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SOUTH JERSEY INDUSTRIES INC - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to ______________________
Commission
File Number
Exact name of registrant as
specified in its charter
State of
Incorporation
I.R.S.
Employer
Identification No.
Securities registered pursuant to Section 12(b) of the Act (Title of each class):
Trading Symbol
Name of exchange on which registered
1-6364
South Jersey Industries, Inc.
New Jersey
22-1901645
Common Stock - $1.25 par value per share
SJI
New York Stock Exchange
000-22211
South Jersey Gas Co
New Jersey
21-0398330
None
N/A
N/A
 
Address of principal executive offices
City
State
Zip Code
Registrant's telephone number, including area code
South Jersey Industries, Inc.
1 South Jersey Plaza
Folsom
New Jersey
08037
(609)
561-9000
South Jersey Gas Co
1 South Jersey Plaza
Folsom
New Jersey
08037
(609)
561-9000

Indicate by check mark whether each 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 such registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.   Yes ☒   No ☐

Indicate by check mark whether each registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that such registrant was required to submit such files). Yes ☒   No ☐

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
South Jersey Industries, Inc.:
 
 
 
Large accelerated filer
☒
Accelerated filer      
☐
Non-accelerated filer    
☐
Smaller reporting company     
☐
Emerging growth company     
☐
 
 
South Jersey Gas Co:
 
 
 
Large accelerated filer   
☐
Accelerated filer      
☐
Non-accelerated filer
☒
Smaller reporting company     
☐
Emerging growth company     
☐
 
 
If an emerging growth company, indicate by check mark if either registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether either registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
  No ☒


South Jersey Industries, Inc. (SJI) common stock ($1.25 par value) outstanding as of August 1, 2019 was 92,390,349 shares. South Jersey Gas Co common stock ($2.50 par value) outstanding as of August 1, 2019 was 2,339,139 shares. All of South Jersey Gas Co's outstanding shares of common stock are held by SJI Utilities, Inc, which is a wholly-owned subsidiary of SJI.
South Jersey Gas Co is a wholly-owned subsidiary of SJI Utilities, Inc. and meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q. As such, South Jersey Gas Co files its Quarterly Report on Form 10-Q with the reduced disclosure format authorized by General Instruction H.


TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page No.
Item 1.
Financial Statements (Unaudited)
 
South Jersey Industries, Inc.
 
 
 
 
 
 
 
 
 
 
South Jersey Gas Company
 
 
 
 
 
 
 
 
 
 
 
  South Jersey Industries, Inc. and South Jersey Gas Company - Combined
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Note 19. Leases
 
Item 2.
 
 
Item 3.
Item 4.
PART II
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 6.
 
 
 

Table of Contents

GLOSSARY OF TERMS AND ABBREVIATIONS

ACB
ACB Energy Partners, LLC
ACLE
AC Landfill Energy, LLC
Acquisition
The Company's acquisition of the assets of Elizabethtown Gas Company and Elkton Gas Company effective July 1, 2018, from Pivotal Utility Holdings, Inc., a subsidiary of Southern Company Gas
AFUDC
Allowance for Funds During Construction
AIRP
Accelerated Infrastructure Replacement Program
AMA
Asset Management Agreement
AOCL
Accumulated Other Comprehensive Loss
ARO
Asset Retirement Obligation
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Bcf
One billion cubic feet
BCLE
BC Landfill Energy, LLC
BGSS
Basic Gas Supply Service
BPU
New Jersey Board of Public Utilities
CEGR
Compounded Earnings Annual Growth Rate
CHP
Combined Heat and Power
CIP
Conservation Incentive Program
CLEP
Clean Energy Program
CODM
Chief Operating Decision Maker
DRP
Dividend Reinvestment Plan
dt
Decatherm
dts/d
Decatherms per day
EEP
Energy Efficiency Program
EET
Energy Efficiency Tracker
EGR
Earnings Growth Rate
ELK
Elkton Gas Company
EMI
Energy & Minerals, Inc.
EnerConnex
EnerConnex, LLC
Energenic
Energenic US, LLC
EnergyMark
EnergyMark, LLC
EPS
Earnings Per Share
ERIP
Early Retirement Incentive Program
ERISA
Employee Retirement Income Security Act of 1974
ETG
Elizabethtown Gas Company
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
GAAP
Generally Accepted Accounting Principles for financial reporting in the United States
IAM
International Association of Machinists and Aerospace Workers
IBEW
International Brotherhood of Electrical Workers
IIP
Infrastructure Investment Programs
LFGTE
Landfill Gas-to-Energy
LIBOR
London Interbank Offer Rate
LMP
Locational Marginal Price
Marina
Marina Energy, LLC

4
Table of Contents

Mcf
One thousand cubic feet
Midstream
SJI Midstream, LLC
Millennium
Millennium Account Services, LLC
MPSC
Maryland Public Service Commission
MMdts
One million decatherms
MMmwh
One million megawatt hours
Morie
The Morie Company, Inc.
MTN
Medium Term Notes
MW
Megawatts
MWh
Megawatt-hours
Non-GAAP
The financial measures that are not prepared in accordance with U.S. GAAP
NPA
Note Purchase Agreement
NJEDA
New Jersey Economic Development Authority
NYMEX
New York Mercantile Exchange
OSS
Off-System Sales
PennEast
PennEast Pipeline, LLC
Potato Creek
Potato Creek, LLC
RAC
Remediation Adjustment Clause
ROE
Return on Equity
SBC
Societal Benefits Clause
SCLE
SC Landfill Energy, LLC
SEC
Securities and Exchange Commission
SERP
Supplemental Executive Retirement Plan
SHARP
Storm Hardening and Reliability Program
SJE
South Jersey Energy Company
SJES
South Jersey Energy Solutions, LLC
SJESP
South Jersey Energy Service Plus, LLC
SJEX
South Jersey Exploration, LLC
SJF
South Jersey Fuel, Inc.
SJG
South Jersey Gas Co or South Jersey Gas Company
SJI
South Jersey Industries, Inc., or the Company
SJIU
SJI Utilities, Inc.
SJRG
South Jersey Resources Group, LLC
SRECs
Solar Renewable Energy Credits
SXLE
SX Landfill Energy, LLC
Tax Reform
Tax Cuts and Jobs Act which was enacted into law on December 22, 2017
TIC
Transportation Initiation Clause
TSA
Transition Services Agreement
TSR
Total Shareholder Return
USF
Statewide Universal Service Fund
Utilities
Represents SJI's three utility businesses: SJG, ETG, and ELK
UWUA
United Workers Union of America
VIE
Variable Interest Entity
WNC
Weather Normalization Clause



5
Table of Contents


INTRODUCTION

FILING FORMAT

This Quarterly Report on Form 10-Q is a combined report being filed separately by two registrants: South Jersey Industries, Inc. (SJI) and South Jersey Gas Company (SJG). Information relating to SJI or any of its subsidiaries, other than SJG, is filed by SJI on its own behalf. SJG is only responsible for information about itself.

Except where the content clearly indicates otherwise, any reference in the report to "SJI," "the Company," "we," "us" or "our" is to the holding company or SJI and all of its subsidiaries, including SJG, which is a wholly-owned subsidiary of SJI Utilities, Inc. (which is wholly-owned by SJI).

Part 1 - Financial information in this Quarterly Report on Form 10-Q includes separate financial statements (i.e., balance sheets, statements of income, statements of comprehensive income, statements of equity and statements of cash flows) for SJI and SJG. The Notes to Unaudited Condensed Consolidated Financial Statements are presented on a combined basis for both SJI and SJG. Management's Discussion and Analysis of Financial Condition and Results of Operations (Management's Discussion) included under Item 2 is divided into two major sections: SJI and SJG.


6
Table of Contents

Item 1. Condensed Consolidated Financial Statements
 
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
(In Thousands, Except for Per Share Data)
 
Three Months Ended
June 30,
 
2019
 
2018
Operating Revenues:
 
 
 
Utility
$
106,832

 
$
75,603

Nonutility
160,102

 
151,727

Total Operating Revenues
266,934

 
227,330

Operating Expenses:
 

 
 

Cost of Sales - (Excluding depreciation and amortization)
 

 
 

 - Utility
16,721

 
18,181

 - Nonutility
148,620

 
127,615

Operations
56,608

 
58,007

Impairment Charges
—

 
99,233

Maintenance
9,273

 
6,812

Depreciation
24,129

 
24,771

Energy and Other Taxes
2,717

 
1,243

Total Operating Expenses
258,068

 
335,862

Operating Income (Loss)
8,866

 
(108,532
)
 
 
 
 
Other Income and Expense
29

 
974

Interest Charges
(28,434
)
 
(19,561
)
Loss Before Income Taxes
(19,539
)
 
(127,119
)
Income Taxes
4,646

 
31,972

Equity in Earnings of Affiliated Companies
1,589

 
1,354

Loss from Continuing Operations
(13,304
)
 
(93,793
)
Loss from Discontinued Operations - (Net of tax benefit)
(95
)
 
(26
)
Net Loss
$
(13,399
)
 
$
(93,819
)
 
 
 
 
Basic Earnings Per Common Share:
 

 
 

Continuing Operations
$
(0.14
)
 
$
(1.12
)
Discontinued Operations
—

 
—

Basic Earnings Per Common Share
$
(0.14
)
 
$
(1.12
)
 
 
 
 
Average Shares of Common Stock Outstanding - Basic
92,389

 
84,080

 
 
 
 
Diluted Earnings Per Common Share:
 

 
 

Continuing Operations
$
(0.14
)
 
$
(1.12
)
Discontinued Operations
—

 
—

Diluted Earnings Per Common Share
$
(0.14
)
 
$
(1.12
)
 
 
 
 
Average Shares of Common Stock Outstanding - Diluted
92,389

 
84,080


The accompanying notes are an integral part of the condensed consolidated financial statements.

7
Table of Contents

 
 
 
 
 
Six Months Ended
June 30,
 
2019
 
2018
Operating Revenues:
 
 
 
Utility
$
521,178

 
$
307,371

Nonutility
383,054

 
441,904

Total Operating Revenues
904,232

 
749,275

Operating Expenses:
 

 
 

Cost of Sales - (Excluding depreciation and amortization)
 

 
 

 - Utility
205,170

 
105,298

 - Nonutility
362,558

 
323,566

Operations
119,434

 
105,051

Impairment Charges
—

 
99,233

Maintenance
18,903

 
13,674

Depreciation
47,814

 
49,433

Energy and Other Taxes
6,934

 
3,682

Total Operating Expenses
760,813

 
699,937

Operating Income
143,419

 
49,338

 
 
 
 
Other Income and Expense
2,604

 
3,735

Interest Charges
(57,087
)
 
(33,533
)
Income Before Income Taxes
88,936

 
19,540

Income Taxes
(20,303
)
 
(4,443
)
Equity in Earnings of Affiliated Companies
3,762

 
2,416

Income from Continuing Operations
72,395

 
17,513

Loss from Discontinued Operations - (Net of tax benefit)
(157
)
 
(92
)
Net Income
$
72,238

 
$
17,421

 
 
 
 
Basic Earnings Per Common Share:
 

 
 

Continuing Operations
$
0.79

 
$
0.21

Discontinued Operations
—

 
—

Basic Earnings Per Common Share
$
0.79

 
$
0.21

 
 
 
 
Average Shares of Common Stock Outstanding - Basic
91,863

 
81,850

 
 
 
 
Diluted Earnings Per Common Share:
 

 
 

Continuing Operations
$
0.79

 
$
0.21

Discontinued Operations
—

 
—

Diluted Earnings Per Common Share
$
0.79

 
$
0.21

 
 
 
 
Average Shares of Common Stock Outstanding - Diluted
91,979

 
82,302


The accompanying notes are an integral part of the condensed consolidated financial statements.


8
Table of Contents


SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In Thousands)
 
 
Three Months Ended
June 30,
 
2019
 
2018
Net Loss
$
(13,399
)
 
$
(93,819
)
 
 
 
 
Other Comprehensive Income, Net of Tax:*
 

 
 

 
 
 
 
Unrealized Gain on Derivatives - Other
8

 
8

 
 
 
 
Other Comprehensive Income - Net of Tax*
8

 
8

 
 
 
 
Comprehensive Loss
$
(13,391
)
 
$
(93,811
)
 
Six Months Ended
June 30,
 
2019
 
2018
Net Income
$
72,238

 
$
17,421

 
 
 
 
Other Comprehensive Income, Net of Tax:*
 
 
 
 
 
 
 
Unrealized Gain on Derivatives - Other
16

 
17

 
 
 
 
Other Comprehensive Income - Net of Tax*
16

 
17

 
 
 
 
Comprehensive Income
$
72,254

 
$
17,438


* Determined using a combined average statutory tax rate of approximately 27% and 25% in 2019 and 2018, respectively.

The accompanying notes are an integral part of the condensed consolidated financial statements.



9
Table of Contents

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
 
 
Six Months Ended
June 30,
 
2019
 
2018
Net Cash Provided by Operating Activities
$
216,079

 
$
152,828

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Capital Expenditures
(256,587
)
 
(125,973
)
Acquisition-related Working Capital Settlement
15,600

 
—

Proceeds from Sale of Property, Plant & Equipment
24,292

 
—

Investment in Long-Term Receivables
(6,585
)
 
(3,947
)
Proceeds from Long-Term Receivables
4,983

 
5,035

Purchase of Company-Owned Life Insurance
—

 
(574
)
Investment in Affiliates
(3,088
)
 
(8,413
)
Advances to Affiliates
(858
)
 
—

Net Repayment of Notes Receivable - Affiliates
—

 
2,006

 
 
 
 
Net Cash Used in Investing Activities
(222,243
)
 
(131,866
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net Borrowings from (Repayments of) Short-Term Credit Facilities
409,502

 
(10,000
)
Proceeds from Issuance of Long-Term Debt
10,000

 
1,592,500

Principal Repayments of Long-Term Debt
(575,000
)
 
—

Payments for Issuance of Long-Term Debt
(1,275
)
 
(13,821
)
Net Settlement of Restricted Stock
—

 
(776
)
Dividends on Common Stock
(26,562
)
 
(22,292
)
Proceeds from Sale of Common Stock
189,032

 
173,750

Payments for the Issuance of Common Stock
—

 
(6,554
)
 
 
 
 
Net Cash Provided by Financing Activities
5,697

 
1,712,807

 
 
 
 
Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash
(467
)
 
1,733,769

Cash, Cash Equivalents and Restricted Cash at Beginning of Period
31,679

 
39,695

 
 
 
 
Cash, Cash Equivalents and Restricted Cash at End of Period
$
31,212

 
$
1,773,464


The accompanying notes are an integral part of the condensed consolidated financial statements.












10
Table of Contents

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
June 30,
2019
 
December 31,
2018
Assets
 
 
 
Property, Plant and Equipment:
 
 
 
Utility Plant, at original cost
$
4,660,845

 
$
4,341,113

Accumulated Depreciation
(815,987
)
 
(787,243
)
Nonutility Property and Equipment, at cost
151,628

 
152,232

Accumulated Depreciation
(54,845
)
 
(52,629
)
 
 
 
 
Property, Plant and Equipment - Net
3,941,641

 
3,653,473

 
 
 
 
Investments:
 

 
 

Available-for-Sale Securities
41

 
41

Restricted
19,019

 
1,649

Investment in Affiliates
81,759

 
76,122

 
 
 
 
Total Investments
100,819

 
77,812

 
 
 
 
Current Assets:
 

 
 

Cash and Cash Equivalents
12,193

 
30,030

Accounts Receivable
223,314

 
337,502

Unbilled Revenues
21,253

 
79,538

Provision for Uncollectibles
(20,508
)
 
(18,842
)
Notes Receivable - Affiliate
2,804

 
1,945

Natural Gas in Storage, average cost
49,431

 
60,425

Materials and Supplies, average cost
1,751

 
1,743

Prepaid Taxes
38,982

 
30,694

Derivatives - Energy Related Assets
34,988

 
54,021

Assets Held For Sale
28,696

 
59,588

Other Prepayments and Current Assets
36,056

 
26,548

 
 
 
 
Total Current Assets
428,960

 
663,192

 
 
 
 
Regulatory and Other Noncurrent Assets:
 

 
 

Regulatory Assets
682,264

 
662,969

Derivatives - Energy Related Assets
11,883

 
7,169

Notes Receivable - Affiliate
13,275

 
13,275

Contract Receivables
29,325

 
27,961

Goodwill
703,864

 
734,607

Other
116,231

 
116,119

 
 
 
 
Total Regulatory and Other Noncurrent Assets
1,556,842

 
1,562,100

 
 
 
 
Total Assets
$
6,028,262

 
$
5,956,577

 
The accompanying notes are an integral part of the condensed consolidated financial statements.

11
Table of Contents

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
June 30,
2019
 
December 31,
2018
Capitalization and Liabilities
 
 
 
Equity:
 
 
 
Common Stock
$
115,488

 
$
106,883

Premium on Common Stock
1,024,974

 
843,268

Treasury Stock (at par)
(283
)
 
(292
)
Accumulated Other Comprehensive Loss
(26,079
)
 
(26,095
)
Retained Earnings
362,372

 
343,258

 
 
 
 
Total Equity
1,476,472

 
1,267,022

 
 
 
 
Long-Term Debt
1,798,551

 
2,106,863

 
 
 
 
Total Capitalization
3,275,023

 
3,373,885

 
 
 
 
Current Liabilities:
 

 
 

Notes Payable
680,002

 
270,500

Current Portion of Long-Term Debt
478,909

 
733,909

Accounts Payable
288,881

 
410,463

Customer Deposits and Credit Balances
33,427

 
32,058

Environmental Remediation Costs
53,230

 
47,592

Taxes Accrued
2,671

 
5,881

Derivatives - Energy Related Liabilities
35,229

 
24,134

   Deferred Contract Revenues
1,772

 
1,772

Derivatives - Other Current
1,092

 
588

Dividends Payable
26,562

 
—

Interest Accrued
13,895

 
14,208

Pension Benefits
3,632

 
3,631

Other Current Liabilities
26,766

 
36,102

 
 
 
 
Total Current Liabilities
1,646,068

 
1,580,838

 
 
 
 
Deferred Credits and Other Noncurrent Liabilities:
 

 
 

Deferred Income Taxes - Net
89,450

 
85,836

Pension and Other Postretirement Benefits
111,134

 
110,112

Environmental Remediation Costs
201,381

 
206,058

Asset Retirement Obligations
206,741

 
80,163

Derivatives - Energy Related Liabilities
7,278

 
7,256

Derivatives - Other Noncurrent
11,449

 
7,285

Regulatory Liabilities
457,958

 
478,499

Other
21,780

 
26,645

 
 
 
 
Total Deferred Credits and Other Noncurrent Liabilities
1,107,171

 
1,001,854

 
 
 
 
Commitments and Contingencies  (Note 11)


 


 
 
 
 
Total Capitalization and Liabilities
$
6,028,262

 
$
5,956,577

 
The accompanying notes are an integral part of the condensed consolidated financial statements.


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Table of Contents

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(In Thousands, Except for Per Share Data)
 
 
Common Stock
 
Premium on Common Stock
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
 
106,883

 
843,268

 
(292
)
 
(26,095
)
 
343,258

 
1,267,022

Net Income
 
—

 
—

 
—

 
—

 
85,637

 
85,637

Other Comprehensive Income, Net of Tax
 
—

 
—

 
—

 
8

 
—

 
8

Common Stock Issued or Granted Through Equity Offering or Stock Plans
 
8,603

 
179,829

 
17

 
—

 
—

 
188,449

Cash Dividends Declared - Common Stock ($0.29 per share)
 
—

 
—

 
—

 
—

 
(26,562
)
 
(26,562
)
Balance at March 31, 2019
 
115,486

 
1,023,097

 
(275
)
 
(26,087
)
 
402,333

 
1,514,554

Net Loss
 
—

 
—

 
—

 
—

 
(13,399
)
 
(13,399
)
Other Comprehensive Income, Net of Tax
 
—

 
—

 
—

 
8

 
—

 
8

Common Stock Issued or Granted Through Equity Offering or Stock Plans
 
2

 
1,877

 
(8
)
 
—

 
—

 
1,871

Cash Dividends Declared - Common Stock ($0.29 per share)
 
—

 
—

 
—

 
—

 
(26,562
)
 
(26,562
)
Balance at June 30, 2019
 
115,488

 
1,024,974

 
(283
)
 
(26,079
)
 
362,372

 
1,476,472

Balance at January 1, 2018
 
99,436

 
709,658

 
(271
)
 
(36,765
)
 
420,351

 
1,192,409

Net Income
 
—

 
—

 
—

 
—

 
111,240

 
111,240

Other Comprehensive Income, Net of Tax
 
—

 
—

 
—

 
9

 
—

 
9

Common Stock Issued or Granted Through Equity Offering or Stock Plans
 
80

 
98

 
(3
)
 
—

 
—

 
175

Cash Dividends Declared - Common Stock ($0.28 per share)
 
—

 
—

 
—

 
—

 
(22,336
)
 
(22,336
)
Balance at March 31, 2018
 
99,516

 
709,756

 
(274
)
 
(36,756
)
 
509,255

 
1,281,497

Net Loss
 
—

 
—

 
—

 
—

 
(93,819
)
 
(93,819
)
Other Comprehensive Income, Net of Tax
 
—

 
—

 
—

 
8

 
—

 
8

Common Stock Issued or Granted Through Equity Offering or Stock Plans
 
7,366

 
132,571

 
(8
)
 
—

 
—

 
139,929

Cash Dividends Declared - Common Stock ($0.28 per share)
 
—

 
—

 
—

 
—

 
(23,898
)
 
(23,898
)
Balance at June 30, 2018
 
106,882

 
842,327

 
(282
)
 
(36,748
)
 
391,538

 
1,303,717


The accompanying notes are an integral part of the condensed consolidated financial statements.

13
Table of Contents



Disclosure of Changes in Accumulated Other Comprehensive Loss Balances (Unaudited)
(In Thousands)


 
 
Postretirement
Liability
Adjustment
 
Unrealized Gain
(Loss) on
Derivatives-Other (A)
 
Unrealized Gain
(Loss) on Available-
for-Sale Securities
 
Other
Comprehensive
Income (Loss) of
Affiliated
Companies
 
Accumulated
Other
Comprehensive
Loss
 
 
 

 
 

 
 

 
 

 
 

Balance at January 1, 2019
 
(25,626
)
 
(362
)
 
(10
)
 
(97
)
 
(26,095
)
   Changes During Period
 
—

 
8

 
—

 
—

 
8

Balance at March 31, 2019
 
(25,626
)
 
(354
)
 
(10
)
 
(97
)
 
(26,087
)
   Changes During Period
 
—

 
8

 
—

 
—

 
8

Balance at June 30, 2019
 
(25,626
)
 
(346
)
 
(10
)
 
(97
)
 
(26,079
)
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
 
(36,262
)
 
(396
)
 
(10
)
 
(97
)
 
(36,765
)
   Changes During Period
 
—

 
9

 
—

 
—

 
9

Balance at March 31, 2018
 
(36,262
)
 
(387
)
 
(10
)
 
(97
)
 
(36,756
)
   Changes During Period
 
—

 
8

 
—

 
—

 
8

Balance at June 30, 2018
 
(36,262
)
 
(379
)
 
(10
)
 
(97
)
 
(36,748
)

(A) Determined using a combined average statutory tax rate of 27% for 2019 and 25% for 2018.

The accompanying notes are an integral part of the condensed consolidated financial statements.


14
Table of Contents

SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)

 
Three Months Ended
June 30,
 
 
2019
 
2018
Operating Revenues
$
62,268

 
$
76,801

 
 
 
 
Operating Expenses:
 
 
 
Cost of Sales (Excluding depreciation and amortization)
2,654

 
19,379

Operations
25,194

 
27,268

Maintenance
7,006

 
6,812

Depreciation
16,045

 
14,401

Energy and Other Taxes
1,154

 
498

 
 
 
 
Total Operating Expenses
52,053

 
68,358

 
 
 
 
Operating Income
10,215

 
8,443

 
 
 
 
Other Income and Expense
328

 
607

 
 
 
 
Interest Charges
(7,896
)
 
(6,999
)
 
 
 
 
Income Before Income Taxes
2,647

 
2,051

 
 
 
 
Income Taxes
(671
)
 
(482
)
 
 
 
 
Net Income
$
1,976

 
$
1,569



The accompanying notes are an integral part of the condensed financial statements.

15
Table of Contents


 
Six Months Ended
June 30,
 
 
2019
 
2018
Operating Revenues
$
334,466

 
$
311,260

 
 
 
 
Operating Expenses:
 
 
 
Cost of Sales (Excluding depreciation and amortization)
121,534

 
109,187

Operations
54,291

 
56,638

Maintenance
15,149

 
13,674

Depreciation
31,789

 
28,764

Energy and Other Taxes
3,143

 
1,753

 
 
 
 
Total Operating Expenses
225,906

 
210,016

 
 
 
 
Operating Income
108,560

 
101,244

 
 
 
 
Other Income and Expense
2,259

 
3,117

 
 
 
 
Interest Charges
(15,744
)
 
(13,727
)
 
 
 
 
Income Before Income Taxes
95,075

 
90,634

 
 
 
 
Income Taxes
(24,368
)
 
(22,318
)
 
 
 
 
Net Income
$
70,707

 
$
68,316


The accompanying notes are an integral part of the condensed financial statements.

16
Table of Contents


SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
 
 
Three Months Ended
June 30,
 
 
2019
 
2018
Net Income
$
1,976

 
$
1,569

 
 
 
 
Other Comprehensive Income - Net of Tax: *
 
 
 
 
 
 
 
Unrealized Gain on Derivatives - Other
8

 
8

 
 
 
 
Other Comprehensive Income - Net of Tax *
8

 
8

 
 
 
 
Comprehensive Income
$
1,984

 
$
1,577

 
 
 
 

 
Six Months Ended
June 30,
 
2019
 
2018
Net Income
$
70,707

 
$
68,316

 
 
 
 
Other Comprehensive Income - Net of Tax: *
 
 
 
 
 
 
 
Unrealized Gain on Derivatives - Other
16

 
17

 
 
 
 
Other Comprehensive Income - Net of Tax *
16

 
17

 
 
 
 
Comprehensive Income
$
70,723

 
$
68,333

 
 
 
 
* Determined using a combined average statutory tax rate of approximately 27% and 25% in 2019 and 2018, respectively.
 
The accompanying notes are an integral part of the condensed financial statements.



17
Table of Contents

SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
 
Six Months Ended
June 30,
 
 
2019
 
2018
Net Cash Provided by Operating Activities
$
126,275

 
$
85,263

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Capital Expenditures
(124,122
)
 
(113,226
)
Investment in Long-Term Receivables
(6,585
)
 
(3,947
)
Proceeds from Long-Term Receivables
4,983

 
5,035

 
 
 
 
Net Cash Used in Investing Activities
(125,724
)
 
(112,138
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Net (Repayments of) Borrowings from Short-Term Credit Facilities
(4,398
)
 
24,400

Proceeds from Issuance of Long-Term Debt
10,000

 
—

Payments from Issuance of Long-Term Debt
—

 
(5
)
 
 
 
 
Net Cash Provided by Financing Activities
5,602

 
24,395

 
 
 
 
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
6,153

 
(2,480
)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period
3,262

 
4,619

 
 
 
 
Cash, Cash Equivalents and Restricted Cash at End of Period
$
9,415

 
$
2,139

 
The accompanying notes are an integral part of the condensed financial statements.


18
Table of Contents

SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Property, Plant and Equipment:
 
 
 
Utility Plant, at original cost
$
3,020,518

 
$
2,907,202

Accumulated Depreciation
(546,149
)
 
(523,743
)
 
 
 
 
Property, Plant and Equipment - Net
2,474,369

 
2,383,459

 
 
 
 
Investments:
 
 
 
Restricted Investments
7,798

 
1,278

 
 
 
 
Total Investments
7,798

 
1,278

 
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
1,617

 
1,984

Accounts Receivable
90,190

 
101,572

Accounts Receivable - Related Parties
203

 
2,442

Unbilled Revenues
8,415

 
43,271

Provision for Uncollectibles
(13,724
)
 
(13,643
)
Natural Gas in Storage, average cost
13,270

 
16,336

Materials and Supplies, average cost
619

 
619

Prepaid Taxes
28,475

 
28,772

Derivatives - Energy Related Assets
1,829

 
5,464

Other Prepayments and Current Assets
20,500

 
11,280

 
 
 
 
Total Current Assets
151,394

 
198,097

 
 
 
 
Regulatory and Other Noncurrent Assets:
 
 
 
Regulatory Assets
499,864

 
492,365

Long-Term Receivables
27,126

 
25,531

Derivatives - Energy Related Assets
—

 
15

Other
23,159

 
17,491

 
 
 
 
Total Regulatory and Other Noncurrent Assets
550,149

 
535,402

 
 
 
 
Total Assets
$
3,183,710

 
$
3,118,236

 
The accompanying notes are an integral part of the condensed financial statements.

