Page 1 of 21
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2000 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 5, 2000 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 21
- 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
March 31,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Operating Revenues:
Utility $146,627 $134,587
Other 375 495
---------- ----------
Total Operating Revenues 147,002 135,082
---------- ----------
Operating Expenses:
Gas Purchased for Resale 88,818 78,674
Utility Operations 9,811 9,160
Other Operations 348 370
Maintenance 2,770 1,282
Depreciation 4,920 4,611
Income Taxes 12,608 12,718
Other Taxes 4,335 4,456
---------- ----------
Total Operating Expenses 123,610 111,271
---------- ----------
Operating Income 23,392 23,811
Interest Charges:
Long-Term Debt 3,833 4,107
Short-Term Debt and Other 1,194 914
---------- ----------
Total Interest Charges 5,027 5,021
Income Before Preferred Dividend Requirements 18,365 18,790
Preferred Stock Dividend Requirements 40 41
Preferred Securities Dividend Requirements 731 731
---------- ----------
Net Income Applicable to Common Stock $17,594 $18,018
========== ==========
Average Shares of Common Stock Outstanding 2,339 2,339
========== ==========
Earnings Per Common Share $7.52 $7.70
========== ==========
Dividends Declared Per Common Share $1.80 $1.73
========== ==========
<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,
----------------------- -------------
2000 1999 1999
---------- ---------- -------------
<S> <C> <C> <C>
Assets
- ------
Property, Plant and Equipment:
Utility Plant, at original cost $729,901 $691,669 $721,338
Accumulated Depreciation (195,958) (183,041) (192,240)
Gas Plant Acquisition Adjustment - Net 1,757 1,832 1,776
---------- ---------- -------------
Property, Plant and Equipment - Net 535,700 510,460 530,874
---------- ---------- -------------
Available-for-Sale Securities 1,701 886 1,662
---------- ---------- -------------
Current Assets:
Cash and Cash Equivalents 335 1,552 4,694
Accounts Receivable 61,552 53,848 37,066
Unbilled Revenues 15,557 16,862 21,294
Provision for Uncollectibles (860) (932) (932)
Natural Gas in Storage, average cost 10,182 11,864 26,840
Materials and Supplies, average cost 3,952 3,821 4,085
Prepaid Taxes - - 4,069
Prepayments and Other Current Assets 2,254 2,060 2,461
---------- ---------- -------------
Total Current Assets 92,972 89,075 99,577
---------- ---------- -------------
Accounts Receivable - Merchandise 599 903 684
---------- ---------- -------------
Regulatory and Other Non-Current Assets:
Environmental Remediation Costs:
Expended - Net 17,840 21,679 25,702
Liability for Future Expenditures 51,029 52,939 51,029
Gross Receipts and Franchise Taxes 3,030 3,474 3,141
Income Taxes - Flowthrough Depreciation 11,286 12,264 11,531
Deferred Fuel Cost - Net 6,517 - 13,174
Deferred Postretirement Benefit Costs 4,820 5,365 4,914
Other 6,734 8,401 7,951
---------- ---------- -------------
Total Regulatory and Other Non-Current Assets 101,256 104,122 117,442
---------- ---------- -------------
Total Assets $732,228 $705,446 $750,239
========== ========== =============
<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,
----------------------- -------------
2000 1999 1999
---------- ---------- -------------
<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 117,817 102,817 117,817
Retained Earnings 71,851 68,243 58,457
---------- ---------- -------------
Total Common Equity 195,516 176,908 182,122
---------- ---------- -------------
Preferred Stock and Securities:
Redeemable Cumulative Preferred - Par Value $100 per share,
Authorized 45,504,46,404 and 45,504 shares, respectively
Outstanding:
Series A, 4.70% - 1,200, 2,100 and 1,200 shares 120 210 120
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 37,044
---------- ---------- -------------
Long-Term Debt 181,373 192,523 183,561
---------- ---------- -------------
Total Capitalization 413,933 406,565 402,727
---------- ---------- -------------
Current Liabilities:
Notes Payable 82,000 59,000 118,900
Current Maturities of Long-Term Debt 8,876 8,876 8,876
Accounts Payable 28,739 31,179 34,822
Customer Deposits 5,462 5,506 5,386
Environmental Remediation Costs 12,534 8,752 12,534
Taxes Accrued 15,729 15,172 634
Interest Accrued and Other Current Liabilities 7,955 7,675 10,422
---------- ---------- -------------
Total Current Liabilities 161,295 136,160 191,574
---------- ---------- -------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 94,467 86,789 93,543
Environmental Remediation Costs 38,495 44,187 38,495
Pension and Other Postretirement Benefits 12,705 13,767 12,303
Investment Tax Credits 4,757 5,141 4,849
Deferred Revenues - Net - 7,505 -
Other 6,576 5,332 6,748
---------- ---------- -------------
