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. 60 -------------------------------------------------------------------------------- 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. OnOctober 21, 2022 ,FERC submitted its approval of theFERC Application for Approval. 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 ofSeptember 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 nine months endedSeptember 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 - 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 . 61 -------------------------------------------------------------------------------- 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 (loss)/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. 62 -------------------------------------------------------------------------------- Table of ContentsSOUTH JERSEY INDUSTRIES, INC.
RESULTS OF OPERATIONS:
Summary:
SJI's net income for the three months endedSeptember 30, 2022 decreased$11.9 million to a net loss of$37.9 million compared with the same period in 2021. SJI's income from continuing operations for the three months endedSeptember 30, 2022 decreased$11.9 million to a loss of$37.8 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 income contribution from the gas utility operations at ETG for the three months endedSeptember 30, 2022 decreased$14.7 million to a loss of$16.4 million compared with the same period in 2021 primarily due to a gain recorded during the third quarter of 2021 from a UTUA settlement agreement with theNew Jersey Division of Taxation that did not recur in 2022, along with a write-off of a regulatory asset in 2022 which consisted of certain property, plant and equipment determined to be no longer probable of recovery (see Note 1 to the condensed consolidated financial statements). •The income contribution from the renewables operating segment for the three months endedSeptember 30, 2022 decreased$4.0 million to a loss of$1.1 million compared with the same period in 2021 primarily due to the timing of ITCs recorded on fuel cell and solar projects (see Note 1 to the condensed consolidated financial statements). and an impairment charge taken at Energenic (see Note 3 to the condensed consolidated financial statements). •The income contribution from the decarbonization segment for the three months endedSeptember 30, 2022 decreased$1.5 million to a loss of$1.0 million compared with the same period in 2021 primarily due to losses incurred during the quarter at REV, in whichSJI Renewable Energy Ventures, LLC has a 35% equity interest. •The Corporate & Services segment incurred approximately$1.4 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 wholesale energy operating segment for the three months endedSeptember 30, 2022 increased$26.7 million to$15.9 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 higher margins from daily energy trading activities during the third quarter of 2022.
•SJI recorded a valuation allowance of
SJI's net income for the nine months endedSeptember 30, 2022 increased$66.6 million to net income of$72.7 million compared with the same period in 2021. SJI's income from continuing operations for the nine months endedSeptember 30, 2022 increased$66.7 million to income of$73.0 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 nine months endedSeptember 30, 2022 increased$87.1 million to$1.7 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 wholesale energy operating segment for the nine months endedSeptember 30, 2022 increased$9.1 million to$6.7 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 partially offset with the change in unrealized gains and losses recorded on forward financial contracts due to price volatility. •The income contribution from the renewables operating segment for the nine months endedSeptember 30, 2022 increased$6.1 million to$9.8 million compared with the same period in 2021 primarily due to the timing of ITCs recorded on fuel cell and solar projects (see Note 1 to the condensed consolidated financial statements). 63 -------------------------------------------------------------------------------- Table of Contents •The income contribution from the gas utility operations at SJG for the nine months endedSeptember 30, 2022 increased$3.2 million to$85.4 million compared with the same period in 2021, primarily due to the roll-in of infrastructure programs and customer growth.
•SJI recorded a valuation allowance of
•The income contribution from the gas utility operations at ETG for the nine months endedSeptember 30, 2022 decreased$14.5 million to$18.8 million compared with the same period in 2021 primarily due to a gain recorded during the third quarter of 2021 from a UTUA settlement agreement with theNew Jersey Division of Taxation that did not recur in 2022, along with a write-off of a regulatory asset in 2022 which consisted of certain property, plant and equipment determined to be no longer probable of recovery (see Note 1 to the condensed consolidated financial statements). •The Corporate & Services segment incurred approximately$4.5 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 decarbonization segment for the three months endedSeptember 30, 2022 decreased$3.0 million to a loss of$2.1 million compared with the same period in 2021 primarily due to losses incurred during the quarter at REV, in whichSJI Renewable Energy Ventures, LLC has a 35% equity interest. 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. •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 ofSeptember 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 64 -------------------------------------------------------------------------------- Table of Contents of Economic Earnings, items excluded from Economic Earnings for the three and nine months endedSeptember 30, 2022 and 2021, are described in (A)-(F) in the table below. Economic Earnings is a significant financial measure used by our management to indicate the amount and timing of income from continuing operations that we expect to earn after taking into account the impact of 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 endedSeptember 30, 2022 decreased$3.6 million to a loss of$22.4 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 Economic Earnings contribution from the renewables operating segment for the three months endedSeptember 30, 2022 decreased$3.2 million to$0.2 million compared with the same period in 2021 primarily due to the timing of ITCs recorded on fuel cell and solar projects (see Note 1 to the condensed consolidated financial statements).
