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LEASES

12 Months Ended

Sep. 30, 2021

14. LEASES

Lessee Accounting

The Company determines if an arrangement is a lease at inception based on whether the Company has the right to control the use of an identified asset, the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset and accounts for leases in accordance with ASC 842, Leases. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term, including payments at commencement that depend on an index or rate. Most leases in which the Company is the lessee do not have a readily determinable implicit rate, so an incremental borrowing rate, based on the information available at the lease commencement date, is utilized to determine the present value of lease payments. When a secured borrowing rate is not readily available, unsecured borrowing rates are adjusted for the effects of collateral to determine the incremental borrowing rate. The Company uses the implicit rate for agreements in which it is a lessor. The Company has not entered into any material agreements in which it is a lessor. Lease expense and lease income are recognized on a straight-line basis over the lease term for operating leases.

The Company’s lease agreements primarily consist of commercial solar land leases, storage and capacity leases, equipment and real property, including land and office facilities, office equipment and the sale leaseback of its natural gas meters.

Certain leases contain escalation provisions for inflation metrics. The storage leases contain a variable payment component that relates to the change in the inflation metrics that are not known past the current payment period. The variable components of these lease payments are excluded from the lease payments that are used to determine the related right-of-use lease asset and liability. The variable portion of these leases are recognized as leasing expenses when they are incurred. The capacity lease payments are fully variable and based on the amount of natural gas stored in the storage caverns.

Generally, the Company’s solar land lease terms are between 15 and 35 years and may include multiple options to extend the terms for an additional five to ten years. The Company’s office leases vary in duration, ranging from one to 17 years and may or may not include extension or early purchase options. The Company’s meter lease terms are between seven and ten years with purchase options available prior to the end of the term. Equipment leases include general office equipment that also vary in duration, most of which are for a term of five years. The Company's storage and capacity leases have assumed terms of 50 years to coincide with the expected useful lives of the cavern assets with which the leases are associated. The Company's lease terms may include options to extend, purchase the leased asset or terminate a lease and they are included in the lease liability calculation when it is reasonably certain that those options will be exercised. The Company has elected an accounting policy that exempts leases with an original term of one year or less from the recognition requirements of ASC 842, Leases.

The Company has lease agreements with lease and non-lease components and has elected the practical expedient to combine lease and non-lease components for certain classes of leases, such as office buildings, solar land leases and office equipment. Variable payments are not considered material to the Company. The Company’s lease agreements do not contain any material residual value guarantees, material restrictions or material covenants. There are no material lease transactions with related parties.

The following table presents the Company's lease costs included in the Consolidated Statements of Operations for the fiscal year ended September 30:


(Thousands)	Income Statement Location	2021		2020
Operating lease cost (1)	Operation and maintenance	$	8,182	$	6,404
Finance lease cost
Amortization of right-of-use assets	Depreciation and amortization	3,442		5,007
Interest on lease liabilities	Interest expense, net of capitalized interest	710		1,511
Total finance lease cost		$	4,152	$	6,518
Short-term lease cost	Operation and maintenance	543		1,041
Variable lease cost	Operation and maintenance	1,381		1,025
Total lease cost		$	14,258	$	14,988

(1)Net of capitalized costs.

The following table presents supplemental cash flow information related to leases for the fiscal year ended September 30:


(Thousands)	2021		2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for operating leases	$	6,675	$	8,804
Operating cash flows for finance leases	$	1,167	$	1,189
Financing cash flows for finance leases	$	8,180	$	6,985

Assets obtained or modified for operating lease liabilities totaled approximately $46.1 million and $76.6 million during fiscal 2021 and 2020, respectively. There were no assets obtained or modified through finance lease liabilities during fiscal 2021. Assets obtained or modified through finance lease liabilities totaled approximately $49.7 million during fiscal 2020.

The following table presents the balance and classifications of the Company’s right of use assets and lease liabilities included in the Consolidated Balance Sheets for the fiscal year ended September 30:


(Thousands)	Balance Sheet Location	2021		2020
Assets
Noncurrent
Operating lease assets	Operating lease assets	$	173,928	$	131,769
Finance lease assets	Utility plant	13,489		71,085
Total lease assets		$	187,417	$	202,854
Liabilities
Current
Operating lease liabilities	Operating lease liabilities	$	4,300	$	6,724
Finance lease liabilities	Current maturities of long-term debt	5,393		10,416
Noncurrent
Operating lease liabilities	Operating lease liabilities	141,363		95,030
Finance lease liabilities	Long-term debt	14,742		63,743
Total lease liabilities		$	165,798	$	175,913

NJNG was a lessee as part of a lease agreement for its headquarters building with a 16-year term that would have expired in June 2037. On May 26, 2021, NJNG exercised a purchase option of the lease to acquire the building for $41.1 million, which is included in utility plant on the Consolidated Balance Sheets. Following the purchase of the building, NJNG removed the present value of the future lease payments of $46.9 million, which was reflected within utility plant and $45.6 million as presented within finance lease liabilities on the Consolidated Balance Sheets.

For operating lease assets and liabilities, the weighted average remaining lease term was 29.6 years and 25.5 years and the weighted average discount rate used in the valuation over the remaining lease term was 3.2 percent for both September 30, 2021 and 2020. For finance lease assets and liabilities as of September 30, 2021 and 2020, the weighted average remaining lease term was 3.4 years and 11.5 years, respectively, and the weighted average discount rate used in the valuation over the remaining lease term is 3.5 percent and 2.5 percent as of September 30, 2021 and 2020, respectively.

The following table presents the Company's maturities of lease liabilities as of September 30, 2021:


(Thousands)	Operating Leases		Finance Leases
2022	$	7,564	$	6,004
2023	8,022		4,622
2024	7,667		5,279
2025	7,127		3,396
2026	7,034		2,324
Thereafter	196,471		—
Total future lease payments	233,885		21,625
Less: Liability accretion	(88,222)		(1,490)

Total lease liability	$	145,663	$	20,135

On August 14, 2020, the Company entered into a partial termination agreement of its lease contracts associated with its natural gas cavern storage. As a result of the partial termination, the Company paid $28.5 million to the lease owners receiving in return a 50 year non-compete agreement. The Company treated these Leaf River lease arrangements as one combined contract and its termination was recognized as remeasurement of the remaining lease assets that will be amortized over the remaining part of the lease lives.

LEASES