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                       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, 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 August 7,November 2, 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.

                                 - 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, ----------------------------------------------- 2001 2000 ----------- --------------------- ---------- Operating Revenues: Utility $ 81,39557,592 $ 76,02663,422 Other 245 635 ----------- -----------216 413 ---------- ---------- Total Operating Revenues 81,640 76,661 ----------- -----------57,808 63,835 ---------- ---------- Operating Expenses: Gas Purchased for Resale 58,560 52,94840,007 46,345 Utility Operations 9,458 9,8279,952 9,544 Other Operations 626 514347 426 Maintenance 1,788 1,7201,554 1,350 Depreciation 5,251 4,9895,313 5,056 Income Taxes (409) (258)(2,599) (2,603) Energy and Other Taxes 1,864 2,036 ----------- -----------1,415 1,664 ---------- ---------- Total Operating Expenses 77,138 71,776 ----------- -----------55,989 61,782 ---------- ---------- Operating Income 4,502 4,885 ----------- -----------1,819 2,053 ---------- ---------- Interest Charges: Long-Term Debt 4,092 3,6864,545 4,268 Short-Term Debt and Other 595 1,172 ----------- -----------584 1,093 ---------- ---------- Total Interest Charges 4,687 4,858 ----------- ----------- (Loss)Income5,129 5,361 ---------- ---------- Loss Before Preferred Dividend Requirements (185) 27(3,310) (3,308) Preferred Stock Dividend Requirements 36 4033 35 Preferred Securities Dividend Requirements 731 730 ----------- -----------731 ---------- ---------- Net Loss Applicable to Common Stock $ (952)(4,074) $ (743) =========== ===========(4,074) ========== ========== Average Shares of Common Stock Outstanding 2,339 2,339 =========== ===================== ========== Earnings Per Common Share $ (0.41)(1.74) $ (0.32) =========== ===========(1.74) ========== ========== Dividends Declared Per Common Share $ 1.87 $ 1.79 =========== ===========0.94 ========== ========== 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, ----------------------------------------------- 2001 2000 ----------- --------------------- ---------- Operating Revenues: Utility $ 300,210357,802 $ 222,653286,075 Other 886 1,010 ----------- -----------1,102 1,423 ---------- ---------- Total Operating Revenues 301,096 223,663 ----------- -----------358,904 287,498 ---------- ---------- Operating Expenses: Gas Purchased for Resale 219,900 141,766259,907 188,111 Utility Operations 18,977 19,63828,929 29,182 Other Operations 980 8621,327 1,288 Maintenance 4,673 4,4906,227 5,840 Depreciation 10,434 9,90915,747 14,965 Income Taxes 11,886 12,3509,287 9,747 Energy and Other Taxes 6,280 6,371 ----------- -----------7,695 8,035 ---------- ---------- Total Operating Expenses 273,130 195,386 ----------- -----------329,119 257,168 ---------- ---------- Operating Income 27,966 28,277 ----------- -----------29,785 30,330 ---------- ---------- Interest Charges: Long-Term Debt 8,324 7,51912,869 11,787 Short-Term Debt and Other 1,929 2,366 ----------- -----------2,513 3,459 ---------- ---------- Total Interest Charges 10,253 9,885 ----------- -----------15,382 15,246 ---------- ---------- Income Before Preferred Dividend Requirements 17,713 18,39214,403 15,084 Preferred Stock Dividend Requirements 72 80105 115 Preferred Securities Dividend Requirements 1,461 1,461 ----------- -----------2,192 2,192 ---------- ---------- Net Income Applicable to Common Stock $ 16,18012,106 $ 16,851 =========== ===========12,777 ========== ========== Average Shares of Common Stock Outstanding 2,339 2,339 =========== ===================== ========== Earnings Per Common Share $ 6.925.18 $ 7.20 =========== ===========5.46 ========== ========== Dividends Declared Per Common Share $ 3.745.61 $ 3.59 =========== ===========4.53 ========== ========== 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, --------------------------------------------------- ------------ 2001 2000 2000 ------------ ------------ ------------ Assets Property, Plant and Equipment: Utility Plant, at original cost $ 781,685791,826 $ 740,265750,498 $ 763,860 Accumulated Depreciation (215,429) (200,076)(218,422) (203,969) (208,292) Gas