•The Economic Earnings contribution from the gas utility operations at ETG
decreased
•The income contribution from the decarbonization segment for the three months endedSeptember 30, 2022 decreased$1.5 million to a loss of$1.0 million compared with the same period in 2021 primarily due to losses incurred during the quarter at REV, in whichSJI Renewable Energy Ventures, LLC has a 35% equity interest. •The Economic Earnings contribution from the wholesale energy operating segment for the three months endedSeptember 30, 2022 increased$4.0 million to$7.7 million compared with the same period in 2021 primarily due to higher margins from daily energy trading activities. Economic Earnings for the nine months endedSeptember 30, 2022 increased$21.3 million to$133.4 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 Economic Earnings contribution from the wholesale energy operating segment for the nine months endedSeptember 30, 2022 increased$15.4 million to$38.7 million compared with the same period in 2021 primarily due to higher margins from daily energy trading activities along with colder weather experienced in the first quarter of 2022. •The Economic Earnings contribution from the renewables operating segment for the nine months endedSeptember 30, 2022 increased$8.0 million to$12.0 million compared with the same period in 2021 primarily due to the timing of 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 nine months endedSeptember 30, 2022 increased$4.6 million to$86.8 million compared with the same period in 2021 primarily due to the roll-in of infrastructure programs and customer growth. •The Economic Earnings contribution from the decarbonization segment for the three months endedSeptember 30, 2022 decreased$3.0 million to a loss of$2.1 million compared with the same period in 2021 primarily due to losses incurred during the quarter at REV, in whichSJI Renewable Energy Ventures, LLC has a 35% equity interest. •The Economic Earnings contribution from the midstream operating segment for the nine months endedSeptember 30, 2022 decreased$2.0 million compared with the same period in 2021 primarily due to AFUDC recorded in 2021 that did not occur in 2022 due to the decision to cease further development of the PennEast project (see Note 3 to the condensed consolidated financial statements). 65
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The following table presents a reconciliation of SJI's income from continuing operations and earnings per share from continuing operations to Economic Earnings and Economic Earnings per share for the three and nine months endedSeptember 30 (in thousands, except per share data): Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 (Loss) Income from Continuing Operations$ (37,771) $ (25,830) $ 72,965 $ 6,308 Minus/Plus: Unrealized Mark-to-Market (Gains) Losses on Derivatives (11,319) 19,815 43,872 35,089 Income Attributable to Noncontrolling Interests (196) (238) (491) (540) Impairment of Equity Method Investment (A) 1,158 - 1,158 87,370 Impairment of Property, Plant & Equipment (B) 7,217 - 9,114 - Acquisition/Sale Net Costs (C) 1,248 924 6,401 1,602 Other (D) - (10,960) - (10,960) Income Taxes (E) 434 (2,519) (16,488) (20,971) Additional Tax Adjustments (F) 16,821 - 16,821 14,176 Economic Earnings$ (22,408)
Earnings per Share from Continuing Operations$ (0.31) $ (0.23) $ 0.59 $ 0.06 Minus/Plus: Unrealized Mark-to-Market (Gains) Losses on Derivatives (0.09) 0.17 0.36 0.32 Income Attributable to Noncontrolling Interests (0.01) - (0.01) (0.01) Impairment of Equity Method Investment (A) 0.01 - 0.01 0.80 Impairment of Property, Plant & Equipment (B) 0.06 - 0.08 - Acquisition/Sale Net Costs (C) 0.01 0.01 0.05 0.01 Other (D) - (0.10) - (0.10) Income Taxes (E) 0.01 (0.02) (0.14) (0.19) Additional Tax Adjustments (F) 0.14 - 0.14 0.13 Economic Earnings per Share$ (0.18) $ (0.17) $ 1.08 $ 1.02 Three Months Ended September Nine Months Ended 30, September 30, 2022 2021 2022 2021
