Page 1 of 2221
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 September 30, 2000March 31, 2001 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 October 24, 2000May 4, 2001 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 1211
SJG-2
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
Three Months Ended
September 30,
----------------------March 31,
--------------------------
2001 2000
1999
---------- ---------------------- ------------
Operating Revenues:
Utility $ 63,422218,815 $ 51,269146,627
Other 413 424
---------- ----------641 375
------------ ------------
Total Operating Revenues 63,835 51,693
---------- ----------219,456 147,002
------------ ------------
Operating Expenses:
Gas Purchased for Resale 46,345 34,878161,340 88,818
Utility Operations 9,544 10,9699,519 9,811
Other Operations 426 409354 348
Maintenance 1,350 1,2842,885 2,770
Depreciation 5,056 4,7665,183 4,920
Income Taxes (2,603) (2,990)12,295 12,608
Energy and Other Taxes 1,664 1,492
---------- ----------4,416 4,335
------------ ------------
Total Operating Expenses 61,782 50,808
---------- ----------195,992 123,610
------------ ------------
Operating Income 2,053 885
---------- ----------23,464 23,392
Interest Charges:
Long-Term Debt 4,268 3,8024,232 3,833
Short-Term Debt and Other 1,093 1,277
---------- ----------1,334 1,194
------------ ------------
Total Interest Charges 5,361 5,079
---------- ----------
Loss5,566 5,027
Income Before Preferred Dividend Requirements (3,308) (4,194)17,898 18,365
Preferred Stock Dividend Requirements 35 3936 40
Preferred Securities Dividend Requirements 730 731
730
---------- ---------------------- ------------
Net LossIncome Applicable to Common Stock $ (4,074)17,132 $ (4,963)
========== ==========17,594
============ ============
Average Shares of Common Stock Outstanding 2,339 2,339
========== ====================== ============
Earnings Per Common Share $ (1.74)7.32 $ (2.12)
========== ==========7.52
============ ============
Dividends Declared Per Common Share $ 0.941.87 $ 1.73
========== ==========1.80
============ ============
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)BALANCE SHEETS
(In Thousands, Except for Per Share Data)Thousands)
Nine Months Ended
Septemer 30,
----------------------(Unaudited)
March 31, December 31,
--------------------------- ------------
2001 2000 1999
---------- ----------2000
------------ ------------ ------------
Operating Revenues:
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $ 286,075771,546 $ 251,957729,901 $ 763,860
Accumulated Depreciation (211,993) (195,958) (208,292)
Gas Plant Acquisition Adjustment - Net 1,683 1,757 1,701
------------ ------------ ------------
Property, Plant and Equipment - Net 561,236 535,700 557,269
------------ ------------ ------------
Available-for-Sale Securities 2,483 1,701 2,494
------------ ------------ ------------
Current Assets:
Cash and Cash Equivalents 4,414 335 4,715
Accounts Receivable 93,824 61,552 67,803
Unbilled Revenues 34,206 15,557 43,803
Provision for Uncollectibles (1,743) (860) (1,754)
Natural Gas in Storage, average cost 7,263 10,182 31,769
Materials and Supplies, average cost 3,894 3,952 4,037
Prepaid Taxes - - 3,960
Prepayments and Other 1,423 1,468
---------- ----------Current Assets 2,374 2,254 2,640
------------ ------------ ------------
Total Operating Revenues 287,498 253,425
---------- ----------
Operating Expenses:
Gas PurchasedCurrent Assets 144,232 92,972 156,973
------------ ------------ ------------
Accounts Receivable - Merchandise 225 599 277
------------ ------------ ------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 9,853 17,840 18,474
Liability for Resale 188,111 156,876
Utility Operations 29,182 29,709
Other Operations 1,288 1,346
Maintenance 5,840 3,875
Depreciation 14,965 14,069Future Expenditures 51,029 51,029 51,029
