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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended
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Sep. 30, 2020
Accounting Policies [Abstract] |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Other financial investments or contractual interests that lack the characteristics of a voting interest entity, which are commonly referred to as variable interest entities, are evaluated by the Company to determine if the entity has the power to direct business activities and, therefore, would be considered a controlling interest that the Company would have to consolidate. Based on those evaluations, NJR has determined that it does not have any investments in variable interest entities as of September 30, 2020, 2019 and 2018. Investments in entities over which the Company does not have a controlling financial interest are either accounted for under the equity method or cost method of accounting. Use of Estimates The preparation of financial statements in conformity with GAAP requires the Company to make estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingencies during the reporting period. On a quarterly basis or more frequently whenever events or changes in circumstances indicate a need, the Company evaluates its estimates, including those related to the calculation of the fair value of derivative instruments, debt, equity method investments, unbilled revenues, allowance for doubtful accounts, provisions for depreciation and amortization, long-lived assets, regulatory assets and liabilities, income taxes, pensions and other postemployment benefits, contingencies related to environmental matters and litigation. ARO are evaluated as often as needed. The Company’s estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The Company has legal, regulatory and environmental proceedings during the normal course of business that can result in loss contingencies. When evaluating the potential for a loss, a reserve is established if a loss is probable and can be reasonably estimated. Where the information is sufficient only to establish a range of probable liability, and no point within the range is more likely than any other, a reserve is established at the lower end of the range. In the normal course of business, estimated amounts are subsequently adjusted to actual results that may differ from estimates. In March 2020, COVID-19 was declared a pandemic by the World Health Organization and the Centers for Disease Control and Prevention and has spread globally, including throughout the U.S.. The Company’s Consolidated Financial Statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities at the balance sheet date and reported amounts of revenue and expenses during the reporting periods presented. The Company considered the impacts of COVID-19 on the assumptions and estimates used and determined that there have been no material adverse impacts on the Company’s results of operations as of September 30, 2020. Acquisitions The Company follows the guidance in ASC 805, Business Combinations, for determining the appropriate accounting treatment for acquisitions. ASU No. 2017-01, Clarifying the Definition of a Business, provides an initial fair value screen to determine if substantially all of the fair value of the assets acquired is concentrated in a single asset or group of similar assets. If the initial screening test is not met, the set is considered a business based on whether there are inputs and substantive processes in place. Based on the results of this analysis and conclusion on an acquisition’s classification of a business combination or an asset acquisition, the accounting treatment is derived. If the acquisition is deemed to be a business, the acquisition method of accounting is applied. Identifiable assets acquired and liabilities assumed at the acquisition date are recorded at fair value. If the transaction is deemed to be an asset purchase, the cost accumulation and allocation model is used whereby the assets and liabilities are recorded based on the purchase price and allocated to the individual assets and liabilities based on relative fair values. The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed are based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates and the number of years on which to base the cash flow projections, as well as other assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates based on the risk inherent in the acquired assets and related cash flows. The valuation of an acquired business is based on available information at the acquisition date and assumptions that are believed to be reasonable. However, a change in facts and circumstances as of the acquisition date can result in subsequent adjustments during the measurement period, but no later than one year from the acquisition date. See Note 19. Acquisitions and Dispositions for further information. Revenues Revenues from the sale of natural gas to NJNG customers are recognized in the period that natural gas is delivered and consumed by customers, including an estimate for unbilled revenue. Natural gas sales to individual customers are based on meter readings, which are performed on a systematic basis throughout the month. At the end of each month, the amount of natural gas delivered to each customer after the last meter reading through the end of the respective accounting period is estimated, and recognizes unbilled revenues related to these amounts. The unbilled revenue estimates are based on estimated customer usage by customer type, weather effects, unaccounted-for natural gas and the most current tariff rates. Clean Energy Ventures recognizes revenue for SRECs when transferred to counterparties. SRECs are physically delivered through the transfer of certificates as per contractual settlement schedules. The Clean Energy Act of 2018 established guidelines for the closure of the SREC registration program to new applicants in New Jersey. The SREC program officially closed to new qualified solar projects on April 30, 2020. In December 2019, the BPU established the TREC as the successor to the SREC program. TRECs provide a fixed compensation base multiplied by an assigned project factor in order to determine their value. The project factor is determined by the type and location of the project, as defined. All TRECs generated are required to be purchased monthly by a TREC program administrator as appointed by the BPU. In June 2020, Clean Energy Ventures began generating TRECs for qualified new residential