Notes to Condensed Consolidated Financial Statements
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL - SJI provides a variety of energy-related products and services primarily through the following wholly-owned subsidiaries:
▪SJIU is a holding company that owns SJG and ETG.
•SJG is a regulated natural gas utility which distributes natural gas in the seven southernmost counties of New Jersey.
•ETG is a regulated natural gas utility which distributes natural gas in seven counties in northern and central New Jersey.
▪SJE has an ownership interest in EnergyMark (see Note 3). Beginning in the second quarter 2022, SJE no longer acquires or markets electricity to retail end users.
▪SJRG markets natural gas storage, commodity and transportation assets along with fuel management services on a wholesale basis in the mid-Atlantic, Appalachian and southern states.
▪SJEX owns oil, gas and mineral rights in the Marcellus Shale region of Pennsylvania.
▪Marina develops and operates on-site energy-related projects. Marina includes the Catamaran joint venture that develops, owns and operates renewable energy projects, and supports SJI's commitment to clean energy initiatives. Catamaran owns Annadale and Bronx Midco, operators of fuel cell projects in New York, in which Marina, through Catamaran, owns 93% and 92%, respectively. Catamaran also owns a solar generation site in Massachusetts, in which Marina, through Catamaran, owns 90%. The remaining ownership percentages are recorded as NCIs in the condensed consolidated financial statements. The principal wholly-owned subsidiaries of Marina are:
•Solar energy projects in New Jersey.
•ACLE, BCLE, SCLE and SXLE own landfill gas-to-energy production facilities in Atlantic, Burlington, Salem and Sussex Counties, respectively, in New Jersey. ACLE ceased operations on September 30, 2021, while BCLE, SCLE and SXLE ceased operations on June 1, 2020.
▪SJESP receives commissions on appliance service contracts from a third party.
▪Midstream invests in infrastructure and other midstream projects, including the PennEast project for which development ceased in September 2021. See Note 3.
▪SJEI provides energy procurement and cost reduction services. The significant wholly-owned subsidiaries of SJEI include:
•AEP, an aggregator, broker and consultant in the retail energy markets that matches end users with suppliers for the procurement of natural gas and electricity.
•EnerConnex, an aggregator, broker and consultant in the retail and wholesale energy markets that matches end users with suppliers for the procurement of natural gas and electricity.
•SJI Renewable Energy Ventures, LLC, which holds our equity interest in REV.
•SJI RNG Devco, LLC, which includes our renewable natural gas development rights and costs incurred in order to develop certain dairy farms, along with the Red River joint venture which was formed on March 22, 2022 (see Note 16).
MERGER AGREEMENT - On February 23, 2022, SJI announced that it had signed a Merger Agreement with NJ Boardwalk Holdings LLC, a Delaware limited liability company (“Parent”) and Boardwalk Merger Sub, Inc., a New 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 of Infrastructure Investments Fund. Following completion of the transaction, SJI intends to delist its shares from the New 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 12 months after signing, subject to certain extensions and exceptions. Under the terms of the Merger Agreement, the Company may be required to pay Parent a termination fee of $140.0 million if the Merger Agreement is terminated under certain specified circumstances. The Merger Agreement additionally provides that Parent pay the Company a termination fee of $255.0 million under certain specified circumstances.
In connection with the Merger Agreement and the transactions contemplated thereby, eight complaints were filed as individual actions in United States District Court. The plaintiffs have subsequently dismissed these claims without prejudice. See Note 11.
On April 11, 2022, the Company filed a definitive proxy statement with the SEC in connection with the Merger. On May 3, 2022, the Company filed additional proxy soliciting materials related to the Merger. On May 10, 2022, SJI’s shareholders voted in favor of the adoption of the Merger Agreement and the Merger at the Company's annual meeting of shareholders.
On April 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.
On April 25, 2022, certain subsidiaries of the Company and NJ Boardwalk Holdings, LLC, an affiliate of IIF filed a joint application requesting approval of the Merger with the FERC under Section 203 of the Federal Power Act, which was assigned FERC Docket No. EC22-60 (the “FERC Application for Approval”). The FERC established a May 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 ask FERC to reject the FERC Application for Approval, but questioned the description of IIF’s affiliates. On May 31, 2022, the Company and IIF filed replies to the May 16, 2022 comments. On October 21, 2022, FERC submitted its approval of the FERC Application for Approval.
On April 29, 2022, the Company and Parent filed the notification and report form with the Antitrust Division of the U.S. Department of Justice and the Federal 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 on May 31, 2022 at 11:59pm.
BASIS OF PRESENTATION - SJI's condensed consolidated financial statements include the accounts of SJI, its direct and indirect wholly-owned subsidiaries (including SJG) and subsidiaries in which SJI has a controlling interest. All significant intercompany accounts and transactions have been eliminated in consolidation. In management’s opinion, the condensed consolidated financial statements of SJI and SJG reflect all normal recurring adjustments needed to fairly present their respective financial positions, operating results and cash flows at the dates and for the periods presented. SJI’s and SJG's businesses are subject to seasonal fluctuations and, accordingly, this interim financial information should not be the basis for estimating the full year’s operating results.
As permitted by the rules and regulations of the SEC, the accompanying unaudited condensed consolidated financial statements of SJI and SJG contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with GAAP. These financial statements should be read in conjunction with SJI’s and SJG's Annual Reports on Form 10-K for the year ended December 31, 2021. There were no significant changes in or changes in the application of the Company’s significant or critical accounting policies or estimation
procedures for the three and nine months ended September 30, 2022 as compared with the significant accounting policies described in the Company’s audited consolidated financial statements for the year ended December 31, 2021.
ESTIMATES AND ASSUMPTIONS - The condensed consolidated financial statements were prepared to conform with GAAP, which requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. Therefore, actual results could differ from those estimates. Significant estimates include amounts related to regulatory accounting, energy derivatives, environmental remediation costs, legal contingencies, pension and other postretirement benefit costs, revenue recognition, goodwill, evaluation of equity method investments for other-than-temporary impairment, income taxes, and allowance for credit losses. Estimates may be subject to future uncertainties, including the continued evolution of the COVID-19 pandemic and its impact on our operations and economic conditions, which could affect the fair value of the ETG reporting unit and its goodwill balance (see Note 17), as well as the allowance for credit losses and the total impact and potential recovery of incremental costs associated with COVID-19 (see Notes 5 and 8, respectively).
IMPAIRMENT OF LONG-LIVED ASSETS - See Note 1 to the Consolidated Financial Statements under "Impairment of Long-Lived Assets" in Item 8 of the Form 10-K for the year ended December 31, 2021 for additional information regarding the Company's policy on impairments of long-lived assets. In the second quarter of 2022, it was determined that SJG had property, plant and equipment that was unusable which resulted in SJI and SJG recording an impairment charge of approximately $1.9 million to Impairment Charges on the condensed consolidated statements of (loss)/income for SJI and SJG during the nine months ended September 30, 2022. These impairment charges were recorded to the SJG Utility Operations segment. No impairments of long-lived assets were identified at SJG for the three months ended September 30, 2022 and three and nine months ended September 30, 2021, respectively.
REGULATION - The Utilities are subject to the rules and regulations of the BPU. See Note 7 for a discussion of the Utilities' rate structure and regulatory actions. The Utilities maintain their accounts according to the BPU's prescribed Uniform System of Accounts. The Utilities follow the accounting for regulated enterprises prescribed by ASC 980, Regulated Operations, which allows for the deferral of certain costs (regulatory assets) and creation of certain obligations (regulatory liabilities) when it is probable that such items will be recovered from or refunded to customers in future periods.
In the third quarter of 2022, ETG determined that a regulatory asset which consisted of certain non-functioning property, plant and equipment costs was no longer probable of recovery. This resulted in SJI recording a charge of approximately $7.2 million to Impairment Charges on the condensed consolidated statements of (loss)/income during the three and nine months ended September 30, 2022. This charge was recorded to the ETG Utility Operations segment. See Note 8 for more information related to regulatory assets and liabilities.
OPERATING REVENUES - Gas and electric revenues are recognized in the period the commodity is delivered to customers. For retail customers (including customers of SJG) that are not billed at the end of the month, we record an estimate to recognize unbilled revenues for gas and electricity delivered from the date of the last meter reading to the end of the month. The Utilities also have revenues that arise from alternative revenue programs, which are discussed in Note 15. For ETG and SJG, unrealized gains and losses on energy-related derivative instruments are recorded in Regulatory Assets or Regulatory Liabilities on the condensed consolidated balance sheets of SJI and SJG (see Note 12) until they become realized, in which case they are recognized in operating revenues. SJRG's gas revenues are recognized in the period the commodity is delivered, and operating revenues for SJRG include realized and unrealized gains and losses on energy-related derivative instruments. SJRG presents revenues and expenses related to its energy trading activities on a net basis in operating revenues. This net presentation has no effect on operating income or net income. The Company recognizes revenues on commissions received related to SJESP appliance service contracts, along with commissions received related to AEP and EnerConnex energy procurement service contracts, on a monthly basis as the commissions are earned. Marina recognizes revenue for renewable energy projects when output is generated and delivered to the customer, and when renewable energy credits have been transferred to the third party at an agreed upon price.
We considered the impact the COVID-19 pandemic has had on operating revenues, noting that SJI and SJG have not seen a significant reduction in revenues as a result of the pandemic. This is due to the delivery of gas and electricity being considered an essential service, with delivery to customers continuing in a timely manner with no delays or operational shutdowns taking place to date. To the extent that the pandemic does impact our ability to deliver in the future, operating revenues could be impacted. Currently, the impact of the pandemic on the collectability of our accounts receivable continues to be monitored, but such receivables have traditionally been included in rate recovery (see Note 8).
INCOME TAXES - Deferred income taxes are provided for all significant temporary differences between the book and taxable bases of assets and liabilities in accordance with ASC 740, Income Taxes. Certain deferred income taxes are recorded with offsetting regulatory assets or liabilities by the Company to recognize that income taxes will be recovered or refunded through future rates.
A valuation allowance is recorded when it is more likely than not that any of SJI's or SJG's deferred tax assets will not be realized. During the three and nine months ended September 30, 2022, SJI recorded a valuation allowance of $16.8 million 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. During the nine months September 30, 2021, SJI recorded a valuation allowance of $14.2 million against the federal deferred tax asset related to the capital loss that resulted from the other-than-temporary impairment charge taken on the Company's investment in PennEast (see Note 3). As of September 30, 2022 and December 31, 2021, SJI had a total federal and state valuation allowance of $39.3 million and $22.5 million, respectively, recorded on the condensed consolidated balance sheets. See Note 4 to the Consolidated Financial Statements in Item 8 of SJI's and SJG’s Annual Report on Form 10-K for the year ended December 31, 2021 for information related to these valuation allowances. SJG believes that it will generate sufficient future taxable income to realize the income tax benefits related to its net deferred tax assets.
The Company evaluates certain tax benefits that have been recorded in the financial statements for uncertainties. In 2021, SJG recorded a reserve of $13.9 million for a portion of tax benefits related to tax positions taken in prior years. The reserve is recorded in Other Noncurrent Liabilities in the condensed consolidated balance sheets as of both September 30, 2022 and December 31, 2021. The amount of income taxes we pay is subject to ongoing audits by federal and state tax authorities, which could result in proposed assessments. Future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period any assessments are determined or resolved or as such statutory audit periods are closed. We are not aware of any other matters that would result in significant changes to the amount of unrecognized income tax benefits reflected on the condensed consolidated balance sheets as of September 30, 2022.
IRA - On August 16, 2022, the IRA was signed into U.S. law. Among other provisions, the IRA includes:
•A 15% minimum tax rate, effective beginning January 1, 2024 for the Company, applied to corporations with profits in excess of $1 billion.
•A 1% excise tax on the repurchase of corporate stock for repurchases made after December 31, 2022.
•A series of financial and tax incentives intended to promote clean energy, including a 30% ITC for projects that commenced construction from 2019-2022 (see "ITC" below).
We do not anticipate this legislation will have a material impact on our consolidated financial statements.
ITC - The U.S. federal government provides businesses with an ITC under Section 48 of the Internal Revenue Code, available to the owner of solar and fuel cell systems that are purchased and placed into service. The Company recognizes ITC on eligible assets in the year in which the project commences commercial operations. Among other requirements, such credits require projects to have commenced construction by a certain date. Accordingly, projects are eligible for a 30% ITC for projects that commenced construction in 2019 and, as a result of the IRA discussed above, that 30% ITC was extended to projects that commenced construction in 2020-2022. As a result, ITCs recorded during the nine months ended September 30, 2022 were $11.9 million, which include an adjustment to increase previously recorded ITCs in 2020 through June 30, 2022 per the provisions of the IRA. ITCs recorded during the three and nine months ended September 30, 2021 were $2.3 million and $2.7 million, respectively.
TAX SETTLEMENT - During the third quarter of 2021, ETG recognized a gain of $11.0 million from a UTUA settlement agreement with the New Jersey Division of Taxation. The gain is presented within Energy and Other Taxes in the SJI condensed consolidated statements of (loss)/income.
GOODWILL - See Note 17.
LEASES - There have been no significant changes to the nature or balances of the Company's leases since December 31, 2021, which are described in Note 9 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2021.
NEW ACCOUNTING PRONOUNCEMENTS - Other than as described below, no new accounting pronouncement had, or is expected to have, a material impact on the condensed consolidated financial statements of SJI, or the condensed financial statements of SJG.
