Page 1 of 26
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1998 Commission File Number 1-12899
SOUTH JERSEY GAS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 22-0398330
(State of incorporation) (IRS employer identification no.)
Number One South Jersey Plaza, Route 54, Folsom, NJ 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 7, 1998, 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 26
- Cover Page -
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 12
SJG-2
<TABLE>
SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(In Thousands Except for Share Data)
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING REVENUES:
Utility $108,163 $126,066
Other 322 521
------------ ------------
Total Operating Revenues 108,485 126,587
------------ ------------
OPERATING EXPENSES:
Gas Purchased for Resale 61,175 69,870
Operation - Utility 9,591 9,380
- Other 366 435
Maintenance 1,592 1,467
Depreciation 4,167 3,885
Federal Income Taxes 7,267 8,426
State, Local and Other Taxes 6,289 13,132
------------ ------------
Total Operating Expenses 90,447 106,595
------------ ------------
OPERATING INCOME 18,038 19,992
INTEREST CHARGES
Long-Term Debt 3,839 3,374
Short-Term Debt 497 1,352
Other 109 99
------------ ------------
Total Interest Charges 4,445 4,825
INCOME BEFORE PREFERRED DIVIDEND REQUIREMENTS 13,593 15,167
Preferred Stock Dividend Requirements 42 43
Preferred Securities Dividend Requirements 731 0
------------ ------------
NET INCOME APPLICABLE TO COMMON STOCK $12,820 $15,124
============ ============
AVERAGE SHARES OF COMMON STOCK OUTSTANDING 2,339,139 2,339,139
============ ============
EARNINGS PER COMMON SHARE $5.48 $6.47
============ ============
DIVIDENDS DECLARED PER COMMON SHARE $1.635 $1.635
============ ============
<FN>
The accompanying notes to the financial statements are an integral part
of these statements.
</FN>
</TABLE>
SJG-3
<TABLE>
SOUTH JERSEY GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
<CAPTION>
(Unaudited)
March 31, December 31,
------------------------- -------------
1998 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT:
Utility Plant, at original cost $628,430 $587,273 $619,489
Accumulated Depreciation (170,483) (160,755) (167,176)
Gas Plant Acquisition Adjustment - Net 1,907 1,982 1,926
------------ ------------ -------------
Property, Plant and Equipment - Net 459,854 428,500 454,239
------------ ------------ -------------
CURRENT ASSETS:
Cash and Cash Equivalents 6,661 7,700 6,596
Accounts Receivable:
Customers 41,022 47,392 25,303
Unbilled Revenues 10,445 13,052 17,263
Merchandise 1,819 2,250 1,977
Other 1,529 1,102 2,836
Provision for Uncollectibles (1,032) (1,032) (1,032)
Natural Gas in Storage, average cost 10,451 6,403 23,877
Materials and Supplies, average cost 4,410 4,056 4,509
Prepaid Gross Receipts & Franchise Taxes 0 0 566
Prepayments and Other Current Assets 1,537 1,303 1,661
------------ ------------ -------------
Total Current Assets 76,842 82,226 83,556
------------ ------------ -------------
ACCOUNTS RECEIVABLE - Merchandise 1,522 1,804 1,449
------------ ------------ -------------
REGULATORY AND OTHER NON-CURRENT ASSETS:
Environmental Remediation Costs:
Expended - Net 20,939 15,864 21,041
Liability for Future Expenditures 52,400 41,700 52,400
Gross Receipts & Franchise Taxes 3,917 4,361 4,028
Income Taxes - Flowthrough Depreciation 13,754 14,732 13,999
Deferred Fuel Costs - Net 0 0 3,674
Deferred Postretirement Benefit Costs 5,988 5,354 6,150
Other 7,691 7,476 8,577
------------ ------------ -------------
Total Regulatory and Other Non-Current Assets 104,689 89,487 109,869
------------ ------------ -------------
TOTAL ASSETS $642,907 $602,017 $649,113
============ ============ =============
<FN>
The accompanying notes to the financial statements are an integral part of these statements.
