GOODWILL - Goodwill represents future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration paid or transferred over the fair value of identifiable net assets acquired. Goodwill is not amortized, but instead is subject to impairment testing on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. No such events have occurred during the three and six months ended June 30, 2019.
The Company performs its annual goodwill impairment test in the fourth quarter of each fiscal year beginning with a qualitative assessment at the reporting unit level. The reporting unit level is identified by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available, whether segment management regularly reviews the operating results of those components and whether the economic and regulatory characteristics are similar. Factors utilized in the qualitative analysis performed on goodwill in our reporting units include, among other things, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, company specific operating results and other relevant entity-specific events affecting individual reporting units.
IDENTIFIABLE INTANGIBLE ASSETS - The primary identifiable intangible assets of the Company are customer relationships, andincluding those obtained in the acquisition of AEP (see Note 17), along with the AMA (see Note 1). The Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Considerations may include the contractual term of any agreement related to the asset, the historical performance of the asset, the Company's long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives (finite-lived intangible assets) are amortized, primarily on a straight-line basis, over their useful lives, generally ranging from 2 to 20 years.
SJG does not have any identifiable intangible assets.
SJI and SJG (collectively, the "Company" for purposes of Note 19) is a lessee for the following classes of underlying assets: equipment, real estate (land and building), and fleet vehicles. The Company determines ifevaluates its contracts for the purpose of determining whether it is, considered a lessee in an arrangement that qualifies asor contains, a lease at its inception based on whether or not the contract grants the Company the use of a specifically identified asset for a period of time, as well as whether the contract grants the Company both the right to direct the use of that asset and receive the significant economic benefits of the asset. SJI's and SJG's real estate leases, which are comprised primarily of office space and payment centers, represent approximately 77%86% and 35%49%, respectively, of operating lease liabilities and generally have a lease term between 5 and 15 years. The remaining operating leases primarily consist of fleet vehicles (SJI only), communication towers, and general office equipment, each with various lease terms ranging between 3 and 25 years. The majority of our leases are comprised of fixed lease payments, with a portion of the Company’s real estate, fleet vehicles, and office equipment leases including lease payments tied to levels of production, maintenance and property
taxes, which may be subject to variability. The Company does not have any finance leases. The Company also evaluates contracts in which it is the owner of an underlying asset in the same manner as if it is a lessee, to determine if it should be considered the lessor of that asset. As of March 31, 2020, SJI has one contractdoes not have any contracts where it is considered the lessor see "Thermal Facility" below; SJG is not considered the lessor of any assets.(see "MTF" below).
As a practical expedient permitted under Topic 842, the Company has elected to account for the lease and non-lease components as a single lease component for all leases.leases where it is a lessee. Lease payments, which may include lease components, non-lease components and non-components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable amounts that depend on a rate or index as stipulated in the lease contract. The Company discounts its lease liability using an estimated incremental borrowing rate computed based on its existing term loan facility adjusted for lease term. On January 1, 2019, the discount rate used on existing leases at adoption was determined using the remaining lease term and available data as of that date based on the Company's collateralized incremental interest rate to borrow over a comparable term. For new or modified leases, starting in 2019, the discount rate is determined using available data at lease commencement and is(for new leases) or the modification date (modified leases), based on its collateralized incremental interest rate to borrow over the lease term, including any reasonably certain renewal periods.
Some of its lease agreements, primarily related to real estate, include Company options to either extend and/or early terminate the lease, the costs of which are included in our lease liability to the extent that such options are reasonably certain of being exercised. Leases with renewal options allow the Company to extend the lease term typically between 1 and 5 years. When determining the lease term, renewal options reasonably certain of being exercised are included in the lease term. When determining if a renewal option is reasonably certain of being exercised, the Company considers several economic factors, including the significance of leasehold improvements incurred on the property, whether the asset is difficult to replace, underlying contractual obligations, or specific characteristics unique to that particular lease that would make it reasonably certain that we would exercise such option. Renewal options were generally not included in the lease term for the Company’s existing leases. The Company does not generally enter into leases involving the construction or design of the underlying asset, and nearly all of the assets we lease are not specialized in nature. Our lease agreements generally do not include restrictions, financial covenants or residual value guarantees.
SJI and SJG recorded the right-of-use assets in Other Noncurrent Assets and the lease liabilities in Other Current and Noncurrent Liabilities (as shown in the table below) on the condensed consolidated balance sheets as of June 30,March 31, 2020 and December 31, 2019.
Neither SJI nor SJG have leases with related parties or leverage lease arrangements. There are no leases that have not yet commenced but that create significant rights and obligations.
See Note 11 - Commitments and Contingencies, Pending Litigation for information related to a court decision issued against SJG and SJRG on August 6, 2019 related to an ongoing pricing dispute related to two long-term gas supply contracts. SJI will be required to make payment by September 5, 2019 in an amount not materially different from what has been reserved.
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:
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• | •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.
- 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.
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• | 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.
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Both sections of Management's Discussion - SJI and SJG - are designed to provide an understanding of each company's respective operations and financial performance and should be read in conjunction with each other as well as in conjunction with the respective company's condensed consolidated financial statements and the combined Notes to Condensed Consolidated Financial Statements in this Quarterly Report as well as SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Unless otherwise noted, earnings per share amounts are presented on a diluted basis, and are based on weighted average common and common equivalent shares outstanding. SJI's and SJG's operations are seasonal and accordingly, operating results for the interim periods presented are not indicative of the results to be expected for the full fiscal year.
Forward-Looking Statements and Risk Factors — This Quarterly Report, including information incorporated by reference, contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.
All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position, expected sources of incremental margin, strategy, financing needs, future capital expenditures and the outcome or effect of ongoing litigation, are forward-looking. This Quarterly Report uses words such as "anticipate," "believe," "expect," "estimate," "forecast," "goal," "intend," "objective," "plan," "project," "seek," "strategy," "target," "will" and similar expressions to identify forward-looking statements. These forward-looking statements are based on the beliefs and assumptions of management at the time that these statements were prepared and are inherently uncertain. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These risks and uncertainties include, but are not limited to, general economic conditions on an international, national, state and local level; weather conditions in SJI’s marketing areas; changes in commodity costs; changes in the availability of natural gas; “non-routine” or “extraordinary” disruptions in SJI’s distribution system; regulatory, legislative and court decisions; competition; the availability and cost of capital; costs and effects of legal proceedings and environmental liabilities; the failure of customers, suppliers or business partners to fulfill their contractual obligations; and changes in business strategies.strategies; and public health crises and epidemics or pandemics, such as a novel coronavirus (COVID-19).
These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ materially from those expressed in the forward-looking statements, are described in greater detail under the heading “Item 1A. Risk Factors” in this Quarterly Report, SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 20182019 and in any other SEC filings made by SJI or SJG during 2019 and prior to the filing of this Quarterly Report. No assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made. SJI and SJG undertake no obligation to revise or update any forward-looking statements, whether as a result offrom new information, future events or otherwise, except as required by law.
Critical Accounting Policies — Estimates and Assumptions — Management must make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. Actual results could differ from those estimates. Certain types of transactions presented in our condensed consolidated financial statements require a significant amount of judgment and estimation. These relate to regulatory accounting, derivatives, environmental remediation
costs, pension and other postretirement benefit costs, revenue recognition, goodwill, and goodwill.evaluation of equity method investments for other-than-temporary impairment. A discussion of these estimates and assumptions may be found in SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2018.2019.
COVID-19- In March 2020, the World Health Organization classified the outbreak of COVID-19 as a pandemic. The rapid spread has resulted in worldwide shutdowns and the halting of business and personal activity as governments around the world imposed regulations to control the spread of COVID-19. As a result, the global economy has been marked by significant slowdowns and uncertainty.
We are continuously evaluating the global pandemic and are taking necessary steps to mitigate known risks. We continue to closely monitor developments related to the pandemic and will adjust our actions and operations as appropriate. The full impact on the businesses of SJI and SJG from the pandemic, including the regulatory responses, is unknown at this time and difficult to predict. SJI and SJG provide critical and essential services to their customers and the health and safety of their employees and customers is our first priority. SJI and SJG considered the impact of COVID-19 on the use of estimates and assumptions used for financial reporting and noted there were no material impacts on our results of operations for the first quarter of 2020.
SJI has been actively addressing the COVID-19 pandemic and has established a task force compromised of members of management, with the mission of ensuring the safety of individuals (customers and employees), while continuing to perform our daily responsibilities in an efficient and safe manner. SJI is following the guidance from federal, state and local authorities to help safeguard the health, safety and well-being of its employees. To date, all of our employees are currently working. The task force identified the essential and non-essential employees and developed a plan for all non-essential employees to work remotely from home while ensuring that the appropriate safety measures are in place for all essential employees in the field. Safety measures include additional personal protective equipment and adjusting shifts to reduce the number of workers in close contact. Given the additional safety measures in place, and the ability for non-essential employees to work remotely, we have not had a material impact on our operations as a result of these human capital constraints, and we do not believe operations will be materially impacted going forward by human capital restraints.
In order to initiate the business continuity plan, the Company has incurred operating costs for emergency supplies, cleaning services, enabling technology and other specific needs during the crisis. SJI has incurred costs during the three months ended March 31, 2020 of $0.6 million, with $0.4 million being recorded as Property, Plant & Equipment on the condensed consolidated balance sheets, and the remaining $0.2 million recorded as Operations Expense on the condensed consolidated statements of income. SJG has recorded $0.2 million and is recorded as Property, Plant & Equipment on the condensed balance sheets. Going forward, we expect further expenses for the above mentioned items; however we do not anticipate these expenses to be material.
The supply chain has not been materially impacted by COVID-19; this is because the Company has large inventory of standard products such as pipe material. In addition, given that the products are considered essential products, factories are remaining open, therefore allowing materials to be replenished. The Company is actively managing the materials, supplies and contract services necessary for our operations, and does not expect a disruption to the Company's gas supply in the future.
Our infrastructure investment programs to replace and upgrade critical infrastructure continue to move forward. As a result of COVID-19, certain construction activity has been delayed due to some activity being ceased in accordance with directives from the Governor of New Jersey. We expect to be able to continue with all construction activity once the directive from the Governor is lifted.
We have considered the impact of COVID-19 on the liquidity position of the Company, and note that it has remained stable throughout this uncertain period, and SJI's and SJG's ability to borrow has not been impacted. See Liquidity and Capital resources section for detailed description of borrowings entered into during the period.
As a result of the COVID-19 pandemic and the resulting market conditions, the Company determined it necessary to perform a quantitative goodwill impairment analysis on the goodwill at the ETG reporting unit as of March 31, 2020. The analysis resulted in no impairments being recorded at March 31, 2020. See "Goodwill" below.
All accounts receivables arise from contracts with customers and are carried at the amount owed by customers. The provision for uncollectible accounts is established based on expected credit losses. During the first quarter of 2020, the Company reviewed its provision for uncollectible receivables, in accordance with the adoption of ASU 2016-13 (see Note 1 to the condensed consolidated financial statements) and included consideration for the recent outbreak of COVID-19. We note there was no material adjustment recognized due to the pandemic. However, due to the significant uncertainty surrounding the pandemic, the full impact to the Company, including governmental and/or regulatory responses, is unknown and difficult to predict at this time. The Utilities have suspended disconnects for nonpayment by our customers, based on orders and requests
from our various regulators. Furthermore, the Utilities have historically utilized the rate cases to recover bad debt expense from customer non-payment.
Given the impact that COVID-19 has had on the economy, on March 27, 2020 the President signed into law the CARES Act, an economic stimulus package in response to the COVID-19 global pandemic, as a way to provide relief to both businesses and individuals affected by the virus. The CARES Act contains several corporate tax provisions that could impact SJI and SJG, including making remaining alternative minimum tax credits immediately refundable, deferring payments on social security taxes for employees, and other employee retention credits. The Company does not currently expect the CARES Act, and these provisions, to have a material effect on current income tax expense or deferred tax assets/liabilities; however, we are currently evaluating the overall impact of the CARES Act and note that new or additional changes to regulations in the future could have a material impact.
Additional information concerning the impact COVID-19 may have upon the Company in the future and results of operations can be found in Part II, Item 1A Risk Factors.
Business CombinationCombinations - On July 1, 2018, the CompanyAugust 31, 2019, SJI, through its wholly-owned subsidiary SJEI, completed the Acquisition.its acquisition of AEP. See detailed discussions concerning the Acquisitionthis acquisition and its impact on SJI, including the accounting for business combinations, in Note 17 to the condensed consolidated financial statements.
New Accounting Pronouncements — See detailed discussions concerning New Accounting Pronouncements and their impact on SJI and SJG in Note 1 to the condensed consolidated financial statements.
