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; 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 in Part II, Item 1A in this Quarterly Report, and Part I, Item 1A in SJI's and SJG's Annual Report on Form 10-K for the year endedDecember 31, 2021 , as they may be supplemented from time to time by otherSEC filings made by SJI or SJG. 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 as required by law. 59 -------------------------------------------------------------------------------- Table of Contents Merger Agreement - OnFebruary 23, 2022 , SJI announced that it had signed a 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 (the "Merger"), 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.
The closing of the Merger is subject to customary conditions, including the receipt of regulatory approvals by the BPU.
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, incur 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 twelve 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.
In connection with the Merger Agreement and the transactions contemplated
thereby, eight complaints were filed as individual actions in
On
OnApril 25, 2022 , the Company filed a joint petition, together with Parent and Merger Sub, to the BPU seeking approval of an indirect change of control of ETG and SJG, to be effectuated by the Merger Agreement. This matter is pending BPU approval. OnApril 25, 2022 , certain subsidiaries of the Company andNJ Boardwalk Holdings, LLC , an affiliate of IIF filed a joint application requesting approval of the Merger with theFERC under Section 203 of the Federal Power Act, which was assigned FERC Docket No. EC22-60 (the "FERC Application for Approval"). TheFERC established aMay 16, 2022 deadline date for comments on the filing. While several motions to intervene were filed, only one entity filed substantive comments on the FERC Application for Approval. Those comments did not askFERC to reject the FERC Application for Approval, but questioned the description of IIF's affiliates. OnMay 31, 2022 , the Company and IIF filed replies to theMay 16, 2022 comments.FERC has yet to act on the FERC Application for Approval, and has not requested additional information. OnApril 29, 2022 , the Company and Parent filed the notification and report form with theAntitrust Division of theU.S. Department of Justice and theFederal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder, and for which the waiting period expired onMay 31, 2022 at11:59pm . COVID-19 - See "Deferred COVID-19 Costs" in Note 8 to the condensed consolidated financial statements for information about regulatory assets recorded as ofJune 30, 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 and six months endedJune 30, 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 . 60 -------------------------------------------------------------------------------- Table of Contents 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. •Decarbonization consists of •SJI Renewables Energy Ventures, LLC, which includes our equity interest in REV, which is included in Equity in Earnings (Losses) 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, and 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. 61 -------------------------------------------------------------------------------- Table of ContentsSOUTH JERSEY INDUSTRIES, INC.
RESULTS OF OPERATIONS:
Summary:
SJI's net income for the three months endedJune 30, 2022 increased$77.9 million to a net loss of$18.8 million compared with the same period in 2021. SJI's income from continuing operations for the three months endedJune 30, 2022 increased$78.0 million to a loss of$18.7 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 midstream operating segment for the three months endedJune 30, 2022 increased$86.9 million to$0.8 million compared with the same period in 2021 primarily due to an other-than-temporary impairment charge on the Company's equity method investment in PennEast recorded in the prior period (see Note 3 to the condensed consolidated financial statements). •The income contribution from the renewables operating segment for the three months endedJune 30, 2022 increased$11.1 million to$10.9 million compared with the same period in 2021 primarily due to ITCs recorded on fuel cell and solar projects (see Note 1 to the condensed consolidated financial statements). •The income contribution from the wholesale energy operating segment for the three months endedJune 30, 2022 decreased$18.1 million to a loss of$22.8 million compared with the same period in 2021 primarily due to the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, along with lower margins from daily energy trading activities during the second