-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RPnPCKuRs8+LweCh1uSEprbE7DknZIFFNKbsFnKvp56g/D+s+Tpn0WunHnirYFIJ xvevtJD8tOcmg89EFCeXjg== 0001035216-02-000005.txt : 20020814 0001035216-02-000005.hdr.sgml : 20020814 20020814112434 ACCESSION NUMBER: 0001035216-02-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTH JERSEY GAS CO/NEW CENTRAL INDEX KEY: 0001035216 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 210398330 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22211 FILM NUMBER: 02732584 BUSINESS ADDRESS: STREET 1: NUMBER ONE SOUTH JERSEY PLAZA STREET 2: ROUTE 54 CITY: FOLSOM STATE: NJ ZIP: 08037 BUSINESS PHONE: 6095619000 MAIL ADDRESS: STREET 1: NUMBER ONE SOUTH JERSEY PLAZA STREET 2: ROUTE 54 CITY: FOLSOM STATE: NJ ZIP: 08037 10-Q 1 sjg10q602.txt SOUTH JERSEY GAS CO FORM 10Q P/E 6/30/02 ================================================================================ 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 June 30, 2002 Commission File Number 000-22211 SOUTH JERSEY GAS COMPANY (Exact name of registrant as specified in its charter) New Jersey 21-0398330 (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 August 1, 2002 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. ================================================================================ PART I -- FINANCIAL INFORMATION Item 1. Financial Statements-- See Pages 3 through 11 SJG-2 SOUTH JERSEY GAS COMPANY AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In Thousands Except for Per Share Data)
Three Months Ended June 30, -------------------------------------- 2002 2001 ----------------- ----------------- Operating Revenues $ 65,007 $ 81,071 ----------------- ----------------- Operating Expenses: Gas Purchased for Resale 41,093 58,560 Utility Operations 10,460 9,458 Maintenance 1,673 1,788 Depreciation 5,559 5,251 Energy and Other Taxes 2,039 1,864 ----------------- ----------------- Total Operating Expenses 60,824 76,921 ----------------- ----------------- Operating Income 4,183 4,150 Other Income and Expense - Net 569 21 Interest Charges 4,383 4,687 Preferred Dividend Requirements 764 767 ----------------- ----------------- Loss Before Income Taxes (395) (1,283) Income Taxes (Benefit) (70) (377) ----------------- ----------------- Loss from Continuing Operations (325) (906) Loss from Discontinued Operations - Net - (46) ----------------- ----------------- Net Loss Applicable to Common Stock $ (325) $ (952) ================= ================= Average Shares of Common Stock Outstanding 2,339 2,339 ================= ================= Earnings Per Common Share Continuing Operations $ (0.14) $ (0.39) Discontinued Operations - Net 0.00 (0.02) ----------------- ----------------- Earnings Per Common Share $ (0.14) $ (0.41) ================= ================= Dividends Declared Per Common Share $ 0.87 $ 1.87 ================= ================= The accompanying footnotes are an integral part of the financial statements.
SJG-3 SOUTH JERSEY GAS COMPANY AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In Thousands Except for Per Share Data)
Six Months Ended June 30, -------------------------------------- 2002 2001 ----------------- ----------------- Operating Revenues $ 219,190 $ 300,210 ----------------- ----------------- Operating Expenses: Gas Purchased for Resale 140,526 219,900 Utility Operations 20,081 18,977 Maintenance 3,090 4,673 Depreciation 11,036 10,434 Energy and Other Taxes 5,822 6,280 ----------------- ----------------- Total Operating Expenses 180,555 260,264 ----------------- ----------------- Operating Income 38,635 39,946 Other Income and Expense - Net 454 70 Interest Charges 8,887 10,253 Preferred Dividend Requirements 1,529 1,533 ----------------- ----------------- Income Before Income Taxes 28,673 28,230 Income Taxes 12,059 11,953 ----------------- ----------------- Income from Continuing Operations 16,614 16,277 Loss from Discontinued Operations - Net - (97) ----------------- ----------------- Net Income Applicable to Common Stock $ 16,614 $ 16,180 ================= ================= Average Shares of Common Stock Outstanding 2,339 2,339 ================= ================= Earnings Per Common Share Continuing Operations $ 7.10 $ 6.96 Discontinued Operations - Net 0.00 (0.04) ----------------- ----------------- Earnings Per Common Share $ 7.10 $ 6.92 ================= ================= Dividends Declared Per Common Share $ 2.82 $ 3.74 ================= ================= The accompanying footnotes are an integral part of the financial statements.
