Notes to Condensed Consolidated Financial Statements
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL - SJI provides a variety of energy-related products and services primarily through the following wholly-owned subsidiaries:
▪SJIU is a holding company that owns SJG, ETG and ELK.
•SJG is a regulated natural gas utility which distributes natural gas in the seven southernmost counties of New Jersey.
•ETG is a regulated natural gas utility which distributes natural gas in seven counties in northern and central New Jersey.
•ELK is a regulated natural gas utility which distributes natural gas in northern Maryland. In December 2019, the Company announced it had entered into an agreement to sell ELK to a third-party buyer, pending MPSC approval (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 was MTF, which, in February 2020, was sold to a third party buyer (see "Agreement to Sell MTF & ACB" below). Also included in Marina are two solar projects which are currently listed 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:
•ACB, which owned and operated a natural gas fueled combined heating, cooling and power facility located in Atlantic City, New Jersey. ACB was included in the sale to a third party buyer (see "Agreement to Sell MTF & ACB" below).
•ACLE, BCLE, SCLE and SXLE, which own and operate landfill gas-to-energy production facilities in Atlantic, Burlington, Salem and Sussex Counties located in New Jersey.
▪SJESP receives commissions on service contracts from a third party.
▪Midstream invests in infrastructure and other midstream projects, including PennEast. See Note 3.
▪SJEI provides energy procurement and cost reduction services. AEP, an aggregator, broker and consultant in the retail energy markets, is a wholly-owned subsidiary of SJEI after completion of the AEP acquisition in August 2019.
BASIS OF PRESENTATION - SJI's condensed consolidated financial statements include the accounts of SJI, its direct and indirect wholly-owned subsidiaries (including SJG) and subsidiaries in which SJI has a controlling interest. All significant intercompany accounts and transactions have been eliminated in consolidation. SJI is reporting on a consolidated basis the operations of AEP as of the date of its acquisition, August 31, 2019.
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 March 31, 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 March 31, 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 SJG's, ETG's and ELK's rate structure and regulatory actions. SJG, ETG and ELK maintain their accounts according to the BPU's and MPSC's prescribed Uniform System of Accounts. SJG, ETG and ELK follow the accounting for regulated enterprises prescribed by ASC 980, Regulated Operations. In general, Topic 980 allows for the deferral of certain costs (regulatory assets) and creation of certain obligations (regulatory liabilities) when it is probable that such items will be recovered from or refunded to customers in future periods. See Note 8 for a detailed discussion of regulatory assets and liabilities.
ACQUISITIONS - On August 31, 2019, SJI, through its wholly-owned subsidiary SJEI, completed its acquisition of AEP for $4.0 million in total consideration. See Note 17.
AGREEMENT TO SELL SOLAR ASSETS - On June 27, 2018, the Company, through its wholly-owned subsidiary, Marina, entered into a series of agreements whereby Marina agreed to sell its portfolio of solar energy assets (the “Transaction”) to a third-party buyer. As part of the Transaction, Marina agreed to sell its distributed solar energy projects across New Jersey, Maryland, Massachusetts and Vermont (the “Projects”), along with the assets comprising the Projects. Also in connection with the Transaction, Marina is leasing back from the buyer certain of the Projects that have not yet passed the fifth anniversary of their placed-in-service dates for U.S. federal income tax purposes. The leaseback will run from the date each such project was acquired by the buyer until the later of the first anniversary of the applicable acquisition date and the fifth anniversary of the applicable placed-in-service date of the project.
During the first quarter of 2020, one Project was sold for total consideration of $7.2 million, which was the net book value of the asset on the date of sale. The solar assets related to this Project were recorded as Assets Held for Sale on the condensed consolidated balance sheets as of December 31, 2019. During the first quarter 2019, four projects were sold for total consideration of $16.1 million, with a gain recognized on these projects of less than $0.1 million.
The Company currently has two solar projects that are not part of the Transaction but are expected to be sold in 2020. The solar assets related to these two projects were recorded as Assets Held For Sale on the condensed consolidated balance sheets as of both March 31, 2020 and December 31, 2019, where they will remain until they are transferred to a buyer.
AGREEMENT TO SELL MTF & ACB - In December 2019, the Company announced it had entered into an agreement to sell MTF and ACB to a third-party buyer for an initial sales price of $100.0 million, which includes working capital. This sale closed on February 18, 2020 for a final sales price of $97.0 million, with the initial sales price being reduced by the amount of cash flows generated by MTF and ACB from October 1, 2019 through the date of closing. These unsold assets and liabilities were recorded as Assets Held for Sale and Liabilities Held For Sale, respectively, on the condensed consolidated balance sheets as of December 31, 2019.
AGREEMENT TO SELL ELK - In December 2019, the Company announced it had entered into an agreement to sell ELK to a third-party buyer for approximately $15.0 million, less any indebtedness at the time of closing, and pending MPSC approval. This transaction is expected to close in the middle of 2020. The assets and liabilities for ELK were recorded as Assets Held for Sale and Liabilities Held for Sale, respectively, on the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019.
ASSETS AND LIABILITIES HELD FOR SALE - As of both March 31, 2020 and December 31, 2019, SJI has recorded assets and liabilities held for sale as a result of the agreement to sell ELK discussed above. As of both March 31, 2020 and December 31, 2019, assets held for sale also relate to the solar projects discussed under "Agreement to Sell Solar Assets" above. As of December 31, 2019, SJI had recorded assets and liabilities held for sale as a result of the agreement to sell MTF and ACB discussed above.
As a result, SJI has recorded the following in Assets Held for Sale and Liabilities Held for Sale on the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019 (in thousands):
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March 31, 2020
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December 31, 2019
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Assets Held for Sale:
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Current Assets
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$
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—
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$
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5,365
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Net Utility Plant
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19,293
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18,692
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Net Nonutility Property, Plant & Equipment
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19,993
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110,400
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Goodwill
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59
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59
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Regulatory Assets
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455
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415
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Other Noncurrent Assets
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29
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8,509
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Total Assets Held for Sale
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$
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39,829
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$
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143,440
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Liabilities Held for Sale:
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Current Liabilities
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$
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—
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$
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916
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Asset Retirement Obligations
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2,609
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2,515
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Regulatory Liabilities
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3,025
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2,583
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Other Noncurrent Liabilities
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170
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29
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Total Liabilities Held for Sale
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$
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5,804
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$
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6,043
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SJG does not have any assets or liabilities recorded as held for sale as of March 31, 2020 or 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 indicate carrying values may not be recoverable. Such reviews are performed in accordance with ASC 350, Intangibles - Goodwill and Other, and ASC 360, Property, Plant and Equipment. An impairment loss is indicated if the total future estimated undiscounted cash flows expected from an asset are less than its carrying value. An impairment charge is measured by the difference between an asset's carrying amount and fair value with the difference recorded within Impairment Charges on the condensed consolidated statements of income. Fair values can be determined based on agreements to sell assets as well as by a variety of valuation methods, including third-party appraisals, sales prices of similar assets, and present value techniques.
We performed a qualitative assessment of the long-lived assets of SJI and SJG as of March 31, 2020 to determine whether the impact of the COVID-19 pandemic, and the resulting downturn in the market conditions, indicates that the fair value of the assets are less than their carrying value. There were no indicators noted through these qualitative assessments that we believe would lead to an other-than-temporary impairment. Further analysis was performed on goodwill, see Note 18.
No impairments were identified at either SJI or SJG for the three months ended March 31, 2020 or 2019, respectively.
OPERATING REVENUES - Gas and electric revenues are recognized in the period the commodity is delivered to customers. For retail customers (including SJG) that are not billed at the end of the month, we record an estimate to recognize unbilled revenues for gas and electricity delivered from the date of the last meter reading to the end of the month. SJRG's gas revenues are recognized in the period the commodity is delivered. Realized and unrealized gains and losses on energy-related derivative instruments are also recognized in operating revenues for SJRG. SJRG presents revenues and expenses related to its energy trading activities on a net basis in operating revenues. This net presentation has no effect on operating income or net income. The Company recognizes revenues on commissions received related to SJESP appliance service contracts from a third party on a monthly basis as these commissions are earned. Marina recognizes revenue on a monthly basis as services are provided, as lease income is earned, and for on-site energy production that is delivered to its customers.
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 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.
GAS EXPLORATION AND DEVELOPMENT - SJI capitalizes all costs associated with gas property acquisition, exploration and development activities under the full cost method of accounting. Capitalized costs include costs related to unproved properties, which are not amortized until proved reserves are found or it is determined that the unproved properties are impaired. All costs related to unproved properties are reviewed quarterly to determine if impairment has occurred. No impairment charges were recorded on these properties during the three months ended March 31, 2020 or 2019. As of both March 31, 2020 and December 31, 2019, $8.6 million related to interests in proved and unproved properties in Pennsylvania, net of amortization, is included with Nonutility Property and Equipment and Other Noncurrent Assets on the condensed consolidated balance sheets and in the Wholesale Energy Operations segment.
TREASURY STOCK - SJI uses the par value method of accounting for treasury stock. As of March 31, 2020 and December 31, 2019, SJI held 219,136 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.
BUSINESS COMBINATIONS - The Company applies the acquisition method to account for business combinations. The consideration transferred for an acquisition is the fair value of the assets transferred, the liabilities incurred or assumed by the acquirer and the equity interests issued by the acquirer. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the consideration transferred over the fair value of the identifiable net assets acquired is recorded as goodwill (see Note 17).
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 $4.25 million, plus additional profit sharing as defined in the AMA. The amounts received by ETG will be credited to its BGSS clause and returned to its ratepayers. The total purchase price was allocated as follows (in thousands):
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Natural Gas in Storage
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$
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9,685
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Intangible Asset
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19,200
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Profit Sharing - Other Liabilities
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(17,546)
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Total Consideration
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$
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11,339
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As of March 31, 2020 and December 31, 2019, the balance of the intangible asset is $10.2 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 March 31, 2020 and December 31, 2019, the balance in the liability is $10.3 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.
CURRENT PORTION OF LONG-TERM DEBT & SHORT-TERM BORROWINGS - As of March 31, 2020, the Company has $470.4 million of long-term debt that is due within one year, along with $697.3 million of notes payable which includes borrowings under the commercial paper program and revolving credit facilities (see Note 10). SJI has refinanced $600.0 million of these short-term amounts, including $400.0 million at SJG, in April 2020 (see Notes 14 and 20). SJI expects to further reduce its debt and notes payable over the next twelve months using cash provided from the sale of ELK and the remaining solar assets as discussed above. The remaining portion of long-term debt that is due within one year is expected to be paid by utilizing funds provided from refinancing activities and from the Company's revolving credit facilities.
Although there can be no assurance, management believes that actions presently being taken to pay off or refinance the long-term debt and borrowings that are due within the next year will be successful, as the Company has been successful in refinancing debt in the past. No adjustments have been made to the financial statements to account for this uncertainty.
AOCL - SJI and SJG release income tax effects from AOCL on an individual unit of account basis.
NEW ACCOUNTING PRONOUNCEMENTS - Other than as described below, no new accounting pronouncement had, or is expected to have, a material impact on the condensed consolidated financial statements of SJI, or the condensed financial statements of SJG.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. The amendments in this update are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. SJI and SJG adopted this guidance on January 1, 2020, consistent with the effective date. Adoption of this guidance did not have an impact on the financial statement results of SJI or SJG.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on the timing of liquidation of an investee's assets and the description of measurement uncertainty at the reporting date. Entities are now required to disclose: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements; and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Further, the standard eliminates disclosure requirements with respect to: (1) the transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation process for Level 3 fair value measurements. The standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The new disclosure requirement for unrealized gains and losses, the range and weighted average of significant unobservable inputs and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively to all periods presented upon their effective date. SJI and SJG adopted this guidance on January 1, 2020, consistent with the effective date. Adoption of this guidance did not have an impact on the financial statement results of SJI or SJG.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plan. This ASU eliminates requirements for certain disclosures such as the amount and timing of plan assets expected to be returned to the employer and the amount of future annual benefits covered by insurance contracts. The standard added new disclosures such as for sponsors of the defined benefit plans to provide information relating to the weighted-average interest crediting rate for cash balance plans and other plans with promised interest crediting rates and an explanation for significant gains or losses related to changes in the benefit obligations for the period. The standard is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this ASU provide codification improvements and further clarification on several topics, including ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, as well as ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10). Since SJI and SJG have adopted the amendments in ASU 2017-12 (with no impact to the financial statements results of SJI or SJG) as of April 25, 2019 (the issuance date of ASU 2019-04), the effective date for the amendments to Topic 815 contained in ASU 2019-04 is as of the beginning of the first annual reporting period beginning after April 25, 2019. Early adoption is permitted, including adoption on any date on or after April 25, 2019. The amendments are effective for fiscal years and interim periods beginning after December 15, 2019. SJI and SJG adopted this guidance on January
1, 2020, consistent with the effective date. Adoption of this guidance did not have an impact on the financial statement results of SJI or SJG. See ASU 2016-13 below for more detail.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to develop credit loss estimates. An entity will apply the amendment through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. After the issuance of ASU 2016-13, the FASB issued additional guidance regarding Topic 326 as follows:
•In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326). The amendments in this ASU provide optional targeted transition relief for entities adopting the provisions of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in ASU 2019-05 provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments - Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, Fair Value Measurement - Overall, and 825-10.
•In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. The amendments in this ASU clarify that the contractual term of a net investment in a lease determined in accordance with Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. The amendments in this ASU related to Subtopic 860-20, Transfers and Servicing - Sales of Financial Assets, clarify that when an entity regains control of financial assets sold, an allowance for credit losses should be recorded in accordance with Topic 326.
The new guidance in ASU 2016-13, as well as all amendments discussed above, was effective for the Company beginning on January 1, 2020. The impact of adoption did not result in an adjustment to retained earnings as of January 1, 2020 nor did it have a material impact on the financial statement results of SJI or SJG, given that the current expected lifetime loss estimates were not materially different from the reserves already in place.
