Page 1 of 2729
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, 1998 Commission File Number 1-12899
SOUTH JERSEY GAS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 22-0398330
(State of incorporation) (IRS employer identification no.)
Number One1 South Jersey Plaza, Route 54, 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 AugustNovember 5, 1998, 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 2729
- Cover Page -
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements - See Pages 3 through 1314
SJG-2
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED (LOSS) INCOMELOSS (UNAUDITED)
(In Thousands Except for Per Share Data)
Three Months Ended
JuneSeptember 30,
-----------------------------
1998 1997
------------ ------------
OPERATING REVENUES:Operating Revenues:
Utility $51,737 $57,822$43,097 $49,635
Other 482 521383 441
------------ ------------
Total Operating Revenues 52,219 58,34343,480 50,076
------------ ------------
OPERATING EXPENSES:Operating Expenses:
Gas Purchased for Resale 30,426 31,95126,259 31,483
Utility Operations 9,928 9,47110,207 10,149
Other Operations 511 500418 404
Maintenance 1,271 1,5341,116 1,552
Depreciation 4,256 3,9674,318 4,027
Federal and State Income Taxes (295) 486
State, Local and(2,329) (1,799)
Other Taxes 2,066 5,2771,575 3,149
------------ ------------
Total Operating Expenses 48,163 53,18641,564 48,965
------------ ------------
OPERATING INCOME 4,056 5,157Operating Income 1,916 1,111
------------ ------------
INTEREST CHARGES:Interest Charges:
Long-Term Debt 2,944 3,9163,646 3,971
Short-Term Debt 619 3691,269 248
Other 127 110108 105
------------ ------------
Total Interest Charges 3,690 4,3955,023 4,324
------------ ------------
INCOME BEFORE PREFERRED DIVIDEND REQUIREMENTS 366 762Loss Before Preferred Dividend Requirements (3,107) (3,213)
Preferred Stock Dividend Requirements 41 42 43
Preferred Securities Dividend Requirements 1,461 471731 731
------------ ------------
NET (LOSS) INCOME APPLICABLE TO COMMON STOCKNet Loss Applicable to Common Stock ($1,137) $2483,879) ($3,986)
============ ============
AVERAGE SHARES OF COMMON STOCK OUTSTANDINGAverage Shares of Common Stock Outstanding 2,339 2,339
============ ============
(LOSS) EARNINGS PER COMMON SHAREEarnings Per Common Share ($0.49) $0.111.66) ($1.70)
============ ============
DIVIDENDS PAID PER COMMON SHAREDividends Declared Per Common Share $1.830 $1.635
============ ============
The accompanying notes to the financial statementsfootnotes are an integral part of thesethe financial statements.
SJG-3
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
SixNine Months Ended
JuneSeptember 30,
-----------------------------
1998 1997
------------ ------------
OPERATING REVENUES:Operating Revenues:
Utility $159,900 $183,888$202,997 $233,523
Other 804 1,0421,224 1,483
------------ ------------
Total Operating Revenues 160,704 184,930204,221 235,006
------------ ------------
OPERATING EXPENSES:Operating Expenses:
Gas Purchased for Resale 91,601 101,821117,860 133,304
Utility Operations 19,519 18,85129,726 29,000
Other Operations 877 9351,307 1,339
Maintenance 2,863 3,0013,979 4,553
Depreciation 8,423 7,85212,741 11,879
Federal and State Income Taxes 6,972 8,912
State, Local and7,120 7,113
Other Taxes 8,355 18,4097,456 21,558
------------ ------------
Total Operating Expenses 138,610 159,781180,189 208,746
------------ ------------
OPERATING INCOME 22,094 25,149Operating Income 24,032 26,260
------------ ------------
INTEREST CHARGES:Interest Charges:
Long-Term Debt 6,783 7,28911,182 11,261
Short-Term Debt 1,116 1,7222,386 1,969
Other 236 209344 314
------------ ------------
Total Interest Charges 8,135 9,22013,912 13,544
------------ ------------
INCOME BEFORE PREFERRED DIVIDEND REQUIREMENTS 13,959 15,929Income Before Preferred Dividend Requirements 10,120 12,716
Preferred Stock Dividend Requirements 84 86125 128
Preferred Securities Dividend Requirements 2,192 4711,202
------------ ------------
NET INCOME APPLICABLE TO COMMON STOCK $11,683 $15,372Net Income Applicable to Common Stock $7,803 $11,386
============ ============
AVERAGE SHARES OF COMMON STOCK OUTSTANDINGAverage Shares of Common Stock Outstanding 2,339 2,339
============ ============
EARNINGS PER COMMON SHARE $4.99 $6.57Earnings Per Common Share $3.34 $4.87
============ ============
DIVIDENDS PAID PER COMMON SHARE $3.465 $3.270Dividends Declared Per Common Share $5.295 $4.906
============ ============
The accompanying notes to the financial statementsfootnotes are an integral part of thesethe financial statements.
SJG-4
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETSHEETS
(In Thousands)
(Unaudited)
JuneSeptember 30, December 31,
------------------------- -------------
1998 1997 1997
------------ ------------ -------------
ASSETS
PROPERTY, PLANT AND EQUIPMENT:Assets
Property, Plant and Equipment:
Utility Plant, at original cost $642,846 $598,301$654,961 $607,395 $619,489
Accumulated Depreciation (173,614) (163,267)(176,367) (164,700) (167,176)
Gas Plant Acquisition Adjustment - Net 1,888 1,9631,869 1,944 1,926
------------ ------------ -------------
Property, Plant and Equipment - Net 471,120 436,997480,463 444,639 454,239
------------ ------------ -------------
CURRENT ASSETS:Available-for-Sale Securities 666 0 0
------------ ------------ -------------
Current Assets:
Cash and Cash Equivalents 2,686 3,2741,134 3,684 6,596
Accounts Receivable:
Customers 23,227 27,571 25,303Receivable 12,680 18,720 30,116
Unbilled Revenues 3,102 3,5524,163 4,220 17,263
Merchandise 2,293 1,854 1,977
Other 674 715 2,836
Provision for Uncollectibles (1,032) (1,032) (1,032)
Natural Gas in Storage, average cost 19,827 15,03828,194 26,600 23,877
Materials and Supplies, average cost 4,244 4,0463,973 3,954 4,509
Prepaid State and Local Taxes 15,345 10,98013,599 8,513 566
Prepayments and Other Current Assets 2,336 1,9951,698 2,386 1,661
------------ ------------ -------------
Total Current Assets 72,702 67,99364,409 67,045 83,556
------------ ------------ -------------
ACCOUNTS RECEIVABLEAccounts Receivable - MERCHANDISE 1,384 1,852Merchandise 1,121 1,547 1,449
------------ ------------ -------------
REGULATORY AND OTHER NON-CURRENT ASSETS:Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 21,301 17,06021,345 17,805 21,041
Liability for Future Expenditures 50,697 52,400 52,400
Gross Receipts & Franchise Taxes 3,806 4,2503,696 4,139 4,028
Income Taxes - Flowthrough Depreciation 13,510 14,48813,265 14,243 13,999
Deferred Fuel Costs - Net 0 04,555 493 3,674
Deferred Postretirement Benefit Costs 5,837 5,7055,679 5,872 6,150
Other 7,607 7,8397,123 7,761 8,577
------------ ------------ -------------
Total Regulatory and Other Non-Current Assets 102,758 101,742106,360 102,713 109,869
------------ ------------ -------------
TOTAL ASSETS $647,964 $608,584Total Assets $653,019 $615,944 $649,113
============ ============ =============
The accompanying notes to the financial statementsfootnotes are an integral part of thesethe financial statements.