Gross Receipts and Franchise Taxes 2,587 3,030 2,698
Income Taxes 9,747 9,855- Flowthrough Depreciation 10,308 11,286 10,553
Deferred Fuel Cost - Net 30,949 6,517 28,810
Deferred Postretirement Benefit Costs 4,441 4,820 4,536
Other Taxes 8,035 7,780
---------- ----------8,619 6,734 8,970
------------ ------------ ------------
Total Operating Expenses 257,168 223,510
---------- ----------
Operating Income 30,330 29,915
---------- ----------
Interest Charges:
Long-Term Debt 11,787 11,826
Short-Term DebtRegulatory and Other 3,459 3,150
---------- ----------Non-Current
Assets 117,786 101,256 125,070
------------ ------------ ------------
Total Interest Charges 15,246 14,976
---------- ----------
Income Before Preferred Dividend Requirements 15,084 14,939
Preferred Stock Dividend Requirements 115 121
Preferred Securities Dividend Requirements 2,192 2,192
---------- ----------
Net Income Applicable to Common StockAssets $ 12,777825,962 $ 12,626
========== ==========
Average Shares of Common Stock Outstanding 2,339 2,339
========== ==========
Earnings Per Common Share732,228 $ 5.46 $ 5.40
========== ==========
Dividends Declared Per Common Share $ 4.53 $ 5.19
========== ==========842,083
============ ============ ============
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)
September 30,March 31, December 31,
---------------------------------------------------- ------------
2001 2000 1999 1999
------------ ------------ ------------
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $ 750,498 $ 711,323 $ 721,338
Accumulated Depreciation (203,969) (188,898) (192,240)
Gas Plant Acquisition Adjustment - Net 1,720 1,794 1,776
------------ ------------ ------------
Property, Plant and Equipment - Net 548,249 524,219 530,874
------------ ------------ ------------
Available-for-Sale Securities 2,295 1,346 1,662
------------ ------------ ------------
Current Assets:
Cash and Cash Equivalents 2,900 1,263 4,694
Accounts Receivable 34,175 19,965 37,066
Unbilled Revenues 7,433 4,901 21,294
Provision for Uncollectibles (860) (932) (932)
Natural Gas in Storage, average cost 54,977 30,617 26,840
Materials and Supplies, average cost 3,807 4,006 4,085
Prepaid Taxes 8,665 8,845 4,069
Prepayments and Other Current Assets 2,702 3,120 2,461
------------ ------------ ------------
Total Current Assets 113,799 71,785 99,577
------------ ------------ ------------
Accounts Receivable - Merchandise 376 674 684
------------ ------------ ------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 14,527 25,818 25,702
Liability for Future Expenditures 51,029 52,939 51,029
Gross Receipts and Franchise Taxes 2,809 3,252 3,141
Income Taxes - Flowthrough Depreciation 10,797 11,775 11,531
Deferred Fuel Cost - Net 23,811 7,953 13,174
Deferred Postretirement Benefit Costs 4,630 5,050 4,914
Other 8,352 8,003 7,951
------------ ------------ ------------
Total Regulatory and Other Non-Current Assets 115,955 114,790 117,442
------------ ------------ ------------
Total Assets $ 780,674 $ 712,814 $ 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)
September 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 125,817 117,817 117,817125,817
Retained Earnings 60,634 54,751 58,45778,193 71,851 65,436
------------ ------------ ------------
Total Common Equity 192,299 178,416 182,122209,858 195,516 197,101
------------ ------------ ------------
Preferred Stock and Securities:
Redeemable Cumulative Preferred - Par Value
$100 per share,
Authorized 43,104, 45,504, and 45,50443,104 shares,
respectively
Outstanding:
Series A, 4.70%4.7% - 300, 1,200 and 1,200300 shares 30 120 12030
Series B, 8.00%8% - 17,742, 19,242 and 19,24217,742
shares 1,774 1,924 1,9241,774
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 37,04436,804
------------ ------------ ------------
Long-Term Debt 207,123 185,704 183,561199,793 178,373 204,981