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this ASU clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments in this ASU also clarify that for the purposes of applying Topic 815, an entity should not consider whether, upon the settlement of a forward contract or exercise of a purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. The standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, for public companies. Early adoption is permitted, including early adoption in an interim period. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide various optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments in this Update must be applied prospectively for all eligible contract modifications for that Topic or Industry
Subtopic. An entity may elect to apply the amendments in this Update to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. Management has not yet adopted this guidance and is currently determining when to adopt it for SJI and SJG, and the impact that adoption of this guidance will have on the financial statements of SJI and SJG.
AMENDED SEC RULES - In March 2020, the SEC adopted final rules that amend the financial disclosure requirements for subsidiary issuers and guarantors of registered debt securities in Rule 3-10 of Regulation S-X. The SEC also amended the disclosure requirements for affiliates whose securities are pledged as collateral for registered securities in Rule 3-16 of Regulation S-X.
As adopted, Rule 3-10 will be amended and partly relocated to new Rule 13-01, and the requirements in Rule 3-16 will be replaced with the requirements in new Rule 13-02. New Rules 13-01 and 13-02 will comprise new Article 13 in Regulation S-X. The amendments are intended to improve the rules by requiring disclosures that focus investors on the information that is material given the specific facts and circumstances and by making the disclosures easier to understand. The amendments are also intended to reduce the costs and burdens of compliance for registrants. Under the amendments, Rule 3-10 will continue to permit the omission of separate financial statements of subsidiary issuers and guarantors when certain conditions are met and the parent company provides supplemental financial and non-financial disclosure about the subsidiary issuers and/or guarantors and the guarantees. Similar to the existing rule, the amended rule will provide the conditions that must be met in order to omit separate subsidiary issuer or guarantor financial statements. New Rule 13-01 specifies the accompanying amended disclosure requirements. The disclosure requirements in Rule 3-16 will be replaced with the amended disclosure requirements in new Rule 13-02 (although existing Rule 3-16 will remain in place for transitional purposes). Among other things, these amendments will:
•Replace the condition that a subsidiary issuer or guarantor be 100%-owned by the parent company with a condition that it be consolidated in the parent company's consolidated financial statements;
•Replace condensed consolidating financial information, as specified in existing Rule 3-10, with certain new financial and non-financial disclosures. The amended financial disclosures will consist of summarized financial information, as defined in Rule 1-02(bb)(1) of Regulation S-X, of the issuers and guarantors, which may be presented on a combined basis, and reduce the number of periods presented. The amended non-financial disclosures, among other matters, will expand the qualitative disclosures about the guarantees and the issuers and guarantors. Consistent with the existing rule, disclosure of additional information about each guarantor will be required if it would be material for investors to evaluate the sufficiency of the guarantee;
•Permit the amended disclosures to be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in all filings;
•Require the amended financial and non-financial disclosures for as long as an issuer or guarantor has an Exchange Act reporting obligation with respect to the guaranteed securities rather than for as long as the guaranteed securities are outstanding;
•Replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with amended financial and non-financial disclosures about the affiliate(s) and the collateral arrangement as a supplement to the consolidated financial statements of the registrant that issues the collateralized security. The registrant will be permitted to provide the amended financial and non-financial disclosures outside the footnotes to its audited annual and unaudited interim consolidated financial statements in all filings; and
•Replace the requirement to provide disclosure only when the pledged securities meet or exceed a numerical threshold relative to the securities registered or being registered with a requirement to provide the proposed financial and non-financial disclosures in all cases, unless they are immaterial.
The amendments will be effective on January 4, 2021; however, voluntary compliance with the final amendments will be accepted in advance of the January 4, 2021 effective date. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.
2. STOCK-BASED COMPENSATION PLAN:
Under SJI's 2015 Omnibus Equity Compensation Plan (Plan), shares may be issued to SJI’s officers (Officers), non-employee directors (Directors) and other key employees. No options were granted or outstanding during the three months ended March 31, 2020 and 2019. No stock appreciation rights have been issued under the Plan. No restricted shares were granted during the three months ended March 31, 2020 or 2019 to Officers and other key employees. Restricted shares to Officers and other key employees are expected to be granted in the second quarter of 2020. Performance-based restricted shares vest over a three-year period and are subject to SJI achieving certain market and earnings-based performance targets, which can cause the actual amount of shares that ultimately vest to range from 0% to 200% of the original shares granted.
SJI grants time-based shares of restricted stock, one-third of which vest annually over a three-year period and which are limited to a 100% payout. 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. No time-based restricted stock was granted during the three months ended March 31, 2020 or 2019. Time-based restricted shares to Officers and other key employees are expected to be granted in the second quarter of 2020.
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 three months ended March 31, 2020 and 2019, SJI granted 36,829 and 30,028 restricted shares, respectively, to Directors. Shares issued to Directors vest over twelve months and contain no performance conditions. As a result, 100% of the shares granted generally vest.
The following table summarizes the nonvested restricted stock awards outstanding for SJI at March 31, 2020 and the assumptions used to estimate the fair value of the awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
Shares Outstanding
|
|
Fair Value Per Share
|
|
Expected Volatility
|
|
Risk-Free Interest Rate
|
|
Officers & Key Employees -
|
2018 - TSR
|
|
49,014
|
|
|
$
|
31.05
|
|
|
21.9
|
%
|
|
2.00
|
%
|
|
|
2018 - CEGR, Time
|
|
64,430
|
|
|
$
|
31.23
|
|
|
N/A
|
|
|
N/A
|
|
|
|
2019 - TSR
|
|
36,642
|
|
|
$
|
32.88
|
|
|
23.2
|
%
|
|
2.40
|
%
|
|
|
2019 - CEGR, Time
|
|
104,712
|
|
|
$
|
31.38
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors -
|
2020
|
|
36,829
|
|
|
$
|
32.42
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility is based on the actual volatility of SJI’s share price over the preceding three-year period as of the valuation date. The risk-free interest rate is based on the zero-coupon U.S. Treasury Bond, with a term equal to the three-year term of the Officers’ and other key employees’ restricted shares. As notional dividend equivalents are credited to the holders during the three-year service period, no reduction to the fair value of the award is required. As the Directors’ restricted stock awards contain no performance conditions and dividends are paid or credited to the holder during the requisite service period, the fair value of these awards are equal to the market value of the shares on the date of grant.
The following table summarizes the total stock-based compensation cost to SJI for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Officers & Key Employees
|
$
|
1,212
|
|
$
|
750
|
|
|
|
|
|
|
Directors
|
299
|
|
202
|
|
|
|
|
|
|
Total Cost
|
1,511
|
|
952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
|
(122)
|
|
(81)
|
|
|
|
|
|
|
Net Expense
|
$
|
1,389
|
|
$
|
871
|
|
|
|
|
|
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 March 31, 2020, there was $4.9 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 1.4 years.
The following table summarizes information regarding restricted stock award activity for SJI during the three months ended March 31, 2020, excluding accrued dividend equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers and Other Key Employees
|
|
Directors
|
|
Weighted
Average
Fair Value
|
|
Nonvested Shares Outstanding, January 1, 2020
|
402,146
|
|
|
30,961
|
|
|
$
|
31.50
|
|
|
Granted
|
—
|
|
|
36,829
|
|
|
$
|
32.42
|
|
|
Cancelled/Forfeited
|
(10,385)
|
|
|
—
|
|
|
$
|
31.59
|
|
|
Vested
|
(136,963)
|
|
|
(30,961)
|
|
|
$
|
31.49
|
|
|
Nonvested Shares Outstanding, March 31, 2020
|
254,798
|
|
|
36,829
|
|
|
$
|
31.61
|
|
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. However, the targets for the time-based grants were met. As a result, during the three months ended March 31, 2020, SJI awarded 47,617 shares to its Officers and other key employees at a market value of $1.4 million. During the three months ended March 31, 2019, SJI awarded 122,265 shares at a market value of $3.6 million. These awarded amounts for 2020 and 2019 include awards for previously deferred shares that were paid during the three month periods.
During the three months ended March 31, 2020 and 2019, SJI also awarded 30,961 and 26,416 shares to its Directors at a market value of $0.8 million for both periods.
SJI has a policy of issuing new shares to satisfy its obligations under the Plan; therefore, there are no cash payment requirements resulting from the normal operation of the Plan. However, a change in control could result in such shares becoming non-forfeitable or immediately payable in cash. At the discretion of the Officers, Directors and other key employees, the receipt of vested shares can be deferred until future periods. These deferred shares are included in Treasury Stock on the condensed consolidated balance sheets.
SJG - Officers and other key employees of SJG participate in the stock-based compensation plans of SJI. During the three months ended March 31, 2020 and 2019, no shares of restricted stock were granted to SJG officers and other key employees. Restricted shares to Officers and other key employees are expected to be granted in the second quarter of 2020. The cost of outstanding stock awards for SJG during both the three months ended March 31, 2020 and 2019 was $0.1 million. Approximately 70% of these costs were capitalized on SJG's condensed balance sheets to Utility Plant.
3. AFFILIATIONS, DISCONTINUED OPERATIONS AND RELATED-PARTY TRANSACTIONS:
AFFILIATIONS — The following affiliated entities are accounted for under the equity method:
PennEast - Midstream has a 20% investment in PennEast. The following events have occurred with respect to PennEast in recent months:
•On September 10, 2019, the U.S. Court of Appeals for the Third Circuit ruled that PennEast does not have eminent domain authority over NJ state-owned lands. A Petition for Rehearing En Banc was denied by the U.S. Court of Appeals for the Third Circuit on November 5, 2019.
•On October 8, 2019, the NJDEP denied and closed PennEast’s application for several permits without prejudice, citing the Third Circuit Court decision. On October 11, 2019, PennEast submitted a letter to the NJDEP objecting to its position that the application is administratively incomplete. PennEast's objections were rejected by the NJDEP on November 18, 2019.
•In December 2019, PennEast asked the FERC for a two-year extension to construct the pipeline.
•On January 30, 2020, the FERC voted to approve PennEast’s petition for a declaratory order and expedited action requesting that the body issue an order interpreting the Natural Gas Act’s eminent domain authority. On the same day, PennEast filed an amendment with FERC to construct PennEast in two phases. Phase one consists of construction of a pipeline in Pennsylvania from the eastern Marcellus Shale region in Luzerne County that would terminate in Northampton County. Phase two includes construction of the remaining original certificated route in Pennsylvania and New Jersey. Construction is expected to begin following approval by FERC of the phased approach and receipt of any remaining governmental and regulatory permits.
•On February 18, 2020, PennEast filed a Petition for a Writ of Certiorari with the Supreme Court of the United States ("petition") to review the September 10, 2019 Third Circuit decision.
•On February 20, 2020, FERC granted PennEast’s request for a two-year extension to complete the construction of the pipeline.
•On April 14, 2020, The US Supreme Court ordered the state of New Jersey to respond to PennEast's petition. The court directed NJ respondents, including state agencies and the NJ Conservation Foundation, to answer the petition by PennEast, with a response due June 2.
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 $85.0 million and $82.7 million as of March 31, 2020 and December 31, 2019, respectively. At March 31, 2020, the Company evaluated its investment in PennEast for impairment and determined there is not an other-than-temporary impairment, and have not recorded any impairment charge to reduce the carrying value of our investment. Our evaluation considered that the pending legal proceedings are at very early stages, 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, to the extent that the legal proceedings have unfavorable outcomes, or if PennEast concludes that the project is not viable or does not go forward as actions progress, our conclusions with respect to other-than-temporary impairment could change and may require that we recognize an impairment charge of up to our recorded investment in the project, net of any cash and working capital. 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 $5.2 million and $13.9 million for the three months ended March 31, 2020 and 2019, respectively.
EnerConnex - SJEI has a 25% investment in EnerConnex, which is a retail and wholesale broker and consultant that matches end users with suppliers for the procurement of natural gas and electricity.
During the first three months of both 2020 and 2019, SJI made net investments in unconsolidated affiliates of $2.1 million. As of March 31, 2020 and December 31, 2019, the outstanding balance of Notes Receivable – Affiliate was $15.5 million and $18.1 million, respectively. These Notes Receivable-Affiliates balances are broken out as follows:
•As of both March 31, 2020 and December 31, 2019, $13.1 million of notes are related to Energenic, which are secured by Energenic's cogeneration assets for energy service projects, accrue interest at 7.5% and are to be repaid through 2025. As of both March 31, 2020 and December 31, 2019, $4.4 million of interest has been accrued and is recorded in Accounts Receivable on the condensed consolidated balance sheets. No payments have been made on this note as of March 31, 2020.
•As of March 31, 2020 and December 31, 2019, the remaining $2.4 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 March 31, 2020, SJI had a net asset of approximately $90.0 million included in Investment in Affiliates on the condensed consolidated balance sheets related to equity method investees, in addition to Notes Receivable – Affiliate as discussed above. SJI’s maximum exposure to loss from these entities as of March 31, 2020, is limited to its combined investments in these entities and the Notes Receivable-Affiliate in the aggregate amount of $105.5 million.
DISCONTINUED OPERATIONS - Discontinued Operations consist of the environmental remediation activities related to the properties of SJF and the product liability litigation and environmental remediation activities related to the prior business of Morie. SJF is a subsidiary of EMI, an SJI subsidiary, which previously operated a fuel oil business. Morie is the former sand mining and processing subsidiary of EMI. EMI sold the common stock of Morie in 1996.
SJI conducts tests annually to estimate the environmental remediation costs for these properties (see Note 11).