quarter of 2022. SJI's net income for the six months endedJune 30, 2022 increased$78.5 million to net income of$110.5 million compared with the same period in 2021. SJI's income from continuing operations for the six months endedJune 30, 2022 increased$78.6 million to income of$110.7 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 midstream operating segment for the six months endedJune 30, 2022 increased$85.7 million to$0.6 million compared with the same period in 2021 primarily due to an other-than-temporary impairment charge on the Company's equity method investment in PennEast recorded in the prior period (see Note 3 to the condensed consolidated financial statements). •The income contribution from the renewables operating segment for the six months endedJune 30, 2022 increased$10.1 million to$11.0 million compared with the same period in 2021 primarily due to ITCs recorded on fuel cell and solar projects (see Note 1 to the condensed consolidated financial statements). •The income contribution from the gas utility operations at SJG for the six months endedJune 30, 2022 increased$3.5 million to$93.5 million compared with the same period in 2021, primarily due to the roll-in of infrastructure programs and customer growth. •The income contribution from the wholesale energy operating segment for the six months endedJune 30, 2022 decreased$17.5 million to a loss of$9.2 million compared with the same period in 2021, primarily due to the change in unrealized gains and losses recorded on forward financial contracts due to price volatility and lower margins from daily energy trading activities during the second quarter of 2022, partially offset with colder weather experienced in the first quarter of 2022. •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). 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. 62 -------------------------------------------------------------------------------- Table of Contents 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. •In past periods, SJE used forward contracts to mitigate commodity price risk on fixed price electric contracts with customers. In accordance with GAAP, the forward contracts were recorded at fair value, with changes in fair value recorded in earnings in the period of change. SJE no longer has any contracts outstanding as ofJune 30, 2022 . 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 and six months endedJune 30, 2022 and 2021, are described in (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 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 endedJune 30, 2022 increased$4.3 million to$6.3 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 renewables operating segment for the three months endedJune 30, 2022 increased$11.0 million to$11.1 million compared with the same period in 2021 primarily due to ITCs recorded on fuel cell and solar projects (see Note 1 to the condensed consolidated financial statements). •The Economic Earnings contribution from the wholesale energy operating segment for the three months endedJune 30, 2022 decreased$4.5 million to$1.9 million compared with the same period in 2021 primarily due to lower margins from daily energy trading activities during the second quarter of 2022. •The Economic Earnings contribution from the midstream operating segment for the three months endedJune 30, 2022 decreased$1.2 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 63 -------------------------------------------------------------------------------- Table of Contents consolidated financial statements). Economic Earnings for the six months endedJune 30, 2022 increased$24.9 million to$155.8 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 six months endedJune 30, 2022 increased$11.4 million to$31.0 million compared with the same period in 2021 primarily due to colder weather experienced in the first quarter of 2022, partially offset with lower margins from daily energy trading activities during the second quarter of 2022. •The Economic Earnings contribution from the renewables operating segment for the six months endedJune 30, 2022 increased$11.2 million to$11.8 million compared with the same period in 2021 primarily due to ITCs recorded on fuel cell and solar projects (see Note 1 to the condensed consolidated financial statements). •The Economic Earnings contribution from gas utility operations at SJG for the six months endedJune 30, 2022 increased$4.9 million to$94.9 million compared with the same period in 2021 primarily due to the roll-in of infrastructure programs and customer growth. •The income contribution from the midstream operating segment for the six months endedJune 30, 2022 decreased$2.2 million compared with the same period in 2021 primarily due to AFUDC recorded in 2021 that did not occur in 2022 due to the decision to cease further development of the PennEast project (see Note 3 to the condensed consolidated financial statements). 