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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 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, New Jersey 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Company Guaranteed Mandatorily Redeemable
Preferred Securities of Subsidiary Trust,
$25 Value per Preferred Security New York Stock Exchange
(Title of each class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
All of the equity securities of the registrant are owned by South Jersey
Industries, Inc., its parent company, a 1934 Act reporting company named in the
registrants description of its business, which has itself fulfilled its 1934 Act
filing requirements.
During the preceding 36 months (and any subsequent period of days) there has not
been any default in (1) any of the indebtedness of the registrant or its
subsidiaries, and (2) the payment of rentals under material long-term leases (of
which there are none).
Documents Incorporated by Reference: None
- Title Page -
PART I
Item 1. Business
General
The registrant, South Jersey Gas Company (SJG), a New Jersey corporation,
is an operating public utility. SJG owns all of the common stock of SJG Capital
Trust, a statutory trust organized in the State of Delaware. All of the equity
securities of SJG are owned by South Jersey Industries, Inc. (SJI), its parent
company, which is itself a 1934 Act reporting company.
Financial Information About Industry Segments
Not applicable.
Description of Business
SJG is an operating public utility company engaged in the purchase,
transmission and sale of natural gas for residential, commercial and industrial
use in an area of approximately 2,500 square miles in the southern part of New
Jersey. 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 by some of its customers.
SJG's service territory includes 112 municipalities throughout Atlantic,
Cape May, Cumberland and Salem Counties and portions of Burlington, Camden and
Gloucester Counties, with an estimated permanent population of 1.1 million.
SJG serves 267,065 residential, commercial and industrial customers (at
December 31, 1998) in southern New Jersey. Gas sales and transportation for
1998 amounted to approximately 80,521,000 Mcf (thousand cubic feet), of which
approximately 46,862,000 Mcf was firm sales and transportation, 6,743,000 Mcf
was interruptible sales and transportation and 26,916,000 Mcf was off-system
sales. The breakdown of firm sales includes 36.2% residential, 10.3%
commercial, 5.1% cogeneration and electric generation, .7% industrial and 47.7%
transportation. At year-end 1998, SJG served 248,210 residential customers,
18,457 commercial customers and 398 industrial customers. This includes 1998
net additions of 6,078 residential customers, 420 commercial customers and no
industrial customers.
Under an agreement with Conectiv, Inc., an electric utility serving
southern New Jersey, SJG supplies natural gas to several electric generation
facilities. This gas service is provided under the terms of a firm electric
service tariff approved by the New Jersey Board of Public Utilities (BPU) on a
demand/commodity basis. In 1998, 2.5 Bcf (billion cubic feet) was delivered
under this agreement.
SJG serviced 7 cogeneration facilities in 1998. Combined sales and
transportation of natural gas to such customers amounted to approximately 6.0
Bcf in 1998.
SJG makes wholesale gas sales for resale to gas marketers for ultimate
delivery to end users. These "off-system" sales are made possible through the
issuance by the Federal Energy Regulatory Commission (FERC) of Orders No. 547
and 636. Order No. 547 issued a blanket certificate of public convenience and
necessity authorizing all parties, which are not interstate pipelines, to make
FERC jurisdictional gas sales for resale at negotiated rates, while Order No.
636 allowed SJG to deliver gas at delivery points on the interstate pipeline
system other than its own city gate stations and release excess pipeline
capacity to third parties. During 1998, off-system sales amounted to 26.9 Bcf.
Also in 1998, capacity release and storage throughput amounted to 27.3 Bcf.
SJG-2
Supplies of natural gas available to SJG that are in excess of the quantity
required by those customers who use gas as their sole source of fuel (firm
customers) make possible the sale and transportation of gas on an interruptible
basis to commercial and industrial customers whose equipment is capable of using
natural gas or other fuels, such as fuel oil and propane. The term
"interruptible" is used in the sense that deliveries of natural gas may be
terminated by SJG at any time if this action is necessary to meet the needs of
higher priority customers as described in SJG's tariffs. Usage by interruptible
customers, excluding off-system customers, in 1998 amounted to approximately 6.7
Bcf, approximately 6.2 percent of the total throughput.
No material part of SJG's business is dependent upon a single customer or a
few customers.
Service Territory
The majority of SJG's residential customers reside in the northern and
western portions of its service territory in Burlington, Camden, Salem and
Gloucester counties. A majority of new customers reside in this section of the
service territory, which includes the residential suburbs of Wilmington and
Philadelphia. The franchise area to the east is centered on Atlantic City and
the neighboring resort communities in Atlantic and Cape May counties, which
experience large population increases in the summer months. The impact of the
casino gaming industry on the Atlantic City area has resulted in the creation
of new jobs and the expansion of the residential and commercial infrastructure
necessary to support a developing year-round economy. Atlantic City is
experiencing a second wave of development as a result of casino gaming. The
centerpiece of this development is the recently completed multipurpose
convention center, accompanied by planned major hotel and entertainment
complexes. These facilities will be used to attract large conventions as well
as making Atlantic City into a family resort on a year-round basis.
Manufacturers or processors of sand, glass, farm products, paints,
chemicals and petroleum products are located in the western and southern sectors
of the service territory. New commercial establishments and high technology
industrial parks and complexes are part of the economic growth of this area.
SJG's service area includes parts of the Pinelands region, a largely undeveloped
area in the heart of southern New Jersey. Future construction in this area is
expected to be limited by statute and by a master plan adopted by the New Jersey
Pinelands Commission; however, in terms of potential growth, significant
portions of SJG's service area are not affected by these limitations.
Rates and Regulation
As a public utility, SJG is subject to regulation by the BPU.
Additionally, the Natural Gas Policy Act, which was enacted in November 1978,
contains provisions for Federal regulation of certain aspects of SJG's business.
SJG is affected by Federal regulation with respect to transportation and pricing
policies applicable to its pipeline capacity from Transcontinental Gas Pipeline
Corporation (Transco), SJG's major supplier, Columbia Gas Transmission
Corporation (Columbia), CNG Transmission Corporation (CNG) and Equitrans, Inc.
(Equitrans), since such services are provided under rates and terms established
under the jurisdiction of the FERC.
Retail sales by SJG are made under rate schedules within a tariff filed
with and subject to the jurisdiction of the BPU. These rate schedules provide
primarily for either block rates or demand/commodity rate structures. The
tariff contains provisions permitting SJG to pass on to customers increases and
decreases in the cost of purchased gas supplies. The tariff also contains
provisions permitting the recovery of environmental remediation costs associated
with former manufactured gas plant sites and for the adjustment of revenues due
to the impact of "temperature" fluctuations as prescribed in SJG's tariff.
In August 1997, SJG initiated its BPU approved pilot program to give
residential customers a choice of gas supplier. The program included
approximately 17,310 residential customers at year end 1998. SJG continues to
deliver the natural gas through its distribution system with no loss of margins.
SJG-3
Revenue requirements for ratemaking purposes are established on the basis
of firm and interruptible sales projections. In January 1997, the BPU granted
SJG a total rate increase of $10.3 million. The $6.0 million base rate portion
of the increase was based on a 9.62% rate of return on rate base, which included
an 11.25% return on common equity. The majority of this increase comes from
residential and small commercial customers. Part of the increase is recovered
from service fees which charge specific customers for costs they cause SJG to
incur. Additionally, SJG's threshold for sharing pre-tax margins generated by
interruptible and off-system sales and transportation (Sharing Formula)
increased from $4.0 million to $5.0 million. Later in 1997, the $5.0 million
threshold increased by $500,000 the annual revenue requirement associated with
completing a specific pipeline interconnection. At the end of 1998, the
threshold increased by another $2.0 million, with the completion of major
construction projects. SJG keeps 100% of pre-tax margins up to the threshold
level and 20% of such margins above that level. In October 1998, the BPU
approved a revision to the Sharing Formula as part of an agreement to modify
SJG's TAC. The revision credits the first $750,000 above the current threshold
level to the LGAC customers. Thereafter, SJG keeps 20% of the pre-tax margins
as it has historically. Additional information on regulatory affairs is
incorporated by reference to Notes 1, 2, 6, and 12 to SJG's consolidated
financial statements for the year ended December 31, 1998. See Item 8.
SJG Capital Trust, a Delaware statutory trust, is a wholly owned subsidiary
of SJG, which had the sole purpose of issuing beneficial interests in its costs
(Preferred Securities), the proceeds of selling such Preferred Securities
invested in Deferrable Interest Subordinated Debentures issued by SJG. SJG
is the guarantor of such Preferred Securities.
In 1998, SJG made no public announcement of, or otherwise made public
information about, a new product or industry segment that would require the
investment of a material amount of the assets of SJG or which otherwise was
material.
Raw Materials
Transportation Contracts and Storage
SJG has direct connections to two interstate pipeline companies, Transco
and Columbia. During 1998, SJG purchased and had delivered approximately 51.7
Bcf of natural gas for distribution to both on-system and off-system customers.
Of this total, 38.6 Bcf was transported on the Transco pipeline system and 13.1
Bcf was transported on the Columbia pipeline system. SJG also secures firm
transportation and other long term services from four additional pipelines
upstream of the Transco and Columbia systems. They include: Columbia Gulf
Transmission Company (Columbia Gulf), Sempra Energy Trading Corp. (Sempra),
Texas Gas Transmission Corporation (Texas Gas) and Equitrans. Services provided
by these upstream pipelines are utilized to deliver gas into either the Transco
or Columbia systems for ultimate delivery to SJG. Services provided by all
of the above mentioned pipelines are subject to changes as directed by FERC
Order No. 636.
Transco:
Transco is SJG's largest supplier of long term gas transmission services.
These services include five year-round and one seasonal firm transportation (FT)
service arrangement. When combined, these services enable SJG to purchase from
SJG-4
third parties and have delivered to its city gate stations by Transco a total of
163,741 Thousand Cubic Feet of gas per day ("Mcf/d"). The terms of the year-
round agreements extend for various periods from 2002 to 2010 while the term of
the seasonal agreement extends to 2011.
SJG also has seven long-term gas storage service agreements with Transco
that, when combined, are capable of storing approximately 10.1 Bcf. Through
these services, SJG can inject gas into storage during periods of low demand and
withdraw gas at a rate of up to 86,972 Mcf/d during periods of high demand.
The terms of the storage service agreements extend for various periods from
2001 to 2008.
Sempra:
SJG has separate gas sales and capacity management agreements with Sempra,
which were formerly with CNG Energy Service Corp., which provide SJG with up to
9,662 Mcf/d of gas during the period November 16 through March 31 of each year.
Columbia:
SJG has three firm transportation agreements with Columbia which, when
combined, provide for 43,500 Mcf/d of firm deliverability.
SJG also subscribes to a firm storage service from Columbia, to March 31,
2009, which provides a maximum withdrawal quantity of 19,807 Mcf/d during the
winter season with an associated 1,121,095 Mcf of storage capacity.
As part of addressing future winter season requirements, SJG entered into
an agreement with Columbia to subscribe to an incremental 31,296 Mcf/d of
storage deliverability with an additional 2,234,482 Mcf of storage capacity that
became available on April 1, 1998. The term of the agreement expires October
31, 2013. The FERC has approved Columbia's arrangements to provide such
services.
Equitrans:
SJG has a long term storage service provided by Equitrans, to April 1,
2002, under which up to 500,000 Mcf of gas may be stored during the summer
season and up to 4,783 Mcf/d may be withdrawn during the winter season. The gas
is delivered to SJG under firm transportation agreements with Equitrans, CNG and
Transco.
Gas Supplies
SJG has several long term gas supply agreements with various producers and
marketers that expire between 1999 and 2007. Under these agreements, SJG can
purchase up to 52,008,000 Mcf of natural gas per year. When advantageous, SJG
can purchase spot supplies of natural gas in place of or in addition to those
volumes reserved under long term agreements.
The following chart shows by percentage the actual sources of purchased gas
supply for each of the last three years:
1998 1997 1996
------ ------ ------
Long-Term Contract 61.8% 73.2% 83.5%
Spot 38.2% 26.8% 16.5%
------ ------ ------
Total 100.0% 100.0% 100.0%
SJG-5
Supplemental Gas Supplies
SJG has a long term LNG purchase agreement with a third party provider
which extends through October 31, 2000. For the 1998-1999 contract year, SJG's
annual contract quantity under the agreement is 279,070 Mcf. LNG purchases
under this agreement are transported to SJG's LNG storage facility in McKee
City, New Jersey via over-the-road trucks.
SJG operates peaking facilities which can store and vaporize both LNG and
propane for injection into its distribution system. SJG's LNG facility has a
storage capacity equivalent to 404,000 Mcf of natural gas and has an installed
capacity to vaporize up to 90,000 Mcf of LNG per day for injection into its
distribution system.
SJG also maintains two propane-air plants that are located in Middle
Township and Ocean City, New Jersey. The combined maximum storage capacity of
these plants is 150,000 gallons of liquefied propane or the equivalent of
approximately 11,364 Mcf of natural gas.
SJG also operates a high pressure pipe storage field at its McKee City
facility which is capable of storing 12,000 Mcf of gas and injecting up to
10,000 Mcf/d of gas into SJG's distribution system.
Peak-Day Supply
SJG plans for a winter season peak-day demand on the basis of an average
daily temperature of 2 degrees F. Gas demand on such a design day was estimated
for the 1998-1999 winter season to be 412,001 Mcf versus a design day supply of
428,215 Mcf. On January 19, 1994, SJG experienced its highest peak-day demand
of 370,582 Mcf with an average temperature of 2.68 degrees F. In 1998, SJG
experienced a peak-day demand of 313,978 Mcf with an average temperature of
22.97 degrees F.
Gas Prices
SJG's average commodity cost of gas purchased in 1998 was $2.27 per Mcf.
Patents and Franchises
SJG holds nonexclusive franchises granted by municipalities in the seven
county area of southern New Jersey that it serves. No other natural gas public
utility presently serves the territory covered by SJG's franchises. Otherwise,
patents, trademarks, licenses, franchises and concessions are not material to
the business of SJG or its subsidiary.