SJG-4 SOUTH JERSEY GAS COMPANY AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands)
(Unaudited) June 30, December 31, -------------------------------------------------------- 2002 2001 2001 --------------- ---------------- ------------------ Assets Property, Plant and Equipment: Utility Plant, at original cost $ 822,053 $ 783,349 $ 805,440 Accumulated Depreciation (229,078) (215,429) (221,457) --------------- ---------------- ------------------ Property, Plant and Equipment - Net 592,975 567,920 583,983 --------------- ---------------- ------------------ Available-for-Sale Securities 3,249 2,689 3,093 --------------- ---------------- ------------------ Current Assets: Cash and Cash Equivalents 4,129 3,962 3,276 Accounts Receivable 41,258 58,471 39,243 Unbilled Revenues 8,482 10,953 32,398 Provision for Uncollectibles (1,877) (1,732) (1,916) Natural Gas in Storage, average cost 39,047 41,487 59,778 Materials and Supplies, average cost 3,755 4,061 3,818 Prepaid Taxes 11,621 13,872 4,650 Prepayments and Other Current Assets 3,941 3,072 2,799 --------------- ---------------- ------------------ Total Current Assets 110,356 134,146 144,046 --------------- ---------------- ------------------ Regulatory Assets: Environmental Remediation Costs: Expended - Net 7,016 11,287 12,831 Liability for Future Expenditures 48,790 51,029 48,790 Gross Receipts and Franchise Taxes 2,032 2,476 2,254 Income Taxes - Flowthrough Depreciation 9,086 10,064 9,575 Deferred Fuel Cost - Net 37,414 37,480 36,798 Deferred Postretirement Benefit Costs 3,969 4,347 4,158 Other Regulatory Assets 5,476 2,257 2,386 --------------- ---------------- ------------------ Total Regulatory Assets 113,783 118,940 116,792 --------------- ---------------- ------------------ Other Non-Current Assets: Unamortized Debt Discount and Expense 5,709 5,024 5,957 Other 3,080 1,606 3,935 --------------- ---------------- ------------------ Total Regulatory and Other Non-Current Assets 8,789 6,630 9,892 --------------- ---------------- ------------------ Total Assets $ 829,152 $ 830,325 $ 857,806 =============== ================ ================== The accompanying footnotes are an integral part of the financial statements.
SJG-5 SOUTH JERSEY GAS COMPANY AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands)
(Unaudited) June 30, December 31, -------------------------------------------------------- 2002 2001 2001 --------------- ---------------- ------------------ 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 135,317 125,817 132,817 Accumulated Other Comprehensive Loss (2,083) - (1,939) Retained Earnings 79,269 72,866 69,256 --------------- ---------------- ------------------ Total Common Equity 218,351 204,531 205,982 --------------- ---------------- ------------------ Preferred Stock and Securities: Redeemable Cumulative Preferred - Par Value $100 per share, Authorized 41,966 shares, respectively Outstanding: Series B, 8% - 16,904 shares 1,690 1,690 1,690 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 36,690 36,690 36,690 --------------- ---------------- ------------------ Long-Term Debt 217,514 195,247 230,247 --------------- ---------------- ------------------ Total Capitalization 472,555 436,468 472,919 --------------- ---------------- ------------------ Current Liabilities: Notes Payable 102,900 138,600 135,500 Current Maturities of Long-Term Debt 9,733 11,876 9,733 Accounts Payable 29,705 35,856 32,391 Deferred Income Taxes - Net 25,074 29,592 25,503 Customer Deposits 6,484 5,516 5,976 Environmental Remediation Costs 11,052 15,872 11,052 Taxes Accrued 2,823 483 2,904 Derivatives 243 - - Interest Accrued and Other Current Liabilities 10,189 11,017 7,752 --------------- ---------------- ------------------ Total Current Liabilities 198,203 248,812 230,811 --------------- ---------------- ------------------ Deferred Credits and Other Non-Current Liabilities: Deferred Income Taxes - Net 92,882 86,682 86,172 Environmental Remediation Costs 37,738 35,157 37,738 Pension and Other Postretirement Benefits 15,022 11,148 17,736 Investment Tax Credits 3,992 4,340 4,166 Other 8,760 7,718 8,264 --------------- ---------------- ------------------ Total Deferred Credits and Other Non-Current Liabilities 158,394 145,045 154,076 --------------- ---------------- ------------------ Commitments and Contingencies (Note 5) Total Capitalization and Liabilities $ 829,152 $ 830,325 $ 857,806 =============== ================ ================== The accompanying footnotes are an integral part of the financial statements.