------------ ------------ ------------
Total Capitalization 436,226 401,164 402,727446,455 410,933 438,886
------------ ------------ ------------
Current Liabilities:
Notes Payable 93,800 89,700 118,90092,500 82,000 113,900
Current Maturities of Long-Term Debt 11,876 8,876 8,87611,876 11,876
Accounts Payable 51,552 34,898 34,82256,350 28,739 75,103
Customer Deposits 5,284 5,305 5,3865,455 5,462 5,366
Environmental Remediation Costs 15,872 12,534 8,752 12,53415,872
Taxes Accrued 2,288 1,781 63414,494 15,729 442
Interest Accrued and Other Current Liabilities 7,837 7,518 10,42211,520 7,955 12,796
------------ ------------ ------------
Total Current Liabilities 185,171 156,830 191,574208,067 164,295 235,355
------------ ------------ ------------
Deferred Credits and Other Non-Current
Liabilities:
Deferred Income Taxes - Net 96,303 86,511 93,543112,110 94,467 107,947
Environmental Remediation Costs 35,157 38,495 44,187 38,49535,157
Pension and Other Postretirement Benefits 11,520 13,404 12,30312,705 12,705 12,314
Investment Tax Credits 4,595 4,946 4,8494,427 4,757 4,513
Other 8,364 5,772 6,7487,041 6,576 7,911
------------ ------------ ------------
Total Deferred Credits and Other
Non-Current Liabilities 159,277 154,820 155,938171,440 157,000 167,842
------------ ------------ ------------
Commitments and Contingencies (See Note(Note 5)
Total Capitalization and
Liabilities $ 780,674825,962 $ 712,814732,228 $ 750,239842,083
============ ============ ============
The accompanying footnotes are an integral part of the financial statements.
SJG-6SJG-5
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands)
NineThree Months Ended
September 30,March 31,
---------------------------
2001 2000 1999
------------ ------------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 12,77717,132 $ 12,62617,594
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 17,192 16,1945,769 5,829
Provision for Losses on Accounts Receivable 740 668519 72
Revenues and Fuel Costs Deferred - Net (10,637) (2,444)(2,139) 6,657
Deferred and Non-Current Income Taxes and
Credits - Net 3,107 2914,277 1,029
Environmental Remediation Costs - Net 11,175 1,6828,621 7,862
Changes in:
Accounts Receivable 15,940 22,134(16,954) (18,893)
Inventories (27,859) (2,953)24,649 16,791
Prepayments and Other Current Assets (241) (853)266 207
Prepaid and Accrued Taxes - Net (2,942) 4,14518,012 19,164
Accounts Payable and Other Accrued Liabilities 14,043 (5,938)(19,940) (8,474)
Other - Net 1,534 2,636(164) 1,028
------------ ------------
Net Cash Provided by Operating Activities 34,829 48,18840,048 48,866
------------ ------------
Cash Flows from Investing Activities:
Capital Expenditures, Cost of Removal and Salvage (33,222) (36,670)
Purchase of Available-for-Sale Securities (633) (460)(9,386) (9,937)
------------ ------------
Net Cash Used in Investing Activities (33,855) (37,130)(9,386) (9,937)
------------ ------------
Cash Flows from Financing Activities:
Net Repayments of Lines of Credit (25,100) (7,300)
Proceeds from Sale of Long-Term Debt 35,000 0(21,400) (36,900)
Principal Repayments of Long-Term Debt (8,438) (9,006)(5,188) (2,188)
Dividends on Common Stock (10,600) (12,150)
Repurchase of Preferred Stock (240) (90)
Additional Investment by Shareholder 8,000 15,000
Payments for Issuance of Long-Term Debt (1,390) 0(4,375) (4,200)
------------ ------------
Net Cash Used in Financing Activities (2,768) (13,546)(30,963) (43,288)
------------ ------------
Net Decrease in Cash and Cash Equivalents (1,794) (2,488)(301) (4,359)
Cash and Cash Equivalents at Beginning of Period 4,715 4,694 3,751
------------ ------------
Cash and Cash Equivalents at End of Period $ 2,9004,414 $ 1,263335
============ ============
The accompanying footnotes are an integral part of the financial statements.
