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MarketScreener Homepage  >  Equities  >  Nyse  >  South Jersey Industries, Inc.    SJI

SOUTH JERSEY INDUSTRIES, INC.

(SJI)
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SOUTH JERSEY INDUSTRIES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/06/2020 | 06:10am EDT

Introduction


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

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


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

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

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

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

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


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

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

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

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

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

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

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


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

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

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

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

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

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

Business Combinations - On August 31, 2019, SJI, through its wholly-owned
subsidiary SJEI, completed its acquisition of AEP. On June 30, 2020, SJI,
through its wholly-owned subsidiary Marina, acquired ESNJ-AL-Somerspoint LLC,
ESNJ-AL-Hamiltonsquare LLC, and ESNJ-AL-BrownsMills LLC, which own and operate
solar-generation sites. See detailed discussions concerning these acquisitions
and their impact on SJI, including the accounting for business combinations, in
Note 17 to the condensed consolidated financial statements.

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


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


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

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

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


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

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

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


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Operating Segments:

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

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

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


•ELK utility operations consist of natural gas distribution to residential,
commercial and industrial customers in Maryland. As discussed in Note 20 to the
condensed consolidated financial statements, on July 31, 2020, SJI closed on its
transaction to sell ELK to a third-party buyer.

•Wholesale energy operations include the activities of SJRG and SJEX.

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


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

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


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

•Corporate & Services segment includes costs related to the Acquisition, along
with other unallocated costs. Also included in this segment are the results of
SJEI.

•Intersegment represents intercompany transactions among the above SJI consolidated entities.


SJI groups its utility businesses under its wholly-owned subsidiary SJIU. This
group consists of gas utility operations of SJG, ETG and ELK. SJI groups its
nonutility operations into separate categories: Energy Group, Energy Services,
Midstream and Corporate & Services. Energy Group includes wholesale energy and
retail electric operations. Energy Services includes on-site energy production
and appliance service operations.

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SOUTH JERSEY INDUSTRIES, INC.

RESULTS OF OPERATIONS:

Summary:


SJI's net income for the three months ended June 30, 2020 increased $10.8
million to a net loss of $2.6 million compared with the same period in 2019.
SJI's income from continuing operations for the three months ended June 30, 2020
increased $10.7 million to a net loss of $2.6 million compared with the same
period in 2019. The significant drivers for the overall change were as follows
(all numbers in the bullet points below are presented after-tax):

•The income contribution from the wholesale energy operations at SJRG for the
three months ended June 30, 2020 increased $6.0 million to $4.7 million compared
with the same period in 2019, primarily due to higher margins on daily energy
trading activities, along with a refund received from a third party supplier as
discussed in Note 1 to the condensed consolidated financial statements. This was
partially offset with the change in unrealized gains and losses on forward
financial contracts due to price volatility.

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

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

SJI's net income for the six months ended June 30, 2020 increased $26.2 million
to $98.4 million compared with the same period in 2019. SJI's income from
continuing operations for the six months ended June 30, 2020 increased $26.1
million to $98.5 million compared with the same period in 2019. The significant
drivers for the overall change were as follows (all numbers in the bullet points
below are presented after-tax):

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

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

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

A significant portion of the volatility in operating results is due to the
impact of the accounting methods associated with SJI's derivative activities.
SJI uses derivatives to limit its exposure to market risk on transactions to
buy, sell, transport and store natural gas and to buy and sell retail
electricity. SJI also uses derivatives to limit its exposure to increasing
interest rates on variable-rate debt.


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The types of transactions that typically cause the most significant volatility
in operating results are as follows:

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

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

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

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

Economic Earnings is a significant financial measure used by our management to
indicate the amount and timing of income from continuing operations that we
expect to earn after taking into account the impact of derivative instruments on
the related transactions, as well as the impact of contractual arrangements and
other events that management believes make period to period comparisons of SJI's
operations difficult or potentially confusing. Management uses Economic Earnings
to manage its business and to determine such items as incentive/compensation
arrangements and allocation of resources. Specifically regarding derivatives, we
believe that this financial measure indicates to investors the profitability of
the entire derivative-related transaction and not just the portion that is
subject to mark-to-market valuation under GAAP. We believe that considering only
the change in market value on the derivative side of the transaction can produce
a false sense as to the ultimate profitability of the total transaction as no
change in value is reflected for the non-derivative portion of the transaction.


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

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

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

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

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

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

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

•The Economic Earnings contribution from gas utility operations at SJG for the
six months ended June 30, 2020 increased $4.7 million to $75.4 million compared
with the same period in 2019, primarily due to customer growth and the roll-in
to rates of infrastructure program investments. SJG's utility margin increased
from its CIP mechanism as discussed in "Utility Margin - SJG Utility Operations"
below. These were partially offset with increases in depreciation and
maintenance expenses.


