Page 1 of 2922
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1998March 31, 1999 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.)
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 November 5, 1998,May 7, 1999, 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 2922
- Cover Page -
PART I FINANCIAL INFORMATION
Item 1. Financial Statements --- See Pages 3 through 1410
SJG-2
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED LOSSINCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
Three Months Ended
September 30,
-----------------------------March 31,
----------------------
1999 1998
1997
------------ ---------------------- ----------
Operating Revenues:
Utility $43,097 $49,635$ 134,587 $ 108,163
Other 383 441
------------ ------------495 322
---------- ----------
Total Operating Revenues 43,480 50,076
------------ ------------135,082 108,485
---------- ----------
Operating Expenses:
Gas Purchased for Resale 26,259 31,48378,674 61,175
Utility Operations 10,207 10,1499,160 9,591
Other Operations 418 404370 366
Maintenance 1,116 1,5521,282 1,592
Depreciation 4,318 4,027
Federal and State4,611 4,167
Income Taxes (2,329) (1,799)12,718 9,672
Other Taxes 1,575 3,149
------------ ------------4,456 3,884
---------- ----------
Total Operating Expenses 41,564 48,965
------------ ------------111,271 90,447
---------- ----------
Operating Income 1,916 1,111
------------ ------------23,811 18,038
Interest Charges:
Long-Term Debt 3,646 3,9714,107 3,839
Short-Term Debt 1,269 248and Other 108 105
------------ ------------914 606
---------- ----------
Total Interest Charges 5,023 4,324
------------ ------------
Loss5,021 4,445
Income Before Preferred Dividend Requirements (3,107) (3,213)18,790 13,593
Preferred Stock Dividend Requirements 41 42
Preferred Securities Dividend Requirements 731 731
------------ ---------------------- ----------
Net LossIncome Applicable to Common Stock ($3,879) ($3,986)
============ ============$ 18,018 $ 12,820
========== ==========
Average Shares of Common Stock Outstanding 2,339 2,339
============ ====================== ==========
Earnings Per Common Share ($1.66) ($1.70)
============ ============$ 7.70 $ 5.48
========== ==========
Dividends Declared Per Common Share $1.830 $1.635
============ ============$ 1.73 $ 1.64
========== ==========
The accompanying footnotes are an integral part of the financial
statements.
SJG-3
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)BALANCE SHEETS
(In Thousands Except for Per Share Data)Thousands)
Nine Months Ended
September 30,
-----------------------------(Unaudited)
March 31, December 31,
------------------------- ------------
1999 1998 19971998
------------ ------------ ------------
Operating Revenues:
Assets
Property, Plant and Equipment:
Utility $202,997 $233,523Plant, at original cost $ 691,669 $ 628,430 $ 679,997
Accumulated Depreciation (183,041) (170,483) (179,605)
Gas Plant Acquisition Adjustment - Net 1,832 1,907 1,851
------------ ------------ ------------
Property, Plant and Equipment - Net 510,460 459,854 502,243
------------ ------------ ------------
Available-for-Sale Securities 886 - 886
------------ ------------ ------------
Current Assets:
Cash and Cash Equivalents 1,552 6,032 3,751
Accounts Receivable 53,848 44,370 28,770
Unbilled Revenues 16,862 10,445 18,998
Provision for Uncollectibles (932) (1,032) (1,032)
Natural Gas in Storage, average cost 11,864 10,451 27,619
Materials and Supplies, average cost 3,821 4,410 4,051
Prepaid Taxes - - 12,596
Prepayments and Other 1,224 1,483Current Assets 2,060 2,166 2,267
------------ ------------ ------------
Total Operating Revenues 204,221 235,006Current Assets 89,075 76,842 97,020
------------ ------------ Operating Expenses:
Gas Purchased------------
Accounts Receivable - Merchandise 903 1,522 990
------------ ------------ ------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 18,824 20,939 25,152
Liability for Resale 117,860 133,304
Utility Operations 29,726 29,000
Other Operations 1,307 1,339
Maintenance 3,979 4,553
Depreciation 12,741 11,879
FederalFuture Expenditures 52,939 52,400 52,939
Gross Receipts and StateFranchise Taxes 3,474 3,917 3,585
Income Taxes 7,120 7,113- Flowthrough Depreciation 12,264 13,754 13,021
Deferred Fuel Cost - Net - - 7,857
Deferred Postretirement Benefit Costs 5,365 5,988 5,522
Other Taxes 7,456 21,5588,401 7,691 10,921
------------ ------------ ------------
Total Operating Expenses 180,189 208,746Regulatory and Other Non-Current Assets 101,267 104,689 118,997
------------ ------------
Operating Income 24,032 26,260
------------ ------------
Interest Charges:
Long-Term Debt 11,182 11,261
Short-Term Debt 2,386 1,969
Other 344 314 ------------ ------------
Total Interest Charges 13,912 13,544
------------ ------------
Income Before Preferred Dividend Requirements 10,120 12,716
Preferred Stock Dividend Requirements 125 128
Preferred Securities Dividend Requirements 2,192 1,202
------------ ------------
Net Income Applicable to Common Stock $7,803 $11,386Assets $ 702,591 $ 642,907 $ 720,136
============ ============
Average Shares of Common Stock Outstanding 2,339 2,339
============ ============
Earnings Per Common Share $3.34 $4.87
============ ============
Dividends Declared Per Common Share $5.295 $4.906 ============ ============
The accompanying footnotes are an integral part of the financial statements.
