South Jersey Industries Form 10-K for Fiscal Year Ended December 31. 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-K
[X]
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
fiscal year ended December
31, 2006
[
] 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 1-6364
SOUTH
JERSEY INDUSTRIES, INC.
(Exact
name of registrant as specified in its charter)
New
Jersey
|
22-1901645
|
(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:
Common
Stock
|
|
($1.25
par value per share)
|
New
York Stock Exchange
|
(Title
of each class)
|
(Name
of exchange on which registered)
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act: Yes [X] No [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Act: Yes [ ] No [X]
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [X]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ]
No [X]
The
aggregate market value of approximately 29,176,671 shares of voting stock held
by non-affiliates of the registrant as of June 30, 2006 was $799,149,019. As
of
February 23, 2007, there were 29,340,537 shares of the registrant’s common
stock outstanding.
Documents
Incorporated by Reference:
In
Part I
of Form 10-K: None
In
Part
II of Form 10-K: None
In
Part
III of Form 10-K: Portions of the registrant’s proxy statement filed
within 120 days of the close of the registrant’s fiscal year in connection with
the registrant’s 2006 annual meeting of shareholders are incorporated by
reference into Part III of this Form 10-K.
Forward
Looking Statements
Certain
statements contained in this Annual Report on form 10-K may qualify as
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All
statements other than statements of historical fact included in this Report
should be considered forward-looking statements made in good faith by the
Company and are intended to qualify for the safe harbor from liability
established by the Private Securities Litigation Reform Act of 1995. When used
in this Report, or any other of the Company’s documents or oral presentations,
words such as “anticipate”, “believe”, “expect”, “estimate”, “forecast”, “goal”,
“intend”, “objective”, “plan”, “project”, “seek”, “strategy” and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed or implied in
the
statements. These risks and uncertainties include, but are not limited to the
risks set forth under “Risk Factors” in Part I, Item 1A of this Annual Report on
Form 10-K and elsewhere throughout this Report. These cautionary statements
should not be construed by you to be exhaustive and they are made only as of
the
date of this Report. While SJI believes these forward-looking statements to
be
reasonable, there can be no assurance that they will approximate actual
experience or that the expectations derived from them will be realized. Further,
SJI undertakes no obligation to update or revise any of its forward-looking
statements whether as a result of new information, future events or
otherwise.
Available
Information
The
Company’s Internet address is www.sjindustries.com.
We make
available free of charge on or through our website SJI’s annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission (SEC). The SEC maintains an Internet site
that contains these reports at http://www.sec.gov.
Also,
copies of SJI’s annual report will be made available, free of charge, upon
written request. The content on any web site referred to in this filing is
not
incorporated by reference into this filing unless expressly noted
otherwise.
|
Units
of Measurement
|
|
|
|
|
|
For
Natural Gas:
|
|
|
1
Mcf
|
=
One thousand cubic feet
|
|
1
MMcf
|
=
One million cubic feet
|
|
1
Bcf
|
=
One billion cubic feet
|
|
1dth
|
=
One decatherm
|
|
1
MMdth
|
=
One million decatherms |
PART
I
Item
1. Business
Description
of Business
The
registrant, South Jersey Industries, Inc. (SJI), a New Jersey corporation,
was
formed in 1969 for the purpose of owning and holding all of the outstanding
common stock of South Jersey Gas Company, a public utility, and acquiring and
developing non-utility lines of business.
SJI
currently provides a variety of energy related products and services primarily
through the following subsidiaries:
· |
South
Jersey Gas Company (SJG) is a regulated natural gas utility. SJG
distributes natural gas in the seven southernmost counties of New
Jersey.
|
· |
South
Jersey Energy Company (SJE) acquires and markets natural gas and
electricity to retail end users and provides total energy management
services to commercial and industrial
customers.
|
· |
South
Jersey Resources Group, LLC (SJRG) markets wholesale natural gas
storage,
commodity and transportation in the mid-Atlantic and southern states.
|
· |
Marina
Energy, LLC (Marina) develops and operates on-site energy-related
projects.
|
· |
South
Jersey Energy Service Plus, LLC (SJESP) installs residential and
small
commercial HVAC systems, provides plumbing services and services
appliances via the sale of appliance service
programs.
|
Additional Information
on the nature of our business can be found in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” under Item 7 of
this report.
Financial
Information About Industry Segments
Information
regarding Industry Segments is incorporated by reference to Note 7 of the
consolidated financial statements included under Item 8 of this
report.
Sources
and Availability of Raw Materials
South
Jersey Gas Company
Transportation
and Storage Agreements
SJG
has
direct connections to two interstate pipeline companies, Transcontinental
Gas
Pipeline Corporation (Transco) and Columbia Gas Transmission Corporation
(Columbia). During 2006, SJG purchased and had delivered approximately 47.4
MMdth of natural gas for distribution to both on-system and off-system
customers. Of this total, 34.9 MMdth was transported on the Transco pipeline
system and 12.5 MMdth was transported on the Columbia pipeline system. SJG
also
secures firm transportation and other long term services from three additional
pipelines upstream of the Transco and Columbia systems. They include Columbia
Gulf Transmission Company (Columbia Gulf), Texas Gas Transmission Corporation
(Texas Gas) and Dominion Transmission Inc. (Dominion). Services provided
by
these upstream pipelines are utilized to deliver gas into either the Transco
or
Columbia systems for ultimate delivery to SJG. Services provided by all of
the
above-mentioned pipelines are subject to the jurisdiction of the Federal
Energy
Regulatory Commission (FERC).
Transco:
Transco
is SJG’s largest supplier of long-term gas transmission services. These services
include six year-round and one seasonal firm transportation (FT) service
arrangements. When combined, these services enable SJG to purchase from third
parties and have delivered to its city gate stations by Transco a total of
280,525 dth of gas per day (dth/d). The terms of the year-round agreements
extend for various periods from 2007 to 2025 while the term of the seasonal
agreement extends to 2011.
SJG
also
has six long-term gas storage service agreements with Transco that, when
combined, are capable of storing approximately 6.0 MMdth. Through these
services, SJG can inject gas into market area storage during periods of low
demand and withdraw gas at a rate of up to 90,017 dth/d during periods of
high
demand. The terms of the storage service agreements extend for various periods
from 2008 to 2013.
Dominion:
SJG
has a
storage service with Dominion which provides a maximum withdrawal capacity
of
10,000 dth per day during the period between November 16 and March 31 of
winter
season with 423,000 dth of storage capacity. Gas is delivered through both
the
Dominion and Transco pipeline systems.
Columbia:
SJG
has
two firm transportation agreements with Columbia which, when combined,
provide
for 45,022 dth/d of firm deliverability.
SJG
also
subscribes to a firm storage service from Columbia, to March 31, 2009,
which
provides a maximum withdrawal quantity of 52,891 dth/d during the winter
season
with an associated 3,473,022 dth of storage capacity.
Gas
Supplies
SJG
has
two long-term gas supply agreements with a single producer and marketer
that
expire on October 31, 2007. Under these agreements, SJG can purchase a
delivered
quantity of up to 7,036,580 dth of natural gas per year. When advantageous,
SJG
can purchase spot supplies of natural gas in place of or in addition to
those
volumes reserved under long-term agreements. In recent years, SJG has replaced
long-term gas supply contracts with short-term agreements. The short-term
agreements are typically for several months in duration. The above contracts
will not be renewed.
Supplemental
Gas Supplies
During
2006 SJG entered into two separate Liquefied Natural Gas (LNG) sales agreements
with third party suppliers. The term of one agreement extended through
October
31, 2006, and had an associated contract quantity of 140,000 dth. The second
agreement, which extends through July 1, 2007, replaced the first agreement
and
provides SJG with up to 216,000 dth of LNG.
SJG
operates peaking facilities which can store and vaporize LNG for injection
into
its distribution system. SJG’s LNG facility has a storage capacity equivalent to
434,300 dth of natural gas and has an installed capacity to vaporize up
to
96,750 dth of LNG per day for injection into its distribution
system.
SJG
also
operates a high-pressure pipe storage field at its New Jersey LNG facility
which
is capable of storing 12,420 dth of gas and injecting up to 10,350 dth/d
of gas
per day into SJG’s distribution system.
Peak-Day
Supply
SJG
plans
for a winter season peak-day demand on the basis of an average daily temperature
of 2
degrees
F. Gas demand on such a design day was estimated for the 2006-2007 winter
season
to be 501,901 dth. SJG projects that it has adequate supplies and interstate
pipeline entitlements to meet its design requirements. On February 18,
2006, SJG
experienced its highest peak-day demand for the year of 355,919 dth with
an
average temperature of 23.68 degrees F.
Natural
Gas Prices
SJG’s
average cost of natural gas purchased and delivered in 2006, 2005 and 2004,
including demand charges, was $9.27 per dth, $9.36 per dth and $7.11 per
dth,
respectively.
South Jersey Energy Company
Transportation
and Storage Agreements
Access
to
gas suppliers and cost of gas are significant to the operations of SJE. No
material part of the business of SJE is dependent upon a single customer or
a
few customers. SJE purchases delivered gas only, primarily from SJRG.
Consequently, SJE maintains no transportation or storage
agreements.
South
Jersey Resources Group
Transportation
and Storage Agreements
National
Fuel Gas Supply Corporation:
SJRG
has
a long-term storage service agreement with National Fuel Gas Supply Corporation
(National Fuel) which extends through March 31, 2008, under which up to
4,746,000 Mcf of gas may be stored during the summer season and up to 48,000
Mcf/d may be withdrawn during the winter season. SJRG entered into a new 11-year
contract with National Fuel for an additional 224,576 Mcf of similar storage
capacity as of March 31, 2008.
SJRG
also
has a long-term firm transportation agreement with National Fuel associated
with
the above-mentioned storage service which extends through March 31, 2008. Under
this agreement, National Fuel will provide SJRG with a maximum daily injection
transportation quantity of 28,500 Mcf with primary receipt points on Tennessee
Gas Pipeline and National Fuel’s system storage. The agreement also provides for
a maximum daily withdrawal transportation quantity of 48,000 Mcf with primary
delivery points on Transcontinental Gas Pipe Line and National Fuel’s system
storage. Firm transportation rights associated with the new agreement consist
of
an additional 1,123 Mcf of injection capacity and 2,042 Mcf of withdrawal
capacity with primary receipt points on Tennessee Gas pipeline and firm
withdrawal rights on Transcontinental pipeline.
Transco
SJRG
has
a storage agreement with Transco for storage service at Transco's WSS facility
which expires in October 2017. Under this evergreen contract, up to 24,500
Mcf/d
may be injected during the summer season and up to 51,837 Mcf/d may be withdrawn
during the winter season. Up to 4,406,000 Mcf of gas may be stored by SJRG
at
this facility.
SJRG
also
has a firm transportation agreement with Transco which expires in October 2017.
Under this evergreen contract, Transco will provide SJRG with a maximum daily
injection transportation quantity of 20,000 Mcf with firm receipt points in
Texas and Louisiana and firm delivery points at South Jersey Gas in New
Jersey.
Patents
and Franchises
South
Jersey Gas Company
SJG
holds
nonexclusive franchises granted by municipalities in the seven-county area
of
southern New Jersey that it serves. No other natural gas public utility
presently serves the territory covered by SJG’s franchises. Otherwise, patents,
trademarks, licenses, franchises and concessions are not material to the
business of SJG.
Seasonal
Aspects
South
Jersey Gas Company
SJG
experiences seasonal fluctuations in sales when selling natural gas for heating
purposes. SJG meets this seasonal fluctuation in demand from its firm customers
by buying and storing gas during the summer months, and by drawing from storage
and purchasing supplemental supplies during the heating season. As a result
of
this seasonality, SJG’s revenues and net income are significantly higher during
the first and fourth quarters than during the second and third quarters of
the
year.
Non-Utility
Companies
Among
SJI’s non-utility activities, wholesale and retail gas marketing
have seasonal patterns similar to SJG’s. Activities such as energy services
and energy project development do not follow seasonal patterns. Other activities
such as retail electric marketing and appliance service can have seasonal
earnings patterns that are different from the utility. While growth in the
earnings contributions from nonutility operations has improved SJI’s second and
third quarter net income levels, the first and fourth quarters remain the
periods where most of SJI’s revenue and net income is produced.
Working
Capital Practices
Reference
is made to “Liquidity and Capital Resources” on pages 30 to 32 of this
report.
Customers
No
material part of the Company’s business is dependent upon a single customer or a
few customers, the loss of which would have a material adverse effect on SJI
performance on a consolidated basis. One of SJI’s subsidiaries, Marina Energy,
does currently receive the majority of its revenues and income from one
customer. However, that customer is under a long-term contract through 2026.
Backlog
Backlog
is not material to an understanding of SJI’s business or that of any of its
subsidiaries.
Government
Contracts
No
material portion of the business of SJI or any of its subsidiaries is subject
to
renegotiation of profits or termination of contracts or subcontracts at the
election of any government.
Competition
Information
on competition for SJI and its subsidiaries can be found on page 21 of this
report.
Research
During
the last three fiscal years, neither SJI nor any of its subsidiaries engaged
in
research activities to any material extent.
Environmental
Matters
Information
on environmental matters for SJI and its subsidiaries can be found in Note
14 of the consolidated financial statements included under Item 8
of this report.
Employees
SJI
and
its subsidiaries had a total of 611 employees as of December 31, 2006. Of that
total, 360 employees are unionized. Employees totaling 310 and 50 are
covered under collective bargaining agreements that expire in January 2009
and
January 2008, respectively. We consider relations with employees to be
good.
Financial
Information About Foreign and Domestic Operations and Export
Sales
SJI
has
no foreign operations and export sales have not been a significant part of
SJI’s
business.
Item
1A. Risk Factors
SJI
and
its subsidiaries operate in an environment that involves risks, many of which
are beyond our control. SJI has identified the following risk factors that
could
cause SJI’s operating results and financial condition to be materially adversely
affected. Investors should carefully consider these risk factors and should
also
be aware that this list is not all inclusive of existing risks. In addition,
new
risks may emerge at any time, and SJI cannot predict those risks or the extent
to which they may affect SJI’s businesses or financial performance.
-
SJI
is a holding company and its assets consist primarily of investments in
subsidiaries. Should
SJI’s subsidiaries be unable to pay dividends or make other payments to SJI
for financial, regulatory, legal or other reasons, SJI’s ability to pay
dividends on its common stock could be limited. SJI’s stock price could be
adversely affected as a result.
-
SJI’s
business activities are concentrated in southern New
Jersey.
Changes in the economies of southern New Jersey and surrounding regions
could
negatively impact the growth opportunities available to SJI and the financial
condition of customers and prospects of SJI.
-
Changes
in the regulatory environment or unfavorable rate regulation at its utility
may have an unfavorable impact on SJI’s financial performance or
condition.
SJI’s utility business is regulated by the New Jersey Board of Public
Utilities which has authority over many of the activities of the business
including, but not limited to, the rates it charges to its customers, the
amount and type of securities it can issue, the nature of investments it
can
make, the nature and quality of services it provides, safety standards
and
other matters. The extent to which the actions of regulatory commissions
restrict or delay SJG’s ability to earn a reasonable rate of return on
invested capital and/or fully recover operating costs may adversely affect
its
results of operations, financial condition and cash flows.
-
SJI
may not
be able to respond effectively to competition, which may negatively impact
SJI’s financial performance or condition. Regulatory
initiatives may provide or enhance opportunities for competitors that could
reduce utility income obtained from existing or prospective customers.
Also,
competitors in all of SJI’s business lines may be able to provide superior or
less costly products or services based upon currently available or newly
developed technologies.
-
Warm
weather, high commodity costs, or customer conservation initiatives could
result in reduced demand for some of SJI’s energy products and services.
While
SJI’s utility currently has a conservation incentive program clause that
protects its revenues and gross margin against usage that is lower than
a set
level, the clause is currently approved as a three-year pilot program.
Should
this clause expire without replacement, lower customer energy utilization
levels would likely reduce SJI’s net income.
-
High
natural gas prices could cause more of SJI’s receivables to be uncollectible.
Higher
levels of uncollectibles from either residential or commercial customers
would
negatively impact SJI’s income and could result in higher working capital
requirements.
-
SJI’s
net income could decrease if it is required to incur additional costs to
comply with new governmental safety, health or environmental legislation.
SJI
is
subject to extensive and changing federal and state laws and regulations
that
impact many aspects of its business; including the storage, transportation
and
distribution of natural gas, as well as the remediation of environmental
contamination at former manufactured gas plant facilities.
-
SJI’s
wholesale commodity marketing business is exposed to the risk that
counterparties that owe money or energy to SJI will not be able to meet
their
obligations for operational or financial reasons.
SJI
could be forced to buy or sell commodity at a loss as a result of such
failure. Such a failure, if large enough, could also impact SJI’s
liquidity.
-
Increasing
interest rates will negatively impact the net income of
SJI.
Several of SJI’s subsidiaries are capital intensive, resulting in the
incurrence of significant amounts of debt financing. While almost all of
SJI’s
existing long-term debt has been issued at fixed rates, new issues of
long-term debt and all variable rate short-term debt are exposed to the
impact
of rising interest rates.
-
A
downgrade
in SJG’s credit rating could negatively affect its ability to access adequate
and cost effective capital. SJG’s
ability to obtain adequate and cost effective capital depends largely on
its
credit ratings, which are greatly influenced by financial condition and
results of operations.
If the
rating agencies downgrade SJG’s credit ratings, particularly below investment
grade, SJG’s borrowing costs would increase. In addition, SJG would likely be
required to pay higher interest rates in future financings and potential
funding sources would likely decrease. To the extent that a decline in
SJG’s
credit rating has a negative effect on SJI, SJI could be required to provide
additional support to certain counterparties of the wholesale gas
operations.
-
. Hedging
activities of the company designed to protect against commodity price or
interest rate risk may cause fluctuations in reported financial results
and
SJI’s stock price could be adversely affected as a result.
Although
SJI enters into various contracts to hedge the value of energy assets,
liabilities, firm commitments or forecasted transactions, the timing of
the
recognition of gains or losses on these economic hedges in accordance with
accounting principles generally accepted in the United States of
America does not always match up with the gains or losses on the items
being hedged. The difference in accounting can result in volatility in
reported results, even though the expected profit margin is essentially
unchanged from the dates the transactions were consummated.
-
The
inability to obtain natural gas would negatively impact the financial
performance of SJI.
Several of SJI’s subsidiaries have businesses based upon the ability to
deliver natural gas to customers. Disruption in the production of natural
gas
or transportation of that gas to SJI from its suppliers, could prevent
SJI
from completing sales to its customers.
-
Transporting
and
storing natural gas involves numerous risks that may result in accidents
and
other operating risks and costs. SJI’s
gas distribution activities involve a variety of inherent hazards and
operating risks, such as leaks, accidents, mechanical problems, natural
disasters or terrorist activities which could cause substantial financial
losses. In addition, these risks could result in loss of human life,
significant damage to property, environmental pollution and impairment
of
operations, which in turn could lead to substantial losses. In accordance
with
customary industry practice, SJI maintains insurance against some, but
not
all, of these risks and losses. The occurrence of any of these events not
fully covered by insurance could adversely affect SJI’s financial position and
results of operations.
-
Adverse
results in legal proceedings could be detrimental to the financial condition
of SJI. Management
does not expect the disposition of any known claims to have a material
adverse
effect on its financial position or net income. However, the outcomes of
legal proceedings
can be unpredictable and can result in adverse judgments.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
The
principal property of SJI consists of SJG’s gas transmission and distribution
systems that include mains, service connections and meters. The transmission
facilities carry the gas from the connections with Transco and Columbia to
SJG’s
distribution systems for delivery to customers. As of December 31, 2006, there
were approximately 107.3 miles of mains in the transmission systems and
5,677 miles of mains in the distribution systems.
SJG
owns
office and service buildings, including its corporate headquarters, at seven
locations in the territory. There is also a liquefied natural gas storage and
vaporization facility at one of these locations.
As
of
December 31, 2006, SJG’s utility plant had a gross book value of $1,079.6
million and a net book value, after accumulated depreciation, of $821.8 million.
In 2006, $56.0 million was spent on additions to utility plant and there were
retirements of property having an aggregate gross book cost of $6.6 million.
Virtually
all of SJG’s transmission pipeline, distribution mains and service connections
are in streets or highways or on the property of others. The transmission and
distribution systems are maintained under franchises or permits or
rights-of-way, many of which are perpetual. SJG’s properties (other than
property specifically excluded) are subject to a lien of mortgage under which
its first mortgage bonds are outstanding. We believe these properties are well
maintained and in good operating condition.
Nonutility
property and equipment totaling $98.1 million consists primarily of Marina’s
energy projects, in particular the thermal energy plant in Atlantic City,
N.J.
Energy
and Minerals Inc. (EMI) owns 235 acres of land in Vineland, New
Jersey.
South
Jersey Fuel, Inc., an inactive subsidiary, owns land and a building in Deptford
Township and owns real estate in Upper Township, New Jersey.
R&T
Castellini, Inc., an inactive subsidiary, owns land and buildings in Vineland,
New Jersey.
SJI
owned
approximately 139 acres of land in Folsom, New Jersey as of December 31, 2006.
Item
3. Legal Proceedings
SJI
is
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 probable settlement costs for these claims.
Among other actions, SJI is named in certain product liability claims related
to
our former sand mining subsidiary. Management does not currently anticipate
the
disposition of any known claims to have a material adverse effect on SJI’s
financial position, results of operations or liquidity.
Item
4. Submission Of Matters To A Vote of Security Holders
No
matter
was submitted to a vote of security holders during the fourth quarter of the
2006 fiscal year.
Item
4A. Executive Officers of the Registrant
Set
forth
below are the names, ages and positions of our executive officers along with
their business experience during the past five years. All executive officers
of
SJI are elected annually and serve at the discretion of the Board of Directors.
All information is as of the date of the filing of this report.
Name,
age and position with the Company
|
Period
Served
|
|
|
Edward
J. Graham,
Age 49
|
|
Chairman
|
April
2005 - Present
|
Chief
Executive Officer
|
February
2004 - Present
|
President
|
January
2003 - Present
|
Chief
Operating Officer
|
January
2002 - February 2004
|
Executive
Vice President
|
January
2002 - January 2003
|
Vice
President
|
June
1998 - January 2002
|
|
|
David
A. Kindlick,
Age 52
|
|
Chief
Financial Officer
|
January
2002 - Present
|
Vice
President
|
June
1997 - Present
|
Treasurer
|
April
2001 - January 2004
|
|
|
Jeffery
E. DuBois,
Age 48
|
|
Vice
President
|
January
2004 - Present
|
Assistant
Vice President (SJG)
|
January
2002 - January 2004
|
|
|
Michael
J. Renna,
Age 39
|
|
Vice
President
|
January
2004 - Present
|
Assistant
Vice President
|
January
2002 - January 2004
|
|
|
Albert
V. Ruggiero,
Age 58 (1)
|
|
Vice
President
|
October
1998 - Present
|
|
|
Richard
H. Walker, Jr.,
Age 56
|
|
Vice
President, General Counsel and Secretary
|
January
2006 - Present
|
Vice
President, Corporate Counsel & Corporate Secretary
|
May
2003 - January 2006
|
Corporate
Counsel & Corporate Secretary
|
April
2002 - May 2003
|
Assistant
Secretary
|
April
1998 - April 2002
|
|
|
(1)
Mr. Ruggiero has announced his intention to retire, effective June
30,
2007.
|
PART
II
Item
5. Market for the Registrant’s Common Equity
Related
Stockholder Matters, and Issuer Purchases of Equity
Securities
Market
Price of Common Stock and Related Information
|
|
|
|
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|
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|
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|
|
|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
Quarter
Ended
|
|
Market
Price Per Share
|
|
Dividends
|
|
|
Quarter
Ended
|
|
Market
Price Per Share
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
Declared
|
|
|
|
|
|
|
|
|
|
|
|
Declared
|
|
2006
|
|
|
High
|
|
|
Low
|
|
|
Per
Share
|
|
|
2005
|
|
|
High
|
|
|
Low
|
|
|
Per
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
30.15
|
|
$
|
26.72
|
|
$
|
0.2250
|
|
|
March
31
|
|
$
|
29.20
|
|
$
|
24.94
|
|
$
|
0.2125
|
|
June
30
|
|
$
|
27.89
|
|
$
|
25.63
|
|
$
|
0.2250
|
|
|
June
30
|
|
$
|
31.50
|
|
$
|
26.66
|
|
$
|
0.2125
|
|
September
30
|
|
$
|
30.09
|
|
$
|
27.20
|
|
$
|
0.2250
|
|
|
September
30
|
|
$
|
32.38
|
|
$
|
27.52
|
|
$
|
0.2125
|
|
December
31
|
|
$
|
34.26
|
|
$
|
29.10
|
|
$
|
0.2450
|
|
|
December
31
|
|
$
|
30.80
|
|
$
|
25.80
|
|
$
|
0.2250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
These
quotations are based on the list of composite transactions of the
New York
Stock Exchange. Our stock is traded on the New York Stock Exchange
under
the symbol SJI. We have declared and expect to continue to declare
regular
quarterly cash dividends. As of December 31, 2006, the latest available
date, our records indicate that there were 7,855
shareholders of record.
|
|
|
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|
Information
required by this item is also found in Note 5 of the consolidated financial
statements included under Item 8 of this report.
SJI
has a stated policy of increasing its dividend by at least 6% to 7%
annually.
In
December 2006, non-employee members of SJI’s Board of Directors received an
aggregate of 9,261 shares of unregistered stock, valued at that time at
$315,059, as part of their compensation for serving on the Board.
Item
6. Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
2006
HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
Five-Year
Summary of Selected Financial Data
|
|
South
Jersey Industries, Inc. and Subsidiaries
|
|
(In
Thousands Where Applicable)
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
(As
Restated
|
|
|
(As
Restated
|
|
|
(As
Restated
|
|
|
|
|
|
|
|
|
|
|
See
Note 16)
|
|
|
See
Note 16)
|
|
|
See
Note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
$
|
931,428
|
|
$
|
906,016
|
|
$
|
819,416
|
|
$
|
703,898
|
|
$
|
520,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
$
|
145,802
|
|
$
|
86,818
|
|
$
|
91,079
|
|
$
|
76,545
|
|
$
|
77,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Applicable to Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
72,250
|
|
$
|
39,770
|
|
$
|
43,173
|
|
$
|
33,789
|
|
$
|
34,439
|
|
Discontinued
Operations - Net (1)
|
|
|
(818
|
)
|
|
(669
|
)
|
|
(680
|
)
|
|
(775
|
)
|
|
(424
|
)
|
Cumulative
Effect of a Change in Accounting Principle - Net
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(426
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Applicable to Common Stock
|
|
$
|
71,432
|
|
$
|
39,101
|
|
$
|
42,493
|
|
$
|
32,588
|
|
$
|
34,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,573,032
|
|
$
|
1,441,712
|
|
$
|
1,243,666
|
|
$
|
1,126,203
|
|
$
|
1,053,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Equity
|
|
$
|
443,036
|
|
$
|
393,645
|
|
$
|
343,363
|
|
$
|
296,412
|
|
$
|
237,156
|
|
Preferred
Stock (2)
|
|
|
-
|
|
|
-
|
|
|
1,690
|
|
|
1,690
|
|
|
1,690
|
|
Long-Term
Debt
|
|
|
358,022
|
|
|
319,066
|
|
|
328,914
|
|
|
308,781
|
|
|
274,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capitalization
|
|
$
|
801,058
|
|
$
|
712,711
|
|
$
|
673,967
|
|
$
|
606,883
|
|
$
|
512,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of Operating Income to Fixed Charges (3)
|
|
|
5.3x
|
|
|
4.1x
|
|
|
4.4x
|
|
|
3.7x
|
|
|
3.7x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Based
on Average Diluted Shares Outstanding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
2.47
|
|
$
|
1.40
|
|
$
|
1.56
|
|
$
|
1.33
|
|
$
|
1.46
|
|
Discontinued
Operations - Net (1)
|
|
|
(0.03
|
)
|
|
(0.02
|
)
|
|
(0.03
|
)
|
|
(0.03
|
)
|
|
(0.02
|
)
|
Cumulative
Effect of a Change in Accounting Principle - Net
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.02
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share
|
|
$
|
2.44
|
|
$
|
1.38
|
|
$
|
1.53
|
|
$
|
1.28
|
|
$
|
1.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on Average Common Equity (4)
|
|
|
16.9
|
%
|
|
12.5
|
%
|
|
13.0
|
%
|
|
12.5
|
%
|
|
14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shareholders of Record
|
|
|
7.9
|
|
|
8.1
|
|
|
8.1
|
|
|
8.3
|
|
|
8.4
|
|
Average
Common Shares
|
|
|
29,175
|
|
|
28,175
|
|
|
27,382
|
|
|
25,118
|
|
|
24,076
|
|
Common
Shares Outstanding at Year End
|
|
|
29,326
|
|
|
28,982
|
|
|
27,760
|
|
|
26,458
|
|
|
24,412
|
|
Dividend
Reinvestment Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shareholders
|
|
|
5.3
|
|
|
5.3
|
|
|
5.2
|
|
|
5.1
|
|
|
5.1
|
|
Number
of Participating Shares
|
|
|
2,194
|
|
|
2,722
|
|
|
2,764
|
|
|
2,750
|
|
|
2,608
|
|
Book
Value at Year End
|
|
$
|
15.11
|
|
$
|
13.58
|
|
$
|
12.37
|
|
$
|
11.20
|
|
$
|
9.71
|
|
Dividends
Declared per Common Share
|
|
$
|
0.92
|
|
$
|
0.86
|
|
$
|
0.82
|
|
$
|
0.78
|
|
$
|
0.76
|
|
Market
Price at Year End
|
|
$
|
33.41
|
|
$
|
29.14
|
|
$
|
26.28
|
|
$
|
20.25
|
|
$
|
16.51
|
|
Dividend
Payout (5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
Continuing Operations
|
|
|
37.2
|
%
|
|
60.9
|
%
|
|
52.0
|
%
|
|
58.0
|
%
|
|
53.1
|
%
|
From
Total Net Income
|
|
|
37.6
|
%
|
|
62.0
|
%
|
|
52.8
|
%
|
|
60.1
|
%
|
|
53.8
|
%
|
Market-to-Book
Ratio
|
|
|
2.2x
|
|
|
2.1x
|
|
|
2.1x
|
|
|
1.8x
|
|
|
1.7x
|
|
Price
Earnings Ratio (4)
|
|
|
13.5x
|
|
|
20.8x
|
|
|
16.8x
|
|
|
15.2x
|
|
|
11.3x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents discontinued business segments: sand mining and distribution
operations sold in 1996 and fuel oil operations with related environmental
|
liabilities
in 1986 (See Note 2 to Consolidated Financial Statements).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
On May 2, 2005, South Jersey Gas (SJG) redeemed its 8% Redeemable
Cumulative Preferred Stock at par.
|
|
|
|
|
|
|
(3)
Calculated as Operating Income divided by Interest Charges. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
Calculated based on Income from Continuing Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
Prior to 2002, dividends declared for the fourth quarter were paid
in
early January of the following year. However, beginning in 2002,
dividends
declared
|
for
the fourth quarter were paid in December, resulting in five quarterly
dividends paid in 2002. For comparability, the payout ratios for
2002 are
based on
|
the
first four quarterly dividends paid in 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
7. Management’s Discussion and Analysis of Financial Condition
and
Results
of Operations
RESTATEMENT
— As discussed in Note 16 to the consolidated financial statements, the
Company's financial statements for the years ended December 31, 2005 and
2004
have been restated. The accompanying management's discussion and analysis
gives effect to that restatement.
OVERVIEW
— SJI is an energy services holding company that provides a variety of products
and services through the following wholly owned subsidiaries:
South
Jersey Gas Company (SJG)
SJG,
a
New Jersey corporation, is an operating public utility company engaged in
the
purchase, transmission and sale of natural gas for residential, commercial
and
industrial use. SJG also sells natural gas and pipeline transportation capacity
(off-system sales) on a wholesale basis to various customers on the interstate
pipeline system and transports natural gas purchased directly from producers
or
suppliers to their customers. SJG contributed approximately 50.1% of SJI’s net
income on a consolidated basis in 2006.
SJG’s
service territory covers approximately 2,500 square miles in the southern
part
of New Jersey. It includes 112 municipalities throughout Atlantic, Cape May,
Cumberland and Salem Counties and portions of Burlington, Camden and Gloucester
Counties, with an estimated permanent population of 1.2 million. SJG benefits
from its proximity to Philadelphia, PA and Wilmington, DE on the western
side of
its service territory and Atlantic City, NJ and the burgeoning shore communities
on the eastern side. Economic development and housing growth have long been
driven by the development of the Philadelphia metropolitan area. In recent
years, housing growth in the eastern portion of the service territory has
increased substantially and now accounts for approximately half of SJG’s annual
customer growth. The foundation for growth in Atlantic City and the surrounding
region rests primarily with new gaming and non-gaming investments that emphasize
destination style attractions. The casino industry is expected to remain
a
significant source of regional economic development going forward. The ripple
effect from Atlantic City continues to produce new housing and commercial
and
industrial construction. Combining with the gaming industry catalyst is the
ongoing conversion of southern New Jersey’s oceanfront communities from seasonal
resorts to year round economies. New and expanded hospitals, schools, and
large
scale retail developments throughout the service territory have contributed
to
SJG’s growth. Presently, SJG serves approximately 64% of households within its
territory with natural gas. SJG also serves southern New Jersey’s diversified
industrial base that includes processors of petroleum and agricultural products;
chemical, glass and consumer goods manufacturers; and high technology industrial
parks.
As
of
December 31, 2006, SJG served a total of 330,049 residential, commercial
and
industrial customers in southern New Jersey, compared with 322,424 customers
at
December 31, 2005. No material part of SJG’s business is dependent upon a single
customer or a few customers. Gas sales, transportation and capacity release
for
2006 amounted to 136 MMDth (million decatherms), of which 48 MMDth were firm
sales and transportation, 3 MMDth were interruptible sales and transportation
and 85 MMDth were off-system sales and capacity release. The breakdown of
firm
sales and transportation includes 43.2% residential, 23.9%
commercial, 30.2% industrial, and 2.7% cogeneration and electric
generation. At year-end 2006, SJG served 307,919 residential customers, 21,652
commercial customers and 478 industrial customers. This includes 2006 net
additions of 7,267 residential customers and 358 commercial and industrial
customers.
SJG
makes
wholesale gas sales for resale to gas marketers for ultimate delivery to
end
users. These “off-system” sales are made possible through the issuance of the
Federal Energy Regulatory Commission (FERC) Orders No. 547 and 636. Order
No.