SJG-5
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETSHEETS
(In Thousands)
(Unaudited)
JuneSeptember 30, December 31,
------------------------- -------------
1998 1997 1997
------------ ------------ -------------
CAPITALIZATION AND LIABILITIES
COMMON EQUITY: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 102,817 102,817 102,817
Retained Earnings 59,697 59,24451,537 51,433 56,120
------------ ------------ -------------
Total Common Equity 168,362 167,909160,202 160,098 164,785
------------ ------------ -------------
PREFERRED STOCK AND SECURITIES:Preferred Stock and Securities:
Redeemable Cumulative Preferred - Par Value $100 per
share,
Authorized - 46,404, 47,304 and 47,304 shares
respectively
Outstanding:
Series A, 4.70%--2,100, - 2,100, 3,000 and 3,000 shares 210 300 300
Series B, 8.00%--19,242 - 19,242 shares 1,924 1,924 1,924
Company-Guaranteed Mandatorily Redeemable
Preferred Securities of Subsidiary Trust
Par Value $25 per share, 1,400,000 shares
Authorized and Outstanding 35,000 35,000 35,000
------------ ------------ -------------
Total Preferred Stock and Securities 37,134 37,224 37,224
------------ ------------ -------------
LONG-TERM DEBTLong-Term Debt 166,853 178,002178,003 175,860
------------ ------------ -------------
Total Capitalization 372,349 383,135364,189 375,325 377,869
------------ ------------ -------------
CURRENT LIABILITIES:Current Liabilities:
Notes Payable 72,300 14,50094,800 28,600 45,900
Current Maturities of Long-Term Debt 8,876 8,876 8,876
Accounts Payable 20,074 26,530 45,62317,464 37,786 45,581
Customer Deposits 5,815 5,9185,552 5,795 5,871
Federal Income Taxes Accrued 694 2,886 514
State and Local Taxes Accrued 1,590 826 466
Environmental Remediation Costs 16,037 7,735 14,373
Taxes Accrued 1,181 142 980
Interest Accrued and Other Current Liabilities 6,633 5,700 6,7096,297 4,580 6,751
------------ ------------ -------------
Total Current Liabilities 132,019 72,971150,207 93,514 128,332
------------ ------------ -------------
DEFERRED CREDITS AND OTHER NON-CURRENT
LIABILITIES:
AccumulatedDeferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 86,468 79,59681,641 80,225 81,847
Investment Tax Credits 5,434 5,8275,335 5,728 5,632
Deferred Revenues - Net 979 6,125 0
Pension and Other Postretirement Benefits 10,537 10,19011,267 10,434 10,798
Environmental Remediation Costs 34,660 44,665 38,027
Other 5,518 6,0755,720 6,053 6,608
------------ ------------ -------------
Total Deferred Credits and Other Non-Current
Liabilities 143,596 152,478138,623 147,105 142,912
------------ ------------ -------------
COMMITMENTS AND CONTINGENCIES
TOTAL CAPITALIZATION AND LIABILITIES $647,964 $608,584Commitments and Contingencies
Total Capitalization and Liabilities $653,019 $615,944 $649,113
============ ============ =============
The accompanying notes to the financial statementsfootnotes are an integral part of thesethe financial statements.
SJG-6
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In Thousands)
SixNine Months Ended
JuneSeptember 30,
-----------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $11,683 $15,372$7,803 $11,386
Adjustments to Reconcile Net Income to Cash Flows Provided by
Operating Activities:
Depreciation and Amortization 9,388 8,80314,211 13,316
Provision for Losses on Accounts Receivable 454 417932 948
Revenues and Fuel Costs Deferred - Net 4,653 6,529(881) (89)
Deferred and Non-Current Federal Income Taxes and Credits - Net 4,582 1,6243,160 2,499
Environmental Remediation Costs - Net (260) (1,494)(304) (2,239)
Changes in:
Accounts Receivable 17,629 15,24729,604 25,468
Inventories 4,315 7,609(3,781) (3,861)
Prepayments and Other Current Assets (675) (433)(38) (824)
Prepaid and Accrued Taxes - Net (12,832) (6,858)
Accounts Payable and Other Accrued Liabilities (25,501) (14,975)
State and Local Taxes Accrued (13,655) (9,099)(28,890) (8,309)
Other - Net (30) 2,373(1,542) 2,870
------------ ------------
Net Cash Provided by Operating Activities 12,583 31,9737,442 34,307
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:Cash Flows from Investing Activities:
Purchase of Available-for Sale Securities (666) 0
Capital Expenditures, Cost of Removal and Salvage (25,663) (23,575)(39,517) (35,587)
------------ ------------
Net Cash Used in Investing Activities (25,663) (23,575)(40,183) (35,587)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:Cash Flows from Financing Activities:
Net Borrowings from (Repayments of) Lines of Credit 26,400 (93,800)48,900 (79,700)
Proceeds from Issuance of Long-Term Debt 0 35,000
Principal Repayments of Long-Term Debt (9,007) (4,461)
Dividends ofon Common Stock (8,106) (7,650)(12,386) (11,475)
Proceeds from Issuance of Preferred Securities 0 35,000
Repurchase of Preferred Stock (90) (90)
Proceeds from Sale of Preferred Securities 0 35,000
Payments for Issuance of Long-Term Debt and Preferred Securities (27) (2,215)(138) (2,402)
Additional Investment by Shareholder 0 25,623
------------ ------------
Net Cash Provided by (Used in) Financing Activities 9,170 (12,593)27,279 (2,505)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,910) (4,195)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIODNet Decrease in Cash and Cash Equivalents (5,462) (3,785)
Cash and Cash Equivalents at Beginning of Period 6,596 7,469
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,686 $3,274Cash and Cash Equivalents at End of Period $1,134 $3,684
============ ============
The accompanying notes to the financial statementsfootnotes are an integral part of thesethe financial statements.
SJG-7
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies:
The Entity
The condensed consolidated financial statements presentinclude the
accounts of South Jersey Gas Company (SJG) and its wholly owned
statutory trust subsidiary, SJG Capital Trust. South Jersey
Industries, Inc. (SJI) owns all of SJG's outstanding common
stock. SJGCertain reclassifications have been made some reclassifications of previously
reported amounts to conform with classifications forused in the
current year.
Estimates and Assumptions
SJG prepares its financial statements to conform with
generally accepted accounting principles. This requires the
company to make estimates and assumptions affecting the amounts
reported in the financial statements and related disclosures.
Therefore, actual results may differ from those estimates.
Regulation
SJG is subject to the rules and regulations of the New Jersey
Board of Public Utilities (BPU) and maintains its accounts in
accordance with the prescribed Uniform System of Accounts of
that Board (See Note 2).
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB)
issued FASB No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is also effective for
fiscal years beginning after December 15, 1997. This statement
establishes standards for reporting selected information about
operating segments in the company's interim and annual financial
statements. SJG is evaluating whether adopting this statement
will change itsthe company's presentation of financial information.
SJG adopted FASB No. 131 effective January 1, 1998; however, as
permitted by this statement, the company will not report segment
information in interim financial statements until 1999.
