Page 1 of 22
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 JuneSeptember 30, 2000 Commission File Number 000-22211
SOUTH JERSEY GAS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 21-0398330
(State of incorporation) (IRS employer identification no.)
1 South Jersey Plaza, Folsom, NJ 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 7,October 24, 2000 there were 2,339,139 shares of the registrant's common
stock outstanding. All common shares are owned by South Jersey Industries,
Inc., the parent company of South Jersey Gas Company.
Exhibit Index on page 22
- Cover Page -
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 12
SJG-2
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands, Except for Per Share Data)
Three Months Ended
JuneSeptember 30,
---------------------------------------------
2000 1999
--------------------- ----------
Operating Revenues:
Utility $ 76,02663,422 $ 66,10151,269
Other 635 549
-----------413 424
---------- ----------
Total Operating Revenues 76,661 66,650
-----------63,835 51,693
---------- ----------
Operating Expenses:
Gas Purchased for Resale 52,948 43,32446,345 34,878
Utility Operations 9,827 9,5809,544 10,969
Other Operations 514 567426 409
Maintenance 1,720 1,3091,350 1,284
Depreciation 4,989 4,6925,056 4,766
Income Taxes (258) 127(2,603) (2,990)
Other Taxes 2,036 1,832
-----------1,664 1,492
---------- ----------
Total Operating Expenses 71,776 61,431
-----------61,782 50,808
---------- ----------
Operating Income 4,885 5,219
-----------2,053 885
---------- ----------
Interest Charges:
Long-Term Debt 3,686 3,9174,268 3,802
Short-Term Debt and Other 1,172 959
-----------1,093 1,277
---------- ----------
Total Interest Charges 4,858 4,876
-----------5,361 5,079
---------- Income----------
Loss Before Preferred Dividend Requirements 27 343(3,308) (4,194)
Preferred Stock Dividend Requirements 40 4235 39
Preferred Securities Dividend Requirements 731 730
730
--------------------- ----------
Net Loss Applicable to Common Stock $ (743)(4,074) $ (429)
===========(4,963)
========== ==========
Average Shares of Common Stock Outstanding 2,339 2,339
===================== ==========
Earnings Per Common Share $ (0.32)(1.74) $ (0.18)
===========(2.12)
========== ==========
Dividends Declared Per Common Share $ 1.790.94 $ 1.73
===================== ==========
The accompanying footnotes are an integral part of the financial statements.
SJG-3
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands, Except for Per Share Data)
SixNine Months Ended
JuneSeptemer 30,
---------------------------------------------
2000 1999
--------------------- ----------
Operating Revenues:
Utility $ 222,653286,075 $ 200,688251,957
Other 1,010 1,044
-----------1,423 1,468
---------- ----------
Total Operating Revenues 223,663 201,732
-----------287,498 253,425
---------- ----------
Operating Expenses:
Gas Purchased for Resale 141,766 121,998188,111 156,876
Utility Operations 19,638 18,74029,182 29,709
Other Operations 862 9371,288 1,346
Maintenance 4,490 2,5915,840 3,875
Depreciation 9,909 9,30314,965 14,069
Income Taxes 12,350 12,8459,747 9,855
Other Taxes 6,371 6,288
-----------8,035 7,780
---------- ----------
Total Operating Expenses 195,386 172,702
-----------257,168 223,510
---------- ----------
Operating Income 28,277 29,030
-----------30,330 29,915
---------- ----------
Interest Charges:
Long-Term Debt 7,519 8,02411,787 11,826
Short-Term Debt and Other 2,366 1,873
-----------3,459 3,150
---------- ----------
Total Interest Charges 9,885 9,897
-----------15,246 14,976
---------- ----------
Income Before Preferred Dividend Requirements 18,392 19,13315,084 14,939
Preferred Stock Dividend Requirements 80 83115 121
Preferred Securities Dividend Requirements 1,461 1,461
-----------2,192 2,192
---------- ----------
Net Income Applicable to Common Stock $ 16,85112,777 $ 17,589
===========12,626
========== ==========
Average Shares of Common Stock Outstanding 2,339 2,339
===================== ==========
Earnings Per Common Share $ 7.205.46 $ 7.52
===========5.40
========== ==========
Dividends Declared Per Common Share $ 3.594.53 $ 3.46
===========5.19
========== ==========
The accompanying footnotes are an integral part of the financial statements.
