Page 1 of 22
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, 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 May 7, 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 22
- Cover Page -
PART I FINANCIAL INFORMATION
Item 1. Financial Statements -- See Pages 3 through 10
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
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating Revenues:
Utility $ 134,587 $ 108,163
Other 495 322
---------- ----------
Total Operating Revenues 135,082 108,485
---------- ----------
Operating Expenses:
Gas Purchased for Resale 78,674 61,175
Utility Operations 9,160 9,591
Other Operations 370 366
Maintenance 1,282 1,592
Depreciation 4,611 4,167
Income Taxes 12,718 9,672
Other Taxes 4,456 3,884
---------- ----------
Total Operating Expenses 111,271 90,447
---------- ----------
Operating Income 23,811 18,038
Interest Charges:
Long-Term Debt 4,107 3,839
Short-Term Debt and Other 914 606
---------- ----------
Total Interest Charges 5,021 4,445
Income Before Preferred Dividend Requirements 18,790 13,593
Preferred Stock Dividend Requirements 41 42
Preferred Securities Dividend Requirements 731 731
---------- ----------
Net Income Applicable to Common Stock $ 18,018 $ 12,820
========== ==========
Average Shares of Common Stock Outstanding 2,339 2,339
========== ==========
Earnings Per Common Share $ 7.70 $ 5.48
========== ==========
Dividends Declared Per Common Share $ 1.73 $ 1.64
========== ==========
<FN>
The accompanying footnotes are an integral part of the financial
statements.
</FN>
</TABLE>
SJG-3
<TABLE>
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
(Unaudited)
March 31, December 31,
------------------------- ------------
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Assets
Property, Plant and Equipment:
Utility Plant, at original cost $ 691,669 $ 628,430 $ 679,997
Accumulated Depreciation (183,041) (170,483) (179,605)
Gas Plant Acquisition Adjustment - Net 1,832 1,907 1,851
------------ ------------ ------------
Property, Plant and Equipment - Net 510,460 459,854 502,243
------------ ------------ ------------
Available-for-Sale Securities 886 - 886
------------ ------------ ------------
Current Assets:
Cash and Cash Equivalents 1,552 6,032 3,751
Accounts Receivable 53,848 44,370 28,770
Unbilled Revenues 16,862 10,445 18,998
Provision for Uncollectibles (932) (1,032) (1,032)
Natural Gas in Storage, average cost 11,864 10,451 27,619
Materials and Supplies, average cost 3,821 4,410 4,051
Prepaid Taxes - - 12,596
Prepayments and Other Current Assets 2,060 2,166 2,267
------------ ------------ ------------
Total Current Assets 89,075 76,842 97,020
------------ ------------ ------------
Accounts Receivable - Merchandise 903 1,522 990
------------ ------------ ------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 18,824 20,939 25,152
Liability for Future Expenditures 52,939 52,400 52,939
Gross Receipts and Franchise Taxes 3,474 3,917 3,585
Income Taxes - Flowthrough Depreciation 12,264 13,754 13,021
Deferred Fuel Cost - Net - - 7,857
Deferred Postretirement Benefit Costs 5,365 5,988 5,522
Other 8,401 7,691 10,921
------------ ------------ ------------
Total Regulatory and Other Non-Current Assets 101,267 104,689 118,997
------------ ------------ ------------
Total Assets $ 702,591 $ 642,907 $ 720,136
============ ============ ============
<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)
March 31, 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 102,817 102,817 102,817
Retained Earnings 68,243 65,115 54,275
------------ ------------ ------------
Total Common Equity 176,908 173,780 162,940
------------ ------------ ------------
Preferred Stock and Securities:
Redeemable Cumulative Preferred-Par Value $100 per share,
Authorized 46,404 and 47,304 shares, respectively
Outstanding:
Series A, 4.70% - 2,100 and 3,000 shares. 210 300 210
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 37,134 37,224 37,134
------------ ------------ ------------
Long-Term Debt 192,523 173,672 194,710
------------ ------------ ------------
Total Capitalization 406,565 384,676 394,784
------------ ------------ ------------
Current Liabilities:
Notes Payable 59,000 32,100 97,000
Current Maturities of Long-Term Debt 8,876 8,876 8,876
Accounts Payable 31,179 32,055 40,823
Customer Deposits 5,506 5,988 5,576
Environmental Remediation Costs 8,752 14,373 8,752
Taxes Accrued 15,172 13,046 1,387
Interest Accrued and Other Current Liabilities 7,675 6,740 7,260
------------ ------------ ------------
Total Current Liabilities 136,160 113,178 169,674
------------ ------------ ------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 86,789 84,154 87,358
