Page 1 of 28
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999 Commission File Number 1-6364
SOUTH JERSEY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-1901645
(State of incorporation) (IRS employer identification no.)
1 South Jersey Plaza, Folsom, NJ 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 6, 1999, there were 10,975,389 shares of the registrant's
common stock outstanding.
Exhibit Index on page 28
- Title Page -
PART I FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 14
SJI-2
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
Three Months Ended
June 30,
----------------------
1999 1998
---------- ----------
Operating Revenues:
Utility $65,897 $52,088
Nonutility 10,800 19,575
---------- ----------
Total Operating Revenues 76,697 71,663
---------- ----------
Operating Expenses:
Gas Purchased for Resale 42,505 30,266
Utility Operations 10,147 10,452
Nonutility Operations 10,008 20,142
Maintenance 1,314 1,275
Depreciation 4,701 4,261
Income Taxes 470 (463)
Other Taxes 1,872 2,036
---------- ----------
Total Operating Expenses 71,017 67,969
---------- ----------
Operating Income 5,680 3,694
Interest Charges:
Long-Term Debt 3,917 3,711
Short-Term Debt and Other 993 765
---------- ----------
Total Interest Charges 4,910 4,476
---------- ----------
Preferred Dividend Requirements of Subsidiary 772 772
---------- ----------
Loss from Continuing Operations (2) (1,554)
Loss from Discontinued Operations - Net (59) (2,368)
---------- ----------
Net Loss Applicable to Common Stock ($61) ($3,922)
========== ==========
Average Shares of Common Stock Outstanding 10,781 10,775
========== ==========
Earnings Per Common Share:
Continuing Operations $0.00 ($0.14)
Discontinued Operations - Net (0.01) (0.22)
---------- ----------
Earnings Per Common Share ($0.01) ($0.36)
========== ==========
Dividends Declared Per Common Share $0.36 $0.36
========== ==========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-3
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
Six Months Ended
June 30,
----------------------
1999 1998
---------- ----------
Operating Revenues:
Utility $200,591 $160,432
Nonutility 22,838 34,078
---------- ----------
Total Operating Revenues 223,429 194,510
---------- ----------
Operating Expenses:
Gas Purchased for Resale 120,725 91,309
Utility Operations 19,677 20,408
Nonutility Operations 22,155 35,243
Maintenance 2,601 2,870
Depreciation 9,321 8,433
Income Taxes 13,171 8,973
Other Taxes 6,369 5,964
---------- ----------
Total Operating Expenses 194,019 173,200
---------- ----------
Operating Income 29,410 21,310
Interest Charges:
Long-Term Debt 8,024 7,563
Short-Term Debt and Other 1,941 1,400
---------- ----------
Total Interest Charges 9,965 8,963
---------- ----------
Preferred Dividend Requirements of Subsidiary 1,544 1,545
---------- ----------
Income from Continuing Operations 17,901 10,802
Loss from Discontinued Operations - Net (123) (2,596)
---------- ----------
Net Income Applicable to Common Stock $17,778 $8,206
========== ==========
Average Shares of Common Stock Outstanding 10,780 10,774
========== ==========
Earnings Per Common Share:
Continuing Operations $1.66 $1.00
Discontinued Operations - Net (0.01) (0.24)
---------- ----------
Earnings Per Common Share $1.65 $0.76
========== ==========
Dividends Declared Per Common Share $0.72 $0.72
========== ==========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-4
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
June 30, December 31,
---------------------- -------------
1999 1998 1998
---------- ---------- -------------
Assets
- ------
Property, Plant and Equipment:
Utility Plant, at original cost $703,929 $644,734 $681,848
Accumulated Depreciation (185,898) (173,614) (179,605)
Nonutility Property and Equipment, at cost 3,029 3,010 2,981
Accumulated Depreciation (983) (991) (965)
---------- ---------- -------------
Property, Plant and Equipment - Net 520,077 473,139 504,259
---------- ---------- -------------
Investments:
Available-for-Sale Securities 1,077 42 931
Investment in Affiliate 2,131 942 1,440
---------- ---------- -------------
Total Investments 3,208 984 2,371
---------- ---------- -------------
Current Assets:
Cash and Cash Equivalents 11,135 8,070 5,991
Notes Receivable - Affiliate 4,050 2,550 4,350
Accounts Receivable 36,678 38,619 42,600
Unbilled Revenues 6,970 3,102 19,489
Provision for Uncollectibles (1,191) (1,257) (1,283)
Natural Gas in Storage, average cost 20,121 19,827 27,619
Materials and Supplies, average cost 3,962 4,244 4,051
Prepaid Taxes 10,009 15,345 13,850
Prepayments and Other Current Assets 5,054 4,237 3,419
---------- ---------- -------------
Total Current Assets 96,788 94,737 120,086
---------- ---------- -------------
Accounts Receivable - Merchandise 1,344 2,080 1,554
---------- ---------- -------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 24,503 22,542 27,500
Liability for Future Expenditures 52,939 50,697 52,939
Gross Receipts & Franchise Taxes 3,363 3,806 3,585
Income Taxes - Flowthrough Depreciation 12,020 13,510 13,021
Deferred Fuel Costs - Net - - 5,509
Deferred Postretirement Benefit Costs 5,207 5,837 5,522
Other 8,127 8,188 11,749
---------- ---------- -------------
Total Regulatory and Other Non-Current Assets 106,159 104,580 119,825
---------- ---------- -------------
Total Assets $727,576 $675,520 $748,095
========== ========== =============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-5
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
June 30, December 31,
---------------------- -------------
1999 1998 1998
---------- ---------- -------------
Capitalization and Liabilities
- ------------------------------
Common Equity:
Common Stock $13,719 $13,469 $13,474