64 -------------------------------------------------------------------------------- Table of Contents The following table presents a reconciliation of SJI's income from continuing operations and earnings per share from continuing operations to Economic Earnings and Economic Earnings per share for the three and six months endedJune 30 (in thousands, except per share data): Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (Loss) Income from Continuing Operations$ (18,678) $ (96,660) $ 110,736 $ 32,138 Minus/Plus: Unrealized Mark-to-Market Losses on Derivatives 33,922 15,230 55,191 15,274 Income Attributable to Noncontrolling Interests (104) (120) (291) (299) Impairment of Equity Method Investment (A) - 87,370 - 87,370 Impairment of Property, Plant & Equipment (B) 1,897 - 1,897 - Acquisition/Sale Net Costs (C) (1,342) 406 5,149 674 Income Taxes (D) (9,391) (18,414) (16,922) (18,451) Additional Tax Adjustments (E) - 14,176 - 14,176 Economic Earnings$ 6,304
Earnings per Share from Continuing Operations$ (0.15) $ (0.87) $ 0.90 $ 0.30 Minus/Plus: Unrealized Mark-to-Market Losses on Derivatives 0.27 0.14 0.45 0.14 Income Attributable to Noncontrolling Interests - - - - Impairment of Equity Method Investment (A) - 0.79 - 0.81 Impairment of Property, Plant & Equipment (B) 0.02 - 0.02 - Acquisition/Sale Net Costs (C) (0.01) - 0.04 0.01 Income Taxes (D) (0.08) (0.17) (0.14) (0.17) Additional Tax Adjustments (E) - 0.13 - 0.13 Economic Earnings per Share$ 0.05 $ 0.02 $ 1.27 $ 1.22 Six Months Ended Three Months Ended June 30, June 30, 2022 2021 2022 2021
(Loss) Income from Continuing Operations
Minus/Plus:
Impairment of Property, Plant & Equipment (B) 1,897 - 1,897 - Income Taxes (D) 518 - 518 - Economic Earnings$ 7,256 $ 6,313 $ 95,898 $ 89,931 65
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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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Total unrealized mark-to-market losses on
derivatives $ (33,922) $ (15,230) $ (55,191) $ (15,274)
Income Attributable to Noncontrolling Interests 104 120 291 299
Impairment of Equity Method Investment (A) - (87,370) - (87,370)
Impairment of Property, Plant & Equipment (B) (1,897) (1,897)
Acquisition/Sale Net Costs (C) 1,342 (406) (5,149) (674) Income Taxes (D) 9,391 18,414 16,922 18,451 Additional Tax Adjustments (E) - (14,176) - (14,176)
Total reconciling items between income from
continuing operations and economic earnings
(A) Represents an other-than-temporary impairment charge taken in 2021 on the Company's equity method investment in PennEast.
(B) Represents an other-than-temporary impairment charge on property, plant & equipment at SJG that was deemed unusable.
(C) In 2022, represents costs incurred related to the Merger Agreement and to finalize the transactions related to acquiring Bronx Midco and solar projects, partially offset with amounts included in continuing operations related to PennEast partnership distributions. In 2021, represents the final working capital payment on the sale ofElkton .
(D) The income taxes were determined using a combined average statutory tax rate.
(E) Represents a federal deferred tax asset valuation allowance taken in 2021 at SJI related to the impairment charge described in (A).
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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 and six months endedJune 30 (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Utility Operating Revenues: Firm Sales - Residential$ 58,842 $ 50,093 $ 258,425 $ 211,195 Commercial 17,054 14,042 60,822 46,151 Industrial 445 579 2,343 2,180 Cogeneration & Electric Generation 965 809 1,644 1,318 Firm Transportation - Residential 1,509 1,509 6,360 6,408 Commercial 8,832 7,827 28,908 25,017 Industrial 7,676 7,114 16,091 14,464 Cogeneration & Electric Generation 1,054 1,410 2,580 2,789 Total Firm Revenues 96,377 83,383 377,173 309,522 Interruptible Sales 741 72 913 145 Interruptible Transportation 1,084 339 1,584 783 Off-System Sales 22,925 6,730 60,573 30,020 Capacity Release 1,092 445 3,998 1,654 Other 383 246 624 490 122,602 91,215 444,865 342,614 Less: Intercompany Sales (2,833) (426) (11,113) (6,755) Total Utility Operating Revenues 119,769 90,789 433,752 335,859
Less:
Cost of Sales - Utility 47,099 18,711 176,967 93,248
Less: Intercompany Cost of Sales (2,833) (426) (11,113) (6,755)
Total Cost of Sales - Utility (Excluding
Depreciation & Amortization) (A) 44,266 18,285 165,854 86,493
Less: Depreciation & Amortization (A) 30,855 29,881 70,864 59,196
