Exhibit 13
----------
Front Cover - Outside
1997 ANNUAL REPORT TO SHAREHOLDERS
South Jersey Industries, Inc.
INSERT: Three photographs side by side. First photo shows people in discussion
behind the South Jersey Energy Company sign. Second photo shows
gentleman wearing South Jersey Gas Company hard hat. Third photo shows
people in discussion around a PC with EnerTrade insignia on PC screen.
Below the three photographs is a group of people indicating various
walks of life.
First Page of Report
Table of Contents
Financial Highlights 1
Letter to Shareholders 2
1997 Highlights 4
Increased Value Through Growth 6
Management's Discussion 10
Consolidated Financial Statements 14
Notes to Consolidated Financial Statements 18
Quarterly Financial Data 24
Comparative Operating Statistics 25
SJI Directors and Officers 26
Company Profile
South Jersey Industries, Inc. is an energy services holding company. South
Jersey Gas Company, SJI's principal subsidiary, is a regulated natural gas
distribution utility supplying natural gas and transportation services to
residential, commercial and industrial customers in southern New Jersey. Gas
Company also sells natural gas to wholesale customers in the interstate market.
South Jersey Energy Company markets natural gas and total energy management
services, including energy consulting, to residential, commercial and industrial
customers in New Jersey and surrounding states. Energy Company also trades
wholesale electricity. SJ EnerTrade, Inc. is a wholesale natural gas asset
manager and marketer serving the mid-Atlantic and southern regions of the
country.
This report contains certain forward-looking statements concerning projected
future financial performance, future operating performance, future plans and
courses of action and future economic conditions. All statements in this report
other than statements of historical fact are forward-looking statements. These
forward-looking statements are made based upon management's expectations and
beliefs concerning future events impacting the company and therefore involve a
number of risks and uncertainties. Management cautions that forward-looking
statements are not guarantees and that actual results could differ materially
from those expressed or implied in the forward-looking statements.
There are a number of factors that could cause the company's actual results to
differ materially from those anticipated, which include, but are not limited to
the following: general economic conditions on an international, federal, state
and local level; weather conditions in the company's marketing areas; regulatory
and court decisions; competition in the company's regulated and deregulated
activities; the availability and cost of capital; the company's ability to
maintain existing and/or establish successful new alliances and joint ventures
to take advantage of marketing opportunities; costs and effects of unanticipated
legal proceedings and environmental liabilities; and changes in business
strategies.
INSERT: Map of South Jersey Gas Company Service Area.
Shows location of Main Office, SJG Divisions, and
SJG Gas Advantage Stores.
(first page)
In Memory Of William F. Ryan
Dear Shareholder, On December 28, 1997, William F. Ryan, chairman, president and
CEO of your company, passed away suddenly at the age of 63. His passing is a sad
occasion for the South Jersey Industries, Inc. family of companies. As members
of the Board of Directors, we deeply regret the loss of Bill Ryan, our friend
and colleague. The Board and I are committed to implementing the strategic
direction we recently finalized in conjunction with the company's senior
management. At the time of Bill Ryan's passing, he had just completed his
message to the shareholders for this report. Out of respect for him, we have
printed his message on pages 2 and 3 as he would have wished it to appear.
Bill spent 32 years with our company, joining South Jersey Gas Company in 1965
as Manager, Systems and Applications and steadily rising to the company's top
position. In 1966, he was elected Assistant Treasurer of Gas Company. The Board
elected Bill to the position of Assistant Vice President of Operations of Gas
Company in 1967 and then Vice President of Operations in the same year. He
became Executive Vice President of Gas Company in 1972 and 5 years later was
elected President and COO. In 1981, Bill was elected President and CEO of both
Gas Company and SJI. He became Gas Company's Chairman of the Board in 1989 and
SJI's Chairman of the Board in 1995.
During his career at SJI, Bill's leadership enabled the company to achieve many
significant milestones. From the time Bill became CEO, SJI's consolidated net
income rose from $8.7 million in 1981 to $18.4 million from continuing
operations in 1997.
In 1983, Gas Company added 27,000 customers in Cape May County through the
acquisition of New Jersey Natural Gas Company's southern division, which is now
the Cape May Division.
In 1988, Gas Company developed some of the most innovative and flexible rates in
the industry allowing large commercial and industrial customers to purchase gas
supplies directly from producers. This resulted in customer savings without
negatively impacting SJI's net income. Gas Company was the first natural gas
utility in New Jersey to offer these unbundled rates.
Capitalizing on Gas Company's initiative, SJI restructured South Jersey Energy
Company in 1987 to assist large commercial and industrial customers to acquire
and transport natural gas in the deregulated marketplace. Energy Company was one
of the first natural gas marketing companies to serve utility customers in New
Jersey.
Bill's philosophy of lean staffing enabled the company to downsize through
attrition where many other utility companies resorted to layoffs in reaction to
competition and the need to lower costs. Under Bill's leadership, Gas Company's
operating and maintenance expenses per customer were historically lower than
its peers.
And, this year, Energy Company became certified to buy and sell electricity
nationwide and established a power marketing group to trade wholesale
electricity on the Pennsylvania-New Jersey-Maryland grid. Also, SJI formed SJ
EnerTrade, Inc. to sell natural gas to energy marketers, electric and natural
gas utilities and other wholesale users in the mid-Atlantic and southern regions
of the country. EnerTrade's creative alliance with Union Pacific Fuels, Inc.
continues to benefit both parties and generate new opportunities for innovative
energy solutions.
My own experience as an SJI Board member since 1984 has helped to facilitate my
transition to a new capacity. In accepting this new role, I am confident that we
will advance our corporate objectives and achieve greater shareholder value.
Richard L. Dunham
Chairman of the Board and Acting CEO of SJI
February 18, 1998
(second page)
1997 Highlights
Five-Year Summary of Selected Financial Data
(In Thousands Where Applicable)
South Jersey Industries, Inc. and Subsidiaries
Year Ended December 31,
- -----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------
Operating Results:
Operating Revenues $348,567 $355,458 $304,163 $329,722 $ 293,492
======== ======== ======== ======== =========
Operating Income $ 38,642 $ 38,559 $ 35,218 $ 27,766 $ 29,170
======== ======== ======== ======== =========
Income Applicable to
Common Stock:
Continuing
Operations (1) $ 18,429 $ 18,265 $ 14,874 $ 10,209 $ 14,455
Discontinued
Operations - Net (2) (2,633) 12,233 2,769 2,170 516
Cumulative Effect of a Change
in Accounting Principle (3) - - - - 382
-------- -------- -------- -------- --------
Net Income Applicable to
Common Stock $ 15,796 $ 30,498 $ 17,643 $ 12,379 $ 15,353
======== ======== ======== ======== =========
Total Assets $670,601 $658,381 $604,309 $571,095 $531,778
======== ======== ======== ======== =========
Capitalization:
Common Equity $173,499 $172,731 $157,297 $154,972 $140,526
Preferred Stock and
Securities of Subsidiary 37,224 2,314 2,404 2,494 2,584
Long-Term Debt 176,360 149,736 168,721 153,086 144,305
-------- -------- -------- -------- --------
Total Capitalization $387,083 $324,781 $328,422 $310,552 $287,415
======== ======== ======== ======== =========
Ratio of Income from Continuing
Operations to Fixed Charges
(Before Federal Income Taxes) 2.44 2.40 2.16 2.02 2.48
======== ======== ======== ======== =========
Earnings Applicable to Common
Stock (Based on Average Shares):
Continuing Operations (1) $ 1.71 $ 1.70 $ 1.39 $ 1.00 $ 1.50
Discontinued
Operations - Net (2) (0.24) 1.14 0.26 0.21 0.05
Cumulative Effect of a
Change in Accounting
Principle (3) - - - - 0.04
-------- -------- -------- -------- --------
Earnings per Common Share $ 1.47 $ 2.84 $ 1.65 $ 1.21 $ 1.59
======== ======== ======== ======== =========
Return on Average
Common Equity (4) 10.65% 11.07% 9.53% 6.91% 10.61%
======== ======== ======== ======== =========
Share Data:
Number of Shareholders 11.4 12.1 12.9 14.0 13.1
Average Common Shares 10,763 10,732 10,720 10,258 9,680
Common Shares Outstanding
at Year End 10,771 10,757 10,722 10,715 9,805
Dividend Reinvestment
and Stock Purchase Plan:
Number of Shareholders 6.0 6.1 6.5 6.6 5.7
Number of Participating Shares 1,440 2,845 2,932 2,941 2,716
Book Value at Year End $ 16.11 $ 16.06 $ 14.67 $ 14.46 $ 14.33
Cash Dividends Declared $ 1.440 $ 1.440 $ 1.440 $ 1.440 $ 1.433
Market Price at Year End 30 5/16 24 3/8 23 1/8 18 1/8 23 3/4
Dividend Payout:
From Continuing Operations 84.1% 84.6% 103.8% 141.5% 94.8%
From Total Net Income 98.1% 50.7% 87.5% 116.7% 89.2%
Market Price to Book Value 188.2% 151.8% 157.6% 125.3% 165.7%
Price Earnings Ratio (4) 17.73 14.34 16.64 18.13 15.83
<FN>
Certain restatements of previously reported amounts were required as a result of
discontinued business segments during the current year.
(1) Included in 1994 is the negative impact of a $3.5 million Customer Refund
Obligation ordered by the BPU which reduced 1994 earnings by $2.3 million,
or $0.22 per share.
(2) Represents discontinued business segments: sand mining and distribution
operations which were sold in 1996, construction operations which were sold
in 1997 and fuel oil operations with related environmental liabilities in
1997 (See Note 2 to Consolidated Financial Statements).
(3) Included in 1993 is the Cumulative Effect of a Change in Accounting
Principle for Income Taxes.
(4) Calculated based on Income from Continuing Operations.
</FN>
-1-
TO OUR SHAREHOLDERS
South Jersey Industries, Inc. achieved improved financial results in 1997,
setting a new record for earnings from continuing operations. Consolidated net
income reached $18.4 million compared with $18.3 million in 1996. Earnings
applicable to common stock from continuing operations rose to $1.71 in 1997,
compared with $1.70 in 1996.
Our financial results reflect improved net income from South Jersey Gas Company
in a year when weather was approximately 7 percent warmer than last year.
Increased sales margins from rate relief granted in January 1997 heavily
contributed to our successful year. Improved revenue, in part, resulted from an
expanding customer base which continues to be a valuable, inherent asset. Key to
this growth is the economic development occurring in Atlantic City which has
positively affected growth throughout our entire service area.
We are pleased to announce that during 1997, SJI's management team updated our
long-term strategic plan, which defines our role in the energy marketplace and
provides challenging, yet achievable, goals and objectives for SJI's companies.
An inspiring road map now exists to guide us toward success in a highly
competitive industry and we are avidly following its path. This process helped
us identify skills and core competencies inherent in our companies and we are
capitalizing on those management skills by applying them to exciting new
prospects in the natural gas and electric sectors. Our number one priority is to
position SJI as an attractive energy investment while creating a sound
foundation for improved shareholder value.
Accepting this challenge means finding and taking advantage of niches and
windows of opportunity as the energy market evolves. Our plan not only
recognizes, but anticipates, both shareholder and market expectations in a
deregulated environment. To meet those expectations, we need to offer greater
returns from innovative, new activities than we can reasonably expect from the
regulated arena. Success in these activities will lead to sustainable growth in
market price and dividend yield. To sustain that growth component, SJI is
investing in moderate risk activities and projects in the deregulated energy
marketplace and will reinvest earnings of its non-utility subsidiaries to fuel
their growth. Designing and offering competitively priced, innovative and
quality energy products, services and solutions will be important to our
success.
We are proud of Gas Company's history as a low-cost natural gas provider and
maintaining that position is a key conclusion of our planning process.
Historically, our efforts to control costs and maintain efficiency and
productivity resulted in lower operating and maintenance expenses than our peer
companies. Although we must maintain our vigilance in this area, we realize that
to further improve earnings we must have realistic and achievable objectives
designed to generate new revenues.
Gas Company's service area growth is unprecedented in its history and our
capital expenditure program has anticipated this growth. We are well prepared
and eager to add and serve new customers ranging from the expanding Atlantic
City casino marketplace to the steadily growing suburban communities of
Philadelphia. New customer growth is just one area of focus for additional
revenue generation. We are ardently working on aggressive new programs for
existing customers that will result in increased use of our products and
services.
Complementing our utility business, the non-regulated companies now offer a
broader range of products and services to traditional customers, as well as new
markets. Our planning efforts have refocused our approach. Now, we offer not
only the energy commodity but also viable energy solutions to commercial and
industrial customers. By managing the total energy needs of our customers we
help them become efficient and informed energy consumers. In the past, we
profited from our natural gas industry expertise. Today, we are seizing
opportunities made available by electric deregulation. In an historic move for
our company, we received certification from the Federal Energy Regulatory
Commission to buy and sell electricity. We then established a power marketing
group and began trading wholesale electricity. Also, we changed SJI's corporate
structure by creating a new subsidiary, SJ EnerTrade, Inc., to assume our
wholesale marketing and natural gas management functions. This restructuring
increases our recognition and presence not only in our region but in the
industry as well.
-2-
During the year we worked hard at improving our financial profile, consistent
with our long-term objectives. Our financing activities, which included a
preferred security offering, were very well received by the investment
community. In addition to increasing our investment in Gas Company, the company
funded select entrepreneurial activities of our non-regulated businesses. SJI's
capital structure was significantly improved with a decrease in the debt
portion, including current debt, by 12.6 per cent. We are pleased that
improvements to our key financial ratios were acknowledged by brokers, analysts
and the financial community.
Our road map for success is clear and the outlook for SJI is exciting. We
defined our role in the evolving energy marketplace and are committed to our
goals and objectives. The prudent investment of our capital, time and talent in
both the regulated and deregulated arenas will improve shareholder value,
maintain dividend stability and provide an essential growth component. Pleased
with the progress we have made and confident in achieving a new vision, we thank
our shareholders and employees for the interest, loyalty and support they have
shown for SJI's plans for the future.
December 22, 1997
* The numbers highlighted in bold italic were placed into the text in January
1998.
