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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
(Amendment No. 1)
[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).
Documents Incorporated by Reference: None
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EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (this "Amendment") amends the
registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
2004, originally filed on March 10, 2005 (the "Original Filing"). The registrant
hereby amends and restates Item 8 of Part II to include a line item on the
balance sheet entitled "Materials and Supplies, average cost" that was
inadvertently omitted from the financial statements included therein during the
EDGARization process. In addition, in connection with the filing of this
Amendment and prusuant to the rules of the Securities and Exchange Commission,
the registrant is including with this Amendment under Item 15 certain currently
dated certifications. Except as described above, no other changes have been made
to the Original Filing.
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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
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.
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.
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
Materials and Supplies, average cost 4,553 3,559
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.
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.
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>
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.
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
==============================
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
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.
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:
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
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)
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
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
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)
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
--------------------------
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
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:
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:
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 for
years 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:
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
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
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).
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>
Item 15. Exhibits and financial statement schedules.
Exhibit Description
Number
23 Independent Registered Public Accounting Firm's Consent
31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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 31, 2005
-----------------
EXHIBIT INDEX
Exhibit Description
Number
23 Independent Registered Public Accounting Firm's Consent
31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.