and commercial solar projects placed into service following the close of the SREC program. TREC revenue is recognized when generated and transferred monthly based upon metered solar electricity activity. Revenues for Energy Services are recognized when the natural gas is physically delivered to the customer. In addition, changes in the fair value of derivatives that economically hedge the forecasted sales of the natural gas are recognized in operating revenues as they occur, as noted above. Energy Services also recognizes changes in the fair value of SREC derivative contracts as a component of operating revenues. Our Storage and Transportation segment generates revenues from firm storage contracts and transportation contracts, related usage fees and hub services for the use of storage space, injections and withdrawals from their natural gas storage facility and the delivery of natural gas to customers. Demand fees are recognized as revenue over the term of the related agreement while usage fees and hub services revenues are recognized as services are performed. Revenues from all other activities are recorded in the period during which products or services are delivered and accepted by customers, or over the related contractual term. See Note 3. Revenue for further information. Natural Gas Purchases NJNG’s tariff includes a component for BGSS, which is designed to allow it to recover the cost of natural gas through rates charged to its customers and is typically revised on an annual basis. As part of computing its BGSS rate, NJNG projects its cost of natural gas, net of supplier refunds, the impact of hedging activities and cost savings created by BGSS incentive programs. NJNG subsequently recovers or credits the difference, if any, of actual costs compared with those included in current rates. Any underrecoveries or overrecoveries are either credited to customers or deferred and, subject to BPU approval, reflected in the BGSS rates in subsequent years. Natural gas purchases at Energy Services are composed of natural gas costs to be paid upon completion of a variety of transactions, as well as realized gains and losses from settled derivative instruments and unrealized gains and losses on the change in fair value of derivative instruments that have not yet settled. Changes in the fair value of derivatives that economically hedge the forecasted purchases of natural gas are recognized in natural gas purchases as they occur. Demand Fees For the purpose of securing storage and pipeline capacity in support of their respective businesses, the Energy Services and Natural Gas Distribution segments enter into storage and pipeline capacity contracts, which require the payment of associated demand fees and charges that allow them access to a high priority of service in order to maintain the ability to access storage or pipeline capacity during a fixed time period, which generally ranges from one to 10 years. Many of these demand fees and charges are based on established tariff rates as established and regulated by FERC. These charges represent commitments to pay storage providers and pipeline companies for the priority right to transport and/or store natural gas utilizing their respective assets. The following table summarizes the demand charges, which are net of capacity releases, and are included as a component of natural gas purchases on the Consolidated Statements of Operations for the fiscal years ended September 30:
(Millions) | 2020 | 2019 | 2018
Energy Services | $ | 121.8 |  | $ | 120.4 |  | $ | 153.0 |
Natural Gas Distribution | 131.9 |  | 119.1 |  | 92.5 |
Total | $ | 253.7 |  | $ | 239.5 |  | $ | 245.5 |
Energy Services expenses demand charges over the term of the service being provided. The Natural Gas Distribution segment’s costs associated with demand charges are included in its weighted average cost of natural gas. The demand charges are expensed based on NJNG’s BGSS sales and recovered as part of its natural gas commodity component of its BGSS tariff. Operations and Maintenance Expenses Operations and maintenance expenses include operations and maintenance salaries and benefits, materials and supplies, usage of vehicles, tools and equipment, payments to contractors, utility plant maintenance, amortization of software costs for unregulated entities, customer service, professional fees and other outside services, insurance expense, accretion of cost of removal for future retirements of utility assets and other administrative expenses and are expensed as incurred. Stock-Based Compensation Stock-based compensation represents costs related to stock-based awards granted to employees and members of NJR’s Board of Directors. NJR recognizes stock-based compensation based upon the estimated fair value of awards. The recognition period for these costs begins at either the applicable service inception date or grant date and continues throughout the requisite service period. The related compensation cost is recognized as O&M expense on the Consolidated Statements of Operations. See Note 10. Stock-Based Compensation for further information. Sales Tax Accounting As a result of the adoption of ASC 606, Revenue from Contracts with Customers, as of October 1, 2018, the Company excludes from the transaction price all sales taxes that are assessed by a governmental authority and therefore presents sales tax on a net basis in operating revenues on the Consolidated Statements of Operations. Prior to October 1, 2018, sales tax was presented in both operating revenues and operating expenses. Income Taxes The Company computes income taxes using the asset and liability method, whereby deferred income taxes are generally determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. See Note 13. Income Taxes. In addition, the Company evaluates its tax positions to determine the appropriate accounting and recognition of future obligations associated with unrecognized tax benefits. The Company invests in property that qualifies for federal ITCs and utilizes the ITCs, as allowed, based on the cost and life of the assets. ITCs at NJNG are deferred and amortized as a reduction to the tax provision over the average lives of the related equipment in accordance with regulatory treatment. ITCs at the unregulated subsidiaries of NJR are recognized as a reduction to the carrying value of the related asset when placed in service. ITCs are recognized in earnings as a reduction to depreciation expense over the productive life of the related property. Projects placed in service through December 