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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2001 Commission File Number 000-22211
SOUTH JERSEY GAS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 21-0398330
(State of incorporation) (IRS employer identification no.)
1 South Jersey Plaza, Folsom, NJ 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 7, 2001 there were 2,339,139 shares of the registrant's common
stock outstanding. All common shares are owned by South Jersey Industries,
Inc., the parent company of South Jersey Gas Company.
- Cover -
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 12
SJG-2
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands, Except for Per Share Data)
Three Months Ended
June 30,
-------------------------
2001 2000
----------- -----------
Operating Revenues:
Utility $ 81,395 $ 76,026
Other 245 635
----------- -----------
Total Operating Revenues 81,640 76,661
----------- -----------
Operating Expenses:
Gas Purchased for Resale 58,560 52,948
Utility Operations 9,458 9,827
Other Operations 626 514
Maintenance 1,788 1,720
Depreciation 5,251 4,989
Income Taxes (409) (258)
Energy and Other Taxes 1,864 2,036
----------- -----------
Total Operating Expenses 77,138 71,776
----------- -----------
Operating Income 4,502 4,885
----------- -----------
Interest Charges:
Long-Term Debt 4,092 3,686
Short-Term Debt and Other 595 1,172
----------- -----------
Total Interest Charges 4,687 4,858
----------- -----------
(Loss)Income Before Preferred Dividend Requirements (185) 27
Preferred Stock Dividend Requirements 36 40
Preferred Securities Dividend Requirements 731 730
----------- -----------
Net Loss Applicable to Common Stock $ (952) $ (743)
=========== ===========
Average Shares of Common Stock Outstanding 2,339 2,339
=========== ===========
Earnings Per Common Share $ (0.41) $ (0.32)
=========== ===========
Dividends Declared Per Common Share $ 1.87 $ 1.79
=========== ===========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJG-3
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands, Except for Per Share Data)
Six Months Ended
June 30,
-------------------------
2001 2000
----------- -----------
Operating Revenues:
Utility $ 300,210 $ 222,653
Other 886 1,010
----------- -----------
Total Operating Revenues 301,096 223,663
----------- -----------
Operating Expenses:
Gas Purchased for Resale 219,900 141,766
Utility Operations 18,977 19,638
Other Operations 980 862
Maintenance 4,673 4,490
Depreciation 10,434 9,909
Income Taxes 11,886 12,350
Energy and Other Taxes 6,280 6,371
----------- -----------
Total Operating Expenses 273,130 195,386
----------- -----------
Operating Income 27,966 28,277
----------- -----------
Interest Charges:
Long-Term Debt 8,324 7,519
Short-Term Debt and Other 1,929 2,366
----------- -----------
Total Interest Charges 10,253 9,885
----------- -----------
Income Before Preferred Dividend Requirements 17,713 18,392
Preferred Stock Dividend Requirements 72 80
Preferred Securities Dividend Requirements 1,461 1,461
----------- -----------
Net Income Applicable to Common Stock $ 16,180 $ 16,851
=========== ===========
Average Shares of Common Stock Outstanding 2,339 2,339
=========== ===========
Earnings Per Common Share $ 6.92 $ 7.20
=========== ===========
Dividends Declared Per Common Share $ 3.74 $ 3.59
=========== ===========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJG-4
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
June 30, December 31,
-------------------------- ------------
2001 2000 2000
------------ ------------ ------------
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $ 781,685 $ 740,265 $ 763,860
Accumulated Depreciation (215,429) (200,076) (208,292)
Gas Plant Acquisition Adjustment - Net 1,664 1,739 1,701
------------ ------------ ------------
Property, Plant and Equipment - Net 567,920 541,928 557,269
------------ ------------ ------------
Available-for-Sale Securities 2,689 1,955 2,494
------------ ------------ ------------
Current Assets:
Cash and Cash Equivalents 3,962 10,250 4,715
Accounts Receivable 58,337 47,938 67,803
Unbilled Revenues 10,953 5,127 43,803
Provision for Uncollectibles (1,732) (860) (1,754)
Natural Gas in Storage, average cost 41,487 24,649 31,769
Materials and Supplies, average cost 4,061 3,978 4,037
Prepaid Taxes 13,872 9,569 3,960
Prepayments and Other Current Assets 3,072 2,883 2,640
------------ ------------ ------------
Total Current Assets 134,012 103,534 156,973
------------ ------------ ------------
