Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] 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, NJ 08037
(Address of principal executive offices, including zip code)
(609) 561-9000
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 9, 2004 there were 2,339,139 shares of the registrant's common
stock outstanding. All common shares are owned by South Jersey Industries, Inc.,
the parent company of South Jersey Gas Company.
================================================================================
SJG-1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements-- See Pages 3 through 17
SJG-2
SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)
Three Months Ended
June 30,
-----------------------------------
2004 2003
-----------------------------------
Operating Revenues $ 73,991 $ 75,547
---------------- ---------------
Operating Expenses:
Gas Purchased for Resale 46,428 49,347
Operations 11,829 10,807
Maintenance 1,439 1,483
Depreciation 6,303 5,870
Energy and Other Taxes 1,983 2,131
---------------- ---------------
Total Operating Expenses 67,982 69,638
---------------- ---------------
Operating Income 6,009 5,909
Other Income and Expense (8) 22
Interest Charges 4,348 4,509
---------------- ---------------
Income Before Income Taxes 1,653 1,422
Income Taxes 830 753
---------------- ---------------
Net Income Applicable to Common Stock $ 823 $ 669
================ ===============
The accompanying footnotes are an integral part of the financial statements.
SJG-3
SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)
Six Months Ended
June 30,
-----------------------------------
2004 2003
-----------------------------------
Operating Revenues $ 274,114 $ 315,483
---------------- ---------------
Operating Expenses:
Gas Purchased for Resale 182,665 228,211
Operations 24,337 21,299
Maintenance 2,784 2,940
Depreciation 12,466 11,657
Energy and Other Taxes 6,711 7,159
---------------- ---------------
Total Operating Expenses 228,963 271,266
---------------- ---------------
Operating Income 45,151 44,217
Other Income and Expense 559 (96)
Interest Charges 8,668 9,294
---------------- ---------------
Income Before Income Taxes 37,042 34,827
Income Taxes 15,513 14,724
---------------- ---------------
Net Income Applicable to Common Stock $ 21,529 $ 20,103
================ ===============
The accompanying footnotes are an integral part of the financial statements.
SJG-4
SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
Three Months Ended
June 30,
-----------------------
2004 2003
----------- ----------
Net Income Applicable to Common Stock $ 823 $ 669
----------- ----------
Other Comprehensive (Loss) Income, Net of Tax:*
Change in Fair Value of Investments (26) 193
Change in Fair Value of Derivatives 4 (14)
----------- ----------
Other Comprehensive (Loss) Income - Net of Tax* (22) 179
----------- ----------
Comprehensive Income $ 801 $ 848
=========== ==========
Six Months Ended
June 30,
-----------------------
2004 2003
----------- ----------
Net Income Applicable to Common Stock $ 21,529 $ 20,103
----------- ----------
Other Comprehensive (Loss) Income, Net of Tax:*
Change in Fair Value of Investments (301) 153
Change in Fair Value of Derivatives 4 70
----------- ----------
Other Comprehensive (Loss) Income - Net of Tax* (297) 223
----------- ----------
Comprehensive Income $ 21,232 $ 20,326
=========== ==========
* Determined using a combined statutory tax rate of 40.85%.
The accompanying footnotes are an integral part of the financial statements.
SJG-5
SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Six Months Ended
June 30,
-------------------------------
2004 2003
------------- --------------
Cash Flows from Operating Activities:
Net Income Applicable to Common Stock $ 21,529 $ 20,103
Adjustments to Reconcile Net Income to Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 13,632 12,816
Provision for Losses on Accounts Receivable 461 936
Revenues and Fuel Costs Deferred - Net 12,784 19,653
Deferred and Non-Current Income Taxes and Credits - Net 6,326 529
Environmental Remediation Costs - Net (1,216) 3,095
Gas Plant Cost of Removal (400) (306)
Changes in:
Accounts Receivable 25,515 18,986
Inventories 9,317 1,202
Prepayments and Other Current Assets 756 (418)
Prepaid and Accrued Taxes - Net (15,423) 2,817
Accounts Payable and Other Accrued Liabilities 9,326 (5,156)
Other - Net 861 (461)
------------- --------------
Net Cash Provided by Operating Activities 83,468 73,796
------------- --------------
Cash Flows from Investing Activities:
Capital Expenditures and Salvage (32,055) (23,618)
------------- --------------
Net Cash Used in Investing Activities (32,055) (23,618)
------------- --------------
Cash Flows from Financing Activities:
Net Repayments of Lines of Credit (59,500) (34,400)
Principal Repayments of Long-Term Debt (6,773) (15,658)
Payments for Issuance of Long-Term Debt (42) (70)
Additional Investment by Shareholder 15,000 -
------------- --------------
Net Cash Used in Financing Activities (51,315) (50,128)
------------- --------------
Net Increase in Cash and Cash Equivalents 98 50
Cash and Cash Equivalents at Beginning of Period 3,210 3,580
------------- --------------
Cash and Cash Equivalents at End of Period $ 3,308 $ 3,630
============= ==============
The accompanying footnotes are an integral part of the financial statements.
