Page 1 of 2223
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 March 31,June 30, 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 May 7,August 6, 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 2223
- CoverTitle Page -
PART I FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 1011
SJG-2
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
Three Months Ended
March 31,
----------------------June 30,
--------------------------
1999 1998
---------- ---------------------- ------------
Operating Revenues:
Utility $ 134,58766,101 $ 108,16351,737
Other 495 322
---------- ----------549 482
----------- -----------
Total Operating Revenues 135,082 108,485
---------- ----------66,650 52,219
----------- -----------
Operating Expenses:
Gas Purchased for Resale 78,674 61,17543,324 30,426
Utility Operations 9,160 9,5919,580 9,928
Other Operations 370 366567 489
Maintenance 1,282 1,5921,309 1,271
Depreciation 4,611 4,1674,692 4,256
Income Taxes 12,718 9,672127 (223)
Other Taxes 4,456 3,884
---------- ----------1,832 1,994
----------- -----------
Total Operating Expenses 111,271 90,447
---------- ----------61,431 48,141
----------- -----------
Operating Income 23,811 18,0385,219 4,078
Interest Charges:
Long-Term Debt 4,107 3,8393,917 3,697
Short-Term Debt and Other 914 606
---------- ----------959 746
----------- -----------
Total Interest Charges 5,021 4,445
Income4,876 4,443
Income(Loss) Before Preferred Dividend
Requirements 18,790 13,593343 (365)
Preferred Stock Dividend Requirements 4142 42
Preferred Securities Dividend Requirements 731 731
---------- ----------730 730
----------- -----------
Net IncomeLoss Applicable to Common Stock $ 18,018(429) $ 12,820
========== ==========(1,137)
=========== ===========
Average Shares of Common Stock Outstanding 2,339 2,339
========== ===================== ===========
Earnings Per Common Share $ 7.70(0.18) $ 5.48
========== ==========(0.49)
=========== ===========
Dividends Declared Per Common Share $ 1.73 $ 1.64
========== ==========1.83
=========== ===========
The accompanying footnotes are an integral part of the financial statements.
SJG-3
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED BALANCE SHEETSINCOME (UNAUDITED)
(In Thousands)Thousands Except for Per Share Data)
(Unaudited)
March 31, December 31,
------------------------- ------------Six Months Ended
June 30,
--------------------------
1999 1998 1998
------------
------------ ------------
Assets
Property, Plant and Equipment:Operating Revenues:
Utility Plant, at original cost $ 691,669200,688 $ 628,430 $ 679,997
Accumulated159,900
Other 1,044 804
----------- -----------
Total Operating Revenues 201,732 160,704
----------- -----------
Operating Expenses:
Gas Purchased for Resale 121,998 91,601
Utility Operations 18,740 19,519
Other Operations 937 855
Maintenance 2,591 2,863
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
Prepaid9,303 8,423
Income Taxes - - 12,596
Prepayments12,845 9,449
Other Taxes 6,288 5,878
----------- -----------
Total Operating Expenses 172,702 138,588
----------- -----------
Operating Income 29,030 22,116
Interest Charges:
Long-Term Debt 8,024 7,536
Short-Term Debt and Other Current Assets 2,060 2,166 2,267
------------ ------------ ------------1,873 1,352
----------- -----------
Total Current Assets 89,075 76,842 97,020
------------ ------------ ------------
Accounts Receivable - Merchandise 903 1,522 990
------------ ------------ ------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended -Interest Charges 9,897 8,888
Income Before Preferred Dividend Requirements 19,133 13,228
Preferred Stock Dividend Requirements 83 84
Preferred Securities Dividend Requirements 1,461 1,461
----------- -----------
Net 18,824 20,939 25,152
Liability for Future Expenditures 52,939 52,400 52,939
Gross Receipts and Franchise Taxes 3,474 3,917 3,585
Income Taxes - 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 8,401 7,691 10,921
------------ ------------ ------------
Total Regulatory and Other Non-Current Assets 101,267 104,689 118,997
------------ ------------ ------------
Total AssetsApplicable to Common Stock $ 702,59117,589 $ 642,90711,683
=========== ===========
Average Shares of Common Stock Outstanding 2,339 2,339
=========== ===========
Earnings Per Common Share $ 720,136
============ ============ ============7.52 $ 4.99
=========== ===========
Dividends Declared Per Common Share $ 3.46 $ 3.47
=========== ===========
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)