Accounts Receivable - Merchandise 134 490 277
------------ ------------ ------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 11,391 18,386 18,474
Liability for Future Expenditures 51,029 51,029 51,029
Gross Receipts and Franchise Taxes 2,476 2,919 2,698
Income Taxes - Flowthrough Depreciation 10,064 11,042 10,553
Deferred Fuel Cost - Net 37,376 13,615 28,810
Deferred Postretirement Benefit Costs 4,347 4,725 4,536
Other 8,887 6,911 8,970
------------ ------------ ------------
Total Regulatory and Other Non-Current Assets 125,570 108,627 125,070
------------ ------------ ------------
Total Assets $ 830,325 $ 756,534 $ 842,083
============ ============ ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJG-5
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
June 30, December 31,
-------------------------- ------------
2001 2000 2000
------------ ------------ ------------
Capitalization and Liabilities
Common Equity:
Common Stock, Par Value $2.50 per share:
Authorized - 4,000,000 shares
Outstanding - 2,339,139 shares $ 5,848 $ 5,848 $ 5,848
Other Paid-In Capital and Premium on Common Stock 125,817 125,817 125,817
Retained Earnings 72,866 66,908 65,436
------------ ------------ ------------
Total Common Equity 204,531 198,573 197,101
------------ ------------ ------------
Preferred Stock and Securities:
Redeemable Cumulative Preferred - Par Value $100 per share,
Authorized 41,966, 43,104 and 43,104 shares, respectively
Outstanding:
Series A, 4.7% - 0, 300 and 300 shares 0 30 30
Series B, 8% - 16,904, 17,742 and 17,742 shares 1,690 1,774 1,774
Company-Guaranteed Mandatorily Redeemable
Preferred Securities of Subsidiary Trust
Par Value $25 per share, 1,400,000 shares
Authorized and Outstanding 35,000 35,000 35,000
------------ ------------ ------------
Total Preferred Stock and Securities 36,690 36,804 36,804
------------ ------------ ------------
Long-Term Debt 195,247 172,123 204,981
------------ ------------ ------------
Total Capitalization 436,468 407,500 438,886
------------ ------------ ------------
Current Liabilities:
Notes Payable 138,600 107,700 113,900
Current Maturities of Long-Term Debt 11,876 11,876 11,876
Accounts Payable 35,856 43,163 75,103
Customer Deposits 5,516 5,367 5,366
Environmental Remediation Costs 15,872 12,534 15,872
Taxes Accrued 483 5,223 442
Interest Accrued and Other Current Liabilities 11,017 5,949 12,796
------------ ------------ ------------
Total Current Liabilities 219,220 191,812 235,355
------------ ------------ ------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 116,274 95,385 107,947
Environmental Remediation Costs 35,157 38,495 35,157
Pension and Other Postretirement Benefits 11,148 11,415 12,314
Investment Tax Credits 4,340 4,676 4,513
Other 7,718 7,251 7,911
------------ ------------ ------------
Total Deferred Credits and Other Non-Current Liabilities 174,637 157,222 167,842
------------ ------------ ------------
Commitments and Contingencies (Note 4)
Total Capitalization and Liabilities $ 830,325 $ 756,534 $ 842,083
============ ============ ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJG-6
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Six Months Ended
June 30,
-------------------------
2001 2000
----------- -----------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 16,180 $ 16,851
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 11,586 11,515
Provision for Losses on Accounts Receivable 680 453
Revenues and Fuel Costs Deferred - Net (8,566) (441)
Deferred and Non-Current Income Taxes and Credits - Net 8,554 2,068
Environmental Remediation Costs - Net 7,083 7,316
Changes in:
Accounts Receivable 41,614 4,770
Inventories (9,742) 2,298
Prepayments and Other Current Assets (432) (422)
Prepaid and Accrued Taxes - Net (9,871) (911)
Accounts Payable and Other Accrued Liabilities (40,876) 3,849
Other - Net (1,252) 317
----------- -----------
Net Cash Provided by Operating Activities 14,958 47,663
----------- -----------
Cash Flows from Investing Activities:
Capital Expenditures, Cost of Removal and Salvage (21,561) (21,627)
Purchase of Available-for-Sale Securities (252) (202)
----------- -----------
Net Cash Used in Investing Activities (21,813) (21,829)
----------- -----------
Cash Flows from Financing Activities:
Net Borrowing from (Repayments of) Lines of Credit 24,700 (11,200)
Principal Repayments of Long-Term Debt (9,734) (8,438)
Dividends on Common Stock (8,750) (8,400)
Repurchase of Preferred Stock (114) (240)
Additional Investment by Shareholder 0 8,000