SJG-6 SOUTH JERSEY GAS COMPANY AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Six Months Ended June 30, ------------------------------------- 2002 2001 ---------------- ---------------- Cash Flows from Operating Activities: Net Income Applicable to Common Stock $ 16,614 $ 16,180 Adjustments to Reconcile Net Income to Cash Flows Provided by Operating Activities: Depreciation and Amortization 12,204 11,586 Provision for Losses on Accounts Receivable 860 680 Revenues and Fuel Costs Deferred - Net (616) (8,670) Deferred and Non-Current Income Taxes and Credits - Net 6,606 8,554 Environmental Remediation Costs - Net 5,815 7,187 Changes in: Accounts Receivable 21,002 41,614 Inventories 20,794 (9,742) Prepayments and Other Current Assets (1,141) (432) Prepaid and Accrued Taxes - Net (7,052) (9,871) Accounts Payable and Other Accrued Liabilities 259 (40,876) Other - Net (3,062) (1,252) ---------------- ---------------- Net Cash Provided by Operating Activities 72,283 14,958 ---------------- ---------------- Cash Flows from Investing Activities: Capital Expenditures, Cost of Removal and Salvage (21,773) (21,561) Purchase of Available-for-Sale Securities (194) (252) ---------------- ---------------- Net Cash Used in Investing Activities (21,967) (21,813) ---------------- ---------------- Cash Flows from Financing Activities: Net (Repayments of) Borrowings from Lines of Credit (32,600) 24,700 Principal Repayments of Long-Term Debt (12,733) (9,734) Dividends on Common Stock (6,600) (8,750) Proceeds from Issuance of Long-Term Debt (30) (114) Additional Investment by Shareholder 2,500 - ---------------- ---------------- Net Cash (Used in) Provided by Financing Activities (49,463) 6,102 ---------------- ---------------- Net Increase (Decrease) in Cash and Cash Equivalents 853 (753) Cash and Cash Equivalents at Beginning of Period 3,276 4,715 ---------------- ---------------- Cash and Cash Equivalents at End of Period $ 4,129 $ 3,962 ================ ================ The accompanying footnotes are an integral part of the financial statements.