Premium on Common Stock 116,388 111,179 111,253
Capital Stock Expense (13) - -
Retained Earnings 54,523 49,487 44,507
---------- ---------- -------------
Total Common Equity 184,617 174,135 169,234
---------- ---------- -------------
Preferred Stock and Securities of Subsidiary:
Redeemable Cumulative Preferred Stock:
South Jersey Gas Company, Par Value $100 per share
Authorized - 45,504, 46,404 and 46,404 shares
Outstanding Shares:
Series A, 4.70% -- 1,200, 2,100 and 2,100 shares 120 210 210
Series B, 8.00% -- 19,242 shares 1,924 1,924 1,924
Company-Guaranteed Manditorily Redeemable
Preferred Securities of Subsidiary Trust:
Par Value $25 per share, 1,400,000 shares
Authorized and Outstanding 35,000 35,000 35,000
---------- ---------- -------------
Total Preferred Stock and Securities of Subsidiary 37,044 37,134 37,134
---------- ---------- -------------
Long-Term Debt 185,704 166,853 194,710
---------- ---------- -------------
Total Capitalization 407,365 378,122 401,078
---------- ---------- -------------
Current Liabilities:
Notes Payable 82,300 72,675 97,000
Current Maturities of Long-Term Debt 8,876 8,876 8,876
Accounts Payable 38,049 34,774 51,960
Customer Deposits 5,373 5,815 5,576
Environmental Remediation Costs 10,173 17,837 9,668
Taxes Accrued 6,697 1,070 1,531
Interest Accrued and Other Current Liabilities 7,706 10,532 14,010
---------- ---------- -------------
Total Current Liabilities 159,174 151,579 188,621
---------- ---------- -------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 84,660 82,686 84,827
Investment Tax Credits 5,044 5,434 5,239
Deferred Revenues - Net 3,777 2,220 -
Pension and Other Postretirement Benefits 14,171 11,535 14,227
Environmental Remediation Costs 47,263 37,871 47,925
Other 6,122 6,073 6,178
---------- ---------- -------------
Total Deferred Credits
and Other Non-Current Liabilities 161,037 145,819 158,396
---------- ---------- -------------
Commitments and Contingencies
Total Capitalization and Liabilities $727,576 $675,520 $748,095
========== ========== =============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-6
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In Thousands)
Six Months Ended
June 30,
-----------------------
1999 1998
---------- ----------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $17,778 $8,206
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 10,777 9,411
Provision for Losses on Accounts Receivable 267 466
Revenues and Fuel Costs Deferred - Net 9,286 5,227
Deferred and Non-Current Income Taxes and Credits - Net 194 4,582
Environmental Remediation Costs - Net 2,840 (445)
Changes in:
Accounts Receivable 18,082 10,668
Inventories 7,587 4,315
Prepayments and Other Current Assets (1,659) (834)
Prepaid and Accrued Taxes - Net 9,007 (13,596)
Accounts Payable and Other Accrued Liabilities (20,418) (17,365)
Other - Net 3,725 (683)
---------- ----------
Net Cash Provided by Operating Activities 57,466 9,952
---------- ----------
Cash Flows from Investing Activities:
Investment in Affiliate (692) 2,011
Loan to Affiliate 300 -
Capital Expenditures, Cost of Removal and Salvage (25,561) (25,733)
Purchase of Available-for-Sale Securities (145) -
---------- ----------
Net Cash Used in Investing Activities (26,098) (23,722)
---------- ----------
Cash Flows from Financing Activities:
Net (Repayments of) Borrowings from Lines of Credit (14,700) 26,775
Principal Repayments of Long-Term Debt (9,006) (9,625)
Dividends on Common Stock (7,762) (7,757)
Repurchase of Preferred Stock (90) (90)
Proceeds from Sale of Common Stock 5,334 122
Payments for Issuance of Long-Term Debt and Preferred Securities - (27)
---------- ----------
Net Cash (Used in) Provided by Financing Activities (26,224) 9,398
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 5,144 (4,372)
Cash and Cash Equivalents at Beginning of Period 5,991 12,442
---------- ----------
Cash and Cash Equivalents at End of Period $11,135 $8,070
========== ==========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJI-7
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Significant Accounting Practices:
Consolidation - The consolidated financial statements include the accounts
of South Jersey Industries, Inc. (SJI) and its subsidiaries. All significant
intercompany accounts and transactions were eliminated. SJI reclassified some
previously reported amounts to conform with current year classifications.
In the company's opinion, the condensed consolidated financial statements
reflect all adjustments needed to fairly present SJI's financial position and
operating results at the dates and for the periods presented. SJI's businesses
are subject to seasonal fluctuations and, accordingly, this interim financial
information should not be the basis for estimating the full year's operating
results.
Estimates and Assumptions - Our financial statements are prepared to
conform with generally accepted accounting principles. Management makes
estimates and assumptions that affect the amounts reported in the financial
statements and related disclosures. Therefore, actual results could differ
from those estimates.
New Accounting Pronouncement - In June 1998, the FASB issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
effective for our fiscal year ending December 31, 2001. This statement
establishes accounting and reporting standards for derivative instruments,
including those embedded in other contracts, and for hedging activities. It
requires recognizing derivatives as assets or liabilities at fair value on the
balance sheet. We are currently evaluating the effects of FASB No. 133 on
SJI's financial condition and results of operations, which will vary based on
our use of derivative instruments at the time of adoption.
