-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OIHpMDNOfQoOkrMxrSeWPSuNyna5a54VmWWU5iOLrzMoleOIb0Q3tEzBISesiH6N 64Rw/0EvHOa2ppn71GCfJw== 0000091928-97-000005.txt : 19970815 0000091928-97-000005.hdr.sgml : 19970815 ACCESSION NUMBER: 0000091928-97-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTH JERSEY INDUSTRIES INC CENTRAL INDEX KEY: 0000091928 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 221901645 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06364 FILM NUMBER: 97660273 BUSINESS ADDRESS: STREET 1: 1 SO JERSEY PLZ STREET 2: RTE 54 CITY: FOLSOM STATE: NJ ZIP: 08037 BUSINESS PHONE: 6095619000 MAIL ADDRESS: STREET 1: 1 SO JERSEY PLZ STREET 2: RTE 54 CITY: FOLSOM STATE: NJ ZIP: 08037 FORMER COMPANY: FORMER CONFORMED NAME: SOUTH JERSEY GAS CO DATE OF NAME CHANGE: 19700507 FORMER COMPANY: FORMER CONFORMED NAME: ATLANTIC CITY GAS CO DATE OF NAME CHANGE: 19680301 10-Q 1 Page 1 of 31 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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, 1997 Commission File Number 1-6364 SOUTH JERSEY INDUSTRIES, INC. - ------------------------------------------------------------------ (Exact name of registrant as specified in its charter) New Jersey 22-1901645 - ------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer's incorporation of organization) Identification No.) Number One South Jersey Plaza, Route 54, Folsom, NJ 08037 - ------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (609) 561-9000 - ------------------------------------------------------------------ (Registrant's telephone number, including area code) - ------------------------------------------------------------------ Former name, former address, and former fiscal year, if changed since last report 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 14, 1997, there were 10,763,450 shares of the registrant's common stock outstanding. Exhibit Index on page 31 PART I - FINANCIAL INFORMATION Item 1. Financial Statements -- See Pages 3 through 16 - 2 - SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) - ------------------------------------------------------------------------------- (In Thousands Except for Share Date)
Three Months Ended June 30, ------------------------- 1997 1996 - ------------------------------------------------------------------------------- Operating Revenues: Utility . . . . . . . . . . . . . . . . . . . . . $58,326 $53,532 Nonutility. . . . . . . . . . . . . . . . . . . . 3,988 5,793 ----------- ----------- Total Operating Revenues. . . . . . . . . . . 62,314 59,325 ----------- ----------- Operating Expenses: Gas Purchased for Resale. . . . . . . . . . . . . 31,939 30,268 Operations - Utility. . . . . . . . . . . . . . . 9,966 10,230 Nonutility . . . . . . . . . . . . . 4,455 6,067 Maintenance . . . . . . . . . . . . . . . . . . . 1,537 1,316 Depreciation. . . . . . . . . . . . . . . . . . . 3,971 3,687 Federal Income Taxes. . . . . . . . . . . . . . . 296 (935) Gross Receipts & Franchise Taxes. . . . . . . . . 4,646 4,897 Other Taxes . . . . . . . . . . . . . . . . . . . 644 649 ----------- ----------- Total Operating Expenses. . . . . . . . . . . 57,454 56,179 ----------- ----------- Operating Income. . . . . . . . . . . . . . . . . . 4,860 3,146 Interest and Other Charges. . . . . . . . . . . . . 4,934 5,070 ----------- ----------- Loss from Continuing Operations . . . . . . . . . . (74) (1,924) (Loss)Income from Discontinued Operations - Net . . (97) 1,157 ----------- ----------- Net Loss Applicable to Common Stock . . . . . . . . ($171) ($767) =========== =========== Average Shares of Common Stock Outstanding. . . . . 10,762,298 10,728,294 =========== =========== (Loss)Earnings Per Common Share: Continuing Operations . . . . . . . . . . . . . . ($0.01) ($0.18) Discontinued Operations - Net . . . . . . . . . . (0.01) 0.11 ----------- ----------- Loss Per Common Share. . . . . . . . . . . . . ($0.02) ($0.07) =========== =========== Dividends Declared Per Common Share . . . . . . . . $0.36 $0.36 =========== =========== See notes to condensed consolidated financial statements. - 3 - SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) - ------------------------------------------------------------------------------- (In Thousands Except for Share Data) Six Months Ended June 30 ------------------------- 1996 1995 - ------------------------------------------------------------------------------- Operating Revenues: Utility . . . . . . . . . . . . . . . . . . . . . $184,908 $192,880 Nonutility. . . . . . . . . . . . . . . . . . . . 8,813 16,404 ----------- ----------- Total Operating Revenues. . . . . . . . . . . 193,721 209,284 ----------- ----------- Operating Expenses: Gas Purchased for Resale. . . . . . . . . . . . . 101,809 109,035 Operations - Utility. . . . . . . . . . . . . . . 19,777 19,848 Nonutility . . . . . . . . . . . . . 9,439 16,524 Maintenance . . . . . . . . . . . . . . . . . . . 3,008 2,578 Depreciation. . . . . . . . . . . . . . . . . . . 7,860 7,320 Federal Income Taxes. . . . . . . . . . . . . . . 8,641 8,245 Gross Receipts & Franchise Taxes. . . . . . . . . 17,025 19,370 Other Taxes . . . . . . . . . . . . . . . . . . . 1,434 1,466 ----------- ----------- Total Operating Expenses. . . . . . . . . . . 168,993 184,386 ----------- ----------- Operating Income. . . . . . . . . . . . . . . . . . 24,728 24,898 Interest and Other Charges. . . . . . . . . . . . . 9,809 10,011 ----------- ----------- Income from Continuing Operations . . . . . . . . . 14,919 14,887 ----------- ----------- Discontinued Operations, Net of Taxes: (Loss)Income from Discontinued Operations - Net . (66) 296 Net Loss on the Disposal of Discontinued Operations . . . . . . . . . . . . (123) (724) ----------- ----------- Net Income Applicable to Common Stock . . . . . . . $14,730 $14,459 =========== =========== Average Shares of Common Stock Outstanding. . . . . 10,761,006 10,726,346 =========== =========== Earnings(Loss) Per Common Share: Continuing Operations . . . . . . . . . . . . . . $1.39 $1.39 Discontinued Operations - Net . . . . . . . . . . (0.02) (0.04) ----------- ----------- Earnings Per Common Share. . . . . . . . . . . $1.37 $1.35 =========== =========== Dividends Declared Per Common Share . . . . . . . . $0.72 $0.72 =========== =========== See notes to condensed consolidated financial statements. - 4 - SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET - ----------------------------------------------------------------------------------------------- (IN THOUSANDS) (Unaudited) June 30, December 31, -------------------------------------- 1997 1996 1996 - --------------------------------------------------------------------------------- ------------ ASSETS - ------ Property, Plant & Equipment: Utility Plant, at original cost . . . . . . . . . . . $600,264 $557,944 $579,304 Accumulated Depreciation. . . . . . . . . . . . . . (163,267) (151,536) (157,682) Nonutility Property & Equipment, at cost. . . . . . . 