtotal 771,184 726,225
Corporate Assets 15,241 21,976
Intersegment Assets (11,345) (20,625)
-------- --------
Total Assets $775,080 $727,576
======== ========
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 consolidated
statements of income and not shown above.
Note 7. Retained Earnings:
Restrictions exist under various loan agreements regarding the amount of
cash dividends or other distributions that SJG may pay on its common stock.
SJI's total equity in its subsidiaries' retained earnings, which is free of
these restrictions, was approximately $59.2 million as of June 30, 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.
SJI-14
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.
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 equipment maintenance, fueling and storage occurred and
a fuel oil business was operated.
Since the early 1980s, SJI recorded environmental remediation costs of
$117.3 million, of which $62.1 million was spent as of June 30, 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 $110.6 million for the
remediation of these sites and spent $59.6 million through June 30, 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 such 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
SJI-15
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 June 30, 2000, SJG's unamortized
remediation costs of $18.4 million are reflected on the condensed consolidated
balance sheets under the caption, Regulatory and Other Non-Current Assets.
Since implementing the RAC in 1992, SJG recovered $23.5 million through rates
as of June 30, 2000.
With the sale of The Morie Company, Energy & Minerals, Inc. (EMI) has
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
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 consolidated statements of income under the caption Loss from
Discontinued Operations - Net.
SJI and South Jersey Fuel Company (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 sheets under Current Liabilities and Deferred Credits and Other
Non-Current Liabilities as of June 30, 2000.
SJI-16
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 277,527 customers at
June 30, 2000, compared with 270,433 customers at June 30, 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 our marketing areas; regulatory and court decisions;
competition in our regulated and deregulated activities; the availability and
cost of capital; our 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-17
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 June 30, 2000, 52,056 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 second quarter and six month net earnings:
2000 1999
------ ------
TAC Adjustment Increase to Net Income
($ in thousands)
Quarter Ended 6/30 $59 $(44)
Six Months Ended 6/30 $1,349 $1,232
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 and Six Months Ended June 30, 2000
Compared to Three and Six Months Ended June 30, 1999
Operating Revenues - Utility
Revenues increased $7.3 million and $18.7 million in the second quarter
and first six months of 2000 compared with the prior year periods. The primary
reasons for the increases were increased off-system sales, 7,094 additional
customers and increased rates resulting from an increase in the Levelized Gas
Adjustment Clause (LGAC) to recover increased gas costs 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-18
Weather in the second quarter of 2000 was 4.6% colder than the prior
year period. Weather for the six month period was unchanged. Weather was also
4.6% colder and 5.0% warmer for the second quarter and the first six months,
respectively, than the 20-year average. As a result of the TAC, 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 and six month periods ended June 30, 2000 vs. the same periods ended
June 30, 1999.
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------- ------- ------- -------
Operating Revenues (Thousands):
Firm
Residential $22,224 $25,025 $92,897 $97,561
Commercial 5,212 5,016 21,492 21,201
Industrial 1,017 913 3,017 2,724
Cogeneration & Electric Generation 4,977 2,136 6,199 2,803
Firm Transportation 7,862 6,131 21,874 16,962
------- ------- -------- --------
Total Firm Operating Revenues 41,292 39,221 145,479 141,251
Interruptible 333 653 832 993
Interruptible Transportation 361 362 845 895
Off-System 33,049 24,557 72,275 55,043
Capacity Release & Storage 567 856 2,428 1,730
Other 1,059 1,001 1,804 1,820
Intercompany Sales (3,462) (753) (4,346) (1,141)
------- ------- -------- --------
Total Operating Revenues $73,199 $65,897 $219,317 $200,591
======= ======= ======== ========
Throughput (MMcf):
Firm
Residential 2,302 2,696 10,783 11,579
Commercial 634 621 2,800 2,837
Industrial 50 37 156 159
Cogeneration & Electric Generation 1,113 679 1,251 750
Firm Transportation 6,349 5,875 14,814 12,664
------- ------- ------- -------
Total Firm Throughput 10,448 9,908 29,804 27,989
Interruptible 56 137 105 244
Interruptible Transportation 737 831 1,577 1,934
Off-System 9,357 10,461 21,427 24,775
Capacity Release & Storage 9,395 8,038 19,934 11,359
------- ------- ------- -------
Total Throughput 29,993 29,375 72,847 66,301
======= ======= ======= =======
SJI-19
Operating Revenues - Nonutility
Nonutility operating revenues increased by $5.3 million and $14.6
million for the second quarter and first six months 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 $7.0 million and $16.7 million for
the second quarter and first six months of 2000 compared with the same periods
in 1999 due principally to increased gas costs on off-system sales. SJG's gas
cost during the first six months of 2000 averaged $3.23/dt compared with
$2.33/dt in 1999. Unlike gas costs associated with off-system sales, changes
in the cost of gas sold to utility ratepayers do not directly affect Cost of
Gas Sold - Utility. Fluctuations in gas costs to ratepayers 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 $4.7 million and $11.7 million for
the second quarter and first six months 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 Six Months Ended
June 30, June 30,
2000 vs. 1999 2000 vs. 1999
------------------ ------------------
Utility:
Other Production Expense $4 $5
Transmission 29 19
Distribution 9 169
Appliance Service - Net 306 285
Customer Accounts and Services 166 451
Sales (25) (5)
Administration and General (540) (609)
Other (53) (75)
Nonutility 382 208
-------- --------
Total Operations $278 $448
======== ========
SJI-20
Appliance Service - Net increased due to service activity on new
warranty plans sold in the second quarter of 2000. Customer Accounts and
Services costs increased in the second quarter of 2000 due to increased meter
reading expenses resulting from increasing meter reading frequency to monthly
from bimonthly. Costs for the six month period were additionally impacted by
temporarily increased staffing levels necessary to handle high call volumes
related to the deregulation process in New Jersey and higher bad debt expense.
