-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R16F4CJ6k+ZNbsZFUp6WKaToW/Qex+jDCkcURcaEN0cddf1ePQxH88figZra2jSr Ygrri6THWgblg3tkoWBV5w== 0001035216-04-000001.txt : 20040318 0001035216-04-000001.hdr.sgml : 20040318 20040318155935 ACCESSION NUMBER: 0001035216-04-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTH JERSEY GAS CO/NEW CENTRAL INDEX KEY: 0001035216 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 210398330 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22211 FILM NUMBER: 04677909 BUSINESS ADDRESS: STREET 1: NUMBER ONE SOUTH JERSEY PLAZA STREET 2: ROUTE 54 CITY: FOLSOM STATE: NJ ZIP: 08037 BUSINESS PHONE: 6095619000 MAIL ADDRESS: STREET 1: NUMBER ONE SOUTH JERSEY PLAZA STREET 2: ROUTE 54 CITY: FOLSOM STATE: NJ ZIP: 08037 10-K 1 sjg10k.txt SOUTH JERSEY GAS COMPANY FORM 10-K P/E 12/31/03 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 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 ================================================================================ 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. Financial Information About Industry Segments Not applicable. Description of Business SJG is an operating public utility company engaged in the purchase, transmission and sale of natural gas for residential, commercial and industrial use in an area of approximately 2,500 square miles in the southern part of New Jersey. SJG also sells natural gas and pipeline transportation capacity (off-system sales) on a wholesale basis to various customers on the interstate pipeline system and transports natural gas purchased directly from producers or suppliers by some of its customers. SJG's service territory includes 112 municipalities throughout Atlantic, Cape May, Cumberland and Salem Counties and portions of Burlington, Camden and Gloucester Counties, with an estimated permanent population of 1.2 million. SJG serves 304,562 residential, commercial and industrial customers (at December 31, 2003) in southern New Jersey. Gas sales, transportation and capacity release for 2003 amounted to 125,024 MMcf (million cubic feet), of which 54,397 MMcf was firm sales and transportation, 2,467 MMcf was interruptible sales and transportation and 68,160 MMcf was off-system sales and capacity release. The breakdown of firm sales includes 29.1% residential, 9.9% commercial, 1.4% cogeneration and electric generation, .4% industrial and 59.2% transportation. At year-end 2003, SJG served 283,722 residential customers, 20,405 commercial customers and 435 industrial customers. This includes 2003 net additions of 7,743 residential customers, 439 commercial customers and 6 industrial customers. Under an agreement with Conectiv Inc., an electric utility serving southern New Jersey, SJG supplies natural gas to several electric generation facilities. This gas service is provided under the terms of a firm electric service tariff approved by the New Jersey Board of Public Utilities (BPU) on a demand/commodity basis. In 2003, .8 Bcf (billion cubic feet) was delivered under this agreement. SJG serviced 6 cogeneration facilities in 2003. Combined sales and transportation of natural gas to such customers amounted to approximately 3.8 Bcf in 2003. 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 2003, off-system sales amounted to 27.0 Bcf. Also in 2003, capacity release and storage throughput amounted to 41.1 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 -2- 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 2003 amounted to approximately 2.5 Bcf, approximately 2.0 percent of the total throughput. No material part of SJG's business is dependent upon a single customer or a few customers. SJG Capital Trust, a Delaware statutory trust, was a wholly owned subsidiary of SJG, which had the sole purpose of issuing beneficial interests in its assets (Preferred Securities). The proceeds of selling such Preferred Securities were invested in Deferrable Interest Subordinated Debentures issued by SJG. SJG was the guarantor of such Preferred Securities. On November 5, 2003 the 8.35% Preferred Securities were redeemed at a price of $25 per preferred security plus interest in accordance with the terms of the Preferred Securities. In 2003, SJG made no public announcement of, or otherwise made public information about, a new product or industry segment that would require the investment of a material amount of the assets of SJG or which otherwise was material. Service Territory The majority of SJG's residential customers reside in the northern and western portions of its service territory in Burlington, Camden, Salem and Gloucester counties. A majority of new customers reside in this section of the service territory, which includes the residential suburbs of Wilmington and Philadelphia. The franchise area to the east is centered on Atlantic City and the neighboring resort communities in Atlantic and Cape May counties, which experience large population increases in the summer months. The impact of the casino gaming industry on the Atlantic City area has resulted in the creation of new jobs and the expansion of the residential and commercial infrastructure necessary to support a developing year-round economy. Construction was completed at the beginning of July on the first new casino/hotel in 13 years, emphasizing the continued expansion of the gaming and hospitality industry in New Jersey. Manufacturers or processors of sand, glass, farm products, paints, chemicals and petroleum products are located in the western and southern sectors of the service territory. New commercial establishments and high technology industrial parks and complexes are part of the economic growth of this area. SJG's service area includes parts of the Pinelands region, a largely undeveloped area in the heart of southern New Jersey. Future construction in this area is expected to be limited by statute and by a master plan adopted by the New Jersey Pinelands Commission; however, in terms of potential growth, significant portions of SJG's service area are not affected by these limitations. Rates and Regulation As a public utility, SJG is subject to regulation by the New Jersey Board of Public Utilities (BPU). Additionally, the Natural Gas Policy Act, which was enacted in November 1978, contains provisions for Federal regulation of certain aspects of SJG's business. SJG is affected by Federal regulation with respect to transportation and pricing policies applicable to its pipeline capacity from Transcontinental Gas Pipeline Corporation, SJG's major supplier, Columbia Gas Transmission Corporation, 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 contains provisions permitting the recovery of environmental remediation costs associated with former manufactured gas plant sites, energy efficiency and -3- renewable energy program costs, consumer education program costs and low income program costs. These costs are recovered through SJG's Societal Benefits Clause. The tariff also allows for the adjustment of revenues due to the impact of "temperature" fluctuations. In addition, the tariff contains provisions permitting SJG to pass on to customers increases and decreases in the cost of purchased gas supplies. The cost of gas purchased from the utility by consumers has historically been set annually by the BPU under a Levelized Gas Adjustment Clause (LGAC) within SJG's tariff. As recently approved by the BPU, in the future gas costs will be recovered through Basic Gas Supply Service ("BGSS"). When actual gas costs experienced by SJG are less than those charged to customers under BGSS, customer bills in the subsequent BGSS period(s) are adjusted to provide credits for the overrecovery with interest. When actual gas costs are more than is recovered through rates, SJG is permitted to charge customers more for gas in future periods for the underrecovery. In February 1999, the Electric Discount and Energy Competition Act (the Act) was signed into law in New Jersey. This bill created the framework and necessary time schedules for the restructuring of the state's electric and natural gas utilities. The Act established unbundling, where redesigned utility rate structures allow natural gas and electric consumers to choose their energy supplier. It also established time frames for instituting competitive services for customer account functions and for determining whether basic gas supply services should become competitive. In January 2000, the BPU approved full unbundling of SJG's system. This allows all natural gas consumers to select their natural gas supplier. Customers choosing to purchase natural gas from providers other than the utility are charged for the cost of gas by the marketer, not the utility. The resulting decrease in SJG's revenues is offset by a corresponding decrease in gas costs. While customer choice can reduce utility revenues, it does not negatively affect SJG's net income or financial condition. The BPU continues to allow for full recovery of natural gas costs. In December 2002, the BPU approved the Basic Gas Supply Service price structure. BGSS is the gas supply service being provided by the natural gas utility. Upon implementation of BGSS in 2003, customers 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 approved price structure replaced the current pricing structure in the LGAC, all other LGAC mechanisms, such as, but not limited to, deferred accounting treatment and the allowance for full recovery of natural gas costs, remain in place under BGSS. The Act also contains numerous provisions requiring the BPU to promulgate and adopt a variety of standards related to implementing the Act. These required standards address fair competition, affiliate relations, accounting, competitive services, supplier licensing, consumer protection and aggregation. In March 2000, the BPU issued Interim Standards in response to the Act. The BPU has undertaken an extensive comment, meeting and audit process to address the concerns of all impacted parties. SJG actively participated in the process, and as such we believe that to date the final standards have not had, nor will they have in the future, a material adverse affect on the company. In August 2002, SJG filed a petition with the BPU seeking to transfer its appliance service business from the regulated utility into a newly created unregulated, limited liability company. If approved, the newly created company would have the flexibility to be more responsive to competition and its customers and further its service offerings in an unregulated environment. In August 2003, SJG filed a base rate case with the BPU to increase its base rate to obtain a certain level of return on its investment of capital. SJG expects the rate case to be concluded during 2004. SJG has not sought a base rate increase from the BPU since the implementation of its base rate case approved in January 1997. 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, 2003. See Item 8. -4- 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 2003, SJG purchased and had delivered approximately 51.7 Bcf of natural gas for distribution to both on-system and off-system customers. Of this total, 38.4 Bcf was transported on the Transco pipeline system and 13.3 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 Regulation 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 2004 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 2004 to 2017. Dominion: Effective April 1, 2003, SJG regained control of its Dominion GSS Storage Service which had been released to Sempra Energy Trading Corporation. This storage service provided a maximum withdrawal capacity of 9,662 Mcf/d during the period between November 16th and March 31st 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. Gas Supplies ------------ SJG has two long-term gas supply agreements with a single producer and marketer that expire 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 replaced long-term gas supply contracts with short-term agreements. The short-term agreements are typically for several months in duration. -5- Supplemental Gas Supplies ------------------------- During 2003, SJG entered into a Liquefied Natural Gas (LNG)liquefaction service agreement with a third party provider which extends through March, 2004. SJG's contract quantity under the agreement is 186,047 Mcf. LNG supplied by this vendor is transported to SJG's McKee City, New Jersey LNG storage facility by truck. SJG operates peaking facilities which can store and vaporize LNG for injection into its distribution system. SJG's LNG facility has a storage capacity equivalent to 404,000 Mcf of natural gas and has an installed capacity to vaporize up to 90,000 Mcf of LNG per day for injection into its distribution system. SJG also operates a high pressure pipe storage field at its McKee City facility which is capable of storing 12,000 Mcf of gas and injecting up to 10,000 Mcf/d of gas per day into SJG's distribution system. Peak-Day Supply --------------- SJG plans for a winter season peak-day demand on the basis of an average daily temperature of 2 degrees F. Gas demand on such a design day was estimated for the 2003-2004 winter season to be 496,304 Mcf. SJG projects that it has adequate supplies and interstate pipeline entitlements to meet its design requirements. On January 23, 2003, SJG experienced its highest peak-day demand for the year of 403,575 Mcf with an average temperature of 15.35 degrees F. Natural Gas Prices ------------------ SJG's average cost of natural gas purchased in 2003, 2002 and 2001, including demand charges was $6.74 per Mcf, $4.46 per Mcf and $6.80 per Mcf, respectively. Patents and Franchises SJG holds nonexclusive franchises granted by municipalities in the seven county area of southern New Jersey that it serves. No other natural gas public utility presently serves the territory covered by SJG's franchises. Otherwise, patents, trademarks, licenses, franchises and concessions are not material to the business of SJG or its subsidiary. Seasonal Aspects SJG experiences seasonal fluctuations in sales when selling natural gas for heating purposes. SJG meets this seasonal fluctuation in demand from its firm customers by buying and storing gas during the summer months, and by drawing from storage and purchasing supplemental supplies during the heating season. As a result of this seasonality, SJG's revenues and net income are significantly higher during the first and fourth quarters than during the second and third quarters of the year. Working Capital Practices Reference is made to "Liquidity and Capital Resources" included in Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition. Customers No material part of SJG's business is dependent upon a single customer or a few customers, the loss of which would have a material adverse effect on any such business. See Item 1, "Service Territory." -6- Backlog Backlog is not material to an understanding of SJG's business. Government Contracts No material portion of SJG's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any government. Competition SJG's franchises are non-exclusive, however, currently no other utility is providing natural gas service within its territory. SJG competes with oil, propane and electricity suppliers for residential, commercial and industrial users. The market for natural gas commodity sales is subject to competition as a result of deregulation. Through its tariff, SJG has promoted competition while maintaining its margins. Substantially all of SJG's profits are from the transportation rather than the sale of the commodity. SJG has maintained its focus on being a low-cost provider of natural gas and energy services. SJG also competes with other marketers/brokers in the selling of wholesale natural gas services. Research During the last three fiscal years, SJG did not engage in research activities to any material extent. Environmental Matters Information on environmental matters is incorporated by reference to Note 13 to SJG's financial statements for the year ended December 31, 2003. See Item 8. Employees SJG had a total of 578 employees as of December 31, 2003 Of that total, 377 employees are unionized. 328 and 49 are covered under collective bargaining agreements that expire in January 2005 and January 2008, respectively. Financial Information About Foreign and Domestic Operations and Export Sales SJG has no foreign operations and export sales are not a part of its business. Item 2. Properties ------------------ The principal property of SJG consists of its gas transmission and distribution systems that include mains, service connections and meters. The transmission facilities carry the gas from the connections with Transco and Columbia to SJG's distribution systems for delivery to customers. As of December 31, 2003, there were approximately 92 miles of mains in the transmission systems and 5,358 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, 2003, the SJG utility plant had a gross book value of $894.6 million and a net book value, after accumulated depreciation, of $639.6 million. In 2003, $53.2 million was spent on additions to utility plant and there were retirements of property having an aggregate gross book cost of $5.4 million. Construction and remediation expenditures for 2004 are currently expected to approximate $67.8 million. -7- Virtually all of SJG's transmission pipeline, distribution mains and service connections are in streets or highways or on the property of others. The transmission and distribution systems are maintained under franchises or permits or rights-of-way, many of which are perpetual. SJG's properties (other than property specifically excluded) are subject to a lien of mortgage under which its first mortgage bonds are outstanding. We believe these properties are well maintained and in good operating condition. Item 3. Legal Proceedings ------------------------- SJG is subject to claims which arise in the ordinary course of its business and other legal proceedings. We accrue liabilities related to these claims when we can determine the amount or range of amounts of likely settlement costs for these claims. We also maintain insurance and record probable insurance recoveries relating to outstanding claims. Management of SJG believes that any pending or potential legal proceedings will not materially affect its operations, financial position, or liquidity. Item 4. Submission Of Matters To A Vote of Security Holders ----------------------------------------------------------- Not applicable. -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 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, 2003, these restrictions did not affect the amount that may be distributed from SJG's retained earnings. No dividends were declared on SJG's common stock in 2003 and $10.7 million were declared in 2002. If preferred stock dividends are in arrears, no dividends may be declared or paid, or other distribution made on the common stock of SJG. If four or more quarterly dividends are in arrears, the Preferred Shareholders may elect a majority of SJG's directors. See Note 4 of SJG's financial statements for additional information on Capitalization. See Item 8. -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, ------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------------------------------------------------- Operating Revenues $528,066 $417,263 $475,461 $445,818 $348,074 ============================================================= Operating Income $65,420 $60,874 $60,462 $62,619 $58,304 ============================================================= Income before Preferred Dividend Requirement and Discontinued Operations 26,743 23,357 21,666 22,006 20,529 Preferred Dividend Requirements -135 -135 -139 -151 -162 ------------------------------------------------------------- Income from Continuing Operations 26,608 23,222 21,527 21,855 20,367 (Loss) Income from Discontinued Operations 0 -29 -207 -76 15 ------------------------------------------------------------- Net Income Applicable to Common Stock $26,608 $23,193 $21,320 $21,779 $20,382 ============================================================= 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 (1) 3.3x 2.9x 2.6x 2.6x 2.5x As of December 31, ------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------------------------------------------------- Property, Plant and Equipment, Net (2) $684,823 $651,486 $622,115 $592,250 $562,921 ============================================================= Total Assets (2) $946,282 $916,400 $898,604 $878,146 $783,368 ============================================================= Capitalization: Common Equity (3) $269,800 $214,224 $205,982 $197,101 $182,122 Preferred Stock (4) 1,690 1,690 1,690 1,804 2,044 Long-Term Debt (4) 263,781 235,098 266,329 241,063 219,643 ------------------------------------------------------------- Total $535,271 $451,012 $474,001 $439,968 $403,809 ============================================================= (1) The ratio of earnings to fixed charges represents, on a pre-tax basis, the number of times earnings cover fixed charges. Earnings consist of net income, to which has been added fixed charges and taxes based on income of the company before discontinued operations. Fixed charges consist of interest charges and preferred securities dividend requirements and an interest factor in rentals on a pre-tax basis. (2) Prior years have been restated as cost of removal has been reclassified from Accumulated Depreciation to Other Liabilities ( see new accounting pronouncements in Note 1 to the financial statements). (3) Included are cash contributions to capital as follows: 2003 - $20.0 million; 2002 - $2.5 million; 2001 - $7.0 million; 2000 - $8.0 million; 1999 - $15.0 million. (4) Prior years have been restated to reclassify $35.0 million of Company Guaranteed Mandatorily Redeemable Preferred Securities of Subsidiary Trust, in accordance with FASB Interpretation No. 46 ( See new accounting pronouncements in Note 1 to the financial statements).
