-----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, RxJahtjXStepN6kB2cVy75nas35zx5vTL07QOwvi2PmniyGiN4F2lfMFgMpqfHbt e7IKzDsCgH+GKXuV8LCBPg== 0001035216-98-000002.txt : 19980514 0001035216-98-000002.hdr.sgml : 19980514 ACCESSION NUMBER: 0001035216-98-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: NONE 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: SEC FILE NUMBER: 000-22211 FILM NUMBER: 98618051 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 Page 1 of 26 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 1998 Commission File Number 1-12899 SOUTH JERSEY GAS COMPANY (Exact name of registrant as specified in its charter) New Jersey 22-0398330 (State of incorporation) (IRS employer identification no.) Number One South Jersey Plaza, Route 54, Folsom, NJ 08037 (Address of principal executive offices, including zip code) (609) 561-9000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of May 7, 1998, there were 2,339,139 shares of the registrant's common stock outstanding. All common shares are owned by South Jersey Industries, Inc., the parent company of South Jersey Gas Company. Exhibit Index on page 26 - Cover Page - PART I - FINANCIAL INFORMATION Item 1. Financial Statements -- See Pages 3 through 12 SJG-2 SOUTH JERSEY GAS COMPANY CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) (In Thousands Except for Share Data)
Three Months Ended March 31, ----------------------------- 1998 1997 ------------ ------------ OPERATING REVENUES: Utility $108,163 $126,066 Other 322 521 ------------ ------------ Total Operating Revenues 108,485 126,587 ------------ ------------ OPERATING EXPENSES: Gas Purchased for Resale 61,175 69,870 Operation - Utility 9,591 9,380 - Other 366 435 Maintenance 1,592 1,467 Depreciation 4,167 3,885 Federal Income Taxes 7,267 8,426 State, Local and Other Taxes 6,289 13,132 ------------ ------------ Total Operating Expenses 90,447 106,595 ------------ ------------ OPERATING INCOME 18,038 19,992 INTEREST CHARGES Long-Term Debt 3,839 3,374 Short-Term Debt 497 1,352 Other 109 99 ------------ ------------ Total Interest Charges 4,445 4,825 INCOME BEFORE PREFERRED DIVIDEND REQUIREMENTS 13,593 15,167 Preferred Stock Dividend Requirements 42 43 Preferred Securities Dividend Requirements 731 0 ------------ ------------ NET INCOME APPLICABLE TO COMMON STOCK $12,820 $15,124 ============ ============ AVERAGE SHARES OF COMMON STOCK OUTSTANDING 2,339,139 2,339,139 ============ ============ EARNINGS PER COMMON SHARE $5.48 $6.47 ============ ============ DIVIDENDS DECLARED PER COMMON SHARE $1.635 $1.635 ============ ============ The accompanying notes to the financial statements are an integral part of these statements.
SJG-3 SOUTH JERSEY GAS COMPANY CONDENSED CONSOLIDATED BALANCE SHEET (In Thousands)
(Unaudited) March 31, December 31, ------------------------- ------------- 1998 1997 1997 ------------ ------------ ------------- ASSETS PROPERTY, PLANT AND EQUIPMENT: Utility Plant, at original cost $628,430 $587,273 $619,489 Accumulated Depreciation (170,483) (160,755) (167,176) Gas Plant Acquisition Adjustment - Net 1,907 1,982 1,926 ------------ ------------ ------------- Property, Plant and Equipment - Net 459,854 428,500 454,239 ------------ ------------ ------------- CURRENT ASSETS: Cash and Cash Equivalents 6,661 7,700 6,596 Accounts Receivable: Customers 41,022 47,392 25,303 Unbilled Revenues 10,445 13,052 17,263 Merchandise 1,819 2,250 1,977 Other 1,529 1,102 2,836 Provision for Uncollectibles (1,032) (1,032) (1,032) Natural Gas in Storage, average cost 10,451 6,403 23,877 Materials and Supplies, average cost 4,410 4,056 4,509 Prepaid Gross Receipts & Franchise Taxes 0 0 566 Prepayments and Other Current Assets 1,537 1,303 1,661 ------------ ------------ ------------- Total Current Assets 76,842 82,226 83,556 ------------ ------------ ------------- ACCOUNTS RECEIVABLE - Merchandise 1,522 1,804 1,449 ------------ ------------ ------------- REGULATORY AND OTHER NON-CURRENT ASSETS: Environmental Remediation Costs: Expended - Net 20,939 15,864 21,041 Liability for Future Expenditures 52,400 41,700 52,400 Gross Receipts & Franchise Taxes 3,917 4,361 4,028 Income Taxes - Flowthrough Depreciation 13,754 14,732 13,999 Deferred Fuel Costs - Net 0 0 3,674 Deferred Postretirement Benefit Costs 5,988 5,354 6,150 Other 7,691 7,476 8,577 ------------ ------------ ------------- Total Regulatory and Other Non-Current Assets 104,689 89,487 109,869 ------------ ------------ ------------- TOTAL ASSETS $642,907 $602,017 $649,113 ============ ============ ============= The accompanying notes to the financial statements are an integral part of these statements.