547 issued a blanket certificate of public convenience and necessity authorizing
all parties, which are not interstate pipelines, to make FERC jurisdictional
gas
sales for resale at negotiated rates, while Order No. 636 allowed SJG to
deliver
gas at delivery points on the interstate pipeline system other than its own
city
gate stations and release excess pipeline capacity to third parties. During
2006, off-system sales amounted to 18.2 MMdth. Also in 2006, capacity release
and storage throughput amounted to 66.5 MMdth.
Supplies
of natural gas available to SJG that are in excess of the quantity required
by
those customers who use gas as their sole source of fuel (firm customers)
make
possible the sale and transportation of gas on an interruptible basis to
commercial and industrial customers whose equipment is capable of using natural
gas or other fuels, such as fuel oil and propane. The term “interruptible” is
used in the sense that deliveries of natural gas may be terminated by SJG
at any
time if this action is necessary to meet the needs of higher priority customers
as described in SJG’s tariffs. Usage by interruptible customers, excluding
off-system customers, in 2006, amounted to approximately 5.6 MMDth,
approximately 2.7% of the total throughput.
South
Jersey Energy Solutions, LLC
Effective
January 1, 2006, SJI established South Jersey Energy Solutions, LLC, (SJES)
as a
direct subsidiary for the purpose of serving as a holding company for all
of
SJI’s non-utility businesses. The following businesses are wholly owned
subsidiaries of SJES:
South
Jersey Energy Company (SJE)
SJE
provides services for the acquisition and transportation of natural gas and
electricity for retail end users, markets total energy management services,
and
prior to June 30, 2006, marketed an air quality monitoring system. As of
December 31, 2006, SJE marketed natural gas and electricity to approximately
15,500 customers, which consist of approximately 85% residential gas customers
and 15% commercial/industrial customers. Most customers served by SJE are
located within southern New Jersey. In 2006, SJE contributed approximately
1.0%
of SJI’s net income on a consolidated basis.
South
Jersey Resources Group, LLC (SJRG)
SJRG
markets natural gas storage, commodity and transportation assets on a wholesale
basis. Customers include energy marketers, electric and gas utilities and
natural gas producers. SJRG’s marketing activities occur mainly in the
mid-Atlantic and southern regions of the country. SJRG also conducts price
risk
management activities by entering into a variety of physical and financial
transactions including forward contracts, swap agreements, option contracts
and
futures contracts. In 2006, SJRG transacted 81.5 Bcf of natural gas. SJRG
contributed approximately 42.2% of SJI’s net income on a consolidated basis.
Marina
Energy, LLC (Marina)
Marina
develops and operates energy-related projects. Marina's largest project provides
cooling, heating and emergency power to the Borgata Hotel Casino & Spa in
Atlantic City, NJ. Marina added service to Borgata’s expanded facilities in July
2006 and service to a new hotel tower is expected to begin in December 2007.
Marina’s
other recent projects include:
·
|
A
51% equity interest in AC Landfill Energy, LLC (ACLE) which began
commercial operation in Egg Harbor Township, NJ of a 1,600 kilowatt
landfill gas-fired electricity production facility in March 2005
and a
1,900 kilowatt facility in August 2006. Engineering for an additional
1,900 kilowatt facility began in the fourth quarter of 2006 and
is
expected to be operational in the fourth quarter of 2007.
|
·
|
A
51% equity interest in WC Landfill Energy, LLC (WCLE) which began
commercial operation in White Township, NJ of a 3,800 kilowatt
landfill
gas-fired electricity production facility in November 2006.
|
·
|
A
50% equity interest in a partnership that will lease and operate
a 7,200
kilowatt landfill gas-fired electricity production facility in
Burlington
County, NJ. This facility is expected to be operational in the
third
quarter of 2007.
|
Marina
contributed approximately 4.8% of SJI’s net income on a consolidated
basis.
South
Jersey Energy Service Plus, LLC (SJESP)
SJESP
installs and services residential and small commercial HVAC systems, provides
plumbing services, and services appliances via the sale of appliance service
programs as well as on a time and materials basis. SJESP serves southern
New
Jersey where it is the largest local appliance service company with nearly
50
experienced, NATE certified technicians and installers. As of December 31,
2006,
SJESP had over 75,000 service contract customers, representing nearly 150,000
service contracts for the repair and maintenance of major appliances, such
as
house heaters, water heaters, gas ranges, and electric central air conditioning
units. SJESP contributed approximately 2.3% of SJI’s net income on a
consolidated basis.
Other
SJI
Services, LLC was established January 1, 2006, for the purpose of providing
services such as information technology, human resources, government relations,
corporate communications, materials purchasing, fleet management and insurance
to SJI and its other subsidiaries.
Energy
& Minerals, Inc. (EMI) principally manages liabilities associated with
discontinued operations of nonutility subsidiaries.
SJI
also
has a joint venture investment with Conectiv Solutions, LLC in Millennium
Account Services, LLC (Millennium). Millennium provides meter reading services
to SJG and Atlantic City Electric Company in southern New Jersey.
Primary
Factors Affecting SJI’s Business
SJI’s
stated long-term goals are to: 1) Grow earnings per share from continuing
operations by an average of at least 6% to 7% per year; 2) Increase the dividend
on common stock by at least 6% to 7% annually; and 3) Maintain a low-to-moderate
risk platform. Management established those goals in conjunction with SJI’s
Board of Directors based upon a number of different internal and external
factors that characterize and influence SJI’s current and expected future
activities.
The
following is a summary of the primary factors we expect to have the greatest
impact on SJI’s performance and ability to achieve long-term goals
going forward:
Business
Model — In developing SJI’s current business model, our focus has been on our
core utility and natural extensions of that business. That focus enables
us to
concentrate on business activities that match our core competencies. We have
no
plans to become involved in business opportunities that do not fit this model.
Customer
Growth — The vibrancy of the economic development in and adjacent to southern
New Jersey, our primary area of operations, and related strong demand for
new
housing has enabled our utility to increase its customer base at an average
rate
of 2.8% over the past five years. While housing growth most significantly
benefits utility performance, it also translates into additional opportunities
to market retail products and services through our nonutility businesses.
Regulatory
Environment — SJG is primarily regulated by the New Jersey Board of Public
Utilities (BPU). The BPU sets the rates that SJG charges its rate-regulated
customers for services provided and establishes the terms of service under
which
SJG operates. We expect the BPU to continue to set rates and establish terms
of
service that will enable SJG to obtain a fair and reasonable return on capital
invested. The BPU approved a change in base rates in July 2004, (discussed
in
greater detail in Note 9 to the consolidated financial statements) that
significantly increased utility margins in 2005, compared with 2004. The
BPU
also approved a Conservation Incentive Program (CIP) effective October 1,
2006,
discussed in greater detail under Results of Operations, that will protect
SJG’s net income from reductions in gas used by residential and commercial
customers.
Weather
Conditions and Customer Usage Patterns — Usage patterns can be affected by a
number of factors, such as wind, precipitation, temperature extremes and
customer conservation. SJG’s earnings are largely protected from fluctuations in
temperatures by the Conservation Incentive Program (CIP), which superseded
the
Temperature Adjustment Clause (TAC), effective October 1, 2006. The CIP has
a
stabilizing effect on utility earnings as SJG adjusts revenues where actual
usage per customer experienced during an annual period varies from an
established baseline usage per customer. Our nonutility gas retail marketing
business is directly affected by weather conditions, as it does not have
accounting mechanisms that address weather volatility. The impact of different
weather conditions on the earnings of our nonutility businesses is dependent
on
a range of different factors. Consequently, weather may impact the earnings
of
SJI’s various subsidiaries in different, or even opposite, ways. Further, the
profitability of individual subsidiaries may vary from year-to-year despite
experiencing substantially similar weather conditions.
Changes
in Natural Gas Prices — In recent years, prices for natural gas have become
increasingly volatile. The utility’s gas costs are passed on directly to
customers without any profit margin added by SJG. The price the utility charges
its periodic customers is set annually, with a regulatory mechanism in place
to
make limited adjustments to that price during the course of a year. In the
event
that gas cost increases would justify customer price increases greater than
those permitted under the regulatory mechanism, SJG can petition the BPU
for an
incremental rate increase. High prices can make it more difficult for our
customers to pay their bills and may result in elevated levels of bad-debt
expense. Among our nonutility activities, the one most likely to be impacted
by
changes in natural gas prices is our retail gas marketing business. Our ability
to add and retain customers is affected by the relationship between the price
that the utility charges customers for gas and the cost of gas available
in the
market at specific points in time.
Energy
Project Development — Marina Energy, LLC, SJI’s energy project development
business, focuses on designing, building, owning and/or operating energy
production facilities on, or adjacent to, customer sites. That business is
currently involved with six projects that are either operating, or are under
development. Based upon our experience to date, market issues that impact
the
reliability and price of electricity supplied by utilities, and discussions
that
we are having regarding additional projects, we expect to continue to expand
this business. However, the price of natural gas also has a direct effect
on the
economics of these projects.
Changes
in Interest Rates — SJI has operated in a relatively low interest rate
environment over the past several years. Rising interest rates would raise
the
expense associated with existing variable-rate debt and all issuances of
new
debt. We have sought to mitigate the impact of a potential rising rate
environment by fixing the costs on long-term debt, either by directly
issuing fixed-rate debt, or by entering into derivative transactions to hedge
against rising interest rates.
Labor
and
Benefit Costs — Labor and benefit costs have a significant impact on SJI’s
profitability. Benefit costs, especially those related to health care, have
risen in recent years. We sought to manage these costs by revising health
care
plans offered to existing employees, capping postretirement health care
benefits, and changing health care and pension packages offered to new hires.
Our workforce totaled 611 employees at the end of 2006, with 59% of that
total
being unionized. During 2004, we agreed to new contracts with all of our
bargaining units that encompass the changes mentioned above. The contracts
run
through at least January 2008, with the largest bargaining units signed through
January 2009. We expect savings from these changes to gradually increase
as new
hires replace retiring employees. In an effort to accelerate the realization
of
those benefits, we offered an early retirement incentive program at the end
of
2004 through 2005.
Balance
Sheet Strength — Our goal is to maintain a strong balance sheet with an average
annual equity-to-capitalization ratio of 46% to 50%. Our
equity-to-capitalization ratio, inclusive of short-term debt, was 44.4% and
45.6% at the end of 2006 and 2005, respectively. A strong balance sheet permits
us to maintain the financial flexibility necessary to take advantage
of growth opportunities and to address volatile economic and commodity
markets while maintaining a low-to-moderate risk platform.
CRITICAL
ACCOUNTING POLICIES — ESTIMATES AND ASSUMPTIONS: As described in the notes to
our consolidated financial statements, management must make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and related disclosures. Actual results could differ from those
estimates. Five types of transactions presented in our consolidated financial
statements require a significant amount of judgment and estimation. These
relate
to regulatory accounting, energy derivatives, environmental remediation costs,
pension and other postretirement benefit costs, and revenue
recognition.
Regulatory
Accounting — SJI’s largest subsidiary, SJG, maintains its accounts according to
the Uniform System of Accounts as prescribed by the New Jersey Board of Public
Utilities (BPU). As a result of the ratemaking process, SJG is required to
follow Financial Accounting Standards Board (FASB) Statement No. 71, “Accounting
for the Effects of Certain Types of Regulation.” SJG is required under Statement
No. 71 to recognize the impact of regulatory decisions on its financial
statements. SJG is required under its Basic Gas Supply Service clause (BGSS)
to
forecast its natural gas costs and customer consumption in setting its rates.
Subject to BPU approval, SJG is able to recover or return the difference
between
gas cost recoveries and the actual costs of gas through a BGSS charge to
customers. SJG records any over/under recoveries as a regulatory asset or
liability on the consolidated balance sheets and reflects it in the BGSS
charge
to customers in subsequent years. SJG also enters into derivatives that are
used
to hedge natural gas purchases. The offset to the resulting derivative assets
or
liabilities is also recorded as a regulatory asset or liability on the
consolidated balance sheets.
In
addition to the BGSS, other regulatory assets consist primarily of remediation
costs associated with manufactured gas plant sites (discussed below under
Environmental Remediation Costs), deferred pension and other postretirement
benefit cost, and several other assets as detailed in Note 10 to the
consolidated financial statements. If there are changes in future regulatory
positions that indicate the recovery of such regulatory assets is not probable,
SJG would charge the related cost to earnings. Currently there are no such
anticipated changes at the BPU.
Energy
Derivatives — SJI recognizes assets or liabilities for energy-related contracts
that qualify as derivatives that are entered into by its subsidiaries when
contracts are executed. We record contracts at their fair value in accordance
with FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended. We record changes in the fair value of the effective
portion of derivatives qualifying as cash flow hedges, net of tax, in
Accumulated Other Comprehensive Loss and recognize such changes in the income
statement when the hedged item affects earnings. Changes in the fair value
of
derivatives not designated as hedges are recorded in earnings in the current
period. We currently have no energy-related derivative instruments designated
as
cash flow hedges. Certain derivatives that result in the physical delivery
of
the commodity may meet the criteria to be accounted for as normal purchases
and
normal sales if so designated, in which case the contract is not
marked-to-market, but rather is accounted for when the commodity is
delivered. Due to the application of regulatory accounting principles under
FASB Statement No. 71, derivatives related to SJG’s gas purchases that are
marked-to-market, are recorded through the BGSS. SJG occasionally enters
into financial derivatives to hedge against forward price risk. These
derivatives are recorded at fair value with an offset to regulatory assets
and
liabilities through SJG’s BGSS, subject to BPU approval (See Notes 9 and 10
to the consolidated financial statements). We adjust the fair value of the
contracts each reporting period for changes in the market. We derive the
fair
value for most of the energy-related contracts from markets where the contracts
are actively traded and quoted. For other contracts, SJI uses published market
surveys and, in certain cases, unrelated third parties to obtain quotes
concerning the contracts' current value. Market quotes tend to be more plentiful
for contracts maturing in two years or less.
Environmental
Remediation Costs — Outside consulting firms assist us in estimating future
costs for environmental remediation activities. We estimate future costs
based
on projected investigation and work plans using existing technologies. We
estimate the range of future costs from $71.8 million to $253.7 million.
In
preparing consolidated financial statements, SJI records liabilities for
future
costs using the lower end of the range because a single reliable estimation
point is not feasible due to the amount of uncertainty involved in the nature
of
projected remediation efforts and the long period over which remediation
efforts
will continue. We update estimates each year to take into account past efforts,
changes in work plans, remediation technologies, government regulations and
site
specific requirements (See Note 14 to the consolidated financial
statements).
Pension
and Other Postretirement Benefit Costs — The costs of providing pension and
other postretirement employee benefits are impacted by actual plan experience
as
well as assumptions of future experience. Employee demographics, plan
contributions, investment performance, and assumptions concerning mortality,
return on plan assets, discount rates and health care cost trends all have
a
significant impact on determining our projected benefit obligations. We evaluate
these assumptions annually with the assistance of our investment manager
and
actuary, and we adjust them accordingly. These adjustments could result in
significant changes to the net periodic benefit costs of providing such benefits
and the related liabilities recognized by SJI. While SJI expects that its
change in mortality tables (to the RP-2000 table) will result in an increase
in
benefit costs, a 20 basis point increase in the discount rate and higher
than
expected returns on plan assets during 2006 are expected to offset this
increase. (See Note 11 to the consolidated financial statements.)
Revenue
Recognition — Gas and electricity revenues are recognized in the period the
commodity is delivered to customers. SJG, SJRG and SJE bill customers monthly.
A
majority of SJG and SJE customers have their meters read on a cycle basis
throughout the month. For SJG and SJE retail customers that are not billed
at
the end of each month, we record an estimate to recognize unbilled revenues
for
gas/electricity delivered from the date of the last meter reading to the
end of
the month. SJG’s and SJE’s unbilled revenue for natural gas is estimated each
month based on monthly deliveries into the system; unaccounted for natural
gas
based on historical results; customer-specific use factors, when available;
actual temperatures during the period; and applicable customer rates. SJE’s
unbilled revenue for retail electricity is based on customer-specific use
factors and applicable customer rates. We bill SJG customers at rates approved
by the BPU. SJE and SJRG customers are billed at rates negotiated between
the
parties.
We
recognize revenues related to SJESP’s appliance service contracts seasonally
over the full 12-month term of the contract. Revenues related to services
provided on a time and materials basis are recognized on a monthly basis
as the
services are provided.
Marina
recognizes revenue on a monthly basis as services are provided and for on-site
energy production that is delivered to its customers.
The
BPU
allows SJG to recover gas costs in rates through the Basic Gas Supply Service
(BGSS) price structure. SJG defers over/under recoveries of gas costs and
includes them in subsequent adjustments to the BGSS rate. 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 SJG realizes 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.
This revenue recognition process does not shift earnings between periods,
as
these clauses only provide for cost recovery on a dollar-for-dollar basis
(See
Notes 9 and 10 to the consolidated financial statements).
NEW
ACCOUNTING PRONOUNCEMENTS — See detailed discussions concerning New Accounting
Pronouncements and their impact on SJI in Note 1 to the consolidated financial
statements.
RATES
AND
REGULATIONS — As a public utility, SJG is subject to regulation by the New
Jersey Board of Public Utilities (BPU). Additionally, the Natural Gas Policy
Act, which was enacted in November 1978, contains provisions for Federal
regulation of certain aspects of SJG’s business. SJG is affected by Federal
regulation with respect to transportation and pricing policies applicable
to
pipeline capacity from Transcontinental Gas Pipeline Corporation (SJG’s major
supplier), Columbia Gas Transmission Corporation, Columbia Gulf Transmission
Company, Dominion Transmission, Inc., and Texas Gas Transmission Corporation,
since such services are provided under rates and terms established under
the
jurisdiction of the FERC. SJG’s retail sales are made under rate schedules
within a tariff filed with and subject to the jurisdiction of the BPU. These
rate schedules provide primarily for either block rates or demand/commodity
rate
structures. SJG’s primary rate mechanisms include base rates, the Basic Gas
Supply Service Clause, Temperature Adjustment Clause and Conservation Incentive
Program.
Basic
Gas
Supply Service Clause (BGSS) - In December 2002, the BPU approved the BGSS
price
structure which gave customers the ability to make more informed decisions
regarding their choices of an alternate supplier by having a utility price
structure that is more consistent with market conditions. The cost of gas
purchased from the utility by consumers is set annually by the BPU through
a
BGSS within SJG’s tariff. When actual gas costs experienced are less than those
charged to customers under the BGSS, customer bills in the subsequent BGSS
period(s) are reduced by returning the overrecovery with interest. When
actual
gas costs are more than is recovered through rates, SJG is permitted to
charge
customers more for gas in future periods to recover the
shortfall.
Temperature
Adjustment Clause (TAC) - Through September 30, 2006, SJG’s tariff included a
TAC to mitigate the effect of variations in heating season temperatures from
historical norms. Each TAC year ran from November 1 through May 31 of the
following year. Once the TAC year ended, the net earnings impact was filed
with
the BPU for future recovery. As a result, the cash inflows or outflows generally
would not begin until the next TAC year. Because of the timing delay between
the
earnings impact and the recovery, the net result can be either a regulatory
asset or liability. The effects of the TAC on SJG’s net income for the last
three years and the associated weather comparisons were as follows:
|
2006
|
2005
|
2004
|
Net
Income Benefit/(Reduction)
|
$5.1
million
|
$(0.2)
million
|
$0.2
million
|
Weather
Compared to 20-Year TAC Average
|
15.0
% warmer
|
3.0
% colder
|
1.0
% warmer
|
Weather
Compared to Prior Year
|
17.5
% warmer
|
2.9
% colder
|
5.8
% warmer
|
Conservation
Incentive Program (CIP) - The CIP is a BPU approved three-year pilot program
that began October 1, 2006 and is designed to eliminate the link between
SJG
profits and the quantity of natural gas SJG sells, and foster conservation
efforts. With the CIP, SJG’s profits will be tied to the number of customers
served and how efficiently SJG serves them, thus allowing SJG to focus on
encouraging conservation and energy efficiency among their customers without
negatively impacting net income. The CIP tracking mechanism adjusts
earnings based on weather, as did the TAC, and also adjusts SJG’s earnings where
actual usage per customer experienced during an annual period varies from
an
established baseline usage per customer.
Similar
to the TAC, utility earnings are recognized during current periods based
upon
the application of the CIP. The cash impact of variations in customer usage
will
result in cash being collected from, or returned to, customers during the
subsequent CIP year, which runs from October 1 to September 30.
The
CIP
protected $4.6 million in earnings in 2006, which would have been lost due
to
warm weather and lower customer usage. Of that amount, $2.9 million was related
to weather and $1.7 million was related to customer usage. For customer usage
variations, the CIP is expected to contribute up to $4.6 million to earnings
during the initial twelve months after implementation. The incremental earnings
are derived from baseline usages per customer which have been set above the
average utilization rate recently experienced by SJG’s customers.
As
part
of the CIP, SJG is required to implement additional conservation programs
including customized customer communication and outreach efforts, targeted
upgrade furnace efficiency packages, financing offers, and an outreach program
to speak to local and state institutional constituents. SJG is also required
to
reduce gas supply and storage assets and their associated fees. Note that
changes in fees associated with supply and storage assets have no effect
on
SJG’s net income as these costs are passed through directly to
customers.
Earnings
accrued and payments received under the CIP are limited to a level that will
not
cause SJG’s return on equity to exceed 10% (excluding earnings from off-system
gas sales and certain other tariff clauses) and the annualized savings attained
from reducing gas supply and storage assets.
Other
Rate Mechanisms - SJG’s tariff also contains provisions permitting the recovery
of environmental remediation costs associated with former manufactured gas
plant
sites, energy efficiency and renewable energy program costs, consumer education
program costs and low-income program costs. These costs are recovered from
customers through the Societal Benefits Clause.
See
additional detailed discussions on Rates and Regulatory Actions in Note 9
to the
consolidated financial statements.
ENVIRONMENTAL
REMEDIATION — See detailed discussion concerning Environmental Remediation in
Note 14 to the consolidated financial statements.
COMPETITION
— SJG’s franchises are non-exclusive. Currently, no other utility provides
retail gas distribution services within SJG’s territory. SJG does not expect any
other utilities to do so in the foreseeable future because of the extensive
investment required for utility plant and related costs. SJG competes with
oil,
propane and electricity suppliers for residential, commercial and industrial
users, with alternative fuel source providers (wind, solar and fuel cells)
based
upon price, convenience and environmental factors, and with other
marketers/brokers in the selling of wholesale natural gas services. The market
for natural gas commodity 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 below).
SJE
competes with utilities and other third-party marketers to sell the unregulated
natural gas and electricity commodity to customers. Marketers compete largely
on
price, which is driven by the commodity market. While the utilities are
typically indifferent as to where customers get their gas or electricity,
the
price they set for the commodity they sell creates competition for SJE. Based
on
its market share, SJE is the largest marketer of natural gas in southern
New
Jersey with approximately 15,500 customers as of December 31, 2006. In addition,
similar to SJG, SJE faces competition from other energy products.
SJRG
competes in the wholesale natural gas market against a wide array of competitors
on a cost competitive, term of service, and reliability basis. SJRG has been
a
reliable energy provider in this arena for ten years.
There
has been significant consolidation of energy wholesale operations and large
financial institutions have also entered the marketplace. We expect this
trend
to continue in the near term, which could result in downward pressure on
the
volume of transactions and the related margins available.
Marina
competes with other companies that develop and operate on-site energy
production. Marina also faces competition from customers’ preferences for
alternative technologies for energy production, as well as those customers
that
address their energy needs internally.
SJESP
competes primarily with smaller, local contractors in southern New Jersey
that
install residential and commercial HVAC systems and provide major appliance
repair and plumbing services. These contractors typically only serve their
local
communities and do not serve the entire southern part of New
Jersey.
CUSTOMER
CHOICE LEGISLATION—
All
residential natural gas customers in New Jersey can choose their natural
gas
commodity supplier under the terms of the “Electric
Discount and Energy Competition Act of 1999.”
This
bill created the framework and necessary time schedules for the restructuring
of
the state’s electric and natural gas utilities. The Act established unbundling,
where
redesigned utility rate structures allow natural gas and electric consumers
to
choose their energy supplier. It also established time frames for instituting
competitive services for customer account functions and for determining whether
basic gas supply services should become competitive. Customers purchasing
natural gas from a provider other than the local utility (marketer) are charged
for the gas costs by the marketer and charged for the transportation costs
by
the utility. For a period of several years, marketers had successfully attracted
gas commodity customers by offering natural gas at prices competitive with
those
available under regulated utility tariffs. However, during the third quarter
of
2005, marketers found it increasingly difficult to compete with the local
utility because of changing market conditions and rising gas costs. SJE
responded to these difficult market conditions by returning all of their
approximately 69,000 residential gas customers to the utility at the end
of the
third quarter of 2005. The total number of customers in SJG’s service territory
purchasing natural gas from a marketer fell from 89,537 to 9,797 during 2005.
Beginning in the first quarter of 2006, marketers began to attract customers
back through new offers, bringing SJG’s total number of customers purchasing the
gas commodity from a marketer to 22,505 as of December 31, 2006.
RESULTS
OF OPERATIONS:
A
significant portion of the volatility in operating results is due to the
impact
of the accounting methods associated with SJRG’s storage activities. SJRG
purchases and holds natural gas in storage to earn a profit margin from its
ultimate sale in the future. SJRG uses derivatives to mitigate commodity
price
risk in order to substantially lock-in the profit margin that will ultimately
be
realized. However, gas stored in inventory is accounted for at the lower
of
average cost or market; the derivatives used to reduce the risk associated
with
a change in the value of the inventory are accounted for at fair value, with
changes in fair value recorded in operating results in the period of change.
As
a result, earnings are subject to volatility as the market price of derivatives
change, even when the underlying hedged value of the inventory is unchanged.
This volatility can be significant from period to period. Over time, gains
or
losses on sale of gas in storage will be offset by losses or gains on the
derivatives, resulting in the realization of the profit margin expected when
the
transactions were initiated.
Net
Income in 2006 increased $32.3 million, or 82.7% to $71.4 million compared
to
2005. This increase is primarily due to:
·
|
a
163% increase in gross margin generated from SJRG related to $30.8
million
of unrealized gains (pre-tax) on energy related derivatives contracts
recognized in 2006 and favorable time spreads on storage asset
positions;
|
·
|
a
2.4% increase in SJG customers and;
|
·
|
a
$5.0 million reduction in utility operations expense.
|
These
increases were offset by the impact of SJE returning all of its residential
customers back to the utility in the third quarter of 2005 and a 16% increase
in
borrowing costs during 2006.
Net
Income in 2005 decreased $3.4 million, or 8.0% to $39.1 million compared
to
2004. This decrease is primarily due to:
·
|
a
120% decrease in gross margin generated from SJRG related to $15.9
million
of unrealized losses (pre-tax) on energy related derivative contracts
recognized in 2005;
|
·
|
the
impact of SJE returning all of its residential customers back to
the
utility in the third quarter of 2005
and;
|
·
|
an
uncollectible reserve adjustment relating to a retail gas
customer.
|
These
decreases were offset by a $6.3 million increase as a result of SJG's base
rate
increase approved in July 2004; a 2.8% increase in SJG customers; and a 5.0%
increase in production from Marina’s thermal plant.
These
changes are discussed in more detail below.
Operating
Revenues and Volumes — Utility — The
following table summarizes the composition of gas utility volumes, revenues
and margin for the three years ended December 31 (in thousands, except for
customer data):
|
2006
|
|
2005
|
|
2004
|
Utility
Volumes - dth
|
|
|
|
|
|
|
|
|
Residential
|
20,786
|
15%
|
|
25,219
|
16%
|
|
24,734
|
18%
|
Commercial
and industrial
|
26,016
|
19%
|
|
29,252
|
18%
|
|
30,389
|
22%
|
Cogeneration
and electric generation
|
1,356
|
1%
|
|
2,093
|
1%
|
|
1,384
|
1%
|
Interruptible
|
3,567
|
3%
|
|
2,955
|
2%
|
|
2,741
|
2%
|
Off-system,
capacity release & storage
|
84,679
|
62%
|
|
101,164
|
63%
|
|
78,914
|
57%
|
Total
Throughput
|
136,404
|
100%
|
|
160,683
|
100%
|
|
138,162
|
100%
|
|
|
|
|
|
|
|
|
|
Utility
Operating Revenues - dollars:
|
|
|
|
|
|
|
|
|
Residential
|
$
338,969
|
56%
|
|
$
277,446
|
48%
|
|
$
225,201
|
46%
|
Commercial
and industrial
|
131,208
|
22%
|
|
119,618
|
21%
|
|
100,777
|
20%
|
Cogeneration
and electric generation
|
10,939
|
2%
|
|
18,175
|
3%
|
|
9,819
|
2%
|
Interruptible
|
2,977
|
0%
|
|
3,396
|
1%
|
|
3,103
|
1%
|
Off-system,
capacity release & storage
|
116,344
|
20%
|
|
155,811
|
27%
|
|
147,585
|
30%
|
Other
revenues
|
1,562
|
0%
|
|
1,959
|
0%
|
|
8,463
|
1%
|
Total
utility operating revenues
|
601,999
|
100%
|
|
576,405
|
100%
|
|
494,948
|
100%
|
Less:
|
|
|
|
|
|
|
|
|
Cost
of sales
|
431,615
|
|
|
404,144
|
|
|
326,981
|
|
Conservation
recoveries *
|
6,862
|
|
|
7,933
|
|
|
8,056
|
|
RAC
recoveries *
|
1,806
|
|
|
2,181
|
|
|
2,508
|
|
Revenue
taxes
|
7,890
|
|
|
9,089
|
|
|
8,704
|
|
Utility
Net Operating Revenues (margin)
|
$
153,826
|
|
|
$
153,058
|
|
|
$
148,699
|
|
|
|
|
|
|
|
|
|
|
Margin
- Utility
|
|
|
|
|
|
|
|
|
Residential
|
$
90,442
|
59%
|
|
$
102,706
|
67%
|
|
$
93,228
|
62%
|
Commercial
and industrial
|
38,129
|
25%
|
|
40,862
|
27%
|
|
37,903
|
26%
|
Cogeneration
and electric generation
|
2,189
|
1%
|
|
2,514
|
2%
|
|
5,029
|
4%
|
Interruptible
|
226
|
0%
|
|
249
|
0%
|
|
236
|
0%
|
Off-system,
capacity release & storage
|
4,711
|
3%
|
|
4,697
|
3%
|
|
5,386
|
4%
|
Other
revenues
|
1,871
|
1%
|
|
2,319
|
1%
|
|
1,979
|
1%
|
Margin
before weather normalization & decoupling
|
137,568
|
89%
|
|
153,347
|
100%
|
|
143,761
|
97%
|
TAC
mechanism
|
8,511
|
6%
|
|
(289)
|
0%
|
|
403
|
0%
|
CIP
mechanism
|
7,747
|
5%
|
|
-
|
0%
|
|
-
|
0%
|
Appliance
Service
|
-
|
|
|
-
|
|
|
4,535
|
3%
|
Utility
Net Operating Revenues (margin)
|
$
153,826
|
100%
|
|
$
153,058
|
100%
|
|
$ 148,699
|
100%
|
|
|
|
|
|
|
|
|
|
Number
of Customers at Year End:
|
|
|
|
|
|
|
|
|
Residential
|
307,919
|
93%
|
|
300,652
|
93%
|
|
292,185
|
93%
|
Commercial
|
21,652
|
7%
|
|
21,322
|
7%
|
|
20,939
|
7%
|
Industrial
|
478
|
0%
|
|
450
|
0%
|
|
455
|
0%
|
Total
Customers
|
330,049
|
100%
|
|
322,424
|
100%
|
|
313,579
|
100%
|
|
|
|
|
|
|
|
|
|
|
*
Represent revenues for which there is a corresponding charge in
operating
expenses. Therefore, such recoveries have no impact on our
financial
results.
|
Volumes
—
Utility — Total gas throughput for SJG decreased 15.1% compared with 2005, to
136 MMDth in 2006. The lower throughput was primarily due to significantly
warmer weather experienced during 2006, as previously discussed under the
TAC,
which lowered sales and demand for capacity release. Total gas throughput
increased 16.3% compared with 2004, to 161 MMDth in 2005. The higher throughput
in 2005 was also primarily due to a significant increase in capacity release
activity.
Operating
Revenues - Utility—
Revenues
for SJG, net of intercompany transactions, increased $25.6 million in 2006,
compared with 2005, primarily due to three factors. First, SJG added 7,625
customers in 2006, which represents a 2.4% increase in total customers. Second,
as previously discussed under Customer Choice Legislation, the average number
of
transportation customers decreased 66.5% from 50,387 in 2005 to 16,871 in
2006.
The migration of customers from transportation service back to sales service
has
a direct impact on utility revenues as charges for gas costs are included
in
sales revenues and not in transportation revenues. However, since gas costs
are
passed on directly to customers without any profit margin added by SJG, the
change in customer utilization of gas marketers did not impact earnings.
Third,
SJG was granted two BGSS rate increases as a result of substantial increases
in
wholesale natural gas prices across the country. The first increase in September
2005 resulted in a 4.4% increase in the average residential customer’s bill and
5.0% in the average commercial/industrial customer’s bill. The second was
effective in December 2005, and resulted in a 24.3% increase in the average
residential customer’s bill and 28.4% in the average commercial/industrial
customer’s bill. However, as previously stated, since gas costs are passed on
directly to customers without any profit margin added by SJG, the BGSS rate
increases did not impact profitability.
Partially
offsetting the positive factors noted above were lower customer utilization
rates experienced during 2006, before the CIP became effective, compared
with
2005. This was primarily due to the impact of higher natural gas prices and
conservation efforts on customer usage. Additionally, sales to an electric
generation customer were substantially lower than 2005, as the 2006 summer
season weather was not nearly as warm as the 2005 summer season.
Revenues
for SJG, net of intercompany transactions increased $81.5 million in 2005
compared with 2004 primarily due to five factors. First, SJG added 8,845
customers during 2005, which represented a 2.8% increase in total customers.
Second, 89% of the residential customers and 25% of the commercial customers
purchasing their gas from sources other than SJG migrated back to utility
sales
service. The total number of transportation customers decreased from 89,537
at
December 31, 2004, to 11,238 at December 31, 2005, as third party marketers
found it difficult to compete with the utility’s Basic Gas Supply Service (BGSS)
rates under current market conditions. Third, natural gas sales to an electric
generation customer increased by $8.1 million in 2005, compared with 2004,
as it
experienced a high demand for electricity during an unusually hot summer
season
in 2005. Fourth SJG was granted the two BGSS rate increases, as previously
discussed. Finally, SJG experienced an increase in revenues from off-system
sales (OSS) as a direct result of the higher per unit cost of natural gas.