-10- Comparative statistical data related to revenues and gas throughput is as follows:
SOUTH JERSEY GAS COMPANY COMPARATIVE OPERATING STATISTICS 2003 2002 2001 2000 1999 ----------- ------------ ------------- ------------ ------------ Operating Revenues (Thousands): Firm Residential $ 193,725 $ 174,252 $ 201,531 $ 172,418 $ 152,946 Commercial 58,749 52,300 76,416 49,669 35,064 Industrial 5,635 4,512 4,250 5,265 4,879 Cogeneration & Electric Generation 6,513 9,363 7,405 11,016 8,496 Firm Transportation 74,080 49,436 29,565 38,213 33,125 ----------- ------------ ------------- ------------ ------------ Total Firm 338,702 289,863 319,167 276,581 234,510 Interruptible 1,682 1,142 1,485 1,695 1,645 Interruptible Transportation 1,121 1,567 1,268 1,531 1,724 Off-System 176,555 115,714 145,530 160,208 104,142 Capacity Release & Storage 6,686 5,365 5,596 4,411 4,193 Other 3,320 3,612 2,415 1,392 1,860 ----------- ------------ ------------- ------------ ------------ Total Operating Revenues $ 528,066 $ 417,263 $ 475,461 $ 445,818 $ 348,074 =========== ============ ============= ============ ============ Throughput (MMcf): Firm Residential 15,843 15,519 17,390 19,124 17,741 Commercial 5,351 5,273 7,544 6,191 4,634 Industrial 212 202 248 282 246 Cogeneration & Electric Generation 777 1,986 1,519 2,046 2,316 Firm Transportation 32,214 26,470 22,085 26,114 25,143 ----------- ------------ ------------- ------------ ------------ Total Firm Throughput 54,397 49,450 48,786 53,757 50,080 ----------- ------------ ------------- ------------ ------------ Interruptible 220 198 207 207 383 Interruptible Transportation 2,247 3,189 2,638 3,022 3,628 Off-System 27,041 29,980 30,117 38,097 42,480 Capacity Release & Storage 41,119 38,048 27,187 37,445 29,247 ----------- ------------ ------------- ------------ ------------ Total Throughput 125,024 120,865 108,935 132,528 125,818 =========== ============ ============= ============ ============ Number of Customers at Year End: Residential 283,722 275,979 268,046 261,621 254,601 Commercial 20,405 19,966 19,542 19,319 18,894 Industrial 435 429 420 410 404 ----------- ------------ ------------- ------------ ------------ Total Customers 304,562 296,374 288,008 281,350 273,899 =========== ============ ============= ============ ============ Maximum Daily Sendout (MMcf) 422 344 326 375 324 =========== ============ ============= ============ ============ Annual Degree Days 4,929 4,380 4,495 4,942 4,468 =========== ============ ============= ============ ============ Normal Degree Days * 4,613 4,625 4,625 4,639 4,664 =========== ============ ============= ============ ============ * Average degree days recorded in SJG service territory during 20-year period ended June 30 of prior year.
-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 304,562 customers at December 31, 2003 compared with 296,374 customers at December 31, 2002. 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 services appliances via the sale of appliance warranty programs as well as on a time and materials basis. 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; 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. Four types of transactions presented in our financial statements require a significant amount of judgment and estimation. These relate to regulatory assets, environmental remediation costs, postretirement employee benefit costs and unbilled revenues. The New Jersey Board of Public Utilities (BPU) has reviewed and approved, through specific orders, most of the items shown as regulatory assets. Other items represent costs that were not yet approved by the BPU for recovery, but are the subject of current filings. In recording these costs as regulatory assets, management believes the costs are probable of recovery under existing rate-making concepts that are embodied in current rate orders received by SJG. However, ultimate recovery is subject to BPU approval. -12- An outside consulting firm assists us in estimating future costs for environmental remediation activities. We estimate future costs based on projected investigation and work plans using existing technologies. Developing a single reliable estimation point is not feasible because of the amount of uncertainty involved in the nature of projected remediation efforts and the long period over which remediation efforts will continue. Therefore, we estimate the range of future costs at $51.0 million to $162.3 million. In preparing financial statements, we record liabilities for future costs using the lower end of the range. We update estimates each year to take into account past efforts, changes in work plans and remediation technologies. The costs of providing postretirement employee benefits are impacted by actual plan experience as well as assumptions of future experience. Employee demographics, plan contributions, investment performance, and actuarial assumptions concerning return on plan assets, discount rates and health care cost trends all have a significant impact on determining our projected benefit obligations. Actuarial assumptions are evaluated annually with the assistance of our investment manager and actuary and adjusted accordingly. These adjustments could result in significant changes to the net periodic benefit cost of providing such benefits and the related liability recognized by SJG. A majority of SJG's customers have their meters read on a cycle basis throughout the month. As a result, recognized revenues include estimates as described below. Revenue Recognition: - ------------------- SJG bills customers monthly for gas delivered and recognizes those revenues during the month. For SJG customers that are not billed at the end of each month, we make an accrual to recognize revenues for gas delivered from the date of the last meter reading to the end of the month. We bill our customers at rates approved by the BPU. We defer and recognize revenues related to SJG's appliance service contracts over the full 12-month term of the contract as earned. The BPU allows us to recover gas costs in rates through the Basic Gas Supply Service (BGSS) price structure (formerly known as the Levelized Gas Adjustment Clause). We defer over/under-recoveries of gas costs and include them in subsequent adjustments to the BGSS rate or other similar rate recovery mechanism. These adjustments result in over/under-recoveries 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 (See Recent Regulatory Actions) without shifting profits between periods, as these clauses provide for recovery of costs on a dollar-for-dollar basis. 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 Board of Public Utilities approved Temperature Adjustment Clause (TAC) decreased SJG's net income by $1.7 million in 2003. The TAC increased net income by $2.3 million and $2.0 million in 2002 and 2001, 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. -13- Recent Regulatory Actions In November 2001, SJG filed for a $2.7 million rate increase to recover the cash related to a prior net deficiency in the Temperature Adjustment Clause (TAC). Additionally, in September 2002, SJG filed for an $8.6 million rate increase to recover the cash related to a TAC deficiency resulting from warmer-than-normal weather for the 2001-2002 winter. 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. During 2002, the BPU convened a gas policy group to address Basic Gas Supply Service (BGSS), which is the gas supply service being provided by the natural gas utility. In December 2002, the BPU approved the proposed BGSS price structure. The BGSS approved price structure replaced the Levelized Gas Adjustment Clause (LGAC) pricing structure. The LGAC was structured to reset gas charges to consumers once per year. The BGSS resets gas prices monthly for larger customers, and for smaller customers permits multiple resets each year, if certain conditions are met. With the implementation of BGSS in March 2003, customers can make more informed decisions about choosing an alternate supplier by having a utility pricing structure that more currently reflects market conditions. Further, BGSS provides SJG with more pricing flexibility, through self-implementing rate changes under certain conditions and limitations, conceptually resulting in the reduction of over/under-recoveries. LGAC-related mechanisms, such as deferred accounting treatment, the sharing of pre-tax margins generated by interruptible and off-system sales and transportation, and the allowance for full recovery of prudently incurred natural gas costs, remain in place under BGSS. In August 2002, SJG filed for a Societal Benefits Clause (SBC) rate increase. The SBC recovers costs related to BPU-mandated programs and environmental remediation costs that are recovered through SJG's Remediation Adjustment Clause; energy efficiency and renewable energy program costs that are recovered through SJG's New Jersey Clean Energy Programs; consumer education program costs; and the interim low income program costs. In August 2003, the BPU approved a $6.7 million increase to SJG's SBC, effective September 1, 2003. This approval increases the current annual recovery level of $6.7 million to $13.4 million. Also in August 2002, SJG filed a petition with the BPU to transfer its appliance service business from the regulated utility into a newly created unregulated company. As filed, the newly created company would have the flexibility to be more responsive to competition and customer needs by expanding and modifying its service offerings in an unregulated environment. 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 cost revenues. 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 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 SJG's price increase on a provisional basis, subject to refund with interest, effective September 1, 2003. -14- In August 2003, SJG filed a base rate case with the BPU to increase its base rate to obtain a certain level of return on its investment of capital. SJG expects the rate case to be concluded during 2004. SJG has not sought a base rate increase from the BPU since the implementation of its base rate case approval in January 1997. Filings and petitions described above are still pending unless otherwise indicated. Additional discussion concerning Regulatory Actions can be found in Note 2 to the Financial Statements. Environmental Remediation: - ------------------------- We incurred and recorded costs for environmental clean up of sites where SJG or its predecessors operated manufactured gas plants (MGP). SJG stopped manufacturing gas in the 1950s. We successfully entered into settlements with all of SJG's historic comprehensive general liability carriers regarding environmental remediation expenditures at former MGP sites. As part of these settlements, SJG purchased an insurance policy that caps its remediation expenditures at 11 of these sites. The insurance policy is in force until 2024 at 10 sites and until 2029 at one site. We believe that all costs incurred net of insurance recoveries relating to the MGP sites will be recovered through rates under SJG's Remediation Adjustment Clause (RAC). The RAC currently permits SJG to recover incurred costs in equal installments over 7-year periods with carrying costs. As of December 31, 2003, SJG has $4.1 million of remediation costs not yet recovered through rates. Other matters are incorporated by reference to 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). Mandatorily Redeemable Preferred Securities SJG's statutory trust affiliate, SJG Capital Trust, had issued $35 million of 8.35% SJG-Guaranteed Mandatorily Redeemable Preferred Securities. The securities traded on the New York Stock Exchange under the symbol SJI.T until being redeemed in November 2003. 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, 2003, 102,563 SJG residential customers chose a natural gas commodity supplier other than the utility. This number increased from 88,219 at December 31, 2002 as marketers were able to offer natural gas at prices competitive with those available under regulated utility tariffs. Customers purchasing natural gas from providers other than 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 SJG's 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. -15- Results of Operations Operating Revenues: - ------------------ Revenues increased $110.8 million compared with the prior year. This increase was primarily due to four factors. First, weather was 12.5% colder than last year. Second, Off-System Sales revenues increased significantly as a direct result of higher prices for natural gas sold in 2003 than in the prior year. 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 Recent 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. Revenues decreased $58.2 million in 2002 compared with 2001. The decrease was primarily due to the migration of residential customers from firm gas sales to transportation, lower revenue from Off-System Sales and weather in 2002 that was 2.6% warmer than 2001. These factors more than offset the revenue increase derived from adding 8,366 customers in 2002, the largest increase in more than a decade. During 2002, the number of residential customers who purchased natural gas from third-party marketers increased by 121% as those marketers were able to offer competitive gas prices in 2002 in comparison with SJG's prices. 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 2003 was 12.5% colder than in 2002 and 3.8% colder than the 20-year TAC average. Weather in 2002 was 2.6% warmer than 2001 and 7.8% warmer for the year than the 20-year TAC average. Total gas throughput increased 3.4% to 125.0 billion cubic feet (Bcf) in 2003. The higher throughput was primarily due to the addition of 8,188 customers and colder weather experienced in 2003. Total gas throughput increased 11.0% to 120.9 Bcf in 2002. The higher throughput was almost entirely due to increased capacity release throughput. Warm weather in 2002 resulted in reduced demand for natural gas and the need for pipeline capacity to transport that gas. Consequently, SJG had more capacity available to sell in 2002 than 2001. Gas Purchased for Resale: - ------------------------ Gas purchased for resale increased $98.4 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 $6.46 per decatherm (dt) compared with $4.29/dt in 2002 and $6.54/dt in 2001. Unlike gas costs associated with Off-System Sales, changes in the unit cost of gas sold to utility ratepayers do not directly affect cost of gas sold. We defer fluctuations in gas costs to ratepayers not reflected in current rates to future periods under a BPU-approved Basic Gas Supply Service (BGSS) price structure, formerly known as the Levelized Gas Adjustment Clause. As described under Recent Regulatory Actions, the BPU approved two increases to SJG's BGSS clause during 2003 resulting in higher cost of gas sold and related revenue. SJG's cost of gas sold decreased $61.4 million in 2002 compared with 2001. Lower gas costs and sales volumes for both local distribution and Off-System Sales were responsible for the decrease. SJG passed lower gas costs on to local distribution customers through a $17.6 million refund in 2002. Warmer weather and the migration of customer gas purchases from the utility to third-party marketers were the main causes of lower sales volumes. -16- 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. Operations: - ---------- A summary of net changes in operations (in thousands): 2003 vs. 2002 2002 vs. 2001 ------------- ------------- Other Production Expense $ 36 $ 47 Transmission 59 30 Distribution (114) 590 Customer Accounts and Services 1,427 1,889 Sales 139 90 Administration and General 4,224 398 ----------- ----------- Total Operations $ 5,771 $ 3,044 =========== =========== Distribution expenses decreased in 2003 as internal labor costs were directed more toward capital improvement activities as compared with last year. Distribution expenses increased in 2002 as the cost to maintain the utility distribution system, inclusive of implementation of new federally mandated training programs, increased over 2001. Customer Accounts and Services expense increased significantly in 2003 as a result of the BPU-approved increase in SJG's Societal Benefits Clause (SBC) in August 2003 (See Recent Regulatory Actions). With this approval, recoveries and a corresponding charge to expense for previously deferred costs under SJG's New Jersey Clean Energy Programs increased by $1.8 million in 2003 when compared with 2002. 