March 31,June 30, December 31,
------------------------------------------------- ------------
1999 1998 1998
----------- ----------- ------------
Assets
- ------
Property, Plant and Equipment:
Utility Plant, at original cost $ 702,116 $ 642,846 $ 679,997
Accumulated Depreciation (185,898) (173,614) (179,605)
Gas Plant Acquisition Adjustment - Net 1,813 1,888 1,851
----------- ----------- -----------
Property, Plant and Equipment - Net 518,031 471,120 502,243
----------- ----------- -----------
Available-for-Sale Securities 1,031 - 886
----------- ----------- -----------
Current Assets:
Cash and Cash Equivalents 8,007 2,057 3,751
Accounts Receivable 31,392 26,194 28,770
Unbilled Revenues 6,709 3,102 18,998
Provision for Uncollectibles (932) (1,032) (1,032)
Natural Gas in Storage, average cost 20,121 19,827 27,619
Materials and Supplies, average cost 3,962 4,244 4,051
Prepaid Taxes 10,009 15,345 12,596
Prepayments and Other Current Assets 3,941 2,965 2,267
----------- ----------- -----------
Total Current Assets 83,209 72,702 97,020
----------- ----------- -----------
Accounts Receivable - Merchandise 851 1,384 990
----------- ----------- -----------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 24,503 22,542 27,500
Liability for Future Expenditures 52,939 50,697 52,939
Gross Receipts and Franchise Taxes 3,363 3,806 3,585
Income Taxes - Flowthrough Depreciation 12,020 13,510 13,021
Deferred Fuel Cost - Net - - 5,509
Deferred Postretirement Benefit Costs 5,207 5,837 5,522
Other 7,866 7,607 10,921
----------- ----------- -----------
Total Regulatory and Other Non-Current Assets 105,898 103,999 118,997
----------- ----------- -----------
Total Assets $ 709,020 $ 649,205 $ 720,136
=========== =========== ===========
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)
June 30, December 31,
------------------------ ------------
1999 1998 1998
----------- ----------- ------------
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 102,817108,067 102,817 102,817
Retained Earnings 68,243 65,11563,764 59,697 54,275
------------ ------------ ----------------------- ----------- -----------
Total Common Equity 176,908 173,780177,679 168,362 162,940
------------ ------------ ----------------------- ----------- -----------
Preferred Stock and Securities:
Redeemable Cumulative Preferred-ParPreferred - Par Value $100 per share,
Authorized 46,40445,504,46,404 and 47,30446,404 shares, respectively
Outstanding:
Series A, 4.70% - 1,200, 2,100 and 3,000 shares.2,100 shares 120 210 300 210
Series B, 8.00% - 19,242 shares.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 37,044 37,134 37,224 37,134
------------ ------------ ----------------------- ----------- -----------
Long-Term Debt 192,523 173,672185,704 166,853 194,710
------------ ------------ ----------------------- ----------- -----------
Total Capitalization 406,565 384,676400,427 372,349 394,784
------------ ------------ ----------------------- ----------- -----------
Current Liabilities:
Notes Payable 59,000 32,10082,300 72,300 97,000
Current Maturities of Long-Term Debt 8,876 8,876 8,876
Accounts Payable 31,179 32,05530,955 20,074 40,823
Customer Deposits 5,506 5,9885,373 5,815 5,576
Environmental Remediation Costs 8,752 14,37316,037 8,752
Taxes Accrued 15,172 13,0466,891 2,284 1,387
Interest Accrued and Other Current Liabilities 7,675 6,7406,983 6,633 7,260
------------ ------------ ----------------------- ----------- -----------
Total Current Liabilities 136,160 113,178150,130 132,019 169,674
------------ ------------ ----------------------- ----------- -----------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 86,789 84,15486,649 86,468 87,358
Environmental Remediation Costs 44,187 38,02734,660 44,187
Pension and Other Postretirement Benefits 13,767 10,66113,189 10,537 13,297
Investment Tax Credits 5,141 5,5335,044 5,434 5,239
Deferred Revenues - Net 4,650 9813,777 2,220 -
Other 5,332 5,6975,617 5,518 5,597
------------ ------------ ----------------------- ----------- -----------
Total Deferred Credits and Other Non-Current Liabilities 159,866 145,053158,463 144,837 155,678
------------ ------------ ----------------------- ----------- -----------
Commitments and Contingencies
Total Capitalization and Liabilities $ 702,591709,020 $ 642,907649,205 $ 720,136
============ ============ ======================= =========== ===========
The accompanying footnotes are an integral part of the financial statements.
