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Page 1 of 21
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, 2002 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 1, 2002 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.
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements-- See Pages 3 through 11
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,
--------------------------------------
2002 2001
----------------- -----------------
Operating Revenues $ 65,007 $ 81,071
----------------- -----------------
Operating Expenses:
Gas Purchased for Resale 41,093 58,560
Utility Operations 10,460 9,458
Maintenance 1,673 1,788
Depreciation 5,559 5,251
Energy and Other Taxes 2,039 1,864
----------------- -----------------
Total Operating Expenses 60,824 76,921
----------------- -----------------
Operating Income 4,183 4,150
Other Income and Expense - Net 569 21
Interest Charges 4,383 4,687
Preferred Dividend Requirements 764 767
----------------- -----------------
Loss Before Income Taxes (395) (1,283)
Income Taxes (Benefit) (70) (377)
----------------- -----------------
Loss from Continuing Operations (325) (906)
Loss from Discontinued Operations - Net - (46)
----------------- -----------------
Net Loss Applicable to Common Stock $ (325) $ (952)
================= =================
Average Shares of Common Stock Outstanding 2,339 2,339
================= =================
Earnings Per Common Share
Continuing Operations $ (0.14) $ (0.39)
Discontinued Operations - Net 0.00 (0.02)
----------------- -----------------
Earnings Per Common Share $ (0.14) $ (0.41)
================= =================
Dividends Declared Per Common Share $ 0.87 $ 1.87
================= =================
<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,
--------------------------------------
2002 2001
----------------- -----------------
Operating Revenues $ 219,190 $ 300,210
----------------- -----------------
Operating Expenses:
Gas Purchased for Resale 140,526 219,900
Utility Operations 20,081 18,977
Maintenance 3,090 4,673
Depreciation 11,036 10,434
Energy and Other Taxes 5,822 6,280
----------------- -----------------
Total Operating Expenses 180,555 260,264
----------------- -----------------
Operating Income 38,635 39,946
Other Income and Expense - Net 454 70
Interest Charges 8,887 10,253
Preferred Dividend Requirements 1,529 1,533
----------------- -----------------
Income Before Income Taxes 28,673 28,230
Income Taxes 12,059 11,953
----------------- -----------------
Income from Continuing Operations 16,614 16,277
Loss from Discontinued Operations - Net - (97)
----------------- -----------------
Net Income Applicable to Common Stock $ 16,614 $ 16,180
================= =================
Average Shares of Common Stock Outstanding 2,339 2,339
================= =================
Earnings Per Common Share
Continuing Operations $ 7.10 $ 6.96
Discontinued Operations - Net 0.00 (0.04)
----------------- -----------------
Earnings Per Common Share $ 7.10 $ 6.92
================= =================
Dividends Declared Per Common Share $ 2.82 $ 3.74
================= =================
<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,
--------------------------------------------------------
2002 2001 2001
--------------- ---------------- ------------------
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $ 822,053 $ 783,349 $ 805,440
Accumulated Depreciation (229,078) (215,429) (221,457)
--------------- ---------------- ------------------
Property, Plant and Equipment - Net 592,975 567,920 583,983
--------------- ---------------- ------------------
Available-for-Sale Securities 3,249 2,689 3,093
--------------- ---------------- ------------------
Current Assets:
Cash and Cash Equivalents 4,129 3,962 3,276
Accounts Receivable 41,258 58,471 39,243
Unbilled Revenues 8,482 10,953 32,398
Provision for Uncollectibles (1,877) (1,732) (1,916)
Natural Gas in Storage, average cost 39,047 41,487 59,778
Materials and Supplies, average cost 3,755 4,061 3,818
Prepaid Taxes 11,621 13,872 4,650
Prepayments and Other Current Assets 3,941 3,072 2,799
--------------- ---------------- ------------------
Total Current Assets 110,356 134,146 144,046
--------------- ---------------- ------------------
Regulatory Assets:
Environmental Remediation Costs:
Expended - Net 7,016 11,287 12,831
Liability for Future Expenditures 48,790 51,029 48,790
Gross Receipts and Franchise Taxes 2,032 2,476 2,254
Income Taxes - Flowthrough Depreciation 9,086 10,064 9,575
Deferred Fuel Cost - Net 37,414 37,480 36,798
Deferred Postretirement Benefit Costs 3,969 4,347 4,158
Other Regulatory Assets 5,476 2,257 2,386
