SOUTH JERSEY INDUSTRIES, INC. 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 endedDecember 31, 2021 . Unless otherwise noted, earnings per share amounts are presented on a diluted basis, and are based on weighted average common and common equivalent shares outstanding. SJI's and SJG's operations are seasonal and accordingly, operating results for the interim periods presented are not indicative of the results to be expected for the full fiscal year. Forward-Looking Statements and Risk Factors - This Quarterly Report, including information incorporated by reference, contains forward-looking statements within the meaning of theU.S. Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position, expected sources of incremental margin, strategy, financing needs, future capital expenditures and the outcome or effect of ongoing litigation, are forward-looking. This Quarterly Report uses words such as "anticipate," "believe," "expect," "estimate," "forecast," "goal," "intend," "objective," "plan," "project," "seek," "strategy," "target," "will" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on the beliefs and assumptions of management at the time that these statements were prepared and are inherently uncertain. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These risks and uncertainties include, but are not limited to, general economic conditions on an international, national, state and local level; weather conditions in SJI's marketing areas; changes in commodity costs; changes in the availability of natural gas; "non-routine" or "extraordinary" disruptions in SJI's distribution system; cybersecurity incidents and related disruptions; regulatory, legislative and court decisions; competition; the availability and cost of capital; costs and effects of legal proceedings and environmental liabilities; the failure of customers, suppliers or business partners to fulfill their contractual obligations; changes in business strategies; failure to satisfy the conditions to closing of the Merger, including obtaining the requisite vote of the shareholders of SJI; the diversion of management time on Merger-related issues; and public health crises and epidemics or pandemics, such as the COVID-19 pandemic. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ materially from those expressed in the forward-looking statements, are described in greater detail under the heading "Item 1A. Risk Factors" in this Quarterly Report, SJI's and SJG's Annual Report on Form 10-K for the year endedDecember 31, 2021 and in any otherSEC filings made by SJI or SJG during 2021 and 2022 and prior to the filing of this Quarterly Report. No assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made. SJI and SJG undertake no obligation to revise or update any forward-looking statements, whether from new information, future events or otherwise, except required by law. 57 -------------------------------------------------------------------------------- Table of Contents Merger - OnFebruary 23, 2022 ,South Jersey Industries, Inc. (SJI or the Company) announced that it had signed an agreement and plan of merger (the "Merger Agreement") withNJ Boardwalk Holdings LLC , aDelaware limited liability company ("Parent") andBoardwalk Merger Sub, Inc. , aNew Jersey corporation and a wholly-owned subsidiary of Parent ("Merger Sub"), pursuant to which, Merger Sub will be merged with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of Parent. Each of Parent and Merger Sub are affiliates ofInfrastructure Investments Fund . Following completion of the transaction, SJI intends to delist its shares from theNew York Stock Exchange . At the effective time of the merger (the "Effective Time"), each share of SJI's common stock issued and outstanding immediately before the Effective Time will be converted into the right to receive$36.00 in cash, without interest. SJI's shareholders will be asked to vote on the adoption of the Merger Agreement and the merger at a special shareholders' meeting that will be held on a date to be announced. The closing of the merger is subject to customary conditions, including the receipt of regulatory approvals by the BPU, and that the Merger Agreement be adopted by at least a majority of the votes cast by shareholders entitled to vote thereon at the meeting. The Merger Agreement places limitations on SJI's ability to engage in certain types of transactions without Parent's consent between the signing of the Merger Agreement and the Effective Time, including limitations on SJI's ability to issue dividends other than consistent with its past practices, acquire other businesses, issue equity of SJI (except in the ordinary course pursuant to equity compensation plans) and, subject to certain exceptions, incurring certain indebtedness for borrowed money. The Merger Agreement contains certain termination rights, including the right of SJI or Parent to terminate if the merger is not consummated within 12 months after signing, subject to certain extensions and exceptions. Under the terms of the Merger Agreement, the Company may be required to pay Parent a termination fee of$140.0 million if the Merger Agreement is terminated under certain specified circumstances. The Merger Agreement additionally provides that Parent pay the Company a termination fee of$255.0 million under certain specified circumstances. COVID-19 - See "Deferred COVID-19 Costs" in Note 8 to the condensed consolidated financial statements for information about regulatory assets recorded as ofMarch 31, 2022 andDecember 31, 2021 related to incremental costs incurred related to COVID-19. Except as discussed therein, the impact of COVID-19 on the financial results of the Company has not been material for the three months endedMarch 31, 2022 and 2021, respectively. For additional information related to COVID-19 and its impacts, see the "COVID-19" section of Item 7 "Management Discussion & Analysis of Financial Condition and Results of Operations" of SJI's Annual Report on Form 10-K for the year endedDecember 31, 2021 . Critical Accounting Policies - Estimates and Assumptions - Other than as described below, there have been no changes to these estimates and assumptions from SJI's and SJG's Annual Report on Form 10-K for the year endedDecember 31, 2021 . Regulatory Actions - Other than the changes discussed in Note 7 to the condensed consolidated financial statements, there have been no significant regulatory actions since those discussed in Note 10 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year endedDecember 31, 2021 .
New Accounting Pronouncements - See discussions concerning New Accounting Pronouncements and their impact on SJI and SJG in Note 1 to the condensed consolidated financial statements.
