Page 1 of 23
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 September 30, 1999 Commission File Number 1-12899
SOUTH JERSEY GAS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 22-0398330
(State of incorporation) (IRS employer identification no.)
1 South Jersey Plaza, Folsom, NJ 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 5, 1999, there were 2,339,139 shares of the registrant's common
stock outstanding. All common shares are owned by South Jersey Industries,
Inc., the parent company of South Jersey Gas Company.
Exhibit Index on page 23
- Title Page -
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 11
SJG-2
<TABLE>
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
<CAPTION>
Three Months Ended
September 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating Revenues:
Utility $ 51,269 $ 43,097
Other 424 420
----------- -----------
Total Operating Revenues 51,693 43,517
----------- -----------
Operating Expenses:
Gas Purchased for Resale 34,878 26,259
Utility Operations 10,969 10,207
Other Operations 409 455
Maintenance 1,284 1,116
Depreciation 4,766 4,318
Income Taxes (2,990) (2,329)
Other Taxes 1,492 1,576
----------- -----------
Total Operating Expenses 50,808 41,602
----------- -----------
Operating Income 885 1,915
----------- -----------
Interest Charges:
Long-Term Debt 3,802 3,646
Short-Term Debt and Other 1,277 1,377
----------- -----------
Total Interest Charges 5,079 5,023
----------- -----------
Loss Before Preferred Dividend Requirements (4,194) (3,108)
Preferred Stock Dividend Requirements 39 41
Preferred Securities Dividend Requirements 730 730
----------- -----------
Net Loss Applicable to Common Stock $ (4,963) $ (3,879)
=========== ===========
Average Shares of Common Stock Outstanding 2,339 2,339
=========== ===========
Earnings Per Common Share $ (2.12) $ (1.66)
=========== ===========
Dividends Declared Per Common Share $ 1.73 $ 1.83
=========== ===========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJG-3
<TABLE>
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating Revenues:
Utility $ 251,957 $ 202,997
Other 1,468 1,224
----------- -----------
Total Operating Revenues 253,425 204,221
----------- -----------
Operating Expenses:
Gas Purchased for Resale 156,876 117,860
Utility Operations 29,709 29,726
Other Operations 1,346 1,307
Maintenance 3,875 3,979
Depreciation 14,069 12,741
Income Taxes 9,855 7,120
Other Taxes 7,780 7,456
----------- -----------
Total Operating Expenses 223,510 180,189
----------- -----------
Operating Income 29,915 24,032
----------- -----------
Interest Charges:
Long-Term Debt 11,826 11,182
Short-Term Debt and Other 3,150 2,730
----------- -----------
Total Interest Charges 14,976 13,912
----------- -----------
Income Before Preferred Dividend Requirements 14,939 10,120
Preferred Stock Dividend Requirements 121 125
Preferred Securities Dividend Requirements 2,192 2,192
----------- -----------
Net Income Applicable to Common Stock $ 12,626 $ 7,803
=========== ===========
Average Shares of Common Stock Outstanding 2,339 2,339
=========== ===========
Earnings Per Common Share $ 5.40 $ 3.34
=========== ===========
Dividends Declared Per Common Share $ 5.19 $ 5.29
=========== ===========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJG-4
<TABLE>
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
(Unaudited)
September 30, December 31,
------------------------ ------------
1999 1998 1998
----------- ----------- ------------
<S> <C> <C> <C>
Assets
- ------
Property, Plant and Equipment:
Utility Plant, at original cost $ 711,323 $ 654,961 $ 679,997
Accumulated Depreciation (188,898) (176,367) (179,605)
Gas Plant Acquisition Adjustment - Net 1,794 1,869 1,851
----------- ----------- -----------
Property, Plant and Equipment - Net 524,219 480,463 502,243
----------- ----------- -----------
Available-for-Sale Securities 1,346 666 886
----------- ----------- -----------
Current Assets:
Cash and Cash Equivalents 1,263 505 3,751
Accounts Receivable 19,965 12,680 28,770
Unbilled Revenues 4,901 4,163 18,998
Provision for Uncollectibles (932) (1,032) (1,032)
Natural Gas in Storage, average cost 30,617 28,194 27,619
Materials and Supplies, average cost 4,006 3,973 4,051
Prepaid Taxes 8,845 13,599 12,596
Prepayments and Other Current Assets 3,120 2,327 2,267
----------- ----------- -----------
Total Current Assets 71,785 64,409 97,020
------------ ----------- -----------
Accounts Receivable - Merchandise 674 1,121 990
----------- ----------- -----------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 25,818 23,177 27,500
Liability for Future Expenditures 52,939 50,697 52,939
Gross Receipts and Franchise Taxes 3,252 3,696 3,585
Income Taxes - Flowthrough Depreciation 11,775 13,265 13,021
Deferred Fuel Cost - Net 7,953 2,723 5,509
Deferred Postretirement Benefit Costs 5,050 5,679 5,522
Other 8,003 7,123 10,921
----------- ----------- -----------
Total Regulatory and Other Non-Current Assets 114,790 106,360 118,997
----------- ----------- -----------