</FN>
</TABLE>
SJG-4
<TABLE>
SOUTH JERSEY GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
<CAPTION>
(Unaudited)
March 31, December 31,
------------------------- -------------
1998 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
SHAREHOLDER'S EQUITY AND LIABILITIES
COMMON EQUITY:
Common Stock, Par Value $2.50 per share:
Authorized - 4,000,000 shares
Outstanding - 2,339,139 shares $5,848 $5,848 $5,848
Other Paid-In Capital and Premium on Common Stock 102,817 102,817 102,817
Retained Earnings 65,115 62,821 56,120
------------ ------------ -------------
Total Common Equity 173,780 171,486 164,785
------------ ------------ -------------
PREFERRED STOCK AND SECURITIES:
Redeemable Cumulative Preferred - Par Value $100 per share,
Authorized - 47,304, 48,204 and 47,304 shares, respectively
Outstanding:
Series A, 4.70%--3,000, 3,900 and 3,000 shares 300 390 300
Series B, 8.00%--19,242 shares 1,924 1,924 1,924
Company-Guaranteed Mandatorily Redeemable
Preferred Securities of Subsidiary Trust
Par Value $25 per share, 1,400,000 shares
Authorized and Outstanding 35,000 0 35,000
------------ ------------ -------------
Total Preferred Stock and Securities 37,224 2,314 37,224
------------ ------------ -------------
LONG-TERM DEBT 173,672 182,548 175,860
------------ ------------ -------------
Total Capitalization 384,676 356,348 377,869
------------ ------------ -------------
CURRENT LIABILITIES:
Notes Payable 32,100 37,200 45,900
Current Maturities of Long-Term Debt 8,876 6,603 8,876
Accounts Payable 32,055 28,494 45,623
Customer Deposits 5,988 5,932 5,871
Federal Income Taxes Accrued 5,602 6,041 514
State and Local Taxes Accrued 7,444 11,390 466
Environmental Remediation Costs 14,373 9,377 14,373
Interest Accrued and Other Current Liabilities 6,740 4,434 6,709
------------ ------------ -------------
Total Current Liabilities 113,178 109,471 128,332
------------ ------------ -------------
DEFERRED CREDITS AND OTHER NON-CURRENT
LIABILITIES:
Accumulated Deferred Income Taxes - Net 84,154 78,967 81,847
Investment Tax Credits 5,533 5,926 5,632
Deferred Revenues - Net 981 3,391 0
Pension and Other Postretirement Benefits 10,661 9,844 10,798
Environmental Remediation Costs 38,027 32,323 38,027
Other 5,697 5,747 6,608
------------ ------------ -------------
Total Deferred Credits and Other Non-Current Liabilities 145,053 136,198 142,912
------------ ------------ -------------
COMMITMENTS AND CONTINGENCIES
TOTAL SHAREHOLDER'S EQUITY AND LIABILITIES $642,907 $602,017 $649,113
============ ============ =============
<FN>
The accompanying notes to the financial statements are an integral part of these statements.
</FN>
</TABLE>
SJG-5
<TABLE>
SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In Thousands)
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income Applicable to Common Stock $12,820 $15,124
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 4,639 4,356
Provision for Losses on Accounts Receivable 237 190
Revenues and Fuel Costs Deferred - Net 4,655 3,795
Deferred and Non-Current Federal Income Taxes
and Credits - Net 2,302 748
Environmental Remediation Costs - Net 102 (298)
Changes in:
Accounts Receivable (7,673) (14,630)
Inventories 13,525 16,234
Prepayments and Other Current Assets 124 259
Accounts Payable and Other Accrued Liabilities (8,332) (11,109)
State and Local Taxes Accrued 7,544 12,445
Other - Net (104) 1,540
------------ ------------
Net Cash Provided by Operating Activities 29,839 28,654
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures, Cost of Removal & Salvage (9,961) (11,237)
------------ ------------
Net Cash Used in Investing Activities (9,961) (11,237)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Repayments of Lines of Credit (13,800) (71,100)
Proceeds from Issuance of Long-Term Debt 0 35,000
Principal Repayments of Long-Term Debt (2,188) (2,188)
Dividends of Common Stock (3,825) (3,825)
Payments for Issuance of Long-Term Debt and Preferred
Securities 0 (696)
Additional Investment by Shareholder 0 25,623
------------ ------------
Net Cash Used in Financing Activities (19,813) (17,186)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 65 231
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,596 7,469
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $6,661 $7,700
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period For:
Interest (Net of Amounts Applicable to LGAC
Overcollections and Amounts Capitalized) $5,128 $5,545
Income Taxes (Net of Refunds) ($191) ($751)
<FN>
The accompanying notes to the financial statements are an integral part
of these statements.
</FN>
</TABLE>
SJG-6
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 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. 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.
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.
Regulation - SJG is subject to the rules and regulations
of the New Jersey Board of Public Utilities (BPU) and maintains
its accounts in accordance with the prescribed Uniform System of
Accounts of that Board (See Note 2).