Operating Segments:
The operating segments reflect the financial information regularly evaluated by the CODM, which for SJI is the Company's Chief Executive Officer. The operating segments are as follows: •SJG utility operations consist primarily of natural gas distribution to residential, commercial and industrial customers in southernNew Jersey . •ETG utility operations consist primarily of natural gas distribution to residential, commercial and industrial customers in northern and centralNew Jersey . •Wholesale energy operations include the activities of SJRG and SJEX. •Retail services operations includes the activities of SJE, SJESP and SJEI, as well as our equity interest in Millennium. •Renewables consists of: •The Catamaran joint venture, which owns Annadale and Bronx Midco, along with a solar project inMassachusetts . •Solar-generation sites located inNew Jersey . •The activities of ACLE, BCLE, SCLE and SXLE, which have all ceased operations. 58 -------------------------------------------------------------------------------- Table of Contents •Decarbonization consists of •SJI Renewables Energy Ventures, LLC, which includes our equity interest in REV, which is included in Equity in Earnings of Affiliated Companies on the condensed consolidated statements of income. •SJI RNG Devco, LLC, which includes costs incurred to develop renewable natural gas operations at certain dairy farms along with the related development rights acquired in 2020. Also included here is theRed River joint venture that was formed inMarch 2022 . •Midstream invests in infrastructure and other midstream projects, including an investment in PennEast for which development ceased inSeptember 2021 . •Corporate & Services segment includes costs related to financing, acquisitions and divestitures, and other unallocated costs. •Intersegment represents intercompany transactions among the above SJI consolidated entities. SJI groups its utility businesses under its wholly-owned subsidiary SJIU. This group consists of gas utility operations of SJG and ETG. SJI groups its nonutility operations into separate categories: Energy Management; Energy Production; Midstream; and Corporate & Services. Energy Management includes wholesale energy and retail services. Energy Production includes renewables and decarbonization. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to the condensed consolidated financial statements. 59 -------------------------------------------------------------------------------- Table of ContentsSOUTH JERSEY INDUSTRIES, INC.
RESULTS OF OPERATIONS:
Summary:
SJI's net income for the three months endedMarch 31, 2022 increased$0.6 million to net income of$129.3 million compared with the same period in 2021. SJI's income from continuing operations for the three months endedMarch 31, 2022 increased$0.6 million to income of$129.4 million compared with the same period in 2021. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax): •The income contribution from the gas utility operations at SJG for the three months endedMarch 31, 2022 increased$5.0 million to$88.6 million compared with the same period in 2021, primarily due to the roll-in of infrastructure programs and customer growth, along with the margin impact of SJG's CIP mechanism as discussed in "Utility Margin - SJG Utility Operations" below. •The income contribution from gas utility operations at ETG for the three months endedMarch 31, 2022 increased$0.6 million to$38.6 million compared with the same period in 2021, primarily due to customer growth and colder weather. •The income contribution from the wholesale energy operating segment for the three months endedMarch 31, 2022 increased$0.5 million to$13.6 million compared with the same period in 2021, primarily due to higher margins from daily energy trading activities and colder weather experienced in the first quarter of 2022. This was almost entirely offset with the change in unrealized gains and losses on forward financial contracts due to price volatility. •The Corporate & Services segment incurred approximately$3.4 million of costs related to the Merger Agreement that did not occur in the prior year period (see Note 1 to the condensed consolidated financial statements). •The income contribution from the renewables operating segment for the three months endedMarch 31, 2022 decreased$1.0 million to$0.1 million compared with the same period in 2021, primarily due to lower sales of SRECs. •The income contribution from the midstream operating segment for the three months endedMarch 31, 2022 decreased$1.2 million to a loss of$0.2 million compared with the same period in 2021, primarily due to AFUDC recorded in 2021 that did not occur in 2022 due to the decision to cease further development of the PennEast project (see Note 3 to the condensed consolidated financial statements). A significant portion of the volatility in operating results is due to the impact of the accounting methods associated with SJI's derivative activities. SJI uses derivatives to limit its exposure to market risk on transactions to buy, sell, transport and store natural gas and to buy and sell retail electricity. SJI also previously used derivatives to limit its exposure to increasing interest rates on variable-rate debt.
The types of transactions that typically cause the most significant volatility in operating results are as follows:
•SJRG purchases and holds natural gas in storage and maintains capacity on
interstate pipelines to earn profit margins in the future. SJRG utilizes
derivatives to mitigate price risk in order to substantially lock-in the profit
margin that will ultimately be realized. However, both gas stored in inventory
and pipeline capacity are not considered derivatives and are not subject to fair
value accounting. Conversely, the derivatives used to reduce the risk associated
with a change in the value of inventory and pipeline capacity are accounted for
at fair value, with changes in fair value recorded in operating results in the
period of change. As a result, earnings are subject to volatility as the market
price of derivatives change, even when the underlying hedged value of inventory
and pipeline capacity are unchanged. Additionally, volatility in earnings is
created when realized gains and losses on derivatives used to mitigate commodity
price risk on expected future purchases of gas injected into storage are
recognized in earnings when the derivatives settle, but the cost of the related
gas in storage is not recognized in earnings until the period of withdrawal.
This volatility can be significant from period to period. Over time, gains or
losses on the sale of gas in storage, as well as use of capacity, will be offset
by losses or gains on the derivatives, resulting in the realization of the
profit margin expected when the transactions were initiated.
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•SJE uses forward contracts to mitigate commodity price risk on fixed price
electric contracts with customers. In accordance with GAAP, the forward
contracts are recorded at fair value, with changes in fair value recorded in
earnings in the period of change. Several related customer contracts are not
considered derivatives and, therefore, are not recorded in earnings until the
electricity is delivered. As a result, earnings are subject to volatility as the
market price of the forward contracts change, even when the underlying hedged
value of the customer contract is unchanged. Over time, gains or losses on the
sale of the fixed price electric under contract will be offset by losses or
gains on the forward contracts, resulting in the realization of the profit
margin expected when the transactions were initiated. These contracts
outstanding as of March 31, 2022 were not material.