31, 2019, qualified for a 30-percent federal ITC. The credit declines to 26 percent for property under construction during 2020, 22 percent for property under construction during 2021 and 10 percent for any property that is under construction before 2022. The Company has taken steps to preserve the ITC at the higher rate for certain solar projects that are completed after the scheduled reduction in rates, in accordance with IRS guidance on safe harbor determination. Investments in Equity Investees The Company accounts for its investments in Steckman Ridge and PennEast using the equity method of accounting where it is not the primary beneficiary, as defined under ASC 810, Consolidation, its respective ownership interests are 50 percent or less and/or it has significant influence over operating and management decisions. The Company’s share of earnings is recognized as equity in earnings of affiliates on the Consolidated Statements of Operations. Equity method investments are reviewed for impairment when changes in facts and circumstances indicate that the current fair value may be less than the asset’s carrying amount. If the Company determines the decline in the value of its equity method investment is other than temporary, an impairment charge is recorded in an amount equal to the excess of the carrying value of the asset over its fair value. Property Plant and Equipment Property, plant and equipment is stated at original cost. Costs include direct labor, materials and third-party construction contractor costs, capitalized interest and certain indirect costs related to equipment and employees engaged in construction. Utility plant and nonutility plant for Adelphia Gateway also includes AFUDC. Upon retirement, the cost of depreciable property, plus removal costs less salvage, is charged to accumulated depreciation with no gain or loss recorded. Depreciation is computed on a straight-line basis over the useful life of the assets for our nonutility entities, and using rates based on the estimated average lives of the various classes of depreciable property for NJNG. The composite rate of depreciation used for NJNG was 2.65 percent of average depreciable property in fiscal 2020, 2.25 percent in fiscal 2019 and 2.29 percent in fiscal 2018. The Company recorded $107.4 million, $81.1 million and $76.6 million in depreciation expense during fiscal 2020, 2019 and 2018, respectively. During fiscal 2018 and 2019, the estimated useful lives of commercial solar assets ranged from 15 to 25 years. During the fourth quarter of fiscal 2020, the Company reassessed the estimated useful lives of its commercial solar asset fleet. Based upon this review, the Company concluded that the actual lives of certain commercial solar assets were longer than the estimated useful lives used for depreciation purposes. As a result, effective July 1, 2020, the Company changed its estimates of the useful lives of its solar assets to a range of 15 to 35 years. The effects of this change were considered immaterial to the Consolidated Financial Statements. Property, plant and equipment was comprised of the following as of September 30:
(Thousands) | Estimated |  |  |
Property Classifications | Estimated Useful Lives |  | 2020 | 2019
Distribution facilities | 38 to 74 years |  | $ | 2,688,885 |  | $ | 2,419,381 |
Transmission facilities | 35 to 56 years |  | 332,947 |  | 330,912 |
Storage facilities | 34 to 47 years |  | 79,922 |  | 79,916 |
Solar property | 15 to 35 years |  | 674,930 |  | 593,867 |
Storage and transportation property | 5 to 50 years |  | 428,491 |  | 28,445 |
All other property | 5 to 35 years |  | 259,791 |  | 48,886 |
Total property, plant and equipment |  |  | 4,464,966 |  | 3,501,407 |
Accumulated depreciation and amortization |  |  | (742,197) |  | (691,774) |
Property, plant and equipment, net |  |  | $ | 3,722,769 |  | $ | 2,809,633 |
Within storage and transportation property, base gas is required to maintain the necessary pressure and to allow for efficient operation of the Leaf River storage facility. The base gas is determined to be recoverable and is considered part of the facility and thus presented as a component in property, plant and equipment. This natural gas is not depreciated, as it is expected to be recovered and sold. As of September 30, 2020, the base gas had a cost basis of $5.7 million. Capitalized and Deferred Interest NJNG’s base rates include the ability to recover AFUDC on its construction work in progress. For all NJNG construction projects, an incremental cost of equity is recoverable during periods when NJNG’s short-term debt balances are lower than its construction work in progress. For more information on AFUDC treatment with respect to certain accelerated infrastructure projects, see Note 4. Regulation - Infrastructure Programs. Capitalized amounts associated with the debt and equity components of NJNG’s AFUDC are recorded in utility plant on the Consolidated Balance Sheets. Corresponding amounts for the debt component are recognized in interest expense and in other income for the equity component on the Consolidated Statements of Operations. Adelphia Gateway’s base rates include the ability to recover AFUDC on its construction work in progress. Beginning in the fourth quarter of fiscal 2020, capitalized amounts associated with Adelphia Gateway’s AFUDC are recorded in nonutility plant on the Consolidated Balance Sheets. Corresponding amounts are recorded in other income on the Consolidated Statements of Operations. Capitalized and deferred interest include the following for the fiscal years ended September 30:
($ in thousands) | 2020 | 2019 | 2018
| NJNG | Adelphia Gateway | NJNG | NJNG
AFUDC: |  |  |  |
Debt | $ | 5,134 |  | $ | 1,394 |  | $ | 3,710 |  | $ | 1,979 |
Equity | 14,599 |  | 2,454 |  | 6,492 |  | 5,531 |
Total | $ | 19,733 |  | $ | 3,848 |  | $ | 10,202 |  | $ | 7,510 |
Weighted average interest rate | 6.79 | % | 8.28 | % | 6.35 | % | 5.94 | %