Summarized operating results of the discontinued operations for the three months ended March 31, 2020 and 2019, were (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Loss before Income Taxes:
|
|
|
|
|
|
|
|
|
Sand Mining
|
$
|
(19)
|
|
|
$
|
(21)
|
|
|
|
|
|
|
Fuel Oil
|
(56)
|
|
|
(57)
|
|
|
|
|
|
|
Income Tax Benefits
|
16
|
|
|
16
|
|
|
|
|
|
|
Loss from Discontinued Operations — Net
|
$
|
(59)
|
|
|
$
|
(62)
|
|
|
|
|
|
|
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
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Operating Revenues/Affiliates:
|
|
|
|
|
|
|
|
|
SJRG
|
$
|
1,029
|
|
|
$
|
1,284
|
|
|
|
|
|
|
Marina
|
60
|
|
|
116
|
|
|
|
|
|
|
Other
|
20
|
|
|
20
|
|
|
|
|
|
|
Total Operating Revenue/Affiliates
|
$
|
1,109
|
|
|
$
|
1,420
|
|
|
|
|
|
Related-party transactions involving SJG, excluding pass-through items, included in SJG's Cost of Sales and Operating Expenses were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Costs of Sales/Affiliates (Excluding depreciation and amortization)
|
|
|
|
|
|
|
|
|
SJRG*
|
$
|
126
|
|
|
$
|
3,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations Expense/Affiliates:
|
|
|
|
|
|
|
|
|
SJI
|
$
|
5,610
|
|
|
$
|
4,726
|
|
|
|
|
|
|
SJIU
|
955
|
|
|
—
|
|
|
|
|
|
|
Millennium
|
827
|
|
|
763
|
|
|
|
|
|
|
Other
|
443
|
|
|
535
|
|
|
|
|
|
|
Total Operations Expense/Affiliates
|
$
|
7,835
|
|
|
$
|
6,024
|
|
|
|
|
|
*These costs are included in either SJG's Cost of Sales on the condensed statements of income, or Regulatory Assets on the condensed balance sheets. As discussed in Note 1 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues – Nonutility on the condensed consolidated income statement.
4. COMMON STOCK:
The following shares were issued and outstanding for SJI:
|
|
|
|
|
|
|
|
|
2020
|
|
Beginning Balance, January 1
|
92,394,155
|
|
|
New Issuances During the Period:
|
|
|
|
|
|
|
Stock-Based Compensation Plan
|
49,770
|
|
|
Ending Balance, March 31
|
92,443,925
|
|
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 a decrease of $0.4 million on the condensed consolidated balance sheets from December 31, 2019 to March 31, 2020 resulting from the reversal of previously recorded costs associated with TSR and CEGR-based grants for which performance goals were not met (see Note 2).
There were 2,339,139 shares of SJG's common stock (par value $2.50 per share) outstanding as of March 31, 2020. SJG did not issue any new shares during the period. SJIU owns all of the outstanding common stock of SJG.
CONVERTIBLE UNITS - In 2018, SJI issued and sold 5,750,000 Equity Units, initially in the form of Corporate Units, which included 750,000 Corporate Units pursuant to the underwriters’ option. Each Corporate Unit has a stated amount of $50 and is comprised of (a) a purchase contract obligating the holder to purchase from the Company, and for the Company to sell to the holder for a price in cash of $50, on the purchase contract settlement date, or April 15, 2021, subject to earlier termination or settlement, a certain number of shares of common stock; and (b) a 1/20, or 5%, undivided beneficial ownership interest in $1,000 principal amount of SJI’s 2018 Series A 3.70% Remarketable Junior Subordinated Notes due 2031. SJI will pay the holder quarterly contract adjustment payments at a rate of 3.55% per year on the stated amount of $50 per Equity Unit, in respect of each purchase contract, subject to the Company's right to defer these payments. The net proceeds, after amortization of the underwriting discounts, are recorded as Long-Term Debt on the condensed consolidated balance sheets.
SJI's EPS — SJI's Basic EPS is based on the weighted-average number of common shares outstanding. The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 111,077 and 100,012 for the three months ended March 31, 2020 and 2019, respectively. These additional shares relate to SJI's restricted stock as discussed in Note 2, along with the impact of the Equity Units discussed above, accounted for under the treasury stock method.
DIVIDENDS PER SHARE — SJI's dividends per share were $0.30 and $0.29 for the three months ended March 31, 2020 and 2019, respectively. SJG did not declare or pay any dividends to SJI during the three months ended March 31, 2020 or 2019.
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 2020. SJI does not intend to issue equity capital via the DRP in 2020.
5. FINANCIAL INSTRUMENTS:
RESTRICTED INVESTMENTS — SJI and SJG maintain margin accounts with certain counterparties to support their risk management activities associated with hedging commodities. The balances required to be held in these margin accounts increase as the net value of the outstanding energy-related contracts with the respective counterparties decrease. As of March 31, 2020 and December 31, 2019, SJI's balances (including SJG) in these accounts totaled $21.7 million and $22.0 million, respectively, held by the counterparties, which is recorded in Restricted Investments on the condensed consolidated balance sheets. As of March 31, 2020 and December 31, 2019, SJG's balance held by the counterparties totaled $5.1 million and $4.0 million and was recorded in Restricted Investments on the condensed balance sheets.
The carrying amounts of the Restricted Investments for both SJI and SJG approximate their fair values at March 31, 2020 and December 31, 2019, which would be included in Level 1 of the fair value hierarchy (see Note 13).
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
Balance Sheet Line Item
|
|
SJI
|
SJG
|
|
Cash and Cash Equivalents
|
|
$
|
10,339
|
|
$
|
2,560
|
|
|
Restricted Investments
|
|
21,694
|
|
5,086
|
|
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
|
|
$
|
32,033
|
|
$
|
7,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
Balance Sheet Line Item
|
|
SJI
|
SJG
|
|
Cash and Cash Equivalents
|
|
$
|
6,417
|
|
$
|
2,678
|
|
|
Restricted Investments
|
|
21,964
|
|
4,073
|
|
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
|
|
$
|
28,381
|
|
$
|
6,751
|
|
NOTES RECEIVABLE-AFFILIATES - See Note 3.
LONG-TERM RECEIVABLES - SJG provides financing to customers for the purpose of attracting conversions to natural gas heating systems from competing fuel sources. The terms of these loans call for customers to make monthly payments over periods ranging from five to ten years, with no interest. The carrying amounts of such loans were $3.4 million and $3.7 million as of March 31, 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 $0.5 million as of both March 31, 2020 and December 31, 2019. 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 $36.5 million and $33.5 million as of March 31, 2020 and December 31, 2019, respectively. On the condensed consolidated balance sheets of SJI and SJG, $5.1 million and $4.6 million of the current portion of EET/EEP loans receivable is reflected in Accounts Receivable as of March 31, 2020 and December 31, 2019, respectively, and $31.4 million and $28.9 million of the non-current portion is reflected in Contract Receivables as of March 31, 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 under ASC 326.
The carrying amounts of these receivables approximate their fair value at March 31, 2020 and December 31, 2019, which would be included in Level 2 of the fair value hierarchy (see Note 13).
CREDIT RISK - As of March 31, 2020, SJI had approximately $16.9 million, or 37.8%, of the current and noncurrent Derivatives – Energy Related Assets transacted with two counterparties. These counterparties are investment-grade rated.
FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE - The fair value of a financial instrument is the market price to sell an asset or transfer a liability at the measurement date. The carrying amounts of SJI's and SJG's financial instruments approximate their fair values at March 31, 2020 and December 31, 2019, except as noted below.
•For Long-Term Debt, in estimating the fair value, SJI and SJG use the present value of remaining cash flows at the balance sheet date. SJI and SJG based the estimates on interest rates available at the end of each period for debt with similar terms and maturities (Level 2 in the fair value hierarchy, see Note 13).
•The estimated fair values of SJI's long-term debt (which includes SJG and all consolidated subsidiaries), including current maturities, as of March 31, 2020 and December 31, 2019, were $2.59 billion and $2.73 billion, respectively. The carrying amounts of SJI's long-term debt, including current maturities, as of both March 31, 2020 and December 31, 2019, were $2.54 billion. SJI's carrying amounts as of March 31, 2020 are net of unamortized debt issuance costs of $26.0 million and unamortized debt discounts of $5.3 million. SJI's carrying amounts as of December 31, 2019 are net of unamortized debt issuance costs of $25.5 million and unamortized debt discounts of $5.3 million.
•The estimated fair values of SJG's long-term debt, including current maturities, as of March 31, 2020 and December 31, 2019, were $969.0 million and $915.2 million, respectively. The carrying amounts of SJG's long-term debt, including current maturities, as of March 31, 2020 and December 31, 2019, were $964.6 million and $965.1 million, respectively. The carrying amounts as of March 31, 2020 and December 31, 2019 are net of unamortized debt issuance costs of $6.7 million and $6.3 million, respectively.
OTHER FINANCIAL INSTRUMENTS - The carrying amounts of SJI's and SJG's other financial instruments approximate their fair values at March 31, 2020 and December 31, 2019.
6. SEGMENTS OF BUSINESS:
SJI operates in several different reportable operating segments which reflect the financial information regularly evaluated by the CODM. These segments are as follows:
•SJG utility operations consist primarily of natural gas distribution to residential, commercial and industrial customers in southern New Jersey.
•ETG utility operations consist of natural gas distribution to residential, commercial and industrial customers in northern and central New Jersey.
•ELK utility operations consist of natural gas distribution to residential, commercial and industrial customers in Maryland. As discussed in Note 1, SJI entered into an agreement to sell ELK to a third party, with expected closing in the middle of 2020.
•Wholesale energy operations include the activities of SJRG and SJEX.
•Retail electric operations at SJE consist of electricity acquisition and transportation to commercial, industrial and residential customers.
•On-site energy production consists of MTF and ACB, which as discussed in Note 1, were sold on February 18, 2020. This segment also includes other energy-related projects, including three solar projects, one of which was sold during the three months ended March 31, 2020 as discussed in Note 1. Also included in this segment are the activities of ACLE, BCLE, SCLE and SXLE.
•Appliance service operations includes SJESP, which receives commissions on service contracts from a third party.
•Midstream was formed to invest in infrastructure and other midstream projects, including a current project to build a natural gas pipeline in Pennsylvania and New Jersey.
•Corporate & Services segment includes costs related to the Acquisition, along with other unallocated costs. Also included in this segment are the results of SJEI.
•Intersegment represents intercompany transactions among the above SJI consolidated entities.