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. We reclassified some previously reported amounts to conform with current year classifications. In our 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. Our 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. The financial statements should be read in conjunction with SJG's 2001 Form 10K. 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. Derivative Instruments -- In April 2002, we executed an interest rate swap that effectively fixes the interest rate on $40 million of bank debt at 3.57% through March 15, 2003. We entered into this interest rate swap agreement to hedge the exposure to an increase in interest rates with respect to our variable rate debt. The differential to be paid or received as a result of this swap agreement is accrued as interest rates change and recognized as an adjustment to interest expense. This interest rate swap is accounted for as a cash flow hedge pursuant to Financial Accounting Standards Board (FASB) Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" adopted January 1, 2001. As of June 30, 2002, the market value of this swap was ($242,891), which represents the amount we would pay to terminate this contract as of that date. This balance is included on the 2002 condensed consolidated balance sheet under the caption Derivatives. As of June 30, 2002, we calculated the swap to be highly effective; therefore, the offset to the hedge liability is recorded, net of taxes, in Accumulated Other Comprehensive Loss. Fair value of the derivative investments is determined by reference quotations from independent parties. New Accounting Pronouncements -- In June 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations." Statement No. 143 establishes accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SJG expects to adopt Statement No. 143 in 2003. SJG-8 In August 2001, the FASB also issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which is effective in 2003. This statement prescribes that a single accounting model be used for valuing long-lived assets to be disposed of and broadens the presentation of discontinued operations. We are currently evaluating the effects of Statement Nos. 143 and 144; however, they are not expected to materially impact SJG's financial condition or results of operations. Note 2. Regulatory Actions: In January 1997, the New Jersey Board of Public Utilities (BPU) granted SJG 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. SJG keeps 100% of pre-tax margins up to the threshold level of $7.8 million and 20% of margins above that level. In 1998, the BPU revised the Sharing Formula to credit 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. In September 1999, the BPU approved an annual recovery level of $6.5 million for remediation costs expended from August 1995 through July 1998. This represents an annual increase of approximately $4.5 million over the recovery previously included in rates. In January 2000, the BPU approved the recovery of carrying costs on unrecovered remediation costs and a proposal by SJG to keep its current Remediation Adjustment Clause (RAC) rate in effect through October 2002. However, due to substantial RAC insurance recoveries, in October 2001, SJG filed for a RAC rate decrease. This proposal would reduce the annual recovery level to $4.2 million, if approved. 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 June 30, , 2002, 66,758 of SJG's customers were purchasing their gas commodity from someone other than SJG. The bills of those using a gas supplier other than SJG are reduced for cost of gas charges and applicable taxes. SJG's net income, financial condition and margins are not affected as a result of the unbundling. On November 15, 2001, SJG filed for a $17.6 million reduction to its LGAC and for recovery of a 3-year net deficiency in the Temperature Adjustment Clause (TAC) amounting to $2.7 million. The BPU approved the LGAC reduction effective December 1, 2001, but has yet to approve the TAC adjustment. Also on December 1, 2001, SJG implemented recovery of its October 31, 2001 underrecovered gas costs through its new GCUA clause. We will recover $48.9 million over three years including interest accrued since April 1, 2001. We will also recover interest for the 3-year amortization period at a rate of 5.75%. In May 2002, SJG received approval from the BPU to reduce its overcollected LGAC balance by $17.6 million. The BPU order approved the company's request to issue credits on customer bills proportionate with each customer's contribution to the overcollection. This refund did not affect SJG's net income or financial condition. SJG-9 Note 3. Common Equity: Restrictions exist under various loan agreements regarding the amount of cash dividends or other distributions that we may pay on our common stock. SJG's retained earnings, which are free of these restrictions, were approximately $77.5 million as of June 30, 2002. SJG received an equity infusion of $2.5 million from SJI on April 22, 2002. Contributions of capital are credited to Other Paid-In Capital and Premium on Common Stock. Future equity contributions will occur on an as needed basis. Note 4. Discontinued Operations: In 2001, SJG formally discontinued the merchandising segment of its operations. Summarized operating results of the discontinued operations were (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 ------------------------------------------- Operating Revenues $ 26 $ 383 $ 26 $ 556 =========================================== Loss before Income Taxes $ - $ (78) $ - $ (164) Income Tax - 32 - 67 ------------------------------------------- Loss from Discontinued Operations $ - $ (46) $ - $ (97) =========================================== Loss Per Common Share from Discontinued Operations - Net $ 0.00 $(0.02) $ 0.00 $(0.04) =========================================== Note 5. Commitments and Contingencies: Construction and Environmental Commitments -- SJG's estimated cost of construction and environmental remediation programs for 2002 totals $60.1 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. In Management's opinion, the ultimate disposition of these claims will not have a material adverse effect on SJG's financial position, results of operations or liquidity. 