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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended
December 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to ______________.
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: None
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [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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Cover Page
PART I
Item 1. Business
General
The registrant, South Jersey Gas Company (SJG), a New Jersey
corporation, is an operating public utility. All of the common equity securities
of SJG are owned by South Jersey Industries, Inc. (SJI), its parent company,
which is itself a 1934 Act reporting company.
Information regarding SJG can be found at SJI's internet address,
www.sjindustries.com. We make available free of charge on or through our website
SJG's annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission (SEC). The SEC maintains
an Internet site that contains these reports at http://www.sec.gov. The content
on any web site referred to in this filing is not incorporated by reference into
this filing unless expressly noted otherwise.
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. 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 covers approximately 2,500 square miles in the
southern part of New Jersey. It 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
benefits from its proximity to Philadelphia and Wilmington on the western side
of its service territory and Atlantic City and the burgeoning shore communities
on the eastern side. Economic development and housing growth had long been
driven by the development of the Philadelphia metropolitan area. In recent
years, however, housing growth in the eastern portion of the service territory
has increased substantially and now accounts for approximately half of SJG's
annual customer growth. The foundation for growth in Atlantic City and the
surrounding region rests primarily with new gaming and non-gaming investments
that emphasize destination style attractions. The casino industry is expected to
remain a significant source of regional economic development going forward. The
ripple effect from Atlantic City continues to produce new housing, commercial
and industrial construction. Combining with the gaming industry catalyst is the
ongoing conversion of southern New Jersey's oceanfront communities from seasonal
resorts to year round economies. New and expanded hospitals, schools, and large
scale retail developments throughout the service territory have contributed to
SJG's growth. Presently, SJG serves approximately 58% of households within its
territory with natural gas. SJG also serves southern New Jersey's diversified
industrial base that includes processors of petroleum and agricultural products;
chemical, glass and consumer goods manufacturers; and high technology industrial
parks.
SJG serves 313,579 residential, commercial and industrial customers (at
December 31, 2004) in southern New Jersey. Gas sales, transportation and
capacity release for 2004 amounted to 132,847 MMcf (million cubic feet), of
which 54,333 MMcf was firm sales and transportation, 2,635 MMcf was
SJG-2
interruptible sales and transportation and 75,879 MMcf was off-system sales and
capacity release. The breakdown of firm sales includes 27.1% residential, 9.6%
commercial, 2.0% cogeneration and electric generation, .3% industrial and 61.0%
transportation. At year-end 2004, SJG served 292,185 residential customers,
20,939 commercial customers and 455 industrial customers. This includes 2004 net
additions of 8,463 residential customers, 534 commercial customers and 20
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 2004, 1.38 Bcf (billion cubic feet) was delivered
under this agreement.
SJG serviced 6 cogeneration facilities in 2004. Combined sales and
transportation of natural gas to such customers amounted to approximately 3.6
Bcf in 2004.
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 2004, off-system sales amounted to 21.3 Bcf.
Also in 2004, capacity release and storage throughput amounted to 54.6 Bcf.
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 2004 amounted to approximately 2.6
Bcf, approximately 2.0% of the total throughput.
No material part of SJG's business is dependent upon a single customer
or a few customers.
In 2004, 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.
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, Columbia Gulf Transmission Company,
Dominion Transmission, Inc., and Texas Gas Transmission Corporation, 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
allows for the adjustment of revenues when temperatures are higher or lower than
normal, thereby stabilizing SJG's income. In years which are warmer or colder
than normal, SJG increases or decreases its revenue, respectively, to a level
equivalent with that of normal temperature. The tariff also contains provisions
permitting the recovery of environmental remediation costs associated with
SJG-3
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. 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 is set annually by the BPU through a Basic Gas
Supply Service ("BGSS") within SJG's tariff. When actual gas costs experienced
by SJG are less than those charged to customers under BGSS, customer bills in
the subsequent BGSS period(s) are reduced by returning 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 BGSS price structure. BGSS is
the gas supply service being provided by the natural gas utility. Upon
implementation of BGSS in 2003, customers 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
provides SJG with more pricing flexibility, through automatic rate changes,
conceptually resulting in the reduction of over/under-recoveries. Although the
BGSS price structure replaced the pricing structure in the previous rate clause,
all other mechanisms from the previous clause, such as, but not limited to,
deferred accounting treatment and the allowance for full recovery of natural gas
costs, remain in place under BGSS
In July 2004, the BPU approved SJG's August 2002 petition and related
agreements to transfer its appliance service business from the regulated
utility. SJI had previously formed South Jersey Energy Service Plus (SJESP) to
accommodate the transfer. SJESP purchased certain assets and assumed certain
liabilities of the appliance service business for the net book value of $1.2
million. SJESP paid an additional $1.5 million for certain intangible assets and
that amount was credited by SJG to its customers through the Remediation
Adjustment Clause.
In January 1997, the BPU granted SJG rate relief, which was predicated
in part upon a 9.62% rate of return on rate base that included an 11.25% return
on common equity. This rate relief provided cost-of-service recovery, including
deferred costs, through base rates. Additionally, SJG's threshold for sharing
pre-tax margins generated by interruptible and off-system sales and
transportation had increased. As a result of this case, SJG kept 100% of pre-tax
margins up to the threshold level of $7.8 million. The next $750,000 was
credited to customers through the BGSS clause. Thereafter, SJG kept 20% of the
pre-tax margins as it had historically.
On July 7, 2004, the BPU granted SJG a base rate increase of $20.0
million, which was predicated in part upon a 7.97% rate of return on rate base
that included a 10.0% return on common equity. The increase was effective July
8, 2004 and designed to provide an incremental $8.5 million on an annualized
basis to net income. SJG was also permitted recovery of regulatory assets
contained in its petition and a reduction in its composite depreciation rate
from 2.9% to 2.4%.
Included in the base rate increase was a change to the sharing of
pre-tax margins on interruptible and off-system sales and transportation. SJG
now recovers through its base rates the $7.8 million that it had previously
recovered through the sharing of pre-tax margins. As a result, the sharing of
pre-tax margins now begins from dollar one, with SJG retaining 20%. Moreover,
SJG now shares pre-tax margins from on-system capacity release sales, in
addition to the interruptible and off-system sales and transportation. Effective
July 1, 2006, the 20% retained by SJG will decrease to 15% of such margins.
SJG-4
As part of the overall settlement effective July 8, 2004, SJG reduced
rates in several rate clauses that were no longer needed by SJG to recover
costs. SJG was either no longer incurring or had already recovered the specific
costs that these clauses were designed to recover. Since revenues raised under
these clauses were for cost recovery only and had no profit margin built in,
their elimination has no impact on SJG's net income. However, SJG's customers'
bills are estimated to decline by $38.9 million annually due to the elimination
of these clauses, more than offsetting the base rate increase awarded.
Additional information on regulatory affairs is incorporated by
reference to Notes 1, 2, 6, 11 and 13 of SJG's financial statements for the year
ended December 31, 2004. 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 2004, SJG purchased and had
delivered approximately 43.2 Bcf of natural gas for distribution to both
on-system and off-system customers. Of this total, 31.5 Bcf was transported on
the Transco pipeline system and 11.7 Bcf was transported on the Columbia
pipeline system. SJG also secures firm transportation and other long term
services from three additional pipelines upstream of the Transco and Columbia
systems. They include: Columbia Gulf Transmission Company (Columbia Gulf), Texas
Gas Transmission Corporation (Texas Gas) and Dominion Transmission Inc.
(Dominion). 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
the jurisdiction of the Federal Energy Regulatory Commission (FERC).
Transco:
Transco is SJG's largest supplier of long-term gas transmission
services. These services include five year-round and one seasonal firm
transportation (FT) service 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 169,589 Thousand Cubic Feet of gas per day ("Mcf/d"). The
terms of the year-round agreements extend for various periods from 2005 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 2005 to 2017.