Plant Acquisition Adjustment - Net 1,664 1,7391,645 1,720 1,701 ------------ ------------ ------------ Property, Plant and Equipment - Net 567,920 541,928575,049 548,249 557,269 ------------ ------------ ------------ Available-for-Sale Securities 2,689 1,9552,962 2,295 2,494 ------------ ------------ ------------ Current Assets: Cash and Cash Equivalents 3,962 10,2503,311 2,900 4,715 Accounts Receivable 58,337 47,93833,221 34,175 67,803 Unbilled Revenues 10,953 5,1277,100 7,433 43,803 Provision for Uncollectibles (1,732)(1,931) (860) (1,754) Natural Gas in Storage, average cost 41,487 24,64963,758 54,977 31,769 Materials and Supplies, average cost 4,061 3,9784,033 3,807 4,037 Prepaid Taxes 13,872 9,56913,355 8,665 3,960 Prepayments and Other Current Assets 3,072 2,8832,837 2,702 2,640 ------------ ------------ ------------ Total Current Assets 134,012 103,534125,684 113,799 156,973 ------------ ------------ ------------ Accounts Receivable - Merchandise 134 49023 376 277 ------------ ------------ ------------ Regulatory and Other Non-Current Assets: Environmental Remediation Costs: Expended - Net 11,391 18,38612,352 14,527 18,474 Liability for Future Expenditures 51,029 51,029 51,029 Gross Receipts and Franchise Taxes 2,476 2,9192,365 2,809 2,698 Income Taxes - Flowthrough Depreciation 10,064 11,0429,819 10,797 10,553 Deferred Fuel Cost - Net 37,376 13,61544,409 23,811 28,810 Deferred Postretirement Benefit Costs 4,347 4,7254,252 4,630 4,536 Other 8,887 6,9119,409 8,352 8,970 ------------ ------------ ------------ Total Regulatory and Other Non-Current Assets 125,570 108,627133,635 115,955 125,070 ------------ ------------ ------------ Total Assets $ 830,325837,353 $ 756,534780,674 $ 842,083 ============ ============ ============ 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, --------------------------------------------------- ------------ 2001 2000 2000 ------------ ------------ ------------ 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 125,817 125,817 125,817 Retained Earnings 72,866 66,90864,416 60,634 65,436 ------------ ------------ ------------ Total Common Equity 204,531 198,573196,081 192,299 197,101 ------------ ------------ ------------ Preferred Stock and Securities: Redeemable Cumulative Preferred - Par Value $100 per share, Authorized 41,966, 43,104 and 43,104 shares, respectively Outstanding: Series A, 4.7% - 0, 300 and 300 shares 0- 30 30 Series B, 8% - 16,904, 17,742 and 17,742 shares 1,690 1,774 1,774 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 36,690 36,804 36,804 ------------ ------------ ------------ Long-Term Debt 195,247 172,123230,247 207,123 204,981 ------------ ------------ ------------ Total Capitalization 436,468 407,500463,018 436,226 438,886 ------------ ------------ ------------ Current Liabilities: Notes Payable 138,600 107,700125,500 93,800 113,900 Current Maturities of Long-Term Debt 11,876 11,876 11,876 Accounts Payable 35,856 43,16327,697 51,552 75,103 Customer Deposits 5,516 5,3675,646 5,284 5,366 Environmental Remediation Costs 15,872 12,534 15,872 Taxes Accrued 483 5,223971 2,288 442 Dividends Payable 4,409 - 4,236 Interest Accrued and Other Current Liabilities 11,017 5,949 12,7968,105 7,837 8,560 ------------ ------------ ------------ Total Current Liabilities 219,220 191,812200,076 185,171 235,355 ------------ ------------ ------------ Deferred Credits and Other Non-Current Liabilities: Deferred Income Taxes - Net 116,274 95,385114,395 96,303 107,947 Environmental Remediation Costs 35,157 38,495 35,157 Pension and Other Postretirement Benefits 11,148 11,41511,795 11,520 12,314 Investment Tax Credits 4,340 4,6764,253 4,595 4,513 Other 7,718 7,2518,659 8,364 7,911 ------------ ------------ ------------ Total Deferred Credits and Other Non-Current Liabilities 174,637 157,222174,259 159,277 167,842 ------------ ------------ ------------ Commitments and Contingencies (Note(See Note 4) Total Capitalization and Liabilities $ 830,325837,353 $ 756,534780,674 $ 842,083 ============ ============ ============ 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 (UNAUDITED) (In Thousands)