SJI groups its utility businesses under its wholly-owned subsidiary SJIU. This group consists of gas utility operations of SJG, ETG and ELK. SJI groups its nonutility operations into separate categories: Energy Group and Energy Services. Energy Group includes wholesale energy and retail electric operations. Energy Services includes on-site energy production and appliance service operations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
Information about SJI’s operations in different reportable operating segments is presented below (in thousands). The results for AEP are included in the Corporate & Services segment from the acquired date of August 31, 2019. Further, the results and balances for On-Site Energy Production are impacted by the sales of solar assets and the sale of MTF and ACB.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Operating Revenues:
|
|
|
|
|
|
|
|
|
SJI Utilities:
|
|
|
|
|
|
|
|
|
SJG Utility Operations
|
240,694
|
|
|
$
|
272,198
|
|
|
|
|
|
|
ETG Utility Operations
|
144,157
|
|
|
140,174
|
|
|
|
|
|
|
ELK Utility Operations
|
3,118
|
|
|
3,374
|
|
|
|
|
|
|
Subtotal SJI Utilities
|
387,969
|
|
|
415,746
|
|
|
|
|
|
|
Energy Group:
|
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
128,444
|
|
|
190,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Electric Operations
|
12,225
|
|
|
22,691
|
|
|
|
|
|
|
Subtotal Energy Group
|
140,669
|
|
|
212,698
|
|
|
|
|
|
|
Energy Services:
|
|
|
|
|
|
|
|
|
On-Site Energy Production
|
6,988
|
|
|
11,330
|
|
|
|
|
|
|
Appliance Service Operations
|
489
|
|
|
531
|
|
|
|
|
|
|
Subtotal Energy Services
|
7,477
|
|
|
11,861
|
|
|
|
|
|
|
Corporate and Services
|
13,710
|
|
|
9,371
|
|
|
|
|
|
|
Subtotal
|
549,825
|
|
|
649,676
|
|
|
|
|
|
|
Intersegment Sales
|
(15,713)
|
|
|
(12,378)
|
|
|
|
|
|
|
Total Operating Revenues
|
$
|
534,112
|
|
|
$
|
637,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
SJI Utilities:
|
|
|
|
|
|
|
|
|
SJG Utility Operations
|
$
|
104,645
|
|
|
$
|
98,345
|
|
|
|
|
|
|
ETG Utility Operations
|
54,062
|
|
|
44,149
|
|
|
|
|
|
|
ELK Utility Operations
|
535
|
|
|
630
|
|
|
|
|
|
|
Subtotal SJI Utilities
|
159,242
|
|
|
143,124
|
|
|
|
|
|
|
Energy Group:
|
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
7,412
|
|
|
(2,506)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Electric Operations
|
(1,221)
|
|
|
(1,656)
|
|
|
|
|
|
|
Subtotal Energy Group
|
6,191
|
|
|
(4,162)
|
|
|
|
|
|
|
Energy Services:
|
|
|
|
|
|
|
|
|
On-Site Energy Production
|
(296)
|
|
|
118
|
|
|
|
|
|
|
Appliance Service Operations
|
439
|
|
|
595
|
|
|
|
|
|
|
Subtotal Energy Services
|
143
|
|
|
713
|
|
|
|
|
|
|
Corporate and Services
|
186
|
|
|
(5,122)
|
|
|
|
|
|
|
Total Operating Income
|
$
|
165,762
|
|
|
$
|
134,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
SJI Utilities:
|
|
|
|
|
|
|
|
|
SJG Utility Operations
|
$
|
25,059
|
|
|
$
|
22,702
|
|
|
|
|
|
|
ETG Utility Operations
|
9,451
|
|
|
6,658
|
|
|
|
|
|
|
ELK Utility Operations
|
133
|
|
|
112
|
|
|
|
|
|
|
Subtotal SJI Utilities
|
34,643
|
|
|
29,472
|
|
|
|
|
|
|
Energy Group:
|
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
16
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Energy Group
|
16
|
|
|
23
|
|
|
|
|
|
|
Energy Services:
|
|
|
|
|
|
|
|
|
On-Site Energy Production
|
3
|
|
|
1,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Energy Services
|
3
|
|
|
1,252
|
|
|
|
|
|
|
Corporate and Services
|
1,240
|
|
|
1,244
|
|
|
|
|
|
|
Total Depreciation and Amortization
|
$
|
35,902
|
|
|
$
|
31,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Charges:
|
|
|
|
|
|
|
|
|
SJI Utilities:
|
|
|
|
|
|
|
|
|
SJG Utility Operations
|
$
|
7,542
|
|
|
$
|
7,848
|
|
|
|
|
|
|
ETG Utility Operations
|
7,145
|
|
|
6,321
|
|
|
|
|
|
|
ELK Utility Operations
|
12
|
|
|
6
|
|
|
|
|
|
|
Subtotal SJI Utilities
|
14,699
|
|
|
14,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Site Energy Production
|
1,602
|
|
|
2,285
|
|
|
|
|
|
|
Midstream
|
580
|
|
|
544
|
|
|
|
|
|
|
Corporate and Services
|
17,887
|
|
|
15,404
|
|
|
|
|
|
|
Subtotal
|
34,768
|
|
|
32,408
|
|
|
|
|
|
|
Intersegment Borrowings
|
|
(2,232)
|
|
|
(3,755)
|
|
|
|
|
|
|
Total Interest Charges
|
$
|
32,536
|
|
|
$
|
28,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Income Taxes:
|
|
|
|
|
|
|
|
|
SJI Utilities:
|
|
|
|
|
|
|
|
|
SJG Utility Operations
|
$
|
25,231
|
|
|
$
|
23,697
|
|
|
|
|
|
|
ETG Utility Operations
|
10,621
|
|
|
6,902
|
|
|
|
|
|
|
ELK Utility Operations
|
136
|
|
|
163
|
|
|
|
|
|
|
Subtotal SJI Utilities
|
35,988
|
|
|
30,762
|
|
|
|
|
|
|
Energy Group:
|
|
|
|
|
|
|
|
|
Wholesale Energy Operations
|
2,006
|
|
|
(477)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Electric Operations
|
(203)
|
|
|
(249)
|
|
|
|
|
|
|
Subtotal Energy Group
|
1,803
|
|
|
(726)
|
|
|
|
|
|
|
Energy Services:
|
|
|
|
|
|
|
|
|
On-Site Energy Production
|
1,049
|
|
|
(478)
|
|
|
|
|
|
|
Appliance Service Operations
|
167
|
|
|
167
|
|
|
|
|
|
|
Subtotal Energy Services
|
1,216
|
|
|
(311)
|
|
|
|
|
|
|
Midstream
|
(29)
|
|
|
(32)
|
|
|
|
|
|
|
Corporate and Services
|
(5,608)
|
|
|
(4,744)
|
|
|
|
|
|
|
Total Income Taxes
|
$
|
33,370
|
|
|
$
|
24,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Additions:
|
|
|
|
|
|
|
|
|
SJI Utilities:
|
|
|
|
|
|
|
|
|
SJG Utility Operations
|
$
|
57,970
|
|
|
$
|
55,305
|
|
|
|
|
|
|
ETG Utility Operations
|
49,014
|
|
|
38,024
|
|
|
|
|
|
|
ELK Utility Operations
|
651
|
|
|
645
|
|
|
|
|
|
|
Subtotal SJI Utilities
|
107,635
|
|
|
93,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Services:
|
|
|
|
|
|
|
|
|
On-Site Energy Production
|
53
|
|
|
23
|
|
|
|
|
|
|
Subtotal Energy Services
|
53
|
|
|
23
|
|
|
|
|
|
|
Midstream
|
45
|
|
|
12
|
|
|
|
|
|
|
Corporate and Services
|
661
|
|
|
585
|
|
|
|
|
|
|
Total Property Additions
|
$
|
108,394
|
|
|
$
|
94,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Identifiable Assets:
|
|
|
|
|
SJI Utilities:
|
|
|
|
|
SJG Utility Operations
|
$
|
3,387,355
|
|
|
$
|
3,348,555
|
|
|
ETG Utility Operations
|
2,491,100
|
|
|
2,458,846
|
|
|
ELK Utility Operations
|
21,466
|
|
|
21,723
|
|
|
Subtotal SJI Utilities
|
5,899,921
|
|
|
5,829,124
|
|
|
Energy Group:
|
|
|
|
|
Wholesale Energy Operations
|
157,548
|
|
|
195,576
|
|
|
|
|
|
|
|
Retail Electric Operations
|
25,805
|
|
|
30,351
|
|
|
Subtotal Energy Group
|
183,353
|
|
|
225,927
|
|
|
Energy Services:
|
|
|
|
|
On-Site Energy Production
|
46,865
|
|
|
154,021
|
|
|
Appliance Service Operations
|
241
|
|
|
—
|
|
|
Subtotal Energy Services
|
47,106
|
|
|
154,021
|
|
|
Midstream
|
85,989
|
|
|
83,517
|
|
|
Discontinued Operations
|
1,754
|
|
|
1,766
|
|
|
Corporate and Services
|
272,642
|
|
|
403,170
|
|
|
Intersegment Assets
|
(196,275)
|
|
|
(332,185)
|
|
|
Total Identifiable Assets
|
$
|
6,294,490
|
|
|
$
|
6,365,340
|
|
7. RATES AND REGULATORY ACTIONS:
SJG and ETG are subject to the rules and regulations of the BPU. ELK is subject to the rules and regulations of the MPSC.
Except as described below, there have been no other significant regulatory actions or changes to the Utilities' rate structure since December 31, 2019. See Note 10 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2019.
SJG:
Rate Case - In March 2020, SJG filed a petition with the BPU requesting a base rate revenue increase to recognize the infrastructure investments made to maintain the safety and reliability of its natural gas system since the approval of its previous base rate case proceeding in October 2017. In its filing, SJG requested a base rate revenue increase of $75.3 million, reflecting an overall rate of return of 7.34%, with a return on equity of 10.4% and a common equity component of approximately 54.18%. This matter is currently pending with the BPU.
In the first quarter of 2020, the final rates were approved by the BPU on SJG's 2019-2020 annual BGSS, CIP and SBC/TIC filings. Additionally, SJG will issue a one-time BGSS bill credit of approximately $0.8 million, plus interest, sales tax and public utility assessments, which will be returned to customers in the second quarter of 2020. The BGSS and CIP 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.
In March 2020, SJG executed a Stipulation of Settlement resolving a 2019 Compliance Filing and 2019 Tax Act Rider petition, anticipated to be approved by the BPU in May 2020. The terms of settlement include the following:
•The “Unprotected” EDIT balance of approximately $44.7 million will be refunded to customers over the remaining 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.
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 has determined that the project under construction will be abandoned. SJG has requested that the project costs spent to date of $10.1 million be recovered as a regulatory asset within its March 2020 rate case petition filed with the BPU. As such, the amount has been reclassified from Utility Plant and is presented as a Regulatory Asset within the condensed consolidated balance sheets at March 31, 2020. The matter is currently pending with the BPU.
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.
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 for approximately $15.0 million, less any indebtedness at the time of closing, and pending MPSC approval. This transaction is expected to close in the middle of 2020.
8. REGULATORY ASSETS AND REGULATORY LIABILITIES:
There have been no significant changes to the nature of the Utilities' regulatory assets and liabilities since December 31, 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 March 31, 2020 consisted of the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
SJG
|
ETG
|
ELK
|
Total SJI
|
|
Environmental Remediation Costs:
|
|
|
|
|
|
Expended - Net
|
$
|
158,947
|
|
$
|
10,564
|
|
$
|
—
|
|
$
|
169,511
|
|
|
Liability for Future Expenditures
|
132,938
|
|
105,984
|
|
—
|
|
238,922
|
|
|
Insurance Recovery Receivables
|
—
|
|
(13,615)
|
|
—
|
|
(13,615)
|
|
|
Deferred ARO Costs
|
37,821
|
|
23,511
|
|
—
|
|
61,332
|
|
|
Deferred Pension Costs - Unrecognized Prior Service Cost
|
—
|
|
36,566
|
|
—
|
|
36,566
|
|
|
Deferred Pension and Other Postretirement Benefit Costs
|
72,010
|
|
1,825
|
|
—
|
|
73,835
|
|
|
Deferred Gas Costs - Net
|
28,171
|
|
—
|
|
—
|
|
28,171
|
|
|
CIP Receivable
|
24,244
|
|
—
|
|
—
|
|
24,244
|
|
|
SBC Receivable
|
1,670
|
|
—
|
|
—
|
|
1,670
|
|
|
Deferred Interest Rate Contracts
|
11,375
|
|
—
|
|
—
|
|
11,375
|
|
|
EET
|
12,557
|
|
—
|
|
—
|
|
12,557
|
|
|
Pipeline Supplier Service Charges
|
503
|
|
—
|
|
—
|
|
503
|
|
|
Pipeline Integrity Cost
|
6,080
|
|
—
|
|
—
|
|
6,080
|
|
|
AFUDC - Equity Related Deferrals
|
10,950
|
|
—
|
|
—
|
|
10,950
|
|
|
WNC
|
—
|
|
8,214
|
|
156
|
|
8,370
|
|
|
Other Regulatory Assets
|
20,918
|
|
8,037
|
|
—
|
|
28,955
|
|
|
|
|
|
|
|
|
Total Regulatory Assets
|
$
|
518,184
|
|
$
|
181,086
|
|
$
|
156
|
|
$
|
699,426
|
|
The Utilities' Regulatory Assets as of December 31, 2019 consisted of the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
SJG
|
ETG
|
ELK
|
Total SJI
|
|
Environmental Remediation Costs:
|
|
|
|
|
|
Expended - Net
|
$
|
156,279
|
|
$
|
16,955
|
|
$
|
—
|
|
$
|
173,234
|
|
|
Liability for Future Expenditures
|
131,262
|
|
101,083
|
|
—
|
|
232,345
|
|
|
Insurance Recovery Receivables
|
—
|
|
(20,423)
|
|
—
|
|
(20,423)
|
|
|
Deferred ARO Costs
|
36,515
|
|
18,108
|
|
—
|
|
54,623
|
|
|
Deferred Pension Costs - Unrecognized Prior Service Cost
|
—
|
|
37,378
|
|
—
|
|
37,378
|
|
|
Deferred Pension and Other Postretirement Benefit Costs
|
72,010
|
|
1,825
|
|
—
|
|
73,835
|
|
|
Deferred Gas Costs - Net
|
49,469
|
|
5,301
|
|
293
|
|
55,063
|
|
|
|
|
|
|
|
|
SBC Receivable
|
1,478
|
|
—
|
|
—
|
|
1,478
|
|
|
Deferred Interest Rate Contracts
|
7,856
|
|
—
|
|
—
|
|
7,856
|
|
|
EET
|
12,877
|
|
—
|
|
—
|
|
12,877
|
|
|
Pipeline Supplier Service Charges
|
525
|
|
—
|
|
—
|
|
525
|
|
|
Pipeline Integrity Cost
|
6,516
|
|
—
|
|
—
|
|
6,516
|
|
|
AFUDC - Equity Related Deferrals
|
10,712
|
|
—
|
|
—
|
|
10,712
|
|
|
WNC
|
—
|
|
—
|
|
231
|
|
231
|
|
|
Other Regulatory Assets
|
10,678
|
|
9,004
|
|
—
|
|
19,682
|
|
|
|
|
|
|
|
|
Total Regulatory Assets
|
$
|
496,177
|
|
$
|
169,231
|
|
$
|
524
|
|
$
|
665,932
|
|
Except where noted below, all regulatory assets are or are expected to be recovered through utility rate charges, as detailed in the following discussion. The Utilities are currently permitted to recover interest on Environmental Remediation Costs, SBC Receivable, EET and Pipeline Integrity Costs, while the other assets are being recovered without a return on investment.
ENVIRONMENTAL REMEDIATION COSTS - SJG and ETG have regulatory assets associated with environmental costs related to the cleanup of environmental sites. SJG has 12 sites where SJG or its predecessors previously operated gas manufacturing plants, while ETG is subject to environmental remediation liabilities associated with five former manufactured gas plant sites in New Jersey. "Environmental Remediation Cost: Expended - Net" represents what was actually spent to clean up the sites, less recoveries through the RAC and insurance carriers. These costs meet the deferral requirements of ASC 980, as the BPU allows SJG and ETG to recover such expenditures through the RAC. "Environmental Remediation Cost: Liability for Future Expenditures" relates to estimated future expenditures required to complete the remediation of these sites. SJG and ETG recorded this estimated amount as a regulatory asset with the corresponding current and noncurrent liabilities on the condensed consolidated balance sheets under the captions "Current Liabilities" (SJI and SJG), "Deferred Credits and Other Noncurrent Liabilities" (SJI) and "Regulatory and Other Noncurrent Liabilities" (SJG). The BPU allows SJG to recover the deferred costs over seven-year periods after they are incurred. Environmental remediation costs at ETG are recoverable from customers through the RAC approved by the BPU. "Insurance Recovery Receivables" represents the balance of an insurance settlement executed in the fourth quarter of 2019 with a third party. This settlement, which is expected to be received in installments through the end of 2021, will be returned to ETG's customers through the RAC. Of the original total of $20.4 million, $6.8 million was received by ETG in 2020.