Pursuant to a BPU order, NJNG is permitted to recover carrying costs on uncollected balances related to SBC program costs, which include NJCEP, RAC and USF expenditures. The SBC interest rate changes each September based on the August 31 seven-year constant maturity treasury rate plus 60 basis points. The rate was 1.97 percent, 3.30 percent and 3.41 percent for the fiscal years ended September 30, 2020, 2019 and 2018, respectively. Accordingly, other income included $511,000, $760,000 and $411,000 in the fiscal years ended September 30, 2020, 2019 and 2018, respectively. Clean Energy Ventures capitalizes interest on the allocation of the costs of debt borrowed for the financing of solar investments. Capitalized amounts are included in nonutility plant and equipment on the Consolidated Balance Sheets. Cash and Cash Equivalents Cash and cash equivalents consist of cash on deposit and temporary investments with maturities of three months or less, and excludes restricted cash related to escrow balances for utility plant projects, which is recorded in other noncurrent assets on the Consolidated Balance Sheets. ASU No. 2016-18, an amendment to ASC 230, Statement of Cash Flows, required that any amounts that are deemed to be restricted cash or restricted cash-equivalents be included in cash and cash-equivalent balances on the cash flow statement. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported in the Consolidated Balance Sheets to the total amounts in the Statements of Cash Flows, as of September 30:
(Thousands) | 2020 | 2019 | 2018
Balance Sheet |  |  |
Cash and cash equivalents | $ | 117,012 |  | $ | 2,676 |  | $ | 1,458 |
Restricted cash in other noncurrent assets | $ | 2,411 |  | $ | 1,387 |  | $ | 252 |
Statements of Cash Flow |  |  |
Cash, cash equivalents and restricted cash | $ | 119,423 |  | $ | 4,063 |  | $ | 1,710 |
Loans Receivable NJNG currently provides loans, with terms ranging from 2 to 10 years, to customers that elect to purchase and install certain energy-efficient equipment in accordance with its BPU-approved SAVEGREEN program. The loans are recognized at fair value on the Consolidated Balance Sheets. The Company recorded $13.7 million and $12.4 million in other current assets and $35.3 million and $38.8 million in other noncurrent assets as of September 30, 2020 and 2019, respectively, on the Consolidated Balance Sheets, related to the loans. If NJNG determines a loan is impaired, the basis of the loan would be subject to regulatory review for recovery. As of September 30, 2020 and 2019, the Company has not recorded any impairments for SAVEGREEN loans. Regulatory Assets & Liabilities Under cost-based regulation, regulated utility enterprises generally are permitted to recover their operating expenses and earn a reasonable rate of return on their utility investment. Our Natural Gas Distribution segment maintains its accounts in accordance with the FERC Uniform System of Accounts as prescribed by the BPU and in accordance with the ASC 980, Regulated Operations. As a result of the impact of the ratemaking process and regulatory actions of the BPU, NJNG is required to recognize the economic effects of rate regulation. Accordingly, NJNG capitalizes or defers certain costs that are expected to be recovered from its customers as regulatory assets and recognizes certain obligations representing probable future expenditures as regulatory liabilities on the Consolidated Balance Sheets. See Note 4. Regulation for a more detailed description of NJNG’s regulatory assets and liabilities. In January 2020, NJR acquired Adelphia Gateway an existing 84-mile pipeline in southeastern Pennsylvania, which maintains its accounts in accordance with the FERC Uniform System of Accounts and in accordance with the ASC 980, Regulated Operations. Accordingly, Adelphia Gateway capitalizes or defers certain costs that are expected to be recovered from its customers as regulatory assets and recognizes certain obligations representing probable future expenditures as regulatory liabilities on the Consolidated Balance Sheets. See Note 4. Regulation for a more detailed description of Adelphia Gateway’s regulatory assets and liabilities. Natural Gas in Storage Natural gas in storage is reflected at average cost on the Consolidated Balance Sheets and represents natural gas and LNG that will be utilized in the ordinary course of business. The following table summarizes natural gas in storage, at average cost by company, as of September 30:
| 2020 | 2019
($ in thousands) | Natural Gas in Storage | Bcf | Natural Gas in Storage | Bcf
Natural Gas Distribution |  | $ | 110,037 |  | 27.2 |  |  | $ | 117,413 |  | 27.0 |
Energy Services |  | 57,352 |  | 34.3 |  |  | 52,390 |  | 25.6 |
Storage and Transportation |  | 115 |  | 0.02 |  |  | — |  | — |
Total |  | $ | 167,504 |  | 61.52 |  |  | $ | 169,803 |  | 52.6 |
Derivative Instruments The Company accounts for its financial instruments, such as futures, options, foreign exchange contracts and interest rate contracts, as well as its physical commodity contracts related to the purchase and sale of natural gas at Energy Services, as derivatives, and therefore recognizes them at fair value on the Consolidated Balance Sheets. The Company’s unregulated subsidiaries record changes in the fair value of their financial commodity derivatives in natural gas purchases and changes in the fair value of their physical forward contracts in natural gas purchases or operating revenues, as appropriate, on the Consolidated Statements of Operations. Ineffective portions of the cash flow hedges are recognized immediately in earnings. The ASC 815, Derivatives and Hedging also provides for a NPNS scope exception for qualifying physical commodity contracts for which physical delivery is probable and the quantities delivered are expected to be used or sold over a reasonable period of time in the normal course of business. Effective January 1, 2016, the Company prospectively applies this normal scope exception on a case-by-case basis to physical commodity contracts at NJNG and PPAs at Clean Energy Ventures. When applied, it does not account for these contracts until the contract settles and the related underlying natural gas or power is delivered. Gains and/or losses on NJNG’s derivatives used to economically hedge its regulated natural gas supply obligations, as well as its exposure to interest rate variability, are recoverable through its BGSS, a component of its tariff. Accordingly, the offset to the change in fair value of these derivatives is recorded as a regulatory asset or liability on the Consolidated Balance Sheets. See Note 5. Derivative Instruments for additional details regarding natural gas trading and hedging activities. Fair values of exchange-traded instruments, including futures and swaps, are based on unadjusted, quoted prices in active markets. The Company’s non-exchange-traded financial instruments, foreign currency derivatives, over-the-counter physical commodity contracts at Energy Services and interest rate contracts are valued using observable, quoted prices for similar or identical assets when available. In establishing the