Seasonal Aspects
SJG experiences seasonal fluctuations in sales when selling natural gas for
heating purposes. SJG meets this seasonal fluctuation in demand from its firm
customers by buying and storing gas during the summer months, and by drawing
from storage and purchasing supplemental supplies during the heating season. As
a result of this seasonality, SJG's revenues and net income are significantly
higher during the first and fourth quarters than during the second and third
quarters of the year.
Working Capital Practices
As stated under Seasonal Aspects, SJG buys and stores natural gas during
the summer months. These purchases are financed by short-term loans which are
substantially paid down during the winter months when gas revenues are higher.
Reference is also made to "Liquidity" included in Item 7, Management's
Discussion and Analysis of Results of Operations and Financial Condition.
SJG-6
Customers
No material part of SJG's business is dependent upon a single customer or a
few customers, the loss of which would have a material adverse effect on any
such business. See Item 1, "Service Territory."
Backlog
Backlog is not material to an understanding of SJG's business.
Government Contracts
No material portion of SJG's business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of any
government.
Competition
SJG's franchises are non-exclusive, however, currently no other utility is
providing service within its territory. SJG competes with oil, propane and
electricity suppliers for residential, commercial and industrial users. The
market for natural gas commodity sales is subject to competition as a result of
deregulation. Through its tariff, SJG has promoted competition while
maintaining its margins. Substantially all of SJG's profits are from the
transportation rather than the sale of the commodity. SJG believes it has been
a leader in addressing the changing marketplace. It maintains its focus on
being a low-cost provider of natural gas and energy services. SJG also competes
with other marketers/brokers in the selling of wholesale natural gas services.
Research
During the last three fiscal years, SJG did not engage in research
activities to any material extent.
Environmental Matters
Information on environmental matters is incorporated by reference to Note
12 to SJG's consolidated financial statements for the year ended December 31,
1998. See Item 8.
Employees
SJG had a total of 644 employees as of December 31, 1998.
Financial Information About Foreign and Domestic Operations and Export Sales
SJG has no foreign operations and export sales are not a part of its
business.
Item 2. Properties
The principal property of SJG consists of its gas transmission and
distribution systems that include mains, service connections and meters. The
transmission facilities carry the gas from the connections with Transco and
Columbia to SJG's distribution systems for delivery to customers. As of
December 31, 1998, there were approximately 92 miles of mains in the
transmission systems and 5,038 miles of mains in the distribution systems.
In 1998, 270 miles of mains previously reported as transmission were
reclassified as distribution.
SJG owns office and service buildings, including its corporate
headquarters, at eight locations in the territory, a liquefied natural gas
storage and vaporization facility, and two propane-air vaporization plants.
SJG-7
As of December 31, 1998, the SJG utility plant had a gross book value of
$680.0 million and a net book value, after accumulated depreciation, of $500.4
million. In 1998, $64.9 million was spent on additions to utility plant and
there were retirements of property having an aggregate gross book cost of $4.4
million. Construction and remediation expenditures for 1999 are currently
expected to approximate $52.2 million.
Virtually all of the SJG transmission pipeline, distribution mains and
service connections are in streets or highways or on the property of others.
The SJG transmission and distribution systems are maintained under franchises or
permits or rights-of-way, many of which are perpetual. The SJG properties
(other than property specifically excluded) are subject to a lien of mortgage
under which its first mortgage bonds are outstanding. Such properties are well
maintained and in good operating condition.
Item 3. Legal Proceedings
SJG is subject to claims which arise in the ordinary course of its business
and other legal proceedings. In September 1998, SJG settled a claim that a
group of Atlantic City casinos filed with the BPU alleging overcharges of over
$10 million, including interest. Management of SJG believes that any pending or
potential legal proceedings will not materially affect its operations or
consolidated financial position. Reference is made under Commitments and
Contingencies in Note 12 to SJG's consolidated financial statements for the year
ended December 31, 1998. See Item 8.
Item 4. Submission Of Matters To A Vote of Security Holders
Not applicable.
SJG-8
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters
Common equity securities of SJG, owned by its parent company, South Jersey
Industries, Inc., are not traded on any stock exchange.
Cash dividends are usually declared on SJG's common stock on a quarterly
basis. 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. Retained earnings free of such restriction approximate $52.4
million at December 31, 1998.
If preferred stock dividends are in arrears, no dividends may be declared
or paid, or other distribution made on the common stock of SJG. If four or more
quarterly dividends are in arrears, the Preferred Shareholders may elect a
majority of SJG's directors. See Note 4 of SJG's consolidated financial
statements for additional information on Capitalization. See Item 8.
SJG-9
Item 6. Selected Financial Data
The following financial data has been obtained from SJG's audited financial
statements:
(In Thousands Except for Share Data)
1998 1997 1996 1995 1994
------------------------------------------------------------
Operating Revenues $299,070 $327,548 $330,335 $282,719 $311,459
============================================================
Operating Income $36,978 $39,996 $38,849 $35,438 $28,003
============================================================
Income before Preferred Securities Dividend
Requirement 17,911 22,000 19,389 15,991 11,200
Preferred Dividend Requirements:
Preferred Stock (166) (170) (174) (178) (183)
Preferred Securities (2,923) (1,932) 0 0 0
------------------------------------------------------------
Net Income Applicable to Common Stock $14,822 $19,898 $19,215 $15,813 $11,017
============================================================
Average Shares of Common Stock Outstanding 2,339,139 2,339,139 2,339,139 2,339,139 2,339,139
Earnings per Common Share $6.34 $8.51 $8.21 $6.76 $4.71
Property, Plant and Equipment, Net $502,243 $454,239 $421,622 $396,770 $375,093
============================================================
Total Assets $720,136 $649,113 $599,926 $549,950 $509,987
============================================================
Capitalization:
Common Equity (1) $162,940 $164,785 $134,564 $130,406 $124,593
Preferred Stock and Securities (2) 37,134 37,224 2,314 2,404 2,494
Long-Term Debt 194,710 175,860 149,736 156,784 138,594
------------------------------------------------------------
Total $394,784 $377,869 $286,614 $289,594 $265,681
============================================================
(1) Included are cash contributions to capital as follows:
1997 - $25.6 million; 1995 - $6.0 million.
(2) Includes sale in 1997 of $35.0 million Company Guaranteed
Mandatorily Redeemable Preferred Securities of Subsidiary
Trust.
SJG-10
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Operating Revenues (Thousands):
Firm
Residential $ 147,274 $ 176,717 $ 177,673 $ 151,720 $ 151,857
Commercial 36,328 60,418 70,755 58,135 61,848
Industrial 4,175 5,535 7,540 6,014 8,349
Cogeneration & Electric Generation 8,119 5,249 16,173 15,725 19,301
Firm Transportation 24,893 15,966 10,473 13,930 18,092
----------- ----------- ----------- ----------- -----------
Total Firm 220,789 263,885 282,614 245,524 259,447
Interruptible 2,506 6,085 7,256 6,786 6,610
Interruptible Transportation 2,598 3,507 2,630 2,778 2,985
Off-System 62,578 39,403 28,236 20,360 38,161
Capacity Release & Storage 6,031 8,533 4,349 3,374 2
Other 4,568 6,135 5,250 3,897 4,254
----------- ----------- ----------- ----------- -----------
Total Operating Revenues $ 299,070 $ 327,548 $ 330,335 $ 282,719 $ 311,459
=========== =========== =========== =========== ===========
Throughput (MMcf):
Firm
Residential 16,979 19,955 21,699 19,573 19,543
Commercial 4,826 8,067 10,117 8,945 9,276
Industrial 348 733 1,238 1,016 1,364
Cogeneration & Electric Generation 2,373 1,230 5,180 4,860 5,384
Firm Transportation 22,336 20,196 12,969 14,417 14,401
----------- ----------- ----------- ----------- -----------
Total Firm Throughput 46,862 50,181 51,203 48,811 49,968
----------- ----------- ----------- ----------- -----------
Interruptible 694 1,345 1,618 1,843 1,810
Interruptible Transportation 6,049 7,586 5,422 5,888 5,424
Off-System 26,916 14,462 8,571 9,590 16,840
Capacity Release & Storage 27,319 36,382 25,460 25,915 46
----------- ----------- ----------- ----------- -----------
Total Throughput 107,840 109,956 92,274 92,047 74,088
=========== =========== =========== =========== ===========
Number of Customers at Year End:
Residential 248,210 242,132 236,008 230,446 224,394
Commercial 18,457 18,037 17,469 17,179 16,615
Industrial 398 398 397 397 397
----------- ----------- ----------- ----------- -----------
Total Customers 267,065 260,567 253,874 248,022 241,406
=========== =========== =========== =========== ===========
Maximum Daily Sendout (MMcf) 314 355 325 335 370
=========== =========== =========== =========== ===========
Annual Degree Days 4,110 4,829 5,175 4,865 4,820
=========== =========== =========== =========== ===========
Normal Degree Days * 4,708 4,728 4,689 4,709 4,680
=========== =========== =========== =========== ===========
* Average degree days recorded in SJG service territory during 20-year period ended
June 30 of prior year. Normal degree days for prior years have been restated.
SJG-11
Item 7. 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 267,065 customers at December 31, 1998, compared with 260,567 customers
at December 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 our
own sales and for some of our customers. South Jersey Industries, Inc. (SJI)
owns all of the common stock of SJG.
Forward Looking Statements
This report contains certain forward-looking statements concerning
projected future financial performance, future operating performance, future
plans and courses of action and future economic conditions. All statements in
this report other than statements of historical fact are forward-looking
statements. These forward-looking statements are made based upon management's
expectations and beliefs concerning future events impacting the company and
involve a number of risks and uncertainties. We caution that forward-looking
statements are not guarantees and actual results could differ materially from
those expressed or implied in the forward-looking statements.
A number of factors could cause our actual results to differ materially
from those anticipated, including, but not limited to the following: general
economic conditions on an international, federal, state and local level; weather
conditions in the company's marketing areas; regulatory and court decisions;
competition in the company's regulated and deregulated activities; the
availability and cost of capital; the company's ability to maintain existing
and/or establish successful new alliances and joint ventures to take advantage
of marketing opportunities; costs and effects of unanticipated legal
proceedings; Year 2000 related costs or operating problems and environmental
liabilities; and changes in business strategies.
Competition
SJG's franchises are non-exclusive. Currently, no other utility provides
retail gas distribution services within our territory. We do not expect any
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 commodity sales is subject to competition as
a result of deregulation. We have enhanced SJG's competitive position while
maintaining margins by using an unbundled tariff. This tariff allows recovery
of the full cost of service, except for the variable cost of the gas commodity,
when transporting gas for our customers. Under this tariff, SJG profits from
transporting rather than selling the commodity. SJG's commercial and industrial
customers can choose their supplier while we recover the cost of service and
fixed gas costs primarily through transportation service. In June 1998, SJG
expanded its New Jersey Board of Public Utilities (BPU) approved pilot program
giving some residential customers a choice of gas suppliers (See "Pilot Program
- - Choice of Gas Supplier"). We believe SJG is a leader in addressing the
changing marketplace, while focusing on being a low-cost provider of natural gas
and energy services.
Pilot Program - Choice of Gas Supplier
In April 1997, SJG began its BPU-approved pilot program giving residential
customers a choice of gas supplier. During the initial enrollment period, which
ended in June 1997, nearly 13,000 residential customers applied for this
service. We began transporting gas for these customers in August 1997. In June
1998, the BPU expanded the number of potential participants to 25,000. There
were 17,310 participants as of December 31, 1998. Participants' bills are
reduced for cost of gas charges and applicable taxes. The resulting decrease in
SJG's revenues is offset by a corresponding decrease in gas costs and taxes
SJG-12
under a BPU-approved fuel clause. While the program reduces utility revenues,
it does not affect SJG's net income, financial condition or margins. Also, we
expanded the choices available to commercial and industrial customers, including
a new transportation tariff providing savings to qualified customers.
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 us to adjust
customer bills for changes in gas supply costs, to reduce the impact of
temperature fluctuations on SJG and its customers, to recover remediation costs
for former gas manufacturing plants and recover conservation plan costs,
respectively. The BPU-approved LGAC, RAC and DSMC adjustments match revenues
with expenses. TAC adjustments affect revenue, income and cash flows since
colder-than-normal weather can generate credits to customers, while warmer-than-
normal weather can result in additional billings to customers. TAC adjustments
related to the 1997-1998 TAC year did not materially impact 1998's financial
statements.
Status of Year 2000 Conversion
We prepared a Year 2000 Impact and Assessment Study and developed a
detailed plan to enable SJG to be ready for year 2000. "Ready" means that
mission critical software, hardware, devices, systems, facilities and business
relationships are prepared to operate satisfactorily through the end of 1999 and
beyond. Also, we will have contingency plans established to address any
problems that arise. As of December 31, 1998, we revised approximately 74% of
programming code. All revisions are scheduled to be completed by April 1999,
providing the remainder of the year for testing. We believe that 90% of all,
and 100% of our mission critical, embedded technology is Y2K ready.
We contacted all vendors providing third party software and all have
indicated they are Y2K ready. SJG has also contacted all product and service
vendors regarding their Y2K readiness. Approximately 65% of all vendors have
indicated readiness. We are actively pursuing assurances that the remainder
will be Y2K ready. Total costs to address Y2K issues at SJG are estimated at
$0.4 million, with $0.3 million having been spent through December 31, 1998.
The worst case scenario that concerns us the most is a temporary disruption
of service to our gas customers. Our gas distribution system can be operated
manually. We have received assurances from our two direct connect gas supply
pipelines that they are Y2K ready. We are seeking assurances from the companies
that supply gas to our system that they will be Y2K ready. We are preparing
contingency plans for use in the event that they are not ready. Contingency
plans have been or are being prepared to address Y2K related problems. All
contingency plans for high priority items such as service continuation, safety
and revenues are scheduled to be completed by July 1999.