INSERT: Photograph - William F. Ryan
-3-
1997 Highlights
INSERT: Photograph on the left side of page 4.
Service trucks laying gas lines in a local neighborhood.
SOUTH JERSEY INDUSTRIES, INC.
. Updated the strategic plan to maximize long-term shareholder value in the
face of regulatory and competitive environments undergoing significant
change. Key objectives of the plan include:
. Achieving earnings growth which will improve the dividend payout ratio
enabling a future pattern of regular, sustainable dividend increases;
. Developing a growth component for SJI stock by exploiting opportunities
within Gas Company's dynamic service territory and prudently investing
capital in SJI's non-regulated businesses;
. Focusing the company's activities exclusively on energy and energy
services.
. Formalized the Investor Relations function to provide the investment
community with an increased awareness of the company's activities and
opportunities. Securities analysts at PaineWebber, Prudential Securities and
Value Line are currently following the company.
. Sold R&T Group, Inc.'s remaining assets in April, marking SJI's exit from
the utility construction and general contracting business.
. Formed SJ EnerTrade, Inc., a non-regulated subsidiary to assume the
marketing activities of South Jersey Fuel, Inc. in selling natural gas to
energy marketers, electric and gas utilities and other wholesale users
throughout the mid-Atlantic and southern regions of the country.
. Achieved a 31.9 percent total return on investment for the full year of 1997
for an SJI investor who reinvested dividends.
-4-
SOUTH JERSEY GAS COMPANY
. Added approximately 6,700 customers, bringing total customers to
approximately 260,600 and completed approximately $44.0 million in pipeline
system expansion and upgrades.
. Recorded the highest number of conversions from other fuels in the last 7
years. Conversions in 1997 were up over 10 percent from 1996.
. Concluded a rate case with the New Jersey Board of Public Utilities in
January 1997. The major components include:
. $10.3 million increase in revenues;
. $6 million increase in base rates and an 11.25 percent return on common
equity;
. Improved the formula to share profits between stockholders and
customers for off-system and interruptible sales and transportation;
. Established rates, service fees and unbundled services on a cost-
causation basis.
. Developed and successfully implemented an innovative pilot program allowing
nearly 13,000 residential customers a choice in their natural gas supplier.
. Implemented a natural gas purchasing strategy which generated savings of
$4.3 million for customers during the 1996-97 winter season.
. Executed off-system sales or released pipeline capacity and storage totaling
51 Bcf which is approximately 46 percent of Gas Company's total throughput.
Off-system throughput increased approximately 49 percent in 1997 over 1996.
. Produced pre-tax profits of $16.1 million from off-system and interruptible
sales. After applying the improved sharing formula, these activities
generated $5.3 million in net income or approximately 27 percent of Gas
Company's earnings.
. Addressed capital needs to build new facilities by selling $35.0 million of
8.35% Preferred Securities through the creation of the SJG Capital Trust.
Gas Company sold $35.0 million principal amount of First Mortgage Bonds and
also received a $25.6 million equity infusion from SJI.
. Negotiated long-term labor contracts with the company's three bargaining
units and restructured the work force to address competitive market
realities.
. Created new programs to generate additional revenues for Gas Company, while
continuing cost reduction initiatives.
. Implemented the Automated Dispatch System to allow Gas Company to dispatch
service crews via a computer network.
SOUTH JERSEY ENERGY COMPANY
. Received a $2.0 million equity infusion from SJI to develop market
initiatives for natural gas, electricity and related energy services.
. Signed a long-term agreement with Mid-Atlantic Recycling Technologies to
supply natural gas to its Vineland, N.J. soil remediation facility. Energy
Company also assisted in financing the pipeline extension for the project.
. Formed a power marketing group to buy and sell electricity on the wholesale
market after receiving a license from the Federal Energy Regulatory
Commission.
. Signed seven long-term agreements of between 5 and 10 years to provide
natural gas and electricity requirements for large residential complexes.
SJ ENERTRADE, INC.
. Through its formal alliance with Union Pacific Fuels, Inc., South Jersey
Resources Group, LLC:
. Managed natural gas storage for several large natural gas utilities in
the mid-Atlantic region;
. Managed the entire gas supply portfolio for a natural gas local
distribution company;
. Expanded commitments for management services to be provided to
customers in 1998.
INSERT: Photograph across the bottom of pages 4 & 5.
Two gentlemen standing in front of storage tanks
-5-
INCREASED VALUE THROUGH GROWTH
South Jersey Industries, Inc.'s management updated our long-term strategic plan
in 1997 to ensure our continued success as the energy industry further evolves.
During this process, we asked ourselves, "what do we do best and how can we use
those strengths and skills to create and offer energy products and services that
fill our customers' needs?" In answering those questions we fashioned
objectives for each subsidiary which contribute to fulfilling our primary goal
of maximizing shareholder value.
SOUTH JERSEY GAS COMPANY
Serving as the foundation for South Jersey Gas Company's objectives are customer
growth, revenue generation from new or enhanced services and continued cost
control. Homeowners in Gas Company's service area continue to show an
overwhelming preference for natural gas heat, as almost all of the new homes
built with access to our mains use natural gas for heating. As evidence of this
preference, we recorded the highest number of conversions from other fuels in
the last 7 years. Conversions in 1997 increased by 10 percent over last year.
In 1997, we added approximately 6,700 customers, boosting our total number of
customers to approximately 260,600 at year end. Our earnings potential has grown
through the net addition of over 31,400 customers during the last 5 years and
residential and small-commercial customers account for nearly 87 percent of our
total sales margin. These customer groups provide earnings stability and
insulation from market risk.
Fueling future growth is the second wave of Atlantic City casino expansion which
is still in its infancy. Leading the continuing revitalization effort, the new
convention center and the Sheraton Hotel, Atlantic City's first deluxe non-
casino hotel, form the beginning of a grand entrance corridor linking the
convention center with the world-famous boardwalk and casino area. In the next 5
to 6 years, we expect the number of first-class hotel rooms in the city to
triple, with new tourist attractions, housing and small businesses augmenting
the renaissance of the city and the surrounding areas. Throughout Gas Company's
service area, homes and small businesses are sprouting up at a rapid pace. With
Atlantic City serving as a catalyst, we anticipate our already impressive
current annual growth rate of 2.6 percent will increase an additional 1 to 1.5
percent during the next 5 years.
Conversions to natural gas from other fuels remain an important part of our
growth, accounting for nearly one-third of Gas Company's new customers each
year. And, a large conversion market remains to be tapped. To identify and
target potential customers, we are introducing an aggressive new conversion
program in the commercial and residential markets during 1998.
Delivering natural gas in southern New Jersey will continue to be SJI's primary
business in the foreseeable future, and we intend to invest significantly in
that business to serve current and prospective customers effectively. Our
commitment to this business is evidenced by our plans to spend approximately
$150 million from 1997 through 1999 to improve our existing pipeline network and
install new mains and services.
INSERT: Photograph in the center of page 6 - Laser-filled lighthouse
INSERT: Passage under photograph -
A laser-filled lighthouse illuminates Atlantic City's grand entrance
corridor linking the convention center with the boardwalk.
-6-
Our planning process also generated ideas for new services and products that our
customers want and need, that are cost-effective to implement and have
significant revenue and income enhancement prospects. During 1997, Gas Company
developed and implemented a targeted campaign to persuade existing customers to
upgrade their electric water heaters to more efficient and less costly natural
gas units. Our goal is to convert a minimum of 4,500 water heaters to natural
gas over the next 5 years. In 1998, we will introduce an expanded Service Sentry
program to customers through a multi-faceted marketing campaign. Changes to this
appliance service contract program were driven by customer demand and our desire
to increase revenues by capturing a larger share of the heating, air
conditioning and appliance repair
INSERT: Bar chart at lower left hand corner of page 7 listing the following
information:
SJI - Earnings Per Common Share from Continuing Operations and
Dividends Declared (Dollars)
INSERT: Photograph on right hand side of page 7 showing man working at meter
station.
-7-
INSERT: Photograph on left hand side of page 8 of power lines.
market. By participating in this program, customers will have more service
contract choices and the benefit of Gas Company's long-standing expertise in the
appliance repair business. We plan to increase our market penetration for this
program from almost 7 percent to about 38 percent over the next 5 years.
SOUTH JERSEY ENERGY COMPANY
South Jersey Energy Company's new objectives expand its focus from solely
providing a commodity to offering customers viable energy solutions. Innovative
steps taken by Energy Company in 1997 resulted in new service and product
offerings, including
INSERT: Line chart at bottom of page 8 listing the following information:
SJI - Consolidated Net Income Applicable to Common Shareholders
($ millions). Information provides Total Consolidated Net
Income; Continuing Operations; and Discontinued Operations.
-8-
financing for commercial conversions to natural gas, electric lighting
retrofitting and wholesale electricity trading.
Becoming a total energy manager for commercial and industrial customers is
another key to Energy Company's growth. Through Energy Company's "Gatekeeper"
program, we can guide customers at all points in their energy decision-making
process from system design to equipment selection to price-based commodity
selection. An alliance with another energy services management company has
enabled Energy Company to offer Gatekeeper services to the long-term health care
industry, including lighting retrofits , heating system conversions and natural
gas and electricity sales.
During the year, in a bold step, Energy Company acquired certification from the
Federal Energy Regulatory Commission to buy and sell electric power nationwide
and established a power marketing group to trade electricity on the
Pennsylvania-New Jersey-Maryland grid. In this capacity, Energy Company arranges
for bulk, power transactions among municipal and regional electric utilities and
energy marketers. When the electric industry is further deregulated, we will add
electricity sales to the Gatekeeper package of retail services. This exciting
new venture brings us one step closer to the vision of establishing Energy
Company as the preferred total energy supplier in our region.
Energy Company's core business, natural gas sales to residential, commercial and
industrial customers, is slated to grow significantly over the next 5 years.
This growth assumes that natural gas prices will remain reasonably competitive
with natural gas utility rate structures and that the New Jersey Board of Public
Utilities opens the retail marketing programs to more residential customers. In
1997, Energy Company successfully participated in Gas Company's pilot
residential marketing program capturing approximately 50 percent of the
eligible customers while competing with five other companies. An alliance with
an outside marketing organization provided Energy Company with an innovative way
to use a large sales force for the project, contributing to the program's
success.
SJ ENERTRADE, INC.
In 1997, SJI formed SJ EnerTrade, Inc. to separate the wholesale energy
marketing and asset management operations from South Jersey Fuel, Inc.'s
previous business activities. EnerTrade assumed Fuel Company's function of
selling natural gas to energy marketers, electric and natural gas utilities and
other wholesale users in the mid-Atlantic and southern regions of the country.
Also, EnerTrade acquired Fuel Company's 50 percent share in South Jersey
Resources Group, LLC, a company formed through an alliance with Union Pacific
Fuels, Inc. Through SJRG, EnerTrade actively manages and profits from its own
portfolio of natural gas assets including storage and the assets of several
large, natural gas utilities. Positioning EnerTrade as a viable wholesale gas
marketer and asset manager on its own, as well as creating new services and
expanding market share with Union Pacific Fuels, are fundamental to its ongoing
success. For 1998, we have secured commitments from several, large utilities to
re new, and in some cases expand, our services which places EnerTrade on target
to meet earnings projections.
We are enthusiastic about the opportunities brought about by natural gas and
electric deregulation. We have prepared and repositioned ourselves based on the
needs and demands of increasingly aware energy consumers and a rapidly evolving
market. Be assured that all our activities are designed and carried out with
particular attention to our primary objective - improving the value of your
investment.
INSERT: Photograph upper right hand corner of page 9 - Caesars' Centurion
Tower.
INSERT: Passage -
Caesars' Centurion tower, which added 620 rooms, is just one example of
the dramatic growth occurring in Atlantic City.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Overview - South Jersey Industries, Inc. (SJI) has three operating subsidiaries,
South Jersey Gas Company (SJG); South Jersey Energy Company (SJE); and SJ
EnerTrade, Inc. (EnerTrade). SJG is a natural gas distribution company serving
260,567 customers at December 31, 1997, compared with 253,874 customers at
December 31, 1996. EnerTrade, formed in October 1997, provides services for the
sale of natural gas to energy marketers, electric and gas utilities, and other
wholesale users in the mid-Atlantic and southern regions of the country. SJE
provides services for the acquisition and transportation of natural gas for
retail end users and also markets total energy management services. The results
of operations of the Company's non-regulated energy service companies are not
material to the Company's financial statements taken as a whole. See "Sale of
Capital and Income from Discontinued Operations" for details related to
discontinued operations.
Competition - SJG franchises are non-exclusive. Currently, no other utility
provides retail gas distribution services within its territory. SJG does not
expect other utilities to do so in the foreseeable future because of the
extensive investment required for utility plant and related costs. SJG competes
with oil, propane and electricity suppliers for residential, commercial and
industrial users. The market for natural gas sales is subject to competition as
a result of deregulation. SJG has enhanced its competitive position while
maintaining its margins by using an unbundled tariff which isolates the variable
cost of the commodity within SJG's rate structure. Under this tariff, SJG
derives substantially all of its profits from the transportation rather than
the sale of the commodity. SJG's commercial and industrial customers can choose
their supplier while SJG recovers its cost of service and fixed gas costs
primarily through its transportation service. In April 1997, SJG initiated its
New Jersey Board of Public Utilities (BPU) approved pilot program giving some
residential customers a choice of gas suppliers (See "Pilot Program - Choice of
Gas Supplier"). SJG believes it has been a leader in addressing the changing
marketplace, while maintaining its focus on being a low-cost provider of natural
gas and energy services. SJE and EnerTrade also actively arrange energy services
designed to provide low-cost energy supplies in a highly competitive
marketplace. SJI's companies intend to develop creative initiatives and propose
meaningful regulatory and tax reforms designed to benefit its customers and
shareholders.
Pilot Program -- Choice of Gas Supplier - In April 1997, SJG initiated its BPU-
approved pilot program giving residential customers a choice of gas supplier.
During the enrollment period, which ended June 30, 1997, nearly 13,000
residential customers applied for this service. Transportation of gas for these
customers began on August 1, 1997. Participants' bills are reduced for certain
cost of gas charges and applicable taxes. The resulting decrease in revenues is
offset by a corresponding decrease in SJG's gas costs and taxes under SJG's BPU-
approved fuel clause. The program does not affect its net income, financial
condition or margins.