SJG-4
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
JuneSeptember 30, December 31,
-------------------------- -------------------------------------- ------------
2000 1999 1999
------------ ------------ -------------------------
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $ 740,265750,498 $ 702,116711,323 $ 721,338
Accumulated Depreciation (200,076) (185,898)(203,969) (188,898) (192,240)
Gas Plant Acquisition Adjustment - Net 1,739 1,8131,720 1,794 1,776
------------ ------------ -------------------------
Property, Plant and Equipment - Net 541,928 518,031548,249 524,219 530,874
------------ ------------ -------------------------
Available-for-Sale Securities 1,955 1,0312,295 1,346 1,662
------------ ------------ -------------------------
Current Assets:
Cash and Cash Equivalents 10,250 8,0072,900 1,263 4,694
Accounts Receivable 47,938 31,39234,175 19,965 37,066
Unbilled Revenues 5,127 6,7097,433 4,901 21,294
Provision for Uncollectibles (860) (932) (932)
Natural Gas in Storage, average cost 24,649 20,12154,977 30,617 26,840
Materials and Supplies, average cost 3,978 3,9623,807 4,006 4,085
Prepaid Taxes 9,569 10,0098,665 8,845 4,069
Prepayments and Other Current Assets 2,883 3,9412,702 3,120 2,461
------------ ------------ -------------------------
Total Current Assets 103,534 83,209113,799 71,785 99,577
------------ ------------ -------------------------
Accounts Receivable - Merchandise 490 851376 674 684
------------ ------------ -------------------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 18,386 24,50314,527 25,818 25,702
Liability for Future Expenditures 51,029 52,939 51,029
Gross Receipts and Franchise Taxes 2,919 3,3632,809 3,252 3,141
Income Taxes - Flowthrough Depreciation 11,042 12,02010,797 11,775 11,531
Deferred Fuel Cost - Net 13,615 -23,811 7,953 13,174
Deferred Postretirement Benefit Costs 4,725 5,2074,630 5,050 4,914
Other 6,911 7,8668,352 8,003 7,951
------------ ------------ -------------------------
Total Regulatory and Other Non-Current Assets 108,627 105,898115,955 114,790 117,442
------------ ------------ -------------------------
Total Assets $ 756,534780,674 $ 709,020712,814 $ 750,239
============ ============ =========================
The accompanying footnotes are an integral part of the financial statements.
SJG-5
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
JuneSeptember 30, December 31,
-------------------------- -------------------------------------- ------------
2000 1999 1999
------------ ------------ -------------------------
Capitalization and Liabilities
Common Equity:
Common Stock, Par Value $2.50 per share:
Authorized - 4,000,000 shares
Outstanding - 2,339,139 shares $ 5,848 $ 5,848 $ 5,848
Other Paid-In Capital and Premium on Common Stock 125,817 108,067117,817 117,817
Retained Earnings 66,908 63,76460,634 54,751 58,457
------------ ------------ -------------------------
Total Common Equity 198,573 177,679192,299 178,416 182,122
------------ ------------ -------------------------
Preferred Stock and Securities:
Redeemable Cumulative Preferred - Par Value $100 per share,
Authorized 43,104, 45,504 and 45,504 shares, respectively
Outstanding:
Series A, 4.70% - 300, 1,200 and 1,200 shares 30 120 120
Series B, 8.00% - 17,742, 19,242 and 19,242 shares 1,774 1,924 1,924
Company-Guaranteed Mandatorily 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 36,804 37,044 37,044
------------ ------------ -------------------------
Long-Term Debt 172,123207,123 185,704 183,561
------------ ------------ -------------------------
Total Capitalization 407,500 400,427436,226 401,164 402,727
------------ ------------ -------------------------
Current Liabilities:
Notes Payable 107,700 82,30093,800 89,700 118,900
Current Maturities of Long-Term Debt 11,876 8,876 8,876
Accounts Payable 43,163 30,95551,552 34,898 34,822
Customer Deposits 5,367 5,3735,284 5,305 5,386
Environmental Remediation Costs 12,534 8,752 12,534
Taxes Accrued 5,223 6,8912,288 1,781 634
Interest Accrued and Other Current Liabilities 5,949 6,9837,837 7,518 10,422
------------ ------------ -------------------------
Total Current Liabilities 191,812 150,130185,171 156,830 191,574
------------ ------------ -------------------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 95,385 86,64996,303 86,511 93,543
Environmental Remediation Costs 38,495 44,187 38,495
Pension and Other Postretirement Benefits 11,415 13,18911,520 13,404 12,303
Investment Tax Credits 4,676 5,0444,595 4,946 4,849
Deferred Revenues - Net - 3,777 -
Other 7,251 5,6178,364 5,772 6,748
------------ ------------ -------------------------
Total Deferred Credits and Other Non-Current
Liabilities 157,222 158,463159,277 154,820 155,938
------------ ------------ -------------------------
Commitments and Contingencies (See Note 5)
Total Capitalization and Liabilities $ 756,534780,674 $ 709,020712,814 $ 750,239
============ ============ =========================
The accompanying footnotes are an integral part of the financial statements.
