SOUTH JERSEY INDUSTRIES INC - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ______________________



Commission File Number	Exact name of registrant as specified in its charter and principal office address and telephone number	State of Incorporation	I.R.S. Employer Identification No.
1-6364	South Jersey Industries, Inc. 1 South Jersey Plaza Folsom, NJ 08037 (609) 561-9000	New Jersey	22-1901645
000-22211	South Jersey Gas Company 1 South Jersey Plaza Folsom, NJ 08037 (609) 561-9000	New Jersey	21-0398330

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that such registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that such registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



South Jersey Industries, Inc.:
Large accelerated filer x	Accelerated filer o	Non-accelerated filer o
Smaller reporting company o	Emerging growth company o

South Jersey Gas Company:
Large accelerated filer o	Accelerated filer o	Non-accelerated filer x
Smaller reporting company o	Emerging growth company o

If an emerging growth company, indicate by check mark if either registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o

Indicate by check mark whether either registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

South Jersey Industries, Inc. common stock ($1.25 par value) outstanding as of May 1, 2018 was 85,502,759 shares. South Jersey Gas Company common stock ($2.50 par value) outstanding as of May 1, 2018 was 2,339,139 shares. All of South Jersey Gas Company's outstanding shares of common stock are held by South Jersey Industries, Inc.

South Jersey Gas Company is a wholly-owned subsidiary of South Jersey Industries, Inc. and meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q. As such, South Jersey Gas Company files its Quarterly Report on Form 10-Q with the reduced disclosure format authorized by General Instruction H.

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PART I	FINANCIAL INFORMATION	Page No.

Item 1.	Financial Statements (Unaudited)	1
	South Jersey Industries, Inc.
	Condensed Consolidated Statements of Income	1
	Condensed Consolidated Statements of Comprehensive Income	2
	Condensed Consolidated Statements of Cash Flows	3
	Condensed Consolidated Balance Sheets	4

	South Jersey Gas Company
	Condensed Statements of Income	6
	Condensed Statements of Comprehensive Income	7
	Condensed Statements of Cash Flows	8
	Condensed Balance Sheets	9

	Notes to Unaudited Condensed Consolidated Financial Statements	11
	South Jersey Industries, Inc. and South Jersey Gas Company - Combined
	Note 1. Summary of Significant Accounting Policies	11
	Note 2. Stock-Based Compensation Plan	16
	Note 3. Affiliations, Discontinued Operations and Related-Party Transactions	18
	Note 4. Common Stock	20
	Note 5. Financial Instruments	20
	Note 6. Segments of Business	22
	Note 7. Rates and Regulatory Actions	25
	Note 8. Regulatory Assets & Regulatory Liabilities	25
	Note 9. Pension and Other Postretirement Benefits	26
	Note 10. Lines of Credit	28
	Note 11. Commitments and Contingencies	29
	Note 12. Derivative Instruments	30
	Note 13. Fair Value of Financial Assets and Financial Liabilities	34
	Note 14. Long-Term Debt	39
	Note 15. Accumulated Other Comprehensive Loss	39
	Note 16. Revenue	40
	Note 17. Subsequent Events	44
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
	South Jersey Industries, Inc.	47
	South Jersey Gas Company	61
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64
Item 4.	Controls and Procedures	68

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	69
Item 1A.	Risk Factors	69
Item 6.	Exhibits	71

Signatures		72

INTRODUCTION

FILING FORMAT

This Quarterly Report on Form 10-Q is a combined report being filed separately by two registrants: South Jersey Industries, Inc. (SJI) and South Jersey Gas Company (SJG). Information relating to SJI or any of its subsidiaries, other than SJG, is filed by SJI on its own behalf. SJG is only responsible for information about itself.

Except where the content clearly indicates otherwise, any reference in the report to "SJI," "the Company," "we," "us" or "our" is to the holding company or SJI and all of its subsidiaries, including SJG, which is a wholly-owned subsidiary of SJI.

Part 1 - Financial information in this Quarterly Report on Form 10-Q includes separate financial statements (i.e. balance sheets, statements of income, statements of comprehensive income and statements of cash flows) for SJI and SJG. The Notes to Unaudited Condensed Consolidated Financial Statements are presented on a combined basis for both SJI and SJG. Management's Discussion and Analysis of Financial Condition and Results of Operations (Management's Discussion) included under Item 2 is divided into two major sections: SJI and SJG.

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Item 1. Unaudited Condensed Consolidated Financial Statements

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In Thousands Except for Per Share Data)



	Three Months Ended March 31,
	2018			2017
Operating Revenues (See Note 16):
Utility	$	231,768		$	195,769
Nonutility	290,177			230,060
Total Operating Revenues	521,945			425,829
Operating Expenses:
Cost of Sales - (Excluding depreciation)
- Utility	87,117			71,379
- Nonutility	195,951			215,763
Operations (See Note 1)	47,044			38,448
Maintenance	6,862			4,981
Depreciation	24,662			24,323
Energy and Other Taxes	2,439			2,071
Total Operating Expenses	364,075			356,965
Operating Income (See Note 1)	157,870			68,864

Other Income and Expense (See Note 1)	2,761			4,487
Interest Charges	(13,972		)	(16,745		)
Income Before Income Taxes	146,659			56,606
Income Taxes	(36,415		)	(21,870		)
Equity in Earnings of Affiliated Companies	1,062			3,011
Income from Continuing Operations	111,306			37,747
Loss from Discontinued Operations - (Net of tax benefit)	(66		)	(30		)
Net Income	$	111,240		$	37,717