SJG-6
SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
June 30, December 31,
-------------------------------- --------------
2004 2003 2003
-------------- -------------- --------------
ASSETS
Property, Plant and Equipment:
Utility Plant, at original cost $ 924,497 $ 867,801 $ 894,654
Accumulated Depreciation (218,042) (202,460) (209,831)
-------------- -------------- --------------
Property, Plant and Equipment - Net 706,455 665,341 684,823
-------------- -------------- --------------
Investments:
Available-for-Sale Securities 4,601 3,657 4,497
Investment in Affiliate - 1,082 -
-------------- -------------- --------------
Total Investments 4,601 4,739 4,497
-------------- -------------- --------------
Current Assets:
Cash and Cash Equivalents 3,308 3,630 3,210
Accounts Receivable 48,901 63,790 48,412
Unbilled Revenues 4,454 6,112 31,070
Provision for Uncollectibles (3,112) (3,225) (3,263)
Natural Gas in Storage, average cost 48,906 40,274 59,432
Materials and Supplies, average cost 4,768 3,450 3,559
Prepaid Taxes 17,361 10,974 2,661
Prepaid Pension 16,695 - 18,206
Other Prepayments and Current Assets 3,072 3,853 2,317
-------------- -------------- --------------
Total Current Assets 144,353 128,858 165,604
-------------- -------------- --------------
Regulatory Assets:
Environmental Remediation Costs:
Expended - Net 5,363 3,375 4,147
Liability for Future Expenditures 52,177 48,211 50,983
Gross Receipts and Franchise Taxes 1,146 1,589 1,367
Income Taxes - Flowthrough Depreciation 7,130 8,108 7,619
Deferred Fuel Cost - Net - 11,941 1,720
Deferred Postretirement Benefit Costs 3,213 3,591 3,402
Societal Benefit Costs 5,053 7,531 7,529
Other Regulatory Assets 1,033 551 732
-------------- -------------- --------------
Total Regulatory Assets 75,115 84,897 77,499
-------------- -------------- --------------
Other Non-Current Assets:
Unamortized Debt Discount and Expense 6,162 5,461 6,383
Accounts Receivable - Merchandise 5,411 3,538 4,671
Other 2,697 4,352 2,805
-------------- -------------- --------------
Total Other Non-Current Assets 14,270 13,351 13,859
-------------- -------------- --------------
Total Assets $ 944,794 $ 897,186 $ 946,282
============== ============== ==============
The accompanying footnotes are an integral part of the financial statements.
SJG-7
SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
June 30, December 31,
-------------------------------- --------------
2004 2003 2003
-------------- -------------- --------------
Capitalization and Liabilities
Common Equity:
Common Stock, Par Value $2.50 per share:
Authorized - 4,000,000 shares
Outstanding - 2,339,139 shares $ 5,848 $ 5,848 $ 5,848
Other Paid-In Capital and Premium on Common Stock 170,317 135,317 155,317
Accumulated Other Comprehensive (Loss) Income (18) (8,466) 279
Retained Earnings 129,885 101,851 108,356
-------------- -------------- --------------
Total Common Equity 306,032 234,550 269,800
-------------- -------------- --------------
Preferred Stock:
Redeemable Cumulative Preferred - Par Value $100 per share,
Authorized 41,966 shares, Outstanding 16,904 shares 8% Series 1,690 1,690 1,690
-------------- -------------- --------------
Long-Term Debt 257,008 221,713 263,781
-------------- -------------- --------------
Total Capitalization 564,730 457,953 535,271
-------------- -------------- --------------
Current Liabilities:
Notes Payable 27,700 119,500 87,200
Current Maturities of Long-Term Debt 5,273 8,423 5,273
Accounts Payable 51,843 39,076 40,954
Deferred Income Taxes - Net 3,463 14,563 6,694
Customer Deposits 8,328 7,143 7,957
Environmental Remediation Costs 5,806 4,852 7,630
Taxes Accrued 8,598 15,563 9,321
Derivatives - 24 7
Interest Accrued and Other Current Liabilities 7,480 6,436 9,414
-------------- -------------- --------------
Total Current Liabilities 118,491 215,580 174,450
-------------- -------------- --------------
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net 128,016 104,275 118,894
Environmental Remediation Costs 46,371 43,359 43,353
Regulatory Liabilities 63,937 47,522 49,880
Pension and Other Postretirement Benefits 11,404 16,256 11,336
Investment Tax Credits 3,300 3,645 3,471
Other 8,545 8,596 9,627
-------------- -------------- --------------
Total Deferred Credits and Other Non-Current Liabilities 261,573 223,653 236,561
-------------- -------------- --------------
Commitments and Contingencies (Note 5)
Total Capitalization and Liabilities $ 944,794 $ 897,186 $ 946,282
============== ============== ==============
The accompanying footnotes are an integral part of the financial statements.