DEFERRED GAS COSTS - NET - Over/under collections of gas costs are monitored through SJG's and ETG's BGSS clause. Net undercollected gas costs are classified as a regulatory asset and net overcollected gas costs are classified as a regulatory liability. Derivative contracts used to hedge natural gas purchases are also included in the BGSS, subject to BPU approval (see Note 12). SJG's balance as of both March 31, 2020 and December 31, 2019 also includes $22.9 million of costs related to a previous pricing dispute on a long-term gas supply contract. We believe that the amount paid by SJG to the third party supplier to settle the pricing dispute reflects a gas cost that ultimately will be recovered from SJG's customers through adjusted rates through the BGSS clause. The BGSS regulatory assets of SJI and SJG decreased $26.9 million and $21.3 million, respectively, from December 31, 2019 to March 31, 2020, primarily due to recoveries from customers exceeding the actual gas commodity costs and changes in valuations of hedged natural gas positions from prior periods. ETG's deferred gas costs-net are over-recovered at March 31,2020, resulting in a regulatory liability.
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 $6.7 million from December 31, 2019 to March 31, 2020, due to revisions to the settlement timing, retirement costs, and changes to inflation and discount rates used to measure the expected retirement. Corresponding decreases 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 three months of 2020, resulting in a regulatory asset at March 31, 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.
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 March 31, 2020 was due to timing of collections from customers and warmer than normal weather during the first three months 2020.
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 is primarily due to a $10.1 million reclassification of costs from Utility Plant to regulatory assets related to a previous project to re-power the former BL England facility with natural gas (see Note 7).
The Utilities Regulatory Liabilities as of March 31, 2020 consisted of the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
SJG
|
ETG
|
ELK
|
Total SJI
|
|
Excess Plant Removal Costs
|
$
|
14,963
|
|
$
|
37,901
|
|
$
|
—
|
|
$
|
52,864
|
|
|
Excess Deferred Taxes
|
242,576
|
|
116,743
|
|
—
|
|
359,319
|
|
|
Deferred Revenues - Net
|
—
|
|
6,183
|
|
—
|
|
6,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts to be Refunded to Customers
|
—
|
|
10,252
|
|
—
|
|
10,252
|
|
|
Other Regulatory Liabilities
|
—
|
|
1,880
|
|
—
|
|
1,880
|
|
|
|
|
|
|
|
|
Total Regulatory Liabilities
|
$
|
257,539
|
|
$
|
172,959
|
|
$
|
—
|
|
$
|
430,498
|
|
The Utilities Regulatory Liabilities as of December 31, 2019 consisted of the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
SJG
|
ETG
|
ELK
|
Total SJI
|
|
Excess Plant Removal Costs
|
$
|
16,333
|
|
$
|
36,343
|
|
$
|
—
|
|
$
|
52,676
|
|
|
Excess Deferred Taxes
|
251,355
|
|
117,695
|
|
—
|
|
369,050
|
|
|
Deferred Revenues - Net
|
—
|
|
52
|
|
—
|
|
52
|
|
|
CIP Payable
|
6,794
|
|
—
|
|
—
|
|
6,794
|
|
|
WNC
|
—
|
|
2,684
|
|
—
|
|
2,684
|
|
|
Amounts to be Refunded to Customers
|
—
|
|
10,625
|
|
—
|
|
10,625
|
|
|
Other Regulatory Liabilities
|
—
|
|
1,037
|
|
—
|
|
1,037
|
|
|
|
|
|
|
|
|
Total Regulatory Liabilities
|
$
|
274,482
|
|
$
|
168,436
|
|
$
|
—
|
|
$
|
442,918
|
|
EXCESS DEFERRED TAXES - This liability is recognized as a result of Tax Reform enacted into law on December 22, 2017. The decrease in this liability from December 31, 2019 to March 31, 2020 is related to excess tax amounts returned to customers through customer billings. The Unprotected amount of excess deferred taxes will be returned to customers over a five year period. The determination of the treatment for the remaining amount of excess deferred taxes will be deferred until SJG's next base rate case as approved by the BPU (see Note 7).
EXCESS PLANT REMOVAL COSTS - The Utilities accrue and collect for cost of removal of utility property. This regulatory liability represents customer collections in excess of actual expenditures, which will be returned to customers as a reduction to depreciation expense.
DEFERRED REVENUES - NET - Over/under collections of gas costs are monitored through SJG's and ETG's bill credit. Net undercollected gas costs are classified as a regulatory asset and net overcollected gas costs are classified as a regulatory liability. Derivative contracts used to hedge natural gas purchases are also included in the BGSS, subject to BPT approval. As a result of over-collection, ETG resulted in a regulatory liability at March 31, 2020 as compared to a regulatory asset at December 31, 2019.
AMOUNTS TO BE REFUNDED TO CUSTOMERS - See "AMA" section in Note 1.
9. PENSION AND OTHER POSTRETIREMENT BENEFITS:
For the three months ended March 31, 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
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Service Cost
|
$
|
1,688
|
|
|
$
|
1,719
|
|
|
|
|
|
|
Interest Cost
|
3,763
|
|
|
4,229
|
|
|
|
|
|
|
Expected Return on Plan Assets
|
(5,452)
|
|
|
(5,193)
|
|
|
|
|
|
|
Amortizations:
|
|
|
|
|
|
|
|
|
Prior Service Cost
|
26
|
|
|
26
|
|
|
|
|
|
|
Actuarial Loss
|
2,715
|
|
|
2,437
|
|
|
|
|
|
|
Net Periodic Benefit Cost
|
2,740
|
|
|
3,218
|
|
|
|
|
|
|
Capitalized Benefit Cost
|
(544)
|
|
|
(594)
|
|
|
|
|
|
|
Deferred Benefit Cost
|
(408)
|
|
|
(541)
|
|
|
|
|
|
|
Total Net Periodic Benefit Expense
|
$
|
1,788
|
|
|
$
|
2,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Service Cost
|
$
|
165
|
|
|
$
|
234
|
|
|
|
|
|
|
Interest Cost
|
608
|
|
|
628
|
|
|
|
|
|
|
Expected Return on Plan Assets
|
(1,346)
|
|
|
(1,149)
|
|
|
|
|
|
|
Amortizations:
|
|
|
|
|
|
|
|
|
Prior Service Cost
|
(144)
|
|
|
(143)
|
|
|
|
|
|
|
Actuarial Loss
|
192
|
|
|
263
|
|
|
|
|
|
|
Net Periodic Benefit Cost
|
(525)
|
|
|
(167)
|
|
|
|
|
|
|
Capitalized Benefit Cost
|
(108)
|
|
|
(56)
|
|
|
|
|
|
|
Deferred Benefit Cost
|
396
|
|
|
116
|
|
|
|
|
|
|
Total Net Periodic Benefit Expense
|
$
|
(237)
|
|
|
$
|
(107)
|
|
|
|
|
|
The Pension Benefits Net Periodic Benefit Cost incurred by SJG was approximately $1.9 million and $2.3 million of the totals presented in the table above for the three months ended March 31, 2020 and 2019, respectively.
For the three months ended March 31, 2020 and 2019, the Other Postretirement Benefits Net Periodic Benefit Cost incurred by SJG was $0.7 million and a benefit of less than $0.1 million, respectively, of the totals presented in the table above.
Capitalized benefit costs reflected in the table above relate to the Utilities' construction programs.
Companies with publicly traded equity securities that sponsor a postretirement benefit plan are required to fully recognize, as an asset or liability, the overfunded or underfunded status of its benefit plans and recognize changes in the funded status in the year in which the changes occur. Changes in funded status are generally reported in AOCL; however, since the Utilities recover all prudently incurred pension and postretirement benefit costs from their ratepayers, a significant portion of the changes resulting from the recording of additional liabilities under this requirement are reported as regulatory assets.
No contributions were made to the pension plans by either SJI or SJG during the three months ended March 31, 2020 or 2019. SJI and SJG do not expect to make any contributions to the pension plans during the remainder of 2020; however, changes in future investment performance and discount rates may ultimately result in a contribution. Payments related to the unfunded SERP are expected to be approximately $3.7 million in 2020.
As part of the Acquisition, SJI acquired the existing pension and other post-employment benefit plans of ETG and ELK. 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.
10. LINES OF CREDIT:
Credit facilities and available liquidity as of March 31, 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Total Facility
|
|
Usage
|
|
Available Liquidity
|
|
Expiration Date
|
|
|
SJI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SJI Syndicated Revolving Credit Facility
|
|
$
|
500,000
|
|
|
$
|
169,300
|
|
(A)
|
$
|
330,700
|
|
|
August 2022
|
|
|
Revolving Credit Facility
|
|
50,000
|
|
|
50,000
|
|
|
—
|
|
|
September 2020 (D)
|
|
|
Term Loan Credit Agreement
|
|
100,000
|
|
|
100,000
|
|
|
—
|
|
|
September 2020 (D)
|
|
|
Term Loan Credit Agreement
|
|
150,000
|
|
|
150,000
|
|
|
—
|
|
|
March 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SJI
|
|
800,000
|
|
|
469,300
|
|
|
330,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SJG:
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper Program/Revolving Credit Facility
|
|
200,000
|
|
|
143,300
|
|
(B)
|
56,700
|
|
|
August 2022
|
|
|
Uncommitted Bank Line
|
|
10,000
|
|
|
—
|
|
|
10,000
|
|
|
September 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SJG
|
|
210,000
|
|
|
143,300
|
|
|
66,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ETG/ELK:
|
|
|
|
|
|
|
|
|
|
|
ETG/ELK Revolving Credit Facility
|
|
200,000
|
|
|
96,100
|
|
(C)
|
103,900
|
|
|
June 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,210,000
|
|
|
$
|
708,700
|
|
|
$
|
501,300
|
|
|
|
|
(A) Includes letters of credit outstanding in the amount of $9.6 million.
(B) Includes letters of credit outstanding in the amount of $0.8 million.
(C) Includes letters of credit outstanding in the amount of $1.0 million.
(D) These agreements were paid off in April 2020. See Notes 14 and 20.
For SJI, the $708.7 million of usage in the table above, less the letters of credit noted in (A)-(C) above, equal the $697.3 million recorded as Notes Payable on the condensed consolidated balance sheets as of March 31, 2020. For SJG, the $143.3 million of usage in the table above, less the letters of credit noted in (B) above, equal the $142.5 million recorded as Notes Payable on the condensed balance sheets as of March 31, 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 March 31, 2020. The proceeds of the loan were used for general corporate purposes.
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.
SJI's unsecured $100.0 million term loan credit agreement bears interest at a variable base rate or a variable LIBOR rate, at the Company’s election. Any amounts repaid prior to the maturity date cannot be reborrowed. As noted in (D), this was repaid in April 2020 (see Notes 14 and 20).
SJI (as a guarantor to ELK's obligation under this revolving credit agreement), SJIU, ETG and ELK (as Borrowers) have a $200.0 million revolving credit agreement with several lenders. The revolving credit agreement provides for the extension of credit to the Borrowers in a total aggregate amount of $200.0 million ($190.0 million for ETG; $10.0 million for ELK; amended in April 2020 to be $10.0 million SJIU), in the form of revolving loans up to a full amount of $200.0 million, swingline loans in an amount not to exceed an aggregate of $20.0 million and letters of credit in an amount not to exceed an aggregate of $50.0 million, each at the applicable interest rates specified in the revolving credit agreement. Subject to certain conditions set forth in the revolving credit agreement, ETG may increase the revolving credit facility up to a maximum aggregate amount of $50.0 million (for a total revolving facility of up to $250.0 million). This facility contains one financial covenant, limiting the ratio of indebtedness to total capitalization (as defined in the credit agreement) of each Borrower to not more than 0.70 to 1, measured at the end of each fiscal quarter. SJIU, ETG and ELK were in compliance with this covenant at March 31, 2020.
The Utilities' facilities are restricted as to use and availability specifically to the respective Utilities; however, if necessary, the SJI facilities can also be used to support the liquidity needs of the Utilities. All committed facilities contain one financial covenant limiting the ratio of indebtedness to total capitalization of the applicable borrowers (as defined in the respective credit agreements), measured on a quarterly basis. SJI and the Utilities were in compliance with these covenants as of March 31, 2020. Borrowings under these credit facilities are at market rates.
SJI's weighted average interest rate on these borrowings (inclusive of SJG, ETG, and ELK), which changes daily, was 2.02% and 3.46% at March 31, 2020 and 2019, respectively. SJG's weighted average interest rate on these borrowings, which changes daily, was 1.76% and 2.74% at March 31, 2020 and 2019, respectively.
SJI's average borrowings outstanding under these credit facilities (inclusive of SJG, ETG, and ELK), not including letters of credit, during the three months ended March 31, 2020 and 2019 were $774.0 million and $241.9 million, respectively. The maximum amounts outstanding under these credit facilities, not including letters of credit, during the three months ended March 31, 2020 and 2019 were $872.2 million and $404.8 million, respectively.
SJG's average borrowings outstanding under its credit facilities during the three months ended March 31, 2020 and 2019 were $152.5 million and $84.6 million, respectively. The maximum amounts outstanding under its credit facilities during the three months ended March 31, 2020 and 2019 were $171.7 million and $108.0 million, respectively.
The SJI and the Utilities principal credit facilities are provided by a syndicate of banks. The NPA for Senior Unsecured Notes issued by SJI contains a financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective NPA or credit agreement) to not more than 0.70 to 1, measured at the end of each fiscal quarter. For SJI, the equity units are treated as equity (as opposed to how they are classified on the condensed consolidated balance sheet, as long-term debt) for purposes of the covenant calculation. SJI and SJG were in compliance with this covenant as of March 31, 2020. However, one SJG bank facility still contains a financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective credit agreement) to not more than 0.65 to 1 measured at the end of each fiscal quarter. As a result, SJG must ensure that the ratio of indebtedness to total capitalization (as defined in the respective credit agreement) does not exceed 0.65 to 1, as measured at the end of each fiscal quarter. SJG is was in compliance with this covenant as of March 31, 2020.