SJG-5SJG-6
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In Thousands)
ThreeSix Months Ended
March 31,
---------------------------June 30,
--------------------------
1999 1998
------------ ----------------------- -----------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 18,01817,589 $ 12,82011,683
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 5,001 4,63910,740 9,388
Provision for Losses on Accounts Receivable 63 237258 454
Revenues and Fuel Costs Deferred - Net 12,507 4,6559,286 5,227
Deferred and Non-Current Income Taxes and Credits - Net 97 2,302194 4,582
Environmental Remediation Costs - Net 6,328 1022,997 (834)
Changes in:
Accounts Receivable (23,105) (7,673)9,309 17,629
Inventories 15,985 13,5257,587 4,315
Prepayments and Other Current Assets 207 124(1,674) (675)
Prepaid and Accrued Taxes - Net 26,381 12,6328,091 (13,655)
Accounts Payable and Other Accrued Liabilities (9,299) (13,420)(10,348) (25,501)
Other - Net 2,899 (104)
------------ ------------2,531 (30)
----------- -----------
Net Cash Provided by Operating Activities 55,082 29,839
------------ ------------56,560 12,583
----------- -----------
Cash Flows from Investing Activities:
Capital Expenditures, Cost of Removal and Salvage (13,044) (9,961)
------------ ------------(25,513) (25,663)
Purchase of Available-for-Sale Securities (145) -
----------- -----------
Net Cash Used in Investing Activities (13,044) (9,961)
------------ ------------(25,658) (25,663)
----------- -----------
Cash Flows from Financing Activities:
Net Repayments of(Repayments of)Borrowins from Lines of Credit (38,000) (13,800)(14,700) 26,400
Principal Repayments of Long-Term Debt (2,187) (2,188)(9,006) (9,007)
Dividends on Common Stock (4,050) (3,825)
------------ ------------(8,100) (8,106)
Repurchase of Preferred Stock (90) (90)
Payments for Issuance of Long-Term Debt and Preferred Securities - (27)
Additional Investment by Shareholder 5,250 -
----------- -----------
Net Cash Used in(Used in)Provided by Financing Activities (44,237) (19,813)
------------ ------------(26,646) 9,170
----------- -----------
Net (Decrease)IncreaseIncrease(Decrease) in Cash and Cash Equivalents (2,199) 654,256 (3,910)
Cash and Cash Equivalents at Beginning of Period 3,751 5,967
------------ ----------------------- -----------
Cash and Cash Equivalents at End of Period $ 1,5528,007 $ 6,032
============ ============2,057
=========== ===========
The accompanying footnotes are an integral part of the financial statements.
SJG-6SJG-7
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Significant Accounting Practices:
Consolidation - The consolidated financial statements include the accounts
of South Jersey Gas Company (SJG) and its wholly-owned statutory trust
subsidiary, SJG Capital Trust. South Jersey Industries, Inc. (SJI) owns all of
the outstanding common stock of SJG. All significant intercompany accounts and
transactions were eliminated. SJG reclassified some previously reported
amounts to conform with current year classifications. In the 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.
South Jersey Industries, Inc. (SJI) owns all of the outstanding common
stock of SJG.
Estimates and Assumptions - Our financial statements are prepared to
conform with generally accepted accounting principles. Management makes
estimates and assumptions that affect the amounts reported in the financial
statements and related disclosures. Therefore, actual results could differ
from those estimates.
New Accounting Pronouncement - In June 1998, the FASB issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
effective for our fiscal year ending December 31, 2000.2001. This statement
establishes accounting and reporting standards for derivative instruments,
including those embedded in other contracts, and for hedging activities.