Regulatory Actions — Other than the changes discussed in Note 7 to the condensed consolidated financial statements, there have been no significant regulatory actions since December 31, 2018.2019. See detailed discussion concerning Regulatory Actions in Note 10 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Environmental Remediation — There have been no significant changes to the status of SJI’s and SJG's environmental remediation efforts since December 31, 2018.2019. See detailed discussion concerning Environmental Remediation Costs in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Impairment of Long-Lived Assets — Long-lived assets that are held and used are reviewed for impairment whenever events or changes in circumstances, such as significant adverse changes in regulation, business climate or market conditions, indicate carrying values may not be recoverable. Such reviews are performed in accordance with ASC 360. An impairment loss is indicated if the total future estimated undiscounted cash flows expected from an asset are less than its carrying value. An impairment charge is measured by the difference between an asset's carrying amount and fair value with the difference recorded within Impairment Charges on the condensed consolidated statements of income. Fair values can be determined by a variety of valuation methods, including third-party appraisals, sales prices of similar assets, and present value techniques. SJI and SJG determine the fair values by using an income approach by applying a discounted cash flow methodology to the future estimated cash flows, and include key inputs such as forecasted revenues, operating expenses and discount rates. No impairments were identified at either SJI or SJG for the three months ended March 31, 2020 or 2019, respectively. See Note 1 to the condensed consolidated financial statements.
Goodwill - See detailed discussion concerningon Goodwill in Note 18 to the condensed consolidated financial statements, along with Note 21 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2019.
As discussed in Note 18 to the condensed consolidated financial statements, SJI monitors all relevant events and circumstances during the year to determine if an interim impairment test is required. Such events and circumstances include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, company specific operating results and other relevant entity-specific events affecting individual reporting units. Subsequent to December 31, 2019, certain triggering events occurred that required the Company to perform an interim goodwill impairment test at March 31, 2020 related to the ETG reporting unit. These triggering events primarily included macroeconomic conditions related to COVID-19.
The fair value of the reporting unit was calculated using a weighted combination of the income approach, which estimates fair value based on discounted cash flows, and the market approach, which estimates fair value based on market comparables within the utility and energy industries. Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include, but are not limited to, forecasts of future operating results capital expenditures, tax rates, and projected terminal values and assumptions related to discount and growth rates and implied market multiples for a selected group of peer companies. Based on the analysis, the fair value of the ETG reporting unit closely
approached, but exceeded, its carrying amount. Should economic conditions deteriorate in future periods or remain depressed for a prolonged period of time, estimates of future cash flows and market valuation assumptions may not be sufficient to support the carrying value, requiring impairment charges in the future.
Evaluation of Equity Method Investments for Other-Than-Temporary Impairment - Our evaluation of impairment of equity method investments when conditions exist that could indicate that the fair value of the investment is less than book value includes key inputs that involve significant management judgments and estimates, including projections of the investment's cash flows, selection of a discount rate and probability weighting of potential outcomes of legal proceedings and other available options. Our evaluation also considered the current economic conditions as a result of COVID-19, noting that the timelines, potential options and legal proceedings have not been impacted. However, to the extent that the legal proceedings have unfavorable outcomes, or if PennEast concludes that the project is not viable or does not go forward as actions progress, our conclusions with respect to other-than-temporary impairment could change and may require that we recognize an impairment charge of up to our recorded investment in the project, net of any cash and working capital. See detailed discussion in Note 3 to the condensed consolidated financial statements, along with Note 3 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Operating Segments:
SJI operates in several different reportable operating segments. These segments are as follows:
•SJG utility operations consist primarily of natural gas distribution to residential, commercial and industrial customers in southern New Jersey.
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▪ | ETG utility operations consist of natural gas distribution to residential, commercial and industrial customers in northern and central New Jersey. |
▪ETG utility operations consist of natural gas distribution to residential, commercial and industrial customers in northern and central New Jersey.
•ELK utility operations consist of natural gas distribution to residential, commercial and industrial customers in Maryland. As discussed in Note 1 to the condensed consolidated financial statements, SJI entered into an agreement to sell ELK to a third party, with expected closing in the middle of 2020.
•Wholesale energy operations include the activities of SJRG and SJEX.
Retail gas and other operations at SJE included natural gas acquisition and transportation service business lines. This business was sold on November 30, 2018.
•Retail electric operations at SJE consist of electricity acquisition and transportation to commercial, industrial and residential customers.
•On-site energy production consists of Marina's thermal energy facilityMTF and ACB, which as discussed in Note 1 to the condensed consolidated financial statements, were sold on February 18, 2020. This segment also includes other energy-related projects.projects, including three solar projects, one of which was sold during the three months ended March 31, 2020 as discussed in Note 1 to the condensed consolidated financial statements. Also included in this segment are the activities of ACB, ACLE, BCLE, SCLE and SXLE.
•Appliance service operations includes SJESP, which receives commissions on service contracts from a third party.
•Midstream was formed to invest in infrastructure and other midstream projects, including a current project to build a natural gas pipeline in Pennsylvania and New Jersey.
•Corporate & Services segment includes costs related to the Acquisition, along with other unallocated costs. Also included in this segment are the results of SJEI.
•Intersegment represents intercompany transactions among the above SJI consolidated entities.
SJI groups its utility businesses under its wholly-owned subsidiary SJIU. This group consists of gas utility operations of SJG, ETG and ELK. SJI groups its nonutility operations into separate categories: Energy Group and Energy Services. Energy Group includes wholesale energy retail gas and other, and retail electric operations. Energy Services includes on-site energy production and appliance service operations.
SOUTH JERSEY INDUSTRIES, INC.
RESULTS OF OPERATIONS:
Summary:
SJI's net income for the three months ended June 30, 2019March 31, 2020 increased $80.4$15.4 million to a net loss of $13.4$101.0 million compared with the same period in 2018.2019. SJI's income from continuing operations for the three months ended March 31, 2020 increased $15.4 million to $101.1 million compared with the same period in 2019. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):
•The net income contribution from on-site energy production at Marina for the three months ended June 30, 2019 increased $77.9 million to a net loss of $0.1 million, primarily due to $74.2 million of impairment charges taken on solar generating facilities in the second quarter of 2018, which were primarily driven by the purchase price in the agreement to sell solar assets being less than the carrying amount of the assets (see Note 1 to the condensed consolidated financial statements). Also contributing were consulting and legal costs related to the sale of Marina's solar assets to a third-party buyer that were incurred during the three months ended June 30, 2018 that did not recur in the same period in 2019. Lower depreciation expense resulting from the sale of solar assets also contributed to the overall increase in net income. These are partially offset with lower margins resulting from less SREC revenue as discussed under "Gross Margin - Energy Services" below.
Acquisition costs were approximately $13.0 million lower during the three months ended June 30, 2019 compared with the same period in 2018. This is primarily due to the Company incurring less legal, consulting and other professional fees related to the Acquisition than the prior year period, as the costs incurred in 2018 were to finalize the Acquisition. These costs are recorded in the Corporate & Services segment.
The net income contribution from the wholesale energy operations at SJRG for the three months ended June 30, 2019March 31, 2020 increased $6.4$6.8 million to a net loss of $1.4$5.4 million compared with the same period in 2018,2019, primarily due to the change in unrealized gains and losses on derivatives used by the wholesale energy operations to mitigate natural gas commodity price risk, as discussed under "Operating Revenues - Energy Group" below. This was partially offset with lower margins on daily energy trading activities in the second quarter of 2019 compared to the same period in the prior year as discussed under "Gross Margin - Energy Group" below.
The net income contribution from gas utility operations at SJG for the three months ended June 30, 2019 increased $0.4 million to $2.0 million, primarily due to roll-in of infrastructure program investments and customer growth, partially offset by an overall increase in depreciation and interest expenses.
SJI recorded $7.9 million of financing/interest costs in connection with the Acquisition during the three months ended June 30, 2019 (see Notes 1 and 17 to the condensed consolidated financial statements). These costs are related to debt that was entered into during the second quarter of 2018 in order to finance the Acquisition. These costs are recorded in the Corporate & Services segment.
In connection with the Acquisition (see Notes 1 and 17 to the condensed consolidated financial statements), SJI consolidated the accounts of ETG and ELK gas utility operations beginning with the third quarter of 2018. ETG and ELK contributed a combined net loss of $3.9 million for the three months ended June 30, 2019.
The net income contribution from SJE for the three months ended June 30, 2019 decreased $3.5 million to a net loss of $1.5 million compared with the same period in 2018. This was primarily due to the sale of the retail gas business in the fourth quarter of 2018, along with the change in unrealized gains and losses recorded on forward financial contracts at the retail electric operations at SJE due to price volatility as discussed under "Gross Margin - Energy Group" below.
The change in unrealized gains and losses on the Company's interest rate derivative contracts contributed a $1.7 million decrease in net income when comparing the three months ended June 30, 2019 to the same period in 2018.
SJI's net income for the six months ended June 30, 2019 increased $54.8 million to $72.2 million compared with the same period in 2018. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):
The net income contribution from on-site energy production at Marina for the six months ended June 30, 2019 increased $79.7 million to a net loss of $1.4 million, primarily due to $74.2 million of impairment charges taken on solar generating facilities in the second quarter of 2018, which were primarily driven by the purchase price in the agreement to sell solar assets being less than the carrying amount of the assets (see Note 1 to the condensed consolidated financial statements). Also contributing were consulting and legal costs related to the sale of Marina's solar assets to a third-party buyer that were incurred during the six months ended June 30, 2018 that did not recur in the same period in 2019. Lower depreciation expense resulting from the sale of solar assets also contributed to the overall increase in net income. These are partially offset with lower margins resulting from less SREC revenue as discussed under "Gross Margin - Energy Services" below.
In connection with the Acquisition (see Notes 1 and 17 to the condensed consolidated financial statements), SJI consolidated the accounts of ETG and ELK gas utility operations beginning with the third quarter of 2018. ETG and ELK contributed combined net income of $27.4 million for the six months ended June 30, 2019.
Acquisition costs were approximately $18.5 million lower during the six months ended June 30, 2019 compared with the same period in 2018. This is primarily due to the Company incurring less legal, consulting and other professional fees related to the Acquisition than the prior year period, as the costs incurred in 2018 were to finalize the Acquisition. These costs are recorded in the Corporate & Services segment.
The net income contribution from gas utility operations at SJG for the six months ended June 30, 2019 increased $2.4 million to $70.7 million, primarily due to roll-in of infrastructure program investments and customer growth, partially offset by an overall increase in depreciation and interest expenses.
The net income contribution from the wholesale energy operations at SJRG for the six months ended June 30, 2019 decreased $51.6 million to a net loss of $2.8 million compared with the same period in 2018, primarily due to lower margins on daily energy trading activities and an overall decrease in sales as discussed under "Operating Revenues - Energy Group" below. Also contributing was the change in unrealized gains and losses on forward financial contracts due to price volatility, as discussed under "Operating Revenues - Energy Group" below.volatility. This was partially offset by lower margins on daily energy trading activities.
SJI recorded $16.4 million of financing/interest costs in connection with•The income contribution from the Acquisition duringgas utility operations at ETG for the sixthree months ended June 30, 2019 (see Notes 1 and 17March 31, 2020 increased $5.9 million to the condensed consolidated financial statements). These costs are related to debt that was entered into during the second quarter of 2018 in order to finance the Acquisition. These costs are recorded in the Corporate & Services segment.
The change in unrealized gains and losses on the Company's interest rate derivative contracts contributed a $3.8$36.8 million decrease in net income when comparing the six months ended June 30, 2019 tocompared with the same period in 2018.2019, primarily due to positive margins due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019, partially offset with higher operations expenses.
SJI recorded $2.2 million of costs to reorganize and restructure•The income contribution from gas utility operations at SJG for the business, including severance and other employee separation costs, that were incurred during the sixthree months ended June 30, 2019.March 31, 2020 increased $1.8 million to $70.5 million, primarily due to customer growth and the roll-in of infrastructure program investments. SJG's utility margin increased from its CIP mechanism as discussed in "Utility Margin - SJG Utility Operations" below. These costs are recordedwere partially offset with an increase in depreciation expense and lower AFUDC income, along with a one-time tax adjustment resulting from SJG's Stipulation of Settlement with the Corporate & Services segment. BPU as part of its recent rate case filing.
A significant portion of the volatility in operating results is due to the impact of the accounting methods associated with SJI’s derivative activities. SJI uses derivatives to limit its exposure to market risk on transactions to buy, sell, transport and store natural gas and to buy and sell retail electricity. SJI also uses derivatives to limit its exposure
to increasing interest rates on variable-rate debt.
The types of transactions that typically cause the most significant volatility in operating results are as follows:
•The wholesale energy operations at SJRG purchases and holds natural gas in storage and maintains capacity on interstate pipelines to earn profit margins in the future. The wholesale energy operations utilize derivatives to mitigate commodity price risk in order to substantially lock-in the profit margin that will ultimately be realized. However, both gas stored in inventory and pipeline capacity are not considered derivatives and are not subject to fair value accounting. Conversely, the derivatives used to reduce the risk associated with a change in the value of inventory and pipeline capacity are accounted for at fair value, with changes in fair value recorded in operating results in the period of change. As a result, earnings are subject to volatility as the market price of derivatives change, even when the underlying hedged value of inventory and pipeline capacity are unchanged. Additionally, volatility in earnings is created when realized gains and losses on derivatives used to mitigate commodity price risk on expected future purchases of gas injected into storage are recognized in earnings when the derivatives settle, but the cost of the related gas in storage is not recognized in earnings until the period of withdrawal. This volatility can be significant from period to period. Over time, gains or losses on the sale of gas in storage, as well as use of capacity, will be offset by losses or gains on the derivatives, resulting in the realization of the profit margin expected when the transactions were initiated.