Dominion:
SJG has a storage service with Dominion which provides a maximum
withdrawal capacity of 9,662 Mcf per day during the period between November 16
and March 31 of winter season with 408,696 Mcf of storage capacity. Gas is
delivered through both the Dominion and Transco pipeline systems.
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.
SJG-5
Gas Supplies
SJG has two long-term gas supply agreements with a single producer and
marketer that expires in 2006. Under these agreements, SJG can purchase up to
6,798,628 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 has replaced long-term gas
supply contracts with short-term agreements. The short-term agreements are
typically for several months in duration.
Supplemental Gas Supplies
During 2004 SJG entered into a Liquified Natural Gas (LNG) liquefaction
service agreement with a third party provider which extends through March 31,
2005. SJG's contract quantity under the agreement is 232,744 Mcf. LNG supplied
by this vendor is transported to SJG's 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 New Jersey
LNG 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 2004-2005 winter season to be 511,363 Mcf. SJG projects that
it has adequate supplies and interstate pipeline entitlements to meet its design
requirements. On January 10, 2004, SJG experienced its highest peak-day demand
for the year of 407,207 Mcf with an average temperature of 11.51 degrees F.
Natural Gas Prices
SJG's average cost of natural gas purchased and delivered in 2004, 2003
and 2002, including demand charges, was $7.39 per Mcf, $6.74 per Mcf and $4.46
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.
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.
SJG-6
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, "Description of Business."
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, no other utility provides
natural gas service within its territory. SJG does 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. SJG
competes with alternative fuel source providers based upon price, convenience
and environmental factors. 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. 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 13 to SJG's financial statements for the year ended December 31, 2004. See
Item 8.
Employees
SJG had a total of 509 employees as of December 31, 2004. Of that
total, 314 employees are unionized. Employees totaling 276 and 38 are covered
under collective bargaining agreements that expire in January 2009 and January
2008, respectively. We consider relations with employees to be good.
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.
SJG-7
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, 2004, there were approximately 92 miles of mains in the transmission systems
and 5,478 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, 2004, SJG's utility plant had a gross book value of
$957.3 million and a net book value, after accumulated depreciation, of $732.8
million. In 2004, $68.6 million was spent on additions to utility plant and
there were retirements of property having an aggregate gross book cost of $5.9
million. Construction and remediation expenditures for 2005 are currently
expected to approximate $67.1 million.
Virtually all of SJG's transmission pipeline, distribution mains and
service connections are in streets or highways or on the property of others. The
transmission and distribution systems are maintained under franchises or permits
or rights-of-way, many of which are perpetual. SJG's properties (other than
property specifically excluded) are subject to a lien of mortgage under which
its first mortgage bonds are outstanding. We believe these properties are well
maintained and in good operating condition.
Item 3. Legal Proceedings
SJG is subject to claims which arise in the ordinary course of 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 affect on SJG's financial position,
results of operations or liquidity.
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 outstanding but shares are not traded on a public exchange.
SJG is restricted as to the amount of cash dividends or other
distributions that may be paid on its common stock by an order issued by the New
Jersey Board of Public Utilities in July 2004, that granted SJG an increase in
base rates. Per the order, SJG is required to maintain Total Common Equity of no
less than $289 million. SJG's Total Common Equity balance was $307 million at
December 31, 2004.
SJG is also 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. As of December 31, 2004, these restrictions did not
affect the amount that may be distributed from SJG's retained earnings.
Dividends of $9.1 million were declared on SJG's common stock in 2004 and no
dividends were declared in 2003.
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 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)
Year Ended December 31,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
-----------------------------------------------------------------
Operating Revenues (1) $ 508,827 $ 536,442 $ 424,027 $ 481,449 $ 450,272
=================================================================
Operating Income $ 71,451 $ 65,420 $ 60,874 $ 60,462 $ 62,619
=================================================================
Income before Preferred Dividend
Requirement and Discontinued Operations $ 31,597 $ 26,743 $ 23,357 $ 21,666 $ 22,006
Preferred Dividend Requirements (135) (135) (135) (139) (151)
-----------------------------------------------------------------
Income from Continuing Operations 31,462 26,608 23,222 21,527 21,855
Loss from Discontinued Operations 0 0 (29) (207) (76)
-----------------------------------------------------------------
Net Income Applicable to Common Stock $ 31,462 $ 26,608 $ 23,193 $ 21,320 $ 21,779
=================================================================
Average Shares of Common Stock Outstanding 2,339,139 2,339,139 2,339,139 2,339,139 2,339,139
Ratio of Earnings to Fixed Charges (2) 3.9x 3.3x 2.9x 2.6x 2.6x
As of December 31,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
-----------------------------------------------------------------
Property, Plant and Equipment, Net $ 732,781 $ 684,823 $ 651,486 $ 622,115 $ 592,250
=================================================================
Total Assets (3) $ 1,007,586 $ 956,537 $ 926,318 $ 898,604 $ 878,146
=================================================================
Capitalization:
Common Equity (4) $ 306,748 $ 269,800 $ 214,224 $ 205,982 $ 197,101
Preferred Stock 1,690 1,690 1,690 1,690 1,804
Long-Term Debt 282,008 263,781 235,098 266,329 241,063
-----------------------------------------------------------------
Total $ 590,446 $ 535,271 $ 451,012 $ 474,001 $ 439,968
=================================================================
(1) Prior year amounts have been adjusted for certain reclassifications.
See "Reclassifications" in Note 1 to the fiancial statements.
(2) 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.
(3) Prior years have been restated. See "Restatements" in Note 1 to the
financial statements.
(4) Included are cash contributions to capital as follows: 2004 - $15.0
million; 2003 - $20.0 million; 2002 - $2.5 million; 2001 - $7.0 million;
2000 - $8.0 million.
SJG-10
SOUTH JERSEY GAS COMPANY COMPARATIVE OPERATING STATISTICS
Comparative statistical data related to revenues and gas throughput is as
follows:
2004 2003 2002 2001 2000
------------ ------------ ------------- ------------ ------------
Operating Revenues (Thousands):
Firm
Residential $ 182,826 $ 193,725 $ 174,252 $ 201,531 $ 172,418
Commercial 57,826 58,749 52,300 76,416 49,669
Industrial 5,223 5,635 4,512 4,250 5,265
Cogeneration & Electric Generation 9,496 6,513 9,363 7,405 11,016
Firm Transportation 80,572 74,080 49,436 29,565 38,213
------------ ------------ ------------- ------------ ------------
Total Firm 335,943 338,702 289,863 319,167 276,581
------------ ------------ ------------- ------------ ------------
Interruptible 1,641 1,682 1,142 1,485 1,695
Interruptible Transportation 1,462 1,121 1,567 1,268 1,531
Off-System 151,161 176,555 115,714 145,530 160,208
Capacity Release & Storage 10,157 6,686 5,365 5,596 4,411
Appliance Service 6,362 9,596 8,386 6,136 5,002
Other 2,101 2,100 1,990 2,268 844
------------ ------------ ------------- ------------ ------------
Total Operating Revenues $ 508,827 $ 536,442 $ 424,027 $ 481,450 $ 450,272
============ ============ ============= ============ ============
Throughput (MMcf):
Firm
Residential 14,723 15,843 15,519 17,390 19,124
Commercial 5,198 5,351 5,273 7,544 6,191
Industrial 187 212 202 248 282
Cogeneration & Electric Generation 1,095 777 1,986 1,519 2,046
Firm Transportation 33,130 32,214 26,470 22,085 26,114
------------ ------------ ------------- ------------ ------------
Total Firm Throughput 54,333 54,397 49,450 48,786 53,757
------------ ------------ ------------- ------------ ------------
Interruptible 172 220 198 207 207
Interruptible Transportation 2,463 2,247 3,189 2,638 3,022
Off-System 21,294 27,041 29,980 30,117 38,097
Capacity Release & Storage 54,585 41,119 38,048 27,187 37,445
------------ ------------ ------------- ------------ ------------
Total Throughput 132,847 125,024 120,865 108,935 132,528
============ ============ ============= ============ ============
Number of Customers at Year End:
Residential 292,185 283,722 275,979 268,046 261,621
Commercial 20,939 20,405 19,966 19,542 19,319
Industrial 455 435 429 420 410
------------ ------------ ------------- ------------ ------------
Total Customers 313,579 304,562 296,374 288,008 281,350
============ ============ ============= ============ ============
Maximum Daily Sendout (MMcf) 428 422 344 326 375
============ ============ ============= ============ ============
Annual Degree Days * 4,641 4,929 4,380 4,495 4,942
============ ============ ============= ============ ============
* Average degree days recorded in SJG's service territory during the 20-year
period ended June 30, 1996, as approved in its Temperature Adjustment Clause,
are 4,688.
