South Jersey Gas Misled Investors And Regulators – Murphy Attorney General Grewal Urged To Investigate

SJG Investor Briefing Based On Exaggerated Representations & Material Omissions

SJG Repeated The Lie That BPU “Ordered” Them To Build Pinelands Pipeline

SJG’s report contained “forward-looking statements” within the meaning of United States (U.S.) federal securities laws.

“there may be massive securities fraud here.”

When do “overly optimistic projections” become fraud?

“The corrupt system is going to kill us all unless we rise up” ~~~  Roger Hallam, quoted by Chris Hedges

At the end of my previous post on the current fiasco on the Pinelands Commission, I raised a question, based on the remarks to the Commission by activist Agnes Marsala (People Over Pipelines) (emphasis in original):

[Agnes] claimed that SJG favorably advised investors of their intent to proceed AFTER the meeting with Wittenberg. That is an incredible situation that warrants investigation.

Agnes has since sent me and I had a chance to read the November 7, 2019 South Jersey Gas investors briefing she alluded to, see:

• South Jersey Industries Inc (SJI) Q3 2019 Earnings Call Transcript

Before highlighting the facts and issues on South Jersey Gas (SJG), let me set the context.

I) NY State Exxon Lawsuit

The New York State Attorney General is suing Exxon for misleading investors and the public about climate change and how it impacts the financial health of the firm.

The NY Times reports: (emphases mine)

The case turns on the claim that Exxon kept a secret set of financial books that seriously underestimated the costs of potential climate change regulation while claiming publicly that it was taking such factors into account.

South Jersey Gas faces similar issues with respect to their investments in the proposed PennEast and Pinelands pipelines.

Again, a prior story in the NY Times framed those issues:

For example, he said, the investigation is scrutinizing a 2014 reportby Exxon Mobil stating that global efforts to address climate change would not mean that it had to leave enormous amounts of oil reserves in the ground as so-called “stranded assets.”

But many scientists have suggested that if the world were to burn even just a portion of the oil in the ground that the industry declares on its books, the planet would heat up to such dangerous levels that “there’s no one left to burn the rest,” Mr. Schneiderman said.

By that logic, Exxon Mobil will have to leave much of its oil in the ground, which means the company’s valuation of its reserves is off by a significant amount.

“If, collectively, the fossil fuel companies are overstating their assets by trillions of dollars, that’s a big deal,” Mr. Schneiderman said. And if the company’s own internal research shows that Exxon Mobil knows better, he added, “there may be massive securities fraud here.”

Since the Exxon lawsuit was filed, the science has become far more urgent, with most recently 11,000 climate scientists issuing a statement warning of “untold suffering”.

Similarly, political events are ramping up dramatically, with non-violent direct action protests worldwide by Extinction Rebellion and here in US by the Sunrise Movement, while Bernie Sanders’ Green New Deal Plan driving the 2020 Presidential debate.

II)  SJG Fails to Disclose That It Faces Existential Threats By Federal Courts and NJ Regulators

There are several significant developments that impact the fundamental economics and risks facing South Jersey Gas, none of which were disclosed by SJG to investors:

1. South Jersey Gas is faced with the termination of the Pinelands pipeline by the Pinelands Commission.

2. Required NJ DEP regulatory approvals and construction of their PennEast pipeline has been blocked by the federal courts and construction is opposed the the Murphy Administration’s Attorney General.

Accordingly, SJG investments in the development of those pipelines – over $80 million – is threatened, as are the multimillion dollar revenue stream, income and profits SJG expected from those pipelines.

3. Additionally, the NJ legislature recently enacted new laws designed to reduce the use and demand for among other things, natural gas through both direct demand reduction (fuel switching from fossil gas to renewable sources) and energy conservation.

4. The Murphy administration has committed to an energy policy of a transition to 100% renewable energy, thereby literally putting SJG out of business.

5. The Murphy Board of Public Utilities will soon adopt a new Energy Master Plan (EMP) that will dramatically revise the Christie Administration’s pro-gas policies.

New BPU EMP policies and regulations may include a moratorium on new pipeline construction, phase out of existing pipelines and power plants, a significant new “Social Cost of Carbon” assessment – or “shadow price” – on fossil fuels, reduction in BPU approved recoveries or SJG profits on fossil investments, closure of prior revenue loopholes (e.g. SBC & RGGI exemptions) and elimination of incentives and subsidies for fossil gas, and replacement of existing heating, cooling, and other building equipment and uses of natural gas.

Such policies would dramatically increase the cost and reduce the demand for natural gas and thereby radically reduce SJG’s projected anticipated revenues and the value of their capital infrastructure and fossil investment portfolio.

[And SJG no longer has their lobbyist Richard Mroz as President of the BPU.]

6. Should NY State prevail in the Exxon lawsuit, SJG could be subject to new financial accounting rules that radically alter the fundamental economics of fossil energy, the value of the firm, and establish new contingent liabilities and stranded assets.

III) Compounding Omissions of Material Facts, SJG “Rosy Scenario” Misleads Investors

However, the SJG November 7, 2019 investors briefing failed to mention any of these major legislative, regulatory, public policy, and BPU planning initiatives and the implications of the Exxon lawsuit.

Just the opposite: SJG presented a rosy scenario: they claimed increases in demand for natural gas and said revenue and risk were consistent with expectations.

Here is the opening statement by Mike Renna — President and Chief Executive Officer:

 I am pleased to report that our third quarter results were in line with our expectations. … We are encouraged by the continued strong demand for natural gas across the different regions we serve. … On the regulatory front as you know we have been busy this year planning and executing several important long-term initiatives for Elizabethtown…. Last on the financial front the sale of our noncore assets over the past year as well as our refinancing activities is steadily improving our balance sheet…. Throughout 2019 we’ve been focused on building a foundation of solid regulated performance. We are pleased with our progress and encouraged by the strong demand we continue to see for natural gas.

Of course, you remember the Renna affair.

By failing to note highly relevant and material facts on legal, regulatory and public policy and how they impact risks, liabilities and financial performance of SJG fossil investments – while instead exaggerating exactly the opposite allegedly favorable developments – SJG misled investors.

A vague allusion that investors review SEC filings, in this context, is totally inadequate and will not cover SJG’s asses (sic) and full disclosure responsibilities!

IV) SJG Misled Pinelands Commission Regulators

SJG also misled NJ regulators.

Specifically, Pinelands Commission Executive Director Nancy Wittenberg summarized a meeting between SJG and Commission staff at the Commissions’ November 9, 2019 Commission meting.

According to Wittenberg, among other things, SJG advised the staff that they were still interested in constructing the pipeline and that BPU had “ordered” then to construct the pipeline. 

This repeats a lie SJG told during the Pinelands Commission’s initial review of the proposed pipeline.

BPU has not “ordered” – as in “mandated” – that SJG construct the Pinelands pipeline. BPU approvals come in the form of a “Order” by the Board. That is BPU standard operating procedure. That BPU “Order” approving SJG pipeline is not the legal equivalent of a mandate that they construct it.

Accordingly, SJG also misled regulators at the Pinelands Commission.

There are similar issues raised by the PennEast pipeline that I have not mentioned here.

Via this post, I am calling on NJ Attorney General Great to conduct an investigation into the issues, along the lines of the NY State Exxon lawsuit.

I will back this up with a letter to AG Grewal – forthcoming.

In the interim, I urge the many securities experts and corporate lawyers out there who are far more familiar with and competent to advocate these issues to join my efforts and reach out to AG Grewal.

Of course, I’d be glad to do so for them on an anonymous basis – just drop me an email.