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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
=================================================================
<FN>
(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.
</FN>
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
============ ============ ============= ============ ============
<FN>
* 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.
</FN>
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)
<FN>
*Determined using a combined statutory tax rate of 40.85%.
</FN>
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 impact on net cash
flows provided by operating activities for the years ended December 31,
2003 and 2002.
Equity Investments - We classify equity investments purchased
as long-term investments as Available-for-Sale Securities on our
balance sheets and carry them at their fair value with any unrealized
gains or losses included in Accumulated Other Comprehensive Income.
Estimates and Assumptions - We prepare our financial
statements to conform with generally accepted accounting principles.
Management makes estimates and assumptions that affect the amounts
reported in the financial statements and related disclosures.
Therefore, actual results could differ from those estimates.
Significant estimates include amounts related to regulatory accounting,
energy derivatives, environmental remediation costs, pension and other
postretirement benefit costs, and revenue recognition.
SJG-30
Regulation - SJG is subject to the rules and regulations of
the New Jersey Board of Public Utilities (BPU). We maintain our
accounts according to the BPU's prescribed Uniform System of Accounts
(See Note 2). SJG follows the accounting for regulated enterprises
prescribed by the Financial Accounting Standards Board (FASB) Statement
No. 71, "Accounting for the Effects of Certain Types of Regulation." In
general, Statement No. 71 allows deferral of certain costs and creation
of certain obligations when it is probable that such items will be
recovered from or refunded to customers in future periods.
Operating Revenues - We bill customers monthly for gas
deliveries. For retail customers not billed at the end of each month,
we record an estimate to recognize unbilled revenues from the date of
the last meter reading to the end of the month. We deferred and
recognized revenues related to our appliance service contracts
seasonally over the full 12-month term of the contract prior to
transferring that business to South Jersey Energy Service Plus (SJESP).
SJESP is an affiliate by common ownership.
The BPU allows us to recover gas costs through the Basic Gas
Supply Service (BGSS) clause. We collect these costs on a forecasted
basis upon BPU order. SJG defers over/under-recoveries of gas costs and
includes them in the following year's BGSS or other similar recovery
mechanism. We pay interest on overcollected BGSS balances at the rate
of return on rate base utilized by the BPU to set rates in its last
base rate proceeding (See Note 2).
Our tariff also includes a Temperature Adjustment Clause
(TAC), a Remediation Adjustment Clause (RAC), a New Jersey Clean Energy
Program (NJCEP) and a Universal Service Fund (USF) program. Our TAC
reduces the impact of temperature fluctuations on the Company and our
customers. The RAC recovers environmental remediation costs of former
gas manufacturing plants and the NJCEP recovers costs associated with
our energy efficiency and renewable energy programs. The USF is a
statewide customer assistance program that utilizes utilities as a
collection agent. TAC adjustments affect revenue, income and cash flows
since colder-than-normal weather can generate credits to customers,
while warmer-than-normal weather can result in additional billings. RAC
adjustments do not directly affect earnings because we defer and
recover these costs through rates over 7-year amortization periods (See
Notes 2 & 13). NJCEP and USF adjustments are also deferred and do not
affect earnings, as related costs and customer credits are recovered
through rates on an ongoing basis (See Note 2).
Accounts Receivable and Provision for Uncollectible Accounts -
Accounts receivable are carried at the amount owed by customers. A
provision for uncollectible accounts has been established based on our
collection experience and an assessment of the collectibility of
specific accounts.
Property, Plant & Equipment - For regulatory purposes, utility
plant is stated at original cost, which may be different than SJG's
cost if the assets were acquired from another regulated entity. The
cost of adding, replacing and renewing property is charged to the
appropriate plant account. The Utility Plant balances as of December
31, 2004 and 2003 were comprised of the following:
Thousands of Dollars
2004 2003
------ ------
Utility Plant:
Production Plant $ 302 $ 302
Storage Plant 11,049 11,013
Transmission Plant 113,691 105,173
Distribution Plant 784,267 741,441
General Plant 33,775 30,977
Intangible Plant 1,855 1,856
----------------------------
Utility Plant in Service 944,939 890,762
Construction Work in Progress 12,348 3,892
----------------------------
Total Utility Plant $ 957,287 $ 894,654
==============================
SJG-31
Depreciation - We depreciate utility plant on a straight-line
basis over the estimated remaining lives of the various property
classes. These estimates are periodically reviewed and adjusted as
required after BPU approval. The composite annual rate for all
depreciable utility property was approximately 2.9% in both 2003 and
2002. As a result of our recent rate case settlement, our composite
depreciation rate was reduced from 2.9% to 2.4%, effective July 8, 2004
(See Note 2). Except for extraordinary retirements, accumulated
depreciation is charged with the cost of depreciable utility property
retired, less salvage (See Asset Retirement Costs).
Capitalized Interest - SJG capitalizes interest on
construction at the rate of return on rate base utilized by the BPU to
set rates in the last base rate proceeding (See Note 2). SJG
capitalized interest of $0.7 million in 2004, $0.6 million in 2003 and
$0.4 million in 2002 which are included in Utility Plant on the balance
sheets. All capitalized interest is reflected on the statements of
income as a reduction of Interest Charges.
Impairment of Long-Lived Assets - We review the carrying
amount of an asset for possible impairment whenever events or changes
in circumstances indicate that such amount may not be recoverable. For
the years ended 2004, 2003 and 2002, no significant circumstances were
identified.
Derivative Instruments - SJG accounts for derivative
instruments in accordance with FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. This
statement establishes accounting and reporting standards for derivative
instruments, including those embedded in other contracts, and for
hedging activities. It requires that all derivatives, whether
designated as hedging relationships or not, must be recorded on the
balance sheet at fair value unless the derivative contracts qualify for
the normal purchase and sale exemption. If the derivative is designated
as a fair value hedge, we recognize the changes in the fair value of
the derivative and of the hedged item attributable to the hedged risk
in earnings. If the derivative is designated as a cash flow hedge, we
record the effective portion of changes in the fair value of the
derivative in Accumulated Other Comprehensive Income (Loss) and
recognize it in the income statement when the hedged item affects
earnings. We recognize ineffective portions of changes in the fair
value of cash flow hedges in earnings. We currently have no fair value
hedges.
As part of its gas purchasing strategy, SJG occasionally uses
financial contracts to hedge against forward price risk. The costs of
these short-term contracts are recoverable through our BGSS, subject to
BPU approval. As of December 31, 2004 and 2003, SJG has $0.5 million
and $(1.8) million of cost (cost reductions), respectively, included in
its BGSS related to these contracts (See Caption Regulatory Assets &
Regulatory Liabilities).
The vast majority of our contracts related to physical
transactions that qualify as derivatives. Management believes, however,
based on its interpretation of guidance issued, that as these
derivative contracts relate to the purchase and sale of natural gas,
they qualify for the normal purchase and sale exception. Therefore, we
are not required to mark these contracts to market.
In May 2003, we entered into an interest rate swap contract
that effectively fixed the interest rate at 2.24% through May 20, 2004
on $20.0 million of our debt outstanding under bank lines.
In November 2004, we 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.