State and Local TaxesEnergy Tax Reform
New Jersey adopted legislation reforming energy taxation
effective July 14, 1997. The new law eliminated the Gross
Receipts &and Franchise Tax (GRAFT), amounting to approximately
13% of utility revenue, and replaced it with a combination of
taxes. Beginning January 1, 1998, retail sales of natural gas
SJG-8
and electricity and utility services, including transportation,
are subject to the 6% State Sales and Use Tax (SUT). Gas and
SJG-8
electric utilities are also subject to the 9% State Corporation
Business Tax (CBT) on income before taxes. To bridge the
revenue gap created by the new tax law, the Statestate imposed a
Transitional Energy Facilities Assessment (TEFA) on volumes of
gas sold and transported. The TEFA will be phased out over five
years beginning January 1, 1999 and ending January 1, 2003. The
revised tax policy is expected to eliminate tax differences
between utility and nonutility suppliers, providing fair
competition and lower energy costs for consumers. Adopting theThe new
legislation does not materially affect SJG'sthe company's financial
position, operating results or liquidity (See Note 2). However,
since the SUT is not included in reported utility revenues or
tax expense as GRAFT was previously, there are equal reductions
in these line items on the Condensed Statements of Consolidated
Income.
Note 2. Regulatory Matters:
On July 31, 1996, 1997 and 1997,1998, SJG filed with the BPU to
recover an increase in remediation costs expended from August
1995 through July 19971998 totaling $1.6$4.5 million. The BPU approved
the 1996-1997 Remediation Adjustment Clause filing on October 9,
1998. The 1997-1998 RAC filing has been updated and the results
were included in the 1998-1999 RAC filing. Both filings were subsequently updated
and are
still pending at the BPU (See Note 6).BPU.
On January 27, 1997, the 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. The majority of
this increase comes from residential and small commercial
customers. Part of the increase is recovered from new
miscellaneous service fees which charge specific customers for
costs they cause SJG to incur. Additionally, SJG's threshold
for sharing pre-tax margins generated by interruptible and
off-system sales and transportation (Sharing Formula) was
increased from $4.0 million to $5.0 million. SJG keeps 100% of
pre-tax margins up to thisthe threshold level and 20% of such
margins above that level. Later in 1997, the $5.0 million
threshold was increased by $500,000 which is the annual revenue
requirement associated with the completion of construction on a
specified pipeline interconnection. In late 1998,At the beginning of 1999,
this $5.5 million threshold will increase by another $1.9$2.3
million, also representative of the annual revenue requirement
associated with major construction projects. On October 9,
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
applicable threshold level to the Levelized Gas Adjustment
Clause (LGAC) customers. Thereafter, SJG keeps 20% of the
pre-tax margins as it has historically.
As part of the tariff changes approved in the rate case, SJG
began its pilot program in April 1997, giving residential
customers a choice of gas supplier. During the initial
enrollment period, which ended June 30, 1997, nearly 13,000
residential customers applied for this service. SJG began
transporting gas for these customers on August 1, 1997. On June
26, 1998, the BPU expanded the number of potential participants
SJG-9
to 25,000. There were 14,841 participants as of September 30,
1998. Participant's bills are reduced for cost of gas charges
and applicable taxes. The resulting decrease in revenues is
offset by a corresponding decrease in gas costs and taxes under
SJG's BPU-approved fuel clause. On June 26, 1998,While the BPU expanded the number of
participants to 25,000. The program results in
a reduction in Utility Revenues. However, the programutility revenues, it does not affect the
company's net income, financial condition or margins. Also,As part
of the tariff changes approved in the rate case, SJG further
expanded the choices available to commercial and industrial
customers, including a new transportation tariff providing
savings to qualified customers.
SJG-9
On May 13, 1997, SJG filed to recover additional
postretirement benefit costs of approximately $1.3 million
annually. This recovery was approved on December 17, 1997 and
began January 1, 1998.
On September 9, 1997, SJG filed with the BPU to adjust rates
by replacing the GRAFT with SUT, CBT and TEFA components.components (See
Note 1). The new rates became effective January 1, 1998 on an
interim basis and were made final effective July 13, 1998.
In September 1996, SJG filed to reduce its rates through itsthe
1996-1997 Levelized Gas Adjustment Clause (LGAC)LGAC reflecting a $1.4 million decrease in natural gas
costs. Updated results
from the 1996-1997 LGAC year results were rolled into the
1997-1998 LGAC which was filed with the BPU in September 1997.
On September 12, 1997 and September 8, 1998, SJG made its
annual LGAC, Temperature
Adjustment Clause (TAC)TAC and Demand Side Management Clause (DSMC)
filings with the BPU. The LGAC and the DSMC cover the period
November 19971 through October 1998.31 of each year. The TAC period runs
from October 1 through May 31. In thisthe 1997-1998 filing, the
company requested a $4.7 million increase in the annual LGAC
recovery which includes the 1996-1997 LGAC year results referred
to above. SJG updated this amount to $7.5$7.0 million in MayAugust
1998 due to increased
actual gas costs as compared to original projections filed with
the BPU.and included this amount in its 1998-1999 LGAC filing. The
1998-1999 LGAC filing requested a decrease in rates of $414,000.
The company also requested resolution of the 1996-1997
filingprior year filings
along with thisthe 1998-1999 filing. BothAll filings are still pending
at the BPU.
On March 5, 1998, the BPU approved new rates related to
appliance service
including a profit margin.rates. The new rates are competitive with those of other
service providers in New Jersey and are designed to increase
earnings and cash flows to SJG over the current rates. TheIn April
1998, the BPU also authorized SJG to instituteoffer new appliance service
contract plans and anto service electric air conditioning repair chargeconditioners.
On June 8, 1998, SJG filed a petition with the BPU requesting
a change in Aprilthe way in which the TAC operates. The request was
granted on October 9, 1998. As a result, SJG will experience
reduced fluctuations in income when temperatures are warmer or
colder than normal.
SJG-10
Note 3. Related Party Transactions:
SJG contracted with R&T Group, Inc. (R&T), SJI's wholly owned
subsidiary, for general utility construction and environmental
remediation services costing approximately $75,100 for the three
months ended$ -0- and $1,901,000
for the sixnine months ended JuneSeptember 30, 1997.1998 and 1997,
respectively. The amounts payable to R&T relating to these
services were $136,600$ -0- and $10,500 at JuneSeptember 30, 1997. SJG1998 and 1997,
respectively. SJI discontinued the operations and sold the
assets of R&T during the first half of 1997.
SJG sells natural gas for resale to South Jersey Energy
Company (SJE), SJI's wholly owned subsidiary. These sales
comply with Section 284.402 of the Regulations of the Federal
Energy Regulatory Commission (FERC). Sales to SJE were
approximately $160,600$39,000 and $ -0- for the three months ended and
$292,900$331,800 and $ -0- for the sixnine months ended JuneSeptember 30, 1998.
SJG-101998
and 1997, respectively.
Note 4. State, LocalIncome and Other Taxes:
SJG is included in the consolidated Federal Income tax return
filed by SJI and files on a separate return basis for State
Income Tax purposes. The totalaggregate amounts of current and
deferred tax (credit) expense for state, localthe three and nine months
ended September 30, 1998 and 1997 are shown below (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Federal:
Current $47 ($2,675) $2,437 $4,614
Deferred (1,721) 975 3,059 2,796
Investment Tax Credits (99) (99) (297) (297)
State:
Current (446) 0 1,523 0
Deferred (110) 0 398 0
---------- ---------- ---------- ----------
Total Federal and State
Income Taxes ($2,329) ($1,799) $7,120 $7,113
========== ========== ========== ==========
The significant components of other taxes reflected in the
Condensed Statements of Consolidated Income for the three and
sixnine months ended JuneSeptember 30, 1998 and 1997 are shown below
(in thousands):
SJG-11
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
CBT - Net $72TEFA $918 $0 $2,479$5,278 $0
TEFA 1,148 0 4,361 0
GRAFT 110 4,544 (97) 16,7272,577 13 19,304
Other Taxes 736 733 1,612 1,682547 572 2,165 2,254
---------- ---------- ---------- ----------
Total State, Local and
Other Taxes $2,066 $5,277 $8,355 $18,409$1,575 $3,149 $7,456 $21,558
========== ========== ========== ==========
During the three and sixnine months ended JuneSeptember 30, 1998, SJG
recorded an additional $2.6$1.4 million and $7.6$9.0 million,
respectively, for SUT on utility services through its Condensed
Consolidated Balance Sheet which doesSheet. Such amounts are not impactincluded in
reported revenues or tax expense as SJG only acts as agent for
the collection of SUT (See Note 1).