SJG-6
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
SixNine Months Ended
JuneSeptember 30,
--------------------------------------------------
2000 1999
---------- ---------------------- ------------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 16,85112,777 $ 17,58912,626
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 11,515 10,74017,192 16,194
Provision for Losses on Accounts Receivable 453 258740 668
Revenues and Fuel Costs Deferred - Net (441) 9,286(10,637) (2,444)
Deferred and Non-Current Income Taxes and Credits - Net 2,068 1943,107 291
Environmental Remediation Costs - Net 7,316 2,99711,175 1,682
Changes in:
Accounts Receivable 4,770 9,30915,940 22,134
Inventories 2,298 7,587(27,859) (2,953)
Prepayments and Other Current Assets (422) (1,674)(241) (853)
Prepaid and Accrued Taxes - Net (911) 8,091(2,942) 4,145
Accounts Payable and Other Accrued Liabilities 3,849 (10,348)14,043 (5,938)
Other - Net 408 2,531
---------- ----------1,534 2,636
------------ ------------
Net Cash Provided by Operating Activities 47,754 56,560
---------- ----------34,829 48,188
------------ ------------
Cash Flows from Investing Activities:
Capital Expenditures, Cost of Removal and Salvage (21,627) (25,513)(33,222) (36,670)
Purchase of Available-for-Sale Securities (293) (145)
---------- ----------(633) (460)
------------ ------------
Net Cash Used in Investing Activities (21,920) (25,658)
---------- ----------(33,855) (37,130)
------------ ------------
Cash Flows from Financing Activities:
Net Repayments of Lines of Credit (11,200) (14,700)(25,100) (7,300)
Proceeds from Sale of Long-Term Debt 35,000 0
Principal Repayments of Long-Term Debt (8,438) (9,006)
Dividends on Common Stock (8,400) (8,100)(10,600) (12,150)
Repurchase of Preferred Stock (240) (90)
Additional Investment by Shareholder 8,000 5,250
---------- ----------15,000
Payments for Issuance of Long-Term Debt (1,390) 0
------------ ------------
Net Cash Used in Financing Activities (20,278) (26,646)
---------- ----------(2,768) (13,546)
------------ ------------
Net IncreaseDecrease in Cash and Cash Equivalents 5,556 4,256(1,794) (2,488)
Cash and Cash Equivalents at Beginning of Period 4,694 3,751
---------- ---------------------- ------------
Cash and Cash Equivalents at End of Period $ 10,2502,900 $ 8,007
========== ==========1,263
============ ============
The accompanying footnotes are an integral part of the financial statements.
SJG-7
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Significant Accounting Practices:
Consolidation - The consolidated financial statements include the accounts
of South Jersey Gas Company (SJG) and its wholly-owned statutory trust
subsidiary, SJG Capital Trust. All significant intercompany accounts and
transactions were eliminated. We reclassified some previously reported amounts
to conform with current year classifications. In our opinion, the condensed
consolidated financial statements reflect all adjustments needed to fairly
present SJG's financial position and operating results at the dates and for the
periods presented. Our businesses are subject to seasonal fluctuations and,
accordingly, this interim financial information should not be the basis for
estimating the full year's operating results.
South Jersey Industries, Inc. (SJI) owns all of the outstanding common
stock of SJG.
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 Financial Accounting
Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for the first quarter
of our fiscal year ending December 31, 2001. This statement establishes
accounting and reporting standards for derivative instruments, including those
embedded in other contracts, and for hedging activities. It requires
recognizing derivatives as assets or liabilities at fair value on the balance
sheet. We are currently evaluating the effects of FASB No. 133 on our
financial condition and results of operations, which willmay vary based on our use
of derivative instruments at the time of adoption.
Note 2. Income Taxes:
The significant components of federal and state income taxes reflected in
the condensed consolidated statements of consolidated income are as follows (in thousands):
SJG-8
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
------------------- ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Current:
Federal $ (1,184)(2,981) $ (140)(2,583) $ 7,5054,524 $ 9,2176,634
State (113) 170 2,778 3,434(662) (504) 2,116 2,930
-------- -------- -------- --------
Total Current (1,297) 30 10,283 12,651(3,643) (3,087) 6,640 9,564
Deferred:
Federal 984 325 1,968 651326 2,952 977
State 136137 (131) 272 (262)409 (393)
-------- -------- -------- --------
Total Deferred 1,120 194 2,240 3891,121 195 3,361 584
Investment Tax Credit (81) (97) (173) (195)(98) (254) (293)
-------- -------- -------- --------
Net Income Taxes $ (258)(2,603) $ 127(2,990) $ 12,3509,747 $ 12,8459,855
======== ======== ======== ========
Note 3. Recent Regulatory Actions:
In January 1997, the Board of Public Utilities (BPU) granted SJG a total
rate increase of $10.3 million. The $6.0 million base rate portion of the
increase was based on a 9.62% rate of return on rate base, which included an
11.25% return on common equity. Additionally, SJG's threshold for sharing
pre-tax margins generated by interruptible and off-system sales and
transportation (Sharing Formula) increased from $4.0 million to $5.0 million.
