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SOUTH JERSEY INDUSTRIES INC - Quarter Report: 2020 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, 2020
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.
1-6364South Jersey Industries, Inc.New Jersey22-1901645
000-22211South Jersey Gas CoNew Jersey21-0398330

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 Jersey08037
(609)
561-9000
South Jersey Gas Co
1 South Jersey Plaza
Folsom
New Jersey08037
(609)
561-9000

Securities registered pursuant to Section 12(b) of the Act:

South Jersey Industries, Inc.
Title of each classTrading Symbol(s)Name of exchange on which registered
Common Stock - $1.25 par value per shareSJINew York Stock Exchange
5.625% Junior Subordinated Notes due 2079SJIJNew York Stock Exchange
Corporate UnitsSJIUNew York Stock Exchange
South Jersey Gas Co
Title of each classTrading Symbol(s)Name of exchange on which registered
NoneN/AN/A

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 filerAccelerated 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, 2020 was 100,586,050 shares. South Jersey Gas Company common stock ($2.50 par value) outstanding as of August 1, 2020 was 2,339,139 shares. All of South Jersey Gas Company's outstanding shares of common stock are held by SJI Utilities, Inc., which is a wholly-owned subsidiary of SJI.
South Jersey Gas Company is a direct 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 Company files its Quarterly Report on Form 10-Q with the reduced disclosure format authorized by General Instruction H.



TABLE OF CONTENTS
PART IFINANCIAL INFORMATIONPage 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 10. Lines of Credit & Short-Term Borrowings
 
 
 
 
     Note 19. Leases
Item 2.
Item 3.
Item 4.
PART IIOTHER INFORMATION 
Item 1.
Item 1A.
Item 6.



Table of Contents
GLOSSARY OF TERMS AND ABBREVIATIONS
ACBACB Energy Partners, LLC
ACLEAC Landfill Energy, LLC
AcquisitionThe 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
AEPApplied Energy Partners, LLC
AFUDCAllowance for Funds During Construction
AIRPAccelerated Infrastructure Replacement Program
AMAAsset Management Agreement
AOCLAccumulated Other Comprehensive Loss
AROAsset Retirement Obligation
ASCAccounting Standards Codification
ASUAccounting Standards Update
ATMAt-The-Market
BCLEBC Landfill Energy, LLC
BGSSBasic Gas Supply Service
BPUNew Jersey Board of Public Utilities
CARES ActCoronavirus Aid, Relief and Economic Security Act of 2020
CEGRCompounded Earnings Annual Growth Rate
CEPClean Energy Program (ETG)
CHPCombined Heat and Power
CIPConservation Incentive Program
CLEPClean Energy Program (SJG)
CODMChief Operating Decision Maker
COVID-19Novel coronavirus
DRPDividend Reinvestment Plan
dt Decatherm
dts/dDecatherms per day
EDITExcess Deferred Income Taxes
EEPEnergy Efficiency Program
EETEnergy Efficiency Tracker
EGREarnings Growth Rate
ELKElkton Gas Company
EMIEnergy & Minerals, Inc.
EnerConnexEnerConnex, LLC
EnergenicEnergenic US, LLC
EnergyMarkEnergyMark, LLC
EPSEarnings Per Share
ERIPEarly Retirement Incentive Program
ERISAEmployee Retirement Income Security Act of 1974
ETGElizabethtown Gas Company
FASBFinancial Accounting Standards Board
FERCFederal Energy Regulatory Commission
GAAPGenerally Accepted Accounting Principles for financial reporting in the United States
IAMInternational Association of Machinists and Aerospace Workers
IBEWInternational Brotherhood of Electrical Workers
IIPInfrastructure Investment Programs
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LIBORLondon Interbank Offer Rate
LMPLocational Marginal Price
MarinaMarina Energy, LLC
MidstreamSJI Midstream, LLC
MillenniumMillennium Account Services, LLC
MPSCMaryland Public Service Commission
MMdtsOne million decatherms
MMmWhOne million megawatt hours
MorieThe Morie Company, Inc.
MTFMarina Thermal Facility
MWhMegawatt-hours
Non-GAAPThe financial measures that are not prepared in accordance with U.S. GAAP
NPANote Purchase Agreement
NJEDANew Jersey Economic Development Authority
NYMEXNew York Mercantile Exchange
OSMCOn-System Margin Sharing Credit
OSSOff-System Sales
PennEastPennEast Pipeline, LLC
Potato CreekPotato Creek, LLC
RACRemediation Adjustment Clause
ROEReturn on Equity
SBCSocietal Benefits Clause
SCLESC Landfill Energy, LLC
SECSecurities and Exchange Commission
SERPSupplemental Executive Retirement Plan
SHARPStorm Hardening and Reliability Program
SJESouth Jersey Energy Company
SJEISJI Energy Investments, LLC
SJESSouth Jersey Energy Solutions, LLC
SJESPSouth Jersey Energy Service Plus, LLC
SJEXSouth Jersey Exploration, LLC
SJFSouth Jersey Fuel, Inc.
SJGSouth Jersey Gas Co or South Jersey Gas Company
SJISouth Jersey Industries, Inc., or the Company
SJIUSJI Utilities, Inc.
SJRGSouth Jersey Resources Group, LLC
SRECsSolar Renewable Energy Credits
SXLESX Landfill Energy, LLC
Tax ReformTax Cuts and Jobs Act which was enacted into law on December 22, 2017
TICTransportation Initiation Clause
TSATransition Services Agreement
TSRTotal Shareholder Return
UtilitiesRepresents SJI's three utility businesses: SJG, ETG, and ELK
UWUAUnited Workers Union of America
VSIPVoluntary Separation Incentive Program
WNCWeather Normalization Clause

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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 (loss), statements of comprehensive income (loss), statements of equity and statements of cash flows) for each of 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.

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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,
 20202019
Operating Revenues:  
Utility$145,846  $106,832  
Nonutility114,118  160,102  
Total Operating Revenues259,964  266,934  
Operating Expenses:  
Cost of Sales - (Excluding depreciation and amortization)  
 - Utility45,564  16,721  
 - Nonutility102,089  148,620  
Operations52,656  56,608  
Maintenance9,397  9,273  
Depreciation27,431  24,129  
Energy and Other Taxes2,636  2,717  
Total Operating Expenses239,773  258,068  
Operating Income20,191  8,866  
Other Income3,625  29  
Interest Charges(28,589) (28,434) 
Loss Before Income Taxes(4,773) (19,539) 
Income Taxes178  4,646  
Equity in Earnings of Affiliated Companies2,017  1,589  
Loss from Continuing Operations(2,578) (13,304) 
Loss from Discontinued Operations - (Net of tax benefit)(61) (95) 
Net Loss$(2,639) $(13,399) 
Basic Loss Per Common Share:  
Continuing Operations$(0.03) $(0.14) 
Discontinued Operations—  —  
Basic Loss Per Common Share$(0.03) $(0.14) 
Average Shares of Common Stock Outstanding - Basic93,712  92,389  
Diluted Loss Per Common Share:  
Continuing Operations$(0.03) $(0.14) 
Discontinued Operations—  —  
Diluted Loss Per Common Share$(0.03) $(0.14) 
Average Shares of Common Stock Outstanding - Diluted93,712  92,389  

The accompanying notes are an integral part of the condensed consolidated financial statements.
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Six Months Ended
June 30,
 20202019
Operating Revenues:  
Utility$532,727  $521,178  
Nonutility261,349  383,054  
Total Operating Revenues794,076  904,232  
Operating Expenses:  
Cost of Sales - (Excluding depreciation and amortization)  
 - Utility180,890  205,170  
 - Nonutility232,831  362,558  
Operations115,012  119,434  
Maintenance18,992  18,903  
Depreciation53,900  47,814  
Energy and Other Taxes6,498  6,934  
Total Operating Expenses608,123  760,813  
Operating Income185,953  143,419  
Other Income2,478  2,604  
Interest Charges(61,125) (57,087) 
Income Before Income Taxes127,306  88,936  
Income Taxes(33,192) (20,303) 
Equity in Earnings of Affiliated Companies4,408  3,762  
Income from Continuing Operations98,522  72,395  
Loss from Discontinued Operations - (Net of tax benefit)(120) (157) 
Net Income$98,402  $72,238  
Basic Earnings Per Common Share:  
Continuing Operations$1.06  $0.79  
Discontinued Operations—  —  
Basic Earnings Per Common Share$1.06  $0.79  
Average Shares of Common Stock Outstanding - Basic93,078  91,863  
Diluted Earnings Per Common Share:  
Continuing Operations$1.06  $0.79  
Discontinued Operations—  —  
Diluted Earnings Per Common Share$1.06  $0.79  
Average Shares of Common Stock Outstanding - Diluted93,195  91,979  

The accompanying notes are an integral part of the condensed consolidated financial statements.
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SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (UNAUDITED)
(In Thousands)
 
Three Months Ended
June 30,
 20202019
Net Loss$(2,639) $(13,399) 
Other Comprehensive Income, Net of Tax:  
Reclassification of Unrealized Gain on Derivatives - Other to Net Loss, net of tax of $(4) and $(4), respectively
  
Other Comprehensive Income - Net of Tax  
Comprehensive Loss$(2,631) $(13,391) 

Six Months Ended
June 30,
 20202019
Net Income$98,402  $72,238  
Other Comprehensive Income, Net of Tax: 
Reclassification of Unrealized Gain on Derivatives - Other to Net Income, net of tax of $(8) and $(8), respectively
16  16  
Other Comprehensive Income - Net of Tax16  16  
Comprehensive Income$98,418  $72,254  

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


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SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
 
Six Months Ended
June 30,
 20202019
Net Cash Provided by Operating Activities$206,310  $216,079  
Cash Flows from Investing Activities:  
Capital Expenditures (234,635) (256,587) 
Acquisition-related Working Capital Settlement—  15,600  
Cash Paid for Acquisition, Net of Cash Acquired(2,806) —  
Proceeds from Sale of Property, Plant & Equipment104,311  24,292  
Investment in Long-Term Receivables(11,506) (6,585) 
Proceeds from Long-Term Receivables7,524  4,983  
Investment in Affiliates(727) (3,088) 
Advances to Affiliates—  (858) 
Net Repayment of Notes Receivable - Affiliates2,730  —  
Net Cash Used in Investing Activities (135,109) (222,243) 
Cash Flows from Financing Activities:  
Net (Repayments of) Borrowings from Short-Term Credit Facilities(395,900) 409,502  
Proceeds from Issuance of Long-Term Debt600,000  10,000  
Principal Repayments of Long-Term Debt(450,000) (575,000) 
Payments for Issuance of Long-Term Debt(5,874) (1,275) 
Dividends on Common Stock(27,276) (26,562) 
Proceeds from Sale of Common Stock200,000  189,032  
Payments for the Issuance of Common Stock (1,863) —  
Net Cash (Used in) Provided by Financing Activities(80,913) 5,697  
Net Decrease in Cash, Cash Equivalents and Restricted Cash(9,712) (467) 
Cash, Cash Equivalents and Restricted Cash at Beginning of Period 28,381  31,679  
Cash, Cash Equivalents and Restricted Cash at End of Period $18,669  $31,212  

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









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SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
June 30,
2020
December 31,
2019
Assets  
Property, Plant and Equipment:  
Utility Plant, at original cost$5,040,204  $4,905,350  
Accumulated Depreciation(881,797) (843,998) 
Nonutility Property and Equipment, at cost29,086  25,991  
Accumulated Depreciation(13,709) (13,807) 
Property, Plant and Equipment - Net4,173,784  4,073,536  
Investments:  
Available-for-Sale Securities40  40  
Restricted11,402  21,964  
Investment in Affiliates91,323  87,087  
Total Investments102,765  109,091  
Current Assets:  
Cash and Cash Equivalents7,267  6,417  
Accounts Receivable231,434  253,661  
Unbilled Revenues16,148  84,821  
Provision for Uncollectibles(30,410) (19,829) 
Notes Receivable - Affiliate2,649  5,379  
Natural Gas in Storage, average cost40,483  54,153  
Materials and Supplies, average cost1,139  1,164  
Prepaid Taxes40,709  26,918  
Derivatives - Energy Related Assets31,925  52,892  
Assets Held for Sale40,044  143,440  
Other Prepayments and Current Assets41,382  43,492  
Total Current Assets422,770  652,508  
Regulatory and Other Noncurrent Assets:  
Regulatory Assets648,769  665,932  
Derivatives - Energy Related Assets11,486  7,243  
Notes Receivable - Affiliate12,720  12,720  
Contract Receivables34,647  30,958  
Goodwill702,070  702,070  
Other107,943  111,282  
Total Regulatory and Other Noncurrent Assets1,517,635  1,530,205  
Total Assets$6,216,954  $6,365,340  
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
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SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
June 30,
2020
December 31,
2019
Capitalization and Liabilities  
Equity:  
Common Stock$125,733  $115,493  
Premium on Common Stock1,216,363  1,027,902  
Treasury Stock (at par)(311) (289) 
Accumulated Other Comprehensive Loss(32,542) (32,558) 
Retained Earnings357,086  313,237  
Total Equity1,666,329  1,423,785  
Long-Term Debt 2,566,378  2,070,086  
Total Capitalization4,232,707  3,493,871  
Current Liabilities:  
Notes Payable452,800  848,700  
Current Portion of Long-Term Debt117,909  467,909  
Accounts Payable160,392  232,242  
Customer Deposits and Credit Balances29,049  35,004  
Environmental Remediation Costs54,731  43,849  
Taxes Accrued3,028  2,235  
Derivatives - Energy Related Liabilities25,963  41,965  
   Deferred Contract Revenues347  —  
Derivatives - Other Current2,101  1,155  
Liabilities Held for Sale5,862  6,043  
Dividends Payable27,277  —  
Interest Accrued16,455  13,580  
Pension Benefits3,727  3,727  
Other Current Liabilities26,563  35,486  
Total Current Liabilities926,204  1,731,895  
Deferred Credits and Other Noncurrent Liabilities:  
Deferred Income Taxes - Net134,611  92,166  
Pension and Other Postretirement Benefits114,422  114,055  
Environmental Remediation Costs145,339  189,036  
Asset Retirement Obligations194,307  263,950  
Derivatives - Energy Related Liabilities5,305  8,206  
Derivatives - Other Noncurrent18,491  11,505  
Regulatory Liabilities434,148  442,918  
Other11,420  17,738  
Total Deferred Credits and Other Noncurrent Liabilities1,058,043  1,139,574  
Commitments and Contingencies  (Note 11)
Total Capitalization and Liabilities$6,216,954  $6,365,340  
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
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SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(In Thousands, Except for Per Share Data)
 Common StockPremium on Common StockTreasury StockAOCLRetained EarningsTotal
 
Balance at January 1, 2020$115,493  $1,027,902  $(289) $(32,558) $313,237  $1,423,785  
Net Income—  —  —  —  101,041  101,041  
Other Comprehensive Income, Net of Tax—  —  —   —   
Common Stock Issued or Granted Through Stock Plans62  (352) 15  —  —  (275) 
Cash Dividends Declared - Common Stock ($0.30 per share)
—  —  —  —  (27,276) (27,276) 
Balance at March 31, 2020115,555  1,027,550  (274) (32,550) 387,002  1,497,283  
Net Loss—  —  —  —  (2,639) (2,639) 
Other Comprehensive Income, Net of Tax—  —  —   —   
Common Stock Issued or Granted Through Equity Offering or Stock Plans10,178  188,813  (37) —  —  198,954  
Cash Dividends Declared - Common Stock ($0.30 per share)
—  —  —  —  (27,277) (27,277) 
Balance at June 30, 2020$125,733  $1,216,363  $(311) $(32,542) $357,086  $1,666,329  

 Common StockPremium on Common StockTreasury StockAOCLRetained EarningsTotal
 
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—  —  —   —   
Common Stock Issued or Granted Through Equity Offering or Stock Plans8,603  179,829  17  —  —  188,449  
Cash Dividends Declared - Common Stock ($0.29 per share)
—  —  —  —  (26,562) (26,562) 
Balance at March 31, 2019115,486  1,023,097  (275) (26,087) 402,333  1,514,554  
Net Loss—  —  —  —  (13,399) (13,399) 
Other Comprehensive Income, Net of Tax—  —  —   —   
Common Stock Issued or Granted Through Stock Plans 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  

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





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

Three Months Ended
June 30,
20202019
Operating Revenues $87,182  $62,268  
Operating Expenses:
Cost of Sales (Excluding depreciation and amortization)25,546  2,654  
Operations25,354  25,194  
Maintenance8,487  7,006  
Depreciation16,993  16,045  
Energy and Other Taxes1,070  1,154  
Total Operating Expenses77,450  52,053  
Operating Income9,732  10,215  
Other Income3,184  328  
Interest Charges(8,019) (7,896) 
Income Before Income Taxes4,897  2,647  
Income Taxes(1,219) (671) 
Net Income$3,678  $1,976  


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

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Six Months Ended
June 30,
20202019
Operating Revenues$327,876  $334,466  
Operating Expenses:
Cost of Sales (Excluding depreciation and amortization)106,080  121,534  
Operations53,977  54,291  
Maintenance17,058  15,149  
Depreciation33,699  31,789  
Energy and Other Taxes2,685  3,143  
Total Operating Expenses213,499  225,906  
Operating Income114,377  108,560  
Other Income1,834  2,259  
Interest Charges(15,561) (15,744) 
Income Before Income Taxes100,650  95,075  
Income Taxes(26,450) (24,368) 
Net Income$74,200  $70,707  

The accompanying notes are an integral part of the condensed financial statements.
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SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
 
Three Months Ended
June 30,
20202019
Net Income$3,678  $1,976  
Other Comprehensive Income - Net of Tax:
Reclassification of Unrealized Gain on Derivatives - Other to Net Income, net of tax of $(4) and $(4), respectively
  
Other Comprehensive Income - Net of Tax *  
Comprehensive Income$3,686  $1,984  

Six Months Ended
June 30,
20202019
Net Income$74,200  $70,707  
Other Comprehensive Income - Net of Tax: *
Reclassification of Unrealized Gain on Derivatives - Other to Net Income, net of tax of $(8) and $(8), respectively
16  16  
Other Comprehensive Income - Net of Tax *16  16  
Comprehensive Income$74,216  $70,723  
The accompanying notes are an integral part of the condensed financial statements.


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SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Six Months Ended
June 30,
20202019
Net Cash Provided by Operating Activities$125,459  $126,275  
Cash Flows from Investing Activities:
Capital Expenditures(118,335) (124,122) 
Investment in Long-Term Receivables(11,506) (6,585) 
Proceeds from Long-Term Receivables7,524  4,983  
Net Cash Used in Investing Activities (122,317) (125,724) 
Cash Flows from Financing Activities:
Net Repayments of Short-Term Credit Facilities(10,800) (4,398) 
Proceeds from Issuance of Long-Term Debt400,000  10,000  
Principal Repayments of Long-Term Debt(400,000) —  
Payments from Issuance of Long-Term Debt(3,001) —  
Additional Investment by Shareholder9,500  —  
Net Cash (Used in) Provided by Financing Activities(4,301) 5,602  
Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash(1,159) 6,153  
Cash, Cash Equivalents and Restricted Cash at Beginning of Period 6,751  3,262  
Cash, Cash Equivalents and Restricted Cash at End of Period $5,592  $9,415  
 
The accompanying notes are an integral part of the condensed financial statements.

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SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
June 30, 2020December 31, 2019
Assets
Property, Plant and Equipment:
Utility Plant, at original cost$3,239,031  $3,154,736  
Accumulated Depreciation(587,441) (558,634) 
Property, Plant and Equipment - Net2,651,590  2,596,102  
Investments:
Restricted Investments3,448  4,073  
Total Investments3,448  4,073  
Current Assets:
Cash and Cash Equivalents2,144  2,678  
Accounts Receivable91,842  84,940  
Accounts Receivable - Related Parties499  2,333  
Unbilled Revenues3,915  45,016  
Provision for Uncollectibles(14,472) (14,032) 
Natural Gas in Storage, average cost9,884  14,839  
Materials and Supplies, average cost619  619  
Prepaid Taxes28,253  19,547  
Derivatives - Energy Related Assets4,699  16,904  
Other Prepayments and Current Assets22,822  25,074  
Total Current Assets150,205  197,918  
Regulatory and Other Noncurrent Assets:
Regulatory Assets485,354  496,177  
Long-Term Receivables34,647  30,958  
Derivatives - Energy Related Assets143   
Other22,513  23,322  
Total Regulatory and Other Noncurrent Assets542,657  550,462  
Total Assets$3,347,900  $3,348,555  
 
The accompanying notes are an integral part of the condensed financial statements.
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SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
June 30, 2020December 31, 2019
Capitalization and Liabilities  
Equity:  
Common Stock$5,848  $5,848  
Other Paid-In Capital and Premium on Common Stock365,244  355,744  
Accumulated Other Comprehensive Loss(27,859) (27,875) 
Retained Earnings830,381  756,181  
Total Equity1,173,614  1,089,898  
Long-Term Debt934,505  547,161  
Total Capitalization2,108,119  1,637,059  
Current Liabilities:  
Notes Payable160,500  171,300  
Current Portion of Long-Term Debt27,909  417,909  
Accounts Payable - Commodity10,070  17,361  
Accounts Payable - Other36,645  60,797  
Accounts Payable - Related Parties7,485  9,752  
Derivatives - Energy Related Liabilities2,651  14,671  
Derivatives - Other Current732  488  
Customer Deposits and Credit Balances19,133  22,430  
Environmental Remediation Costs34,995  29,569  
Taxes Accrued1,973  1,907  
Pension Benefits3,693  3,693  
Interest Accrued9,879  6,789  
Other Current Liabilities7,691  12,489  
Total Current Liabilities323,356  769,155  
Regulatory and Other Noncurrent Liabilities:  
Regulatory Liabilities255,229  274,482  
Deferred Income Taxes - Net390,842  357,637  
Environmental Remediation Costs73,983  101,693  
Asset Retirement Obligations79,819  96,509  
Pension and Other Postretirement Benefits101,282  99,981  
Derivatives - Energy Related Liabilities—  95  
Derivatives - Other Noncurrent10,675  7,368  
Other4,595  4,576  
Total Regulatory and Other Noncurrent Liabilities916,425  942,341  
Commitments and Contingencies (Note 11)
Total Capitalization and Liabilities$3,347,900  $3,348,555  
 
The accompanying notes are an integral part of the condensed financial statements.
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SOUTH JERSEY GAS COMPANY
STATEMENTS OF CHANGES IN COMMON EQUITY (UNAUDITED)
(In Thousands)


 Common StockOther Paid-In Capital and Premium on Common StockAOCLRetained EarningsTotal
Balance at January 1, 2020$5,848  $355,744  $(27,875) $756,181  $1,089,898  
Net Income—  —  —  70,522  70,522  
Other Comprehensive Income, Net of Tax—  —   —   
Balance at March 31, 20205,848  355,744  (27,867) 826,703  1,160,428  
Net Income—  —  —  3,678  3,678  
Other Comprehensive Income, Net of Tax—  —   —   
Additional Investment by Shareholder—  9,500  —  —  9,500  
Balance at June 30, 2020$5,848  $365,244  $(27,859) $830,381  $1,173,614  

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—  —   —   
Balance at March 31, 20195,848  355,744  (22,349) 737,518  1,076,761  
Net Income—  —  —  1,976  1,976  
Other Comprehensive Income, Net of Tax—  —   —   
Balance at June 30, 2019$5,848  $355,744  $(22,341) $739,494  $1,078,745  

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








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 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, ETG and ELK.