Total Assets $ 712,814 $ 653,019 $ 720,136
=========== =========== ===========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJG-5
<TABLE>
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
(Unaudited)
September 30, December 31,
------------------------ ------------
1999 1998 1998
----------- ----------- ------------
<S> <C> <C> <C>
Capitalization and Liabilities
- ------------------------------
Common Equity:
Common Stock, Par Value $2.50 per share:
Authorized - 4,000,000 shares
Outstanding - 2,339,139 shares $ 5,848 $ 5,848 $ 5,848
Other Paid-In Capital and Premium on Common Stock 117,817 102,817 102,817
Retained Earnings 54,751 51,537 54,275
----------- ----------- -----------
Total Common Equity 178,416 160,202 162,940
----------- ----------- -----------
Preferred Stock and Securities:
Redeemable Cumulative Preferred - Par Value $100 per share,
Authorized 45,504,46,404 and 46,404 shares, respectively
Outstanding:
Series A, 4.70% - 1,200, 2,100 and 2,100 shares 120 210 210
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 35,000 35,000
----------- ----------- -----------
Total Preferred Stock and Securities 37,044 37,134 37,134
----------- ----------- -----------
Long-Term Debt 185,704 166,853 194,710
----------- ----------- -----------
Total Capitalization 401,164 364,189 394,784
----------- ----------- -----------
Current Liabilities:
Notes Payable 89,700 94,800 97,000
Current Maturities of Long-Term Debt 8,876 8,876 8,876
Accounts Payable 34,898 17,464 40,823
Customer Deposits 5,305 5,552 5,576
Environmental Remediation Costs 8,752 16,037 8,752
Taxes Accrued 1,781 1,181 1,387
Interest Accrued and Other Current Liabilities 7,518 6,297 7,260
----------- ----------- -----------
Total Current Liabilities 156,830 150,207 169,674
----------- ----------- -----------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 86,511 81,641 87,358
Environmental Remediation Costs 44,187 34,660 44,187
Pension and Other Postretirement Benefits 13,404 11,267 13,297
Investment Tax Credits 4,946 5,335 5,239
Other 5,772 5,720 5,597
----------- ----------- -----------
Total Deferred Credits and Other Non-Current Liabilities 154,820 138,623 155,678
----------- ----------- -----------
Commitments and Contingencies
Total Capitalization and Liabilities $ 712,814 $ 653,019 $ 720,136
=========== =========== ===========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJG-6
<TABLE>
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In Thousands)
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 12,626 $ 7,803
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 16,194 14,211
Provision for Losses on Accounts Receivable 668 932
Revenues and Fuel Costs Deferred - Net (2,444) 284
Deferred and Non-Current Income Taxes and Credits - Net 291 3,160
Environmental Remediation Costs - Net 1,682 (1,469)
Changes in:
Accounts Receivable 22,134 29,604
Inventories (2,953) (3,781)
Prepayments and Other Current Assets (853) (38)
Prepaid and Accrued Taxes - Net 4,145 (12,832)
Accounts Payable and Other Accrued Liabilities (5,938) (28,890)
Other - Net 2,636 (1,542)
----------- -----------
Net Cash Provided by Operating Activities 48,188 7,442
----------- -----------
Cash Flows from Investing Activities:
Capital Expenditures, Cost of Removal and Salvage (36,670) (39,517)
Purchase of Available-for-Sale Securities (460) (666)
----------- -----------
Net Cash Used in Investing Activities (37,130) (40,183)
----------- -----------
Cash Flows from Financing Activities:
Net (Repayments of)Borrowings from Lines of Credit (7,300) 48,900
Principal Repayments of Long-Term Debt (9,006) (9,007)
Dividends on Common Stock (12,150) (12,386)
Repurchase of Preferred Stock (90) (90)
Payments for Issuance of Long-Term Debt and Preferred
Securities - (138)
Additional Investment by Shareholder 15,000 -
----------- -----------
Net Cash (Used in)Provided by Financing Activities (13,546) 27,279
----------- -----------
Net Decrease in Cash and Cash Equivalents (2,488) (5,462)
Cash and Cash Equivalents at Beginning of Period 3,751 5,967
----------- -----------
Cash and Cash Equivalents at End of Period $ 1,263 $ 505
=========== ===========
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJG-7
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Significant Accounting Practices:
Consolidation - The consolidated financial statements include the accounts
of South Jersey Gas Company (SJG) and its wholly-owned statutory trust
subsidiary, SJG Capital Trust. All significant intercompany accounts and
transactions were eliminated. SJG reclassified some previously reported
amounts to conform with current year classifications. In the company's
opinion, the condensed consolidated financial statements reflect all
adjustments needed to fairly present SJG's financial position and operating
results at the dates and for the periods presented. SJG's businesses are
subject to seasonal fluctuations and, accordingly, this interim financial
information should not be the basis for estimating the full year's operating
results.