New Accounting Pronouncements - 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 annual
periods beginning after December 15, 1997. The Company
currently has no additional items qualifying as other
comprehensive income under FASB No. 130 and, therefore, its
adoption does not have any impact on the Company's financial
statements.
In June 1997, the FASB also issued FASB No. 131,
"Disclosures about Segments of an Enterprise and Related
Information", which is also effective for fiscal years beginning
after December 15, 1997. This statement establishes standards
for the reporting of selected information about operating
segments in the Company's interim and annual financial
statements. The Company is evaluating whether the adoption of
this statement will result in any change to its presentation of
financial information. The Company adopted FASB No. 131
effective January 1, 1998; however, as permitted by this
statement, segment information will not be reported in interim
financial statements until 1999.
State and Local Taxes - Legislation reforming the taxation
of energy in New Jersey was adopted effective July 14, 1997.
The new law eliminated the Gross Receipts and Franchise Tax
(GRAFT), which was equivalent to approximately 13 percent of
utility revenue and replaced it with a combination of taxes.
Beginning January 1, 1998, retail sales of natural gas and
electricity and utility services, including transportation, are
subject to the 6 percent State Sales and Use Tax. Gas and
electric utilities are also subject to the 9 percent State
Corporation Business Tax (CBT) on income before taxes. To
SJG-7
bridge the revenue gap created by the new tax law, the State
imposed a Transitional Energy Facilities Assessment (TEFA) on
volumes of gas sold and transported. The TEFA will be phased
out over a 5-year period beginning January 1, 1999 and ending
January 1, 2003. It is expected that the revised tax policy
will eliminate tax disparities between utility and nonutility
suppliers, providing fair competition and lower energy costs for
the consumer. The adoption of the new legislation does not
materially affect the Company's financial position, results of
operations or liquidity (See Note 2). However, since the Sales
and Use Tax is not included in reported utility revenues or tax
expense, as GRAFT had been previously, equal reductions in these
line items on the Condensed Statements of Consolidated Income
will result.
Note 2. Recent Regulatory Actions:
On July 31, 1996 and 1997, SJG made its annual filings with
the BPU to recover remediation costs expended during the period
of August 1995 through July 1997 totaling $1.6 million. Both
filings were subsequently updated and are still pending at the
BPU (See Note 6).
On January 27, 1997, the BPU granted SJG a base 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 common
equity. The majority of this increase comes from residential and
small commercial customers. Part of the increase is recovered
from new miscellaneous service fees which charge specific
customers for costs they cause SJG to incur. Additionally, SJG
is now allowed to retain the first $5.5 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 1998, this $5.5 million threshold will increase 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
$0.3 million in 1998 and $1.9 million in 1999.
As part of the tariff changes approved in the rate case, SJG
initiated its pilot program in April 1997, giving residential
customers a choice of gas supplier. During the enrollment
period, which ended June 30, 1997, nearly 13,000 residential
customers applied for this service. Transportation of gas for
these customers began on August 1, 1997. Participant's bills
are reduced for certain cost of gas charges and applicable
taxes. The resulting decrease in revenues is offset by a
corresponding decrease in SJG's gas costs and taxes under SJG's
BPU-approved fuel clause. The program does not affect its net
income, financial condition or margins. In addition, because
the program affects only 5 percent of SJG's residential
customers, any reduction in revenue is not material. Also, SJG
further expanded the choices available to commercial and
industrial customers, including a new transportation tariff
providing savings to qualified customers.
On September 9, 1997, SJG filed 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
SJG-8
became effective January 1, 1998 on an interim basis subject to
refund upon final BPU order which is expected in the second
quarter of 1998.
In September 1996, SJG filed to reduce its rates through its
1996-1997 Levelized Gas Adjustment Clause (LGAC) reflecting a
$1.4 million decrease in natural gas costs. Updated projections
of 1996-1997 LGAC year results were rolled into the 1997-1998
LGAC year and filed with the BPU.
On September 12, 1997, SJG made its annual LGAC, Temperature
Adjustment Clause (TAC) and Demand Side Management Clause (DSMC)
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 $4.7 million which is inclusive
of 1996-1997 LGAC year results referred to above. This amount was
updated to $7.5 million in May 1998. It also requested that the
1996-1997 filing be resolved simultaneously with this filing.
Both filings are still pending at the BPU.
On March 5, 1998, the BPU approved new rates related to
appliance service charges, including a profit margin. The new
rates are competitive with those of other service providers in
New Jersey and are designed to increase earnings and cash flows
to SJG over the current rates. The BPU also authorized SJG to
institute new Appliance Service Contract plans and an electric
air conditioning repair charge by an order issued orally April
1, 1998 and in writing on April 29, 1998.