Note 2. Discontinued Operations and Affiliations:
Discontinued Operations - Summarized operating results of the discontinued
operations were (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Loss before Income Taxes:
Sand Mining $ (58) $(3,222) $ (141) $(3,515)
Construction (11) (383) (23) (454)
Fuel Oil (27) (11) (38) (24)
Income Tax Credits 37 1,248 79 1,397
------- ------- ------- -------
Loss from Discontinued
Operations - Net $ (59) $(2,368) $ (123) $(2,596)
======= ======= ======= =======
Earnings per Common Share
from Discontinued Operations $(0.01) $(0.22) $(0.01) $(0.24)
======= ======= ======= =======
SJI-8
Affiliations - In April 1999, South Jersey Energy Company, Inc. (SJE, a
wholly-owned subsidiary of SJI) and Energy East Solutions, Inc. (a subsidiary
of Energy East Corporation) entered into an agreement to form South Jersey
Energy Solutions, LLC, a jointly-owned limited liability company (LLC) to
market retail electricity and energy management services. The LLC is intended
to create significant efficiencies and expand service capabilities for both
companies when proceedings to implement electric utility restructuring are
completed in New Jersey.
Note 3. Common Stock:
SJI has 20,000,000 shares of authorized Common Stock. The following
shares were issued and outstanding:
1999 1998
---------- ----------
Beginning Balance, January 1 10,778,990 10,771,413
New Issues During Period:
Dividend Reinvestment and
Stock Purchase Plan 192,675 -
Employees' Stock Ownership Plan 3,175 2,812
Stock Option & Stock Appreciation
Rights Plan 31 1,472
---------- ----------
Ending Balance, June 30 10,974,871 10,775,697
========== ==========
The par value ($1.25 per share) of stock issued in 1999 and 1998 was
credited to Common Stock. Net excess over par value of $5,135,444 and $182,413
respectively, was credited to Premium on Common Stock for the six months ended
June 30, 1999 and 1998, respectively.
Stock Option and Stock Appreciation Rights Plan - Under this plan, not
more than 306,000 shares in the aggregate may be issued to SJI's officers and
other key employees. No options or stock appreciation rights may be granted
under the Plan after January 23, 2007. At June 30, 1999 and 1998, SJI had
4,500 and 6,530 options outstanding, respectively, all exercisable at prices
from $17.89 to $24.69 per share. During the six months ended June 30, 1999 and
1998, 500 and 6,530 options were surrendered for the issuance of 31 and 1,472
shares, respectively. No options were granted in 1999 and 1998. No stock
appreciation rights were issued under the Plan. Stock options outstanding at
June 30, 1999 and 1998, had no effect on EPS.
Dividend Reinvestment and Stock Purchase Plan (DRP) and Employees' Stock
Ownership Plan (ESOP) - Effective June 1999, newly issued shares of common
stock offered through the DRP are issued directly by SJI. All shares offered
through the ESOP continue to be issued directly by SJI. As of June 30, 1999,
SJI reserved 869,408 and 28,321 shares of authorized, but unissued, common
stock for future issuance to the DRP and ESOP, respectively.
SJI-9
Note 4. Income Taxes:
The significant components of federal and state income taxes reflected in
the condensed statements of consolidated income are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Current:
Federal $ (9) $(2,800) $ 9,384 $ 1,915
State 381 (212) 3,592 1,969
------- ------- -------- --------
Total Current 372 (3,012) 12,976 3,884
Deferred:
Federal 326 2,378 652 4,779
State (131) 270 (262) 508
------- ------- -------- --------
Total Deferred 195 2,648 390 5,287
Investment Tax Credit (97) (99) (195) (198)
------- ------- -------- --------
Income Taxes as reported on
the Condensed Statements of
Consolidated Income 470 (463) 13,171 8,973
Tax Associated with Discontinued
Operations (37) (1,248) (79) (1,397)
------- ------- -------- --------
Net Income Taxes $ 433 $(1,711) $ 13,092 $ 7,576
======= ======= ======== ========
Note 5. Recent Regulatory Actions:
SJG began a pilot program in April 1997, giving residential customers a
choice of gas supplier. During the initial enrollment period in 1997, nearly
13,000 residential customers applied for and received this service. The BPU
subsequently expanded the number of potential participants to 50,000 and, as
of June 30, 1999, enrollment totaled 24,750. In January 2000, all of SJG's
customers will become eligible to choose a gas supplier. Participants' bills
are reduced for cost of gas charges and applicable taxes. The resulting
decrease in revenues is offset by a corresponding decrease in gas costs and
taxes under SJG's BPU-approved fuel clause. While the program reduces utility
revenues, it does not affect SJG's net income, financial condition or margins.
In September 1998, SJG filed its annual LGAC, TAC and DSMC with the BPU.
The LGAC and DSMC cover the period November 1 through October 31 of each year.
The TAC period runs from October 1 through May 31. On May 12, 1999, the BPU
approved a $7.1 million increase in rates as part of the current annual filing,
which included the results of the previous two annual filings.
SJI-10
In April 1999, the BPU approved new hourly appliance service rates which
SJG implemented in that same month. On June 30, 1999, SJG filed a proposal to
implement several new service contract plans and to expand its existing service
contract plans to include appliances not presently covered. Subsequently, SJG
increased the price of its existing service contract plans effective August 1,
1999. The new rates and plans are competitive with those of other service
providers in New Jersey and are designed to increase earnings and cash flows.