We enter into interest rate derivative agreements to hedge the
exposure to increasing rates with respect to our variable rate debt.
The differential to be paid or received as a result of these agreements
SJG-32
is accrued as interest rates change and is recognized as an adjustment
to interest expense. Interest rate derivatives are accounted for as
cash flow hedges. As of December 31, 2004 and 2003, the market value of
these contracts was $(344,000) and $(7,000), respectively, which
represents the amount we would have to pay the counterparty to
terminate the contracts as of those dates. We included these balances
on the balance sheets under the caption Derivatives - Other. As of
December 31, 2004 and 2003, we calculated the derivatives to be highly
effective; therefore, we recorded the change in fair value of the
contracts, net of taxes, in Accumulated Other Comprehensive Income
(Loss).
We determined the fair value of interest rate derivative
agreements using quotations from independent parties.
Asset Retirement Costs - In January 2003, SJG adopted FASB
Statement No. 143, "Accounting for Asset Retirement Obligations," which
establishes accounting and reporting standards for legal obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. We have certain easements and
right-of-way agreements that qualify as legal obligations under
Statement No. 143. However, it is our intent to maintain these
agreements in perpetuity; therefore, no change in our current
accounting practices is required related to these agreements.
SJG recovers certain asset retirement costs through rates
charged to customers. As of December 31, 2004 and 2003, we had accrued
amounts in excess of actual removal costs incurred totaling $47.3 and
$45.2 million, respectively, which in accordance with Statement No.
143, are recorded as Regulatory Liabilities on the balance sheets. The
adoption of this statement did not materially affect our financial
condition or results of operations.
Stock Compensation - Officers of SJG participate in the Stock
Option, Stock Appreciation Rights and Restricted Stock Awards Plan of
SJI. Under the SJI plan, no more than 306,000 shares of SJI common
stock in the aggregate may be issued to officers of SJI and SJG, or
other key employees. No options or stock appreciation rights may be
granted under the plan after November 22, 2006. No options were granted
or outstanding during the three years ended December 31, 2004, 2003 and
2002. No stock appreciation rights have been issued under the plan. In
2004, 2003 and 2003, SJI granted 21,899, 30,810 and 26,034 restricted
shares, respectively. Of these amounts, 14,601, 24,296 and 21,083
restricted shares were issued to SJG officers in 2004, 2003 and 2002,
respectively. These restricted shares vest over a 3-year period and are
subject to SJI achieving certain performance targets. SJG's annual
expense associated with these awards was approximately $1.3 million,
$0.8 million and $0.4 million in 2004, 2003 and 2002, respectively.
Prior to 2003, SJI valued stock options to employees using
the intrinsic value method. Effective in 2003, SJI adopted the policy
of accounting for this compensation using the fair value based method
on a prospective basis.
New Accounting Pronouncements - In December 2002, the FASB
issued Statement No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure," which was effective for SJG's
2002 annual financial statements. As previously discussed, SJG
participates in the stock compensation plans of SJI. Effective in 2003,
SJI adopted the policy of accounting for this compensation using the
fair value based method on a prospective basis. This method calls for
expensing the estimated fair value of a stock option. The provisions of
this statement currently have no impact on either SJG's or SJI's
financial statements. In addition, the FASB issued Statement No.
123(R), "Share-Based Payment," in December 2004. This statement
establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. While
this statement is not effective until reporting periods beginning after
June 15, 2005, management has completed its assessment of Statement No.
123(R) and has determined that it does not have any impact on either
SJG's or SJI's accounting for share-based payments.
SJG-33
In December 2003, the FASB revised Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46R), which
clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." This interpretation provides
guidance on the identification and consolidation of variable interest
entities (VIEs), whereby consolidation is achieved through means other
than through control. We have completed our assessment of FIN 46R and
have determined that we do not have any interest in VIEs.
Also in December 2003, the FASB revised Statement No. 132,
"Employers' Disclosure about Pensions and Other Postretirement
Benefits." This statement revises employers' disclosures about pension
and other post-retirement benefit plans, including new interim
reporting requirements. We have adopted and complied with new
disclosure requirements.
In November 2004, the FASB issued Statement No. 151,
"Inventory Costs." This statement requires that abnormal amounts of
idle facility expense, freight, handling costs and spoilage be charged
to income as a current period expense rather than capitalized as
inventory costs. The effective date of this statement is January 1,
2006; however, it is not expected to have any impact on SJG based on
its current lines of business.
In December 2004, the FASB issued Statement No. 153,
"Exchanges of Nonmonetary Assets, an amendment to APB Opinion No. 29,
Accounting for Nonmonetary Transactions." This statement redefines the
types of nonmonetary exchanges that require fair value measurement.
Statement No. 153 is effective for nonmonetary transactions entered
into on and after July 1, 2005. Management is currently evaluating the
effect of this standard, but it does not anticipate the adoption of
this statement to have a material effect on our consolidated financial
statements.
Income Taxes - Deferred income taxes are provided for all
significant temporary differences between book and taxable basis of
assets and liabilities (See Notes 5 & 6).
Regulatory Assets & Regulatory Liabilities - All significant
regulatory assets are separately identified on the balance sheets under
the caption Regulatory Assets. Each item that is separately identified
is being recovered through utility rate charges. SJG is currently
permitted to recover interest on its Environmental Remediation and
Societal Benefit costs while the other assets are being recovered
without a return on investments over the following periods (See Note
2):
Years Remaining
Regulatory Asset As of December 31, 2004
---------------- -----------------------
Environmental Remediation Costs:
(Notes 2 & 13)
Expended - Net Various
Liability for Future Expenditures Not Applicable
Gross Receipts and Franchise Taxes (Note 6) 2
Income Taxes - Flowthrough Depreciation (Note 6) 7
Deferred Postretirement Benefit Costs (Note 11) 8
Societal Benefit Costs (Note 2) Various
Most of the assets reflected under the caption Other
Regulatory Assets are currently being recovered from ratepayers as
approved by the BPU (See Note 2). Management believes that all deferred
costs are probable of recovery from ratepayers through future utility
rates.
Regulatory Liabilities at December 31, 2004 and 2003 consisted
of the following items:
SJG-34
Thousands of Dollars
2004 2003
-------- ------------
Deferred Gas Revenues - Net (Note 2) $ 12,334 $ 90
Excess Plant Removal Costs 47,345 45,241
Overcollected State Taxes 3,871 4,353
Other 286 286
--------------------------
Total Regulatory Liabilities $ 63,836 $ 49,970
==========================
Deferred Gas Revenues - Net represent SJG's net overcollected
gas costs and are monitored through SJG's BGSS mechanism. As of
December 31, 2003, we carried an offsetting underrecovery of gas costs
in the amount of $16.1 million representing the remaining balance of a
$38.9 million underrecovery originating in 2001. This 2001
underrecovery was collected from customers over a 3-year period. The
remaining balance was collected during 2004 (See previous discussion of
Revenues and Note 9).
Derivatives used to hedge our natural gas purchases are
recoverable through its BGSS, subject to BPU approval. The offset to
the change in fair value of these contracts is recorded as a Regulatory
Asset or Regulatory Liability accordingly.