--------------- ---------------- ------------------
Total Regulatory Assets 113,783 118,940 116,792
--------------- ---------------- ------------------
Other Non-Current Assets:
Unamortized Debt Discount and Expense 5,709 5,024 5,957
Other 3,080 1,606 3,935
--------------- ---------------- ------------------
Total Regulatory and Other Non-Current Assets 8,789 6,630 9,892
--------------- ---------------- ------------------
Total Assets $ 829,152 $ 830,325 $ 857,806
=============== ================ ==================
<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,
--------------------------------------------------------
2002 2001 2001
--------------- ---------------- ------------------
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 135,317 125,817 132,817
Accumulated Other Comprehensive Loss (2,083) - (1,939)
Retained Earnings 79,269 72,866 69,256
--------------- ---------------- ------------------
Total Common Equity 218,351 204,531 205,982
--------------- ---------------- ------------------
Preferred Stock and Securities:
Redeemable Cumulative Preferred - Par Value $100 per share,
Authorized 41,966 shares, respectively
Outstanding:
Series B, 8% - 16,904 shares 1,690 1,690 1,690
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 36,690 36,690
--------------- ---------------- ------------------
Long-Term Debt 217,514 195,247 230,247
--------------- ---------------- ------------------
Total Capitalization 472,555 436,468 472,919
--------------- ---------------- ------------------
Current Liabilities:
Notes Payable 102,900 138,600 135,500
Current Maturities of Long-Term Debt 9,733 11,876 9,733
Accounts Payable 29,705 35,856 32,391
Deferred Income Taxes - Net 25,074 29,592 25,503
Customer Deposits 6,484 5,516 5,976
Environmental Remediation Costs 11,052 15,872 11,052
Taxes Accrued 2,823 483 2,904
Derivatives 243 - -
Interest Accrued and Other Current Liabilities 10,189 11,017 7,752
--------------- ---------------- ------------------
Total Current Liabilities 198,203 248,812 230,811
--------------- ---------------- ------------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 92,882 86,682 86,172
Environmental Remediation Costs 37,738 35,157 37,738
Pension and Other Postretirement Benefits 15,022 11,148 17,736
Investment Tax Credits 3,992 4,340 4,166
Other 8,760 7,718 8,264
--------------- ---------------- ------------------
Total Deferred Credits and Other Non-Current
Liabilities 158,394 145,045 154,076
--------------- ---------------- ------------------
Commitments and Contingencies (Note 5)
Total Capitalization and Liabilities $ 829,152 $ 830,325 $ 857,806
=============== ================ ==================
<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
(In Thousands)
Six Months Ended
June 30,
-------------------------------------
2002 2001
---------------- ----------------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 16,614 $ 16,180
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 12,204 11,586
Provision for Losses on Accounts Receivable 860 680
Revenues and Fuel Costs Deferred - Net (616) (8,670)
Deferred and Non-Current Income Taxes and Credits - Net 6,606 8,554
Environmental Remediation Costs - Net 5,815 7,187
Changes in:
Accounts Receivable 21,002 41,614
Inventories 20,794 (9,742)
Prepayments and Other Current Assets (1,141) (432)
Prepaid and Accrued Taxes - Net (7,052) (9,871)
Accounts Payable and Other Accrued Liabilities 259 (40,876)
Other - Net (3,062) (1,252)
---------------- ----------------
Net Cash Provided by Operating Activities 72,283 14,958
---------------- ----------------
Cash Flows from Investing Activities:
Capital Expenditures, Cost of Removal and Salvage (21,773) (21,561)
Purchase of Available-for-Sale Securities (194) (252)
---------------- ----------------
Net Cash Used in Investing Activities (21,967) (21,813)
---------------- ----------------
Cash Flows from Financing Activities:
Net (Repayments of) Borrowings from Lines of Credit (32,600) 24,700
Principal Repayments of Long-Term Debt (12,733) (9,734)
Dividends on Common Stock (6,600) (8,750)
Proceeds from Issuance of Long-Term Debt (30) (114)
Additional Investment by Shareholder 2,500 -
---------------- ----------------
Net Cash (Used in) Provided by Financing Activities (49,463) 6,102
---------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents 853 (753)
Cash and Cash Equivalents at Beginning of Period 3,276 4,715
---------------- ----------------
Cash and Cash Equivalents at End of Period $ 4,129 $ 3,962
================ ================
<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. The financial statements should be
read in conjunction with SJG's 2001 Form 10K.
