10-K/A 1 sjg10ka.txt SOUTH JERSEY GAS COMPANY FORM 10K/A P/E 12/31/04 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K/A (Amendment No. 1) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________to ______________. Commission File Number 000-22211 SOUTH JERSEY GAS COMPANY (Exact name of registrant as specified in its charter) New Jersey 21-0398330 (State of incorporation) (IRS employer identification no.) 1 South Jersey Plaza, Folsom, New Jersey 08037 (Address of principal executive offices, including zip code) (609) 561-9000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] All of the equity securities of the registrant are owned by South Jersey Industries, Inc., its parent company, a 1934 Act reporting company named in the registrants description of its business, which has itself fulfilled its 1934 Act filing requirements. During the preceding 36 months (and any subsequent period of days) there has not been any default in (1) any of the indebtedness of the registrant or its subsidiaries, and (2) the payment of rentals under material long-term leases (of which there are none). Documents Incorporated by Reference: None =============================================================================== EXPLANATORY NOTE This Amendment No. 1 on Form 10-K/A (this "Amendment") amends the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, originally filed on March 10, 2005 (the "Original Filing"). The registrant hereby amends and restates Item 8 of Part II to include a line item on the balance sheet entitled "Materials and Supplies, average cost" that was inadvertently omitted from the financial statements included therein during the EDGARization process. In addition, in connection with the filing of this Amendment and prusuant to the rules of the Securities and Exchange Commission, the registrant is including with this Amendment under Item 15 certain currently dated certifications. Except as described above, no other changes have been made to the Original Filing. =============================================================================== Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholder and Board of Directors of South Jersey Gas Company: We have audited the accompanying balance sheets of South Jersey Gas Company (the "Company") as of December 31, 2004 and 2003, and the related statements of income, changes in common equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedules listed in the Index at Item 15(a)2. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of South Jersey Gas Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 1, the accompanying 2003 balance sheet has been restated. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 2, 2005 SOUTH JERSEY GAS COMPANY STATEMENTS OF INCOME -------------------------------------------------------------------------------- (In Thousands) Year Ended December 31, ------------------------------------- 2004 2003 2002 -------------------------------------------------------------------------------- Operating Revenues (Notes 1, 2 & 3) $ 508,827 $ 536,442 $ 424,027 ------------ ------------ ------------ Operating Expenses: Cost of Sales (Note 1) 340,860 375,815 277,199 Operations 56,238 54,141 46,928 Maintenance 5,772 5,678 6,101 Depreciation (Note 1) 23,048 23,663 22,350 Energy and Other Taxes (Notes 1 & 6) 11,458 11,725 10,575 ------------ ------------ ------------ Total Operating Expenses 437,376 471,022 363,153 ------------ ------------ ------------ Operating Income 71,451 65,420 60,874 Other Income and Expense 886 111 333 Interest Charges 17,906 19,304 20,613 ------------ ------------ ------------ Income Before Income Taxes 54,431 46,227 40,594 Income Taxes (Notes 1, 5 & 6) 22,969 19,619 17,372 ------------ ------------ ------------ Income from Continuing Operations 31,462 26,608 23,222 Loss from Discontinued Operations - Net (Note 12) - - (29) ------------ ------------ ------------ Net Income Applicable to Common Stock $ 31,462 $ 26,608 $ 23,193 ============ ============ ============ The accompanying footnotes are an integral part of the financial statements. SOUTH JERSEY GAS COMPANY STATEMENTS OF CASH FLOWS -------------------------------------------------------------------------------- (In Thousands) Year Ended December 31, ------------------------------- 2004 2003 2002 -------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Income Applicable to Common Stock $ 31,462 $ 26,608 $ 23,193 Adjustments to Reconcile Net Income to Cash Flows Provided by Operating Activities: Depreciation and Amortization 25,831 26,627 24,730 Provision for Losses on Accounts Receivable 816 3,084 3,664 Revenues and Fuel Costs Deferred - Net 14,582 29,874 6,788 Deferred and Noncurrent Income Taxes and Credits - Net 13,982 1,225 11,096 Environmental Remediation Costs - Net (2,634) 2,323 6,361 Additional Pension Contributions (8,028) (5,200) (15,851) Gas Plant Cost of Removal (1,107) (925) (1,147) Changes in: Accounts Receivable 7,871 6,854 (20,569) Inventories (7,713) (18,065) 18,670 Other Prepayments and Current Assets (311) 1,118 (636) Prepaid and Accrued Taxes - Net (11,536) 4,888 3,518 Accounts Payable and Other Accrued Liabilities 12,435 515 11,977 Other - Assets 423 480 (1,390) Other - Liabilities 811 (1,011) 1,009 ----------- ----------- ------------ Net Cash Provided by Operating Activities 76,884 78,395 71,413 ----------- ----------- ------------ Cash Flows from Investing Activities: Return of Investment in Affiliate - 1,082 - Capital Expenditures (68,632) (53,175) (49,530) Purchase of Available-for-Sale Securities (338) (339) (693) Proceeds from Sale of Appliance Service Operations 2,668 - - ----------- ----------- ------------ Net Cash Used in Investing Activities (66,302) (52,432) (50,223) ----------- ----------- ------------ Cash Flows from Financing Activities: Net (Repayments of) Borrowing from Lines of Credit (34,200) (66,700) 18,400 Proceeds from Issuance of Long-Term Debt 40,000 110,000 - Principal Repayments of Long-Term Debt (21,773) (86,740) (30,268) Premium for Early Retirement of Debt - (1,048) (617) Dividends on Common Stock (9,123) - (10,700) Payments for Issuance of Long-Term Debt (386) (1,845) (201) Additional Investment by Shareholder 15,000 20,000 2,500 ------------ ---------- ------------ Net Cash Used in Financing Activities (10,482) (26,333) (20,886) ------------ ---------- ------------ Net Increase (Decrease) in Cash and Cash Equivalents 100 (370) 304 Cash and Cash Equivalents at Beginning of Period 3,210 3,580 3,276 ------------ ---------- ------------ Cash and Cash Equivalents at End of Period $ 3,310 $ 3,210 $ 3,580 =========== ========== ============ Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest (Net of Amounts Applicable to Gas Cost Overcollections and Amounts Capitalized) $ 17,467 $ 19,805 $ 23,710 Income Taxes (Net of Refunds) $ 14,594 $ 14,060 $ 4,779 The accompanying footnotes are an integral part of the financial statements. SOUTH JERSEY GAS COMPANY BALANCE SHEETS -------------------------------------------------------------------------------- (In Thousands) December 