SOUTH JERSEY INDUSTRIES INC - Quarter Report: 2022 March (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 March 31, 2022
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. | ||||||||
| 1-6364 | South Jersey Industries, Inc. | New Jersey | 22-1901645 | ||||||||
| 000-22211 | South Jersey Gas Co | New Jersey | 21-0398330 | ||||||||
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 Jersey | 08037 | (609) | 561-9000 | ||||||||||||||
South Jersey Gas Co | 1 South Jersey Plaza | Folsom | New Jersey | 08037 | (609) | 561-9000 | ||||||||||||||
Securities registered pursuant to Section 12(b) of the Act:
South Jersey Industries, Inc.
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||||||
| Common Stock - $1.25 par value per share | SJI | New York Stock Exchange | ||||||
| 5.625% Junior Subordinated Notes due 2079 | SJIJ | New York Stock Exchange | ||||||
| Corporate Units | SJIV | New York Stock Exchange | ||||||
South Jersey Gas Co
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||||||
| None | N/A | N/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 filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | ||||||||||||
| Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||
| South Jersey Gas Co: | |||||||||||||||||
| Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☒ | ||||||||||||
| Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||
If an emerging growth company, indicate by check mark if either registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether either registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
South Jersey Industries, Inc. (SJI) common stock ($1.25 par value) outstanding as of May 1, 2022 was 122,407,427 shares. South Jersey Gas Company common stock ($2.50 par value) outstanding as of May 1, 2022 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 an indirect wholly-owned subsidiary of SJI 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 I | FINANCIAL INFORMATION | Page No. | ||||||
| Item 1. | Financial Statements (Unaudited) | |||||||
| South Jersey Industries, Inc. | ||||||||
| South Jersey Gas Company | ||||||||
South Jersey Industries, Inc. and South Jersey Gas Company - Combined | ||||||||
Note 10. Lines of Credit & Short-Term Borrowings | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | OTHER INFORMATION | |||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 6. | ||||||||
GLOSSARY OF TERMS AND ABBREVIATIONS
| ACB | ACB Energy Partners, LLC | ||||
| ACLE | AC Landfill Energy, LLC | ||||
| ADIT | Accumulated Deferred Income Taxes | ||||
| AEP | Applied Energy Partners, LLC | ||||
| AFUDC | Allowance for Funds During Construction | ||||
| AIRP | Accelerated Infrastructure Replacement Program | ||||
| AMA | Asset Management Agreement | ||||
| Annadale | Annadale Community Clean Energy Projects LLC | ||||
| AOCL | Accumulated Other Comprehensive Loss | ||||
| ARO | Asset Retirement Obligation | ||||
| ASC | Accounting Standards Codification | ||||
| ASU | Accounting Standards Update | ||||
| ATM | At-The-Market | ||||
| BCLE | BC Landfill Energy, LLC | ||||
| BGSS | Basic Gas Supply Service | ||||
| BPU | New Jersey Board of Public Utilities | ||||
| Bronx Midco | Bronx Midco, LLC | ||||
| CARES Act | Coronavirus Aid, Relief and Economic Security Act of 2020 | ||||
| Catamaran | Catamaran Renewables, LLC | ||||
| CBA | Collective Bargaining Agreement | ||||
| CEGR | Compounded Earnings Annual Growth Rate | ||||
| CEP | Clean Energy Program (ETG) | ||||
| CHP | Combined Heat and Power | ||||
| CIP | Conservation Incentive Program | ||||
| CLEP | Clean Energy Program (SJG) | ||||
| CODM | Chief Operating Decision Maker | ||||
| COVID-19 | A highly contagious respiratory disease caused by the SARS-CoV-2 virus | ||||
| DRP | Dividend Reinvestment Plan | ||||
| dt | Decatherm | ||||
| dts/d | Decatherms per day | ||||
| EDIT | Excess Deferred Income Taxes | ||||
| EEP | Energy Efficiency Program | ||||
| EET | Energy Efficiency Tracker | ||||
| EGR | Earnings Growth Rate | ||||
| ELK | Elkton Gas Company | ||||
| EMI | Energy & Minerals, Inc. | ||||
| EMP | Energy Master Plan | ||||
| EnerConnex | EnerConnex, LLC | ||||
| Energenic | Energenic US, LLC | ||||
| EnergyMark | EnergyMark, LLC | ||||
| EPS | Earnings Per Share | ||||
| ERISA | Employee Retirement Income Security Act of 1974 | ||||
| ETG | Elizabethtown Gas Company | ||||
| ETG Acquisition | The Company's acquisition of the assets of Elizabethtown Gas Company, effective July 1, 2018, from Pivotal Utility Holdings, Inc., a subsidiary of Southern Company Gas | ||||
4
| FASB | Financial Accounting Standards Board | ||||
| FERC | Federal Energy Regulatory Commission | ||||
| GAAP | Generally Accepted Accounting Principles for financial reporting in the United States | ||||
| IAM | International Association of Machinists and Aerospace Workers | ||||
| IBEW | International Brotherhood of Electrical Workers | ||||
| IIP | Infrastructure Investment Programs | ||||
| ITC | Investment Tax Credit | ||||
| LIBOR | London Interbank Offer Rate | ||||
| LL | Lifeline Credit and Tenants Assistance Program | ||||
| LMP | Locational Marginal Price | ||||
| Marina | Marina Energy, LLC | ||||
| Merger; Merger Agreement | Agreement and plan of merger signed by SJI with NJ Boardwalk Holdings LLC and Boardwalk Merger Sub, Inc. | ||||
| Midstream | SJI Midstream, LLC | ||||
| Millennium | Millennium Account Services, LLC | ||||
| MPSC | Maryland Public Service Commission | ||||
| MMdts | One million decatherms | ||||
| MMmWh | One million megawatt hours | ||||
| Morie | The Morie Company, Inc. | ||||
| MTF | Marina Thermal Facility | ||||
| MTN | Medium Term Notes | ||||
| MW | Megawatt | ||||
| MWh | Megawatt-hours | ||||
| NCI | Noncontrolling Interests | ||||
| NOL | Net Operating Loss | ||||
| Non-GAAP | The financial measures that are not prepared in accordance with U.S. GAAP | ||||
| NPA | Note Purchase Agreement | ||||
| NJEDA | New Jersey Economic Development Authority | ||||
| NYMEX | New York Mercantile Exchange | ||||
| OSMC | On-System Margin Sharing Credit | ||||
| OSS | Off-System Sales | ||||
| PennEast | PennEast Pipeline, LLC | ||||
| Potato Creek | Potato Creek, LLC | ||||
| RAC | Remediation Adjustment Clause | ||||
| Red River | Red River RNG, LLC | ||||
| REV | REV LNG, LLC | ||||
| RNG | Renewable Natural Gas | ||||
| ROE | Return on Equity | ||||
| ROU | Right of Use | ||||
| SBC | Societal Benefits Clause | ||||
| SCLE | SC Landfill Energy, LLC | ||||
| SEC | Securities and Exchange Commission | ||||
| SERP | Supplemental Executive Retirement Plan | ||||
| SHARP | Storm Hardening and Reliability Program | ||||
| SJE | South Jersey Energy Company | ||||
| SJEI | SJI Energy Investments, LLC | ||||
| SJES | South Jersey Energy Solutions, LLC | ||||
5
| SJESP | South Jersey Energy Service Plus, LLC | ||||
| SJEX | South Jersey Exploration, LLC | ||||
| SJF | South Jersey Fuel, Inc. | ||||
| SJG | South Jersey Gas Co or South Jersey Gas Company | ||||
| SJI | South Jersey Industries, Inc., or the Company | ||||
| SJIU | SJI Utilities, Inc. | ||||
| SJRG | South Jersey Resources Group, LLC | ||||
| SRECs | Solar Renewable Energy Credits | ||||
| SXLE | SX Landfill Energy, LLC | ||||
| Tax Reform | Tax Cuts and Jobs Act which was enacted into law on December 22, 2017 | ||||
| TIC | Transportation Initiation Clause | ||||
| TSA | Transition Services Agreement | ||||
| TSR | Total Shareholder Return | ||||
| Utilities | Represents SJI's two utility businesses: SJG, and ETG | ||||
| USF | Statewide Universal Service Fund | ||||
| UWUA | United Workers Union of America | ||||
| VSIP | Voluntary Separation Incentive Program | ||||
| WNC | Weather Normalization Clause | ||||
6
INTRODUCTION
FILING FORMAT
This Quarterly Report on Form 10-Q is a combined report being filed separately by two registrants: South Jersey Industries, Inc. (SJI) and South Jersey Gas Company (SJG). Information relating to SJI or any of its subsidiaries, other than SJG, is filed by SJI on its own behalf. SJG is only responsible for information about itself.
Except where the content clearly indicates otherwise, any reference in the report to "SJI," "the Company," "we," "us" or "our" is to the holding company or SJI and all of its subsidiaries, including SJG, which is a wholly-owned subsidiary of SJI Utilities, Inc. (which is wholly-owned by SJI).
Part 1 - Financial information in this Quarterly Report on Form 10-Q includes separate financial statements (i.e., balance sheets, statements of income, statements of comprehensive income, statements of equity and statements of cash flows) for 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.
7
Item 1. Condensed Consolidated Financial Statements
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands, Except for Per Share Data)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating Revenues: | |||||||||||
| Utility | $ | 490,219 | $ | 402,616 | |||||||
| Nonutility | 334,359 | 271,684 | |||||||||
| Total Operating Revenues | 824,578 | 674,300 | |||||||||
| Operating Expenses: | |||||||||||
| Cost of Sales - (Excluding depreciation and amortization) | |||||||||||
| - Utility | 200,504 | 126,513 | |||||||||
| - Nonutility | 307,764 | 245,061 | |||||||||
| Operations and Maintenance | 78,978 | 70,103 | |||||||||
| Depreciation | 33,957 | 31,812 | |||||||||
| Energy and Other Taxes | 4,775 | 3,983 | |||||||||
| Total Operating Expenses | 625,978 | 477,472 | |||||||||
| Operating Income | 198,600 | 196,828 | |||||||||
| Other Income and Expense | 2,603 | 2,068 | |||||||||
| Interest Charges | (31,579) | (31,459) | |||||||||
| Income Before Income Taxes | 169,624 | 167,437 | |||||||||
| Income Taxes | (40,666) | (41,769) | |||||||||
| Equity in Earnings of Affiliated Companies | 456 | 3,130 | |||||||||
| Income from Continuing Operations | 129,414 | 128,798 | |||||||||
| Loss from Discontinued Operations - (Net of tax benefit) | (70) | (71) | |||||||||
| Net Income | 129,344 | 128,727 | |||||||||
| Less: Income Attributable to Noncontrolling Interests | 135 | 129 | |||||||||
| Net Income Attributable to South Jersey Industries, Inc. | $ | 129,209 | $ | 128,598 | |||||||
| Basic Earnings Per Common Share: | |||||||||||
| Continuing Operations | $ | 1.10 | $ | 1.28 | |||||||
| Discontinued Operations | — | — | |||||||||
| Net Income | 1.10 | 1.28 | |||||||||
| Less: Income Attributable to Noncontrolling Interests | — | — | |||||||||
| Net Income Attributable to South Jersey Industries, Inc. | $ | 1.10 | $ | 1.28 | |||||||
| Average Shares of Common Stock Outstanding - Basic | 118,167 | 100,845 | |||||||||
| Diluted Earnings Per Common Share: | |||||||||||
| Continuing Operations | $ | 1.08 | $ | 1.26 | |||||||
| Discontinued Operations | — | — | |||||||||
| Net Income | 1.08 | 1.26 | |||||||||
| Less: Income Attributable to Noncontrolling Interests | — | — | |||||||||
| Net Income Attributable to South Jersey Industries, Inc. | $ | 1.08 | $ | 1.26 | |||||||
| Average Shares of Common Stock Outstanding - Diluted | 119,747 | 101,937 | |||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
8
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net Income | $ | 129,344 | $ | 128,727 | |||||||
| Other Comprehensive Income, Net of Tax: | |||||||||||
Reclassification of Unrealized Gain on Derivatives - Other to Net Income, net of tax of $(4) and $(4), respectively | 9 | 8 | |||||||||
| Other Comprehensive Income - Net of Tax | 9 | 8 | |||||||||
| Comprehensive Income | 129,353 | 128,735 | |||||||||
| Less: Comprehensive Income Attributable to Noncontrolling Interests | 135 | 129 | |||||||||
| Comprehensive Income Attributable to South Jersey Industries, Inc. | $ | 129,218 | $ | 128,606 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
9
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net Cash Provided by Operating Activities | $ | 306,957 | $ | 198,463 | |||||||
| Cash Flows from Investing Activities: | |||||||||||
| Capital Expenditures | (121,473) | (105,380) | |||||||||
| Investment in Contract Receivables | (5,704) | (6,166) | |||||||||
| Proceeds from Contract Receivables | 3,427 | 3,370 | |||||||||
| Investment in Affiliates | (20,769) | (196) | |||||||||
| Return of Investment in Affiliates | 4,000 | — | |||||||||
| Advances to Affiliates | (12,105) | — | |||||||||
| Net Repayment of Notes Receivable - Affiliates | — | 311 | |||||||||
| Divestiture Working Capital Settlement | — | (267) | |||||||||
| Investment in Subsidiary, Net of Cash Acquired | (5,660) | — | |||||||||
| Other | — | (4,000) | |||||||||
| Net Cash Used in Investing Activities | (158,284) | (112,328) | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Net Repayments of Short-Term Credit Facilities | (243,300) | (425,100) | |||||||||
| Proceeds from Issuance of Long-Term Debt | — | 300,000 | |||||||||
| Principal Repayments of Long-Term Debt | (2,500) | (2,500) | |||||||||
| Payments for Issuance of Long-Term Debt | — | (9,108) | |||||||||
| Proceeds from Sale of Common Stock | 100,380 | 42,272 | |||||||||
| Payments for the Issuance of Common Stock | — | (1,662) | |||||||||
| Capital Distributions to Noncontrolling Interests in Subsidiaries | (130) | — | |||||||||
| Capital Contributions of Noncontrolling Interests in Subsidiaries | 43 | — | |||||||||
| Net Cash Used in Financing Activities | (145,507) | (96,098) | |||||||||
| Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | 3,166 | (9,963) | |||||||||
| Cash, Cash Equivalents and Restricted Cash at Beginning of Period | 29,440 | 41,831 | |||||||||
| Cash, Cash Equivalents and Restricted Cash at End of Period | $ | 32,606 | $ | 31,868 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
10
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
| March 31, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Property, Plant and Equipment: | |||||||||||
| Utility Plant, at original cost | $ | 5,775,603 | $ | 5,682,805 | |||||||
| Accumulated Depreciation | (997,976) | (975,619) | |||||||||
| Nonutility Property and Equipment, at cost | 262,704 | 240,503 | |||||||||
| Accumulated Depreciation | (37,342) | (35,367) | |||||||||
| Property, Plant and Equipment - Net | 5,002,989 | 4,912,322 | |||||||||
| Investments: | |||||||||||
| Available-for-Sale Securities | 37 | 37 | |||||||||
| Restricted | 84 | 686 | |||||||||
| Investment in Affiliates | 53,884 | 38,509 | |||||||||
| Total Investments | 54,005 | 39,232 | |||||||||
| Current Assets: | |||||||||||
| Cash and Cash Equivalents | 32,522 | 28,754 | |||||||||
| Accounts Receivable | 407,313 | 343,835 | |||||||||
| Unbilled Revenues | 74,296 | 87,357 | |||||||||
| Provision for Uncollectibles | (46,969) | (41,763) | |||||||||
| Notes Receivable - Affiliates | 2,995 | 5,695 | |||||||||
| Natural Gas in Storage, average cost | 19,613 | 59,744 | |||||||||
| Materials and Supplies, average cost | 1,082 | 1,053 | |||||||||
| Prepaid Taxes | 12,100 | 33,977 | |||||||||
| Derivatives - Energy Related Assets | 150,133 | 95,041 | |||||||||
| Other Prepayments and Current Assets | 24,271 | 25,269 | |||||||||
| Total Current Assets | 677,356 | 638,962 | |||||||||
| Regulatory and Other Noncurrent Assets: | |||||||||||
| Regulatory Assets | 624,229 | 672,416 | |||||||||
| Derivatives - Energy Related Assets | 52,102 | 22,488 | |||||||||
| Notes Receivable - Affiliates | 79,080 | 64,254 | |||||||||
| Contract Receivables | 47,103 | 45,339 | |||||||||
| Goodwill | 706,960 | 706,960 | |||||||||
| Other | 213,002 | 206,699 | |||||||||
| Total Regulatory and Other Noncurrent Assets | 1,722,476 | 1,718,156 | |||||||||
| Total Assets | 7,456,826 | $ | 7,308,672 | ||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
11
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
| March 31, 2022 | December 31, 2021 | ||||||||||
| Capitalization and Liabilities | |||||||||||
| Equity: | |||||||||||
| Common Stock | $ | 153,009 | $ | 146,675 | |||||||
| Premium on Common Stock | 1,653,313 | 1,559,060 | |||||||||
| Treasury Stock (at par) | (255) | (287) | |||||||||
| Accumulated Other Comprehensive Loss | (26,720) | (26,729) | |||||||||
| Retained Earnings | 403,244 | 310,433 | |||||||||
| Total South Jersey Industries, Inc. Equity | 2,182,591 | 1,989,152 | |||||||||
| Noncontrolling Interests | 10,337 | 10,289 | |||||||||
| Total Equity | 2,192,928 | 1,999,441 | |||||||||
| Long-Term Debt | 3,187,571 | 3,189,009 | |||||||||
| Total Capitalization | 5,380,499 | 5,188,450 | |||||||||
| Current Liabilities: | |||||||||||
| Notes Payable | 90,700 | 334,000 | |||||||||
| Current Portion of Long-Term Debt | 66,076 | 66,076 | |||||||||
| Accounts Payable | 358,632 | 330,164 | |||||||||
| Customer Deposits and Credit Balances | 26,581 | 40,355 | |||||||||
| Environmental Remediation Costs | 37,506 | 40,905 | |||||||||
| Taxes Accrued | 7,844 | 4,937 | |||||||||
| Derivatives - Energy Related Liabilities | 93,458 | 60,002 | |||||||||
| Deferred Contract Revenues | 532 | 753 | |||||||||
| Derivatives - Other Current | 435 | 568 | |||||||||
| Dividends Payable | 36,398 | — | |||||||||
| Interest Accrued | 37,580 | 23,611 | |||||||||
| Other Current Liabilities | 53,049 | 54,311 | |||||||||
| Total Current Liabilities | 808,791 | 955,682 | |||||||||
| Deferred Credits and Other Noncurrent Liabilities: | |||||||||||
| Deferred Income Taxes - Net | 241,220 | 198,901 | |||||||||
| Environmental Remediation Costs | 123,109 | 125,176 | |||||||||
| Asset Retirement Obligations | 231,113 | 229,030 | |||||||||
| Derivatives - Energy Related Liabilities | 34,681 | 16,079 | |||||||||
| Derivatives - Other Noncurrent | 5,582 | 7,432 | |||||||||
| Regulatory Liabilities | 443,639 | 398,951 | |||||||||
| Other | 188,192 | 188,971 | |||||||||
| Total Deferred Credits and Other Noncurrent Liabilities | 1,267,536 | 1,164,540 | |||||||||
| Commitments and Contingencies (Note 11) | |||||||||||
| Total Capitalization and Liabilities | $ | 7,456,826 | $ | 7,308,672 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
12
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(In Thousands, Except for Per Share Data)
| Common Stock | Premium on Common Stock | Treasury Stock | AOCL | Retained Earnings | Total South Jersey Industries, Inc. Equity | NCI | Total Equity | |||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | 146,675 | $ | 1,559,060 | $ | (287) | $ | (26,729) | $ | 310,433 | $ | 1,989,152 | $ | 10,289 | $ | 1,999,441 | ||||||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | 129,209 | 129,209 | 135 | 129,344 | ||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income, Net of Tax | — | — | — | 9 | — | 9 | — | 9 | ||||||||||||||||||||||||||||||||||||||||||
| Common Stock Issued or Granted Through Equity Offering or Stock Plans | 6,334 | 94,253 | 32 | — | — | 100,619 | — | 100,619 | ||||||||||||||||||||||||||||||||||||||||||
Cash Dividends Declared - Common Stock ($0.310 per share) | — | — | — | — | (36,398) | (36,398) | — | (36,398) | ||||||||||||||||||||||||||||||||||||||||||
| Capital Distributions to Noncontrolling Interests in Subsidiaries | — | — | — | — | — | — | (130) | (130) | ||||||||||||||||||||||||||||||||||||||||||
| Capital Contributions of Noncontrolling Interests in Subsidiaries | — | — | — | — | — | — | 43 | 43 | ||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | 153,009 | $ | 1,653,313 | $ | (255) | $ | (26,720) | $ | 403,244 | $ | 2,182,591 | $ | 10,337 | $ | 2,192,928 | ||||||||||||||||||||||||||||||||||
| Common Stock | Premium on Common Stock | Treasury Stock | AOCL | Retained Earnings | Total South Jersey Industries, Inc. Equity | NCI | Total Equity | |||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | 125,740 | $ | 1,218,000 | $ | (321) | $ | (38,216) | $ | 355,678 | $ | 1,660,881 | $ | 5,995 | $ | 1,666,876 | ||||||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | 128,598 | 128,598 | 129 | 128,727 | ||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income, Net of Tax | — | — | — | 8 | — | 8 | — | 8 | ||||||||||||||||||||||||||||||||||||||||||
| Common Stock Issued or Granted Through Equity Offering or Stock Plans | 2,475 | 37,771 | 57 | — | — | 40,303 | — | 40,303 | ||||||||||||||||||||||||||||||||||||||||||
| Contract Liability Adjustment (see Note 4) | — | (62,219) | — | — | — | (62,219) | — | (62,219) | ||||||||||||||||||||||||||||||||||||||||||
Cash Dividends Declared - Common Stock ($0.303 per share) | — | — | — | — | (30,453) | (30,453) | — | (30,453) | ||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 128,215 | $ | 1,193,552 | $ | (264) | $ | (38,208) | $ | 453,823 | $ | 1,737,118 | $ | 6,124 | $ | 1,743,242 | ||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
13
SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating Revenues | $ | 322,263 | $ | 251,399 | |||||||
| Operating Expenses: | |||||||||||
| Cost of Sales (Excluding depreciation and amortization) | 129,868 | 74,537 | |||||||||
| Operations and Maintenance | 44,226 | 37,268 | |||||||||
| Depreciation | 20,467 | 19,208 | |||||||||
| Energy and Other Taxes | 2,000 | 1,544 | |||||||||
| Total Operating Expenses | 196,561 | 132,557 | |||||||||
| Operating Income | 125,702 | 118,842 | |||||||||
| Other Income and Expense | 1,539 | 1,615 | |||||||||
| Interest Charges | (9,723) | (9,725) | |||||||||
| Income Before Income Taxes | 117,518 | 110,732 | |||||||||
| Income Taxes | (28,876) | (27,114) | |||||||||
| Net Income | $ | 88,642 | $ | 83,618 | |||||||
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 March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Net Income | $ | 88,642 | $ | 83,618 | ||||||||||
| Other Comprehensive Income - Net of Tax: | ||||||||||||||
Reclassification of Unrealized Gain on Derivatives - Other to Net Income, net of tax of $(4) and $(4), respectively | 9 | 8 | ||||||||||||
| Other Comprehensive Income - Net of Tax | 9 | 8 | ||||||||||||
| Comprehensive Income | $ | 88,651 | $ | 83,626 | ||||||||||
The accompanying notes are an integral part of the condensed financial statements.
