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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 Commission File Number 000-22211
SOUTH JERSEY GAS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 21-0398330
(State of incorporation) (IRS employer identification no.)
1 South Jersey Plaza, Folsom, New Jersey 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Company Guaranteed Mandatorily Redeemable
Preferred Securities of Subsidiary Trust,
$25 Value per Preferred Security New York Stock Exchange
(Title of each class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
All of the equity securities of the registrant are owned by South Jersey
Industries, Inc., its parent company, a 1934 Act reporting company named in the
registrants description of its business, which has itself fulfilled its 1934 Act
filing requirements.
During the preceding 36 months (and any subsequent period of days) there has not
been any default in (1) any of the indebtedness of the registrant or its
subsidiaries, and (2) the payment of rentals under material long-term leases (of
which there are none).
The registrant meets all of the conditions set forth in General Instruction I
1(a) and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
Documents Incorporated by Reference: None
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- Title Page -
PART I
Item 1. Business
General
The registrant, South Jersey Gas Company (SJG), a New Jersey corporation,
is an operating public utility. SJG owns all of the common stock of SJG Capital
Trust, a statutory trust organized in the state of Delaware. All of the equity
securities of SJG are owned by South Jersey Industries, Inc. (SJI), its parent
company, which is itself a 1934 Act reporting company.
Financial Information About Industry Segments
Not applicable.
Description of Business
SJG is an operating public utility company engaged in the purchase,
transmission and sale of natural gas for residential, commercial and industrial
use in an area of approximately 2,500 square miles in the southern part of New
Jersey. SJG also sells natural gas and pipeline transportation capacity
(off-system sales) 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 296,374 residential, commercial and industrial customers (at
December 31, 2002) in southern New Jersey. Gas sales, transportation and
capacity release for 2002 amounted to approximately 120,865 MMcf (million cubic
feet), of which approximately 49,450 MMcf was firm sales and transportation,
3,387 MMcf was interruptible sales and transportation and 68,028 MMcf was
off-system sales and capacity release. The breakdown of firm sales includes
31.4% residential, 10.7% commercial, 4.0% cogeneration and electric generation,
..4% industrial and 53.5% transportation. At year-end 2002, SJG served 275,979
residential customers, 19,966 commercial customers and 429 industrial customers.
This includes 2002 net additions of 7,933 residential customers, 424 commercial
customers and 9 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 2002, 2.1 Bcf (billion cubic feet) was delivered under this agreement.
SJG serviced 5 cogeneration facilities in 2002. Combined sales and
transportation of natural gas to such customers amounted to approximately 4.1
Bcf in 2002.
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 the 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 2002, off-system sales amounted to 30.0 Bcf.
Also in 2002, capacity release and storage throughput amounted to 38.0 Bcf.
SJG-2
Supplies of natural gas available to SJG that are in excess of the quantity
required by those customers who use gas as their sole source of fuel (firm
customers) make possible the sale and transportation of gas on an interruptible
basis to commercial and industrial customers whose equipment is capable of using
natural gas or other fuels, such as fuel oil and propane. The term
"interruptible" is used in the sense that deliveries of natural gas may be
terminated by SJG at any time if this action is necessary to meet the needs of
higher priority customers as described in SJG's tariffs. Usage by interruptible
customers, excluding off-system customers, in 2002 amounted to approximately 3.4
Bcf, approximately 2.8 percent of the total throughput.
No material part of SJG's business is dependent upon a single customer or a
few customers.
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 2002, 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.
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. Construction is near
completion on the first new casino/hotel in 13 years, marking the beginning of
another round of development in the city.
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 New Jersey Board
of Public Utilities (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, SJG's major supplier, Columbia Gas
Transmission Corporation and Dominion Transmission, Inc., 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 the recovery of environmental remediation costs
associated with former manufactured gas plant sites, energy efficiency and
renewable energy program costs, consumer education program costs and low income
program costs. These costs are recovered through SJG's Societal Benefits Clause.
The tariff also allows for the adjustment of revenues due to the impact of
SJG-3
"temperature" fluctuations. In addition, the tariff contains provisions
permitting SJG to pass on to customers increases and decreases in the cost of
purchased gas supplies. The cost of gas purchased from the utility by consumers
has historically been set annually by the BPU under a Levelized Gas Adjustment
Clause (LGAC) within SJG's tariff. As recently approved by the BPU, in the
future gas costs will be recovered through Basic Gas Supply Service ("BGSS").
When actual gas costs experienced by SJG are less than those charged to
customers under the LGAC, customer bills in the subsequent LGAC period(s) are
adjusted to provide credits for the overrecovery with interest. When actual gas
costs are more than is recovered through rates, SJG is permitted to charge
customers more for gas in future periods for the underrecovery.
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 for determining whether basic gas supply
services should become competitive.
In January 2000, the BPU approved full unbundling of SJG's system. This
allows all natural gas consumers to select their natural gas supplier. Customers
choosing to purchase natural gas from providers other than the utility are
charged for the cost of gas by the marketer, not the utility. The resulting
decrease in SJG's revenues is offset by a corresponding decrease in gas costs.
While customer choice can reduce utility revenues, it does not negatively affect
SJG's net income or financial condition. The BPU continues to allow for full
recovery of natural gas costs.
In December 2002, the BPU approved the Basic Gas Supply Service price
structure. BGSS is the gas supply service being provided by the natural gas
utility. Upon implementation of BGSS in 2003, customers should have the ability
to make more informed decisions regarding their choices of an alternate supplier
by having a utility price structure that is more consistent with market
conditions. Further, BGSS will provide SJG with more pricing flexibility,
through automatic rate changes, resulting in the reduction or elimination of
over/under-recoveries. Although the BGSS approved price structure will replace
the current pricing structure in the LGAC, all other LGAC mechanisms, such as,
but not limited to, deferred accounting treatment and the allowance for full
recovery of natural gas costs, will remain in place under BGSS.
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. The BPU has
undertaken an extensive comment, meeting and audit process to address the
concerns of all impacted parties. SJG actively participated in the process, and
as such we believe that to date the final standards have not had, nor will they
have in the future, a material adverse affect on the company.
In August 2002, SJG filed a petition with the BPU seeking to transfer its
appliance service business from the regulated utility into a newly created
unregulated, limited liability company. If approved, the newly created company
would have the flexibility to be more responsive to competition and its
customers and further its service offerings in an unregulated environment.
Additional information on regulatory affairs is incorporated by reference
to Notes 1, 2, 6, 11 and 14 of SJG's consolidated financial statements for the
year ended December 31, 2002. See Item 8.
Raw Materials
Transportation Contracts and Storage
SJG has direct connections to two interstate pipeline companies,
Transcontinental Gas Pipeline Corporation (Transco) and Columbia Gas
Transmission Corporation (Columbia). During 2002, SJG purchased and had
SJG-4
delivered approximately 54.9 Bcf of natural gas for distribution to both
on-system and off-system customers. Of this total, 42.0 Bcf was transported on
the Transco pipeline system and 12.9 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 Dominion Transmission Inc. 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
164,089 Thousand Cubic Feet of gas per day (Mcf/d). The terms of the year-round
agreements extend for various periods from 2003 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 market area storage during periods of
low demand and withdraw gas at a rate of up to 86,973 Mcf per day during periods
of high demand. The terms of the storage service agreements extend for various
periods from 2003 to 2008.
Sempra:
SJG has separate gas sales and capacity management agreements with Sempra
which provide SJG with up to 9,662 Mcf per day of gas during the period November
16 through March 31 of each year. This contract provides management services for
storage and pipeline capacity held by SJG on the Dominion Transmission System.
Effective April 1, 2003, this service agreement terminates and the storage and
transportation assets revert back to SJG.
Columbia:
SJG has two 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.
South Jersey Resources Group:
SJG has a one year storage capacity contract with South Jersey Resources
Group which expires March 31, 2003. There is a maximum withdrawal capacity of
4,831 Mcf per day and total storage capacity of 504,831 Mcf. Gas is delivered
through Transco pipeline system.
Gas Supplies
SJG has several long-term gas supply agreements with various producers and
marketers that expire between 2003 and 2006. Under these agreements, SJG can
purchase up to 17,350,098 Mcf of natural gas per year. When advantageous, SJG
can purchase spot supplies of natural gas in place of or in addition to those
volumes reserved under long-term agreements. In recent years, SJG replaced
long-term gas supply contracts with short-term agreements. The short-term
agreements are typically for several months in duration.
