LEASES

9 Months Ended

Sep. 30, 2019

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 determines if it is considered a lessee in an arrangement that qualifies as 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 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 64% and 38%, 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. SJI has one contract where it is considered the lessor, see "Thermal Facility" below; SJG is not considered the lessor of any assets.

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 all leases. 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. On January 1, 2019, the discount rate used on existing leases at adoption was determined using the remaining lease term and available data as of that date based on the Company's collateralized incremental interest rate to

borrow over a comparable term. For new or modified leases starting in 2019, the discount rate is determined using available data at lease commencement and is 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 stated in Note 1, SJI and SJG had $3.1 million and $0.5 million, respectively, of right-of-use assets upon adoption of Topic 842 on January 1, 2019, with lease liabilities of the same amount. As of September 30, 2019, SJI recognized right-of-use assets and lease liabilities of $1.9 million and $2.1 million, respectively, for operating leases, with the reduction being amortization. The lease liability is comprised of approximately $1.3 million of real estate leases, $0.7 million of equipment leases and $0.1 million of fleet vehicle leases. As of September 30, 2019, SJG recognized right-of-use assets and lease liabilities of $0.4 million each for operating leases, with the difference also being amortization. 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 September 30, 2019.

The maturity of the Company’s operating lease liabilities as of September 30, 2019 is as follows (in thousands):

	As of September 30, 2019
	SJI Consolidated		SJG
2019 (excluding the nine months ended September 30, 2019)	$	414	$	43
2020	1,075		150
2021	233		39
2022	65		21
2023	34		19
Thereafter	114		114
Total future minimum lease payments	1,935		386
Less imputed interest	64		32
Total lease payments	$	1,871	$	354
Included in the condensed consolidated balance sheet
Current lease liabilities (included in Other Current Liabilities)	$	1,326	$	166
Long-term lease liabilities (included in Other Noncurrent Liabilities)	545		188
Total lease liabilities	$	1,871	$	354

The total operating lease cost for SJI was $0.7 million and $2.3 million during the three and nine months ended September 30, 2019, respectively. The total operating lease cost for SJG was $0.1 million and $0.3 million during the three and nine months ended September 30, 2019, respectively. Short-term lease costs were immaterial for both SJI and SJG. Neither SJI nor SJG had any sublease income during the three and nine months ended September 30, 2019. Operating cash flows from operating leases for SJI were $0.4 million and $1.2 million during the three and nine months ended September 30, 2019, respectively. Operating cash flows from operating leases for SJG were $0.1 million and $0.3 million during the three and nine months ended September 30, 2019, respectively.

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 $0.3 million and $1.1 million of variable lease payments pertaining to leased back assets during the three and nine months ended September 30, 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 are treated as operating leases. As per 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.

The following summarizes our contractual obligations for operating leases and their applicable payment due dates, as of December 31, 2018 under ASC Topic 840, prior to the implementation of ASC 842:

	Total	Up to 1 year	Years 2&3	Years 4&5	More than 5 years
SJI Consolidated	1,885	838	916	131	—
SJG	175	56	112	7	—

Supplemental Non-Cash Disclosures

SJI and SJG did not record any new leases during the three and nine months ended September 30, 2019.

The weighted average remaining lease term for SJI's operating leases is 2.6 years at a weighted average discount rate of 3.0%.

The weighted average remaining lease term for SJG's operating leases is 6.9 years at a weighted average discount rate of 3.0%.

Thermal Facility

Marina is considered to be the lessor of certain thermal energy generating property and equipment under an operating lease which expires in May 2027. As of September 30, 2019 and December 31, 2018, the carrying costs of this property and equipment under operating lease was $69.1 million and $71.5 million, respectively (net of accumulated depreciation of $40.1 million and $37.7 million, respectively), and is included in Nonutility Property and Equipment in the condensed consolidated balance sheets.

Minimum future rentals to be received on this operating lease of property and equipment as of September 30, 2019 for the remainder of 2019 and each of the next five fiscal years and in the aggregate are (in thousands):

2019 (remaining three months)	$	1,349
2020	5,396
2021	5,396
2022	5,396
2023	5,396
2024	5,396
Thereafter	13,042
Total minimum future rentals	$	41,371

Minimum future rentals do not include additional amounts to be received based on actual use of the leased property.