(Loss) Income from Continuing Operations
Minus/Plus:
Impairment of Property, Plant & Equipment (B) - - 1,897 - Income Taxes (E) - - (518) - Economic Earnings$ (8,057) $ (7,700) $ 86,805 $ 82,231 66
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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 Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Total unrealized mark-to-market gains (losses) on
derivatives $ 11,319 $ (19,815) $ (43,872) $ (35,089)
Income Attributable to Noncontrolling Interests 196 238 491 540
Impairment of Equity Method Investment (A) (1,158) - (1,158) (87,370)
Impairment of Property, Plant & Equipment (B) (7,217) - (9,114) -
Acquisition/Sale Net Costs (C) (1,248) (924) (6,401) (1,602)
Other (D) - 10,960 - 10,960
Income Taxes (E) (434) 2,519 16,488 20,971
Additional Tax Adjustments (F) (16,821) - (16,821) (14,176)
Total reconciling items between income from
continuing operations and economic earnings
(A) Represents other-than-temporary impairment charges taken on the Company's equity method investments in Energenic (2022) and PennEast (2021).
(B) Represents charges on property, plant & equipment and on a regulatory asset which consisted of certain property, plant & equipment that were deemed unrecoverable at SJG and ETG, respectively.
(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 costs incurred to finalize acquisitions of solar projects, along with the final working capital payment on the sale ofElkton .
(D) For 2021, represents a gain recognized by ETG from a UTUA settlement agreement.
(E) The income taxes were determined using a combined average statutory tax rate.
(F) Represents state and federal deferred tax asset valuation allowances taken in 2022 and 2021, respectively.
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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 nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Utility Operating Revenues:
Firm Sales -
Residential $ 36,137 $ 32,750 $ 294,562 $ 243,945
Commercial 11,970 10,753 72,792 56,904
Industrial 227 231 2,570 2,411
Cogeneration & Electric Generation 2,251 2,126 3,895 3,444
Firm Transportation -
Residential 947 1,002 7,307 7,410
Commercial 6,726 5,945 35,634 30,962
Industrial 7,535 7,758 23,626 22,222
Cogeneration & Electric Generation 1,122 1,060 3,702 3,849
Total Firm Revenues 66,915 61,625 444,088 371,147
Interruptible Sales - 40 913 185
Interruptible Transportation 14 370 1,598 1,153
Off-System Sales 44,046 7,169 104,619 37,189
Capacity Release 1,312 496 5,310 2,150
Other 433 258 1,057 748
112,720 69,958 557,585 412,572
Less: Intercompany Sales (7,613) (907) (18,726) (7,662)
Total Utility Operating Revenues 105,107 69,051 538,859 404,910
Less:
Cost of Sales - Utility 59,905 16,630 236,872 109,878
Less: Intercompany Cost of Sales (7,613) (907) (18,726) (7,662)
Total Cost of Sales - Utility (Excluding
Depreciation & Amortization) (A) 52,292 15,723 218,146 102,216
Less: Depreciation & Amortization (A) 28,727 30,083 99,591 89,279
Total GAAP Gross Margin 24,088 23,245 221,122 213,415
Add: Depreciation & Amortization (A) 28,727 30,083 99,591 89,279
Less: CIP Recoveries (B) 1,768 1,587 10,880 7,803
Less: RAC Recoveries (B) 2,306 6,965 18,655 20,893
Less: TIC Recoveries (B) (1) - 93 -
Less: EET Recoveries (B) 3,308 1,190 4,876 3,528
Less: Revenue Taxes 225 279 1,442 1,045
Utility Margin (C) $ 45,209 $ 43,307 $ 284,767 $ 269,425