Basic Earnings Per Common Share:
Continuing Operations	$	1.40		$	0.47
Discontinued Operations	—			—
Basic Earnings Per Common Share	$	1.40		$	0.47

Average Shares of Common Stock Outstanding - Basic	79,595			79,519

Diluted Earnings Per Common Share:
Continuing Operations	$	1.40		$	0.47
Discontinued Operations	—			—
Diluted Earnings Per Common Share	$	1.40		$	0.47

Average Shares of Common Stock Outstanding - Diluted	79,724			79,641

Dividends Declared Per Common Share	$	0.28		$	0.27

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In Thousands)



	Three Months Ended March 31,
	2018		2017
Net Income	$	111,240	$	37,717

Other Comprehensive Income, Net of Tax:*

Unrealized Gain on Derivatives - Other	9		1,515

Other Comprehensive Income - Net of Tax*	9		1,515

Comprehensive Income	$	111,249	$	39,232

* Determined using a combined average statutory tax rate of approximately 25% and 40% in 2018 and 2017, respectively.

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)



	Three Months Ended March 31,
	2018			2017
Net Cash Provided by Operating Activities	$	95,201		$	79,528

Cash Flows from Investing Activities:
Capital Expenditures	(58,816		)	(67,278		)
Proceeds from Sale of Property, Plant & Equipment	—			3,058
Investment in Long-Term Receivables	(1,916		)	(2,362		)
Proceeds from Long-Term Receivables	2,390			2,554
Notes Receivable	—			3,000
Purchase of Company-Owned Life Insurance	(279		)	(8,074		)
Investment in Affiliate	(3,975		)	(5,902		)
Net Repayment of Notes Receivable - Affiliate	1,065			2,251

Net Cash Used in Investing Activities	(61,531		)	(72,753		)

Cash Flows from Financing Activities:
Net Repayments of Short-Term Credit Facilities	(98,300		)	(91,000		)
Proceeds from Issuance of Long-Term Debt	50,000			273,000
Principal Repayments of Long-Term Debt	—			(200,000		)
Payments for Issuance of Long-Term Debt	(1,264		)	(2,021		)
Net Settlement of Restricted Stock	(776		)	(751		)

Net Cash Used in Financing Activities	(50,340		)	(20,772		)

Net Decrease in Cash, Cash Equivalents and Restricted Cash	(16,670		)	(13,997		)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period	39,695			31,910

Cash, Cash Equivalents and Restricted Cash at End of Period	$	23,025		$	17,913

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Thousands)



	March 31, 2018			December 31, 2017
Assets
Property, Plant and Equipment:
Utility Plant, at original cost	$	2,696,087		$	2,652,244
Accumulated Depreciation	(504,936		)	(498,161		)
Nonutility Property and Equipment, at cost	745,826			741,027
Accumulated Depreciation	(205,230		)	(194,913		)

Property, Plant and Equipment - Net	2,731,747			2,700,197

Investments:
Available-for-Sale Securities	36			36
Restricted	16,713			31,876
Investment in Affiliates	66,970			62,292

Total Investments	83,719			94,204

Current Assets:
Cash and Cash Equivalents	6,312			7,819
Accounts Receivable	243,395			202,379
Unbilled Revenues	62,601			73,377
Provision for Uncollectibles	(14,684		)	(13,988		)
Notes Receivable - Affiliate	3,848			4,913
Natural Gas in Storage, average cost	33,422			48,513
Materials and Supplies, average cost	4,233			4,239
Prepaid Taxes	20,391			41,355
Derivatives - Energy Related Assets	24,386			42,139
Other Prepayments and Current Assets	29,602			28,247

Total Current Assets	413,506			438,993

Regulatory and Other Noncurrent Assets:
Regulatory Assets	491,629			469,224
Derivatives - Energy Related Assets	12,268			5,988
Notes Receivable - Affiliate	13,275			13,275
Contract Receivables	27,638			28,721
Goodwill	3,578			3,578
Identifiable Intangible Assets	12,240			12,480
Other	100,480			98,426

Total Regulatory and Other Noncurrent Assets	661,108			631,692

Total Assets	$	3,890,080		$	3,865,086

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Thousands)



	March 31, 2018			December 31, 2017
Capitalization and Liabilities
Equity:
Common Stock	$	99,516		$	99,436
Premium on Common Stock	709,756			709,658
Treasury Stock (at par)	(274		)	(271		)
Accumulated Other Comprehensive Loss	(36,756		)	(36,765		)
Retained Earnings	509,255			420,351

Total Equity	1,281,497			1,192,409

Long-Term Debt	974,749			1,122,999

Total Capitalization	2,256,246			2,315,408

Current Liabilities:
Notes Payable	248,100			346,400
Current Portion of Long-Term Debt	263,809			63,809
Accounts Payable	259,684			284,899
Customer Deposits and Credit Balances	29,356			43,398
Environmental Remediation Costs	60,846			66,372
Taxes Accrued	6,814			2,932
Derivatives - Energy Related Liabilities	12,486			46,938
Deferred Contract Revenues	262			259
Derivatives - Other Current	526			748
Dividends Payable	22,334			—
Interest Accrued	7,790			9,079
Pension Benefits	2,388			2,388
Other Current Liabilities	9,785			15,860