SJG-5
Supplemental Gas Supplies
SJG entered into a Liquefied Natural Gas (LNG) purchase agreement with a
third party provider which extends through October 31, 2003. For the 2002-2003
contract year, SJG's annual contract quantity under the agreement is 186,047
Mcf. LNG purchases are transported to SJG's McKee City, New Jersey LNG storage
facility by truck.
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 per day 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 2002-2003 winter season to be 485,476 Mcf. SJG projects that it has
adequate supplies and interstate pipeline entitlements to meet its design
requirements. On December 3, 2002, SJG experienced its highest peak-day demand
for the year of 343,572 Mcf with an average temperature of 22.45 degrees F.
Commodity
SJG's average commodity cost of gas purchased in 2002, 2001 and 2000 was
$4.46 per Mcf, $6.80 per Mcf and $5.68 per Mcf, respectively.
Patents and Franchises
SJG holds nonexclusive franchises granted by municipalities in the seven
county area of southern New Jersey that it serves. No other natural gas public
utility presently serves the territory covered by SJG's franchises. Otherwise,
patents, trademarks, licenses, franchises and concessions are not material to
the business of SJG or its subsidiary.
Seasonal Aspects
SJG experiences seasonal fluctuations in sales when selling natural gas for
heating purposes. SJG meets this seasonal fluctuation in demand from its firm
customers by buying and storing gas during the summer months, and by drawing
from storage and purchasing supplemental supplies during the heating season. As
a result of this seasonality, SJG's revenues and net income are significantly
higher during the first and fourth quarters than during the second and third
quarters of the year.
Working Capital Practices
Reference is made to "Liquidity and Capital Resources" 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."
SJG-6
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 has maintained its focus on being a
low-cost provider of natural gas and energy services. SJG also competes with
other marketers/brokers in the selling of wholesale natural gas services.
Research
During the last three fiscal years, SJG did not engage in research
activities to any material extent.
Environmental Matters
Information on environmental matters is incorporated by reference to Note
14 to SJG's consolidated financial statements for the year ended December 31,
2002. See Item 8.
Employees
SJG had a total of 599 employees as of December 31, 2002. Of that total,
387 employees are unionized and are covered under collective bargaining
agreements that expire in January 2005.
Financial Information About Foreign and Domestic Operations and Export Sales
SJG has no foreign operations and export sales are not a part of its
business.
Item 2. Properties
The principal property of SJG consists of its gas transmission and
distribution systems that include mains, service connections and meters. The
transmission facilities carry the gas from the connections with Transco and
Columbia to SJG's distribution systems for delivery to customers. As of December
31, 2002, there were approximately 92 miles of mains in the transmission systems
and 5,279 miles of mains in the distribution systems.
SJG owns office and service buildings, including its corporate
headquarters, at seven locations in the territory. There is also a liquefied
natural gas storage and vaporization facility at one of those locations.
As of December 31, 2002, the SJG utility plant had a gross book value of
$846.9 million and a net book value, after accumulated depreciation, of $610.1
million. In 2002, $49.6 million was spent on additions to utility plant and
there were retirements of property having an aggregate gross book cost of $6.9
million. Construction and remediation expenditures for 2003 are currently
expected to approximate $55.2 million.
SJG-7
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. Legal Proceedings
SJG is subject to claims which arise in the ordinary course of its business
and other legal proceedings. We accrue liabilities related to these claims when
we can determine the amount or range of amounts of likely settlement costs for
these claims. Management does not currently anticipate the disposition of any
known claims to have a material adverse effect on SJI's financial position,
results of operations or liquidity. 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. Submission Of Matters To A Vote of Security Holders
Not applicable.
SJG-8
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters
Common equity securities of SJG, owned by its parent company, South Jersey
Industries, Inc., are not traded on any stock exchange. SJG has preferred stock
and preferred securities outstanding. Only the preferred securities are listed
and traded on a public exchange. The preferred securities are listed on the New
York Stock Exchange and trade under the symbol "SJI.T".
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 $80.0
million at December 31, 2002.
If preferred stock dividends are in arrears, no dividends may be declared
or paid, or other distribution made on the common stock of SJG. If four or more
quarterly dividends are in arrears, the Preferred Shareholders may elect a
majority of SJG's directors. See Note 4 of SJG's consolidated financial
statements for additional information on Capitalization. See Item 8.
SJG-9
Item 6. Selected Financial Data
The following financial data has been obtained from SJG's audited financial
statements:
(In Thousands Except for Share Data)
Year Ended December 31,
-------------------------------------------------------------------------------
2002 2001 2000 1999 1998
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Operating Revenues $417,263 $475,461 $445,818 $348,074 $297,500
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Operating Income $60,874 $60,462 $62,619 $58,304 $49,243
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Income before Preferred Securities Dividend
Requirement and Discontinued Operations 26,280 24,589 24,929 23,451 17,972
Preferred Dividend Requirements:
Preferred Stock (135) (139) (151) (162) (166)
Preferred Securities (2,923) (2,923) (2,923) (2,922) (2,922)
-------------------------------------------------------------------------------
Income from Continuing Operations 23,222 21,527 21,855 20,367 14,884
(Loss) Income from Discontinued Operations (29) (207) (76) 15 (62)
-------------------------------------------------------------------------------
Net Income Applicable to Common Stock $23,193 $21,320 $21,779 $20,382 $14,822
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Average Shares of Common Stock Outstanding 2,339,139 2,339,139 2,339,139 2,339,139 2,339,139
Earnings per Common Share:
Continuing Operations $9.93 $9.20 $9.34 $8.70 $6.37
Discontinued Operations - Net (0.01) (0.09) (0.03) 0.01 (0.03)
-------------------------------------------------------------------------------
Earnings per Common Share $9.92 $9.11 $9.31 $8.71 $6.34
Dividends Declared Per Common Share $4.57 $7.48 $6.33 $6.93 $7.13
Ratio of Earnings to Fixed Charges (1) 3.0x 2.6x 2.6x 2.5x 2.2x
As of December 31,
-------------------------------------------------------------------------------
2002 2001 2000 1999 1998
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Property, Plant and Equipment, Net $610,052 $583,983 $557,269 $530,874 $502,243
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Total Assets $874,326 $859,390 $842,083 $750,239 $720,136
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Capitalization:
Common Equity (2) $214,224 $205,982 $197,101 $182,122 $162,940
Preferred Stock and Securities (3) 36,690 36,690 36,804 37,044 37,134
Long-Term Debt 199,016 230,247 204,981 183,561 194,710
-------------------------------------------------------------------------------
Total $449,930 $472,919 $438,886 $402,727 $394,784
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(1) The ratio of earnings to fixed charges represents, on a pre-tax basis,
the number of times earnings cover fixed charges. Earnings consist of net
income, to which has been added fixed charges and taxes based on income
of the company before discontinued operations. Fixed charges consist of
interest charges and preferred securities dividend requirements and an
interest factor in rentals.
(2) Included are cash contributions to capital as follows: 2002 - $2.5
million; 2001 - $7.0 million; 2000 - $8.0 million; 1999 - $15.0 million.
(3) Includes $35.0 million of Company Guaranteed Mandatorily Redeemable
Preferred Securities of Subsidiary Trust.