Note 6. Segments of Business:
Information about SJI's operations in different industry segments is
presented below (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Operating Revenues:
Gas Utility Operations $66,650 $52,256 $201,732 $160,741
Other Industries 11,123 19,783 23,483 34,518
------- ------- -------- --------
Subtotal 77,773 72,039 225,215 195,259
Intersegment Sales (1,076) (376) (1,786) (749)
------- ------- -------- --------
Total Operating Revenues $76,697 $71,663 $223,429 $194,510
======= ======= ======== ========
The increase in operating revenues from Other Industries is due primarily
to SJE's wholesale electricity sales which began and ended in 1998.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Operating Income:
Gas Utility Operations $ 5,345 $ 3,856 $ 41,873 $ 31,566
Other Industries 919 (133) 1,348 (300)
------- ------- -------- --------
Subtotal 6,264 3,723 43,221 31,266
Income Taxes (469) 463 (13,170) (8,973)
General Corporate Expense (115) (492) (641) (983)
------- ------- -------- --------
Total Operating Income $ 5,680 $ 3,694 $ 29,410 $ 21,310
======= ======= ======== ========
Depreciation and Amortization:
Gas Utility Operations $ 5,739 $ 4,749 $ 10,740 $ 9,388
Other Industries 11 7 21 12
Discontinued Operations 8 6 16 11
------- ------- -------- --------
Total $ 5,758 $ 4,762 $ 10,777 $ 9,411
======= ======= ======== ========
SJI-11
Property Additions:
Gas Utility Operations $12,222 $15,517 $ 25,034 $ 25,254
Other Industries 44 65 48 70
------- ------- -------- --------
Total $12,266 $15,582 $ 25,082 $ 25,324
======= ======= ======== ========
Identifiable Assets:
Gas Utility Operations $709,020 $649,202
Other Industries 14,668 18,532
Discontinued Operations 2,537 1,611
-------- --------
Subtotal 726,225 669,345
Corporate Assets 21,976 21,523
Intersegment Assets (20,625) (15,348)
-------- --------
Total Assets $727,576 $675,520
======== ========
SJI's interest expense relates primarily to SJG's borrowing and financing
activities. Interest income is essentially derived from borrowings between the
subsidiaries and is eliminated during consolidation. These amounts are
included in our condensed statements of consolidated income and not shown
above.
Gas Utility Operations consist primarily of natural gas distribution to
residential, commercial and industrial customers. Other Industries include the
natural gas and electric acquisition and transportation service companies (See
Note 2).
Total Operating Revenues by industry segment include both sales to
unaffiliated customers, as reported in SJI's condensed statements of
consolidated income, and intercompany sales, which are accounted for at the
fair market value of the goods or services rendered.
Operating Income is total revenues less operating expenses, income taxes
and general corporate expenses, as shown on the condensed statements of
consolidated income.
Identifiable Assets are those used in each segment of SJI's operations.
Corporate assets are principally cash and cash equivalents, land, buildings and
equipment held for corporate use.
Note 7. Retained Earnings:
Restrictions exist under various loan agreements regarding the amount of
cash dividends or other distributions that we may pay on SJG's common stock.
SJI's total equity in its subsidiaries' retained earnings, which is free of
these restrictions, was approximately $52.7 million as of June 30, 1999.
SJI-12
Note 8. Commitments and Contingencies:
Construction Commitments - SJI's estimated cost of construction and
environmental remediation programs for 1999 totals $53.2 million. Commitments
were made regarding these programs.
Pending Litigation - SJI is subject to claims arising in the ordinary
course of business and other legal proceedings. We set up reserves when these
claims become apparent. We also maintain insurance and record probable
insurance recoveries relating to outstanding claims.
Environmental Remediation Costs - SJI incurred and recorded costs for
environmental clean up of sites where SJG or its predecessors operated gas
manufacturing plants. SJG stopped manufacturing gas over 35 years ago. SJI
and some of its nonutility subsidiaries also recorded costs for environmental
clean up of sites where South Jersey Fuel Company (SJF) previously operated a
fuel oil business and Morie maintained equipment, fueling stations and storage.
Since the early 1980s, SJI recorded environmental remediation costs of
$114.6 million, of which $57.2 million was spent as of June 30, 1999. With the
assistance of an outside consulting firm, we estimate that future costs to
clean up SJG's sites will range from $52.9 million to $160.3 million. We
recorded the lower end of this range as a liability. It is reflected on the
1999 condensed consolidated balance sheet under the captions Current
Liabilities and Deferred Credits and Other Non-Current Liabilities. SJG did
not adjust the accrued liability for future insurance recoveries, which
management is pursuing. We use insurance proceeds to offset related litigation
costs and to reduce the balance of deferred environmental remediation costs.
Recorded amounts include estimated costs based on projected investigation and
remediation work plans using existing technologies. Actual costs could differ
from the estimates due to the long-term nature of the projects, changing
technology, government regulations and site specific requirements.
The major portion of recorded environmental costs relate to the cleanup of
SJG's former gas manufacturing sites. SJG recorded $107.9 million for the
remediation of these sites and spent $55.0 million through June 30, 1999.
SJG has two regulatory assets associated with environmental cost. The
first regulatory asset is titled Environmental Remediation Cost: Expended -
Net. These expenditures represent what was actually spent to clean up former
gas manufacturing plant sites. These costs meet the requirements of FASB
Statement No. 71, "Accounting for the Effects of Certain Types of Regulation."
The BPU allowed SJG to recover expenditures through July 1996 and petitions to
recover costs through July 1999 are pending.
SJI-13
The other regulatory asset titled Environmental Remediation Cost:
Liability for Future Expenditures relates to estimated future expenditures
determined under the guidance of FASB Statement No. 5, "Accounting for
Contingencies." This amount, which relates to former manufactured gas plant
sites, was recorded as a deferred debit with the corresponding amount
reflected on the condensed consolidated balance sheet under the captions,
Current Liabilities and Deferred Credits and Other Non-Current Liabilities.
The deferred debit is a regulatory asset under FASB No. 71. The BPU's intent,
evidenced by current practice, is to allow SJG to recover the deferred costs
after they are spent.
SJG files with the BPU to recover these costs in rates through its RAC.