SJG-8
Notes to Condensed Financial Statements (Unaudited)
Note 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.
In our opinion, the condensed financial statements reflect all adjustments,
which are of a normally occurring nature, needed to fairly present SJG's
financial position and operating results at the dates and for the periods
presented. Our business is subject to seasonal fluctuations and, accordingly,
this interim financial information should not be the basis for estimating the
full year's operating results. These financial statements should be read in
conjunction with SJG's 2003 Form 10K.
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 (Loss) 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.
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.
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 $0.2 million and $0.1 million in the three month periods and
$0.3 million in each of the six month periods ended June 30, 2004 and 2003,
respectively.
Derivative Instruments and Hedge Accounting - SJG accounts for its
derivatives under the guidance of 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
SJG-9
Other Comprehensive (Loss) Income 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 credit agreements. We entered into
this interest rate swap agreement to hedge the exposure to increasing rates with
respect to our variable rate debt. The differential paid as a result of this
swap agreement was accrued as interest rates changed and recognized as an
adjustment to interest expense. We accounted for this interest rate swap as a
cash flow hedge.
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 June 30, 2004
and 2003, SJG had accrued amounts in excess of actual removal costs incurred
totaling $47.3 million and $43.5 million, respectively, which, in accordance
with Statement No. 143, are recorded as Regulatory Liabilities on the condensed
balance sheets. The adoption of this statement did not materially affect SJG's
financial condition or 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 adopted FIN 46 and accordingly
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 condensed balance sheet rather
SJG-10
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. The Company is not a party to any
variable interest entities covered by FIN 46.
In December 2003, the FASB revised Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This revised
statement requires certain interim period disclosures about pension and other
postretirement benefit plans (See Note 4).
Regulatory Assets & Regulatory Liabilities - All significant regulatory
assets are separately identified on the condensed balance sheets under the
caption Regulatory Assets. Each item that is separately identified is being
recovered through utility rate charges without a return on investment over the
following periods:
Years Remaining
Regulatory Asset As of June 30, 2004
Environmental Remediation Costs:
Expended - Net Various
Liability for Future Expenditures Not Applicable
Gross Receipts and Franchise Taxes 3
Income Taxes - Flowthrough Depreciation 7
Deferred Fuel Costs - Net Various
Deferred Postretirement Benefit Costs 9
Societal Benefit Costs Various Various
The remaining assets reflected under the caption Other Regulatory
Assets are being recovered from ratepayers as approved by the BPU (See Note 6).
Regulatory Liabilities consisted of the following items (in thousands):
June 30, December 31,
2004 2003 2003
----------- ---------- -----------
Deferred Revenues - Net $ 11,063 $ - $ -
Excess Plant Removal Costs 47,320 43,462 45,241
Overcollected State Taxes 5,268 3,774 4,353
Other 286 286 286
----------- ---------- -----------
Total Regulatory Liabilities $ 63,937 $ 47,522 $ 49,880
=========== ========== ===========
Deferred Revenues - Net reflects the overrecovery of gas costs from
ratepayers under SJG's gas cost clauses (See Note 2). 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.
SJG-11
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.
Note 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 that included an 11.25% return
on common equity. This rate relief provided 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. As a result of this case, we 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, we kept 20% of the pre-tax margins as we had historically. See Note
6 for information regarding the July 7, 2004 approval of SJG's base rate
increase.
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 June 30, 2004, 106,179 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
certain 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%. As of June 30, 2004, the remaining deferred
underrecovered balance totaled $1.9 million.
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 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.
SJG-12
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 (RAC); 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 increased the 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. See Note 6
for additional information on the approval of SJG's petition.
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 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 budget of $113.0 million with new rates being implemented effective
July 1, 2004.
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 rates to obtain a certain level of return on its invested capital. The rate
case was approved on July 7, 2004 (See Note 6). We had not sought a base rate
increase from the BPU since the implementation of its base rate case approval in
January 1997.
Also in August 2003, the BPU approved SJG's previously filed petition
for the recovery of a $5.7 million Temperature Adjustment Clause (TAC)
deficiency, effective September 1, 2003. As of June 30, 2004, the deferred TAC
deficiency has been reduced to $1.3 million.
SJG-13
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 $21.8 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.
Filings and petitions described above are still pending unless
otherwise indicated.
Note 3. 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 June 30, 2004, these restrictions did not affect the amount that may be
distributed from SJG's retained earnings.
We received equity infusions of $15.0 million during the first quarter
of 2004 and $20.0 million during 2003 from SJI. 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.
Note 4. 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.
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. With the assistance of the company's actuary, management has
determined that the Act has no impact on the postretirement benefit plans of
SJI.