SJG-4 SOUTH JERSEY GAS COMPANY CONDENSED CONSOLIDATED BALANCE SHEET (In Thousands)
(Unaudited) March 31, December 31, ------------------------- ------------- 1998 1997 1997 ------------ ------------ ------------- SHAREHOLDER'S EQUITY AND LIABILITIES COMMON EQUITY: Common Stock, Par Value $2.50 per share: Authorized - 4,000,000 shares Outstanding - 2,339,139 shares $5,848 $5,848 $5,848 Other Paid-In Capital and Premium on Common Stock 102,817 102,817 102,817 Retained Earnings 65,115 62,821 56,120 ------------ ------------ ------------- Total Common Equity 173,780 171,486 164,785 ------------ ------------ ------------- PREFERRED STOCK AND SECURITIES: Redeemable Cumulative Preferred - Par Value $100 per share, Authorized - 47,304, 48,204 and 47,304 shares, respectively Outstanding: Series A, 4.70%--3,000, 3,900 and 3,000 shares 300 390 300 Series B, 8.00%--19,242 shares 1,924 1,924 1,924 Company-Guaranteed Mandatorily Redeemable Preferred Securities of Subsidiary Trust Par Value $25 per share, 1,400,000 shares Authorized and Outstanding 35,000 0 35,000 ------------ ------------ ------------- Total Preferred Stock and Securities 37,224 2,314 37,224 ------------ ------------ ------------- LONG-TERM DEBT 173,672 182,548 175,860 ------------ ------------ ------------- Total Capitalization 384,676 356,348 377,869 ------------ ------------ ------------- CURRENT LIABILITIES: Notes Payable 32,100 37,200 45,900 Current Maturities of Long-Term Debt 8,876 6,603 8,876 Accounts Payable 32,055 28,494 45,623 Customer Deposits 5,988 5,932 5,871 Federal Income Taxes Accrued 5,602 6,041 514 State and Local Taxes Accrued 7,444 11,390 466 Environmental Remediation Costs 14,373 9,377 14,373 Interest Accrued and Other Current Liabilities 6,740 4,434 6,709 ------------ ------------ ------------- Total Current Liabilities 113,178 109,471 128,332 ------------ ------------ ------------- DEFERRED CREDITS AND OTHER NON-CURRENT LIABILITIES: Accumulated Deferred Income Taxes - Net 84,154 78,967 81,847 Investment Tax Credits 5,533 5,926 5,632 Deferred Revenues - Net 981 3,391 0 Pension and Other Postretirement Benefits 10,661 9,844 10,798 Environmental Remediation Costs 38,027 32,323 38,027 Other 5,697 5,747 6,608 ------------ ------------ ------------- Total Deferred Credits and Other Non-Current Liabilities 145,053 136,198 142,912 ------------ ------------ ------------- COMMITMENTS AND CONTINGENCIES TOTAL SHAREHOLDER'S EQUITY AND LIABILITIES $642,907 $602,017 $649,113 ============ ============ ============= The accompanying notes to the financial statements are an integral part of these statements.
SJG-5 SOUTH JERSEY GAS COMPANY CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) (In Thousands)
Three Months Ended March 31, ----------------------------- 1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income Applicable to Common Stock $12,820 $15,124 Adjustments to Reconcile Net Income to Cash Flows Provided by Operating Activities: Depreciation and Amortization 4,639 4,356 Provision for Losses on Accounts Receivable 237 190 Revenues and Fuel Costs Deferred - Net 4,655 3,795 Deferred and Non-Current Federal Income Taxes and Credits - Net 2,302 748 Environmental Remediation Costs - Net 102 (298) Changes in: Accounts Receivable (7,673) (14,630) Inventories 13,525 16,234 Prepayments and Other Current Assets 124 259 Accounts Payable and Other Accrued Liabilities (8,332) (11,109) State and Local Taxes Accrued 7,544 12,445 Other - Net (104) 1,540 ------------ ------------ Net Cash Provided by Operating Activities 29,839 28,654 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures, Cost of Removal & Salvage (9,961) (11,237) ------------ ------------ Net Cash Used in Investing Activities (9,961) (11,237) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net Repayments of Lines of Credit (13,800) (71,100) Proceeds from Issuance of Long-Term Debt 0 35,000 Principal Repayments of Long-Term Debt (2,188) (2,188) Dividends of Common Stock (3,825) (3,825) Payments for Issuance of Long-Term Debt and Preferred Securities 0 (696) Additional Investment by Shareholder 0 25,623 ------------ ------------ Net Cash Used in Financing Activities (19,813) (17,186) ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 65 231 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,596 7,469 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $6,661 $7,700 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid During the Period For: Interest (Net of Amounts Applicable to LGAC Overcollections and Amounts Capitalized) $5,128 $5,545 Income Taxes (Net of Refunds) ($191) ($751) The accompanying notes to the financial statements are an integral part of these statements.