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
313,579 customers at December 31, 2004, compared with 304,562 customers at
December 31, 2003. SJG also:
o sells natural gas and pipeline transportation capacity (off-system
sales) on a wholesale basis to various customers on the interstate
pipeline system;
o transports natural gas purchased directly from producers or
suppliers for its own sales and for some of its customers; and
o serviced appliances via the sale of appliance service programs, as
well as, on a time and materials basis through September 1, 2004,
at which time the business line was transferred out of SJG and
into an affiliate by common ownership, South Jersey Energy Service
Plus, LLC.
SJG's primary goal is to provide safe, reliable natural gas service at
the lowest cost possible. Other goals include: 1) promoting natural gas as the
fuel of choice for a variety of energy needs, ranging from home heating, to
cooking (both residential and commercial), to recreational uses (such as gas
fireplaces and grills); and 2) maintaining annual customer growth above the
national average of 1.8% through a combination of new customer additions and
customer conversions from other fuels.
Business Model - SJG is the primary focus of its parent, SJI, and will
continue to account for the majority of SJI's net income by maximizing the
growth potential of its service territory.
Customer Growth - The vibrancy of the economic development in and
adjacent to southern New Jersey, our primary area of operations, and related
strong demand for new housing has enabled our utility to grow its customer count
at an average rate of 2.75% over the past five years. That growth rate increased
to 3.0% in 2004. Housing growth significantly benefits utility performance.
Regulatory Environment - SJG is primarily regulated by the New Jersey
Board of Public Utilities (BPU). The BPU sets the rates that we can charge our
rate-regulated customers for services provided and establishes the terms of
service under which we operate. We expect the BPU to continue to set rates and
establish terms of service that will enable us to obtain a fair and reasonable
return on capital invested. The BPU approved a change in base rates in July 2004
that will provide a significant earnings benefit in 2005 compared with 2004.
Weather Conditions - SJG's earnings are largely protected from
fluctuations in temperatures by a BPU approved Temperature Adjustment Clause.
This clause has a stabilizing effect on utility income as SJG recognizes and
records earnings based upon an average of temperatures over a 20-year period,
and not actual temperatures experienced during a given year. However, our
earnings are not protected from changes in the natural gas usage patterns of our
customers. Usage patterns can be affected by a number of factors, such as wind,
precipitation and temperature extremes.
Changes in Natural Gas Prices - In recent years, prices for natural gas
have become increasingly volatile. Gas costs are passed on directly to customers
without any profit margin added. The price charged to customers is set annually,
with a regulatory mechanism in place to make limited adjustments to that price
during the course of a year. High prices can make it more difficult for our
customers to pay their bills and may result in elevated levels of bad-debt
expense.
Changes in Interest Rates - SJG has operated in a relatively low
interest rate environment over the past several years. Rising interest rates
SJG-12
would raise the expense associated with existing variable rate debt and all
issuances of new debt. We have sought to mitigate the impact of a potential
rising rate environment by fixing the costs on all long-term debt, either by
directly issuing fixed rate debt or by entering into derivative transactions to
hedge against rising interest rates.
Labor and Benefit Costs - Labor and benefit costs have a significant
impact on SJG's profitability. Benefit costs, especially those related to health
care, have been rising in recent years. We sought to manage these costs by
revising health care plans offered to existing employees, capping
post-retirement health care benefits and changing health care and pension
packages offered to new hires. Our workforce totaled 509 employees at the end of
2004, with 62% of that total being unionized. During 2004, we agreed to new
contracts with all of our bargaining units that encompass the changes mentioned
above. The contracts run through at least January 2008, with the largest
bargaining units signed through January 2009. We expect cost benefits from these
changes to gradually increase as new hires replace retiring employees.
Balance Sheet Strength - In 2003 and 2004, SJG took significant steps
to enhance the quality of its balance sheet. Through the receipt of capital
contributions from its parent and strong earnings performance, SJG's equity to
capitalization ratio, inclusive of short-term debt, improved from 43% at the end
of 2003 to 48% at the end of 2004. A strong balance sheet permits us to maintain
the financial flexibility necessary to address volatile economic and commodity
markets while maintaining a low-risk financial profile.
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; changes
in the availability of natural gas; legislative, 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.
Critical Accounting Policies
Estimates and Assumptions:
As described in the footnotes to our 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. Five types of transactions presented in our financial
statements require a significant amount of judgment and estimation. These relate
to regulatory accounting, energy derivatives, environmental remediation costs,
pension and other postretirement employee benefit costs, and revenue
recognition.
Regulatory Accounting - SJG maintains its accounts in accordance with
the Uniform System of Accounts as prescribed by the New Jersey Board of Public
Utilities (BPU). As a result of the ratemaking process, we are required to
follow Financial Accounting Standards Board (FASB) Statement No. 71, "Accounting
SJG-13
for the Effects of Certain Types of Regulation" and, consequently, the
accounting principles applied by SJG differ in certain respects from those
applied by its businesses not regulated by the BPU. We are required under
Statement No. 71 to recognize the impact of regulatory decisions on our
financial statements. SJG is required under its Basic Gas Supply Service (BGSS)
to forecast its natural gas costs in setting its rates and provides the ability,
subject to BPU approval, to recover or refund the difference between gas cost
recoveries and the actual costs of gas through a BGSS charge to customers. Any
underrecovery or overrecovery is recorded as a Regulatory Asset or Liability on
the Balance Sheets and reflected in the BGSS in subsequent years. We also enter
into derivatives that are used to hedge natural gas purchases, and the offset to
the resulting derivative assets or liabilities is recorded as a Regulatory Asset
or Liability on the Balance Sheets.
In addition to the BGSS, other regulatory assets consist primarily of
remediation costs associated with manufactured gas plant sites, which are
discussed below under Environmental Remediation Costs, and several other assets
as detailed in Note 1 to the Financial Statements. If there are changes in
future regulatory positions that indicate the recovery of such regulatory assets
is not probable, the related cost would be charged to income. However, currently
there are no such anticipated changes at the BPU.
Energy Derivatives - SJG recognizes assets or liabilities for the
energy-related contracts that qualify as derivatives when contracts are
executed. We record contracts at their fair value in accordance with FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. We occasionally enter into derivatives to hedge against
forward price risk. The costs of these contracts are recoverable through our
BGSS, subject to BPU approval (See Regulatory Actions). We adjust the fair value
of the contracts each reporting period for changes in the market. We derive the
fair value for most of the energy-related contracts from markets where the
contracts are actively traded and quoted. For other contracts, SJG uses
published market surveys and, in certain cases, independent parties to obtain
quotes concerning the contracts' current value. Market quotes tend to be more
plentiful for contracts maturing in two years or less (See Commodity Market
Risk).
Environmental Remediation Costs - 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. The estimated future costs range from $51.0 million to $192.8
million. In preparing financial statements, we record liabilities for future
costs range from using the lower end of the range because a single reliable
estimation point is not feasible due to the amount of uncertainty involved in
the nature of projected remediation efforts and the long period over which
remediation efforts will continue. We update estimates each year to take into
account past efforts, changes in work plans and remediation technologies (See
Section under Environmental Remediation later in this discussion).