SJG-4
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
September 30,March 31, December 31,
------------------------- -------------------------
1999 1998 1997 19971998
------------ ------------ -------------
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $654,961 $607,395 $619,489
Accumulated Depreciation (176,367) (164,700) (167,176)
Gas Plant Acquisition Adjustment - Net 1,869 1,944 1,926
------------ ------------ -------------
Property, Plant and Equipment - Net 480,463 444,639 454,239
------------ ------------ -------------
Available-for-Sale Securities 666 0 0
------------ ------------ -------------
Current Assets:
Cash and Cash Equivalents 1,134 3,684 6,596
Accounts Receivable 12,680 18,720 30,116
Unbilled Revenues 4,163 4,220 17,263
Provision for Uncollectibles (1,032) (1,032) (1,032)
Natural Gas in Storage, average cost 28,194 26,600 23,877
Materials and Supplies, average cost 3,973 3,954 4,509
Prepaid Taxes 13,599 8,513 566
Prepayments and Other Current Assets 1,698 2,386 1,661
------------ ------------ -------------
Total Current Assets 64,409 67,045 83,556
------------ ------------ -------------
Accounts Receivable - Merchandise 1,121 1,547 1,449
------------ ------------ -------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 21,345 17,805 21,041
Liability for Future Expenditures 50,697 52,400 52,400
Gross Receipts & Franchise Taxes 3,696 4,139 4,028
Income Taxes - Flowthrough Depreciation 13,265 14,243 13,999
Deferred Fuel Costs - Net 4,555 493 3,674
Deferred Postretirement Benefit Costs 5,679 5,872 6,150
Other 7,123 7,761 8,577
------------ ------------ -------------
Total Regulatory and Other Non-Current Assets 106,360 102,713 109,869
------------ ------------ -------------
Total Assets $653,019 $615,944 $649,113
============ ============ =============
The accompanying footnotes are an integral part of the financial statements.
SJG-5
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
September 30, December 31,
------------------------- -------------
1998 1997 1997
------------ ------------ -------------
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 $5,848$ 5,848 $ 5,848 $ 5,848
Other Paid-In Capital and Premium on
Common Stock 102,817 102,817 102,817
Retained Earnings 51,537 51,433 56,12068,243 65,115 54,275
------------ ------------ -------------------------
Total Common Equity 160,202 160,098 164,785176,908 173,780 162,940
------------ ------------ -------------------------
Preferred Stock and Securities:
Redeemable Cumulative Preferred - ParPreferred-Par Value $100 per share,
Authorized - 46,404 47,304 and 47,304 shares, respectively
Outstanding:
Series A, 4.70% - 2,100 3,000 and 3,000 sharesshares. 210 300 300210
Series B, 8.00% - 19,242 sharesshares. 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 37,22437,134
------------ ------------ -------------------------
Long-Term Debt 166,853 178,003 175,860192,523 173,672 194,710
------------ ------------ -------------------------
Total Capitalization 364,189 375,325 377,869406,565 384,676 394,784
------------ ------------ -------------------------
Current Liabilities:
Notes Payable 94,800 28,600 45,90059,000 32,100 97,000
Current Maturities of Long-Term Debt 8,876 8,876 8,876
Accounts Payable 17,464 37,786 45,58131,179 32,055 40,823
Customer Deposits 5,552 5,795 5,8715,506 5,988 5,576
Environmental Remediation Costs 16,037 7,7358,752 14,373 8,752
Taxes Accrued 1,181 142 98015,172 13,046 1,387
Interest Accrued and Other Current Liabilities 6,297 4,580 6,7517,675 6,740 7,260
------------ ------------ -------------------------
Total Current Liabilities 150,207 93,514 128,332136,160 113,178 169,674
------------ ------------ -------------------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 81,641 80,225 81,847
Investment Tax Credits 5,335 5,728 5,63286,789 84,154 87,358
Environmental Remediation Costs 44,187 38,027 44,187
Pension and Other Postretirement Benefits 11,267 10,434 10,798
Environmental Remediation Costs 34,660 44,665 38,02713,767 10,661 13,297
Investment Tax Credits 5,141 5,533 5,239
Deferred Revenues - Net 4,650 981 -
Other 5,720 6,053 6,6085,332 5,697 5,597
------------ ------------ -------------------------
Total Deferred Credits and Other Non-Current
Liabilities 138,623 147,105 142,912159,866 145,053 155,678
------------ ------------ -------------------------
Commitments and Contingencies
Total Capitalization and Liabilities $653,019 $615,944 $649,113$ 702,591 $ 642,907 $ 720,136
============ ============ =========================
The accompanying footnotes are an integral part of the financial statements.