----------- -----------
Net Cash Provided by (Used in) Financing Activities 6,102 (20,278)
----------- -----------
Net (Decrease)Increase in Cash and Cash Equivalents (753) 5,556
Cash and Cash Equivalents at Beginning of Period 4,715 4,694
----------- -----------
Cash and Cash Equivalents at End of Period $ 3,962 $ 10,250
=========== ===========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
SJG-7
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Significant Accounting Practices:
Consolidation - The consolidated financial statements include the accounts
of South Jersey Gas Company (SJG) and its wholly-owned statutory trust
subsidiary, SJG Capital Trust. All significant intercompany accounts and
transactions were eliminated. We reclassified some previously reported amounts
to conform with current year classifications. In our opinion, the condensed
consolidated financial statements reflect all adjustments needed to fairly
present SJG's financial position and operating results at the dates and for the
periods presented. Our businesses are subject to seasonal fluctuations and,
accordingly, this interim financial information should not be the basis for
estimating the full year's operating results.
South Jersey Industries, Inc. (SJI) owns all of the outstanding common
stock of SJG.
Estimates and Assumptions - Our financial statements are prepared to
conform with generally accepted accounting principles. Management makes
estimates and assumptions that affect the amounts reported in the financial
statements and related disclosures. Therefore, actual results could differ
from those estimates.
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and in June 2000, FASB issued Statement
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." Both were effective for our fiscal year beginning January 2001.
These statements establish accounting and reporting standards for derivative
instruments, including those embedded in other contracts, and for hedging
activities. They require recognizing derivatives as assets or liabilities at
fair value on the balance sheet. SJG has identified financial instruments that
qualify as derivatives. Management believes, based on its interpretation of
guidance issued, that the derivative contracts qualify for the normal purchases
and normal sales exception and, therefore, no additional disclosure is
required. Subsequent guidance from FASB or the Derivative Implementation Group
could affect the accounting for such transactions later in 2001 and beyond.
In June 2001, the FASB issued Statement No. 141, "Business Combinations"
and FASB No. 142, "Goodwill and Other Tangible Assets". FASB No. 141 requires
that all business combinations initiated after June 30, 2001 be accounted for
under the purchase method and addresses the initial recognition and measurement
of goodwill and other intangible assets acquired in a business combination.
FASB No. 142 addresses the initial recognition and measurement of intangible
SJG-8
assets acquired outside of a business combination and the accounting for
goodwill and other intangible assets subsequent to their acquisition. FASB No.
142 provides that intangible assets with finite useful lives be amortized and
that goodwill and intangible assets with indefinite lives not be
amortized, but rather be tested at least annually for impairment. SJG
will adopt FASB No. 142 for its fiscal year beginning January 1, 2002. We are
currently evaluating the effects of its adoption; however, it is not expected
to have a material impact on SJG's financial condition or results of
operations.
Note 2. Regulatory Actions:
In January 1997, the New Jersey Board of Public Utilities (BPU) granted
SJG a total rate increase of $10.3 million. The $6.0 million base rate portion
of the increase was based on a 9.62% rate of return on rate base, which
included an 11.25% return on common equity. Additionally, SJG's threshold for
sharing pre-tax margins generated by interruptible and off-system sales and
transportation (Sharing Formula) increased from $4.0 million to $7.8 million.
SJG keeps 100% of pre-tax margins up to the threshold level and 20% of margins
above that level. In October 1998, the BPU approved a revision to the Sharing
Formula as part of an agreement to modify SJG's Temperature Adjustment Clause
(TAC). The revision credits the first $750,000 above the current threshold
level to the Levelized Gas Adjustment Clause (LGAC) customers. Thereafter, SJG
keeps 20% of the pre-tax margins as it has historically.