Net periodic benefit cost for the three and six months ended June 30,
2004 and 2003 related to the pension and other postretirement benefit insurance
plans consisted of the following components (in thousands):
Pension Benefits
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-------- ------- ------ ------
Service Cost $ 672 $ 579 $ 1,344 $ 1,158
Interest Cost 1,274 1,205 2,548 2,410
SJG-14
Expected Return on Plan Assets (1,580) (1,241) (3,160) (2,482)
Amortization of
Transition Obligation - 16 - 32
Amortization of Loss and Other 388 402 776 804
--------- --------- --------- ---------
Net Periodic Benefit Cost $ 754 $ 961 $ 1,508 $ 1,922
========= ========= ========= =========
Other Benefits
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-------- ------- ------ ------
Service Cost $ 341 $ 290 $ 682 $ 580
Interest Cost 603 476 1,206 952
Expected Return on Plan Assets (351) (202) (702) (404)
Amortization of
Transition Obligation 189 144 378 288
Amortization of Loss and Other 37 74 74 148
--------- --------- --------- ---------
Net Periodic Benefit Cost $ 819 $ 782 $ 1,638 $ 1,564
========= ========= ========= =========
Contributions - SJG expects to make no contributions to its pension
plan and contribute approximately $3.6 million in equal quarterly installments
to its other postretirement benefit plans in 2004.
Note 5. 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. During the next 12 months, no contracts
are expiring that would have a material negative impact, either alone or in
combination, on SJG. 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 in the ordinary
course of business and other legal proceedings. We accrue liabilities related to
these claims when we can determine the amount or range of amounts of likely
settlement costs for 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.
SJG-15
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
$141.0 million, of which $88.8 million has been spent as of June 30, 2004. With
the assistance of a consulting firm, we estimate that future costs to clean up
our sites will range from $52.2 million to $162.6 million. We recorded the lower
end of this range as a liability. It is reflected on the 2004 condensed 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 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 condensed balance
sheets under the captions, Current Liabilities and Deferred Credits and Other
Non-Current Liabilities. The recorded 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 these costs are spent over 7-year
periods. As of June 30, 2004, we reflected the unamortized remediation costs of
$5.4 million on the condensed balance sheet under the caption Regulatory Assets.
Since implementing the RAC in 1992, we have recovered $40.8 million through
rates (See Note 2).
Note 6. Subsequent Events:
Rate Case Settlement - 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. SJG expects
the settlement of the case 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.
SJG-16
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
will now recover 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 will begin from dollar one, with SJG retaining 20% as it has
historically. Moreover, SJG will now share 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 tariff changes, SJG further expanded its choices
available to commercial and industrial customers. SJG added two electric
generation services for small and large users, and restructured its existing
Firm Electric Service so it is applicable to electric generation. The addition
of these services allowed SJG to eliminate its existing cogeneration services
since these services will be provided under one of the three electric generation
services, based on the customer needs. SJG also split its existing commercial
service into two classes to separate large and small users, resulting in two
distinct price structures.
As part of the overall settlement, SJG provided customers with an
offsetting $38.9 million rate reduction. These reductions are being provided to
customers through the company's various clauses and will not negatively impact
the company's net income.
Pending Audits - The BPU has 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
will commence later in 2004, are mandated by statute to be conducted at
predetermined intervals.
Appliance Service Business - On July 23, 2004, the BPU approved SJG's
petition 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 will purchase certain assets required to perform such repair
services from SJG. In addition, SJESP will assume certain liabilities from SJG.
The final price will be determined at the date of transfer which is currently
expected to be on September 1, 2004. The agreement also calls for SJESP to pay
an additional $1.5 million to SJG. This $1.5 million will be credited to
customers through the RAC and will have no earnings impact on SJG. The approval
of SJG's proposal will have no effect on the provision of safety-related or
emergency-related services to the public. The services being transferred include
only non-safety related, competitive appliance services.
Financing Activities - SJG redeemed, at par, its 7.7% Medium Term Note
(MTN) due 2015 on July 15, 2004. Subsequently, on August 4, 2004, SJG issued
$40.0 million of debt under its MTN program established in 2002. The debt was
issued at an average interest rate of 5.66% and an average maturity of 17 years.
This represents the final amount authorized to be issued under the 2002 MTN
program.
SJG-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Unaudited)
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
306,953 customers at June 30, 2004 compared with 298,877 customers at June 30,
2003. SJG also:
o sells natural gas and pipeline transportation capacity (off-system
sales) on a wholesale basis to various customers on the interstate
pipeline system;
o transports natural gas purchased directly from producers or suppliers
for its own sales and for some of its customers; and
o 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; legislative, regulatory and court decisions;
competition; 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
condensed 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 condensed financial statements require a
significant amount of judgment and estimation. These relate to regulatory
assets, environmental remediation costs, pension and postretirement employee
benefit costs and unbilled revenues.
SJG-18
The New Jersey Board of Public Utilities (BPU) has reviewed and
approved, through specific orders, all of the items shown as regulatory assets.
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.
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 $52.2 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 quarter to take into account past efforts,
changes in work plans and remediation technologies.