It requires recognizing derivatives as assets or liabilities at fair value on
the balance sheet. We are currently evaluating the effects of FASB No. 133 on
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 condensed statements of consolidated income for the three and six months
ended March 31,June 30, 1999 and 1998 are as follows (in thousands):
SJG-7SJG-8
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Current:
Federal $ 9,357(140) $ 4,965(2,575) $ 9,217 $ 2,390
State 3,264 2,167
------- -------170 (198) 3,434 1,969
-------- -------- -------- --------
Total Current 12,621 7,13230 (2,773) 12,651 4,359
Deferred:
Federal 326 2,401325 2,379 651 4,780
State (131) 238
------- -------270 (262) 508
-------- -------- -------- --------
Total Deferred 195 2,639194 2,649 389 5,288
Investment Tax Credit (98)(97) (99) ------- -------(195) (198)
-------- -------- -------- --------
Net Income Taxes $12,718 $ 9,672
======= =======127 $ (223) $ 12,845 $ 9,449
======== ======== ======== ========
Note 3. Recent Regulatory Actions:
SJG began a pilot program in April 1997, giving residential customers a
choice of gas supplier. During the initial enrollment period in 1997, nearly
13,000 residential customers applied for and received this service. In June
1998, theThe BPU
subsequently expanded the number of potential participants to 25,000. There
were 20,906 participants50,000 and, as
of March 31, 1999.June 30, 1999, enrollment totaled 24,750. In January 2000, all of SJG's
customers will become eligible to choose a gas supplier. 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 reduces utility
revenues, it does not affect SJG's net income, financial condition or margins.
In September 1998, SJG filed its annual LGAC, TAC and DSMC with the BPU.
The LGAC and DSMC cover the period November 1 through October 31 of each year.
The TAC period runs from October 1 through May 31. ThisOn May 12, 1999, the BPU
approved a $7.1 million increase in rates as part of the current LGAC filing, which
includesincluded the results of the previous two LGAC filings, was updated in
January 1999 and requests an increase in rates of $7.1 million. These filings
contain no material TAC or DSMC recovery issues at this time. All filings are
still pending at the BPU. We believe the ultimate settlement of these filings
will not adversely affect SJG's financial position, results of operations or
liquidity.annual filings.
In April 1999, the BPU approved new hourly appliance service rates which
SJG implemented in that same month. On June 30, 1999, SJG filed a proposal to
implement several new service contract plans and to expand its existing service
contract plans to include appliances not presently covered. Subsequently, SJG
increased the price of its existing service contract plans effective August 1,
1999. The new rates and plans are competitive with those of other service
providers in New Jersey and are designed to increase earnings and cash flows.
SJG-8SJG-9
Note 4. Retained Earnings:
Restrictions exist under various loan agreements regarding the amount of
cash dividends or other distributions that we may pay on SJG's common stock.
SJG's retained earnings, which is free of these restrictions, was approximately
$66.3$61.9 million as of March 31,June 30, 1999.
Note 5. Commitments and Contingencies:
Construction Commitments - The estimated cost of construction and
environmental remediation programs of SJG for 1999 totals $52.2 million.
Commitments were made regarding these programs.
Pending Litigation - SJG is subject to claims arising in the ordinary
course of business and other legal proceedings. We set up reserves when these
claims become apparent. We also maintain insurance and record probable
insurance recoveries relating to outstanding claims.
Environmental Remediation Costs - SJG incurred and recorded costs for
environmental clean up of sites where SJG or its predecessors operated gas
manufacturing plants. SJG stopped manufacturing gas over 35 years ago.
Since the early 1980s, SJG recorded environmental remediation costs of
$101.0$107.9 million, of which $48.1$55.0 million was spent as of March 31,June 30, 1999. With the
assistance of an outside consulting firm, we estimate that future costs to
clean up SJG's sites will range from $52.9 million to $160.3 million. We
recorded the lower end of this range as a liability. It is reflected on the
1999 condensed consolidated balance sheet under the captions Current
Liabilities and Deferred Credits and Other Non-Current Liabilities. SJG did
not adjust the accrued liability for future insurance recoveries, which
management is pursuing. We use insurance proceeds to offset related legal feeslitigation
costs and to reduce the balance of deferred environmental remediation costs.
Recorded amounts include estimated costs based on projected investigation and
remediation work plans using existing technologies. Actual costs could differ
from the estimates due to the long-term nature of the projects, changing
technology, government regulations and site-specific requirements.
SJG has two regulatory assets associated with environmental cost. The
first 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
Statement No. 71, "Accounting for the Effects of Certain Types of Regulation."
