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 1.2 million.
SJG serves 273,899 residential, commercial and industrial customers (at December 31, 1999) in southern New Jersey. Gas sales and transportation for 1999 amounted to approximately 96,571 MMcf (million cubic feet), of which approximately 50,080 MMcf was firm sales and transportation, 4,011 MMcf was interruptible sales and transportation and 42,480 MMcf was off-system sales. The breakdown of firm sales includes 35.4% residential, 9.3% commercial, 4.6% cogeneration and electric generation, .5% industrial and 50.2% transportation. At year-end 1999, SJG served 254,601 residential customers, 18,894 commercial customers and 404 industrial customers. This includes 1999 net additions of 6,391 residential customers, 437 commercial customers and 6 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 1999, 2.3 Bcf (billion cubic feet) was delivered under this agreement.
SJG serviced 6 cogeneration facilities in 1999. Combined sales and transportation of natural gas to such customers amounted to approximately 5.0 Bcf in 1999.
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 of Federal Energy Regulatory Commission (FERC) 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 1999, off-system sales amounted to 42.5 Bcf. Also in 1999, capacity release and storage throughput amounted to 29.2 Bcf.
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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 1999 amounted to approximately 4.0 Bcf, approximately 3.2 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. With the completion of a multipurpose convention center, accompanied by additional casino, hotel and entertainment development, Atlantic City is enhancing its status as a year-round destination resort.
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 February, 1999, the Electric Discount and Energy Competition Act (the Act) was signed into law in New Jersey. This bill created the framework and necessary time schedules for the restructuring of the state's electric and natural gas utilities. The Act established "unbundling", where redesigned utility rate structures allow natural gas and electric consumers to choose their energy supplier. It also established time frames for instituting competitive services for customer account functions and to determine whether basic gas supply service should become competitive.
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SJG received BPU approval of its unbundling proposal in January 2000. In addition to allowing all customers to select their own gas supplier, the approval incented customers to choose a supplier other than SJG with a Market Development Credit (MDC). This credit is available to customers through December 2001. The credit, approximately $2.5 million plus carrying costs, appears on SJG's books as a Deferred Credit. Therefore, the MDC should not materially impact future periods.
The unbundling proposal also provided SJG with the ability to recover carrying costs on unrecovered remediation costs under the Remediation Adjustment Clause (RAC), while holding the current RAC rate in effect through October 2002. Our RAC rate last changed in September 1999. SJG's Levelized Gas Adjustment Clause (LGAC) was also modified by the unbundling process. Under-recovered gas costs of $11.9 million as of October 31, 1999, and related carrying costs, will be recovered over 3 years. The LGAC for the period starting November 1999, continues to operate as it has in the past.
The Act also contains numerous provisions requiring the BPU to promulgate and adopt a variety of standards related to implementing the Act. These required standards address fair competition, affiliate relations, accounting, competitive services, supplier licensing, consumer protection and aggregation. In March 2000, the BPU issued Interim Standards in response to the Act. We believe the final standards will not have a material adverse affect on the company.
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 Temperature Adjustment Clause (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, 1999. 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 assets (Preferred Securities). The proceeds of selling such Preferred Securities were invested in Deferrable Interest Subordinated Debentures issued by SJG. SJG is the guarantor of such Preferred Securities.
In 1999, 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.
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Raw Materials
Transportation Contracts and Storage
SJG has direct connections to two interstate pipeline companies, Transco and Columbia. During 1999, SJG purchased and had delivered approximately 68.2 Bcf of natural gas for distribution to both on-system and off-system customers. Of this total, 52.4 Bcf was transported on the Transco pipeline system and 15.8 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 four year-round and one seasonal firm transportation (FT) service arrangements. When combined, these services enable SJG to purchase from third parties and have delivered to its city gate stations by Transco a total of 159,589 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 86,999 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 51,102 Mcf/d during the winter season with an associated 3,355,557 Mcf of storage capacity.
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 4,829 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 2000 and 2007. Under these agreements, SJG can purchase up to 66,427,914 Mcf of natural gas per year. When advantageous, SJG
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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:
1999 1998 1997 ------ ------ ------
Long-Term Contract 76.8% 61.8% 73.2% Spot 23.2% 38.2% 26.8% ------ ------ ------ Total 100.0% 100.0% 100.0%
Supplemental Gas Supplies
SJG has a long term Liquified Natural Gas (LNG) purchase agreement with a third party provider which extends through October 31, 2000. For the 1999-2000 contract year, SJG's annual contract quantity under the agreement is 186,047 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 is currently in the process of securing a new LNG contract to replace the existing deal.
SJG operates peaking facilities which can store and vaporize LNG 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 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 1999-2000 winter season to be 443,198 Mcf versus a design day supply of 460,565 Mcf. On January 17, 2000, SJG experienced its highest peak-day demand of 371,612 Mcf with an average temperature of 12.95 degrees F. In 1999, SJG experienced a peak-day demand of 323,750 Mcf with an average temperature of 22.58 degrees F.
Gas Prices
SJG's average commodity cost of gas purchased in 1999 was $2.30 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
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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 and fall months. These purchases are financed by short-term loans which are significantly reduced 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.
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, while maintaining 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, 1999. See Item 8.
Employees
SJG had a total of 626 employees as of December 31, 1999.
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.
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Item 2.
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, 1999, there were approximately 92 miles of mains in the transmission systems and 5,132 miles of mains in the distribution systems.
SJG owns office and service buildings, including its corporate headquarters, at seven locations in the territory and a liquefied natural gas storage and vaporization facility.