3,425 13,975 3,342 Accumulated Depreciation & Depletion. . . . . . . . (1,036) (5,625) (1,060) ----------- ----------- ------------ Property, Plant & Equipment - Net . . . . . . . 439,386 414,758 423,904 ----------- ----------- ------------ Investment in Affiliate . . . . . . . . . . . . . . . . 1,208 1,034 1,286 ----------- ----------- ------------ Current Assets: Cash and Cash Equivalents . . . . . . . . . . . . . . 11,080 2,218 46,905 Notes Receivable - Affiliate. . . . . . . . . . . . . 2,700 0 2,800 Accounts Receivable . . . . . . . . . . . . . . . . . 34,146 40,043 38,714 Unbilled Revenues . . . . . . . . . . . . . . . . . . 3,552 3,629 17,855 Provision for Uncollectibles. . . . . . . . . . . . . (1,557) (1,102) (1,425) Natural Gas in Storage, average cost. . . . . . . . . 15,038 11,581 22,638 Materials and Supplies, average cost. . . . . . . . . 4,046 3,935 4,114 Assets of Discontinued Businesses Held for Disposal . 637 28,811 4,966 Prepaid Gross Receipts & Franchise Taxes. . . . . . . 10,980 13,217 1,602 Prepayments and Other Current Assets. . . . . . . . . 2,131 3,163 1,773 ----------- ----------- ------------ Total Current Assets. . . . . . . . . . . . . . 82,753 105,495 139,942 ----------- ----------- ------------ Accounts Receivable - Merchandise . . . . . . . . . . . 2,373 2,296 1,999 ----------- ----------- ------------ Deferred Debits: Environmental Remediation Costs: Expended - Net. . . . . . . . . . . . . . . . . . . 17,060 13,516 15,566 Liability for Future Expenditures . . . . . . . . . 52,400 23,099 41,700 Gross Receipts & Franchise Taxes. . . . . . . . . . . 4,250 4,668 4,468 Income Taxes - Flowthrough Depreciation . . . . . . . 14,488 15,466 14,977 Deferred Postretirement Benefit Costs . . . . . . . . 5,705 5,000 5,153 Other . . . . . . . . . . . . . . . . . . . . . . . . 8,422 9,162 9,386 ----------- ----------- ------------ Total Deferred Debits . . . . . . . . . . . . . 102,325 70,911 91,250 ----------- ----------- ------------ Total Assets. . . . . . . . . . . . . . . $628,045 $594,494 $658,381 =========== =========== ============ See notes to condensed consolidated financial statements. - 5 - SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET - ----------------------------------------------------------------------------------------------- (IN THOUSANDS) (Unaudited) June 30, December 31, -------------------------------------- 1996 1995 1995 - --------------------------------------------------------------------------------- ------------ CAPITALIZATION AND LIABILITIES - ------------------------------ Common Equity: Common Stock. . . . . . . . . . . . . . . . . . . . . $13,454 $13,413 $13,446 Premium on Common Stock . . . . . . . . . . . . . . . 110,750 110,358 110,542 Retained Earnings . . . . . . . . . . . . . . . . . . 55,725 40,441 48,743 ----------- ----------- ------------ Total Common Equity . . . . . . . . . . . . . . 179,929 164,212 172,731 ----------- ----------- ------------ Preferred Stock and Securities of Subsidiary: Redeemable Cumulative Preferred Stock - Par Value $100 per share: Authorized - 47,304, 48,204 and 48,204 Shares Outstanding - Series A, 4.70% -- 3,000, 3,900 and 3,900 Shares. . . . . . . . . . . . . . 300 390 390 Series B, 8.00% -- 19,242 shares. . . . . . . 1,924 1,924 1,924 Company-Obligated Manditorily Redeemable Preferred Securities of Subsidiary Trust Par Value $25 per share, 1,400,000 shares Authorized and Outstanding . . . . . . . . . . . . 35,000 0 0 ----------- ----------- ------------ Total Preferred Stock and Securities of Subsidiary. . . . . . . . . . . 37,224 2,314 2,314 ----------- ----------- ------------ Long-Term Debt. . . . . . . . . . . . . . . . . . . . . 178,403 150,733 149,736 ----------- ----------- ------------ Current Liabilities: Notes Payable to Banks. . . . . . . . . . . . . . . . 14,500 92,775 108,300 Current Maturities of Long-Term Debt. . . . . . . . . 8,960 20,276 6,603 Accounts Payable. . . . . . . . . . . . . . . . . . . 28,480 25,543 50,301 Customer Deposits . . . . . . . . . . . . . . . . . . 5,918 5,545 6,050 Environmental Remediation Costs . . . . . . . . . . . 7,735 6,999 9,377 Federal Income Taxes Accrued. . . . . . . . . . . . . 2,878 5,374 4,417 Interest Accrued and Other Current Liabilities. . . . 9,788 6,616 13,693 ----------- ----------- ------------ Total Current Liabilities . . . . . . . . . . . 78,259 163,128 198,741 ----------- ----------- ------------ Deferred Credits and Other Non-Current Liabilities: Accumulated Deferred Income Taxes - Net . . . . . . . 77,030 69,217 75,821 Investment Tax Credits. . . . . . . . . . . . . . . . 5,827 6,222 6,025 Deferred Revenues - Net . . . . . . . . . . . . . . . 6,125 6,636 0 Pension and Other Postretirement Benefits . . . . . . 11,693 9,487 10,218 Environmental Remediation Costs . . . . . . . . . . . 46,655 16,103 34,353 Other . . . . . . . . . . . . . . . . . . . . . . . . 6,900 6,442 8,442 ----------- ----------- ------------ Total Deferred Credits and Other Non-Current Liabilities . . . . . . 154,230 114,107 134,859 ----------- ----------- ------------ Commitments and Contingencies (Note 5) Total Capitalization and Liabilities. . . $628,045 $594,494 $658,381 =========== =========== ============ See notes to condensed consolidated financial statements. - 6 - SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) - ------------------------------------------------------------------------------------- (In Thousands) Six Months Ended June 30, ------------------- 1997 1996 - ------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Income Applicable to Common Stock. . . . . . . . . . . . $14,730 $14,459 Adjustments to Reconcile Net Income to Cash Flows Provided by Operating Activities: Depreciation, Depletion and Amortization . . . . . . . . . 9,025 9,592 Provision for Losses on Accounts Receivable. . . . . . . . 425 665 Revenues and Fuel Costs Deferred - Net . . . . . . . . . . 6,529 (679) Deferred and Non-Current Federal Income Taxes and Credits - Net . . . . . . . . . . . . . . . . . . . . 