Pension and Other Postretirement Benefit Costs - The costs of providing
pension and other postretirement employee benefits are impacted by actual plan
experience as well as assumptions of future experience. Employee demographics,
plan contributions, investment performance, and assumptions concerning return on
plan assets, discount rates and health care cost trends all have a significant
impact on determining our projected benefit obligations. We evaluate these
assumptions annually with the assistance of our investment manager and actuary
and we adjust them accordingly. These adjustments could result in significant
changes to the net periodic benefit costs of providing such benefits and the
related liabilities recognized by SJG.
Revenue Recognition - Gas revenues are recognized in the period the
commodity is delivered. SJG bills customers monthly. A majority of SJG's
customers have their meters read on a cycle basis throughout the month. As a
result, recognized revenues include estimates. For customers that are not billed
at the end of each month, we record an estimate to recognize unbilled revenues
for gas delivered from the date of the last meter reading to the end of the
month. SJG's unbilled revenue is estimated each month based on natural gas
delivered monthly into the system; unaccounted for natural gas based on
historical results; customer specific use factors, when available; actual
temperatures during the period; and applicable customer rates. We bill our
customers at rates approved by the BPU.
SJG-14
We deferred and recognized revenues related to SJG's appliance service
contracts seasonably over the full 12-month term of the contract as earned. This
practice ceased upon the transfer of SJG's appliance repair operations to an
affiliate on September 1, 2004.
The BPU allows us to recover gas costs in rates through the Basic Gas
Supply Service (BGSS) price structure. We defer over/underrecoveries of gas
costs and include them in subsequent adjustments to the BGSS rate or other
similar rate recovery mechanism. These adjustments result in
over/underrecoveries of gas costs being included in rates during future periods.
As a result of these 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
without shifting profits between periods, as these clauses provide for recovery
of costs on a dollar-for-dollar basis (See Regulatory Actions).
New Accounting Pronouncements
See detailed discussions concerning New Accounting Pronouncements and
their impact on SJG in Note 1 to the Financial Statements.
Temperature Adjustment Clause
A BPU-approved Temperature Adjustment Clause (TAC) increased
(decreased) SJG's net income by $0.2 million, $(1.7) million and $2.3 million in
2004, 2003 and 2002, respectively. The clause is designed to mitigate the effect
of variations in heating season temperatures 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.
Recent Regulatory Actions
Base Rates - In January 1997, the BPU granted SJG rate relief, which
was predicated in part upon a 9.62% rate of return on rate base that included an
11.25% return on common equity. This rate relief provided for cost-of-service
recovery, including deferred costs, through base rates. Additionally, SJG's
threshold for sharing pre-tax margins generated by interruptible and off-system
sales and transportation had increased. As a result of this case, SJG kept 100%
of pre-tax margins up to the threshold level of $7.8 million. The next $750,000
was credited to customers through the Basic Gas Supply Service (BGSS) clause.
Thereafter, SJG kept 20% of the pre-tax margins as it had historically.
On July 7, 2004, the BPU granted SJG a base rate increase of $20.0
million, which was predicated in part upon a 7.97% rate of return on rate base
that included a 10.0% return on common equity. The increase was effective July
8, 2004 and designed to provide an incremental $8.5 million on an annualized
basis to net income. SJG was also permitted recovery of regulatory assets
contained in its petition and a reduction in its composite depreciation rate
from 2.9% to 2.4%.
Included in the base rate increase was a change to the sharing of
pre-tax margins on interruptible and off-system sales and transportation. SJG
now recovers through its base rates the $7.8 million that it had previously
recovered through the sharing of pre-tax margins. As a result, the sharing of
pre-tax margins now begins from dollar one, with SJG retaining 20%. Moreover,
SJG now shares pre-tax margins from on-system capacity release sales, in
addition to the interruptible and off-system sales and transportation. Effective
July 1, 2006, the 20% retained by SJG will decrease to 15% of such margins.
As part of the overall settlement effective July 8, 2004, SJG reduced
rates in several rate clauses that were no longer needed by SJG to recover
costs. SJG was either no longer incurring or had already recovered the specific
costs that these clauses were designed to recover. Since revenues raised under
these clauses were for cost recovery only and had no profit margin built in,
their elimination has no impact on SJG's net income. However, SJG's customers'
bills are estimated to decline by $38.9 million annually due to the elimination
of these clauses, more than offsetting the base rate increase awarded.
SJG-15
Pending Audits - The BPU issued an order under which it will perform a
competitive services audit and a management audit that includes a focused review
of SJG's gas supply and purchasing practices. The audits, which commenced in
October 2004, are mandated by statute to be conducted at predetermined
intervals. Management does not currently anticipate the outcome of these audits
to have a material effect on SJG's financial position, results of operations or
liquidity.
Appliance Service Business - On July 23, 2004, the BPU approved SJG's
petition and related agreements to transfer its appliance service business from
the regulated utility. In anticipation of this transfer, SJI had formed South
Jersey Energy Service Plus, LLC (SJESP) to perform appliance repair services
after BPU approval of the transfer. SJESP purchased certain assets and assumed
certain liabilities required to perform such repair services from SJG for the
net book value of $1.2 million on September 1, 2004. The agreements also called
for SJESP to pay an additional $1.5 million to SJG. This $1.5 million was
credited by SJG to customers through the Remediation Adjustment Clause (RAC) and
had no earnings impact on SJG. Furthermore, the transfer has had no effect on
the provision of safety-related or emergency-related services to the public
since the transferred services include only non-safety related, competitive
appliance services.
Other Regulatory Matters - Effective January 10, 2000, the BPU approved
full unbundling of SJG's system. This allows all natural gas consumers to select
their natural gas commodity supplier. As of December 31, 2004, 87,645 of SJG's
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 prudently incurred natural gas costs through the
BGSS. Unbundling did not change the fact that SJG still recovers cost of
service, including deferred costs, through base rates.
In December 2001, the BPU approved recovery of SJG's October 31, 2001
underrecovered gas cost balance of $48.9 million plus accrued interest since
April 1, 2001 at a rate of 5.75%. The recovery of this balance was completed
upon the settlement of SJG's base rate case in July 2004.
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 SJG's RAC; energy
efficiency and renewable energy program costs that are recovered through SJG's
New Jersey Clean Energy Programs; consumer education program costs; and low
income program costs that are recovered through the Universal Service Fund. In
August 2003, the BPU approved a $6.7 million increase to SJG's SBC, effective
September 1, 2003. In September 2004, SJG filed for a $2.6 million reduction to
its current SBC annual recovery level of $17.5 million.
In September 2002, we filed for an $8.6 million rate increase to
recover the cash related to a Temperature Adjustment Clause (TAC) deficiency
resulting from warmer-than-normal weather for the 2001-2002 winter. As a result
of the colder-than-normal 2002-2003 winter, the cumulative TAC deficiency
decreased to $5.7 million. In August 2003, the BPU approved the recovery of the
$5.7 million TAC deficiency, effective September 1, 2003. SJG has fully
recovered the $5.7 million. In September 2004, we filed for a $1.2 million
increase to recover the cash related to the TAC deficiency resulting from the
2003-2004 winter, which was warmer than normal.
Also in September 2002, we filed with the BPU to maintain its current
BGSS rate through October 2003. However, due to price increases in the wholesale
market, in February 2003, SJG filed an amendment to the September 2002 filing.
In April 2003, the BPU approved a $16.6 million increase to our annual gas costs
recoveries.
In March 2003, the BPU approved a statewide Universal Service Fund
(USF) program on a permanent basis. In June 2003, the BPU established a
statewide program through which funds for the USF and Lifeline Credit and
Tenants Assistance (Lifeline) Programs would be collected from customers of all
electric and gas utilities in the state. The BPU ordered that utility rates be
set to recover a total statewide USF budget of $33.0 million, and a total
SJG-16
Lifeline budget of $72.0 million. Recovery rates for both programs were
implemented in August 2003. In April 2004, SJG made its annual USF filing, along
with the state's other electric and gas utilities, proposing a statewide USF
budget of $105.5 million. The proposed statewide budget was updated to $113.0
million and filed with the BPU in May 2004. In June 2004, the BPU approved the
statewide budget of $113.0 million and the increased rates were implemented
effective July 1, 2004, resulting in a $3.9 million increase to our annual USF
recoveries.