While unexpected Y2K problems can occur, we do not anticipate any material
difficulty in achieving Y2K readiness based upon the nature of SJG's operating
and information systems and the state of planning and remediation. Any problems
that arise should be immaterial to our financial position or operating results.
Results of Operations
Operating Revenues
Revenues decreased $28.5 million in 1998 compared with 1997. In 1997,
revenues declined $2.8 million from 1996. The revenue decline in 1998 was due
to weather that was 14.9% warmer than 1997 and 12.7% warmer than the 20-year
average for our service territory. Temperatures in 1998 were the highest
recorded since meteorologists began keeping records in 1894. Revenues were
also reduced by state tax reform which lowered the tax component in reported
revenue and by customers using increased firm transportation in lieu of firm gas
SJG-13
sales. Revenue from transporting gas excludes commodity costs. The lower tax
component in reported revenue was offset by a reduction in Other Taxes (See
Notes 1 and 6). Our tariffs are structured so that profits come from
transporting gas, not the sale of the gas itself. Consequently, while both the
tax reform and the switch to firm transportation reduced total revenues, neither
affected our profits. Revenues from adding 6,498 customers were more than
offset by the factors discussed above. The revenue decrease in 1997 was due to
weather that was 6.7% warmer than 1996 and increased firm transportation service
replacing firm sales. Our 1997 decline was partially offset by increased base
rates, 6,693 new customers, increased off-system sales and increased capacity
release revenues.
Gas Purchased for Resale
Gas purchased for resale decreased $6.3 million in 1998 compared with 1997
due principally to weather-related decreased sales volumes and customers
switching from gas sales to firm transportation. Gas purchased for resale
decreased $5.0 million in 1997 versus 1996 primarily due to lower sales volumes.
Gas supply sources include contract and open-market purchases. SJG secures and
maintains its own gas supplies to serve its customers.
SJG has long-term contracts for natural gas supplies, firm transportation,
and firm gas storage service. The earliest any of these contracts expires is
October 2000. All transportation and storage service agreements between SJG and
its interstate pipeline suppliers were made under Federal Energy Regulatory
Commission (FERC) approved tariffs. SJG's cumulative obligation for demand
charges and reservation fees paid to suppliers for these services is
approximately $4.8 million per month, recovered on a current basis through the
LGAC.
Operations
A summary of net changes in Utility Operations and Other Operations (in
thousands):
1998 vs. 1997 1997 vs. 1996
------------- -------------
Other Production Expense $ 12 $ (25)
Transmission 110 (21)
Distribution 66 (76)
Customer Accounts and Services 438 (322)
Sales (147) 126
Administration and General (1,256) 3,170
Other (13) (446)
------- -------
$ (790) $ 2,406
======= =======
Customer Accounts and Services costs increased in 1998 principally due to
an increase in payroll expense. This account decreased in 1997 principally due
to a 1996 charge to increase the reserve for uncollectible accounts and lower
payroll costs. Administrative and General costs decreased in 1998 principally
due to a $1.5 million death benefit liability recorded in 1997. This liability
became payable upon the death of SJG's president in December 1997. The decrease
was partially offset by increased employee benefits costs in 1998.
SJG-14
Other Operating Expenses
A summary of principal changes in other consolidated operating expenses (in
thousands):
1998 vs. 1997 1997 vs. 1996
------------- -------------
Maintenance $ (200) $ 77
Depreciation 1,158 1,123
Income Taxes 697 932
Other Taxes (19,981) (3,497)
Changes in Maintenance expense in 1998 principally reflect reduced repair
activity due to the mild winter. Depreciation is higher in each period due to
increased investment in property, plant and equipment by SJG. Income Tax
changes reflect the impact of changes in pre-tax income and of energy tax reform
legislation discussed under Operating Revenues. Other taxes decreased because
of the energy tax reform legislation (See Note 5).
Interest Charges
Interest charges increased in 1998, following a decrease in 1997. The
increase in 1998 was due to higher levels of short and long-term debt
outstanding. The increased debt was used primarily to finance capital
expenditures and to support higher levels of purchased gas inventories resulting
from unexpectedly warm weather throughout 1998. Interest charges were reduced
in 1997 because of a $25.6 million equity infusion from SJI and the issuance of
Mandatorily Redeemable Preferred Securities were used to reduce bank debt
outstanding.
Preferred Securities Dividend Requirements
Preferred Dividends increased in 1998 as the $35.0 million of 8.35% SJG-
guaranteed Mandatorily Redeemable Preferred Securities issued in May 1997 were
outstanding for the full year (See "Capital Resources").
Net Income Applicable to Common Stock
The details affecting the changes in net income and earnings per share are
discussed under the appropriate captions above.
Liquidity
The seasonal nature of gas operations; the timing of construction and
remediation expenditures and related permanent financing; as well as mandated
tax and sinking fund payment dates require large, short-term cash requirements.
These requirements are generally met by cash from operations and short-term
lines of credit. We maintain short-term lines of credit with a number of banks,
totaling $120.0 million, of which $23.0 million was available at December 31,
1998. The credit lines are uncommitted and unsecured with interest rates at or
below the prime rate.
The changes in cash flows from operating activities (in thousands):
SJG-15
1998 vs. 1997 1997 vs. 1996
------------- -------------
Increases/(Decreases):
Net Income $ (5,076) $ 683
Depreciation and Amortization 1,147 327
Provision for Losses on Accounts
Receivable 14 (244)
Revenues and Fuel Costs Deferred - Net (913) 4,449
Deferred and Non-Current Income Taxes
and Credits - Net 318 (3,889)
Environmental Remediation Costs - Net 1,364 (1,682)
Accounts Receivable (2,380) (2,334)
Inventories (1,591) 6,395
Prepayments and Other Current Assets 122 (549)
Prepaid and Accrued Taxes - Net (13,551) 1,771
Accounts Payable and Other Accrued
Liabilities (6,278) (6,142)
Other - Net (1,106) (47)
-------- --------
Net Cash Provided by Operating
Activities $(27,930) $ (1,262)
======== ========
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.
Changes in Revenues and Fuel Costs Deferred - Net reflect the
undercollection of fuel costs resulting from weather related reductions in gas
sales and regulatory delays in recovering fuel costs under the LGAC (See Note
2).
Changes in Deferred and Non-Current Income Taxes and Credits - Net
represent the differences between taxes accrued and amounts paid. Generally,
deferred income taxes related to deferred fuel costs will be paid in the next
year.
Increases in Environmental Remediation Costs - Net represent the excess of
amounts collected under the RAC and insurance recoveries over remediation
expenditures.
Changes in Accounts Receivable are primarily due to the impact of weather
and commodity prices. Changes impact cash flows when collected in subsequent
periods.
Changes in Inventories reflect the impact of seasonal requirements,
temperatures and price changes.
Changes in Prepaid and Accrued Taxes - Net reflect the difference between
taxes paid and taxes accrued. Significant timing differences exist in cash
flows during the year. As stated in Note 1, on January 1, 1998, the Gross
Receipts & Franchise Taxes were replaced with a 6% State Sales and Use Tax,
a 9% State Corporate 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% of these taxes are paid in installments during the first half of the year
and the remaining 50% are paid on May 15 of each year. SJG uses short-term
borrowings to pay taxes, resulting in a temporary increase in the short-term
debt level. The carrying costs of timing differences are recognized in base
utility rates.
Changes in Accounts Payable and Other Current Liabilities reflect the
impact of timing differences between the accrual and payment of costs.
SJG-16
Regulatory Matters
Rate Actions
In January 1997, the BPU granted SJG a total rate increase of $10.3
million. The $6.0 million base rate portion of the increase was based on a
9.62% rate of return on rate base, which included an 11.25% return on common
equity. The majority of this increase comes from residential and small
commercial customers. We recover the increase from new miscellaneous service
fees which charge specific customers for costs they cause us to incur.
Additionally, our starting point for sharing pre-tax margins generated by
interruptible and off-system sales and transportation (Sharing Formula) was
increased from $4.0 million to $5.0 million. SJG was permitted to keep 100% of
pre-tax margins up to the threshold level and 20% of margins above that level.
Later in 1997, the $5.0 million threshold increased by $500,000, the annual
revenue requirement associated with completing a specific pipeline
interconnection. In December 1998, the threshold increased by $2.0 million,
with the completion of major construction projects. In October 1998, the
BPU approved a revision to the Sharing Formula as part of an agreement to modify
SJG's TAC. The revision credits the first $750,000 above the applicable
threshold level to the LGAC customers. Thereafter, SJG keeps 20% of the pre-tax
margins as it has historically.
Also in January 1997, the BPU approved SJG's request for a $2.5 million
revenue reduction through the TAC. This standard BPU procedure credits
customers with previously collected revenues exceeding 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.
In September 1997, SJG filed with the BPU to adjust rates by replacing the
GRAFT with the SUT, CBT and TEFA (See "Liquidity"). The new rates were
effective January 1, 1998.
SJG has an LGAC filing pending with the BPU requesting a $7.1 million rate
increase. This filing encompasses all of the adjustments filed for from the
1996-1997 LGAC filing through the 1998-1999 LGAC filing.
In March 1998, the BPU approved new appliance service rates. In April
1998, the BPU also authorized SJG to offer new appliance service contract plans
and to service electric air conditioners. In January 1999, SJG filed for an
increase in our appliance service rates. The new rates are competitive with
those of other service providers in New Jersey and are designed to increase
earnings and cash flows.
In June 1998, we filed a petition with the BPU requesting a change to the
TAC. The request was granted in October 1998. As a result, SJG will experience
reduced fluctuations in income when weather is warmer or colder than normal.
In July 1998, SJG filed a motion to further unbundle natural gas service.
The BPU's order of June 1998 expanded the residential transportation pilot
program. It also directed SJG to make a filing addressing full residential
unbundling which we did in November 1998. Many of the residential unbundling
issues also relate to the commercial and industrial transportation program. The
filing encompasses all issues surrounding both programs and is still outstanding
at the BPU.
Environmental Remediation
We incurred and recorded costs for environmental clean up of sites where
SJG or its predecessors operated gas manufacturing plants. SJG stopped
manufacturing gas over 35 years ago.
Since the early 1980s, SJG recorded environmental remediation costs of
$98.6 million. We spent $45.7 million as of December 31, 1998. With the
assistance of an outside consulting firm, we estimate that future costs to clean
up the sites will range from $52.9 million to $160.3 million. We recorded the
lower end of this range as a liability. It is reflected on the consolidated
balance sheet under the captions Current Liabilities and Deferred Credits and
Other Non-Current Liabilities. SJG did not adjust the accrued liability for
SJG-17
future insurance recoveries, which management is pursuing. SJG received $4.2
million of insurance recoveries as of December 31, 1998. We used these proceeds
to offset related legal fees and to reduce the balance of deferred environmental
remediation costs. Recorded amounts include estimated costs based on projected
investigation and remediation work plans using existing technologies. Actual
costs could differ from the estimates due to the long-term nature of the
projects, changing technology, government regulations and site specific
requirements.
SJG has two regulatory assets associated with environmental costs. The
first regulatory asset is titled Environmental Remediation Cost: Expended - Net.
These expenditures represent what was actually spent to clean up former gas
manufacturing plant sites. These costs meet the requirements of FASB Statement
No. 71, "Accounting for the Effects of Certain Types of Regulation." The BPU
allowed SJG to recover expenditures through July 1996 and petitions to recover
costs through July 1998 are pending.
The other regulatory asset titled Environmental Remediation Cost: Liability
for Future Expenditures relates to estimated future expenditures determined
under FASB No. 5. This amount, which relates to former manufactured gas plant
sites, was recorded as a deferred debit with the corresponding amount reflected
on the consolidated balance sheet under the captions Current Liabilities and
Deferred Credits and Other Non-Current Liabilities. The deferred debit is a
regulatory asset under FASB No. 71. The BPU's intent, evidenced by its current
practice, is to allow SJG to recover the deferred costs after they are spent.
SJG files with the BPU to recover these costs in rates through its RAC.
The BPU has consistently allowed the full recovery over 7-year periods, and SJG
believes this will continue. As of December 31, 1998, SJG's unamortized
remediation costs of $25.2 million are reflected on the consolidated balance
sheet under the caption Regulatory and Other Non-Current Assets. Since BPU
approval of the RAC in 1992, SJG recovered $16.3 million through rates as of
December 31, 1998.
In July 1996, 1997 and 1998, SJG filed with the BPU to recover increased
remediation costs expended from August 1995 through July 1998 totaling $4.5
million. This amount was updated to $5.0 million in a December 1998 filing.
The BPU approved the 1996-1997 RAC filing in October 1998. We updated the 1997-
1998 RAC filing and included the results in the 1998-1999 RAC filing. Both
filings are still pending at the BPU.
Other Regulatory Asset Recovery
Adopting FASB Statement No. 109, "Accounting for Income Taxes," in 1993
primarily resulted in creating a $17.6 million regulatory asset. SJG is
recovering the amortization of this asset through rates over 18 years which
began in December 1994. Also, SJG adopted FASB Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," in 1993. The
BPU provided for partial recovery of costs associated with FASB No. 106 and
prescribed continued deferral of unrecovered costs until 1998. Beginning
January 1, 1998, the BPU approved full recovery of the net periodic benefit cost
as well as recovery of the regulatory asset, amounting to $5.5 million at
December 31, 1998, over 15 years.
Other
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.
SJG also maintains insurance and records probable insurance recoveries relating
to outstanding claims.
In 1996, a group of Atlantic City casinos filed a petition with the BPU
alleging overcharges of over $10.0 million, including interest. We reached a
settlement under which SJG will make no payments. The casinos have issued
general releases to SJG, and withdrew the petition in September 1998. In
return, SJG filed with the BPU to amend an existing rate schedule providing the
casinos with limited firm service that will better meet their needs.
