South Jersey Industries (SJIIU) 10-K2021 FY Annual report

South Jersey Industries, Inc. (SJI) common stock ($1.25 par value) - The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2021 was $2,910,165,365. As of February 15, 2022, there were 117,379,409 shares of the registrant's common stock outstanding. South Jersey Gas Company (SJG) common stock ($2.50 par value) outstanding as of February 15, 2022 was 2,339,139 shares. All of SJG's outstanding shares of common stock are held by SJI Utilities, Inc. (SJIU), which is a wholly-owned subsidiary of SJI.

SJG is an indirect wholly-owned subsidiary of SJI and meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K; therefore, SJG files this form with the reduced disclosure format.

In Part III of Form 10-K:  Portions of South Jersey Industries, Inc.'s definitive proxy statement for its 2022 annual meeting of shareholders to be filed with the Securities and Exchange Commission are incorporated by reference into Part III of this Form 10-K.

This Annual Report on Form 10-K is a combined report being filed separately by two registrants: South Jersey Industries, Inc. (SJI or "the Company") and South Jersey Gas Company (SJG). Information relating to SJI or any of its subsidiaries, other than SJG, is filed by SJI on its own behalf. SJG is only responsible for information about itself.

Except where the content clearly indicates otherwise, any reference in the report to "SJI," "the Company," "we," "us" or "our" is to SJI and all of its subsidiaries, including SJG, which is an indirect wholly-owned subsidiary of SJI.

Certain statements contained in this Annual Report on Form 10-K may qualify as “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements in this Report other than statements of historical fact, including statements regarding guidance, industry prospects, future results of operations or financial position, expected sources of incremental margin, strategy, financing needs, future capital expenditures and the outcome or effect of ongoing litigation, should be considered forward-looking statements made in good faith by SJI and SJG, as applicable, and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, or any other documents, words such as “anticipate,” “believe,” "estimate," “expect,” “forecast,” “goal,” “intend,” “objective,” “plan,” “project,” “seek,” “strategy,” "target," "will" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on the beliefs and assumptions of management at the time that these statements were prepared and are inherently uncertain. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These risks and uncertainties include, but are not limited to the risks set forth under “Risk Factors” in Part I, Item 1A of this Report and elsewhere throughout this Report. These cautionary statements should not be construed by you to be exhaustive and they are made only as of the date of this Report. While the Company believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, neither SJI nor SJG undertakes no obligation to update or revise any of its forward-looking statements whether as a result of new information, future events or otherwise.

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 Merger Agreement places limitations on SJI’s ability to engage in certain types of transactions without Parent’s consent between the signing of the Merger Agreement and the Effective Time, including limitations on SJI’s ability to issue dividends other than consistent with its past practices, acquire other businesses, issue equity of SJI (except in the ordinary course pursuant to equity compensation plans) and, subject to certain exceptions, incurring certain indebtedness for borrowed money.

South Jersey Industries, Inc. (SJI or the Company), a New Jersey corporation, was formed in 1969 for the purpose of owning and holding all of the outstanding common stock of South Jersey Gas Company (SJG), a public utility, and acquiring and developing non-utility lines of business.

SJI provides a variety of energy-related products and services, primarily through the following wholly-owned subsidiaries:

 

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 that is in the process of being constructed. Marina, through its ownership in Catamaran, has a 92% ownership interest in Bronx Midco. The total expected cost of the fuel cell project is $60.1 million, of which the partners have paid $28.7 million as of December 31, 2021. Of this total, Marina invested $26.4 million as of December 31, 2021.

In 2021, Catamaran completed its acquisition of a solar project in Massachusetts, of which Marina has a 90% ownership interest. In 2021 and 2020, SJI, through its wholly-owned subsidiary Marina, acquired solar energy projects along with entities owning newly operational rooftop solar-generation sites. The total consideration paid for these acquisitions in each year was not significant.

On August 7, 2020, SJI, through its wholly-owned subsidiary SJEI, completed its acquisition of the remaining 75% of EnerConnex for total consideration of $7.5 million. Prior to this transaction, SJEI had a 25% interest in EnerConnex.

On August 12, 2020, SJI, through its wholly-owned subsidiary Marina, formed the Catamaran joint venture with a third party partner. On the same date, Catamaran purchased 100% ownership in Annadale, an entity that has constructed two fuel cell projects totaling 7.5 MW in Staten Island, New York. These fuel cell projects became operational in December 2020. Marina invested $80.2 million in Annadale as part of this $86.2 million acquisition.

See Notes 1, 3 and 20 to the consolidated financial statements.

See Note 1 to the consolidated financial statements.

Additional information on the nature of SJI's and SJG's businesses can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under Item 7 of this Report.