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. SJG-10 SJG successfully entered into settlements with all of its historic comprehensive general liability carriers regarding the environmental remediation expenditures at our sites. Also, we have purchased a Cleanup Cost Cap Insurance Policy limiting the amount of remediation expenditures that we will be required to make at 11 of our sites. This policy will be in force until 2024 at 10 sites and until 2029 at one site. The following future cost estimates were reduced by projected insurance recoveries from the Cleanup Cost Cap Insurance Policy. Since the early 1980s, SJG accrued estimated environmental remediation costs of $128.5 million, of which $79.7 million was spent as of June 30, 2002. With the assistance of a consulting firm, we estimate that future costs to clean up SJG's sites will range from $48.8 million to $143.5 million. We recorded the lower end of this range as a liability. It is reflected on the 2002 condensed consolidated balance sheet under the captions Current Liabilities and Deferred Credits and Other Non-Current Liabilities. 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 remediation technology, government regulations and site-specific requirements. SJG has two regulatory assets associated with environmental cost (see Note 1 under Other Regulatory Assets). The first asset is titled Environmental Remediation Cost: Expended - Net. This asset represents what was actually spent to clean up former gas manufacturing plant sites, net of recoveries. These costs meet the requirements of FASB Statement No. 71, "Accounting for the Effects of Certain Types of Regulation." The BPU allows SJG to recover expenditures through the RAC. The other 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." We recorded this amount, which relates to former manufactured gas plant sites, as a deferred debit with the corresponding amount reflected on the condensed consolidating balance sheet under the captions, Current Liabilities and Deferred Credits and Other Non-Current Liabilities. The deferred debit is a regulatory asset under Statement No. 71. The BPU's intent, evidenced by current practice, is to allow SJG to recover the deferred costs after they are spent over 7-year periods. As of June 30, 2002, we reflected SJG's unamortized remediation costs of $7.0 million on the condensed consolidated balance sheet under the caption Regulatory and Other Non-Current Assets. Since implementing the RAC in 1992, SJG recovered $32.4 million through rates as of June 30, 2002. SJG-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG distributes natural gas to 291,691 customers in the seven southernmost counties of New Jersey. SJG also: - makes off-system sales of natural gas on a wholesale basis to various customers on the interstate pipeline system; - transports natural gas purchased directly from producers or suppliers for its own sales and for some of its customers; and - services appliances via the sale of appliance warranty programs, as well as on a time and materials basis. 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, national, state and local level; weather conditions in our marketing areas; changes in commodity costs; regulatory and court decisions; competition in our utility activities; the availability and cost of capital; costs and effects of legal proceedings and environmental liabilities; the failure of customers or suppliers to fulfill their contractual obligations; and changes in business strategies. Customer Choice Legislation All natural gas customers in New Jersey are able to choose their gas supplier. As of June 30, 2002, 66,758 SJG customers chose a natural gas supplier other than the utility. This number increased from 33,520 at June 30, 2001 as third party marketers were able to offer natural gas at prices competitive with those available to consumers under regulated utility tariffs. The bills of SJG-12 customers choosing to purchase natural gas from providers other than the utility 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 or financial condition. Temperature Adjustment Clause SJG's Board of Public Utilities approved Temperature Adjustment Clause (TAC) had the following impacts on 2002 and 2001 second quarter and six month net earnings: 2002 2001 -------------------------- TAC Adjustment Increase (Decrease) to Net Income ($ in thousands) Quarter Ended 6/30 $ 247 $ 272 Six Months Ended 6/30 $ 3,249 $ 132 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 and Six Months Ended June 30, 2002 Compared to Three and Six Months Ended June 30, 2001 Operating Revenues Revenues decreased $16.1 million and $81.0 million in the second quarter and first six months of 2002 compared with the prior year periods. The decreases were primarily due to three factors. First, weather in the second quarter 2002 was 1.4% warmer and 14.5% warmer for the first six months than the prior year periods. Second, a significantly higher number of residential customers utilized a third party marketer instead of SJG as their gas supplier. Third, off-system sales revenues decreased for the second quarter and the first six months of 2002 primarily due to lower prices for natural gas sold. Lower off-system sales volumes in the second quarter 2002 contributed to the decrease in sales revenues over last year, however, sales volumes year-to-date are slightly higher. Partially offsetting the effect of these factors was an additional 7,711 customers compared to same time last year. As a result of SJG's TAC, revenues from utility ratepayers are closely tied to 20-year normal temperatures calculated under the TAC and not actual temperatures. While the TAC significantly reduces fluctuations in revenues related to temperature, as a general rule, revenues continue to be positively impacted by colder weather and negatively impacted by warmer weather. Weather was 9.2% warmer and 15.5% warmer for the second quarter and first six months of 2002, respectively, than the 20-year average. In comparison, weather for the SJG-13 second quarter and first six months of 2001 was 7.9% warmer and 1.2% warmer, respectively, than the 20-year average. The following is a comparison of operating revenue and throughput for the three and six month periods ended June 30, 2002 vs. the same periods ended June 30, 2001.