Recently Adopted Standards:
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| Standard | | Description | | Date of Adoption | | Application | | Effect on the Financial Statements of SJI and SJG |
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ASU 2020-04: Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting
ASU 2021-01: Reference Rate Reform (Topic 848) | | The amendments in ASU 2020-04 provide various optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in ASU 2021-01 clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to changes in the interest rates used for margining, discounting, or contract price alignment for derivative instruments that are being implemented as part of the market-wide transition to new reference rates (commonly referred to as the "discounting transition"). | | January 1, 2022
| | Prospective for contract modifications and hedging relationships. Once elected for a Topic or an Industry Subtopic, the amendments in this Update must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. | | Adoption of this guidance did not have a material impact on the financial statement results of SJI or SJG. |
| ASU 2020-06: Accounting for Convertible Instruments and Contracts in an Entity's Own Equity | | The amendments in this ASU simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20. Under the amendments, embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. The amendments also add new convertible instrument disclosure requirements. Additionally, the amendments in this ASU remove certain conditions from the settlement guidance within the derivative scope exception guidance contained in Subtopic 815-40 and further clarify the derivative scope exception guidance. Finally, the amendments in this ASU align the diluted EPS calculation for convertible instruments by requiring that an entity use the if-converted method instead of the treasury stock method when calculated diluted EPS for convertible instruments. | | January 1, 2022 | | Retrospective or Modified Retrospective | | Adoption of this guidance did not have a material impact on the financial statement results of SJI or SJG. |
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Standards Not Yet Effective: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Standard | | Description | | Date of Adoption | | Application | | Effect on the Financial Statements of SJI and SJG |
| ASU 2021-10: Government Assistance (ASC 832): Disclosures by Business Entities about Government Assistance | | This ASU requires disclosure in the notes to annual financial statements of government financial assistance from local, (city, town, county, municipal), regional, and federal governments and entities related to those governments. Required disclosure for government assistance transactions includes: 1) information about the nature of transactions and the related accounting policy used to account for the transactions; 2) the line items on the balance sheet and income statement that are affected by the transactions and the amounts applicable to each financial statement line item; and 3) significant terms and conditions of the transactions, including commitments and contingencies. | | Annual periods beginning January 1, 2022; early adoption is permitted. | | Either (1) prospectively to all transactions that are reflected in financial statements at the date of initial application and to all transactions that are entered into after adoption (2) retrospectively to those transactions | | Since this ASU is disclosure only, adoption will not have an impact on the financial statement results of SJI or SJG. Management is currently determining the impact that adoption of this guidance will have on the disclosures of SJI and SJG. |
| ASU 2021-08: Business Combinations (ASC 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers | | The amendments to ASC 805 in this ASU require an acquirer to account for revenue contracts acquired in a business combination in accordance with ASC 606 as if it had originated the contracts. The acquirer may assess how the acquiree applied ASC 606 to determine what to record for the acquired contracts. The standard also provides practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from a business combination. | | January 1, 2023; early adoption is permitted, including adoption in an interim period | | Prospectively to business combinations occurring on or after the effective date of the amendments | | These amendments have not yet been adopted and management is currently evaluating whether to adopt this amendment prior to the effective date. |
2. STOCK-BASED COMPENSATION PLAN:
Under SJI's Omnibus Equity Compensation Plan (Plan), shares, stock appreciation rights, and options may be issued to SJI’s officers (Officers), non-employee directors (Directors) and other key employees.
Grants to Officers and other key employees - SJI grants time-based shares of restricted stock, one-third of which vest annually over a three-year period and which are limited to a 100% payout. The vesting and payout of time-based shares of restricted stock is solely contingent upon the service requirement being met in years one, two, and three of the grant. SJI also grants performance-based restricted shares which vest over a three-year period and are subject to SJI achieving certain market or earnings-based performance targets, which can cause the actual amount of shares that ultimately vest to range from 0% to 200% of the original shares granted. During the nine months ended September 30, 2022 and 2021, SJI granted a total of 184,935 and 243,540 restricted shares, respectively, to Officers and other key employees under the Plan. No options were granted or outstanding during the nine months ended September 30, 2022 and 2021. No stock appreciation rights have been issued under the Plan.
Performance-based grants containing market-based performance targets use SJI's TSR relative to a peer group to measure performance. As these TSR-related performance-based grants are contingent upon market and service conditions, SJI is required to measure and recognize stock-based compensation expense based on the fair value at the date of grant on a straight-line basis over the requisite three-year period of each award. In addition, SJI identifies specific forfeitures of share-based awards, and compensation expense is adjusted accordingly over the requisite service period. Compensation expense is not adjusted based on the actual achievement of market goals. The fair value of TSR-related performance-based restricted stock awards on the date of grant is estimated using a Monte Carlo simulation model.
Performance-based grants containing earnings-based performance targets use pre-defined CEGR goals for SJI to measure performance. As CEGR-based grants are contingent upon performance and service conditions, SJI is required to measure and recognize stock-based compensation expense based on the fair value at the date of grant over the requisite three-year period of each award. The fair value is measured as the market price at the date of grant. The initial accruals of compensation expense are based on the estimated number of shares expected to vest, assuming the requisite service is rendered and probable outcome of the performance condition is achieved. That estimate is revised if subsequent information indicates that the actual number of shares is likely to differ from previous estimates. Compensation expense is ultimately adjusted based on the actual achievement of service and performance targets.
Grants to Directors - During the nine months ended September 30, 2022 and September 30, 2021, SJI granted 32,003 and 54,419 restricted shares, respectively, to its Directors. Shares issued to Directors vest over twelve months and contain no performance conditions. As a result, 100% of the shares granted generally vest.
The following table summarizes the nonvested restricted stock awards outstanding at September 30, 2022, and the assumptions used to estimate the fair value of the awards:
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| Grants | | Shares Outstanding | | Fair Value Per Share | | Expected Volatility | | Risk-Free Interest Rate |
| Officers & Key Employees - | 2020 - TSR | | 31,957 | | | $ | 25.51 | | | 34.8 | % | | 0.21 | % |
| 2020 - CEGR, Time | | 80,644 | | | $ | 25.19 | | | N/A | | N/A |
| 2021 - TSR | | 35,091 | | | $ | 28.11 | | | 39.9 | % | | 0.27 | % |
| 2021 - CEGR, Time | | 132,543 | | | $ | 25.33 | | | N/A | | N/A |
| 2022 - TSR | | 37,608 | | | $ | 35.05 | | | 43.5 | % | | 1.80 | % |
| 2022 - CEGR, Time | | 147,327 | | | $ | 35.05 | | | N/A | | N/A |
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| Directors - | 2022 | | 32,003 | | | $ | 33.90 | | | N/A | | N/A |
Expected volatility is based on the actual volatility of SJI’s share price over the preceding three-year period as of the valuation date. The risk-free interest rate is based on the zero-coupon U.S. Treasury Bond, with a term equal to the three-year term of the Officers’ and other key employees’ restricted shares. As notional dividend equivalents are credited to the holders during the three-year service period, no reduction to the fair value of the award is required. As the Directors’ restricted stock awards contain no performance conditions and dividends are paid or credited to the holder during the twelve month service period, the fair value of these awards is equal to the market value of the shares on the date of grant.
The following table summarizes the total stock-based compensation cost to SJI for the three and nine months ended September 30, 2022 and 2021 (in thousands):
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| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2022 | 2021 | | 2022 | | 2021 |
| Officers & Key Employees | $ | 1,317 | | $ | 1,123 | | | $ | 3,951 | | | $ | 3,804 | |
| Directors | (226) | | 317 | | | 45 | | | 561 | |
| Total Cost | 1,091 | | 1,440 | | | 3,996 | | | 4,365 | |
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| Capitalized | (246) | | (33) | | | (335) | | | (101) | |
| Net Expense | $ | 845 | | $ | 1,407 | | | $ | 3,661 | | | $ | 4,264 | |
As of September 30, 2022, there was $9.2 million of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.6 years.
The following table summarizes information regarding restricted stock award activity for SJI during the nine months ended September 30, 2022, excluding accrued dividend equivalents:
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| Officers and Other Key Employees | | Directors | | Weighted
Average
Fair Value |
| Nonvested Shares Outstanding, January 1, 2022 | 492,475 | | | 54,419 | | | $ | 26.72 | |
| Granted | 184,935 | | | 32,003 | | | $ | 34.88 | |
| Cancelled/Forfeited | (71,775) | | | — | | | $ | 28.53 | |
| Vested | (140,466) | | | (54,419) | | | $ | 27.48 | |
Nonvested Shares Outstanding, September 30, 2022 | 465,169 | | | 32,003 | | | $ | 29.72 | |
SJI has a policy of issuing new shares to satisfy its obligations under the Plan; therefore, there are no cash payment requirements resulting from the normal operation of the Plan. At the discretion of the Officers, Directors and other key employees, the receipt of vested shares can be deferred until future periods. These deferred shares are included in Treasury Stock on the condensed consolidated balance sheets.
A change in control could result in such shares becoming non-forfeitable or immediately payable in cash. At the Effective Time of the Merger, each share granted and outstanding under the Plan immediately before the Effective Time will be converted into the right to receive $36.00 in cash, without interest.
During the nine months ended September 30, 2022, SJI issued 128,238 shares to its Officers and other key employees at a market value of $3.5 million. During the nine months ended September 30, 2021, SJI issued 146,270 shares to its Officers and other key employees at a market value of $3.6 million. These issued shares include shares deferred for payout in prior periods.
SJG - Officers and other key employees of SJG participate in the stock-based compensation plans of SJI. During the nine months ended September 30, 2022 and 2021, there were 10,230 and 23,010 restricted shares, respectively (time-based and performance-based), granted to SJG officers and other key employees, which had an immaterial impact to SJG's financial statements for both periods.
3. AFFILIATIONS, DISCONTINUED OPERATIONS AND RELATED-PARTY TRANSACTIONS:
AFFILIATIONS — The following affiliated entities are accounted for under the equity method:
PennEast - Midstream has a 20% investment in PennEast. See Note 3 to the Consolidated Financial Statements in Item 8 of SJI's and SJG’s Annual Report on Form 10-K for the year ended December 31, 2021 for a timeline of events related to PennEast, including the determination by the PennEast partners that further development of the project is no longer supported, and thus all further development of the project has ceased. As a result of this determination, the Company recognized an other-than-temporary impairment charge of $87.4 million, which was recorded in Equity in Earnings (Losses) from Affiliates in the condensed consolidated statements of (loss)/income for the nine months ended September 30, 2021.
During the three and nine months ended September 30, 2022, PennEast sold certain project related assets and received refunds of interconnection fees from interstate pipelines. As a result, the PennEast board of managers approved cash distributions to members of the partnership totaling $1.5 million and $11.0 million per partner for the three and nine months ended September 30, 2022, respectively. The return of capital was received by the Company during the three and nine months ended September 30, 2022, and eliminated the remaining carrying value of its equity method investment in PennEast on the condensed consolidated balance sheet. As a result of these distributions, the Company recorded $1.5 million and $2.7 million to Other Income and Expense on the condensed consolidated statements of (loss)/income for the three and nine months ended September 30, 2022, respectively.
Energenic - Marina and a joint venture partner formed Energenic, in which Marina has a 50% equity interest. Energenic developed and operated on-site, self-contained, energy-related projects. Energenic currently does not have any projects that are operational; however, it owns cogeneration, long-lived assets for which Energenic had been pursuing project development opportunities. Marina has notes related to Energenic; such notes are secured by the cogeneration assets.
Energenic reviewed these cogeneration assets for impairment as of September 30, 2022, as a determination was made to sell the assets. The impairment assessment was performed in accordance with ASC 360, Property, Plant and Equipment, and included consideration of an offered sales price of the equipment. As a result, Energenic recorded an impairment charge of $2.2 million, of which Marina recorded its 50% equity interest, or $1.1 million, which was recorded in Equity in (Losses) Earnings of Affiliated Companies on the condensed consolidated statements of (loss)/income for the three and nine months ended September 30, 2022. This loss reduced the Notes Receivable – Affiliate balance on the condensed consolidated balance sheets as our investment in the Energenic affiliate had been reduced to zero as a result of previous losses.
See Note 3 to the Consolidated Financial Statements in Item 8 of SJI's and SJG’s Annual Report on Form 10-K for the year ended December 31, 2021 for more information regarding these assets and notes, including the impairment charge recorded in the fourth quarter of 2021 due to a determination that future development of a project was no longer probable.
Millennium - SJI and a joint venture partner formed Millennium, in which SJI has a 50% equity interest. Millennium reads utility customers’ meters on a monthly basis for a fee.
Potato Creek - SJI and a joint venture partner formed Potato Creek, in which SJEX has a 30% equity interest. Potato Creek owns and manages the oil, gas and mineral rights of certain real estate in Pennsylvania.
EnergyMark - SJE has a 33% investment in EnergyMark, an entity that acquires and markets natural gas to retail end users.
SJRG had net sales to EnergyMark of $8.2 million and $5.0 million for the three months ended September 30, 2022 and 2021, respectively, and $28.2 million and $15.9 million for the nine months ended September 30, 2022 and 2021, respectively.
REV - SJI Renewable Energy Ventures, LLC has a 35% equity interest in REV, an LNG distributor and developer of LNG and RNG assets and projects.
SJI made payments to REV of $11.2 million and $24.6 million during the three and nine months ended September 30, 2022, respectively, for services performed for SJI RNG Devco related to the development of renewable natural gas facilities at dairy farms; these costs do not include the notes to REV discussed below. Payments during the three and nine months ended September 30, 2021 were not material.
Red River - SJI RNG Devco, LLC has an 80% equity interest in Red River, an entity that processes raw biogas derived from agricultural feedstock into renewable biomethane for pipeline injection. In 2022, SJI invested $55.7 million into the Red River joint venture.
AFFILIATE TRANSACTIONS - SJI made net investments in and net advances to unconsolidated affiliates of $94.8 million and $39.8 million for the nine months ended September 30, 2022 and 2021, respectively.
As of September 30, 2022 and December 31, 2021, the outstanding balance of Notes Receivable – Affiliates was $99.4 million and $69.9 million, respectively. These Notes Receivable-Affiliates balances are comprised of:
•As of September 30, 2022 and December 31, 2021, $93.4 million and $62.6 million, respectively, of the notes are related to REV, which accrue interest at variable rates.
•As of September 30, 2022 and December 31, 2021, $0.8 million and $2.0 million, respectively, of the notes are related to Energenic, after the impairments discussed above. Such notes are secured by Energenic's cogeneration assets for energy service projects and are to be repaid through 2025, although the Company does not expect to realize amounts above its share of the remaining fair value of Energenic's cogeneration assets, and thus the Company does not accrue interest. Current losses at Energenic have been offset against the Notes Receivable – Affiliates balance in recent years as our investment in the Energenic affiliate has been reduced to zero as a result of previous losses.
