Page 1 of 29
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1997
Commission File Number 1-12899
SOUTH JERSEY GAS COMPANY
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-0398330
- -----------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer's
incorporation of organization) Identification No.)
Number One South Jersey Plaza, Route 54, Folsom, NJ 08037
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(609) 561-9000
- -----------------------------------------------------------------
(Registrant's telephone number, including area code)
- -----------------------------------------------------------------
Former name, former address, and former fiscal year, if changed
since last report
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of November 13, 1997, 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 29
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 14
SJG-2
<PAGE>
<TABLE>
SOUTH JERSEY GAS COMPANY
STATEMENTS OF CONSOLIDATED INCOME AND RETAINED EARNINGS (UNAUDITED)
(In Thousands Except for Share Data)
<CAPTION>
Three Months Ended
September 30,
-----------------------
1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES:
Utility . . . . . . . . . . . . . . . . . . . . . . . . . . . $49,635 $39,559
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441 787
---------- ----------
Total Operating Revenues . . . . . . . . . . . . . . . . . 50,076 40,346
---------- ----------
OPERATING EXPENSES:
Gas Purchased for Resale. . . . . . . . . . . . . . . . . . . 31,483 22,354
Operation - Utility . . . . . . . . . . . . . . . . . . . . . 10,149 9,451
- Other. . . . . . . . . . . . . . . . . . . 404 504
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . 1,552 1,302
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . 4,027 3,738
Federal Income Taxes. . . . . . . . . . . . . . . . . . . . . (2,675) (2,313)
Deferred and Non-current Federal Income Taxes . . . . . . . . 975 591
Investment Tax Credit Deferred - Net. . . . . . . . . . . . . (99) (98)
Gross Receipts and Franchise Taxes. . . . . . . . . . . . . . 2,585 2,925
Other Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 564 501
---------- ----------
Total Operating Expenses . . . . . . . . . . . . . . . . . 48,965 38,955
---------- ----------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . 1,111 1,391
INTEREST CHARGES . . . . . . . . . . . . . . . . . . . . . . . . 4,324 4,864
---------- ----------
LOSS BEFORE PREFERRED DIVIDEND REQUIREMENTS. . . . . . . . . . . (3,213) (3,473)
Preferred Stock Dividend Requirements. . . . . . . . . . . . . . 42 43
Preferred Securities Dividend Requirements . . . . . . . . . . . 731 0
---------- ----------
NET LOSS APPLICABLE TO COMMON STOCK . . . . . . . . . . . . . . (3,986) (3,516)
RETAINED EARNINGS AT BEGINNING OF PERIOD . . . . . . . . . . . . 59,244 55,141
---------- ----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . 55,258 51,625
COMMON STOCK DIVIDENDS DECLARED. . . . . . . . . . . . . . . . . 3,825 3,778
---------- ----------
RETAINED EARNINGS AT END OF PERIOD . . . . . . . . . . . . . . . $51,433 $47,847
========== ==========
AVERAGE SHARES OF COMMON STOCK OUTSTANDING . . . . . . . . . . . 2,339,139 2,339,139
LOSS PER COMMON SHARE. . . . . . . . . . . . . . . . . . . . . . ($1.70) ($1.50)
========== ==========
DIVIDENDS PAID PER COMMON SHARE. . . . . . . . . . . . . . . . . $1.635 $1.615
========== ==========
The accompanying notes to the consolidated financial statements are an integral part
of these statements.
SJG-3
<PAGE>
SOUTH JERSEY GAS COMPANY
STATEMENTS OF CONSOLIDATED INCOME AND RETAINED EARNINGS (UNAUDITED)
(In Thousands Except for Share Data)
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES:
Utility. . . . . . . . . . . . . . . . . . . . . . . . . . . . $233,523 $231,889
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,483 2,249
---------- ----------
Total Operating Revenues. . . . . . . . . . . . . . . . . . 235,006 234,138
---------- ----------
OPERATING EXPENSES:
Gas Purchased for Resale . . . . . . . . . . . . . . . . . . . 133,304 132,283
Operation - Utility . . . . . . . . . . . . . . . . . . . . . 29,000 28,206
- Other . . . . . . . . . . . . . . . . . . . 1,339 1,614
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . 4,553 3,866
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 11,879 11,045
Federal Income Taxes . . . . . . . . . . . . . . . . . . . . . 4,613 5,173
Deferred and Non-current Federal Income Taxes. . . . . . . . . 2,797 1,756
Investment Tax Credit Deferred - Net . . . . . . . . . . . . . (297) (293)
19,610 22,295
Other Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 1,948 1,873
---------- ----------
Total Operating Expenses. . . . . . . . . . . . . . . . . . 208,746 207,818
---------- ----------
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 26,260 26,320
INTEREST CHARGES. . . . . . . . . . . . . . . . . . . . . . . . . 13,544 14,428
---------- ----------
INCOME BEFORE PREFERRED DIVIDEND REQUIREMENTS . . . . . . . . . . 12,716 11,892
Preferred Stock Dividend Requirements . . . . . . . . . . . . . . 128 131
Preferred Securities Dividend Requirements. . . . . . . . . . . . 1,202 0
---------- ----------
NET INCOME APPLICABLE TO COMMON STOCK . . . . . . . . . . . . . . 11,386 11,761
RETAINED EARNINGS AT BEGINNING OF PERIOD. . . . . . . . . . . . . 51,522 47,364
---------- ----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,908 59,125
COMMON STOCK DIVIDENDS DECLARED . . . . . . . . . . . . . . . . . 11,475 11,278
---------- ----------
RETAINED EARNINGS AT END OF PERIOD. . . . . . . . . . . . . . . . $51,433 $47,847
========== ==========
AVERAGE SHARES OF COMMON STOCK OUTSTANDING. . . . . . . . . . . . 2,339,139 2,339,139
EARNINGS PER COMMON SHARE . . . . . . . . . . . . . . . . . . . . $4.87 $5.03
========== ==========
DIVIDENDS PAID PER COMMON SHARE . . . . . . . . . . . . . . . . . $4.906 $4.821
========== ==========
The accompanying notes to the consolidated financial statements are an integral part
of these statements.
