Loading...
Docoh

SOUTH JERSEY GAS (SJI)

Filed: 4 Nov 20, 7:00pm
000009192812/312020Q3FALSE000103521612/312020Q3FALSEP1YP2YP3Y33.3333.3333.33P5YP2Yus-gaap:OtherLiabilitiesCurrentus-gaap:OtherLiabilitiesNoncurrent

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to ______________________

Commission
File Number
Exact name of registrant as
specified in its charter
State of
Incorporation
I.R.S. Employer Identification No.
1-6364South Jersey Industries, Inc.New Jersey22-1901645
000-22211South Jersey Gas CoNew Jersey21-0398330

Address of principal executive officesCityStateZip CodeRegistrant's telephone number, including area code
South Jersey Industries, Inc.1 South Jersey PlazaFolsomNew Jersey08037(609)561-9000
South Jersey Gas Co1 South Jersey PlazaFolsomNew Jersey08037(609)561-9000

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

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

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that such registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes    No

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

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



South Jersey Industries, Inc.:
Large accelerated filerAccelerated filer      Non-accelerated filer    
Smaller reporting company     Emerging growth company     
South Jersey Gas Co:
Large accelerated filer   Accelerated filer      Non-accelerated filer
Smaller reporting company     Emerging growth company     
If an emerging growth company, indicate by check mark if either registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

Indicate by check mark whether either registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No
South Jersey Industries, Inc. (SJI) common stock ($1.25 par value) outstanding as of November 1, 2020 was 100,590,307 shares. South Jersey Gas Company common stock ($2.50 par value) outstanding as of November 1, 2020 was 2,339,139 shares. All of South Jersey Gas Company's outstanding shares of common stock are held by SJI Utilities, Inc., which is a wholly-owned subsidiary of SJI.
South Jersey Gas Company is a direct wholly-owned subsidiary of SJI Utilities, Inc. and meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q. As such, South Jersey Gas Company files its Quarterly Report on Form 10-Q with the reduced disclosure format authorized by General Instruction H.



TABLE OF CONTENTS
PART IFINANCIAL INFORMATIONPage No.
Item 1.Financial Statements (Unaudited)
South Jersey Industries, Inc.
 
 
 
 
South Jersey Gas Company
 
  South Jersey Industries, Inc. and South Jersey Gas Company - Combined
 
 
 
 
 
 
 
 
 
 
Note 10. Lines of Credit & Short-Term Borrowings
 
 
 
 
     Note 19. Leases
Item 2.
Item 3.
Item 4.
PART IIOTHER INFORMATION 
Item 1.
Item 1A.
Item 6.



GLOSSARY OF TERMS AND ABBREVIATIONS
ACBACB Energy Partners, LLC
ACLEAC Landfill Energy, LLC
ADITAccumulated Deferred Income Taxes
AEPApplied Energy Partners, LLC
AFUDCAllowance for Funds During Construction
AIRPAccelerated Infrastructure Replacement Program
AMAAsset Management Agreement
AnnadaleAnnadale Community Clean Energy Projects LLC
AOCLAccumulated Other Comprehensive Loss
AROAsset Retirement Obligation
ASCAccounting Standards Codification
ASUAccounting Standards Update
ATMAt-The-Market
BCLEBC Landfill Energy, LLC
BGSSBasic Gas Supply Service
BPUNew Jersey Board of Public Utilities
CARES ActCoronavirus Aid, Relief and Economic Security Act of 2020
CatamaranCatamaran Renewables, LLC
CEGRCompounded Earnings Annual Growth Rate
CEPClean Energy Program (ETG)
CHPCombined Heat and Power
CIPConservation Incentive Program
CLEPClean Energy Program (SJG)
CODMChief Operating Decision Maker
COVID-19Novel coronavirus
DRPDividend Reinvestment Plan
dtDecatherm
dts/dDecatherms per day
EDITExcess Deferred Income Taxes
EEPEnergy Efficiency Program
EETEnergy Efficiency Tracker
EGREarnings Growth Rate
ELKElkton Gas Company
EMIEnergy & Minerals, Inc.
EnerConnexEnerConnex, LLC
EnergenicEnergenic US, LLC
EnergyMarkEnergyMark, LLC
EPSEarnings Per Share
ERIPEarly Retirement Incentive Program
ERISAEmployee Retirement Income Security Act of 1974
ETGElizabethtown Gas Company
ETG/ELK AcquisitionThe Company's acquisition of the assets of Elizabethtown Gas Company and Elkton Gas Company effective July 1, 2018, from Pivotal Utility Holdings, Inc., a subsidiary of Southern Company Gas
FASBFinancial Accounting Standards Board
FERCFederal Energy Regulatory Commission
GAAPGenerally Accepted Accounting Principles for financial reporting in the United States
4

IAMInternational Association of Machinists and Aerospace Workers
IBEWInternational Brotherhood of Electrical Workers
IIPInfrastructure Investment Programs
ITCInvestment Tax Credit
LIBORLondon Interbank Offer Rate
LMPLocational Marginal Price
MarinaMarina Energy, LLC
MidstreamSJI Midstream, LLC
MillenniumMillennium Account Services, LLC
MPSCMaryland Public Service Commission
MMdtsOne million decatherms
MMmWhOne million megawatt hours
MorieThe Morie Company, Inc.
MTFMarina Thermal Facility
MTNMedium Term Notes
MWMegawatt
MWhMegawatt-hours
NCINon-Controlling Interest
NOLNet Operating Loss
Non-GAAPThe financial measures that are not prepared in accordance with U.S. GAAP
NPANote Purchase Agreement
NJEDANew Jersey Economic Development Authority
NYMEXNew York Mercantile Exchange
OSMCOn-System Margin Sharing Credit
OSSOff-System Sales
PennEastPennEast Pipeline, LLC
Potato CreekPotato Creek, LLC
RACRemediation Adjustment Clause
ROEReturn on Equity
ROURight of Use
SBCSocietal Benefits Clause
SCLESC Landfill Energy, LLC
SECSecurities and Exchange Commission
SERPSupplemental Executive Retirement Plan
SHARPStorm Hardening and Reliability Program
SJESouth Jersey Energy Company
SJEISJI Energy Investments, LLC
SJESSouth Jersey Energy Solutions, LLC
SJESPSouth Jersey Energy Service Plus, LLC
SJEXSouth Jersey Exploration, LLC
SJFSouth Jersey Fuel, Inc.
SJGSouth Jersey Gas Co or South Jersey Gas Company
SJISouth Jersey Industries, Inc., or the Company
SJIUSJI Utilities, Inc.
SJRGSouth Jersey Resources Group, LLC
SRECsSolar Renewable Energy Credits
SXLESX Landfill Energy, LLC
5

Tax ReformTax Cuts and Jobs Act which was enacted into law on December 22, 2017
TICTransportation Initiation Clause
TSATransition Services Agreement
TSRTotal Shareholder Return
UtilitiesRepresents SJI's three utility businesses: SJG, ETG, and until its sale, ELK
UWUAUnited Workers Union of America
VSIPVoluntary Separation Incentive Program
WNCWeather Normalization Clause

6


INTRODUCTION

FILING FORMAT

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

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

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

7

Item 1. Condensed Consolidated Financial Statements
 
SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME/(LOSS) (UNAUDITED)
(In Thousands, Except for Per Share Data)
Three Months Ended
September 30,
 20202019
Operating Revenues:  
Utility$103,383 $92,377 
Nonutility158,166 168,826 
Total Operating Revenues261,549 261,203 
Operating Expenses:  
Cost of Sales - (Excluding depreciation and amortization)  
 - Utility29,277 26,452 
 - Nonutility146,752 163,914 
Operations53,641 54,169 
Impairment Charges1,296 
Maintenance9,666 9,081 
Depreciation27,977 24,945 
Energy and Other Taxes2,730 2,663 
Net Gain on Sales of Assets(2,292)
Total Operating Expenses270,043 280,228 
Operating Loss(8,494)(19,025)
Other Income5,143 618 
Interest Charges(27,762)(28,857)
Loss Before Income Taxes(31,113)(47,264)
Income Taxes19,467 10,925 
Equity in Earnings of Affiliated Companies1,302 1,593 
Loss from Continuing Operations(10,344)(34,746)
Loss from Discontinued Operations - (Net of tax benefit)(58)(59)
Net Loss$(10,402)$(34,805)
Basic Loss Per Common Share:  
Continuing Operations$(0.10)$(0.38)
Discontinued Operations
Basic Loss Per Common Share$(0.10)$(0.38)
Average Shares of Common Stock Outstanding - Basic100,587 92,392 
Diluted Loss Per Common Share:  
Continuing Operations$(0.10)$(0.38)
Discontinued Operations
Diluted Loss Per Common Share$(0.10)$(0.38)
Average Shares of Common Stock Outstanding - Diluted100,587 92,392 

The accompanying notes are an integral part of the condensed consolidated financial statements.
8

Nine Months Ended
September 30,
 20202019
Operating Revenues:  
Utility$636,110 $613,555 
Nonutility419,515 551,880 
Total Operating Revenues1,055,625 1,165,435 
Operating Expenses:  
Cost of Sales - (Excluding depreciation and amortization)  
 - Utility210,167 231,622 
 - Nonutility379,583 526,472 
Operations168,653 173,603 
Impairment Charges1,296 
Maintenance28,658 27,984 
Depreciation81,877 72,759 
Energy and Other Taxes9,228 9,597 
Net Gain on Sales of Assets(3,246)
Total Operating Expenses878,166 1,040,087 
Operating Income177,459 125,348 
Other Income7,621 2,268 
Interest Charges(88,887)(85,944)
Income Before Income Taxes96,193 41,672 
Income Taxes(13,725)(9,378)
Equity in Earnings of Affiliated Companies5,710 5,355 
Income from Continuing Operations88,178 37,649 
Loss from Discontinued Operations - (Net of tax benefit)(178)(216)
Net Income$88,000 $37,433 
Basic Earnings Per Common Share:  
Continuing Operations$0.92 $0.41 
Discontinued Operations
Basic Earnings Per Common Share$0.92 $0.41 
Average Shares of Common Stock Outstanding - Basic95,599 92,041 
Diluted Earnings Per Common Share:  
Continuing Operations$0.92 $0.41 
Discontinued Operations
Diluted Earnings Per Common Share$0.92 $0.41 
Average Shares of Common Stock Outstanding - Diluted95,724 92,158 

The accompanying notes are an integral part of the condensed consolidated financial statements.
9


SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (UNAUDITED)
(In Thousands)
 
Three Months Ended
September 30,
 20202019
Net Loss$(10,402)$(34,805)
Other Comprehensive Income, Net of Tax:  
Reclassification of Unrealized Gain on Derivatives - Other to Net Loss, net of tax of $(3) and $(3), respectively
Other Comprehensive Income - Net of Tax
Comprehensive Loss$(10,393)$(34,796)

Nine Months Ended
September 30,
 20202019
Net Income$88,000 $37,433 
Other Comprehensive Income, Net of Tax: 
Reclassification of Unrealized Gain on Derivatives - Other to Net Income, net of tax of $(10) and $(10), respectively25 25 
Other Comprehensive Income - Net of Tax25 25 
Comprehensive Income$88,025 $37,458 

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


10

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
 
Nine Months Ended
September 30,
 20202019
Net Cash Provided by Operating Activities$254,200 $121,416 
Cash Flows from Investing Activities:  
Capital Expenditures(344,828)(357,844)
Acquisition-related Working Capital Settlement15,600 
Cash Paid for Acquisition, Net of Cash Acquired(10,932)(3,952)
Proceeds from Dispositions and Sale of Property, Plant & Equipment119,948 26,360 
Investment in Long-Term Receivables(18,787)(10,939)
Proceeds from Long-Term Receivables10,457 7,604 
Proceeds from Company-Owned Life Insurance1,694 
Investment in Affiliates(1,353)(4,102)
Advances to Affiliates(1,902)
Net Repayment of Notes Receivable - Affiliates2,504 
Investment in Subsidiary, Net of Cash Acquired(54,328)
Net Cash Used in Investing Activities(297,319)(327,481)
Cash Flows from Financing Activities:  
Net (Repayments of) Borrowings from Short-Term Credit Facilities(251,700)541,800 
Proceeds from Issuance of Long-Term Debt800,000 244,657 
Principal Repayments of Long-Term Debt(660,000)(725,000)
Payments for Issuance of Long-Term Debt(6,810)(2,106)
Dividends on Common Stock(54,553)(53,124)
Proceeds from Sale of Common Stock200,000 189,032 
Payments for the Issuance of Common Stock(1,897)
Net Cash Provided by Financing Activities25,040 195,259 
Net Decrease in Cash, Cash Equivalents and Restricted Cash(18,079)(10,806)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period28,381 31,679 
Cash, Cash Equivalents and Restricted Cash at End of Period$10,302 $20,873 

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









11

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
September 30,
2020
December 31,
2019
Assets  
Property, Plant and Equipment:  
Utility Plant, at original cost$5,150,209 $4,905,350 
Accumulated Depreciation(908,184)(843,998)
Nonutility Property and Equipment, at cost88,911 25,991 
Accumulated Depreciation(13,389)(13,807)
Property, Plant and Equipment - Net4,317,547 4,073,536 
Investments:  
Available-for-Sale Securities40 40 
Restricted199 21,964 
Investment in Affiliates92,945 87,087 
Total Investments93,184 109,091 
Current Assets:  
Cash and Cash Equivalents10,103 6,417 
Accounts Receivable167,534 253,661 
Unbilled Revenues22,712 84,821 
Provision for Uncollectibles(33,017)(19,829)
Notes Receivable - Affiliate2,875 5,379 
Natural Gas in Storage, average cost51,606 54,153 
Materials and Supplies, average cost1,061 1,164 
Prepaid Taxes37,333 26,918 
Derivatives - Energy Related Assets36,541 52,892 
Assets Held for Sale19,997 143,440 
Other Prepayments and Current Assets38,082 43,492 
Total Current Assets354,827 652,508 
Regulatory and Other Noncurrent Assets:  
Regulatory Assets659,724 665,932 
Derivatives - Energy Related Assets10,407 7,243 
Notes Receivable - Affiliate12,009 12,720 
Contract Receivables38,530 30,958 
Goodwill706,960 702,070 
Other115,735 111,282 
Total Regulatory and Other Noncurrent Assets1,543,365 1,530,205 
Total Assets$6,308,923 $6,365,340 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
12

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
September 30,
2020
December 31,
2019
Capitalization and Liabilities  
Equity:  
Common Stock$125,735 $115,493 
Premium on Common Stock1,217,822 1,027,902 
Treasury Stock (at par)(314)(289)
Accumulated Other Comprehensive Loss(32,533)(32,558)
Retained Earnings317,007 313,237 
Non-Controlling Interest4,236 
Total Equity1,631,953 1,423,785 
Long-Term Debt2,531,632 2,070,086 
Total Capitalization4,163,585 3,493,871 
Current Liabilities:  
Notes Payable597,000 848,700 
Current Portion of Long-Term Debt142,809 467,909 
Accounts Payable162,845 232,242 
Customer Deposits and Credit Balances37,697 35,004 
Environmental Remediation Costs47,956 43,849 
Taxes Accrued4,839 2,235 
Derivatives - Energy Related Liabilities25,005 41,965 
   Deferred Contract Revenues321 
Derivatives - Other Current2,078 1,155 
Liabilities Held for Sale6,043 
Dividends Payable29,677 
Interest Accrued27,187 13,580 
Pension Benefits3,727 3,727 
Other Current Liabilities22,564 35,486 
Total Current Liabilities1,103,705 1,731,895 
Deferred Credits and Other Noncurrent Liabilities:  
Deferred Income Taxes - Net116,321 92,166 
Pension and Other Postretirement Benefits114,764 114,055 
Environmental Remediation Costs148,515 189,036 
Asset Retirement Obligations195,718 263,950 
Derivatives - Energy Related Liabilities4,452 8,206 
Derivatives - Other Noncurrent17,637 11,505 
Regulatory Liabilities428,939 442,918 
Other15,287 17,738 
Total Deferred Credits and Other Noncurrent Liabilities1,041,633 1,139,574 
Commitments and Contingencies  (Note 11)
Total Capitalization and Liabilities$6,308,923 $6,365,340 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
13

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(In Thousands, Except for Per Share Data)
 Common StockPremium on Common StockTreasury StockAOCLRetained EarningsNCITotal
 
Balance at January 1, 2020$115,493 $1,027,902 $(289)$(32,558)$313,237 $$1,423,785 
Net Income— — — — 101,041 — 101,041 
Other Comprehensive Income, Net of Tax— — — — — 
Common Stock Issued or Granted Through Stock Plans62 (352)15 — — — (275)
Cash Dividends Declared - Common Stock ($0.30 per share)— — — — (27,276)— (27,276)
Balance at March 31, 2020115,555 1,027,550 (274)(32,550)387,002 1,497,283 
Net Loss— — — — (2,639)— (2,639)
Other Comprehensive Income, Net of Tax— — — — — 
Common Stock Issued or Granted Through Equity Offering or Stock Plans10,178 188,813 (37)— — — 198,954 
Cash Dividends Declared - Common Stock ($0.30 per share)— — — — (27,277)— (27,277)
Balance at June 30, 2020125,733 1,216,363 (311)(32,542)357,086 1,666,329 
Net Loss— — — — (10,402)— (10,402)
Other Comprehensive Income, Net of Tax— — — — — 
Common Stock Issued or Granted Through Equity Offering or Stock Plans1,459 (3)— — — 1,458 
Cash Dividends Declared - Common Stock ($0.30 per share)— — — — (29,677)— (29,677)
Capital Contributions of Non-Controlling Interest in Subsidiary— — — — — 4,236 $4,236 
Balance at September 30, 2020$125,735 $1,217,822 $(314)$(32,533)$317,007 $4,236 $1,631,953 

14

 Common StockPremium on Common StockTreasury StockAOCLRetained EarningsTotal
 
Balance at January 1, 2019$106,883 $843,268 $(292)$(26,095)$343,258 $1,267,022 
Net Income— — — — 85,637 85,637 
Other Comprehensive Income, Net of Tax— — — — 
Common Stock Issued or Granted Through Equity Offering or Stock Plans8,603 179,829 17 — — 188,449 
Cash Dividends Declared - Common Stock ($0.29 per share)— — — — (26,562)(26,562)
Balance at March 31, 2019115,486 1,023,097 (275)(26,087)402,333 1,514,554 
Net Loss— — — — (13,399)(13,399)
Other Comprehensive Income, Net of Tax— — — — 
Common Stock Issued or Granted Through Stock Plans1,877 (8)— — 1,871 
Cash Dividends Declared - Common Stock ($0.29 per share)— — — — (26,562)(26,562)
Balance at June 30, 2019115,488 1,024,974 (283)(26,079)362,372 1,476,472 
Net Loss— — — — (34,805)(34,805)
Other Comprehensive Income, Net of Tax— — — — 
Common Stock Issued or Granted Through Equity Offering or Stock Plans1,669 (1)— — 1,671 
Cash Dividends Declared - Common Stock ($0.29 per share)— — — — (26,560)(26,560)
Balance at September 30, 2019$115,491 $1,026,643 $(284)$(26,070)$301,007 $1,416,787 

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





15

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

Three Months Ended
September 30,
20202019
Operating Revenues$66,190 $62,039 
Operating Expenses:
Cost of Sales (Excluding depreciation and amortization)20,575 19,268 
Operations24,763 25,855 
Maintenance8,399 7,678 
Depreciation17,339 16,398 
Energy and Other Taxes1,194 1,159 
Total Operating Expenses72,270 70,358 
Operating Loss(6,080)(8,319)
Other Income1,515 808 
Interest Charges(8,271)(7,840)
Loss Before Income Taxes(12,836)(15,351)
Income Taxes3,293 3,747 
Net Loss$(9,543)$(11,604)


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

16

Nine Months Ended
September 30,
20202019
Operating Revenues$394,066 $396,505 
Operating Expenses:
Cost of Sales (Excluding depreciation and amortization)126,655 140,802 
Operations78,740 80,146 
Maintenance25,457 22,827 
Depreciation51,038 48,187 
Energy and Other Taxes3,879 4,302 
Total Operating Expenses285,769 296,264 
Operating Income108,297 100,241 
Other Income3,349 3,067 
Interest Charges(23,832)(23,584)
Income Before Income Taxes87,814 79,724 
Income Taxes(23,157)(20,620)
Net Income$64,657 $59,104 

The accompanying notes are an integral part of the condensed financial statements.
17


SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (UNAUDITED)
(In Thousands)
 
Three Months Ended
September 30,
20202019
Net Loss$(9,543)$(11,604)
Other Comprehensive Income - Net of Tax:
Reclassification of Unrealized Gain on Derivatives - Other to Net Loss, net of tax of $(3) and $(3), respectively
Other Comprehensive Income - Net of Tax
Comprehensive Loss$(9,534)$(11,595)

Nine Months Ended
September 30,
20202019
Net Income$64,657 $59,104 
Other Comprehensive Income - Net of Tax:
Reclassification of Unrealized Gain on Derivatives - Other to Net Income, net of tax of $(10) and $(10), respectively25 25 
Other Comprehensive Income - Net of Tax25 25 
Comprehensive Income$64,682 $59,129 
The accompanying notes are an integral part of the condensed financial statements.