31, -------------------------- 2004 2003 (1) -------------------------------------------------------------------------------- ASSETS Property, Plant and Equipment: (Notes 1, 3 & 7) Utility Plant, at original cost $ 957,287 $ 894,654 Accumulated Depreciation (224,506) (209,831) ------------- ------------- Property, Plant and Equipment - Net 732,781 684,823 ------------- ------------- Investments: Available-for-Sale Securities (Note 1) 5,296 4,497 ------------- ------------- Current Assets: Cash and Cash Equivalents (Notes 1 & 9) 3,310 3,210 Accounts Receivable (Notes 1, 2 & 3) 39,916 58,012 Unbilled Revenues (Note 1) 34,861 31,070 Provision for Uncollectibles (Note 1) (2,871) (3,263) Natural Gas in Storage, average cost 65,691 59,432 Materials and Supplies, average cost 4,553 3,559 Prepaid Taxes 6,104 2,661 Derivatives - Energy Related Assets (Note 1) 1,273 2,375 Other Prepayments and Current Assets 2,078 2,317 ------------- ------------- Total Current Assets 154,915 159,373 ------------- ------------- Regulatory Assets: (Note 1) Environmental Remediation Costs: (Notes 2 & 13) Expended - Net 5,281 4,147 Liability for Future Expenditures 51,046 50,983 Gross Receipts and Franchise Taxes (Note 6) 924 1,367 Income Taxes - Flowthrough Depreciation (Note 6) 6,641 7,619 Deferred Postretirement Benefit Costs (Note 11) 3,024 3,402 Societal Benefit Costs (Note 2) 4,562 7,529 Other Regulatory Assets 1,157 732 --------------- ------------- Total Regulatory Assets 72,635 75,779 --------------- ------------- Other Noncurrent Assets: Unamortized Debt Discount and Expense (Note 7) 7,957 8,122 Prepaid Pension (Notes 1 & 11) 24,812 18,206 Accounts Receivable - Merchandise 7,101 4,671 Other 2,089 1,066 --------------- ------------- Total Other Noncurrent Assets 41,959 32,065 --------------- ------------- Total Assets $ 1,007,586 $ 956,537 =============== ============= (1) Restated - See Note 1. The accompanying footnotes are an integral part of the financial statements. SOUTH JERSEY GAS COMPANY BALANCE SHEETS -------------------------------------------------------------------------------- (In Thousands) December 31, -------------------------- 2004 2003 (1) -------------------------------------------------------------------------------- Capitalization and Liabilities Common Equity: (Note 10) Common Stock, Par Value $2.50 per share: Authorized - 4,000,000 shares Outstanding - 2,339,139 shares $ 5,848 $ 5,848 Other Paid-In Capital and Premium on Common Stock 170,317 155,317 Accumulated Other Comprehensive (Loss) Income (112) 279 Retained Earnings 130,695 108,356 --------------- ------------- Total Common Equity 306,748 269,800 --------------- ------------- Preferred Stock: (Note 4) Redeemable Cumulative Preferred 8% Series - Par Value $100 per share, Authorized 41,966 shares, Outstanding 16,904 shares 1,690 1,690 -------------- -------------- Long-Term Debt (Notes 7 & 8) 282,008 263,781 -------------- -------------- Total Capitalization 590,446 535,271 -------------- -------------- Current Liabilities: Notes Payable (Note 9) 53,000 87,200 Current Maturities of Long-Term Debt (Note 7) 5,273 5,273 Accounts Payable (Notes 1 & 3) 59,026 50,554 Derivatives - Energy Related Liabilities (Note 1) 1,800 565 Derivatives - Other (Note 1) 344 7 Deferred Income Taxes - Net (Note 5) 2,627 6,694 Customer Deposits 8,846 7,957 Environmental Remediation Costs (Note 13) 13,531 7,630 Taxes Accrued (Note 5) 1,228 9,321 Interest Accrued and Other Current Liabilities 12,386 9,414 --------------- ------------- Total Current Liabilities 158,061 184,615 --------------- ------------- Deferred Credits and Other Noncurrent Liabilities: Deferred Income Taxes - Net (Note 5) 138,208 118,894 Environmental Remediation Costs (Note 13) 37,515 43,353 Regulatory Liabilities (Note 1) 63,836 49,970 Pension and Other Postretirement Benefits (Note 11) 11,039 11,336 Investment Tax Credits (Note 6) 3,129 3,471 Other 5,352 9,627 --------------- ------------- Total Deferred Credits and Other Noncurrent Liabilities 259,079 236,651 --------------- ------------- Total Capitalization and Liabilities $ 1,007,586 $ 956,537 =============== ============= (1) Restated - See Note 1. The accompanying footnotes are an integral part of the financial statements. SOUTH JERSEY GAS COMPANY STATEMENTS OF CHANGES IN COMMON EQUITY AND COMPREHENSIVE INCOME ----------------------------------------------------------------------------------------------------------------------------------- (In Thousands) Other Paid-in Accumulated Capital & Other Common Premium on Comprehensive Retained Stock Common Stock (Loss) Income Earnings Total ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 5,848 132,817 (1,939) 69,255 205,981 Net Income Applicable to Common Stock 23,193 23,193 Other Comprehensive Loss, Net of Tax:* Minimum Pension Liability Adjustment (6,517) (6,517) Unrealized Loss on Equity Investments (149) (149) Unrealized Loss on Derivatives (84) (84) ----------- Comprehensive Income 16,443 Additional Investment by Shareholder 2,500 2,500 Cash Dividends Declared - Common Stock (10,700) (10,700) ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 5,848 135,317 (8,689) 81,748 214,224 Net Income Applicable to Common Stock 26,608 26,608 Other Comprehensive Income, Net of Tax:* Minimum Pension Liability Adjustment 8,456 8,456 Unrealized Gain on Equity Investments 432 432 Unrealized Gain on Derivatives 80 80 ------------- Comprehensive Income 35,576 Additional Investment by Shareholder 20,000 20,000 Cash Dividends Declared - Common Stock - - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2003 5,848 155,317 279 108,356 269,800 Net Income Applicable to Common Stock 31,462 31,462 Other Comprehensive Income, Net of Tax:* Unrealized Loss on Equity Investments (192) (192) Unrealized Loss on Derivatives (199) (199) ---------- Comprehensive Income 31,071 Additional Investment by Shareholder 15,000 15,000 Cash Dividends Declared - Common Stock (9,123) (9,123) ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2004 $ 5,848 $ 170,317 $ (112) $ 130,695 $ 306,748 ---------------------------------------------------------------------------------------------------------------------------------- Disclosure of Accumulated Other Comprehensive (Loss) Income Balances* (In Thousands) Minimum Unrealized Accumulated Pension (Loss) Gain Unrealized Gain Other Liability on Equity (Loss) on Comprehensive Adjustment Investments Derivatives (Loss) Income ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2001 $ (1,939) $ - $ - $ (1,939) Changes During Year (6,517) (149) (84) (6,750) ------------------------------------------------------------------ Balance at December 31, 2002 (8,456) (149) (84) (8,689) Changes During Year 8,456 432 80 8,968 ------------------------------------------------------------------ Balance at December 31, 2003 - 283 (4) 279 Changes During Year - (192) (199) (391) ------------------------------------------------------------------ Balance at December 31, 2004 $ - $ 91 $ (203) $ (112) *Determined using a combined statutory tax rate of 40.85%.