With the completion of major construction projects, this $5.0 million threshold
increased by $2.8 million to a total of $7.8 million. SJG keeps 100% of
pre-tax margins up to the threshold level and 20% of such margins above that
level. In October 1998, the BPU approved a revision to the Sharing Formula as
part of an agreement to modify SJG's Temperature Adjustment Clause (TAC). The
revision credits the first $750,000 above the current threshold level to the
Levelized Gas Adjustment Clause (LGAC) customers. Thereafter, SJG keeps 20% of
the pre-tax margins as it has historically.
In August 1998, SJG filed with the BPU to recover increased remediation
costs expended from August 1995 through July 1998. In September 1999, the BPU
approved the requested annual recovery level of $6.5 million. This represents
an annual increase of approximately $4.5 million over the recovery previously
included in rates. In July 1999, SJG filed its annual Remediation Adjustment
Clause (RAC) with the BPU requesting recovery of carrying costs on unrecovered
remediation costs and proposed no change in the current RAC rate for the next 3
years. In January 2000, the BPU approved the recovery of carrying costs on
unrecovered remediation costs and SJG's proposal to keep its current RAC rate
in effect through October, 2002.
SJG-9
In September 1998, SJG filed its annual LGAC, TAC and Demand Side
Management Clause (DSMC) with the BPU. The LGAC and DSMC cover the period
November 1 through October 31 of each year. The TAC period runs from October 1
through May 31. In May 1999, the BPU approved a $7.1 million increase in rates
as part of this filing, which included the results of the previous two annual
filings.
In April 2000, SJG made its 1999-2000 TAC and LGAC filings and
anticipates making its 2000-2001 TAC, LG AC, RAC and DSMC filings during the
summer of 2000.
In February 1999, the Electric Discount and Energy Competition Act became
law. This law established "unbundling,"unbundling, where redesigned utility rate structures
allow natural gas and electric consumers to choose their energy supplier. SJG
filed its unbundling proposal in April 1999 and received final BPU approval in
January 2000.
Effective January 10, 2000, the BPU approved full unbundling of SJG's
system. This allows all natural gas consumers to select their natural gas
supplier. As of JuneSeptember 30, 2000, 52,05644,863 of SJG's residential customers had
elected to purchase their gas commodity from someone other than us.SJG. The bills
of those using a gas supplier other than SJG are reduced for cost of gas
charges and applicable taxes. The resulting decrease in revenues is offset by
a corresponding decrease in gas costs and taxes under SJG's BPU-approved fuel
clause. SJI's net income, financial condition and margins are not affected as
a result of the unbundling.
In addition to allowing all customers to select their own supplier, the
unbundling settlement also created an incentive to customers to select a
supplier, other than SJG, in the form of a Market Development Credit (MDC).
This credit will beis being provided to customers over the next two yearsa two-year period beginning
January 2000 and will approximate $2.5 million plus carrying costs through
December 2001. The majority of this credit was provided for on SJG's books as
a Deferred Credit. Therefore, the impact of the MDC will not materially impact
future periods.
Also included in the proposalapproved was the approved recovery of carrying costs on the RAC, as previously
discussed, and a modification to SJG's LGAC. Under-recovered gas costs of
$11.9 million as of October 31, 1999, and carrying costs thereon, will beare being
recovered over 3 years. The LGAC fora three-year period beginning January 2000.
In April 2000, the period
starting November 1999, will continue to operate as it has in the past.
In June 1999, SJG madeBPU approved an appliance service filing with the BPU to modify
SJG's existing service sentry plans, implement three new service sentry plans
and to implement flat rate pricing for its appliance service business.
On
April 27, 2000, the BPU approved SJG's filing.
Effective June 9, 2000, SJG implemented price increases for its appliance
service business. The new rates are competitive with those of other service
providers in New Jersey.
In August 2000, SJG filed its annual LGAC and TAC for 2000-2001. The
filing requested a $35.0 million increase to its LGAC. Also included in the
proposal was the recovery of projected under-recovered gas costs of $26.5
SJG-10
million as of October 31, 2000 and carrying costs thereon, over a three-year
period. SJG also requested recovery of $6.3 million under its TAC resulting
from warmer weather during the last two winter seasons.