15
SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net Cash Provided by Operating Activities | 153,136 | 125,284 | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Capital Expenditures | (48,613) | (61,437) | |||||||||
| Investment in Contract Receivables | (5,528) | (6,166) | |||||||||
| Proceeds from Contract Receivables | 3,427 | 3,370 | |||||||||
| Net Cash Used in Investing Activities | (50,714) | (64,233) | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Net Repayments of Short-Term Credit Facilities | (100,700) | (47,500) | |||||||||
| Principal Repayments of Long-Term Debt | (2,500) | (2,500) | |||||||||
| Payments for Issuance of Long-Term Debt | — | (9) | |||||||||
| Net Cash Used in Financing Activities | (103,200) | (50,009) | |||||||||
| Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash | (778) | 11,042 | |||||||||
| Cash, Cash Equivalents and Restricted Cash at Beginning of Period | 4,046 | 6,424 | |||||||||
| Cash, Cash Equivalents and Restricted Cash at End of Period | $ | 3,268 | $ | 17,466 | |||||||
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)
| March 31, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Property, Plant and Equipment: | |||||||||||
| Utility Plant, at original cost | $ | 3,659,722 | $ | 3,613,360 | |||||||
| Accumulated Depreciation | (672,148) | (656,829) | |||||||||
| Property, Plant and Equipment - Net | 2,987,574 | 2,956,531 | |||||||||
| Investments: | |||||||||||
| Restricted Investments | 34 | 686 | |||||||||
| Total Investments | 34 | 686 | |||||||||
| Current Assets: | |||||||||||
| Cash and Cash Equivalents | 3,234 | 3,360 | |||||||||
| Accounts Receivable | 174,489 | 125,848 | |||||||||
| Accounts Receivable - Related Parties | 3,840 | 7,591 | |||||||||
| Unbilled Revenues | 40,977 | 43,236 | |||||||||
| Provision for Uncollectibles | (28,366) | (25,166) | |||||||||
| Natural Gas in Storage, average cost | 6,296 | 23,143 | |||||||||
| Materials and Supplies, average cost | 606 | 606 | |||||||||
| Prepaid Taxes | 7,825 | 17,252 | |||||||||
| Derivatives - Energy Related Assets | 32,804 | 9,396 | |||||||||
| Other Prepayments and Current Assets | 14,537 | 13,413 | |||||||||
| Total Current Assets | 256,242 | 218,679 | |||||||||
| Regulatory and Other Noncurrent Assets: | |||||||||||
| Regulatory Assets | 429,882 | 482,745 | |||||||||
| Contract Receivables | 46,861 | 45,247 | |||||||||
| Derivatives - Energy Related Assets | 440 | 507 | |||||||||
| Other | 63,340 | 63,502 | |||||||||
| Total Regulatory and Other Noncurrent Assets | 540,523 | 592,001 | |||||||||
| Total Assets | $ | 3,784,373 | $ | 3,767,897 | |||||||
The accompanying notes are an integral part of the condensed financial statements.
17
SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)
| March 31, 2022 | December 31, 2021 | ||||||||||
| Capitalization and Liabilities | |||||||||||
| Equity: | |||||||||||
| Common Stock | $ | 5,848 | $ | 5,848 | |||||||
| Other Paid-In Capital and Premium on Common Stock | 505,244 | 505,244 | |||||||||
| Accumulated Other Comprehensive Loss | (22,967) | (22,976) | |||||||||
| Retained Earnings | 1,080,520 | 991,878 | |||||||||
| Total Equity | 1,568,645 | 1,479,994 | |||||||||
| Long-Term Debt | 1,008,396 | 1,010,727 | |||||||||
| Total Capitalization | 2,577,041 | 2,490,721 | |||||||||
| Current Liabilities: | |||||||||||
| Notes Payable | 7,300 | 108,000 | |||||||||
| Current Portion of Long-Term Debt | 31,084 | 31,084 | |||||||||
| Accounts Payable - Commodity | 41,259 | 31,846 | |||||||||
| Accounts Payable - Other | 44,004 | 33,162 | |||||||||
| Accounts Payable - Related Parties | 5,608 | 12,901 | |||||||||
| Derivatives - Energy Related Liabilities | 595 | 2,520 | |||||||||
| Derivatives - Other Current | 435 | 568 | |||||||||
| Customer Deposits and Credit Balances | 15,216 | 25,232 | |||||||||
| Environmental Remediation Costs | 22,643 | 27,575 | |||||||||
| Taxes Accrued | 8,194 | 3,615 | |||||||||
| Interest Accrued | 14,882 | 11,604 | |||||||||
| Other Current Liabilities | 17,180 | 11,365 | |||||||||
| Total Current Liabilities | 208,400 | 299,472 | |||||||||
| Regulatory and Other Noncurrent Liabilities: | |||||||||||
| Regulatory Liabilities | 217,866 | 222,411 | |||||||||
| Deferred Income Taxes - Net | 473,400 | 443,402 | |||||||||
| Environmental Remediation Costs | 62,827 | 64,389 | |||||||||
| Asset Retirement Obligations | 104,395 | 103,371 | |||||||||
| Derivatives - Energy Related Liabilities | — | 324 | |||||||||
| Derivatives - Other Noncurrent | 5,582 | 7,432 | |||||||||
| Other | 134,862 | 136,375 | |||||||||
| Total Regulatory and Other Noncurrent Liabilities | 998,932 | 977,704 | |||||||||
| Commitments and Contingencies (Note 11) | |||||||||||
| Total Capitalization and Liabilities | $ | 3,784,373 | $ | 3,767,897 | |||||||
The accompanying notes are an integral part of the condensed financial statements.
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SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF CHANGES IN COMMON EQUITY (UNAUDITED)
(In Thousands)
| Common Stock | Other Paid-In Capital and Premium on Common Stock | AOCL | Retained Earnings | Total | |||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | 5,848 | $ | 505,244 | $ | (22,976) | $ | 991,878 | $ | 1,479,994 | |||||||||||||||||||
| Net Income | — | — | 88,642 | 88,642 | |||||||||||||||||||||||||
| Other Comprehensive Income, Net of Tax | — | — | 9 | — | 9 | ||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | 5,848 | $ | 505,244 | $ | (22,967) | $ | 1,080,520 | $ | 1,568,645 | |||||||||||||||||||
| Common Stock | Other Paid-In Capital and Premium on Common Stock | AOCL | Retained Earnings | Total | |||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | 5,848 | $ | 465,244 | $ | (31,606) | $ | 864,240 | $ | 1,303,726 | |||||||||||||||||||
| Net Income | — | — | — | 83,618 | 83,618 | ||||||||||||||||||||||||
| Other Comprehensive Income, Net of Tax | — | — | 8 | — | 8 | ||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 5,848 | $ | 465,244 | $ | (31,598) | $ | 947,858 | $ | 1,387,352 | |||||||||||||||||||
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 and ETG.
•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.
▪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. Marina includes the Catamaran joint venture that was entered into for the purpose of developing, owning and operating renewable energy projects, and supporting SJI's commitment to clean energy initiatives. Catamaran owns Annadale and Bronx Midco, operators of fuel cell projects in New York, in which Marina, through Catamaran, owns 93% and 92%, respectively. Catamaran also owns a solar generation site in Massachusetts, in which Marina, through Catamaran, owns 90%. The remaining ownership percentages are recorded as NCIs in the condensed consolidated financial statements. The principal wholly-owned subsidiaries of Marina are:
•Marina owns, directly and through wholly-owned subsidiaries, solar energy projects in New Jersey.
•ACLE, BCLE, SCLE and SXLE own landfill gas-to-energy production facilities in Atlantic, Burlington, Salem and Sussex Counties, respectively, located in New Jersey. ACLE ceased operations on September 30, 2021, while BCLE, SCLE and SXLE ceased operations on June 1, 2020.
▪SJESP receives commissions on appliance service contracts from a third party.
▪Midstream invests in infrastructure and other midstream projects, including the PennEast project for which development ceased in September 2021. See Note 3.
▪SJEI provides energy procurement and cost reduction services. The significant wholly-owned subsidiaries of SJEI include:
•AEP, an aggregator, broker and consultant in the retail energy markets that matches end users with suppliers for the procurement of natural gas and electricity.
•EnerConnex, an aggregator, broker and consultant in the retail and wholesale energy markets that matches end users with suppliers for the procurement of natural gas and electricity. On August 7, 2020, SJEI acquired the remaining 75% of EnerConnex, of which SJEI previously held a 25% interest.
•SJI Renewable Energy Ventures, LLC, which holds our equity interest in REV.
•SJI RNG Devco, LLC, which includes our renewable natural gas development rights and costs incurred in order to develop certain dairy farms, along with the Red River joint venture which was formed on March 22, 2022 (see Note 16).
20
MERGER AGREEMENT - On February 23, 2022, SJI announced that it had signed a Merger Agreement with NJ Boardwalk Holdings LLC, a Delaware limited liability company (“Parent”) and Boardwalk Merger Sub, Inc., a New Jersey corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), pursuant to which, Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. Each of Parent and Merger Sub are affiliates of Infrastructure Investments Fund. Following completion of the transaction, SJI intends to delist its shares from the New York Stock Exchange.
At the effective time of the Merger (the “Effective Time”), each share of SJI’s common stock issued and outstanding immediately before the Effective Time will be converted into the right to receive $36.00 in cash, without interest.
SJI’s shareholders will be asked to vote on the adoption of the Merger Agreement and the Merger at the Company's annual shareholders' meeting to be held on May 10, 2022. The closing of the Merger is subject to customary conditions, including the receipt of regulatory approvals by the BPU, and that the Merger Agreement be adopted by at least a majority of the votes cast by shareholders entitled to vote thereon at the meeting.
The Merger Agreement places limitations on SJI’s ability to engage in certain types of transactions without Parent’s consent between the signing of the Merger Agreement and the Effective Time, including limitations on SJI’s ability to issue dividends other than consistent with its past practices, acquire other businesses, issue equity of SJI (except in the ordinary course pursuant to equity compensation plans) and, subject to certain exceptions, incurring certain indebtedness for borrowed money.
The Merger Agreement contains certain termination rights, including the right of SJI or Parent to terminate if the Merger is not consummated within 12 months after signing, subject to certain extensions and exceptions. Under the terms of the Merger Agreement, the Company may be required to pay Parent a termination fee of $140.0 million if the Merger Agreement is terminated under certain specified circumstances. The Merger Agreement additionally provides that Parent pay the Company a termination fee of $255.0 million under certain specified circumstances.
In connection with the Merger Agreement, two complaints have been filed as individual actions in United States District Courts. See Note 11.
On April 11, 2022, the Company filed a definitive proxy statement with the SEC in connection with the Merger. On May 3, 2022, the Company filed additional proxy soliciting materials related to the Merger.
On April 25, 2022, the Company filed a joint petition, together with Parent and Merger Sub, to the BPU seeking authority for approval of an indirect change of control of ETG and SJG, effectuated by the Merger Agreement. This matter is pending BPU approval.
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. In management’s opinion, the condensed consolidated financial statements of SJI and SJG reflect all normal recurring adjustments needed to fairly present their respective financial positions, operating results and cash flows at the dates and for the periods presented. SJI’s and SJG's businesses are subject to seasonal fluctuations and, accordingly, this interim financial information should not be the basis for estimating the full year’s operating results.
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, 2021. There were no significant changes in or changes in the application of the Company’s significant or critical accounting policies or estimation procedures for the three months ended March 31, 2022 as compared with the significant accounting policies described in the Company’s audited consolidated financial statements for the year ended December 31, 2021.
ESTIMATES AND ASSUMPTIONS - The condensed consolidated financial statements were prepared to conform with GAAP, which requires management to make 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, legal contingencies, pension and other postretirement benefit costs, revenue recognition, goodwill, evaluation of equity method investments for other-than-temporary impairment, income taxes, and allowance for credit losses. Estimates may be subject to future uncertainties, including the continued evolution of the COVID-19 pandemic and its impact on our operations and
21
economic conditions, which could affect the fair value of the ETG reporting unit and its goodwill balance (see Note 17), as well as the allowance for credit losses and the total impact and potential recovery of incremental costs associated with COVID-19 (see Notes 5 and 8, respectively).
IMPAIRMENT OF LONG-LIVED ASSETS - See Note 1 to the Consolidated Financial Statements under "Impairment of Long-Lived Assets" in Item 8 of the Form 10-K for the year ended December 31, 2021 for additional information regarding the Company's policy on impairments of long-lived assets. No impairments of long-lived assets were identified at SJI or SJG for the three months ended March 31, 2022 and 2021, respectively.
REGULATION - The Utilities are subject to the rules and regulations of the BPU. See Note 7 for a discussion of the Utilities' rate structure and regulatory actions. The Utilities maintain their accounts according to the BPU's prescribed Uniform System of Accounts. The Utilities follow the accounting for regulated enterprises prescribed by ASC 980, Regulated Operations, which 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 more information related to regulatory assets and liabilities.
OPERATING REVENUES - Gas and electric revenues are recognized in the period the commodity is delivered to customers. For retail customers (including customers of 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 in Note 15. 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, and operating revenues for SJRG include realized and unrealized gains and losses on energy-related derivative instruments. 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, along with commissions received related to AEP and EnerConnex energy procurement service contracts, on a monthly basis as the commissions are earned. Marina recognizes revenue for renewable energy projects when output is generated and delivered to the customer, and when renewable energy credits have been transferred to the third party at an agreed upon price.
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 the delivery of gas and electricity being considered an essential service, with delivery to customers continuing in a timely manner with no delays or operational shutdowns taking place to date. To the extent that the pandemic does impact our ability to deliver in the future, operating revenues could be impacted. Currently, the impact of the pandemic on the collectability of our accounts receivable continues to be monitored, but such receivables have traditionally been included in rate recovery (see Note 8).
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. Certain deferred income taxes are recorded with offsetting regulatory assets or liabilities by the Company to recognize that income taxes will be recovered or refunded through future rates.
A valuation allowance is recorded when it is more likely than not that any of SJI's or SJG's deferred tax assets will not be realized. As of both March 31, 2022 and December 31, 2021, SJI had a total federal and state valuation allowance of $22.5 million recorded on the condensed consolidated balance sheets. See Note 4 to the Consolidated Financial Statements in Item 8 of SJI's and SJG’s Annual Report on Form 10-K for the year ended December 31, 2021 for information related to these valuation allowances. SJG believes that they will generate sufficient future taxable income to realize the income tax benefits related to their net deferred tax assets.
The Company evaluates certain tax benefits that have been recorded in the financial statements for uncertainties. In 2021, SJG recorded a reserve of $13.9 million for a portion of tax benefits related to tax positions taken in prior years. The reserve is recorded in Other Noncurrent Liabilities in the condensed consolidated balance sheets as of both March 31, 2022 and December 31, 2021. The amount of income taxes we pay is subject to ongoing audits by federal and state tax authorities, which could result in proposed assessments. Future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period any assessments are determined or resolved or as such statutory audit periods are closed. We are not aware of any other matters that would result in significant changes to the amount of unrecognized income tax benefits reflected on the condensed consolidated balance sheets as of March 31, 2022.
22
The U.S. federal government provides businesses with an ITC under Section 48 of the Internal Revenue Code, available to the owner of solar and fuel cell systems that are purchased and placed into service. The Company recognizes ITC on eligible assets in the year in which the project commences commercial operations. Among other requirements, such credits require projects to have commenced construction by a certain date. Accordingly, projects are eligible for a 26% ITC for projects that commence construction in 2020-2022, 22% for projects that commence construction in 2023, and 10% for projects that commence construction thereafter. ITCs recorded during the three months ended March 31, 2022 were not material. No ITC was recorded during the three months ended March 31, 2021.