Excess Plant Removal Costs represent amounts accrued in excess
of actual utility plant removal costs incurred to date (See Asset
Retirement Costs). All other amounts are subject to being returned to
ratepayers in future rate proceedings.
Cash and Cash Equivalents - For purposes of reporting cash
flows, highly liquid investments with original maturities of three
months or less are considered cash equivalents.
Reclassifications - SJG reclassified some previously reported
amounts to conform with current year classifications. Such
reclassifications include the move of $8.4 million and $6.8 million of
certain operating expenses previously included in Revenue to Cost of
Sales and Operations Expense for 2003 and 2002, respectively. These
amounts are considered immaterial to the overall presentation of SJG's
financial statements.
2. 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, our 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 $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
SJG-35
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.
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. The transfer
has 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 SJG. 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 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, SJG filed for an $8.6 million rate increase
to recover the cash related to a Temperature Adjustment Clause (TAC)
SJG-36
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, SJG 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, SJG 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 SJG's 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 Lifeline budget of
$72.0 million. Recovery rates for both programs were implemented on
August 1, 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 SJG's 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 their annual gas cost
revenues. In August 2003, the BPU approved SJG's 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.
3. RELATED PARTY TRANSACTIONS:
SJG sells natural gas for resale to South Jersey Energy
Company (SJE) and South Jersey Resources Group, LLC (SJRG), SJI's
wholly owned subsidiaries. These sales comply with Section 284.402 of
the Regulations of the Federal Energy Regulatory Commission (FERC).
Sales to SJE were approximately $7.6 million, $25.9 million, and $14.0
million for the years ended December 31, 2004, 2003 and 2002,
respectively. The amounts due from SJE relating to these sales were $
-0- and $0.8 million at December 31, 2004 and 2003, respectively. Sales
to SJRG were approximately $5.1 million, $12.8 million and $17.0
million for the years ended December 31, 2004, 2003 and 2002,
respectively. The amounts due from SJRG relating to these sales were
$0.6 million and $ -0- at December 31, 2004 and 2003, respectively.
We also meet some of our gas purchasing requirements by
purchasing natural gas for resale from SJRG. Such purchases were
approximately $22.1 million, $20.5 million and $11.7 million for the
years ended December 31, 2004, 2003 and 2002, respectively.
Additionally, we purchased gas storage services from SJRG totaling
SJG-37
approximately $ -0-, $0.2 million and $0.6 million for the years ended
December 31, 2004, 2003 and 2002, respectively. There were no amounts
due to SJRG relating to gas purchases and storage services at December
31, 2004 or 2003.
SJG also provides transportation services to Marina Energy,
LLC, an affiliate by common ownership. Sales for these services were
$171,200 and $71,000 for the years ended December 31, 2004 and 2003.
The amount due relating to such services was $18,000 and $48,000 at
December 31, 2004 and 2003, respectively.
SJG provides billing services for third-party energy marketers
supplying natural gas to customers within SJG's territory. For
commercial and industrial customers, SJG provides this service for a
fixed fee per customer. For residential customers, SJG purchases the
accounts receivable at book value from the marketer and assumes all
risk associated with the collection of such amounts. The fee paid by
third-party energy marketers for the purchase of the residential
accounts receivables includes a factor for potential uncollectible
accounts. The largest marketer in SJG's territory is SJE. Fees charged
for the billing service and the purchase of SJE's customer accounts
receivable totaled $0.5 million, $0.3 million and $0.1 million for the
years ended 2004, 2003 and 2002, respectively. The amounts due to SJE
for account collections and the purchase of the residential accounts
receivables were $6.5 million and $8.2 million at December 31, 2004 and
2003, respectively.
SJG also provides billing services for South Jersey Energy
Service Plus, LLC (SJESP), an affiliate by common ownership, and
receives a fee for the provision of this service. Since the transfer of
SJG's appliance service operations on September 1, 2004 (See Note 2),
fees for providing such services totaled $22,800 for the four months
ended December 31, 2004. The amount due to SJESP relating to these
collections was $1.8 million at December 31, 2004.
SJI and Conectiv Solution, LLC formed Millennium Account
Services, LLC (Millennium) to provide meter reading services in
southern New Jersey. SJG uses the services of Millennium to read
utility customers' meters on a monthly basis for a fee. The fees
incurred by SJG related to such services were approximately $2.4
million in each of the three years ended December 31, 2004, 2003, and
2002. The amounts due to Millennium for meter reading services were
$0.4 million and $0.2 million at December 31, 2004 and 2003,
respectively.
4. PREFERRED STOCK:
Redeemable Cumulative Preferred Stock - Annually, we are
required to offer to purchase 1,500 shares of our Cumulative Preferred
Stock, Series B, at par value, plus accrued dividends. We may not
declare or pay dividends or make distributions on our common stock if
preferred stock dividends are in arrears. Preferred shareholders may
elect a majority of our directors if four or more quarterly dividends
are in arrears.
5. INCOME TAXES:
SJG is included in the consolidated Federal income tax return
filed by SJI. The actual taxes, including credits, are allocated by SJI
to its subsidiaries, generally on a separate return basis. Total income
taxes applicable to operations differ from the tax that would have
resulted by applying the statutory Federal Income Tax rate to pre-tax
income for the following reasons:
Thousands of Dollars
2004 2003 2002
------------------------------------
Tax at Statutory Rate $ 19,051 $ 16,319 $ 14,208
Increase (Decrease) Resulting from:
State Income Taxes 3,738 3,137 2,847
Amortization of Investment
Tax Credit (Note 6) (342) (347) (347)
Amortization of Flowthrough
Depreciation (Note 6) 664 664 664
SJG-38
Other - Net (142) (154) -
--------------------------------------
Income Taxes:
Continuing Operations 22,969 19,619 17,372
Discontinued Operations - - (21)
--------------------------------------
Net Income Taxes $ 22,969 $ 19,619 $ 17,351
======================================
The provision for Income Taxes is comprised of the following:
Thousands of Dollars
2004 2003 2002
-------------------------------------
Current:
Federal $ 4,078 $ 12,143 $ 3,152
State 4,632 6,251 3,124
--------------------------------------
Total Current 8,710 18,394 6,276
--------------------------------------
Deferred:
Federal:
Excess of Tax Depreciation
Over Book Depreciation - Net 14,781 10,752 9,609
Deferred Fuel Costs - Net (3,548) (10,446) (3,728)
Environmental Costs - Net 826 (184) (1,494)
Alternative Minimum Tax - 1,332 (66)
Prepaid Pension 2,515 1,496 5,343
Deferred Regulatory Costs (883) 750 1,543
Other - Net (209) (703) (1,021)
State 1,119 (1,425) 1,257
--------------------------------------
Total Deferred 14,601 1,572 11,443
Investment Tax Credit (342) (347) (347)
--------------------------------------
Income Taxes:
Continuing Operations 22,969 19,619 17,372
Discontinued Operations - - (21)
--------------------------------------
Net Income Taxes $ 22,969 $ 19,619 $ 17,351
======================================
The net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and
income tax purposes resulted in the following deferred tax liabilities
at December 31:
Thousands of Dollars
2004 2003
-------------------------
Current:
Deferred Fuel Costs - Net $ 2,774 $ 7,236
Other (147) (542)
---------------------------
Current Deferred Tax Liability - Net 2,627 6,694
---------------------------
Noncurrent:
Book Versus Tax Basis of Property 124,630 110,994
Prepaid Pension 11,570 7,138
Environmental 2,680 1,642
Deferred Regulatory Costs 3,241 4,687
Deferred State Tax (2,711) (2,146)
Investment Tax Credit Basis Gross-Up (1,612) (1,891)
SJG-39
Other 410 (1,530)
---------------------------
Noncurrent Deferred Tax Liability - Net 138,208 118,894
---------------------------
$ 140,835 $ 125,588
===========================
As of December 31, 2004 and 2003, income taxes (due from) due
to SJI were approximately $(0.2) million and $2.8 million,
respectively.