This
was coupled with an increase in capacity release activity in 2005. Capacity
release allows SJG to sell any unused capacity, but the revenues from such
activities are much lower than those from OSS since no commodity is included
in
the sale. While revenues from capacity release are not as high as when SJG
sells
the commodity, contributions to margins are comparable.
Partially
offsetting the positive factors noted above were lower customer utilization
rates experienced during 2005, compared with 2004, the transfer of the appliance
service business from the utility, and the impact of the July 2004 rate case
settlement on revenues. This settlement increased SJG’s base rates but, at the
same time, eliminated rates in several clauses that were no longer needed
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 had no impact on our earnings.
Operating
Revenues — Nonutility 2006 vs. 2005 — Combined revenues for SJI’s nonutility
businesses, net of intercompany transactions, decreased by $0.2 million in
2006,
compared with 2005.
SJE’s
revenues from retail gas decreased by $42.1 million in 2006, compared with
2005,
due mainly to a decline in the number of residential and commercial gas
customers resulting from unfavorable market conditions. As the market price
for
gas has been above the price charged by SJG to its customers, SJE returned
all
of its approximately 69,000 residential customers to the utility in the third
quarter of 2005. SJE resumed its residential gas marketing efforts in 2006,
increasing their customer count to over 13,000 as of December 31, 2006. The
loss
of residential and commercial sales revenue was partially offset by higher
gas
prices and sales from customers that were acquired from a retail gas marketer
in
northwestern Pennsylvania in November 2006.
SJE’s
revenues from retail electricity decreased $25.0 million in 2006, compared
with
2005, due mainly to the loss of revenues from a large school contract that
was
not renewed in May 2005. This decrease was partially offset by higher
electricity commodity prices and the addition of several industrial
customers.
SJRG’s
revenues increased $64.0 million in 2006, compared with 2005. Of this increase,
$46.4 million relates to the net mark to market gain recorded on forward
financial contracts. Due to price volatility, SJRG recorded a net unrealized
gain of $30.8 million in 2006, as compared to a net unrealized loss of $15.8
million recorded in 2005. Operationally, SJRG contracted for the sale of
more
volumes during these periods as several customers renewed and extended existing
contracts to take advantage of the drop in commodity prices that occurred
particularly in the last three quarters of 2006. Volumes sold to one of our
largest customers also increased in 2006 compared with 2005 as that customer
took advantage of attractive spreads between natural gas and electricity
prices.
Revenues
for Marina increased $1.3 million in 2006 compared with 2005 due mainly to
sales
from the thermal plant expansion which came on line in July 2006 and the
landfill gas-fired electricity production facilities which began commercial
operation in March 2005, August 2006 and November 2006. This increase was
partially offset by a decline in the sales of chilled and hot water from
the
original phase of the thermal plant. Chilled water sales declined 8% to 21.2
million ton hours in 2006 compared with 23.0 million ton hours in 2005. Hot
water sales declined 6% to 161,722 mmbtu in 2006 compared with 171,213 mmbtu
in
2005. These decreases were mainly due to warmer weather in the winter and
cooler
weather in the summer of 2006 as compared with 2005 and operational efficiencies
recognized by The Borgata.
Revenues
for SJESP in 2006 did not change significantly from 2005.
Operating
Revenues — Nonutility 2005 vs. 2004 — Combined revenues for SJI’s nonutility
business, net of intercompany transactions increased by $5.1 million in 2005,
compared with 2004.
SJESP’s
revenues increased $8.5 million in 2005, compared with 2004. Of this increase,
$5.4 million relates to the operations of the appliance service business
that
was formerly within SJG through September 1, 2004.
SJRG’s
revenues decreased by $3.8 million in 2005, compared with 2004. Of this
decrease, $14.6 million relates to the net mark to market loss recorded on
forward financial contracts. Due to price volatility, SJRG recorded a net
unrealized loss of $15.8 million in 2005, as compared to a net unrealized
loss
of $1.2 million recorded in 2004. Operationally, revenues were higher due
mainly
to sales volume growth, enhanced by additional storage capacity, and higher
gas
prices. In 2005, sales volumes grew by 4% to 81.5 MMDth compared with 78.6
MMDth
in 2004, due primarily to volumes sold pursuant to our contract with a large
customer.
SJE’s
revenues from retail gas decreased by $4.9 million in 2005, compared with
2004,
due mainly to a decline in the number of residential and commercial gas
customers, resulting from unfavorable market conditions experienced over
the
preceding 12 months. As the market price for gas has been above the price
charged by SJG to its customers, SJE returned all of its approximately 69,000
residential customers to the utility in the third quarter of 2005.
SJE’s
revenues from retail electricity increased by $0.7 million in 2005, compared
with 2004, due mainly to higher electricity commodity prices and the addition
of
several industrial customers. This increase was partially offset by the loss
of
revenues from a large school bid that was not renewed in May 2005.
Marina’s
revenues increased by $4.3 million in 2005, compared with 2004, due mainly
to
increased sales volumes from our thermal plant and revenues from its Seneca
and
ACLE projects, which began in 2005.
Margin
(pre-tax) —
Utility
— SJG’s margin is defined as natural gas revenues less natural gas costs;
volumetric and revenue based energy taxes; and regulatory rider expenses.
We
believe that margin provides a more meaningful basis for evaluating utility
operations than revenues since natural gas costs, energy taxes and regulatory
rider expenses are passed through to customers, and therefore, have no effect
on
margin. Natural gas costs are charged to operating expenses on the basis
of
therm sales at the prices approved by the New Jersey Board of Public Utilities
through the BGSS tariff.
For
SJG,
total margin for 2006 was comparable to the 2005 total margin; however,
residential margins were much lower in 2006, than compared with 2005. This
decrease was offset by contributions to net income from the TAC and CIP,
which
together, accounted for 11% of the 2006 total margin. The CIP replaced the
TAC
effective October 1, 2006 and takes into account variations in customer usage
factors due to weather as well as all other variations. As previously discussed
under the TAC, weather was substantially warmer in 2006 as compared to both
2005
and historical norms. The TAC represented only a negligible portion of both
the
2005 and 2004 margins because weather conditions were more consistent with
historical norms in those years. The CIP added $7.7 million to margin in
2006
related to the 2006-2007 winter season. Of this amount $4.9 million was related
to weather variations and $2.8 million was related to other customer usage
variations. Had the CIP not been implemented, SJG’s margins and net income would
have been significantly lower.
Total
margin increased $4.4 million from 2004 to 2005. The July 2004 base rate
increase, discussed in greater detail in Note 9 to the consolidated financial
statements, had the impact of increasing utility margins by approximately
$10.7
million in 2005, compared with 2004. This was offset by a $2.7 million
contribution to margin in 2004, due to the buyout of a large utility customer’s
long-term contract, and the transfer of our appliance service operations
to
SJESP in September 2004.
Gross
Margin — Nonutility — Gross margin for the nonutility businesses is defined as
revenue less all costs that are directly related to the production, selling
and
delivery of the company’s products and services. These costs primarily include
natural gas and electric commodity costs as well as payroll and related
benefits. On the statements of consolidated income, revenue is reflected
in
Operating Revenues - Nonutility and the costs are reflected in Cost of Sales
-
Nonutility. As discussed in Note 1 to the Consolidated Financial Statements,
revenues and expenses related to the energy trading activities of SJRG are
presented on a net basis in Operating Revenues - Nonutility.
For
2006,
combined gross margins for the nonutility businesses, net of intercompany
transactions, increased $52.6 million to $84.9 million compared to 2005.
This
increase is primarily due to the following:
·
|
Gross
Margin for SJRG increased $57.5 million in 2006, compared with
2005. Of
this increase, $46.6 million relates to the net mark to market
gain
recorded on forward financial contracts. Due to price volatility,
SJRG
recorded a net unrealized gain of $30.8 million in 2006, as compared
to a
net unrealized loss of $15.8 million recorded in 2005. Operationally,
margins increased due primarily to favorable time spreads on storage
asset
positions. These storage assets allow SJRG to lock in the differential
between purchasing natural gas at low current prices and selling
equivalent quantities at higher future prices. Gross margin is
generated
via pricing differentials that occur over time. SJRG’s contribution to
margin continues to increase as we expand our portfolio of storage
assets
under contract which totaled 9.6 Bcf, 4.8 Bcf and 2.7 Bcf as of
December
31, 2006, 2005 and 2004, respectively. However, margins could fluctuate
significantly due to the volatile nature of wholesale gas prices.
|
·
|
Gross
Margin for Marina increased $1.3 million in 2006 compared with
2005 due
mainly to the increase in sales volumes from the thermal plant
and the
landfill gas-fired electricity production facilities discussed
above.
|
·
|
Gross
margin from SJE’s retail gas sales decreased $6.9 million in 2006,
compared with 2005, due mainly to the decline in residential sales
volumes
and losses incurred relating to a full requirements customer in
the commercial market. Management believes the vast majority of
this loss
was caused by erroneous consumption information provided by the
sponsoring
consortium in the original bid document. After discussions with
the
consortium, it is management’s expectation we will recover a substantial
amount of this loss over the remaining term of the contract which
currently ends in October 2008.
|
·
|
Gross
margin from SJE’s retail electricity sales increased $3.5 million in 2006,
compared with 2005, due mainly to the recovery of $1.8 million
in electric
commodity costs recognized in previous periods. SJE also restructured
its
contracts in 2006 to pass a variable component of pricing on to
its
customers.
|
·
|
Gross
Margin for SJESP decreased $2.6 million in 2006, compared with
2005. This
decrease was due mainly to the recording of $3.5 million in costs
that
management believes are more appropriately recorded as cost of
sales that
were reported as operating expenses in prior periods. Gross margins
on
sales of service contracts increased by $0.9 million in 2006 compared
with
2005 due mainly to price increases that went into effect in August
2006.
|
For
2005,
combined gross margins for the nonutility businesses net of intercompany
transactions, decreased $4.5 million to $32.3 million compared to 2004. This
decrease is primarily due to the following:
·
|
Gross
Margin for SJRG decreased $8.9 million in 2005, compared with 2004.
Of
this decrease, $14.6 million relates to the net mark to market
loss
recorded on forward financial contacts. Due to price volatility,
SJRG
recorded a net unrealized loss of $15.8 million in 2005, as compared
to a
net unrealized loss of $1.2 million recorded in 2004. Operationally,
margins increased due primarily to favorable time spreads on storage
asset
positions and increased volumes as discussed above.
|
·
|
Gross
Margin for Marina increased $3.7 million in 2005, compared with
2004, due
mainly to the increase in sales volumes discussed above and lower
production costs in 2005 compared with 2004. Gross margins were
also
positively impacted by contributions from our ACLE landfill energy
project
which came on line in May 2005.
|
·
|
Gross
margin from SJE’s retail gas sales decreased $3.7 million in 2005,
compared with 2004, due mainly to the decline in residential sales
volumes
discussed above.
|
·
|
Gross
margin from SJE’s retail electricity decreased $1.0 million in 2005,
compared with 2004, due mainly to the loss of sales from the school
bid
that was not renewed in May 2005.
|
·
|
Gross
Margin for SJESP increased $5.7 million in 2005, compared with
2004. This
increase was due mainly to $3.6 million of gross margin attributable
to the operation of the appliance service business that was formerly
within SJG through September 1, 2004. The remainder of the increase
relates to customer growth and the expansion of our heater and
air
conditioner installation business line in
2005.
|
Operations
Expense — A summary of net changes in operations expense follows (in
thousands):
|
|
2006
vs. 2005
|
|
2005
vs. 2004
|
|
Utility
|
|
$
|
(4,995
|
)
|
$
|
(1,255
|
)
|
Nonutility:
|
|
|
|
|
|
|
|
Wholesale
Gas
|
|
|
1,035
|
|
|
114
|
|
Retail
Gas and Other
|
|
|
(2,029
|
)
|
|
1,835
|
|
Retail
Electricity
|
|
|
(113
|
)
|
|
30
|
|
On-Site
Energy Production
|
|
|
1,445
|
|
|
508
|
|
Appliance
Service
|
|
|
(2,105
|
)
|
|
3,164
|
|
Total
Nonutility
|
|
|
(1,767
|
)
|
|
5,651
|
|
Corporate
and Services
|
|
|
7,327
|
|
|
104
|
|
Intercompany
Eliminations
|
|
|
(9,562
|
)
|
|
(261
|
)
|
Total
Operations
|
|
$
|
(8,997
|
)
|
$
|
4,239
|
|
Utility
Operations expense decreased $5.0 million during 2006, compared with 2005,
primarily as a result of several factors. First, there was a $1.1 million
decrease in 2006 in SJG’s costs under the New Jersey Clean Energy Program
(NJCEP). Such costs are recovered on a dollar-for-dollar basis; therefore,
SJG
experienced offsetting decreases in revenues during the periods (See preceding
margin table). The BPU-approved NJCEP allows for full recovery of costs,
including carrying costs when applicable. As a result, the decrease in expense
had no impact on net income. Second, SJG’s regulatory expenses decreased $0.7
million in 2006, primarily as a result of amortization of previously deferred
expenses related to our 2004 base rate proceeding with the BPU. Such costs
were
fully amortized as of December 31, 2005. Third, SJG also experienced lower
pension and postretirement benefit costs during 2006. Such reductions were
the result of earnings on additional contributions to the plans, the transfer
of
employees to SJI Services, LLC (SJIS) effective January 1, 2006, and savings
resulting from the early retirement plan (ERIP) offered in 2004 and 2005.
The
total cost of providing the ERIP in 2005, including monetary incentives,
was
$1.8 million. There was no ERIP offered in 2006. Finally, SJG also experienced
a
significant decrease in compensation and healthcare costs as a result of
the
transfer of approximately 10% of our workforce to SJIS. While much of those
costs were charged back to SJG for services rendered, increased activity
and
growth in SJI’s non-utility entities resulted in a net savings to SJG.
Additional information regarding compensation can be found in Note 1 to the
consolidated financial statements under Stock-Based Compensation Plans.
Nonutility
Wholesale Gas Operations expense increased in 2006, compared with 2005, due
mainly to higher Corporate and Services cost allocations and additional
personnel costs to support growth.
Nonutility
Retail Gas and Other Operations expense decreased in 2006, compared with
2005,
mainly due to an uncollectible reserve adjustment following a bankruptcy
declaration by one of SJE’s industrial gas customers in 2005.
Nonutility
On-Site Energy Production Operations expense increased in 2006, compared
with
2005, due mainly to higher labor and operating costs at all active projects,
higher Corporate and Services cost allocations, costs related to landfill
projects which began operations in 2006, and six months of costs related
to the
thermal plant expansion which began operations in July 2006.
Nonutility
Appliance Service Operations expense decreased in 2006, compared with 2005,
due
mainly to the recording of certain costs in 2006 that management believes
are
more appropriately recorded in Cost of Sales - Nonutility that were recorded
as
Operations expense in 2005. This decrease was partially offset by higher
Corporate and Services allocations.
Corporate
and Services increased in 2006 compared with 2005, mainly due to the formation
of SJI Services, LLC (SJIS) effective January 1, 2006 and the growing needs
of
our nonutility subsidiaries. Common services such as information technology
and
human resources were transferred to SJIS, having mostly been housed within
SJG
prior to January 1, 2006. Because these costs are allocated to our operating
subsidiaries, they are eliminated in consolidation.
Utility
Operations expense decreased $1.3 million in 2005, which is the net result
of a
decrease in appliance service expense partially offset by an increase in
utility
operations expense. Appliance service expense within Utility Operations
decreased $3.5 million due to the transfer of this business from the utility
in
2004. The offsetting increase in expense was due primarily to an increase
in
bad-debt expense, early retirement incentive plan (ERIP) cost, officers’
long-term incentive compensation, and higher employee wages and salaries.
Additional bad-debt expense in the amount of $1.3 million was recognized
due to
higher write-offs and to an increase in the reserve for potential uncollectible
accounts to correspond with the increase in customer accounts receivable
caused
by rising gas prices. Also, as previously discussed, SJG offered an ERIP
in late
2005. Overall, costs related to the plan were $0.6 million more in 2005,
than in
2004. SJG also incurred additional expense for the officers’ long-term incentive
compensation plan, which provides for annual awards based on SJI’s performance
as compared to a select peer group. Due to improved corporate performance,
we
recorded $0.5 million more expense in 2005, than in 2004. Finally, SJG
experienced an increase in wages and salaries from 2004 to 2005, due to contract
terms and cost of living increases. The increases in these expenses were
partially offset by lower pension expense caused by earnings on additional
pension contributions, and lower postretirement benefit costs (not related
to
the ERIP) due to cost caps put in place in November 2004 (See Note 11 to
the
consolidated financial statements).
Nonutility
Retail Gas and Other Operations expense increased in 2005, compared with
2004,
mainly due to a significant uncollectible reserve adjustment following a
bankruptcy declaration by one of SJE’s industrial gas customers. On-Site Energy
Production Operations expense increased in 2005, compared with 2004, due
mainly
to new projects that became operational in 2005. Appliance Service Operations
expense increased as the business became fully independent from SJG in September
2004.
Other
Operating Expenses — A summary of changes in other consolidated operating
expenses (in thousands):
|
|
2006
vs. 2005
|
|
2005
vs. 2004
|
|
Maintenance
|
|
$
|
(276
|
)
|
$
|
42
|
|
Depreciation
|
|
|
2,218
|
|
|
(857
|
)
|
Energy
and Other Taxes
|
|
|
(1,158
|
)
|
|
636
|
|
Depreciation
increased in 2006, compared with 2005, due mainly to the increased investment
in
property, plant and equipment by SJG and Marina. Depreciation expense decreased
in 2005, compared with 2004, due to a reduction in SJG’s composite depreciation
rate from 2.9% to 2.4% effective July 2004, offset by additional depreciation
on
SJG’s continuing investment in utility plant.
Energy
and Other Taxes — Energy and Other Taxes decreased in 2006, compared with 2005,
primarily due to lower energy-related taxes based on lower sales volumes
in
2006. Energy and Other Taxes increased in 2005, compared with 2004, primarily
due to higher energy-related taxes based on increased sales volumes and revenues
in 2005.
Other
Income and Expense — Other income and expense increased in 2006, compared with
2005, primarily as a result of $0.7 million in earnings on restricted
investments, a $0.3 million improvement in the earnings performance of our
available-for-sale securities over prior year and a gain of $0.4 million
on the
sale of AirLogics, LLC.
Other
income and expense was higher in 2004, compared with 2005, due to a pre-tax
gain
of $0.7 million on our postretirement healthcare plan trust. The movement
of
plan assets to a new investment manager triggered the recognition of gains
on
investments in 2004.
Interest
Charges — Interest charges increased by $6.7 million in 2006, compared with
2005, due primarily to higher levels of short-term and long-term debt and
higher
interest rates on short-term debt. Short-term debt levels rose to support
our
capital expenditures, which we have not yet financed with long-term debt,
and
increased levels of gas in storage. Interest charges increased by $0.4 million
in 2005, compared with 2004, due primarily to higher levels of short-term
debt
and higher interest rates on short-term debt. A steep rise in short-term
interest rates was driven by a series of interest rate hikes enacted by the
Federal Reserve Bank during 2005 and 2006. The increase in interest charges
associated with short-term debt was partially offset by lower levels of
long-term debt outstanding during 2005, compared with 2004.
Discontinued
Operations — The losses are primarily comprised of environmental remediation and
product liability litigation associated with previously disposed of
businesses.
LIQUIDITY
AND CAPITAL RESOURCES:
Liquidity
needs 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; working capital needs
of
our energy trading and marketing activities; the timing of construction and
remediation expenditures and related permanent financings; mandated tax payment
dates; both discretionary and required repayments of long-term debt; and
the
amounts and timing of dividend payments.
Cash
Flows from Operating Activities — Liquidity needs are first met with net cash
provided by operating activities. Net cash provided by operating activities
totaled $29.1 million, $39.3 million and $79.6 million in 2006, 2005 and
2004,
respectively. Net cash provided by operating activities varies from year-to-year
primarily due to the impact of weather on customer demand and related gas
purchases, customer usage factors related to conservation efforts and the
price
of the natural gas commodity, inventory utilization and gas cost recoveries.
Net
cash provided by operating activities was significantly impacted in 2006
by a
change in the terms under which SJI purchased natural gas, and the impact
of
extremely warm weather on inventory levels and collection under regulatory
clauses at year end. The reduction in payable levels at year end 2006 as
compared with 2005 was due to SJI’s election to pay for certain gas supplies on
a current basis as opposed to 2005 when we delayed those payments
into the first quarter of the subsequent year. Very warm weather conditions
experienced during the fourth quarter of 2006 resulted in low levels of gas
withdrawn from storage to meet customer demand, and decreased gas volumes
consumed resulted in slower collections of expenses under several regulatory
clauses. Net cash provided by operating activities in 2005 was heavily impacted
by these factors as collection of much higher fuel costs incurred by SJG
during
2005 were deferred for collection until 2006. On December 15, 2005, SJG was
authorized by the BPU to increase the rates it charges customers by 24.3%
for
residential and 28.4% for commercial/industrial customers. The increase enabled
SJG to recover from its customers the higher cost of gas that was delivered
to
them during 2005 and 2006. Changes in Accounts Receivable, Inventories and
Accounts Payable on the statement of consolidated cash flows for 2005 reflected
the impact of higher gas prices experienced during the year. We typically
anticipate that delays in withdrawing gas from storage during the fourth
quarter
of any fiscal year will result in increased withdrawals in the subsequent
quarter, benefiting our cash flows for that quarter. SJI also ends each calendar
year in a prepaid tax position due to mandatory prepayment requirements on
all
state taxes. Such prepayments are credited against amounts otherwise due
during
the first quarter of the subsequent year; further improving first quarter
liquidity.
Cash
Flows from Investing Activities — SJI has a continuing need for cash resources
and capital, primarily to invest in new and replacement facilities and
equipment. Net cash outflows for construction projects for 2006, 2005 and
2004
amounted to $73.7 million, $92.9 million and $71.6 million, respectively.
We
estimate the net cash outflows for construction projects for 2007, 2008 and
2009
to be approximately $59.0 million, $51.1 million and $47.5 million,
respectively. Included in the 2007 estimates is $3.8 million in capital costs
accrued but not paid as of December 31, 2006.
In
support of its risk management activities, SJRG is required to maintain a
margin
account with a national investment firm as collateral for its forward contracts,
swap agreements, options contracts and futures contracts. This margin account
is
included in Restricted Investments on the consolidated balance sheets. The
required amount of restricted investments changes on a daily basis due to
fluctuations in the market value of the related outstanding contracts and
are
difficult to predict.
Cash
Flows from Financing Activities — Short-term borrowings under lines of credit
from commercial banks are used to supplement cash from operations, to support
working capital needs and to finance capital expenditures as incurred. From
time
to time, short-term debt incurred to finance capital expenditures is refinanced
with long-term debt.
Bank
credit available to SJI totaled $406.0 million at December 31, 2006, of which
$194.6 million, inclusive of $66.1 million of letters of credit, was used.
Those
bank facilities consist of a $100.0 million revolving credit facility and,
$76.0
million of uncommitted bank lines available to SJG; and a $200.0 million
revolving credit facility and $30.0 million of uncommitted bank lines available
to SJI. The revolving credit facilities expire in August 2011 and contain
one
financial covenant regarding the ratio of total debt to total capitalization,
measured on a quarterly basis. SJI and SJG were in compliance with this covenant
as of December 31, 2006. Based upon the existing credit facilities and a
regular
dialog with our banks, we believe there will continue to be sufficient credit
available to meet our business’ future liquidity needs.
SJI
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
utility assets, to finance its long-term borrowing needs. These needs are
primarily capital expenditures for property, plant and equipment. In April
2006,
SJG issued $25.0 million of secured tax-exempt, auction-rate debt through
the
New Jersey Economic Development Authority (NJEDA). The debt was issued under
SJG’s MTN program. An additional $115.0 million of MTN’s remains available for
issuance under that program. In March 2006, Marina issued $16.4 million of
tax-exempt Series A variable-rate bonds, through the NJEDA due in 2036. The
proceeds were used to fund construction costs related to the expansion of
Marina’s Atlantic City thermal plant. Investors in the bonds receive liquidity
and credit support via letters of credit provided by commercial banks through
SJI’s revolving credit.
SJI
has
raised equity capital over the past three years through its Dividend
Reinvestment Plan (DRP). Participants in SJI's DRP receive newly issued shares.
We offer a 2% discount on DRP investments as it is the most cost-effective
way
to raise equity capital in the quantities we are seeking. Through the DRP,
SJI
raised $6.6 million of equity capital by issuing 232,883 shares in 2006,
and
$31.9 million of equity capital by issuing 1,141,590 shares in 2005 and $25.3
million of equity capital by issuing 1,232,602 shares in 2004. We anticipate
raising less than $10.0 million of additional equity capital through the
DRP in
2007, for the purpose of maintaining an equity-to-capitalization ratio close
to
50%.
SJI’s
capital structure was as follows:
|
|
As
of December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Common
Equity
|
|
|
44.4
|
%
|
|
45.6
|
%
|
Long-Term
Debt
|
|
|
36.1
|
%
|
|
37.3
|
%
|
Short-Term
Debt
|
|
|
19.5
|
%
|
|
17.1
|
%
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
%
|
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.
For
2006,
2005 and 2004, SJI paid quarterly dividends to its common shareholders. SJI
has
paid dividends on its common stock for 55 consecutive years and has increased
that dividend each year for the last eight years. The Company currently looks
to
grow that dividend by at least 6% to 7% per year and has a targeted payout
ratio
of between 50% and 60%. In setting the dividend rate, the Board of Directors
of
SJI considers future earnings expectations, payout ratio, and dividend yield
relative to those at peer companies as well as returns available on other
income-oriented investments.
COMMITMENTS
AND CONTINGENCIES — SJI 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 cash outflows for construction and
remediation projects for 2006 amounted to $73.7 and $10.8 million, respectively.
We estimate net cash outflows for construction and remediation projects for
2007, 2008 and 2009, to be approximately $84.1 million, $64.7 million and
$56.5
million, respectively.
SJI
is
obligated on the letters of credit supporting the variable-rate demand bonds
issued through the New Jersey Economic Development Authority by Marina.
Commercial banks have issued $62.3 million of renewing letters of credit
under
SJI’s revolving credit agreement to support the financing of the original
construction and recent expansion of Marina’s Atlantic City thermal plant
project.
SJG
has
certain commitments for both pipeline capacity and gas supply for which it
pays
fees regardless of usage. Those commitments as of December 31, 2006, average
$45.5 million annually and total $196.2 million over the contracts’ lives.
Approximately 50% of the financial commitment under these contracts expires
during the next five years. We expect to renew each of these contracts under
renewal provisions as provided in each contract. SJG recovers all prudently
incurred fees through rates via the Basic Gas Supply Service
clause.
The
following table summarizes our contractual cash obligations and their applicable
payment due dates as of December 31, 2006 (in thousands):
|
|
|
Up
to
|
|
Years
|
|
Years
|
|
More
than
|
|
Contractual
Cash Obligations
|
Total
|
|
1
Year
|
|
2
& 3
|
|
4
& 5
|
|
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
$
|
360,391
|
|
$
|
2,369
|
|
$
|
218
|
|
$
|
35,306
|
|
$
|
322,498
|
|
Interest
on Long-Term Debt
|
|
298,515
|
|
|
20,117
|
|
|
40,028
|
|
|
39,388
|
|
|
198,982
|
|
Operating
Leases
|
|
2,774
|
|
|
696
|
|
|
980
|
|
|
600
|
|
|
498
|
|
Construction
Obligations
|
|
9,015
|
|
|
9,015
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Commodity
Supply Purchase Obligations
|
|
670,685
|
|
|
423,922
|
|
|
166,298
|
|
|
21,725
|
|
|
58,740
|
|
New
Jersey Clean Energy Program (Note 9)
|
|
15,000
|
|
|
7,000
|
|
|
8,000
|
|
|
-
|
|
|
-
|
|
Other
Purchase Obligations
|
|
1,599
|
|
|
677
|
|
|
526
|
|
|
396
|
|
|
-
|
|
Total
Contractual Cash Obligations
|
$
|
1,357,979
|
|
$
|
463,796
|
|
$
|
216,050
|
|
$
|
97,415
|
|
$
|
580,718
|
|
Interest
on Long-Term Debt includes the impact of the related interest rate swap
agreements. Expected environmental remediation costs and asset retirement
obligations are not included in the table above as the total obligation cannot
be calculated due to the subjective nature of these costs and the timing
of
anticipated payments. As discussed in Note 11 to the consolidated financial
statements, we currently do not expect to make a pension contribution in
2007;
however, changes in future investment performance and discount rates may
ultimately result in a contribution. Furthermore, future pension contributions
beyond 2007 cannot be determined at this time. SJG’s regulatory obligation to
contribute to its other postretirement benefit plans’ trusts, less costs
incurred directly by the company, is not included as the duration is
indefinite.
Off-Balance
Sheet Arrangements — SJI has no off-balance sheet financing
arrangements.
Pending
Litigation — SJI 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 probable settlement costs. SJI
has
been named in, among other actions, certain product liability claims related
to
our former sand mining subsidiary. Management does not currently anticipate
the
disposition of any known claims to have a material adverse effect on SJI’s
financial position, results of operations or liquidity.
MARKET
RISKS:
Commodity
Market Risks — Certain regulated and nonregulated SJI subsidiaries are involved
in buying, selling, transporting and storing natural gas and buying and selling
retail electricity for their own accounts as well as managing these activities
for other third parties. These subsidiaries are subject to market risk due
to
price fluctuations. To hedge against this risk, we enter into a variety of
physical and financial transactions including forward contracts, swaps, futures
and options agreements. To manage these transactions, SJI has a well-defined
risk management policy approved by our Board of Directors that includes
volumetric and monetary limits. Management reviews reports detailing activity
daily. Generally, the derivative activities described above are entered into
for
risk management purposes.
SJG
and
SJE transact commodities on a physical basis and typically do not enter into
financial derivative positions directly. SJRG manages risk for these entities
as
well as for its own portfolio by entering into the types of transactions
noted
above. As part of its gas purchasing strategy, SJG uses financial contracts
through SJRG to hedge against forward price risk. These contracts are
recoverable through SJG’s BGSS, subject to BPU approval. It is management's
policy, to the extent practical, within predetermined risk management policy
guidelines, to have limited unmatched positions on a deal or portfolio basis
while conducting these activities. As a result of holding open positions
to a
minimal level, the economic impact to SJRG of changes in value of a particular
transaction is substantially offset by an opposite change in the related
hedge
transaction.
As
of
December 31, 2006, SJRG had $33.8 million of Accounts Receivable under sales
contracts. Of that total, 78% were with companies rated investment-grade,
were
guaranteed by an investment-grade-rated parent or were with companies where
we
have a collateral arrangement. The remainder of the Accounts Receivable were
within approved credit limits.
SJRG
and
SJE entered into certain contracts to purchase, sell, and transport natural
gas.
For those derivatives not designated as hedges, we recorded the net unrealized
pre-tax gain (loss) of $30.9 million, $(16.6) million and $(0.6) million
in
earnings during the years 2006, 2005 and 2004, respectively, which are included
with realized gains and losses in Operating Revenues — Nonutility. The fair
value and maturity of these energy trading contracts determined under the
mark-to-market method as of December 31, 2006 is as follows (in
thousands):
Assets
|
|
Source
of
Fair
Value
|
|
|
Maturity
<
1 Year
|
|
|
Maturity
1
-
3 Years
|
|
|
Beyond
3
Years
|
|
|
Total
|
|
Prices
Actively Quoted
|
|
NYMEX
|
|
$
|
33,528
|
|
$
|
18,443
|
|
$
|
1,571
|
|
$
|
53,542
|
|
Other
External Sources
|
|
Basis
|
|
|
12,099
|
|
|
3,523
|
|
|
-
|
|
|
15,622
|
|
Total
|
|
|
|
$
|
45,627
|
|
$
|
21,966
|
|
$
|
1,571
|
|
$
|
69,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
Source of
Fair
Value
|
|
|
Maturity
<
1 Year
|
|
|
Maturity
1
-
3 Years
|
|
|
Beyond
3
Years
|
|
|
Total
|
|
Prices
Actively Quoted
|
|
NYMEX
|
|
$
|
35,773
|
|
$
|
4,740
|
|
$
|
365
|
|
$
|
40,878
|
|
Other
External Sources
|
|
Basis
|
|
|
6,351
|
|
|
2,813
|
|
|
-
|
|
|
9,164
|
|
Total
|
|
|
|
$
|
42,124
|
|
$
|
7,553
|
|
$
|
365
|
|
$
|
50,042
|
|
NYMEX
(New York Mercantile Exchange) is the primary national commodities exchange
on
which natural gas is traded. Basis represents the price of a NYMEX natural
gas
futures contract adjusted for the difference in price for delivering the
gas at
another location. Contracted volumes of our NYMEX and Basis Contracts are
4.7
MMDth with a weighted-average settlement price of $9.94 per
decatherm.
A
reconciliation of SJI's estimated net fair value of energy-related derivatives
follows (in thousands):
Net
Derivatives — Energy Related Assets,
|
|
|
|
January
1, 2006
|
|
$
|
2,636
|
|
Contracts
Settled During 2006, Net
|
|
|
8,978
|
|
Other
Changes in Fair Value from Continuing and New Contracts,
Net
|
|
|
7,508
|
|
Net
Derivatives — Energy Related Assets,
|
|
|
|
|
December
31, 2006
|
|
$
|
19,122
|
|
Interest
Rate Risk — Our exposure to interest-rate risk relates primarily to short-term,
variable-rate borrowings. Short-term variable-rate debt outstanding at December
31, 2006, was $194.6 million and averaged $142.6 million during 2006. The
months
where average outstanding variable-rate debt was at its highest and lowest
levels were October, at $108.3 million, and May, at $97.1 million. A
hypothetical 100 basis point (1%) increase in interest rates on our average
variable-rate debt outstanding would result in a $841,000 increase in our
annual
interest expense, net of tax. The 100 basis point increase was chosen 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: 2006
— 67
b.p. increase; 2005 — 194 b.p. increase; 2004 — 115 b.p. increase; 2003 — 28
b.p. decrease; 2002 — 74 b.p. decrease; and 2001 — 383 b.p. decrease. For
December 2006, our average interest rate on variable-rate debt was 5.69%.
We
issue
long-term debt either at fixed rates or use interest rate derivatives to
fix
interest rates on variable-rate, long-term debt. As of December 31, 2006,
the
interest costs on all but $4.1 million of our long-term debt were either
at a
fixed-rate or at a rate fixed via an interest rate derivative. Consequently,
interest expense on existing long-term debt is not significantly impacted
by
changes in market interest rates.