SJG-10
Comparative statistical data related to revenues and gas throughput is as
follows:
2002 2001 2000 1999 1998
-------------- -------------- -------------- -------------- ---------------
Operating Revenues (Thousands):
Firm
Residential $ 174,252 $ 201,531 $ 172,418 $ 152,946 $ 147,274
Commercial 52,300 76,416 49,669 35,064 36,328
Industrial 4,512 4,250 5,265 4,879 4,175
Cogeneration & Electric Generation 9,363 7,405 11,016 8,496 8,119
Firm Transportation 49,436 29,565 38,213 33,125 24,893
-------------- -------------- -------------- -------------- ---------------
Total Firm 289,863 319,167 276,581 234,510 220,789
Interruptible 1,142 1,485 1,695 1,645 2,506
Interruptible Transportation 1,567 1,268 1,531 1,724 2,598
Off-System 115,714 145,530 160,208 104,142 62,578
Capacity Release & Storage 5,365 5,596 4,411 4,193 6,031
Other 3,612 2,415 1,392 1,860 2,998
-------------- -------------- -------------- -------------- ---------------
Total Operating Revenues $ 417,263 $ 475,461 $ 445,818 $ 348,074 $ 297,500
============== ============== ============== ============== ===============
Throughput (MMcf):
Firm
Residential 15,519 17,390 19,124 17,741 16,979
Commercial 5,273 7,544 6,191 4,634 4,826
Industrial 202 248 282 246 348
Cogeneration & Electric Generation 1,986 1,519 2,046 2,316 2,373
Firm Transportation 26,470 22,085 26,114 25,143 22,336
-------------- -------------- -------------- -------------- ---------------
Total Firm Throughput 49,450 48,786 53,757 50,080 46,862
-------------- -------------- -------------- -------------- ---------------
Interruptible 198 207 207 383 694
Interruptible Transportation 3,189 2,638 3,022 3,628 6,049
Off-System 29,980 30,117 38,097 42,480 26,916
Capacity Release & Storage 38,048 27,187 37,445 29,247 27,319
-------------- -------------- -------------- -------------- ---------------
Total Throughput 120,865 108,935 132,528 125,818 107,840
============== ============== ============== ============== ===============
Number of Customers at Year End:
Residential 275,979 268,046 261,621 254,601 248,210
Commercial 19,966 19,542 19,319 18,894 18,457
Industrial 429 420 410 404 398
-------------- -------------- -------------- -------------- ---------------
Total Customers 296,374 288,008 281,350 273,899 267,065
============== ============== ============== ============== ===============
Maximum Daily Sendout (MMcf) 344 326 375 324 314
============== ============== ============== ============== ===============
Annual Degree Days 4,380 4,495 4,942 4,468 4,110
============== ============== ============== ============== ===============
Normal Degree Days * 4,625 4,625 4,639 4,664 4,708
============== ============== ============== ============== ===============
* Average degree days recorded in SJG service territory during 20-year period
ended June 30 of prior year.
SJG-11
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Overview
South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG
distributed natural gas in the seven southernmost counties of New Jersey to
296,374 customers at December 31, 2002 compared with 288,008 customers at
December 31, 2001. SJG also:
* sells natural gas and pipeline transportation capacity (off-system sales)
on a wholesale basis to various customers on the interstate pipeline
system;
* transports natural gas purchased directly from producers or suppliers for
its own sales and for some of its customers; and
* services appliances via the sale of appliance warranty programs, as well
as on a time and materials basis.
Estimates and Assumptions
As described in the footnotes to our consolidated financial statements,
management must make estimates and assumptions that affect the amounts reported
in the financial statements and related disclosures. Actual results could differ
from those estimates. Two types of transactions presented in our consolidated
financial statements require a significant amount of judgment and estimation.
These relate to regulatory assets and environmental remediation costs.
The New Jersey Board of Public Utilities (BPU) has reviewed and approved
most of the items shown as regulatory assets through specific orders. Other
items represent costs that were not yet approved by the BPU for recovery, but
are the subject of current or future filings. In recording these costs as
regulatory assets, management believes the costs will be allowable under
existing rate-making concepts that are embodied in current rate orders received
by SJG. However, ultimate recovery is subject to BPU approval.
An outside consulting firm assists us in estimating future costs for
environmental remediation activities. We estimate future costs based on
projected investigation and work plans using existing technologies. Developing a
single reliable estimation point is not feasible because of the amount of
uncertainty involved in the nature of projected remediation efforts and the long
period over which remediation efforts will continue. Therefore, we estimate the
range of future costs at $48.2 million to $143.9 million. In preparing financial
statements, SJG records liabilities for future costs using the lower end of the
range. We update estimates each year to take into account past efforts, changes
in work plans and remediation technologies.
Revenue Recognition
SJG bills customers monthly for gas delivered and recognizes those revenues
during the month. For SJG retail customers we do not bill at the end of each
month; we make an accrual to recognize revenues for gas delivered from the date
of the last bill to the end of the month. We bill customers at rates approved by
the BPU.
We defer and recognize revenues related to SJG's appliance warranty
contracts over the full 12-month term of the contract as earned.
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). SJG
defers over/under-recoveries of gas costs and includes them in the following
year's LGAC rate or other similar rate recovery mechanism. As a result of these
SJG-12
deferrals, utility revenue recognition does not directly translate to
profitability. While we realize profits on gas sales during the month of
providing the utility service, significant shifts in revenue recognition may
result from the various recovery clauses approved by the BPU (See Regulatory
Matters) without shifting profits between periods.
New Accounting Pronouncements
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets" and Statement No. 143, "Accounting for Asset Retirement
Obligations."
Statement No. 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. It
provides that intangible assets with finite useful lives be amortized and that
goodwill and intangible assets with indefinite lives not be amortized, but
rather be tested at least annually for impairment. The adoption of this
statement did not materially affect SJG's financial condition or results of
operations.
Statement No. 143, which will be adopted in 2003, establishes accounting
and reporting standards for legal obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SJG has
certain easements and right-of-way agreements that qualify as legal obligations
under Statement No. 143. However, we intend to maintain such agreements in
perpetuity; therefore, no change in SJG's current accounting practices is
required at this time.
SJG recovers certain asset retirement costs through rates charged to
customers as an approved component of depreciation expense. When we retire
depreciable properties, we charge the original cost thereof, plus cost of
removal less salvage, to accumulated depreciation. As of December 31, 2002, SJG
had accrued amounts in excess of actual removal costs incurred totaling $41.4
million which is included in utility plant accumulated depreciation. We do not
expect the adoption of this statement to materially affect SJG's financial
condition or results of operations.
In August 2001, the FASB also issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which became effective in 2002.
This statement prescribes that a single accounting model be used for valuing
long-lived assets to be disposed of and broadens the presentation of
discontinued operations. The adoption of this statement did not affect SJG's
financial condition or results of operations, nor do we expect its ongoing
application to materially affect SJG's financial statements.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective for exit or
disposal activities initiated after December 31, 2002. We do not expect the
adoption of this statement to materially affect SJG's financial condition or
results of operations.
In November 2002, the FASB released Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The provisions for this interpretation
have no impact on SJG's financial statements.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which is effective for
SJG's 2002 annual financial statements and subsequent interim financial
reporting. This statement provides alternate methods of transitioning for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, it requires prominent disclosures about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The provisions for this statement have no
impact on SJG's financial statements.
SJG-13
Forward-Looking Statements
This report contains certain forward-looking statements concerning
projected financial and operating performance, future plans and courses of
action and future economic conditions. All statements in this report other than
statements of historical fact are forward-looking statements. These
forward-looking statements are made based upon management's expectations and
beliefs concerning future events impacting the company and involve a number of
risks and uncertainties. We caution that forward-looking statements are not
guarantees and actual results could differ materially from those expressed or
implied in the forward-looking statements. Also, in making forward-looking
statements, we assume no duty to update these statements should expectations
change or actual results and events differ from current expectations.
A number of factors could cause our actual results to differ materially
from those anticipated including, but not limited to, the following: general
economic conditions on an international, national, state and local level;
weather conditions in our marketing areas; changes in commodity costs;
regulatory and court decisions; competition in our utility and nonutility
activities; the availability and cost of capital; costs and effects of legal
proceedings and environmental liabilities; the failure of customers or suppliers
to fulfill their contractual obligations; and changes in business strategies.
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 due to
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).
Mandatorily Redeemable Preferred Securities
SJG's statutory trust subsidiary, SJG Capital Trust, currently has $35
million of 8.35% SJG-Guaranteed Mandatorily Redeemable Preferred Securities
outstanding. SJG may redeem these securities at a price equal to 100% of the
principal amount at any time. The securities currently trade on the New York
Stock Exchange under the symbol SJI.T.
Customer Choice Legislation
All residential natural gas customers in New Jersey can choose their gas
supplier under the terms of the Electric Discount and Energy Competition Act of
1999. As of December 31, 2002, 88,219 SJG residential customers chose a natural
gas supplier other than the utility. This number increased from 39,998 at
December 31, 2001 as marketers were able to offer natural gas at prices
competitive with those available under regulated utility tariffs. Customers
purchasing natural gas from providers other than the utility are charged for gas
costs by the marketer, not the utility. The resulting decrease in SJG's revenues
is offset by a corresponding decrease in gas costs. While customer choice can
reduce utility revenues, it does not negatively affect SJG's net income or
financial condition. The Board of Public Utilities continues to allow for full
recovery of natural gas costs through the Levelized Gas Adjustment Clause as
well as other costs of service including deferred costs, through tariffs.