19
Table of Contents

SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
 
June 30, 2019
 
December 31, 2018
Capitalization and Liabilities
 
 
 
Equity:
 
 
 
Common Stock
$
5,848

 
$
5,848

Other Paid-In Capital and Premium on Common Stock
355,744

 
355,744

Accumulated Other Comprehensive Loss
(22,341
)
 
(22,357
)
Retained Earnings
739,494

 
668,787

 
 
 
 
Total Equity
1,078,745

 
1,008,022

 
 
 
 
Long-Term Debt
564,808

 
874,507

 
 
 
 
Total Capitalization
1,643,553

 
1,882,529

 
 
 
 
Current Liabilities:
 

 
 

Notes Payable
103,102

 
107,500

Current Portion of Long-Term Debt
338,909

 
18,909

Accounts Payable - Commodity
34,065

 
48,490

Accounts Payable - Other
43,577

 
52,966

Accounts Payable - Related Parties
6,265

 
12,563

Derivatives - Energy Related Liabilities
5,996

 
2,146

Derivatives - Other Current
464

 
343

Customer Deposits and Credit Balances
22,683

 
23,862

Environmental Remediation Costs
39,860

 
33,022

Taxes Accrued
2,141

 
1,891

Pension Benefits
3,597

 
3,597

Interest Accrued
7,117

 
7,134

Other Current Liabilities
7,664

 
9,444

 
 
 
 
Total Current Liabilities
615,440

 
321,867

 
 
 
 
Regulatory and Other Noncurrent Liabilities:
 

 
 

Regulatory Liabilities
272,370

 
286,539

Deferred Income Taxes - Net
350,500

 
325,886

Environmental Remediation Costs
110,491

 
115,049

Asset Retirement Obligations
81,631

 
79,890

Pension and Other Postretirement Benefits
97,970

 
96,053

Derivatives - Energy Related Liabilities
297

 
43

Derivatives - Other Noncurrent
7,236

 
5,524

Other
4,222

 
4,856

 
 
 
 
Total Regulatory and Other Noncurrent Liabilities
924,717

 
913,840

 
 
 
 
Commitments and Contingencies (Note 11)


 


 
 
 
 
Total Capitalization and Liabilities
$
3,183,710

 
$
3,118,236

 
The accompanying notes are an integral part of the condensed financial statements.

20
Table of Contents

SOUTH JERSEY GAS COMPANY
STATEMENTS OF CHANGES IN COMMON EQUITY (UNAUDITED)
(In Thousands)


 
Common Stock
 
Other Paid-In Capital and Premium on Common Stock
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total
Balance at January 1, 2019
5,848

 
355,744

 
(22,357
)
 
668,787

 
1,008,022

Net Income
—

 
—

 
—

 
68,731

 
68,731

Other Comprehensive Income, Net of Tax
—

 
—

 
8

 
—

 
8

Balance at March 31, 2019
5,848

 
355,744

 
(22,349
)
 
737,518

 
1,076,761

Net Income
—

 
—

 
—

 
1,976

 
1,976

Other Comprehensive Income, Net of Tax
—

 
—

 
8

 
—

 
8

Balance at June 30, 2019
5,848

 
355,744

 
(22,341
)
 
739,494

 
1,078,745


Balance at January 1, 2018
5,848

 
355,744

 
(25,997
)
 
585,838

 
921,433

Net Income
—

 
—

 
—

 
66,747

 
66,747

Other Comprehensive Income, Net of Tax
—

 
—

 
9

 
—

 
9

Balance at March 31, 2018
5,848

 
355,744

 
(25,988
)
 
652,585

 
988,189

Net Income
—

 
—

 
—

 
1,569

 
1,569

Other Comprehensive Income, Net of Tax
—

 
—

 
8

 
—

 
8

Balance at June 30, 2018
5,848

 
355,744

 
(25,980
)
 
654,154

 
989,766


The accompanying notes are an integral part of the condensed financial statements.


Disclosure of Changes in Accumulated Other Comprehensive Loss Balances (Unaudited)
(In Thousands)


 
Postretirement Liability Adjustment
 
Unrealized Gain (Loss) on Derivatives (A)
 
Accumulated Other Comprehensive Income (Loss)
Balance at January 1, 2019
(21,901
)
 
(456
)
 
(22,357
)
Changes During Period
—

 
8

 
8

Balance at March 31, 2019
(21,901
)
 
(448
)
 
(22,349
)
Changes During Period
—

 
8

 
8

Balance at June 30, 2019
(21,901
)
 
(440
)
 
(22,341
)
 
 
 
 
 


Balance at January 1, 2018
(25,507
)
 
(490
)
 
(25,997
)
Changes During Period
—

 
9

 
9

Balance at March 31, 2018
(25,507
)
 
(481
)
 
(25,988
)
Changes During Period
—

 
8

 
8

Balance at June 30, 2018
(25,507
)
 
(473
)
 
(25,980
)

(A) Determined using a combined average statutory tax rate of 27% for 2019 and 25% for 2018.

The accompanying notes are an integral part of the condensed financial statements.


21
Table of Contents

 Notes to Condensed Consolidated Financial Statements

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

GENERAL - SJI provides a variety of energy-related products and services primarily through the following wholly-owned subsidiaries:

▪
SJIU is a holding company that owns SJG, and, as of July 1, 2018, ETG and ELK (see "Acquisition" below).

*
SJG is a regulated natural gas utility which distributes natural gas in the seven southernmost counties of New Jersey.

*
ETG is a regulated natural gas utility which distributes natural gas in seven counties in northern and central New Jersey.

*
ELK is a regulated natural gas utility which distributes natural gas in northern Maryland.

▪
SJE acquires and markets electricity to retail end users. In November 2018, the Company sold SJE's retail gas businesses.

▪
SJRG markets natural gas storage, commodity and transportation assets along with fuel management services on a wholesale basis in the mid-Atlantic, Appalachian and southern states.

▪
SJEX owns oil, gas and mineral rights in the Marcellus Shale region of Pennsylvania.

▪
Marina develops and operates on-site energy-related projects. The significant wholly-owned subsidiaries of Marina include:

• ACB, which owns and operates a natural gas fueled combined heating, cooling and power facility located in Atlantic City, New Jersey.

• ACLE, BCLE, SCLE and SXLE, which own and operate LFGTE production facilities in Atlantic, Burlington, Salem and Sussex Counties located in New Jersey.

▪
SJESP receives commissions on service contracts from a third party.

▪
Midstream invests in infrastructure and other midstream projects, including a current project to build an approximately 118-mile natural gas pipeline in Pennsylvania and New Jersey.

BASIS OF PRESENTATION - SJI's condensed consolidated financial statements include the accounts of SJI, its direct and indirect wholly-owned subsidiaries (including SJG) and subsidiaries in which SJI has a controlling interest. All significant intercompany accounts and transactions have been eliminated in consolidation. Beginning as of the date of their acquisition, July 1, 2018, SJI is also reporting on a consolidated basis the combined operations of ETG and ELK.

As permitted by the rules and regulations of the SEC, the accompanying unaudited condensed consolidated financial statements of SJI and SJG contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with GAAP. These financial statements should be read in conjunction with SJI’s and SJG's Annual Reports on Form 10-K for the year ended December 31, 2018. In management’s opinion, the condensed consolidated financial statements of SJI and SJG reflect all normal recurring adjustments needed to fairly present their respective financial positions, operating results and cash flows at the dates and for the periods presented. SJI’s and SJG's businesses are subject to seasonal fluctuations and, accordingly, this interim financial information should not be the basis for estimating the full year’s operating results.

ACQUISITION - On July 1, 2018, SJI, through its wholly-owned subsidiary SJIU, acquired the assets of ETG and ELK from Pivotal Utility Holdings, Inc., a subsidiary of Southern Company Gas (collectively, the "Acquisition"), for total consideration of $1.72 billion (see Note 17).


22
Table of Contents

AGREEMENT TO SELL SOLAR ASSETS - On June 27, 2018, the Company, through its wholly-owned subsidiary, Marina, entered into a series of agreements whereby Marina agreed to sell its portfolio of solar energy assets (the “Transaction”) to a third-party buyer. As part of the Transaction, Marina has agreed to sell its distributed solar energy projects across New Jersey, Maryland, Massachusetts and Vermont (the “Projects”), along with the assets comprising the Projects. The sale of individual Projects is occurring on a rolling basis as the conditions precedent to each closing are satisfied. Also in connection with the Transaction, Marina is leasing certain of the Projects that have not yet passed the fifth anniversary of their placed-in-service dates for U.S. federal income tax purposes back from the buyer from the date each such project is acquired by the buyer until the later of the first anniversary of the applicable acquisition date and the fifth anniversary of the applicable placed-in-service date of the project.
During the first six months of 2019, seven projects were sold for total consideration of $24.3 million. The Company currently has one other project that is part of the Transaction and has not yet closed, but is expected to close in 2019. The Company also has two projects that are not part of the Transaction but are also expected to be sold in 2019. The value of all unsold solar assets is $28.7 million and is recorded as Assets Held For Sale on the condensed consolidated balance sheets as of June 30, 2019, where they will remain until they are transferred to a buyer.

IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets that are held and used are reviewed for impairment whenever events or changes in circumstances indicate carrying values may not be recoverable. Such reviews are performed in accordance with FASB ASC Topic 360. An impairment loss is indicated if the total future estimated undiscounted cash flows expected from an asset are less than its carrying value. An impairment charge is measured by the difference between an asset's carrying amount and fair value with the difference recorded within Operating Income on the condensed consolidated statements of income. Fair values can be determined by a variety of valuation methods, including third-party appraisals, sales prices of similar assets, and present value techniques.

No impairments were identified at SJI for the three and six months ended June 30, 2019. SJI recorded an impairment charge within the on-site energy production segment of $99.2 million (pre-tax) during the three and six months ended June 30, 2018, which was recorded in Impairment Charges on the condensed consolidated statements of income. This impairment charge was the result of the transaction described above under "Agreement to Sell Solar Assets" triggering an indicator of impairment as the purchase price was less than the carrying amount for several of the assets being sold (but not all of them) and, as a result, several assets were considered to be impaired.

No impairments were identified at SJG for the three and six months ended June 30, 2019 and 2018, respectively.

GAS EXPLORATION AND DEVELOPMENT - SJI capitalizes all costs associated with gas property acquisition, exploration and development activities under the full cost method of accounting. Capitalized costs include costs related to unproved properties, which are not amortized until proved reserves are found or it is determined that the unproved properties are impaired. All costs related to unproved properties are reviewed quarterly to determine if impairment has occurred. No impairment charges were recorded on these properties during the three and six months ended June 30, 2019 or 2018. As of both June 30, 2019 and December 31, 2018, $8.6 million related to interests in proved and unproved properties in Pennsylvania, net of amortization, is included with Nonutility Property and Equipment and Other Noncurrent Assets on the condensed consolidated balance sheets.
 
TREASURY STOCK - SJI uses the par value method of accounting for treasury stock. As of June 30, 2019 and December 31, 2018, SJI held 226,245 and 233,482 shares of treasury stock, respectively. These shares are related to deferred compensation arrangements where the amounts earned are held in the stock of SJI.

AFUDC - SJI and SJG record AFUDC, which represents the estimated debt and equity costs of capital funds that are necessary to finance the construction of new regulated facilities. While cash is not realized currently, AFUDC increases the regulated revenue requirement and is included in rate base and recovered over the service life of the asset through a higher rate base and higher depreciation.

INCOME TAXES - Deferred income taxes are provided for all significant temporary differences between the book and taxable bases of assets and liabilities in accordance with FASB ASC Topic 740 - “Income Taxes.” A valuation allowance is established when it is determined that it is more likely than not that a deferred tax asset will not be realized.

BUSINESS COMBINATION - The Company applies the acquisition method to account for business combinations. The consideration transferred for an acquisition is the fair value of the assets transferred, the liabilities incurred by the acquirer and the equity interests issued by the acquirer. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the consideration transferred over the fair value of the identifiable net assets acquired is recorded as goodwill (see Note 17).


23
Table of Contents

GOODWILL - See Note 18.

AMA - On July 1, 2018, SJRG purchased from a third party an AMA whereby SJRG manages the pipeline capacity of ETG. Total cash payment was $11.3 million. The AMA expires on March 31, 2022. Under the AMA, SJRG pays ETG an annual fee of $4.25 million, plus additional profit sharing as defined in the AMA. The amounts received by ETG are credited to its BGSS clause and returned to its ratepayers. The total purchase price was allocated as follows (in thousands):

Natural Gas in Storage
 
$
9,685

Intangible Asset
 
19,200

Profit Sharing - Other Liabilities
 
(17,546
)
   Total Consideration
 
$
11,339



As of June 30, 2019 and December 31, 2018, the balance of the intangible asset is $14.1 million and $16.6 million, respectively, and is recorded to Other Current and Noncurrent Assets on the condensed consolidated balance sheets of SJI, with the reduction being due to amortization. As of June 30, 2019 and December 31, 2018, the balance in the liability is $12.8 million and $17.0 million and is recorded to Regulatory Liabilities on the condensed consolidated balance sheets of SJI, with the change resulting from profit sharing earned.

CURRENT PORTION OF LONG-TERM DEBT - As of June 30, 2019 and December 31, 2018, SJI had $478.9 million and $733.9 million, respectively, of long-term debt that is due within one year. The decrease is due to $575.0 million of long-term debt that was paid down in 2019 (see Note 14), partially offset by SJG's term loan of $320.0 million becoming due in April 2020 and classified as current on the condensed consolidated balance sheets. SJI expects to further reduce its debt in 2019 using cash provided from the sale of the remaining solar assets, along with the sale of other assets considered non-core to its business. The remaining long-term debt that is due within one year is expected to be paid by utilizing funds provided from refinancing activity and from the Company's revolving credit facilities.

AOCL - SJI and SJG release income tax effects from AOCL on an individual unit of account basis.

NEW ACCOUNTING PRONOUNCEMENTS - Other than as described below, no new accounting pronouncement had, or is expected to have, a material impact on the condensed consolidated financial statements of SJI, or the condensed financial statements of SJG.

In March 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize substantially all leases on their balance sheet as a right-of-use asset and corresponding lease liability, including leases accounted for as operating leases. Topic 842 also resulted in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The accounting for leases by the lessor remains relatively the same. In connection with this new standard, the FASB has issued the following amendments to ASU 2016-02:

•
In January 2018, the FASB issued an amendment (ASU 2018-01) to clarify the application of the new lease guidance to land easements and provided relief concerning adoption efforts for existing land easements that are not accounted for as leases under current GAAP.

•
In July 2018, the FASB issued ASUs 2018-10 and 2018-11, which included a number of technical corrections and improvements to this standard, including an additional option for transition. The guidance initially required a modified retrospective transition method of adoption, under which lessees and lessors were to recognize and measure leases at the beginning of the earliest period presented. The additional, optional transition method allows an entity to initially apply the requirements of the lease standard at the adoption date, and avoid restating the comparative periods.


24
Table of Contents

•
In December 2018, the FASB issued ASU 2018-20, Narrow-Scope Improvements for Lessors. The amendments in this ASU permit lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. A lessor making this election will exclude from the consideration in the contract all collections from lessees of taxes within the scope of the election and will provide certain disclosures. The amendments in this ASU related to certain lessor costs also require lessors to exclude from variable payments, and therefore revenue, lessor costs paid by lessees directly to third parties, and require lessors to account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by the lessee as variable payments, and record those reimbursed costs as revenue. Lastly, the amendments in this ASU related to recognizing variable payments for contracts with lease and nonlease components require lessors to allocate (rather than recognize as currently required) certain variable payments to the lease and nonlease components when the changes in facts and circumstances on which the variable payment is based occur.

•
In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements. The amendments in this ASU reinstate a Topic 840 explicit exception for lessors that are not manufacturers or dealers for determining fair value of the leased property in Topic 842. This exception specifies that such lessors will use their cost, reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset. However, if significant time lapses between the acquisition of the underlying asset and lease commencement, those lessors will be required to apply the definition of fair value (exit price) in Topic 820. Lastly, the amendments in this ASU added an explicit exception to the Topic 250, Accounting Changes and Error Corrections, paragraph 250-10-50-3 interim disclosure requirements in the Topic 842 transition disclosure requirements.

The new guidance in ASU 2016-02, as well as all amendments discussed above, was effective for the Company beginning on January 1, 2019. The impact of adopting Topic 842 did not result in an adjustment to retained earnings as of January 1, 2019.

As of January 1, 2019, the Company designed the necessary changes to its existing processes and configured all system requirements to adopt the new standard and applied its provisions to all contracts using the optional transition method discussed above, and by applying certain transition practical expedients. The Company elected the “package of practical expedients,” which permits the Company to not reassess under Topic 842 the Company’s prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the expedient not to evaluate existing or expired land easements under Topic 842 that were not previously accounted for as leases. The Company has elected not to use hindsight when determining the lease term at the effective date. The Company elected the short-term lease recognition exemption for all leases that qualify. For the leases that qualify, including leases effective at adoption, the Company will not recognize right-of-use assets or lease liabilities. The Company has elected the practical expedient to not separate lease and non-lease components for all leases. The Company’s non-lease components are primarily related to property maintenance on real estate leases, which varies based on future outcomes, and thus is recognized in rent expense when incurred. Additionally, the Company elected to apply a portfolio approach when establishing the discount rate for certain of its leases.

The Company has leases for the following classes of underlying assets: equipment, real estate (land and building), and fleet vehicles. After adopting Topic 842, SJI and SJG had operating right-of-use assets of approximately $3.1 million and $0.5 million, respectively, as of January 1, 2019, with operating lease liabilities of the same amounts. The Company did not have any finance leases.
The Company determines the initial classification and measurement of its right-of-use assets and lease liabilities at the lease commencement date and thereafter if modified. The lease term includes any renewal options that the Company is reasonably certain to exercise. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable. Otherwise, the Company uses its incremental borrowing rate, which is determined by using a portfolio approach based on the rate of interest in its existing collateralized term loan facility adjusted for lease term.
Rent expense for operating leases is recognized on a straight-line basis over the reasonably certain lease term based on the total lease payments and is included in Operations Expense in the condensed consolidated statements of income.
For all leases, rent payments that are based on a fixed index or rate are included in the measurement of right-of-use assets and lease liabilities using the index or rate at the lease commencement date. Rent payments that vary based on changes in future indexes or rates are expensed in the period incurred.

For more information on the Company's leases, see Note 19.


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In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. The amendments in this update are effective for annual and any interim impairment tests performed in periods beginning after December 31, 2019. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on the timing of liquidation of an investee's assets and the description of measurement uncertainty at the reporting date. Entities are now required to disclose: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements; and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Further, the standard eliminates disclosure requirements with respect to: (1) the transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation process for Level 3 fair value measurements. The standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The new disclosure requirement for unrealized gains and losses, the range and weighted average of significant unobservable inputs and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively to all periods presented upon their effective date. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plan. This ASU eliminates requirements for certain disclosures such as the amount and timing of plan assets expected to be returned to the employer and the amount of future annual benefits covered by insurance contracts. The standard added new disclosures such as for sponsors of the defined benefit plans to provide information relating to the weighted-average interest crediting rate for cash balance plans and other plans with promised interest crediting rates and an explanation for significant gains or losses related to changes in the benefit obligations for the period. The standard is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The amendments in this ASU for determining whether a decision-making fee is a variable interest require reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required by GAAP). These amendments will create alignment between determining whether a decision-making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a VIE. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019 for public companies. Early adoption is permitted. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this ASU provide codification improvements and further clarification on several topics, including ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, as well as ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10). Since SJI and SJG have adopted the amendments in ASU 2017-12 (with no impact to the financial statements results of SJI or SJG) as of April 25, 2019 (the issuance date of ASU 2019-04), the effective date for the amendments to Topic 815 contained in ASU 2019-04 is as of the beginning of the first annual reporting period beginning after April 25, 2019. Early adoption is permitted, including adoption on any date on or after April 25, 2019. The amendments are effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption in any interim period is permitted. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.


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In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326). The amendments in this ASU provide optional targeted transition relief for entities adopting the provisions of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in ASU 2019-05 provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments - Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, Fair Value Measurement - Overall, and 825-10. The amendments in ASU 2019-05, along with ASU 2016-13, are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.

2.
STOCK-BASED COMPENSATION PLAN:

Under SJI's 2015 Omnibus Equity Compensation Plan (Plan), shares may be issued to SJI’s officers (Officers), non-employee directors (Directors) and other key employees. No options were granted or outstanding during the six months ended June 30, 2019 and 2018. No stock appreciation rights have been issued under the Plan. During the six months ended June 30, 2019 and 2018, SJI granted 181,387 and 197,844 restricted shares, respectively, to Officers and other key employees under the Plan. Performance-based restricted shares vest over a three-year period and are subject to SJI achieving certain market and earnings-based performance targets, which can cause the actual amount of shares that ultimately vest to range from 0% to 200% of the original shares granted.

SJI grants time-based shares of restricted stock, one-third of which vest annually over a three-year period and which are limited to a 100% payout. Vesting of time-based grants is contingent upon SJI achieving an ROE of at least 7% during the initial year of the grant and meeting the service requirement. Provided that the 7% ROE requirement is met in the initial year, payout is solely contingent upon the service requirement being met in years two and three of the grant. Beginning in 2018, the vesting and payout of time-based shares of restricted stock is solely contingent upon the service requirement being met in years one, two, and three of the grant. During the six months ended June 30, 2019 and 2018, Officers and other key employees were granted 85,146 and 64,712 shares of time-based restricted stock, respectively, which are included in the shares noted above.

Grants containing market-based performance targets use SJI's TSR relative to a peer group to measure performance. As TSR-based grants are contingent upon market and service conditions, SJI is required to measure and recognize stock-based compensation expense based on the fair value at the date of grant on a straight-line basis over the requisite three year period of each award. In addition, SJI identifies specific forfeitures of share-based awards, and compensation expense is adjusted accordingly over the requisite service period. Compensation expense is not adjusted based on the actual achievement of performance goals. The fair value of TSR-based restricted stock awards on the date of grant is estimated using a Monte Carlo simulation model.

Earnings-based performance targets include pre-defined EGR and ROE goals to measure performance. Performance targets include pre-defined CEGR for SJI. As EGR-based, ROE-based and CEGR-based grants are contingent upon performance and service conditions, SJI is required to measure and recognize stock-based compensation expense based on the fair value at the date of grant over the requisite three year period of each award. The fair value is measured as the market price at the date of grant. The initial accruals of compensation expense are based on the estimated number of shares expected to vest, assuming the requisite service is rendered and probable outcome of the performance condition is achieved. That estimate is revised if subsequent information indicates that the actual number of shares is likely to differ from previous estimates. Compensation expense is ultimately adjusted based on the actual achievement of service and performance targets.

During the six months ended June 30, 2019 and 2018, SJI granted 30,028 and 26,416 restricted shares, respectively, to Directors. Shares issued to Directors vest over twelve months and contain no performance conditions. As a result, 100% of the shares granted generally vest.


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The following table summarizes the nonvested restricted stock awards outstanding for SJI at June 30, 2019 and the assumptions used to estimate the fair value of the awards:

 
Grants
 
Shares Outstanding
 
Fair Value Per Share
 
Expected Volatility
 
Risk-Free Interest Rate
Officers & Key Employees -
2017 - TSR
 
41,103

 
$
32.17

 
20.8
%
 
1.47
%
 
2017 - CEGR, Time
 
54,677

 
$
33.69

 
N/A

 
N/A

 
2018 - TSR
 
51,731

 
$
31.05

 
21.9
%
 
2.00
%
 
2018 - CEGR, Time
 
86,038

 
$
31.23

 
N/A

 
N/A

 
2019 - TSR
 
38,934

 
$
32.88

 
23.2
%
 
2.40
%
 
2019 - CEGR, Time
 
139,663

 
$
31.26

 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
Directors -
2019
 
30,028

 
$
26.89

 
N/A

 
N/A

 

 


 


 


 




Expected volatility is based on the actual 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’ and other key employees’ restricted shares. As notional dividend equivalents are credited to the holders 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 dividends are paid or credited to the holder during the requisite service period, the fair value of these awards are equal to the market value of the shares on the date of grant.

The following table summarizes the total stock-based compensation cost to SJI for the three and six months ended June 30, 2019 and 2018 (in thousands):

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
2018
 
2019
 
2018
Officers & Key Employees
$
1,534

$
1,090

 
$
2,284

 
$
2,190

Directors
202

206

 
404

 
412

Total Cost
1,736

1,296

 
2,688

 
2,602

 
 
 
 
 
 
 
Capitalized
47

(101
)
 
(34
)
 
(202
)
Net Expense
$
1,783

$
1,195

 
$
2,654

 
$
2,400



As of June 30, 2019, there was $8.6 million of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.9 years.

The following table summarizes information regarding restricted stock award activity for SJI during the six months ended June 30, 2019, excluding accrued dividend equivalents:

 
Officers and Other Key Employees
 
Directors
 
Weighted
Average
Fair Value
Nonvested Shares Outstanding, January 1, 2019
411,809

 
26,416

 
$
29.57

  Granted
181,387

 
30,028

 
$
30.94

  Cancelled/Forfeited
(33,516
)
 
—

 
$
31.60

  Vested
(147,534
)
 
(26,416
)
 
$
26.04

Nonvested Shares Outstanding, June 30, 2019
412,146

 
30,028

 
$
31.46




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During the six months ended June 30, 2019 and 2018, SJI awarded 125,288 shares to its Officers and other key employees at a market value of $3.7 million, and 66,894 shares at a market value of $2.0 million, respectively. During the six months ended June 30, 2019 and 2018, SJI also awarded 26,416 and 30,394 shares to its Directors at a market value of $0.8 million and $1.0 million, respectively.

SJI has a policy of issuing new shares to satisfy its obligations under the Plan; therefore, there are no cash payment requirements resulting from the normal operation of the Plan. However, a change in control could result in such shares becoming nonforfeitable or immediately payable in cash. At the discretion of the Officers, Directors and other key employees, the receipt of vested shares can be deferred until future periods. These deferred shares are included in Treasury Stock on the condensed consolidated balance sheets.

SJG - Officers and other key employees of SJG participate in the stock-based compensation plans of SJI. During the six months ended June 30, 2019 and 2018, SJG officers and other key employees were granted 6,095 and 32,185 shares of SJI restricted stock, respectively. The cost of outstanding stock awards for SJG during the six months ended June 30, 2019 and 2018 was $0.1 million and $0.3 million, respectively. Approximately 65% of these costs were capitalized on SJG's condensed balance sheets to Utility Plant.

3.
AFFILIATIONS, DISCONTINUED OPERATIONS AND RELATED-PARTY TRANSACTIONS:

AFFILIATIONS — The following affiliated entities are accounted for under the equity method:

PennEast - Midstream has a 20% investment in PennEast, which is planning to construct an approximately 118-mile natural gas pipeline that will extend from Northeastern Pennsylvania into New Jersey.

Energenic - Marina and a joint venture partner formed Energenic, in which Marina has a 50% equity interest. Energenic developed and operated on-site, self-contained, energy-related projects. Energenic currently does not have any projects that are operational.

Millennium - SJI and a joint venture partner formed Millennium, in which SJI has a 50% equity interest. Millennium reads utility customers’ meters on a monthly basis for a fee.

Potato Creek - SJI and a joint venture partner formed Potato Creek, in which SJI has a 30% equity interest. Potato Creek owns and manages the oil, gas and mineral rights of certain real estate in Pennsylvania.

EnergyMark - SJE has a 33% investment in EnergyMark, an entity that acquires and markets natural gas to retail end users.

SJRG had net sales to EnergyMark of $5.3 million and $8.0 million for the three months ended June 30, 2019 and 2018, respectively, and $19.2 million and $21.2 million for the six months ended June 30, 2019 and 2018, respectively.

EnerConnex - SJI has a 25% investment in EnerConnex, which is a retail and wholesale broker and consultant that matches end users with suppliers for the procurement of natural gas and electricity.

During the first six months of 2019 and 2018, SJI made net investments in unconsolidated affiliates of $3.9 million and $6.4 million, respectively.  As of June 30, 2019 and December 31, 2018, the outstanding balance of Notes Receivable – Affiliate was $16.1 million and $15.2 million, respectively. As of both June 30, 2019 and December 31, 2018, $13.6 million of these notes were secured by property, plant and equipment of the affiliates, accrue interest at 7.5% and are to be repaid through 2025. As of June 30, 2019 and December 31, 2018, the remaining $2.5 million and $1.6 million, respectively, of these notes are unsecured and accrue interest at variable rates.
    