In September 1999, the BPU approved an annual recovery level of $6.5
million for remediation costs expended from August 1995 through July 1998. In
January 2000, the BPU approved the recovery of carrying costs on unrecovered
remediation costs and a proposal by SJG to keep its current Remediation
Adjustment Clause (RAC) rate in effect through October 2002.
Effective January 10, 2000, the BPU approved full unbundling of SJG's
system. This allows all natural gas consumers to select their natural gas
supplier. As of June 30, 2001, 31,745 of SJG's residential customers were
purchasing their gas commodity from someone other than SJG. The bills of those
using a gas supplier other than SJG are reduced for cost of gas charges and
applicable taxes. The resulting decrease in revenues is offset by a
corresponding decrease in gas costs and taxes under SJG's BPU-approved fuel
clause. SJG's net income and financial condition are not affected as a result
of the unbundling.
In addition to allowing all customers to select their own supplier, the
unbundling settlement also created an incentive to customers to select a
supplier, other than SJG, in the form of a Market Development Credit (MDC).
This credit is being provided to customers over a two-year period beginning
January 2000, and will approximate $2.5 million plus carrying costs through
December 2001. This credit was provided for on SJG's books as a Deferred
Credit. Therefore, the impact of the MDC will not materially impact future
periods.
SJG-9
Also approved was a modification to SJG's LGAC whereby under-recovered gas
costs of $11.9 million as of October 31, 1999, and carrying costs thereon, are
being recovered over a three-year period beginning January 2000.
On November 16, 2000, SJG received approval to increase its LGAC in
response to unprecedented natural gas price run-ups during 2000. The impact of
this initial increase was approximately 19.0% to a typical residential heating
customer. The BPU also approved the creation of a flexible pricing mechanism,
allowing additional 2.0% increases each month from December 2000 through July
2001. In addition, the ruling permits SJG to recover unrecovered gas costs as
of October 31, 2001 with interest at 5.5% or 5.75% over a three-year period,
beginning December 1, 2001. The higher interest rate is applicable if SJG does
not seek an LGAC rate increase for the next LGAC year. Recoverable interest
costs began accruing on April 1, 2001.
Note 3. Common Equity:
Restrictions exist under various loan agreements regarding the amount of
cash dividends or other distributions that we may pay on our common stock.
SJG's retained earnings, which is free of these restrictions, was approximately
$71.0 million as of June 30, 2001.
SJG received an equity infusion of $8 million from SJI during 2000.
Contributions of capital are credited to Other Paid-In Capital and Premium on
Common Stock. Future equity contributions will occur on an as-needed basis.
Note 4. Commitments and Contingencies:
Construction and Environmental Commitments - SJG's estimated cost of
construction and environmental remediation programs for 2001 totals $45.0
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 in the 1950s.
SJG has successfully entered into settlements with all of its historic
comprehensive general liability carriers regarding the environmental
remediation expenditures at our sites. In addition, we have purchased a
Cleanup Cost Cap Insurance Policy which limits the amount of remediation
expenditures that we will be required to make at eleven of our sites. This
SJG-10
Policy will be in force for a 25-year period at ten sites and for a 30-year
period at one site. The following future cost estimates have not been reduced
by any insurance recoveries from settlements or the Cleanup Cost Cap Insurance
Policy.
Since the early 1980s, SJG accrued environmental remediation costs of
$125.0 million, of which $73.9 million was spent as of June 30, 2001. With the
assistance of an outside consulting firm, we estimate that future costs to
clean up SJG's sites will range from $51.0 million to $148.5 million. We
recorded the lower end of this range as a liability. It is reflected on the
2001 condensed consolidated balance sheets under the captions Current
Liabilities and Deferred Credits and Other Non-Current Liabilities. SJG did
not adjust the accrued liability for future insurance recoveries, which we were
successful in pursuing. We used these proceeds to offset related legal fees
and to reduce the balance of deferred environmental remediation costs.
Recorded amounts include estimated costs based on projected investigation and
remediation work plans using existing technologies. Actual costs could differ
from the estimates due to the long-term nature of the projects, changing
technology, government regulations and site-specific requirements.