SJG has a commercial paper program under which SJG may issue short-term, unsecured promissory notes to qualified investors up to a maximum aggregate amount outstanding at any time of $200.0 million. The notes have fixed maturities which vary by note, but may not exceed 270 days from the date of issue. Proceeds from the notes are used for general corporate purposes. SJG uses the commercial paper program in tandem with its $200.0 million revolving credit facility and does not expect the principal amount of borrowings outstanding under the commercial paper program and the credit facility at any time to exceed an aggregate of $200.0 million.
11. COMMITMENTS AND CONTINGENCIES:
GUARANTEES — As of March 31, 2020, SJI had issued $11.3 million of parental guarantees on behalf of EnergyMark, an unconsolidated subsidiary. These guarantees generally expire within the next two years and were issued to enable the subsidiary to market retail natural gas.
GAS SUPPLY CONTRACTS - In the normal course of business, SJG, SJRG and ETG have entered into long-term contracts for natural gas supplies, firm transportation and gas storage service. The transportation and storage service agreements with interstate pipeline suppliers were made under FERC-approved tariffs. SJG and ETG's cumulative obligation for gas supply-related demand charges and reservation fees paid to suppliers for these services averages approximately $8.8 million and $5.2 million per month, respectively, and is recovered on a current basis through the BGSS. SJRG's cumulative obligation for demand charges and reservation fees paid to suppliers for these services averages approximately $1.6 million per month. SJRG has also committed to purchase 672,500 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 68% of SJI's and SJG's workforce at March 31, 2020, respectively. SJI has collective bargaining agreements with unions that represent these employees: IBEW Local 1293, IAM Local 76 and UWUA Local 424. SJG employees represented by the IBEW operate under a collective bargaining agreement that runs through February 2022. SJG's remaining unionized employees are represented by the IAM and operate under a collective bargaining agreement that runs through August 2021. ETG employees represented by the UWUA operate under a collective bargaining agreement that runs through November 2020.
STANDBY LETTERS OF CREDIT — As of March 31, 2020, SJI provided $9.6 million of standby letters of credit through its revolving credit facility to enable SJE to market retail electricity and for various construction and operating activities. ETG provided a $1.0 million letter of credit under its revolving credit facility to support commodity trading activity. SJG provided a $0.8 million letter of credit under its revolving credit facility to support the remediation of environmental conditions at certain locations in SJG's service territory. SJG has provided $25.1 million of additional letters of credit under a separate facility outside of the revolving credit facility to support variable-rate demand bonds issued through the NJEDA to finance the expansion of SJG’s natural gas distribution system.
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 $3.2 million and $3.1 million related to all claims in the aggregate as of March 31, 2020 and December 31, 2019, respectively, of which SJG has accrued approximately $0.9 million as of both March 31, 2020 and December 31, 2019.
ENVIRONMENTAL REMEDIATION COSTS — SJG incurred and recorded costs for environmental cleanup of 12 sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s. ETG is subject to environmental remediation liabilities associated with five former manufactured gas plant sites in New Jersey. These environmental remediation expenditures are recoverable from customers through rate mechanisms approved by the BPU (see Note 8). SJI and some of its nonutility subsidiaries also recorded costs for environmental cleanup of sites where SJF previously operated a fuel oil business and Morie maintained equipment, fueling stations and storage (see Note 3). There have been no significant changes to the status of SJI’s environmental remediation efforts since December 31, 2019, as described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2019.
12. DERIVATIVE INSTRUMENTS:
Certain SJI subsidiaries, including SJG, are involved in buying, selling, transporting and storing natural gas and buying and selling retail electricity for their own accounts as well as managing these activities for third parties. These subsidiaries are subject to market risk on expected future purchases and sales due to commodity price fluctuations. SJI and SJG use a variety of derivative instruments to limit this exposure to market risk in accordance with strict corporate guidelines. These derivative instruments include forward contracts, swap agreements, options contracts and futures contracts.
As of March 31, 2020, SJI and SJG had outstanding derivative contracts as follows:
|
|
|
|
|
|
|
|
|
|
|
|
SJI Consolidated
|
SJG
|
|
Derivative contracts intended to limit exposure to market risk to:
|
|
|
|
Expected future purchases of natural gas (in MMdts)
|
79.0
|
|
16.7
|
|
|
Expected future sales of natural gas (in MMdts)
|
82.1
|
|
4.1
|
|
|
Expected future purchases of electricity (in MMmWh)
|
0.4
|
|
|
|
|
Expected future sales of electricity (in MMmWh)
|
0.3
|
|
|
|
|
|
|
|
|
Basis and Index related net purchase (sale) contracts (in MMdts)
|
113.7
|
|
1.3
|
|
These contracts, which have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives - Energy Related Assets or Derivatives - Energy Related Liabilities on the condensed consolidated balance sheets of SJI and SJG. For SJE and SJRG contracts, the net unrealized pre-tax gains (losses) for these energy-related commodity contracts are included with realized gains (losses) in Operating Revenues – Nonutility on the condensed consolidated statements of income for SJI. These unrealized pre-tax (losses) were $(0.3) million and $(12.1) million for the three months ended March 31, 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 March 31, 2020 and December 31, 2019, SJI had $(5.0) million and $(4.0) million, respectively, and SJG had $0.9 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 March 31, 2020, SJI’s active interest rate swaps were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Fixed Interest Rate
|
|
Start Date
|
|
Maturity
|
|
|
|
Obligor
|
|
$
|
20,000,000
|
|
|
3.049%
|
|
3/15/2017
|
|
3/15/2027
|
|
|
|
SJI
|
|
$
|
20,000,000
|
|
|
3.049%
|
|
3/15/2017
|
|
3/15/2027
|
|
|
|
SJI
|
|
$
|
10,000,000
|
|
|
3.049%
|
|
3/15/2017
|
|
3/15/2027
|
|
|
|
SJI
|
|
$
|
12,500,000
|
|
|
3.530%
|
|
12/1/2006
|
|
2/1/2036
|
|
|
|
SJG
|
|
$
|
12,500,000
|
|
|
3.430%
|
|
12/1/2006
|
|
2/1/2036
|
|
|
|
SJG
|
The unrealized gains and losses on interest rate derivatives that are not designated as cash flow hedges are included in Interest Charges in the condensed consolidated statements of income. However, for selected interest rate derivatives at SJG, management believes that, subject to BPU approval, the market value upon termination can be recovered in rates and, therefore, these unrealized losses have been included in Other Regulatory Assets in the condensed consolidated balance sheets.
The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of March 31, 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 GAAP
|
|
March 31, 2020
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
Energy-related commodity contracts:
|
|
|
|
|
|
|
|
|
|
Derivatives - Energy Related - Current
|
|
$
|
31,120
|
|
|
$
|
30,710
|
|
|
$
|
52,892
|
|
|
$
|
41,965
|
|
|
Derivatives - Energy Related - Non-Current
|
|
13,522
|
|
|
5,284
|
|
|
7,243
|
|
|
8,206
|
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
Derivatives - Other - Current
|
|
—
|
|
|
1,736
|
|
|
—
|
|
|
1,155
|
|
|
Derivatives - Other - Noncurrent
|
|
—
|
|
|
18,489
|
|
|
—
|
|
|
11,505
|
|
|
Total derivatives not designated as hedging instruments under GAAP
|
|
$
|
44,642
|
|
|
$
|
56,219
|
|
|
$
|
60,135
|
|
|
$
|
62,831
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
$
|
44,642
|
|
|
$
|
56,219
|
|
|
$
|
60,135
|
|
|
$
|
62,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SJG:
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under GAAP
|
|
March 31, 2020
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
Energy-related commodity contracts:
|
|
|
|
|
|
|
|
|
|
Derivatives – Energy Related – Current
|
|
$
|
7,553
|
|
|
$
|
6,628
|
|
|
$
|
16,904
|
|
|
$
|
14,671
|
|
|
Derivatives – Energy Related – Non-Current
|
|
80
|
|
|
89
|
|
|
5
|
|
|
95
|
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
Derivatives – Other - Current
|
|
—
|
|
|
464
|
|
|
—
|
|
|
488
|
|
|
Derivatives – Other - Noncurrent
|
|
—
|
|
|
10,911
|
|
|
—
|
|
|
7,368
|
|
|
Total derivatives not designated as hedging instruments under GAAP
|
|
$
|
7,633
|
|
|
$
|
18,092
|
|
|
$
|
16,909
|
|
|
$
|
22,622
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
$
|
7,633
|
|
|
$
|
18,092
|
|
|
$
|
16,909
|
|
|
$
|
22,622
|
|
SJI and SJG enter into derivative contracts with counterparties, some of which are subject to master netting arrangements, which allow net settlements under certain conditions. These derivatives are presented at gross fair values on the condensed consolidated balance sheets.
As of March 31, 2020 and December 31, 2019, information related to these offsetting arrangements were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Gross amounts of recognized assets/liabilities
|
|
Gross amount offset in the balance sheet
|
|
Net amounts of assets/liabilities in balance sheet
|
|
Gross amounts not offset in the balance sheet
|
|
|
|
Net amount
|
|
|
|
|
|
|
|
|
|
Financial Instruments
|
|
Cash Collateral Posted
|
|
|
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives - Energy Related Assets
|
|
$
|
44,642
|
|
|
$
|
—
|
|
|
$
|
44,642
|
|
|
$
|
(15,579)
|
|
(A)
|
|
$
|
—
|
|
|
$
|
29,063
|
|
|
Derivatives - Energy Related Liabilities
|
|
$
|
35,994
|
|
|
$
|
—
|
|
|
$
|
35,994
|
|
|
$
|
15,579
|
|
(B)
|
|
$
|
15,805
|
|
|
$
|
67,378
|
|
|
Derivatives - Other
|
|
$
|
(20,225)
|
|
|
$
|
—
|
|
|
$
|
(20,225)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(20,225)
|
|
|
SJG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives - Energy Related Assets
|
|
$
|
7,633
|
|
|
$
|
—
|
|
|
$
|
7,633
|
|
|
$
|
(2,711)
|
|
(A)
|
|
$
|
—
|
|
|
$
|
4,922
|
|
|
Derivatives - Energy Related Liabilities
|
|
$
|
(6,717)
|
|
|
$
|
—
|
|
|
$
|
(6,717)
|
|
|
$
|
2,711
|
|
(B)
|
|
$
|
3,989
|
|
|
$
|
(17)
|
|
|
Derivatives - Other
|
|
$
|
(11,375)
|
|
|
$
|
—
|
|
|
$
|
(11,375)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(11,375)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Gross amounts of recognized assets/liabilities
|
|
Gross amount offset in the balance sheet
|
|
Net amounts of assets/liabilities in balance sheet
|
|
Gross amounts not offset in the balance sheet
|
|
|
|
Net amount
|
|
|
|
|
|
|
|
|
|
Financial Instruments
|
|
Cash Collateral Posted
|
|
|
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives - Energy Related Assets
|
|
$
|
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 March 31, 2020 and December 31, 2019 were related to derivative liabilities which can be net settled against derivative assets.
(B) The balances at March 31, 2020 and December 31, 2019 were related to derivative assets which can be net settled against derivative liabilities.
The effect of derivative instruments on the condensed consolidated statements of income for the three months ended March 31, 2020 and 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships under GAAP
|
|
2020
|
|
2019
|
|
|
|
|
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts:
|
|
|
|
|
|
|
|
|
|
Losses reclassified from AOCL into income (a)
|
|
$
|
(12)
|
|
|
$
|
(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SJG:
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts:
|
|
|
|
|
|
|
|
|
|
Losses reclassified from AOCL into income (a)
|
|
$
|
(12)
|
|
|
$
|
(12)
|
|
|
|
|
|
(a) Included in Interest Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments under GAAP
|
|
2020
|
|
2019
|
|
|
|
|
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
|
|
|
|
|
Losses on energy-related commodity contracts (a)
|
|
$
|
(276)
|
|
|
$
|
(12,060)
|
|
|
|
|
|
|
Losses on interest rate contracts (b)
|
|
(4,046)
|
|
|
(1,090)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(4,322)
|
|
|
$
|
(13,150)
|
|
|
|
|
|
(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 March 31, 2020, is approximately $0.5 million. If the credit-risk-related contingent features underlying these agreements were triggered on March 31, 2020, SJI would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $0.4 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.