South Jersey Industries, Inc. (SJI) owns all of the outstanding common
stock of SJG.
Estimates and Assumptions - Our financial statements are prepared to
conform with generally accepted accounting principles. Management makes
estimates and assumptions that affect the amounts reported in the financial
statements and related disclosures. Therefore, actual results could differ
from those estimates.
New Accounting Pronouncement - In June 1998, the FASB issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
effective for our fiscal year ending December 31, 2001. This statement
establishes accounting and reporting standards for derivative instruments,
including those embedded in other contracts, and for hedging activities.
It requires recognizing derivatives as assets or liabilities at fair value on
the balance sheet. We are currently evaluating the effects of FASB No. 133 on
SJG's financial condition and results of operations, which will vary based on
our use of derivative instruments at the time of adoption.
Note 2. Income Taxes:
The significant components of federal and state income taxes reflected in
the condensed statements of consolidated income for the three and nine months
ended September 30, 1999 and 1998 are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- -------
Current:
Federal $(2,583) $ 47 $ 6,634 $ 2,437
State (504) (446) 2,930 1,523
------- ------- ------- -------
Total Current (3,087) (399) 9,564 3,960
SJG-8
Deferred:
Federal 326 (1,721) 977 3,059
State (131) (110) (393) 398
------- ------- ------- -------
Total Deferred 195 (1,831) 584 3,457
Investment Tax Credit (98) (99) (293) (297)
------- ------- ------- -------
Net Income Taxes $(2,990) $(2,329) $ 9,855 $ 7,120
======= ======= ======= =======
Note 3. Recent Regulatory Actions:
SJG began a pilot program in April 1997, giving residential customers a
choice of gas supplier. During the initial enrollment period in 1997, nearly
13,000 residential customers applied for and received this service. The BPU
subsequently expanded the number of potential participants to 50,000 and, as
of September 30, 1999, enrollment totaled 28,623. In January 2000, all of
SJG's customers will become eligible to choose a gas supplier. Participants'
bills are reduced for cost of gas charges and applicable taxes. The resulting
decrease in revenues is offset by a corresponding decrease in gas costs and
taxes under SJG's BPU-approved fuel clause. While the program reduces utility
revenues, it does not affect SJG's net income, financial condition or margins.
In September 1998, SJG filed its annual LGAC, TAC and DSMC with the BPU.
The LGAC and DSMC cover the period November 1 through October 31 of each year.
The TAC period runs from October 1 through May 31. On May 12, 1999, the BPU
approved a $7.1 million increase in rates as part of the current filing, which
included the results of the previous two annual filings. We are currently in
the process of preparing the 1999 annual filing which should be filed with the
BPU during the fourth quarter.
In April 1999, the BPU approved new hourly appliance service rates which
SJG implemented in that same month. On June 30, 1999, SJG filed a proposal to
implement several new service contract plans and to expand its existing service
contract plans to include appliances not presently covered. Subsequently, SJG
increased the price of its existing service contract plans effective August 1,
1999. The new rates and plans are competitive with those of other service
providers in New Jersey and are designed to increase earnings and cash flows.
In August 1998, SJG filed with the BPU to recover increased remediation
costs expended from August 1995 through July 1998. On September 30, 1999, the
BPU approved the filed annual recovery level of $6.5 million. This represents
an annual increase of approximately $4.5 million over the recovery previously
included in rates. In July 1999, SJG filed its annual RAC with the BPU
proposing no change in the current level of recovery. This filing is still
pending at the BPU.
SJG-9
Note 4. Retained Earnings:
Restrictions exist under various loan agreements regarding the amount of
cash dividends or other distributions that we may pay on SJG's common stock.