SJG has two regulatory assets associated with environmental cost. The
first asset is titled Environmental Remediation Cost: Expended - Net. These
expenditures represent what was actually spent to clean up former gas
manufacturing plant sites. These costs meet the requirements of FASB No. 71,
"Accounting for the Effects of Certain Types of Regulation." The BPU allows
SJG to recover expenditures through the RAC. SJG's current recovery level
includes remediation costs expended through July 1998 and petitions to recover
costs through July 2000 are pending.
The other asset titled Environmental Remediation Cost: Liability for
Future Expenditures relates to estimated future expenditures determined under
the guidance of FASB No. 5, "Accounting for Contingencies." This amount, which
relates to former manufactured gas plant sites, was recorded as a deferred
debit with the corresponding amount reflected on the condensed consolidated
balance sheets under the captions Current Liabilities and Deferred Credits and
Other Non-Current Liabilities. The deferred debit is a regulatory asset under
FASB No. 71. The BPU's intent, evidenced by current practice, is to allow SJG
to recover the deferred costs after they are spent.
SJG files with the BPU to recover these costs in rates through its RAC.
The BPU has consistently allowed the full recovery over 7-year periods, and SJG
believes this will continue. As of June 30, 2001, SJG's unamortized
remediation costs of $11.3 million are reflected on the condensed consolidated
balance sheets under the caption Regulatory and Other Non-Current Assets.
Since implementing the RAC in 1992, SJG recovered $27.2 million through rates
as of June 30, 2001.
SJG-11
Note 5. Subsequent Event:
In July 2001, SJG issued the remaining $35 million of debt under its
Medium Term Note Program. Notes totaling $10 million were issued at 6.74%,
maturing in 2011; notes totaling $15 million were issued at 6.57%, maturing in
2011; and notes totaling $10 million were issued at 6.50%, maturing in 2016.
SJG-12
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Overview
South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG
distributes natural gas to almost 284,000 customers in the seven southernmost
counties of New Jersey. SJG also:
. makes off-system sales of natural gas on a wholesale basis to various
customers on the interstate pipeline system;
. transports natural gas purchased directly from producers or suppliers
for our own sales and for some of our customers;
. services appliances via the sale of appliance warranty programs, as well
as on a time and materials basis.
South Jersey Industries, Inc. (SJI) owns all of the common stock of SJG.
Forward Looking Statements
This report contains certain forward-looking statements concerning
projected financial and operating performance, future plans and courses of
action and future economic conditions. All statements in this report other
than statements of historical fact are forward-looking statements. These
forward-looking statements are made based upon management's expectations and
beliefs concerning future events impacting the company and involve a number of
risks and uncertainties. We caution that forward-looking statements are not
guarantees and actual results could differ materially from those expressed or
implied in the forward-looking statements. Also, in making forward-looking
statements, we assume no duty to update these statements should expectations
change or actual results and events differ from current expectations.
A number of factors could cause our actual results to differ materially
from those anticipated, including, but not limited to the following: general
economic conditions on an international, national, state and local level;
weather conditions in our marketing areas; changes in commodity costs;
regulatory and court decisions; competition in our regulated activities; the
availability and cost of capital; costs and effects of legal proceedings and
environmental liabilities; and changes in business strategies.
Customer Choice Legislation
Effective January 1, 2000, all residential natural gas customers in New
Jersey are able to choose their gas supplier under the terms of the Electric
Discount and Energy Competition Act of February 1999. Commercial and
industrial customers have had the ability to choose gas suppliers since 1987.
SJG's residential customers have been able to choose a gas supplier since April
1997 under a pilot program. As of June 30, 2001, 31,745 SJG residential
customers chose a natural gas supplier other than the utility. This number
decreased from 51,928 at June 30, 2000 as third party marketers were unable to
SJG-13
offer natural gas at prices competitive with those available to consumers under
regulated utility tariffs. During the second quarter 2001, the market price of
natural gas became comparable to utility prices. Under these conditions, the
likelihood that third party marketers will increase customer acquisition
efforts rises. The bills of customers choosing to purchase natural gas from
providers other than the utility are reduced for cost of gas charges and
applicable taxes. The resulting decrease in SJG's revenues is offset by a
corresponding decrease in gas costs and taxes. While customer choice can
reduce utility revenues, it does not negatively affect SJG's net income or
financial condition.