1,624 517 Environmental Remediation Costs - Net. . . . . . . . . . . (1,494) (1,747) Net Pre-Tax Loss on the Disposal of Discontinued Operations. . . . . . . . . . . . . . . . 189 1,291 Changes in: Accounts Receivable. . . . . . . . . . . . . . . . . . . 18,578 16,498 Inventories. . . . . . . . . . . . . . . . . . . . . . . 7,668 3,103 Prepayments and Other Current Assets . . . . . . . . . . (358) (1,371) Prepaid Gross Receipts & Franchise Taxes . . . . . . . . (9,378) (9,568) Accounts Payable and Other Accrued Liabilities . . . . . (27,397) (14,876) Other - Net. . . . . . . . . . . . . . . . . . . . . . . . (388) 300 -------- -------- Net Cash Provided by Operating Activities . . . . . . . . . . . 19,753 18,184 -------- -------- Cash Flows from Investing Activities: Investment in Affiliate. . . . . . . . . . . . . . . . . . . 0 (1,034) Repayments of Loan to Affiliate. . . . . . . . . . . . . . . 100 0 Proceeds from the Sale of Assets . . . . . . . . . . . . . . 3,487 0 Proceeds from Sale of Available-for-Sale Securities. . . . . 0 795 Capital Expenditures, Cost of Removal and Salvage. . . . . . (23,691) (17,590) -------- -------- Net Cash Used in Investing Activities . . . . . . . . . . . . . (20,104) (17,829) -------- -------- Cash Flows from Financing Activities: Net (Repayments of)Borrowings from Lines of Credit . . . . . (93,800) 16,475 Proceeds from Issuance of Long-Term Debt . . . . . . . . . . 35,485 0 Principal Repayments of Long-Term Debt . . . . . . . . . . . (4,461) (12,565) Dividends on Common Stock. . . . . . . . . . . . . . . . . . (7,748) (7,723) Proceeds from Sale of Common Stock . . . . . . . . . . . . . 140 179 Proceeds from the Issuance of Preferred Securities . . . . . 35,000 0 Repurchase of Preferred Stock. . . . . . . . . . . . . . . . (90) (90) -------- -------- Net Cash Used in Financing Activities . . . . . . . . . . . . . (35,474) (3,724) -------- -------- Net Decrease in Cash and Cash Equivalents . . . . . . . . . . . (35,825) (3,369) Cash and Cash Equivalents at Beginning of Period. . . . . . . . 46,905 5,587 -------- -------- Cash and Cash Equivalents at End of Period. . . . . . . . . . . $11,080 $2,218 ======== ======== See notes to condensed consolidated financial statements. - 7 -
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. Significant Accounting Practices: Consolidation -- The condensed consolidated financial statements include the accounts of South Jersey Industries, Inc. (the Company or SJI) and all of its subsidiaries. Certain intercompany transactions, amounting to approximately $.1 million and $1.6 million for the three-month periods and $1.9 million and $2.6 million for the six month-periods ended June 30, 1997 and 1996, respectively, 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 5). 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. In the opinion of management, the condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the financial position and operating results of the Company at the dates and for the periods presented. The businesses of the Company are subject to seasonal fluctuations and, accordingly, this interim financial information should not be considered a basis for estimating the results of operations for the full 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 and, therefore, actual results could differ from those estimates. In February 1997, the Financial Accounting Standards Board (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. The adoption of FASB No. 128 is not expected to have a material impact on the Company's EPS. - 8 - SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note 2. 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 to the books of EMI. 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. 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 condensed statement of consolidated income for the six months ended June 30, 1997 under the caption "Net Loss on the Disposal of Discontinued Operations". Summarized operating results of the discontinued operations were (in thousands): Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1997 1996 1997 1996 Operating Revenues: Sand Mining $ 0 $ 9,327 $ 0 $ 15,855 Construction 1,199 4,134 4,354 7,293 -------- -------- -------- -------- Total Operating Revenues $ 1,199 $ 13,461 $ 4,354 $ 23,148 ======== ======== ======== ======== (Loss)Income before Income Taxes: Sand Mining $ (36) $ 1,638 $ (11) $ 846 Construction (103) 52 (100) (531) - 9 - SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note 2. Divestitures: (Continued) Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1997 1996 1997 1996 Income Tax Credits(Expense) 42 (533) 45 (19) -------- -------- -------- -------- Income(Loss) from Discontinued Operations $ (97) $ 1,157 $ (66) $ 296 ======== ======== ======== ======== Income(Loss) per Common Share from Discontinued Operations $ 0.01 $ 0.11 $ (0.01) $ 0.03 ======== ======== ======== ======== The 1996 results of operations have been restated to reflect the accounting for these segments as Discontinued Operations. Note 3. Common Stock: The Company has 20,000,000 shares of Common Stock authorized of which the following shares were issued and outstanding: 1997 1996 ---- ---- Beginning Balance January 1, 10,756,679 10,722,171 Issued during period: Employees' Stock Ownership Plan 3,771 4,601 Stock Option & Stock Appreciation Rights Plan 3,060 4,060 ---------- ---------- Ending Balance June 30, 10,763,450 10,730,832 ========== ========== The par value ($1.25 per share) of the stock issued in 1997 and 1996 has been credited to common stock and the net excess over par value of $169,523 and $169,114 for the six months ended June 30, 1997 and 1996, respectively, has been 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 - 10 - SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note 3. Common Stock (Continued): 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 has 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 three and six month periods ended June 30, 1997 and 1996. 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 June 30, 1997 and 1996, the Company had 31,930 and 45,480 options outstanding, respectively, exercisable at prices from $17.16 to $24.69 per share. During the six-month period ended June 30, 1997 and 1996, 3,060 and 4,060 options were exercised, respectively, at a price of $17.89 per share. No options were granted in 1997 or 1996. No stock appreciation rights have been issued under the plan. The stock options outstanding at June 30, 1997 and 1996, did not have a material effect on the earnings per share calculations. 