SJG's retained earnings, which is free of these restrictions, was approximately
$52.9 million as of September 30, 1999.
Note 5. Commitments and Contingencies:
Construction Commitments - The estimated cost of construction and
environmental remediation programs of SJG for 1999 totals $53.4 million.
Commitments were made regarding these programs.
Pending Litigation - SJG is subject to claims arising in the ordinary
course of business and other legal proceedings. We set up reserves when these
claims become apparent. We also maintain insurance and record probable
insurance recoveries relating to outstanding claims.
Environmental Remediation Costs - SJG incurred and recorded costs for
environmental clean up of sites where SJG or its predecessors operated gas
manufacturing plants. SJG stopped manufacturing gas over 35 years ago.
Since the early 1980s, SJG recorded environmental remediation costs of
$110.5 million, of which $57.6 million was spent as of September 30, 1999.
With the assistance of an outside consulting firm, we estimate that future
costs to clean up SJG's sites will range from $52.9 million to $160.3 million.
We recorded the lower end of this range as a liability. It is reflected on the
1999 condensed consolidated balance sheet under the captions Current
Liabilities and Deferred Credits and Other Non-Current Liabilities. SJG did
not adjust the accrued liability for future insurance recoveries, which
management is pursuing. We use insurance proceeds to offset related legal
fees and to reduce the balance of deferred environmental remediation costs.
Recorded amounts include estimated costs based on projected investigation and
remediation work plans using existing technologies. Actual costs could differ
from the estimates due to the long-term nature of the projects, changing
technology, government regulations and site-specific requirements.
SJG has two regulatory assets associated with environmental cost. The
first regulatory asset is titled Environmental Remediation Cost: Expended -
Net. These expenditures represent what was actually spent to clean up former
gas manufacturing plant sites. These costs meet the requirements of FASB
Statement No. 71, "Accounting for the Effects of Certain Types of Regulation."
The BPU allowed SJG to recover expenditures through July 1998 and petitions to
recover costs through July 1999 are pending.
SJG-10
The other regulatory asset titled Environmental Remediation Cost:
Liability for Future Expenditures relates to estimated future expenditures
determined under the guidance of FASB Statement No. 5, "Accounting for
Contingencies." This amount, which relates to former manufactured gas plant
sites, was recorded as a deferred debit with the corresponding amount
reflected on the condensed consolidated balance sheet under the captions,
Current Liabilities and Deferred Credits and Other Non-Current Liabilities.
The deferred debit is a regulatory asset under FASB No. 71. The BPU's intent,
evidenced by current practice, is to allow SJG to recover the deferred
costs after they are spent.
We file with the BPU to recover these costs in rates through our RAC. The
BPU has consistently allowed the full recovery over 7-year periods, and we
believe this will continue. As of September 30, 1999, SJG's unamortized
remediation costs of $25.8 million are reflected on the condensed consolidated
balance sheet under the caption Regulatory and Other Non-Current Assets. Since
BPU approval of the RAC in 1992, SJG recovered $20.6 million through rates as
of September 30, 1999.
Note 6. Other Paid-In Capital:
On June 30, 1999, SJG received $5.25 million as a contribution of capital
from SJI. Subsequently, on July 30, 1999, SJG received an additional $9.75
million contribution from SJI. Contributions of capital are credited to Other
Paid-In Capital and Premium on Common Stock. There have been no other changes
in Common Stock during 1999 and 1998.
SJG-11
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Overview
South Jersey Gas Company (SJG) is a natural gas distribution company
serving 270,692 customers at September 30, 1999, compared with 263,883
customers at September 30, 1998. SJG also makes off-system sales of natural
gas on a wholesale basis to various customers on the interstate pipeline system
and transports natural gas purchased directly from producers or suppliers for
our own sales and for some of our customers. South Jersey Industries, Inc.
(SJI) owns all of the common stock of SJG.
Forward Looking Statements
This report contains certain forward-looking statements concerning
projected future financial performance, future operating performance, future
plans and courses of action and future economic conditions. All statements in
this report other than statements of historical fact are forward-looking
statements. These forward-looking statements are made based upon management's
expectations and beliefs concerning future events impacting the company and
involve a number of risks and uncertainties. We caution that forward-looking
statements are not guarantees and actual results could differ materially from
those expressed or implied in the forward-looking statements.