SJG has direct connections to the interstate pipeline systems of Transco and Columbia. SJG secures other long-term services from Dominion, a pipeline upstream of the Transco and Columbia systems. Services provided by Dominion are utilized to deliver gas into either the Transco or Columbia systems for ultimate delivery to SJG.

ETG has direct connections to the interstate pipeline systems of Transco, Columbia, Tetco and Tennessee. ETG secures other long-term services from several inter-state pipelines, Eastern Gas, National Fuel and Gulf South that are not directly connected to ETG and are upstream of the Transco and Tetco systems. Services provided by Eastern Gas are utilized to deliver gas into either the Transco or Tetco systems for ultimate delivery to ETG. Services provided by National Fuel and Gulf South are utilized to deliver gas into the Transco system for ultimate delivery to ETG. ETG also secures third-party storage services from Stagecoach Gas Services and Stagecoach Pipeline & Storage Company.

The Company's intention is to renew or extend these transportation and storage service agreements before they expire.

Services provided by all of the above-mentioned pipelines are subject to the jurisdiction of the FERC.  

ETG has an AMA with SJRG which extends through March 31, 2022; both entities plan to extend this AMA prior to its expiration. Under this agreement ETG released to SJRG and/or designated SJRG as agent for all firm transportation and storage contracts. SJRG is obligated to provide natural gas supply to meet demand requirements and optimize ETG’s portfolio of natural gas transportation and storage contracts. SJRG pays a fixed fee and shares net margin generated through portfolio optimization.

As part of the gas purchasing strategy, the Utilities use financial contracts to hedge against forward price risk. These contracts are recoverable through the BGSS clause, subject to BPU approval.

SJG operates peaking facilities, located in McKee City, NJ, where it liquefies, stores and vaporizes LNG for injection into its distribution system. SJG's LNG facility has a storage capacity equivalent to 434,300 dts of natural gas and has an installed capacity to vaporize up to 118,250 dts of LNG per day for injection into its distribution system.

SJRG holds various firm transportation agreements with National Fuel, Transco, Dominion, Columbia, Tennessee and Tetco. Total transportation under contract is 423,030 dts/d. These contracts have terms with various ending dates, ranging from September 30, 2022 through March 31, 2043.

SJRG holds multiple storage service agreements, primarily with Transco (for storage service at Transco's WSS facility) and National Fuel. Total storage capacity under contract is approximately 4.6 MMdts. The contracts have terms with various ending dates, ranging from October 31, 2022 through March 31, 2023.

The Company's intention is to renew or extend these transportation and storage service agreements before they expire.

SJRG has entered into several long-term natural gas supply agreements to purchase 526,400 dts/d, depending upon production levels, for terms ranging from five to eleven years at index-based prices.

The Utilities hold nonexclusive franchises granted by municipalities in the areas which they serve. No other natural gas public utility presently serves the territory covered by the Utilities' franchises. Otherwise, patents, trademarks, licenses, franchises and concessions are not material to the business of the Utilities.

The Utilities experience seasonal fluctuations in sales when selling natural gas for heating purposes. The Utilities meet these seasonal fluctuations in demand from firm customers by buying and storing gas during the summer months, and by drawing from storage and purchasing supplemental supplies during the heating season. As a result of this seasonality, the Utilities' revenues and net income are significantly higher during the first and fourth quarters than during the second and third quarters of the year.

The potential impact of climate change on our operations is uncertain. Our operating results are significantly influenced by weather, and significant changes in historical weather patterns could significantly impact our future operating results. Further, severe weather events, including but not limited to hurricanes, tropical storms, blizzards, winter storms, heat waves, heavy precipitation events, flooding, and wildfires, can result in delays or other negative consequences for our operations, which could negatively impact our financial results. Climate change may also affect the conditions in which we operate or result in potential new regulations and regulatory actions, which could result in increased costs.

The Company has taken several approaches to address climate change. The Utilities' earnings are largely protected from fluctuations in temperatures by their respective CIP clauses as described in Item 7. Management has identified multiple risks and opportunities related to climate change, including potential environmental regulation and technological innovation. Management is also responsible for assessing significant risks, developing and executing appropriate responses, and reporting to the Board of Directors on the status of risk activities. Accordingly, the Board provides oversight of the various challenges and opportunities presented by these risks, including the financial consequences that might result from enacted and potential federal and/or state regulation; plans to mitigate these risks; and the impacts these risks may have on the Company’s strategy. The Board of Directors is also informed of the Company’s practices and procedures to assess the impacts of operations on the environment.

Reference is made to “Liquidity and Capital Resources” included in Item 7 of this Report.

No material portion of the business of SJI or any of its subsidiaries is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any government.

Information on competition for SJI and its subsidiaries can be found in Item 7 of this Report.