•As of September 30, 2022 and December 31, 2021, $5.2 million and $5.3 million, respectively, of unsecured notes which accrue interest at variable rates.
SJI holds significant variable interests in these entities but is not the primary beneficiary. Consequently, these entities are accounted for under the equity method because SJI does not have both (a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity. As of September 30, 2022 and December 31, 2021, SJI had a net asset of approximately $105.5 million and $38.5 million, respectively, included in Investment in Affiliates on the condensed consolidated balance sheets related to equity method investees. SJI’s maximum exposure to loss from these entities as of September 30, 2022 and December 31, 2021 is limited to its combined investments in these entities, which includes related Notes Receivable-Affiliates, in the aggregate amount of $204.9 million and $108.5 million, respectively.
DISCONTINUED OPERATIONS - There have been no significant changes to the nature or balances of SJI's discontinued operations since December 31, 2021, which are defined and described in Note 3 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2021.
GUARANTEES - SJI has issued guarantees to third parties on behalf of its consolidated subsidiaries. See Note 11.
SJI RELATED-PARTY TRANSACTIONS - On April 1, 2022, SJRG and ETG entered into an AMA whereby SJRG manages the pipeline capacity of ETG. This AMA expires on March 31, 2024. Under the AMA, SJRG pays ETG an annual fee of $3.6 million, plus additional profit sharing as defined in the AMA. The amounts received by ETG will be credited to its BGSS clause and returned to its ratepayers.
SJG RELATED-PARTY TRANSACTIONS - There have been no significant changes in the nature of SJG’s related-party transactions since December 31, 2021. See Note 3 to the Consolidated Financial Statements in Item 8 of SJI's and SJG’s Annual Report on Form 10-K for the year ended December 31, 2021 for a description of related parties and associated transactions.
A summary of related-party transactions involving SJG, excluding pass-through items, included in SJG's Operating Revenues were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Operating Revenues/Affiliates: | | | | | | | |
| SJRG | $ | 7,613 | | | $ | 907 | | | $ | 18,726 | | | 7,662 | |
| Other | 21 | | | 21 | | | 63 | | | 62 | |
| Total Operating Revenues/Affiliates | $ | 7,634 | | | $ | 928 | | | $ | 18,789 | | | $ | 7,724 | |
Related-party transactions involving SJG, excluding pass-through items, included in SJG's Cost of Sales and Operating Expenses were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Costs of Sales/Affiliates (Excluding depreciation and amortization) | | | | | | | |
| SJRG | $ | 20 | | | $ | 954 | | | $ | 136 | | | $ | 4,924 | |
| | | | | | | |
| Operations Expense/Affiliates: | | | | | | | |
| SJI (parent company only) | $ | 6,294 | | | $ | 5,832 | | | $ | 19,390 | | | $ | 17,082 | |
| SJIU | 1,259 | | | 1,045 | | | 3,469 | | | 2,957 | |
| Millennium | 910 | | | 857 | | | 2,772 | | | 2,598 | |
| Other | 17 | | | 18 | | | 57 | | | 163 | |
| Total Operations Expense/Affiliates | $ | 8,480 | | | $ | 7,752 | | | $ | 25,688 | | | $ | 22,800 | |
4. COMMON STOCK:
The following shares were issued and outstanding for SJI:
| | | | | |
| | 2022 |
| Beginning Balance, January 1 | 117,340,493 | |
| New Issuances During the Period: | |
| Settlement of Equity Forward Sale Agreement | 4,996,062 | |
| Stock-Based Compensation Plan | 128,238 | |
| Ending Balance, September 30 | 122,464,793 | |
The par value ($1.25 per share) of stock issued was recorded in Common Stock and the net excess over par value was recorded in Premium on Common Stock.
There were 2,339,139 shares of SJG's common stock (par value $2.50 per share) outstanding as of September 30, 2022. SJG did not issue any new shares during the period. SJIU owns all of the outstanding common stock of SJG.
On March 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, with 1,899,859 shares issued in March 2021. 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 ended December 31, 2021 for a description of this transaction and the additional issuances that occurred in 2021. On March 18, 2022, the remaining 4,996,062 forward shares were issued under the forward sale agreement for proceeds of $100.4 million, net of issuance fees that were not material. 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.
At the Effective Time of the Merger, SJI's common stock outstanding immediately before the Effective Time will be converted into the right to receive $36.00 in cash, without interest.
EQUITY AND CONVERTIBLE UNITS - 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 ended December 31, 2021 for a description of the issuances of equity units that occurred in March 2021.
Total interest recorded related to the equity units during the three and nine months ended September 30, 2022 was $0.2 million and $0.6 million, respectively, related to the contract adjustment liabilities to the holders of the equity units and is recorded within Interest Charges on the condensed consolidated statements of (loss)/income. The contract adjustment liabilities are recorded in Other Current and Noncurrent Liabilities on the condensed consolidated balance sheet and were $23.8 million and $17.5 million, respectively, as of September 30, 2022, and $23.8 million and $34.6 million, respectively, as of December 31, 2021.
The convertible units consist of the following (in thousands):
| | | | | | | | | | | | |
| September 30, 2022 | December 31, 2021 |
| Principal amount: | 2021 Series B Remarketable Junior Subordinated Notes due 2029 |
| Principal (A) | $ | 335,000 | | | | $ | 335,000 | |
| Unamortized debt discount and issuance costs (A) | 8,190 | | | | 9,110 | |
| Net carrying amount | $ | 326,810 | | | | $ | 325,890 | |
| Carrying amount of the equity component (B) | $ | — | | | | $ | — | |
(A) Included in the condensed consolidated balance sheets within Long-Term Debt.
(B) There is no equity portion as of September 30, 2022 and December 31, 2021 for these Notes.
During both the three months ended September 30, 2022 and 2021, the Company recognized $5.0 million of coupon interest expense, and during the nine months ended September 30, 2022 and 2021, the Company recognized $14.9 million and $12.8 million, respectively, of coupon interest expense, all of which was included in Interest Charges on the condensed consolidated statements of (loss)/income. During those periods, the amortization of debt discount and issuance costs was not material. As of September 30, 2022, the effective interest rate was 2.1% on these Notes.
SJI's EPS — SJI's basic EPS is based on the weighted-average number of common shares outstanding. SJI's diluted EPS includes consideration of the effect of SJI's restricted stock as discussed in Note 2, along with the impact of the Equity Units and Convertible Units discussed above, accounted for under the treasury stock method. For the nine months ended September 30, 2022 and 2021, the shares required for inclusion in the denominator for the diluted EPS calculation were 2,848,163 and 1,481,770, respectively. For the three months ended September 30, 2022 and 2021, shares of 3,345,989 and 1,469,623, respectively, were not included in the denominator for the diluted EPS calculation because they would have had an antidilutive effect on EPS.
DRP — SJI offers a DRP which allows participating shareholders to purchase shares of SJI common stock by automatic reinvestment of dividends or optional purchases. SJI currently purchases shares on the open market to fund share purchases by DRP participants, and as a result SJI did not raise any equity capital through the DRP in the first nine months of 2022 or 2021.
RETAINED EARNINGS — The Utilities are limited by their regulatory authorities on the amount of cash dividends or other distributions they are able to transfer to their parent, specifically if such dividends or other distributions could impact their capital structure. In addition, SJG's First Mortgage Indentures contain a restriction regarding the amount of cash dividends or other distributions that they may pay. As of September 30, 2022, this loan restriction did not affect the amount that may be distributed from SJG's retained earnings.
5. FINANCIAL INSTRUMENTS:
RESTRICTED INVESTMENTS — SJI and SJG maintain margin accounts with certain counterparties to support their risk management activities associated with hedging commodities. The balances required to be held in these margin accounts increase as the net value of the outstanding energy-related contracts with the respective counterparties decrease.
The following table provides SJI's (including SJG) and SJG's balances of Restricted Investments as well as presents a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that total to the amounts shown in the condensed consolidated statements of cash flows (in thousands):
| | | | | | | | | | | |
| | | |
| | September 30, 2022 |
| Balance Sheet Line Item | | SJI | SJG |
| Cash and Cash Equivalents | | $ | 52,763 | | $ | 1,331 | |
| Restricted Investments | | 775 | | 725 | |
| Total cash, cash equivalents and restricted cash shown in the statement of cash flows | | $ | 53,538 | | $ | 2,056 | |
| | | | | | | | | | | |
| | December 31, 2021 |
| Balance Sheet Line Item | | SJI | SJG |
| Cash and Cash Equivalents | | $ | 28,754 | | $ | 3,360 | |
| Restricted Investments | | 686 | | 686 | |
| Total cash, cash equivalents and restricted cash shown in the statement of cash flows | | $ | 29,440 | | $ | 4,046 | |
The carrying amounts of the Restricted Investments for both SJI and SJG approximate their fair values at September 30, 2022 and December 31, 2021, which would be included in Level 1 of the fair value hierarchy (see Note 13).
ALLOWANCE FOR CREDIT LOSSES - Accounts receivable and unbilled revenues are recorded gross on the condensed consolidated balance sheets with allowance for credit losses shown as a separate line item titled Provision for Uncollectibles. A summary of changes in the allowance for credit losses for the three and nine months ended September 30, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| SJI (includes SJG and all other consolidated subsidiaries): | | | | | | | |
| Balance at beginning of period | $ | 50,876 | | | $ | 42,233 | | | $ | 41,763 | | | $ | 30,582 | |
| Provision for expected credit losses | 2,435 | | | 2,375 | | | 7,355 | | | 7,621 | |
| Regulated assets (a) | (5,863) | | | (293) | | | 815 | | | 8,982 | |
| Recoveries of accounts previously written off | 326 | | | 414 | | | 1,324 | | | 772 | |
| Uncollectible accounts written off | (3,367) | | | (1,664) | | | (6,850) | | | (4,892) | |
| Balance at end of period | $ | 44,407 | | | $ | 43,065 | | | $ | 44,407 | | | $ | 43,065 | |
| | | | | | | |
| SJG: | | | | | | | |
| Balance at beginning of period | $ | 29,791 | | | $ | 21,706 | | | $ | 25,166 | | | $ | 17,359 | |
| Provision for expected credit losses | 1,816 | | | 1,411 | | | 5,499 | | | 5,529 | |
| Regulated assets (a) | (1,598) | | | 1,059 | | | (44) | | | 3,030 | |
| Recoveries of accounts previously written off | 156 | | | 400 | | | 814 | | | 503 | |
| Uncollectible accounts written off | (1,200) | | | (702) | | | (2,470) | | | (2,547) | |
| Balance at end of period | $ | 28,965 | | | $ | 23,874 | | | $ | 28,965 | | | $ | 23,874 | |
(a) Net change in COVID-19 pandemic incremental expected credit losses from uncollectible accounts deferred as a regulatory asset, resulting from a July 2, 2020 BPU Order (see Note 8).
NOTES RECEIVABLE-AFFILIATES - The carrying amounts of the Note Receivable - Affiliates balances approximate their fair values at September 30, 2022 and December 31, 2021, which would be included in Level 2 of the fair value hierarchy. See Note 3 for information about these balances and Note 13 for information about the fair value hierarchy.
CONTRACT RECEIVABLES - SJG provides financing to customers for the purpose of attracting conversions to natural gas heating systems from competing fuel sources. The terms of these loans call for customers to make monthly payments over periods ranging from three to five years, with no interest. The carrying amounts of such loans were $1.3 million and $1.7 million as of September 30, 2022 and December 31, 2021, respectively. The current portion of these receivables is reflected in Accounts Receivable and the non-current portion is reflected in Contract Receivables on the condensed consolidated balance sheets. The carrying amounts noted above are net of unamortized discounts resulting from imputed interest. The amount of such discounts and the annualized amortization to interest is not material to SJI's or SJG's consolidated financial statements.
In addition, as part of the EET program, SJG and ETG provide funding to customers to upgrade equipment for the purpose of promoting energy efficiency. The terms of these loans range from two to ten years. The carrying amounts of such loans for SJG were $62.7 million and $55.4 million as of September 30, 2022 and December 31, 2021, respectively. The carrying amounts of such loans for ETG were not material at September 30, 2022 and December 31, 2021. On the condensed consolidated balance sheets of SJG, the current portion of EET loans receivable totaled $12.1 million and $11.1 million as of September 30, 2022 and December 31, 2021, respectively, and is reflected in Accounts Receivable; and the non-current portion totaled $50.6 million and $44.3 million as of September 30, 2022 and December 31, 2021, respectively, and is reflected in Contract Receivables. Given the risk of uncollectibility is low due to the oversight and preapproval required by the BPU, no allowance for credit loss has been recognized on the above-mentioned receivables.
There have been no material impacts to this risk of uncollectibility as a result of COVID-19.
The carrying amounts of these receivables approximate their fair value at September 30, 2022 and December 31, 2021, which would be included in Level 2 of the fair value hierarchy (see Note 13).
CREDIT RISK - As of September 30, 2022, there were no individual counterparties that totaled more than five percent of SJI's current and noncurrent Derivatives - Energy Related Assets.
FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE - The fair value of a financial instrument is the market price to sell an asset or transfer a liability at the measurement date. The carrying amounts of SJI's and SJG's financial instruments approximate their fair values at September 30, 2022 and December 31, 2021, except as noted below (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| SJI (includes SJG and all consolidated entities) | | | |
| Estimated fair values of long-term debt | $ | 3,282,165 | | | $ | 3,653,868 | |
| | | |
| Carrying amounts of long-term debt, including current maturities (A) | $ | 3,597,838 | | | $ | 3,255,085 | |
| Net of: | | | |
| Unamortized debt issuance costs | $ | 37,673 | | | $ | 38,462 | |
| Unamortized debt discounts | $ | 5,068 | | | $ | 5,135 | |
| | | |
| SJG | | | |
| Estimated fair values of long-term debt | $ | 888,073 | | | $ | 1,171,657 | |
| | | |
| Carrying amounts of long-term debt, including current maturities | $ | 1,019,145 | | | $ | 1,041,811 | |
| Net of: | | | |
| Unamortized debt issuance costs | $ | 8,217 | | | $ | 8,726 | |
(A) SJI Long-Term Debt on the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021 includes $5.7 million and $5.6 million of finance leases, respectively.