SJG-6 Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Summary of Significant Accounting Policies: The Entity - The consolidated financial statements present the accounts of South Jersey Gas Company (the Company or SJG) and its wholly owned statutory trust subsidiary, SJG Capital Trust. South Jersey Industries, Inc. (Industries) owns all of the outstanding common stock of SJG. Certain reclassifications have been made of previously reported amounts to conform with classifications used in the current year. Estimates and Assumptions - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related disclosures. Therefore, actual results could differ from those estimates. Regulation - SJG is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU) and maintains its accounts in accordance with the prescribed Uniform System of Accounts of that Board (See Note 2). New Accounting Pronouncements - In June 1997, the FASB issued FASB No. 130, "Reporting Comprehensive Income". This statement, which establishes standards for reporting and disclosure of comprehensive income, is effective for annual periods beginning after December 15, 1997. The Company currently has no additional items qualifying as other comprehensive income under FASB No. 130 and, therefore, its adoption does not have any impact on the Company's financial statements. In June 1997, the FASB also issued FASB No. 131, "Disclosures about Segments of an Enterprise and Related Information", which is also effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the reporting of selected information about operating segments in the Company's interim and annual financial statements. The Company is evaluating whether the adoption of this statement will result in any change to its presentation of financial information. The Company adopted FASB No. 131 effective January 1, 1998; however, as permitted by this statement, segment information will not be reported in interim financial statements until 1999. State and Local Taxes - Legislation reforming the taxation of energy in New Jersey was adopted effective July 14, 1997. The new law eliminated the Gross Receipts and Franchise Tax (GRAFT), which was equivalent to approximately 13 percent of utility revenue and replaced it with a combination of taxes. Beginning January 1, 1998, retail sales of natural gas and electricity and utility services, including transportation, are subject to the 6 percent State Sales and Use Tax. Gas and electric utilities are also subject to the 9 percent State Corporation Business Tax (CBT) on income before taxes. To SJG-7 bridge the revenue gap created by the new tax law, the State imposed a Transitional Energy Facilities Assessment (TEFA) on volumes of gas sold and transported. The TEFA will be phased out over a 5-year period beginning January 1, 1999 and ending January 1, 2003. It is expected that the revised tax policy will eliminate tax disparities between utility and nonutility suppliers, providing fair competition and lower energy costs for the consumer. The adoption of the new legislation does not materially affect the Company's financial position, results of operations or liquidity (See Note 2). However, since the Sales and Use Tax is not included in reported utility revenues or tax expense, as GRAFT had been previously, equal reductions in these line items on the Condensed Statements of Consolidated Income will result. Note 2. Recent Regulatory Actions: On July 31, 1996 and 1997, SJG made its annual filings with the BPU to recover remediation costs expended during the period of August 1995 through July 1997 totaling $1.6 million. Both filings were subsequently updated and are still pending at the BPU (See Note 6). On January 27, 1997, the BPU granted SJG a base rate increase of $6.0 million based on a 9.62 percent rate of return on rate base, which included an 11.25 percent return on common equity. The majority of this increase comes from residential and small commercial customers. Part of the increase is recovered from new miscellaneous service fees which charge specific customers for costs they cause SJG to incur. Additionally, SJG is now allowed to retain the first $5.5 million of pre-tax margins generated by interruptible and off-system sales and transportation and 20 percent of pre-tax margins above that level. In 1998, this $5.5 million threshold will increase by the annual revenue requirement associated with specified major construction projects. These sharing formula improvements are expected to result in additional rate relief of approximately $0.3 million in 1998 and $1.9 million in 1999. As part of the tariff changes approved in the rate case, SJG initiated its pilot program in April 1997, giving residential customers a choice of gas supplier. During the enrollment period, which ended June 30, 1997, nearly 13,000 residential customers applied for this service. Transportation of gas for these customers began on August 1, 1997. Participant's bills are reduced for certain cost of gas charges and applicable taxes. The resulting decrease in revenues is offset by a corresponding decrease in SJG's gas costs and taxes under SJG's BPU-approved fuel clause. The program does not affect its net income, financial condition or margins. In addition, because the program affects only 5 percent of SJG's residential customers, any reduction in revenue is not material. Also, SJG further expanded the choices available to commercial and industrial customers, including a new transportation tariff providing savings to qualified customers. On September 9, 1997, SJG filed with the BPU to adjust rates by replacing the current State Gross Receipts and Franchise Tax components with a Sales and Use Tax, a Corporation Business Tax and a Transitional Energy Facilities Assessment. The new rates SJG-8 became effective January 1, 1998 on an interim basis subject to refund upon final BPU order which is expected in the second quarter of 1998. In September 1996, SJG filed to reduce its rates through its 1996-1997 Levelized Gas Adjustment Clause (LGAC) reflecting a $1.4 million decrease in natural gas costs. Updated projections of 1996-1997 LGAC year results were rolled into the 1997-1998 LGAC year and filed with the BPU. On September 12, 1997, SJG made its annual LGAC, Temperature Adjustment Clause (TAC) and Demand Side Management Clause (DSMC) filings with the BPU for the period November 1997 through October 1998. In this filing, SJG requested an increase in the annual level of LGAC recovery of $4.7 million which is inclusive of 1996-1997 LGAC year results referred to above. This amount was updated to $7.5 million in May 1998. It also requested that the 1996-1997 filing be resolved simultaneously with this filing. Both filings are still pending at the BPU. On March 5, 1998, the BPU approved new rates related to appliance service charges, including a profit margin. The new rates are competitive with those of other service providers in New