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. This increase was partially offset by lower bad debt expense in 2003 as SJG's reserve for bad debts did not require an increase as it had in 2002. Customer Accounts and Services expense increased significantly in 2002 primarily due to higher bad debt expense as customer account write-offs rose and SJG increased its reserve for bad debts. The higher write-off level was attributable to the unusually cold 2000-2001 winter season. In addition, the colder start to the 2002-2003 winter season resulted in the need to increase the reserve for future uncollectible account balances. Administrative and General (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 nearly $1.7 million from 2002 to 2003 as the cost of providing such benefits continues to increase at alarming rates. Additionally, declines in long-term interest rates resulted in an unfavorable movement in actuarially determined benefit costs (See Note 10 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. Finally, SJG had incurred higher annual expense associated with incentive compensation awards and additional expense associated with establishing committed bank facilities in 2003 (See Liquidity and Capital Resources). A&G expenses also increased in 2002 compared with 2001 primarily as a result of increasing health care and pension costs. These increases were partially offset by the decrease in SJG's insurance claims reserve as previously discussed. -17- Other Operating Expenses: A summary of principal changes in other operating expenses (in thousands): 2003 vs. 2002 2002 vs. 2001 ------------- ------------- Maintenance $ (423) $ (1,670) Depreciation 1,313 1,214 Energy and Other Taxes 1,150 180 Maintenance expense decreased in both 2003 and 2002 primarily due to lower levels of Remediation Adjustment Clause (RAC) amortization. RAC-related expenses do not affect earnings as an offsetting amount is recognized in revenues. Depreciation was higher due to SJG's increased investment in property, plant and equipment. The increase in Energy and Other Taxes relate 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 2002 compared with 2003 and 2001 due to a pre-tax gain of $686,000 on the sale of stock received as a result of the demutualization of Prudential's mutual life insurance company. Both 2002 and 2001 were negatively impacted by negative returns on our available-for-sale securities. Interest Charges: - ---------------- Interest charges decreased in both 2003 and 2002 compared with the prior year due primarily to reductions in short-term rates on line of credit borrowings and the refunding of higher priced, fixed rate, long-term debt with lower cost debt. These refundings were financed during the second half of 2003 with long-term debt issuances under our Medium Term Note program at significantly lower interest rates compared with the previous long-term interest rates. 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. The loss in 2001 was primarily due to the cost associated with discontinuing these activities. Additional losses in 2002 were the result of reevaluating the reserve for future cost necessary to complete the exit of this segment of operations and recognizing that additional future costs will be incurred. Net Income Applicable to Common Stock: - ------------------------------------- Net income increased $3.4 million, or 14.6%, to $26.6 million in 2003 as compared with $23.2 million in 2002. Net income in 2002 increased $1.9 million, or 8.8%, as compared with $21.3 million in 2001. Reasons for the increases in net income in 2003 and 2002 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. -18- We first seek to meet liquidity needs with net cash provided by operating activities. Net cash provided by operating activities totaled $79.3 million, $72.6 million and $15.1 million in 2003, 2002 and 2001, 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 utilize short-term borrowings under lines of credit from commercial banks to supplement cash from operations where necessary. Bank credit available to SJG totaled $176.0 million at December 31, 2003, of which $87.2 million was used. Those bank facilities consist of a $100.0 million, 3-year revolving credit and $76.0 million of uncommitted bank lines. The revolving credits were established in August 2003 with a syndicate of banks to enhance the liquidity position of SJG. 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 business' future liquidity needs. SJG supplements its operating cash flow and credit lines with both debt and equity capital. Over the years, SJG has used long-term debt, primarily in the form of First Mortgage Bonds, to finance its long-term borrowing needs. These needs are primarily capital expenditures for property, plant and equipment. Since 1998, SJG has financed these needs via a 3-year Medium Term Note (MTN) program, secured in similar fashion to the First Mortgage Bonds. SJG's registration of a $150.0 million MTN program with the Securities and Exchange Commission became effective in December 2002. This program replaced the previous $100.0 million MTN program that was fully used in 2001. In July 2003, SJG issued $85.5 million of long-term debt under the program. In September, SJG issued an additional $24.5 million of MTNs. Consequently, $40.0 million of the MTN program remains available for future debt issuances. Proceeds of the July and September issues were used to refinance short-term debt outstanding under commercial bank lines and for the redemption of certain high-rate First Mortgage Bonds. Current maturities on long-term debt over the next five years are $5.3 million per year in 2004 through 2007 and $3.0 million in 2008. SJI contributed $20.0 million, $2.5 million and $7.0 million of capital to SJG during 2003, 2002 and 2001, respectively. Contributions of capital are credited to Other Paid-in Capital and Premium on Common Stock. Capital Expenditures, Commitments and Contingencies Capital Expenditures: - -------------------- SJG has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment and for environmental remediation costs. Net construction and remediation expenditures for 2003 amounted to $51.8 million. We estimate the net costs for 2004, 2005 and 2006 at approximately $67.8 million, $54.9 million and $50.5 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, 2003 average $45.0 million annually and total $251.6 million over the contracts' lives. Approximately 14% 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. 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. -19-
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 $ 269,054 $ 5,273 $ 10,546 $ 8,270 $ 244,965 Operating Leases 952 405 431 85 31 Construction Obligations 3,857 3,857 - - - Commodity Supply Purchase Obligations 251,600 44,500 80,700 70,400 56,000 Other Purchase Obligations 1,785 1,082 703 - - ----------- ----------- ----------- ----------- ----------- Total Contractual Cash Obligations $ 527,248 $ 55,117 $ 92,380 $ 78,755 $ 300,996 =========== =========== =========== =========== ===========
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 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. Market Risks Commodity Market Risks: - ---------------------- SJG is a regulated utility. As such, we recover gas commodity costs under the Basic Gas Supply Service Clause that is part of our tariff. While SJG is protected from gas cost fluctuations by the clause, we do not utilize forward contracts to shield our customers from gas cost fluctuations. 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, 2003 was $87.2 million and averaged $89.0 million during 2003. The months where outstanding variable rate debt was at its highest and lowest points were January at $155.3 million and October at $27.1 million. A hypothetical 100 basis point (1%) increase in interest rates on our average variable rate debt outstanding would result in a $525,000 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: 2003 - 31 b.p. decrease; 2002 - 74 b.p. decrease; 2001 - 383 b.p. decrease; 2000 - 83 b.p. increase; and 1999 - 81 b.p. increase. For December 2003, our average interest rate on variable rate debt was 1.86%. Consequently, the interest rate reduction experienced since the beginning of 2001 cannot be duplicated. To reduce exposure to an interest rate increase on our variable rate debt, SJG entered into an interest rate swap agreement that became effective in June 2003, which fixed the rate on $20.0 million of variable rate debt through May 2004 at 2.24%. 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 prepaid, at par, $3.0 million of 8.6% debenture notes in February 2003. In May 2003, SJG redeemed an additional $5.1 million of 10.25% First Mortgage Bonds prior to scheduled maturity. SJG paid a premium of $110,000 to redeem that issue. In October 2003, SJG redeemed in full its 6.95% First Mortgage Bonds prior to scheduled maturity. To redeem the $31.9 million of outstanding bonds, SJG paid a premium of $1.0 million. -20- 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, -------------------------------------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- 3.3x 2.9x 2.6x 2.6x 2.5x 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 7A. Quantitative and Qualitative Disclosures About Market Risks -------------------------------------------------------------------- Information required by this item is incorporated by reference to the section entitled "Market Risks" in Item 7 on page 20 of this Form 10-K. -21- Item 8. Financial Statements and Supplementary Data --------------------------------------------------- INDEPENDENT AUDITORS' REPORT To the Shareholder and Board of Directors of South Jersey Gas Company: We have audited the balance sheets of South Jersey Gas Company as of December 31, 2003 and 2002, and the related statements of income, common equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15(a)2. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of South Jersey Gas Company as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, 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 consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania February 18, 2004 -22-
SOUTH JERSEY GAS COMPANY STATEMENTS OF INCOME - ----------------------------------------------------------------------------------------------------------------------------- (In Thousands) Year Ended December 31, ------------------------------------------------- 2003 2002 2001 ------------------------------------------------- Operating Revenues (Notes 1, 2 & 3) $528,066 $417,263 $475,461 -------------- -------------- -------------- Operating Expenses: Gas Purchased for Resale 372,851 274,405 335,783 Operations 48,729 42,958 39,914 Maintenance 5,678 6,101 7,771 Depreciation (Note 1) 23,663 22,350 21,136 Energy and Other Taxes (Notes 1 & 5) 11,725 10,575 10,395 -------------- -------------- -------------- Total Operating Expenses 462,646 356,389 414,999 -------------- -------------- -------------- Operating Income 65,420 60,874 60,462 Other Income and Expense 111 333 (54) Interest Charges 19,304 20,613 23,188 -------------- -------------- -------------- Income Before Income Taxes 46,227 40,594 37,220 Income Taxes (Notes 1, 5 & 6) 19,619 17,372 15,693 -------------- -------------- -------------- Income from Continuing Operations 26,608 23,222 21,527 Loss from Discontinued Operations - Net (Note 12) - (29) (207) -------------- -------------- -------------- Net Income Applicable to Common Stock $ 26,608 $ 23,193 $ 21,320 ============== ============== ============== The accompanying footnotes are an integral part of the financial statements.
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SOUTH JERSEY GAS COMPANY STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------------------------------------------------- (In Thousands) Year Ended December 31, -------------------------------------------- 2003 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Income Applicable to Common Stock $ 26,608 $ 23,193 $ 21,320 Adjustments to Reconcile Net Income to Cash Flows Provided by Operating Activities: Depreciation and Amortization 26,627 24,730 23,407 Provision for Losses on Accounts Receivable 3,084 3,664 2,067 Revenues and Fuel Costs Deferred - Net 29,874 6,788 (9,202) Deferred and Non-Current Income Taxes and Credits - Net 1,225 11,096 5,154 Environmental Remediation Costs - Net 2,323 6,361 5,643 Additional Pension Contributions (5,200) (15,851) (190) Changes in: Accounts Receivable 6,854 (20,569) 38,337 Inventories (18,065) 18,670 (27,790) Prepayments and Other Current Assets 1,118 (636) (159) Prepaid and Accrued Taxes - Net 4,888 3,518 1,772 Accounts Payable and Other Accrued Liabilities 515 11,977 (47,146) Other - Net (531) (381) 1,868 ------------- -------------- ------------- Net Cash Provided by Operating Activities 79,320 72,560 15,081 ------------- -------------- ------------- Cash Flows from Investing Activities: Return of Investment in Affiliate 1,082 - - Capital Expenditures, Cost of Removal and Salvage (54,100) (50,677) (48,720) Purchase of Available-for-Sale Securities (339) (693) (766) ------------- -------------- ------------- Net Cash Used in Investing Activities (53,357) (51,370) (49,486) ------------- -------------- ------------- Cash Flows from Financing Activities: Net (Repayments of) Borrowing from Lines of Credit (66,700) 18,400 21,600 Proceeds from Issuance of Long-Term Debt 110,000 - 35,000 Principal Repayments of Long-Term Debt (86,740) (30,268) (11,877) Premium on Acquisiton of Debt (1,048) (617) - Dividends on Common Stock - (10,700) (17,501) Payments for Issuance of Long-Term Debt (1,845) (201) (1,256) Additional Investment by Shareholder 20,000 2,500 7,000 ------------- -------------- ------------- Net Cash (Used in) Provided by Financing Activities (26,333) (20,886) 32,966 ------------- -------------- ------------- Net (Decrease) Increase in Cash and Cash Equivalents (370) 304 (1,439) Cash and Cash Equivalents at Beginning of Period 3,580 3,276 4,715 ------------- -------------- ------------- Cash and Cash Equivalents at End of Period $ 3,210 $ 3,580 $ 3,276 ============= ============== ============= Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest (Net of Amounts Applicable to LGAC/BGSS Overcollections and Amounts Capitalized) $ 19,805 $ 23,710 $ 26,268 Income Taxes (Net of Refunds) $ 14,060 $ 4,779 $ 5,886 The accompanying footnotes are an integral part of the financial statements.