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.
Derivative Instruments -- In April 2002, we executed an interest rate
swap that effectively fixes the interest rate on $40 million of bank debt at
3.57% through March 15, 2003.
We entered into this interest rate swap agreement to hedge the exposure
to an increase in interest rates with respect to our variable rate debt. The
differential to be paid or received as a result of this swap agreement is
accrued as interest rates change and recognized as an adjustment to interest
expense. This interest rate swap is accounted for as a cash flow hedge pursuant
to Financial Accounting Standards Board (FASB) Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities" adopted January 1, 2001. As
of June 30, 2002, the market value of this swap was ($242,891), which represents
the amount we would pay to terminate this contract as of that date. This balance
is included on the 2002 condensed consolidated balance sheet under the caption
Derivatives. As of June 30, 2002, we calculated the swap to be highly effective;
therefore, the offset to the hedge liability is recorded, net of taxes, in
Accumulated Other Comprehensive Loss.
Fair value of the derivative investments is determined by reference
quotations from independent parties.
New Accounting Pronouncements -- In June 2001, the FASB issued
Statement No. 143, "Accounting for Asset Retirement Obligations." Statement No.
143 establishes accounting and reporting standards for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SJG expects to adopt Statement No. 143 in 2003.
SJG-8
In August 2001, the FASB also issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", which is effective in 2003.
This statement prescribes that a single accounting model be used for valuing
long-lived assets to be disposed of and broadens the presentation of
discontinued operations.
We are currently evaluating the effects of Statement Nos. 143 and 144;
however, they are not expected to materially impact 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 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. SJG keeps 100% of pre-tax margins up to the threshold level
of $7.8 million and 20% of margins above that level. In 1998, the BPU revised
the Sharing Formula to credit 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. This represents an annual increase
of approximately $4.5 million over the recovery previously included in rates. 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. However, due to
substantial RAC insurance recoveries, in October 2001, SJG filed for a RAC rate
decrease. This proposal would reduce the annual recovery level to $4.2 million,
if approved.
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, , 2002, 66,758 of SJG's 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. SJG's net income, financial condition and margins are not affected as a
result of the unbundling.
On November 15, 2001, SJG filed for a $17.6 million reduction to its
LGAC and for recovery of a 3-year net deficiency in the Temperature Adjustment
Clause (TAC) amounting to $2.7 million. The BPU approved the LGAC reduction
effective December 1, 2001, but has yet to approve the TAC adjustment. Also on
December 1, 2001, SJG implemented recovery of its October 31, 2001
underrecovered gas costs through its new GCUA clause. We will recover $48.9
million over three years including interest accrued since April 1, 2001. We will
also recover interest for the 3-year amortization period at a rate of 5.75%.
In May 2002, SJG received approval from the BPU to reduce its
overcollected LGAC balance by $17.6 million. The BPU order approved the
company's request to issue credits on customer bills proportionate with each
customer's contribution to the overcollection. This refund did not affect SJG's
net income or financial condition.