For Long-Term Debt (including current maturities), in estimating the fair value, SJI and SJG use the present value of remaining cash flows at the balance sheet date. SJI and SJG based the estimates on interest rates available at the end of each period for debt with similar terms and maturities (Level 2 in the fair value hierarchy, see Note 13).
6. SEGMENTS OF BUSINESS:
ASC 280, Segment Reporting, establishes standards for reporting information about operating segments and requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the CODM in deciding how to allocate resources and in assessing performance.
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 southern New Jersey.
•ETG utility operations consist primarily of natural gas distribution to residential, commercial and industrial customers in northern and central New 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 in Massachusetts.
◦Solar-generation sites located in New 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 the Red River joint venture that was formed in March 2022.
•Midstream invests in infrastructure and other midstream projects, including an investment in PennEast for which development ceased in September 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. See Note 1.
Information about SJI’s operations in different reportable operating segments is presented below (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Operating Revenues: | | | | | | | |
| SJI Utilities: | | | | | | | |
| SJG Utility Operations | $ | 112,720 | | | $ | 69,958 | | | $ | 557,585 | | | $ | 412,572 | |
| ETG Utility Operations | 42,155 | | | 37,072 | | | 279,733 | | | 248,098 | |
| Subtotal SJI Utilities | 154,875 | | | 107,030 | | | 837,318 | | | 660,670 | |
| Energy Management: | | | | | | | |
| Wholesale Energy Operations | 452,130 | | | 247,402 | | | 1,103,106 | | | 669,067 | |
| Retail Services | 1,919 | | | 5,360 | | | 5,759 | | | 13,382 | |
| Subtotal Energy Management | 454,049 | | | 252,762 | | | 1,108,865 | | | 682,449 | |
| Energy Production: | | | | | | | |
| Renewables | 7,409 | | | 7,352 | | | 18,321 | | | 17,980 | |
| Decarbonization | — | | | — | | | — | | | — | |
| Subtotal Energy Production | 7,409 | | | 7,352 | | | 18,321 | | | 17,980 | |
| Corporate and Services | 15,102 | | | 13,577 | | | 46,798 | | | 39,416 | |
| Subtotal | 631,435 | | | 380,721 | | | 2,011,302 | | | 1,400,515 | |
| Intersegment Sales | (22,917) | | | (15,090) | | | (66,775) | | | (48,756) | |
| Total Operating Revenues | $ | 608,518 | | | $ | 365,631 | | | $ | 1,944,527 | | | $ | 1,351,759 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Operating (Loss) Income: | | | | | | | |
| SJI Utilities: | | | | | | | |
| SJG Utility Operations | $ | (2,741) | | | $ | (1,961) | | | $ | 137,787 | | | $ | 133,350 | |
| ETG Utility Operations | (12,262) | | | 5,634 | | | 49,523 | | | 66,521 | |
| Subtotal SJI Utilities | (15,003) | | | 3,673 | | | 187,310 | | | 199,871 | |
| Energy Management: | | | | | | | |
| Wholesale Energy Operations | 21,551 | | | (15,534) | | | 7,326 | | | (5,393) | |
| Retail Services | 680 | | | 849 | | | 1,778 | | | 763 | |
| Subtotal Energy Management | 22,231 | | | (14,685) | | | 9,104 | | | (4,630) | |
| Energy Production: | | | | | | | |
| Renewables | 1,240 | | | 1,787 | | | 2,252 | | | 4,920 | |
| Decarbonization | (257) | | | (63) | | | (1,015) | | | (71) | |
| Subtotal Energy Production | 983 | | | 1,724 | | | 1,237 | | | 4,849 | |
| Corporate and Services | (4,028) | | | 315 | | | (7,014) | | | (626) | |
| Total Operating (Loss) Income | $ | 4,183 | | | $ | (8,973) | | | $ | 190,637 | | | $ | 199,464 | |
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September 30, | | Nine Months Ended
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| | 2022 | | 2021 | | 2022 | | 2021 |
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| SJI Utilities: | | | | | | | |
| SJG Utility Operations | $ | 70,100 | | | $ | 64,988 | | | $ | 177,099 | | | $ | 186,948 | |
| ETG Utility Operations | 72,340 | | | 58,923 | | | 182,197 | | | 158,953 | |
| Subtotal SJI Utilities | 142,440 | | | 123,911 | | | 359,296 | | | 345,901 | |
| Energy Management: | | | | | | | |
| Wholesale Energy Operations | 23 | | | 4 | | | (11) | | | 6 | |
| Retail Services | — | | | — | | | — | | | — | |
| Subtotal Energy Management | 23 | | | 4 | | | (11) | | | 6 | |
| Energy Production: | | | | | | | |
| Renewables | 23,317 | | | 6,471 | | | 34,174 | | | 24,458 | |
| Decarbonization | 54,283 | | | 8,140 | | | 93,399 | | | 10,014 | |
| Subtotal Energy Production | 77,600 | | | 14,611 | | | 127,573 | | | 34,472 | |
| Midstream | — | | | 11 | | | — | | | 19 | |
| Corporate and Services | 1,242 | | | 747 | | | 3,562 | | | 3,105 | |
| Total Property Additions | $ | 221,305 | | | $ | 139,284 | | | $ | 490,420 | | | $ | 383,503 | |
| | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| Identifiable Assets: | | | |
| SJI Utilities: | | | |
| SJG Utility Operations | $ | 3,857,493 | | | $ | 3,767,897 | |
| ETG Utility Operations | 2,956,797 | | | 2,788,465 | |
| | | |
| Subtotal SJI Utilities | 6,814,290 | | | 6,556,362 | |
| Energy Management: | | | |
| Wholesale Energy Operations | 400,963 | | | 278,995 | |
| | | |
| Retail Services | 23,008 | | | 25,741 | |
| Subtotal Energy Management | 423,971 | | | 304,736 | |
| Energy Production: | | | |
| Renewables | 222,895 | | | 195,791 | |
| Decarbonization | 306,816 | | | 138,787 | |
| | | |
| Subtotal Energy Production | 529,711 | | | 334,578 | |
| Midstream | — | | | 8,970 | |
| Discontinued Operations | 27 | | | 47 | |
| Corporate and Services | 508,817 | | | 370,899 | |
| Intersegment Assets | (358,868) | | | (266,920) | |
| Total Identifiable Assets | $ | 7,917,948 | | | $ | 7,308,672 | |
7. RATES AND REGULATORY ACTIONS:
SJG and ETG are subject to the rules and regulations of the BPU.
Except as described below, there have been no significant regulatory actions or changes to the Utilities' rate structures since December 31, 2021. See Note 10 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2021.
SJG:
Effective January 1, 2022, the BPU approved the Company's June 2021 AIRP II petition, to roll into base rates $69.0 million of investments placed into service during the period of July 1, 2020 through September 30, 2021. The result was an increase in annual revenue of $6.7 million.
In the first quarter of 2022:
•The BPU issued an Order resolving SJG's 2021-2022 Tax Act Rider petition, with a revised Rider H credit rate effective April 1, 2022 in order to refund approximately $11.7 million for the period beginning October 1, 2021 and ending September 30, 2022.
•The BPU approved a decrease in SJG's EET rate effective April 1, 2022, reflecting a $1.1 million decrease in annual revenues related to the recovery of costs of energy efficiency programs.
In April 2022, SJG filed a petition with the BPU requesting a base rate revenue increase of $73.1 million, which was updated in September 2022 to a requested $82.3 million, primarily to obtain a return on and of new capital investments made by SJG since the settlement of its last base rate case in 2020. The matter is currently pending BPU approval.
In May 2022, the BPU approved an increase in SJG's SBC and TIC rates, effective June 1, 2022, reflecting a $0.8 million increase in annual revenues related to the recovery of costs of SJG's societal benefit programs.
In November 2020, SJG filed a petition with the BPU, seeking authority to implement an IIP pursuant to which SJG would recover the costs associated with SJG's planned initial investment of approximately $742.5 million from 2021-2026 to, among other things, replace its at-risk plastic and coated steel mains, as well as excess flow valves on new service lines, and related services. In June 2022, the BPU approved a 5-year $200 million program with an effective date of July 1, 2022.
In July 2022, the provisional rates approved by the BPU in November 2021 for SJG's 2021-2022 BGSS/CIP filing were made final, effective August 1, 2022.
In September 2022, the BPU approved provisional rates for SJG's 2022-2023 BGSS/CIP filing submitted in June 2022, with effective dates of October 1, 2022. These rates reflect a $85.7 million increase in gas cost recoveries associated with the BGSS component and a $5.6 million increase in annual revenues for the CIP component.
In September 2022, the BPU approved decreases to the statewide USF and Lifeline rates, with effective dates of October 1, 2022, resulting in an approximately $1.2 million decrease for SJG.
The following activity outside of the base rate revenue petition described above is currently pending BPU approval:
•SJG submitted its annual filing associated with the Tax Cuts and Jobs Act of 2017 in June 2022, which proposed a $9.5 million refund to customers through the Rider H credit rate for the period of October 1, 2022 through September 30, 2023.
•SJG submitted its annual EET filing in July 2022, requesting a $4.8 million decrease in annual revenues related to the recovery of the costs of its energy efficiency programs, with a proposed effective date of October 1, 2022.
•SJG submitted its annual SBC and TIC filing in July 2022, requesting a $1.8 million increase in annual revenues related to the recovery of costs of SJG's societal benefits programs and electronic data interchange development and operating costs, with a proposed effective date of November 1, 2022.
ETG:
In the first quarter of 2022:
•Provisional rates approved by the BPU in September 2021 for ETG's 2021-2022 WNC and CEP filing were made final, effective February 25, 2022.
•The provisional rate approved by the BPU in November 2021 for ETG's 2021-2022 BGSS-P rate was made final, effective March 30, 2022.
•The BPU approved a decrease in ETG's EEP rate, effective March 1, 2022, reflecting a $1.6 million decrease in annual revenues related to the recovery of costs of energy efficiency programs.
In June 2022, the provisional rates approved by the BPU in November 2021 for ETG's 2021-2022 RAC filing were made final, effective July 1, 2022.
In August 2022, the BPU approved the settlement of ETG's rate case petition, resulting in an increase in annual revenues from base rates effective September 1, 2022 of $40.0 million, including an approved after-tax rate of return of 6.8%, with a return on equity of 9.6% and a common equity component of 52.0%.
In September 2022, the BPU approved provisional rates for ETG's BGSS/CIP filing submitted in June 2022 with effective dates of October 1, 2022. These rates reflect a $57.4 million increase in gas cost recoveries associated with the BGSS component and a $2.2 million net increase in annual revenues for the CIP component.
In September 2022, the BPU approved a provisional rate for ETG's CEP filing submitted in July 2022, effective October 1, 2022, resulting in a decrease of $0.8 million in revenues.
In September 2022, the BPU approved decreases to the statewide USF and Lifeline rates, with effective dates of October 1, 2022, resulting in an approximate $1.1 million revenue decrease for ETG.
In September 2022, the BPU approved the increases to IIP rates effective October 1, 2022. This approval reflected an increase to annual revenues of approximately $6.3 million to reflect the roll-in of approximately $57.7 million of IIP investments placed in service from July 1, 2021 through June 30, 2022.
The following activity is currently pending BPU approval:
•ETG submitted its annual RAC filing in July 2022, requesting a $5.1 million increase in revenue related to the recovery of remediation costs, with a proposed effective date of October 1, 2022.
•ETG submitted its annual filing for its EEP programs in July 2022, requesting a $0.1 million decrease in revenues, with a proposed effective date of October 1, 2022.
8. REGULATORY ASSETS AND REGULATORY LIABILITIES:
Except as described below, there have been no significant changes to the nature or balances of the Utilities' regulatory assets and liabilities since December 31, 2021, which are described in Note 11 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2021.
The Utilities' Regulatory Assets as of September 30, 2022 and December 31, 2021 consisted of the following items (in thousands): | | | | | | | | | | | |
| September 30, 2022 |
| SJG | ETG | Total SJI |
| Environmental Remediation Costs: | | | |
| Expended - Net | $ | 150,189 | | $ | 24,268 | | $ | 174,457 | |
| Liability for Future Expenditures | 97,492 | | 75,443 | | 172,935 | |
| Deferred ARO Costs | 52,395 | | 37,910 | | 90,305 | |
| Deferred Pension and Other Postretirement Benefit Costs - Unrecognized Prior Service Cost | — | | 28,438 | | 28,438 | |
| Deferred Pension and Other Postretirement Benefit Costs | 47,504 | | 611 | | 48,115 | |
| Deferred Gas Costs - Net | 16,217 | | — | | 16,217 | |
| CIP Receivable | 11,053 | | 3,884 | | 14,937 | |
| SBC Receivable (excluding RAC) | 7,308 | | 551 | | 7,859 | |
| Deferred Interest Rate Contracts | 2,861 | | — | | 2,861 | |
| EET/EEP | 24,464 | | 7,657 | | 32,121 | |
| AFUDC - Equity Related Deferrals | 12,675 | | — | | 12,675 | |
| | | |
| Deferred COVID-19 Costs | 7,791 | | 11,625 | | 19,416 | |
| Other Regulatory Assets | 23,319 | | 2,694 | | 26,013 | |
| Total Regulatory Assets | $ | 453,268 | | $ | 193,081 | | $ | 646,349 | |
| | | | | | | | | | | |
| December 31, 2021 |
| SJG | ETG | Total SJI |
| Environmental Remediation Costs: | | | |
| Expended - Net | $ | 151,630 | | $ | 13,972 | | $ | 165,602 | |
| Liability for Future Expenditures | 97,964 | | 77,830 | | 175,794 | |
| Deferred ARO Costs | 47,784 | | 33,872 | | 81,656 | |
| Deferred Pension and Other Postretirement Benefit Costs - Unrecognized Prior Service Cost | — | | 30,881 | | 30,881 | |
| Deferred Pension and Other Postretirement Benefit Costs | 47,504 | | 813 | | 48,317 | |
| Deferred Gas Costs - Net | 38,234 | | — | | 38,234 | |
| CIP Receivable | 17,776 | | 2,955 | | 20,731 | |
| SBC Receivable (excluding RAC) | 7,519 | | — | | 7,519 | |
| Deferred Interest Rate Contracts | 8,002 | | — | | 8,002 | |
| EET/EEP | 20,632 | | 5,199 | | 25,831 | |
| AFUDC - Equity Related Deferrals | 12,199 | | — | | 12,199 | |
| WNC | — | | 4,269 | | 4,269 | |
| Deferred COVID-19 Costs | 7,687 | | 10,225 | | 17,912 | |
| Other Regulatory Assets | 25,814 | | 9,655 | | 35,469 | |
| | | |
| Total Regulatory Assets | $ | 482,745 | | $ | 189,671 | | $ | 672,416 | |
Except where noted below, all regulatory assets are or are expected to be recovered through utility rate charges, as detailed in the following discussion. The Utilities are currently permitted to recover interest on Environmental Remediation Costs, SBC Receivable, and EET/EEP, while the other assets are being recovered without a return on investment.