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Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021Utility Margin: Residential$ 25,987 $ 23,630 $ 189,822 $ 181,330 Commercial and Industrial 16,370 15,111 82,455 76,233 Cogeneration and Electric Generation 1,290 1,136 3,494 3,558 Interruptible 27 15 72 94 Off-System Sales & Capacity Release 813 237 3,996 1,170 Other Revenues 1,114 523 2,015 1,502 Margin Before Weather Normalization & Decoupling 45,601 40,652 281,854 263,887 CIP Mechanism (1,343) 1,011 (2,738) 885 EET Mechanism 951 1,644 5,651 4,653 Utility Margin (C)$ 45,209 $ 43,307 $ 284,767 $ 269,425
(A) Does not include amortization of debt issuance costs that are recorded as Interest Charges on the condensed consolidated statements of (loss)/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$42.8 million , or 61.1%, for the three months endedSeptember 30, 2022 compared with the same period in 2021. Excluding intercompany transactions, revenues increased$36.1 million , or 52.2%, for the three months endedSeptember 30, 2022 compared with the same period in 2021. Revenues from the gas utility operations at SJG increased$145.0 million , or 35.1%, for the nine months endedSeptember 30, 2022 compared with the same period in 2021. Excluding intercompany transactions, revenues increased$133.9 million , or 33.1%, for the nine months endedSeptember 30, 2022 compared with the same period in 2021. The significant drivers for the overall change were as follows: •Firm revenue increased$5.3 million and$72.9 million for the three and nine months endedSeptember 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$36.9 million and$67.4 million for the three and nine months endedSeptember 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$1.9 million , or 4.4%, for the three months endedSeptember 30, 2022 compared with the same period in 2021. Total Utility Margin increased$15.3 million , or 5.7%, for the nine months endedSeptember 30, 2022 compared with the same period in 2021. The increases are primarily due to the roll-in of infrastructure programs and customer growth. The change in revenues from SJG's BGSS clause had no impact to SJG's Utility Margin as discussed under "Operating Revenues - SJG Utility Operations" above.
ETG Utility Operations:
The following tables summarize the composition of ETG utility operations operating revenues and margin for the three and nine months endedSeptember 30 (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Utility Operating Revenues: Firm & Interruptible Sales - Residential$ 19,808 $ 18,060 $ 173,098 $ 155,593 Commercial & Industrial 11,753 9,408 70,151 54,498 Firm & Interruptible Transportation - Residential 187 225 1,400 1,588 Commercial & Industrial 9,181 9,006 34,925 35,698 Other 1,226 373 159 721 Total Firm & Interruptible Revenues 42,155 37,072 279,733 248,098 Less: Total Cost of Sales - Utility (Excluding Depreciation & Amortization) (A) 10,307 8,406 112,090 81,711 Less: Depreciation & Amortization (A) 15,746 14,557 48,153 53,369 Total GAAP Gross Margin 16,102 14,109 119,490 113,018 Add: Depreciation & Amortization (A) 15,746 14,557 48,153 53,369 Less: Regulatory Rider Recoveries (B) 1,590 2,280 8,544 16,872 Utility Margin (C)$ 30,258 $ 26,386 $ 159,099 $ 149,515 Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Utility Margin: Residential$ 15,331 $ 13,634 $ 104,364 $ 101,168 Commercial & Industrial 15,252 14,623 63,027 64,396 Regulatory Rider Mechanisms (B) (325) (1,871) (8,292) (16,049) Utility Margin (C)$ 30,258 $ 26,386 $ 159,099 $ 149,515
(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 $5.1 million , or
13.7%, and increased $31.6 million , or 12.8%, for the three and nine months
ended September 30, 2022 , respectively, compared with the same periods in 2021.