The BPU allowed SJG to recover expenditures through July 1996 and petitions to
recover costs through July 19981999 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 Statement No. 5, "Accounting for
Contingencies." This amount, which relates to former manufactured gas plant
SJG-9SJG-10
sites, was recorded as a deferred debit with the corresponding amount reflected
on the condensed consolidated balance sheet under the captions, Current
Liabilities and Deferred Credits and Other Non-Current Liabilities. The
deferred debit is a regulatory asset under FASB No. 71. The BPU's intent,
evidenced by current practice, is to allow SJG to recover the deferred costs
after they are spent.
We file with the BPU to recover these costs in rates through our RAC. The
BPU has consistently allowed the full recovery over 7-year periods, and we
believe this will continue. As of March 31,June 30, 1999, SJG's unamortized remediation
costs of $18.8$24.5 million are reflected on the condensed consolidated balance
sheet under the caption Regulatory and Other Non-Current Assets. Since BPU
approval of the RAC in 1992, SJG recovered $18.0$19.3 million through rates as of
March 31,June 30, 1999.
SJG-10Note 6. Other Paid-In Capital:
On June 30, 1999, SJG received $5.25 million as a contribution of capital
from SJI. Subsequently, on July 30, 1999, SJG received an additional $9.75
million contribution from SJI. Contributions of capital are credited to Other
Paid-In Capital and Premium on Common Stock. There have been no other changes
in Common Stock during 1999 and 1998.
SJG-11
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 269,108270,433 customers at March 31,June 30, 1999, compared with 262,315263,678 customers at
March 31,June 30, 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 our own sales
and for some of our customers. South Jersey Industries, Inc. (SJI) owns all of
the common stock of SJG.
Forward Looking Statements
This report contains certain forward-looking statements concerning
projected 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
involve a number of risks and uncertainties. We caution that forward-looking
statements are not guarantees and actual results could differ materially from
those expressed or implied in the forward-looking statements.
A number of factors could cause our actual results to differ materially
from those anticipated, including, but not limited to the following: general
economic conditions on an international, federal, state and local level;
weather conditions in 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.
Pilot Program - Choice of Gas Supplier
In April 1997, SJG began itsoperates a New Jersey Board of Public Utilities (BPU) approved pilot
program giving residential customers a choice of gas supplier. DuringCurrently the
initial enrollment period in 1997, approximately 13,000 residential
customers applied for and received this service. In June 1998, the BPU
expanded the number ofprogram is open to 50,000 potential participants to 25,000. There were 20,906
participantsand, as of March 31, 1999.June 30, 1999,
enrollment totaled 24,750. In January 2000, all of SJG's customers will become
eligible to choose a gas supplier. 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 a BPU-approved
fuel clause. While the program reduces utility revenues, it does not affect
SJG's net income, financial condition or margins.
SJG-11SJG-12
Energy Adjustment Clauses
In 1998, the BPU approved a revised Temperature Adjustment Clause (TAC)
for SJG, effective October 1998. TAC adjustments duringhad the firstfollowing impacts on
1999 and 1998 second quarter ofand six month net earnings:
1999 increased revenue and net income by $2.16 million and $1.28 million,
respectively.1998
------ ------
TAC adjustments for the same periodAdjustment to Net Income ($ in 1998 were immaterial.thousands)
Quarter Ended 6/30 ($44) $247
Six Months Ended 6/30 $1,232 $247
While the revenue and income impacts of TAC adjustments are recorded as
incurred, cash inflows or outflows directly attributable to TAC adjustments do
not begin until the next TAC year. Each TAC year begins October 1.
Status of Year 2000 Conversion
State of Readiness
We prepared a Year 2000 Impact and Assessment Study and developed a
detailed plan to enable SJG to be ready for year 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%100% of effected programming code as of March 31,
1999. We have scheduled all revisions to be complete by JulyJune 1, 1999. We
believe that 90% of all, and 100% of our mission critical, embedded technology
is Y2K ready. We have been testingtested all revisions on an as completed basis and will
continue to test through the end of this year.
The most significant areasarea that areis not as of yetcurrently Y2K ready areis our SCADA
software, whichthat monitors natural gas flow throughout our distribution system,
and our cash processing equipment.system.
