LEASES

3 Months Ended

Mar. 31, 2020

Leases [Abstract]

LEASES

LEASES:SJI and SJG (collectively, the "Company" for purposes of Note 19) is a lessee for the following classes of underlying assets: equipment, real estate (land and building), and fleet vehicles. The Company evaluates its contracts for the purpose of determining whether it is, or contains, a lease at its inception based on whether or not the contract grants the Company the use of a specifically identified asset for a period of time, as well as whether the contract grants the Company both the right to direct the use of that asset and receive the significant economic benefits of the asset. SJI's and SJG's real estate leases, which are comprised primarily of office space and payment centers, represent approximately 86% and 49%, respectively, of operating lease liabilities and generally have a lease term between 5 and 15 years. The remaining operating leases primarily consist of fleet vehicles (SJI only), communication towers, and general office equipment, each with various lease terms ranging between 3 and 25 years. The majority of our leases are comprised of fixed lease payments, with a portion of the Company’s real estate, fleet vehicles, and office equipment leases including lease payments tied to levels of production, maintenance and property

taxes, which may be subject to variability. The Company does not have any finance leases. The Company also evaluates contracts in which it is the owner of an underlying asset in the same manner as if it is a lessee, to determine if it should be considered the lessor of that asset. As of March 31, 2020, SJI does not have any contracts where it is considered the lessor (see "MTF" below).

As a practical expedient permitted under Topic 842, the Company has elected to account for the lease and non-lease components as a single lease component for leases where it is a lessee. Lease payments, which may include lease components, non-lease components and non-components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable amounts that depend on a rate or index as stipulated in the lease contract. The Company discounts its lease liability using an estimated incremental borrowing rate computed based on its existing term loan facility adjusted for lease term. For new or modified leases, the discount rate is determined using available data at lease commencement (for new leases) or the modification date (modified leases), based on its collateralized incremental interest rate to borrow over the lease term, including any reasonably certain renewal periods.

Some of its lease agreements, primarily related to real estate, include Company options to either extend and/or early terminate the lease, the costs of which are included in our lease liability to the extent that such options are reasonably certain of being exercised. Leases with renewal options allow the Company to extend the lease term typically between 1 and 5 years. When determining the lease term, renewal options reasonably certain of being exercised are included in the lease term. When determining if a renewal option is reasonably certain of being exercised, the Company considers several economic factors, including the significance of leasehold improvements incurred on the property, whether the asset is difficult to replace, underlying contractual obligations, or specific characteristics unique to that particular lease that would make it reasonably certain that we would exercise such option. Renewal options were generally not included in the lease term for the Company’s existing leases. The Company does not generally enter into leases involving the construction or design of the underlying asset, and nearly all of the assets we lease are not specialized in nature. Our lease agreements generally do not include restrictions, financial covenants or residual value guarantees.

As of March 31, 2020 and December 31, 2019, SJI recognized right-of-use assets and lease liabilities of $2.0 million and $1.9 million each for operating leases, respectively. The lease liability is comprised of approximately $1.7 million of real estate leases, $0.2 million of equipment leases and $0.1 million of fleet vehicle leases as of March 31, 2020, and $1.5 million of real estate leases, $0.3 million of equipment leases and $0.1 million of fleet vehicle leases as of December 31, 2019.

As of both March 31, 2020 and December 31, 2019, SJG recognized right-of-use assets and lease liabilities of $0.3 million each for operating leases. As of both March 31, 2020 and December 31, 2019, the lease liability is comprised of approximately $0.2 million of equipment leases and $0.1 million of real estate leases.

SJI and SJG recorded the right-of-use assets in Other Noncurrent Assets and the lease liabilities in Other Current and Noncurrent Liabilities (as shown in the table below) on the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019.