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The following table presents a reconciliation of SJI's income from continuing
operations and earnings per share from continuing operations to Economic
Earnings and Economic Earnings per share for the three and six months ended June
30 (in thousands, except per share data):
                                                               Three Months Ended                                 Six Months Ended
                                                                    June 30,                                          June 30,
                                                            2020               2019               2020               2019
(Loss) Income from Continuing Operations                 $ (2,578)         $ (13,304)         $  98,522          $  72,395
Minus/Plus:
Unrealized Mark-to-Market Losses on Derivatives             1,621              1,888              5,943             15,038

Net Losses from a Legal Proceeding in a Pricing Dispute (A)

                                                             -                986                  -              1,977
Acquisition/Sale Net Costs (Gains) (B)                         92             (1,822)             1,453                163
Other Costs (C)                                               617                422                764              2,995
 Income Taxes (D)                                            (615)              (391)            (1,920)            (5,352)
 Additional Tax Adjustments (E)                                 -                  -              1,214                  -
Economic Earnings                                        $   (863)         

$ (12,221) $ 105,976 $ 87,216


(Loss) Earnings per Share from Continuing Operations     $  (0.03)         $   (0.14)         $    1.06          $    0.79
Minus/Plus:
Unrealized Mark-to-Market Losses on Derivatives              0.02               0.02               0.06               0.16

Net Losses from a Legal Proceeding in a Pricing Dispute (A)

                                                             -               0.01                  -               0.02
Acquisition/Sale Net Costs (Gains) (B)                          -              (0.02)              0.02               0.01
Other Costs (C)                                              0.01               0.01               0.01               0.03
 Income Taxes (D)                                           (0.01)             (0.01)             (0.02)             (0.06)
 Additional Tax Adjustments (E)                                 -                  -               0.01                  -
Economic Earnings per Share                              $  (0.01)         

$ (0.13) $ 1.14 $ 0.95




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

                                                                                                            Six Months Ended
                                                   Three Months Ended June 30,                                  June 30,
                                                      2020                 2019             2020               2019
Income from Continuing Operations               $       3,678           $ 

1,976 $ 74,200 $ 70,707

Plus:

  Additional Tax Adjustments (E)                            -                 -             1,214                  -
Economic Earnings                               $       3,678           $ 1,976          $ 75,414          $  70,707



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

                                                              Three Months Ended                                   Six Months Ended
                                                                   June 30,                                            June 30,
                                                            2020              2019              2020                  2019
Losses on Energy Related Commodity Contracts             $ (1,285)         

$ (143) $ (1,561) $ (12,203) Losses on Interest Rate Contracts

                            (336)           (1,745)           (4,382)                  (2,835)

Total unrealized mark-to-market losses on derivatives (1,621)

  (1,888)           (5,943)                 (15,038)

Net Losses from a Legal Proceeding in a Pricing Dispute -

                         -
(A)                                                                            (986)                                    (1,977)
Acquisition/Sale Net (Costs) Gains (B)                        (92)            1,822            (1,453)                    (163)
Other Costs (C)                                              (617)             (422)             (764)                  (2,995)
Income Taxes (D)                                              615               391             1,920                    5,352
Additional Tax Adjustments (E)                                  -                 -            (1,214)                       -

Total reconciling items between (losses) income from continuing operations and economic earnings

              $ (1,715)         

$ (1,083) $ (7,454) $ (14,821)

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


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

(C) Represents severance and other employee separation costs.


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

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

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SJI Utilities:

SJG Utility Operations:

The following tables summarize the composition of SJG utility operations
operating revenues and margin for the three and six months ended June 30 (in
thousands):
                                                   Three Months Ended                                       Six Months Ended
                                                        June 30,                                                June 30,
                                                2020                2019                2020                   2019
Utility Operating Revenues:
Firm Sales -
Residential                                 $   56,496          $   27,139          $  216,403          $       207,105
Commercial                                      10,967               9,721              43,522                   46,415
Industrial                                         332                 603               1,579                    2,535
Cogeneration & Electric Generation                 586                 391               1,040                      971
Firm Transportation -
Residential                                      1,588               1,540               5,941                    6,528
Commercial                                       5,942               6,715              21,377                   21,953
Industrial                                       5,851               5,653              12,264                   12,250
Cogeneration & Electric Generation               1,088               1,241               2,515                    2,969

Total Firm Revenues                             82,850              53,003             304,641                  300,726