As of December 31, 1999, the SJG utility plant had a gross book value of $721.3 million and a net book value, after accumulated depreciation, of $529.1 million. In 1999, $47.4 million was spent on additions to utility plant and there were retirements of property having an aggregate gross book cost of $6.0 million. Construction and remediation expenditures for 2000 are currently expected to approximate $49.8 million.
Virtually all of SJG's transmission pipeline, distribution mains and service connections are in streets or highways or on the property of others. The transmission and distribution systems are maintained under franchises or permits or rights-of-way, many of which are perpetual. SJG's properties (other than property specifically excluded) are subject to a lien of mortgage under which its first mortgage bonds are outstanding. We believe these properties are well maintained and in good operating condition.
Item 3.
Item 3. Legal Proceedings
SJG is subject to claims which arise in the ordinary course of its business and other legal proceedings. We set up reserves when claims become apparent. We also maintain insurance and record probable insurance recoveries relating to outstanding claims. Management of SJG believes that any pending or potential legal proceedings will not materially affect its operations or consolidated financial position.
Item 4.
Item 4. Submission Of Matters To A Vote of Security Holders
Not applicable.
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PART II
Item 5.
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 $56.6 million at December 31, 1999.
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.
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Item 6.
Item 6. Selected Financial Data
The following financial data has been obtained from SJG's audited financial statements:
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Comparative statistical data related to revenues and gas throughput is as follows:
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Item 7.
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
Overview
South Jersey Gas Company (SJG) is a wholly-owned subsidiary of South Jersey Industries, Inc. (SJI). SJG is a regulated natural gas distribution company serving 273,899 customers at December 31, 1999, compared with 267,065 customers at December 31, 1998. SJG also makes off-system sales of natural gas on a wholesale basis to various customers on the interstate pipeline system. In addition, SJG transports natural gas purchased directly from producers or suppliers for our own sales and for some of our customers.
Forward-Looking Statements
This report contains certain forward-looking statements concerning projected financial and operating performance, future plans and courses of action and future economic conditions. All statements in this report other than statements of historical fact are forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting SJG and involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and actual results could differ materially from those expressed or implied in the forward-looking statements. Also, in making forward-looking statements, we assume no duty to update these statements should actual results and events differ from current expectations.
A number of factors could cause our actual results to differ materially from those anticipated, including, but not limited to the following: general economic conditions on an international, federal, state and local level; weather conditions in our marketing areas; regulatory and court decisions; competition; the availability and cost of capital; our 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, environmental liabilities and Year 2000-related costs or operating problems; 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 sales is subject to competition as a result of deregulation. We enhanced SJG's competitive position while maintaining margins by using an unbundled tariff. This tariff allows full cost of service recovery, 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 residential, commercial and industrial customers can choose their supplier while we recover the cost of service through transportation service (See Customer Choice Legislation). 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.
Customer Choice Legislation
Effective January 1, 2000, all residential natural gas customers in New Jersey are able to choose their gas supplier under the terms of the Electric Discount and Energy Competition Act of February 1999. Commercial and industrial customers have had the ability to choose gas suppliers since 1987. SJG's residential customers have been able to choose a gas supplier since April of 1997 under a pilot program. As of December 31, 1999, 35,683 SJG residential customers participated in the program. Customers' bills are reduced for cost of gas charges and applicable taxes. The resulting decrease in SJG's revenues is offset by a corresponding decrease in gas costs and taxes under a BPU-approved fuel clause. While customer choice can reduce utility revenues, it does not negatively affect SJG's net income, financial condition or margins.
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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; reduce the impact of temperature fluctuations on SJG and its customers; recover remediation costs for former gas manufacturing plants; and recover conservation plan costs. 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.
The BPU approved a revised TAC for SJG, effective October 1998. TAC adjustments had the following impacts on 1999 and 1998 fourth quarter and 12-month net earnings:
1999 1998 ------ ------ TAC Adjustment Increase to Net Income ($ in thousands)
Quarter Ended 12/31 $642 $361 12 Months Ended 12/31 $1,980 $607
While the revenue and income impacts of TAC adjustments are recorded as incurred, cash inflows or outflows directly attributable to TAC adjustments do not begin until the next TAC year. Each TAC year begins October 1.
Status of Year 2000 Impact
As of March 27, 2000, we were not aware of any material Y2K-related event affecting either the operational or financial performance of SJG. We continue to regularly monitor the output and performance of our information and operating systems and our suppliers, but do not anticipate any material residual Y2K problems. Total Y2K related costs were $0.53 million.
Results of Operations
Operating Revenues
Revenues increased $51.9 million in 1999 compared with 1998. The primary reasons for the increase were higher off-system sales and 6,834 additional customers. Results also benefited significantly from the revised TAC. These factors more than offset revenue reductions due to the continued migration of firm gas sales to firm transportation. Note, however, that SJG's tariffs are structured so profits are derived from gas transportation, not commodity sales. Consequently, the switch to firm transportation reduced revenues but did not impact profitability. In 1998, revenues decreased $28.5 million primarily due to weather that was 14.9% warmer than 1997. State tax reform and increased firm transportation in lieu of firm gas sales also reduced revenues.
Weather in 1999 was 8.7% colder than in 1998, but was 4.2% warmer than the 20-year average. Previously, changes in temperatures were typically the single most important factor in explaining revenue fluctuations for comparative periods at SJG. Revisions to our TAC significantly reduced the weather-related volatility in revenues. However, comparisons for the first two quarters of 1999 to the prior year's periods continued to show volatility as 1998 revenues were heavily influenced by weather. Weather during the third quarter of the year historically has minimal impact on SJG's earnings as heating requirements are at their seasonal low point. The fourth quarter of 1999 and 1998 operated under the same TAC. Revenues for 1999 were closely tied to 20-year normal temperatures and not actual weather conditions.