Utility Margin from the gas utility operations at ETG increased $3.9 million , or
14.6%, and increased $9.6 million , or 6.4% for the three and nine months ended
September 30, 2022 , respectively, compared with the same periods in 2021. These
changes in revenues and Utility Margin are primarily due to increases in base
rates, customer growth and the roll-in of investments from infrastructure
replacement programs.
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$205.0 million to$451.9 million , and increased$434.9 million to$1.10 billion , for the three and nine months endedSeptember 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 nine month comparative period increase was colder weather experienced in the first quarter of 2022. Included with these comparative period changes 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 increase of$31.2 million and a total decrease of$9.0 million for the three and nine months endedSeptember 30, 2022 , respectively, 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$3.3 million to$1.9 million and decreased$7.2 million to$5.8 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with the same periods in 2021, primarily due to SJE no longer acquiring or marketing electricity to retail end users. 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$0.1 million , or 1.3%, to$7.4 million , and increased$0.5 million , or 2.8%, to$18.3 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with the same periods in 2021. These comparative period increases were 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, increased$36.3 million to$24.9 million and increased$13.7 million to$18.7 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with the same periods in 2021. The significant drivers for the overall change were as follows: 71 -------------------------------------------------------------------------------- Table of Contents •Gross margin from the wholesale energy operations at SJRG, net of intercompany transactions, increased$36.6 million to$23.0 million , and increased$12.6 million to$12.9 million for the nine months endedSeptember 30, 2022 compared with the same period in 2021, due to higher margins on daily energy trading activities along with 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 nine months ended
Gross Margin - Energy Production
Combined gross margins for Energy Production, net of intercompany transactions, decreased$0.5 million to$6.3 million and decreased$1.2 million to$15.3 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with the same periods in 2021. These comparative period decreases were not significant.
Operating Expenses - All Segments:
A summary of net changes in Operations and Maintenance expense for the three and
nine months ended
Three Months Ended Nine Months Ended
September 30 , September 30, 2022
2022 vs. 2021 vs. 2021
SJG Utility Operations $ (1,316) $ 8,190
ETG Utility Operations 892 (3,450)
Subtotal SJI Utilities (424) 4,740
Nonutility:
Energy Management:
Wholesale Energy Operations (700) (954) Retail Services (228) (56) Subtotal Energy Management (928) (1,010) Energy Production: Renewables (174) 1,175 Decarbonization 193 943 Subtotal Energy Production 19 2,118 Midstream (66) (190) Corporate & Services and Intercompany Eliminations 4,169 5,897 Total Operations and Maintenance Expense $ 2,770 $ 11,555 Operations & Maintenance SJG utility operations and maintenance expense decreased$1.3 million and increased$8.2 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with the same periods in 2021. These changes were primarily due to the operations of SJG's CLEP and EEP. Such costs are recovered on a dollar-for-dollar basis; therefore, SJG experienced an offset to revenue during the three and nine months endedSeptember 30, 2022 compared with the same period in the prior year. ETG utility operations and maintenance expense increased$0.9 million and decreased$3.5 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with the same periods in 2021. These changes were primarily due to the operation of ETG's RAC. Such costs are recovered on a dollar-for-dollar basis; therefore, ETG experienced an offset to revenue during the three and nine months endedSeptember 30, 2022 compared with the same period in the prior year. 72 -------------------------------------------------------------------------------- Table of Contents Operations and Maintenance expense for Energy Production increased$2.1 million for the nine months endedSeptember 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 nine-month period in 2022 compared to 2021. Operations and Maintenance expense for the Corporate & Services segment, after intercompany eliminations, increased$4.2 million and$5.9 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with the same periods in 2021, primarily due to expenses incurred related to the Merger Agreement. Depreciation - Depreciation increased$3.8 million and$7.1 million for the three and nine months endedSeptember 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 months endedSeptember 30, 2022 , ETG recorded$7.2 million of charges related to the write-off of a regulatory asset which consisted of certain property, plant and equipment that was determined to be no longer probable of recovery. In addition to this charge, the Company recorded$1.9 million of impairment charges related to long-lived assets that were deemed no longer usable during the nine months