SOUTH JERSEY GAS COMPANY NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The Entity - South Jersey Industries, Inc. (SJI) owns all of the outstanding common stock of South Jersey Gas Company (SJG). Restatements - Subsequent to the issuance of the December 31, 2003 balance sheet, SJG determined that it had certain misclassifications, improper netting and omissions from last year's balance sheet. The restatements to the December 31, 2003 balance sheet as presented were required to correct the misclassification of prepaid pension assets; the improper netting of certain accounts receivables and accounts payables to third-party gas marketers (See Note 3); and the omission of gas supply derivative contracts that are subject to regulatory recovery. A summary of the restatements of the December 31, 2003 balance sheet is presented in the table below: Thousands of Dollars As Previously As Recorded Restated Current Assets: Accounts Receivable $ 48,412 $ 58,012 Prepaid Pension 18,206 -- Derivatives - Energy Related Assets -- 2,375 Regulatory Assets: Deferred Fuel Costs - Net 1,720 -- Other Noncurrent Assets: Prepaid Pension -- 18,206 Current Liabilities: Accounts Payable 40,954 50,554 Derivatives - Energy Related Liabilities -- 565 Deferred Credits and Other Noncurrent Liabilities: Regulatory Liabilities 49,880 49,970 The restatements had no impact on common equity or the statements of income. Furthermore, there was no impact on net cash flows provided by operating activities for the years ended December 31, 2003 and 2002. Equity Investments - We classify equity investments purchased as long-term investments as Available-for-Sale Securities on our balance sheets and carry them at their fair value with any unrealized gains or losses included in Accumulated Other Comprehensive Income. Estimates and Assumptions - We prepare our financial statements to conform with generally accepted accounting principles. Management makes estimates and assumptions that affect the amounts reported in the financial statements and related disclosures. Therefore, actual results could differ from those estimates. Significant estimates include amounts related to regulatory accounting, energy derivatives, environmental remediation costs, pension and other postretirement benefit costs, and revenue recognition. Regulation - SJG is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU). We maintain our accounts according to the BPU's prescribed Uniform System of Accounts (See Note 2). SJG follows the accounting for regulated enterprises prescribed by the Financial Accounting Standards Board (FASB) Statement No. 71, "Accounting for the Effects of Certain Types of Regulation." In general, Statement No. 71 allows deferral of certain costs and creation of certain obligations when it is probable that such items will be recovered from or refunded to customers in future periods. Operating Revenues - We bill customers monthly for gas deliveries. For retail customers not billed at the end of each month, we record an estimate to recognize unbilled revenues from the date of the last meter reading to the end of the month. We deferred and recognized revenues related to our appliance service contracts seasonally over the full 12-month term of the contract prior to transferring that business to South Jersey Energy Service Plus (SJESP). SJESP is an affiliate by common ownership. The BPU allows us to recover gas costs through the Basic Gas Supply Service (BGSS) clause. We collect these costs on a forecasted basis upon BPU order. SJG defers over/under-recoveries of gas costs and includes them in the following year's BGSS or other similar recovery mechanism. We pay interest on overcollected BGSS balances at the rate of return on rate base utilized by the BPU to set rates in its last base rate proceeding (See Note 2). Our tariff also includes a Temperature Adjustment Clause (TAC), a Remediation Adjustment Clause (RAC), a New Jersey Clean Energy Program (NJCEP) and a Universal Service Fund (USF) program. Our TAC reduces the impact of temperature fluctuations on the Company and our customers. The RAC recovers environmental remediation costs of former gas manufacturing plants and the NJCEP recovers costs associated with our energy efficiency and renewable energy programs. The USF is a statewide customer assistance program that utilizes utilities as a collection agent. TAC adjustments affect revenue, income and cash flows since colder-than-normal weather can generate credits to customers, while warmer-than-normal weather can result in additional billings. RAC adjustments do not directly affect earnings because we defer and recover these costs through rates over 7-year amortization periods (See Notes 2 & 13). NJCEP and USF adjustments are also deferred and do not affect earnings, as related costs and customer credits are recovered through rates on an ongoing basis (See Note 2). Accounts Receivable and Provision for Uncollectible Accounts - Accounts receivable are carried at the amount owed by customers. A provision for uncollectible accounts has been established based on our collection experience and an assessment of the collectibility of specific accounts. Property, Plant & Equipment - For regulatory purposes, utility plant is stated at original cost, which may be different than SJG's cost if the assets were acquired from another regulated entity. The cost of adding, replacing and renewing property is charged to the appropriate plant account. The Utility Plant balances as of December 31, 2004 and 2003 were comprised of the following: Thousands of Dollars 2004 2003 ------ ------ Utility Plant: Production Plant $ 302 $ 302 Storage Plant 11,049 11,013 Transmission Plant 113,691 105,173 Distribution Plant 784,267 741,441 General Plant 33,775 30,977 Intangible Plant 1,855 1,856 ---------------------------- Utility Plant in Service 944,939 890,762 Construction Work in Progress 12,348 3,892 ---------------------------- Total Utility Plant $ 957,287 $ 894,654 ============================== Depreciation - We depreciate utility plant on a straight-line basis over the estimated remaining lives of the various property classes. These estimates are periodically reviewed and adjusted as required after BPU approval. The composite annual rate for all depreciable utility property was approximately 2.9% in both 2003 and 2002. As a result of our recent rate case settlement, our composite depreciation rate was reduced from 2.9% to 2.4%, effective July 8, 2004 (See Note 2). Except for extraordinary retirements, accumulated depreciation is charged with the cost of depreciable utility property retired, less salvage (See Asset Retirement Costs). Capitalized Interest - SJG capitalizes interest on construction at the rate of return on rate base utilized by the BPU to set rates in the last base rate proceeding (See Note 2). SJG capitalized interest of $0.7 million in 2004, $0.6 million in 2003 and $0.4 million in 2002 which are included in Utility Plant on the balance sheets. All capitalized interest is reflected on the statements of income as a reduction of Interest Charges. Impairment of Long-Lived Assets - We review the carrying amount of an asset for possible impairment whenever events or changes in circumstances indicate that such amount may not be recoverable. For the years ended 2004, 2003 and 2002, no significant circumstances were identified. Derivative Instruments - SJG accounts for derivative instruments in accordance with FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This statement establishes accounting and reporting standards for derivative instruments, including those embedded in other contracts, and for hedging activities. It requires that all derivatives, whether designated as hedging relationships or not, must be recorded on the balance sheet at fair value unless the derivative contracts qualify for the normal purchase and sale exemption. If the derivative is designated as a fair value hedge, we recognize the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk in earnings. If the derivative is designated as a cash flow hedge, we record the effective portion of changes in the fair value of the derivative in Accumulated Other Comprehensive Income (Loss) and recognize it in the income statement when the hedged item affects earnings. We recognize ineffective portions of changes in the fair value of cash flow hedges in earnings. We currently have no fair value hedges. As part of its gas purchasing strategy, SJG occasionally uses financial contracts to hedge against forward price risk. The costs of these short-term contracts are recoverable through our BGSS, subject to BPU approval. As of December 31, 2004 and 2003, SJG has $0.5 million and $(1.8) million of cost (cost reductions), respectively, included in its BGSS related to these contracts (See Caption Regulatory Assets & Regulatory Liabilities). The vast majority of our contracts related to physical transactions that qualify as derivatives. Management believes, however, based on its interpretation of guidance issued, that as these derivative contracts relate to the purchase and sale of natural gas, they qualify for the normal purchase and sale exception. Therefore, we are not required to mark these contracts to market. In May 2003, we entered into an interest rate swap contract that effectively fixed the interest rate at 2.24% through May 20, 2004 on $20.0 million of our debt outstanding under bank lines. In November 2004, we entered into a derivative transaction known as a "Treasury Lock" to hedge against the impact of possible interest rate increases on a $10.0 million, 30-year debt issuance planned for July 