To ensure strategic efforts related to human capital are met, the ESG Committee of the Board of Directors is responsible for oversight of key initiatives, including human capital management, diversity and inclusion, and safety. In addition, the Compensation Committee of the Board of Directors oversees executive compensation and engages independent consultants to provide expertise and guidance on competitive pay programs. SJI also has an internal Executive Safety Council that monitors progress and planning on safety efforts and an internal ESG Management Committee that manages the progress on SJI’s ESG efforts and provides periodic reports to the ESG Committee of the Board. SJI has also established a Diversity Council made up of a cross section of leadership to help drive diversity and inclusiveness.

SJI's sustainability report, which is published annually, is available free of charge on its corporate website under “ESG - Home.” Our 2020 ESG Annual Report reflects the most recent available data on a variety of topics, including specific information relating to (i) diversity in the workplace; and (ii) certain safety metrics at our natural gas businesses. Information included in this sustainability report is not incorporated into this Form 10-K.

Every day, our employees play a critical role in building the foundation that will support the future growth of SJI. Through our focus on talent acquisition and development, employee engagement initiatives, diversity and inclusion efforts, and our emphasis on safety, we are invested in creating a truly empowered workforce. We create an environment that fosters diverse perspectives and a support structure that champions our employees.

When we recruit, we look for diverse talent with strong technical skills, as well as the ability to thrive in a highly collaborative and dynamic environment. It is our policy to comply fully with all federal, state and local laws, rules and regulations relating to discrimination in the workplace. SJI is committed to continuing to build a culture of inclusion through diversity and inclusion initiatives, including mandatory diversity and inclusion training for employees.

SJI provides employees with programs and opportunities to develop, as well as a commitment to a positive environment. SJI offers competitive pay, health and welfare benefits, and incentive programs that recognize, reward, and retain employees, while driving performance. SJI also prides itself on developing our internal talent, capitalizing on opportunities to provide growth and promotions to roles of increased responsibility. Through our internal corporate development programs, employees can develop critical skills and hone industry knowledge. Multiple training opportunities and development programs provide employees the knowledge, skills, abilities, and experiences they need to grow within the organization. Employee engagement surveys are also conducted to ensure our employees have a voice in informing SJI’s ongoing efforts to foster a positive workplace culture.

SJI has no foreign operations and export sales have not been a significant part of SJI's business.

SJI and its subsidiaries, including SJG, operate in an environment that involves risks, many of which are beyond our control. SJI has identified the following risk factors that could cause SJI's operating results and financial condition to be materially adversely affected. In addition, new risks may emerge at any time, and SJI cannot predict those risks or the extent to which they may affect SJI's businesses or financial performance. To the extent such risk factors may affect SJI's utility businesses, such risk factors may also affect SJG's business or performance.

None.

The principal property of SJI consists of gas transmission and distribution systems that include mains, service connections and meters. The transmission facilities carry the gas from the connections with Transco and Columbia to distribution systems for delivery to customers. As of December 31, 2021, there were approximately 147 miles of mains in SJG's transmission systems and 6,815 miles of mains in SJG's distribution systems.

SJG is headquartered in Atlantic City, NJ and also has office and service buildings at six other locations in its territory. There is a liquefied natural gas storage, liquefaction and vaporization facility at one of these locations. SJG owns approximately 44 acres of land in Folsom, New Jersey which is the site of SJI's corporate headquarters. SJG leases the corporate headquarters to SJI (see Note 9 to the consolidated financial statements). Approximately 30 acres of this property is deed restricted.

ETG is headquartered in Union, NJ and owns approximately 3,273 miles of distribution pipeline and 12 miles of transmission system mains in seven counties in northern and central New Jersey. ETG has office and service buildings at six other locations in its territory. There is a liquefied natural gas storage, liquefaction and vaporization facility at one of these locations.

Nonutility property and equipment has a net book value of approximately $205.1 million and consists mostly of fuel cell and solar assets, ongoing construction of renewable natural gas facilities and equipment at dairy farms, along with miscellaneous equipment and vehicles.

SJI and SJG believe existing property, facilities and equipment are in good operating condition and are suitable for the conduct of its business.

SJI and SJG are subject to claims, actions and other legal proceedings arising in the ordinary course of business. Neither SJI nor SJG can make any assurance as to the outcome of any of these actions but, based on an analysis of these claims and consultation with outside counsel, we do not believe that any of these claims, other than those described in Note 15 to the consolidated financial statements, 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. See Note 15 to the consolidated financial statements for more detail on these claims.

Not applicable.

This performance graph and accompanying information shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any of the Company’s filings under the Securities Act, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

Information required by this item is also found in Note 6 of the consolidated financial statements included under Item 8 of this Report.