SJG-9
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 are free of these restrictions, were
approximately $77.5 million as of June 30, 2002.
SJG received an equity infusion of $2.5 million from SJI on April 22,
2002. 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. Discontinued Operations:
In 2001, SJG formally discontinued the merchandising segment of its
operations. Summarized operating results of the discontinued operations were (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------------------------------------------
Operating Revenues $ 26 $ 383 $ 26 $ 556
===========================================
Loss before Income Taxes $ - $ (78) $ - $ (164)
Income Tax - 32 - 67
-------------------------------------------
Loss from Discontinued Operations $ - $ (46) $ - $ (97)
===========================================
Loss Per Common Share from
Discontinued Operations - Net $ 0.00 $(0.02) $ 0.00 $(0.04)
===========================================
Note 5. Commitments and Contingencies:
Construction and Environmental Commitments -- SJG's estimated cost of
construction and environmental remediation programs for 2002 totals $60.1
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. In Management's opinion, the ultimate
disposition of these claims will not have a material adverse effect on SJG's
financial position, results of operations or liquidity.
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-10
SJG successfully entered into settlements with all of its historic
comprehensive general liability carriers regarding the environmental remediation
expenditures at our sites. Also, we have purchased a Cleanup Cost Cap Insurance
Policy limiting the amount of remediation expenditures that we will be required
to make at 11 of our sites. This policy will be in force until 2024 at 10 sites
and until 2029 at one site. The following future cost estimates were reduced by
projected insurance recoveries from the Cleanup Cost Cap Insurance Policy.
Since the early 1980s, SJG accrued estimated environmental remediation
costs of $128.5 million, of which $79.7 million was spent as of June 30, 2002.
With the assistance of a consulting firm, we estimate that future costs to clean
up SJG's sites will range from $48.8 million to $143.5 million. We recorded the
lower end of this range as a liability. It is reflected on the 2002 condensed
consolidated balance sheet under the captions Current Liabilities and Deferred
Credits and Other Non-Current Liabilities. 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 remediation technology, government regulations
and site-specific requirements.
SJG has two regulatory assets associated with environmental cost (see
Note 1 under Other Regulatory Assets). The first asset is titled Environmental
Remediation Cost: Expended - Net. This asset represents what was actually spent
to clean up former gas manufacturing plant sites, net of recoveries. These costs
meet the requirements of FASB Statement No. 71, "Accounting for the Effects of
Certain Types of Regulation." The BPU allows SJG to recover expenditures through
the RAC.
The other 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." We
recorded this amount, which relates to former manufactured gas plant sites, as a
deferred debit with the corresponding amount reflected on the condensed
consolidating balance sheet under the captions, Current Liabilities and Deferred
Credits and Other Non-Current Liabilities. The deferred debit is a regulatory
asset under Statement No. 71. The BPU's intent, evidenced by current practice,
is to allow SJG to recover the deferred costs after they are spent over 7-year
periods.
As of June 30, 2002, we reflected SJG's unamortized remediation costs
of $7.0 million on the condensed consolidated balance sheet under the caption
Regulatory and Other Non-Current Assets. Since implementing the RAC in 1992, SJG
recovered $32.4 million through rates as of June 30, 2002.
SJG-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG
distributes natural gas to 291,691 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 its own sales and for some of its customers; and
- 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 utility activities; the
availability and cost of capital; costs and effects of legal proceedings and
environmental liabilities; the failure of customers or suppliers to fulfill
their contractual obligations; and changes in business strategies.
Customer Choice Legislation
All natural gas customers in New Jersey are able to choose their gas
supplier. As of June 30, 2002, 66,758 SJG customers chose a natural gas supplier
other than the utility. This number increased from 33,520 at June 30, 2001 as
third party marketers were able to offer natural gas at prices competitive with
those available to consumers under regulated utility tariffs. The bills of
SJG-12
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.