Interruptible Sales                                  1                   -                  15                       62
Interruptible Transportation                       274                 260                 616                      640
Off-System Sales                                 3,130               7,119              19,534                   29,546
Capacity Release                                   750               1,575               2,690                    2,951
Other                                              177                 311                 380                      541
                                                87,182              62,268             327,876                  334,466
Less: Intercompany Sales                          (568)             (1,247)             (1,657)                  (2,647)
Total Utility Operating Revenues                86,614              61,021             326,219                  331,819

Less:

    Cost of Sales - Utility                     25,546               2,654             106,080                  121,534
    Less: Intercompany Cost of Sales              (568)             (1,247)             (1,657)                  (2,647)
Total Cost of Sales - Utility (Excluding
Depreciation & Amortization) (A)                24,978               1,407             104,423                  118,887
Less: Depreciation & Amortization (A)           25,201              22,918              50,082                   45,460
   Total GAAP Gross Margin                      36,435              36,696             171,714                  167,472
Add: Depreciation & Amortization (A)            25,201              22,918              50,082                   45,460
Less: Conservation Recoveries (B)                1,990               2,560               6,875                    9,358
Less: RAC Recoveries (B)                         6,233               5,219              12,466                   10,438
Less: EET Recoveries (B)                         1,185                 650               2,364                    1,146
Less: Revenue Taxes                                191                 204                 736                      880
Utility Margin (C)                          $   52,037          $   50,981          $  199,355          $       191,110




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                                                  Three Months Ended                                       Six Months Ended
                                                       June 30,                                                June 30,
                                               2020                2019                2020                   2019
Utility Margin:
Residential                                $   36,770          $   27,945          $  119,867          $       126,812
Commercial and Industrial                      15,645              15,574              47,076                   51,822
Cogeneration and Electric Generation            1,071               1,064               2,351                    2,268
Interruptible                                       7                  19                  33                       43
Off-System Sales & Capacity Release               172                 515                 957                    2,186
Other Revenues                                    458                 538                 661                      787
Margin Before Weather Normalization &
Decoupling                                     54,123              45,655             170,945                  183,918
CIP Mechanism                                  (3,548)              4,382              25,363                    5,256
EET Mechanism                                   1,462                 944               3,047                    1,936
Utility Margin (C)                         $   52,037          $   50,981          $  199,355          $       191,110


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

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

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

Operating Revenues - SJG Utility Operations


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

•Total firm revenue increased $29.8 million for the three months ended June 30,
2020 compared with the same period in 2019, primarily due to customer growth, a
higher BGSS refund to customers in 2019 compared to 2020, and colder weather
during the second quarter of 2020. While changes in gas costs and BGSS
recoveries/refunds fluctuate from period to period, SJG does not profit from the
sale of the commodity. Therefore, corresponding fluctuations in Operating
Revenue or Cost of Sales have no impact on profitability, as further discussed
below under the caption "Utility Margin."

•Partially offsetting these increases was OSS, which decreased $4.0 million for
the three months ended June 30, 2020 compared with the same period in 2019,
primarily due to decreased commodity costs as a result of lower cash market
prices and lower demand. However, the impact of changes in OSS activity does not
have a material impact on the earnings of SJG, as SJG is required to return 93%
of the profits of such activity to its ratepayers. Earnings from OSS can be seen
in the "Margin" table above.

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

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

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

Utility Margin - SJG Utility Operations


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

Total Utility Margin increased $1.1 million, or 2.1%, and $8.2 million, or 4.3%,
for the three and six months ended June 30, 2020, respectively, compared with
the same periods in 2019. The increase is primarily due to customer growth and
the roll-in to rates of infrastructure program investments. Also contributing to
SJG's Utility Margin is the CIP tracking mechanism, which adjusts earnings when
actual usage per customer experienced during the period varies from an
established baseline usage per customer. As reflected in the Utility Margin
table above and the CIP table in SJG's Management Discussion section, changes
year over year to the CIP mechanism are primarily due to variation in customer
usage compared to the same period in 2019. Partially offsetting the six month
comparative period increases is warmer weather in the first three months of 2020
compared to the same period in the prior year.