Energy Adjustment Clauses - SJG's tariff includes a Levelized Gas Adjustment
Clause (LGAC), a Temperature Adjustment Clause (TAC), a Remediation Adjustment
Clause (RAC) and a Demand Side Management Clause (DSMC). These clauses permit
adjustments for changes in gas supply costs, reduce the impact of extreme
fluctuations in temperatures on SJG and its customers, recover costs for the
remediation of former gas manufacturing plants and recover costs associated with
its conservation plan, respectively. The BPU-approved LGAC, RAC and DSMC
adjustments are made to match revenues and expenses. TAC adjustments do affect
revenue, income and cash flows since extremely cold weather can generate credits
to customers, while extremely warm weather during t he winter season can result
in additional billings to customers.
Status of Year 2000 Conversion - The Company prepared a Year 2000 Impact and
Assessment study and developed a plan for program modification. An outside
service was used to identify both informational and logic date variables within
the programming codes. This service was completed and expensed in 1997.
Presently, the Company is revising affected programming code. As of December 31,
1997, approximately 20 percent of the programming code was revised. All
revisions are scheduled to be completed by early 1999, providing the remainder
of 1999 for testing. Total conversion costs are estimated at $0.4 million of
which approximately $0.1 million was spent as of December 31, 1997. Vendors who
provide third party software and support services are being contacted to
establish Year 2000 compliance. The Company is also in the process of securing
written verification from its key product and service vendors to ensure their
compliance.
Operating Revenues -- Utility - In 1997, revenues decreased $1.8 million from
1996. Revenues increased $49.1 million when comparing 1996 with 1995. In 1997,
the revenue decrease is due to lower firm sales resulting from weather which was
6.7 percent warmer than 1996 and increased firm transportation service replacing
firm sales. These results were partially offset by the settlement of the base
rate case and customer growth. The revenue from transportation excludes
commodity costs (See Competition), and SJG's profits are from the transportation
rather than the sale of commodity. Therefore, the migration to firm
transportation does not lower SJG's margin. Total sales margin was higher in
1997 due to the impact of a rate increase effective January 27, 1997 (See
Regulatory Matters), the addition of 6,700 new customers, increased off-system
sales (nonjurisdictional sales) and increased capacity release revenues. The
revenue and sales margin increase in 1996 was primarily due to greater firm
sales resulting from weather which was 6.4 percent colder than 1995 and a net
increase of approximately 5,900 customers. The net customer increase in 1995 was
approximately 6,600.
Operating Revenues -- Nonutility - Revenues decreased $5.1 million in 1997
compared with 1996 and increased $2.2 million in 1996 compared with 1995. The
1997 decrease was principally due to lower commodity sales. The 1996 increase
resulted from higher volume sales and the effect of increased prices resulting
from higher commodity costs.
Gas Purchased for Resale - Gas purchased for resale decreased $4.0 million in
1997 compared with 1996 principally due to decreased unit sales. Gas purchased
for resale increased by $41.4 million for 1996 compared with 1995, principally
due to increased unit sales. Sources of gas supply include both contract and
open-market purchases. SJG is responsible for securing and maintaining its own
gas supplies to serve its customers.
SJG has entered into long-term contracts for natural gas supplies, firm
transportation, and firm gas storage service. The earliest expiration of any of
these contracts is 1999. All of the transportation and storage service
agreements between SJG and its interstate pipeline suppliers are provided under
tariffs approved by the Federal Energy Regulatory Commission. SJG's cumulative
obligation for demand charges and reservation fees for all of these services is
approximately $4.6 million per month, which is recovered on a current basis
through its LGAC.
Operation and Maintenance -- Utility - A summary of net changes in utility
operations and maintenance cost is as follows (in thousands):
1997 vs. 1996 1996 vs. 1995
-----------------------------
Other Production Expense $ 123 $ 171
Transmission (35) 83
Distribution (179) 474
Customer Accounts and Services (322) 186
Sales 126 (32)
Administration and General 3,216 (994)
Other (433) (243)
---------------------------
$ 2,496 $ (355)
===========================
Customer Accounts and Service costs decreased in 1997 principally due to a
charge in 1996 to increase the Company's reserve for uncollectible accounts and
lower payroll costs. Administrative and General costs increased in 1997
principally due to increased payroll, employee benefits (including a $1.5
million death-benefit liability which became payable upon the death of the
Company's president in December 1997) and regulatory costs.
-10-
Distribution costs increased in 1996 principally due to greater markout and leak
survey activities. The 1996 reduction in administrative and general costs was
principally due to decreased data processing, employee welfare and regulatory
costs.
Other Operating Expenses - A summary of principal changes in other consolidated
expenses for December 31, 1997 and 1996, is as follows (in thousands):
1997 vs. 1996 1996 vs. 1995
-----------------------------
Operation and Maintenance - Nonutility $ (3,625) $ 2,312
Depreciation 1,114 1,016
Federal Income Taxes 561 1,402
Gross Receipts & Franchise and Other Taxes (3,499) 2,229
Changes in nonutility expenses principally reflect the impact of unit sales and
commodity costs. Depreciation is higher in each period principally due to
increased investment in property, plant and equipment by SJG. Federal Income Tax
changes reflect the impact of changes in pre-tax income. The changes in Gross
Receipts & Franchise Taxes are due to changes in volumes of gas sold, which are
subject to those taxes. In addition, lower tax rates applied to certain customer
classes in 1997.
Interest Charges - Interest charges decreased in 1997 and 1996. The decrease in
1997 was due to the effect of lower short-term interest resulting from lower
levels of short-term debt outstanding. Short-term debt levels were reduced in
March 1997 by using proceeds from the sale of $35.0 million of first mortgage
bonds by SJG; the application of a $25.6 million cash equity infusion to SJG
from SJI; and the application of the net proceeds from the sale of the
Mandatorily Redeemable Preferred Securities in May 1997. Utility long-term
interest increased in 1997 due to increased levels of long-term debt
outstanding.
Preferred Dividend Requirements of Subsidiary - Preferred Dividends increased in
1997 due to the issuance of $35.0 million of 8.35% SJG-guaranteed Mandatorily
Redeemable Preferred Securities (See Capital Resources).
Sale of Capital Assets and Income from Discontinued Operations - In 1996, Energy
& Minerals, Inc. (EMI) sold The Morie Company, Inc.'s (Morie) common stock for
approximately $55.3 million. The underlying book value was approximately $27.9
million and the net gain on the transaction amounted to $15.0 million, after
deducting income taxes of $11.3 million and selling costs of $1.1 million (See
Note 2). A portion of the sale proceeds was used to redeem subsidiary debt,
including $9.0 million of 9.6 6% Senior Notes and a bank note of approximately
$2.0 million. Also, the Company sold the assets of certain R&T Group, Inc.
(R&T) subsidiaries in early 1997 for approximately $3.5 million, which
approximated the net book value of the assets sold. In connection with a plan to
discontinue or sell the R&T companies, R&T's recorded value was reduced in 1996
to estimated net realizable value (net of income taxes). The profit or loss and
the write down to net realizable value, net of income taxes, are included under
the caption Net (Loss) Gain on the Disposal of Discontinued Operations (See Note
2). The sale of assets in 1996, as described above, impacts the comparative
financial information for 1997 and 1996. Also, in 1997, the Company recorded
additional costs of approximately $2.6 million related to environmental
remediation expenditures for the previously operated fuel oil business of South
Jersey Fuel, Inc. (SJF) and for Morie (See Note 2).
The 1997 decrease in income from discontinued operations is principally due to
the recording of liabilities for anticipated environmental remediation
expenditures. The 1996 decrease in income from discontinued operations is
principally due to recording a liability for anticipated environmental
remediation expenses, insurance claims and termination costs.
Net Income Applicable to Common Stock - Net income (in thousands) and earnings
per common share reflect the following changes:
1997 vs. 1996 1996 vs. 1995
-----------------------------
Income from Continuing Operations $ 164 $ 3,391
Loss from Discontinued Operations (1,459) (3,176)
Net (Loss) Gain on Disposal of
Discontinued Operations (13,407) 12,640
---------------------------
Net Income (Decrease) Increase $ (14,702) $ 12,855
===========================
Earnings per Common Share
Continuing Operations $ .01 $ 0.31
Discontinued Operations (1.38) 0.88
---------------------------
Earnings per Share (Decrease) Increase $ (1.37) $ 1.19
===========================
The details affecting the increase 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 are generally met by cash from operations and short-term
lines of credit. The Company maintains short-term lines of credit with a number
of banks, aggregating $130.0 million of which $84.1 million was available at
December 31, 1997. The credit lines are uncommitted and unsecured with interest
rates below the prime rate.
The changes in cash flows from operating activities are as follows (in
thousands):
1997 vs. 1996 1996 vs. 1995
-----------------------------
Increases/(Decreases):
Net Income $ (14,702) $ 12,855
Depreciation, Depletion and Amortization (3,350) 740
Provision for Losses on Accounts Receivable (792) 878
Revenues and Fuel Costs Deferred - Net 4,449 (2,196)
Deferred and Non-Current
Federal Income Taxes - Net (4,365) 5,397
Environmental Remediation Costs - Net (1,112) (3,315)
Net Pre-Tax Loss (Gain) on the Disposal
of Discontinued Operations 23,465 (22,620)
Accounts Receivable 44 18,745
Inventories 6,732 (10,663)
Prepayments and Other Current Assets (973) 1,367
Prepaid Gross Receipts & Franchise Taxes (1,011) 5,892
Accounts Payable and Other
Accrued Liabilities (13,184) 8,453
Other - Net 2,865 (9,087)
------------------------
Net Cash from Operating Activities $ (1,934) $ 6,446
========================
Depreciation and Amortization are non-cash charges to income and do not impact
cash flow. Changes in depreciation cost reflect the effect of additions and
reductions to fixed assets.
Increases in Revenues and Fuel Costs Deferred - Net reflect the impact of
overcollection of fuel costs or the recovery of previously deferred fuel costs.
Decreases reflect the impact of payments or credits to customers for amounts
previously overcollected and the undercollection of fuel costs resulting from
increases in natural gas costs.
Increases in Deferred and Non-Current Federal Income Taxes and Credits - Net
represent the excess of taxes accrued over amounts paid. Decreases reflect the
impact of taxes paid in excess of amounts accrued. Generally, deferred income
taxes related to deferred fuel costs will be paid in the next year.
Changes in Environmental Remediation Costs - Net represent the difference
between remediation expenditures and amounts collected under the RAC and
insurance recoveries.
-11-
Changes in Accounts Receivable are generally weather and price related. Changes
impact cash flows when collected in subsequent periods.
Changes in Inventory reflect the impact of seasonal requirements, temperatures
and price changes.
Changes in Prepaid Gross Receipts & Franchise Taxes reflect the impact of excess
taxes paid over taxes accrued. However, significant timing differences exist in
cash flows during the year since SJG must pay the full year's tax on April 1 of
each year and amortize any prepaid tax over the remainder of the year, on the
basis of gas volumes sold. SJG uses short-term borrowings to make these tax
payments which result in a temporary increase in the short-term debt level. The
carrying costs of timing differences are recognized in base utility rates.
As stated in Note 1, on January 1, 1998, the Gross Receipts & Franchise Taxes
were being replaced with a 6 percent State Sales and Use Tax, a 9 percent State
Corporation Business Tax on income before taxes and a Transitional Energy
Facilities Assessment (TEFA) on volumes of gas sold and transported. The TEFA
will be phased out over 5 years beginning January 1, 1999. Approximately 50
percent of the new taxes will be paid in monthly installments during the first 6
months of the year and the principal portion of the remaining taxes will be paid
on June 25, 1998, and on May 15 of each year thereafter. New rates became
effective on January 1, 1998, and are subject to change following BPU approval
which is expected in early 1998.
Changes in Accounts Payable and Other Current Liabilities reflect the impact of
timing differences between the accrual and payment of costs.
Cash flow from nonutility operations is generally retained by those companies
with amounts in excess of cash requirements passed up to SJI either as dividends
or as temporary short-term loans. Nonutility operations are service oriented and
do not require significant investment in capital facilities, inventories or
personnel. These operations are not considered material to the financial
statements.
EMI has assumed responsibility for the environmental liabilities of Morie, which
was sold in 1996. The environmental liabilities are estimated to range between
$3.1 million and $15.5 million. EMI has accrued the lower end of the range under
the guidance of FASB No. 5 "Accounting for Contingencies" (See Note 13).
As a result of additional testing performed during 1997, both SJI and SJF's
discontinued operations have also estimated their potential exposure for the
future environmental remediation of four sites where fuel oil operations were
conducted years ago. Estimates for SJI's site range between $0.3 million and
$1.1 million while the estimated liability for SJF's discontinued operations
ranges from $1.5 million to $4.2 million for the remaining three sites. The
lower end of these ranges have been accrued. SJI's charge is included in the
consolidated income statement as operating expense while SJF's charge is
reflected under the caption "(Loss) Income from Discontinued Operations - Net"
(See Note 2).
Regulatory Matters - On January 27, 1997, the BPU granted SJG a base rate
increase of $6.0 million based on a 9.62 percent rate of return on rate base,
which included an 11.25 percent return on common equity. The majority of this
increase comes from residential and small commercial customers. Part of the
increase is recovered from new service fees which charge specific customers for
costs they cause SJG to incur. Additionally, SJG is now allowed to retain the
first $5.5 million of pre-tax margins generated by interruptible and off-system
sales and transportation and 20 percent of pre-tax margins above that level. In
1998 and 1999, this $5.5 million threshold will increase by the annual revenue
requirement associated with specified major construction projects. These
sharing formula improvements are expected to result in additional rate relief of
approximately $0.3 million in 1998 and $1.8 million in 1999.
Rates of return are calculated by weighting SJG's individual capital cost rates
by the proportion of each respective type of capital. This requires selecting
appropriate capital structure ratios and determining the cost rate for each
capital component as determined in each rate proceeding.