SJG-4
<PAGE>
SOUTH JERSEY GAS COMPANY
CONSOLIDATED BALANCE SHEET
(In Thousands) (Unaudited)
<CAPTION>
September 30, December 31,
------------------------ ------------
1997 1996 1996
- --------------------------------------------------------------------------------- ------------
<S> <C> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT:
Utility Plant, at original cost . . . . . . . . . . . $607,395 $565,232 $577,304
Accumulated Depreciation . . . . . . . . . . . . . (164,700) (154,594) (157,682)
Gas Plant Acquisition Adjustment - Net. . . . . . . . 1,944 2,019 2,000
----------- ----------- ------------
Property, Plant and Equipment - Net. . . . . . 444,639 412,657 421,622
----------- ----------- ------------
CURRENT ASSETS:
Cash & Cash Equivalents . . . . . . . . . . . . . . . 3,684 4,139 7,469
Accounts Receivable:
Customers. . . . . . . . . . . . . . . . . . . . . 16,098 10,491 28,733
Unbilled Revenues. . . . . . . . . . . . . . . . . 4,220 4,690 17,855
Merchandise. . . . . . . . . . . . . . . . . . . . 1,841 2,113 2,260
Other. . . . . . . . . . . . . . . . . . . . . . . 781 4,371 508
Provision for Uncollectibles . . . . . . . . . . . (1,032) (1,032) (1,032)
Natural Gas in Storage, average cost. . . . . . . . . 26,600 24,777 22,638
Materials and Supplies, average cost. . . . . . . . . 3,954 4,546 4,055
Prepaid Gross Recpts and Franchise Taxes. . . . . . . 8,513 10,445 1,602
Prepayments and Other . . . . . . . . . . . . . . . . 2,386 2,003 1,562
----------- ----------- ------------
Total Current Assets . . . . . . . . . . . . . 67,045 66,543 85,650
----------- ----------- ------------
ACCOUNTS RECEIVABLE - Merchandise. . . . . . . . . . . . 1,547 2,066 1,999
----------- ----------- ------------
DEFERRED DEBITS:
Environmental Remediation Costs:
Expended - Net. . . . . . . . . . . . . . . . . . . 17,805 15,045 15,566
Liability for Future Expenditures . . . . . . . . . 52,400 23,099 41,700
Gross Receipts and Franchise Taxes. . . . . . . . . . 4,139 4,568 4,468
Income Taxes - Flowthrough Depreciation . . . . . . . 14,243 15,221 14,977
Deferred Postretirement Benefit Costs . . . . . . . . 5,872 5,119 5,153
Deferred Fuel Costs . . . . . . . . . . . . . . . . . 493 0 404
Other . . . . . . . . . . . . . . . . . . . . . . . . 7,761 7,276 8,387
----------- ----------- ------------
Total Deferred Debits. . . . . . . . . . . . . 102,713 70,328 90,655
----------- ----------- ------------
TOTAL . . . . . . . . . . . . . . . . . . $615,944 $551,594 $599,926
=========== =========== ============
The accompanying notes to the consolidated financial statements are an integral part
of these statements.
SJG-5
<PAGE>
SOUTH JERSEY GAS COMPANY
CONSOLIDATED BALANCE SHEET
(In Thousands) (Unaudited)
<CAPTION>
September 30, December 31,
------------------------ ------------
1997 1996 1996
- --------------------------------------------------------------------------------- ------------
<S> <C> <C> <C>
SHAREHOLDER'S EQUITY AND LIABILITIES
COMMON EQUITY:
Common Stock, Par Value $2.50 a 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 . . 102,817 77,194 77,194
Retained Earnings . . . . . . . . . . . . . . . . . . 51,433 47,847 51,522
----------- ----------- ------------
Total Common Equity. . . . . . . . . . . . . . 160,098 130,889 134,564
----------- ----------- ------------
PREFERRED STOCK AND SECURITIES:
Redeemable Cumulative Preferred - Par Value $100,
Authorized 47,304 and 48,204 shares, respectively
Outstanding shares:
Series A, 4.70% - 3,000, 3,900 and 3,900 shares . 300 390 390
Series B, 8.00% - 19,242 shares. . . . . . . . . . 1,924 1,924 1,924
Company-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust
Par Value $25, 1,400,000 shares
Authorized and Outstanding. . . . . . . . . . . . . . 35,000 0 0
----------- ----------- ------------
Total Preferred Stock and Securities . . . . . 37,224 2,314 2,314
----------- ----------- ------------
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . 178,003 151,879 149,736
----------- ----------- ------------
CURRENT LIABILITIES:
Notes Payable to Banks. . . . . . . . . . . . . . . . 28,600 95,900 108,300
Current Maturities of Long-Term Debt. . . . . . . . . 8,876 6,603 6,603
Accounts Payable. . . . . . . . . . . . . . . . . . . 37,786 34,193 48,347
Customer Deposits . . . . . . . . . . . . . . . . . . 5,795 5,647 6,050
Environmental Remediation Costs . . . . . . . . . . . 7,735 6,996 9,377
Interest and Other Accrued Current Liabilities. . . . 4,722 8,677 2,161
----------- ----------- ------------
Total Current Liabilities. . . . . . . . . . . 93,514 158,016 180,838
----------- ----------- ------------
DEFERRED CREDITS AND OTHER NON-CURRENT LIABILITIES:
Deferred Income Taxes - Net . . . . . . . . . . . . . 80,225 69,655 78,415
Investment Tax Credits. . . . . . . . . . . . . . . . 5,728 6,124 6,025
Deferred Revenues . . . . . . . . . . . . . . . . . . 0 509 0
Pension and Other Postretirement Benefits . . . . . . 10,434 9,224 9,551
Environmental Remediation Costs . . . . . . . . . . . 44,665 16,103 32,323
Other . . . . . . . . . . . . . . . . . . . . . . . . 6,053 6,881 6,160
----------- ----------- ------------
Total Deferred Credits
and Other Non-Current Liabilities. . . . . . 147,105 108,496 132,474
----------- ----------- ------------
COMMITMENTS AND CONTINGENCIES
TOTAL . . . . . . . . . . . . . . . . . . $615,944 $551,594 $599,926
=========== =========== ============
The accompanying notes to the consolidated financial statements are an integral part
of these statements.
SJG-6
<PAGE>
SOUTH JERSEY GAS COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In Thousands)
<CAPTION>
Nine Months Ended
September 30,
---------------------
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income Applicable to Common Stock . . . . . . . . $11,386 $11,761
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization . . . . . . . . . . . 13,316 13,161
Provision for Losses on Accounts Receivable . . . . 949 1,168
Revenues and Fuel Costs Deferred - Net. . . . . . . (89) (6,806)
Deferred and Non-Current Federal Income Taxes
and Credits - Net. . . . . . . . . . . . . . . . . 2,500 1,463
Environmental Remediation Costs - Net . . . . . . . (2,239) (3,272)
Changes in:
Accounts Receivable . . . . . . . . . . . . . . . 25,467 31,078
Inventories . . . . . . . . . . . . . . . . . . . (3,861) (10,718)
Prepayments and Other Current Assets. . . . . . . (824) 9
Accounts Payable and Other Accrued Liabilities. . (8,255) (2,056)
Prepaid Gross Receipts and Franchise Taxes. . . . (6,911) (6,796)
Other - Net . . . . . . . . . . . . . . . . . . . . 466 2,274
-------- --------
Net Cash Provided by Operating Activities . . . . . . 31,905 31,266
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, Cost of Removal & Salvage . . . (35,587) (27,439)
-------- --------
Net Cash Used in Investing Activities . . . . . . . . (35,587) (27,439)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (Repayments of) Borrowings from Lines of Credit . (79,700) 19,600
Proceeds from Sale of Long-Term Debt. . . . . . . . . 35,000 0
Principal Repayments of Long-Term Debt. . . . . . . . (4,461) (10,113)
Repurchase of Preferred Stock . . . . . . . . . . . . (90) (90)
Proceeds from Sale of Preferred Securities. . . . . . 35,000 0
Additional Investment by Shareholder. . . . . . . . . 25,623 0
Dividends of Common Stock . . . . . . . . . . . . . . (11,475) (11,278)
-------- --------
Net Cash Used In Financing Activities . . . . . . . . (103) (1,881)
-------- --------
NET (DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS . (3,785) 1,946
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. . . 7,469 2,193
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . $3,684 $4,139
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (Net of Amounts Applicable to LGAC
Overcollections and Amounts Capitalized) . . . . $15,578 $14,354
Income Taxes (Net of Refunds) . . . . . . . . . . $2,525 $947
The accompanying notes to the financial statements are an integral part
of these statements.