As a result, management also uses the non-GAAP financial measures of Economic
Earnings and Economic Earnings per share when evaluating its results of
operations. These non-GAAP financial measures should not be considered as an
alternative to GAAP measures, such as net income, operating income, earnings per
share from continuing operations or any other GAAP measure of financial
performance.
We define Economic Earnings as: Income from Continuing Operations, (i) less the
change in unrealized gains and plus the change in unrealized losses on
non-utility derivative transactions; (ii) less income and plus losses
attributable to noncontrolling interests; and (iii) less the impact of
transactions, contractual arrangements or other events where management believes
period to period comparisons of SJI's operations could be difficult or
potentially confusing. With respect to part (iii) of the definition of Economic
Earnings, items excluded from Economic Earnings for the three months ended March
31, 2022 and 2021, are described in (A)-(B) in the table below.
Economic Earnings is a significant financial measure used by our management to
indicate the amount and timing of income from continuing operations that we
expect to earn after taking into account the impact of the items described
above. Management uses Economic Earnings to manage its business and to determine
such items as incentive/compensation arrangements and allocation of resources.
Specifically regarding derivatives, we believe that this financial measure
indicates to investors the profitability of the entire derivative-related
transaction and not just the portion that is subject to mark-to-market valuation
under GAAP. We believe that considering only the change in market value on the
derivative side of the transaction can produce a false sense as to the ultimate
profitability of the total transaction as no change in value is reflected for
the non-derivative portion of the transaction.
Economic Earnings for the three months ended March 31, 2022 increased $20.6
million to $149.5 million compared with the same period in 2021. The significant
drivers for the overall change were as follows (all numbers in the bullet points
below are presented after-tax):
•The Economic Earnings contribution from the wholesale energy operating segment
for the three months ended March 31, 2022 increased $15.8 million to $29.0
million compared with the same period in 2021, primarily due to higher margins
from daily energy trading activities and from colder weather experienced in the
first quarter of 2022.
•The Economic Earnings contribution from gas utility operations at SJG for the
three months ended March 31, 2022 increased $5.0 million to $88.6 million
compared with the same period in 2021, primarily due to the roll-in of
infrastructure programs and customer growth, along with the margin impact of
SJG's CIP mechanism as discussed in "Utility Margin - SJG Utility Operations"
below.
•The Economic Earnings contribution from the gas utility operations at ETG for
the three months ended March 31, 2022 increased $0.6 million to $38.6 million
compared with the same period in 2021, primarily due to customer growth and
colder weather.
•The income contribution from the midstream operating segment for the three
months ended March 31, 2022 decreased $1.0 million compared with the same period
in 2021, primarily due to AFUDC recorded in 2021 that did not occur in 2022 due
to the decision to cease further development of the PennEast project (see Note 3
to the condensed consolidated financial statements).
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The following table presents a reconciliation of SJI's income from continuing
operations and earnings per share from continuing operations to Economic
Earnings and Economic Earnings per share for the three months ended March 31 (in
thousands, except per share data):
Three Months Ended
March 31,
2022 2021
Income from Continuing Operations $ 129,414 $ 128,798
Minus/Plus:
Unrealized Mark-to-Market Losses on Derivatives 21,268 44
Income Attributable to Noncontrolling Interests (135) (129)
Acquisition/Sale Net Costs (A) 6,491 267
Income Taxes (B) (7,583) (86)
Economic Earnings $ 149,455 $ 128,894
Earnings per Share from Continuing Operations $ 1.08 $ 1.26
Minus/Plus:
Unrealized Mark-to-Market Losses on Derivatives 0.18 -
Income Attributable to Noncontrolling Interests - -
Acquisition/Sale Net Costs (A) 0.05 -
Income Taxes (B) (0.06) -
Economic Earnings per Share $ 1.25 $ 1.26
The reconciliation of derivative instruments not designated as hedging
instruments under GAAP in the condensed consolidated statements of income (see
Note 12 to the condensed consolidated financial statements), and the Economic
Earnings table above, is as follows (in thousands):
Three Months Ended
March 31,
2022 2021
Total unrealized mark-to-market losses on derivatives (21,268) (44)
Income Attributable to Noncontrolling Interests 135 129
Acquisition/Sale Net Costs (A) (6,491) (267)
Income Taxes (B) 7,583 86
Total reconciling items between income from continuing operations and
economic earnings $ (20,041) $ (96)
(A) In 2022, represents costs incurred related to the Merger Agreement and to
finalize the transactions related to acquiring Bronx Midco and solar projects.
In 2021, represents the final working capital payment on the sale of Elkton ,
which was finalized during the first quarter of 2021.
(B) The income taxes were determined using a combined average statutory tax rate.