In setting a rate of return, the BPU must provide a utility and its investors
with a return that is commensurate with the risk to which the invested capital
is exposed so that the utility has access to the capital required to meet its
public service responsibility.
Also on January 27, 1997, the BPU approved SJG's request for a $2.5 million
revenue reduction through the TAC. This is the standard BPU procedure used to
credit customers with previously collected revenues, which were in excess of
those allowed by the TAC (See "Energy Adjustment Clauses"). This revenue
reduction reflects the TAC's normal operation, as does the BPU's confirmation of
the decrease.
In April 1996, SJG received BPU approval to increase its rates to recover
approximately $8.0 million of increased natural gas costs through the LGAC.
In September 1996, SJG filed to reduce its rates through its 1996-97 LGAC
reflecting a $1.4 million decrease in natural gas costs. Updated projections of
the 1996-97 LGAC year results were rolled into the 1997-98 LGAC year and filed
with the BPU on September 12, 1997. The 1997-98 LGAC filing requested a rate
increase to reflect an increase of $4.7 million in natural gas costs, inclusive
of the $1.4 million reduction related to the 1996-97 LGAC filing. Both filings
are still pending at the BPU.
The adoption of FASB No. 109, "Accounting for Income Taxes" in 1993 primarily
resulted in creating a regulatory asset and a deferred income tax liability. As
a result of positions taken in the 1994 rate case, the amortization of the asset
is being recovered through rates over an 18-year period which began in December
1994. Also, FASB No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions", adopted by the Company in 1993, requires an accrual basis
of accounting for retiree benefit payments during the years of employment. The
Company elected to recognize the unfunded transition obligation over a 20-year
period beginning in 1993. The majority of the postretirement benefit costs apply
to SJG, which previously recovered these costs through rates on a pay-as-you-go
basis. A December 1994 BPU order provided for partial recovery of costs
associated with FASB No. 106 and prescribed continued deferral of unrecovered
costs. Also, beginning in 1995, an external trust was established towards
funding postretirement benefit costs. Rate recovery in excess of SJG's pay-as-
you-go requirement is contributed to the trust and provides no operating benefit
to SJG except to the extent that trust income reduces future net periodic cost.
Gross contributions to the trust amounted to $2.0 million in 1997 and the
balance of the regulatory asset amounted to $6.1 million at December 31, 1997.
This amount will be recovered from ratepayers over a 15-year period beginning
January 1, 1998, as approved by the BPU in December 1997. In addition, the BPU
approved full recovery of the net periodic benefit cost.
The Company incurred and recorded certain costs for environmental remediation of
sites where SJG or predecessor companies operated gas manufacturing plants. SJG
terminated manufactured gas operations at all sites more than 35 years ago.
Since the early 1980s, the Company has recorded environmental remediation costs
of $96.2 million, of which $39.2 million was expended as of December 31, 1997.
The Company, with the assistance of an outside consulting firm, estimates that
total future expenditures to remediate SJG sites will range from $52.4 million
to $165.6 million. The lower end of this range was recorded as a liability and
is reflected on the balance sheet under the captions "Current Liabilities" and
"Deferred Credits and Other Non-Current Liabilities". Recorded environmental
remediation costs of SJG do not directly affect earnings because those costs
are deferred and, when expended, recovered through rates over 7-year
amortization periods as authorized by the BPU. Amounts accrued for future
expenditures were not adjusted for future insurance recoveries, which
management is pursuing. SJG received $4.2 million of insurance recoveries as of
December 31, 1997. SJG used these proceeds first to offset legal fees incurred
in connection with those recoveries and used the excess to reduce the balance
of deferred environmental remediation costs. Recorded amounts include estimated
costs based on projected investigation and remediation work plans using existing
technologies. Actual expenditures could differ from the estimates due to the
long-term nature of the projects, changing technology, government regulations
and site specific requirements.
The major portion of recorded environmental costs relate to the cleanup of SJG's
former gas manufacturing sites. SJG recorded $90.2 million for
-12-
the remediation of these sites, of which $37.8 million was expended through
December 31, 1997.
As a result of the 7-year recovery mechanism, SJG does not expense environmental
remediation costs when incurred and defers costs to be recovered. SJG has two
regulatory assets associated with environmental cost. The first regulatory asset
is titled "Environmental Remediation Cost: Expended - Net". These expenditures
represent actual costs incurred to remediate former gas manufacturing plant
sites net of rate and insurance recoveries. These costs meet the requirements of
FASB No. 71, "Accounting for the Effects of Certain Types of Regulation". The
BPU allowed recovery of these expenditures through July 1995 and petitions to
recover these costs through July 1997 are pending.
The other regulatory asset titled "Environmental Remediation Cost: Liability for
Future Expenditures" relates to estimated future expenditures determined under
the guidance of FASB No. 5, "Accounting for Contingencies". This amount, which
relates to former manufactured gas plant sites was recorded as a deferred debit
with the corresponding amount reflected in Current Liabilities and Deferred
Credits and Other Non-Current Liabilities, as appropriate. The deferred debit is
a regulatory asset under FASB No. 71, because the BPU's intent, as evidenced by
its current practice, is to provide recovery sufficient to recover the deferred
costs after they are expended.
Annually, SJG files with the BPU to recover expended remediation costs in rates.
The BPU has consistently allowed the full recovery over 7-year periods, and SJG
believes this will continue. As of December 31, 1997, SJG's unamortized
remediation expenditures of $21.0 million are reflected on the balance sheet
under the caption "Regulatory and Other Non-Current Assets." Since BPU approval
of the RAC mechanism in August 1992, SJG recovered $12.6 million as of December
31, 1997.
On July 31, 1996 and 1997, SJG made its annual filings with the BPU to recover
remediation costs expended during the period of August 1995 through July 1997
totaling $1.6 million. Both filings were subsequently updated and are still
pending at the BPU.
On September 9, 1997, SJG filed with the BPU to adjust rates by replacing the
current State Gross Receipts & Franchise Tax components with a Sales and Use
Tax, a Corporation Business Tax and a Transitional Energy Facilities Assessment
(See "Liquidity").
On May 5, 1997, SJG filed with the BPU to update rates related to appliance
service charges, including a profit margin. The new rates are competitive with
other service providers in New Jersey and are designed to increase earnings and
cash flows to SJG over the current rates. This filing is pending.
The Company is subject to claims which arise in the ordinary course of its
business and other legal proceedings. A group of Atlantic City casinos filed a
petition with the BPU on January 16, 1996, alleging overcharges of over $10.0
million, including interest. Management believes that charges to the casinos
were based on applicable tariffs and that the casinos were not qualified under
less expensive rate schedules, as claimed. Management believes that the
ultimate impact of these actions will not materially affect the Company's
financial position, results of operations or liquidity.
Capital Resources - The Company has a continuing need for cash resources and
capital, primarily to invest in new and replacement facilities, equipment and
for environmental cleanup costs. Total construction and remediation expenditures
for 1997 amounted to $58.7 million. The costs for 1998, 1999 and 2000 are
estimated at approximately $63.9 million, $60.2 million and $48.7 million,
respectively. These investments are expected to be funded from several sources,
which may include cash generated by operations, temporary use of short-term
debt, sale of first mortgage bonds, capital leases and RAC recoveries.
On March 21, 1997, SJG sold $35.0 million of its First Mortgage Bonds, 7.7%
Series due 2027.
On May 2, 1997, SJG's Delaware statutory trust subsidiary, SJG Capital Trust,
sold $35.0 million of 8.35% SJG-guaranteed Mandatorily Redeemable Preferred
Securities. The Trust holds as its sole asset the 8.35% Deferrable Interest
Subordinated Debentures issued by SJG maturing April 30, 2037. The Debentures
and Preferred Securities are redeemable at the option of SJG at a redemption
price equal to 100 percent of the principal amount at any time on or after April
30, 2002.
In January 1996, SJG redeemed a total of $5,258,000 of its 8-1/4% Series First
Mortgage Bonds maturing in 1996 and 1998. In April 1996, SJG redeemed the
remaining balance of its 9.2% Series First Mortgage Bonds due 1998 amounting to
$2,667,000.
A shareholder rights plan is in effect beginning September 20, 1996, extending
through September 20, 2006 (See Note 4).
Inflation - The ratemaking process provides that only the original cost of
utility plant is recoverable in revenues as depreciation. Therefore, the excess
cost of utility plant, stated in terms of current cost over the original cost
of utility plant, is not presently recoverable. While the ratemaking process
gives no recognition to the current cost of replacing utility plant, based on
past practices, SJG believes it will be allowed to earn on the increased cost
of its net investment as replacement of facilities actually occurs.
Summary - The company is confident it will have sufficient cash flow to meet its
operating, capital and dividend needs and is taking and will take such actions
necessary to employ its resources effectively.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of
South Jersey Industries, Inc.:
We have audited the consolidated balance sheet of South Jersey Industries, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related statements of
consolidated income, consolidated retained earnings and consolidated cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of South Jersey Industries, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 18, 1998
-13-
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands Except for Per Share Data)
South Jersey Industries, Inc. and Subsidiaries
Year Ended December 31,
1997 1996 1995
----------------------------
Operating Revenues:
Utility (Notes 1 & 6) $327,477 $329,295 $280,233
Nonutility 21,090 26,163 23,930
----------------------------
Total Operating Revenues 348,567 355,458 304,163
----------------------------
Operating Expenses:
Gas Purchased for Resale 181,117 185,138 143,788
Operation and Maintenance - Utility (Note 9) 48,519 46,023 46,378
Nonutility 23,154 26,779 24,467
Depreciation (Note 1) 15,978 14,864 13,848
Federal Income Taxes (Notes 1, 5 & 8) 10,716 10,155 8,753
Gross Receipts & Franchise Taxes
and Other Taxes (Note 8) 30,441 33,940 31,711
----------------------------
Total Operating Expenses 309,925 316,899 268,945
----------------------------
Operating Income 38,642 38,559 35,218
----------------------------
Interest Charges:
Long-Term Debt 15,197 14,117 15,022
Short-Term Debt 2,550 5,533 3,489
Other 364 470 1,655
----------------------------
Total Interest Charges 18,111 20,120 20,166
----------------------------
Preferred Dividend Requirements
of Subsidiary (Note 3) 2,102 174 178
----------------------------
Income from Continuing Operations 18,429 18,265 14,874
Discontinued Operations (Note 2):
(Loss) Income from Discontinued
Operations - Net (1,866) (407) 2,769
Net (Loss) Gain on the Disposal
of Discontinued Operations (767) 12,640 -
----------------------------
Net Income Applicable to Common Stock $ 15,796 $ 30,498 $ 17,643
============================
Average Shares of Common Stock
Outstanding (Note 4) 10,763 10,732 10,720
============================
Earnings Per Common Share: (Notes 2 & 4)
Continuing Operations $ 1.71 $ 1.70 $ 1.39
Discontinued Operations - Net (0.24) 1.14 0.26
----------------------------
Earnings Per Common Share $ 1.47 $ 2.84 $ 1.65
============================
Cash Dividends Declared Per Common Share $ 1.44 $ 1.44 $ 1.44
============================
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(In Thousands)
Year Ended December 31,
1997 1996 1995
----------------------------
Balance at Beginning of Year $ 48,743 $ 33,705 $ 31,497
Net Income Applicable to Common Stock 15,796 30,498 17,643
Cash Dividends Declared - Common Stock (15,501) (15,460) (15,435)
----------------------------
Balance at End of Year (Note 12) $ 49,038 $ 48,743 $ 33,705
============================
<FN>
The accompanying schedule and footnotes are an integral part of the financial
statements.
</FN>
-14-
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands)
South Jersey Industries, Inc. and Subsidiaries
Year Ended December 31,
1997 1996 1995
----------------------------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 15,796 $ 30,498 $ 17,643
Adjustments to Reconcile Net Income
to Cash Flows Provided by Operating
Activities:
Depreciation, Depletion and Amortization 18,112 21,462 20,722
Provision for Losses on Accounts Receivable 1,351 2,143 1,265
Revenues and Fuel Costs Deferred - Net (3,270) (7,719) (5,523)
Deferred and Non-Current Federal
Income Taxes and Credits - Net 5,358 9,723 4,326
Net Pre-Tax Loss (Gain) on the Disposal
of Discontinued Operations 845 (22,620) -
Environmental Remediation Costs - Net* (2,883) (1,771) 1,544
Changes in:
Accounts Receivable 2,113 2,069 (16,676)
Inventories (1,634) (8,366) 2,297
Prepayments and Other Current Assets (89) 884 (483)
Prepaid Gross Receipts & Franchise
Taxes - Net 1,036 2,047 (3,845)
Accounts Payable and Other
Accrued Liabilities 3,720 16,904 8,451
Other - Net (502) (3,367) 5,720
----------------------------
Net Cash Provided by Operating Activities 39,953 41,887 35,441
----------------------------
Cash Flows from Investing Activities:
Investment in Affiliate - (1,000) -
Loan to Affiliate (1,761) (2,800) -
Proceeds from the Sale of Assets - Net 3,488 56,056 -
Taxes Paid on the Sale of Assets - Net (9,807) - -
Proceeds from the Sale of
Available-for-Sale Securities - 795 -
Capital Expenditures, Cost of
Removal and Salvage (49,604) (43,218) (44,607)
----------------------------
Net Cash (Used in) Provided
by Investing Activities (57,684) 9,833 (44,607)
----------------------------
Cash Flows from Financing Activities:
Net (Repayments of) Borrowings
from Lines of Credit (62,400) 32,000 (3,900)
Proceeds from Issuance of Long-Term Debt 35,618 - 30,000
Principal Repayments of Long-Term Debt (6,603) (27,235) (9,500)
Dividends on Common Stock (15,501) (15,460) (15,435)
Proceeds from Sale of Common Stock 320 383 117
Proceeds from the Issuance of
Preferred Securities 35,000 - -
Repurchase of Preferred Stock (90) (90) (90)
Payments for Issuance of Long-Term
Debt and Preferred Securities (2,429) - (647)
----------------------------
Net Cash (Used In) Provided by
Financing Activities (16,085) (10,402) 545
----------------------------
Net (Decrease) Increase in Cash and
Cash Equivalents (33,816) 41,318 (8,621)
Cash and Cash Equivalents
at Beginning of Year 46,905 5,587 14,208
----------------------------
Cash and Cash Equivalents
at End of Year $ 13,089 $ 46,905 $ 5,587
============================
Supplemental Disclosures of Cash Flow Info
Cash paid during the year for:
Interest (Net of Amounts Applicable to LGAC
Overcollections and Amounts Capitalized) $ 18,303 $ 21,879 $ 18,409
Income Taxes (Net of Refunds) $ 12,129 $ 2,858 $ 6,907
<FN>
* Note 13 contains additional information relating to environmental remediation
costs.