SJG has contracted with a vendor to replace the SCADA software with a version
that is Y2K compliant, with installation and testing to be completed by the
end of the 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. RegardingSJG's cash processing we are currently considering options that include outsourcingsystem was Y2K ready as of
June 30. This function had previously been identified in the function, purchasingMarch Form 10Q as
not being Y2K compliant equipment and modifying the existing
equipment. Back-up cash processing procedures are in place.ready.
We surveyed all of our vendors regarding their Y2K readiness. All vendors
providing third party software have indicated their products used by us are Y2K
ready. Of product and service vendors surveyed, 72%71% of all and 96%100% of mission
critical vendors have indicated Y2K readiness. We are actively pursuing
assurances that the remainder of our vendors will be Y2K ready.
SJG-13
Year 2000 Costs
We project Y2K costs to total $0.58$0.54 million, with $0.41$0.43 million having
been spent through March 31,June 30, 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 Julythe end of August 1999.
Y2K Summary
If some key systems and devices are not ready for the Year 2000, in
particular at pipeline, telecommunication, electricity or banking service
vendors, there will likely be adverse effects on the company's business,
results of operations and financial condition.
While unexpected Y2K problems can occur, we do not anticipate any material
difficulty in achieving Y2K readiness based upon the nature of SJG's operating
and information systems and the state of planning and remediation. Any
problems that arise within the company should be immaterial to our financial
position or operating results.
Results of Operations - First QuarterThree and Six Months Ended March 31,June 30, 1999
Compared to First QuarterThree and Six Months Ended March 31,June 30, 1998
Operating Revenues
Revenues increased $26.6$14.4 million and $41.0 million in the second quarter
and first threesix months of 1999, respectively, compared with the prior year
period.periods. The primary reasons for the increaseincreases were increased off-system sales
the effects ofand 6,755 additional customers. Six month results also benefited significantly
from the revised TAC and 6,793 additional
customers.TAC. These factors more than offset revenue reductions due to
the continued migration of firm gas sales to firm transportation. Note,
however, that SJG's tariffs are structured so that profits are derived from the
transportation of gas, not the sale of the commodity. Consequently, the switch
to firm transportation reduced revenues but did not impact profitability.
Weather in the second quarter and first threesix months of 1999 was 15.5%8.7% and
14.2% colder, respectively, than the prior year period, but 3.9%periods. Weather was 0.9%
colder and 3.0% warmer for the second quarter and first six months,
respectively, 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
SJG-14
effective in October 1998 will significantly reducereduced the weather related volatility
in our revenues. However, comparisons for the first two quarters of 1999 to
the prior year periods will continuecontinued 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 and six month periodperiods ended March 31,June 30, 1999 vs. the three month periodsame periods ended
March 31,June 30, 1998.
2nd Quarter Year to Date
----------- ------------
1999 1998 ---------- ----------
Utility1999 1998
-------- -------- -------- --------
Operating Revenues (Thousands):
Firm
Residential $72,536 $63,852$ 25,025 $ 23,494 $97,561 $87,346
Commercial 16,185 15,9175,016 5,899 21,201 21,816
Industrial 1,811 1,815913 733 2,724 2,548
Cogeneration & Electric
Generation 667 9612,136 2,458 2,803 3,419
Firm Transportation 10,831 7,582
---------- ----------6,131 4,726 16,962 12,308
-------- -------- -------- --------
Total Firm 102,030 90,12739,221 37,310 141,251 127,437
Interruptible 340 1,037653 614 993 1,651
Interruptible Transportation 533362 541 895 1,436
Off-System 30,486 13,17424,557 11,051 55,043 24,225
Capacity Release & Storage 874 2,262856 1,428 1,730 3,690
Other 819 990
---------- ----------1,001 1,275 1,820 2,265
-------- -------- -------- --------
Total Utility Operating Revenues $135,082 $108,485
========== ==========$ 66,650 $ 52,219 $201,732 $160,704
======== ======== ======== ========
Throughput (Mmcf):
Firm
Residential 8,883 7,9222,696 2,480 11,579 10,402
Commercial 2,216 2,235621 737 2,837 2,972
Industrial 122 17237 58 159 230
Cogeneration & Electric
Generation 71 91679 802 750 893
Firm Transportation 6,789 6,397
---------- ----------5,875 4,887 12,664 11,284
-------- -------- -------- --------
Total Firm Throughput 18,081 16,8179,908 8,964 27,989 25,781
Interruptible 107 283137 178 244 461
Interruptible Transportation 1,103 2,118831 1,280 1,934 3,398
Off-System 14,314 5,30610,461 4,570 24,775 9,876
Capacity Release & Storage 3,321 6,485
---------- ----------8,038 7,653 11,359 14,138
-------- -------- -------- --------
Total Throughput 36,926 31,009
========== ==========
SJG-1429,375 22,645 66,301 53,654
======== ======== ======== ========
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Gas Purchased for Resale
Gas purchased for resale increased $17.5$12.9 million inand $30.4 million for the
second quarter and six month periods of 1999, respectively, compared with the
same periods in 1998 due principally to increased sales volumes, particularly
to off-system customers. These increases were partially offset by SJG's
ability to buy gas during the first six months of 1999 at an average cost of
$2.10/dt compared with $2.39/dt in 1998. Gas supply sources include contract
and open-market purchases. SJG secures and maintains its own gas supplies to
serve its customers.