GOODWILL - See Note 17.
LEASES - There have been no significant changes to the nature or balances of the Company's leases since December 31, 2021, 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, 2021.
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:
| Standard | Description | Date of Adoption | Application | Effect on the Financial Statements of SJI and SJG | ||||||||||||||||||||||
ASU 2020-04: Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting ASU 2021-01: Reference Rate Reform (Topic 848) | The amendments in ASU 2020-04 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 ASU 2021-01 clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to changes in the interest rates used for margining, discounting, or contract price alignment for derivative instruments that are being implemented as part of the market-wide transition to new reference rates (commonly referred to as the "discounting transition"). | 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. | Prospective for contract modifications and hedging relationships. 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. | Adoption of this guidance did not have a material impact on the financial statement results of SJI or SJG. | ||||||||||||||||||||||
23
| ASU 2020-06: Accounting for Convertible Instruments and Contracts in an Entity's Own Equity | The amendments in this ASU simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20. Under the amendments, embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. The amendments also add new convertible instrument disclosure requirements. Additionally, the amendments in this ASU remove certain conditions from the settlement guidance within the derivative scope exception guidance contained in Subtopic 815-40 and further clarify the derivative scope exception guidance. Finally, the amendments in this ASU align the diluted EPS calculation for convertible instruments by requiring that an entity use the if-converted method instead of the treasury stock method when calculated diluted EPS for convertible instruments. | January 1, 2022; early adoption permitted, but not before January 1, 2021. | Retrospective or Modified Retrospective | Adoption of this guidance did not have a material impact on the financial statement results of SJI or SJG. | ||||||||||||||||||||||
24
Standards Not Yet Effective:
| Standard | Description | Date of Adoption | Application | Effect on the Financial Statements of SJI and SJG | ||||||||||||||||||||||
| ASU 2021-10: Government Assistance (ASC 832): Disclosures by Business Entities about Government Assistance | This ASU requires disclosure in the notes to annual financial statements of government financial assistance from local, (city, town, county, municipal), regional, and federal governments and entities related to those governments. Required disclosure for government assistance transactions includes: 1) information about the nature of transactions and the related accounting policy used to account for the transactions; 2) the line items on the balance sheet and income statement that are affected by the transactions and the amounts applicable to each financial statement line item; and 3) significant terms and conditions of the transactions, including commitments and contingencies. | Annual periods beginning January 1, 2022; early adoption is permitted. | Either (1) prospectively to all transactions that are reflected in financial statements at the date of initial application and to all transactions that are entered into after adoption (2) retrospectively to those transactions | Since this ASU is disclosure only, adoption will not have an impact on the financial statement results of SJI or SJG. Management is currently determining the impact that adoption of this guidance will have on the disclosures of SJI and SJG. | ||||||||||||||||||||||
| ASU 2021-08: Business Combinations (ASC 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers | The amendments to ASC 805 in this ASU require an acquirer to account for revenue contracts acquired in a business combination in accordance with ASC 606 as if it had originated the contracts. The acquirer may assess how the acquiree applied ASC 606 to determine what to record for the acquired contracts. The standard also provides practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from a business combination. | January 1, 2023; early adoption is permitted, including adoption in an interim period | Prospectively to business combinations occurring on or after the effective date of the amendments | These amendments have not yet been adopted and management is currently evaluating whether to adopt this amendment prior to the effective date. | ||||||||||||||||||||||
2. STOCK-BASED COMPENSATION PLAN:
Under SJI's Omnibus Equity Compensation Plan (Plan), shares, stock appreciation rights, and options may be issued to SJI’s officers (Officers), non-employee directors (Directors) and other key employees.
Grants to Officers and other key employees - 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 , , and of the grant. SJI also grants performance-based restricted shares which vest over a three-year period and are subject to SJI achieving certain market or 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 three months ended March 31, 2022, SJI granted a total of 184,935 restricted shares to Officers and other key employees under the Plan. No restricted shares were granted during the three months ended March 31, 2021. No options were granted or outstanding during the three months ended March 31, 2022 and 2021. No stock appreciation rights have been issued under the Plan.
Performance-based grants containing market-based performance targets use SJI's TSR relative to a peer group to measure performance. As these TSR-related performance-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 market goals. The fair value of TSR-related performance-based restricted stock awards on the date of grant is estimated using a Monte Carlo simulation model.
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Performance-based grants containing earnings-based performance targets use pre-defined CEGR goals for SJI to measure performance. As 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.
Grants to Directors - No restricted shares were granted to Directors during the three months ended March 31, 2022 and March 31, 2021. Shares issued to Directors vest over twelve months and contain no performance conditions. As a result, 100% of the shares granted generally vest.
The following table summarizes the nonvested restricted stock awards outstanding at March 31, 2022, and the assumptions used to estimate the fair value of the awards:
| Grants | Shares Outstanding | Fair Value Per Share | Expected Volatility | Risk-Free Interest Rate | |||||||||||||||||||||||||
| Officers & Key Employees - | 2020 - TSR | 31,957 | $ | 25.51 | 34.8 | % | 0.21 | % | |||||||||||||||||||||
| 2020 - CEGR, Time | 80,644 | $ | 25.19 | N/A | N/A | ||||||||||||||||||||||||
| 2021 - TSR | 35,091 | $ | 28.11 | 39.9 | % | 0.27 | % | ||||||||||||||||||||||
| 2021 - CEGR, Time | 171,526 | $ | 25.33 | N/A | N/A | ||||||||||||||||||||||||
| 2022 - TSR | 37,608 | $ | 35.05 | 43.6 | % | 1.83 | % | ||||||||||||||||||||||
| 2022 - CEGR, Time | 147,327 | $ | 35.05 | N/A | N/A | ||||||||||||||||||||||||
| Directors - | 2021 | 54,419 | $ | 24.75 | N/A | N/A | |||||||||||||||||||||||
Expected volatility is based on the actual volatility of SJI’s share price over the preceding three-year period as of the valuation date. The risk-free interest rate is based on the zero-coupon U.S. Treasury Bond, with a term equal to the three-year term of the Officers’ and other key employees’ restricted shares. As notional dividend equivalents are credited to the holders during the three-year service period, no reduction to the fair value of the award is required. As the Directors’ restricted stock awards contain no performance conditions and dividends are paid or credited to the holder during the twelve month 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 months ended March 31, 2022 and 2021 (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Officers & Key Employees | $ | 1,317 | $ | 1,264 | |||||||
| Directors | 112 | 10 | |||||||||
| Total Cost | 1,429 | 1,274 | |||||||||
| Capitalized | (38) | (23) | |||||||||
| Net Expense | $ | 1,391 | $ | 1,251 | |||||||
As of March 31, 2022, there was $10.4 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 2.2 years.
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The following table summarizes information regarding restricted stock award activity for SJI during the three months ended March 31, 2022, excluding accrued dividend equivalents:
| Officers and Other Key Employees | Directors | Weighted Average Fair Value | |||||||||||||||
| Nonvested Shares Outstanding, January 1, 2022 | 492,475 | 54,419 | $ | 26.72 | |||||||||||||
| Granted | 184,935 | — | $ | 35.05 | |||||||||||||
| Cancelled/Forfeited | (71,775) | — | $ | 25.86 | |||||||||||||
| Vested | (101,482) | — | $ | 30.25 | |||||||||||||
Nonvested Shares Outstanding, March 31, 2022 | 504,153 | 54,419 | $ | 28.69 | |||||||||||||
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. 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.
A change in control could result in such shares becoming non-forfeitable or immediately payable in cash. At the Effective Time of the Merger, each share granted and outstanding under the Plan immediately before the Effective Time will be converted into the right to receive $36.00 in cash, without interest.
During the three months ended March 31, 2022, SJI issued 70,872 shares to its Officers and other key employees at a market value of $2.3 million. During the three months ended March 31, 2021, SJI issued 110,891 shares at a market value of $2.7 million. These issued shares include shares deferred for payout in prior periods.
SJG - Officers and other key employees of SJG participate in the stock-based compensation plans of SJI. During the three months ended March 31, 2022, there were 21,784 restricted shares (time-based and performance-based) granted to SJG officers and other key employees. No restricted shares were granted to SJG officers and key employees during the three months ended March 31, 2021.
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. See 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, 2021 for a timeline of events related to PennEast, including the determination by the PennEast partners that further development of the project is no longer supported, and thus all further development of the project has ceased.
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; however, it owns cogeneration, long-lived assets for which Energenic has been pursuing project development opportunities. Marina has notes related to Energenic; such notes are secured by the cogeneration assets. See 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, 2021 for more information regarding these assets and notes, including the impairment charge recorded in the fourth quarter of 2021 due to a determination that future development of a project is no longer probable.
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 SJEX 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 $11.6 million and $7.4 million for the three months ended March 31, 2022 and 2021, respectively.
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REV - SJI Renewable Energy Ventures, LLC has a 35% equity interest in REV, an LNG distributor and developer of LNG and RNG assets and projects.
Red River - SJI RNG Devco, LLC has an 80% equity interest in Red River, an entity that processes raw biogas derived from agricultural feedstock into renewable biomethane for pipeline injection.
AFFILIATE TRANSACTIONS - SJI made net investments in and net advances to unconsolidated affiliates of $28.9 million for the three months ended March 31, 2022; net investments in and net advances to unconsolidated affiliates for the three months ended March 31, 2021 were not material.
As of March 31, 2022 and December 31, 2021, the outstanding balance of Notes Receivable – Affiliates was $82.1 million and $69.9 million, respectively. These Notes Receivable-Affiliates balances are comprised of:
•As of March 31, 2022 and December 31, 2021, $77.4 million and $62.6 million, respectively, of the notes are related to REV, which accrue interest at variable rates.
•As of both March 31, 2022 and December 31, 2021, $2.0 million of the notes are related to Energenic. Such notes are secured by Energenic's cogeneration assets for energy service projects and are to be repaid through 2025, although the Company does not expect to realize amounts above its share of the remaining fair value of Energenic's cogeneration assets, and thus the Company does not accrue interest. Current losses at Energenic have been offset against the Notes Receivable – Affiliates balance in recent years as our investment in the Energenic affiliate has been reduced to zero as a result of previous losses.
•As of March 31, 2022 and December 31, 2021, $2.7 million and $5.3 million, respectively, of unsecured notes which accrue interest at variable rates.
SJI holds significant variable interests in these entities but is not the primary beneficiary. Consequently, these entities are accounted for under the equity method because SJI does not have both (a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity. As of March 31, 2022 and December 31, 2021, SJI had a net asset of approximately $53.9 million and $38.5 million, respectively, included in Investment in Affiliates on the condensed consolidated balance sheets related to equity method investees. SJI’s maximum exposure to loss from these entities as of March 31, 2022 and December 31, 2021 is limited to its combined investments in these entities, which includes related Notes Receivable-Affiliates, in the aggregate amount of $136.0 million and $108.5 million, respectively.
DISCONTINUED OPERATIONS - There have been no significant changes to the nature or balances of SJI's discontinued operations since December 31, 2021, which are defined and described in 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, 2021.
GUARANTEES - SJI has issued guarantees to third parties on behalf of its consolidated subsidiaries. See Note 11.
SJI RELATED-PARTY TRANSACTIONS - On April 1, 2022, SJRG and ETG entered into an AMA whereby SJRG manages the pipeline capacity of ETG. This AMA expires on March 31, 2024. Under the AMA, SJRG pays ETG an annual fee of $3.6 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.
SJG RELATED-PARTY TRANSACTIONS - There have been no significant changes in the nature of SJG’s related-party transactions since December 31, 2021. See 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, 2021 for a description of related parties and associated transactions.
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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 March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating Revenues/Affiliates: | |||||||||||
| SJRG | $ | 8,280 | 6,329 | ||||||||
| Other | 21 | 21 | |||||||||
| Total Operating Revenues/Affiliates | $ | 8,301 | $ | 6,350 | |||||||
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 March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Costs of Sales/Affiliates (Excluding depreciation and amortization) | |||||||||||
| SJRG | $ | 80 | $ | 1,367 | |||||||
| Operations Expense/Affiliates: | |||||||||||
| SJI (parent company only) | $ | 6,372 | $ | 5,564 | |||||||
| SJIU | 1,006 | 960 | |||||||||
| Millennium | 930 | 866 | |||||||||
| Other | 18 | 73 | |||||||||
| Total Operations Expense/Affiliates | $ | 8,326 | $ | 7,463 | |||||||
4. COMMON STOCK:
The following shares were issued and outstanding for SJI:
| 2022 | |||||
| Beginning Balance, January 1 | 117,340,493 | ||||
| New Issuances During the Period: | |||||
| Settlement of Equity Forward Sale Agreement | 4,996,062 | ||||
| Stock-Based Compensation Plan | 70,872 | ||||
| Ending Balance, March 31 | 122,407,427 | ||||
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.
There were 2,339,139 shares of SJG's common stock (par value $2.50 per share) outstanding as of March 31, 2022. SJG did not issue any new shares during the period. SJIU owns all of the outstanding common stock of SJG.
On March 22, 2021, SJI offered 10,250,000 shares of its common stock, par value $1.25 per share, at a public offering price of $22.25 per share, with 1,899,859 shares issued in March 2021. See Note 6 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, 2021 for a description of this transaction and the additional issuances that occurred in 2021. On March 18, 2022, the remaining 4,996,062 forward shares were issued under the forward sale agreement for proceeds of $100.4 million, net of issuance fees that were not material. The forward price used to determine cash proceeds received by SJI was calculated based on the initial forward sale price, as adjusted for underwriting fees, interest rate adjustments as specified in the forward sale agreement and any dividends paid on our common stock during the forward period.
At the Effective Time of the Merger, SJI's common stock outstanding immediately before the Effective Time will be converted into the right to receive $36.00 in cash, without interest.
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EQUITY AND CONVERTIBLE UNITS - See Note 6 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, 2021 for a description of the issuances of equity units that occurred in March 2021.
Total interest recorded related to the equity units during the three months ended March 31, 2022 was $0.2 million related to the contract adjustment liabilities to the holders of the equity units and is recorded within Interest Charges on the condensed consolidated statements of income. The contract adjustment liabilities are recorded in Other Current and Noncurrent Liabilities on the condensed consolidated balance sheet and were $23.8 million and $28.9 million, respectively, as of March 31, 2022, and $23.8 million and $34.6 million, respectively, as of December 31, 2021.
The convertible units consist of the following (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Principal amount: | 2021 Series B Remarketable Junior Subordinated Notes due 2029 | ||||||||||
| Principal (A) | $ | 335,000 | $ | 335,000 | |||||||
| Unamortized debt discount and issuance costs (A) | 8,808 | 9,110 | |||||||||
| Net carrying amount | $ | 326,192 | $ | 325,890 | |||||||
| Carrying amount of the equity component (B) | $ | — | $ | — | |||||||
(A) Included in the condensed consolidated balance sheets within Long-Term Debt.
(B) There is no equity portion as of March 31, 2022 and December 31, 2021 for these Notes.
During the three months ended March 31, 2022 and 2021, the Company recognized $4.9 million and $2.7 million, respectively, of coupon interest expense, all of which was included in Interest Charges on the condensed consolidated statements of income. During those periods, the amortization of debt discount and issuance costs was not material. As of March 31, 2022, the effective interest rate was 2.1% on these Notes.
SJI's EPS — SJI's basic EPS is based on the weighted-average number of common shares outstanding. SJI's diluted EPS includes consideration of the effect of SJI's restricted stock as discussed in Note 2, along with the impact of the Equity Units and Convertible Units discussed above, accounted for under the treasury stock method. For the three months ended March 31, 2022 and 2021, the shares required for inclusion in the denominator for the diluted EPS calculation were 1,579,626 and 1,091,313, respectively.
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 the first three months of 2022 or 2021.
RETAINED EARNINGS — The Utilities are limited by their regulatory authorities on the amount of cash dividends or other distributions they are able to transfer to their parent, specifically if such dividends or other distributions could impact their capital structure. In addition, SJG's First Mortgage Indentures contain a restriction regarding the amount of cash dividends or other distributions that they may pay. As of March 31, 2022, this loan restriction does not affect the amount that may be distributed from SJG's retained earnings.
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):
| March 31, 2022 | |||||||||||
| Balance Sheet Line Item | SJI | SJG | |||||||||
| Cash and Cash Equivalents | $ | 32,522 | $ | 3,234 | |||||||
| Restricted Investments | 84 | 34 | |||||||||
| Total cash, cash equivalents and restricted cash shown in the statement of cash flows | $ | 32,606 | $ | 3,268 | |||||||
| December 31, 2021 | |||||||||||
| Balance Sheet Line Item | SJI | SJG | |||||||||
| Cash and Cash Equivalents | $ | 28,754 | $ | 3,360 | |||||||
| Restricted Investments | 686 | 686 | |||||||||
| Total cash, cash equivalents and restricted cash shown in the statement of cash flows | $ | 29,440 | $ | 4,046 | |||||||
The carrying amounts of the Restricted Investments for both SJI and SJG approximate their fair values at March 31, 2022 and December 31, 2021, which would be included in Level 1 of the fair value hierarchy (see Note 13).
ALLOWANCE FOR CREDIT LOSSES - Accounts receivable and unbilled revenues are recorded gross on the condensed consolidated balance sheets with allowance for credit losses shown as a separate line item titled Provision for Uncollectibles. A summary of changes in the allowance for credit losses for the three months ended March 31, 2022 and 2021 is as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| SJI (includes SJG and all other consolidated subsidiaries): | |||||||||||
| Balance at beginning of period | $ | 41,763 | $ | 30,582 | |||||||
| Provision for expected credit losses | 2,453 | 2,409 | |||||||||
| Regulated assets (a) | 4,044 | 4,134 | |||||||||
| Recoveries of accounts previously written off | 79 | 230 | |||||||||
| Uncollectible accounts written off | (1,370) | (1,500) | |||||||||
| Balance at end of period | $ | 46,969 | $ | 35,855 | |||||||
| SJG: | |||||||||||
| Balance at beginning of period | $ | 25,166 | $ | 17,359 | |||||||
| Provision for expected credit losses | 1,834 | 1,760 | |||||||||
| Regulated assets (a) | 1,752 | 2,194 | |||||||||
| Recoveries of accounts previously written off | 42 | 127 | |||||||||
| Uncollectible accounts written off | (428) | (967) | |||||||||
| Balance at end of period | $ | 28,366 | $ | 20,473 | |||||||
(a) Deferral of incremental costs related to the COVID-19 pandemic as a regulatory asset, resulting from a July 2, 2020 BPU Order (see Note 8).
NOTES RECEIVABLE-AFFILIATES - The carrying amounts of the Note Receivable - Affiliates balances approximate their fair values at March 31, 2022 and December 31, 2021, which would be included in Level 2 of the fair value hierarchy. See Note 3 for information about these balances and Note 13 for information about the fair value hierarchy.
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CONTRACT 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 to five years, with no interest. The carrying amounts of such loans were $1.6 million and $1.7 million as of March 31, 2022 and December 31, 2021, 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. The amount of such discounts and the annualized amortization to interest is not material to SJI's or SJG's consolidated financial statements.
In addition, as part of the EET program, SJG and ETG provide funding to customers to upgrade equipment for the purpose of promoting energy efficiency. The terms of these loans range from to ten years. The carrying amounts of such loans for SJG were $57.7 million and $55.4 million as of March 31, 2022 and December 31, 2021, respectively. The carrying amounts of such loans for ETG were not material at March 31, 2022 and December 31, 2021. On the condensed consolidated balance sheets of SJG, the current portion of EET loans receivable totaled $11.7 million and $11.1 million as of March 31, 2022 and December 31, 2021, respectively, and is reflected in Accounts Receivable; and the non-current portion totaled $46.0 million and $44.3 million as of March 31, 2022 and December 31, 2021, respectively, and is reflected in Contract Receivables. 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 on the above-mentioned receivables.