18

SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Nine Months Ended
September 30,
20202019
Net Cash Provided by Operating Activities$158,813 $114,482 
Cash Flows from Investing Activities:
Capital Expenditures(188,173)(178,666)
Investment in Long-Term Receivables(18,787)(10,939)
Proceeds from Long-Term Receivables10,457 7,604 
Net Cash Used in Investing Activities(196,503)(182,001)
Cash Flows from Financing Activities:
Net (Repayments of) Borrowings from Short-Term Credit Facilities(63,400)67,700 
Proceeds from Issuance of Long-Term Debt400,000 10,000 
Principal Repayments of Long-Term Debt(410,000)(10,000)
Payments for Issuance of Long-Term Debt(3,434)(12)
Additional Investment by Shareholder109,500 
Net Cash Provided by Financing Activities32,666 67,688 
Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash(5,024)169 
Cash, Cash Equivalents and Restricted Cash at Beginning of Period6,751 3,262 
Cash, Cash Equivalents and Restricted Cash at End of Period$1,727 $3,431 
 
The accompanying notes are an integral part of the condensed financial statements.

19

SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
September 30, 2020December 31, 2019
Assets
Property, Plant and Equipment:
Utility Plant, at original cost$3,308,798 $3,154,736 
Accumulated Depreciation(601,318)(558,634)
Property, Plant and Equipment - Net2,707,480 2,596,102 
Investments:
Restricted Investments199 4,073 
Total Investments199 4,073 
Current Assets:
Cash and Cash Equivalents1,528 2,678 
Accounts Receivable62,447 84,940 
Accounts Receivable - Related Parties2,856 2,333 
Unbilled Revenues9,985 45,016 
Provision for Uncollectibles(16,837)(14,032)
Natural Gas in Storage, average cost15,041 14,839 
Materials and Supplies, average cost619 619 
Prepaid Taxes26,355 19,547 
Derivatives - Energy Related Assets6,060 16,904 
Other Prepayments and Current Assets19,316 25,074 
Total Current Assets127,370 197,918 
Regulatory and Other Noncurrent Assets:
Regulatory Assets486,070 496,177 
Long-Term Receivables38,530 30,958 
Derivatives - Energy Related Assets425 
Other23,375 23,322 
Total Regulatory and Other Noncurrent Assets548,400 550,462 
Total Assets$3,383,449 $3,348,555 
 
The accompanying notes are an integral part of the condensed financial statements.
20

SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)
 
September 30, 2020December 31, 2019
Capitalization and Liabilities  
Equity:  
Common Stock$5,848 $5,848 
Other Paid-In Capital and Premium on Common Stock465,244 355,744 
Accumulated Other Comprehensive Loss(27,850)(27,875)
Retained Earnings820,838 756,181 
Total Equity1,264,080 1,089,898 
Long-Term Debt899,307 547,161 
Total Capitalization2,163,387 1,637,059 
Current Liabilities:  
Notes Payable107,900 171,300 
Current Portion of Long-Term Debt52,809 417,909 
Accounts Payable - Commodity9,981 17,361 
Accounts Payable - Other46,379 60,797 
Accounts Payable - Related Parties5,339 9,752 
Derivatives - Energy Related Liabilities817 14,671 
Derivatives - Other Current709 488 
Customer Deposits and Credit Balances26,462 22,430 
Environmental Remediation Costs24,154 29,569 
Taxes Accrued2,785 1,907 
Pension Benefits3,693 3,693 
Interest Accrued11,239 6,789 
Other Current Liabilities6,774 12,489 
Total Current Liabilities299,041 769,155 
Regulatory and Other Noncurrent Liabilities:  
Regulatory Liabilities253,302 274,482 
Deferred Income Taxes - Net387,840 357,637 
Environmental Remediation Costs78,735 101,693 
Asset Retirement Obligations80,855 96,509 
Pension and Other Postretirement Benefits105,510 99,981 
Derivatives - Energy Related Liabilities95 
Derivatives - Other Noncurrent10,163 7,368 
Other4,616 4,576 
Total Regulatory and Other Noncurrent Liabilities921,021 942,341 
Commitments and Contingencies (Note 11)
Total Capitalization and Liabilities$3,383,449 $3,348,555 
 
The accompanying notes are an integral part of the condensed financial statements.
21

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


 Common StockOther Paid-In Capital and Premium on Common StockAOCLRetained EarningsTotal
Balance at January 1, 2020$5,848 $355,744 $(27,875)$756,181 $1,089,898 
Net Income— — — 70,522 70,522 
Other Comprehensive Income, Net of Tax— — — 
Balance at March 31, 20205,848 355,744 (27,867)826,703 1,160,428 
Net Income— — — 3,678 3,678 
Other Comprehensive Income, Net of Tax— — — 
Additional Investment by Shareholder— 9,500 — — 9,500 
Balance at June 30, 20205,848 365,244 (27,859)830,381 1,173,614 
Net Loss— — — (9,543)(9,543)
Other Comprehensive Income, Net of Tax— — — 
Additional Investment by Shareholder— 100,000 — — 100,000 
Balance at September 30, 2020$5,848 $465,244 $(27,850)$820,838 $1,264,080 

Balance at January 1, 2019$5,848 $355,744 $(22,357)$668,787 $1,008,022 
Net Income— — — 68,731 68,731 
Other Comprehensive Income, Net of Tax— — — 
Balance at March 31, 20195,848 355,744 (22,349)737,518 1,076,761 
Net Income— — — 1,976 1,976 
Other Comprehensive Income, Net of Tax— — — 
Balance at June 30, 20195,848 355,744 (22,341)739,494 1,078,745 
Net Loss— — — (11,604)(11,604)
Other Comprehensive Income, Net of Tax— — — 
Balance at September 30, 2019$5,848 $355,744 $(22,332)$727,890 $1,067,150 

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








22

 Notes to Condensed Consolidated Financial Statements

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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

SJIU is a holding company that owns SJG and ETG and, until its sale, owned ELK.

SJG is a regulated natural gas utility which distributes natural gas in the 7 southernmost counties of New Jersey.

ETG is a regulated natural gas utility which distributes natural gas in 7 counties in northern and central New Jersey.

ELK is a regulated natural gas utility which distributes natural gas in northern Maryland. On July 31, 2020, SJI sold ELK to a third-party buyer (see "Agreement to Sell ELK" below).

SJE acquires and markets electricity to retail end users.

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

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

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

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

ESNJ-AL-Somers Point LLC, ESNJ-AL-Hamilton Square LLC, ESNJ-AL-Browns Mills LLC, and ESNJ-AL-Woodbury LLC own and operate solar generation sites located in New Jersey. All 4 were acquired in 2020 (see "Acquisitions" below).

SJESP receives commissions on service contracts from a third party.

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

SJEI provides energy procurement and cost reduction services. The significant wholly-owned subsidiaries of SJEI include:

AEP, an aggregator, broker and consultant in the retail energy markets, which was acquired in August 2019.

EnerConnex, which is a retail and wholesale broker and consultant that matches end users with suppliers for the procurement of natural gas and electricity. On August 7, 2020, SJEI acquired the remaining 75% of EnerConnex (see "Acquisitions" below), of which SJEI previously held a 25% interest.

BASIS OF PRESENTATION - SJI's condensed consolidated financial statements include the accounts of SJI, its direct and indirect wholly-owned subsidiaries (including SJG) and subsidiaries in which SJI has a controlling interest. All significant intercompany accounts and transactions have been eliminated in consolidation. SJI is reporting on a consolidated basis the results of operations of the acquired entities discussed above as of their respective dates of acquisition, along with its controlling interest in Catamaran as noted below.

23

As permitted by the rules and regulations of the SEC, the accompanying unaudited condensed consolidated financial statements of SJI and SJG contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with GAAP. These financial statements should be read in conjunction with SJI’s and SJG's Annual Reports on Form 10-K for the year ended December 31, 2019. In management’s opinion, the condensed consolidated financial statements of SJI and SJG reflect all normal recurring adjustments needed to fairly present their respective financial positions, operating results and cash flows at the dates and for the periods presented. SJI’s and SJG's businesses are subject to seasonal fluctuations and, accordingly, this interim financial information should not be the basis for estimating the full year’s operating results.

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

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

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

ACQUISITIONS - SJI, through its wholly-owned subsidiary Marina, acquired ESNJ-AL-Somers Point LLC, ESNJ-AL-Hamilton Square LLC, and ESNJ-AL-Browns Mills LLC on June 30, 2020, and acquired ESNJ-AL-Woodbury LLC on August 21, 2020. These entities own newly operational solar-generation sites as noted above, and were acquired for $3.8 million in total consideration. See Note 17. These entities are separate from the solar assets and projects that are discussed under "Agreement to Sell Solar Assets."

On August 7, 2020, SJI, through its wholly-owned subsidiary SJEI, completed its acquisition of the remaining 75% of EnerConnex for total consideration of $7.5 million in cash. Prior to this transaction, SJEI had a 25% interest in EnerConnex; as such, the acquisition of the remaining 75% was accounted for as a business combination achieved in stages. See Note 17.

On August 12, 2020, SJI, through its wholly-owned subsidiary Marina, formed the Catamaran joint venture with a third party partner. On the same date, Catamaran purchased 100% ownership of Annadale, of which Marina has a 93% ownership interest. See Note 17.

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

ITC - The U.S. federal government provides businesses with an ITC under Section 48 of the Internal Revenue Code, available to the owner of solar and fuel cell systems that are purchased and placed into service. Among other requirements, such credits require projects to have commenced construction by a certain date. Accordingly, projects that commenced construction in 2019 were eligible for a 30% ITC. The credit will step down to 26% for projects that commence construction in 2020, 22% for projects that commence construction in 2021, and 10% for projects that commence construction thereafter. Marina is able to recognize a 30% ITC on the acquired solar assets of ESNJ-AL-Somers Point LLC, ESNJ-AL-Hamilton Square LLC, ESNJ-AL-Browns Mills LLC and ESNJ-AL-Woodbury LLC as all four projects commenced construction in 2019. Annadale also commenced construction in 2019 and qualified for a 30% ITC; however, as a fuel cell project, the ITC is capped at $1,500 per 0.5 kilowatt of capacity. Total ITCs on these solar and fuel cell projects recorded during the three and nine months ended September 30, 2020 were $12.0 million. NaN ITC was recorded during the three and nine months ended September 30, 2019.

24

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

During the first nine months of 2020, 1 Project was sold for total consideration of $7.2 million, which was the net book value of the asset on the date of sale. The solar assets related to that Project were recorded as Assets Held for Sale on the condensed consolidated balance sheets as of December 31, 2019. During the first nine months of 2019, 7 Projects were sold for total consideration of $24.3 million.

The Company currently has 2 solar projects that are not part of the Transaction but are expected to be sold in 2020. The solar assets related to these 2 projects were recorded as Assets Held for Sale on the condensed consolidated balance sheets as of both September 30, 2020 and December 31, 2019, where they will remain until they are transferred to a buyer.

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

AGREEMENT TO SELL ELK - In December 2019, the Company announced it had entered into an agreement to sell ELK to a third-party buyer. The MPSC approved this transaction during the second quarter of 2020 (see Note 7), and the transaction closed on July 31, 2020. Total consideration received was approximately $15.6 million, with working capital and other closing adjustments pending. The total net loss on the sale of ELK was not material. The assets and liabilities for ELK were recorded as Assets Held for Sale and Liabilities Held for Sale, respectively, on the condensed consolidated balance sheets as of December 31, 2019.

ASSETS AND LIABILITIES HELD FOR SALE - As discussed above, SJI is involved in the potential sale of solar assets and has recorded $20.0 million of Nonutility Property & Equipment for 2 solar projects in Assets Held for Sale on the condensed consolidated balance sheets as of September 30, 2020. See Note 1 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2019 for more information about the Assets and Liabilities Held for Sale balances as of December 31, 2019, which, at the time, included 3 solar projects, MTF, ACB and ELK.

IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets that are held and used are reviewed for impairment whenever events or changes in circumstances indicate carrying values may not be recoverable. We performed a qualitative assessment of the long-lived assets of SJI and SJG as of September 30, 2020 to determine whether the impact of the COVID-19 pandemic, and the resulting fluctuations in market conditions, indicate that the fair value of the assets are less than their carrying value. There were no indicators noted through these qualitative assessments that indicate an impairment has occurred.

NaN impairments were identified at SJI for the three and nine months ended September 30, 2020. An impairment charge of $1.3 million (pre-tax) was recorded within the on-site energy production segment at SJI for the three and nine months ended September 30, 2019, which was recorded in Impairment Charges on the condensed consolidated statements of income. This impairment charge was related to the expected purchase price of one of the unsold solar sites being less than its carrying value.

NaN impairments were identified at SJG for the three and nine months ended September 30, 2020 and 2019, respectively.

See discussion of impairment considerations related to goodwill and other intangible assets in Note 18.

OPERATING REVENUES - Gas and electric revenues are recognized in the period the commodity is delivered to customers. For retail customers (including SJG) that are not billed at the end of the month, we record an estimate to recognize unbilled revenues for gas and electricity delivered from the date of the last meter reading to the end of the month. The Utilities also have revenues that arise from alternative revenue programs, which are discussed in Note 16. For ETG and SJG, unrealized gains and losses on energy-related derivative instruments are recorded in Regulatory Assets or Regulatory Liabilities on the condensed consolidated balance sheets of SJI and SJG (see Note 12) until they become realized, in which case they are recognized in operating revenues. SJRG's gas revenues are recognized in the period the commodity is delivered. Realized and unrealized gains and losses on energy-related derivative instruments are also recognized in operating revenues for SJRG. SJRG presents revenues and expenses related to its energy trading activities on a net basis in operating revenues. This net presentation has no
25

effect on operating income or net income. The Company recognizes revenues on commissions received related to SJESP appliance service contracts, along with AEP and EnerConnex energy procurement service contracts from a third party, on a monthly basis as the commissions are earned. Marina recognizes revenues for renewable energy projects when renewable energy credits have been transferred to the third party at an agreed upon price.

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

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

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

SJI (includes SJG and all other consolidated subsidiaries):2020
ARO as of January 1,$263,950 
Accretion7,129 
Additions3,266 
Settlements(6,195)
Revisions in Estimated Cash Flows (A)(72,432)
ARO as of September 30,$195,718 
SJG:2020
ARO as of January 1,$96,509 
Accretion3,078 
Additions1,161 
Settlements(1,142)
Revisions in Estimated Cash Flows (A)(18,751)
ARO as of September 30,$80,855 

(A) The revisions in estimated cash flows for SJI and SJG for the nine months ended September 30, 2020 shown in the table above reflect decreases in the estimated retirement costs primarily as a result of changes in contractor costs to settle the ARO liability. Corresponding entries were made to Regulatory Assets and Utility Plant, thus having no impact on earnings.
 
TREASURY STOCK - SJI uses the par value method of accounting for treasury stock. As of September 30, 2020 and December 31, 2019, SJI held 251,524 and 231,514 shares of treasury stock, respectively. These shares are related to deferred compensation arrangements where the amounts earned are held in the stock of SJI.

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

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

26

GOODWILL - See Note 18.

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

Natural Gas in Storage$9,685 
Intangible Asset19,200 
Profit Sharing - Other Liabilities(17,546)
   Total Consideration$11,339 

As of September 30, 2020 and December 31, 2019, the balance of the intangible asset is $7.7 million and $11.5 million, respectively, and is recorded to Other Current and Noncurrent Assets on the condensed consolidated balance sheets of SJI, with the reduction being due to amortization. As of September 30, 2020 and December 31, 2019, the balance in the liability is $7.5 million and $10.6 million, respectively, and is recorded to Regulatory Liabilities on the condensed consolidated balance sheets of SJI, with the change resulting from profit sharing earned.

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

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

CURRENT PORTION OF LONG-TERM DEBT & SHORT-TERM BORROWINGS - As of September 30, 2020, the Company had $142.8 million of long-term debt that was due within one year ("current portion"), along with $597.0 million of notes payable which included borrowings under the commercial paper program and revolving credit facilities ("short-term borrowings"; see Note 10). As of December 31, 2019, the Company had $467.9 million of current portion and $848.7 million of short-term borrowings. This reduction is the result of SJI refinancing $600.0 million of short-term and current portion amounts that were outstanding as of December 31, 2019, including $400.0 million at SJG (see Note 14), with the remainder being paid down using proceeds from the agreements to sell assets discussed above. SJI expects to further reduce its current portion and short-term borrowings over the next twelve months by utilizing funds provided from refinancing activities and from the Company's revolving credit facilities.

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

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

NEW ACCOUNTING PRONOUNCEMENTS - Other than as described below, no new accounting pronouncement had, or is expected to have, a material impact on the condensed consolidated financial statements of SJI, or the condensed financial statements of SJG.
27


Recently Adopted Standards:


StandardDescriptionDate of AdoptionApplicationEffect on the Financial Statements of SJI and SJG
ASU 2017-04:
Simplifying the Test for Goodwill Impairment
The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount.January 1, 2020ProspectiveAdoption of this guidance did not have a material impact on the financial statement results of SJI or SJG.
ASU 2018-13:
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
This ASU modifies the disclosure requirements on the timing of liquidation of an investee's assets and the description of measurement uncertainty at the reporting date. Entities are now required to disclose: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements; and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Further, the standard eliminates disclosure requirements with respect to: (1) the transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation process for Level 3 fair value measurements.January 1, 2020Prospective for added disclosures and for the narrative description of measurement uncertaintyAdoption of this guidance did not have a material impact on the financial statement results of SJI or SJG. Disclosures requirements are reflected in Note 13.
ASU 2019-04:
Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments
The amendments in this ASU provide codification improvements and further clarification on several topics, including ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, as well as ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10). See ASU 2016-13 below for more detail.January 1, 2020Amendments related to ASU 2016-01 and ASU 2016-13 - modified retrospective; all other amendments - prospectiveAdoption of this guidance did not have a material impact on the financial statement results of SJI or SJG.
ASU 2016-13:
Measurement of Credit Losses on Financial Instruments
The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to develop credit loss estimates. An entity will apply the amendment through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.January 1, 2020Modified retrospectiveThe impact of adoption did not result in an adjustment to retained earnings for either SJI or SJG as of January 1, 2020.


28

Standards Not Yet Effective:
StandardDescriptionDate of AdoptionApplicationEffect on the Financial Statements of SJI and SJG
ASU 2018-14:
Changes to the Disclosure Requirements for Defined Benefit Plans
This ASU eliminates requirements for certain disclosures such as the amount and timing of plan assets expected to be returned to the employer and the amount of future annual benefits covered by insurance contracts. The standard adds new disclosures that provide information relating to the weighted-average interest crediting rate for cash balance plans and other plans with promised interest crediting rates and an explanation for significant gains or losses related to changes in the benefit obligations for the period.Annual disclosures for the fiscal year ending December 31, 2020RetrospectiveAdoption of this guidance will not have a material impact on the financial statements of SJI and SJG. Management is currently determining the impact that adoption of this guidance will have on the SJI and SJG disclosures within the notes to the financial statements.
ASU 2019-12:
Simplifying the Accounting for Income Taxes
This ASU removes exceptions related to the incremental approach for intraperiod tax allocation, the requirement to recognize a deferred tax liability for changes in ownership of a foreign subsidiary or equity method investment, and the general methodology for calculating income taxes in an interim period when the year-to-date loss exceeds the anticipated loss. The guidance also adds requirements to reflect changes to tax laws or rates in the annual effective tax rate computation in the interim period in which the changes were enacted, to recognize franchise or other similar taxes that are partially based on income as an income-based tax and any incremental amounts as non-income-based tax, and to evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction.January 1, 2021; early adoption permittedModified retrospective for amendments related to changes in ownership of a foreign subsidiary or equity method investment; Modified retrospective or retrospective for amendments related to taxes partially based on income; Prospective for all other amendmentsManagement is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.
ASU 2020-01:
Clarifying the Interactions between Topic 321 (Investments - Equity Securities), Topic 323 (Investments - Equity Method and Joint Ventures), and Topic 815 (Derivatives and Hedging)
The amendments in this ASU clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments in this ASU also clarify that for the purposes of applying Topic 815, an entity should not consider whether, upon the settlement of a forward contract or exercise of a purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825.January 1, 2021; early adoption permittedProspectiveManagement is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.
29

ASU 2020-04:
Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting
The amendments in this ASU provide various optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.
March 12, 2020 through December 31, 2022

An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued.
Prospective for contract modifications and hedging relationships. Once elected for a Topic or an Industry Subtopic, the amendments in this Update must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic.Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG. Management is also evaluating timing of adoption.
ASU 2020-06:
Accounting for Convertible Instruments and Contracts in an Entity's Own Equity
The amendments in this ASU simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20. Under the amendments, embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. The amendments also add new convertible instrument disclosure requirements. Additionally, the amendments in this ASU remove certain conditions from the settlement guidance within the derivative scope exception guidance contained in Subtopic 815-40 and further clarify the derivative scope exception guidance. Finally, the amendments in this ASU align the diluted EPS calculation for convertible instruments by requiring that an entity use the if-converted method instead of the treasury stock method when calculated diluted EPS for convertible instruments.January 1, 2022; early adoption permitted, but not before January 1, 2021Retrospective or Modified RetrospectiveManagement is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.