The maturity of the Company’s operating lease liabilities as of March 31, 2020 is as follows (in thousands):

	As of March 31, 2020
	SJI Consolidated		SJG
2020 (excluding the three months ended March 31, 2020)	$	884	$	108
2021	508		39
2022	323		21
2023	166		19
2024	140		12
Thereafter	117		102
Total future minimum lease payments	2,138		301
Less imputed interest	108		31
Total lease payments	$	2,030	$	270
Included in the condensed consolidated balance sheet
Current lease liabilities (included in Other Current Liabilities)	$	961	$	113
Long-term lease liabilities (included in Other Noncurrent Liabilities)	1,069		157
Total lease liabilities	$	2,030	$	270

The total operating lease cost for SJI and SJG was $0.5 million and $0.1 million, respectively, during the three months ended March 31, 2020, and $0.8 million and $0.1 million, respectively, during the three months ended March 31, 2019. Short-term lease costs were immaterial for both SJI and SJG. Neither SJI nor SJG had any sublease income during the three months ended March 31, 2020 and 2019. Operating cash flows from operating leases for SJI and SJG were $0.4 million and $0.1 million, respectively, during both the three months ended March 31, 2020 and 2019.

Neither SJI nor SJG have leases with related parties or leverage lease arrangements. There are no leases that have not yet commenced but that create significant rights and obligations.

SJI had $0.1 million and $0.4 million of variable lease payments pertaining to leased back assets during the three months ended March 31, 2020 and 2019, respectively. As discussed in Note 1 under "Agreement to Sell Solar Assets," SJI has solar assets that are being leased back from the buyer; however these assets were leased back in 2018 and were treated as operating leases. As per the adoption of the "package of expedients" discussed in Note 1, SJI is not required to reassess under Topic 842 the Company’s prior conclusions about lease identification or classification.

Supplemental Non-Cash Disclosures

The weighted average remaining lease term for SJI's operating leases is 2.9 years at a weighted average discount rate of 3.0%.

The weighted average remaining lease term for SJG's operating leases is 7.7 years at a weighted average discount rate of 3.0%.

MTF

As of December 31, 2019, Marina was considered to be the lessor of certain thermal energy generating property and equipment under an operating lease which was set to expire in May 2027. As of December 31, 2019, the carrying costs of this property and equipment under operating lease was $68.9 million (net of accumulated depreciation of $40.6 million), and is included in Assets Held for Sale in the condensed consolidated balance sheets. As discussed in Note 1, MTF was sold to a third party buyer in February 2020, and as a result, Marina no longer is the lessor of this property, and no longer has future rentals or commitments.

LEASES

LEASES:SJI and SJG (collectively, the "Company" for purposes of Note 19) is a lessee for the following classes of underlying assets: equipment, real estate (land and building), and fleet vehicles. The Company evaluates its contracts for the purpose of determining whether it is, or contains, a lease at its inception based on whether or not the contract grants the Company the use of a specifically identified asset for a period of time, as well as whether the contract grants the Company both the right to direct the use of that asset and receive the significant economic benefits of the asset. SJI's and SJG's real estate leases, which are comprised primarily of office space and payment centers, represent approximately 86% and 49%, respectively, of operating lease liabilities and generally have a lease term between 5 and 15 years. The remaining operating leases primarily consist of fleet vehicles (SJI only), communication towers, and general office equipment, each with various lease terms ranging between 3 and 25 years. The majority of our leases are comprised of fixed lease payments, with a portion of the Company’s real estate, fleet vehicles, and office equipment leases including lease payments tied to levels of production, maintenance and property

taxes, which may be subject to variability. The Company does not have any finance leases. The Company also evaluates contracts in which it is the owner of an underlying asset in the same manner as if it is a lessee, to determine if it should be considered the lessor of that asset. As of March 31, 2020, SJI does not have any contracts where it is considered the lessor (see "MTF" below).

As a practical expedient permitted under Topic 842, the Company has elected to account for the lease and non-lease components as a single lease component for leases where it is a lessee. Lease payments, which may include lease components, non-lease components and non-components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable amounts that depend on a rate or index as stipulated in the lease contract. The Company discounts its lease liability using an estimated incremental borrowing rate computed based on its existing term loan facility adjusted for lease term. For new or modified leases, the discount rate is determined using available data at lease commencement (for new leases) or the modification date (modified leases), based on its collateralized incremental interest rate to borrow over the lease term, including any reasonably certain renewal periods.