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 June 30, 1997, 239,483 and 36,430 shares of authorized, but unissued, Common Stock were reserved for future issuance to the DRP and ESOP, respectively. 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, on December 5, 1996, 600 additional shares were granted at a market value of $24.125 per share. There have been no awards in 1997. Initial awards will vest over a five-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. - 11 - SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note 3. Common Stock (Continued): 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 right entitles its holder to purchase 1/1000 of one share of Series A Stock at an exercise price of $90. 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. Note 4. 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 $53.8 million as of June 30, 1997. Note 5. Commitments and Contingencies: 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 1998. 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 paid to its suppliers for all of these services is approximately $5.1 million per month which is recovered on a current basis through the LGAC. - 12 - SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note 5. Commitments and Contingencies (Continued) 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 SJI's financial position, results of operations or liquidity. Environmental Remediation Costs - The Company has incurred and recorded certain costs for environmental remediation of sites where SJG or predecessor companies operated gas manufacturing plants. Manufactured gas operations were terminated at all SJG sites more than 30 years ago. Certain of SJI's 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 $87.4 million, of which $33.0 million has been expended as of June 30, 1997. SJG, 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 has been recorded as a liability and is reflected on the condensed 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 have not been adjusted for future insurance recoveries, which management is pursuing. SJG has received $4.2 million of insurance recoveries as of June 30, 1997. These proceeds were first used to offset legal fees incurred in connection with those recoveries and the excess was used to reduce the balance of deferred environmental remediation costs. Recorded amounts include estimated costs to be incurred 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 and changing technology, government regulations and site specific requirements. - 13 - SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note 5. Commitments and Contingencies (Continued) The major portion of the recorded environmental remediation costs relate to the remediation of SJG's former gas manufacturing sites. SJG has recorded $84.6 million for the remediation of these sites, of which $32.2 million has been expended through June 30, 1997. As a result of the 7-year recovery mechanism, SJG does not expense environmental costs for former gas manufacturing sites 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 has allowed recovery of these expenditures through July 1995 and petitions to recover these costs through July 1997 are pending before the BPU. 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 has been 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 in amount to recover the deferred costs after they have been expended. SJG makes annual filings with the BPU to recover these costs in rates. The BPU has consistently allowed the full recovery over such 7-year periods, and SJG believes the BPU will continue to do so. As of June 30, 1997, SJG has unamortized remediation expenditures of $17.1 million which are reflected on the balance sheet under the caption "Deferred Debits". Since BPU approval of the RAC mechanism in August 1992, SJG has recovered $10.9 million through rates as of June 30, 1997. With Morie's sale, EMI assumed responsibility for environmental liabilities which are estimated to range between $2.0 million and $4.0 million. The information available on these sites was sufficient only to establish a range of probable liability and no point within the range is more likely than any other, therefore, EMI accrued the lower end of the range. - 14 - SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note 6. Recent Regulatory Action: On January 27, 1997, the BPU granted SJG a 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 equity. Revenue requirements for ratemaking purposes are established on the basis of firm and interruptible sales projections. The majority of this increase will come from residential and small commercial customers. In addition, part of the increase will be recovered from customers through new service fees which charge specific customers for costs which they cause SJG to incur. As part of this rate increase, SJG is allowed to retain the first $5.4 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 1997 and 1998, this $5.4 million threshold will be increased 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 $0.2 million in 1997 and $1.8 million in 1998. In 1997, SJG filed to recover additional post-retirement benefit costs of approximately $1.2 million annually. This recovery is expected to begin in 1998. In addition to the rate increase, the BPU approved a revenue reduction in SJG's Temperature Adjustment Clause, a mechanism designed to reduce the impact of extreme fluctuations in temperatures on SJG and its customers. For the period ended May 31, 1996, weather in SJG's service area was significantly colder than the 20-year average, resulting in a $2.5 million credit due to customers' bills which is reflected in the 1996 results of operations. As part of the tariff changes approved, SJG initiated its BPU approved pilot program in April 1997 to give residential customers a choice of gas supplier. During the enrollment period which ended June 30, 1997, approximately 13,000 residential customers applied for this service. Transportation of gas for these customers began on August 1, 1997 and will continue until June 30, 1998, or later if approved by the BPU. Under the applicable rate schedule, amounts billed to participants in the program will be reduced for cost of gas charges and applicable gross receipts taxes. This decrease in revenues will be offset by a corresponding decrease in SJG's gas costs and taxes under SJG's BPU- approved fuel