Note 5. Capitalization:
SJG's First Mortgage Indenture, as supplemented, restricts the
company as to the amount of cash dividends or other
distributions it may pay on its common stock. SJG had
approximately $57.8$49.6 million in retained earnings at JuneSeptember
30, 1998 that were free of these restrictions.
On March 26, 1997, SJG received $25.6 million in contributions
of capital from SJI. SJG credits capital contributions to Other
Paid-In Capital and Premium on Common Stock. SJG made no other
changes in common stock during 1998 and 1997.
Note 6. Commitments and Contingencies:
Construction Commitments
SJG estimates theThe estimated cost of construction and environmental
remediation programs for the company in 1998 will total $72.0$71.6
million. SJG has made certain commitments regarding these
programs.
SJG-11
Gas Supply Contracts
SJG has entered into long-term contracts for natural gas
supplies, firm transportation, and firm gas storage service.
The earliest that any of the gas supply contracts expiresexpire is
1999.October 2000. All of the transportation and storage service
agreements between SJG and its interstate pipeline suppliers
were made under FERC approved tariffs. SJG's cumulative
obligation for demand charges and reservation fees paid to its
SJG-12
suppliers for all of these services is approximately $4.9
million per month.month, which SJG recovers this on a current basis through
the LGAC.
Pending Litigation
SJG is subject to claims which arise in the ordinary course of
business and other legal proceedings. The company sets up
reserves when these claims become apparent. SJG also maintains
insurance and records probable insurance recoveries relating to
outstanding claims.
A group of Atlantic City casinos filed a petition with the BPU
inon January 16, 1996 alleging overcharges of over $10.0 million,
including interest. Management believes that chargesA settlement has been arrived at in this
litigation, under which SJG will make no payments. The group of
casinos have issued general releases to SJG, and on September 4,
1998 the casinos were
based on applicable SJG tariffs and that the casinos were not
qualified under less expensive rate schedules, as claimed.
Management believes that the ultimate impact of these actions
will not materially affect the company's financial position,
operating results or liquidity.petition was withdrawn.
Environmental Remediation Costs
SJG incurred and recorded costs for environmental cleanupclean up of
sites where SJG or predecessor companies operated gas
manufacturing plants. The companySJG terminated manufactured gas
operations at all sites more than 35 years ago.
Since the early 1980s, SJG has recorded environmental
cleanupremediation costs of $90.8$91.8 million. The company has spent $40.1$41.1
million as of JuneSeptember 30, 1998. SJG, with the assistance of
an outside consulting firm, estimates that future costs to clean
up the sites will range from $50.7 million to $150.6 million.
The company recorded the lower end of this range as a liability.
It is reflected on the Condensed Consolidated Balance Sheet
under the captions "Current Liabilities" and "Deferred Credits
and Other Non-Current Liabilities." SJG's recorded
environmental cleanupremediation costs do not directly affect earnings
because the company defersthose costs are deferred and recovers themrecovered through rates
over 7-year amortization periods as allowed by the BPU. SJG did
not adjust the accrued liability for future insurance
recoveries, which the company is pursuing. SJG received $4.2
million of insurance recoveries as of JuneSeptember 30, 1998. The companySJG
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 SJG-12
costs could differ from the estimates due
to the long-term nature of the projects, changing technology,
government regulations and site specific requirements.
As a result of the 7-year Remediation Adjustment Clause (RAC)
recovery mechanism, the companySJG does not expense environmental
remediation costs when incurred. Rather, itincurred and defers costs to be
recovered. SJG has two regulatory assets associated with
environmental cost.costs. The first regulatory asset is titled
"Environmental Remediation Cost: Expended - Net." These
expenditures represent what the companywas actually spent to clean up
former gas manufacturing plant sites. These costs meet the
requirements of FASB No. 71, "Accounting for the Effects of
SJG-13
Certain Types of Regulation." The BPU allowed SJG to recover
these expenditures through July 19951996 and petitions to recover
these costs through July 19971998 are pending (See Note 2).
The other regulatory asset titled "Environmental Remediation
Cost: Liability for Future Expenditures" relates to estimated
future expenditures determined under the guidance of FASB No. 5,
"Accounting for Contingencies." SJG recorded thisThis amount, which relates to
former manufactured gas plant sites, was recorded as a deferred
debit with the corresponding amount reflected in Current
Liabilitieson the balance
sheet under the captions "Current Liabilities" and Deferred"Deferred
Credits and Other Non-Current Liabilities." The deferred debit
is a regulatory asset under FASB No. 71 because the BPU's
intent, as evidenced by its current practice, is to allow SJG to
recover the deferred costs after they are expended.
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, 1998, the company'sSJG's unamortized cleanupremediation costs of $21.3
million are reflected on the balance sheet under the caption
"Regulatory and Other Non-Current Assets." Since BPU approval
of the RAC in August 1992, the companySJG has recovered $14.6$15.6 million
through rates as of JuneSeptember 30, 1998 (See Note 2).
Note 7. Subsequent Event:Events:
On July 10,October 14, 1998, SJI and Conectiv announced plans for a
joint customer account services venture that will begin to
provide meter reading services in southern New Jersey by the end
of the year. The new venture will allow both companies to
capitalize on the synergies that exist because their companies'
territories overlap. Customers should benefit from the
companies' collective ability to reduce meter reading costs.
On October 21, 1998, SJG filed a petition with the BPU requesting
authority to establishissued $30.0 million of debt under a
Medium Term Note (MTN) program. The
petition requests authority to issue $100Program established October 5, 1998. Under
this program, $10.0 million of MTN's
through December 2001. The net proceedsnotes were issued at 6.12%,
maturing in 2010, and $20.0 million of this MTN program
will be used to retire short-term debt and to fund capital
expenditures.
SJG-13notes were issued at
7.125%, maturing in 2018.
SJG-14
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Overview
South Jersey Gas Company (SJG) is a natural gas distribution
company serving 263,678263,883 customers at JuneSeptember 30, 1998,
compared with 257,449257,587 customers at JuneSeptember 30, 1997. SJG also
makes off-system sales of natural gas on a wholesale basis to
various customers on the interstate pipeline system and
transports natural gas purchased directly from producers or
suppliers for its own sales and for some of its customers.
South Jersey Industries, Inc. owns all of the common stock of
SJG.
Forward-Looking Statements
This report contains certain forward-looking statements
concerning projected future financial performance, future
operating performance, future plans and courses of action and
future economic conditions. All statements in this report other
than statements of historical fact are forward-looking
statements. These forward-looking statements are made based
upon management's expectations and beliefs concerning future
events impacting the company and therefore involve a number of
risks and uncertainties. Management cautions that
forward-looking statements are not guarantees and that actual
results could differ materially from those expressed or implied
in the forward-looking statements.