Note 4. Retained Earnings:
Restrictions exist under various loan agreements regarding the amount of
cash dividends or other distributions that we may pay on our common stock.
SJG's retained earnings, which is free of these restrictions, was approximately
$65.1$58.8 million as of JuneSeptember 30, 2000.
Note 5. Commitments and Contingencies:
Construction Commitments - SJG's estimated net cost of construction and
environmental remediation programs for 2000 totals $49.8$45.2 million. Commitments
were made regarding these programs.
Pending Litigation - SJG 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 - SJG incurred and recorded costs for
environmental clean up of sites where SJG or its predecessors operated gas
manufacturing plants. SJG stopped manufacturing gas in the 1950s.
Since the early 1980s, SJG recordedaccrued environmental remediation costs of
$110.6$113.9 million, of which $59.6$62.9 million was spent as of JuneSeptember 30, 2000.
With the assistance of an outside consulting firm, we estimate that future
costs to clean up SJG's sites will range from $51.0 million to $161.3 million.
We recorded the lower end of this range as a liability. It is reflected on the
2000 condensed consolidated balance sheet under the captions Current
Liabilities and Deferred Credits and Other Non-Current Liabilities. SJG did
not adjust the accrued liability for future insurance recoveries, which we have
been successful in pursuing. We used these proceeds to offset related legal
fees and to reduce the balance of deferred environmental remediation costs.
Recorded amounts include estimated costs based on projected investigation and
remediation work plans using existing technologies. Actual costs could differ
from the estimates due to the long-term nature of the projects, changing
technology, government regulations and site-specific requirements.
SJG has two regulatory assets associated with environmental remediation
cost. The first asset is titled Environmental Remediation Cost: Expended -
Net. These expenditures represent what was actually spent to clean up former
gas manufacturing plant sites. These costs meet the requirements of FASB
No. 71, "Accounting for the Effects of Certain Types of Regulation." The BPU
allows SJG to recover such expenditures through the RAC. SJG's current
recovery level includes remediation costs expended through July 1998 and
petitions to recover costs through July 19992000 are pending.
SJG-11
The other asset titled Environmental Remediation Cost: Liability for
Future Expenditures relates to estimated future expenditures determined under
the guidance of FASB No. 5, "Accounting for Contingencies." This amount, which
relates to former manufactured gas plant sites, was recorded as a deferred
debit with the corresponding amount reflected on the consolidatingcondensed 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 JuneSeptember 30, 2000, SJG's unamortized
remediation costs of $18.4$14.5 million are reflected on the condensed consolidated
balance sheetssheet under the caption Regulatory and Other Non-Current Assets. Since
implementing the RAC in 1992, SJG recovered $23.5$24.4 million through rates as of
JuneSeptember 30, 2000.
Note 6. Other Paid-In Capital:
SJG received $8.0 million and $5.25 million as a contribution of capital
from SJI on June 30, 2000 and 1999, respectively. Also, on July 30, 1999, SJG
received an additional $9.75 million contribution from SJI. Contributions of
capital are credited to Other Paid-In Capital and Premium on Common Stock.
There have been no other changes in Common Stock during 2000 or 1999.
Note 7. Long-Term Debt:
In July 2000, SJG issued $35 million of debt under a Medium Term Note
Program established October 1998. Notes totaling $15 million were issued at
7.70%, maturing in 2015; notes totaling $10 million were issued at 7.97%,
maturing in 2018; and notes totaling $10 million were issued at 7.90%, maturing
in 2030. A remainder of $35 million is authorized to be issued under this
program through December 2001.
SJG-12
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Overview
South Jersey Gas Company (SJG) is a natural gas distribution company
serving 277,527278,495 customers at JuneSeptember 30, 2000, compared with 270,433270,692
customers at JuneSeptember 30, 1999. 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. South Jersey Industries, Inc.
(SJI) owns all of the common stock of SJG.
Forward-Looking Statements
This report contains certain forward-looking statements concerning
projected financial and operating performance, future plans and courses of
action and future economic conditions. All statements in this report other
than statements of historical fact are forward-looking statements. These
forward-looking statements are made based upon management's expectations and
beliefs concerning future events impacting the company and involve a number of
risks and uncertainties. We caution that forward-looking statements are not
guarantees and actual results could differ materially from those expressed or
implied in the forward-looking statements. Also, in making forward-looking
statements, we assume no duty to update these statements should expectations
change or actual results and events differ from current expectations.
A number of factors could cause our actual results to differ materially
from those anticipated, including, but not limited to the following: general
economic conditions on an international, federal, state and local level;
weather conditions in our marketing areas; regulatory and court decisions;
competition in our regulated activities; the availability and cost of capital;
costs and effects of legal proceedings and environmental liabilities; and
changes in business strategies.