Three Months Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 ----------------------------------------------------------- Utility Operating Revenues (Thousands): Firm Residential $ 25,133 $ 28,464 $ 101,232 $ 124,823 Commercial 6,111 11,692 28,655 51,525 Industrial 838 555 2,547 2,503 Cogeneration & Electric Generation 2,963 2,009 3,579 2,657 Firm Transportation 8,394 5,027 22,658 14,459 ----------------------------------------------------------- Total Firm Utility Operating Revenues 43,439 47,747 158,671 195,967 Interruptible 307 251 546 937 Interruptible Transportation 327 285 802 597 Off-System 18,908 31,478 54,661 98,673 Capacity Release & Storage 1,136 1,022 2,830 2,848 Other 890 288 1,680 1,188 ----------------------------------------------------------- Total Utility Operating Revenues $ 65,007 $ 81,071 $ 219,190 $ 300,210 =========================================================== Throughput (MMcf): Firm Residential 2,229 2,215 9,371 11,372 Commercial 684 1,091 3,018 5,305 Industrial 24 25 115 173 Cogeneration & Electric Generation 635 352 722 376 Firm Transportation 5,311 4,802 12,794 10,586 ---------------------------------------------------------- Total Firm Throughput 8,883 8,485 26,020 27,812 Interruptible 55 57 103 116 Interruptible Transportation 683 609 1,640 1,230 Off-System 4,940 6,153 16,243 15,623 Capacity Release and Other 10,498 5,673 17,144 11,727 ---------------------------------------------------------- Total Throughput 25,059 20,977 61,150 56,508 ==========================================================
SJG-14 Gas Purchased for Resale Gas purchased for resale decreased $17.5 million and $79.4 million for the second quarter and first six months of 2002 compared with the same periods in 2001. The second quarter decrease was due principally to lower gas costs for off-system sales. The first six months decrease was also due to lower gas costs for off-system sales, as well as lower firm gas sales volume. Warmer weather and the migration of firm gas sales customers to transportation service were the main causes of the decrease in firm gas sales volume. SJG's gas cost during the first six months of 2002 averaged $4.60/dt compared with $5.91/dt in 2001. Unlike gas costs associated with off-system sales, changes in the cost of gas sold to utility ratepayers are not reflected in Gas Purchased for Resale as incurred. Fluctuations in gas costs to ratepayers not reflected in current rates are deferred and addressed in future periods under the Levelized Gas Adjustment Clause (LGAC) embedded in the utility rate structure. Gas supply sources include contract and open-market purchases. SJG secures and maintains its own gas supplies to serve its customers. We do not anticipate any difficulty renewing or replacing expiring contracts under substantially similar terms and conditions. Operations A summary of net changes in Utility Operations (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2002 vs. 2001 2002 vs. 2001 ---------------------------------- Other Production Expense $ 4 $ 29 Transmission 3 11 Distribution (71) 18 Customer Accounts and Services 496 786 Sales 23 11 Administration and General 547 249 ------------------------------ $ 1,002 $ 1,104 ============================== Customer Accounts and Services Costs increased primarily due to higher bad debt expense as accounts previously shut off for nonpayment were determined to be uncollectible. Administration and General Costs were higher due to increases in pension and employee welfare expenses primarily resulting from effects of the continuing poor performance of financial markets on retirement plan assets and increasing health care costs. SJG-15 Other Operating Expenses A summary of principal changes in other consolidated operating expenses (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2002 vs. 2001 2002 vs. 2001 --------------------------------------- Maintenance $ (115) $ (1,583) Depreciation $ 308 $ 602 Energy and Other Taxes $ 175 $ (458) Maintenance expense decreased in the first six months of 2002 primarily due to lower levels of Remediation Adjustment Clause (RAC) amortization recognized during the first quarter. RAC-related expenses do not affect earnings as an offsetting amount is recognized in revenues. Depreciation is higher due to increased