ENVIRONMENTAL REMEDIATION COSTS - SJG and ETG have regulatory assets associated with environmental costs related to the cleanup of environmental sites as discussed in Note 15 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2021. The BPU allows SJG and ETG to recover the deferred costs not recovered from insurance carriers through their RAC mechanisms over seven-year periods after the costs are incurred.
DEFERRED ARO COSTS - The Utilities record AROs primarily related to the legal obligation to cut and cap gas distribution pipelines when taking those pipelines out of service. Deferred ARO costs represent the period to period passage of time (accretion) and depreciation of the underlying ARO asset. The Deferred ARO Costs regulatory asset increased due to both accretion and depreciation. There is no impact on earnings as a result of these changes.
DEFERRED GAS COSTS - NET - Over/under collections of gas costs are monitored through SJG's and ETG's BGSS clause. Included in SJG's balance as of September 30, 2022 and December 31, 2021 is $15.1 million and $21.3 million, respectively, of costs related to a previous pricing dispute on a long-term gas supply contract. As of June 1, 2021, SJG has begun to recover these costs from its customers through the BGSS clause. SJG’s "Deferred Gas Costs - Net" are in an under-recovered position, resulting in a regulatory asset as of both September 30, 2022 and December 31, 2021. The decrease in this asset is primarily due to the recoveries from customers exceeding the actual gas commodity costs and changes in valuations of hedged natural gas positions. ETG's Deferred Gas Costs-Net are in an over-recovered position, resulting in a regulatory liability as of September 30, 2022 and December 31, 2021, see the Regulatory Liabilities table below.
CIP RECEIVABLE - The CIP tracking mechanism at SJG and ETG adjusts earnings when the actual usage per customer experienced during the period varies from an established baseline usage per customer. For SJG, actual usage per customer was more than the established baseline during the first nine months of 2022, resulting in a reduction of the regulatory asset at September 30, 2022 as compared to December 31, 2021. For ETG, actual usage per customer was less than the established baseline during the first nine months of 2022, resulting in an increase of the regulatory asset at September 30, 2022. As noted in Note 7, ETG began recovering against the CIP deferred regulatory asset on October 1, 2022.
DEFERRED INTEREST RATE CONTRACTS - These amounts represent the net unrealized gains or losses of interest rate derivatives as discussed further in Note 12.
EET/EEP - The EET/EEP Regulatory Assets of SJG and ETG increased from December 31, 2021 to September 30, 2022 primarily due to expenditures in excess of recoveries as well as investments in the new EEP.
WNC - The tariffs for ETG included a weather normalization clause that reduced customer bills when weather was colder than normal and increased customer bills when weather was warmer than normal. The WNC deferral ended May 31, 2021 and was replaced by the CIP effective July 1, 2021. As such, the WNC program is no longer active. The remaining under-recovered WNC deferral balance is inconsequential and is presented with the CIP.
DEFERRED COVID-19 COSTS - On July 2, 2020, the BPU issued an Order authorizing New Jersey's regulated utilities to create a COVID-19-related regulatory asset by deferring on their books and records the prudently incurred incremental costs related to COVID-19 beginning on March 9, 2020 and continuing through September 30, 2021, or 60 days after the termination of the public health emergency, whichever is later. On September 14, 2021, the BPU extended this period to December 31, 2022. The Company is required to file quarterly reports with the BPU, along with a petition of recovery of such incremental costs with the BPU by December 31, 2022 or within 60 days of the close of the tracking period, whichever is later. The deferred balance is principally related to expected credit losses from uncollectibles as a result of the COVID-19 pandemic, specifically related to changes in payment patterns observed to date and consideration of macroeconomic factors. We have deemed these costs to be probable of recovery. As of September 30, 2022 and December 31, 2021, ETG deferred $11.6 million and $10.2 million, respectively, and SJG deferred $7.8 million and $7.7 million, respectively, principally related to changes in payment patterns observed to date and consideration of macroeconomic factors. The Utilities continued the suspension of disconnects for nonpayment by our customers, based on an executive order issued by the Governor of New Jersey in 2020, in which water, gas and electricity providers were barred from cutting services to New Jersey residents. On June 14, 2021, the Governor ended the shutoff moratorium effective July 1, 2021, but established a grace period that ran through the end of 2021. In December 2021, the Governor extended this grace period to March 15, 2022. During the grace period, disconnections for residential customers for nonpayment were prohibited, and low and moderate income households had until March 15, 2022 to work out how to pay back any outstanding bills. On March 25, 2022, the BPU approved an order which amended the existing customer bill of rights. These amendments require the Company to continue service for customers who submitted an application for State-administered utility assistance programs prior to June 15, 2022. The Company is required to continue service through the date that the application is either approved or rejected by the respective State agency.
OTHER REGULATORY ASSETS - The Other Regulatory Asset balance decreased from December 31, 2021 to September 30, 2022 primarily due to the write-off of an ETG regulatory asset which consisted of certain non-functioning property, plant, and equipment costs which was determined to no longer be probable of recovery (see Note 1).
The Utilities' Regulatory Liabilities as of September 30, 2022 and December 31, 2021 consisted of the following items (in thousands):
| | | | | | | | | | | |
| September 30, 2022 |
| SJG | ETG | Total SJI |
| Excess Plant Removal Costs | $ | 12,947 | | $ | 35,221 | | $ | 48,168 | |
| Excess Deferred Taxes | 193,830 | | 108,790 | | 302,620 | |
| Deferred Gas Costs - Net | — | | 52,535 | | 52,535 | |
| | | |
| | | |
| Other Regulatory Liabilities | 3,549 | | 1,727 | | 5,276 | |
| Total Regulatory Liabilities | $ | 210,326 | | $ | 198,273 | | $ | 408,599 | |
| | | | | | | | | | | | |
| December 31, 2021 | |
| | SJG | ETG | Total SJI | |
| Excess Plant Removal Costs | $ | 12,125 | | $ | 33,988 | | $ | 46,113 | | |
| Excess Deferred Taxes | 206,902 | | 111,003 | | 317,905 | | |
| Deferred Gas Costs - Net | — | | 28,842 | | 28,842 | | |
| | | | |
| | | | |
| Other Regulatory Liabilities | 3,384 | | 2,707 | | 6,091 | | |
| | | | |
| Total Regulatory Liabilities | $ | 222,411 | | $ | 176,540 | | $ | 398,951 | | |
EXCESS DEFERRED TAXES - This liability is recognized as a result of Tax Reform enacted into law on December 22, 2017. The decrease in this regulatory liability from December 31, 2021 to September 30, 2022 is related to excess tax amounts returned to customers through customer billings. See Note 10 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2021.
DEFERRED GAS COSTS - NET - Over/under collections of gas costs are monitored through ETG's BGSS mechanism. Net under collected gas costs are classified as a regulatory asset and net over collected gas costs are classified as a regulatory liability. Derivative contracts used to hedge natural gas purchase are also included in the BGSS, subject to BPU approval. The increase from December 31, 2021 to September 30, 2022 is primarily due to the change in the value of the energy related derivative contracts along with the recoveries from customers exceeding the actual gas commodity costs.
9. PENSION AND OTHER POSTRETIREMENT BENEFITS:
For the three and nine months ended September 30, 2022 and 2021, net periodic benefit cost related to the SJI employee and officer pension and other postretirement benefit plans consisted of the following components (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Service Cost | $ | 1,241 | | | $ | 1,519 | | | $ | 3,880 | | | $ | 4,701 | |
| Interest Cost | 3,681 | | | 3,404 | | | 10,510 | | | 9,876 | |
| Expected Return on Plan Assets | (5,736) | | | (6,154) | | | (18,137) | | | (17,821) | |
| Amortizations: | | | | | | | |
| Prior Service Cost | 17 | | | 25 | | | 53 | | | 73 | |
| Actuarial Loss | 2,014 | | | 3,325 | | | 5,691 | | | 9,713 | |
| Net Periodic Benefit Cost | 1,217 | | | 2,119 | | | 1,997 | | | 6,542 | |
| Settlement Cost | 202 | | | — | | | 202 | | | — | |
| Capitalized Benefit Cost | (409) | | | (577) | | | (1,405) | | | (1,708) | |
| Deferred Benefit Cost (Credit) | 8 | | | (339) | | | 677 | | | (971) | |
| Total Net Periodic Benefit Expense | $ | 1,018 | | | $ | 1,203 | | | $ | 1,471 | | | $ | 3,863 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Other Postretirement Benefits |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Service Cost | $ | 154 | | | $ | 212 | | | $ | 499 | | | $ | 638 | |
| Interest Cost | 494 | | | 475 | | | 1,499 | | | 1,424 | |
| Expected Return on Plan Assets | (1,692) | | | (1,436) | | | (5,075) | | | (4,308) | |
| Amortizations: | | | | | | | |
| Prior Service Cost | (156) | | | (156) | | | (468) | | | (468) | |
| Actuarial Loss | 25 | | | 273 | | | 94 | | | 817 | |
| Net Periodic Benefit Cost | (1,175) | | | (632) | | | (3,451) | | | (1,897) | |
| Capitalized Benefit Cost | (49) | | | (108) | | | (169) | | | (320) | |
| Deferred Benefit Cost | 355 | | | 337 | | | 1,420 | | | 1,010 | |
| Total Net Periodic Benefit Expense | $ | (869) | | | $ | (403) | | | $ | (2,200) | | | $ | (1,207) | |
The Pension Benefits Net Periodic Benefit Cost incurred by SJG was approximately $0.4 million and $1.6 million of the totals presented in the table above for the three months ended September 30, 2022 and 2021, respectively, and $0.6 million and $4.7 million of the totals presented in the table above for the nine months ended September 30, 2022 and 2021, respectively. The weighted average expected long term rate of return on plan assets used to determine the net benefit cost was 7.25%.
The Other Postretirement Benefits Net Periodic Benefit Cost incurred by SJG was approximately $(0.6) million of the totals presented in the table above for both the three months ended September 30, 2022 and 2021,, and $(2.8) million and $(1.6) million of the totals presented in the table above for the nine months ended September 30, 2022 and 2021, respectively. The weighted average expected long term rate of return on plan assets used to determine the net benefit cost was 6.75%.
Capitalized benefit costs reflected in the table above relate to the Utilities' construction programs.
No contributions were made to the pension plans by either SJI or SJG during the nine months ended September 30, 2022 or 2021. Future pension contributions by SJI cannot be determined at this time. Payments related to the unfunded SERP for SJG are expected to be approximately $3.9 million in 2022.
See Note 12 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2021 for additional information related to SJI’s and SJG's pension and other postretirement benefits.
10. LINES OF CREDIT & SHORT-TERM BORROWINGS:
Credit facilities and available liquidity as of September 30, 2022 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Company | | Total Facility | | Usage | | Available Liquidity | | Expiration Date | |
| SJI: | | | | | | | | | |
| SJI Syndicated Revolving Credit Facility | | $ | 500,000 | | | $ | 7,100 | | (A) | $ | 492,900 | | | September 2026 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| SJG: | | | | | | | | | |
| Commercial Paper Program/Revolving Credit Facility | | 250,000 | | | 97,300 | | (B) | 152,700 | | | September 2026 | |
| | | | | | | | | |
| 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 $7.1 million, which is used for various construction and operating activities.
(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 of September 30, 2022.
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 on September 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, since December 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 ended December 31, 2021.
There have been no significant changes to the nature or balances of SJG's commercial paper program since December 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 ended December 31, 2021.
Although there can be no assurance, management believes that actions presently being taken to pay off or refinance the short-term debt and borrowings that are due within the next year will be successful, as the Company has been successful in refinancing debt in the past. No adjustments have been made to the financial statements to account for this uncertainty.
SJI, SJG and ETG were all in compliance with the financial covenants in their respective borrowing arrangements described herein and in Note 14 as of September 30, 2022.
The consummation of the Merger would constitute a "Change in Control" under the Revolving Credit Facility, and, as such, would create an event of default, resulting in amounts outstanding being payable. The Parent has entered into a five-year revolving credit agreement with a syndicate of lenders, with the expectation that upon consummation of the Merger, each of SJI, SJG and ETG will sign joinders to that new credit agreement and become borrowers thereunder with available credit and other terms similar to the Revolving Credit Agreement, however it could result in additional interest to be paid. At such time, the Revolving Credit Agreement would be terminated.
The weighted average interest rate on these borrowings, which changes daily, were as follows:
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
| Weighted average interest rate on borrowings: | | | |
| SJI (inclusive of SJG, ETG and SJIU) | 3.90 | % | | 0.69 | % |
| SJG | 1.42 | % | | 0.18 | % |
Average borrowings and maximum amounts outstanding on these facilities were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | 2021 | | 2022 | 2021 |
| Average borrowings outstanding, not including LOC: | | | | | | | |
| SJI (inclusive of all subsidiaries' facilities) | $ | 249,350 | | | $ | 83,500 | | | $ | 209,811 | | | $ | 169,000 | |
| SJG | $ | 40,150 | | | $ | 47,000 | | | $ | 35,644 | | | $ | 24,200 | |
| | | | | | | |
| Maximum amounts outstanding, not including LOC: | | | | | | | |
| SJI (inclusive of all subsidiaries' facilities) | $ | 366,800 | | | $ | 159,800 | | | $ | 375,300 | | | $ | 452,900 | |
| SJG | $ | 110,300 | | | $ | 87,300 | | | $ | 110,300 | | | $ | 87,300 | |
11. COMMITMENTS AND CONTINGENCIES:
Except as described below, there have been no significant changes to the Company's commitments and contingencies since December 31, 2021, which are described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2021.