The accompanying schedule and footnotes are an integral part of the financial
statements.
</FN>
-15-
CONSOLIDATED BALANCE SHEET
(In Thousands)
South Jersey Industries, Inc. and Subsidiaries
December 31,
------------------------
1997 1996
---------- ---------
Assets
Property, Plant and Equipment: (Note 1)
Utility Plant, at original cost $ 619,489 $ 577,304
Accumulated Depreciation (167,176) (157,682)
Gas Plant Acquisition Adjustment - Net 1,926 2,000
Nonutility Property and Equipment, at cost 3,332 3,342
Accumulated Depreciation (1,033) (1,060)
------------------------
Property, Plant and Equipment - Net 456,538 423,904
------------------------
Investment in Affiliate (Note 2) 849 1,286
------------------------
Current Assets:
Cash and Cash Equivalents (Notes 1 & 11) 13,089 46,905
Notes Receivable - Affiliate 4,561 2,800
Accounts Receivable 35,947 38,714
Unbilled Revenues (Note 1) 17,263 17,855
Provision for Uncollectibles (1,530) (1,425)
Natural Gas in Storage, average cost 23,877 22,638
Materials and Supplies, average cost 4,509 4,114
Assets of Discontinued Businesses Held for Disposal 622 4,966
Prepaid Gross Receipts & Franchise Taxes 566 1,602
Prepayments and Other Current Assets 1,862 1,773
------------------------
Total Current Assets 100,766 139,942
------------------------
Accounts Receivable - Merchandise 1,998 1,999
------------------------
Regulatory and Other Non-Current Assets (Note 1)
Environmental Remediation Costs: (Note 13)
Expended - Net 21,041 15,566
Liability for Future Expenditures 52,400 41,700
Gross Receipts & Franchise Taxes (Note 8) 4,028 4,468
Income Taxes - Flowthrough Depreciation (Note 8) 13,999 14,977
Deferred Fuel Costs - Net 3,674 404
Deferred Postretirement Benefit Costs (Notes 6 & 9) 6,150 5,153
Other 9,158 8,982
------------------------
Total Regulatory and Other Non-Current Assets 110,450 91,250
------------------------
Total Assets $ 670,601 $ 658,381
========================
Capitalization and Liabilities
Capitalization: (see Schedule)
Common Equity (Notes 4 & 12) $ 173,499 $ 172,731
Preferred Stock and Securities
of Subsidiary (Note 3) 37,224 2,314
Long-Term Debt 176,360 149,736
------------------------
Total Capitalization 387,083 324,781
------------------------
Current Liabilities:
Notes Payable (Note 11) 45,900 108,300
Current Maturities of Long-Term Debt 8,994 6,603
Accounts Payable 49,142 50,301
Customer Deposits 5,871 6,050
Environmental Remediation Costs (Note 13) 16,511 9,377
Federal Income Taxes Accrued 884 4,417
Interest Accrued and Other Current Liabilities 12,477 13,693
------------------------
Total Current Liabilities 139,779 198,741
------------------------
Deferred Credits and Other
Non-Current Liabilities: (Note 1)
Deferred Income Taxes - Net (Note 5) 78,631 75,821
Investment Tax Credits 5,632 6,025
Pension and Other Postretirement Benefits (Note 9) 11,747 10,218
Environmental Remediation Costs (Note 13) 40,511 34,353
Other 7,218 8,442
------------------------
Total Deferred Credits and
Other Non-Current Liabilities 143,739 134,859
------------------------
Commitments and Contingencies (Note 13)
Total Capitalization and Liabilities $ 670,601 $ 658,381
========================
<FN>
The accompanying schedule and footnotes are an integral part of the financial
statements.
</FN>
-16-
SCHEDULE OF CONSOLIDATED CAPITALIZATION
(In Thousands Except for Share Data)
South Jersey Industries, Inc. and Subsidiaries
December 31,
1997 1996
------------------------
Common Equity: (Notes 4 & 12)
Common Stock: Par Value $1.25 per share;
Authorized 20,000,000 shares;
Outstanding Shares: 10,771,413 (1997)
and 10,756,679 (1996) $ 13,464 $ 13,446
Premium on Common Stock 110,997 110,542
Retained Earnings 49,038 48,743
------------------------
Total Common Equity 173,499 172,731
------------------------
Preferred Stock and Securities of Subsidiary:(Note 3)
Redeemable Cumulative Preferred Stock:
South Jersey Gas Company, Par Value $100 per share
Authorized Shares: 47,304 (1997)
and 48,204 (1996)
Outstanding Shares:
Series A, 4.70% - 3,000 (1997)
and 3,900 (1996) 300 390
Series B, 8.00% - 19,242 1,924 1,924
Company-Guaranteed Manditorily Redeemable
Preferred Securities of Subsidiary Trust:
Par Value $25 per share, 1,400,000 shares
Authorized and Outstanding 35,000 -
------------------------
Total Preferred Stock and
Securities of Subsidiary $ 37,224 $ 2,314
========================
Long-Term Debt: (A)
South Jersey Gas Company:
First Mortgage Bonds (B):
8.19% Series due 2007 22,727 25,000
10 1/4% Series due 2008 25,000 25,000
9% Series due 2010 28,438 30,625
6.95% Series due 2013 35,000 35,000
7.7% Series due 2027 (C) 35,000 -
Unsecured Notes:
Term Note, 8.47% due 2001 (D) 8,571 10,714
Debenture Notes, 8.6% due 2010 30,000 30,000
South Jersey Energy Company:
Promissory Notes (E) 618 -
------------------------
Total Long-Term Debt Outstanding 185,354 156,339
Less Current Maturities 8,994 6,603
------------------------
Total Long-Term Debt 176,360 149,736
------------------------
Total Capitalization $ 387,083 $ 324,781
========================
<FN>
(A) The long-term debt maturities and sinking fund requirements for the
succeeding 5 years are as follows: 1998, $8,994,176; 1999, $9,005,064;
2000, $9,016,888; 2001, $12,029,829; and 2002, $9,810,873.
(B) SJG's First Mortgage dated October 1, 1947, as supplemented, securing
the First Mortgage Bonds constitutes a direct first mortgage lien on
substantially all utility plant.
(C) On March 21, 1997, SJG sold $35,000,000 of its First Mortgage Bonds,
7.7% Series due 2027.
(D) An additional $5,000,000 revolving credit facility was available under
the terms of this agreement which expired December 31, 1997.
(E) SJE has several unsecured notes at interest rates ranging from 8.75% to
9.0% and an average term of 5 years. SJE has a $1,000,000 line of credit
against which these notes are drawn.
</FN>
-17-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Practices:
Consolidation - The consolidated financial statements include the accounts of
South Jersey Industries, Inc. (SJI or the Company) and all of its subsidiaries.
Certain intercompany transactions, amounting to approximately $1.9 million, $7.3
million, and $6.9 million, respectively, in 1997, 1996 and 1995, were not
required to be eliminated. Those amounts were capitalized to utility plant or
environmental remediation costs on the South Jersey Gas Company (SJG) books of
account and are recoverable by SJG through the rate-making process (See Note
13). All other significant intercompany accounts and transactions have been
eliminated. Certain reclassifications have been made of previously reported
amounts to conform with classifications used in the current year.
Estimates and Assumptions - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and related disclosures. Therefore, actual results could differ from
those estimates.
Regulation - SJG is subject to the rules and regulations of the New Jersey Board
of Public Utilities (BPU) and maintains its accounts in accordance with the
prescribed Uniform System of Accounts of that Board (See Note 6).
Utility Revenues - SJG bills most of its customers on a monthly cycle basis,
although certain commercial and industrial customers are billed at or near the
end of each month. An accrual is made to recognize the unbilled revenues from
the date of the last bill to the end of period.
In accordance with a BPU order, SJG is allowed to recover the excess cost of gas
sold over the cost included in base rates through the Levelized Gas Adjustment
Clause (LGAC). This collection is made on a forecasted basis upon BPU order.
Under-recoveries and over-recoveries of gas costs are deferred and included in
the determination of the following year's LGAC. Interest is paid on
overcollected LGAC balances based on SJG's return on rate base as determined in
its base rate proceedings.
SJG's tariff also includes a Temperature Adjustment Clause (TAC) and a
Remediation Adjustment Clause (RAC). These clauses are designed to reduce the
impact of extreme fluctuations in temperatures on SJG and its customers, and
recover costs incurred in the remediation of former gas manufacturing plants,
respectively. TAC adjustments affect revenue, income and cash flows since
extremely cold weather can generate credits to customers, while extremely warm
weather during the winter season can result in additional billings to customers.
RAC adjustments do not directly affect earnings because costs are deferred and
recovered through rates over 7-year amortization periods (See Note 13).
Property, Plant & Equipment - Utility plant is stated at original cost as
defined for regulatory purposes; nonutility plant is stated at cost. The cost of
additions, replacements and renewals of property is charged to the appropriate
plant account.
New Accounting Pronouncements - In March 1995, the Financial Accounting
Standards Board (FASB) issued FASB No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company
adopted this statement in 1996. It requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The resultant impairment was
included in discontinued operations. See Note 4 for discussion of FASB No. 123
which also became effective in 1996.
In February 1997, the FASB issued FASB No. 128, "Earnings per Share", which is
effective for financial statements for periods ending after December 15, 1997.
FASB No. 128 supersedes previous reporting requirements on Earnings per Share
(EPS) and replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with a complex capital structure when
those amounts are different. The adoption of FASB No. 128 did not have an
impact on the Company's EPS (See Note 4).
In June 1997, the FASB issued FASB No. 130, "Reporting Comprehensive Income".
This statement, which establishes standards for reporting and disclosure of
comprehensive income, is effective for annual periods beginning after December
15, 1997. The Company currently has no additional items qualifying as other
comprehensive income under FASB No. 130 and, therefore, believes its adoption
will not have any impact on the Company's financial position on results of
operations.
In June 1997, the FASB also issued FASB No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which is also effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for the
reporting of selected information about operating segments in the Company's
interim and annual financial statements. The Company is evaluating whether the
adoption of this statement will result in any change to its presentation of
financial information. The Company expects to adopt FASB No. 131 effective
January 1, 1998; however, as permitted by this statement, segment information
will not be reported in interim financial statements until 1999.
Depreciation and Amortization - Depreciation of utility plant is provided on a
straight-line basis over the estimated remaining lives of the various classes of
property. These estimates are periodically reviewed and adjustments are made as
required after BPU approval. The composite rate per annum for all depreciable
utility property was approximately 2.8 percent in 1997, 1996 and 1995.
Generally, with the exception of extraordinary retirements, accumulated
depreciation is charged with the cost of depreciable utility property retired,
together with removal costs less salvage. The gas plant acquisition adjustment
is being amortized on a straight-line basis over a 40-year period. The
unamortized balance amounting to $1.9 million at December 31, 1997, is not
included in rate base. Depreciation of nonutility property is computed generally
on a straight-line basis over the estimated useful lives of the property,
ranging up to 35 years. Any gain or loss realized upon the disposition of
nonutility property is recognized in determining net income.
Federal Income and Other Taxes - Deferred Income Taxes are provided for all
significant temporary differences between book and taxable income (See Notes 5 &
8).
On July 14, 1997, legislation reforming energy taxation in New Jersey was
adopted. The new law eliminates the Gross Receipts & Franchise Tax (equivalent
to approximately 13 percent of utility revenue) and replaces it with a
combination of taxes. Beginning January 1, 1998, retail sales of natural gas and
electricity and utility services, including transportation, will be subject to
the 6 percent State Sales and Use Tax. Utilities will also be subject to the 9
percent State Corporation Business Tax on income before taxes. To bridge the
revenue gap created by the new tax law, the State will impose a Transitional
Energy Facilities Assessment (TEFA) on volumes of gas sold and transported. The
TEFA will be phased out over a 5-year period beginning January 1, 1999 and
ending January 1, 2003. It is expected that the revised tax policy will
eliminate tax disparities between utility and non-utility suppliers, providing
fair competition and lower energy costs for the consumer. The adoption of the
new legislation will not materially affect the Company's financial position,
results of operations or liquidity (See Note 6).
Statements of Cash Flows - For purposes of reporting cash flows, all highly
liquid investments with original maturities of three months or less are
considered cash equivalents.
2. Divestitures and Affiliations:
Divestitures - On December 3, 1996, Energy & Minerals, Inc. (EMI), a subsidiary
of SJI, sold the common stock of The Morie Company, Inc. (Morie), its sand
mining and processing subsidiary, in a cash transaction for approximately $55.3
million. The net book value of assets sold was approximately $27.9 million.
Cash, certain real estate and other miscellaneous assets, along with certain
liabilities, remaining after the sale were transferred
-18-
Notes to Consolidated Financial Statements, Continued
to the books of EMI (See Note 13). The 1996 gain on the sale of $15.0 million,
net of applicable income taxes of $11.3 million and selling costs of $1.1
million, is included in the consolidated income statement under the caption "Net
(Loss) Gain on the Disposal of Discontinued Operations". The sale price was
subject to customary post-closing entries resulting in a downward adjustment of
$0.6 million which was recorded in 1997.
In December 1996, the Company developed a formal plan to discontinue the
operations of its construction and environmental services operations, R & T
Group, Inc. (R & T) and its five subsidiaries. As a result, the Company
recognized a net loss of $2.4 million, net of applicable income tax credits of
$1.3 million, on the planned disposition of R & T's assets. Additionally, in two
separate sales on January 9, 1997, and on April 4, 1997, R & T sold all of its
operating assets, except certain real estate. The aggregate proceeds from these
sales, approximately $3.5 million, approximated the net book value of the assets
at the date of sale. Associated disposal costs of $189,500, or $123,200 after
taxes, are included in the consolidated income statement for 1997. These losses
are reflected in the consolidated income statement under the caption "Net (Loss)
Gain on the Disposal of Discontinued Operations".