Total GAAP Gross Margin 44,648 42,623 197,034 190,170
Add: Depreciation & Amortization (A) 30,855 29,881 70,864 59,196
Less: CIP Recoveries (B) 2,951 1,978 9,112 6,216
Less: RAC Recoveries (B) 5,127 6,963 16,084 13,928
Less: TIC Recoveries (B) 25 - 94 -
Less: EET Recoveries (B) 1,472 1,172 2,820 2,338
Less: Revenue Taxes 280 254 1,217 766
Utility Margin (C) $ 65,648 $ 62,137 $ 238,571 $ 226,118
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Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Utility Margin:
Residential $ 40,345 $ 37,728 $ 163,823 $ 157,701
Commercial and Industrial 21,499 20,101 66,086 61,123
Cogeneration and Electric Generation 953 1,172 2,204 2,421
Interruptible 19 14 45 79
Off-System Sales & Capacity Release 920 195 3,183 932
Other Revenues 661 736 901 979
Margin Before Weather Normalization &
Decoupling 64,397 59,946 236,242 223,235
CIP Mechanism (669) 636 (1,395) (126)
EET Mechanism 1,920 1,555 3,724 3,009
Utility Margin (C) $ 65,648 $ 62,137 $ 238,571 $ 226,118 (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$31.4 million , or 34.4%, for the three months endedJune 30, 2022 compared with the same period in 2021. Excluding intercompany transactions, revenues increased$29.0 million , or 31.9%, for the three months endedJune 30, 2022 compared with the same period in 2021. Revenues from the gas utility operations at SJG increased$102.3 million , or 29.8%, for the six months endedJune 30, 2022 compared with the same period in 2021. Excluding intercompany transactions, revenues increased$97.9 million , or 29.1%, for the six months endedJune 30, 2022 compared with the same period in 2021. The significant drivers for the overall change were as follows: •Firm revenue increased$13.0 million and$67.7 million for the three and six months endedJune 30, 2022 , respectively, compared with the same periods in 2021 primarily due to increased revenue related to BGSS recoveries, along with customer growth in 2022 compared to 2021. 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$16.2 million and$30.6 million for the three and six months endedJune 30, 2022 , respectively, compared with the same periods in 2021, primarily due to higher commodity costs, along with colder weather. 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
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Table of Contents 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$3.5 million , or 5.7%, for the three months endedJune 30, 2022 compared with the same period in 2021. Total Utility Margin increased$12.5 million , or 5.5%, for the six months endedJune 30, 2022 compared with the same period in 2021. The increases are primarily due to the roll-in of infrastructure programs and customer growth. The change in revenues from SJG's BGSS clause had no impact to SJG's Utility Margin as discussed under "Operating Revenues - SJG Utility Operations" above.
ETG Utility Operations:
The following tables summarize the composition of ETG utility operations operating revenues and margin for the three and six months endedJune 30 (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Utility Operating Revenues: Firm & Interruptible Sales - Residential$ 34,019 $ 31,325 $ 153,291 $ 137,533 Commercial & Industrial 16,752 11,713 58,398 45,090 Firm & Interruptible Transportation - Residential 314 331 1,213 1,363 Commercial & Industrial 9,867 9,936 25,744 26,692 Other 390 176 (1,068) 348 Total Firm & Interruptible Revenues 61,342 53,481 237,578 211,026 Less: Total Cost of Sales - Utility (Excluding Depreciation & Amortization) (A) 22,867 15,001 101,783 73,306 Less: Depreciation & Amortization (A) 15,188 11,082 32,408 22,298 Total GAAP Gross Margin 23,287 27,398 103,387 115,422 Add: Depreciation & Amortization (A) 15,188 11,082 32,408 22,298 Less: Regulatory Rider Recoveries (B) 2,335 4,342 6,954 14,592 Utility Margin (C)$ 36,140 $ 34,138 $ 128,841 $ 123,128 Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Utility Margin: Residential$ 21,427 $ 21,552 $ 89,033 $ 87,533 Commercial & Industrial 16,629 16,716 47,775 49,773 Regulatory Rider Mechanisms (B) (1,916) (4,130) (7,967) (14,178) Utility Margin (C)$ 36,140 $ 34,138 $ 128,841 $ 123,128
(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 $7.9 million , or
14.7%, and increased $26.6 million , or 12.6%, for the three and six months ended
June 30, 2022 , respectively, compared with the same periods in 2021. Utility
Margin from the gas utility operations at ETG increased $2.0 million , or 5.8%,
and increased $5.7 million , or 4.6% for the three and six months ended June 30,
2022 , respectively, compared with the same periods in 2021. These changes in
revenues and Utility Margin are primarily due to customer growth and colder
weather.