In July 2003, SJG made its annual BGSS filing, as amended, with the
BPU. Due to further price increases in the wholesale market, SJG filed for a
$24.0 million increase to its annual gas cost revenues. In August 2003, the BPU
approved our price increase on a provisional basis, subject to refund with
interest, effective September 1, 2003. In October 2004, the provisional rate
increase was made final with no refund required.
In February 2004, SJG filed notice with the BPU to reduce its gas cost
revenues by approximately $5.0 million, via a rate reduction, in addition to
providing for a $20.8 million bill credit to customers. Both the rate reduction
and bill credit were approved and implemented in March 2004.
In June 2004, SJG made its annual BGSS filing with the BPU requesting a
$4.9 million increase in gas cost recoveries. In October 2004, the requested
increase was approved on a provisional basis.
Filings and petitions described above are still pending unless
otherwise indicated.
Environmental Remediation:
We incurred and recorded costs for environmental clean up of 12 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 the MGP sites will be recovered through rates under SJG's Remediation
Adjustment Clause (RAC). The RAC currently permits us to recover incurred costs
in equal installments over 7-year periods with carrying costs. As of December
31, 2004, we have $5.3 million of remediation costs not yet recovered through
rates.
Other matters are discussed in Note 13 to the Financial Statements
included as part of this report.
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).
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, 2004, 87,645 SJG residential customers chose a
natural gas commodity supplier other than SJG. This number fell from 102,563 at
SJG-17
December 31, 2003 as marketers were unable to offer natural gas at prices
competitive with those available under regulated utility tariffs. Customers
purchasing natural gas from providers other than SJG are charged for gas costs
by the marketer, not SJG. The resulting decrease in SJG's revenues is offset by
a corresponding decrease in SJG's 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 prudently incurred
natural gas costs through the Basic Gas Supply Service clause as well as other
costs of service including deferred costs, through tariffs.
Results of Operations
Operating Revenues:
Revenues decreased $27.6 million compared with prior year. The decrease
was primarily due to lower Off-System Sales (OSS) revenues. OSS revenues
decreased $25.3 million compared to 2003 as a direct result of lower sales
volume and lower prices for natural gas in this market in 2004 compared with
2003. Additionally, weather was 5.8% warmer than last year resulting in lower
utility sales. Offsetting these factors were the addition of 9,017 customers and
a $5.7 million increase in recoveries for previously deferred costs under the
New Jersey Clean Energy Program (See discussion under Operations Expense).
Revenues increased $112.4 million in 2003 compared with 2002. This
increase was primarily due to four factors. First, weather was 12.5% colder in
2003 than in 2002. Second, Off-System Sales revenues increased $60.8 million
from 2002; this was a direct result of higher prices for natural gas sold in
2003 than in 2002. Third, we added 8,188 customers in 2003. Finally, the BPU
approved two increases in SJG's Basic Gas Supply Service clause to address the
recovery of the increasing prices of natural gas sold in 2003 and an increase in
SJG's Societal Benefits Clause recoveries to fund State sponsored programs (See
Regulatory Actions). Partially offsetting the effect of these factors was a
16.3% increase in the number of residential customers purchasing their gas from
a source other than SJG. The decline in customers who purchased their natural
gas from SJG directly impacted utility revenues. However, since gas costs are
passed on directly to customers without any profit margin added by SJG, the
increased customer usage of gas marketers did not impact SJG's profitability.
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 2004 was 5.8% warmer than in 2003, and
1.0% warmer than the 20-year TAC average. Weather in 2003 was 12.5% colder than
2002, and 5.1% colder for the year than the 20-year TAC average.
Total gas throughput increased 6.3% to 132.8 billion cubic feet (Bcf)
in 2004. The higher throughput was primarily due to a significant increase in
capacity release activity during the year. While revenues from such activities
are not as high as those including the actual sale of commodity, contributions
to margins are still comparable. Total gas throughput increased 3.4% to 125.0
Bcf from 2002 to 2003. The higher throughput was primarily due to the addition
of 8,188 customers and colder weather experienced in 2003
Cost of Sales:
SJG's cost of sales decreased $35.0 million in 2004 compared with 2003
due principally to a significant decrease in sales volumes, primarily in the
Off-System Sales market. Unlike gas costs associated with Off-System Sales,
changes in the unit cost of gas sold to utility ratepayers do not always
directly affect cost of sales. We defer fluctuations in gas costs to rate payers
not reflected in current rates to future periods under a BPU-approved Basic Gas
Supply Service (BGSS) price structure. Primarily as a result of the impact of
warmer weather, firm sales volume in the residential and commercial markets
decreased by 6.0% for the year 2004 compared with last year.
SJG-18
Cost of Sales increased $98.6 million in 2003 compared with 2002 due
principally to a significant increase in costs for both local distribution and
Off-System Sales. SJG's gas cost during 2003 averaged $6.74 per decatherm (dt)
compared with $4.46 per dt in 2002. Additionally, as described under Regulatory
Actions, the BPU approved two increases to SJG's BGSS clause during 2003
resulting in higher cost of sales and related revenue.
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.
Operating Expenses:
A summary of principal changes in other operating expenses (in
thousands):
2004 vs. 2003 2003 vs. 2002
------------- -------------
Operations $ 2,097 $ 7,213
Maintenance 94 (423)
Depreciation (615) 1,313
Energy and Other Taxes (267) 1,150
Operations expense increased in 2004 primarily as a result of the
BPU-approved increase in SJG's Societal Benefits Clause (SBC) in August 2003
(See Regulatory Actions). With this approval, recoveries and a corresponding
charge to expense for previously deferred costs under SJG's New Jersey Clean
Energy Programs (NJCEP) increased by $5.7 million for the year 2004 when
compared with 2003. The BPU-approved SBC clause allows for full recovery of
these deferred costs including carrying costs and, as a result, the increase in
expense has no impact on SJG's net income. Our administrative and general (A&G)
expenses also increased in 2004 compared with 2003 primarily as a result of
deferred cost amortizations approved as part of the July 2004 rate case
settlement. The resulting amortizations of approximately $0.5 million in 2004
were included in rate recovery from its customers and had no impact on net
income. In addition, we incurred significant expense during the year to improve
controls to ensure compliance with both SEC and New Jersey Board of Public
Utility rules and regulations. Lower bad debt expense during 2004 significantly
offset the previously noted increases for the year. A March 2004 BGSS refund
improved our accounts receivable aging significantly in 2004. As a result, we
benefited from lower uncollectible account write-offs during 2004. In addition,
operating expenses related to the appliance service operations decreased $1.9
million as a result of the September 1, 2004 transfer of this function out of
the utility (See Regulatory Actions).
Utility Operations expense increased significantly in 2003 as a result
of the BPU-approved increase in SJG's SBC in August 2003, as previously
discussed. With this approval, recoveries and a corresponding charge to expense
for previously deferred costs under the NJCEP increased by $1.8 million in 2003
when compared with 2002. In addition, A&G expenses increased in 2003 compared
with 2002 primarily because of increasing health care and pension costs, higher
insurance expense, higher stock compensation expense and bank fees. Health care
and pension costs increased as the cost of providing such benefits continued to
increase. Additionally, declines in long-term interest rates resulted in an
unfavorable movement in actuarially determined benefit costs (See Note 11 to the
Financial Statements). Insurance expense was reduced by $0.9 million in 2002 by
lowering SJG's reserve for outstanding claims following a period of favorable
settlements. SJG also incurred a higher annual expense for executive
compensation awards (See Note 1 to the Financial Statements) and additional
expense related to the establishment of committed bank facilities in 2003 (See
Liquidity and Capital Resources). Finally, the SJG appliance service operations
expense increased as its operations grew compared with the prior year.