Total Current Liabilities	924,180			883,082

Deferred Credits and Other Noncurrent Liabilities:
Deferred Income Taxes - Net	123,239			86,884
Pension and Other Postretirement Benefits	104,262			101,544
Environmental Remediation Costs	101,551			106,483
Asset Retirement Obligations	59,807			59,497
Derivatives - Energy Related Liabilities	4,153			6,025
Derivatives - Other Noncurrent	7,194			9,622
Regulatory Liabilities	300,358			287,105
Other	9,090			9,436

Total Deferred Credits and Other Noncurrent Liabilities	709,654			666,596

Commitments and Contingencies (Note 11)

Total Capitalization and Liabilities	$	3,890,080		$	3,865,086

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

(In Thousands)



	Three Months Ended March 31,

	2018			2017
Operating Revenues (See Note 16)	$	234,459		$	196,814

Operating Expenses:
Cost of Sales (Excluding depreciation)	89,808			72,424
Operations (See Note 1)	29,370			24,175
Maintenance	6,862			4,981
Depreciation	14,363			12,714
Energy and Other Taxes	1,255			1,295

Total Operating Expenses	141,658			115,589

Operating Income (See Note 1)	92,801			81,225

Other Income and Expense (See Note 1)	2,510			1,042

Interest Charges	(6,728		)	(5,878		)

Income Before Income Taxes	88,583			76,389

Income Taxes	(21,836		)	(29,911		)

Net Income	$	66,747		$	46,478

The accompanying notes are an integral part of the unaudited condensed financial statements.

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SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In Thousands)



	Three Months Ended March 31,
	Three Months Ended March 31,
	2018		2017
Net Income	$	66,747	$	46,478

Other Comprehensive Income - Net of Tax: *

Unrealized Gain on Derivatives - Other	9		7

Other Comprehensive Income - Net of Tax *	9		7

Comprehensive Income	$	66,756	$	46,485

* Determined using a combined average statutory tax rate of approximately 25% and 40% in 2018 and 2017, respectively.

The accompanying notes are an integral part of the unaudited condensed financial statements.

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SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)



	Three Months Ended March 31,

	2018			2017
Net Cash Provided by Operating Activities	$	44,492		$	56,986

Cash Flows from Investing Activities:
Capital Expenditures	(54,960		)	(56,086		)
Purchase of Company-Owned Life Insurance	—			(4,875		)
Investment in Long-Term Receivables	(1,916		)	(2,362		)
Proceeds from Long-Term Receivables	2,390			2,554

Net Cash Used in Investing Activities	(54,486		)	(60,769		)

Cash Flows from Financing Activities:
Net Borrowings from (Repayments of) Short-Term Credit Facilities	11,100			(104,300		)
Proceeds from Issuance of Long-Term Debt	—			273,000
Principal Repayments of Long-Term Debt	—			(200,000		)
Payments for Issuance of Long-Term Debt	(5		)	(2,021		)
Additional Investment by Shareholder	—			40,000

Net Cash Provided by Financing Activities	11,095			6,679

Net Increase in Cash, Cash Equivalents and Restricted Cash	1,101			2,896
Cash, Cash Equivalents and Restricted Cash at Beginning of Period	4,619			1,391

Cash, Cash Equivalents and Restricted Cash at End of Period	$	5,720		$	4,287

The accompanying notes are an integral part of the unaudited condensed financial statements.

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SOUTH JERSEY GAS COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

(In Thousands)



	March 31, 2018			December 31, 2017
Assets
Property, Plant and Equipment:
Utility Plant, at original cost	$	2,696,087		$	2,652,244
Accumulated Depreciation	(504,936		)	(498,161		)

Property, Plant and Equipment - Net	2,191,151			2,154,083

Investments:
Restricted Investments	2,322			2,912

Total Investments	2,322			2,912

Current Assets:
Cash and Cash Equivalents	3,398			1,707
Accounts Receivable	128,583			78,571
Accounts Receivable - Related Parties	2,842			988
Unbilled Revenues	44,287			54,980
Provision for Uncollectibles	(14,491		)	(13,799		)
Natural Gas in Storage, average cost	5,190			14,932
Materials and Supplies, average cost	824			825
Prepaid Taxes	17,156			38,326
Derivatives - Energy Related Assets	404			7,327
Other Prepayments and Current Assets	12,895			12,670

Total Current Assets	201,088			196,527

Regulatory and Other Noncurrent Assets:
Regulatory Assets	491,629			469,224
Long-Term Receivables	24,874			25,851
Derivatives - Energy Related Assets	—			5
Other	19,063			17,372

Total Regulatory and Other Noncurrent Assets	535,566			512,452

Total Assets	$	2,930,127		$	2,865,974

The accompanying notes are an integral part of the unaudited condensed financial statements.