SixNine Months Ended JuneSeptember 30, ---------------------------------------------------- 2001 2000 ----------- ----------------------- ------------ Cash Flows from Operating Activities: Net Income Applicable to Common Stock $ 16,18012,106 $ 16,85112,777 Adjustments to Reconcile Net Income to Cash Flows Provided by Operating Activities: Depreciation and Amortization 11,586 11,51517,464 17,192 Provision for Losses on Accounts Receivable 680 4531,046 740 Revenues and Fuel Costs Deferred - Net (8,566) (441)(15,599) (10,637) Deferred and Non-Current Income Taxes and Credits - Net 8,554 2,0686,787 3,107 Environmental Remediation Costs - Net 7,083 7,3166,122 11,175 Changes in: Accounts Receivable 41,614 4,77070,416 15,940 Inventories (9,742) 2,298(31,985) (27,859) Prepayments and Other Current Assets (432) (422)(197) (241) Prepaid and Accrued Taxes - Net (9,871) (911)(8,866) (2,942) Accounts Payable and Other Accrued Liabilities (40,876) 3,849(51,783) 14,043 Other - Net (1,252) 317 ----------- -----------939 1,407 ------------ ------------ Net Cash Provided by Operating Activities 14,958 47,663 ----------- -----------6,450 34,702 ------------ ------------ Cash Flows from Investing Activities: Capital Expenditures, Cost of Removal and Salvage (21,561) (21,627)(34,244) (33,222) Purchase of Available-for-Sale Securities (252) (202) ----------- -----------(571) (506) ------------ ------------ Net Cash Used in Investing Activities (21,813) (21,829) ----------- -----------(34,815) (33,728) ------------ ------------ Cash Flows from Financing Activities: Net BorrowingBorrowings from (Repayments of) Lines of Credit 24,700 (11,200)11,600 (25,100) Proceeds from Sale of Long-Term Debt 35,000 35,000 Principal Repayments of Long-Term Debt (9,734) (8,438) Dividends on Common Stock (8,750) (8,400)(10,600) Repurchase of Preferred Stock (114) (240) Additional Investment by Shareholder 0- 8,000 ----------- -----------Payments for Issuance of Long-Term Debt (1,041) (1,390) ------------ ------------ Net Cash Provided by (Used in) Financing Activities 6,102 (20,278) ----------- -----------26,961 (2,768) ------------ ------------ Net (Decrease)IncreaseDecrease in Cash and Cash Equivalents (753) 5,556(1,404) (1,794) Cash and Cash Equivalents at Beginning of Period 4,715 4,694 ----------- ----------------------- ------------ Cash and Cash Equivalents at End of Period $ 3,9623,311 $ 10,250 =========== ===========2,900 ============ ============ 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 Pronouncements - In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," and in June 2000, FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." Both were effective for our fiscal year beginning January 2001. These statements establish accounting and reporting standards for derivative instruments, including those embedded in other contracts, and for hedging activities. They require recognizing derivatives as assets or liabilities at fair value on the balance sheet. SJG has identified financial instruments that qualify as derivatives. Management believes, based on its interpretation of guidance issued, that the derivative contracts qualify for the 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.the future. In June 2001, the FASB issued Statement No. 141, "Business Combinations" andCombinations," FASB No. 142, "Goodwill and Other Tangible Assets". and FASB No. 143, "Accounting for Asset Retirement Obligations." FASB No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. FASB No. 142 addresses the initial recognition and measurement of intangible SJG-8 assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. FASB No. 142 provides SJG-8 that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. FASB No. 143 establishes accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SJG willexpects to adopt FASB No.Nos. 141 and 142 for its fiscal year beginning January 1, 2002.2002 and FASB 143 for its fiscal year beginning January 1, 2003. We are currently evaluating the effects of its adoption;these pronouncements; however, it isthey are not expected to have a material impact on SJG's financial condition or results of operations. Note 2. 