SJG is restricted under its First Mortgage Indenture, as supplemented, as to the amount of cash dividends or other distributions that may be paid on its common stock. As of December 31, 2021, these restrictions did not affect the amount that may be distributed from SJG’s retained earnings. No dividends were declared or paid on SJG's common stock in 2021, 2020 or 2019.

SJG received $40.0 million and $109.5 million in equity contributions from SJI in 2021 and 2020, respectively. There were no equity contributions to SJG in 2019. Future equity contributions will occur on an as needed basis.

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 Merger Agreement places limitations on SJI’s ability to engage in certain types of transactions without Parent’s consent between the signing of the Merger Agreement and the Effective Time, including limitations on SJI’s ability to issue dividends other than consistent with its past practices, acquire other businesses, issue equity of SJI (except in the ordinary course pursuant to equity compensation plans) and, subject to certain exceptions, incurring certain indebtedness for borrowed money.

OVERVIEW - SJI (or the Company) is an energy services holding company that provides a variety of products and services through the following direct or indirect wholly-owned subsidiaries:

SJG, a New Jersey corporation, is an operating public utility company engaged in the purchase, transmission and sale of natural gas for residential, commercial and industrial use. SJG also sells natural gas and pipeline transportation capacity (off-system sales) on a wholesale basis to various customers on the interstate pipeline system and transports natural gas purchased directly from producers or suppliers to their customers. SJG contributed approximately $127.6 million to SJI's net income on a consolidated basis in 2021.

SJG's service territory covers approximately 2,500 square miles in the southern part of New Jersey. It includes 113 municipalities throughout Atlantic, Cape May, Cumberland and Salem Counties and portions of Burlington, Camden and Gloucester Counties. SJG benefits from its proximity to Philadelphia, PA and Wilmington, DE on the western side of its service territory and the popular shore communities on the eastern side. Continuing expansion of SJG's infrastructure throughout its seven-county region has fueled annual customer growth and creates opportunities for future extension into areas not yet served by natural gas.

Southern New Jersey's oceanfront communities continue to experience demand for new single and multifamily homes for both seasonal and year-round living. Demand for existing homes has increased throughout our service territory, in line with national trends. Building expansions in the medical, education, warehouse/distribution, and retail sectors contributed to SJG's growth. At present, SJG serves approximately 81% of households within its territory with natural gas. SJG also serves southern New Jersey's diversified industrial base that includes processors of petroleum and agricultural products; chemical, glass and consumer goods manufacturers; and high technology industrial parks.

As of December 31, 2021, SJG served 384,062 residential customers, 26,826 commercial customers and 413 industrial customers in southern New Jersey. Net additions in 2021 of residential and commercial/industrial customers amounted to 5,959 and 456, respectively. No part of SJG's business is dependent upon a single customer or a few customers. Gas sales, transportation and capacity release for 2021 amounted to 136.2 MMdts, of which 52.5 MMdts were firm sales and transportation, 1.1 MMdts were interruptible sales and transportation and 82.6 MMdts were off-system sales and capacity release. The breakdown of firm sales and transportation includes 48.5% residential, 23.1% commercial, 19.9% industrial, and 8.5% cogeneration and electric generation.

SJG makes wholesale gas sales to gas marketers for resale and ultimate delivery to end users. These “off-system” sales are made possible through the issuance of the FERC Orders No. 547 and 636. Order No. 547 issued a blanket certificate of public convenience and necessity authorizing all parties, which are not interstate pipelines, to make FERC jurisdictional gas sales for resale at negotiated rates, while Order No. 636 allowed SJG to deliver gas at delivery points on the interstate pipeline system other than its own city gate stations and release excess pipeline capacity to third parties. During 2021, off-system sales amounted to 14.7 MMdts and capacity release amounted to 67.9 MMdts.

Supplies of natural gas available to SJG that are in excess of the quantity required by those customers who use gas as their sole source of fuel (firm customers) make possible the sale and transportation of gas on an interruptible basis to commercial and industrial customers whose equipment is capable of using natural gas or other fuels, such as fuel oil and propane. The term “interruptible” is used in the sense that deliveries of natural gas may be terminated by SJG at any time if this action is necessary to meet the needs of higher priority customers as described in SJG's tariffs. In 2021, usage by interruptible customers, excluding off-system customers, amounted to 1.1 MMdts.

SJI, through its wholly-owned subsidiary SJIU, acquired the assets of ETG and ELK from Pivotal Utility Holdings, Inc., a subsidiary of Southern Company Gas in 2018. ELK was subsequently sold on July 31, 2020.

ETG is a regulated natural gas utility which distributes natural gas in seven counties in northern and central New Jersey. ETG serves residential, business and industrial customers, with a service territory that covers the northern part of New Jersey, including municipalities throughout Union, Middlesex, Sussex, Warren, Hunterdon, Morris and Mercer Counties. ETG was founded in 1855 and is based in Union, New Jersey. ETG contributed net income of approximately $50.7 million during 2021.