Temperature Adjustment Clause
SJG's Board of Public Utilities approved Temperature Adjustment Clause
(TAC) had the following impacts on 2002 and 2001 second quarter and six month
net earnings:
2002 2001
--------------------------
TAC Adjustment Increase (Decrease) to
Net Income ($ in thousands)
Quarter Ended 6/30 $ 247 $ 272
Six Months Ended 6/30 $ 3,249 $ 132
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, 2002
Compared to Three and Six Months Ended June 30, 2001
Operating Revenues
Revenues decreased $16.1 million and $81.0 million in the second
quarter and first six months of 2002 compared with the prior year periods. The
decreases were primarily due to three factors. First, weather in the second
quarter 2002 was 1.4% warmer and 14.5% warmer for the first six months than the
prior year periods. Second, a significantly higher number of residential
customers utilized a third party marketer instead of SJG as their gas supplier.
Third, off-system sales revenues decreased for the second quarter and the first
six months of 2002 primarily due to lower prices for natural gas sold. Lower
off-system sales volumes in the second quarter 2002 contributed to the decrease
in sales revenues over last year, however, sales volumes year-to-date are
slightly higher. Partially offsetting the effect of these factors was an
additional 7,711 customers compared to same time last year.
As a result of SJG's TAC, revenues from utility ratepayers are closely
tied to 20-year normal temperatures calculated under the TAC and not actual
temperatures. While the TAC significantly reduces fluctuations in revenues
related to temperature, as a general rule, revenues continue to be positively
impacted by colder weather and negatively impacted by warmer weather. Weather
was 9.2% warmer and 15.5% warmer for the second quarter and first six months of
2002, respectively, than the 20-year average. In comparison, weather for the
SJG-13
second quarter and first six months of 2001 was 7.9% warmer and 1.2% warmer,
respectively, than the 20-year average.
The following is a comparison of operating revenue and throughput for
the three and six month periods ended June 30, 2002 vs. the same periods ended
June 30, 2001.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-----------------------------------------------------------
Utility Operating Revenues (Thousands):
Firm
Residential $ 25,133 $ 28,464 $ 101,232 $ 124,823
Commercial 6,111 11,692 28,655 51,525
Industrial 838 555 2,547 2,503
Cogeneration & Electric Generation 2,963 2,009 3,579 2,657
Firm Transportation 8,394 5,027 22,658 14,459
-----------------------------------------------------------
Total Firm Utility Operating Revenues 43,439 47,747 158,671 195,967
Interruptible 307 251 546 937
Interruptible Transportation 327 285 802 597
Off-System 18,908 31,478 54,661 98,673
Capacity Release & Storage 1,136 1,022 2,830 2,848
Other 890 288 1,680 1,188
-----------------------------------------------------------
Total Utility Operating Revenues $ 65,007 $ 81,071 $ 219,190 $ 300,210
===========================================================
Throughput (MMcf):
Firm
Residential 2,229 2,215 9,371 11,372
Commercial 684 1,091 3,018 5,305
Industrial 24 25 115 173
Cogeneration & Electric Generation 635 352 722 376
Firm Transportation 5,311 4,802 12,794 10,586
----------------------------------------------------------
Total Firm Throughput 8,883 8,485 26,020 27,812
Interruptible 55 57 103 116
Interruptible Transportation 683 609 1,640 1,230
Off-System 4,940 6,153 16,243 15,623
Capacity Release and Other 10,498 5,673 17,144 11,727
----------------------------------------------------------
Total Throughput 25,059 20,977 61,150 56,508
==========================================================
SJG-14
Gas Purchased for Resale
Gas purchased for resale decreased $17.5 million and $79.4 million for
the second quarter and first six months of 2002 compared with the same periods
in 2001. The second quarter decrease was due principally to lower gas costs for
off-system sales. The first six months decrease was also due to lower gas costs
for off-system sales, as well as lower firm gas sales volume. Warmer weather and
the migration of firm gas sales customers to transportation service were the
main causes of the decrease in firm gas sales volume. SJG's gas cost during the
first six months of 2002 averaged $4.60/dt compared with $5.91/dt in 2001.