The costs of providing pension and other postretirement employee
benefits are impacted by actual plan experience as well as assumptions of future
experience. Employee demographics, plan contributions, investment performance,
and 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 estimated
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 (which replaced 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.
SJG-19
New Accounting Pronouncements - See detailed discussions concerning New
Accounting Pronouncements and their impact on SJG in Note 1 to the condensed
financial statements.
Temperature Adjustment Clause - A Board of Public Utilities approved
Temperature Adjustment Clause (TAC) increased(decreased) SJG's net income by
$0.9 million and $(1.0) million for the three months ended and $0.2 million and
$(2.4) million for the six months ended June 30, 2004 and 2003, respectively.
The clause is designed to mitigate the effect of variations in heating season
temperatures from historical norms. While we record the revenue and income
impacts of TAC adjustments as incurred, cash inflows or outflows directly
attributable to TAC adjustments generally do not begin until the next clause
year. Each TAC year begins October 1.
Recent Regulatory Actions - 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 increased the 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. On July 23, 2004, the BPU approved SJG's petition 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 will purchase certain assets required to perform such repair
services from SJG. In addition, SJESP will assume certain liabilities from SJG.
The final price will be determined at the date of transfer which is currently
expected to be on September 1, 2004. The agreement also calls for SJESP to pay
an additional $1.5 million to SJG. This $1.5 million will be credited to
customers through the RAC and will have no earnings impact on SJG. The approval
of SJG's proposal will have no effect on the provision of safety-related or
emergency-related services to the public. The services being transferred include
only non-safety related, competitive appliance services. It is anticipated that
SJESP will 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 Basic
Gas Supply Service (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
SJG-20
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 budget of $113.0 million with new rates being implemented effective
July 1, 2004.
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.
In August 2003, the BPU approved SJG's previously filed petition for
the recovery of a $5.7 million Temperature Adjustment Clause (TAC) deficiency,
effective September 1, 2003. As of June 30, 2004, the deferred TAC deficiency
has been reduced to $1.3 million.
Also 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 had not sought a base rate increase from the BPU since the
implementation of its base rate case approval in January 1997. On July 7, 2004,
the BPU approved an increase to SJG's base rates totaling $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. SJG expects the settlement of the case 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.
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
will now recover through its base rates $7.8 million that it previously had
recovered through the sharing of pre-tax margins. As a result, the sharing of
pre-tax margins will begin from dollar one, with SJG retaining 20% as it has
historically. Moreover, SJG will now share 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 tariff changes, SJG further expanded service choices
available to commercial and industrial customers. SJG added two electric
generation services for small and large users, and restructured its existing
Firm Electric Service so it is applicable to electric generation. The addition
of these services allowed SJG to eliminate its existing cogeneration services
since these services will be provided under one of the three electric generation
services, based on customer needs. SJG also split its existing commercial
service into two classes to separate large and small users, resulting in two
distinct price structures.
As part of the overall settlement, SJG provided customers with an
offsetting $38.9 million rate reduction. These reductions are being provided to
customers through the company's various clauses and will not negatively impact
the company's net income.
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
SJG-21
providing for a $21.8 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.
Pending Audits - The BPU has 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
will commence later in 2004, are mandated by statute to be conducted at
predetermined intervals.
Filings and petitions described above are still pending unless
otherwise indicated. Additional discussion concerning Regulatory Actions can be
found in Notes 2 and 6 to the condensed 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 June 30,
2004, SJG has $5.4 million of remediation costs not yet recovered through rates.
Other matters are incorporated by reference to Note 5 to the condensed
financial statements included as part of this report.
Competition - SJG's franchises are non-exclusive. Currently, no other
utility provides retail gas distribution services within our territory. We do
not expect any other utilities to do so in the foreseeable future because of the
extensive investment required for utility plant and related costs. SJG competes
with oil, propane and electricity suppliers for residential, commercial and
industrial users. The market for natural gas sales is subject to competition due
to deregulation. We enhanced SJG's competitive position while maintaining
margins by using an unbundled tariff. This tariff allows full cost-of-service
recovery, except for the variable cost of the gas commodity, when transporting
gas for our customers. Under this tariff, SJG profits from transporting, rather
than selling, the commodity. SJG's residential, commercial and industrial
customers can choose their supplier while we recover the cost of service through
transportation service (see Customer Choice Legislation).
Customer Choice Legislation - All residential natural gas customers in
New Jersey can choose their gas supplier under the terms of the Electric
Discount and Energy Competition Act of 1999. As of June 30, 2004, 106,179 SJG
residential customers chose a natural gas commodity supplier other than the
utility. This number increased from 95,410 at June 30, 2003 as marketers were
SJG-22
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.
Results of Operations
Operating Revenues - Revenues decreased $1.6 million during the second
quarter compared with the same period in 2003. The decrease was primarily due to
two factors. First, weather was 37.8% warmer during the quarter than last year,
which resulted in a reduction in utility sales volume. Second, there was an
11.3% 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.