Note 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 $1,825,900 for the three months ended March 31, 1998 and
1997, respectively. The amounts payable to R & T Group, Inc.
relating to these services were $ -0- and $919,300 at March 31,
1998 and 1997, respectively.
SJG engages in sales of natural gas for resale pursuant to
Section 284.402 of the Regulations of the Federal Energy
Regulatory Commission which engages in sales to South Jersey
Energy Company (SJE) and engaged in sales to South Jersey Fuel
Company (SJF), affiliates by common ownership of Industries.
Sales to SJE approximated $132,300, and $ -0- for the three
months ended March 31, 1998 and 1997, respectively. There were
no sales to SJF during the three months ended March 31, 1998 and
1997.
Note 4. State, Local and Other Taxes:
The aggregate expense for state, local and other taxes as
reflected in the Condensed Statements of Consolidated Income for
the three months ended March 31, 1998 and 1997 are shown below
(in thousands):
SJG-9
1998 1997
------- -------
CBT - Net $ 2,407 $0
TEFA 3,213 0
GRAFT (207) 12,183
Other Taxes 876 949
------- -------
Total State, Local and Other Taxes $ 6,289 $13,132
======= =======
During the three months ended March 31, 1998, SJG recorded
an additional $5.0 million for State Sales and Use Tax on utility
services through its Condensed Consolidated Balance Sheet which does
not impact reported revenues or tax expense (See Note 1).
Note 5. Capitalization:
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
$63.1 million at March 31, 1998.
On March 26, 1997, SJG received $25.6 million as
contributions of capital from Industries. Contributions of
capital are credited to Other Paid-In Capital and Premium on
Common Stock. There have been no other changes in Common Stock
during 1998 and 1997.
Note 6. Commitments and Contingencies:
Construction Commitments - The estimated cost of
construction and environmental remediation programs of SJG for
the year 1998 aggregates $68.8 million and, in connection
therewith, certain commitments have been made.
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 and reservation fees paid to its suppliers for
all of these services is approximately $4.9 million per month
which is recovered on a current basis through the LGAC.
Pending Litigation - The Company is subject to claims
which arise in the ordinary course of its business and other
legal proceedings. As such, reserves are set up when these
claims become apparent. The Company also maintains insurance and
records probable insurance recoveries relating to outstanding
claims.
SJG-10
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 the Company'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. SJG terminated manufactured gas operations at all sites
more than 35 years ago.
Since the early 1980s, SJG has recorded environmental
remediation costs of $91.1 million, of which $38.7 million was
expended as of March 31, 1998. 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 was
recorded as a liability and is reflected on the Condensed Consolidated
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
were not adjusted for future insurance recoveries, which
management is pursuing. SJG received $4.2 million of insurance
recoveries as of March 31, 1998. SJG first used these proceeds
to offset legal fees incurred in connection with those recoveries
and used the excess to reduce the balance of deferred
environmental remediation costs. Recorded amounts include
estimated costs based on projected investigation and remediation
work plans using existing technologies. Actual expenditures
could differ from the estimates due to the long-term nature of
the projects, changing technology, government regulations and
site specific requirements.
As a result of the 7-year Remediation Adjustment Clause
(RAC) recovery mechanism, SJG does not expense environmental
remediation costs 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 of Regulation". The BPU allowed recovery of these
expenditures through July 1995 and petitions to recover these
costs through July 1997 are pending (See Note 2).
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 was recorded as a deferred
debit with the corresponding amount reflected in Current
Liabilities and Deferred Credits and Other Non-Current
SJG-11
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 to
recover the deferred costs after they are expended.
SJG files with the BPU to recover these costs in rates
through its RAC. The BPU has consistently allowed the full
recovery over 7-year periods, and SJG believes this will
continue. As of March 31, 1998, SJG's unamortized remediation
expenditures of $20.9 million are reflected on the balance sheet
under the caption "Regulatory and Other Non-Current Assets".
Since BPU approval of the RAC mechanism in August 1992, SJG
recovered $13.6 million through rates as of March 31, 1998 (See
Note 2).
SJG-12
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Overview
South Jersey Gas Company (SJG) is a natural gas
distribution company serving 262,315 customers at March 31,
1998, compared with 255,912 customers at March 31, 1997. SJG
also makes off-system sales of natural gas on a wholesale basis
to various customers on the interstate pipeline system and
transports natural gas purchased directly from producers or
suppliers for its own sales and for some of its customers. South
Jersey Industries, Inc. owns all of the common stock of SJG.