Environmental Remediation Costs 44,187 38,027 44,187
Pension and Other Postretirement Benefits 13,767 10,661 13,297
Investment Tax Credits 5,141 5,533 5,239
Deferred Revenues - Net 4,650 981 -
Other 5,332 5,697 5,597
------------ ------------ ------------
Total Deferred Credits and Other Non-Current
Liabilities 159,866 145,053 155,678
------------ ------------ ------------
Commitments and Contingencies
Total Capitalization and Liabilities $ 702,591 $ 642,907 $ 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 STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In Thousands)
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 18,018 $ 12,820
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 5,001 4,639
Provision for Losses on Accounts Receivable 63 237
Revenues and Fuel Costs Deferred - Net 12,507 4,655
Deferred and Non-Current Income Taxes and Credits - Net 97 2,302
Environmental Remediation Costs - Net 6,328 102
Changes in:
Accounts Receivable (23,105) (7,673)
Inventories 15,985 13,525
Prepayments and Other Current Assets 207 124
Prepaid and Accrued Taxes - Net 26,381 12,632
Accounts Payable and Other Accrued Liabilities (9,299) (13,420)
Other - Net 2,899 (104)
------------ ------------
Net Cash Provided by Operating Activities 55,082 29,839
------------ ------------
Cash Flows from Investing Activities:
Capital Expenditures, Cost of Removal and Salvage (13,044) (9,961)
------------ ------------
Net Cash Used in Investing Activities (13,044) (9,961)
------------ ------------
Cash Flows from Financing Activities:
Net Repayments of Lines of Credit (38,000) (13,800)
Principal Repayments of Long-Term Debt (2,187) (2,188)
Dividends on Common Stock (4,050) (3,825)
------------ ------------
Net Cash Used in Financing Activities (44,237) (19,813)
------------ ------------
Net (Decrease)Increase in Cash and Cash Equivalents (2,199) 65
Cash and Cash Equivalents at Beginning of Period 3,751 5,967
------------ ------------
Cash and Cash Equivalents at End of Period $ 1,552 $ 6,032
============ ============
<FN>
The accompanying footnotes are an integral part of the financial statements.
</FN>
</TABLE>
SJG-6
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. South Jersey Industries, Inc. (SJI) owns all of
the outstanding common stock of SJG. 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.
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, 2000. 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 months ended
March 31, 1999 and 1998 are as follows (in thousands):
SJG-7
1999 1998
-------- --------
Current:
Federal $ 9,357 $ 4,965
State 3,264 2,167
------- -------
Total Current 12,621 7,132
Deferred:
Federal 326 2,401
State (131) 238
------- -------
Total Deferred 195 2,639
Investment Tax Credit (98) (99)
------- -------
Net Income Taxes $12,718 $ 9,672
======= =======
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. In June
1998, the BPU expanded the number of potential participants to 25,000. There
were 20,906 participants as of March 31, 1999. 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. This current LGAC filing,
which includes the results of the previous two LGAC filings, was updated in
January 1999 and requests an increase in rates of $7.1 million. These filings
contain no material TAC or DSMC recovery issues at this time. All filings are
still pending at the BPU. We believe the ultimate settlement of these filings
will not adversely affect SJG's financial position, results of operations or
liquidity.
In April 1999, the BPU approved new appliance service rates which SJG
implemented in that same month. The new rates are competitive with those of
other service providers in New Jersey and are designed to increase earnings and
cash flows.
SJG-8
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
$66.3 million as of March 31, 1999.
Note 5. Commitments and Contingencies:
Construction Commitments - The estimated cost of construction and
environmental remediation programs of SJG for 1999 totals $52.2 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
$101.0 million, of which $48.1 million was spent as of March 31, 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 1996 and petitions to
recover costs through July 1998 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 Statement No. 5, "Accounting for
Contingencies." This amount, which relates to former manufactured gas plant
SJG-9
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 March 31, 1999, SJG's unamortized
remediation costs of $18.8 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 $18.0 million through
rates as of March 31, 1999.