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SOUTH JERSEY GAS COMPANY BALANCE SHEETS - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) December 31, ------------------------------- 2003 2002 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS Property, Plant and Equipment: (Notes 1, 3 & 7) Utility Plant, at original cost $ 894,654 $ 846,865 Accumulated Depreciation (209,831) (195,379) -------------- ------------- Property, Plant and Equipment - Net 684,823 651,486 -------------- ------------- Investments: Available-for-Sale Securities 4,497 3,407 Investment in Affiliate - 1,082 -------------- ------------- Total Investments 4,497 4,489 -------------- ------------- Current Assets: Cash and Cash Equivalents (Notes 1 & 9) 3,210 3,580 Accounts Receivable (Notes 2 & 3) 48,412 61,845 Unbilled Revenues (Note 1) 31,070 27,570 Provision for Uncollectibles (3,263) (3,258) Natural Gas in Storage, average cost 59,432 40,769 Materials and Supplies, average cost 3,559 4,157 Prepaid Taxes (Note 1) 2,661 2,440 Prepaid Pension (Note 11) 18,206 - Other Prepayments and Current Assets 2,317 3,435 -------------- ------------- Total Current Assets 165,604 140,538 -------------- ------------- Regulatory Assets: (Note 1) Environmental Remediation Costs: (Notes 2 & 14) Expended - Net 4,147 6,470 Liability for Future Expenditures 50,983 48,211 Gross Receipts and Franchise Taxes (Note 6) 1,367 1,811 Income Taxes - Flowthrough Depreciation (Note 6) 7,619 8,597 Deferred Fuel Cost - Net (Notes 1 & 2) 1,720 31,594 Deferred Postretirement Benefit Costs (Note 11) 3,402 3,780 Societal Benefit Costs (Notes 1 & 2) 7,529 5,956 Other Regulatory Assets 732 494 -------------- ------------- Total Regulatory Assets 77,499 106,913 -------------- ------------- Other Non-Current Assets: Unamortized Debt Discount and Expense (Note 7) 6,383 5,660 Accounts Receivable - Merchandise 4,671 1,776 Other 2,805 5,538 -------------- ------------- Total Other Non-Current Assets 13,859 12,974 -------------- ------------- Total Assets $ 946,282 $ 916,400 ============== ============= The accompanying footnotes are an integral part of the financial statements.
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SOUTH JERSEY GAS COMPANY BALANCE SHEETS - ---------------------------------------------------------------------------------------------------------------------------- December 31, ------------------------------- 2003 2002 - ---------------------------------------------------------------------------------------------------------------------------- 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 155,317 135,317 Accumulated Other Comprehensive Income (Loss) 279 (8,689) Retained Earnings 108,356 81,748 -------------- ------------- Total Common Equity 269,800 214,224 -------------- ------------- 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) 263,781 235,098 -------------- ------------- Total Capitalization 535,271 451,012 -------------- ------------- Current Liabilities: Notes Payable (Note 9) 87,200 153,900 Current Maturities of Long-Term Debt (Note 7) 5,273 10,696 Accounts Payable (Note 3) 40,954 43,066 Deferred Income Taxes - Net (Note 5) 6,694 19,844 Customer Deposits 7,957 6,924 Environmental Remediation Costs (Note 14) 7,630 4,852 Taxes Accrued (Note 2) 9,321 4,212 Derivatives 7 142 Interest Accrued and Other Current Liabilities 9,414 7,820 -------------- ------------- Total Current Liabilities 174,450 251,456 -------------- ------------- Deferred Credits and Other Non-Current Liabilities: Deferred Income Taxes - Net (Note 5) 118,894 98,537 Environmental Remediation Costs (Note 14) 43,353 43,359 Regulatory Liabilities (Note 1) 49,880 3,133 Asset Retirement Obligation (Note 1) - 41,434 Pension and Other Postretirement Benefits (Note 11) 11,336 14,205 Investment Tax Credits (Note 9) 3,471 3,819 Other 9,627 9,445 -------------- ------------- Total Deferred Credits and Other Non-Current Liabilities 236,561 213,932 -------------- ------------- Total Capitalization and Liabilities $ 946,282 $ 916,400 ============== ============= The accompanying footnotes are an integral part of the financial statements.
-26- SOUTH JERSEY GAS COMPANY STATEMENTS OF COMMON STOCK 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, 2000 $ 5,848 $ 125,817 $ - $ 65,435 $ 197,100 Net Income Applicable to Common Stock 21,320 21,320 Other Comprehensive Loss, Net of Tax:* Minimum Pension Liability Adjustment (1,939) (1,939) ------------- Other Comprehensive Loss, Net of Tax* (1,939) ------------- Comprehensive Income 19,381 Additional Investment by Shareholder 7,000 7,000 Cash Dividends Declared - Common Stock (17,500) (17,500) - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 5,848 132,817 (1,939) 69,255 205,981 Net Income Applicable to Common Stock 3,193 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) ------------- Other Comprehensive Loss, Net of Tax* (6,750) ------------- 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 80 80 Unrealized Gain on Derivatives 432 432 ------------- Other Comprehensive Income, Net of Tax* 8,968 ------------- 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 - ------------------------------------------------------------------------------------------------------------------------- *Determined using a combined statutory tax rate of 40.85%.
-27- 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). SJG reclassified some previously reported amounts to conform with current year classifications. Equity Investments - We classify equity investments purchased as long-term investments as Available-for-Sale Securities on our balance sheets and carry them at their fair value with any changes in unrealized gains or losses included in Other Comprehensive Income (Loss). Estimates and Assumptions - We prepare our financial statements to conform with generally accepted accounting principles. Management makes estimates and assumptions that affect the amounts reported in the financial statements and related disclosures. Therefore, actual results could differ from those estimates. Regulation - SJG is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU). We maintain our accounts according to the BPU's prescribed Uniform System of Accounts (See Note 2). SJG follows the accounting for regulated enterprises prescribed by the Financial Accounting Standards Board (FASB) Statement No. 71, "Accounting for the Effects of Certain Types of Regulation." In general, Statement No. 71 allows deferral of certain costs and creation of certain obligations when it is probable that such items will be recovered from or refunded to customers in future periods. Operating Revenues - We bill customers monthly for gas deliveries. For retail customers not billed at the end of each month, an accrual is made to recognize unbilled revenues from the date of the last meter reading to the end of the month. We defer and recognize revenues related to our appliance service contracts over the full 12-month term of the contract as earned. The BPU allows SJG to recover gas costs through the Basic Gas Supply Service (BGSS) clause. The BGSS-approved price structure replaced the Levelized Gas Adjustment Clause (LGAC) pricing structure. 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 based on SJG's approved return on rate base (See Note 2). Our tariff also includes a Temperature Adjustment Clause (TAC), a Remediation Adjustment Clause (RAC) and a New Jersey Clean Energy Program (CLEP). Our TAC reduces the impact of temperature fluctuations on the Company and our customers. The RAC recovers remediation costs of former gas manufacturing plants and the CLEP recovers costs associated with our energy efficiency and renewable energy programs. 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). CLEP adjustments are also deferred and do not affect earnings, as these costs are recovered through rates on an ongoing basis. -28- Property, Plant & Equipment - For regulatory purposes, utility plant is stated at original cost. The cost of adding, replacing and renewing property is charged to the appropriate plant account. The Utility Plant balances as of December 31, 2003 and 2002 were comprised of the following: Thousands of Dollars 2003 2002 -------------- ------------ Utility Plant: Production Plant $ 302 $ 302 Storage Plant 11,013 10,885 Transmission Plant 105,173 99,708 Distribution Plant 741,441 701,639 General Plant 30,977 28,890 Intangible Plant 1,856 1,856 ------------- ------------- Utility Plant in Service 890,762 843,280 Construction Work in Progress 3,892 3,585 ------------- ------------- Total Utility Plant $ 894,654 $ 846,865 =============================== Depreciation and Amortization - We depreciate utility plant on a straight-line basis over the estimated remaining lives of the various property classes. We periodically review and adjust these estimates as required after BPU approval. The composite annual rate for all depreciable utility property was approximately 2.9% in both 2003 and 2002, and 2.8% in 2001. Except for extraordinary retirements, accumulated depreciation is charged with the cost of depreciable utility property retired, less salvage (See New Accounting Pronouncements). Capitalized Interest - SJG capitalizes interest on construction at its BPU-approved rate of return on rate base (See Note 2). SJG's capitalized interest totaled $0.6 million in 2003, $0.4 million in 2002 and $0.2 million in 2001. 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 2003, 2002 and 2001, no such circumstances were identified. Derivative Instruments and Hedge Accounting - Effective January 1, 2001, SJG adopted FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This statement establishes accounting and reporting standards for derivative instruments, including those embedded in other contracts, and for hedging activities. It requires that all derivatives, whether designated as hedging relationships or not, must be recorded on the balance sheet at fair value 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. No commodity related activities of SJG are considered subject to the fair value recognition requirements of Statement No. 133, as amended. 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. -29- We entered into this interest rate swap agreement 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 swap agreements is accrued as interest rates change and is recognized as an adjustment to interest expense. We account for this interest rate swap as cash flow hedge. As of December 31, 2003 and 2002, the market value of swaps was $7,000 and $142,000, respectively, which represents the amount we would have to pay the counterparty to terminate the contracts. We included these balances on the balance sheets under the caption Derivatives. As of December 31, 2003 and 2002, we calculated the swaps to be highly effective; therefore, we recorded the offset to the hedge liability, net of taxes, in Accumulated Other Comprehensive Income (Loss). We determined the fair value of the interest rate swap agreements using quotations from independent parties. We have also identified other 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 purchases and normal sales exception and, therefore, are not required to be marked to market. New Accounting Pronouncements - 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 SJG's current accounting practices is required related to these agreements. SJG recovers certain asset retirement costs through rates charged to customers as an approved component of depreciation expense. As of December 31, 2002, SJG had accrued amounts in excess of actual removal costs incurred totaling $41.4 million which we reclassified from Accumulated Depreciation to Asset Retirement Obligation on the balance sheets. As of December 31, 2003, SJG had accrued amounts in excess of actual removal costs incurred totaling $45.2 million which, in accordance with Statement No. 143, we reclassified to Regulatory Liabilities on the balance sheets. The adoption of this statement did not affect SJG's results of operations. In January 2003, the FASB issued Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Management has evaluated the impact of adopting FIN 46 and has determined that SJG Capital Trust, which was established for the sole purpose of issuing $35 million of mandatorily redeemable preferred securities, could no longer be consolidated into SJI's financial statements effective July 1, 2003. These securities were redeemed in November 2003. Prior periods were restated to report the original equity investment amount in SJG Capital Trust as a separate $1.1 million investment in an affiliate and the $36.1 million subordinated debenture to SJG Capital Trust as debt on its balance sheet rather than the $35 million of mandatorily redeemable preferred securities as previously reported. The adoption of FIN 46 did not impact SJG's net income or retained earnings for the periods reported. In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which is effective for certain contracts entered into or modified and for hedging relationships designated after June 30, 2003. The amendments set forth in Statement No. 149 require that certain contracts with comparable characteristics be accounted for similarly. We have determined there is no impact on our financial statements from the provisions of this statement. -30- In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." Statement No. 150 requires that certain types of financial instruments be reported as liabilities by their issuers. We adopted Statement No. 150 effective June 1, 2003. The adoption of this statement had no impact on our financial position or results of operation. 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 without a return on investments over the following periods: Years Remaining Regulatory Asset As of December 31, 2003 ---------------- ----------------------- Environmental Remediation Costs: Expended - Net 7 Liability for Future Expenditures Not Applicable Gross Receipts and Franchise Taxes 3 Income Taxes - Flowthrough Depreciation 8 Deferred Fuel Costs - Net Various Deferred Postretirement Benefit Costs 9 Societal Benefit Costs Various The majority of the assets reflected under the caption Other Regulatory Assets are currently being recovered or are subject to filings with the BPU requesting recovery. Management believes that all such deferred costs are probable of recovery from ratepayers through future utility rates. Regulatory Liabilities at December 31, 2003 and 2002 consisted of the following items: Thousands of Dollars 2003 2002 ----------- ----------- Excess Plant Removal Costs $ 45,241 $ - Overcollected State Taxes 4,353 2,847 Other 286 286 ----------- ----------- Total Regulatory Liabilities $ 49,880 $ 3,133 =========== =========== Excess Plant Removal Costs represent amounts accrued in excess of actual utility plant removal costs incurred to date (See New Accounting Pronouncements). All other amounts are subject to being returned to ratepayers in future rate proceedings. Statements of Cash Flows - For purposes of reporting cash flows, highly liquid investments with original maturities of three months or less are considered cash equivalents. 2. REGULATORY ACTIONS: - --------------------- In January 1997, the BPU granted SJG rate relief, which was predicated in part, upon a 9.62% rate of return on rate base, which included an 11.25% return on common equity. This rate relief provides for the recovery of cost of service, including deferred costs, through base rates. Additionally, our threshold for sharing pre-tax margins generated by interruptible and off-system sales and transportation increased. Currently, we keep 100% of pre-tax margins up to the -31- threshold level of $7.8 million. The next $750,000 is credited to customers through the Basic Gas Supply Service (BGSS) clause. Thereafter, we keep 20% of the pre-tax margins as we have historically. 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, 2003, 102,563 of our 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 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 November 2001, SJG filed for a $2.7 million rate increase to recover the cash related to a prior net deficiency in the Temperature Adjustment Clause (TAC). Additionally, in September 2002, we filed for an $8.6 million rate increase to recover the cash related to a TAC deficiency resulting from warmer-than-normal weather for the 2001-2002 winter. 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. 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%. As of December 31, 2003, the remaining deferred underrecovered balance totaled $16.1 million. During 2002, the BPU convened a gas policy group to address BGSS, which is the gas supply service being provided by the natural gas utility. In December 2002, the BPU approved the proposed BGSS price structure. The BGSS-approved price structure replaced the Levelized Gas Adjustment Clause (LGAC) pricing structure. The LGAC was structured to reset gas charges to consumers once per year. The BGSS resets gas prices monthly for larger customers, and for smaller customers permits multiple resets each year, if certain conditions are met. With the implementation of BGSS in March 2003, customers can make more informed decisions about choosing an alternate supplier by having a utility pricing structure that more currently reflects market conditions. Further, BGSS provides us with more pricing flexibility, through self-implementing rate changes under certain conditions and limitations, conceptually resulting in the reduction of over/under-recoveries. LGAC-related mechanisms, such as deferred accounting treatment, the sharing of pre-tax margins generated by interruptible and off-system sales and transportation, and the allowance for full recovery of prudently incurred natural gas costs, remain in place under BGSS. In August 2002, SJG filed for a Societal Benefits Clause (SBC) rate increase. The SBC recovers costs related to BPU-mandated programs and environmental remediation costs that are recovered through our Remediation Adjustment Clause; energy efficiency and renewable energy program costs that are recovered through our New Jersey Clean Energy Programs; consumer education program costs; and the interim low income program costs. In August 2003, the BPU approved a $6.7 million increase to our SBC, effective September 1, 2003. This approval increases the current annual recovery level of $6.7 million to $13.4 million. Also in August 2002, SJG filed a petition with the BPU to transfer its appliance service business from the regulated utility into a newly created unregulated company. As filed, the newly created company would have the flexibility to be more responsive to competition and customer needs by expanding and modifying its service offerings in an unregulated environment. -32- 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, we 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 Lifeline budget of $72.0 million. Recovery rates for both programs were implemented on August 1, 2003. In July 2003, SJG made its annual BGSS filing, as amended, with the BPU. Due to further price increases in the wholesale market, we filed for a $24.0 million increase to our 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 August 2003, SJG filed a base rate case with the BPU to increase its base rate to obtain a certain level of return on its investment of capital. We expect the rate case to be concluded during 2004. We have not sought a base rate increase from the BPU since the implementation of its base rate case approval in January 1997. 