fair value of contracts for which a quoted basis price is not available at the measurement date, management utilizes available market data and pricing models to estimate fair values. Fair values are subject to change in the near term and reflect management’s best estimate based on a variety of factors. Estimating fair values of instruments that do not have quoted market prices requires management’s judgment in determining amounts that could reasonably be expected to be received from, or paid to, a third party in settlement of the instruments. These amounts could be materially different from amounts that might be realized in an actual sale transaction. During fiscal 2020, the Company entered into treasury lock transactions to fix the benchmark treasury rate associated with debt issuances for NJNG and NJR that occurred during the fiscal year. Settlement of the NJNG treasury locks resulted in a loss, which was recorded as a component of regulatory assets on the Consolidated Balance Sheets and will be amortized in earnings over the term of the debt as a component of interest expense on the Consolidated Statements of Operations. NJR designated its treasury lock contracts as cash flow hedges, therefore, changes in fair value of the effective portion of the hedges were recorded in OCI. Settlement of the treasury locks resulted in a loss, which was recorded within OCI and will be amortized in earnings over the life of the debt as a component of interest expense on the Consolidated Statements of Operations. Amounts recognized in interest expense for NJNG and NJR related to the amortization of the loss on treasury lock transactions totaled $50,000 and $108,000, respectively, as of September 30, 2020. Software Costs The Company capitalizes certain costs, such as software design and configuration, coding, testing and installation, that are incurred to purchase or create and implement computer software for internal use. Capitalized costs include external costs of materials and services utilized in developing or obtaining internal-use software and payroll and payroll-related costs for employees who are directly associated with and devote time to the internal-use software project. Maintenance costs are expensed as incurred. Upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Amortization is recorded on the straight-line basis over the estimated useful lives of the respective software. The following table presents the software costs included in the Consolidated Financial Statements, as of September 30:
(Thousands) | 2020 | 2019
Balance Sheets |  |
Utility plant, at cost | $ | 13,452 |  | $ | — |
Construction work in progress | $ | — |  | $ | 4,778 |
Nonutility plant and equipment, at cost | $ | 316 |  | $ | — |
Accumulated depreciation and amortization, utility plant | $ | (279) |  | $ | — |
Accumulated depreciation and amortization, nonutility plant and equipment | $ | (5) |  | $ | — |
Software costs | $ | 4,707 |  | $ | 1,702 |
Statements of Operations |  |
Operation and maintenance (1) | $ | 6,720 |  | $ | 9,062 |
Depreciation and amortization | $ | 284 |  | $ | — |
(1)During fiscal 2020, $63,000 was amortized into O&M. Investments in Equity Securities Investments in equity securities were carried at fair value on the Consolidated Balance Sheets. For the fiscal year ended September 30, 2018, total unrealized gains and losses associated with equity securities were included as a part of accumulated other comprehensive income, a component of common stock equity, and reclassifications of realized gains or losses out of other comprehensive income into earnings were recorded in other income, net on the Consolidated Statements of Operations, based on average cost. On October 1, 2018, the Company adopted ASU No. 2016-01, an amendment to ASC 825, Financial Instruments. As a result, both realized and unrealized gains and losses were recorded in other income, net on the Consolidated Statements of Operations, based on average cost. At September 30, 2018, the Company's investments in equity securities were comprised of an investment in DM Common Units, which had a fair value of $32.9 million. On January 28, 2019, Dominion and DM finalized an agreement and plan of merger and each outstanding DM Common Unit was converted into 0.2492 shares of Dominion common stock. This resulted in the conversion of the Company's 1.84 million DM Common Units into approximately 458,000 Dominion common shares. On March 6, 2019, the Company sold its investment in Dominion and received proceeds of approximately $34.5 million. As a result of the sale, the Company recorded total realized gains of $1.6 million in other income, net on the Consolidated Statements of Operations. Intangible Assets Finite-lived intangible assets are stated at cost less accumulated amortization. The Company amortizes intangible assets based upon the pattern in which the economic benefits are consumed over the life of the asset unless a pattern cannot be reliably determined, in which case the Company uses a straight-line amortization method. As of September 30, 2020, intangible assets consist primarily of acquired wholesale natural gas energy contracts totaling $10 million. The wholesale natural gas contracts are being amortized based upon expected cash flows over the respective terms of the agreements. The estimated future amortization expense as of September 30, is as follows:
(Thousands) |
2021 | $ | 5,101 |
2022 | $ | 2,611 |
2023 | $ | 2,271 |
2024 | $ | 77 |
Long-lived Assets The Company reviews the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable, such as significant adverse changes in regulation, business climate or market conditions, including prolonged periods of adverse commodity and capacity prices. If there are changes indicating that the carrying value of such assets may not be recoverable, an undiscounted cash flows test is performed. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized by reducing the recorded value of the asset to its fair value. Factors that the Company analyzes in determining whether an impairment in its long-lived assets exists include: a significant decrease in the market price of a long-lived asset; a significant adverse change in the extent in which a long-lived asset is being used in its physical condition; legal proceedings or other contributing factors; significant business climate changes; accumulations of costs in significant excess of the amounts expected; a current-period operating or cash flow loss combined with a history of such events; and current expectations that more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its estimated useful life. During fiscal 2020 and 2019, there were no events or circumstances that indicated that the carrying value of long-lived assets or finite-lived intangibles were not recoverable. Debt Issuance Costs Debt issuance costs are capitalized and amortized as interest expense on a basis which approximates the effective interest method over the term of the related debt. Debt issuance costs are presented as a direct deduction from the carrying amount of the related debt. See Note 9. Debt for the total unamortized debt issuance costs that are recorded as a reduction to long-term debt on the Consolidated Balance Sheets. Sale Leasebacks NJNG utilizes sale leaseback arrangements as a financing mechanism to fund certain of its capital expenditures related to natural gas meters, whereby the physical asset is sold concurrent with an agreement to lease the asset back. These agreements include options to renew the lease or repurchase the asset at the end of the term. Proceeds from sale leaseback transactions are accounted for as financing arrangements and are included in long-term debt on the Consolidated Balance Sheets. During fiscal 2020 and 2019, NJNG received $4 million and $9.9 million, respectively, in connection with the sale leaseback of its natural gas meters with terms ranging from seven to 11 years. In addition, for certain of its commercial solar energy projects, the Company enters into lease agreements that provide for the sale of commercial solar energy assets to third parties and the concurrent leaseback of the assets. For sale leaseback transactions where the Company has concluded that the terms of the arrangement does not qualify as a sale as the Company retains control of the underlying assets and, as such, the Company uses the financing method to account for the transaction. Under the financing method, the Company recognizes the proceeds received from the buyer-lessor that constitute a payment to acquire the solar energy asset as a financing arrangement, which is recorded as a component of debt on the Consolidated Balance Sheets. During fiscal 2020 and 2018, Clean Energy Ventures received proceeds of $42.9 million and $71.5 million, respectively, in connection with the failed sale leaseback of commercial solar assets. The proceeds received were recognized as a financing obligation on the Consolidated Balance Sheets. Clean Energy Ventures did not enter into any sale leaseback transactions for its commercial solar assets during fiscal 2019. Clean Energy Ventures simultaneously entered into agreements to lease the assets back over a term of five- to 15-years. The Company continues to operate the solar assets and is responsible for related expenses and entitled to retain the revenue generated from SRECs and energy sales. The ITCs and other tax benefits associated with these solar projects transfer to the buyer; however, the payments are structured so that Clean Energy Ventures is compensated for the transfer of the related tax attributes. Accordingly, Clean Energy Ventures recognizes the equivalent value of the tax attributes in other income on the Consolidated Statements of Operations over the respective five-year ITC recapture periods, starting with the second year of the lease. Environmental Contingencies Loss contingencies are recorded as liabilities when it is probable a liability has been incurred and the amount of the loss is reasonably estimable in accordance with accounting standards for contingencies. Estimating probable losses requires an analysis of uncertainties that often depend upon judgments about potential actions by third parties. Accruals for loss contingencies are recorded based on an analysis of potential results. With respect to environmental liabilities and related costs, NJNG periodically, and at least annually, performs an environmental review of the MGP sites, including a review of potential liability for investigation and remedial action. NJNG’s estimate of these liabilities is based upon known facts, existing technology and enacted laws and regulations in place when the review was completed. Where it is probable that costs will be incurred, and the information is sufficient to establish a range of possible liability, NJNG accrues the most likely amount in the range. If no point within the range is more likely than the other, it is NJNG’s policy to accrue the lower end of the range. The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations, the ultimate ability of other responsible parties to pay and any insurance recoveries. NJNG will continue to seek recovery of MGP-related costs through the RAC. If any future regulatory position indicates that the recovery of such costs is not probable, the related non-recoverable costs would be charged to income in the period of such determination. See Note 15. Commitments and Contingent Liabilities for more details. Pension and Postemployment Plans The Company has two noncontributory defined pension plans covering eligible employees, including officers. Benefits are based on each employee’s years of service and compensation. The Company’s funding policy is to contribute annually to these plans at least the minimum amount required under the Employee Retirement Income Security Act, as amended, and not more than can be deducted for federal income tax purposes. Plan assets consist of equity securities, fixed-income securities and short-term investments. The Company did not make any discretionary contributions to the pension plans in fiscal 2020, 2019 and 2018, respectively. The Company also provides two primarily noncontributory medical and life insurance plans for eligible retirees and dependents. Medical benefits, which make up the largest component of the plans, are based upon an age and years-of-service vesting schedule and other plan provisions. Funding of these benefits is made primarily into Voluntary Employee Beneficiary Association trust funds. The Company contributed $8.4 million, $7.9 million and $6.2 million in aggregate to these plans in fiscal 2020, 2019 and 2018, respectively, which is recorded in postemployment employee benefit liability on the Consolidated Balance Sheets. See Note 11. Employee Benefit Plans, for a more detailed description of the Company’s pension and postemployment plans. Asset Retirement Obligations The Company recognizes ARO related to the costs associated with cutting and capping NJNG’s main and service natural gas distribution mains, which is required by New Jersey law when taking such