6. FEDERAL AND OTHER REGULATORY TAX ASSETS AND DEFERRED CREDITS:
The primary asset created by adopting FASB Statement No. 109,
"Accounting for Income Taxes," was Income Taxes - Flowthrough
Depreciation in the amount of $17.6 million as of January 1, 1993. This
amount represented excess tax depreciation over book depreciation on
utility plant because of temporary differences for which, prior to
Statement No. 109, deferred taxes previously were not provided. We
previously passed these tax benefits through to ratepayers. We are
recovering the amortization of the regulatory asset through rates over
18 years which began in December 1994 (See Notes 1 & 5).
The Investment Tax Credit was deferred and continues to be
amortized at the annual rate of 3%, which approximates the life of
related assets (See Note 5).
We deferred $11.8 million resulting from a change in the basis
for accruing the Gross Receipts & Franchise Tax in 1978, and are
amortizing it on a straight-line basis to operations over 30 years
beginning that same year. We accelerated this amortization slightly as
a result of a subsequent rate making proceeding (See Note 1).
7. LONG-TERM DEBT: (A)
Principal Outstanding
December 31,
(In Thousands)
2004 2003
---------------------
First Mortgage Bonds: (B)
8.19% Series due 2007 $ 6,816 $ 9,089
6.12% Series due 2010 10,000 10,000
6.74% Series due 2011 10,000 10,000
6.57% Series due 2011 15,000 15,000
4.46% Series due 2013 10,500 10,500
5.027% Series due 2013 14,500 14,500
4.52% Series due 2014 11,000 11,000
5.115% Series due 2014 10,000 10,000
7.7% Series due 2015 (C) - 15,000
6.50% Series due 2016 9,965 9,965
4.60% Series due 2016 17,000 17,000
4.657% Series due 2017 15,000 15,000
7.97% Series due 2018 10,000 10,000
7.125% Series due 2018 20,000 20,000
7.7% Series due 2027 35,000 35,000
7.9% Series due 2030 10,000 10,000
5.55% Series due 2033 32,000 32,000
5.387% Series due 2015 (D) 10,000 -
5.437% Series due 2016 (D) 10,000 -
5.587% Series due 2019 (D) 10,000 -
6.213% Series due 2034 (D) 10,000 -
Unsecured Notes:
Debenture Notes, 8.6% due 2010 10,500 15,000
--------------------------
SJG-40
Total Long-Term Debt Outstanding 287,281 269,054
Less Current Maturities 5,273 5,273
--------------------------
Long-Term Debt $ 282,008 $ 263,781
============================
(A) Long-term debt maturities and sinking fund requirements for the
succeeding five years are as follows (in thousands): 2005, $5,273;
2006, $5,273; 2007, $5,270; 2008, $1,500; and 2009, $ -0-.
(B) SJG's First Mortgage dated October 1, 1947, as supplemented,
securing the First Mortgage Bonds (FMB) constitutes a direct first
mortgage lien on substantially all utility plant.
(C) On July 15, 2004, SJG redeemed its 7.7% Series due 2015 at par.
(D) On August 4, 2004, we issued $40.0 million of debt under our Medium
Term Note program established in 2002.
8. FINANCIAL INSTRUMENTS:
Long-Term Debt - We estimate the fair values of our long-term
debt, including current maturities, as of December 31, 2004 and 2003,
to be $303.3 and $293.6 million, respectively. Carrying amounts are
$287.3 and $269.1 million, respectively. We base the estimates on
interest rates available to us at the end of each year for debt with
similar terms and maturities. We retire debt when it is cost effective
as permitted by the debt agreements.
Other Financial Instruments - The carrying amounts of our
other financial instruments approximate their fair values at December
31, 2004 and 2003.
9. UNUSED LINES OF CREDIT AND COMPENSATING BALANCES:
Unused lines of credit available at December 31, 2004 were
$123.0 million. Borrowings under these lines of credit are at market
rates. The weighted borrowing cost, which changes daily, was 3.00% and
1.81% at December 31, 2004 and 2003, respectively. We maintain demand
deposits with lending banks on an informal basis and they do not
constitute compensating balances.
10. RETAINED EARNINGS:
Restrictions exist under various loan agreements regarding the
amount of cash dividends or other distributions that we may pay on our
common stock. As of December 31, 2004, these restrictions did not
affect the amount that may be distributed from SJG's retained earnings.
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 $289.0 million. SJG's
Total Common Equity balance was $306.7 million at December 31, 2004.
We received equity infusions of $15.0 million, $20.0 million
and $2.5 million from SJI during 2004, 2003 and 2002, respectively.
Contributions of capital are credited to Other Paid-In Capital and
Premium on Common Stock. Future equity contributions will occur on an
as needed basis.
11. EMPLOYEE BENEFIT PLANS:
Pensions & Other Postretirement Benefit Plans - We participate
in the defined benefit pension plans and other postretirement benefit
plans of SJI. The pension plans provide annuity payments to the
majority of full-time, regular employees upon retirement. Newly hired
SJG-41
employees in certain classifications and companies do not qualify for
participation in the defined benefit pension plans. The other
postretirement benefit plans provide health care and life insurance
benefits to some retirees.
The BPU authorized SJG to recover costs related to
postretirement benefits other than pensions under the accrual method of
accounting consistent with FASB Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." We
deferred amounts accrued prior to that authorization and are amortizing
them as allowed by the BPU. The unamortized balance of $3.0 million at
December 31, 2004 is recoverable in rates. We are amortizing this
amount over 15 years which started January 1998.
On December 8, 2003, the President signed into law the
Medicare Prescription Drug, Improvement and Modernization Act (the
"Act") of 2003. In accordance with FASB Staff Position No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003," issued
in December 2003, management elected to defer any financial impact
resulting from the Act pending the availability of more information. In
2004, with the assistance of SJI's actuary, management has determined
that the Act has no impact on the postretirement benefits plans of SJI.