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SOUTH JERSEY GAS COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

(In Thousands, except per share amounts)



	March 31, 2018			December 31, 2017
Capitalization and Liabilities
Equity:
Common Stock	$	5,848		$	5,848
Other Paid-In Capital and Premium on Common Stock	355,744			355,744
Accumulated Other Comprehensive Loss	(25,988		)	(25,997		)
Retained Earnings	652,584			585,838

Total Equity	988,188			921,433

Long-Term Debt	558,218			758,052

Total Capitalization	1,546,406			1,679,485

Current Liabilities:
Notes Payable	63,100			52,000
Current Portion of Long-Term Debt	263,809			63,809
Accounts Payable - Commodity	37,810			43,341
Accounts Payable - Other	34,923			41,365
Accounts Payable - Related Parties	13,176			17,029
Derivatives - Energy Related Liabilities	784			9,270
Derivatives - Other Current	337			389
Customer Deposits and Credit Balances	24,788			41,656
Environmental Remediation Costs	60,528			66,040
Taxes Accrued	5,785			1,760
Pension Benefits	2,353			2,353
Interest Accrued	5,938			7,615
Other Current Liabilities	5,755			7,027

Total Current Liabilities	519,086			353,654

Regulatory and Other Noncurrent Liabilities:
Regulatory Liabilities	300,358			287,105
Deferred Income Taxes - Net	302,524			280,746
Environmental Remediation Costs	100,736			105,656
Asset Retirement Obligations	59,018			58,714
Pension and Other Postretirement Benefits	91,264			88,871
Derivatives - Energy Related Liabilities	328			170
Derivatives - Other Noncurrent	5,669			6,639
Other	4,738			4,934

Total Regulatory and Other Noncurrent Liabilities	864,635			832,835

Commitments and Contingencies (Note 11)

Total Capitalization and Liabilities	$	2,930,127		$	2,865,974

The accompanying notes are an integral part of the unaudited condensed financial statements.

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Notes to Unaudited Condensed Consolidated Financial Statements


1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

GENERAL - South Jersey Industries, Inc. (SJI or the Company) currently provides a variety of energy-related products and services primarily through the following wholly-owned subsidiaries:


▪	South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG distributes natural gas in the seven southernmost counties of New Jersey.


▪	South Jersey Energy Company (SJE) acquires and markets natural gas and electricity to retail end users and provides total energy management services to commercial, industrial and residential customers.


▪	South Jersey Resources Group, LLC (SJRG) markets natural gas storage, commodity and transportation assets along with fuel management services on a wholesale basis in the mid-Atlantic, Appalachian and southern states.


▪	South Jersey Exploration, LLC (SJEX) owns oil, gas and mineral rights in the Marcellus Shale region of Pennsylvania.


▪	Marina Energy, LLC (Marina) develops and operates on-site energy-related projects. It currently operates projects in New Jersey, Maryland, Massachusetts and Vermont. The significant wholly-owned subsidiaries of Marina include:

•ACB Energy Partners, LLC (ACB) owns and operates a natural gas fueled combined heating, cooling and power facility located in Atlantic City, New Jersey.

•AC Landfill Energy, LLC (ACLE), BC Landfill Energy, LLC (BCLE), SC Landfill Energy, LLC (SCLE) and SX Landfill Energy, LLC (SXLE) own and operate landfill gas-to-energy production facilities in Atlantic, Burlington, Salem and Sussex Counties located in New Jersey.

•MCS Energy Partners, LLC (MCS), NBS Energy Partners, LLC (NBS) and SBS Energy Partners, LLC (SBS) own and operate solar-generation sites located in New Jersey.

▪

South Jersey Energy Service Plus, LLC (SJESP) serviced residential and small commercial HVAC systems, installed small commercial HVAC systems, provided plumbing services and serviced appliances under warranty via a subcontractor arrangement as well as on a time and materials basis. On September 1, 2017, SJESP sold certain assets of its residential and small commercial HVAC and plumbing business to a third party. SJESP continues to receive commissions paid on service contracts from the third party and will do so on a go forward basis.


▪	SJI Midstream, LLC (Midstream) invests in infrastructure and other midstream projects, including a current project to build an approximately 118-mile natural gas pipeline in Pennsylvania and New Jersey.

In October 2017, SJI announced that it had entered into agreements to acquire the assets of Elizabethtown Gas and Elkton Gas from Pivotal Utility Holdings, Inc., a subsidiary of Southern Company Gas. SJI is acquiring the assets of both companies for total consideration of $1.7 billion. The transaction is expected to close in mid-2018, and is subject to approvals by the New Jersey Board of Public Utilities (BPU) and the Maryland Public Service Commission (PSC), with limited approvals also required from the Federal Energy Regulatory Commission (FERC), as well as certain anti-trust filings and approvals. In April 2018, SJI completed public equity offerings and issued long-term debt to help fund the acquisition (see Note 17).

In connection with the acquisition, SJI has incurred total fees of $9.3 million during the three months ended March 31, 2018. Of these fees, $5.5 million were related to consulting and legal expenses and recorded as Operations Expenses in the condensed consolidated statements of income for the three months ended March 31, 2018. The remaining $3.8 million relates to a senior unsecured bridge facility (the “Bridge Facility”), which was entered into in the fourth quarter of 2017. Debt issuance costs associated with the Bridge Facility of $2.6 million were amortized to interest expense during the three months ended March 31, 2018. Also incurred was $1.2 million of ticking fees which are also recorded as interest expense during the three months ended March 31, 2018. The interest expenses noted above are recorded in Interest Charges in the condensed consolidated statements of income. All of the above costs are included in the Corporate & Services segment.