A number of factors could cause our actual results to differ materially
from those anticipated, including, but not limited to the following: general
economic conditions on an international, federal, state and local level;
weather conditions in the company's marketing areas; regulatory and court
decisions; competition in the company's regulated and deregulated activities;
the availability and cost of capital; the company's ability to maintain
existing and/or establish successful new alliances and joint ventures to take
advantage of marketing opportunities; costs and effects of unanticipated legal
proceedings, environmental liabilities and Year 2000 related costs or operating
problems; and changes in business strategies.
Pilot Program - Choice of Gas Supplier
SJG operates a New Jersey Board of Public Utilities (BPU) approved pilot
program giving residential customers a choice of gas supplier. Currently the
program is open to 50,000 potential participants and, as of September 30, 1999,
enrollment totaled 28,623. In January 2000, all of SJG's customers will become
eligible to choose a gas supplier. Participants' bills are reduced for cost of
gas charges and applicable taxes. The resulting decrease in SJG's revenues is
offset by a corresponding decrease in gas costs and taxes under a BPU-approved
fuel clause. While the program reduces utility revenues, it does not affect
SJG's net income, financial condition or margins.
SJG-12
Energy Adjustment Clauses
In 1998, the BPU approved a revised Temperature Adjustment Clause (TAC)
for SJG, effective October 1998. TAC adjustments had the following impacts on
1999 and 1998 third quarter and nine month net earnings:
1999 1998
------ ------
TAC Adjustment Increase to Net Income
($ in thousands)
Quarter Ended 9/30 $0 $0
Nine Months Ended 9/30 $1,232 $247
While the revenue and income impacts of TAC adjustments are recorded as
incurred, cash inflows or outflows directly attributable to TAC adjustments do
not begin until the next TAC year. Each TAC year begins October 1.
Status of Year 2000 Conversion
State of Readiness
We prepared a Year 2000 Impact and Assessment Study and developed a
detailed plan to enable SJG to be ready for year 2000. Ready means that
mission critical software, hardware, devices, systems, facilities and business
relationships are prepared to operate satisfactorily through the end of 1999
and beyond.
We revised 100% of effected programming code as of June 1, 1999. We
believe that 98% of all, and 100% of our mission critical, embedded technology
is Y2K ready. We have tested all revisions on an as completed basis and will
continue to test through the end of this year.
As of November 12, 1999, SJG's SCADA software, which monitors natural gas
flow throughout our distribution system, was replaced with an updated, Y2K
ready version. Our gas distribution system is designed to provide
uninterrupted gas flow and has regularly tested back-up procedures in place to
ensure gas flow in the event of hardware, software, electrical or SCADA
failures. This function had previously been identified in the June 1999 Form
10-Q as not being Y2K ready.
In June 1998, all vendors were notified by letter requesting verification
of their Y2K readiness. Since then, follow-up requests for information have
been made on an on going basis to those vendors who did not reply. A current
analysis of this process indicates that 73% of all product and service vendors
and 100% of our mission critical vendors have responded and are Y2K ready. A
review of the vendors that have not replied has been conducted to assess the
impact that the potential loss of their products and services will have on the
company's supply chain and our ability to conduct business after January 1,
2000. Based upon this review and verification from our critical suppliers
SJG-13
regarding their Y2K readiness, we believe that there will be no disruptions
in SJI's supply chain on or after January 1, 2000 which will impede our
ability to conduct business as usual.
Year 2000 Costs
We project Y2K costs to total $0.54 million, with $0.44 million having
been spent through September 30, 1999.
Year 2000 Risks and Contingency Plans
The worst case scenario that concerns us the most is a temporary
disruption of service to our gas customers. As a contingency, our gas
distribution system can be operated manually. We have received assurances from
our two direct connect gas supply pipelines that they are Y2K ready. We are
seeking assurances from the companies that supply gas to our system that they
will be Y2K ready. We have prepared contingency plans for use in the event
that they are not ready. We continually update our contingency plans to
address potential Y2K related problems. All contingency plans for high
priority items such as service continuation, safety and revenues have been
completed.
Y2K Summary
If some key systems and devices are not ready for the Year 2000, in
particular at pipeline, telecommunication, electricity or banking service
vendors, there will likely be adverse effects on the company's business,
results of operations and financial condition.
While unexpected Y2K problems can occur, we do not anticipate any material
difficulty in achieving Y2K readiness based upon the nature of SJG's operating
and information systems and the state of planning and remediation. Any
problems that arise within the company should be immaterial to our financial
position or operating results.
Results of Operations - Three and Nine Months Ended September 30, 1999
Compared to Three and Nine Months Ended September 30, 1998
Operating Revenues
Revenues increased $8.2 million and $49.0 million in the third quarter and
first nine months of 1999, respectively, compared with the prior year periods.