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--------------------------------------------------------------------------------Table of ContentsSJI Utilities : SJG Utility Operations: The following tables summarize the composition of SJG utility operations operating revenues and margin for the three months endedMarch 31 (in thousands): Three Months Ended March 31, 2022 2021 Utility Operating Revenues: Firm Sales - Residential$ 199,583 $ 161,102 Commercial 43,768 32,109 Industrial 1,898 1,601 Cogeneration & Electric Generation 679 509 Firm Transportation - Residential 4,851 4,899 Commercial 20,076 17,190 Industrial 8,415 7,350 Cogeneration & Electric Generation 1,526 1,379 Total Firm Revenues 280,796 226,139 Interruptible Sales 172 73 Interruptible Transportation 500 444 Off-System Sales 37,648 23,290 Capacity Release 2,906 1,209 Other 241 244 322,263 251,399 Less: Intercompany Sales (8,280) (6,329) Total Utility Operating Revenues 313,983 245,070
Less:
Cost of Sales - Utility 129,868 74,537
Less: Intercompany Cost of Sales (8,280) (6,329)
Total Cost of Sales - Utility (Excluding Depreciation & Amortization) (A)
121,588 68,208
Less: Depreciation & Amortization (A) 40,009 29,315
Total GAAP Gross Margin 152,386 147,547
Add: Depreciation & Amortization (A) 40,009 29,315
Less: CIP Recoveries (B) 6,161 4,238
Less: RAC Recoveries (B) 10,957 6,965
Less: TIC Recoveries (B) 68 -
Less: EET Recoveries (B) 1,348 1,166
Less: Revenue Taxes 937 512
Utility Margin (C) $ 172,924 $ 163,981
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Three Months Ended
March 31,
2022 2021
Utility Margin:
Residential $ 123,478 $ 119,974
Commercial and Industrial 44,587 41,022
Cogeneration and Electric Generation 1,252 1,249
Interruptible 26 65 Off-System Sales & Capacity Release 2,262 737 Other Revenues 240 243 Margin Before Weather Normalization & Decoupling 171,845 163,290 CIP Mechanism (726) (763) EET Mechanism 1,805 1,454 Utility Margin (C)$ 172,924 $ 163,981
(A) Does not include amortization of debt issuance costs that are recorded as Interest Charges on the condensed consolidated statements of income.
(B) Represents pass-through expenses for which there is a corresponding credit in operating revenues. Therefore, such recoveries have no impact on SJG's financial results.
(C) Utility Margin is a non-GAAP financial measure and is further defined under the caption "Utility Margin - SJG Utility Operations" below.
Operating Revenues - SJG Utility Operations
Revenues from the gas utility operations at SJG increased$70.9 million , or 28.2%, for the three months endedMarch 31, 2022 compared with the same period in 2021. Excluding intercompany transactions, revenues increased$68.9 million , or 28.1%, for the three months endedMarch 31, 2022 compared with the same period in 2021. The significant drivers for the overall change were as follows: •Firm revenue increased$54.7 million for the three months endedMarch 31, 2022 compared with the same period in 2021 partially due to customer growth in 2022 compared to 2021, along with increased revenue related to BGSS. While changes in gas costs and BGSS recoveries/refunds fluctuate from period to period, SJG does not profit from the sale of the commodity. Therefore, corresponding fluctuations in Operating Revenue or Cost of Sales have no impact on profitability, as further discussed below under the caption "Utility Margin." •OSS increased$14.4 million for the three months endedMarch 31, 2022 compared with the same period in 2021, primarily due to higher commodity costs, along with colder weather during the first quarter of 2022. However, the impact of changes in OSS activity does not have a material impact on the earnings of SJG as SJG is required to return the majority of the profits of such activity to its ratepayers.
Utility Margin - SJG Utility Operations
Management uses Utility Margin, a non-GAAP financial measure, when evaluating
the operating results of SJG. Utility Margin is defined as natural gas revenues
plus depreciation and amortization expenses, less natural gas costs, regulatory
rider recoveries and related volumetric and revenue-based energy taxes.
Management believes that Utility Margin provides a more meaningful basis for
evaluating utility operations than revenues since natural gas costs, regulatory
rider recoveries and related energy taxes are passed through to customers, and
since depreciation and amortization expenses are considered to be
administrative. Natural gas costs are charged to operating expenses on the basis
of therm sales at the prices approved by the BPU through SJG's BGSS clause.
Non-GAAP financial measures are not in accordance with, or an alternative to,
GAAP and should be considered in addition to, and not as a substitute for, the
comparable GAAP measure.
64-------------------------------------------------------------------------------- Table of Contents Total Utility Margin increased$8.9 million , or 5.5%, for the three months endedMarch 31, 2022 compared with the same period in 2021. The increases are primarily due to the roll-in of infrastructure programs and customer growth. The change in revenues from SJG's BGSS clause had no impact to SJG's Utility Margin as discussed under "Operating Revenues - SJG Utility Operations" above.
ETG Utility Operations:
The following tables summarize the composition of regulated natural gas utility operations, operating revenues and margin at ETG for the three months endedMarch 31 (in thousands): Three Months Ended March 31, 2022 2021 Utility Operating Revenues: Firm & Interruptible Sales - Residential$ 119,272 $ 106,208 Commercial & Industrial 41,646 33,377 Firm & Interruptible Transportation - Residential 899 1,032 Commercial & Industrial 15,878 16,756 Other (1,459) 173 Total Firm & Interruptible Revenues 176,236 157,546
Less: Total Cost of Sales - Utility (Excluding Depreciation & Amortization) (A)
78,916 58,305
Less: Depreciation & Amortization (A) 17,220 22,428
Total GAAP Gross Margin 80,100 76,813
Add: Depreciation & Amortization (A) 17,220 22,428
Less: Regulatory Rider Recoveries (B) 4,619 10,251
Utility Margin (C) $ 92,701 $ 88,990
Three Months Ended
March 31,
2022 2021
Utility Margin:
Residential $ 67,606 $ 65,981
Commercial & Industrial 31,146 33,057
Regulatory Rider Mechanisms (B) (6,051) (10,048)
Utility Margin (C) $ 92,701 $ 88,990 (A) Does not include amortization of debt issuance costs that are recorded as Interest Charges on the condensed consolidated statements of income.