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Total gas throughput increased 16.6% to 125,818 MMcf in 1999. Throughput in 1998 declined 1.9% to 107,840 MMcf compared to 1997. The majority of the 1999 increase was due to increased off-system sales. The 1998 decline was due to weather-related reductions in residential and commercial usage.
Gas Purchased for Resale
Gas purchased for resale increased $37.6 million in 1999 compared with 1998 due mostly to increased sales volumes, particularly to off-system customers. SJG's gas costs also accounted for a portion of the increase, averaging $2.38/dt in 1999 compared with $2.35/dt in 1998. A $6.3 million decline in 1998 compared with 1997 was due principally to warmer weather and customers switching from gas sales to firm transportation. Gas supply sources include contract and open-market purchases. SJG secures and maintains its own gas supplies to serve its customers. The next contract expiration is in October 2000. We do not anticipate any difficulty renewing or replacing expiring contracts under substantially similar terms and conditions. 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.
Utility Operations
Summary of net changes in Utility Operations (in thousands):
1999 vs. 1998 1998 vs. 1997 ------------- -------------
Production $9 $12 Transmission (47) 110 Distribution (238) 66 Customer Accounts and Services (343) 438 Sales (72) (147) Administration and General 1,438 (1,256) Other 23 (13) ------ ------ Total Net Change $(770) $(790) ====== ======
Distribution expenses declined due to improvements in operating practices. These improvements included the implementation of an automated dispatch system and home-based reporting of service personnel. Customer Accounts and Services costs decreased in 1999 principally due to lower bad debt expenses and a corresponding downward adjustment in reserves for uncollectible accounts. The 1998 increase was due principally to an increase in payroll expense. Administrative and General costs increased in 1999 principally due to a change in the way costs are allocated to subsidiaries at the SJI level. The decline in 1998 was primarily due to a $1.5 million death benefit liability recorded in 1997.
Other Operating Expenses
Summary of principal changes in other consolidated operating expenses (in thousands):
1999 vs. 1998 1998 vs. 1997 ------------- -------------
Maintenance $775 $(200) Depreciation 1,774 1,158 Income Taxes 3,199 697 Other Taxes 648 (19,981)
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Higher Maintenance costs in 1999 were due primarily to higher levels of amortization of previously deferred environmental remediation expenses. These expenses did not negatively impact net income as they were offset by higher revenue recovery through the RAC (See Notes 2 and 12). Depreciation is higher due to increased investment in property, plant and equipment. Income Tax changes reflect the impact of changes in pre-tax income. Other Taxes decreased in 1998 due to the Energy Tax Reform Act implemented January 1998 (See Note 5).
Interest Charges
Interest charges increased in 1999 due to higher average levels of short-and long-term debt outstanding, partially offset by lower average interest rates on debt outstanding during the year. The debt was incurred primarily to support working capital needs and improvements to our gas transmission and distribution system.
Net Income Applicable to Common Stock
The details affecting the changes in net income and earnings per share are discussed under the appropriate captions above.
Liquidity
The seasonal nature of gas operations; the timing of construction and remediation expenditures and related permanent financing; as well as mandated tax and sinking fund payment dates create 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 $129 million, of which $10.1 million was available at December 31, 1999. The credit lines are uncommitted and unsecured with interest rates typically available based upon the Federal Funds Rate or London Interbank Offered Rates (LIBOR).
The changes in cash flows from operating activities (in thousands):
1999 vs. 1998 1998 vs. 1997 ------------- ------------- Increases/(Decreases): Net Income Applicable to Common Stock $5,560 $(5,076) Depreciation and Amortization 2,662 1,147 Provision for Losses on Accounts Receivable (413) 14 Revenues and Fuel Costs Deferred - Net (5,163) 101 Deferred and Non-Current Income Taxes and Credits - Net 357 318 Environmental Remediation Costs - Net 7,590 350 Accounts Receivable (9,890) (2,380) Inventories 4,029 (1,591) Prepayments and Other Current Assets (217) 751 Prepaid and Accrued Taxes - Net 19,397 (13,551) Accounts Payable and Other Accrued Liabilities 1,516 (6,278) Other - Net 3,318 (1,106) -------- -------- Net Cash Provided by Operating Activities $28,746 $(27,301) ======== ========
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.
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Decreases in Revenues and Fuel Costs Deferred - Net reflect undercollection of fuel costs resulting from increases in natural gas costs and payments or credits to customers for amounts previously overcollected. Increases reflect overcollection of fuel costs or the recovery of previously deferred fuel costs.
Changes in Deferred and Non-Current Income Taxes and Credits - Net represent the differences between taxes accrued and amounts paid. Generally, deferred income taxes related to deferred fuel costs will be paid in the next year.
Changes in Environmental Remediation Costs - Net represent the differences between amounts expended for environmental remediation compared with amounts collected under the RAC and insurance recoveries.
Changes in Accounts Receivable are primarily due to higher receivable balances due to off-system sales and the impact of colder weather on SJG's sales volumes. Commodity prices also impact this line item. Changes impact cash flows when receivables are collected in subsequent periods.
Changes in Inventories reflect the impact of seasonal requirements, temperatures and commodity price changes.