SJI holds significant variable interests in these entities but is not the primary beneficiary. Consequently, these entities are accounted for under the equity method because SJI does not have both (a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity. As of June 30, 2019, SJI had a net asset of approximately $81.8 million included in Investment in Affiliates on the condensed consolidated balance sheets related to equity method investees, in addition to Notes Receivable – Affiliate as discussed above. SJI’s maximum exposure to loss from these entities as of June 30, 2019, is limited to its combined investments in these entities and the Notes Receivable-Affiliate in the aggregate amount of $97.9 million.


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DISCONTINUED OPERATIONS - Discontinued Operations consist of the environmental remediation activities related to the properties of SJF and the product liability litigation and environmental remediation activities related to the prior business of Morie. SJF is a subsidiary of EMI, an SJI subsidiary, which previously operated a fuel oil business. Morie is the former sand mining and processing subsidiary of EMI. EMI sold the common stock of Morie in 1996.

SJI conducts tests annually to estimate the environmental remediation costs for these properties (see Note 11).

Summarized operating results of the discontinued operations for the three and six months ended June 30, 2019 and 2018, were (in thousands, except per share amounts):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Loss before Income Taxes:
 
 
 
 
 
 
 
Sand Mining
$
(23
)
 
$
7

 
$
(44
)
 
$
(33
)
Fuel Oil
(96
)
 
(40
)
 
(153
)
 
(81
)
Income Tax Benefits
24

 
7

 
40

 
22

Loss from Discontinued Operations — Net
$
(95
)
 
$
(26
)
 
$
(157
)
 
$
(92
)
Earnings Per Common Share from
 
 
 

 
 
 
 
Discontinued Operations — Net:
 
 
 

 
 
 
 
Basic and Diluted
$
—

 
$
—

 
$
—

 
$
—



SJG RELATED-PARTY TRANSACTIONS - There have been no significant changes in the nature of SJG’s related-party transactions since December 31, 2018. See Note 3 to the Financial Statements in Item 8 of SJI's and SJG’s Form 10-K for the year ended December 31, 2018 for a detailed description of the related parties and their associated transactions.

A summary of related-party transactions involving SJG, excluding pass-through items, included in SJG's Operating Revenues were as follows (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Operating Revenues/Affiliates:
 
 
 
 
 
 
 
SJRG
$
1,142

 
$
1,109

 
$
2,426

 
$
3,697

Marina
105

 
89

 
221

 
192

Other
20

 
23

 
40

 
46

Total Operating Revenue/Affiliates
$
1,267

 
$
1,221

 
$
2,687

 
$
3,935


Related-party transactions involving SJG, excluding pass-through items, included in SJG's Cost of Sales and Operating Expenses were as follows (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Costs of Sales/Affiliates (Excluding depreciation and amortization)
 
 
 
 
 
 
 
SJRG*
$
3,335

 
$
2,093

 
$
6,582

 
$
27,431

 
 
 
 
 
 
 
 
Operations Expense/Affiliates:
 
 
 
 
 
 
 
SJI
$
5,694

 
$
6,708

 
$
10,420

 
$
13,751

SJIU
578

 
—

 
578

 
—

Millennium
789

 
744

 
1,552

 
1,441

Other
426

 
(117
)
 
961

 
(232
)
Total Operations Expense/Affiliates
$
7,487

 
$
7,335

 
$
13,511

 
$
14,960



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*These costs are included in either SJG's Cost of Sales on the condensed statements of income, or Regulatory Assets on the condensed balance sheets. As discussed in Note 1 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues – Nonutility on the condensed consolidated income statement.

4.
COMMON STOCK:

The following shares were issued and outstanding for SJI:

 
2019
Beginning Balance, January 1
85,506,218

New Issuances During the Period:
 

Settlement of Equity Forward Sale Agreement
6,779,661

Stock-Based Compensation Plan
104,470

Ending Balance, June 30
92,390,349



The par value ($1.25 per share) of stock issued was recorded in Common Stock and the net excess over par value of approximately $181.7 million was recorded in Premium on Common Stock. The increase is discussed under "Forward Shares" below.

There were 2,339,139 shares of SJG's common stock (par value $2.50 per share) outstanding as of June 30, 2019. SJG did not issue any new shares during the period. SJIU owns all of the outstanding common stock of SJG.

FORWARD SHARES - In the second quarter of 2018, SJI offered 12,669,491 shares of its common stock, par value $1.25 per share, at a public offering price of $29.50 per share. Of the offered shares, 5,889,830 shares were issued at closing. On January 15, 2019, SJI settled its equity forward sale agreement by physically delivering the remaining 6,779,661 shares of common stock and receiving net cash proceeds of approximately $189.0 million. The forward price used to determine cash proceeds received by SJI at settlement was calculated based on the initial forward sale price, as adjusted for underwriting fees, interest rate adjustments as specified in the equity forward agreement and any dividends paid on our common stock during the forward period.

CONVERTIBLE UNITS - In 2018, SJI issued and sold 5,750,000 Equity Units, initially in the form of Corporate Units, which included 750,000 Corporate Units pursuant to the underwriters’ option. Each Corporate Unit has a stated amount of $50 and is comprised of (a) a purchase contract obligating the holder to purchase from the Company, and for the Company to sell to the holder for a price in cash of $50, on the purchase contract settlement date, or April 15, 2021, subject to earlier termination or settlement, a certain number of shares of common stock; and (b) a 1/20, or 5%, undivided beneficial ownership interest in $1,000 principal amount of SJI’s 2018 Series A 3.70% Remarketable Junior Subordinated Notes due 2031. SJI will pay the holder quarterly contract adjustment payments at a rate of 3.55% per year on the stated amount of $50 per Equity Unit, in respect of each purchase contract, subject to the Company's right to defer these payments. The net proceeds, after amortization of the underwriting discounts, are recorded as Long-Term Debt on the condensed consolidated balance sheets.

SJI's EPS — SJI's Basic EPS is based on the weighted-average number of common shares outstanding. The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 115,798 and 452,210 for the six months ended June 30, 2019 and 2018, respectively. For the three months ended June 30, 2019 and 2018, incremental shares of 100,012 and 806,695, respectively, were not included in the denominator for the diluted EPS calculation because they would have an antidilutive effect on EPS. These additional shares relate to SJI's restricted stock as discussed in Note 2, along with the impact of the Equity Units discussed above, accounted for under the treasury stock method.

DIVIDENDS PER SHARE — SJI's dividends per share were $0.29 and $0.28 for the three months ended June 30, 2019 and 2018, respectively, and $0.58 and $0.56 for the six months ended June 30, 2019 and 2018, respectively. Cash dividends were not declared or paid by the Utilities to SJI during the three and six months ended June 30, 2019 or 2018.

DRP — SJI offers a DRP which allows participating shareholders to purchase shares of SJI common stock by automatic reinvestment of dividends or optional purchases. SJI currently purchases shares on the open market to fund share purchases by DRP participants, and as a result SJI did not raise any equity capital through the DRP in 2018 or 2019. SJI does not intend to issue equity capital via the DRP in 2019.


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Table of Contents

5.
FINANCIAL INSTRUMENTS:

RESTRICTED INVESTMENTS — SJI and SJG maintain margin accounts with certain counterparties to support their risk management activities associated with hedging commodities. The balances required to be held in these margin accounts increase as the net value of the outstanding energy-related contracts with the respective counterparties decrease. As of June 30, 2019 and December 31, 2018, SJI's balances (including SJG) in these accounts totaled $19.0 million and $1.6 million, respectively, held by the counterparties, which is recorded in Restricted Investments on the condensed consolidated balance sheets. As of June 30, 2019 and December 31, 2018, SJG's balance held by the counterparties totaled $7.8 million and $1.3 million and was recorded in Restricted Investments on the condensed balance sheets.

The carrying amounts of the Restricted Investments for both SJI and SJG approximate their fair values at June 30, 2019 and December 31, 2018, which would be included in Level 1 of the fair value hierarchy (see Note 13).

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):

 
 
As of June 30, 2019
Balance Sheet Line Item
 
SJI
SJG
Cash and Cash Equivalents
 
$
12,193

$
1,617

Restricted Investments
 
19,019

7,798

   Total cash, cash equivalents and restricted cash shown in the statement of cash flows
 
$
31,212

$
9,415


 
 
As of December 31, 2018
Balance Sheet Line Item
 
SJI
SJG
Cash and Cash Equivalents
 
$
30,030

$
1,984

Restricted Investments
 
1,649

1,278

   Total cash, cash equivalents and restricted cash shown in the statement of cash flows
 
$
31,679

$
3,262



NOTES RECEIVABLE-AFFILIATES - As of June 30, 2019, SJI had approximately $13.6 million included in Notes Receivable - Affiliate on the condensed consolidated balance sheets, due from Energenic, which is secured by its cogeneration assets for energy service projects. This note is subject to a reimbursement agreement that secures reimbursement for SJI, from its joint venture partner, of a proportionate share of any amounts that are not repaid.

LONG-TERM RECEIVABLES - SJG provides financing to customers for the purpose of attracting conversions to natural gas heating systems from competing fuel sources. The terms of these loans call for customers to make monthly payments over periods ranging from five to ten years, with no interest. The carrying amounts of such loans were $4.5 million and $5.3 million as of June 30, 2019 and December 31, 2018, respectively. The current portion of these receivables is reflected in Accounts Receivable and the non-current portion is reflected in Contract Receivables on the condensed consolidated balance sheets. The carrying amounts noted above are net of unamortized discounts resulting from imputed interest in the amount of $0.6 million and $0.7 million as of June 30, 2019 and December 31, 2018, respectively. The annualized amortization to interest is not material to SJI’s or SJG's condensed consolidated financial statements. The carrying amounts of these receivables approximate their fair value at June 30, 2019 and December 31, 2018, which would be included in Level 2 of the fair value hierarchy (see Note 13).

CREDIT RISK - As of June 30, 2019, SJI had approximately $15.9 million, or 33.8%, of the current and noncurrent Derivatives – Energy Related Assets transacted with two counterparties. These counterparties are investment-grade rated.

FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE - The fair value of a financial instrument is the market price to sell an asset or transfer a liability at the measurement date. The carrying amounts of SJI's and SJG's financial instruments approximate their fair values at June 30, 2019 and December 31, 2018, except as noted below.
•
For Long-Term Debt, in estimating the fair value, SJI and SJG use the present value of remaining cash flows at the balance sheet date. SJI and SJG based the estimates on interest rates available at the end of each period for debt with similar terms and maturities (Level 2 in the fair value hierarchy, see Note 13).


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•
The estimated fair values of SJI's long-term debt (which includes SJG and all consolidated subsidiaries), including current maturities, as of June 30, 2019 and December 31, 2018, were $2.43 billion and $2.91 billion, respectively.  The carrying amounts of SJI's long-term debt, including current maturities, as of June 30, 2019 and December 31, 2018, were $2.28 billion and $2.84 billion, respectively. SJI's carrying amounts as of June 30, 2019 and December 31, 2018 are net of unamortized debt issuance costs of $25.3 million and $27.0 million, respectively.

•
The estimated fair values of SJG's long-term debt, including current maturities, as of June 30, 2019 and December 31, 2018, were $929.3 million and $895.1 million, respectively. The carrying amounts of SJG's long-term debt, including current maturities, as of June 30, 2019 and December 31, 2018, were $903.7 million and $893.4 million, respectively. The carrying amounts as of June 30, 2019 and December 31, 2018 are net of unamortized debt issuance costs of $6.5 million and $6.8 million, respectively.

OTHER FINANCIAL INSTRUMENTS - The carrying amounts of SJI's and SJG's other financial instruments approximate their fair values at June 30, 2019 and December 31, 2018.
6.
SEGMENTS OF BUSINESS:

SJI operates in several different reportable operating segments which reflect the financial information regularly evaluated by the CODM. These segments are as follows:

•
SJG utility operations consist primarily of natural gas distribution to residential, commercial and industrial customers in southern New Jersey.
•
ETG utility operations consist of natural gas distribution to residential, commercial and industrial customers in northern and central New Jersey.
•
ELK utility operations consist of natural gas distribution to residential, commercial and industrial customers in Maryland.
•
Wholesale energy operations include the activities of SJRG and SJEX.
•
Retail gas and other operations at SJE included natural gas acquisition and transportation service business lines. This business was sold on November 30, 2018.
•
Retail electric operations at SJE consist of electricity acquisition and transportation to commercial, industrial and residential customers.
•
On-site energy production consists of Marina's thermal energy facility and other energy-related projects. Also included in this segment are the activities of ACB, ACLE, BCLE, SCLE and SXLE.
•
Appliance service operations includes SJESP, which receives commissions on service contracts from a third party.
•
Midstream was formed to invest in infrastructure and other midstream projects, including a current project to build a natural gas pipeline in Pennsylvania and New Jersey.
•
Corporate & Services segment includes costs related to the Acquisition, along with other unallocated costs.
•
Intersegment represents intercompany transactions among the above SJI consolidated entities.
 
SJI groups its utility businesses under its wholly-owned subsidiary SJIU. This group consists of gas utility operations of SJG, ETG and ELK. SJI groups its nonutility operations into separate categories: Energy Group and Energy Services. Energy Group includes wholesale energy, retail gas and other, and retail electric operations. Energy Services includes on-site energy production and appliance service operations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.


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Table of Contents

Information about SJI’s operations in different reportable operating segments is presented below (in thousands):

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Operating Revenues:
 
 
 
 
 
 
 
SJI Utilities:
 
 
 
 
 
 
 
   SJG Utility Operations
62,268

 
$
76,801

 
$
334,466

 
$
311,260

   ETG Utility Operations
44,854

 
—

 
185,028

 
—

   ELK Utility Operations
944

 
—

 
4,318

 
—

     Subtotal SJI Utilities
108,066

 
76,801

 
523,812

 
311,260

Energy Group:
 
 
 
 
 
 
 
     Wholesale Energy Operations
126,483

 
67,220

 
316,490

 
257,563

Retail Gas and Other Operations
—

 
23,168

 
—

 
63,369

Retail Electric Operations
20,531

 
42,662

 
43,222

 
86,697

     Subtotal Energy Group
147,014

 
133,050

 
359,712

 
407,629

Energy Services:
 
 
 
 
 
 
 
On-Site Energy Production
14,788

 
24,734

 
26,118

 
45,891

Appliance Service Operations
484

 
451

 
1,015

 
971

Subtotal Energy Services
15,272

 
25,185

 
27,133

 
46,862

Corporate and Services
11,815

 
11,082

 
21,186

 
24,082

Subtotal
282,167

 
246,118

 
931,843

 
789,833

Intersegment Sales
(15,233
)
 
(18,788
)
 
(27,611
)
 
(40,558
)
Total Operating Revenues
$
266,934

 
$
227,330

 
$
904,232

 
$
749,275


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Operating Income (Loss):
 

 
 

 
 
 
 
SJI Utilities:
 
 
 
 
 
 
 
     SJG Utility Operations
$
10,215

 
$
8,443

 
$
108,560

 
$
101,244

     ETG Utility Operations
2,051

 
—

 
46,200

 
—

     ELK Utility Operations
(32
)
 
—

 
598

 
—

          Subtotal SJI Utilities
12,234


8,443

 
155,358


101,244

Energy Group:
 
 
 
 
 
 
 
     Wholesale Energy Operations
(2,386
)
 
(10,472
)
 
(4,892
)
 
65,185

Retail Gas and Other Operations
—

 
1,659

 
—

 
(4,099
)
Retail Electric Operations
(2,313
)
 
1,094

 
(3,969
)
 
886

     Subtotal Energy Group
(4,699
)
 
(7,719
)
 
(8,861
)
 
61,972

Energy Services:
 
 
 
 
 
 
 
On-Site Energy Production
1,343

 
(100,435
)
 
1,461

 
(100,989
)
Appliance Service Operations
421

 
442

 
1,016

 
945

  Subtotal Energy Services
1,764

 
(99,993
)
 
2,477

 
(100,044
)
Corporate and Services
(433
)
 
(9,263
)
 
(5,555
)
 
(13,834
)
Total Operating Income (Loss)
$
8,866

 
$
(108,532
)
 
$
143,419

 
$
49,338


 
 
 
 
 
 
 
Depreciation and Amortization:
 

 
 

 
 
 
 
SJI Utilities:
 
 
 
 
 
 
 
     SJG Utility Operations
$
23,083

 
$
20,274

 
$
45,785

 
$
40,589

     ETG Utility Operations
6,813

 
—

 
13,471

 
—



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Table of Contents

     ELK Utility Operations
113

 
—


225

 
—

          Subtotal SJI Utilities
30,009


20,274

 
59,481


40,589

Energy Group:
 
 
 
 
 
 
 
     Wholesale Energy Operations
25

 
29

 
48

 
52

Retail Gas and Other Operations
—

 
78

 
—

 
153

     Subtotal Energy Group
25

 
107

 
48

 
205

Energy Services:
 
 
 
 
 
 
 
On-Site Energy Production
1,256

 
10,324

 
2,508

 
20,595

Appliance Service Operations
—

 
—

 
—

 
—

  Subtotal Energy Services
1,256

 
10,324

 
2,508

 
20,595

Corporate and Services
1,754

 
5,951

 
2,998

 
9,165

Total Depreciation and Amortization
$
33,044

 
$
36,656

 
$
65,035

 
$
70,554


 
 
 
 
 
 
 
Interest Charges:
 

 
 

 
 
 
 
SJI Utilities:
 
 
 
 
 
 
 
       SJG Utility Operations
$
7,896

 
$
6,999

 
$
15,744

 
$
13,727

       ETG Utility Operations
6,620

 
—

 
12,941

 
—

       ELK Utility Operations
5

 
—

 
11

 
—

            Subtotal SJI Utilities
14,521


6,999

 
28,696


13,727

Energy Group:
 
 
 
 
 
 
 
Retail Gas and Other Operations
—

 
105

 
—

 
251

     Subtotal Energy Group
—

 
105

 
—

 
251

Energy Services:
 
 
 
 
 
 
 
On-Site Energy Production
2,138

 
4,098

 
4,423

 
7,945

Midstream
555

 
479

 
1,099

 
905

Corporate and Services
14,659

 
13,368

 
30,063

 
20,838

Subtotal
31,873

 
25,049

 
64,281

 
43,666

Intersegment Borrowings
(3,439
)
 
(5,488
)
 
(7,194
)
 
(10,133
)
Total Interest Charges
$
28,434

 
$
19,561

 
$
57,087

 
$
33,533




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Table of Contents

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Income Taxes:
 

 
 

 
 
 
 
 SJI Utilities:
 
 
 
 
 
 
 
     SJG Utility Operations
$
671

 
$
482

 
$
24,368

 
$
22,318

     ETG Utility Operations
(809
)
 
—

 
6,093

 
—

     ELK Utility Operations
(9
)
 
—

 
154

 
—

           Subtotal SJI Utilities
(147
)

482

 
30,615


22,318

Energy Group:
 
 
 
 
 
 
 
     Wholesale Energy Operations
(481
)
 
(2,478
)
 
(958
)
 
16,649

Retail Gas and Other Operations
—

 
474

 
—

 
(1,060
)
Retail Electric Operations
(569
)
 
307

 
(818
)
 
249

     Subtotal Energy Group
(1,050
)
 
(1,697
)
 
(1,776
)
 
15,838

Energy Services:
 
 
 
 
 
 
 
On-Site Energy Production
121

 
(26,489
)
 
(357
)
 
(27,646
)
Appliance Service Operations
136

 
106

 
303

 
237

  Subtotal Energy Services
257

 
(26,383
)
 
(54
)
 
(27,409
)
Midstream
(33
)
 
(22
)
 
(65
)
 
40

Corporate and Services
(3,673
)
 
(4,352
)
 
(8,417
)
 
(6,344
)
Total Income Taxes
$
(4,646
)
 
$
(31,972
)
 
$
20,303

 
$
4,443

 
 
 
 
 
 
 
 
Property Additions:
 
 
 
 
 
 
 
SJI Utilities:
 
 
 
 
 
 
 
     SJG Utility Operations
$
67,257

 
$
65,148

 
$
122,562

 
$
115,385

     ETG Utility Operations
53,938

 
—

 
91,962

 
—

     ELK Utility Operations
983

 
—


1,628

 
—

          Subtotal SJI Utilities
122,178


65,148

 
216,152


115,385

Energy Group:
 
 
 
 
 
 
 
     Wholesale Energy Operations
—

 
27

 
—

 
32

Retail Gas and Other Operations
—

 
136

 
—

 
309

     Subtotal Energy Group
—

 
163

 
—

 
341

Energy Services:
 
 
 
 
 
 
 
On-Site Energy Production
141

 
570

 
164

 
1,683

  Subtotal Energy Services
141

 
570

 
164

 
1,683

Midstream
7

 
99

 
19

 
310

Corporate and Services
1

 
8,204

 
586

 
11,549

Total Property Additions
$
122,327

 
$
74,184

 
$
216,921

 
$
129,268



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Table of Contents

 
June 30, 2019
 
December 31, 2018
Identifiable Assets:
 
 
 
SJI Utilities:
 
 
 
     SJG Utility Operations
$
3,183,710

 
$
3,118,236

     ETG Utility Operations
2,291,156

 
2,148,175

     ELK Utility Operations
19,043

 
16,482

          Subtotal SJI Utilities
5,493,909

 
5,282,893

Energy Group:
 
 
 
     Wholesale Energy Operations
177,183

 
266,417

Retail Gas and Other Operations (A)
141

 
12,736

Retail Electric Operations
34,394

 
39,345

     Subtotal Energy Group
211,718

 
318,498

Energy Services:
 
 
 
On-Site Energy Production
170,251

 
195,329

Appliance Service Operations
81

 
—

Subtotal Energy Services
170,332

 
195,329

Midstream
78,246

 
72,333

Discontinued Operations
1,742

 
1,777

Corporate and Services
317,842

 
387,482

Intersegment Assets
(245,527
)
 
(301,735
)
Total Identifiable Assets
$
6,028,262

 
$
5,956,577


(A)    As of June 30, 2019, the remaining $0.1 million of assets in the retail gas and other operations segment represents outstanding accounts receivable balances.

7.
RATES AND REGULATORY ACTIONS:

SJG and ETG are subject to the rules and regulations of the BPU. ELK is subject to the rules and regulations of the MPSC.

SJG:

In September 2018, the BPU issued an Order approving, on a provisional basis, SJG's request for a $65.5 million increase in the gas cost recoveries associated with the 2018-2019 BGSS year, effective October 1, 2018. The matter was thereafter referred to the Office of Administrative Law for further proceedings.  Also, in December 2018, SJG submitted a notice of intent to self-implement a BGSS rate adjustment based on a 5% increase of the monthly bill of a typical residential customer; that adjustment took effect on February 1, 2019. In May 2019, the BPU issued an Order authorizing SJG to spread the $65.5 million recovery of gas costs over a two-year period, resulting in a reduction in the BGSS rate effective May 15, 2019, and a one-time bill credit of approximately $24.0 million.

In April 2019, SJG submitted its annual filing, pursuant to the October 2016 BPU approval of the AIRP II, seeking a base rate adjustment to increase annual revenues by approximately $6.5 million to reflect the roll-in of approximately $63.0 million of AIRP II investments placed in service during July 1, 2018 through June 30, 2019. The matter is currently pending BPU approval.

In April 2019, SJG submitted its first annual filing, pursuant to the May 2018 BPU approval of the SHARP II, seeking a base rate adjustment to increase annual revenues by approximately $3.0 million to reflect the roll-in of approximately $28.3 million of SHARP II investments placed in service during June 1, 2018 through June 30, 2019. The matter is currently pending BPU approval.

In June 2019, SJG filed its annual BGSS and CIP filing with the BPU, requesting a $27.6 million decrease in gas cost recoveries related to its BGSS and a $7.6 million decrease in revenues related to its CIP, resulting in a net revenue decrease of $35.2 million. The matter is currently pending BPU approval. SJG does not profit from the sale of the commodity and will pass through the costs of the commodity to the customer. Similarly BGSS recoveries/refunds may impact Operating Revenue and Cost of Sales, however would not have an impact on SJG’s net income.


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Table of Contents

In June 2019, SJG filed its annual EET rate adjustment petition, requesting a $1.3 million increase in revenues to continue recovering the costs of, and the allowed return on, investments associated with its EEPs. The matter is currently pending BPU approval.

In June 2019, SJG filed its annual USF petition, along with the State’s other electric and gas utilities. The proposed revenue increase for SJG is approximately $1.0 million. The matter is currently pending BPU approval.

In June 2019, SJG filed its first annual Tax Act Rider petition, requesting a rate adjustment to refund approximately $6.8 million related to SJG’s excess deferred income taxes, resulting from the change in the Federal corporate tax rate from 35% to 21% associated with the Tax Reform. The matter is currently pending BPU approval.

ETG:

In April 2019, ETG filed a petition with the BPU requesting a base rate revenue increase of approximately $65.0 million to recognize the infrastructure investments made to maintain the safety and reliability of its natural gas system. The petition reflects approximately $346.0 million in net plant additions not reflected in ETG’s current rates. The matter is currently pending BPU approval.

In April 2019, the BPU issued an Order approving a revenue increase of $1.3 million associated with ETG’s annual EEP rate adjustment filing, effective May 1, 2019.

In May 2019, the BPU issued an Order approving a revenue increase of $6.9 million associated with ETG’s annual RAC rate adjustment filing, effective June 1, 2019.

In June 2019, the BPU issued an Order approving a $300.0 million IIP effective July 1, 2019. The Order authorized the recovery of costs associated with ETG’s investments of approximately $300.0 million between 2019-2024 to replace its cast-iron and bare steel vintage main and related services. The Order provides for annual recovery of ETG's investments through a separate rate mechanism.

In June 2019, ETG along with the other NJ gas utilities filed jointly for statewide USF and Lifeline rate increases with an effective date of October 1, 2019. The proposed revenue increase for ETG is approximately $0.8 million.

There have been no other significant regulatory actions or changes to the Utilities' rate structure since December 31, 2018. See Note 10 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2018.

8.
REGULATORY ASSETS AND REGULATORY LIABILITIES:

There have been no significant changes to the nature of the Utilities' regulatory assets and liabilities since December 31, 2018, which are described in Note 11 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018.


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Table of Contents

The Utilities Regulatory Assets as of June 30, 2019 consisted of the following items (in thousands):
 
June 30, 2019
 
SJG
ETG
ELK
Total SJI
Environmental Remediation Costs:
 
 
 
 
Expended - Net
$
136,772

$
16,510

$
—

$
153,282

Liability for Future Expenditures
150,351

103,349

—

253,700

Deferred ARO Costs
33,659

10,655

128

44,442

Deferred Pension Costs - Unrecognized Prior Service Cost
—

38,996

14

39,010

Deferred Pension and Other Postretirement Benefit Costs
79,466

2,607

30

82,103

Deferred Gas Costs - Net
60,993

—

549

61,542

SBC Receivable
150

—

—

150

Deferred Interest Rate Contracts
7,700

—

—

7,700

Energy Efficiency Tracker
4,919

—

—

4,919

Pipeline Supplier Service Charges
571

—

—

571

Pipeline Integrity Cost
5,325

—

—

5,325

AFUDC - Equity Related Deferrals
10,224

—

—

10,224

Weather Normalization
—

—

252

252

Other Regulatory Assets
9,734

9,085

225

19,044

 
 
 
 
 
Total Regulatory Assets
$
499,864

$
181,202

$
1,198

$
682,264



The Utilities Regulatory Assets as of December 31, 2018 consisted of the following items (in thousands):

 
December 31, 2018
 
SJG
ETG
ELK
Total SJI
Environmental Remediation Costs:
 
 
 
 
Expended - Net
$
136,227

$
10,875

$
—

$
147,102

Liability for Future Expenditures
148,071

104,594

—

252,665

Deferred ARO Costs
31,096

—

—

31,096

Deferred Pension Costs - Unrecognized Prior Service Cost
—

40,612

14

40,626

Deferred Pension and Other Postretirement Benefit Costs
80,121

2,607

30

82,758

Deferred Gas Costs - Net
57,889

—

289

58,178

SBC Receivable
2,173

—

—

2,173

Deferred Interest Rate Contracts
5,867

—

—

5,867

Energy Efficiency Tracker
2,319

—

—

2,319

Pipeline Supplier Service Charges
617

—

—

617

Pipeline Integrity Cost
5,140

—

—

5,140

AFUDC - Equity Related Deferrals
13,914

—

—

13,914

Weather Normalization
—

3,210

139

3,349

Other Regulatory Assets
8,931

8,023

211

17,165

 
 
 
 
 
Total Regulatory Assets
$
492,365

$
169,921

$
683

$
662,969




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Table of Contents

Except where noted below, all regulatory assets are or are expected to be recovered through utility rate charges, as detailed in the following discussion. The Utilities are currently permitted to recover interest on Environmental Remediation Costs, Societal Benefit Costs Receivable, EET and Pipeline Integrity Costs, while the other assets are being recovered without a return on investment.