2005. We enter into interest rate derivative agreements to hedge the exposure to increasing rates with respect to our variable rate debt. The differential to be paid or received as a result of these agreements is accrued as interest rates change and is recognized as an adjustment to interest expense. Interest rate derivatives are accounted for as cash flow hedges. As of December 31, 2004 and 2003, the market value of these contracts was $(344,000) and $(7,000), respectively, which represents the amount we would have to pay the counterparty to terminate the contracts as of those dates. We included these balances on the balance sheets under the caption Derivatives - Other. As of December 31, 2004 and 2003, we calculated the derivatives to be highly effective; therefore, we recorded the change in fair value of the contracts, net of taxes, in Accumulated Other Comprehensive Income (Loss). We determined the fair value of interest rate derivative agreements using quotations from independent parties. Asset Retirement Costs - In January 2003, SJG adopted FASB Statement No. 143, "Accounting for Asset Retirement Obligations," which establishes accounting and reporting standards for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We have certain easements and right-of-way agreements that qualify as legal obligations under Statement No. 143. However, it is our intent to maintain these agreements in perpetuity; therefore, no change in our current accounting practices is required related to these agreements. SJG recovers certain asset retirement costs through rates charged to customers. As of December 31, 2004 and 2003, we had accrued amounts in excess of actual removal costs incurred totaling $47.3 and $45.2 million, respectively, which in accordance with Statement No. 143, are recorded as Regulatory Liabilities on the balance sheets. The adoption of this statement did not materially affect our financial condition or results of operations. Stock Compensation - Officers of SJG participate in the Stock Option, Stock Appreciation Rights and Restricted Stock Awards Plan of SJI. Under the SJI plan, no more than 306,000 shares of SJI common stock in the aggregate may be issued to officers of SJI and SJG, or other key employees. No options or stock appreciation rights may be granted under the plan after November 22, 2006. No options were granted or outstanding during the three years ended December 31, 2004, 2003 and 2002. No stock appreciation rights have been issued under the plan. In 2004, 2003 and 2003, SJI granted 21,899, 30,810 and 26,034 restricted shares, respectively. Of these amounts, 14,601, 24,296 and 21,083 restricted shares were issued to SJG officers in 2004, 2003 and 2002, respectively. These restricted shares vest over a 3-year period and are subject to SJI achieving certain performance targets. SJG's annual expense associated with these awards was approximately $1.3 million, $0.8 million and $0.4 million in 2004, 2003 and 2002, respectively. Prior to 2003, SJI valued stock options to employees using the intrinsic value method. Effective in 2003, SJI adopted the policy of accounting for this compensation using the fair value based method on a prospective basis. New Accounting Pronouncements - In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure," which was effective for SJG's 2002 annual financial statements. As previously discussed, SJG participates in the stock compensation plans of SJI. Effective in 2003, SJI adopted the policy of accounting for this compensation using the fair value based method on a prospective basis. This method calls for expensing the estimated fair value of a stock option. The provisions of this statement currently have no impact on either SJG's or SJI's financial statements. In addition, the FASB issued Statement No. 123(R), "Share-Based Payment," in December 2004. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. While this statement is not effective until reporting periods beginning after June 15, 2005, management has completed its assessment of Statement No. 123(R) and has determined that it does not have any impact on either SJG's or SJI's accounting for share-based payments. In December 2003, the FASB revised Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46R), which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." This interpretation provides guidance on the identification and consolidation of variable interest entities (VIEs), whereby consolidation is achieved through means other than through control. We have completed our assessment of FIN 46R and have determined that we do not have any interest in VIEs. Also in December 2003, the FASB revised Statement No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." This statement revises employers' disclosures about pension and other post-retirement benefit plans, including new interim reporting requirements. We have adopted and complied with new disclosure requirements. In November 2004, the FASB issued Statement No. 151, "Inventory Costs." This statement requires that abnormal amounts of idle facility expense, freight, handling costs and spoilage be charged to income as a current period expense rather than capitalized as inventory costs. The effective date of this statement is January 1, 2006; however, it is not expected to have any impact on SJG based on its current lines of business. In December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary Assets, an amendment to APB Opinion No. 29, Accounting for Nonmonetary Transactions." This statement redefines the types of nonmonetary exchanges that require fair value measurement. Statement No. 153 is effective for nonmonetary transactions entered into on and after July 1, 2005. Management is currently evaluating the effect of this standard, but it does not anticipate the adoption of this statement to have a material effect on our consolidated financial statements. Income Taxes - Deferred income taxes are provided for all significant temporary differences between book and taxable basis of assets and liabilities (See Notes 5 & 6). Regulatory Assets & Regulatory Liabilities - All significant regulatory assets are separately identified on the balance sheets under the caption Regulatory Assets. Each item that is separately identified is being recovered through utility rate charges. SJG is currently permitted to recover interest on its Environmental Remediation and Societal Benefit costs while the other assets are being recovered without a return on investments over the following periods (See Note 2): Years Remaining Regulatory Asset As of December 31, 2004 ---------------- ----------------------- Environmental Remediation Costs: (Notes 2 & 13) Expended - Net Various Liability for Future Expenditures Not Applicable Gross Receipts and Franchise Taxes (Note 6) 2 Income Taxes - Flowthrough Depreciation (Note 6) 7 Deferred Postretirement Benefit Costs (Note 11) 8 Societal Benefit Costs (Note 2) Various Most of the assets reflected under the caption Other Regulatory Assets are currently being recovered from ratepayers as approved by the BPU (See Note 2). Management believes that all deferred costs are probable of recovery from ratepayers through future utility rates. Regulatory Liabilities at December 31, 2004 and 2003 consisted of the following items: Thousands of Dollars 2004 2003 -------- ------------ Deferred Gas Revenues - Net (Note 2) $ 12,334 $ 90 Excess Plant Removal Costs 47,345 45,241 Overcollected State Taxes 3,871 4,353 Other 286 286 -------------------------- Total Regulatory Liabilities $ 63,836 $ 49,970 ========================== Deferred Gas Revenues - Net represent SJG's net overcollected gas costs and are monitored through SJG's BGSS mechanism. As of December 31, 2003, we carried an offsetting underrecovery of gas costs in the amount of $16.1 million representing the remaining balance of a $38.9 million underrecovery originating in 2001. This 2001 underrecovery was collected from customers over a 3-year period. The remaining balance was collected during 2004 (See previous discussion of Revenues and Note 9). Derivatives used to hedge our natural gas purchases are recoverable through its BGSS, subject to BPU approval. The offset to the change in fair value of these contracts is recorded as a Regulatory Asset or Regulatory Liability accordingly. Excess Plant Removal Costs represent amounts accrued in excess of actual utility plant removal costs incurred to date (See Asset Retirement Costs). All other amounts are subject to being returned to ratepayers in future rate proceedings. Cash and Cash Equivalents - For purposes of reporting cash flows, highly liquid investments with original maturities of three months or less are considered cash equivalents. Reclassifications - SJG reclassified some previously reported amounts to conform with current year classifications. Such reclassifications include the move of $8.4 million and $6.8 million of certain operating expenses previously included in Revenue to Cost of Sales and Operations Expense for 2003 and 2002, respectively. These amounts are considered immaterial to the overall presentation of SJG's financial statements. 