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BASIS OF PRESENTATION - SJI's condensed consolidated financial statements include the accounts of SJI, its wholly-owned subsidiaries (including SJG) and subsidiaries in which SJI has a controlling interest. SJI eliminates all significant intercompany accounts and transactions. In management’s opinion, the unaudited condensed consolidated financial statements of SJI and SJG reflect all normal and recurring adjustments needed to fairly present their respective financial positions, operating results and cash flows at the dates and for the periods presented. SJI’s and SJG's businesses are subject to seasonal fluctuations and, accordingly, this interim financial information should not be the basis for estimating the full year’s operating results. As permitted by the rules and regulations of the Securities and Exchange Commission (SEC), the accompanying unaudited condensed consolidated financial statements of SJI and SJG contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These financial statements should be read in conjunction with SJI’s and SJG's Annual Reports on Form 10-K for the year ended December 31, 2017 for a more complete discussion of the accounting policies and certain other information.

Certain reclassifications have been made to SJI's and SJG's prior period condensed consolidated statements of income to conform to the current period presentation. The non-service cost components of net periodic pension and postretirement benefit costs are now included as a reduction to Other Income and Expense, as opposed to being recorded as an Operations Expense, to conform with ASU 2017-07, which is described below under "New Accounting Pronouncements." This caused Other Income to be reduced, and Operations Expense to also be reduced, by $1.2 million and $0.6 million for SJI and SJG, respectively, for the three months ended March 31, 2017. This also caused a reclassification to SJI's prior period segments disclosure in Note 6 to increase Operating Income within both the Gas Utility Operations and Corporate & Services segments by $0.6 million for the three months ended March 31, 2017.

Certain reclassifications have been made to SJI's prior period segments disclosures to conform to the current period presentation. The activities of SJI Midstream, which were presented in the Corporate & Services segment during the three months ended March 31, 2017, are now separated into the Midstream segment for the same period in 2018. This caused prior period adjustments to Interest Charges, Income Taxes and Property Additions in Note 6.

REVENUE-BASED TAXES - SJG collects certain revenue-based energy taxes from its customers. Such taxes include the New Jersey State Sales Tax and Public Utilities Assessment (PUA). State sales tax is recorded as a liability when billed to customers and is not included in revenue or operating expenses. The PUA is included in both Utility Revenue and Energy and Other Taxes and totaled $0.4 million for both the three months ended March 31, 2018 and 2017.

IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets that are held and used are reviewed for impairment whenever events or changes in circumstances indicate carrying values may not be recoverable. Such reviews are performed in accordance with ASC 360. An impairment loss is indicated if the total future estimated undiscounted cash flows expected from an asset are less than its carrying value. An impairment charge is measured by the difference between an asset's carrying amount and fair value with the difference recorded within Operating Expenses on the condensed consolidated statements of income. Fair values can be determined by a variety of valuation methods, including third-party appraisals, sales prices of similar assets, and present value techniques.

No impairments were identified at SJI or SJG for the three months ended March 31, 2018. SJI recorded an impairment charge of $0.3 million during the first quarter of 2017 due to a reduction in the expected cash flows to be received from a solar generating facility within the on-site energy production segment. For the three months ended March 31, 2017, no impairments were identified at SJG.

Marina’s solar energy projects rely on returns from electricity and solar renewable energy credits (SRECs). A decrease in the value of electricity and SRECs due to market conditions and/or legislative changes may negatively impact Marina's return on its investments as well as lead to impairment of the respective assets.

GAS EXPLORATION AND DEVELOPMENT - SJI capitalizes all costs associated with gas property acquisition, exploration and development activities under the full cost method of accounting. Capitalized costs include costs related to unproved properties, which are not amortized until proved reserves are found or it is determined that the unproved properties are impaired. All costs related to unproved properties are reviewed quarterly to determine if impairment has occurred. No impairment charges were recorded during the three months ended March 31, 2018 or 2017. As of March 31, 2018 and December 31, 2017, $8.6 million and $8.7 million, respectively, related to interests in proved and unproved properties in Pennsylvania, net of amortization, is included with Nonutility Property and Equipment and Other Noncurrent Assets on SJI's condensed consolidated balance sheets.

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TREASURY STOCK - SJI uses the par value method of accounting for treasury stock. As of March 31, 2018 and December 31, 2017, SJI held219,136 and 216,642 shares of treasury stock, respectively. These shares are related to deferred compensation arrangements where the amounts earned are held in the stock of SJI.

INCOME TAXES - Deferred income taxes are provided for all significant temporary differences between the book and taxable bases of assets and liabilities in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740 - “Income Taxes.” A valuation allowance is established when it is determined that it is more likely than not that a deferred tax asset will not be realized.

On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Reform") was enacted into law, which changed various corporate income tax provisions within the existing Internal Revenue Code. The law became effective January 1, 2018 but was required to be accounted for in the period of enactment, as such SJI adopted the new law in the fourth quarter of 2017. SJI and SJG were impacted in several ways as a result of Tax Reform, including provisions related to the permanent reduction in the U.S. federal corporate income tax rate from 35% to 21%, modification of bonus depreciation and changes to the deductibility of certain business-related expenses.

The SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of Tax Reform. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date of Tax Reform for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of Tax Reform for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of Tax Reform is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of Tax Reform.

SJI and SJG were able to make reasonable, good faith estimates of certain effects and, therefore, recorded provisional adjustments for the following: the tax rules regarding the appropriate bonus deprecation rate that should be applied to assets placed in service after September 27, 2017, including the information required to compute the applicable depreciable tax basis. Further, Tax Reform is unclear in certain respects and will require interpretations and implementing regulations by the Internal Revenue Service, as well as state tax authorities. Tax Reform could also be subject to potential amendments and technical corrections which could impact the Company’s financial statements.