Net periodic benefit cost related to the pension and other
postretirement benefit plans consisted of the following components:
Thousands of Dollars
Other
Pension Benefits Postretirement Benefits
2004 2003 2002 2004 2003 2002
--------------------------------------------------------------
Service Cost $ 2,443 $ 2,375 $ 2,079 $ 1,160 $ 1,421 $ 1,095
Interest Cost 4,665 4,848 4,597 2,173 2,448 2,285
Expected Return on
Plan Assets (5,793) (4,996) (4,157) (1,302) (1,078) (1,046)
Amortization of
Transition Obligation - 87 87 592 756 756
Amortization of Loss
and Other 1,432 1,563 722 130 373 72
---------------------------------------------------------------
Net Periodic
Benefit Cost 2,747 3,877 3,328 2,753 3,920 3,162
ERIP Cost 711 - - 134 - -
---------------------------------------------------------------
Total Net Periodic
Benefit Cost $ 3,458 $ 3,877 $ 3,328 $ 2,887 $ 3,920 $ 3,162
===============================================================
The table above includes benefit costs capitalized by SJG
related to its construction program. Capitalized pension benefit costs
totaled $1.0 million, $1.3 million and $1.1 million in 2004, 2003 and
2002, respectively. Capitalized other postretirement benefit costs
totaled $1.0 million, $1.3 million and $1.0 million in 2004, 2003 and
2002, respectively.
The ERIP costs reflected in the table above relate to an early
retirement plan offered during 2004. Additional monetary incentives not
reflected in the table above totaled $367,500, which will be funded
outside of the retirement plans.
A reconciliation of the plans' benefit obligations, fair value
of plan assets, funded status and amounts recognized in our balance
sheets follows:
SJG-42
Thousands of Dollars
Pension Other
Benefits Postretirement Benefits
2004 2003 2004 2003
--------------------------------------------------
Change in Benefit Obligations:
Benefit Obligation at Beginning of Year $ 84,099 $ 75,004 $ 43,109 $ 30,025
Transferred to Affiliate (Note 2) (4,024) - (2,804) -
Service Cost 2,443 2,375 1,160 1,421
Interest Cost 4,665 4,848 2,172 2,448
Plan Amendments 434 - (8,643) -
Actuarial Loss and Other 9,966 5,437 1,723 10,556
Benefits Paid (3,559) (3,565) (1,751) (1,341)
--------------------------------------------------
Benefit Obligation at End of Year $ 94,024 $ 84,099 $ 34,966 $ 43,109
==================================================
Change in Plan Assets:
Fair Value of Plan Assets at
Beginning of Year $ 76,626 $ 58,204 $ 19,096 $ 13,835
Transferred to Affiliate (Note 2) (3,585) - (1,392) -
Actual Return on Plan Assets 7,643 12,911 1,533 3,336
Employer Contributions 10,762 9,076 3,225 3,266
Benefits Paid (3,559) (3,565) (1,751) (1,341)
--------------------------------------------------
Fair Value of Plan Assets at End of Year $ 87,887 $ 76,626 $ 20,711 $ 19,096
==================================================
Funded Status: $ (6,137) $ (7,473) $ (14,255) $ (24,014)
Unrecognized Prior Service Cost 2,612 2,485 (3,260) -
Unrecognized Net Obligation
Assets from Transition - - - 6,801
Unrecognized Net Loss and Other 28,337 23,194 11,368 10,268
--------------------------------------------------
Prepaid (Accrued) Net Benefit Cost at
End of Year $ 24,812 $ 18,206 $ (6,147) $ (6,945)
==================================================
The accumulated benefit obligation of our pension plans at
December 31, 2004 and 2003 was $82.2 million and $70.0 million,
respectively. In 2003, SJG had a decrease in its minimum pension
liability included in Accumulated Other Comprehensive Income amounting
to $8.5 million. As of December 31, 2004, no minimum pension liability
adjustment was required.
As of November 2004, we implemented caps on the amount of the
premium we pay for all employees eligible for postretirement health
care. Employees are responsible for those costs which exceed the
premium caps. Subsequently, we were able to reduce our 2004
postretirement benefit costs other than pension by a total of $325,200
for the months of November and December 2004. On an ongoing basis, we
will experience reduced postretirement benefit costs other than pension
due to this plan change.
We also have unqualified pension plans provided to certain
officers and outside directors which are unfunded. The aggregate
accrued net benefit obligation of such plans as of December 31, 2004
and 2003 was $4.7 million and $4.2 million, respectively.
The weighted-average assumptions used to determine benefit
obligations at December 31 were:
SJG-43
Other
Pension Benefits Postretirement Benefits
2004 2003 2004 2003
-------------------------------------------------
Discount Rate 5.75% 6.25% 5.75% 6.25%
Rate of Compensation Increase 3.60% 3.60% - -
The weighted-average assumptions used to determine net
periodic benefit cost foryears ended December 31 were:
Other
Pension Benefits Postretirement Benefits
2004 2003 2002 2004 2003 2002
--------------------------------------------------------------
Discount Rate 6.25% 6.75% 7.25% 6.25% 6.75% 7.25%
Expected Long-Term Return
on Plan Assets 8.75% 9.00% 9.00% 7.25% 7.50% 7.50%
Rate of Compensation Increase 3.60% 3.60% 4.10% - - -
The expected long-term return on plan assets was based on
return projections prepared by our investment manager using SJI's
current investment mix as described under Plan Assets below.
The assumed health care cost trend rates at December 31 were:
2004 2003
---------------
Post-65 Medical Care Cost Trend Rate Assumed for Next Year 6.5% 7.0%
Pre-65 Medical Care Cost Trend Rate Assumed for Next Year 11.0% 11.5%
Dental Care Cost Trend Rate Assumed for Next Year 6.5% 7.0%
Rate to which Cost Trend Rates are Assumed to Decline
(the Ultimate Trend Rate) 5.0% 5.0%
Year that the Rate Reaches the Ultimate Trend Rate 2016 2016
Assumed health care cost trend rates have a significant effect
on the amounts reported for our postretirement health care plans. A
one-percentage-point change in assumed health care cost trend rates
would have the following effects:
Thousands of Dollars
1-Percentage- 1-Percentage-
Point Increase Point Decrease
Effect on the Total of Service
and Interest Cost $ 84 $ (71)
Effect on Postretirement
Benefit Obligation 1,121 (1,076)
Plan Assets - SJG's weighted-average asset allocations at
December 31, 2004 and 2003, by asset category are as follows:
SJG-44
Other
Pension Benefits Postretirement Benefits
2004 2003 2004 2003
-------------------------------------------------
Asset Category
U.S. Equity Securities 52% 47% 48% 47%
International Equity Securities 16 13 16 13
Fixed Income 32 40 36 40
------------------------------------------------
Total 100% 100% 100% 100%
================================================
Based on the investment objectives and risk tolerances stated
in SJI's current pension and other postretirement benefit plans'
investment policy and guidelines, the long-term asset mix target
considered appropriate is within the range of 58 to 68% equity and 32
to 42% fixed-income investments. Historical performance results and
future expectations suggest that equities will provide higher total
investment returns than fixed-income securities over a long-term
investment horizon.
The policy recognizes that risk and volatility are present to
some degree with all types of investments. We seek to avoid high levels
of risk at the total fund level through diversification by asset class,
style of manager, and sector and industry limits. Specifically
prohibited investments include, but are not limited to, venture
capital, margin trading, commodities and securities of companies with
less than $250.0 million capitalization (except in the small-cap
portion of the fund where capitalization levels as low as $50.0 million
are permissible).