Maintenance expense decreased in 2003 compared with 2002 primarily due
to lower levels of Remediation Adjustment Clause (RAC) amortization. RAC-related
expenses do not affect earnings as we recognize an offsetting amount in
revenues. Depreciation decreased due to lower depreciation rates approved by the
SJG-19
BPU as part of our recent rate case settlement. The composite depreciation rate
was reduced from 2.9% to 2.4% effective July 2004. Depreciation was higher in
2003 compared with 2002 due to SJG's increased investment in property, plant and
equipment. The increase in Energy & Other Taxes relates primarily to increases
in volumes of gas sold and transported by SJG as reflected under the caption,
"Operating Revenues."
Other Income and Expense:
Other income and expense was higher in 2004 compared with 2003 due to a
pre-tax gain of $686,000 on SJG's post-retirement healthcare plan trust. The
movement of plan assets to a new investment manager triggered the recognition of
gains on investments.
Interest Charges:
Interest charges decreased in both 2004 and 2003 compared with the
prior year due primarily to the refunding of higher priced, fixed rate,
long-term debt with lower cost debt. These refundings occurred primarily during
2003, with smaller portions occurring in 2004, and were accomplished with
long-term, fixed rate debt issuances under our Medium Term Note program. We also
benefited in 2004 from lower levels of short-term bank debt outstanding as
compared with 2003. These benefits were partially offset by higher average
short-term interest rates experienced on bank debt during 2004. Interest charges
decreased in 2003 compared with 2002 due to lower interest rates incurred on
short-term borrowings in 2003 and the refunding of high-rate, long-term debt
described previously. 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. 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 costs will be incurred.
Net Income Applicable to Common Stock:
Net income increased $4.9 million, or 18.2%, to $31.5 million in 2004
as compared with $26.6 million in 2003. Net income in 2003 increased $3.4
million, or 14.7%, as compared with $23.2 million in 2002. Reasons for the
increases in net income in 2004 and 2003 are discussed in detail above.
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 Basic Gas Supply Service charge;
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 $76.9
million, $78.4 million and $71.4 million in 2004, 2003 and 2002, respectively.
Net cash provided by operating activities varies from year to year primarily due
to the impact of weather on customer demand and related gas purchases, inventory
utilization and gas cost recoveries. We use short-term borrowings under lines of
credit from commercial banks to supplement cash from operations, to support
working capital needs and to finance capital expenditures as incurred. From time
to time, we refinance short-term debt incurred to finance capital expenditures
with long-term debt.
Bank credit available to SJG totaled $176.0 million at December 31,
2004, of which $53.0 million was used. Those bank facilities consist of a $100.0
million, 3-year revolving credit facility that expires in August 2006 and $76.0
SJG-20
million of uncommitted bank lines. The revolving credit was established in
August 2003 with a syndicate of banks to enhance the liquidity position of SJG.
The revolving credit facility contains certain financial covenants measured on a
quarterly basis. SJG was in compliance with these covenants as of December 31,
2004. Based upon the existing credit facilities and a regular dialogue with our
banks, we believe that there will continue to be sufficient credit available to
meet our future liquidity needs.
SJG supplements its operating cash flow and credit lines with both debt
and capital contributions from its parent, SJI. Over the years, SJG has used
long-term debt, primarily in the form of First Mortgage Bonds and Medium Term
Notes (MTN), secured by the same pool of utility assets, to finance its
long-term borrowing needs. These needs are primarily capital expenditures for
property, plant and equipment. Under a $150.0 million MTN program established in
December 2002, SJG issued $110.0 million of long-term debt in 2003. SJG issued
the remaining $40.0 million of notes under the MTN program in August 2004 at an
average interest rate of 5.66% and an average maturity of 17 years. We used the
proceeds of all of the issues to refinance short-term debt outstanding to
commercial banks and for the redemption of certain high interest bearing
securities. During 2004, maturities of long-term debt totaled $6.8 million. In
addition, SJG redeemed $15.0 million of its 7.7% MTN in July 2004. We anticipate
establishing a new MTN program during the first half of 2005.
SJI contributed $15.0 million, $20.0 million and $2.5 million of
capital to SJG during 2004, 2003 and 2002, respectively. Contributions of
capital are credited to Other Paid-in Capital and Premium on Common Stock.
SJG's capital structure, excluding preferred stock which is immaterial,
was as follows:
As of December 31,
2004 2003
-------------------------------
Common Equity 48% 43%
Long-Term Debt 44% 43%
Short-Term Debt 8% 14%
-------------------------------
Total 100% 100%
===============================
SJG's long-term, senior secured debt is rated "A" and "Baa1" by
Standard & Poor's and Moody's Investor Services, respectively. These ratings
have not changed in the past five years.
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 2004
amounted to $71.3 million. We estimate the net costs for 2005, 2006 and 2007 at
approximately $67.1 million, $42.1 million and $43.8 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,
2004 average $44.5 million annually and total $209.7 million over the contracts'
lives. Approximately 30% 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 Basic Gas Supply Service clause.
The following table summarizes our contractual cash obligations and
their applicable payment due dates (in thousands):
SJG-21
Up to Years Years More than
Contractual Obligations Total 1 Year 2 & 3 4 & 5 5 Years
----------------------- ----- ------ ----- ----- -------
Long-Term Debt $ 287,281 $ 5,273 $ 10,543 $ 1,500 $ 269,965
Interest on Long-Term Debt 247,872 17,628 33,926 32,842 163,476
Operating Leases 741 255 420 50 16
Construction Obligations 5,133 5,133 - - -
Commodity Supply
Purchase Obligations 209,673 42,331 78,870 63,431 25,041
Other Purchase Obligations 3,509 3,446 63 - -
----------- ----------- ----------- ----------- -----------
Total Contractual Cash Obligations $ 754,209 $ 74,066 $ 123,822 $ 97,823 $ 458,498
=========== =========== =========== ========== ===========
Expected environmental remediation costs are not included in the table
above due to the subjective nature of such costs and time of anticipated
payments. Our regulatory obligation to contribute $3.6 million annually to SJG's
postretirement benefit plans, less costs incurred directly, is not included as
the duration is indefinite. As a result, the total obligation cannot be
calculated. SJG does not expect to make a pension contribution in 2005 and
future contributions cannot be determined at this time (See Note 10 to the
Financial Statements).
Off-Balance Sheet Arrangements:
SJG has no off-balance sheet financing arrangements.
Pending Litigation:
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 those
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.
Contract Modifications:
On October 1, 2004, SJG and a large utility customer executed an
agreement for the buy-out of the customer's long-term energy contract. This
settlement contributed approximately $1.6 million to net income in the fourth
quarter of 2004.
On November 5, 2004, our largest bargaining unit voted to ratify a new,
4-year contract. The contract will cover the period from the expiration of the
old contract on January 15, 2005 through January 14, 2009. Terms of the deal
include wage increases ranging from 3% to 3.5% over the life of the contract,
health care plan redesign, the establishment of caps on payments for
post-retirement medical benefits, and the implementation of separate wage and
benefit packages for new hires. With this agreement, all unionized personnel,
which represent 62% of our workforce at December 31, 2004, are operating under
agreements that run through at least January 2008.