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. On July 31, 2020, SJI sold ELK to a third-party buyer (see "Agreement to Sell ELK" below).

SJE acquires and markets electricity to retail end users.

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. Included in Marina were MTF and ACB, which, in February 2020, were sold to a third-party buyer (see "Agreement to Sell MTF & ACB" below). Also included in Marina are two solar projects which are currently classified as held for sale, and a third solar project that was sold in March 2020 (see "Agreement to Sell Solar Assets" below). The significant wholly-owned subsidiaries of Marina include:

ACLE, BCLE, SCLE and SXLE, which own and operate landfill gas-to-energy production facilities in Atlantic, Burlington, Salem and Sussex Counties located in New Jersey. On June 1, 2020, the BCLE, SCLE, and SXLE landfill gas-to-energy-production facilities ceased operations after receiving approval from their respective local governmental authorities to do so.

ESNJ-AL-Somerspoint LLC, ESNJ-AL-Hamiltonsquare LLC, and ESNJ-AL-Brownsmills LLC own and operate solar generation sites located in New Jersey. These entities were acquired on June 30, 2020 (see "Acquisitions" below).

SJESP receives commissions on service contracts from a third party.

Midstream invests in infrastructure and other midstream projects, including PennEast. See Note 3.

SJEI provides energy procurement and cost reduction services. AEP, an aggregator, broker and consultant in the retail energy markets, is a wholly-owned subsidiary of SJEI after completion of the AEP acquisition in August 2019.

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. SJI is reporting on a consolidated basis the results of operations of the acquired entities discussed above as of the date of acquisition.

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, 2019. 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.
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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.

As of June 30, 2020 and December 31, 2019, SJI had assets and liabilities held for sale on the condensed consolidated balance sheets as a result of the agreements to sell that are discussed below. Unless otherwise noted, the disclosures herein related to specific asset and liability balances as of June 30, 2020 and December 31, 2019 exclude assets and liabilities held for sale. See "Assets and Liabilities Held for Sale" below for additional information including major classes of assets and liabilities classified as held for sale for both periods presented.

ESTIMATES AND ASSUMPTIONS - The condensed consolidated financial statements were prepared to conform with GAAP. Management makes estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. Therefore, actual results could differ from those estimates. Significant estimates include amounts related to regulatory accounting, energy derivatives, environmental remediation costs, pension and other postretirement benefit costs, revenue recognition, goodwill and evaluation of equity method investments for other-than-temporary impairment.

REGULATION - SJG and ETG are subject to the rules and regulations of the BPU, while ELK is subject to the rules and regulations of the MPSC. See Note 7 for a discussion of the Utilities' rate structure and regulatory actions. The Utilities maintain their accounts according to the BPU's and MPSC's prescribed Uniform System of Accounts. The Utilities follow the accounting for regulated enterprises prescribed by ASC 980, Regulated Operations. In general, Topic 980 allows for the deferral of certain costs (regulatory assets) and creation of certain obligations (regulatory liabilities) when it is probable that such items will be recovered from or refunded to customers in future periods. See Note 8 for a detailed discussion of regulatory assets and liabilities.

ACQUISITIONS - On June 30, 2020, SJI, through its wholly-owned subsidiary Marina, acquired ESNJ-AL-Somerspoint LLC, ESNJ-AL-Hamiltonsquare LLC, and ESNJ-AL-BrownsMills LLC, which own and operate solar-generation sites as noted above, for $2.8 million in total consideration. See Note 17. These entities are separate from the solar assets and projects that are discussed under "Agreement to Sell Solar Assets."

On August 31, 2019, SJI, through its wholly-owned subsidiary SJEI, completed its acquisition of AEP for $4.0 million in total consideration.

AGREEMENT TO SELL SOLAR ASSETS - See Note 1 to the Consolidated Financial Statements under "Agreement to Sell Solar Assets" in Item 8 of the Form 10-K for the year ended December 31, 2019 for additional information regarding SJI’s agreement to sell its portfolio of solar energy assets (each, a "Project" and, in total, the "Transaction").

During the first six months of 2020, one Project was sold for total consideration of $7.2 million, which was the net book value of the asset on the date of sale. The solar assets related to this Project were recorded as Assets Held for Sale on the condensed consolidated balance sheets as of December 31, 2019. During the first six months of 2019, seven Projects were sold for total consideration of $24.3 million.

The Company currently has two solar projects that are not part of the Transaction but are expected to be sold in 2020. The solar assets related to these two projects were recorded as Assets Held for Sale on the condensed consolidated balance sheets as of both June 30, 2020 and December 31, 2019, where they will remain until they are transferred to a buyer.

AGREEMENT TO SELL MTF & ACB - In December 2019, the Company announced it had entered into an agreement to sell MTF and ACB to a third-party buyer for an initial sales price of $100.0 million, which includes working capital. This sale closed on February 18, 2020 for a final sales price of $97.0 million, with the initial sales price being reduced by the amount of cash flows generated by MTF and ACB from October 1, 2019 through the date of closing. These unsold assets and liabilities were recorded as Assets Held for Sale and Liabilities Held for Sale, respectively, on the condensed consolidated balance sheets as of December 31, 2019.

AGREEMENT TO SELL ELK - In December 2019, the Company announced it had entered into an agreement to sell ELK to a third-party buyer. The MPSC approved this transaction during the second quarter of 2020 (see Note 7), and the transaction closed on July 31, 2020 (see Note 20). The assets and liabilities for ELK were recorded as Assets Held for Sale and Liabilities Held for Sale, respectively, on the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019.


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ASSETS AND LIABILITIES HELD FOR SALE - As discussed above, SJI is involved in the sale and/or potential sale of solar assets, MTF & ACB, and ELK and has recorded the following in Assets Held for Sale and Liabilities Held for Sale on the condensed consolidated balance sheets as of June 30, 2020 (ELK and two solar projects) and December 31, 2019 (ELK, MTF & ACB, and three solar projects):

June 30, 2020December 31, 2019
Assets Held for Sale:
   Current Assets$—  $5,365  
   Net Utility Plant19,335  18,692  
   Net Nonutility Property, Plant & Equipment19,993  110,400  
   Goodwill59  59  
   Regulatory Assets638  415  
   Other Noncurrent Assets19  8,509  
      Total Assets Held for Sale$40,044  $143,440  
Liabilities Held for Sale:
   Current Liabilities$—  $916  
   Asset Retirement Obligations2,609  2,515  
   Regulatory Liabilities3,246  2,583  
   Other Noncurrent Liabilities 29  
      Total Liabilities Held for Sale$5,862  $6,043  


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. We performed a qualitative assessment of the long-lived assets of SJI and SJG as of June 30, 2020 to determine whether the impact of the COVID-19 pandemic, and the resulting fluctuations in market conditions, indicate that the fair value of the assets are less than their carrying value. There were no indicators noted through these qualitative assessments that indicate an impairment has occurred.

No impairments were identified at either SJI or SJG for the three and six months ended June 30, 2020 or 2019, respectively.

OPERATING REVENUES - Gas and electric revenues are recognized in the period the commodity is delivered to customers. For retail customers (including SJG) that are not billed at the end of the month, we record an estimate to recognize unbilled revenues for gas and electricity delivered from the date of the last meter reading to the end of the month. The Utilities also have revenues that arise from alternative revenue programs, which are discussed further in Note 16. For ETG and SJG, unrealized gains and losses on energy-related derivative instruments are recorded in Regulatory Assets or Regulatory Liabilities on the condensed consolidated balance sheets of SJI and SJG (see Note 12) until they become realized, in which case they are recognized in operating revenues. SJRG's gas revenues are recognized in the period the commodity is delivered. Realized and unrealized gains and losses on energy-related derivative instruments are also recognized in operating revenues for SJRG. SJRG presents revenues and expenses related to its energy trading activities on a net basis in operating revenues. This net presentation has no effect on operating income or net income. The Company recognizes revenues on commissions received related to SJESP appliance service contracts from a third party on a monthly basis as these commissions are earned.

We considered the impact the COVID-19 pandemic has had on operating revenues, noting that SJI and SJG have not seen a significant reduction in revenues as a result of the pandemic. This is due to gas and electricity being considered an essential service and continuing to be delivered timely to customers, and no delays or operational shutdowns taking place to date. Given the performance obligation is satisfied at delivery, which matches the time when the Company is able to invoice the customer, the Company is confident in being able to meet its future performance obligations. To the extent that the pandemic does impact our ability to deliver in the future, operating revenues could be impacted.


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ARO - The amounts included under ARO are primarily related to the legal obligations SJI and SJG have to cut and cap gas distribution pipelines when taking those pipelines out of service in future years. These liabilities are generally recognized upon the acquisition or construction of the asset, or when management has adequate information in order to make an estimate of the obligation. The related asset retirement cost is capitalized concurrently by increasing the carrying amount of the related asset by the same amount as the liability. Changes in the liability are recorded for the passage of time (accretion) or for revisions to cash flows originally estimated to settle the ARO.

ARO activity for the six months ended June 30, 2020 as follows (in thousands):

SJI (includes SJG and all other consolidated subsidiaries):2020
ARO as of January 1,$263,950  
Accretion6,074  
Additions 2,012  
Settlements(5,152) 
Revisions in Estimated Cash Flows (A)(72,577) 
ARO as of June 30,$194,307  
SJG:2020
ARO as of January 1,$96,509  
Accretion2,042  
Additions1,161  
Settlements(1,142) 
Revisions in Estimated Cash Flows (A)(18,751) 
ARO as of June 30,$79,819  

(A) The revisions in estimated cash flows for SJI and SJG for the six months ended June 30, 2020 shown in the table above reflect decreases in the estimated retirement costs primarily as a result of changes in contractor costs to settle the ARO liability. Corresponding entries were made to Regulatory Assets and Utility Plant, thus having no impact on earnings.
 
TREASURY STOCK - SJI uses the par value method of accounting for treasury stock. As of June 30, 2020 and December 31, 2019, SJI held 248,411 and 231,514 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 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 ASC 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.

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 will be 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 Asset19,200  
Profit Sharing - Other Liabilities(17,546) 
   Total Consideration$11,339  

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As of June 30, 2020 and December 31, 2019, the balance of the intangible asset is $9.0 million and $11.5 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, 2020 and December 31, 2019, the balance in the liability is $8.5 million and $10.6 million, respectively, and is recorded to Regulatory Liabilities on the condensed consolidated balance sheets of SJI, with the change resulting from profit sharing earned.

VSIP - SJG entered into a VSIP program with IBEW Local 1293 and IAM Local 76 union employees over the age of 60 years old with 10 or more years of service to SJG. Communication was made to these employees in both the first and second quarter 2020, with acceptance made by the Local 1293 employees by April 14, 2020 and by the Local 76 employees by May 6, 2020. Total cost to SJG for the VSIP was $0.6 million, all of which related to employees of SJG and was included in Operations Expense on the condensed consolidated statements of income (loss) of SJI and SJG for the three and six months ended June 30, 2020.

THIRD PARTY GAS SUPPLIER REFUND - During the second quarter of 2020, a third party pipeline capacity supplier that is utilized by the Utilities and the wholesale energy operations at SJRG in the normal course of business settled its rate case with the FERC. As part of the executed settlement, the third party supplier was ordered to refund customers for over billings on transportation costs that had been charged during the rate case period. As a result, in June 2020, SJRG and SJG received notification from the supplier that refunds totaling approximately $11.2 million and $10.0 million, respectively, would be received. SJRG and SJG received the refunds in July 2020. Of the total SJRG refund, approximately $7.1 million will be remitted to ETG under the terms of the AMA (see above). As transportation costs incurred by ETG under the AMA can be recovered from ratepayers under its BGSS rate mechanism, the $7.1 million was recorded as an increase to ETG's Regulatory Liabilities as of June 30, 2020 (see Note 8). For the remaining $3.9 million retained by SJRG, approximately $3.8 million was recorded as Operating Revenues; as noted above, SJRG presents revenues and expenses related to its energy trading activities on a net basis in Operating Revenues. The remaining $0.1 million in interest was recorded in Other Income. As SJG also recovers these costs through its BGSS rate mechanism, the $10.0 million refund was recorded as a reduction to SJG's Regulatory Assets as of June 30, 2020 (see Note 8).

CURRENT PORTION OF LONG-TERM DEBT & SHORT-TERM BORROWINGS - As of June 30, 2020, the Company had $117.9 million of long-term debt that was due within one year ("current portion"), along with $452.8 million of notes payable which included borrowings under the commercial paper program and revolving credit facilities ("short-term borrowings" see Note 10). As of December 31, 2019, the Company had $467.9 million of current portion and $848.7 million of short-term borrowings. This reduction is the result of SJI refinancing $600.0 million of short-term and current portion amounts that were outstanding as of December 31, 2019, including $400.0 million at SJG (see Note 14), with the remainder being paid down using proceeds from the agreements to sell assets discussed above. SJI expects to further reduce its debt and notes payable over the next twelve months using cash provided from the sale of ELK and the remaining solar assets as discussed above. The remaining portion of long-term debt that is due within one year is expected to be paid by utilizing funds provided from refinancing activities and from the Company's revolving credit facilities.

Although there can be no assurance, management believes that actions presently being taken to pay off or refinance the long-term debt and borrowings that are due within the next year will be successful, as the Company has been successful in refinancing debt in the past. No adjustments have been made to the financial statements to account for this uncertainty.

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.

Recently Adopted Standards:

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. SJI and SJG adopted this guidance on January 1, 2020, consistent with the effective date. Adoption of this guidance did not have an impact on the financial statement results of SJI or SJG.


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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 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. SJI and SJG adopted this guidance on January 1, 2020, consistent with the effective date. Adoption of this guidance did not have an impact on the financial statement results of SJI or 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 adopted the amendments in ASU 2017-12 (with no impact to the financial statement results of SJI or SJG) as of April 25, 2019 (the issuance date of ASU 2019-04), the remaining amendments became effective and were adopted by SJI and SJG on January 1, 2020. Adoption of this guidance did not have an impact on the financial statement results of SJI or SJG. See ASU 2016-13 below for more detail.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to develop credit loss estimates. An entity will apply the amendment through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 was effective for SJI and SJG beginning on January 1, 2020. The impact of adoption did not result in an adjustment to retained earnings for either SJI or SJG as of January 1, 2020.

Standards Not Yet Effective:

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 adds new disclosures that 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 the annual disclosures for fiscal years ending after December 15, 2020. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.

In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this ASU clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments in this ASU also clarify that for the purposes of applying Topic 815, an entity should not consider whether, upon the settlement of a forward contract or exercise of a purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. The standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, for public companies. Early adoption is permitted, including early adoption in an interim period. 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 March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide various optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments in this Update must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. An entity may elect to apply the amendments in this Update to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. Management has not yet adopted this guidance and is currently determining when to adopt it for SJI and SJG, and 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, 2020 and 2019. No stock appreciation rights have been issued under the Plan.  During the six months ended June 30, 2020 and 2019, SJI granted 225,278 and 181,387 total restricted shares, respectively, to Officers and other key employees under the Plan.

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. 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, 2020 and 2019, Officers and other key employees were granted 105,451 and 85,146 shares of time-based restricted stock, respectively, which are included in the total restricted shares noted above.

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. During the six months ended June 30, 2020 and 2019, Officers and other key employees were granted 119,827 and 96,241 shares of performance-based restricted stock, respectively, which are included in the total restricted 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, 2020 and 2019, SJI granted 36,829 and 30,028 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, 2020 and the assumptions used to estimate the fair value of the awards:

 GrantsShares OutstandingFair Value Per ShareExpected VolatilityRisk-Free Interest Rate
Officers & Key Employees -2018 - TSR48,304  $31.05  21.9 %2.00 %
2018 - CEGR, Time63,389  $31.23  N/AN/A
2019 - TSR36,642  $32.88  23.2 %2.40 %
2019 - CEGR, Time101,982  $31.38  N/AN/A
2020 - TSR119,827  $25.51  34.8 %0.21 %
2020 - Time105,451  $25.19  N/AN/A
Directors -202036,829  $32.42  N/AN/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 is 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, 2020 and 2019 (in thousands):

 Three Months Ended
June 30,
Six Months Ended
June 30,
 2020201920202019
Officers & Key Employees$1,239  $1,534  $2,451  $2,284  
Directors298  202  597  404  
Total Cost1,537  1,736  3,048  2,688  
Capitalized99  47  (23) (34) 
Net Expense$1,636  $1,783  $3,025  $2,654  

The table above does not reflect the reversal of approximately $1.3 million in 2020 of previously recorded costs associated with TSR and CEGR-based grants for which performance goals were not met.

As of June 30, 2020, there was $8.5 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.


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The following table summarizes information regarding restricted stock award activity for SJI during the six months ended June 30, 2020, excluding accrued dividend equivalents:

 Officers and Other Key EmployeesDirectorsWeighted
Average
Fair Value
Nonvested Shares Outstanding, January 1, 2020402,146  30,961  $31.50  
  Granted225,278  36,829  $26.42  
  Cancelled/Forfeited(14,867) —  $31.48  
  Vested*(136,963) (30,961) $31.49  
Nonvested Shares Outstanding, June 30, 2020
475,594  36,829  $28.90  

*Earnings and performance-based targets during the three-year vesting periods were not attained for the 2017 Officer and other key employee grants that vested in the first quarter of 2020. As a result, no shares were awarded in 2020 associated with the 2017 TSR and CEGR-based grants.

The targets for the time-based grants were met. As a result, during the six months ended June 30, 2020, SJI awarded 72,145 shares to its Officers and other key employees at a market value of $2.0 million. During the six months ended June 30, 2019, SJI awarded 125,288 shares at a market value of $3.7 million. These awarded amounts for 2020 and 2019 include awards for previously deferred shares that were paid during the six month periods.

During the six months ended June 30, 2020 and 2019, SJI also awarded 30,961 and 26,416 shares to its Directors at a market value of $0.8 million for both periods.

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 non-forfeitable 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, 2020 and 2019, SJG officers and other key employees were granted 7,902 and 6,095 shares of SJI restricted stock, respectively, which had an immaterial impact to SJG's financial statements for both the six months ended June 30, 2020 and 2019.

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. SJG and ETG are each parties to a precedent capacity agreement with PennEast. The following events have occurred with respect to PennEast in recent months:

On September 10, 2019, the U.S. Court of Appeals for the Third Circuit ruled that PennEast does not have eminent domain authority over NJ state-owned lands. A Petition for Rehearing En Banc was denied by the U.S. Court of Appeals for the Third Circuit on November 5, 2019.
On October 8, 2019, the NJDEP denied and closed PennEast’s application for several permits without prejudice, citing the Third Circuit Court decision. On October 11, 2019, PennEast submitted a letter to the NJDEP objecting to its position that the application is administratively incomplete. PennEast's objections were rejected by the NJDEP on November 18, 2019.
In December 2019, PennEast asked the FERC for a two-year extension to construct the pipeline.
On January 30, 2020, the FERC voted to approve PennEast’s petition for a declaratory order and expedited action requesting that the body issue an order interpreting the Natural Gas Act’s eminent domain authority. On the same day, PennEast filed an amendment with FERC to construct PennEast in two phases. Phase one consists of construction of a pipeline in Pennsylvania from the eastern Marcellus Shale region in Luzerne County that would terminate in Northampton County. Phase two includes construction of the remaining original certificated route in Pennsylvania and New Jersey. Construction is expected to begin following approval by FERC of the phased approach and receipt of any remaining governmental and regulatory permits.
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On February 18, 2020, PennEast filed a Petition for a Writ of Certiorari with the Supreme Court of the United States ("petition") to review the September 10, 2019 Third Circuit decision.
On February 20, 2020, FERC granted PennEast’s request for a two-year extension to complete the construction of the pipeline.
On April 14, 2020, The US Supreme Court ordered the state of New Jersey to respond to PennEast's petition. The court directed NJ respondents, including state agencies and the NJ Conservation Foundation, to answer the petition by PennEast. The state responded on June 2.
On June 25, 2020, the Supreme Court examined the PennEast case to determine if it would review the decision by the U.S. Court of Appeals for the Third Circuit.
On June 29, 2020, the Supreme Court invited the US Solicitor General to file a brief expressing the views of the United States.