There are a number of factors that could cause the company's
actual results to differ materially from those anticipated,
which include, but are not limited to, the following: general
economic conditions on an international, federal, state and
local level; weather conditions in the company's marketing
areas; regulatory and court decisions; competition in the
company's regulated activities; the availability and cost of
capital; costs and effects of unanticipated legal proceedings,
Year 2000 related costs or operating problems and environmental
liabilities; and changes in business strategies.
Competition
SJG's franchises are non-exclusive. Currently no other utility
provides retail gas distribution services within its territory.
SJG does not expect any other utilities to do so in the
foreseeable future because of the extensive investment required
for utility plant and related costs. SJG competes with oil,
propane and electricity suppliers for residential, commercial
and industrial users. The market for natural gas sales is
subject to competition as a result of deregulation. SJG has
enhanced its competitive position while maintaining its margins
by using an unbundled tariff which allows the company to recover
its full cost of service, except for the variable cost of the
gas commodity, when engaging in the transportation of gas for
its customers. Under this tariff, SJG derives substantially all
of its profits from the transportation rather than the sale of
the commodity. SJG's commercial and industrial customers can
SJG-15
choose their supplier while SJG recovers its cost of service and
fixed
SJG-14 gas costs primarily through its transportation service.
In April 1997, SJG initiated its New Jersey Board of Public
Utilities (BPU) approved pilot program giving some residential
customers a choice of gas suppliers (See Pilot"Pilot Program - Choice
of Gas Supplier)Supplier"). SJG believes it has been a leader in
addressing the changing marketplace, while maintaining its focus
on being a low-cost provider of natural gas and energy services.
Pilot Program - Choice of Gas Supplier
In April 1997, SJG initiatedbegan its BPU-approved pilot program giving
residential customers a choice of gas supplier. During the
initial enrollment period, which ended June 30, 1997, nearly
13,000 residential customers applied for this service. InSJG
began transporting gas for these customers on August 1, 1997.
On June 26, 1998, the durationBPU expanded the number of the pilot program was extendedpotential
participants to July 31,
1999 and the scope was approximately doubled to 25,000 customers
(See Regulatory Matters).25,000. There were 14,841 participants as of
September 30, 1998. Participants' bills are reduced for
certain cost of
gas charges and applicable taxes. The resulting decrease in
revenues is offset by a corresponding decrease in SJG's gas costs and
taxes under SJG's BPU-approved fuel clause. TheWhile the program
results in a reduction in utility revenues, it does not affect
itsSJG's net income, financial condition or margins. Also, SJG
further expanded the choices available to commercial and
industrial customers, including a new transportation tariff
providing savings to qualified customers.
Energy Adjustment Clauses
SJG's tariff includes a Levelized Gas Adjustment Clause (LGAC),
a Temperature Adjustment Clause (TAC), a Remediation Adjustment
Clause (RAC) and a Demand Side Management Clause (DSMC). These
clauses permit adjustments for changes in gas supply costs,
reduce the impact of extreme fluctuations in temperatures on SJG
and its customers, recover costs for the remediation of former
gas manufacturing plants and recover costs associated with its
conservation plan, respectively. The BPU-approved LGAC, RAC and
DSMC adjustments are made to match revenues and expenses. TAC
adjustments do affect revenue, income and cash flows since
extremely coldcolder than normal weather can generate credits to customers,
while extremely warmwarmer than normal weather during the winter season can result in additional
billings to customers. TAC adjustments related to the 1997-1998
TAC year did not materially impact the financial statements for
1998.
Status of Year 2000 Conversion
The company prepared a Year 2000 Impact and Assessment study
and developed a plan for program modification.modification for software and
embedded technology. An outside service was used to identify both
informational and logic date variables within the programming codes.
This service was completed and expensed in 1997. Presently, the
company is revising the affected programming codes. As of JuneSeptember
30, 1998, approximately 38%64% of the programming code was revised.
All revisions are scheduled to be completed by early 1999,
providing the remainder of 1999 for testing. The company believes
that all embedded technology relating to its distribution systems is
Y2K compliant. The conversion costs are estimated at $0.4 million of
which approximately $0.15$0.28 million was spent as of JuneSeptember 30, 1998.
Vendors who provide third party software have been contacted and 2628 of
3531 have indicated that they are now compliant. The company is also in
SJG-16
the process of securing written verification from its key
product and service vendors to ensure their compliance.
Approximately 50% of all product and service vendors and 80% of
those vendors deemed key suppliers have to date verified that they
will be compliant. Of the company's two principal gas suppliers, one
has indicated Y2K compliance and the other has yet to respond.
The worst case scenarios facing SJG involve the impact on the
company's distribution system and general office activities of the
loss of telecommunications and or electrical power as a result of
a Y2K problem with the provider's system. These events in
themselves do not pose a problem if the duration of loss is less
than 72 hours. All company sites have electrical generation backup
and utilize two phone carriers should one fail due to a Y2K problem.
The company also has both a private voice and data radio systems
which allow it to monitor remote stations manually.
Based upon the nature of SJG's operating and information
systems and the current advanced state of planning and
remediation, the company does not anticipate any material
difficulty in completing full year 2000 compliance and that any
problems that do arise are expected to be immaterial or
insignificant.
SJG-15
Results of Operations - Three and SixNine Months Ended JuneSeptember 30, 1998
Compared to Three and SixNine Months Ended JuneSeptember 30, 1997
Operating Revenues
Revenues decreased $6.1$6.6 million for the secondthird quarter of 1998
as compared to the same period in 1997. The decrease for the
third quarter comparison was primarily due to state tax reform
effective January 1998 which lowered the tax component contained
in reported revenue and $24.2by customers using increased levels of
firm transportation service in lieu of firm gas sales. This
decrease was partially offset by customer growth.
The lower tax component in reported revenue was offset by a
reduction in Other Taxes (See Notes 1 and 6). South Jersey Gas'
tariffs are structured such that profits are derived from
transportation, not from the sale of the commodity.
Consequently, while both the tax reform and the switch to firm
transportation reduced total revenues, neither impacted
profitability.
Revenues decreased $30.8 million for the first sixnine months of
1998, as compared to the same periods in 1997. These decreases wereprior year period, primarily due to
lower firm sales resulting from weather whichthat was warmer than
1997 and state tax reform which lowered the tax component
contained in reported revenue, effective January 1, 1998, with
an offsetting reduction in State, Local and Other Taxes (See
Notes 1 and 4). Weather in 1998 was 29.1% and 16.0% warmer for
the three and six month periods, respectively, compared with the
prior year periods. Also, increased firm transportation service
replaced firm sales. These16.8% warmer.
The results were partially offset by
increased customer growth in both periods and off-system sales
for the six month period. The revenue from transportation
excludes commodity costs (See Competition). As SJG's profits
are from the transportation rather than the sale of commodity,
the migration of customers to firm transportation does not lower
SJG's margin. Total sales margin decreased in 1998 due to lower
sales volumes and decreased margins on off-system sales,
partially offsetalso impacted by the effect ofsame factors that effected
the addition of 6,200 new
customers since the end of the second quarter of 1997.quarterly results.
Gas Purchased for Resale
Gas purchased for resale decreased $1.5$5.2 million inand $15.4
million for the second
quarter ofthree and the nine month periods ending
September 30, 1998 compared with thecomparable 1997 quarterperiods. The
nine month decrease was principally due to weather related
decreased sales volumes. ForIncreased levels of firm
transportation versus firm gas sales accounted for a portion of
the six months ended June 30,
1998, gas purchased for resale decreased $10.2 million compared
with 1997 principally due to decreased sales volumes. Decreased
sales volumes fordecrease in both periods were primarily caused by warmer
temperatures.periods. Sources of gas supply include
both contract and open-market purchases. SJG is responsible for
securing and maintaining its own gas supplies to serve its
customers.