SJG-7
</TABLE>
<PAGE>
SOUTH JERSEY GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Entity - The consolidated financial statements
present the accounts of South Jersey Gas Company (the Company
or SJG) and its wholly owned statutory trust subsidiary, SJG
Capital Trust. All intercompany accounts and transactions
have been eliminated. South Jersey Industries, Inc.
(Industries) owns all of the outstanding common stock of SJG.
Certain reclassifications have been made of previously
reported amounts to conform with classifications used in the
current year. In the opinion of management, the financial
statements reflect all adjustments necessary for a fair
presentation of the financial position and operating results
of the Company at the dates and for the periods presented.
The business of the Company is subject to seasonal
fluctuations and, accordingly, this interim financial
information should not be considered a basis for estimating
the results of operations for the full year.
Estimates and Assumptions - The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make 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 February 1997, the
Financial Accounting Standards Board issued FASB No. 128,
"Earnings per Share", which is effective for financial
statements for periods ending after December 15, 1997. FASB
No. 128 supersedes previous reporting requirements on
Earnings per Share (EPS) and replaces the presentation of
primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with a complex
capital structure. The adoption of FASB No. 128 will have no
impact on the EPS of the Company.
In June 1997, the FASB issued FASB No. 130, "Reporting
Comprehensive Income". This statement, which establishes
standards for reporting and disclosure of comprehensive
income, is effective for interim and annual periods beginning
after December 15, 1997. The Company currently has no
additional items qualifying as comprehensive income under
FASB No. 130 and, therefore, its adoption is not expected to
have any impact.
2. RECENT REGULATORY ACTIONS:
On January 27, 1997, the BPU granted SJG a rate increase
of $6.0 million based on a 9.62% rate of return on rate base,
which included an 11.25% return on equity. Revenue
requirements for ratemaking purposes are established on the
basis of firm and interruptible sales projections. The
majority of this increase will come from residential and
small commercial customers. In addition, part of the
SJG-8
<PAGE>
SOUTH JERSEY GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. RECENT REGULATORY ACTIONS: (Continued)
increase will be recovered from customers through new service
fees which charge specific customers for costs which they
cause SJG to incur. SJG is allowed to retain the first $5.4
million of pre-tax margins generated by interruptible and
off-system sales and transportation and 20% of pre-tax
margins above that level. In 1997 and 1998, this $5.4
million threshold will be increased by the annual revenue
requirement associated with specified major construction
projects. These sharing formula improvements are expected to
result in additional rate relief of approximately $0.2
million in 1997 and $1.8 million in 1998.
In addition to the rate increase, the BPU approved a
revenue reduction in SJG's Temperature Adjustment Clause
(TAC), a mechanism designed to reduce the impact of extreme
fluctuations in temperatures on SJG and its customers. For
the TAC period running from October 1, 1995 through May 31,
1996, weather in SJG's service area was significantly colder
than the 20-year average, resulting in a $2.5 million credit
due to customers' bills which is reflected in the 1996
results of operations.
As part of the tariff changes approved, SJG initiated
its BPU approved pilot program in April 1997 to give
residential customers a choice of gas supplier. During the
enrollment period which ended June 30, 1997, approximately
13,000 residential customers applied for this service.
Transportation of gas for these customers began on August 1,
1997 and will continue until July 31, 1998, or later if
approved by the BPU. Under the applicable rate schedule,
amounts billed to participants in the program will be reduced
for cost of gas charges and applicable gross receipts taxes.
This decrease in revenues will be offset by a corresponding
decrease in SJG's gas costs and taxes under SJG's BPU-
approved fuel clause. Accordingly, SJG believes that the
program will not affect its net income, financial condition
or margins. In addition, because the program affects only 5%
of SJG's residential customers, and not all of those
customers may elect to purchase gas from other suppliers, SJG
believes that any reduction in revenue will not be material.
SJG further expanded the choices available to commercial and
industrial customers.
On May 5, 1997, SJG made a filing with the BPU to update
rates related to appliance service charges, including therein
a design profit margin. The rates are competitive with other
providers of such services in South Jersey and are designed
to provide increased earnings and cash flows to SJG over the
current cost-based appliance service charge system. The
filing is pending before the BPU.
SJG-9
<PAGE>
SOUTH JERSEY GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. RECENT REGULATORY ACTIONS: (Continued)
On May 13, 1997, SJG filed to recover additional post-
retirement benefit costs of approximately $1.2 million
annually. This recovery is expected to begin in 1998.
On July 31, 1997, SJG made a filing with the BPU
requesting an increase in the level of its annual recoveries
through the RAC of $1.5 million. This increase primarily
reflects costs incurred pursuant to agreements with the NJDEP
for cleanup of such sites during the period of August 1996
through July 1997. The amount sought to be recovered during
the 1997-1998 Recovery Year, $3.9 million, consists of the
amortization of Remediation Costs incurred during the 1996-
1997 Remediation Year of $0.9 million and the amortization of
Remediation Costs incurred prior to the 1996-1997 Remediation
Year of $3.2 million. It also consists of a credit for
carrying costs on Deferred Tax Benefits of $0.7 million and
the addition of an underrecovery from the 1996-1997 Recovery
Year of $0.5 million.
On September 6, 1996, SJG made its annual LGAC and TAC
filings with the BPU. SJG proposed a decrease to the LGAC of
$1.4 million. In addition, a credit resulting from the TAC
of $2.5 million was filed and, on January 27, 1997, the BPU
approved a revenue reduction for this credit, as noted above.
On September 12, 1997, SJG made its LGAC, TAC and DSM filings
with the BPU for the period November 1997 through October
1998. In this filing, SJG requested an increase in the
annual level of LGAC recovery of $4.4 million which is
inclusive of the $1.4 million proposed decrease filed in
1996. It also requested that the 1996-1997 filing be
resolved simultaneously with this case. Both cases are still
pending at the BPU.