There have been no material impacts to this risk of uncollectibility as a result of COVID-19.
The carrying amounts of these receivables approximate their fair value at March 31, 2022 and December 31, 2021, which would be included in Level 2 of the fair value hierarchy (see Note 13).
CREDIT RISK - As of March 31, 2022, there were no individual counterparties that totaled more than five percent of SJI's current and noncurrent Derivatives - Energy Related Assets.
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 March 31, 2022 and December 31, 2021, except as noted below (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| SJI (includes SJG and all consolidated entities) | |||||||||||
| Estimated fair values of long-term debt | $ | 3,384,680 | $ | 3,653,868 | |||||||
| Carrying amounts of long-term debt, including current maturities (A) | $ | 3,253,647 | $ | 3,255,085 | |||||||
| Net of: | |||||||||||
| Unamortized debt issuance costs | $ | 37,446 | $ | 38,462 | |||||||
| Unamortized debt discounts | $ | 5,113 | $ | 5,135 | |||||||
| SJG | |||||||||||
| Estimated fair values of long-term debt | $ | 1,047,429 | $ | 1,171,657 | |||||||
| Carrying amounts of long-term debt, including current maturities | $ | 1,039,480 | $ | 1,041,811 | |||||||
| Net of: | |||||||||||
| Unamortized debt issuance costs | $ | 8,557 | $ | 8,726 | |||||||
(A) SJI Long-Term Debt on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 includes $5.7 million and $5.6 million of finance leases, respectively.
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For Long-Term Debt (including current maturities), 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).
6. SEGMENTS OF BUSINESS:
ASC 280, Segment Reporting, establishes standards for reporting information about operating segments and requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the CODM in deciding how to allocate resources and in assessing performance.
The operating segments reflect the financial information regularly evaluated by the CODM, which for SJI is the Company's Chief Executive Officer.
The operating 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 primarily of natural gas distribution to residential, commercial and industrial customers in northern and central New Jersey.
•Wholesale energy operations include the activities of SJRG and SJEX.
•Retail services operations includes the activities of SJE, SJESP and SJEI, as well as our equity interest in Millennium.
•Renewables consists of:
◦The Catamaran joint venture, which owns Annadale and Bronx Midco, along with a solar project in Massachusetts.
◦Solar-generation sites located in New Jersey.
◦The activities of ACLE, BCLE, SCLE and SXLE, which have all ceased operations.
•Decarbonization consists of
◦SJI Renewables Energy Ventures, LLC, which includes our equity interest in REV, which is included in Equity in Earnings of Affiliated Companies on the condensed consolidated statements of income.
◦SJI RNG Devco, LLC, which includes costs incurred to develop renewable natural gas operations at certain dairy farms along with the related development rights acquired in 2020. Also included here is the Red River joint venture that was formed in March 2022.
•Midstream invests in infrastructure and other midstream projects, including an investment in PennEast for which development ceased in September 2021.
•Corporate & Services segment includes costs related to financing, acquisitions and divestitures, and other unallocated costs.
•Intersegment represents intercompany transactions among the above SJI consolidated entities.
SJI groups its utility businesses under its wholly-owned subsidiary SJIU. This group consists of gas utility operations of SJG and ETG. SJI groups its nonutility operations into separate categories: Energy Management; Energy Production; Midstream; and Corporate & Services. Energy Management includes wholesale energy and retail services. Energy Production includes renewables and decarbonization. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. See Note 1.
Information about SJI’s operations in different reportable operating segments is presented below (in thousands). All prior periods were revised to conform to the new segment alignment noted above.
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| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating Revenues: | |||||||||||
| SJI Utilities: | |||||||||||
| SJG Utility Operations | $ | 322,263 | $ | 251,399 | |||||||
| ETG Utility Operations | 176,236 | 157,545 | |||||||||
| Subtotal SJI Utilities | 498,499 | 408,944 | |||||||||
| Energy Management: | |||||||||||
| Wholesale Energy Operations | 327,497 | 261,910 | |||||||||
| Retail Services | 2,069 | 3,896 | |||||||||
| Subtotal Energy Management | 329,566 | 265,806 | |||||||||
| Energy Production: | |||||||||||
| Renewables | 5,356 | 6,423 | |||||||||
| Decarbonization | — | — | |||||||||
| Subtotal Energy Production | 5,356 | 6,423 | |||||||||
| Corporate and Services | 16,434 | 13,793 | |||||||||
| Subtotal | 849,855 | 694,966 | |||||||||
| Intersegment Sales | (25,277) | (20,666) | |||||||||
| Total Operating Revenues | $ | 824,578 | $ | 674,300 | |||||||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating Income: | |||||||||||
| SJI Utilities: | |||||||||||
| SJG Utility Operations | $ | 125,702 | $ | 118,842 | |||||||
| ETG Utility Operations | 59,284 | 58,020 | |||||||||
| Subtotal SJI Utilities | 184,986 | 176,862 | |||||||||
| Energy Management: | |||||||||||
| Wholesale Energy Operations | 17,451 | 17,308 | |||||||||
| Retail Services | 1,179 | (220) | |||||||||
| Subtotal Energy Management | 18,630 | 17,088 | |||||||||
| Energy Production: | |||||||||||
| Renewables | (580) | 2,700 | |||||||||
| Decarbonization | (445) | — | |||||||||
| Subtotal Energy Production | (1,025) | 2,700 | |||||||||
| Corporate and Services | (3,991) | 178 | |||||||||
| Total Operating Income | $ | 198,600 | $ | 196,828 | |||||||
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| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Property Additions: | |||||||||||
| SJI Utilities: | |||||||||||
| SJG Utility Operations | $ | 51,146 | $ | 53,409 | |||||||
| ETG Utility Operations | 51,603 | 41,130 | |||||||||
| Subtotal SJI Utilities | 102,749 | 94,539 | |||||||||
| Energy Management: | |||||||||||
| Wholesale Energy Operations | — | — | |||||||||
| Retail Services | — | — | |||||||||
| Subtotal Energy Management | — | — | |||||||||
| Energy Production: | |||||||||||
| Renewables | 5,483 | 773 | |||||||||
| Decarbonization | 17,321 | 836 | |||||||||
| Subtotal Energy Production | 22,804 | 1,609 | |||||||||
| Midstream | — | 4 | |||||||||
| Corporate and Services | 1,518 | 744 | |||||||||
| Total Property Additions | $ | 127,071 | $ | 96,896 | |||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
| Identifiable Assets: | |||||||||||
| SJI Utilities: | |||||||||||
| SJG Utility Operations | $ | 3,784,373 | $ | 3,767,897 | |||||||
| ETG Utility Operations | 2,852,249 | 2,788,465 | |||||||||
| Subtotal SJI Utilities | 6,636,622 | 6,556,362 | |||||||||
| Energy Management: | |||||||||||
| Wholesale Energy Operations | 281,716 | 278,995 | |||||||||
| Retail Services | 20,179 | 25,741 | |||||||||
| Subtotal Energy Management | 301,895 | 304,736 | |||||||||
| Energy Production: | |||||||||||
| Renewables | 190,316 | 195,791 | |||||||||
| Decarbonization | 195,091 | 138,787 | |||||||||
| Subtotal Energy Production | 385,407 | 334,578 | |||||||||
| Midstream | 4,517 | 8,970 | |||||||||
| Discontinued Operations | 25 | 47 | |||||||||
| Corporate and Services | 362,381 | 370,899 | |||||||||
| Intersegment Assets | (234,021) | (266,920) | |||||||||
| Total Identifiable Assets | $ | 7,456,826 | $ | 7,308,672 | |||||||
7. RATES AND REGULATORY ACTIONS:
SJG and ETG are subject to the rules and regulations of the BPU.
Except as described below, there have been no significant regulatory actions or changes to the Utilities' rate structures since December 31, 2021. 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, 2021.
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SJG:
Effective January 1, 2022, the BPU approved the Company's June 2021 AIRP II petition, to roll into base rates $69.0 million of investments placed into service during the period of July 1, 2020 through September 30, 2021. The result was an increase in annual revenue of $6.7 million.
In the first quarter of 2022:
•The BPU issued an Order resolving SJG's 2021 Tax Act Rider petition, with a revised Rider H credit rate effective April 1, 2022 in order to refund approximately $11.7 million for the period beginning October 1, 2021 and ending September 30, 2022.
•The BPU also approved a decrease in SJG's EET rate effective April 1, 2022, reflecting a $1.1 million decrease in revenues related to the recovery of costs of energy efficiency programs.
In April 2022, SJG filed a petition with the BPU requesting a base rate revenue increase of $73.1 million, primarily to obtain a return on and of new capital investments made by SJG since the settlement of its last base rate case in 2020. The matter is pending before the BPU.
ETG:
In December 2021, ETG filed a petition with the BPU requesting a base rate revenue increase, which was updated in February 2022 to a requested increase of $72.9 million, primarily to obtain a return on new capital investments made by ETG since the settlement of its last base rate case in 2019. This matter is pending before the BPU.
In the first quarter of 2022, final rates were approved by the BPU for ETG's 2021-2022 WNC and CEP filings, effective February 25, 2022, and the 2021-2022 BGSS-P rate, effective March 30, 2022, all of which were already in effect on a provisional basis. The BPU also approved the requested EEP rate reflecting a $1.6 million decrease in revenues related to the recovery of costs of energy efficiency programs, effective March 1, 2022.
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, 2021, 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, 2021.
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The Utilities' Regulatory Assets as of March 31, 2022 and December 31, 2021 consisted of the following items (in thousands):
| March 31, 2022 | |||||||||||
| SJG | ETG | Total SJI | |||||||||
| Environmental Remediation Costs: | |||||||||||
| Expended - Net | $ | 150,400 | $ | 21,609 | $ | 172,009 | |||||
| Liability for Future Expenditures | 91,470 | 74,729 | 166,199 | ||||||||
| Deferred ARO Costs | 49,311 | 35,519 | 84,830 | ||||||||
| Deferred Pension and Other Postretirement Benefit Costs - Unrecognized Prior Service Cost | — | 30,062 | 30,062 | ||||||||
| Deferred Pension and Other Postretirement Benefit Costs | 47,504 | 813 | 48,317 | ||||||||
| Deferred Gas Costs - Net | 369 | — | 369 | ||||||||
| CIP Receivable | 14,522 | 4,215 | 18,737 | ||||||||
| SBC Receivable (excluding RAC) | 7,637 | — | 7,637 | ||||||||
| Deferred Interest Rate Contracts | 6,017 | — | 6,017 | ||||||||
| EET/EEP | 16,786 | 3,980 | 20,766 | ||||||||
| AFUDC - Equity Related Deferrals | 12,345 | — | 12,345 | ||||||||
| WNC | — | 1,160 | 1,160 | ||||||||
| Deferred COVID-19 Costs | 9,401 | 12,604 | 22,005 | ||||||||
| Other Regulatory Assets | 24,120 | 9,656 | 33,776 | ||||||||
| Total Regulatory Assets | $ | 429,882 | $ | 194,347 | $ | 624,229 | |||||
| December 31, 2021 | |||||||||||
| SJG | ETG | Total SJI | |||||||||
| Environmental Remediation Costs: | |||||||||||
| Expended - Net | $ | 151,630 | $ | 13,972 | $ | 165,602 | |||||
| Liability for Future Expenditures | 97,964 | 77,830 | 175,794 | ||||||||
| Deferred ARO Costs | 47,784 | 33,872 | 81,656 | ||||||||
| Deferred Pension and Other Postretirement Benefit Costs - Unrecognized Prior Service Cost | — | 30,881 | 30,881 | ||||||||
| Deferred Pension and Other Postretirement Benefit Costs | 47,504 | 813 | 48,317 | ||||||||
| Deferred Gas Costs - Net | 38,234 | — | 38,234 | ||||||||
| CIP Receivable | 17,776 | 2,955 | 20,731 | ||||||||
| SBC Receivable (excluding RAC) | 7,519 | — | 7,519 | ||||||||
| Deferred Interest Rate Contracts | 8,002 | — | 8,002 | ||||||||
| EET/EEP | 20,632 | 5,199 | 25,831 | ||||||||
| AFUDC - Equity Related Deferrals | 12,199 | — | 12,199 | ||||||||
| WNC | — | 4,269 | 4,269 | ||||||||
| Deferred COVID-19 Costs | 7,687 | 10,225 | 17,912 | ||||||||
| Other Regulatory Assets | 25,814 | 9,655 | 35,469 | ||||||||
| Total Regulatory Assets | $ | 482,745 | $ | 189,671 | $ | 672,416 | |||||
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, and EET/EEP, while the other assets are being recovered without a return on investment.
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ENVIRONMENTAL REMEDIATION COSTS - SJG and ETG have regulatory assets associated with environmental costs related to the cleanup of environmental sites as discussed in Note 15 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2021. The BPU allows SJG and ETG to recover the deferred costs not recovered from insurance carriers through their RAC mechanisms over seven-year periods after the costs are incurred.
DEFERRED GAS COSTS - NET - Over/under collections of gas costs are monitored through SJG's and ETG's BGSS clause. Included in SJG's balance as of March 31, 2022 and December 31, 2021 is $17.1 million and $21.3 million, respectively, of costs related to a previous pricing dispute on a long-term gas supply contract. As of June 1, 2021, SJG has begun to recover these costs from its customers through the BGSS clause. SJG’s Deferred Gas Costs - Net are in an under-recovered position, resulting in a regulatory asset as of March 31, 2022 and December 31, 2021. The decrease in these assets is primarily due to the recoveries from customers exceeding the actual gas commodity costs and changes in valuations of hedged natural gas positions. ETG's Deferred Gas Costs-Net are in an over-recovered position, resulting in a regulatory liability as of March 31, 2022 and December 31, 2021, see the Regulatory Liabilities table below.
CIP RECEIVABLE - The CIP tracking mechanism at SJG adjusts earnings when the actual usage per customer experienced during the period varies from an established baseline usage per customer. For SJG, actual usage per customer was more than the established baseline during the first three months of 2022, resulting in a reduction of the regulatory asset at March 31, 2022 as compared to December 31, 2021. This is primarily the result of colder than normal weather experienced in the region. For ETG, actual usage per customer was less than the established baseline during the first three months of 2022, resulting in an increase to the regulatory asset at March 31, 2022. ETG has not begun recovering against this regulatory asset as the CIP was established on July 1, 2021.
EET/EEP - The EET/EEP Regulatory Assets of SJG and ETG decreased primarily due to recoveries in excess of expenditures.
WNC - The tariffs for ETG included a weather normalization clause that reduced customer bills when weather was colder than normal and increased customer bills when weather was warmer than normal. The WNC deferral ended May 31, 2021 and was replaced by the CIP effective July 1, 2021. As such, the WNC regulatory asset will continue to decrease due to collections until the balance is fully recovered.
DEFERRED COVID-19 COSTS - 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. On September 14, 2021, the BPU extended this period to December 31, 2022. The Company is required to file quarterly reports with the BPU, along with a petition of recovery of such incremental costs with the BPU by December 31, 2022 or within 60 days of the close of the tracking period, whichever is later. The deferred balance is 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. As of March 31, 2022 and December 31, 2021, ETG deferred $12.6 million and $10.2 million, respectively, and SJG deferred $9.4 million and $7.7 million, respectively, specifically related to changes in payment patterns observed to date and consideration of macroeconomic factors. The Utilities have continued the suspension of disconnects for nonpayment by our customers, based on an executive order issued by the Governor of New Jersey in 2020, in which water, gas and electricity providers were barred from cutting services to New Jersey residents. On June 14, 2021, the Governor ended the shutoff moratorium effective July 1, 2021, but established a grace period that ran through the end of 2021. In December 2021, the Governor extended this grace period to March 15, 2022. During the grace period, disconnections for residential customers for nonpayment were prohibited, and low and moderate income households had until March 15, 2022 to work out how to pay back any outstanding bills. On March 25, 2022, the BPU approved an order which amended the existing customer bill of rights. These amendments require the Company to continue service for customers who submit an application for State-administered utility assistance programs prior to June 15, 2022. The Company is required to continue service through the date that the application is either approved or rejected by the respective State agency.
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The Utilities Regulatory Liabilities as of March 31, 2022 and December 31, 2021 consisted of the following items (in thousands):
| March 31, 2022 | |||||||||||
| SJG | ETG | Total SJI | |||||||||
| Excess Plant Removal Costs | $ | 12,392 | $ | 34,826 | $ | 47,218 | |||||
| Excess Deferred Taxes | 199,350 | 110,265 | 309,615 | ||||||||
| Deferred Gas Costs - Net | — | 75,416 | 75,416 | ||||||||
| Other Regulatory Liabilities | 6,124 | 5,266 | 11,390 | ||||||||
| Total Regulatory Liabilities | $ | 217,866 | $ | 225,773 | $ | 443,639 | |||||
| December 31, 2021 | |||||||||||
| SJG | ETG | Total SJI | |||||||||
| Excess Plant Removal Costs | $ | 12,125 | $ | 33,988 | $ | 46,113 | |||||
| Excess Deferred Taxes | 206,902 | 111,003 | 317,905 | ||||||||
| Deferred Gas Costs - Net | — | 28,842 | 28,842 | ||||||||
| Other Regulatory Liabilities | 3,384 | 2,707 | 6,091 | ||||||||
| Total Regulatory Liabilities | $ | 222,411 | $ | 176,540 | $ | 398,951 | |||||
EXCESS DEFERRED TAXES - This liability is recognized as a result of Tax Reform enacted into law on December 22, 2017. The decrease in this regulatory liability from December 31, 2021 to March 31, 2022 is related to excess tax amounts returned to customers through customer billings. See Note 10 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2021.
DEFERRED GAS COSTS - NET - Over/under collections of gas costs are monitored through ETG's BGSS mechanism. Net under collected gas costs are classified as a regulatory asset and net over collected gas costs are classified as a regulatory liability. Derivative contracts used to hedge natural gas purchase are also included in the BGSS, subject to BPU approval, along with amounts to be returned to customers under the AMA with SJRG as discussed in Note 3 as well as Note 1 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2021. The increase from December 31, 2021 to March 31, 2022 is primarily driven by the change in the value of the energy related derivative contracts as well as an increase in the amounts to be returned to customers under the AMA due to variable profit sharing.
OTHER REGULATORY LIABILITIES - This liability primarily represents recoveries in excess of expenditures for the SBC programs, which include the CEP/CLEP, USF and LL mechanisms.
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9. PENSION AND OTHER POSTRETIREMENT BENEFITS:
For the three months ended March 31, 2022 and 2021, 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 March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Service Cost | $ | 1,319 | $ | 1,591 | |||||||
| Interest Cost | 3,415 | 3,236 | |||||||||
| Expected Return on Plan Assets | (6,201) | (5,834) | |||||||||
| Amortizations: | |||||||||||
| Prior Service Cost | 18 | 25 | |||||||||
| Actuarial Loss | 1,839 | 3,194 | |||||||||
| Net Periodic Benefit Cost | 390 | 2,212 | |||||||||
| Capitalized Benefit Cost | (491) | (566) | |||||||||
| Deferred Benefit Cost (Credit) | 334 | (316) | |||||||||
| Total Net Periodic Benefit Expense | $ | 233 | $ | 1,330 | |||||||
| Other Postretirement Benefits | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Service Cost | $ | 173 | $ | 212 | |||||||
| Interest Cost | 502 | 475 | |||||||||
| Expected Return on Plan Assets | (1,692) | (1,436) | |||||||||
| Amortizations: | |||||||||||
| Prior Service Cost | (156) | (156) | |||||||||
| Actuarial Loss | 35 | 273 | |||||||||
| Net Periodic Benefit Cost | (1,138) | (632) | |||||||||
| Capitalized Benefit Cost | (60) | (106) | |||||||||
| Deferred Benefit Cost | 532 | 337 | |||||||||
| Total Net Periodic Benefit Expense | $ | (666) | $ | (401) | |||||||
The Pension Benefits Net Periodic Benefit Cost incurred by SJG was approximately $0.1 million and $1.6 million of the totals presented in the table above for the three months ended March 31, 2022 and 2021, respectively. The weighted average expected long term rate of return on plan assets used to determine the net benefit cost was 7.25%.