Providing an offset to the factors noted above were a significant increase in
Off-System Sales (OSS) during the quarter, the addition of 8,076 customers and
several rate increases over the past 12 months (See Recent Regulatory Actions).
Revenues decreased $41.4 million for the six months ended June 30, 2004
compared with the same period last year. The year-to-date decrease was
primarily due to three factors. First, weather was 9.8% warmer than last year
resulting in lower utility sales. Second, OSS revenues decreased $31.3 million
as a direct result of lower sales volume and lower prices for natural gas in
this market in 2004 compared with the same period in 2003. Finally, there was an
increase in the number of residential customers purchasing their gas from a
source other than SJG. Partially offsetting these negative factors were the
impact of 8,076 additional customers and several rate increases over the past 12
months as discussed earlier.
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 during the second quarter of 2004 was 37.8%
warmer than in 2003 and 19.9% warmer than the 20-year TAC average. Weather
during the first six months of 2004 was 9.8% warmer than in 2003 and 0.7% warmer
than the 20-year TAC average.
The following is a comparison of operating revenue and throughput for
the three and six months ended June 30, 2004 vs. the same periods ended June 30,
2003:
SJG-23
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Operating Revenues (thousands):
Firm
Residential $ 17,967 $ 25,699 $ 99,108 $ 115,007
Commercial 5,014 7,287 28,980 34,717
Industrial 715 973 3,032 3,340
Cogeneration & Electric Generation 2,004 1,969 2,423 3,291
Firm Transportation 13,540 13,142 46,409 41,202
----------- ----------- ----------- -----------
Total Firm Operating Revenues 39,240 49,070 179,952 197,557
----------- ----------- ----------- -----------
Interruptible 469 558 757 1,049
Interruptible Transportation 269 300 564 495
Off-System 31,024 22,985 86,376 111,715
Capacity Release & Storage 1,937 1,510 4,664 2,813
Other 1,052 1,124 1,801 1,854
----------- ----------- ----------- -----------
Total Operating Revenues $ 73,991 $ 75,547 $ 274,114 $ 315,483
=========== =========== =========== ===========
Throughput (MMcf):
Firm
Residential 1,801 2,449 9,289 10,504
Commercial 587 793 3,018 3,522
Industrial 24 43 116 148
Cogeneration & Electric Generation 218 240 243 348
Firm Transportation 6,562 6,427 18,774 17,490
----------- ----------- ----------- -----------
Total Firm Throughput 9,192 9,952 31,440 32,012
----------- ----------- ----------- -----------
Interruptible 54 96 88 132
Interruptible Transportation 589 547 1,165 958
Off-System 4,789 3,744 12,622 15,474
Capacity Release & Storage 13,533 10,402 25,195 16,395
----------- ----------- ----------- -----------
Total Throughput 28,157 24,741 70,510 64,971
=========== =========== =========== ===========
Gas Purchased for Resale - Gas purchased for resale decreased $2.9
million in the second quarter primarily as a result of weather that was 37.8%
warmer than the same period last year and the continued migration of customers
from sales to transportation service as described under Operating Revenues. As a
result of these two factors, firm sales volume decreased by 25.4% for the
quarter. Significantly offsetting these negative factors were increased
Off-System Sales (OSS) during the quarter compared with last year. Increased
sales volume resulted in an additional $8.0 million in gas costs for the period.
In addition, customer additions and increased gas cost recoveries approved by
the BPU contributed substantially to offsetting the impact of the warmer weather
and customer migration to transportation services.
SJG-24
Gas purchased for resale decreased $45.5 million for the six months
ended June 30, 2004 compared with 2003 due principally to a significant decrease
in sales volumes and lower gas costs for OSS. Gas Costs associated with
OSS decreased by $23.4 million as compared with the same quarter last year.
Unlike gas costs associated with OSS, 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. SJG also
experienced a decrease in gas costs as a result of the continued migration of
customers from sales to transportation services as previously discussed. As a
result of this migration and the impact of warmer weather, firm sales volume
decreased by 12.8% for the six months ended June 30, 2004 compared to the same
period last year.
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):
Three Months Ended Six Months Ended
June 30, June 30,
2004 vs. 2003 2004 vs. 2003
------------- -------------
Other Production Expense $ (7) $ (5)
Transmission - 35
Distribution (131) (228)
Customer Accounts and Services 1,130 3,962
Sales (73) (51)
Administration and General 103 (675)
----------- -----------
Total Operations $ 1,022 $ 3,038
=========== ===========
Customer Accounts and Services expense increased significantly in 2004
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 $1.4 million in the second quarter
and $4.4 million for the six months ended June 30, 2004 when compared with the
respective periods in 2003. The BPU-approved SBC clause allows for full recovery
of these deferred costs including carrying costs and, as a result, the increase
in expense has no impact on SJG's net income. This increase was partially offset
by lower bad debt expense during 2004 as a result of a March 2004 BGSS refund
improving SJG's accounts receivable aging (See Recent Regulatory Actions).