On September 9, 1997, SJG made a filing with the BPU to
adjust rates by replacing the current State Gross Receipts
and Franchise Tax components with a Sales and Use Tax, a
Corporation Business Tax and a Transitional Energy Facilities
Assessment. The new rates are expected to become effective
January 1, 1998 (See Note 8).
3. RELATED PARTY TRANSACTIONS:
SJG had contracted with R & T Group, Inc., a wholly
owned subsidiary of Industries, for general utility
construction and environmental remediation services costing
approximately $ -0- and $1,763,100 for the three months ended
and $1,901,000 and $4,363,900 for the nine months ended
September 30, 1997 and 1996, respectively. Amounts payable
to R & T Group, Inc. relating to these services were $10,500
and $1,318,900 at September 30, 1997 and 1996, respectively.
SJG engages in sales of natural gas for resale pursuant
to Section 284.402 of the Regulations of the Federal Energy
SJG-10
<PAGE>
SOUTH JERSEY GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. RELATED PARTY TRANSACTIONS: (Continued)
Regulatory Commission which included sales to South Jersey
Energy Company (SJE) and South Jersey Fuel Company (SJF),
affiliates by common ownership of Industries. Sales to SJE
approximated $73,500 for the three months ended and $258,200
for the nine months ended September 30, 1996. There have
been no sales to SJE during the three and nine months ended
September 30, 1997. Sales to SJF approximated $ -0- and
$684,300 for the nine months ended September 30, 1997 and
1996, respectively. There have been no sales to SJF during
the three months ended September 30, 1997 and 1996.
4. FINANCING ACTIVITIES:
On March 21, 1997, SJG sold $35.0 million of its First
Mortgage Bonds, 7.7% Series due 2027.
On May 2, 1997, SJG's statutory trust subsidiary, SJG
Capital Trust (Trust), established in the State of Delaware
on March 24, 1997, sold $35.0 million of 8.35% SJG-obligated
Mandatorily Redeemable Preferred Securities. The Trust
solely holds as an asset the 8.35% Deferrable Interest
Subordinated Debentures issued by SJG which mature on April
30, 2037, which is also the maturity date of the Preferred
Securities. The Debentures and Preferred Securities are
redeemable at the option of SJG at a redemption price equal
to 100% of the principal amount thereof at any time on or
after April 30, 2002.
5. RETAINED EARNINGS:
SJG is restricted under its First Mortgage Indenture, as
supplemented, as to the amount of cash dividends or other
distributions that may be paid on its common stock. SJG had
retained earnings free of such restriction of approximately
$49.4 million at September 30, 1997.
6. COMMITMENTS AND CONTINGENCIES:
Gas Supply Contracts - SJG, in the normal course of
conducting business, has entered into long-term contracts for
natural gas supplies, firm transportation, and firm gas
storage service. The earliest expiration of any of the gas
supply contracts is 1999. All of the transportation and
storage service agreements between SJG and its interstate
pipeline suppliers are provided under Federal Energy
Regulatory Commission (FERC) approved tariffs. SJG's
cumulative obligation for demand charges paid to its
suppliers for all of these services is approximately $4.5
million per month which is recovered on a current basis
through the LGAC.
SJG-11
<PAGE>
SOUTH JERSEY GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. COMMITMENTS AND CONTINGENCIES: (Continued)
Pending Litigation - The Company is subject to claims
which arise in the ordinary course of its business and other
legal proceedings. A group of Atlantic City casinos filed a
petition with the BPU on January 16, 1996, alleging
overcharges of over $10.0 million, including interest.
Management believes that charges to the casinos were based on
applicable tariffs and that the casinos were not qualified
under less expensive rate schedules, as claimed. Management
believes that the ultimate impact of these actions will not
materially affect SJG's financial position, results of
operations or liquidity.
Environmental Remediation Costs - SJG has incurred and
recorded certain costs for environmental remediation of sites
where SJG or predecessor companies operated gas manufacturing
plants. Manufactured gas operations were terminated at all
SJG sites more than 30 years ago.
Since the early 1980s, SJG has recorded environmental
remediation costs of $86.1 million, of which $33.7 million
has been expended as of September 30, 1997. SJG, with the
assistance of an outside consulting firm, estimates that
total future expenditures to remediate the sites will range
from $52.4 million to $165.6 million. The lower end of this
range has been recorded as a liability and is reflected on
the balance sheet under the captions "Current Liabilities"
and "Deferred Credits and Other Non-Current Liabilities".
Recorded environmental remediation costs do not directly
affect earnings because those costs are deferred and, when
expended, recovered through rates over 7-year amortization
periods as authorized by the BPU. Amounts accrued for future
expenditures have not been adjusted for future insurance
recoveries, which management is pursuing. SJG has received
$4.2 million of insurance recoveries as of September 30,
1997. These proceeds were first used to offset legal fees
incurred in connection with those recoveries and the excess
was used to reduce the balance of deferred environmental
remediation costs. Recorded amounts include estimated costs
to be incurred based on projected investigation and
remediation work plans using existing technologies. Actual
expenditures could differ from the estimates due to the long-
term nature of the projects and changing technology,
government regulations and site specific requirements.
As a result of the 7-year recovery mechanism, SJG does
not expense environmental costs for former gas manufacturing
sites when incurred and defers costs to be recovered. SJG
has two regulatory assets associated with environmental cost.
The first regulatory asset is titled "Environmental
Remediation Cost: Expended -Net". These expenditures
represent actual cost incurred to remediate former gas
manufacturing plant sites. These costs meet the requirements
of FASB No. 71, "Accounting for the Effects of Certain Types
SJG-12
<PAGE>
SOUTH JERSEY GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. COMMITMENTS AND CONTINGENCIES: (Continued)
of Regulation". The BPU has allowed recovery of these
expenditures through July 1995 and petitions to recover these
costs through July 1997 are pending before the BPU.
The other regulatory asset titled "Environmental
Remediation Cost: Liability for Future Expenditures" relates
to estimated future expenditures determined under the
guidance of FASB No. 5, "Accounting for Contingencies". This
amount, which relates to former manufactured gas plant sites
has been recorded as a deferred debit with the corresponding
amount reflected in Current Liabilities and Deferred Credits
and Other Non-Current Liabilities, as appropriate. The
deferred debit is a regulatory asset under FASB No. 71
because the BPU's intent, as evidenced by its current
practice, is to provide recovery sufficient in amount to
recover the deferred costs after they have been expended.
SJG makes annual filings with the BPU to recover these
costs in rates. The BPU has consistently allowed the full
recovery over such 7-year periods, and SJG believes the BPU
will continue to do so. As of September 30, 1997, SJG has
unamortized remediation expenditures of $17.8 million which
are reflected on the consolidated balance sheet under the
caption "Deferred Debits". Since BPU approval of the RAC
mechanism in August 1992, SJG has recovered $11.7 million
through rates as of September 30, 1997.