Changes in Prepaid and Accrued Taxes - Net reflect the impact of differences between taxes paid and accrued. Significant timing differences exist in cash flows during the year. Approximately 50% of SJG's taxes are paid in installments during the first half of the year and the remaining 50% are paid May 15 of each year. SJG uses short-term borrowings to pay taxes, resulting in a temporary increase in short-term debt levels. The carrying costs of timing differences are recognized in base utility rates.
Changes in Accounts Payable and Other Current Liabilities reflect the impact of timing differences between the accrual and payment of costs.
Changes in Other - Net reflect numerous changes in non-current assets and liabilities, including accrued deferred income taxes. The majority of the change in 1999 relates to the reclassification of previously deferred costs to Utility Plant.
Regulatory Matters
Rate Actions
In February, 1999, the Electric Discount and Energy Competition Act (the Act) was signed into law in New Jersey. This bill created the framework and necessary time schedules for the restructuring of the state's electric and natural gas utilities. The Act established "unbundling", where redesigned utility rate structures allow natural gas and electric consumers to choose their energy supplier. It also established time frames for instituting competitive services for customer accounting functions and to determine whether basic gas supply services should become competitive.
SJG received BPU approval of its unbundling proposal in January 2000. In addition to allowing all customers to select their own gas supplier, the approval incented customers to choose a supplier other than SJG with a Market Development Credit (MDC). This credit is available to customers through December 2001. The credit, approximately $2.5 million plus carrying costs, appears on our books as a Deferred Credit. Therefore, the MDC will not materially impact future periods.
The unbundling proposal also provided SJG with the ability to recover carrying costs on unrecovered remediation costs under the RAC, while holding the current RAC rate in effect through October 2002. Our RAC rate last changed in September 1999. SJG's LGAC was also modified by the unbundling process. Under-recovered gas costs of $11.9 million as of October 31, 1999, and related carrying costs, will be recovered over 3 years. The LGAC for the period starting November 1999, continues to operate as it has in the past.
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The Act also contains numerous provisions requiring the BPU to promulgate and adopt a variety of standards related to implementing the Act. These required standards address fair competition, affiliate relations, accounting, competitive services, supplier licensing, consumer protection and aggregation. In March 2000, the BPU issued Interim Standards in response to the Act. We believe the final standards will not have a material adverse affect on the company.
In January 1997, the BPU granted SJG a total rate increase of $10.3 million. The $6 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 that 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) increased from $4 million to $5 million. SJG was permitted to keep 100% of pre-tax margins up to the threshold level and 20% of margins above that level. The $5 million threshold increased by $500,000 later in 1997, and in December 1998, the threshold increased an additional $2 million. The increases resulted from 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.
SJG calculates rates of return by weighting individual capital cost rates by the proportion of each prospective type of capital. This requires selecting appropriate capital structure ratios and determining the cost rate for each capital component as determined in each rate proceeding. In setting a rate of return, the BPU must provide a utility and its investors with a return on invested capital matching the risk so the utility can access capital required to meet its public service responsibility.
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 experiences reduced fluctuations in income when weather is warmer or colder than normal.
In April 1999, the BPU approved an increase in our appliance service rates, which SJG implemented that month. In June 1999, the BPU authorized SJG to offer additional appliance service contract plans. The new rates and plans are competitive with those of other service providers in New Jersey and are designed to increase earnings and cash flows.
Environmental Remediation
SJG has incurred and recorded costs for environmental cleanup of sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s. Since the early 1980s, SJG recorded environmental remediation costs of $109.6 million. We spent $58.5 million as of December 31, 1999. With the assistance of an outside consulting firm, we estimate that future costs to clean up the sites will range from $51 million to $161.3 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 future insurance recoveries, which we have been successful in pursuing. We used these proceeds to offset related legal fees and to reduce the balance of deferred environmental remediation costs. Recorded amounts include estimated costs based on projected investigation and remediation work plans using existing technologies. Actual costs could differ from the estimates due to the long-term nature of the projects, changing technology, government regulations, and site-specific requirements.
SJG has two regulatory assets associated with environmental costs. The first asset is titled Environmental Remediation Cost: Expended - Net. These expenditures represent what was actually spent to clean up former gas manufacturing plant sites. These costs meet the requirements of FASB No. 71, "Accounting for the Effects of Certain Types of Regulation."
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In September 1999, the BPU approved SJG's request to recover remediation costs at former manufactured gas plant sites as permitted under the RAC. SJG's RAC level increased from $0.0032 per therm to $0.0107 per therm to include all RAC related expenditures made between 1993 and 1998. Consequently, we expect to recover an additional $4.5 million per year for the next 7 years.
The other 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, 1999, SJG's unamortized remediation costs of $25.7 million are reflected on the consolidated balance sheet under the caption, Regulatory and Other Non-Current Assets. Since implementing the RAC in 1992, SJG recovered $21.6 million through rates as of December 31, 1999.
Other Regulatory Asset Recovery
Adopting FASB 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 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 1998, the BPU approved full recovery of the net periodic benefit cost as well as recovery of the regulatory asset, amounting to $4.9 million at December 31, 1999, 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.
Financial Risk Management
Our regulated natural gas business is subject to market risk due to fluctuations in natural gas prices. To hedge against fluctuations, SJG has at times entered into forward contracts. We recover gas costs through the LGAC, and hedge against price fluctuations by using forward contracts.
To manage these transactions, we have a well-defined risk management policy that includes volumetric and monetary limits. All derivative activities described above are entered into for hedging, not trading, purposes.
