AFFILIATIONS, DISCONTINUED OPERATIONS AND RELATED-PARTY TRANSACTIONS

9 Months Ended

Sep. 30, 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, which is planning to construct an approximately 118-mile natural gas pipeline that will extend from Northeastern Pennsylvania into New Jersey. 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. In October 2019, the New Jersey Department of Environmental Protection denied and closed PennEast’s application for several permits without prejudice, citing the Third Circuit Court decision. On November 5, 2019, the U.S. Court of Appeals for the Third Circuit denied PennEast's petition for rehearing en banc. PennEast management remains committed to pursuing the project and intends to pursue all available options to challenge the court’s decision. SJI, along with the other partners, are intending to contribute to the project.

Our investment in PennEast totaled $80.4 million as of September 30, 2019. As a result of the court decision, 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 key inputs involve significant management judgments and estimates, including projections of the project’s cash flows, selection of a discount rate and probability weighting of potential outcomes of legal proceedings. 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.

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 SJI 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 $3.4 million and $7.7 million for the three months ended September 30, 2019 and 2018, respectively, and $22.6 million and $29.0 million for the nine months ended September 30, 2019 and 2018, 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.

During the first nine months of 2019 and 2018, SJI made net investments in unconsolidated affiliates of $6.0 million and $8.2 million, respectively. As of September 30, 2019 and December 31, 2018, the outstanding balance of Notes Receivable – Affiliate was $17.1 million and $15.2 million, respectively. As of both September 30, 2019 and December 31, 2018, $13.6 million of these notes were secured by property, plant and equipment of the affiliates, accrue interest at 7.5% and are to be repaid through 2025. As of September 30, 2019 and December 31, 2018, the remaining $3.5 million and $1.6 million, respectively, of these 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 September 30, 2019, SJI had a net asset of approximately $84.2 million included in Investment in Affiliates on the condensed consolidated balance sheets related to equity method investees, in addition to Notes Receivable – Affiliate as discussed above. SJI’s maximum exposure to loss from these entities as of September 30, 2019, is limited to its combined investments in these entities and the Notes Receivable-Affiliate in the aggregate amount of $101.3 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 11).

Summarized operating results of the discontinued operations for the three and nine months ended September 30, 2019 and 2018, were (in thousands, except per share amounts):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Loss before Income Taxes:
Sand Mining	$	(16)	$	3	$	(60)	$	(30)
Fuel Oil	(59)		(57)		(212)		(139)
Income Tax Benefits	16		11		56		34
Loss from Discontinued Operations — Net	$	(59)	$	(43)	$	(216)	$	(135)
Earnings Per Common Share from
Discontinued Operations — Net:
Basic and Diluted	$	—	$	—	$	—	$	—

SJG RELATED-PARTY TRANSACTIONS - There have been no significant changes in the nature of SJG’s related-party transactions since December 31, 2018. See Note 3 to the Financial Statements in Item 8 of SJI's and SJG’s Form 10-K for the year ended December 31, 2018 for a detailed description of the related parties and their 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,
	2019		2018		2019		2018
Operating Revenues/Affiliates:
SJRG	$	1,092	$	691	$	3,518	$	4,388
Marina	82		89		290		281
Other	20		23		60		69
Total Operating Revenue/Affiliates	$	1,194	$	803	$	3,868	$	4,738

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,
	2019		2018		2019		2018
Costs of Sales/Affiliates (Excluding depreciation and amortization)
SJRG*	$	2,326	$	1,094	$	8,908	$	28,525

Operations Expense/Affiliates:
SJI	$	5,087	$	6,148	$	15,507	$	19,899
SJIU	630		—		1,971		—
Millennium	794		750		2,118		2,191
Other	340		(112)		6,790		(344)
Total Operations Expense/Affiliates	$	6,851	$	6,786	$	26,386	$	21,746

*These costs are included in either SJG's Cost of Sales on the condensed statements of income, or Regulatory Assets on the condensed balance sheets. As discussed in Note 1 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, 2018, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues – Nonutility on the condensed consolidated income statement.