investment in property, plant and equipment by SJG. Changes in Energy and Other Taxes relate primarily to changes in SJG's firm and interruptible throughput of gas. Other Income and Expense Other income and expense was higher in the second quarter and the first six months of 2002 compared with the prior year periods due to a pre-tax gain of $639,300 on the sale of stock received as a result of the demutualization of Prudential's mutual life insurance company. Interest Charges Interest charges were lower in the second quarter and the first six months of 2002 compared with the prior year periods due primarily to reductions in short-term rates on line of credit borrowings. The effect of lower short-term rates was partially offset by the interest expense associated with higher levels of long-term debt outstanding in the first six months of 2002. 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 and Capital Resources Liquidity needs at SJG are driven by factors that include natural gas commodity prices; lags in fully collecting gas costs from customers under the LGAC clause; the timing of construction and remediation expenditures and related permanent financings; mandated tax payment dates; and requirements to repay long-term debt. SJG-16 We first seek to meet liquidity needs with cash from operations. We utilize short-term borrowings under lines of credit from commercial banks to supplement cash from operations where necessary. Lines of credit available to SJG totaled $120.0 million at June 30, 2002, of which $102.9 million was utilized. All but $10 million of these lines are made available through five commercial banks on an uncommitted basis. The banks and SJI review and renew the lines annually. The $10 million line is extended on a committed basis, maturing May 2003, by a sixth commercial bank. SJG has long-standing relationships with all of these banks and we believe, based upon ongoing dialogue, that there will continue to be sufficient credit available to meet our business' future liquidity needs. SJG supplements its operating cash flow and credit lines with both debt and equity capital. Over the years, SJG has utilized long-term debt, primarily in the form of First Mortgage Bonds, to finance its long-term needs. These needs are primarily capital expenditures for property, plant and equipment. Since 1998, SJG has financed these needs via a Medium Term Note (MTN) program, secured in similar fashion to the First Mortgage Bonds. In July 2001, SJG issued the final $35 million of notes available under that program in three transactions: $10 million at 6.74% maturing 2011; $15 million at 6.57% maturing 2011; and $10 million at 6.50% maturing 2016. We used note proceeds to retire short-term debt. We anticipate establishing a new MTN program during the third quarter of 2002. Current maturities on long-term debt over the next five years are as follows: $9.7 million in 2002; $12.9 million per year in 2003 through 2005; and $11.2 million in 2006. SJI contributed $2.5 million of capital to SJG during April 2002. Contributions of capital are credited to Other Paid-in Capital and Premium on Common Stock. Capital Expenditures, Commitments and Contingencies Capital Expenditures 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 six months of 2002 amounted to $16.0 million. We estimate the net costs for 2002, 2003 and 2004 at approximately $60.1 million, $62.4 million and $56.3 million, respectively. Commitments and Contingencies SJG has certain commitments for both pipeline capacity and gas supply for which it pays fees regardless of usage. Those commitments average $51.2 million annually and total $335.7 million over the contracts' lives. Approximately 70% of the financial commitment under these contracts expires during the next five years. SJG recovers all prudently incurred fees through rates via the LGAC. SJG-17 Regulatory Matters Rate Actions In November 2001, SJG filed for a $17.6 million rate reduction to its LGAC and for recovery of a 3-year net deficiency in its TAC amounting to $2.7 million. The BPU approved the LGAC rate reduction effective December 1, 2001 but has yet to approve the TAC adjustment. Also on December 1, 2001, SJG implemented recovery of its October 31, 2001 underrecovered gas costs. SJG was authorized to recover $48.9 million