SJG-18
Financial Risk Management
The regulated natural gas business of SJG is subject to market risk due to
fluctuations in natural gas prices. To hedge against fluctuations, SJG has at
times entered into forward contracts. SJG recovers gas costs through LGAC, and
hedges against price fluctuations by using forward contracts.
To manage these transactions, SJG has a well-defined risk management policy
and procedures which include volumetric and monetary limits. SJG does not
purchase or sell derivative financial instruments.
Capital Resources
SJG has a continuing need for cash resources and capital, primarily to
invest in new and replacement facilities and equipment and for environmental
remediation costs. Net construction and remediation expenditures for 1998
amounted to $69.9 million. The costs for 1999, 2000 and 2001 are estimated
at approximately $52.2 million, $56.5 million and $55.7 million, respectively.
We will fund these expenditures from several sources, which may include cash
generated by operations, temporary use of short-term debt, sale of medium-term
notes, capital leases and RAC recoveries.
In March 1997, SJG sold $35.0 million of First Mortgage Bonds, 7.7% Series
due 2027.
In May 1997, SJG's Delaware statutory trust subsidiary, SJG Capital Trust
(Trust), sold $35.0 million of 8.35% SJG-Guaranteed Mandatorily Redeemable
Preferred Securities. The Trust's only assets are the 8.35% Deferrable Interest
Subordinated Debentures issued by SJG maturing April 2037. The Debentures and
Preferred Securities are redeemable at SJG's option at a price equal to 100% of
the principal amount at any time on or after April 30, 2002.
In October 1998, SJG issued $30.0 million of debt under a $100 million
Medium Term Note Program. Notes totaling $10.0 million were issued at 6.12%,
maturing in 2010, and $20.0 million of notes issued at 7.125%, maturing in 2018.
The net proceeds of these note issuances were used to retire short-term debt and
to fund capital expenditures.
Inflation
In the ratemaking process, only the original cost of utility plant is
recoverable in revenues as depreciation. 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, SJG believes it will be allowed
to earn a return on the increased cost of its investment as replacement of the
facilities occurs.
Summary
We are confident we will have sufficient cash flow to meet SJG's operating,
capital and dividend needs and are taking and will take such actions necessary
to employ our resources effectively.
SJG-19
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITOR'S REPORT
To the Shareholder and Board of Directors of
South Jersey Gas Company:
We have audited the consolidated balance sheets of South Jersey Gas Company
and subsidiary as of December 31, 1998 and 1997, and the related statements of
consolidated income, consolidated retained earnings and consolidated cash flows
for each of the three years in the period ended December 31, 1998. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of South Jersey Gas Company and
subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 12, 1999
SJG-20
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
------------------------
1998 1997
----------- -----------
ASSETS
- ------
Property, Plant and Equipment: (Notes 1, 3 & 7)
Utility Plant, at original cost $ 679,997 $ 619,489
Accumulated Depreciation (179,605) (167,176)
Gas Plant Acquisition Adjustment - Net 1,851 1,926
----------- -----------
Property, Plant and Equipment - Net 502,243 454,239
----------- -----------
Available-for-Sale Securities 886 -
----------- -----------
Current Assets:
Cash and Cash Equivalents (Notes 1 & 9) 4,380 6,596
Accounts Receivable (Notes 2 & 3) 28,770 30,116
Unbilled Revenues (Note 1) 18,998 17,263
Provision for Uncollectibles (1,032) (1,032)
Natural Gas in Storage, average cost 27,619 23,877
Materials and Supplies, average cost 4,051 4,509
Prepaid Taxes (Note 1) 12,596 566
Prepayments and Other Current Assets 1,638 1,661
----------- -----------
Total Current Assets 97,020 83,556
----------- -----------
Accounts Receivable - Merchandise 990 1,449
----------- -----------
Regulatory and Other Non-Current Assets: (Note 1)
Environmental Remediation Costs: (Note 12)
Expended - Net 25,152 21,041
Liability for Future Expenditures 52,939 52,400
Gross Receipts and Franchise Taxes (Note 6) 3,585 4,028
Income Taxes - Flowthrough Depreciation (Note 6) 13,021 13,999
Deferred Fuel Cost - Net (Notes 1 & 2) 7,857 3,674
Deferred Postretirement Benefit Costs (Notes 2 & 11) 5,522 6,150
Other 10,921 8,577
----------- -----------
Total Regulatory and Other Non-Current Assets 118,997 109,869
----------- -----------
Total Assets $ 720,136 $ 649,113
=========== ===========
The accompanying footnotes are an integral part of the financial statements.
SJG-21
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
------------------------
1998 1997
----------- -----------
Capitalization and Liabilities
- ------------------------------
Common Equity: (Note 10)
Common Stock, Par Value $2.50 per share:
Authorized - 4,000,000 shares
Outstanding - 2,339,139 shares $ 5,848 $ 5,848
Other Paid-In Capital and Premium on Common Stock 102,817 102,817
Retained Earnings 54,275 56,120
----------- -----------
Total Common Equity 162,940 164,785
----------- -----------
Preferred Stock and Securities: (Note 4)
Redeemable Cumulative Preferred - Par Value $100
per share,
Authorized 46,404 and 47,304 shares, respectively
Outstanding:
Series A, 4.70% - 2,100 and 3,000 shares. 210 300
Series B, 8.00% - 19,242 shares. 1,924 1,924
Company-Guaranteed Mandatorily Redeemable
Preferred Securities of Subsidiary Trust
Par Value $25 per share, 1,400,000 shares
Authorized and Outstanding 35,000 35,000
----------- -----------
Total Preferred Stock and Securities 37,134 37,224
----------- -----------
Long-Term Debt (Notes 7 & 8) 194,710 175,860
----------- -----------
Total Capitalization 394,784 377,869
----------- -----------
Current Liabilities:
Notes Payable (Note 9) 97,000 45,900
Current Maturities of Long-Term Debt (Note 7) 8,876 8,876
Accounts Payable (Note 3) 40,823 45,581
Customer Deposits 5,576 5,871
Environmental Remediation Costs (Notes 2 & 12) 8,752 14,373
Taxes Accrued (Note 2) 1,387 980
Interest Accrued and Other Current Liabilities 7,260 6,751
----------- -----------
Total Current Liabilities 169,674 128,332
----------- -----------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net (Notes 5 & 6) 87,358 81,847
Investment Tax Credits (Note 6) 5,239 5,632
Pension and Other Postretirement Benefits (Note 11) 13,297 10,798
Environmental Remediation Costs (Note 12) 44,187 38,027
Other 5,597 6,608
----------- -----------
Total Deferred Credits and Other Non-Current
Liabilities 155,678 142,912
----------- -----------
Commitments and Contingencies (Note 12)
Total Capitalization and Liabilities $ 720,136 $ 649,113
=========== ===========
The accompanying footnotes are an integral part of the financial statements.
SJG-22
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(In Thousands Except for Share Data)
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Operating Revenues:
Utility (Notes 1, 2 & 3) $ 297,431 $ 324,766 $ 327,317
Other 1,639 2,782 3,018
---------- ---------- ----------
Total Operating Revenues 299,070 327,548 330,335
---------- ---------- ----------
Operating Expenses:
Gas Purchased for Resale 174,822 181,166 186,141
Utility Operations 40,488 41,265 38,413
Other Operations 1,781 1,794 2,240
Maintenance 5,282 5,482 5,405
Depreciation (Note 1) 17,120 15,962 14,839
Income Taxes (Notes 1, 5 & 6) 12,256 11,559 10,627
Other Taxes (Notes 1 & 5) 10,343 30,324 33,821
---------- ---------- ----------
Total Operating Expenses 262,092 287,552 291,486
---------- ---------- ----------
Operating Income 36,978 39,996 38,849
Interest Charges
Long-Term Debt 15,218 15,165 13,636
Short-Term Debt 3,437 2,416 4,821
Other 412 415 1,003
---------- ---------- ----------
Total Interest Charges 19,067 17,996 19,460
Income Before Preferred Dividend
Requirements 17,911 22,000 19,389
Preferred Stock Dividend Requirements 166 170 174
Preferred Securities Dividend Requirements 2,923 1,932 -
---------- ---------- ----------
Net Income Applicable to Common Stock 14,822 19,898 19,215
Retained Earnings at Beginning of Year 56,120 51,522 47,364
---------- ---------- ----------
70,942 71,420 66,579
Dividends Declared - Common Stock 16,667 15,300 15,057
---------- ---------- ----------
Retained Earnings at End of Year (Note 10) $ 54,275 $ 56,120 $ 51,522
========== ========== ==========
Average Shares of Common Stock Outstanding 2,339 2,339 2,339
Earnings Per Common Share $ 6.34 $ 8.51 $ 8.21
========== ========== ==========
Dividends Declared Per Common Share $ 7.13 $ 6.54 $ 6.44
========== ========== ==========
The accompanying footnotes are an integral part of the financial statements.
SJG-23
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands)
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 14,822 $ 19,898 $ 19,215
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 19,014 17,867 17,540
Provision for Losses on Accounts Receivable 1,385 1,371 1,615
Revenues and Fuel Costs Deferred - Net (4,183) (3,270) (7,719)
Deferred and Non-Current Income Taxes and
Credits - Net 6,416 6,098 9,987
Environmental Remediation Costs - Net (4,111) (5,475) (3,793)
Changes in:
Accounts Receivable (1,774) 606 2,940
Inventories (3,284) (1,693) (8,088)
Prepayments and Other Current Assets 23 (99) 450
Prepaid and Accrued Taxes - Net (11,623) 1,928 157
Accounts Payable and Other Accrued Liabilities (4,545) 1,733 7,875
Other - Net (282) 824 871
----------- ----------- -----------
Net Cash Provided by Operating Activities 11,858 39,788 41,050
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchase of Available-for-Sale Securities (886) - -
Capital Expenditures, Cost of Removal and Salvage (65,824) (49,462) (40,371)
----------- ----------- -----------
Net Cash Used in Investing Activities (66,710) (49,462) (40,371)
----------- ----------- -----------
Cash Flows from Financing Activities:
Net Borrowing from (Repayments of) Lines of Credit 51,100 (62,400) 32,000
Proceeds from Issuance of Long-Term Debt 30,000 35,000 -
Principal Repayments of Long-Term Debt (11,150) (6,603) (12,256)
Dividends on Common Stock (16,667) (15,300) (15,057)
Proceeds from Issuance of Preferred Securities - 35,000 -
Repurchase of Preferred Stock (90) (90) (90)
Payments for Issuance of Long-Term Debt and Preferred
Securities (557) (2,429) -
Additional Investment by Shareholder - 25,623 -
----------- ----------- -----------
Net Cash Provided by Financing Activities 52,636 8,801 4,597
----------- ----------- -----------
Net (Decrease)Increase in Cash and Cash Equivalents (2,216) (873) 5,276
Cash and Cash Equivalents at Beginning of Year 6,596 7,469 2,193
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 4,380 $ 6,596 $ 7,469
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest (Net of Amounts Applicable to LGAC
Overcollections and Amounts Capitalized) $ 21,614 $ 18,268 $ 19,985
Income Taxes (Net of Refunds) $ 12,037 $ 4,382 $ 1,733
The accompanying footnotes are an integral part of the financial statements.
SJG-24
SOUTH JERSEY GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. (SJI) 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 - 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.
Regulation - SJG is subject to the rules and regulations of the New Jersey
Board of Public Utilities (BPU). We maintain our accounts according to the
BPU's prescribed Uniform System of Accounts (See Note 2).
Utility Revenues - SJG bills customers monthly. For customers not billed
at the end of each month, an accrual is made to recognize unbilled revenues from
the date of the last bill to the end of the month.
The BPU allows SJG to recover the excess cost of gas sold over the cost
included in base rates through the Levelized Gas Adjustment Clause (LGAC). We
collect these costs on a forecasted basis upon BPU order. SJG defers under- or
over-recoveries of gas costs and includes them in the following year's LGAC. We
pay interest on overcollected LGAC balances based on SJG's return on rate base
determined in base rate proceedings.
SJG's tariff also includes a Temperature Adjustment Clause (TAC), a
Remediation Adjustment Clause (RAC) and a Demand Side Management Clause (DSMC).
Our TAC reduces the impact of temperature fluctuations on SJG and its customers.
The RAC recovers remediation costs of former gas manufacturing plants and the
DSMC recovers costs associated with our conservation plan. TAC adjustments
affect revenue, income and cash flows since colder-than-normal weather can
generate credits to customers, while warmer-than-normal weather during the
winter season can result in additional billings. RAC adjustments do not
directly affect earnings because we defer and recover these costs through rates
over 7-year amortization periods (See Note 12). DSMC adjustments are not
significant and do not affect earnings.
Property, Plant & Equipment - For regulatory purposes, utility plant is
stated at original cost. The cost of adding, replacing and renewing property is
charged to the appropriate plant account.
SJG-25
1998 1997
-------- --------
Utility Plant:
Production Plant $ 967 $ 971
Storage Plant 8,467 8,210
Transmission Plant 88,135 66,726
Distribution Plant 553,227 516,718
General Plant 25,417 22,914
Intangible Plant 267 267
-------- --------
Utility Plant in Service 676,480 615,806
Construction Work in Progress 2,195 2,361
Gas Stored - Base Gas 1,322 1,322
-------- --------
Total Utility Plant $679,997 $619,489
======== ========
Depreciation and Amortization - We depreciate utility plant on a straight-
line basis over the estimated remaining lives of the various property classes.
These estimates are periodically reviewed and adjusted as required after BPU
approval. The composite annual rate for all depreciable utility property was
approximately 2.8% in 1998, 1997 and 1996. Except for extraordinary
retirements, accumulated depreciation is charged with the cost of depreciable
utility property retired, and removal costs less salvage. The gas plant
acquisition adjustment is amortized on a straight-line basis over 40 years.
The unamortized balance of $1.9 million at December 31, 1998, is not included in
rate base.