Market Risks
Commodity Market Risks:
SJG primarily transacts commodities on a physical basis. As part of its
gas purchasing strategy, SJG occasionally uses financial derivative contracts to
hedge against forward price risk. These contracts are recoverable through SJG's
BGSS, subject to BPU approval. The fair value and maturity of these energy
trading contracts determined under the mark-to-market method as of December 31,
2004 is as follows (in thousands):
SJG-22
Assets Maturity Maturity Beyond
Source of Fair Value < 1 Year 1 - 3 Years 3 Years Total
-------- ----------- ------- -----
Prices Actively Quoted NYMEX $ 1,204 $ - $ - $ 1,204
Other External Sources Basis 68 - - 68
--------------------------------------------------
Total $ 1,272 $ - $ - $ 1,272
==================================================
Liabilities Maturity Maturity Beyond
Source of Fair Value < 1 Year 1 - 3 Years 3 Years Total
-------- ----------- ------- -----
Prices Actively Quoted NYMEX $ 1,411 $ - $ - $ 1,411
Other External Sources Basis 389 - - 389
--------------------------------------------------
Total $ 1,800 $ - $ - $ 1,800
==================================================
NYMEX (New York Mercantile Exchange) is the primary national commodities
exchange on which natural gas is traded. Basis represents the price of a NYMEX
natural gas futures contract adjusted for the difference in price for delivering
the gas at another location.
A reconciliation of SJG's estimated net fair value of energy-related
derivatives, including energy trading and hedging contracts, follows (in
thousands):
Net Derivatives -- Energy Related Assets,
January 1, 2004 $ 1,810
Contracts Settled During 2004, Net (2,857)
Other Changes in Fair Value from Continuing
and New Contracts, Net 519
-----------
Net Derivatives -- Energy Related Liability,
December 31, 2004 $ (528)
============
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, 2004, was $53.0 million and averaged $36.2 million during 2004. The
months where outstanding variable rate debt was at its highest and lowest points
were January at $87.2 million and May at $-0-. A hypothetical 100 basis point
(1%) increase in interest rates on our average variable rate debt outstanding
would result in a $214,000 increase in our annual interest expense, net of tax.
We chose the 100 basis point increase 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 past 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: 2004 - 115 b.p. increase; 2003 - 31 b.p.
decrease; 2002 - 74 b.p. decrease; 2001 - 383 b.p. decrease; and 2000 - 83 b.p.
increase. For December 2004, our average interest rate on variable rate debt was
2.89%.
SJG primarily issues long-term debt at fixed rates and, consequently,
interest expense on existing debt is not significantly impacted by changes in
market interest rates. SJG redeemed, at par, $4.5 million of 8.6% debenture
notes in February 2004 and $15.0 million of 7.7% Medium Term Notes in July 2004.
In November 2004, SJG entered into a derivative transaction known as a "Treasury
Lock" to hedge against the impact of possible interest rate increases on a $10.0
million, 30-year debt issuance planned for July 2005.
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,
-------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
3.9x 3.3x 2.9x 2.6x 2.6x
SJG-23
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 before discontinued operations. Fixed charges consist of interest
charges and preferred securities dividend requirements and an interest factor in
rentals.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholder and Board of Directors of
South Jersey Gas Company:
We have audited the accompanying balance sheets of South Jersey Gas Company (the
"Company") as of December 31, 2004 and 2003, and the related statements of
income, changes in common equity and comprehensive income, and cash flows for
each of the three years in the period ended December 31, 2004. Our audits also
included the financial statement schedules listed in the Index at Item 15(a)2.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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 financial statements present fairly, in all material
respects, the financial position of South Jersey Gas Company as of December 31,
2004 and 2003, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Note 1, the accompanying 2003 balance sheet has been restated.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 2, 2005
SJG-24
SOUTH JERSEY GAS COMPANY
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(In Thousands)
Year Ended December 31,
-------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Operating Revenues (Notes 1, 2 & 3) $ 508,827 $ 536,442 $ 424,027
------------ ------------ ------------
Operating Expenses:
Cost of Sales (Note 1) 340,860 375,815 277,199
Operations 56,238 54,141 46,928
Maintenance 5,772 5,678 6,101
Depreciation (Note 1) 23,048 23,663 22,350
Energy and Other Taxes (Notes 1 & 6) 11,458 11,725 10,575
------------ ------------ ------------
Total Operating Expenses 437,376 471,022 363,153
------------ ------------ ------------
Operating Income 71,451 65,420 60,874
Other Income and Expense 886 111 333
Interest Charges 17,906 19,304 20,613
------------ ------------ ------------
Income Before Income Taxes 54,431 46,227 40,594
Income Taxes (Notes 1, 5 & 6) 22,969 19,619 17,372
------------ ------------ ------------
Income from Continuing Operations 31,462 26,608 23,222
Loss from Discontinued
Operations - Net (Note 12) - - (29)
------------ ------------ ------------
Net Income Applicable to Common Stock $ 31,462 $ 26,608 $ 23,193
============ ============ ============
The accompanying footnotes are an integral part of the financial statements.
SJG-25
SOUTH JERSEY GAS COMPANY
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(In Thousands)
Year Ended December 31,
-------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 31,462 $ 26,608 $ 23,193
Adjustments to Reconcile Net Income
to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 25,831 26,627 24,730
Provision for Losses on
Accounts Receivable 816 3,084 3,664
Revenues and Fuel Costs Deferred - Net 14,582 29,874 6,788
Deferred and Noncurrent
Income Taxes and Credits - Net 13,982 1,225 11,096
Environmental Remediation Costs - Net (2,634) 2,323 6,361
Additional Pension Contributions (8,028) (5,200) (15,851)
Gas Plant Cost of Removal (1,107) (925) (1,147)
Changes in:
Accounts Receivable 7,871 6,854 (20,569)
Inventories (7,713) (18,065) 18,670
Other Prepayments and Current Assets (311) 1,118 (636)
Prepaid and Accrued Taxes - Net (11,536) 4,888 3,518
Accounts Payable and Other
Accrued Liabilities 12,435 515 11,977
Other - Assets 423 480 (1,390)
Other - Liabilities 811 (1,011) 1,009
----------- ----------- ------------
Net Cash Provided by
Operating Activities 76,884 78,395 71,413
----------- ----------- ------------
Cash Flows from Investing Activities:
Return of Investment in Affiliate - 1,082 -
Capital Expenditures (68,632) (53,175) (49,530)
Purchase of Available-for-Sale
Securities (338) (339) (693)
Proceeds from Sale of Appliance
Service Operations 2,668 - -
----------- ----------- ------------
Net Cash Used in Investing
Activities (66,302) (52,432) (50,223)
----------- ----------- ------------
Cash Flows from Financing Activities:
Net (Repayments of) Borrowing from
Lines of Credit (34,200) (66,700) 18,400
Proceeds from Issuance of
Long-Term Debt 40,000 110,000 -
Principal Repayments of Long-Term Debt (21,773) (86,740) (30,268)
Premium for Early Retirement of Debt - (1,048) (617)
Dividends on Common Stock (9,123) - (10,700)
Payments for Issuance of Long-Term Debt (386) (1,845) (201)
Additional Investment by Shareholder 15,000 20,000 2,500
------------ ---------- ------------
Net Cash Used in Financing
Activities (10,482) (26,333) (20,886)
------------ ---------- ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 100 (370) 304
Cash and Cash Equivalents at
Beginning of Period 3,210 3,580 3,276
------------ ---------- ------------
Cash and Cash Equivalents at
End of Period $ 3,310 $ 3,210 $ 3,580
=========== ========== ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest (Net of Amounts Applicable to Gas Cost
Overcollections and Amounts
Capitalized) $ 17,467 $ 19,805 $ 23,710
Income Taxes (Net of Refunds) $ 14,594 $ 14,060 $ 4,779
The accompanying footnotes are an integral part of the financial statements.