The BPU has consistently allowed the full recovery over 7-year periods, and SJG
believes this will continue. As of June 30, 1999, SJG's unamortized
remediation costs of $24.5 million are reflected on the condensed consolidated
balance sheet under the caption Regulatory and Other Non-Current Assets. Since
BPU approval of the RAC in 1992, SJG recovered $19.3 million through rates as
of June 30, 1999.
With Morie's sale, Energy & Minerals, Inc. (EMI) assumed responsibility
for environmental liabilities which we estimate to range between $3.1 million
and $9.7 million. The information available on these sites is sufficient only
to establish a range of probable liability, and no point within the range is
more likely than any other. Therefore, EMI continues to accrue the lower end
of the range. Changes in the accrual are included in the condensed statements
of consolidated income under the caption, Loss from Discontinued Operations -
Net.
SJI and SJF estimated their potential exposure for the future remediation
of four sites where fuel oil operations existed years ago. Estimates for SJI's
site range between $0.3 million and $0.9 million, while SJF's estimated
liability ranges from $1.3 million to $4.8 million for its three sites. The
lower ends of these ranges were recorded and are reflected on the condensed
consolidated balance sheet under Current Liabilities and Deferred Credits and
Other Non-Current Liabilities as of June 30, 1999.
SJI-14
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Overview
South Jersey Industries, Inc. (SJI) has two operating subsidiaries, South
Jersey Gas Company (SJG) and South Jersey Energy Company (SJE). SJG is a
regulated natural gas distribution company serving 270,433 customers at June
30, 1999, compared with 263,678 customers at June 30, 1998. SJG also makes
off-system sales of natural gas on a wholesale basis to various customers on
the interstate pipeline system and transports natural gas purchased directly
from producers or suppliers for our own sales and for some of our customers.
SJE provides services for the acquisition and transportation of natural gas for
retail end users and markets total energy management services. SJE also
markets an air quality monitoring system that provides around-the-clock, real
time monitoring for airborne substances around a site or facility. In 1998,
SJE bought and sold electricity in the wholesale market. However, as a result
of an alliance with Energy East Solutions, Inc. (EES, a subsidiary of Energy
East Corporation), SJE ceased buying and selling wholesale electricity. SJE
plans to begin marketing retail electricity in New Jersey in 1999 through a
limited liability company, jointly owned with EES. SJE has one operating
subsidiary, SJ EnerTrade (EnerTrade). EnerTrade, formed in October 1997,
provides services for the sale of natural gas to energy marketers, electric and
gas utilities, and other wholesale users in the mid-Atlantic and southern
regions of the country.
Forward Looking Statements
This report contains certain forward-looking statements concerning
projected future financial performance, future operating performance, future
plans and courses of action and future economic conditions. All statements in
this report other than statements of historical fact are forward-looking
statements. These forward-looking statements are made based upon management's
expectations and beliefs concerning future events impacting the company and
involve a number of risks and uncertainties. We caution that forward-looking
statements are not guarantees and actual results could differ materially from
those expressed or implied in the forward-looking statements.
A number of factors could cause our actual results to differ materially
from those anticipated, including, but not limited to the following: general
economic conditions on an international, federal, state and local level;
weather conditions in the company's marketing areas; regulatory and court
decisions; competition in the company's regulated and deregulated activities;
the availability and cost of capital; the company's ability to maintain
existing and/or establish successful new alliances and joint ventures to take
advantage of marketing opportunities; costs and effects of unanticipated legal
proceedings, Year 2000 related costs or operating problems and environmental
liabilities; and changes in business strategies.
SJI-15
Pilot Program - Choice of Gas Supplier
SJG operates a New Jersey Board of Public Utilities (BPU) approved pilot
program giving residential customers a choice of gas supplier. Currently the
program is open to 50,000 potential participants and, as of June 30, 1999,
enrollment totaled 24,750. In January 2000, all of SJG's customers will become
eligible to choose a gas supplier. Participants' bills are reduced for cost of
gas charges and applicable taxes. The resulting decrease in SJG's revenues is
offset by a corresponding decrease in gas costs and taxes under a BPU-approved
fuel clause. While the program reduces utility revenues, it does not affect
SJG's net income, financial condition or margins.
Energy Adjustment Clauses
In 1998, the BPU approved a revised Temperature Adjustment Clause (TAC)
for SJG, effective October 1998. TAC adjustments had the following impacts on
1999 and 1998 second quarter and six month net earnings:
1999 1998
-------- --------
TAC Adjustment to Net Income ($ in thousands)
Quarter Ended 6/30 ($44) $247
Six Months Ended 6/30 $1,232 $247
While the revenue and income impacts of TAC adjustments are recorded as
incurred, cash inflows or outflows directly attributable to TAC adjustments do
not begin until the next TAC year. Each TAC year begins October 1.
Status of Year 2000 Conversion
State of Readiness
We prepared a Year 2000 Impact and Assessment Study and developed a
detailed plan to enable SJI to be ready for year 2000. Ready means that
mission critical software, hardware, devices, systems, facilities and business
relationships are prepared to operate satisfactorily through the end of 1999
and beyond.
SJI revised 100% of effected programming code as of June 1, 1999. We
believe that 90% of all, and 100% of our mission critical, embedded technology
is Y2K ready. We have tested all revisions on an as completed basis and will
continue to test through the end of this year.
SJI-16
The most significant area that is not currently Y2K ready is SJG's SCADA
software, that monitors natural gas flow throughout our distribution system.
SJG has contracted with a vendor to replace the SCADA software with a version
that is Y2K compliant, with installation and testing to be completed by the end
of the third quarter. SJG's gas distribution system is designed to provide
uninterrupted gas flow and has long-standing, repeatedly tested back-up
procedures in place to ensure gas flow in the event of hardware, software,
electrical or SCADA failures. SJI's cash processing system was Y2K ready as of
June 30. This function had previously been identified in the March Form 10Q as
not being Y2K ready.