•The retail electric operations at SJE use forward contracts to mitigate commodity price risk on fixed price electric contracts with customers. In accordance with GAAP, the forward contracts are recorded at fair value, with changes in fair value recorded in earnings in the period of change. Several related customer contracts are not considered derivatives and, therefore, are not recorded in earnings until the electricity is delivered. As a result, earnings are subject to volatility as the market price of the forward contracts change, even when the underlying hedged value of the customer contract is unchanged. Over time, gains or losses on the sale of the fixed price electric under contract will be offset by losses or gains on the forward contracts, resulting in the realization of the profit margin expected when the transactions were initiated.
As a result, management also uses the non-generally accepted accounting principles (non-GAAP)non-GAAP financial measures of Economic Earnings and Economic Earnings per share when evaluating its results of operations. These non-GAAP financial measures should not be considered as an alternative to GAAP measures, such as net income, operating income, earnings per share from continuing operations or any other GAAP measure of liquidity or financial performance.
We define Economic Earnings as: Income from continuing operations, (i) less the change in unrealized gains and plus the change in unrealized losses on all derivative transactions; (ii) less realized gains and plus realized losses on all commodity derivative transactions attributed to expected purchases of gas in storage to match the recognition of these gains and losses with the recognition of the related cost of the gas in storage in the period of withdrawal; and (iii)(ii) less the impact of transactions, contractual arrangements or other events where management believes period to period comparisons of SJI's operations could be difficult or potentially confusing. With respect to part (iii)(ii) of the definition of Economic Earnings, several items are excluded from Economic Earnings for the three and six months June 30, 2019 and 2018, Economic Earnings excludes the following:
| |
• | For the three and six months ended June 30, 2019, Economic Earnings excludes costs incurred to reorganize and restructure the business, including severance and other employee separation costs.
|
For the three and six months ended June 30,March 31, 2020 and 2019, and 2018, Economic Earnings excludesconsisting of the impact of pricing disputes with third parties, costs to acquire the assets of ETG and ELK, including legal, consulting and other professional fees, and costs incurredto prepare to exit the Transaction Service Agreement (TSA). Economic Earnings also excludesTSA, costs incurred and gains recognized on the salesales of the remaining solar, assets,MTF/ACB, and the saleELK, severance and other employee separation costs, and a one-time tax adjustment resulting from SJG's Stipulation of certain SREC's.
For the three and six months ended June 30, 2019 and 2018, Economic Earnings excludes the impact of a May 2017 jury verdict stemming from a pricing dispute with a gas supplier over costs, including interest charges and legal fees incurred, alongSettlement with the realized differenceBPU. See (A)-(E) in the market value of the commodity (including financial hedges).
For the three and six months ended June 30, 2018, Economic Earnings excludes approximately $99.2 million (pre-tax) of impairment charges recorded on solar generating facilities, which was primarily driven by the purchase price in the agreement to sell solar assets being less than the carrying amount of the assets. See Note 1 to the condensed consolidated financial statements.
table below.
Economic Earnings is a significant performance metricfinancial measure used by our management to indicate the amount and timing of income from continuing operations that we expect to earn after taking into account the impact of derivative instruments on the related transactions, as well as the impact of contractual arrangements and other events that management believes make period to period comparisons of SJI's operations difficult or potentially confusing. Management uses Economic Earnings to manage its business and to determine such items as incentive/compensation arrangements and allocation of resources. Specifically regarding derivatives, we believe that this financial measure indicates to investors the profitability of the entire derivative-related transaction and not just the portion that is subject to mark-to-market valuation under GAAP. We believe that considering only the change in market value on the derivative side of the transaction can produce a false sense as to the ultimate profitability of the total transaction as no change in value is reflected for the non-derivative portion of the transaction.
Economic Earnings for the three months ended June 30, 2019 decreased $17.7March 31, 2020 increased $7.4 million to a net loss of $12.2$106.8 million compared with the same period in 2018.2019. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):
SJI recorded $7.9 million of financing costs and other charges in connection with the Acquisition during the three months ended June 30, 2019 (see Notes 1 and 17 to the condensed consolidated financial statements). These costs are related to debt that was entered into during the second quarter of 2018 in order to finance the Acquisition. These costs are recorded in the Corporate & Services segment.
•The incomeEconomic Earnings contribution from on-site energy productiongas utility operations at MarinaETG increased $5.9 million to $36.8 million, primarily due to positive margins due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019, partially offset with higher operations expenses.
•The Economic Earnings contribution from gas utility operations at SJG for the three months ended June 30, 2019 decreased $4.1March 31, 2020 increased $3.0 million to a net loss of $1.8$71.7 million, primarily due to less SREC revenue in 2019 as a resultcustomer growth and the roll-in of the sale of solar assets to a third party buyerAIRP II investments. SJG's utility margin increased from its CIP mechanism as discussed under "Grossin "Utility Margin - Energy Services"SJG Utility Operations" below. This isThese were partially offset with loweran increase in depreciation expense resulting from the sale of solar assets.and lower AFUDC income.
In connection with the Acquisition (see Notes 1 and 17 to the condensed consolidated financial statements), SJI consolidated the accounts of ETG and ELK gas utility operations beginning with the third quarter of 2018. ETG and ELK contributed a combined net loss of $3.9 million for the three months ended June 30, 2019.
•The incomeEconomic Earnings contribution from the wholesale energy operations at SJRG for the three months ended June 30, 2019March 31, 2020 decreased $2.8$1.9 million to a net loss of $2.0$5.3 million compared with the same period in 2018, primarily due to lower margins on daily energy trading activities during the three months ended June 30, 2019 compared to the same period in the prior year.activities.
The income contribution from gas utility operations at SJG for the three months ended June 30, 2019 increased $0.4 million to $2.0 million, primarily due to roll-in of infrastructure program investments and customer growth, partially offset by an overall increase in depreciation and interest expenses.
Economic Earnings for the six months ended June 30, 2019 decreased $18.7 million to $87.2 million compared with the same period in 2018. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):
The income contribution from the wholesale energy operations at SJRG for the six months ended June 30, 2019 decreased $31.6 million to $5.2 million, primarily due to lower margins on daily energy trading activities during the six months ended June 30, 2019 compared to the same period in the prior year.
SJI recorded $16.4 million of financing costs and other charges in connection with the Acquisition during the six months ended June 30, 2019 (see Notes 1 and 17 to the condensed consolidated financial statements). These costs are related to debt that was entered into during the second quarter of 2018 in order to finance the Acquisition and are recorded in the Corporate & Services segment.
In connection with the Acquisition (see Notes 1 and 17 to the condensed consolidated financial statements), SJI consolidated the accounts of ETG and ELK gas utility operations beginning with the third quarter of 2018. ETG and ELK contributed a combined net income of $27.4 million for the six months ended June 30, 2019.
The net income contribution from gas utility operations at SJG for the six months ended June 30, 2019 increased $2.4 million to $70.7 million, primarily due to roll-in of infrastructure program investments and customer growth, partially offset by an overall increase in depreciation and interest expenses.
The following table presents a reconciliation of SJI's income from continuing operations and earnings per share from continuing operations to Economic Earnings and Economic Earnings per share for the three and six months ended June 30March 31 (in thousands, except per share data):
| | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | | | | | |
| | 2020 | | 2019 | | | | |
| Income from Continuing Operations | $ | 101,100 | | | $ | 85,699 | | | | | |
| Minus/Plus: | | | | | | | |
| Unrealized Mark-to-Market Losses on Derivatives | 4,322 | | | 13,150 | | | | | |
| | | | | | | |
| Net Losses from a Legal Proceeding in a Pricing Dispute (A) | — | | | 991 | | | | | |
| Acquisition/Sale Net Costs (B) | 1,361 | | | 1,985 | | | | | |
| Other Costs (C) | 147 | | | 2,573 | | | | | |
| Income Taxes (D) | (1,305) | | | (4,961) | | | | | |
| Additional Tax Adjustments (E) | 1,214 | | | — | | | | | |
| Economic Earnings | $ | 106,839 | | | $ | 99,437 | | | | | |
| | | | | | | |
| Earnings per Share from Continuing Operations | $ | 1.09 | | | $ | 0.94 | | | | | |
| Minus/Plus: | | | | | | | | | |
| Unrealized Mark-to-Market Losses on Derivatives | 0.05 | | | 0.14 | | | | | |
| | | | | | | |
| Net Losses from a Legal Proceeding in a Pricing Dispute (A) | — | | | 0.01 | | | | | |
| Acquisition/Sale Net Costs (B) | 0.01 | | | 0.02 | | | | | |
| Other Costs (C) | — | | | 0.03 | | | | | |
| Income Taxes (D) | (0.01) | | | (0.05) | | | | | |
| Additional Tax Adjustments (E) | 0.01 | | | — | | | | | |
| Economic Earnings per Share | $ | 1.15 | | | $ | 1.09 | | | | | |
The following table presents a reconciliation of SJG's income from continuing operations to Economic Earnings for the three months ended March 31 (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2020 | | 2019 |
| Income from Continuing Operations | $ | 70,522 | | | $ | 68,731 | |
| Plus: | | | |
| Additional Tax Adjustments (E) | 1,214 | | | — | |
| Economic Earnings | $ | 71,736 | | | $ | 68,731 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Income from Continuing Operations | $ | (13,304 | ) | | $ | (93,793 | ) | | $ | 72,395 |
| | $ | 17,513 |
|
| Minus/Plus: | | | | | | | |
| Unrealized Mark-to-Market Losses (Gains) on Derivatives | 1,888 |
| | 5,697 |
| | 15,038 |
| | (19,493 | ) |
| Loss on Property, Plant and Equipment (A) | — |
| | 99,233 |
| | — |
| | 99,233 |
|
| Net Losses from a Legal Proceeding in a Pricing Dispute (B) | 986 |
| | 1,661 |
| | 1,977 |
| | 3,006 |
|
| Acquisition/Sale Net (Gains) Costs (C) | (1,822 | ) | | 26,246 |
| | 163 |
| | 35,523 |
|
| Other Costs (D) | 422 |
| | — |
| | 2,995 |
| | — |
|
| Income Taxes (E) | (391 | ) | | (33,555 | ) | | (5,352 | ) | | (29,875 | ) |
| Economic Earnings | $ | (12,221 | ) | | $ | 5,489 |
| | $ | 87,216 |
| | $ | 105,907 |
|
| | | | | | | | |
| Earnings per Share from Continuing Operations | $ | (0.14 | ) | | $ | (1.12 | ) | | $ | 0.79 |
| | $ | 0.21 |
|
| Minus/Plus: | | | | | | | |
| Unrealized Mark-to-Market Losses (Gains) on Derivatives | 0.02 |
| | 0.07 |
| | 0.16 |
| | (0.23 | ) |
| Loss on Property, Plant and Equipment (A) | — |
| | 1.18 |
| | — |
| | 1.20 |
|
| Net Losses from a Legal Proceeding in a Pricing Dispute (B) | 0.01 |
| | 0.02 |
| | 0.02 |
| | 0.04 |
|
| Acquisition/Sale Net (Gains) Costs (C) | (0.02 | ) | | 0.31 |
| | 0.01 |
| | 0.43 |
|
| Other Costs (D) | 0.01 |
| | — |
| | 0.03 |
| | — |
|
| Income Taxes (E) | (0.01 | ) | | (0.39 | ) | | (0.06 | ) | | (0.36 | ) |
| Economic Earnings per Share | $ | (0.13 | ) | | $ | 0.07 |
| | $ | 0.95 |
| | $ | 1.29 |
|
The effect of derivative instruments not designated as hedging instruments under GAAP in the condensed consolidated statements of income (see Note 12 to the condensed consolidated financial statements), as compared to the Economic Earnings table above, is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| (Losses) Gains on Energy Related Commodity Contracts | $ | (143 | ) | | $ | (6,178 | ) | | $ | (12,203 | ) | | $ | 17,175 |
|
| (Losses) Gains on Interest Rate Contracts | (1,745 | ) | | 620 |
| | (2,835 | ) | | 2,248 |
|
| Total before income taxes | (1,888 | ) | | (5,558 | ) | | (15,038 | ) | | 19,423 |
|
| Unrealized mark-to-market gains on derivatives held by affiliated companies, before taxes | — |
| | (139 | ) | | — |
| | 70 |
|
| Total unrealized mark-to-market (losses) gains on derivatives | (1,888 | ) | | (5,697 | ) | | (15,038 | ) | | 19,493 |
|
| Loss on Property, Plant and Equipment (A) | — |
| | (99,233 | ) | | — |
| | (99,233 | ) |
| Net Losses from a Legal Proceeding in a Pricing Dispute (B) | (986 | ) | | (1,661 | ) | | (1,977 | ) | | (3,006 | ) |
| Acquisition/Sale Net Gains (Costs) (C) | 1,822 |
| | (26,246 | ) | | (163 | ) | | (35,523 | ) |
| Other Costs (D) | (422 | ) | | — |
| | (2,995 | ) | | — |
|
| Income Taxes (E) | 391 |
| | 33,555 |
| | 5,352 |
| | 29,875 |
|
| Total reconciling items between (losses) income from continuing operations and economic earnings | $ | (1,083 | ) | | $ | (99,282 | ) | | $ | (14,821 | ) | | $ | (88,394 | ) |
| | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| Losses on Energy Related Commodity Contracts | $ | (276) | | | $ | (12,060) | | | | | |
| Losses on Interest Rate Contracts | (4,046) | | | (1,090) | | | | | |
| Total before income taxes | (4,322) | | | (13,150) | | | | | |
| | | | | | | | | |
| Total unrealized mark-to-market losses on derivatives | (4,322) | | | (13,150) | | | | | |
| | | | | | | |
| Net Losses from a Legal Proceeding in a Pricing Dispute (A) | — | | | (991) | | | | | |
| Acquisition/Sale Net Costs (B) | (1,361) | | | (1,985) | | | | | |
| Other Costs (C) | (147) | | | (2,573) | | | | | |
| Income Taxes (D) | 1,305 | | | 4,961 | | | | | |
| Additional Tax Adjustments (E) | (1,214) | | | — | | | | | |
| Total reconciling items between (losses) income from continuing operations and economic earnings | $ | (5,739) | | | $ | (13,738) | | | | | |
(A) Represents impairment charges taken on solar generating facilities in 2018, which was primarily driven by the purchase price in the agreement to sell solar assets being less than the carrying amount of the assets.