PennEast management remains committed to pursuing the project and intends to pursue all available options. SJI, along with the other partners, are intending to contribute to the project.

Our investment in PennEast totaled $86.9 million and $82.7 million as of June 30, 2020 and December 31, 2019, respectively. At June 30, 2020, the Company evaluated its investment in PennEast for impairment and determined there is not a triggering event for other-than-temporary impairment, and has not recorded any impairment charge to reduce the carrying value of our investment. Our evaluation considered that the pending legal proceedings are ongoing, and the intent is to move forward with all potential legal proceedings and other options available. Our evaluation also considered the current economic conditions as a result of COVID-19, noting that the timelines, potential options and legal proceedings have not been impacted. However, it is reasonably possible that the legal proceedings could have unfavorable outcomes, or there could be other future unfavorable developments, such as a reduced likelihood of success from development options and legal outcomes, estimated increases in construction costs, increases in the discount rate, or further significant delays, or PennEast could conclude that the project is not viable or does not go forward as actions progress. These could impact our conclusions with respect to other-than-temporary impairment and may require that we recognize an impairment charge of up to our recorded investment in the project, net of any cash and working capital. We will continue to monitor and update this analysis as required. Different assumptions could affect the timing and amount of any charge recorded in a period.

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 $3.5 million and $5.3 million for the three months ended June 30, 2020 and 2019, respectively and $8.7 million and $19.2 million for the six months ended June 30, 2020 and 2019, respectively.

EnerConnex - SJEI 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 both 2020 and 2019, SJI made net investments in unconsolidated affiliates of $2.0 million and $3.9 million, respectively.  As of June 30, 2020 and December 31, 2019, the outstanding balance of Notes Receivable – Affiliate was $15.4 million and $18.1 million, respectively. These Notes Receivable-Affiliates balances are broken out as follows:

As of both June 30, 2020 and December 31, 2019, $13.1 million of notes are related to Energenic, which are secured by Energenic's cogeneration assets for energy service projects, accrue interest at 7.5% and are to be repaid through 2025. As of both June 30, 2020 and December 31, 2019, $4.4 million of interest has been accrued and is recorded in Accounts Receivable on the condensed consolidated balance sheets. No payments have been made on this note as of June 30, 2020.
As of June 30, 2020 and December 31, 2019, the remaining $2.3 million and $5.0 million, respectively, of these notes are unsecured and accrue interest at variable rates.

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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, 2020 and December 31, 2019, SJI had a net asset of approximately $91.3 million and $87.1 million, respectively, 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, 2020 and December 31, 2019 is limited to its combined investments in these entities and the Notes Receivable-Affiliate in the aggregate amount of $106.7 million and $105.2 million, respectively.

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, 2020 and 2019, were (in thousands, except per share amounts):
Three Months Ended
June 30,
Six Months Ended
June 30,
 2020201920202019
Loss before Income Taxes:  
Sand Mining$(17) $(23) $(36) $(44) 
Fuel Oil(60) (96) (116) (153) 
Income Tax Benefits16  24  32  40  
Loss from Discontinued Operations — Net$(61) $(95) $(120) $(157) 
Earnings Per Common Share from  
Discontinued Operations — Net:  
Basic and Diluted$—  $—  $—  $—  

SJG RELATED-PARTY TRANSACTIONS - There have been no significant changes in the nature of SJG’s related-party transactions since December 31, 2019. 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, 2019 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,
2020201920202019
Operating Revenues/Affiliates:  
SJRG$568  $1,142  $1,597  $2,426  
Marina—  105  60  221  
Other20  20  40  40  
Total Operating Revenue/Affiliates$588  $1,267  $1,697  $2,687  


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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,
2020201920202019
Costs of Sales/Affiliates (Excluding depreciation and amortization)  
SJRG*$1,470  $3,335  $1,596  $6,582  
Operations Expense/Affiliates:
SJI$5,944  $5,694  $11,554  $10,420  
SJIU917  578  1,873  578  
Millennium821  789  1,647  1,552  
Other439  426  882  961  
Total Operations Expense/Affiliates$8,121  $7,487  $15,956  $13,511  

*These costs are included in either SJG's Cost of Sales on the condensed statements of income (loss). 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, 2019, 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:

 2020
Beginning Balance, January 1 92,394,155  
New Issuances During the Period: 
ATM Equity Offering8,122,283  
Stock-Based Compensation Plan69,612  
Ending Balance, June 30100,586,050  

The par value ($1.25 per share) of stock issued was recorded in Common Stock and the net excess over par value was recorded in Premium on Common Stock, which shows an increase on the condensed consolidated balance sheets from December 31, 2019 to June 30, 2020 primarily due to the issuance of shares under the ATM equity offering.

There were 2,339,139 shares of SJG's common stock (par value $2.50 per share) outstanding as of June 30, 2020. SJG did not issue any new shares during the period. SJIU owns all of the outstanding common stock of SJG.

ATM EQUITY OFFERING - In April 2020, SJI entered into an ATM Equity Offering Sales Agreement (the "Sales Agreement") to sell, from time to time, shares of the Company’s common stock, par value $1.25 per share, having an aggregate sale price up to $200.0 million, through an “at-the-market” equity offering program. Pursuant to the Sales Agreement, the shares of common stock were to be offered and sold through any of the named sales agents in negotiated transactions or transactions that are deemed to be “at-the-market” offerings. In June 2020, 8,122,283 shares were sold pursuant to the Sales Agreement at an average market price of approximately $24.62 for total net proceeds of $198.0 million after deducting commissions and other general & administrative expenses. These sales exhausted the shares that were available for sale under the Sales Agreement. The Company intends to use the net proceeds from this offering for general corporate purposes.


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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.

The convertible units consisted of the following (in thousands):


June 30, 2020December 31, 2019
Principal amount:
     Principal (A)$287,500  $287,500  
     Unamortized debt discount and issuance costs (A)7,463  7,737  
     Net carrying amount$280,037  $279,763  
     Carrying amount of the equity component (B)$—  $—  

(A) Included in the condensed consolidated balance sheets within Long-Term Debt.
(B) There is currently no equity portion.

During both the three months ended June 30, 2020 and 2019, the Company recognized approximately $0.1 million of amortization of debt discount and issuance costs prior to capitalization of interest, and $2.7 million of coupon interest expense, all of which was included in Interest Charges on the condensed consolidated statements of income (loss). During both the six months ended June 30, 2020 and 2019, the Company recognized approximately $0.3 million of amortization of debt discount and issuance costs prior to capitalization of interest, and $5.3 million, of coupon interest expense, all of which was included in Interest Charges on the condensed consolidated statements of income (loss). The effective interest rate was 4.0%.

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 116,527 and 115,798 for the six months ended June 30, 2020 and 2019, respectively. For the three months ended June 30, 2020 and 2019, incremental shares of 121,976 and 100,012, 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.

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 2019 or the first six months of 2020. SJI does not intend to issue equity capital via the DRP during the remainder of 2020.

ADDITIONAL INVESTMENT BY SHAREHOLDER - SJG received a $9.5 million equity infusion from SJI during the three and six months ended June 30, 2020. There was no equity infusion during the three and six months ended June 30, 2019. Future equity contributions will occur on an as-needed basis.

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.

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The following table provides SJI's (including SJG) and SJG's balances of Restricted Investments as well as presents a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that total to the amounts shown in the condensed consolidated statements of cash flows (in thousands):

As of June 30, 2020
Balance Sheet Line ItemSJISJG
Cash and Cash Equivalents$7,267  $2,144  
Restricted Investments11,402  3,448  
   Total cash, cash equivalents and restricted cash shown in the statement of cash flows$18,669  $5,592  

As of December 31, 2019
Balance Sheet Line ItemSJISJG
Cash and Cash Equivalents$6,417  $2,678  
Restricted Investments21,964  4,073  
   Total cash, cash equivalents and restricted cash shown in the statement of cash flows$28,381  $6,751  

The carrying amounts of the Restricted Investments for both SJI and SJG approximate their fair values at June 30, 2020 and December 31, 2019, which would be included in Level 1 of the fair value hierarchy (see Note 13).

ALLOWANCE FOR CREDIT LOSSES - Accounts receivable are recorded net of an allowance for credit losses. A summary of changes in the allowance for credit losses is as follows (in thousands):

Three Months Ended
June 30, 2020
Six Months Ended
June 30, 2020
SJI (includes SJG and all other consolidated subsidiaries):
Balance at beginning of period$23,533  $19,829  
Provision for expected credit losses9,715  14,578  
Recoveries of accounts previously written off319  562  
Uncollectible accounts written off(3,157) (4,559) 
Balance at end of period$30,410  $30,410  
SJG:
Balance at beginning of period$14,902  $14,032  
Provision for expected credit losses1,608  3,472  
Recoveries of accounts previously written off159  291  
Uncollectible accounts written off(2,197) (3,323) 
Balance at end of period$14,472  $14,472  

As discussed in Note 8, as a result of a July 2, 2020 BPU Order, during the second quarter 2020, ETG and SJG deferred amounts of incremental costs related to the COVID-19 pandemic as regulatory assets. As of June 30, 2020, the amounts recorded within this regulatory asset related to the allowance for credit losses is approximately $9.0 million and $0.7 million for ETG and SJG, respectively, and are included in the provision for expected losses shown in the tables above.

NOTES RECEIVABLE-AFFILIATES - See Note 3.

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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 $3.1 million and $3.7 million as of June 30, 2020 and December 31, 2019, 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 $0.4 million and $0.5 million as of June 30, 2020 and December 31, 2019, respectively. The annualized amortization to interest is not material to SJI’s or SJG's condensed consolidated financial statements. In addition, as part of the EET/EEP programs, SJG provides funding to customers to upgrade equipment for the purpose of promoting energy efficiency. The terms of these loans range from two to ten years. The carrying amounts of such loans were $38.2 million and $33.5 million as of June 30, 2020 and December 31, 2019, respectively. On the condensed consolidated balance sheets of SJI and SJG, the current portion of EET/EEP loans receivable totaled $5.3 million and $4.6 million and is reflected in Accounts Receivable as of June 30, 2020 and December 31, 2019, respectively, and the non-current portion totaled $32.9 million and $28.9 million and is reflected in Contract Receivables as of June 30, 2020 and December 31, 2019, respectively. Given the risk of uncollectibility is low due to the oversight and preapproval required by the BPU, no allowance for credit loss has been recognized. There have been no impacts to this risk of uncollectibility as a result of COVID-19.

The carrying amounts of these receivables approximate their fair value at June 30, 2020 and December 31, 2019, which would be included in Level 2 of the fair value hierarchy (see Note 13).

CREDIT RISK - As of June 30, 2020, SJI had approximately $10.5 million, or 24.1%, 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, 2020 and December 31, 2019, 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).

The estimated fair values of SJI's long-term debt (which includes SJG and all consolidated subsidiaries), including current maturities, as of both June 30, 2020 and December 31, 2019, were $2.73 billion.  The carrying amounts of SJI's long-term debt, including current maturities, as of June 30, 2020 and December 31, 2019, were $2.68 billion and $2.54 billion, respectively. SJI's carrying amounts as of June 30, 2020 are net of unamortized debt issuance costs of $29.3 million and unamortized debt discounts of $5.3 million. SJI's carrying amounts as of December 31, 2019 are net of unamortized debt issuance costs of $25.5 million and unamortized debt discounts of $5.3 million.

The estimated fair values of SJG's long-term debt, including current maturities, as of June 30, 2020 and December 31, 2019, were $982.9 million and $915.2 million, respectively. The carrying amounts of SJG's long-term debt, including current maturities, as of June 30, 2020 and December 31, 2019, were $962.4 million and $965.1 million, respectively. The carrying amounts as of June 30, 2020 and December 31, 2019 are net of unamortized debt issuance costs of $8.9 million and $6.3 million, respectively.

OTHER FINANCIAL INSTRUMENTS - The carrying amounts of SJI's and SJG's other financial instruments approximate their fair values at June 30, 2020 and December 31, 2019.

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. As discussed in Note 1, on July 31, 2020, SJI sold ELK to a third-party buyer.
Wholesale energy operations include the activities of SJRG and SJEX.
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Retail electric operations at SJE consist of electricity acquisition and transportation to commercial, industrial and residential customers.
On-site energy production consists of MTF and ACB, which as discussed in Note 1, were sold on February 18, 2020. This segment also includes other energy-related projects, including three legacy solar projects, one of which was sold during the three months ended March 31, 2020 as discussed in Note 1. Also included in this segment are the activities of ACLE, BCLE, SCLE and SXLE. Operations at BCLE, SCLE, and SXLE ceased during the second quarter of 2020 as discussed in Note 1. As of June 30, 2020, on-site energy production also includes newly acquired entities which own and operate solar-generation sites located in New Jersey. See Note 17.
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. Also included in this segment are the results of SJEI.
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, Energy Services, Midstream and Corporate & Services. Energy Group includes wholesale energy 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.

Information about SJI’s operations in different reportable operating segments is presented below (in thousands). The results for AEP are included in the Corporate & Services segment from the acquired date of August 31, 2019. Further, the results and balances for On-Site Energy Production are impacted by the sales of solar assets and the sale of MTF and ACB (see Note 1). The identifiable assets balance for On-Site Energy Production as of June 30, 2020 is also impacted by the newly acquired entities, which closed on June 30, 2020 (see Note 17).


 Three Months Ended
June 30,
Six Months Ended
June 30,
 2020201920202019
Operating Revenues:  
SJI Utilities:
   SJG Utility Operations$87,182  $62,268  $327,876  $334,466  
   ETG Utility Operations57,843  44,854  202,000  185,028  
   ELK Utility Operations1,389  944  4,507  4,318  
     Subtotal SJI Utilities146,414  108,066  534,383  523,812  
Energy Group:
     Wholesale Energy Operations101,526  126,483  229,970  316,490  
Retail Electric Operations9,957  20,531  22,182  43,222  
     Subtotal Energy Group111,483  147,014  252,152  359,712  
Energy Services:
On-Site Energy Production2,154  14,788  9,142  26,118  
Appliance Service Operations505  484  994  1,015  
Subtotal Energy Services2,659  15,272  10,136  27,133  
Corporate and Services12,918  11,815  26,628  21,186  
Subtotal273,474  282,167  823,299  931,843  
Intersegment Sales(13,510) (15,233) (29,223) (27,611) 
Total Operating Revenues$259,964  $266,934  $794,076  $904,232  

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 Three Months Ended
June 30,
Six Months Ended
June 30,
 2020201920202019
Operating Income:  
SJI Utilities:
     SJG Utility Operations$9,732  $10,215  $114,377  $108,560  
     ETG Utility Operations6,375  2,051  60,437  46,200  
     ELK Utility Operations212  (32) 747  598  
          Subtotal SJI Utilities16,319  12,234  175,561  155,358  
Energy Group:
     Wholesale Energy Operations6,092  (2,386) 13,504  (4,892) 
Retail Electric Operations(449) (2,313) (1,670) (3,969) 
     Subtotal Energy Group5,643  (4,699) 11,834  (8,861) 
Energy Services:
On-Site Energy Production(2,016) 1,343  (2,312) 1,461  
Appliance Service Operations457  421  896  1,016  
  Subtotal Energy Services(1,559) 1,764  (1,416) 2,477  
Corporate and Services(212) (433) (26) (5,555) 
Total Operating Income$20,191  $8,866  $185,953  $143,419  
Depreciation and Amortization:  
SJI Utilities:
     SJG Utility Operations$25,395  $23,083  $50,454  $45,785  
     ETG Utility Operations10,528  6,813  19,979  13,471  
     ELK Utility Operations169  113  302  225  
          Subtotal SJI Utilities36,092  30,009  70,735  59,481  
Energy Group:
     Wholesale Energy Operations14  25  30  48  
     Subtotal Energy Group14  25  30  48  
Energy Services:
On-Site Energy Production 1,256   2,508  
  Subtotal Energy Services 1,256   2,508  
Corporate and Services1,197  1,754  2,437  2,998  
Total Depreciation and Amortization$37,306  $33,044  $73,208  $65,035  
Interest Charges:  
SJI Utilities:
       SJG Utility Operations$8,019  $7,896  $15,561  $15,744  
       ETG Utility Operations7,778  6,620  14,923  12,941  
       ELK Utility Operations  19  11  
            Subtotal SJI Utilities15,804  14,521  30,503  28,696  
On-Site Energy Production1,095  2,138  2,697  4,423  
Midstream580  555  1,160  1,099  
Corporate and Services12,955  14,659  30,842  30,063  
Subtotal30,434  31,873  65,202  64,281  
Intersegment Borrowings(1,845) (3,439) (4,077) (7,194) 
Total Interest Charges$28,589  $28,434  $61,125  $57,087  

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 Three Months Ended
June 30,
Six Months Ended
June 30,
 2020201920202019
Income Taxes:  
 SJI Utilities:
     SJG Utility Operations$1,219  $671  $26,450  $24,368  
     ETG Utility Operations(277) (809) 10,344  6,093  
     ELK Utility Operations54  (9) 190  154  
           Subtotal SJI Utilities996  (147) 36,984  30,615  
Energy Group:
     Wholesale Energy Operations1,719  (481) 3,725  (958) 
Retail Electric Operations(42) (569) (245) (818) 
     Subtotal Energy Group1,677  (1,050) 3,480  (1,776) 
Energy Services:
On-Site Energy Production(755) 121  294  (357) 
Appliance Service Operations178  136  345  303  
  Subtotal Energy Services(577) 257  639  (54) 
Midstream(87) (33) (116) (65) 
Corporate and Services(2,187) (3,673) (7,795) (8,417) 
Total Income Taxes$(178) $(4,646) $33,192  $20,303  
Property Additions:  
SJI Utilities:
     SJG Utility Operations$49,989  $67,257  $107,959  $122,562  
     ETG Utility Operations55,112  53,938  104,126  91,962  
     ELK Utility Operations208  983  859  1,628  
          Subtotal SJI Utilities105,309  122,178  212,944  216,152  
Energy Services:
On-Site Energy Production2,832  141  2,885  164  
  Subtotal Energy Services2,832  141  2,885  164  
Midstream 41   86  19  
Corporate and Services700   1,361  586  
Total Property Additions$108,882  $122,327  $217,276  $216,921  

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 June 30, 2020December 31, 2019
Identifiable Assets:  
SJI Utilities:
     SJG Utility Operations$3,347,900  $3,348,555  
     ETG Utility Operations2,451,923  2,458,846  
     ELK Utility Operations21,137  21,723  
          Subtotal SJI Utilities5,820,960  5,829,124  
Energy Group:
     Wholesale Energy Operations148,869  195,576  
Retail Electric Operations23,545  30,351  
     Subtotal Energy Group172,414  225,927  
Energy Services:
On-Site Energy Production48,924  154,021  
Appliance Service Operations61  —  
Subtotal Energy Services48,985  154,021  
Midstream88,078  83,517  
Discontinued Operations1,737  1,766  
Corporate and Services182,348  403,170  
Intersegment Assets(97,568) (332,185) 
Total Identifiable Assets$6,216,954  $6,365,340  


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.

Except as described below, there have been no other significant regulatory actions or changes to the Utilities' rate structure since December 31, 2019. 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, 2019.

SJG:

Rate Case - In March 2020, SJG filed a petition with the BPU requesting a base rate revenue increase to recognize the infrastructure investments made to maintain the safety and reliability of its natural gas system since the approval of its previous base rate case proceeding in October 2017. In May 2020, SJG filed to request a base revenue increase of $75.7 million, reflecting an overall rate of return of 7.4%, based on an update to long-term debt costs, a return on equity of 10.4% and common equity component of 54.2%. This matter is currently pending with the BPU.

In the first quarter of 2020, the final rates were approved by the BPU on SJG's 2019-2020 annual BGSS, CIP and SBC/TIC filings. All were approved as requested. The BGSS and CIP approvals do not impact SJG's earnings. They represent changes in the cash requirements of SJG corresponding to cost changes and/or previous over/under recoveries from ratepayers associated with each respective mechanism.

In April 2020, 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 $59.5 million of AIRP II investments placed in service during July 1, 2019 through June 30, 2020. The matter is currently pending BPU approval.

In April 2020, SJG submitted its annual filing, pursuant to the May 2018 BPU approval of the SHARP II, seeking a base rate adjustment to increase annual revenues by approximately $3.8 million to reflect the roll-in of approximately $34.2 million of SHARP II investments placed in service during July 1, 2019 through June 30, 2020. The matter is currently pending BPU approval.

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In May 2020, the BPU issued an Order resolving SJG’s 2019 Compliance Filing and 2019 Tax Act Rider petition, with a revised Rider H credit rate effective June 1, 2020. The terms of settlement include the following:
The “Unprotected” EDIT balance of approximately $44.7 million will be refunded to customers over a 5 year period through the approved rider;
The net “Protected” EDIT regulatory liability of $149.4 million (regulatory liability of $181.0 million partially offset by a regulatory asset of $31.6 million) will be refunded to customers through a proposed base rate adjustment in SJG’s next base rate case.

In June 2020, SJG submitted its annual Tax Act Rider filing, requesting a rate adjustment to refund approximately $14.9 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 Tax Reform. The matter is currently pending BPU approval.

In June 2020, SJG submitted its annual 2020-2021 BGSS and CIP filings, requesting a $39.2 million decrease in gas costs recoveries related to its BGSS and a $27.4 million increase in revenue related to its CIP, resulting in a net revenue decrease of $11.8 million. In its annual BGSS filing, SJG is seeking recovery of gas costs related to a previous pricing dispute with a third party supplier on two long-term gas supply contracts, with recovery occurring over a two-year period (see Note 8). In addition, the requested decrease in gas costs recoveries includes the return of the refund received from a third party gas supplier (see Note 1). These matters are currently pending BPU approval. Additionally, SJG issued a one-time BGSS bill credit in May 2020 of approximately $0.8 million, plus interest, sales tax and public utility assessments.