ENVIRONMENTAL REMEDIATION COSTS - SJG and ETG have two regulatory assets associated with environmental costs related to the cleanup of environmental sites. SJG has 12 sites where SJG or its predecessors previously operated gas manufacturing plants, while ETG is subject to environmental remediation liabilities associated with six former manufactured gas plant sites in New Jersey. 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 GAAP, as the BPU allows SJG and ETG 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. SJG and ETG recorded this estimated amount as a regulatory asset with the corresponding current and noncurrent liabilities on the condensed consolidated balance sheets under the captions "Current Liabilities" (SJI and SJG), "Deferred Credits and Other Noncurrent Liabilities" (SJI) and "Regulatory and Other Noncurrent Liabilities" (SJG). The BPU allows SJG to recover the deferred costs over seven year periods after they are incurred. Accrued environmental remediation costs at ETG are recoverable from customers through rate mechanisms approved by the BPU.

DEFERRED GAS COSTS - NET - Over/under collections of gas costs are monitored through SJG's and ETG's BGSS bill credit. 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 natural gas purchases are also included in the BGSS, subject to BPU approval. The BGSS regulatory assets of SJI and SJG increased $3.4 million and $3.1 million, respectively, from December 31, 2018 to June 30, 2019, primarily due to gas commodity costs exceeding recoveries from customers.

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. Included in this number for SJG is the impact of the ERIP on SJG employees, see Note 1 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018.

The Utilities Regulatory Liabilities as of June 30, 2019 consisted of the following items (in thousands):

 
June 30, 2019
 
SJG
ETG
ELK
Total SJI
Excess Plant Removal Costs
$
17,910

$
47,827

$
1,386

$
67,123

Excess Deferred Taxes
252,854

120,470

1,231

374,555

CIP Payable
1,606

—

—

1,606

Weather Normalization
—

1,641

—

1,641

Amounts to be Refunded to Customers
—

12,750

—

12,750

Other Regulatory Liabilities
—

283

—

283

 
 
 
 
 
Total Regulatory Liabilities
$
272,370

$
182,971

$
2,617

$
457,958


 

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Table of Contents

The Utilities Regulatory Liabilities as of December 31, 2018 consisted of the following items (in thousands):

 
December 31, 2018
 
SJG
ETG
ELK
Total SJI
Excess Plant Removal Costs
$
20,805

$
47,909

$
1,393

$
70,107

Excess Deferred Taxes
259,863

118,757

1,231

379,851

Deferred Revenues - Net
—

3,188

—

3,188

CIP Payable
5,871

—

—

5,871

Amounts to be Refunded to Customers
—

17,039

—

17,039

Other Regulatory Liabilities
—

2,443

—

2,443

 
 
 
 
 
Total Regulatory Liabilities
$
286,539

$
189,336

$
2,624

$
478,499



EXCESS DEFERRED TAXES - This liability is recognized as a result of Tax Reform (see Notes 1 and 4 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018). The decrease in this liability from December 31, 2018 to June 30, 2019 is related to excess tax amounts returned to customers through customer billings. The Unprotected amount of excess deferred taxes of $26.1 million will be returned to customers over a five year period. The remaining balance will be deferred until SJG's next base rate case as approved by the BPU.

WEATHER NORMALIZATION - The tariffs for ETG include a weather normalization clause that reduces customer bills when winter weather is colder than normal and increases customer bills when winter weather is warmer than normal. The overall reduction of the weather normalization from a $3.2 million regulatory asset at December 31, 2018 to a
$1.6 million regulatory liability at June 30, 2019, was due to timing of collections from customers and colder than normal weather during the first three months of the year.

DEFERRED REVENUES - NET - Over/under collections of gas costs are monitored through ETG's BGSS mechanism. Net under collected gas costs are classified as a regulatory asset and net over collected gas costs are classified as a regulatory liability. Derivative contracts used to hedge natural gas purchases are also included in the BGSS, subject to BPU approval. The BGSS regulatory liability of ETG increased due to recoveries from customers exceeding actual gas costs.

AMOUNTS TO BE REFUNDED TO CUSTOMERS - See "AMA" section in Note 1.


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9.
PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three and six months ended June 30, 2019 and 2018, net periodic benefit cost related to the employee and officer pension and other postretirement benefit plans for SJI consisted of the following components (in thousands):
 
Pension Benefits
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019

2018
 
2019
 
2018
Service Cost
$
1,081

 
$
639

 
$
2,800

 
$
2,816

Interest Cost
4,435

 
716

 
8,664

 
5,824

Expected Return on Plan Assets
(4,942
)
 
(19
)
 
(10,135
)
 
(7,652
)
Amortizations:
 
 
 

 
 
 
 
Prior Service Cost
27

 
(13
)
 
53

 
58

Actuarial Loss
2,360

 
1,632

 
4,797

 
5,764

Net Periodic Benefit Cost
2,961

 
2,955

 
6,179

 
6,810

Capitalized Benefit Cost
(374
)
 
(554
)
 
(968
)
 
(1,037
)
   Deferred Benefit Cost
(653
)
 
(374
)
 
(1,194
)
 
(1,125
)
Total Net Periodic Benefit Expense
$
1,934

 
$
2,027

 
$
4,017

 
$
4,648


 
Other Postretirement Benefits
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019

2018
 
2019
 
2018
Service Cost
$
37

 
$
360

 
$
271

 
$
441

Interest Cost
806

 
859

 
1,434

 
1,076

Expected Return on Plan Assets
(1,133
)
 
(1,578
)
 
(2,282
)
 
(1,883
)
Amortizations:
 
 
 

 
 

 
 
Prior Service Cost
(145
)
 
(141
)
 
(288
)
 
(172
)
Actuarial Loss
321

 
340

 
584

 
451

Net Periodic Benefit Cost
(114
)
 
(160
)
 
(281
)
 
(87
)
Capitalized Benefit Cost
(99
)
 
—

 
(155
)
 
(5
)
   Deferred Benefit Cost
119

 
—

 
235

 
—

Total Net Periodic Benefit Expense
$
(94
)
 
$
(160
)
 
$
(201
)
 
$
(92
)

The Pension Benefits Net Periodic Benefit Cost incurred by SJG was approximately $2.1 million and $1.9 million of the totals presented in the table above for the three months ended June 30, 2019 and 2018, respectively, and $4.4 million and $4.3 million of the totals presented in the table above for the six months ended June 30, 2019 and 2018, respectively.

For the three months ended June 30, 2019 and 2018, the Other Postretirement Benefits Net Periodic Benefit Cost incurred by SJG was $(0.1) million and less than $0.1 million, respectively, of the totals presented in the table above, and, for the six months ended June 30, 2019 and 2018, $(0.2) million and less than $0.1 million, respectively, of the totals presented in the table above.

Capitalized benefit costs reflected in the table above relate to the Utilities' construction programs.

Companies with publicly traded equity securities that sponsor a postretirement benefit plan are required to fully recognize, as an asset or liability, the overfunded or underfunded status of its benefit plans and recognize changes in the funded status in the year in which the changes occur. Changes in funded status are generally reported in AOCL; however, since the Utilities recover all prudently incurred pension and postretirement benefit costs from their ratepayers, a significant portion of the changes resulting from the recording of additional liabilities under this requirement is reported as regulatory assets.


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No contributions were made to the pension plans by either SJI or SJG during the six months ended June 30, 2019 or 2018. SJI and SJG do not expect to make any contributions to the pension plans during the remainder of 2019; however, changes in future investment performance and discount rates may ultimately result in a contribution. Payments related to the unfunded SERP are expected to be approximately $3.6 million in 2019.

As part of the Acquisition, SJI acquired ETG's and ELK's existing pension and other post-employment benefit plans.  The plans include a qualified defined benefit, trusteed, pension plan covering most eligible employees.  The qualified pension plan is funded in accordance with requirements of the ERISA.  The Company also provides certain non-qualified defined benefit and defined contribution pension plans for a selected group of the Company's management and highly compensated employees.  Benefits under these non-qualified pension plans are funded on a cash basis.  In addition, the entities have a postretirement benefit plan, which provides certain medical care and life insurance benefits for eligible retired employees through a postretirement benefit plan.

See Note 12 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018 for additional information related to SJI’s and SJG's pension and other postretirement benefits.

10.
LINES OF CREDIT:
 
Credit facilities and available liquidity as of June 30, 2019 were as follows (in thousands):

Company
 
Total Facility
 
Usage
 
Available Liquidity
 
Expiration Date
SJI:
 
 
 
 
 
 
 
 
SJI Syndicated Revolving Credit Facility
 
$
500,000

 
$
396,600

(A)
$
103,400

 
August 2022
Revolving Credit Facility
 
50,000

 
50,000

 
—

 
September 2019 (D)
 
 
 
 
 
 
 
 
 
Total SJI
 
550,000

 
446,600

 
103,400

 
 
 
 
 
 
 
 
 
 
 
SJG:
 
 
 
 
 
 
 
 
Commercial Paper Program/Revolving Credit Facility
 
200,000

 
104,000

(B)
96,000

 
August 2022
Uncommitted Bank Line
 
10,000

 
—

 
10,000

 
August 2019 (D)
 
 
 
 
 
 
 
 
 
Total SJG
 
210,000

 
104,000

 
106,000

 
 
 
 
 
 
 
 
 
 
 
ETG/ELK:
 
 
 
 
 
 
 
 
ETG/ELK Revolving Credit Facility
 
200,000

 
140,900

(C)
59,100

 
June 2021
 
 
 
 
 
 
 
 
 
Total
 
$
960,000

 
$
691,500

 
$
268,500

 
 

(A) Includes letters of credit outstanding in the amount of $9.6 million.
(B) Includes letters of credit outstanding in the amount of $0.9 million.
(C) Includes letters of credit outstanding in the amount of $1.0 million.
(D) SJI and SJG intend to renew these facilities upon expiration.

In June 2019, SJI entered into an amendment to its Five Year Revolving Credit Agreement ("Credit Agreement"), expiring in August 2022, that increased by $100.0 million the amount SJI can borrow under the Credit Agreement in the form of revolving loans from a total aggregate amount of $400.0 million to $500.0 million. In addition, as part of the total $500.0 million extension of credit, the Credit Agreement provides for swingline loans (in an amount not to exceed an aggregate of $50.0 million ) and letters of credit (in an amount not to exceed an aggregate of $200.0 million), each at the applicable interest rates specified in the Credit Agreement. Subject to certain conditions set forth in the Credit Agreement, the Company may increase the revolving credit facility up to a maximum aggregate amount of $100.0 million (for a total facility of up to $600.0 million), although no lender is obligated to increase its commitment.


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SJI (as a guarantor to ELK's obligation under this revolving credit agreement), ETG and ELK (as Borrowers) have a $200.0 million revolving credit agreement with several lenders. The revolving credit agreement provides for the extension of credit to the Borrowers in a total aggregate amount of $200.0 million ($175.0 million for ETG; $25.0 million for ELK), in the form of revolving loans up to a full amount of $200.0 million, swingline loans in an amount not to exceed an aggregate of $20.0 million and letters of credit in an amount not to exceed an aggregate of $50.0 million, each at the applicable interest rates specified in the revolving credit agreement. Subject to certain conditions set forth in the revolving credit agreement, ETG may increase the revolving credit facility up to a maximum aggregate amount of $50.0 million (for a total revolving facility of up to $250.0 million). This facility contains one financial covenant, limiting the ratio of indebtedness to total capitalization (as defined in the credit agreement) of each Borrower to not more than 0.70 to 1, measured at the end of each fiscal quarter. ETG and ELK were in compliance with this covenant at June 30, 2019. In June 2019, this revolving credit agreement was amended to add SJIU as an additional Borrower and to extend the termination date from June 2020 to June 2021.

The Utilities' facilities are restricted as to use and availability specifically to the respective Utilities; however, if necessary, the SJI facilities can also be used to support the liquidity needs of the Utilities. All committed facilities contain one financial covenant limiting the ratio of indebtedness to total capitalization of the applicable borrowers (as defined in the respective credit agreements), measured on a quarterly basis. SJI and the Utilities were in compliance with these covenants as of June 30, 2019. Borrowings under these credit facilities are at market rates.

SJI's weighted average interest rate on these borrowings (inclusive of SJG for both periods and ETG/ELK for 2019), which changes daily, was 3.45% and 2.90% at June 30, 2019 and 2018, respectively. SJG's weighted average interest rate on these borrowings, which changes daily, was 2.60% and 2.33% at June 30, 2019 and 2018, respectively.

SJI's average borrowings outstanding under these credit facilities (inclusive of SJG for both periods and ETG/ELK for 2019), not including letters of credit, during the six months ended June 30, 2019 and 2018 were $347.2 million and $201.6 million, respectively. The maximum amounts outstanding under these credit facilities, not including letters of credit, during the six months ended June 30, 2019 and 2018 were $687.2 million and $397.3 million, respectively.

SJG's average borrowings outstanding under its credit facilities during the six months ended June 30, 2019 and 2018 were $72.5 million and $49.3 million, respectively. The maximum amounts outstanding under its credit facilities during the six months ended June 30, 2019 and 2018 were $108.0 million and $85.0 million, respectively.

The SJI, SJG and ETG/ELK principal credit facilities are provided by a syndicate of banks. The NPA for Senior Unsecured Notes issued by SJI contains a financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective NPA or credit agreement) to not more than 0.70 to 1, measured at the end of each fiscal quarter. For SJI, the equity units are treated as equity (as opposed to how they are classified on the condensed consolidated balance sheet, as long-term debt) for purposes of the covenant calculation. SJI and SJG were in compliance with this covenant as of June 30, 2019. However, one SJG bank facility still contains a financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective credit agreement) to not more than 0.65 to 1 measured at the end of each fiscal quarter. As a result, SJG must ensure that the ratio of indebtedness to total capitalization (as defined in the respective credit agreement) does not exceed 0.65 to 1, as measured at the end of each fiscal quarter. SJG is was in compliance with this covenant as of June 30, 2019.

SJG has a commercial paper program under which SJG may issue short-term, unsecured promissory notes to qualified investors up to a maximum aggregate amount outstanding at any time of $200.0 million. The notes have fixed maturities which vary by note, but may not exceed 270 days from the date of issue. Proceeds from the notes are used for general corporate purposes. SJG uses the commercial paper program in tandem with its $200.0 million revolving credit facility and does not expect the principal amount of borrowings outstanding under the commercial paper program and the credit facility at any time to exceed an aggregate of $200.0 million. In June 2019, the revolving credit agreement was amended to add SJIU as an additional Borrower.
  

11.
COMMITMENTS AND CONTINGENCIES:

GUARANTEES — As of June 30, 2019, SJI had issued $8.8 million of parental guarantees on behalf of an unconsolidated subsidiary. These guarantees generally expire within the next two years and were issued to enable the subsidiary to market retail natural gas.


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GAS SUPPLY CONTRACTS - In the normal course of business, SJG, SJRG and ETG have entered into long-term contracts for natural gas supplies, firm transportation and gas storage service. The transportation and storage service agreements with interstate pipeline suppliers were made under FERC-approved tariffs. SJG and ETG's cumulative obligation for gas supply-related demand charges and reservation fees paid to suppliers for these services averages approximately $6.7 million and $5.2 million per month, respectively, and is recovered on a current basis through the BGSS. SJRG's cumulative obligation for demand charges and reservation fees paid to suppliers for these services averages approximately $1.3 million per month. SJRG has also committed to purchase 832,500 dts/d of natural gas, from various suppliers, for terms ranging from 4 to 10 years at index-based prices.

ETG has an AMA with SJRG for transportation and storage capacity to meet natural gas demands. The AMA is valid through March 31, 2022. It also requires SJRG to pay minimum annual fees of $4.25 million to ETG and includes tiered margin sharing levels between ETG and SJRG (see Note 1).

TSA - SJI has entered into a TSA with Southern Company Gas whereby the latter will provide certain administrative and operational services through no later than January 31, 2020.

COLLECTIVE BARGAINING AGREEMENTS — Unionized personnel represent approximately 46% and 67% of SJI's and SJG's workforce at June 30, 2019, respectively. SJI has collective bargaining agreements with unions that represent these employees: IBEW Local 1293, IAM Local 76 and UWUA Local 424. SJG employees represented by the IBEW operate under a collective bargaining agreement that runs through February 2022. SJG's remaining unionized employees are represented by the IAM and operate under a collective bargaining agreement that runs through August 2021. ETG employees represented by the UWUA operate under a collective bargaining agreement that runs through November 2020.

STANDBY LETTERS OF CREDIT — As of June 30, 2019, SJI provided $9.6 million of standby letters of credit through its revolving credit facility to enable SJE to market retail electricity and for various construction and operating activities. ETG provided a $1.0 million letter of credit under its revolving credit facility to support commodity trading activity. SJG provided a $0.9 million letter of credit under its revolving credit facility to support the remediation of environmental conditions at certain locations in SJG's service territory. SJG has provided $25.1 million of additional letters of credit under a separate facility outside of the revolving credit facility to support variable-rate demand bonds issued through the NJEDA to finance the expansion of SJG’s natural gas distribution system.

EQUITY AND CORPORATE UNITS - The Company has a contract obligating the holder of the units to purchase from the Company, and for the Company to sell to the holder for a price in cash of $50, a certain number of shares of common stock. See Note 4.

PENDING LITIGATION — SJI and SJG are subject to claims, actions and other legal proceedings arising in the ordinary course of business. Neither SJI nor SJG can make any assurance as to the outcome of any of these actions but, based on an analysis of these claims and consultation with outside counsel, we do not believe that any of these claims, other than described below, will have a material impact on the business or financial statements of SJI or SJG. 


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Table of Contents

SJI is currently involved in a pricing dispute related to two long-term gas supply contracts. On May 8, 2017, a jury from the United States District Court for the District of Colorado returned a verdict in favor of the plaintiff supplier. On July 21, 2017, the court entered final judgment against SJG and SJRG. As a result of this ruling, SJG and SJRG have accrued, including interest, $22.6 million and $58.9 million, respectively, from the first quarter of 2017 through June 30, 2019. We believe that the amount to be paid by SJG reflects a gas cost that ultimately will be recovered from SJG’s customers through adjusted rates. As such, the $22.6 million associated with SJG was recorded as both an Accounts Payable and an increase in Regulatory Assets on the condensed consolidated balance sheets of both SJI and SJG as of June 30, 2019. The $58.9 million associated with SJRG was also recorded as an Accounts Payable on the condensed consolidated balance sheets of SJI as of June 30, 2019. Charges recorded to Cost of Sales - Nonutility on the condensed consolidated statements of income of SJI were $0.4 million and $0.5 million for the three and six months ended June 30, 2019, respectively, and $0.9 million and $1.0 million for the three and six months ended June 30, 2018, respectively. SJI also recorded to Interest Charges on the condensed consolidated statements of income $0.4 million and $0.7 million for the three and six months ended June 30, 2019, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2018, respectively. In April 2018, SJI filed an appeal of this judgment which was heard by the Tenth Circuit on January 22, 2019. On August 6, 2019, the Tenth Circuit issued its decision affirming the lower court’s decision and finding that SJG and SJRG breached the contracts and the plaintiff is entitled to damages. SJI has a reserve to reflect the differences between the invoices and paid amounts, and SJI will be required to make payment by September 5, 2019 in an amount not materially different from what has been reserved. The plaintiff supplier filed a second related lawsuit against SJG and SJRG in the United States District Court for the District of Colorado on December 21, 2017, alleging that SJG and SJRG have continued to breach the gas supply contracts notwithstanding the judgment in the prior lawsuit. The plaintiff supplier is seeking recovery of the amounts disputed by SJI since the earlier judgment, and a declaration regarding the price under the disputed contracts going forward until the contracts terminate in October 2019. The decision in the first lawsuit is prejudicial to this second lawsuit and SJI is similarly obligated to pay damages related to this breach of contract claim as well. All reserves related to this second lawsuit are recorded as part of the accrued amounts disclosed above.

In August 2018, the State of New Jersey filed a civil enforcement action against SJG and several other current and former owners of certain property in Atlantic City, NJ where SJG and its predecessors previously operated a manufactured gas plant. The State of New Jersey is alleging damage to the State's natural resources and seeking payment for damages to those natural resources. SJG has been working with a licensed state remediation professional to remediate the site and is currently evaluating the merits of the State of New Jersey's allegations. At this time, SJG cannot reasonably estimate nor provide an assessment of the claim or any assurance regarding its outcome.

Liabilities related to claims are accrued when the amount or range of amounts of probable settlement costs or other charges for these claims can be reasonably estimated. For matters other than the disputes noted above, SJI has accrued approximately $2.8 million and $3.2 million related to all claims in the aggregate as of June 30, 2019 and December 31, 2018, respectively, of which SJG has accrued approximately $0.6 million and $0.9 million as of June 30, 2019 and December 31, 2018, respectively.

ENVIRONMENTAL REMEDIATION COSTS — SJG 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. ETG is subject to environmental remediation liabilities associated with six former manufactured gas plant sites in New Jersey. These environmental remediation expenditures are recoverable from customers through rate mechanisms approved by the BPU. 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. There have been no signifcant changes to the status of SJI’s environmental remediation efforts since December 31, 2018, as described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018.

12.
DERIVATIVE INSTRUMENTS:

Certain SJI subsidiaries, including SJG, 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 third parties. These subsidiaries are subject to market risk on expected future purchases and sales due to commodity price fluctuations. SJI and SJG use a variety of derivative instruments to limit this exposure to market risk in accordance with strict corporate guidelines. These derivative instruments include forward contracts, swap agreements, options contracts and futures contracts.

As of June 30, 2019, SJI and SJG had outstanding derivative contracts as follows: 

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Table of Contents

 
SJI Consolidated
SJG
Derivative contracts intended to limit exposure to market risk to:
 
 
    Expected future purchases of natural gas (in MMdts)
90.8

24.5

    Expected future sales of natural gas (in MMdts)
87.7

0.3

    Expected future purchases of electricity (in MMmWh)
1.1



    Expected future sales of electricity (in MMmWh)
0.9



 
 
 
Basis and Index related net purchase (sale) contracts (in MMdts)
18.8

3.8



These contracts, which have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives - Energy Related Assets or Derivatives - Energy Related Liabilities on the condensed consolidated balance sheets of SJI and SJG. For SJE and SJRG contracts, the net unrealized pre-tax gains (losses) for these energy-related commodity contracts are included with realized gains (losses) in Operating Revenues – Nonutility on the condensed consolidated statements of income for SJI. These unrealized pre-tax (losses) gains were $(0.1) million and $(6.2) million for the three months ended June 30, 2019 and 2018, respectively, and $(12.2) million and $17.2 million for the six months ended June 30, 2019 and 2018, respectively. For ETG's and SJG's contracts, the costs or benefits are recoverable through the BGSS clause, subject to BPU approval. As a result, the net unrealized pre-tax gains and losses for SJG and ETG energy-related commodity contracts are included with realized gains and losses in Regulatory Assets or Regulatory Liabilities on the condensed consolidated balance sheets of SJI (ETG and SJG) and SJG. As of June 30, 2019 and December 31, 2018, SJI had $(9.0) million and $4.1 million, respectively, and SJG had $(4.5) million and $3.3 million, respectively, of unrealized (losses) gains included in its BGSS related to energy-related commodity contracts.

SJI, including SJG, has also entered into interest rate derivatives to mitigate exposure to increasing interest rates and the impact of those rates on cash flows of variable-rate debt. These interest rate derivatives are measured at fair value and recorded in Derivatives - Other on the condensed consolidated balance sheets. Any unrealized gains and losses on these derivatives are being recorded in earnings over the remaining life of the derivative.

For SJI and SJG interest rate derivatives, the fair value represents the amount SJI and SJG would have to pay the counterparty to terminate these contracts as of those dates.

As of June 30, 2019, SJI’s active interest rate swaps were as follows:

Notional Amount
 
Fixed Interest Rate
 
Start Date
 
Maturity
 
Obligor
$
20,000,000

 
3.049%
 
3/15/2017
 
3/15/2027
 
SJI
$
20,000,000

 
3.049%
 
3/15/2017
 
3/15/2027
 
SJI
$
10,000,000

 
3.049%
 
3/15/2017
 
3/15/2027
 
SJI
$
12,500,000

 
3.530%
 
12/1/2006
 
2/1/2036
 
SJG
$
12,500,000

 
3.430%
 
12/1/2006
 
2/1/2036
 
SJG


The unrealized gains and losses on interest rate derivatives that are not designated as cash flow hedges are included in Interest Charges in the condensed consolidated statements of income. However, for selected interest rate derivatives at SJG, management believes that, subject to BPU approval, the market value upon termination can be recovered in rates and, therefore, these unrealized losses have been included in Other Regulatory Assets in the condensed consolidated balance sheets.

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Table of Contents


The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018, are as follows (in thousands):

SJI (includes SJG and all other consolidated subsidiaries):
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments under GAAP
 
June 30, 2019
 
December 31, 2018
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Energy-related commodity contracts:
 
 
 
 
 
 
 
 
Derivatives - Energy Related - Current
 
$
34,988

 
$
35,229

 
$
54,021

 
$
24,134

Derivatives - Energy Related - Non-Current
 
11,883

 
7,278

 
7,169

 
7,256

Interest rate contracts:
 
 
 
 
 
 

 
 

Derivatives - Other - Current
 
—

 
1,092

 
—

 
588

Derivatives - Other - Noncurrent
 
—

 
11,449

 
—

 
7,285

Total derivatives not designated as hedging instruments under GAAP
 
$
46,871

 
$
55,048

 
$
61,190

 
$
39,263

 
 
 
 
 
 
 
 
 
Total Derivatives
 
$
46,871

 
$
55,048

 
$
61,190

 
$
39,263



SJG:
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments under GAAP
 
June 30, 2019
 
December 31, 2018
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Energy-related commodity contracts:
 
 
 
 
 
 
 
 
Derivatives – Energy Related – Current
 
$
1,829

 
$
5,996

 
$
5,464

 
$
2,146

Derivatives – Energy Related – Non-Current
 
—

 
297

 
15

 
43

Interest rate contracts:
 
 
 
 
 
 
 
 
Derivatives – Other - Current
 
—

 
464

 
—

 
343

Derivatives – Other - Noncurrent
 
—

 
7,236

 
—

 
5,524

Total derivatives not designated as hedging instruments under GAAP
 
$
1,829

 
$
13,993

 
$
5,479

 
$
8,056

 
 
 
 
 
 
 
 
 
Total Derivatives
 
$
1,829

 
$
13,993

 
$
5,479

 
$
8,056



SJI and SJG enter into derivative contracts with counterparties, some of which are subject to master netting arrangements, which allow net settlements under certain conditions. These derivatives are presented at gross fair values on the condensed consolidated balance sheets.

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As of June 30, 2019 and December 31, 2018, information related to these offsetting arrangements were as follows (in thousands):
As of June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Description
 
Gross amounts of recognized assets/liabilities
 
Gross amount offset in the balance sheet
 
Net amounts of assets/liabilities in balance sheet
 
Gross amounts not offset in the balance sheet
 
Net amount
 
 
 
 
Financial Instruments
 
Cash Collateral Posted
 
SJI (includes SJG and all other consolidated subsidiaries):
Derivatives - Energy Related Assets
 
$
46,871

 
$
—

 
$
46,871

 
$
(25,996
)
(A)
$
—

 
$
20,875

Derivatives - Energy Related Liabilities
 
$
(42,507
)
 
$
—

 
$
(42,507
)
 
$
25,996

(B)
$
10,371

 
$
(6,140
)
Derivatives - Other
 
$
(12,541
)
 
$
—

 
$
(12,541
)
 
$
—

 
$
—

 
$
(12,541
)
SJG:
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives - Energy Related Assets
 
$
1,829

 
$
—

 
$
1,829

 
$
(45
)
(A)
$
—

 
$
1,784

Derivatives - Energy Related Liabilities
 
$
(6,293
)
 
$
—

 
$
(6,293
)
 
$
45

(B)
$
5,794

 
$
(454
)
Derivatives - Other
 
$
(7,700
)
 
$
—

 
$
(7,700
)
 
$
—

 
$
—

 
$
(7,700
)


As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Description
 
Gross amounts of recognized assets/liabilities
 
Gross amount offset in the balance sheet
 
Net amounts of assets/liabilities in balance sheet
 
Gross amounts not offset in the balance sheet
 
Net amount
 
 
 
 
Financial Instruments
 
Cash Collateral Posted
 
SJI (includes SJG and all other consolidated subsidiaries):
Derivatives - Energy Related Assets
 
$
61,190

 
$
—

 
$
61,190

 
$
(21,045
)
(A)
$
(7,252
)
 
$
32,893

Derivatives - Energy Related Liabilities
 
$
(31,390
)
 
$
—

 
$
(31,390
)
 
$
21,045

(B)
$
—

 
$
(10,345
)
Derivatives - Other
 
$
(7,873
)
 
$
—

 
$
(7,873
)
 
$
—

 
$
—

 
$
(7,873
)
SJG:
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives - Energy Related Assets
 
$
5,479

 
$
—

 
$
5,479

 
$
(347
)
(A)
$
688

 
$
5,820

Derivatives - Energy Related Liabilities
 
$
(2,189
)
 
$
—

 
$
(2,189
)
 
$
347

(B)
$
—

 
$
(1,842
)
Derivatives - Other
 
$
(5,867
)
 
$
—

 
$
(5,867
)
 
$
—

 
$
—

 
$
(5,867
)

(A) The balances at June 30, 2019 and December 31, 2018 were related to derivative liabilities which can be net settled against derivative assets.