The Other Postretirement Benefits Net Periodic Benefit Cost incurred by SJG was approximately $(1.1) million and $(0.5) million of the totals presented in the table above for the three months ended March 31, 2022 and 2021, respectively. 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.
No contributions were made to the pension plans by either SJI or SJG during the three months ended March 31, 2022 or 2021. Future pension contributions by SJI cannot be determined at this time. Payments related to the unfunded SERP for SJG are expected to be approximately $3.9 million in 2022.
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, 2021 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 March 31, 2022 were as follows (in thousands):
| Company | Total Facility | Usage | Available Liquidity | Expiration Date | ||||||||||||||||||||||
| SJI: | ||||||||||||||||||||||||||
| SJI Syndicated Revolving Credit Facility | $ | 500,000 | $ | 60,400 | (A) | $ | 439,600 | September 2026 | ||||||||||||||||||
| SJG: | ||||||||||||||||||||||||||
| Commercial Paper Program/Revolving Credit Facility | 250,000 | 9,200 | (B) | 240,800 | September 2026 | |||||||||||||||||||||
| ETG: | ||||||||||||||||||||||||||
| ETG Revolving Credit Facility | 250,000 | 39,400 | (C) | 210,600 | September 2026 | |||||||||||||||||||||
| Total | $ | 1,000,000 | $ | 109,000 | $ | 891,000 | ||||||||||||||||||||
(A) Includes letters of credit outstanding in the amount of $15.4 million, which is used for various construction and operating activities.
(B) Includes letters of credit outstanding in the amount of $1.9 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.
For SJI and SJG, the amount of usage shown in the table above, less the letters of credit noted in (A)-(C) for SJI and (B) for SJG above, equals the amounts recorded as Notes Payable on the respective condensed consolidated balance sheets as of March 31, 2022.
SJI, SJG and ETG (collectively, the "Borrowers") have an unsecured, five-year master revolving credit facility (the "Credit Facility") with a syndicate of banks, which expires on September 1, 2026, unless earlier terminated or extended in accordance with its terms. There have been no significant changes to the nature or balances of this Credit Facility, except for the usage shown in the table above, since December 31, 2021, which are described in Note 13 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, 2021.
There have been no significant changes to the nature or balances of SJG's commercial paper program since December 31, 2021, which are described in Note 13 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, 2021.
Although there can be no assurance, management believes that actions presently being taken to pay off or refinance the short-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.
SJI, SJG and ETG were all in compliance with the financial covenants in their respective borrowing arrangements described herein and in Note 14 as of March 31, 2022.
The consummation of the Merger would constitute a "Change in Control" under the Revolving Credit Facility, and, as such, would create an event of default, resulting in amounts outstanding being payable. The Parent has secured a debt commitment letter to provide funding to repay, if necessary, any borrowings outstanding at the time of such a Change in Control.
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The weighted average interest rate on these borrowings, which changes daily, were as follows:
| March 31, 2022 | March 31, 2021 | ||||||||||
| Weighted average interest rate on borrowings: | |||||||||||
| SJI (inclusive of SJG, ETG and SJIU) | 1.21 | % | 1.40 | % | |||||||
| SJG | 0.39 | % | 0.19 | % | |||||||
Average borrowings and maximum amounts outstanding on these facilities were as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Average borrowings outstanding, not including LOC: | |||||||||||
| SJI (inclusive of all subsidiaries' facilities) | $ | 268,243 | $ | 366,500 | |||||||
| SJG | $ | 59,738 | $ | 21,200 | |||||||
| Maximum amounts outstanding, not including LOC: | |||||||||||
| SJI (inclusive of all subsidiaries' facilities) | $ | 375,300 | $ | 452,900 | |||||||
| SJG | $ | 108,000 | $ | 47,500 | |||||||
11. COMMITMENTS AND CONTINGENCIES:
Except as described below, there have been no significant changes to the Company's commitments and contingencies since December 31, 2021, which are 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, 2021.
GAS SUPPLY CONTRACTS - SJG has certain commitments for both pipeline capacity and gas supply for which SJG pays fees regardless of usage. Those commitments, as of March 31, 2022, averaged $92.9 million annually and totaled $419.5 million over the contracts’ lives; the increase since December 31, 2021 is due to two executed contracts in the first quarter of 2022 with Adelphia and Columbia pipelines. Approximately 46% 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.
GUARANTEES — As of March 31, 2022, SJI had issued $11.4 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.
AFFILIATE LOANS - SJI has provided $77.4 million and $62.6 million in capital contribution loans to REV, which are recorded in Notes Receivable - Affiliates on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively (see Note 3). The amount of capital contribution loans may be amended upward from time to time at the sole discretion of SJI.
COLLECTIVE BARGAINING AGREEMENTS — SJI and its subsidiaries employed 1,172 and 1,173 employees as of March 31, 2022 and December 31, 2021, respectively. SJG employed 430 and 432 employees as of March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022, 292 of the total number of employees were represented by labor unions at SJG, and 232 were represented by a labor union at ETG. As of December 31, 2021, 289 of the total number of employees were represented by labor unions at SJG, and 233 were represented by a labor union at ETG. Collective bargaining agreements with unions that represent SJG employees include agreements with IBEW Local 1293, which was finalized in February 2022 and now runs through February 2025, and with IAM Local 76 which runs through August 2025. A collective bargaining agreement with UWUA Local 424 that represents unionized ETG employees runs through November 2022. The labor agreements cover wage increases, health and welfare benefits, paid time off programs, and other benefits. At ETG, 68 employees voted to certify as a new bargaining unit effective November 23, 2021, for which SJI is actively negotiating a new collective bargaining agreement.
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CONVERTIBLE UNITS - See Notes 6 and 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, 2021 for a description of the issuances of convertible units and the respective obligations.
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. 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.
In August 2018, the State of New Jersey filed a civil enforcement action in the New Jersey Superior Court, Atlantic County, 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. Assessment of the nature and extent of the alleged damages requires substantial analysis from multiple experts. To date, discovery has not yet taken place and there is limited precedent on a number of the legal matters involved. As a result, SJG is currently evaluating the merits of the State of New Jersey’s allegations. All parties have agreed to and begun mediation efforts. SJG intends to vigorously defend itself in this matter, however, an adverse outcome in the litigation could have a material impact on SJI's and SJG's results of operations, financial condition and liquidity. SJG recorded a liability based on its best-estimate of the probable outcome of this matter as of March 31, 2022. This manufactured gas plant site has been fully remediated as discussed under "Environmental Remediation Costs" below.
In connection with the Merger Agreement and the transactions contemplated thereby, eight purported Company shareholders have filed lawsuits under federal securities laws, five in the United States District Court for the Southern District of New York, one in the United States District Court for the Eastern District of New York, one in the United States District Court for the District of New Jersey and one in the United States District Court for the Eastern District of Pennsylvania, challenging the adequacy of the disclosures made in the preliminary proxy statement filed by the Company with the SEC on March 30, 2022. These cases are captioned Stein v. South Jersey Industries, et al., Case No. 1:22-cv-02647, Finger v. South Jersey Industries, et al., Case No. 1:22-cv-03226, Kaufmann v. South Jersey Industries, et al., Case No. 1:22-cv-03255, Hopkins v. South Jersey Industries, et al., Case No. 1:22-cv-01972, Przyborowski v. South Jersey Industries, et al., Case No. 1:22-cv-02202, Justice v. South Jersey Industries, et al., Case No. 2:22-cv-01495, Brining v. South Jersey Industries, et. al., Case No. 1:22-cv-03384, and Jones v. South Jersey Industries, et. al., Case No. 1:22-cv-03424, respectively. The Complaints generally allege that the preliminary proxy statement filed by the Company with the SEC on March 30, 2022 misrepresents and/or omits certain purportedly material information relating to the Company’s financial projections and the analyses performed for the Board in connection with the Merger Agreement. The Complaints assert violations of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder against the Company and the members of its Board. The Complaints seek, among other things, an injunction enjoining the shareholder vote on the Merger and the consummation of the Merger unless and until certain additional information is disclosed to Company shareholders, costs of the action, including plaintiffs’ attorneys’ fees and experts’ fees, and other relief the court may deem just and proper. In response to these lawsuits, on May 3, 2022, the Company filed additional proxy soliciting materials related to the Merger. The Company cannot predict the outcomes of the Complaints. The Company believes that the Complaints are without merit and the Company and the individual defendants intend to vigorously defend against the Complaints and any subsequently filed similar actions.
SJI has accrued approximately $10.8 million and $11.3 million related to all claims in the aggregate as of March 31, 2022 and December 31, 2021, respectively, of which SJG has accrued approximately $10.0 million as of both March 31, 2022 and December 31, 2021.
ENVIRONMENTAL REMEDIATION COSTS — Except as noted under "Litigation" above, there have been no significant changes to the status of SJI’s environmental remediation efforts since December 31, 2021, 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, 2021.
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. Management takes an active
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role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in identifying, assessing and controlling various risks. Management reviews any open positions in accordance with strict policies to limit exposure to market risk. These derivative instruments include forward contracts, swap agreements, options contracts and futures contracts.
As of March 31, 2022, SJI and SJG had outstanding derivative contracts as follows:
| SJI Consolidated | SJG | |||||||
| Derivative contracts intended to limit exposure to market risk to: | ||||||||
| Expected future purchases of natural gas (in MMdts) | 69.0 | 13.7 | ||||||
| Expected future sales of natural gas (in MMdts) | 81.3 | 0.4 | ||||||
| Basis and Index related net purchase contracts (in MMdts) | 76.4 | 8.7 | ||||||
The expected future purchases and sales of electricity are not material.
These contracts, which have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives - Energy Related Assets or Derivatives - Energy Related Liabilities on the condensed consolidated balance sheets of SJI and SJG. For SJE and SJRG contracts, the net unrealized pre-tax gains (losses) for these energy-related commodity contracts are included with realized gains (losses) in Operating Revenues – Nonutility on the condensed consolidated statements of income for SJI. These unrealized pre-tax (losses) were $(21.3) million and $(0.1) million for the three months ended March 31, 2022 and 2021, 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 (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 March 31, 2022 and December 31, 2021, SJI had $66.6 million and $22.1 million, respectively, and SJG had $32.6 million and $7.1 million, respectively, of unrealized gains included in its BGSS related to energy-related commodity contracts.
SJG has 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. The fair value represents the amount SJG would have to pay the counterparty to terminate these contracts as of those dates.
As of March 31, 2022, SJG’s active interest rate swaps were as follows:
| Notional Amount | Fixed Interest Rate | Start Date | Maturity | |||||||||||||||||
| $ | 12,500,000 | 3.530% | 12/1/2006 | 2/1/2036 | ||||||||||||||||
| $ | 12,500,000 | 3.430% | 12/1/2006 | 2/1/2036 | ||||||||||||||||
For the unrealized gains and losses on 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 gains (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 March 31, 2022 and December 31, 2021, are as follows (in thousands):
| SJI (includes SJG and all other consolidated subsidiaries): | ||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments under GAAP | March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||
| Energy-related commodity contracts: | ||||||||||||||||||||||||||
| Derivatives - Energy Related - Current | $ | 150,133 | $ | 93,458 | $ | 95,041 | $ | 60,002 | ||||||||||||||||||
| Derivatives - Energy Related - Non-Current | 52,102 | 34,681 | 22,488 | 16,079 | ||||||||||||||||||||||
| Interest rate contracts: | ||||||||||||||||||||||||||
| Derivatives - Other - Current | — | 435 | — | 568 | ||||||||||||||||||||||
| Derivatives - Other - Noncurrent | — | 5,582 | — | 7,432 | ||||||||||||||||||||||
| Total Derivatives | $ | 202,235 | $ | 134,156 | $ | 117,529 | $ | 84,081 | ||||||||||||||||||
| SJG: | ||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments under GAAP | March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||
| Energy-related commodity contracts: | ||||||||||||||||||||||||||
| Derivatives – Energy Related – Current | $ | 32,804 | $ | 595 | $ | 9,396 | $ | 2,520 | ||||||||||||||||||
| Derivatives – Energy Related – Non-Current | 440 | — | 507 | 324 | ||||||||||||||||||||||
| Interest rate contracts: | ||||||||||||||||||||||||||
| Derivatives – Other - Current | — | 435 | — | 568 | ||||||||||||||||||||||
| Derivatives – Other - Noncurrent | — | 5,582 | — | 7,432 | ||||||||||||||||||||||
| Total Derivatives | $ | 33,244 | $ | 6,612 | $ | 9,903 | $ | 10,844 | ||||||||||||||||||
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 March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Description | Gross amounts of recognized assets/liabilities | Gross amount offset in the balance sheet | Net amounts of assets/liabilities in balance sheet | Gross amounts not offset in the balance sheet | Net amount | |||||||||||||||||||||||||||||||||
| Financial Instruments | Cash Collateral Posted/(Received) | |||||||||||||||||||||||||||||||||||||
| SJI (includes SJG and all other consolidated subsidiaries): | ||||||||||||||||||||||||||||||||||||||
| Derivatives - Energy Related Assets | $ | 202,235 | $ | — | $ | 202,235 | $ | (73,066) | (A) | $ | (75,456) | $ | 53,713 | |||||||||||||||||||||||||
| Derivatives - Energy Related Liabilities | $ | (128,139) | $ | — | $ | (128,139) | $ | 73,066 | (B) | $ | — | $ | (55,073) | |||||||||||||||||||||||||
| Derivatives - Other | $ | (6,017) | $ | — | $ | (6,017) | $ | — | $ | — | $ | (6,017) | ||||||||||||||||||||||||||
| SJG: | ||||||||||||||||||||||||||||||||||||||
| Derivatives - Energy Related Assets | $ | 33,244 | $ | — | $ | 33,244 | $ | (5) | (A) | $ | (16,084) | $ | 17,155 | |||||||||||||||||||||||||
| Derivatives - Energy Related Liabilities | $ | (595) | $ | — | $ | (595) | $ | 5 | (B) | $ | — | $ | (590) | |||||||||||||||||||||||||
| Derivatives - Other | $ | (6,017) | $ | — | $ | (6,017) | $ | — | $ | — | $ | (6,017) | ||||||||||||||||||||||||||
| As of December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Description | Gross amounts of recognized assets/liabilities | Gross amount offset in the balance sheet | Net amounts of assets/liabilities in balance sheet | Gross amounts not offset in the balance sheet | Net amount | |||||||||||||||||||||||||||||||||
| Financial Instruments | Cash Collateral Posted/(Received) | |||||||||||||||||||||||||||||||||||||
| SJI (includes SJG and all other consolidated subsidiaries): | ||||||||||||||||||||||||||||||||||||||
| Derivatives - Energy Related Assets | $ | 117,529 | $ | — | $ | 117,529 | $ | (57,804) | (A) | $ | (32,782) | $ | 26,943 | |||||||||||||||||||||||||
| Derivatives - Energy Related Liabilities | $ | (76,081) | $ | — | $ | (76,081) | $ | 57,804 | (B) | $ | — | $ | (18,277) | |||||||||||||||||||||||||
| Derivatives - Other | $ | (8,000) | $ | — | $ | (8,000) | $ | — | $ | — | $ | (8,000) | ||||||||||||||||||||||||||
| SJG: | ||||||||||||||||||||||||||||||||||||||
| Derivatives - Energy Related Assets | $ | 9,903 | $ | — | $ | 9,903 | $ | (1,780) | (A) | $ | — | $ | 8,123 | |||||||||||||||||||||||||
| Derivatives - Energy Related Liabilities | $ | (2,844) | $ | — | $ | (2,844) | $ | 1,780 | (B) | $ | — | $ | (1,064) | |||||||||||||||||||||||||
| Derivatives - Other | $ | (8,000) | $ | — | $ | (8,000) | $ | — | $ | — | $ | (8,000) | ||||||||||||||||||||||||||
(A) The balances at March 31, 2022 and December 31, 2021 were related to derivative liabilities which can be net settled against derivative assets.
(B) The balances at March 31, 2022 and December 31, 2021 were related to derivative assets which can be net settled against derivative liabilities.
The effect of derivative instruments on the condensed consolidated statements of income are as follows (in thousands):
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| Three Months Ended March 31, | ||||||||||||||
| Derivatives Previously in Cash Flow Hedging Relationships under GAAP | 2022 | 2021 | ||||||||||||
| SJI (includes SJG and all other consolidated subsidiaries): | ||||||||||||||
| Interest Rate Contracts: | ||||||||||||||
| Losses reclassified from AOCL into income (a) | $ | (13) | $ | (12) | ||||||||||
| SJG: | ||||||||||||||
| Interest Rate Contracts: | ||||||||||||||
| Losses reclassified from AOCL into income (a) | $ | (13) | $ | (12) | ||||||||||
(a) Included in Interest Charges
| Three Months Ended March 31, | ||||||||||||||
| Derivatives Not Designated as Hedging Instruments under GAAP | 2022 | 2021 | ||||||||||||
| SJI (no balances for SJG; includes all other consolidated subsidiaries): | ||||||||||||||
| Losses on energy-related commodity contracts (a) | $ | (21,268) | $ | (44) | ||||||||||
(a) Included in Operating Revenues - Nonutility
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 March 31, 2022 is not material. The amount SJI would have been required to pay to settle the instruments immediately or post collateral to its counterparties if the credit-risk-related contingent features underlying these agreements were triggered on March 31, 2022 after offsetting asset positions with the same counterparties under master netting arrangements, is also not material.
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.
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):
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| As of March 31, 2022 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| SJI (includes SJG and all other consolidated subsidiaries): | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Available-for-Sale Securities (A) | $ | 37 | $ | 37 | $ | — | $ | — | |||||||||||||||
| Derivatives – Energy Related Assets (B) | 202,235 | 119,438 | 65,413 | 17,384 | |||||||||||||||||||
| $ | 202,272 | $ | 119,475 | $ | 65,413 | $ | 17,384 | ||||||||||||||||
| SJG: | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Derivatives – Energy Related Assets (B) | $ | 33,244 | $ | 20,879 | $ | 107 | $ | 12,258 | |||||||||||||||
| $ | 33,244 | $ | 20,879 | $ | 107 | $ | 12,258 | ||||||||||||||||
| SJI (includes SJG and all other consolidated subsidiaries): | |||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives – Energy Related Liabilities (B) | $ | 128,139 | $ | 10,415 | $ | 98,110 | $ | 19,614 | |||||||||||||||
| Derivatives – Other (C) | 6,017 | — | 6,017 | — | |||||||||||||||||||
| $ | 134,156 | $ | 10,415 | $ | 104,127 | $ | 19,614 | ||||||||||||||||
| SJG: | |||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives – Energy Related Liabilities (B) | $ | 595 | $ | 5 | $ | 582 | $ | 8 | |||||||||||||||
| Derivatives – Other (C) | 6,017 | — | 6,017 | — | |||||||||||||||||||
| $ | 6,612 | $ | 5 | $ | 6,599 | $ | 8 | ||||||||||||||||
| As of December 31, 2021 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| SJI (includes SJG and all other consolidated subsidiaries): | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Available-for-Sale Securities (A) | $ | 37 | $ | 37 | $ | — | $ | — | |||||||||||||||
| Derivatives – Energy Related Assets (B) | 117,529 | 56,260 | 52,277 | 8,992 | |||||||||||||||||||
| $ | 117,566 | $ | 56,297 | $ | 52,277 | $ | 8,992 | ||||||||||||||||
| SJG: | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Derivatives – Energy Related Assets (B) | $ | 9,903 | $ | 4,648 | $ | 1,617 | $ | 3,638 | |||||||||||||||
| $ | 9,903 | $ | 4,648 | $ | 1,617 | $ | 3,638 | ||||||||||||||||
| SJI (includes SJG and all other consolidated subsidiaries): | |||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives – Energy Related Liabilities (B) | $ | 76,081 | $ | 21,879 | $ | 45,890 | $ | 8,312 | |||||||||||||||
| Derivatives – Other (C) | 8,000 | — | 8,000 | — | |||||||||||||||||||
| $ | 84,081 | $ | 21,879 | $ | 53,890 | $ | 8,312 | ||||||||||||||||
| SJG: | |||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives – Energy Related Liabilities (B) | $ | 2,844 | $ | 1,780 | $ | 1,064 | $ | — | |||||||||||||||
| Derivatives – Other (C) | 8,000 | — | 8,000 | — | |||||||||||||||||||
| $ | 10,844 | $ | 1,780 | $ | 9,064 | $ | — | ||||||||||||||||
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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.