Future Benefit Payments - The following benefit payments,
which reflect expected future service, as appropriate, are expected to
be paid during the following years:
Thousands of Dollars
Other
Pension Benefits Postretirement Benefits
2005 $ 3,823 $ 1,461
2006 3,987 1,651
2007 4,189 1,854
2008 4,420 2,036
2009 4,694 2,207
2010-2014 29,188 12,606
Contributions - SJG expects to make no contributions to its
pension plan and contribute approximately $3.0 million to its other
postretirement benefit plan in 2005.
Defined Contribution Plan - The company also offers an
Employees' Retirement Savings Plan (Savings Plan) to eligible
employees. We match 50% of participants' contributions up to 6% of base
compensation. For newly hired employees who are not eligible for
participation in SJI's defined benefit plan, we match 50% of
participants' contributions up to 8% of base compensation. We also make
a year-end contribution of $500 for employees with fewer than 10 years
of service and $1,000 for employees with 10 years or more of service.
The amount expensed and contributed for the matching provision
of the Savings Plan was approximately $0.8 million in each of the years
2004, 2003 and 2002.
12. DISCONTINUED OPERATIONS:
We operated retail stores which sold natural gas appliances.
The stores were intended to provide gas customers with access to and
choice among natural gas appliances. In 2001, we formally discontinued
this merchandising segment of our operations as such appliances are
SJG-45
readily available from other retailers. In 2002, SJG incurred a loss of
$29,000 related to these operations. No additional impact on earnings
was recognized in either 2004 or 2003.
13. COMMITMENTS AND CONTINGENCIES:
The following table summarizes our contractual cash
obligations and their applicable payment due dates (in thousands):
Up to 1 - 3 3 - 5 More than
Contractual Obligations Total 1 Year Years Years 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. SJG's regulatory obligation to contribute $3.6
million annually to its 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 11).
Construction and Environmental Commitments - Our estimated net
cost of construction and environmental remediation programs for 2005
totals $67.1 million. Commitments were made regarding some of these
programs.
Gas Supply Contracts - SJG, in the normal course of conducting
business, has entered into long-term contracts for natural gas
supplies, firm transportation and gas storage service. The earliest
that any of these contracts expires is 2005. The transportation and
storage service agreements between us and our interstate pipeline
suppliers were made under Federal Energy Regulatory Commission approved
tariffs. Our cumulative obligation for demand charges and reservation
fees paid to suppliers for these services is approximately $4.5 million
per month, recovered on a current basis through the BGSS.
Pending Litigation - We are subject to claims arising from 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 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.
Environmental Remediation Costs - We incurred and recorded
costs for environmental cleanup of 12 sites where the Company or its
predecessors operated manufactured gas plants (MGP). We stopped
manufacturing gas in the 1950s.
We successfully entered into settlements with all of our
historic comprehensive general liability carriers regarding the
environmental remediation expenditures at our sites. Also, we have
purchased a Cleanup Cost Cap Insurance Policy limiting the amount of
remediation expenditures that we will be required to make at 11 of our
SJG-46
sites. This Policy will be in force until 2024 at 10 sites and until
2029 at one site. The following minimum future cost estimates were not
reduced by projected insurance recoveries from the Cleanup Cost Cap
Insurance Policy.
Since the early 1980s, we accrued environmental remediation
costs of $142.8 million, of which $91.8 million has been spent as of
December 31, 2004. With the assistance of a consulting firm, we
estimate that undiscounted future costs to clean up our sites will
range from $51.0 million to $192.8 million. We recorded the lower end
of this range as a liability 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. It is reflected on the 2004
consolidated balance sheet under the captions Current Liabilities and
Deferred Credits and Other Non-Current Liabilities (See Note 1).
Recorded amounts include estimated costs based on projected
investigation and remediation work plans using existing technologies.
Actual costs could differ from the estimates due to the long-term
nature of the projects, changing technology, government regulations and
site-specific requirements.
We have two regulatory assets associated with environmental
costs (See Note 1). The first asset, Environmental Remediation Cost:
Expended - Net, represents what was actually spent to clean up former
gas manufacturing plant sites. These costs meet the requirements of
FASB Statement No. 71. The BPU allows us to recover expenditures
through the RAC (See Note 2).
The other asset, Environmental Remediation Cost: Liability for
Future Expenditures, relates to estimated future expenditures
determined under the guidance of FASB Statement No. 5, "Accounting for
Contingencies." We recorded this amount, which relates to former
manufactured gas plant sites, as a regulatory asset under Statement No.
71 with the corresponding amount reflected on the balance sheets under
the captions Current Liabilities and Deferred Credits and Other
Non-Current Liabilities. The BPU's intent, evidenced by current
practice, is to allow us to recover the deferred costs after they are
spent over 7-year periods.
As of December 31, 2004, we reflected the unamortized
remediation costs of $5.3 million on the balance sheet under the
caption Regulatory Assets. Since implementing the RAC in 1992, we have
recovered $43.9 million through rates (See Note 2).
SJG-47
14. QUARTERLY RESULTS OF OPERATIONS - UNAUDITED:
The summarized quarterly results of SJG's operations, in
thousands:
SOUTH JERSEY GAS COMPANY QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly results of SJG's operations, in thousands except for per share amounts:
------------------------------------------------
2004 Quarter Ended 2003 Quarter Ended
------------------------------------------------ --------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
--------- ---------- --------- ---------- --------- ---------- ---------- ----------
Operating Revenues $202,260 $ 75,970 $ 73,480 $157,117 $241,956 $ 77,405 $ 60,389 $156,692
--------- ---------- --------- ---------- --------- ---------- ---------- ----------
Expenses:
Cost of Sales 137,096 47,066 50,184 106,514 179,694 49,919 40,762 105,440
Operation and Maintenance
Including Fixed Charges 25,614 25,260 23,314 28,776 23,711 23,955 24,508 30,566
Income Taxes (Benefit) 14,683 830 (519) 7,975 13,971 753 (2,420) 7,315
Energy and Other Taxes 4,728 1,983 1,653 3,094 5,028 2,131 1,349 3,217
--------- ---------- --------- ---------- --------- ---------- ---------- ----------
Total Expenses 182,121 75,139 74,632 146,359 222,404 76,758 64,199 146,538
--------- ---------- --------- ---------- --------- ---------- ---------- ----------
Other Income and Expense 567 (8) 72 255 (118) 22 6 155
--------- ---------- --------- ---------- --------- ---------- ---------- ----------
Net Income (Loss) Applicable
to Common Stock $ 20,706 $ 823 $ (1,080) $ 11,013 $ 19,434 $ 669 $ (3,804) $ 10,309
========= ========== ========= ========== ========= ========== ========== ==========
------------------------------------------------
<FN>
NOTE: Because of the seasonal nature of the business, statements for the
3-month periods are not indicative of the results for a full year.
</FN>
SJG-48
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures - Management has
established controls and procedures to ensure that material information relating
to SJG is made known to the officers who certify its financial reports and to
other members of senior management and the Board of Directors.
Based upon their evaluation as of December 31, 2004, the principal
executive officer and the principal financial officer of SJG have concluded that
the disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) employed at SJG are
effective to ensure that the information required to be disclosed by SJG in the
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
No change in SJG's internal control over financial reporting occurred
during SJG's fourth fiscal quarter.