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 $7.8 million. SJG keeps 100% of pre-tax margins up to the threshold level and 20% of 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 September 1999, the BPU approved an annual recovery level of $6.5 million for remediation costs expended from August 1995 through July 1998. In January 2000, the BPU approved the recovery of carrying costs on unrecovered remediation costs and a proposal by SJG to keep its current Remediation Adjustment Clause (RAC) rate in effect through October 2002. However, due to substantial RAC insurance recoveries, SJG filed for a RAC rate decrease in October 2001. This proposal would reduce the annual recovery level to $4.2 million, if approved. 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, 2001, 31,74536,393 of SJG's residential customers were 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. SJG's net income and financial condition 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 SJG-9 December 2001. 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. SJG-9 Also approved was a modification to SJG's LGAC whereby under-recoveredunderrecovered 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. On November 16, 2000, SJG received approval to increase its LGAC in response to unprecedented natural gas price run-ups during 2000. The impact of this initial increase was approximately 19.0% to a typical residential heating customer. The BPU also approved the creation of a flexible pricing mechanism, allowing additional 2.0% increases each month from December 2000 through July 2001. In addition, the ruling permits SJG to recover unrecovered gas costs as of October 31, 2001 with interest at 5.5% or 5.75% over a three-year period, beginning December 1, 2001. The higher interest rate is applicable if SJG does not seek an LGAC rate increase for the next LGAC year. Recoverable interest costs began accruing on April 1, 2001. Note 3. 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 $71.0$62.6 million as of JuneSeptember 30, 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 4. Commitments and Contingencies: Construction and Environmental Commitments - SJG's estimated cost of construction and environmental remediation programs for 2001 totals $45.0$47.8 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 reservesaccrue liabilities when these claims become apparent.apparent for amounts we believe these claims may be settled. 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-10 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 SJG-10 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 $125.0$126.8 million, of which $73.9$75.8 million was spent as of JuneSeptember 30, 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 $148.5 million. We recorded the lower end of this range as a liability. It is reflected on the 2001 condensed consolidated balance sheets 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 were 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 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 expenditures through the RAC. SJG's current recovery level includes remediation costs expended through July 1998 and petitions to recover costs through July 20002001 are pending. 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 sheets 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, 2001, SJG's unamortized remediation costs of $11.3$12.3 million are reflected on the condensed consolidated balance sheets under the caption Regulatory and Other Non-Current Assets. Since implementing the RAC in 1992, SJG recovered $27.2$28.0 million through rates as of JuneSeptember 30, 2001. SJG-11 Note 5. Subsequent Event:Long-Term Debt: In July 2001, SJG issued the remaining $35 million of debt under its Medium Term Note Program. Notes totaling $10 million were issued at 6.74%, maturing in 2011; notes totaling $15 million were issued at 6.57%, maturing in 2011; and notes totaling $10 million were issued at 6.50%, maturing in 2016. SJG-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Financial Condition Overview South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG distributes natural gas to almost 284,000284,240 customers in the seven southernmost counties of New Jersey. SJG also: . makes off-system sales of natural gas on a wholesale basis to various customers on the interstate pipeline system; . transports natural gas purchased directly from producers or suppliers for ourits own sales and for some of ourits 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 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, 