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 $25.9 million, $14.0 million and $7.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. The amounts due from SJE relating to these sales were $0.8 million, $3.6 million and $1.0 million at December 31, 2003, 2002 and 2001, respectively. Sales to SJRG were approximately $12.8 million, $17.0 million and $23.0 million for the years ended December 31, 2003, 2002 and 2001, respectively. The amounts due from SJRG relating to these sales were $ -0-, $4.1 million and $3.4 million at December 31, 2003, 2002 and 2001, respectively. We also meet some of our gas purchasing requirements by purchasing natural gas for resale from SJRG. Such purchases were approximately $20.5 million, $11.7 million and $28.8 million for the years ended December 31, 2003, 2002 and 2001, respectively. Additionally, SJG purchased gas storage services from SJRG totaling approximately $0.2 million and $0.6 million for the years ended December 31, 2003 and 2002, respectively. The amounts due to SJRG relating to gas purchases and storage services were approximately $ -0-, $2.3 million and $1.5 million at December 31, 2003, 2002 and 2001, respectively. In 2003, SJG also provided transportation services to Marina Energy, LLC. Sales for these services were $71,000 and the amount due at December 31, 2003 relating to such services was $48,000. As of December 31, 2003 and 2002, income taxes due to SJI were approximately $2.8 million and $3.7 million, 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 -33- 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 2003 2002 2001 ----------- ----------- ------------ Tax at Statutory Rate $ 16,319 $ 14,208 $ 13,027 Increase (Decrease) Resulting from: State Income Taxes 3,137 2,847 2,367 Amortization of Investment Tax Credit (347) (347) (347) Tax Depreciation under Book Depreciation on Utility Plant 664 664 664 Other - Net (154) - (18) ----------- ----------- ----------- Income Taxes: Continuing Operations 19,619 17,372 15,693 Discontinued Operations - (21) (144) ----------- ----------- ----------- Net Income Taxes $ 19,619 $ 17,351 $ 15,549 =========== =========== =========== The provision for Income Taxes is comprised of the following: Thousands of Dollars 2003 2002 2001 ----------- ----------- ----------- Current: Federal $ 12,143 $ 3,152 $ 7,332 State 6,251 3,124 3,206 ----------- ---------- ---------- Total Current 18,394 6,276 10,538 ----------- ---------- --------- Deferred: Federal - Excess of Tax Depreciation Over Book Depreciation - Net 10,752 9,609 4,659 Deferred Fuel Costs - Net (10,446) (3,728) 794 Environmental Costs - Net (184) (1,494) (1,852) Alternative Minimum Tax 1,332 (66) 1,947 Prepaid Pension 1,496 5,343 - Deferred Regulatory Costs 750 1,543 175 Other - Net (703) (1,021) (657) State (1,425) 1,257 436 ----------- ----------- ----------- Total Deferred 1,572 11,443 5,502 Investment Tax Credit (347) (347) (347) ----------- ----------- ----------- Income Taxes: Continuing Operations 19,619 17,372 15,693 Discontinued Operations - (21) (144) ----------- ----------- ----------- Net Income Taxes $ 19,619 $ 17,351 $ 15,549 =========== =========== ===========
-34- 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 2003 2002 ----------- ------------ Current: Deferred Fuel Costs - Net $ 7,236 $ 20,368 Other (542) (524) ----------- ----------- Current Deferred Tax Liability - Net 6,694 19,844 ----------- ----------- Non-Current: Book Versus Tax Basis of Property 110,994 100,227 Prepaid Pension 7,138 6,716 Environmental 1,642 1,855 Deferred Regulatory Costs 4,687 3,873 Minimum Pension Liability - (5,840) Deferred State Tax (2,146) (2,664) Investment Tax Credit Basis Gross Up (1,891) (2,070) Alternative Minimum Tax - (1,398) Other (1,530) (2,162) ----------- ----------- Non-Current Deferred Tax Liability - Net 118,894 98,537 ----------- ----------- $ 125,588 $ 118,381 =========== =========== As of December 31, 2003 and 2002, income taxes due to SJI were approximately $2.8 million and $3.7 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. The Investment Tax Credit was deferred and continues to be amortized at the annual rate of 3%, which approximates the life of related assets. 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. -35- 7. LONG-TERM DEBT: (A) - ----------------- Principal Outstanding December 31, (In Thousands) 2003 2002 ------ ------ First Mortgage Bonds: (B) 8.19% Series due 2007 $ 9,089 $ 11,362 10.25% Series due 2008 (C) - 7,385 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 6.95% Series due 2013 (C) - 35,000 7.7% Series due 2015 15,000 15,000 6.50% Series due 2016 9,965 9,965 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 4.46% Series due 1013 (D) 10,500 - 5.027% Series due 2013 (D) 14,500 - 4.52% Series due 2014 (D) 11,000 - 5.115% Series due 2014 (D) 10,000 - 4.60% Series due 2016 (D) 17,000 - 4.657% Series due 2017 (D) 15,000 - 5.55% Series due 2033 (D) 32,000 - Unsecured Notes: Debenture Notes, 8.6% due 2010 15,000 21,000 Debenture Notes, 8.35% due 2037 (C) - 36,082 ----------- ----------- Total Long-Term Debt Outstanding 269,054 245,794 Less Current Maturities 5,273 10,696 ----------- ----------- Long-Term Debt $ 263,781 $ 235,098 =========== =========== (A) Long-term debt maturities and sinking fund requirements for the succeeding five years are as follows (in thousands): 2004, $5,273; 2005, $5,273; 2006, $5,273; 2007, $5,270; and 2008, $3,000. (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 May 1, 2003, we redeemed our 10.25% Series FMB due 2008. The premium associated with the redemption was approximately $0.1 million. On October 14, 2003, we redeemed our 6.95% Series FMB due 2013. The premium associated with the redemption was approximately $1.0 million. On November 5, 2003, we redeemed our 8.35% Debenture Notes due 2037, at par. We are seeking BPU approval to amortize the premiums and recover them from ratepayers over the terms of the new bond issues in accordance with the BPU's uniform system of accounts. (D) On July 16, 2003, we issued $85.5 million of debt under our Medium Term Note program established in 2002. On September 17, 2003, we issued an additional $24.5 million of Medium Term Notes. A remainder of $40.0 million is authorized to be issued under this program through July 31, 2005. 8. FINANCIAL INSTRUMENTS: - ------------------------ Long-Term Debt - We estimate the fair values of our long-term debt, including current maturities, as of December 31, 2003 and 2002, to be $293.6 and $297.0 million, respectively. Carrying amounts are $269.1 and $245.8 million, respectively. We base the estimates on -36- 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, 2003 and 2002. 9. UNUSED LINES OF CREDIT AND COMPENSATING BALANCES: - --------------------------------------------------- Unused lines of credit available at December 31, 2003 were $88.8 million. Borrowings under these lines of credit are at market rates. The weighted borrowing cost, which changes daily, was 1.81% and 2.28% at December 31, 2003 and 2002, 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, 2003, these restrictions did not affect the amount that may be distributed from SJG's retained earnings. We received equity infusions of $20.0 million, $2.5 million, and $7.0 million from SJI during 2003, 2002 and 2001, 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. PENSIONS & OTHER POSTRETIREMENT BENEFITS: - -------------------------------------------- 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 do not qualify for participation in the defined benefit pension plan. The other postretirement benefit plans provide health care and life insurance benefits to some retirees. In 2002, SJI changed the actuarial valuation measurement date for the pension plans from September 30 to December 31 to conform to the measurement date used for the postretirement health care plans and to better reflect the actual pension balances as of its balance sheet dates. This change had no significant effect on 2002 or prior years' pension expense. The BPU authorized us 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 $3.4 million at December 31, 2003 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 has elected to defer any financial impact resulting from the Act pending the availability of more information. As such, measures of the accumulated projected benefit obligation or net periodic postretirement benefit cost in the financial statements or accompanying notes do not reflect the effects of the Act on the plan. Furthermore, specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require changes to previously reported information. -37- Net periodic benefit cost related to the pension and other postretirement benefit insurance plans consisted of the following components:
Thousands of Dollars Pension Benefits Other Benefits 2003 2002 2001 2003 2002 2001 -------- ------- ------ ------ ------ ------ Service Cost $ 2,375 $ 2,079 $ 1,998 $ 1,421 $ 1,095 $ 1,000 Interest Cost 4,848 4,597 4,574 2,448 2,285 1,842 Expected Return on Plan Assets (4,996) (4,157) (4,932) (1,078) (1,046) (895) Amortization of Transition Obligation 87 87 87 756 756 756 Amortization of Loss (Gain) and Other 1,563 722 321 373 72 (5) -------- -------- -------- -------- -------- --------- Net Periodic Benefit Cost $ 3,877 $ 3,328 $ 2,048 $ 3,920 $ 3,162 $ 2,698 ======== ======== ======== ======== ========= =========
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 Benefits Other Benefits 2003 2002 2003 2002 ------------------------ ------------------------ Change in Benefit Obligations: Benefit Obligation at Beginning of Year $ 75,004 $ 67,624 $ 30,025 $ 27,748 Service Cost 2,375 2,079 1,421 1,095 Interest Cost 4,848 4,597 2,448 2,285 Actuarial Loss (Gain) and Other 5,437 4,571 10,556 (83) Benefits Paid (3,565) (3,867) (1,341) (1,020) ----------- ----------- ----------- ----------- Benefit Obligation at End of Year $ 84,099 $ 75,004 $ 43,109 $ 30,025 =========== =========== =========== =========== Change in Plan Assets: Fair Value of Plan Assets at Beginning of Year $ 58,204 $ 46,514 $ 13,835 $ 13,465 Actual Return on Plan Assets 12,911 (3,622) 3,336 (1,529) Employer Contributions 9,076 19,179 3,266 2,919 Benefits Paid (3,565) (3,867) (1,341) (1,020) ----------- ----------- --------- ----------- Fair Value of Plan Assets at End of Year $ 76,626 $ 58,204 $ 19,096 $ 13,835 =========== =========== =========== ============ Funded Status: $ (7,473) $ (16,800) $ (24,014) $ (16,190) Unrecognized Prior Service Cost 2,485 2,765 - - Unrecognized Net Transition Obligation - 87 6,801 7,557 Unrecognized Net Loss & Other 23,194 26,948 10,268 2,343 Prepaid (Accrued) Net Benefit Cost at End of Year $ 18,206 $ 13,000 $ (6,945) $ (6,290) =========== =========== =========== ============ Amounts Recognized in the Statement of Financial Position Consist of: Prepaid Benefit Costs $ 18,206 $ - $ - $ - Accrued Benefit Liability - (4,149) (6,945) (6,290) Intangible Asset - 2,852 - - Accumulated Other Comprehensive Income - 14,297 - - ---------- ----------- ----------- ----------- Net Amount Recognized at End of Year $ 18,206 $ 13,000 $ (6,945) $ (6,290) =========== =========== =========== ============
-38- The accumulated benefit obligation of our pension plans at December 31, 2003 and 2002 was $70 million and $62 million, respectively. At December 31, 2002, we recorded an additional minimum pension liability of $17.1 million, which is reflected in the balance sheet under the caption Pension and Other Postretirement Benefits. This liability adjustment resulted from decreases in the fair value of plan assets, which were due to the declining stock market, and increases in the benefit obligation due to decreases in the discount rates over the prior two years. 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, 2003 and 2002 was $4.2 million and $3.8 million, respectively. Additional disclosures relating to the minimum pension liability adjustments at December 31 were: Thousands of Dollars Pension Benefits Other Benefits 2003 2002 2003 2002 ------------------------------------------ The (Decrease) Increase in Minimum Liability Included in Other Comprehensive Income $ (8,456) $ 6,517 N/A N/A The weighted-average assumptions used to determine benefit obligations at December 31 were: Pension Benefits Other Benefits 2003 2002 2003 2002 ----------------------------------------- Discount Rate 6.25% 6.75% 6.25% 6.75% 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: Pension Benefits Other Benefits 2003 2002 2003 2002 ---------------------------------------- Discount Rate 6.75% 7.25% 6.75% 7.25% Expected Long-Term Return on Plan Assets 9.00% 9.00% 7.50% 7.50% Rate of Compensation Increase 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: 2003 2002 -------------------- Post-65 Medical Care Cost Trend Rate Assumed for Next Year 7.0% 7.5% Pre-65 Medical Care Cost Trend Rate Assumed for Next Year 11.5% 12.0% Dental Care Cost Trend Rate Assumed for Next Year 7.0% 7.5% 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 -39- 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 in 2003 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 $ 597 $ (850) Effect on Postretirement Benefit Obligation 6,040 (4,638) Plan Assets - SJG's weighted-average asset allocations at December 31, 2003, and 2002, by asset category are as follows: Pension Benefits Other Benefits 2003 2002 2003 2002 ------------------------------------------ Asset Category U.S. Equity Securities 47% 24% 47% 11% International Equity Securities 13 12 13 11 Fixed Income 40 64 40 78 ---- ---- ---- ---- 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 "Policy"), the long-term asset mix target considered appropriate is 60% equity and 40% 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. However, high levels of risk are to be avoided at the total fund level. This is to be accomplished through diversification by asset class, style of manager, and sector and industry limits. Specifically prohibited investments include, but are not limited to, securities of companies with less than $250 million capitalization (except in the small-cap portion of the fund where capitalization levels as low as $50 million are permissible), venture capital, margin trading and commodities. Contributions - SJG expects to make no contributions to its pension plan and contribute approximately $3 million to its other postretirement benefit plan in 2004. 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. -40- Summarized operating results of the discontinued operations were: Thousands of Dollars 2003 2002 2001 ------ ------ ------ Operating Revenues $ - $ 26 $ 1,016 ========= ========= ========= Loss before Income Taxes - (50) (351) Income Tax - 21 144 --------- --------- --------- Loss from Discontinued Operations $ - $ (29) $ (207) ========= ========= ========= Earnings Per Common Share from Discontinued Operations - Net $ 0.00 $ (0.01) $ (0.03) ========= ========= ========= 13. COMMITMENTS AND CONTINGENCIES: - --------------------------------- Construction and Environmental Commitments - Our estimated net cost of construction and environmental remediation programs for 2004 totals $67.7 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 2004. 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 $4.2 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. We also maintain insurance and record probable insurance recoveries relating to outstanding 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 sites where the Company or its predecessors operated gas manufacturing plants. 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 estimate was not reduced by projected insurance recoveries from the Cleanup Cost Cap Insurance Policy. Since the early 1980s, we accrued environmental remediation costs of $137.5 million, of which $86.6 million has been spent as of December 31, 2003. With the assistance of a consulting firm, we estimate that future costs to clean up our sites will range from $51.0 million to $162.3 million. We recorded the lower end of this range as a liability. It is reflected on the 2003 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. The first asset is titled Environmental Remediation Cost: Expended - Net. These expenditures represent what was actually spent to clean up former gas manufacturing plant sites. These costs meet the -41- requirements of FASB Statement No. 71. The BPU allows us to recover expenditures through the RAC (See Note 2). The other asset titled Environmental Remediation Cost: Liability for Future Expenditures relates to estimated future expenditures determined under the guidance of FASB Statement No. 5, "Accounting for Contingencies." We recorded this amount, which relates to former manufactured gas plant sites, as a deferred debit with the corresponding amount reflected on the balance sheets under the captions, Current Liabilities and Deferred Credits and Other Non-Current Liabilities. The deferred debit is a regulatory asset under Statement No. 71. 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, 2003, we reflected the unamortized remediation costs of $4.1 million on the balance sheet under the caption Regulatory Assets. Since implementing the RAC in 1992, we have recovered $39.8 million through rates (See Note 2). -42- 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:
-------------------------------------------------- 2003 Quarter Ended 2002 Quarter Ended -------------------------------------------------- --------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 ---------- ---------- ---------- ---------- --------- --------- --------- --------- Operating Revenues $239,936 $ 75,547 $ 58,491 $154,092 $154,183 $ 65,007 $ 51,764 $146,309 ---------- ---------- ---------- ---------- --------- --------- --------- --------- Expenses: Operation and Maintenance Including Fixed Charges 201,408 72,039 63,372 133,406 121,217 63,932 56,519 124,759 Income Taxes (Benefit) 13,971 753 (2,420) 7,315 12,129 (70) (2,454) 7,767 Energy and Other Taxes 5,028 2,131 1,349 3,217 3,783 2,039 1,398 3,355 ---------- ---------- ---------- ---------- --------- --------- --------- --------- Total Expenses 220,407 74,923 62,301 143,938 137,129 65,901 55,463 135,881 ---------- ---------- ---------- ---------- --------- --------- --------- --------- Other Income and Expense (95) 45 6 155 (115) 569 (89) (32) ---------- ---------- ---------- ---------- --------- --------- --------- --------- Income (Loss) from Continuing Operations 19,434 669 (3,804) 10,309 16,939 (325) (3,788) 10,396 Discontinued Operations - Net - - - - - - - (29) ---------- ---------- ---------- ---------- --------- --------- --------- --------- Net Income (Loss) Applicable to Common Stock $ 19,434 $ 669 $ (3,804) $ 10,309 $ 16,939 $ (325) $ (3,788) $ 10,367 ========== ========== ========== ========== ========= ========= ========= ========= 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.