2. REGULATORY ACTIONS: Base Rates - In January 1997, the BPU granted SJG rate relief, which was predicated in part upon a 9.62% rate of return on rate base that included an 11.25% return on common equity. This rate relief provided for cost-of-service recovery, including deferred costs, through base rates. Additionally, our threshold for sharing pre-tax margins generated by interruptible and off-system sales and transportation had increased. As a result of this case, SJG kept 100% of pre-tax margins up to the threshold level of $7.8 million. The next $750,000 was credited to customers through the Basic Gas Supply Service (BGSS) clause. Thereafter, SJG kept 20% of the pre-tax margins as it had historically. On July 7, 2004, the BPU granted SJG a base rate increase of $20.0 million, which was predicated in part upon a 7.97% rate of return on rate base that included a 10.0% return on common equity. The increase was effective July 8, 2004 and designed to provide an incremental $8.5 million on an annualized basis to net income. SJG was also permitted recovery of regulatory assets contained in its petition and a reduction in its composite depreciation rate from 2.9% to 2.4%. Included in the base rate increase was a change to the sharing of pre-tax margins on interruptible and off-system sales and transportation. SJG now recovers through its base rates $7.8 million that it had previously recovered through the sharing of pre-tax margins. As a result, the sharing of pre-tax margins now begins from dollar one, with SJG retaining 20%. Moreover, SJG now shares pre-tax margins from on-system capacity release sales, in addition to the interruptible and off-system sales and transportation. Effective July 1, 2006, the 20% retained by SJG will decrease to 15% of such margins. As part of the overall settlement effective July 8, 2004, SJG reduced rates in several rate clauses that were no longer needed by SJG to recover costs. SJG was either no longer incurring or had already recovered the specific costs that these clauses were designed to recover. Since revenues raised under these clauses were for cost recovery only and had no profit margin built in, their elimination has no impact on SJG's net income. However, SJG's customers' bills are estimated to decline by $38.9 million annually due to the elimination of these clauses, more than offsetting the base rate increase awarded. Pending Audits - The BPU issued an order under which it will perform a competitive services audit and a management audit that includes a focused review of SJG's gas supply and purchasing practices. The audits, which commenced in October 2004, are mandated by statute to be conducted at predetermined intervals. Management does not currently anticipate the outcome of these audits to have a material effect on SJG's financial position, results of operations or liquidity. Appliance Service Business - On July 23, 2004, the BPU approved SJG's petition and related agreements to transfer its appliance service business from the regulated utility. In anticipation of this transfer, SJI had formed South Jersey Energy Service Plus, LLC (SJESP) to perform appliance repair services after BPU approval of the transfer. SJESP purchased certain assets and assumed certain liabilities required to perform such repair services from SJG for the net book value of $1.2 million on September 1, 2004. The agreements also called for SJESP to pay an additional $1.5 million to SJG. This $1.5 million was credited by SJG to customers through the Remediation Adjustment Clause (RAC) and had no earnings impact on SJG. The transfer has no effect on the provision of safety-related or emergency-related services to the public since the transferred services include only non-safety related, competitive appliance services. Other Regulatory Matters - Effective January 10, 2000, the BPU approved full unbundling of SJG's system. This allows all natural gas consumers to select their natural gas commodity supplier. As of December 31, 2004, 87,645 of SJG's residential customers were purchasing their gas commodity from someone other than SJG. Customers choosing to purchase natural gas from providers other than the utility are charged for the cost of gas by the marketer, not the utility. The resulting decrease in SJG's revenues is offset by a corresponding decrease in gas costs. While customer choice can reduce utility revenues, it does not negatively affect SJG's net income or financial condition. The BPU continues to allow for full recovery of prudently incurred natural gas costs through the BGSS. Unbundling did not change the fact that SJG still recovers cost of service, including deferred costs, through base rates. In December 2001, the BPU approved recovery of SJG's October 31, 2001 underrecovered gas cost balance of $48.9 million plus accrued interest since April 1, 2001 at a rate of 5.75%. The recovery of this balance was completed upon the settlement of SJG's base rate case in July 2004. In August 2002, SJG filed for a Societal Benefits Clause (SBC) rate increase. The SBC recovers costs related to BPU-mandated programs, including environmental remediation costs that are recovered through SJG's RAC; energy efficiency and renewable energy program costs that are recovered through SJG's New Jersey Clean Energy Programs; consumer education program costs; and low income program costs that are recovered through the Universal Service Fund. In August 2003, the BPU approved a $6.7 million increase to SJG's SBC, effective September 1, 2003. In September 2004, SJG filed for a $2.6 million reduction to its current SBC annual recovery level of $17.5 million. In September 2002, SJG filed for an $8.6 million rate increase to recover the cash related to a Temperature Adjustment Clause (TAC) deficiency resulting from warmer-than-normal weather for the 2001-2002 winter. As a result of the colder-than-normal 2002-2003 winter, the cumulative TAC deficiency decreased to $5.7 million. In August 2003, the BPU approved the recovery of the $5.7 million TAC deficiency, effective September 1, 2003. SJG has fully recovered the $5.7 million. In September 2004, SJG filed for a $1.2 million increase to recover the cash related to the TAC deficiency resulting from the 2003-2004 winter, which was warmer than normal. Also, in September 2002, SJG filed with the BPU to maintain its current BGSS rate through October 2003. However, due to price increases in the wholesale market, in February 2003, SJG filed an amendment to the September 2002 filing. In April 2003, the BPU approved a $16.6 million increase to SJG's annual gas costs recoveries. In March 2003, the BPU approved a statewide Universal Service Fund (USF) program on a permanent basis. In June 2003, the BPU established a statewide program through which funds for the USF and Lifeline Credit and Tenants Assistance (Lifeline) Programs would be collected from customers of all electric and gas utilities in the state. The BPU ordered that utility rates be set to recover a total statewide USF budget of $33.0 million, and a total Lifeline budget of $72.0 million. Recovery rates for both programs were implemented on August 1, 2003. In April 2004, SJG made its annual USF filing, along with the state's other electric and gas utilities, proposing a statewide USF budget of $105.5 million. The proposed statewide budget was updated to $113.0 million and filed with the BPU in May 2004. In June 2004, the BPU approved the statewide budget of $113.0 million and the increased rates were implemented effective July 1, 2004, resulting in a $3.9 million increase to SJG's annual USF recoveries. In July 2003, SJG made its annual BGSS filing, as amended, with the BPU. Due to further price increases in the wholesale market, SJG filed for a $24.0 million increase to their annual gas cost revenues. In August 2003, the BPU approved SJG's price increase on a provisional basis, subject to refund with interest, effective September 1, 2003. In October 2004, the provisional rate increase was made final with no refund required. In February 2004, SJG filed notice with the BPU to reduce its gas cost revenues by approximately $5.0 million, via a rate reduction, in addition to providing for a $20.8 million bill credit to customers. Both the rate reduction and bill credit were approved and implemented in March 2004. In June 2004, SJG made its annual BGSS filing with the BPU requesting a $4.9 million increase in gas cost recoveries. In October 2004, the requested increase was approved on a provisional basis. Filings and petitions described above are still pending unless otherwise indicated. 3. RELATED PARTY TRANSACTIONS: SJG sells natural gas for resale to South Jersey Energy Company (SJE) and South Jersey Resources Group, LLC (SJRG), SJI's wholly owned subsidiaries. These sales comply with Section 284.402 of the Regulations of the Federal Energy Regulatory Commission (FERC). Sales to SJE were approximately $7.6 million, $25.9 million, and $14.0 million for the years ended December 31, 2004, 2003 and 2002, respectively. The amounts due from SJE relating to these sales were $ -0- and $0.8 million at December 31, 2004 and 2003, respectively. Sales to SJRG were approximately $5.1 million, $12.8 million and $17.0 million for the years ended December 31, 2004, 2003 and 2002, respectively. The amounts due from SJRG relating to these sales were $0.6 million and $ -0- at December 31, 2004 and 2003, respectively. We also meet some of our gas purchasing requirements by purchasing natural gas for resale from SJRG. Such purchases were approximately $22.1 million, $20.5 million and $11.7 million for the years ended December 31, 2004, 2003 and 2002, respectively. Additionally, we purchased gas storage services from SJRG totaling approximately $ -0-, $0.2 million and $0.6 million for the years ended December 31, 2004, 2003 and 2002, respectively. There were no amounts due to SJRG relating to gas purchases and storage services at December 31, 2004 or 2003. SJG also provides transportation services to Marina Energy, LLC, an affiliate by common ownership. Sales for these services were $171,200 and $71,000 