Operations
A summary of net changes in Utility Operations and Other Operations (in
thousands):
Three Months Ended March 31,Six Months Ended
June 30, June 30,
1999 vs. 1998 -------------1999 vs. 1998
------------------ ----------------
Other Production Expense $13$(3) $10
Transmission 2619 45
Distribution 94(295) (201)
Customer Accounts and Services (225)(115) (340)
Sales (27)9 (18)
Administration and General (312)37 (275)
Other 478 82
------ $(427)-------
$(270) $(697)
====== =======
Distribution expenses declined due to reduced levels of new and
replacement meter and regulator installations. Installation activity is
expected to increase during the second half of 1999. Customer Accounts and
Services costs decreased in 1999 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 for the six month period from 1998 levels
principally due to an emphasis on cost cutting in general.
SJG-16
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses
(in thousands):
Three Months Ended March 31,Six Months Ended
June 30, June 30,
1999 vs. 1998 -------------1999 vs. 1998
------------------ ----------------
Maintenance $(310)$38 $(272)
Depreciation 444436 880
Income Taxes 3,046350 3,396
Other Taxes 572
SJG-15(162) 410
The decrease in maintenance expensecosts for the first six months is principally
due to reduced overtime charges and fewer occurrences of distribution system
leaks.leaks experienced. Depreciation is higher due to increased investment in
property, plant and equipment.equipment by SJG. Income Tax changes reflect the impact of
changes in pre-tax income. Other taxes increased for the first six months
because of higher sales volumes due primarily to lower temperatures in the
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 1999 principally due to the effect of increased short
and long-term debt outstanding.outstanding, partially offset by lower interest rates
experienced during the first half of this year. The debt was incurred
primarily to support the expansion and upgrade of ourSJG's gas transmission and
distribution system.
Net Income Applicable to Common Stock
The details affecting the changes in net income and earnings per share are
discussed under the appropriate captions above.
Liquidity
The seasonal nature of gas operations; the timing of construction and
remediation expenditures and related permanent financing; as well as mandated
tax and sinking fund payment dates require large, short-term cash requirements.
These requirements are generally met by cash from operations and short-term
lines of credit. We maintain short-term lines of credit with a number of
banks, totaling $120.0$130.0 million, of which $61.0$47.7 million was available at March
31,June
30, 1999. The credit lines are uncommitted and unsecured with interest rates
attypically available based upon the Federal Funds Rates or below the prime rate.
SJG-16London Interbank
Offered Rates (LIBOR).
SJG-17
The changes in cash flows from operating activities (in thousands):
ThreeSix Months Ended
March 31,June 30,
1999 vs. 1998
-----------------------------
Increases/(Decreases):
Net Income $5,198Applicable to Common Stock $ 5,906
Depreciation and Amortization 3621,352
Provision for Losses on Accounts Receivable (174)(196)
Revenues and Fuel Costs Deferred - Net 7,8524,059
Deferred and Non-Current Income Taxes and
Credits - Net (2,205)(4,388)
Environmental Remediation Costs-Net 6,2263,831
Accounts Receivable (15,432)(8,320)
Inventories 2,4603,272
Prepayments and Other Current Assets 83(999)
Prepaid and Accrued Taxes - Net 13,74921,746
Accounts Payable and Other Accrued Liabilities 4,12115,153
Other - Net 3,0032,561
-------
Net Cash Provided by Operating
Activities $25,243$43,977
=======
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
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.