In 1997, the Company performed additional testing to arrive at an estimate of
the cost to perform environmental cleanup and remediation of properties owned by
South Jersey Fuel, Inc. (SJF), a subsidiary of EMI, as part of its previously
operated fuel oil business. Also in 1997, SJ EnerTrade, Inc. (EnerTrade) was
created as a direct subsidiary of SJI to assume SJF's gas marketing activity,
including its affiliation with South Jersey Resources Group, LLC (SJRG). The gas
marketing activities are shown as part of continuing operations; the
environmental remediation activity related to properties used in the previously
operated fuel oil business are reported as part of discontinued operations
consistent with the reporting in previous years of other costs related to the
discontinued fuel oil business (See also Note 13).
Summarized operating results of the discontinued operations were:
Thousands of Dollars
1997 1996 1995
----------------------------
Operating Revenues:
Sand Mining $ - $ 30,054 $ 32,249
Construction 4,928 17,081 18,335
----------------------------
Total Operating Revenues $ 4,928 $ 47,135 $ 50,584
============================
(Loss) Income before Income Taxes:
Sand Mining $ (1,257) $ 68 $ 3,592
Construction 39 (1,348) 11
Fuel Oil (See Note 13) (1,725) - -
Income Tax Credits (Expense) 1,077 873 (834)
----------------------------
(Loss) Income from Discontinued Operations $ (1,866) $ (407) $ 2,769
============================
(Loss) Income per Common Share
from Discontinued Operations $ (0.17) $ (0.04) $ 0.26
============================
The 1995 results of operations were restated to reflect the accounting for these
segments as Discontinued Operations.
Affiliations - On April 1, 1996, SJF and Union Pacific Fuels, Inc. joined
efforts in the formation of SJRG, to provide natural gas storage, peaking
services and transportation capacity for wholesale customers in New Jersey and
surrounding states. EnerTrade currently holds a 50 percent non-controlling
interest in this affiliation and, accordingly, accounts for the investment under
the equity method.
3. Preferred Stock and Securities of Subsidiary:
Redeemable Cumulative Preferred Stock - SJG is required to offer annually to
purchase 900 and 1,500 shares of its Cumulative Preferred Stock, Series A and
Series B, respectively, at par value, plus accrued dividends.
If preferred stock dividends are in arrears, no dividends may be declared or
paid, or other distribution made on the SJG Common Stock. If four or more
quarterly dividends are in arrears, the Preferred Shareholders may elect a
majority of SJG's directors.
Mandatorily Redeemable Preferred Securities - On May 2, 1997, SJG's statutory
trust subsidiary, SJG Capital Trust (Trust), established in the State of
Delaware on March 24, 1997, sold $35.0 million of 8.35 percent SJG-guaranteed
Mandatorily Redeemable Preferred Securities. The Trust holds as its only asset
the 8.35 percent Deferrable Interest Subordinated Debentures issued by SJG which
mature on April 30, 2037, which is also the maturity date of the Preferred
Securities. The Debentures and Preferred Securities are redeemable at the option
of SJG at a redemption price equal to 100 percent of the principal amount
thereof at any time on or after April 30, 2002.
The Company has 2,500,000 authorized shares of Preference Stock, no par value,
none of which has been issued. The Company has registered and reserved for the
issuance of 15,000 shares of Series A Junior Participating Cumulative Preferred
Stock (Series A Stock) in connection with the adoption of the Company's
Shareholder Rights Plan (See Note 4).
4. Common Stock:
The Company has 20,000,000 shares of Common Stock authorized of which the
following shares were issued and outstanding:
1997 1996 1995
----------------------------------------
Beginning of Year 10,756,679 10,722,171 10,715,211
New Issues During Year:
Employees' Stock Ownership Plan 4,770 5,945 6,960
Stock Option & Stock Appreciation
Rights Plan 9,514 14,163 -
Directors' Restricted Stock Plan 450 14,400 -
----------------------------------------
End of Year 10,771,413 10,756,679 10,722,171
========================================
The par value ($1.25 per share) of the stock issued in 1997, 1996 and 1995 was
credited to common stock and the net excess over par value of approximately $0.5
million, $0.4 million, and $0.1 million, respectively, was credited to Premium
on Common Stock.
Effective January 1, 1996, the Company adopted FASB No. 123, "Accounting for
Stock-Based Compensation". This statement defines a fair value based method of
accounting for stock-based compensation. However, the Company has elected, as
permitted by the statement, to continue to measure compensation costs using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Accordingly, there was no impact
from the adoption of FASB No. 123 on the Company's financial statements. The
Company determined that the pro forma effect of adoption of the fair value based
method of accounting on net income and earnings per share would be immaterial
for the years ended December 31, 1997, 1996 and 1995.
Stock Option and Stock Appreciation Rights Plan - Under this plan, not more than
306,000 shares in the aggregate may be issued to officers and other key
employees of the Company and its subsidiaries. No options or stock appreciation
rights may be granted under the Plan after January 23, 2007. At December 31,
1997, the Company had 13,060 options outstanding exercisable at prices from
$17.89 to $24.69 per share and at December 31, 1996, the Company had 34,990
options outstanding exercisable at prices from $17.16 to $24.69 per share.
During 1997 and 1996, 4,311 and 14,550 options were exercised respectively, at
prices from $17.16 to $17.89 per share. In addition, during 1997, 17,619 options
were surrendered for the issuance of 5,203 shares. No options were exercised in
1995. No options were granted in 1997, 1996 or 1995. No stock appreciation
rights were issued under the plan. The stock options outstanding at December 31,
1997, 1996, and 1995, did not have an effect on the earnings per share
calculations (See Note 1).
Dividend Reinvestment and Stock Purchase Plan (DRP) and Employees' Stock
Ownership Plan (ESOP) - Shares of common stock offered through the DRP are
currently purchased in the open market. All shares offered through the ESOP are
issued directly by the Company. As of December 31, 1997, 208,647 and 35,371
shares of authorized, but unissued, Common Stock were reserved for future
issuance to the DRP and ESOP, respectively.
-19-
Notes to Consolidated Financial Statements, Continued
Directors' Restricted Stock Plan - On September 20, 1996, the Board of Directors
adopted a restricted stock plan. Under this plan, an initial award of 13,800
shares was granted on December 4, 1996, at a market value of $24.00 per share.
The plan also provides for annual awards and, in December 1997 and 1996,
respectively, 450 and 600 additional shares were granted. Initial awards will
vest over a 5-year period, with 20 percent of such awards vesting per year.
Annual awards will vest on the third anniversary of each award. Shares issued as
restricted stock are held by the Company until the attached restrictions lapse.
The market value of the stock on the date granted is recorded as compensation
expense over the applicable vesting period.
Shareholder Rights Plan - On September 20, 1996, the Board of Directors adopted
a shareholder rights plan that provides for the distribution of one right for
each share of common stock outstanding on October 11, 1996. Each entitles its
holder to purchase 1/1000 of one share of Series A Stock at an exercise price
of $90 (See Note 3).
The rights plan provides that when a person or group acquires 10 percent or more
of the Company's common stock, each of the rights (except for those held by the
10 percent holder) becomes the right upon payment of the exercise price to
receive that number of shares of the Company's common stock, or common stock of
the acquiring company, which have a market value equal to two times the exercise
price.
The rights may be redeemed by the Company for $.001 per right at any time prior
to the time the acquiring person or group reaches the 10 percent threshold. If
the rights are not exercised or redeemed by September 20, 2006, they will
expire.
5. Federal Income Taxes:
Income tax expense applicable to operations differs from the tax that would have
resulted by applying the statutory rate to income from operations before Federal
Income Tax for the following reasons:
Thousands of Dollars
1997 1996 1995
----------------------------
Tax at Statutory Rate $ 10,260 $ 9,947 $ 8,269
Increase (Decrease) Resulting from:
Amortization of Investment
Tax Credits (ITC) (393) (390) (390)
Liberalized Depreciation Under Book
Depreciation on Utility Plant 664 664 664
Other - Net 185 (66) 210
----------------------------
Federal Income Taxes as reported on the
Statements of Consolidated Income 10,716 10,155 8,753
Tax Associated with
Discontinued Operations (674) 5,887 621
----------------------------
Net Federal Income Taxes $ 10,042 $ 16,042 $ 9,374
============================
The provision for Federal Income Taxes is comprised of the following:
Thousands of Dollars
1997 1996 1995
----------------------------
Current $ 4,964 $ (709) $ 4,506
Deferred:
Excess of Tax Depreciation Over
Book Depreciation - Net 4,162 4,610 4,059
Deferred Fuel Costs 349 3,340 1,380
Environmental Remediation Costs - Net 1,903 1,214 (556)
Amortization of Gross Receipts Taxes (140) (140) (136)
Alternative Minimum Tax (304) 2,939 -
Other - Net 175 (709) (110)
----------------------------
Total Deferred 6,145 11,254 4,637
----------------------------
ITC (393) (390) (390)
Federal Income Taxes as reported
on the Statements of Consolidated Income 10,716 10,155 8,753
Tax Associated with Discontinued Operations (674) 5,887 621
----------------------------
Net Federal Income Taxes $ 10,042 $ 16,042 $ 9,374
============================
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax liability at December 31, 1997 and 1996, are as
follows:
Thousands of Dollars
1997 1996
-----------------------
Deferred Tax Liabilities:
Tax Depreciation Over Book Depreciation $ 62,945 $ 60,527
Difference Between Book and Tax Basis of Property 5,579 5,215
Deferred Fuel Costs 5,078 4,720
Deferred Regulatory Costs 996 1,189
Environmental Remediation Costs 7,463 5,332
Excess Protected 3,485 3,550
Gross Receipts Taxes 1,424 1,564
Other 1,204 2,351
-----------------------
Total Deferred Tax Liabilities 88,174 84,448
-----------------------
Deferred Tax Assets:
Alternative Minimum Tax 1,542 1,102
ITC Basis Gross Up 3,004 3,207
Other 4,997 4,318
-----------------------
Total Deferred Tax Assets $ 9,543 $ 8,627
-----------------------
Net Deferred Tax Liability $ 78,631 $ 75,821
=======================
6. Recent Regulatory Actions:
On April 10, 1996, SJG received approval from the BPU to increase its rates by
approximately $8.0 million, or 2.9 percent, through its LGAC. The primary reason
for the LGAC increase was higher natural gas costs incurred by the Company
during November and December 1995 due to weather that was colder than normal.
On June 20, 1996, SJG received approval from the BPU to recover environmental
remediation costs incurred during the 2-year period ended July 31, 1995,
totaling $1.5 million, net of insurance recoveries. On July 31, 1996 and 1997,
SJG made its annual filings with the BPU to recover remediation costs expended
during the period of August 1995 through July 1997 totaling $1.6 million. Both
filings were subsequently updated and are still pending at the BPU (See Note
13).
On September 6, 1996, SJG made its annual LGAC and TAC filings with the BPU
proposing a decrease to the LGAC of $1.4 million and a credit resulting from the
TAC of $2.5 million. The TAC credit resulted from significantly colder weather
in SJG's service area during the TAC period running from October 1, 1995 through
May 31, 1996. The BPU approved the revenue reduction for the TAC credit on
January 27, 1997. While customers received the credit in their bills during
1997, the earnings impact was reflected in the 1996 results of operations.
On January 27, 1997, the BPU granted SJG a base rate increase of $6.0 million
based on a 9.62 percent rate of return on rate base, which included an 11.25
percent return on common equity. The majority of this increase comes from
residential and small commercial customers. Part of the increase is recovered
from new miscellaneous service fees which charge specific customers for costs
they cause SJG to incur. Additionally, SJG is now allowed to retain the first
$5.5 million of pre-tax margins generated by interruptible and off-system sales
and transportation and 20 percent of pre-tax margins above that level. In 1998,
this $5.5 million threshold will increase by the annual revenue requirement
associated with specified major construction projects. These sharing formula
improvements are expected to result in additional rate relief of approximately
$0.3 million in 1998 and $1.8 million in 1999.
As part of the tariff changes approved in the rate case, SJG initiated its pilot
program in April 1997, giving residential customers a choice of gas supplier.
During the enrollment period, which ended June 30, 1997, nearly 13,000
residential customers applied for this service. Transportation of gas for these
customers began on August 1, 1997. Participant's bills are reduced for certain
cost of gas charges and applicable taxes. The resulting decrease in revenues is
offset by a corresponding decrease in SJG's gas costs and taxes under SJG's BPU-
approved fuel clause. The program does not affect its net income, financial
condition or margins. In addition, because the program affects only
-20-
Notes to Consolidated Financial Statements, Continued
5 percent of SJG's residential customers, any reduction in revenue is not
material. Also, SJG further expanded the choices available to commercial and
industrial customers, including a new transportation tariff providing savings to
qualified customers.
On May 5, 1997, SJG filed with the BPU to update rates related to appliance
service charges, including a profit margin. The new rates are competitive with
other service providers in New Jersey and are designed to increase earnings and
cash flows to SJG over the current rates. The filing is pending.
On May 13, 1997, SJG filed to recover additional post-retirement benefit costs
of approximately $1.3 million annually. This recovery was approved on December
17, 1997, and began January 1, 1998 (See Note 9).
On September 9, 1997, SJG filed with the BPU to adjust rates by replacing the
current State Gross Receipts and Franchise Tax components with a Sales and Use
Tax, a Corporation Business Tax and a Transitional Energy Facilities Assessment.
The new rates became effective January 1, 1998, on an interim basis subject to
refund upon final BPU order which is expected in early 1998.
On September 12, 1997, SJG made its annual LGAC, TAC and Demand Side Management
Clause (DSMC) filings with the BPU for the period November 1997 through October
1998. In this filing, SJG requested an increase in the annual level of LGAC
recovery of $4.7 million which is inclusive of the $1.4 million proposed
decrease filed in 1996. It also requested that the 1996-1997 filing be resolved
simultaneously with this filing. Both filings are still pending at the BPU.