Unlike gas costs associated with off-system sales, changes in the cost of gas
sold to utility ratepayers are not reflected in Gas Purchased for Resale as
incurred. Fluctuations in gas costs to ratepayers not reflected in current rates
are deferred and addressed in future periods under the Levelized Gas Adjustment
Clause (LGAC) embedded in the utility rate structure. Gas supply sources include
contract and open-market purchases. SJG secures and maintains its own gas
supplies to serve its customers. We do not anticipate any difficulty renewing or
replacing expiring contracts under substantially similar terms and conditions.
Operations
A summary of net changes in Utility Operations (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 vs. 2001 2002 vs. 2001
----------------------------------
Other Production Expense $ 4 $ 29
Transmission 3 11
Distribution (71) 18
Customer Accounts and Services 496 786
Sales 23 11
Administration and General 547 249
------------------------------
$ 1,002 $ 1,104
==============================
Customer Accounts and Services Costs increased primarily due to higher
bad debt expense as accounts previously shut off for nonpayment were determined
to be uncollectible. Administration and General Costs were higher due to
increases in pension and employee welfare expenses primarily resulting from
effects of the continuing poor performance of financial markets on retirement
plan assets and increasing health care costs.
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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,
2002 vs. 2001 2002 vs. 2001
---------------------------------------
Maintenance $ (115) $ (1,583)
Depreciation $ 308 $ 602
Energy and Other Taxes $ 175 $ (458)
Maintenance expense decreased in the first six months of 2002 primarily
due to lower levels of Remediation Adjustment Clause (RAC) amortization
recognized during the first quarter. RAC-related expenses do not affect earnings
as an offsetting amount is recognized in revenues. Depreciation is higher due to
increased investment in property, plant and equipment by SJG. Changes in Energy
and Other Taxes relate primarily to changes in SJG's firm and interruptible
throughput of gas.
Other Income and Expense
Other income and expense was higher in the second quarter and the first
six months of 2002 compared with the prior year periods due to a pre-tax gain of
$639,300 on the sale of stock received as a result of the demutualization of
Prudential's mutual life insurance company.
Interest Charges
Interest charges were lower in the second quarter and the first six
months of 2002 compared with the prior year periods due primarily to reductions
in short-term rates on line of credit borrowings. The effect of lower short-term
rates was partially offset by the interest expense associated with higher levels
of long-term debt outstanding in the first six months of 2002. The debt was
incurred primarily to support the expansion and upgrade of SJG'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 and Capital Resources
Liquidity needs at SJG are driven by factors that include natural gas
commodity prices; lags in fully collecting gas costs from customers under the
LGAC clause; the timing of construction and remediation expenditures and related
permanent financings; mandated tax payment dates; and requirements to repay
long-term debt.
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We first seek to meet liquidity needs with cash from operations. We
utilize short-term borrowings under lines of credit from commercial banks to
supplement cash from operations where necessary.
Lines of credit available to SJG totaled $120.0 million at June 30,
2002, of which $102.9 million was utilized. All but $10 million of these lines
are made available through five commercial banks on an uncommitted basis. The
banks and SJI review and renew the lines annually. The $10 million line is
extended on a committed basis, maturing May 2003, by a sixth commercial bank.
SJG has long-standing relationships with all of these banks and we believe,
based upon ongoing dialogue, that there will continue to be sufficient credit
available to meet our business' future liquidity needs.
SJG supplements its operating cash flow and credit lines with both debt
and equity capital. Over the years, SJG has utilized long-term debt, primarily
in the form of First Mortgage Bonds, to finance its long-term needs. These needs
are primarily capital expenditures for property, plant and equipment. Since
1998, SJG has financed these needs via a Medium Term Note (MTN) program, secured
in similar fashion to the First Mortgage Bonds. In July 2001, SJG issued the
final $35 million of notes available under that program in three transactions:
$10 million at 6.74% maturing 2011; $15 million at 6.57% maturing 2011; and $10
million at 6.50% maturing 2016. We used note proceeds to retire short-term debt.