Any required changes to the provisional estimates would result in the recording of regulatory assets or liabilities to the extent such amounts are probable of settlement or recovery through customer rates and a net change to income tax expense for any other amounts. Final adjustments to the provisional amounts are expected to be recorded by the third quarter of 2018. The accounting for all other applicable provisions of Tax Reform is considered complete based on the current interpretation.

GOODWILL - Goodwill represents the excess of the consideration paid over the fair value of identifiable net assets acquired. Goodwill is not amortized, but instead is subject to impairment testing on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. No such events have occurred during the three months ended March 31, 2018. Goodwill totaled $3.6 million on the condensed consolidated balance sheets of SJI as of both March 31, 2018 and December 31, 2017.

NEW ACCOUNTING PRONOUNCEMENTS - Other than as described below, no new accounting pronouncement issued or effective during 2018 or 2017 had, or are expected to have, a material impact on the condensed consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606). This ASU supersedes the revenue recognition requirements in FASB ASC 605, Revenue Recognition, and in most industry-specific topics. The new guidance identifies how and when entities should recognize revenue. The new rules establish a core principle requiring the recognition of revenue to depict the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. In connection with this new standard, the FASB has issued several amendments to ASU 2014-09, as follows:

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•	In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This standard improves the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis.


•	In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This standard clarifies identifying performance obligations and the licensing implementation guidance.

•

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This standard provides additional guidance on (a) the objective of the collectibility criterion, (b) the presentation of sales tax collected from customers, (c) the measurement date of non-cash consideration received, (d) practical expedients in respect of contract modifications and completed contracts at transition, and (e) disclosure of the effects of the accounting change in the period of adoption.

•

In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which amends certain narrow aspects of the guidance, including the disclosure of remaining performance obligations and prior-period performance obligations, as well as other amendments to the guidance on loan guarantee fees, contract costs, refund liabilities, advertising costs and the clarification of certain examples.

The new guidance in ASU 2014-09, as well as all amendments discussed above, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.

On January 1, 2018, SJI and SJG adopted ASU 2014-09 and all amendments, which meant adopting the guidance in ASC 606. SJI and SJG adopted the new guidance using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under ASC 605. See Note 16. The methods of recognizing revenue for SJI's and SJG's contracts with customers is the same under ASC 605 and ASC 606, as revenues from contracts that SJI and SJG have with customers are currently recorded as gas or electricity is delivered to the customer, which is consistent with the new guidance under ASC 606. As such, there was no significant impact to revenues for the quarter ended March 31, 2018 as a result of applying ASC 606, and there was no cumulative catch-up to retained earnings under the modified retrospective method for changes in accounting for revenues. Further, there were no significant changes to our business processes, systems or internal controls over financial reporting needed to support recognition and disclosure under the new guidance.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which enhances the reporting model for financial instruments and includes amendments to address aspects of recognition, measurement, presentation and disclosure. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted for only certain portions of the new guidance. Adoption of this guidance did not have an impact on the financial statement results of SJI or SJG.

In March 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a new lease accounting model for lessees. The new standard requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The accounting for leases by the lessor remains relatively the same. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. Management has formed an implementation team that is inventorying leases and evaluating the impact that adoption of this guidance will have on SJI's and SJG's financial statements, which includes monitoring industry specific developments including the exposure draft issued by the FASB that would introduce a land easement practical expedient to ASC 842. Consistent with the requirements of the standard, SJI and SJG expect to both transition to the new guidance using the modified retrospective approach, although this could be subject to change based on new guidance from the FASB. The Company does not plan to early adopt the new guidance.

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In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard requires recognition of the current and deferred income tax effects of an intra-entity asset transfer, other than inventory, when the transfer occurs, as opposed to current GAAP, which requires companies to defer the income tax effects of intra-entity asset transfers until the asset has been sold to an outside party. The income tax effects of intra-entity inventory transfers will continue to be deferred until the inventory is sold. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, with early adoption permitted. The standard is required to be adopted on a modified retrospective basis with a cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. Adoption of this guidance did not have an impact on the financial statement results of SJI or SJG.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This new standard provides amended and clarifying guidance regarding whether an integrated set of assets and activities acquired is deemed the acquisition of a business (and, thus, accounted for as a business combination) or the acquisition of assets. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. Adoption of this guidance did not have an impact on the financial statement results of SJI or SJG.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. The amendments in this update are effective for annual and any interim impairment tests performed in periods beginning after December 31, 2019. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU is designed to improve guidance related to the presentation of defined benefit costs in the income statement. In particular, this ASU requires an employer to report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Adoption of this guidance was applied retrospectively and did not have a material impact on the financial statements of SJI or SJG; however, current and prior period presentation on the condensed consolidated statements of income were modified for SJI and SJG to conform to this guidance, as described under “Basis of Presentation” above.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU clarifies and reduces both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, to a change to the terms and conditions of a share-based payment award. This standard is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. Adoption of this guidance did not have an impact on the financial statement results of SJI or SJG.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU is intended to improve the financial reporting of hedging relationships so that it represents a more faithful portrayal of an entity’s risk management activities (i.e. to help financial statement users understand an entity’s risk exposures and the manner in which hedging strategies are used to manage them), as well as to further simplify the application of the hedge accounting guidance in GAAP. The standard is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income. This ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from Tax Reform. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Reform and will improve the usefulness of information reported to financial statement users. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Management is currently determining the impact that adoption of this guidance will have on the financial statements of SJI and SJG.