This report contains certain forward-looking statements
concerning projected future financial performance, future
operating performance, future plans and courses of action and
future economic conditions. All statements in this report other
than statements of historical fact are forward-looking
statements. These forward-looking statements are made based
upon management's expectations and beliefs concerning future
events impacting the company and therefore involve a number of
risks and uncertainties. Management cautions that
forward-looking statements are not guarantees and that actual
results could differ materially from those expressed or implied
in the forward-looking statements.
There are a number of factors that could cause the
company's actual results to differ materially from those
anticipated, which include, but are not limited to the following:
general economic conditions on an international, federal, state
and local level; weather conditions in the company's marketing
areas; regulatory and court decisions; competition in the
company's regulated activities; the availability and cost of
capital; costs and effects of unanticipated legal proceedings
and environmental liabilities; and changes in business
strategies.
Competition
SJG franchises are non-exclusive. Currently no other
utility provides retail gas distribution services within its
territory. SJG does not expect 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 by using an
unbundled tariff which allows the Company to recover its full
cost of service, except for the variable cost of the gas
commodity, when engaging in the transportation of gas for its
customers. Under this tariff, SJG derives substantially all of
its profits from the transportation rather than the sale of the
commodity. SJG's commercial and industrial customers can choose
their supplier while SJG recovers its cost of service and fixed
gas costs primarily through its transportation service. In
April 1997, SJG initiated its New Jersey Board of Public
Utilities (BPU) approved pilot program giving some residential
customers a choice of gas suppliers (See "Pilot Program - Choice
SJG-13
of Gas Supplier"). SJG believes it 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.
Pilot Program - Choice of Gas Supplier
In April 1997, SJG initiated its BPU-approved pilot
program giving residential customers a choice of gas supplier.
During the enrollment period, which ended June 30, 1997, nearly
13,000 residential customers applied for this service.
Transportation of gas for these customers began on August 1,
1997. Participants' bills are reduced for certain cost of gas
charges and applicable taxes. The resulting decrease in revenues
is offset by a corresponding decrease in SJG's gas costs and
taxes under SJG's BPU-approved fuel clause. The program does not
affect its net income, financial condition or margins.
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). These clauses permit adjustments for changes in gas
supply costs, reduce the impact of extreme fluctuations in
temperatures on SJG and its customers, recover costs for the
remediation of former gas manufacturing plants and recover costs
associated with its conservation plan, respectively. The BPU-
approved LGAC, RAC and DSMC adjustments are made to match
revenues and expenses. TAC adjustments do affect revenue, income
and cash flows since extremely cold weather can generate credits
to customers, while extremely warm weather during the winter
season can result in additional billings to customers. TAC
adjustments related to the 1997-1998 TAC year are not expected to
materially impact the financial statements for 1998.
Status of Year 2000 Conversion
The Company prepared a Year 2000 Impact and Assessment
study and developed a plan for program modification. An outside
service was used to identify both informational and logic date
variables within the programming codes. This service was
completed and expensed in 1997. Presently, the Company is
revising the affected programming codes. As of March 31, 1998,
approximately 27% of the programming code was revised. All
revisions are scheduled to be completed by early 1999, providing
the remainder of 1999 for testing. The conversion costs are
estimated at $0.4 million of which approximately $0.1 million
was spent as of March 31, 1998. Vendors who provide third party
software and support services are being contacted to establish
Year 2000 compliance. The Company is also in the process of
securing written verification from its key product and service
vendors to ensure their compliance.
SJG-14
Results of Operations - First Quarter Ended March 31, 1998
Compared to First Quarter Ended March 31, 1997
Operating Revenues
In 1998, revenues decreased $18.1 million principally due
to lower firm sales resulting from weather which was 12.0 percent
warmer than 1997 and state tax reform which lowered the tax
component contained in reported revenue, effective January 1,
1998, with an offsetting reduction in State, Local and Other
Taxes (See Notes 1 and 4). Also, increased firm transportation
service replaced firm sales. These results were partially offset
by increased off-system sales, the settlement of the base rate
case on January 27, 1997 and customer growth. The revenue from
transportation excludes commodity costs (See Competition). As
SJG's profits are from the transportation rather than the sale
of commodity, the migration of customers to firm transportation
does not lower SJG's margin. Total sales margin decreased in
1998 due to lower sales volumes and decreased margins on
off-system sales, partially offset by the effect of the addition
of 6,400 new customers since the end of the first quarter of
1997.
Gas Purchased for Resale
Gas purchased for resale decreased $8.7 million in 1998
principally due to decreased sales volumes. 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 and reservation fees
for all of these services is approximately $4.9 million per
month, which is recovered on a current basis through its LGAC.