endedSeptember 30, 2022 . Energy and Other Taxes - Energy and other taxes increased$11.5 million and$12.8 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with the same periods in 2021, primarily due to a gain recorded in 2021 from a UTUA settlement agreement with theNew Jersey Division of Taxation that did not recur in 2022 (see Note 1 to the condensed consolidated financial statements). Other Income and Expense - Other income and expense increased$5.6 million and$5.4 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with the same periods in 2021, primarily due to gains recorded at the midstream operating segment as PennEast sold certain project-related assets and received refunds of interconnection fees from interstate pipelines, along with interest income on outstanding loans to REV (see Note 3 to the condensed consolidated financial statements). Interest Charges - Interest charges increased$7.0 million and$7.5 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with the same periods in 2021, primarily due to higher long-term debt outstanding, including debt issued during the third quarter of 2022 (see Note 14 to the condensed consolidated financial statements). Income Taxes - Income taxes changed from a$11.7 million benefit for the three months endedSeptember 30, 2021 to an expense of$10.0 million for the three months endedSeptember 30, 2022 , primarily due to a valuation allowance related to state deferred taxes for a certain tax filing group, inclusive of net operating loss carryforwards and credits which are expected to expire prior to being fully utilized, along with a lower loss before income taxes and the timing of ITCs recorded in 2022 compared to 2021. Income tax expense increased$3.2 million for the nine months endedSeptember 30, 2022 compared with the same period in 2021 due to the same valuation allowance discussed above, partially offset by lower income before income taxes and the timing of ITCs recorded in 2022 compared to 2021. Equity in (Loss) Earnings of Affiliated Companies - Equity in (loss) earnings of affiliated companies decreased$1.9 million for the three months endedSeptember 30, 2022 compared with the same period in 2021 primarily due to an impairment charge taken at Energenic (see Note 3 to the condensed consolidated financial statements). Equity in (loss) earnings of affiliated companies increased$80.8 million for the nine months endedSeptember 30, 2022 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 taken in 2021 (see Note 3 to the condensed consolidated financial statements). 73 -------------------------------------------------------------------------------- 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):
Nine months ended Nine months ended
September 30, 2022 September 30, 2021
Net Cash Provided by Operating Activities $ 374,907 $ 273,927
Net Cash Used in Investing Activities $ (586,522) $ (434,171)
Net Cash Provided by Financing Activities $ 235,713 $ 143,862
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 nine 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$907.0 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 nine months of 2022 and 2021 were as follows:
•SJI invested a net amount of$21.0 million and$15.3 million for the nine months endedSeptember 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$94.8 million and$39.8 million for the nine months endedSeptember 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 . 74
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Credit facilities and available liquidity as of
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
97,300 (B) 152,700
ETG:
ETG Revolving Credit Facility 250,000 107,800 (C) 142,200 September 2026 Total$ 1,000,000 $ 212,200 $ 787,800
(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) There are currently no letters of credit outstanding that support ETG's construction activity.
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 ofSeptember 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 ofSeptember 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. 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.
Equity Issuances
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. 75 -------------------------------------------------------------------------------- Table of Contents 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. Note Purchase Agreement: OnJuly 14, 2022 , SJI entered into a Note Purchase Agreement that provided 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 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 on
•$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 issued the remaining 50% of each series of Notes on
•$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 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
In
In
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Impact of Change in Control
For additional information regarding SJI's or SJG's long-term debt, along with
Change in Control considerations related to the Merger Agreement, see Note 14 to
the condensed consolidated financial statements. Under the new arrangements SJI,
SJG, or ETG expect to become parties to, including as discussed in Note 10 to
the condensed consolidated financial statements related to the Revolving Credit
Agreement, we expect that interest rates will be higher than under the previous
arrangements.
DRP - See Note 4 to the condensed consolidated financial statements.