ETG believes growth exists in the expansion of its Northwestern service territory, the Franklin/Sparta area, and the Hackettstown Interconnect. ETG also serves northern New Jersey's diversified industrial base within its territory with natural gas, which includes pharmaceutical, food and beverage, and transportation industries.

SJIEE is a direct subsidiary for the purpose of serving as a holding company for all of SJI's non-utility businesses. The following businesses are wholly-owned subsidiaries of SJIEE:

SJE provides services for the acquisition and transportation of electricity for retail end users and markets total energy management services. SJE markets electricity to residential, commercial and industrial customers. Most customers served by SJE are located within New Jersey, northwestern Pennsylvania and New England. In 2021, SJE contributed approximately $0.7 million to SJI's net income on a consolidated basis.

SJRG markets natural gas storage, commodity and transportation assets along with fuel management services on a wholesale basis. Customers include energy marketers, electric and gas utilities, power plants and natural gas producers. SJRG's marketing activities occur mainly in the mid-Atlantic, Appalachian and southern regions of the country.

SJRG also conducts price risk management activities by entering into a variety of physical and financial transactions including forward contracts, swap agreements, option contracts and futures contracts. In 2021, SJRG contributed approximately $36.9 million to SJI's net income on a consolidated basis.

SJEX owns oil, gas and mineral rights in the Marcellus Shale region of Pennsylvania. SJEX is considered part of SJI's wholesale energy operations. In 2021, SJEX contributed approximately $0.4 million to SJI's net income on a consolidated basis.

Marina develops and operates on-site energy-related projects. There are several businesses under Marina, as discussed below.

Marina owns entities and solar energy projects which own and operate rooftop solar generation sites located in New Jersey.

In 2020, the Company sold MTF and ACB for a final sales price of $97.0 million. See Note 1 to the consolidated financial statements. MTF previously provided cooling, heating and emergency power to the Borgata Hotel Casino & Spa in Atlantic City, NJ. ACB previously owned and operated a combined heating, cooling and power facility fueled by natural gas located in Atlantic City, New Jersey.

SJESP receives commissions on appliance service contracts from a third party. In 2021, SJESP contributed approximately $1.8 million to SJI's net income on a consolidated basis.

SJEI provides energy procurement and cost reduction services. SJEI includes the following wholly-owned subsidiaries:

In 2021, SJEI incurred a net loss of approximately $0.5 million, which reduced SJI's net income on a consolidated basis by such amount.

driven by customer growth, a long runway for infrastructure modernization, and clean energy and decarbonization investment. Management established those goals in conjunction with SJI's Board of Directors based upon a number of different internal and external factors that characterize and influence SJI's current and expected future activities.

The following is a summary of the primary factors we expect to have the greatest impact on SJI's performance and ability to achieve the long-term goals going forward:

Customers in the Utilities' service territory typically base their decisions to convert on comparisons of fuel costs, environmental considerations and fuel pricing stability. While oil and propane prices have become more competitive with natural gas in the past two years, affecting the number of conversions, the Utilities' leverage their comprehensive partnership with the State’s Office of Clean Energy to educate consumers on energy efficiency and to promote the rebates and incentives available to natural gas users.

The BPU approved regulatory mechanisms, along with other BPU approvals, that have the most significant impact on the Utilities' results are described below. For more information on the regulatory environments of the Utilities, see Notes 10 and 11 to the consolidated financial statements.

SJG

In September 2020, SJG settled its rate case petition, resulting in an increase in annual revenues from base rates effective October 1, 2020 of $39.5 million.

The CIP protects SJG's net income from severe fluctuations in gas used by residential, commercial and small industrial customers. See "Rates and Regulations" below.

system in coastal areas. Pursuant to the order, SHARP II investments are to be recovered through annual base rate adjustments. The SHARP II program ended June 30, 2021 and the final rate adjustment for this program became effective October 1, 2021.

In September 2020, the BPU approved, on a provisional basis, a $59.4 million decrease in SJG's BGSS gas cost recoveries, effective October 1, 2020 based on SJG's June 2020 BGSS filing. Although SJG's June 2020 BGSS filing included consideration of $22.9 million of costs requested to be recovered over a two-year period related to a previous dispute on a long-term gas supply contract that was settled during 2019 ("supply contract costs"), the provisional rate adjustments effective October 1, 2020 included the temporary removal of the supply contract costs to allow for a further review of these costs during the course of the proceeding. In May 2021, the BPU approved these provisional rates, adjusted for a two-year amortization of the supply contract costs through September 30, 2022, as final, effective June 1, 2021.

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. This matter is pending before the BPU.

ETG

ETG's CIP, which was implemented in 2021, is similar to SJG's discussed above. See "Rates and Regulations" below.