We surveyed all of our vendors regarding their Y2K readiness. All vendors
providing third party software have indicated their products used by us are Y2K
ready. Of product and service vendors surveyed, 71% of all and 100% of mission
critical vendors have indicated Y2K readiness. We are actively pursuing
assurances that the remainder of our vendors will be Y2K ready.
Year 2000 Costs
We project Y2K costs to total $0.54 million, with $0.43 million having
been spent through June 30, 1999.
Year 2000 Risks and Contingency Plans
The worst case scenario that concerns us the most is a temporary
disruption of service to our gas customers. As a contingency, our gas
distribution system can be operated manually. We have received assurances from
our two direct connect gas supply pipelines that they are Y2K ready. We are
seeking assurances from the companies that supply gas to our system that they
will be Y2K ready. We are preparing contingency plans for use in the event
that they are not ready. Contingency plans have been or are being prepared to
address Y2K related problems. All contingency plans for high priority items
such as service continuation, safety and revenues are scheduled to be completed
by the end of August 1999.
Y2K Summary
If some key systems and devices are not ready for the Year 2000, in
particular at pipeline, telecommunication, electricity or banking service
vendors, there will likely be adverse effects on the company's business,
results of operations and financial condition.
While unexpected Y2K problems can occur, we do not anticipate any material
difficulty in achieving Y2K readiness based upon the nature of SJI's operating
and information systems and the state of planning and remediation. Any
problems that arise within the company should be immaterial to our financial
position or operating results.
SJI-17
Results of Operations - Three and Six Months Ended June 30, 1999
Compared to Three and Six Months Ended June 30, 1998
Operating Revenues - Utility
Revenues increased $13.8 million in the second quarter and $40.2 million
in the first six months of 1999 compared with the prior year periods. The
primary reasons for the increases were increased off-system sales and 6,755
additional customers at SJG. Six month results also benefited significantly
from the revised TAC. These factors more than offset revenue reductions due to
the continued migration of firm gas sales to firm transportation. Note,
however, that SJG's tariffs are structured so that profits are derived from the
transportation of gas, not the sale of the commodity. Consequently, the switch
to firm transportation reduced revenues but did not impact profitability.
Weather in the second quarter and first six months of 1999 was 8.7% and
14.2% colder, respectively, than the prior year periods. Weather was 0.9%
colder and 3.0% warmer for the second quarter and first six months,
respectively, than the 20-year average. Previously, changes in temperatures
were typically the single most important factor in explaining revenue
fluctuations for comparative periods in SJI's utility operations. Revisions
to SJG's TAC that became effective in October 1998 significantly reduced the
weather related volatility in SJI's utility revenues. However, comparisons for
the first two quarters of 1999 to the prior year periods continued to show
volatility as 1998 revenues were heavily influenced by weather. Revenues for
1999 will be closely tied to the 20-year normal temperatures and not actual
weather conditions.
The following is a comparison of operating revenue and throughput for the
three and six month periods ended June 30, 1999 vs. the same periods ended
June 30, 1998.
SJI-18
2nd Quarter Year to Date
----------- ------------
1999 1998 1999 1998
-------- -------- --------- ---------
Utility Operating Revenues (Thousands):
Firm
Residential $25,025 $23,494 $97,561 $87,346
Commercial 5,016 5,899 21,201 21,816
Industrial 913 733 2,724 2,548
Cogeneration & Electric
Generation 2,136 2,458 2,803 3,419
Firm Transportation 6,131 4,726 16,962 12,308
------- ------- -------- --------
Total Firm 39,221 37,310 141,251 127,437
Interruptible 653 614 993 1,651
Interruptible Transportation 362 541 895 1,436
Off-System 24,557 11,051 55,043 24,225
Capacity Release & Storage 856 1,428 1,730 3,690
Other 1,001 1,275 1,820 2,265
Intercompany Sales (753) (131) (1,141) (272)
------- ------- -------- --------
Total Utility Operating
Revenues $65,897 $52,088 $200,591 $160,432
======= ======= ======== ========
Throughput (Mmcf):
Firm
Residential 2,696 2,480 11,579 10,402
Commercial 621 737 2,837 2,972
Industrial 37 58 159 230
Cogeneration & Electric
Generation 679 802 750 893
Firm Transportation 5,875 4,887 12,664 11,284
------- ------- ------- -------
Total Firm Throughput 9,908 8,964 27,989 25,781
Interruptible 137 178 244 461
Interruptible Transportation 831 1,280 1,934 3,398
Off-System 10,461 4,570 24,775 9,876
Capacity Release & Storage 8,038 7,653 11,359 14,138
------- ------- ------- -------
Total Throughput 29,375 22,645 66,301 53,654
======= ======= ======= =======
SJI-19
Operating Revenues - Nonutility
Nonutility operating revenues decreased by $8.8 million and $11.2 million
for the second quarter and six month periods of 1999, respectively, primarily
due to the discontinuation of SJE's wholesale electric trading activities. The
loss of these revenues was partially offset by increased levels of retail gas
sales to residential customers and casinos in Atlantic City.
Gas Purchased for Resale
Gas purchased for resale increased $12.2 million and $29.4 million for the
second quarter and six month periods of 1999, respectively, compared with the
same periods in 1998 due principally to increased sales volumes, particularly
to off-system customers. These increases were partially offset by SJG's
ability to buy gas during the first six months of 1999 at an average cost of
$2.10/dt compared with $2.39/dt in 1998. Gas supply sources include contract
and open-market purchases. SJG secures and maintains its own gas supplies to
serve its customers.