ETG Utility Operations:


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

                                             Three Months Ended                                       Six Months Ended
                                                  June 30,                                                June 30,
                                          2020                2019                2020                   2019
Utility Operating Revenues:
Firm & Interruptible Sales -
Residential                           $   37,480          $   27,134          $  136,876          $       123,393
Commercial & Industrial                   10,088               8,470              36,373                   37,445
Firm & Interruptible Transportation -
Residential                                  402                 284               1,272                      996
Commercial & Industrial                    9,750               7,438              23,509                   19,020
Other                                        123               1,528               3,970                    4,174
Total Firm & Interruptible Revenues       57,843              44,854             202,000                  185,028

Less: Total Cost of Sales - Utility
(Excluding Depreciation &
Amortization) (A)                         19,928              15,084              74,045                   84,062
Less: Depreciation & Amortization (A)      9,933               6,681              19,181                   13,204
   Total GAAP Gross Margin                27,982              23,089             108,774                   87,762
Add: Depreciation & Amortization (A)       9,933               6,681              19,181                   13,204
Less: Regulatory Rider Expenses (B)        3,747               1,199               9,046                    3,459
Utility Margin (C)                    $   34,168          $   28,571          $  118,909          $        97,507



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                                        Three Months Ended                            Six Months Ended
                                             June 30,                                     June 30,
                                       2020           2019            2020               2019
   Utility Margin:
   Residential                      $ 22,135       $ 15,980       $  79,568       $        62,501
   Commercial & Industrial            15,637         12,135          43,549                34,108
   Regulatory Rider Expenses (B)      (3,604)           456         
(4,208)                  898
   Utility Margin (C)               $ 34,168       $ 28,571       $ 118,909       $        97,507


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

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


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

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

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

ELK Utility Operations:


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

Nonutility:

Operating Revenues - Energy Group


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

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

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•Revenues from retail electric operations at SJE, net of intercompany
transactions, decreased $9.1 million to $10.0 million and decreased $19.1
million to $21.6 million, for the three and six months ended June 30, 2020,
respectively, compared with the same periods in 2019, primarily due to lower
overall sales volumes as SJE did not renew several contracts that have expired
over the last twelve months. Partially offsetting this decrease was the change
in unrealized gains and losses recorded on forward financial contracts due to
price volatility, which is excluded for Economic Earnings and represented a
total increase of $2.1 million and $3.0 million for the three and six months
ended June 30, 2020, respectively, compared with the same periods in 2019.

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

Operating Revenues - Energy Services
Combined revenues for Energy Services, net of intercompany transactions,
decreased $11.9 million, or 81.9%, to $2.6 million, and decreased $16.1 million,
or 62.2%, to $9.8 million for the three and six months ended June 30, 2020,
respectively, compared with the same periods in 2019. The significant drivers
for the overall change were as follows:
•Revenues from on-site energy production at Marina, net of intercompany
transactions, decreased $12.3 million to $1.8 million and decreased $16.8
million to $8.1 million for the three and six months ended June 30, 2020,
respectively, compared with the same periods in 2019, primarily due to lack of
revenues from MTF and ACB subsequent to the sale that was completed February 18,
2020 (see Note 1 to the condensed consolidated financial statements).

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

Gross Margin - Energy Group & Energy Services


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

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

Gross Margin - Energy Group


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

•Gross margin from the wholesale energy operations at SJRG increased $8.5
million to $8.7 million, and increased $18.4 million to $18.8 million for the
three and six months ended June 30, 2020, respectively, compared with the same
periods in 2019, primarily due to higher margins on daily energy trading
activities, along with a refund received from a third party gas supplier as
discussed in Note 1 to the condensed consolidated financial statements. Also
impacting the comparative period gross margins was the change in unrealized
gains and losses recorded on forward financial contracts due to price
volatility, which is excluded for Economic Earnings and represented a total
decrease of $3.2 million and a total increase of $7.7 million for the three and
six months ended June 30, 2020, respectively, compared with the same periods in
2019.
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The wholesale energy operations at SJRG are expected to continue to add
incremental margin from marketing and related opportunities in the Marcellus
region, capitalizing on its established presence in the area. Future margins
could fluctuate significantly due to the volatile nature of wholesale gas
prices.

•Gross margin from SJE's retail electric operations increased $1.9 million to
$0.4 million and increased $2.3 million to $0.3 million for the three and six
months ended June 30, 2020, respectively, compared with the same periods in
2019, primarily due to the change in unrealized gains and losses recorded on
forward financial contracts due to price volatility, which is excluded for
Economic Earnings and represented a total increase of $2.1 million and $3.0
million for the three and six months ended June 30, 2020, respectively, compared
with the same periods in 2019. Partially offsetting this increase is overall
lower sales volumes as SJE did not renew several contracts that have expired
over the last twelve months.