Customer Choice Legislation
Effective January 1, 2000, all residential natural gas customers in New
Jersey are able to choose their gas supplier under the terms of the Electric
Discount and Energy Competition Act of February 1999. Commercial and
industrial customers have had the ability to choose gas suppliers since 1987.
SJG's residential customers have been able to choose a gas supplier since April
of 1997 under a pilot program. As of JuneSeptember 30, 2000, 52,05644,863 SJG
residential customers participated in the program. Customers' bills are
reduced for cost of gas charges and applicable taxes. The resulting decrease
in SJG's revenues is offset by a corresponding decrease in gas costs and taxes.
While customer choice can reduce utility revenues, it does not negatively
affect SJG's net income, financial condition or margins.
SJG-13
Energy Adjustment Clauses
SJG's BPU approved Temperature Adjustment Clause (TAC) had the following
impacts on 2000 and 1999 secondthird quarter and sixnine month net earnings:
2000 1999
------ ------
TAC Adjustment Increase to Net Income
($ in thousands)
Quarter Ended 6/9/30 $59 $(44)
Six$0 $106
Nine Months Ended 6/9/30 $1,349 $1,232$1,338
While the revenue and income impacts of TAC adjustments are recorded as
incurred, cash inflows or outflows directly attributable to TAC adjustments
generally do not begin until the next TAC year. Each TAC year begins
October 1.
Results of Operations - Three and SixNine Months Ended JuneSeptember 30, 2000
Compared to Three and SixNine Months Ended JuneSeptember 30, 1999
Operating Revenues
Revenues increased $10.0$12.1 million and $21.9$34.1 million in the secondthird quarter
and first sixnine months of 2000 compared with the prior year periods. The
primary reasons for the increases were increased off-system sales, 7,0947,803
additional customers and increased rates resulting from an increase in the
Levelized Gas Adjustment Clause (LGAC) to recover increased gas costs. 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.
WeatherBecause customer heating needs are minimal in the secondthird quarter, of 2000weather
is not material to SJG's operating results. Weather for the nine month period
was 4.6%1.8% colder than the prior year period. Weather for the six month period was unchanged.year. Weather was 4.6%
colder and 5.0%3.6% warmer for the second quarter and first
sixnine months
respectively, than the 20-year average. As a result of the TAC, revenues for
2000 will be closely tied to the 20-year normal temperatures and not actual
weather conditions due to our TAC.
The following is a comparison of operating revenue and throughput for the
three and sixnine month periods ended JuneSeptember 30, 2000 vs. the same periods
ended JuneSeptember 30, 1999.
SJG-14
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
2000 1999 2000 1999
-------- --------------- ------- -------- --------
Operating Revenues (Thousands):
Firm
Residential $22,224 $25,025 $ 92,897 $ 97,561$14,911 $12,986 $107,808 $110,547
Commercial 5,212 5,016 21,492 21,2014,404 3,306 25,895 24,507
Industrial 1,017 913 3,017 2,724559 921 3,576 3,645
Cogeneration & Electric Generation 4,977 2,136 6,199 2,8033,894 4,259 10,093 7,062
Firm Transportation 7,862 6,131 21,874 16,962
-------- --------6,077 5,209 27,952 22,171
------- ------- -------- --------
Total Firm Operating Revenues 41,292 39,221 145,479 141,25129,845 26,681 175,324 167,932
Interruptible 333 653 832 993308 277 1,140 1,270
Interruptible Transportation 361 362 845 895309 305 1,154 1,200
Off-System 33,049 24,557 72,275 55,04332,015 22,704 104,290 77,747
Capacity Release & Storage 567568 870 2,996 2,600
Other 790 856 2,428 1,730
Other 1,059 1,001 1,804 1,820
-------- --------2,594 2,676
------- ------- -------- --------
Total Operating Revenues $76,661 $66,650 $223,663 $201,732
======== ========$63,835 $51,693 $287,498 $253,425
======= ======= ======== ========
Throughput (MMcf):
Firm
Residential 2,302 2,696 10,783 11,5791,331 1,260 12,114 12,839
Commercial 634 621 2,800 2,837514 403 3,314 3,240
Industrial 50 37 156 15925 26 181 185
Cogeneration & Electric Generation 1,113 679 1,251 750707 1,297 1,958 2,047
Firm Transportation 6,349 5,875 14,814 12,664
-------- --------5,135 5,704 19,949 18,368
------- ------- -------- --------
Total Firm Throughput 10,448 9,908 29,804 27,9897,712 8,690 37,516 36,679
Interruptible 56 137 105 24429 63 134 307
Interruptible Transportation 737 831 1,577 1,934661 711 2,238 2,645
Off-System 9,357 10,461 21,427 24,7756,948 8,277 28,375 33,052
Capacity Release & Storage 9,395 8,038 19,934 11,359
-------- --------9,627 8,149 29,561 19,508
------- ------- -------- --------
Total Throughput 29,993 29,375 72,847 66,301
======== ========24,977 25,890 97,824 92,191
======= ======= ======== ========
Gas Purchased for Resale
Gas purchased for resale increased $9.6$11.5 million and $19.8$31.2 million for the
secondthird quarter and first sixnine months of 2000 compared with the same periods in
1999 due principally to increased gas costs on off-system sales. SJG's gas
cost during the first threenine months of 2000 averaged $3.23/$3.61/dt compared with
$2.33/$2.28/dt in 1999. Unlike gas costs associated with off-system sales, changes
in the cost of gas sold to utility rate payers do not directly effect Gas
Purchased for Resale. Fluctuations in gas costs to rate payers not reflected
in current rates are deferred and addressed in future periods under a BPU
approved Levelized Gas Adjustment Clause (LGAC). Under the LGAC, fluctuations
in gas costs not covered currently are reflected in future customer rates. Gas
supply sources include contract and open-market purchases. SJG secures and
maintains its own gas supplies to serve its customers.