(A) Available-for-Sale Securities include securities that are traded in active markets and securities that are not traded publicly. The securities traded in active markets are valued using the quoted principal market close prices that are provided by the trustees and are categorized in Level 1 in the fair value hierarchy.
(B) Derivatives – Energy Related Assets and Liabilities are traded in both exchange-based and non-exchange-based markets. Exchange-based contracts are valued using unadjusted quoted market sources in active markets and are categorized in Level 1 in the fair value hierarchy. Certain non-exchange-based contracts are valued using indicative price quotations available through brokers or over-the-counter, on-line exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask mid-point prices and are obtained from sources that management believes provide the most liquid market. 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. 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.
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 – 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.
The following table provides quantitative information regarding significant unobservable inputs in Level 3 fair value measurements (in thousands, except for ranges):
SJI (includes SJG and all other consolidated subsidiaries):
| Type | Fair Value at March 31, 2022 | Valuation Technique | Significant Unobservable Input | Range [Weighted Average] | ||||||||||||||||
| Assets | Liabilities | |||||||||||||||||||
| Forward Contract - Natural Gas | $17,384 | $19,614 | Discounted Cash Flow | Forward price (per dt) | $2.27 - $12.20 [$5.27] | (A) | ||||||||||||||
| Type | Fair Value at December 31, 2021 | Valuation Technique | Significant Unobservable Input | Range [Weighted Average] | ||||||||||||||||
| Assets | Liabilities | |||||||||||||||||||
| Forward Contract - Natural Gas | $8,916 | $8,107 | Discounted Cash Flow | Forward price (per dt) | $1.77 - $8.30 [$3.73] | (A) | ||||||||||||||
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SJG:
| Type | Fair Value at March 31, 2022 | Valuation Technique | Significant Unobservable Input | Range [Weighted Average] | ||||||||||||||||
| Assets | Liabilities | |||||||||||||||||||
| Forward Contract - Natural Gas | $ | 12,258 | $ | 8 | Discounted Cash Flow | Forward price (per dt) | $4.37 - $11.52 [$6.92] | (A) | ||||||||||||
| Type | Fair Value at December 31, 2021 | Valuation Technique | Significant Unobservable Input | Range [Weighted Average] | ||||||||||||||||
| Assets | Liabilities | |||||||||||||||||||
| Forward Contract - Natural Gas | $ | 3,638 | $ | — | Discounted Cash Flow | Forward price (per dt) | $3.75 - $5.66 [$4.94] | (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.
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 March 31, 2022 | Three Months Ended March 31, 2021 | ||||||||||
| SJI (includes SJG and all other consolidated subsidiaries): | |||||||||||
| Balance at beginning of period | $ | 680 | $ | 11,006 | |||||||
| Other Changes in Fair Value from Continuing and New Contracts, Net | (398) | 5,477 | |||||||||
| Settlements | (2,512) | (5,063) | |||||||||
| Balance at end of period | $ | (2,230) | $ | 11,420 | |||||||
| SJG: | |||||||||||
| Balance at beginning of period | $ | 3,638 | $ | 3,385 | |||||||
| Other Changes in Fair Value from Continuing and New Contracts, Net | 12,250 | 3,391 | |||||||||
| Settlements | (3,638) | (3,385) | |||||||||
| Balance at end of period | $ | 12,250 | $ | 3,391 | |||||||
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14. LONG-TERM DEBT:
Except as described below, there have been no significant changes to SJI's or SJG's long-term debt since December 31, 2021. See Note 14 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, 2021.
The consummation of the Merger would constitute a "Change in Control" under certain long-term debt agreements, and, as such, would provide applicable debt holders the right to have their debt repurchased. If the debt holders elect repayment, the Parent has secured a debt commitment letter to provide funding to repay those amounts.
In March 2022, SJG repaid $2.5 million of 4.84% MTNs, which are due annually with the final payment due March 2026.
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15. REVENUE:
There have been no significant changes to the nature of the Company's revenues or the revenue recognition policies and practices of the Company since December 31, 2021, 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, 2021.
Disaggregated revenues from contracts with customers are disclosed below, by operating segment (in thousands).
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||
| SJG Utility Operations | ETG Utility Operations | Wholesale Energy Operations | Retail Services | Renewables | Corporate Services and Intersegment | Total | |||||||||||||||||
| Customer Type: | |||||||||||||||||||||||
| Residential | $ | 208,728 | $ | 117,538 | $ | 527 | $ | — | $ | — | $ | 326,793 | |||||||||||
| Commercial & Industrial | 77,889 | 58,867 | 447,411 | 21 | 5,356 | (8,708) | 580,836 | ||||||||||||||||
| OSS & Capacity Release | 4,902 | — | — | — | — | — | 4,902 | ||||||||||||||||
| Other | 913 | 188 | — | 1,393 | — | (135) | 2,359 | ||||||||||||||||
| $ | 292,432 | $ | 176,593 | $ | 447,411 | $ | 1,941 | $ | 5,356 | $ | (8,843) | $ | 914,890 | ||||||||||
| Product/Service Line: | |||||||||||||||||||||||
| Gas | $ | 292,432 | $ | 176,593 | $ | 447,411 | $ | — | $ | — | $ | (8,708) | $ | 907,728 | |||||||||
| Electric | — | — | — | 21 | — | — | 21 | ||||||||||||||||
| Solar | — | — | — | — | 1,016 | — | 1,016 | ||||||||||||||||
| Fuel Cells | — | — | — | — | 3,748 | — | 3,748 | ||||||||||||||||
| Other | — | — | — | 1,920 | 592 | (135) | 2,377 | ||||||||||||||||
| $ | 292,432 | $ | 176,593 | $ | 447,411 | $ | 1,941 | $ | 5,356 | $ | (8,843) | $ | 914,890 | ||||||||||
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||
| SJG Utility Operations | ETG Utility Operations | Wholesale Energy Operations | Retail Services | Renewables | Corporate Services and Intersegment | Total | |||||||||||||||||
| Customer Type: | |||||||||||||||||||||||
| Residential | $ | 166,589 | $ | 105,904 | $ | — | $ | 512 | $ | — | $ | — | $ | 273,005 | |||||||||
| Commercial & Industrial | 60,313 | 49,654 | 373,967 | 1,607 | 6,423 | (6,777) | 485,187 | ||||||||||||||||
| OSS & Capacity Release | 2,299 | — | — | — | — | — | 2,299 | ||||||||||||||||
| Other | 761 | 192 | — | 935 | — | (96) | 1,792 | ||||||||||||||||
| $ | 229,962 | $ | 155,750 | $ | 373,967 | $ | 3,054 | $ | 6,423 | $ | (6,873) | $ | 762,283 | ||||||||||
| Product/ Service Line: | |||||||||||||||||||||||
| Gas | $ | 229,962 | $ | 155,750 | $ | 373,967 | $ | — | $ | — | $ | (6,699) | $ | 752,980 | |||||||||
| Electric | — | — | — | 1,607 | — | (78) | 1,529 | ||||||||||||||||
| Solar | — | — | — | — | 1,911 | — | 1,911 | ||||||||||||||||
| Landfills | — | — | — | — | 425 | — | 425 | ||||||||||||||||
| Fuel Cells | — | — | — | — | 4,087 | — | 4,087 | ||||||||||||||||
| Other | — | — | — | 1,447 | — | (96) | 1,351 | ||||||||||||||||
| $ | 229,962 | $ | 155,750 | $ | 373,967 | $ | 3,054 | $ | 6,423 | $ | (6,873) | $ | 762,283 | ||||||||||
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The SJG balance is a part of the SJG Utility Operations segment, and is before intercompany eliminations with other SJI entities.
Revenues on the condensed consolidated statements of income that are not with contracts with customers consist of (a) revenues from alternative revenue programs at the SJG and ETG utility operating segments (primarily CIP and WNC), (b) both utility and nonutility realized revenue from derivative contracts at the SJG and ETG Utility Operations, Wholesale Energy Operations and Retail Services operating segments, and (c) unrealized revenues from derivative contracts at the Wholesale Energy Operations and Retail Services operating segments.
The Utilities' 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, 2021. Total revenues arising from alternative revenue programs at SJI were $(6.2) million and $1.0 million for the three months ended March 31, 2022 and 2021, respectively. Total revenues arising from alternative revenue programs at SJG were $(5.8) million and $(0.8) million for the three months ended March 31, 2022 and 2021, respectively.
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, 2022 | $ | 343,835 | $ | 87,357 | ||||
| Ending balance as of March 31, 2022 | 407,313 | 74,296 | ||||||
| Increase (Decrease) | $ | 63,478 | $ | (13,061) | ||||
| Beginning balance as of January 1, 2021 | $ | 278,723 | $ | 85,423 | ||||
| Ending balance as of March 31, 2021 | 327,832 | 68,155 | ||||||
| Increase (Decrease) | $ | 49,109 | $ | (17,268) | ||||
| SJG: | ||||||||
| Beginning balance as of January 1, 2022 | $ | 125,848 | $ | 43,236 | ||||
| Ending balance as of March 31, 2022 | 174,489 | 40,977 | ||||||
| Increase (Decrease) | $ | 48,641 | $ | (2,259) | ||||
| Beginning balance as of January 1, 2021 | $ | 88,657 | $ | 46,837 | ||||
| Ending balance as of March 31, 2021 | 130,286 | 35,362 | ||||||
| Increase (Decrease) | $ | 41,629 | $ | (11,475) | ||||
(A) 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.
(B) 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.
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16. ACQUISITIONS & BUSINESS COMBINATIONS:
Bronx Midco
Catamaran and a third party formed Bronx Midco, of which Catamaran owns 99%. On June 9, 2021, Bronx Midco purchased a fuel cell project totaling 5 MW in Bronx, New York that is in the process of being constructed and, while we estimate the project could go live in 2022, due to the possibility of additional permitting and/or construction delays, this project may be delayed until 2023. Marina, through its ownership in Catamaran, has a 92% ownership interest in Bronx Midco, and, as a result, Marina consolidates the entity as Marina has the power to direct the activities of the entity that most significantly impact the entity’s economic performance.
ASC Topic 805, “Business Combinations,” states that a business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. As the acquisition did not meet the definition of a business combination under ASC 805, the Company accounted for the transaction as an asset acquisition. In an asset acquisition, goodwill is not recognized, but rather any excess consideration transferred over the fair value of the net assets acquired is allocated on a relative fair value basis to the identifiable net assets. The fuel cell project includes a land lease and working capital.
The total expected cost of the fuel cell project is $60.1 million, of which the partners have paid $34.1 million as of March 31, 2022. Of this total, Marina invested $31.4 million as of March 31, 2022. To account for the third party partner's interest in Bronx Midco, Marina recorded $2.7 million of NCIs in Total Equity on the condensed consolidated balance sheets as of March 31, 2022. The major depreciable assets of the Bronx Midco fuel cell project are the fuel cell modules, which will be depreciated over their estimated useful lives of 35 years once placed in service. The lease cost associated with the land lease is being recognized on a straight-line basis over the lease term of 35 years.
All assets and financial results of Bronx Midco are included in the Renewables segment. As this project is not yet placed into service, no revenues have been recorded, expenses incurred in the Company's condensed consolidated statements of income in the three months ended March 31, 2022 and 2021 are not material, and no ITC has been recorded.
Red River
On March 22, 2022, SJI, through its wholly-owned subsidiary SJI RNG Devco, LLC, formed the Red River joint venture with two third party partners, of which SJI RNG Devco, LLC has an 80% ownership interest. Red River was formed for the purpose of building anaerobic digesters on certain dairy farms to produce RNG for injection into natural gas pipelines, and supporting SJI's commitment to decarbonization. There has been no activity among this joint venture as of March 31, 2022.
Notes 1 and 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, 2021 describe the asset acquisitions and business combinations that occurred in 2021 and 2020.
17. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS:
GOODWILL - See Note 21 to the Consolidated Financial Statements in Item 8 of SJI's and SJG’s Annual Report on Form 10-K for the year ended December 31, 2021 for a description of the Company's goodwill accounting policies and annual impairment test.
The Company determined that, during the three months ended March 31, 2022, there were not indicators of impairment of the goodwill associated with its reporting units, and as such did not perform a quantitative analysis. The qualitative factors analyzed also included macroeconomic conditions related to the COVID-19 pandemic. There were no impairments recorded for the three months ended March 31, 2022 and 2021. Should economic conditions deteriorate in future periods or become 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.
As of both March 31, 2022 and December 31, 2021, SJI had $707.0 million of goodwill, including $700.2 million in the ETG Utility Operations segment and $6.8 million included in the Retail Services segment.
IDENTIFIABLE INTANGIBLE ASSETS - The primary identifiable intangible assets of the Company are customer relationships within the Retail Services segment, interconnection and power purchase agreements at Annadale (collectively
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"Annadale intangible assets"), and an AMA within the ETG Utility Operations segment which expired on March 31, 2022. Total SJI amortization expense related to identifiable intangible assets was $1.5 million for both the three months ended March 31, 2022 and 2021. No impairment charges were recorded on identifiable intangible assets during the three months ended March 31, 2022 or 2021.
Other than amortization, there were no significant changes to the identifiable intangible assets since December 31, 2021. For more information, see Note 21 to the Consolidated Financial Statements in Item 8 of SJI's and SJG’s Annual Report on Form 10-K for the year ended December 31, 2021.
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18. SUBSEQUENT EVENTS:
The following events occurred in April/May 2022:
•SJRG and ETG entered into an AMA whereby SJRG manages the pipeline capacity of ETG. See Note 3.
•SJG filed a petition with the BPU requesting a base revenue increase to obtain a return on and of new capital investments. See Note 7.
•In connection with the Merger Agreement, the Company filed a definitive proxy statement with the SEC, along with additional proxy soliciting materials. See Note 1.
•The Company filed a joint petition to the BPU seeking authority for approval of an indirect change of control of ETG and SJG, effectuated by the Merger Agreement. This matter is pending BPU approval. See Note 1.
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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, 2021.
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 are intended 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; cybersecurity incidents and related disruptions; 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; failure to satisfy the conditions to closing of the Merger, including obtaining the requisite vote of the shareholders of SJI; the diversion of management time on Merger-related issues; and public health crises and epidemics or pandemics, such as the COVID-19 pandemic.
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, 2021 and in any other SEC filings made by SJI or SJG during 2021 and 2022 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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Merger - On February 23, 2022, South Jersey Industries, Inc. (SJI or the Company) announced that it had signed an agreement and plan of merger (the “Merger Agreement”) with NJ Boardwalk Holdings LLC, a Delaware limited liability company (“Parent”) and Boardwalk Merger Sub, Inc., a New Jersey corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), pursuant to which, Merger Sub will be merged with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of Parent. Each of Parent and Merger Sub are affiliates of Infrastructure Investments Fund. Following completion of the transaction, SJI intends to delist its shares from the New York Stock Exchange.
At the effective time of the merger (the “Effective Time”), each share of SJI’s common stock issued and outstanding immediately before the Effective Time will be converted into the right to receive $36.00 in cash, without interest.
SJI’s shareholders will be asked to vote on the adoption of the Merger Agreement and the merger at a special shareholders’ meeting that will be held on a date to be announced. The closing of the merger is subject to customary conditions, including the receipt of regulatory approvals by the BPU, and that the Merger Agreement be adopted by at least a majority of the votes cast by shareholders entitled to vote thereon at the meeting.
The Merger Agreement places limitations on SJI’s ability to engage in certain types of transactions without Parent’s consent between the signing of the Merger Agreement and the Effective Time, including limitations on SJI’s ability to issue dividends other than consistent with its past practices, acquire other businesses, issue equity of SJI (except in the ordinary course pursuant to equity compensation plans) and, subject to certain exceptions, incurring certain indebtedness for borrowed money.
The Merger Agreement contains certain termination rights, including the right of SJI or Parent to terminate if the merger is not consummated within 12 months after signing, subject to certain extensions and exceptions. Under the terms of the Merger Agreement, the Company may be required to pay Parent a termination fee of $140.0 million if the Merger Agreement is terminated under certain specified circumstances. The Merger Agreement additionally provides that Parent pay the Company a termination fee of $255.0 million under certain specified circumstances.
COVID-19 - See “Deferred COVID-19 Costs” in Note 8 to the condensed consolidated financial statements for information about regulatory assets recorded as of March 31, 2022 and December 31, 2021 related to incremental costs incurred related to COVID-19. Except as discussed therein, the impact of COVID-19 on the financial results of the Company has not been material for the three months ended March 31, 2022 and 2021, respectively. For additional information related to COVID-19 and its impacts, see the "COVID-19" section of Item 7 "Management Discussion & Analysis of Financial Condition and Results of Operations" of SJI's Annual Report on Form 10-K for the year ended December 31, 2021.
Critical Accounting Policies — Estimates and Assumptions — Other than as described below, there have been no changes to these estimates and assumptions from SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2021.
Regulatory Actions — Other than the changes discussed in Note 7 to the condensed consolidated financial statements, there have been no significant regulatory actions since those discussed 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, 2021.
New Accounting Pronouncements — See discussions concerning New Accounting Pronouncements and their impact on SJI and SJG in Note 1 to the condensed consolidated financial statements.
Operating Segments:
The operating segments reflect the financial information regularly evaluated by the CODM, which for SJI is the Company's Chief Executive Officer. The operating 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 primarily of natural gas distribution to residential, commercial and industrial customers in northern and central New Jersey.
•Wholesale energy operations include the activities of SJRG and SJEX.
•Retail services operations includes the activities of SJE, SJESP and SJEI, as well as our equity interest in Millennium.
•Renewables consists of:
◦The Catamaran joint venture, which owns Annadale and Bronx Midco, along with a solar project in Massachusetts.
◦Solar-generation sites located in New Jersey.
◦The activities of ACLE, BCLE, SCLE and SXLE, which have all ceased operations.
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•Decarbonization consists of
◦SJI Renewables Energy Ventures, LLC, which includes our equity interest in REV, which is included in Equity in Earnings of Affiliated Companies on the condensed consolidated statements of income.
◦SJI RNG Devco, LLC, which includes costs incurred to develop renewable natural gas operations at certain dairy farms along with the related development rights acquired in 2020. Also included here is the Red River joint venture that was formed in March 2022.