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In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which gave improvements and enhancements to ASU 2016-01 discussed above. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. SJI and SJG adopted this guidance during the first quarter of 2018 in conjunction with adopting ASU 2016-01 discussed above. Adoption of this guidance did not have an impact on the financial statement results of SJI or SJG.

In March 2018, the FASB issued ASU 2018-04, Investments—Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (SEC Update). This ASU incorporates recent SEC guidance which was issued in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulation. ASU No. 2018-04 was effective upon issuance. Adoption of this guidance did not have an impact on the financial statement results of SJI or SJG.

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update). This ASU incorporates recent SEC guidance related to the income tax accounting implications of Tax Reform. ASU No. 2018-05 was effective upon issuance. Adoption of this guidance did not have an impact on the financial statement results of SJI or SJG.


2.	STOCK-BASED COMPENSATION PLAN:

On April 30, 2015, the shareholders of SJI approved the adoption of SJI's 2015 Omnibus Equity Compensation Plan (Plan), replacing the Amended and Restated 1997 Stock-Based Compensation Plan that had terminated on January 26, 2015. Under the Plan, shares may be issued to SJI’s officers (Officers), non-employee directors (Directors) and other key employees. No options were granted or outstanding during the three months ended March 31, 2018 and 2017. No stock appreciation rights have been issued under the plans. During the three months ended March 31, 2018 and 2017, SJI granted 185,214 and 158,688 restricted shares, respectively, to Officers and other key employees under the Plan. Performance-based restricted shares vest over a three-year period and are subject to SJI achieving certain market and earnings-based performance targets, which can cause the actual amount of shares that ultimately vest to range from 0% to 200% of the original shares granted.

In 2015, SJI began granting time-based shares of restricted stock, one-third of which vest annually over a three-year period and which are limited to a 100% payout. Vesting of time-based grants is contingent upon SJI achieving a return on equity (ROE) of at least 7% during the initial year of the grant and meeting the service requirement. Provided that the 7% ROE requirement is met in the initial year, payout is solely contingent upon the service requirement being met in years two and three of the grant. Beginning in 2018, the vesting and payout of time-based shares of restricted stock is only contingent upon the service requirement being met in years one, two, and three of the grant. During the three months ended March 31, 2018 and 2017, Officers and other key employees were granted 56,634 and 48,790 shares of time-based restricted stock, respectively, which are included in the shares noted above.

Grants containing market-based performance targets use SJI's total shareholder return (TSR) relative to a peer group to measure performance. As TSR-based grants are contingent upon market and service conditions, SJI is required to measure and recognize stock-based compensation expense based on the fair value at the date of grant on a straight-line basis over the requisite three-year period of each award. In addition, SJI identifies specific forfeitures of share-based awards, and compensation expense is adjusted accordingly over the requisite service period. Compensation expense is not adjusted based on the actual achievement of performance goals. The fair value of TSR-based restricted stock awards on the date of grant is estimated using a Monte Carlo simulation model.

Through 2014, grants containing earnings-based targets were based on SJI's earnings growth rate per share (EGR) relative to a peer group to measure performance. In 2015, earnings-based performance targets included pre-defined EGR and ROE goals to measure performance. Beginning in 2016, performance targets include pre-defined compounded earnings annual growth rate (CEGR) for SJI. As EGR-based, ROE-based and CEGR-based grants are contingent upon performance and service conditions, SJI is required to measure and recognize stock-based compensation expense based on the fair value at the date of grant over the requisite three-year period of each award. The fair value is measured as the market price at the date of grant. The initial accruals of compensation expense are based on the estimated number of shares expected to vest, assuming the requisite service is rendered and probable outcome of the performance condition is achieved. That estimate is revised if subsequent information indicates that the actual number of shares is likely to differ from previous estimates. Compensation expense is ultimately adjusted based on the actual achievement of service and performance targets.

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During the three months ended March 31, 2018 and 2017, SJI granted 26,416 and 30,394 restricted shares, respectively, to Directors. Shares issued to Directors vest over twelve months and contain no performance conditions. As a result, 100% of the shares granted generally vest.

The following table summarizes the nonvested restricted stock awards outstanding for SJI at March 31, 2018 and the assumptions used to estimate the fair value of the awards:



	Grants	Shares Outstanding	Fair Value Per Share		Expected Volatility		Risk-Free Interest Rate
Officers & Key Employees -	2016 - TSR	58,205	$	22.53	18.1	%	1.31	%
	2016 - CEGR, Time	73,344	$	23.52	N/A		N/A
	2017 - TSR	49,981	$	32.17	20.8	%	1.47	%
	2017 - CEGR, Time	81,372	$	33.69	N/A		N/A
	2018 - TSR	64,290	$	31.05	21.9	%	2.00	%
	2018 - CEGR, Time	120,924	$	31.23	N/A		N/A

Directors -	2018	26,416	$	31.16	N/A		N/A

Expected volatility is based on the actual volatility of SJI’s share price over the preceding three-year period as of the valuation date. The risk-free interest rate is based on the zero-coupon U.S. Treasury Bond, with a term equal to the three-year term of the Officers’ and other key employees’ restricted shares. As notional dividend equivalents are credited to the holders during the three-year service period, no reduction to the fair value of the award is required. As the Directors’ restricted stock awards contain no performance conditions and dividends are paid or credited to the holder during the requisite service period, the fair value of these awards are equal to the market value of the shares on the date of grant.