30


2.    STOCK-BASED COMPENSATION PLAN:

Under SJI's 2015 Omnibus Equity Compensation Plan (Plan), shares may be issued to SJI’s officers (Officers), non-employee directors (Directors) and other key employees. NaN options were granted or outstanding during the nine months ended September 30, 2020 and 2019. NaN stock appreciation rights have been issued under the Plan.  During the nine months ended September 30, 2020 and 2019, SJI granted 225,278 and 184,791 total restricted shares, respectively, to Officers and other key employees under the Plan.

SJI grants time-based shares of restricted stock, one-third of which vest annually over a three-year period and which are limited to a 100% payout. The vesting and payout of time-based shares of restricted stock is solely contingent upon the service requirement being met in years one, two, and three of the grant. During the nine months ended September 30, 2020 and 2019, Officers and other key employees were granted 105,451 and 88,550 shares of time-based restricted stock, respectively, which are included in the total restricted shares noted above.

Performance-based restricted shares vest over a three-year period and are subject to SJI achieving certain market and earnings-based performance targets, which can cause the actual amount of shares that ultimately vest to range from 0% to 200% of the original shares granted. During the nine months ended September 30, 2020 and 2019, Officers and other key employees were granted 119,827 and 96,241 shares of performance-based restricted stock, respectively, which are included in the total restricted shares noted above.

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

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

During the nine months ended September 30, 2020 and 2019, SJI granted 38,456 and 30,961 restricted shares, respectively, to Directors. Shares issued to Directors vest over twelve months and contain no performance conditions. As a result, 100% of the shares granted generally vest.

The following table summarizes the nonvested restricted stock awards outstanding for SJI at September 30, 2020 and the assumptions used to estimate the fair value of the awards:

 GrantsShares OutstandingFair Value Per ShareExpected VolatilityRisk-Free Interest Rate
Officers & Key Employees -2018 - TSR48,304 $31.05 21.9 %2.00 %
2018 - CEGR, Time63,389 $31.23 N/AN/A
2019 - TSR36,642 $32.88 23.2 %2.40 %
2019 - CEGR, Time101,982 $31.38 N/AN/A
2020 - TSR46,752 $25.51 34.8 %0.21 %
2020 - CEGR, Time178,526 $25.19 N/AN/A
Directors -202038,456 $32.07 N/AN/A
 
31



Expected volatility is based on the actual volatility of SJI’s share price over the preceding three-year period as of the valuation date. The risk-free interest rate is based on the zero-coupon U.S. Treasury Bond, with a term equal to the three-year term of the Officers’ and other key employees’ restricted shares. As notional dividend equivalents are credited to the holders during the three-year service period, no reduction to the fair value of the award is required. As the Directors’ restricted stock awards contain no performance conditions and dividends are paid or credited to the holder during the requisite service period, the fair value of these awards is equal to the market value of the shares on the date of grant.

The following table summarizes the total stock-based compensation cost to SJI for the three and nine months ended September 30, 2020 and 2019 (in thousands):

 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Officers & Key Employees$1,220 $1,071 $3,671 $3,355 
Directors302 209 899 613 
Total Cost1,522 1,280 4,570 3,968 
Capitalized(12)(119)(35)(153)
Net Expense$1,510 $1,161 $4,535 $3,815 

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

As of September 30, 2020, there was $7.0 million of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.8 years.

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

 Officers and Other Key EmployeesDirectorsWeighted
Average
Fair Value
Nonvested Shares Outstanding, January 1, 2020402,146 30,961 $31.50 
  Granted225,278 38,456 $26.32 
  Cancelled/Forfeited(14,867)$31.48 
  Vested*(136,963)(30,961)$31.49 
Nonvested Shares Outstanding, September 30, 2020475,594 38,456 $28.84 

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

The targets for the time-based grants were met. As a result, during the nine months ended September 30, 2020, SJI awarded 72,470 shares to its Officers and other key employees at a market value of $2.1 million. During the nine months ended September 30, 2019, SJI awarded 125,288 shares at a market value of $3.7 million. These awarded amounts for 2020 and 2019 include awards for previously deferred shares that were paid during the nine month periods.

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


32

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

SJG - Officers and other key employees of SJG participate in the stock-based compensation plans of SJI. During the nine months ended September 30, 2020 and 2019, SJG officers and other key employees were granted 7,902 and 6,095 shares of SJI restricted stock, respectively, which had an immaterial impact to SJG's financial statements for both the nine months ended September 30, 2020 and 2019.

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

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

PennEast - Midstream has a 20% investment in PennEast. SJG and ETG are each parties to a precedent capacity agreement with PennEast. The following events have occurred with respect to PennEast in recent months:

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

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

Our investment in PennEast totaled $89.4 million and $82.7 million as of September 30, 2020 and December 31, 2019, respectively. At September 30, 2020, the Company evaluated its investment in PennEast for impairment and determined there is not a triggering event for other-than-temporary impairment, and has not recorded any impairment charge to reduce the carrying value of our investment. Our evaluation considered that the pending legal proceedings are ongoing, and the intent is to move forward with all potential legal proceedings and other options available. Our evaluation also considered the current economic conditions as a result of COVID-19, noting that the timelines, potential options and legal proceedings have not been impacted. However, it is reasonably possible that the legal proceedings could have unfavorable outcomes, or there could be other future unfavorable developments, such as a reduced likelihood of success from development options and legal outcomes, estimated increases in construction costs, increases in the discount rate, or further significant delays, or PennEast could conclude that the project is not viable or does not go forward as actions progress. These could impact our conclusions with respect to other-than-temporary impairment and may require that we recognize an impairment charge of up to our recorded investment in the project,
33

net of any cash and working capital. We will continue to monitor and update this analysis as required. Different assumptions could affect the timing and amount of any charge recorded in a period.

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

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

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

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

SJRG had net sales to EnergyMark of $1.8 million and $3.4 million for the three months ended September 30, 2020 and 2019, respectively and $10.4 million and $22.6 million for the nine months ended September 30, 2020 and 2019, respectively.

Affiliate Transactions - During the first nine months of 2020, SJI had net repayments from unconsolidated affiliates of $1.2 million. During the first nine months of 2019, SJI made investments in and advances to unconsolidated affiliates of $6.0 million.  As of September 30, 2020 and December 31, 2019, the outstanding balance of Notes Receivable – Affiliate was $14.9 million and $18.1 million, respectively. These Notes Receivable-Affiliates balances are broken out as follows:

As of September 30, 2020 and December 31, 2019, $12.4 million and $13.1 million, respectively, of notes are related to Energenic; such notes are secured by Energenic's cogeneration assets for energy service projects, accrue interest at 7.5% and are to be repaid through 2025. Losses incurred in the current periods at Energenic are offset against the Notes Receivable – Affiliate balance as our investment in the Energenic affiliate has been reduced to 0 as a result of prior period losses.

As of September 30, 2020 and December 31, 2019, the remaining $2.5 million and $5.0 million, respectively, of these notes are unsecured and accrue interest at variable rates.

SJI holds significant variable interests in these entities but is not the primary beneficiary. Consequently, these entities are accounted for under the equity method because SJI does not have both (a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity. As of September 30, 2020 and December 31, 2019, SJI had a net asset of approximately $92.9 million and $87.1 million, respectively, included in Investment in Affiliates on the condensed consolidated balance sheets related to equity method investees. SJI’s maximum exposure to loss from these entities as of September 30, 2020 and December 31, 2019 is limited to its combined investments in these entities and the Notes Receivable-Affiliate in the aggregate amount of $107.8 million and $105.2 million, respectively.

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

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

34

Summarized operating results of the discontinued operations for the three and nine months ended September 30, 2020 and 2019, were (in thousands, except per share amounts):
Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Loss before Income Taxes:  
Sand Mining$$(16)$(32)$(60)
Fuel Oil(76)(59)(193)(212)
Income Tax Benefits15 16 47 56 
Loss from Discontinued Operations — Net$(58)$(59)$(178)$(216)
Earnings Per Common Share from  
Discontinued Operations — Net:  
Basic and Diluted$$$$

SJG RELATED-PARTY TRANSACTIONS - There have been no significant changes in the nature of SJG’s related-party transactions since December 31, 2019. See Note 3 to the Financial Statements in Item 8 of SJI's and SJG’s Form 10-K for the year ended December 31, 2019 for a detailed description of the related parties and their associated transactions.

A summary of related-party transactions involving SJG, excluding pass-through items, included in SJG's Operating Revenues were as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Operating Revenues/Affiliates:  
SJRG$595 $1,092 $2,192 $3,518 
Marina82 60 290 
Other20 20 59 60 
Total Operating Revenue/Affiliates$615 $1,194 $2,311 $3,868 


35

Related-party transactions involving SJG, excluding pass-through items, included in SJG's Cost of Sales and Operating Expenses were as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Costs of Sales/Affiliates (Excluding depreciation and amortization)  
SJRG*$1,808 $2,326 $3,404 $8,908 
Operations Expense/Affiliates:
SJI$5,909 $5,087 $17,463 $15,507 
SJIU743 630 2,616 1,971 
Millennium814 794 2,461 2,118 
Other453 340 1,335 6,790 
Total Operations Expense/Affiliates$7,919 $6,851 $23,875 $26,386 

*These costs are included in SJG's Cost of Sales on the condensed statements of income/(loss). As discussed in Note 1 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues – Nonutility on the condensed consolidated income statement.

4.    COMMON STOCK:

The following shares were issued and outstanding for SJI:

 2020
Beginning Balance, January 192,394,155 
New Issuances During the Period: 
ATM Equity Offering8,122,283 
Stock-Based Compensation Plan71,474 
Ending Balance, September 30100,587,912 

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

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

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


36

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

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


September 30, 2020December 31, 2019
Principal amount:
     Principal (A)$287,500 $287,500 
     Unamortized debt discount and issuance costs (A)7,323 7,737 
     Net carrying amount$280,177 $279,763 
     Carrying amount of the equity component (B)$$

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

During both the three months ended September 30, 2020 and 2019, the Company recognized approximately $0.1 million of amortization of debt discount and issuance costs prior to capitalization of interest, and $2.7 million of coupon interest expense, all of which was included in Interest Charges on the condensed consolidated statements of income/(loss). During both the nine months ended September 30, 2020 and 2019, the Company recognized approximately $0.4 million of amortization of debt discount and issuance costs prior to capitalization of interest, and $8.0 million of coupon interest expense, all of which was included in Interest Charges on the condensed consolidated statements of income/(loss). The effective interest rate was 4.0%.

SJI's EPS — SJI's Basic EPS is based on the weighted-average number of common shares outstanding. The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 124,705 and 116,904 for the nine months ended September 30, 2020 and 2019, respectively. For the three months ended September 30, 2020 and 2019, incremental shares of 141,062 and 129,979, respectively, were not included in the denominator for the diluted EPS calculation because they would have an antidilutive effect on EPS. These additional shares relate to SJI's restricted stock as discussed in Note 2, along with the impact of the Equity Units discussed above, accounted for under the treasury stock method.

DRP — SJI offers a DRP which allows participating shareholders to purchase shares of SJI common stock by automatic reinvestment of dividends or optional purchases. SJI currently purchases shares on the open market to fund share purchases by DRP participants, and as a result SJI did not raise any equity capital through the DRP in 2019 or the first nine months of 2020. SJI does not intend to issue equity capital via the DRP during the remainder of 2020.

ADDITIONAL INVESTMENT BY SHAREHOLDER - SJG received $100.0 million and $109.5 million in equity infusions from SJI during the three and nine months ended September 30, 2020, respectively. There was 0 equity infusion during the three and nine months ended September 30, 2019. Future equity contributions will occur on an as-needed basis.

5.    FINANCIAL INSTRUMENTS:

RESTRICTED INVESTMENTS — SJI and SJG maintain margin accounts with certain counterparties to support their risk management activities associated with hedging commodities. The balances required to be held in these margin accounts increase as the net value of the outstanding energy-related contracts with the respective counterparties decrease.

37

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

As of September 30, 2020
Balance Sheet Line ItemSJISJG
Cash and Cash Equivalents$10,103 $1,528 
Restricted Investments199 199 
   Total cash, cash equivalents and restricted cash shown in the statement of cash flows$10,302 $1,727 

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

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

ALLOWANCE FOR CREDIT LOSSES - Accounts receivable are recorded gross on the condensed consolidated balance sheets with allowance for credit losses shown as a separate line item titled Provision for Uncollectibles. A summary of changes in the allowance for credit losses is as follows (in thousands):

Three Months Ended
September 30, 2020
Nine Months Ended
September 30, 2020
SJI (includes SJG and all other consolidated subsidiaries):
Balance at beginning of period$30,410 $19,829 
Provision for expected credit losses5,416 19,994 
Recoveries of accounts previously written off126 688 
Uncollectible accounts written off(2,935)(7,494)
Balance at end of period$33,017 $33,017 
SJG:
Balance at beginning of period$14,472 $14,032 
Provision for expected credit losses4,783 8,255 
Recoveries of accounts previously written off295 
Uncollectible accounts written off(2,422)(5,745)
Balance at end of period$16,837 $16,837 

As discussed in Note 8, as a result of a July 2, 2020 BPU Order, during the second quarter 2020, ETG and SJG deferred amounts of incremental costs related to the COVID-19 pandemic as regulatory assets. As of September 30, 2020, the amounts recorded within this regulatory asset related to the allowance for credit losses are approximately $9.3 million and $3.8 million for ETG and SJG, respectively, and are included in the provision for expected credit losses shown in the tables above.

NOTES RECEIVABLE-AFFILIATES - See Note 3.

38

LONG-TERM RECEIVABLES - SJG provides financing to customers for the purpose of attracting conversions to natural gas heating systems from competing fuel sources. The terms of these loans call for customers to make monthly payments over periods ranging from five to ten years, with no interest. The carrying amounts of such loans were $2.8 million and $3.7 million as of September 30, 2020 and December 31, 2019, respectively. The current portion of these receivables is reflected in Accounts Receivable and the non-current portion is reflected in Contract Receivables on the condensed consolidated balance sheets. The carrying amounts noted above are net of unamortized discounts resulting from imputed interest in the amount of $0.4 million and $0.5 million as of September 30, 2020 and December 31, 2019, respectively. The annualized amortization to interest is not material to SJI’s or SJG's condensed consolidated financial statements. In addition, as part of the EET/EEP programs, SJG provides funding to customers to upgrade equipment for the purpose of promoting energy efficiency. The terms of these loans range from two to ten years. The carrying amounts of such loans were $42.8 million and $33.5 million as of September 30, 2020 and December 31, 2019, respectively. On the condensed consolidated balance sheets of SJI and SJG, the current portion of EET/EEP loans receivable totaled $5.9 million and $4.6 million and is reflected in Accounts Receivable as of September 30, 2020 and December 31, 2019, respectively, and the non-current portion totaled $36.9 million and $28.9 million and is reflected in Contract Receivables as of September 30, 2020 and December 31, 2019, respectively. Given the risk of uncollectibility is low due to the oversight and preapproval required by the BPU, no allowance for credit loss has been recognized. There have been no impacts to this risk of uncollectibility as a result of COVID-19.

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

CREDIT RISK - As of September 30, 2020, SJI had approximately $5.7 million, or 12.2%, of the current and noncurrent Derivatives – Energy Related Assets transacted with 2 counterparties. These counterparties are investment-grade rated.

FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE - The fair value of a financial instrument is the market price to sell an asset or transfer a liability at the measurement date. The carrying amounts of SJI's and SJG's financial instruments approximate their fair values at September 30, 2020 and December 31, 2019, except as noted below (in thousands):

September 30, 2020December 31, 2019
SJI (includes SJG and all consolidated entities)
Estimated fair values of long-term debt$2,836,407 $2,734,745 
Carrying amounts of long-term debt, including current maturities$2,674,441 $2,537,995 
Net of:
   Unamortized debt issuance costs$29,168 $25,547 
   Unamortized debt discounts$5,246 $5,313 
SJG
Estimated fair values of long-term debt$1,035,948 $915,248 
Carrying amounts of long-term debt, including current maturities$952,116 $965,100 
Net of:
   Unamortized debt issuance costs$9,239 $6,284 

For Long-Term Debt (including current maturities), in estimating the fair value, SJI and SJG use the present value of remaining cash flows at the balance sheet date. SJI and SJG based the estimates on interest rates available at the end of each period for debt with similar terms and maturities (Level 2 in the fair value hierarchy, see Note 13)

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

39

6.    SEGMENTS OF BUSINESS:

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

SJG utility operations consist primarily of natural gas distribution to residential, commercial and industrial customers in southern New Jersey.
ETG utility operations consist of natural gas distribution to residential, commercial and industrial customers in northern and central New Jersey.
ELK utility operations consist of natural gas distribution to residential, commercial and industrial customers in Maryland. As discussed in Note 1, on July 31, 2020, SJI sold ELK to a third-party buyer.
Wholesale energy operations include the activities of SJRG and SJEX.
Retail electric operations at SJE consist of electricity acquisition and transportation to commercial, industrial and residential customers.
On-site energy production consists of MTF and ACB, which were sold on February 18, 2020. This segment also includes other energy-related projects, including 3 legacy solar projects, 1 of which was sold during the three months ended March 31, 2020. Also included in this segment are the activities of ACLE, BCLE, SCLE and SXLE. Operations at BCLE, SCLE, and SXLE ceased during the second quarter of 2020. As of September 30, 2020, on-site energy production also includes newly acquired entities which own and operate solar-generation sites located in New Jersey, as well as the Catamaran joint venture, which owns Annadale. See Notes 1 and 17.
Appliance service operations includes SJESP, which receives commissions on service contracts from a third party.
Midstream was formed to invest in infrastructure and other midstream projects, including a current project to build a natural gas pipeline in Pennsylvania and New Jersey.
Corporate & Services segment includes costs related to acquisitions and divestitures, 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 and ETG and, until its sale, ELK. SJI groups its nonutility operations into separate categories: Energy Group, Energy Services, Midstream and Corporate & Services. Energy Group includes wholesale energy and retail electric operations. Energy Services includes on-site energy production and appliance service operations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

Information about SJI’s operations in different reportable operating segments is presented below (in thousands). The results for AEP are included in the Corporate & Services segment from the acquisition date of August 31, 2019, and the results for EnerConnex are included in the Corporate & Services segment for all periods, based on the ownership interest levels applicable within each period (see Notes 1 and 17). Further, the results and balances for On-Site Energy Production are impacted by the sales of solar assets and the sale of MTF and ACB (see Note 1). The identifiable assets balance for On-Site Energy Production as of September 30, 2020 is also impacted by the newly acquired entities (see Notes 1 and 17).