SJG-25
Administrative and General (A&G) expenses decreased in the six months
ended June 30, 2004 compared with the same period of 2003 primarily because of
lower pension expense, lower insurance expense and cost control measures
implemented throughout the company. Pension expense decreased $414,000 from 2003
to 2004 as a result of SJG making a $9.1 million pension plan contribution in
December 2003 as well as an improvement in investment returns throughout 2003
(See Note 4 to the condensed financial statements). Insurance expense was
reduced by $340,000 in the first quarter of 2004 by lowering SJG's reserve for
outstanding claims following a period of favorable settlements that were not
appealed as anticipated. Significant increases in healthcare costs during the
second quarter resulted in higher A&G for the three months ended June 30, 2004.
Other Operating Expenses - A summary of principal changes in other
operating expenses (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2004 vs. 2003 2004 vs. 2003
------------- -------------
Maintenance $ (44) $ (156)
Depreciation 433 809
Energy and Other Taxes (148) (448)
Depreciation was higher due to SJG's increased investment in property,
plant and equipment. The decrease in Energy and Other Taxes relate primarily to
lower revenue-based taxes and decreases in taxable volumes of gas sold and
transported by SJG (See table under the caption, "Operating Revenues").
Other Income and Expense - Other income and expense was higher during
the six months ended June 30, 2004 compared with 2003 due to a pre-tax gain of
$686,000 on SJG's postretirement healthcare plan trust. The movement of plan
assets to a new investment manager triggered the recognition of gains on
investments.
Interest Charges - Interest charges decreased in both the three and six
month periods ended June 30, 2004 compared with the respective periods of the
prior year due to reductions in short-term rates on line of credit borrowings,
the refunding of higher priced, fixed rate, long-term debt with lower cost debt,
and a lower total debt level. These refundings occurred primarily during the
second half of 2003 and were financed 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.
Income Taxes - SJG's total income taxes applicable to operations differ
from the tax that would have resulted by applying the statutory federal and
state income tax rates to pre-tax income as a result of various deferred tax
items. The account of Income Taxes - Flowthrough Depreciation, as shown on the
condensed balance sheets, is amortized at a rate of $245,000 per quarter and is
SJG-26
the primary cause of these differences. Due to the seasonal nature of our
operations, these tax variances may appear larger relative to the pre-tax income
during the second and third quarters when operating results are historically
lower.
Net Income Applicable to Common Stock - Net income increased $154,000,
or 23%, to $823,000 in the second quarter of 2004 as compared with $669,000 in
the same period of 2003. For the six months ended June 30, 2004, net income
increased $1.4 million, or 7%, to $21.5 million compared with $20.1 million last
year. Reasons for the increase in net income in 2004 are discussed in detail
above.
Liquidity and Capital Resources - Liquidity needs at SJG are driven by
factors that include natural gas commodity prices; the impact of weather on
customer bills; lags in fully collecting gas costs from customers under the
Basic Gas Supply Service charge; the timing of construction and remediation
expenditures and related permanent financings; mandated tax payment dates; and
both discretionary and required repayments of long-term debt.
We first seek to meet liquidity needs with net cash provided by
operating activities. Net cash provided by operating activities 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 credit facilities provided by commercial banks to
supplement cash from operations where necessary.
Bank credit available to SJG totaled $176.0 million at June 30, 2004,
of which $27.7 million was used. Those bank facilities consist of a $100.0
million revolving credit facility that expires in August 2006 and $76.0 million
of uncommitted bank lines. The revolving credit facility was 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 and Medium Term Notes (MTN), secured by the
same pool of assets as the First Mortgage Bonds, to finance its long-term
borrowing needs. These needs are primarily capital expenditures for property,
plant and equipment. SJG's registration of a $150.0 million MTN program with the
Securities and Exchange Commission became effective in December 2002. In July
2003, SJG issued $85.5 million of long-term debt under the program. In September
2003, SJG issued an additional $24.5 million of MTNs. SJG issued the remaining
$40.0 million of notes under the MTN program in August 2004 at an average
interest rate of 5.66% and an average maturity of 17 years. All proceeds of the
issues were used to refinance short-term debt outstanding to commercial banks
and for the redemption of certain high-rate First Mortgage Bonds. Maturities of
long-term debt in 2004 have totaled $6.8 million. In addition, SJG called $15.0
million of its 7.7% Medium Term Notes for redemption in July 2004. No additional
maturities are scheduled or redemptions are anticipated for the remainder of
2004. Maturities of long-term debt over the next five calendar years are $5.3
million per year in 2005 through 2007, $1.5 million in 2008 and $0 in 2009.