In June 2020, SJG filed its annual EET rate adjustment petition, requesting a $5.9 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 2020, SJG filed its annual USF petition, along with the State’s other electric and gas utilities. The proposed revenue decrease for SJG is approximately $0.3 million. The matter is currently pending BPU approval.

ETG:

In the first quarter of 2020, the final rates were approved by the BPU on ETG's 2019-2020 annual BGSS, RAC, EEP, WNC, CEP and OSMC filings, effective April 1, 2020. All were approved as requested with the exception of RAC (a final rate reflecting a $6.0 million increase in revenues compared to a request of $6.1 million) and EEP (a final rate reflecting a $0.9 million increase in revenues compared to a request of $1.0 million).

In February 2020, ETG entered into a Stipulation with the BPU and the New Jersey Division of Rate Counsel extending its EEP through June 2020 under the previously approved budget and from July 2020 through December 2021 at a total budget of approximately $4.2 million. The BPU issued an Order in February 2020 approving the Stipulation.

In April 2020, ETG submitted its annual filing, pursuant to the June 2019 BPU approval of the IIP, seeking a rider rate to increase annual revenues by approximately $6.5 million to reflect the roll-in of approximately $60.0 million of IIP investments placed in service during July 1, 2019 through June 30, 2020. The matter is currently pending BPU approval.

In June 2020, ETG submitted its annual BGSS filing, requesting a $15.5 million decrease in gas cost recoveries. with an effective date of October 1, 2020. The matter is currently pending BPU approval.

In June 2020, ETG along with the other New Jersey gas utilities filed jointly for a statewide USF rate decrease and a statewide Lifeline rate increase with effective dates of October 1, 2020 resulting in a reduction in the combined rates. The proposed revenue decrease for ETG is approximately $0.3 million. The matter is currently pending BPU approval.

ELK:

As discussed in Note 1, in December 2019, the Company announced it had entered into an agreement to sell ELK to a third-party buyer. This transaction was approved by the MPSC on June 29, 2020. This transaction closed on July 31, 2020 (see Note 20).
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8. REGULATORY ASSETS AND REGULATORY LIABILITIES:

Except as described below, there have been no significant changes to the nature or balances of the Utilities' regulatory assets and liabilities since December 31, 2019, 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, 2019.


The Utilities' Regulatory Assets as of June 30, 2020 and December 31, 2019 consisted of the following items (in thousands):
June 30, 2020
SJGETGELKTotal SJI
Environmental Remediation Costs:
Expended - Net$159,619  $10,211  $—  $169,830  
Liability for Future Expenditures108,979  90,603  —  199,582  
   Insurance Recovery Receivables—  (13,615) —  (13,615) 
Deferred ARO Costs39,335  14,360  —  53,695  
Deferred Pension Costs - Unrecognized Prior Service Cost—  35,751  —  35,751  
Deferred Pension and Other Postretirement Benefit Costs72,010  1,825  —  73,835  
Deferred Gas Costs - Net17,732  —  84  17,816  
CIP Receivable21,638  —  —  21,638  
SBC Receivable1,660  —  —  1,660  
Deferred Interest Rate Contracts11,407  —  —  11,407  
EET13,615  —  —  13,615  
Pipeline Supplier Service Charges477  —  —  477  
Pipeline Integrity Cost5,959  —  —  5,959  
AFUDC - Equity Related Deferrals11,204  —  —  11,204  
WNC—  5,535  154  5,689  
Other Regulatory Assets21,719  18,507  —  40,226  
Total Regulatory Assets$485,354  $163,177  $238  $648,769  


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December 31, 2019
SJGETGELKTotal SJI
Environmental Remediation Costs:
Expended - Net$156,279  $16,955  $—  $173,234  
Liability for Future Expenditures131,262  101,083  —  232,345  
   Insurance Recovery Receivables—  (20,423) —  (20,423) 
Deferred ARO Costs36,515  18,108  —  54,623  
Deferred Pension Costs - Unrecognized Prior Service Cost—  37,378  —  37,378  
Deferred Pension and Other Postretirement Benefit Costs72,010  1,825  —  73,835  
Deferred Gas Costs - Net49,469  5,301  293  55,063  
SBC Receivable1,478  —  —  1,478  
Deferred Interest Rate Contracts7,856  —  —  7,856  
EET12,877  —  —  12,877  
Pipeline Supplier Service Charges525  —  —  525  
Pipeline Integrity Cost6,516  —  —  6,516  
AFUDC - Equity Related Deferrals10,712  —  —  10,712  
WNC—  —  231  231  
Other Regulatory Assets10,678  9,004  —  19,682  
Total Regulatory Assets$496,177  $169,231  $524  $665,932  

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, SBC 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 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 five former manufactured gas plant sites in New Jersey. "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 ASC 980, as the BPU allows SJG and ETG to recover such expenditures through the RAC. "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. Environmental remediation costs at ETG are recoverable from customers through the RAC approved by the BPU. "Insurance Recovery Receivables" represents the balance of an insurance settlement executed in the fourth quarter of 2019 with a third party. This settlement, which is expected to be received in installments through the end of 2021, will be returned to ETG's customers through the RAC. Of the original total of $20.4 million, $6.8 million was received by ETG in 2020.

DEFERRED GAS COSTS - NET - Over/under collections of gas costs are monitored through SJG's BGSS clause. 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 (see Note 12). SJG's balance as of both June 30, 2020 and December 31, 2019 also includes $22.9 million of costs related to a previous pricing dispute on a long-term gas supply contract. We believe that the amount paid by SJG to the third party supplier to settle the pricing dispute reflects a gas cost that ultimately will be recovered from SJG's customers through adjusted rates through the BGSS clause. The BGSS regulatory assets of SJI and SJG decreased from December 31, 2019 to June 30, 2020, primarily due to recoveries from customers exceeding the actual gas commodity costs, changes in valuations of hedged natural gas positions from prior periods and refunds from a third party gas supplier (see Note 1).

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DEFERRED ARO COSTS - The Utilities record AROs primarily related to the legal obligation to cut and cap gas distribution pipelines when taking those pipelines out of service. Deferred ARO costs represent the period to period passage of time (accretion) and the revision to cash flows originally estimated to settle the retirement obligation. Corresponding changes are made to the ARO liability, thus having no impact on earnings.

CIP RECEIVABLE - The CIP tracking mechanism at SJG adjusts earnings when actual usage per customer experienced during the period varies from an established baseline usage per customer. Actual usage per customer was less than the established baseline during the first six months of 2020, resulting in a regulatory asset at June 30, 2020 as compared to a regulatory liability at December 31, 2019. This is primarily the result of warmer than normal weather experienced in the region during the winter months.

WNC - The tariffs for ETG include a weather normalization clause that reduces customer bills when weather is colder than normal and increases customer bills when weather is warmer than normal. The overall change in ETG's weather normalization from a regulatory liability at December 31, 2019 to a regulatory asset at June 30, 2020 was due to timing of collections from customers and warmer than normal weather during the winter months.

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 Other Regulatory Assets 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, 2019. The increase in Other Regulatory Assets for SJG is primarily due to a $10.1 million reclassification of costs from Utility Plant to Regulatory Assets on the condensed consolidated balance sheet related to a previous project to re-power the former BL England facility with natural gas. 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. As of March 2020, SJG had determined that the project under construction will be abandoned. SJG requested that the project costs spent to date be recovered as a regulatory asset within its March 2020 rate case petition filed with the BPU. The matter is currently pending with the BPU.

On July 2, 2020, the BPU issued an Order authorizing New Jersey's regulated utilities to create a COVID-19-related regulatory asset by deferring on their books and records the prudently incurred incremental costs related to COVID-19 beginning on March 9, 2020 and continuing through September 30, 2021, or 60 days after the termination of the public health emergency, whichever is later. The Company will be required to file quarterly reports with the BPU, along with a petition of recovery of such incremental costs with the BPU by December 31, 2021 or within 60 days of the close of the tracking period, whichever is later. During the second quarter 2020, ETG and SJG deferred $9.0 million and $0.7 million, respectively, of incremental costs principally related to expected credit losses from uncollectibles as a result of the COVID-19 pandemic, specifically related to changes in payment patterns observed to date and consideration of macroeconomic factors. We have deemed these costs to be probable of recovery.

The Utilities Regulatory Liabilities as of June 30, 2020 and December 31, 2019 consisted of the following items (in thousands):

June 30, 2020
SJGETGELKTotal SJI
Excess Plant Removal Costs$13,853  $38,847  $—  $52,700  
Excess Deferred Taxes241,376  115,791  —  357,167  
Deferred Revenues - Net—  15,205  —  15,205  
Amounts to be Refunded to Customers—  8,500  —  8,500  
Other Regulatory Liabilities—  576  —  576  
Total Regulatory Liabilities$255,229  $178,919  $—  $434,148  

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December 31, 2019
 SJGETGELKTotal SJI
Excess Plant Removal Costs$16,333  $36,343  $—  $52,676  
Excess Deferred Taxes251,355  117,695  —  369,050  
Deferred Revenues - Net—  52  —  52  
CIP Payable6,794  —  —  6,794  
WNC—  2,684  —  2,684  
Amounts to be Refunded to Customers—  10,625  —  10,625  
Other Regulatory Liabilities—  1,037  —  1,037  
Total Regulatory Liabilities$274,482  $168,436  $—  $442,918  

EXCESS DEFERRED TAXES - This liability is recognized as a result of Tax Reform enacted into law on December 22, 2017. The decrease in this liability from December 31, 2019 to June 30, 2020 is related to excess tax amounts returned to customers through customer billings. The Unprotected amount of excess deferred taxes will be returned to customers over a five year period. The determination of the treatment for the remaining amount of excess deferred taxes will be deferred until SJG's next base rate case as approved by the BPU (see Note 7).

DEFERRED REVENUES - NET - Over/under collections of gas costs are monitored through ETG's bill credit. 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 regulatory liability as of June 30, 2019 is a result of over-collection and refunds from a third party gas supplier (see Note 1).

9. PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three and six months ended June 30, 2020 and 2019, net periodic benefit cost related to the SJI employee and officer pension and other postretirement benefit plans consisted of the following components (in thousands):

 Pension Benefits
 Three Months Ended
June 30,
Six Months Ended
June 30,
2020201920202019
Service Cost$1,688  $1,081  $3,375  $2,800  
Interest Cost3,763  4,435  7,526  8,664  
Expected Return on Plan Assets(5,452) (4,942) (10,904) (10,135) 
Amortizations:    
Prior Service Cost26  27  53  53  
Actuarial Loss2,715  2,360  5,430  4,797  
Net Periodic Benefit Cost2,740  2,961  5,480  6,179  
Capitalized Benefit Cost(517) (374) (1,061) (968) 
   Deferred Benefit Cost(408) (653) (816) (1,194) 
Total Net Periodic Benefit Expense$1,815  $1,934  $3,603  $4,017  

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 Other Postretirement Benefits
 Three Months Ended
June 30,
Six Months Ended
June 30,
 2020201920202019
Service Cost$165  $37  $329  $271  
Interest Cost608  806  1,216  1,434  
Expected Return on Plan Assets(1,346) (1,133) (2,691) (2,282) 
Amortizations:    
Prior Service Cost(144) (145) (288) (288) 
Actuarial Loss193  321  385  584  
Net Periodic Benefit Cost(524) (114) (1,049) (281) 
Capitalized Benefit Cost(106) (99) (214) (155) 
   Deferred Benefit Cost396  119  792  235  
Total Net Periodic Benefit Expense$(234) $(94) $(471) $(201) 

The Pension Benefits Net Periodic Benefit Cost incurred by SJG was approximately $1.9 million and $2.1 million of the totals presented in the table above for the three months ended June 30, 2020 and 2019, respectively and $3.7 million and $4.4 million of the totals presented in the table above for the six months ended June 30, 2020 and 2019, respectively. The weighted average expected long term rate of return on plan assets used to determine the net benefit cost was 7.25%.

For the three months ended June 30, 2020 and 2019, the Other Postretirement Benefits Net Periodic Benefit Cost incurred by SJG was $(0.7) million and $(0.1) million, respectively, of the totals presented in the table above, and, for the six months ended June 30, 2020 and 2019, $(1.4) million and $(0.2) million, respectively, of the totals presented in the table above. The weighted average expected long term rate of return on plan assets used to determine the net benefit cost was 6.75%.

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 are reported as regulatory assets.

No contributions were made to the pension plans by either SJI or SJG during the six months ended June 30, 2020 or 2019. SJI and SJG do not expect to make any contributions to the pension plans during the remainder of 2020; 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 $3.7 million in 2020.

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, 2019 for additional information related to SJI’s and SJG's pension and other postretirement benefits.
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10. LINES OF CREDIT & SHORT-TERM BORROWINGS:
 
Credit facilities and available liquidity as of June 30, 2020 were as follows (in thousands):

CompanyTotal FacilityUsageAvailable LiquidityExpiration Date
SJI:    
SJI Syndicated Revolving Credit Facility$500,000  $28,000  (A)$472,000  August 2022
Term Loan Credit Agreement150,000  150,000  —  March 2021
Total SJI650,000  178,000  472,000   
SJG:    
Commercial Paper Program/Revolving Credit Facility200,000  161,300  (B)38,700  August 2022
Uncommitted Bank Line10,000  —  10,000  September 2020 (D)
Total SJG210,000  161,300  48,700   
ETG/SJIU:
ETG/SJIU Revolving Credit Facility200,000  124,900  (C)75,100  April 2022
Total$1,060,000  $464,200  $595,800   

(A) Includes letters of credit outstanding in the amount of $9.6 million, which is used to enable SJE to market retail electricity as well as for various construction and operating activities.
(B) Includes letters of credit outstanding in the amount of $0.8 million, which supports the remediation of environmental conditions at certain locations in SJG's service territory.
(C) Includes letters of credit outstanding in the amount of $1.0 million, which supports ETG's construction activity.
(D) SJG intends to renew this facility prior to expiration.

For SJI, the $464.2 million of usage in the table above, less the letters of credit noted in (A)-(C) above, equal the $452.8 million recorded as Notes Payable on the condensed consolidated balance sheets as of June 30, 2020. For SJG, the $161.3 million of usage in the table above, less the letters of credit noted in (B) above, equal the $160.5 million recorded as Notes Payable on the condensed balance sheets as of June 30, 2020.

On March 26, 2020, SJI entered into an unsecured $150.0 million term loan agreement, which bears interest at variable rates. The maturity date of the term loan is March 25, 2021, and the loan is recorded in Notes Payable on the condensed consolidated balance sheets as of June 30, 2020. The proceeds of the loan were used for general corporate purposes.

See Note 14 for information related to amounts previously outstanding under revolving credit facilities and short-term loan arrangements.

SJI's Five Year Revolving Credit Agreement ("Credit Agreement") allows SJI to borrow in the form of revolving loans a total aggregate amount of $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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SJIU and ETG (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, 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, the Borrowers 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. SJIU and ETG were in compliance with this covenant at June 30, 2020.

The Utilities' (including SJG) 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, 2020. Borrowings under these credit facilities are at market rates.

SJI's weighted average interest rate on these borrowings (inclusive of SJG, ETG, and SJIU), which changes daily, was 1.27% and 3.45% at June 30, 2020 and 2019, respectively. SJG's weighted average interest rate on these borrowings, which changes daily, was 0.74% and 2.60% at June 30, 2020 and 2019, respectively.

SJI's average borrowings outstanding under these credit facilities (inclusive of SJG, ETG, and SJIU), not including letters of credit, during the six months ended June 30, 2020 and 2019 were $595.3 million and $347.2 million, respectively. The maximum amounts outstanding under these credit facilities, not including letters of credit, during the six months ended June 30, 2020 and 2019 were $872.2 million and $687.2 million, respectively.

SJG's average borrowings outstanding under its credit facilities during the six months ended June 30, 2020 and 2019 were $146.3 million and $72.5 million, respectively. The maximum amounts outstanding under its credit facilities during the six months ended June 30, 2020 and 2019 were $171.7 million and $108.0 million, respectively.

The SJI and the Utilities' (including SJG) principal credit facilities are provided by a syndicate of banks. The NPA for Senior Unsecured Notes issued by SJI, and the SJG bank facilities, contain 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 these covenants as of June 30, 2020.

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.

11. COMMITMENTS AND CONTINGENCIES:

GUARANTEES — As of June 30, 2020, SJI had issued $10.2 million of parental guarantees on behalf of EnergyMark, an unconsolidated subsidiary. These guarantees generally expire within one year and were issued to enable the subsidiary to market retail natural gas.

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 $7.8 million and $4.8 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 $1.6 million per month. SJRG has also committed to purchase 731,250 dts/d of natural gas, from various suppliers, for terms ranging from 5 to 11 years at index-based prices.

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ETG has an AMA with SJRG for transportation and storage capacity to meet natural gas demands. The AMA is in effect 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 had entered into a TSA with Southern Company Gas whereby the latter provided certain administrative and operational services. On March 16, 2020, the TSA between SJI and Southern Company Gas terminated. As of that date, Southern Company Gas no longer provides any administrative or operational services to ETG.

COLLECTIVE BARGAINING AGREEMENTS — Unionized personnel represent approximately 45% and 58% of SJI's and SJG's workforce at June 30, 2020, 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 — See Note 10. In addition, SJG has provided $25.1 million of 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.

CONVERTIBLE 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.

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, would be reasonably likely to have a material impact on the business or financial statements of SJI or SJG. 

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 alleging damage to the State's natural resources and seeking payment for damages to those natural resources, where SJG and its predecessors previously operated a manufactured gas plant. SJG is currently evaluating the merits of the State of New Jersey's allegations. At this time, SJG cannot reasonably estimate or 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 $4.0 million and $3.1 million related to all claims in the aggregate as of June 30, 2020 and December 31, 2019, respectively, of which SJG has accrued approximately $1.0 million and $0.9 million as of June 30, 2020 and December 31, 2019, 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 five former manufactured gas plant sites in New Jersey. These environmental remediation expenditures are recoverable from customers through rate mechanisms approved by the BPU (see Note 8). 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 (see Note 3). There have been no significant changes to the status of SJI’s environmental remediation efforts since December 31, 2019, 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, 2019.

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.


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As of June 30, 2020, SJI and SJG had outstanding derivative contracts as follows: 
SJI ConsolidatedSJG
Derivative contracts intended to limit exposure to market risk to:
    Expected future purchases of natural gas (in MMdts)78.9  10.2  
    Expected future sales of natural gas (in MMdts)84.0  0.4  
    Expected future purchases of electricity (in MMmWh)0.2  
    Expected future sales of electricity (in MMmWh)0.2  
Basis and Index related net purchase (sale) contracts (in MMdts)94.1  2.5  

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 (loss) for SJI. These unrealized pre-tax (losses) were $(1.3) million and $(0.1) million for the three months ended June 30, 2020 and 2019, respectively, and $(1.6) million and $(12.2) million for the six months ended June 30, 2020 and 2019, 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, 2020 and December 31, 2019, SJI had $(0.2) million and $(4.0) million, respectively, and SJG had $2.2 million and $2.1 million, respectively, of unrealized gains (losses) 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, 2020, SJI’s active interest rate swaps were as follows:

Notional AmountFixed Interest RateStart DateMaturityObligor
$20,000,000  3.049%3/15/20173/15/2027SJI
$20,000,000  3.049%3/15/20173/15/2027SJI
$10,000,000  3.049%3/15/20173/15/2027SJI
$12,500,000  3.530%12/1/20062/1/2036SJG
$12,500,000  3.430%12/1/20062/1/2036SJG

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 (loss). 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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The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019, are as follows (in thousands):

SJI (includes SJG and all other consolidated subsidiaries):
Derivatives not designated as hedging instruments under GAAPJune 30, 2020December 31, 2019
 AssetsLiabilitiesAssetsLiabilities
Energy-related commodity contracts:    
Derivatives - Energy Related - Current$31,925  $25,963  $52,892  $41,965  
Derivatives - Energy Related - Non-Current11,486  5,305  7,243  8,206  
Interest rate contracts:    
Derivatives - Other - Current—  2,101  —  1,155  
Derivatives - Other - Noncurrent—  18,491  —  11,505  
Total derivatives not designated as hedging instruments under GAAP$43,411  $51,860  $60,135  $62,831  
Total Derivatives$43,411  $51,860  $60,135  $62,831  


SJG:
Derivatives not designated as hedging instruments under GAAPJune 30, 2020December 31, 2019
AssetsLiabilitiesAssetsLiabilities
Energy-related commodity contracts:    
Derivatives – Energy Related – Current$4,699  $2,651  $16,904  $14,671  
Derivatives – Energy Related – Non-Current143  —   95  
Interest rate contracts:  
Derivatives – Other - Current—  732  —  488  
Derivatives – Other - Noncurrent—  10,675  —  7,368  
Total derivatives not designated as hedging instruments under GAAP$4,842  $14,058  $16,909  $22,622  
Total Derivatives$4,842  $14,058  $16,909  $22,622  

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. Information related to these offsetting arrangements were as follows (in thousands):
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As of June 30, 2020
DescriptionGross amounts of recognized assets/liabilitiesGross amount offset in the balance sheetNet amounts of assets/liabilities in balance sheetGross amounts not offset in the balance sheetNet amount
Financial InstrumentsCash Collateral Posted
SJI (includes SJG and all other consolidated subsidiaries):
Derivatives - Energy Related Assets$43,411  $—  $43,411  $(23,219) (A)$—  $20,192  
Derivatives - Energy Related Liabilities$(31,268) $—  $(31,268) $23,219  (B)$4,297  $(3,752) 
Derivatives - Other$(20,592) $—  $(20,592) $—  $—  $(20,592) 
SJG:
Derivatives - Energy Related Assets$4,842  $—  $4,842  $(369) (A)$—  $4,473  
Derivatives - Energy Related Liabilities$(2,651) $—  $(2,651) $369  (B)$2,085  $(197) 
Derivatives - Other$(11,407) $—  $(11,407) $—  $—  $(11,407) 

As of December 31, 2019
DescriptionGross amounts of recognized assets/liabilitiesGross amount offset in the balance sheetNet amounts of assets/liabilities in balance sheetGross amounts not offset in the balance sheetNet amount
Financial InstrumentsCash Collateral Posted
SJI (includes SJG and all other consolidated subsidiaries):
Derivatives - Energy Related Assets$60,135  $—  $60,135  $(32,185) (A)$—  $27,950  
Derivatives - Energy Related Liabilities$(50,171) $—  $(50,171) $32,185  (B)$12,878  $(5,108) 
Derivatives - Other$(12,660) $—  $(12,660) $—  $—  $(12,660) 
SJG:
Derivatives - Energy Related Assets$16,909  $—  $16,909  $(11,860) (A)$—  $5,049  
Derivatives - Energy Related Liabilities$(14,766) $—  $(14,766) $11,860  (B)$2,706  $(200) 
Derivatives - Other$(7,856) $—  $(7,856) $—  $—  $(7,856) 

(A) The balances at June 30, 2020 and December 31, 2019 were related to derivative liabilities which can be net settled against derivative assets.