Total Deferred Credits and Other Non-Current Liabilities 157,000 162,721 155,938
---------- ---------- -------------
Commitments and Contingencies
Total Capitalization and Liabilities $732,228 $705,446 $750,239
========== ========== =============
<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,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $17,594 $18,018
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 5,829 5,001
Provision for Losses on Accounts Receivable 72 63
Revenues and Fuel Costs Deferred - Net 6,657 12,507
Deferred and Non-Current Income Taxes and Credits - Net 1,029 97
Environmental Remediation Costs - Net 7,862 6,328
Changes in:
Accounts Receivable (18,893) (23,105)
Inventories 16,791 15,985
Prepayments and Other Current Assets 207 207
Prepaid and Accrued Taxes - Net 19,164 26,381
Accounts Payable and Other Accrued Liabilities (8,474) (9,299)
Other - Net 1,067 2,899
---------- ----------
Net Cash Provided by Operating Activities 48,905 55,082
---------- ----------
Cash Flows from Investing Activities:
Purchase of Available-for-Sale Securities (39) -
Capital Expenditures, Cost of Removal and Salvage (9,937) (13,044)
---------- ----------
Net Cash Used in Investing Activities (9,976) (13,044)
---------- ----------
Cash Flows from Financing Activities:
Net Repayments of Lines of Credit (36,900) (38,000)
Principal Repayments of Long-Term Debt (2,188) (2,187)
Dividends on Common Stock (4,200) (4,050)
---------- ----------
Net Cash Used in Financing Activities (43,288) (44,237)
---------- ----------
Net Decrease in Cash and Cash Equivalents (4,359) (2,199)
Cash and Cash Equivalents at Beginning of Period 4,694 3,751
---------- ----------
Cash and Cash Equivalents at End of Period $335 $1,552
========== ==========
<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. 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 Financial Accounting
Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for the first
quarter of 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 the Company'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, 2000 and 1999 are as follows (in thousands):
SJG-7
Three Months Ended
March 31,
-----------------------
2000 1999
-------- --------
Current:
Federal $ 8,689 $ 9,357
State 2,891 3,265
-------- --------
Total Current 11,580 12,622
Deferred:
Federal 984 325
State 136 (131)
-------- --------
Total Deferred 1,120 194
Investment Tax Credit (92) (98)
-------- --------
Net Income Taxes $ 12,608 $ 12,718
======== ========
Note 3. Recent Regulatory Actions:
In January 1997, the Board of Public Utilities (BPU) granted SJG a
total rate increase of $10.3 million. The $6.0 million base rate portion of
the increase was based on a 9.62% rate of return on rate base, which
included an 11.25% return on common equity. Additionally, SJG's threshold
for sharing pre-tax margins generated by interruptible and off-system sales
and transportation (Sharing Formula) increased from $4.0 million to $5.0
million. With the completion of major construction projects, this $5.0
million threshold increased by $2.8 million to a total of $7.8 million. SJG
keeps 100% of pre-tax margins up to the threshold level and 20% of such
margins above that level. In October 1998, the BPU approved a revision to
the Sharing Formula as part of an agreement to modify SJG's Temperature
Adjustment Clause (TAC). The revision credits the first $750,000 above the
current threshold level to the Levelized Gas Adjustment Clause (LGAC)
customers. Thereafter, SJG keeps 20% of the pre-tax margins as it has
historically.
Effective January 10, 2000, the BPU approved full unbundling of SJG's
system. This allows all natural gas consumers to select their natural gas
supplier. As of March 31, 2000, 47,281 of SJG's residential customers had
elected to purchase their gas commodity from someone other than us. The
bills of those using a gas supplier other than SJG 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. SJI's net income, financial condition and margins are
not affected.
SJG-8
In June 1998, SJG filed a petition with the BPU requesting a change to
the TAC. The request was granted in October 1998. As a result, SJG
experiences reduced fluctuations in income when weather is warmer or colder
than normal.
In August 1998, SJG filed with the BPU to recover increased remediation
costs expended from August 1995 through July 1998. In September 1999, the
BPU approved the requested 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 requesting recovery of carrying costs on unrecovered
remediation costs and proposed no change in the current RAC rate for the
next 3 years. In January 2000, the BPU approved the recovery of carrying
costs on unrecovered remediation costs and SJG's proposal to keep its
current RAC rate in effect through October 2002.