Utility Operations
A summary of net changes in Utility Operations (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1999 vs. 1998 1999 vs. 1998
------------------ ----------------
Other Production Expense $(3) $10
Transmission 19 45
Distribution (295) (201)
Customer Accounts and Services (115) (340)
Sales 9 (18)
Administration and General 37 (275)
Other 43 48
------ ------
$(305) $(731)
====== ======
Distribution expenses declined due to reduced levels of new and
replacement meter and regulator installations. Installation activity is
expected to increase during the second half of 1999. Customer Accounts and
Services costs decreased in 1999 principally due to a decrease in reserves for
uncollectible accounts and reduced meter reading expenses. Meter reading
expenses declined due to a change to bimonthly meter reading. Administrative
and General costs decreased for the six month period from 1998 levels
principally due to an emphasis on cost cutting in general.
SJI-20
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1999 vs. 1998 1999 vs. 1998
------------------ ----------------
Nonutility Operations $(10,134) $(13,088)
Maintenance 39 (269)
Depreciation 440 888
Income Taxes 933 4,198
Other Taxes (164) 405
Decreases in nonutility expenses principally reflect the discontinuation
of SJE's wholesale electricity trading activities, partially offset by
increased levels of retail gas sales to residential customers and casinos in
Atlantic City. The decrease in maintenance costs for the first six months is
principally due to reduced overtime charges and fewer occurrences of
distribution system leaks experienced. Depreciation is higher due to increased
investment in property, plant and equipment by SJG. Income Tax changes reflect
the impact of changes in pre-tax income. Other taxes increased for the first
six months because of higher sales volumes due primarily to lower temperatures
in the first quarter of 1999 and adjustments recorded in 1998 related to the
Energy Tax Reform Act implemented January 1998.
Interest Charges
Interest charges increased in 1999 due to the effect of increased short
and long-term debt outstanding, partially offset by lower interest rates
experienced during the first half of this year. The debt was incurred
primarily to support the expansion and upgrade of SJG's gas transmission and
distribution system.
Discontinued Operations
Loss from discontinued operations decreased $2.3 million for the second
quarter and $2.5 million for the first six months of 1999 principally due to a
product liability settlement recorded in June 1998 and decreased environmental
remediation costs.
SJI-21
Net Income Applicable to Common Stock
Net income (in thousands) and earnings per common share reflect the
following changes:
Three Months Ended Six Months Ended
June 30, June 30,
1999 vs. 1998 1999 vs. 1998
------------------ ----------------
Income from Continuing Operations $1,552 $7,099
Loss from Discontinued Operations
- Net 2,309 2,473
------- -------
Net Income Increase $3,861 $9,572
======= =======
Earnings per Common Share:
Continuing Operations $0.14 $0.66
Discontinued Operations - Net 0.21 0.23
------- -------
Earnings per Share Increase $0.35 $0.89
======= =======
The details affecting the changes in net income and earnings per share are
discussed under the appropriate captions above.
Liquidity
The seasonal nature of gas operations; the timing of construction and
remediation expenditures and related permanent financing; as well as mandated
tax and sinking fund payment dates require large, short-term cash requirements.
These requirements are generally met by cash from operations and short-term
lines of credit. We maintain short-term lines of credit with a number of
banks, totaling $145.0 million, of which $62.7 million was available at June
30, 1999. The credit lines are uncommitted and unsecured with interest rates
typically available based upon the Federal Funds Rates or London Interbank
Offered Rates (LIBOR).
SJI-22
The changes in cash flows from operating activities (in thousands):
Six Months Ended
June 30,
1999 vs. 1998
----------------
Increases/(Decreases):
Net Income Applicable to Common Stock $9,572
Depreciation and Amortization 1,366
Provision for Losses on Accounts Receivable (199)
Revenues and Fuel Costs Deferred - Net 4,059
Deferred and Non-Current Income Taxes and
Credits - Net (4,388)
Environmental Remediation Costs-Net 3,285
Accounts Receivable 7,414
Inventories 3,272
Prepayments and Other Current Assets (825)
Prepaid and Accrued Taxes - Net 22,603
Accounts Payable and Other Accrued Liabilities (3,053)
Other - Net 4,408
--------
Net Cash Provided by Operating Activities $47,514
========
Depreciation and Amortization are non-cash charges to income and do not
impact cash flow. Changes in depreciation cost reflect the effect of additions
and reductions to fixed assets.
Increases in Revenues and Fuel Costs Deferred - Net reflect the impact of
overcollection of fuel costs or the recovery of previously deferred fuel costs.
Decreases reflect the impact of payments or credits to customers for amounts
previously overcollected and the undercollection of fuel costs resulting from
increases in natural gas costs.
Changes in Deferred and Non-Current Income Taxes and Credits - Net
represent the differences between taxes accrued and amounts paid. Generally,
deferred income taxes related to deferred fuel costs will be paid in the next
year.
Changes in Environmental Remediation Costs - Net represent the differences
between amounts expended for environmental remediation compared with amounts
collected under the RAC and insurance recoveries.
Changes in Accounts Receivable are primarily due to the discontinuation of
wholesale electricity sales by SJE. This cash source was partially offset by
higher off-system sales and the impact of colder weather on SJG's sales
volumes. Weather and commodity prices also impact this line item. Changes
impact cash flows when receivables are collected in subsequent periods.
SJI-23
Changes in Inventories reflect the impact of seasonal requirements,
temperatures and price changes.
Changes in Prepaid and Accrued Taxes - Net reflect the impact of
differences between taxes paid and taxes accrued. Significant timing
differences exist in cash flows during the year. Approximately 50% of SJG's
taxes are paid in installments during the first half of the year and the
remaining 50% are paid on May 15 of each year. SJG uses short-term borrowings
to pay taxes, resulting in a temporary increase in the short-term debt level.
The carrying costs of timing differences are recognized in base utility rates.