(B) The balances at June 30, 2019 and December 31, 2018 were related to derivative assets which can be net settled against derivative liabilities.

The effect of derivative instruments on the condensed consolidated statements of income for the three and six months ended June 30, 2019 and 2018 are as follows (in thousands):


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Three Months Ended
June 30,
 
Six Months Ended
June 30,
Derivatives in Cash Flow Hedging Relationships under GAAP
 
2019
 
2018
 
2019
 
2018
SJI (includes SJG and all other consolidated subsidiaries):
 
 
 
 
 
 
 
 
Interest Rate Contracts:
 
 
 
 
 
 
 
 
Losses reclassified from AOCL into income (a)
 
$
(12
)
 
$
(12
)
 
$
(24
)
 
$
(24
)
 
 
 
 
 
 
 
 
 
SJG:
 
 
 
 
 
 
 
 
Interest Rate Contracts:
 
 
 
 
 
 
 
 
Losses reclassified from AOCL into income (a)
 
$
(12
)
 
$
(12
)
 
(24
)
 
(24
)

(a) Included in Interest Charges

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Derivatives Not Designated as Hedging Instruments under GAAP
 
2019
 
2018
 
2019
 
2018
SJI (includes SJG and all other consolidated subsidiaries):
 
 
 
 
 
 
 
 
(Losses) Gains on energy-related commodity contracts (a)
 
$
(143
)
 
$
(6,178
)
 
$
(12,203
)
 
$
17,175

(Losses) Gains on interest rate contracts (b)
 
(1,745
)
 
620

 
(2,835
)
 
2,248

 
 
 
 
 
 
 
 
 
Total
 
$
(1,888
)
 
$
(5,558
)
 
$
(15,038
)
 
$
19,423


(a)  Included in Operating Revenues - Nonutility
(b)  Included in Interest Charges

Certain of SJI’s derivative instruments contain provisions that require immediate payment or demand immediate and ongoing collateralization on derivative instruments in net liability positions in the event of a material adverse change in the credit standing of SJI. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on June 30, 2019, is less than $0.5 million. If the credit-risk-related contingent features underlying these agreements were triggered on June 30, 2019, SJI would have been required to settle the instruments immediately or post collateral to its counterparties of less than $0.5 million after offsetting asset positions with the same counterparties under master netting arrangements.

13.
FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:

GAAP establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques. The levels of the hierarchy are described below:

•
Level 1:  Observable inputs, such as quoted prices in active markets for identical assets or liabilities.

•
Level 2:  Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

•
Level 3:  Unobservable inputs that reflect the reporting entity’s own assumptions.

Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy.


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Table of Contents

For financial assets and financial liabilities measured at fair value on a recurring basis, information about the fair value measurements for each major category is as follows (in thousands):

As of June 30, 2019
Total
 
Level 1
 
Level 2
 
Level 3
SJI (includes SJG and all other consolidated subsidiaries):
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Available-for-Sale Securities (A)
$
41

 
$
41

 
$
—

 
$
—

Derivatives – Energy Related Assets (B)
46,871

 
6,935

 
16,212

 
23,724

 
$
46,912

 
$
6,976

 
$
16,212

 
$
23,724

SJG:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Derivatives – Energy Related Assets (B)
$
1,829

 
$
45

 
$
24

 
$
1,760

 
$
1,829

 
$
45

 
$
24

 
$
1,760

SJI (includes SJG and all other consolidated subsidiaries):
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Derivatives – Energy Related Liabilities (B)
$
42,507

 
$
20,245

 
$
8,498

 
$
13,764

Derivatives – Other (C)
12,541

 
—

 
12,541

 
—

 
$
55,048

 
$
20,245

 
$
21,039

 
$
13,764

SJG:
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Derivatives – Energy Related Liabilities (B)
$
6,293

 
$
5,839

 
$
402

 
$
52

Derivatives – Other (C)
7,700

 
—

 
7,700

 
—

 
$
13,993

 
$
5,839

 
$
8,102

 
$
52


As of December 31, 2018
Total
 
Level 1
 
Level 2
 
Level 3
SJI (includes SJG and all other consolidated subsidiaries):
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Available-for-Sale Securities (A)
$
41

 
$
41

 
$
—

 
$
—

Derivatives – Energy Related Assets (B)
61,190

 
9,955

 
23,429

 
27,806

 
$
61,231

 
$
9,996

 
$
23,429

 
$
27,806

SJG:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Derivatives – Energy Related Assets (B)
$
5,479

 
$
348

 
$
126

 
$
5,005

 
$
5,479

 
$
348

 
$
126

 
$
5,005

 
 
 
 
 
 
 
 
SJI (includes SJG and all other consolidated subsidiaries):
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Derivatives – Energy Related Liabilities (B)
$
31,390

 
$
7,291

 
$
12,354

 
$
11,745

Derivatives – Other (C)
7,873

 
—

 
7,873

 
—

 
$
39,263

 
$
7,291

 
$
20,227

 
$
11,745

SJG:
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Derivatives – Energy Related Liabilities (B)
$
2,189

 
$
1,035

 
$
1,077

 
$
77

Derivatives – Other (C)
5,867

 
—

 
5,867

 
—

 
$
8,056

 
$
1,035

 
$
6,944

 
$
77





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Table of Contents



(A) Available-for-Sale Securities include securities that are traded in active markets and securities that are not traded publicly. The securities traded in active markets are valued using the quoted principal market close prices that are provided by the trustees and are categorized in Level 1 in the fair value hierarchy.

(B) Derivatives – Energy Related Assets and Liabilities are traded in both exchange-based and non-exchange-based markets. Exchange-based contracts are valued using unadjusted quoted market sources in active markets and are categorized in Level 1 in the fair value hierarchy. Certain non-exchange-based contracts are valued using indicative price quotations available through brokers or over-the-counter, on-line exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask mid-point prices and are obtained from sources that management believes provide the most liquid market. For non-exchange-based derivatives that trade in less liquid markets with limited pricing information, model inputs generally would include both observable and unobservable inputs. In instances where observable data is unavailable, management considers the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 as the model inputs generally are not observable.

Significant Unobservable Inputs - Management uses the discounted cash flow model to value Level 3 physical and financial forward contracts, which calculates mark-to-market valuations based on forward market prices, original transaction prices, volumes, risk-free rate of return and credit spreads. Inputs to the valuation model are reviewed and revised as needed, based on historical information, updated market data, market liquidity and relationships, and changes in third party pricing sources. The validity of the mark-to-market valuations and changes in mark-to-market valuations from period to period are examined and qualified against historical expectations by the risk management function. If any discrepancies are identified during this process, the mark-to-market valuations or the market pricing information is evaluated further and adjusted, if necessary.

Level 3 valuation methods for natural gas derivative contracts include utilizing another location in close proximity adjusted for certain pipeline charges to derive a basis value. The significant unobservable inputs used in the fair value measurement of certain natural gas contracts consist of forward prices developed based on industry-standard methodologies. Significant increases (decreases) in these forward prices for purchases of natural gas would result in a directionally similar impact to the fair value measurement and for sales of natural gas would result in a directionally opposite impact to the fair value measurement. Level 3 valuation methods for electric represent the value of the contract marked to the forward wholesale curve, as provided by daily exchange quotes for delivered electricity. The significant unobservable inputs used in the fair value measurement of electric contracts consist of fixed contracted electric load profiles; therefore, no change in unobservable inputs would occur. Unobservable inputs are updated daily using industry-standard techniques. Management reviews and corroborates the price quotations to ensure the prices are observable which includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration.

(C) Derivatives – Other are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.

The following table provides quantitative information regarding significant unobservable inputs in Level 3 fair value measurements (in thousands, except for ranges):

SJI (includes SJG and all other consolidated subsidiaries):

Type
Fair Value at June 30, 2019
Valuation Technique
Significant Unobservable Input
Range
[Weighted Average]
 
 
Assets
Liabilities
 
 
 
 
Forward Contract - Natural Gas
$18,772
$9,815
Discounted Cash Flow
Forward price (per dt)

$1.69 - $8.31 [$2.50]
(A)
Forward Contract - Electric


$4,952
$3,949
Discounted Cash Flow
Fixed electric load profile (on-peak)
40.24% - 100.00% [54.98%]
(B)
Fixed electric load profile (off-peak)
0.00% - 59.76% [45.02%]
(B)



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Table of Contents

Type
Fair Value at December 31, 2018
Valuation Technique
Significant Unobservable Input
Range
[Weighted Average]
 
 
Assets
Liabilities
 
 
 
 
Forward Contract - Natural Gas
$20,706
$8,976
Discounted Cash Flow
Forward price (per dt)

$1.56 - $9.00 [$3.12]
(A)
Forward Contract - Electric


$7,100
$2,769
Discounted Cash Flow
Fixed electric load profile (on-peak)
0.00% - 100.00% [54.55%]
(B)
Fixed electric load profile (off-peak)
0.00% - 100.00% [45.45%]
(B)



SJG:
Type
Fair Value at June 30, 2019
Valuation Technique
Significant Unobservable Input
Range
[Weighted Average]
 
 
Assets
Liabilities
 
 
 
 
Forward Contract - Natural Gas
$
1,760

$
52

Discounted Cash Flow
Forward price (per dt)
$1.78 - $5.78 [$2.66]
(A)


Type
Fair Value at December 31, 2018
Valuation Technique
Significant Unobservable Input
Range
[Weighted Average]
 

Assets
Liabilities



 
Forward Contract - Natural Gas
$
5,005

$
77

Discounted Cash Flow
Forward price (per dt)
$3.13 - $6.00 [$4.53]
(A)

(A) Represents the range, along with the weighted average, of forward prices for the sale and purchase of natural gas.

(B) Represents the range, along with the weighted average, of the percentage of contracted usage that is loaded during on-peak hours versus off-peak.



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Table of Contents

The changes in fair value measurements of Derivatives – Energy Related Assets and Liabilities for the three and six months ended June 30, 2019 and 2018, using significant unobservable inputs (Level 3), are as follows (in thousands):

 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
SJI (includes SJG and all other consolidated subsidiaries):
 
 
 
Balance at beginning of period
$
8,277

 
$
16,061

Other Changes in Fair Value from Continuing and New Contracts, Net (A)
6,553

 
4,285

Settlements
(4,870
)
 
(10,386
)
 
 
 
 
Balance at end of period
$
9,960

 
$
9,960

 
 
 
 
SJG:
 
 
 
Balance at beginning of period
$
1,706

 
$
4,928

Other Changes in Fair Value from Continuing and New Contracts, Net (A)
2

 
1,708

Settlements
—

 
(4,928
)
 
 
 
 
Balance at end of period
$
1,708

 
$
1,708



 
Three Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2018
SJI (includes SJG and all other consolidated subsidiaries):
 
 
 
Balance at beginning of period
$
16,586

 
$
3,110

Other Changes in Fair Value from Continuing and New Contracts, Net (A)
6,215

 
10,204

Settlements
(4,440
)
 
5,047

 
 
 
 
Balance at end of period
$
18,361

 
$
18,361

 
 
 
 
SJG:
 
 
 
Balance at beginning of period
$
(6
)
 
$
2,052

Other Changes in Fair Value from Continuing and New Contracts, Net (A)
6,003

 
5,997

Settlements
—

 
(2,052
)
 
 
 
 
Balance at end of period
$
5,997

 
$
5,997



(A) Represents total gains (losses) included in earnings for SJI and SJG for the three and six months ended June 30, 2019 and 2018 that are attributable to the change in unrealized gains (losses) relating to those assets and liabilities included in Level 3 still held as of June 30, 2019 and 2018, respectively. These gains (losses) are included in Operating Revenues-Nonutility on the condensed consolidated statements of income.


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Table of Contents

14.
LONG-TERM DEBT:

During the six months ended June 30, 2019, SJI provided four Notices of Optional Prepayment to the holders of its Floating Rate Senior Notes, Series 2018D, due June 20, 2019 of the Company’s intent to prepay the $475.0 million aggregate principal amount outstanding. As a result of these notices, the Company has repaid the $475.0 million aggregate principal amount in full.

During the six months ended June 30, 2019, SJI paid off $60.0 million principal amount outstanding on its 3.30% Senior Notes, Series 2014A-1, due June 26, 2019, and paid off $40.0 million principal amount outstanding on its Floating Rate Senior Notes, Series 2014B-1, due June 26, 2019.

Also during the six months ended June 30, 2019, SJG issued $10.0 million of debt by drawing on its $400.0 million term loan credit agreement. All loans under this credit agreement are due and payable in April 2020; as such, the issuance amount is recorded in current portion of long-term debt on the condensed consolidated balance sheets.

SJI and SJG did not issue or retire any other long-term debt during the six months ended June 30, 2019.

15.
ACCUMULATED OTHER COMPREHENSIVE LOSS:

The following table summarizes the changes in SJI's AOCL for the three and six months ended June 30, 2019 (in thousands):
 
Postretirement Liability Adjustment
Unrealized Gain (Loss) on Derivatives-Other
Unrealized Gain (Loss) on Available-for-Sale Securities
Other Comprehensive Income (Loss) of Affiliated Companies
Total
Balance at April 1, 2019 (a)
$
(25,626
)
$
(354
)
$
(10
)
$
(97
)
$
(26,087
)
   Other comprehensive income before reclassifications
—

—

—

—

—

   Amounts reclassified from AOCL (b)
—

8

—

—

8

Net current period other comprehensive income
—

8

—

—

8

Balance at June 30, 2019 (a)
$
(25,626
)
$
(346
)
$
(10
)
$
(97
)
$
(26,079
)
 
Postretirement Liability Adjustment
Unrealized Gain (Loss) on Derivatives-Other
Unrealized Gain (Loss) on Available-for-Sale Securities
Other Comprehensive Income (Loss) of Affiliated Companies
Total
Balance at January 1, 2019 (a)
$
(25,626
)
$
(362
)
$
(10
)
$
(97
)
$
(26,095
)
   Other comprehensive income before reclassifications
—

—

—

—

—

   Amounts reclassified from AOCL (b)
—

16

—

—

16

Net current period other comprehensive income
—

16

—

—

16

Balance at June 30, 2019 (a)
$
(25,626
)
$
(346
)
$
(10
)
$
(97
)
$
(26,079
)

(a) Determined using a combined average statutory tax rate of 27%.
(b) See table below.


55
Table of Contents

The following table provides details about reclassifications out of SJI's AOCL for the three and six months ended June 30, 2019 (in thousands):
Components of AOCL
Amounts Reclassified from AOCL
 
Affected Line Item in the Condensed Consolidated Statements of Income
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
 
Unrealized Loss on Derivatives-Other - interest rate contracts designated as cash flow hedges
$
12

 
$
24

 
Interest Charges
   Income Taxes
(4
)
 
(8
)
 
Income Taxes (a)
Losses from reclassifications for the period net of tax
$
8

 
$
16

 
 


(a) Determined using a combined average statutory tax rate of 27%.

The following table summarizes the changes in SJG's AOCL for the three and six months ended June 30, 2019 (in thousands):
 
Postretirement Liability Adjustment
 
Unrealized Gain (Loss) on Derivatives-Other
 
Total
Balance at April 1, 2019 (a)
$
(21,901
)
 
$
(448
)
 
$
(22,349
)
Other comprehensive loss before reclassifications
—

 
—

 
—

   Amounts reclassified from AOCL (b)
—

 
8

 
8

Net current period other comprehensive income
—

 
8

 
8

Balance at June 30, 2019 (a)
$
(21,901
)
 
$
(440
)
 
$
(22,341
)
 
Postretirement Liability Adjustment
 
Unrealized Gain (Loss) on Derivatives-Other
 
Total
Balance at January 1, 2019 (a)
$
(21,901
)
 
$
(456
)
 
$
(22,357
)
Other comprehensive loss before reclassifications
—

 
—

 
—

   Amounts reclassified from AOCL (b)
—

 
16

 
16

Net current period other comprehensive income (loss)
—

 
16

 
16

Balance at June 30, 2019 (a)
$
(21,901
)
 
$
(440
)
 
$
(22,341
)

(a) Determined using a combined average statutory tax rate of 27%.
(b) See table below.


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Table of Contents

The reclassifications out of SJG's AOCL during the three and six months ended June 30, 2019 are as follows (in thousands):

Components of AOCL
 
Amounts Reclassified from AOCL
 
Affected Line Item in the Condensed Statements of Income
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
 
Unrealized Loss in on Derivatives - Other - Interest Rate Contracts designated as cash flow hedges
 
$
12

 
$
24

 
Interest Charges
Income Taxes
 
(4
)
 
(8
)
 
Income Taxes (a)
Losses from reclassifications for the period net of tax

$
8

 
$
16

 
 

(a) Determined using a combined average statutory tax rate of 27%.


57
Table of Contents

16.
REVENUE:

At contract inception, SJI and SJG assess the goods and services promised in all of its contracts with customers, and identify a performance obligation for each promise to transfer to a customer a distinct good or service.
 
 
 
 
 
 

SJI revenues from contracts with customers totaled $231.8 million and $201.9 million for the three months ended June 30, 2019 and 2018, respectively, and $838.5 million and $645.8 million for the six months ended June 30, 2019 and 2018, respectively. SJG revenues from contracts with customers totaled $47.0 million and $64.1 million for the three months ended June 30, 2019 and 2018, respectively, and $280.0 million and $258.0 million for the six months ended June 30, 2019 and 2018, respectively. The SJG balance is a part of the SJG utility operating segment, and is before intercompany eliminations with other SJI entities. Revenues on the condensed consolidated statements of income that are not with contracts with customers consist of (a) revenues from alternative revenue programs at the SJG, ETG and ELK gas utility operating segments (including CIP, AIRP, SHARP, and WNC), and (b) both utility and nonutility revenue from derivative contracts at the SJG and ETG gas utility, wholesale energy and retail electric operating segments.

SJI and SJG disaggregate revenue from contracts with customers into customer type and product line. SJI and SJG have determined that disaggregating revenue into these categories achieves the disclosure objective in ASC 606 to depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors. Further, disaggregating revenue into these categories is consistent with information regularly reviewed by the CODM in evaluating the financial performance of SJI's operating segments. SJG only operates in the SJG Utility Operations segment. See Note 6 for further information regarding SJI's operating segments.

Disaggregated revenues from contracts with customers, by both customer type and product line, are disclosed below, by operating segment, for the three and six months ended June 30, 2019 (in thousands):

Three Months Ended
June 30, 2019
 
SJG Utility Operations
ETG Utility Operations
ELK Utility Operations
Wholesale Energy Operations
Retail Electric Operations
On-Site Energy Production
Appliance Service Operations
Corporate Services and Intersegment
Total
Customer Type:
 
 
 
 
 
 
 
 
 
Residential
$
28,679

$
27,503

$
207

$
—

$
2,953

$
—

$
484

$
—

$
59,826

Commercial & Industrial
15,503

16,065

482

111,794

12,419

14,788

—

(3,418
)
167,633

OSS & Capacity Release
2,244

—

—

—

—

—

—

—

2,244

Other
571

1,527

39

—

—

—

—

—

2,137

 
$
46,997

$
45,095

$
728

$
111,794

$
15,372

$
14,788

$
484

$
(3,418
)
$
231,840

Product Line:
 
 
 
 
 
 
 
 
 
Gas
$
46,997

$
45,095

$
728

$
111,794

$
—

$
—

$
—

$
(1,234
)
$
203,380

Electric
—

—

—

—

15,372

—

—

(2,184
)
13,188

Solar
—

—

—

—

—

6,438

—

—

6,438

CHP
—

—

—

—

—

6,794

—

—

6,794

Landfills
—

—

—

—

—

1,556

—

—

1,556

Other
—

—

—

—

—

—

484

—

484

 
$
46,997

$
45,095

$
728

$
111,794

$
15,372

$
14,788

$
484

$
(3,418
)
$
231,840



58
Table of Contents

Six Months Ended
June 30, 2019
 
SJG Utility Operations
ETG Utility Operations
ELK Utility Operations
Wholesale Energy Operations
Retail Electric Operations
On-Site Energy Production
Appliance Service Operations
Corporate Services and Intersegment
Total
Customer Type:
 
 
 
 
 
 
 
 
 
Residential
$
213,633

$
127,492

$
1,961

$
—

$
6,761

$
—

$
1,015

$
—

$
350,862

Commercial & Industrial
61,091

58,213

2,140

311,561

25,422

26,118

—

(6,425
)
478,120

OSS & Capacity Release
4,014

—

—

—

—

—

—

—

4,014

Other
1,243

4,174

104

—

—

—

—

—

5,521

 
$
279,981

$
189,879

$
4,205

$
311,561

$
32,183

$
26,118

$
1,015

$
(6,425
)
$
838,517

Product Line:
 
 
 
 
 
 
 
 
 
Gas
$
279,981

$
189,879

$
4,205

$
311,561

$
—

$
—

$
—

$
(2,634
)
$
782,992

Electric
—

—

—

—

32,183

—

—

(3,791
)
28,392

Solar
—

—

—

—

—

9,014

—

—

9,014

CHP
—

—

—

—

—

14,153

—

—

14,153

Landfills
—

—

—

—

—

2,951

—

—

2,951

Other
—

—

—

—

—

—

1,015

—

1,015

 
$
279,981

$
189,879

$
4,205

$
311,561

$
32,183

$
26,118

$
1,015

$
(6,425
)
$
838,517




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Disaggregated revenues from contracts with customers, by both customer type and product line, are disclosed below, by operating segment, for the three and six months ended June 30, 2018 (in thousands):

Three Months Ended
June 30, 2018
 
SJG Utility Operations
ETG Utility Operations
ELK Utility Operations
Wholesale Energy Operations
Retail Gas and Other Operations
Retail Electric Operations
On-Site Energy Production
Appliance Service Operations
Corporate Services and Intersegment
Total
Customer Type:
 
 
 
 
 
 
 
 
 
 
Residential
$
43,982

$
—

$
—

$
—

$
—

$
6,391

$
—

$
451

$
—

$
50,824

Commercial & Industrial
18,563

—

—

76,376

15,121

22,430

24,734

—

(7,705
)
149,519

OSS & Capacity Release
972

—

—

—

—

—

—

—

—

972

Other
539

—

—

—

—

—

—

—

—

539

 
$
64,056

$
—

$
—

$
76,376

$
15,121

$
28,821

$
24,734

$
451

$
(7,705
)
$
201,854

Product Line:
 
 
 
 
 
 
 
 
 
 
Gas
$
64,056

$
—

$
—

$
76,376

$
15,121

$
—

$
—

$
—

$
(1,914
)
$
153,639

Electric
—

—

—

—

—

28,821

—

—

(2,012
)
26,809

Solar
—

—

—

—

—

—

15,905

—

(3,779
)
12,126

CHP
—

—

—

—

—

—

7,161

—

—

7,161

Landfills
—

—

—

—

—

—

1,668

—

—

1,668

Other
—

—

—

—

—

—

—

451

—

451

 
$
64,056

$
—

$
—

$
76,376

$
15,121

$
28,821

$
24,734

$
451

$
(7,705
)
$
201,854



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Six Months Ended
June 30, 2018
 
SJG Utility Operations
ETG Utility Operations
ELK Utility Operations
Wholesale Energy Operations
Retail Gas and Other Operations
Retail Electric Operations
On-Site Energy Production
Appliance Service Operations
Corporate Services and Intersegment
Total
Customer Type:
 
 
 
 
 
 
 
 
 
 
Residential
$
191,244

$
—

$
—

—

—

$
14,487

—

$
971

—

$
206,702

Commercial & Industrial
59,368

—

—

250,222

48,367

44,380

45,891

—

(16,475
)
431,753

OSS & Capacity Release
6,176

—

—

—

—

—

—

—

—

6,176

Other
1,202

—

—

—

—

—

—

—

—

1,202

 
$
257,990

$
—

$
—

$
250,222

$
48,367

$
58,867

$
45,891

$
971

$
(16,475
)
$
645,833

Product Line:
 
 
 
 
 
 
 
 
 
 
Gas
$
257,990

$
—

$
—

$
250,222

$
48,367

—

—

—

$
(6,488
)
$
550,091

Electric
—

—

—

—

—

58,867

—

—

(3,680
)
55,187

Solar
—

—

—

—

—

—

27,741

—

(6,307
)
21,434

CHP
—

—

—

—

—

—

15,014

—

—

15,014

Landfills
—

—

—

—

—

—

3,136

—

—

3,136

Other
—

—

—

—

—

—

—

971

—

971

 
$
257,990

$
—

$
—

$
250,222

$
48,367

$
58,867

$
45,891

$
971

$
(16,475
)
$
645,833



The following table provides information about SJI's and SJG's receivables and unbilled revenue from contracts with customers (in thousands):

 
Accounts Receivable (1)
Unbilled Revenue (2)
SJI (including SJG and all other consolidated subsidiaries):
Beginning balance as of 1/1/19
$
337,502

$
79,538

Ending balance as of 6/30/19
223,314

21,253

Increase (Decrease)
$
(114,188
)
$
(58,285
)
 
 
 
Beginning balance as of 1/1/18
$
202,379

$
73,377

Ending balance as of 6/30/18
196,601

24,464

Increase (Decrease)
$
(5,778
)
$
(48,913
)
 
 
 
SJG:
 
 
Beginning balance as of 1/1/19
$
101,572

$
43,271

Ending balance as of 6/30/19
90,190

8,415

Increase (Decrease)
$
(11,382
)
$
(34,856
)
 
 
 
Beginning balance as of 1/1/18
$
78,571

$
54,980

Ending balance as of 6/30/18
95,420

9,721

Increase (Decrease)
$
16,849

$
(45,259
)


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(1) Included in Accounts Receivable in the condensed consolidated balance sheets. A receivable is SJI's and SJG's right to consideration that is unconditional, as only the passage of time is required before payment is expected from the customer. All of SJI's and SJG's Accounts Receivable arise from contracts with customers.

(2) Included in Unbilled Revenues in the condensed consolidated balance sheets. All unbilled revenue for SJI and SJG arises from contracts with customers. Unbilled revenue relates to SJI's and SJG's right to receive payment for commodity delivered but not yet billed. This represents contract assets that arise from contracts with customers, which is defined in ASC 606 as the right to payment in exchange for goods already transferred to a customer, excluding any amounts presented as a receivable. The unbilled revenue is transferred to accounts receivable when billing occurs and the rights to collection become unconditional. The change in unbilled revenues for the six months ended June 30, 2019 and 2018 is due primarily to the timing difference between SJI and SJG delivering the commodity to the customer and the customer actually receiving the bill for payment.

17.
BUSINESS COMBINATION:

On July 1, 2018, the Company completed the Acquisition of ETG and ELK. The Company completed the Acquisition for total consideration of $1.72 billion in cash, inclusive of $24.7 million of certain net working capital adjustments. Of the total, $1.71 billion relates to the acquisition of ETG, while $10.9 million relates to the acquisition of ELK. The Acquisition supports the Company’s strategy of earnings growth derived from high-quality, regulated utilities. Further, the Acquisition expands the Company’s customer base in the natural gas industry, which drives efficiencies by providing a greater operating scale.

Purchase price allocations

The Acquisition was accounted for as a business combination using the acquisition method of accounting in accordance with GAAP, which includes GAAP for regulated operations. Under the acquisition method of accounting, the total estimated purchase price of an acquisition is allocated to the net assets based on their estimated fair values. ETG's and ELK's regulated natural gas distribution operations are subject to rate-setting authorities of the BPU and the MPSC, respectively, which includes provisions in place that provide revenues to recover costs of service, including a carrying charge on most net assets and liabilities. Given the regulatory environment under which ETG and ELK operate, the historical book value of the assets acquired and liabilities assumed approximate fair value.




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Table of Contents

The purchase price for the Acquisition has been allocated to the assets acquired and liabilities assumed as of the acquisition date and is as follows:

(in thousands)
ETG and ELK
Property, Plant and Equipment
$
1,202,435

Accounts Receivable
45,875

Provision for Uncollectibles
(6,579
)
Natural Gas in Storage
12,204

Materials and Supplies
345

Other Prepayments and Current Assets
200

Deferred Income Taxes
39,470

Regulatory Assets
136,212

Goodwill
700,286

     Total assets acquired
2,130,448

Accounts Payable
13,089

Other Current Liabilities
9,185

Environmental Remediation Costs - Current
7,100

Pension and Other Postretirement Benefits
3,213

Environmental Remediation Costs - Non Current
66,165

Regulatory Liabilities
192,811

Asset Retirement Obligation
113,093

Other
1,107

     Total liabilities assumed
405,763

          Total net assets acquired
$
1,724,685


Goodwill of $700.3 million arising from the Acquisition includes the potential synergies between ETG, ELK and the Company. The goodwill, of which $599.7 million is expected to be deductible for income tax purposes, was assigned to the ETG and ELK Utility Operations segments.