In September 2020, the BPU approved, on a provisional basis, a $21.1 million decrease in ETG's BGSS gas cost recoveries, effective October 1, 2020. In June 2021, the BPU approved these provisional rates as final, effective July 1, 2021.

In November 2021, the BPU approved, on a provisional basis, an $11.3 million increase in ETG's BGSS gas cost recoveries, effective December 1, 2021. In addition, as allowed under the BGSS clause, in November 2021, ETG issued a notice to the BPU of ETG's intent to self-implement a BGSS rate adjustment representing an additional 5% increase of the monthly bill of a typical residential customer, effective December 1, 2021, for a total increase of $19.1 million in revenues.

In June 2019, the BPU approved a $300.0 million IIP for ETG effective July 1, 2019. The Order authorized the recovery of costs associated with ETG’s investments of approximately $300.0 million between 2019-2024 to replace its cast-iron and bare steel vintage main and related services. The Order provides for annual recovery of ETG's investments through a separate rate mechanism. In April 2021, ETG submitted its annual filing, reflecting rider rates to increase annual revenues by $7.1 million to reflect the roll-in of $64.0 million of IIP investments for the period July 2020 through June 2021. The BPU issued an Order in September 2021 approving the updated IIP rates effective October 1, 2021.

Hedge accounting has been discontinued for the remaining interest rate derivatives. As a result, unrealized gains and losses on these derivatives, that were previously recorded in AOCL on the consolidated balance sheets, are being recorded into earnings over the remaining life of the derivative.

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.

Level 3 valuation methods for natural gas derivative contracts include utilizing another location in close proximity adjusted for certain pipeline charges to derive a basis value. The significant unobservable inputs used in the fair value measurement of certain natural gas contracts consist of forward prices developed based on industry-standard methodologies. Significant increases (decreases) in these forward prices for purchases of natural gas would result in a directionally similar impact to the fair value measurement, and for sales of natural gas, would result in a directionally opposite impact to the fair value measurement. Level 3 valuation methods for electricity derivative contracts are not material. Unobservable inputs are updated daily using industry-standard techniques. Management reviews and corroborates the price quotations to ensure the prices are observable which includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration.

Market pricing risks are further discussed in Item 7A below.

We bill SJG and ETG customers at rates approved by the BPU.

The BPU allows the Utilities to recover gas costs in rates through the BGSS price structure. The Utilities defer over/under recoveries of gas costs and include them in subsequent adjustments to the BGSS rate. These adjustments result in over/under recoveries of gas costs being included in rates during future periods. As a result of these deferrals, utility revenue recognition does not directly translate to profitability. While the Utilities realize profits on gas sales during the month of providing the utility service, significant shifts in revenue recognition may result from the various recovery clauses approved by the BPU. This revenue recognition process does not shift earnings between periods, as these clauses only provide for cost recovery on a dollar-for-dollar basis (see Notes 10 and 11 to the consolidated financial statements).

The Utilities' unbilled revenue for natural gas is estimated each month based on: monthly deliveries into the system; unaccounted for natural gas based on historical results; customer-specific use factors, when available; actual temperatures during the period; and applicable customer rates.

The Utilities also have revenues that arise from alternative revenue programs, which are discussed in Note 19 to the consolidated financial statements.

For the Utilities, unrealized gains and losses on energy-related derivative instruments are recorded in Regulatory Assets or Regulatory Liabilities on the consolidated balance sheets of SJI and SJG until they become realized, in which case they are recognized in operating revenues.

SJE and SJRG customers are billed at rates negotiated between the parties.

SJRG's gas revenues are recognized in the period the commodity is delivered. Realized and unrealized gains and losses on energy-related derivative instruments are also recognized in operating revenues for SJRG. SJRG presents revenues and expenses related to its energy trading activities on a net basis in Operating Revenues - Nonutility in the statements of consolidated income. 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 AEP and EnerConnex energy procurement service contracts from a third party, 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.

instead is subject to impairment testing on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount.

The Company performs its annual goodwill impairment test as of October 1 of each fiscal year beginning with a qualitative assessment at the reporting unit level. The reporting unit level is identified by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available, whether segment management regularly reviews the operating results of those components and whether the economic and regulatory characteristics are similar. Factors utilized in the qualitative analysis performed on goodwill in our reporting units include, among other things, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, company specific operating results and other relevant entity-specific events affecting individual reporting units.

If sufficient qualitative factors exist, potential goodwill impairment is evaluated quantitatively by comparing the fair value of a reporting unit to the book value, including goodwill. For each reporting unit, the Company estimates the fair value of a reporting unit using a discounted cash flow analysis (an income approach) and, for certain reporting units, management also considers other methods, which include a market multiples analysis, and performs a weighted combination of the income approach and the market approach. Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include, but are not limited to, forecasts of future operating results, discount and growth rates, capital expenditures, tax rates, projected terminal values and, in the cases where market multiples analysis is utilized, implied market multiples for a selected group of peer companies.