(B)(A) Represents net losses, including interest, legal fees, and the realized difference in the market value of the commodity (including financial hedges), resulting from a ruling in a legal proceeding related to a pricing dispute between SJI and a gas supplier that began in October 2014.
(C)(B) Represents costs incurred to acquire the assets of ETG and ELK, including legal, consulting and other professional fees, and costs incurredprepare to exit the TSA. Also included here are gainsgains/losses recognized and costs incurred on the sale of the remaining solar assets as well as MTF/ACB and ELK, and sales of certain SREC's.
(D)(C) Represents severance and other employee separation costs.
(E) Determined(D) The income taxes on (A) through (C) above were determined using a combined average statutory tax rate of approximately 26.5% and 25% for the three and six months ended June 30, 2019March 31, 2020 and 2018, respectively. 2019.
SJI Utilities:
SJG Utility Operations:
The following tables summarize the composition of SJG utility operations operating revenues and margin for the three and six months ended June 30March 31 (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | | | | |
| | 2020 | | 2019 | | | | |
| Utility Operating Revenues: | | | | | | | |
| Firm Sales - | | | | | | | |
| Residential | $ | 159,907 | | | $ | 179,966 | | | | | |
| Commercial | 32,555 | | | 36,694 | | | | | |
| Industrial | 1,247 | | | 1,932 | | | | | |
| Cogeneration & Electric Generation | 454 | | | 580 | | | | | |
| Firm Transportation - | | | | | | | |
| Residential | 4,353 | | | 4,988 | | | | | |
| Commercial | 15,435 | | | 15,238 | | | | | |
| Industrial | 6,413 | | | 6,597 | | | | | |
| Cogeneration & Electric Generation | 1,427 | | | 1,728 | | | | | |
| | | | | | | |
| Total Firm Revenues | 221,791 | | | 247,723 | | | | | |
| | | | | | | |
| Interruptible Sales | 14 | | | 62 | | | | | |
| Interruptible Transportation | 342 | | | 380 | | | | | |
| Off-System Sales | 16,404 | | | 22,427 | | | | | |
| Capacity Release | 1,940 | | | 1,376 | | | | | |
| Other | 203 | | | 230 | | | | | |
| | 240,694 | | | 272,198 | | | | | |
| Less: Intercompany Sales | (1,089) | | | (1,400) | | | | | |
| Total Utility Operating Revenues | 239,605 | | | 270,798 | | | | | |
| Less: | | | | | | | |
| Cost of Sales - Utility | 80,534 | | | 118,880 | | | | | |
| Less: Intercompany Cost of Sales | (1,089) | | | (1,400) | | | | | |
| Total Cost of Sales - Utility (Excluding depreciation) | 79,445 | | | 117,480 | | | | | |
| Total Gross Margin | 160,160 | | | 153,318 | | | | | |
| Conservation Recoveries* | 4,885 | | | 6,798 | | | | | |
| RAC Recoveries* | 6,233 | | | 5,219 | | | | | |
| EET Recoveries* | 1,179 | | | 496 | | | | | |
| Revenue Taxes | 545 | | | 676 | | | | | |
| Utility Margin** | $ | 147,318 | | | $ | 140,129 | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Utility Operating Revenues: | | | | | | | |
| Firm Sales - | | | | | | | |
| Residential | $ | 27,139 |
| | $ | 42,184 |
| | 207,105 |
| | $ | 182,938 |
|
| Commercial | 9,721 |
| | 10,478 |
| | 46,415 |
| | 39,227 |
|
| Industrial | 603 |
| | 613 |
| | 2,535 |
| | 2,770 |
|
| Cogeneration & Electric Generation | 391 |
| | 1,750 |
| | 971 |
| | 3,049 |
|
| Firm Transportation - | | | | | | | |
| Residential | 1,540 |
| | 1,798 |
| | 6,528 |
| | 8,306 |
|
| Commercial | 6,715 |
| | 6,063 |
| | 21,953 |
| | 22,535 |
|
| Industrial | 5,653 |
| | 5,687 |
| | 12,250 |
| | 12,049 |
|
| Cogeneration & Electric Generation | 1,241 |
| | 1,014 |
| | 2,969 |
| | 2,350 |
|
| | | | | | | | |
| Total Firm Revenues | 53,003 |
| | 69,587 |
| | 300,726 |
| | 273,224 |
|
| | | | | | | | |
| Interruptible Sales | — |
| | 8 |
| | 62 |
| | 123 |
|
| Interruptible Transportation | 260 |
| | 256 |
| | 640 |
| | 578 |
|
| Off-System Sales | 7,119 |
| | 4,600 |
| | 29,546 |
| | 32,185 |
|
| Capacity Release | 1,575 |
| | 2,075 |
| | 2,951 |
| | 4,649 |
|
| Other | 311 |
| | 275 |
| | 541 |
| | 501 |
|
| | 62,268 |
| | 76,801 |
| | 334,466 |
| | 311,260 |
|
| Less: Intercompany Sales | (1,247 | ) | | (1,198 | ) | | (2,647 | ) | | (3,889 | ) |
| Total Utility Operating Revenues | 61,021 |
| | 75,603 |
| | 331,819 |
| | 307,371 |
|
| Less: | | | |
| | | | |
| Cost of Sales - Utility | 2,654 |
| | 19,379 |
| | 121,534 |
| | 109,187 |
|
| Less: Intercompany Cost of Sales | (1,247 | ) | | (1,198 | ) | | (2,647 | ) | | (3,889 | ) |
| Total Cost of Sales - Utility (Excluding depreciation) | 1,407 |
| | 18,181 |
| | 118,887 |
| | 105,298 |
|
| Total Gross Margin | 59,614 |
| | 57,422 |
| | 212,932 |
| | 202,073 |
|
| Conservation Recoveries* | 2,560 |
| | 3,288 |
| | 9,358 |
| | 8,964 |
|
| RAC Recoveries* | 5,219 |
| | 4,086 |
| | 10,438 |
| | 8,172 |
|
| EET Recoveries* | 650 |
| | 465 |
| | 1,146 |
| | 977 |
|
| Revenue Taxes | 204 |
| | 179 |
| | 880 |
| | 545 |
|
| Utility Margin** | $ | 50,981 |
| | $ | 49,404 |
| | $ | 191,110 |
| | $ | 183,415 |
|
| | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | | | | | |
| | 2020 | | 2019 | | | | | |
| Utility Margin: | | | | | | | | |
| Residential | $ | 83,099 | | | $ | 98,868 | | | | | | |
| Commercial and Industrial | 31,431 | | | 36,248 | | | | | | |
| Cogeneration and Electric Generation | 1,280 | | | 1,204 | | | | | | |
| Interruptible | 26 | | | 24 | | | | | | |
| Off-System Sales & Capacity Release | 785 | | | 1,670 | | | | | | |
| Other Revenues | 203 | | | 249 | | | | | | |
| Margin Before Weather Normalization & Decoupling | 116,824 | | | 138,263 | | | | | | |
| CIP Mechanism | 28,910 | | | 874 | | | | | | |
| EET Mechanism | 1,584 | | | 992 | | | | | | |
| Utility Margin** | $ | 147,318 | | | $ | 140,129 | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Utility Margin: | | | | | | | |
| Residential | $ | 27,945 |
| | $ | 32,744 |
| | $ | 126,812 |
| | $ | 128,807 |
|
| Commercial and Industrial | 15,574 |
| | 16,512 |
| | 51,822 |
| | 52,155 |
|
| Cogeneration and Electric Generation | 1,064 |
| | 1,196 |
| | 2,268 |
| | 2,191 |
|
| Interruptible | 19 |
| | (102 | ) | | 43 |
| | 27 |
|
| Off-System Sales & Capacity Release | 515 |
| | 608 |
| | 2,186 |
| | 2,543 |
|
| Other Revenues | 538 |
| | 817 |
| | 787 |
| | 1,043 |
|
| Margin Before Weather Normalization & Decoupling | 45,655 |
| | 51,775 |
| | 183,918 |
| | 186,766 |
|
| CIP Mechanism | 4,382 |
| | (3,145 | ) | | 5,256 |
| | (4,905 | ) |
| EET Mechanism | 944 |
| | 774 |
| | 1,936 |
| | 1,554 |
|
| Utility Margin** | $ | 50,981 |
| | $ | 49,404 |
| | $ | 191,110 |
| | $ | 183,415 |
|
* Represents expenses for which there is a corresponding credit in operating revenues. Therefore, such recoveries have no impact on SJG's financial results.
** Utility Margin is a non-GAAP financial measure and is further defined under the caption "Utility Margin" below.
Operating Revenues - SJG Utility Operations
Revenues from the gas utility operations at SJG decreased $14.5$31.5 million, or 18.9%11.6%, for the three months ended June 30, 2019March 31, 2020 compared with the same period in 2018.2019. Excluding intercompany transactions, revenues decreased $14.6$31.2 million, or 19.3%11.5%, for the three months ended June 30, 2019March 31, 2020 compared with the same period in 2018.2019.
The main driver for the decreased revenue was lower firm sales. Total firm revenue decreased $16.6$25.9 million, or 23.8%10.5%, for the three months ended June 30, 2019,March 31, 2020, compared with the same periods in 20182019 primarily due to warmer weather as discussed under "Throughput Utility Operations" induring the SJG Management's Discussion section.
Revenues from the gas utility operations at SJG increased $23.2 million, or 7.5%, for the six months ended June 30, 2019 compared with the same period in 2018. Excluding intercompany transactions, revenues increased $24.4 million, or 8.0%, for the six months ended June 30, 2019 compared with the same period in 2018.
Total firm revenue increased $27.5 million or 10.1%, for the six months ended June 30, 2019 as a resultfirst quarter of 6,708 additional customers.2020. While changes in gas costs and BGSS recoveries/refunds fluctuate from period to period, SJG does not profit from the sale of the commodity. Therefore, corresponding fluctuations in Operating Revenue or Cost of Sales have no impact on profitability, as further discussed below under the caption "Utility Margin."
Partially offsetting these increases was the impact ofTotal OSS volume, discussed under "Throughput - Gas Utility Operations" below, which resulted in a corresponding decrease of $2.6decreased $6.0 million or 8.2%, in OSS revenues for the sixthree months ended June 30, 2019,March 31, 2020 compared with the same period in 2018.2019, primarily due to decreased commodity costs as a result of lower cash market prices and warmer weather. However, the impact of changes in OSS and capacity release activity dodoes not have a material impact on the earnings of SJG, as SJG is required to return 85% of the profits of such activity to its ratepayers. Earnings from OSS can be seen in the “Margin” table above.
Utility Margin - SJG Utility Operations
Management uses Utility Margin, a non-GAAP financial measure, when evaluating the operating results of SJG. Utility Margin is defined as natural gas revenues less natural gas costs, regulatory rider expenses and related volumetric and revenue-based energy taxes. Management believes that Utility Margin provides a more meaningful basis for evaluating utility operations than revenues since natural gas costs, regulatory rider expenses and related energy taxes are passed through to customers. Natural gas costs are charged to operating expenses on the basis of therm sales at the prices approved by the BPU through SJG’s BGSS clause. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measure of gross margin, which is calculated as revenues less cost of sales as shown in the table above.
Total Utility Margin increased $1.6$7.2 million, or 3.2%, and $7.7 million, or 4.2%5.1%, for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018.2019. The increase is primarily due to customer growth and the roll-in of AIRP II Investments.