New Accounting Pronouncements - SJG adopted Financial Accounting Standards
Board (FASB) Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," in 1996. It requires the
review of long-lived assets for impairment whenever events or changes in
circumstances indicate that we may not recover the carrying amount of an asset.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which became effective in
1998. This statement establishes standards for reporting selected information
about operating segments in the Company's interim and annual financial
statements. Adopting this statement did not significantly change the
presentation of SJG's financial information. We adopted FASB No. 131 effective
January 1, 1998.
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits," to standardize
and simplify disclosure requirements about employers' retirement benefit plans.
SJG adopted this statement January 1, 1998 (See Note 11).
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for our fiscal year
ending December 31, 2000. This statement establishes accounting and reporting
standards for derivative instruments, including those embedded in other
contracts, and for hedging activities. It requires recognizing derivatives as
assets or liabilities at fair value on the balance sheet. We are currently
evaluating the effects of FASB No. 133 on the Company's financial condition and
results of operations, which will vary based on our use of derivative
instruments at the time of adoption.
Income and Other Taxes - Deferred Income Taxes are provided for all
significant temporary differences between book and taxable income (See Notes 5 &
6).
SJG-26
New Jersey adopted legislation reforming energy taxation in 1997. The law
eliminated the Gross Receipts & Franchise Tax (GRAFT) of approximately 13% of
utility revenue, replacing it with a combination of taxes. Beginning January 1,
1998, retail sales and transportation of natural gas, electricity and utility
services are subject to the 6% State Sales and Use Tax (SUT). Gas and electric
utilities are also subject to the 9% State Corporation Business Tax (CBT). To
bridge the revenue gap the law created, the State imposed a Transitional Energy
Facilities Assessment (TEFA) on gas volumes sold and transported. The TEFA
will be phased out over 5 years beginning January 1, 1999. The revised tax
policy is expected to eliminate tax differences between utility and non-utility
suppliers, providing fair competition and lower energy costs for consumers. The
legislation required SJG to prepay taxes which, primarily due to warmer weather,
did not materialize as expense during 1998. SJG will utilize the balance of
these prepayments in 1999. Additionally, the SUT is not included in reported
utility revenues or tax expense, as GRAFT was previously. Therefore, there are
equal reductions in these line items on the statements of consolidated income
(See Notes 2 & 5).
Statements of Cash Flows - For purposes of reporting cash flows, highly
liquid investments with original maturities of 3 months or less are considered
cash equivalents.
2. RECENT REGULATORY ACTIONS:
In July 1996, 1997 and 1998, SJG filed with the BPU to recover increased
remediation costs expended from August 1995 through July 1998 totaling $4.5
million. The BPU approved the 1996-1997 RAC filing in October 1998. We updated
the 1997-1998 RAC filing and included the results in the 1998-1999 RAC filing.
We updated the 1998-1999 RAC filing in December 1998 requesting a $5.0 million
increase. Both filings are still pending at the BPU.
In September 1996, SJG made its annual LGAC and TAC filings with the BPU
proposing a decrease to the LGAC of $1.4 million and a credit resulting from the
TAC of $2.5 million. We rolled the updated 1996-1997 LGAC year results into the
1997-1998 LGAC filed with the BPU in September 1997. The TAC credit resulted
from significantly colder weather during the TAC period from October 1, 1995
through May 31, 1996. The BPU approved the revenue reduction for the TAC credit
in January 1997. We credited customers bills in 1997, and the earnings impact
was reflected in 1996.
In January 1997, the BPU granted SJG a total rate increase of $10.3
million. The $6.0 million base rate portion of the increase was based on a
9.62% rate of return on rate base, which included an 11.25% return on common
equity. The majority of this increase comes from residential and small
commercial customers. Part of the increase is recovered from service fees
which charge specific customers for costs they cause SJG to incur.
Additionally, SJG's threshold for sharing pre-tax margins generated by
interruptible and off-system sales and transportation (Sharing Formula)
increased from $4.0 million to $5.0 million. Later in 1997, the $5.0 million
threshold increased by $500,000 - the annual revenue requirement associated with
completing a specific pipeline interconnection. At the end of 1998, the
threshold increased by $2.0 million, with the completion of major construction
projects. SJG keeps 100% of pre-tax margins up to the threshold level and 20%
of such margins above that level. In October 1998, the BPU approved a revision
to the Sharing Formula as part of an agreement to modify SJG's TAC. The
revision credits the first $750,000 above the current threshold level to the
LGAC customers. Thereafter, SJG keeps 20% of the pre-tax margins as it has
historically.
As part of the tariff changes approved in the rate case, SJG began its
pilot program in April 1997, giving residential customers a choice of gas
supplier. During the initial enrollment period, which ended June in 1997,
nearly 13,000 residential customers applied for this service. SJG began
transporting gas for these customers in August 1997. In June 1998, the BPU
expanded the number of potential participants to 25,000. There were 17,310
participants as of December 31, 1998. Participants' bills are reduced for cost
of gas charges and applicable taxes. The resulting decrease in revenues is
offset by a corresponding decrease in gas costs and taxes under SJG's
BPU-approved fuel clause. While the program reduces utility revenues, it does
SJG-27
not affect the SJG's net income, financial condition or margins. We also
expanded the choices available to commercial and industrial customers, including
a new transportation tariff providing savings to qualified customers.
In May 1997, SJG filed to recover additional postretirement benefit costs
of approximately $1.3 million annually. This recovery was approved in December
1997 and began January 1998.
In September 1997, SJG filed with the BPU to adjust rates by replacing the
GRAFT with the SUT, CBT and TEFA (See Notes 1 & 5). The new rates were
effective January 1, 1998.
In September 1997 and 1998, SJG filed its annual LGAC, TAC and DSMC with
the BPU. The LGAC and DSMC cover the period November 1 through October 31 of
each year. The TAC period runs from October 1 through May 31. In the 1997-1998
filing, SJG requested a $4.7 million increase in the annual LGAC recovery which
includes the 1996-1997 LGAC year. The 1997-1998 LGAC year ended in October 1998
and we rolled the results of that year into the 1998-1999 LGAC filing. The
1998-1999 LGAC filing requested a decrease in rates of $414,000 and resolution
of prior filings. All filings are still pending at the BPU. We believe the
ultimate settlement of these filings will not adversely affect SJG's financial
position, results of operations or liquidity.
In March 1998, the BPU approved new appliance service rates. The new rates
are competitive with those of other service providers in New Jersey and are
designed to increase earnings and cash flows. In April 1998, the BPU also
authorized SJG to offer new appliance service contract plans and to service
electric air conditioners.
In June 1998, SJG filed a petition with the BPU requesting a change to the
TAC. The request was granted in October 1998. As a result, SJG will experience
reduced fluctuations in income when weather is warmer or colder than normal.
3. RELATED PARTY TRANSACTIONS:
SJG had contracted with R & T Group, Inc. (R&T), a wholly owned subsidiary
of SJI, for general utility construction and environmental remediation services
costing approximately $ -0-, $1,895,500, and $7,257,800 for the years ended
December 31, 1998, 1997 and 1996, respectively. SJI discontinued the operations
and sold the assets of R&T during the first half of 1997.
SJG sells natural gas for resale to South Jersey Energy Company (SJE),
SJI's wholly owned subsidiary. These sales comply with Section 284.402 of the
Regulations of the Federal Energy Regulatory Commission (FERC). Sales to SJE
were approximately $970,200, $48,200, and $339,700 for the years ended December
31, 1998, 1997 and 1996, respectively. The amount due from SJE relating to
these sales was $354,900 and $6,000 at December 31, 1998 and 1997, respectively.
4. PREFERRED STOCK AND SECURITIES:
Redeemable Cumulative Preferred Stock - Annually, SJG is required to offer
to purchase 900 and 1,500 shares of its Cumulative Preferred Stock, Series A and
Series B, respectively, at par value, plus accrued dividends.
If preferred stock dividends are in arrears, SJG may not declare or pay
dividends or make distributions on its Common Stock. Preferred Shareholders may
elect a majority of SJG's directors if four or more quarterly dividends are in
arrears.
Mandatorily Redeemable Preferred Securities - In May 1997, SJG's statutory
trust subsidiary, SJG Capital Trust (Trust), sold $35.0 million of 8.35% SJG-
guaranteed Mandatorily Redeemable Preferred Securities. The Trust's only assets
SJG-28
are the 8.35% Deferrable Interest Subordinated Debentures issued by SJG maturing
April, 2037. This is also the maturity date of the Preferred Securities. The
Debentures and Preferred Securities are redeemable at SJG's option at a price
equal to 100% of the principal amount at any time on or after April 30, 2002.
5. INCOME AND OTHER TAXES:
SJG is included in the consolidated Federal Income tax return filed by SJI.
The actual taxes, including credits, are allocated by SJI to its subsidiaries
generally on a separate return basis. Total income taxes applicable to
operations differs from the tax that would have resulted by applying the
statutory Federal Income Tax rate to pre-tax income for the following reasons
(in thousands):
1998 1997 1996
------- ------- -------
Tax at Statutory Rate $ 8,441 $11,069 $10,506
Increase (Decrease) Resulting from:
State Income Taxes 3,126 - -
Amortization of Investment
Tax Credits (ITC) (393) (393) (392)
Tax Depreciation Under Book
Depreciation on Utility Plant 664 664 664
Other - Net 418 219 (151)
------- ------- -------
Net Income Taxes $12,256 $11,559 $10,627
======= ======= =======
The provision for Income Taxes is comprised of the following (in
thousands):
1998 1997 1996
------- ------- -------
Current:
Federal $ 3,637 $ 5,461 $ 640
State 2,204 - -
------- ------- -------
Total Current 5,841 5,461 640
------- ------- -------
Deferred:
Federal -
Excess of Tax Depreciation Over
Book Depreciation - Net 5,305 4,496 4,608
Deferred Fuel Costs 1,397 349 3,340
Environmental Remediation
Costs - Net 1,962 2,017 1,214
Amortization of Gross Receipts
Taxes (155) (140) (140)
Alternative Minimum Tax (2,622) - 1,929
Other - Net (19) (231) (572)
State 940 - -
------- ------- -------
Total Deferred 6,808 6,491 10,379
ITC (393) (393) (392)
------- ------- -------
Net Income Taxes $12,256 $11,559 $10,627
------- ------- -------
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Significant components of SJG's net deferred tax
liability at December 31 are (in thousands):
SJG-29
1998 1997
-------- --------
Deferred Tax Liabilities:
Tax Depreciation Over Book Depreciation $ 66,865 $ 62,879
Between Book and Tax Basis of Property 5,952 5,579
Deferred Fuel Costs 6,835 5,078
Deferred Regulatory Costs 727 996
Environmental Remediation Costs 10,062 7,463
Excess Protected 3,420 3,485
Gross Receipts Taxes 1,214 1,424
Other 710 901
-------- --------
Total Deferred Tax Liabilities 95,785 87,805
-------- --------
Deferred Tax Assets:
Alternative Minimum Tax 3,465 843
ITC Basis Gross Up 2,802 3,004
Other 2,160 2,111
-------- --------
Total Deferred Tax Assets 8,427 5,958
-------- --------
Net Deferred Tax Liability $ 87,358 $ 81,847
======== ========
As of December 31, 1998 and 1997, income taxes due from(to) SJI were
approximately $3,359,400 and $(514,000), respectively.
The significant components of Other Taxes are (in thousands):
1998 1997 1996
------- ------- -------
TEFA $ 7,378 $ - $ -
GRAFT 123 27,361 30,917
Other 2,842 2,963 2,904
------- ------- -------
Total Other Taxes $10,343 $30,324 $33,821
======= ======= =======
During 1998, SJG recorded an additional $12.0 million for SUT on utility
services through its consolidated balance sheet. As an agent for the collection
of SUT, we exclude these amounts from reported revenues and tax expense (See
Note 1).
6. REGULATORY ASSETS AND DEFERRED CREDITS - FEDERAL AND OTHER TAXES:
The primary asset created by adopting FASB Statement No. 109, "Accounting
for Income Taxes," was Income Taxes - Flowthrough Depreciation in the amount of
$17.6 million as of January 1, 1993. This amount represented excess federal tax
depreciation over book depreciation on utility plant because of temporary
differences for which, prior to FASB No. 109, deferred taxes previously were not
provided. SJG previously flowed these tax benefits through in rates. SJG is
recovering the amortization of the regulatory asset through rates over 18 years
which began in December 1994.
The ITC attributable to SJG was deferred and continues to be amortized at
the annual rate of 3%, which approximates the life of related assets.
SJG deferred $11.8 million resulting from a change in the basis for
accruing GRAFT in 1978, and is amortizing it on a straight-line basis to
operations over 30 years beginning that same year.
SJG-30
7. LONG-TERM DEBT: (A)
Principal Outstanding
December 31,
(In Thousands)
1998 1997
-------- --------
First Mortgage Bonds: (B)
8.19% Series due 2007 $ 20,454 $ 22,727
10 1/4% Series due 2008 20,454 25,000
9% Series due 2010 26,250 28,438
6.12% Series due 2010 (C) 10,000 -
6.95% Series due 2013 35,000 35,000
7.125% Series due 2018 (C) 20,000 -
7.7% Series due 2027 35,000 35,000
Unsecured Notes:
Term Note, 8.47% due 2001 (D) 6,428 8,571
Debenture Notes, 8.6% due 2010 30,000 30,000
Total Long-Term Debt Outstanding 203,586 184,736
Less Current Maturities 8,876 8,876
Long-Term Debt $194,710 $175,860
(A) Long-Term Debt Maturities and Sinking Fund Requirements for the
succeeding five years are as follows: 1999, $8,876,357; 2000,
$8,876,357; 2001, $11,876,358; 2002, $9,733,573; and 2003,
$12,883,500.