(B) The balances at June 30, 2020 and December 31, 2019 were related to derivative assets which can be net settled against derivative liabilities.


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The effect of derivative instruments on the condensed consolidated statements of income (loss) are as follows (in thousands):

 Three Months Ended
June 30,
Six Months Ended
June 30,
Derivatives in Cash Flow Hedging Relationships under GAAP2020201920202019
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 GAAP2020201920202019
SJI (includes SJG and all other consolidated subsidiaries):
Losses on energy-related commodity contracts (a)$(1,285) $(143) $(1,561) $(12,203) 
Losses on interest rate contracts (b)(336) (1,745) (4,382) (2,835) 
Total$(1,621) $(1,888) $(5,943) $(15,038) 

(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, 2020, is approximately $0.3 million. If the credit-risk-related contingent features underlying these agreements were triggered on June 30, 2020, SJI would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $0.2 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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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, 2020TotalLevel 1Level 2Level 3
SJI (includes SJG and all other consolidated subsidiaries):
Assets    
Available-for-Sale Securities (A)$40  $40  $—  $—  
Derivatives – Energy Related Assets (B)43,411  10,868  15,591  16,952  
 $43,451  $10,908  $15,591  $16,952  
SJG:
Assets    
Derivatives – Energy Related Assets (B)$4,842  $369  $107  $4,366  
$4,842  $369  $107  $4,366  
SJI (includes SJG and all other consolidated subsidiaries):
Liabilities    
Derivatives – Energy Related Liabilities (B)$31,268  $15,004  $11,563  $4,701  
Derivatives – Other (C)20,592  —  20,592  —  
 $51,860  $15,004  $32,155  $4,701  
SJG:
Liabilities
Derivatives – Energy Related Liabilities (B)$2,651  $2,454  $196  $ 
Derivatives – Other (C)11,407  —  11,407  —  
$14,058  $2,454  $11,603  $ 

As of December 31, 2019TotalLevel 1Level 2Level 3
SJI (includes SJG and all other consolidated subsidiaries):
Assets    
Available-for-Sale Securities (A)$40  $40  $—  $—  
Derivatives – Energy Related Assets (B)60,135  16,931  17,841  25,363  
 $60,175  $16,971  $17,841  $25,363  
SJG:
Assets
Derivatives – Energy Related Assets (B)$16,909  $11,860  $—  $5,049  
$16,909  $11,860  $—  $5,049  
SJI (includes SJG and all other consolidated subsidiaries):
Liabilities    
Derivatives – Energy Related Liabilities (B)$50,171  $34,446  $7,936  $7,789  
Derivatives – Other (C)12,660  —  12,660  —  
 $62,831  $34,446  $20,596  $7,789  
SJG:
Liabilities
Derivatives – Energy Related Liabilities (B)$14,766  $14,565  $187  $14  
Derivatives – Other (C)7,856  —  7,856  —  
$22,622  $14,565  $8,043  $14  



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(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 - established by FASB ASC Topic 820 - “Fair Value Measurements and Disclosures.” 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. Management reviews and corroborates the price quotations with at least one additional source to ensure the prices are observable market information, which includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration. Derivative instruments that are used to limit our exposure to changes in interest rates on variable-rate, long-term debt 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, as a result, these instruments are categorized in Level 2 in the fair value hierarchy. 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 in the fair value hierarchy as the model inputs generally are not observable. Counterparty credit risk and the credit risk of SJI are incorporated and considered in the valuation of all derivative instruments as appropriate. The effect of counterparty credit risk and the credit risk of SJI on the derivative valuations is not significant.

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 these values 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.

(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):

TypeFair Value at June 30, 2020Valuation TechniqueSignificant Unobservable InputRange
[Weighted Average]
AssetsLiabilities
Forward Contract - Natural Gas$15,279$2,953Discounted Cash FlowForward price (per dt)
$1.27 - $6.47 [$2.74]
(A)
Forward Contract - Electric

$1,673$1,748Discounted Cash FlowFixed electric load profile (on-peak)
40.34% - 100.00% [58.15%]
(B)
Fixed electric load profile (off-peak)
0.00% - 59.66% [41.85%]
(B)

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TypeFair Value at December 31, 2019Valuation TechniqueSignificant Unobservable InputRange
[Weighted Average]
AssetsLiabilities
Forward Contract - Natural Gas$21,645$4,333Discounted Cash FlowForward price (per dt)
$1.57 - $7.28 [$2.38]
(A)
Forward Contract - Electric$3,718$3,456Discounted Cash FlowFixed electric load profile (on-peak)
0.00% - 100.00% [55.46%]
(B)
Fixed electric load profile (off-peak)
0.00% - 100.00% [44.54%]
(B)


SJG:
TypeFair Value at June 30, 2020Valuation TechniqueSignificant Unobservable InputRange
[Weighted Average]
AssetsLiabilities
Forward Contract - Natural Gas$4,366  $ Discounted Cash FlowForward price (per dt)
$1.34 - $4.98 [$3.72]
(A)


TypeFair Value at December 31, 2019Valuation TechniqueSignificant Unobservable InputRange
[Weighted Average]
AssetsLiabilities
Forward Contract - Natural Gas$5,049  $14  Discounted Cash FlowForward price (per dt)
$1.85 - $3.61 [$3.02]
(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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The changes in fair value measurements of Derivatives – Energy Related Assets and Liabilities, using significant unobservable inputs (Level 3), are as follows (in thousands):

Three Months Ended
June 30, 2020
Six Months Ended
June 30, 2020
SJI (includes SJG and all other consolidated subsidiaries):
Balance at beginning of period$18,979  $17,574  
Other Changes in Fair Value from Continuing and New Contracts, Net (2,386) 7,017  
Settlements(4,342) (12,340) 
Balance at end of period$12,251  $12,251  
SJG:
Balance at beginning of period$4,806  $5,035  
Other Changes in Fair Value from Continuing and New Contracts, Net (441) 4,365  
Settlements—  (5,035) 
Balance at end of period$4,365  $4,365  

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



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14. LONG-TERM DEBT:

SJI and SJG had the following long-term debt-related activity during the six months ended June 30, 2020:

On April 3, 2020, SJI entered into an unsecured $200.0 million term loan credit agreement, which bears interest at variable rates. The maturity of the term loan is October 31, 2021. Proceeds from the debt were used to pay off the following:

$50.0 million outstanding on the SJI revolving credit facility, which was previously recorded in Notes Payable on the condensed consolidated balance sheets.
$100.0 million SJI Term Loan, which was previously recorded in Notes Payable on the condensed consolidated balance sheets and due to mature in September 2020.
$50.0 million SJI variable rate note, which was previously recorded in Current Portion of Long-Term Debt on the condensed consolidated balance sheets.

On April 16, 2020, SJG entered into a Note Purchase Agreement which provides for SJG to issue and sell its Senior Secured Notes, Series F, 2020 in the aggregate principal amount of $525.0 million in three Tranches, as follows: (a) Senior Secured Notes, Series F, 2020, Tranche A due April 16, 2030 in the aggregate principal amount of $150.0 million; (b) Senior Secured Notes, Series F, 2020, Tranche B due April 16, 2050 in the aggregate principal amount of $250.0 million; and (c) Senior Secured Notes, Series F, 2020, Tranche C expected to be due October 1, 2050 in the aggregate principal amount of $125.0 million. All of the Tranche A Notes and the Tranche B Notes were issued on April 16, 2020, and bear interest at 3.28% and 3.93%, respectively. The Tranche C Notes are expected to be issued on October 1, 2020.

On April 26, 2020, SJG used proceeds from Tranche A and B discussed above to pay off $400.0 million principal amount outstanding on its term loan credit agreement, which was previously recorded in Current Portion of Long-Term Debt on the condensed consolidated balance sheets.

On May 27, 2020, SJI entered into a Note Purchase Agreement which provides for the Company to issue an aggregate of $200.0 million of senior unsecured notes in two tranches, as follows: (a) Senior Notes, Series 2020A due July 30, 2027, in the aggregate principal amount of $75.0 million (the "Series 2020A Notes"); and (b) Senior Notes, Series 2020B due July 30, 2030, in the aggregate principal amount of $125.0 million (the "Series 2020B Notes"). The Company issued the Notes on July 30, 2020 (see Note 20). The Series 2020A Notes will bear interest at 3.71% and the Series 2020B Notes will bear interest at 3.91%. The proceeds from this issuance were used to pay off the unsecured $200.0 million term loan credit agreement issued in April 2020, which was paid off on July 31, 2020 (see Note 20).


15. ACCUMULATED OTHER COMPREHENSIVE LOSS:

The following table summarizes the changes in SJI's AOCL for the three and six months ended June 30, 2020 (in thousands):

Postretirement Liability AdjustmentUnrealized Gain (Loss) on Derivatives-Other (A)Unrealized Gain (Loss) on Available-for-Sale SecuritiesOther Comprehensive Income (Loss) of Affiliated CompaniesTotal
Balance at April 1, 2020$(32,124) $(319) $(10) $(97) $(32,550) 
   Other comprehensive income before reclassifications—  —  —  —  —  
   Amounts reclassified from AOCL—   —  —   
Net current period other comprehensive income—   —  —   
Balance at June 30, 2020
$(32,124) $(311) $(10) $(97) $(32,542) 

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Postretirement Liability AdjustmentUnrealized Gain (Loss) on Derivatives-Other (A)Unrealized Gain (Loss) on Available-for-Sale SecuritiesOther Comprehensive Income (Loss) of Affiliated CompaniesTotal
Balance at January 1, 2020$(32,124) $(327) $(10) $(97) $(32,558) 
   Other comprehensive income before reclassifications—  —  —  —  —  
   Amounts reclassified from AOCL—  16  —  —  16  
Net current period other comprehensive income—  16  —  —  16  
Balance at June 30, 2020
$(32,124) $(311) $(10) $(97) $(32,542) 

(A) The affected line item for these reclassifications from AOCL into the condensed consolidated statements of income (loss) is Interest Charges. These amounts are net of tax of $(4) and $(8) for the three and six months ended June 30, 2020, respectively, for which the affected line item in the condensed consolidated statements of income (loss) is Income Taxes.
The following table summarizes the changes in SJG's AOCL for the three and six months ended June 30, 2020 (in thousands):
Postretirement Liability AdjustmentUnrealized Gain (Loss) on Derivatives-Other (A)Total
Balance at April 1, 2020$(27,454) $(413) $(27,867) 
Other comprehensive loss before reclassifications—  —  —  
   Amounts reclassified from AOCL—    
Net current period other comprehensive income—    
Balance at June 30, 2020
$(27,454) $(405) $(27,859) 

Postretirement Liability AdjustmentUnrealized Gain (Loss) on Derivatives-Other (A)Total
Balance at January 1, 2020$(27,454) $(421) $(27,875) 
Other comprehensive loss before reclassifications—  —  —  
   Amounts reclassified from AOCL—  16  16  
Net current period other comprehensive income (loss)—  16  16  
Balance at June 30, 2020
$(27,454) $(405) $(27,859) 

(A) The affected line item for these reclassifications from AOCL into the condensed statements of income (loss) is Interest Charges. These amounts are net of tax of $(4) and $(8) for the three and six months ended June 30, 2020, respectively, for which the affected line item in the condensed statements of income (loss) is Income Taxes.
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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.

Except as described below, along with the sale of MTF as noted in Note 1, there have been no significant changes to the nature of the Company's revenues since December 31, 2019, which are described in Note 19 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, 2019.

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 (in thousands):

Three Months Ended
June 30, 2020
SJG Utility OperationsETG Utility OperationsELK Utility OperationsWholesale Energy OperationsRetail Electric OperationsOn-Site Energy ProductionAppliance Service OperationsCorporate Services and IntersegmentTotal
Customer Type:
Residential$58,964  $40,113  $566  $—  $—  $—  $505  $—  $100,148  
Commercial & Industrial24,057  20,606  700  119,852  5,654  2,154  —  (592) 172,431  
OSS & Capacity Release1,463  —  —  —  —  —  —  —  1,463  
Other453  122  97  —  —  —  —  —  672  
$84,937  $60,841  $1,363  $119,852  $5,654  $2,154  $505  $(592) $274,714  
Product Line:
Gas$84,937  $60,841  $1,363  $119,852  $—  $—  $—  $(568) $266,425  
Electric—  —  —  —  5,654  —  —  (379) 5,275  
Solar—  —  —  —  —  1,390  —  —  1,390  
Landfills—  —  —  —  —  764  —  —  764  
Other—  —  —  —  —  —  505  355  860  
$84,937  $60,841  $1,363  $119,852  $5,654  $2,154  $505  $(592) $274,714  

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Six Months Ended
June 30, 2020
SJG Utility OperationsETG Utility OperationsELK Utility OperationsWholesale Energy OperationsRetail Electric OperationsOn-Site Energy ProductionAppliance Service OperationsCorporate Services and IntersegmentTotal
Customer Type:
Residential$201,772  $132,522  $2,102  $—  $—  $—  $994  $—  $337,390  
Commercial & Industrial65,892  57,754  2,359  258,847  12,648  9,142  —  (2,596) 404,046  
OSS & Capacity Release4,072  —  —  —  —  —  —  —  4,072  
Other1,010  3,971  180  —  —  —  —  —  5,161  
$272,746  $194,247  $4,641  $258,847  $12,648  $9,142  $994  $(2,596) $750,669  
Product Line:
Gas$272,746  $194,247  $4,641  $258,847  $—  $—  $—  $(1,657) $728,824  
Electric—  —  —  —  12,648  —  —  (1,662) 10,986  
Solar—  —  —  —  —  3,296  —  —  3,296  
CHP—  —  —  —  —  3,502  —  —  3,502  
Landfills—  —  —  —  —  2,344  —  —  2,344  
Other—  —  —  —  —  —  994  723  1,717  
$272,746  $194,247  $4,641  $258,847  $12,648  $9,142  $994  $(2,596) $750,669  


Three Months Ended
June 30, 2019
SJG Utility OperationsETG Utility OperationsELK Utility OperationsWholesale Energy OperationsRetail Electric OperationsOn-Site Energy ProductionAppliance Service OperationsCorporate Services and IntersegmentTotal
Customer Type:
Residential$28,679  $27,503  $207  $—  $2,953  $—  $484  $—  $59,826  
Commercial & Industrial15,503  16,065  482  111,794  12,419  14,788  —  (3,418) 167,633  
OSS & Capacity Release2,244  —  —  —  —  —  —  —  2,244  
Other571  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  
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Six Months Ended
June 30, 2019
SJG Utility OperationsETG Utility OperationsELK Utility OperationsWholesale Energy OperationsRetail Electric OperationsOn-Site Energy ProductionAppliance Service OperationsCorporate Services and IntersegmentTotal
Customer Type:
Residential$213,633  $127,492  $1,961  —  $6,761  —  $1,015  —  $350,862  
Commercial & Industrial61,091  58,213  2,140  311,561  25,422  26,118  —  (6,425) 478,120  
OSS & Capacity Release4,014  —  —  —  —  —  —  —  4,014  
Other1,243  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  


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 (loss) that are not with contracts with customers consist of (a) revenues from alternative revenue programs at the SJG, ETG and ELK utility operating segments (including CIP, AIRP, SHARP, and WNC), (b) both utility and nonutility realized revenue from derivative contracts at the SJG and ETG utility, wholesale energy and retail electric operating segments, and (c) unrealized revenues from derivative contracts of the wholesale energy and retail electric operating segments (see Note 12).

The Company’s rate mechanisms that qualify as alternative revenue programs are described 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, 2019. These mechanisms are subject to compliance filings on at least an annual basis, and the tariff rate adjustments are designed to occur over this compliance period. These rate mechanisms satisfy the criteria in ASC 980-605-25-4, as (a) each mechanism is established by order of the BPU for SJG and ETG, and the MPSC for ELK; (b) the amounts recoverable under each program are determined by tracking and are probable of recovery; and (c) the adjustments to tariff rates are designed to recover from or refund to customers within a 24 month period. For each individual rate reconciling mechanism, operating revenues are recognized when allowable costs are greater than the amounts billed in the current period and are reduced when allowable costs are less than amounts billed in the current period. Total revenues arising from alternative revenue programs at SJI were $(3.1) million and $8.8 million for the three months ended June 30, 2020 and 2019, respectively, and $44.6 million and $21.3 million for the six months ended June 30, 2020 and 2019, respectively. Total revenues arising from alternative revenue programs at SJG were $(0.2) million and $8.8 million for the three months ended June 30, 2020 and 2019, respectively, and $37.0 million and $26.0 million for the six months ended June 30, 2020 and 2019, respectively. The SJI and SJG amounts for revenues arising from alternative revenue programs were negative during the three months ended June 30, 2020 as a result of ETG's WNC program and SJG's CIP, AIRP, and SHARP programs being in a net over-collected position during the period, which caused a net reduction in operating revenues as allowable costs were less than amounts billed.


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

Accounts Receivable (A)Unbilled Revenue (B)
SJI (including SJG and all other consolidated subsidiaries):
Beginning balance as of January 1, 2020$253,661  $84,821  
Ending balance as of June 30, 2020231,434  16,148  
Increase (Decrease)$(22,227) $(68,673) 
Beginning balance as of January 1, 2019$337,502  $79,538  
Ending balance as of June 30, 2019223,314  21,253  
Increase (Decrease)$(114,188) $(58,285) 
SJG:
Beginning balance as of January 1, 2020$84,940  $45,016  
Ending balance as of June 30, 202091,842  3,915  
Increase (Decrease)$6,902  $(41,101) 
Beginning balance as of January 1, 2019$101,572  $43,271  
Ending balance as of June 30, 201990,190  8,415  
Increase (Decrease)$(11,382) $(34,856) 

(A) 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.

(B) 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.

17. BUSINESS COMBINATIONS:

There were no changes to the accounting policy with regards to business combinations described 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, 2019.

AEP Acquisition

On August 31, 2019, SJI, through its wholly-owned subsidiary SJEI, completed its acquisition of AEP for $4.0 million in total consideration, inclusive of certain working capital and other closing adjustments.

AEP does not have any regulated operations.

The Company has finalized its valuation of assets and liabilities in connection with the acquisition of AEP. There are no changes to the purchase price or the allocation disclosed in Note 20 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, 2019. All assets and financial results of AEP are included in the Corporate & Services segment. The amount of revenues and net income included in the Company's condensed consolidated statement of income for the three and six months ended June 30, 2020 related to AEP is not material.
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Solar Projects Acquisition

On June 30, 2020, the Company, through its wholly-owned subsidiary Marina, completed its acquisition of ESNJ-AL-Somerspoint LLC, ESNJ-AL-Hamiltonsquare LLC, and ESNJ-AL-Brownsmills LLC, which own and operate solar-generation sites located in New Jersey, for $2.8 million in total consideration. The total purchase price equaled the fair value of property, plant, and equipment that were acquired in the transaction. Costs related to this acquisition were not material. The purchase of these entities is in support of the New Jersey Energy Master Plan.

All assets and financial results of these entities are included in the On-Site Energy Production segment. There were no revenues or net income included in the Company's condensed consolidated statement of income for the three and six months ended June 30, 2020 related to these entities.

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.

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.

If sufficient qualitative factors exist, goodwill impairment is determined quantitatively. Potential impairment is identified 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, an impairment charge is recognized for the excess up until the amount of goodwill allocated to the reporting unit.

As a result of the COVID-19 pandemic and the resulting macroeconomic market conditions, the Company determined it necessary to perform a quantitative goodwill impairment analysis on the goodwill at the ETG reporting unit as of March 31, 2020. There were no impairments recorded as a result of this interim impairment test. During the second quarter of 2020, management did not identify any qualitative factors indicating that it was more likely than not that the fair value of the ETG reporting unit was less than its carrying amount. Should economic conditions deteriorate in future periods or remain depressed for a prolonged period of time, estimates of future cash flows and market valuation assumptions may not be sufficient to support the carrying value, requiring impairment charges in the future.

Total goodwill of $702.1 million was recorded on the condensed consolidated balance sheets as of both June 30, 2020 and December 31, 2019. As of both June 30, 2020 and December 31, 2019, $700.2 million was included in the ETG Utility Operations segment and $1.9 million was included in the Corporate & Services segment.

IDENTIFIABLE INTANGIBLE ASSETS - The primary identifiable intangible assets of the Company are customer relationships obtained in the acquisition of AEP (see Note 17), along with 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
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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.