Jersey and are designed to increase earnings and cash flows to SJG over the current rates. The BPU also authorized SJG to institute new Appliance Service Contract plans and an electric air conditioning repair charge by an order issued orally April 1, 1998 and in writing on April 29, 1998. Note 3. Related Party Transactions: SJG had contracted with R & T Group, Inc., a wholly owned subsidiary of Industries, for general utility construction and environmental remediation services costing approximately $ -0- and $1,825,900 for the three months ended March 31, 1998 and 1997, respectively. The amounts payable to R & T Group, Inc. relating to these services were $ -0- and $919,300 at March 31, 1998 and 1997, respectively. SJG engages in sales of natural gas for resale pursuant to Section 284.402 of the Regulations of the Federal Energy Regulatory Commission which engages in sales to South Jersey Energy Company (SJE) and engaged in sales to South Jersey Fuel Company (SJF), affiliates by common ownership of Industries. Sales to SJE approximated $132,300, and $ -0- for the three months ended March 31, 1998 and 1997, respectively. There were no sales to SJF during the three months ended March 31, 1998 and 1997. Note 4. State, Local and Other Taxes: The aggregate expense for state, local and other taxes as reflected in the Condensed Statements of Consolidated Income for the three months ended March 31, 1998 and 1997 are shown below (in thousands): SJG-9 1998 1997 ------- ------- CBT - Net $ 2,407 $0 TEFA 3,213 0 GRAFT (207) 12,183 Other Taxes 876 949 ------- ------- Total State, Local and Other Taxes $ 6,289 $13,132 ======= ======= During the three months ended March 31, 1998, SJG recorded an additional $5.0 million for State Sales and Use Tax on utility services through its Condensed Consolidated Balance Sheet which does not impact reported revenues or tax expense (See Note 1). Note 5. Capitalization: SJG is restricted under its First Mortgage Indenture, as supplemented, as to the amount of cash dividends or other distributions that may be paid on its common stock. SJG had retained earnings free of such restriction of approximately $63.1 million at March 31, 1998. On March 26, 1997, SJG received $25.6 million as contributions of capital from Industries. Contributions of capital are credited to Other Paid-In Capital and Premium on Common Stock. There have been no other changes in Common Stock during 1998 and 1997. Note 6. Commitments and Contingencies: Construction Commitments - The estimated cost of construction and environmental remediation programs of SJG for the year 1998 aggregates $68.8 million and, in connection therewith, certain commitments have been made. Gas Supply Contracts - SJG, in the normal course of conducting business, has entered into long-term contracts for natural gas supplies, firm transportation, and firm gas storage service. The earliest expiration of any of the gas supply contracts is 1999. All of the transportation and storage service agreements between SJG and its interstate pipeline suppliers are provided under Federal Energy Regulatory Commission (FERC) approved tariffs. SJG's cumulative obligation for demand charges and reservation fees paid to its suppliers for all of these services is approximately $4.9 million per month which is recovered on a current basis through the LGAC. Pending Litigation - The Company is subject to claims which arise in the ordinary course of its business and other legal proceedings. As such, reserves are set up when these claims become apparent. The Company also maintains insurance and records probable insurance recoveries relating to outstanding claims. SJG-10 A group of Atlantic City casinos filed a petition with the BPU on January 16, 1996, alleging overcharges of over $10.0 million, including interest. Management believes that charges to the casinos were based on applicable tariffs and that the casinos were not qualified under less expensive rate schedules, as claimed. Management believes that the ultimate impact of these actions will not materially affect the Company's financial position, results of operations or liquidity. Environmental Remediation Costs - SJG has incurred and recorded certain costs for environmental remediation of sites where SJG or predecessor companies operated gas manufacturing plants. SJG terminated manufactured gas operations at all sites more than 35 years ago. Since the early 1980s, SJG has recorded environmental remediation costs of $91.1 million, of which $38.7 million was expended as of March 31, 1998. SJG, with the assistance of an outside consulting firm, estimates that total future expenditures to remediate the sites will range from $52.4 million to $165.6 million. The lower end of this range was recorded as a liability and is reflected on the Condensed Consolidated Balance Sheet under the captions "Current Liabilities" and "Deferred Credits and Other Non-Current Liabilities". Recorded environmental remediation costs of SJG do not directly affect earnings because those costs are deferred and, when expended, recovered through rates over 7-year amortization periods as authorized by the BPU. Amounts accrued for future expenditures were not adjusted for future insurance recoveries, which management is pursuing. SJG received $4.2 million of insurance recoveries as of March 31, 1998. SJG first used these proceeds to offset legal fees incurred in connection with those recoveries and used the excess to reduce the balance of deferred environmental remediation costs. Recorded amounts include estimated costs based on projected investigation and remediation work plans using existing technologies. Actual expenditures could differ from the estimates due to the long-term nature of the projects, changing technology, government regulations and site specific requirements. As a result of the 7-year Remediation Adjustment Clause (RAC) recovery mechanism, SJG does not expense environmental remediation costs when incurred and defers costs to be recovered. SJG has two regulatory assets associated with environmental cost. The first regulatory asset is titled "Environmental Remediation Cost: Expended - Net". These expenditures represent actual cost incurred to remediate former gas manufacturing plant sites. These costs meet the requirements of FASB No. 71, "Accounting for the Effects of Certain Types of Regulation". The BPU allowed recovery of these expenditures through July 1995 and petitions to recover these costs through July 1997 are pending (See Note 2). The other regulatory asset titled "Environmental Remediation Cost: Liability for Future Expenditures" relates to estimated future expenditures determined under the guidance of FASB No. 5, "Accounting for Contingencies". This amount, which relates to former manufactured gas plant sites was recorded as a deferred debit with the corresponding amount reflected in Current Liabilities and Deferred Credits and Other Non-Current SJG-11 