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 1999 amounted to $46.5 million. Net costs for 2000, 2001 and 2002 are estimated at approximately $49.8 million, $45.5 million and $51.9 million, respectively. We will fund these expenditures from several sources, which may include cash generated by operations, temporary use of short-term debt, sale of medium-term notes, capital leases and RAC recoveries and equity infusions from SJI.
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SJI contributed $15.0 million of capital to SJG during 1999. Contributions of capital are credited to Other Paid-In Capital and Premium on Common Stock.
In March 1997, SJG sold $35 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 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 million of debt under a $100 million Medium-Term Note Program. Notes totaling $10 million were issued at 6.12%, maturing in 2010, and $20 million of notes were 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. The Medium-Term Note program had $70 million of availability remaining at December 31, 1999 and remains effective through December 31, 2001.
Other Events
In August 1999, SJG completed the transition of all meter reading activities to Millennium Account Services, LLP. Millennium began providing meter reading services in southern New Jersey in January 1999. Customers should benefit from reduced meter reading costs.
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 facilities are replaced.
Summary
We are confident SJG will have sufficient cash flow to meet its operating, capital and dividend needs and is taking, and will take, such actions necessary to employ its resources effectively.
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Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
SJG is exposed to interest rate risk and, to a much lesser degree, commodity price risk. Outlined below is a description of these exposures and an explanation as to how we manage these risks.
Interest Rate Risk - SJG is subject to the risk of fluctuating interest rates in the normal course of business. We manage interest rates through the use of fixed and, to a lesser extent, variable rate debt. For fiscal year 1999, a hypothetical 10% change in interest rates would have resulted in a $0.48 million change in interest costs and earnings before taxes related to variable rate debt.
Commodity Price Risk - SJG's natural gas businesses 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 the LGAC, and hedges against price fluctuations by using forward contracts.
Item 8.
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, 1999 and 1998, and the related statements of consolidated income and retained earnings and consolidated cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania
February 16, 2000
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SOUTH JERSEY GAS COMPANY AND SUBSIDIARY 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 (See Note 2).
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 Notes 2 & 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.
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1999 1998 -------- -------- Utility Plant:
Production Plant $ 967 $ 967 Storage Plant 8,522 8,467 Transmission Plant 95,175 88,135 Distribution Plant 588,479 553,227 General Plant 25,068 25,417 Intangible Plant 267 267 -------- -------- Utility Plant in Service 718,478 676,480
Construction Work in Progress 1,538 2,195 Gas Stored - Base Gas 1,322 1,322 -------- -------- Total Utility Plant $721,338 $679,997 ======== ========
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 1999, 1998 and 1997. 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 $1.8 million at December 31, 1999, is not included in the rate base.
New Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for the first quarter of our fiscal year ending December 31, 2001. This statement establishes accounting and reporting standards for derivative instruments, including those embedded in other contracts, and for hedging activities. It requires recognizing derivatives as assets or liabilities at fair value on the balance sheet. We are currently evaluating the effects of FASB No. 133 on the Company's financial condition and results of operations, which will vary based on our use of derivative instruments at the time of adoption.
Income and Other Taxes - Deferred Income Taxes are provided for all significant temporary differences between book and taxable income (See Notes 5 & 6).
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 is being 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 requires SJG to prepay taxes which, depending on weather, may not materialize as expense during that same year. Any remaining balance of these prepayments is settled up in the subsequent year. 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 Note 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.
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2. RECENT REGULATORY 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. Additionally, SJG's threshold for sharing pre-tax margins generated by interruptible and off-system sales and transportation (Sharing Formula) increased from $4.0 million to $5.0 million. With the completion of major construction projects, this $5.0 million threshold increased by $500,000 in 1997 and by another $2.0 million in 1998. 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, nearly 13,000 residential customers applied for this service. The BPU subsequently expanded the number of potential participants to 50,000 and, as of December 31, 1999, enrollment totaled 35,683. Effective January 10, 2000, the BPU approved full unbundling of SJG's system. This allows all natural gas consumers to select their supplier, lifting the previously existing cap of 50,000 residential customers. Participants' bills are reduced for cost of gas charges and applicable taxes. The resulting decrease in revenues is offset by a corresponding decrease in gas costs and taxes under SJG's BPU-approved fuel clause. While the program reduces utility revenues, it does not affect SJI's net income, financial condition or margins.
In June 1998, SJG filed a petition with the BPU requesting a change to the TAC. The request was granted in October 1998. As a result, SJG experiences reduced fluctuations in income when weather is warmer or colder than normal.
In August 1998, SJG filed with the BPU to recover increased remediation costs expended from August 1995 through July 1998. In September 1999, the BPU approved the requested annual recovery level of $6.5 million. This represents an annual increase of approximately $4.5 million over the recovery previously included in rates. In July 1999, SJG filed its annual RAC with the BPU requesting recovery of carrying costs on unrecovered remediation costs and proposed no change in the current RAC rate for the next 3 years. In January 2000, the BPU approved the recovery of carrying costs on unrecovered remediation costs and SJG's proposal to keep its current RAC rate in effect through October, 2002.
In September 1998, SJG filed its annual LGAC, TAC and DSMC with the BPU. The LGAC and DSMC cover the period November 1 through October 31 of each year. The TAC period runs from October 1 through May 31. In May 1999, the BPU approved a $7.1 million increase in rates as part of this filing, which included the results of the previous two annual filings. We are currently in the process of preparing the 1999 annual filing which should be made with the BPU during the first quarter of 2000.
In February 1999, the Electric Discount and Energy Competition Act became law. This law established "unbundling", where redesigned utility rate structures allow natural gas & electric consumers to choose their energy supplier. SJG filed its unbundling proposal in April 1999 and received final BPU approval in January 2000.