Utilization of prepaid tax balances resulted in minimal cash outflows in the
first quarter of 1999.
Changes in Accounts Payable and Other Current Liabilities reflect the
impact of timing differences between the accrual and payment of costs.
Changes in Other - Net reflect numerous changes in noncurrent assets and
liabilities, including a settlement of an eminent domain proceeding and accrued
deferred income taxes.
Cash flow from nonutility operations is generally retained by those
companies with amounts in excess of cash requirements passed up to SJI either
as dividends or as temporary short-term loans. Nonutility operations are
service oriented and do not require significant investment in capital
facilities, inventories or personnel.
Regulatory Matters
In July 1999, SJG filed its annual petition to recover environmental
remediation costs through the Remediation Adjustment Clause (RAC) mechanism.
In the petition, SJG proposed to freeze the level of the RAC for three years
and to obtain recovery of interest expenses that SJG incurs on unamortized
remediation costs.
On February 9, 1999, the "Electric Discount and Energy Computation Act"
P.L. 1999, c. 23 (the Act) was signed into law in New Jersey. This bill
establishes the framework and necessary time schedules for the deregulation and
restructuring of the electric and natural gas utilities in the state. As to
natural gas utilities, the Act completes the "unbundling" rate process,
establishes a time frame for the institution of competitive services for
customer accounting functions and also sets forth a time frame for a
determination as to whether basic gas supply services should become
competitive.
The Act also contains numerous provisions which require the BPU to
promulgate and adopt a variety of standards related to the implementation of
the Act. These required standards address fair competition, affiliate
relations, accounting, competitive services, supplier licensing, consumer
protection and aggregation. On March 31, 1999, the BPU issued Draft Interim
Standards in response to the Act. In issuing its Order, the BPU stated that
the Draft Interim Standards ". . . do not necessarily represent the final views
of the Board on these matters. . ." As such, the BPU has undertaken an
extensive comment and meeting process to address the concerns of all impacted
parties. The company has been actively participating in this process, and
management believes the final standards will not have a material adverse effect
on the company.
Other matters are incorporated by reference to Note 5 to the condensed
consolidated financial statements included as part of this report.
SJI-24
Capital Resources
SJI has a continuing need for cash resources and capital, primarily to
invest in new and replacement facilities and equipment and for environmental
remediation costs. Net construction and remediation expenditures for the first
half of 1999 amounted to $22.7 million. The costs for 1999, 2000 and 2001 are
estimated at approximately $53.2 million, $57.8 million and $56.7 million,
respectively. We will fund these expenditures from several sources, which may
include cash generated by operations, temporary use of short-term debt, sale
of medium-term notes, capital leases, RAC recoveries, insurance recoveries and
the issuance of equity.
Effective June 1999, SJI changed the way that shares were purchased by
participants in the company's Dividend Reinvestment Plan (DRP). Since 1994,
our DRP purchased shares for participants on the open market. Now plan
participants are receiving newly issued shares. On June 30, the DRP
participants received a total of 192,675 newly issued shares at a discounted
price of $27.3157 per share. We chose to offer a 2% discount on DRP
investments because it was the most cost effective way to raise equity capital
in the quantities that we were seeking. The DRP provided SJI with $5.26
million of equity capital in June and our goal is to raise an additional $9.74
million via this method by January 2000.
Other Events
In April 1999, SJE and EES completed the formation of a jointly owned
limited liability company to market retail electricity and energy management
services. The LLC is intended to create significant efficiencies and expand
service capabilities for both companies upon the completion of proceedings to
implement the electric utility restructuring legislation.
SJE and GZA GeoEnvironmental, Inc. (GZA) have begun marketing a jointly-
developed air monitoring system which is designed to assist companies involved
in environmental clean-up. The partners were awarded their first contract to
install the system in April 1999. The relationship between SJE and GZA
currently exists on a contract-by-contract basis.
Summary
SJI is confident it will have sufficient cash flow to meet its operating,
capital and dividend needs and is taking and will take such actions necessary
to employ its resources effectively.
SJI-25
PART II OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part I,
Item 1, Note 8, on pages 13 and 14, excluding the first two paragraphs of the
Note, regarding contingencies, including pending litigation and matters related
to environmental remediation.
Item 2. Submission of Matters to a Vote of Security Holders
(a) The company held its annual meeting of shareholders on April 22, 1999.
(c) Class I directors (with a term expiring in 2002) were elected by a
vote of:
For Withheld
Charles Biscieglia 9,286,311 318,491
Richard L. Dunham 9,287,047 317,755
W. Cary Edwards 9,284,567 320,235
Class II directors (with a term expiring in 2000) continuing in office
are: Anthony G. Dickson, Clarence D. McCormick and Shirli M. Vioni,
Ph.D.
Class III directors (with a term expiring in 2001) continuing in
office are: Thomas L. Glenn, Jr., Herman D. James, Ph.D. and
Frederick R. Raring.
The amendment of the Registrant's 1997 Stock-Based Compensation Plan
was approved by a vote of 8,161,976 for the amendment, and 1,201,724
against, with abstentions of 241,101.
The appointment of Deloitte & Touche LLP as the company's independent
accountants for the year ending December 1999 was approved by a vote
of 9,400,393 for the appointment and 92,461 against, with 111,943
abstentions.
Item 6. Exhibits and Reports on Form 8-K
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
SJI-26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTH JERSEY INDUSTRIES, INC.
(Registrant)
Dated: August 13, 1999 By: /s/ David A. Kindlick
David A. Kindlick
Vice President, Financial Operations
Dated: August 13, 1999 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Treasurer
SJI-27
SOUTH JERSEY INDUSTRIES, INC.
Index to Exhibits
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
(Submitted only in electronic format to the
Securities and Exchange Commission).
SJI-28