Conditions of approval

The Acquisition was subject to regulatory approval from the BPU and the MPSC. Approvals were obtained from both commissions, subject to various conditions. As a requirement for approval of the acquisition of ETG, the BPU mandated that the Company pay $15.0 million to existing ETG customers in the form of a one-time credit. As a requirement for approval of ELK, the MPSC mandated that the Company pay $0.3 million to existing ELK customers in the form of a one-time payout. Other key conditions of approval related to the Acquisition include but are not limited to ETG filing a base rate case no later than June 2020, which ETG accomplished with its April 2019 base rate case filing (see Note 7).

Consistent with Acquisition approval, SJI was required to develop a plan, in concert with the BPU, to address the remaining aging infrastructure at ETG. In June 2019, the BPU issued an Order approving a $300.0 million IIP effective July 1, 2019. The Order authorized the recovery of costs associated with ETG’s investments of approximately $300.0 million between 2019-2023 to replace its cast-iron and bare steel vintage main and related services. The Order provides for annual recovery of ETG's investments through a separate rate mechanism.

Financial information of the acquirees

The amount of ETG and ELK revenues included in the Company's condensed consolidated statement of income for the three and six months ended June 30, 2019 is $45.8 million and $189.3 million, respectively. The amount of ETG and ELK net income (loss) included in the Company's condensed consolidated statement of income for the three and six months ended June 30, 2019 is $(3.9) million and $27.4 million, respectively.

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Table of Contents

18.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS:

GOODWILL - Goodwill represents future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration paid or transferred over the fair value of identifiable net assets acquired. Goodwill is not amortized, but instead is subject to impairment testing on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. No such events have occurred during the three and six months ended June 30, 2019.

The Company performs its annual goodwill impairment test in the fourth quarter of each fiscal year beginning with a qualitative assessment at the reporting unit level. The reporting unit level is identified by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available, whether segment management regularly reviews the operating results of those components and whether the economic and regulatory characteristics are similar. Factors utilized in the qualitative analysis performed on goodwill in our reporting units include, among other things, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, company specific operating results and other relevant entity-specific events affecting individual reporting units.

In the absence of sufficient qualitative factors, goodwill impairment is determined using a two-step process. Step one identifies potential impairment by comparing the fair value of a reporting unit to the book value, including goodwill. The Company estimates the fair value of a reporting unit using a discounted cash flow analysis.  Management also considers other methods, which includes a market multiples analysis. Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include, but are not limited to, forecasts of future operating results, discount and growth rates, capital expenditures, tax rates, and projected terminal values. Changes in estimates or the application of alternative assumptions could produce significantly different results. If the fair value exceeds book value, goodwill of the reporting unit is not considered impaired. If the book value exceeds fair value, proceed to step two, which compares the implied fair value of the reporting unit's goodwill to the book value of the reporting unit goodwill. If the book value of goodwill exceeds the implied fair value, an impairment charge is recognized for the excess.

Total goodwill of $703.9 million and $734.6 million is recorded on the condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019, $700.2 million was included in the ETG Utility Operations segment, $3.6 million was included in the On-Site Energy Production segment, and $0.1 million was included in the ELK Utility Operations segment. As of December 31, 2018, $730.9 million was included in the ETG Utility Operations segment, $3.6 million was included in the On-Site Energy Production segment, and $0.1 million was included in the ELK Utility Operations segment. SJG does not have any goodwill.

A rollforward of the Company's goodwill is as follows (in thousands):
 
2019
Beginning Balance, January 1
$
734,607

Acquisition-related Working Capital Settlement
(15,600
)
Fair Value Adjustments During Measurement Period
(15,143
)
Ending Balance, June 30
$
703,864



IDENTIFIABLE INTANGIBLE ASSETS - The primary identifiable intangible assets of the Company are customer relationships and the AMA (see Note 1). The Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Considerations may include the contractual term of any agreement related to the asset, the historical performance of the asset, the Company's long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives (finite-lived intangible assets) are amortized, primarily on a straight-line basis, over their useful lives, generally ranging from 2 to 20 years.

The cost (less accumulated amortization) of identifiable intangible assets of $25.1 million and $28.1 million are included in Other Noncurrent Assets on the consolidated balance sheets as of June 30, 2019 and December 31, 2018, respectively. The decrease from the prior year is due to amortization recorded during the six months ended June 30, 2019. No impairment charges were recorded on identifiable intangible assets during the three and six months ended June 30, 2019 or 2018. SJG does not have any identifiable intangible assets.


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Table of Contents

19.
LEASES:

SJI and SJG (collectively, the "Company" for purposes of Note 19) is a lessee for the following classes of underlying assets: equipment, real estate (land and building), and fleet vehicles. The Company determines if it is considered a lessee in an arrangement that qualifies as a lease at its inception based on whether or not the contract grants the Company the use of a specifically identified asset for a period of time, as well as both the right to direct the use of that asset and receive the significant economic benefits of the asset. SJI's and SJG's real estate leases, which are comprised primarily of office space and payment centers, represent approximately 77% and 35%, respectively, of operating lease liabilities and generally have a lease term between 5 and 15 years. The remaining operating leases primarily consist of fleet vehicles (SJI only), communication towers, and general office equipment, each with various lease terms ranging between 3 and 25 years. The majority of our leases are comprised of fixed lease payments, with a portion of the Company’s real estate, fleet vehicles, and office equipment leases including lease payments tied to levels of production, maintenance and property taxes, which may be subject to variability. The Company does not have any finance leases. The Company also evaluates contracts in which it is the owner of an underlying asset in the same manner as if it is a lessee, to determine if it should be considered the lessor of that asset. SJI has one contract where it is considered the lessor, see "Thermal Facility" below; SJG is not considered the lessor of any assets.

As a practical expedient permitted under Topic 842, the Company has elected to account for the lease and non-lease components as a single lease component for all leases. Lease payments, which may include lease components, non-lease components and non-components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable amounts that depend on a rate or index as stipulated in the lease contract. The Company discounts its lease liability using an estimated incremental borrowing rate computed based on its existing term loan facility adjusted for lease term. On January 1, 2019, the discount rate used on existing leases at adoption was determined using the remaining lease term and available data as of that date based on the Company's collateralized incremental interest rate to borrow over a comparable term. For new or modified leases starting in 2019, the discount rate is determined using available data at lease commencement and is based on its collateralized incremental interest rate to borrow over the lease term, including any reasonably certain renewal periods.

Some of its lease agreements, primarily related to real estate, include Company options to either extend and/or early terminate the lease, the costs of which are included in our lease liability to the extent that such options are reasonably certain of being exercised. Leases with renewal options allow the Company to extend the lease term typically between 1 and 5 years. When determining the lease term, renewal options reasonably certain of being exercised are included in the lease term. When determining if a renewal option is reasonably certain of being exercised, the Company considers several economic factors, including the significance of leasehold improvements incurred on the property, whether the asset is difficult to replace, underlying contractual obligations, or specific characteristics unique to that particular lease that would make it reasonably certain that we would exercise such option. Renewal options were generally not included in the lease term for the Company’s existing leases. The Company does not generally enter into leases involving the construction or design of the underlying asset, and nearly all of the assets we lease are not specialized in nature. Our lease agreements generally do not include restrictions, financial covenants or residual value guarantees.

As stated in Note 1, SJI and SJG had $3.1 million and $0.5 million, respectively, of right-of-use assets upon adoption of Topic 842 on January 1, 2019, with lease liabilities of the same amount. As of June 30, 2019, SJI recognized right-of-use assets and lease liabilities of $2.3 million each for operating leases, with the difference being amortization. The lease liability is comprised of approximately $1.8 million of real estate leases, $0.4 million of equipment leases and $0.1 million of fleet vehicle leases. As of June 30, 2019, SJG recognized right-of-use assets and lease liabilities of $0.4 million each for operating leases, with the difference also including amortization. The lease liability is comprised of approximately $0.3 million of equipment leases and $0.1 million of real estate leases. SJI and SJG recorded the right-of-use assets in Other Noncurrent Assets and the lease liabilities in Other Current and Noncurrent Liabilities (as shown in the table below) on the condensed consolidated balance sheets as of June 30, 2019.


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Table of Contents

The maturity of the Company’s operating lease liabilities as of June 30, 2019 is as follows (in thousands):
 
As of June 30, 2019
 
SJI Consolidated
SJG
2019 (excluding the six months ended June 30, 2019)
$
850

$
91

2020
1,080

152

2021
233

39

2022
65

21

2023
34

19

Thereafter
114

114

Total future minimum lease payments
2,376

436

Less imputed interest
82

38

Total lease payments
$
2,294

$
398

Included in the condensed consolidated balance sheet
 
 
Current lease liabilities (included in Other Current Liabilities)
$
1,519

$
169

Long-term lease liabilities (included in Other Noncurrent Liabilities)
775

229

Total lease liabilities
$
2,294

$
398



The total operating lease cost for SJI was $0.8 million and $1.6 million during the three and six months ended June 30, 2019, respectively. The total operating lease cost for SJG was $0.1 million and $0.2 million during the three and six months ended June 30, 2019, respectively. Short-term lease costs were immaterial for both SJI and SJG. Neither SJI nor SJG had any sublease income during the three and six months ended June 30, 2019. Operating cash flows from operating leases for SJI were $0.4 million and $0.8 million during the three and six months ended June 30, 2019, respectively. Operating cash flows from operating leases for SJG were $0.1 million and $0.2 million during the three and six months ended June 30, 2019, respectively.

Neither SJI nor SJG have leases with related parties or leverage lease arrangements. There are no leases that have not yet commenced but that create significant rights and obligations.

SJI had $0.4 million and $0.8 million of variable lease payments pertaining to leased back assets during the three and six months ended June 30, 2019, respectively. As discussed in Note 1 under "Agreement to Sell Solar Assets," SJI has solar assets that are being leased back from the buyer; however these assets were leased back in 2018 and are treated as operating leases. As per the "package of expedients" discussed in Note 1, SJI is not required to reassess under Topic 842 the Company’s prior conclusions about lease identification or classification.

The following summarizes our contractual obligations for operating leases and their applicable payment due dates, as of December 31, 2018 under ASC Topic 840, prior to the implementation of ASC 842:

 
Total
Up to 1 year
Years 2&3
Years 4&5
More than 5 years
SJI Consolidated
1,885

838

916

131

—

SJG
175

56

112

7

—



Supplemental Non-Cash Disclosures

SJI and SJG did not record any new leases during the three and six months ended June 30, 2019.

The weighted average remaining lease term for SJI's operating leases is 2.5 years at a weighted average discount rate of 3.0%.

The weighted average remaining lease term for SJG's operating leases is 6.6 years at a weighted average discount rate of 3.0%.

Thermal Facility


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Table of Contents

Marina is considered to be the lessor of certain thermal energy generating property and equipment under an operating lease which expires in May 2027. As of June 30, 2019 and December 31, 2018, the carrying costs of this property and equipment under operating lease was $69.9 million and $71.5 million, respectively (net of accumulated depreciation of $39.3 million and $37.7 million, respectively), and is included in Nonutility Property and Equipment in the condensed consolidated balance sheets.

Minimum future rentals to be received on this operating lease of property and equipment as of June 30, 2019 for the remainder of 2019 and each of the next five years and in the aggregate are (in thousands):

Year ended June 30,
 
2019 (remaining six months)
$
2,698

2020
5,396

2021
5,396

2022
5,396

2023
5,396

2024
5,396

Thereafter
13,042

Total minimum future rentals
$
42,720



Minimum future rentals do not include additional amounts to be received based on actual use of the leased property.

20.
SUBSEQUENT EVENT:

See Note 11 - Commitments and Contingencies, Pending Litigation for information related to a court decision issued against SJG and SJRG on August 6, 2019 related to an ongoing pricing dispute related to two long-term gas supply contracts. SJI will be required to make payment by September 5, 2019 in an amount not materially different from what has been reserved.





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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Management's Discussion and Analysis of Financial Condition and Results of Operations (Management's Discussion) analyzes the financial condition, results of operations and cash flows of SJI and its subsidiaries. It also includes management’s analysis of past financial results and potential factors that may affect future results, potential future risks and approaches that may be used to manage them. Except where the content clearly indicates otherwise, “SJI,” “we,” “us” or “our” refers to the holding company or the consolidated entity of SJI and all of its subsidiaries.

Management's Discussion is divided into the following two major sections:

•
SJI - This section describes the financial condition and results of operations of SJI and its subsidiaries on a consolidated basis. It includes discussions of our regulated operations, including SJG, and our non-regulated operations.

•
SJG - This section describes the financial condition and results of operations of SJG, a subsidiary of SJI and separate registrant, which comprises the SJG utility operations segment.

Both sections of Management's Discussion - SJI and SJG - are designed to provide an understanding of each company's respective operations and financial performance and should be read in conjunction with each other as well as in conjunction with the respective company's condensed consolidated financial statements and the combined Notes to Condensed Consolidated Financial Statements in this Quarterly Report as well as SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018.

Unless otherwise noted, earnings per share amounts are presented on a diluted basis, and are based on weighted average common and common equivalent shares outstanding. SJI's and SJG's operations are seasonal and accordingly, operating results for the interim periods presented are not indicative of the results to be expected for the full fiscal year.

Forward-Looking Statements and Risk Factors — This Quarterly Report, including information incorporated by reference, contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.
All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position, expected sources of incremental margin, strategy, financing needs, future capital expenditures and the outcome or effect of ongoing litigation, are forward-looking. This Quarterly Report uses words such as "anticipate," "believe," "expect," "estimate," "forecast," "goal," "intend," "objective," "plan," "project," "seek," "strategy," "target," "will" and similar expressions to identify forward-looking statements. These forward-looking statements are based on the beliefs and assumptions of management at the time that these statements were prepared and are inherently uncertain. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These risks and uncertainties include, but are not limited to, general economic conditions on an international, national, state and local level; weather conditions in SJI’s marketing areas; changes in commodity costs; changes in the availability of natural gas; “non-routine” or “extraordinary” disruptions in SJI’s distribution system; regulatory, legislative and court decisions; competition; the availability and cost of capital; costs and effects of legal proceedings and environmental liabilities; the failure of customers, suppliers or business partners to fulfill their contractual obligations; and changes in business strategies.
These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ materially from those expressed in the forward-looking statements, are described in greater detail under the heading “Item 1A. Risk Factors” in this Quarterly Report, SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018 and in any other SEC filings made by SJI or SJG during 2019 and prior to the filing of this Quarterly Report. No assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made. SJI and SJG undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.


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Table of Contents

Critical Accounting Policies — Estimates and Assumptions — Management must make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. Actual results could differ from those estimates. Certain types of transactions presented in our condensed consolidated financial statements require a significant amount of judgment and estimation. These relate to regulatory accounting, derivatives, environmental remediation costs, pension and other postretirement benefit costs, revenue recognition, and goodwill. A discussion of these estimates and assumptions may be found in SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2018.

Business Combination - On July 1, 2018, the Company completed the Acquisition. See detailed discussions concerning the Acquisition and its impact on SJI, including the accounting for business combinations, in Note 17 to the condensed consolidated financial statements.

New Accounting Pronouncements — See detailed discussions concerning New Accounting Pronouncements and their impact on SJI and SJG in Note 1 to the condensed consolidated financial statements.

Regulatory Actions — Other than the changes discussed in Note 7 to the condensed consolidated financial statements, there have been no significant regulatory actions since December 31, 2018. See detailed discussion concerning Regulatory Actions in Note 10 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018.

Environmental Remediation — There have been no significant changes to the status of SJI’s and SJG's environmental remediation efforts since December 31, 2018. See detailed discussion concerning Environmental Remediation Costs in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018.

Impairment of Long-Lived Assets — Long-lived assets that are held and used are reviewed for impairment whenever events or changes in circumstances, such as significant adverse changes in regulation, business climate or market conditions, indicate carrying values may not be recoverable. Such reviews are performed in accordance with ASC 360. An impairment loss is indicated if the total future estimated undiscounted cash flows expected from an asset are less than its carrying value. An impairment charge is measured by the difference between an asset's carrying amount and fair value with the difference recorded within Impairment Charges on the condensed consolidated statements of income. Fair values can be determined by a variety of valuation methods, including third-party appraisals, sales prices of similar assets, and present value techniques.  SJI and SJG determine the fair values by using an income approach by applying a discounted cash flow methodology to the future estimated cash flows, and include key inputs such as forecasted revenues, operating expenses and discount rates. See Note 1 to the condensed consolidated financial statements.

Goodwill - See detailed discussion concerning Goodwill in Note 18 to the condensed consolidated financial statements, along with Note 21 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018.

Operating Segments:

SJI operates in several different reportable operating segments. These segments are as follows:

•
SJG utility operations consist primarily of natural gas distribution to residential, commercial and industrial customers in southern New Jersey.

▪
ETG utility operations consist of natural gas distribution to residential, commercial and industrial customers in northern and central New Jersey.

•
ELK utility operations consist of natural gas distribution to residential, commercial and industrial customers in Maryland.

•
Wholesale energy operations include the activities of SJRG and SJEX.

•
Retail gas and other operations at SJE included natural gas acquisition and transportation service business lines. This business was sold on November 30, 2018.

•
Retail electric operations at SJE consist of electricity acquisition and transportation to commercial, industrial and residential customers.


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•
On-site energy production consists of Marina's thermal energy facility and other energy-related projects. Also included in this segment are the activities of ACB, ACLE, BCLE, SCLE and SXLE.

•
Appliance service operations includes SJESP, which receives commissions on service contracts from a third party.

•
Midstream was formed to invest in infrastructure and other midstream projects, including a current project to build a natural gas pipeline in Pennsylvania and New Jersey.

•
Corporate & Services segment includes costs related to the Acquisition, along with other unallocated costs.

•
Intersegment represents intercompany transactions among the above SJI consolidated entities.
 
SJI groups its utility businesses under its wholly-owned subsidiary SJIU. This group consists of gas utility operations of SJG, ETG and ELK. SJI groups its nonutility operations into separate categories: Energy Group and Energy Services. Energy Group includes wholesale energy, retail gas and other, and retail electric operations. Energy Services includes on-site energy production and appliance service operations.

SOUTH JERSEY INDUSTRIES, INC.

RESULTS OF OPERATIONS:

Summary:

SJI's net income for the three months ended June 30, 2019 increased $80.4 million to a net loss of $13.4 million compared with the same period in 2018. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):

•
The net income contribution from on-site energy production at Marina for the three months ended June 30, 2019 increased $77.9 million to a net loss of $0.1 million, primarily due to $74.2 million of impairment charges taken on solar generating facilities in the second quarter of 2018, which were primarily driven by the purchase price in the agreement to sell solar assets being less than the carrying amount of the assets (see Note 1 to the condensed consolidated financial statements). Also contributing were consulting and legal costs related to the sale of Marina's solar assets to a third-party buyer that were incurred during the three months ended June 30, 2018 that did not recur in the same period in 2019. Lower depreciation expense resulting from the sale of solar assets also contributed to the overall increase in net income. These are partially offset with lower margins resulting from less SREC revenue as discussed under "Gross Margin - Energy Services" below.

•
Acquisition costs were approximately $13.0 million lower during the three months ended June 30, 2019 compared with the same period in 2018. This is primarily due to the Company incurring less legal, consulting and other professional fees related to the Acquisition than the prior year period, as the costs incurred in 2018 were to finalize the Acquisition. These costs are recorded in the Corporate & Services segment.

•
The net income contribution from the wholesale energy operations at SJRG for the three months ended June 30, 2019 increased $6.4 million to a net loss of $1.4 million compared with the same period in 2018, primarily due to the change in unrealized gains and losses on derivatives used by the wholesale energy operations to mitigate natural gas commodity price risk, as discussed under "Operating Revenues - Energy Group" below. This was partially offset with lower margins on daily energy trading activities in the second quarter of 2019 compared to the same period in the prior year as discussed under "Gross Margin - Energy Group" below.

•
The net income contribution from gas utility operations at SJG for the three months ended June 30, 2019 increased $0.4 million to $2.0 million, primarily due to roll-in of infrastructure program investments and customer growth, partially offset by an overall increase in depreciation and interest expenses.

•
SJI recorded $7.9 million of financing/interest costs in connection with the Acquisition during the three months ended June 30, 2019 (see Notes 1 and 17 to the condensed consolidated financial statements). These costs are related to debt that was entered into during the second quarter of 2018 in order to finance the Acquisition. These costs are recorded in the Corporate & Services segment.

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•
In connection with the Acquisition (see Notes 1 and 17 to the condensed consolidated financial statements), SJI consolidated the accounts of ETG and ELK gas utility operations beginning with the third quarter of 2018. ETG and ELK contributed a combined net loss of $3.9 million for the three months ended June 30, 2019.

•
The net income contribution from SJE for the three months ended June 30, 2019 decreased $3.5 million to a net loss of $1.5 million compared with the same period in 2018. This was primarily due to the sale of the retail gas business in the fourth quarter of 2018, along with the change in unrealized gains and losses recorded on forward financial contracts at the retail electric operations at SJE due to price volatility as discussed under "Gross Margin - Energy Group" below.

•
The change in unrealized gains and losses on the Company's interest rate derivative contracts contributed a $1.7 million decrease in net income when comparing the three months ended June 30, 2019 to the same period in 2018.

SJI's net income for the six months ended June 30, 2019 increased $54.8 million to $72.2 million compared with the same period in 2018. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):

•
The net income contribution from on-site energy production at Marina for the six months ended June 30, 2019 increased $79.7 million to a net loss of $1.4 million, primarily due to $74.2 million of impairment charges taken on solar generating facilities in the second quarter of 2018, which were primarily driven by the purchase price in the agreement to sell solar assets being less than the carrying amount of the assets (see Note 1 to the condensed consolidated financial statements). Also contributing were consulting and legal costs related to the sale of Marina's solar assets to a third-party buyer that were incurred during the six months ended June 30, 2018 that did not recur in the same period in 2019. Lower depreciation expense resulting from the sale of solar assets also contributed to the overall increase in net income. These are partially offset with lower margins resulting from less SREC revenue as discussed under "Gross Margin - Energy Services" below.

•
In connection with the Acquisition (see Notes 1 and 17 to the condensed consolidated financial statements), SJI consolidated the accounts of ETG and ELK gas utility operations beginning with the third quarter of 2018. ETG and ELK contributed combined net income of $27.4 million for the six months ended June 30, 2019.

•
Acquisition costs were approximately $18.5 million lower during the six months ended June 30, 2019 compared with the same period in 2018. This is primarily due to the Company incurring less legal, consulting and other professional fees related to the Acquisition than the prior year period, as the costs incurred in 2018 were to finalize the Acquisition. These costs are recorded in the Corporate & Services segment.

•
The net income contribution from gas utility operations at SJG for the six months ended June 30, 2019 increased $2.4 million to $70.7 million, primarily due to roll-in of infrastructure program investments and customer growth, partially offset by an overall increase in depreciation and interest expenses.

•
The net income contribution from the wholesale energy operations at SJRG for the six months ended June 30, 2019 decreased $51.6 million to a net loss of $2.8 million compared with the same period in 2018, primarily due to lower margins on daily energy trading activities and an overall decrease in sales as discussed under "Operating Revenues - Energy Group" below. Also contributing was the change in unrealized gains and losses on forward financial contracts due to price volatility, as discussed under "Operating Revenues - Energy Group" below.

•
SJI recorded $16.4 million of financing/interest costs in connection with the Acquisition during the six months ended June 30, 2019 (see Notes 1 and 17 to the condensed consolidated financial statements). These costs are related to debt that was entered into during the second quarter of 2018 in order to finance the Acquisition. These costs are recorded in the Corporate & Services segment.

•
The change in unrealized gains and losses on the Company's interest rate derivative contracts contributed a $3.8 million decrease in net income when comparing the six months ended June 30, 2019 to the same period in 2018.

•
SJI recorded $2.2 million of costs to reorganize and restructure the business, including severance and other employee separation costs, that were incurred during the six months ended June 30, 2019. These costs are recorded in the Corporate & Services segment. A significant portion of the volatility in operating results is due to the impact of the accounting methods associated with SJI’s derivative activities. SJI uses derivatives to limit its exposure to market risk on transactions to buy, sell, transport and store natural gas and to buy and sell retail electricity. SJI also uses derivatives to limit its exposure

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to increasing interest rates on variable-rate debt.

The types of transactions that typically cause the most significant volatility in operating results are as follows:

•
The wholesale energy operations at SJRG purchases and holds natural gas in storage and maintains capacity on interstate pipelines to earn profit margins in the future. The wholesale energy operations utilize derivatives to mitigate commodity price risk in order to substantially lock-in the profit margin that will ultimately be realized. However, both gas stored in inventory and pipeline capacity are not considered derivatives and are not subject to fair value accounting. Conversely, the derivatives used to reduce the risk associated with a change in the value of inventory and pipeline capacity 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 inventory and pipeline capacity are unchanged. Additionally, volatility in earnings is created when realized gains and losses on derivatives used to mitigate commodity price risk on expected future purchases of gas injected into storage are recognized in earnings when the derivatives settle, but the cost of the related gas in storage is not recognized in earnings until the period of withdrawal. This volatility can be significant from period to period. Over time, gains or losses on the sale of gas in storage, as well as use of capacity, will be offset by losses or gains on the derivatives, resulting in the realization of the profit margin expected when the transactions were initiated.

•
The retail electric operations at SJE use forward contracts to mitigate commodity price risk on fixed price electric contracts with customers. In accordance with GAAP, the forward contracts are recorded at fair value, with changes in fair value recorded in earnings in the period of change. Several related customer contracts are not considered derivatives and, therefore, are not recorded in earnings until the electricity is delivered. As a result, earnings are subject to volatility as the market price of the forward contracts change, even when the underlying hedged value of the customer contract is unchanged. Over time, gains or losses on the sale of the fixed price electric under contract will be offset by losses or gains on the forward contracts, resulting in the realization of the profit margin expected when the transactions were initiated.

As a result, management also uses the non-generally accepted accounting principles (non-GAAP) financial measures of Economic Earnings and Economic Earnings per share when evaluating its results of operations. These non-GAAP financial measures should not be considered as an alternative to GAAP measures, such as net income, operating income, earnings per share from continuing operations or any other GAAP measure of liquidity or financial performance.

We define Economic Earnings as: Income from continuing operations, (i) less the change in unrealized gains and plus the change in unrealized losses on all derivative transactions; (ii) less realized gains and plus realized losses on all commodity derivative transactions attributed to expected purchases of gas in storage to match the recognition of these gains and losses with the recognition of the related cost of the gas in storage in the period of withdrawal; and (iii) less the impact of transactions, contractual arrangements or other events where management believes period to period comparisons of SJI's operations could be difficult or potentially confusing. With respect to part (iii) of the definition of Economic Earnings, for the three and six months June 30, 2019 and 2018, Economic Earnings excludes the following:

•
For the three and six months ended June 30, 2019, Economic Earnings excludes costs incurred to reorganize and restructure the business, including severance and other employee separation costs.

•
For the three and six months ended June 30, 2019 and 2018, Economic Earnings excludes costs to acquire the assets of ETG and ELK, including legal, consulting and other professional fees, and costs incurred to exit the Transaction Service Agreement (TSA). Economic Earnings also excludes costs incurred and gains recognized on the sale of the remaining solar assets, and the sale of certain SREC's.

•
For the three and six months ended June 30, 2019 and 2018, Economic Earnings excludes the impact of a May 2017 jury verdict stemming from a pricing dispute with a gas supplier over costs, including interest charges and legal fees incurred, along with the realized difference in the market value of the commodity (including financial hedges).

•
For the three and six months ended June 30, 2018, Economic Earnings excludes approximately $99.2 million (pre-tax) of impairment charges recorded on solar generating facilities, which was primarily driven by the purchase price in the agreement to sell solar assets being less than the carrying amount of the assets. See Note 1 to the condensed consolidated financial statements.


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Economic Earnings is a significant performance metric used by our management to indicate the amount and timing of income from continuing operations that we expect to earn after taking into account the impact of derivative instruments on the related transactions, as well as the impact of contractual arrangements and other events that management believes make period to period comparisons of SJI's operations difficult or potentially confusing. Management uses Economic Earnings to manage its business and to determine such items as incentive/compensation arrangements and allocation of resources. Specifically regarding derivatives, we believe that this financial measure indicates to investors the profitability of the entire derivative-related transaction and not just the portion that is subject to mark-to-market valuation under GAAP. We believe that considering only the change in market value on the derivative side of the transaction can produce a false sense as to the ultimate profitability of the total transaction as no change in value is reflected for the non-derivative portion of the transaction.