SJG-10
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 269,108 customers at March 31, 1999, compared with 262,315 customers at
March 31, 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; Year 2000 related costs or operating problems and environmental
liabilities; and changes in business strategies.
Pilot Program - Choice of Gas Supplier
In April 1997, SJG began its New Jersey Board of Public Utilities (BPU)
approved pilot program giving residential customers a choice of gas supplier.
During the initial enrollment period in 1997, approximately 13,000 residential
customers applied for and received this service. In June 1998, the BPU
expanded the number of potential participants to 25,000. There were 20,906
participants as of March 31, 1999. 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-11
Energy Adjustment Clauses
In 1998, the BPU approved a revised Temperature Adjustment Clause (TAC)
for SJG, effective October 1998. TAC adjustments during the first quarter of
1999 increased revenue and net income by $2.16 million and $1.28 million,
respectively. TAC adjustments for the same period in 1998 were immaterial.
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 approximately 91% of effected programming code as of March 31,
1999. We have scheduled all revisions to be complete by July 1999. We believe
that 90% of all, and 100% of our mission critical, embedded technology is Y2K
ready. We have been testing all revisions on an as completed basis and will
continue to test through the end of this year.
The most significant areas that are not as of yet Y2K ready are our SCADA
software, which monitors natural gas flow throughout our distribution system,
and our cash processing equipment. SJG has contracted with a vendor to replace
the SCADA software with a version that is Y2K compliant, with installation and
testing to be completed by the end of the third quarter. Our gas distribution
system is designed to provide uninterrupted gas flow and has long-standing,
repeatedly tested back-up procedures in place to ensure gas flow in the event
of hardware, software, electrical or SCADA failures. Regarding cash
processing, we are currently considering options that include outsourcing the
function, purchasing Y2K compliant equipment and modifying the existing
equipment. Back-up cash processing procedures are in place.
We surveyed all of our vendors regarding their Y2K readiness. All vendors
providing third party software have indicated their products used by us are Y2K
ready. Of product and service vendors surveyed, 72% of all and 96% of mission
critical vendors have indicated Y2K readiness. We are actively pursuing
assurances that the remainder of our vendors will be Y2K ready.
Year 2000 Costs
We project Y2K costs to total $0.58 million, with $0.41 having been spent
through March 31, 1999.
SJG-12
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 are preparing contingency plans for use in the event
that they are not ready. Contingency plans have been or are being prepared to
address Y2K related problems. All contingency plans for high priority items
such as service continuation, safety and revenues are scheduled to be completed
by July 1999.
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 should be immaterial to our financial position or operating
results.
Results of Operations - First Quarter Ended March 31, 1999
Compared to First Quarter Ended March 31, 1998
Operating Revenues
Revenues increased $26.6 million in the first three months of 1999
compared with the prior year period. The primary reasons for the increase were
increased off-system sales, the effects of the revised TAC and 6,793 additional
customers. 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.
Weather in the first three months of 1999 was 15.5% colder than the prior
year period, but 3.9% warmer 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 will significantly reduce the weather related
volatility in our revenues. However, comparisons for the first two quarters of
1999 to the prior year periods will continue to show volatility as 1998
revenues were heavily influenced by weather. Revenues for 1999 will be closely
tied to the 20-year normal temperatures and not actual weather conditions.
SJG-13
The following is a comparison of operating revenue and throughput for the
three month period ended March 31, 1999 vs. the three month period ended
March 31, 1998.
1999 1998
---------- ----------
Utility Operating Revenues (Thousands):
Firm
Residential $72,536 $63,852
Commercial 16,185 15,917
Industrial 1,811 1,815
Cogeneration & Electric Generation 667 961
Firm Transportation 10,831 7,582
---------- ----------
Total Firm 102,030 90,127
Interruptible 340 1,037
Interruptible Transportation 533 895
Off-System 30,486 13,174
Capacity Release & Storage 874 2,262
Other 819 990
---------- ----------
Total Utility Operating Revenues $135,082 $108,485
========== ==========
Throughput (Mmcf):
Firm
Residential 8,883 7,922
Commercial 2,216 2,235
Industrial 122 172
Cogeneration & Electric Generation 71 91
Firm Transportation 6,789 6,397
---------- ----------
Total Firm Throughput 18,081 16,817
Interruptible 107 283
Interruptible Transportation 1,103 2,118
Off-System 14,314 5,306
Capacity Release & Storage 3,321 6,485
---------- ----------
Total Throughput 36,926 31,009
========== ==========
SJG-14
Gas Purchased for Resale
Gas purchased for resale increased $17.5 million in 1999 compared with
1998 due principally to increased sales volumes, particularly to off-system
customers. 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
March 31,
1999 vs. 1998
-------------
Other Production Expense $13
Transmission 26
Distribution 94
Customer Accounts and Services (225)
Sales (27)
Administration and General (312)
Other 4
------
$(427)
======
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. Administrative and General costs decreased from 1998 levels
principally due to an emphasis on cost cutting in general.