-43- Item 9. Changes in and Disagreements with Accountants on -------------------------------------------------------- Accounting and Financial Disclosure ----------------------------------- None Item 9A. Controls and Procedures -------------------------------- SJG management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. -44- 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 2003. During 2003, 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 $115,000 and $112,000 in fiscal years 2003 and 2002, respectively. Audit-Related Fees - ------------------ The aggregate bills for audit-related services for fiscal years 2003 and 2002 were $35,000 and $12,000, respectively. Tax Fees - -------- None. All Other Fees - -------------- None. -45- 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 February 18, 2004. See Item 8. 2 - Supplementary Financial Information Supplemental Schedules as of December 31, 2003, 2002 and 2001 and for the three years ended December 31, 2003, 2002, and 2001: The Independent Auditors' Report of Deloitte & Touche LLP, Auditors of the Company. See Item 8. Schedule II - Valuation and Qualifying Accounts. See page 54. 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 Dated: October 3, 2003 South Jersey Gas Company issued a press release announcing the redemption of its SJG Capital Trust 8.35% Preferred Securities effective November 5, 2003, under Items 5 and 9. (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 filed March 7, 1997. (3)(b) Bylaws of South Jersey Gas Company, as amended and restated through November 21, 2003 (filed herewith). (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). -46- Exhibit Description Reference Number (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). (4)(b)(xix) Twenty-First Supplemental Indenture dated as Incorporated by reference from Exhibit of March 1, 1997. (4)(b)(xviv) of Form 10-K of SJI for 1997 (1-6364). (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(4)(b)(x) of September 1, 2002. 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)(d) Certificate of Trust for SJG Capital Trust. Incorporated by reference from Exhibit 3(a) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(d)(i) Trust Agreement of SJG Capital Trust. Incorporated by reference from Exhibit 3(b) of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(d)(ii) Form of Amended and Restated Trust Agreement Incorporated by reference from Exhibit 3(c) for SJG Capital Trust. of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(d)(vi) Form of Guaranty Agreement between South Incorporated by reference from Exhibit 4(d) Jersey Gas Company and SJG Capital Trust. of Form S-3 - SJG Capital Trust and South Jersey Gas Company as filed March 27, 1997, as amended April 18, 1997 and April 23, 1997 (333-24065). (4)(e) Medium Term Note Indenture of Trust dated 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). -47- Exhibit - ------- Number Description Reference - ------ ----------- --------- (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 (10)(i)(a) of Form 10-K of SJI for 1988 May 10, 1987 (effective April 1, 1988). (1-6364). (10)(e)(iii) Gas storage agreement (ESS) between South Incorporated by reference from Exhibit Jersey Gas Company and Transco dated (10)(i)(b) of Form 10-K of SJI for 1993 November 1, 1993. (1-6364). (10)(e)(iv) Gas transportation service agreement between Incorporated by reference from Exhibit South Jersey Gas Company and Transco (10)(i)(c) of Form 10-K of SJI for 1989 dated April 1, 1986. (1-6364). (10)(e)(v) Service agreement (FS) between South Jersey Incorporated by reference from Exhibit Gas Company and Transco dated August 1, 1991. (10)(i)(e) of Form 10-K of SJI for 1991 (1-6364). (10)(e)(vi) Service agreement (FT) between South Jersey Incorporated by reference from Exhibit Gas Company and Transco dated February 1, 1992. (10)(i)(f) of Form 10-K of SJI for 1991 (1-6364). (10)(e)(vii) Service agreement (Incremental FT) between Incorporated by reference from Exhibit South Jersey Gas Company and Transco (10)(i)(g) of Form 10-K of SJI for 1991 dated August 1, 1991. (1-6364). (10)(e)(viii) Gas storage agreement (SS-2) between South Incorporated by reference from Exhibit Jersey Gas Company and Transco dated (10)(i)(i) of Form 10-K of SJI for 1991 July 25, 1990. (1-6364). (10)(e)(ix) Gas transportation service agreement between Incorporated by reference from Exhibit South Jersey Gas Company and Transco (10)(i)(j) of Form 10-K of SJI for 1993 dated December 20, 1991. (1-6364). -48- Exhibit - ------- Number Description Reference - ------ ----------- --------- (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)(f) Gas transportation service agreement (FTS) Incorporated by reference from Exhibit between South Jersey Gas Company and (10)(j)(a) of Form 10-K of SJI for 1989 Equitable Gas Company dated November 1, 1986. (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, 1993. (1-6364). (10)(g)(ii) Gas purchase agreement between South Jersey Incorporated by reference from Exhibit Gas Company and ARCO Gas Marketing, (10)(k)(i) of Form 10-K of SJI for 1989 Inc. dated March 5, 1990. (1-6364). (10)(g)(iii) Gas transportation service agreement (FTS-1) Incorporated by reference from Exhibit between South Jersey Gas Company and 10)(k)(k) of Form 10-K of SJI for 1993 Columbia ( Gulf Transmission Company (1-6364). dated November 1, 1993. (10)(g)(iv) Assignment agreement capacity and service Incorporated by reference from Exhibit rights (FTS-2) between South Jersey (10)(k)(i) of Form 10-K of SJI for 1993 Gas 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 (1-6364). November 1,1993. (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 (1-6364). November 1, 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 (1-6364). November 1, 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 (1-6364). November 1, 1993. -49- Exhibit - ------- Number Description Reference - ------ ----------- --------- (10)(g)(x) NS (Negotiated Sales) Service Agreement dated Incorporated by reference from Exhibit December 1, 1994 between South Jersey Gas (10)(k)(r) of Form 10-K of SJI for 1994 Company and Transco Gas Marketing Company as (1-6364). agent for Transcontinental Gas Pipeline. (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 (filed herewith). (10)(h)(vii)* Officer Severance Benefit Program for all Incorporated by reference from Exhibit officers. (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) 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). (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). -50- Exhibit - ------- Number Description Reference - ------- ------------ --------- (21) Subsidiaries of the Registrant (filed herewith). (23) Independent Auditors' Consent (filed herewith). (24) Power of Attorney (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).
* Constitutes a management contract or a compensatory plan or arrangement. -51- 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 12, 2004 --------------------------------- 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 12, 2004 (Edward J. Graham) Director (Principal Executive Officer) /s/ David A. Kindlick - --------------------------- (David A. Kindlick) Executive Vice President & Chief March 12, 2004 Financial Officer (Principal Financial and Accounting Officer) /s/ Richard H. Walker, Jr. - --------------------------- (Richard H. Walker, Jr.) Sr. Vice President, Corporate Counsel, & March 12, 2004 Corporate Secretary /s/ Charles Biscieglia Chairman of the Board March 12, 2004 - --------------------------- (Charles Biscieglia) /s/ Shirli M. Billings Director March 12, 2004 - --------------------------- (Shirli M. Billings) -52- Signature Title Date /s/ Sheila Hartnett-Devlin Director March 12, 2004 - --------------------------- (Sheila Hartnett-Devlin) Director March 12, 2004 - --------------------------- (William J. Hughes) /s/ Clarence D. McCormick Director March 12, 2004 - --------------------------- (Clarence D. McCormick) /s/ Frederick R. Raring Director March 12, 2004 - --------------------------- (Frederick R. Raring)
-53- 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, 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 Provision for Uncollectible Accounts for the Year Ended December 31, 2001 $1,754 $2,067 $387 $2,028 $2,180 (a) Recoveries of accounts previously written off and minor adjustments. (b) Uncollectible accounts written off.