Liabilities, as appropriate. The deferred debit is a regulatory asset under FASB No. 71, because the BPU's intent, as evidenced by its current practice, is to provide recovery sufficient to recover the deferred costs after they are expended. SJG files with the BPU to recover these costs in rates through its RAC. The BPU has consistently allowed the full recovery over 7-year periods, and SJG believes this will continue. As of March 31, 1998, SJG's unamortized remediation expenditures of $20.9 million are reflected on the balance sheet under the caption "Regulatory and Other Non-Current Assets". Since BPU approval of the RAC mechanism in August 1992, SJG recovered $13.6 million through rates as of March 31, 1998 (See Note 2). SJG-12 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Overview South Jersey Gas Company (SJG) is a natural gas distribution company serving 262,315 customers at March 31, 1998, compared with 255,912 customers at March 31, 1997. SJG also makes off-system sales of natural gas on a wholesale basis to various customers on the interstate pipeline system and transports natural gas purchased directly from producers or suppliers for its own sales and for some of its customers. South Jersey Industries, Inc. owns all of the common stock of SJG. This report contains certain forward-looking statements concerning projected future financial performance, future operating performance, future plans and courses of action and future economic conditions. All statements in this report other than statements of historical fact are forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of risks and uncertainties. Management cautions that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. There are a number of factors that could cause the company's actual results to differ materially from those anticipated, which include, but are not limited to the following: general economic conditions on an international, federal, state and local level; weather conditions in the company's marketing areas; regulatory and court decisions; competition in the company's regulated activities; the availability and cost of capital; costs and effects of unanticipated legal proceedings and environmental liabilities; and changes in business strategies. Competition SJG franchises are non-exclusive. Currently no other utility provides retail gas distribution services within its territory. SJG does not expect other utilities to do so in the foreseeable future because of the extensive investment required for utility plant and related costs. SJG competes with oil, propane and electricity suppliers for residential, commercial and industrial users. The market for natural gas sales is subject to competition as a result of deregulation. SJG has enhanced its competitive position while maintaining its margins by using an unbundled tariff which allows the Company to recover its full cost of service, except for the variable cost of the gas commodity, when engaging in the transportation of gas for its customers. Under this tariff, SJG derives substantially all of its profits from the transportation rather than the sale of the commodity. SJG's commercial and industrial customers can choose their supplier while SJG recovers its cost of service and fixed gas costs primarily through its transportation service. In April 1997, SJG initiated its New Jersey Board of Public Utilities (BPU) approved pilot program giving some residential customers a choice of gas suppliers (See "Pilot Program - Choice SJG-13 of Gas Supplier"). SJG believes it has been a leader in addressing the changing marketplace, while maintaining its focus on being a low-cost provider of natural gas and energy services. Pilot Program - Choice of Gas Supplier In April 1997, SJG initiated its BPU-approved pilot program giving residential customers a choice of gas supplier. During the enrollment period, which ended June 30, 1997, nearly 13,000 residential customers applied for this service. Transportation of gas for these customers began on August 1, 1997. Participants' bills are reduced for certain cost of gas charges and applicable taxes. The resulting decrease in revenues is offset by a corresponding decrease in SJG's gas costs and taxes under SJG's BPU-approved fuel clause. The program does not affect its net income, financial condition or margins. Energy Adjustment Clauses SJG's tariff includes a Levelized Gas Adjustment Clause (LGAC), a Temperature Adjustment Clause (TAC), a Remediation Adjustment Clause (RAC) and a Demand Side Management Clause (DSMC). These clauses permit adjustments for changes in gas supply costs, reduce the impact of extreme fluctuations in temperatures on SJG and its customers, recover costs for the remediation of former gas manufacturing plants and recover costs associated with its conservation plan, respectively. The BPU- approved LGAC, RAC and DSMC adjustments are made to match revenues and expenses. TAC adjustments do affect revenue, income and cash flows since extremely cold weather can generate credits to customers, while extremely warm weather during the winter season can result in additional billings to customers. TAC adjustments related to the 1997-1998 TAC year are not expected to materially impact the financial statements for 1998. Status of Year 2000 Conversion The Company prepared a Year 2000 Impact and Assessment study and developed a plan for program modification. An outside service was used to identify both informational and logic date variables within the programming codes. This service was completed and expensed in 1997. Presently, the Company is revising the affected programming codes. As of March 31, 1998, approximately 27% of the programming code was revised. All revisions are scheduled to be completed by early 1999, providing the remainder of 1999 for testing. The conversion costs are estimated at $0.4 million of which approximately $0.1 million was spent as of March 31, 1998. Vendors who provide third party software and support services are being contacted to establish Year 2000 compliance. The Company is also in the process of securing written verification from its key product and service vendors to ensure their compliance. SJG-14 Results of Operations - First Quarter Ended March 31, 1998 Compared to First Quarter Ended March 31, 1997 Operating Revenues In 1998, revenues decreased $18.1 million principally due to lower firm sales resulting from weather which was 12.0 percent warmer than 1997 and state tax reform which lowered the tax component contained in reported revenue, effective January 1, 1998, with an offsetting reduction in State, Local and Other Taxes (See Notes 1 and 4). Also, increased firm transportation service replaced firm sales. These results were partially offset by increased off-system sales, the settlement of the base rate case on January 27, 1997 and customer growth. The revenue from transportation excludes commodity costs (See Competition). As