As
of
December 31, 2006, SJI’s active interest rate swaps were as
follows:
Notional
Amount
|
|
Fixed
Interest Rate
|
|
Start
Date
|
|
Maturity
|
|
Type
of Debt
|
|
Obligor
|
$ 3,000,000
|
*
|
4.550
|
%
|
|
11/19/2001
|
|
12/01/2007
|
|
Taxable
|
|
Marina
|
$ 3,900,000
|
|
4.795
|
%
|
|
12/01/2004
|
|
12/01/2014
|
|
Taxable
|
|
Marina
|
$ 8,000,000
|
|
4.775
|
%
|
|
11/12/2004
|
|
11/12/2014
|
|
Taxable
|
|
Marina
|
$ 20,000,000
|
|
4.080
|
%
|
|
11/19/2001
|
|
12/01/2011
|
|
Tax-exempt
|
|
Marina
|
$ 14,500,000
|
|
3.905
|
%
|
|
03/17/2006
|
|
01/15/2026
|
|
Tax-exempt
|
|
Marina
|
$ 500,000
|
|
3.905
|
%
|
|
03/17/2006
|
|
01/15/2026
|
|
Tax-exempt
|
|
Marina
|
$ 330,000
|
|
3.905
|
%
|
|
03/17/2006
|
|
01/15/2026
|
|
Tax-exempt
|
|
Marina
|
$ 7,100,000
|
|
4.895
|
%
|
|
02/01/2006
|
|
02/01/2016
|
|
Taxable
|
|
Marina
|
$ 12,500,000
|
|
3.430
|
%
|
|
12/01/2006
|
|
02/01/2036
|
|
Tax-exempt
|
|
SJG
|
$ 12,500,000
|
|
3.430
|
%
|
|
12/01/2006
|
|
02/01/2036
|
|
Tax-exempt
|
|
SJG
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Amount
reduced to $3.0 million on 12/01/06, and further reduces to $0
million on
12/01/07.
|
Item
7A. Quantitative and Qualitative Disclosures about Market
Risks
Information
required by this item can be found in the section entitled “Market Risks” on
page -- of this report.
Item
8. Financial Statements and Supplementary Data
Statements
of Consolidated Income
|
|
South
Jersey Industries, Inc. and Subsidiaries
|
(In
Thousands Except for Per Share Data)
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(As
Restated
|
|
|
(As
Restated
|
|
|
|
|
|
|
|
See
Note 16)
|
|
|
See
Note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Utility
|
|
$
|
601,999
|
|
$
|
576,405
|
|
$
|
494,948
|
|
Nonutility
|
|
|
329,429
|
|
|
329,611
|
|
|
324,468
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Revenues
|
|
|
931,428
|
|
|
906,016
|
|
|
819,416
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales - Utility - (Excluding depreciation)
|
|
|
431,615
|
|
|
404,144
|
|
|
326,981
|
|
Cost
of Sales - Nonutility - (Excluding depreciation)
|
|
|
244,522
|
|
|
297,352
|
|
|
287,714
|
|
Operations
|
|
|
66,225
|
|
|
75,222
|
|
|
70,983
|
|
Maintenance
|
|
|
5,538
|
|
|
5,814
|
|
|
5,772
|
|
Depreciation
|
|
|
26,249
|
|
|
24,031
|
|
|
24,888
|
|
Energy
and Other Taxes
|
|
|
11,477
|
|
|
12,635
|
|
|
11,999
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
785,626
|
|
|
819,198
|
|
|
728,337
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
145,802
|
|
|
86,818
|
|
|
91,079
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income and Expense
|
|
|
2,672
|
|
|
619
|
|
|
985
|
|
Interest
Charges
|
|
|
(27,671
|
)
|
|
(20,950
|
)
|
|
(20,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
Before Income Taxes
|
|
|
120,803
|
|
|
66,487
|
|
|
71,491
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
(49,683
|
)
|
|
(27,619
|
)
|
|
(29,218
|
)
|
Equity
in Unconsolidated Companies
|
|
|
1,130
|
|
|
902
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
|
72,250
|
|
|
39,770
|
|
|
43,173
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations - (Net of tax benefit)
|
|
|
(818
|
)
|
|
(669
|
)
|
|
(680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
71,432
|
|
$
|
39,101
|
|
$
|
42,493
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Common Share:
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
2.48
|
|
$
|
1.41
|
|
$
|
1.58
|
|
Discontinued
Operations
|
|
|
(0.03
|
)
|
|
(0.02
|
)
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Common Share
|
|
$
|
2.45
|
|
$
|
1.39
|
|
$
|
1.55
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Shares of Common Stock Outstanding - Basic
|
|
|
29,175
|
|
|
28,175
|
|
|
27,382
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Common Share:
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
2.47
|
|
$
|
1.40
|
|
$
|
1.56
|
|
Discontinued
Operations
|
|
|
(0.03
|
)
|
|
(0.02
|
)
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Common Share
|
|
$
|
2.44
|
|
$
|
1.38
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Shares of Common Stock Outstanding - Diluted
|
|
|
29,261
|
|
|
28,399
|
|
|
27,596
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
Declared per Common Share
|
|
$
|
0.92
|
|
$
|
0.86
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
Statements
of Consolidated Cash Flows
|
|
South
Jersey Industries, Inc. and Subsidiaries
|
|
(In
Thousands)
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(As
Restated
See
Note 16)
|
|
|
(As
Restated
See
Note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
71,432 |
|
$ |
39,101 |
|
$ |
42,493 |
|
Loss
from Discontinued Operations
|
|
|
818 |
|
|
669 |
|
|
680 |
|
Income
from Continuing Operations
|
|
|
72,250
|
|
|
39,770
|
|
|
43,173
|
|
Adjustments
to Reconcile Income from Continuing Operations to Cash Flows Provided
by
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
30,834
|
|
|
26,842
|
|
|
27,720
|
|
Unrealized
(Gain) Loss on Derivatives - Energy Related
|
|
|
(30,915
|
)
|
|
16,557
|
|
|
628
|
|
Provision
for Losses on Accounts Receivable
|
|
|
1,466
|
|
|
3,910
|
|
|
1,171
|
|
TAC/CIP
Receivable
|
|
|
(15,740
|
)
|
|
291
|
|
|
4,173
|
|
Deferred
Gas Costs - Net of Recoveries
|
|
|
18,694
|
|
|
(34,742
|
)
|
|
14,582
|
|
Deferred
SBC Costs - Net of Recoveries
|
|
|
(4,221
|
)
|
|
1,871
|
|
|
2,967
|
|
Stock-Based
Compensation Charge
|
|
|
1,059
|
|
|
3,208
|
|
|
2,957
|
|
Deferred
and Noncurrent Income Taxes and Credits - Net
|
|
|
21,829
|
|
|
19,030
|
|
|
15,043
|
|
Environmental
Remediation Costs - Net
|
|
|
(10,840
|
)
|
|
(4,071
|
)
|
|
(2,634
|
)
|
Additional
Pension Contributions
|
|
|
-
|
|
|
(1,486
|
)
|
|
(9,681
|
)
|
Gas
Plant Cost of Removal
|
|
|
(1,369
|
)
|
|
(985
|
)
|
|
(1,107
|
)
|
Changes
in:
|
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
37,863
|
|
|
(37,001
|
)
|
|
(19,763
|
)
|
Inventories
|
|
|
(25,726
|
)
|
|
(33,503
|
)
|
|
(11,430
|
)
|
Prepaid
and Accrued Taxes - Net
|
|
|
(5,243
|
)
|
|
(4,677
|
)
|
|
(9,967
|
)
|
Other
Prepayments and Current Assets
|
|
|
152
|
|
|
(925
|
)
|
|
(223
|
)
|
Accounts
Payable and Other Accrued Liabilities
|
|
|
(57,892
|
)
|
|
56,037
|
|
|
39,994
|
|
Other
Assets
|
|
|
(1,497
|
)
|
|
1,554
|
|
|
(13,090
|
)
|
Other
Liabilities
|
|
|
(1,808
|
)
|
|
(11,199
|
)
|
|
(4,808
|
)
|
Cash
Flows From Discontinued Operations
|
|
|
178
|
|
|
(1,155
|
)
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Operating Activities
|
|
|
29,074
|
|
|
39,326
|
|
|
79,615
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Purchase of) Proceeds from Sale of Restricted Investments
|
|
|
(14,817
|
)
|
|
5,363
|
|
|
(9,575
|
)
|
Capital
Expenditures
|
|
|
(73,677
|
)
|
|
(92,906
|
)
|
|
(71,633
|
)
|
Purchase
of Gas Marketing and Production Assets
|
|
|
(3,277
|
)
|
|
-
|
|
|
-
|
|
Proceeds
from Sale of Investment in Affiliate
|
|
|
1,450
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
(650
|
)
|
|
470
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
|
(90,971
|
)
|
|
(87,073
|
)
|
|
(80,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Borrowings from (Repayments of) Lines of Credit
|
|
|
47,300
|
|
|
55,000
|
|
|
(20,500
|
)
|
Proceeds
from Issuance of Long-Term Debt
|
|
|
41,400
|
|
|
10,000
|
|
|
41,981
|
|
Principal
Repayments of Long-Term Debt
|
|
|
(2,437
|
)
|
|
(22,832
|
)
|
|
(21,773
|
)
|
Dividends
on Common Stock
|
|
|
(26,874
|
)
|
|
(24,397
|
)
|
|
(22,534
|
)
|
Proceeds
from Sale of Common Stock
|
|
|
6,606
|
|
|
31,882
|
|
|
25,330
|
|
Payments
for Issuance of Long-Term Debt
|
|
|
(1,350
|
)
|
|
(420
|
)
|
|
(386
|
)
|
Premium
for Early Retirement of Debt
|
|
|
-
|
|
|
(184
|
)
|
|
-
|
|
Redemption
of Preferred Stock
|
|
|
-
|
|
|
(1,690
|
)
|
|
-
|
|
Excess
Tax Benefit from Restricted Stock Plan
|
|
|
300
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
|
64,945
|
|
|
47,359
|
|
|
2,118
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
3,048
|
|
|
(388
|
)
|
|
908
|
|
Cash
and Cash Equivalents at Beginning of Year
|
|
|
4,884
|
|
|
5,272
|
|
|
4,364
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at End of Year
|
|
$
|
7,932
|
|
$
|
4,884
|
|
$
|
5,272
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest
(Net of Amounts Capitalized)
|
|
$
|
27,341
|
|
$
|
21,608
|
|
$
|
20,084
|
|
Income
Taxes (Net of Refunds)
|
|
$
|
28,171
|
|
$
|
15,054
|
|
$
|
17,551
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Non-Cash Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures acquired on account but unpaid as of year-end
|
|
$
|
3,776
|
|
$
|
10,397
|
|
$
|
5,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
(In
Thousands)
|
|
South
Jersey Industries, Inc. and Subsidiaries
|
|
|
|
December
31,
|
Assets
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment:
|
|
|
|
|
|
|
|
Utility
Plant, at original cost
|
|
$
|
1,079,614
|
|
$
|
1,030,028
|
|
Accumulated
Depreciation
|
|
|
(257,781
|
)
|
|
(241,242
|
)
|
Nonutility
Property and Equipment, at cost
|
|
|
106,657
|
|
|
94,623
|
|
Accumulated
Depreciation
|
|
|
(8,485
|
)
|
|
(6,061
|
)
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment - Net
|
|
|
920,005
|
|
|
877,348
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Available-for-Sale
Securities
|
|
|
6,356
|
|
|
5,642
|
|
Restricted
|
|
|
23,051
|
|
|
8,234
|
|
Investment
in Affiliates
|
|
|
1,368
|
|
|
2,094
|
|
|
|
|
|
|
|
|
|
Total
Investments
|
|
|
30,775
|
|
|
15,970
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
|
7,932
|
|
|
4,884
|
|
Accounts
Receivable
|
|
|
117,832
|
|
|
138,139
|
|
Unbilled
Revenues
|
|
|
39,397
|
|
|
59,066
|
|
Provision
for Uncollectibles
|
|
|
(5,224
|
)
|
|
(5,871
|
)
|
Natural
Gas in Storage, average cost
|
|
|
145,130
|
|
|
117,542
|
|
Materials
and Supplies, average cost
|
|
|
2,895
|
|
|
4,758
|
|
Deferred
Income Taxes - Net
|
|
|
-
|
|
|
624
|
|
Prepaid
Taxes
|
|
|
12,443
|
|
|
13,061
|
|
Derivatives
- Energy Related Assets
|
|
|
45,627
|
|
|
24,408
|
|
Other
Prepayments and Current Assets
|
|
|
5,692
|
|
|
5,415
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
371,724
|
|
|
362,026
|
|
|
|
|
|
|
|
|
|
Regulatory
and Other Noncurrent Assets:
|
|
|
|
|
|
|
|
Regulatory
Assets
|
|
|
196,962
|
|
|
122,486
|
|
Prepaid
Pension
|
|
|
-
|
|
|
30,075
|
|
Derivatives
- Energy Related Assets
|
|
|
23,537
|
|
|
5,080
|
|
Unamortized
Debt Issuance Costs
|
|
|
7,972
|
|
|
7,147
|
|
Contract
Receivables
|
|
|
13,654
|
|
|
14,766
|
|
Other
|
|
|
8,403
|
|
|
6,814
|
|
|
|
|
|
|
|
|
|
Total
Regulatory and Other Noncurrent Assets
|
|
|
250,528
|
|
|
186,368
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,573,032
|
|
$
|
1,441,712
|
|
|
|
|
|
|
|
|
|
Capitalization
and Liabilities
|
|
|
|
|
|
|
|
Capitalization:
|
|
|
|
|
|
|
|
Common
Equity
|
|
$
|
443,036
|
|
$
|
393,645
|
|
Long-Term
Debt
|
|
|
358,022
|
|
|
319,066
|
|
|
|
|
|
|
|
|
|
Total
Capitalization
|
|
|
801,058
|
|
|
712,711
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
461
|
|
|
394
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Notes
Payable
|
|
|
194,600
|
|
|
147,300
|
|
Current
Maturities of Long-Term Debt
|
|
|
2,369
|
|
|
2,364
|
|
Accounts
Payable
|
|
|
101,615
|
|
|
179,023
|
|
Customer
Deposits and Credit Balances
|
|
|
24,982
|
|
|
12,534
|
|
Environmental
Remediation Costs
|
|
|
26,439
|
|
|
18,165
|
|
Taxes
Accrued
|
|
|
1,967
|
|
|
7,456
|
|
Derivatives
- Energy Related Liabilities
|
|
|
42,124
|
|
|
21,957
|
|
Deferred
Income Taxes - Net
|
|
|
10,687
|
|
|
-
|
|
Deferred
Contract Revenues
|
|
|
5,066
|
|
|
5,077
|
|
Interest
Accrued
|
|
|
6,458
|
|
|
6,258
|
|
Pension
and Other Postretirement Benefits
|
|
|
788
|
|
|
-
|
|
Other
Current Liabilities
|
|
|
5,699
|
|
|
6,077
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
422,794
|
|
|
406,211
|
|
|
|
|
|
|
|
|
|
Deferred
Credits and Other Noncurrent Liabilities:
|
|
|
|
|
|
|
|
Deferred
Income Taxes - Net
|
|
|
177,220
|
|
|
169,423
|
|
Investment
Tax Credits
|
|
|
2,470
|
|
|
2,795
|
|
Pension
and Other Postretirement Benefits
|
|
|
33,162
|
|
|
18,942
|
|
Environmental
Remediation Costs
|
|
|
45,391
|
|
|
42,489
|
|
Asset
Retirement Obligations
|
|
|
23,970
|
|
|
22,588
|
|
Derivatives
- Energy Related Liabilities
|
|
|
7,918
|
|
|
4,895
|
|
Regulatory
Liabilities
|
|
|
50,797
|
|
|
54,002
|
|
Other
|
|
|
7,791
|
|
|
7,262
|
|
|
|
|
|
|
|
|
|
Total
Deferred Credits and Other Noncurrent Liabilities
|
|
|
348,719
|
|
|
322,396
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 14)
|
|
|
|
|
|
|
|
Total
Capitalization and Liabilities
|
|
$
|
1,573,032
|
|
$
|
1,441,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
|
|
|
|
|
|
|
Statements
of Consolidated Capitalization
|
|
South
Jersey Industries, Inc. and Subsidiaries
|
|
(In
Thousands Except for Share Data)
|
|
December
31,
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
(As
Restated
|
|
|
|
|
|
|
|
See
Note 16)
|
|
|
|
|
|
|
|
|
|
Common
Equity:
|
|
|
|
|
|
Common
Stock: Par Value $1.25 per share; Authorized 60,000,000
shares;
|
|
|
|
Outstanding
Shares: 29,325,593 (2006) and 28,982,440 (2005)
|
|
|
|
Balance
at Beginning of Year
|
$
|
36,228
|
|
$
|
34,700
|
|
Common
Stock Issued or Granted Under Stock Plans
|
|
429
|
|
|
1,528
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at End of Year
|
|
36,657
|
|
|
36,228
|
|
Premium
on Common Stock
|
|
239,763
|
|
|
231,861
|
|
Accumulated
Other Comprehensive Loss
|
|
(7,791
|
)
|
|
(4,445
|
)
|
Retained
Earnings
|
|
174,407
|
|
|
130,001
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Common Equity
|
|
443,036
|
|
|
393,645
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt: (A)
|
|
|
|
|
|
|
South
Jersey Gas Company:
|
|
|
|
|
|
|
First
Mortgage Bonds: (B)
|
|
|
|
|
|
|
8.19%
|
Series
due 2007 |
|
|
|
|
2,270
|
|
|
4,543
|
|
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
|
|
5.387%
|
Series
due 2015 |
|
|
|
|
10,000
|
|
|
10,000
|
|
5.437%
|
Series
due 2016 |
|
|
|
|
10,000
|
|
|
10,000
|
|
6.50%
|
Series
due 2016 |
|
|
|
|
9,893
|
|
|
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
|
|
5.587%
|
Series
due 2019 |
|
|
|
|
10,000
|
|
|
10,000
|
|
7.7%
|
Series
due 2027 |
|
|
|
|
35,000
|
|
|
35,000
|
|
5.55%
|
Series
due 2033 |
|
|
|
|
32,000
|
|
|
32,000
|
|
6.213%
|
Series
due 2034 |
|
|
|
|
10,000
|
|
|
10,000
|
|
5.45%
|
Series
due 2035 |
|
|
|
|
10,000
|
|
|
10,000
|
|
Series
A 2006 Bonds at variable rates due 2036 (C)
|
|
25,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Marina
Energy LLC: (D)
|
|
|
|
|
|
|
Series
A 2001 Bonds at variable rates due 2031
|
|
20,000
|
|
|
20,000
|
|
Series
B 2001 Bonds at variable rates due 2021
|
|
25,000
|
|
|
25,000
|
|
Series
A 2006 Bonds at variable rates due 2036
|
|
16,400
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
AC
Landfill Energy, LLC: (E)
|
|
|
|
|
|
|
Bank
Term Loan, 6% due 2014
|
|
647
|
|
|
741
|
|
Mortgage
Bond, 4.19% due 2019
|
|
1,181
|
|
|
1,181
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Long-Term Debt Outstanding
|
|
360,391
|
|
|
321,430
|
|
Less
Current Maturities
|
|
(2,369
|
)
|
|
(2,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
Long-Term Debt
|
|
358,022
|
|
|
319,066
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capitalization
|
$
|
801,058
|
|
$
|
712,711
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
The
long-term debt maturities and sinking fund requirements for the
succeeding
five years are as follows:
|
|
|
|
2007,
$2,369; 2008, $106; 2009, $112; 2010, $10,119 and 2011, $25,119.
|
|
|
(B)
|
|
SJG's
First Mortgage dated October 1, 1947, as supplemented, securing
the First
Mortgage Bonds constitutes a direct first mortgage lien on substantially
all utility plant.
|
(C)
|
|
On
April 20, 2006, SJG issued $25.0 million of tax exempt, auction
rate debt
through the New Jersey Economic Development Authority (NJEDA) under
its
$150.0 million MTN Program. As of December 31, 2006, $115.0 million
remains available under the program.
|
(D)
|
|
Marina
has issued $61.4 million of unsecured variable-rate revenue bonds
through
the NJEDA. The variable rates at December 31, 2006 for the Series
A 2001,
Series B 2001, and Series A 2006 bonds were 3.90%, 5.35% and 3.91%
respectively.
|
(E)
|
|
The
debt of AC Landfill Energy is secured by a first mortgage interest
in
plant and equipment, and an assignment of rents and leases of the
facility.
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
Consolidated
Statements of Changes In Common Equity
|
|
|
|
|
|
|
|
|
|
|
|
and
Comprehensive Income
|
|
South
Jersey Industries, Inc. and Subsidiaries
|
|
(In
Thousands)
|
|
Years
Ended December 31, 2004, 2005 & 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Premium
on
Common
Stock
|
|
|
Comprehensive
Loss
|
|
|
Retained
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2004 (a)
|
|
$
|
33,072
|
|
$
|
171,078
|
|
$
|
(3,638
|
)
|
$
|
95,900
|
|
$
|
296,412
|
|
Net
Income (a)
|
|
|
|
|
|
|
|
|
|
|
|
42,493
|
|
|
42,493
|
|
Other
Comprehensive Loss, Net of Tax:(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
Pension Liability Adjustment
|
|
|
|
|
|
|
|
|
(1,077
|
)
|
|
|
|
|
(1,077
|
)
|
Unrealized
Loss on Equity Investments
|
|
|
|
|
|
|
|
|
(192
|
)
|
|
|
|
|
(192
|
)
|
Unrealized
Loss on Derivatives (a)
|
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
(26
|
)
|
Other
Comprehensive Loss, Net of Tax (a)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,295
|
)
|
Comprehensive
Income (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,198
|
|
Common
Stock Issued or Granted Under Stock Plans
|
|
|
1,628
|
|
|
26,659
|
|
|
|
|
|
|
|
|
28,287
|
|
Cash
Dividends Declared - Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
(22,534
|
)
|
|
(22,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004 (a)
|
|
|
34,700
|
|
|
197,737
|
|
|
(4,933
|
)
|
|
115,859
|
|
|
343,363
|
|
Net
Income (a)
|
|
|
|
|
|
|
|
|
|
|
|
39,101
|
|
|
39,101
|
|
Other
Comprehensive Loss, Net of Tax:(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
Pension Liability Adjustment
|
|
|
|
|
|
|
|
|
427
|
|
|
|
|
|
427
|
|
Unrealized
Gain on Equity Investments
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
63
|
|
Unrealized
Loss on Derivatives (a)
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
(2
|
)
|
Other
Comprehensive Income, Net of Tax (a)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
488
|
|
Comprehensive
Income (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,589
|
|
Common
Stock Issued or Granted Under Stock Plans
|
|
|
1,528
|
|
|
34,124
|
|
|
|
|
|
(562
|
)
|
|
35,090
|
|
Cash
Dividends Declared - Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
(24,397
|
)
|
|
(24,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005 (a)
|
|
|
36,228
|
|
|
231,861
|
|
|
(4,445
|
)
|
|
130,001
|
|
|
393,645
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
71,432
|
|
|
71,432
|
|
Other
Comprehensive Loss, Net of Tax:(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
Pension Liability Adjustment
|
|
|
|
|
|
|
|
|
(439
|
)
|
|
|
|
|
(439
|
)
|
Unrealized
Gain on Equity Investments
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
53
|
|
Unrealized
Gain on Derivatives
|
|
|
|
|
|
|
|
|
260
|
|
|
|
|
|
260
|
|
Other
Comprehensive Loss, Net of Tax (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126
|
)
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,306
|
|
FAS
158 Transition Amount (c)
|
|
|
|
|
|
|
|
|
(3,220
|
)
|
|
|
|
|
(3,220
|
)
|
Common
Stock Issued or Granted Under Stock Plans
|
|
|
429
|
|
|
7,902
|
|
|
|
|
|
(152
|
)
|
|
8,179
|
|
Cash
Dividends Declared - Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
(26,874
|
)
|
|
(26,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$
|
36,657
|
|
$
|
239,763
|
|
$
|
(7,791
|
)
|
$
|
174,407
|
|
$
|
443,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclosure
of Changes In Accumulated Other Comprehensive Loss Balances
(b)
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS
158 Transition Amount(c)
|
|
|
Minimum
Pension Liability Adjustment
|
|
|
Unrealized
(Loss) Gain on Derivatives
|
|
|
Unrealized
Gain (Loss) on Equity Investments
|
|
|
Accumulated
Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2004 (a)
|
|
$
|
-
|
|
$
|
(2,847
|
)
|
$
|
(1,074
|
)
|
$
|
283
|
|
$
|
(3,638
|
)
|
Changes
During Year (a)
|
|
|
-
|
|
|
(1,077
|
)
|
|
(26
|
)
|
|
(192
|
)
|
|
(1,295
|
)
|
Balance
at December 31, 2004 (a)
|
|
|
-
|
|
|
(3,924
|
)
|
|
(1,100
|
)
|
|
91
|
|
|
(4,933
|
)
|
Changes
During Year (a)
|
|
|
-
|
|
|
427
|
|
|
(2
|
)
|
|
63
|
|
|
488
|
|
Balance
at December 31, 2005 (a)
|
|
|
-
|
|
|
(3,497
|
)
|
|
(1,102
|
)
|
|
154
|
|
|
(4,445
|
)
|
Changes
During Year
|
|
|
(3,220
|
)
|
|
(439
|
)
|
|
260
|
|
|
53
|
|
|
(3,346
|
)
|
Balance
at December 31, 2006
|
|
$
|
(3,220
|
)
|
$
|
(3,936
|
)
|
$
|
(842
|
)
|
$
|
207
|
|
$
|
(7,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
As Restated - See Note 16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
Determined using a combined statutory tax rate of 41.08% in 2006
and
40.85% in prior years.
|
|
|
|
|
|
|
|
|
|
(c)
See Note 11, Pension and Other Postretirement Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
Notes
to
Consolidated Financial Statements
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS
OF
PRESENTATION — The consolidated financial statements include the accounts of
South Jersey Industries, Inc. (SJI or the Company ), its wholly owned
subsidiaries and subsidiaries in which we have a controlling interest. We
eliminate all significant intercompany accounts and transactions. In
management’s opinion, the consolidated financial statements reflect all normal
and recurring adjustments needed to fairly present SJI’s financial position and
operating results at the dates and for the periods presented.
EQUITY
INVESTMENTS — Marketable equity securities that are purchased as long-term
investments are classified as Available-for-Sale Securities and carried at
their
fair value on our consolidated balance sheets. Any unrealized gains or losses
are included in Accumulated Other Comprehensive Loss. SJI, through a wholly
owned subsidiary, currently holds a 50% non-controlling interest in one
affiliated company and accounts for the investment under the equity method.
We
include the operations of this affiliated company on a pre-tax basis in the
statements of consolidated income under Equity in Affiliated Companies (See
Note
2).
ESTIMATES
AND ASSUMPTIONS — We prepare our consolidated financial statements to conform
with accounting principles generally accepted in the United States of America
(GAAP). Management makes estimates and assumptions that affect the amounts
reported in the consolidated 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
— South Jersey Gas Company (SJG) is subject to the rules and regulations of
the
New Jersey Board of Public Utilities (BPU). See Note 9 for a detailed discussion
of SJG’s rate structure and regulatory actions. SJG maintains its accounts
according to the BPU's prescribed Uniform System of Accounts. 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 for the deferral of
certain costs (regulatory assets) and creation of certain obligations
(regulatory liabilities) when it is probable that such items will be recovered
from or refunded to customers in future periods. See Note 10 for a detailed
discussion of regulatory assets and liabilities.
OPERATING
REVENUES — Gas and electric revenues are recognized in the period the commodity
is delivered to customers. For SJG and South Jersey Energy (SJE) retail
customers that are not billed at the end of the month, we record an estimate
to
recognize unbilled revenues for gas and electricity delivered from the date
of
the last meter reading to the end of the month. South Jersey Resources Group,
LLC’s (SJRG) gas revenues are recognized in the period the commodity is
delivered. Unrealized gains and losses on energy related derivative instruments
are also recognized in operating revenues for SJRG. See further discussion
under
Derivative Instruments. We recognize revenues related to South Jersey Energy
Service Plus, LLC (SJESP) appliance service contracts seasonally over the
full
12-month terms of the contracts. Revenue related to services provided on
a time
and materials basis is recognized on a monthly basis as the jobs are completed.
Marina Energy, LLC (Marina) recognizes revenue on a monthly basis as services
are provided, as lease income is earned, and for on-site energy production
that
is delivered to its customers.
SJI
collects certain revenue-based energy taxes from customers. Such taxes include
New Jersey State Sales Tax, Transitional Energy Facility Assessment (TEFA)
and
Public Utilities Assessment (PUA). State sales tax is recorded as a liability
when billed to customers and is not included in revenue or operating expenses.
TEFA and PUA are included in both utility revenue and cost of sales utility
and
totaled $7.9 million, $9.1 million and $8.7 million in 2006, 2005 and 2004,
respectively.
ACCOUNTS
RECEIVABLE AND PROVISION FOR UNCOLLECTIBLE ACCOUNTS — Accounts receivable are
carried at the amount owed by customers. A provision for uncollectible accounts
is established based on our collection experience and an assessment of the
collectibility of specific accounts.
PROPERTY,
PLANT AND 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. Nonutility plant is stated at cost.
The
cost of adding, replacing and renewing property is charged to the appropriate
plant account.
ASSET
RETIREMENT OBLIGATIONS - On December 31, 2005, the Company adopted FASB
Interpretation No. 47, "Accounting for Conditional Retirement Obligations"
(FIN
47) and recorded an obligation of $22.6 million on the consolidated balance
sheet under Asset Retirement Obligation (ARO). The amounts included in ARO
are primarily related to the legal obligations the Company has to cut and
cap
gas distribution pipelines when taking those pipelines out of service in
future
years. These liabilities are generally recognized upon the acquisition or
construction of the asset. The related asset retirement cost is capitalized
concurrently by increasing the carrying amount of the related asset by the
same
amount as the liability. Changes in the liability are recorded for the passage
of time (accretion) or for revisions to cash flows originally estimated to
settle the ARO.
ARO
activity during 2006 was as follows (in thousands):
AROs
as of January 1, 2006
|
|
$
|
22,588
|
|
Accretion
|
|
|
961
|
|
Additions
|
|
|
426
|
|
Settlements
|
|
|
(5
|
)
|
ARO’s
as of December 31, 2006
|
|
$
|
23,970
|
|
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 2.3% in
2006
and 2.4% in 2005. Under SJG’s 2004 rate case settlement, its composite
depreciation rate was reduced from 2.9% to 2.4% effective July 8, 2004 (See
Note
9). The actual composite rate may differ from the approved rate as the asset
mix
changes over time. Except for retirements outside of the normal course of
business, accumulated depreciation is charged with the cost of depreciable
utility property retired, less salvage. Nonutility property depreciation
is
computed on a straight-line basis over the estimated useful lives of the
property, ranging up to 50 years. Gain or loss on the disposition of nonutility
property is recognized in operating income.
CAPITALIZED
INTEREST — SJG capitalizes interest on construction at the rate of return on
rate base utilized by the BPU to set rates in its last base rate proceeding
(See
Note 9). Marina capitalizes interest on construction projects in progress
based
on the actual cost of borrowed funds. SJG’s amounts are included in Utility
Plant and Marina’s amounts are included in Nonutility Property and Equipment on
the consolidated balance sheets. Interest Charges are presented net of
capitalized interest on the consolidated statements of income. SJI capitalized
interest of $1.0 million in 2006, $1.6 million in 2005, and $0.7 million
in
2004.
IMPAIRMENT
OF LONG-LIVED ASSETS — We review the carrying amount of long-lived assets for
possible impairment whenever events or changes in circumstances indicate
that
such amounts may not be recoverable. For the years ended 2006, 2005 and 2004,
no
significant impairments were identified.
DERIVATIVE
INSTRUMENTS — Certain SJI subsidiaries are involved in buying, selling,
transporting and storing natural gas and buying and selling retail electricity
for their own accounts as well as managing these activities for other third
parties. These subsidiaries are subject to market risk due to commodity price
fluctuations. To manage this risk, our companies enter into a variety of
physical and financial transactions including forward contracts, swap
agreements, options contracts and futures contracts.
SJI
structured its subsidiaries so that SJG and SJE transact commodities on a
physical basis and typically do not directly enter into positions that
financially settle. SJRG performs this risk management function for these
entities and enters into the types of financial transactions noted above.
As
part of its gas purchasing strategy, SJG uses financial contracts through
SJRG
to hedge against forward price risk. The costs or benefits of these short-term
contracts are recoverable through SJG’s Basic Gas Supply Service (BGSS) clause,
subject to BPU approval. As of December 31, 2006 and 2005, SJG had $17.0
million
and $(0.5) million of costs (benefits), respectively, included in its BGSS
related to open financial contracts.
Management
takes an active role in the risk management process and has developed policies
and procedures that require specific administrative and business functions
to
assist in identifying, assessing and controlling various risks. Management
reviews any open positions in accordance with strict policies to limit exposure
to market risk.
SJI
accounts for derivative instruments in accordance with FASB Statement No.
133,
“Accounting for Derivative Instruments and Hedging Activities,” as amended. We
record all derivatives, whether designated in hedging relationships or not,
on
the consolidated balance sheets at fair value unless the derivative contracts
qualify for the normal purchase and sale exemption. In general, 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. We currently have no fair value hedges. If the derivative
is
designated as a cash flow hedge, we record the effective portion of the hedge
in
Accumulated Other Comprehensive Loss and recognize it in the income statement
when the hedged item affects earnings. Due to the application of regulatory
accounting principles under FASB Statement No. 71, derivatives related to
SJG’s
gas purchases are recorded through the BGSS clause. We recognize ineffective
portions of the cash flow hedges immediately in earnings. We currently have
no
energy-related derivative instruments designated as cash flow hedges. We
formally document all relationships between hedging instruments and hedged
items, as well as our risk management objectives, strategies for undertaking
various hedge transactions and our methods for assessing and testing correlation
and hedge ineffectiveness. All hedging instruments are linked to the hedged
asset, liability, firm commitment or forecasted transaction.
Initially
and on an ongoing basis we assess whether these derivatives are highly effective
in offsetting changes in cash flows or fair values of the hedged items. We
discontinue hedge accounting prospectively if we decide to discontinue the
hedging relationship; determine that the anticipated transaction is no longer
likely to occur; or determine that a derivative is no longer highly effective
as
a hedge. In the event that hedge accounting is discontinued, we will continue
to
carry the derivative on the balance sheet at its current fair value and
recognize subsequent changes in fair value in current period earnings.