(B) SJG's First Mortgage dated October 1, 1947, as supplemented, securing
the First Mortgage Bonds constitutes a direct first mortgage lien on
substantially all utility plant. The First Mortgage Bonds also
require an annual replacement fund, which may be met by the deposit of
cash funds with the Trustee or by using bondable property additions at
166.6% of cash requirements. SJG expects to continue to satisfy this
requirement with property additions in each of the next five years.
(C) On October 21, 1998, SJG issued $30.0 million of debt under a Medium
Term Note Program established October 5, 1998. Under this program,
$10.0 million of the notes were issued at 6.12%, maturing in 2010, and
$20.0 million of notes were issued at 7.125%, maturing in 2018. A
total of $100.0 million is authorized to be issued under this program
through December 2001.
(D) An additional $5.0 million revolving credit facility was available
under the terms of this agreement which expired December 31, 1997.
8. FINANCIAL INSTRUMENTS:
Long-Term Debt - The fair values of SJG's long-term debt, including current
maturities, as of December 31, 1998 and 1997, are estimated to be $227.0 million
and $205.2 million, respectively. Carrying amounts are $203.6 million and
$184.7 million, respectively. The estimates are based on the interest rates
available to SJG at the end of each year for debt with similar terms and
maturities. SJG retires debt when it is cost effective as permitted by the debt
agreements.
Other Financial Instruments - The carrying amounts of SJG's other financial
instruments approximate their fair values at December 31, 1998 and 1997.
SJG-31
9. UNUSED LINES OF CREDIT AND COMPENSATING BALANCES:
Unused lines of credit available at December 31, 1998, were approximately
$23.0 million. Borrowings under these lines of credit are at market rates. The
weighted borrowing cost, which changes daily, was approximately 5.81% and 6.06%
at December 31, 1998 and 1997, respectively. Demand deposits are maintained
with lending banks on an informal basis and do not constitute compensating
balances.
10. RETAINED EARNINGS:
Restrictions exist under various loan agreements regarding the amount of
cash dividends or other distributions that we may pay on SJG's common stock.
SJG's retained earnings, which is free of these restrictions, was approximately
$52.4 million as of December 31, 1998.
11. PENSIONS & OTHER POSTRETIREMENT BENEFITS:
The following reflects the new disclosure requirements of FASB Statement
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits."
SJG participates in the defined benefit retirement plans of SJI. The
pension plans provide annuity payments to substantially all full-time, regular
employees upon retirement. The other postretirement benefit plans provide
health care and life insurance benefits to some retired employees.
The BPU authorized SJG to recover costs related to postretirement benefits
other than pensions under the accrual method of accounting consistent with FASB
Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." Amounts accrued prior to that authorization were deferred and are
being amortized as allowed by the BPU. The unamortized balance amounting to
$5.5 million at December 31, 1998 is recoverable in rates. We are amortizing
the major portion of this amount over 15 years which started January 1998.
Net periodic benefit cost related to the pension and other postretirement
benefit insurance plans, consisted of the following components (in thousands):
Pension Benefits Other Benefits
1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------
Service cost $1,850 $1,858 $1,589 $ 882 $ 963 $ 883
Interest cost 3,814 3,598 2,839 1,457 1,540 1,381
Expected return on
plan assets (3,742) (3,171) (2,574) (417) (272) (164)
Amortization of
transition obligation 87 87 87 779 779 779
Amortization of loss
(gain) and other 258 292 163 (9) - -
------ ------ ------ ------ ------ ------
Net periodic benefit cost $2,267 $2,664 $2,104 $2,692 $3,010 $2,879
====== ====== ====== ====== ====== ======
A reconciliation of the Plans' benefit obligations, fair value of plan
assets, funded status and amounts recognized in SJG's consolidated balance
sheets follows (in thousands):
SJG-32
Pension Benefits Other Benefits
1998 1997 1998 1997
-------- -------- -------- --------
Change in Benefit Obligation:
Benefit obligation at beginning of
year $ 50,210 $ 45,001 $ 23,428 $ 20,902
Service cost 1,850 1,678 882 963
Interest cost 3,814 3,204 1,457 1,539
Plan amendments - 1,373 - -
Actuarial loss (gain) and other 5,495 1,020 (1,645) 871
Benefits paid (2,038) (2,066) (485) (847)
-------- -------- -------- --------
Benefit obligation at end of year $ 59,331 $ 50,210 $ 23,637 $ 23,428
======== ======== ======== ========
Change in Plan Assets:
Fair value of plan assets at
beginning of year $ 41,993 $ 36,326 $ 4,403 $ 2,835
Actual return on plan assets 2,466 5,558 568 448
Employer contributions 1,516 2,175 2,486 1,967
Benefits paid (2,038) (2,066) (485) (847)
-------- -------- -------- --------
Fair value of plan assets at end
of year $ 43,937 $ 41,993 $ 6,972 $ 4,403
======== ======== ======== ========
Funded status $(15,394) $ (8,218) $(16,665) $(19,025)
Unrecognized prior service cost 2,552 2,777 - -
Unrecognized net transition
obligation 435 523 10,912 11,691
Unrecognized net loss (gain) and
other 9,240 2,502 (1,017) 770
-------- -------- -------- --------
Accrued net benefit cost at end of
year $ (3,167) $ (2,416) $ (6,770) $ (6,564)
======== ======== ======== ========
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets as of December 31, 1998, were $35.2 million, $28.4
million, and $26.2 million, respectively. As of December 31, 1997, the
accumulated benefit obligations did not exceed plan assets.
Assumptions used in the accounting for these plans were as follows (in
thousands):
Pension Benefits Other Benefits
1998 1997 1998 1997
-------- -------- -------- --------
Discount rate 6.75 7.25 6.75 7.25
Expected return on plan assets 9.00 8.50 9.00 8.50
Rate of compensation increase 4.10 4.10 - -
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation as of December 31, 1998, are: Medical and Drug
- - 6.25% in 1998 for participants age 65 or older, grading to 5.5% in 2001, and
8.0% in 1998 for participants under age 65, grading to 5.5% in 2005. Dental -
7.25% in 1998, grading to 5.5% in 2005.
A 1% change in the assumed health care cost trend rates for SJG's
postretirement health care plans in 1998 would have the following effects (in
thousands):
SJG-33
1% Increase 1% Decrease
----------- -----------
Effect on the aggregate of the service
and interest cost components $ 389 $ (334)
Effect on the postretirement benefit obligation $3,453 $(2,801)
12. COMMITMENTS AND CONTINGENCIES:
Construction Commitments - The estimated cost of construction and
environmental remediation programs of SJG for 1999 totals $52.2 million.
Commitments were made regarding these programs.
Gas Supply Contracts - SJG, in the normal course of conducting business,
has entered into long-term contracts for natural gas supplies, firm
transportation and gas storage service. The earliest that any of these
contracts expires is 2000. The transportation and storage service agreements
between SJG and its interstate pipeline suppliers were made under Federal Energy
Regulatory Commission approved tariffs. SJG's cumulative obligation for demand
charges and reservation fees paid to suppliers for these services is
approximately $4.8 million per month, recovered on a current basis through the
LGAC.
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 1996, a group of Atlantic City casinos filed a petition with the BPU
alleging overcharges of over $10.0 million, including interest. We reached a
settlement under which SJG will make no payments. The casinos issued general
releases to SJG and withdrew the petition in September 1998. In return, SJG
filed with the BPU to amend an existing rate schedule providing the casinos with
limited firm service which will better meet their needs.
Environmental Remediation Costs - SJG incurred and recorded costs for
environmental clean up of sites where SJG or its predecessors operated gas
manufacturing plants. SJG stopped manufacturing gas over 35 years ago.
Since the early 1980s, SJG recorded environmental remediation costs of
$98.6 million, of which $45.7 million was spent as of December 31, 1998. With
the assistance of an outside consulting firm, we estimate that future costs to
clean up SJG's sites will range from $52.9 million to $160.3 million. We
recorded the lower end of this range as a liability. It is reflected on the
1998 consolidated balance sheet under the captions Current Liabilities and
Deferred Credits and Other Non-Current Liabilities (See Note 1). SJG did not
adjust the accrued liability for future insurance recoveries, which management
is pursuing. SJG received $4.2 million of insurance recoveries as of December
31, 1998. We used these proceeds to offset related legal fees and to reduce the
balance of deferred environmental remediation costs. Recorded amounts include
estimated costs based on projected investigation and remediation work plans
using existing technologies. Actual costs could differ from the estimates due
to the long-term nature of the projects, changing technology, government
regulations and site-specific requirements.
SJG has two regulatory assets associated with environmental cost. The
first regulatory asset is titled Environmental Remediation Cost: Expended - Net.
These expenditures represent what was actually spent to clean up former gas
manufacturing plant sites. These costs meet the requirements of FASB Statement
No. 71, "Accounting for the Effects of Certain Types of Regulation." The BPU
allowed SJG to recover expenditures through July 1996 and petitions to recover
costs through July 1998 are pending (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 Statement No. 5, "Accounting for Contingencies."
SJG-34
This amount, which relates to former manufactured gas plant sites, was recorded
as a deferred debit with the corresponding amount reflected on the consolidating
balance sheet under the captions, Current Liabilities and Deferred Credits and
Other Non-Current Liabilities. The deferred debit is a regulatory asset under
FASB No. 71. The BPU's intent, evidenced by current practice, is to allow SJG
to recover the deferred costs after they are spent.
SJG files with the BPU to recover these costs in rates through its RAC.
The BPU has consistently allowed the full recovery over 7-year periods, and SJG
believes this will continue. As of December 31, 1998, SJG's unamortized
remediation costs of $25.2 million are reflected on the consolidated balance
sheet under the caption Regulatory and Other Non-Current Assets. Since BPU
approval of the RAC in 1992, SJG recovered $16.3 million through rates as of
December 31, 1998 (See Note 2).
SJG-35
13. QUARTERLY RESULTS OF OPERATIONS - UNAUDITED:
The summarized quarterly results of SJG's operations, in thousands except
for per share amounts:
1998 Quarter Ended 1997 Quarter Ended
--------------------------------------- ---------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- --------- --------- --------- --------- ---------
Operating Revenues $108,484 $ 52,257 $ 43,480 $ 94,849 $126,587 $ 58,343 $ 50,076 $ 92,542
--------- --------- --------- --------- --------- --------- --------- ---------
Operating Expenses:
Operation and Maintenance
Including Fixed Charges 81,335 50,850 47,341 79,034 89,862 51,818 51,939 70,046
Income Taxes 9,673 (225) (2,329) 5,137 8,426 486 (1,799) 4,446
Other Taxes 3,883 1,996 1,575 2,889 13,132 5,277 3,149 8,766
--------- --------- --------- --------- --------- --------- --------- ---------
Income (Loss) before
Preferred Dividend
Requirements 13,593 (364) (3,107) 7,789 15,167 762 (3,213) 9,284
Preferred Dividend
Requirements 773 773 772 771 43 514 773 772
--------- --------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) Applicable
to Common Stock $ 12,820 $ (1,137) $ (3,879) $ 7,018 $ 15,124 $ 248 $ (3,986) $ 8,512
========= ========= ========= ========= ========= ========= ========= =========
Earnings Per Common
Share (Based on Average
Shares Outstanding):(1) $ 5.48 $ (0.49) $ (1.66) $ 3.00 $ 6.47 $ 0.11 $ (1.70) $ 3.64
========= ========= ========= ========= ========= ========= ========= =========
Average Shares Outstanding 2,339 2,339 2,339 2,339 2,339 2,339 2,339 2,339
(1) The sum of the quarters for 1998 and 1997 does not equal the year's total due to rounding.
NOTE: Because of the seasonal nature of the business, statements for the 3 month periods are not
indicative of the results for a full year.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
SJG-36
PART III
Item 10. Directors and Executive Officers of the Registrant
Not applicable.
Item 11. Executive Compensation
Not applicable.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Not applicable.
Item 13. Certain Relationships and Related Transactions
Not applicable.
SJG-37
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) Listed below are all financial statements and schedules filed as part of
this report:
1 - The consolidated financial statements and notes to consolidated
financial statements together with the report thereon of Deloitte & Touche LLP,
dated February 12, 1999. See Item 8.
2 - Supplementary Financial Information
Supplemental Schedules as of December 31, 1998, 1997 and 1996 and for the
three years ended December 31, 1998, 1997, and 1996:
The Independent Auditors' Report of Deloitte & Touche LLP, Auditors of the
Company. See Item 8.
Schedule II - Valuation and Qualifying Accounts . See page 47.
(All Schedules, other than that listed above, are omitted because the
information called for is included in the financial statements filed or because
they are not applicable or are not required. Separate financial statements are
not presented because SJG's subsidiary is wholly-owned.)
3 - See Item 14(c)(13)
(b) Reports on Form 8-K - None.
(c) List of Exhibits (Exhibit Number is in Accordance with the Exhibit Table
in Item 601 of Regulation S-K)
Exhibit
Number
(1)(a) Medium Term Note Distribution Agreement. Incorporated by reference from
Exhibit (1)(a) of Form S-3 (333-62019)
(3)(a) Certificate of Incorporation of South Jersey Gas Company. Incorporated
by reference from Exhibit (3)(a) of Form 10 filed March 7, 1997.
(3)(b) Bylaws of South Jersey Gas Company, as amended and restated through June
19, 1998 (filed herewith).
(4)(a) Form of Stock Certified for Common Stock. Incorporated by reference
from Exhibit (4)(a) of Form 10 filed March 7, 1997.
(4)(b)(i) First Mortgage Indenture dated October 1, 1947. Incorporated by
reference from Exhibit (4)(b)(i) of Form 10-K of SJI for 1987 (1-6364).
(4)(b)(iv) Twelfth Supplemental Indenture dated as of June 1, 1980.
Incorporated by reference from Exhibit 5(b) of Form S-7 of SJI (2-68038).