The primary reasons for the increases were increased off-system sales and 6,809
additional customers. Nine month results also benefited significantly from the
revised TAC. These factors more than offset revenue reductions due to the
continued migration of firm gas sales to firm transportation. Note, however,
that SJG's tariffs are structured so that profits are derived from the
transportation of gas, not the sale of the commodity. Consequently, the switch
to firm transportation reduced revenues but did not impact profitability.
SJG-14
Weather in the third quarter and first nine months of 1999 was 65.0% and
14.5% colder, respectively, than the prior year periods. Weather was 29.8% and
3.4% warmer for the third quarter and first nine months, respectively, than the
20-year average. Previously, changes in temperatures were typically the single
most important factor in explaining revenue fluctuations for comparative
periods. Revisions to SJG's TAC that became effective in October 1998
significantly reduced the weather related volatility in our revenues. However,
comparisons for the first two quarters of 1999 to the prior year periods
continued to show volatility as 1998 revenues were heavily influenced by
weather. Weather experienced during the third quarter of the year historically
has had a minimal impact on SJG's earnings as heating requirements are at their
seasonal low point during July, August and September in our service territory.
Revenues for 1999 will be closely tied to the 20-year normal temperatures and
not actual weather conditions.
The following is a comparison of operating revenue and throughput for the
three and six month periods ended September 30, 1999 vs. the same periods ended
September 30, 1998.
3rd Quarter Year to Date
----------------- -------------------
1999 1998 1999 1998
------- ------- -------- --------
Operating Revenues (Thousands):
Firm
Residential $12,986 $14,834 $110,547 $102,180
Commercial 3,306 4,126 24,508 25,942
Industrial 921 523 3,645 3,072
Cogeneration & Electric
Generation 4,259 3,815 7,062 7,234
Firm Transportation 5,209 4,428 22,171 16,736
------- ------- -------- --------
Total Firm Operating
Revenues 26,681 27,726 167,933 155,164
Interruptible 277 373 1,270 2,024
Interruptible Transportation 305 518 1,200 1,954
Off-System 22,704 12,479 77,747 36,704
Capacity Release & Storage 870 1,351 2,600 5,041
Other 856 1,070 2,675 3,334
------- ------- -------- --------
Total Operating Revenues $51,693 $43,517 $253,425 $204,221
======= ======= ======== ========
Throughput (MMcf):
Firm
Residential 1,260 1,308 12,839 11,710
Commercial 403 485 3,240 3,457
Industrial 26 43 185 273
Cogeneration & Electric
Generation 1,297 1,336 2,047 2,229
Firm Transportation 5,704 5,345 18,368 16,629
------- ------- -------- --------
Total Firm Throughput 8,690 8,517 36,679 34,298
Interruptible 63 101 307 562
Interruptible Transportation 711 1,224 2,645 4,622
Off-System 8,277 5,539 33,052 15,415
Capacity Release & Storage 8,149 8,253 19,508 22,391
------- ------- -------- --------
Total Throughput 25,890 23,634 92,191 77,288
======= ======= ======== ========
SJG-15
Gas Purchased for Resale
Gas purchased for resale increased $8.7 million and $39.0 million for the
third quarter and nine month periods of 1999, respectively, compared with the
same periods in 1998 due principally to increased sales volumes, particularly
to off-system customers. These increases were partially offset by SJG's
ability to buy gas during the first nine months of 1999 at an average cost of
$2.28/dt compared with $2.30/dt in 1998. Gas supply sources include contract
and open-market purchases. SJG secures and maintains its own gas supplies to
serve its customers.
Operations
A summary of net changes in Utility Operations and Other Operations (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 vs. 1998 1999 vs. 1998
------------- -------------
Other Production Expense $3 $13
Transmission 30 75
Distribution (509) (710)
Customer Accounts and Services (61) (401)
Sales (21) (39)
Administration and General 1,320 1,045
Other (46) 39
------ ------
$716 $22
====== ======
Distribution expenses declined due to improvements in operating practices.
These improvements included the implementation of an automated dispatch system
and home based reporting of service personal. Customer Accounts and Services
costs decreased in 1999 principally due to a decrease in reserves for
uncollectible accounts and reduced meter reading expenses. Meter reading
expenses declined due to a change to bimonthly meter reading during the first
six months. We began to read meters on a monthly basis again during the third
quarter but continued to reduce expenses by completing the outsourcing of the
meter reading function to Millenium Services, LLP. Millenium is a joint
venture, equally owned by SJI and Conectiv, Inc. Administrative and General
costs decreased for the three and nine month periods from 1998 levels
principally due to a change in the way management fees are being charged from
SJI to its subsidiaries. The year to date increase was partially offset by
a decline in amortized regulatory expenses.