for the years ended December 31, 2004 and 2003. The amount due relating to such services was $18,000 and $48,000 at December 31, 2004 and 2003, respectively. SJG provides billing services for third-party energy marketers supplying natural gas to customers within SJG's territory. For commercial and industrial customers, SJG provides this service for a fixed fee per customer. For residential customers, SJG purchases the accounts receivable at book value from the marketer and assumes all risk associated with the collection of such amounts. The fee paid by third-party energy marketers for the purchase of the residential accounts receivables includes a factor for potential uncollectible accounts. The largest marketer in SJG's territory is SJE. Fees charged for the billing service and the purchase of SJE's customer accounts receivable totaled $0.5 million, $0.3 million and $0.1 million for the years ended 2004, 2003 and 2002, respectively. The amounts due to SJE for account collections and the purchase of the residential accounts receivables were $6.5 million and $8.2 million at December 31, 2004 and 2003, respectively. SJG also provides billing services for South Jersey Energy Service Plus, LLC (SJESP), an affiliate by common ownership, and receives a fee for the provision of this service. Since the transfer of SJG's appliance service operations on September 1, 2004 (See Note 2), fees for providing such services totaled $22,800 for the four months ended December 31, 2004. The amount due to SJESP relating to these collections was $1.8 million at December 31, 2004. SJI and Conectiv Solution, LLC formed Millennium Account Services, LLC (Millennium) to provide meter reading services in southern New Jersey. SJG uses the services of Millennium to read utility customers' meters on a monthly basis for a fee. The fees incurred by SJG related to such services were approximately $2.4 million in each of the three years ended December 31, 2004, 2003, and 2002. The amounts due to Millennium for meter reading services were $0.4 million and $0.2 million at December 31, 2004 and 2003, respectively. 4. PREFERRED STOCK: Redeemable Cumulative Preferred Stock - Annually, we are required to offer to purchase 1,500 shares of our Cumulative Preferred Stock, Series B, at par value, plus accrued dividends. We may not declare or pay dividends or make distributions on our common stock if preferred stock dividends are in arrears. Preferred shareholders may elect a majority of our directors if four or more quarterly dividends are in arrears. 5. INCOME TAXES: SJG is included in the consolidated Federal income tax return filed by SJI. The actual taxes, including credits, are allocated by SJI to its subsidiaries, generally on a separate return basis. Total income taxes applicable to operations differ from the tax that would have resulted by applying the statutory Federal Income Tax rate to pre-tax income for the following reasons: Thousands of Dollars 2004 2003 2002 ------------------------------------ Tax at Statutory Rate $ 19,051 $ 16,319 $ 14,208 Increase (Decrease) Resulting from: State Income Taxes 3,738 3,137 2,847 Amortization of Investment Tax Credit (Note 6) (342) (347) (347) Amortization of Flowthrough Depreciation (Note 6) 664 664 664 Other - Net (142) (154) - -------------------------------------- Income Taxes: Continuing Operations 22,969 19,619 17,372 Discontinued Operations - - (21) -------------------------------------- Net Income Taxes $ 22,969 $ 19,619 $ 17,351 ====================================== The provision for Income Taxes is comprised of the following: Thousands of Dollars 2004 2003 2002 ------------------------------------- Current: Federal $ 4,078 $ 12,143 $ 3,152 State 4,632 6,251 3,124 -------------------------------------- Total Current 8,710 18,394 6,276 -------------------------------------- Deferred: Federal: Excess of Tax Depreciation Over Book Depreciation - Net 14,781 10,752 9,609 Deferred Fuel Costs - Net (3,548) (10,446) (3,728) Environmental Costs - Net 826 (184) (1,494) Alternative Minimum Tax - 1,332 (66) Prepaid Pension 2,515 1,496 5,343 Deferred Regulatory Costs (883) 750 1,543 Other - Net (209) (703) (1,021) State 1,119 (1,425) 1,257 -------------------------------------- Total Deferred 14,601 1,572 11,443 Investment Tax Credit (342) (347) (347) -------------------------------------- Income Taxes: Continuing Operations 22,969 19,619 17,372 Discontinued Operations - - (21) -------------------------------------- Net Income Taxes $ 22,969 $ 19,619 $ 17,351 ====================================== The net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes resulted in the following deferred tax liabilities at December 31: Thousands of Dollars 2004 2003 ------------------------- Current: Deferred Fuel Costs - Net $ 2,774 $ 7,236 Other (147) (542) --------------------------- Current Deferred Tax Liability - Net 2,627 6,694 --------------------------- Noncurrent: Book Versus Tax Basis of Property 124,630 110,994 Prepaid Pension 11,570 7,138 Environmental 2,680 1,642 Deferred Regulatory Costs 3,241 4,687 Deferred State Tax (2,711) (2,146) Investment Tax Credit Basis Gross-Up (1,612) (1,891) Other 410 (1,530) --------------------------- Noncurrent Deferred Tax Liability - Net 138,208 118,894 --------------------------- $ 140,835 $ 125,588 =========================== As of December 31, 2004 and 2003, income taxes (due from) due to SJI were approximately $(0.2) million and $2.8 million, respectively. 6. FEDERAL AND OTHER REGULATORY TAX ASSETS AND DEFERRED CREDITS: The primary asset created by adopting FASB Statement No. 109, "Accounting for Income Taxes," was Income Taxes - Flowthrough Depreciation in the amount of $17.6 million as of January 1, 1993. This amount represented excess tax depreciation over book depreciation on utility plant because of temporary differences for which, prior to Statement No. 109, deferred taxes previously were not provided. We previously passed these tax benefits through to ratepayers. We are recovering the amortization of the regulatory asset through rates over 18 years which began in December 1994 (See Notes 1 & 5). The Investment Tax Credit was deferred and continues to be amortized at the annual rate of 3%, which approximates the life of related assets (See Note 5). We deferred $11.8 million resulting from a change in the basis for accruing the Gross Receipts & Franchise Tax in 1978, and are amortizing it on a straight-line basis to operations over 30 years beginning that same year. We accelerated this amortization slightly as a result of a subsequent rate making proceeding (See Note 1). 7. LONG-TERM DEBT: (A) Principal Outstanding December 31, (In Thousands) 2004 2003 --------------------- First Mortgage Bonds: (B) 8.19% Series due 2007 $ 6,816 $ 9,089 6.12% Series due 2010 10,000 10,000 6.74% Series due 2011 10,000 10,000 6.57% Series due 2011 15,000 15,000 4.46% Series due 2013 10,500 10,500 5.027% Series due 2013 14,500 14,500 4.52% Series due 2014 11,000 11,000 5.115% Series due 2014 10,000 10,000 7.7% Series due 2015 (C) - 15,000 6.50% Series due 2016 9,965 9,965 4.60% Series due 2016 17,000 17,000 4.657% Series due 2017 15,000 15,000 7.97% Series due 2018 10,000 10,000 7.125% Series due 2018 20,000 20,000 7.7% Series due 2027 35,000 35,000 7.9% Series due 2030 10,000 10,000 5.55% Series due 2033 32,000 32,000 5.387% Series due 2015 (D) 10,000 - 5.437% Series due 2016 (D) 10,000 - 5.587% Series due 2019 (D) 10,000 - 6.213% Series due 2034 (D) 10,000 - Unsecured Notes: Debenture Notes, 8.6% due 2010 10,500 15,000 -------------------------- Total Long-Term Debt Outstanding 287,281 269,054 Less Current Maturities 5,273 5,273 -------------------------- Long-Term Debt $ 282,008 $ 263,781 ============================ (A) Long-term debt maturities and sinking fund requirements for the succeeding five years are as follows (in thousands): 2005, $5,273; 2006, $5,273; 2007, $5,270; 2008, $1,500; and 2009, $ -0-. (B) SJG's First Mortgage dated October 1, 1947, as supplemented, securing the First Mortgage Bonds (FMB) constitutes a direct first mortgage lien on substantially all utility plant. (C) On July 15, 2004, SJG redeemed its 7.7% Series due 2015 at par. (D) On August 4, 2004, we issued $40.0 million of debt under our Medium Term Note program established in 2002. 8. FINANCIAL INSTRUMENTS: Long-Term Debt - We estimate the fair values of our long-term debt, including current maturities, as of December 31, 2004 and 2003, to be $303.3 and $293.6 million, respectively. Carrying amounts are $287.3 and $269.1 million, respectively. We base the estimates on interest rates available to us at the end of each year for debt with similar terms and maturities. We retire debt when it is cost effective as permitted by the debt agreements. Other Financial Instruments - The carrying amounts of our other financial instruments approximate their fair values at December 31, 2004 and 2003. 9. UNUSED LINES OF CREDIT AND COMPENSATING BALANCES: Unused lines of credit available at December 31, 2004 were $123.0 million. Borrowings under these lines of credit are at market rates. The weighted borrowing cost, which changes daily, was 3.00% and 1.81% at December 31, 2004 and 2003, respectively. We maintain demand deposits with lending banks on an informal basis and they do not constitute compensating balances. 