Nonutility:
Operating Revenues - Energy Management
Combined revenues for Energy Management, net of intercompany transactions,
increased
•Revenues from wholesale energy operations at SJRG, net of intercompany transactions, increased$163.6 million to$323.3 million , and increased$229.1 million to$650.6 million , for the three and six months endedJune 30, 2022 , respectively, compared with the same periods in 2021, primarily due to revenues earned on gas supply contracts and increases in the average monthly NYMEX settlement price. Also contributing to the six month comparative period increase was 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$18.7 million and$40.1 million for the three and six months endedJune 30, 2022 compared with the same periods 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$2.4 million to$1.8 million and decreased$4.2 million to$3.8 million for the three and six months endedJune 30, 2022 , respectively, compared with the same periods 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, increased$1.4 million , or 32.1%, to$5.6 million , and increased$0.3 million , or 2.7%, to$10.9 million for the three and six months endedJune 30, 2022 , respectively, compared with the same periods in 2021. The three month comparative period increase is due to higher SREC revenues, while the six month comparative period increase was not significant.
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 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 each 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, net of intercompany transactions, decreased$24.4 million to a loss of$28.5 million and decreased$23.2 million to a loss of$6.1 million for the three and six months endedJune 30, 2022 , respectively, compared with the same periods in 2021. The significant drivers for the overall change were as follows: 70 -------------------------------------------------------------------------------- Table of Contents •Gross margin from the wholesale energy operations at SJRG, net of intercompany transactions, decreased$24.7 million to a loss of$30.1 million , and decreased$24.7 million to a loss of$10.1 million for the six months endedJune 30, 2022 compared with the same period in 2021, due to the change in unrealized gains and losses recorded on forward financial contracts due to price volatility as discussed above. 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.
•The change in gross margin from retail services, net of intercompany
transactions, for the three and six months ended
Gross Margin - Energy Production
Combined gross margins for Energy Production, net of intercompany transactions, increased$1.2 million to$4.7 million and decreased$0.1 million to$9.0 million for the three and six months endedJune 30, 2022 , respectively, compared with the same periods in 2021. The three month comparative period increase is due to higher SREC revenues, while the six month comparative period change was not significant.