Energy Adjustment Clauses
SJG's Board of Public Utilities (BPU) approved Temperature Adjustment
Clause (TAC) had the following impacts on 2001 and 2000 second quarter and
six month net earnings:
2001 2000
-------- --------
TAC Adjustment Increase to Net Income
($ in thousands)
Quarter Ended June 30 $272 $59
Six Months Ended June 30 $132 $1,349
While the revenue and income impacts of TAC adjustments are recorded as
incurred, cash inflows or outflows directly attributable to TAC adjustments
generally do not begin until the next TAC year. Each TAC year begins
October 1.
Results of Operations - Three and Six Months Ended June 30, 2001
Compared to Three and Six Months Ended June 30, 2000
Operating Revenues
Revenues increased $5.0 million and $77.4 million in the second quarter
and first six months of 2001 compared with the prior year periods. The primary
reasons for the increases were increased rates resulting from an increase in
the Levelized Gas Adjustment Clause (LGAC) that reflects higher gas costs, the
return of residential customers to firm gas sales from firm transportation and,
6,453 additional customers. A large number of residential customers resumed
purchasing natural gas from SJG as third party gas marketers were unable to
offer competitive prices. Increased off-system sales also had a significant
impact on six month results. The increase in off-system revenues was due to
higher prices for natural gas sold. Total volumes of gas sold off-system were
lower in both quarters of 2001 than in the prior year.
SJG-14
Weather in the second quarter of 2001 was 12.9% warmer than the prior year
period. Weather for the six-month period was 4.0% colder than in 2000.
Weather was 7.9% warmer and 1.2% warmer for the second quarter and first six
months, respectively, than the 20-year average. Revenues for 2001 will be
closely tied to the 20-year normal temperatures and not actual weather
conditions due to our TAC.
The following is a comparison of operating revenue and throughput for the
three- and six-month periods ended June 30, 2001 and the same periods ended
June 30, 2000.
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Operating Revenues (Thousands):
Firm
Residential $ 28,464 $ 22,224 $124,823 $ 92,897
Commercial 11,692 5,212 51,525 21,492
Industrial 555 1,017 2,503 3,017
Cogeneration & Electric Generation 2,009 4,977 2,657 6,199
Firm Transportation 5,027 7,862 14,459 21,874
-------- -------- -------- --------
Total Firm Operating Revenues 47,747 41,292 195,967 145,479
Interruptible 251 333 937 832
Interruptible Transportation 285 361 597 845
Off-System 31,478 33,049 98,673 72,275
Capacity Release & Storage 1,022 567 2,848 2,428
Other 857 1,059 2,074 1,804
-------- -------- -------- --------
Total Operating Revenues $81,640 $76,661 $301,096 $223,663
======== ======== ======== ========
Throughput (MMcf):
Firm
Residential 2,215 2,302 11,372 10,783
Commercial 1,091 634 5,305 2,800
Industrial 25 50 173 156
Cogeneration & Electric Generation 352 1,113 376 1,251
Firm Transportation 4,802 6,349 10,586 14,814
-------- -------- -------- --------
Total Firm Throughput 8,485 10,448 27,812 29,804
Interruptible 57 56 116 105
Interruptible Transportation 609 737 1,230 1,577
Off-System 6,153 9,357 15,623 21,427
Capacity Release & Storage 5,673 9,395 11,727 19,934
-------- -------- -------- --------
Total Throughput 20,977 29,993 56,508 72,847
======== ======== ======== ========
SJG-15
Gas Purchased for Resale
Gas purchased for resale increased $5.6 million and $78.1 million for the
second quarter and first six months of 2001 compared with the same periods in
2000 due principally to increased gas costs for both local distribution and
off-system sales. SJG's gas cost during 2001 averaged $5.91/dt compared with
$3.23/dt in the first six months of 2000. Unlike gas costs associated with
off-system sales, changes in the cost of gas sold to utility rate payers are
not reflected in Gas Purchased for Resale as incurred. Fluctuations in gas
costs to rate payers not reflected in current rates are deferred and addressed
in future periods under a BPU approved Levelized Gas Adjustment Clause (LGAC).