SJG-6SJG-5
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In Thousands)
NineThree Months Ended
September 30,
-----------------------------March 31,
---------------------------
1999 1998 1997
------------ ------------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $7,803 $11,386$ 18,018 $ 12,820
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 14,211 13,3165,001 4,639
Provision for Losses on Accounts Receivable 932 94863 237
Revenues and Fuel Costs Deferred - Net (881) (89)12,507 4,655
Deferred and Non-Current Income Taxes and Credits - Net 3,160 2,49997 2,302
Environmental Remediation Costs - Net (304) (2,239)6,328 102
Changes in:
Accounts Receivable 29,604 25,468(23,105) (7,673)
Inventories (3,781) (3,861)15,985 13,525
Prepayments and Other Current Assets (38) (824)207 124
Prepaid and Accrued Taxes - Net (12,832) (6,858)26,381 12,632
Accounts Payable and Other Accrued Liabilities (28,890) (8,309)(9,299) (13,420)
Other - Net (1,542) 2,8702,899 (104)
------------ ------------
Net Cash Provided by Operating Activities 7,442 34,30755,082 29,839
------------ ------------
Cash Flows from Investing Activities:
Purchase of Available-for Sale Securities (666) 0
Capital Expenditures, Cost of Removal and Salvage (39,517) (35,587)(13,044) (9,961)
------------ ------------
Net Cash Used in Investing Activities (40,183) (35,587)(13,044) (9,961)
------------ ------------
Cash Flows from Financing Activities:
Net Borrowings from (Repayments of)Repayments of Lines of Credit 48,900 (79,700)
Proceeds from Issuance of Long-Term Debt 0 35,000(38,000) (13,800)
Principal Repayments of Long-Term Debt (9,007) (4,461)(2,187) (2,188)
Dividends on Common Stock (12,386) (11,475)
Proceeds from Issuance of Preferred Securities 0 35,000
Repurchase of Preferred Stock (90) (90)
Payments for Issuance of Long-Term Debt and Preferred Securities (138) (2,402)
Additional Investment by Shareholder 0 25,623(4,050) (3,825)
------------ ------------
Net Cash Provided by (Used in)Used in Financing Activities 27,279 (2,505)(44,237) (19,813)
------------ ------------
Net Decrease(Decrease)Increase in Cash and Cash Equivalents (5,462) (3,785)(2,199) 65
Cash and Cash Equivalents at Beginning of Period 6,596 7,4693,751 5,967
------------ ------------
Cash and Cash Equivalents at End of Period $1,134 $3,684$ 1,552 $ 6,032
============ ============
The accompanying footnotes are an integral part of the financial statements.
SJG-7SJG-6
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies:Practices:
Consolidation - The Entity
The condensed consolidated financial statements include the accounts
of South Jersey Gas Company (SJG) and its wholly ownedwholly-owned statutory trust
subsidiary, SJG Capital Trust. South Jersey Industries, Inc. (SJI) owns all of
SJG'sthe outstanding common stock. Certain reclassifications have been madestock of SJG. All significant intercompany accounts and
transactions were eliminated. SJG reclassified some previously reported
amounts to conform with classifications used incurrent year classifications. In the current year.company's
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. SJG's 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.
Estimates and Assumptions SJG prepares its- Our financial statements are prepared to
conform with generally accepted accounting principles. This requires the
company to makeManagement makes
estimates and assumptions affectingthat affect the amounts reported in the financial
statements and related disclosures. Therefore, actual results maycould 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 PronouncementsPronouncement - In June 1997,1998, the Financial Accounting Standards Board (FASB)FASB issued FASBStatement No.
131, "Disclosures about Segments of an
Enterprise133, "Accounting for Derivative Instruments and Related Information,Hedging Activities," which is
effective for our fiscal years beginning afteryear ending December 15, 1997.31, 2000. This statement
establishes accounting and reporting standards for reporting selected information about
operating segmentsderivative instruments,
including those embedded in other contracts, and for hedging activities.
It requires recognizing derivatives as assets or liabilities at fair value on
the balance sheet. We are currently evaluating the effects of FASB No. 133 on
SJG's financial condition and results of operations, which will vary based on
our use of derivative instruments at the time of adoption.
Note 2. Income Taxes:
The significant components of federal and state income taxes reflected in
the company's interim and annual financial
statements. SJG is evaluating whether adopting this statement
will changecondensed statements of consolidated income for the 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.
Energy 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
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 state 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,three months ended
March 31, 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. The new
legislation does not materially affect the company's financial
position, operating results or liquidity (See1998 are as follows (in thousands):
SJG-7
1999 1998
-------- --------
Current:
Federal $ 9,357 $ 4,965
State 3,264 2,167
------- -------
Total Current 12,621 7,132
Deferred:
Federal 326 2,401
State (131) 238
------- -------
Total Deferred 195 2,639
Investment Tax Credit (98) (99)
------- -------
Net Income Taxes $12,718 $ 9,672
======= =======
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 2.3. Recent Regulatory Matters:
On July 31, 1996, 1997 and 1998, SJG filed with the BPU to
recover an increase in remediation costs expended from August
1995 through July 1998 totaling $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 are
still pending at the 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 the 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. At the beginning of 1999,
this $5.5 million threshold will increase by another $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,Actions:
SJG began itsa pilot program in April 1997, giving residential customers a
choice of gas supplier. During the initial enrollment period which ended June 30,in 1997, nearly
13,000 residential customers applied for and received this service. SJG began
transporting gas for these customers on August 1, 1997. OnIn June
26,
1998, the BPU expanded the number of potential participants SJG-9
to 25,000. There
were 14,84120,906 participants as of September 30,
1998. Participant'sMarch 31, 1999. Participants' 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. While the program results in
a reduction inreduces utility revenues, it
does not affect the
company'sSJG's net income, financial condition or margins.
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.