In addition to allowing all customers to select their own supplier effective January 10, 2000, the unbundling approval also created an incentive to customers to select a supplier, other than SJG, in the form of a Market Development Credit (MDC). This credit will be provided to customers over the next two years and will approximate $2.5 million plus carrying costs through December 2001. The majority of this credit was provided for on SJG's books as a Deferred Credit. Therefore, the impact of the MDC will not materially impact future periods.
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Also included in the proposal was the approved recovery of carrying costs on the RAC, as previously discussed, and a modification to SJG's LGAC. Under-recovered gas costs of $11.9 million as of October 31, 1999, and carrying costs thereon, will be recovered over a 3 years. The LGAC for the period starting November 1999, will continue to operate as it has in the past (See Note 1).
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 $1.9 million for the year ended December 31, 1997. 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 $5,172,500, $970,200, and $48,200 for the years ended December 31, 1999, 1998, and 1997, respectively. The amount due from SJE relating to these sales was $511,700 and $354,900 at December 31, 1999 and 1998, 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 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. 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):
1999 1998 1997 ------- ------- ------- Tax at Statutory Rate $11,255 $ 8,441 $11,069 Increase (Decrease) Resulting from: State Income Taxes 3,841 3,126 - Amortization of Investment Tax Credits (ITC) (390) (393) (393) Tax Depreciation Under Book Depreciation on Utility Plant 664 664 664 Other - Net 85 418 219 ------- ------- ------- Income Taxes $15,455 $12,256 $11,559 ======= ======= =======
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The provision for Income Taxes is comprised of the following (in thousands): 1999 1998 1997 ------- ------- ------- Current: Federal $ 5,490 $ 3,637 $ 5,461 State 3,189 2,204 - ------- ------- ------- Total Current 8,679 5,841 5,461 ------- ------- ------- Deferred: Federal - Excess of Tax Depreciation Over Book Depreciation - Net 5,479 5,305 4,496 Deferred Fuel Costs 1,909 1,397 349 Environmental Remediation Costs - Net (1,087) 1,962 2,017 Alternative Minimum Tax 589 (2,622) - Other - Net (149) (174) (371) State 425 940 - ------- ------- ------- Total Deferred 7,166 6,808 6,491
ITC (390) (393) (393) ------- ------- ------- Income Taxes $15,455 $12,256 $11,559 ======= ======= =======
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):
1999 1998 ------- ------- Deferred Tax Liabilities: Tax Depreciation Over Book Depreciation $70,263 $66,865 Between Book and Tax Basis of Property 6,478 5,952 Deferred Fuel Costs 9,235 6,835 Deferred Regulatory Costs 1,301 727 Environmental Remediation Costs 8,778 10,062 Excess Protected 3,355 3,420 GRAFT 1,022 1,214 Other 442 710 ------- ------- Total Deferred Tax Liabilities 100,874 95,785 ------- ------- Deferred Tax Assets: Alternative Minimum Tax 1,663 3,465 ITC Basis Gross Up 2,601 2,802 Deferred State Taxes 705 167 Other 2,362 1,993 ------- ------- Total Deferred Tax Assets 7,331 8,427 ------- ------- Net Deferred Tax Liability $93,543 $87,358 ======= =======
As of December 31, 1999 and 1998, income taxes due from(to) SJI were approximately $1.5 and $3.4 million, respectively.
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The significant components of Other Taxes are (in thousands):
1999 1998 1997 ------- ------- ------- TEFA $ 7,637 $ 7,378 $ - GRAFT 197 123 27,361 Other 3,157 2,842 2,963 ------- ------- ------- Total Other Taxes $10,991 $10,343 $30,324 ======= ======= =======
During 1999 and 1998, SJG recorded an additional $13.4 and $12.0 million, respectively, 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 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 to ratepayers. 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.
7. LONG-TERM DEBT: (A) Principal Outstanding December 31, (In Thousands) 1999 1998 -------- -------- First Mortgage Bonds: (B) 8.19% Series due 2007 $ 18,181 $ 20,454 10.25% Series due 2008 15,908 20,454 9% Series due 2010 24,062 26,250 6.12% Series due 2010 (C) 10,000 10,000 6.95% Series due 2013 35,000 35,000 7.125% Series due 2018 (C) 20,000 20,000 7.7% Series due 2027 35,000 35,000 Unsecured Notes: Term Note, 8.47% due 2001 4,286 6,428 Debenture Notes, 8.6% due 2010 30,000 30,000 -------- -------- Total Long-Term Debt Outstanding 192,437 203,586
Less Current Maturities 8,876 8,876 -------- -------- Long-Term Debt $183,561 $194,710 ======== ========
(A) Long-Term Debt Maturities and Sinking Fund Requirements for the succeeding five years are as follows: 2000, $8,876; 2001, $11,876; 2002, $9,734; 2003, $12,884; and 2004, $12,884.
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(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 million of debt under a Medium Term Note Program established October 5, 1998. A total of $100 million is authorized to be issued under this program through December 2001.
8. FINANCIAL INSTRUMENTS:
Long-Term Debt - The fair values of SJG's long-term debt, including current maturities, as of December 31, 1999 and 1998, are estimated to be $190.1 million and $227.0 million, respectively. Carrying amounts are $192.4 million and $203.6 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, 1999 and 1998.