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 1997 under a pilot program. As of JuneSeptember 30, 2001, 31,74536,393 SJG residential customers chose a natural gas supplier other than the utility. This number decreased from 51,92844,863 at JuneSeptember 30, 2000 as third party marketers were SJG-13 unable to SJG-13 offer natural gas at prices competitive with those available to consumers under regulated utility tariffs. During the second quarterspring of 2001, the market price of natural gas became comparable to utility prices. Under these conditions, the likelihood thatConsequently, third party marketers will increaseincreased customer acquisition efforts rises.efforts. 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. Energy Adjustment Clauses SJG's Board of Public Utilities (BPU) approved Temperature Adjustment Clause (TAC) had the following impactsimpact on 2001 and 2000 secondthird quarter and sixnine month net earnings: 2001 2000 -------- -------- TAC Adjustment Increase to Net Income ($ in thousands) Quarter Ended JuneSeptember 30 $272 $59 Six$0 $0 Nine Months Ended JuneSeptember 30 $132 $1,349 While the revenue and income impactsimpact 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, 2001 Compared to Three and SixNine Months Ended JuneSeptember 30, 2000 Operating Revenues Revenues increased $5.0 million and $77.4decreased $6.0 million in the secondthird quarter, andbut increased $71.4 million in the first sixnine months of 2001 compared with the prior year periods. The primary reasons for the increasesBoth periods were positively impacted by increased rates resulting from an increase in the Levelized Gas Adjustment Clause (LGAC) that reflects higher gas costs, the return of residential customers to firm gas sales from firm transportation and, 6,4535,745 additional customers. A large number of residential customers resumed purchasing natural gas from SJG as third party gas marketers were unable to offer competitive prices.prices through the spring of this year. Increased off-system sales also had a significant positive impact on sixnine month results. The increase in off-system revenues was due to higher prices for natural gas sold.sold during the first half of the year. Significantly lower gas prices experienced during the third quarter completely offset the positive factors discussed previously, causing the revenue decline for the three month period. Total volumes of gas sold off-system were lower in boththe first three quarters of 2001 than in the prior year. SJG-14 Weather in the secondthird quarter of 2001 was 12.9%2.3% warmer than the prior year period. Weather for the six-monthnine-month period was 4.0%3.8% colder than in 2000. Weather was 7.9% warmer82.6% colder and 1.2%0.1% warmer for the secondthird quarter and first sixnine months, respectively, than the 20-year average.averages. Even large percentage changes in weather experienced during the third quarter typically have a minimal impact on revenues. The number of degree days experienced during the period is very small, rarely sufficient for our customers to use their heaters. Revenues for 2001 will be more closely tied to the 20-year normal temperatures and notthan actual weather conditions due to our TAC. The following is a comparison of operating revenue and throughput for the three- and six-monthnine-month periods ended JuneSeptember 30, 2001 and the same periods ended JuneSeptember 30, 2000. Three Months Ended SixNine Months Ended JuneSeptember 30, JuneSeptember 30, 2001 2000 2001 2000 -------- -------- -------- -------- Operating Revenues (Thousands): Firm Residential $ 28,464 $ 22,224 $124,823 $ 92,897$18,243 $14,911 $143,067 $107,808 Commercial 11,692 5,212 51,525 21,4926,922 4,404 58,447 25,895 Industrial 555 1,017 2,503 3,017497 559 2,999 3,576 Cogeneration & Electric Generation 2,009 4,977 2,657 6,1993,929 3,894 6,586 10,093 Firm Transportation 5,027 7,862 14,459 21,8745,363 6,077 19,822 27,952 -------- -------- -------- -------- Total Firm Operating Revenues 47,747 41,292 195,967 145,47934,954 29,845 230,921 175,324 Interruptible 251 333 937 832236 308 1,173 1,140 Interruptible Transportation 285 361 597 845284 309 881 1,154 Off-System 31,478 33,049 98,673 72,27520,530 32,015 119,203 104,290 Capacity Release & Storage 