clause. Accordingly, SJG believes that the program will not affect its net income, financial condition or margins. In addition, because the program affects only 5% of SJG's residential customers, and not all of those - 15 - SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note 6. Recent Regulatory Action (Continued): customers may elect to purchase gas from other suppliers, SJG believes that any reduction in revenue will not be material. SJG further expanded the choices available to commercial and industrial customers. Note 7. Financing Activities: 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 wholly owned statutory trust subsidiary, SJG Capital Trust (Trust), established in the State of Delaware on March 24, 1997, sold $35.0 million of 8.35% SJG-obligated Mandatorily Redeemable Preferred Securities. The Trust solely holds as an asset the 8.35% Deferrable Interest Subordinated Debentures issued by SJG which mature on April 30, 2037, 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% of the principal amount thereof at any time on or after April 30, 2002. Note 8. Subsequent Event: On July 14, 1997, legislation reforming the taxation of energy in New Jersey was adopted. The new law eliminates the Gross Receipts and Franchise Taxes (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 will be subject to the 6 percent State Sales and Use Tax. Utilities will also be subject to the 9 percent State Corporate Business Tax on new income. To bridge the revenue gap created by the new tax law, the State will impose a Transitional Energy Facilities Assessment (TEFA) on gas and electric facilities. the TEFA will be phased out over a five-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, thereby 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 or results of operations. - 16 - SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Overview The wholly owned operating subsidiaries of South Jersey Industries include South Jersey Gas Company (SJG), Energy & Minerals, Inc. (EMI) and South Jersey Energy Company (SJE). SJG is a natural gas distribution company serving 257,400 customers at June 30, 1997, compared with 250,700 customers at June 30, 1996. Seasonal aspects affect SJG's reported revenues, inventories, receivables, operating expenses and cash flows, which are usually greater during the first and fourth quarters of the year. EMI is a holding company engaged in the wholesale marketing of natural gas through its energy service subsidiary, South Jersey Fuel, Inc. (SJF). SJE provides services for the acquisition and transportation of natural gas for retail end users. Competition SJG franchises are non-exclusive. However, currently no other utility is providing retail gas distribution services within its territory. SJG does not expect any 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 through its initiative in obtaining an unbundled tariff which isolates the variable cost of the gas commodity component within SJG's rate structure. Under this tariff, substantially all of SJG's profits are derived from the transportation rather than the sale of the commodity since SJG does not generally add a profit mark-up to the cost of the commodity. Therefore, SJG is able to offer its commercial and industrial customers flexibility regarding choice of gas supply while SJG continues to recover its cost of service and fixed gas costs while providing and charging for transportation service. In April 1997, SJG initiated its BPU-approved pilot program to give certain of its residential customers a choice of gas suppliers (See "Pilot Program - - Choice of Gas Supplier"). In all of these respects, SJG 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 SJF are also active participants in arranging energy services designed to provide low-cost energy supplies. It is the intent of the SJI companies 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 to give residential customers a choice of gas supplier. During the enrollment period which ended June 30, 1997, approximately 13,000 residential customers applied for this service. Transportation of gas for these customers began on August 1, 1997 - 17 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Pilot Program - Choice of Gas Supplier (Continued) and will continue until June 30, 1998, or later if approved by the BPU. Under the applicable rate schedule, amounts billed to participants in the program will be reduced for cost of gas charges and applicable gross receipts taxes. The resulting decrease in revenues will be offset by a corresponding decrease in SJG's gas costs and taxes under SJG's BPU-approved fuel clause. Accordingly, SJG believes that the program will not affect its net income, financial condition or margins. In addition, because the program affects only 5% of SJG's residential customers, and not all of those customers may elect to purchase gas from other suppliers, SJG believes that any reduction in revenue will not be material. 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"). Such clauses are designed to permit adjustments for changes in gas supply costs, reduce the impact of extreme fluctuations in temperatures on SJG and its customers, recover costs incurred in the remediation of former gas manufacturing plants and recover costs associated with its conservation plan. The BPU approved LGAC, RAC and DSMC adjustments do not directly affect earnings because revenues are adjusted to match costs. The Company's base rates are designed based on twenty-year normal temperatures. When actual temperatures are colder than the twenty-year average, the Company sells more gas than was anticipated generating higher revenues and net income. Conversely, when actual temperatures are warmer than normal, the Company sells less gas and revenues and net income are lower than projected. The TAC dampens the effect of these peaks and valleys (and thus moderates the effect of weather extremes on SJG's revenues) by giving customers a credit against higher usage in colder weather and giving SJG a surcharge on lower usage in warmer weather. TAC adjustments therefore affect revenue, income and cash flows. Results of Operations - Three and Six Months Ended June 30, 1997 Compared to Three and Six Months Ended June 30, 1996 Operating Revenues - Utility The following is a summary of changes in operating revenue and throughput by major category for 1997 compared with 1996 [before the elimination of intersegment sales]: - 18 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Operating