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 determines if it is considered a lessee in an arrangement that qualifies as 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 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 64% and 38%, 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. SJI has one contract where it is considered the lessor, see "Thermal Facility" below; SJG is not considered the lessor of any assets.

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 all leases. 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. On January 1, 2019, the discount rate used on existing leases at adoption was determined using the remaining lease term and available data as of that date based on the Company's collateralized incremental interest rate to

borrow over a comparable term. For new or modified leases starting in 2019, the discount rate is determined using available data at lease commencement and is 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 stated in Note 1, SJI and SJG had $3.1 million and $0.5 million, respectively, of right-of-use assets upon adoption of Topic 842 on January 1, 2019, with lease liabilities of the same amount. As of September 30, 2019, SJI recognized right-of-use assets and lease liabilities of $1.9 million and $2.1 million, respectively, for operating leases, with the reduction being amortization. The lease liability is comprised of approximately $1.3 million of real estate leases, $0.7 million of equipment leases and $0.1 million of fleet vehicle leases. As of September 30, 2019, SJG recognized right-of-use assets and lease liabilities of $0.4 million each for operating leases, with the difference also being amortization. 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 September 30, 2019.

The maturity of the Company’s operating lease liabilities as of September 30, 2019 is as follows (in thousands):

	As of September 30, 2019
	SJI Consolidated		SJG
2019 (excluding the nine months ended September 30, 2019)	$	414	$	43
2020	1,075		150
2021	233		39
2022	65		21
2023	34		19
Thereafter	114		114
Total future minimum lease payments	1,935		386
Less imputed interest	64		32
Total lease payments	$	1,871	$	354
Included in the condensed consolidated balance sheet
Current lease liabilities (included in Other Current Liabilities)	$	1,326	$	166
Long-term lease liabilities (included in Other Noncurrent Liabilities)	545		188
Total lease liabilities	$	1,871	$	354

The total operating lease cost for SJI was $0.7 million and $2.3 million during the three and nine months ended September 30, 2019, respectively. The total operating lease cost for SJG was $0.1 million and $0.3 million during the three and nine months ended September 30, 2019, respectively. Short-term lease costs were immaterial for both SJI and SJG. Neither SJI nor SJG had any sublease income during the three and nine months ended September 30, 2019. Operating cash flows from operating leases for SJI were $0.4 million and $1.2 million during the three and nine months ended September 30, 2019, respectively. Operating cash flows from operating leases for SJG were $0.1 million and $0.3 million during the three and nine months ended September 30, 2019, respectively.

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 $0.3 million and $1.1 million of variable lease payments pertaining to leased back assets during the three and nine months ended September 30, 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 are treated as operating leases. As per 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.

The following summarizes our contractual obligations for operating leases and their applicable payment due dates, as of December 31, 2018 under ASC Topic 840, prior to the implementation of ASC 842:

	Total	Up to 1 year	Years 2&3	Years 4&5	More than 5 years
SJI Consolidated	1,885	838	916	131	—
SJG	175	56	112	7	—

Supplemental Non-Cash Disclosures

SJI and SJG did not record any new leases during the three and nine months ended September 30, 2019.

The weighted average remaining lease term for SJI's operating leases is 2.6 years at a weighted average discount rate of 3.0%.

The weighted average remaining lease term for SJG's operating leases is 6.9 years at a weighted average discount rate of 3.0%.

Thermal Facility

Marina is considered to be the lessor of certain thermal energy generating property and equipment under an operating lease which expires in May 2027. As of September 30, 2019 and December 31, 2018, the carrying costs of this property and equipment under operating lease was $69.1 million and $71.5 million, respectively (net of accumulated depreciation of $40.1 million and $37.7 million, respectively), and is included in Nonutility Property and Equipment in the condensed consolidated balance sheets.

Minimum future rentals to be received on this operating lease of property and equipment as of September 30, 2019 for the remainder of 2019 and each of the next five fiscal years and in the aggregate are (in thousands):

2019 (remaining three months)	$	1,349
2020	5,396
2021	5,396
2022	5,396
2023	5,396
2024	5,396
Thereafter	13,042
Total minimum future rentals	$	41,371

Minimum future rentals do not include additional amounts to be received based on actual use of the leased property.