Temperature Adjustment Clause
A BPU-approved Temperature Adjustment Clause (TAC) increased SJG's net
earnings by $2.3 million in 2002. In 2001, the TAC increased net income by $2.0
million and in 2000, the TAC decreased net earnings by $0.9 million. The clause
is designed to mitigate the effect of variations in heating season temperatures
SJG-14
from historical norms. While we record the revenue and income impacts of TAC
adjustments as incurred, cash inflows or outflows directly attributable to TAC
adjustments generally do not begin until the next clause year. Each TAC year
begins October 1.
Operating Revenues
Revenues decreased $58.2 million in 2002 compared with the prior year. The
decrease was primarily due to the migration of residential customers from firm
gas sales to transportation, lower revenue from off-system sales and weather
that was 2.6% warmer than last year. These factors more than offset the revenue
increase derived from adding 8,366 customers in 2002, the largest increase in
more than a decade. During 2002, the number of residential customers who
purchased natural gas from gas marketers increased by 121% as those marketers
were able to offer competitive gas prices in 2002 compared with SJG's prices.
The corresponding decline in customers who purchased their natural gas from the
utility directly impacted utility revenues. However, since gas costs are passed
on directly to customers without any profit margin added by New Jersey
utilities, the increased customer usage of gas marketers did not impact SJG's
profitability. SJG also experienced a significant decrease in off-system
revenues due to lower average prices for gas sold in 2002. The volume of gas
sold off-system was slightly lower in 2002; however, due to the higher margins
per unit sold, off-system sales activity contributed more to earnings this year
compared with 2001.
Revenues increased $29.6 million in 2001 compared with the prior year. The
increase was primarily due to higher rates resulting from an increase in the
Levelized Gas Adjustment Clause that reflected higher gas costs, the return of
residential customers to firm gas sales from transportation and 6,658 additional
customers. Early in 2001, a large number of residential customers who purchased
natural gas from other providers resumed purchasing natural gas from SJG as
marketers were unable to offer competitive prices. These increases offset a
decrease in off-system revenues. The decrease was due to lower average prices
for natural gas sold during 2001 compared with 2000. The volume of gas sold
off-system was also lower in 2001 than in 2000.
As a result of SJG's Temperature Adjustment Clause (TAC), revenues from
utility ratepayers are closely tied to 20-year normal temperatures calculated
under the clause and not actual temperatures. While the clause significantly
reduces fluctuations in revenues related to temperature, as a general rule,
revenues continue to be positively impacted by colder weather and negatively
impacted by warmer weather. Weather in 2002 was 2.6% warmer than in 2001 and
7.8% warmer for the year than the 20-year TAC average. Revenues in 2001 were
also negatively impacted by the weather. Weather in 2001 was 9.0% warmer than in
2000 and was also 5.3% warmer in 2001 than the 20-year TAC average.
Total gas throughput increased 11.0% to 120.9 billion cubic feet (Bcf) in
2002. The higher throughput was almost entirely due to increased capacity
release throughput. Warm weather resulted in reduced demand for natural gas and
the need for pipeline capacity to transport that gas. Consequently, SJG had more
capacity available to sell in 2002 than 2001. In 2001, total gas throughput
decreased 17.8% to 108.9 Bcf. Results in 2001 were due to decreased capacity
release, off-system sales, transportation and residential activity. Off-system
and capacity release throughput declined primarily because we canceled a
high-volume, low-margin supply and storage contract.
Gas Purchased for Resale
Gas purchased for resale decreased $61.4 million in 2002 compared with
2001. Lower gas costs and sales volumes for both local distribution and
off-system sales were responsible for the decrease. SJG's gas cost during 2002
averaged $4.46 per thousand cubic feet (Mcf) compared with $6.80/Mcf in 2001 and
$5.68/Mcf in 2000. SJG passed lower gas costs on to local distribution customers
through a $17.6 million refund in 2002. Warmer weather and the migration of
customer gas purchases from the utility to gas marketers were the main causes of
lower sales volumes. In 2001, gas purchased for resale increased $33.1 million
compared with 2000 as a result of higher gas costs for both local distribution
and off-system sales, partially offset by lower volumes sold. Unlike gas costs
associated with off-system sales, changes in the unit cost of gas sold to
utility ratepayers do not directly affect the cost of gas purchased for resale
SJG-15
on the statements of consolidated income. We defer and address fluctuations in
gas costs to ratepayers not reflected in current rates in future periods under a
BPU-approved Levelized Gas Adjustment Clause. Gas supply sources include
contract and open-market purchases. SJG secures and maintains its own gas
supplies to serve its sales customers. We do not anticipate any difficulty
renewing or replacing expiring contracts under substantially similar terms and
conditions.
Utility Operations
A summary of net changes in operations (in thousands):
2002 vs. 2001 2001 vs. 2000
------------- -------------
Other Production Expense $ 47 $ (9)
Transmission 30 30
Distribution 590 283
Customer Accounts and Services 1,889 492
Sales 90 18
Administration and General 398 (2,121)
----------- -----------
Total Operations $ 3,044 $ (1,307)
=========== ===========
Distribution expenses increased in 2002 as the cost to maintain the utility
distribution system, inclusive of implementation of new federally mandated
training programs, continues to increase. Customer Accounts and Services expense
increased significantly in 2002 primarily due to higher bad debt expense as
customer account write-offs rose and SJG increased its reserve for bad debts.
The higher level of write-offs was attributable to the unusually cold 2000-2001
winter season. In addition, the colder start to the 2002-2003 winter season
resulted in the need to increase the reserve for future uncollectible account
balances. The increase in Customer Accounts and Services in 2001 compared with
2000 resulted from the absence of almost two months of payroll expense in 2000
due to a work stoppage in that year. Administrative and General (A&G) expenses
increased in 2002 primarily because of increasing healthcare and pension costs.
Approximately two-thirds of the A&G decline in 2001 was work-stoppage related.
The remainder was due to a reallocation of benefits to individual cost centers
mandated by the BPU as part of New Jersey's energy deregulation process.
Other Operating Expenses
A summary of principal changes in other operating expenses (in thousands):
2002 vs. 2001 2001 vs. 2000
------------- -------------
Maintenance $ (1,670) $ (26)
Depreciation 1,214 1,064
Energy and Other Taxes 180 (1,062)
Maintenance expense decreased in 2002 primarily due to lower levels of
Remediation Adjustment Clause (RAC) amortization. RAC-related expenses do not
affect earnings as an offsetting amount is recognized in revenues. Depreciation
was higher due to SJG's increased investment in property, plant and equipment.
Changes in Energy and Other Taxes relate primarily to changes in volumes of gas
sold and transported by SJG.
Other Income and Expense
Other income and expense was higher in 2002 compared with 2001 due to a
pre-tax gain of $686,000 on the sale of stock received as a result of the
demutualization of Prudential's mutual life insurance company. Other income and
SJG-16
expense was lower in 2001 compared with 2000 due to a sharp decline in
investment income on our available-for-sale securities.
Interest Charges
Interest charges decreased in both 2002 and 2001 compared with the prior
year due primarily to reductions in short-term rates on line of credit
borrowings and recoveries of carrying costs associated with unrecovered RAC and
purchased gas costs. We have incurred debt primarily to expand and upgrade SJG's
gas transmission and distribution system and to support seasonal working capital
needs related to gas inventories and customer receivables.
Discontinued Operations
In 2001, we formally discontinued the merchandising segment of our
operations, which consisted of retail sales of natural gas appliances. Results
for 2000 reflect the operating performance of this business segment. The higher
loss in 2001 was primarily due to the cost associated with discontinuing these
activities. Additional losses in 2002 were the result of reevaluating the
reserve for future cost necessary to complete the exit of this segment of
operations and recognizing that additional future cost will be incurred.
Net Income Applicable to Common Stock
Net income for 2002 was $23.2 million as compared with $21.3 million and
$21.8 million in 2001 and 2000, respectively. Reasons for the changes in net
income in 2002 and 2001 are discussed in detail above.