Revenues - Utility (Continued) Period Ended June 30, ------------------------------ Three Months Six Months 1997 vs. 1996 1997 vs. 1996 ------------- -------------- Operating Revenues (Thousands): Firm Residential $ 1,380 $ (877) Commercial (412) (2,792) Industrial (573) (1,107) Cogeneration & Electric Generation (3,509) (6,799) Firm Transportation 550 1,022 ------------ ------------ Total Firm (2,564) (10,553) Interruptible (1,266) (725) Interruptible Transportation 107 520 Off-System 7,492 (913) Capacity Release & Storage 856 2,559 Other Revenues 132 250 ------------ ------------ Total Operating Revenues $ 4,757 $ (8,862) ============ ============ Throughput (MMcf): Firm Residential 11 (1,409) Commercial (94) (943) Industrial (128) (247) Cogeneration & Electric Generation (1,230) (2,334) Firm Transportation 1,972 3,541 ------------ ------------ Total Firm Throughput 531 (1,392) Interruptible (305) (211) Interruptible Transportation 397 1,173 Off-System 3,093 1,497 Capacity Release & Storage 3,195 10,258 ------------ ------------ Total Throughput 6,911 11,325 ============ ============ Firm revenues in both 1997 periods were negatively impacted by the effects of warmer temperatures, partially offset by increases in rates for residential and commercial customers. Increased off-system sales and increased revenues from capacity release and storage programs benefitted each 1997 period. Operating Revenues - Nonutility Nonutility revenues decreased $1.8 and $7.6 million in the three and six month periods ended June 30, 1997 compared to the same period in 1996, principally due to lower commodity sales. - 19 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Gas Purchased for Resale Gas purchased for resale increased $1.7 million in the second quarter of 1997 compared with the 1996 quarter, principally due to increased off-system sales, partially offset by decreased cogeneration and electric generation unit sales. Gas purchased for resale decreased by $7.2 million for the six months ended June 30, 1997, compared with 1996, principally due to lower firm 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 1998. 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 for all of these services is approximately $5.1 million per month which is recovered on a current basis through its LGAC. Operations A summary of net changes in utility operations for 1997 compared with 1996 is as follows (in thousands): Period Ended June 30, ------------------------------ Three Months Six Months 1997 vs. 1996 1997 vs. 1996 ------------- ------------- Other Production Expense $ (6) $ (25) Transmission (2) (9) Distribution 126 180 Customer Accounts and Services (367) (347) Sales 1 51 Administration and General 65 246 Other (81) (167) ------ ------ $ (264) $ (71) ====== ====== Customer Accounts and Service costs decreased in both periods principally due to a charge in 1996 to increase the Company's reserve for uncollectible accounts and lower salary costs. Administrative and General costs increased in 1997 principally due to increased salary and employee benefit costs, partially offset by decreases in insurance and outside service costs. Nonutility operations decreased $1.6 and $7.1 million, respectively, in the three and six month periods ended June 30, 1997 compared to the same periods in 1996, principally due to decreased commodity sales. - 20 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Other Operating Expenses A summary of principal changes in other expenses for 1997 compared with 1996 is as follows (in thousands): Period Ended June 30, ------------------------------ Three Months Six Months 1997 vs. 1996 1997 vs. 1996 ------------- ------------- Maintenance $ 221 $ 430 Depreciation 284 540 Federal Income Taxes - Net 1,231 396 Gross Receipts & Franchise and Other Taxes (256) (2,377) The increase in maintenance expense is principally due to increased utility production plant maintenance, which includes the amortization of increased environmental remediation costs (such increases are offset by an equal amount of revenue recovery under SJG's RAC). Depreciation is higher in 1997 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 in 1997 are due to changes in volumes of gas sold, which are subject to those taxes, in addition to lower tax rates applicable to certain customer classes in 1997. Interest and Other Charges Interest charges decreased $136,000 and $202,000 in the 1997 three and six month periods, respectively, principally due to the effects of lower levels of short-term debt outstanding. Utility long-term interest increased in each 1997 period due to increased levels of long-term debt outstanding including the issuance by SJG of $35.0 million of first mortgage bonds in March 1997, and the issuance, in May 1997, of $35 million of Manditorily Redeemable Preferred Securities (See "Capital Resources"). Discontinued Operations Loss from discontinued operations amounted to $97,000 for the three months ended June 30, 1997 compared to income of $1,157,000 for the same period in 1996. Loss from discontinued operations amounted to $66,000 for the six months ended June 30, 1997 compared to income of $296,000 in 1996. The income in 1996 principally reflect the operating results of The Morie Company, Inc., the Company's sand mining subsidiary which was sold in December 1996 (See Note 2, Divestitures). Also, the net loss on the sale of discontinued operations decreased from $724,000 in 1996 to $123,000 in 1997. This change principally reflects a write-down of goodwill in 1996. - 21 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Net Income Applicable to Common Stock Net Income (in thousands) and earnings per common shares reflect the following changes: Period Ended June 30, ----------------------------- Three Months Six Months 1997 vs. 1996 1997 vs. 1996 ------------- ------------- Income from Continuing Operations $ 1,850 $ 32 Loss from Discontinued Operations (1,254) (362) Net Gain on Disposal of Discontinued Operations 0 601 ------------ ------------ Net Income Increase $ 596 $ 271 ============ ============ Earnings per Common Share Continuing Operations $ 0.17 $ 0.00 Discontinued Operations (Loss) (0.12) 0.02 ------------ ------------ Earnings per Share Increase $ 0.05 $ 0.02 ============ ============ The details affecting the increase in net income and earnings per share are discussed under the appropriate captions above. The increases in net income and earnings per share principally reflect increased utility operating income in the 1997 periods resulting from increased residential rates and increased off-system and capacity release and storage revenues. 