(4)(b)(xiv) Sixteenth Supplemental Indenture dated as of April 1, 1988, 10 1/4%
Series due 2008. Incorporated by reference from Exhibit (4)(b)(xv) of Form 10-Q
of SJI for the quarter ended March 31, 1988 (1-6364).
SJG-38
Exhibit
Number
(4)(b)(xv) Seventeenth Supplemental Indenture dated as of May 1, 1989.
Incorporated by reference from Exhibit (4)(b)(xv) of Form 10-K of SJI for 1989
(1-6364).
(4)(b)(xvi) Eighteenth Supplemental Indenture dated as of March 1, 1990.
Incorporated by reference from Exhibit (4)(e) of Form S-3 of SJI (33-36581).
(4)(b)(xvii) Nineteenth Supplemental Indenture dated as of April 1, 1992.
Incorporated by reference from Exhibit (4)(b)(xvii) of Form 10-K of SJI for 1992
(1-6364).
(4)(b)(xviii) Twentieth Supplemental Indenture dated as of June 1, 1993.
Incorporated by reference from Exhibit (4)(b)(xviii) of Form 10-K of SJI for
1993(1-6364).
(4)(b)(xix) Twenty-First Supplemental Indenture dated as of March 1, 1997.
Incorporated by reference from Exhibit (4)(b)(xviv) of Form 10-K of SJI for 1997
(1-6364).
(4)(b)(xx) Twenty-Second Supplemental Indenture dated as of October 1, 1998.
Incorporated by reference from Exhibit (4)(b)(ix) of Form S-3 (333-62019).
(4)(c) Indenture dated as of January 31, 1995; 8.60% Debenture Notes due
February 1, 2010. Incorporated by reference from Exhibit (4)(c) of Form 10-K of
SJI for 1994 (1-6364).
(4)(d) Certificate of Trust for SJG Capital Trust. Incorporated by reference
from Exhibit 3(a) of Form S-3 - SJG Capital Trust and South Jersey Gas Company
as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997
(333-24065).
(4)(d)(i) Trust Agreement of SJG Capital Trust. Incorporated by reference from
Exhibit 3(b) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as
filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065).
(4)(d)(ii) Form of Amended and Restated Trust Agreement for SJG Capital Trust.
Incorporated by reference from Exhibit 3(c) of Form S-3 - SJG Capital Trust and
South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and
April 23, 1997 (333-24065).
(4)(d)(iii) Form of Preferred Security for SJG Capital Trust. Incorporated by
reference from Exhibit 4(a) of Form S-3 - SJG Capital Trust and South Jersey Gas
Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997
(333-24065).
(4)(d)(iv) Form of Deferrable Interest Subordinated Debenture. Incorporated by
reference from Exhibit 4(b) of Form S-3 - SJG Capital Trust and South Jersey Gas
Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997
(333-24065).
SJG-39
Exhibit
Number
(4)(d)(v) Form of Deferrable Interest Subordinated Debenture. Incorporated by
reference from Exhibit 4(c) of Form S-3 - SJG Capital Trust and South Jersey Gas
Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997
(333-24065).
(4)(d)(vi) Form of Guaranty Agreement between South Jersey Gas Company and SJG
Capital Trust. Incorporated by reference from Exhibit 4(d) of Form S-3 - SJG
Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended
April 18, 1997 and April 23, 1997 (333-24065).
(4)(e) Medium Term Note Indenture of Trust dated October 1, 1998. Incorporated
by reference from Exhibit (4)(e) of Form S-3 (333-62019).
(9) None
(10)(a) Gas storage agreement (GSS) between South Jersey Gas Company and
Transco dated October 1, 1993. Incorporated by reference from Exhibit (10)(d)
of Form 10-K of SJI for 1993 (1-6364).
(10)(b) Gas storage agreement (S-2) between South Jersey Gas Company and
Transco dated December 16, 1953. Incorporated by reference from Exhibit (5)(h)
of Form S-7 of SJI (2-56223).
(10)(c) Gas storage agreement (LG-A) between South Jersey Gas Company and
Transco dated June 3, 1974. Incorporated by reference from Exhibit (5)(f) of
Form S-7 of SJI (2-56223).
(10)(d) Gas storage agreement (WSS) between South Jersey Gas Company and
Transco dated August 1, 1991. Incorporated by reference from Exhibit (10)(h) of
Form 10-K of SJI for 1991 (1-6364).
(10)(e)(i) Gas storage agreement (LSS) between South Jersey Gas Company and
Transco dated October 1, 1993. Incorporated by reference from Exhibit (10)(i)
of Form 10-K of SJI for 1993 (1-6364).
(10)(e)(ii) Gas storage agreement (SS-1) between South Jersey Gas Company and
Transco dated May 10, 1987 (effective April 1, 1988). Incorporated by reference
from Exhibit (10)(i)(a) of Form 10-K of SJI for 1988 (1-6364).
(10)(e)(iii) Gas storage agreement (ESS) between South Jersey Gas Company and
Transco dated November 1, 1993. Incorporated by reference from Exhibit
(10)(i)(b) of Form 10-K of SJI for 1993 (1-6364).
(10)(e)(iv) Gas transportation service agreement between South Jersey Gas
Company and Transco dated April 1, 1986. Incorporated by reference from Exhibit
(10)(i)(c) of Form 10-K of SJI for 1989 (1-6364).
(10)(e)(v) Service agreement (FS) between South Jersey Gas Company and Transco
dated August 1, 1991. Incorporated by reference from Exhibit (10)(i)(e) of Form
10-K of SJI for 1991 (1-6364).
SJG-40
Exhibit
Number
(10)(e)(vi) Service agreement (FT) between South Jersey Gas Company and Transco
dated February 1, 1992. Incorporated by reference from Exhibit (10)(i)(f) of
Form 10-K of SJI for 1991 (1-6364).
(10)(e)(vii) Service agreement (Incremental FT) between South Jersey Gas
Company and Transco dated August 1, 1991. Incorporated by reference from
Exhibit (10)(i)(g) of Form 10-K of SJI for 1991 (1-6364).
(10)(e)(viii) Gas storage agreement (SS-2) between South Jersey Gas Company and
Transco dated July 25, 1990. Incorporated by reference from Exhibit (10)(i)(i)
of Form 10-K of SJI for 1991 (1-6364).
(10)(e)(ix) Gas transportation service agreement between South Jersey Gas
Company and Transco dated December 20, 1991. Incorporated by reference from
Exhibit (10)(i)(j) of Form 10-K of SJI for 1993 (1-6364).
(10)(e)(x) Amendment to gas transportation agreement dated December 20, 1991
between South Jersey Gas Company and Transco dated October 5, 1993.
Incorporated by reference from Exhibit (10)(i)(k) of Form 10-K of SJI for 1993
(1-6364).
(10)(f) Gas transportation service agreement (FTS) between South Jersey Gas
Company and Equitable Gas Company dated November 1, 1986. Incorporated by
reference from Exhibit (10)(j)(a) of Form 10-K of SJI for 1989 (1-6364).
(10)(g)(i) Gas transportation service agreement (TF) between South Jersey Gas
Company and CNG Transmission Corporation dated October 1, 1993. Incorporated by
reference from Exhibit (10)(k)(h) of Form 10-K of SJI for 1993 (1-6364).
(10)(g)(ii) Gas purchase agreement between South Jersey Gas Company and ARCO
Gas Marketing, Inc. dated March 5, 1990. Incorporated by reference from Exhibit
(10)(k)(i) of Form 10-K of SJI for 1989 (1-6364).
(10)(g)(iii) Gas transportation service agreement (FTS-1) between South Jersey
Gas Company and Columbia Gulf Transmission Company dated November 1, 1993.
Incorporated by reference from Exhibit (10)(k)(k) of Form 10-K of SJI for 1993
(1-6364).
(10)(g)(iv) Assignment agreement capacity and service rights (FTS-2) between
South Jersey Gas Company and Columbia Gulf Transmission Company dated November
1, 1993. Incorporated by reference from Exhibit (10)(k)(i) of Form 10-K of SJI
for 1993 (1-6364).
(10)(g)(v) FTS Service Agreement No. 39556 between South Jersey Gas Company and
Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated by
reference from Exhibit (10)(k)(m) of Form 10-K of SJI for 1993 (1-6364).
(10)(g)(vi) FTS Service Agreement No. 38099 between South Jersey Gas Company
and Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated
by reference from Exhibit (10)(k)(n) of Form 10-K of SJI for 1993 (1-6364).
SJG-41
Exhibit
Number
(10)(g)(vii) NTS Service Agreement No. 39305 between South Jersey Gas Company
and Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated
by reference from Exhibit (10)(k)(o) of Form 10-K of SJI for 1993 (1-6364).
(10)(g)(viii) FSS Service Agreement No. 38130 between South Jersey Gas Company
and Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated
by reference from Exhibit (10)(k)(p) of Form 10-K of SJI for 1993 (1-6364).
(10)(g)(ix) SST Service Agreement No. 38086 between South Jersey Gas Company
and Columbia Gas Transmission Corporation dated November 1, 1993. Incorporated
by reference from Exhibit (10)(k)(q) of Form 10-K of SJI for 1993 (1-6364).
(10)(g)(x) NS (Negotiated Sales) Service Agreement dated December 1, 1994
between South Jersey Gas Company and Transco Gas Marketing Company as agent for
Transcontinental Gas Pipeline. Incorporated by reference from Exhibit
(10)(k)(r) of Form 10-K of SJI for 1994 (1-6364).
(10)(h)(i) Deferred Payment Plan for Directors of South Jersey Industries,
Inc., South Jersey Gas Company, Energy & Minerals, Inc., R&T Group, Inc. and
South Jersey Energy Company as amended and restated October 21, 1994.
Incorporated by reference from Exhibit (10)(l) of Form 10-K of SJI for 1994
(1-6364).
(10)(h)(ii) Form of Deferred Compensation Agreement between South Jersey
Industries, Inc. and/or a subsidiary and seven of its officers. Incorporated by
reference from Exhibit (10)(j)(a) of Form 10-K of SJI for 1980 (1-6364).
(10)(h)(iii) Schedule of Deferred Compensation Agreements. Incorporated by
reference from Exhibit (10)(l)(b) of Form 10-K of SJI for 1997 (1-6364).
(10)(h)(iv) Supplemental Executive Retirement Program, as amended and restated
effective July 1, 1997, and Form of Agreement between certain South Jersey
Industries, Inc. or subsidiary Company officers. Incorporated by reference from
Exhibit (10)(l)(i) of Form 10-K of SJI for 1997 (1-6364).
(10)(h)(v) Form of Officer Employment Agreement between certain officers and
either South Jersey Industries, Inc. or its subsidiaries. Incorporated by
reference from Exhibit (10)(l)(d) of Form 10-K of SJI for 1994 (1-6364).
(10)(h)(vi) Schedule of Officer Employment Agreements. Incorporated by
reference from Exhibit (10)(l)(e) of Form 10-K of SJI for 1998 (1-6364).
(10)(h)(vii) Officer Severance Benefit Program for all officers. Incorporated
by reference from Exhibit (10)(l)(g) of Form 10-K of SJI for 1985 (1-6364).
SJG-42
Exhibit
Number
(10)(h)(viii) Discretionary Incentive Bonus Program for all officers and
management employees. Incorporated by reference from Exhibit (10)(l)(h) of Form
10-K of SJI for 1985 (1-6364).
(10)(h)(ix) The 1987 Stock Option and Stock Appreciation Rights Plan including
Form of Agreement. Incorporated by reference from Exhibit (10)(l)(i) of Form
10-K of SJI for 1987 (1-6364).
(11) Not applicable.
(12) Calculation of Ratio of Earnings to Fixed Charges (Before Federal Income
Taxes) (filed herewith).
(13) Not applicable.
(16) Not applicable.
(18) Not applicable.
(21) Subsidiaries of the Registrant (filed herewith).
(22) None.
(23) Independent Auditors' Consent (filed herewith).
(24) Power of Attorney (filed herewith).
(27) Financial Data Schedule (submitted only in electronic format to the
Securities and Exchange Commission).
(99) None.
SJG-43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
BY: /s/ David A. Kindlick
David A. Kindlick, Senior Vice President
Finance & Rates
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Charles Biscieglia President March 29, 1999
(Charles Biscieglia)
/s/ David A. Kindlick Senior Vice President, March 29, 1999
Finance & Rates
(David A. Kindlick) (Principal Financial Officer)
/s/ William J. Smethurst, Jr. Vice President and Treasurer March 29, 1999
(William J. Smethurst, Jr.) (Principal Accounting Officer)
/s/ George L. Baulig Secretary March 29, 1999
(George L. Baulig)
/s/ Anthony G. Dickson Director March 29, 1999
(Anthony G. Dickson)
/s/ Richard L. Dunham Director March 29, 1999
(Richard L. Dunham)
SJG-44
Signature Title Date
/s/ Clarence D. McCormick Director March 29, 1999
(Clarence D. McCormick)
/s/ Frederick R. Raring Director March 29, 1999
(Federick R. Raring)
/s/ Shirli M. Vioni Director March 29, 1999
(Shirli M. Vioni)
SJG-45
INDEPENDENT AUDITORS' REPORT
South Jersey Gas Company:
We have audited the consolidated financial statements of South Jersey Gas
Company and its subsidiary as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998 and have issued our report
thereon dated February 12, 1999. Such financial statements and report are
included in Item 8 of this report on Form 10K.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 12, 1999
SJG-46
SOUTH JERSEY GAS COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Col. A Col. B Col. C Col. D Col. E
- --------------------------------------------------------------------------------------------------------
Additions
--------------------------------
(1) (2)
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts - Deductions - End
Classification of Period Expenses Describe * Describe ** of Period
- --------------------------------------------------------------------------------------------------------
Provision for Uncollectible
Accounts for the Year Ended
December 31, 1998 $1,031,700 $1,384,852 $411,430 $1,796,282 $1,031,700
Provision for Uncollectible
Accounts for the Year Ended
December 31, 1997 $1,031,700 $1,371,080 $453,936 $1,825,016 $1,031,700
Provision for Uncollectible
Accounts for the Year Ended
December 31, 1996 $737,400 $1,615,490 $376,919 $1,698,109 $1,031,700
* Recoveries of accounts previously written off and minor adjustments.