10. RETAINED EARNINGS: Restrictions exist under various loan agreements regarding the amount of cash dividends or other distributions that we may pay on our common stock. As of December 31, 2004, these restrictions did not affect the amount that may be distributed from SJG's retained earnings. SJG is restricted as to the amount of cash dividends or other distributions that may be paid on its common stock by an order issued by the New Jersey Board of Public Utilities in July 2004, that granted SJG an increase in base rates. Per the order, SJG is required to maintain Total Common Equity of no less than $289.0 million. SJG's Total Common Equity balance was $306.7 million at December 31, 2004. We received equity infusions of $15.0 million, $20.0 million and $2.5 million from SJI during 2004, 2003 and 2002, respectively. Contributions of capital are credited to Other Paid-In Capital and Premium on Common Stock. Future equity contributions will occur on an as needed basis. 11. EMPLOYEE BENEFIT PLANS: Pensions & Other Postretirement Benefit Plans - We participate in the defined benefit pension plans and other postretirement benefit plans of SJI. The pension plans provide annuity payments to the majority of full-time, regular employees upon retirement. Newly hired employees in certain classifications and companies do not qualify for participation in the defined benefit pension plans. The other postretirement benefit plans provide health care and life insurance benefits to some retirees. The BPU authorized SJG to recover costs related to postretirement benefits other than pensions under the accrual method of accounting consistent with FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." We deferred amounts accrued prior to that authorization and are amortizing them as allowed by the BPU. The unamortized balance of $3.0 million at December 31, 2004 is recoverable in rates. We are amortizing this amount over 15 years which started January 1998. On December 8, 2003, the President signed into law the Medicare Prescription Drug, Improvement and Modernization Act (the "Act") of 2003. In accordance with FASB Staff Position No. 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," issued in December 2003, management elected to defer any financial impact resulting from the Act pending the availability of more information. In 2004, with the assistance of SJI's actuary, management has determined that the Act has no impact on the postretirement benefits plans of SJI. Net periodic benefit cost related to the pension and other postretirement benefit plans consisted of the following components: Thousands of Dollars Other Pension Benefits Postretirement Benefits 2004 2003 2002 2004 2003 2002 --------------------------------------------------------------
Service Cost $ 2,443 $ 2,375 $ 2,079 $ 1,160 $ 1,421 $ 1,095 Interest Cost 4,665 4,848 4,597 2,173 2,448 2,285 Expected Return on Plan Assets (5,793) (4,996) (4,157) (1,302) (1,078) (1,046) Amortization of Transition Obligation - 87 87 592 756 756 Amortization of Loss and Other 1,432 1,563 722 130 373 72 --------------------------------------------------------------- Net Periodic Benefit Cost 2,747 3,877 3,328 2,753 3,920 3,162 ERIP Cost 711 - - 134 - - --------------------------------------------------------------- Total Net Periodic Benefit Cost $ 3,458 $ 3,877 $ 3,328 $ 2,887 $ 3,920 $ 3,162 ===============================================================
The table above includes benefit costs capitalized by SJG related to its construction program. Capitalized pension benefit costs totaled $1.0 million, $1.3 million and $1.1 million in 2004, 2003 and 2002, respectively. Capitalized other postretirement benefit costs totaled $1.0 million, $1.3 million and $1.0 million in 2004, 2003 and 2002, respectively. The ERIP costs reflected in the table above relate to an early retirement plan offered during 2004. Additional monetary incentives not reflected in the table above totaled $367,500, which will be funded outside of the retirement plans. A reconciliation of the plans' benefit obligations, fair value of plan assets, funded status and amounts recognized in our balance sheets follows: Thousands of Dollars Pension Other Benefits Postretirement Benefits 2004 2003 2004 2003 --------------------------------------------------
Change in Benefit Obligations: Benefit Obligation at Beginning of Year $ 84,099 $ 75,004 $ 43,109 $ 30,025 Transferred to Affiliate (Note 2) (4,024) - (2,804) - Service Cost 2,443 2,375 1,160 1,421 Interest Cost 4,665 4,848 2,172 2,448 Plan Amendments 434 - (8,643) - Actuarial Loss and Other 9,966 5,437 1,723 10,556 Benefits Paid (3,559) (3,565) (1,751) (1,341) -------------------------------------------------- Benefit Obligation at End of Year $ 94,024 $ 84,099 $ 34,966 $ 43,109 ================================================== Change in Plan Assets: Fair Value of Plan Assets at Beginning of Year $ 76,626 $ 58,204 $ 19,096 $ 13,835 Transferred to Affiliate (Note 2) (3,585) - (1,392) - Actual Return on Plan Assets 7,643 12,911 1,533 3,336 Employer Contributions 10,762 9,076 3,225 3,266 Benefits Paid (3,559) (3,565) (1,751) (1,341) -------------------------------------------------- Fair Value of Plan Assets at End of Year $ 87,887 $ 76,626 $ 20,711 $ 19,096 ================================================== Funded Status: $ (6,137) $ (7,473) $ (14,255) $ (24,014) Unrecognized Prior Service Cost 2,612 2,485 (3,260) - Unrecognized Net Obligation Assets from Transition - - - 6,801 Unrecognized Net Loss and Other 28,337 23,194 11,368 10,268 -------------------------------------------------- Prepaid (Accrued) Net Benefit Cost at End of Year $ 24,812 $ 18,206 $ (6,147) $ (6,945) ==================================================
The accumulated benefit obligation of our pension plans at December 31, 2004 and 2003 was $82.2 million and $70.0 million, respectively. In 2003, SJG had a decrease in its minimum pension liability included in Accumulated Other Comprehensive Income amounting to $8.5 million. As of December 31, 2004, no minimum pension liability adjustment was required. As of November 2004, we implemented caps on the amount of the premium we pay for all employees eligible for postretirement health care. Employees are responsible for those costs which exceed the premium caps. Subsequently, we were able to reduce our 2004 postretirement benefit costs other than pension by a total of $325,200 for the months of November and December 2004. On an ongoing basis, we will experience reduced postretirement benefit costs other than pension due to this plan change. We also have unqualified pension plans provided to certain officers and outside directors which are unfunded. The aggregate accrued net benefit obligation of such plans as of December 31, 2004 and 2003 was $4.7 million and $4.2 million, respectively. The weighted-average assumptions used to determine benefit obligations at December 31 were: Other Pension Benefits Postretirement Benefits 2004 2003 2004 2003 -------------------------------------------------
Discount Rate 5.75% 6.25% 5.75% 6.25% Rate of Compensation Increase 3.60% 3.60% - -
The weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 were: Other Pension Benefits Postretirement Benefits 2004 2003 2002 2004 2003 2002 --------------------------------------------------------------
Discount Rate 6.25% 6.75% 7.25% 6.25% 6.75% 7.25% Expected Long-Term Return on Plan Assets 8.75% 9.00% 9.00% 7.25% 7.50% 7.50% Rate of Compensation Increase 3.60% 3.60% 4.10% - - -
The expected long-term return on plan assets was based on return projections prepared by our investment manager using SJI's current investment mix as described under Plan Assets below. The assumed health care cost trend rates at December 31 were: 2004 2003 --------------- Post-65 Medical Care Cost Trend Rate Assumed for Next Year 6.5% 7.0% Pre-65 Medical Care Cost Trend Rate Assumed for Next Year 11.0% 11.5% Dental Care Cost Trend Rate Assumed for Next Year 6.5% 7.0% Rate to which Cost Trend Rates are Assumed to Decline (the Ultimate Trend Rate) 5.0% 5.0% Year that the Rate Reaches the Ultimate Trend Rate 2016 2016 Assumed health care cost trend rates have a significant effect on the amounts reported for our postretirement health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects: Thousands of Dollars 1-Percentage- 1-Percentage- Point Increase Point Decrease Effect on the Total of Service and Interest Cost $ 84 $ (71) Effect on Postretirement Benefit Obligation 1,121 (1,076) Plan Assets - SJG's weighted-average asset allocations at December 31, 2004 and 2003, by asset category are as follows: Other Pension Benefits Postretirement Benefits 2004 2003 2004 2003 -------------------------------------------------
Asset Category U.S. Equity Securities 52% 47% 48% 47% International Equity Securities 16 13 16 13 Fixed Income 32 40 36 40 ------------------------------------------------ Total 100% 100% 100% 100% ================================================