Gross Margin - Energy Services
Combined gross margins for Energy Services decreased $9.9 million to $2.9
million and decreased $12.7 million to $9.5 million for the three and six months
ended June 30, 2020, respectively, compared with the same periods in 2019. The
significant drivers for the overall change were as follows:
•Gross margin from on-site energy production at Marina decreased $10.2 million
to $2.0 million and decreased $13.4 million to $7.8 million for the three and
six months ended June 30, 2020, respectively, compared with the same periods in
2019, primarily due to lack of margin from MTF and ACB subsequent to the sale
that was completed February 18, 2020 (see Note 1 to the condensed consolidated
financial statements).

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

Operating Expenses - All Segments:

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

                                                              Three Months Ended         Six Months Ended June
                                                                   June 30,                       30,
                                                                 2020 vs. 2019               2020 vs. 2019
SJI Utilities:
  SJG Utility Operations                                     $            160            $           (314)
  ETG Utility Operations                                                1,852                       8,350
  ELK Utility Operations                                                 (179)                       (105)
    Subtotal SJI Utilities                                              1,833                       7,931

Nonutility:

Energy Group:

  Wholesale Energy Operations                                              64                         118
  Retail Electric Operations                                               38                          (2)
   Subtotal Energy Group                                                  102                         116

Energy Services:

  On-Site Energy Production                                            (5,789)                     (7,573)
  Appliance Service Operations                                            (16)                         99
Subtotal Energy Services                                               (5,805)                     (7,474)
Midstream                                                                 229                         228
Corporate & Services and Intercompany Eliminations                       (311)                     (5,223)
Total Operations Expense                                     $         (3,952)           $         (4,422)




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Operations Expense

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

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

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

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

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


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

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

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

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

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

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

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LIQUIDITY AND CAPITAL RESOURCES:

Liquidity needs are driven by factors that include natural gas commodity prices;
the impact of weather on customer bills; lags in fully collecting gas costs from
customers under the BGSS charge and other regulatory clauses, settlement of
legal matters, and environmental remediation expenditures through the RAC;
working capital needs of SJI's energy trading and marketing activities; the
timing of construction and remediation expenditures and related permanent
financings; the timing of equity contributions to unconsolidated affiliates;
mandated tax payment dates; both discretionary and required repayments of
long-term debt; and the amounts and timing of dividend payments.

Cash Flows from Operating Activities - Liquidity needs are first met with net
cash provided by operating activities. Net cash provided by operating activities
totaled $206.3 million and $216.1 million in the first six months of 2020 and
2019, respectively. Net cash provided by operating activities varies from
year-to-year primarily due to the impact of weather on customer demand and
related gas purchases, customer usage factors related to conservation efforts
and the price of the natural gas commodity, inventory utilization, and gas cost
recoveries. Cash flows provided by operating activities in the first six months
of 2020 produced less net cash than the same period in 2019, primarily due to
lower revenues on fuel supply management contracts at SJRG (see "Operating
Revenues-Energy Group") along with the timing of a refund from a third party gas
supplier that was received in July (see Note 1 to the condensed consolidated
financial statements). These changes are partially offset with higher ETG
revenues due to favorable changes in base rates resulting from the completion of
ETG's rate case in November 2019 (see "ETG Utility Operations").

Cash Flows from Investing Activities - SJI has a continuing need for cash
resources and capital, primarily to invest in new and replacement facilities and
equipment. Net cash outflows from investing activities, which are primarily
construction projects, for the first six months of 2020 and 2019 amounted to
$135.1 million and $222.2 million, respectively. We estimate the cash outflows
for investing activities, net of refinancings and returns/advances on
investments from affiliates, for fiscal years 2020, 2021 and 2022 at SJI to be
approximately $491.3 million, $777.3 million and $650.1 million, respectively.
The high level of investing activities for 2020, 2021 and 2022 is due to the
accelerated infrastructure investment programs and future capital expenditures
at SJG and ETG, projected investment in PennEast in 2021 and 2022, and
investments in future renewable energy projects. SJI expects to use short-term
borrowings under lines of credit from commercial banks and a commercial paper
program to finance these investing activities as incurred. From time to time,
SJI may refinance the short-term debt with long-term debt.

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


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

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

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

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

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


Cash Flows from Financing Activities - Short-term borrowings from the commercial
paper program and lines of credit from commercial banks are used to supplement
cash flows from operations, to support working capital needs and to finance
capital expenditures and acquisitions as incurred. From time to time, short-term
debt incurred to finance capital expenditures is refinanced with long-term debt.