(B) Represents pass-through expenses for which there is a corresponding credit in operating revenues. Therefore, such recoveries have no impact on ETG's financial results.
(C) Utility Margin is a non-GAAP financial measure and is further defined under
the caption "Utility Margin - SJG Utility Operations" above. The definition of
Utility Margin is the same for each of the Utilities.
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Operating Revenues and Utility Margin - ETG Utility Operations
Revenues from the gas utility operations at ETG increased $18.7 million , or
11.9%, and Utility Margin from the gas utility operations at ETG increased $3.7
million , or 4.2% for the three months ended March 31, 2022 compared with the
same period in 2021. These increases in revenues and Utility Margin are
primarily due to customer growth and colder weather during the first quarter of
2022.
Nonutility:
Operating Revenues - Energy Management
Combined revenues for Energy Management, net of intercompany transactions, increased$63.7 million , or 24.0%, to$329.0 million for the three months endedMarch 31, 2022 compared with the same period in 2021. The significant drivers for the overall change were as follows: •Revenues from wholesale energy operations at SJRG, net of intercompany transactions, increased$65.4 million to$326.9 million for the three months endedMarch 31, 2022 compared with the same period in 2021 primarily due to revenues earned on gas supply contracts, increases in the average monthly NYMEX settlement price, and colder weather experienced in the first quarter of 2022. Partially offsetting these comparative period increases was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded from Economic Earnings and represented a total decrease of$21.4 million for the three months endedMarch 31, 2022 compared with the same period in 2021. As discussed in Note 1 to the condensed consolidated financial statements, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues - Nonutility on the condensed consolidated statement of income. •Revenues from retail services, net of intercompany transactions, decreased$1.9 million to$1.9 million for the three months endedMarch 31, 2022 compared with the same period in 2021 primarily due to lower overall sales volumes as SJE chose not to renew several contracts that have expired over the last twelve months. This was partially offset with new contracts entered into at EnerConnex as that business continues to grow.
Operating Revenues - Energy Production
Combined revenues for Energy Production, net of intercompany transactions, decreased$1.0 million , or 15.6%, to$5.4 million for the three months endedMarch 31, 2022 compared with the same period in 2021, primarily due to lower SREC revenues.
Gross Margin - Energy Management & Energy Production
Gross margin for the Energy Management and Energy Production businesses is a GAAP measure and is defined as revenue less all costs that are directly related to the production, sale and delivery of SJI's products and services. These costs primarily include natural gas and electric commodity costs as well as certain payroll and related benefits. On the condensed consolidated statements of income, revenue is reflected in Operating Revenues - Nonutility and the costs are reflected in Cost of Sales - Nonutility.
Gross margin is broken out between Energy Management and Energy Production, which are comprised of a group of segments as described in Note 6 to the condensed consolidated financial statements.
Gross Margin - Energy Management
Combined gross margins for Energy Management increased$1.2 million to$22.4 million for the three months endedMarch 31, 2022 compared with the same period in 2021. The significant drivers for the overall change were as follows: •Gross margin from the wholesale energy operations at SJRG decreased$0.1 million to$20.0 million for the three months endedMarch 31, 2022 compared with the same period in 2021, as the change in unrealized gains and losses recorded on forward financial contracts due to price volatility was offset with higher margins on daily energy trading activities and colder weather experienced in the first quarter of 2022. 66 -------------------------------------------------------------------------------- Table of Contents We expect the wholesale energy operations to continue to add incremental margin from marketing and related opportunities in the Marcellus region, capitalizing on its established presence in the area. Future margins could fluctuate significantly due to the volatile nature of wholesale gas prices. •Gross margin from retail services increased$1.2 million to$2.2 million for the three months endedMarch 31, 2022 compared with the same period in 2021, primarily due to new contracts entered into at EnerConnex as that business continues to grow.
Gross Margin - Energy Production
Combined gross margins for Energy Production decreased
Operating Expenses - All Segments:
A summary of net changes in Operations and Maintenance expense for the three
months ended
Three Months Ended
March 31, 2022 vs.
2021
SJG Utility Operations $ 6,958
ETG Utility Operations (3,742)
Subtotal SJI Utilities 3,216Nonutility:
Energy Management:
Wholesale Energy Operations (102) Retail Services (225) Subtotal Energy Management (327) Energy Production: Renewables 1,710 Decarbonization 445 Subtotal Energy Production 2,155 Midstream (62) Corporate & Services and Intercompany Eliminations 3,893 Total Operations and Maintenance Expense $ 8,875 Operations & Maintenance SJG utility operations and maintenance expense increased$7.0 million for the three months endedMarch 31, 2022 compared with the same period in 2021. The increase was primarily due to the operations of SJG's CLEP and EEP, which experienced an aggregate net increase. Such costs are recovered on a dollar-for-dollar basis; therefore, SJG experienced an offsetting increase in revenue during the three months endedMarch 31, 2022 compared with the same period in the prior year. ETG utility operations and maintenance expense decreased$3.7 million for the three months endedMarch 31, 2022 compared with the same period in 2021, primarily due to the operation of ETG's RAC, which experienced an aggregate net decrease. Such costs are recovered on a dollar-for-dollar basis; therefore, ETG experienced an offsetting decrease in revenue during the three months endedMarch 31, 2022 compared with the same period in the prior year. Operations and Maintenance expense for Energy Production increased$2.2 million for the three months endedMarch 31, 2022 , compared with the same period in 2021, primarily due to additional operating costs for the Annadale fuel cell project and various solar projects, which were all operating during the entire quarter in 2022 compared to 2021. 67 -------------------------------------------------------------------------------- Table of Contents Operations and Maintenance expense for the Corporate & Services segment, after intercompany eliminations, increased$3.9 million for the three months endedMarch 31, 2022 compared with the same period in 2021, primarily due to expenses incurred related to the Merger Agreement. Depreciation - Depreciation increased$2.1 million for the three months endedMarch 31, 2022 compared with the same period in 2021, primarily due to increased investment in property, plant and equipment by the gas utility operations of SJG and ETG, along with an increase in renewables segment depreciation related to assets at the Annadale fuel cell facility and various solar projects.