natural gas distribution mains out of service. The Company also recognizes ARO associated with Clean Energy Ventures’ solar assets when there are decommissioning provisions in lease agreements that require removal of the asset at the end of the lease term. ARO are initially recognized when the legal obligation to retire an asset has been incurred and a reasonable estimate of fair value can be made. The discounted fair value is recognized as an ARO liability with a corresponding amount capitalized as part of the carrying cost of the underlying asset. The obligation is subsequently accreted to the future value of the expected retirement cost and the corresponding asset retirement cost is depreciated over the life of the related asset. Accretion expense associated with Clean Energy Ventures’ ARO is recognized as a component of operations and maintenance expense on the Consolidated Statements of Operations. Accretion amounts associated with NJNG’s ARO are recognized as part of its depreciation expense and the corresponding regulatory asset and liability will be shown gross on the Consolidated Balance Sheets. Estimating future removal costs requires management to make significant judgments because most of the removal obligations span long time frames and removal may be conditioned upon future events. Asset removal technologies are also constantly changing, which makes it difficult to estimate removal costs. Accordingly, inherent in the estimate of ARO are various assumptions including the ultimate settlement date, expected cash outflows, inflation rates, credit-adjusted risk-free rates and consideration of potential outcomes where settlement of the ARO can be conditioned upon events. In the latter case, the Company develops possible retirement scenarios and assigns probabilities based on management’s reasonable judgment and knowledge of industry practice. Accordingly, ARO are subject to change. Accumulated Other Comprehensive Income The following table presents the changes in the components of accumulated other comprehensive income, net of related tax effects, as of September 30:
(Thousands) | Investments in Equity Securities | Cash Flow Hedges | Postemployment Benefit Obligation | Total
Balance at September 30, 2018 | $ | 3,446 |  |  | $ | — |  |  | $ | (16,056) |  |  | $ | (12,610) |
Other comprehensive income, net of tax |  |  |  |  |  |  |
Other comprehensive (loss), before reclassifications, net of tax of $0, $0, $6,557 and $6,557, respectively | — |  |  | — |  |  | (16,978) |  |  | (16,978) |
Amounts reclassified from accumulated other comprehensive (loss), net of tax of $0, $0, $(451) and $(451), respectively | — |  |  | — |  |  | 1,247 |  | (1) | 1,247 |
Net current-period other comprehensive income, net of tax of $0, $0, $6,106 and $6,106, respectively | — |  |  | — |  |  | (15,731) |  |  | (15,731) |
Reclassifications of certain income tax effects to retained earnings (2) | (3,446) |  |  | — |  |  | — |  |  | (3,446) |
Balance at September 30, 2019 | $ | — |  |  | $ | — |  |  | $ | (31,787) |  |  | $ | (31,787) |
Other comprehensive income, net of tax |  |  |  |  |  |  |
Other comprehensive (loss) income, before reclassifications, net of tax of $0, $3,203, $1,235, $4,438, respectively | — |  |  | (10,505) |  |  | (4,882) |  |  | (15,387) |
Amounts reclassified from accumulated other comprehensive loss, net of tax of $0, $(32), $(668), $(700), respectively | — |  |  | 108 |  |  | 2,751 |  | (1) | 2,859 |
Net current-period other comprehensive income, net of tax of $0, $3,171, $567, $3,738, respectively | — |  |  | (10,397) |  |  | (2,131) |  |  | (12,528) |
Balance at September 30, 2020 | $ | — |  |  | $ | (10,397) |  |  | $ | (33,918) |  |  | $ | (44,315) |
(1)Included in the computation of net periodic pension cost, a component of O&M expense on the Consolidated Statements of Operations. For more details, see Note 11. Employee Benefit Plans. (2)Due to the adoption of ASU No. 2016-01, an amendment to ASC 825, Financial Instruments. See Note 2. Summary of Significant Accounting Policies - Recently Adopted Updates to the Accounting Standards Codification section for more details. Foreign Currency Transactions The market area of Energy Services includes Canadian delivery points and as a result, Energy Services incurs certain natural gas commodity costs and demand fees denominated in Canadian dollars. Gains or losses that occur as a result of these foreign currency transactions are reported as a component of natural gas purchases on the Consolidated Statements of Operations. Gains and losses recognized for the fiscal years ended September 30, 2020, 2019 and 2018, are considered immaterial. Reclassification Certain prior period amounts have been reclassified to conform to the current period presentation. Amounts related to energy and other taxes have been reclassified to O&M on the Consolidated Statements of Operations. Software costs previously recorded in other non-current assets have been reclassified to utility plant and software costs, and prepaid expenses previously recorded in other current assets have been reclassified on the Consolidated Balance Sheets. Certain amounts related to software costs previously reported in cash flows from operating activities have been reclassified to cash flows used in investing activities and prepaid expenses were reclassified within working capital on the Consolidated Statements of Cash Flows. Change in Accounting Policy Effective October 1, 2020, the Company changed its method of accounting for ITCs at Clean Energy Ventures from the flow through method to the deferral method. Prior to the change, the Company recognized ITCs as a reduction of income tax expense in the period that the qualified solar energy property to which it relates was placed in service. Effective with the accounting change, the Company records ITCs as a reduction to the carrying value of the related asset when placed in service and recognizes ITCs in earnings as a reduction to depreciation expense over the productive life of the related property. The deferral method is considered the preferred method per the authoritative guidance as described in ASC 740 - Income Taxes. The change to the deferral method is also consistent with the application of authoritative accounting guidance throughout other reporting segments and promotes proper matching of the benefits of the recognition of the ITC with the expected use of the asset. The Company applied the change in accounting method retrospectively to all prior periods presented. The impact of the change in accounting policy on the Unaudited Condensed Consolidated Statements of Operations during the fiscal years ended September 30, 2020, 2019 and 2018 are as follows:
(Thousands) | As Previously | Effect of | As
September 30, 2020 | Reported | Change | Adjusted
Depreciation and amortization | $ | 119,894 |  | (12,526) |  | $ | 107,368 |
Total operating expenses | $ | 1,737,285 |  | (12,526) |  | $ | 1,724,759 |
Operating income | $ | 216,383 |  | 12,526 |  | $ | 228,909 |
Income before income taxes and equity in earnings of affiliates | $ | 172,664 |  | 12,526 |  | $ | 185,190 |
Income tax (benefit) expense | $ | (6,944) |  | 43,438 |  | $ | 36,494 |
Net income | $ | 193,919 |  | (30,912) |  | $ | 163,007 |
Weighted average shares outstanding |  |  |
Diluted | 95,107 | (4) | 95,103
Earnings per common share |  |  |
Basic | $ | 2.05 |  | (0.33) |  | $ | 1.72 |
Diluted | $ | 2.04 |  | (0.33) |  | $ | 1.71 |
September 30, 2019 |  |  |
Depreciation and amortization | $ | 91,730 |  | (10,621) |  | $ | 81,109 |
Total operating expenses | $ | 2,438,110 |  | (10,621) |  | $ | 2,427,489 |
Operating income | $ | 153,935 |  | 10,621 |  | $ | 164,556 |
Income before income taxes and equity in earnings of affiliates | $ | 118,126 |  | 10,621 |  | $ | 128,747 |
Income tax (benefit) expense | $ | (37,751) |  | 56,191 |  | $ | 18,440 |
Net income | $ | 169,505 |  | (45,570) |  | $ | 123,935 |
Weighted average shares outstanding |  |  |
Diluted | 89,616 | (20) | 89,596
Earnings per common share |  |  |
Basic | $ | 1.90 |  | (0.51) |  | $ | 1.39 |
Diluted | $ | 1.89 |  | (0.51) |  | $ | 1.38 |
September 30, 2018 |  |  |
Depreciation and amortization | $ | 85,701 |  | (9,130) |  | $ | 76,571 |
Total operating expenses | $ | 2,715,227 |  | (9,130) |  | $ | 2,706,097 |
Operating income | $ | 199,882 |  | 9,130 |  | $ | 209,012 |
Income before income taxes and equity in earnings of affiliates | $ | 166,643 |  | 9,130 |  | $ | 175,773 |
Income tax benefit | $ | (53,785) |  | 11,553 |  | $ | (42,232) |
Net income | $ | 233,436 |  | (2,423) |  | $ | 231,013 |
Earnings per common share |  |  |
Basic | $ | 2.66 |  | (0.03) |  | $ | 2.63 |
Diluted | $ | 2.64 |  | (0.02) |  | $ | 2.62 |
The cumulative effect of the change in accounting policy on the Unaudited Condensed Consolidated Balance Sheets as of September 30, 2020 and 2019 are as follows:
(Thousands) | As Previously | Effect of | As
September 30, 2020 | Reported | Change | Adjusted
Assets |  |  |
Nonutility plant and equipment, at cost | $ | 1,430,723 |  | (322,211) |  | $ | 1,108,512 |
Accumulated depreciation and amortization, nonutility plant and equipment | $ | (202,507) |  | 61,945 |  | $ | (140,562) |
Property, plant and equipment, net | $ | 3,983,035 |  | (260,266) |  | $ | 3,722,769 |
Other noncurrent assets | $ | 78,716 |  | 6,941 |  | $ | 85,657 |
Total noncurrent assets | $ | 964,435 |  | 6,941 |  | $ | 971,376 |
Total assets | $ | 5,569,802 |  | (253,325) |  | $ | 5,316,477 |
Capitalization |  |  |
Retained earnings | $ | 1,148,297 |  | (200,796) |  | $ | 947,501 |
Common stock equity | $ | 1,844,692 |  | (200,796) |  | $ | 1,643,896 |
Total capitalization | $ | 4,104,158 |  | (200,796) |  | $ | 3,903,362 |
Liabilities |  |  |
Deferred income taxes | $ | 190,610 |  | (52,529) |  | $ | 138,081 |
Total noncurrent liabilities | $ | 931,922 |  | (52,529) |  | $ | 879,393 |
Total capitalization and liabilities | $ | 5,569,802 |  | (253,325) |  | $ | 5,316,477 |
September 30, 2019 |  |  |
Assets |  |  |
Nonutility plant and equipment, at cost | $ | 861,904 |  | (285,730) |  | $ | 576,174 |
Accumulated depreciation and amortization, nonutility plant and equipment | $ | (156,033) |  | 49,419 |  | $ | (106,614) |
Property, plant and equipment, net | $ | 3,045,944 |  | (236,311) |  | $ | 2,809,633 |
Other noncurrent assets | $ | 94,791 |  | 21,268 |  | $ | 116,059 |
Total noncurrent assets | $ | 815,435 |  | 21,268 |  | $ | 836,703 |
Total assets | $ | 4,372,985 |  | (215,043) |  | $ | 4,157,942 |
Capitalization |  |  |
Retained earnings | $ | 1,075,960 |  | (169,884) |  | $ | 906,076 |
Common stock equity | $ | 1,551,717 |  | (169,884) |  | $ | 1,381,833 |
Total capitalization | $ | 3,088,894 |  | (169,884) |  | $ | 2,919,010 |
Liabilities |  |  |
Deferred income taxes | $ | 190,663 |  | (45,159) |  | $ | 145,504 |
Total noncurrent liabilities | $ | 837,714 |  | (45,159) |  | $ | 792,555 |
Total capitalization and liabilities | $ | 4,372,985 |  | (215,043) |  | $ | 4,157,942 |
The impact of the change in accounting policy on the Unaudited Condensed Consolidated Statements of Cash Flows as of September 30, 2020, 2019 and 2018 are as follow:
(Thousands) | As Previously | Effect of | As
September 30, 2020 | Reported | Change | Adjusted
Depreciation and amortization | $ | 119,894 |  | (12,526) |  | $ | 107,368 |
Deferred income taxes | $ | (9,092) |  | 43,438 |  | $ | 34,346 |
September 30, 2019 |  |  |
Depreciation and amortization | $ | 91,730 |  | (10,621) |  | $ | 81,109 |
Deferred income taxes | $ | (59,013) |  | 56,191 |  | $ | (2,822) |
September 30, 2018 |  |  |
Depreciation and amortization | $ | 85,701 |  | (9,130) |  | $ | 76,571 |
Deferred income taxes | $ | 15,590 |  | 11,553 |  | $ | 27,143 |
The impact of the change in accounting policy on the Unaudited Condensed Consolidated Statements of Common Stock Equity as of September 30, 2020, 2019 and 2018 are as follows:
| As Previously | Effect of | As
(Thousands) | Reported | Change | Adjusted
Retained Earnings |  |  |
Balance at September 30, 2017 | $ | 867,984 |  | (121,891) |  | $ | 746,093 |
Net Income | $ | 233,436 |  | (2,423) |  | $ | 231,013 |
Balance at September 30, 2018 | $ | 1,007,117 |  | (124,314) |  | $ | 882,803 |
Net Income | $ | 169,505 |  | (45,570) |  | $ | 123,935 |
Balance at September 30, 2019 | $ | 1,075,960 |  | (169,884) |  | $ | 906,076 |
Net Income | $ | 193,919 |  | (30,912) |  | $ | 163,007 |
Balance at September 30, 2020 | $ | 1,148,297 |  | (200,796) |  | $ | 947,501 |
Total Common stock equity |  |  |
Balance at September 30, 2017 | $ | 1,236,643 |  | (121,891) |  | $ | 1,114,752 |
Net Income | $ | 233,436 |  | (2,423) |  | $ | 231,013 |
Balance at September 30, 2018 | $ | 1,418,978 |  | (124,314) |  | $ | 1,294,664 |
Net Income | $ | 169,505 |  | (45,570) |  | $ | 123,935 |
Balance at September 30, 2019 | $ | 1,551,717 |  | (169,884) |  | $ | 1,381,833 |
Net Income | $ | 193,919 |  | (30,912) |  | $ | 163,007 |
Balance at September 30, 2020 | $ | 1,844,692 |  | (200,796) |  | $ | 1,643,896 |

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