GAS SUPPLY CONTRACTS - SJG has certain commitments for both pipeline capacity and gas supply for which SJG pays fees regardless of usage. Those commitments, as of September 30, 2022, averaged $101.0 million annually and totaled $458.7 million over the contracts’ lives; the increase since December 31, 2021 is due to two executed contracts in the first quarter of 2022 with Adelphia and Columbia pipelines and extension of the existing firm capacity contracts with Columbia pipelines during the second quarter 2022. Approximately 53% 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.
GUARANTEES — As of September 30, 2022, SJI had issued $11.5 million of parental guarantees on behalf of EnergyMark, an unconsolidated subsidiary. These guarantees generally expire within one year and were issued to enable the subsidiary to market retail natural gas.
AFFILIATE LOANS - SJI has provided $93.4 million and $62.6 million in capital contribution loans to REV, which are recorded in Notes Receivable - Affiliates on the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively (see Note 3). The amount of capital contribution loans may be amended upward from time to time at the sole discretion of SJI.
COLLECTIVE BARGAINING AGREEMENTS — SJI and its subsidiaries employed 1,163 and 1,173 employees as of September 30, 2022 and December 31, 2021, respectively. SJG employed 422 and 432 employees as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022, 286 of the total number of employees were represented by labor unions at SJG, and 211 were represented by a labor union at ETG. As of December 31, 2021, 289 of the total number of employees were represented by labor unions at SJG, and 233 were represented by a labor union at ETG. Collective bargaining agreements with unions that represent SJG employees include agreements with IBEW Local 1293, which was finalized in February 2022 and now runs through February 2025, and with IAM Local 76 which runs through August 2025. A collective bargaining agreement with UWUA Local 424 that represents unionized ETG employees was renegotiated and now runs through October 2024. The labor agreements cover wage increases, health and welfare benefits, paid time off programs, and other benefits. At ETG, 47 current employees voted to certify as a new bargaining unit effective November 23, 2021, for which SJI is actively negotiating a new collective bargaining agreement.
CONVERTIBLE UNITS - See Notes 6 and 15 to the Consolidated Financial Statements in Item 8 of SJI's and SJG’s Annual Report on Form 10-K for the year ended December 31, 2021 for a description of the issuances of convertible units and the respective obligations.
LITIGATION — SJI and SJG are subject to claims, actions and other legal proceedings arising in the ordinary course of business. Neither SJI nor SJG can make any assurance as to the outcome of any of these actions but, based on an analysis of these claims and consultation with outside counsel, we do not believe that any of these claims, other than described below, would be reasonably likely to have a material impact on the business or financial statements of SJI or SJG. 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.
In August 2018, the State of New Jersey filed a civil enforcement action in the New Jersey Superior Court, Atlantic County, against SJG and several other current and former owners of certain property in Atlantic City, NJ alleging damage to the State's natural resources and seeking payment for damages to those natural resources, where SJG and its predecessors previously operated a manufactured gas plant. Assessment of the nature and extent of the alleged damages requires substantial analysis from multiple experts. To date, discovery has not yet taken place and there is limited precedent on a number of the legal matters involved. As a result, SJG is currently evaluating the merits of the State of New Jersey’s allegations. All parties have agreed to and begun mediation efforts. SJG intends to vigorously defend itself in this matter, however, an adverse outcome in the litigation could have a material impact on SJI's and SJG's results of operations, financial condition and liquidity. SJG has recorded a liability based on its best-estimate of the probable outcome of this matter as of September 30, 2022. This manufactured gas plant site has been fully remediated as discussed under "Environmental Remediation Costs" below.
In connection with the Merger Agreement and the transactions contemplated thereby, eight purported Company shareholders filed lawsuits under federal securities laws, five in the United States District Court for the Southern District of New York, one in the United States District Court for the Eastern District of New York, one in the United States District Court for the District of New Jersey and one in the United States District Court for the Eastern District of Pennsylvania, challenging the adequacy of the disclosures made in the preliminary proxy statement filed by the Company with the SEC on March 30, 2022. These cases are captioned Stein v. South Jersey Industries, et al., Case No. 1:22-cv-02647, Finger v. South Jersey Industries, et al., Case No. 1:22-cv-03226, Kaufmann v. South Jersey Industries, et al., Case No. 1:22-cv-03255, Hopkins v. South Jersey Industries, et al., Case No. 1:22-cv-01972, Przyborowski v. South Jersey Industries, et al., Case No. 1:22-cv-02202, Justice v. South Jersey Industries, et al., Case No. 2:22-cv-01495, Brining v. South Jersey Industries, et. al., Case No. 1:22-cv-03384, and Jones v. South Jersey Industries, et. al., Case No. 1:22-cv-03424, respectively. The Complaints generally alleged that the preliminary proxy statement filed by the Company with the SEC on March 30, 2022 misrepresented and/or omitted certain purportedly material information relating to the Company’s financial projections and the analyses performed for the Board in connection with the Merger Agreement. The Complaints asserted violations of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder against the Company and the members of its Board. The Complaints sought, among other things, an injunction enjoining the shareholder vote on the Merger and the consummation of the Merger unless and until certain additional information was disclosed to Company shareholders, costs of the action, including plaintiffs’ attorneys’ fees and experts’ fees, and other relief the court may have deemed just and proper. In response to these lawsuits, on May 3, 2022, the Company filed additional proxy soliciting materials related to the Merger. The plaintiffs have subsequently dismissed these claims without prejudice.
SJI has accrued approximately $18.1 million and $11.3 million related to all claims in the aggregate as of September 30, 2022 and December 31, 2021, respectively, of which SJG has accrued approximately $17.5 million and $10.0 million as of September 30, 2022 and December 31, 2021, respectively.
ENVIRONMENTAL REMEDIATION COSTS — Except as noted under "Litigation" above, there have been no significant changes to the status of SJI’s environmental remediation efforts since December 31, 2021, as described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2021.
12. DERIVATIVE INSTRUMENTS:
Certain SJI subsidiaries, including SJG, are involved in buying, selling, transporting and storing natural gas, and buying and selling retail electricity for their own accounts as well as managing these activities for third parties. These subsidiaries are subject to market risk on expected future purchases and sales due to commodity price fluctuations. Management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in identifying, assessing and controlling various risks. Management reviews any open positions in accordance with strict policies to limit exposure to market risk. These derivative instruments include forward contracts, swap agreements, options contracts and futures contracts.
As of September 30, 2022, SJI and SJG had outstanding derivative contracts as follows: | | | | | | | | |
| SJI Consolidated | SJG |
| Derivative contracts intended to limit exposure to market risk to: | | |
| Expected future purchases of natural gas (in MMdts) | 77.9 | | 12.7 | |
| Expected future sales of natural gas (in MMdts) | 72.1 | | 0.4 | |
| | |
| | |
| | |
| Basis and Index related net purchase contracts (in MMdts) | 73.4 | | 7.0 | |
The expected future purchases and sales of electricity are not material.
These contracts, which have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives - Energy Related Assets or Derivatives - Energy Related Liabilities on the condensed consolidated balance sheets of SJI and SJG. For SJRG contracts, the net unrealized pre-tax gains (losses) for these energy-related commodity contracts are included with realized gains (losses) in Operating Revenues – Nonutility on the condensed consolidated statements of (loss)/income for SJI. These unrealized pre-tax gains (losses) were $11.3 million and $(19.8) million for the three months ended September 30, 2022 and 2021, respectively, and $(43.9) million and $(35.1) million for the nine months ended September 30, 2022 and 2021, respectively. For ETG's and SJG's contracts, the costs or benefits are recoverable through the BGSS clause, subject to BPU approval. As a result, the net unrealized pre-tax gains (losses) for SJG and ETG energy-related commodity contracts are included with realized gains and losses in Regulatory Assets or Regulatory Liabilities on the condensed consolidated balance sheets of SJI (ETG and SJG) and SJG. As of September 30, 2022 and December 31, 2021, SJI had $59.9 million and $22.1 million, respectively, and SJG had $24.0 million and $7.1 million, respectively, of net unrealized gains included in its BGSS related to energy-related commodity contracts.
SJG has interest rate derivatives to mitigate exposure to increasing interest rates and the impact of those rates on cash flows of variable-rate debt. These interest rate derivatives are measured at fair value and recorded in Derivatives - Other on the condensed consolidated balance sheets. The fair value represents the amount SJG would have to pay the counterparty to terminate these contracts as of those dates.
As of September 30, 2022, SJG’s active interest rate swaps were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | Fixed Interest Rate | | Start Date | | Maturity |
| $ | 12,500,000 | | | 3.530% | | 12/1/2006 | | 2/1/2036 |
| $ | 12,500,000 | | | 3.430% | | 12/1/2006 | | 2/1/2036 |
For the unrealized gains and losses on interest rate derivatives at SJG, management believes that, subject to BPU approval, the market value upon termination can be recovered in rates and, therefore, these unrealized gains (losses) have been included in Other Regulatory Assets in the condensed consolidated balance sheets.
The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| SJI (includes SJG and all other consolidated subsidiaries): | | | | | | | | |
| Derivatives not designated as hedging instruments under GAAP | | September 30, 2022 | | December 31, 2021 |
| | | Assets | | Liabilities | | Assets | | Liabilities |
| Energy-related commodity contracts: | | | | | | | | |
| Derivatives - Energy Related - Current | | $ | 187,126 | | | $ | 159,805 | | | $ | 95,041 | | | $ | 60,002 | |
| Derivatives - Energy Related - Non-Current | | 52,461 | | | 39,359 | | | 22,488 | | | 16,079 | |
| Interest rate contracts: | | | | | | | | |
| Derivatives - Other - Current | | — | | | 215 | | | — | | | 568 | |
| Derivatives - Other - Noncurrent | | — | | | 2,646 | | | — | | | 7,432 | |
| Total Derivatives | | $ | 239,587 | | | $ | 202,025 | | | $ | 117,529 | | | $ | 84,081 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| SJG: | | | | | | | | |
| Derivatives not designated as hedging instruments under GAAP | | September 30, 2022 | | December 31, 2021 |
| | Assets | | Liabilities | | Assets | | Liabilities |
| Energy-related commodity contracts: | | | | | | | | |
| Derivatives – Energy Related – Current | | $ | 33,317 | | | $ | 9,547 | | | $ | 9,396 | | | $ | 2,520 | |
| Derivatives – Energy Related – Non-Current | | 652 | | | 425 | | | 507 | | | 324 | |
| Interest rate contracts: | | | | | | | | |
| Derivatives – Other - Current | | — | | | 215 | | | — | | | 568 | |
| Derivatives – Other - Noncurrent | | — | | | 2,646 | | | — | | | 7,432 | |
| Total Derivatives | | $ | 33,969 | | | $ | 12,833 | | | $ | 9,903 | | | $ | 10,844 | |
SJI and SJG enter into derivative contracts with counterparties, some of which are subject to master netting arrangements, which allow net settlements under certain conditions. These derivatives are presented at gross fair values on the condensed consolidated balance sheets.
Information related to these offsetting arrangements were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2022 | | | | | | | | | | | | |
| Description | | Gross amounts of recognized assets/liabilities | | Gross amount offset in the balance sheet | | Net amounts of assets/liabilities in balance sheet | | Gross amounts not offset in the balance sheet | | Net amount |
| | | | Financial Instruments | | Cash Collateral Posted/(Received) | |
| SJI (includes SJG and all other consolidated subsidiaries): |
| Derivatives - Energy Related Assets | | $ | 239,587 | | | $ | — | | | $ | 239,587 | | | $ | (128,106) | | (A) | $ | (28,918) | | | $ | 82,563 | |
| Derivatives - Energy Related Liabilities | | $ | (199,164) | | | $ | — | | | $ | (199,164) | | | $ | 128,106 | | (B) | $ | — | | | $ | (71,058) | |
| Derivatives - Other | | $ | (2,861) | | | $ | — | | | $ | (2,861) | | | $ | — | | | $ | — | | | $ | (2,861) | |
| SJG: | | | | | | | | | | | | |
| Derivatives - Energy Related Assets | | $ | 33,969 | | | $ | — | | | $ | 33,969 | | | $ | (4,620) | | (A) | $ | — | | | $ | 29,349 | |
| Derivatives - Energy Related Liabilities | | $ | (9,972) | | | $ | — | | | $ | (9,972) | | | $ | 4,620 | | (B) | $ | — | | | $ | (5,352) | |
| Derivatives - Other | | $ | (2,861) | | | $ | — | | | $ | (2,861) | | | $ | — | | | $ | — | | | $ | (2,861) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 | | | | | | | | | | | | |
| Description | | Gross amounts of recognized assets/liabilities | | Gross amount offset in the balance sheet | | Net amounts of assets/liabilities in balance sheet | | Gross amounts not offset in the balance sheet | | Net amount |
| | | | Financial Instruments | | Cash Collateral Posted/(Received) | |
| SJI (includes SJG and all other consolidated subsidiaries): |
| Derivatives - Energy Related Assets | | $ | 117,529 | | | $ | — | | | $ | 117,529 | | | $ | (57,804) | | (A) | $ | (32,782) | | | $ | 26,943 | |
| Derivatives - Energy Related Liabilities | | $ | (76,081) | | | $ | — | | | $ | (76,081) | | | $ | 57,804 | | (B) | $ | — | | | $ | (18,277) | |
| Derivatives - Other | | $ | (8,000) | | | $ | — | | | $ | (8,000) | | | $ | — | | | $ | — | | | $ | (8,000) | |
| SJG: | | | | | | | | | | | | |
| Derivatives - Energy Related Assets | | $ | 9,903 | | | $ | — | | | $ | 9,903 | | | $ | (1,780) | | (A) | $ | — | | | $ | 8,123 | |
| Derivatives - Energy Related Liabilities | | $ | (2,844) | | | $ | — | | | $ | (2,844) | | | $ | 1,780 | | (B) | $ | — | | | $ | (1,064) | |
| Derivatives - Other | | $ | (8,000) | | | $ | — | | | $ | (8,000) | | | $ | — | | | $ | — | | | $ | (8,000) | |
(A) The balances at September 30, 2022 and December 31, 2021 were related to derivative liabilities which can be net settled against derivative assets.