Item 9B. Other Information
None.
SJG-49
PART III
Item 10. Directors and Executive Officers of the Registrant
Not applicable.
Item 11. Executive Compensation
Not applicable.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Not applicable.
Item 13. Certain Relationships and Related Transactions
Not applicable.
Item 14. Principal Accounting Fees and Services
Fees Paid to Auditors
Deloitte & Touche LLP served as the auditors of SJG and its parent,
SJI, during 2004. During 2004, the audit services performed by that firm for SJG
consisted of the audits of the financial statements of the Company and the
preparation of various reports based on those audits and services related to
filings with the Securities Exchange Commission and New York Stock Exchange.
Audit Fees
The aggregate fees billed for the audit of SJG's financial statements
by Deloitte & Touche totaled $119,000 and $115,000 in fiscal years 2004 and
2003, respectively.
Audit-Related Fees
The aggregate bills for audit-related services for fiscal years 2004
and 2003 were $13,000 and $35,000, respectively.
Tax Fees
None.
All Other Fees
None.
SJG-50
PART IV
Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) Listed below are all financial statements and schedules filed as part of
this report:
1 - The financial statements and notes to financial statements together
with the report thereon of Deloitte & Touche LLP, dated March 2, 2005.
See Item 8.
2 - Supplementary Financial Information
Supplemental Schedules as of December 31, 2004, 2003 and 2002 and for
the three years ended December 31, 2004, 2003, and 2002:
The Independent Registered Public Accounting Firm's Consent of Deloitte
& Touche LLP, Auditors of the Company. See Item 8.
Schedule II - Valuation and Qualifying Accounts. See page 58.
All schedules, other than that listed above, are omitted because the
information called for is included in the financial statements filed or because
they are not applicable or are not required.
(b) Reports on Form 8-K - None
(c) List of Exhibits (Exhibit Number is in Accordance with the Exhibit Table in
Item 601 of Regulation S-K).
Exhibit Description Reference
Number
(3)(a) Certificate of Incorporation of South Jersey Incorporated by reference from Exhibit (3)(a)
Gas Company. of Form 10-K filed March 7, 1997.
(3)(b) Bylaws of South Jersey Gas Company, as Incorporated by reference from Exhibit
amended and restated through November 21, (3)(b) of Form 10-K of SJI filed for 2003.
2003.
(4)(a) Form of Stock Certified for Common Stock. Incorporated by reference from Exhibit (4)(a)
of Form 10 filed March 7, 1997.
(4)(b)(i) First Mortgage Indenture dated October 1, Incorporated by reference from Exhibit
1947. (4)(b)(i) of Form 10-K of SJI for 1987
(1-6364).
(4)(b)(iv) Twelfth Supplemental Indenture dated as of Incorporated by reference from Exhibit 5(b)
June 1, 1980. of Form S-7 of SJI (2-68038).
(4)(b)(xv) Seventeenth Supplemental Indenture dated as Incorporated by reference from Exhibit
of May 1, 1989. (4)(b)(xv) of Form 10-K of SJI for 1989
(1-6364).
(4)(b)(xvii) Nineteenth Supplemental Indenture dated as of Incorporated by reference from Exhibit
April 1, 1992. (4)(b)(xvii) of Form 10-K of SJI for 1992
(1-6364).
SJG-51
Exhibit Description Reference
Number
(4)(b)(xx) Twenty-Second Supplemental Indenture dated as Incorporated by reference from Exhibit
of October 1, 1998. (4)(b)(ix) of Form S-3 (333-62019).
(4)(b)(xxi) Twenty-Third Supplemental Indenture dated as Incorporated by reference from Exhibit
of September 1, 2002. (4)(b)(x) of Form S-3 (333-98411)
(4)(c) Indenture dated as of January 31, 1995; 8.60% Incorporated by reference from Exhibit (4)(c)
Debenture Notes due February 1, 2010. of Form 10-K of SJI for 1994 (1-6364).
(4)(e) Medium Term Note Indenture of Trust dated Incorporated by reference from Exhibit (4)(e)
October 1, 1998. of Form S-3 (333-62019).
(4)(f) Medium Term Note Indenture of Trust, as Incorporated by reference from Exhibit 4(e)
amended, dated December 16, 2002. of Form S-3 (333-98411).
(10)(a) Gas storage agreement (GSS) between South Incorporated by reference from Exhibit
Jersey Gas Company and Transco dated October (10)(d) of Form 10-K of SJI for 1993
1, 1993. (1-6364).
(10)(b) Gas storage agreement (S-2) between South Incorporated by reference from Exhibit (5)(h)
Jersey Gas Company and Transco dated December of Form S-7 of SJI (2-56223).
16, 1953.
(10)(c) Gas storage agreement (LG-A) between South Incorporated by reference from Exhibit (5)(f)
Jersey Gas Company and Transco dated June 3, of Form S-7 of SJI (2-56223).
1974.
(10)(d) Gas storage agreement (WSS) between South Incorporated by reference from Exhibit
Jersey Gas Company and Transco dated August (10)(h) of Form 10-K of SJI for 1991
1, 1991. (1-6364).
(10)(e)(i) Gas storage agreement (LSS) between South Incorporated by reference from Exhibit
Jersey Gas Company and Transco dated October (10)(i) of Form 10-K of SJI for 1993
1, 1993. (1-6364).
(10)(e)(ii) Gas storage agreement (SS-1) between South Incorporated by reference from Exhibit
Jersey Gas Company and Transco dated May 10, (10)(i)(a) of Form 10-K of SJI for 1988
1987 (effective April 1, 1988). (1-6364).
(10)(e)(iv) Gas transportation service agreement between Incorporated by reference from Exhibit
South Jersey Gas Company and Transco dated (10)(i)(c) of Form 10-K of SJI for 1989
April 1, 1986. (1-6364).
(10)(e)(vi) Service agreement (FT) between South Jersey Incorporated by reference from Exhibit
Gas Company and Transco dated February 1, (10)(i)(f) of Form 10-K of SJI for 1991
1992. (1-6364).
SJG-52
Exhibit Description Reference
Number
(10)(e)(viii) Gas storage agreement (SS-2) between South Incorporated by reference from Exhibit
Jersey Gas Company and Transco dated July 25, (10)(i)(i) of Form 10-K of SJI for 1991
1990. (1-6364).
(10)(e)(ix) Gas transportation service agreement between Incorporated by reference from Exhibit
South Jersey Gas Company and Transco dated (10)(i)(j) of Form 10-K of SJI for 1993
December 20, 1991. (1-6364).
(10)(e)(x) Amendment to gas transportation agreement Incorporated by reference from Exhibit
dated December 20, 1991 between South Jersey (10)(i)(k) of Form 10-K of SJI for 1993
Gas Company and Transco dated October 5, 1993. (1-6364).
(10)(g)(i) Gas transportation service agreement (TF) Incorporated by reference from Exhibit
between South Jersey Gas Company and CNG (10)(k)(h) of Form 10-K of SJI for 1993
Transmission Corporation dated October 1, (1-6364).
1993.