•Midstream invests in infrastructure and other midstream projects, including an investment in PennEast for which development ceased in September 2021.
•Corporate & Services segment includes costs related to financing, acquisitions and divestitures, and other unallocated costs.
•Intersegment represents intercompany transactions among the above SJI consolidated entities.
SJI groups its utility businesses under its wholly-owned subsidiary SJIU. This group consists of gas utility operations of SJG and ETG. SJI groups its nonutility operations into separate categories: Energy Management; Energy Production; Midstream; and Corporate & Services. Energy Management includes wholesale energy and retail services. Energy Production includes renewables and decarbonization. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to the condensed consolidated financial statements.
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SOUTH JERSEY INDUSTRIES, INC.
RESULTS OF OPERATIONS:
Summary:
SJI's net income for the three months ended March 31, 2022 increased $0.6 million to net income of $129.3 million compared with the same period in 2021. SJI's income from continuing operations for the three months ended March 31, 2022 increased $0.6 million to income of $129.4 million compared with the same period in 2021. 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 gas utility operations at SJG for the three months ended March 31, 2022 increased $5.0 million to $88.6 million compared with the same period in 2021, primarily due to the roll-in of infrastructure programs and customer growth, along with the margin impact of SJG's CIP mechanism as discussed in "Utility Margin - SJG Utility Operations" below.
•The income contribution from gas utility operations at ETG for the three months ended March 31, 2022 increased $0.6 million to $38.6 million compared with the same period in 2021, primarily due to customer growth and colder weather.
•The income contribution from the wholesale energy operating segment for the three months ended March 31, 2022 increased $0.5 million to $13.6 million compared with the same period in 2021, primarily due to higher margins from daily energy trading activities and colder weather experienced in the first quarter of 2022. This was almost entirely offset with the change in unrealized gains and losses on forward financial contracts due to price volatility.
•The Corporate & Services segment incurred approximately $3.4 million of costs related to the Merger Agreement that did not occur in the prior year period (see Note 1 to the condensed consolidated financial statements).
•The income contribution from the renewables operating segment for the three months ended March 31, 2022 decreased $1.0 million to $0.1 million compared with the same period in 2021, primarily due to lower sales of SRECs.
•The income contribution from the midstream operating segment for the three months ended March 31, 2022 decreased $1.2 million to a loss of $0.2 million compared with the same period in 2021, primarily due to AFUDC recorded in 2021 that did not occur in 2022 due to the decision to cease further development of the PennEast project (see Note 3 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 previously used derivatives to limit its exposure to increasing interest rates on variable-rate debt.
The types of transactions that typically cause the most significant volatility in operating results are as follows:
•SJRG purchases and holds natural gas in storage and maintains capacity on interstate pipelines to earn profit margins in the future. SJRG utilizes 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.
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•SJE uses 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. These contracts outstanding as of March 31, 2022 were not material.
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; (ii) less income and plus losses attributable to noncontrolling interests; and (iii) less the impact of transactions, contractual arrangements or other events where management believes period to period comparisons of SJI's operations could be difficult or potentially confusing. With respect to part (iii) of the definition of Economic Earnings, items excluded from Economic Earnings for the three months ended March 31, 2022 and 2021, are described in (A)-(B) 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 the items described above. Management uses Economic Earnings to manage its business and to determine such items as incentive/compensation arrangements and allocation of resources. Specifically regarding derivatives, we believe that this financial measure indicates to investors the profitability of the entire derivative-related transaction and not just the portion that is subject to mark-to-market valuation under GAAP. We believe that considering only the change in market value on the derivative side of the transaction can produce a false sense as to the ultimate profitability of the total transaction as no change in value is reflected for the non-derivative portion of the transaction.
Economic Earnings for the three months ended March 31, 2022 increased $20.6 million to $149.5 million compared with the same period in 2021. 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 operating segment for the three months ended March 31, 2022 increased $15.8 million to $29.0 million compared with the same period in 2021, primarily due to higher margins from daily energy trading activities and from colder weather experienced in the first quarter of 2022.
•The Economic Earnings contribution from gas utility operations at SJG for the three months ended March 31, 2022 increased $5.0 million to $88.6 million compared with the same period in 2021, primarily due to the roll-in of infrastructure programs and customer growth, along with the margin impact of SJG's CIP mechanism as discussed in "Utility Margin - SJG Utility Operations" below.
•The Economic Earnings contribution from the gas utility operations at ETG for the three months ended March 31, 2022 increased $0.6 million to $38.6 million compared with the same period in 2021, primarily due to customer growth and colder weather.
•The income contribution from the midstream operating segment for the three months ended March 31, 2022 decreased $1.0 million compared with the same period in 2021, primarily due to AFUDC recorded in 2021 that did not occur in 2022 due to the decision to cease further development of the PennEast project (see Note 3 to the condensed consolidated financial statements).
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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 months ended March 31 (in thousands, except per share data):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Income from Continuing Operations | $ | 129,414 | $ | 128,798 | |||||||
Minus/Plus: | |||||||||||
Unrealized Mark-to-Market Losses on Derivatives | 21,268 | 44 | |||||||||
| Income Attributable to Noncontrolling Interests | (135) | (129) | |||||||||
Acquisition/Sale Net Costs (A) | 6,491 | 267 | |||||||||
| Income Taxes (B) | (7,583) | (86) | |||||||||
| Economic Earnings | $ | 149,455 | $ | 128,894 | |||||||
| Earnings per Share from Continuing Operations | $ | 1.08 | $ | 1.26 | |||||||
| Minus/Plus: | |||||||||||
Unrealized Mark-to-Market Losses on Derivatives | 0.18 | — | |||||||||
Income Attributable to Noncontrolling Interests | — | — | |||||||||
Acquisition/Sale Net Costs (A) | 0.05 | — | |||||||||
| Income Taxes (B) | (0.06) | — | |||||||||
Economic Earnings per Share | $ | 1.25 | $ | 1.26 | |||||||
The reconciliation of derivative instruments not designated as hedging instruments under GAAP in the condensed consolidated statements of income (see Note 12 to the condensed consolidated financial statements), and the Economic Earnings table above, is as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Total unrealized mark-to-market losses on derivatives | (21,268) | (44) | |||||||||
| Income Attributable to Noncontrolling Interests | 135 | 129 | |||||||||
| Acquisition/Sale Net Costs (A) | (6,491) | (267) | |||||||||
| Income Taxes (B) | 7,583 | 86 | |||||||||
| Total reconciling items between income from continuing operations and economic earnings | $ | (20,041) | $ | (96) | |||||||
(A) In 2022, represents costs incurred related to the Merger Agreement and to finalize the transactions related to acquiring Bronx Midco and solar projects. In 2021, represents the final working capital payment on the sale of Elkton, which was finalized during the first quarter of 2021.
(B) The income taxes were determined using a combined average statutory tax rate.
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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 months ended March 31 (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Utility Operating Revenues: | |||||||||||
| Firm Sales - | |||||||||||
| Residential | $ | 199,583 | $ | 161,102 | |||||||
| Commercial | 43,768 | 32,109 | |||||||||
| Industrial | 1,898 | 1,601 | |||||||||
| Cogeneration & Electric Generation | 679 | 509 | |||||||||
| Firm Transportation - | |||||||||||
| Residential | 4,851 | 4,899 | |||||||||
| Commercial | 20,076 | 17,190 | |||||||||
| Industrial | 8,415 | 7,350 | |||||||||
| Cogeneration & Electric Generation | 1,526 | 1,379 | |||||||||
| Total Firm Revenues | 280,796 | 226,139 | |||||||||
| Interruptible Sales | 172 | 73 | |||||||||
| Interruptible Transportation | 500 | 444 | |||||||||
| Off-System Sales | 37,648 | 23,290 | |||||||||
| Capacity Release | 2,906 | 1,209 | |||||||||
| Other | 241 | 244 | |||||||||
| 322,263 | 251,399 | ||||||||||
| Less: Intercompany Sales | (8,280) | (6,329) | |||||||||
| Total Utility Operating Revenues | 313,983 | 245,070 | |||||||||
| Less: | |||||||||||
| Cost of Sales - Utility | 129,868 | 74,537 | |||||||||
| Less: Intercompany Cost of Sales | (8,280) | (6,329) | |||||||||
| Total Cost of Sales - Utility (Excluding Depreciation & Amortization) (A) | 121,588 | 68,208 | |||||||||
| Less: Depreciation & Amortization (A) | 40,009 | 29,315 | |||||||||
| Total GAAP Gross Margin | 152,386 | 147,547 | |||||||||
| Add: Depreciation & Amortization (A) | 40,009 | 29,315 | |||||||||
| Less: CIP Recoveries (B) | 6,161 | 4,238 | |||||||||
| Less: RAC Recoveries (B) | 10,957 | 6,965 | |||||||||
| Less: TIC Recoveries (B) | 68 | — | |||||||||
| Less: EET Recoveries (B) | 1,348 | 1,166 | |||||||||
| Less: Revenue Taxes | 937 | 512 | |||||||||
| Utility Margin (C) | $ | 172,924 | $ | 163,981 | |||||||
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| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Utility Margin: | |||||||||||
| Residential | $ | 123,478 | $ | 119,974 | |||||||
| Commercial and Industrial | 44,587 | 41,022 | |||||||||
| Cogeneration and Electric Generation | 1,252 | 1,249 | |||||||||
| Interruptible | 26 | 65 | |||||||||
| Off-System Sales & Capacity Release | 2,262 | 737 | |||||||||
| Other Revenues | 240 | 243 | |||||||||
| Margin Before Weather Normalization & Decoupling | 171,845 | 163,290 | |||||||||
| CIP Mechanism | (726) | (763) | |||||||||
| EET Mechanism | 1,805 | 1,454 | |||||||||
| Utility Margin (C) | $ | 172,924 | $ | 163,981 | |||||||
(A) Does not include amortization of debt issuance costs that are recorded as Interest Charges on the condensed consolidated statements of income.
(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 $70.9 million, or 28.2%, for the three months ended March 31, 2022 compared with the same period in 2021. Excluding intercompany transactions, revenues increased $68.9 million, or 28.1%, for the three months ended March 31, 2022 compared with the same period in 2021. The significant drivers for the overall change were as follows:
•Firm revenue increased $54.7 million for the three months ended March 31, 2022 compared with the same period in 2021 partially due to customer growth in 2022 compared to 2021, along with increased revenue related to BGSS. 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."
•OSS increased $14.4 million for the three months ended March 31, 2022 compared with the same period in 2021, primarily due to higher commodity costs, along with colder weather during the first quarter of 2022. 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 the majority of the profits of such activity to its ratepayers.
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 recoveries 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 recoveries 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.
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Total Utility Margin increased $8.9 million, or 5.5%, for the three months ended March 31, 2022 compared with the same period in 2021. The increases are primarily due to the roll-in of infrastructure programs and customer growth. The change in revenues from SJG's BGSS clause had no impact to SJG's Utility Margin as discussed under "Operating Revenues - SJG Utility Operations" above.
ETG Utility Operations:
The following tables summarize the composition of regulated natural gas utility operations, operating revenues and margin at ETG for the three months ended March 31 (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Utility Operating Revenues: | |||||||||||
| Firm & Interruptible Sales - | |||||||||||
| Residential | $ | 119,272 | $ | 106,208 | |||||||
| Commercial & Industrial | 41,646 | 33,377 | |||||||||
| Firm & Interruptible Transportation - | |||||||||||
| Residential | 899 | 1,032 | |||||||||
| Commercial & Industrial | 15,878 | 16,756 | |||||||||
| Other | (1,459) | 173 | |||||||||
| Total Firm & Interruptible Revenues | 176,236 | 157,546 | |||||||||
| Less: Total Cost of Sales - Utility (Excluding Depreciation & Amortization) (A) | 78,916 | 58,305 | |||||||||
| Less: Depreciation & Amortization (A) | 17,220 | 22,428 | |||||||||
| Total GAAP Gross Margin | 80,100 | 76,813 | |||||||||
| Add: Depreciation & Amortization (A) | 17,220 | 22,428 | |||||||||
| Less: Regulatory Rider Recoveries (B) | 4,619 | 10,251 | |||||||||
| Utility Margin (C) | $ | 92,701 | $ | 88,990 | |||||||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Utility Margin: | |||||||||||
| Residential | $ | 67,606 | $ | 65,981 | |||||||
| Commercial & Industrial | 31,146 | 33,057 | |||||||||
| Regulatory Rider Mechanisms (B) | (6,051) | (10,048) | |||||||||
| Utility Margin (C) | $ | 92,701 | $ | 88,990 | |||||||
(A) Does not include amortization of debt issuance costs that are recorded as Interest Charges on the condensed consolidated statements of income.
(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.
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Operating Revenues and Utility Margin - ETG Utility Operations
Revenues from the gas utility operations at ETG increased $18.7 million, or 11.9%, and Utility Margin from the gas utility operations at ETG increased $3.7 million, or 4.2% for the three months ended March 31, 2022 compared with the same period in 2021. These increases in revenues and Utility Margin are primarily due to customer growth and colder weather during the first quarter of 2022.
Nonutility:
Operating Revenues - Energy Management
Combined revenues for Energy Management, net of intercompany transactions, increased $63.7 million, or 24.0%, to $329.0 million for the three months ended March 31, 2022 compared with the same period in 2021. The significant drivers for the overall change were as follows:
•Revenues from wholesale energy operations at SJRG, net of intercompany transactions, increased $65.4 million to $326.9 million for the three months ended March 31, 2022 compared with the same period in 2021 primarily due to revenues earned on gas supply contracts, increases in the average monthly NYMEX settlement price, and colder weather experienced in the first quarter of 2022. Partially offsetting these comparative period increases was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded from Economic Earnings and represented a total decrease of $21.4 million for the three months ended March 31, 2022 compared with the same period in 2021.
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.
•Revenues from retail services, net of intercompany transactions, decreased $1.9 million to $1.9 million for the three months ended March 31, 2022 compared with the same period in 2021 primarily due to lower overall sales volumes as SJE chose not to renew several contracts that have expired over the last twelve months. This was partially offset with new contracts entered into at EnerConnex as that business continues to grow.
Operating Revenues - Energy Production
Combined revenues for Energy Production, net of intercompany transactions, decreased $1.0 million, or 15.6%, to $5.4 million for the three months ended March 31, 2022 compared with the same period in 2021, primarily due to lower SREC revenues.
Gross Margin - Energy Management & Energy Production
Gross margin for the Energy Management and Energy Production 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, revenue is reflected in Operating Revenues - Nonutility and the costs are reflected in Cost of Sales - Nonutility.
Gross margin is broken out between Energy Management and Energy Production, which are comprised of a group of segments as described in Note 6 to the condensed consolidated financial statements.
Gross Margin - Energy Management
Combined gross margins for Energy Management increased $1.2 million to $22.4 million for the three months ended March 31, 2022 compared with the same period in 2021. The significant drivers for the overall change were as follows:
•Gross margin from the wholesale energy operations at SJRG decreased $0.1 million to $20.0 million for the three months ended March 31, 2022 compared with the same period in 2021, as the change in unrealized gains and losses recorded on forward financial contracts due to price volatility was offset with higher margins on daily energy trading activities and colder weather experienced in the first quarter of 2022.
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We expect the wholesale energy operations 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 retail services increased $1.2 million to $2.2 million for the three months ended March 31, 2022 compared with the same period in 2021, primarily due to new contracts entered into at EnerConnex as that business continues to grow.
Gross Margin - Energy Production
Combined gross margins for Energy Production decreased $1.3 million to $4.3 million for the three months ended March 31, 2022 compared with the same period in 2021, primarily due to less SREC revenues.
Operating Expenses - All Segments:
A summary of net changes in Operations and Maintenance expense for the three months ended March 31, follows (in thousands):
| Three Months Ended March 31, 2022 vs. 2021 | |||||
| SJI Utilities: | |||||
| SJG Utility Operations | $ | 6,958 | |||
| ETG Utility Operations | (3,742) | ||||
| Subtotal SJI Utilities | 3,216 | ||||
| Nonutility: | |||||
| Energy Management: | |||||
| Wholesale Energy Operations | (102) | ||||
| Retail Services | (225) | ||||
| Subtotal Energy Management | (327) | ||||
| Energy Production: | |||||
| Renewables | 1,710 | ||||
| Decarbonization | 445 | ||||
| Subtotal Energy Production | 2,155 | ||||
| Midstream | (62) | ||||
| Corporate & Services and Intercompany Eliminations | 3,893 | ||||
| Total Operations and Maintenance Expense | $ | 8,875 | |||
Operations & Maintenance
SJG utility operations and maintenance expense increased $7.0 million for the three months ended March 31, 2022 compared with the same period in 2021. The increase was primarily due to the operations of SJG’s CLEP and EEP, which experienced an aggregate net increase. Such costs are recovered on a dollar-for-dollar basis; therefore, SJG experienced an offsetting increase in revenue during the three months ended March 31, 2022 compared with the same period in the prior year.
ETG utility operations and maintenance expense decreased $3.7 million for the three months ended March 31, 2022 compared with the same period in 2021, primarily due to the operation of ETG's RAC, which experienced an aggregate net decrease. Such costs are recovered on a dollar-for-dollar basis; therefore, ETG experienced an offsetting decrease in revenue during the three months ended March 31, 2022 compared with the same period in the prior year.
Operations and Maintenance expense for Energy Production increased $2.2 million for the three months ended March 31, 2022, compared with the same period in 2021, primarily due to additional operating costs for the Annadale fuel cell project and various solar projects, which were all operating during the entire quarter in 2022 compared to 2021.
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Operations and Maintenance expense for the Corporate & Services segment, after intercompany eliminations, increased $3.9 million for the three months ended March 31, 2022 compared with the same period in 2021, primarily due to expenses incurred related to the Merger Agreement.
Depreciation - Depreciation increased $2.1 million for the three months ended March 31, 2022 compared with the same period in 2021, primarily due to increased investment in property, plant and equipment by the gas utility operations of SJG and ETG, along with an increase in renewables segment depreciation related to assets at the Annadale fuel cell facility and various solar projects.
Energy and Other Taxes - The change in energy and other taxes for the three months ended March 31, 2022 compared with the same period in 2021 was not significant.
Other Income and Expense - The change in other income and expense for the three months ended March 31, 2022 compared with the same period in 2021 was not significant.
Interest Charges – The change in interest charges for the three months ended March 31, 2022 compared with the same period in 2021 was not significant.
Income Taxes – Income tax expense decreased $1.1 million for the three months ended March 31, 2022 compared with the same period in 2021 due to ITC recorded in 2022 (see Note 1 to the condensed consolidated financial statements).
Equity in Earnings of Affiliated Companies – Equity in earnings of affiliated companies decreased $2.7 million for the three months ended March 31, 2022 compared with the same period in 2021 primarily due to AFUDC recorded in 2021 that did not occur in 2022 due to the decision to cease further development of the PennEast project (see Note 3 to the condensed consolidated financial statements).
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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; environmental remediation expenditures through the RAC as compared to the timing of collections; 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; acquisitions; and the amounts and timing of dividend payments.
Cash flows for the period were the following (in thousands):
| Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||
| Net Cash Provided by Operating Activities | $ | 306,957 | $ | 198,463 | |||||||
| Net Cash Used in Investing Activities | $ | (158,284) | $ | (112,328) | |||||||
| Net Cash Used in Financing Activities | $ | (145,507) | $ | (96,098) | |||||||
Cash Flows from Operating Activities — Liquidity needs are first met with net cash provided by operating activities. Net cash provided by operating activities varies from year-to-year primarily due to the impact of weather on customer demand and related gas purchases, 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 three months of 2022 produced more net cash than the same period in 2021, primarily due to the following: (1) higher revenues and increased collections on daily energy trading activities at SJRG; (2) customer growth at the Utilities; and (3) higher purchased gas payable due to higher prices and increase in outstanding invoices payable to vendors.