Changes in Deferred and Non-Current Income Taxes and Credits - Net
represent the differences between taxes accrued and amounts paid. Generally,
deferred income taxes related to deferred fuel costs will be paid in the next
year.
Changes in Environmental Remediation Costs - Net represent the differences
between amounts expended for environmental remediation compared with amounts
collected under the RAC and insurance recoveries.
Changes in Accounts Receivable are primarily due to higher off-system
sales and the impact of colder weather on SJG's sales volumes. Weather and
commodity prices also impact this line item. Changes impact cash flows when
collected in subsequent periods.
SJG-17SJG-18
Changes in Inventories reflect the impact of seasonal requirements,
temperatures and price changes.
Changes in Prepaid and Accrued Taxes - Net reflect the impact of
differences between taxes paid and taxes accrued. Significant timing
differences exist in cash flows during the year. Approximately 50% of SJG's
taxes are paid in installments during the first half of the year and the
remaining 50% are paid on May 15 of each year. SJG uses short-term borrowings
to pay taxes, resulting in a temporary increase in the short-term debt level.
The carrying costs of timing differences are recognized in base utility rates.
Utilization of prepaid tax balances resulted in minimal cash outflows in the
first quarter of 1999.
Changes in Accounts Payable and Other Current Liabilities reflect the
impact of timing differences between the accrual and payment of costs.
Changes in Other - Net reflect numerous changes in noncurrent assets and
liabilities, including accrued deferred income taxes.
Regulatory Matters
In July 1999, SJG filed its annual petition to recover environmental
remediation costs through the Remediation Adjustment Clause (RAC) mechanism.
In the petition, SJG proposed to freeze the level of the RAC for three years
and to obtain recovery of interest expenses that SJG incurs on unamortized
remediation costs.
On February 9, 1999, the "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 electric and natural gas utilities in the state. As to
natural gas utilities, the Act completes the "unbundling" rate process,
establishes a time frame for the institution of competitive services for
customer accounting functions and also sets forth a time frame for a
determination as to whether basic gas supply services should become
competitive.
The Act also contains numerous provisions which require the BPU to
promulgate and adopt a variety of standards related to the implementation of
the Act. These required standards address fair competition, affiliate
relations, accounting, competitive services, supplier licensing, consumer
protection and aggregation. On March 31, 1999, the BPU issued Draft Interim
Standards in response to the Act. In issuing its Order, the BPU stated that
the Draft Interim Standards ". . . do not necessarily represent the final views
of the Board on these matters. . ." As such, the BPU has undertaken an
extensive comment and meeting process to address the concerns of all impacted
parties. The company has been actively participating in this process, and
management believes the final standards will be reasonable for all parties.not have a material adverse effect
on the company.
Other matters are incorporated by reference to Note 3 to the condensed
consolidated financial statements included as part of this report.
Capital Resources
SJG has a continuing need for cash resources and capital, primarily to
invest in new and replacement facilities and equipment and for environmental
remediation costs. Net construction and remediation expenditures for the first
quartersix months of 1999 amounted to $6.7$22.5 million. The costs for 1999, 2000 and
SJG-19
2001
SJG-18 are estimated at approximately $52.2 million, $56.5 million and $55.7
million, respectively. We will fund these expenditures from several sources,
which may include cash generated by operations, temporary use of short-term
debt, sale of medium-term notes, capital leases, RAC recoveries, insurance
recoveries and RAC recoveries.equity infusions from SJI.
SJG received an equity infusion of $5.25 million from SJI on June 30,
1999. On July 30, 1999, SJI contributed an additional $9.75 million of equity
capital to SJG. Future equity contributions will occur on an as needed basis.
Summary
We are confident we will have sufficient cash flow to meet SJG's
operating, capital and dividend needs and are taking and will take such actions
necessary to employ our resources effectively.
SJG-19SJG-20
PART II -- OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part I,
Item 1, Note 5, on pages 910 and 1011 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-20SJG-21
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: May 14,August 13, 1999 By: /s/ David A. Kindlick
David A. Kindlick
Senior Vice President, Finance & Rates
Dated: May 14,August 13, 1999 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Vice President and Treasurer
SJG-21SJG-22
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-22SJG-23