Some of its lease agreements, primarily related to real estate, include Company options to either extend and/or early terminate the lease, the costs of which are included in our lease liability to the extent that such options are reasonably certain of being exercised. Leases with renewal options allow the Company to extend the lease term typically between 1 and 5 years. When determining the lease term, renewal options reasonably certain of being exercised are included in the lease term. When determining if a renewal option is reasonably certain of being exercised, the Company considers several economic factors, including the significance of leasehold improvements incurred on the property, whether the asset is difficult to replace, underlying contractual obligations, or specific characteristics unique to that particular lease that would make it reasonably certain that we would exercise such option. Renewal options were generally not included in the lease term for the Company’s existing leases. The Company does not generally enter into leases involving the construction or design of the underlying asset, and nearly all of the assets we lease are not specialized in nature. Our lease agreements generally do not include restrictions, financial covenants or residual value guarantees.

As of March 31, 2020 and December 31, 2019, SJI recognized right-of-use assets and lease liabilities of $2.0 million and $1.9 million each for operating leases, respectively. The lease liability is comprised of approximately $1.7 million of real estate leases, $0.2 million of equipment leases and $0.1 million of fleet vehicle leases as of March 31, 2020, and $1.5 million of real estate leases, $0.3 million of equipment leases and $0.1 million of fleet vehicle leases as of December 31, 2019.

As of both March 31, 2020 and December 31, 2019, SJG recognized right-of-use assets and lease liabilities of $0.3 million each for operating leases. As of both March 31, 2020 and December 31, 2019, the lease liability is comprised of approximately $0.2 million of equipment leases and $0.1 million of real estate leases.

SJI and SJG recorded the right-of-use assets in Other Noncurrent Assets and the lease liabilities in Other Current and Noncurrent Liabilities (as shown in the table below) on the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019.

The maturity of the Company’s operating lease liabilities as of March 31, 2020 is as follows (in thousands):

	As of March 31, 2020
	SJI Consolidated		SJG
2020 (excluding the three months ended March 31, 2020)	$	884	$	108
2021	508		39
2022	323		21
2023	166		19
2024	140		12
Thereafter	117		102
Total future minimum lease payments	2,138		301
Less imputed interest	108		31
Total lease payments	$	2,030	$	270
Included in the condensed consolidated balance sheet
Current lease liabilities (included in Other Current Liabilities)	$	961	$	113
Long-term lease liabilities (included in Other Noncurrent Liabilities)	1,069		157
Total lease liabilities	$	2,030	$	270

The total operating lease cost for SJI and SJG was $0.5 million and $0.1 million, respectively, during the three months ended March 31, 2020, and $0.8 million and $0.1 million, respectively, during the three months ended March 31, 2019. Short-term lease costs were immaterial for both SJI and SJG. Neither SJI nor SJG had any sublease income during the three months ended March 31, 2020 and 2019. Operating cash flows from operating leases for SJI and SJG were $0.4 million and $0.1 million, respectively, during both the three months ended March 31, 2020 and 2019.

Neither SJI nor SJG have leases with related parties or leverage lease arrangements. There are no leases that have not yet commenced but that create significant rights and obligations.

SJI had $0.1 million and $0.4 million of variable lease payments pertaining to leased back assets during the three months ended March 31, 2020 and 2019, respectively. As discussed in Note 1 under "Agreement to Sell Solar Assets," SJI has solar assets that are being leased back from the buyer; however these assets were leased back in 2018 and were treated as operating leases. As per the adoption of the "package of expedients" discussed in Note 1, SJI is not required to reassess under Topic 842 the Company’s prior conclusions about lease identification or classification.

Supplemental Non-Cash Disclosures

The weighted average remaining lease term for SJI's operating leases is 2.9 years at a weighted average discount rate of 3.0%.

The weighted average remaining lease term for SJG's operating leases is 7.7 years at a weighted average discount rate of 3.0%.

MTF

As of December 31, 2019, Marina was considered to be the lessor of certain thermal energy generating property and equipment under an operating lease which was set to expire in May 2027. As of December 31, 2019, the carrying costs of this property and equipment under operating lease was $68.9 million (net of accumulated depreciation of $40.6 million), and is included in Assets Held for Sale in the condensed consolidated balance sheets. As discussed in Note 1, MTF was sold to a third party buyer in February 2020, and as a result, Marina no longer is the lessor of this property, and no longer has future rentals or commitments.