SJG-27
SJG's capital structure was as follows:
As of As of
June 30, December 31,
2004 2003 2003
------ ------ ------
Common and Preferred Stock Equity 51% 40% 43%
Long-Term Debt 44% 39% 43%
Short-Term Debt 5% 21% 14%
--- ----- ----
Total 100% 100% 100%
==== ==== ====
SJG typically experiences seasonal fluctuations in leverage as
short-term debt has historically peaked in the November to January period in
support of high inventory and receivable levels. The seasonal low point for
short-term debt incurred in support of working capital usually occurs between
the end of March and the end of May each year. The ratios presented in the chart
above reflect a conscious effort by management to increase the percentage of
equity in SJG's capital structure over the past year.
SJI contributed $15.0 million and $20.0 million of capital to SJG
during 2004 and 2003, 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 the first six months of 2004 amounted to $31.9 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 June 30, 2004 averaged $44.8 million annually and
totaled $233.2 million over the contracts' lives with expirations ranging from
one to 13 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.
The following table summarizes our contractual cash obligations and
their applicable payment due dates (in thousands):
SJG-28
Up to Years Years More than
Contractual Obligations Total 1 Year 2 & 3 4 & 5 5 Years
----------------------- ----- ------ ----- ----- -------
Long-Term Debt $ 262,281 $ 5,273 $ 10,543 $ 1,500 $ 244,965
Operating Leases 761 357 310 71 23
Construction Obligations 8,454 8,454 - - -
Commodity Supply
Purchase Obligations 233,178 43,746 80,906 68,413 40,113
Other Purchase Obligations 3,762 3,059 703 - -
----------- ----------- ----------- ----------- -----------
Total Contractual Cash Obligations $ 508,436 $ 60,889 $ 92,462 $ 69,984 $ 285,101
=========== =========== =========== =========== ===========
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 expects to make no contributions to its pension plan and contribute
approximately $3.6 million in equal quarterly installments to its other
postretirement benefit plans in 2004.
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.
Ratio of Earnings to Fixed Charges - The company's ratio of earnings to fixed
charges for each of the periods indicated is as follows:
Twelve Months
Ended
June 30, Year Ended December 31,
-------------- --------------------------------------------------------
2004 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ----
3.6x 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.
SJG-29
Item 3. Quantitative and Qualitative Disclosures About
Market Risks of the Company (Unaudited)
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 and are protected from gas cost fluctuations by the clause.
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 June 30, 2004 was $27.7 million and averaged $33.2 million
for the first six months of 2004. A hypothetical 100 basis point (b.p.), or 1%,
increase in interest rates on our average variable rate debt outstanding would
result in a $196,000 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
June 2004, our average interest rate on variable rate debt was 1.54%.
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, $1.5 million of 8.6% debenture notes
in February 2004 and $15.0 million of 7.7% Medium Term Notes in July 2004.
SJG-30
Item 4. Controls and Procedures
SJG management, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. 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 quarterly 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.
No change in SJG's internal control over financial reporting occurred
during SJG's second fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
SJG-31
PART II -- OTHER INFORMATION
Item l. Legal Proceedings
Information required by this Item is incorporated by reference to Part
I, Item 1, Note 5, beginning on page 15.
Item 6. Exhibits
(a) Exhibits
Exhibit No. Description
31.1 Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) of the Exchange Act.
31.2 Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) of the Exchange Act.
32.1 Certification of Chief Executive Officer Pursuant
to Rule 13a-14(b) of the Exchange Act as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code).
32.2 Certification of Chief Financial Officer Pursuant
to Rule 13a-14(b) of the Exchange Act as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code).
SJG-32
SIGNATURES
Pursuant to the requirements 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
(Registrant)
Dated: August 9, 2004 By: /s/ Edward J. Graham
-----------------------------------------
Edward J. Graham
President & Chief Executive Officer
Dated: August 9, 2004 By: /s/ David A. Kindlick
-----------------------------------------
David A. Kindlick
Executive Vice President &
Chief Financial Officer
SJG-33
Exhibit 31.1
CERTIFICATION
I, Edward J. Graham, certify that:
1. I have reviewed this report on Form 10-Q for the period ended June 30, 2004,
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)) for the registrant and we have:
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 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: August 9, 2004 /s/ Edward J. Graham
-------------------------------------------
Edward J. Graham
President & Chief Executive Officer
SJG-34
Exhibit 31.2
CERTIFICATION
I, David A. Kindlick, certify that:
1. I have reviewed this report on Form 10-Q for the period ended June 30, 2004,
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)) for the registrant and we have:
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 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: August 9, 2004 /s/ David A. Kindlick
--------------------------------------------
David A. Kindlick
Executive Vice President &
Chief Financial Officer
SJG-35
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 Quarterly Report on Form 10-Q of
South Jersey Gas Company (the "Company") for the period ended June 30, 2004, 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.
- -------------------------------
Name: Edward J. Graham
Title: Chief Executive Officer
August 9, 2004
SJG-36
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 Quarterly Report on Form 10-Q of
South Jersey Gas Company (the "Company") for the period ended June 30, 2004, 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
August 9, 2004
SJG-37