SJG's profits are from the transportation rather than the sale of commodity, the migration of customers to firm transportation does not lower SJG's margin. Total sales margin decreased in 1998 due to lower sales volumes and decreased margins on off-system sales, partially offset by the effect of the addition of 6,400 new customers since the end of the first quarter of 1997. Gas Purchased for Resale Gas purchased for resale decreased $8.7 million in 1998 principally due to decreased sales volumes. Sources of gas supply include both contract and open-market purchases. SJG is responsible for securing and maintaining its own gas supplies to serve its customers. SJG has entered into long-term contracts for natural gas supplies, firm transportation, and firm gas storage service. The earliest expiration of any of these contracts is 1999. All of the transportation and storage service agreements between SJG and its interstate pipeline suppliers are provided under tariffs approved by the Federal Energy Regulatory Commission. SJG's cumulative obligation for demand charges and reservation fees for all of these services is approximately $4.9 million per month, which is recovered on a current basis through its LGAC. Operations A summary of net changes in utility operations for 1998 compared with 1997 is as follows (in thousands): SJG-15 1998 vs. 1997 ------------- Other Production Expense ($4) Transmission 13 Distribution (145) Customer Accounts and Services 161 Sales (13) Administration and General 199 Other (69) ------------- $142 ============= Distribution costs decreased in 1998 principally due to increased service contract revenue. Customer Accounts and Service costs increased in 1998 principally due to an increase in uncollectible accounts expense and increased collection costs. Administrative and General costs increased in 1998 principally due to increased employee benefits and regulatory costs. Other Operating Expenses A summary of principal changes in other operating expenses for 1998 compared with 1997 is as follows (in thousands): 1998 vs. 1997 ------------- Maintenance $125 Depreciation 282 Federal Income Taxes - Net (1,159) State, Local and Other Taxes (6,843) The increase in maintenance expense is principally due to utility production plant maintenance, which includes the amortization of increased environmental remediation costs (such increases are offset by revenue recovery under SJG's RAC). Depreciation is higher principally due to increased investment in property, plant and equipment. Federal Income Tax changes reflect the impact of changes in pre-tax income. State, Local and Other Taxes decreased because of the energy tax reform legislation discussed under Operating Revenues - Utility. SJG-16 Interest Charges Interest charges decreased in 1998 due to the effect of lower short-term interest resulting from lower levels of short- term debt outstanding. Short-term debt levels were reduced in March 1997 by using proceeds from the sale of $35.0 million of first mortgage bonds by SJG; the application of a $25.6 million cash equity infusion to SJG from SJI and the application of the net proceeds from the sale of the Mandatorily Redeemable Preferred Securities in May 1997. Utility long-term interest increased in 1998 due to increased levels of long-term debt outstanding. Preferred Securities Dividend Requirements Preferred Dividends increased in 1998 due to the issuance of $35.0 million of 8.35% SJG-guaranteed Mandatorily Redeemable Preferred Securities in May 1997 (See Capital Resources). Net Income Applicable to Common Stock The details affecting net income and earnings per common share are discussed under the appropriate captions above. Liquidity The seasonal nature of gas operations, the timing of construction and remediation expenditures and related permanent financing, as well as mandated tax and sinking fund payment dates require large short-term cash requirements. These are generally met by cash from operations and short-term lines of credit. The Company maintains short-term lines of credit with a number of banks, aggregating $115.0 million of which $82.9 million was available at March 31, 1998. The credit lines are uncommitted and unsecured with interest rates below the prime rate. The changes in cash flows from operating activities are as follows (in thousands): SJG-17 1998 vs. 1997 ------------- Increases/(Decreases): Net Income ($2,304) Depreciation and Amortization 283 Provision for Losses on Accts Receivable 47 Revenues and Fuel Costs Deferred - Net 860 Deferred and Non-Current Federal Income Taxes and Credits - Net 1,554 Environmental Remediation Costs - Net 400 Accounts Receivable 6,957 Inventories (2,709) Prepayments and Other Current Assets (135) Accounts Payable and Other Accrued Liabilities 2,777 State and Local Taxes Accrued (4,901) Other - Net (1,644) ------------- Increase in Net Cash from Operating Activities $1,185 ============= Depreciation and Amortization are non-cash charges to income and do not impact cash flow. Changes in depreciation cost reflect the effect of additions and reductions to fixed assets. Increases in Revenues and Fuel Costs Deferred - Net reflect the impact of overcollection of fuel costs or the recovery of previously deferred fuel costs. Decreases reflect the impact of payments or credits to customers for amounts previously overcollected and the undercollection of fuel costs resulting from increases in natural gas costs. Increases in Deferred and Non-Current Federal Income Taxes and Credits - Net represent the excess of taxes accrued over amounts paid. Decreases reflect the impact of taxes paid in excess of amounts accrued. Generally, deferred income taxes related to deferred fuel costs will be paid in the next year. Changes in Environmental Remediation Costs - Net represent the difference between remediation expenditures and amounts collected under the RAC and insurance recoveries. Changes in Accounts Receivable are generally weather and price related. Changes impact cash flows when collected in subsequent periods. Changes in Inventory reflect the impact of seasonal requirements, temperatures and price changes. Changes in State and Local Taxes Accrued reflect the impact of changes between taxes paid and taxes accrued. However, significant timing differences exist in cash flows during the SJG-18 year. In 1997, SJG paid the full year's Gross Receipts & Franchise Taxes on April 1 and amortized the remaining prepaid tax over the remainder of the year on the basis of gas volumes sold. As stated in Note 1, on January 1, 1998, the Gross Receipts and Franchise Taxes were replaced with a 6 percent State Sales and Use Tax, a 9 percent State Corporation Business Tax on income before taxes and a Transitional Energy Facilities Assessment (TEFA) on volumes of gas sold and transported. The TEFA will be phased out over 5 years beginning January 1, 1999. Approximately 50 percent of the new taxes will be paid