over three years including interest accrued since April 1, 2001. SJG recovered $9.8 million as of June 30, 2002. SJG will also recover interest for the 3-year amortization period at a rate of 5.75%. In May 2002, SJG received approval from the BPU to reduce its overcollected LGAC balance by $17.6 million. The BPU order approved the company's request to issue credits on customer bills coincident with each customer's contribution to the overcollection. This refund did not affect SJG's net income or financial condition. Other matters are incorporated by reference to Note 2 to the condensed consolidated financial statements included as part of this report. Ratio of Earnings to Fixed Charges The company's ratio of earnings to fixed charges for each of the periods indicated is as follows: Twelve Months Ended Years Ended December 31, June 30, ------------------------ -------- 1997 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- ---- 2.6x 2.2x 2.5x 2.6x 2.6x 2.7x The ratio of earnings to fixed charges represents, on a pre-tax basis, the number of times earnings cover fixed charges. Earnings consist of net income, to which has been added fixed charges and taxes based on income of the company. Fixed charges consist of interest charges and preferred securities dividend requirements and an interest factor in rentals. SJG-18 Item 3. Quantitative and Qualitative Disclosures About Market Risks of the Company Commodity Market Risks SJG is subject to market risk due to fluctuations in natural gas prices. To limit exposure to fluctuations, SJG has at times entered into forward contracts. SJG recovers natural gas costs from ratepayers through the LGAC. Interest Rate Risk Our exposure to interest rate risk relates primarily to short-term, variable rate borrowings. A hypothetical 100 basis point increase in interest rates on $102.9 million of variable rate debt outstanding at June 30, 2002 would result in an $607,000 increase in our interest expense net of tax on an annual basis. In order to reduce exposure to an increase in interest rates on our variable rate debt, SJG entered into two interest rate swap agreements. The swaps effectively fixed the rate on $40 million of variable rate debt from April 2002 to March of 2003 at 3.57%. Our long-term debt is primarily issued at fixed rates and, consequently, interest expense is not significantly impacted by changes in market interest rates. SJG has $17.5 million of 9% first mortgage bonds that are prepayable at a premium beginning in September 2002. It is likely that these bonds will be prepaid and replaced with a debt issuance under a new medium term note program. Otherwise, our debt was issued with provisions that do not permit us to pre-pay a material amount of such debt during the next 12 months to take advantage of changes in interest rates. 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, beginning on page 10. Item 6. Exhibits and Reports on Form 8-K None 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: August 13, 2002 By: /s/ Charles Biscieglia ----------------------------------------------- Charles Biscieglia President & Chief Executive Officer Dated: August 13, 2002 By: /s/ David A. Kindlick ----------------------------------------------- David A. Kindlick Executive Vice President & Chief Financial Officer SJG-21 EX-99.1 3 sjgex991.txt SOUTH JERSEY GAS CO 10Q 6/30/02 OFFICERS CERT Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, SOUTH JERSEY GAS COMPANY AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of South Jersey Gas Company (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Charles Biscieglia, President & Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Charles Biscieglia Charles Biscieglia President & Chief Executive Officer August 13, 2002 EX-99.2 4 sjgex992.txt SOUTH JERSEY GAS CO 10Q 6/30/02 OFFICERS CERT Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, SOUTH JERSEY GAS COMPANY AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of South Jersey Gas Company (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David A. Kindlick, Executive Vice President & Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ David A. Kindlick David A. Kindlick Executive Vice President & Chief Financial Officer August 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----