SJI's identifiable intangible assets were as follows (in thousands):

As of June 30, 2020
Gross CostAccumulated AmortizationIdentifiable Intangible Assets, Net
Identifiable intangible assets subject to amortization:
Customer Relationships$2,400  $(133) $2,267  
AMA 19,200  (10,240) 8,960  
Total$21,600  $(10,373) $11,227  

As of December 31, 2019
Gross CostAccumulated AmortizationIdentifiable Intangible Assets, Net
Identifiable intangible assets subject to amortization:
Customer Relationships$2,400  $(53) $2,347  
AMA 19,200  (7,680) 11,520  
Total$21,600  $(7,733) $13,867  


The net identifiable intangible asset balances shown in the table above are included in Other Noncurrent Assets on the condensed consolidated balance sheets.

Total SJI amortization expense related to identifiable intangible assets was $1.3 million and $1.5 million for the three months ended June 30, 2020 and 2019, respectively, and $2.6 million and $3.0 million for the six months ended June 30, 2020 and 2019, respectively. No impairment charges were recorded on identifiable intangible assets during the three and six months ended June 30, 2020 or 2019.

As of June 30, 2020, SJI's estimated amortization expense related to identifiable intangible assets for each of the five succeeding fiscal years is as follows (in thousands):
Year ended December 31, SJI
2020 (remaining six months)2,640  
20215,280  
20221,440  
2023160  
2024160  

The decreases in estimated amortization expense in the table above are due to the AMA ceasing in March 2022 (see Note 1).

19. LEASES:

Except as described below, there have been no significant changes to the nature of the Company's leases since December 31, 2019, which are described in Note 9 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, 2019.

SJI's and SJG's real estate leases, which are comprised primarily of office space and payment centers, represent approximately 89% and 56%, 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. As of June 30, 2020, SJI does not have any contracts where it is considered the lessor (see "MTF" below).
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As of both June 30, 2020 and December 31, 2019, SJI recognized right-of-use assets and lease liabilities of $1.9 million each for operating leases. The lease liability is comprised of approximately $1.7 million of real estate leases, $0.2 million of equipment leases and less than $0.1 million of fleet vehicle leases as of June 30, 2020, and $1.5 million of real estate leases, $0.3 million of equipment leases and $0.1 million of fleet vehicle leases as of December 31, 2019.

SJG recognized right-of-use assets and lease liabilities of $0.2 million each for operating leases as of June 30, 2020, and $0.3 million each for operating leases as of December 31, 2019. As of June 30, 2020, the lease liability is comprised of approximately $0.1 million of equipment leases and $0.1 million of real estate leases, and as of December 31, 2019, the lease liability is comprised of approximately $0.2 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, 2020 and December 31, 2019.

The maturity of the Company’s operating lease liabilities is as follows (in thousands):
As of June 30, 2020
SJI ConsolidatedSJG
2020 (excluding the six months ended June 30, 2020)
$515  $65  
2021534  39  
2022348  21  
2023190  19  
2024165  12  
Thereafter236  102  
Total future minimum lease payments1,988  258  
Less imputed interest109  29  
Total lease payments$1,879  $229  
Included in the condensed consolidated balance sheet
Current lease liabilities (included in Other Current Liabilities)$759  $80  
Long-term lease liabilities (included in Other Noncurrent Liabilities)1,120  149  
Total lease liabilities$1,879  $229  

The total operating lease cost for SJI was $0.6 million and $1.1 million, respectively, during the three and six months ended June 30, 2020, and $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 less than $0.1 million and approximately $0.1 million during the three and six months ended June 30, 2020, respectively, and $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, 2020 and 2019.

Operating cash flows from operating leases for SJI were $0.4 million and $0.7 million during the three and six months ended June 30, 2020, respectively, and $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 less than $0.1 million and approximately $0.1 million during the three and six months ended June 30, 2020, respectively, and $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 $0.2 million and $0.3 million of variable lease payments pertaining to leased back assets during the three and six months ended June 30, 2020, respectively, and $0.4 million and $0.8 million during the three and six ended June 30, 2019, respectively.
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Supplemental Non-Cash Disclosures

The weighted average remaining lease term for SJI's operating leases is 4.4 years at a weighted average discount rate of 3.1%.

The weighted average remaining lease term for SJG's operating leases is 8.4 years at a weighted average discount rate of 3.1%.

MTF

As of December 31, 2019, Marina was considered to be the lessor of certain thermal energy generating property and equipment under an operating lease which was set to expire in May 2027. As of December 31, 2019, the carrying costs of this property and equipment under operating lease was $68.9 million (net of accumulated depreciation of $40.6 million), and is included in Assets Held for Sale in the condensed consolidated balance sheets. As discussed in Note 1, MTF was sold to a third party buyer in February 2020, and as a result, Marina no longer is the lessor of this property, and no longer has future rentals or commitments.

20. SUBSEQUENT EVENTS:

On July 30, 2020, SJI issued its Series 2020A Notes and Series 2020B Notes for an aggregate principal amount of $200.0 million. The proceeds from this issuance were used to pay off the unsecured $200.0 million term loan credit agreement issued in April 2020, which was paid off on July 31, 2020 (see Note 14).

On July 31, 2020, SJI, through its wholly-owned subsidiary SJIU, closed on its transaction to sell ELK to a third-party buyer. Total consideration received was approximately $15.6 million, inclusive of working capital and other closing adjustments.


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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, 2019.

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; changes in business strategies; and public health crises and epidemics or pandemics, such as a novel coronavirus (COVID-19).
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, 2019 and in any other SEC filings made by SJI or SJG during 2019 and 2020 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 from new information, future events or otherwise, except required by law.


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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, goodwill, and evaluation of equity method investments for other-than-temporary impairment. 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, 2019.

COVID-19 - In March 2020, the World Health Organization classified the outbreak of COVID-19 as a pandemic. The rapid spread has resulted in worldwide shutdowns and the halting of business and personal activity as governments around the world imposed regulations to control the spread of COVID-19. As a result, the global economy has been marked by significant slowdowns and uncertainty.

Our business operations continue to function effectively during the pandemic. We are continuously evaluating the global pandemic and are taking necessary steps to mitigate known risks. We continue to closely monitor developments related to the pandemic and will adjust our actions and operations as appropriate in order to continue to provide safe and reliable service to our customers and communities while keeping employees safe. The full impact on the businesses of SJI and SJG from the pandemic, including the regulatory responses, is unknown at this time and difficult to predict as the situation remains fluid. SJI and SJG provide critical and essential services to our customers and the health and safety of our employees and customers is our first priority. SJI and SJG considered the impact of COVID-19 on the use of estimates and assumptions used for financial reporting and noted there were no material impacts on our results of operations for the three and six months ended June 30, 2020, as operations and delivery of product to our customers has not been materially impacted. To date, SJI has not experienced significant reductions in sales volumes across our businesses.

SJI has been actively addressing the COVID-19 pandemic and has established a task force comprised of members of management, with the mission of ensuring the safety of individuals (customers and employees), while continuing to perform our daily responsibilities in an efficient and safe manner. SJI is following the guidance from federal, state and local authorities to help safeguard the health, safety and well-being of its employees. To date, all of our employees are currently working. The task force identified which roles are essential (i.e. need to work in field/office to conduct daily activities) and non-essential (i.e. able to perform work from a remote location) and developed a plan for all employees in non-essential roles to work remotely from home while ensuring that the appropriate safety measures are in place for all employees in essential roles in the field/office. These plans remain in place, as all employees in non-essential roles continue to work remotely despite some states, including New Jersey, easing restrictions. For employees in essential roles, safety measures include additional personal protective equipment and adjusting shifts to reduce the number of workers in close contact. Given the additional safety measures in place, and the ability for employees in non-essential roles to work remotely, we have not had a material impact on our operations as a result of these human capital constraints, and we do not believe operations will be materially impacted going forward by human capital constraints.

In order to initiate the business continuity plan, the Company has incurred operating costs for emergency supplies, cleaning services, enabling technology and other specific needs during the pandemic. SJI has incurred costs during the six months ended June 30, 2020 of $1.4 million, with $0.8 million being recorded as Property, Plant & Equipment on the condensed consolidated balance sheets, and the remaining $0.6 million recorded as Operations Expense on the condensed consolidated statements of income (loss). SJG has recorded $0.2 million of such costs, which are recorded as Property, Plant & Equipment on the condensed balance sheets. Going forward, we expect further expenses for the above mentioned items; however, we do not anticipate these expenses to be material.

The supply chain has not been materially impacted by COVID-19; this is because the Company has a large inventory of standard products such as pipe material. In addition, given that the products are considered essential products, factories are remaining open, therefore allowing materials to be replenished. The Company is actively managing the materials, supplies and contract services necessary for our operations, and does not expect a disruption to the Company's gas supply in the future.

Our infrastructure investment programs to replace and upgrade critical utility infrastructure continue to move forward. As a result of COVID-19, certain construction activity had been delayed due to some activity being ceased in accordance with directives from the Governor of New Jersey. Construction activity has since resumed given the directive from the Governor was lifted. Our infrastructure investment programs continue to move forward and we remain on track to achieve our capital spending projections in 2020; however, to the extent the pandemic worsens or a similar directive is put in place in the future for a long period of time, our capital projects could be significantly impacted.


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We have considered the impact of COVID-19 on the liquidity position of the Company, and note that it has remained stable throughout this uncertain period, and SJI's and SJG's ability to borrow has not been impacted to date. Further, SJI and SJG have successfully paid off and refinanced debt, and raised equity through the ATM offering, during the second quarter of 2020. See Liquidity and Capital resources section for detailed description of borrowings entered into during the period.

As a result of the COVID-19 pandemic and the resulting macroeconomic market conditions, the Company determined it necessary to perform a quantitative goodwill impairment analysis on the goodwill at the ETG reporting unit as of March 31, 2020. There were no impairments recorded as a result of this interim impairment test. During the second quarter of 2020, management did not identify any qualitative factors indicating that it was more likely than not that the fair value of the ETG reporting unit was less than its carrying amount. See "Goodwill" below, along with Note 18 to the condensed consolidated financial statements.

We considered the impact the pandemic has had on operating revenues, noting that SJI and SJG have not seen a significant reduction in revenues as a result of the pandemic. This is due to gas and electricity being considered an essential service and continuing to be delivered timely to customers, and no delays or operational shutdowns taking place to date. Given the performance obligation is satisfied at delivery, which matches the time when the Company is able to invoice the customer, the Company is confident in being able to meet its future performance obligations. To the extent that the pandemic does impact our ability to deliver in the future, operating revenues could be impacted.

All accounts receivables arise from contracts with customers and are carried at the amount owed by customers. The provision for uncollectible accounts is established based on expected credit losses. On July 2, 2020, the BPU issued an Order authorizing New Jersey's regulated utilities to create a COVID-19-related regulatory asset by deferring on their books and records the prudently incurred incremental costs related to COVID-19 beginning on March 9, 2020 and continuing through September 30, 2021, or 60 days after the termination of the public health emergency, whichever is later. The Company will be required to file quarterly reports with the BPU, along with a petition of recovery of such incremental costs with the BPU by December 31, 2021 or within 60 days of the close of the tracking period, whichever is later. During the second quarter 2020, ETG and SJG deferred $9.0 million and $0.7 million, respectively, of incremental costs principally related to expected credit losses from uncollectibles as a result of the COVID-19 pandemic, specifically related to changes in payment patterns observed to date and consideration of macroeconomic factors. We have deemed these costs to be probable of recovery. (see Note 8 to the condensed consolidated financial statements). The Utilities have suspended disconnects for nonpayment by our customers, based on orders and requests from our various regulators; these suspensions will continue until further orders are received from our regulators.

Given the impact that COVID-19 has had on the economy, on March 27, 2020 the President signed into law the CARES Act, an economic stimulus package in response to the COVID-19 global pandemic, as a way to provide relief to both businesses and individuals affected by the virus. The CARES Act contains several corporate tax provisions that could impact SJI and SJG, including making remaining alternative minimum tax credits immediately refundable, deferring payments on social security taxes for employees, and other employee retention credits. The Company does not currently expect the CARES Act, and these provisions, to have a material effect on current income tax expense or deferred tax assets/liabilities; however, we are currently evaluating the overall impact of the CARES Act and note that new or additional changes to regulations in the future could have a material impact.

Additional information concerning the impact COVID-19 may have upon the Company in the future and results of operations can be found in Part II, Item 1A Risk Factors.

Business Combinations - On August 31, 2019, SJI, through its wholly-owned subsidiary SJEI, completed its acquisition of AEP. On June 30, 2020, SJI, through its wholly-owned subsidiary Marina, acquired ESNJ-AL-Somerspoint LLC, ESNJ-AL-Hamiltonsquare LLC, and ESNJ-AL-BrownsMills LLC, which own and operate solar-generation sites. See detailed discussions concerning these acquisitions and their 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, 2019. 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, 2019.


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Environmental Remediation — There have been no significant changes to the status of SJI’s and SJG's environmental remediation efforts since December 31, 2019. 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, 2019.

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 (loss). 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. No impairments were identified at either SJI or SJG for the three and six months ended June 30, 2020 or 2019, respectively. See Note 1 to the condensed consolidated financial statements.

Goodwill - See discussion on 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 Annual Report on Form 10-K for the year ended December 31, 2019.

As discussed in Note 18 to the condensed consolidated financial statements, SJI monitors all relevant events and circumstances during the year to determine if an interim impairment test is required. Such events and circumstances include 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. Subsequent to December 31, 2019, certain qualitative factors were present that required the Company to perform a quantitative assessment for goodwill impairment at March 31, 2020 related to the ETG reporting unit. The qualitative factors primarily included macroeconomic conditions related to COVID-19. No impairment was recorded as a result of this interim impairment test. During the second quarter of 2020, management did not identify any qualitative factors indicating that it was more likely than not that the fair value of the ETG reporting unit was less than its carrying amount.

In preparing the goodwill impairment tests as of March 31, 2020 and December 31, 2019, the fair value of the reporting unit was calculated using a weighted combination of the income approach, which estimates fair value based on discounted cash flows, and the market approach, which estimates fair value based on market comparables within the utility and energy industries. 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 capital expenditures, tax rates, and projected terminal values and assumptions related to discount and growth rates and implied market multiples for a selected group of peer companies. Based on the analysis, the fair value of the ETG reporting unit closely approached, but exceeded, its carrying amount. Should economic conditions deteriorate in future periods or remain depressed for a prolonged period of time, estimates of future cash flows and market valuation assumptions may not be sufficient to support the carrying value, requiring impairment charges in the future.

Evaluation of Equity Method Investments for Other-Than-Temporary Impairment - Our evaluation of impairment of equity method investments when conditions exist that could indicate that the fair value of the investment is less than book value includes key inputs that involve significant management judgments and estimates, including projections of the investment's cash flows, selection of a discount rate and probability weighting of potential outcomes of legal proceedings and other available options. Our evaluation also considered the current economic conditions as a result of COVID-19, noting that the timelines, potential options and legal proceedings have not been impacted. However, the legal proceedings could have unfavorable outcomes, or there could be other future unfavorable developments, such as a reduced likelihood of success from development options and legal outcomes, estimated increases in construction costs, increases in the discount rate, or further significant delays, or PennEast could conclude that the project is not viable or does not go forward as actions progress. These could impact our conclusions with respect to other-than-temporary impairment and may require that we recognize an impairment charge of up to our recorded investment in the project, net of any cash and working capital. See detailed discussion in Note 3 to the condensed consolidated financial statements, along with Note 3 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, 2019.


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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. As discussed in Note 20 to the condensed consolidated financial statements, on July 31, 2020, SJI closed on its transaction to sell ELK to a third-party buyer.

Wholesale energy operations include the activities of SJRG and SJEX.

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

On-site energy production consists of MTF and ACB, which as discussed in Note 1 to the condensed consolidated financial statements, were sold on February 18, 2020. This segment also includes other energy-related projects, including three legacy solar projects, one of which was sold during the three months ended March 31, 2020 as discussed in Note 1 to the condensed consolidated financial statements. Also included in this segment are the activities of ACLE, BCLE, SCLE and SXLE. Operations at BCLE, SCLE, and SXLE ceased during the second quarter of 2020 as discussed in Note 1 to the condensed consolidated financial statements. As of June 30, 2020, on-site energy production also includes ESNJ-AL-Somerspoint LLC, ESNJ-AL-Hamiltonsquare LLC, and ESNJ-AL-BrownsMills LLC, which are newly acquired entities which own and operate solar-generation sites located in New Jersey. See Note 17 to the condensed consolidated financial statements.

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. Also included in this segment are the results of SJEI.

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, Energy Services, Midstream and Corporate & Services. Energy Group includes wholesale energy and retail electric operations. Energy Services includes on-site energy production and appliance service operations.

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SOUTH JERSEY INDUSTRIES, INC.

RESULTS OF OPERATIONS:

Summary:

SJI's net income for the three months ended June 30, 2020 increased $10.8 million to a net loss of $2.6 million compared with the same period in 2019. SJI's income from continuing operations for the three months ended June 30, 2020 increased $10.7 million to a net loss of $2.6 million compared with the same period in 2019. 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 three months ended June 30, 2020 increased $6.0 million to $4.7 million compared with the same period in 2019, primarily due to higher margins on daily energy trading activities, along with a refund received from a third party supplier as discussed in Note 1 to the condensed consolidated financial statements. This was partially offset with the change in unrealized gains and losses on forward financial contracts due to price volatility.

The income contribution from the gas utility operations at ETG for the three months ended June 30, 2020 increased $3.1 million to a loss of $0.8 million compared with the same period in 2019, primarily due to positive margins due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019, along with customer growth and lower maintenance expenses. This was partially offset with higher operations and depreciation expenses.

The income contribution from gas utility operations at SJG for the three months ended June 30, 2020 increased $1.7 million to $3.7 million compared with the same period in 2019, primarily due to customer growth and the roll-in to rates of infrastructure program investments. Also contributing was higher investment performance and higher AFUDC income. These were partially offset with increases in depreciation and maintenance expenses.

SJI's net income for the six months ended June 30, 2020 increased $26.2 million to $98.4 million compared with the same period in 2019. SJI's income from continuing operations for the six months ended June 30, 2020 increased $26.1 million to $98.5 million compared with the same period in 2019. 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, 2020 increased $12.9 million to $10.1 million compared with the same period in 2019, primarily due to higher margins on daily energy trading activities, along with a refund received from a third party supplier as discussed in Note 1 to the condensed consolidated financial statements. Also contributing to the increase was the change in unrealized gains and losses on forward financial contracts due to price volatility.

The income contribution from the gas utility operations at ETG for the six months ended June 30, 2020 increased $9.0 million to $35.9 million compared with the same period in 2019, primarily due to positive margins due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019, along with customer growth and lower maintenance expenses. This was partially offset with higher operations and depreciation expenses.

The income contribution from gas utility operations at SJG for the six months ended June 30, 2020 increased $3.5 million to $74.2 million compared with the same period in 2019, primarily due to customer growth and the roll-in to rates of infrastructure program investments. SJG's utility margin increased from its CIP mechanism as discussed in "Utility Margin - SJG Utility Operations" below. These were partially offset with increases in depreciation and maintenance expenses, along with a one-time tax adjustment resulting from SJG's Stipulation of Settlement with the BPU as part of its recent rate case filing (see Note 7 to the condensed consolidated financial statements).

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 to increasing interest rates on variable-rate debt.


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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 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-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 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 non-utility derivative transactions; and (ii) 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 (ii) of the definition of Economic Earnings, several items are excluded from Economic Earnings for the three and six months ended June 30, 2020 and 2019, consisting of the impact of pricing disputes with third parties, costs to acquire ETG and ELK, costs to prepare to exit the TSA, costs incurred and gains recognized on sales of solar, MTF/ACB, and ELK, costs incurred to cease operations at three landfill gas-to-energy-production facilities, severance and other employee separation costs, and a one-time tax adjustment resulting from SJG's Stipulation of Settlement with the BPU. See (A)-(E) in the table below.

Economic Earnings is a significant financial measure 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.


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Economic Earnings for the three months ended June 30, 2020 increased $11.4 million to a loss of $0.9 million compared with the same period in 2019. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):

The Economic Earnings contribution from the wholesale energy operations at SJRG for the three months ended June 30, 2020 increased $7.7 million to $5.7 million compared with the same period in 2019, primarily due to higher margins on daily energy trading activities, along with a refund received from a third party supplier as discussed in Note 1 to the condensed consolidated financial statements.

The Economic Earnings contribution from gas utility operations at ETG for the three months ended June 30, 2020 increased $3.1 million to a loss of $0.8 million compared with the same period in 2019, primarily due to positive margins due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019, along with customer growth and lower maintenance expenses. This was partially offset with higher operations and depreciation expenses.

The Economic Earnings contribution from gas utility operations at SJG for the three months ended June 30, 2020 increased $1.7 million to $3.7 million compared with the same period in 2019, primarily due to customer growth and the roll-in to rates of infrastructure program investments. Also contributing was higher investment performance and higher AFUDC income. These were partially offset with increases in depreciation and maintenance expenses.

Economic Earnings for the six months ended June 30, 2020 increased $18.8 million to $106.0 million compared with the same period in 2019. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):

The Economic Earnings contribution from gas utility operations at ETG for the six months ended June 30, 2020 increased $9.0 million to $35.9 million compared with the same period in 2019, primarily due to positive margins due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019, along with customer growth and lower maintenance expenses. This was partially offset with higher operations and depreciation expenses.

The Economic Earnings contribution from the wholesale energy operations at SJRG for the six months ended June 30, 2020 increased $5.8 million to $11.0 million compared with the same period in 2019, primarily due to higher margins on daily energy trading activities, along with a refund received from a third party supplier as discussed in Note 1 to the condensed consolidated financial statements.