SJG-7SJG-6
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 PronouncementPronouncements - In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which isand in June 2000, FASB issued Statement
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." Both were effective for the first quarter
of our fiscal year ending December 31,beginning January 2001.
This statement establishesThese statements establish 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 ourSJG has identified financial condition and results of operations, which may varyinstruments that
qualify as derivatives. Management believes, based on our useits interpretation of
guidance issued, that the derivative instruments atcontracts qualify for the time of adoption.normal purchases
and normal sales exception and, therefore, no additional disclosure is
required. Subsequent guidance from FASB or the Derivative Implementation Group
could affect the accounting for such transactions later in 2001 and beyond.
SJG-7
Note 2. Income Taxes:
The significant components of federal and state income taxes reflected in
the condensed consolidated statements of income are as follows (in thousands):
SJG-8
Three Months Ended
Nine Months Ended
September 30, September 30,
-------------------March 31,
------------------
2001 2000 1999 2000 1999
-------- --------
-------- --------
Current:
Federal $ (2,981)5,821 $ (2,583) $ 4,524 $ 6,6348,689
State (662) (504) 2,116 2,930
-------- -------- -------- --------2,197 2,891
------- -------
Total Current (3,643) (3,087) 6,640 9,5648,018 11,580
Deferred:
Federal 3,580 984
326 2,952 977
State 137 (131) 409 (393)
-------- -------- -------- --------784 136
------- -------
Total Deferred 1,121 195 3,361 5844,364 1,120
Investment Tax Credit (81) (98) (254) (293)
-------- -------- -------- --------(87) (92)
------- -------
Net Income Taxes $ (2,603) $ (2,990) $ 9,747 $ 9,855
======== ======== ======== ========$12,295 $12,608
======= =======
As of March 31, 2001 and 2000, income taxes due to SJI were approximately
$6.0 and $8.1 million, respectively.
Note 3. Recent Regulatory Actions:
In January 1997, the New Jersey 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
SJG-8
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 February 1999, the Electric Discount and Energy Competition Act became
law. This law established unbundling, where redesigned utility rate structures
allow natural gas and electric consumers to choose their energy supplier. SJG
filed its unbundling proposal in April 1999 and received final BPU approval in
January 2000.
Effective January 10, 2000, the BPU approved full unbundling of SJG's
system. This allows all natural gas consumers to select their natural gas
supplier. As of September 30, 2000, 44,863March 31, 2001, 33,156 of SJG's residential customers had
elected to purchasewere
purchasing their gas commodity from someone other than SJG. The bills of those
using a gas supplier other than SJG are reduced for cost of gas charges and
applicable taxes. The resulting decrease in revenues is offset by a
corresponding decrease in gas costs and taxes under SJG's BPU-approved fuel
clause. SJI'sSJG's net income and 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 is being provided to customers over a two-year period beginning
January 2000, and will approximate $2.5 million plus carrying costs through
December 2001. The majority of thisThis 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 approved was the 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, are being
recovered over a three-year period beginning January 2000.
In April 2000, the BPU approved an appliance service filing 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.
Effective June 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 includedHowever, due to
unprecedented natural gas price run-ups, SJG filed for an additional increase
in October 2000.
On November 16, 2000, SJG received approval to increase its LGAC. The
impact of this increase will be approximately 19.0% to a typical residential
heating customer. The BPU also approved the proposal wascreation of a flexible pricing
mechanism, allowing for five additional 2.0% increases effective for December
2000 and January, February, March and April of 2001. In March 2001, the recoveryBPU
approved additional LGAC rate increases for SJG using a flexible pricing
mechanism. Additional rate increases of projected under-recovered2% in May , June and July 2001 were
approved. In addition, the ruling permits SJG to recover unrecovered gas costs of $26.5
SJG-10
million
as of October 31, 2000 and carrying costs thereon,2001 with interest at 5.5% 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.period,
beginning December 1, 2001. Recoverable interest costs will begin accruing on
April 1, 2001.