40

 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Operating Revenues:  
SJI Utilities:
   SJG Utility Operations$66,190 $62,039 $394,066 $396,505 
   ETG Utility Operations37,503 30,619 239,503 215,647 
   ELK Utility Operations285 892 4,792 5,210 
     Subtotal SJI Utilities103,978 93,550 638,361 617,362 
Energy Group:
     Wholesale Energy Operations143,338 135,856 373,308 452,346 
Retail Electric Operations7,692 22,395 29,874 65,617 
     Subtotal Energy Group151,030 158,251 403,182 517,963 
Energy Services:
On-Site Energy Production6,317 11,980 15,459 38,098 
Appliance Service Operations491 514 1,485 1,529 
Subtotal Energy Services6,808 12,494 16,944 39,627 
Corporate and Services11,488 10,252 38,116 31,438 
Subtotal273,304 274,547 1,096,603 1,206,390 
Intersegment Sales(11,755)(13,344)(40,978)(40,955)
Total Operating Revenues$261,549 $261,203 $1,055,625 $1,165,435 

41

 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Operating (Loss) Income:  
SJI Utilities:
     SJG Utility Operations$(6,080)$(8,319)$108,297 $100,241 
     ETG Utility Operations(3,163)(5,112)57,274 41,088 
     ELK Utility Operations(374)(197)373 401 
          Subtotal SJI Utilities(9,617)(13,628)165,944 141,730 
Energy Group:
     Wholesale Energy Operations2,768 (8,371)16,272 (13,263)
Retail Electric Operations(842)(3)(2,512)(3,972)
     Subtotal Energy Group1,926 (8,374)13,760 (17,235)
Energy Services:
On-Site Energy Production2,455 2,634 143 5,049 
Appliance Service Operations586 468 1,482 1,484 
  Subtotal Energy Services3,041 3,102 1,625 6,533 
Corporate and Services(3,844)(125)(3,870)(5,680)
Total Operating (Loss) Income$(8,494)$(19,025)$177,459 $125,348 
Depreciation and Amortization:  
SJI Utilities:
     SJG Utility Operations$25,762 $23,564 $76,216 $69,349 
     ETG Utility Operations10,391 7,461 30,370 20,932 
     ELK Utility Operations52 158 354 383 
          Subtotal SJI Utilities36,205 31,183 106,940 90,664 
Energy Group:
     Wholesale Energy Operations14 22 44 70 
     Subtotal Energy Group14 22 44 70 
Energy Services:
On-Site Energy Production30 1,248 36 3,756 
  Subtotal Energy Services30 1,248 36 3,756 
Corporate and Services1,267 1,094 3,704 4,092 
Total Depreciation and Amortization$37,516 $33,547 $110,724 $98,582 
Interest Charges:  
SJI Utilities:
       SJG Utility Operations$8,271 $7,840 $23,832 $23,584 
       ETG Utility Operations7,398 7,165 22,321 20,106 
       ELK Utility Operations21 15 
            Subtotal SJI Utilities15,671 15,009 46,174 43,705 
On-Site Energy Production277 2,097 2,974 6,520 
Midstream677 573 1,837 1,672 
Corporate and Services12,490 14,433 43,332 44,496 
Subtotal29,115 32,112 94,317 96,393 
Intersegment Borrowings(1,353)(3,255)(5,430)(10,449)
Total Interest Charges$27,762 $28,857 $88,887 $85,944 

42

 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Income Taxes:  
 SJI Utilities:
     SJG Utility Operations$(3,293)$(3,747)$23,157 $20,620 
     ETG Utility Operations(2,475)(2,065)7,869 4,028 
     ELK Utility Operations(4)(54)186 100 
           Subtotal SJI Utilities(5,772)(5,866)31,212 24,748 
Energy Group:
     Wholesale Energy Operations858 (2,130)4,583 (3,088)
Retail Electric Operations(233)(478)(814)
     Subtotal Energy Group625 (2,126)4,105 (3,902)
Energy Services:
On-Site Energy Production(11,191)242 (10,897)(115)
Appliance Service Operations116 142 461 445 
  Subtotal Energy Services(11,075)384 (10,436)330 
Midstream(58)(18)(174)(83)
Corporate and Services(3,187)(3,299)(10,982)(11,715)
Total Income Taxes$(19,467)$(10,925)$13,725 $9,378 
Property Additions:  
SJI Utilities:
     SJG Utility Operations$73,481 $73,059 $181,440 $195,621 
     ETG Utility Operations45,452 50,426 149,578 142,388 
     ELK Utility Operations112 468 971 2,096 
          Subtotal SJI Utilities119,045 123,953 331,989 340,105 
Energy Group:
     Wholesale Energy Operations
     Subtotal Energy Group
Energy Services:
On-Site Energy Production59,866 62,751 164 
  Subtotal Energy Services59,866 62,751 164 
Midstream29 16 115 35 
Corporate and Services715 368 2,076 954 
Total Property Additions$179,657 $124,338 $396,933 $341,259 

43

 September 30, 2020December 31, 2019
Identifiable Assets:  
SJI Utilities:
     SJG Utility Operations$3,383,449 $3,348,555 
     ETG Utility Operations2,482,155 2,458,846 
     ELK Utility Operations21,723 
          Subtotal SJI Utilities5,865,604 5,829,124 
Energy Group:
     Wholesale Energy Operations126,973 195,576 
Retail Electric Operations21,176 30,351 
     Subtotal Energy Group148,149 225,927 
Energy Services:
On-Site Energy Production113,050 154,021 
Subtotal Energy Services113,050 154,021 
Midstream90,459 83,517 
Discontinued Operations1,790 1,766 
Corporate and Services249,943 403,170 
Intersegment Assets(160,072)(332,185)
Total Identifiable Assets$6,308,923 $6,365,340 


7.    RATES AND REGULATORY ACTIONS:

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

Except as described below, there have been no other significant regulatory actions or changes to the Utilities' rate structure since December 31, 2019. See Note 10 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2019.

SJG:

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

In May 2020, the BPU issued an Order resolving SJG’s 2019 Compliance Filing and 2019 Tax Act Rider petition, with a revised Rider H credit rate effective June 1, 2020. The terms of settlement include the following:

The “Unprotected” EDIT balance of approximately $44.7 million will be refunded to customers over a 5 year period through the approved rider;
The net “Protected” EDIT regulatory liability of $149.4 million (regulatory liability of $181.0 million partially offset by a regulatory asset of $31.6 million) will be refunded to customers through a proposed base rate adjustment in SJG’s next base rate case.

In June 2020, SJG filed its annual EET rate adjustment petition, requesting a $5.9 million increase in revenues to continue recovering the costs of, and the allowed return on, investments associated with its EEPs. The matter is currently pending BPU approval.

In July 2020, SJG filed its annual SBC petition, requesting a $5.5 million increase in revenues. The SBC is comprised of three sub-components, consisting of the RAC, CLEP and TIC. This matter is currently pending BPU approval.


44

In September 2020, SJG filed a petition seeking authorization to implement new EEPs and to recover costs associated with the EEPs through the existing cost recovery mechanism, the EET. SJG requested to implement the new EEPs commencing July 1, 2021. SJG’s petition includes a request to recover, in the first year, $6.3 million in revenues to continue recovering the costs of, and the allowed return on, investments associated with prior period EEPs, along with investments associated with the new EEPs. This matter is currently pending BPU approval.

In September 2020, the BPU approved the following:

A $59.4 million decrease in BGSS annual revenues and a $27.4 million increase in CIP annual revenues, both effective October 1, 2020, on a provisional basis; these rate adjustments are associated with our June 2020 annual filings for the 2020-2021 BGSS/CIP year, which runs from October 1, 2020 through September 30, 2021. Our BGSS filing included consideration of $22.9 million of costs requested to be recovered over a two-year period related to a previous dispute on a long-term gas supply contract that was settled during 2019. The provisional rate adjustments effective October 1, 2020, include the temporary removal of these amounts to allow for a further review of these costs during the course of this proceeding which we expect to be completed during the second quarter of 2021.

The settlement of SJG's rate case petition, resulting in an increase in annual revenues from base rates effective October 1, 2020 of $39.5 million, including an approved overall rate of return of 6.9%, with a return on equity of 9.6% and a common equity component of 54.0%. Also included was recovery of $10.1 million in costs related to a previous project to re-power the former BL England facility with natural gas (see Note 8). These costs are to be amortized over a five year period commencing October 1, 2020.

An increase in annual revenues from base rates of $6.4 million to reflect the roll-in of $58.8 million of AIRP II in service investments for the period July 2019 through June 2020, effective October 1, 2020.

An increase in annual revenues from base rates of $3.7 million to reflect the roll-in of $33.3 million of SHARP II in service investments for the period July 2019 through June 2020, effective October 1, 2020.

The Statewide USF annual 2020-2021 budget for all the State’s gas utilities, which included a decrease of approximately $0.3 million in SJG’s USF recoveries, effective October 1, 2020.

A rate adjustment to SJG’s Tax Act Rider to refund approximately $14.9 million related to SJG’s unprotected EDIT. Additionally, as part of the approved settlement in its base rate case, SJG will refund an additional $1.9 million associated with the accumulated balance of the amortization of the protected excess ADIT during the period January 1, 2018 through June 30, 2019. Effective October 1, 2020, this amount will be refunded to customers through the Tax Act Rider H over its remaining three-year term.

The BGSS, CIP and USF approvals discussed above do not impact SJG's earnings. They represent changes in the cash requirements of SJG corresponding to cost changes and/or previously over/under recoveries from ratepayers associated with each respective mechanism.

ETG:

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

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

In April 2020, ETG submitted its annual filing, pursuant to the June 2019 BPU approval of the IIP. In July 2020, ETG submitted an updated filing, reflecting rider rates to increase revenues by $6.8 million to reflect the roll-in of $63.3 million of IIP investments. The BPU issued an Order in September 2020 approving the updated IIP rates effective October 1, 2020.

In June 2020, ETG submitted its annual BGSS filing. During discovery, ETG updated the rate for a revised request of a $21.1 million decrease in revenues. The BPU issued an Order in September 2020 approving the revised rate decrease on a provisional basis effective October 1, 2020. The matter is currently pending final BPU approval.


45

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

In July 2020, ETG filed its annual RAC rate adjustment petition, requesting a $3.2 million decrease in revenues related to the recovery of costs of remediation. This matter is currently pending BPU approval.

In July 2020, ETG filed its annual WNC/CEP/OSMC rate adjustment petition, requesting an $8.5 million increase in revenues to recover costs associated with these riders. The BPU issued an Order in September 2020 approving the rates on a provisional basis effective October 1, 2020. This matter is currently pending final BPU approval.

In July 2020, ETG filed its annual EEP rate adjustment petition, requesting a $0.2 million decrease in revenues related to the recovery of costs of, and the allowed return on, investments associated with its EEPs. This matter is currently pending BPU approval.

In September 2020, ETG filed to expand its EEPs for three years with proposed investments totaling approximately $100.0 million. ETG proposed a rate adjustment beginning in July 2021, which would initially increase annual revenues by $3.7 million. ETG also proposed to establish a CIP, similar to SJG’s CIP, which eliminates the link between usage and margin and includes a weather component. This matter is currently pending BPU approval.

The BGSS, USF, Lifeline, RAC, WNC, CEP and OSMC approvals discussed above do not impact ETG's earnings. They represent changes in the cash requirements of ETG corresponding to cost changes and/or previously over/under recoveries from ratepayers associated with each respective mechanism.

ELK:

As discussed in Note 1, in December 2019, the Company announced it had entered into an agreement to sell ELK to a third-party buyer. This transaction was approved by the MPSC on June 29, 2020. This transaction closed on July 31, 2020 (see Note 1).
46


8.    REGULATORY ASSETS AND REGULATORY LIABILITIES:

Except as described below, there have been no significant changes to the nature or balances of the Utilities' regulatory assets and liabilities since December 31, 2019, which are described in Note 11 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019.


The Utilities' Regulatory Assets as of September 30, 2020 and December 31, 2019 consisted of the following items (in thousands):
September 30, 2020
SJGETGELKTotal SJI
Environmental Remediation Costs:
Expended - Net$160,828 $10,267 $$171,095 
Liability for Future Expenditures102,889 93,111 196,000 
   Insurance Recovery Receivables(13,615)(13,615)
Deferred ARO Costs40,858 23,591 64,449 
Deferred Pension Costs - Unrecognized Prior Service Cost34,940 34,940 
Deferred Pension and Other Postretirement Benefit Costs72,010 1,825 73,835 
Deferred Gas Costs - Net19,222 19,222 
CIP Receivable16,242 16,242 
SBC Receivable2,665 2,665 
Deferred Interest Rate Contracts10,872 10,872 
EET16,810 16,810 
Pipeline Supplier Service Charges457 457 
Pipeline Integrity Cost5,837 5,837 
AFUDC - Equity Related Deferrals11,491 11,491 
WNC5,535 5,535 
Other Regulatory Assets25,889 18,000 43,889 
Total Regulatory Assets$486,070 $173,654 $$659,724 


47

December 31, 2019
SJGETGELKTotal SJI
Environmental Remediation Costs:
Expended - Net$156,279 $16,955 $$173,234 
Liability for Future Expenditures131,262 101,083 232,345 
   Insurance Recovery Receivables(20,423)(20,423)
Deferred ARO Costs36,515 18,108 54,623 
Deferred Pension Costs - Unrecognized Prior Service Cost37,378 37,378 
Deferred Pension and Other Postretirement Benefit Costs72,010 1,825 73,835 
Deferred Gas Costs - Net49,469 5,301 293 55,063 
SBC Receivable1,478 1,478 
Deferred Interest Rate Contracts7,856 7,856 
EET12,877 12,877 
Pipeline Supplier Service Charges525 525 
Pipeline Integrity Cost6,516 6,516 
AFUDC - Equity Related Deferrals10,712 10,712 
WNC231 231 
Other Regulatory Assets10,678 9,004 19,682 
Total Regulatory Assets$496,177 $169,231 $524 $665,932 

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

ENVIRONMENTAL REMEDIATION COSTS - SJG and ETG have regulatory assets associated with environmental costs related to the cleanup of environmental sites. SJG has 12 sites where SJG or its predecessors previously operated gas manufacturing plants, while ETG is subject to environmental remediation liabilities associated with 5 former manufactured gas plant sites in New Jersey. "Environmental Remediation Cost: Expended - Net" represents what was actually spent to clean up the sites, less recoveries through the RAC and insurance carriers. These costs meet the deferral requirements of ASC 980, as the BPU allows SJG and ETG to recover such expenditures through the RAC. "Environmental Remediation Cost: Liability for Future Expenditures" relates to estimated future expenditures required to complete the remediation of these sites. SJG and ETG recorded this estimated amount as a regulatory asset with the corresponding current and noncurrent liabilities on the condensed consolidated balance sheets under the captions "Current Liabilities" (SJI and SJG), "Deferred Credits and Other Noncurrent Liabilities" (SJI) and "Regulatory and Other Noncurrent Liabilities" (SJG). The BPU allows SJG to recover the deferred costs over seven-year periods after they are incurred. Environmental remediation costs at ETG are recoverable from customers through the RAC approved by the BPU. "Insurance Recovery Receivables" represents the balance of an insurance settlement executed in the fourth quarter of 2019 with a third party. This settlement, which is expected to be received in installments through the end of 2021, will be returned to ETG's customers through the RAC. Of the original total of $20.4 million, $6.8 million was received by ETG in 2020.

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

48

DEFERRED ARO COSTS - The Utilities record AROs primarily related to the legal obligation to cut and cap gas distribution pipelines when taking those pipelines out of service. Deferred ARO costs represent the period to period passage of time (accretion) and the revision to cash flows originally estimated to settle the retirement obligation. The Deferred ARO costs regulatory asset increased from the prior year due to the revisions to the settlement timing, retirement costs and changes to inflation and discount rates used to measure the expected retirement costs. Corresponding changes are made to the ARO liability, thus having no impact on earnings.

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

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

OTHER REGULATORY ASSETS - Some of the assets included in Other Regulatory Assets are currently being recovered from ratepayers as approved by the BPU. Management believes the remaining deferred costs are probable of recovery from ratepayers through future utility rates. Included in Other Regulatory Assets for SJG is the impact of the ERIP on SJG employees, see Note 1 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019. The increase in Other Regulatory Assets for SJG is primarily due to a $10.1 million reclassification of costs from Utility Plant to Regulatory Assets on the condensed consolidated balance sheet related to a previous project to re-power the former BL England facility with natural gas. RC Cape May Holdings, LLC has communicated to SJG that it no longer intends to proceed with a project to re-power the former BL England facility with natural gas. As of March 2020, SJG had determined that the project under construction will be abandoned. SJG requested that the project costs spent to date be recovered as a regulatory asset within its rate case petition, which was approved by the BPU during the third quarter of 2020 (see Note 7).

On July 2, 2020, the BPU issued an Order authorizing New Jersey's regulated utilities to create a COVID-19-related regulatory asset by deferring on their books and records the prudently incurred incremental costs related to COVID-19 beginning on March 9, 2020 and continuing through September 30, 2021, or 60 days after the termination of the public health emergency, whichever is later. The Company will be required to file quarterly reports with the BPU, along with a petition of recovery of such incremental costs with the BPU by December 31, 2021 or within 60 days of the close of the tracking period, whichever is later. As of September 30, 2020, ETG and SJG deferred $9.3 million and $3.8 million, respectively, of incremental costs principally related to expected credit losses from uncollectibles as a result of the COVID-19 pandemic, specifically related to changes in payment patterns observed to date and consideration of macroeconomic factors. We have deemed these costs to be probable of recovery.

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

September 30, 2020
SJGETGELKTotal SJI
Excess Plant Removal Costs$12,849 $37,648 $$50,497 
Excess Deferred Taxes240,453 114,839 355,292 
Deferred Revenues - Net15,106 15,106 
Amounts to be Refunded to Customers7,455 7,455 
Other Regulatory Liabilities589 589 
Total Regulatory Liabilities$253,302 $175,637 $$428,939 

49

December 31, 2019
 SJGETGELKTotal SJI
Excess Plant Removal Costs$16,333 $36,343 $$52,676 
Excess Deferred Taxes251,355 117,695 369,050 
Deferred Revenues - Net52 52 
CIP Payable6,794 6,794 
WNC2,684 2,684 
Amounts to be Refunded to Customers10,625 10,625 
Other Regulatory Liabilities1,037 1,037 
Total Regulatory Liabilities$274,482 $168,436 $$442,918 

EXCESS DEFERRED TAXES - This liability is recognized as a result of Tax Reform enacted into law on December 22, 2017. The decrease in this liability from December 31, 2019 to September 30, 2020 is related to excess tax amounts returned to customers through customer billings. The Unprotected amount of excess deferred taxes will be returned to customers over a five year period. As part of the BPU approved settlement of its 2020 base rate case, SJG will amortize the Protected Excess ADIT liability and the Excess ADIT Asset NOL (see Note 7).

DEFERRED REVENUES - NET - Over/under collections of gas costs are monitored through SJG's and ETG's bill credit. Net under-collected gas costs are classified as a regulatory asset and net over-collected gas costs are classified as a regulatory liability. Derivative contracts used to hedge natural gas purchases are also included in the BGSS, subject to BPU approval. The regulatory liability as of September 30, 2020 is a result of over-collection and refunds from a third party gas supplier (see Note 1).

9.    PENSION AND OTHER POSTRETIREMENT BENEFITS:

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

 Pension Benefits
 Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Service Cost$974 $1,387 $4,349 $4,187 
Interest Cost3,862 4,307 11,388 12,971 
Expected Return on Plan Assets(5,569)(5,077)(16,473)(15,213)
Amortizations:    
Prior Service Cost26 26 79 79 
Actuarial Loss2,647 2,398 8,077 7,195 
Net Periodic Benefit Cost1,940 3,041 7,420 9,219 
Capitalized Benefit Cost(410)(454)(1,470)(1,423)
   Deferred Benefit Cost(377)(516)(1,193)(1,710)
Total Net Periodic Benefit Expense$1,153 $2,071 $4,757 $6,086 

50

 Other Postretirement Benefits
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Service Cost$182 $129 $511 $400 
Interest Cost560 729 1,775 2,163 
Expected Return on Plan Assets(1,345)(1,147)(4,036)(3,428)
Amortizations:    
Prior Service Cost(180)(144)(468)(432)
Actuarial Loss255 292 640 876 
Net Periodic Benefit Cost(528)(141)(1,578)(421)
Capitalized Benefit Cost57 (115)(157)(270)
   Deferred Benefit Cost(90)118 701 352 
Total Net Periodic Benefit Expense$(561)$(138)$(1,034)$(339)

The Pension Benefits Net Periodic Benefit Cost incurred by SJG was approximately $1.6 million and $1.9 million of the totals presented in the table above for the three months ended September 30, 2020 and 2019, respectively, and $5.4 million and $6.3 million of the totals presented in the table above for the nine months ended September 30, 2020 and 2019, respectively. The weighted average expected long term rate of return on plan assets used to determine the net benefit cost was 7.25%.

The Other Postretirement Benefits Net Periodic Benefit Cost incurred by SJG was approximately $(0.1) million and $(0.1) million of the totals presented in the table above for the three months ended September 30, 2020 and 2019, respectively, and $(1.5) million and $(0.3) million of the totals presented in the table above for the nine months ended September 30, 2020 and 2019, respectively. The weighted average expected long term rate of return on plan assets used to determine the net benefit cost was 6.75%.

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

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

NaN contributions were made to the pension plans by either SJI or SJG during the nine months ended September 30, 2020 or 2019. SJI and SJG do 0t expect to make any contributions to the pension plans during the remainder of 2020; however, changes in future investment performance and discount rates may ultimately result in a contribution. Payments related to the unfunded SERP are expected to be approximately $3.7 million in 2020.

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

See Note 12 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019 for additional information related to SJI’s and SJG's pension and other postretirement benefits.
51


10.    LINES OF CREDIT & SHORT-TERM BORROWINGS:
 
Credit facilities and available liquidity as of September 30, 2020 were as follows (in thousands):

CompanyTotal FacilityUsageAvailable LiquidityExpiration Date
SJI:    
SJI Syndicated Revolving Credit Facility$500,000 $199,300 (A)$300,700 August 2022
Term Loan Credit Agreement150,000 150,000 March 2021
Total SJI650,000 349,300 300,700  
SJG:    
Commercial Paper Program/Revolving Credit Facility200,000 108,700 (B)91,300 August 2022
Uncommitted Bank Line10,000 10,000 September 2021 (D)
Total SJG210,000 108,700 101,300  
ETG/SJIU:
ETG/SJIU Revolving Credit Facility200,000 150,400 (C)49,600 April 2022
Total$1,060,000 $608,400 $451,600  

(A) Includes letters of credit outstanding in the amount of $9.6 million, which is used to enable SJE to market retail electricity as well as for various construction and operating activities.
(B) Includes letters of credit outstanding in the amount of $0.8 million, which supports the remediation of environmental conditions at certain locations in SJG's service territory.
(C) Includes letters of credit outstanding in the amount of $1.0 million, which supports ETG's construction activity.
(D) SJG renewed this facility during the third quarter of 2020.

For SJI and SJG, the amount of usage shown in the table above, less the letters of credit noted in (A)-(C) above, equals the amounts recorded as Notes Payable on the respective condensed consolidated balance sheets as of September 30, 2020.

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

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

SJI's Five Year Revolving Credit Agreement ("Credit Agreement") allows SJI to borrow in the form of revolving loans a total aggregate amount of $500.0 million. In addition, as part of the total $500.0 million extension of credit, the Credit Agreement provides for swingline loans (in an amount not to exceed an aggregate of $50.0 million) and letters of credit (in an amount not to exceed an aggregate of $200.0 million), each at the applicable interest rates specified in the Credit Agreement. Subject to certain conditions set forth in the Credit Agreement, the Company may increase the revolving credit facility up to a maximum aggregate amount of $100.0 million (for a total facility of up to $600.0 million), although no lender is obligated to increase its commitment.