Energy and Other Taxes - The change in energy and other taxes for the three
months ended
Other Income and Expense - The change in other income and expense for the three
months ended
Interest Charges - The change in interest charges for the three months ended
Income Taxes - Income tax expense decreased$1.1 million for the three months endedMarch 31, 2022 compared with the same period in 2021 due to ITC recorded in 2022 (see Note 1 to the condensed consolidated financial statements). Equity in Earnings of Affiliated Companies - Equity in earnings of affiliated companies decreased$2.7 million for the three months endedMarch 31, 2022 compared with the same period in 2021 primarily due to AFUDC recorded in 2021 that did not occur in 2022 due to the decision to cease further development of the PennEast project (see Note 3 to the condensed consolidated financial statements). 68 -------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES: Liquidity needs are driven by factors that include natural gas commodity prices; the impact of weather on customer bills; lags in fully collecting gas costs from customers under the BGSS charge and other regulatory clauses; settlement of legal matters; environmental remediation expenditures through the RAC as compared to the timing of collections; working capital needs of SJI's energy trading and marketing activities; the timing of construction and remediation expenditures and related permanent financings; the timing of equity contributions to unconsolidated affiliates; mandated tax payment dates; both discretionary and required repayments of long-term debt; acquisitions; and the amounts and timing of dividend payments.
Cash flows for the period were the following (in thousands):
Three months ended Three months ended
March 31, 2022 March 31, 2021
Net Cash Provided by Operating Activities $ 306,957 $ 198,463
Net Cash Used in Investing Activities $ (158,284) $ (112,328)
Net Cash Used in Financing Activities $ (145,507) $ (96,098)
Cash Flows from Operating Activities - Liquidity needs are first met with net cash provided by operating activities. Net cash provided by operating activities varies from year-to-year primarily due to the impact of weather on customer demand and related gas purchases, customer usage factors related to conservation efforts and the price of the natural gas commodity, inventory utilization, and gas cost recoveries. Cash flows provided by operating activities in the first three months of 2022 produced more net cash than the same period in 2021, primarily due to the following: (1) higher revenues and increased collections on daily energy trading activities at SJRG; (2) customer growth at the Utilities; and (3) higher purchased gas payable due to higher prices and increase in outstanding invoices payable to vendors. Cash Flows from Investing Activities - SJI has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment. We estimate the cash outflows for investing activities, net of returns/advances on investments from affiliates, for fiscal years 2022, 2023 and 2024 at SJI to be approximately$936.7 million ,$798.3 million and$930.3 million , respectively. The high level of investing activities for 2022, 2023 and 2024 is due to the accelerated infrastructure investment programs and future capital expenditures at SJG and ETG, and investments in future renewable energy projects including efforts to meet our decarbonization goals, which were announced inApril 2021 targeting 70% reduction in emissions by 2030 and 100% by 2040, with at least 25% of capital spending annually in support of sustainability investments. SJI expects to use short-term borrowings under lines of credit from commercial banks and a commercial paper program to finance these investing activities as incurred. From time to time, SJI may refinance the short-term debt with long-term debt.
Other significant investing activities of SJI during the first three months of 2022 and 2021 were as follows:
•SJI made net investments in and net advances to unconsolidated affiliates of$28.9 million for the three months endedMarch 31, 2022 ; net investments in and net advances to unconsolidated affiliates for the three months endedMarch 31, 2021 were not material. Cash Flows from Financing Activities - The Merger Agreement places limitations on SJI's ability to engage in certain types of financing transactions without Parent's consent between the signing of the Merger Agreement and the Effective Time, including issuing equity of SJI (except in the ordinary course pursuant to equity compensation plans) and incurring certain indebtedness for borrowed money. Short-term borrowings from the commercial paper program and lines of credit from commercial banks have historically been used to supplement cash flows from operations, to support working capital needs and to finance capital expenditures and acquisitions as incurred. From time to time, SJI may refinance the short-term debt with long-term debt There have been no significant changes to the nature or balances of SJG's commercial paper program sinceDecember 31, 2021 , which are described in Note 13 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year endedDecember 31, 2021 . 69 -------------------------------------------------------------------------------- Table of Contents SJI has historically supplemented its operating cash flow, commercial paper program and credit lines with both debt and equity capital. Over the years, SJG has used long-term debt, primarily in the form of First Mortgage Bonds and Medium Term Notes, secured by the same pool of utility assets, to finance its long-term borrowing needs. These needs are primarily capital expenditures for property, plant and equipment. Credit facilities and available liquidity as ofMarch 31, 2022 were as follows (in thousands): Available Company Total Facility Usage Liquidity Expiration Date SJI: SJI Syndicated Revolving Credit Facility$ 500,000
SJG:
Commercial Paper Program/Revolving Credit Facility 250,000
9,200 (B) 240,800
ETG:
ETG Revolving Credit Facility 250,000 39,400 (C) 210,600 September 2026 Total$ 1,000,000 $ 109,000 $ 891,000
(A) Includes letters of credit outstanding in the amount of
(B) Includes letters of credit outstanding in the amount of$1.9 million , which supports the remediation of environmental conditions at certain locations in SJG's service territory.