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 (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 1996,1998, SJG filed to reduce rates through the
1996-1997 LGAC reflecting a $1.4 million decrease in natural gas
costs. Updated 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, TAC and Demand Side Management Clause (DSMC)
filingsDSMC 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 1997-1998This current LGAC filing, the
company requested a $4.7 million increase in the annual LGAC
recovery
which includes the 1996-1997results of the previous two LGAC year results referred
to above. SJGfilings, was updated this amount to $7.0 million in
August
1998January 1999 and included this amount in its 1998-1999 LGAC filing. The
1998-1999 LGAC filing requested a decreaserequests an increase in rates of $414,000.
The company also requested resolution of prior year$7.1 million. These filings
along with the 1998-1999 filing.contain no material TAC or DSMC recovery issues at this time. All filings are
still pending at the BPU. On March 5, 1998,We believe the ultimate settlement of these filings
will not adversely affect SJG's financial position, results of operations or
liquidity.
In April 1999, the BPU approved new appliance service rates.rates which SJG
implemented in that same month. 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. In April
1998, the BPU also authorized SJG to offer new appliance service
contract plans and to service electric air conditioners.
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.
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 $ -0- and $1,901,000
for the nine months ended September 30, 1998 and 1997,
respectively. The amounts payable to R&T relating to these
services were $ -0- and $10,500 at September 30, 1998 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 $39,000 and $ -0- for the three months ended and
$331,800 and $ -0- for the nine months ended September 30, 1998
and 1997, respectively.flows.
SJG-8
Note 4. Income 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 aggregate amounts of current and
deferred tax (credit) expense for the 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
nine months ended September 30, 1998 and 1997 are shown below
(in thousands):
SJG-11
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
TEFA $918 $0 $5,278 $0
GRAFT 110 2,577 13 19,304
Other Taxes 547 572 2,165 2,254
---------- ---------- ---------- ----------
Total Other Taxes $1,575 $3,149 $7,456 $21,558
========== ========== ========== ==========
During the three and nine months ended September 30, 1998, SJG
recorded an additional $1.4 million and $9.0 million,
respectively, for SUT on utility services through its Condensed
Consolidated Balance Sheet. Such amounts are not included 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 toRetained Earnings:
Restrictions exist under various loan agreements regarding the amount of
cash dividends or other distributions itthat we may pay on itsSJG's common stock.
SJG had
approximately $49.6 million inSJG's retained earnings, at September
30, 1998 that werewhich is free of these restrictions.
Onrestrictions, was approximately
$66.3 million as of 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 1997.31, 1999.
Note 6.5. Commitments and Contingencies:
Construction Commitments - The estimated cost of construction and
environmental remediation programs of SJG for the company in 1998 will total $71.61999 totals $52.2 million.
SJG hasCommitments were made certain commitments regarding these programs.
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 expire is
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, which SJG recovers on a current basis through
the LGAC.
Pending Litigation - SJG is subject to claims which arisearising in the ordinary
course of business and other legal proceedings. The company setsWe set up reserves when these
claims become apparent. SJGWe also maintainsmaintain insurance and recordsrecord 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. A 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 petition was withdrawn.
Environmental Remediation Costs - SJG incurred and recorded costs for
environmental clean up of sites where SJG or predecessor companiesits predecessors operated gas
manufacturing plants. SJG terminated manufacturedstopped manufacturing gas operations at all sites more thanover 35 years ago.
Since the early 1980s, SJG has recorded environmental remediation costs of
$91.8 million. The company has$101.0 million, of which $48.1 million was spent $41.1
million as of September 30, 1998. SJG, withMarch 31, 1999. With
the assistance of an outside consulting firm, estimateswe estimate that future costs to
clean up theSJG's sites will range from $50.7$52.9 million to $150.6$160.3 million. The companyWe
recorded the lower end of this range as a liability. It is reflected on the
Condensed Consolidated Balance Sheet1999 condensed consolidated balance sheet under the captions "Current Liabilities"Current
Liabilities and "DeferredDeferred Credits and Other Non-Current Liabilities." SJG's recorded
environmental remediation costs do not directly affect earnings
because those costs are deferred and recovered 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 companymanagement is pursuing. SJG received $4.2
million ofWe use insurance recoveries as of September 30, 1998. SJG
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 specificsite-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 costs.cost. The
first regulatory asset is titled "EnvironmentalEnvironmental 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
Statement No. 71, "Accounting for the Effects of
SJG-13 Certain Types of Regulation."
The BPU allowed SJG to recover these expenditures through July 1996 and petitions to
recover these costs through July 1998 are pending (See Note 2).pending.
The other regulatory asset titled "EnvironmentalEnvironmental Remediation Cost:
Liability for Future Expenditures"Expenditures relates to estimated future expenditures
determined under the guidance of FASB Statement No. 5, "Accounting for
Contingencies." This amount, which relates to former manufactured gas plant
SJG-9
sites, was recorded as a deferred debit with the corresponding amount
reflected on the condensed consolidated balance sheet under the captions,
"Current Liabilities"Current Liabilities and "DeferredDeferred Credits and Other Non-Current Liabilities."
The deferred debit is a regulatory asset under FASB No. 71 because the71. The BPU's intent,
as evidenced by its current practice, is to allow SJG to recover the deferred costs
after they are expended.
SJG filesspent.
We file with the BPU to recover these costs in rates through itsour RAC. The
BPU has consistently allowed the full recovery over 7-year periods, and SJG believeswe
believe this will continue. As of September 30, 1998,March 31, 1999, SJG's unamortized
remediation costs of $21.3$18.8 million are reflected on the condensed consolidated
balance sheet under the caption "RegulatoryRegulatory and Other Non-Current Assets." Since
BPU approval of the RAC in August 1992, SJG has recovered $15.6$18.0 million through
rates as of September 30, 1998 (See Note 2).