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 $135.0 million of which $120.5 million was available at June 30, 1997. The credit lines are uncommitted and unsecured with interest rates below the prime rate. The changes in cash flows from operating activities for the six months ended June 30, 1997, compared with the same period in 1996, are as follows (in thousands): - 22 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Liquidity (Continued) Six Months Ended June 30, ---------------- 1997 vs. 1996 ---------------- Increases/(Decreases): Net Income $ 271 Depreciation, Depletion and Amortization (567) Revenues and Fuel Costs Deferred - Net 7,208 Deferred and Non-Current Federal Income Taxes - Net 1,107 Environmental Remediation Costs-Net 253 Net Pre-Tax Loss on the Disposal of Discontinued Operations (1,102) Accounts Receivable 2,080 Inventories 4,565 Prepayments and Other Current Assets 1,013 Prepaid Gross Receipts & Franchise Taxes 190 Accounts Payable and Other Accrued Liabilities (12,521) Other - Net (928) -------- Increase in Net Cash Provided by Operating Activities $ 1,569 ======== 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 or 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 amounts collected under the RAC and through insurance recoveries and remediation expenditures. Changes in Accounts Receivable are generally weather and price related. Increases generate cash flows when collected in subsequent periods. Changes in Inventory reflect the impact of seasonal requirements, temperatures and price changes. - 23 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Liquidity (Continued) Changes in Prepaid Gross Receipts & Franchise Taxes reflect the impact of the excess of taxes paid over taxes accrued. However, there are significant timing differences 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 and, accordingly, this results in a temporary increase in the short-term debt level. The carrying costs for these timing differences are recognized in base utility rates. As stated in Note 8 on page 16, on January 1, 1998, the gross receipts and franchise taxes are being replaced with a 6 percent State Sales and Use Tax, a 9 percent State Corporation Business Tax on net income and a Transitional Energy Facilities Assessment (TEFA) on gas facilities. TEFA will be phased out over five years beginning January 1, 1999. Approximately fifty percent of the new taxes will be paid in monthly installments during the first six months of the year and the principal portion of the remaining taxes will be paid on May 15 of each year. SJG is required to file a petition with the BPU, on or before September 14, 1997, to reflect the impact of this tax change on base rates. Changes in Accounts Payable and Other Accrued Liabilities reflect the impact of timing differences between the accrual and payment of costs. Cash flows from nonutility operations are generally retained by those companies with amounts in excess of cash requirements being 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. Such operations are not considered material to the financial statements. EMI has assumed responsibility for the environmental liabilities of The Morie Company, Inc. (Morie), a subsidiary which was sold in 1996. The environmental liabilities are estimated to range between $2.0 million and $4.0 million. EMI has accrued the lower end of the range under the guidance of FAS 5 "Accounting for Contingencies" (See Note 5 on page 14). Regulatory Matters On January 27, 1997, the BPU granted SJG a 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 equity. Revenue requirements for ratemaking purposes are established on the basis of firm and interruptible sales projections. The majority of this increase will come from residential and small commercial customers. In addition, part of the increase will be recovered from customers through new service fees which charge specific customers for costs which they cause SJG to incur. As part of this rate increase, SJG is allowed to retain the first $5.4 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 1997 and - 24 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Regulatory Matters (Continued) 1998, this $5.4 million threshold will be increased 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 $0.2 million in 1997 and $1.8 million in 1998. Rates of return are calculated by weighting SJG's individual capital cost rates by the proportion of each respective type of capital. This requires the selection of appropriate capital structure ratios and a determination of the cost rate for each capital component which are 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, which is the standard BPU procedure used to credit customers with excess revenues, previously collected from customers, which were in excess of allowed revenues determined under the TAC (See "Energy Adjustment Clauses"). This revenue reduction reflects the normal operation of the TAC, 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. On August 31, 1996, SJG made its 1996-97 LGAC filing to reduce rates to reflect a decrease of $1.4 million in natural gas costs, which is pending at the BPU. The adoption of FASB No. 109, "Accounting for Income Taxes" in 1993 primarily resulted in the creation of 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 SJG in 1993, requires an accrual basis of accounting for retiree benefit payments during the years of employment. SJG has elected to recognize the unfunded transition obligation over a 20-year period which began in 1993. SJG had 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 prescribes continued deferral of unrecovered costs. SJG was initially seeking recovery of this asset in its recently completed rate proceeding; however, the BPU initiated a generic proceeding to address the recovery of these costs by all utilities in the State. Phase I of the generic proceeding was completed in January 1997 and SJG, in May 1997, has made a prescribed filing with the BPU to recover additional postretirement benefit costs of approximately $1.2 million annually, beginning in 1998. Also, beginning in 1995, an external trust was established towards funding postretirement benefit costs for the purpose of contributing costs recovered from - 25 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Regulatory Matters (Continued) ratepayers as authorized by the BPU. 