52

SJIU and ETG (as Borrowers) have a $200.0 million revolving credit agreement with several lenders. The revolving credit agreement provides for the extension of credit to the Borrowers in a total aggregate amount of $200.0 million, in the form of revolving loans up to a full amount of $200.0 million, swingline loans in an amount not to exceed an aggregate of $20.0 million and letters of credit in an amount not to exceed an aggregate of $50.0 million, each at the applicable interest rates specified in the revolving credit agreement. Subject to certain conditions set forth in the revolving credit agreement, the Borrowers may increase the revolving credit facility up to a maximum aggregate amount of $50.0 million (for a total revolving facility of up to $250.0 million). This facility contains one financial covenant, limiting the ratio of indebtedness to total capitalization (as defined in the credit agreement) of each Borrower to not more than 0.70 to 1, measured at the end of each fiscal quarter. SJIU and ETG were in compliance with this covenant at September 30, 2020.

The Utilities' (including SJG) facilities are restricted as to use and availability specifically to the respective Utilities; however, if necessary, the SJI facilities can also be used to support the liquidity needs of the Utilities. All committed facilities contain one financial covenant limiting the ratio of indebtedness to total capitalization of the applicable borrowers (as defined in the respective credit agreements), measured on a quarterly basis. SJI and the Utilities were in compliance with these covenants as of September 30, 2020. Borrowings under these credit facilities are at market rates.

The weighted average interest rate on these borrowings, which changes daily, were as follows:

September 30, 2020September 30, 2019
Weighted average interest rate on borrowings:
SJI (inclusive of SJG, ETG and SJIU)1.26 %3.00 %
SJG0.23 %2.39 %

Average borrowings and maximum amounts outstanding on these facilities were as follows (in thousands):
Nine Months Ended
September 30, 2020
Nine Months Ended
September 30, 2019
Average borrowings outstanding, not including LOC:
SJI (inclusive of SJG, ETG and SJIU)$516.8 $487.8 
SJG$149.0 $96.2 
Maximum amounts outstanding:
SJI (inclusive of SJG, ETG and SJIU)$872.2 $882.7 
SJG$187.0 $175.3 

The SJI and the Utilities' (including SJG) principal credit facilities are provided by a syndicate of banks. The NPA for Senior Unsecured Notes issued by SJI, and the SJG credit facilities, contain a financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective NPA or credit agreement) to not more than 0.70 to 1, measured at the end of each fiscal quarter. For SJI, the equity units are treated as equity (as opposed to how they are classified on the condensed consolidated balance sheet, as long-term debt) for purposes of the covenant calculation. SJI and the Utilities were in compliance with these covenants as of September 30, 2020.

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

11.    COMMITMENTS AND CONTINGENCIES:

GUARANTEES — As of September 30, 2020, SJI had issued $10.5 million of parental guarantees on behalf of EnergyMark, an unconsolidated subsidiary. These guarantees generally expire within one year and were issued to enable the subsidiary to market retail natural gas.
53


GAS SUPPLY CONTRACTS - In the normal course of business, SJG, SJRG and ETG have entered into long-term contracts for natural gas supplies, firm transportation and gas storage service. The transportation and storage service agreements with interstate pipeline suppliers were made under FERC-approved tariffs. SJG and ETG's cumulative obligation for gas supply-related demand charges and reservation fees paid to suppliers for these services averages approximately $6.0 million and $5.3 million per month, respectively, and is recovered on a current basis through the BGSS. SJRG's cumulative obligation for demand charges and reservation fees paid to suppliers for these services averages approximately $1.6 million per month. SJRG has also committed to purchase 738,250 dts/d of natural gas, from various suppliers, for terms ranging from 5 to 11 years at index-based prices.

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

TSA - SJI had entered into a TSA with Southern Company Gas whereby the latter provided certain administrative and operational services. On March 16, 2020, the TSA between SJI and Southern Company Gas terminated. As of that date, Southern Company Gas no longer provides any administrative or operational services to ETG.

COLLECTIVE BARGAINING AGREEMENTS — Unionized personnel represent approximately 43% and 69% of SJI's and SJG's workforce at September 30, 2020, respectively. SJI has collective bargaining agreements with unions that represent these employees: IBEW Local 1293, IAM Local 76 and UWUA Local 424. SJG employees represented by the IBEW operate under a collective bargaining agreement that runs through February 2022. SJG's remaining unionized employees are represented by the IAM and operate under a collective bargaining agreement that runs through August 2021. ETG employees represented by the UWUA operate under a collective bargaining agreement that runs through November 2022.

STANDBY LETTERS OF CREDIT — See Note 10. In addition, SJG has provided $25.1 million of letters of credit under a separate facility outside of the revolving credit facility to support variable-rate demand bonds issued through the NJEDA to finance the expansion of SJG’s natural gas distribution system.

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

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

In August 2018, the State of New Jersey filed a civil enforcement action against SJG and several other current and former owners of certain property in Atlantic City, NJ alleging damage to the State's natural resources and seeking payment for damages to those natural resources, where SJG and its predecessors previously operated a manufactured gas plant. SJG is currently evaluating the merits of the State of New Jersey's allegations. At this time, SJG cannot reasonably estimate or provide an assessment of the claim or any assurance regarding its outcome.

Liabilities related to claims are accrued when the amount or range of amounts of probable settlement costs or other charges for these claims can be reasonably estimated. For matters other than the disputes noted above, SJI has accrued approximately $4.1 million and $3.1 million related to all claims in the aggregate as of September 30, 2020 and December 31, 2019, respectively, of which SJG has accrued approximately $1.1 million and $0.9 million as of September 30, 2020 and December 31, 2019, respectively.

ENVIRONMENTAL REMEDIATION COSTS — SJG incurred and recorded costs for environmental cleanup of 12 sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s. ETG is subject to environmental remediation liabilities associated with 5 former manufactured gas plant sites in New Jersey. These environmental remediation expenditures are recoverable from customers through rate mechanisms approved by the BPU (see Note 8). SJI and some of its nonutility subsidiaries also recorded costs for environmental cleanup of sites where SJF previously operated a fuel oil business and Morie maintained equipment, fueling stations and storage (see Note 3). There have been no significant changes to the status of SJI’s environmental remediation efforts since December 31, 2019, as described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019.

54

12.    DERIVATIVE INSTRUMENTS:

Certain SJI subsidiaries, including SJG, are involved in buying, selling, transporting and storing natural gas and buying and selling retail electricity for their own accounts as well as managing these activities for third parties. These subsidiaries are subject to market risk on expected future purchases and sales due to commodity price fluctuations. SJI and SJG use a variety of derivative instruments to limit this exposure to market risk in accordance with strict corporate guidelines. These derivative instruments include forward contracts, swap agreements, options contracts and futures contracts.

As of September 30, 2020, SJI and SJG had outstanding derivative contracts as follows: 
SJI ConsolidatedSJG
Derivative contracts intended to limit exposure to market risk to:
    Expected future purchases of natural gas (in MMdts)87.0 13.1 
    Expected future sales of natural gas (in MMdts)101.5 0.7 
    Expected future purchases of electricity (in MMmWh)0.1 
    Expected future sales of electricity (in MMmWh)0.1 
Basis and Index related net purchase (sale) contracts (in MMdts)86.7 2.6 

These contracts, which have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives - Energy Related Assets or Derivatives - Energy Related Liabilities on the condensed consolidated balance sheets of SJI and SJG. For SJE and SJRG contracts, the net unrealized pre-tax gains (losses) for these energy-related commodity contracts are included with realized gains (losses) in Operating Revenues – Nonutility on the condensed consolidated statements of income (loss) for SJI. These unrealized pre-tax (losses) were $(6.2) million for both the three months ended September 30, 2020 and 2019, and $(7.8) million and $(18.4) million for the nine months ended September 30, 2020 and 2019, respectively. For ETG's and SJG's contracts, the costs or benefits are recoverable through the BGSS clause, subject to BPU approval. As a result, the net unrealized pre-tax gains and losses for SJG and ETG energy-related commodity contracts are included with realized gains and losses in Regulatory Assets or Regulatory Liabilities on the condensed consolidated balance sheets of SJI (ETG and SJG) and SJG. As of September 30, 2020 and December 31, 2019, SJI had $11.4 million and $(4.0) million, respectively, and SJG had $5.7 million and $2.1 million, respectively, of unrealized gains (losses) included in its BGSS related to energy-related commodity contracts.

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

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

As of September 30, 2020, SJI’s active interest rate swaps were as follows:

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

The unrealized gains and losses on interest rate derivatives that are not designated as cash flow hedges are included in Interest Charges in the condensed consolidated statements of income/(loss). However, for selected interest rate derivatives at SJG, management believes that, subject to BPU approval, the market value upon termination can be recovered in rates and, therefore, these unrealized losses have been included in Other Regulatory Assets in the condensed consolidated balance sheets.
55


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

SJI (includes SJG and all other consolidated subsidiaries):
Derivatives not designated as hedging instruments under GAAPSeptember 30, 2020December 31, 2019
 AssetsLiabilitiesAssetsLiabilities
Energy-related commodity contracts:    
Derivatives - Energy Related - Current$36,541 $25,005 $52,892 $41,965 
Derivatives - Energy Related - Non-Current10,407 4,452 7,243 8,206 
Interest rate contracts:    
Derivatives - Other - Current2,078 1,155 
Derivatives - Other - Noncurrent17,637 11,505 
Total derivatives not designated as hedging instruments under GAAP$46,948 $49,172 $60,135 $62,831 
Total Derivatives$46,948 $49,172 $60,135 $62,831 


SJG:
Derivatives not designated as hedging instruments under GAAPSeptember 30, 2020December 31, 2019
AssetsLiabilitiesAssetsLiabilities
Energy-related commodity contracts:    
Derivatives – Energy Related – Current$6,060 $817 $16,904 $14,671 
Derivatives – Energy Related – Non-Current425 95 
Interest rate contracts:  
Derivatives – Other - Current709 488 
Derivatives – Other - Noncurrent10,163 7,368 
Total derivatives not designated as hedging instruments under GAAP$6,485 $11,689 $16,909 $22,622 
Total Derivatives$6,485 $11,689 $16,909 $22,622 


56

SJI and SJG enter into derivative contracts with counterparties, some of which are subject to master netting arrangements, which allow net settlements under certain conditions. These derivatives are presented at gross fair values on the condensed consolidated balance sheets. Information related to these offsetting arrangements were as follows (in thousands):
As of September 30, 2020
DescriptionGross amounts of recognized assets/liabilitiesGross amount offset in the balance sheetNet amounts of assets/liabilities in balance sheetGross amounts not offset in the balance sheetNet amount
Financial InstrumentsCash Collateral Posted/(Received)
SJI (includes SJG and all other consolidated subsidiaries):
Derivatives - Energy Related Assets$46,948 $$46,948 $(24,937)(A)$(3,706)$18,305 
Derivatives - Energy Related Liabilities$(29,457)$$(29,457)$24,937 (B)$$(4,520)
Derivatives - Other$(19,715)$$(19,715)$$$(19,715)
SJG:
Derivatives - Energy Related Assets$6,485 $$6,485 $(338)(A)$$6,147 
Derivatives - Energy Related Liabilities$(817)$$(817)$338 (B)$$(479)
Derivatives - Other$(10,872)$$(10,872)$$$(10,872)

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

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

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


57

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

 Three Months Ended
September 30,
Nine Months Ended
September 30,
Derivatives in Cash Flow Hedging Relationships under GAAP2020201920202019
SJI (includes SJG and all other consolidated subsidiaries):
Interest Rate Contracts:  
Losses reclassified from AOCL into income (a)$(12)$(12)$(35)$(35)
SJG:
Interest Rate Contracts:
Losses reclassified from AOCL into income (a)$(12)$(12)$(35)$(35)

(a) Included in Interest Charges

 Three Months Ended
September 30,
Nine Months Ended
September 30,
Derivatives Not Designated as Hedging Instruments under GAAP2020201920202019
SJI (includes SJG and all other consolidated subsidiaries):
Losses on energy-related commodity contracts (a)$(6,246)$(6,187)$(7,807)$(18,390)
Gains (Losses) on interest rate contracts (b)342 (1,137)(4,040)(3,972)
Total$(5,904)$(7,324)$(11,847)$(22,362)

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

Certain of SJI’s derivative instruments contain provisions that require immediate payment or demand immediate and ongoing collateralization on derivative instruments in net liability positions in the event of a material adverse change in the credit standing of SJI. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on September 30, 2020, is approximately $0.3 million. If the credit-risk-related contingent features underlying these agreements were triggered on September 30, 2020, SJI would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $0.1 million after offsetting asset positions with the same counterparties under master netting arrangements.

13.    FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:

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

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

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

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

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

58

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

As of September 30, 2020TotalLevel 1Level 2Level 3
SJI (includes SJG and all other consolidated subsidiaries):
Assets    
Available-for-Sale Securities (A)$40 $40 $$
Derivatives – Energy Related Assets (B)46,948 18,953 16,876 11,119 
 $46,988 $18,993 $16,876 $11,119 
SJG:
Assets    
Derivatives – Energy Related Assets (B)$6,485 $2,181 $$4,304 
$6,485 $2,181 $$4,304 
SJI (includes SJG and all other consolidated subsidiaries):
Liabilities    
Derivatives – Energy Related Liabilities (B)$29,457 $8,393 $16,354 $4,710 
Derivatives – Other (C)19,715 19,715 
 $49,172 $8,393 $36,069 $4,710 
SJG:
Liabilities
Derivatives – Energy Related Liabilities (B)$817 $338 $479 $
Derivatives – Other (C)10,872 10,872 
$11,689 $338 $11,351 $

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



59



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

(B) Derivatives – Energy Related Assets and Liabilities are traded in both exchange-based and non-exchange-based markets. Exchange-based contracts are valued using unadjusted quoted market sources in active markets and are categorized in Level 1 in the fair value hierarchy - established by FASB ASC Topic 820 - “Fair Value Measurements and Disclosures.” Certain non-exchange-based contracts are valued using indicative price quotations available through brokers or over-the-counter, on-line exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask mid-point prices and are obtained from sources that management believes provide the most liquid market. Management reviews and corroborates the price quotations with at least one additional source to ensure the prices are observable market information, which includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration. Derivative instruments that are used to limit our exposure to changes in interest rates on variable-rate, long-term debt are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment, as a result, these instruments are categorized in Level 2 in the fair value hierarchy. For non-exchange-based derivatives that trade in less liquid markets with limited pricing information, model inputs generally would include both observable and unobservable inputs. In instances where observable data is unavailable, management considers the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 in the fair value hierarchy as the model inputs generally are not observable. Counterparty credit risk and the credit risk of SJI are incorporated and considered in the valuation of all derivative instruments as appropriate. The effect of counterparty credit risk and the credit risk of SJI on the derivative valuations is not significant.

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

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

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

SJI (includes SJG and all other consolidated subsidiaries):

TypeFair Value at September 30, 2020Valuation TechniqueSignificant Unobservable InputRange
[Weighted Average]
AssetsLiabilities
Forward Contract - Natural Gas$10,403$4,050Discounted Cash FlowForward price (per dt)
$0.72 - $7.09 [$3.18](A)
Forward Contract - Electric

$716$660Discounted Cash FlowFixed electric load profile (on-peak)40.34% - 100.00% [60.14%](B)
Fixed electric load profile (off-peak)0.00% - 59.66% [39.86%](B)

60

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


SJG:
TypeFair Value at September 30, 2020Valuation TechniqueSignificant Unobservable InputRange
[Weighted Average]
AssetsLiabilities
Forward Contract - Natural Gas$4,304 $Discounted Cash FlowForward price (per dt)
$1.05 - $5.47 [$4.03](A)


TypeFair Value at December 31, 2019Valuation TechniqueSignificant Unobservable InputRange
[Weighted Average]
AssetsLiabilities
Forward Contract - Natural Gas$5,049 $14 Discounted Cash FlowForward price (per dt)
$1.85 - $3.61 [$3.02](A)

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

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


61

The changes in fair value measurements of Derivatives – Energy Related Assets and Liabilities, using significant unobservable inputs (Level 3), are as follows (in thousands):

Three Months Ended
September 30, 2020
Nine Months Ended
September 30, 2020
SJI (includes SJG and all other consolidated subsidiaries):
Balance at beginning of period$12,251 $17,574 
Other Changes in Fair Value from Continuing and New Contracts, Net(3,198)3,819 
Settlements(2,644)(14,984)
Balance at end of period$6,409 $6,409 
SJG:
Balance at beginning of period$4,365 $5,035 
Other Changes in Fair Value from Continuing and New Contracts, Net(61)4,304 
Settlements(5,035)
Balance at end of period$4,304 $4,304 

Three Months Ended
September 30, 2019
Nine Months Ended
September 30, 2019
SJI (includes SJG and all other consolidated subsidiaries):
Balance at beginning of period$9,959 $16,061 
Other Changes in Fair Value from Continuing and New Contracts, Net6,046 10,331 
Settlements(4,144)(14,531)
Balance at end of period$11,861 $11,861 
SJG:
Balance at beginning of period$1,708 $4,928 
Other Changes in Fair Value from Continuing and New Contracts, Net6,533 8,241 
Settlements(4,928)
Balance at end of period$8,241 $8,241 



62


14.    LONG-TERM DEBT:

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

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

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

On April 16, 2020, SJG entered into a Note Purchase Agreement which provides for SJG to issue and sell its Senior Secured Notes, Series F, 2020 in the aggregate principal amount of $525.0 million in 3 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 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 were issued on October 1, 2020, and bear interest at 3.98% (see Note 20).

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

On May 27, 2020, SJI entered into a Note Purchase Agreement which provided for the Company to issue an aggregate of $200.0 million of senior unsecured notes in 2 tranches, as follows: (a) Senior Notes, Series 2020A due July 30, 2027, in the aggregate principal amount of $75.0 million (the "Series 2020A Notes"); and (b) Senior Notes, Series 2020B due July 30, 2030, in the aggregate principal amount of $125.0 million (the "Series 2020B Notes"). The Company issued both tranches of the Notes on July 30, 2020. The Series 2020A Notes bear interest at 3.71% and the Series 2020B Notes bear interest at 3.91%. The proceeds from these issuances were used to pay off the unsecured $200.0 million term loan credit agreement issued in April 2020, which was paid off on July 31, 2020.

In September 2020, SJG paid off $10.0 million of the principal balance outstanding on its 3.00% MTNs.


15.    ACCUMULATED OTHER COMPREHENSIVE LOSS:

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

Postretirement Liability AdjustmentUnrealized Gain (Loss) on Derivatives-Other (A)Unrealized Gain (Loss) on Available-for-Sale SecuritiesOther Comprehensive Income (Loss) of Affiliated CompaniesTotal
Balance at July 1, 2020$(32,124)$(311)$(10)$(97)$(32,542)
   Other comprehensive income before reclassifications
   Amounts reclassified from AOCL
Net current period other comprehensive income
Balance at September 30, 2020
$(32,124)$(302)$(10)$(97)$(32,533)
63


Postretirement Liability AdjustmentUnrealized Gain (Loss) on Derivatives-Other (A)Unrealized Gain (Loss) on Available-for-Sale SecuritiesOther Comprehensive Income (Loss) of Affiliated CompaniesTotal
Balance at January 1, 2020$(32,124)$(327)$(10)$(97)$(32,558)
   Other comprehensive income before reclassifications
   Amounts reclassified from AOCL25 25 
Net current period other comprehensive income25 25 
Balance at September 30, 2020
$(32,124)$(302)$(10)$(97)$(32,533)

(A) The affected line item for these reclassifications from AOCL into the condensed consolidated statements of income (loss) is Interest Charges. These amounts are net of tax of $(3) and $(10) for the three and nine months ended September 30, 2020, respectively, for which the affected line item in the condensed consolidated statements of income (loss) is Income Taxes.
The following table summarizes the changes in SJG's AOCL for the three and nine months ended September 30, 2020 (in thousands):
Postretirement Liability AdjustmentUnrealized Gain (Loss) on Derivatives-Other (A)Total
Balance at July 1, 2020$(27,454)$(405)$(27,859)
Other comprehensive loss before reclassifications
   Amounts reclassified from AOCL
Net current period other comprehensive income
Balance at September 30, 2020
$(27,454)$(396)$(27,850)

Postretirement Liability AdjustmentUnrealized Gain (Loss) on Derivatives-Other (A)Total
Balance at January 1, 2020$(27,454)$(421)$(27,875)
Other comprehensive loss before reclassifications
   Amounts reclassified from AOCL25 25 
Net current period other comprehensive income (loss)25 25 
Balance at September 30, 2020
$(27,454)$(396)$(27,850)

(A) The affected line item for these reclassifications from AOCL into the condensed statements of income (loss) is Interest Charges. These amounts are net of tax of $(3) and $(10) for the three and nine months ended September 30, 2020, respectively, for which the affected line item in the condensed statements of income (loss) is Income Taxes.
64



16.    REVENUE:

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

Except as described below, along with the acquisitions and sales as noted in Note 1, there have been no significant changes to the nature of the Company's revenues since December 31, 2019, which are described in Note 19 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019. Revenues recorded for the newly acquired businesses (see Note 1) during the nine months ended September 30, 2020 are not material.