Note 7. Subsequent Events:
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.
On October 21, 1998, SJG issued $30.0 million of debt under a
Medium Term Note Program established October 5, 1998. Under
this program, $10.0 million of notes were issued at 6.12%,
maturing in 2010, and $20.0 million of notes were issued at
7.125%, maturing in 2018.
SJG-14March 31, 1999.
SJG-10
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 263,883269,108 customers at September 30, 1998,March 31, 1999, compared with 257,587262,315 customers at
September 30, 1997.March 31, 1998. 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 itsour own sales
and for some of itsour customers. South Jersey Industries, Inc. (SJI) owns all of
the common stock of SJG.
Forward-LookingForward Looking Statements
This report contains certain forward-looking statements concerning
projected 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 cautionsWe caution 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 aA number of factors that could cause the company'sour actual results to differ materially
from those anticipated, which include,including, 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 and deregulated activities;
the availability and cost of capital; the company's ability to maintain
existing and/or establish successful new alliances and joint ventures to take
advantage of marketing opportunities; costs and effects of unanticipated legal
proceedings,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 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 Program - Choice
of Gas 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 began its BPU-approvedNew Jersey Board of Public Utilities (BPU)
approved pilot program giving residential customers a choice of gas supplier.
During the initial enrollment period which ended June 30,in 1997, nearlyapproximately 13,000 residential
customers applied for and received this service. SJG
began transporting gas for these customers on August 1, 1997.
OnIn June 26, 1998, the BPU
expanded the number of potential participants to 25,000. There were 14,84120,906
participants as of September 30, 1998.March 31, 1999. Participants' bills are reduced for cost of
gas charges and applicable taxes. The resulting decrease in SJG's revenues is
offset by a corresponding decrease in gas costs and taxes under SJG'sa BPU-approved
fuel clause. While the program results in a reduction inreduces utility revenues, it does not affect
SJG'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.SJG-11
Energy Adjustment Clauses
SJG's tariff includesIn 1998, the BPU approved a Levelized Gas Adjustment Clause (LGAC),
arevised Temperature Adjustment Clause (TAC), a Remediation Adjustment
Clause (RAC)
for SJG, effective October 1998. TAC adjustments during the first quarter of
1999 increased revenue and a Demand Side Management Clause (DSMC). These
clauses permitnet income by $2.16 million and $1.28 million,
respectively. TAC adjustments for changesthe same period in gas supply costs,
reduce1998 were immaterial.
While the impactrevenue and income impacts 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
DSMCTAC adjustments are maderecorded as
incurred, cash inflows or outflows directly attributable to match revenues and expenses. TAC adjustments do
affect revenue, income and cash flows since
colder than normal weather can generate credits to customers,
while warmer than normal weather can result in additional
billings to customers.not begin until the next TAC adjustments related to the 1997-1998year. Each TAC year did not materially impact the financial statements for
1998.begins October 1.
Status of Year 2000 Conversion
The companyState of Readiness
We prepared a Year 2000 Impact and Assessment studyStudy and developed a
detailed plan to enable SJG to be ready for program modification foryear 2000. Ready means that
mission critical software, hardware, devices, systems, facilities and business
relationships are prepared to operate satisfactorily through the end of 1999
and beyond.
We revised approximately 91% of effected programming code as of March 31,
1999. We have scheduled all revisions to be complete by July 1999. We believe
that 90% of all, and 100% of our mission critical, embedded technology. An outside service was usedtechnology is Y2K
ready. We have been testing all revisions on an as completed basis and will
continue to identify both
informationaltest through the end of this year.
The most significant areas that are not as of yet Y2K ready are our SCADA
software, which monitors natural gas flow throughout our distribution system,
and logic date variables withinour cash processing equipment. SJG has contracted with a vendor to replace
the programming codes.
This service wasSCADA software with a version that is Y2K compliant, with installation and
testing to be completed and expensed in 1997. Presently,by the company is revising the affected programming codes. As of September
30, 1998, approximately 64%end of the programming code was revised.third quarter. Our gas distribution
system is designed to provide uninterrupted gas flow and has long-standing,
repeatedly tested back-up procedures in place to ensure gas flow in the event
of hardware, software, electrical or SCADA failures. Regarding cash
processing, we are currently considering options that include outsourcing the
function, purchasing Y2K compliant equipment and modifying the existing
equipment. Back-up cash processing procedures are in place.
We surveyed all of our vendors regarding their Y2K readiness. All revisionsvendors
providing third party software have indicated their products used by us are Y2K
ready. Of product and service vendors surveyed, 72% of all and 96% of mission
critical vendors have indicated Y2K readiness. We are actively pursuing
assurances that the remainder of our vendors will be Y2K ready.
Year 2000 Costs
We project Y2K costs to total $0.58 million, with $0.41 having been spent
through March 31, 1999.
SJG-12
Year 2000 Risks and Contingency Plans
The worst case scenario that concerns us the most is a temporary
disruption of service to our gas customers. As a contingency, our gas
distribution system can be operated manually. We have received assurances from
our two direct connect gas supply pipelines that they are Y2K ready. We are
seeking assurances from the companies that supply gas to our system that they
will be Y2K ready. We are preparing contingency plans for use in the event
that they are not ready. Contingency plans have been or are being prepared to
address Y2K related problems. All contingency plans for high priority items
such as service continuation, safety and revenues are scheduled to be completed
by early 1999,
providingJuly 1999.