SJG-9
Note 4. Retained Earnings:Common Equity:
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
$58.8$76.4 million as of September 30,March 31, 2001.
SJG received an equity infusion of $8 million from SJI during 2000.
Contributions of capital are credited to Other Paid-In Capital and Premium on
Common Stock. Future equity contributions will occur on an as needed basis.
Note 5. Commitments and Contingencies:
Construction and Environmental Commitments - SJG's estimated net cost of
construction and environmental remediation programs for 20002001 totals $45.2$45.0
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.
SJG has successfully entered into settlements with all of its historic
comprehensive general liability carriers regarding the environmental
remediation expenditures at our sites. In addition, we have purchased a
Cleanup Cost Cap Insurance Policy which limits the amount of remediation
expenditures that we will be required to make at eleven of our sites. This
Policy will be in force for a 25-year period at ten sites and for a 30-year
period at one site. The following future cost estimates have not been reduced
by any insurance recoveries from settlements or the Cleanup Cost Cap Insurance
Policy.
Since the early 1980s, SJG accrued environmental remediation costs of
$113.9$122.3 million, of which $62.9$71.3 million was spent as of September 30, 2000.March 31, 2001. 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$148.5 million. We
recorded the lower end of this range as a liability. It is reflected on the
20002001 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
beenwere
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
SJG-10
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 2000 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 condensed consolidated
balance sheet under the captions Current Liabilities and Deferred Credits and
Other Non-Current Liabilities. The deferred debit is a regulatory asset under
FASB No. 71. The BPU's intent, evidenced by current practice, is to allow SJG
to recover the deferred costs after they are spent.
SJG files with the BPU to recover these costs in rates through its RAC.
The BPU has consistently allowed the full recovery over 7-year periods, and SJG
believes this will continue. As of September 30, 2000,March 31, 2001, SJG's unamortized
remediation costs of $14.5$9.9 million are reflected on the condensed consolidated
balance sheet under the caption Regulatory and Other Non-Current Assets. Since
implementing the RAC in 1992, SJG recovered $24.4$25.9 million through rates as of
September 30, 2000.March 31, 2001.
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-12SJG-11
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Overview
South Jersey Gas Company (SJG) is a regulated natural gas distribution company
serving 278,495utility. SJG
distributes natural gas to almost 284,000 customers at September 30, 2000, compared with 270,692
customers at September 30, 1999.in the seven southernmost
counties of New Jersey. SJG alsoalso:
* makes off-system sales of natural gas on a wholesale basis to various
customers on the interstate pipeline system
andsystem;
* transports natural gas purchased directly from producers or suppliers
for our own sales and for some of our customers.customers;
* services appliances via the sale of appliance warranty programs, as
well as on a time and materials basis.
South Jersey Industries, Inc. (SJI) owns all of the common stock of SJG.
Forward-LookingForward 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,national, state and local level;
weather conditions in our marketing areas; changes in commodity costs;
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 September 30, 2000, 44,863March 31, 2001, 33,156 SJG residential
customers participated inchose a natural gas supplier other than the program. Customers'utility. This number
decreased from 47,281 at March 31, 2000 as third party marketers were unable to
SJG-12
offer natural gas at prices competitive with those available to consumers under
regulated utility tariffs. The bills of customers choosing to purchase natural
gas from providers other than the utility 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 or
financial condition or margins.
SJG-13condition.