Economic Earnings for the three months ended June 30, 2019 decreased $17.7 million to a net loss of $12.2 million compared with the same period in 2018. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):

•
SJI recorded $7.9 million of financing costs and other charges in connection with the Acquisition during the three months ended June 30, 2019 (see Notes 1 and 17 to the condensed consolidated financial statements). These costs are related to debt that was entered into during the second quarter of 2018 in order to finance the Acquisition. These costs are recorded in the Corporate & Services segment.

•
The income contribution from on-site energy production at Marina for the three months ended June 30, 2019 decreased $4.1 million to a net loss of $1.8 million, primarily due to less SREC revenue in 2019 as a result of the sale of solar assets to a third party buyer as discussed under "Gross Margin - Energy Services" below. This is partially offset with lower depreciation expense resulting from the sale of solar assets.

•
In connection with the Acquisition (see Notes 1 and 17 to the condensed consolidated financial statements), SJI consolidated the accounts of ETG and ELK gas utility operations beginning with the third quarter of 2018. ETG and ELK contributed a combined net loss of $3.9 million for the three months ended June 30, 2019.

•
The income contribution from the wholesale energy operations at SJRG for the three months ended June 30, 2019 decreased $2.8 million to a net loss of $2.0 million, primarily due to lower margins on daily energy trading activities during the three months ended June 30, 2019 compared to the same period in the prior year.

•
The income contribution from gas utility operations at SJG for the three months ended June 30, 2019 increased $0.4 million to $2.0 million, primarily due to roll-in of infrastructure program investments and customer growth, partially offset by an overall increase in depreciation and interest expenses.

Economic Earnings for the six months ended June 30, 2019 decreased $18.7 million to $87.2 million compared with the same period in 2018. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):

•
The income contribution from the wholesale energy operations at SJRG for the six months ended June 30, 2019 decreased $31.6 million to $5.2 million, primarily due to lower margins on daily energy trading activities during the six months ended June 30, 2019 compared to the same period in the prior year.

•
SJI recorded $16.4 million of financing costs and other charges in connection with the Acquisition during the six months ended June 30, 2019 (see Notes 1 and 17 to the condensed consolidated financial statements). These costs are related to debt that was entered into during the second quarter of 2018 in order to finance the Acquisition and are recorded in the Corporate & Services segment.

•
In connection with the Acquisition (see Notes 1 and 17 to the condensed consolidated financial statements), SJI consolidated the accounts of ETG and ELK gas utility operations beginning with the third quarter of 2018. ETG and ELK contributed a combined net income of $27.4 million for the six months ended June 30, 2019.

•
The net income contribution from gas utility operations at SJG for the six months ended June 30, 2019 increased $2.4 million to $70.7 million, primarily due to roll-in of infrastructure program investments and customer growth, partially offset by an overall increase in depreciation and interest expenses.

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The following table presents a reconciliation of SJI's income from continuing operations and earnings per share from continuing operations to Economic Earnings and Economic Earnings per share for the three and six months ended June 30 (in thousands, except per share data):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Income from Continuing Operations
$
(13,304
)
 
$
(93,793
)
 
$
72,395

 
$
17,513

Minus/Plus:
 
 
 
 
 
 
 
Unrealized Mark-to-Market Losses (Gains) on Derivatives
1,888

 
5,697

 
15,038

 
(19,493
)
Loss on Property, Plant and Equipment (A)
—

 
99,233

 
—

 
99,233

Net Losses from a Legal Proceeding in a Pricing Dispute (B)
986

 
1,661

 
1,977

 
3,006

Acquisition/Sale Net (Gains) Costs (C)
(1,822
)
 
26,246

 
163

 
35,523

Other Costs (D)
422

 
—

 
2,995

 
—

Income Taxes (E)
(391
)
 
(33,555
)
 
(5,352
)
 
(29,875
)
Economic Earnings
$
(12,221
)
 
$
5,489

 
$
87,216

 
$
105,907

 
 
 
 
 
 
 
 
Earnings per Share from Continuing Operations
$
(0.14
)
 
$
(1.12
)
 
$
0.79

 
$
0.21

Minus/Plus:
 
 
 
 
 
 
 
Unrealized Mark-to-Market Losses (Gains) on Derivatives
0.02

 
0.07

 
0.16

 
(0.23
)
Loss on Property, Plant and Equipment (A)
—

 
1.18

 
—

 
1.20

Net Losses from a Legal Proceeding in a Pricing Dispute (B)
0.01

 
0.02

 
0.02

 
0.04

Acquisition/Sale Net (Gains) Costs (C)
(0.02
)
 
0.31

 
0.01

 
0.43

Other Costs (D)
0.01

 
—

 
0.03

 
—

Income Taxes (E)
(0.01
)
 
(0.39
)
 
(0.06
)
 
(0.36
)
Economic Earnings per Share
$
(0.13
)
 
$
0.07

 
$
0.95

 
$
1.29

The effect of derivative instruments not designated as hedging instruments under GAAP in the condensed consolidated statements of income (see Note 12 to the condensed consolidated financial statements), as compared to the Economic Earnings table above, is as follows (in thousands):

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
(Losses) Gains on Energy Related Commodity Contracts
$
(143
)
 
$
(6,178
)
 
$
(12,203
)
 
$
17,175

(Losses) Gains on Interest Rate Contracts
(1,745
)
 
620

 
(2,835
)
 
2,248

                         Total before income taxes
(1,888
)
 
(5,558
)
 
(15,038
)
 
19,423

Unrealized mark-to-market gains on derivatives held by affiliated companies, before taxes
—

 
(139
)
 
—

 
70

Total unrealized mark-to-market (losses) gains on derivatives
(1,888
)
 
(5,697
)
 
(15,038
)
 
19,493

Loss on Property, Plant and Equipment (A)
—

 
(99,233
)
 
—

 
(99,233
)
Net Losses from a Legal Proceeding in a Pricing Dispute (B)
(986
)
 
(1,661
)
 
(1,977
)
 
(3,006
)
Acquisition/Sale Net Gains (Costs) (C)
1,822

 
(26,246
)
 
(163
)
 
(35,523
)
Other Costs (D)
(422
)
 
—

 
(2,995
)
 
—

Income Taxes (E)
391

 
33,555

 
5,352

 
29,875

Total reconciling items between (losses) income from continuing operations and economic earnings
$
(1,083
)
 
$
(99,282
)
 
$
(14,821
)
 
$
(88,394
)


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(A) Represents impairment charges taken on solar generating facilities in 2018, which was primarily driven by the purchase price in the agreement to sell solar assets being less than the carrying amount of the assets.

(B) Represents net losses, including interest, legal fees, and the realized difference in the market value of the commodity (including financial hedges), resulting from a ruling in a legal proceeding related to a pricing dispute between SJI and a gas supplier that began in October 2014.

(C) Represents costs incurred to acquire the assets of ETG and ELK, including legal, consulting and other professional fees, and costs incurred to exit the TSA. Also included here are gains recognized and costs incurred on the sale of the remaining solar assets and sales of certain SREC's.

(D) Represents severance and other employee separation costs.

(E) Determined using a combined average statutory tax rate of approximately 26.5% and 25% for the three and six months ended June 30, 2019 and 2018, respectively.


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SJI Utilities:

SJG Utility Operations:

The following tables summarize the composition of SJG utility operations operating revenues and margin for the three and six months ended June 30 (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Utility Operating Revenues:
 
 
 
 
 
 
 
Firm Sales -
 
 
 
 
 
 
 
Residential
$
27,139

 
$
42,184

 
207,105

 
$
182,938

Commercial
9,721

 
10,478

 
46,415

 
39,227

Industrial
603

 
613

 
2,535

 
2,770

Cogeneration & Electric Generation
391

 
1,750

 
971

 
3,049

Firm Transportation -
 
 
 
 
 
 
 
Residential
1,540

 
1,798

 
6,528

 
8,306

Commercial
6,715

 
6,063

 
21,953

 
22,535

Industrial
5,653

 
5,687

 
12,250

 
12,049

Cogeneration & Electric Generation
1,241

 
1,014

 
2,969

 
2,350

 
 
 
 
 
 
 
 
Total Firm Revenues
53,003

 
69,587

 
300,726

 
273,224

 
 
 
 
 
 
 
 
Interruptible Sales
—

 
8

 
62

 
123

Interruptible Transportation
260

 
256

 
640

 
578

Off-System Sales
7,119

 
4,600

 
29,546

 
32,185

Capacity Release
1,575

 
2,075

 
2,951

 
4,649

Other
311

 
275

 
541

 
501

 
62,268

 
76,801

 
334,466

 
311,260

Less: Intercompany Sales
(1,247
)
 
(1,198
)
 
(2,647
)
 
(3,889
)
Total Utility Operating Revenues
61,021

 
75,603

 
331,819

 
307,371

Less:
 
 
 

 
 
 
 
       Cost of Sales - Utility
2,654

 
19,379

 
121,534

 
109,187

       Less: Intercompany Cost of Sales
(1,247
)
 
(1,198
)
 
(2,647
)
 
(3,889
)
Total Cost of Sales - Utility (Excluding depreciation)
1,407

 
18,181

 
118,887

 
105,298

     Total Gross Margin
59,614

 
57,422

 
212,932

 
202,073

Conservation Recoveries*
2,560

 
3,288

 
9,358

 
8,964

RAC Recoveries*
5,219

 
4,086

 
10,438

 
8,172

EET Recoveries*
650

 
465

 
1,146

 
977

Revenue Taxes
204

 
179

 
880

 
545

Utility Margin**
$
50,981

 
$
49,404

 
$
191,110

 
$
183,415




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Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Utility Margin:
 
 
 
 
 
 
 
Residential
$
27,945

 
$
32,744

 
$
126,812

 
$
128,807

Commercial and Industrial
15,574

 
16,512

 
51,822

 
52,155

Cogeneration and Electric Generation
1,064

 
1,196

 
2,268

 
2,191

Interruptible
19

 
(102
)
 
43

 
27

Off-System Sales & Capacity Release
515

 
608

 
2,186

 
2,543

Other Revenues
538

 
817

 
787

 
1,043

Margin Before Weather Normalization & Decoupling
45,655

 
51,775

 
183,918

 
186,766

CIP Mechanism
4,382

 
(3,145
)
 
5,256

 
(4,905
)
EET Mechanism
944

 
774

 
1,936

 
1,554

Utility Margin**
$
50,981

 
$
49,404

 
$
191,110

 
$
183,415


* Represents expenses for which there is a corresponding credit in operating revenues. Therefore, such recoveries have no impact on SJG's financial results.

** Utility Margin is a non-GAAP financial measure and is further defined under the caption "Utility Margin" below.

Operating Revenues - SJG Utility Operations

Revenues from the gas utility operations at SJG decreased $14.5 million, or 18.9%, for the three months ended June 30, 2019 compared with the same period in 2018. Excluding intercompany transactions, revenues decreased $14.6 million, or 19.3%, for the three months ended June 30, 2019 compared with the same period in 2018.

The main driver for the decreased revenue was lower firm sales. Total firm revenue decreased $16.6 million, or 23.8%, for the three months ended June 30, 2019, compared with the same periods in 2018 due to warmer weather, as discussed under "Throughput Utility Operations" in the SJG Management's Discussion section.

Revenues from the gas utility operations at SJG increased $23.2 million, or 7.5%, for the six months ended June 30, 2019 compared with the same period in 2018. Excluding intercompany transactions, revenues increased $24.4 million, or 8.0%, for the six months ended June 30, 2019 compared with the same period in 2018.

Total firm revenue increased $27.5 million or 10.1%, for the six months ended June 30, 2019 as a result of 6,708 additional customers. While changes in gas costs and BGSS recoveries/refunds fluctuate from period to period, SJG does not profit from the sale of the commodity. Therefore, corresponding fluctuations in Operating Revenue or Cost of Sales have no impact on profitability, as further discussed below under the caption "Utility Margin."

Partially offsetting these increases was the impact of OSS volume, discussed under "Throughput - Gas Utility Operations" below, which resulted in a corresponding decrease of $2.6 million, or 8.2%, in OSS revenues for the six months ended June 30, 2019, compared with the same period in 2018. However, the impact of changes in OSS and capacity release activity do not have a material impact on the earnings of SJG, as SJG is required to return 85% of the profits of such activity to its ratepayers. Earnings from OSS can be seen in the “Margin” table above.

Utility Margin - SJG Utility Operations

Management uses Utility Margin, a non-GAAP financial measure, when evaluating the operating results of SJG. Utility Margin is defined as natural gas revenues less natural gas costs, regulatory rider expenses and related volumetric and revenue-based energy taxes. Management believes that Utility Margin provides a more meaningful basis for evaluating utility operations than revenues since natural gas costs, regulatory rider expenses and related energy taxes are passed through to customers. Natural gas costs are charged to operating expenses on the basis of therm sales at the prices approved by the BPU through SJG’s BGSS clause. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measure of gross margin, which is calculated as revenues less cost of sales as shown in the table above.

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Total Utility Margin increased $1.6 million, or 3.2%, and $7.7 million, or 4.2%, for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018. The increase is primarily due to customer growth and the roll-in of AIRP II Investments.

The CIP tracking mechanism adjusts earnings when actual usage per customer experienced during the period varies from an established baseline usage per customer. As reflected in the Utility Margin table above and the CIP table in SJG's Management Discussion section, the CIP mechanism increased Utility Margin by $4.4 million, or $3.6 million after taxes, for the three months ended June 30, 2019, and $5.0 million, or $4.2 million after taxes, for the six months ended June 30, 2019, primarily due to variation in customer usage compared to the same periods in 2018.

ETG Utility Operations:

The following tables summarize the composition of regulated natural gas utility operations, operating revenues and margin at ETG for the three and six months ended June 30 (in thousands, except for degree day data).
 
Three Months Ended June 30, 2019
Six Months Ended June 30, 2019
Utility Operating Revenues:
 
 
Firm & Interruptible Sales -
 
 
Residential
$
27,134

$
123,393

Commercial & Industrial
8,470

37,445

Firm & Interruptible Transportation -
 
 
Residential
284

996

Commercial & Industrial
7,438

19,020

Other
1,528

4,174

Total Firm & Interruptible Revenues
44,854

185,028

Less:
 
 
Total Cost of Sales - Utility (Excluding depreciation)
15,084

84,062

     Total Gross Margin
29,770

100,966

Regulatory Rider Expenses*
1,199

3,459

Utility Margin**
$
28,571

$
97,507


Utility Margin:
 
 
Residential
$
15,980

$
62,501

Commercial & Industrial
12,135

34,108

Regulatory Rider Expenses*
456

898

Utility Margin**
$
28,571

$
97,507

 
 
 
Degree Days
424

2,994


*Represents expenses for which there is a corresponding credit in operating revenues.  Therefore, such recoveries have no impact on ETG's financial results.

**Utility Margin is a non-GAAP financial measure and is further defined under the caption "Utility Margin" above. The definition of Utility Margin is the same for the Utilities.


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As ETG was acquired on July 1, 2018, there is no activity for the three and six months ended June 30, 2018 (see Note 17 to the condensed consolidated financial statements). ETG consists of natural gas distribution to residential, commercial and industrial customers in northern and central New Jersey. ETG's operating revenues of $44.9 million and $185.0 million for the three and six months ended June 30, 2019, respectively, consist of firm sales and transportation, as well as interruptible sales and transportation. ETG does not have any off-system sales. The Utility Margin at ETG of $28.6 million and $97.5 million for the three and six months ended June 30, 2019, respectively, is considered a non-GAAP measure and calculated the same as SJG as discussed under "Utility Margin" above.

ELK Utility Operations:

The activities of ELK utility operations are not material to SJI's financial results.

Nonutility:

Operating Revenues - Energy Group

Combined revenues for Energy Group, net of intercompany transactions, increased $14.6 million, or 11.2%, to $145.5 million, and decreased $45.2 million, or 11.2%, to $357.2 million, for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018. The significant drivers for the overall change were as follows:

•
Revenues from wholesale energy operations at SJRG, net of intercompany transactions, increased $59.5 million to $126.4 million for the three months ended June 30, 2019 compared with the same period in 2018. Revenues earned on gas supply contracts with electric generation facilities increased primarily due to three contracts that began operations in the second quarter of 2018 or later. Also contributing to the increase was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total increase of $11.6 million for the three months ended June 30, 2019 compared with the same period in 2018.

•
Revenues from wholesale energy operations at SJRG, net of intercompany transactions, increased $59.5 million to $316.4 million for the six months ended June 30, 2019 compared with the same period in 2018. Revenues earned on gas supply contracts with electric generation facilities increased for the six months ended June 30, 2019 compared with the same period in 2018primarily due to three contracts that began operations in the second quarter of 2018 or later as discussed above. Offsetting this increase was an overall decrease in sales, specifically compared to the first two weeks of January 2018 due to market conditions during that time, along with the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total decrease of $27.9 million for the six months ended June 30, 2019 compared with the same period in 2018. As discussed in Note 1 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues – Nonutility on the condensed consolidated income statement.

•
The retail gas operations at SJE were sold November 30, 2018. As a result, the Company recorded no revenues from this business during the three and six months ended June 30, 2019, as opposed to revenues, net of intercompany transactions, of $22.7 million and $61.3 million for the same periods in the prior year.

•
Revenues from retail electric operations at SJE, net of intercompany transactions, decreased $22.2 million to $19.0 million, and $43.4 million to $40.7 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018, primarily due to lower average LMP per megawatt hour and lower overall sales volumes. Also contributing to the decrease was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total decrease of .$2.8 million and $3.8 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018.

SJE uses forward financial contracts to mitigate commodity price risk on fixed price electric contracts. In accordance with GAAP, the forward financial contracts are recorded at fair value, with changes in fair value recorded in earnings in the period of change. The related customer contracts are not considered derivatives and, therefore, are not recorded in earnings until the electricity is delivered. As a result, earnings are subject to volatility as the market price of the forward financial contracts change, even when the underlying hedged value of the customer contract is unchanged. Over time, gains or losses on the sale of the fixed price electric under contract will be offset by losses or gains on the forward financial contracts, resulting in the realization of the profit margin expected when the transactions were initiated. The retail electric operations at SJE serve both fixed and market-priced customers.

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Operating Revenues - Energy Services
Combined revenues for Energy Services, net of intercompany transactions, decreased $6.3 million, or 30.0%, to $14.6 million, and decreased $13.7 million, or 34.50%, to $25.9 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018. The significant drivers for the overall change were as follows:
•
Revenues from on-site energy production at Marina, net of intercompany transactions, decreased $6.3 million, or 31.0%, to $14.1 million, and decreased $13.8 million, or 35.6%, to $24.8 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018, primarily due to less SREC revenue in 2019 as a result of the sale of solar assets to a third party buyer (see Note 1 to the condensed consolidated financial statements).

•
The change in revenues from appliance service operations at SJESP, net of intercompany transactions, was not significant.

Gross Margin - Nonutility

Gross margin for the nonutility businesses is defined as revenue less all costs that are directly related to the production, sale and delivery of SJI’s products and services. These costs primarily include natural gas and electric commodity costs as well as certain payroll and related benefits. On the condensed consolidated statements of 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 in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2018, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues - Nonutility on the condensed consolidated statements of income.

Gross margin for our nonutility business totaled $11.5 million for the three and six months ended June 30, 2019, respectively. Gross margin is broken out between Energy Group and Energy Services, which are defined as categories of segments in Note 6 to the condensed consolidated financial statements.

Gross Margin - Energy Group

Combined gross margins for Energy Group increased $0.2 million to a loss of $1.2 million and decreased $76.4 million to a loss of $1.6 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018. The significant drivers for the overall change were as follows:

•
Gross margin from the wholesale energy operations at SJRG increased $7.7 million to $0.2 million for the three months ended June 30, 2019 compared with the same period in 2018, The main driver for the overall increase was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total increase of $11.6 million. This was partially offset with lower margins on daily energy trading activities.

•
Gross margin from the wholesale energy operations at SJRG decreased $71.1 million to $0.4 million primarily due to lower margins on daily energy trading activities and an overall decrease in sales as noted under "Operating Revenues-Energy Group" above. Also contributing was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total decrease of $27.9 million for the six months ended June 30, 2019 compared with the same period in 2018.

The wholesale energy operations at SJRG expect to continue to add incremental margin from marketing and related opportunities in the Marcellus region, capitalizing on its established presence in the area. Future margins could fluctuate significantly due to the volatile nature of wholesale gas prices.

•
The retail gas operations at SJE were sold November 30, 2018. As a result, the Company recorded no margin from this business during the three and six months ended June 30, 2019, as opposed to $4.0 million and $0.6 million for the same periods in the prior year.

•
Gross margin from SJE’s retail electric operations decreased $3.5 million to a loss of $1.5 million, and $4.7 million to a loss of $2.0 million, for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018, primarily due to the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total decrease of .$2.8 million and $3.8 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018.

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Gross Margin - Energy Services
Combined gross margins for Energy Services decreased $12.7 million to $12.8 million and decreased $21.3 million to $22.3 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018. The significant drivers for the overall change were as follows:
•
Gross margin from on-site energy production at Marina decreased $12.8 million to $12.3 million, and $21.3 million to $21.2 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018, primarily due to less SREC revenue in 2019 as a result of the sale of solar assets to a third party buyer (see Note 1 to the condensed consolidated financial statements).

•
The change in gross margin from appliance service operations at SJESP was not significant.

Operating Expenses - All Segments:

A summary of net changes in operations expense for the three and six months ended June 30, follows (in thousands):

 
Three Months Ended June 30,
2019 vs. 2018
 
Six Months Ended June 30,
2019 vs. 2018
SJI Utilities:
 
 
 
   SJG Utility Operations
$
(2,074
)
 
$
(2,347
)
   ETG Utility Operations
17,865

 
35,839

   ELK Utility Operations
500

 
1,024

        Subtotal SJI Utilities
16,291

 
34,516

Nonutility:
 
 
 
Energy Group:
 
 
 
   Wholesale Energy Operations
(320
)
 
(922
)
   Retail Gas and Other Operations
(2,576
)
 
(4,989
)
   Retail Electric Operations
191

 
566

      Subtotal Energy Group
(2,705
)
 
(5,345
)
Energy Services:
 
 
 
   On-Site Energy Production
(6,276
)
 
(6,395
)
   Appliance Service Operations
52

 
(28
)
Subtotal Energy Services
(6,224
)
 
(6,423
)
     Total Nonutility
(8,929
)
 
(11,768
)
Midstream
10

 
71

Corporate & Services and Intercompany Eliminations
(8,771
)
 
(8,436
)
Total Operations Expense
$
(1,399
)
 
$
14,383


Operations Expense

In connection with the Acquisition, SJI consolidated the accounts of ETG and ELK utility operations beginning July 2018 (see Note 17 to the condensed consolidated financial statements), contributing an increase to Operations Expenses of $18.4 million and $36.9 million for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018.

SJG utility operations expense decreased $2.1 million and $2.3 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018, primarily due to the operation of SJG’s CLEP and EEP, which experienced an aggregate net decrease. Such costs are recovered on a dollar-for-dollar basis; therefore, SJG experienced an offsetting decrease in revenue during the three and six months ended June 30, 2019, compared with the same period in the prior year. Partially offsetting this decrease was higher expenses in various areas, including those associated with corporate support, governance and compliance costs.

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Nonutility operations expense decreased $8.9 million and $11.8 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018, primarily due to consulting and legal costs related to the sale of Marina's solar assets to a third-party buyer that were incurred in 2018 that did not recur in 2019, along with no expenses at the retail gas segment during 2019 resulting from the sale of the SJE gas business during the fourth quarter of 2018 as well as lower legal fees incurred at the wholesale energy operations at SJRG from an unfavorable court ruling related to a pricing dispute between SJRG and a supplier (see Note 11 to the condensed consolidated financial statements).

Maintenance - Maintenance expense increased $2.5 million and $5.2 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018, of which ETG and ELK contributed $2.3 million and $3.8 million, respectively. The remaining increases were primarily due to increased maintenance of services activity and higher levels of RAC amortization, both at SJG. This increase in RAC-related expenses does not affect earnings, as SJG recognizes an offsetting amount in revenues.

Depreciation - Depreciation decreased $0.6 million and $1.6 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018, primarily due to reduced depreciation expense at Marina as a result of the solar assets either being sold or classified as held for sale (see Note 1 to the condensed consolidated financial statements). Partially offsetting this decrease is the impact of ETG and ELK, along with increased investment in property, plant and equipment by the gas utility operations of SJG.

Energy and Other Taxes - Energy and other taxes increased $1.5 million and $3.3 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018, of which ETG and ELK contributed the majority of the increase.

Other Income and Expense - The change in other income and expense for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018 was not significant.

Interest Charges – Interest charges increased $8.9 million and $23.6 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018, primarily due to interest incurred on higher amounts of long-term debt outstanding at SJI and SJG, including financing for the Acquisition.

Income Taxes – Income tax expense increased $27.3 million and $15.9 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018. For the three month comparative period, the Company experienced a lower loss before income taxes compared to the prior year period. For the six month comparative period, the Company experienced higher income before income taxes compared to the prior year period.

Equity in Earnings of Affiliated Companies – The change in equity in earnings of affiliated companies for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018 was not significant.

Discontinued Operations – The results 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 BGSS charge and other regulatory clauses, settlement of legal matters, and environmental remediation expenditures through the RAC; working capital needs of SJI's energy trading and marketing activities; the timing of construction and remediation expenditures and related permanent financings; the timing of equity contributions to unconsolidated affiliates; 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 $216.1 million and $152.8 million in the first six months of 2019 and 2018, 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. Operating activities in the first six months of 2019 produced more net cash than the same period in 2018, $60.9 million of which was produced by ETG and ELK. The remaining increases are primarily due to higher customer collections, including under SJG regulatory clauses, and improvements in working capital.

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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 from investing activities, which are primarily construction projects, for the first six months of 2019 and 2018 amounted to $222.2 million and $131.9 million, respectively. We estimate the cash outflows for investing activities, net of refinancings and returns/advances on investments from affiliates, for fiscal years 2019, 2020 and 2021 at SJI to be approximately $376.5 million, $536.7 million and $462.2 million, respectively. The high level of investing activities for 2019, 2020 and 2021 is due to the accelerated infrastructure investment programs at SJG, the capital expenditures of ETG and ELK (post-Acquisition) and projected SJI Midstream investments, net of projected returns, in 2019 through 2021. SJI expects to use short-term borrowings under lines of credit from commercial banks and a commercial paper program to finance these investing activities as incurred. From time to time, SJI may refinance the short-term debt with long-term debt.

Other key investing activities of SJI during the first six months of 2019 and 2018 were as follows:

•
SJI received approximately $24.3 million during the first six months of 2019 from the sale of certain solar assets. See Note 1 to the condensed consolidated financial statements.

•
SJI received $15.6 million as an adjustment to the purchase price related to the Acquisition. See Note 17 to the condensed consolidated financial statements.

•
During the first six months of 2019 and 2018, SJI made net investments in unconsolidated affiliates of $3.9 million and $6.4 million, respectively.
 
Cash Flows from Financing Activities — Short-term borrowings from the commercial paper program and lines of credit from commercial banks are used to supplement cash flows from operations, to support working capital needs and to finance capital expenditures and acquisitions as incurred. From time to time, short-term debt incurred to finance capital expenditures is refinanced with long-term debt.

Credit facilities and available liquidity as of June 30, 2019 were as follows (in thousands):

Company
 
Total Facility
 
Usage
 
Available Liquidity
 
Expiration Date
SJI:
 
 
 
 
 
 
 
 
SJI Syndicated Revolving Credit Facility
 
$
500,000

 
$
396,600

(A)
$
103,400

 
August 2022
Revolving Credit Facility
 
50,000

 
50,000

 
—

 
September 2019 (D)
 
 
 
 
 
 
 
 
 
Total SJI
 
550,000

 
446,600

 
103,400

 
 
 
 
 
 
 
 
 
 
 
SJG:
 
 
 
 
 
 
 
 
Commercial Paper Program/Revolving Credit Facility
 
200,000

 
104,000

(B)
96,000

 
August 2022
Uncommitted Bank Line
 
10,000

 
—

 
10,000

 
August 2019 (D)
 
 
 
 
 
 
 
 
 
Total SJG
 
210,000

 
104,000

 
106,000

 
 
 
 
 
 
 
 
 
 
 
ETG/ELK:
 
 
 
 
 
 
 
 
ETG/ELK Revolving Credit Facility
 
200,000

 
140,900

(C)
59,100

 
June 2021
 
 
 
 
 
 
 
 
 
Total
 
$
960,000

 
$
691,500

 
$
268,500

 
 

(A) Includes letters of credit outstanding in the amount of $9.6 million.
(B) Includes letters of credit outstanding in the amount of $0.9 million.
(C) Includes letters of credit outstanding in the amount of $1.0 million.
(D) SJI and SJG intend to renew these facilities upon expiration.