Y2K Summary
If some key systems and devices are not ready for 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 estimatedYear 2000, in
particular at $0.4 million of
which approximately $0.28 million was spent as of September 30, 1998.
Vendors who provide third party software have been contacted and 28 of
31 have indicated that they are now compliant. The company is also in
SJG-16
the process of securing written verification from its key
product andpipeline, telecommunication, electricity or banking 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 theythere will likely 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 impactadverse effects on the company's distribution systembusiness,
results of operations and general office activities of the
loss of telecommunications and or electrical power as a result of
afinancial condition.
While unexpected Y2K problem with the provider's system. These events in
themselvesproblems can occur, we 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 aanticipate any material
difficulty in achieving Y2K problem.
The company also has both a private voice and data radio systems
which allow it to monitor remote stations manually.
Basedreadiness 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 anyremediation. Any
problems that do arise are expected toshould be immaterial to our financial position or insignificant.operating
results.
Results of Operations - Three and Nine MonthsFirst Quarter Ended September 30, 1998March 31, 1999
Compared to Three and Nine MonthsFirst Quarter Ended September 30, 1997March 31, 1998
Operating Revenues
Revenues decreased $6.6increased $26.6 million in the first three months of 1999
compared with the prior year period. The primary reasons for the third quarterincrease were
increased off-system sales, the effects of 1998
as comparedthe revised TAC and 6,793 additional
customers. These factors more than offset revenue reductions due 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 by customers using increased levels of
firm transportation service in lieucontinued migration 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'sales to firm transportation. Note, however,
that SJG's tariffs are structured suchso that profits are derived from the
transportation of gas, not from the sale of the commodity. Consequently, while both the tax reform and the switch
to firm transportation reduced total revenues neither impactedbut did not impact profitability.
Revenues decreased $30.8 millionWeather in the first three months of 1999 was 15.5% colder than the prior
year period, but 3.9% warmer than the 20-year average. Previously, changes in
temperatures were typically the single most important factor in explaining
revenue fluctuations for comparative periods. Revisions to SJG's TAC that
became effective in October 1998 will significantly reduce the weather related
volatility in our revenues. However, comparisons for the first nine monthstwo quarters of
1998, as compared1999 to the prior year periods will continue to show volatility as 1998
revenues were heavily influenced by weather. Revenues for 1999 will be closely
tied to the 20-year normal temperatures and not actual weather conditions.
SJG-13
The following is a comparison of operating revenue and throughput for the
three month period primarily due to
lower firm sales resulting from weather that was 16.8% warmer.
The results were also impacted byended March 31, 1999 vs. the same factors that effected
the quarterly results.three month period ended
March 31, 1998.
1999 1998
---------- ----------
Utility Operating Revenues (Thousands):
Firm
Residential $72,536 $63,852
Commercial 16,185 15,917
Industrial 1,811 1,815
Cogeneration & Electric Generation 667 961
Firm Transportation 10,831 7,582
---------- ----------
Total Firm 102,030 90,127
Interruptible 340 1,037
Interruptible Transportation 533 895
Off-System 30,486 13,174
Capacity Release & Storage 874 2,262
Other 819 990
---------- ----------
Total Utility Operating Revenues $135,082 $108,485
========== ==========
Throughput (Mmcf):
Firm
Residential 8,883 7,922
Commercial 2,216 2,235
Industrial 122 172
Cogeneration & Electric Generation 71 91
Firm Transportation 6,789 6,397
---------- ----------
Total Firm Throughput 18,081 16,817
Interruptible 107 283
Interruptible Transportation 1,103 2,118
Off-System 14,314 5,306
Capacity Release & Storage 3,321 6,485
---------- ----------
Total Throughput 36,926 31,009
========== ==========
SJG-14
Gas Purchased for Resale
Gas purchased for resale decreased $5.2increased $17.5 million and $15.4
million for the three and the nine month periods ending
September 30, 1998in 1999 compared with
comparable 1997 periods. The
nine month decrease was1998 due principally due to weather related
decreasedincreased sales volumes. Increased levels of firm
transportation versus firm gas sales accounted for a portion of
the decrease in both periods. Sources of gasvolumes, particularly to off-system
customers. Gas supply sources include
both contract and open-market purchases. SJG
is responsible for
securingsecures and maintainingmaintains 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 that any of these contracts expire is October 2000.
All of the transportation and storage service agreements
between SJG and its interstate pipeline suppliers were made
under Federal Energy Regulatory 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 SJG recovers on a
current basis through the LGAC.
Operations
A summary of net changes in utility operations for 1998
compared with 1997 is as followsUtility Operations and Other Operations (in
thousands):
Period Ended September 30,
----------------------------
Three Months Nine MonthsEnded
March 31,
1999 vs. 1998 vs. 1997 1998 vs. 1997
-------------
-------------
Other Production Expense $1 $4$13
Transmission 33 5226
Distribution (130) (337)
Appliance Service 316 54394
Customer Accounts and Services (3) 282(225)
Sales (24) (34)(27)
Administration and General (135) 216(312)
Other 14 (32)
------------- -------------
$72 $694
============= =============
Distribution costs decreased for both periods in 1998
principally due to decreased meter exchange activity. The majority
of the increase in Appliance Service expense comparisons was due to
expenditures on advertising.4
------
$(427)
======
Customer Accounts and Services costs increaseddecreased in the first nine months of1999 principally due to
a decrease in reserves for uncollectible accounts and reduced meter reading
expenses. Meter reading expenses declined due to a change to bimonthly meter
reading. Administrative and General costs decreased from 1998 levels
principally due to an increaseemphasis on cost cutting 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 for the
first nine months of 1998 principally due to increased employee
benefits costs, however, these costs were more than offset
during the third quarter by reductions in expenses for
consultants and regulatory activities.general.