Regulatory Matters
Rate Actions
In January 1997, the BPU granted SJG a 9.62% rate of return on rate base,
which included an 11.25% return on common equity. Additionally, SJG's threshold
for sharing pre-tax margins generated by interruptible and off-system sales and
transportation increased. Currently, SJG keeps 100% of pre-tax margins up to the
threshold level of $7.8 million. The next $750,000 is credited to the Levelized
Gas Adjustment Clause (LGAC). Thereafter, SJG keeps 20% of the pre-tax margins
as it has historically.
In November 2001, SJG filed for a $2.7 million rate increase to recover the
cash related to a 3-year net deficiency in the TAC. Additionally, in September
2002, SJG filed for an $8.6 million rate increase to recover the cash related to
a TAC deficiency resulting from warmer-than-normal weather for the 2001-2002
winter.
Also in November 2001, SJG filed for a $17.6 million reduction to its LGAC.
The BPU approved the LGAC reduction effective December 1, 2001 and concurrently
approved recovery of SJG's October 31, 2001 underrecovered gas cost balance. As
a result, SJG is recovering $48.9 million over three years plus interest accrued
since April 1, 2001. SJG is also recovering interest for the 3-year amortization
period at a rate of 5.75%. In May 2002, SJG received approval from the BPU to
reduce its overcollected LGAC balance by another $17.6 million through a
customer refund. This refund did not affect SJG's net income or financial
condition. In September 2002, SJG filed with the BPU to maintain its current
LGAC rate through October 2003.
During 2002, the BPU convened a gas policy group to address Basic Gas
Supply Service (BGSS), which is the gas supply service being provided by the
natural gas utility. In December 2002, the BPU approved the proposed BGSS price
structure which was submitted by the gas policy group. When implemented in 2003,
customers will be able to make more informed decisions about choosing an
alternate supplier by having a utility price structure that more currently
reflects market conditions. Further, BGSS will provide SJG with more pricing
flexibility, through automatic rate changes, resulting in the reduction of
over/under-recoveries. The BGSS-approved price structure will replace the
current LGAC pricing structure. However, other LGAC related mechanisms, such as
SJG-17
deferred accounting treatment, the sharing of pre-tax margins generated by
interruptible and off-system sales and transportation, and the allowance for
full recovery of natural gas costs, will remain in place under BGSS.
In August 2002, SJG filed for a Societal Benefits Clause (SBC) rate
increase. The SBC recovers costs related to BPU-mandated programs, including
environmental remediation costs that are recovered through its Remediation
Adjustment Clause (RAC); energy efficiency and renewable energy program costs
that are recovered through its Comprehensive Resource Analysis Clause (renamed
in December 2002 as the New Jersey Clean Energy Programs); consumer education
program costs; and low income program costs. If approved, the rate increase
filed would provide for annual recovery of $13.7 million, representing an annual
increase of approximately $7.0 million over the $6.7 million recovery currently
included in rates.
Also in August 2002, SJG filed a petition with the BPU to transfer its
appliance service business from the regulated utility into a newly created
unregulated company. As filed, the newly created company would have the
flexibility to be more responsive to competition and customer needs by expanding
and modifying its service offerings in an unregulated environment.
Filings and petitions described above are still pending unless otherwise
indicated.
Environmental Remediation
We incurred and recorded costs for environmental clean up of sites where
SJG or its predecessors operated manufactured gas plants (MGP). SJG stopped
manufacturing gas in the 1950s. We successfully entered into settlements with
all of SJG's historic comprehensive general liability carriers regarding
environmental remediation expenditures at former MGP sites. As part of these
settlements, SJG purchased an insurance policy that caps its remediation
expenditures at 11 of these sites. The insurance policy is in force until 2024
at 10 sites and until 2029 at one site.
We believe that all costs incurred net of insurance recoveries relating to
SJG's MGP sites will be recovered through rates under SJG's RAC. The RAC
currently permits SJG to recover incurred costs in equal installments over
7-year periods with carrying costs. As of December 31, 2002, SJG has $6.5
million of remediation costs not yet recovered through rates.
Other matters are incorporated by reference to Note 14 to the consolidated
financial statements included in this report.
Liquidity and Capital Resources
Liquidity needs at SJG are driven by factors that include natural gas
commodity prices; the impact of weather on customer bills; lags in fully
collecting gas costs from customers under the LGAC; the timing of construction
and remediation expenditures and related permanent financings; mandated tax
payment dates; and both discretionary and required repayments of long-term debt.
We first seek to meet liquidity needs with net cash provided by operating
activities. Net cash provided by operating activities totaled $72.6 million,
$15.1 million and $37.4 million in 2002, 2001 and 2000, respectively. The wide
swing in our net cash provided by operating activities between 2002 and 2001 was
primarily due to the impact of cold weather in November and December of 2002
compared with warm weather experienced at the same time in 2001. Consequently,
inventories were lower than at December 31, 2001 due to high levels of gas
consumption by customers in late 2002. The majority of the 2001 change resulted
from significantly higher-cost gas placed into inventory during the year. Very
high gas prices combined with cold weather experienced during November and
December of 2000 resulted in much higher receivables and payables and much lower
inventories at year end 2000 as compared with December 31, 2001 when weather
conditions at year end were warmer-than-normal. We use short-term borrowings
under lines of credit from commercial banks to supplement cash from operations
where necessary.
SJG-18
Lines of credit available to SJG totaled $172.0 million at December 31,
2002, of which $153.9 million was used. All but $10 million of these lines are
available through five commercial banks on an uncommitted basis. The banks and
SJG review and renew the lines annually. The $10 million line is extended on a
committed basis, maturing May 2003, by a sixth commercial bank. SJG has
long-standing relationships with all of these banks and we believe, based upon
ongoing dialogue, that there will continue to be sufficient credit available to
meet our business' future liquidity needs.
SJG supplements its operating cash flow and credit lines with both debt and
equity capital. Over the years, SJG has used long-term debt, primarily in the
form of First Mortgage Bonds, to finance its long-term needs. These needs are
primarily capital expenditures for property, plant and equipment. Since 1998,
SJG has financed these needs via a Medium Term Note (MTN) program, secured in
similar fashion to the First Mortgage Bonds. SJG's registration of a new $150
million MTN program with the Securities and Exchange Commission became effective
in December 2002. This program replaces a previous $100 million, 3-year MTN
program that was fully used in 2001. Current maturities on long-term debt over
the next five years are as follows: $10.7 million per year in 2003 through 2005;
$9.0 million in 2006; and $8.4 million in 2007.
SJI contributed $2.5 million, $7.0 million and $8.0 million of capital to
SJG during 2002, 2001 and 2000, respectively. Contributions of capital are
credited to Other Paid-in Capital and Premium on Common Stock.
Capital Expenditures, Commitments and Contingencies
Capital Expenditures
SJG has a continuing need for cash resources and capital, primarily to
invest in new and replacement facilities and equipment and for environmental
remediation costs. Net construction and remediation expenditures for 2002
amounted to $44.3 million. We estimate the net costs for 2003, 2004 and 2005 at
approximately $55.2 million, $48.4 million and $48.8 million, respectively.
Commitments and Contingencies
SJG has certain commitments for both pipeline capacity and gas supply for
which it pays fees regardless of usage. Those commitments as of December 31,
2002 average $44.1 million annually and total $293.5 million over the contracts'
lives. Approximately 15% of the financial commitment under these contracts
expires during the next five years. We expect to renew each of these contracts
under renewal provisions as provided in each contract. SJG recovers all
prudently incurred fees through rates via the Levelized Gas Adjustment Clause.
Occasionally, SJG enters into operating leases to finance the use of a
variety of assets, including vehicles, telecommunications equipment and copiers.
SJG's operating lease obligations for the next five years are: $502,000 in 2003;
$356,000 in 2004; $190,000 in 2005; $35,000 in 2006; and a total of $62,000 in
2007 and beyond.
SJG is subject to claims arising in the ordinary course of business and
other legal proceedings. We accrue liabilities related to claims when we can
determine the amount or range of amounts of likely settlement costs for these
claims. Management does not currently anticipate the disposition of any known
claims to have a material adverse effect on SJG's financial position, results of
operations or liquidity.
Market Risks
Commodity Market Risks
SJG is a regulated utility. As such, we recover gas commodity costs under
the Levelized Gas Adjustment Clause that is part of our tariff. While SJG is
protected from gas cost fluctuations by the clause, we do utilize forward
contracts to shield our customers from gas cost fluctuations.