Administrative and General costs decreased from 1999 levels principally due to
lower employee welfare and pension costs.
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2000 vs. 1999 2000 vs. 1999
------------------ ------------------
Maintenance $412 $1,901
Depreciation 323 647
Income Taxes (222) 703
Other Taxes 206 92
Maintenance was higher due to higher levels of Remediation Adjustment
Clause (RAC) amortization. This additional amortization expense is recovered
during the current period through rates (See Note 8 to the Condensed
Consolidated Financial Statements). Depreciation was 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 slightly lower in the first half 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.
Discontinued Operations
Loss from discontinued operations increased for the three and six month
periods almost entirely due to legal expenses incurred in relation to a
complaint in bankruptcy court against SJE filed by Goldin Associates LLC, for
the Power Company of America Liquidating Trust (PCA). PCA was a wholesale
electricity trading company with whom SJE did business. PCA filed for
bankruptcy protection under Chapter 11 of the Bankruptcy Code.
SJI-21
Net Income Applicable to Common Stock
Net income (in thousands) and earnings per common share reflect the
following changes:
Three Months Ended Six Months Ended
June 30, June 30,
2000 vs. 1999 2000 vs. 1999
------------------ ------------------
Income from Continuing Operations ($7) $1,161
Loss from Discontinued Operations - Net (68) (94)
------ ------
Net Income Increase ($75) $1,067
====== ======
Earnings per Common Share:
Continuing Operations $0.00 $0.02
Discontinued Operations - Net 0.00 (0.01)
------ ------
Earnings per Share Increase $0.00 $0.01
====== ======
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 $155.0 million, of which $47.3 million was available at
June 30, 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-22
The changes in cash flows from operating activities (in thousands):
Six Months Ended
June 30,
2000 vs. 1999
-------------
Increases/(Decreases):
Net Income Applicable to Common Stock $1,067
Depreciation and Amortization 809
Provision for Losses on Accounts Receivable 174
Revenues and Fuel Costs Deferred - Net (9,727)
Deferred and Non-Current Income Taxes and
Credits - Net 1,874
Environmental Remediation Costs - Net 4,321
Accounts Receivable (10,384)
Inventories (5,108)
Prepayments and Other Current Assets 1,209
Prepaid and Accrued Taxes - Net (8,808)
Accounts Payable and Other Accrued Liabilities 26,055
Other - Net (2,945)
-------
Net Cash Provided by Operating Activities ($1,463)
=======
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.
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 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.
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
six months of 2000 amounted to $14.8 million. The costs for 2000, 2001 and
2002 are estimated at approximately $51.6 million, $46.7 million and $53.1
million, respectively. We expect to 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 $2.6 million of equity capital via the issuance of 98,867
shares under our Dividend Reinvestment Plan (DRP) in July 2000.
In July 2000, SJG issued a total of $35 million of senior secured debt
under its Medium Term Note program (MTN). Notes totaling $15 million were
issued at 7.70%, maturing in 2015; notes totaling $10 million were issued at
7.97%, maturing in 2018; and notes totaling $10 million were issued at 7.90%,
maturing in 2030. The net proceeds of these note issuances were used to retire
short-term debt.
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 14.
Item 2. Submission of Matters to a Vote of Security Holders
(a) Our annual meeting of shareholders was held on April 19, 2000.
(c) Class II directors (with a term expiring in 2003) were elected by
a vote of:
For Withheld
Shirli M. Billings 10,001,286 156,901
Sheila Hartnett-Devlin 10,000,469 157,718
Clarence D. McCormick 9,971,775 186,412
Class I directors (with a term expiring in 2002) continuing in
office are: Charles Biscieglia, Richard L. Dunham, W. Cary Edwards.
Class III directors (with a term expiring in 2001) continuing in
office are: Thomas L. Glenn, Jr., Herman D. James, Ph.D. and Frederick R.
Raring.
The appointment of Deloitte & Touche LLP as our independent
accountants for the year ending December 2000 was approved by a vote of
10,101,041 for the appointment and 65,540 against, with 82,606 abstentions.
Item 3. Quantitative and Qualitative Disclosures About Market Risks of the
Company
We have interest rate risk exposure related to short-term debt.
Additionally, our subsidiary, SJE, has commodity price risk exposure related to
gas marketing activities. For information regarding our exposure related to
these risks, see Item 7A in our Form 10-K for the year ended December 31,
1999. Our 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: August 14, 2000 By: /s/ David A. Kindlick
David A. Kindlick
Vice President, Financial Operations
Dated: August 14, 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