Theinfrastructure program investments. Also contributing to the three month comparative period increase was the CIP tracking mechanism, which adjusts earnings when actual usage per customer experienced during the period varies from an established baseline usage per customer. As reflected in the Utility Margin table above and the CIP table in SJG's Management Discussion section, the CIP mechanism increased Utility Margin by $4.4 million, or $3.6 million after taxes, for the three months ended June 30, 2019, and $5.0 million, or $4.2 million after taxes, for the six months ended June 30, 2019,March 31, 2020, primarily due to variation in customer usage compared to the same periods period
in 2018.2019. Partially offsetting these increases is warmer weather in the first three months of 2020 compared to the same period in the prior year,
ETG Utility Operations:
The following tables summarize the composition of regulated natural gas utility operations, operating revenues and margin at ETG for the three and six months ended June 30March 31 (in thousands, except for degree day data).
| | | | | | | | | | | | |
| Three Months Ended
March 31, | | | |
| 2020 | | 2019 | |
| Utility Operating Revenues: | | | | |
| Firm & Interruptible Sales - | | | | |
| Residential | $ | 99,396 | | | $ | 96,259 | | |
| Commercial & Industrial | 26,284 | | | 28,975 | | |
| Firm & Interruptible Transportation - | | | | |
| Residential | 870 | | | 712 | | |
| Commercial & Industrial | 13,758 | | | 11,582 | | |
| Other | 3,849 | | | 2,646 | | |
| Total Firm & Interruptible Revenues | 144,157 | | | 140,174 | | |
| Less: | | | | |
| Total Cost of Sales - Utility (Excluding depreciation) | 54,116 | | | 68,978 | | |
| Total Gross Margin | 90,041 | | | 71,196 | | |
| Regulatory Rider Expenses* | 5,302 | | | 2,260 | | |
| Utility Margin** | $ | 84,739 | | | $ | 68,936 | | |
| | | | | | | | | | | | |
| Utility Margin: | | | | |
| Residential | $ | 57,433 | | | $ | 46,521 | | |
| Commercial & Industrial | 27,912 | | | 21,973 | | |
| Regulatory Rider Expenses* | (606) | | | 442 | | |
| Utility Margin** | $ | 84,739 | | | $ | 68,936 | | |
| | | | |
| Degree Days | 2,082 | | | 2,570 | | |
|
| | | | | | |
| | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 |
| Utility Operating Revenues: | | |
| Firm & Interruptible Sales - | | |
| Residential | $ | 27,134 |
| $ | 123,393 |
|
| Commercial & Industrial | 8,470 |
| 37,445 |
|
| Firm & Interruptible Transportation - | | |
| Residential | 284 |
| 996 |
|
| Commercial & Industrial | 7,438 |
| 19,020 |
|
| Other | 1,528 |
| 4,174 |
|
| Total Firm & Interruptible Revenues | 44,854 |
| 185,028 |
|
| Less: | | |
| Total Cost of Sales - Utility (Excluding depreciation) | 15,084 |
| 84,062 |
|
| Total Gross Margin | 29,770 |
| 100,966 |
|
| Regulatory Rider Expenses* | 1,199 |
| 3,459 |
|
| Utility Margin** | $ | 28,571 |
| $ | 97,507 |
|
|
| | | | | | |
| Utility Margin: | | |
| Residential | $ | 15,980 |
| $ | 62,501 |
|
| Commercial & Industrial | 12,135 |
| 34,108 |
|
| Regulatory Rider Expenses* | 456 |
| 898 |
|
| Utility Margin** | $ | 28,571 |
| $ | 97,507 |
|
| | | |
| Degree Days | 424 |
| 2,994 |
|
*Represents expenses for which there is a corresponding credit in operating revenues. Therefore, such recoveries have no impact on ETG's financial results.
**Utility Margin is a non-GAAP financial measure and is further defined under the caption "Utility Margin" above. The definition of Utility Margin is the same for the Utilities.
As ETG was acquired on July 1, 2018, there is no activity for the three and six months ended June 30, 2018 (see Note 17 to the condensed consolidated financial statements). ETGETG's business consists of natural gas distribution to residential, commercial and industrial customers in northern and central New Jersey. ETG's operating revenues of $44.9 million and $185.0 million for the three and six months ended June 30, 2019, respectively, consist of firm sales and transportation, as well as interruptible sales and transportation. ETG does not have any off-system sales. The Utility Margin at ETG of $28.6 million and $97.5 million for the three and six months ended June 30, 2019, respectively, is considered a non-GAAP measure and calculated the same as SJG as discussed under "Utility Margin" above.
Revenues from the gas utility operations at ETG increased $4.0 million, or 2.8%, for the three months ended March 31, 2020 compared with the same period in 2019 primarily due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019, partially offset by warmer weather. Utility margin from the gas utility operations at ETG increased $15.8 million, or 22.9%, for the three months ended March 31, 2020 compared with the same period in 2019 primarily due to the favorable change in base rates as noted above.
ELK Utility Operations:
The activities of ELK utility operations are not material to SJI's financial results.
Nonutility:
Operating Revenues - Energy Group
Combined revenues for Energy Group, net of intercompany transactions, increased $14.6decreased $71.5 million, or 11.2%33.8%, to $145.5 million, and decreased $45.2 million, or 11.2%, to $357.2$140.1 million, for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018.2019. The significant drivers for the overall change were as follows:
•Revenues from wholesale energy operations at SJRG, net of intercompany transactions, increased $59.5decreased $61.6 million to $126.4$128.3 million for the three months ended June 30, 2019March 31, 2020 compared with the same period in 2018. Revenues earned on gas supply contracts with2019, primarily due to an overall decrease in sales resulting from maintenance and scheduled outages at several electric generation facilities increased primarily due to three contracts that began operations in the second quarter of 2018 or later. Also contributing to the increasefor which SJRG has gas supply contracts. Partially offsetting these decreases was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total increase of $11.6$10.9 million for the three months ended June 30, 2019March 31, 2020 compared with the same period in 2018.2019.
Revenues from wholesale energy operations at SJRG, net of intercompany transactions, increased $59.5 million to $316.4 million for the six months ended June 30, 2019 compared with the same period in 2018. Revenues earned on gas supply contracts with electric generation facilities increased for the six months ended June 30, 2019 compared with the same period in 2018primarily due to three contracts that began operations in the second quarter of 2018 or later as discussed above. Offsetting this increase was an overall decrease in sales, specifically compared to the first two weeks of January 2018 due to market conditions during that time, along with the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total decrease of $27.9 million for the six months ended June 30, 2019 compared with the same period in 2018. As discussed in Note 1 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues – Nonutility on the condensed consolidated income statement.
The retail gas operations at SJE were sold November 30, 2018. As a result, the Company recorded no revenues from this business during the three and six months ended June 30, 2019, as opposed to revenues, net of intercompany transactions, of $22.7 million and $61.3 million for the same periods in the prior year.
•Revenues from retail electric operations at SJE, net of intercompany transactions, decreased $22.2$10.0 million to $19.0 million, and $43.4 million to $40.7$11.6 million, for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018,2019, primarily due to lower average LMP per megawatt hour and lower overall sales volumes. Also contributing tovolumes as SJE did not renew several contracts that have expired over the last twelve months. Partially offsetting this decrease was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total decreaseincrease of .$2.8 million and $3.8$0.9 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018.2019.
SJE uses forward financial contracts to mitigate commodity price risk on fixed price electric contracts. In accordance with GAAP, the forward financial contracts are recorded at fair value, with changes in fair value recorded in earnings in the period of change. The related customer contracts are not considered derivatives and, therefore, are not recorded in earnings until the electricity is delivered. As a result, earnings are subject to volatility as the market price of the forward financial contracts change, even when the underlying hedged value of the customer contract is unchanged. Over time, gains or losses on the sale of the fixed price electric under contract will be offset by losses or gains on the forward financial contracts, resulting in the realization of the profit margin expected when the transactions were initiated. The retail electric operations at SJE serve both fixed and market-priced customers.
Operating Revenues - Energy Services
Combined revenues for Energy Services, net of intercompany transactions, decreased $6.3$4.2 million, or 30.0%36.9%, to $14.6 million, and decreased $13.7 million, or 34.50%, to $25.9$7.1 million, for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018.2019. The significant drivers for the overall change were as follows:
•Revenues from on-site energy production at Marina, net of intercompany transactions, decreased $6.3$4.5 million or 31.0%, to $14.1 million, and decreased $13.8 million, or 35.6%, to $24.8$6.3 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018,2019, primarily due to less SREC revenue in 2019 as a resultlack of revenues from MTF and ACB subsequent to the sale of solar assets to a third party buyerthat was completed February 18, 2020 (see Note 1 to the condensed consolidated financial statements).
•The change in revenues from appliance service operations at SJESP, net of intercompany transactions, was not significant.
Gross Margin - NonutilityEnergy Group & Energy Services
Gross margin for the nonutilityEnergy Group and Energy Services businesses is a GAAP measure and is defined as revenue less all costs that are directly related to the production, sale and delivery of SJI’sSJI's products and services. These costs primarily include natural gas and electric commodity costs as well as certain payroll and related benefits. On the condensed consolidated statements of income, revenue is reflected in Operating Revenues - Nonutility and the costs are reflected in Cost of Sales - Nonutility. As discussed in Note 1 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues - Nonutility on the condensed consolidated statements of income.
Gross margin for our nonutility business totaled $11.5 million for the three and six months ended June 30, 2019, respectively.
Gross margin is broken out between Energy Group and Energy Services, which are definedcomprised of a group of segments as categories of segmentsdescribed in Note 6 to the condensed consolidated financial statements.
Gross Margin - Energy Group
Combined gross margins for Energy Group increased $0.2$10.4 million to a loss of $1.2 million and decreased $76.4 million to a loss of $1.6$10.0 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018.2019. The significant drivers for the overall change were as follows:
•Gross margin from the wholesale energy operations at SJRG increased $7.7$9.9 million to $0.2$10.1 million for the three months ended June 30, 2019March 31, 2020 compared with the same period in 2018,2019. The main driver for the overall increase was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total increase of $11.6$10.9 million. This was partially offset with lower margins on daily energy trading activities.
Gross margin from the wholesale energy operations at SJRG decreased $71.1 million to $0.4 million primarily due to lower margins on daily energy trading activities and an overall decrease in sales as noted under "Operating Revenues-Energy Group" above. Also contributing was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total decrease of $27.9 million for the six months ended June 30, 2019 compared with the same period in 2018.
The wholesale energy operations at SJRG expectare expected to continue to add incremental margin from marketing and related opportunities in the Marcellus region, capitalizing on its established presence in the area. Future margins could fluctuate significantly due to the volatile nature of wholesale gas prices.
The retail gas operations at SJE were sold November 30, 2018. As a result, the Company recorded no margin from this business during the three and six months ended June 30, 2019, as opposed to $4.0 million and $0.6 million for the same periods in the prior year.
•Gross margin from SJE’s retail electric operations decreased $3.5increased $0.4 million to a loss of $1.5 million, and $4.7 million to a loss of $2.0$0.2 million, for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018,2019, primarily due to the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total decreaseincrease of .$2.8 million and $3.8 million for$0.9 million. Partially offsetting this increase is overall lower sales volumes as SJE did not renew several contracts that have expired over the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018.last twelve months.
Gross Margin - Energy Services
Combined gross margins for Energy Services decreased $12.7$2.8 million to $12.8 million and decreased $21.3 million to $22.3$6.6 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018.2019. The significant drivers for the overall change were as follows:
•Gross margin from on-site energy production at Marina decreased $12.8$3.1 million to $12.3 million, and $21.3 million to $21.2$5.8 million, for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018,2019, primarily due to less SREC revenue in 2019 as a resultlack of margin from MTF and ACB subsequent to the sale of solar assets to a third party buyerthat was completed February 18, 2020 (see Note 1 to the condensed consolidated financial statements).
•The change in gross margin from appliance service operations at SJESP was not significant.
Operating Expenses - All Segments:
A summary of net changes in operations expense for the three and six months ended June 30,March 31, follows (in thousands):
| | | | | | | |
| Three Months Ended March 31,
2020 vs. 2019 | | |
| SJI Utilities: | | | |
| SJG Utility Operations | $ | (474) | | | |
| ETG Utility Operations | 6,498 | | | |
| ELK Utility Operations | 74 | | | |
| Subtotal SJI Utilities | 6,098 | | | |
| Nonutility: | | | | |
| Energy Group: | | | |
| Wholesale Energy Operations | 54 | | | |
| Retail Electric Operations | (40) | | | |
| Subtotal Energy Group | 14 | | | |
| Energy Services: | | | |
| On-Site Energy Production | (1,784) | | | |
| Appliance Service Operations | 115 | | | |
| Subtotal Energy Services | (1,669) | | | |
| Midstream | (1) | | | |
| Corporate & Services and Intercompany Eliminations | (4,912) | | | |
| Total Operations Expense | $ | (470) | | | |
|
| | | | | | | |
| | Three Months Ended June 30,
2019 vs. 2018 | | Six Months Ended June 30,
2019 vs. 2018 |
| SJI Utilities: | | | |
| SJG Utility Operations | $ | (2,074 | ) | | $ | (2,347 | ) |
| ETG Utility Operations | 17,865 |
| | 35,839 |
|
| ELK Utility Operations | 500 |
| | 1,024 |
|
| Subtotal SJI Utilities | 16,291 |
| | 34,516 |
|
| Nonutility: | | | |
| Energy Group: | | | |
| Wholesale Energy Operations | (320 | ) | | (922 | ) |
| Retail Gas and Other Operations | (2,576 | ) | | (4,989 | ) |
| Retail Electric Operations | 191 |
| | 566 |
|
| Subtotal Energy Group | (2,705 | ) | | (5,345 | ) |
| Energy Services: | | | |
| On-Site Energy Production | (6,276 | ) | | (6,395 | ) |
| Appliance Service Operations | 52 |
| | (28 | ) |
| Subtotal Energy Services | (6,224 | ) | | (6,423 | ) |
| Total Nonutility | (8,929 | ) | | (11,768 | ) |
| Midstream | 10 |
| | 71 |
|
| Corporate & Services and Intercompany Eliminations | (8,771 | ) | | (8,436 | ) |
| Total Operations Expense | $ | (1,399 | ) | | $ | 14,383 |
|
Operations Expense
In connection with the Acquisition, SJI consolidated the accounts of ETG and ELK utility operations beginning July 2018 (see Note 17 to the condensed consolidated financial statements), contributing an increase to Operations Expenses of $18.4 million and $36.9 million for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018.