SJG-19
Interest Rate Risk
Our exposure to interest rate risk relates primarily to short-term,
variable rate borrowings. Our short-term, variable rate debt outstanding at
December 31, 2002 was $153.9 million and averaged $116.5 million for the entire
year. The months where average outstanding variable rate debt was at its high
and low points were November at $154.3 million and April at $86.2 million,
respectively. A hypothetical 100 basis point (1%) increase in interest rates on
our average variable rate debt outstanding would result in a $687,000 increase
in our interest expense net of tax on an annual basis. The 100 basis point
increase was chosen for illustrative purposes, as it provides a simple basis for
calculating the impact of interest rate changes under a variety of interest rate
scenarios. Over the last five years, the change in basis points (b.p.) of our
average monthly interest rates from the beginning to end of each year was as
follows: 2002 -74 b.p. decrease; 2001 - 383 b.p. decrease; 2000 - 83 b.p.
increase; 1999 - 81 b.p. increase; and 1998 - 38 b.p. decrease. For December
2002, our average interest rate on variable rate debt was 2.22%. Consequently,
the interest rate reduction experienced since the beginning of 2001 cannot be
duplicated.
To reduce exposure to an interest rate increase on our variable rate debt,
SJG entered into two interest rate swap agreements. The swaps fixed the rate on
$40 million of variable rate debt from April 2002 to March 2003 at 3.57%. SJG
primarily issues long-term debt at fixed rates and, consequently, interest
expense is not significantly impacted by changes in market interest rates. SJG
prepaid $17.5 million of 9% first mortgage bonds in October 2002. SJG paid a
premium of $566,000 to bondholders in conjunction with that redemption. Given
current interest rate levels, we anticipate redeeming an additional $8.1 million
of first mortgage bonds prior to scheduled maturity during the next 12 months.
Ratio of Earnings to Fixed Charges
The company's ratio of earnings to fixed charges for each of the periods
indicated is as follows:
Year Ended December 31,
------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
2.9x 2.6x 2.6x 2.5x 2.2x
The ratio of earnings to fixed charges represents, on a pre-tax basis, the
number of times earnings covers fixed charges. Earnings consist of net income,
to which has been added fixed charges and taxes based on income of the company.
Fixed charges consist of interest charges and preferred securities dividend
requirements and an interest factor in rentals.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
Information required by this item is incorporated by reference to the
section entitled "Market Risks" in Item 7 on pages 19 and 20 of this Form 10-K.
SJG-20
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' 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, 2002 and 2001, 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, 2002. 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 auditing standards generally
accepted in the United States of America. 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 19, 2003
SJG-21
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------
(In Thousands)
December 31,
---------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Property, Plant and Equipment: (Notes 1, 3 & 7)
Utility Plant, at original cost $ 846,865 $ 805,440
Accumulated Depreciation (236,813) (221,457)
----------------- ------------------
Property, Plant and Equipment - Net 610,052 583,983
----------------- ------------------
Available-for-Sale Securities 3,407 3,093
----------------- ------------------
Current Assets:
Cash and Cash Equivalents (Notes 1 & 9) 3,580 3,276
Accounts Receivable (Notes 2 & 3) 61,845 39,212
Unbilled Revenues (Note 1) 27,570 32,398
Provision for Uncollectibles (2,816) (1,916)
Natural Gas in Storage, average cost 40,769 59,778
Materials and Supplies, average cost 4,157 3,818
Prepaid Taxes (Note 1) 2,440 4,650
Other Prepayments and Current Assets 3,435 2,799
----------------- ------------------
Total Current Assets 140,980 144,015
----------------- ------------------
Regulatory Assets: (Note 1)
Environmental Remediation Costs: (Notes 2 & 14)
Expended - Net 6,470 12,831
Liability for Future Expenditures 48,211 48,790
Gross Receipts and Franchise Taxes (Note 6) 1,811 2,254
Income Taxes - Flowthrough Depreciation (Note 6) 8,597 9,575
Deferred Fuel Cost - Net (Notes 1 & 2) 31,594 38,382
Deferred Postretirement Benefit Costs (Note 11) 3,780 4,158
Other Regulatory Assets 6,450 2,386
----------------- ------------------
Total Regulatory Assets 106,913 118,376
----------------- ------------------
Other Non-Current Assets:
Unamortized Debt Discount and Expense 5,660 5,957
Accounts Receivable - Merchandise 1,776 31
Other 5,538 3,935
----------------- ------------------
Total Other Non-Current Assets 12,974 9,923
----------------- ------------------
Total Assets $ 874,326 $ 859,390
================= ==================
The accompanying footnotes are an integral part of the financial statements.
SJG-22
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------
(In Thousands)
December 31,
---------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
Common Equity: (Note 10)
Common Stock, Par Value $2.50 per share:
Authorized - 4,000,000 shares
Outstanding - 2,339,139 shares $ 5,848 $ 5,848
Other Paid-In Capital and Premium on Common Stock 135,317 132,817
Accumulated Other Comprehensive Loss (Note 12) (8,689) (1,939)
Retained Earnings 81,748 69,256
----------------- ------------------
Total Common Equity 214,224 205,982
----------------- ------------------
Preferred Stock and Securities: (Note 4)
Redeemable Cumulative Preferred - Par Value $100 per share,
Authorized 41,966 shares, Outstanding 16,904 shares 8% Series 1,690 1,690
Company-Guaranteed Mandatorily Redeemable Preferred
Securities of Subsidiary Trust, Par Value $25 per share,
1,400,000 shares Authorized and Outstanding 35,000 35,000
----------------- ------------------
Total Preferred Stock and Securities 36,690 36,690
----------------- ------------------
Long-Term Debt (Notes 7 & 8) 199,016 230,247
----------------- ------------------
Total Capitalization 449,930 472,919
----------------- ------------------
Current Liabilities:
Notes Payable (Note 9) 153,900 135,500
Current Maturities of Long-Term Debt (Note 7) 10,696 9,733
Accounts Payable 43,066 32,391
Deferred Income Taxes - Net (Note 5) 19,844 25,503
Customer Deposits 6,924 5,976
Environmental Remediation Costs (Note 14) 4,852 11,052
Taxes Accrued (Note 2) 4,212 2,904
Derivatives 142 -
Interest Accrued and Other Current Liabilities 8,106 7,752
----------------- ------------------
Total Current Liabilities 251,742 230,811
----------------- ------------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net (Note 5) 98,537 86,172
Environmental Remediation Costs (Note 14) 43,359 37,738
Pension and Other Postretirement Benefits (Note 11) 14,205 17,736
Investment Tax Credits (Note 6) 3,819 4,166
Other 12,734 9,848
----------------- ------------------
Total Deferred Credits and Other Non-Current Liabilities 172,654 155,660
----------------- ------------------
Total Capitalization and Liabilities $ 874,326 $ 859,390
================= ==================
The accompanying footnotes are an integral part of the financial statements.
SJG-23
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED INCOME AND RETAINED EARNINGS
- --------------------------------------------------------------------------------------------------------------------------------
(In Thousands Except for Per Share Data)
Year Ended December 31,
-----------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (Notes 1, 2 & 3) $ 417,263 $ 475,461 $ 445,818
---------------- ---------------- ----------------
Operating Expenses:
Gas Purchased for Resale 274,405 335,783 302,652
Utility Operations 42,958 39,914 41,221
Maintenance 6,101 7,771 7,797
Depreciation (Note 1) 22,350 21,136 20,072
Energy and Other Taxes (Notes 1 & 5) 10,575 10,395 11,457
----------------- ----------------- -----------------
Total Operating Expenses 356,389 414,999 383,199
----------------- ----------------- -----------------
Operating Income 60,874 60,462 62,619
Other Income and Expense - Net 333 (54) 170
Interest Charges 17,555 20,126 21,157
Preferred Dividend Requirements (Note 4) 3,058 3,062 3,074
----------------- ----------------- -----------------
Income Before Income Taxes 40,594 37,220 38,558
Income Taxes (Notes 1, 5 & 6) 17,372 15,693 16,703
----------------- ----------------- -----------------
Income from Continuing Operations 23,222 21,527 21,855
Loss from Discontinued Operations - Net (Note 13) (29) (207) (76)
----------------- ----------------- -----------------
Net Income Applicable to Common Stock 23,193 21,320 21,779
Retained Earnings at Beginning of Year 69,256 65,436 58,457
Dividends Declared - Common Stock 10,700 17,500 14,800
----------------- ----------------- -----------------
Retained Earnings at End of Year (Note 10) $ 81,749 $ 69,256 $ 65,436
================= ================= =================
Average Shares of Common Stock Outstanding 2,339 2,339 2,339
Earnings Per Common Share:
Continuing Operations $ 9.93 $ 9.20 $ 9.34
Discontinued Operations - Net (Note 13) (0.01) (0.09) (0.03)
----------------- ----------------- -----------------
Earnings Per Common Share $ 9.92 $ 9.11 $ 9.31
================= ================= =================
Dividends Declared Per Common Share $ 4.57 $ 7.48 $ 6.33
================= ================= =================
The accompanying footnotes are an integral part of the financial statements.