We anticipate establishing a new MTN program during the third quarter of 2002.
Current maturities on long-term debt over the next five years are as follows:
$9.7 million in 2002; $12.9 million per year in 2003 through 2005; and $11.2
million in 2006.
SJI contributed $2.5 million of capital to SJG during April 2002.
Contributions of capital are credited to Other Paid-in Capital and Premium on
Common Stock.
Capital Expenditures, Commitments and Contingencies
Capital Expenditures
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 2002 amounted to $16.0 million. We estimate the net costs for
2002, 2003 and 2004 at approximately $60.1 million, $62.4 million and $56.3
million, respectively.
Commitments and Contingencies
SJG has certain commitments for both pipeline capacity and gas supply
for which it pays fees regardless of usage. Those commitments average $51.2
million annually and total $335.7 million over the contracts' lives.
Approximately 70% of the financial commitment under these contracts expires
during the next five years. SJG recovers all prudently incurred fees through
rates via the LGAC.
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Regulatory Matters
Rate Actions
In November 2001, SJG filed for a $17.6 million rate reduction to its
LGAC and for recovery of a 3-year net deficiency in its TAC amounting to $2.7
million. The BPU approved the LGAC rate reduction effective December 1, 2001 but
has yet to approve the TAC adjustment. Also on December 1, 2001, SJG implemented
recovery of its October 31, 2001 underrecovered gas costs. SJG was authorized to
recover $48.9 million over three years including interest accrued since April 1,
2001. SJG recovered $9.8 million as of June 30, 2002. SJG will also recover
interest for the 3-year amortization period at a rate of 5.75%.
In May 2002, SJG received approval from the BPU to reduce its
overcollected LGAC balance by $17.6 million. The BPU order approved the
company's request to issue credits on customer bills coincident with each
customer's contribution to the overcollection. This refund did not affect SJG's
net income or financial condition.
Other matters are incorporated by reference to Note 2 to the condensed
consolidated financial statements included as part of this report.
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,
------------------------ --------
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
2.6x 2.2x 2.5x 2.6x 2.6x 2.7x
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. Fixed charges consist of interest charges and preferred securities
dividend requirements and an interest factor in rentals.
SJG-18
Item 3. Quantitative and Qualitative Disclosures About
Market Risks of the Company
Commodity Market Risks
SJG is subject to market risk due to fluctuations in natural gas
prices. To limit exposure to fluctuations, SJG has at times entered into forward
contracts. SJG recovers natural gas costs from ratepayers through the LGAC.
Interest Rate Risk
Our exposure to interest rate risk relates primarily to short-term,
variable rate borrowings. A hypothetical 100 basis point increase in interest
rates on $102.9 million of variable rate debt outstanding at June 30, 2002 would
result in an $607,000 increase in our interest expense net of tax on an annual
basis. In order to reduce exposure to an increase in interest rates on our
variable rate debt, SJG entered into two interest rate swap agreements. The
swaps effectively fixed the rate on $40 million of variable rate debt from April
2002 to March of 2003 at 3.57%. Our long-term debt is primarily issued at fixed
rates and, consequently, interest expense is not significantly impacted by
changes in market interest rates. SJG has $17.5 million of 9% first mortgage
bonds that are prepayable at a premium beginning in September 2002. It is likely
that these bonds will be prepaid and replaced with a debt issuance under a new
medium term note program. Otherwise, our debt was issued with provisions that do
not permit us to pre-pay a material amount of such debt during the next 12
months to take advantage of changes in interest rates.
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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
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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 13, 2002 By: /s/ Charles Biscieglia
-----------------------------------------------
Charles Biscieglia
President & Chief Executive Officer
Dated: August 13, 2002 By: /s/ David A. Kindlick
-----------------------------------------------
David A. Kindlick
Executive Vice President & Chief Financial
Officer
SJG-21