7. COMMON EQUITY:
On March 26, 1997, SJG received $25.6 million as a
contribution of capital from Industries. Contributions of
capital are credited to Other Paid-In Capital and Premium on
Common Stock.
8. ENERGY TAX REFORM:
On July 14, 1997, legislation reforming the taxation of
energy in New Jersey was adopted. The new law eliminates the
Gross Receipts and Franchise Taxes (approximately 13 percent
of utility revenue) and replaces it with a combination of
taxes. Beginning January 1, 1998, retail sales of natural
gas and electricity and utility services will be subject to
the 6 percent State Sales and Use Tax on gas sales and
transportation revenues. Utilities will also be subject to
the 9 percent State Corporation Business Tax on net income.
To bridge the revenue gap created by the new tax law, the
State will impose a Transitional Energy Facilities Assessment
(TEFA) on volumes of gas sold and transported. The TEFA will
be phased out over a five-year period beginning January 1,
1999 and ending January 1, 2003. It is expected that the
revised tax policy will eliminate tax disparities between
SJG-13
<PAGE>
SOUTH JERSEY GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. ENERGY TAX REFORM: (Continued)
utility and non-utility suppliers, thereby providing fair
competition and lower energy costs for the consumer. The
adoption of the new legislation will not materially affect
the Company's financial position or results of operations.
SJG-14
<PAGE>
SOUTH JERSEY GAS COMPANY
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Overview
SJG is a natural gas distribution company serving 257,600
customers at September 30, 1997, compared with 250,400 customers
at September 30, 1996. Seasonal aspects affect SJG's reported
revenues, inventories, receivables, operating expenses and cash
flows, which are usually greater during the first and fourth
quarters of the year.
Competition
SJG franchises are non-exclusive. However, currently no other
utility is providing retail gas distribution services within its
territory. SJG does not expect any other utilities to do so in the
foreseeable future because of the extensive investment required for
utility plant and related costs. SJG competes with oil, propane and
electricity suppliers for residential, commercial and industrial
users. The market for natural gas sales is subject to competition
as a result of deregulation. SJG has enhanced its competitive
position while maintaining its margins through its initiative in
obtaining an unbundled tariff which isolates the variable cost of
the gas commodity component within SJG's rate structure. Under this
tariff, substantially all of SJG's profits are derived from the
transportation rather than the sale of the commodity since SJG does
not generally add a profit mark-up to the cost of the commodity.
Therefore, SJG is able to offer its commercial and industrial
customers flexibility regarding choice of gas supply while SJG
continues to recover its cost of service and fixed gas costs while
providing and charging for transportation service. In April 1997,
SJG initiated its BPU-approved pilot program to give certain of its
residential customers a choice of gas suppliers (See "Pilot Program
- - Choice of Gas Supplier"). In all of these respects, SJG has been
a leader in addressing the changing marketplace while maintaining
its focus on being a low-cost provider of natural gas and energy
services. It is the intent of the SJG to develop creative
initiatives and propose meaningful regulatory and tax reforms
designed to benefit its customers and shareholder.
Pilot Program - Choice of Gas Supplier
In April 1997, SJG initiated its BPU approved pilot program
to give residential customers a choice of gas supplier. During
the enrollment period which ended June 30, 1997, approximately
13,000 residential customers applied for this service.
Transportation of gas for these customers began on August 1, 1997
and will continue until July 31, 1998, or later if approved by the
BPU. Under the applicable rate schedule, amounts billed to
participants in the program will be reduced for cost of gas
charges and applicable gross receipts taxes. The resulting
decrease in revenues will be offset by a corresponding decrease in
SJG's gas costs and taxes under SJG's BPU-approved fuel clause.
Accordingly, SJG believes that the program will not affect its net
SJG-15
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Pilot Program - Choice of Gas Supplier (Continued)
income, financial condition or margins. In addition, because the
program affects only 5% of SJG's residential customers, and not
all of those customers may elect to purchase gas from other
suppliers, SJG believes that any reduction in revenue will not be
material.
Energy Adjustment Clauses
SJG's tariff includes a Levelized Gas Adjustment Clause
("LGAC"), a Temperature Adjustment Clause ("TAC"), a Remediation
Adjustment Clause ("RAC") and a Demand Side Management Clause
("DSMC"). Such clauses are designed to permit adjustments for
changes in gas supply costs, reduce the impact of extreme
fluctuations in temperatures on SJG and its customers, recover
costs incurred in the remediation of former gas manufacturing
plants and recover costs associated with its conservation plan,
respectively. The BPU approved LGAC, RAC and DSMC adjustments do
not directly affect earnings because revenues are adjusted to
match costs. The Company's base rates are designed based on
twenty-year normal temperatures. When actual temperatures are
colder than the twenty-year average, the Company sells more gas
than was anticipated generating higher revenues and net income.
Conversely, when actual temperatures are warmer than normal, the
Company sells less gas and revenues and net income are lower than
projected. The TAC dampens the effect of these peaks and valleys
(and thus moderates the effect of weather extremes on SJG's
revenues) by giving customers a credit against higher usage in
colder weather and giving SJG a surcharge on lower usage in warmer
weather. TAC adjustments therefore affect revenue, income and
cash flows.
Results of Operations - Three and Nine Months Ended September 30,
1997 Compared to Three and Nine Months Ended September 30, 1996
Operating Revenues
The following is a summary of changes in operating revenue
and throughput by major category for 1997 compared with 1996:
SJG-16
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Operating Revenues - Utility (Continued)
Period Ended September 30,
------------------------------
Three Months Nine Months
1997 vs. 1996 1997 vs. 1996
------------- -------------
Operating Revenues (Thousands):
Firm
Residential $ 614 $ (262)
Commercial (1,161) (3,952)
Industrial (240) (1,347)
Cogeneration & Electric
Generation (4,159) (10,958)
Firm Transportation 687 1,707
------------ ------------
Total Firm (4,259) (14,812)
Interruptible 478 (247)
Interruptible Transportation 116 636
Off-System 11,563 10,650
Capacity Release & Storage 1,903 4,462
Other Revenues (71) 179
------------ ------------
Total Operating Revenues $ 9,730 $ 868
============ ============
Throughput (MMcf):
Firm
Residential (120) (1,529)
Commercial (201) (1,145)
Industrial (55) (303)
Cogeneration & Electric
Generation (1,592) (3,926)
Firm Transportation 1,960 5,503
------------ ------------
Total Firm Throughput (8) (1,400)
Interruptible 136 (75)
Interruptible Transportation 306 1,479
Off-System 4,699 6,196
Capacity Release & Storage 1,827 12,084
------------ ------------
Total Throughput 6,960 18,284
============ ============
Firm revenues in 1997 were negatively impacted by the effects
of warmer temperatures, partially offset by the effect of
increases in rates for residential and commercial customers.