In September 1998, SJG filed its annual LGAC, TAC and Demand Side
Management Clause (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. In May 1999, the BPU approved a $7.1 million increase in
rates as part of this filing, which included the results of the previous two
annual filings. In April 2000, SJG made a TAC and LGAC filing and
anticipates making TAC, LGAC and DSMC filings during the summer of 2000.
In February 1999, the Electric Discount and Energy Competition Act
became law. This law established unbundling, where redesigned utility rate
structures allow natural gas and electric consumers to choose their energy
supplier. SJG filed its unbundling proposal in April 1999 and received BPU
approval of its settlement in January 2000.
In addition to allowing all customers to select their own supplier
effective January 10, 2000, the unbundling settlement also created an
incentive to customers to select a supplier, other than SJG, in the form of
a Market Development Credit (MDC). This credit will be provided to
customers over the next two years and will approximate $2.5 million plus
carrying costs through December 2001. The majority of this credit was
provided for on SJG's books as a Deferred Credit. Therefore, the MDC will
not materially impact future periods.
Also included in the settlement was the approved recovery of carrying
costs on the RAC, as previously discussed, and a modification to SJG's LGAC.
Under-recovered gas costs of $11.9 million as of October 31, 1999, and
carrying costs thereon, will be recovered over 3 years. The LGAC for the
period starting November 1999, will continue to operate as it has in the
past.
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 $65.8 million as of March 31, 2000.
Note 5. Commitments and Contingencies:
Construction Commitments - The estimated net cost of construction and
environmental remediation programs of SJG for 2000 totals $49.8 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 in the 1950s.
Since the early 1980s, SJG recorded environmental remediation costs of
$109.1 million, of which $58.1 million was spent as of March 31, 2000. With
the assistance of an outside consulting firm, we estimate that future costs
to clean up SJG's sites will range from $51.0 million to $161.3 million. We
recorded the lower end of this range as a liability. It is reflected on the
2000 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 we have been
successful in pursuing. We used these 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 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 No.
71, "Accounting for the Effects of Certain Types of Regulation." The BPU
allows SJG to recover expenditures through July 1998 and petitions to
recover costs through July 1999 are pending.
The other 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 on the
consolidating balance sheet under the captions, Current Liabilities and
Deferred Credits and Other Non-Current Liabilities. The deferred debit is a
SJG-10
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.
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, 2000, SJG's unamortized
remediation costs of $17.8 million are reflected on the consolidated balance
sheet under the caption Regulatory and Other Non-Current Assets. Since
implementing the RAC in 1992, SJG recovered $22.5 million through rates as
of March 31, 2000.
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 276,088 customers at March 31, 2000, compared with 269,108 customers at
March 31, 1999. 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 financial and operating performance, future plans and courses of
action and future economic conditions. All statements in this report other
than statements of historical fact are forward-looking statements. These
forward-looking statements are made based upon management's expectations and
beliefs concerning future events impacting the company and involve a number of
risks and uncertainties. We caution that forward-looking statements are not
guarantees and actual results could differ materially from those expressed or
implied in the forward-looking statements. Also, in making forward-looking
statements, we assume no duty to update these statements should expectations
change or actual results and events differ from current expectations.
A number of factors could cause our actual results to differ materially
from those anticipated, including, but not limited to the following: general
economic conditions on an international, 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 legal proceedings and environmental
liabilities; and changes in businesss strategies.
Customer Choice Legislation
Effective January 1, 2000, all residential natural gas customers in New
Jersey are able to choose their gas supplier under the terms of the Electric
Discount and Energy Competition Act of February 1999. Commercial and
industrial customers have had the ability to choose gas suppliers since 1987.
SJG's residential customers have been able to choose a gas supplier since April
of 1997 under a pilot program. As of March 31, 2000, 47,281 SJG residential
customers participated in the program . Customers' 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. While customer
choice can reduce utility revenues, it does not negatively affect SJG's net
income, financial condition or margins.
SJG-12
Energy Adjustment Clauses
SJG's BPU approved Temperature Adjustment Clause (TAC) had the
following impacts on 2000 and 1999 first quarter net earnings:
2000 1999
-------- --------
TAC Adjustment Increase to Net Income
($ in thousands)
Quarter Ended 3/31 $1,290 $1,276
While the revenue and income impacts of TAC adjustments are recorded
as incurred, cash inflows or outflows directly attributable to TAC adjustments
generally do not begin until the next TAC year. Each TAC year begins
October 1.