in monthly installments during the first 6 months of the year and the principal portion of the remaining taxes is to be paid on June 25, 1998, and on May 15 of each year thereafter. SJG uses short-term borrowings to make these tax payments which result in a temporary increase in the short-term debt level. The new rates are subject to change following BPU approval which is expected by July 1, 1998. Changes in Accounts Payable and Other Current Liabilities reflect the impact of timing differences between the accrual and payment of costs. Regulatory Matters On January 27, 1997, the BPU granted SJG a base rate increase of $6.0 million based on a 9.62 percent rate of return on rate base, which included an 11.25 percent return on common equity. The majority of this increase comes from residential and small commercial customers. Part of the increase results from new service fees to customers for costs they cause SJG to incur. Additionally, SJG is allowed to retain the first $5.5 million of pre-tax margins generated by interruptible and off-system sales and transportation and 20 percent of pre-tax margins above that level. In 1998 and 1999, this $5.5 million threshold will increase by the annual revenue requirement associated with specified major construction projects. These sharing formula improvements are expected to result in additional rate relief of approximately $0.3 million in 1998 and $1.9 million in 1999. Rates of return are calculated by weighting SJG's individual capital cost rates by the proportion of each respective type of capital. This requires selecting appropriate capital structure ratios and determining the cost rate for each capital component as determined in each rate proceeding. In setting a rate of return, the BPU must provide a utility and its investors with a return that is commensurate with the risk to which the invested capital is exposed so that the utility has access to the capital required to meet its public service responsibility. Also on January 27, 1997, the BPU approved SJG's request for a $2.5 million revenue reduction through the TAC. This is the standard BPU procedure used to credit customers with previously collected revenues, which were in excess of those allowed by the TAC (See "Energy Adjustment Clauses"). This revenue reduction reflects the TAC's normal operation, as does the BPU's confirmation of the decrease. SJG-19 The adoption of FASB No. 109, "Accounting for Income Taxes" in 1993 primarily resulted in creating a regulatory asset and a deferred income tax liability. As a result of positions taken in the 1994 rate case, the amortization of the asset is being recovered through rates over an 18-year period which began in December 1994. Also, FASB No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", adopted by the Company in 1993, requires an accrual basis of accounting for retiree benefit payments during the years of employment. The Company elected to recognize the unfunded transition obligation over a 20-year period beginning in 1993. The majority of the postretirement benefit costs were previously recoverable by SJG through rates on a pay-as-you-go basis. A December 1994 BPU order provided for partial recovery of costs associated with FASB No. 106 and prescribed continued deferral of unrecovered costs. Also, beginning in 1995, an external trust was established towards funding postretirement benefit costs. Rate recovery in excess of SJG's pay-as-you-go requirement is contributed to the trust and provides no operating benefit to SJG except to the extent that trust income reduces future net periodic cost. Gross contributions to the trust amounted to $7.1 million and the balance of the regulatory asset amounted to $6.0 million at March 31, 1998. As approved by the BPU, this amount is being recovered from ratepayers over a 15-year period beginning January 1, 1998. In addition, the BPU approved full recovery of the net periodic benefit cost. The Company incurred and recorded certain costs for environmental remediation of sites where SJG or predecessor companies operated gas manufacturing plants. SJG terminated manufactured gas operations at all sites more than 35 years ago. Since the early 1980s, the Company has recorded environmental remediation costs of $91.1 million, of which $38.7 million was expended as of March 31, 1998. The Company, with the assistance of an outside consulting firm, estimates that total future expenditures to remediate SJG sites will range from $52.4 million to $165.6 million. The lower end of this range was recorded as a liability and is reflected on the balance sheet under the captions "Current Liabilities" and "Deferred Credits and Other Non-Current Liabilities". Recorded environmental remediation costs of SJG do not directly affect earnings because those costs are deferred and, when expended, recovered through rates over 7-year amortization periods as authorized by the BPU. Amounts accrued for future expenditures were not adjusted for future insurance recoveries, which management is pursuing. SJG received $4.2 million of insurance recoveries as of March 31, 1998. SJG used these proceeds first to offset legal fees incurred in connection with those recoveries and used the excess to reduce the balance of deferred environmental remediation costs. Recorded amounts include estimated costs based on projected investigation and remediation work plans using existing technologies. Actual expenditures could differ from the estimates due to the long-term nature of the projects, changing technology, government regulations and site specific requirements. As a result of the 7-year recovery mechanism, SJG does not expense environmental remediation costs when incurred and defers costs to be recovered. SJG has two regulatory assets associated with environmental cost. The first regulatory asset is titled "Environmental Remediation Cost: Expended - Net". These expenditures represent actual costs incurred to remediate former gas manufacturing plant sites net of rate and insurance recoveries. These costs meet the requirements of FASB No. 71, SJG-20 "Accounting for the Effects of Certain Types of Regulation". The BPU allowed recovery of these expenditures through July 1995 and petitions to recover these costs through July 1997 are pending. The other regulatory asset titled "Environmental Remediation Cost: Liability for Future Expenditures" relates to estimated future expenditures determined under the guidance of FASB No. 5, "Accounting for Contingencies". This amount, which relates to former manufactured gas plant sites was recorded as a deferred debit with the corresponding amount reflected in Current Liabilities and Deferred Credits and Other Non-Current Liabilities, as appropriate. The deferred debit is a regulatory asset under FASB No. 71, because the BPU's intent, as evidenced by its current practice, is to provide recovery sufficient to recover the deferred costs after they are expended. Annually, SJG