SJG-17
SJG has entered into long-term contracts for natural gas
supplies, firm transportation, and firm gas storage service.
The earliest expiration ofthat any of these contracts expire is 1999.October 2000.
All of the transportation and storage service agreements
between SJG and its interstate pipeline suppliers are providedwere made
under tariffs
approved by the Federal Energy Regulatory Commission.Commission (FERC) approved
tariffs. SJG's cumulative obligation for demand charges and
reservation fees paid to its suppliers for all of these services
is approximately $4.9 million per month, which is recoveredSJG recovers on a
current basis through itsthe LGAC.
Operations
A summary of net changes in utility operations for 1998
compared with 1997 is as follows (in thousands):
SJG-16
Period Ended JuneSeptember 30,
---------------------------------------------------------
Three Months SixNine Months
1998 vs. 1997 1998 vs. 1997
------------- -------------
Other Production Expense $7 $3$1 $4
Transmission 6 1933 52
Distribution (78) (209)(130) (337)
Appliance Service 244 228316 543
Customer Accounts and Services 124 285(3) 282
Sales 4 (9)(24) (34)
Administration and General 150 351(135) 216
Other 11 (58)14 (32)
------------- -------------
$468 $610$72 $694
============= =============
Distribution costs decreased for both comparative periods in 1998
principally due to decreased meter exchange activity. The majority
of the increase in Appliance Service expenses increased in theexpense comparisons was due to
expenditures on advertising. Customer Accounts and Services
costs increased in the first nine months of 1998 principally due
to an increase in payroll expense. The payroll expense increase
was offset in the third quarter by a reduction in bad debt
expense. Administrative and General costs increased infor the
first nine months of 1998 principally due to increased employee
benefits costs.costs, however, these costs were more than offset
during the third quarter by reductions in expenses for
consultants and regulatory activities.
Other Operating Expenses
A summary of principal changes in other operating expenses for
1998 compared with 1997 is as follows (in thousands):
SJG-18
Period Ended JuneSeptember 30,
---------------------------------------------------------
Three Months SixNine Months
1998 vs. 1997 1998 vs. 1997
------------- -------------
Maintenance ($263) (138)436) (574)
Depreciation 289 571291 862
Federal and State Income Taxes (781) (1,940)
State, Local and530 7
Other Taxes (3,211) (10,054)(1,574) (14,102)
The decrease in maintenance expense is principally due to
utility production plant maintenance, which includes the
amortization of environmental remediation costs (such decreases
are offset by lower revenue recovery under SJG's RAC).
Depreciation is higher principally due to increased investment
in property, plant and equipment. Federal and State Income Tax
changes
SJG-17 reflect the impact of changes in pre-tax income. State, Localincome and the
impact of the energy tax reform legislation discussed under
Operating Revenues. Other Taxes decreased because of
the energy tax reform legislation discussed under Operating Revenues - Utility.legislation.
Interest Charges
Interest charges decreasedincreased in 1998 by $.7 million and $1.1$.4
million for the three and sixnine month periods, respectively,
versus the comparable 1997 periods. Interest charges were
reducedincreased for the quarterthree and nine month periods due to carrying
lowerhigher levels of long-term debt outstanding partially offset by higher levels of
short-term debt outstanding. Interest charges were reduced for
the six month period due to lower levels of short-term and
long-term debt outstanding.interest rates.
Short-term debt levels were reduced by the application of a
$25.6 million cash equity infusion to SJG from SJI and the
application of the net proceeds from the sale of the Mandatorily
Redeemable Preferred Securities in May 1997.
Preferred Securities Dividend Requirements
Preferred Dividends increased in 19981997 due to the issuance of
$35.0 million of 8.35% SJG-guaranteed Mandatorily Redeemable
Preferred Securities in May 1997 (See Capital Resources)"Capital Resources").
Net Income Applicable to Common Stock
The details affecting net income and earnings per common 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 are
generally met by cash from operations and short-term lines of
SJG-19
credit. The company maintains short-term lines of credit with a
number of banks, aggregating $100.0$120.0 million of which $27.7$25.2
million was available at JuneSeptember 30, 1998. The credit lines
are uncommitted and unsecured with interest rates below the
prime rate.
The changes in cash flows from operating activities are as
follows (in thousands):
SJG-18
SixNine Months Ended
JuneSeptember 30,
1998 vs. 1997
----------------------------
Increases/(Decreases):
Net Income ($3,689)3,583)
Depreciation and Amortization 585895
Provision for Losses on AcctsAccounts Receivable 37(16)
Revenues and Fuel Costs Deferred - Net (1,876)(792)
Deferred and Non-Current Federal Income Taxes and
Credits - Net 2,958661
Environmental Remediation Costs - Net 1,2341,935
Accounts Receivable 2,3824,136
Inventories (3,294)80
Prepayments and Other Current Assets (242)786
Prepaid and Accrued Taxes - Net (5,974)
Accounts Payable and Other Accrued Liabilities (10,526)
State and Local Taxes Accrued (4,556)(20,581)
Other - Net (2,403)
-------------(4,412)
------------
Decrease in Net Cash from Operating Activities ($19,390)
=============26,865)
============
Depreciation and Amortization are non-cash charges to income
and do not impact cash flow. Changes in depreciation cost
reflect the effect of additions and reductions to fixed assets.
Increases in Revenues and Fuel Costs Deferred - Net reflect the
impact of overcollection of fuel costs or the recovery of
previously deferred fuel costs. Decreases reflect the impact of
payments or credits to customers for amounts previously
overcollected and the undercollection of fuel costs resulting
from increases in natural gas costs.
Increases in Deferred and Non-Current Federal Income Taxes and
Credits - Net represent the excess of taxes accrued over amounts
paid. Decreases reflect the impact of taxes paid in excess of
amounts accrued. Generally, deferred income taxes related to
deferred fuel costs will be paid in the next year.
SJG-20
Changes in Environmental Remediation Costs - Net represent the
difference between remediation expenditures and amounts
collected under the RAC and insurance recoveries.
Changes in Accounts Receivable are generally weather and price
related. Changes impact cash flows when collected in subsequent
periods.
Changes in Inventories reflect the impact of seasonal
requirements, temperatures and price changes.
SJG-19
Changes in Accounts PayablePrepaid and Other Accrued Liabilities
principally reflect a change in gas inventory purchasing
practices mandated by the BPU and the impact of timing
differences between the accrual and payment of costs.
Changes in State and Local Taxes Accrued- Net reflect the impact
of changes between taxes paid and taxes accrued. However,
significant timing differences exist in cash flows during the
year. In 1997, SJG paid the full year's Gross Receipts &
Franchise Tax (GRAFT) on April 1 and amortized the remaining
prepaid tax over the remainder of the year on the basis of gas
volumes sold.
As stated in Note 1, on January 1, 1998, the GRAFT was replaced
with a 6% State Sales and Use Tax (SUT), a 9% State Corporate
Business Tax (CBT) on income before taxes and a Transitional
Energy Facilities Assessment (TEFA) on volumes of gas sold and
transported. The TEFA will be phased out over five years
beginning January 1, 1999. Approximately 50% of the new taxes
are paid in monthly installments during the first six months of
the year and the principal portion of the remaining taxes are
paid on June 25, 1998, and on May 15 of each year thereafter.