Higher gas costs are reflected in rates via a series of LGAC increases since
November 2000. 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 Six Months Ended
June 30, June 30,
2001 vs. 2000 2001 vs. 2000
------------- -------------
Other Production Expense ($2) $(20)
Transmission 7 (16)
Distribution (249) (498)
Appliance Service - Net 62 (76)
Customer Accounts and Services 16 266
Sales (35) (71)
Administration and General (168) (246)
Other 112 118
-------- --------
($257) $(543)
======== ========
Distribution expenses decreased in the first quarter of 2001 as costs
related to our unionized workforce were avoided as a result of a work stoppage
that ended on January 17, 2001. Further reductions occurred in the second
quarter through decreases in overtime expenses. Expenses related to
performing critical operational functions during the work stoppage were
recognized under Administration and General. Offsetting these expenses in the
Administration and General account was a reallocation of costs among other
expense categories. The reallocation was BPU mandated as part of the energy
deregulation process in New Jersey.
SJG-16
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2001 vs. 2000 2001 vs. 2000
------------- -------------
Maintenance $68 $183
Depreciation 262 525
Income Taxes (151) (464)
Energy and Other Taxes (172) (91)
Depreciation was higher due to increased investment in property, plant
and equipment by SJG. Income Tax changes reflect the impact of changes in
pre-tax income.
Interest Charges
Interest charges were lower in the second quarter of 2001 compared with
the prior year period. Increased debt outstanding was offset by lower interest
rates and recoveries of carrying costs associated with unrecovered RAC and
purchased gas costs. The debt was incurred primarily to support the expansion
and upgrade of SJG's gas transmission and distribution system, as well as
higher levels of unrecovered gas costs. Interest expense for the six month
period was higher than the same period in 2000 mostly due to expenses
associated with higher levels of unrecovered gas costs.
Net Income Applicable to Common Stock
The details affecting the changes in net income and earnings per share
are discussed under the appropriate captions above.
Liquidity
The seasonal nature of gas operations; the timing of construction and
remediation expenditures and related permanent financing; as well as mandated
tax and sinking fund payment dates require large, short-term cash requirements.
These requirements are generally met by cash from operations and short-term
lines of credit. We maintain short-term lines of credit with a number of
banks, totaling $155.0 million, of which $16.4 million was available at June
30, 2001. The credit lines are uncommitted and unsecured with interest rates
typically available based upon the Federal Funds Rates or London Interbank
Offered Rates (LIBOR).
SJG-17
The changes in cash flows from operating activities (in thousands):
Six Months Ended
June 30,
2001 vs. 2000
-------------
Increases/(Decreases):
Net Income Applicable to Common Stock ($671)
Depreciation and Amortization 71
Provision for Losses on Accounts Receivable 227
Revenues and Fuel Costs Deferred - Net (8,125)
Deferred and Non-Current Income Taxes and
Credits - Net 6,486
Environmental Remediation Costs-Net (233)
Accounts Receivable 36,844
Inventories (12,040)
Prepayments and Other Current Assets (10)
Prepaid and Accrued Taxes - Net (8,960)
Accounts Payable and Other Accrued Liabilities (44,725)
Other - Net (1,569)
---------
Net Cash Provided by Operating Activities ($32,705)
=========
Depreciation and Amortization are non-cash charges to income and do not
impact cash flow. Changes in depreciation cost reflect the effect of additions
and reductions to fixed assets.
Decreases in Revenues and Fuel Costs Deferred - Net reflect the impact
of payments or credits to customers for amounts previously overcollected and
the undercollection of fuel costs resulting from increases in natural gas
costs. Increases reflect the impact of overcollection of fuel costs or the
recovery of previously deferred fuel costs.
Changes in Deferred and Non-Current Income Taxes and Credits - Net
represent the differences between taxes accrued and amounts paid. Generally,
deferred income taxes related to deferred fuel costs will be paid in the next
year.
Changes in Environmental Remediation Costs - Net represent the
differences between amounts expended for environmental remediation compared
with amounts collected under the RAC and insurance recoveries.
Changes in Accounts Receivable are primarily due to changes in
off-system sales activity and SJG's sales volumes. Weather and commodity
prices are the variables that primarily impact these sales. Changes impact
cash flows when collected in subsequent periods.