Unrealized gains and losses on the discontinued hedges that were previously
included in Accumulated Other Comprehensive Loss will be reclassified into
earnings when the forecasted transaction occurs, or when it is probable that
it
will not occur.
SJRG
manages its portfolio of purchases and sales, as well as natural gas in storage,
using a variety of instruments that include forward contracts, swap agreements,
options contracts and futures contracts. SJRG measures the fair value of
the
contracts and records these as Derivatives — Energy Related Assets or
Derivatives — Energy Related Liabilities on our consolidated balance sheets. We
recorded the net pre-tax unrealized gain (loss) of $30.9 million, $(16.6)
million and $(0.6) million in earnings during the years 2006, 2005 and 2004,
respectively, which are included with realized gains and losses in Operating
Revenues — Nonutility.
SJI
presents revenues and expenses related to its energy trading activities on
a net
basis in Operating Revenues — Nonutility in the consolidated statements of
income consistent with Emerging Issues Task Force (EITF) Issue No. 02-03,
“Issues Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities.” The above presentation has no effect on operating income or net
income.
From
time
to time we enter into interest rate derivatives and similar agreements to
hedge
exposure to increasing interest rates, and the impact of those rates on our
cash
flows with respect to our variable-rate debt. We have designated and account
for
these interest rate derivatives as cash flow hedges which are included in
Other
Noncurrent Assets and Other Noncurrent Liabilities. As of December 31, 2006,
SJI’s active interest rate swaps were as follows:
Notional
Amount
|
|
|
Fixed
Interest
Rate
|
|
|
Start
Date
|
|
|
Maturity
|
|
|
Type
of Debt
|
|
|
Obligor
|
|
$ 3,000,000*
|
|
|
4.550
|
%
|
|
|
11/19/2001
|
|
|
12/01/2007
|
|
|
Taxable
|
|
|
Marina
|
|
$
3,900,000
|
|
|
4.795
|
%
|
|
|
12/01/2004
|
|
|
12/01/2014
|
|
|
Taxable
|
|
|
Marina
|
|
$ 8,000,000
|
|
|
4.775
|
%
|
|
|
11/12/2004
|
|
|
11/12/2014
|
|
|
Taxable
|
|
|
Marina
|
|
$ 20,000,000
|
|
|
4.080
|
%
|
|
|
11/19/2001
|
|
|
12/01/2011
|
|
|
Tax-exempt
|
|
|
Marina
|
|
$ 14,500,000
|
|
|
3.905
|
%
|
|
|
03/17/2006
|
|
|
01/15/2026
|
|
|
Tax-exempt
|
|
|
Marina
|
|
$
500,000
|
|
|
3.905
|
%
|
|
|
03/17/2006
|
|
|
01/15/2026
|
|
|
Tax-exempt
|
|
|
Marina
|
|
$
330,000
|
|
|
3.905
|
%
|
|
|
03/17/2006
|
|
|
01/15/2026
|
|
|
Tax-exempt
|
|
|
Marina
|
|
$ 7,100,000
|
|
|
4.895
|
%
|
|
|
02/01/2006
|
|
|
02/01/2016
|
|
|
Taxable
|
|
|
Marina
|
|
$ 12,500,000
|
|
|
3.430
|
%
|
|
|
12/01/2006
|
|
|
02/01/2036
|
|
|
Tax-exempt
|
|
|
SJG
|
|
$ 12,500,000
|
|
|
3.430
|
%
|
|
|
12/01/2006
|
|
|
02/01/2036
|
|
|
Tax-exempt
|
|
|
SJG
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Amount
reduced to $3.0 million on 12/01/06, and further reduces to $0 million on
12/01/07.
The
differential to be paid or received as a result of these swap agreements
is
accrued as interest rates change and is recognized as an adjustment to interest
expense. As of December 31, 2006 and 2005, the net market value of these
swaps
was not significant. The market value represents the amount we would have
to pay
the counterparty, or the counterparty would have to pay us, to terminate
these
contracts as of those dates. As of December 31, 2006 and 2005, we determined
that the swaps were highly effective; therefore, we recorded the changes
in fair
value of the swaps along with the cumulative unamortized costs, net of taxes,
in
Accumulated Other Comprehensive Loss.
We
determined the fair value of derivative instruments by reference to quoted
market prices of listed contracts, published quotations or quotations from
unrelated third parties.
STOCK-BASED
COMPENSATION PLAN —
Under
the Amended and Restated 1997 Stock-Based Compensation Plan, no more than
2,000,000 shares in the aggregate may be issued to SJI's officers (Officers),
non-employee directors (Directors) and other key employees. The plan will
terminate on January 26, 2015, unless terminated earlier by the Board of
Directors. No options were granted or outstanding during the years ended
December 31, 2006, 2005 and 2004 and no stock appreciation rights have been
issued under the plan. During the years ended December 31, 2006, 2005 and
2004,
SJI granted 42,983, 38,316 and 43,798 restricted shares to Officers,
respectively. These restricted shares vest over a three-year period and are
subject to SJI achieving certain market based performance targets as compared
to
a peer group average, which can cause the actual amount of shares that
ultimately vest to range from between 0% to 150% of the original share units
granted. During the years ended December 31, 2006, 2005 and 2004, SJI granted
5,220, 6,340 and 9,261 restricted shares to Directors. These shares vest
over a
three-year service period but contain no performance conditions. As a result,
100% of the shares granted generally vest.
On
January 1, 2006, SJI adopted FASB Statement No. 123(R), “Share-Based Payment,”
which revised FASB Statement No. 123, “Accounting for Stock-Based Compensation”
and superseded Accounting Principles Board (APB) Opinion No. 25, “Accounting for
Stock Issued to Employees.” As the performance targets under the plan are
considered market and service conditions, Statement No. 123(R) requires SJI
to
measure and recognize stock-based compensation expense in its consolidated
financial statements based on the fair value at the date of grant for its
share-based awards. In accordance with Statement No. 123(R), SJI is recognizing
compensation expense on a straight-line basis over the requisite service
period
for: (i) awards granted on, or after, January 1, 2006 and (ii) unvested awards
previously granted and outstanding as of January 1, 2006. In addition, SJI
is
estimating forfeitures over the requisite service period when recognizing
compensation expense. These estimates can be adjusted to the extent to which
actual forfeitures differ, or are expected to materially differ, from such
estimates. Compensation expense is not adjusted based on the actual achievement
of performance goals. The Company estimated the fair value of officers’
restricted stock awards on the date of grant using a Monte Carlo simulation
model.
As
permitted by Statement No. 123(R), SJI chose the modified prospective method
of
adoption; accordingly, financial results for the prior period presented were
not
retroactively adjusted to reflect the effects of this Statement. Under the
modified prospective application, this Statement applies to new awards and
to
awards modified, repurchased, or cancelled after the required effective date,
which for the Company was January 1, 2006. Compensation costs for the portion
of
awards for which the requisite service has not been rendered that were
outstanding as of the required effective date are being recognized as the
requisite service is rendered based on the grant-date fair value.
The
following table summarizes the nonvested restricted stock awards outstanding
at
December 31, 2006 and the assumptions used to estimate the fair value of
the
awards:
|
|
|
Grant
|
|
|
Shares
|
|
|
Fair
Value
|
|
|
Expected
|
|
|
Risk-Free
|
|
|
|
|
Date
|
|
|
Outstanding
|
|
|
Per
Share
|
|
|
Volatility
|
|
|
Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers
-
|
|
|
Jan. 2004
|
|
|
42,135
|
|
$
|
20.105
|
|
|
16.4%
|
|
|
2.4%
|
|
|
|
|
Jan.
2005
|
|
|
35,221
|
|
$
|
25.155
|
|
|
15.5%
|
|
|
3.4%
|
|
|
|
|
Jan.
2006
|
|
|
39,076
|
|
$
|
27.950
|
|
|
16.9%
|
|
|
4.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
-
|
|
|
Dec.
2004
|
|
|
5,220
|
|
$
|
24.955
|
|
|
-
|
|
|
-
|
|
|
|
|
Dec.
2005
|
|
|
6,340
|
|
$
|
29.970
|
|
|
-
|
|
|
-
|
|
|
|
|
Dec.
2006
|
|
|
9,261
|
|
$
|
34.020
|
|
|
-
|
|
|
-
|
|
Expected
volatility is based on the actual daily volatility of SJI’s share price over the
preceding three-year period as of the valuation date. The risk-free interest
rate is based on the zero-coupon U.S. Treasury Bond, with a term equal to
the
three-year term of the Officers’ restricted shares. As notional dividend
equivalents are credited to the holders, which are reinvested during the
three-year service period, no reduction to the fair value of the award is
required. As the Directors’ restricted stock awards contain no performance
conditions and notional dividend equivalents are credited to the holder,
which
are reinvested during the three-year service period, the fair value of these
awards are equal to the market value of shares on the date of
grant.
The
following table summarizes the total compensation cost for the years ended
December 31, 2006, 2005 and 2004 (in thousands):
|
|
|
2006
|
|
2005
|
|
2004
|
|
Officers
|
|
|
$
|
919
|
|
$
|
3,677
|
|
$
|
2,875
|
|
Directors
|
|
|
|
140
|
|
|
93
|
|
|
83
|
|
Total
Cost
|
|
|
$
|
1,059
|
|
$
|
3,770
|
|
$
|
2,958
|
|
Capitalized
|
|
|
|
(114)
|
|
|
(872)
|
|
|
(740)
|
|
Net
Expense
|
|
|
$
|
945
|
|
$
|
2,898
|
|
$
|
2,218
|
|
As
of
December 31, 2006, there was $1.4 million of total unrecognized compensation
cost related to nonvested share-based compensation awards granted under the
restricted stock plans. That cost is expected to be recognized over a weighted
average period of 2.0 years.
Prior
to
the adoption of Statement No. 123 (R), SJI applied Statement No. 123, as
amended, which permitted the application of APB No. 25. In accordance with
APB
No. 25, SJI recorded compensation expense over the requisite service period
for
restricted stock based on the probable number of shares expected to be issued
and the market value of the Company’s common stock at the end of each reporting
period. As a result of SJI’s previous accounting treatment, there have been no
excess tax benefits recognized prior to the adoption of Statement No.
123(R).
For
the
year ended December 31, 2006, the decrease in stock based compensation expense
resulting from the adoption of Statement No. 123(R) was $0.8 million, or
$0.5
million after taxes. This decrease in compensation expense resulted in an
increase in both basic and diluted earnings per share of $0.02 per share.
Also
contributing to the decrease in expense in 2006 were officer retirements
during
the year which resulted in the forfeitures noted in the table
below.
The
following table summarizes information regarding restricted stock award activity
during 2006 excluding accrued dividend equivalents:
|
|
Officers
|
|
Directors
|
|
|
|
|
|
Nonvested
Shares Outstanding, January 1, 2006
|
|
143,734
|
|
16,120
|
|
|
|
|
|
Granted
|
|
42,983
|
|
9,261
|
Vested*
|
|
(61,620
|
)
|
(4,560)
|
Cancelled/Forfeited
|
|
(8,665
|
)
|
-
|
|
|
|
|
|
Nonvested
Shares Outstanding, December 31, 2006
|
|
116,432
|
|
20,821
|
|
|
|
|
|
|
|
|
|
|
*
Actual shares awarded to officers upon vesting, including dividend
equivalents and
|
adjustments for performance measures, totaled 101,009
shares.
|
During
the years ended December 31, 2006 and 2005, SJI awarded 101,009 shares at
a
market value of $2.9 million and 74,574 shares at a market value of $2.0
million, respectively. The Company has a policy of issuing new shares to
satisfy
its obligations under these plans; therefore, there are no cash payment
requirements resulting from the normal operation of this plan. However, a
change
in control could result in such shares becoming nonforefeitable or immediately
payable in cash.
INCOME
TAXES — Deferred income taxes are provided for all significant temporary
differences between the book and taxable basis of assets and liabilities
in
accordance with FASB Statement No. 109, “Accounting for Income Taxes” (See Note
3). A valuation allowance will be established when it is determined that
it is
more likely than not that a deferred tax asset will not be
realized.
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.
NEW
ACCOUNTING PRONOUNCEMENTS —
In
July
2006, the FASB issued Interpretation No. 48 “Uncertainty in Income Taxes” (FIN
48). This Interpretation provides guidance on the recognition and measurement
of
uncertain tax positions in the financial statements. The effective date of
FIN
48 is January 1, 2007. Management does not anticipate that the adoption of
this
interpretation will have a material effect on the Company’s consolidated
financial statements.
In
September 2006, the FASB issued its Staff Position (FSP) on “Accounting for
Planned Major Maintenance Activities”. This FSP prohibits the use of the
accrue-in-advance method of accounting for planned major maintenance activities
in annual and interim financial reporting periods. This FSP is effective
the
first fiscal year beginning after December 15, 2006. Management does not
anticipate that this FSP will have a material effect on the Company’s
consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair Value Measurements”, which defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about
fair
value measurements. This statement is effective in fiscal years beginning
after
November 15, 2007. Management is currently evaluating the impact that the
adoption of this statement will have on the Company’s consolidated financial
statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities.” The
statement permits entities to choose to measure certain financial instruments
and certain other items at fair value that are not currently required to
be
measured at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This statement is effective
for the first fiscal year beginning after November 15, 2007. Management is
currently evaluating the impact that the adoption of this statement will
have on
our consolidated financial statements.
RECLASSIFICATIONS
— Certain
amounts
from prior years have been reclassified to conform to the current year
presentation. During
the second quarter of 2006, the Company determined that certain customer
accounts receivable were in a credit position and accordingly, reclassified
amounts included in Accounts
Receivable
as of
December 31, 2005 to Customer
Deposits and Credit Balances.
These changes did not impact previously reported revenue, net income
or
earnings per share and are considered immaterial to the overall presentation
of
our consolidated financial statements.
2. DISCONTINUED
OPERATIONS, AFFILIATIONS AND CONTROLLING INTERESTS:
DISCONTINUED
OPERATIONS — In 1996, Energy & Minerals, Inc. (EMI), an SJI subsidiary, sold
the common stock of The Morie Company, Inc. (Morie), its sand mining and
processing subsidiary. SJI conducts tests annually to estimate the environmental
remediation costs for properties owned by South Jersey Fuel, Inc. (SJF),
an EMI
subsidiary, from its previously operated fuel oil business. SJI reports the
environmental remediation activity related to these properties as discontinued
operations.
Summarized
operating results of the discontinued operations for the years ended December
31, were (in thousands, except per share amounts):
|
|
2006
|
|
2005
|
|
2004
|
|
Loss
before Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
Sand
Mining
|
|
$
|
(1,021
|
)
|
$
|
(944
|
)
|
$
|
(863
|
)
|
Fuel
Oil
|
|
|
(266
|
)
|
|
(84
|
)
|
|
(183
|
)
|
Income
Tax Benefits
|
|
|
469
|
|
|
359
|
|
|
366
|
|
Loss
from Discontinued Operations
|
|
$
|
(818
|
)
|
$
|
(669
|
)
|
$
|
(680
|
)
|
Earnings
Per Common Share from
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
Losses
from sand mining are mainly comprised of environmental remediation and product
liability litigation associated with Morie’s prior activities.
AFFILIATIONS
— SJI and Conectiv Solutions, LLC formed Millennium Account Services, LLC to
provide meter reading services in southern New Jersey. SJE and GZA
GeoEnvironmental, Inc. formed AirLogics, LLC to market a jointly developed
air
monitoring system designed to assist companies involved in environmental
cleanup
activities. On June 30, 2006, SJE sold its entire interest in AirLogics for
$1.5
million, resulting in an after-tax gain of $0.2 million. The investment in
these
affiliated companies is accounted for under the equity method.
CONTROLLING
INTERESTS IN JOINTLY OWNED PROJECTS — Marina and DCO Energy, LLC (DCO) formed AC
Landfill Energy, LLC (ACLE) and WC Landfill Energy, LLC (WCLE) to develop
and
install methane-to-electric power generation systems at certain county-owned
landfills. Marina owns a 51% interest in ACLE and WCLE and accounts for these
entities as consolidated subsidiaries.
3. INCOME
TAXES:
SJI
files
a consolidated federal income tax return. State income tax returns are filed
on
a separate company basis in states where SJI has operations and/or a requirement
to file. 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 (in thousands):
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Tax
at Statutory Rate
|
|
$
|
42,677
|
|
$
|
23,586
|
|
$
|
25,337
|
|
Increase
(Decrease) Resulting from:
|
|
|
|
|
|
|
|
|
|
|
State
Income Taxes
|
|
|
7,593
|
|
|
4,587
|
|
|
4,403
|
|
ESOP
|
|
|
(749
|
)
|
|
(783
|
)
|
|
(766
|
)
|
Amortization
of Investment
|
|
|
|
|
|
|
|
|
|
|
Tax
Credits
|
|
|
(325
|
)
|
|
(334
|
)
|
|
(342
|
)
|
Amortization
of Flowthrough
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
664
|
|
|
664
|
|
|
664
|
|
Other
- Net
|
|
|
(177
|
)
|
|
(101
|
)
|
|
(78
|
)
|
Income
Taxes:
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
|
49,683
|
|
|
27,619
|
|
|
29,218
|
|
Discontinued
Operations
|
|
|
(469
|
)
|
|
(359
|
)
|
|
(366
|
)
|
Net
Income Taxes
|
|
$
|
49,214
|
|
$
|
27,260
|
|
$
|
28,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
provision for Income Taxes is comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
2004
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
23,027
|
|
$
|
5,040
|
|
$
|
8,270
|
|
State
|
|
|
5,152
|
|
|
3,432
|
|
|
5,879
|
|
Total
Current
|
|
|
28,179
|
|
|
8,472
|
|
|
14,149
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
Derivatives/Unrealized
Gain (Loss)
|
|
|
9,694
|
|
|
(5,028
|
)
|
|
(493
|
)
|
Excess
of Tax Depreciation Over
|
|
|
|
|
|
|
|
|
|
|
Book Depreciation - Net
|
|
|
8,652
|
|
|
5,528
|
|
|
15,548
|
|
Deferred
Fuel Costs - Net
|
|
|
(9,907
|
)
|
|
17,567
|
|
|
(3,229
|
)
|
Environmental
Costs - Net
|
|
|
1,782
|
|
|
970
|
|
|
752
|
|
Prepaid
Pension
|
|
|
298
|
|
|
368
|
|
|
2,765
|
|
Deferred
Regulatory Costs
|
|
|
3,525
|
|
|
(1,156
|
)
|
|
(804
|
)
|
Other
- Net
|
|
|
1,257
|
|
|
(2,393
|
)
|
|
(85
|
)
|
State:
|
|
|
6,528
|
|
|
3,625
|
|
|
957
|
|
Total
Deferred
|
|
|
21,829
|
|
|
19,481
|
|
|
15,411
|
|
Investment
Tax Credits
|
|
|
(325
|
)
|
|
(334
|
)
|
|
(342
|
)
|
Income
Taxes:
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
|
49,683
|
|
|
27,619
|
|
|
29,218
|
|
Discontinued
Operations
|
|
|
(469
|
)
|
|
(359
|
)
|
|
(366
|
)
|
Net
Income Taxes
|
|
$
|
49,214
|
|
$
|
27,260
|
|
$
|
28,852
|
|
Investment
Tax Credits attributable to SJG were deferred and continue to be amortized
at
the annual rate of 3%, which approximates the life of related
assets.
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 net deferred tax liabilities (assets) at December 31 (in
thousands):
|
|
2006
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
Deferred
Fuel Costs - Net
|
|
$
|
7,669
|
|
$
|
4,098
|
|
Derivatives
/ Unrealized (Loss) Gain
|
|
|
3,487
|
|
|
(2,816
|
)
|
Other
|
|
|
(469
|
)
|
|
(1,906
|
)
|
Current
Deferred Tax Liability (Asset) - Net
|
|
$
|
10,687
|
|
$
|
(624
|
)
|
Noncurrent:
|
|
|
|
|
|
|
|
Book
versus Tax Basis of Property
|
|
$
|
152,802
|
|
$
|
139,362
|
|
Deferred
Fuel Costs - Net
|
|
|
9,108
|
|
|
22,890
|
|
Prepaid
Pension
|
|
|
-
|
|
|
13,227
|
|
Environmental
|
|
|
5,188
|
|
|
3,013
|
|
Deferred
Regulatory Costs
|
|
|
3,370
|
|
|
1,684
|
|
Deferred
State Tax
|
|
|
(4,461
|
)
|
|
(4,900
|
)
|
Minimum
Pension Liability
|
|
|
-
|
|
|
(2,602
|
)
|
Investment
Tax Credit Basis Gross-Up
|
|
|
(1,272
|
)
|
|
(1,440
|
)
|
Deferred
Pension & Other Post Retirement Benefits
|
|
|
15,239
|
|
|
-
|
|
Pension
& Other Post Retirement Benefits
|
|
|
(12,991
|
)
|
|
-
|
|
Deferred
Revenues
|
|
|
2,376
|
|
|
-
|
|
Derivatives/Unrealized
(Loss) Gain
|
|
|
6,646
|
|
|
-
|
|
Other
|
|
|
1,215
|
|
|
(1,811
|
)
|
Noncurrent
Deferred Tax Liability - Net
|
|
$
|
177,220
|
|
$
|
169,423
|
|
4. PREFERRED
STOCK:
REDEEMABLE
CUMULATIVE PREFERRED STOCK — On May 2, 2005, SJG redeemed all of its Redeemable
Cumulative Preferred 8% Series of preferred stock at its par value of $1.7
million. SJI has 2,500,000 authorized shares of Preference Stock, no par
value,
which has not been issued.
5. COMMON
STOCK:
The
following shares were issued and outstanding at December 31:
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Beginning
of Year
|
|
|
28,982,440
|
|
|
27,759,936
|
|
|
26,458,002
|
|
New
Issues During Year:
|
|
|
|
|
|
|
|
|
|
|
Dividend
Reinvestment Plan
|
|
|
232,883
|
|
|
1,141,590
|
|
|
1,232,602
|
|
Stock-Based
Compensation Plan
|
|
|
110,270
|
|
|
80,914
|
|
|
69,332
|
|
End
of Year
|
|
|
29,325,593
|
|
|
28,982,440
|
|
|
27,759,936
|
|
We
recorded the par value ($1.25 per share) of stock issued in 2006, 2005 and
2004
in Common Stock and recorded the net excess over par value of approximately
$7.9
million, $34.1 million and $26.7 million, respectively, in Premium on Common
Stock.
EARNINGS
PER COMMON SHARE — We present basic EPS based on the weighted-average number of
common shares outstanding. EPS is presented in accordance with FASB Statement
No. 128, “Earnings Per Share,” which establishes standards for computing and
presenting basic and diluted EPS. The incremental shares required for inclusion
in the denominator for the diluted EPS calculation were 85,120, 224,331 and
213,524 shares for the years ended December 31, 2006, 2005 and 2004,
respectively. These shares relate to SJI’s restricted stock as discussed in Note
1.
DIVIDEND
REINVESTMENT PLAN (DRP) — Newly issued shares of common stock offered through
the DRP are issued directly by SJI. As of December 31, 2006, SJI reserved
1,343,614 shares of authorized, but unissued, common stock for future issuance
through the DRP.
6. FINANCIAL
INSTRUMENTS:
RESTRICTED
INVESTMENTS — In accordance with the terms of the Marina and certain SJG loan
agreements, unused proceeds are required to be escrowed pending approved
construction expenditures. There were no escrowed proceeds as of December
31,
2005. As of December 31, 2006, the escrowed proceeds, including interest
earned,
totaled $12.7 million.
SJRG
maintains a margin account with a national investment firm to support its
risk
management activities. The balance required to be held in this margin account
increases as the net value of the outstanding energy related financial contracts
with this investment firm decreases. As of December 31, 2006 and 2005, the
balance of this account was $10.4 million and $8.2 million, respectively.
LONG-TERM
DEBT — In March 2006, Marina issued $16.4 million of tax-exempt, variable-rate
bonds through the New Jersey Economic Development Authority (NJEDA), which
mature in March 2036. Proceeds of the bonds were used to finance the expansion
of Marina’s Atlantic City thermal energy plant. The interest rate on all but
$1.1 million of the bonds has been effectively fixed via interest rate swaps
at
3.91% until January 2026. The variable interest rate on the $1.1 million
portion
of the bonds that remain unhedged was 3.91% as of December 31, 2006. These
bonds contain no financial covenants.
In
April
2006, SJG issued $25.0 million of secured tax-exempt, auction-rate debt through
the NJEDA to finance infrastructure costs that qualify for tax-exempt financing.
The auction rate, which resets weekly, was set at 3.80% as of December 31,
2006.
SJG entered into forward-starting interest rate swap agreements that effectively
fixed the interest rate on this debt at 3.43%, commencing December 1, 2006
through January 2036. The debt was issued under SJG’s medium-term note program.
An additional $115.0 million of medium-term notes remain available for issuance
under that program.
We
estimated the fair values of SJI's long-term debt, including current maturities,
as of December 31, 2006 and 2005, to be $381.1 million and $334.3 million,
respectively. Carrying amounts as of December 31, 2006 and 2005, were $360.4
million and $321.4 million, respectively. We based the estimates on interest
rates available to SJI at the end of each year for debt with similar terms
and
maturities. SJI retires debt when it is cost effective as permitted by the
debt
agreements.
OTHER
FINANCIAL INSTRUMENTS — The carrying amounts of SJI's other financial
instruments approximate their fair values at December 31, 2006 and
2005.
7. SEGMENTS
OF BUSINESS:
SJI
operates in several different operating segments. Gas Utility Operations
(SJG)
consists primarily of natural gas distribution to residential, commercial
and
industrial customers. Wholesale Gas Operations include SJRG’s activities. SJE is
involved in both retail gas and retail electric activities. Retail Gas and
Other
Operations include natural gas acquisition and transportation service business
lines. Retail Electric Operations consist of electricity acquisition and
transportation to commercial and industrial customers. On-Site Energy Production
consists of Marina’s thermal energy facility and other energy-related projects.
Appliance Service Operations includes SJESP’s servicing of appliances via the
sale of appliance service programs as well as on a time and materials basis,
and
the installation of residential and small commercial HVAC systems. The appliance
service business operated within SJG until September 1, 2004 (See Note
9).
Information
about SJI's operations in different operating segments is presented below
(in
thousands):
|
|
2006
|
|
2005
|
|
2004
|
|
Operating
Revenues:
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
642,671
|
|
$
|
587,212
|
|
$
|
502,465
|
|
Wholesale
Gas Operations
|
|
|
78,060
|
|
|
14,388
|
|
|
18,399
|
|
Retail
Gas and Other Operations
|
|
|
163,064
|
|
|
204,699
|
|
|
211,295
|
|
Retail
Electric Operations
|
|
|
50,732
|
|
|
75,779
|
|
|
72,852
|
|
On-Site
Energy Production
|
|
|
32,264
|
|
|
30,846
|
|
|
23,682
|
|
Appliance
Service Operations
|
|
|
15,730
|
|
|
14,870
|
|
|
12,733
|
|
Corporate
& Services
|
|
|
12,886
|
|
|
2,788
|
|
|
2,491
|
|
Subtotal
|
|
|
995,407
|
|
|
930,582
|
|
|
843,917
|
|
Intersegment
Sales
|
|
|
(63,979
|
)
|
|
(24,566
|
)
|
|
(24,501
|
)
|
Total
Operating Revenues
|
|
$
|
931,428
|
|
$
|
906,016
|
|
$
|
819,416
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income:
|
|
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
81,208
|
|
$
|
77,676
|
|
$
|
70,455
|
|
Wholesale
Gas Operations
|
|
|
53,014
|
|
|
(3,287
|
)
|
|
5,740
|
|
Retail
Gas and Other Operations
|
|
|
(3,685
|
)
|
|
1,511
|
|
|
7,366
|
|
Retail
Electric Operations
|
|
|
4,231
|
|
|
602
|
|
|
1,612
|
|
On-Site
Energy Production
|
|
|
7,901
|
|
|
8,785
|
|
|
5,756
|
|
Appliance
Service Operations
|
|
|
2,554
|
|
|
2,896
|
|
|
1,780
|
|
Corporate
and Services
|
|
|
579
|
|
|
(1,365
|
)
|
|
(1,630
|
)
|
Total
Operating Income
|
|
$
|
145,802
|
|
$
|
86,818
|
|
$
|
91,079
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
28,140
|
|
$
|
24,717
|
|
$
|
25,831
|
|
Wholesale
Gas Operations
|
|
|
11
|
|
|
15
|
|
|
15
|
|
Retail
Gas and Other Operations
|
|
|
9
|
|
|
10
|
|
|
11
|
|
On-Site
Energy Production
|
|
|
2,262
|
|
|
1,817
|
|
|
1,680
|
|
Appliance
Service Operations
|
|
|
237
|
|
|
182
|
|
|
81
|
|
Corporate
and Services
|
|
|
175
|
|
|
101
|
|
|
102
|
|
Total
Depreciation and Amortization
|
|
$
|
30,834
|
|
$
|
26,842
|
|
$
|
27,720
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
Additions:
|
|
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
55,510
|
|
$
|
74,873
|
|
$
|
68,656
|
|
Wholesale
Gas Operations
|
|
|
557
|
|
|
2
|
|
|
15
|
|
Retail
Gas and Other Operations
|
|
|
8
|
|
|
151
|
|
|
90
|
|
On-Site
Energy Production
|
|
|
10,731
|
|
|
23,149
|
|
|
5,314
|
|
Appliance
Service Operations
|
|
|
313
|
|
|
315
|
|
|
97
|
|
Corporate
and Services
|
|
|
491
|
|
|
-
|
|
|
-
|
|
Total
Property Additions
|
|
$
|
67,610
|
|
$
|
98,490
|
|
$
|
74,172
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
Assets:
|
|
|
|
|
|
|
|
|
|
|
Gas
Utility Operations
|
|
$
|
1,228,076
|
|
$
|
1,167,398
|
|
|
|
|
Wholesale
Gas Operations
|
|
|
181,257
|
|
|
124,922
|
|
|
|
|
Retail
Gas and Other Operations
|
|
|
48,998
|
|
|
50,880
|
|
|
|
|
Retail
Electric Operations
|
|
|
4,537
|
|
|
7,751
|
|
|
|
|
On-Site
Energy Production
|
|
|
121,498
|
|
|
105,822
|
|
|
|
|
Appliance
Service Operations
|
|
|
14,147
|
|
|
13,624
|
|
|
|
|
Discontinued
Operations
|
|
|
415
|
|
|
408
|
|
|
|
|
Subtotal
|
|
|
1,598,928
|
|
|
1,470,805
|
|
|
|
|
Corporate
and Services
|
|
|
109,201
|
|
|
70,379
|
|
|
|
|
Intersegment
Assets
|
|
|
(135,097
|
)
|
|
(99,472
|
)
|
|
|
|
Total
Identifiable Assets
|
|
$
|
1,573,032
|
|
$
|
1,441,712
|
|
|
|
|
8. OPERATING
LEASES:
In
accordance with GAAP, the Company is considered to be the lessor of certain
thermal energy generating property and equipment under an operating lease
which
expires in July 2026. As of December 31, 2006 and 2005 the carrying costs
of
this property and equipment under operating leases was $79.2 million and
$76.2
million, respectively, (net of accumulated depreciation of $5.7 million and
$3.8
million, respectively) and is included in Nonutility Property and Equipment
in
the consolidated balance sheets.
Minimum
future rentals to be received on non-cancelable leases as of December 31,
2006
for each of the next five years and in the aggregate are (in
thousands):
Year
ended December 31,
|
|
|
2007
|
$
|
4,618
|
2008
|
|
4,618
|
2009
|
|
4,618
|
2010
|
|
4,618
|
2011
|
|
4,618
|
Thereafter
|
|
66,961
|
Total
minimum future rentals
|
$
|
90,051
|
Minimum
future rentals do not include additional amounts to be received based on
actual
use of the leased property.
9. RATES
AND
REGULATORY
ACTIONS:
BASE
RATES — From January 1997 through July 2004, SJG’s rate structure was based on a
9.62% rate of return on rate base that included an 11.25% return on common
equity. Rate base is established by the BPU and refers to the investment
in
property used and useful in public service upon which a utility is permitted
to
earn a specified rate of return. This rate structure provided for the recovery
of cost of service, including deferred costs, through base rates. Additionally,
SJG was authorized to keep 100% of pre-tax margins generated by interruptible
and off-system sales and transportation up to the threshold level of $7.8
million. The next $750,000 was credited to customers through the BGSS clause
and
thereafter, SJG kept 20% of the pre-tax margins.
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 to recover regulatory assets contained in
its
petition and to reduce its composite depreciation rate from 2.9% to 2.4%.
Included in the base rate increase was also a change to the sharing of pre-tax
margins on interruptible, off-system sales and transportation. The $7.8 million
threshold and provision for a $750,000 credit to customers were eliminated
and,
as a result, the sharing of pre-tax margins began from dollar one, with SJG
retaining 20% through June 30, 2006. Effective July 1, 2006, the 20% retained
by
SJG decreased to 15% of such margins.
As
part
of the overall settlement effective July 8, 2004, SJG provided customers
with a
$38.9 million revenue reduction, more than offsetting the cost of the base
rate
increase awarded to SJG. This reduction was provided to customers through
the
reduction and elimination of rates associated with SJG’s various clauses where
SJG was either no longer incurring or had already recovered the specific
costs
that these clauses were designed to recover. Under those clauses, costs incurred
by SJG were billed to customers on a dollar-for-dollar basis and therefore
the
reductions did not negatively impact SJG’s net income.
RATE
MECHANISMS — SJG’s tariff, a schedule detailing the terms, conditions and rate
information applicable to the various types of natural gas service, as approved
by the BPU, has several primary rate mechanisms as discussed in detail
below:
Basic
Gas
Supply Service (BGSS) Clause — The BGSS price structure was approved by the BPU
in January 2003, and allows SJG to recover all prudently incurred gas costs.
BGSS charges to customers can be either periodic or monthly. Monthly BGSS
charges are applicable to large use customers and are referred to as monthly
because the rate changes on a monthly basis pursuant to BPU-approved formula
based on commodity market prices. Periodic BGSS charges are applicable to
lower
usage customers, which include all of SJG’s residential customers, and are
evaluated at least annually by the BPU. However, to some extent, more frequent
rate changes to the periodic BGSS are allowed. SJG collects gas costs from
customers on a forecasted basis and defers periodic over/underrecoveries
to the
following BGSS year, which runs from October 1 though September 30. If SJG
is in
a net cumulative undercollected position, gas costs deferrals are reflected
on
the balance sheet as a regulatory asset. If SJG is in a net cumulative
overcollected position, amounts due back to customers are reflected on the
balance sheet as a regulatory liability. SJG pays interest on net overcollected
BGSS balances at the rate of return utilized by the BPU to set rates in the
last
base rate proceeding, which decreased from 9.62% to 7.97% effective July
8,
2004, pursuant to the base rate settlement.
