AFFILIATIONS, DISCONTINUED OPERATIONS AND RELATED-PARTY TRANSACTIONS

12 Months Ended

Dec. 31, 2019

AFFILIATIONS, DISCONTINUED OPERATIONS AND RELATED-PARTY TRANSACTIONS

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. The following events have occurred with respect to PennEast in recent months:

•On September 10, 2019, the U.S. Court of Appeals for the Third Circuit ruled that PennEast does not have eminent domain authority over NJ state-owned lands. A Petition for Rehearing En Banc was denied by the U.S. Court of Appeals for the Third Circuit on November 5, 2019.

•On October 8, 2019, the NJDEP denied and closed PennEast’s application for several permits without prejudice, citing the Third Circuit Court decision. On October 11, 2019, PennEast submitted a letter to the NJDEP objecting to its

position that the application is administratively incomplete. PennEast's objections were rejected by the NJDEP on November 18, 2019.

•In December 2019, PennEast asked the FERC for a two-year extension to construct the pipeline.

•On January 30, 2020, the FERC voted to approve PennEast’s petition for a declaratory order and expedited action requesting that the body issue an order interpreting the Natural Gas Act’s eminent domain authority. On the same day, PennEast filed an amendment with FERC to construct PennEast in two phases. Phase one consists of construction of a pipeline in Pennsylvania from the eastern Marcellus Shale region in Luzerne County that would terminate in Northampton County. Phase two includes construction of the remaining original certificated route in Pennsylvania and New Jersey. Construction is expected to begin following approval by FERC of the phased approach and receipt of any remaining governmental and regulatory permits.

•On February 18, 2020, PennEast filed a Petition for a Writ of Certiorari with the Supreme Court of the United States to review the September 10, 2019 Third Circuit decision.

•On February 20, 2020, FERC granted PennEast’s request for a two-year extension to complete the construction of the pipeline.

PennEast management remains committed to pursuing the project and intends to pursue all available options. SJI, along with the other partners, are intending to contribute to the project.

Our investment in PennEast totaled $82.7 million as of December 31, 2019. As a result of the September decision by the U.S. Court of Appeals and continuing events, we evaluated our investment in the PennEast project for an other-than-temporary impairment. Our impairment assessment used a discounted cash flow income approach, including consideration of the severity and duration of any decline in fair value of our investment in the project. Our significant estimates and assumptions included development options and legal outcomes, construction costs, timing of in-service dates, revenues (including forecasted volumes and rates), and discount rates. At this time, we believe we do not have an other-than-temporary impairment and have not recorded any impairment charge to reduce the carrying value of our investment. Our evaluation considered that the pending legal proceedings are at very early stages, and the intent is to move forward with all potential legal proceedings and other options available. However, to the extent that the legal proceedings have unfavorable outcomes, or if PennEast concludes that the project is not viable or does not go forward as actions progress, our conclusions with respect to other-than-temporary impairment could change and may require that we recognize an impairment charge of up to our recorded investment in the project, net of any cash and working capital. We will continue to monitor and update this analysis as required. Different assumptions could affect the timing and amount of any charge recorded in a period.

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.

Potato Creek - SJI and a joint venture partner formed Potato Creek, in which SJI has a 30% equity interest. Potato Creek owns and manages the oil, gas and mineral rights of certain real estate in Pennsylvania.

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.

EnergyMark - SJE has a 33% investment in EnergyMark, an entity that acquires and markets natural gas to retail end users.

For the years ended December 31, 2019, 2018 and 2017, SJRG had net sales to EnergyMark of $27.8 million, $41.6 million and $37.5 million, respectively.

EnerConnex - SJEI has a 25% investment in EnerConnex, which is a retail and wholesale broker and consultant that matches end users with suppliers for the procurement of natural gas and electricity.

The Company made net investments in unconsolidated affiliates of $8.3 million, $6.6 million and $32.1 million in 2019, 2018 and 2017, respectively. As of December 31, 2019 and 2018, the outstanding balance of Notes Receivable – Affiliates was $18.1 million and $15.2 million, respectively. These Notes Receivable-Affiliates are broken out as follows:

•$13.1 million and $13.6 million, respectively, of notes are related to Energenic, which are secured by Energenic's cogeneration assets for energy service projects, accrue interest at 7.5% and are to be repaid through 2025. As of December 31, 2019 and 2018, $4.4 million and $3.4 million, respectively, of interest has been accrued and is recorded in Accounts Receivable on the consolidated balance sheets. No payments have been made on this note as of December 31, 2019.