SJG-18
Changes in Inventories reflect the impact of seasonal requirements,
temperatures and commodity price changes.
Changes in Prepaid and Accrued Taxes - Net reflect the impact of
differences between taxes paid and taxes accrued. Significant timing
differences exist in cash flows during the year. Approximately 50% of SJG's
taxes are paid in installments during the first half of the year and the
remaining 50% are paid on May 15 of each year. SJG uses short-term borrowings
to pay taxes, resulting in a temporary increase in the short-term debt level.
The carrying costs of timing differences are recognized in base utility rates.
Changes in Accounts Payable and Other Current Liabilities reflect the
impact of timing differences between the accrual and payment of costs.
Changes in Other - Net reflect numerous changes in noncurrent assets
and liabilities, including accrued deferred income taxes.
Regulatory Matters
Rate Actions
On November 16, 2000, SJG received approval to increase its LGAC. The
impact of this increase was approximately 19.0% to a typical residential
heating customer. The BPU also approved the creation of a flexible pricing
mechanism, allowing for five additional 2.0% increases effective for December
2000 and January, February, March and April of 2001. In March 2001, the BPU
approved additional LGAC rate increases for SJG using a flexible pricing
mechanism. Additional rate increases of 2% in May, June and July 2001 were
approved. In addition, the ruling permits SJG to recover unrecovered gas costs
as of October 31, 2001 with interest at 5.5% or 5.75% over a three-year period,
beginning December 1, 2001. The higher interest rate becomes effective only
if SJG does not file for an increase in the LGAC rate for the next LGAC year.
Recoverable interest costs began accruing on April 1, 2001.
Other matters are incorporated by reference to Note 2 to the condensed
consolidated financial statements included as part of this report.
Capital Resources
SJG has a continuing need for cash resources and capital, primarily to
invest in new and replacement facilities and equipment and for environmental
remediation costs. Net construction and remediation expenditures for the first
six months of 2001 amounted to $14.5 million. The costs for 2001, 2002 and
2003 are estimated at approximately $45.0 million, $50.7 million and $48.9
million, respectively. We expect to fund these expenditures from several
sources, which may include cash generated by operations, temporary use of
short-term debt, sale of medium-term notes, capital leases, RAC recoveries,
insurance recoveries and equity infusions from SJI.
SJG-19
In July 2001, SJG issued a total of $35 million of debt under its
Medium Term Note program (MTN). Notes totaling $10 million were issued at
6.74%, maturing in 2011; notes totaling $15 million were issued at 6.57%,
maturing in 2011; and notes totaling $10 million were issued at 6.50%,
maturing in 2016. The net proceeds of these note issuances were used to
retire short-term debt.
Ratio of Earnings to Fixed Charges
The company's ratio of earnings to fixed charges for each of the
periods indicated is as follows:
Twelve Months
Ended
Years Ended December 31, June 30,
---------------------------------------------------- -------------
1996 1997 1998 1999 2000 2001
2.5x 2.6x 2.2x 2.5x 2.6x 2.5x
The ratio of earnings to fixed charges represents, on a pre-tax basis,
the number of times earnings cover fixed charges. Earnings consist of net
income, to which has been added fixed charges and taxes based on income of the
company, excluding the cumulative effect of an accounting change. Fixed
charges consist of interest charges and preferred securities dividend
requirements and an interest factor in rentals.
SJG-20
Item 3. Quantitative and Qualitative Disclosures About
Market Risks of the Company
We have exposure to interest rate risk related to short-term debt and,
to a much lesser degree, commodity price risk. For information regarding our
exposure related to these risks, see Item 7A in our Form 10-K for the year
ended December 31, 2000. Our market risks have not materially changed from
December 31, 2000.
SJG-21
PART II -- OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part
I, Item 1, Note 5, beginning on page 10.
Item 6. Exhibits and Reports on Form 8-K
None
SJG-22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTH JERSEY GAS COMPANY
(Registrant)
Dated: August 14, 2001 By: /s/ David A. Kindlick
David A. Kindlick
Senior Vice President, Finance and
Treasurer
Dated: August 14, 2001 By: /s/ George L. Baulig
George L. Baulig
Senior Vice President & Corporate
Secretary
SJG-22