Increased off-system sales and increased revenues from capacity
release and storage programs benefitted each 1997 period.
SJG-17
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Gas Purchased for Resale
Gas purchased for resale increased $9.1 million in the third
quarter of 1997 compared with the 1996 quarter, principally due to
increased off-system sales, partially offset by decreases in unit
sales to commercial, cogeneration and electric generation
customers. Gas purchased for resale increased by $1.0 million for
the nine months ended September 30, 1997, compared with 1996,
principally due to increased off-system sales, partially offset by
lower firm sales. Sources of gas supply include both contract and
open-market purchases. SJG is responsible for securing and
maintaining its own gas supplies to serve its customers.
SJG has entered into long-term contracts for natural gas
supplies, firm transportation, and firm gas storage service. The
earliest expiration of any of these contracts is 1999. All of the
transportation and storage service agreements between SJG and its
interstate pipeline suppliers are provided under tariffs approved
by the Federal Energy Regulatory Commission. SJG's cumulative
obligation for demand charges for all of these services is
approximately $4.5 million per month which is recovered on a
current basis through its LGAC.
Operations
A summary of net changes in operations for 1997 compared with
1996 is as follows (in thousands):
Period Ended September 30,
------------------------------
Three Months Nine Months
1997 vs. 1996 1997 vs. 1996
------------- -------------
Other Production Expense $ 1 $ (24)
Transmission (13) (23)
Distribution 107 287
Customer Accounts and Services (29) (376)
Sales 29 81
Administration and General 603 849
Other (100) (275)
------ ------
$ 598 $ 519
====== ======
Customer Accounts and Service costs decreased in both periods
principally due to a charge in 1996 to increase the Company's
reserve for uncollectible accounts and lower payroll costs.
Administrative and General costs increased in 1997 principally due
to increased payroll, employee benefit and regulatory costs,
partially offset by decreases in outside service costs.
SJG-18
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Other Operating Expenses
A summary of principal changes in other expenses for 1997
compared with 1996 is as follows (in thousands):
Period Ended September 30,
------------------------------
Three Months Nine Months
1997 vs. 1996 1997 vs. 1996
------------- --------------
Maintenance $ 250 $ 687
Depreciation 289 834
Federal Income Taxes - Net 21 477
Gross Receipts & Franchise
and Other Taxes (277) (2,610)
The increase in maintenance expense is principally due to
increased utility production plant maintenance, which includes the
amortization of increased environmental remediation costs (such
increases are offset by revenue recovery under SJG's RAC).
Depreciation is higher in 1997 principally due to increased
investment in property, plant and equipment by SJG. Federal
Income Tax changes reflect the impact of changes in pre-tax
income. The changes in Gross Receipts & Franchise Taxes in 1997
are due to changes in volumes of gas sold, which are subject to
those taxes, in addition to lower tax rates applicable to certain
customer classes in 1997.
Interest and Other Charges
Interest and other charges decreased by $540,000 and $884,000
in the 1997 three and nine month periods, respectively,
principally due to the effects of lower levels of short-term debt
outstanding, partially offset by the effect of increased long-term
interest due to increased levels of long-term debt outstanding.
Preferred Securities Dividend Requirements reflect the issuance of
$35.0 million of SJG obligated Mandatorily Redeemable Preferred
Securities in May 1997 (See Note 4 on page 10). Short-term debt
levels were reduced in March 1997 by the use of proceeds resulting
from the sale of $35.0 million of first mortgage bonds; the
application of a $25.6 million equity infusion from SJG's parent
company; and, in May 1997, the application of net proceeds from
the sale of $35.0 million of 8.35% SJG obligated Mandatorily
Redeemable Preferred Securities (See "Capital Resources").
SJG-19
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Net Income Applicable to Common Stock
A summary of changes in net income (in thousands) and
earnings per average common share is as follows:
Period Ended September 30,
-----------------------------
Three Months Nine Months
1997 vs. 1996 1997 vs. 1996
------------- -------------
Net Income $ (470) $ (375)
============ ============
Earnings per Common Share $(0.20) $(0.16)
============ ============
The details affecting the decrease in net income and earnings
per share are discussed under the appropriate captions above. The
decreases in net income and earnings per share in 1997 principally
reflect the negative effect of warmer temperatures on higher
margin firm sales, increased operating costs and preferred
securities dividend requirements, partially offset by the effect
of increased revenues resulting from increased residential rates,
increased off-system and capacity release and storage revenues and
lower short-term interest.
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 are generally
met by cash from operations and short-term lines of credit. The
Company maintains short-term lines of credit with a number of
banks, aggregating $115.0 million of which $86.4 million was
available at September 30, 1997. The credit lines are uncommitted
and unsecured with interest rates below the prime rate.
The changes in cash flows from operating activities for the
nine months ended September 30, 1997, compared with the same
period in 1996, are as follows (in thousands):
SJG-20
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Liquidity (Continued)
Nine Months Ended
September 30,
-----------------
1997 vs. 1996
-----------------
Increases/(Decreases):
Net Income $ (375)
Depreciation and Amortization 155
Revenues and Fuel Costs Deferred - Net 6,717
Deferred and Non-Current Federal
Income Taxes - Net 1,037
Environmental Remediation Costs-Net 1,033
Accounts Receivable (5,611)
Inventories 6,857
Prepayments and Other Current Assets (833)
Prepaid Gross Receipts & Franchise Taxes (115)
Accts Payable and Other Accrued Liabilities (6,199)
Other - Net (2,027)
--------
Increase in Net Cash from Operating
Activities $ 639
========
Depreciation and Amortization are non-cash charges to income
and do not impact cash flow. Changes in depreciation cost reflect
the effect of additions and reductions to fixed assets.
Increases in Revenues and Fuel Costs Deferred - Net reflect
the impact of overcollection of fuel costs or the recovery of
previously deferred fuel costs. Decreases reflect the impact of
payments or credits to customers for amounts previously
overcollected or the undercollection of fuel costs resulting from
increases in natural gas costs.
Increases in Deferred and Non-Current Federal Income Taxes
and Credits - Net represent the excess of taxes accrued over
amounts paid. Decreases reflect the impact of taxes paid in
excess of amounts accrued. Generally, deferred income taxes
related to deferred fuel costs will be paid in the next year.
Changes in Environmental Remediation Costs - Net represent
the difference between amounts collected under the RAC and through
insurance recoveries and remediation expenditures.
Changes in Accounts Receivable are generally weather and
price related. Increases generate cash flows when collected in
subsequent periods.
Changes in Inventory reflect the impact of seasonal
requirements, temperatures and price changes.
Changes in Prepaid Gross Receipts & Franchise Taxes reflect the
impact of the excess of taxes paid over taxes accrued. However,
there are significant timing differences in cash flows during the
year since SJG must pay the full year's tax on April 1 of each year
SJG-21
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Liquidity (Continued)
and amortize any prepaid tax over the remainder of the year, on the
basis of gas volumes sold. SJG uses short-term borrowings to make
these tax payments and, accordingly, this results in a temporary
increase in the short-term debt level. The carrying costs for these
timing differences are recognized in base utility rates.