Regulatory
actions regarding the BGSS were as follows:
·
|
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.
|
·
|
March
2004 - Both the rate reduction and bill credit were approved and
implemented.
|
·
|
June
2004 - SJG made its periodic BGSS filing with the BPU requesting
a $4.9
million increase in gas cost recoveries.
|
·
|
October
2004 - The increase in gas cost recoveries requested in June 2004
was
approved on a provisional basis.
|
·
|
February
2005 - SJG filed notice with the BPU to provide for an $11.4 million
bill
credit to customers.
|
·
|
March
2005 - The bill credit was approved and
implemented.
|
·
|
June
2005 - SJG made its periodic BGSS filing with the BPU requesting
a $17.1
million, or 6.3%, increase in gas cost recoveries in response to
increasing wholesale gas costs.
|
·
|
August
2005 - The BPU approved SJG’s requested June 2005 increase, effective
September 1, 2005, on an interim
basis.
|
·
|
November
2005 - SJG filed a BGSS Motion for Emergent Rate Relief in conjunction
with the other natural gas utilities in New Jersey. This filing
was
necessary due to substantial increases in wholesale natural gas
prices
across the country. SJG requested a $103.2 million increase.
|
·
|
December
2005 - The BPU approved an $85.7 million increase to SJG’s rates,
effective December 15, 2005.
|
·
|
March
2006 - The BPU approved a global settlement, effective April 1,
2006,
which among other items, fully resolved SJG’s 2004-2005 BGSS filing and
certain issues in the 2005-2006 BGSS filing. The net impact of
the global
settlement was a $4.4 million reduction to annual revenues; however,
this
reduction had no impact on net income as there was a corresponding
reduction in expense. In addition, a pilot storage incentive program
was
approved. This program began during the second quarter of 2006
and will
continue for three summer injection periods through 2008. It is
designed
to provide SJG with the opportunity to achieve BGSS price reductions
and
additional price stability. It will also provide SJG with an opportunity
to share in storage-related gains and losses, with 20% being retained
by
SJG, and 80% being credited to customers. Total storage-related
gains for
2006 were $1.6 million.
|
·
|
June
2006 - SJG made its periodic BGSS filing with the BPU requesting
a $19.7
million, or 4.4% decrease in gas cost recoveries in response to
decreasing
wholesale gas costs, an $11.5 million benefit derived from the
release of
a storage facility, and the liquidation of some low-cost base gas
made
available during the second quarter.
|
·
|
September
2006 - The BPU approved a $38.7 million, or 8.6%, annual decrease
in gas
cost recoveries due to the continuing decrease in wholesale gas
costs
subsequent to SJG’s June 2006 filing, an agreement to utilize gas from a
released storage facility for the upcoming winter, and a credit
to gas
costs for previously overcollected state
taxes.
|
Temperature
Adjustment Clause (TAC) - The TAC provided stability to SJG’s earnings by
normalizing the impact of colder-than-normal and warmer-than-normal weather
through September 30, 2006, when it was replaced by the Conservation Incentive
Program. Each TAC year began October 1 and ended May 31 of the subsequent
year.
SJG recorded the earnings impact of TAC adjustments as incurred on a monthly
basis during the TAC year. Subsequent to each TAC year, SJG made a filing
with
the BPU requesting the return or recovery of amounts recorded under the TAC.
BPU
approved cash inflows or outflows generally did not begin until the next
TAC
year. TAC adjustments affected revenue, earnings and cash flows since colder
than normal weather generated credits to customers, while warmer-than-normal
weather resulted in additional charges to customers. As of December 31, 2006
and
2005, our consolidated balance sheets include a TAC receivable of $9.0 million
and $1.0 million, respectively, under the caption Regulatory
Assets.
Regulatory
actions regarding the TAC were as follows:
·
|
November
2005 - SJG made an annual TAC filing, requesting a $1.0 million
increase
in annual revenues, to recover the cash related to the net TAC
deficiency
resulting from warmer-than-normal weather for the 2003-2004 winter,
partially offset by colder-than-normal weather for the 2004-2005
winter.
|
·
|
March
2006 - The BPU approved a global settlement, effective April 1,
2006,
fully resolving SJG’s 2003-2004 TAC filing.
|
·
|
October
1, 2006 - The TAC was replaced by the Conservation Incentive Program
(CIP).
|
·
|
October
2006 - SJG made its annual TAC filing, requesting recovery of an
$8.3
million net deficiency associated with weather being 12.5% warmer
than
normal for the TAC year ended May 31,
2006.
|
Conservation
Incentive Program (CIP) - In December 2005, SJG made a filing to implement
a
Conservation and Usage Adjustment (CUA) Clause. The primary purpose of the
CUA
is to promote conservation efforts, without negatively impacting financial
stability and to base SJG’s profit margin on the number of customers rather than
the amount of natural gas distributed to customers. In October 2006, the
BPU
approved the CUA as a three year pilot program and renamed it the Conservation
Incentive Program. Each CIP year begins October 1 and ends September 30 of
the
subsequent year. On a monthly basis during the CIP year, SJG records adjustments
to earnings based on weather and customer usage factors, as incurred. Subsequent
to each year, SJG will make filings with the BPU to review and approve amounts
recorded under the CIP. BPU approved cash inflows or outflows generally will
not
begin until the next CIP year.
Societal
Benefits Clause (SBC) - The SBC allows SJG to recover costs related to several
BPU-mandated programs. Within the SBC are a Remediation Adjustment Clause
(RAC),
a New Jersey Clean Energy Program (NJCEP), a Universal Service Fund (USF)
program and a Consumer Education Program (CEP).
Regulatory
actions regarding the SBC, with the exception of USF which requires separate
regulatory filings, were as follows:
·
|
September
2004 - SJG filed for a $2.6 million reduction to the annual SBC
recovery
level.
|
·
|
November
2005 - SJG made the annual SBC filing, requesting a $6.1 million
reduction
in annual recoveries.
|
·
|
March
2006 - As part of the global settlement discussed under BGSS above,
the
September 2004 SBC filing was fully resolved effective April 1,
2006.
|
·
|
October
2006 - SJG made the annual SBC filing, superseding the 2005 SBC
filing,
requesting a $0.4 million reduction in annual SBC recoveries.
|
Remediation
Adjustment Clause (RAC) - The RAC recovers environmental remediation costs
of 12
former gas manufacturing plants (See Note 14). The BPU allows SJG to recover
such costs over seven year amortization periods. The net between the amounts
actually spent and amounts recovered from customers is recorded as a regulatory
asset, Environmental Remediation Cost Expended - Net. Note that RAC activity
affects revenue and cash flows but does not directly affect earnings because
of
the cost recovery over seven year amortization periods. As of December 31,
2006,
SJG reflected the unamortized remediation costs of $17.7 million on the
consolidated balance sheet under Regulatory Assets (See Note 10). Since
implementing the RAC in 1992, SJG has recovered $45.1 million through
rates.
New
Jersey Clean Energy Program (NJCEP) - This mechanism recovers costs associated
with SJG’s energy efficiency and renewable energy programs. In December 2004,
the BPU approved the statewide funding of the NJCEP of $745.0 million for
the
years 2005 through 2008. Of this amount, SJG will be responsible for
approximately $25.4 million over the four-year period. Amounts not yet expended
have been included in the Contractual Cash Obligations table included in
Note
14. NJCEP adjustments affect revenue and cash flows but do not directly affect
earnings as related costs are deferred and recovered through rates on an
on-going basis.
Universal
Service Fund (USF) - The USF is a statewide program through which funds for
the
USF and Lifeline Credit and Tenants Assistance Programs are collected from
customers of all New Jersey electric and gas utilities. In June 2004, the
BPU
approved the statewide budget of $113.0 million for all the state’s electric and
gas utilities and the increased rates were implemented effective July 1,
2004,
resulting in a $3.9 million increase to the annual USF recoveries. USF
adjustments affect revenue and cash flows but do not directly affect earnings
as
related costs are deferred and recovered through rates on an on-going
basis.
Separate
regulatory actions regarding the USF were as follows:
·
|
April
2005 - SJG made the annual USF filing, along with the state’s other
electric and gas utilities, proposing no rate change to the statewide
program. This rate proposal was approved by the BPU in June 2005.
|
·
|
July
2006 - SJG made the annual USF filing, along with the state’s other
electric and gas utilities, proposing to increase annual statewide
gas
revenues to $115.3 million, an increase of $68.5 million. This
rate
proposal was approved by the BPU in October 2006, on an interim
basis and
will increase our annual revenues by $7.7 million. The revised
rates are
effective from November, 1, 2006 through September 30,
2007.
|
Consumer
Education Program (CEP) - The CEP recovers costs associated with providing
education to the public concerning customer choice. CEP adjustments affect
revenue and cash flows but do not directly affect earnings as related costs
were
deferred and recovered on an on-going basis. SJG’s CEP recovery rate was reduced
to zero in April 2006.
Other
Regulatory Matters -
Unbundling
- 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, 2006, 19,824 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. The resulting decrease in utility 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 certain deferred costs,
through base rates.
Appliance
Service Business - On July 23, 2004, the BPU approved SJG’s petition and related
agreements to transfer the appliance service business. 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 SJG an additional
$1.5 million for certain intangible assets. This $1.5 million was credited
by
SJG to customers through the RAC and had no earnings impact. The transfer
has no
effect on the provision of safety-related or emergency-related services to
the
public since the transferred services included only non-safety related,
competitive appliance services.
Pipeline
Integrity - In October 2005, SJG, along with the three other natural gas
distribution companies in New Jersey, filed a petition with the BPU to implement
a Pipeline Integrity Management Tracker (Tracker). The purpose of the Tracker
is
to recover costs to be incurred by SJG as a result of new federal regulations,
which are aimed at enhancing public safety and reliability. The regulations
require that utilities use a comprehensive analysis to assess, evaluate,
repair
and validate the integrity of certain transmission lines in the event of
a leak
or failure. The New Jersey utilities are requesting approval of the Tracker
since the new regulations will result in ongoing incremental costs. A large
portion of these incremental costs are dependent upon overall assessment
results
and, therefore, cannot be specifically predicted at this time. As of December
31, 2006, costs incurred under this program totaled $0.4 million and are
included in Other Regulatory Assets (see Note 10).
Filings
and petitions described above are still pending unless otherwise
indicated.
10. REGULATORY
ASSETS & REGULATORY LIABILITIES:
The
discussion under Note 9, Rates and Regulatory Actions, is integral to the
following explanations of specific regulatory assets and liabilities.
Regulatory
Assets at December 31 consisted of the following items (in
thousands):
|
|
2006
|
|
2005
|
|
Environmental
Remediation Costs:
|
|
|
|
|
|
|
|
Expended
- Net
|
|
$ |
17,743 |
|
$ |
9,350
|
|
Liability
for Future Expenditures
|
|
|
67,905
|
|
|
56,717
|
|
Income
Taxes-Flowthrough Depreciation
|
|
|
4,685
|
|
|
5,663
|
|
Deferred
Asset Retirement Obligation Costs
|
|
|
21,009
|
|
|
19,986
|
|
Deferred
Fuel Costs - Net
|
|
|
19,698
|
|
|
21,237
|
|
Deferred
Pension and Other Postretirement Benefit Costs
|
|
|
39,359
|
|
|
2,646
|
|
Temperature
Adjustment Clause Receivable
|
|
|
8,996
|
|
|
1,003
|
|
Conservation
Incentive Program Receivable
|
|
|
7,747
|
|
|
-
|
|
Societal
Benefit Costs Receivable
|
|
|
6,912
|
|
|
2,691
|
|
Premium
for Early Retirement of Debt
|
|
|
1,532
|
|
|
1,694
|
|
Other
Regulatory Assets
|
|
|
1,376
|
|
|
1,499
|
|
|
|
$
|
196,962
|
|
$
|
122,486
|
|
Except
where noted below, all regulatory assets are or will be recovered through
utility rate charges as detailed in the following discussion. SJG is currently
permitted to recover interest on Environmental Remediation Costs and Societal
Benefit Costs while the other assets are being recovered without a return
on
investment.
Environmental
Remediation Costs - SJG has two regulatory assets associated with environmental
costs related to the cleanup of 12 sites where SJG or their predecessors
previously operated gas manufacturing plants. The first asset, Environmental
Remediation Cost: Expended - Net, represents what was actually spent to clean
up
the sites, less recoveries through the RAC and insurance carriers. These
costs
meet the deferral requirements of FASB Statement No. 71 as the BPU allows
SJG to
recover such expenditures through the RAC. The other asset, Environmental
Remediation Cost: Liability for Future Expenditures, relates to estimated
future
expenditures required to complete the remediation of these sites as determined
under the guidance of FASB Statement No. 5, "Accounting for Contingencies."
SJG
recorded this estimated amount as a regulatory asset under Statement No.
71,
with the corresponding current and noncurrent liabilities reflected on the
consolidated balance sheets under the captions Current Liabilities and Deferred
Credits and Other Noncurrent Liabilities. The BPU allows SJG to recover the
deferred costs over seven-year periods after they are spent.
Income
Taxes - Flowthrough Depreciation - This regulatory asset was created upon
the
adoption of FASB Statement No. 109, "Accounting for Income Taxes,” in 1993. The
amount represents unamortized 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. SJG previously passed these
tax benefits through to ratepayers and are recovering the amortization of
the
regulatory asset through rates until 2011.
Deferred
Asset Retirement Obligation Costs - This regulatory asset was created with
the
adoption of FASB Interpretation No. 47, “Accounting for Conditional Asset
Retirements Obligations” (FIN 47), in 2005. FIN 47 resulted in the recording of
asset retirement obligations (ARO’s) and additional utility plant, primarily
related to a legal obligation SJG has for certain safety requirements upon
the
retirement of its gas distribution and transmission system. SJG recovers
asset
retirement costs through rates charged to customers. All related accumulated
accretion and depreciation amounts for these ARO’s represent timing differences
in the recognition of retirement costs that SJG is currently recovering in
rates
and, as such, SJG is deferring such differences as regulatory assets under
FASB
Statement No. 71.
Deferred
Fuel Costs - Net -
Over/under collections of gas costs are monitored through the BGSS mechanism.
Net undercollected gas costs are classified as a regulatory asset and net
overcollected gas costs are classified as a regulatory liability. Derivative
contracts used to hedge SJG’s natural gas purchases are also included in the
BGSS, subject to BPU approval. See detailed discussion under Derivative
Instruments in Note 1.
Deferred
Pension and Other Postretirement Benefit Costs -
The BPU
authorized SJG to recover costs related to postretirement benefits under
the
accrual method of accounting consistent with FASB Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SJG deferred
amounts accrued prior to that authorization and are amortizing them as allowed
by the BPU over 15 years through 2012. The unamortized balance was $2.3 million
at December 31, 2006. Upon the adoption of FASB Statement No. 158 in 2006,
SJG’s
regulatory asset was increased by $37.1 million representing the recognition
of
underfunded positions of SJG’s pension and other postretirement benefit plans
(See Note 11).
Temperature
Adjustment Clause Receivable - As discussed in Note 9, the net income impact
of
the TAC was recorded as an adjustment to earnings as incurred. The recovery
(or
credit) generally did not begin until the next TAC year. As a result, there
was
a timing difference that resulted in a regulatory asset or liability. SJG
was in
a net under-recovered position as of both December 31, 2006 and 2005. The
TAC
receivable increased substantially as a result of the unseasonably warm
2005-2006 winter season.
Conservation
Incentive Program Receivable - Similar to the TAC, the impact of the CIP
is
recorded as an adjustment to earnings as incurred. Cash recovery under the
CIP
will not begin until after the first CIP year ends on October 31, 2007.
Societal
Benefit Costs Receivable - At both December 31, 2006 and 2005, this regulatory
asset primarily represents cumulative costs less recoveries under the USF
program. The receivable increased substantially from 2005 as a result of
slowed
recoveries as sales dropped due to unseasonably warm weather experienced
during
2006.
Premium
for Early Retirement of Debt - This regulatory asset represents unamortized
debt
issuance costs related to long-term debt refinancings in 2005 and 2004 and
a
$184,500 call premium associated with the retirement of SJG’s 8.6% unsecured
debenture notes in February 2005. Unamortized debt issuance costs are being
amortized over the term of the new debt issue pursuant to regulatory approval
by
the BPU. The call premium is expected to be approved for recovery through
future
rate proceedings.
Other
Regulatory Assets - Some of the assets included in Other Regulatory Assets
are
currently being recovered from ratepayers as approved by the BPU. Management
believes the remaining deferred costs are probable of recovery from ratepayers
through future utility rates.
Regulatory
Liabilities at December 31 consisted of the following items (in
thousands):
|
2006
|
|
2005
|
Excess
Plant Removal Costs
|
$
|
$48,377
|
|
$
|
$48,071
|
Overcollected
State Taxes
|
|
-
|
|
|
4,025
|
Other
|
|
2,420
|
|
|
1,906
|
|
|
|
|
|
|
Total
Regulatory Liabilities
|
$
|
$50,797
|
|
$
|
$54,002
|
Excess
Plant Removal Costs represent amounts accrued in excess of actual utility
plant
removal costs incurred to date, which SJG has an obligation to either expend
or
return to ratepayers in future periods. Overcollected State Taxes were credited
to the BGSS clause and returned to customers as a condition of the CIP
settlement (See Note 9). All other regulatory liabilities are subject to
being
returned to ratepayers in future rate proceedings.
11. PENSION
AND OTHER POSTRETIREMENT BENEFITS:
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans.” The new statement requires a calendar year-end company with publicly
traded equity securities that sponsors a postretirement benefit plan to fully
recognize, as an asset or liability, the overfunded or underfunded status
of its
benefit plans in its 2006 year-end balance sheet and recognize changes in
the
funded status in the year in which the changes occur. Changes in funded status
are generally reported in Other Comprehensive Loss; however, since SJG recovers
all prudently incurred pension and postretirement benefit costs from its
ratepayers, a significant portion of the charges resulting from the recording
of
additional liabilities under this statement are reported as regulatory assets
(See Note 10).
The
incremental effect of applying FASB Statement No. 158 on individual line
items
in the Consolidated Balance Sheet at December 31, 2006 are as follows (in
Thousands):
|
|
|
Before
Application
of Statement 158
|
|
|
Adjustments
|
|
|
After
Application
of Statement 158
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory
Assets
|
|
$
|
159,871
|
|
$
|
37,091
|
|
$
|
196,962
|
|
Prepaid
Pension
|
|
|
27,759
|
|
|
(27,759
|
)
|
|
-
|
|
Total
Assets
|
|
$
|
187,630
|
|
$
|
9,332
|
|
$
|
196,962
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Income Taxes - Net
|
|
$
|
190,131
|
|
$
|
(2,224
|
)
|
$
|
187,907
|
|
Pension
and Other Postretirement
Benefits
(Noncurrent)
|
|
|
18,386
|
|
|
14,776
|
|
|
33,162
|
|
Total
Liabilities
|
|
$
|
208,517
|
|
$
|
12,552
|
|
$
|
221,069
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Equity (Accumulated Other
Comprehensive
Loss)
|
|
$
|
(4,571
|
)
|
|
(3,220
|
)
|
|
(7,791
|
)
|
Total
Capitalization
|
|
$
|
(4,571
|
)
|
$
|
(3,220
|
)
|
|
(7,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
SJI
has
several defined benefit pension plans and other postretirement benefit plans.
The pension plans provide annuity payments to the majority of full-time,
regular
employees upon retirement. Newly hired employees do not qualify for
participation in the defined benefit pension plans. New hires are eligible
to
receive an enhanced version of SJI’s defined contribution plan. Certain SJI
officers also participate in a non-funded supplemental executive retirement
plan
(SERP), a non-qualified defined benefit pension plan. The other postretirement
benefit plans provide health care and life insurance benefits to some
retirees.
Net
periodic benefit cost related to the employee and officer pension and other
postretirement benefit plans consisted of the following components (in
thousands):
|
Pension
Benefits
|
|
Other
Postretirement Benefits
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
Service
Cost
|
$
|
3,169
|
|
$
|
3,236
|
|
$
|
3,041
|
|
$
|
931
|
|
$
|
907
|
|
$
|
1,402
|
|
Interest
Cost
|
|
7,214
|
|
|
6,761
|
|
|
6,289
|
|
|
2,622
|
|
|
2,155
|
|
|
2,412
|
|
Expected
Return on Plan Assets
|
|
(9,237
|
)
|
|
(8,569
|
)
|
|
(7,094
|
)
|
|
(1,791
|
)
|
|
(1,597
|
)
|
|
(1,402
|
)
|
Amortizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition
Obligation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
643
|
|
Prior
Service Cost (Credits)
|
|
457
|
|
|
606
|
|
|
570
|
|
|
(355
|
)
|
|
(466
|
)
|
|
(181
|
)
|
Actuarial
Loss
|
|
2,385
|
|
|
2,394
|
|
|
1,858
|
|
|
822
|
|
|
603
|
|
|
314
|
|
Net
Periodic Benefit Cost
|
|
3,988
|
|
|
4,428
|
|
|
4,664
|
|
|
2,229
|
|
|
1,602
|
|
|
3,188
|
|
ERIP
Cost
|
|
-
|
|
|
532
|
|
|
814
|
|
|
-
|
|
|
1,415
|
|
|
160
|
|
Capitalized
Benefit Costs
|
|
(1,574
|
)
|
|
(1,823
|
)
|
|
(1,474
|
)
|
|
(903
|
)
|
|
(640
|
)
|
|
(991
|
)
|
Total
Net Periodic Benefit Expense
|
$
|
2,414
|
|
$
|
3,137
|
|
$
|
4,004
|
|
$
|
1,326
|
|
$
|
2,377
|
|
$
|
2,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
benefit costs reflected in the table above relate to SJG’s construction program.
The ERIP costs relate to an early retirement plan offered during both 2005
and
2004. Additional monetary incentives not reflected in the table above totaled
$0.2 million in 2005 and $0.4 million in 2004, and were funded outside of
SJI’s
retirement plans.
The
estimated costs that will be amortized from Regulatory Assets into net periodic
benefit costs in 2007 are as follows (in thousands):
|
|
|
Pension
Benefits
|
|
|
Other
Postretirement
Benefits
|
|
Prior
Service Costs (Credits)
|
|
$
|
240
|
|
$
|
(264
|
)
|
Net
Actuarial Loss
|
|
$
|
1,066
|
|
$
|
648
|
|
The
estimated costs that will be amortized from Accumulated Other Comprehensive
Loss
into net periodic benefit costs in 2007 are as follows (in
thousands):
|
|
|
Pension
Benefits
|
|
|
Other
Postretirement
Benefits
|
|
Prior
Service Costs (Credits)
|
|
$
|
51
|
|
$
|
(84
|
)
|
Net
Actuarial Loss
|
|
$
|
818
|
|
$
|
32
|
|
A
reconciliation of the plans' benefit obligations, fair value of plan assets,
funded status and amounts recognized in SJI's consolidated balance sheets
follows (in thousands):
|
|
|
|
|
Other
Postretirement
|
|
|
Pension
Benefits
|
|
Benefits
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Change
in Benefit Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
Obligation at Beginning of Year
|
$
|
126,680
|
|
$
|
119,252
|
|
$
|
43,391
|
|
$
|
38,484
|
|
Service
Cost
|
|
3,169
|
|
|
3,236
|
|
|
931
|
|
|
907
|
|
Interest
Cost
|
|
7,214
|
|
|
6,761
|
|
|
2,622
|
|
|
2,155
|
|
Plan
Amendments
|
|
-
|
|
|
-
|
|
|
1,545
|
|
|
-
|
|
Actuarial
Loss
|
|
1,953
|
|
|
2,771
|
|
|
1,745
|
|
|
3,983
|
|
Retiree
Contributions
|
|
-
|
|
|
-
|
|
|
305
|
|
|
299
|
|
Benefits
Paid
|
|
(6,397
|
)
|
|
(5,340
|
)
|
|
(2,812
|
)
|
|
(2,437
|
)
|
Benefit
Obligation at End of Year
|
$
|
132,619
|
|
$
|
126,680
|
|
$
|
47,727
|
|
$
|
43,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value of Plan Assets at Beginning of Year
|
$
|
108,529
|
|
$
|
100,524
|
|
$
|
25,053
|
|
$
|
22,310
|
|
Actual
Return on Plan Assets
|
|
14,156
|
|
|
7,618
|
|
|
3,040
|
|
|
1,277
|
|
Employer
Contributions
|
|
778
|
|
|
5,727
|
|
|
3,468
|
|
|
3,604
|
|
Retiree
Contributions
|
|
-
|
|
|
-
|
|
|
305
|
|
|
299
|
|
Benefits
Paid
|
|
(6,397
|
)
|
|
(5,340
|
)
|
|
(2,812
|
)
|
|
(2,437
|
)
|
Fair
Value of Plan Assets at End of Year
|
$
|
117,066
|
|
$
|
108,529
|
|
$
|
29,054
|
|
$
|
25,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
Status at End of Year:
|
$
|
(15,553
|
)
|
$
|
(18,151
|
)
|
$
|
(18,673
|
)
|
$
|
(18,338
|
)
|
Unrecognized
Prior Service Cost
|
|
-
|
|
|
2,666
|
|
|
-
|
|
|
(3,762
|
)
|
Unrecognized
Net Loss and Other
|
|
-
|
|
|
40,303
|
|
|
-
|
|
|
14,599
|
|
Amounts
Related to Unconsolidated Affiliate
|
|
-
|
|
|
(326
|
)
|
|
276
|
|
|
191
|
|
(Accrued)
Prepaid Net Benefit Cost at End of Year
|
$
|
(15,553
|
)
|
$
|
24,492
|
|
$
|
(18,397
|
)
|
$
|
(7,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
Recognized in the Statement of Financial Position Consist
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
Asset
|
$
|
-
|
|
$
|
30,075
|
|
$
|
-
|
|
$
|
-
|
|
Current
Liabilities
|
|
(788
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Noncurrent
Liabilities
|
|
(14,765
|
)
|
|
(11,632
|
)
|
|
(18,397
|
)
|
|
(7,310
|
)
|
Intangible
Asset
|
|
-
|
|
|
136
|
|
|
-
|
|
|
-
|
|
Accumulated
Other Comprehensive Loss
(pre-tax)
|
|
-
|
|
|
5,913
|
|
|
-
|
|
|
-
|
|
Net
Amount Recognized at End of Year
|
$
|
(15,553
|
)
|
$
|
24,492
|
|
$
|
(18,397
|
)
|
$
|
(7,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
Recognized in Regulatory Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consist
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
Service Costs (Credit)
|
$
|
1,859
|
|
|
|
|
$
|
(1,231
|
)
|
|
|
|
|
Net
Actuarial Loss
|
|
23,376
|
|
|
|
|
|
13,087
|
|
|
|
|
|
|
$
|
25,235
|
|
|
|
|
$
|
11,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
Recognized in Accumulated Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss Consist of (pre-tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
Service Costs (Credit)
|
$
|
339
|
|
|
|
|
$
|
(588
|
)
|
|
|
|
|
Net
Actuarial Loss
|
|
11,284
|
|
|
|
|
|
1,064
|
|
|
|
|
|
|
$
|
11,623
|
|
|
|
|
$
|
476
|
|
|
|
|
|
The
accumulated benefit obligation (ABO) of SJI’s qualified employee pension plans
at December 31, 2006 and 2005, was $106.1 million and $99.7 million,
respectively. The projected benefit obligation and ABO for SJI’s non-funded
SERP, which had accumulated benefits in excess of plan assets, were $13.1
million and $13.0 million, respectively, as of December 31, 2006, and $11.7
million and $11.6 million, respectively, as of December 31, 2005. The SERP
is
reflected in the tables above and has no assets.
At
December 31, 2006 and 2005, SJI had recorded additional minimum pension
obligations of $6.7 million and $6.0 million, related to the SERP, with a
corresponding amount recorded to Accumulated Other Comprehensive
Loss.
The
net
changes included in Accumulated Other Comprehensive Loss due to the increase
in
the minimum pension obligation related to the SERP were $(0.4) million, $0.4
million and $(1.1) million for the years ended December 31, 2006, 2005 and
2004,
respectively.
The
weighted-average assumptions used to determine benefit obligations at December
31 were:
|
|
|
|
Other
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension
Benefits
|
Benefits
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Discount
Rate
|
|
|
6.04
|
%
|
|
5.84
|
%
|
|
6.04
|
%
|
|
5.84
|
%
|
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
Postretirement
|
|
|
|
|
|
Pension
Benefits
|
Benefits
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Discount
Rate
|
|
|
5.84
|
%
|
|
5.75
|
%
|
|
6.25
|
%
|
|
|
|
|
5.84
|
%
|
|
5.75
|
%
|
|
6.25
|
%
|
Expected
Long-Term Return on Plan Assets
|
|
|
8.75
|
%
|
|
8.75
|
%
|
|
8.75
|
%
|
|
|
|
|
7.25
|
%
|
|
7.25
|
%
|
|
7.25
|
%
|
Rate
of Compensation Increase
|
|
|
3.60
|
%
|
|
3.60
|
%
|
|
3.60
|
%
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
discount rates used to determine the benefit obligations at December 31,
2006
and 2005, which are used to determine the net periodic benefit cost for the
subsequent year, were based on a portfolio model of high-quality instruments
with maturities that match the expected benefit payments under our pension
and
other postretirement benefit plans. Prior to those years, SJI used the Moody’s
Aa industrial bond index yield at each respective year end. We believe that
the
new method better reflects the rate at which the benefit obligations could
be
effectively settled.
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
Company has also elected to make a change in its mortality table from the
1983
GAM to the RP-2000 tables. All obligations as of December 31, 2006 disclosed
herein reflect this change.
The
assumed health care cost trend rates at December 31 were:
|
|
|
2006
|
|
|
2005
|
|
Post-65
Medical Care Cost Trend Rate Assumed for Next Year
|
|
|
6.67
|
%
|
|
7.5
|
%
|
Pre-65
Medical Care Cost Trend Rate Assumed for Next Year
|
|
|
9.0
|
%
|
|
11.0
|
%
|
Dental
Care Cost Trend Rate Assumed for Next Year
|
|
|
6.67
|
%
|
|
7.5
|
%
|
Rate
to which Cost Trend Rates are Assumed to Decline (the Ultimate
Trend
Rate)
|
|
|
5.0
|
%
|
|
5.0
|
%
|
Year
that the Rate Reaches the Ultimate Trend Rate
|
|
|
2013
|
|
|
2013
|
|
Assumed
health care cost trend rates have a significant effect on the amounts reported
for SJI’s postretirement health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects (in
thousands):
|
|
1-Percentage-
|
|
1-Percentage-
|
|
|
|
Point
Increase
|
|
Point
Decrease
|
|
Effect
on the Total of Service and Interest Cost
|
|
$
|
148
|
|
$
|
(131
|
)
|
Effect
on Postretirement Benefit Obligation
|
|
$
|
2,397
|
|
$
|
(2,115
|
)
|
PLAN
ASSETS — SJI’s weighted-average asset allocations at December 31, 2006 and 2005,
by asset category are as follows:
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Asset
Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Equity Securities
|
|
|
51
|
%
|
|
50
|
%
|
|
48
|
%
|
|
48
|
%
|
International
Equity Securities
|
|
|
16
|
|
|
15
|
|
|
17
|
|
|
16
|
|
Fixed
Income
|
|
|
33
|
|
|
35
|
|
|
35
|
|
|
36
|
|
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 for SJI 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). These restrictions are only applicable to individual investment
managers with separately managed portfolios and do not apply to mutual funds
or
commingled trusts.
FUTURE
BENEFIT PAYMENTS — The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid during the following years
(in
thousands):
|
|
|
Pension
Benefits
|
|
|
Other
Postretirement
Benefits
|
|
2007
|
|
$
|
6,755
|
|
$
|
3,109
|
|
2008
|
|
|
6,812
|
|
|
3,280
|
|
2009
|
|
|
6,859
|
|
|
3,411
|
|
2010
|
|
|
6,993
|
|
|
3,625
|
|
2011
|
|
|
7,174
|
|
|
3,731
|
|
2012-2016
|
|
|
42,008
|
|
|
18,529
|
|
|
|
|
|
|
|
|
|
CONTRIBUTIONS
— SJI does not expect to make any contributions to its employee pension plan
in
2007; however, changes in future investment performance and discount rates
may
ultimately result in a contribution. Payments related to the unfunded SERP
plan
are expected to approximate $0.8 million in 2007. SJG has a regulatory
obligation to contribute approximately $3.6 million annually to its other
postretirement benefit plans’ trusts, less costs incurred directly by the
Company.
DEFINED
CONTRIBUTION PLAN — SJI offers an Employees’ Retirement Savings Plan (Savings
Plan) to eligible employees. SJI matches 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 pension plan, we match 50% of
participants’ contributions up to 8% of base compensation. Employees not
eligible for the pension plans also receive a year-end contribution of $500
if
fewer than 10 years of service or $1,000 if 10 or more years of service.
The
amount expensed and contributed for the matching provision of the Savings
Plan
approximated $1.0 million in each of the years 2006, 2005 and 2004.
12. 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 BPU 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 $289.2 million. SJG’s total common equity balance
was $360.4 million at December 31, 2006.
Various
loan agreements also contain potential restrictions regarding the amount
of cash
dividends or other distributions that SJG may pay on its common stock. As
of
December 31, 2006, these loan restrictions did not affect the amount that
may be
distributed from either SJG’s or SJI’s retained earnings.
13. UNUSED
LINES OF CREDIT:
Bank
credit available to SJI totaled $406.0 million at December 31, 2006, of which
$194.6 million, inclusive of $66.1 million of letters of credit, was used.
Those
bank facilities consist of a $100.0 million revolving credit facility and
$76.0
million of uncommitted bank lines available to SJG; and a $200.0 million
revolving credit facility and $30.0 million of uncommitted bank lines available
to SJI. The revolving credit facilities expire in August 2011 and contain
one
financial covenant regarding the ratio of total debt to total capitalization,
measured on a quarterly basis. SJI and SJG were in compliance with this covenant
as of December 31, 2006. Borrowings under these credit facilities are at
market
rates. The average borrowing cost, which changes daily, was 5.76%, 4.96%
and
3.02% at December 31, 2006, 2005 and 2004, respectively.