Operating Expenses - All Segments:
A summary of net changes in Operations and Maintenance expense for the three and
six months ended
Three Months Ended
June 30 , Six Months Ended June
2022 vs. 2021 30, 2022 vs. 2021
SJG Utility Operations $ 2,548 $ 9,506
ETG Utility Operations (599) (4,341)
Subtotal SJI Utilities 1,949 5,165
Nonutility:
Energy Management:
Wholesale Energy Operations (152) (254) Retail Services 397 172 Subtotal Energy Management 245 (82) Energy Production: Renewables (361) 1,349 Decarbonization 306 751 Subtotal Energy Production (55) 2,100 Midstream (62) (124) Corporate & Services and Intercompany Eliminations (2,167) 1,726 Total Operations and Maintenance Expense $ (90) $ 8,785 Operations & Maintenance SJG utility operations and maintenance expense increased$2.5 million and$9.5 million for the three and six months endedJune 30, 2022 , respectively, compared with the same periods 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 and six months endedJune 30, 2022 compared with the same period in the prior year. ETG utility operations and maintenance expense decreased$0.6 million and$4.3 million for the three and six months endedJune 30, 2022 , respectively, compared with the same periods 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 71 -------------------------------------------------------------------------------- Table of Contents offsetting decrease in revenue during the three and six months endedJune 30, 2022 compared with the same period in the prior year. Operations and Maintenance expense for Energy Production increased$2.1 million for the six months endedJune 30, 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 six-month period in 2022 compared to 2021. Operations and Maintenance expense for the Corporate & Services segment, after intercompany eliminations, decreased$2.2 million for the three months endedJune 30, 2022 compared with the same period in 2021, primarily due to less corporate level overheads. Operations and Maintenance expense for the Corporate & Services segment, after intercompany eliminations, increased$1.7 million for the six months endedJune 30, 2022 compared with the same period in 2021, primarily due to expenses incurred related to the Merger Agreement. Depreciation - Depreciation increased$1.2 million and$3.3 million for the three and six months endedJune 30, 2022 , respectively, compared with the same periods 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. Impairment Charges - During the three and six months endedJune 30, 2022 , the Company recorded$1.9 million of impairment charges related to long-lived assets that were deemed no longer usable. Energy and Other Taxes - The change in energy and other taxes for the three and six months endedJune 30, 2022 compared with the same periods in 2021 was not significant. Other Income and Expense - The change in other income and expense for the three and six months endedJune 30, 2022 compared with the same periods in 2021 was not significant.
Interest Charges - The change in interest charges for the three and six months
ended
Income Taxes - Income tax benefit increased$17.4 million for the three months endedJune 30, 2022 compared with the same period in 2021 due to a higher loss before income taxes along with ITC recorded in 2022. Income tax expense decreased$18.5 million for the six months endedJune 30, 2022 compared with the same period in 2021 due to lower income before income taxes along with ITC recorded in 2022. Equity in Earnings of Affiliated Companies - Equity in earnings of affiliated companies increased$85.4 million and$82.8 million for the three and six months endedJune 30, 2022 , respectively, compared with the same periods in 2021 primarily due to an other-than-temporary impairment charge on the Company's equity method investment in PennEast taken in 2021 (see Note 3 to the condensed consolidated financial statements). 72 -------------------------------------------------------------------------------- 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):
Six months ended Six months ended
June 30, 2022 June 30, 2021
Net Cash Provided by Operating Activities $ 323,580 $ 241,651
Net Cash Used in Investing Activities $ (312,926) $ (269,320)
Net Cash Provided by Financing Activities $ 15,619 $ 73,771
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, gas cost recoveries and timing of collections from customers. Cash flows provided by operating activities in the first six 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 payables due to higher prices and increases 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$849.4 million ,$793.4 million and$911.7 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 six months of 2022 and 2021 were as follows:
•SJI invested a net amount of$5.7 million and$15.3 million for the six months endedJune 30, 2022 and 2021, respectively, in Bronx Midco (see Note 16 to the condensed consolidated financial statements). •SJI made net investments in and net advances to unconsolidated affiliates of$41.8 million and$16.8 million for the six months endedJune 30, 2022 and 2021, respectively. Cash Flows from Financing Activities - The Merger Agreement places limitations on SJI's ability to engage in certain types of financing transactions without Parent's consent between the signing of the Merger Agreement and the Effective Time, including issuing equity of SJI (except in the ordinary course pursuant to equity compensation plans) and incurring certain indebtedness for borrowed money. Short-term borrowings from the commercial paper program and lines of credit from commercial banks have historically been used to supplement cash flows from operations, to support working capital needs and to finance capital expenditures and acquisitions as incurred. From time to time, SJI may refinance the short-term debt with long-term debt There have been no significant changes to the nature or balances of SJG's commercial paper program sinceDecember 31, 2021 , which are described in Note 13 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year endedDecember 31, 2021 . 73 -------------------------------------------------------------------------------- Table of Contents SJI has historically supplemented its operating cash flow, commercial paper program and credit lines with both debt and equity capital. Over the years, SJG has used long-term debt, primarily in the form of First Mortgage Bonds and Medium Term Notes, secured by the same pool of utility assets, to finance its long-term borrowing needs. These needs are primarily capital expenditures for property, plant and equipment. Credit facilities and available liquidity as ofJune 30, 2022 were as follows (in thousands): Available Company Total Facility Usage Liquidity Expiration Date SJI: SJI Syndicated Revolving Credit Facility$ 500,000
SJG:
Commercial Paper Program/Revolving Credit Facility 250,000
26,700 (B) 223,300
ETG:
ETG Revolving Credit Facility 250,000 70,100 (C) 179,900 September 2026 Total$ 1,000,000 $ 352,200 $ 647,800
(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 ofJune 30, 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 ofJune 30, 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, along with Change in Control considerations related to the Merger Agreement, 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. 74 -------------------------------------------------------------------------------- Table of Contents Note Purchase Agreement: OnJuly 14, 2022 , SJI entered into a Note Purchase Agreement that provides for the Company to issue an aggregate of$400.0 million of senior unsecured notes in four series, as follows: •$100.0 million aggregate principal amount of the Company's Senior Notes, Series 2022A, dueJuly 14, 2027 (the "Series 2022A Notes") •$100.0 million aggregate principal amount of the Company's Senior Notes, Series 2022B, dueJuly 14, 2029 (the "Series 2022B Notes") •$120.0 million aggregate principal amount of the Company's Senior Notes, Series 2022C, dueJuly 14, 2032 (the "Series 2022C Notes") •$80.0 million aggregate principal amount of the Company's Senior Notes, Series 2022D, dueJuly 14, 2034 (the "Series 2022D Notes") and, together with the Series 2022A Notes, the Series 2022B Notes and the Series 2022C Notes, the "Notes"). The Company issued 50% of each Series of Notes onJuly 14, 2022 (a total of$200.0 million of Notes) as follows: •$50.0 million aggregate principal amount of Series 2022A Notes at an interest rate of 5.35% •$50.0 million aggregate principal amount of Series 2022B Notes at an interest rate of 5.44% •$60.0 million aggregate principal amount of Series 2022C Notes at an interest rate of 5.60% •$40.0 million aggregate principal amount of Series 2022D Notes at an interest rate of 5.60%. The Company expects to issue the remaining$200.0 million of Notes onSeptember 15, 2022 , in the same aggregate principal amount of each series of Notes as was issued onJuly 14, 2022 . The Company expects to use the net proceeds of the Series 2022A Notes, the 2022B Notes and the 2022C Notes to fund capital expenditures, to repay indebtedness, and for general corporate purposes. The Company is required to use the net proceeds of the Series 2022D Notes to finance or refinance one or more green investments, as defined in the Note Purchase Agreement.
Other Debt Activity
In
In
In
In
In
In
DRP - See Note 4 to the condensed consolidated financial statements.
SJI's capital structure was as follows:
As of June 30, 2022 As of December 31, 2021
Equity 37.6 % 35.8 %
Long-Term Debt 56.5 % 58.3 %
Short-Term Debt 5.9 % 5.9 %
Total 100.0 % 100.0 %
During the six months ended June 30, 2022 and 2021, SJI declared quarterly
dividends to its common shareholders, which were paid in April and July 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
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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$33.5 million ,$39.7 million and$51.8 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, along with gas supply contracts and collective bargaining agreements as discussed in Note 11 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.