-54- SJG-53 EX-3.(II) 3 sjg03bylaws.txt SJG BY-LAWS (AMENDED AND RESTATED THROUGH NOVEMBER 21, 2003) SOUTH JERSEY GAS COMPANY ARTICLE I SHAREHOLDERS Section 1. Annual Meeting. An annual meeting of the shareholders for the election of Directors and for other business shall be held on the next to the last Thursday in April of each year, if not a legal holiday, and if a legal holiday, then on the first day following which is not a legal holiday, or on such other day as may be designated by the Board of Directors. Section 2. Special Meetings. At any time in the interval between annual meetings, special meetings of the shareholders may be called by the Chairman of the Board, the President or by a majority of the Board of Directors by vote at a meeting or in writing with or without a meeting, or may be called by three or more shareholders having voting powers as provided for under the Corporation Law of the State of New Jersey. Section 3. Notice of Meetings. Written or printed notice of every meeting of the shareholders shall be given to each shareholder entitled to vote at such meeting, not less than ten days before such meeting, by the Chairman of the Board, the President or any Vice President, or by the Secretary or any Assistant Secretary, by leaving the same with him or at his residence or usual place of business, or by mailing it, postage prepaid and addressed to him at his address as it appears upon the books of the Company on the record date for such meeting, as provided in Section 3 of Article V of these Bylaws. In the event of the transfer of stock after the giving of such notice and prior to the holding of the meeting, it shall not be necessary to give notice of the meeting to the transferee. Notice of every special meeting shall state the place, day, and hour of such meeting and the general nature of the business proposed to be transacted thereat. Failure to give notice of any annual meeting or any irregularity in such notice shall not affect the validity of such annual meeting or of any proceedings at such meeting (other than proceedings of which special notice is required by law, by the Charter, or by the Bylaws). It shall not be requisite to the validity of any meeting of shareholders that notice thereof, whether prescribed by law, by the Charter or by the Bylaws, shall have been given to any shareholder who attends in person or by proxy, or to any shareholder who in writing, executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. No notice other than by oral announcement need be given of any adjourned meetings of shareholders. SJG-1 Section 4. Quorum. At all meetings of shareholders, a majority of the outstanding shares of capital stock entitled to vote, represented by shareholders in person or by proxy, shall constitute a quorum for the transaction of business; but in the absence of a quorum the shareholders present in person or by proxy at the time and place fixed by Section 1 of this Article I for an annual meeting, or designated in the notice of a special meeting, or at the time and place of any adjournment thereof, by majority vote may adjourn the meeting from time to time without notice other than by oral announcement at the meeting, until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the original meeting. Section 5. Judges of Election. Judges of election, who need not be shareholders, shall be appointed by the Board of Directors for any meeting of shareholders for the election of directors and may be so appointed for any other meeting of shareholders. In case any of the judges of election shall be absent or unable or unwilling to serve, all such vacancies may be filled by appointment made by the Board of Directors in advance of the convening of the meeting, or at the meeting by the person acting as chairman. Every election of directors shall be conducted by ballot by two judges and, after the election, they shall file with the Secretary a certificate of the results thereof, with the names of the directors elected. The judges of election, at the request of the chairman of the meeting, shall act as tellers of any other vote by ballot taken at the meeting and shall certify the result thereof. Section 6. Voting and Proxies. Any shareholder having the right to vote at any meeting shall be entitled to one vote for each share of stock held by him, provided that, at all meetings for the election of directors, each shareholder entitled to vote thereat shall be entitled to as many votes as shall equal the number of shares held by him, multiplied by the number of directors to be elected, and each such shareholder may cast all of such votes for a single director or may distribute them among the total number of directors to be voted for, or among any two or more of such directors as such shareholder may see fit. Any shareholder entitled to vote at any meeting of shareholders may vote either in person or by proxy, but no proxy which is dated more than two months prior to the meeting at which it is offered shall confer the right to vote thereat. Every proxy shall be in writing, subscribed by a shareholder or his duly authorized attorney in fact, and dated, but need not be sealed, witnessed, or acknowledged. Section 7. List of Shareholders. A complete list of the shareholders entitled to vote at the annual meeting of the shareholders or at any special meeting of shareholders, arranged in alphabetical order, with the mailing address of each according to the records of the Company and the number of voting shares held by each, shall be prepared by the Secretary or any Assistant Secretary and filed in the office where the meeting is to be held, at least ten days before each meeting of shareholders, shall be subject to inspection by any shareholder during usual business hours, shall be produced and kept open at the time and place of meeting, and shall be subject to the inspection of any shareholder during the whole time of the meeting. SJG-2 ARTICLE II BOARD OF DIRECTORS Section 1. Election and Powers. The business and property of the Company shall be conducted and managed by its Board of Directors, consisting of seven directors, which Board may exercise all the powers of the Company except such as are by statute, by the Charter, or by these Bylaws conferred upon or reserved to the shareholders. The members of the Board of Directors shall be elected by the shareholders at their annual meeting or at any meeting held in lieu thereof, except as provided in Section 8 of this Article II. Each director shall hold office until the annual meeting held next after his or her election and until his or her successor shall have been duly chosen and qualified, or until he or she shall have resigned, or shall have been removed in the manner provided in Section 10 of this Article II. The Board of Directors shall keep full and fair account of its transactions. Section 2. First Regular Meeting. After each meeting of shareholders at which a Board of Directors shall have been elected, the Board of Directors so elected shall meet at the same place immediately following adjournment of the shareholders' meeting for the purpose of organization and the transaction of other business, unless some other time and place shall be designated by the shareholders at their meeting. Section 3. Additional Regular Meetings. In addition to the first regular meeting, regular meetings of the Board of Directors shall be held on such dates as may be fixed, from time to time, by the Board of Directors, or by a majority of the directors in writing without a meeting. Section 4. Special Meetings. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, the President or by the Board of Directors or by a majority of the Board of Directors in writing, with or without a meeting. Section 5. Place of Meetings. Subject to the provisions of Section 2 of this Article II, the Board of Directors may hold its regular and special meetings at such place or places within or without the State of New Jersey as it may, from time to time, determine. In the absence of any such determination, such regular and special meetings of the Board of Directors shall be held at such places as may be designated in the calls therefor. Section 6. Notice of Meetings. Notice of the place, day and hour of every meeting shall be given to each director at least two days before the meeting, by delivering the same to him personally, or by sending the same to him by telegraph, or by leaving the same at his residence or usual place of business, or, in the alternative, upon three days' notice, by mailing it, postage prepaid, and addressed to him at his last known mailing address, according to the records of the Company. It shall not be requisite to the validity of any meetings of the Board of Directors, that notice thereof shall have been given to any director who attends, or to any director who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. No notice other than by oral announcement need be given of any adjourned meetings of the Board of Directors. All regular meetings of the Board of Directors shall be general meetings, that is to say, open for the transaction of any business within the powers of the Company without special notice of such business, except in cases in which special notice is required by law, by the Charter, by these Bylaws, or by the call of such meeting. SJG-3 Section 7. Quorum. At all meetings of the Board of Directors, a majority of the total number of the directors shall constitute a quorum for the transaction of business. Except in cases in which it is by law, by the Charter, or by these Bylaws otherwise provided, a majority of such quorum shall decide any questions that may come before the meeting. In the absence of a quorum, the directors present by majority vote may adjourn the meeting from time to time without notice other than by oral announcement at the meeting until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Section 8. Vacancies. Vacancies occurring in the Board of Directors, through any cause other than removal by the shareholders, including vacancies created by an increase in the number of directors, may be filled by the vote of a majority of the remaining directors. Section 9. Compensation. The directors may be compensated for their services on an annual basis and/or they may receive a fixed sum for attendance at each regular or special meeting and every adjournment thereof; such compensation or fixed sum to be fixed from time to time by resolution by the Board of Directors. The directors shall be reimbursed for all reasonable traveling expenses incurred in attending meetings. Directors who are employees of the Company shall not receive compensation for their services as directors; but nothing in this Section shall preclude any director from serving the Company in any other capacity and receiving compensation therefor. Section 10. Removal. At any meeting of the shareholders called for the purpose, any director may, by vote of the shareholders entitled to cast a majority in number of all the votes, be removed from office, with or without cause, and another be elected in the place of the person so removed, to serve for the remainder of his term. ARTICLE III COMMITTEES Section 1. Executive Committee. The Board of Directors, by resolution adopted by a majority of the whole Board of Directors, may designate an Executive Committee of three or more directors and shall appoint one of the directors so designated to be Chairman of the Executive Committee. The Chief Executive Officer of the Company shall be ex officio a member of the Executive Committee. The Executive Committee shall formulate policies to be followed in planning and conducting the business and affairs of the Company. During the intervals between the meetings of the Board of Directors, the Executive Committee shall have and may exercise all the powers of the Board of Directors in the management of the business and affairs of the Company conferred by these Bylaws or otherwise. The Executive Committee shall keep full and fair account of its transactions. All action by the Executive Committee shall be reported to the Board of Directors at its meeting next succeeding such action, and shall be subject to revision and alteration by the Board of Directors; provided that no rights of third persons shall be affected by any such revision or alteration. Vacancies in the Executive Committee shall be filled by the Board of Directors. SJG-4 Section 2. Compensation. Members of the Executive Committee may be compensated for their services on an annual basis and/or they may receive a fixed sum for attendance at each meeting of the Executive Committee and every adjournment thereof; such compensation or fixed sum to be fixed from time to time by resolution of the Board of Directors. The members of the Executive Committee shall be reimbursed for all reasonable traveling expenses incurred in attending meetings. Members of the Executive Committee who are employees of the Company shall not receive compensation for their services as members of such Committee; but nothing in this Section shall preclude a member of the Executive Committee from serving the Company in any other capacity and receiving compensation therefor or shall preclude the Chairman of the Executive Committee from receiving compensation for his services as such Chairman. Section 3. Meetings of the Executive Committee. The Executive Committee shall fix its own rules of procedure and shall meet as provided by such rules or by resolution of the Board of Directors, and it shall also meet at the call of the Chairman of the Executive Committee or any two members of the Committee. Unless otherwise provided by such rules or by such resolutions, the provisions of Section 5 and Section 6 of Article II relating to the place of holding and notice required of meetings of the Board of Directors shall govern the Executive Committee. A majority of the Executive Committee shall be necessary to constitute a quorum. Section 4. Other Committees. The Board of Directors may by resolution designate such other standing or special committees as it deems desirable and discontinue the same at pleasure. Each such committee shall have such powers and perform such duties, not inconsistent with law, as may be assigned to it by the Board of Directors. ARTICLE IV OFFICERS Section 1. Executive Officers. The Executive Officers of the Company shall be a President, one or more Vice Presidents (one or more of whom may be designated as Executive Vice President or Senior Vice President), a Secretary, a Treasurer, and a Controller. The Board of Directors may also designate the Chairman of the Board as an Executive Officer, which designation may be cancelled by the Board at any time. The Executive Officers shall be elected annually by the Board of Directors at its first meeting following the annual meeting of the shareholders and each such Officer shall hold office until the corresponding meeting in the next year and until his successor shall have been duly chosen and qualified, or until he shall have resigned or shall have been removed, in the manner provided in Section 12 of this Article IV. Whether or nor the Chairman of the Board has been designated as an Executive Officer, he shall be elected and hold office as set forth in the preceding sentence. Any vacancy in any of the above-mentioned offices may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting. SJG-5 Section 2. Chairman of the Board. The Chairman of the Board shall have such powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors. He may, from time to time, delegate to any other Officer such powers and such duties as he deems advisable. The Chairman of the Board shall preside at all meetings of the Board of Directors and shareholders at which he is present (except as he may request the President to so preside). If the Chairman of the Board is designated as the Chief Executive Officer, he shall have the powers and duties of the Chief Executive Officer referred to in the next section of these Bylaws. Section 3. President. The President shall be the Chief Executive Officer, unless the Board of Directors designates the Chairman of the Board as the Chief Executive Officer. As Chief Executive Officer, the President shall carry out policies adopted or approved by the Board of Directors and shall have general charge and supervision of the business of the Company, subject to the control of the Board of Directors. The President, if not designated the Chief Executive Officer, shall have such powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors or by the Chief Executive Officer. Section 4. Vice Presidents. At the request of the President, or in his absence or disability, any Vice President shall perform all the duties of the President, and when so acting shall have the powers of the President, unless otherwise determined by the Board of Directors. Each Vice President shall also have and exercise such powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors or the Chief Executive Officer. Section 5. Secretary. The Secretary shall record the proceedings of the meetings of the Board of Directors and, if so directed, of the Executive Committee, in books provided for that purpose; he shall see that all notices of meetings of the Directors are duly given in accordance with the provisions of these Bylaws, or as required by law; he shall be custodian of the Directors' minutes and of the corporate seal or seals of the Company; he shall see that the corporate seal is affixed to all documents, the execution of which, on behalf of the Company, under its seal, is duly authorized, and when so affixed may attest the same; and, in general, he shall perform all duties incident to the office of a Secretary of a corporation, and such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer. Section 6. Treasurer. The Treasurer shall serve as the chief financial officer and shall have charge of and be responsible for procuring capital and maintaining financial arrangements as shall from time to time, be selected by the Board of Directors; he shall manage the level of funds deposited in banks, trust companies, or other depositories so as to minimize the cost of borrowing such funds as shall be periodically required and to maximize the return on the investment of Company funds as shall from time to time, be available; and, in general, he shall perform all the duties incident to the office of a Treasurer of a corporation, and such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer. SJG-6 Section 7. Controller. The Controller shall serve as the chief accounting officer and shall have charge of the accounting books and records of the Company; he shall render to the Chief Executive Officer and to the Board of Directors, whenever requested, an account of the financial condition of the Company; he shall have charge of and be responsible for the receipt and disbursement of all funds of the Company and shall deposit or cause to be deposited, in the name of the Company, all moneys or valuable effects in such banks, trust companies, or other depositories as shall from time to time be selected by the Board of Directors; and, in general, he shall perform all the duties incident to the duties of a Chief Accounting Officer of a corporation, and such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer. Section 8. Assistant Officers. The Board of Directors may elect one or more Assistant Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers and one or more Assistant Controllers. Each Assistant Vice President, if any, each Assistant Secretary, if any, each Assistant Treasurer, if any, and each Assistant Controller, if any, shall hold office for such period and shall have such authority and perform such duties as the Board of Directors or the Chief Executive Officer may prescribe. Section 9. Subordinate Officers. The Board of Directors may select such subordinate Officers as it may deem desirable. Each such Officer shall hold office for such period, have such authority, and perform such duties as the Board of Directors or the Chief Executive Officer may prescribe. The Board of Directors may, from time to time, authorize any Officer to appoint and remove subordinate Officers and prescribe the powers and duties thereof. Section 10. Certain Powers of Officers. Certificates of Stock of the Company shall be signed by the President or any Vice President and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary or the Controller or any Assistant Controller of the Company. The President may sign and execute in the name of the Company all authorized deeds, mortgages, bonds, contracts, or other instruments, except in cases in which the signing and execution thereof shall have been expressly delegated to some other Officer or Agent of the Company. Section 11. Officers Holding Two or More Offices. Any two of the above-mentioned offices, except those of President and Secretary or Assistant Secretary, may be held by the same person, but no officer shall execute, acknowledge, or verify any instrument in more than one capacity, if such instrument be required by Statute, by the Charter, or by these Bylaws, to be executed, acknowledged, or verified by any two or more Officers. Section 12. Compensation. The Board of Directors shall have power to fix the compensation of all Officers of the Company. It may authorize any Officer, upon whom the power of appointing subordinate Officers may have been conferred, to fix the compensation of such subordinate Officers. SJG-7 Section 13. Removal. Any Officer of the Company may be removed, with or without cause, by vote of a majority of the entire Board of Directors at a meeting called for that purpose, or (except in case of an Officer elected by the Board of Directors) by an Officer upon whom such power of removal may have been conferred. ARTICLE V STOCK Section 1. Certificates. Every shareholder shall be entitled to a certificate or certificates of stock of the Company in form prescribed by the Board of Directors, duly numbered and sealed with the corporate seal of the Company, and setting forth the number and kind of shares represented thereby to which each shareholder is entitled. Such certificates shall be signed by the Chairman of the Board or the President or any Vice President and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary or the Controller or any Assistant Controller of the Company. The Board of Directors may also appoint one or more Transfer Agents and/or Registrars for its stock of any class or classes and may require stock certificates to be countersigned and/or registered by one or more of such Transfer Agents and/or Registrars. If certificates of capital stock of the Company are signed by a Transfer Agent and by a Registrar, the signature of the officers of the Company and the seal of the Company thereon may be facsimiles, engraved or printed. Any provisions of these Bylaws with reference to the signing and sealing of stock certificates shall include, in cases above permitted, such facsimiles. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on any such certificate or certificates shall cease to be such officer or officers of the Company, whether because of death, resignation, or otherwise, before such certificate or certificates shall have been delivered by the Company, such certificate or certificates may nevertheless be adopted by the Board of Directors of the Company and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures shall have been used thereon had not ceased to be such officer or officers of the Company. Section 2. Transfer of Shares. The Board of Directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, and registration of certificates of stock. Section 3. Record Dates. The Board of Directors is hereby authorized to fix the time, not exceeding fifty (50) days preceding the date of any meeting of shareholders, or the date for payment of any dividend, or the date for the allotment of rights, or the date when any change, or conversion, or exchange of capital stock shall go into effect, during which the books of the Company shall be closed against transfers of stock; provided, however, that in case of any such closing of the stock transfer books, notice thereof shall be mailed to the shareholders at their last known address as the same appears upon the books of the Company, at least ten (10) days before the closing thereof. In lieu of providing for the closing of the books against transfers of stock as aforesaid, the Board of Directors shall have the authority to fix in advance a date, not exceeding fifty (50) days preceding (1) the date of any meeting of shareholders, SJG-8 (2) the date for the payment of any dividend, (3) the date for the allotment of rights, or (4) the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the determination of the shareholders entitled to notice of, or to vote at, any such meeting, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion, or exchange of capital stock, and in such case such shareholders and only such shareholders as shall be shareholders of record on the date so fixed, shall be entitled to such notice of, and to vote at such meeting, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any stock on the books of the Company after any such record date fixed as aforesaid. In any case in which the Board of Directors does not provide for the closing of the Books against transfer of stock as aforesaid, or fix a record date as aforesaid, the twentieth day preceding the date of the meeting of shareholders, the dividend payment date or the date for the allotment of rights, shall be the record date for the determination of the shareholders entitled to notice of and to vote at such meeting, or to receive such dividends or rights, as the case may be. Section 4. Mutilated, Lost or Destroyed Certificates. The holder of any certificate representing shares of stock of the Company shall immediately notify the Company of any mutilation, loss, or destruction thereof, and the Board of Directors may, in its discretion, cause one or more new certificates, for the same number of shares in the aggregate, to be issued to such holder upon the surrender of the mutilated certificate, or in case of loss or destruction of the certificate, upon satisfactory proof of such loss or destruction, and the deposit of indemnity by way of bond or otherwise, in such form and amount and with such sureties or securities as the Board of Directors may require to indemnify the Company against loss or liability by reason of the issuance of such new certificate or certificates, and the failure of such holder to comply with the requirements of this Section 4 shall constitute a waiver by such holder of any right to receive such new certificate or certificates, provided however that no deposit of indemnity, other than personal bond, shall be required for the issuance of one or more new certificates where the value of the number of shares in the aggregate does not exceed $200.00. The Board of Directors may, in its discretion, refuse to issue such new certificates, save upon the order of some Court having jurisdiction in such matters. ARTICLE VI DIVIDENDS AND FINANCE Section 1. Dividends. Subject to the provisions of the Charter, the Board of Directors may, in its discretion, declare what, if any, dividends shall be paid upon the stock of the Company, or upon any class of such stock. Except as otherwise provided by the Charter, dividends shall be payable upon such dates as the Board of Directors may designate. Before payment of any dividend there may be set aside out of any funds of the Company available for dividends such sum or sums as the directors, from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Company, or for such other purposes as the directors shall think conducive to the interest of the Company, and the directors may abolish any such reserve in the manner in which it was created. SJG-9 Section 2. Checks, Drafts, Etc. All checks, drafts, or orders for the payment of money, notes, and other evidences of indebtedness, issued in the name of the Company, shall unless otherwise provided by the Board of Directors, be signed by the Treasurer or an Assistant Treasurer, or the Controller or an Assistant Controller and countersigned by the Chairman of the Board or the President or a Vice President or the Secretary. Section 3. Annual Reports. A report on the affairs of the Company shall be submitted at the annual meeting of the shareholders. Such statement shall be prepared by such executive officer of the Company as may be designated by the Board of Directors. If no other executive officer is so designated, it shall be the duty of the Chairman of the Board to prepare such statement. Section 4. Fiscal Year. The fiscal year of the Company shall be the calendar year, unless otherwise provided by the Board of Directors. ARTICLE VII INDEMNIFICATION Section 1. Right to Indemnification. The Company shall indemnify any corporate agent against his expenses and liabilities in connection with any proceedings involving the corporate agent by reason of his being or having been such a corporate agent to the extent that (a) such corporate agent is not otherwise indemnified; and (b) the power to do so has been or may be granted by statute; and for this purpose the Board of Directors may, and on request of any such corporate agent shall be required to, determine in each case whether or not the applicable standards in any such statute have been met, or such determination shall be made by independent legal counsel if the Board so directs or if the Board is not empowered by statute to make such determination. Section 2. Prepayment of Expenses. To the extent that the power to do so has been or may be granted by statute, the Company shall pay expenses incurred by a corporate agent in connection with a proceeding in advance of the final disposition of the proceeding upon receipt of an undertaking by or on behalf of such corporate agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified as provided by statute. Section 3. Indemnification Not Exclusive. This indemnification shall not be exclusive of any other rights to which a corporate agent may be entitled, both as to any action in his official capacity or as to any action in another capacity while holding such office, and shall inure to the benefits of the heirs, executors, or administrators of any such corporate agent. Section 4. Insurance and Other Indemnification. The Board of Directors shall have the power to (a) purchase and maintain, at the Company's expense, insurance on behalf of the Company and on behalf of others to the extent that power to do so has been or may be granted by statute and (b) give other indemnification to the extent permitted by law. SJG-10 Section 5. Definitions. As used in this Article, (a) "corporate agent" means any person who is or was a Director, officer, employee or agent of the Company and any person who is or was a Director, officer, trustee, employee or agent of any other enterprise, serving as such at the request of the Company, or the legal representative of any such Director, officer, trustee, employee or agent; (b) "other enterprises" means any domestic or foreign corporation, other than the Company, and any partnership, joint venture, sole proprietorship, trust or other enterprise whether or not for profit, served by a corporate agent; (c) "expenses" means reasonable costs, disbursements, and counsel fees; (d) "liabilities" means amounts paid or incurred in satisfaction of settlements, judgments, fines, and penalties; (e) "proceedings" means any pending, threatened or completed civil, criminal, administrative or arbitrative action, suit or proceeding, and any appeal therein and any inquiry or investigation which could lead to such action, suit or proceeding. ARTICLE VIII SUNDRY PROVISIONS Section 1. Seal. The Corporate Seal of the Company shall contain within a circle the words "South Jersey Gas Company," and in an inner circle the word "SEAL." If deemed advisable by the Board of Directors, a duplicate seal or duplicate seals may be provided and kept for the necessary purposes of the Company. Section 2. Books and Records. The Board of Directors may determine from time to time whether and, if allowed, when and under what conditions and regulations, the books and records of the Company, or any of them, shall be open to the inspection of shareholders and the rights of shareholders in this respect are and shall be limited accordingly, except as otherwise provided by Statute. Under no circumstances shall any shareholder have the right to inspect any book or record or receive any statement for an illegal or improper purpose. Section 3. Bonds. The Board of Directors may require any officer, agent, or employee of the Company to give a bond to the Company, conditioned upon the faithful discharge of his duties, with one or more sureties and in such amount as may be satisfactory to the Board of Directors. SJG-11 Section 4. Voting upon Stock in Other Corporations. Any Stock in other corporations, which may from time to time be held by the Company, may be represented and voted at any meeting of shareholders of such other corporations by the Chairman of the Board, the President or a Vice President of the Company or by proxy executed in the name of the Company by the Chairman of the Board, the President or a Vice President with the corporate seal affixed and attested by the Secretary or an Assistant Secretary. Section 5. Amendments. These Bylaws may be altered or amended at any annual meeting of the shareholders or at any special meeting called for that purpose, by a majority vote of all the shareholders entitled to vote at such meeting, or at any meeting of the Board of Directors, by a majority vote of the directors, provided notice of any such proposed alteration or amendment shall be given in the notice of any such meeting. SJG-12 Amendments Article II Section 1 Amended February 19, 1959. Article I Section 1 Amended February 19, 1960. Article I Section 1 Amended February 21, 1963. Article IV Section 8 Amended August 19, 1965. Article V Section 1 Amended August 19, 1965. Article I Section 1 Amended June 20, 1968. Article I Section 1 Amended April 16, 1970. Article II Section 1 Amended August 19, 1971. Article II Section 1 Amended June 22, 1972. Article II Section 1 Amended August 23, 1973. Article II Section 1 Amended February 20, 1975. Article II Section 11 Repealed August 21, 1975. Article VII Renum. Article VIII August 21, 1975. Article VII Newly added August 21, 1975. Article I Section 1 Amended December 18, 1975. Article II Section 1 Amended February 19, 1976. Article II Section 1 Amended February 17, 1977. Article IV Section 3-11 renum. April 21, 1977. Article IV Section 3 Newly added April 21, 1977. Article VI Section 1 Amended April 21, 1977. Bylaws restated in their entirety. Article II Section 1 Amended February 16, 1978. Article II Section 1 Amended February 15, 1979. Article II Section 1 Amended August 23, 1979. Article III Section 1 Amended October 24, 1980. Article IV Section 1, 2 & 3 Amended October 24, 1980. Article II Section 1 Amended April 22, 1981. Article II Section 1 Amended October 23, 1981. Article IV Section 1-12 Amended October 23, 1981. Article II Section 1 Amended January 21, 1983. Article II Section 1 Amended May 22, 1985. Article II Section 1 Amended April 17, 1986. Article IV Section 1 & 6-13 Amended March 18, 1988, effective April 1, 1988. Article V Section 1 Amended March 18, 1988, effective April 1, 1988. Article VI Section 2 Amended March 18, 1988, effective April 1, 1988. Article II Section 1 Amended April 18, 1989, effective April 19, 1989 (Spl.Mtg.) Article II Section 1 Amended October 20, 1989. Article II Section 1 Amended April 19, 1990. Article II Section 1 Amended October 1, 1990. Article II Section 1 Amended April 23, 1992. Article II Section 1 Amended April 22, 1993. Article II Section 1 Amended October 21, 1994. Article II Section 1 Amended April 20, 1995. Article II Section 1 Amended June 21, 1996. Article II Section 1 Amended April 17, 1997. Article II Section 1 Amended April 23, 1998. Article II Section 1 Amended June 19, 1998. Article II Section 1 Amended April 19, 2000. Article II Section 1 Amended November 16, 2001. Article II Section 1 Amended November 22, 2002, effective January 1, 2003. SJG-13 Article I Section 1 Amended November 21, 2003 SJG-14 EX-10 4 sjgex10.txt SJG SCHEDULE OF OFFICER AGREEMENTS Exhibit (10)(h)(vi) SOUTH JERSEY INDUSTRIES, INC. SCHEDULE OF OFFICER AGREEMENTS Pursuant to Rule 12b-31, the following sets forth the material details which differ in the Executive Employment Agreements, the form of which is filed herewith as Exhibit (100(l)(d).
Name Capacities in Which Served Date Minimum of Base Salary Agreement Charles Biscieglia Chairman of the Board, South Jersey Industries, 1/1/03 $367,780 Inc.* Edward J. Graham President and Chief Executive Officer, 1/1/03 300,000 South Jersey Industries, Inc.; President and Chief Executive Officer, South Jersey Gas Richard J. Jackson Vice President, Utility Operations, South Jersey 1/1/03 169,590 Industries; Executive Vice President and Chief Operating Officer, South Jersey Gas Company David A. Kindlick Vice President and Chief Financial Officer,South 1/1/03 203,820 Jersey Industries, Inc.; Executive Vice President and Chief Financial Officer, South Jersey Gas Company Janet T. Nickels Senior Vice President, Corporate Communications 1/1/03 142,090 and Administrative Services, South Jersey Gas Company Albert V. Ruggiero Vice President, South Jersey Industries, Inc.; 1/1/03 203,820 Executive Vice President and Chief Administrative Officer, South Jersey Gas Company Richard H. Walker, Jr. Vice President, Corporate Counsel and Corporate 1/1/03 149,030 Secretary, South Jersey Industries, Inc.; Senior Vice President, Corporate Counsel and Corporate Secretary, South Jersey Gas Company Michael Renna Vice President, South Jersey Industries, Inc.; 1/1/04 145,000 President, South Jersey Energy Jeffrey E. DuBois Vice President, South Jersey Industries, Inc.; 1/1/04 135,400 Senior Vice President, South Jersey Gas Company * Charles Biscieglia retired from the position of Chief Executive Officer on February 1, 2004. He ceased being an officer of the Company and his Officer Agreement terminated on that date.
EX-12 5 sjgex12.txt SJG CALC OF RATIO TO FIXED EARNINGS Exhibit 12 SOUTH JERSEY GAS COMPANY Calculation of Ratio of Earnings from Continuing Operations to Fixed Charges (IN THOUSANDS)
Fiscal Year Ended December 31, ------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------------------------------------------------------------------- Net Income* $26,608 $23,222 $21,527 $21,855 $20,367 Income Taxes, Net 19,619 17,372 15,693 16,703 15,445 Fixed Charges** 19,868 20,972 23,409 24,255 24,033 Capitalized Interest (564) (359) (221) (24) (390) ------------------------------------------------------------------------------- Total Available for Coverage $65,531 $61,207 $60,408 $62,789 $59,455 =============================================================================== Total Available 3.3x 2.9x 2.6x 2.6x 2.5x - ------------------------------------ Fixed Charges * Net Income before Discontinued Operations ** Fixed charges consist of interest charges and preferred dividend requirement amounting to $135,000 in 2003 ( rentals are not material).
EX-21 6 sjgex21.txt SJG SUBSIDIARIES OF REGISTRANT Exhibit 21 SOUTH JERSEY GAS COMPANY SUBSIDIARIES OF REGISTRANT AS OF DECEMBER 31, 2003
Percentage of Voting Securities State of Owned by Parent Relationship Incorporation ----------------------------------------------------------- South Jersey Gas Company Registrant Parent New Jersey SJG Capital Trust 100 Subsidiary Delaware (inactive as of November 5, 2003)
EX-23 7 sjgex23.txt SJG INDEPENDENT AUDITORS' CONSENT INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-24065 and 333-62019 of South Jersey Gas Company on Form S-3 of our reports dated February 19, 2003, appearing in this Annual Report on Form 10-K of South Jersey Gas Company for the year ended December 31, 2002. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 13, 2003 EX-31.1 8 sjgex311.txt SJG CEO CERTIFICATE PURSUANT TO SARBANES-OXLEY ACT Exhibit 31.1 CERTIFICATION I, Edward J. Graham, certify that: 1. I have reviewed this annual report on Form 10-K for the period ended December 31, 2003, of South Jersey Gas Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)): a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2004 /s/ Edward J. Graham ----------------------------------- Edward J. Graham President & Chief Executive Officer EX-31.2 9 sjgex312.txt SJG CFO CERTIFICATE PURSUANT TO SARBANES-OXLEY ACT Exhibit 31.2 CERTIFICATION I, David A. Kindlick, certify that: 1. I have reviewed this annual report on Form 10-K for the period ended December 31, 2003, of South Jersey Gas Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)): a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2004 /s/ David A. Kindlick ----------------------------------- David A. Kindlick Executive Vice President & Chief Financial Officer EX-32.1 10 sjgex321.txt SJG CEO CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Annual Report on Form 10-K of South Jersey Gas Company (the "Company") for the period ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward J. Graham, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Edward J. Graham - ----------------------------------------------------- Name: Edward J. Graham Title: Chief Executive Officer March 12, 2004 EX-32.2 11 sjgex322.txt SJG CFO CERTIFICATION Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Annual Report on Form 10-K of South Jersey Gas Company (the "Company") for the period ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David A. Kindlick, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ David A. Kindlick - ------------------------------------------------------- Name: David A. Kindlick Title: Chief Financial Officer March 12, 2004 -----END PRIVACY-ENHANCED MESSAGE-----