files with the BPU to recover expended remediation costs in rates. The BPU has consistently allowed the full recovery over 7-year periods, and SJG believes this will continue. As of March 31, 1998, SJG's unamortized remediation expenditures of $20.9 million are reflected on the balance sheet under the caption "Regulatory and Other Non-Current Assets". Since BPU approval of the RAC mechanism in August 1992, SJG recovered $13.6 million as of March 31, 1998. On July 31, 1996 and 1997, SJG made its annual filings with the BPU to recover remediation costs expended during the period of August 1995 through July 1997 totaling $1.6 million. Both filings were subsequently updated and are still pending at the BPU. On September 9, 1997, SJG filed with the BPU to adjust rates by replacing the current State Gross Receipts and Franchise Tax components with a Sales and Use Tax, a Corporation Business Tax and a Transitional Energy Facilities Assessment (See "Liquidity"). Interim rates reflecting this change became effective January 1, 1998. The BPU is expected to approve final rates by July 1, 1998. In September 1996, SJG filed to reduce its rates through its 1996-1997 LGAC reflecting a $1.4 million decrease in natural gas costs. Updated projections of 1996-1997 LGAC year results were rolled into the 1997-1998 LGAC year and filed with the BPU. On September 12, 1997, updated projections of the 1996-1997 LGAC year results were rolled into the 1997-1998 LGAC year and filed with the BPU. The 1997-1998 LGAC filing requested a rate increase to reflect an increase of $4.7 million in natural gas costs, inclusive of the 1996-1997 LGAC filing. This amount was updated to $7.5 million in May 1998. Both filings are still pending at the BPU. FASB No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", requires an accrual basis of accounting for retiree benefit payments during the years of employment. A December 1994 BPU order provided for partial recovery of costs associated with FASB No. 106 and prescribed continued deferral of unrecovered costs. Also, beginning in 1995, an external trust was established towards funding postretirement benefit costs. Rate recovery in excess of SJG's SJG-21 pay-as-you-go requirement is contributed to the trust and provides no operating benefit to SJG except to the extent that trust income reduces future net periodic cost. Deferred postretirement benefit costs will be recovered from ratepayers over a 15 year period beginning January 1, 1998, as approved by the BPU. On March 5, 1998, the BPU approved new rates related to appliance service charges, including a profit margin. The new rates are competitive with those of other service providers in New Jersey and are designed to increase earnings and cash flows to SJG over the current rates. The BPU also authorized SJG to institute new Appliance Service Contract plans effective April 1, 1998, including electric air conditioning repairs within its service territory. The Company is subject to claims which arise in the ordinary course of its business and other legal proceedings. As such, reserves are set up when these claims become apparent. The Company also maintains insurance and records probable insurance recoveries relating to outstanding claims. A group of Atlantic City casinos filed a petition with the BPU on January 16, 1996, alleging overcharges of over $10.0 million, including interest. Management believes that charges to the casinos were based on applicable SJG tariffs and that the casinos were not qualified under less expensive rate schedules, as claimed. Management believes that the ultimate impact of these actions will not materially affect the Company's financial position, results of operations or liquidity. Capital Resources The Company has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities, equipment and for environmental cleanup costs. Net construction and remediation expenditures for 1998 amounted to $9.9 million. The costs for 1998, 1999 and 2000 are estimated at approximately $68.8 million, $54.6 million and $47.8 million, respectively. These investments are expected to be funded from several sources, which may include cash generated by operations, temporary use of short-term debt, sale of first mortgage bonds, capital leases and RAC recoveries. On March 21, 1997, SJG sold $35.0 million of its First Mortgage Bonds, 7.7% Series due 2027. On May 2, 1997, SJG's Delaware statutory trust subsidiary, SJG Capital Trust, sold $35.0 million of 8.35% SJG- guaranteed Mandatorily Redeemable Preferred Securities. The Trust holds as its sole asset the 8.35% Deferrable Interest Subordinated Debentures issued by SJG maturing April 30, 2037. The Debentures and Preferred Securities are redeemable at the option of SJG at a redemption price equal to 100 percent of the principal amount at any time on or after April 30, 2002. SJG-22 Inflation The ratemaking process provides that only the original cost of utility plant is recoverable in revenues as depreciation. Therefore, the excess cost of utility plant, stated in terms of current cost over the original cost of utility plant, is not presently recoverable. While the ratemaking process gives no recognition to the current cost of replacing utility plant, based on past practices, SJG believes it will be allowed to earn on the increased cost of its net investment as replacement of facilities actually occurs. Summary The company is confident it will have sufficient cash flow to meet its operating, capital and dividend needs and is taking and will take such actions necessary to employ its resources effectively. SJG-23 PART II -- OTHER INFORMATION Item 1. Legal Proceedings Information required by this Item is incorporated by reference to Part I, Item 1, Note 6, on pages 10, 11 and 12 excluding the first two paragraphs of the Note, regarding contingencies, including pending litigation and the remediation and clean-up of certain sites which included manufactured gas operations. Item 6. Exhibits and Reports on Form 8-K b. No reports on Form 8-K were filed during the quarter for which this report is filed. SJG-24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTH JERSEY GAS COMPANY (Registrant) Dated: May 12, 1998 By: /s/ David A. Kindlick David A. Kindlick Senior Vice President, Finance & Rates Dated: May 12, 1998 By: /s/ William J. Smethurst, Jr. William J. Smethurst, Jr. Vice President and Treasurer SJG-25 SOUTH JERSEY GAS COMPANY Index to Exhibits Exhibit Number Description 27 Financial Data Schedule (Submitted only in electronic format to the Securities and Exchange Commission). SJG-26 EX-27 2 SJG EXHIBIT 27
UT 1,000 3-MOS DEC-31-1998 MAR-31-1998 PER-BOOK 459,854 0 76,842 104,689 1,522 642,907 5,848 102,817 65,115 173,780 35,000 2,224 173,672 32,100 0 0 8,876 0 0 0 217,255 642,907 108,485 9,674 80,773 90,447 18,038 0 18,038 4,445 13,593 773 12,820 3,825 3,839 29,839 5.48 5.48
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