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses for
1998 compared with 1997 is as follows
(in thousands):
SJG-18
Period Ended September 30,
----------------------------
Three Months Nine MonthsEnded
March 31,
1999 vs. 1998 vs. 1997 1998 vs. 1997
-------------
-------------
Maintenance ($436) (574)$(310)
Depreciation 291 862
Federal and State444
Income Taxes 530 73,046
Other Taxes (1,574) (14,102)572
SJG-15
The decrease in maintenance expense is principally due to utility production plant maintenance, which includes the
amortizationreduced overtime
charges and fewer occurrences of environmental remediation costs (such decreases
are offset by lower revenue recovery under SJG's RAC).distribution system leaks. Depreciation is
higher principally due to increased investment in property, plant and equipment. Federal and State Income
Tax changes reflect the impact of changes in pre-tax income and the
impact of the energy tax reform legislation discussed under
Operating Revenues.income. Other Taxes decreasedtaxes
increased because of higher sales volumes due to lower temperatures in the
energy tax reform legislation.first quarter of 1999 and adjustments recorded in 1998 related to the Energy
Tax Reform Act implemented January 1998.
Interest Charges
Interest charges increased in 1998 by $.7 million and $.4
million for the three and nine month periods, respectively,
versus the comparable 1997 periods. Interest charges were
increased for the three and nine month periods due to carrying
higher levels of debt partially offset by lower 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 19971999 principally due to the issuanceeffect of
$35.0 millionincreased short and long-term debt outstanding. The debt was incurred
primarily to support the expansion and upgrade of 8.35% SJG-guaranteed Mandatorily Redeemable
Preferred Securities in May 1997 (See "Capital Resources").our gas transmission and
distribution system.
Net Income Applicable to Common Stock
The details affecting the changes in net income and earnings per common share are
discussed under the appropriate captions above.
Liquidity
The seasonal nature of gas operations,operations; the timing of construction and
remediation expenditures and related permanent financing,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 SJG-19
credit. The company maintainsWe maintain short-term lines of credit with a number of
banks, aggregatingtotaling $120.0 million, of which $25.2$61.0 million was available at September 30, 1998.March
31, 1999. The credit lines are uncommitted and unsecured with interest rates
at or below the prime rate.
SJG-16
The changes in cash flows from operating activities are as
follows (in thousands):
NineThree Months Ended
September 30,March 31,
1999 vs. 1998
vs. 1997
----------------------------
Increases/(Decreases):
Net Income ($3,583)$5,198
Depreciation and Amortization 895362
Provision for Losses on Accounts Receivable (16)(174)
Revenues and Fuel Costs Deferred - Net (792)7,852
Deferred and Non-Current Income Taxes and
Credits - Net 661(2,205)
Environmental Remediation Costs - Net 1,935Costs-Net 6,226
Accounts Receivable 4,136(15,432)
Inventories 802,460
Prepayments and Other Current Assets 78683
Prepaid and Accrued Taxes - Net (5,974)13,749
Accounts Payable and Other Accrued Liabilities (20,581)4,121
Other - Net (4,412)
------------
Decrease in3,003
-------
Net Cash fromProvided by Operating Activities ($26,865)
============$25,243
=======
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.
IncreasesChanges in Deferred and Non-Current Federal Income Taxes and Credits - Net
represent the excess ofdifferences between taxes accrued overand 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 differencedifferences
between amounts expended for environmental remediation expenditures andcompared with amounts
collected under the RAC and insurance recoveries.
Changes in Accounts Receivable are generallyprimarily due to higher off-system
sales and the impact of colder weather on SJG's sales volumes. Weather and
price
related.commodity prices also impact this line item. Changes impact cash flows when
collected in subsequent periods.
SJG-17
Changes in Inventories reflect the impact of seasonal requirements,
temperatures and price changes.
Changes in Prepaid and Accrued Taxes - Net reflect the impact of
changesdifferences between taxes paid and taxes accrued. However,
significantSignificant 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 newSJG's
taxes are paid in monthly installments during the first six monthshalf of the year and the
principal portion of the remaining taxes50% are paid on June 25, 1998, and on May 15 of each year thereafter.year. SJG uses short-term borrowings
to make these tax payments which
resultpay taxes, resulting in a temporary increase in the short-term debt level.
The carrying costs of timing differences are recognized in base utility rates.
Utilization of prepaid tax balances resulted in minimal cash outflows in the
first quarter of 1999.
Changes in Accounts Payable and Other AccruedCurrent 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 Other - Net reflect numerous changes in noncurrent assets and
liabilities, including accrued deferred income taxes.