14. COMMITMENTS
AND CONTINGENCIES:
CONTRACTUAL
CASH OBLIGATIONS — The following table summarizes our contractual cash
obligations and their applicable payment due dates as of December 31, 2006
(in
thousands):
|
|
|
Up
to
|
|
Years
|
|
Years
|
|
More
than
|
|
Contractual
Cash Obligations
|
Total
|
|
1
Year
|
|
2
& 3
|
|
4
& 5
|
|
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
$
|
360,391
|
|
$
|
2,369
|
|
$
|
218
|
|
$
|
35,306
|
|
$
|
322,498
|
|
Interest
on Long-Term Debt
|
|
298,515
|
|
|
20,117
|
|
|
40,028
|
|
|
39,388
|
|
|
198,982
|
|
Operating
Leases
|
|
2,774
|
|
|
696
|
|
|
980
|
|
|
600
|
|
|
498
|
|
Construction
Obligations
|
|
9,015
|
|
|
9,015
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Commodity
Supply Purchase Obligations
|
|
670,685
|
|
|
423,922
|
|
|
166,298
|
|
|
21,725
|
|
|
58,740
|
|
New
Jersey Clean Energy Program (Note 9)
|
|
15,000
|
|
|
7,000
|
|
|
8,000
|
|
|
-
|
|
|
-
|
|
Other
Purchase Obligations
|
|
1,599
|
|
|
677
|
|
|
526
|
|
|
396
|
|
|
-
|
|
Total
Contractual Cash Obligations
|
$
|
1,357,979
|
|
$
|
463,796
|
|
$
|
216,050
|
|
$
|
97,415
|
|
$
|
580,718
|
|
Interest
on Long-Term Debt includes the impact of the related interest rate swap
agreements. Expected environmental remediation costs and asset retirement
obligations are not included in the table above as the total obligation cannot
be calculated due to the subjective nature of such costs and timing of
anticipated payments. Additionally, future pension contributions are not
included in the table as contributions vary from year-to-year based on
investment performance and discount rates. SJG’s regulatory obligation to
contribute to its other postretirement benefit plans’ trusts, as discussed in
Note 11, is not included as the duration is indefinite.
GAS
SUPPLY CONTRACTS — In the normal course of business, SJG has entered into
long-term contracts for natural gas supplies, firm transportation and gas
storage service. The earliest that any of these contracts expire is October
2007. The transportation and storage service agreements between SJG and its
interstate pipeline suppliers were made under FERC approved tariffs. SJG's
cumulative obligation for demand charges and reservation fees paid to suppliers
for these services is approximately $4.7 million per month and is recovered
on a
current basis through the BGSS.
PENDING
LITIGATION — SJI is subject to claims arising in the ordinary course of business
and other legal proceedings. We accrue liabilities related to these claims
when
we can reasonably estimate the amount or range of amounts of probable settlement
costs or other charges. SJI has been named in, among other actions, certain
product liability claims related to our former sand mining subsidiary.
Management does not currently anticipate the disposition of any known claims
to
have a material adverse effect on SJI’s financial position, results of
operations or liquidity.
COLLECTIVE
BARGAINING AGREEMENTS —
Unionized personnel represent 59% of our workforce at December 31, 2006 and
operate under agreements that run through at least January 2008.
PARENTAL
GUARANTEES — As of December 31, 2006, SJI had issued $305.7 million of parental
guarantees on behalf of its subsidiaries. Of this total, $247.0 million expire
within one year, and $58.7 million have no expiration date. These guarantees
were issued to guarantee payment to third parties with whom our subsidiaries
have commodity supply contracts and for Marina’s construction and operating
activities. As of December 31, 2006, these guarantees support future firm
commitments and $43.3 million of the Accounts Payable recorded on our
consolidated balance sheet.
STANDBY
LETTERS OF CREDIT — As of December 31, 2006, SJI provided $65.1 million of
standby letters of credit through SJI’s revolving credit facility. Letters of
credit in the amount of $62.3 million support the variable-rate demand bonds
issued through the NJEDA to finance Marina’s thermal plant project. SJI has five
additional letters of credit outstanding totaling $2.8 million, two of which
were posted to different utilities and one was posted to the PJM Interconnection
to enable SJE to market retail electricity. The remaining two letters were
posted for various construction activities.
ENVIRONMENTAL
REMEDIATION COSTS — SJI incurred and recorded costs for environmental cleanup of
12 sites where SJG or its predecessors operated gas manufacturing plants.
SJG
stopped manufacturing gas in the 1950s. SJI and some of its nonutility
subsidiaries also recorded costs for environmental cleanup of sites where
SJF
previously operated a fuel oil business and Morie maintained equipment, fueling
stations and storage.
SJI
successfully entered into settlements with all of its historic comprehensive
general liability carriers regarding the environmental remediation expenditures
at the SJG sites. Also, SJG purchased a Cleanup Cost Cap Insurance Policy
limiting the amount of remediation expenditures that SJG will be required
to
make at 11 of its sites. This policy will be in force until 2024 at 10 sites
and
until 2029 at one site. The future cost estimates discussed hereafter are
not
reduced by projected insurance recoveries from the Cleanup Cost Cap Insurance
Policy. The policy is limited to an aggregate amount of $50.0 million, of
which
SJG has recovered $9.0 million through December 31, 2006.
Since
the
early 1980s, SJI accrued environmental remediation costs of $186.1 million,
of
which $114.1 million was spent as of December 31, 2006.
The
following table details the amounts expended and accrued for SJI’s environmental
remediation during the last two years (in thousands):
|
|
2006
|
|
2005
|
|
Beginning
of Year
|
|
$
|
60,654
|
|
$
|
54,991
|
|
Accruals
|
|
|
22,172
|
|
|
11,791
|
|
Expenditures
|
|
|
(9,503
|
)
|
|
(6,128
|
)
|
Insurance Recoveries
|
|
|
(1,493
|
)
|
|
-
|
|
End
of Year
|
|
$
|
71,830
|
|
$
|
60,654
|
|
The
balances are segregated between current and noncurrent on the consolidated
balance sheets under the captions Current Liabilities and Deferred Credits
and
Other Noncurrent Liabilities.
Management,
with the assistance of consulting firms, estimates that undiscounted future
costs to clean up SJG's sites will range from $67.8 million to $239.9 million.
Four of SJG’s sites comprise a significant portion of these estimates, ranging
from a low of $40.8 million to a high of $141.0 million. SJG recorded the
lower
end of this range, $67.8 million, 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. 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. Significant risks surrounding these estimates
include unforeseen market price increases for remedial services, property
owner
acceptance of remedy selection, regulatory approval of selected remedy and
remedial investigative findings.
The
remediation efforts at SJG’s four most significant sites include the
following:
Site
1 -
A remedial action work plan is being prepared and will be submitted to the
New
Jersey Department of Environmental Protection (NJDEP) for approval. Remaining
steps to remediate include regulatory approval and remedy implementation
for
impacted soil, groundwater, and river sediments as well as acceptance of
the
selected remedy by affected property owners.
Site
2 -
Various remedial investigation and action activities, such as completed and
approved interim remedial measures and conceptual remedy selection, are ongoing
at this site. Remaining steps to remediate include remedy selection, regulatory
approval, and implementation for the remaining impacted soil, groundwater,
and
stream sediments as well as acceptance of the selected remedy by affected
property owners.
Site
3 -
Remedial investigative activities are ongoing at this site. Remaining steps
to
remediate include completing the remedial investigation of impacted soil
and
groundwater in preparation for selecting the appropriate action and
implementation and gaining regulatory and property owner approval of the
selected remedy.
Site
4 -
Remedial action activities are planned at this site. Remaining steps to
remediate include implementation of the NJDEP approved Remedial Action Work
Plan
of impacted soil and groundwater.
The
estimate for Site 4 increased by $16 million to reflect the actual environmental
remediation bids received to perform the remediation alternative the Company
selected and the NJDEP approved. At one other site not specifically discussed
above, the estimate was increased by $6 million to reflect the impact of
the
bids received at Site 4 since the same remediation alternative is currently
proposed for this site.
With
Morie's sale, EMI assumed responsibility for environmental liabilities estimated
between $2.7 million and $8.8 million. The information available on these
sites
is sufficient only to establish a range of probable liability and no point
within the range is more likely than any other. Therefore, EMI has accrued
the
lower end of the range. Changes in the accrual are included in the statements
of
consolidated income under Loss from Discontinued Operations.
SJI
and
SJF estimated their potential exposure for the future remediation of four
sites
where fuel oil operations existed years ago. Estimates for these sites range
from $1.3 million to $5.0 million. We recorded the lower end of this range
on
the 2006 consolidated balance sheet under Current Liabilities and Deferred
Credits and Other Noncurrent Liabilities as of December 31, 2006.
15. PURCHASE
OF NATURAL GAS MARKETING ASSETS:
On
November 1, 2006, the Company purchased selected natural gas marketing and
production assets for $3.2 million. These assets are primarily located in
northwestern Pennsylvania and complement the Company’s existing marketing assets
by allowing for expansion into Pennsylvania and other states. Approximately
$1.0
million of the purchase price was allocated to contracts that will settle
during
the next year and are recorded in Other Current Assets on the consolidated
balance sheets and approximately $0.5 million was allocated to gas production
assets. The remaining $1.7 million of the purchase price was allocated to
various intangible items that are being amortized over periods ranging from
approximately 5 to 20 years and are recorded in Other Noncurrent Assets.
The
amount of goodwill recorded was not significant. The Company is also obligated
to pay additional amounts to the seller in the event that earnings generated
from these assets through October 2011 exceed agreed upon levels.
16.
RESTATEMENT OF FINANCIAL INFORMATION:
In
February 2007, and subsequent to the issuance of the Company’s financial
statements for the year ended December 31, 2005, management and the audit
committee determined that its documentation for selected hedge transactions
did
not meet the requirements of paragraph 28 of Statement of Financial Accounting
Standards No. 133 “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”) which states that the forecasted transaction being
hedged should be described with sufficient specificity so that when the
transaction occurs, it is clear whether that transaction is or is not the
hedged
transaction. The documentation of these
hedges did not contain sufficient specificity. Consequently, these hedges
do not
qualify for hedge accounting treatment.
As
a
result, we are restating herein our consolidated financial statements as
of and
for the years ended December 31, 2005 and 2004 to correct the accounting
error.
Prior
to
the restatement, changes in fair value of derivative instruments that were
designated as cash flow hedges of forecasted purchases and sales of natural
gas
were recorded in Accumulated Other Comprehensive Loss until the forecasted
transaction was recognized in earnings. Subsequent to the restatement,
those
changes in fair value of derivative instruments previously designated as
cash
flow hedges are now recorded in the Company’s statements of consolidated
income.
In
addition, during the second quarter of 2006, the Company determined that
certain
realized hedge gains related to natural gas purchases were recorded as an
offset to inventory rather than Accumulated Other Comprehensive Loss as of
December 31, 2005. The Company did not consider the balance sheet impact
of
these amounts to be material. During the second quarter of 2006, the
Company
corrected the classification by increasing Natural Gas in Storage with the
offset to Accumulated Other Comprehensive Loss net of tax as of December
31, 2005. This adjustment is reflected in the “As Previously Reported” amounts
seen below. As a result of the elimination of hedge accounting, the amounts
recorded in Accumulated Other Comprehensive Loss relating to these items
are
also included in the restatement.
EFFECTS
OF RESTATEMENT — The
following tables set forth the effects of the restatement on affected line
items
within our previously reported financial statements for the years ended
December
31:
|
|
2005
|
|
2004
|
|
(In
thousands except per share amounts)
|
|
As
Previously
Reported
|
|
Restated
|
|
As
Previously
Reported
|
|
Restated
|
|
Statements
of Consolidated Income
|
|
|
|
|
|
|
|
|
|
Operating
Revenues - Nonutility
|
|
$
|
344,577
|
|
$
|
329,611
|
|
$
|
324,128
|
|
$
|
324,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Revenues
|
|
|
920,982
|
|
|
906,016
|
|
|
819,076
|
|
|
819,416
|
|
Operating
Income
|
|
|
101,784
|
|
|
86,818
|
|
|
90,739
|
|
|
91,079
|
|
Income
before Income Taxes
|
|
|
81,453
|
|
|
66,487
|
|
|
71,151
|
|
|
71,491
|
|
Income
Taxes
|
|
|
(33,767
|
)
|
|
(27,619
|
)
|
|
(29,079
|
)
|
|
(29,218
|
)
|
Income
from Continuing Operations
|
|
|
48,588
|
|
|
39,770
|
|
|
42,973
|
|
|
43,173
|
|
Net
Income Applicable to Common Stock
|
|
|
47,919
|
|
|
39,101
|
|
|
42,293
|
|
|
42,493
|
|
Basic
Earnings per Common Share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
|
1.72
|
|
|
1.41
|
|
|
1.57
|
|
|
1.58
|
|
Basic
Earnings per Common Share
|
|
|
1.70
|
|
|
1.39
|
|
|
1.54
|
|
|
1.55
|
|
Diluted
Earnings per Common Share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
|
1.71
|
|
|
1.40
|
|
|
1.56
|
|
|
1.56
|
|
Diluted
Earnings per Common Share
|
|
|
1.69
|
|
|
1.38
|
|
|
1.53
|
|
|
1.53
|
|
Statements
of Consolidated Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income |
|
|
47,919 |
|
|
39,101 |
|
|
42,293 |
|
|
42,493 |
|
Income
from Continuing Operations
|
|
|
48,588
|
|
|
39,770
|
|
|
42,973
|
|
|
43,173
|
|
Unrealized
Loss on Derivatives - Energy Related
|
|
|
1,590
|
|
|
16,557
|
|
|
967
|
|
|
628
|
|
Deferred
and Noncurrent Income Taxes and Credits - Net
|
|
|
25,179
|
|
|
19,030
|
|
|
14,904
|
|
|
15,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Consolidated Capitalization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Loss
|
|
|
(8,801
|
)
|
|
(4,445
|
)
|
|
|
|
|
|
|
Retained
Earnings
|
|
|
134,357
|
|
|
130,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Changes in Common Equity and Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
47,919
|
|
|
39,101
|
|
|
42,293
|
|
|
42,493
|
|
Unrealized
Gain (Loss) on Derivatives
|
|
|
(15,063
|
)
|
|
(2
|
)
|
|
3,445
|
|
|
(26
|
)
|
Reclassification
Adjustment for Amounts Included in Net Income
|
|
|
3,783
|
|
|
-
|
|
|
(3,271
|
)
|
|
-
|
|
Other
Comprehensive Income (Loss), Net of Tax
|
|
|
(10,790
|
)
|
|
488
|
|
|
(1,095
|
)
|
|
(1,295
|
)
|
Comprehensive
Income
|
|
|
37,129
|
|
|
39,589
|
|
|
41,198
|
|
|
41,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
effect of the restatement on opening Retained Earnings as of January 1,
2004 was
a net increase of $4.3 million from Accumulated Other Comprehensive Loss.
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
South
Jersey Industries, Inc.
Folsom,
New Jersey
We
have
audited the accompanying consolidated balance sheets and statements of
consolidated capitalization of South Jersey Industries, Inc. and subsidiaries
(the “Company”) as of December 31, 2006 and 2005, and the related statements of
consolidated income, changes in common equity and comprehensive income,
and cash
flows for each of the three years in the period ended December 31, 2006.
These
financial statements are the responsibility of the Company's management.
Our
responsibility is to express an opinion on these financial statements
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 examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all
material
respects, the financial position of South Jersey Industries, Inc. and
subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period
ended
December 31, 2006, in conformity with accounting principles generally
accepted
in the United States of America.
As
discussed in Note 1 to the consolidated financial statements, in 2006
the
Company changed its method of accounting for stock-based compensation
to conform
to FASB Statement No. 123(R), Share-Based
Payment. As
discussed in Note 11 to the consolidated financial statements, in 2006
the
Company changed its method of accounting for postretirement benefits
to conform
to FASB Statement No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
Also as
discussed in Note 1 to the consolidated financial statements, in 2005
the
Company changed its method of accounting for asset retirement obligations
to
conform to FASB Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations.
As
discussed in Note 16, the accompanying 2005 and 2004 consolidated financial
statements have been restated.
We
have
also audited, in accordance with the standards of the Public Company
Accounting
Oversight Board (United States), the effectiveness of the Company's internal
control over financial reporting as of December 31, 2006, based on the
criteria
established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
and our
report dated March 1, 2007 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over
financial
reporting and an adverse opinion on the effectiveness of the Company's
internal
control over financial reporting because of a material weakness.
/s/
DELOITTE & TOUCHE LLP
Philadelphia,
Pennsylvania
March
1,
2007
Supplementary Financial
Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Summarized
quarterly results of SJI's operations, in thousands except for
per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Quarter Ended
|
2005
Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
|
June
30
|
|
|
Sept.
30
|
|
|
Dec.
31
|
|
|
March
31
|
|
|
June
30
|
|
|
Sept.
30
|
|
|
Dec.
31
|
|
|
|
|
(As
Restated
|
|
|
(As
Restated
|
|
|
(As
Restated
|
|
|
|
|
|
(As
Restated
|
|
|
(As
Restated
|
|
|
(As
Restated
|
|
|
(As
Restated
|
|
|
|
|
See
Note 16)
|
|
|
See
Note 16)
|
|
|
See
Note 16)
|
|
|
|
|
|
See
Note 16)
|
|
|
See
Note 16)
|
|
|
See
Note 16)
|
|
|
See
Note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
$
|
372,611
|
|
$
|
153,769
|
|
$
|
154,705
|
|
$
|
250,343
|
|
$
|
328,512
|
|
$
|
148,515
|
|
$
|
143,600
|
|
$
|
285,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
284,238
|
|
|
114,048
|
|
|
96,950
|
|
|
180,901
|
|
|
245,116
|
|
|
110,901
|
|
|
122,430
|
|
|
223,049
|
|
Operations
and Maintenance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including
Fixed Charges
|
|
|
31,780
|
|
|
28,720
|
|
|
31,158
|
|
|
34,025
|
|
|
32,868
|
|
|
28,534
|
|
|
28,167
|
|
|
36,448
|
|
Income
Taxes (Benefit)
|
|
|
21,486
|
|
|
4,146
|
|
|
10,584
|
|
|
13,467
|
|
|
19,090
|
|
|
2,822
|
|
|
(3,402
|
)
|
|
9,109
|
|
Energy
and Other Taxes
|
|
|
4,731
|
|
|
1,891
|
|
|
1,783
|
|
|
3,072
|
|
|
5,158
|
|
|
2,117
|
|
|
1,733
|
|
|
3,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
|
342,235
|
|
|
148,805
|
|
|
140,475
|
|
|
231,465
|
|
|
302,232
|
|
|
144,374
|
|
|
148,928
|
|
|
272,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income and Expense
|
|
|
527
|
|
|
977
|
|
|
835
|
|
|
1,463
|
|
|
578
|
|
|
160
|
|
|
132
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
|
30,903
|
|
|
5,941
|
|
|
15,065
|
|
|
20,341
|
|
|
26,858
|
|
|
4,301
|
|
|
(5,196
|
)
|
|
13,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations
|
|
|
(166
|
)
|
|
(63
|
)
|
|
(149
|
)
|
|
(440
|
)
|
|
(144
|
)
|
|
(182
|
)
|
|
(191
|
)
|
|
(152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
30,737
|
|
$
|
5,878
|
|
$
|
14,916
|
|
$
|
19,901
|
|
$
|
26,714
|
|
$
|
4,119
|
|
$
|
(5,387
|
)
|
$
|
13,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Based
on Average Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
1.06
|
|
$
|
0.20
|
|
$
|
0.52
|
|
$
|
0.70
|
|
$
|
0.97
|
|
$
|
0.15
|
|
$
|
(0.18
|
)
|
$
|
0.48
|
|
Discontinued
Operations
|
|
|
(0.01
|
)
|
|
(0.00
|
)
|
|
(0.01
|
)
|
|
(0.02
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings (Loss) Per Common Share
|
|
$
|
1.05
|
|
$
|
0.20
|
|
$
|
0.51
|
|
$
|
0.68
|
|
$
|
0.96
|
|
$
|
0.14
|
|
$
|
(0.19
|
)
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Shares Outstanding - Basic
|
|
|
29,032
|
|
|
29,162
|
|
|
29,225
|
|
|
29,282
|
|
|
27,799
|
|
|
27,953
|
|
|
28,244
|
|
|
28,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Based
on Average Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
1.06
|
|
$
|
0.20
|
|
$
|
0.51
|
|
$
|
0.69
|
|
$
|
0.96
|
|
$
|
0.15
|
|
$
|
(0.18
|
)
|
$
|
0.48
|
|
Discontinued
Operations
|
|
|
(0.01
|
)
|
|
(0.00
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings (Loss) Per Common Share
|
|
$
|
1.05
|
|
$
|
0.20
|
|
$
|
0.50
|
|
$
|
0.68
|
|
$
|
0.95
|
|
$
|
0.14
|
|
$
|
(0.19
|
)
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Shares Outstanding - Diluted
|
|
|
29,100
|
|
|
29,226
|
|
|
29,320
|
|
|
29,396
|
|
|
27,999
|
|
|
28,180
|
|
|
28,459
|
|
|
28,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*The
sum of the quarters for 2006 and 2005 do not equal the year's
total due to
rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE:
Because of the seasonal nature of the business and the volatility
from
energy related derivatives, statements for the 3-month periods
|
|
|
|
|
|
|
are
not indicative of the results for a full year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
discussed in Note 16 to the consolidated financial statements, the Company’s
financial statements for the years ended December 31, 2005 and 2004 have
been
restated. The Company has also determined that the matters discussed
in Note 16
also affect the first three quarters of 2006. As a result, the Company
is
restating herein previously reported selected quarterly financial information
for the first three quarters of 2006 and for each of the quarters of
2005.
The
Company’s quarterly reports for 2006 have also been restated to appropriately
reflect costs related to a supply contract, that were previously deferred
during
those quarters. These amounts have been recognized in Cost of Sales
- Nonutility
in the restated financial statements.
The
following tables set forth the effects of the restatement
on the affected
line items within our previously reported financial statements
for each of
the
|
quarters
in the years 2006 and 2005: |
|
|
|
|
|
|
|
|
Quarter
Ending
|
|
|
|
September
30, 2006
|
|
June
30, 2006
|
|
March
31, 2006
|
|
As
|
|
|
|
As
|
|
|
|
|
As
|
|
|
|
Previously
|
|
|
|
Previously
|
|
|
|
|
Previously
|
|
|
(In
thousands except per share amounts)
|
Reported
|
|
Restated
|
|
Reported
|
|
Restated
|
|
Reported
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Consolidated Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
$ 133,061
|
|
$
154,705
|
|
|
$
155,532
|
|
|
$
153,769
|
|
$
364,975
|
|
$
372,611
|
Cost
of Sales
|
|
96,614
|
|
96,950
|
|
|
113,625
|
|
|
114,048
|
|
283,116
|
|
284,238
|
Income
Taxes
|
|
1,830
|
|
10,584
|
|
|
5,044
|
|
|
4,146
|
|
18,810
|
|
21,486
|
Total
Expenses
|
|
131,385
|
|
140,475
|
|
|
149,280
|
|
|
148,805
|
|
338,437
|
|
342,235
|
Income
from Continuing Operations
|
|
2,511
|
|
15,065
|
|
|
7,229
|
|
|
5,941
|
|
27,065
|
|
30,903
|
Net
Income Applicable to Common Stock
|
|
2,362
|
|
14,916
|
|
|
7,166
|
|
|
5,878
|
|
26,899
|
|
30,737
|
Basic
Earnings per Common Share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
0.09
|
|
0.52
|
|
|
0.25
|
|
|
0.20
|
|
0.93
|
|
1.06
|
Basic
Earnings per Common Share
|
|
0.08
|
|
0.51
|
|
|
0.25
|
|
|
0.20
|
|
0.93
|
|
1.05
|
Diluted
Earnings per Common Share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
0.09
|
|
0.51
|
|
|
0.25
|
|
|
0.20
|
|
0.93
|
|
1.06
|
Diluted
Earnings per Common Share
|
|
0.08
|
|
0.50
|
|
|
0.25
|
|
|
0.20
|
|
0.92
|
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ending
|
|
|
|
|
December
31, 2005
|
|
|
September
30, 2005
|
|
|
June
30, 2005
|
|
|
March
31, 2005
|
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
Previously
|
|
|
|
|
|
Previously
|
|
|
|
|
|
Previously
|
|
|
|
|
(In
thousands except per share amounts)
|
|
|
Reported
|
|
|
Restated
|
|
|
Reported
|
|
|
Restated
|
|
|
Reported
|
|
|
Restated
|
|
|
Reported
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Consolidated Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
$
|
281,402
|
|
$
|
285,389
|
|
$
|
156,971
|
|
$
|
143,600
|
|
$
|
154,039
|
|
$
|
148,515
|
|
$
|
328,570
|
|
$
|
328,512
|
|
Income
Taxes
|
|
|
7,471
|
|
|
9,109
|
|
|
2,092
|
|
|
(3402
|
)
|
|
5,091
|
|
|
2,822
|
|
|
19,114
|
|
|
19,090
|
|
Total
Expenses
|
|
|
270,595
|
|
|
272,233
|
|
|
154,421
|
|
|
148928
|
|
|
146,644
|
|
|
144,374
|
|
|
302,256
|
|
|
302,232
|
|
Income
(Loss) from Continuing Operations
|
|
|
11,458
|
|
|
13,807
|
|
|
2,682
|
|
|
(5196
|
)
|
|
7,555
|
|
|
4,301
|
|
|
26,892
|
|
|
26,858
|
|
Net
Income (Loss) Applicable to Common Stock
|
|
|
11,306
|
|
|
13,655
|
|
|
2,491
|
|
|
(5387
|
)
|
|
7,373
|
|
|
4,119
|
|
|
26,748
|
|
|
26,714
|
|
Basic
Earnings per Common Share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
|
0.40
|
|
|
0.48
|
|
|
0.09
|
|
|
(0.18
|
)
|
|
0.27
|
|
|
0.15
|
|
|
0.97
|
|
|
0.97
|
|
Basic
Earnings per Common Share
|
|
|
0.39
|
|
|
0.47
|
|
|
0.09
|
|
|
(0.19
|
)
|
|
0.26
|
|
|
0.14
|
|
|
0.96
|
|
|
0.96
|
|
Diluted
Earnings per Common Share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
|
0.40
|
|
|
0.48
|
|
|
0.09
|
|
|
(0.18
|
)
|
|
0.27
|
|
|
0.15
|
|
|
0.96
|
|
|
0.96
|
|
Diluted
Earnings per Common Share
|
|
|
0.39
|
|
|
0.47
|
|
|
0.09
|
|
|
(0.19
|
)
|
|
0.26
|
|
|
0.14
|
|
|
0.96
|
|
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
Jersey Gas Company Comparative Operating Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues - Utility (Thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Firm
Sales -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
334,201
|
|
$
|
252,150
|
|
$
|
182,826
|
|
$
|
193,725
|
|
$
|
174,252
|
|
Commercial
|
|
|
99,578
|
|
|
88,321
|
|
|
57,826
|
|
|
58,749
|
|
|
52,300
|
|
Industrial
|
|
|
6,590
|
|
|
4,428
|
|
|
5,223
|
|
|
5,635
|
|
|
4,512
|
|
Cogeneration
& Electric Generation
|
|
|
10,746
|
|
|
17,916
|
|
|
9,496
|
|
|
6,513
|
|
|
9,363
|
|
Firm
Transportation -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
4,768
|
|
|
25,296
|
|
|
42,375
|
|
|
40,067
|
|
|
23,172
|
|
Commercial
|
|
|
12,621
|
|
|
14,043
|
|
|
22,142
|
|
|
22,464
|
|
|
15,958
|
|
Industrial
|
|
|
12,599
|
|
|
12,999
|
|
|
15,732
|
|
|
11,500
|
|
|
10,065
|
|
Cogeneration
& Electric Generation
|
|
|
193
|
|
|
259
|
|
|
323
|
|
|
49
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Firm Revenues
|
|
|
481,296
|
|
|
415,412
|
|
|
335,943
|
|
|
338,702
|
|
|
289,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interruptible
|
|
|
1,109
|
|
|
1,498
|
|
|
1,641
|
|
|
1,682
|
|
|
1,142
|
|
Interruptible
Transportation
|
|
|
1,868
|
|
|
1,898
|
|
|
1,462
|
|
|
1,121
|
|
|
1,567
|
|
Off-System
|
|
|
147,180
|
|
|
153,637
|
|
|
151,161
|
|
|
176,555
|
|
|
115,714
|
|
Capacity
Release & Storage
|
|
|
9,656
|
|
|
12,808
|
|
|
10,157
|
|
|
6,686
|
|
|
5,365
|
|
Appliance
Service
|
|
|
-
|
|
|
-
|
|
|
6,362
|
|
|
9,596
|
|
|
8,386
|
|
Other
|
|
|
1,562
|
|
|
1,960
|
|
|
2,101
|
|
|
2,099
|
|
|
1,989
|
|
Intercompany
Sales
|
|
|
(40,672
|
)
|
|
(10,808
|
)
|
|
(13,879
|
)
|
|
(40,387
|
)
|
|
(31,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Revenues - Utility
|
|
$
|
601,999
|
|
$
|
576,405
|
|
$
|
494,948
|
|
$
|
496,054
|
|
$
|
392,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
dth (Thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm
Sales -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
19,830
|
|
|
19,464
|
|
|
15,312
|
|
|
16,477
|
|
|
16,140
|
|
Commercial
|
|
|
6,958
|
|
|
7,607
|
|
|
5,406
|
|
|
5,565
|
|
|
5,484
|
|
Industrial
|
|
|
296
|
|
|
204
|
|
|
194
|
|
|
220
|
|
|
210
|
|
Cogeneration
& Electric Generation
|
|
|
1,103
|
|
|
1,743
|
|
|
1,139
|
|
|
808
|
|
|
2,065
|
|
Firm
Transportation -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
956
|
|
|
5,755
|
|
|
9,422
|
|
|
9,124
|
|
|
5,381
|
|
Commercial
|
|
|
4,536
|
|
|
5,267
|
|
|
7,690
|
|
|
7,945
|
|
|
6,081
|
|
Industrial
|
|
|
14,226
|
|
|
16,174
|
|
|
17,099
|
|
|
16,404
|
|
|
15,903
|
|
Cogeneration
& Electric Generation
|
|
|
253
|
|
|
350
|
|
|
245
|
|
|
29
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Firm Throughput
|
|
|
48,158
|
|
|
56,564
|
|
|
56,507
|
|
|
56,572
|
|
|
51,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interruptible
|
|
|
93
|
|
|
119
|
|
|
179
|
|
|
229
|
|
|
206
|
|
Interruptible
Transportation
|
|
|
3,474
|
|
|
2,836
|
|
|
2,562
|
|
|
2,337
|
|
|
3,317
|
|
Off-System
|
|
|
18,221
|
|
|
15,045
|
|
|
22,146
|
|
|
28,123
|
|
|
31,179
|
|
Capacity
Release & Storage
|
|
|
66,458
|
|
|
86,119
|
|
|
56,768
|
|
|
42,764
|
|
|
39,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Throughput
|
|
|
136,404
|
|
|
160,683
|
|
|
138,162
|
|
|
130,025
|
|
|
125,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Customers at Year End:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
307,919
|
|
|
300,652
|
|
|
292,185
|
|
|
283,722
|
|
|
275,979
|
|
Commercial
|
|
|
21,652
|
|
|
21,322
|
|
|
20,939
|
|
|
20,405
|
|
|
19,966
|
|
Industrial
|
|
|
478
|
|
|
450
|
|
|
455
|
|
|
435
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Customers
|
|
|
330,049
|
|
|
322,424
|
|
|
313,579
|
|
|
304,562
|
|
|
296,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
Daily Sendout dth (Thousands)
|
|
|
356
|
|
|
424
|
|
|
428
|
|
|
422
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
Degree Days
|
|
|
3,943
|
|
|
4,777
|
|
|
4,641
|
|
|
4,929
|
|
|
4,380
|
|
Item
9. Changes in and Disagreements with Accountants on
Accounting
and Financial Disclosure
None
Item
9A. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
The
Company’s
management, with the participation of its chief executive officer and
chief
financial officer, evaluated the effectiveness of the design and operation
of
the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of December 31, 2006. Based
on that
evaluation, the Company’s chief executive officer and chief financial officer
concluded that because of the material weakness in internal control over
financial reporting discussed below, the Company’s disclosure controls and
procedures were not effective as of December 31, 2006.
In
reviewing
our internal controls over financial reporting with respect to accounting
for
certain derivative instruments, we identified a material weakness with
respect
to how we designed our procedures to designate at inception certain hedging
relationships with the required specificity necessary to meet the requirements
of Statement of Financial Accounting Standards No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (SFAS 133).
Management’s
Report on Internal Control over Financial Reporting
Management
is
responsible for establishing and maintaining adequate internal control
over
financial reporting, as such term is defined under Exchange Act Rules
13a-15(f).
The Company’s internal control system is designed to provide reasonable
assurance to its management and board of directors regarding the preparation
and
fair presentation of published financial statements. Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted
an
evaluation of the effectiveness of our internal control over financial
reporting
based on the framework in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
As a
result of the restatement of the Company’s consolidated financial statements,
management has determined that a material weakness in internal control
over
financial reporting existed as of December 31, 2006, and based on the
criteria
noted above, concluded that the Company’s internal control over financial
reporting was not effective as of December 31, 2006.
A
material
weakness, as defined by the Public Company Accounting Oversight Board
(PCAOB) in
Auditing Standard No.2, is a significant deficiency, or combination of
significant deficiencies, that results in more than a remote likelihood
that a
material misstatement of the annual or interim financial statements will
not be
prevented or detected. Based upon this definition, management concluded
that as
of December 31, 2006, the Company did not maintain effective controls
over our
procedures to designate at inception certain hedging relationships with
the
required specificity necessary to meet the requirements of Statement
of
Financial Accounting Standards No. 133, “Accounting for Derivative Instruments
and Hedging Activities” (SFAS 133). Specifically,
controls to ensure that a
forecasted transaction being hedged was described and documented with
sufficient
specificity so that when the transaction occurs, it was clear whether
the
transaction was or was not the hedged transaction did not operate effectively.
Management has determined, for all affected periods that the documentation
of
these hedges did not contain sufficient specificity to qualify them for
hedge
accounting, resulting in a material weakness.
As
a result
of this material weakness, the Company restated its previously issued
consolidated financial statements as of December 31, 2005 and for the
years
ended December 31, 2005 and 2004, and as discussed in Quarterly Financial
Data,
the Company restated its previously reported selected quarterly financial
information for the first three quarters in 2006 and for each of the
quarters in
2005. Selected financial data for each of the years ended December 31, 2002
through 2005 was also restated.