(C) Includes letters of credit outstanding in the amount of
For SJI and SJG, the amount of usage shown in the table above, less the letters of credit noted in (A)-(C) for SJI and (B) for SJG above, equals the amounts recorded as Notes Payable on the respective condensed consolidated balance sheets as ofMarch 31, 2022 . Based upon the existing credit facilities and a regular dialogue with our banks, we believe there will continue to be sufficient credit available to meet our business' future liquidity needs. SJI, SJG and ETG (collectively, the "Borrowers") have an unsecured, five-year master revolving credit facility (the "Credit Facility") with a syndicate of banks, which expires onSeptember 1, 2026 , unless earlier terminated or extended in accordance with its terms. There have been no significant changes to the nature or balances of this Credit Facility, except for the usage shown in the table above, sinceDecember 31, 2021 , which are described in Note 13 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year endedDecember 31, 2021 . SJI, SJG and ETG were all in compliance with the related financial covenants as ofMarch 31, 2022 . For additional information regarding the terms of the credit facilities as well as weighted average interest rates, average borrowings outstanding and maximum amounts outstanding under these credit facilities see Note 10 to the condensed consolidated financial statements. OnMarch 22, 2021 , SJI offered 10,250,000 shares of its common stock, par value$1.25 per share, at a public offering price of$22.25 per share. See Note 6 to the Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year endedDecember 31, 2021 for a description of this transaction and the issuances that occurred in 2021. OnMarch 18, 2022 , the remaining 4,996,062 forward shares were issued under the forward sale agreement for net proceeds of$100.4 million . The forward price used to determine cash proceeds received by SJI was calculated based on the initial forward sale price, as adjusted for underwriting fees, interest rate adjustments as specified in the forward sale agreement and any dividends paid on our common stock during the forward period. See Note 6 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year endedDecember 31, 2021 for a description of the issuances of equity and convertible units that occurred in 2021. 70
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In
In
DRP - See Note 4 to the condensed consolidated financial statements.
SJI's capital structure was as follows:
As of March 31, 2022 As of December 31, 2021
Equity 39.6 % 35.8 %
Long-Term Debt 58.8 % 58.3 %
Short-Term Debt 1.6 % 5.9 %
Total 100.0 % 100.0 %
During the three months ended March 31, 2022 and 2021, SJI declared quarterly
dividends to its common shareholders, which were paid in April for both 2022 and
2021. SJI has a long history of paying dividends on its common stock and has
increased its dividend every year since 1999. SJI's current long-term goals are
to grow the dividend at a rate consistent with earnings growth over the long
term, subject to the approval of its Board of Directors, with a long-term
targeted payout ratio of between 55% and 65% of Economic Earnings. In setting
the dividend rate, the Board of Directors of SJI considers future earnings
expectations, payout ratio, and dividend yield relative to those at peer
companies, as well as returns available on other income-oriented investments.
However, there can be no assurance that SJI will be able to continue to increase
the dividend, meet the targeted payout ratio or pay a dividend at all in the
future. Under the Merger Agreement, SJI's ability to pay dividends (other than
consistent with its past practices) is limited.
COMMITMENTS AND CONTINGENCIES:
Environmental Remediation - Total net cash outflows for remediation projects are expected to be$37.6 million ,$38.9 million and$48.4 million for 2022, 2023 and 2024, respectively. As discussed in Notes 10 and 15 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's 10-K for the year endedDecember 31, 2021 , certain environmental costs are subject to recovery from ratepayers.
Affiliate Loans - See Note 3 to the condensed consolidated financial statements.
Convertible and Equity Units - See Note 4 to the condensed consolidated financial statements.
Standby Letters of Credit - See Note 10 to the condensed consolidated financial statements.
Contractual Obligations - There were no significant changes to SJI's contractual obligations described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year endedDecember 31, 2021 , except for the AMA as discussed in Note 3 to the condensed consolidated financial statements.
Off-Balance Sheet Arrangements - An off-balance sheet arrangement is any contractual arrangement involving an unconsolidated entity under which SJI has either made guarantees, or has certain other interests or obligations.
See "Guarantees" in Note 11 to the condensed consolidated financial statements for more detail.
Notes Receivable-Affiliates - See Note 3 to the condensed consolidated financial statements.
Pending Litigation - SJI and SJG are subject to claims, actions and other legal
proceedings arising in the ordinary course of business. Neither SJI nor SJG can
make any assurance as to the outcome of any of these actions but, based on an
analysis of these claims and consultation with outside counsel, we do not
believe that any of these claims, other than those described in Note 11 to the
condensed consolidated financial statements, are reasonably likely to have a
material impact on the business or financial statements of SJI or SJG.
Liabilities related to claims are accrued when the amount or range of amounts of
probable settlement costs or other charges for these claims can be reasonably
estimated. See Note 11 to the condensed consolidated financial statements for
more detail on these claims.
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This section of Management's Discussion focuses on SJG for the reported periods. In many cases, explanations and disclosures for both SJI and SJG are substantially the same or specific disclosures for SJG are included in the Management's Discussion for SJI.
RESULTS OF OPERATIONS:
The results of operations for the SJG utility operations are described above under "Results of Operations - SJG Utility Operations"; therefore, this section primarily focuses on statistical information and other information that is not discussed in the results of operations underSouth Jersey Industries, Inc.