SJG-15
Operations
A summary of net changes in Utility Operations and Other Operations (in
thousands):
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
2000 vs. 1999 2000 vs. 1999
------------- -------------
Other Production Expense $4 $5 $10
Transmission 29 191 20
Distribution 9 169(87) 82
Appliance Service - Net 306 285550 835
Customer Accounts and Services 166 451(103) 348
Sales (25) (5)(29) (34)
Administration and General (242) (26)(1,762) (1,788)
Other (53) (75)17 (58)
------- -------
$194 $823($1,408) ($585)
======= =======
Appliance Service - Net increased primarily due to service activity on new
warranty plans sold in the second and third quarter of 2000. The BPU mandated
reallocation of costs between utility and non-utility operations as part of the
energy deregulation process in New Jersey also contributed to this increase.
Customer Accounts and Services costs increased in the second quarterfirst nine months of
2000 due primarily to higher meter reading expenses. We increased meter
reading frequency to enhance customer service. The six month period was alsoCosts were additionally
impacted by temporarily increased staffing levelscosts necessary to handle high call
volumes related to the deregulation process in New Jersey and higher bad debt
expense.
Administrative and General costs decreased for the three month period from 1999 levels principally
due to lower employee welfare and pension costs offsetting a change in the wayaddition to lower management
fees are being charged from SJI to its subsidiaries.
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses
(in thousands):
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
2000 vs. 1999 2000 vs. 1999
------------- -------------
Maintenance $411 $1,899$66 $1,965
Depreciation 297 606290 896
Income Taxes (385) (495)387 (108)
Other Taxes 204 83172 255
SJG-16
Maintenance was higher due to higher levels of Remediation Adjustment
Clause (RAC) amortization.amortization during the first half of the year. This additional
amortization expense is recovered during the current period through rates (See
Note 5 to the Condensed Consolidated Financial Statements). Depreciation was
higher due to increased investment in property, plant and equipment by SJG.
SJG-16
Interest Charges
Interest charges were slightly lowerhigher in the first halfnine months of 2000 compared
with the prior year period. Increased debt outstanding and higher interest
rates in 2000 were largelymostly offset by recoveries of carrying costs associated
with unrecovered RAC and purchased gas costs. The debt was incurred primarily
to support the expansion and upgrade of SJG's gas transmission and distribution
system.
Net Income Applicable to Common Stock
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 $140.0 million, of which $32.3$46.2 million was available at
JuneSeptember 30, 2000. The credit lines are uncommitted and unsecured with
interest rates typically available based upon the Federal Funds Rates or London
Interbank Offered Rates (LIBOR).
SJG-17
The changes in cash flows from operating activities (in thousands):
SixNine Months Ended
JuneSeptember 30,
2000 vs. 1999
-------------
Increases/(Decreases):
Net Income Applicable to Common Stock ($738)$151
Depreciation and Amortization 775998
Provision for Losses on Accounts Receivable 19572
Revenues and Fuel Costs Deferred - Net (9,727)(8,193)
Deferred and Non-Current Income Taxes and
Credits - Net 1,8742,816
Environmental Remediation Costs - Net 4,3199,493
Accounts Receivable (4,539)(6,194)
Inventories (5,289)(24,906)
Prepayments and Other Current Assets 1,252612
Prepaid and Accrued Taxes - Net (9,002)(7,087)
Accounts Payable and Other Accrued Liabilities 14,19719,981
Other - Net (2,123)
-------(1,102)
--------
Net Cash Provided by Operating Activities ($8,806)
=======
SJG-1713,359)
========
Depreciation and Amortization are non-cash charges to income and do not
impact cash flow. Changes in depreciation cost reflect the effect of additions
and reductions to fixed assets.