SJG-16
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses
(in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 vs. 1998 1999 vs. 1998
------------- -------------
Maintenance $168 $(104)
Depreciation 448 1,328
Income Taxes (661) 2,735
Other Taxes (84) 324
Depreciation is higher due to increased investment in property, plant and
equipment by SJG. Income Tax changes reflect the impact of changes in pre-tax
income. Other taxes increased for the first nine months because of higher
sales volumes due primarily to lower temperatures in the first quarter of 1999
and adjustments recorded in 1998 related to the Energy Tax Reform Act
implemented January 1998.
Interest Charges
Interest charges increased in 1999 due to the effect of increased short
and long-term debt outstanding, partially offset by lower interest rates
experienced during the first nine months of this year. The debt was incurred
primarily to support the expansion and upgrade of SJG's gas transmission and
distribution system.
Net Income Applicable to Common Stock
The details affecting the changes in net income and earnings per share are
discussed under the appropriate captions above.
Liquidity
The seasonal nature of gas operations; the timing of construction and
remediation expenditures and related permanent financing; as well as mandated
tax and sinking fund payment dates require large, short-term cash requirements.
These requirements are generally met by cash from operations and short-term
lines of credit. We maintain short-term lines of credit with a number of
banks, totaling $129.0 million, of which $39.3 million was available at
September 30, 1999. The credit lines are uncommitted and unsecured with
interest rates typically available based upon the Federal Funds Rates or London
Interbank Offered Rates (LIBOR).
SJG-17
The changes in cash flows from operating activities (in thousands):
Nine Months Ended
September 30,
1999 vs. 1998
-------------
Increases/(Decreases):
Net Income Applicable to Common Stock $4,823
Depreciation and Amortization 1,983
Provision for Losses on Accounts Receivable (264)
Revenues and Fuel Costs Deferred - Net (2,728)
Deferred and Non-Current Income Taxes and
Credits - Net (2,869)
Environmental Remediation Costs-Net 3,151
Accounts Receivable (7,470)
Inventories 828
Prepayments and Other Current Assets (815)
Prepaid and Accrued Taxes - Net 16,977
Accounts Payable and Other Accrued Liabilities 22,952
Other - Net 4,178
-------
Net Cash Provided by Operating Activities $40,746
=======
Depreciation and Amortization are non-cash charges to income and do not
impact cash flow. Changes in depreciation cost reflect the effect of additions
and reductions to fixed assets.
Decreases in Revenues and Fuel Costs Deferred - Net reflect the impact of
payments or credits to customers for amounts previously overcollected and the
undercollection of fuel costs resulting from increases in natural gas costs.
Increases reflect the overcollection of fuel costs or the recovery of
previously deferred fuel costs.
Changes in Deferred and Non-Current Income Taxes and Credits - Net
represent the differences between taxes accrued and amounts paid. Generally,
deferred income taxes related to deferred fuel costs will be paid in the next
year.
Changes in Environmental Remediation Costs - Net represent the differences
between amounts expended for environmental remediation compared with amounts
collected under the RAC and insurance recoveries.
Changes in Accounts Receivable are primarily due to higher off-system
sales and the impact of colder weather on SJG's sales volumes. Weather and
commodity prices also impact this line item. Changes impact cash flows when
collected in subsequent periods.
SJG-18
Changes in Inventories reflect the impact of seasonal requirements,
temperatures and price changes.
Changes in Prepaid and Accrued Taxes - Net reflect the impact of
differences between taxes paid and taxes accrued. Significant timing
differences exist in cash flows during the year. Approximately 50% of SJG's
taxes are paid in installments during the first half of the year and the
remaining 50% are paid on May 15 of each year. SJG uses short-term borrowings
to pay taxes, resulting in a temporary increase in the short-term debt level.
The carrying costs of timing differences are recognized in base utility rates.
Changes in Accounts Payable and Other Current Liabilities reflect the
impact of timing differences between the accrual and payment of costs.
Changes in Other - Net reflect numerous changes in noncurrent assets and
liabilities, including accrued deferred income taxes.