As stated in Note 8 on page 13, on January 1, 1998, the gross
receipts and franchise taxes are being replaced with a 6 percent
State Sales and Use Tax, a 9 percent State Corporation Business Tax
on net income and a Transitional Energy Facilities Assessment (TEFA)
on gas facilities. TEFA will be phased out over five years
beginning January 1, 1999. Approximately fifty percent of the new
taxes will be paid in monthly installments during the first six
months of the year and the principal portion of the remaining taxes
will be paid on June 25, 1998 and May 15 of each year thereafter.
In September 1997, SJG filed a petition with the BPU to reflect the
impact of this tax change in base rates.
Changes in Accounts Payable and Other Accrued Liabilities
reflect the impact of timing differences between the accrual and
payment of costs.
Regulatory Matters
On January 27, 1997, the BPU granted SJG a rate increase of
$6.0 million based on a 9.62 percent rate of return on rate base,
which included an 11.25 percent return on equity. Revenue
requirements for ratemaking purposes are established on the basis
of firm and interruptible sales projections. The majority of this
increase will come from residential and small commercial customers.
In addition, part of the increase will be recovered from customers
through new service fees which charge specific customers for costs
which they cause SJG to incur. As part of this rate increase, SJG
is allowed to retain the first $5.4 million of pre-tax margins
generated by interruptible and off-system sales and transportation
and 20 percent of pre-tax margins above that level. In 1997 and
1998, this $5.4 million threshold will be increased by the annual
revenue requirement associated with specified major construction
projects. These sharing formula improvements are expected to
result in additional rate relief of approximately $0.2 million in
1997 and $1.8 million in 1998.
Rates of return are calculated by weighting SJG's individual
capital cost rates by the proportion of each respective type of
capital. This requires the selection of appropriate capital
structure ratios and a determination of the cost rate for each
capital component which are determined in each rate proceeding.
In setting a rate of return, the BPU must provide a utility
and its investors with a return that is commensurate with the risk
to which the invested capital is exposed so that the utility has
access to the capital required to meet its public service
responsibility.
SJG-22
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Regulatory Matters (Continued)
Also on January 27, 1997, the BPU approved SJG's request for a
$2.5 million revenue reduction through the TAC, which is the
standard BPU procedure used to credit customers with excess
revenues, previously collected from customers, which were in excess
of allowed revenues determined under the TAC (See "Energy Adjustment
Clauses"). This revenue reduction reflects the normal operation of
the TAC, as does the BPU's confirmation of the decrease.
In April 1996, SJG received BPU approval to increase its
rates to recover approximately $8.0 million of increased natural
gas costs through the LGAC. On August 31, 1996, SJG made its
1996-97 LGAC filing to reduce rates to reflect a decrease of $1.4
natural gas costs. Updated projections of the 1996-97 LGAC year
results have been rolled into the 1997-98 LGAC year, which was filed
with the BPU on September 12, 1997. The 1997-98 LGAC filing
requested an increase in rates to reflect an increase of $4.4
million in natural gas costs, inclusive of the $1.4 million
reduction related to the 1996-97 LGAC filing. Both filings are
still pending at the BPU.
The adoption of FASB No. 109, "Accounting for Income Taxes"
in 1993 primarily resulted in the creation of a regulatory asset
and a deferred income tax liability. As a result of positions
taken in the 1994 rate case, the amortization of the asset is
being recovered through rates over an 18-year period which began
in December 1994. Also, FASB No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", adopted by SJG in
1993, requires an accrual basis of accounting for retiree benefit
payments during the years of employment. SJG has elected to
recognize the unfunded transition obligation over a 20-year period
which began in 1993. SJG had previously recovered these costs
through rates on a pay-as-you-go basis. A December 1994 BPU order
provided for partial recovery of costs associated with FASB No.
106 and prescribes continued deferral of unrecovered costs. SJG
was initially seeking recovery of this asset in its recently
completed rate proceeding; however, the BPU initiated a generic
proceeding to address the recovery of these costs by all utilities
in the State. Phase I of the generic proceeding was completed in
January 1997 and SJG, in May 1997, has made a prescribed filing
with the BPU to recover additional postretirement benefit costs of
approximately $1.2 million annually, beginning in 1998. Also,
beginning in 1995, an external trust was established towards
funding postretirement benefit costs for the purpose of
contributing costs recovered from ratepayers as authorized by the
BPU. Rate recovery in excess of SJG's pay-as-you-go requirement
is contributed to the trust and provides no operating benefit to
SJG except to the extent that trust income would reduce future net
periodic cost. Gross contributions to the trust amounted to $5.7
million as of September 30, 1997. The balance of this regulatory
asset amounted to $5.9 million at September 30, 1997.
SJG-23
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Regulatory Matters (Continued)
SJG has incurred and recorded certain costs for environmental
remediation of sites where SJG or predecessor companies operated
gas manufacturing plants. Manufactured gas operations were
terminated at all SJG sites more than 30 years ago.
Since the early 1980's, the Company has recorded environmental
remediation costs of $86.1 million, of which $33.7 million has been
expended as of September 30, 1997. The major portion of the
recorded environmental remediation costs relate to the remediation
of SJG's former gas manufacturing sites. SJG, with the assistance
of an outside consulting firm, estimates that total future
expenditures to remediate the sites will range from $52.4 million
to $165.6 million. The lower end of this range has been recorded
as a liability and is reflected on the balance sheet under the
captions "Current Liabilities" and "Deferred Credits and Other
Non-Current Liabilities". Recorded environmental remediation costs
of SJG do not directly affect earnings because those costs are
deferred and, when expended, recovered through rates over 7-year
amortization periods as authorized by the BPU. Amounts accrued for
future expenditures have not been adjusted for future insurance
recoveries, which management is pursuing. SJG has received $4.2
million of insurance recoveries as of September 30, 1997. These
proceeds were first used to offset legal fees incurred in
connection with those recoveries and the excess was used to reduce
the balance of deferred environmental remediation costs. Recorded
amounts include estimated costs to be incurred based on projected
investigation and remediation work plans using existing
technologies. Actual expenditures could differ from the estimates
due to the long-term nature of the projects and changing
technology, government regulations and site specific requirements.
As a result of the 7-year recovery mechanism, SJG does not
expense environmental costs for former gas manufacturing sites
when incurred and defers costs to be recovered. SJG has two
regulatory assets associated with environmental cost. The first
regulatory asset is titled "Environmental Remediation Cost:
Expended - Net". These expenditures represent actual costs
incurred to remediate 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 has allowed
recovery of these expenditures through July 1995 and petitions to
recover these costs through July 1997 are pending before the BPU.