The following table summarizes the composition of selected gas utility
throughput for the three month periods ended
Three Months Ended March 31,
2022 2021
Utility Throughput - dts:
Firm Sales -
Residential 13,033 12,959
Commercial 3,042 2,771
Industrial 114 135
Cogeneration & Electric Generation 86 85
Firm Transportation -
Residential 480 509
Commercial 2,823 2,662
Industrial 2,822 2,823
Cogeneration & Electric Generation 734 648
Total Firm Throughput 23,134 22,592
Interruptible Sales 13 6
Interruptible Transportation 310 342
Off-System Sales 5,307 6,044
Capacity Release 14,911 12,327
Total Throughput - Utility 43,675 41,311
Throughput - Gas Utility Operations - Total gas throughput increased 2.4 MMdts
for the three months ended March 31, 2022 compared with the same period in 2021,
primarily due to volume increases in Capacity Release resulting from higher
value of pipeline capacity due to market conditions.
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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
March 31,
2022 2021
Net Income Impact:
CIP - Weather Related $ 5.1 $ 5.6
CIP - Usage Related (5.6) (6.2)
Total Net Income Impact $ (0.5) $ (0.6)
Weather Compared to 20-Year Average 5.5% Warmer 6.5% Warmer
Weather Compared to Prior Year 1.8% Colder 15.1% Colder
Operating Revenues & Utility Margin - See SJI's Management Discussion section above.
Operations & Maintenance Expense - See SJI's Management Discussion section above.
Depreciation - Depreciation expense increased$1.3 million for the three months endedMarch 31, 2022 compared with the same period in 2021, primarily due toNew Jersey's infrastructure improvement efforts, which included the approval of SJG's AIRP and SHARP, in addition to significant investment in new technology systems.
Energy and Other Taxes - The change in energy and other taxes for the three
months ended
Other Income and Expense - The change in other income and expense for the three
months ended
Interest Charges - The change in interest charges for the three months ended
Income Taxes - Income tax expense generally fluctuates as income before taxes changes. Minor variations will occur period to period as a result of effective tax rate adjustments.
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity and capital resources for SJG are substantially covered in the Management's Discussion of SJI (except for the items and transactions that relate to SJI and its nonutility subsidiaries). Those explanations are incorporated by reference into this discussion.
Liquidity needs for SJG are driven by factors that include natural gas commodity prices; the impact of weather on customer bills; lags in fully collecting gas costs from customers under the BGSS charge, settlement of legal matters and environmental remediation expenditures through the RAC as compared to the timing of collections; the timing of construction and remediation expenditures and related permanent financings; mandated tax payment dates; both discretionary and required repayments of long-term debt; and the amounts and timing of dividend payments.
Cash flows for the period were the following (in thousands):
Three months ended Three months ended
March 31, 2022 March 31, 2021
Net Cash Provided by Operating Activities $ 153,136 $ 125,284
Net Cash Used in Investing Activities $ (50,714) $ (64,233)
Net Cash Used in Financing Activities $ (103,200) $ (50,009)
Cash Flows from Operating Activities - Liquidity needs are first met with net
cash provided by operating activities. Net cash provided by operating activities
varies from year-to-year primarily due to the impact of weather on customer
demand and related gas purchases, customer usage factors related to conversion
efforts and the price of the natural gas commodity,
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inventory utilization, and gas cost recoveries. Cash flows provided by operating
activities in the first three months of 2022 produced more net cash than the
same period in 2021, primarily due to customer growth and higher purchased gas
payable due to higher prices.
Cash Flows from Investing Activities - SJG has a continuing need for cash
resources for capital expenditures, primarily to invest in new and replacement
facilities and equipment. SJG estimates the net cash outflows for capital
expenditures for fiscal years 2022, 2023 and 2024 to be approximately $256.9
million , $334.8 million and $448.9 million , respectively. For capital
expenditures, SJG expects to use short-term borrowings under both its commercial
paper program and lines of credit from commercial banks to finance capital
expenditures as incurred. From time to time, SJG may refinance the short-term
debt incurred to support capital expenditures with long-term debt.
Cash Flows from Financing Activities - SJG supplements its operating cash flow
and credit lines with both debt and equity capital. Over the years, SJG has used
long-term debt, primarily in the form of First Mortgage Bonds and Medium Term
Notes, secured by the same pool of utility assets, to finance its long-term
borrowing needs. These needs are primarily capital expenditures for property,
plant and equipment.
See SJI's Management Discussion section above.
SJI did not contribute any equity to SJG during the three months ended
SJG's capital structure was as follows:
As of March 31, 2022 As of December 31, 2021
Common Equity 60.0 % 56.3 %
Long-Term Debt 39.7 % 39.6 %
Short-Term Debt 0.3 % 4.1 %
Total 100.0 % 100.0 %
COMMITMENTS AND CONTINGENCIES:
Total net cash outflows for remediation projects are expected to be
SJG has certain commitments for both pipeline capacity and gas supply for which SJG pays fees regardless of usage. Those commitments, as ofMarch 31, 2022 , averaged$92.9 million annually and totaled$419.5 million over the contracts' lives; the increase sinceDecember 31, 2021 is due to two executed contracts in the first quarter of 2022 withAdelphia andColumbia pipelines. Approximately 46% of the financial commitments under these contracts expire during the next five years. SJG expects to renew each of these contracts under renewal provisions as provided in each contract. SJG recovers all such prudently incurred fees through rates via the BGSS.
Litigation - See the Commitments and Contingencies section of SJI's Management Discussion above.
Contractual Cash Obligations - There were no significant changes to SJG's
contractual obligations described in Note 15 to the Consolidated Financial
Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year
ended
Off-Balance Sheet Arrangements - SJG has no off-balance sheet arrangements.
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