Operations
A summary of net changes in utility operations for 1998
compared with 1997 is as follows (in thousands):
SJG-15
1998 vs. 1997
-------------
Other Production Expense ($4)
Transmission 13
Distribution (145)
Customer Accounts and Services 161
Sales (13)
Administration and General 199
Other (69)
-------------
$142
=============
Distribution costs decreased in 1998 principally due to
increased service contract revenue. Customer Accounts and
Service costs increased in 1998 principally due to an increase
in uncollectible accounts expense and increased collection
costs. Administrative and General costs increased in 1998
principally due to increased employee benefits and regulatory
costs.
Other Operating Expenses
A summary of principal changes in other operating
expenses for 1998 compared with 1997 is as follows (in
thousands):
1998 vs. 1997
-------------
Maintenance $125
Depreciation 282
Federal Income Taxes - Net (1,159)
State, Local and Other Taxes (6,843)
The increase in maintenance expense is principally due to
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 principally due to increased investment
in property, plant and equipment. Federal Income Tax changes
reflect the impact of changes in pre-tax income. State, Local
and Other Taxes decreased because of the energy tax reform
legislation discussed under Operating Revenues - Utility.
SJG-16
Interest Charges
Interest charges decreased in 1998 due to the effect of
lower short-term interest resulting from lower levels of short-
term debt outstanding. Short-term debt levels were reduced in
March 1997 by using proceeds from the sale of $35.0 million of
first mortgage bonds by SJG; the application of a $25.6 million
cash equity infusion to SJG from SJI and the application of the
net proceeds from the sale of the Mandatorily Redeemable
Preferred Securities in May 1997. Utility long-term interest
increased in 1998 due to increased levels of long-term debt
outstanding.
Preferred Securities Dividend Requirements
Preferred Dividends increased in 1998 due to the issuance
of $35.0 million of 8.35% SJG-guaranteed Mandatorily Redeemable
Preferred Securities in May 1997 (See Capital Resources).
Net Income Applicable to Common Stock
The details affecting net income and earnings per common
share are discussed under the appropriate captions above.
Liquidity
The seasonal nature of gas operations, the timing of
construction and remediation expenditures and related permanent
financing, as well as mandated tax and sinking fund payment
dates require large short-term cash requirements. These 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 $82.9
million was available at March 31, 1998. The credit lines are
uncommitted and unsecured with interest rates below the prime
rate.
The changes in cash flows from operating activities are
as follows (in thousands):
SJG-17
1998 vs. 1997
-------------
Increases/(Decreases):
Net Income ($2,304)
Depreciation and Amortization 283
Provision for Losses on Accts Receivable 47
Revenues and Fuel Costs Deferred - Net 860
Deferred and Non-Current Federal
Income Taxes and Credits - Net 1,554
Environmental Remediation Costs - Net 400
Accounts Receivable 6,957
Inventories (2,709)
Prepayments and Other Current Assets (135)
Accounts Payable and Other Accrued
Liabilities 2,777
State and Local Taxes Accrued (4,901)
Other - Net (1,644)
-------------
Increase in Net Cash from
Operating Activities $1,185
=============
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 and 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 remediation expenditures and
amounts collected under the RAC and insurance recoveries.
Changes in Accounts Receivable are generally weather and
price related. Changes impact cash flows when collected in
subsequent periods.
Changes in Inventory reflect the impact of seasonal
requirements, temperatures and price changes.
Changes in State and Local Taxes Accrued reflect the
impact of changes between taxes paid and taxes accrued. However,
significant timing differences exist in cash flows during the
SJG-18
year. In 1997, SJG paid the full year's Gross Receipts &
Franchise Taxes on April 1 and amortized the remaining prepaid
tax over the remainder of the year on the basis of gas volumes
sold.
As stated in Note 1, on January 1, 1998, the Gross
Receipts and Franchise Taxes were replaced with a 6 percent State
Sales and Use Tax, a 9 percent State Corporation Business Tax on
income before taxes and a Transitional Energy Facilities
Assessment (TEFA) on volumes of gas sold and transported. The
TEFA will be phased out over 5 years beginning January 1, 1999.
Approximately 50 percent of the new taxes will be paid in
monthly installments during the first 6 months of the year and
the principal portion of the remaining taxes is to be paid on
June 25, 1998, and on May 15 of each year thereafter. SJG uses
short-term borrowings to make these tax payments which result in
a temporary increase in the short-term debt level. The new
rates are subject to change following BPU approval which is
expected by July 1, 1998.