Regulatory Matters
In September 1999, the BPU approved SJG's filed request to recover costs
incurred to remediate environmental problems at former manufactured gas plant
sites as permitted under a previously approved Remediation Adjustment Clause
(RAC) in our tariff. SJG's RAC level increased from $0.0032 per therm to
$0.0107 per therm to include all RAC related expenditures made between 1993 and
1998. Consequently, SJG will recover via the RAC an additional $4.5 million
per year for the next seven years as a result of this ruling.
On February 9, 1999, the "Electric Discount and Energy Competition Act"
P.L. 1999, c. 23 (the Act) was signed into law in New Jersey. This bill
establishes the framework and necessary time schedules for the deregulation and
restructuring of the electric and natural gas utilities in the state. As to
natural gas utilities, the Act completes the "unbundling" rate process,
establishes a time frame for the institution of competitive services for
customer accounting functions and also sets forth a time frame for a
determination as to whether basic gas supply services should become
competitive.
The Act also contains numerous provisions which require the BPU to
promulgate and adopt a variety of standards related to the implementation of
the Act. These required standards address fair competition, affiliate
relations, accounting, competitive services, supplier licensing, consumer
protection and aggregation. On March 31, 1999, the BPU issued Draft Interim
Standards in response to the Act. In issuing its Order, the BPU stated that
the Draft Interim Standards ". . . do not necessarily represent the final views
of the Board on these matters. . ." As such, the BPU has undertaken an
extensive comment and meeting process to address the concerns of all impacted
parties. The company has been actively participating in this process, and
management believes the final standards will not have a material adverse effect
on the company.
SJG-19
Other matters are incorporated by reference to Note 3 to the condensed
consolidated financial statements included as part of this report.
Capital Resources
SJG has a continuing need for cash resources and capital, primarily to
invest in new and replacement facilities and equipment and for environmental
remediation costs. Net construction and remediation expenditures for the first
nine months of 1999 amounted to $35.0 million. The costs for 1999, 2000 and
2001 are estimated at approximately $53.4 million, $56.5 million and $55.7
million, respectively. We will fund these expenditures from several sources,
which may include cash generated by operations, temporary use of short-term
debt, sale of medium-term notes, capital leases, RAC recoveries, insurance
recoveries and equity infusions from SJI.
SJG received an equity infusion of $5.25 million from SJI on June 30,
1999. On July 30, 1999, SJI contributed an additional $9.75 million of equity
capital to SJG. Future equity contributions will occur on an as needed basis.
Summary
We are confident we will have sufficient cash flow to meet SJG's
operating, capital and dividend needs and are taking and will take such actions
necessary to employ our resources effectively.
SJG-20
PART II OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part I,
Item 1, Note 5, on pages 10 and 11 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-21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTH JERSEY GAS COMPANY
(Registrant)
Dated: November 15, 1999 By: /s/ David A. Kindlick
David A. Kindlick
Senior Vice President, Finance & Rates
Dated: November 15, 1999 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Vice President and Treasurer
SJG-22
SOUTH JERSEY GAS COMPANY
Index to Exhibits
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
(Submitted only in electronic format to
the Securities and Exchange Commission).
SJG-23
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<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 524,219
<OTHER-PROPERTY-AND-INVEST> 1,346
<TOTAL-CURRENT-ASSETS> 71,785
<TOTAL-DEFERRED-CHARGES> 114,790
<OTHER-ASSETS> 674
<TOTAL-ASSETS> 712,814
<COMMON> 5,848
<CAPITAL-SURPLUS-PAID-IN> 117,817
<RETAINED-EARNINGS> 54,751
<TOTAL-COMMON-STOCKHOLDERS-EQ> 178,416
35,000
2,044
<LONG-TERM-DEBT-NET> 185,704
<SHORT-TERM-NOTES> 89,700
<LONG-TERM-NOTES-PAYABLE> 0
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0
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<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 213,074
<TOT-CAPITALIZATION-AND-LIAB> 712,814
<GROSS-OPERATING-REVENUE> 253,425
<INCOME-TAX-EXPENSE> 9,855
<OTHER-OPERATING-EXPENSES> 213,655
<TOTAL-OPERATING-EXPENSES> 223,510
<OPERATING-INCOME-LOSS> 29,915
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 29,915
<TOTAL-INTEREST-EXPENSE> 14,976
<NET-INCOME> 14,939
2,313
<EARNINGS-AVAILABLE-FOR-COMM> 12,626
<COMMON-STOCK-DIVIDENDS> 12,150
<TOTAL-INTEREST-ON-BONDS> 11,826
<CASH-FLOW-OPERATIONS> 48,188
<EPS-BASIC> 5.40
<EPS-DILUTED> 5.40
</TABLE>