Energy Adjustment Clauses
SJG's BPUBoard of Public Utilities approved Temperature Adjustment Clause
(TAC) had the following impacts on 2001 and 2000 and 1999 thirdfirst quarter and nine month net earnings:
2001 2000
1999
------ -------------- --------
TAC Adjustment (Decrease) Increase to
Net Income ($ in thousands)
Quarter Ended 9/30 $0 $106
Nine Months Ended 9/30 $1,349 $1,3383/31 $(140) $1,290
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 Nine Months Ended September 30, 2000March 31, 2001
Compared to Three and Nine Months Ended September 30, 1999March 31, 2000
Operating Revenues
Revenues increased $12.1 million and $34.1$72.5 million in the thirdfirst quarter and first nine months of 20002001 compared
with the prior year periods.period. The primary reasons for the increasesincrease were
increased off-system sales, 7,803
additional customers and increasedsales; higher rates resulting from an increaseincreases in the
Levelized Gas Adjustment Clause (LGAC) to recover increasedthat reflect higher gas costs. These
factors more than offset revenue reductionscosts; and 7,856
additional customers. The increase in off-system revenues was due to the continued migration of
firmhigher
prices for natural gas sales to firm transportation. Note, however, that SJG's tariffs are
structured so that profits are derived from the transportationsold. Total volumes of gas not the
sale of the commodity. Consequently, the switch to firm transportation reduced
revenues but did not impact profitability.
Because customer heating needs are minimalsold off-system were lower
in 2001 than in the thirdprior year.
Weather in the first quarter weather
is not material to SJG's operating results. Weather for the nine month periodof 2001 was 1.8%8.1% colder than the prior year.year
period. Weather was 3.6% warmeralso .2% colder for the first nine monthsquarter than the 20-year
average. As a result ofRevisions to SJG's TAC that became effective in October 1998
significantly reduced the TAC, revenuesweather related volatility in our revenues.
Revenues for 20002001 will be closely tied to the 20-year normal temperatures
and not actual weather conditions due to our TAC.conditions.
The following is a comparison of operating revenue and throughput for the
three and nine month periodsperiod ended September 30, 2000March 31, 2001 vs. the same periodsperiod ended September 30, 1999.
SJG-14
Three Months Ended Nine Months Ended
September 30, September 30,March 31,
2000.
SJG-13
1st Quarter
2001 2000
1999 2000 1999
------- ------- -------- --------
Utility Operating Revenues (Thousands):
Firm
Residential $14,911 $12,986 $107,808 $110,547$ 96,359 $ 70,673
Commercial 4,404 3,306 25,895 24,50739,833 16,280
Industrial 559 921 3,576 3,6451,948 2,000
Cogeneration & Electric Generation 3,894 4,259 10,093 7,062648 1,222
Firm Transportation 6,077 5,209 27,952 22,171
------- -------9,432 14,012
-------- --------
Total Firm Utility Operating Revenues 29,845 26,681 175,324 167,932148,220 104,187
Interruptible 308 277 1,140 1,270686 499
Interruptible Transportation 309 305 1,154 1,200312 484
Off-System 32,015 22,704 104,290 77,74767,195 39,226
Capacity Release & Storage 568 870 2,996 2,6001,826 1,861
Other 790 856 2,594 2,676
------- -------1,217 745
-------- --------
Total Utility Operating Revenues $63,835 $51,693 $287,498 $253,425
======= =======$219,456 $147,002
======== ========
Throughput (MMcf):
Firm
Residential 1,331 1,260 12,114 12,8399,157 8,481
Commercial 514 403 3,314 3,2404,214 2,166
Industrial 25 26 181 185148 106
Cogeneration & Electric Generation 707 1,297 1,958 2,04724 138
Firm Transportation 5,135 5,704 19,949 18,368
------- -------5,784 8,465
-------- --------
Total Firm Throughput 7,712 8,690 37,516 36,67919,327 19,356
Interruptible 29 63 134 30759 49
Interruptible Transportation 661 711 2,238 2,645621 840
Off-System 6,948 8,277 28,375 33,0529,470 12,070
Capacity Release & Storage 9,627 8,149 29,561 19,508
------- -------6,054 10,539
-------- --------
Total Throughput 24,977 25,890 97,824 92,191
======= =======35,531 42,854
======== ========
Gas Purchased for Resale
Gas purchased for resale increased $11.5 million and $31.2$72.5 million for the thirdfirst quarter and first nine months of
20002001 compared with the same periodsperiod in 19992000 due principally to increased gas
costs onfor both local distribution and off-system sales. SJG's gas cost during
the first nine monthsquarter of 20002001 averaged $3.61/$6.87/dt compared with $2.28/$2.87/dt in 1999.2000.