Management’s
assessment of the effectiveness of our internal control over financial
reporting
as of December 31, 2006 has been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in their report
which
is incorporated by reference.
Changes
in Internal Control over Financial Reporting
There
was no
change in the Company’s internal control over financial reporting during the
fourth fiscal quarter, that materially affected, or is reasonably likely
to
materially affect the Company’s internal control over financial reporting.
Subsequent
to
December 31, 2006, the Company has discontinued the use of hedge accounting
and
is currently evaluating whether it will be used in future periods. Prior
to
applying hedge accounting, the Company will ensure that appropriate procedures
have been implemented to comply with the provisions of SFAS
133.
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
South
Jersey Industries, Inc.
Folsom,
New Jersey
We
have
audited management's assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that South Jersey
Industries, Inc. and subsidiaries (the "Company") did not maintain effective
internal control over financial reporting as of December 31, 2006, because
of
the effect of the material weakness identified in management's assessment
based
on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We
conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed
by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected
by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future
periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies
or
procedures may deteriorate.
A
material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included
in
management's assessment: The Company did not maintain effective controls
over
procedures to designate at inception certain hedging relationships with the
required specificity necessary to meet the requirements of Statement of
Financial Accounting Standards No. 133, “Accounting for Derivative Instruments
and Hedging Activities” (SFAS 133). Specifically, controls to ensure that a
forecasted transaction being hedged was described and documented with sufficient
specificity so that when the transaction occurs, it was clear whether the
transaction was or was not the hedged transaction did not operate effectively.
Management has determined, for all affected periods that the documentation
of
these hedges did not contain sufficient specificity to qualify them for hedge
accounting, resulting in a material weakness. As a result of this material
weakness, the Company restated its previously issued consolidated financial
statements as of December 31, 2005 and for the years ended December 31, 2005
and
2004, and as discussed in Quarterly Financial Data, the Company restated
its
previously reported selected quarterly financial information for the first
three
quarters in 2006 and for each of the quarters in 2005. This material weakness
was considered in determining the nature, timing, and extent of audit tests
applied in our audit of the consolidated financial statements as of and for
the
year ended December 31, 2006, of the Company and this report does not affect
our
report on such financial statements.
In
our
opinion, management's assessment that the Company did not maintain effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the criteria established in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
Also in
our opinion, because of the effect of the material weakness described above
on
the achievement of the objectives of the control criteria, the Company has
not
maintained effective internal control over financial reporting as of December
31, 2006, based on the criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as
of and
for the year ended December 31, 2006, of the Company and our report dated
March
1, 2007 expressed an unqualified opinion on those financial statements and
included explanatory paragraphs as to changes in accounting principles for
stock-based compensation and postretirement benefits in 2006 and asset
retirement obligations in 2005, and concerning the restatement of the 2005
and
2004 consolidated financial statements.
/s/
DELOITTE & TOUCHE LLP
Philadelphia,
Pennsylvania
March
1,
2007
Item
9B. Other Information
None
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance
Information
concerning Directors may be found under the captions “Director Elections,”
“Nominees,” “Directors Continuing in Office,” and “Security Ownership” in our
definitive proxy statement for our 2007 Annual Meeting of Shareholders (the
“2007 Proxy Statement”), which will be filed within the Commission within 120
days after the close of our fiscal year. Such information is incorporated herein
by reference. Information required by this item relating to the executive
officers of SJI is set forth in Item 4-A of this report.
Code
of Ethics
The
Company has adopted a Code of Ethics for its Principal Executive, Financial
and
Accounting Officers. It is available on SJI’s website, www.sjindustries.com
by
clicking “Investors” and then “Corporate Governance.” We will post any amendment
to or waiver of the Code to our website.
Item
11. Executive Compensation
Information
concerning executive compensation may be found under the captions
“Compensation/Pension Committee Report on Executive Compensation” and “Executive
Compensation” of our 2007 Proxy Statement. Such information is incorporated
herein by reference.
Item
12. Security Ownership of Certain Beneficial Owners and
Management
and
Related Stockholder Matters
The
information in our 2007 Proxy Statement set forth under the caption “Security
Ownership” is incorporated herein by reference.
Item
13. Certain Relationships and Related Transactions, and Director
Independence
The
information in our 2007 Proxy Statement set forth under the caption “The Board
of Directors” and the subcaption “Certain Relationships” is incorporated herein
by reference.
Item
14. Principal Accountant Fees and Services
The
information in our 2007 Proxy Statement set forth under the caption
“Ratification of Appointment of Independent Registered Public Accounting Firm”
is incorporated herein by reference.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
(a) Listed
below are all financial statements and schedules filed as part of this
report:
1
- The
consolidated financial statements and notes to consolidated financial statements
together with the report thereon of Deloitte & Touche LLP, dated March 1,
2007, are filed as part of this report under Item 8- Financial Statements and
Supplementary Data.
2
-
Supplementary Financial Information
Information
regarding selected quarterly financial data can be found on pages 71 and 72
of
this report.
Supplemental
Schedules as of December 31, 2006 and 2005 and for the three years ended
December 31, 2006, 2005, and 2004:
Report
of
Independent Registered Public Accounting Firm of Deloitte & Touche LLP (page
87).
Schedule
I - Statements of Income, Statements of Comprehensive Income, Statements of
Retained Earnings, Statements of Cash Flows and Balance Sheets of SJI (pages
88-90).
Schedule
II - Valuation and Qualifying Accounts (page 93).
All
schedules, other than that listed above, are omitted because the information
called for is included in the financial statements filed or because they are
not
applicable or are not required.
(b) List
of
Exhibits (Exhibit Number is in Accordance with the Exhibit Table in Item 601
of
Regulation S-K).
Exhibit
Number
|
Description
|
Reference
|
(3)(a)(i)
|
Certificate
of Incorporation of South Jersey Industries, Inc., as amended through
April 19, 1984.
|
Incorporated
by reference from Exhibit (4)(a) of Form S-2 (2-91515).
|
(3)(a)(ii)
|
Amendment
to Certificate of Incorporation relating to two-for-one stock split
effective as of April 28, 1987.
|
Incorporated
by reference from Exhibit (4)(e)(1) of Form S-3
(33-1320).
|
(3)(a)(iii)
|
Amendment
to Certificate of Incorporation relating to director and officer
liability.
|
Incorporated
by reference from Exhibit (4)(e)(2) of Form S-3
(33-1320).
|
(3)(a)(iv)
|
Amendment
to Certificate of Incorporation relating to two-for-one stock split
effective as of June 30, 2005.
|
Incorporated
by reference from Exhibit 3 of Form 10-Q of SJI filed on May 10,
2005.
|
Exhibit
Number
|
Description
|
Reference
|
(3)(b)
|
Bylaws
of South Jersey Industries, Inc. as amended and restated through
May 25,
2006 (filed herewith).
|
|
(4)(a)
|
Form
of Stock Certificate for common stock.
|
Incorporated
by reference from Exhibit (4)(a) of Form 10-K for 1985
(1-6364).
|
(4)(b)(i)
|
First
Mortgage Indenture dated October 1, 1947.
|
Incorporated
by reference from Exhibit (4)(b)(i) of Form 10-K for 1987
(1-6364).
|
(4)(b)(ii)
|
Nineteenth
Supplemental Indenture dated as of April 1, 1992.
|
Incorporated
by reference from Exhibit (4)(b)(xvii) of Form 10-K for 1992
(1-6364).
|
(4)(b)(iii)
|
Twenty-First
Supplemental Indenture dated as of March 1, 1997.
|
Incorporated
by reference from Exhibit (4)(b)(xviv) of Form 10-K for
1997(1-6364).
|
(4)(b)(iv)
|
Twenty-Second
Supplemental Indenture dated as of October 1, 1998.
|
Incorporated
by reference from Exhibit (4)(b)(ix) of Form S-3
(333-62019).
|
(4)(b)(v)
|
Twenty-Third
Supplemental Indenture dated as of September 1, 2002.
|
Incorporated
by reference from Exhibit (4)(b)(x) of Form S-3
(333-98411).
|
(4)(b)(vi)
|
Twenty-Fourth
Supplemental Indenture dated as of September 1, 2005.
|
Incorporated
by reference from Exhibit (4)(b)(vi) of Form S-3
(333-126822).
|
(4)(b)(vii)
|
Amendment
to Twenty-Fourth Supplemental Indenture dated as of March 31,
2006
|
Incorporated
by reference from Exhibit 4 of Form 8-K of SJG as filed April 26,
2006.
|
(4)(b)(viii)
|
Loan
Agreement by and between New Jersey Economic Development Authority
and SJG
dated April 1, 2006.
|
Incorporated
by reference from Exhibit 10 of Form 8-K of SJG as filed April 26,
2006.
|
(4)(c)(i)
|
Medium
Term Note Indenture of Trust dated October 1, 1998.
|
Incorporated
by reference from Exhibit 4(e) of Form S-3 (333-62019).
|
(4)(c)(ii)
|
First
Supplement to Indenture of Trust dated as of June 29,
2000.
|
Incorporated
by reference from Exhibit 4.1 of Form 8-K of SJG dated July 12,
2001.
|
(4)(c)(iii)
|
Second
Supplement to Indenture of Trust dated as of July 5, 2000.
|
Incorporated
by reference from Exhibit 4.2 of Form 8-K of SJG dated July 12,
2001.
|
(4)(c)(iv)
|
Third
Supplement to Indenture of Trust dated as of July 9, 2001.
|
Incorporated
by reference from Exhibit 4.3 of Form 8-K of SJG dated July 12,
2001.
|
(10)(a)(i)
|
Gas
storage agreement (GSS) between South Jersey Gas Company and Transco
dated
October 1, 1993.
|
Incorporated
by reference from Exhibit (10)(d) of Form 10-K for 1993
(1-6364).
|
Exhibit
Number
|
Description
|
Reference
|
(10)(a)(ii)
|
Gas
storage agreement (LG-A) between South Jersey Gas Company and Transco
dated June 3, 1974.
|
Incorporated
by reference from Exhibit (5)(f) of Form S-7 (2-56223).
|
(10)(a)(iii)
|
Gas
storage agreement (WSS) between South Jersey Gas Company and Transco
dated
August 1, 1991.
|
Incorporated
by reference from Exhibit (10)(h) of Form 10-K for 1991
(1-6364).
|
(10)(a)(iv)
|
Gas
storage agreement (LSS) between South Jersey Gas Company and Transco
dated
October 1, 1993.
|
Incorporated
by reference from Exhibit (10)(i) of Form 10-K for 1993
(1-6364).
|
(10)(a)(v)
|
Gas
storage agreement (SS-1) between South Jersey Gas Company and Transco
dated May 10, 1987 (effective April 1, 1988).
|
Incorporated
by reference from Exhibit (10)(i)(a) of Form 10-K for 1988
(1-6364).
|
(10)(b)(i)
|
Gas
storage agreement (SS-2) between South Jersey Gas Company and Transco
dated July 25, 1990.
|
Incorporated
by reference from Exhibit (10)(i)(i) of Form 10-K for 1991
(1-6364).
|
(10)(b)(ii)
|
Gas
transportation service agreement between South Jersey Gas Company
and
Transco dated December 20, 1991.
|
Incorporated
by reference from Exhibit (10)(i)(j) of Form 10-K for 1993
(1-6364).
|
(10)(b)(iii)
|
Amendment
to gas transportation agreement dated December 20, 1991 between
South
Jersey Gas Company and Transco dated October 5, 1993.
|
Incorporated
by reference from Exhibit (10)(i)(k) of Form 10-K for 1993
(1-6364).
|
(10)(b)(iv)
|
CNJEP
Service agreement between South Jersey Gas Company and Transco
dated
June
27, 2005.
|
Incorporated
by reference
frm Exhibit (10)(i)(l) of Form 10-K for 2005
(1-6364).
|
(10)(b)(v)
|
Gas
transportation service agreement (TF) between South Jersey Gas
Company and
CNG Transmission Corporation dated October 1, 1993.
|
Incorporated
by reference from Exhibit (10)(k)(h) of Form 10-K for 1993
(1-6364).
|
(10)(c)(i)
|
Gas
transportation service agreement (FTS-1) between South Jersey Gas
Company
and Columbia Gulf Transmission Company dated November 1,
1993.
|
Incorporated
by reference from Exhibit (10)(k)(k) of Form 10-K for 1993
(1-6364).
|
(10)(c)(ii)
|
FTS
Service Agreement No. 39556 between South Jersey Gas Company and
Columbia
Gas Transmission Corporation dated November 1, 1993.
|
Incorporated
by reference from Exhibit (10)(k)(m) of Form 10-K for 1993
(1-6364).
|
Exhibit
Number
|
Description |
Reference
|
(10)(c)(iii)
|
FTS
Service Agreement No. 38099 between South Jersey Gas Company and
Columbia
Gas Transmission Corporation dated November 1, 1993.
|
Incorporated
by reference from Exhibit (10)(k)(n) of Form 10-K for 1993
(1-6364).
|
(10)(c)(iv)
|
NTS
Service Agreement No. 39305 between South Jersey Gas Company and
Columbia
Gas Transmission Corporation dated November 1, 1993.
|
Incorporated
by reference from Exhibit (10)(k)(o) of Form 10-K for 1993
(1-6364).
|
(10)(c)(v)
|
FSS
Service Agreement No. 38130 between South Jersey Gas Company and
Columbia
Gas Transmission Corporation dated November 1, 1993.
|
Incorporated
by reference from Exhibit (10)(k)(p) of Form 10-K for 1993
(1-6364).
|
(10)(d)(i)
|
SST
Service Agreement No. 38086 between South Jersey Gas Company and
Columbia
Gas Transmission Corporation dated November 1, 1993.
|
Incorporated
by reference from Exhibit (10)(k)(q) of Form 10-K for 1993
(1-6364).
|
(10)(e)(i)*
|
Deferred
Payment Plan for Directors of South Jersey Industries, Inc., South
Jersey
Gas Company, Energy & Minerals, Inc., R&T Group, Inc. and South
Jersey Energy Company as amended and restated October 21,
1994.
|
Incorporated
by reference from Exhibit (10)(l) of Form 10-K for 1994
(1-6364).
|
(10)(e)(ii)*
|
Form
of Deferred Compensation Agreement between South Jersey Industries,
Inc.
and/or a subsidiary and seven of its officers.
|
Incorporated
by reference from Exhibit (10)(j)(a) of Form 10-K for 1980
(1-6364).
|
(10)(e)(iii)*
|
Schedule
of Deferred Compensation Agreements.
|
Incorporated
by reference from Exhibit (10)(l)(b) of Form 10-K for 1997
(1-6364).
|
(10)(e)(iv)*
|
Form
of Officer Employment Agreement between certain officers and either
South
Jersey Industries, Inc. or its subsidiaries.
|
Incorporated
by reference from Exhibit (10)(l)(d) of Form 10-K for 1999
(1-6364).
|
(10)(e)(v)*
|
Schedule
of Officer Employment Agreements.
|
Incorporated
by reference from Exhibit (10)(l)(e) of Form 10-K of SJI for
2003.
|
(10)(f)(i)*
|
Officer
Severance Benefit Program for all Officers.
|
Incorporated
by reference from Exhibit (10)(l)(g) of Form 10-K for 1985
(1-6364).
|
(10)(f)(ii)*
|
Supplemental
Executive Retirement Program, as amended and restated effective July
1,
1997, and Form of Agreement between certain SJI or subsidiary
officers.
|
Incorporated
by reference from Exhibit (10)(l)(i) of Form 10-K for 1997
(1-6364).
|
(10)(f)(iii)*
|
South
Jersey Industries, Inc. 1997 Stock-Based Compensation Plan (As Amended
and
Restated Effective January 1, 1999).
|
Incorporated
by reference from Exhibit (10)(l)(j) of Form 10-K for 1999
(1-6364).
|
Exhibit
Number
|
Description
|
Reference
|
(10)(f)(iv)*
|
South
Jersey Industries, Inc. 1997 Stock-Based Compensation Plan (As Amended
and
Restated Effective January 26, 2005).
|
Incorporated
by reference from Exhibit 10 of Form 10-Q of SJI as filed May 10,
2005.
|
(10)(g)(i)
|
Five-year
Revolving Credit Agreement for SJI.
|
Incorporated
by reference from Exhibit 10 of Form 8-K of SJI as filed August 22,
2006.
|
(10)(g)(ii)
|
Five-year
Revolving Credit Agreement for SJG.
|
Incorporated
by reference from Exhibit 10 of Form 8-K of SJI as filed on August
8,
2006.
|
(12)
|
Calculation
of Ratio of Earnings to Fixed Charges (Before Federal Income Taxes)
(filed
herewith).
|
|
(14)
|
Code
of Ethics.
|
Incorporated
by reference from Exhibit (14) of Form 10-K of SJI as filed for
2003.
|
(21)
|
Subsidiaries
of the Registrant (filed herewith).
|
|
(23)
|
Independent
Registered Public Accounting Firm’s Consent (filed
herewith).
|
|
(31.1)
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
|
|
(31.2)
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
|
|
(32.1)
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
|
|
(32.2)
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
|
|
*
Constitutes a management contract or a compensatory plan or
arrangement.
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 INDUSTRIES, INC.
BY:
/s/
David A. Kindlick
David
A.
Kindlick
Vice
President & Chief Financial Officer
Date
March
1, 2007
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
|
|
|
|
|
|
/s/
Edward J.
Graham
|
President,
Chairman of the Board & Chief Executive Officer
|
March
1, 2007
|
(Edward
J. Graham)
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
David A.
Kindlick
|
Vice
President & Chief Financial Officer
|
March
1, 2007
|
(David
A. Kindlick)
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Richard H. Walker, Jr.
|
Vice
President, General Counsel &
|
March
1, 2007
|
(Richard
H. Walker, Jr.)
|
Secretary
|
|
|
|
|
|
|
|
/s/
Shirli M.
Billings
|
Director
|
March
1, 2007
|
(Shirli
M. Billings)
|
|
|
|
|
|
|
|
|
|
Director
|
|
(Helen
R. Bosley)
|
|
|
|
|
|
/s/
Thomas A. Bracken
|
Director
|
March
1, 2007
|
(Thomas
A. Bracken)
|
|
|
|
|
|
|
|
|
/s/
Keith S. Campbell
|
Director
|
March
1, 2007
|
(Keith
S. Campbell)
|
|
|
|
|
|
|
|
|
/s/
W. Cary Edwards
|
Director
|
March
1, 2007
|
(W.
Cary Edwards)
|
|
|
|
|
|
|
|
|
/s/
Sheila Hartnett-Devlin
|
Director
|
March
1, 2007
|
(Sheila
Hartnett-Devlin)
|
|
|
|
|
|
|
|
|
/s/
William J.
Hughes
|
Director
|
March
1, 2007
|
(William
J. Hughes)
|
|
|
|
|
|
|
|
|
|
Director
|
|
(Herman
D. James)
|
|
|
|
|
|
|
|
|
/s/
Frederick R.
Raring
|
Director
|
March
1, 2007
|
(Frederick
R. Raring)
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
South
Jersey Industries, Inc.
Folsom,
New Jersey
We
have
audited the consolidated financial statements of South Jersey Industries,
Inc.
and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and for each
of the three years in the period ended December 31, 2006, management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of December 31, 2006, and the effectiveness of the Company's
internal control over financial reporting as of December 31, 2006, and have
issued our reports thereon dated March 1, 2007 (which report on the consolidated
financial statements expresses an unqualified opinion and includes explanatory
paragraphs as to changes in accounting principles for stock-based compensation
and postretirement benefits in 2006 and asset retirement obligations in 2005,
and concerning the restatement of the 2005 and 2004 consolidated financial
statements; and which report on the effectiveness of the Company’s internal
control over financial reporting expresses an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an adverse opinion on the effectiveness of the
Company's internal control over financial reporting because of a material
weakness); such consolidated financial statements and reports are included
elsewhere in this Form 10-K. Our audits also included the consolidated financial
statement schedules of the Company listed in Item 15(a)2. These consolidated
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In
our opinion, such consolidated financial statement schedules, when considered
in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth
therein.
As
discussed in Note A to Schedule I, the accompanying 2005 and 2004 financial
statements in Schedule I have been restated.
/s/
DELOITTE & TOUCHE LLP
Philadelphia,
Pennsylvania
March
1,
2007
|
|
STATEMENTS
OF INCOME
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(As Restated
See
Note A)
|
|
|
(As Restated
See
Note A)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
$
|
5,083
|
|
$
|
2,788
|
|
$
|
2,491
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
4,352
|
|
|
4,183
|
|
|
4,146
|
|
Depreciation
|
|
|
78
|
|
|
100
|
|
|
102
|
|
Energy
and Other Taxes
|
|
|
147
|
|
|
285
|
|
|
391
|
|
Total
Operating Expenses
|
|
|
4,577
|
|
|
4,568
|
|
|
4,639
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
506
|
|
|
(1,780
|
)
|
|
(2,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income:
|
|
|
|
|
|
|
|
|
|
|
Equity
in Earnings of Subs
|
|
|
72,250
|
|
|
39,485
|
|
|
43,238
|
|
Other
|
|
|
3,196
|
|
|
1,366
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Income
|
|
|
75,446
|
|
|
40,851
|
|
|
43,655
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Charges
|
|
|
3,689
|
|
|
988
|
|
|
619
|
|
Income
Taxes
|
|
|
13
|
|
|
(909
|
)
|
|
(1,519
|
)
|
Equity
in Affiliated Companies
|
|
|
-
|
|
|
(778
|
)
|
|
(766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
|
72,250
|
|
|
39,770
|
|
|
43,173
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in Undistributed Earnings of Discontinued
Subsidiaries
|
|
|
(818 |
) |
|
(669 |
)
|
|
(680 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
71,432
|
|
$
|
39,101
|
|
$
|
42,493
|
|
|
|
|
|
|
|
|
|
|
|
|
See
South Jersey Industries, Inc. and Subsidiaries Notes to Consolidated
Financial Statements under Item 8.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I - SOUTH JERSEY INDUSTRIES, INC.
|
STATEMENTS
OF COMPREHENSIVE INCOME
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(As Restated
See
Note A)
|
|
|
(As Restated
See
Note A)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
71,432
|
|
$
|
39,101
|
|
$
|
42,493
|
|
Other
Comprehensive (Loss) Income:
|
|
|
|
|
|
|
|
|
|
|
Minimum
Pension Liability Adjustment
|
|
|
(439
|
)
|
|
427
|
|
|
(1,077
|
)
|
Unrealized
Gain (Loss) on Equity Investments
|
|
|
53
|
|
|
63
|
|
|
(192
|
)
|
Unrealized
Gain (Loss) on Derivatives
|
|
|
260
|
|
|
(2
|
)
|
|
(26
|
)
|
Total
Other Comprehensive (Loss) Income
|
|
|
(126
|
)
|
|
488
|
|
|
(1,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$
|
71,306
|
|
$
|
39,589
|
|
$
|
41,198
|
|
|
|
|
|
|
|
|
|
|
|
|
See
South Jersey Industries, Inc. and Subsidiaries Notes to Consolidated
Financial Statements under Item 8.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I - SOUTH JERSEY INDUSTRIES, INC.
|
STATEMENTS
OF RETAINED EARNINGS
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(As Restated
See
Note A)
|
|
|
(As Restated
See
Note A)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
Earnings - Beginning
|
|
$
|
130,001
|
|
$
|
115,859
|
|
$
|
95,900
|
|
Net
Income
|
|
|
71,432
|
|
|
39,101
|
|
|
42,493
|
|
|
|
|
201,433
|
|
|
154,960
|
|
|
138,393
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
Declared - Common Stock
|
|
|
(27,026
|
)
|
|
(24,959
|
)
|
|
(22,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Retained
Earnings - Ending
|
|
$
|
174,407
|
|
$
|
130,001
|
|
$
|
115,859
|
|
|
|
|
|
|
|
|
|
|
|
|
See
South Jersey Industries, Inc. and Subsidiaries Notes to Consolidated
Financial Statements under Item 8.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I - SOUTH JERSEY INDUSTRIES, INC.
|
|
STATEMENTS
OF CASH FLOWS
|
FOR
THE TWELVE MONTHS ENDED DECEMBER 31,
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(As Restated
See
Note A)
|
|
|
(As Restated
See
Note A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
PROVIDED BY OPERATING ACTIVITIES
|
|
$ |
23,568
|
|
$ |
25,235
|
|
$ |
9,434
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in Affiliate
|
|
|
(1,726
|
)
|
|
(30,000
|
)
|
|
(19,000
|
) |
Capital
Expenditures
|
|
|
(63
|
)
|
|
(83
|
)
|
|
(82
|
)
|
Other
|
|
|
18
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Used In Investing Activities
|
|
|
(1,771
|
)
|
|
(30,083
|
)
|
|
(19,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Repayments to Associated Companies
|
|
|
(32,030
|
)
|
|
(24,272
|
)
|
|
(6,648
|
)
|
Net
Borrowings from Lines of Credits
|
|
|
30,800
|
|
|
21,000
|
|
|
13,700
|
|
Dividends
on Common Stock
|
|
|
(26,874
|
)
|
|
(24,397
|
)
|
|
(22,534
|
)
|
Proceeds
from Sale of Common Stock
|
|
|
6,606
|
|
|
31,882
|
|
|
25,330
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash (Used in) Provided by Financing Activities
|
|
|
(21,498
|
)
|
|
4,213
|
|
|
9,848
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
|
|
|
299
|
|
|
(635
|
)
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
|
|
154 |
|
|
789 |
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
453
|
|
$
|
154
|
|
$
|
789
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
received from subsidiaries amounted to $19.9 million, $22.5 million
and
$9.1 million in 2006, 2005, and 2004 respectively. |
|
|
|
See
South Jersey Industries, Inc. and Subsidiaries Notes to Consolidated
Financial Statements under Item 8.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I - SOUTH JERSEY INDUSTRIES, INC.
|
|
BALANCE
SHEETS
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
(As Restated
See
Note A)
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
Plant and Equipment:
|
|
|
|
|
|
|
|
Nonutility
Property, Plant and Equipment, at cost
|
|
$
|
1,076
|
|
$
|
1,213
|
|
Accumulated
Depreciation
|
|
|
(308
|
)
|
|
(379
|
)
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment - Net
|
|
|
768
|
|
|
834
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Investments
in Subsidiaries
|
|
|
446,538
|
|
|
394,188
|
|
Available-for-Sale
Securities
|
|
|
15
|
|
|
14
|
|
Investment
in Affiliates
|
|
|
40
|
|
|
1,277
|
|
|
|
|
|
|
|
|
|
Total
Investments
|
|
|
446,593
|
|
|
395,479
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
|
453
|
|
|
154
|
|
Notes
Receivable - Associated Companies
|
|
|
92,240
|
|
|
58,610
|
|
Accounts
Receivable
|
|
|
10
|
|
|
11
|
|
Accounts
Receivable - Associated Companies
|
|
|
4,434
|
|
|
7,296
|
|
Other
|
|
|
338
|
|
|
1061
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
97,475
|
|
|
67,132
|
|
|
|
|
|
|
|
|
|
Other
Noncurrent Assets
|
|
|
1,977
|
|
|
3,597
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
546,813
|
|
$
|
467,042
|
|
|
|
|
|
|
|
|
|
Capitalization
and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Equity:
|
|
|
|
|
|
|
|
Common
Stock SJI
|
|
|
|
|
|
|
|
Par Value $1.25 a share
|
|
|
|
|
|
|
|
Authorized - 60,000,000 shares
|
|
|
|
|
|
|
|
Outstanding - 29,325,593 shares and 28,982,440
|
|
$
|
36,657
|
|
$
|
36,228
|
|
Premium
on Common Stock
|
|
|
239,763
|
|
|
231,861
|
|
Accumulated
Other Comprehensive Loss
|
|
|
(7,791
|
)
|
|
(4,445
|
)
|
Retained
Earnings
|
|
|
174,407
|
|
|
130,001
|
|
|
|
|
|
|
|
|
|
Total
Common Equity
|
|
|
443,036
|
|
|
393,645
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Notes
Payable - Banks
|
|
|
91,100
|
|
|
60,300
|
|
Notes
Payable - Associated Companies
|
|
|
8,410
|
|
|
6,810
|
|
Accounts
Payable
|
|
|
1,199
|
|
|
2,308
|
|
Accounts
Payable to Associated Companies
|
|
|
342
|
|
|
677
|
|
Other
Current Liabilities
|
|
|
251
|
|
|
411
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
101,302
|
|
|
70,506
|
|
|
|
|
|
|
|
|
|
Other
Noncurrent Liabilities
|
|
|
2,475
|
|
|
2,891
|
|
|
|
|
|
|
|
|
|
Total
Capitalization and Liabilities
|
|
$
|
546,813
|
|
$
|
467,042
|
|
|
|
|
|
|
|
|
|
See
South Jersey Industries, Inc. and Subsidiaries Notes to Consolidated
Financial Statements under Item 8.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I
NOTE
A.
RESTATEMENT OF FINANCIAL INFORMATION:
As
discussed in Note 16 to the consolidated financial statements, the Company’s
financial statements for the years ended December 31, 2005 and 2004 have
been
restated. The financial statements of the parent company presented herein,
have
been restated to reflect the effects of this restatement at the wholly-owned
subsidiaries which are accounted for on the equity method for purposes of
this
Schedule I. This restatement removes amounts that were previously recorded
through Accumulated Other Comprehensive Loss on the Balance Sheets and reflects
them in Equity in Earnings of Subsidiaries on the Statements of Income in
this
Schedule I.
In
addition, subsequent to the issuance of Schedule I included in the 2005 Form
10-k, it was determined that the Balance Sheets of the parent company did
not
reflect the parent company’s interest in the Accumulated Other Comprehensive
Income (Loss) of it’s wholly owned subsidiaries or its obligation to issue
shares of common stock on behalf of its wholly owned subsidiaries under the
stock-based compensation plan. As a result, Investments in Subsidiaries,
Accounts Receivable - Associated Companies, Accumulated Other Comprehensive
Loss
and Premium on Common Stock on the Balance Sheets of the parent company in
this
Schedule I have been restated. It was also determined that the cash distributed
from wholly owned subsidiaries should have been reflected in Cash Flows from
Operating Activities instead of Cash Flows from Investing Activities on the
Statements of Cash Flows of the parent company in this Schedule I, and as
such,
those amounts have been restated.
EFFECTS
OF RESTATEMENT
The
following tables set forth the effects of the restatement on affected line
items
within the previously reported financial statements on Schedule I for the
years
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
|
|
|
As
Previously
|
|
|
|
|
|
As
Previously
|
|
|
|
|
(in
thousands)
|
|
|
Reported
|
|
|
As
Restated
|
|
|
Reported
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in Earnings of Subs
|
|
$
|
48,303
|
|
$
|
39,485
|
|
$
|
43,038
|
|
$
|
43,238
|
|
Total
Other Income
|
|
|
49,669
|
|
|
40,851
|
|
|
43,455
|
|
|
43,655
|
|
Income
from Continuing Operations
|
|
|
48,588
|
|
|
39,770
|
|
|
42,973
|
|
|
43,173
|
|
Net
Income
|
|
|
47,919
|
|
|
39,101
|
|
|
42,293
|
|
|
42,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
47,919
|
|
|
39,101
|
|
|
42,293
|
|
|
42,493
|
|
Minimum
Pension Liability Adjustment
|
|
|
4
|
|
|
427
|
|
|
(3
|
)
|
|
(1,077
|
)
|
Unrealized
Gain (Loss) on Equity Investments
|
|
|
- |
|
|
63
|
|
|
- |
|
|
(192
|
)
|
Unrealized
Gain (Loss) on Derivatives
|
|
|
- |
|
|
(2
|
)
|
|
- |
|
|
(26
|
)
|
Total
Other Comprehensive (Loss) Income
|
|
|
4
|
|
|
488
|
|
|
(3
|
)
|
|
(1,295
|
)
|
Comprehensive
Income
|
|
|
47,923
|
|
|
39,589
|
|
|
42,290
|
|
|
41,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in Subsidiaries
|
|
|
402,989
|
|
|
394,188
|
|
|
|
|
|
|
|
Total
Investments
|
|
|
404,280
|
|
|
395,479
|
|
|
|
|
|
|
|
Accounts
Receivable - Associated Companies
|
|
|
2,704
|
|
|
7,296
|
|
|
|
|
|
|
|
Other
|
|
|
121
|
|
|
1,061
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
61,600
|
|
|
67,132
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
470,310
|
|
|
467,042
|
|
|
|
|
|
|
|
Premium
on Common Stock
|
|
|
227,269
|
|
|
231,861
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Loss
|
|
|
1
|
|
|
(4,445
|
)
|
|
|
|
|
|
|
Retained
Earnings
|
|
|
134,357
|
|
|
130,001
|
|
|
|
|
|
|
|
Total
Common Equity
|
|
|
397,855
|
|
|
393,645
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
69,566
|
|
|
70,506
|
|
|
|
|
|
|
|
Total
Capitalization and Liabilities
|
|
|
470,310
|
|
|
467,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Cash Provided By Operating Activities
|
|
|
2,760
|
|
|
25,235
|
|
|
177
|
|
|
9,434
|
|
Net
Cash Used in Investing Activities
|
|
|
(7,608
|
)
|
|
(30,083
|
)
|
|
(9,825
|
)
|
|
(19,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
Earnings - Beginning
|
|
|
111,397
|
|
|
115,859
|
|
|
91,638
|
|
|
95,900
|
|
Net
Income
|
|
|
47,919
|
|
|
39,101
|
|
|
42,293
|
|
|
42,493
|
|
Retained
Earnings - Ending
|
|
|
134,357
|
|
|
130,001
|
|
|
111,397
|
|
|
115,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Col.
A
|
|
Col.
B
|
|
Col.
C
|
|
Col.
D
|
|
Col.
E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
|
Balance
at Beginning of Period
|
|
|
Charged
to Costs and Expenses
|
|
|
Charged
to Other Accounts - Describe (a)
|
|
|
Deductions
- Describe (b)
|
|
|
Balance
at End of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Uncollectible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
for the Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$
|
5,871
|
|
$
|
1,466
|
|
$
|
428
|
|
$
|
2,541
|
|
$
|
5,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Uncollectible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
for the Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
$
|
3,495
|
|
$
|
3,910
|
|
$
|
85
|
|
$
|
1,619
|
|
$
|
5,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Uncollectible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
for the Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004
|
|
$
|
3,565
|
|
$
|
1,171
|
|
$
|
1,716
|
|
$
|
2,957
|
|
$
|
3,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Recoveries of accounts previously written off and minor
adjustments.
|
|
|
|
|
|
|
(b)
Uncollectible accounts written off.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|