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 March 31, 2020
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities (A)
|
$
|
40
|
|
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivatives – Energy Related Assets (B)
|
44,642
|
|
|
4,413
|
|
|
14,378
|
|
|
25,851
|
|
|
|
$
|
44,682
|
|
|
$
|
4,453
|
|
|
$
|
14,378
|
|
|
$
|
25,851
|
|
|
SJG:
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Derivatives – Energy Related Assets (B)
|
$
|
7,633
|
|
|
$
|
2,711
|
|
|
$
|
110
|
|
|
$
|
4,812
|
|
|
|
$
|
7,633
|
|
|
$
|
2,711
|
|
|
$
|
110
|
|
|
$
|
4,812
|
|
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives – Energy Related Liabilities (B)
|
$
|
35,994
|
|
|
$
|
23,449
|
|
|
$
|
5,672
|
|
|
$
|
6,873
|
|
|
Derivatives – Other (C)
|
20,225
|
|
|
—
|
|
|
20,225
|
|
|
—
|
|
|
|
$
|
56,219
|
|
|
$
|
23,449
|
|
|
$
|
25,897
|
|
|
$
|
6,873
|
|
|
SJG:
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives – Energy Related Liabilities (B)
|
$
|
6,717
|
|
|
$
|
6,700
|
|
|
$
|
11
|
|
|
$
|
6
|
|
|
Derivatives – Other (C)
|
11,375
|
|
|
—
|
|
|
11,375
|
|
|
—
|
|
|
|
$
|
18,092
|
|
|
$
|
6,700
|
|
|
$
|
11,386
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 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
|
|
(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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Fair Value at March 31, 2020
|
|
Valuation Technique
|
Significant Unobservable Input
|
Range
[Weighted Average]
|
|
|
|
Assets
|
Liabilities
|
|
|
|
|
|
Forward Contract - Natural Gas
|
$22,438
|
$3,216
|
Discounted Cash Flow
|
Forward price (per dt)
|
$1.19 - $6.02 [$2.05]
|
(A)
|
Forward Contract - Electric
|
$3,413
|
$3,657
|
Discounted Cash Flow
|
Fixed electric load profile (on-peak)
|
40.34% - 100.00% [56.67%]
|
(B)
|
|
|
|
|
|
Fixed electric load profile (off-peak)
|
0.00% - 59.66% [43.33%]
|
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Fair Value at December 31, 2019
|
|
Valuation Technique
|
Significant Unobservable Input
|
Range
[Weighted Average]
|
|
|
|
Assets
|
Liabilities
|
|
|
|
|
|
Forward Contract - Natural Gas
|
$21,645
|
$4,333
|
Discounted Cash Flow
|
Forward price (per dt)
|
$1.57 - $7.28 [$2.38]
|
(A)
|
|
Forward Contract - Electric
|
$3,718
|
$3,456
|
Discounted Cash Flow
|
Fixed 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Fair Value at March 31, 2020
|
|
Valuation Technique
|
Significant Unobservable Input
|
Range
[Weighted Average]
|
|
|
|
Assets
|
Liabilities
|
|
|
|
|
|
Forward Contract - Natural Gas
|
$
|
4,812
|
|
$
|
6
|
|
Discounted Cash Flow
|
Forward price (per dt)
|
$1.12 - $5.14 [$3.72]
|
(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Fair Value at December 31, 2019
|
|
Valuation Technique
|
Significant Unobservable Input
|
Range
[Weighted Average]
|
|
|
|
Assets
|
Liabilities
|
|
|
|
|
|
Forward Contract - Natural Gas
|
$
|
5,049
|
|
$
|
14
|
|
Discounted Cash Flow
|
Forward 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.
The changes in fair value measurements of Derivatives – Energy Related Assets and Liabilities for the three months ended March 31, 2020 and 2019, using significant unobservable inputs (Level 3), are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2020
|
|
|
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
Balance at beginning of period
|
$
|
17,574
|
|
|
|
|
Other Changes in Fair Value from Continuing and New Contracts, Net (A)
|
9,403
|
|
|
|
|
Settlements
|
(7,999)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
$
|
18,978
|
|
|
|
|
|
|
|
|
|
SJG:
|
|
|
|
|
Balance at beginning of period
|
$
|
5,035
|
|
|
|
|
Other Changes in Fair Value from Continuing and New Contracts, Net (A)
|
4,806
|
|
|
|
|
Settlements
|
(5,035)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
$
|
4,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2019
|
|
|
|
SJI (includes SJG and all other consolidated subsidiaries):
|
|
|
|
|
Balance at beginning of period
|
$
|
16,061
|
|
|
|
|
Other Changes in Fair Value from Continuing and New Contracts, Net (A)
|
(2,268)
|
|
|
|
|
Settlements
|
(5,516)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
$
|
8,277
|
|
|
|
|
|
|
|
|
|
SJG:
|
|
|
|
|
Balance at beginning of period
|
$
|
4,928
|
|
|
|
|
Other Changes in Fair Value from Continuing and New Contracts, Net (A)
|
1,706
|
|
|
|
|
Settlements
|
(4,928)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
$
|
1,706
|
|
|
|
(A) Represents total gains (losses) included in earnings for SJI and SJG for the three months ended March 31, 2020 and 2019 that are attributable to the change in unrealized gains (losses) relating to those assets and liabilities included in Level 3 still held as of March 31, 2020 and 2019, respectively. These gains (losses) are included in Operating Revenues-Nonutility on the condensed consolidated statements of income.
14. LONG-TERM DEBT:
SJI and SJG had the following long-term debt-related activity during the three months ended March 31, 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 down the following:
•$50.0 million outstanding on the SJI revolving credit facility (see Note 10)
•$100.0 million SJI Term Loan (see Note 10)
•$50.0 million SJI variable rate note, which was in current portion of long-term debt as of March 31, 2020.
On April 16, 2020, SJG entered into a Note Purchase Agreement which provides for SJG to issue and sell its Senior Secured Notes, Series F, 2020 in the aggregate principal amount of $525.0 million in three Tranches, as follows: (a) Senior Secured Notes, Series F, 2020, Tranche A due April 16, 2030 in the aggregate principal amount of $150.0 million; (b) Senior Secured Notes, Series F, 2020, Tranche B due April 16, 2050 in the aggregate principal amount of $250.0 million; and (c) Senior Secured Notes, Series F, 2020, Tranche C expected to be due October 1, 2050 in the aggregate principal amount of $125.0 million. All of the Tranche A Notes and the Tranche B Notes were issued on April 16, 2020, and bear interest at 3.28% and 3.93%, respectively. The Tranche C Notes are expected to be issued on October 1, 2020.
SJI and SJG did not issue or retire any other long-term debt during the three months ended March 31, 2020.
15. ACCUMULATED OTHER COMPREHENSIVE LOSS:
The following table summarizes the changes in SJI's AOCL for the three months ended March 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Liability Adjustment
|
Unrealized Gain (Loss) on Derivatives-Other (a)
|
Unrealized Gain (Loss) on Available-for-Sale Securities
|
Other Comprehensive Income (Loss) of Affiliated Companies
|
Total
|
|
Balance at January 1, 2020
|
$
|
(32,124)
|
|
$
|
(327)
|
|
$
|
(10)
|
|
$
|
(97)
|
|
$
|
(32,558)
|
|
|
Other comprehensive income before reclassifications
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Amounts reclassified from AOCL
|
—
|
|
8
|
|
—
|
|
—
|
|
8
|
|
|
Net current period other comprehensive income
|
—
|
|
8
|
|
—
|
|
—
|
|
8
|
|
Balance at March 31, 2020
|
$
|
(32,124)
|
|
$
|
(319)
|
|
$
|
(10)
|
|
$
|
(97)
|
|
$
|
(32,550)
|
|
(a) The affected line item for these reclassifications from AOCL into the condensed consolidated statements of income is Interest Charges. These amounts are net of tax of $(4) for the three months ended March 31, 2020, for which the affected line item in the condensed consolidated statements of income is Income Taxes.
The following table summarizes the changes in SJG's AOCL for the three months ended March 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Liability Adjustment
|
|
Unrealized Gain (Loss) on Derivatives-Other (a)
|
|
|
|
Total
|
|
Balance at January 1, 2020
|
$
|
(27,454)
|
|
|
$
|
(421)
|
|
|
|
|
$
|
(27,875)
|
|
|
Other comprehensive loss before reclassifications
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
Amounts reclassified from AOCL
|
—
|
|
|
8
|
|
|
|
|
8
|
|
|
Net current period other comprehensive income
|
—
|
|
|
8
|
|
|
|
|
8
|
|
Balance at March 31, 2020
|
$
|
(27,454)
|
|
|
$
|
(413)
|
|
|
|
|
$
|
(27,867)
|
|
(a) The affected line item for these reclassifications from AOCL into the condensed statements of income is Interest Charges. These amounts are net of tax of $(4) for the three months ended March 31, 2020, for which the affected line item in the condensed statements of income is Income Taxes.
16. REVENUE:
At contract inception, SJI and SJG assess the goods and services promised in all of its contracts with customers, and identify a performance obligation for each promise to transfer to a customer a distinct good or service.
SJI revenues from contracts with customers totaled $476.0 million and $606.7 million for the three months ended March 31, 2020 and 2019, respectively. SJG revenues from contracts with customers totaled $187.8 million and $233.0 million for the three months ended March 31, 2020 and 2019, respectively. The SJG balance is a part of the SJG utility operating segment, and is before intercompany eliminations with other SJI entities. Revenues on the condensed consolidated statements of income that are not with contracts with customers consist of (a) revenues from alternative revenue programs at the SJG, ETG and ELK utility operating segments (including CIP, AIRP, SHARP, and WNC), and (b) both utility and nonutility revenue from derivative contracts at the SJG and ETG utility, wholesale energy and retail electric operating segments.
SJI and SJG disaggregate revenue from contracts with customers into customer type and product line. SJI and SJG have determined that disaggregating revenue into these categories achieves the disclosure objective in ASC 606 to depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors. Further, disaggregating revenue into these categories is consistent with information regularly reviewed by the CODM in evaluating the financial performance of SJI's operating segments. SJG only operates in the SJG Utility Operations segment. See Note 6 for further information regarding SJI's operating segments.
Disaggregated revenues from contracts with customers, by both customer type and product line, are disclosed below, by operating segment, for the three months ended March 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
SJG Utility Operations
|
ETG Utility Operations
|
ELK Utility Operations
|
Wholesale Energy Operations
|
Retail Electric Operations
|
On-Site Energy Production
|
Appliance Service Operations
|
Corporate Services and Intersegment
|
Total
|
|
Customer Type:
|
|
|
|
|
|
|
|
|
|
|
Residential
|
$
|
142,808
|
|
$
|
92,409
|
|
$
|
1,536
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
489
|
|
$
|
—
|
|
$
|
237,242
|
|
|
Commercial & Industrial
|
41,835
|
|
37,148
|
|
1,659
|
|
138,995
|
|
6,994
|
|
6,988
|
|
—
|
|
(2,003)
|
|
231,616
|
|
|
OSS & Capacity Release
|
2,609
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,609
|
|
|
Other
|
557
|
|
3,849
|
|
83
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4,489
|
|
|
|
$
|
187,809
|
|
$
|
133,406
|
|
$
|
3,278
|
|
$
|
138,995
|
|
$
|
6,994
|
|
$
|
6,988
|
|
$
|
489
|
|
$
|
(2,003)
|
|
$
|
475,956
|
|
|
Product Line:
|
|
|
|
|
|
|
|
|
|
|
Gas
|
$
|
187,809
|
|
$
|
133,406
|
|
$
|
3,278
|
|
$
|
138,995
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(1,089)
|
|
$
|
462,399
|
|
|
Electric
|
—
|
|
—
|
|
—
|
|
—
|
|
6,994
|
|
—
|
|
—
|
|
(1,283)
|
|
5,711
|
|
|
Solar
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,907
|
|
—
|
|
—
|
|
1,907
|
|
|
CHP
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,502
|
|
—
|
|
—
|
|
3,502
|
|
|
Landfills
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,579
|
|
—
|
|
—
|
|
1,579
|
|
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
489
|
|
369
|
|
858
|
|
|
|
$
|
187,809
|
|
$
|
133,406
|
|
$
|
3,278
|
|
$
|
138,995
|
|
$
|
6,994
|
|
$
|
6,988
|
|
$
|
489
|
|
$
|
(2,003)
|
|
$
|
475,956
|
|
Disaggregated revenues from contracts with customers, by both customer type and product line, are disclosed below, by operating segment, for the three months ended March 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
SJG Utility Operations
|
ETG Utility Operations
|
ELK Utility Operations
|
Wholesale Energy Operations
|
|
Retail Electric Operations
|
On-Site Energy Production
|
Appliance Service Operations
|
Corporate Services and Intersegment
|
Total
|
|
Customer Type:
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
$
|
184,954
|
|
$
|
99,989
|
|
$
|
1,754
|
|
$
|
—
|
|
|
$
|
3,808
|
|
$
|
—
|
|
$
|
531
|
|
$
|
—
|
|
$
|
291,036
|
|
|
Commercial & Industrial
|
45,588
|
|
42,148
|
|
1,658
|
|
199,767
|
|
|
13,003
|
|
11,330
|
|
—
|
|
(3,007)
|
|
310,487
|
|
|
OSS & Capacity Release
|
1,770
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,770
|
|
|
Other
|
672
|
|
2,647
|
|
65
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,384
|
|
|
|
$
|
232,984
|
|
$
|
144,784
|
|
$
|
3,477
|
|
$
|
199,767
|
|
|
$
|
16,811
|
|
$
|
11,330
|
|
$
|
531
|
|
$
|
(3,007)
|
|
$
|
606,677
|
|
|
Product Line:
|
|
|
|
|
|
|
|
|
|
|
|
Gas
|
$
|
232,984
|
|
$
|
144,784
|
|
$
|
3,477
|
|
$
|
199,767
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(1,400)
|
|
$
|
579,612
|
|
|
Electric
|
—
|
|
—
|
|
—
|
|
—
|
|
|
16,811
|
|
—
|
|
—
|
|
(1,607)
|
|
15,204
|
|
|
Solar
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
2,576
|
|
—
|
|
—
|
|
2,576
|
|
|
CHP
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
7,359
|
|
—
|
|
—
|
|
7,359
|
|
|
Landfills
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
1,395
|
|
—
|
|
—
|
|
1,395
|
|
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
531
|
|
—
|
|
531
|
|
|
|
$
|
232,984
|
|
$
|
144,784
|
|
$
|
3,477
|
|
$
|
199,767
|
|
|
$
|
16,811
|
|
$
|
11,330
|
|
$
|
531
|
|
$
|
(3,007)
|
|
$
|
606,677
|
|
The following table provides information about SJI's and SJG's receivables and unbilled revenue from contracts with customers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable (1)
|
Unbilled Revenue (2)
|
|
SJI (including SJG and all other consolidated subsidiaries):
|
|
|
|
Beginning balance as of 1/1/20
|
$
|
253,661
|
|
$
|
84,821
|
|
|
Ending balance as of 3/31/20
|
262,850
|
|
51,973
|
|
|
Increase (Decrease)
|
$
|
9,189
|
|
$
|
(32,848)
|
|
|
|
|
|
|
Beginning balance as of 1/1/19
|
$
|
337,502
|
|
$
|
79,538
|
|
|
Ending balance as of 3/31/19
|
317,917
|
|
68,155
|
|
|
Increase (Decrease)
|
$
|
(19,585)
|
|
$
|
(11,383)
|
|
|
|
|
|
|
SJG:
|
|
|
|
Beginning balance as of 1/1/20
|
$
|
84,940
|
|
$
|
45,016
|
|
|
Ending balance as of 3/31/20
|
112,606
|
|
24,916
|
|
|
Increase (Decrease)
|
$
|
27,666
|
|
$
|
(20,100)
|
|
|
|
|
|
|
Beginning balance as of 1/1/19
|
$
|
101,572
|
|
$
|
43,271
|
|
|
Ending balance as of 3/31/19
|
146,185
|
|
38,292
|
|
|
Increase (Decrease)
|
$
|
44,613
|
|
$
|
(4,979)
|
|
(1) Included in Accounts Receivable in the condensed consolidated balance sheets. A receivable is SJI's and SJG's right to consideration that is unconditional, as only the passage of time is required before payment is expected from the customer. All of SJI's and SJG's Accounts Receivable arise from contracts with customers.