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses
(in thousands):
Three Months Ended
March 31,
1999 vs. 1998
-------------
Maintenance $(310)
Depreciation 444
Income Taxes 3,046
Other Taxes 572
SJG-15
The decrease in maintenance expense is principally due to reduced overtime
charges and fewer occurrences of distribution system leaks. Depreciation is
higher due to increased investment in property, plant and equipment. Income
Tax changes reflect the impact of changes in pre-tax income. Other taxes
increased because of higher sales volumes due 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 principally due to the effect of
increased short and long-term debt outstanding. The debt was incurred
primarily to support the expansion and upgrade of our 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 $120.0 million, of which $61.0 million was available at March
31, 1999. The credit lines are uncommitted and unsecured with interest rates
at or below the prime rate.
SJG-16
The changes in cash flows from operating activities (in thousands):
Three Months Ended
March 31,
1999 vs. 1998
-------------
Increases/(Decreases):
Net Income $5,198
Depreciation and Amortization 362
Provision for Losses on Accounts Receivable (174)
Revenues and Fuel Costs Deferred - Net 7,852
Deferred and Non-Current Income Taxes and
Credits - Net (2,205)
Environmental Remediation Costs-Net 6,226
Accounts Receivable (15,432)
Inventories 2,460
Prepayments and Other Current Assets 83
Prepaid and Accrued Taxes - Net 13,749
Accounts Payable and Other Accrued Liabilities 4,121
Other - Net 3,003
-------
Net Cash Provided by Operating Activities $25,243
=======
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
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.
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-17
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.
Utilization of prepaid tax balances resulted in minimal cash outflows in the
first quarter of 1999.
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
On February 9, 1999, the "Electric Discount and Energy Computation 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 be reasonable for all parties.
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
quarter of 1999 amounted to $6.7 million. The costs for 1999, 2000 and 2001
SJG-18
are estimated at approximately $52.2 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 and RAC recoveries.
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-19
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 9 and 10 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-20
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 14, 1999 By: /s/ David A. Kindlick
David A. Kindlick
Senior Vice President, Finance & Rates
Dated: May 14, 1999 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Vice President and Treasurer
SJG-21
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-22
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 510,460
<OTHER-PROPERTY-AND-INVEST> 886
<TOTAL-CURRENT-ASSETS> 89,075
<TOTAL-DEFERRED-CHARGES> 101,267
<OTHER-ASSETS> 903
<TOTAL-ASSETS> 702,591
<COMMON> 5,848
<CAPITAL-SURPLUS-PAID-IN> 102,817
<RETAINED-EARNINGS> 68,243
<TOTAL-COMMON-STOCKHOLDERS-EQ> 176,908
35,000
2,134
<LONG-TERM-DEBT-NET> 195,523
<SHORT-TERM-NOTES> 59,000
<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> 228,150
<TOT-CAPITALIZATION-AND-LIAB> 702,591
<GROSS-OPERATING-REVENUE> 135,082
<INCOME-TAX-EXPENSE> 12,718
<OTHER-OPERATING-EXPENSES> 98,553
<TOTAL-OPERATING-EXPENSES> 111,271
<OPERATING-INCOME-LOSS> 23,811
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 23,811
<TOTAL-INTEREST-EXPENSE> 5,021
<NET-INCOME> 18,790
773
<EARNINGS-AVAILABLE-FOR-COMM> 18,018
<COMMON-STOCK-DIVIDENDS> 4,050
<TOTAL-INTEREST-ON-BONDS> 4,107
<CASH-FLOW-OPERATIONS> 55,082
<EPS-PRIMARY> 7.70
<EPS-DILUTED> 7.70
</TABLE>