SJI's capital structure was as follows:
As of September 30, 2022 As of December 31, 2021
Equity 35.2 % 35.8 %
Long-Term Debt 61.3 % 58.3 %
Short-Term Debt 3.5 % 5.9 %
Total 100.0 % 100.0 %
During the nine months ended September 30, 2022 and 2021, SJI declared quarterly
dividends to its common shareholders, which were paid in April, July and October
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$30.6 million ,$44.3 million and$54.1 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, gas supply contracts and collective bargaining agreements as discussed in Note 11 to the condensed consolidated financial statements, and the issuance of long-term debt as discussed in Note 14 to the condensed consolidated financial statements.
Off-Balance Sheet Arrangements - An off-balance sheet arrangement is any contractual arrangement involving an unconsolidated entity under which SJI has either made guarantees, or has certain other interests or obligations.
See "Guarantees" in Note 11 to the condensed consolidated financial statements for more detail.
Notes Receivable-Affiliates - See Note 3 to the condensed consolidated financial statements.
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
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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.
SOUTH JERSEY GAS COMPANY This section of Management's Discussion focuses on SJG for the reported periods. In many cases, explanations and disclosures for both SJI and SJG are substantially the same or specific disclosures for SJG are included in the Management's Discussion for SJI.
RESULTS OF OPERATIONS:
The results of operations for the SJG utility operations are described 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 and nine month periods endedSeptember 30 , (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Utility Throughput - dts: Firm Sales - Residential 1,676 1,435 17,987 17,474 Commercial 686 622 4,773 4,392 Industrial 10 5 161 180 Cogeneration & Electric Generation 213 434 399 684 Firm Transportation - Residential 54 50 651 676 Commercial 832 682 4,837 4,428 Industrial 2,211 2,348 7,429 7,569 Cogeneration & Electric Generation 1,635 1,181 3,292 2,864 Total Firm Throughput 7,317 6,757 39,529 38,267 Interruptible Sales - - 71 8 Interruptible Transportation 273 246 889 839 Off-System Sales 4,955 1,322 12,852 9,387 Capacity Release 20,523 20,267 55,784 49,989 Total Throughput - Utility 33,068 28,592 109,125 98,490 Throughput - Gas Utility Operations - Total gas throughput increased 4.5 and 10.6 MMdts for the three and nine months endedSeptember 30, 2022 , respectively, compared with the same periods in 2021, primarily due to volume increases in Off-System Sales resulting from a combination of gas withdrawn from storage and volatile market conditions. 78
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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 September 30 ,
Nine Months Ended
2022 2021 2022 2021
Net Income Impact:
CIP - Weather Related $ - $ - $ 5.8 $ 5.5
CIP - Usage Related (1.0) 0.7 (7.9) (4.9)
Total Net Income Impact $ (1.0) $ 0.7 $ (2.1) $ 0.6
Weather Compared to 20-Year Average 3.7% Colder 70.4% Colder 5.2% Warmer 5.1% Warmer
Weather Compared to Prior Year 110.2% Colder 64.0% Warmer
2.4% Colder 5.4% 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 and$2.5 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with the same periods 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 and nine months endedSeptember 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 nine months endedSeptember 30, 2022 compared with the same periods in 2021 was not significant.
Interest Charges - The change in interest charges for the three and nine 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):
Nine months ended Nine months ended
September 30, 2022 September 30, 2021
Net Cash Provided by Operating Activities $ 211,430 $ 177,812
Net Cash Used in Investing Activities $ (177,645) $ (194,804)
Net Cash (Used in) Provided by Financing Activities $ (35,775) $ 12,588
79-------------------------------------------------------------------------------- Table of Contents 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 nine 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$257.6 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 nine 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 nine months ended
SJG's capital structure was as follows:
As of September 30, 2022 As of December 31, 2021
Equity 58.4 % 56.3 %
Long-Term Debt 38.0 % 39.6 %
Short-Term Debt 3.6 % 4.1 %
Total 100.0 % 100.0 %
COMMITMENTS AND CONTINGENCIES:
Total net cash outflows for environmental remediation projects are expected to be$22.7 million ,$26.0 million and$32.0 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.
See Note 11 to the condensed consolidated financial statements for information on SJG's commitments for both pipeline capacity and gas supply.
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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