7. Segments of Business:
Information about the Company's operations in different industry segments is
presented below:
Thousands of Dollars
1997 1996 1995
----------------------------
Operating Revenues:
Gas Utility Operations $327,548 $330,334 $282,719
Other Industries 22,083 27,237 23,982
----------------------------
Total 349,631 357,571 306,701
Intersegment Sales (1,064) (2,113) (2,538)
----------------------------
Consolidated Operating Revenues $348,567 $355,458 $304,163
============================
Operating Income:
Gas Utility Operations $ 51,555 $ 49,476 $ 44,716
Other Industries (942) 327 556
----------------------------
Total 50,613 49,803 45,272
Federal Income Taxes (10,716) (10,155) (8,753)
General Corporate Expense (1,255) (1,089) (1,301)
----------------------------
Total Operating Income $ 38,642 $ 38,559 $ 35,218
============================
Depreciation, Depletion and Amortization:
Gas Utility Operations $ 17,867 $ 17,540 $ 16,672
Other Industries 18 35 40
Discontinued Operations 227 3,887 4,010
----------------------------
Total $ 18,112 $ 21,462 $ 20,722
============================
Property Additions:
Gas Utility Operations $ 48,533 $ 39,384 $ 40,078
Other Industries 141 6 1
Discontinued Operations 1 2,841 3,628
----------------------------
Total $ 48,675 $ 42,231 $ 43,707
============================
Identifiable Assets:
Gas Utility Operations $649,113 $599,926 $549,458
Other Industries 11,322 8,041 5,703
Discontinued Operations 2,993 9,341 52,821
----------------------------
Total 663,428 617,308 607,982
Corporate Assets 23,664 67,018 11,981
Intersegment Assets (16,491) (25,945) (15,654)
----------------------------
Total Assets $670,601 $658,381 $604,309
============================
Gas utility operations consist primarily of natural gas distribution to
residential, commercial and industrial customers. Other industries include the
natural gas and electric acquisition and transportation service companies (See
Note 2).
Total operating revenues by industry segment include both sales to unaffiliated
customers, as reported in the Company's statements of consolidated income, and
intercompany sales, which are accounted for at the fair market value of the
goods or services rendered.
Operating income is total revenues less operating expenses, Federal Income
Taxes, and general corporate expenses, as shown on the statements of
consolidated income.
Identifiable assets are those assets that are used in each segment of the
Company's operations. Corporate assets are principally cash and cash
equivalents, land, buildings and equipment held for corporate use.
8. Regulatory Assets and Deferred Credits - Federal and Other Taxes:
The primary asset created as a result of adopting FASB No. 109, "Accounting for
Income Taxes", was income taxes - flowthrough depreciation in the amount of
$17.6 million as of January 1, 1993. This amount represented the recording of
the net tax effect of excess liberalized depreciation over book depreciation on
utility plant because of temporary differences for which, prior to FASB No. 109,
deferred taxes had not previously been provided. These tax benefits were
previously flowed through in rates. As a result of positions taken in the 1994
rate case, the amortization of the regulatory asset is being recovered through
rates over an 18-year period which began in December 1994.
The ITC attributable to SJG was deferred and continues to be amortized at the
annual rate of 3 percent, which approximates the life of the related assets.
Effective March 1, 1978, SJG began and continued to accrue through 1991 for
Gross Receipts and Franchise Taxes (GRAFT) on current revenues rather than on
the previous basis of prior period revenues. The one-time increase resulting
from this change has been deferred and is being amortized on a straight-line
basis to operations over a 30-year period. In June 1991, New Jersey adopted
GRAFT legislation accelerating tax payments, the carrying costs on which are
being recovered from ratepayers. The legislation also changed the basis of the
tax to gas volumes rather than percentage of revenue (See Note 1).
9. Retirement Benefit Plans & Other:
Pensions - SJI and its subsidiaries have several defined benefit retirement
plans that provide annuity payments to substantially all full-time regular
employees upon retirement. The companies pay the entire cost of the plans.
Approximately 53 percent of the plans' assets are invested in securities which
provide for fixed income and a return of principal. The remaining assets are
invested in professionally managed common stock portfolios. Net periodic pension
cost, including the amortization of the cost of past service benefits over a
period of approximately 30 years, included the following components:
Thousands of Dollars
1997 1996 1995
-------------------------------------
Service cost - benefits earned during
the period $ 1,960 $ 1,916 $ 1,736
Interest cost on projected
benefit obligation 3,820 3,481 3,183
Actual return on plan assets (6,103) (3,336) (3,245)
Net amortization and deferral 3,157 525 730
-------------------------------------
Net periodic pension cost $ 2,834 $ 2,586 $ 2,404
=====================================
Assumptions as of December 31 were:
Discount rate 7.25% 7.25%-7.50% 7.25%-7.50%
Rate of increase in compensation levels 4.1% 4.6% 4.6%
Expected long term rate of return
on assets 8.5% 8.5% 8.5%
Due to the positive performance of the capital markets in 1997, the actual
return on plan assets increased significantly compared with prior years. In
accordance with FASB No. 87, "Employers' Accounting for Pensions", the amounts
in excess of the expected return of 8.5 percent is deferred and will be
recognized over future periods.
-21-
Notes to Consolidated Financial Statements, Continued
A reconciliation of the funded status of the plans to the amounts recognized in
the consolidated balance sheets is presented below:
Thousands of Dollars
1997 1996
------------------------
Actuarial present value of plan benefits
Vested benefits $ (44,885) $ (39,078)
Non-vested benefits (291) (314)
Impact of estimated future compensation changes (11,577) (11,343)
------------------------
Projected plan benefits (56,753) (50,735)
Plan assets at fair value 46,875 40,335
------------------------
Projected plan benefits in excess of plan assets (9,878) (10,400)
Unrecognized net loss 3,312 5,297
Unrecognized prior service costs 3,514 2,113
Unrecognized net obligation at January 1 430 502
------------------------
Net Pension liability recognized in the
consolidated balance sheet $ (2,622) $ (2,488)
========================
Postretirement Benefits Other Than Pensions - The Company and its subsidiaries
provide postretirement health care and life insurance benefits to certain
retired employees. Effective January 1, 1993, the Company adopted FASB No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions". This
statement requires the Company to accrue the estimated cost of retiree benefit
payments during the years the employee provides services. The Company previously
expensed the cost of these benefits, which are principally health care, on a
pay-as-you-go (PAYGO) basis. The Company elected to recognize the unfunded
transition obligation over a 20-year period.
The majority of the Company's costs apply to SJG, which previously recovered
these costs on a PAYGO basis through its rates. As part of SJG's 1994 base rate
case settlement, SJG was granted full recovery of the current service cost
component of the annual cost in addition to continued recovery of PAYGO costs.
The BPU also approved recovery of previously deferred 1993 and 1994 service
costs over a 5-year period beginning in December 1994. Beginning in 1995, an
external trust was established to fund a portion of the obligation recovered
from ratepayers as a part of the BPU settlement. Gross contributions to this
trust totaled $2.0 million in 1997 and $2.1 million in both 1996 and 1995.
However, due to the timing of 1995 contributions, the return stated in the
table below does not reflect a full year's return. SJG was also authorized to
continue recording a regulatory asset for the amount by which the cost exceeded
the level recovered in rates. The balance of this regulatory asset, which
amounted to approximately $6.1 million at December 31, 1997, will be recovered
from ratepayers over a 15-year period beginning January 1, 1998, as approved by
the BPU in December 1997. At that time, the BPU also approved full recovery of
the net periodic benefit costs. The additional annual recovery of approximately
$1.3 million will be contributed to the external trust and provides no operating
benefit to SJG except to the extent that trust income would reduce future net
postretirement benefit costs (See Note 6).
A reconciliation of the accumulated postretirement benefit obligation to the
amounts recognized in the Consolidated Balance Sheet is presented below:
Thousands of Dollars
1997 1996 1995
----------------------------
Service cost - benefits earned during
the period $ 994 $ 930 $ 878
Actual return on plan assets (272) (164) (26)
Interest cost on accumulated
postretirement benefit obligation 1,579 1,432 1,320
Amortization of transition obligation 796 796 796
----------------------------
Subtotal 3,097 2,994 2,968
Other Adjustments - - (2,690)
----------------------------
Net postretirement benefit costs
as reported in the consolidated
Financial Statements $ 3,097 $ 2,994 $ 278
============================
The amounts expensed in 1997, 1996 and 1995 were $1.5 million, $1.7 million and
$1.7 million, respectively.
The following table sets forth the life and health care plans' funded status at
December 31, 1997 and 1996.
Actuarial present value of accumulated postretirement benefit obligations:
Thousands of Dollars
1997 1996
-----------------------
Retirees $ (5,631) $ (4,933)
Other active plan participants (18,393) (16,744)
-----------------------
Accumulated postretirement benefit obligation (24,024) (21,677)
Fair value of plan assets 4,403 2,835
-----------------------
Accumulated postretirement benefit obligation
in excess of plan assets (19,621) (18,842)
Unrecognized net loss 701 242
Unrecognized transition obligation 11,947 12,743
-----------------------
Postretirement benefit liability recognized in
the consolidated balance sheet $ (6,973) $ (5,857)
=======================
In 1995, the Company recalculated the net postretirement benefit cost and
present value of accumulated postretirement benefit for the years 1994 and 1993
utilizing assumptions based on corrected data. The effects of the recalculation
were recorded in 1995 since the changes did not materially affect previously
reported net income or retained earnings.
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation as of December 31, 1997, are as follows:
Medical and Drug - 7.4 percent for participants age 65 or older and 10.15
percent for participants under age 65 in 1997, both grading to 5.75 percent in
2008. Dental - 7.42 percent in 1997, grading to 5.75 percent in 2003. If the
health care cost trend rate assumptions were increased by 1 percent, the
accumulated postretirement benefit obligation as of December 31, 1997, would be
increased by $3.4 million. The effect of this change on the sum of the service
cost and interest cost would be an increase of $0.5 million. An assumed discount
rate of 7.25 percent in 1997 and 7.5 percent in 1996, and an expected return on
plan assets of 8.5 percent were used in determining the accumulated
postretirement benefit obligation as of December 31, 1997 and 1996.
Employment Contracts - With the death of the Company's president, certain
benefits became payable under the provisions of his employment contract. The
total of these benefits, approximately $1.5 million, has been accrued as of
December 31, 1997. Under a separate contract, life insurance proceeds of
approximately $0.2 million payable to the Company were also recorded. The
benefit expense is reflected in the statement of consolidated income for the
year 1997 under the caption "Operation and Maintenance - Utility".
10. Financial Instruments:
Long-Term Debt - The fair values of the Company's long-term debt, including
current maturities, as of December 31, 1997 and 1996, are estimated to be
$205.8 million and $166.6 million, respectively (carrying amounts $185.4
million and $156.3 million, respectively). They are estimated based on the
interest rates available to the Company at each respective year end for debt
with similar terms and remaining maturities. The Company retires higher cost
debt whenever it is cost effective to do so with in the constraints of the
respective debt covenants.
Other Financial Instruments - The carrying amounts of the Company's other
financial instruments approximate their fair values at December 31, 1997 and
1996.
11. Unused Lines of Credit and Compensating Balances:
Unused lines of credit available at December 31, 1997, were approximately $84.1
million. Borrowings under these lines of credit are at market rates. The
weighted cost of such borrowings, which usually changes each business day,
approximated 6.06 and 5.85 percent at December 31, 1997 and 1996, respectively.
Demand deposits are maintained with lending banks on an informal basis and do
not constitute compensating balances.
-22-
Notes to Consolidated Financial Statements, Continued
12. Retained Earnings:
There are certain restrictions under various loan agreements as to the amount of
cash dividends or other distributions that may be paid on the Common Stock of
SJG. The Company's aggregate equity in its subsidiaries' retained earnings
which is free of these restrictions was approximately $47.1 million as of
December 31, 1997.
13. Commitments and Contingencies:
Construction Commitments - The estimated cost of construction and environmental
remediation programs of SJI and its subsidiaries for the year 1998 aggregates
$63.9 million and, in connection therewith, certain commitments have been made.
Gas Supply Contracts - SJG, in the normal course of conducting business, has
entered into long-term contracts for natural gas supplies, firm transportation,
and gas storage service. The earliest expiration of any of the gas supply
contracts is 1999. All of the transportation and storage service agreements
between SJG and its interstate pipeline suppliers are provided under Federal
Energy Regulatory Commission (FERC) approved tariffs. SJG's cumulative
obligation for demand charges and reservation fees paid to its suppliers for all
of these services is approximately $4.6 million per month which is recovered on
a current basis through the LGAC.
Pending Litigation - The Company is subject to claims which arise in the
ordinary course of its business and other legal proceedings. A group of Atlantic
City casinos filed a petition with the BPU on January 16, 1996, alleging
overcharges of over $10.0 million, including interest. Management believes that
charges to the casinos were based on applicable tariffs and that the casinos
were not qualified under less expensive rate schedules, as claimed. Management
believes that the ultimate impact of these actions will not materially affect
the Company's financial position, results of operations or liquidity.
Environmental Remediation Costs - The Company incurred and recorded certain
costs for environmental remediation of sites where SJG or predecessor companies
operated gas manufacturing plants. SJG terminated manufactured gas operations at
all sites more than 35 years ago. SJI and certain of its nonutility
subsidiaries have also recorded costs for environmental remediation of sites
where SJF previously operated a fuel oil business and Morie maintained
equipment, fueling stations and storage.
Since the early 1980s, the Company has recorded environmental remediation costs
of $96.2 million, of which $39.2 million was expended as of December 31, 1997.
The Company, with the assistance of an outside consulting firm, estimates that
total future expenditures to remediate SJG's sites will range from $52.4
million to $165.6 million. The lower end of this range was recorded as a
liability and is reflected on the consolidated balance sheet under the captions
"Current Liabilities" and "Deferred Credits and Other Non-Current Liabilities".