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

                                                                                                   Available
Company                                                Total Facility            Usage             Liquidity              Expiration Date
SJI:
SJI Syndicated Revolving Credit Facility              $      500,000        

$ 28,000 (A) $ 472,000 August 2022


Term Loan Credit Agreement                                   150,000            150,000                   -          March 2021

Total SJI                                                    650,000            178,000             472,000

SJG:
Commercial Paper Program/Revolving Credit
Facility                                                     200,000            161,300    (B)       38,700          August 2022
Uncommitted Bank Line                                         10,000                  -              10,000          September 2020 (D)

Total SJG                                                    210,000            161,300              48,700

ETG/SJIU:
ETG/SJIU Revolving Credit Facility                           200,000            124,900    (C)       75,100          April 2022

Total                                                 $    1,060,000          $ 464,200          $  595,800



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

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

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

SJIU and ETG (as Borrowers) have a $200.0 million revolving credit agreement
with several lenders. The revolving credit agreement provides for the extension
of credit to the Borrowers in a total aggregate amount of $200.0 million. See
Note 10 to the condensed consolidated financial statements.


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

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

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

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

Based upon the existing credit facilities and a regular dialogue with our banks,
we believe there will continue to be sufficient credit available to meet our
business' future liquidity needs.

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

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

SJI supplements its operating cash flow, commercial paper program and credit
lines with both debt and equity capital. Over the years, SJG has used long-term
debt, primarily in the form of First Mortgage Bonds and Medium Term Notes,
secured by the same pool of utility assets, to finance its long-term borrowing
needs. These needs are primarily capital expenditures for property, plant and
equipment.

2020 Activity:

Debt Issuances/Paydowns

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

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

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

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

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

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

ATM Equity Offering


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

2019 Activity:


On January 15, 2019, SJI settled its equity forward sale agreement by physically
delivering the remaining 6,779,661 shares of common stock and receiving net cash
proceeds of approximately $189.0 million. The forward price used to determine
cash proceeds received by SJI at settlement was calculated based on the initial
forward sale price, as adjusted for underwriting fees, interest rate adjustments
as specified in the equity forward agreement and any dividends paid on our
common stock during the forward period.

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


During the six months ended June 30, 2019, SJI paid off $60.0 million principal
amount outstanding on its 3.30% Senior Notes, Series 2014A-1, due June 26, 2019,
and paid off $40.0 million principal amount outstanding on its Floating Rate
Senior Notes, Series 2014B-1, due June 26, 2019.

Also during the six months ended June 30, 2019, SJG issued $10.0 million of debt by drawing on its $400.0 million term loan credit agreement.

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

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

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SJI's capital structure was as follows:
                   As of June 30, 2020      As of December 31, 2019
Equity                          34.7  %                      29.6  %
Long-Term Debt                  55.9  %                      52.8  %
Short-Term Debt                  9.4  %                      17.6  %
Total                          100.0  %                     100.0  %



SJI has paid dividends on its common stock for 69 consecutive years and has
increased that dividend each year for the last 21 years. SJI's current long-term
goals are to grow the dividend at a rate consistent with earnings growth over
the long term, subject to the approval of its Board of Directors, with a
targeted payout ratio of between 55% and 65% of Economic Earnings. In setting
the dividend rate, the Board of Directors of SJI considers future earnings
expectations, payout ratio, and dividend yield relative to those at peer
companies, as well as returns available on other income-oriented investments.
However, there can be no assurance that SJI will be able to continue to increase
the dividend, meet the targeted payout ratio or pay a dividend at all in the
future.


COMMITMENTS AND CONTINGENCIES:


Environmental Remediation - Costs for remediation projects, net of recoveries
from ratepayers, for the first six months of 2020 and 2019 amounted to net cash
outflows of $16.3 million and $11.6 million, respectively. Total net cash
outflows for remediation projects are expected to be $43.2 million, $58.3
million and $69.5 million for 2020, 2021 and 2022, respectively. As discussed in
Notes 10 and 15 to the Consolidated Financial Statements in Item 8 of SJI's and
SJG's 10-K for the year ended December 31, 2019, certain environmental costs are
subject to recovery from ratepayers.

Standby Letters of Credit - See Notes 10 and 11 to the condensed consolidated financial statements.


Contractual Obligations - There were no significant changes to SJI's contractual
obligations described in Note 15 to the Consolidated Financial Statements in
Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year ended
December 31, 2019, except for the following:

•RC Cape May Holdings, LLC has communicated to SJG that it no longer intends to
proceed with a project to re-power the former BL England facility with natural
gas. As of March 2020, SJG had determined that the project under construction
will be abandoned. SJG requested that the project costs spent to date of
$10.1 million be recovered as a regulatory asset within its March 2020 rate case
petition filed with the BPU. As such, the amount has been reclassified from
Utility Plant and is presented as a Regulatory Asset within the condensed
consolidated balance sheets at June 30, 2020. The matter is currently pending
with the BPU. See Note 8 to the condensed consolidated financial statements.