SJG uses short-term borrowings to make these tax payments which
result in a temporary increase in the short-term debt level.
Changes in Accounts Payable and Other Accrued Liabilities
principally reflect a change in gas inventory purchasing
practices mandated by the BPU and the impact of timing
differences between the accrual and payment of costs.
Regulatory Matters
Rate Actions
On January 27, 1997, the 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. The majority of
this increase comes from residential and small commercial
customers. Part of the increase is recovered from new
miscellaneous service fees which charge specific customers for
costs they cause SJG to incur. Additionally, SJG's threshold
for sharing pre-tax margins generated by interruptible and
off-system sales and transportation (Sharing Formula) was
increased from $4.0 million to $5.0 million. SJG keeps 100% of
pre-tax margins up to thisthe threshold level and 20% of such
margins above that level. Later in 1997, the $5.0 million
threshold was increased by $500,000 which is the annual revenue
requirement associated with the completion of construction on a
specified pipeline interconnection. In late 1998,At the beginning of 1999,
this $5.5 million threshold will increase by another $1.9$2.3
million, also representative of the annual revenue requirement
associated with major construction projects. On October 9,
1998, the BPU approved a revision to the Sharing Formula as part
SJG-21
of an agreement to modify SJG's Temperature Adjustment Clause
(TAC). The revision credits the first $750,000 above the
applicable threshold level to the Levelized Gas Adjustment
Clause (LGAC) customers. Thereafter, SJG keeps 20% of the
pre-tax margins as it has historically.
Rates of return are calculated by weighting SJG's individual
capital cost rates by the proportion of each respective type of
capital. This requires selecting appropriate capital structure
ratios and determining the cost rate for each capital component
as determined in each rate proceeding.
SJG-20
In setting a rate of return, the BPU must provide a utility and
its investors with a return that is commensurate with the risk
to which the invested capital is exposed so that the utility has
access to the capital required to meet its public service
responsibility.
Also on January 27, 1997, the BPU approved SJG's request for a
$2.5 million revenue reduction through the TAC. This is the
standard BPU procedure used to credit customers with previously
collected revenues which were in excess of those allowed by the
TAC (See Energy"Energy Adjustment Clauses)Clauses"). This revenue reduction
reflects the TAC's normal operation, as does the BPU's
confirmation of the decrease.
On September 9, 1997, SJG filed with the BPU to adjust rates by
replacing the current State Gross Receipts and Franchise Tax
componentsGRAFT with a SUT, a CBT and a TEFA components (See
"Liquidity"). InterimThe new rates reflecting this change became effective January 1, 1998. Final rates1998 on
an interim basis and were approved onmade final effective July 13 , 1998.
In September 1996, SJG filed to reduce its rates through itsthe
1996-1997 LGAC reflecting a $1.4 million decrease in natural gas
costs. Updated results from the 1996-1997 LGAC year results were rolled into the
1997-1998 LGAC which was filed with the BPU in September 1997.
On September 12, 1997, and September 8, 1998, SJG made its
annual LGAC, Temperature Adjustment Clause (TAC) and Demand Side
Management Clause (DSMC) filings 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
the 1997-1998 filing, the company requested a $4.7 million
increase in the annual LGAC recovery which includes the
1996-1997 LGAC year results referred to above. SJG updated this
amount to $7.0 million in August 1998 and included this amount
in its 1998-1999 LGAC filing. The 1998-1999 LGAC filing
requested a rate increase to reflect
an increasedecrease in rates of $4.7 million in natural gas costs, inclusive$414,000. The company also
requested resolution of prior year filings along with the
1996-1997 LGAC1998-1999 filing. This amount was updated to $7.5
million in May 1998. BothAll filings are still pending at the BPU.
On September 12, 1997, SJG also filed its 1997-1998 TAC with
the BPU. For the TAC period ended May 31, 1997, temperatures were
within the TAC range and no adjustment to customers' bills was
required. SJG experienced warmer than normal weather during the TAC
period running from October 1, 1997 through May 31, 1998. The warmer
weather decreased net income in 1998 by approximately $3.7 million.
SJG anticipates filing its 1998-1999 TAC with the BPU in August 1998.
SJG will seek recovery of approximately $416,000 of revenues from its
firm customers resulting from warmer than normal temperatures. In
addition, SJG filed a petition with the BPU on June 8, 1998 requesting
a change in the way in which the TAC operates. If the request is
granted, SJG will not experience significant fluctuations in income
when temperatures are warmer or colder than normal.
On March 5, 1998, the BPU approved new rates related to
appliance service charges, including a profit margin.rates.
The new rates are competitive with those of other service
providers in New Jersey and are designed to increase earnings
and cash flows to SJG over the current rates. TheIn April 1998,
the BPU also authorized SJG to instituteoffer new appliance service
contract plans effective April
1, 1998, includingand to service electric air conditioning repairs within its
service territory.conditioners.
SJG-22
On June 8, 1998, SJG filed a petition with the BPU requesting a
change in the way in which the TAC operates. The request was
granted on October 9, 1998. As a result, SJG will experience
reduced fluctuations in income when temperatures are warmer or
colder than normal.
On July 31, 1998, SJG filed a motion to establish a
procedure to further unbundle
natural gas service. The BPU's Order of June 26, 1998, which
expanded the current residential transportation pilot program,
directed SJG to file a proposal in which full residential
unbundling would take place on or before January 1, 1999. Many
of the issues related to residential SJG-21
unbundling also relate to
the commercial and industrial transportation program.
Therefore, the motion encompasses all
issues surrounding both
programs. A proposal to completely unbundle natural gas service
on SJG's system is expected to be filed with the BPU in November
1998.
Environmental Remediation
The companySJG incurred and recorded certain costs for environmental remediationclean up of
sites where SJG or predecessor companies operated gas
manufacturing plants. SJG terminated manufactured gas
operations at all sites more than 35 years ago.
Since the early 1980s, SJG has recorded environmental
cleanupremediation costs of $90.8$91.8 million. The company has spent $40.1$41.1
million as of JuneSeptember 30, 1998. SJG, with the assistance of
an outside consulting firm, estimates that future costs to clean
up the sites will range from $50.7 million to $150.6 million.
The company recorded the lower end of this range as a liability.
It is reflected on the Condensed Consolidated Balance Sheet
under the captions "Current Liabilities" and "Deferred Credits
and Other Non-Current Liabilities." SJG's recorded
environmental cleanupremediation costs do not directly affect earnings
because the company defersthose costs are deferred and recovers themrecovered through rates
over 7-year amortization periods as allowed by the BPU. SJG did
not adjust the accrued liability for future insurance
recoveries, which the company is pursuing. SJG received $4.2
million of insurance recoveries as of JuneSeptember 30, 1998. The companySJG
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.
As a result of the 7-year Remediation Adjustment Clause (RAC)
recovery mechanism, SJG does not expense environmental
remediation costs when incurred and defers costs to be
recovered. SJG has two regulatory assets associated with
environmental cost.costs. The first regulatory asset is titled
"Environmental Remediation Cost: Expended - Net." These
expenditures represent actual costs incurredwhat was actually spent to remediateclean up
former gas manufacturing plant sites net of rate and insurance
recoveries.sites. These costs meet the
requirements of FASB No. 71, "Accounting for the Effects of
Certain Types of Regulation." The BPU allowed recovery ofSJG to recover
these expenditures through July 19951996 and petitions to recover
these costs through July 1998 are pending.