Decreases in Revenues and Fuel Costs Deferred - Net reflect the impact of
payments or credits to customers for amounts previously overcollected and the
undercollection of fuel costs resulting from increases in natural gas costs.
Increases reflect the overcollection of fuel costs or the recovery of
previously deferred fuel costs.
Changes in Deferred and Non-Current Income Taxes and Credits - Net
represent the differences between taxes accrued and amounts paid. Generally,
deferred income taxes related to deferred fuel costs will be paid in the next
year.
Changes in Environmental Remediation Costs - Net represent the differences
between amounts expended for environmental remediation compared with amounts
collected under the RAC and insurance recoveries.
Changes in Accounts Receivable are primarily due to changes in off-system
sales activity and SJG's sales volumes. Weather and commodity prices are the
variables that primarily impact these sales. Changes impact cash flows when
collected in subsequent periods.
Changes in Inventories reflect the impact of seasonal requirements,
temperatures and commodity price changes.
SJG-18
Changes in Prepaid and Accrued Taxes - Net reflect the impact of
differences between taxes paid and taxes accrued. Significant timing
differences exist in cash flows during the year. Approximately 50% of SJG's
taxes are paid in installments during the first half of the year and the
remaining 50% are paid on May 15 of each year. SJG uses short-term borrowings
to pay taxes, resulting in a temporary increase in the short-term debt level.
The carrying costs of timing differences are recognized in base utility rates.
Changes in Accounts Payable and Other Current Liabilities reflect the
impact of timing differences between the accrual and payment of costs.
Changes in Other - Net reflect numerous changes in noncurrent assets and
liabilities, including accrued deferred income taxes.
Capital Resources
SJG 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
sixnine months of 2000 amounted to $14.3$22.0 million. The net costs for 2000, 2001
and 2002 are estimated at approximately $49.8$45.2 million, $45.5$44.4 million and $51.9
million, respectively. We expect to fund these expenditures from several
sources, which may include cash generated by operations, temporary use of
short-term debt, sale of medium-term notes, capital leases, RAC recoveries,
insurance recoveries and equity infusions from SJI.
SJG-18
In June 2000, SJI contributed $8 million of equity capital to SJG.
In July 2000, SJG issued a total of $35 million of senior secured debt
under its Medium Term Note program (MTN). Notes totaling $15 million were
issued at 7.70%, maturing in 2015; notes totaling $10 million were issued at
7.97%, maturing in 2018; and notes totaling $10 million were issued at 7.90%,
maturing in 2030. The net proceeds of these note issuances were used to retire
short-term debt.
Ratio of Earnings to Fixed Charges
The company's ratio of earnings to fixed charges for each of the periods
indicated is as follows:
Twelve Months
Ended
Years Ended December 31, JuneSeptember 30,
------------------------------------------ ------------------------------------------------ -------------
1995 1996 1997 1998 1999 2000
2.3x 2.5x 2.6x 2.2x 2.5x 2.5x
The ratio of earnings to fixed charges represents, on a pre-tax basis, the
number of times earnings cover fixed charges. Earnings consist of net income,
to which has been added fixed charges and taxes based on income of the company,
excluding the cumulative effect of an accounting change. Fixed charges consist
of interest charges and preferred securities dividend requirements and an
interest factor in rentals.
SJG-19
PART II -- OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part I,
Item 1, Note 5, beginning on page 11.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have interest rate risk exposure related to short-term debt. For
information regarding our exposure related to this risk, see Item 7A in our
Form 10-K for the year ended December 31, 1999. Our market risks have not
materially changed from December 31, 1999.
PART II OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part I,
Item 1, Note 5, beginning on page 11.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (submitted only in electronic
format to the Securities and Exchange Commission).
(b) On June 30, 2000, July 5, 2000 and July 6, 2000, South Jersey Gas
Company filed Forms 8-K in relation to the issuance of a total of
$35,000,000 of Secured Medium Term Notes. The company registered
the Notes under the Securities Act of 1933 pursuant to a
Registration Statement on Form S-3 (File No. 333-62019).
Items reported include:
Item 5. Other Events
Item 7. Exhibits
SJG-20
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 GAS COMPANY
(Registrant)
Dated: August 14,November 6, 2000 By: /s/ David A. Kindlick
David A. Kindlick
Senior Vice President, Finance & Rates
Dated: August 14,November 6, 2000 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Vice President and Treasurer
SJG-21
SOUTH JERSEY GAS COMPANY
Index to Exhibits
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
(Submitted only in electronic format to
the Securities and Exchange Commission).
SJG-22