Changes in Accounts Payable and Other Current 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 base 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 common
equity. The majority of this increase comes from residential and
small commercial customers. Part of the increase results from
new service fees to customers for costs they cause SJG to incur.
Additionally, SJG is allowed to retain the first $5.5 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 1998 and 1999, this $5.5 million threshold will
increase 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 $0.3 million in 1998 and $1.9 million in 1999.
Rates of return are calculated by weighting SJG's
individual capital cost rates by the proportion of each
respective type of capital. This requires selecting appropriate
capital structure ratios and determining the cost rate for each
capital component as 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.
Also on January 27, 1997, the BPU approved SJG's request
for a $2.5 million revenue reduction through the TAC. This is
the standard BPU procedure used to credit customers with
previously collected revenues, which were in excess of those
allowed by the TAC (See "Energy Adjustment Clauses"). This
revenue reduction reflects the TAC's normal operation, as does
the BPU's confirmation of the decrease.
SJG-19
The adoption of FASB No. 109, "Accounting for Income
Taxes" in 1993 primarily resulted in creating 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 the
Company in 1993, requires an accrual basis of accounting for
retiree benefit payments during the years of employment. The
Company elected to recognize the unfunded transition obligation
over a 20-year period beginning in 1993. The majority of the
postretirement benefit costs were previously recoverable by SJG
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 prescribed continued deferral of unrecovered
costs. Also, beginning in 1995, an external trust was
established towards funding postretirement benefit costs. 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 reduces future net
periodic cost. Gross contributions to the trust amounted to
$7.1 million and the balance of the regulatory asset amounted to
$6.0 million at March 31, 1998. As approved by the BPU, this
amount is being recovered from ratepayers over a 15-year period
beginning January 1, 1998. In addition, the BPU approved full
recovery of the net periodic benefit cost.
The Company incurred and recorded certain costs for
environmental remediation of sites where SJG or predecessor
companies operated gas manufacturing plants. SJG terminated
manufactured gas operations at all sites more than 35 years ago.
Since the early 1980s, the Company has recorded
environmental remediation costs of $91.1 million, of which $38.7
million was expended as of March 31, 1998. The Company, with the
assistance of an outside consulting firm, estimates that total
future expenditures to remediate SJG sites will range from $52.4
million to $165.6 million. The lower end of this range was
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 were not adjusted for
future insurance recoveries, which management is pursuing. SJG
received $4.2 million of insurance recoveries as of March 31,
1998. SJG used these proceeds first to offset legal fees
incurred in connection with those recoveries and used the excess
to reduce the balance of deferred environmental remediation
costs. Recorded amounts include estimated costs based on
projected investigation and remediation work plans using
existing technologies. Actual expenditures could differ from
the estimates due to the long-term nature of the projects,
changing technology, government regulations and site specific
requirements.
As a result of the 7-year recovery mechanism, SJG does
not expense environmental remediation costs 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 net of rate and insurance
recoveries. These costs meet the requirements of FASB No. 71,
SJG-20
"Accounting for the Effects of Certain Types of Regulation".
The BPU allowed recovery of these expenditures through July 1995
and petitions to recover these costs through July 1997 are
pending.
The other regulatory asset titled "Environmental
Remediation Cost: Liability for Future Expenditures" relates to
estimated future expenditures determined under the guidance of
FASB No. 5, "Accounting for Contingencies". This amount, which
relates to former manufactured gas plant sites was recorded as a
deferred debit with the corresponding amount reflected 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 to
recover the deferred costs after they are expended.
Annually, SJG files with the BPU to recover expended
remediation costs in rates. The BPU has consistently allowed
the full recovery over 7-year periods, and SJG believes this
will continue. As of March 31, 1998, SJG's unamortized
remediation expenditures of $20.9 million are reflected on the
balance sheet under the caption "Regulatory and Other
Non-Current Assets". Since BPU approval of the RAC mechanism in
August 1992, SJG recovered $13.6 million as of March 31, 1998.
On July 31, 1996 and 1997, SJG made its annual filings
with the BPU to recover remediation costs expended during the
period of August 1995 through July 1997 totaling $1.6 million.
Both filings were subsequently updated and are still pending at
the BPU.
On September 9, 1997, SJG filed 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 (See
"Liquidity"). Interim rates reflecting this change became
effective January 1, 1998. The BPU is expected to approve final
rates by July 1, 1998.
In September 1996, SJG filed to reduce its rates through
its 1996-1997 LGAC reflecting a $1.4 million decrease in natural
gas costs. Updated projections of 1996-1997 LGAC year results
were rolled into the 1997-1998 LGAC year and filed with the BPU.