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

Off-Balance Sheet Arrangements - An off-balance sheet arrangement is any contractual arrangement involving an unconsolidated entity under which SJI has either made guarantees, or has certain other interests or obligations.

See "Guarantees" in Note 11 to the condensed consolidated financial statements for more detail.

Notes Receivable-Affiliates - See Note 3 to the condensed consolidated financial statements.

Litigation - SJI and SJG are subject to claims, actions and other legal proceedings arising in the ordinary course of business. See Note 11 to the condensed consolidated financial statements for more detail on these claims.

PennEast - See Note 3 to the condensed consolidated financial statements.

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SOUTH JERSEY GAS COMPANY

This section of Management's Discussion focuses on SJG for the reported periods. In many cases, explanations and disclosures for both SJI and SJG are substantially the same or specific disclosures for SJG are included in the Management's Discussion for SJI.

RESULTS OF OPERATIONS:


The results of operations for the SJG utility operations are described in detail
above; therefore, this section primarily focuses on statistical information and
other information that is not discussed in the results of operations under South
Jersey Industries, Inc. Refer to the section entitled "Results of Operations -
SJG Utility Operations" for a detailed discussion of the results of operations
for SJG.

The following table summarizes the composition of selected gas utility
throughput for the three and six month periods ended June 30, (in thousands):

                                                                                                                       Six Months Ended June
                                                     Three Months Ended June 30,                                                30,
                                                    2020                    2019                    2020                    2019
Utility Throughput - dts:
Firm Sales -
Residential                                            3,767                   2,530                  13,979                  15,508
Commercial                                               874                     864                   3,271                   3,987
Industrial                                                20                      64                     128                     259
Cogeneration & Electric Generation                       128                      56                     209                     139
Firm Transportation -
Residential                                              160                     123                     610                     751
Commercial                                               982                     966                   3,331                   3,673
Industrial                                             2,196                   2,190                   4,966                   4,980
Cogeneration & Electric Generation                       571                   1,025                   1,439                   2,367

Total Firm Throughput                                  8,698                   7,818                  27,933                  31,664

Interruptible Sales                                        -                       -                       1                       6
Interruptible Transportation                             223                     227                     516                     547
Off-System Sales                                       1,194                   2,478                   6,732                   7,541
Capacity Release                                      20,726                  24,903                  38,790                  42,234

Total Throughput - Utility                            30,841                  35,426                  73,972                  81,992



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

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Table of Contents CIP - The effects of the CIP on SJG's net income and the associated weather comparisons are as follows (dollars in millions):

                                            Three Months Ended June 30,                                   Six Months Ended June 30,
                                            2020                    2019                  2020                    2019
Net Income Impact:
CIP - Weather Related                $         (2.9)           $        4.4          $      11.0          $         5.0
CIP - Usage Related                             0.3                    (0.8)                 7.4                   (0.8)
Total Net Income Impact              $         (2.6)           $        3.6          $      18.4          $         4.2

Weather Compared to 20-Year Average     19.6% Colder            133.3% Colder         13.2% Warmer           271.9% Colder
Weather Compared to Prior Year          72.9% Colder            74.0% Warmer          6.3% Warmer             4.6% Warmer



Operating Revenues & Margin - See SJI's Management Discussion section above.


Operating Expenses - A summary of changes in operating expenses for SJG is as
follows (in thousands):

                             Three Months Ended June 30,       Six Months Ended June 30,
                                    2020 vs. 2019                    2020 vs. 2019
 Operations                                        160       $                  (314)
 Maintenance                                     1,481       $                 1,909
 Depreciation                                      948       $                 1,910
 Energy and Other Taxes                            (84)      $                  (458)


Operations - See SJI's Management Discussion section above.


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

Depreciation - Depreciation expense increased $0.9 million and $1.9 million for
the three and six months ended June 30, 2020, respectively, compared with the
same periods in 2019, primarily due to New Jersey's infrastructure improvement
efforts, which included the approval of SJG's AIRP and SHARP, in addition to
significant investment in new technology systems.

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

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

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

Income Taxes - Income tax expense generally fluctuates as income before taxes
changes. Minor variations will occur period to period as a result of effective
tax rate adjustments. Also, during the first quarter of 2020, SJG recorded $1.2
million in tax expense related to a one-time tax adjustment resulting from its
Stipulation of Settlement with the BPU, as part of its recent rate case filing
(see Note 7 to the condensed consolidated financial statements).

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LIQUIDITY AND CAPITAL RESOURCES:

Liquidity and capital resources for SJG are substantially covered in the Management's Discussion of SJI (except for the items and transactions that relate to SJI and its nonutility subsidiaries). Those explanations are incorporated by reference into this discussion.