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. 76
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Table of Contents The following table summarizes the composition of selected gas utility throughput for the three and six month periods endedJune 30 , (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Utility Throughput - dts: Firm Sales - Residential 3,278 3,080 16,311 16,039 Commercial 1,045 999 4,087 3,770 Industrial 36 40 151 175 Cogeneration & Electric Generation 100 165 186 250 Firm Transportation - Residential 117 117 597 626 Commercial 1,182 1,084 4,005 3,746 Industrial 2,396 2,398 5,218 5,221 Cogeneration & Electric Generation 923 1,035 1,657 1,683 Total Firm Throughput 9,077 8,918 32,212 31,510 Interruptible Sales 58 2 71 8 Interruptible Transportation 306 251 616 593 Off-System Sales 2,590 2,021 7,897 8,065 Capacity Release 20,350 17,395 35,261 29,722 Total Throughput - Utility 32,381 28,587 76,057 69,898 Throughput - Gas Utility Operations - Total gas throughput increased 3.8 and 6.2 MMdts for the three and six months endedJune 30, 2022 , respectively, compared with the same periods in 2021, primarily due to volume increases in Capacity Release resulting from higher volume of pipeline capacity due to market conditions.
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,
2022 2021 2022 2021
Net Income Impact:
CIP - Weather Related $ 0.7 $ - $ 5.8 $ 5.6
CIP - Usage Related (1.8) 0.5 (7.5) (5.7)
Total Net Income Impact $ (1.1) $ 0.5 $ (1.7) $ (0.1)
Weather Compared to 20-Year Average 3.8% Warmer 1.9% Warmer 5.3% Warmer 5.7% Warmer
Weather Compared to Prior Year 1.3% Colder 20% Warmer 1.7% Colder 6.8% Colder
Operating Revenues & Utility Margin - See SJI's Management Discussion section above.
Operations & Maintenance Expense - See SJI's Management Discussion section above.
Depreciation - The change in depreciation expense for the three months endedJune 30, 2022 compared with the same period in 2021 was not significant. Depreciation expense increased$1.2 million for the six months endedJune 30, 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. 77 -------------------------------------------------------------------------------- Table of Contents Energy and Other Taxes - The change in energy and other taxes for the three and six months endedJune 30, 2022 compared with the same period in 2021 was not significant. Other Income and Expense - The change in other income and expense for the three and six months endedJune 30, 2022 compared with the same period in 2021 was not significant.
Interest Charges - The change in interest charges for the three and six 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 and additional investments from SJI.
Cash flows for the period were the following (in thousands):
Six months ended Six months ended
June 30, 2022 June 30, 2021
Net Cash Provided by Operating Activities $ 205,123 $ 161,270
Net Cash Used in Investing Activities $ (110,829) $ (132,784)
Net Cash Used in Financing Activities $ (96,375) $ (32,811)
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, inventory utilization, gas cost recoveries and the timing of collections from customers. Cash flows provided by operating activities in the first six months of 2022 produced more net cash than the same period in 2021, primarily due to higher purchased gas payables 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$249.2 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. Cash used in Financing Activities increased in the first six months of 2022 primarily due to repayment of long term debt.
See SJI's Management Discussion section above.
SJI did not contribute any equity to SJG during the three and six months ended
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SJG's capital structure was as follows:
As of June 30, 2022 As of December 31, 2021
Equity 59.9 % 56.3 %
Long-Term Debt 39.2 % 39.6 %
Short-Term Debt 0.9 % 4.1 %
Total 100.0 % 100.0 %
COMMITMENTS AND CONTINGENCIES:
Total net cash outflows for environmental remediation projects are expected to be$26.5 million ,$21.7 million and$33.3 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. SJG has certain commitments for both pipeline capacity and gas supply for which SJG pays fees regardless of usage. Those commitments, as ofJune 30, 2022 , averaged$95.2 million annually and totaled$465.8 million over the contracts' lives; the increase sinceDecember 31, 2021 is due to two executed contracts withAdelphia andColumbia pipeline during the first quarter 2022 and extension of the existing firm capacity contracts withColumbia pipelines during the second quarter 2022. Approximately 39% 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 endedDecember 31, 2021 , except as discussed above related to commitments for both pipeline capacity and gas supply for which SJG pays fees regardless of usage.
Off-Balance Sheet Arrangements - SJG has no off-balance sheet arrangements.
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