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

Disaggregated revenues from contracts with customers, by both customer type and product line, are disclosed below, by operating segment (in thousands):

Three Months Ended
September 30, 2020
SJG Utility OperationsETG Utility OperationsELK Utility OperationsWholesale Energy OperationsRetail Electric OperationsOn-Site Energy ProductionAppliance Service OperationsCorporate Services and IntersegmentTotal
Customer Type:
Residential$40,900 $20,974 $77 $— $— $— $491 $— $62,442 
Commercial & Industrial24,625 16,998 185 197,580 4,814 6,317 — (267)250,252 
OSS & Capacity Release1,859 — — — — — — — 1,859 
Other381 191 23 — — — — — 595 
$67,765 $38,163 $285 $197,580 $4,814 $6,317 $491 $(267)$315,148 
Product Line:
Gas$67,765 $38,163 $285 $197,580 $— $— $— $(595)$303,198 
Electric— — — — 4,814 — — (324)4,490 
Solar— — — — — 5,429 — — 5,429 
Landfills— — — — — 888 — — 888 
Other— — — — — — 491 652 1,143 
$67,765 $38,163 $285 $197,580 $4,814 $6,317 $491 $(267)$315,148 

65

Nine Months Ended
September 30, 2020
SJG Utility OperationsETG Utility OperationsELK Utility OperationsWholesale Energy OperationsRetail Electric OperationsOn-Site Energy ProductionAppliance Service OperationsCorporate Services and IntersegmentTotal
Customer Type:
Residential$244,114 $153,496 $2,179 $— $— $— $1,485 $— $401,274 
Commercial & Industrial100,689 74,752 2,544 456,427 17,462 15,459 — (2,862)664,471 
OSS & Capacity Release5,931 — — — — — — — 5,931 
Other1,393 4,162 203 — — — — — 5,758 
$352,127 $232,410 $4,926 $456,427 $17,462 $15,459 $1,485 $(2,862)$1,077,434 
Product Line:
Gas$352,127 $232,410 $4,926 $456,427 $— $— $— $(2,252)$1,043,638 
Electric— — — — 17,462 — — (1,986)15,476 
Solar— — — — — 8,725 — — 8,725 
CHP— — — — — 3,502 — — 3,502 
Landfills— — — — — 3,232 — — 3,232 
Other— — — — — — 1,485 1,376 2,861 
$352,127 $232,410 $4,926 $456,427 $17,462 $15,459 $1,485 $(2,862)$1,077,434 


Three Months Ended
September 30, 2019
SJG Utility OperationsETG Utility OperationsELK Utility OperationsWholesale Energy OperationsRetail Electric OperationsOn-Site Energy ProductionAppliance Service OperationsCorporate Services and IntersegmentTotal
Customer Type:
Residential$31,256 $16,092 $243 $— $4,205 $— $514 $— $52,310 
Commercial & Industrial21,164 12,799 629 158,244 10,275 11,980 — (3,092)211,999 
OSS & Capacity Release2,234 — — — — — — — 2,234 
Other544 1,733 23 — — — — — 2,300 
$55,198 $30,624 $895 $158,244 $14,480 $11,980 $514 $(3,092)$268,843 
Product Line:
Gas$55,198 $30,624 $895 $158,244 $— $— $— $(1,173)$243,788 
Electric— — — — 14,480 — — (2,184)12,296 
Solar— — — — — 3,429 — — 3,429 
CHP— — — — — 7,218 — — 7,218 
Landfills— — — — — 1,333 — — 1,333 
Other— — — — — — 514 265 779 
$55,198 $30,624 $895 $158,244 $14,480 $11,980 $514 $(3,092)$268,843 
66


Nine Months Ended
September 30, 2019
SJG Utility OperationsETG Utility OperationsELK Utility OperationsWholesale Energy OperationsRetail Electric OperationsOn-Site Energy ProductionAppliance Service OperationsCorporate Services and IntersegmentTotal
Customer Type:
Residential$244,889 $143,584 $2,204 $— $10,966 $— $1,529 $— $403,172 
Commercial & Industrial82,255 71,013 2,769 469,805 35,697 38,098 — (9,517)690,120 
OSS & Capacity Release6,248 — — — — — — — 6,248 
Other1,787 5,906 127 — — — — — 7,820 
$335,179 $220,503 $5,100 $469,805 $46,663 $38,098 $1,529 $(9,517)$1,107,360 
Product Line:
Gas$335,179 $220,503 $5,100 $469,805 $— $— $— $(3,807)$1,026,780 
Electric— — — — 46,663 — — (5,975)40,688 
Solar— — — — — 12,443 — — 12,443 
CHP— — — — — 21,371 — — 21,371 
Landfills— — — — — 4,284 — — 4,284 
Other— — — — — — 1,529 265 1,794 
$335,179 $220,503 $5,100 $469,805 $46,663 $38,098 $1,529 $(9,517)$1,107,360 


The SJG balance is a part of the SJG utility operating segment, and is before intercompany eliminations with other SJI entities. Revenues on the condensed consolidated statements of income/(loss) that are not with contracts with customers consist of (a) revenues from alternative revenue programs at the SJG, ETG and ELK utility operating segments (including CIP and WNC), (b) both utility and nonutility realized revenue from derivative contracts at the SJG and ETG utility, wholesale energy and retail electric operating segments, and (c) unrealized revenues from derivative contracts of the wholesale energy and retail electric operating segments (see Note 12).

The Company’s rate mechanisms that qualify as alternative revenue programs are described in Note 10 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019. These mechanisms are subject to compliance filings on at least an annual basis, and the tariff rate adjustments are designed to occur over this compliance period. These rate mechanisms satisfy the criteria in ASC 980-605-25-4, as (a) each mechanism is established by order of the BPU for SJG and ETG, and the MPSC for ELK; (b) the amounts recoverable under each program are determined by tracking and are probable of recovery; and (c) the adjustments to tariff rates are designed to recover from or refund to customers within a 24 month period. For each individual rate reconciling mechanism, operating revenues are recognized when allowable costs are greater than the amounts billed in the current period and are reduced when allowable costs are less than amounts billed in the current period. Total revenues arising from alternative revenue programs at SJI were $(6.4) million and $1.2 million for the three months ended September 30, 2020 and 2019, respectively, and $26.6 million and $22.5 million for the nine months ended September 30, 2020 and 2019, respectively. Total revenues arising from alternative revenue programs at SJG were $(5.8) million and $1.2 million for the three months ended September 30, 2020 and 2019, respectively, and $19.6 million and $27.2 million for the nine months ended September 30, 2020 and 2019, respectively. The SJI and SJG amounts for revenues arising from alternative revenue programs were negative during the three months ended September 30, 2020 as a result of ETG's WNC program and SJG's CIP program being in a net over-collected position during the period, which caused a net reduction in operating revenues as allowable costs were less than amounts billed.


67

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

Accounts Receivable (A)Unbilled Revenue (B)
SJI (including SJG and all other consolidated subsidiaries):
Beginning balance as of January 1, 2020$253,661 $84,821 
Ending balance as of September 30, 2020167,534 22,712 
Increase (Decrease)$(86,127)$(62,109)
Beginning balance as of January 1, 2019$337,502 $79,538 
Ending balance as of September 30, 2019179,108 18,714 
Increase (Decrease)$(158,394)$(60,824)
SJG:
Beginning balance as of January 1, 2020$84,940 $45,016 
Ending balance as of September 30, 202062,447 9,985 
Increase (Decrease)$(22,493)$(35,031)
Beginning balance as of January 1, 2019$101,572 $43,271 
Ending balance as of September 30, 201965,511 7,831 
Increase (Decrease)$(36,061)$(35,440)

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

(B) Included in Unbilled Revenues in the condensed consolidated balance sheets. All unbilled revenue for SJI and SJG arises from contracts with customers. Unbilled revenue relates to SJI's and SJG's right to receive payment for commodity delivered but not yet billed. This represents contract assets that arise from contracts with customers, which is defined in ASC 606 as the right to payment in exchange for goods already transferred to a customer, excluding any amounts presented as a receivable. The unbilled revenue is transferred to accounts receivable when billing occurs and the rights to collection become unconditional.

17.    ACQUISITIONS & BUSINESS COMBINATIONS:

There were no changes to the accounting policy with regards to business combinations described in Note 1 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019.

Catamaran/Annadale Acquisition

On August 12, 2020, SJI, through its wholly-owned subsidiary Marina, formed the Catamaran joint venture with a third party partner. Catamaran was formed for the purpose of developing, owning and operating renewable energy projects, and will support SJI's commitment to clean energy initiatives. On the same date, Catamaran purchased 100% ownership in Annadale, an entity that is constructing 2 fuel cell projects totaling 7.5 MW in Staten Island, New York. These fuel cell projects are expected to be operational and placed into service in the fourth quarter of 2020. Marina has a 93% ownership interest in Annadale, and as a result Marina fully consolidates the entity as Marina has the power to direct the activities of the entity that most significantly impact the entity’s economic performance.


68

ASC Topic 805, “Business Combinations” states that a business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. As the acquisition did not meet the definition of a business combination under ASC 805, the Company accounted for the transaction as an asset acquisition. In an asset acquisition, goodwill is not recognized, but rather any excess consideration transferred over the fair value of the net assets acquired is allocated on a relative fair value basis to the identifiable net assets. The acquisition of Annadale included a land lease and working capital.

Marina recorded $58.5 million in Nonutility Property, Plant & Equipment on the condensed consolidated balance sheets as of September 30, 2020. Of this total, Marina invested a net amount of $54.3 million as of September 30, 2020. To account for the third party partner's interest in Annadale, Marina recorded $4.2 million of non-controlling interest in stockholder's equity on the condensed consolidated balance sheets as of September 30, 2020. The major depreciable assets of the Annadale Fuel Cell Project are the fuel cell modules, which will be depreciated over their estimated useful lives of 35 years. The land lease is being amortized over the lease term of 35 years.

As these projects are not yet placed into service, no revenues have been recorded, and expenses incurred in the Company's condensed consolidated statements of income for the three and nine months ended September 30, 2020, are not material.

EnerConnex Acquisition

On August 7, 2020, SJI, through its wholly-owned subsidiary SJEI, completed its acquisition of the remaining 75% of EnerConnex for total consideration of $7.5 million. This acquisition supports the Company's initiative to expand its energy consulting business.

The acquisition of EnerConnex was accounted for as a business combination using the acquisition method of accounting in accordance with GAAP. Under the acquisition method of accounting, the total estimated purchase price of an acquisition is allocated to the net assets based on their estimated fair values. EnerConnex does not have any regulated operations.

Prior to this transaction, SJEI previously had a 25% investment in EnerConnex that was accounted for under the equity method of accounting. As this was a business combination achieved in stages, an approximately $2.0 million (pre-tax) gain was recorded as a result of remeasuring the carrying value of the previously held equity interest in EnerConnex to its acquisition date fair value. This gain was recorded in Other Income on the condensed consolidated statements of income. The acquisition date fair value of the previously held equity interest was $2.5 million and was determined based on the cash consideration exchanged for the remaining 75% of EnerConnex. The total of the $7.5 million in cash consideration for the remaining 75%, the $2.5 million acquisition date fair value of the previously held interest, and $0.2 million in assumed liabilities served as the total allocable basis shown in the preliminary purchase price allocation below.

The Company has not finalized its valuation of certain assets and liabilities in connection with the acquisition of EnerConnex. As such, the estimated measurements recorded to date are subject to change. Any changes will be recorded as adjustments to the fair value of those assets and liabilities and residual amounts will be allocated to goodwill. The final valuation adjustments may also require adjustment to the consolidated statements of operations and cash flows. The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date.


69

The purchase price for the EnerConnex acquisition has been allocated, on a preliminary basis, to the assets acquired and liabilities assumed as of the acquisition date and is as follows:


(in thousands)EnerConnex
Cash$415 
Accounts Receivable249 
Identifiable Intangible Assets (A)4,500 
Goodwill4,890 
Other Noncurrent Assets100 
     Total assets acquired10,154 
Accounts Payable
Other Current Liabilities150 
     Total liabilities assumed154 
          Total net assets acquired$10,000 

(A) The identifiable intangible asset balances shown in the table above are related to customer relationships acquired in the transaction, and are included in Other Noncurrent Assets on the condensed consolidated balance sheets.

All assets and financial results of EnerConnex are included in the Corporate & Services segment. The amount of revenues and net income included in the Company's condensed consolidated statements of income for the three and nine months ended September 30, 2020 related to EnerConnex is not material. Our results would not have been materially different if this acquisition had occurred at the beginning of the periods presented herein. The amount of acquisition-related costs for EnerConnex was not material.

Solar Projects Acquisition

SJI, through its wholly-owned subsidiary Marina, completed its acquisition of ESNJ-AL-Somers Point LLC, ESNJ-AL-Hamilton Square LLC, and ESNJ-AL-Browns Mills LLC on June 30, 2020, and acquired ESNJ-AL-Woodbury LLC on August 21, 2020. These entities own newly operational solar-generation sites located in New Jersey, and were acquired for $3.8 million in total consideration. The total purchase price equaled the fair value of property, plant, and equipment that were acquired in the transactions. Costs related to these acquisitions were not material. The purchase of these entities is in support of the New Jersey Energy Master Plan.

All assets and financial results of these entities are included in the On-Site Energy Production segment. The amount of revenues and net income included in the Company's condensed consolidated statements of income for the three and nine months ended September 30, 2020 related to these entities is not material.

AEP Acquisition

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

AEP does not have any regulated operations.

The Company has finalized its valuation of assets and liabilities in connection with the acquisition of AEP. There are no changes to the purchase price or the allocation disclosed in Note 20 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019. All assets and financial results of AEP are included in the Corporate & Services segment. The amount of revenues and net income included in the Company's condensed consolidated statements of income for the three and nine months ended September 30, 2020 related to AEP is not material. Our results would not have been materially different if this acquisition had occurred at the beginning of the prior periods presented herein. The amount of acquisition-related costs for AEP was not material.
70



18.    GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS:

GOODWILL - Goodwill represents future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration paid or transferred over the fair value of identifiable net assets acquired. Goodwill is not amortized, but instead is subject to impairment testing on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount.

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

If sufficient qualitative factors exist, potential goodwill impairment is evaluated quantitatively. Potential impairment is identified by comparing the fair value of a reporting unit to the book value, including goodwill. The Company estimates the fair value of a reporting unit using a discounted cash flow analysis.  Management also considers other methods, which includes a market multiples analysis. Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include, but are not limited to, forecasts of future operating results, discount and growth rates, capital expenditures, tax rates, and projected terminal values.

Changes in estimates or the application of alternative assumptions could produce significantly different results. If the fair value exceeds book value, goodwill of the reporting unit is not considered impaired. If the book value exceeds fair value, an impairment charge is recognized for the excess up until the amount of goodwill allocated to the reporting unit.

As a result of the COVID-19 pandemic and the resulting macroeconomic market conditions, the Company determined it necessary to perform a quantitative goodwill impairment analysis on the goodwill at the ETG reporting unit as of March 31, 2020. During the third quarter of 2020, due to a decline in market conditions for gas distributors and our performance relative to the overall sector, the Company determined it necessary to perform a quantitative goodwill impairment analysis on the goodwill at the ETG reporting unit as of September 30, 2020. There were 0 impairments recorded as a result of either interim impairment test. Should economic conditions deteriorate in future periods or remain depressed for a prolonged period of time, estimates of future cash flows and market valuation assumptions may not be sufficient to support the carrying value, requiring impairment charges in the future.

Total goodwill of $707.0 million and $702.1 million was recorded on the condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, $700.2 million was included in the ETG Utility Operations segment and $6.8 million was included in the Corporate & Services segment. As of December 31, 2019, $700.2 million was included in the ETG Utility Operations segment and $1.9 million was included in the Corporate & Services segment.

The following table summarizes the changes in goodwill for the nine months ended September 30, 2020 (in thousands):
2020
Beginning Balance, January 1$702,070 
Goodwill from EnerConnex Acquisition (see Note 17)4,890 
Ending Balance, September 30$706,960 


71

IDENTIFIABLE INTANGIBLE ASSETS - The primary identifiable intangible assets of the Company are customer relationships obtained in the acquisitions of EnerConnex and 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.

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

As of September 30, 2020
Gross CostAccumulated AmortizationIdentifiable Intangible Assets, Net
Identifiable intangible assets subject to amortization:
Customer Relationships$6,900 $(223)$6,677 
AMA19,200 (11,520)7,680 
Total$26,100 $(11,743)$14,357 

As of December 31, 2019
Gross CostAccumulated AmortizationIdentifiable Intangible Assets, Net
Identifiable intangible assets subject to amortization:
Customer Relationships$2,400 $(53)$2,347 
AMA19,200 (7,680)11,520 
Total$21,600 $(7,733)$13,867 


The net identifiable intangible asset balances shown in the table above are included in Other Noncurrent Assets on the condensed consolidated balance sheets. The increase in the net identifiable intangible asset balance from the prior year is due to customer relationships recorded in connection with the EnerConnex acquisition during the third quarter of 2020, partially offset by amortization recorded during the first nine months of 2020.

Total SJI amortization expense related to identifiable intangible assets was $1.4 million and $1.5 million for the three months ended September 30, 2020 and 2019, respectively, and $4.0 million and $4.6 million for the nine months ended September 30, 2020 and 2019, respectively. NaN impairment charges were recorded on identifiable intangible assets during the three and nine months ended September 30, 2020 or 2019.

As of September 30, 2020, SJI's estimated amortization expense related to identifiable intangible assets for each of the five succeeding fiscal years is as follows (in thousands):
Year ended December 31,SJI
2020 (remaining three months)$1,395 
2021$5,580 
2022$1,740 
2023$460 
2024$460 

The decreases in estimated amortization expense in the table above are due to the AMA ceasing in March 2022 (see Note 1).
72



19.    LEASES:

Except as described below, there have been no significant changes to the nature of the Company's leases since December 31, 2019, which are described in Note 9 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019.

As part of the Annadale acquisition (see Note 17), a real estate lease was acquired resulting in the recognition of an ROU asset and lease liability upon acquisition of $3.1 million. This arrangement is classified as a finance lease and will be amortized over the lease term of 35 years. As of September 30, 2020, SJI recognized an ROU asset and a lease liability of $3.0 million and $3.1 million, respectively, for this lease. The remainder of SJI's and SJG's real estate leases, which are comprised primarily of office space and payment centers, are classified as operating leases and represent approximately 91% and 68%, respectively, of operating lease liabilities and generally have a lease term between 5 and 15 years.

Other operating leases primarily consist of fleet vehicles (SJI only), communication towers, and general office equipment, each with various lease terms ranging between 3 and 25 years. As of September 30, 2020 and December 31, 2019, the operating lease ROU asset was $1.6 million and $1.9 million, respectively, and the lease liability balance was $1.6 million and $1.9 million, respectively, at SJI. The ROU assets and lease liabilities at SJG were not material. SJI does not have any contracts where it is considered the lessor (see "MTF" below).

The maturity of the Company’s operating lease and finance lease liabilities are as follows (in thousands):
As of September 30, 2020
SJI Consolidated
Operating Leases
SJI Consolidated
Finance Leases
SJG
Operating Leases
2020 (excluding the nine months ended September 30, 2020)$206 $36 $23 
2021534 145 39 
2022348 145 21 
2023190 145 19 
2024165 145 12 
Thereafter235 6,557 102 
Total lease payments1,678 7,173 216 
Less imputed interest109 4,122 28 
Total lease liabilities$1,569 $3,051 $188 
Included in the condensed consolidated balance sheet
Current lease liabilities (included in Other Current Liabilities)$581 $$49 
Long-term lease liabilities (included in Other Noncurrent Liabilities)988 3,051 139 
Total lease liabilities$1,569 $3,051 $188 

SJG does 0t have any finance leases.

The total operating lease costs, the components of finance lease costs, and variable lease costs for SJI were as follows (in thousands):


73

Three months ended September 30, 2020Nine months ended September 30, 2020
SJI (includes SJG and all other consolidated subsidiaries):
Total operating lease cost$364 $983 
Finance Lease cost:
   Amortization of ROU assets10 10 
   Interest expense18 18 
Variable lease cost190 491 
Total lease cost$582 $1,502 



Three months ended September 30, 2019Nine months ended September 30, 2019
SJI (includes SJG and all other consolidated subsidiaries):
Total operating lease cost$717 $2,317 
Variable lease cost270 1,070 
Total lease cost$987 $3,387 


The total operating lease costs for SJG were not material. SJG does not have any finance lease costs or variable lease costs.

Short-term lease costs were not material for either SJI or SJG. Neither SJI nor SJG had any sublease income during the three and nine months ended September 30, 2020 and 2019.

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

The supplemental cash flow information related to leases for SJI (including SJG and all other consolidated subsidiaries) were as follows (in thousands):


Three months ended September 30, 2020Nine months ended September 30, 2020
Operating cash flows from operating leases$250 $980 

Three months ended September 30, 2019Nine months ended September 30, 2019
Operating cash flows from operating leases$430 $1,230 

Operating and financing cash flows from finance leases for SJI were not material for the three and nine months ended September 30, 2020. Operating cash flows from operating leases for SJG were not material for the three and nine months ended September 30, 2020.


74

Supplemental Non-Cash Disclosures

The following table represents the weighted-average remaining lease term and weighted-average discount rate:

Weighted average remaining lease termSeptember 30, 2020
SJI (includes SJG and all other consolidated subsidiaries):
   Operating lease4.6 years
   Finance lease34.9 years
SJG:
   Operating lease9.5 years
Weighted average discount rateSeptember 30, 2020
SJI (includes SJG and all other consolidated subsidiaries):
   Operating lease3.1%
   Finance lease5.0%
SJG:
   Operating lease3.0%


MTF

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

20.    SUBSEQUENT EVENTS:

On October 1, 2020, SJG issued the Tranche C Notes related to its April 16, 2020 Note Purchase Agreement for an aggregate principal amount of $125.0 million. The notes bear interest at 3.98%. SJG intends to use these proceeds to repay short-term indebtedness and for general corporate purposes.