SJG utility operations expense decreased $2.1 million and $2.3$0.5 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018,2019. The three month comparative period decrease was primarily due to the operation of SJG’s CLEP and EEP, which experienced an aggregate net decrease. Such costs are recovered on a dollar-for-dollar basis; therefore, SJG experienced an offsetting decrease in revenue during the three and six months ended June 30, 2019,March 31, 2020, compared with the same period in the prior year. Partially
ETG utility operations expense increased $6.5 million for the three months ended March 31, 2020 compared with the same period in 2019, primarily due to the operation of ETG's RAC, which experienced an aggregate net increase. Such costs are recovered on a dollar-for-dollar basis; therefore, ETG experienced an offsetting this decreaseincrease in revenue during the three months ended March 31, 2020, compared with the same period in the prior year. Also contributing to the increase was higher expenses in various areas, including those associated with corporate support, governance and compliance costs.costs, along with higher costs related to exiting the TSA in the first quarter of 2020.
NonutilityCombined operations expense for the Energy Group and Energy Services areas of business decreased $8.9 million and $11.8$1.7 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018,2019, primarily due to consulting and legal costs related to the sale of Marina's solar assets to a third-party buyer that were incurred in 2018 that did not recur in 2019, along with no expenses at the retail gas segment during 2019 resulting from the sale of the SJE gas business during the fourth quarter of 2018 as well as lower legal fees incurred at the wholesale energy operations at SJRG from an unfavorable court ruling related to a pricing dispute between SJRGMTF and a supplier (see Note 11 to the condensed consolidated financial statements).
Maintenance - Maintenance expense increased $2.5 million and $5.2 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018, of which ETG and ELK contributed $2.3 million and $3.8 million, respectively. The remaining increases were primarily due to increased maintenance of services activity and higher levels of RAC amortization, both at SJG. This increase in RAC-related expenses does not affect earnings, as SJG recognizes an offsetting amount in revenues.
Depreciation - Depreciation decreased $0.6 million and $1.6 million for the three and six months ended June 30, 2019, respectively, compared with the same periods in 2018, primarily due to reduced depreciation expense at Marina as a result of the solar assets either being sold or classified as held for saleACB (see Note 1 to the condensed consolidated financial statements). Partially offsetting this
The Corporate & Services segment had a $4.9 million decrease isin Operations Expense for the impactthree months ended March 31, 2020 compared with the same period in 2019, primarily due to less severance and other employee separation costs and less costs incurred to exit the TSA, along with intercompany eliminations.
Maintenance - The change in maintenance expense for the three months ended March 31, 2020 compared with the same period in 2019 was not significant.
Depreciation - Depreciation increased $2.8 million for the three months ended March 31, 2020 compared with the same period in 2019, primarily due to increased investment in property, plant and equipment by the gas utility operations of SJG.SJG and ETG. This was partially offset by reduced depreciation expense at Marina as a result of the MTF & ACB sale (see Note 1 to the condensed consolidated financial statements).
Energy and Other Taxes - EnergyThe change in energy and other taxes increased $1.5 million and $3.3 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018, of which ETG and ELK contributed the majority of the increase.2019 was not significant.
Other Income and Expense - The change in otherOther income and expense decreased $3.7 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared withto the same periodsperiod in 2018 was not significant.2019, primarily due to lower investment performance, including pension and other postretirement benefit plan, along with lower AFUDC income at SJG.
Interest Charges – Interest charges increased $8.9 million and $23.6$3.9 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018,2019, primarily due to interest incurred on higher amounts of long-term debt outstanding at SJI and SJG, including financing for the Acquisition.SJG.
Income Taxes – Income tax expense increased $27.3 million and $15.9$8.4 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018. For the three month comparative period, the Company experienced a lower loss before income taxes compared2019, primarily due to the prior year period. For the six month comparative period, the Company experienced higherincrease in income before income taxes in 2020 compared towith the prior year, period.along with a one-time tax adjustment at SJG resulting from SJG's Stipulation of Settlement with the BPU as part of its recent rate case filing.
Equity in Earnings of Affiliated Companies – The change in equity in earnings of affiliated companies for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 20182019 was not significant.
Discontinued Operations – The results are primarily comprised of environmental remediation and product liability litigation associated with previously disposed of businesses.
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity needs are driven by factors that include natural gas commodity prices; the impact of weather on customer bills; lags in fully collecting gas costs from customers under the BGSS charge and other regulatory clauses, settlement of legal matters, and environmental remediation expenditures through the RAC; working capital needs of SJI's energy trading and marketing activities; the timing of construction and remediation expenditures and related permanent financings; the timing of equity contributions to unconsolidated affiliates; mandated tax payment dates; both discretionary and required repayments of long-term debt; and the amounts and timing of dividend payments.
Cash Flows from Operating Activities — Liquidity needs are first met with net cash provided by operating activities. Net cash provided by operating activities totaled $216.1$165.9 million and $152.8$212.3 million in the first sixthree months of 20192020 and 2018,2019, respectively. Net cash provided by operating activities varies from year-to-year primarily due to the impact of weather on customer demand and related gas purchases, customer usage factors related to conservation efforts and the price of the natural gas commodity, inventory utilization, and gas cost recoveries. Operating activities in the first sixthree months of 20192020 produced moreless net cash than the same period in 2018, $60.9 million of which was produced by ETG and ELK. The remaining increases are2019, primarily due to higher customerless cash collections including under SJG regulatory clauses,at SJRG resulting from maintenance and improvements in working capital.scheduled outages at several electric generation facilities for which SJRG has gas supply contracts.
Cash Flows from Investing Activities — SJI has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment. Net cash outflows from investing activities, which are primarily construction projects, for the first sixthree months of 20192020 and 20182019 amounted to $222.2$10.1 million and $131.9$108.8 million, respectively. We estimate the cash outflows for investing activities, net of refinancings and returns/advances on investments from affiliates, for fiscal years 2019, 2020, 2021 and 20212022 at SJI to be approximately $376.5$533.4 million, $536.7$801.8 million and $462.2$859.1 million, respectively. The high level of investing activities for 2019, 2020, 2021 and 20212022 is due to the accelerated infrastructure investment programs at SJG, thefuture capital expenditures ofat ETG, and ELK (post-Acquisition)projected investment in PennEast in 2021 and projected SJI Midstream investments, net of projected returns, in 2019 through 2021.2022. SJI expects to use short-term borrowings under lines of credit from commercial banks and a commercial paper program to finance these investing activities as incurred. From time to time, SJI may refinance the short-term debt with long-term debt.
Other key investing activities of SJI during the first sixthree months of 20192020 and 20182019 were as follows:
•SJI received approximately $24.3$97.0 million from the sale of MTF and ACB. See Note 1 to the condensed consolidated financial statements.
•SJI received approximately $7.2 million and $16.1 million during the first sixthree months of 2020 and 2019, respectively, from the sale of certain solar assets. See Note 1 to the condensed consolidated financial statements.
SJI received $15.6 million as an adjustment to the purchase price related to the Acquisition. See Note 17 to the condensed consolidated financial statements.
•During the first sixthree months of 2019both 2020 and 2018,2019, SJI made net investments in unconsolidated affiliates of $3.9 million and $6.4 million, respectively.$2.1 million.
Cash Flows from Financing Activities — Short-term borrowings from the commercial paper program and lines of credit from commercial banks are used to supplement cash flows from operations, to support working capital needs and to finance capital expenditures and acquisitions as incurred. From time to time, short-term debt incurred to finance capital expenditures is refinanced with long-term debt.
Credit facilities and available liquidity as of June 30, 2019March 31, 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Company | | Total Facility | | Usage | | Available Liquidity | | Expiration Date | |
| SJI: | | | | | | | | | |
| SJI Syndicated Revolving Credit Facility | | $ | 500,000 | | | $ | 169,300 | | (A) | $ | 330,700 | | | August 2022 | |
| Revolving Credit Facility | | 50,000 | | | 50,000 | | | — | | | September 2020 (D) | |
| Term Loan Credit Agreement | | 100,000 | | | 100,000 | | | — | | | September 2020 (D) | |
| Term Loan Credit Agreement | | 150,000 | | | 150,000 | | | — | | | March 2021 | |
| | | | | | | | | |
| Total SJI | | 800,000 | | | 469,300 | | | 330,700 | | | | |
| | | | | | | | | |
| SJG: | | | | | | | | | |
| Commercial Paper Program/Revolving Credit Facility | | 200,000 | | | 143,300 | | (B) | 56,700 | | | August 2022 | |
| Uncommitted Bank Line | | 10,000 | | | — | | | 10,000 | | | September 2020 | |
| | | | | | | | | |
| Total SJG | | 210,000 | | | 143,300 | | | 66,700 | | | | |
| | | | | | | | | |
| ETG/ELK: | | | | | | | | | |
| ETG/ELK Revolving Credit Facility | | 200,000 | | | 96,100 | | (C) | 103,900 | | | June 2021 | |
| | | | | | | | | |
| Total | | $ | 1,210,000 | | | $ | 708,700 | | | $ | 501,300 | | | | |
|
| | | | | | | | | | | | | | |
| Company | | Total Facility | | Usage | | Available Liquidity | | Expiration Date |
| SJI: | | | | | | | | |
| SJI Syndicated Revolving Credit Facility | | $ | 500,000 |
| | $ | 396,600 |
| (A) | $ | 103,400 |
| | August 2022 |
| Revolving Credit Facility | | 50,000 |
| | 50,000 |
| | — |
| | September 2019 (D) |
| | | | | | | | | |
| Total SJI | | 550,000 |
| | 446,600 |
| | 103,400 |
| | |
| | | | | | | | | |
| SJG: | | | | | | | | |
| Commercial Paper Program/Revolving Credit Facility | | 200,000 |
| | 104,000 |
| (B) | 96,000 |
| | August 2022 |
| Uncommitted Bank Line | | 10,000 |
| | — |
| | 10,000 |
| | August 2019 (D) |
| | | | | | | | | |
| Total SJG | | 210,000 |
| | 104,000 |
| | 106,000 |
| | |
| | | | | | | | | |
| ETG/ELK: | | | | | | | | |
| ETG/ELK Revolving Credit Facility | | 200,000 |
| | 140,900 |
| (C) | 59,100 |
| | June 2021 |
| | | | | | | | | |
| Total | | $ | 960,000 |
| | $ | 691,500 |
| | $ | 268,500 |
| | |
(A) Includes letters of credit outstanding in the amount of $9.6 million.
(B) Includes letters of credit outstanding in the amount of $0.9$0.8 million.
(C) Includes letters of credit outstanding in the amount of $1.0 million.
(D) These agreements were paid off in April 2020. See Notes 14 and 20 to the condensed consolidated financial statements.
For SJI, andthe $708.7 million of usage in the table above, less the letters of credit noted in (A)-(C) above, equal the $697.3 million recorded as Notes Payable on the condensed consolidated balance sheet as of March 31, 2020. For SJG, intend to renew these facilities upon expiration.the $143.3 million of usage in the table above, less the letters of credit noted in (B) above, equal the $142.5 million recorded as Notes Payable on the condensed balance sheet as of March 31, 2020.
In June 2019, SJI entered into an amendment to itsSJI's Five Year Revolving Credit Agreement ("Credit Agreement"), expiring in August 2022, that increased by $100.0 million the amount allows SJI canto borrow under the Credit Agreement in the form of revolving loans from a total aggregate amount of $400.0 million to $500.0 million. In addition, as part of the total $500.0 million extension of credit, the Credit Agreement provides for swingline loans (in an amount not to exceed an aggregate of $50.0 million ) and letters of credit (in an amount not to exceed an aggregate of $200.0 million), each at the applicable interest rates specified in the Credit Agreement. Subject to certain conditions set forth in the Credit Agreement, the Company may increase the revolving credit facility up to a maximum aggregate amount of $100.0 million (for a total facility of up to $600.0 million), although no lender is obligated to increase its commitment.
SJI's unsecured $100.0 million term loan credit agreement bears interest at a variable base rate or a variable LIBOR rate, at the Company’s election. Any amounts repaid prior to the maturity date cannot be reborrowed. As noted in (D), this was repaid in April 2020 (see Notes 14 and 20 to the condensed consolidated financial statements).