In preparing the ETG goodwill impairment test, the fair value of the ETG reporting unit was calculated using a weighted combination of the income approach, which estimates fair value based on discounted cash flows, and the market approach, which estimates fair value based on market comparables within the utility and energy industries. Determining the fair value of the ETG reporting unit requires judgment and the use of significant estimates and assumptions as discussed above. Based on the analysis performed, the fair value of the ETG reporting unit closely approached, but exceeded, its carrying amount. Should economic conditions deteriorate in future periods or remain depressed for a prolonged period of time, estimates of future cash flows and market valuation assumptions may not be sufficient to support the carrying value, requiring impairment charges in the future.

Energenic has cogeneration, long-lived assets related to a project that is not operational. Marina has notes and related interest receivable related to Energenic; such notes are secured by these cogeneration assets for energy service projects.

As a result of the impairment charge taken by Energenic, Marina evaluated the realizability of its remaining recorded interests in Energenic, which include notes receivable and related accrued interest, and determined that these interests were no longer realizable above the amount of Marina's share in the fair market value of Energenic's cogeneration assets. As a result, we recognized an other-than-temporary impairment charge of $9.1 million. Of this amount, $6.4 million was recorded in Other Income and Expense related to the write off of interest accrued on the notes receivable (which decreased Accounts Receivable on the consolidated balance sheets), and $2.7 million was recorded in Equity in (Losses) Earnings of Affiliated Companies (which decreased Notes Receivable – Affiliate on the consolidated balance sheets).

For state income tax and other taxes, estimates and judgments are required with respect to the apportionment among the various jurisdictions. In addition, we operate within multiple tax jurisdictions and are subject to audits in these jurisdictions. The interpretation of tax laws involves uncertainty since tax authorities may interpret the laws differently. In addition, there is uncertainty with respect to possible outcomes of current and future tax audits. We maintain a liability for the estimate of potential income tax exposure. Any significant changes to the estimates and judgments with respect to the apportionment factor could result in a material change to our results of operations or cash flows.

SJI and SJG are mindful to the fact that the federal and state taxing authorities may make changes to the income tax laws. These changes may include but are not limited to changes in the tax rates and/or the treatment of certain items of income or expense. As a result, the Company may be required to re-measure its deferred tax assets and liabilities as of the date of enactment of such tax law changes. To the extent these tax law or rate changes occur, it could impact our results of operations and cash flows.

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

RATES AND REGULATION - The Utilities are subject to regulation by the BPU. Additionally, the Natural Gas Policy Act contains provisions for Federal regulation of certain aspects of the Utilities' business. The Utilities and SJRG are affected by Federal regulation with respect to transportation and pricing policies applicable to pipeline capacity from Transco, Columbia and Dominion, since such services are provided under rates and terms established under the jurisdiction of the FERC. The Utilities' retail sales are made under rate schedules within a tariff filed with, and subject to the jurisdiction of, the BPU. These rate schedules provide primarily for either block rates or demand/commodity rate structures. The Utilities' primary rate mechanisms include base rates, the BGSS, Accelerated Infrastructure Programs, EEP and the CIP.

The CIP is designed to eliminate the link between the Utilities' profits and the quantity of natural gas sold, and to foster conservation efforts. With the CIP, profits are tied to the number of customers served and how efficiently they are served, thus allowing focus on encouraging conservation and energy efficiency among its customers without negatively impacting net income.  The CIP tracking mechanism adjusts revenue based on weather, and also adjusts revenue when actual usage per customer experienced during an annual period varies from an established baseline usage per customer. 

For SJG, each CIP year begins October 1 and ends September 30 of the subsequent year. For ETG, each CIP year begins on July 1 and ends on June 30 of the subsequent year, with the first year effective July 1, 2021; prior to this date, ETG had in place a WNC which is discussed below.  On a monthly basis during a CIP year, the Utilities record adjustments to revenue based on weather and customer usage factors, as incurred.  Subsequent to each year, the Utilities make filings with the BPU to review and approve amounts recorded under the CIP.  BPU-approved cash inflows or outflows generally will not begin until the next CIP year and have no impact on revenue at that time.

Utility revenue is recognized during current periods based upon the application of the CIP. The cash impact of variations in customer usage will result in cash being collected from, or returned to, customers during the subsequent CIP year.

As part of the CIP, the Utilities are required to implement additional conservation programs, including customized customer communication and outreach efforts, targeted upgrade furnace efficiency packages, financing offers, and an outreach program to speak to local and state institutional constituents. They are also required to reduce gas supply and storage assets and their associated fees. Note that changes in fees associated with supply and storage assets have no effect on net income as these costs are passed through directly to customers on a dollar-for-dollar basis.