** Uncollectible accounts written off.
SJG-47
South Jersey Gas Company
1 South Jersey Plaza
Folsom, NJ 08037
Form 10-K FYE 12/31/98
EXHIBIT INDEX
Exhibit
Number
(1)(a) Medium Term Note Distribution Agreement. Incorporated by reference
from Exhibit (1)(a) of Form S-3 (333-62019).
(3)(a) Certificate of Incorporation of South Jersey Gas Company.
Incorporated by reference from Exhibit (3)(a) of Form 10 filed March 7, 1997.
(3)(b) Bylaws of South Jersey Gas Company, as amended and restated through
June 19, 1998 (filed herewith).
(4)(a) Form of Stock Certified for Common Stock. Incorporated by reference
from Exhibit (4)(a) of Form 10 filed March 7, 1997.
(4)(b)(i) First Mortgage Indenture dated October 1, 1947. Incorporated by
reference from Exhibit (4)(b)(i) of Form 10-K of SJI for 1987 (1-6364).
(4)(b)(iv) Twelfth Supplemental Indenture dated as of June 1, 1980.
Incorporated by reference from Exhibit 5(b) of Form S-7 of SJI (2-68038).
(4)(b)(xiv) Sixteenth Supplemental Indenture dated as of April 1, 1988,
10 1/4% Series due 2008. Incorporated by reference from Exhibit (4)(b)(xv) of
Form 10-Q of SJI for the quarter ended March 31, 1988 (1-6364).
(4)(b)(xv) Seventeenth Supplemental Indenture dated as of May 1, 1989.
Incorporated by reference from Exhibit (4)(b)(xv) of Form 10-K of SJI for 1989
(1-6364).
(4)(b)(xvi) Eighteenth Supplemental Indenture dated as of March 1, 1990.
Incorporated by reference from Exhibit (4)(e) of Form S-3 of SJI (33-36581).
(4)(b)(xvii) Nineteenth Supplemental Indenture dated as of April 1, 1992.
Incorporated by reference from Exhibit (4)(b)(xvii) of Form 10-K of SJI for
1992 (1-6364).
(4)(b)(xviii) Twentieth Supplemental Indenture dated as of June 1, 1993.
Incorporated by reference from Exhibit (4)(b)(xviii) of Form 10-K of SJI for
1993 (1-6364).
(4)(b)(xix) Twenty-First Supplemental Indenture dated as of March 1, 1997.
Incorporated by reference from Exhibit (4)(b)(xviv) of Form 10-K of SJI for
1997 (1-6364).
(4)(b)(xx) Twenty-Second Supplemental Indenture dated as of October 1, 1998.
Incorporated by reference from Exhibit (4)(b)(ix) of Form S-3 (333-62019).
(4)(c) Indenture dated as of January 31, 1995; 8.60% Debenture Notes due
February 1, 2010. Incorporated by reference from Exhibit (4)(c) of Form 10-K
of SJI for 1994 (1-6364).
SJG-48
Exhibit
Number
(4)(d) Certificate of Trust for SJG Capital Trust. Incorporated by reference
from Exhibit 3(a) of Form S-3 - SJG Capital Trust and South Jersey Gas Company
as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997
(333-24065).
(4)(d)(i) Trust Agreement of SJG Capital Trust. Incorporated by reference
from Exhibit 3(b) of Form S-3 - SJG Capital Trust and South Jersey Gas Company
as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997
(333-24065).
(4)(d)(ii) Form of Amended and Restated Trust Agreement for SJG Capital
Trust. Incorporated by reference from Exhibit 3(c) of Form S-3 - SJG Capital
Trust and South Jersey Gas Company as filed March 27, 1997, as amended April
18, 1997 and April 23, 1997 (333-24065).
(4)(d)(iii) Form of Preferred Security for SJG Capital Trust. Incorporated
by reference from Exhibit 4(a) of Form S-3 - SJG Capital Trust and South
Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and
April 23, 1997 (333-24065).
(4)(d)(iv) Form of Deferrable Interest Subordinated Debenture. Incorporated
by reference from Exhibit 4(b) of Form S-3 - SJG Capital Trust and South
Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and
April 23, 1997 (333-24065).
(4)(d)(v) Form of Deferrable Interest Subordinated Debenture. Incorporated
by reference from Exhibit 4(c) of Form S-3 - SJG Capital Trust and South
Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and
April 23, 1997 (333-24065).
(4)(d)(vi) Form of Guaranty Agreement between South Jersey Gas Company and
SJG Capital Trust. Incorporated by reference from Exhibit 4(d) of Form S-3 -
SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as
amended April 18, 1997 and April 23, 1997 (333-24065).
(4)(e) Medium Term Note Indenture of Trust dated October 1, 1998.
Incorporated by reference from Exhibit (4)(e) of Form S-3 (333-62019).
(9) None
SJG-49
Exhibit
Number
(10)(a) Gas storage agreement (GSS) between South Jersey Gas Company and
Transco dated October 1, 1993. Incorporated by reference from Exhibit (10)(d)
of Form 10-K of SJI for 1993 (1-6364).
(10)(b) Gas storage agreement (S-2) between South Jersey Gas Company and
Transco dated December 16, 1953. Incorporated by reference from Exhibit
(5)(h) of Form S-7 of SJI (2-56223).
(10)(c) Gas storage agreement (LG-A) between South Jersey Gas Company and
Transco dated June 3, 1974. Incorporated by reference from Exhibit (5)(f) of
Form S-7 of SJI (2-56223).
(10)(d) Gas storage agreement (WSS) between South Jersey Gas Company and
Transco dated August 1, 1991. Incorporated by reference from Exhibit (10)(h)
of Form 10-K of SJI for 1991 (1-6364).
(10)(e)(i) Gas storage agreement (LSS) between South Jersey Gas Company and
Transco dated October 1, 1993. Incorporated by reference from Exhibit (10)(i)
of Form 10-K of SJI for 1993 (1-6364).
(10)(e)(ii) Gas storage agreement (SS-1) between South Jersey Gas Company and
Transco dated May 10, 1987 (effective April 1, 1988). Incorporated by
reference from Exhibit (10)(i)(a) of Form 10-K of SJI for 1988 (1-6364).
(10)(e)(iii) Gas storage agreement (ESS) between South Jersey Gas Company and
Transco dated November 1, 1993. Incorporated by reference from Exhibit
(10)(i)(b) of Form 10-K of SJI for 1993 (1-6364).
(10)(e)(iv) Gas transportation service agreement between South Jersey Gas
Company and Transco dated April 1, 1986. Incorporated by reference from
Exhibit (10)(i)(c) of Form 10-K of SJI for 1989 (1-6364).
(10)(e)(v) Service agreement (FS) between South Jersey Gas Company and
Transco dated August 1, 1991. Incorporated by reference from Exhibit
(10)(i)(e) of Form 10-K of SJI for 1991 (1-6364).
(10)(e)(vi) Service agreement (FT) between South Jersey Gas Company and
Transco dated February 1, 1992. Incorporated by reference from Exhibit
(10)(i)(f) of Form 10-K of SJI for 1991 (1-6364).
(10)(e)(vii) Service agreement (Incremental FT) between South Jersey Gas
Company and Transco dated August 1, 1991. Incorporated by reference from
Exhibit (10)(i)(g) of Form 10-K of SJI for 1991 (1-6364).
(10)(e)(viii) Gas storage agreement (SS-2) between South Jersey Gas Company
and Transco dated July 25, 1990. Incorporated by reference from Exhibit
(10)(i)(i) of Form 10-K of SJI for 1991 (1-6364).
SJG-50
Exhibit
Number
(10)(e)(ix) Gas transportation service agreement between South Jersey Gas
Company and Transco dated December 20, 1991. Incorporated by reference from
Exhibit (10)(i)(j) of Form 10-K of SJI for 1993 (1-6364).
(10)(e)(x) Amendment to gas transportation agreement dated December 20, 1991
between South Jersey Gas Company and Transco dated October 5, 1993.
Incorporated by reference from Exhibit (10)(i)(k) of Form 10-K of SJI for 1993
(1-6364).
(10)(f) Gas transportation service agreement (FTS) between South Jersey Gas
Company and Equitable Gas Company dated November 1, 1986. Incorporated by
reference from Exhibit (10)(j)(a) of Form 10-K of SJI for 1989 (1-6364).
(10)(g)(i) Gas transportation service agreement (TF) between South Jersey Gas
Company and CNG Transmission Corporation dated October 1, 1993. Incorporated
by reference from Exhibit (10)(k)(h) of Form 10-K of SJI for 1993 (1-6364).
(10)(g)(ii) Gas purchase agreement between South Jersey Gas Company and ARCO
Gas Marketing, Inc. dated March 5, 1990. Incorporated by reference from
Exhibit (10)(k)(i) of Form 10-K of SJI for 1989 (1-6364).
(10)(g)(iii) Gas transportation service agreement (FTS-1) between South
Jersey Gas Company and Columbia Gulf Transmission Company dated November 1,
1993. Incorporated by reference from Exhibit (10)(k)(k) of Form 10-K of SJI
for 1993 (1-6364).
(10)(g)(iv) Assignment agreement capacity and service rights (FTS-2) between
South Jersey Gas Company and Columbia Gulf Transmission Company dated November
1, 1993. Incorporated by reference from Exhibit (10)(k)(i) of Form 10-K of
SJI for 1993 (1-6364).
(10)(g)(v) FTS Service Agreement No. 39556 between South Jersey Gas Company
and Columbia Gas Transmission Corporation dated November 1, 1993.
Incorporated by reference from Exhibit (10)(k)(m) of Form 10-K of SJI for 1993
(1-6364).
(10)(g)(vi) FTS Service Agreement No. 38099 between South Jersey Gas Company
and Columbia Gas Transmission Corporation dated November 1, 1993.
Incorporated by reference from Exhibit (10)(k)(n) of Form 10-K of SJI for 1993
(1-6364).
(10)(g)(vii) NTS Service Agreement No. 39305 between South Jersey Gas Company
and Columbia Gas Transmission Corporation dated November 1, 1993.
Incorporated by reference from Exhibit (10)(k)(o) of Form 10-K of SJI for 1993
(1-6364).
SJG-51
Exhibit
Number
(10)(g)(viii) FSS Service Agreement No. 38130 between South Jersey Gas
Company and Columbia Gas Transmission Corporation dated November 1, 1993.
Incorporated by reference from Exhibit (10)(k)(p) of Form 10-K of SJI for 1993
(1-6364).
(10)(g)(ix) SST Service Agreement No. 38086 between South Jersey Gas Company
and Columbia Gas Transmission Corporation dated November 1, 1993.
Incorporated by reference from Exhibit (10)(k)(q) of Form 10-K of SJI for 1993
(1-6364).
(10)(g)(x) NS (Negotiated Sales) Service Agreement dated December 1, 1994
between South Jersey Gas Company and Transco Gas Marketing Company as agent
for Transcontinental Gas Pipeline. Incorporated by reference from Exhibit
(10)(k)(r) of Form 10-K of SJI for 1994 (1-6364).
(10)(h)(i) Deferred Payment Plan for Directors of South Jersey Industries,
Inc., South Jersey Gas Company, Energy & Minerals, Inc., R&T Group, Inc. and
South Jersey Energy Company as amended and restated October 21, 1994.
Incorporated by reference from Exhibit (10)(l) of Form 10-K of SJI for 1994
(1-6364).
(10)(h)(ii) Form of Deferred Compensation Agreement between South Jersey
Industries, Inc. and/or a subsidiary and seven of its officers. Incorporated
by reference from Exhibit (10)(j)(a) of Form 10-K of SJI for 1980 (1-6364).
(10)(h)(iii) Schedule of Deferred Compensation Agreements. Incorporated by
reference from Exhibit (10)(l)(b) of Form 10-K of SJI for 1997 (1-6364).
(10)(h)(iv) Supplemental Executive Retirement Program, as amended and
restated effective July 1, 1997, and Form of Agreement between certain South
Jersey Industries, Inc. or subsidiary officers. Incorporated by reference
from Exhibit (10)(l)(i) of Form 10-K of SJI for 1997 (1-6364).
(10)(h)(v) Form of Officer Employment Agreement between certain officers and
either South Jersey Industries, Inc. or its subsidiaries. Incorporated by
reference from Exhibit (10)(l)(d) of Form 10-K of SJI for 1994 (1-6364).
(10)(h)(vi) Schedule of Officer Employment Agreements. Incorporated by
reference from Exhibit (10)(l)(e) of Form 10-K of SJI for 1998 (1-6364).
(10)(h)(vii) Officer Severance Benefit Program for all officers.
Incorporated by reference from Exhibit (10)(l)(g) of Form 10-K of SJI for 1985
(1-6364).
SJG-52
Exhibit
Number
(10)(h)(viii) Discretionary Incentive Bonus Program for all officers and
management employees. Incorporated by reference from Exhibit (10)(l)(h) of
Form 10-K of SJI for 1985 (1-6364).
(10)(h)(ix) The 1987 Stock Option and Stock Appreciation Rights Plan
including Form of Agreement. Incorporated by reference from Exhibit
(10)(l)(i) of Form 10-K of SJI for 1987 (1-6364).
(11) Not applicable.
(12) Calculation of Ratio of Earnings to Fixed Charges (Before Federal
Income Taxes) (filed herewith).
(13) Not applicable.
(16) Not applicable.
(18) Not applicable.
(21) Subsidiaries of the Registrant (filed herewith).
(22) None.
(23) Independent Auditors' Consent (filed herewith).
(24) Power of Attorney (filed herewith).
(27) Financial Data Schedule (submitted only in electronic
format to the Securities and Exchange Commission).
(99) None.
SJG-53