On September 12, 1997, updated projections of the 1996-1997
LGAC year results were rolled into the 1997-1998 LGAC year and
filed with the BPU. The 1997-1998 LGAC filing requested a rate
increase to reflect an increase of $4.7 million in natural gas
costs, inclusive of the 1996-1997 LGAC filing. This amount was
updated to $7.5 million in May 1998. Both filings are still
pending at the BPU.
FASB No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", requires an accrual basis of
accounting for retiree benefit payments during the years of
employment. A December 1994 BPU order provided for partial
recovery of costs associated with FASB No. 106 and prescribed
continued deferral of unrecovered costs. Also, beginning in
1995, an external trust was established towards funding
postretirement benefit costs. Rate recovery in excess of SJG's
SJG-21
pay-as-you-go requirement is contributed to the trust and
provides no operating benefit to SJG except to the extent that
trust income reduces future net periodic cost. Deferred
postretirement benefit costs will be recovered from ratepayers
over a 15 year period beginning January 1, 1998, as approved by
the BPU.
On March 5, 1998, the BPU approved new rates related to
appliance service charges, including a profit margin. The new
rates are competitive with those of other service providers in
New Jersey and are designed to increase earnings and cash flows
to SJG over the current rates. The BPU also authorized SJG to
institute new Appliance Service Contract plans effective April
1, 1998, including electric air conditioning repairs within its
service territory.
The Company is subject to claims which arise in the
ordinary course of its business and other legal proceedings. As
such, reserves are set up when these claims become apparent. The
Company also maintains insurance and records probable insurance
recoveries relating to outstanding claims.
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 SJG 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 the Company's financial
position, results of operations or liquidity.
Capital Resources
The Company has a continuing need for cash resources and
capital, primarily to invest in new and replacement facilities,
equipment and for environmental cleanup costs. Net construction
and remediation expenditures for 1998 amounted to $9.9 million.
The costs for 1998, 1999 and 2000 are estimated at approximately
$68.8 million, $54.6 million and $47.8 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, capital leases and
RAC recoveries.
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 Delaware statutory trust
subsidiary, SJG Capital Trust, sold $35.0 million of 8.35% SJG-
guaranteed Mandatorily Redeemable Preferred Securities. The
Trust holds as its sole asset the 8.35% Deferrable Interest
Subordinated Debentures issued by SJG maturing April 30, 2037.
The Debentures and Preferred Securities are redeemable at the
option of SJG at a redemption price equal to 100 percent of the
principal amount at any time on or after April 30, 2002.
SJG-22
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-23
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Information required by this Item is incorporated by
reference to Part I, Item 1, Note 6, on pages 10, 11 and 12
excluding the first two paragraphs of the Note, regarding
contingencies, including pending litigation and the remediation
and clean-up of certain sites which included manufactured gas
operations.
Item 6. Exhibits and Reports on Form 8-K
b. No reports on Form 8-K were filed during the quarter
for which this report is filed.
SJG-24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SOUTH JERSEY GAS COMPANY
(Registrant)
Dated: May 12, 1998 By: /s/ David A. Kindlick
David A. Kindlick
Senior Vice President,
Finance & Rates
Dated: May 12, 1998 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Vice President and Treasurer
SJG-25
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-26
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<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 459,854
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 76,842
<TOTAL-DEFERRED-CHARGES> 104,689
<OTHER-ASSETS> 1,522
<TOTAL-ASSETS> 642,907
<COMMON> 5,848
<CAPITAL-SURPLUS-PAID-IN> 102,817
<RETAINED-EARNINGS> 65,115
<TOTAL-COMMON-STOCKHOLDERS-EQ> 173,780
35,000
2,224
<LONG-TERM-DEBT-NET> 173,672
<SHORT-TERM-NOTES> 32,100
<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> 217,255
<TOT-CAPITALIZATION-AND-LIAB> 642,907
<GROSS-OPERATING-REVENUE> 108,485
<INCOME-TAX-EXPENSE> 9,674
<OTHER-OPERATING-EXPENSES> 80,773
<TOTAL-OPERATING-EXPENSES> 90,447
<OPERATING-INCOME-LOSS> 18,038
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 18,038
<TOTAL-INTEREST-EXPENSE> 4,445
<NET-INCOME> 13,593
773
<EARNINGS-AVAILABLE-FOR-COMM> 12,820
<COMMON-STOCK-DIVIDENDS> 3,825
<TOTAL-INTEREST-ON-BONDS> 3,839
<CASH-FLOW-OPERATIONS> 29,839
<EPS-PRIMARY> 5.48
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</TABLE>