(2) Included in Unbilled Revenues in the condensed consolidated balance sheets. All unbilled revenue for SJI and SJG arises from contracts with customers. Unbilled revenue relates to SJI's and SJG's right to receive payment for commodity delivered but not yet billed. This represents contract assets that arise from contracts with customers, which is defined in ASC 606 as the right to payment in exchange for goods already transferred to a customer, excluding any amounts presented as a receivable. The unbilled revenue is transferred to accounts receivable when billing occurs and the rights to collection become unconditional.
17. BUSINESS COMBINATION:
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.
The acquisition of AEP 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. AEP does not have any regulated operations.
The Company has not finalized its valuation of certain assets and liabilities in connection with the acquisition of AEP. 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.
The purchase price for the AEP 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)
|
AEP
|
|
Cash
|
$
|
43
|
|
|
Accounts Receivable
|
116
|
|
|
Other Prepayments and Current Assets
|
53
|
|
|
Goodwill
|
1,843
|
|
|
Other Noncurrent Assets (A)
|
2,400
|
|
|
Total assets acquired
|
4,455
|
|
|
Accounts Payable
|
11
|
|
|
Other Current Liabilities
|
449
|
|
|
Total liabilities assumed
|
460
|
|
|
Total net assets acquired
|
$
|
3,995
|
|
(A) Balance is comprised of identifiable intangible assets.
All assets and financial results of AEP are included in the Corporate & Services segment. The amount of AEP revenues and net income included in the Company's condensed consolidated statement of income for the three months ended March 31, 2020 is approximately $0.3 million and approximately $0.2 million, respectively.
18. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS:
GOODWILL - Goodwill represents future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration paid or transferred over the fair value of identifiable net assets acquired. Goodwill is not amortized, but instead is subject to impairment testing on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount.
The Company performs its annual goodwill impairment test in the fourth quarter of each fiscal year beginning with a qualitative assessment at the reporting unit level. The reporting unit level is identified by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available, whether segment management regularly reviews the operating results of those components and whether the economic and regulatory characteristics are similar. Factors utilized in the qualitative analysis performed on goodwill in our reporting units include, among other things, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, company specific operating results and other relevant entity-specific events affecting individual reporting units.
If sufficient qualitative factors exist, goodwill impairment is determined quantitatively. Potential impairment is identified by comparing the fair value of a reporting unit to the book value, including goodwill. The Company estimates the fair value of a reporting unit using a discounted cash flow analysis. Management also considers other methods, which includes a market multiples analysis. Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include, but are not limited to, forecasts of future operating results, discount and growth rates, capital expenditures, tax rates, and projected terminal values. Changes in estimates or the application of alternative assumptions could produce significantly different results. If the fair value exceeds book value, goodwill of the reporting unit is not considered impaired. If the book value exceeds fair value, an impairment charge is recognized for the excess up until the amount of goodwill allocated to the reporting unit.
As a result of the COVID-19 pandemic and the resulting market conditions, the Company determined it necessary to perform a quantitative goodwill impairment analysis on the goodwill at the ETG reporting unit as of March 31, 2020. The analysis resulted in no impairments being recorded at March 31, 2020. Should economic conditions deteriorate in future periods or remain depressed for a prolonged period of time, estimates of future cash flows and market valuation assumptions may not be sufficient to support the carrying value, requiring impairment charges in the future.
Total goodwill of $702.1 million was recorded on the condensed consolidated balance sheets as of both March 31, 2020 and December 31, 2019. As of both March 31, 2020 and December 31, 2019, $700.2 million was included in the ETG Utility Operations segment and $1.9 million was included in the Corporate & Services segment. SJG does not have any goodwill.
IDENTIFIABLE INTANGIBLE ASSETS - The primary identifiable intangible assets of the Company are customer relationships, including those obtained in the acquisition of AEP (see Note 17), along with the AMA (see Note 1). The Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Considerations may include the contractual term of any agreement related to the asset, the historical performance of the asset, the Company's long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives (finite-lived intangible assets) are amortized, primarily on a straight-line basis, over their useful lives, generally ranging from 2 to 20 years.
SJI's identifiable intangible assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
|
|
Gross Cost
|
Accumulated Amortization
|
Identifiable Intangible Assets, Net
|
|
Identifiable intangible assets subject to amortization:
|
|
|
|
|
Customer Relationships
|
$
|
2,400
|
|
$
|
(93)
|
|
$
|
2,307
|
|
|
AMA (See Note 1)
|
19,200
|
|
(8,960)
|
|
10,240
|
|
|
Total
|
$
|
21,600
|
|
$
|
(9,053)
|
|
$
|
12,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
Gross Cost
|
Accumulated Amortization
|
Identifiable Intangible Assets, Net
|
|
Identifiable intangible assets subject to amortization:
|
|
|
|
|
Customer Relationships
|
$
|
2,400
|
|
$
|
(53)
|
|
$
|
2,347
|
|
|
AMA (See Note 1)
|
19,200
|
|
(7,680)
|
|
11,520
|
|
|
Total
|
$
|
21,600
|
|
$
|
(7,733)
|
|
$
|
13,867
|
|
The net identifiable intangible asset balances shown in the table above are included in Other Noncurrent Assets on the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively. The decrease in the net identifiable intangible asset balance from the prior year is due to amortization recorded in 2020.
Total SJI amortization expense related to identifiable intangible assets during the three months ended March 31, 2020 and 2019 was $1.3 million and $1.5 million, respectively. No impairment charges were recorded on identifiable intangible assets during the three months ended March 31, 2020 or 2019.
SJG does not have any identifiable intangible assets.
19. LEASES:
SJI and SJG (collectively, the "Company" for purposes of Note 19) is a lessee for the following classes of underlying assets: equipment, real estate (land and building), and fleet vehicles. The Company evaluates its contracts for the purpose of determining whether it is, or contains, a lease at its inception based on whether or not the contract grants the Company the use of a specifically identified asset for a period of time, as well as whether the contract grants the Company both the right to direct the use of that asset and receive the significant economic benefits of the asset. SJI's and SJG's real estate leases, which are comprised primarily of office space and payment centers, represent approximately 86% and 49%, respectively, of operating lease liabilities and generally have a lease term between 5 and 15 years. The remaining operating leases primarily consist of fleet vehicles (SJI only), communication towers, and general office equipment, each with various lease terms ranging between 3 and 25 years. The majority of our leases are comprised of fixed lease payments, with a portion of the Company’s real estate, fleet vehicles, and office equipment leases including lease payments tied to levels of production, maintenance and property
taxes, which may be subject to variability. The Company does not have any finance leases. The Company also evaluates contracts in which it is the owner of an underlying asset in the same manner as if it is a lessee, to determine if it should be considered the lessor of that asset. As of March 31, 2020, SJI does not have any contracts where it is considered the lessor (see "MTF" below).
As a practical expedient permitted under Topic 842, the Company has elected to account for the lease and non-lease components as a single lease component for leases where it is a lessee. Lease payments, which may include lease components, non-lease components and non-components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable amounts that depend on a rate or index as stipulated in the lease contract. The Company discounts its lease liability using an estimated incremental borrowing rate computed based on its existing term loan facility adjusted for lease term. For new or modified leases, the discount rate is determined using available data at lease commencement (for new leases) or the modification date (modified leases), based on its collateralized incremental interest rate to borrow over the lease term, including any reasonably certain renewal periods.
Some of its lease agreements, primarily related to real estate, include Company options to either extend and/or early terminate the lease, the costs of which are included in our lease liability to the extent that such options are reasonably certain of being exercised. Leases with renewal options allow the Company to extend the lease term typically between 1 and 5 years. When determining the lease term, renewal options reasonably certain of being exercised are included in the lease term. When determining if a renewal option is reasonably certain of being exercised, the Company considers several economic factors, including the significance of leasehold improvements incurred on the property, whether the asset is difficult to replace, underlying contractual obligations, or specific characteristics unique to that particular lease that would make it reasonably certain that we would exercise such option. Renewal options were generally not included in the lease term for the Company’s existing leases. The Company does not generally enter into leases involving the construction or design of the underlying asset, and nearly all of the assets we lease are not specialized in nature. Our lease agreements generally do not include restrictions, financial covenants or residual value guarantees.
As of March 31, 2020 and December 31, 2019, SJI recognized right-of-use assets and lease liabilities of $2.0 million and $1.9 million each for operating leases, respectively. The lease liability is comprised of approximately $1.7 million of real estate leases, $0.2 million of equipment leases and $0.1 million of fleet vehicle leases as of March 31, 2020, and $1.5 million of real estate leases, $0.3 million of equipment leases and $0.1 million of fleet vehicle leases as of December 31, 2019.
As of both March 31, 2020 and December 31, 2019, SJG recognized right-of-use assets and lease liabilities of $0.3 million each for operating leases. As of both March 31, 2020 and December 31, 2019, the lease liability is comprised of approximately $0.2 million of equipment leases and $0.1 million of real estate leases.
SJI and SJG recorded the right-of-use assets in Other Noncurrent Assets and the lease liabilities in Other Current and Noncurrent Liabilities (as shown in the table below) on the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019.
The maturity of the Company’s operating lease liabilities as of March 31, 2020 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
|
SJI Consolidated
|
SJG
|
|
2020 (excluding the three months ended March 31, 2020)
|
$
|
884
|
|
$
|
108
|
|
|
2021
|
508
|
|
39
|
|
|
2022
|
323
|
|
21
|
|
|
2023
|
166
|
|
19
|
|
|
2024
|
140
|
|
12
|
|
|
Thereafter
|
117
|
|
102
|
|
|
Total future minimum lease payments
|
2,138
|
|
301
|
|
|
Less imputed interest
|
108
|
|
31
|
|
|
Total lease payments
|
$
|
2,030
|
|
$
|
270
|
|
|
Included in the condensed consolidated balance sheet
|
|
|
|
Current lease liabilities (included in Other Current Liabilities)
|
$
|
961
|
|
$
|
113
|
|
|
Long-term lease liabilities (included in Other Noncurrent Liabilities)
|
1,069
|
|
157
|
|
|
Total lease liabilities
|
$
|
2,030
|
|
$
|
270
|
|
The total operating lease cost for SJI and SJG was $0.5 million and $0.1 million, respectively, during the three months ended March 31, 2020, and $0.8 million and $0.1 million, respectively, during the three months ended March 31, 2019. Short-term lease costs were immaterial for both SJI and SJG. Neither SJI nor SJG had any sublease income during the three months ended March 31, 2020 and 2019. Operating cash flows from operating leases for SJI and SJG were $0.4 million and $0.1 million, respectively, during both the three months ended March 31, 2020 and 2019.
Neither SJI nor SJG have leases with related parties or leverage lease arrangements. There are no leases that have not yet commenced but that create significant rights and obligations.
SJI had $0.1 million and $0.4 million of variable lease payments pertaining to leased back assets during the three months ended March 31, 2020 and 2019, respectively. As discussed in Note 1 under "Agreement to Sell Solar Assets," SJI has solar assets that are being leased back from the buyer; however these assets were leased back in 2018 and were treated as operating leases. As per the adoption of the "package of expedients" discussed in Note 1, SJI is not required to reassess under Topic 842 the Company’s prior conclusions about lease identification or classification.
Supplemental Non-Cash Disclosures
The weighted average remaining lease term for SJI's operating leases is 2.9 years at a weighted average discount rate of 3.0%.
The weighted average remaining lease term for SJG's operating leases is 7.7 years at a weighted average discount rate of 3.0%.
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 April 3, 2020, SJI entered into an unsecured $200.0 million term loan credit agreement, with the proceeds used to pay down $200.0 million of other outstanding loans. See Note 14.
On April 6, 2020, SJI entered into an ATM Equity Offering Sales Agreement (the "Sales Agreement") to sell, from time to time, shares of the Company’s common stock, par value $1.25 per share, having an aggregate sale price up to $200.0 million,
through an “at-the-market” equity offering program. Pursuant to the Sales Agreement, the shares of common stock may be offered and sold through any of the Sales Agents in negotiated transactions or transactions that are deemed to be “at-the-market” offerings. SJI has no obligation to sell any of the shares of common stock under the Sales Agreement and may at any time suspend solicitation and offers under the Sales Agreement. As of the date of this filing on Form 10-Q, SJI has not sold any shares under the ATM Offering.
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, of which $400.0 million was issued on April 16, 2020. See Note 14.
On April 29, 2020, ETG amended its $200.0 million revolving credit agreement, which was amended to provide for the extension of credit to the Borrowers as $190.0 million ETG and $10.0 million SJIU.