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. We estimate the cash outflows for investing activities, net of returns/advances on investments from affiliates, for fiscal years 2022, 2023 and 2024 at SJI to be approximately $936.7 million, $798.3 million and $930.3 million, respectively. The high level of investing activities for 2022, 2023 and 2024 is due to the accelerated infrastructure investment programs and future capital expenditures at SJG and ETG, and investments in future renewable energy projects including efforts to meet our decarbonization goals, which were announced in April 2021 targeting 70% reduction in emissions by 2030 and 100% by 2040, with at least 25% of capital spending annually in support of sustainability investments. 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 significant investing activities of SJI during the first three months of 2022 and 2021 were as follows:
•SJI made net investments in and net advances to unconsolidated affiliates of $28.9 million for the three months ended March 31, 2022; net investments in and net advances to unconsolidated affiliates for the three months ended March 31, 2021 were not material.
Cash Flows from Financing Activities — The Merger Agreement places limitations on SJI’s ability to engage in certain types of financing transactions without Parent’s consent between the signing of the Merger Agreement and the Effective Time, including issuing equity of SJI (except in the ordinary course pursuant to equity compensation plans) and incurring certain indebtedness for borrowed money.
Short-term borrowings from the commercial paper program and lines of credit from commercial banks have historically been 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, SJI may refinance the short-term debt with long-term debt
There have been no significant changes to the nature or balances of SJG's commercial paper program since December 31, 2021, which are described in Note 13 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, 2021.
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SJI has historically supplemented 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.
Credit facilities and available liquidity as of March 31, 2022 were as follows (in thousands):
| Company | Total Facility | Usage | Available Liquidity | Expiration Date | ||||||||||||||||||||||
| SJI: | ||||||||||||||||||||||||||
| SJI Syndicated Revolving Credit Facility | $ | 500,000 | $ | 60,400 | (A) | $ | 439,600 | September 2026 | ||||||||||||||||||
| SJG: | ||||||||||||||||||||||||||
| Commercial Paper Program/Revolving Credit Facility | 250,000 | 9,200 | (B) | 240,800 | September 2026 | |||||||||||||||||||||
| ETG: | ||||||||||||||||||||||||||
| ETG Revolving Credit Facility | 250,000 | 39,400 | (C) | 210,600 | September 2026 | |||||||||||||||||||||
| Total | $ | 1,000,000 | $ | 109,000 | $ | 891,000 | ||||||||||||||||||||
(A) Includes letters of credit outstanding in the amount of $15.4 million, which is used for various construction and operating activities.
(B) Includes letters of credit outstanding in the amount of $1.9 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.
For SJI and SJG, the amount of usage shown in the table above, less the letters of credit noted in (A)-(C) for SJI and (B) for SJG above, equals the amounts recorded as Notes Payable on the respective condensed consolidated balance sheets as of March 31, 2022.
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.
SJI, SJG and ETG (collectively, the "Borrowers") have an unsecured, five-year master revolving credit facility (the "Credit Facility") with a syndicate of banks, which expires on September 1, 2026, unless earlier terminated or extended in accordance with its terms. There have been no significant changes to the nature or balances of this Credit Facility, except for the usage shown in the table above, since December 31, 2021, which are described in Note 13 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, 2021. SJI, SJG and ETG were all in compliance with the related financial covenants as of March 31, 2022.
For additional information regarding the terms of the credit facilities as well as weighted average interest rates, average borrowings outstanding and maximum amounts outstanding under these credit facilities see Note 10 to the condensed consolidated financial statements.
On March 22, 2021, SJI offered 10,250,000 shares of its common stock, par value $1.25 per share, at a public offering price of $22.25 per share. See Note 6 to the Financial Statements in Item 8 of SJI's and SJG’s Annual Report on Form 10-K for the year ended December 31, 2021 for a description of this transaction and the issuances that occurred in 2021. On March 18, 2022, the remaining 4,996,062 forward shares were issued under the forward sale agreement for net proceeds of $100.4 million. The forward price used to determine cash proceeds received by SJI was calculated based on the initial forward sale price, as adjusted for underwriting fees, interest rate adjustments as specified in the forward sale agreement and any dividends paid on our common stock during the forward period.
See Note 6 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, 2021 for a description of the issuances of equity and convertible units that occurred in 2021.
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In March 2022 and 2021, SJG paid $2.5 million of 4.84% MTNs due annually beginning March 2021.
In March 2021, SJI paid off its $150.0 million term loan agreement at maturity.
DRP - See Note 4 to the condensed consolidated financial statements.
SJI’s capital structure was as follows:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| Equity | 39.6 | % | 35.8 | % | |||||||
| Long-Term Debt | 58.8 | % | 58.3 | % | |||||||
| Short-Term Debt | 1.6 | % | 5.9 | % | |||||||
| Total | 100.0 | % | 100.0 | % | |||||||
During the three months ended March 31, 2022 and 2021, SJI declared quarterly dividends to its common shareholders, which were paid in April for both 2022 and 2021. SJI has a long history of paying dividends on its common stock and has increased its dividend every year since 1999. 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 long-term 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. Under the Merger Agreement, SJI’s ability to pay dividends (other than consistent with its past practices) is limited.
COMMITMENTS AND CONTINGENCIES:
Environmental Remediation - Total net cash outflows for remediation projects are expected to be $37.6 million, $38.9 million and $48.4 million for 2022, 2023 and 2024, 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, 2021, certain environmental costs are subject to recovery from ratepayers.
Affiliate Loans - See Note 3 to the condensed consolidated financial statements.
Convertible and Equity Units - See Note 4 to the condensed consolidated financial statements.
Standby Letters of Credit - See Note 10 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, 2021, except for the AMA as discussed in Note 3 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.
Pending Litigation — SJI and SJG are subject to claims, actions and other legal proceedings arising in the ordinary course of business. Neither SJI nor SJG can make any assurance as to the outcome of any of these actions but, based on an analysis of these claims and consultation with outside counsel, we do not believe that any of these claims, other than those described in Note 11 to the condensed consolidated financial statements, are reasonably likely to have a material impact on the business or financial statements of SJI or SJG. 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. See Note 11 to the condensed consolidated financial statements for more detail on these claims.
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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 above under "Results of Operations - SJG Utility Operations" 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.
The following table summarizes the composition of selected gas utility throughput for the three month periods ended March 31, (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Utility Throughput – dts: | |||||||||||
| Firm Sales - | |||||||||||
| Residential | 13,033 | 12,959 | |||||||||
| Commercial | 3,042 | 2,771 | |||||||||
| Industrial | 114 | 135 | |||||||||
| Cogeneration & Electric Generation | 86 | 85 | |||||||||
| Firm Transportation - | |||||||||||
| Residential | 480 | 509 | |||||||||
| Commercial | 2,823 | 2,662 | |||||||||
| Industrial | 2,822 | 2,823 | |||||||||
| Cogeneration & Electric Generation | 734 | 648 | |||||||||
| Total Firm Throughput | 23,134 | 22,592 | |||||||||
| Interruptible Sales | 13 | 6 | |||||||||
| Interruptible Transportation | 310 | 342 | |||||||||
| Off-System Sales | 5,307 | 6,044 | |||||||||
| Capacity Release | 14,911 | 12,327 | |||||||||
| Total Throughput - Utility | 43,675 | 41,311 | |||||||||
Throughput – Gas Utility Operations - Total gas throughput increased 2.4 MMdts for the three months ended March 31, 2022 compared with the same period in 2021, primarily due to volume increases in Capacity Release resulting from higher value of pipeline capacity due to market conditions.
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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 March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net Income Impact: | |||||||||||
| CIP – Weather Related | $ | 5.1 | $ | 5.6 | |||||||
| CIP – Usage Related | (5.6) | (6.2) | |||||||||
| Total Net Income Impact | $ | (0.5) | $ | (0.6) | |||||||
| Weather Compared to 20-Year Average | 5.5% Warmer | 6.5% Warmer | |||||||||
| Weather Compared to Prior Year | 1.8% Colder | 15.1% Colder | |||||||||
Operating Revenues & Utility Margin - See SJI's Management Discussion section above.
Operations & Maintenance Expense - See SJI's Management Discussion section above.
Depreciation - Depreciation expense increased $1.3 million for the three months ended March 31, 2022 compared with the same period in 2021, 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 months ended March 31, 2022 compared with the same period in 2021 was not significant.
Other Income and Expense - The change in other income and expense for the three months ended March 31, 2022 compared with the same period in 2021 was not significant.
Interest Charges – The change in interest charges for the three months ended March 31, 2022 compared with the same period in 2021 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.
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 as compared to the timing of collections; 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 for the period were the following (in thousands):
| Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||
| Net Cash Provided by Operating Activities | $ | 153,136 | $ | 125,284 | |||||||
| Net Cash Used in Investing Activities | $ | (50,714) | $ | (64,233) | |||||||
| Net Cash Used in Financing Activities | $ | (103,200) | $ | (50,009) | |||||||
Cash Flows from Operating Activities - Liquidity needs are first met with net cash provided by operating activities. Net cash provided by operating activities varies from year-to-year primarily due to the impact of weather on customer demand and related gas purchases, customer usage factors related to conversion efforts and the price of the natural gas commodity,
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inventory utilization, and gas cost recoveries. Cash flows provided by operating activities in the first three months of 2022 produced more net cash than the same period in 2021, primarily due to customer growth and higher purchased gas payable due to higher prices.
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 2022, 2023 and 2024 to be approximately $256.9 million, $334.8 million and $448.9 million, respectively. For capital expenditures, 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 did not contribute any equity to SJG during the three months ended March 31, 2022 or 2021.
SJG’s capital structure was as follows:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| Common Equity | 60.0 | % | 56.3 | % | |||||||
| Long-Term Debt | 39.7 | % | 39.6 | % | |||||||
| Short-Term Debt | 0.3 | % | 4.1 | % | |||||||
| Total | 100.0 | % | 100.0 | % | |||||||
COMMITMENTS AND CONTINGENCIES:
Total net cash outflows for remediation projects are expected to be $26.2 million, $17.5 million and $33.0 million for 2022, 2023 and 2024, 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, 2021, certain environmental costs are subject to recovery from ratepayers.
SJG has certain commitments for both pipeline capacity and gas supply for which SJG pays fees regardless of usage. Those commitments, as of March 31, 2022, averaged $92.9 million annually and totaled $419.5 million over the contracts’ lives; the increase since December 31, 2021 is due to two executed contracts in the first quarter of 2022 with Adelphia and Columbia pipelines. Approximately 46% 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.
Litigation - See 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, 2021.
Off-Balance Sheet Arrangements - SJG has no off-balance sheet arrangements.
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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 the Utilities' 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 $(21.3) million and $(0.1) million for the three months ended March 31, 2022 and 2021, which are included with realized (losses) in Operating Revenues - Nonutility on the condensed consolidated statements of income.
The fair value and maturity of these energy-related contracts determined under the mark-to-market method as of March 31, 2022 is as follows (in thousands):
| Assets | |||||||||||||||||||||||
| Source of Fair Value | Maturity < 1 Year | Maturity 1 -3 Years | Maturity Beyond 3 Years | Total | |||||||||||||||||||
| Prices actively quoted | $ | 99,016 | $ | 17,258 | $ | 3,164 | $ | 119,438 | |||||||||||||||
| Prices provided by other external sources | 36,281 | 28,938 | 194 | 65,413 | |||||||||||||||||||
| Prices based on internal models or other valuation methods | 14,836 | 1,597 | 951 | 17,384 | |||||||||||||||||||
| Total | $ | 150,133 | $ | 47,793 | $ | 4,309 | $ | 202,235 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Source of Fair Value | Maturity <1 Year | Maturity 1 -3 Years | Maturity Beyond 3 Years | Total | |||||||||||||||||||
| Prices actively quoted | $ | 9,914 | $ | 501 | $ | — | $ | 10,415 | |||||||||||||||
| Prices provided by other external sources | 68,847 | 28,968 | 295 | 98,110 | |||||||||||||||||||
| Prices based on internal models or other valuation methods | 14,697 | 4,068 | 849 | 19,614 | |||||||||||||||||||
| Total | $ | 93,458 | $ | 33,537 | $ | 1,144 | $ | 128,139 | |||||||||||||||
•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 45.7 MMdts with a weighted average settlement price of $3.30 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 76.4 MMdts with a weighted average settlement price of $1.14 per dt.
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•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 58.0 MMdts with a weighted average settlement price of $5.07 per dt.
•Volumes of electric included in the table above under "Prices based on internal models or other valuation methods" are not material.
A reconciliation of SJI’s estimated net fair value of energy-related derivatives follows (in thousands):
| Net Derivatives — Energy Related Assets, January 1, 2022 | $ | 41,448 | |||
Contracts Settled During the Three Months Ended March 31, 2022, Net | (15,695) | ||||
| Other Changes in Fair Value from Continuing and New Contracts, Net | 48,343 | ||||
Net Derivatives — Energy Related Assets, March 31, 2022 | $ | 74,096 | |||
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 March 31, 2022 was $115.6 million and averaged $293.1 million during the first three months of 2022. A hypothetical 100 basis point (1%) increase in interest rates on our average variable-rate debt outstanding would result in a $2.1 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: 2021 - 29 b.p. decrease; 2020 - 152 b.p. decrease; 2019 - 64 b.p. decrease; 2018 - 91 b.p. increase; and 2017 - 82 b.p. increase. At March 31, 2022, our average interest rate on variable-rate debt was 1.11%.
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 March 31, 2022, the interest costs on $3.3 billion of our long-term debt (including current portion) was either at a fixed rate or hedged via an interest rate derivative.
SJG has 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.
As of March 31, 2022, SJG’s active interest rate swaps were as follows:
| Notional Amount | Fixed Interest Rate | Start Date | Maturity | |||||||||||||||||
| $ | 12,500,000 | 3.530% | 12/1/2006 | 2/1/2036 | ||||||||||||||||
| $ | 12,500,000 | 3.430% | 12/1/2006 | 2/1/2036 | ||||||||||||||||
Credit Risk - As of March 31, 2022, there were no individual counterparties that totaled more than five percent of SJI's current and noncurrent Derivatives - Energy Related Assets.
As of March 31, 2022, SJRG had $118.8 million of Accounts Receivable under sales contracts. Of that total, 46% 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.
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SJG:
The fair value and maturity of SJG's energy-trading and hedging contracts determined using mark-to-market accounting as of March 31, 2022 are as follows (in thousands):
| Assets | ||||||||||||||||||||
| Source of Fair Value | Maturity < 1 Year | Maturity 1 - 3 Years | Total | |||||||||||||||||
| Prices actively quoted | $ | 20,439 | $ | 440 | $ | 20,879 | ||||||||||||||
| Prices provided by other external sources | 107 | — | 107 | |||||||||||||||||
| Prices based on internal models or other valuable methods | 12,258 | — | 12,258 | |||||||||||||||||
| Total | $ | 32,804 | $ | 440 | $ | 33,244 | ||||||||||||||
| Liabilities | ||||||||||||||||||||
| Maturity | Maturity | |||||||||||||||||||
| Source of Fair Value | < 1 Year | 1 - 3 Years | Total | |||||||||||||||||
| Prices actively quoted | $ | 5 | $ | — | $ | 5 | ||||||||||||||
| Prices provided by other external sources | 582 | — | 582 | |||||||||||||||||
| Prices based on internal models or other valuable methods | 8 | — | 8 | |||||||||||||||||
| Total | $ | 595 | $ | — | $ | 595 | ||||||||||||||
Contracted volumes of SJG's NYMEX contracts are 13.3 MMdts with a weighted-average settlement price of $3.97 per dt. Contracted volumes of SJG's Basis contracts are 8.7 MMdts with a weighted-average settlement price of $2.12 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, 2021 | $ | 7,059 | |||
Contracts Settled During the Three Months ended March 31, 2022, Net | (4,610) | ||||
| Other Changes in Fair Value from Continuing and New Contracts, Net | 30,200 | ||||
Net Derivatives — Energy Related Assets, March 31, 2022 | $ | 32,649 | |||
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 March 31, 2022, was $32.2 million and averaged $84.6 million during the first three months of 2022. A hypothetical 100 basis point (1%) increase in interest rates on SJG's average variable-rate debt outstanding would result in a $0.6 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: 2021 - 12 b.p. increase; 2020 - 220 b.p. decrease; 2019 - 73 b.p. decrease; 2018 - 91 b.p. increase; and 2017 - 91 b.p. increase. As of March 31, 2022, SJG's average interest rate on variable-rate debt was 0.31%.
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 March 31, 2022, the interest costs on $1.1 billion of long-term debt (including current portion) was either at a fixed-rate or hedged via an interest rate derivative.
SJG's interest rate swaps are the same as SJI's as shown above.
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 officers and principal financial officers, 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 March 31, 2022. Based on that evaluation, the
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principal executive officer and principal financial officer of each of SJI and SJG concluded that, as of March 31, 2022, the disclosure controls and procedures employed at SJI and SJG, respectively, are 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 March 31, 2022, 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 Report on Form 10-K for the year ended December 31, 2021.
Our business, results of operations, cash flows and financial position may be adversely impacted by the continuation and consequences of the war in Ukraine. In late February 2022, Russian military forces commenced a military operation and invasion against Ukraine. The length, impact, and outcome of the ongoing war in Ukraine is highly unpredictable, which has created uncertainty for financial and commodity markets. While the Company does not have direct operations overseas, the conflict elevates the likelihood of supply chain disruptions, both in the region and globally, along with heightened volatility in oil and gas prices. These may inhibit our ability to timely source materials and services and could affect our business, financial condition and results of operations.
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Item 6. Exhibits
(a) Exhibits
| Exhibit No. | Description | |||||||
| Agreement and Plan of Merger, dated as of February 23, 2022, by and among South Jersey Industries, Inc., NJ Boardwalk Holdings LLC and Boardwalk Merger Sub, Inc. (incorporated by reference from Exhibit 2.1 of Form 8-K of SJI as filed February 24, 2022. | ||||||||
| Certification of SJI's Principal Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act. | ||||||||
| Certification of SJI's Principal Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act. | ||||||||
| Certification of SJG's Principal Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act. | ||||||||
| Certification of SJG's Principal Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act. | ||||||||
| Certification of SJI's Principal Executive Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code). | ||||||||
| Certification of SJI's Principal Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code). | ||||||||
| Certification of SJG's Principal Executive Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code). | ||||||||
| Certification of SJG's Principal Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code). | ||||||||
| 101 | The following financial statements from South Jersey Industries, Inc.’s Quarterly Report on Form 10-Q for the three months ended March 31, 2022, filed with the Securities and Exchange Commission on May 5, 2022 formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income; (ii) the Condensed Consolidated Statements of Comprehensive Income; (iii) the Condensed Consolidated Statements of Cash Flows; (iv) the Condensed Consolidated Balance Sheets; (v) the Condensed Consolidated Statements of Equity; and (vi) the Notes to Condensed Consolidated Financial Statements. The following financial statements from South Jersey Gas’ Quarterly Report on Form 10-Q for the three months ended March 31, 2022, filed with the Securities and Exchange Commission on May 5, 2022 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. | |||||||
| 104 | Cover 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: | May 5, 2022 | By: | /s/ Steven R. Cocchi | ||||||||
| Steven R. Cocchi | |||||||||||
| Senior Vice President & Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SOUTH JERSEY GAS COMPANY | |||||||||||
| Dated: | May 5, 2022 | By: | /s/ Steven R. Cocchi | ||||||||
| Steven R. Cocchi | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
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