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 ======== ======== ======== ======== SJG-15 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