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 would reduce future net periodic cost. Contributions to the trust amounted to $2.1 million in 1996. The balance of this regulatory asset amounted to $5.7 million at June 30, 1997. SJG has incurred and recorded certain costs for environmental remediation of sites where SJG or predecessor companies operated gas manufacturing plants. Manufactured gas operations were terminated at all SJG sites more than 30 years ago. Since the early 1980's, the Company has recorded environmental remediation costs of $87.4 million, of which $33.0 million has been expended as of June 30, 1997. SJG, with the assistance of an outside consulting firm, estimates that total future expenditures to remediate the sites will range from $52.4 million to $165.6 million. The lower end of this range has been 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 have not been adjusted for future insurance recoveries, which management is pursuing. SJG has received $4.2 million of insurance recoveries as of June 30, 1997. These proceeds were first used to offset legal fees incurred in connection with those recoveries and the excess was used to reduce the balance of deferred environmental remediation costs. Recorded amounts include estimated costs to be incurred 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 and changing technology, government regulations and site specific requirements. The major portion of the recorded environmental remediation costs relate to the remediation of SJG's former gas manufacturing sites. SJG has recorded $84.6 million for the remediation of these sites, of which $32.2 million has been expended through June 30, 1997. As a result of the 7-year recovery mechanism, SJG does not expense environmental costs for former gas manufacturing sites 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. These costs meet the requirements of FASB No. 71, "Accounting for the Effects of Certain Types of Regulation". The BPU has allowed recovery of these expenditures through July 1995 and petitions to recover these costs through July 1997 are pending before the BPU. The other regulatory asset titled "Environmental Remediation Cost: Liability for Future Expenditures" relates to estimated future - 26 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Regulatory Matters (Continued) expenditures determined under the guidance of FAS 5 "Accounting for Contingencies". This amount, which relates to former manufactured gas plant sites has been 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 FAS 71 because the BPU's intent, as evidenced by its current practice, is to provide recovery sufficient in amount to recover the deferred costs after they have been expended. SJG makes annual filings with the BPU to recover expended remediation costs in rates. The BPU has consistently allowed the full recovery over such seven-year periods, and SJG believes the BPU will continue to do so. As of June 30, 1997, SJG has unamortized remediation expenditures of $17.1 million which are reflected on the balance sheet under the caption "Deferred Debits." Since BPU approval of the RAC mechanism in August 1992, SJG has recovered $10.9 million through rates as of June 30, 1997. On July 31, 1997, SJG made a filing with the BPU requesting an increase in the level of its annual recoveries through the RAC of $1.5 million. This increase primarily reflects costs incurred pursuant to agreements with the NJDEP for cleanup of such sites during the period of August 1996 through July 1997. The amount sought to be recovered during the 1997-1998 Recovery Year, $3.9 million, consists of the amortization of Remediation Costs incurred during the 1996- 1997 Remediation Year of $0.9 million and the amortization of Remediation Costs incurred prior to the 1996-1997 Remediation year of $3.2 million. It also consists of a credit for carrying costs on Deferred Tax Benefits of $0.7 million and the addition of an underrecovery from the 1996-1997 Recovery Year of $0.5 million. SJG 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 SJG's financial position or results of operations. Capital Resources SJG has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment for the remediation of former coal gas manufacturing sites. Total construction and remediation expenditures for 1997 are estimated at $58.5 million, of which $26.7 million was expended through June 30, 1997. The costs for 1998 and 1999 are estimated at approximately $55.4 million and $61.6 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 and capital leases. - 27 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Capital Resources (Continued) 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-obligated Mandatorily Redeemable Preferred Securities. The Trust solely holds as an asset the 8.35% Deferrable Interest Subordinated Debentures issued by SJG which mature on April 30, 2037. The Debentures and Preferred Securities are redeemable at the option of SJG at a redemption price equal to 100% of the principal amount thereof 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. 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 right entitles its holder to purchase 1/1000 of one share of Series A Stock at an exercise price of $90. 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. 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. - 28 - PART II -- OTHER INFORMATION Item l. Legal Proceedings Information required by this Item is incorporated by reference to Part I, Item 1, Note 5, on pages 12 through 14, excluding the first paragraph of the Note, regarding contingencies, including pending litigation and the remediation and clean-up of certain sites which included manufactured gas operations. 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. - 29 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTH JERSEY INDUSTRIES, INC. (Registrant) Dated: August 14, 1997 By: /s/ George L. Baulig George L. Baulig Secretary & Treasurer Dated: August 14, 1997 By: /s/ William J. Smethurst, Jr. William J. Smethurst, Jr. Assistant Secretary & Assistant Treasurer - 30 - 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). - 31 - EX-27 2
UT 1,000 6-MOS DEC-31-1997 JUN-30-1997 PER-BOOK 436,997 2,389 82,753 102,325 3,581 628,045 13,454 110,750 55,725 179,929 35,000 2,224 178,403 14,500 0 0 8,960 0 0 0 209,029 628,045 193,721 8,641 160,352 168,993 24,728 0 24,728 9,809 14,919 0 14,730 7,748 7,290 19,753 1.37 1.37
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