SJG-24
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Year Ended December 31,
------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 23,193 $ 21,320 $ 21,779
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 24,730 23,407 22,986
Provision for Losses on Accounts Receivable 3,664 2,067 2,176
Revenues and Fuel Costs Deferred - Net 6,788 (9,202) (16,006)
Deferred and Non-Current Income Taxes and Credits - Net 11,096 5,154 14,030
Environmental Remediation Costs - Net 6,361 5,643 7,228
Additional Pension Contributions (15,851) (190) (267)
Changes in:
Accounts Receivable (20,569) 38,337 (54,193)
Inventories 18,670 (27,790) (4,881)
Prepayments and Other Current Assets (636) (159) (179)
Prepaid and Accrued Taxes - Net 3,518 1,772 (83)
Accounts Payable and Other Accrued Liabilities 11,977 (47,146) 42,635
Other - Net (381) 1,868 2,172
--------------- ---------------- ----------------
Net Cash Provided by Operating Activities 72,560 15,081 37,397
--------------- ---------------- ----------------
Cash Flows from Investing Activities:
Capital Expenditures, Cost of Removal and Salvage (50,677) (48,720) (47,574)
Purchase of Available-for-Sale Securities (693) (766) (718)
--------------- ---------------- ----------------
Net Cash Used in Investing Activities (51,370) (49,486) (48,292)
--------------- ---------------- ----------------
Cash Flows from Financing Activities:
Net Borrowing from (Repayments of) Lines of Credit 18,400 21,600 (5,000)
Proceeds from Issuance of Long-Term Debt - 35,000 35,000
Principal Repayments of Long-Term Debt (30,268) (11,877) (10,580)
Premium on Acquisition of Debt (617) - -
Dividends on Common Stock (10,700) (17,501) (14,800)
Payments for Issuance of Long-Term Debt (201) (1,256) 1,704
Additional Investment by Shareholder 2,500 7,000 8,000
--------------- ---------------- ----------------
Net Cash (Used in) Provided by Financing Activities (20,886) 32,966 14,324
--------------- ---------------- ----------------
Net Increase(Decrease) in Cash and Cash Equivalents 304 (1,439) 3,429
Cash and Cash Equivalents at Beginning of Year 3,276 4,715 4,694
--------------- ---------------- ----------------
Cash and Cash Equivalents at End of Year $ 3,580 $ 3,276 $ 8,123
=============== ================ ================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest (Net of Amounts Applicable to LGAC
Overcollections and Amounts Capitalized) $ 23,710 $ 26,268 $ 24,210
Income Taxes (Net of Refunds) $ 4,779 $ 5,886 $ 3,468
The accompanying footnotes are an integral part of the financial statements.
SJG-25
SOUTH JERSEY GAS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Entity - The consolidated financial statements include the
accounts of South Jersey Gas Company (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. SJG reclassified some
previously reported amounts to conform with current year classifications.
Equity Investments - We classify equity investments purchased as
long-term investments as Available-for-Sale Securities on our consolidated
balance sheets and carry them at their estimated fair value with any
changes in unrealized gains or losses included in Other Comprehensive
Income (See Note 12).
Estimates and Assumptions - We prepare our financial statements 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). SJG
follows the accounting for regulated enterprises prescribed by the
Financial Accounting Standards Board (FASB) Statement No. 71, "Accounting
for the Effects of Certain Types of Regulation." In general, Statement No.
71 allows deferral of certain costs and creation of certain obligations
when it is probable that such items will be recovered from or refunded to
customers in future periods.
Operating Revenues - We bill customers monthly for gas deliveries. For
retail 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. We defer and recognize revenues related to our appliance
warranty contracts over the full 12-month term of the contract as earned.
The BPU allows us 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. We defer
over/under-recoveries of gas costs and include them in the following year's
LGAC or other similar recovery mechanism. We pay interest on overcollected
LGAC balances based on our approved return on rate base (See Note 2).
Our tariff also includes a Temperature Adjustment Clause (TAC), a
Remediation Adjustment Clause (RAC) and a Comprehensive Resource Analysis
Clause (CRA). Our TAC reduces the impact of temperature fluctuations on the
Company and our customers. The RAC recovers remediation costs of former gas
manufacturing plants and the CRA 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 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 &
14). CRA adjustments are also deferred and do not affect earnings, as these
costs are recovered through rates on an ongoing basis.
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. The Utility Plant
balances as of December 31, 2002 and 2001, were comprised of the following:
SJG-26
Thousands of Dollars
2002 2001
--------- ---------
Utility Plant:
Production Plant $ 302 $ 585
Storage Plant 10,885 11,186
Transmission Plant 99,708 97,979
Distribution Plant 701,639 663,262
General Plant 28,890 27,822
Intangible Plant 1,856 1,856
--------- --------
Utility Plant in Service 843,280 802,690
Construction Work in Progress 3,585 1,428
Gas Stored - Base Gas - 1,322
--------- --------
Total Utility Plant $846,865 $805,440
========= ========
Depreciation and Amortization - We depreciate utility plant on a
straight-line basis over the estimated remaining lives of the various
property classes. We periodically review and adjust these estimates as
required after BPU approval. The composite annual rate for all depreciable
utility property was approximately 2.9% in 2002 and 2.8% in both 2001 and
2000. Except for extraordinary retirements, accumulated depreciation is
charged with the cost of depreciable utility property retired, and removal
costs less salvage.
Impairment of Long-Lived Assets - We review the carrying amount of an
asset for possible impairment whenever events or changes in circumstances
indicate that such amount may not be recoverable. For the years ended 2002,
2001 and 2000, no such circumstances were identified.
Derivative Instruments and Hedge Accounting - Effective January 1,
2001, SJG adopted FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. This statement establishes
accounting and reporting standards for derivative instruments, including
those embedded in other contracts, and for hedging activities. It requires
that all derivatives, whether designated as hedging relationships or not,
must be recorded on the balance sheet at fair value. If the derivative is
designated as a fair value hedge, we recognize the changes in the fair
value of the derivative and of the hedged item attributable to the hedged
risk in earnings. If the derivative is designated as a cash flow hedge, we
record the effective portion of changes in the fair value of the derivative
in Other Comprehensive Income and recognize it in the income statement when
the hedged item affects earnings. We recognize ineffective portions of
changes in the fair value of cash flow hedges in earnings.
In April 2002, we entered into two interest rate swap contracts that
effectively fixed the interest rate at 3.57% through March 15, 2003 on
$40.0 million of our debt outstanding under bank lines.
We entered into these interest rate swap agreements to hedge the
exposure to increasing rates with respect to our variable rate debt. The
differential to be paid or received as a result of these swap agreements is
accrued as interest rates change and is recognized as an adjustment to
interest expense. We account for these interest rate swaps as cash flow
hedges. As of December 31, 2002, the market value of these swaps was $0.1
million, which represents the amount we would have to pay the counterparty
to terminate these contracts. We included this balance on the 2002
consolidated balance sheet under the caption Derivatives. As of December
31, 2002, we calculated the swaps to be highly effective; therefore, we
recorded the offset to the hedge asset, net of taxes, in Accumulated Other
Comprehensive Loss (See Note 12).
We determined the fair value of the interest rate swap agreements
using quotations from independent parties.
SJG-27
We have also identified other financial instruments that qualify as
derivatives. Management believes, however, based on its interpretation of
guidance issued, that as these derivative contracts relate to the purchase
and sale of natural gas, they qualify for the normal purchases and normal
sales exception and, therefore, no additional disclosure is required.
New Accounting Pronouncements - In June 2001, the FASB issued
Statement No. 142, "Goodwill and Other Intangible Assets," and Statement
No. 143, "Accounting for Asset Retirement Obligations."