On October 16, 2020, SJI filed an amendment to its Certificate of Incorporation that increased the authorized number of shares of its common stock from 120,000,000 to 220,000,000 and the aggregate number of shares authorized to be issued by SJI from 122,500,000 to 222,500,000.






75

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

Introduction

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

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

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

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

Both sections of Management's Discussion - SJI and SJG - are designed to provide an understanding of each company's respective operations and financial performance and should be read in conjunction with each other as well as in conjunction with the respective company's condensed consolidated financial statements and the combined Notes to Condensed Consolidated Financial Statements in this Quarterly Report as well as SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019.

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

Forward-Looking Statements and Risk Factors — This Quarterly Report, including information incorporated by reference, contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.
All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position, expected sources of incremental margin, strategy, financing needs, future capital expenditures and the outcome or effect of ongoing litigation, are forward-looking. This Quarterly Report uses words such as "anticipate," "believe," "expect," "estimate," "forecast," "goal," "intend," "objective," "plan," "project," "seek," "strategy," "target," "will" and similar expressions to identify forward-looking statements. These forward-looking statements are based on the beliefs and assumptions of management at the time that these statements were prepared and are inherently uncertain. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These risks and uncertainties include, but are not limited to, general economic conditions on an international, national, state and local level; weather conditions in SJI’s marketing areas; changes in commodity costs; changes in the availability of natural gas; “non-routine” or “extraordinary” disruptions in SJI’s distribution system; regulatory, legislative and court decisions; competition; the availability and cost of capital; costs and effects of legal proceedings and environmental liabilities; the failure of customers, suppliers or business partners to fulfill their contractual obligations; changes in business strategies; and public health crises and epidemics or pandemics, such as a novel coronavirus (COVID-19).
These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ materially from those expressed in the forward-looking statements, are described in greater detail under the heading “Item 1A. Risk Factors” in this Quarterly Report, SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019 and in any other SEC filings made by SJI or SJG during 2019 and 2020 and prior to the filing of this Quarterly Report. No assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made. SJI and SJG undertake no obligation to revise or update any forward-looking statements, whether from new information, future events or otherwise, except required by law.


76

Critical Accounting Policies — Estimates and Assumptions — Management must make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. Actual results could differ from those estimates. Certain types of transactions presented in our condensed consolidated financial statements require a significant amount of judgment and estimation. These relate to regulatory accounting, derivatives, environmental remediation costs, pension and other postretirement benefit costs, revenue recognition, goodwill, and evaluation of equity method investments for other-than-temporary impairment. A discussion of these estimates and assumptions may be found in SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2019.

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

Our business operations continue to function effectively during the pandemic. We are continuously evaluating the global pandemic and are taking necessary steps to mitigate known risks. We continue to closely monitor developments related to the pandemic and will adjust our actions and operations as appropriate in order to continue to provide safe and reliable service to our customers and communities while keeping employees safe. Although the impact to the operations of SJI and SJG has been minimal to date as discussed below, given the pandemic remains prevalent and the situation is evolving, the future impact on the business of SJI and SJG besides what is noted below is unknown. SJI and SJG provide critical and essential services to our customers and the health and safety of our employees and customers is our first priority. SJI and SJG considered the impact of COVID-19 on the use of estimates and assumptions used for financial reporting and noted there were no material impacts on our results of operations for the three and nine months ended September 30, 2020, as operations and delivery of product to our customers has not been materially impacted. To date, SJI has not experienced significant reductions in sales volumes across our businesses, and we do not anticipate any significant reductions in sales volumes going forward, especially with the winter months approaching.

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

In order to initiate the business continuity plan, the Company has incurred operating costs for emergency supplies, cleaning services, enabling technology and other specific needs during the pandemic. SJI has incurred costs during the nine months ended September 30, 2020 of $1.7 million, with $0.6 million being recorded as Property, Plant & Equipment on the condensed consolidated balance sheets, and the remaining $1.1million recorded as Operations Expense on the condensed consolidated statements of income/(loss). SJG has recorded $0.2 million of such costs, which are recorded as Property, Plant & Equipment on the condensed balance sheets. Going forward, we expect further expenses for the above mentioned items; however, we do not anticipate these expenses to be material.

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

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


77

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

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

All accounts receivables are carried at the amount owed by customers. The provision for uncollectible accounts is established based on expected credit losses. On July 2, 2020, the BPU issued an Order authorizing New Jersey's regulated utilities to create a COVID-19-related regulatory asset by deferring on their books and records the prudently incurred incremental costs related to COVID-19 beginning on March 9, 2020 and continuing through September 30, 2021, or 60 days after the termination of the public health emergency, whichever is later. The Company will be required to file quarterly reports with the BPU, along with a petition of recovery of such incremental costs with the BPU by December 31, 2021 or within 60 days of the close of the tracking period, whichever is later. During the three and nine months ended September 30, 2020, ETG deferred $0.3 million and $9.3 million, respectively, and SJG deferred $3.0 million and $3.8 million, respectively, of incremental costs principally related to expected credit losses from uncollectibles as a result of the COVID-19 pandemic, specifically related to changes in payment patterns observed to date and consideration of macroeconomic factors. We have deemed these costs to be probable of recovery (see Note 8 to the condensed consolidated financial statements). The Utilities have suspended disconnects for nonpayment by our customers, based on orders and requests from our various regulators. These suspensions will go through at least March 15, 2021 based on an executive order issued by the Governor of New Jersey, in which water, gas and electricity providers are barred from cutting services to New Jersey residents.

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.

As a result of the COVID-19 pandemic and the resulting macroeconomic market conditions, the Company determined it necessary to perform a quantitative goodwill impairment analysis on the goodwill at the ETG reporting unit as of March 31, 2020, and again as of September 30, 2020. There were no impairments recorded as a result of either interim impairment test. See "Goodwill" below, along with Note 18 to the condensed consolidated financial statements.

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

Business Combinations/Acquisitions - SJI has made the following acquisitions over the last two years:

On August 31, 2019, SJI, through its wholly-owned subsidiary SJEI, completed its acquisition of AEP.

SJI, through its wholly-owned subsidiary Marina, acquired ESNJ-AL-Somers Point LLC, ESNJ-AL-Hamilton Square LLC, and ESNJ-AL-Browns Mills LLC on June 30, 2020, and acquired ESNJ-AL-Woodbury LLC on August 21, 2020. These entities own newly operational solar-generation sites.

On August 7, 2020, SJI, through its wholly-owned subsidiary SJEI, completed its acquisition of the remaining 75% of EnerConnex. Prior to this transaction, SJEI had a 25% interest in EnerConnex.

On August 12, 2020, SJI, through its wholly-owned subsidiary Marina, formed the Catamaran joint venture with a third party partner. On the same date, Catamaran purchased 100% ownership in Annadale, an entity that is constructing two fuel cell projects in Staten Island, New York. Marina has a 93% ownership interest in Annadale.

78

See detailed discussions concerning these acquisitions and their impact on SJI, including the accounting for business combinations, in Note 17 to the condensed consolidated financial statements.

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

Regulatory Actions — Other than the changes discussed in Note 7 to the condensed consolidated financial statements, there have been no significant regulatory actions since December 31, 2019. See detailed discussion concerning Regulatory Actions in Note 10 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019.

Environmental Remediation — There have been no significant changes to the status of SJI’s and SJG's environmental remediation efforts since December 31, 2019. See detailed discussion concerning Environmental Remediation Costs in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019.

Impairment of Long-Lived Assets — Long-lived assets that are held and used are reviewed for impairment whenever events or changes in circumstances, such as significant adverse changes in regulation, business climate or market conditions, indicate carrying values may not be recoverable. Such reviews are performed in accordance with ASC 360. An impairment loss is indicated if the total future estimated undiscounted cash flows expected from an asset are less than its carrying value. An impairment charge is measured by the difference between an asset's carrying amount and fair value with the difference recorded within Impairment Charges on the condensed consolidated statements of income/(loss). Fair values can be determined by a variety of valuation methods, including third-party appraisals, sales prices of similar assets, and present value techniques.  SJI and SJG determine the fair values by using an income approach by applying a discounted cash flow methodology to the future estimated cash flows, and include key inputs such as forecasted revenues, operating expenses and discount rates. No impairments were identified at SJI for the three and nine months ended September 30, 2020. An impairment charge of $1.3 million (pre-tax) was recorded within the on-site energy production segment at SJI for the three and nine months ended September 30, 2019. This impairment charge was related to the expected purchase price of one of the unsold solar sites being less than its carrying value. No impairments were identified at SJG for the three and nine months ended September 30, 2020 and 2019, respectively. See Note 1 to the condensed consolidated financial statements.

Goodwill - See discussion on Goodwill in Note 18 to the condensed consolidated financial statements, along with Note 21 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2019.

As discussed in Note 18 to the condensed consolidated financial statements, SJI monitors all relevant events and circumstances during the year to determine if an interim impairment test is required. Such events and circumstances include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, company specific operating results and other relevant entity-specific events affecting individual reporting units. Subsequent to December 31, 2019, certain qualitative factors were present that required the Company to perform a quantitative assessment for goodwill impairment at March 31, 2020 related to the ETG reporting unit. The qualitative factors primarily included macroeconomic conditions related to COVID-19. During the third quarter of 2020, due to a decline in market conditions for gas distributors and our performance relative to the overall sector, the Company determined it necessary to perform a quantitative goodwill impairment analysis on the goodwill at the ETG reporting unit as of September 30, 2020. There were no impairments recorded as a result of either interim impairment test.

In preparing the goodwill impairment tests, 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 September 30, 2020 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.


79

Evaluation of Equity Method Investments for Other-Than-Temporary Impairment - Our evaluation of impairment of equity method investments when conditions exist that could indicate that the fair value of the investment is less than book value includes key inputs that involve significant management judgments and estimates, including projections of the investment's cash flows, selection of a discount rate and probability weighting of potential outcomes of legal proceedings and other available options. Our evaluation also considered the current economic conditions as a result of COVID-19, noting that the timelines, potential options and legal proceedings have not been impacted. However, the legal proceedings could have unfavorable outcomes, or there could be other future unfavorable developments, such as a reduced likelihood of success from development options and legal outcomes, estimated increases in construction costs, increases in the discount rate, or further significant delays, or PennEast could conclude that the project is not viable or does not go forward as actions progress. These could impact our conclusions with respect to other-than-temporary impairment and may require that we recognize an impairment charge of up to our recorded investment in the project, net of any cash and working capital. See detailed discussion in Note 3 to the condensed consolidated financial statements, along with Note 3 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019.

Operating Segments:

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

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

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

ELK utility operations consist of natural gas distribution to residential, commercial and industrial customers in Maryland. As discussed in Note 1 to the condensed consolidated financial statements, on July 31, 2020, SJI sold ELK to a third-party buyer.

Wholesale energy operations include the activities of SJRG and SJEX.

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

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

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

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

Corporate & Services segment includes costs related to acquisitions and divestitures, 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 and ETG and, until its sale, ELK. SJI groups its nonutility operations into separate categories: Energy Group, Energy Services, Midstream and Corporate & Services. Energy Group includes wholesale energy and retail electric operations. Energy Services includes on-site energy production and appliance service operations.

80

SOUTH JERSEY INDUSTRIES, INC.

RESULTS OF OPERATIONS:

Summary:

SJI's net income for the three months ended September 30, 2020 increased $24.4 million to a net loss of $10.4 million compared with the same period in 2019. SJI's income from continuing operations for the three months ended September 30, 2020 increased $24.4 million to a net loss of $10.3 million compared with the same period in 2019. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):

The income contribution from on-site energy production at Marina for the three months ended September 30, 2020 increased $13.3 million to $13.7 million compared with the same period in 2019, primarily due to ITC recorded on assets of recently acquired fuel cell (Annadale) and solar projects as discussed in Note 1 to the condensed consolidated financial statements, along with a reduction in operations expenses.

The income contribution from the wholesale energy operations at SJRG for the three months ended September 30, 2020 increased $8.3 million to $2.3 million compared with the same period in 2019, primarily due to higher margins on daily energy trading activities.

The income contribution from gas utility operations at SJG for the three months ended September 30, 2020 increased $2.1 million to a loss of $9.5 million compared with the same period in 2019, primarily due to customer growth, the roll-in to rates of infrastructure program investments, and decreases in operations expense. These were partially offset with increases in depreciation and maintenance expenses.

The income contribution from the gas utility operations at ETG for the three months ended September 30, 2020 increased $1.3 million to a loss of $8.6 million compared with the same period in 2019, primarily due to positive margins due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019, along with customer growth. This was partially offset with higher operations and depreciation expenses.

SJI's net income for the nine months ended September 30, 2020 increased $50.6 million to $88.0 million compared with the same period in 2019. SJI's income from continuing operations for the nine months ended September 30, 2020 increased $50.5 million to $88.2 million compared with the same period in 2019. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):

The income contribution from the wholesale energy operations at SJRG for the nine months ended September 30, 2020 increased $21.1 million to $12.4 million compared with the same period in 2019, primarily due to higher margins on daily energy trading activities, along with a refund received from a third party supplier as discussed in Note 1 to the condensed consolidated financial statements. Also contributing to the increase was the change in unrealized gains and losses on forward financial contracts due to price volatility.

The income contribution from on-site energy production at Marina for the nine months ended September 30, 2020 increased $11.3 million to $10.3 million, primarily due to ITC recorded on assets of recently acquired fuel cell (Annadale) and solar projects as discussed in Note 1 to the condensed consolidated financial statements.

The income contribution from the gas utility operations at ETG for the nine months ended September 30, 2020 increased $10.2 million to $27.3 million compared with the same period in 2019, primarily due to positive margins due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019, along with customer growth and lower maintenance expenses. This was partially offset with higher operations and depreciation expenses.

The income contribution from gas utility operations at SJG for the nine months ended September 30, 2020 increased $5.6 million to $64.7 million compared with the same period in 2019, primarily due to customer growth and the roll-in to rates of infrastructure program investments. SJG's utility margin increased from its CIP mechanism as discussed in "Utility Margin - SJG Utility Operations" below. These were partially offset with increases in depreciation and maintenance expenses, along with a one-time tax adjustment resulting from SJG's Stipulation of Settlement with the BPU as part of its recent rate case filing (see Note 7 to the condensed consolidated financial statements).

81

SJI incurred $1.8 million less severance and other employee separation costs during the nine months ended September 30, 2020 compared with the same period in 2019.

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 price risk in order to substantially lock-in the profit margin that will ultimately be realized. However, both gas stored in inventory and pipeline capacity are not considered derivatives and are not subject to fair value accounting. Conversely, the derivatives used to reduce the risk associated with a change in the value of inventory and pipeline capacity are accounted for at fair value, with changes in fair value recorded in operating results in the period of change. As a result, earnings are subject to volatility as the market price of derivatives change, even when the underlying hedged value of inventory and pipeline capacity are unchanged. Additionally, volatility in earnings is created when realized gains and losses on derivatives used to mitigate commodity price risk on expected future purchases of gas injected into storage are recognized in earnings when the derivatives settle, but the cost of the related gas in storage is not recognized in earnings until the period of withdrawal. This volatility can be significant from period to period. Over time, gains or losses on the sale of gas in storage, as well as use of capacity, will be offset by losses or gains on the derivatives, resulting in the realization of the profit margin expected when the transactions were initiated.

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

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

We define Economic Earnings as: Income from continuing operations, (i) less the change in unrealized gains and plus the change in unrealized losses on non-utility derivative transactions; and (ii) less the impact of transactions, contractual arrangements or other events where management believes period to period comparisons of SJI's operations could be difficult or potentially confusing. With respect to part (ii) of the definition of Economic Earnings, several items are excluded from Economic Earnings for the three and nine months ended September 30, 2020 and 2019, consisting of the impact of pricing disputes with third parties, impairment charges recorded on solar generating facilities, costs incurred and gains recognized related to the acquisitions of EnerConnex and Annadale (fuel cell projects), costs to prepare to exit the transaction service agreement (TSA), costs incurred and gains/losses recognized on sales of solar, MTF/ACB, and ELK, costs incurred to cease operations at three landfill gas-to-energy-production facilities, severance and other employee separation costs, and a one-time tax adjustment resulting from SJG's Stipulation of Settlement with the BPU. See (A)-(F) in the table below.

Economic Earnings is a significant financial measure used by our management to indicate the amount and timing of income from continuing operations that we expect to earn after taking into account the impact of derivative instruments on the related transactions, as well as the impact of contractual arrangements and other events that management believes make period to period comparisons of SJI's operations difficult or potentially confusing. Management uses Economic Earnings to manage its business and to determine such items as incentive/compensation arrangements and allocation of resources. Specifically regarding derivatives, we believe that this financial measure indicates to investors the profitability of the entire derivative-related transaction and not just the portion that is subject to mark-to-market valuation under GAAP. We believe that considering
82

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 September 30, 2020 increased $21.5 million to a loss of $6.0 million compared with the same period in 2019. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):

The Economic Earnings contribution from on-site energy production at Marina for the three months ended September 30, 2020 increased $12.7 million to $13.8 million, primarily due to ITC recorded on assets of recently acquired fuel cell (Annadale) and solar projects as discussed in Note 1 to the condensed consolidated financial statements, along with a reduction in operations expenses.

The Economic Earnings contribution from the wholesale energy operations at SJRG for the three months ended September 30, 2020 increased $8.1 million to $7.0 million compared with the same period in 2019, primarily due to higher margins on daily energy trading activities.

The Economic Earnings contribution from gas utility operations at SJG for the three months ended September 30, 2020 increased $2.1 million to a loss of $9.5 million compared with the same period in 2019, primarily due to customer growth, the roll-in to rates of infrastructure program investments, and decreases in operations expense. These were partially offset with increases in depreciation and maintenance expenses.

The Economic Earnings contribution from gas utility operations at ETG for the three months ended September 30, 2020 increased $1.3 million to a loss of $8.6 million compared with the same period in 2019, primarily due to positive margins due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019, along with customer growth. This was partially offset with higher operations and depreciation expenses.

Economic Earnings for the nine months ended September 30, 2020 increased $40.3 million to $100.0 million compared with the same period in 2019. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):

The Economic Earnings contribution from the wholesale energy operations at SJRG for the nine months ended September 30, 2020 increased $13.8 million to $18.0 million compared with the same period in 2019, primarily due to higher margins on daily energy trading activities, along with a refund received from a third party supplier as discussed in Note 1 to the condensed consolidated financial statements.

The Economic Earnings contribution from on-site energy production at Marina for the nine months ended September 30, 2020 increased $12.9 million to $10.9 million, primarily due to ITC recorded on assets of recently acquired fuel cell (Annadale) and solar projects as discussed in Note 1 to the condensed consolidated financial statements.

The Economic Earnings contribution from gas utility operations at ETG for the nine months ended September 30, 2020 increased $10.2 million to $27.3 million compared with the same period in 2019, primarily due to positive margins due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019, along with customer growth and lower maintenance expenses. This was partially offset with higher operations and depreciation expenses.

The Economic Earnings contribution from gas utility operations at SJG for the nine months ended September 30, 2020 increased $6.8 million to $65.9 million compared with the same period in 2019, primarily due to customer growth and the roll-in to rates of infrastructure program investments. SJG's utility margin increased from its CIP mechanism as discussed in "Utility Margin - SJG Utility Operations" below. These were partially offset with increases in depreciation and maintenance expenses.


83

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 nine months ended September 30 (in thousands, except per share data):
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
(Loss) Income from Continuing Operations$(10,344)$(34,746)$88,178 $37,649 
Minus/Plus:    
Unrealized Mark-to-Market Losses on Derivatives5,904 7,324 11,847 22,362 
Loss on Property, Plant and Equipment (A)— 1,296 — 1,296 
Net Losses from a Legal Proceeding in a Pricing Dispute (B)— 359 — 2,336 
Acquisition/Sale Net Costs (Gains) (C)(77)540 1,241 703 
Other Costs (D)77 299 977 3,294 
  Income Taxes (E)(1,564)(2,605)(3,484)(7,957)
  Additional Tax Adjustments (F)— — 1,214 — 
Economic Earnings$(6,004)$(27,533)$99,973 $59,683 
(Loss) Earnings per Share from Continuing Operations$(0.10)$(0.38)$0.92 $0.41 
Minus/Plus:    
Unrealized Mark-to-Market Losses on Derivatives0.06 0.08 0.12 0.24 
Loss on Property, Plant and Equipment (A)— 0.02 — 0.02 
Net Losses from a Legal Proceeding in a Pricing Dispute (B)— — — 0.02 
Acquisition/Sale Net Costs (Gains) (C)— 0.01 0.01 0.01 
Other Costs (D)— — 0.01 0.04 
  Income Taxes (E)(0.02)(0.03)(0.03)(0.09)
  Additional Tax Adjustments (F)— — 0.01 — 
Economic Earnings per Share$(0.06)$(0.30)$1.04 $0.65 

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

Three Months Ended September 30,Nine Months Ended
September 30,
2020201920202019
(Loss) Income from Continuing Operations$(9,543)$(11,604)$64,657 $59,104 
   Plus:
   Additional Tax Adjustments (F)— — 1,214 — 
Economic Earnings$(9,543)$(11,604)$65,871 $59,104 

84


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

 Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Losses on Energy Related Commodity Contracts$(6,246)$(6,187)$(7,807)$(18,390)
Gains (Losses) on Interest Rate Contracts342 (1,137)(4,040)(3,972)
Total unrealized mark-to-market losses on derivatives(5,904)(7,324)(11,847)(22,362)
Loss on Property, Plant and Equipment (A)— (1,296)— (1,296)
Net Losses from a Legal Proceeding in a Pricing Dispute (B)— (359)— (2,336)
Acquisition/Sale Net (Costs) Gains (C)77 (540)(1,241)(703)
Other Costs (D)(77)(299)(977)(3,294)
Income Taxes (E)1,564 2,605 3,484 7,957 
Additional Tax Adjustments (F)— — (1,214)— 
Total reconciling items between (losses) income from continuing operations and economic earnings$(4,340)$(7,213)$(11,795)$(22,034)

(A) Represents impairment charges recorded on solar generating facilities in 2019, which were primarily driven by the expected purchase price of one of the unsold solar sites being less than its carrying value.