Regulatory Matters
Rate Actions
On January 27, 1997,February 9, 1999, the BPU granted SJG a total rate increase
of $10.3 million. The $6.0 million base rate portion"Electric Discount and Energy Computation Act"
P.L. 1999, c. 23 (the Act) was signed into law in New Jersey. This bill
establishes the framework and necessary time schedules for the deregulation and
restructuring of the increase was based onelectric and natural gas utilities in the state. As to
natural gas utilities, the Act completes the "unbundling" rate process,
establishes a 9.62% ratetime frame for the institution of return on rate base, which
included an 11.25% return on common equity. The majority of
this increase comes from residentialcompetitive services for
customer accounting functions 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 the 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 onalso sets forth a specified pipeline interconnection. At the beginning of 1999,
this $5.5 million threshold will increase by another $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.
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 requesttime frame for a
$2.5 million revenue reduction through the TAC. This is the
standard BPU procedure useddetermination as to credit customers with previously
collected revenueswhether basic gas supply services should become
competitive.
The Act also contains numerous provisions which were in excess of those allowed by the
TAC (See "Energy Adjustment 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 withrequire the BPU to
adjust rates by
replacingpromulgate and adopt a variety of standards related to the GRAFT with SUT, CBTimplementation of
the Act. These required standards address fair competition, affiliate
relations, accounting, competitive services, supplier licensing, consumer
protection and TEFA components (See
"Liquidity"). 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 rates through the
1996-1997 LGAC reflecting a $1.4 million decrease in natural gas
costs. Updated 1996-1997 LGAC year results were rolled into the
1997-1998 LGAC which was filed withaggregation. On March 31, 1999, the BPU issued Draft Interim
Standards in September 1997.
On September 12, 1997, and September 8, 1998, SJG maderesponse to the Act. In issuing 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 decrease in rates of $414,000. The company also
requested resolution of prior year filings along with the
1998-1999 filing. All filings are still pending at the BPU.
On March 5, 1998,Order, the BPU approved new appliance service rates.
The new rates are competitive with thosestated that
the Draft Interim Standards ". . . do not necessarily represent the final views
of other service
providers in New Jersey and are designed to increase earnings
and cash flows to SJG over the current rates. In April 1998,Board on these matters. . ." As such, the BPU also authorized SJGhas undertaken an
extensive comment and meeting process to offer new appliance service
contract plans and to service electric air conditioners.
SJG-22
On June 8, 1998, SJG filed a petition withaddress 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 further unbundle
natural gas service. The BPU's Orderconcerns 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 unbundling also relate to
the commercial and industrial transportation program.
Therefore, the motion encompasses 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
SJG incurred and recorded costs for environmental clean 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
remediation costs of $91.8 million.impacted
parties. The company has spent $41.1
millionbeen actively participating in this process, and
management believes the final standards will be reasonable for all parties.
Other matters are incorporated by reference to Note 3 to the condensed
consolidated financial statements included as of September 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 endpart 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 remediation costs do not directly affect earnings
because those costs are deferred and recovered 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 September 30, 1998. SJG
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 costs. The first regulatory 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 allowed SJG to recover
these expenditures through July 1996 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 on the balance
sheet under the captions "Current Liabilities" and "Deferred
Credits and Other Non-Current Liabilities." The deferred debit
is a regulatory asset under FASB No. 71, 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
September 30, 1998, SJG's unamortized remediation 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, SJG has recovered $15.6 million
through rates as of September 30, 1998.
On July 31, 1996, 1997 and 1998, SJG filed with the BPU to
recover an increase in remediation costs expended from August
1995 through July 1998 totaling $4.5 million. The BPU approved
the 1996-1997 Remediation Adjustment Clause (RAC) 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 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 $.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 $5.7 million at September
30, 1998.
SJG-24
Other
SJG is subject to claims which arise in the ordinary course of
its business and other legal proceedings. The company sets up
reserves when 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
on January 16, 1996 alleging overcharges of over $10.0 million,
including interest. A 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 petition was withdrawn.report.
Capital Resources
The companySJG 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
nine
monthsquarter of 19981999 amounted to $39.8$6.7 million. The costs for 1998,
1999, 2000 and 20002001
SJG-18
are estimated at approximately $71.6 million,
$52.2 million, $56.5 million and $60.5$55.7 million,
respectively. These
investments are expected to be fundedWe will fund these expenditures from several sources, which may
include cash generated by operations, temporary use of short-term debt, sale
of first mortgage bonds,medium-term notes, 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 SecuritiesSummary
We 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 October 21, 1998, SJG issued $30.0 million of debt under a
Medium Term Note Program established October 5, 1998. Notes
totaling $10.0 million were issued at 6.12%, maturing in 2010,
and $20.0 million of notes were issued at 7.125%, maturing in
2018. The net proceeds of these 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 itwe will have sufficient cash flow to meet itsSJG's
operating, capital and dividend needs and isare taking and will take such actions
necessary to employ itsour resources effectively.
SJG-26SJG-19
PART II -- OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part I,
Item 1, Note 6,5, on pages 12, 139 and 1410 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-27SJG-20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTH JERSEY GAS COMPANY
(Registrant)
Dated: November 13, 1998May 14, 1999 By: /s/ David A. Kindlick
David A. Kindlick
Senior Vice President, Finance & Rates
Dated: November 13, 1998May 14, 1999 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Vice President and Treasurer
SJG-28SJG-21
SOUTH JERSEY GAS COMPANY
Index to Exhibits
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
(Submitted only in electronic format to
the Securities and Exchange Commission).
SJG-29SJG-22