9. UNUSED LINES OF CREDIT AND COMPENSATING BALANCES:
Unused lines of credit available at December 31, 1999, were $10.1 million. Borrowings under these lines of credit are at market rates. The weighted borrowing cost, which changes daily, was 6.45% and 5.81% at December 31, 1999 and 1998, 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 $56.6 million as of December 31, 1999.
SJG received an equity infusion of $5.25 million from SJI on June 30, 1999. On July 30, 1999, SJI contributed an additional $9.75 million of equity capital to SJG. Future equity contributions will occur on an as needed basis.
11. PENSIONS & 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 retirees.
The BPU authorized SJG to recover costs related to postretirement benefits other than pensions under the accrual method of accounting consistent with FASB 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 $4.9 million at December 31, 1999, is recoverable in rates. We are amortizing this amount over 15 years which started January 1998.
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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 1999 1998 1997 1999 1998 1997 ------ ------ ------ ------ ------ ------ Service cost $2,184 $1,850 $1,858 $1,064 $ 882 $ 963 Interest cost 4,071 3,814 3,598 1,551 1,457 1,540 Expected return on plan assets (4,139) (3,742) (3,171) (675) (417) (272) Amortization of transition obligation 87 87 87 755 779 779 Amortization of loss (gain) and other 398 258 292 - (9) - ------ ------ ------ ------ ------ ------ Net periodic benefit cost $2,601 $2,267 $2,664 $2,695 $2,692 $3,010 ====== ====== ====== ====== ====== ======
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):
Pension Benefits Other Benefits 1999 1998 1999 1998 ------- -------- -------- -------- Change in Benefit Obligation:
Benefit obligation at beginning of year $ 59,331 $ 50,210 $ 23,637 $ 23,428 Service cost 2,184 1,850 1,064 882 Interest cost 4,071 3,814 1,551 1,457 Plan amendments - - - - Actuarial (gain) loss and other (8,113) 5,495 (3,503) (1,412) Benefits paid (2,282) (2,038) (655) (718) -------- -------- -------- -------- Benefit obligation at end of year $ 55,191 $ 59,331 $ 22,094 $ 23,637 ======== ======== ======== ========
Change in Plan Assets: Fair value of plan assets at beginning of year $ 43,937 $ 41,993 $ 6,972 $ 4,403 Actual return on plan assets 4,791 2,466 392 568 Employer contributions 2,458 1,516 2,763 2,719 Benefits paid (2,282) (2,038) (655) (718) -------- -------- -------- -------- Fair value of plan assets at end of year $ 48,904 $ 43,937 $ 9,472 $ 6,972 ======== ======== ======== ========
Funded status $ (6,287) $(15,394) $(12,622) $(16,665) Unrecognized prior service cost 2,327 2,552 - - Unrecognized net transition obligation 348 435 9,823 10,579 Unrecognized net loss (gain) and other 303 9,240 (3,670) (451) -------- -------- -------- -------- Accrued net benefit cost at end of year $ (3,309) $ (3,167) $ (6,469) $ (6,537) ======== ======== ======== ========
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
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million, $28.4 million, and $26.2 million, respectively. As of December 31, 1999, the accumulated benefit obligations did not exceed plan assets.
Assumptions used in the accounting for these plans were:
Pension Benefits Other Benefits 1999 1998 1999 1998 ------- -------- -------- --------
Discount rate 7.75% 6.75% 7.75% 6.75% Expected return on plan assets 9.00% 9.00% 9.00% 9.00% Rate of compensation increase 4.60% 4.10% - -
The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation as of December 31, 1999, are: Medical and Drug - 6.0% in 1999 for participants age 65 or older, grading to 5.5% in 2001, and 7.5% in 1999 for participants under age 65, grading to 5.5% in 2005. Dental - 7.0% in 1999, 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 1999 would have the following effects (in thousands):
1% Increase 1% Decrease ----------- ----------- Effect on the aggregate of the service and interest cost components $ 443 $ (356)
Effect on the postretirement benefit obligation $ 2,989 $(2,451)
12. COMMITMENTS AND CONTINGENCIES:
Construction and Environmental Commitments - SJG's estimated net cost of construction and environmental remediation programs for 2000 totals $49.8 million. Commitments were made regarding some of 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 from the ordinary course of business and other legal proceedings. We set up reserves when these claims become apparent. We also maintain insurance and record probable insurance recoveries relating to outstanding claims.
Environmental Remediation Costs - SJG incurred and recorded costs for environmental clean up of sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s.
Since the early 1980s, SJG recorded environmental remediation costs of $109.6 million, of which $58.5 million was spent as of December 31, 1999. With the assistance of an outside consulting firm, we estimate that future costs to clean up SJG's sites will range from $51.0 million to $161.3 million. We recorded the lower end of this range as a liability. It is reflected on the 1999 consolidated balance sheet under the captions Current
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Liabilities and Deferred Credits and Other Non-Current Liabilities (See Note 1). SJG did not adjust the accrued liability for future insurance recoveries, which we have been successful in pursuing. We used these proceeds to offset related legal fees and to reduce the balance of deferred environmental remediation costs. Recorded amounts include estimated costs based on projected investigation and remediation work plans using existing technologies. Actual costs could differ from the estimates due to the long- term nature of the projects, changing technology, government regulations and site-specific requirements.
SJG has two regulatory assets associated with environmental cost. The first asset is titled Environmental Remediation Cost: Expended - Net. These expenditures represent what was actually spent to clean up former gas manufacturing plant sites. These costs meet the requirements of FASB No. 71, "Accounting for the Effects of Certain Types of Regulation." The BPU allows SJG to recover expenditures through July 1998 and petitions to recover costs through July 1999 are pending (See Note 2).