Based on the investment objectives and risk tolerances stated in SJI's current pension and other postretirement benefit plans' investment policy and guidelines, the long-term asset mix target considered appropriate is within the range of 58 to 68% equity and 32 to 42% fixed-income investments. Historical performance results and future expectations suggest that equities will provide higher total investment returns than fixed-income securities over a long-term investment horizon. The policy recognizes that risk and volatility are present to some degree with all types of investments. We seek to avoid high levels of risk at the total fund level through diversification by asset class, style of manager, and sector and industry limits. Specifically prohibited investments include, but are not limited to, venture capital, margin trading, commodities and securities of companies with less than $250.0 million capitalization (except in the small-cap portion of the fund where capitalization levels as low as $50.0 million are permissible). Future Benefit Payments - The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the following years: Thousands of Dollars Other Pension Benefits Postretirement Benefits 2005 $ 3,823 $ 1,461 2006 3,987 1,651 2007 4,189 1,854 2008 4,420 2,036 2009 4,694 2,207 2010-2014 29,188 12,606 Contributions - SJG expects to make no contributions to its pension plan and contribute approximately $3.0 million to its other postretirement benefit plan in 2005. Defined Contribution Plan - The company also offers an Employees' Retirement Savings Plan (Savings Plan) to eligible employees. We match 50% of participants' contributions up to 6% of base compensation. For newly hired employees who are not eligible for participation in SJI's defined benefit plan, we match 50% of participants' contributions up to 8% of base compensation. We also make a year-end contribution of $500 for employees with fewer than 10 years of service and $1,000 for employees with 10 years or more of service. The amount expensed and contributed for the matching provision of the Savings Plan was approximately $0.8 million in each of the years 2004, 2003 and 2002. 12. DISCONTINUED OPERATIONS: We operated retail stores which sold natural gas appliances. The stores were intended to provide gas customers with access to and choice among natural gas appliances. In 2001, we formally discontinued this merchandising segment of our operations as such appliances are readily available from other retailers. In 2002, SJG incurred a loss of $29,000 related to these operations. No additional impact on earnings was recognized in either 2004 or 2003. 13. COMMITMENTS AND CONTINGENCIES: The following table summarizes our contractual cash obligations and their applicable payment due dates (in thousands): Up to 1 - 3 3 - 5 More than Contractual Obligations Total 1 Year Years Years 5 Years ----------------------- ----------------------------------------------------------------
Long-Term Debt $ 287,281 $ 5,273 $ 10,543 $ 1,500 $ 269,965 Interest on Long-Term Debt 247,872 17,628 33,926 32,842 163,476 Operating Leases 741 255 420 50 16 Construction Obligations 5,133 5,133 - - - Commodity Supply Purchase Obligations 209,673 42,331 78,870 63,431 25,041 Other Purchase Obligations 3,509 3,446 63 - - ---------------------------------------------------------------- Total Contractual Cash Obligations $ 754,209 $ 74,066 $ 123,822 $ 97,823 $458,498 ================================================================
Expected environmental remediation costs are not included in the table above due to the subjective nature of such costs and time of anticipated payments. SJG's regulatory obligation to contribute $3.6 million annually to its postretirement benefit plans, less costs incurred directly, is not included as the duration is indefinite. As a result, the total obligation cannot be calculated. SJG does not expect to make a pension contribution in 2005 and future contributions cannot be determined at this time (See Note 11). Construction and Environmental Commitments - Our estimated net cost of construction and environmental remediation programs for 2005 totals $67.1 million. Commitments were made regarding some of these programs. Gas Supply Contracts - SJG, in the normal course of conducting business, has entered into long-term contracts for natural gas supplies, firm transportation and gas storage service. The earliest that any of these contracts expires is 2005. The transportation and storage service agreements between us and our interstate pipeline suppliers were made under Federal Energy Regulatory Commission approved tariffs. Our cumulative obligation for demand charges and reservation fees paid to suppliers for these services is approximately $4.5 million per month, recovered on a current basis through the BGSS. Pending Litigation - We are subject to claims arising from the ordinary course of business and other legal proceedings. We accrue liabilities related to these claims when we can determine the amount or range of amounts of likely settlement costs for those claims. Management does not currently anticipate the disposition of any known claims to have a material adverse effect on SJG's financial position, results of operations or liquidity. Environmental Remediation Costs - We incurred and recorded costs for environmental cleanup of 12 sites where the Company or its predecessors operated manufactured gas plants (MGP). We stopped manufacturing gas in the 1950s. We successfully entered into settlements with all of our historic comprehensive general liability carriers regarding the environmental remediation expenditures at our sites. Also, we have purchased a Cleanup Cost Cap Insurance Policy limiting the amount of remediation expenditures that we will be required to make at 11 of our sites. This Policy will be in force until 2024 at 10 sites and until 2029 at one site. The following minimum future cost estimates were not reduced by projected insurance recoveries from the Cleanup Cost Cap Insurance Policy. Since the early 1980s, we accrued environmental remediation costs of $142.8 million, of which $91.8 million has been spent as of December 31, 2004. With the assistance of a consulting firm, we estimate that undiscounted future costs to clean up our sites will range from $51.0 million to $192.8 million. We recorded the lower end of this range as a liability because a single reliable estimation point is not feasible due to the amount of uncertainty involved in the nature of projected remediation efforts and the long period over which remediation efforts will continue. It is reflected on the 2004 consolidated balance sheet under the captions Current Liabilities and Deferred Credits and Other Non-Current Liabilities (See Note 1). Recorded amounts include estimated costs based on projected investigation and remediation work plans using existing technologies. Actual costs could differ from the estimates due to the long-term nature of the projects, changing technology, government regulations and site-specific requirements. We have two regulatory assets associated with environmental costs (See Note 1). The first asset, Environmental Remediation Cost: Expended - Net, represents what was actually spent to clean up former gas manufacturing plant sites. These costs meet the requirements of FASB Statement No. 71. The BPU allows us to recover expenditures through the RAC (See Note 2). The other asset, Environmental Remediation Cost: Liability for Future Expenditures, relates to estimated future expenditures determined under the guidance of FASB Statement No. 5, "Accounting for Contingencies." We recorded this amount, which relates to former manufactured gas plant sites, as a regulatory asset under Statement No. 71 with the corresponding amount reflected on the balance sheets under the captions Current Liabilities and Deferred Credits and Other Non-Current Liabilities. The BPU's intent, evidenced by current practice, is to allow us to recover the deferred costs after they are spent over 7-year periods. As of December 31, 2004, we reflected the unamortized remediation costs of $5.3 million on the balance sheet under the caption Regulatory Assets. Since implementing the RAC in 1992, we have recovered $43.9 million through rates (See Note 2). 14. QUARTERLY RESULTS OF OPERATIONS - UNAUDITED: The summarized quarterly results of SJG's operations, in thousands: SOUTH JERSEY GAS COMPANY QUARTERLY FINANCIAL DATA (Unaudited) Summarized quarterly results of SJG's operations, in thousands except for per share amounts: ------------------------------------------------ 2004 Quarter Ended 2003 Quarter Ended ------------------------------------------------ -------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 --------- ---------- --------- ---------- --------- ---------- ---------- ----------
Operating Revenues $202,260 $ 75,970 $ 73,480 $157,117 $241,956 $ 77,405 $ 60,389 $156,692 --------- ---------- --------- ---------- --------- ---------- ---------- ---------- Expenses: Cost of Sales 137,096 47,066 50,184 106,514 179,694 49,919 40,762 105,440 Operation and Maintenance Including Fixed Charges 25,614 25,260 23,314 28,776 23,711 23,955 24,508 30,566 Income Taxes (Benefit) 14,683 830 (519) 7,975 13,971 753 (2,420) 7,315 Energy and Other Taxes 4,728 1,983 1,653 3,094 5,028 2,131 1,349 3,217 --------- ---------- --------- ---------- --------- ---------- ---------- ---------- Total Expenses 182,121 75,139 74,632 146,359 222,404 76,758 64,199 146,538 --------- ---------- --------- ---------- --------- ---------- ---------- ---------- Other Income and Expense 567 (8) 72 255 (118) 22 6 155 --------- ---------- --------- ---------- --------- ---------- ---------- ---------- Net Income (Loss) Applicable to Common Stock $ 20,706 $ 823 $ (1,080) $ 11,013 $ 19,434 $ 669 $ (3,804) $ 10,309 ========= ========== ========= ========== ========= ========== ========== ========== ------------------------------------------------ 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.
Item 15. Exhibits and financial statement schedules. Exhibit Description Number 23 Independent Registered Public Accounting Firm's Consent 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOUTH JERSEY GAS COMPANY BY: /s/ David A. Kindlick --------------------------------------------- David A. Kindlick, Executive Vice President & Chief Financial Officer Date: March 31, 2005 ----------------- EXHIBIT INDEX Exhibit Description Number 23 Independent Registered Public Accounting Firm's Consent 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.