The other regulatory asset titled "Environmental Remediation
Cost: Liability for Future Expenditures" relates to estimated
future expenditures determined under the guidance of FASB 5
"Accounting for Contingencies". This amount, which relates to
former manufactured gas plant sites has been recorded as a
deferred debit with the corresponding amount reflected in Current
Liabilities and Deferred Credits and Other Non-Current
Liabilities, as appropriate. The deferred debit is a regulatory
asset under FASB 71 because the BPU's intent, as evidenced by its
current practice, is to provide recovery sufficient in amount to
recover the deferred costs after they have been expended.
SJG-24
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Regulatory Matters (Continued)
SJG makes annual filings with the BPU to recover expended
remediation costs in rates. The BPU has consistently allowed the
full recovery over such seven-year periods, and SJG believes the
BPU will continue to do so. As of September 30, 1997, SJG has
unamortized remediation expenditures of $17.8 million which are
reflected on the balance sheet under the caption "Deferred
Debits." Since BPU approval of the RAC mechanism in August 1992,
SJG has recovered $11.7 million through rates as of
September 30, 1997.
On May 5, 1997, SJG made a filing with the BPU to update rates
related to appliance service charges, including therein a design
profit margin. The new rates are competitive with other providers
of such services in South Jersey and are designed to provide
increased earnings and cash flows to SJG over the current cost-based
appliance service charge system. This filing is pending before the
BPU.
On July 31, 1997, SJG made a filing with the BPU requesting
an increase in the level of its annual recoveries through the RAC
of $1.5 million. This increase primarily reflects costs incurred
pursuant to agreements with the NJDEP for cleanup of such sites
during the period of August 1996 through July 1997. The amount
sought to be recovered during the 1997-1998 Recovery Year, $3.9
million, consists of the amortization of Remediation Costs
incurred during the 1996-1997 Remediation Year of $0.9 million and
the amortization of Remediation Costs incurred prior to the
1996-1997 Remediation year of $3.2 million. It also consists of a
credit for carrying costs on Deferred Tax Benefits of $0.7 million
and the addition of an underrecovery from the 1996-1997 Recovery
Year of $0.5 million.
On September 9, 1997, SJG made a filing with the BPU to adjust
rates by replacing the current State Gross Receipts and Franchise
Tax components with a Sales and Use Tax, a Corporation Business Tax
and a Transitional Energy Facilities Assessment. The new rates are
expected to become effective January 1, 1998 (See "Liquidity").
SJG is subject to claims which arise in the ordinary course
of its business and other legal proceedings. A group of Atlantic
City casinos filed a petition with the BPU on January 16, 1996
alleging overcharges of over $10.0 million, including interest.
Management believes that charges to the casinos were based on
applicable tariffs and that the casinos were not qualified under
less expensive rate schedules as claimed. Management believes
that the ultimate impact of these actions will not materially
affect SJG's financial position or results of operations.
Capital Resources
SJG has a continuing need for cash resources and capital,
primarily to invest in new and replacement facilities and
equipment for the remediation of former coal gas manufacturing
sites. Total construction and remediation expenditures for 1997
SJG-25
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Capital Resources (Continued)
are estimated at $60.0 million, of which $40.1 million was
expended through September 30, 1997. The costs for 1998 and 1999
are estimated at approximately $61.8 million and $58.6 million,
respectively. These investments are expected to be funded from
several sources, which may include cash generated by operations,
temporary use of short-term debt, sale of first mortgage bonds and
capital leases.
On March 21, 1997, SJG sold $35.0 million of its First
Mortgage Bonds, 7.7% Series due 2027.
On March 26, 1997, SJG received a capital contribution of
$25.6 million from South Jersey Industries, Inc., SJG's parent
company.
On May 2, 1997, SJG's Delaware statutory trust subsidiary,
SJG Capital Trust, sold $35.0 million of 8.35% SJG-obligated
Mandatorily Redeemable Preferred Securities. The Trust solely
holds as an asset the 8.35% Deferrable Interest Subordinated
Debentures issued by SJG which mature on April 30, 2037. The
Debentures and Preferred Securities are redeemable at the option
of SJG at a redemption price equal to 100% of the principal amount
thereof at any time on or after April 30, 2002.
In January 1996, SJG redeemed a total of $5,258,000 of its
8-1/4% Series First Mortgage Bonds maturing in 1996 and 1998. In
April 1996, SJG redeemed the remaining balance of its 9.2% Series
First Mortgage Bonds due 1998 amounting to $2,667,000.
Inflation
The ratemaking process provides that only the original cost
of utility plant is recoverable in revenues as depreciation.
Therefore, the excess cost of utility plant, stated in terms of
current cost over the original cost of utility plant, is not
presently recoverable. While the ratemaking process gives no
recognition to the current cost of replacing utility plant, based
on past practices, SJG believes it will be allowed to earn on the
increased cost of its net investment as replacement of facilities
actually occurs.
Summary
The company is confident it will have sufficient cash flow to
meet its operating, capital and dividend needs and is taking and
will take such actions necessary to employ its resources effectively.
SJG-26
<PAGE>
PART II -- OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by
reference to Part I, Item 1, Note 6, on pages 11 and 12,
excluding the first paragraph 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-27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SOUTH JERSEY GAS COMPANY
(Registrant)
Dated: November 13, 1997 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Vice President & Treasurer
Dated: November 13, 1997 By: /s/ David A. Kindlick
David A. Kindlick
Vice President, Rates and
Budgeting
SJG-28
<PAGE>
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-29
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 444,639
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 67,045
<TOTAL-DEFERRED-CHARGES> 102,713
<OTHER-ASSETS> 1,547
<TOTAL-ASSETS> 615,944
<COMMON> 5,848
<CAPITAL-SURPLUS-PAID-IN> 102,817
<RETAINED-EARNINGS> 51,433
<TOTAL-COMMON-STOCKHOLDERS-EQ> 160,098
35,000
2,224
<LONG-TERM-DEBT-NET> 178,003
<SHORT-TERM-NOTES> 28,600
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 8,876
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 203,143
<TOT-CAPITALIZATION-AND-LIAB> 615,944
<GROSS-OPERATING-REVENUE> 235,006
<INCOME-TAX-EXPENSE> 7,113
<OTHER-OPERATING-EXPENSES> 201,633
<TOTAL-OPERATING-EXPENSES> 208,746
<OPERATING-INCOME-LOSS> 26,260
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 26,260
<TOTAL-INTEREST-EXPENSE> 13,544
<NET-INCOME> 12,716
1,330
<EARNINGS-AVAILABLE-FOR-COMM> 11,386
<COMMON-STOCK-DIVIDENDS> 11,475
<TOTAL-INTEREST-ON-BONDS> 11,297
<CASH-FLOW-OPERATIONS> 31,905
<EPS-PRIMARY> 4.87
<EPS-DILUTED> 4.87
</TABLE>