(B) The balances at September 30, 2022 and December 31, 2021 were related to derivative assets which can be net settled against derivative liabilities.
The effect of derivative instruments on the condensed consolidated statements of income are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| Derivatives Previously in Cash Flow Hedging Relationships under GAAP | | 2022 | | 2021 | | 2022 | | 2021 |
| SJI (includes SJG and all other consolidated subsidiaries): | | | | | | | | |
| Interest Rate Contracts: | | | | | | | | |
| Losses reclassified from AOCL into income (a) | | $ | (11) | | | $ | (12) | | | $ | (35) | | | $ | (35) | |
| | | | | | | | |
| SJG: | | | | | | | | |
| Interest Rate Contracts: | | | | | | | | |
| Losses reclassified from AOCL into income (a) | | $ | (11) | | | $ | (12) | | | $ | (35) | | | $ | (35) | |
(a) Included in Interest Charges
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| Derivatives Not Designated as Hedging Instruments under GAAP | | 2022 | | 2021 | | 2022 | | 2021 |
| SJI (no balances for the Utilities; includes all other consolidated subsidiaries): | | | | | | | | |
| Gains (Losses) on energy-related commodity contracts (a) | | $ | 11,319 | | | $ | (19,815) | | | $ | (43,872) | | | $ | (35,089) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(a) Included in Operating Revenues - Nonutility
Certain of SJI’s derivative instruments contain provisions that require immediate payment or demand immediate and ongoing collateralization on derivative instruments in net liability positions in the event of a material adverse change in the credit standing of SJI. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on September 30, 2022 is not material. The amount SJI would have been required to pay to settle the instruments immediately or post collateral to its counterparties if the credit-risk-related contingent features underlying these agreements were triggered on September 30, 2022 after offsetting asset positions with the same counterparties under master netting arrangements, is also not material.
13. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:
GAAP establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques. The levels of the hierarchy are described below:
•Level 1: Observable inputs, such as quoted prices in active markets for identical assets or liabilities.
•Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy.
For financial assets and financial liabilities measured at fair value on a recurring basis, information about the fair value measurements for each major category is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2022 | Total | | Level 1 | | Level 2 | | Level 3 |
| SJI (includes SJG and all other consolidated subsidiaries): | | | | | | | |
| Assets | | | | | | | |
| Available-for-Sale Securities (A) | $ | 37 | | | $ | 37 | | | $ | — | | | $ | — | |
| Derivatives – Energy Related Assets (B) | 239,587 | | | 110,170 | | | 103,206 | | | 26,211 | |
| | $ | 239,624 | | | $ | 110,207 | | | $ | 103,206 | | | $ | 26,211 | |
| SJG: | | | | | | | |
| Assets | | | | | | | |
| Derivatives – Energy Related Assets (B) | $ | 33,969 | | | $ | 13,145 | | | $ | 9 | | | $ | 20,815 | |
| $ | 33,969 | | | $ | 13,145 | | | $ | 9 | | | $ | 20,815 | |
| SJI (includes SJG and all other consolidated subsidiaries): | | | | | | | |
| Liabilities | | | | | | | |
| Derivatives – Energy Related Liabilities (B) | $ | 199,164 | | | $ | 19,668 | | | $ | 150,832 | | | $ | 28,664 | |
| Derivatives – Other (C) | 2,861 | | | — | | | 2,861 | | | — | |
| | $ | 202,025 | | | $ | 19,668 | | | $ | 153,693 | | | $ | 28,664 | |
| SJG: | | | | | | | |
| Liabilities | | | | | | | |
| Derivatives – Energy Related Liabilities (B) | $ | 9,972 | | | $ | 4,620 | | | $ | 5,352 | | | $ | — | |
| Derivatives – Other (C) | 2,861 | | | — | | | 2,861 | | | — | |
| $ | 12,833 | | | $ | 4,620 | | | $ | 8,213 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 | Total | | Level 1 | | Level 2 | | Level 3 |
| SJI (includes SJG and all other consolidated subsidiaries): | | | | | | | |
| Assets | | | | | | | |
| Available-for-Sale Securities (A) | $ | 37 | | | $ | 37 | | | $ | — | | | $ | — | |
| Derivatives – Energy Related Assets (B) | 117,529 | | | 56,260 | | | 52,277 | | | 8,992 | |
| | $ | 117,566 | | | $ | 56,297 | | | $ | 52,277 | | | $ | 8,992 | |
| SJG: | | | | | | | |
| Assets | | | | | | | |
| Derivatives – Energy Related Assets (B) | $ | 9,903 | | | $ | 4,648 | | | $ | 1,617 | | | $ | 3,638 | |
| $ | 9,903 | | | $ | 4,648 | | | $ | 1,617 | | | $ | 3,638 | |
| | | | | | | |
| SJI (includes SJG and all other consolidated subsidiaries): | | | | | | | |
| Liabilities | | | | | | | |
| Derivatives – Energy Related Liabilities (B) | $ | 76,081 | | | $ | 21,879 | | | $ | 45,890 | | | $ | 8,312 | |
| Derivatives – Other (C) | 8,000 | | | — | | | 8,000 | | | — | |
| | $ | 84,081 | | | $ | 21,879 | | | $ | 53,890 | | | $ | 8,312 | |
| SJG: | | | | | | | |
| Liabilities | | | | | | | |
| Derivatives – Energy Related Liabilities (B) | $ | 2,844 | | | $ | 1,780 | | | $ | 1,064 | | | $ | — | |
| Derivatives – Other (C) | 8,000 | | | — | | | 8,000 | | | — | |
| $ | 10,844 | | | $ | 1,780 | | | $ | 9,064 | | | $ | — | |
Counterparty credit risk and the credit risk of SJI are incorporated and considered in the valuation of all derivative instruments as appropriate. The effect of counterparty credit risk and the credit risk of SJI on the derivative valuations is not significant.
(A) Available-for-Sale Securities include securities that are traded in active markets and securities that are not traded publicly. The securities traded in active markets are valued using the quoted principal market close prices that are provided by the trustees and are categorized in Level 1 in the fair value hierarchy.
(B) Derivatives – Energy Related Assets and Liabilities are traded in both exchange-based and non-exchange-based markets. Exchange-based contracts are valued using unadjusted quoted market sources in active markets and are categorized in Level 1 in the fair value hierarchy. Certain non-exchange-based contracts are valued using indicative price quotations available through brokers or over-the-counter, on-line exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask mid-point prices and are obtained from sources that management believes provide the most liquid market. Management reviews and corroborates the price quotations with at least one additional source to ensure the prices are observable market information, which includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration. For non-exchange-based derivatives that trade in less liquid markets with limited pricing information, model inputs generally would include both observable and unobservable inputs. In instances where observable data is unavailable, management considers the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 in the fair value hierarchy as the model inputs generally are not observable.
Management uses the discounted cash flow model to value Level 3 physical and financial forward contracts, which calculates mark-to-market valuations based on forward market prices, original transaction prices, volumes, risk-free rate of return and credit spreads. Inputs to the valuation model are reviewed and revised as needed, based on historical information, updated market data, market liquidity and relationships, and changes in third party pricing sources. The validity of the mark-to-market valuations and changes in these values from period to period are examined and qualified against historical expectations by the risk management function. If any discrepancies are identified during this process, the mark-to-market valuations or the market pricing information is evaluated further and adjusted, if necessary.
(C) Derivatives – Derivative instruments that are used to limit our exposure to changes in interest rates on variable-rate, long-term debt are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment, as a result, these instruments are categorized in Level 2 in the fair value hierarchy.
The following table provides quantitative information regarding significant unobservable inputs in Level 3 fair value measurements (in thousands, except for ranges):
SJI (includes SJG and all other consolidated subsidiaries):
| | | | | | | | | | | | | | | | | | | | |
| Type | Fair Value at September 30, 2022 | Valuation Technique | Significant Unobservable Input | Range
[Weighted Average] | |
| Assets | Liabilities | | | | |
| Forward Contract - Natural Gas | $26,211 | $28,664 | Discounted Cash Flow | Forward price (per dt)
| $2.62 - $18.03 [$6.50] | (A) |
| | | | | | |
| | |
| | | | | | | | | | | | | | | | | | | | |
| Type | Fair Value at December 31, 2021 | Valuation Technique | Significant Unobservable Input | Range
[Weighted Average] | |
| Assets | Liabilities | | | | |
| Forward Contract - Natural Gas | $8,916 | $8,107 | Discounted Cash Flow | Forward price (per dt)
| $1.77 - $8.30 [$3.73] | (A) |
| | | | | | |
| | |
SJG: | | | | | | | | | | | | | | | | | | | | |
| Type | Fair Value at September 30, 2022 | Valuation Technique | Significant Unobservable Input | Range
[Weighted Average] | |
| Assets | Liabilities | | | | |
| Forward Contract - Natural Gas | $ | 20,815 | | $ | 0 | | Discounted Cash Flow | Forward price (per dt)
| $4.47 - $15.55 [$9.89] | (A) |
| | | | | | | | | | | | | | | | | | | | |
| Type | Fair Value at December 31, 2021 | Valuation Technique | Significant Unobservable Input | Range
[Weighted Average] | |
| Assets | Liabilities | | | | |
| Forward Contract - Natural Gas | $ | 3,638 | | $ | — | | Discounted Cash Flow | Forward price (per dt)
| $3.75 - $5.66 [$4.94] | (A) |
(A) Represents the range, along with the weighted average, of forward prices for the sale and purchase of natural gas.
(B) Represents the range, along with the weighted average, of the percentage of contracted usage that is loaded during on-peak hours versus off-peak.
The changes in fair value measurements of Derivatives – Energy Related Assets and Liabilities, using significant unobservable inputs (Level 3), are as follows (in thousands):
| | | | | | | | | | | |
| | | |
| Three Months Ended
September 30, 2022 | | Nine Months Ended September 30, 2022 |
| SJI (includes SJG and all other consolidated subsidiaries): | | | |
| Balance at beginning of period | $ | 1,364 | | | $ | 680 | |
| Other Changes in Fair Value from Continuing and New Contracts, Net | (2,786) | | | 1,667 | |
| Settlements | (1,031) | | | (4,800) | |
| | | |
| Balance at end of period | $ | (2,453) | | | $ | (2,453) | |
| | | |
| SJG: | | | |
| Balance at beginning of period | $ | 22,215 | | | $ | 3,638 | |
| Other Changes in Fair Value from Continuing and New Contracts, Net | (1,400) | | | 20,815 | |
| Settlements | — | | | (3,638) | |
| | | |
| Balance at end of period | $ | 20,815 | | | $ | 20,815 | |
| | | | | | | | | | | |
| Three Months Ended
September 30, 2021 | | Nine Months Ended
September 30, 2021 |
| SJI (includes SJG and all other consolidated subsidiaries): | | | |
| Balance at beginning of period | $ | 4,956 | | | $ | 11,006 | |
| Other Changes in Fair Value from Continuing and New Contracts, Net | (13,860) | | | (12,547) | |
| Settlements | (1,222) | | | (8,585) | |
| | | |
| Balance at end of period | $ | (10,126) | | | $ | (10,126) | |
| | | |
| SJG: | | | |
| Balance at beginning of period | $ | 4,721 | | | $ | 3,385 | |
| Other Changes in Fair Value from Continuing and New Contracts, Net | 2,396 | | | 7,117 | |
| Settlements | — | | | (3,385) | |
| | | |
| Balance at end of period | $ | 7,117 | | | $ | 7,117 | |
14. LONG-TERM DEBT:
Except as described below, there have been no significant changes to SJI's or SJG's long-term debt since December 31, 2021. See Note 14 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2021.
The consummation of the Merger would constitute a "Change in Control" under certain long-term debt agreements of each of SJI, SJG and ETG, and, as such, would provide applicable debt holders the right to have their debt repurchased. The Parent has entered into term-loan credit agreements with a syndicate of lenders intended to fund any such required repurchases. Upon consummation of the Merger, each of SJI, SJG and ETG is expected to sign a joinder to the relevant term-loan agreement to provide it with the funds necessary to make any such debt repurchases, which could result in additional interest to be paid.
In March 2022, SJG repaid $2.5 million of 4.84% MTNs, which are due annually with the final payment due March 2026.
In April 2022, SJG repaid $3.2 million of 3.74% MTNs, which are due annually with the final payment due April 2032.
In June 2022, SJG repaid $7.5 million of 4.93% MTNs, which are due annually with the final payment due June 2026.
In September 2022, SJG repaid $10.0 million of 3.00% MTNs, which are due annually with the final payment due September 2024.
In June 2022, SJI repaid $35.0 million of 3.71% MTNs at maturity.
On July 14, 2022, SJI entered into a Note Purchase Agreement ("July 2022 NPA") 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, due July 14, 2027 (the “Series 2022A Notes”)
•$100.0 million aggregate principal amount of the Company’s Senior Notes, Series 2022B, due July 14, 2029 (the “Series 2022B Notes”)
•$120.0 million aggregate principal amount of the Company’s Senior Notes, Series 2022C, due July 14, 2032 (the “Series 2022C Notes”)
•$80.0 million million aggregate principal amount of the Company’s Senior Notes, Series 2022D, due July 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 July 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 issued the remaining 50% of each series of Notes on September 15, 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 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.
The July 2022 NPA includes a carve-out for the Merger such that the Change in Control provision in that Merger Agreement will not be triggered by the consummation of the Merger. In addition, in the event of the sale of a Substantial Part (as defined in the Note Purchase Agreement) of the assets of the Company and its subsidiaries, the Company may be required to use a portion of such proceeds to prepay or retire Senior Indebtedness, which term is defined in the Note Purchase Agreement and includes, among other things, the Notes.