Earnings accrued and payments received under the CIP are limited to a level that will not cause SJG's return on equity to exceed 9.6% (excluding earnings from off-system gas sales and certain other tariff clauses) and ETG's return on equity to not exceed 9.6% (excluding earnings from certain sale transactions and certain other tariff clauses.) CIP recoveries are limited by the annualized savings attained from reducing gas supply and storage assets.

As a result of the WNC, ETG's net income was increased through May 2021 and for 2020 by $2.2 million and $10.2 million, respectively, primarily due to warmer than average weather for the applicable months during the respective winter periods. In 2019, WNC reduced ETG's net income by $5.9 million, primarily due to colder than average weather for the applicable months in the 2019 winter period.

See additional discussions on Rates and Regulatory Actions in Note 10 to the consolidated financial statements.

ENVIRONMENTAL REMEDIATION - See discussion concerning Environmental Remediation in Note 15 to the consolidated financial statements.

COMPETITION - The Utilities' franchises are non-exclusive. Currently, no other utility provides retail gas distribution services within the Utilities territories, and we do not expect any other utilities to do so in the foreseeable future because of the extensive investment required for utility plant and related costs. The Utilities compete with oil, propane and electricity suppliers for residential, commercial and industrial users, with alternative fuel source providers (wind, solar and fuel cells) based upon price, convenience and environmental factors, and with other marketers/brokers in the selling of wholesale natural gas services. The market for natural gas commodity sales is subject to competition due to deregulation. SJG's competitive position was enhanced while maintaining margins by using an unbundled tariff. This tariff allows full cost-of-service recovery when transporting gas for SJG's customers. Under this tariff, SJG profits from transporting, rather than selling, the commodity. SJG's residential, commercial and industrial customers can choose their supplier, while SJG recovers the cost of service through transportation service (See Customer Choice Legislation below).

SJRG competes in the wholesale natural gas market against a wide array of competitors on a cost competitive, term of service, and reliability basis. SJRG has been a reliable energy provider in this arena for more than 20 years.

Marina competes with other companies that develop and operate similar types of on-site energy production. Marina also faces competition from customers' preferences for alternative technologies for energy production, as well as those customers that address their energy needs internally.

For information on the changes in results of operations from 2020 compared to 2019, refer to the Management Discussion & Analysis section in Item 7 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2020.

Beginning with the first quarter of 2021, our internal management reporting, specifically around our nonutility businesses, changed primarily due to recent acquisitions, and new product lines entered into. These were primarily within the fuel cell, solar, RNG, and retail businesses. As a result of these changes in our businesses, the Company realigned its operating segments. The realigned 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:

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

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

We define Economic Earnings as: Income from Continuing Operations, (i) less the change in unrealized gains and plus the change in unrealized losses on non-utility derivative transactions; (ii) less income and plus losses attributable to noncontrolling interests; and (iii) less the impact of transactions, contractual arrangements or other events where management believes period to period comparisons of SJI's and SJG's operations could be difficult or potentially confusing. With respect to part (iii) of the definition of Economic Earnings, items excluded from Economic Earnings for 2021, 2020 and 2019 are described in (A)-(G) in the table below.

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

Economic Earnings for 2021 increased $15.1 million, or 9.2%, to $178.0 million compared to 2020. The significant drivers for the overall change were as follows (all numbers in the bullet points below are presented after-tax):

The following table presents a reconciliation of our income from continuing operations and earnings per share from continuing operations to Economic Earnings and Economic Earnings per share (in thousands, except per share data):

The following table presents a reconciliation of SJG's Income from Continuing Operations to Economic Earnings:

The effect of derivative instruments not designated as hedging instruments under GAAP in the statements of consolidated income (see Note 16 to the consolidated financial statements) is as follows (gains (losses) in thousands):

(A) Represents other-than-temporary impairment charges on the Company’s equity method investments in PennEast and Energenic, as well as an other-than-temporary impairment charge recognized by Marina related to the realizability of the outstanding notes receivable, including accrued interest, related to Energenic. See Note 3 to the consolidated financial statements.

(B) Represents impairment charges taken in 2019 on solar generating facilities along with the agreement to sell MTF and ACB, which were both driven by the expected purchase prices being less than the carrying value of the assets.

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

(D) Represents the following:

(E) For 2021, includes a gain recognized by ETG from a UTUA settlement agreement. For 2021, 2020 and 2019, represents severance and other employee separation costs, along with costs incurred to cease operations at landfill gas-to-energy production facilities, including ACLE in 2021.

(F) The income taxes on (A) through (E) above are determined using a combined average statutory tax rate applicable to each period presented.

(G) Represents additional tax adjustments, primarily including