Statement No. 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the
accounting for goodwill and other intangible assets subsequent to their
acquisition. It provides that intangible assets with finite useful lives be
amortized and that goodwill and intangible assets with indefinite lives
will not be amortized, but rather be tested at least annually for
impairment. In 1983, we acquired certain gas distribution and operating
facilities with an excess of purchase price over net book value of $2.9
million, which was being amortized over 40 years. This acquisition
adjustment is deemed to have an indefinite useful life. Accordingly, we
ceased amortizing the premium on January 1, 2002 upon adoption of Statement
No. 142, leaving a carrying amount of $1.6 million, which we reflected in
the caption Utility Plant on the consolidated balance sheets. The premium
amortization approximated $75,000 in 2001 and 2000.
Statement No. 143, which will be adopted in 2003, establishes
accounting and reporting standards for legal obligations associated with
the retirement of tangible long-lived assets and the associated asset
retirement costs. We have certain easements and right-of-way agreements
that qualify as legal obligations under Statement No. 143. However, it is
our intent to maintain these agreements in perpetuity; therefore, no change
in our current accounting practices is required at this time.
We recover certain asset retirement costs through rates charged to
customers as an approved component of depreciation expense. When we retire
depreciable properties, we charge the original cost thereof, plus cost of
removal less salvage, to accumulated depreciation. As of December 31, 2002,
we had accrued amounts in excess of actual removal costs incurred totaling
$41.4 million which is included in Utility Plant Accumulated Depreciation.
We do not expect the adoption of this statement to materially affect our
financial condition or results of operations.
In August 2001, the FASB also issued Statement No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," which became
effective in 2002. This statement prescribes that a single accounting model
be used for valuing long-lived assets to be disposed of and broadens the
presentation of discontinued operations. The adoption of this statement did
not affect our financial condition or results of operations nor do we
expect its ongoing application to materially affect our financial
statements.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective for exit
on disposal activities initiated after December 31, 2002. We do not expect
the adoption of this statement to materially affect our financial condition
or results of operations.
In November 2002, the FASB released Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." The provisions of
this interpretation have no impact on SJG's financial statements.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which is effective
for our 2002 annual financial statements and subsequent interim financial
reporting. This statement provides alternate methods of transitioning for a
SJG-28
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, it requires prominent
disclosures about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
provisions for this statement have no impact on the Company.
Income Taxes - Deferred income taxes are provided for all significant
temporary differences between book and taxable income (See Notes 5 & 6).
Regulatory Assets - All significant regulatory assets are separately
identified on the consolidated balance sheets under the caption Regulatory
Assets. Each item that is separately identified is being recovered through
utility rate charges without a return on investments over the following
periods:
Years Remaining
Regulatory Asset As of December 31, 2002
---------------- -----------------------
Environmental Remediation Costs:
Expended - Net 7
Liability for Future Expenditures Not Applicable
Gross Receipts and Franchise Taxes 4
Income Taxes - Flowthrough Depreciation 9
Deferred Fuel Costs - Net Various
Deferred Postretirement Benefit Costs 10
The majority of the assets reflected under the caption Other
Regulatory Assets are currently subject to filings with the BPU requesting
recovery. Management believes that all such deferred costs will be
permitted to be recovered from ratepayers through future utility rates.
In addition, we had one significant regulatory liability for
overcollected taxes totaling $2.8 million and $1.6 million, including
interest, as of December 31, 2002 and 2001, respectively. We included these
amounts in the caption Other under the heading Deferred Credits and Other
Non-Current Liabilities and are subject to being returned to ratepayers in
future rate proceedings.
Statements of Cash Flows - For purposes of reporting cash flows,
highly liquid investments with original maturities of three months or less
are considered cash equivalents.
2. REGULATORY ACTIONS:
In January 1997, the BPU granted us a 9.62% rate of return on rate
base, which included an 11.25% return on common equity. Additionally, our
threshold for sharing pre-tax margins generated by interruptible and
off-system sales and transportation increased. Currently, we keep 100% of
pre-tax margins up to the threshold level of $7.8 million. The next
$750,000 is credited to the LGAC. Thereafter, we keep 20% of the pre-tax
margins as we have historically.
Effective January 10, 2000, the BPU approved full unbundling of our
system. This allows all natural gas consumers to select their natural gas
supplier. As of December 31, 2002, 92,543 of our residential customers were
purchasing their gas commodity from someone other than us. Customers
choosing to purchase natural gas from providers other than the utility are
charged for the cost of gas by the marketer, not the utility. The resulting
decrease in our revenues is offset by a corresponding decrease in gas
costs. While customer choice can reduce utility revenues, it does not
negatively affect our net income or financial condition. The BPU continues
to allow for full recovery of natural gas costs through the LGAC as well as
other costs of service, including deferred costs, through tariffs.
SJG-29
In November 2001, we filed for a $2.7 million rate increase to recover
the cash related to a 3-year net deficiency in the TAC. Additionally, in
September 2002, we filed for an $8.6 million rate increase to recover the
cash related to a TAC deficiency resulting from warmer-than-normal weather
for the 2001-2002 winter.
Also in November 2001, we filed for a $17.6 million reduction to the
LGAC. The BPU approved the LGAC reduction effective December 1, 2001 and
concurrently approved recovery of our October 31, 2001 underrecovered gas
cost balance. As a result, we will recover $48.9 million over three years
plus interest accrued since April 1, 2001. We will also recover interest
for the 3-year amortization period at a rate of 5.75%. In May 2002, we
received approval from the BPU to reduce our overcollected LGAC balance by
another $17.6 million through a customer refund. This refund did not affect
our net income or financial condition. In September 2002, we filed with the
BPU to maintain our current LGAC rate through October 2003.
During 2002, the BPU convened a gas policy group to address Basic Gas
Supply Service (BGSS), which is the gas supply service being provided by
the natural gas utility. On December 18, 2002, the BPU approved the
proposed BGSS price structure which was submitted by the gas policy group.
When the BGSS is implemented in 2003, customers will be able to make more
informed decisions about choosing an alternate supplier by having a utility
price structure that more currently reflects market conditions. Further,
BGSS will provide us with more pricing flexibility, through automatic rate
changes, resulting in the reduction of over/under-recoveries. The BGSS
approved price structure will replace the current LGAC pricing structure.
However, other LGAC related mechanisms, such as deferred accounting
treatment, the sharing of pre-tax margins generated by interruptible and
off-system sales and transportation, and the allowance for full recovery of
natural gas costs, will remain in place under BGSS.
In August 2002, we filed for a Societal Benefits Clause (SBC) rate
increase. The SBC recovers costs related to BPU mandated programs,
including environmental remediation costs that are recovered through our
RAC; energy efficiency and renewable energy program costs that are
recovered through our CRA Clause (renamed in December 2002 as the New
Jersey Clean Energy Programs); consumer education program costs; and low
income program costs. If approved, the rate increase filed would provide
for an annual recovery level of $13.7 million, representing an annual
increase of approximately $7.0 million over the $6.7 million recovery
currently included in rates.
Also in August 2002, we filed a petition with the BPU to transfer our
appliance service business from the regulated utility into a newly created
unregulated company. As filed, the newly created company would have the
flexibility to be more responsive to competition and customer needs by
expanding and modifying its service offerings in an unregulated
environment.
3. RELATED PARTY TRANSACTIONS:
SJG sells natural gas for resale to South Jersey Energy Company (SJE)
and South Jersey Resources Group, LLC (SJRG), SJI's wholly owned
subsidiaries. These sales comply with Section 284.402 of the Regulations of
the Federal Energy Regulatory Commission (FERC). Sales to SJE were
approximately $13,991,000 and $7,184,000 and $14,620,000 for the years
ended December 31, 2002, 2001 and 2000, respectively. The amounts due from
SJE relating to these sales were $3,647,000, $1,004,000 and $2,824,000 at
December 31, 2002, 2001 and 2000, respectively. Sales to SJRG were
approximately $17,074,000, $23,011,000 and $30,327,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. The amounts due from SJRG
relating to these sales were $4,110,000, $3,353,000 and $4,587,000 at
December 31, 2002, 2001 and 2000, respectively.
We also meet some of our gas purchasing requirements by purchasing
natural gas for resale from SJRG. Such purchases were approximately
$11,68