The other asset titled Environmental Remediation Cost: Liability for Future Expenditures relates to estimated future expenditures determined under the guidance of FASB No. 5, "Accounting for Contingencies." This amount, which relates to former manufactured gas plant sites, was recorded as a deferred debit with the corresponding amount reflected on the consolidating balance sheet under the captions, Current Liabilities and Deferred Credits and Other Non-Current Liabilities. The deferred debit is a 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, 1999, SJG's unamortized remediation costs of $25.7 million are reflected on the consolidated balance sheet under the caption Regulatory and Other Non-Current Assets. Since implementing the RAC in 1992, SJG recovered $21.6 million through rates as of December 31, 1999 (See Note 2).
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13. QUARTERLY RESULTS OF OPERATIONS - UNAUDITED:
The summarized quarterly results of SJG's operations, in thousands except for per share amounts:
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
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PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Not applicable.
Item 11.
Item 11. Executive Compensation
Not applicable.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Not applicable.
Item 13.
Item 13. Certain Relationships and Related Transactions
Not applicable.
SJG-36
PART IV
Item 14.
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 16, 2000. See Item 8.
2 - Supplementary Financial Information
Supplemental Schedules as of December 31, 1999, 1998 and 1997 and for the three years ended December 31, 1999, 1998, and 1997:
The Independent Auditors' Report of Deloitte & Touche LLP, Auditors of the Company. See Item 8.
Schedule II - Valuation and Qualifying Accounts. See page 46.
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.
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 Description/Reference
(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. Incorporated by reference from Exhibit (3)(b) of Form 10-K for 1998 (1-6364).
(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).
SJG-37
Exhibit Number Description/Reference
(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 (33 3-24065).
(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 (33 3-24065).
SJG-38
Exhibit Number Description/Reference
(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 (33 3-24065).
(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).
(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).
SJG-39
Exhibit Number Description/Reference
(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-40
Exhibit Number Description/Reference
(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 referen ce 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-41
Exhibit Number Description/Reference
(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).
(12) Calculation of Ratio of Earnings to Fixed Charges (Before Federal Income Taxes) (filed herewith).
(21) Subsidiaries of the Registrant (filed herewith).
(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).
* Constitutes a management contract or a compensatory plan or arrangement.
SJG-42
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 30, 2000
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 and CEO March 30, 2000 (Charles Biscieglia)
/s/ David A. Kindlick Senior Vice President, Finance March 30, 2000 (David A. Kindlick) & Rates (Principal Financial Officer)
/s/ William J. Smethurst, Jr. Vice President and Treasurer March 30, 2000 (William J. Smethurst, Jr.) (Principal Accounting Officer)
/s/ George L. Baulig Senior Vice President & March 30, 2000 (George L. Baulig) Corporate Secretary
/s/ Shirli M. Billings Director March 30, 2000 (Shirli M. Billings)
/s/ Sheila H. Coco Director March 30, 2000 (Sheila H. Coco)
SJG-43
Signature Title Date
/s/ Richard L. Dunham Director March 30, 2000 (Richard L. Dunham)
/s/ Clarence D. McCormick Director March 30, 2000 (Clarence D. McCormick)
/s/ Frederick R. Raring Director March 30, 2000 (Federick R. Raring)
SJG-44
INDEPENDENT AUDITORS' REPORT
To the Shareholder and Board of Directors of South Jersey Gas Company:
We have audited the consolidated financial statements of South Jersey Gas Company and its subsidiary as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, and have issued our report thereon dated February 16, 2000; such financial statements and report are included in Item 8 of this report on Form 10K. Our audits also included the financial statement schedule of South Jersey Gas Company and its subsidiaries, listed in Item 14(a) 2. This financial statement schedule is the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. 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 16, 2000
SJG-45
SJG-46
South Jersey Gas Company 1 South Jersey Plaza Folsom, NJ 08037 Form 10-K FYE 12/31/99 EXHIBIT INDEX
Exhibit Number Description/Reference
(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. Incorporated by reference from Exhibit (3)(b) of Form 10-K for 1998 (1-6364).
(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).
(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).
SJG-47
South Jersey Gas Company 1 South Jersey Plaza Folsom, NJ 08037 Form 10-K FYE 12/31/99 EXHIBIT INDEX
Exhibit Number Description/Reference
(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 (33 3-24065).
(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 (33 3-24065).
(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 (33 3-24065).
(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).
(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).
SJG-48
South Jersey Gas Company 1 South Jersey Plaza Folsom, NJ 08037 Form 10-K FYE 12/31/99 EXHIBIT INDEX
Exhibit Number Description/Reference
(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).
(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).
SJG-49
South Jersey Gas Company 1 South Jersey Plaza Folsom, NJ 08037 Form 10-K FYE 12/31/99 EXHIBIT INDEX
Exhibit Number Description/Reference
(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).
(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).
SJG-50
South Jersey Gas Company 1 South Jersey Plaza Folsom, NJ 08037 Form 10-K FYE 12/31/99 EXHIBIT INDEX
Exhibit Number Description/Reference
(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 referen ce 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).
(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).
(12) Calculation of Ratio of Earnings to Fixed Charges (Before Federal Income Taxes) (filed herewith).
SJG-51
South Jersey Gas Company 1 South Jersey Plaza Folsom, NJ 08037 Form 10-K FYE 12/31/99 EXHIBIT INDEX
Exhibit Number Description/Reference
(21) Subsidiaries of the Registrant (filed herewith).
(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).
* Constitutes a management contract or a compensatory plan or arrangement.
SJG-52