Unlike gas costs associated with off-system sales, changes in the cost of gas
sold to utility rate payers doratepayers are not directly effectreflected in Gas Purchased for Resale.Resale as
SJG-14
incurred. Fluctuations in gas costs to rate payersratepayers 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
inLGAC. Higher gas
costs not covered currently arewere reflected in future customer rates.rates via a series of LGAC increases since November
2000. 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
Nine Months Ended
September 30, September 30,March 31,
2001 vs. 2000 vs. 1999 2000 vs. 1999
-------------
-------------
Other Production Expense $5 $10$(18)
Transmission 1 20(23)
Distribution (87) 82(249)
Appliance Service - Net 550 835(138)
Customer Accounts and Services (103) 348250
Sales (29) (34)(36)
Administration and General (1,762) (1,788)(78)
Other 17 (58)
------- -------
($1,408) ($585)
======= =======
Appliance Service - Net increased primarily due to service activity on new
warranty plans sold6
--------
$(286)
========
Distribution expenses decreased in the second and thirdfirst quarter of 2000. The BPU mandated
reallocation2001 as costs
related to our unionized workforce were avoided as a result of costs between utilitya work stoppage
that ended on January 17, 2001. Expenses related to performing critical
operational functions during the work stoppage were recognized under
Administration and non-utility operations as part of the
energy deregulation process in New Jersey also contributed to this increase.General. Customer Accounts and Services costs increased in the first nine months of
2000 due
primarily to higher meter reading expenses. We increased meter
reading frequency to enhance customer service. Costs were additionally
impacted by temporarily increased staffing costs necessary to handle high call
volumes related to the deregulation process in New Jersey and higher bad debt expense.
Administrative and General costs decreased from 1999 levels principally
dueexpenses directly related to lower employee welfare and pension costsa significant increase in addition to lower management
fees charged from SJI to its subsidiaries.gas
costs.
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses
(in thousands):
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
2001 vs. 2000 vs. 1999 2000 vs. 1999
-------------
-------------
Maintenance $66 $1,965$115
Depreciation 290 896263
Income Taxes 387 (108)(313)
Other Taxes 172 255
SJG-16
Maintenance was higher due to higher levels of Remediation Adjustment
Clause (RAC) amortization during the first half of the year. This additional
amortization expense(81)
SJG-15
Depreciation 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. Income Tax changes reflect the impact of changes in pre-tax
income.
Interest Charges
Interest charges were higherincreased in the first nine monthsquarter of 20002001 compared with the
prior year period. IncreasedThe rise in interest expense was due to increased debt
outstanding and higher interest rates in 2000 were mostly offset by recoveries of carrying costs associated
with unrecovered RAC and purchased gas costs.rates. The debt was incurred primarily to
support the expansion and upgrade of SJG's gas transmission and distribution
system.system, as well as higher levels of unrecovered gas costs.
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$160.0 million, of which $46.2$67.5 million was available at September 30, 2000.March
31, 2001. 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):
NineThree Months Ended
September 30,March 31,
2001 vs. 2000 vs. 1999
-------------
Increases/(Decreases):
Net Income Applicable to Common Stock $151($462)
Depreciation and Amortization 998(60)
Provision for Losses on Accounts Receivable 72447
Revenues and Fuel Costs Deferred - Net (8,193)(8,796)
Deferred and Non-Current Income Taxes and
Credits - Net 2,8163,248
Environmental Remediation Costs - Net 9,493Costs-Net 759
Accounts Receivable (6,194)1,939
Inventories (24,906)7,858
Prepayments and Other Current Assets 61259
Prepaid and Accrued Taxes - Net (7,087)(1,152)
Accounts Payable and Other Accrued Liabilities 19,981(11,466)
Other - Net (1,102)
--------(1,192)
-------
Net Cash Provided by Operating
Activities ($13,359)
========8,818)
=======
Depreciation and Amortization are non-cash charges to income and do not
impact cash flow. Changes in depreciation cost reflect the effect of additions
and reductions to fixed assets.