The other regulatory asset titled "Environmental Remediation
Cost: Liability for Future Expenditures" relates to estimated
future expenditures determined under the guidance of FASB No. 5,
SJG-23
"Accounting for Contingencies." This amount, which relates to
former manufactured gas plant sites, was recorded as a deferred
debit with the corresponding amount reflected in Current
Liabilitieson the balance
sheet under the captions "Current Liabilities" and Deferred"Deferred
Credits and Other Non-Current Liabilities, as appropriate.Liabilities." The deferred debit
is a regulatory asset under FASB No. 71, because the BPU's
intent, as evidenced by its current practice, is to provide recovery sufficientallow SJG to
recover the deferred costs after they are expended.
SJG files with the BPU to recover expended remediationthese costs in rates through
its RAC. The BPU has consistently allowed the full recovery
over 7-year periods, and SJG believes this will SJG-22
continue. As of
JuneSeptember 30, 1998, , SJG's unamortized clean-upremediation costs of $21.3
million are reflected on the balance sheet under the caption
"Regulatory and Other Non-Current Assets." Since BPU approval
of the RAC mechanism in August 1992, SJG has recovered $14.6$15.6 million
through rates as of JuneSeptember 30, 1998.
On July 31, 1996, 1997 and 1998, SJG made its annual filingsfiled with the BPU to
recover an increase in remediation costs expended during the
period offrom August
1995 through July 1998 totaling $4.5 million. The BPU approved
the 1996-1997 Remediation Adjustment Clause (RAC) filing on
October 9, 1998. In 1998,The 1997-1998 RAC filing has been updated and
the company
requested an increaseresults were included in the level of its annual recoveries of
$4.5 million. This increase represents combined changes for
three years since SJG's last two proceedings remain unresolved.1998-1999 RAC filing. Both
filings are still pending at the BPU.
Other Regulatory Asset Recovery
The adoption of FASB No. 109, "Accounting for Income Taxes," in
1993 primarily resulted in creating a regulatory asset and a
deferred income tax liability. As a result of positions taken
in the 1994 rate case, the amortization of the asset is being
recovered through rates over an 18-year period which began in
December 1994. Also, FASB No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," adopted by the
company in 1993, requires an accrual basis of accounting for
retiree benefit payments during the years of employment. The
company elected to recognize the unfunded transition obligation
over a 20-year period beginning in 1993. The majority of the
postretirement benefit costs were previously recoverable by SJG
through rates on a pay-as-you-go basis. A December 1994 BPU
order provided for partial recovery of costs associated with
FASB No. 106 and prescribed continued deferral of unrecovered
costs. Beginning January 1, 1998, the BPU approved full
recovery of the net periodic benefit cost as well as recovery of
the regulatory asset over a 15-year period. In 1995, an
external trust was established towards funding postretirement
benefit costs. Rate recovery in excess of SJG's pay-as-you-go
requirement is contributed to the trust and provides no
operating benefit to SJG except to the extent that trust income
reduces future net periodic cost. Gross contributions to the
trust amounted to $8.2$.9 million and $2.7 million for the three and
nine months ended September 30, 1998, respectively. The balance
of the regulatory asset amounted to $5.8$5.7 million at JuneSeptember
30, 1998.
SJG-24
Other
The companySJG is subject to claims which arise in the ordinary course of
its business and other legal proceedings. As such,The company sets up
reserves are set up when these claims become apparent. The
companySJG also maintains
insurance and records probable insurance recoveries relating to
outstanding claims.
A group of Atlantic City casinos filed a petition with the BPU
on January 16, 1996 alleging overcharges of over $10.0 million,
including interest. Management believes that chargesA settlement has been arrived at in this
litigation, under which SJG will make no payments. The group of
casinos have issued general releases to SJG, and on September 4,
1998 the casinos were based on applicable SJG tariffs and that the
casinos were not qualified under less expensive rate schedules,
as claimed. Management believes that the ultimate impact of
these actions will not materially affect the company's financial
position, results of operations or liquidity.
SJG-23petition was withdrawn.
Capital Resources
The company has a continuing need for cash resources and
capital, primarily to invest in new and replacement facilities
and equipment and for environmental cleanupremediation costs. Net
construction and remediation expenditures for the first sixnine
months of 1998 amounted to $25.9$39.8 million. The annual costs for 1998,
1999 and 2000 are estimated at approximately $72.0$71.6 million,
$56.3$52.2 million and $49.4$60.5 million, respectively. These
investments are expected to be funded from several sources,
which may include cash generated by operations, temporary use of
short-term debt, sale of first mortgage bonds, capital leases
and RAC recoveries.
On March 21, 1997, SJG sold $35.0 million of its First Mortgage
Bonds, 7.7% Series due 2027.
On May 2, 1997, SJG's Delaware statutory trust subsidiary, SJG
Capital Trust, sold $35.0 million of 8.35% SJG-guaranteed
Mandatorily Redeemable Preferred Securities. The Trust holds as
its sole asset the 8.35% Deferrable Interest Subordinated
Debentures issued by SJG maturing April 30, 2037. The
Debentures and Preferred Securities are redeemable at the option
of SJG at a redemption price equal to 100% of the principal
amount at any time on or after April 30, 2002.
On July 10,October 21, 1998, SJG filed a petition with the BPU requesting
authority to establishissued $30.0 million of debt under a
Medium Term Note (MTN) program. The
petition requests authority to issue $100Program established October 5, 1998. Notes
totaling $10.0 million were issued at 6.12%, maturing in 2010,
and $20.0 million of MTN's
through December 2001.notes were issued at 7.125%, maturing in
2018. The net proceeds of this MTN program
will bethese note issuances were used to
retire short-term debt and to fund capital expenditures.
Ratio of Earnings to Fixed Charges
The company's ratio of earnings to fixed charges for each of
the periods indicated is as follows:
SJG-25
Twelve
Months Ended
Years Ended December 31, September 30,
- --------------------------------------------- ------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
2.6 2.1 2.3 2.5 2.6 2.2
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.
Other Event
On October 14, 1998, SJI and Conectiv announced plans for a
joint customer account services venture that will begin to
provide meter reading services in southern New Jersey by the end
of the year. The new venture will allow both companies to
capitalize on the synergies that exist because their companies'
territories overlap. Customers should benefit from the
companies' collective ability to reduce meter reading costs.
Inflation
The ratemaking process provides that only the original cost of
utility plant is recoverable in revenues as depreciation.
Therefore, the excess cost of utility plant, stated in terms of
current cost over the original cost of utility plant, is not
presently recoverable. While the ratemaking process gives no
recognition to the current cost of replacing utility plant,
based on past practices, SJG believes it will be allowed to earn
on the increased cost of its net investment as replacement of
facilities actually occurs.
Summary
The company is confident it will have sufficient cash flow to
meet its operating, capital and dividend needs and is taking and
will take such actions necessary to employ its resources
effectively.
SJG-24SJG-26
PART II OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference
to Part I, Item 1, Note 6, on pages 11, 12, 13 and 1314 excluding the
first two paragraphs of the Note, regarding contingencies,
including pending litigation and the remediation and clean-up of
certain sites which included manufactured gas operations.
Item 6. Exhibits and Reports on Form 8-K
b. No reports on Form 8-K were filed during the quarter
for which this report is filed.
SJG-25SJG-27
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 12,November 13, 1998 By: /s/ David A. Kindlick
David A. Kindlick
Senior Vice President, Finance & Rates
Dated: August 12,November 13, 1998 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Vice President and Treasurer
SJG-26SJG-28
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-27SJG-29