1,022 567 2,848 2,4281,130 568 3,978 2,996 Other 857 1,059 2,074 1,804674 790 2,748 2,594 -------- -------- -------- -------- Total Operating Revenues $81,640 $76,661 $301,096 $223,663$57,808 $63,835 $358,904 $287,498 ======== ======== ======== ======== Throughput (MMcf): Firm Residential 2,215 2,302 11,372 10,7831,259 1,331 12,631 12,114 Commercial 1,091 634 5,305 2,800617 514 5,922 3,314 Industrial 13 25 50 173 156186 181 Cogeneration & Electric Generation 352 1,113 376 1,2511,021 707 1,397 1,958 Firm Transportation 4,802 6,349 10,586 14,8145,353 5,135 15,939 19,949 -------- -------- -------- -------- Total Firm Throughput 8,485 10,448 27,812 29,8048,263 7,712 36,075 37,516 Interruptible 57 56 116 10541 29 157 134 Interruptible Transportation 609 737 1,230 1,577611 661 1,841 2,238 Off-System 6,153 9,357 15,623 21,4276,257 6,948 21,880 28,375 Capacity Release & Storage 5,673 9,395 11,727 19,9347,321 9,627 19,048 29,561 -------- -------- -------- -------- Total Throughput 20,977 29,993 56,508 72,84722,493 24,977 79,001 97,824 ======== ======== ======== ======== SJG-15 Gas Purchased for Resale Gas purchased for resale increased $5.6decreased $6.3 million and $78.1increased $71.8 million for the secondthird quarter and first sixnine months of 2001 compared with the same periods in 2000 due principally to increased2000. Higher gas costs for both local distribution and off-system sales.sales were responsible for the nine-month comparison. However, the cost of gas sold off-system was comparatively lower in the third quarter of 2001. SJG's gas cost during 2001 averaged $5.91/$5.25/dt compared with $3.23/$3.61/dt in the first sixnine months of 2000. Unlike gas costs associated with off-system sales, changes in the unit cost of gas sold to utility rate payers are not reflected in Gas Purchased for Resale as incurred. 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). Higher gas costs are reflected in rates via a series of monthly LGAC increases sincebetween November 2000.2000 and July 2001. Gas supply sources include contract and open-market purchases. SJG secures and maintains its own gas supplies to serve its customers. Operations A summary of net changes in Utility Operations and Other Operations (in thousands): Three Months Ended SixNine Months Ended JuneSeptember 30, JuneSeptember 30, 2001 vs. 2000 2001 vs. 2000 ------------- ------------- Other Production Expense ($2) $(20)9) $(29) Transmission 7 (16)(10) (26) Distribution (249) (498)(17) (515) Appliance Service - Net 62 (76)190 114 Customer Accounts and Services 16 266208 474 Sales (35) (71)29 (42) Administration and General (168) (246)17 (229) Other 112 118(79) 39 -------- -------- ($257) $(543)$329 $(214) ======== ======== Distribution expenses decreased in the first quarter of 2001 as costs related to our unionized workforce were avoided as a result of a work stoppage that ended on January 17, 2001. Further reductions occurred infor the second quarteryear-to- date through decreases in overtime expenses. Expenses related to performing critical operational functions during the work stoppage were recognized under Administration and General. Offsetting these expenses in the Administration and General account was a reallocation of costs among other expense categories. The reallocation was BPU mandated as part of the energy deregulation process in New Jersey. Customer Accounts and Services rose due to a third quarter increase to the allowance for uncollectible accounts. Higher meter reading costs resulting from customer additions and fewer estimated meter reads were factors for the nine-month period. SJG-16 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, 2001 vs. 2000 2001 vs. 2000 ------------- ------------- Maintenance $68 $183$204 $387 Depreciation 262 525257 782 Income Taxes (151) (464)4 (460) Energy and Other Taxes (172) (91)(249) (340) Maintenance expense increased during both periods primarily due to the deferral last year of expenses associated with the Remediation Adjustment Clause (RAC). Higher levels of RAC recoveries this year eliminated the need to defer these expenses. RAC related expenses do not affect earnings, as an offsetting amount is recognized in revenues. 