Decreases in Revenues and Fuel Costs Deferred - Net reflect the impact of
payments or credits to customers for amounts previously overcollected and the
undercollection of fuel costs resulting from increases in natural gas costs.
Increases reflect the impact of overcollection of fuel costs or the recovery of
previously deferred fuel costs.
Changes in Deferred and Non-Current Income Taxes and Credits - Net
represent the differences between taxes accrued and amounts paid. Generally,
deferred income taxes related to deferred fuel costs will be paid in the next
year.
Changes in Environmental Remediation Costs - Net represent the differences
between amounts expended for environmental remediation compared with amounts
collected under the RAC and insurance recoveries.
Changes in Accounts Receivable are primarily due to changes in off-system
sales activity and 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.
SJG-17
Regulatory Matters
Rate Actions
In August 2000, SJG filed its annual LGAC, TAC and Demand Side Management
Clause for 2000-2001. The filing requested a $35.0 million increase to its
LGAC. However, due to unprecedented natural gas price run-ups, SJG filed for
an additional increase in October 2000.
On November 16, 2000, SJG received approval to increase its LGAC. The
impact of this increase was approximately 19.0% to a typical residential
heating customer. The BPU also approved the creation of a flexible pricing
mechanism, allowing for five additional 2.0% increases effective for December
2000 and January, February, March and April of 2001. In March 2001, the BPU
approved additional LGAC rate increases for SJG using a flexible pricing
mechanism. Additional rate increases of 2% in May, June and July 2001 were
approved. In addition, the ruling permits SJG to recover unrecovered gas costs
as of October 31, 2001 with interest at 5.5% over a three-year period,
beginning December 1, 2001. Recoverable interest costs will begin accruing on
April 1, 2001.
Other matters are incorporated by reference to Note 3 to the condensed
consolidated financial statements included as part of this report.
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
ninethree months of 20002001 amounted to $22.0$0.8 million. The net costs for 2000, 2001, 2002 and
20022003 are estimated at approximately $45.2$45.0 million, $44.4$50.7 million and $51.9$48.9
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.
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, September 30,
----------------------------------------March 31,
-------------------------------------------- -------------
1995
1996 1997 1998 1999 2000 2.3x2001
---- ---- ---- ---- ---- ----
2.5x 2.6x 2.2x 2.5x 2.5x 2.6x
SJG-18
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-19Other Events
SJG employs 401 workers who are members of two separate unions. Following
the expiration of a labor contract, the 354 members of our largest union
commenced a work stoppage on November 9, 2000. The remaining 47 unionized
employees also commenced a work stoppage on December 13, 2000. SJG's unionized
employees returned to work on January 17, 2001, agreeing to a new 4-year
contract. Key elements of the contract include employee contributions toward
healthcare costs, wage increases, revised wage structures for new employees,
and revisions to sick-time policies. During the work stoppage, operation
critical work was conducted mostly by SJI's non-union personnel. As a result
of the nature of SJG's operations, the work stoppage did not materially effect
the operational or financial condition of SJG.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to interest rate risk exposure related to short-term debt.debt and, to
a much lesser degree, commodity price risk. For information regarding our
exposure related to this risk,these risks, see Item 7A in our Form 10-K for the year
ended December 31, 1999.2000. Our market risks have not materially changed from
December 31, 1999.2000.
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 11.10.
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. ExhibitsNone
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: November 6, 2000May 15, 2001 By: /s/ David A. Kindlick
David A. Kindlick
Senior Vice President, Finance & Ratesand Treasurer
Dated: November 6, 2000May 15, 2001 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.George L. Baulig
George L. Baulig
Senior Vice President and Treasurer& Corporate Secretary
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