SJG-26
SOUTH JERSEY GAS COMPANY
BALANCE SHEETS
- --------------------------------------------------------------------------------
(In Thousands)
December 31,
--------------------------
2004 2003 (1)
- --------------------------------------------------------------------------------
ASSETS
Property, Plant and Equipment: (Notes 1, 3 & 7)
Utility Plant, at original cost $ 957,287 $ 894,654
Accumulated Depreciation (224,506) (209,831)
------------- -------------
Property, Plant and Equipment - Net 732,781 684,823
------------- -------------
Investments:
Available-for-Sale Securities (Note 1) 5,296 4,497
------------- -------------
Current Assets:
Cash and Cash Equivalents (Notes 1 & 9) 3,310 3,210
Accounts Receivable (Notes 1, 2 & 3) 39,916 58,012
Unbilled Revenues (Note 1) 34,861 31,070
Provision for Uncollectibles (Note 1) (2,871) (3,263)
Natural Gas in Storage, average cost 65,691 59,432
Prepaid Taxes 6,104 2,661
Derivatives - Energy Related Assets (Note 1) 1,273 2,375
Other Prepayments and Current Assets 2,078 2,317
------------- -------------
Total Current Assets 154,915 159,373
------------- -------------
Regulatory Assets: (Note 1)
Environmental Remediation Costs: (Notes 2 & 13)
Expended - Net 5,281 4,147
Liability for Future Expenditures 51,046 50,983
Gross Receipts and Franchise Taxes (Note 6) 924 1,367
Income Taxes - Flowthrough Depreciation (Note 6) 6,641 7,619
Deferred Postretirement Benefit Costs (Note 11) 3,024 3,402
Societal Benefit Costs (Note 2) 4,562 7,529
Other Regulatory Assets 1,157 732
--------------- -------------
Total Regulatory Assets 72,635 75,779
--------------- -------------
Other Noncurrent Assets:
Unamortized Debt Discount and Expense (Note 7) 7,957 8,122
Prepaid Pension (Notes 1 & 11) 24,812 18,206
Accounts Receivable - Merchandise 7,101 4,671
Other 2,089 1,066
--------------- -------------
Total Other Noncurrent Assets 41,959 32,065
--------------- -------------
Total Assets $ 1,007,586 $ 956,537
=============== =============
(1) Restated - See Note 1.
The accompanying footnotes are an integral part of the financial statements.
SJG-27
SOUTH JERSEY GAS COMPANY
BALANCE SHEETS
- --------------------------------------------------------------------------------
(In Thousands)
December 31,
--------------------------
2004 2003 (1)
- --------------------------------------------------------------------------------
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 170,317 155,317
Accumulated Other Comprehensive
(Loss) Income (112) 279
Retained Earnings 130,695 108,356
--------------- -------------
Total Common Equity 306,748 269,800
--------------- -------------
Preferred Stock: (Note 4)
Redeemable Cumulative Preferred 8% Series -
Par Value $100 per share,
Authorized 41,966 shares,
Outstanding 16,904 shares 1,690 1,690
-------------- --------------
Long-Term Debt (Notes 7 & 8) 282,008 263,781
-------------- --------------
Total Capitalization 590,446 535,271
-------------- --------------
Current Liabilities:
Notes Payable (Note 9) 53,000 87,200
Current Maturities of Long-Term Debt
(Note 7) 5,273 5,273
Accounts Payable (Notes 1 & 3) 59,026 50,554
Derivatives - Energy Related Liabilities
(Note 1) 1,800 565
Derivatives - Other (Note 1) 344 7
Deferred Income Taxes - Net (Note 5) 2,627 6,694
Customer Deposits 8,846 7,957
Environmental Remediation Costs (Note 13) 13,531 7,630
Taxes Accrued (Note 5) 1,228 9,321
Interest Accrued and Other
Current Liabilities 12,386 9,414
--------------- -------------
Total Current Liabilities 158,061 184,615
--------------- -------------
Deferred Credits and Other Noncurrent Liabilities:
Deferred Income Taxes - Net (Note 5) 138,208 118,894
Environmental Remediation Costs (Note 13) 37,515 43,353
Regulatory Liabilities (Note 1) 63,836 49,970
Pension and Other Postretirement Benefits
(Note 11) 11,039 11,336
Investment Tax Credits (Note 6) 3,129 3,471
Other 5,352 9,627
--------------- -------------
Total Deferred Credits and
Other Noncurrent Liabilities 259,079 236,651
--------------- -------------
Total Capitalization and Liabilities $ 1,007,586 $ 956,537
=============== =============
(1) Restated - See Note 1.
The accompanying footnotes are an integral part of the financial statements.
SJG-28
SOUTH JERSEY GAS COMPANY
STATEMENTS OF CHANGES IN COMMON EQUITY AND COMPREHENSIVE INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Other Paid-in Accumulated
Capital & Other
Common Premium on Comprehensive Retained
Stock Common Stock (Loss) Income Earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 5,848 132,817 (1,939) 69,255 205,981
Net Income Applicable to Common Stock 23,193 23,193
Other Comprehensive Loss, Net of Tax:*
Minimum Pension Liability Adjustment (6,517) (6,517)
Unrealized Loss on Equity Investments (149) (149)
Unrealized Loss on Derivatives (84) (84)
-----------
Comprehensive Income 16,443
Additional Investment by Shareholder 2,500 2,500
Cash Dividends Declared - Common Stock (10,700) (10,700)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 5,848 135,317 (8,689) 81,748 214,224
Net Income Applicable to Common Stock 26,608 26,608
Other Comprehensive Income, Net of Tax:*
Minimum Pension Liability Adjustment 8,456 8,456
Unrealized Gain on Equity Investments 432 432
Unrealized Gain on Derivatives 80 80
-------------
Comprehensive Income 35,576
Additional Investment by Shareholder 20,000 20,000
Cash Dividends Declared - Common Stock - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 5,848 155,317 279 108,356 269,800
Net Income Applicable to Common Stock 31,462 31,462
Other Comprehensive Income, Net of Tax:*
Unrealized Loss on Equity Investments (192) (192)
Unrealized Loss on Derivatives (199) (199)
----------
Comprehensive Income 31,071
Additional Investment by Shareholder 15,000 15,000
Cash Dividends Declared - Common Stock (9,123) (9,123)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 $ 5,848 $ 170,317 $ (112) $ 130,695 $ 306,748
- ----------------------------------------------------------------------------------------------------------------------------------
Disclosure of Accumulated Other Comprehensive (Loss) Income Balances*
(In Thousands)
Minimum Unrealized Accumulated
Pension (Loss) Gain Unrealized Gain Other
Liability on Equity (Loss) on Comprehensive
Adjustment Investments Derivatives (Loss) Income
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ (1,939) $ - $ - $ (1,939)
Changes During Year (6,517) (149) (84) (6,750)
------------------------------------------------------------------
Balance at December 31, 2002 (8,456) (149) (84) (8,689)
Changes During Year 8,456 432 80 8,968
------------------------------------------------------------------
Balance at December 31, 2003 - 283 (4) 279
Changes During Year - (192) (199) (391)
------------------------------------------------------------------
Balance at December 31, 2004 $ - $ 91 $ (203) $ (112)
*Determined using a combined statutory tax rate of 40.85%.
SJG-29
SOUTH JERSEY GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Entity - South Jersey Industries, Inc. (SJI) owns all of
the outstanding common stock of South Jersey Gas Company (SJG).
Restatements - Subsequent to the issuance of the December 31,
2003 balance sheet, SJG determined that it had certain
misclassifications, improper netting and omissions from last year's
balance sheet. The restatements to the December 31, 2003 balance sheet
as presented were required to correct the misclassification of prepaid
pension assets; the improper netting of certain accounts receivables
and accounts payables to third-party gas marketers (See Note 3); and
the omission of gas supply derivative contracts that are subject to
regulatory recovery.
A summary of the restatements of the December 31, 2003 balance
sheet is presented in the table below:
Thousands of Dollars
As Previously As
Recorded Restated
Current Assets:
Accounts Receivable $ 48,412 $ 58,012
Prepaid Pension 18,206 --
Derivatives - Energy Related Assets -- 2,375
Regulatory Assets:
Deferred Fuel Costs - Net 1,720 --
Other Noncurrent Assets:
Prepaid Pension -- 18,206
Current Liabilities:
Accounts Payable 40,954 50,554
Derivatives - Energy Related Liabilities -- 565
Deferred Credits and Other Noncurrent Liabilities:
Regulatory Liabilities 49,880 49,970
The restatements had no impact on common equity or the
statements of income. Furthermore, there was no