Liquidity needs for SJG are driven by factors that include natural gas commodity
prices; the impact of weather on customer bills; lags in fully collecting gas
costs from customers under the BGSS charge, settlement of legal matters, and
environmental remediation expenditures through the RAC; the timing of
construction and remediation expenditures and related permanent financings;
mandated tax payment dates; both discretionary and required repayments of
long-term debt; and the amounts and timing of dividend payments.

Cash Flows from Operating Activities - Liquidity needs are first met with net
cash provided by operating activities. Net cash provided by operating activities
totaled $125.5 million and $126.3 million in the first six months of 2020 and
2019, respectively. Net cash provided by operating activities varies from
year-to-year primarily due to the impact of weather on customer demand and
related gas purchases, customer usage factors related to conversion efforts and
the price of the natural gas commodity, inventory utilization, and gas cost
recoveries. Cash flows provided by operating activities in the first six months
of 2020 compared to the same period in 2019, did not change significantly.

Cash Flows from Investing Activities - SJG has a continuing need for cash
resources for capital expenditures, primarily to invest in new and replacement
facilities and equipment. SJG estimates the net cash outflows for capital
expenditures for fiscal years 2020, 2021 and 2022 to be approximately $283.3
million, $320.2 million and $327.1 million, respectively. For capital
expenditures, including those under the AIRP and SHARP, SJG expects to use
short-term borrowings under both its commercial paper program and lines of
credit from commercial banks to finance capital expenditures as incurred. From
time to time, SJG may refinance the short-term debt incurred to support capital
expenditures with long-term debt.

Cash Flows from Financing Activities - SJG supplements its operating cash flow
and credit lines with both debt and equity capital. Over the years, SJG has used
long-term debt, primarily in the form of First Mortgage Bonds and Medium Term
Notes, secured by the same pool of utility assets, to finance its long-term
borrowing needs. These needs are primarily capital expenditures for property,
plant and equipment.

See SJI's Management Discussion section above.


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

SJG's capital structure was as follows:

                   As of June 30, 2020      As of December 31, 2019
Common Equity                   51.1  %                      49.0  %
Long-Term Debt                  41.9  %                      43.3  %
Short-Term Debt                  7.0  %                       7.7  %

Total                          100.0  %                     100.0  %




COMMITMENTS AND CONTINGENCIES:


Costs for remediation projects, net of recoveries from ratepayers, for the first
six months of 2020 and 2019 amounted to net cash outflows of $16.2 million and
$11.5 million, respectively. Total net cash outflows for remediation projects
are expected to be $34.8 million, $31.5 million and $23.3 million for 2020, 2021
and 2022, respectively. As discussed in Notes 10 and 15 to the Consolidated
Financial Statements in Item 8 of SJI's and SJG's 10-K for the year ended
December 31, 2019, certain environmental costs are subject to recovery from
ratepayers.

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SJG has certain commitments for both pipeline capacity and gas supply for which
SJG pays fees regardless of usage. Those commitments, as of June 30, 2020,
averaged $93.2 million annually and totaled $404.7 million over the contracts'
lives. Approximately 28% of the financial commitments under these contracts
expire during the next five years. SJG expects to renew each of these contracts
under renewal provisions as provided in each contract. SJG recovers all such
prudently incurred fees through rates via the BGSS.

Pending Litigation - See SJG's disclosure in the Commitments and Contingencies section of SJI's Management Discussion above.

Contractual Cash Obligations - There were no significant changes to SJG's contractual obligations described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2019, other than the BL England facility (see SJI's Management Discussion section above).

Off-Balance Sheet Arrangements - SJG has no off-balance sheet arrangements.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2020 1 542 M - -
Net income 2020 146 M - -
Net Debt 2020 3 276 M - -
P/E ratio 2020 15,9x
Yield 2020 5,02%
Capitalization 2 389 M 2 389 M -
EV / Sales 2020 3,67x
EV / Sales 2021 3,65x
Nbr of Employees 1 100
Free-Float 91,1%
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Consensus
Sell
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Mean consensus HOLD
Number of Analysts 9
Average target price 28,67 $
Last Close Price 23,81 $
Spread / Highest target 51,2%
Spread / Average Target 20,4%
Spread / Lowest Target -16,0%
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Managers
NameTitle
Michael J. Renna President, Chief Executive Officer & Director
Joseph M. Rigby Chairman
Steven R. Cocchi CFO, Chief Strategy & Development Officer, SVP
Keith S. Campbell Independent Director
Sheila Hartnett-Devlin Independent Director
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