SJI (as a guarantor to ELK's obligation under this revolving credit agreement) and SJIU, ETG and ELK (as Borrowers) have a $200.0 million two-year revolving credit agreement with several lenders. The revolving credit agreement provides for the extension of credit to the Borrowers in a total aggregate amount of $200.0 million ($175.0190.0 million for ETG; $25.0$10.0 million for ELK). In June 2019, this revolving credit agreement wasELK; amended to add SJIU as an additional Borrower and to extend the termination date from Junein April 2020 to June 2021.be $10.0 million SJIU). See Note 10 to the condensed consolidated financial statements.
The Utilities' facilities are restricted as to use and availability specifically to the respective Utilities; however, if necessary, the SJI facilities can also be used to support liquidity needs of the Utilities. All committed facilities contain one financial covenant limiting the ratio of indebtedness to total capitalization of the applicable borrowers (as defined in the respective credit agreements), measured on a quarterly basis. SJI and the Utilities were in compliance with these covenants as of June 30, 2019.March 31, 2020. Borrowings under these credit facilities are at market rates.
SJI's weighted average interest rate on these borrowings (inclusive of SJG, for both periodsETG and ETG/ELK for 2019)ELK), which changes daily, was 3.45%2.02% and 2.90%3.46% at June 30,March 31, 2020 and 2019, and 2018, respectively. SJG's weighted average interest rate on these borrowings, which changes daily, was 2.60%1.76% and 2.33%2.74% at June 30,March 31, 2020 and 2019, and 2018, respectively.
SJI's average borrowings outstanding under these credit facilities (inclusive of SJG, for both periodsETG and ETG/ELK for 2019)ELK), not including letters of credit, during the sixthree months ended June 30,March 31, 2020 and 2019 and 2018 were $347.2$774.0 million and $201.6$241.9 million, respectively. The maximum amounts outstanding under these credit facilities, not including letters of credit, during the sixthree months ended June 30,March 31, 2020 and 2019 and 2018 were $687.2$872.2 million and $397.3$404.8 million, respectively.
SJG's average borrowings outstanding under these credit facilities during the sixthree months ended June 30,March 31, 2020 and 2019 and 2018 were $72.5$152.5 million and $49.3$84.6 million, respectively. The maximum amount outstanding under its credit facilities during the sixthree months ended June 30,March 31, 2020 and 2019 were $171.7 million and 2018 were $108.0 million, and $85.0 million, respectively.
Based upon the existing credit facilities and a regular dialogue with our banks, we believe there will continue to be sufficient credit available to meet our business’ future liquidity needs.
The SJI SJG, and ETG/ELKthe Utilities principal credit facilities are provided by a syndicate of banks. The NPA for Senior Unsecured Notes issued by SJI contains a financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective NPA or credit agreement) to not more than 0.70 to 1, measured at the end of each fiscal quarter. For SJI, the equity units issued in 2018 are treated as equity (as opposed to how they are classified on the condensed consolidated balance sheet, as long term debt) for purposes of the covenant calculation. SJI and SJG were in compliance with this covenant as of June 30, 2019.March 31, 2020. However, one SJG bank facility still contains a financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective credit agreement) to not more than 0.65 to 1 measured at the end of each fiscal quarter. As a result, SJG must ensure that the ratio of indebtedness to total capitalization (as defined in the respective credit agreement) does not exceed 0.65 to 1, as measured at the end of each fiscal quarter. SJG was in compliance with this covenant as of June 30, 2019.March 31, 2020.
SJG has a commercial paper program under which SJG may issue short-term, unsecured promissory notes to qualified investors up to a maximum aggregate amount outstanding at any time of $200.0 million. The notes have fixed maturities which vary by note, but may not exceed 270 days from the date of issue. Proceeds from the notes are used for general corporate purposes. SJG uses the commercial paper program in tandem with its $200.0 million revolving credit facility and does not expect the principal amount of borrowings outstanding under the commercial paper program and the credit facility at any time to exceed an aggregate of $200.0 million. In June 2019, the revolving credit agreement was amended to add SJIU as an additional Borrower.
SJI supplements its operating cash flow, commercial paper program and credit lines with both debt and equity capital. Over the years, SJG has used long-term debt, primarily in the form of First Mortgage Bonds and MTN's, secured by the same pool of utility assets, to finance its long-term borrowing needs. These needs are primarily capital expenditures for property, plant and equipment.
2020 Activity:
Debt Issuances/Paydowns
On March 26, 2020, SJI entered into an unsecured $150.0 million term loan agreement, which bears interest at variable rates. The maturity date of the term loan is March 25, 2021, and the loan is recorded in Notes Payable on the condensed consolidated balance sheets as of March 31, 2020. The proceeds of the loan were used for general corporate purposes.
On April 3, 2020, SJI entered into an unsecured $200.0 million term loan credit agreement, which bears interest at variable rates. The maturity of the term loan is October 31, 2021. Proceeds from the debt were used to pay down the following:
•$50.0 million outstanding on the SJI Revolving credit facility
•$100.0 SJI Term Loan
•$50.0 million SJI variable rate note, which was in current portion of long-term debt as of March 31, 2020.
On April 16, 2020, SJG entered into a Note Purchase Agreement which provides for SJG to issue and sell its Senior Secured Notes, Series F, 2020 in the aggregate principal amount of $525.0 million in three Tranches, as follows: (a) Senior Secured Notes, Series F, 2020, Tranche A due April 16, 2030 in the aggregate principal amount of $150.0 million; (b) Senior Secured Notes, Series F, 2020, Tranche B due April 16, 2050 in the aggregate principal amount of $250.0 million; and (c) Senior Secured Notes, Series F, 2020, Tranche C expected to be due October 1, 2050 in the aggregate principal amount of $125.0 million. All of the Tranche A Notes and the Tranche B Notes were issued on April 16, 2020, and bear interest at 3.28% and 3.93%, respectively. The Tranche C Notes are expected to be issued on October 1, 2020.
On April 29, 2020, ETG amended its $200.0 million revolving credit agreement, which was amended to provide for the extension of credit to the Borrowers as $190.0 million ETG and $10.0 million SJIU.
ATM Equity Offering
On April 6, 2020, SJI entered into an ATM Equity Offering Sales Agreement (the "Sales Agreement") to sell, from time to time, shares of the Company’s common stock, par value $1.25 per share, having an aggregate sale price up to $200.0 million, through an “at-the-market” equity offering program. Pursuant to the Sales Agreement, the shares of common stock may be offered and sold through any of the Sales Agents in negotiated transactions or transactions that are deemed to be “at-the-market” offerings. SJI has no obligation to sell any of the shares of common stock under the Sales Agreement and may at any time suspend solicitation and offers under the Sales Agreement. As of the date of this filing on Form 10-Q, SJI has not sold any shares under the ATM Offering.
2019 Activity:
On January 15, 2019, SJI settled its equity forward sale agreement by physically delivering the remaining 6,779,661 shares of common stock and receiving net cash proceeds of approximately $189.0 million. The forward price used to determine cash proceeds received by SJI at settlement was calculated based on the initial forward sale price, as adjusted for underwriting fees, interest rate adjustments as specified in the equity forward agreement and any dividends paid on our common stock during the forward period. See Note 4 to
In the condensed consolidated financial statements.
During the six months ended June 30,first quarter of 2019, SJI provided fourthree Notices of Optional Prepayment to the holders of its Floating Rate Senior Notes, Series 2018D, due June 20, 2019 of the Company’s intent to prepay the $475.0 million aggregate principal amount outstanding. As a result of these three notices, the Company has repaid the $475.0paid a total of $400.0 million aggregate principal amount in full.
During the six months ended June 30, 2019, SJI paid off $60.0 million principal amount outstanding on its 3.30% Senior Notes, Series 2014A-1, due June 26, 2019, and paid off $40.0 million principal amount outstanding on its Floating Rate Senior Notes, Series 2014B-1, due June 26, 2019.
Also during the six months ended June 30,first quarter 2019. The remaining $75.0 million was paid in April 2019.
Also in the first quarter of 2019, SJG issued $10.0 million of debt by drawing on its $400.0 million term loan credit agreement. All loans under this credit agreement are due and payable in April 2020; as such, the issuance amount is recorded in current portion of long-term debt on the condensed consolidated balance sheets.
Current Portion of Long-Term Debt - See Note 1 to the condensed consolidated financial statements.
DRP - See Note 4 to the condensed consolidated financial statements.
SJI’s capital structure was as follows:
| | | | | | | | | | | |
| | As of March 31, 2020 | | As of December 31, 2019 |
| Equity | 31.6 | % | | 29.6 | % |
| Long-Term Debt | 53.6 | % | | 52.8 | % |
| Short-Term Debt | 14.8 | % | | 17.6 | % |
| Total | 100.0 | % | | 100.0 | % |
|
| | | | | |
| | As of June 30, 2019 | | As of December 31, 2018 |
| Equity | 33.4 | % | | 28.9 | % |
| Long-Term Debt | 51.3 | % | | 64.9 | % |
| Short-Term Debt | 15.3 | % | | 6.2 | % |
| Total | 100.0 | % | | 100.0 | % |
SJI has paid dividends on its common stock for 6869 consecutive years and has increased that dividend each year for the last 2021 years. SJI currently seeksSJI’s current long-term goals are to grow thatthe dividend at a rate consistent with earnings growth while targetingover the long term, subject to the approval of its Board of Directors, with a targeted payout ratio of between 55% and 65% of Economic Earnings. In setting the dividend rate, the Board of Directors of SJI considers future earnings expectations, payout ratio, and dividend yield relative to those at peer companies, as well as returns available on other income-oriented investments. However, there can be no assurance that SJI will be able to continue to increase the dividend, meet the targeted payout ratio or pay a dividend at all in the future.
COMMITMENTS AND CONTINGENCIES:
Environmental Remediation - Costs for remediation projects, net of recoveries from ratepayers, for the first sixthree months of 20192020 and 20182019 amounted to net cash outflows of $11.6$9.5 million and $30.2$7.6 million, respectively. The amounts for the first six months of 2019 include environmental remediation liabilities of ETG associated with six former manufactured gas plant sites in New Jersey which are recoverable from customers through rate mechanisms approved by the BPU. Total net cash outflows for remediation projects are expected to be $34.1$42.2 million, $39.3$68.3 million and $47.4$67.5 million for 2019, 2020, 2021 and 2021,2022, respectively. As discussed in Notes 10 and 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's 10-K for the year ended December 31, 2018,2019, certain environmental costs are subject to recovery from ratepayers.
Standby Letters of Credit - See Note 11 to the condensed consolidated financial statements.
Contractual Obligations - There were no significant changes to SJI’s contractual obligations described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2018,2019, except for the following:
•RC Cape May Holdings, LLC has communicated to SJG that it no longer intends to proceed with a project to re-power the former BL England facility with natural gas. The proposedAs of March 2020, SJG has determined that the project was approved byunder construction will be abandoned. SJG has requested that the BPU in 2015 andproject costs spent to date of $10.1 million be recovered as a regulatory asset within its March 2020 rate case petition filed with the New Jersey Pinelands Commission in 2017, and would have supplied natural gas to this facility as well as provided a secondary supply of natural gas to customers in Atlantic and Cape May counties. SJG remains committed to meetingBPU. As such, the vitally important needs of residents and businesses in these countiesamount has been reclassified from Utility Plant and is exploring other alternatives.
$565.0 million decrease in long-term debt (excluding unamortized debt issuance costs), which decreased due topresented as a Regulatory Asset within the net pay downs that occurred in 2019, as discussed under "Liquidity and Capital Resources" above (also seecondensed consolidated balance sheets at March 31, 2020. The matter is currently pending with the BPU. See Note 147 to the condensed consolidated financial statements). Also resulting from these pay downs wasstatements.
•SJI entered into an overall decrease in future interest payments.unsecured term loan agreement for $150.0 million. See Note 10 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 53 to the condensed consolidated financial statements.
Pending Litigation — SJI and SJG are subject to claims, actions and other legal proceedings arising in the ordinary course of business. See Note 11 to the condensed consolidated financial statements for more detail on these claims, including information relatedclaims.
PennEast - See Note 3 to a court decision issued against SJG and SJRG on August 6, 2019 related to an ongoing pricing dispute related to two long-term gas supply contracts. Regarding this decision, SJI has a reserve to reflect the differences between the invoices and paid amounts, and SJI will be required to make payment by September 5, 2019 in an amount not materially different from what has been reserved.condensed consolidated financial statements.
SOUTH JERSEY GAS COMPANY
This section of Management’s Discussion focuses on SJG for the reported periods. In many cases, explanations and disclosures for both SJI and SJG are substantially the same or specific disclosures for SJG are included in the Management's Discussion for SJI.
RESULTS OF OPERATIONS:
The results of operations for the SJG utility operations are described in detail above; therefore, this section primarily focuses on statistical information and other information that is not discussed in the results of operations under South Jersey Industries, Inc. Refer to the section entitled “Results of Operations - SJG Utility Operations” for a detailed discussion of the results of operations for SJG.