•The remaining $5.0 million and $1.6 million of notes are unsecured and 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 December 31, 2019, the Company had a net asset of approximately $87.1 million included in Investment in Affiliates on the consolidated balance sheets related to equity method investees, in addition to Notes Receivable – Affiliates as discussed above. SJI’s maximum exposure to loss from these entities as of December 31, 2019 is limited to its combined equity contributions and the Notes Receivable-Affiliates in the aggregate amount of $105.2 million.

DISCONTINUED OPERATIONS - Discontinued Operations consist of the environmental remediation activities related to the properties of SJF and the product liability litigation and environmental remediation activities related to the prior business of Morie. SJF is a subsidiary of EMI, an SJI subsidiary, which previously operated a fuel oil business. Morie is the former sand mining and processing subsidiary of EMI. EMI sold the common stock of Morie in 1996.

SJI conducts tests annually to estimate the environmental remediation costs for these properties (see Note 15).

Summarized operating results of the discontinued operations for the years ended December 31, were (in thousands, except per share amounts):


	2019		2018		2017
Loss before Income Taxes:
Sand Mining	$	(79)	$	(118)	$	(84)
Fuel Oil	(263)		(184)		(175)
Income Tax Benefits	70		62		173
Loss from Discontinued Operations — Net	$	(272)	$	(240)	$	(86)
Earnings Per Common Share from
Discontinued Operations — Net:
Basic and Diluted	$	—	$	—	$	—

SJG RELATED-PARTY TRANSACTIONS - SJG conducts business with its parent, SJI, and several other related parties. A description of each of these affiliates and related transactions is as follows:

SJES - a wholly-owned subsidiary of SJI that serves as a holding company for all of SJI’s nonutility operating businesses:

•SJE - Prior to the sale of SJE's retail gas business (see Note 1), for SJE’s commercial customers for which SJG performed billing services, SJG purchased the related accounts receivable at book value and charged them a purchase of receivable fee for potential uncollectible accounts, and assumed all risk associated with collection.

•SJRG - SJG sells natural gas for resale and capacity release to SJRG and also meets some of SJG's gas purchasing requirements by purchasing natural gas from SJRG.

•Marina - SJG provides natural gas transportation services to Marina under BPU-approved tariffs.

•Millennium - Reads SJG's utility customers’ meters on a monthly basis for a fee.

Sales of gas to SJRG and SJE comply with Section 284.02 of the regulations of the FERC.

In addition to the above, SJG provides various administrative and professional services to SJI and each of the affiliates discussed above. Likewise, SJI provides substantial administrative services on SJG's behalf. For certain types of transactions, SJG served as central processing agents for the related parties discussed above. Amounts due to and due from these related parties for pass-through items are not considered material to SJG's financial statements as a whole.

A summary of related party transactions involving SJG, excluding pass-through items, included in SJG's Operating Revenues were as follows (in thousands):


	2019		2018		2017
Operating Revenues/Affiliates:
SJRG	$	5,039	$	5,813	$	4,458
Marina	394		379		314
Other	80		91		86
Total Operating Revenues/Affiliates	$	5,513	$	6,283	$	4,858

Related-party transactions involving SJG, excluding pass-through items, included in SJG's Cost of Sales and Operating Expenses were as follows (in thousands):


	2019		2018		2017
Costs of Sales/Affiliates (Excluding depreciation and amortization)
SJRG*	$	9,612	$	33,313	$	24,337




Operations Expense/Affiliates:
SJI	$	22,462	$	31,740	$	22,154
SJIU	1,833		—		—
Millennium	3,146		2,920		2,856
Other	1,680		(569)		(653)
Total Operations Expense/Affiliates	$	29,121	$	34,091	$	24,357

*These costs are included in either SJG's Cost of Sales on the statements of income, or Regulatory Assets on the balance sheets. As discussed in Note 1, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues - Nonutility on the statements of consolidated income.