Results of Operations - Three Months Ended March 31, 2000
Compared to Three Months Ended March 31, 1999
- ---------------------------------------------
Operating Revenues
Revenues increased $11.9 million in the first quarter of 2000 compared
with the prior year period. The primary reasons for the increase were
increased off-system sales and 6,980 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 quarter of 2000 was 1.1% warmer than the prior
year period. Weather was 7.3% warmer for the first quarter than the 20-year
average. Revisions to SJG's TAC that became effective in October 1998
significantly reduced the weather related volatility in our revenues. Revenues
for 2000 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 month period ended March 31, 2000 vs. the same period ended
March 31, 1999.
SJG-13
1st Quarter
-----------
2000 1999
-------- --------
Operating Revenues (Thousands):
Firm
Residential $70,673 72,536
Commercial 16,280 16,185
Industrial 2,000 1,811
Cogeneration & Electric Generation 1,222 667
Firm Transportation 14,012 10,831
-------- --------
Total Firm Operating Revenues 104,187 102,030
Interruptible 499 340
Interruptible Transportation 484 533
Off-System 39,226 30,486
Capacity Release & Storage 1,861 874
Other 745 819
--------- ---------
Total Operating Revenues $147,002 $135,082
========= =========
Throughput (MMcf):
Firm
Residential 8,481 8,883
Commercial 2,166 2,216
Industrial 106 122
Cogeneration & Electric Generation 138 71
Firm Transportation 8,465 6,789
-------- --------
Total Firm Throughput 19,356 18,081
Interruptible 49 107
Interruptible Transportation 840 1,103
Off-System 12,070 14,314
Capacity Release & Storage 10,539 3,321
-------- --------
Total Throughput 42,854 36,926
======== ========
Gas Purchased for Resale
Gas purchased for resale increased $10.1 million for the first quarter
of 2000 compared with the same period in 1999 due principally to increased
sales volumes, particularly to off-system customers. SJG's gas cost during the
first three months of 2000 averaged $2.87/dt compared with $1.96/dt in 1999.
However, changes in gas costs do not directly effect Gas Purchased for Resale.
Fluctuations in gas costs not reflected in current rates are deferred and
addressed in future periods under a BPU approved Levelized Gas Adjustment
Clause (LGAC). Under the LGAC, fluctuations in gas costs not covered currently
are reflected in future customer rates. Gas supply sources include contract
and open-market purchases. SJG secures and maintains its own gas supplies to
serve its customers.
SJG-14
Operations
A summary of net changes in Utility Operations and Other Operations (in
thousands):
Three Months Ended
March 31,
2000 vs. 1999
-------------
Other Production Expense $1
Transmission (10)
Distribution 139
Customer Accounts and Services 285
Sales 20
Administration and General 216
Other (22)
-------
$629
=======
Customer Accounts and Services costs increased in the first quarter of
2000 due to temporarily increased staffing levels necessary to handle high call
volumes related to the deregulation process in New Jersey and higher bad debt
expense. Administrative and General costs increased for the three month
period from 1999 levels principally due to a change in the way management fees
are being charged from SJI to its subsidiaries.
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses
(in thousands):
Three Months Ended
March 31,
2000 vs. 1999
-------------
Maintenance $1,488
Depreciation 309
Income Taxes (110)
Other Taxes (121)
Maintenance is higher due to higher levels of Remediation Adjustment
Clause (RAC) amortization. This additional amortization expense is recovered
during the current period through rates (See Regulatory Matters). Depreciation
is higher due to increased investment in property, plant and equipment by SJG.
SJG-15
Interest Charges
Interest charges were flat in the first quarter of 2000 compared with
the prior year period. Increased debt outstanding and higher interest rates
in 2000 were largely offset by recoveries of carrying costs associated with
unrecovered RAC and purchased gas costs. 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 $130.0 million, of which $48.0 million was available at
March 31, 2000. The credit lines are uncommitted and unsecured with interest
rates typically available based upon the Federal Funds Rates or London
Interbank Offered Rates (LIBOR).