The Economic Earnings contribution from gas utility operations at SJG for the six months ended June 30, 2020 increased $4.7 million to $75.4 million compared with the same period in 2019, primarily due to customer growth and the roll-in to rates of infrastructure program investments. SJG's utility margin increased from its CIP mechanism as discussed in "Utility Margin - SJG Utility Operations" below. These were partially offset with increases in depreciation and maintenance 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,
 2020201920202019
(Loss) Income from Continuing Operations$(2,578) $(13,304) $98,522  $72,395  
Minus/Plus:
    
Unrealized Mark-to-Market Losses on Derivatives
1,621  1,888  5,943  15,038  
Net Losses from a Legal Proceeding in a Pricing Dispute (A)
—  986  —  1,977  
Acquisition/Sale Net Costs (Gains) (B)
92  (1,822) 1,453  163  
Other Costs (C)
617  422  764  2,995  
  Income Taxes (D)(615) (391) (1,920) (5,352) 
  Additional Tax Adjustments (E)—  —  1,214  —  
Economic Earnings$(863) $(12,221) $105,976  $87,216  
(Loss) Earnings per Share from Continuing Operations$(0.03) $(0.14) $1.06  $0.79  
Minus/Plus:    
Unrealized Mark-to-Market Losses on Derivatives
0.02  0.02  0.06  0.16  
Net Losses from a Legal Proceeding in a Pricing Dispute (A)
—  0.01  —  0.02  
Acquisition/Sale Net Costs (Gains) (B)
—  (0.02) 0.02  0.01  
Other Costs (C)
0.01  0.01  0.01  0.03  
  Income Taxes (D) (0.01) (0.01) (0.02) (0.06) 
  Additional Tax Adjustments (E) —  —  0.01  —  
Economic Earnings per Share
$(0.01) $(0.13) $1.14  $0.95  

The following table presents a reconciliation of SJG's income from continuing operations to Economic Earnings for the three and six months ended June 30 (in thousands):

Three Months Ended June 30,Six Months Ended
June 30,
2020201920202019
Income from Continuing Operations$3,678  $1,976  $74,200  $70,707  
   Plus:
   Additional Tax Adjustments (E)—  —  1,214  —  
Economic Earnings$3,678  $1,976  $75,414  $70,707  

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The effect of derivative instruments not designated as hedging instruments under GAAP in the condensed consolidated statements of income (loss) (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,
2020201920202019
Losses on Energy Related Commodity Contracts$(1,285) $(143) $(1,561) $(12,203) 
Losses on Interest Rate Contracts(336) (1,745) (4,382) (2,835) 
Total unrealized mark-to-market losses on derivatives(1,621) (1,888) (5,943) (15,038) 
Net Losses from a Legal Proceeding in a Pricing Dispute (A)—  (986) —  (1,977) 
Acquisition/Sale Net (Costs) Gains (B)(92) 1,822  (1,453) (163) 
Other Costs (C)(617) (422) (764) (2,995) 
Income Taxes (D)615  391  1,920  5,352  
Additional Tax Adjustments (E)—  —  (1,214) —  
Total reconciling items between (losses) income from continuing operations and economic earnings$(1,715) $(1,083) $(7,454) $(14,821) 

(A) 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.

(B) Represents costs incurred to prepare to exit the TSA. Also included here are gains/losses recognized and costs incurred on the sale of certain solar assets included in Assets Held for Sale in previous periods as well as MTF/ACB and ELK, and costs incurred to cease operations at three landfill gas-to-energy production facilities.

(C) Represents severance and other employee separation costs.

(D) The income taxes on (A) through (C) above were determined using a combined average statutory tax rate for the three and six months ended June 30, 2020 and 2019.

(E) Represents a one-time tax adjustment resulting from SJG's Stipulation of Settlement with the BPU, as part of its recent rate case filing.
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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,
 2020201920202019
Utility Operating Revenues:  
Firm Sales -  
Residential$56,496  $27,139  $216,403  $207,105  
Commercial10,967  9,721  43,522  46,415  
Industrial332  603  1,579  2,535  
Cogeneration & Electric Generation586  391  1,040  971  
Firm Transportation -
Residential1,588  1,540  5,941  6,528  
Commercial5,942  6,715  21,377  21,953  
Industrial5,851  5,653  12,264  12,250  
Cogeneration & Electric Generation1,088  1,241  2,515  2,969  
Total Firm Revenues82,850  53,003  304,641  300,726  
Interruptible Sales —  15  62  
Interruptible Transportation274  260  616  640  
Off-System Sales3,130  7,119  19,534  29,546  
Capacity Release750  1,575  2,690  2,951  
Other177  311  380  541  
 87,182  62,268  327,876  334,466  
Less: Intercompany Sales(568) (1,247) (1,657) (2,647) 
Total Utility Operating Revenues86,614  61,021  326,219  331,819  
Less:  
       Cost of Sales - Utility25,546  2,654  106,080  121,534  
       Less: Intercompany Cost of Sales(568) (1,247) (1,657) (2,647) 
Total Cost of Sales - Utility (Excluding Depreciation & Amortization) (A)24,978  1,407  104,423  118,887  
Less: Depreciation & Amortization (A)25,201  22,918  50,082  45,460  
     Total GAAP Gross Margin36,435  36,696  171,714  167,472  
Add: Depreciation & Amortization (A)25,201  22,918  50,082  45,460  
Less: Conservation Recoveries (B)1,990  2,560  6,875  9,358  
Less: RAC Recoveries (B)6,233  5,219  12,466  10,438  
Less: EET Recoveries (B)1,185  650  2,364  1,146  
Less: Revenue Taxes191  204  736  880  
Utility Margin (C)$52,037  $50,981  $199,355  $191,110  


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Three Months Ended
June 30,
Six Months Ended
June 30,
 2020201920202019
Utility Margin:
Residential$36,770  $27,945  $119,867  $126,812  
Commercial and Industrial15,645  15,574  47,076  51,822  
Cogeneration and Electric Generation1,071  1,064  2,351  2,268  
Interruptible 19  33  43  
Off-System Sales & Capacity Release172  515  957  2,186  
Other Revenues458  538  661  787  
Margin Before Weather Normalization & Decoupling54,123  45,655  170,945  183,918  
CIP Mechanism(3,548) 4,382  25,363  5,256  
EET Mechanism1,462  944  3,047  1,936  
Utility Margin (C)$52,037  $50,981  $199,355  $191,110  

(A) Does not include amortization of debt issuance costs that are recorded as Interest Charges on the condensed consolidated statements of income (loss).

(B) Represents pass-through expenses for which there is a corresponding credit in operating revenues. Therefore, such recoveries have no impact on SJG's financial results.

(C) Utility Margin is a non-GAAP financial measure and is further defined under the caption "Utility Margin - SJG Utility Operations" below.

Operating Revenues - SJG Utility Operations

Revenues from the gas utility operations at SJG increased $24.9 million, or 40.0%, for the three months ended June 30, 2020 compared with the same period in 2019. Excluding intercompany transactions, revenues increased $25.6 million, or 41.9%, for the three months ended June 30, 2020 compared with the same period in 2019. The significant drivers for the overall change were as follows:

Total firm revenue increased $29.8 million for the three months ended June 30, 2020 compared with the same period in 2019, primarily due to customer growth, a higher BGSS refund to customers in 2019 compared to 2020, and colder weather during the second quarter of 2020. 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 OSS, which decreased $4.0 million for the three months ended June 30, 2020 compared with the same period in 2019, primarily due to decreased commodity costs as a result of lower cash market prices and lower demand. However, the impact of changes in OSS activity does not have a material impact on the earnings of SJG, as SJG is required to return 93% of the profits of such activity to its ratepayers. Earnings from OSS can be seen in the “Margin” table above.

Revenues from the gas utility operations at SJG decreased $6.6 million, or 2.0%, for the six months ended June 30, 2020 compared with the same period in 2019. Excluding intercompany transactions, revenues decreased $5.6 million, or 1.7%, for the six months ended June 30, 2020 compared with the same period in 2019. The significant drivers for the overall change were as follows:

Total OSS decreased $10.0 million for the six months ended June 30, 2020 compared with the same period in 2019 primarily due to lower commodity costs as a result of lower cash market prices and lower demand, along with warmer weather during the first quarter of 2020. However, the impact of changes in OSS do not have a material impact on the earnings of SJG as discussed above.

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Partially offsetting these decreases was firm revenue, which increased $3.9 million for the six months ended June 30, 2020 compared with the same period in 2019 primarily due to customer growth and a higher BGSS refund to customers in 2019 compared to 2020. Partially offsetting this increase was warmer weather during the first quarter of 2020. SJG does not profit from the sale of the commodity as discussed 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 plus depreciation and amortization expenses, 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, and since depreciation and amortization expenses are considered to be administrative. 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.

Total Utility Margin increased $1.1 million, or 2.1%, and $8.2 million, or 4.3%, for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019. The increase is primarily due to customer growth and the roll-in to rates of infrastructure program investments. Also contributing to SJG's Utility Margin is the CIP tracking mechanism, which 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, changes year over year to the CIP mechanism are primarily due to variation in customer usage compared to the same period in 2019. Partially offsetting the six month comparative period increases is warmer weather in the first three months of 2020 compared to the same period in the prior year.

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,
Six Months Ended
June 30,
2020201920202019
Utility Operating Revenues:
Firm & Interruptible Sales - 
Residential$37,480  $27,134  $136,876  $123,393  
Commercial & Industrial10,088  8,470  36,373  37,445  
Firm & Interruptible Transportation -
Residential402  284  1,272  996  
Commercial & Industrial9,750  7,438  23,509  19,020  
Other123  1,528  3,970  4,174  
Total Firm & Interruptible Revenues57,843  44,854  202,000  185,028  
Less: Total Cost of Sales - Utility (Excluding Depreciation & Amortization) (A)19,928  15,084  74,045  84,062  
Less: Depreciation & Amortization (A)9,933  6,681  19,181  13,204  
     Total GAAP Gross Margin27,982  23,089  108,774  87,762  
Add: Depreciation & Amortization (A)9,933  6,681  19,181  13,204  
Less: Regulatory Rider Expenses (B)3,747  1,199  9,046  3,459  
Utility Margin (C)$34,168  $28,571  $118,909  $97,507  

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Three Months Ended
June 30,
Six Months Ended
June 30,
2020201920202019
Utility Margin:
Residential$22,135  $15,980  $79,568  $62,501  
Commercial & Industrial15,637  12,135  43,549  34,108  
Regulatory Rider Expenses (B)(3,604) 456  (4,208) 898  
Utility Margin (C)$34,168  $28,571  $118,909  $97,507  

(A) Does not include amortization of debt issuance costs that are recorded as Interest Charges on the condensed consolidated statements of income (loss).

(B) Represents pass-through expenses for which there is a corresponding credit in operating revenues.  Therefore, such recoveries have no impact on ETG's financial results.

(C) Utility Margin is a non-GAAP financial measure and is further defined under the caption "Utility Margin - SJG Utility Operations" above. The definition of Utility Margin is the same for each of the Utilities.

ETG's business consists of natural gas distribution to residential, commercial and industrial customers in northern and central New Jersey. ETG's operating revenues 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 is considered a non-GAAP measure and calculated the same as SJG as discussed under "Utility Margin" above.

Revenues from the gas utility operations at ETG increased $13.0 million, or 29.0%, and $17.0 million, or 9.2%, for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019 primarily due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019, along with customer growth. Utility Margin from the gas utility operations at ETG increased $5.6 million, or 19.6%, and $21.4 million, or 21.9%, for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019 primarily due to the favorable change in base rates and customer growth as noted above.

ELK Utility Operations:

The activities of ELK utility operations are not material to SJI's financial results. On July 31, 2020, SJI, through its wholly-owned subsidiary SJIU, closed on its transaction to sell ELK to a third-party buyer. See Note 20 to the condensed consolidated financial statements.

Nonutility:

Operating Revenues - Energy Group

Combined revenues for Energy Group, net of intercompany transactions, decreased $34.0 million, or 23.4%, to $111.5 million, and decreased $105.6 million, or 29.6%, to $251.6 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019. The significant drivers for the overall change were as follows:

Revenues from wholesale energy operations at SJRG, net of intercompany transactions, decreased $25.0 million to $101.5 million and decreased $86.6 million to $229.8 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019, primarily due to lower sales on fuel supply management contracts that SJRG has with several electric generation facilities, which was a result of decreases in the average monthly NYMEX settle price. Also contributing to the six month comparative period decrease was maintenance and scheduled outages at these electric generation facilities during the first quarter of 2020. Also impacting the comparative period revenues 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 $3.2 million and a total increase of $7.7 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019. As discussed in Note 1 to the condensed consolidated financial statements, 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 statement of income (loss).

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Revenues from retail electric operations at SJE, net of intercompany transactions, decreased $9.1 million to $10.0 million and decreased $19.1 million to $21.6 million, for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019, primarily due to lower overall sales volumes as SJE did not renew several contracts that have expired over the last twelve months. Partially offsetting this 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 increase of $2.1 million and $3.0 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019.

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.

Operating Revenues - Energy Services
Combined revenues for Energy Services, net of intercompany transactions, decreased $11.9 million, or 81.9%, to $2.6 million, and decreased $16.1 million, or 62.2%, to $9.8 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019. The significant drivers for the overall change were as follows:
Revenues from on-site energy production at Marina, net of intercompany transactions, decreased $12.3 million to $1.8 million and decreased $16.8 million to $8.1 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019, primarily due to lack of revenues from MTF and ACB subsequent to the sale that was completed February 18, 2020 (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 - Energy Group & Energy Services

Gross margin for the Energy Group and Energy Services businesses is a GAAP measure and 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 (loss), revenue is reflected in Operating Revenues - Nonutility and the costs are reflected in Cost of Sales - Nonutility. As discussed in Note 1 to the condensed consolidated financial statements, 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 (loss).

Gross margin is broken out between Energy Group and Energy Services, which are comprised of a group of segments as described in Note 6 to the condensed consolidated financial statements.

Gross Margin - Energy Group

Combined gross margins for Energy Group increased $10.4 million to $9.2 million and increased $20.8 million to $19.2 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019. The significant drivers for the overall change were as follows:

Gross margin from the wholesale energy operations at SJRG increased $8.5 million to $8.7 million, and increased $18.4 million to $18.8 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019, primarily due to higher margins on daily energy trading activities, along with a refund received from a third party gas supplier as discussed in Note 1 to the condensed consolidated financial statements. Also impacting the comparative period gross margins 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 $3.2 million and a total increase of $7.7 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019.
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The wholesale energy operations at SJRG are expected 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.

Gross margin from SJE’s retail electric operations increased $1.9 million to $0.4 million and increased $2.3 million to $0.3 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019, 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 increase of $2.1 million and $3.0 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019. Partially offsetting this increase is overall lower sales volumes as SJE did not renew several contracts that have expired over the last twelve months.

Gross Margin - Energy Services
Combined gross margins for Energy Services decreased $9.9 million to $2.9 million and decreased $12.7 million to $9.5 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019. The significant drivers for the overall change were as follows:
Gross margin from on-site energy production at Marina decreased $10.2 million to $2.0 million and decreased $13.4 million to $7.8 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019, primarily due to lack of margin from MTF and ACB subsequent to the sale that was completed February 18, 2020 (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,
2020 vs. 2019
Six Months Ended June 30,
2020 vs. 2019
SJI Utilities:
   SJG Utility Operations$160  $(314) 
   ETG Utility Operations1,852  8,350  
   ELK Utility Operations(179) (105) 
        Subtotal SJI Utilities1,833  7,931  
Nonutility: 
Energy Group:
   Wholesale Energy Operations64  118  
   Retail Electric Operations38  (2) 
      Subtotal Energy Group102  116  
Energy Services:
   On-Site Energy Production(5,789) (7,573) 
   Appliance Service Operations(16) 99  
Subtotal Energy Services(5,805) (7,474) 
Midstream229  228  
Corporate & Services and Intercompany Eliminations(311) (5,223) 
Total Operations Expense$(3,952) $(4,422) 


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Operations Expense

The change in SJG utility operations expense for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019, was not significant. Changes in SJG utility operations expense are typically due to the operation of SJG’s CLEP and EEP, for which costs are recovered on a dollar-for-dollar basis; therefore, SJG experiences an offsetting change in revenue.

ETG utility operations expense increased $1.9 million and $8.4 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019, primarily due to the operation of ETG's RAC, which experienced an aggregate net increase. Such costs are recovered on a dollar-for-dollar basis; therefore, ETG experienced an offsetting increase in revenue during the three and six months ended June 30, 2020, respectively, compared with the same periods in the prior year. Also contributing to the increase was higher expenses in various areas, including those associated with corporate support, governance and compliance costs.

Combined operations expense for the Energy Group and Energy Services decreased $5.7 million and $7.4 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019, primarily due to the sale of MTF and ACB (see Note 1 to the condensed consolidated financial statements).

The change in operations expense for the Corporate & Services segment for the three months ended June 30, 2020 compared with the same period in 2019 was not significant. The Corporate & Services segment had a $5.2 million decrease in Operations Expense for the six months ended June 30, 2020 compared with the same period in 2019, primarily due to less severance and other employee separation costs and less costs incurred to exit the TSA, which occurred in March 2020, along with intercompany eliminations.

Maintenance - The change in maintenance expense for the three and six months ended June 30, 2020 compared with the same periods in 2019 was not significant.

Depreciation - Depreciation increased $3.3 million and $6.1 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019, primarily due to increased investment in property, plant and equipment by the gas utility operations of SJG and ETG. This was partially offset by reduced depreciation expense at Marina as a result of the MTF & ACB sale (see Note 1 to the condensed consolidated financial statements).

Energy and Other Taxes - The change in energy and other taxes for the three and six months ended June 30, 2020 compared with the same periods in 2019 was not significant.

Other Income and Expense - Other income and expense increased $3.6 million for the three months ended June 30, 2020 compared with the same period in 2019, primarily due to higher investment performance and higher AFUDC income at SJG. The change in other income and expense for the six months ended June 30, 2020 compared with the same period in 2019 was not significant, as the increases in the three month comparative period change noted above were offset with similar decreases in the first quarter of 2020 compared to the same period in 2019.

Interest Charges – Interest charges increased $0.2 million and $4.0 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019, primarily due to interest incurred on higher amounts of long-term debt outstanding at SJI and SJG.

Income Taxes  Income tax benefit decreased $4.5 million for the three months ended June 30, 2020 compared to the same period in 2019 primarily due to a lower loss before income taxes during the second quarter of 2020. Income tax expense increased $12.9 million for the six months ended June 30, 2020 compared with the same period in 2019, primarily due to the increase in income before income taxes in 2020 compared with the prior year, along with a one-time tax adjustment at SJG resulting from SJG's Stipulation of Settlement with the BPU as part of its recent rate case filing that occurred in the first quarter of 2020 (see Note 7 to the condensed consolidated financial statements).

Equity in Earnings of Affiliated Companies The change in equity in earnings of affiliated companies for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019 was not significant.

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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 $206.3 million and $216.1 million in the first six months of 2020 and 2019, 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. Cash flows provided by operating activities in the first six months of 2020 produced less net cash than the same period in 2019, primarily due to lower revenues on fuel supply management contracts at SJRG (see "Operating Revenues-Energy Group") along with the timing of a refund from a third party gas supplier that was received in July (see Note 1 to the condensed consolidated financial statements). These changes are partially offset with higher ETG revenues due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019 (see "ETG Utility Operations").

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 2020 and 2019 amounted to $135.1 million and $222.2 million, respectively. We estimate the cash outflows for investing activities, net of refinancings and returns/advances on investments from affiliates, for fiscal years 2020, 2021 and 2022 at SJI to be approximately $491.3 million, $777.3 million and $650.1 million, respectively. The high level of investing activities for 2020, 2021 and 2022 is due to the accelerated infrastructure investment programs and future capital expenditures at SJG and ETG, projected investment in PennEast in 2021 and 2022, and investments in future renewable energy projects. 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 2020 and 2019 were as follows:

SJI received approximately $97.0 million from the sale of MTF and ACB during the six months ended June 30, 2020. See Note 1 to the condensed consolidated financial statements.

During the six months ended June 30, 2020, SJI paid $2.8 million to acquire ESNJ-AL-Somerspoint LLC, ESNJ-AL-Hamiltonsquare LLC, and ESNJ-AL-BrownsMills LLC, which own and operate solar-energy projects in New Jersey. See Note 17 to the condensed consolidated financial statements.

SJI received approximately $7.2 million and $24.3 million during the first six months of 2020 and 2019, respectively, from the sale of certain solar assets. See Note 1 to the condensed consolidated financial statements.

During the first six months of 2020 and 2019, SJI made net investments in unconsolidated affiliates of $2.0 million and $3.9 million, respectively.

During the first six months of 2019, SJI received $15.6 million as an adjustment to the purchase price related to the Acquisition.

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.


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Credit facilities and available liquidity as of June 30, 2020 were as follows (in thousands):

CompanyTotal FacilityUsageAvailable LiquidityExpiration Date
SJI:    
SJI Syndicated Revolving Credit Facility$500,000  $28,000  (A)$472,000  August 2022
Term Loan Credit Agreement150,000  150,000  —  March 2021
Total SJI650,000  178,000  472,000   
SJG:
Commercial Paper Program/Revolving Credit Facility200,000  161,300  (B)38,700  August 2022
Uncommitted Bank Line10,000  —  10,000  September 2020 (D)
Total SJG210,000  161,300  48,700  
ETG/SJIU:
ETG/SJIU Revolving Credit Facility200,000  124,900  (C)75,100  April 2022
Total$1,060,000  $464,200  $595,800  

(A) Includes letters of credit outstanding in the amount of $9.6 million, which is used to enable SJE to market retail electricity as well as for various construction and operating activities.
(B) Includes letters of credit outstanding in the amount of $0.8 million, which supports the remediation of environmental conditions at certain locations in SJG's service territory.
(C) Includes letters of credit outstanding in the amount of $1.0 million, which supports ETG's construction activity.
(D) SJG intends to renew this facility prior to expiration.