(10)(g)(iii) Gas transportation service agreement (FTS-1) Incorporated by reference from Exhibit
between South Jersey Gas Company and Columbia (10)(k)(k) of Form 10-K of SJI for 1993
Gulf Transmission Company dated November 1, (1-6364).
1993.
(10)(g)(iv) Assignment agreement capacity and service Incorporated by reference from Exhibit
rights (FTS-2) between South Jersey Gas (10)(k)(i) of Form 10-K of SJI for 1993
Company and Columbia Gulf Transmission (1-6364).
Company dated November 1, 1993.
(10)(g)(v) FTS Service Agreement No. 39556 between South Incorporated by reference from Exhibit
Jersey Gas Company and Columbia Gas (10)(k)(m) of Form 10-K of SJI for 1993
Transmission Corporation dated November 1, (1-6364).
1993.
(10)(g)(vi) FTS Service Agreement No. 38099 between South Incorporated by reference from Exhibit
Jersey Gas Company and Columbia Gas (10)(k)(n) of Form 10-K of SJI for 1993
Transmission Corporation dated November 1, (1-6364).
1993.
(10)(g)(vii) NTS Service Agreement No. 39305 between South Incorporated by reference from Exhibit
Jersey Gas Company and Columbia Gas (10)(k)(o) of Form 10-K of SJI for 1993
Transmission Corporation dated November 1, (1-6364).
1993.
(10)(g)(viii) FSS Service Agreement No. 38130 between South Incorporated by reference from Exhibit
Jersey Gas Company and Columbia Gas (10)(k)(p) of Form 10-K of SJI for 1993
Transmission Corporation dated November 1, (1-6364).
1993.
(10)(g)(ix) SST Service Agreement No. 38086 between South Incorporated by reference from Exhibit
Jersey Gas Company and Columbia Gas (10)(k)(q) of Form 10-K of SJI for 1993
Transmission Corporation dated November 1, (1-6364).
1993.
SJG-53
Exhibit Description Reference
Number
(10)(h)(i)* Deferred Payment Plan for Directors of South Incorporated by reference from Exhibit
Jersey Industries, Inc., South Jersey Gas (10)(l) of Form 10-K of SJI for 1994
Company, Energy & Minerals, Inc., R&T Group, (1-6364).
Inc. and South Jersey Energy Company as
amended and restated October 21, 1994.
(10)(h)(ii)* Form of Deferred Compensation Agreement Incorporated by reference from Exhibit
between South Jersey Industries, Inc. and/or (10)(j)(a) of Form 10-K of SJI for 1980
a subsidiary and seven of its officers. (1-6364).
(10)(h)(iii)* Schedule of Deferred Compensation Agreements. Incorporated by reference from Exhibit
(10)(l)(b) of Form 10-K of SJI for 1997
(1-6364).
(10)(h)(iv)* Supplemental Executive Retirement Program, as Incorporated by reference from Exhibit
amended and restated effective July 1, 1997, (10)(l)(i) of Form 10-K of SJI for 1997
and Form of Agreement between certain South (1-6364).
Jersey Industries, Inc. or subsidiary Company
officers.
(10)(h)(v)* Form of Officer Employment Agreement between Incorporated by reference from Exhibit
certain officers and either South Jersey (10)(l)(d) of Form 10-K of SJI for 1994
Industries, Inc. or its subsidiaries. (1-6364).
(10)(h)(vi)* Schedule of Officer Employment Agreements. Incorporated by reference from Exhibit
(10)(h)(vi) of Form 10-K of SJI for 2003.
Officer Severance Benefit Program for all
(10)(h)(vii)* officers. Incorporated by reference from Exhibit
(10)(l)(g) of Form 10-K of SJI for 1985
(1-6364).
(10)(h)(viii)* Discretionary Incentive Bonus Program for all Incorporated by reference from Exhibit
officers and management employees. (10)(l)(h) of Form 10-K of SJI for 1985
(1-6364).
(10)(i)(i) Three-year Revolving Credit Agreement for SJG Incorporated by reference from Exhibit 10 of
Form 10-Q of SJG as filed on November 14,
2003 (000-22211).
(10)(i)(ii) First Amendment to Three-Year Revolving Credit Incorporated by reference from Exhibit 10.1 of
Agreement Form 10-Q of SJG as filed on November 15, 2004
(000-22211).
(12) Calculation of Ratio of Earnings to Fixed
Charges (Before Federal Income Taxes) (filed
herewith).
(18) Preferability Letter from Independent Incorporated by reference from Exhibit 18 of
Auditors' Re: Pension Measurement Date. Form 10-K of SJG for 2002 (000-22211).
SJG-54
Exhibit Reference
Number Description
(21) Subsidiaries of the Registrant (filed herewith).
(23) Independent Registered Public Accounting Firm's Consent
(filed herewith).
(31.1) Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
(31.2) Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
(32.1) Certification of Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
(32.2)
Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
<FN>
* Constitutes a management contract or a compensatory plan or arrangement.
</FN>
SJG-55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOUTH JERSEY GAS COMPANY
BY: /s/ David A. Kindlick
---------------------------------------------
David A. Kindlick, Executive Vice President &
Chief Financial Officer
Date: March 7, 2005
-----------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Edward J. Graham President, Chief Executive Officer, & March 7, 2005
- ------------------------------ Director
(Edward J. Graham) (Principal Executive Officer)
/s/ David A. Kindlick Executive Vice President & Chief March 7, 2005
- ------------------------------ Financial Officer
(David A. Kindlick) (Principal Financial and Accounting Officer)
/s/ Richard H. Walker, Jr. Sr. Vice President, Corporate Counsel, & March 7, 2005
- ------------------------------ Corporate Secretary
Richard H. Walker, Jr.)
/s/ Charles Biscieglia Chairman of the Board March 7, 2005
- -----------------------------
(Charles Biscieglia)
/s/ Shirli M. Billings Director March 7, 2005
- -----------------------------
(Shirli M. Billings)
SJG-56
Signature Title Date
/s/ Sheila Hartnett-Devlin Director March 7, 2005
- -----------------------------
(Sheila Hartnett-Devlin)
/s/ William J. Hughes Director March 7, 2005
- -----------------------------
(William J. Hughes)
/s/ Frederick R. Raring Director March 7, 2005
- -----------------------------
(Frederick R. Raring)
SJG-57
SOUTH JERSEY GAS COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Col. A Col. B Col. C Col. D Col. E
- ---------------------------------------------------------------------------------------------------------------------------
Additions
------------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts - Deductions - End
Classification of Period Expenses Describe (a) Describe (b) of Period
- ---------------------------------------------------------------------------------------------------------------------------
Provision for Uncollectible
Accounts for the Year Ended
December 31, 2004 $3,263 $816 $1,716 $2,924 $2,871
Provision for Uncollectible
Accounts for the Year Ended
December 31, 2003 $3,258 $3,084 $806 $3,885 $3,263
Provision for Uncollectible
Accounts for the Year Ended
December 31, 2002 $2,180 $3,664 $658 $3,244 $3,258
<FN>
(a) Recoveries of accounts previously written off and minor adjustments.
(b) Uncollectible accounts written off.
</FN>
SJG-58