The changes in cash flows from operating activities (in thousands):
Three Months Ended
March 31,
2000 vs. 1999
-------------
Increases/(Decreases):
Net Income Applicable to Common Stock ($424)
Depreciation and Amortization 828
Provision for Losses on Accounts Receivable 9
Revenues and Fuel Costs Deferred - Net (5,850)
Deferred and Non-Current Income Taxes and
Credits - Net 932
Environmental Remediation Costs-Net 1,534
Accounts Receivable 4,212
Inventories 806
Prepayments and Other Current Assets 0
Prepaid and Accrued Taxes - Net (7,217)
Accounts Payable and Other Accrued Liabilities 825
Other - Net (1,832)
-------
Net Cash Provided by Operating
Activities ($6,177)
=======
SJG-16
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 changes in off-system
sales activity and SJG's sales volumes. Weather and commodity prices are the
ariables that primarily impact these sales. Changes impact cash flows when
collected in subsequent periods.
Changes in Inventories reflect the impact of seasonal requirements,
temperatures and commodity 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
Rate Actions
In February 1999, the Electric Discount and Energy Competition Act (the
Act) was signed into law in New Jersey. This bill created the framework and
necessary time schedules for the restructuring of the state's electric and
natural gas utilities. The Act established unbundling, where redesigned
utility rate structures allow natural gas and electric consumers to choose
their energy supplier. It also established time frames for instituting
SJG-17
competitive services for customer accounting functions and to determine
whether basic gas supply services should become competitive.
SJG received BPU approval of its unbundling settlement in January 2000.
In addition to allowing all customers to select their own gas supplier, the
approval incented customers to choose a supplier other than SJG with a Market
Development Credit (MDC). This credit is available to customers through
December 2001. The credit, approximately $2.5 million plus carrying costs,
appears on our books as a Deferred Credit. Therefore, the MDC will not
materially impact future periods.
The unbundling settlement also provided SJG with the ability to recover
carrying costs on unrecovered remediation costs under the RAC, while holding
the current RAC rate in effect through October 2002. Our RAC rate last changed
in September 1999. SJG's LGAC was also modified by the unbundling process.
Under-recovered gas costs of $11.9 million as of October 31, 1999, and related
carrying costs, will be recovered over 3 years. The LGAC for the period
starting November 1999, continues to operate as it has in the past.
The Act also contains numerous provisions requiring the BPU to
promulgate and adopt a variety of standards related to implementing the Act.
These required standards address fair competition, affiliate relations,
accounting, competitive services, supplier licensing, consumer protection and
aggregation. In March 2000, the BPU issued Interim Standards in response to
the Act. We believe the standards will not have a material adverse affect on
the company.
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
three months of 2000 amounted to $2.1 million. The costs for 2000, 2001 and
2002 are estimated at approximately $49.8 million, $45.5 million and $51.9
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-18
PART II OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part
I, Item 1, Note 5, beginning on page 10.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The company has interest rate risk exposure related to short-term debt.
For information regarding SJG's exposure related to market risk, see Item 7A in
SJG's most recently filed Form 10-K. SJG's market risks have not materially
changed from December 31, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule (submitted only in
electronic format to the Securities and
Exchange Commission).
SJG-19
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 15, 2000 By: /s/ David A. Kindlick
David A. Kindlick
Senior Vice President, Finance & Rates
Dated: May 15, 2000 By: /s/ William J. Smethurst, Jr.
William J. Smethurst, Jr.
Vice President and Treasurer
SJG-20
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-21
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 535,700
<OTHER-PROPERTY-AND-INVEST> 1,701
<TOTAL-CURRENT-ASSETS> 92,972
<TOTAL-DEFERRED-CHARGES> 101,256
<OTHER-ASSETS> 599
<TOTAL-ASSETS> 732,228
<COMMON> 5,848
<CAPITAL-SURPLUS-PAID-IN> 117,817
<RETAINED-EARNINGS> 71,851
<TOTAL-COMMON-STOCKHOLDERS-EQ> 195,516
35,000
2,044
<LONG-TERM-DEBT-NET> 181,373
<SHORT-TERM-NOTES> 82,000
<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> 227,419
<TOT-CAPITALIZATION-AND-LIAB> 732,228
<GROSS-OPERATING-REVENUE> 147,002
<INCOME-TAX-EXPENSE> 12,608
<OTHER-OPERATING-EXPENSES> 111,002
<TOTAL-OPERATING-EXPENSES> 123,610
<OPERATING-INCOME-LOSS> 23,392
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 23,392
<TOTAL-INTEREST-EXPENSE> 5,027
<NET-INCOME> 18,365
771
<EARNINGS-AVAILABLE-FOR-COMM> 17,594
<COMMON-STOCK-DIVIDENDS> 4,200
<TOTAL-INTEREST-ON-BONDS> 3,833
<CASH-FLOW-OPERATIONS> 48,905
<EPS-BASIC> 7.52
<EPS-DILUTED> 7.52
</TABLE>