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In June 2019, SJI entered into an amendment to its Five Year Revolving Credit Agreement ("Credit Agreement"), expiring in August 2022, that increased by $100.0 million the amount SJI can borrow under the Credit Agreement in the form of revolving loans from a total aggregate amount of $400.0 million to $500.0 million. In addition, as part of the total $500.0 million extension of credit, the Credit Agreement provides for swingline loans (in an amount not to exceed an aggregate of $50.0 million ) and letters of credit (in an amount not to exceed an aggregate of $200.0 million), each at the applicable interest rates specified in the Credit Agreement. Subject to certain conditions set forth in the Credit Agreement, the Company may increase the revolving credit facility up to a maximum aggregate amount of $100.0 million (for a total facility of up to $600.0 million), although no lender is obligated to increase its commitment.

SJI (as a guarantor to ELK's obligation under this revolving credit agreement) and ETG and ELK (as Borrowers) have a $200.0 million, two-year revolving credit agreement with several lenders. The revolving credit agreement provides for the extension of credit to the Borrowers in a total aggregate amount of $200.0 million ($175.0 million for ETG; $25.0 million for ELK). In June 2019, this revolving credit agreement was amended to add SJIU as an additional Borrower and to extend the termination date from June 2020 to June 2021. See Note 10 to the condensed consolidated financial statements.

The Utilities' facilities are restricted as to use and availability specifically to the respective Utilities; however, if necessary, the SJI facilities can also be used to support liquidity needs of the Utilities. All committed facilities contain one financial covenant limiting the ratio of indebtedness to total capitalization of the applicable borrowers (as defined in the respective credit agreements), measured on a quarterly basis. SJI and the Utilities were in compliance with these covenants as of June 30, 2019. Borrowings under these credit facilities are at market rates.

SJI's weighted average interest rate on these borrowings (inclusive of SJG for both periods and ETG/ELK for 2019), which changes daily, was 3.45% and 2.90% at June 30, 2019 and 2018, respectively. SJG's weighted average interest rate on these borrowings, which changes daily, was 2.60% and 2.33% at June 30, 2019 and 2018, respectively.

SJI's average borrowings outstanding under these credit facilities (inclusive of SJG for both periods and ETG/ELK for 2019), not including letters of credit, during the six months ended June 30, 2019 and 2018 were $347.2 million and $201.6 million, respectively. The maximum amounts outstanding under these credit facilities, not including letters of credit, during the six months ended June 30, 2019 and 2018 were $687.2 million and $397.3 million, respectively.

SJG's average borrowings outstanding under these credit facilities during the six months ended June 30, 2019 and 2018 were $72.5 million and $49.3 million, respectively. The maximum amount outstanding under its credit facilities during the six months ended June 30, 2019 and 2018 were $108.0 million and $85.0 million, respectively.

Based upon the existing credit facilities and a regular dialogue with our banks, we believe there will continue to be sufficient credit available to meet our business’ future liquidity needs.

The SJI SJG, and ETG/ELK principal credit facilities are provided by a syndicate of banks. The NPA for Senior Unsecured Notes issued by SJI contains a financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective NPA or credit agreement) to not more than 0.70 to 1, measured at the end of each fiscal quarter. For SJI, the equity units issued in 2018 are treated as equity (as opposed to how they are classified on the condensed consolidated balance sheet, as long term debt) for purposes of the covenant calculation. SJI and SJG were in compliance with this covenant as of June 30, 2019. However, one SJG bank facility still contains a financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective credit agreement) to not more than 0.65 to 1 measured at the end of each fiscal quarter. As a result, SJG must ensure that the ratio of indebtedness to total capitalization (as defined in the respective credit agreement) does not exceed 0.65 to 1, as measured at the end of each fiscal quarter. SJG was in compliance with this covenant as of June 30, 2019.

SJG has a commercial paper program under which SJG may issue short-term, unsecured promissory notes to qualified investors up to a maximum aggregate amount outstanding at any time of $200.0 million. The notes have fixed maturities which vary by note, but may not exceed 270 days from the date of issue. Proceeds from the notes are used for general corporate purposes. SJG uses the commercial paper program in tandem with its $200.0 million revolving credit facility and does not expect the principal amount of borrowings outstanding under the commercial paper program and the credit facility at any time to exceed an aggregate of $200.0 million. In June 2019, the revolving credit agreement was amended to add SJIU as an additional Borrower.

SJI supplements its operating cash flow, commercial paper program 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 MTN's, 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.

2019 Activity:

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On January 15, 2019, SJI settled its equity forward sale agreement by physically delivering the remaining 6,779,661 shares of common stock and receiving net cash proceeds of approximately $189.0 million. The forward price used to determine cash proceeds received by SJI at settlement was calculated based on the initial forward sale price, as adjusted for underwriting fees, interest rate adjustments as specified in the equity forward agreement and any dividends paid on our common stock during the forward period. See Note 4 to the condensed consolidated financial statements.

During the six months ended June 30, 2019, SJI provided four Notices of Optional Prepayment to the holders of its Floating Rate Senior Notes, Series 2018D, due June 20, 2019 of the Company’s intent to prepay the $475.0 million aggregate principal amount outstanding. As a result of these notices, the Company has repaid the $475.0 million aggregate principal amount in full.

During the six months ended June 30, 2019, SJI paid off $60.0 million principal amount outstanding on its 3.30% Senior Notes, Series 2014A-1, due June 26, 2019, and paid off $40.0 million principal amount outstanding on its Floating Rate Senior Notes, Series 2014B-1, due June 26, 2019.

Also during the six months ended June 30, 2019, SJG issued $10.0 million of debt by drawing on its $400.0 million term loan credit agreement. All loans under this credit agreement are due and payable in April 2020; as such, the issuance amount is recorded in current portion of long-term debt on the condensed consolidated balance sheets.

Current Portion of Long-Term Debt - See Note 1 to the condensed consolidated financial statements.

DRP - See Note 4 to the condensed consolidated financial statements.

SJI’s capital structure was as follows:
 
As of June 30, 2019
 
As of December 31, 2018
Equity
33.4
%
 
28.9
%
Long-Term Debt
51.3
%
 
64.9
%
Short-Term Debt
15.3
%
 
6.2
%
Total
100.0
%
 
100.0
%

SJI has paid dividends on its common stock for 68 consecutive years and has increased that dividend each year for the last 20 years.  SJI currently seeks to grow that dividend consistent with earnings growth while targeting a payout ratio of between 55% and 65% of Economic Earnings. 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. However, there can be no assurance that SJI will be able to continue to increase the dividend, meet the targeted payout ratio or pay a dividend at all in the future.


COMMITMENTS AND CONTINGENCIES:

Environmental Remediation - Costs for remediation projects, net of recoveries from ratepayers, for the first six months of 2019 and 2018 amounted to net cash outflows of $11.6 million and $30.2 million, respectively. The amounts for the first six months of 2019 include environmental remediation liabilities of ETG associated with six former manufactured gas plant sites in New Jersey which are recoverable from customers through rate mechanisms approved by the BPU. Total net cash outflows for remediation projects are expected to be $34.1 million, $39.3 million and $47.4 million for 2019, 2020 and 2021, respectively.  As discussed in Notes 10 and 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's 10-K for the year ended December 31, 2018, certain environmental costs are subject to recovery from ratepayers.

Standby Letters of Credit - See Note 11 to the condensed consolidated financial statements.

Contractual Obligations - There were no significant changes to SJI’s contractual obligations described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018, except for the following:


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•
RC Cape May Holdings, LLC has communicated to SJG that it no longer intends to proceed with a project to re-power the former BL England facility with natural gas. The proposed project was approved by the BPU in 2015 and the New Jersey Pinelands Commission in 2017, and would have supplied natural gas to this facility as well as provided a secondary supply of natural gas to customers in Atlantic and Cape May counties. SJG remains committed to meeting the vitally important needs of residents and businesses in these counties and is exploring other alternatives.

•
$565.0 million decrease in long-term debt (excluding unamortized debt issuance costs), which decreased due to the net pay downs that occurred in 2019, as discussed under "Liquidity and Capital Resources" above (also see Note 14 to the condensed consolidated financial statements). Also resulting from these pay downs was an overall decrease in future interest payments.

Off-Balance Sheet Arrangements – An off-balance sheet arrangement is any contractual arrangement involving an unconsolidated entity under which SJI has either made guarantees, or has certain other interests or obligations.

See "Guarantees" in Note 11 to the condensed consolidated financial statements for more detail.

Notes Receivable-Affiliates - See Note 5 to the condensed consolidated financial statements.

Pending Litigation — SJI and SJG are subject to claims, actions and other legal proceedings arising in the ordinary course of business. See Note 11 to the condensed consolidated financial statements for more detail on these claims, including information related to a court decision issued against SJG and SJRG on August 6, 2019 related to an ongoing pricing dispute related to two long-term gas supply contracts. Regarding this decision, SJI has a reserve to reflect the differences between the invoices and paid amounts, and SJI will be required to make payment by September 5, 2019 in an amount not materially different from what has been reserved.


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SOUTH JERSEY GAS COMPANY

This section of Management’s Discussion focuses on SJG for the reported periods. In many cases, explanations and disclosures for both SJI and SJG are substantially the same or specific disclosures for SJG are included in the Management's Discussion for SJI.

RESULTS OF OPERATIONS:

The results of operations for the SJG utility operations are described in detail above; therefore, this section primarily focuses on statistical information and other information that is not discussed in the results of operations under South Jersey Industries, Inc. Refer to the section entitled “Results of Operations - SJG Utility Operations” for a detailed discussion of the results of operations for SJG.

The following table summarizes the composition of selected gas utility throughput for the three and six month periods ended June 30, (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Utility Throughput – dts:
 
 
 
 
 
 
 
Firm Sales -
 
 
 
 
 
 
 
Residential
2,530

 
3,322

 
15,508

 
16,052

Commercial
864

 
911

 
3,987

 
3,620

Industrial
64

 
521

 
259

 
736

Cogeneration & Electric Generation
56

 
(35
)
 
139

 
220

Firm Transportation -
 
 
 
 
 
 
 
Residential
123

 
198

 
751

 
1,027

Commercial
966

 
1,172

 
3,673

 
4,313

Industrial
2,190

 
2,363

 
4,980

 
5,338

Cogeneration & Electric Generation
1,025

 
1,158

 
2,367

 
2,179

 
 
 
 
 
 
 
 
Total Firm Throughput
7,818

 
9,610

 
31,664

 
33,485

 
 
 
 
 
 
 
 
Interruptible Sales
—

 
1

 
6

 
10

Interruptible Transportation
227

 
233

 
547

 
534

Off-System Sales
2,478

 
1,130

 
7,541

 
7,877

Capacity Release
24,903

 
23,551

 
42,234

 
41,580

 
 
 
 
 
 
 
 
Total Throughput - Utility
35,426

 
34,525

 
81,992

 
83,486


Throughput – Gas Utility Operations - Total gas throughput increased 0.9 MMdts , for the three months ended June 30, 2019, compared with the same period in 2018. This increase was realized primarily in combined throughput in Capacity Release and OSS which increased 2.7 MMdts during the three months ended June 30, 2019 as compared with the same period in 2018. Offsetting the three month comparative was a 0.7 MMdts decrease in total firm throughput.

Total gas throughput decreased 1.5 MMdts, for the six months ended June 30,2019, compared with the same period in 2018, primarily due to a decrease in firm throughput, offset by an increase in Capacity Release. Total firm throughput decreased
1.8 MMdts for the six month period primarily due to the warmer weather. Total Capacity Release increased 0.7 MMdts for the for the six months ended June 30, 2019.


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CIP - The effects of the CIP on SJG's net income and the associated weather comparisons are as follows (dollars in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net Income Impact:
 
 
 
 
 
 
 
CIP – Weather Related
$
4.4

 
$
(0.6
)
 
$
5.0

 
$
0.3

CIP – Usage Related
(0.8
)
 
(1.1
)
 
(0.8
)
 
(3.3
)
Total Net Income Impact
$
3.6

 
$
(1.7
)
 
$
4.2

 
$
(3.0
)
 
 
 
 
 
 
 
 
Weather Compared to 20-Year Average
133.3% Colder
 
193.7% Colder
 
271.9% Colder
 
178.5% Colder
Weather Compared to Prior Year
74.0% Warmer
 
25.5% Colder
 
4.6% Warmer
 
14.6% Colder

Operating Revenues & Margin - See SJI's Management Discussion section above.

Operating Expenses - A summary of changes in operating expenses for SJG is as follows (in thousands):

 
Three Months Ended June 30,
2019 vs. 2018
 
Six Months Ended June 30,
2019 vs. 2018
Operations
(2,074
)
 
$
(2,347
)
Maintenance
194

 
$
1,475

Depreciation
1,644

 
$
3,025

Energy and Other Taxes
656

 
$
1,390


Operations - See SJI's Management Discussion section above.

Maintenance - See SJI's Management Discussion section above.

Depreciation - Depreciation expense increased $1.6 million and $3.0 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018, primarily due to New Jersey's infrastructure improvement efforts, which included the approval of SJG's AIRP and SHARP, in addition to significant investment in new technology systems.

Energy and Other Taxes -The change in Energy and Other Taxes for the three and six months ended June 30, 2019 compared with the same period in 2018 was not significant.

Other Income and Expense - The change in Other Income and Expense for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018 was not significant.

Interest Charges – Interest charges increased $0.9 million and $2.0 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018, primarily due to higher amounts of long-term debt outstanding.

Income Taxes – Income tax expense generally fluctuates as income before taxes changes. Minor variations will occur period to period as a result of effective tax rate adjustments.

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LIQUIDITY AND CAPITAL RESOURCES:

Liquidity and capital resources for SJG are substantially covered in the Management’s Discussion of SJI (except for the items and transactions that relate to SJI and its nonutility subsidiaries). Those explanations are incorporated by reference into this discussion.

Liquidity needs for SJG are driven by factors that include natural gas commodity prices; the impact of weather on customer bills; lags in fully collecting gas costs from customers under the BGSS charge, settlement of legal matters, and environmental remediation expenditures through the RAC; 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 $126.3 million and $85.3 million in the first six months of 2019 and 2018, 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 conversion efforts and the price of the natural gas commodity, inventory utilization, and gas cost recoveries. Operating activities in the first six months of 2019 produced more net cash than the same period in 2018, primarily due to higher collections under SJG regulatory clauses, partially offset by higher working capital needs.

Cash Flows from Investing Activities - SJG has a continuing need for cash resources for capital expenditures, primarily to invest in new and replacement facilities and equipment. SJG estimates the net cash outflows for capital expenditures for fiscal years 2019, 2020 and 2021 to be approximately $276.2 million, $310.4 million and $304.4 million, respectively. For capital expenditures, including those under the AIRP and SHARP, SJG expects to use short-term borrowings under both its commercial paper program and lines of credit from commercial banks to finance capital expenditures as incurred. From time to time, SJG may refinance the short-term debt incurred to support capital expenditures with long-term debt.

Cash Flows from Financing Activities - SJG supplements its operating cash flow and credit lines with both debt and equity capital. Over the years, SJG has used long-term debt, primarily in the form of First Mortgage Bonds and MTN's, 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.

As noted above, SJG issued $10.0 million of debt by drawing on its $400.0 million term loan credit agreement.

SJI did not contribute any equity to SJG during the six months ended June 30, 2019 or 2018.

SJG’s capital structure was as follows:

 
As of June 30, 2019
 
As of December 31, 2018
Common Equity
51.7
%
 
50.2
%
Long-Term Debt
43.4
%
 
44.5
%
Short-Term Debt
4.9
%
 
5.3
%
 
 
 
 
Total
100.0
%
 
100.0
%



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COMMITMENTS AND CONTINGENCIES:

Costs for remediation projects, net of recoveries from ratepayers, for the first six months of 2019 and 2018 amounted to net cash outflows of $11.5 million and $30.2 million, respectively. Total net cash outflows for remediation projects are expected to be $23.7 million, $15.2 million and $23.3 million for 2019, 2020 and 2021, respectively. As discussed in Notes 10 and 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's 10-K for the year ended December 31, 2018, certain environmental costs are subject to recovery from ratepayers.

SJG has certain commitments for both pipeline capacity and gas supply for which SJG pays fees regardless of usage. Those commitments, as of June 30, 2019, averaged $80.5 million annually and totaled $471.5 million over the contracts’ lives.  Approximately 31% of the financial commitments under these contracts expire during the next five years. SJG expects to renew each of these contracts under renewal provisions as provided in each contract. SJG recovers all such prudently incurred fees through rates via the BGSS.

Pending Litigation - See SJG's disclosure in the Commitments and Contingencies section of SJI's Management Discussion above, including information related to a court decision issued against SJG on August 6, 2019 related to an ongoing pricing dispute related to two long-term gas supply contracts. Regarding this decision, SJG has a reserve to reflect the differences between the invoices and paid amounts, and SJG will be required to make payment by September 5, 2019 in an amount not materially different from what has been reserved.

Contractual Cash Obligations – There were no significant changes to SJG's contractual obligations described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018, except for the addition of $10.0 million of long-term debt outstanding, see Note 14 to the condensed consolidated financial statements.

Off-Balance Sheet Arrangements - SJG has no off-balance sheet arrangements.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

SJI:

Commodity Market Risks — Certain SJI subsidiaries, including SJG, 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 third parties. These subsidiaries are subject to market risk due to price fluctuations. To hedge against this risk, SJI enters 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 SJI's 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.

As part of its gas purchasing strategy, SJG and ETG use financial contracts to hedge against forward price risk. These contracts are recoverable through SJG's and ETG's BGSS, subject to BPU approval.

SJRG manages risk for its own portfolio by entering into the types of transactions noted above. The retail electric operations of SJE use forward physical and financial contracts to mitigate commodity price risk on fixed price electric contracts. 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 of changes in value of a particular transaction is substantially offset by an opposite change in the related hedge transaction.

SJI has entered into certain contracts to buy, sell, and transport natural gas and to buy and sell retail electricity. SJI recorded net pre-tax unrealized (losses) gains of $(0.1) million and $(6.2) million for the three months ended June 30, 2019 and 2018, respectively, and $(12.2) million and $17.2 million for the six months ended June 30, 2019 and 2018, respectively, which are included with realized (losses) gains in Operating Revenues - Nonutility on the condensed consolidated statements of income. 


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The fair value and maturity of these energy-related contracts determined under the mark-to-market method as of June 30, 2019 is as follows (in thousands):

Assets
 
 
 
 
 
 
 
Source of Fair Value
Maturity
 < 1 Year
 
Maturity
 1 -3 Years
 
Maturity
Beyond 3 Years
 
Total
Prices actively quoted
$
6,900

 
$
34

 
$
1

 
$
6,935

Prices provided by other external sources
11,406

 
4,452

 
354

 
16,212

Prices based on internal models or other valuation methods
16,682

 
6,847

 
195

 
23,724

 
 
 
 
 
 
 
 
Total
$
34,988

 
$
11,333

 
$
550

 
$
46,871

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Source of Fair Value
Maturity
 <1 Year
 
Maturity
1 -3 Years
 
Maturity
Beyond 3 Years
 
Total
Prices actively quoted
$
17,878

 
$
2,340

 
$
27

 
$
20,245

Prices provided by other external sources
7,472

 
1,026

 
—

 
8,498

Prices based on internal models or other valuation methods
9,879

 
3,721

 
164

 
13,764

 
 
 
 
 
 
 
 
Total
$
35,229

 
$
7,087

 
$
191

 
$
42,507


•
NYMEX is the primary national commodities exchange on which natural gas is traded. Volumes of our NYMEX contracts included in the table above under "Prices actively quoted" are 59.0 MMdts with a weighted average settlement price of $2.77 per dt.
•
Basis represents the differential to the NYMEX natural gas futures contract for delivering gas to a specific location. Volumes of our basis contracts, along with volumes of our discounted index related purchase and sales contracts, included in the table above under "Prices provided by other external sources" and "Prices based on internal models or other valuation methods" are 18.8 MMdts with a weighted average settlement price of $(0.55) per dt.
•
Fixed Price Gas Daily represents the price of a NYMEX natural gas futures contract adjusted for the difference in price for delivering the gas at another location. Volumes of our Fixed Price Gas Daily contracts included in the table above under "Prices provided by other external sources" are 55.9 MMdts with a weighted average settlement price of $2.07 per dt.
•
Volumes of electric included in the table above under "Prices based on internal models or other valuation methods" are 0.2 MMmwh with a weighted average settlement price of $32.34 per mwh.

A reconciliation of SJI’s estimated net fair value of energy-related derivatives follows (in thousands):

Net Derivatives — Energy Related Assets, January 1, 2019
$
29,800

Contracts Settled During the Six Months Ended June 30, 2019, Net
(21,830
)
Other Changes in Fair Value from Continuing and New Contracts, Net
(3,606
)
 
 
Net Derivatives — Energy Related Assets, June 30, 2019
$
4,364





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Interest Rate Risk — Our exposure to interest-rate risk relates to short-term and long-term variable-rate borrowings. Variable-rate debt outstanding, including short-term and long-term debt, at June 30, 2019 was $1.10 billion and averaged $931.8 million during the first six months of 2019. A hypothetical 100 basis point (1%) increase in interest rates on our average variable-rate debt outstanding would result in a $6.9 million 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: 2018 - 91 b.p. increase; 2017 - 82 b.p. increase; 2016 - 47 b.p. increase; 2015 - 14 b.p. increase; and 2014 - 1 b.p. decrease. At June 30, 2019, our average interest rate on variable-rate debt was 3.38%.

We typically issue long-term debt either at fixed rates or use interest rate derivatives to limit our exposure to changes in interest rates on variable rate, long-term debt. As of June 30, 2019, the interest costs on $1.91 billion of our long-term debt (including current portion) was either at a fixed rate or hedged via an interest rate derivative.

As of June 30, 2019, SJI’s active interest rate swaps were as follows:

Notional Amount
 
Fixed Interest Rate
 
Start Date
 
Maturity
 
Obligor
$
20,000,000

 
3.049%
 
3/15/2017
 
3/15/2027
 
SJI
$
20,000,000

 
3.049%
 
3/15/2017
 
3/15/2027
 
SJI
$
10,000,000

 
3.049%
 
3/15/2017
 
3/15/2027
 
SJI
$
12,500,000

 
3.530%
 
12/1/2006
 
2/1/2036
 
SJG
$
12,500,000

 
3.430%
 
12/1/2006
 
2/1/2036
 
SJG

Credit Risk - As of June 30, 2019, SJI had approximately $15.9 million, or 33.8%, of the current and noncurrent Derivatives – Energy Related Assets transacted with two counterparties. These counterparties are investment-grade rated.

As of June 30, 2019, SJRG had $56.1 million of Accounts Receivable under sales contracts. Of that total, 24.8% were with regulated utilities or companies rated investment-grade or guaranteed by an investment-grade-rated parent or were with companies where we have a collateral arrangement or insurance coverage. The remainder of the Accounts Receivable were within approved credit limits.

SJG:

The fair value and maturity of SJG's energy trading and hedging contracts determined using mark-to-market accounting as of June 30, 2019 are as follows (in thousands):

Assets
 
 
 
 
 
 
Source of Fair Value
 
Maturity
< 1 Year
 
Maturity
1 - 3 Years
 
Total
Prices actively quoted
 
$
45

 
$
—

 
$
45

Prices provided by other external sources
 
24

 
—

 
24

Prices based on internal models or other valuable methods
 
1,760

 
—

 
1,760

 
 
 
 
 
 
 
Total
 
$
1,829

 
$
—

 
$
1,829


Liabilities
 
 
 
 
 
 
 
 
Maturity
 
Maturity
 
 
Source of Fair Value
 
< 1 Year
 
1 - 3 Years
 
Total
Prices actively quoted
 
$
5,542

 
$
297

 
$
5,839

Prices provided by other external sources
 
402

 
—

 
402

Prices based on internal models or other valuable methods
 
52

 
—

 
52

 
 
 
 
 
 
 
Total
 
$
5,996

 
$
297

 
$
6,293



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Contracted volumes of SJG's NYMEX contracts are 24.2 MMdts with a weighted-average settlement price of $2.76 per dt. Contracted volumes of SJG's Basis contracts are 3.8MMdts with a weighted-average settlement price of $(0.19) per dt.

A reconciliation of SJG's estimated net fair value of energy-related derivatives follows (in thousands):
Net Derivatives — Energy Related Assets, January 1, 2019
$
3,290

Contracts Settled During the Six Months ended June 30, 2019, Net
(3,331
)
Other Changes in Fair Value from Continuing and New Contracts, Net
(4,423
)
Net Derivatives — Energy Related Liabilities, June 30, 2019
$
(4,464
)

Interest Rate Risk - SJG's exposure to interest rate risk relates primarily to variable-rate borrowings. Variable-rate debt, including both short-term and long-term debt outstanding at June 30, 2019, was $423.2 million and averaged $391.1 million during the first six months of 2019. A hypothetical 100 basis point (1%) increase in interest rates on SJG's average variable-rate debt outstanding would result in a $2.8 million increase in SJG's 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 SJG's average monthly interest rates from the beginning to end of each year was as follows: 2018 - 91 b.p. increase; 2017 - 91 b.p. increase; 2016 - 19 b.p. increase; 2015 - 20 b.p. increase; and 2014 - 32 b.p. increase. As of June 30, 2019, SJG's average interest rate on variable-rate debt was 3.02%.

SJG typically issues long-term debt either at fixed rates or uses interest rate derivatives to limit exposure to changes in interest rates on variable-rate, long-term debt. As of June 30, 2019, the interest costs on $590.3 million of long-term debt (including current portion) was either at a fixed-rate or hedged via an interest rate derivative.


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Item 4. Controls and Procedures


Evaluation of Disclosure Controls and Procedures

The management of each of SJI and SJG, with the participation of their respective principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of SJI’s and SJG's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2019. Based on that evaluation, the principal executive officer and principal financial officer of each of SJI and SJG concluded that the disclosure controls and procedures employed at SJI and SJG are effective.

Changes in Internal Control Over Financial Reporting

On July 1, 2018, SJI completed the acquisition of ETG and ELK. See Note 17 - Business Combination in the Notes to the condensed consolidated financial statements for additional information. Under the guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting for a period of up to one year following an acquisition while integrating the acquired company.  SJI is in the process of integrating ETG and ELK into its internal control over financial reporting structure.  As a result of these integration activities, certain controls will be evaluated and may be changed.  The operations of ETG and ELK represented 37% of SJI's consolidated assets and 21% of SJI's consolidated revenues as of and for the six months ended June 30, 2019. There have not been any changes in SJI’s internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act, during the quarter ended June 30, 2019, that has materially affected, or is reasonably likely to materially affect, SJI’s internal control over financial reporting.


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PART II — OTHER INFORMATION

Item l. Legal Proceedings

Information required by this Item for SJI and SJG is incorporated by reference to Part I, Item 1, Note 11, Pending Litigation.

Item 1A. Risk Factors

There have been no material changes in the risk factors for SJI or SJG from those disclosed in Item 1A of SJI’s and SJG's Annual Reports on Form 10-K for the year ended December 31, 2018.




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Item 6. Exhibits
(a)  Exhibits


Exhibit No.
 
Description
 
 
 
 
Certification of SJI's Principal Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
 
 
 
 
Certification of SJI's Principal Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
 
 
 
 
Certification of SJG's Principal Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
 
 
 
 
Certification of SJG's Principal Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
 
 
 
 
Certification of SJI's Principal Executive Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).
 
 
 
 
Certification of SJI's Principal Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).
 
 
 
 
Certification of SJG's Principal Executive Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).
 
 
 
 
Certification of SJG's Principal Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).
 
 
 
101
 
The following financial statements from South Jersey Industries, Inc.’s Quarterly Report on Form 10-Q for the three and six months ended June 30, 2019, filed with the Securities and Exchange Commission on August 8, 2019 formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income; (ii) the Condensed Consolidated Statements of Comprehensive Income; (iii) the Condensed Consolidated Statements of Cash Flows; (iv) the Condensed Consolidated Balance Sheets; (v) the Condensed Consolidated Statements of Equity; and (vi) the Notes to Condensed Consolidated Financial Statements. The following financial statements from South Jersey Gas’ Quarterly Report on Form 10-Q for the three and six months ended June 30, 2019, filed with the Securities and Exchange Commission on August 8, 2019 formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Statements of Income; (ii) the Condensed Statements of Comprehensive Income; (iii) the Condensed Statements of Cash Flows; (iv) the Condensed Balance Sheets; and (v) the Condensed Statements of Equity.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
SOUTH JERSEY INDUSTRIES, INC.
 
 
 
 
Dated:
August 8, 2019
By:
/s/ Cielo Hernandez
 
 
 
Cielo Hernandez
 
 
 
Senior Vice President & Chief Financial Officer
 
 
 
(Principal Financial Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
SOUTH JERSEY GAS COMPANY
 
 
 
 
Dated:
August 8, 2019
By:
/s/ Ann T. Anthony
 
 
 
Ann T. Anthony
 
 
 
Treasurer - SJG
 
 
 
(Principal Financial Officer)


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