Recorded environmental remediation costs of SJG do not directly affect earnings
because those costs are deferred and, when expended, recovered through rates
over 7-year amortization periods as authorized by the BPU. Amounts accrued for
future expenditures were not adjusted for future insurance recoveries, which
management is pursuing. SJG received $4.2 million of insurance recoveries as of
December 31, 1997. SJG first used these proceeds to offset legal fees incurred
in connection with those recoveries and used the excess to reduce the balance
of deferred environmental remediation costs. Recorded amounts include estimated
costs based on projected investigation and remediation work plans using existing
technologies. Actual expenditures could differ from the estimates due to the
long-term nature of the projects, changing technology, government regulations
and site specific requirements.
The major portion of recorded environmental costs relate to the cleanup of SJG's
former gas manufacturing sites. SJG recorded $90.2 million for the remediation
of these sites, of which $37.8 million was expended through December 31, 1997.
As a result of the 7-year RAC recovery mechanism, SJG does not expense
environmental remediation costs when incurred and defers costs to be recovered.
SJG has two regulatory assets associated with environmental cost. The first
regulatory asset is titled "Environmental Remediation Cost: Expended - Net".
These expenditures represent actual cost incurred to remediate former gas
manufacturing plant sites. These costs meet the requirements of FASB No. 71,
"Accounting for the Effects of Certain Types of Regulation". The BPU allowed
recovery of these expenditures through July 1995 and petitions to recover these
costs through July 1997 are pending (See Note 6).
The other regulatory asset titled "Environmental Remediation Cost: Liability for
Future Expenditures" relates to estimated future expenditures determined under
the guidance of FASB No. 5, "Accounting for Contingencies". This amount, which
relates to former manufactured gas plant sites was recorded as a deferred debit
with the corresponding amount reflected in Current Liabilities and Deferred
Credits and Other Non-Current Liabilities, as appropriate. The deferred debit is
a regulatory asset under FASB No. 71, because the BPU's intent, as evidenced by
its current practice, is to provide recovery sufficient to recover the deferred
costs after they are expended.
SJG files with the BPU to recover these costs in rates through its RAC. The BPU
has consistently allowed the full recovery over 7-year periods, and SJG believes
this will continue. As of December 31, 1997, SJG's unamortized remediation
expenditures of $21.0 million are reflected on the balance sheet under the
caption "Regulatory and Other Non-Current Assets". Since BPU approval of the RAC
mechanism in August 1992, SJG recovered $12.6 million through rates as of
December 31, 1997 (See Note 6). With Morie's sale, EMI assumed responsibility
for environmental liabilities which are currently estimated to range between
$2.8 million and $15.5 million. The information available on these sites is
sufficient only to establish a range 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. The 1997 increase in the accrual of $0.8 million, $0.5
million after taxes, is included in the consolidated income statement under the
caption "(Loss) Income from Discontinued Operations - Net".
As a result of additional testing performed during 1997, both SJI and the
discontinued operations of SJF have also estimated their potential exposure for
the future environmental remediation of four sites where fuel oil operations
were conducted years ago. Estimates for SJI's site range between $0.3 million
and $1.1 million while SJF's estimated liability ranges from $1.5 million to
$4.2 million for the remaining three sites. The lower end of these ranges were
recorded and are reflected in Current Liabilities and Deferred Credits and
Other Non-Current Liabilities as of December 31, 1997. SJI's charge is included
in the statement of consolidated income as operating expense while SJF's charge
is reflected under the caption "(Loss) Income from Discontinued Operations -
Net" (See Note 2).
MANAGEMENT'S RESPONSIBILITIES FOR FINANCIAL STATEMENTS
The management of South Jersey Industries, Inc. is responsible for the integrity
and objectivity of the Company's financial statements and related disclosures.
These statements and disclosures were prepared using management's best judgment
and are in conformity with generally accepted accounting principles.
The Board of Directors, acting through its Audit Committee, which is composed of
outside directors, oversees management's responsibilities for accounting,
internal control and financial reporting. The Audit Committee meets periodically
with management and the internal and independent auditors to discuss auditing
and financial matters, and to assure that each is carrying out its
responsibilities. The internal auditors and independent auditors have access to
the members of the Audit Committee at any time.
-23-
QUARTERLY FINANCIAL DATA
The summarized quarterly results of operations of the Company, in thousands
except for per share amounts, for 1997 and 1996 are presented below:
1997 Quarter Ended 1996 Quarter Ended
-------------------------------------- --------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------------------------------------- --------------------------------------
Operating Revenues: $131,403 $ 62,312 $ 54,151 $100,701 $149,960 $ 59,325 $ 44,856 $101,317
-------------------------------------- --------------------------------------
Operating Expenses:
Operation and
Maintenance Including
Fixed Charges 94,802 56,666 57,532 79,981 108,678 56,638 47,326 80,456
Federal Income Taxes 8,374 338 (2,071) 4,075 9,180 (935) (2,021) 3,931
Gross Receipts &
Franchise and
Other Taxes 13,179 5,306 3,173 8,783 15,291 5,546 3,437 9,666
-------------------------------------- --------------------------------------
Income (Loss) from
Continuing Operations 15,048 2 (4,483) 7,862 16,811 (1,924) (3,886) 7,264
Discontinued
Operations - Net (147) (173) (284) (2,029) (1,585) 1,157 1,532 11,129
-------------------------------------- --------------------------------------
Net Income (Loss)
Applicable to
Common Stock $ 14,901 $ (171) $ (4,767) $ 5,833 $ 15,226 $ (767) $ (2,354) $ 18,393
====================================== ======================================
Earnings (Loss)
Per Common Share
(Based on Average
Shares Outstand.):(1)
Continuing
Operations $ 1.39 $ 0.00 $ (0.42) $ 0.73 $ 1.57 $ (0.18) $ (0.36) $ 0.67
Discontinued
Operations (0.01) (0.02) (0.02) (0.19) (0.15) 0.11 0.14 1.04
-------------------------------------- --------------------------------------
Earnings (Loss) Per
Common Share $ 1.38 $ (0.02) $ (0.44) $ 0.54 $ 1.42 $ (0.07) $ (0.22) $ 1.71
====================================== ======================================
Average Shares
Outstanding 10,760 10,762 10,763 10,767 10,724 10,728 10,732 10,745
<FN>
(1) The sum of the quarters for 1997 does not equal the year's total due to
rounding.
NOTE: Because of the seasonal nature of the business, statements for the 3-month
periods are not indicative of the results for a full year.
</FN>
MARKET PRICE OF COMMON STOCK AND RELATED INFORMATION
Market Price Market Price
Per Share Dividends Per Share Dividends
Quarter Ended ---------------- Declared Quarter Ended ---------------- Declared
1997 High Low Per Share 1996 High Low Per Share
- ------------- ------- ------- --------- ------------- ------- ------- ---------
March 31 24 7/8 21 3/8 $0.36 March 31 23 1/2 20 7/8 $0.36
June 30 23 3/8 21 $0.36 June 30 23 3/4 21 1/4 $0.36
Sept. 30 25 3/16 22 3/8 $0.36 Sept. 30 24 20 1/8 $0.36
Dec. 31 30 1/2 24 5/16 $0.36 Dec. 31 24 5/8 23 $0.36
<FN>
These quotations are based on the list of composite transactions of the New York
Stock Exchange. The Company's stock is traded on the New York and Philadelphia
stock exchanges and the ticker symbol is SJI. The Company has declared and
expects to continue to declare regular quarterly cash dividends. As of December
10, 1997, the latest available date, the stock records indicate that there were
11,429 shareholders.
</FN>
-24-
SOUTH JERSEY GAS COMPANY COMPARATIVE OPERATING STATISTICS
1997 1996 1995 1994 1993
------------------------------------------------
Operating Revenues
(Thousands): (1)
Firm
Residential $176,717 $177,673 $151,720 $151,857 $142,409
Commercial 60,418 70,755 58,135 61,848 57,392
Industrial 5,535 7,540 6,014 8,349 13,609
Cogeneration &
Electric Generation 5,249 16,173 15,725 19,301 23,726
Firm Transportation 15,966 10,473 13,930 18,092 13,746
------------------------------------------------
Total Firm 263,885 282,614 245,524 259,447 250,882
Interruptible 6,085 7,256 6,786 6,610 11,299
Interruptible
Transportation 3,507 2,630 2,778 2,985 2,412
Off-System 39,403 28,236 20,360 38,161 8,788
Capacity Release & Storage 8,533 4,349 3,374 2 -
Other 6,135 5,249 3,897 4,254 4,200
------------------------------------------------
Total Operating Revenues $327,548 $330,334 $ 282,719 $311,459 $277,581
================================================
Throughput (MMcf):
Firm
Residential 19,955 21,699 19,573 19,543 19,368
Commercial 8,067 10,117 8,945 9,276 9,182
Industrial 733 1,238 1,016 1,364 2,599
Cogeneration &
Electric Generation 1,230 5,180 4,860 5,384 6,741
Firm Transportation 20,196 12,969 14,417 14,401 10,194
------------------------------------------------
Total Firm Throughput 50,181 51,203 48,811 49,968 48,084
Interruptible 1,345 1,618 1,843 1,810 3,105
Interruptible Transportation 7,586 5,422 5,888 5,424 4,328
Off-System 14,462 8,571 9,590 16,840 3,563
Capacity Release & Storage 36,382 25,460 25,915 46 -
------------------------------------------------
Total Throughput 109,956 92,274 92,047 74,088 59,080
================================================
Number of Customers at
Year End: (2)
Residential 242,132 236,008 230,446 224,394 218,484
Commercial 18,037 17,469 17,179 16,615 16,206
Industrial 398 397 397 397 377
------------------------------------------------
Total Customers 260,567 253,874 248,022 241,406 235,067
================================================
Maximum Daily Sendout (MMcf) 355 325 335 370 318
================================================
Annual Degree Days 4,829 5,175 4,865 4,820 4,953
================================================
Normal Degree Days (3) 4,953 4,928 4,936 4,911 4,895
================================================
<FN>
(1) Before the elimination of intercompany sales.
(2) 1996 has been restated.
(3) Average degree days recorded in SJG service territory during 20-year period
ended June 30 of prior year.
</FN>
-25-
South Jersey Industries, Inc.
Board Of Directors
Anthony G. Dickson
Director since 1995, Age 49 3, 4, 6
President, New Jersey Manufacturers Insurance Company and New Jersey
Re-Insurance Company, West Trenton, N.J.
Richard L. Dunham
Director since 1984, Age 68 3, 5*
Chairman of the Board and Acting Chief Executive Officer of SJI; former Chairman
of Zinder Companies, Inc., an economic and regulatory consulting firm,
Washington, D.C.; former Chairman of the Federal Power Commission (now the
Federal Energy Regulatory Commission), Washington, D.C.
W. Cary Edwards
Director from April 1990 to January 1993 and September 1993 to present, Age 53
2, 4
Partner, law firm of Edwards, Caldwell & Poff, Hawthorne, N.J.
Thomas L. Glenn, Jr.
Director since 1986, Age 63 3, 4*, 5, 6
Chairman, Glenn Insurance, Inc., Absecon, N.J.
Herman D. James, Ph.D.
Director since 1990, Age 54 1, 6
President, Rowan University, Glassboro, N.J.
Clarence D. McCormick
Director since 1979, Age 68 2*, 3*, 5
Chairman and CEO of The Farmers and Merchants National Bank of Bridgeton, N.J.
and Chairman and President of Southern Jersey Bancorp of Delaware, Bridgeton,
N.J.
Peter M. Mitchell, Ph.D.
Director since 1981, Age 63 1, 2, 5, 6*
President, Massachusetts Maritime Academy, Buzzards Bay, Mass.
Frederick R. Raring
Director since 1995, Age 60 1, 4
President, Seashore Supply Company, Atlantic City, N. J.
Shirli M. Vioni, Ph.D.
Director since 1983, Age 57 1*, 2
President, Billings-Vioni Management Associates, Gahanna, Ohio
1 Audit Committee
2 Compensation/Pension Committee
3 Corporate Development Committee
4 Environmental Committee
5 Executive Committee
6 Nominating Committee
* Committee Chair
South Jersey Industries, Inc.
Officers
Richard L. Dunham
Chairman of the Board and Acting Chief Executive Officer
Charles Biscieglia
Vice President
David A. Kindlick
Vice President
Joseph E. McCullough
Vice President
George L. Baulig
Secretary and Treasurer
William J. Smethurst, Jr.
Assistant Secretary and Assistant Treasurer
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Back Cover - Inside
SJI Corporate Headquarters
1 South Jersey Plaza
Folsom, NJ 08037-9917
(609) 561-9000
TDD only 1-800-547-9085
www.sjindustries.com
Transfer Agent and Registrar
First Union National Bank of North Carolina
Corporate Trust Client Services NC 1153
1525 West W. T. Harris Blvd. 3C3
Charlotte, NC 28288-1153
Dividend, Dividend Reinvestment and Other Shareholder Inquiries
South Jersey Industries, Inc.
Shareholder Records Department
609-561-9000 ext. 4238 or 4321
Investor Relations
Stephen H. Clark, Manager
609-561-9000 ext. 4260
www.sjindustries.com
Annual Meeting Information
The Annual Meeting of Shareholders will be held Thursday, April 23, 1998, at 10
a.m. at the company's corporate headquarters.
South Jersey Industries, Inc. stock is traded on the New York and Philadelphia
stock exchanges under the trading symbol, SJI.
The information contained herein is not given in connection with any sale or
offer of, or solicitation of an offer to buy, any securities.
Dividend Reinvestment and Stock Purchase Plan
SJI's Dividend Reinvestment and Stock Purchase Plan provides record shareholders
of the company's common stock with a way to increase their investment in the
company without payment of any brokerage commission or service charge.
Shareholders who participate in the Plan may purchase shares of common stock by
the automatic reinvestment of dividends. Optional purchases are permitted each
quarter up to a maximum of $100,000 in any calendar year as prescribed in the
Plan. Shares of common stock offered through the Plan are currently purchased in
the open market. The price of shares purchased under the Plan will be determined
by dividing the total cost of all shares purchased during the investment period
by the number of shares purchased. The offer and sale of shares under the Plan
will be made only through a Prospectus, which may be obtained by contacting the
Shareholder Records Department (address and phone listed above).
Back cover - Outside
South Jersey Industries, Inc.
1 South Jersey Plaza
Folsom, New Jersey 08037-9917