For SJI, the $464.2 million of usage in the table above, less the letters of credit noted in (A)-(C) above, equal the $452.8 million recorded as Notes Payable on the condensed consolidated balance sheet as of June 30, 2020. For SJG, the $161.3 million of usage in the table above, less the letters of credit noted in (B) above, equal the $160.5 million recorded as Notes Payable on the condensed balance sheet as of June 30, 2020.

SJI's Five Year Revolving Credit Agreement ("Credit Agreement") allows SJI to borrow in the form of revolving loans a total aggregate amount of $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.

SJIU and ETG (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. See Note 10 to the condensed consolidated financial statements.


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The Utilities' (including SJG) 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, 2020. Borrowings under these credit facilities are at market rates.

SJI's weighted average interest rate on these borrowings (inclusive of SJG, ETG and SJIU), which changes daily, was 1.27% and 3.45% at June 30, 2020 and 2019, respectively. SJG's weighted average interest rate on these borrowings, which changes daily, was 0.74% and 2.60% at June 30, 2020 and 2019, respectively.

SJI's average borrowings outstanding under these credit facilities (inclusive of SJG, ETG and SJIU), not including letters of credit, during the six months ended June 30, 2020 and 2019 were $595.3 million and $347.2 million, respectively. The maximum amounts outstanding under these credit facilities, not including letters of credit, during the six months ended June 30, 2020 and 2019 were $872.2 million and $687.2 million, respectively.

SJG's average borrowings outstanding under these credit facilities during the six months ended June 30, 2020 and 2019 were $146.3 million and $72.5 million, respectively. The maximum amount outstanding under its credit facilities during the six months ended June 30, 2020 and 2019 were $171.7 million and $108.0 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 and the Utilities (including SJG) principal credit facilities are provided by a syndicate of banks. The NPA for Senior Unsecured Notes issued by SJI, and the SJG bank facilities, contain 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 these covenants as of June 30, 2020.

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.

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 Medium Term Notes, 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.

2020 Activity:

Debt Issuances/Paydowns

On March 26, 2020, SJI entered into an unsecured $150.0 million term loan agreement, which bears interest at variable rates. The maturity date of the term loan is March 25, 2021, and the loan is recorded in Notes Payable on the condensed consolidated balance sheets as of June 30, 2020. The proceeds of the loan were used for general corporate purposes.

On April 3, 2020, SJI entered into an unsecured $200.0 million term loan credit agreement, which bears interest at variable rates. The maturity of the term loan is October 31, 2021. Proceeds from the debt were used to pay down the following:

$50.0 million outstanding on the SJI Revolving credit facility, which was previously recorded in Notes Payable on the condensed consolidated balance sheets.
$100.0 million SJI Term Loan, which was previously recorded in Notes Payable on the condensed consolidated balance sheets and due to mature in September 2020.
$50.0 million SJI variable rate note, which was previously recorded in current portion of long-term debt on the condensed consolidated balance sheets.

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On April 16, 2020, SJG entered into a Note Purchase Agreement which provides for SJG to issue and sell its Senior Secured Notes, Series F, 2020 in the aggregate principal amount of $525.0 million in three Tranches, as follows: (a) Senior Secured Notes, Series F, 2020, Tranche A due April 16, 2030 in the aggregate principal amount of $150.0 million; (b) Senior Secured Notes, Series F, 2020, Tranche B due April 16, 2050 in the aggregate principal amount of $250.0 million; and (c) Senior Secured Notes, Series F, 2020, Tranche C expected to be due October 1, 2050 in the aggregate principal amount of $125.0 million. All of the Tranche A Notes and the Tranche B Notes were issued on April 16, 2020, and bear interest at 3.28% and 3.93%, respectively. The Tranche C Notes are expected to be issued on October 1, 2020.

On April 26, 2020, SJG used proceeds from Tranche A and B discussed above to pay off $400.0 million principal amount outstanding on its term loan credit agreement, which was previously recorded in current portion of long-term debt on the condensed consolidated balance sheets.

On May 27, 2020, SJI entered into a Note Purchase Agreement which provides for the Company to issue an aggregate of $200.0 million of senior unsecured notes in two tranches, as follows: (a) Senior Notes, Series 2020A due July 30, 2027, in the aggregate principal amount of $75.0 million (the "Series 2020A Notes"); and (b) Senior Notes, Series 2020B due July 30, 2030, in the aggregate principal amount of $125.0 million (the "Series 2020B Notes"). The Company issued the Notes on July 30, 2020. The Series 2020A Notes will bear interest at 3.71% and the Series 2020B Notes will bear interest at 3.91%. The proceeds from this issuance were used to pay off the unsecured $200.0 million term loan credit agreement issued in April 2020, which was paid off on July 31, 2020.

ATM Equity Offering

In April 2020, SJI entered into an ATM Equity Offering Sales Agreement (the "Sales Agreement") to sell, from time to time, shares of the Company’s common stock, par value $1.25 per share, having an aggregate sale price up to $200.0 million, through an “at-the-market” equity offering program. Pursuant to the Sales Agreement, the shares of common stock were to be offered and sold through any of the named sales agents in negotiated transactions or transactions that are deemed to be “at-the-market” offerings. In June 2020, 8,122,283 shares were sold pursuant to the Sales Agreement at an average market price of approximately $24.62 for total net proceeds of $198.0 million after deducting commissions and other general & administrative expenses. These sales exhausted the shares that were available for sale under the Sales Agreement. The Company intends to use the net proceeds from this offering for general corporate purposes.

2019 Activity:

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.

During the six months ended June 30, 2019, SJI repaid $475.0 million aggregate principal amount of Floating Rate Senior Notes, Series 2018D.

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.

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

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


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SJI’s capital structure was as follows:
 As of June 30, 2020As of December 31, 2019
Equity34.7 %29.6 %
Long-Term Debt55.9 %52.8 %
Short-Term Debt9.4 %17.6 %
Total100.0 %100.0 %

SJI has paid dividends on its common stock for 69 consecutive years and has increased that dividend each year for the last 21 years.  SJI’s current long-term goals are to grow the dividend at a rate consistent with earnings growth over the long term, subject to the approval of its Board of Directors, with a targeted 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 2020 and 2019 amounted to net cash outflows of $16.3 million and $11.6 million, respectively. Total net cash outflows for remediation projects are expected to be $43.2 million, $58.3 million and $69.5 million for 2020, 2021 and 2022, 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, 2019, certain environmental costs are subject to recovery from ratepayers.

Standby Letters of Credit - See Notes 10 and 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, 2019, except for the following:

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. As of March 2020, SJG had determined that the project under construction will be abandoned. SJG requested that the project costs spent to date of $10.1 million be recovered as a regulatory asset within its March 2020 rate case petition filed with the BPU. As such, the amount has been reclassified from Utility Plant and is presented as a Regulatory Asset within the condensed consolidated balance sheets at June 30, 2020. The matter is currently pending with the BPU. See Note 8 to the condensed consolidated financial statements.

Both SJI and SJG entered into agreements to issue or pay off short-term and long-term debt. See "Cash Flows from Financing Activities" above, along with Notes 10 and 14 to the condensed consolidated financial statements.

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 3 to the condensed consolidated financial statements.

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.

PennEast - See Note 3 to the condensed consolidated financial statements.
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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,
2020201920202019
Utility Throughput – dts:
Firm Sales -
Residential3,767  2,530  13,979  15,508  
Commercial874  864  3,271  3,987  
Industrial20  64  128  259  
Cogeneration & Electric Generation128  56  209  139  
Firm Transportation -
Residential160  123  610  751  
Commercial982  966  3,331  3,673  
Industrial2,196  2,190  4,966  4,980  
Cogeneration & Electric Generation571  1,025  1,439  2,367  
Total Firm Throughput8,698  7,818  27,933  31,664  
Interruptible Sales—  —    
Interruptible Transportation223  227  516  547  
Off-System Sales1,194  2,478  6,732  7,541  
Capacity Release20,726  24,903  38,790  42,234  
Total Throughput - Utility30,841  35,426  73,972  81,992  

Throughput – Gas Utility Operations - Total gas throughput decreased 4.6 MMdts and 8.0 MMdts for the three months and six months ended June 30, 2020, respectively, compared with the same period in 2019, primarily due to lower demand and warmer weather.


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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,
2020201920202019
Net Income Impact:    
CIP – Weather Related$(2.9) $4.4  $11.0  $5.0  
CIP – Usage Related0.3  (0.8) 7.4  (0.8) 
Total Net Income Impact$(2.6) $3.6  $18.4  $4.2  
Weather Compared to 20-Year Average19.6% Colder133.3% Colder13.2% Warmer271.9% Colder
Weather Compared to Prior Year72.9% Colder74.0% Warmer6.3% Warmer4.6% Warmer

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,
2020 vs. 2019
Six Months Ended June 30,
2020 vs. 2019
Operations160  $(314) 
Maintenance1,481  $1,909  
Depreciation948  $1,910  
Energy and Other Taxes(84) $(458) 

Operations - See SJI's Management Discussion section above.

Maintenance - Maintenance expense increased $1.5 million and $1.9 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019, primarily due to an increase in RAC amortization expense resulting from increased environmental expenditures.

Depreciation - Depreciation expense increased $0.9 million and $1.9 million for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019, 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, 2020, respectively, compared with the same periods in 2019 was not significant.

Other Income and Expense - Other Income and Expense increased $2.9 million for the three months ended June 30, 2020 compared with the same period in 2019, primarily due to higher investment performance and higher AFUDC income. The change in other income and expense for the six months ended June 30, 2020 compared with the same period in 2019 was not significant, as the increases in the three month comparative period change noted above were offset with similar decreases in the first quarter of 2020 compared to the same period in 2019.

Interest Charges – The change in interest charges for the three and six months ended June 30, 2020, respectively, compared with the same periods in 2019 was not significant.

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. Also, during the first quarter of 2020, SJG recorded $1.2 million in tax expense related to a one-time tax adjustment resulting from its Stipulation of Settlement with the BPU, as part of its recent rate case filing (see Note 7 to the condensed consolidated financial statements).

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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 $125.5 million and $126.3 million in the first six months of 2020 and 2019, 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. Cash flows provided by operating activities in the first six months of 2020 compared to the same period in 2019, did not change significantly.

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 2020, 2021 and 2022 to be approximately $283.3 million, $320.2 million and $327.1 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 Medium Term Notes, 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.

See SJI's Management Discussion section above.

SJI contributed equity infusions of $9.5 million to SJG during the six months ended June 30, 2020. There were no equity infusions during the six months ended June 30, 2019.

SJG’s capital structure was as follows:

 As of June 30, 2020As of December 31, 2019
Common Equity51.1 %49.0 %
Long-Term Debt41.9 %43.3 %
Short-Term Debt7.0 %7.7 %
Total100.0 %100.0 %



COMMITMENTS AND CONTINGENCIES:

Costs for remediation projects, net of recoveries from ratepayers, for the first six months of 2020 and 2019 amounted to net cash outflows of $16.2 million and $11.5 million, respectively. Total net cash outflows for remediation projects are expected to be $34.8 million, $31.5 million and $23.3 million for 2020, 2021 and 2022, 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, 2019, certain environmental costs are subject to recovery from ratepayers.

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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, 2020, averaged $93.2 million annually and totaled $404.7 million over the contracts’ lives.  Approximately 28% 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.

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, 2019, other than the BL England facility (see SJI's Management Discussion section above).

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 on expected future purchases and sales due to commodity 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) of $(1.3) million and $(0.1) million for the three months ended June 30, 2020 and 2019, respectively, and $(1.6) million and $(12.2) million for the six months ended June 30, 2020 and 2019, respectively.which are included with realized (losses) in Operating Revenues - Nonutility on the condensed consolidated statements of income (loss). 

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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, 2020 is as follows (in thousands):

Assets    
Source of Fair ValueMaturity
 < 1 Year
Maturity
 1 -3 Years
Maturity
Beyond 3 Years
Total
Prices actively quoted$9,494  $1,354  $20  $10,868  
Prices provided by other external sources9,707  4,552  1,332  15,591  
Prices based on internal models or other valuation methods12,724  3,195  1,033  16,952  
Total$31,925  $9,101  $2,385  $43,411  
Liabilities    
Source of Fair ValueMaturity
 <1 Year
Maturity
1 -3 Years
Maturity
Beyond 3 Years
Total
Prices actively quoted$13,771  $937  $296  $15,004  
Prices provided by other external sources8,259  1,654  1,650  11,563  
Prices based on internal models or other valuation methods3,933  683  85  4,701  
Total$25,963  $3,274  $2,031  $31,268  

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 31.3 MMdts with a weighted average settlement price of $2.45 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 94.1 MMdts with a weighted average settlement price of $(0.49) 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 36.4 MMdts with a weighted average settlement price of $1.64 per dt.
Volumes of electric included in the table above under "Prices based on internal models or other valuation methods" are less than 0.1 MMmwh with a weighted average settlement price of $33.07 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, 2020$9,964  
Contracts Settled During the Six Months Ended June 30, 2020, Net(7,048) 
Other Changes in Fair Value from Continuing and New Contracts, Net9,227  
  
Net Derivatives — Energy Related Assets, June 30, 2020$12,143  

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, 2020 was $652.8 million and averaged $1.0 billion during the first six months of 2020. A hypothetical 100 basis point (1%) increase in interest rates on our average variable-rate debt outstanding would result in a $7.7 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: 2019 - 64 b.p. decrease; 2018 - 91 b.p. increase; 2017 - 82 b.p. increase; 2016 - 47 b.p. increase; and 2015 - 14 b.p. increase. At June 30, 2020, our average interest rate on variable-rate debt was 2.15%.

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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, 2020, the interest costs on $2.5 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, 2020, SJI’s active interest rate swaps were as follows:

Notional AmountFixed Interest RateStart DateMaturityObligor
$20,000,000  3.049%3/15/20173/15/2027SJI
$20,000,000  3.049%3/15/20173/15/2027SJI
$10,000,000  3.049%3/15/20173/15/2027SJI
$12,500,000  3.530%12/1/20062/1/2036SJG
$12,500,000  3.430%12/1/20062/1/2036SJG

Credit Risk - As of June 30, 2020, SJI had approximately $10.5 million, or 24.1%, of the current and noncurrent Derivatives – Energy Related Assets transacted with two counterparties. These counterparties are investment-grade rated.

As of June 30, 2020, SJRG had $45.0 million of Accounts Receivable under sales contracts. Of that total, 48.7% 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, 2020 are as follows (in thousands):

Assets   
Source of Fair ValueMaturity
< 1 Year
Maturity
1 - 3 Years
Total
Prices actively quoted$225  $144  $369  
Prices provided by other external sources107  —  107  
Prices based on internal models or other valuable methods4,366  —  4,366  
Total$4,698  $144  $4,842  

Liabilities   
 MaturityMaturity 
Source of Fair Value< 1 Year1 - 3 YearsTotal
Prices actively quoted$2,454  $—  $2,454  
Prices provided by other external sources196  —  196  
Prices based on internal models or other valuable methods —   
Total$2,651  $—  $2,651  

Contracted volumes of SJG's NYMEX contracts are 9.8 MMdts with a weighted-average settlement price of $2.38 per dt. Contracted volumes of SJG's Basis contracts are 2.5 MMdts with a weighted-average settlement price of $0.26 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, 2020$2,143  
Contracts Settled During the Six Months ended June 30, 2020, Net(2,774) 
Other Changes in Fair Value from Continuing and New Contracts, Net2,822  
Net Derivatives — Energy Related Assets, June 30, 2020$2,191  
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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, 2020, was $160.5 million and averaged $397.5 million during the first six months of 2020. A hypothetical 100 basis point (1%) increase in interest rates on SJG's average variable-rate debt outstanding would result in a $2.9 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: 2019 - 73 b.p. decrease; 2018 - 91 b.p. increase; 2017 - 91 b.p. increase; 2016 - 19 b.p. increase; and 2015 - 20 b.p. increase. As of June 30, 2020, SJG's average interest rate on variable-rate debt was 1.77%.

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, 2020, the interest costs on $971.4 million of long-term debt (including current portion) was either at a fixed-rate or hedged via an interest rate derivative.

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) and 15d-15(e) under the Exchange Act) as of June 30, 2020. Based on that evaluation, the principal executive officer and principal financial officer of each of SJI and SJG concluded that, as of June 30, 2020, the disclosure controls and procedures employed at SJI and SJG, respectively, were effective.

Changes in Internal Control Over Financial Reporting

There was no change in SJI’s or SJG's internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, during the quarter ended June 30, 2020, that has materially affected, or is reasonably likely to materially affect, SJI’s and SJG'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, Litigation.

Item 1A. Risk Factors

Other than described below, 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, 2019.

Public health crises and epidemics or pandemics, such as a novel coronavirus, could materially and adversely affect our business, operations and financial condition. Our business could be materially and adversely affected by a public health crisis or the widespread outbreak of contagious disease, such as the recent outbreak of respiratory illness caused by a novel coronavirus (COVID-19), which has been declared a pandemic by the World Health Organization in March 2020. In recent weeks, the continued spread of COVID-19 across the world has led to disruption and volatility in the global capital markets, which increases the cost of capital and adversely impacts access to capital. Additionally, our reliance on third-party suppliers, contractors, service providers, and commodity markets exposes us to possibility of delay or interruption of our operations. For the duration of the outbreak of COVID-19, legislative and government action limits our ability to collect on overdue accounts, and prohibits us from shutting off services, which may cause a decrease in our cash flows or net income. We have been executing our business continuity plans since the outbreak of COVID-19 and are closely monitoring potential impacts due to COVID-19 pandemic responses at the state and federal level. As expected, we have incurred operating costs for emergency supplies, cleaning services, enabling technology and other specific needs during this crisis which have traditionally been recognized as prudent expenditures by our regulators. The effects of the pandemic also may have a material adverse impact on our ability to collect accounts receivable as customers face higher liquidity and solvency risks. Currently, the impact of the pandemic to the collectability of our accounts receivable is an unknown and continues to be monitored, but such receivables have traditionally been included in rate recovery. Our infrastructure investment programs continue to move forward, and construction activity that was delayed in accordance with directives from the Governor of New Jersey have since continued; however, to the extent the pandemic worsens or a similar directive is put in place in the future for a long period of time, our capital projects could be significantly impacted. It is impossible to predict the effect of the continued spread of the coronavirus in the communities we service. Should the coronavirus continue to spread or not be contained, our business, financial condition and results of operations could be materially impacted, including impairment of goodwill or access to capital markets, which in turn may have a negative effect on the market price of our common stock.




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Item 6. Exhibits
(a)  Exhibits


Exhibit No.Description
  
ATM Equity Offering Sales Agreement, dated as of April 6, 2020, for SJI (incorporated by reference from Exhibit 1.1 of Form 8-K of SJI as filed April 6, 2020).
SJI By-Laws effective April 24, 2020 (incorporated by reference from Exhibit 3.1 of Form 8-K of SJI as filed April 29, 2020).
Second Supplemental Indenture, dated as of April 16, 2020, for SJG (incorporated by reference from Exhibit 4.1 of Form 8-K of SJG as filed April 20, 2020).
Form of Senior Secured Note, Series F, 2020, Tranche A for SJG (incorporated by reference from Exhibit 4.2 of Form 8-K of SJG as filed April 20, 2020).
Form of Senior Secured Note, Series F, 2020, Tranche B for SJG (incorporated by reference from Exhibit 4.3 of Form 8-K of SJG as filed April 20, 2020).
Form of Senior Secured Note, Series F, 2020, Tranche C for SJG (incorporated by reference from Exhibit 4.4 of Form 8-K of SJG as filed April 20, 2020).
Credit Agreement, dated as of April 3, 2020, for SJI (incorporated by reference from Exhibit 10.1 of Form 8-K of SJI as filed April 6, 2020).
Third Amendment to Two-Year Revolving Credit Agreement and Extension Agreement, dated as of April 29, 2020, for ETG, ELK, and SJIU (Borrowers) and SJI (Guarantor) (incorporated by reference from Exhibit 10.1 of Form 8-K of SJI as filed May 4, 2020).
Note Purchase Agreement, dated as of May 27, 2020, for SJI (incorporated by reference from Exhibit 10.1 of Form 8-K of SJI as filed May 29, 2020).
Note Purchase Agreement, dated as of April 16, 2020, for SJG (incorporated by reference from Exhibit 10.1 of Form 8-K of SJG as filed April 20, 2020).
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).
  
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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).
Third Amendment to the Note Purchase Agreement dated as of June 28, 2012, for SJI, dated as of May 27, 2020 (incorporated by reference from Exhibit 99.1 of Form 8-K of SJI as filed May 29, 2020).
Third Amendment to the Note Purchase Agreement dated as of August 16, 2017, for SJI, dated as of May 27, 2020 (incorporated by reference from Exhibit 99.2 of Form 8-K of SJI as filed May 29, 2020).
Second Amendment to the Note Purchase Agreement dated as of April 25, 2018, for SJI, dated as of May 27, 2020 (incorporated by reference from Exhibit 99.3 of Form 8-K of SJI as filed May 29, 2020).
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, 2020, filed with the Securities and Exchange Commission on August 5, 2020 formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income/(Loss); (ii) the Condensed Consolidated Statements of Comprehensive Income/(Loss); (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, 2020, filed with the Securities and Exchange Commission on August 5, 2020 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.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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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 5, 2020By:/s/ Steven R. Cocchi
  Steven R. Cocchi
  Senior Vice President, Chief Strategy and Development Officer, and Interim 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 5, 2020By:/s/ Steven R. Cocchi
  Steven R. Cocchi
  Treasurer
(Principal Financial Officer)

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