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

(C) Represents the following:
Costs incurred to acquire EnerConnex, Annadale, and four solar LLCs
Gain recorded on the step-acquisition of EnerConnex
Costs incurred and gains recognized on the sale of certain solar assets included in Assets Held for Sale in previous periods as well as MTF/ACB and ELK
Costs incurred to prepare to exit the TSA

(D) Represents severance and other employee separation costs, along with costs incurred to cease operations at three landfill gas-to-energy production facilities.

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

(F) Represents a one-time tax adjustment resulting from SJG's Stipulation of Settlement with the BPU, as part of its recent rate case filing.
85

SJI Utilities:

SJG Utility Operations:

The following tables summarize the composition of SJG utility operations operating revenues and margin for the three and nine months ended September 30 (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Utility Operating Revenues:  
Firm Sales -  
Residential$35,711 $30,267 $252,114 $237,372 
Commercial9,308 8,448 52,830 54,863 
Industrial218 352 1,797 2,887 
Cogeneration & Electric Generation1,186 1,899 2,226 2,870 
Firm Transportation -
Residential1,045 989 6,986 7,517 
Commercial5,115 4,682 26,492 26,635 
Industrial6,310 5,909 18,574 18,159 
Cogeneration & Electric Generation862 1,089 3,377 4,058 
Total Firm Revenues59,755 53,635 364,396 354,361 
Interruptible Sales— 16 62 
Interruptible Transportation207 241 823 881 
Off-System Sales5,214 6,292 24,748 35,838 
Capacity Release839 1,568 3,529 4,519 
Other174 303 554 844 
 66,190 62,039 394,066 396,505 
Less: Intercompany Sales(595)(1,174)(2,252)(3,808)
Total Utility Operating Revenues65,595 60,865 391,814 392,697 
Less:  
       Cost of Sales - Utility20,575 19,268 126,655 140,802 
       Less: Intercompany Cost of Sales(595)(1,174)(2,252)(3,808)
Total Cost of Sales - Utility (Excluding Depreciation & Amortization) (A)19,980 18,094 124,403 136,994 
Less: Depreciation & Amortization (A)25,600 23,410 75,710 68,894 
     Total GAAP Gross Margin20,015 19,361 191,701 186,809 
Add: Depreciation & Amortization (A)25,600 23,410 75,710 68,894 
Less: Conservation Recoveries (B)978 1,290 7,853 10,648 
Less: RAC Recoveries (B)6,233 5,219 18,699 15,657 
Less: EET Recoveries (B)1,896 1,024 4,260 2,170 
Less: Revenue Taxes182 175 918 1,055 
Utility Margin (C)$36,326 $35,063 $235,681 $226,173 


86

Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Utility Margin:
Residential$25,109 $20,432 $144,977 $147,244 
Commercial and Industrial13,695 12,559 60,771 64,381 
Cogeneration and Electric Generation1,120 1,223 3,471 3,491 
Interruptible19 41 62 
Off-System Sales & Capacity Release222 489 1,178 2,675 
Other Revenues457 469 1,118 1,256 
Margin Before Weather Normalization & Decoupling40,611 35,191 211,556 219,109 
CIP Mechanism(5,770)(1,248)19,593 4,008 
EET Mechanism1,485 1,120 4,532 3,056 
Utility Margin (C)$36,326 $35,063 $235,681 $226,173 

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

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

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

Operating Revenues - SJG Utility Operations

Revenues from the gas utility operations at SJG increased $4.2 million, or 6.7%, for the three months ended September 30, 2020 compared with the same period in 2019. Excluding intercompany transactions, revenues increased $4.7 million, or 7.8%, for the three months ended September 30, 2020 compared with the same period in 2019. The significant drivers for the overall change were as follows:

Total firm revenue increased $6.1 million for the three months ended September 30, 2020 compared with the same period in 2019, primarily due to customer growth and an increase in base rates during the third quarter of 2020. While changes in gas costs and BGSS recoveries/refunds fluctuate from period to period, SJG does not profit from the sale of the commodity. Therefore, corresponding fluctuations in Operating Revenue or Cost of Sales have no impact on profitability, as further discussed below under the caption "Utility Margin."

Partially offsetting these increases was OSS, which decreased $1.1 million for the three months ended September 30, 2020 compared with the same period in 2019, primarily due to decreased commodity costs as a result of lower cash market prices and lower demand. However, the impact of changes in OSS activity does not have a material impact on the earnings of SJG, as SJG is required to return 93% of the profits of such activity to its ratepayers. Earnings from OSS can be seen in the “Margin” table above.

Revenues from the gas utility operations at SJG decreased $2.4 million, or 0.6%, for the nine months ended September 30, 2020 compared with the same period in 2019. Excluding intercompany transactions, revenues decreased $0.9 million, or 0.2%, for the nine months ended September 30, 2020 compared with the same period in 2019. The significant drivers for the overall change were as follows:

Total OSS decreased $11.1 million for the nine months ended September 30, 2020 compared with the same period in 2019 primarily due to lower commodity costs as a result of lower cash market prices and lower demand, along with warmer weather during the first quarter of 2020. However, the impact of changes in OSS do not have a material impact on the earnings of SJG as discussed above.
87


Partially offsetting these decreases was firm revenue, which increased $10.0 million for the nine months ended September 30, 2020 compared with the same period in 2019 primarily due to customer growth and a higher BGSS refund to customers in 2019 compared to 2020. Partially offsetting this increase was warmer weather during the first quarter of 2020. SJG does not profit from the sale of the commodity as discussed above.

Utility Margin - SJG Utility Operations

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

Total Utility Margin increased $1.3 million, or 3.6%, and $9.5 million, or 4.2%, for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019. The increase is primarily due to customer growth and the roll-in to rates of infrastructure program investments. Also contributing to SJG's Utility Margin is the CIP tracking mechanism, which adjusts earnings when actual usage per customer experienced during the period varies from an established baseline usage per customer. As reflected in the Utility Margin table above and the CIP table in SJG's Management Discussion section, changes year over year to the CIP mechanism are primarily due to variation in customer usage compared to the same period in 2019. Partially offsetting the nine month comparative period increases is warmer weather in the first three months of 2020 compared to the same period in the prior year.

ETG Utility Operations:

The following tables summarize the composition of regulated natural gas utility operations, operating revenues and margin at ETG for the three and nine months ended September 30 (in thousands, except for degree day data).

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Utility Operating Revenues:
Firm & Interruptible Sales - 
Residential$20,388 $15,950 $157,263 $139,343 
Commercial & Industrial8,233 6,713 44,606 44,158 
Firm & Interruptible Transportation -
Residential238 141 1,510 1,136 
Commercial & Industrial8,453 6,085 31,962 25,104 
Other191 1,730 4,162 5,906 
Total Firm & Interruptible Revenues37,503 30,619 239,503 215,647 
Less: Total Cost of Sales - Utility (Excluding Depreciation & Amortization) (A)9,142 8,069 83,186 92,131 
Less: Depreciation & Amortization (A)10,187 7,335 29,368 20,539 
     Total GAAP Gross Margin18,174 15,215 126,949 102,977 
Add: Depreciation & Amortization (A)10,187 7,335 29,368 20,539 
Less: Regulatory Rider Expenses (B)2,012 1,357 11,060 4,816 
Utility Margin (C)$26,349 $21,193 $145,257 $118,700 

88

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Utility Margin:
Residential$14,281 $10,560 $93,849 $73,061 
Commercial & Industrial13,870 10,209 57,419 44,317 
Regulatory Rider Expenses (B)(1,802)424 (6,011)1,322 
Utility Margin (C)$26,349 $21,193 $145,257 $118,700 

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

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

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

ETG's business consists of natural gas distribution to residential, commercial and industrial customers in northern and central New Jersey. ETG's operating revenues consist of firm sales and transportation, as well as interruptible sales and transportation. ETG does not have any off-system sales. The Utility Margin at ETG is considered a non-GAAP measure and calculated the same as SJG as discussed under "Utility Margin" above.

Revenues from the gas utility operations at ETG increased $6.9 million, or 22.5%, and $23.9 million, or 11.1%, for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019. Utility Margin from the gas utility operations at ETG increased $5.2 million, or 24.3%, and $26.6 million, or 22.4%, for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019. These increases in revenues and Utility Margin compared to the prior year periods are primarily due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019, along with customer growth.

ELK Utility Operations:

The activities of ELK utility operations are not material to SJI's financial results. On July 31, 2020, SJI, through its wholly-owned subsidiary SJIU, closed on its transaction to sell ELK to a third-party buyer. See Note 1 to the condensed consolidated financial statements.

Nonutility:

Operating Revenues - Energy Group

Combined revenues for Energy Group, net of intercompany transactions, decreased $5.7 million, or 3.6%, to $151.0 million, and decreased $111.3 million, or 21.7%, to $402.6 million for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019. The significant drivers for the overall change were as follows:

Revenues from retail electric operations at SJE, net of intercompany transactions, decreased $13.2 million to $7.7 million and decreased $32.2 million to $29.3 million, for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019, primarily due to lower overall sales volumes as SJE chose not to renew several contracts that have expired over the last twelve months. Partially offsetting the nine month comparative period decrease was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total increase $3.0 million for the nine months ended September 30, 2020 compared with the same period in 2019.

89

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.

Revenues from wholesale energy operations at SJRG, net of intercompany transactions, increased $7.5 million to $143.3 million for the three months ended September 30, 2020 compared with the same period in 2019, primarily due to higher margins on daily energy trading activities, along with revenues earned on gas supply contracts with two electric generation facilities that began operating in 2020. These increases were partially offset by decreases in the average monthly NYMEX settle price.

Revenues from wholesale energy operations at SJRG, net of intercompany transactions, decreased $79.1 million to $373.1 million for the nine months ended September 30, 2020 compared with the same period in 2019, primarily due to decreases in the average monthly NYMEX settle price, along with maintenance and scheduled outages at several electric generation facilities during the first quarter of 2020. These nine month comparative period decreases were partially offset by higher margins on daily energy trading activities, as well as revenues earned on gas supply contracts with two electric generation facilities that began operating in 2020. Also impacting the nine month comparative period revenues was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total increase of $7.6 million for the nine months ended September 30, 2020 compared with the same period in 2019.

As discussed in Note 1 to the condensed consolidated financial statements, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues – Nonutility on the condensed consolidated statement of income (loss).

Operating Revenues - Energy Services
Combined revenues for Energy Services, net of intercompany transactions, decreased $4.8 million, or 39.7%, to $7.3 million, and decreased $20.9 million, or 55.1%, to $17.1 million for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019. The significant drivers for the overall change were as follows:
Revenues from on-site energy production at Marina, net of intercompany transactions, decreased $5.2 million to $6.1 million and decreased $22.0 million to $14.2 million for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019, primarily due to lack of revenues from MTF and ACB subsequent to the sale that was completed February 18, 2020 (see Note 1 to the condensed consolidated financial statements).

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

Gross Margin - Energy Group & Energy Services

Gross margin for the Energy Group and Energy Services businesses is a GAAP measure and is defined as revenue less all costs that are directly related to the production, sale and delivery of SJI's products and services. These costs primarily include natural gas and electric commodity costs as well as certain payroll and related benefits. On the condensed consolidated statements of income/(loss), revenue is reflected in Operating Revenues - Nonutility and the costs are reflected in Cost of Sales - Nonutility. As discussed in Note 1 to the condensed consolidated financial statements, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues - Nonutility on the condensed consolidated statements of income/(loss).

Gross margin is broken out between Energy Group and Energy Services, which are comprised of a group of segments as described in Note 6 to the condensed consolidated financial statements.
90



Gross Margin - Energy Group

Combined gross margins for Energy Group increased $9.6 million to $4.5 million and increased $30.4 million to $23.7 million for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019. The significant drivers for the overall change were as follows:

Gross margin from the wholesale energy operations at SJRG increased $10.7 million to $4.8 million, and increased $29.1 million to $23.6 million for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019, primarily due to higher margins on daily energy trading activities. Also contributing to the nine month comparative period increase was a refund received from a third party gas supplier as discussed in Note 1 to the condensed consolidated financial statements, as well as 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 $7.6 million for the nine months ended September 30, 2020, respectively, compared with the same period in 2019.

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

Gross margin from SJE’s retail electric operations decreased $1.1 million to a loss of $0.3 million for the three months ended September 30, 2020 compared with the same period in 2019, primarily due to overall lower sales volumes as SJE chose not to renew several contracts that have expired over the last twelve months. Gross margin from SJE's retail electric operations increased $1.2 million to a loss of $0.1 million for the nine months ended September 30, 2020 compared with the same period in 2019 primarily due to the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total increase of $3.0 million for the nine months ended September 30, 2020 compared with the same period in 2019. Partially offsetting this nine month comparative period increase is overall lower sales volumes as SJE did not renew several contracts that have expired over the last twelve months.

Gross Margin - Energy Services
Combined gross margins for Energy Services decreased $3.0 million to $7.0 million and decreased $15.8 million to $16.5 million for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019. The significant drivers for the overall change were as follows:
Gross margin from on-site energy production at Marina decreased $3.2 million to $6.1 million and decreased $16.6 million to $13.9 million for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019, primarily due to lack of margin from MTF and ACB subsequent to the sale that was completed February 18, 2020 (see Note 1 to the condensed consolidated financial statements).

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

91

Operating Expenses - All Segments:

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

 Three Months Ended September 30,
2020 vs. 2019
Nine Months Ended September 30,
2020 vs. 2019
SJI Utilities:
   SJG Utility Operations$(1,092)$(1,406)
   ETG Utility Operations823 9,173 
   ELK Utility Operations(125)(230)
        Subtotal SJI Utilities(394)7,537 
Nonutility: 
Energy Group:
   Wholesale Energy Operations(381)(263)
   Retail Electric Operations(283)(285)
      Subtotal Energy Group(664)(548)
Energy Services:
   On-Site Energy Production(3,092)(10,665)
   Appliance Service Operations(140)(41)
Subtotal Energy Services(3,232)(10,706)
Midstream84 312 
Corporate & Services and Intercompany Eliminations3,678 (1,545)
Total Operations Expense$(528)$(4,950)


Operations Expense

SJG utility operations expense decreased $1.1 million and $1.4 million for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019. These decreases were 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 offsetting decreases in revenue during the three and nine months ended September 30, 2020, respectively, compared with the same periods in the prior year.

The change in ETG utility operations expense for the three months ended September 30, 2020 compared with the same period in 2019 was not significant. ETG utility operations expense increased $9.2 million for the nine months ended September 30, 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 increase in revenue during the nine months ended September 30, 2020 compared with the same period in the prior year. Also contributing to the nine month comparative period increase was higher expenses in various areas, including those associated with corporate support, governance and compliance costs.

Combined operations expense for Energy Group and Energy Services decreased $3.9 million and $11.3 million for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019, primarily due to the sale of MTF and ACB (see Note 1 to the condensed consolidated financial statements).

Operations expense for the Corporate & Services segment increased $3.7 million for the three months ended September 30, 2020 compared with the same period in 2019, primarily due to an increase in corporate salary and benefit costs and corporate consulting and other professional service expenses, along with an increase in operations expense at SJEI due to the acquisitions of AEP and EnerConnex (see Note 1 to the condensed consolidated financial statements) and intercompany eliminations. The Corporate & Services segment had a $1.5 million decrease in Operations Expense for the nine months ended September 30, 2020 compared with the same period in 2019, primarily due to less severance and other employee separation costs and less costs incurred to exit the TSA, which occurred in March 2020, along with intercompany eliminations. This nine month
92

comparative period decrease was partially offset by an increase in operations expense at SJEI due to the acquisitions of AEP and EnerConnex (see Note 1 to the condensed consolidated financial statements).

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

Depreciation - Depreciation increased $3.0 million and $9.1 million for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019, primarily due to increased investment in property, plant and equipment by the gas utility operations of SJG and ETG. This was partially offset by reduced depreciation expense at Marina as a result of the MTF & ACB sale (see Note 1 to the condensed consolidated financial statements).

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

Other Income and Expense - Other income and expense increased $4.5 million and $5.4 million for the three and nine months ended September 30, 2020, respectively, compared with the same periods in 2019, primarily due to the step acquisition gain recorded in connection with the EnerConnex acquisition (see Notes 1 and 17 to the condensed consolidated financial statements), along with higher investment performance and higher SJG AFUDC income.

Interest Charges – The change in interest charges for the three months ended September 30, 2020 compared with the same period in 2019 was not significant. Interest charges increased $2.9 million for the nine months ended September 30, 2020 compared with the same period in 2019, primarily due to interest incurred on higher amounts of long-term debt outstanding at SJI and SJG.

Income Taxes  Income tax benefit increased $8.5 million for the three months ended September 30, 2020 compared to the same period in 2019 primarily due to ITC recorded on the assets of recently acquired solar and fuel cell projects (see Note 1 to the condensed consolidated financial statements), partially offset by a lower loss before income taxes during the third quarter of 2020 compared to the prior year period. Income tax expense increased $4.3 million for the nine months ended September 30, 2020 compared with the same period in 2019, primarily due to the increase in income before income taxes in 2020 compared with the prior year, along with a one-time tax adjustment at SJG resulting from SJG's Stipulation of Settlement with the BPU as part of its recent rate case filing that occurred in the first quarter of 2020 (see Note 7 to the condensed consolidated financial statements). These were partially offset with the benefits from ITC recorded on the assets of recently acquired solar and fuel cell projects that had previously commenced construction (see Note 1 to the condensed consolidated financial statements).

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

93

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 for the period were the following (in thousands):

Nine months ended September 30, 2020Nine months ended September 30, 2019
Net Cash Provided by Operating Activities$254,200 $121,416 
Net Cash Used in Investing Activities$(297,319)$(327,481)
Net Cash Provided by Financing Activities$25,040 $195,259 

Cash Flows from Operating Activities — Liquidity needs are first met with net cash provided by operating activities. Net cash provided by operating activities varies from year-to-year primarily due to the impact of weather on customer demand and related gas purchases, customer usage factors related to conservation efforts and the price of the natural gas commodity, inventory utilization, and gas cost recoveries. Cash flows provided by operating activities in the first nine months of 2020 produced more net cash than the same period in 2019, primarily due to the following: (1) cash payments related to a legal proceeding of a pricing dispute which were paid during the third quarter of 2019 and did not recur in 2020; (2) a refund from a third party gas supplier that was received in July 2020 (see Note 1 to the condensed consolidated financial statements); (3) higher ETG revenues due to favorable changes in base rates resulting from the completion of ETG's rate case in November 2019 (see "ETG Utility Operations"); (4) higher margins and increased collections on daily energy trading activities at SJRG; and (5) customer growth and lower costs experienced at SJG for environmental remediation.

Cash Flows from Investing Activities — SJI has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment. We estimate the cash outflows for investing activities, net of refinancings and returns/advances on investments from affiliates, for fiscal years 2020, 2021 and 2022 at SJI to be approximately $491.3 million, $777.3 million and $650.1 million, respectively. The high level of investing activities for 2020, 2021 and 2022 is due to the accelerated infrastructure investment programs and future capital expenditures at SJG and ETG, projected investment in PennEast in 2021 and 2022, and investments in future renewable energy projects. SJI expects to use short-term borrowings under lines of credit from commercial banks and a commercial paper program to finance these investing activities as incurred. From time to time, SJI may refinance the short-term debt with long-term debt.

Other significant investing activities of SJI during the first nine months of 2020 and 2019 were as follows:

SJI received approximately $97.0 million from the sale of MTF and ACB during the nine months ended September 30, 2020.

SJI received approximately $7.2 million and $26.4 million during the first nine months of 2020 and 2019, respectively, from the sale of certain solar assets.

SJI received approximately $15.6 million during the three and nine months ended September 20, 2020 related to the sale of ELK.

SJI paid approximately $10.9 million, net of cash acquired, for the acquisitions of EnerConnex and four solar LLC in 2020.

SJI paid $54.3 million, net of cash acquired, to acquire a 93% ownership interest in Annadale.

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

94

See Notes 1 and 17 to the consolidated financial statements for more information related to the acquisitions and sales made during the period.

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.

SJG