15. REVENUE:
There have been no significant changes to the nature of the Company's revenues or the revenue recognition policies and practices of the Company since December 31, 2021, which are described in Note 19 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2021. Disaggregated revenues from contracts with customers are disclosed below, by operating segment (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| Three Months Ended
September 30, 2022 |
| SJG Utility Operations | ETG Utility Operations | Wholesale Energy Operations | Retail Services | Renewables | | Corporate Services and Intersegment | Total |
| Customer Type: | | | | | | | | |
| Residential | $ | 36,727 | | $ | 18,481 | | $ | — | | $ | 530 | | $ | — | | | $ | — | | $ | 55,738 | |
| Commercial & Industrial | 29,397 | | 20,789 | | 624,866 | | — | | 7,409 | | | (8,030) | | 674,431 | |
| OSS & Capacity Release | 4,742 | | — | | — | | — | | — | | | — | | 4,742 | |
| Other | 447 | | 192 | | — | | 1,389 | | — | | | 215 | | 2,243 | |
| $ | 71,313 | | $ | 39,462 | | $ | 624,866 | | $ | 1,919 | | $ | 7,409 | | | $ | (7,815) | | $ | 737,154 | |
| Product/Service Line: | | | | | | | | |
| Gas | $ | 71,313 | | $ | 39,462 | | $ | 624,866 | | $ | — | | $ | — | | | $ | (8,030) | | $ | 727,611 | |
| Solar | — | | — | | — | | — | | 1,158 | | | — | | 1,158 | |
| Fuel Cells | — | | — | | — | | — | | 6,180 | | | — | | 6,180 | |
| Other | — | | — | | — | | 1,919 | | 71 | | | 215 | | 2,205 | |
| $ | 71,313 | | $ | 39,462 | | $ | 624,866 | | $ | 1,919 | | $ | 7,409 | | | $ | (7,815) | | $ | 737,154 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended
September 30, 2022 |
| SJG Utility Operations | ETG Utility Operations | | Wholesale Energy Operations | Retail Services | Renewables | | Corporate Services and Intersegment | Total |
| Customer Type: | | | | | | | | | |
| Residential | $ | 306,124 | | $ | 171,765 | | | $ | — | | $ | 1,562 | | $ | — | | | $ | — | | $ | 479,451 | |
| Commercial & Industrial | 143,934 | | 106,880 | | | 1,599,474 | | 21 | | 18,321 | | | (19,977) | | 1,848,653 | |
| OSS & Capacity Release | 14,166 | | — | | | — | | — | | — | | | — | | 14,166 | |
| Other | 3,568 | | 683 | | | — | | 4,048 | | — | | | — | | 8,299 | |
| $ | 467,792 | | $ | 279,328 | | | $ | 1,599,474 | | $ | 5,631 | | $ | 18,321 | | | $ | (19,977) | | $ | 2,350,569 | |
| Product/Service Line: | | | | | | | | | |
| Gas | $ | 467,792 | | $ | 279,328 | | | $ | 1,599,474 | | $ | — | | $ | — | | | $ | (19,977) | | $ | 2,326,617 | |
| Electric | — | | — | | | — | | 21 | | — | | | — | | 21 | |
| Solar | — | | — | | | — | | — | | 4,195 | | | — | | 4,195 | |
| Fuel Cells | — | | — | | | — | | — | | 13,283 | | | — | | 13,283 | |
| Other | — | | — | | | — | | 5,610 | | 843 | | | — | | 6,453 | |
| $ | 467,792 | | $ | 279,328 | | | $ | 1,599,474 | | $ | 5,631 | | $ | 18,321 | | | $ | (19,977) | | $ | 2,350,569 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| Three Months Ended September 30, 2021 |
| SJG Utility Operations | ETG Utility Operations | | Wholesale Energy Operations | | Retail Services | Renewables | | Corporate Services and Intersegment | Total |
| Customer Type: | | | | | | | | | | |
| Residential | $ | 33,075 | | $ | 18,993 | | | $ | — | | | $ | 488 | | $ | — | | | $ | — | | $ | 52,556 |
| Commercial & Industrial | 27,538 | | 18,269 | | | 406,985 | | | 2,846 | | 7,352 | | | (1,333) | | 461,657 | |
| OSS & Capacity Release | 2,504 | | — | | | — | | | — | | — | | | — | | 2,504 | |
| Other | 668 | | 376 | | | — | | | 1,502 | | — | | | (180) | | 2,366 | |
| $ | 63,785 | | $ | 37,638 | | | $ | 406,985 | | | $ | 4,836 | | $ | 7,352 | | | $ | (1,513) | | $ | 519,083 | |
| Product/Service Line: | | | | | | | | | | |
| Gas | $ | 63,785 | | $ | 37,638 | | | $ | 406,985 | | | $ | — | | $ | — | | | $ | (1,294) | | $ | 507,114 | |
| Electric | — | | — | | | — | | | 2,846 | | — | | | (39) | | 2,807 | |
| Solar | — | | — | | | — | | | — | | 1,961 | | | — | | 1,961 | |
| Fuel Cells | — | | — | | | — | | | — | | 5,063 | | | — | | 5,063 | |
| Landfills | — | | — | | | — | | | — | | 328 | | | — | | 328 | |
| Other | — | | — | | | — | | | 1,990 | | — | | | (180) | | 1,810 | |
| $ | 63,785 | | $ | 37,638 | | | $ | 406,985 | | | $ | 4,836 | | $ | 7,352 | | | $ | (1,513) | | $ | 519,083 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended
September 30, 2021 |
| SJG Utility Operations | ETG Utility Operations | Wholesale Energy Operations | | Retail Services | Renewables | | Corporate Services and Intersegment | Total |
| Customer Type: | | | | | | | | | |
| Residential | $ | 250,697 | | $ | 156,254 | | | | $ | 1,482 | | $ | — | | | $ | — | | $ | 408,433 | |
| Commercial & Industrial | 119,565 | | 89,464 | | 1,032,181 | | | 6,409 | | 17,980 | | | (8,955) | | 1,256,644 | |
| OSS & Capacity Release | 7,053 | | — | | — | | | — | | — | | | — | | 7,053 | |
| Other | 2,086 | | 748 | | — | | | 3,469 | | — | | | (385) | | 5,918 | |
| $ | 379,401 | | $ | 246,466 | | $ | 1,032,181 | | | $ | 11,360 | | $ | 17,980 | | | $ | (9,340) | | $ | 1,678,048 | |
| Product/ Service Line: | | | | | | | | | |
| Gas | $ | 379,401 | | $ | 246,466 | | $ | 1,032,181 | | | $ | — | | $ | — | | | $ | (8,790) | | $ | 1,649,258 | |
| Electric | — | | — | | — | | | 6,409 | | — | | | (165) | | 6,244 | |
| Solar | — | | — | | — | | | — | | 4,776 | | | — | | 4,776 | |
| Fuel Cells | — | | — | | — | | | — | | 12,167 | | | — | | 12,167 | |
| Landfills | — | | — | | — | | | — | | 1,037 | | | — | | 1,037 | |
| Other | — | | — | | — | | | 4,951 | | — | | | (385) | | 4,566 | |
| $ | 379,401 | | $ | 246,466 | | $ | 1,032,181 | | | $ | 11,360 | | $ | 17,980 | | | $ | (9,340) | | $ | 1,678,048 | |
The SJG balance is a part of the SJG Utility Operations segment, and is before intercompany eliminations with other SJI entities.
Revenues on the condensed consolidated statements of (loss)/income that are not with contracts with customers consist of (a) revenues from alternative revenue programs at the SJG and ETG utility operating segments (primarily CIP and WNC), (b) both utility and nonutility realized revenue from derivative contracts at the SJG and ETG Utility Operations, Wholesale Energy Operations and Retail Services operating segments, and (c) unrealized revenues from derivative contracts at the Wholesale Energy Operations and Retail Services operating segments.
The Utilities' rate mechanisms that qualify as alternative revenue programs are described in Note 10 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2021. Total revenues arising from alternative revenue programs at SJI were $3.5 million and $0.4 million for the three months ended September 30, 2022 and 2021, respectively, and $(5.6) million and $2.5 million for the nine months ended September 30, 2022 and 2021, respectively. Total revenues arising from alternative revenue programs at SJG were $0.8 million and $1.0 million for the three months ended September 30, 2022 and 2021, respectively, and $(6.0) million and $0.9 million for the nine months ended September 30, 2022 and 2021, respectively.
The following table provides information about SJI's and SJG's receivables (excluding SJG receivables from related parties) and unbilled revenue from contracts with customers (in thousands):
| | | | | | | | |
| Accounts Receivable (A) | Unbilled Revenue (B) |
| SJI (including SJG and all other consolidated subsidiaries): |
| Beginning balance as of January 1, 2022 | $ | 343,835 | | $ | 87,357 | |
| Ending balance as of September 30, 2022 | 352,437 | | 22,021 | |
| Increase (Decrease) | $ | 8,602 | | $ | (65,336) | |
| | |
| Beginning balance as of January 1, 2021 | $ | 278,723 | | $ | 85,423 | |
| Ending balance as of September 30, 2021 | 272,286 | | 26,783 | |
| Increase (Decrease) | $ | (6,437) | | $ | (58,640) | |
| | |
| SJG: | | |
| Beginning balance as of January 1, 2022 | $ | 125,848 | | $ | 43,236 | |
| Ending balance as of September 30, 2022 | 99,727 | | 11,258 | |
| Increase (Decrease) | $ | (26,121) | | $ | (31,978) | |
| | |
| Beginning balance as of January 1, 2021 | $ | 88,657 | | $ | 46,837 | |
| Ending balance as of September 30, 2021 | 83,031 | | 8,288 | |
| Increase (Decrease) | $ | (5,626) | | $ | (38,549) | |
(A) A receivable is SJI's and SJG's right to consideration that is unconditional, as only the passage of time is required before payment is expected from the customer.
(B) All unbilled revenue for SJI and SJG arises from contracts with customers. Unbilled revenue relates to SJI's and SJG's right to receive payment for commodity delivered but not yet billed. This represents contract assets that arise from contracts with customers, which is defined in ASC 606 as the right to payment in exchange for goods already transferred to a customer, excluding any amounts presented as a receivable. The unbilled revenue is transferred to accounts receivable when billing occurs and the rights to collection become unconditional.
16. ACQUISITIONS & BUSINESS COMBINATIONS:
Bronx Midco
Catamaran and a third party formed Bronx Midco, of which Catamaran owns 99%. On June 9, 2021, Bronx Midco purchased a fuel cell project totaling 5 MW in Bronx, New York, which was completed and became operational during the third quarter of 2022. Marina, through its ownership in Catamaran, has a 92% ownership interest in Bronx Midco, and, as a result, Marina consolidates the entity as Marina has the power to direct the activities of the entity that most significantly impact the entity’s economic performance.
ASC Topic 805, “Business Combinations,” states that a business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. As the acquisition did not meet the definition of a business combination under ASC 805, the Company accounted for the transaction as an asset acquisition. In an asset acquisition, goodwill is not recognized, but rather any excess consideration transferred over the fair value of the net assets acquired is allocated on a relative fair value basis to the identifiable net assets. The fuel cell project includes a land lease and working capital.
The total cost of the fuel cell project is $60.1 million, of which the partners have paid $50.8 million as of September 30, 2022; the remaining balance was paid in October 2022. Of this total, Marina invested $46.8 million as of September 30, 2022. To account for the third party partner's interest in Bronx Midco, Marina recorded $4.0 million of NCIs in Total Equity on the condensed consolidated balance sheets as of September 30, 2022. The major depreciable assets of the Bronx Midco fuel cell project are the fuel cell modules, which will be depreciated over their estimated useful lives of 35 years once placed in service. The lease cost associated with the land lease is being recognized on a straight-line basis over the lease term of 35 years.
All assets and financial results of Bronx Midco are included in the Renewables segment. Revenues and expenses incurred in the Company's condensed consolidated statements of (loss)/income in the three and nine months ended September 30, 2022 and 2021 are not material.
Red River
On March 22, 2022, SJI, through its wholly-owned subsidiary SJI RNG Devco, LLC, formed the Red River joint venture with two third party partners, of which SJI RNG Devco, LLC has an 80% ownership interest. Red River was formed for the purpose of building anaerobic digesters on certain dairy farms to produce RNG for injection into natural gas pipelines, and supporting SJI's commitment to decarbonization. In 2022, SJI invested $55.7 million into the Red River joint venture. There has been no other activity among this joint venture as of September 30, 2022.
Notes 1 and 20 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2021 describe asset acquisitions and business combinations that occurred in 2021.
17. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS:
GOODWILL - See Note 21 to the Consolidated Financial Statements in Item 8 of SJI's and SJG’s Annual Report on Form 10-K for the year ended December 31, 2021 for a description of the Company's goodwill accounting policies and annual impairment test.
The Company determined that, during the three and nine months ended September 30, 2022, there were not indicators of impairment of the goodwill associated with its reporting units, and as such did not perform a quantitative analysis. The qualitative factors analyzed also included macroeconomic conditions related to the COVID-19 pandemic. There were no impairments recorded for the three and nine months ended September 30, 2022 and 2021. Should economic conditions deteriorate in future periods or become depressed for a prolonged period of time, estimates of future cash flows and market valuation assumptions may not be sufficient to support the carrying value, requiring impairment charges in the future.
As of both September 30, 2022 and December 31, 2021, SJI had $707.0 million of goodwill, including $700.2 million in the ETG Utility Operations segment and $6.8 million included in the Retail Services segment.
IDENTIFIABLE INTANGIBLE ASSETS - The primary identifiable intangible assets of the Company are customer relationships within the Retail Services segment, interconnection and power purchase agreements at Annadale (collectively "Annadale intangible assets"), and an AMA within the ETG Utility Operations segment which expired on March 31, 2022.
Total SJI amortization expense related to identifiable intangible assets was $0.2 million and $1.5 million for the three months ended September 30, 2022 and 2021, respectively, and $2.0 million and $4.4 million for the nine months ended September 30, 2022 and 2021, respectively. No impairment charges were recorded on identifiable intangible assets during the three and nine months ended September 30, 2022 or 2021.
Other than amortization, there were no significant changes to the identifiable intangible assets since December 31, 2021. For more information, see Note 21 to the Consolidated Financial Statements in Item 8 of SJI's and SJG’s Annual Report on Form 10-K for the year ended December 31, 2021.
18. SUBSEQUENT EVENTS:
On October 21, 2022, FERC issued an order authorizing its approval of the Merger under Section 203 of the Federal Power Act.