The following table summarizes the composition of selected gas utility throughput for the three and six month periods ended June 30,March 31, (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| Utility Throughput – dts: | | | | | | | |
| Firm Sales - | | | | | | | |
| Residential | 10,212 | | | 12,978 | | | | | |
| Commercial | 2,397 | | | 3,123 | | | | | |
| Industrial | 108 | | | 195 | | | | | |
| Cogeneration & Electric Generation | 81 | | | 83 | | | | | |
| Firm Transportation - | | | | | | | |
| Residential | 450 | | | 628 | | | | | |
| Commercial | 2,349 | | | 2,707 | | | | | |
| Industrial | 2,770 | | | 2,790 | | | | | |
| Cogeneration & Electric Generation | 868 | | | 1,342 | | | | | |
| | | | | | | |
| Total Firm Throughput | 19,235 | | | 23,846 | | | | | |
| | | | | | | |
| Interruptible Sales | 1 | | | 6 | | | | | |
| Interruptible Transportation | 293 | | | 320 | | | | | |
| Off-System Sales | 5,538 | | | 5,063 | | | | | |
| Capacity Release | 18,064 | | | 17,331 | | | | | |
| | | | | | | |
| Total Throughput - Utility | 43,131 | | | 46,566 | | | | | |
|
| | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Utility Throughput – dts: | | | | | | | |
| Firm Sales - | | | | | | | |
| Residential | 2,530 |
| | 3,322 |
| | 15,508 |
| | 16,052 |
|
| Commercial | 864 |
| | 911 |
| | 3,987 |
| | 3,620 |
|
| Industrial | 64 |
| | 521 |
| | 259 |
| | 736 |
|
| Cogeneration & Electric Generation | 56 |
| | (35 | ) | | 139 |
| | 220 |
|
| Firm Transportation - | | | | | | | |
| Residential | 123 |
| | 198 |
| | 751 |
| | 1,027 |
|
| Commercial | 966 |
| | 1,172 |
| | 3,673 |
| | 4,313 |
|
| Industrial | 2,190 |
| | 2,363 |
| | 4,980 |
| | 5,338 |
|
| Cogeneration & Electric Generation | 1,025 |
| | 1,158 |
| | 2,367 |
| | 2,179 |
|
| | | | | | | | |
| Total Firm Throughput | 7,818 |
| | 9,610 |
| | 31,664 |
| | 33,485 |
|
| | | | | | | | |
| Interruptible Sales | — |
| | 1 |
| | 6 |
| | 10 |
|
| Interruptible Transportation | 227 |
| | 233 |
| | 547 |
| | 534 |
|
| Off-System Sales | 2,478 |
| | 1,130 |
| | 7,541 |
| | 7,877 |
|
| Capacity Release | 24,903 |
| | 23,551 |
| | 42,234 |
| | 41,580 |
|
| | | | | | | | |
| Total Throughput - Utility | 35,426 |
| | 34,525 |
| | 81,992 |
| | 83,486 |
|
Throughput – Gas Utility Operations - Total gas throughput increased 0.9decreased 3.4 MMdts , for the three months ended June 30, 2019,March 31, 2020, compared with the same period in 2018. This increase was realized2019, primarily due to 4.6 MMdts decrease in combinedfirm throughput in Capacity Release and OSS which increased 2.7 MMdts during the three months ended June 30, 2019 as compared with the same period in 2018.resulting from warmer weather. Offsetting the three month comparative was a 0.71.2 MMdts decreaseincrease in total firm throughput.
Total gas throughput decreased 1.5 MMdts, for the six months ended June 30,2019, compared with the same period in 2018, primarilycombined Capacity Release and OSS due to a decrease in firm throughput, offset by an increase in Capacity Release. Total firm throughput decreased
1.8 MMdtswarmer than normal weather making more pipeline capacity available for the six month period primarily due to the warmer weather. Total Capacity Release increased 0.7 MMdts for the for the six months ended June 30, 2019.and OSS.
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, | | | | | | |
| 2020 | | 2019 | | | | |
| Net Income Impact: | | | | | | | |
| CIP – Weather Related | $ | 13.9 | | | $ | 0.6 | | | | | |
| CIP – Usage Related | 7.1 | | | — | | | | | |
| Total Net Income Impact | $ | 21.0 | | | $ | 0.6 | | | | | |
| | | | | | | |
| Weather Compared to 20-Year Average | 19.8% Warmer | | 274.5% Colder | | | | |
| Weather Compared to Prior Year | 18.1 % Warmer | | 1.5% Colder | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net Income Impact: | | | | | | | |
| CIP – Weather Related | $ | 4.4 |
| | $ | (0.6 | ) | | $ | 5.0 |
| | $ | 0.3 |
|
| CIP – Usage Related | (0.8 | ) | | (1.1 | ) | | (0.8 | ) | | (3.3 | ) |
| Total Net Income Impact | $ | 3.6 |
| | $ | (1.7 | ) | | $ | 4.2 |
| | $ | (3.0 | ) |
| | | | | | | | |
| Weather Compared to 20-Year Average | 133.3% Colder | | 193.7% Colder | | 271.9% Colder | | 178.5% Colder |
| Weather Compared to Prior Year | 74.0% Warmer | | 25.5% Colder | | 4.6% Warmer | | 14.6% Colder |
Operating Revenues & Margin - See SJI's Management Discussion section above.
Operating Expenses - A summary of changes in operating expenses for SJG is as follows (in thousands):
| | | | | | | |
| Three Months Ended March 31,
2020 vs. 2019 | | |
| Operations | (474) | | | |
| Maintenance | 428 | | | |
| Depreciation | 962 | | | |
| Energy and Other Taxes | (374) | | | |
|
| | | | | | |
| | Three Months Ended June 30,
2019 vs. 2018 | | Six Months Ended June 30,
2019 vs. 2018 |
| Operations | (2,074 | ) | | $ | (2,347 | ) |
| Maintenance | 194 |
| | $ | 1,475 |
|
| Depreciation | 1,644 |
| | $ | 3,025 |
|
| Energy and Other Taxes | 656 |
| | $ | 1,390 |
|
Operations - See SJI's Management Discussion section above.
Maintenance - See SJI's Management Discussion section above.The change in maintenance expense for the three months ended March 31, 2020 compared with the same period in 2019 was not significant.
Depreciation - Depreciation expense increased $1.6 million and $3.0$1.0 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018,2019, primarily due to New Jersey's infrastructure improvement efforts, which included the approval of SJG's AIRP and SHARP, in addition to significant investment in new technology systems.
Energy and Other Taxes -The- The change in Energyenergy and Other Taxesother taxes for the three and six months ended June 30, 2019March 31, 2020 compared with the same period in 20182019 was not significant.
Other Income and Expense - The change in Other Income and Expense decreased $3.3 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018 was not significant.2019, primarily due to lower investment performance, including pension and other postretirement benefit plan, along with lower AFUDC income.
Interest Charges – InterestThe change in interest charges increased $0.9 million and $2.0 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared with the same periodsperiod in 2018, primarily due to higher amounts of long-term debt outstanding.2019 was not significant.
Income Taxes – Income tax expense generally fluctuates as income before taxes changes. Minor variations will occur period to period as a result of effective tax rate adjustments. Also, during the first quarter of 2020, SJG recorded $1.2 million in tax expense related to a one-time tax adjustment resulting from its Stipulation of Settlement with the BPU, as part of its recent rate case filing.
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity and capital resources for SJG are substantially covered in the Management’s Discussion of SJI (except for the items and transactions that relate to SJI and its nonutility subsidiaries). Those explanations are incorporated by reference into this discussion.
Liquidity needs for SJG are driven by factors that include natural gas commodity prices; the impact of weather on customer bills; lags in fully collecting gas costs from customers under the BGSS charge, settlement of legal matters, and environmental remediation expenditures through the RAC; the timing of construction and remediation expenditures and related permanent financings; mandated tax payment dates; both discretionary and required repayments of long-term debt; and the amounts and timing of dividend payments.
Cash Flows from Operating Activities - Liquidity needs are first met with net cash provided by operating activities. Net cash provided by operating activities totaled $126.3$86.4 million and $85.3$87.8 million in the first sixthree months of 20192020 and 2018,2019, respectively. Net cash provided by operating activities varies from year-to-year primarily due to the impact of weather on customer demand and related gas purchases, customer usage factors related to conversion efforts and the price of the natural gas commodity, inventory utilization, and gas cost recoveries. Operating activities in the first sixthree months of 2019 produced more net cash than2020 compared to the same period in 2018, primarily due to higher collections under SJG regulatory clauses, partially offset by higher working capital needs.2019, did not change significantly.
Cash Flows from Investing Activities - SJG has a continuing need for cash resources for capital expenditures, primarily to invest in new and replacement facilities and equipment. SJG estimates the net cash outflows for capital expenditures for fiscal years 2019, 2020, 2021 and 20212022 to be approximately $276.2$294.8 million, $310.4$409.0 million and $304.4$577.1 million, respectively. For capital expenditures, including those under the AIRP and SHARP, SJG expects to use short-term borrowings under both its commercial paper program and lines of credit from commercial banks to finance capital expenditures as incurred. From time to time, SJG may refinance the short-term debt incurred to support capital expenditures with long-term debt.
Cash Flows from Financing Activities - SJG supplements its operating cash flow and credit lines with both debt and equity capital. Over the years, SJG has used long-term debt, primarily in the form of First Mortgage Bonds and MTN's, secured by the same pool of utility assets, to finance its long-term borrowing needs. These needs are primarily capital expenditures for property, plant and equipment.
As noted above, SJG issued $10.0 million of debt by drawing on its $400.0 million term loan credit agreement.See SJI's Management Discussion section above.
SJI did not contribute any equity to SJG during the sixthree months ended June 30, 2019March 31, 2020 or 2018.
SJG’s capital structure was as follows:
| | | | | | | | | | | |
| | As of March 31, 2020 | | As of December 31, 2019 |
| Common Equity | 51.2 | % | | 49.0 | % |
| Long-Term Debt | 42.5 | % | | 43.3 | % |
| Short-Term Debt | 6.3 | % | | 7.7 | % |
| | | |
| Total | 100.0 | % | | 100.0 | % |
Costs for remediation projects, net of recoveries from ratepayers, for the first sixthree months of 20192020 and 20182019 amounted to net cash outflows of $11.5$9.1 million and $30.2$3.9 million, respectively. Total net cash outflows for remediation projects are expected to be $23.7$29.1 million, $15.2$39.8 million and $23.3$28.0 million for 2019, 2020, 2021 and 2021,2022, respectively. As discussed in Notes 10 and 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's 10-K for the year ended December 31, 2018,2019, certain environmental costs are subject to recovery from ratepayers.
SJG has certain commitments for both pipeline capacity and gas supply for which SJG pays fees regardless of usage. Those commitments, as of June 30, 2019,March 31, 2020, averaged $80.5$105.8 million annually and totaled $471.5$441.8 million over the contracts’ lives. Approximately 31% of the financial commitments under these contracts expire during the next five years. SJG expects to renew each of these contracts under renewal provisions as provided in each contract. SJG recovers all such prudently incurred fees through rates via the BGSS.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As part of its gas purchasing strategy, SJG and ETG use financial contracts to hedge against forward price risk. These contracts are recoverable through SJG's and ETG's BGSS, subject to BPU approval.
SJRG manages risk for its own portfolio by entering into the types of transactions noted above. The retail electric operations of SJE use forward physical and financial contracts to mitigate commodity price risk on fixed price electric contracts. It is management's policy, to the extent practical, within predetermined risk management policy guidelines, to have limited unmatched positions on a deal or portfolio basis while conducting these activities. As a result of holding open positions to a minimal level, the economic impact of changes in value of a particular transaction is substantially offset by an opposite change in the related hedge transaction.
SJI has entered into certain contracts to buy, sell, and transport natural gas and to buy and sell retail electricity. SJI recorded net pre-tax unrealized (losses) gains of $(0.1)$(0.3) million and $(6.2)$(12.1) million for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $(12.2) million and $17.2 million for the six months ended June 30, 2019 and 2018, respectively, which are included with realized (losses) gains in Operating Revenues - Nonutility on the condensed consolidated statements of income.
A reconciliation of SJI’s estimated net fair value of energy-related derivatives follows (in thousands):
We typically issue long-term debt either at fixed rates or use interest rate derivatives to limit our exposure to changes in interest rates on variable rate, long-term debt. As of June 30, 2019,March 31, 2020, the interest costs on $1.91$2.12 billion of our long-term debt (including current portion) was either at a fixed rate or hedged via an interest rate derivative.
The fair value and maturity of SJG's energy trading and hedging contracts determined using mark-to-market accounting as of June 30, 2019March 31, 2020 are as follows (in thousands):
A reconciliation of SJG's estimated net fair value of energy-related derivatives follows (in thousands):
SJG typically issues long-term debt either at fixed rates or uses interest rate derivatives to limit exposure to changes in interest rates on variable-rate, long-term debt. As of June 30, 2019,March 31, 2020, the interest costs on $590.3$571.3 million of long-term debt (including current portion) was either at a fixed-rate or hedged via an interest rate derivative.
Item 4. Controls and Procedures
The management of each of SJI and SJG, with the participation of their respective principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of SJI’s and SJG's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2019.March 31, 2020. Based on that evaluation, the principal executive officer and principal financial officer of each of SJI and SJG concluded that, as of March 31, 2020, the disclosure controls and procedures employed at SJI and SJG, arerespectively, were effective.
Item l. Legal Proceedings
Information required by this Item for SJI and SJG is incorporated by reference to Part I, Item 1, Note 11, Pending Litigation.
Item 1A. Risk Factors
Item 6. Exhibits
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.
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.