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 lower in the secondthird quarter of 2001 compared with the prior year period. Increased debt outstanding was offset by lower interest rates and 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, as well as higher levels of unrecovered gas costs. Interest expense for the sixnine month period was higher than the same period in 2000 mostly due to expenses associated with 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 $155.0$175.0 million, of which $16.4$49.5 million was available at JuneSeptember 30, 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): SixNine Months Ended JuneSeptember 30, 2001 vs. 2000 ------------- Increases/(Decreases): Net Income Applicable to Common Stock ($671) Depreciation and Amortization 71272 Provision for Losses on Accounts Receivable 227306 Revenues and Fuel Costs Deferred - Net (8,125)(4,962) Deferred and Non-Current Income Taxes and Credits - Net 6,4863,680 Environmental Remediation Costs-Net (233)(5,053) Accounts Receivable 36,84454,476 Inventories (12,040)(4,126) Prepayments and Other Current Assets (10)44 Prepaid and Accrued Taxes - Net (8,960)(5,924) Accounts Payable and Other Accrued Liabilities (44,725)(65,826) Other - Net (1,569) ---------(468) -------- Net Cash Provided by Operating Activities ($32,705) =========28,252) ======== 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. SJG-18 Changes in Inventories reflect the impact of seasonal requirements, temperatures and commodity price changes. Changes in Prepaid and Accrued Taxes - Net reflect the impact of differences between taxes paid and taxes accrued. Significant timing differences exist in cash flows during the year. Approximately 50% of SJG's taxes are paid in installments during the first half of the year and the remaining 50% are paid on May 15 of each year. SJG uses short-term borrowings to pay taxes, resulting in a temporary increase in the short-term debt level. The carrying costs of timing differences are recognized in base utility rates. 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. Regulatory Matters Rate Actions 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% or 5.75% over a three-year period, beginning December 1, 2001. The higher interest rate becomes effective only if SJG does not file for an increase in the LGAC rate for the next LGAC year. Recoverable interest costs began accruing on April 1, 2001. Other matters are incorporated by reference to Note 2 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 sixnine months of 2001 amounted to $14.5$28.1 million. The costs for 2001, 2002 and 2003 are estimated at approximately $45.0$47.8 million, $50.7$59.7 million and $48.9$64.2 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-19 In July 2001, SJG issued a total of $35 million of debt under its Medium Term Note program (MTN). Notes totaling $10 million were issued at 6.74%, maturing in 2011; notes totaling $15 million were issued at 6.57%, maturing in 2011; and notes totaling $10 million were issued at 6.50%, maturing in 2016. 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, ------------------------------------------------------------------------------------------------ ------------- 1996 1997 1998 1999 2000 2001 2.5x 2.6x 2.2x 2.5x 2.6x 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-20 Item 3. Quantitative and Qualitative Disclosures About Market Risks of the Company We have exposure to interest rate risk related to short-term debt and, to a much lesser degree, commodity price risk. For information regarding our exposure related to these risks, see Item 7A in our Form 10-K for the year ended December 31, 2000. Our market risks have not materially changed from December 31, 2000. SJG-21SKG-21 PART II -- OTHER INFORMATION Item l. Legal Proceedings Information required by this Item is incorporated by reference to Part I, Item 1, Note 5,4, beginning on page 10. Item 6. Exhibits and Reports on Form 8-K NoneOn July 12, 2001, July 13, 2001 and July 20, 2001, 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-22 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, 2001November 13, 20011 By: /s/ David A. Kindlick David A. Kindlick Senior Vice President, Finance and Treasurer Dated: August 14,November 13, 2001 By: /s/ George L. Baulig George L. Baulig Senior Vice President & Corporate Secretary SJG-22SJG-23