The following table summarizes the total stock-based compensation cost to SJI for the three months ended March 31, 2018 and 2017 (in thousands):



	Three Months Ended March 31,
	2018			2017
Officers & Key Employees	$	1,100		$	1,070
Directors	206			256
Total Cost	1,306			1,326

Capitalized	(101		)	(88		)
Net Expense	$	1,205		$	1,238

As of March 31, 2018, there was $9.3 million of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under the plans. That cost is expected to be recognized over a weighted average period of 2.1 years.

The following table summarizes information regarding restricted stock award activity for SJI during the three months ended March 31, 2018, excluding accrued dividend equivalents:



	Officers &Other Key Employees		Directors		Weighted Average Fair Value
Nonvested Shares Outstanding, January 1, 2018	342,793		30,394		$	28.60
Granted	185,214		26,416		$	31.17
Cancelled/Forfeited	(34,990	)	—		$	28.21
Vested	(44,901	)	(30,394	)	$	30.56
Nonvested Shares Outstanding, March 31, 2018	448,116		26,416		$	29.46

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During the three months ended March 31, 2018 and 2017, SJI awarded 63,030 shares to its Officers and other key employees at a market value of $1.9 million, and 65,628 shares at a market value of $2.2 million, respectively. During the three months ended March 31, 2018 and 2017, SJI also granted 26,416 and 30,394 shares to its Directors at a market value of $0.8 million and $1.0 million, respectively.

SJI has a policy of issuing new shares to satisfy its obligations under the Plan; therefore, there are no cash payment requirements resulting from the normal operation of the Plan. However, a change in control could result in such shares becoming nonforfeitable or immediately payable in cash. At the discretion of the Officers, Directors and other key employees, the receipt of vested shares can be deferred until future periods. These deferred shares are included in Treasury Stock on the condensed consolidated balance sheets.

South Jersey Gas Company - Officers and other key employees of SJG participate in the stock-based compensation plans of SJI. During the three months ended March 31, 2018 and 2017, SJG officers and other key employees were granted 26,652 and 21,061 shares of SJI restricted stock, respectively. The cost of outstanding stock awards for SJG during the three months ended March 31, 2018 and 2017 was $0.2 million and $0.1 million, respectively. Approximately 60% of these costs were capitalized on SJG's condensed balance sheets to Utility Plant.


3.	AFFILIATIONS, DISCONTINUED OPERATIONS AND RELATED-PARTY TRANSACTIONS:

AFFILIATIONS — The following affiliated entities are accounted for under the equity method:

PennEast Pipeline Company, LLC (PennEast) - Midstream has a 20% investment in PennEast, which is planning to construct an approximately 118-mile natural gas pipeline that will extend from Northeastern Pennsylvania into New Jersey.

Energenic – US, LLC (Energenic) - Marina and a joint venture partner formed Energenic, in which Marina has a 50% equity interest. Energenic developed and operated on-site, self-contained, energy-related projects.

Millennium Account Services, LLC (Millennium) - SJI and a joint venture partner formed Millennium, in which SJI has a 50% equity interest. Millennium reads utility customers’ meters on a monthly basis for a fee.

Potato Creek, LLC (Potato Creek) - SJI and a joint venture partner formed Potato Creek, in which SJI has a 30% equity interest. Potato Creek owns and manages the oil, gas and mineral rights of certain real estate in Pennsylvania.

EnergyMark, LLC (EnergyMark) - SJE has a 33% investment in EnergyMark, an entity that acquires and markets natural gas to retail end users.

For the three months ended March 31, 2018 and 2017, SJRG had net sales to EnergyMark of $14.6 million and $15.2 million, respectively.

During the first three months of 2018 and 2017, SJI made net investments in unconsolidated affiliates of $2.9 million and $3.7 million, respectively. As of March 31, 2018 and December 31, 2017, the outstanding balance of Notes Receivable – Affiliate was $17.1 million and $18.2 million, respectively. As of March 31, 2018, $13.6 million of these notes were secured by property, plant and equipment of the affiliates, accrue interest at 7.5% and are to be repaid through 2025. The remaining $3.5 million of these notes are unsecured and accrue interest at variable rates.

SJI holds significant variable interests in these entities but is not the primary beneficiary. Consequently, these entities are accounted for under the equity method because SJI does not have both (a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity. As of March 31, 2018, SJI had a net asset of approximately $67.0 million included in Investment in Affiliates on the condensed consolidated balance sheets related to equity method investees, in addition to Notes Receivable – Affiliate as discussed above. SJI’s maximum exposure to loss from these entities as of March 31, 2018, is limited to its combined equity contributions and the Notes Receivable-Affiliate in the aggregate amount of $84.1 million.

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DISCONTINUED OPERATIONS - Discontinued Operations consist of the environmental remediation activities related to the properties of South Jersey Fuel, Inc. (SJF) and the product liability litigation and environmental remediation activities related to the prior business of The Morie Company, Inc. (Morie). SJF is a subsidiary of Energy & Minerals, Inc. (EMI), an SJI subsidiary, which previously operated a fuel oil business. Morie is the former sand mining and processing subsidiary of EMI. EMI sold the common stock of Morie in 1996.

SJI conducts tests annually to estimate the environmental remediation costs for these properties (see Note 11).

Summarized operating results of the discontinued operations for the three months ended March 31, 2018 and 2017, were (in thousands, except per share amounts):



	Three Months Ended March 31,
	2018			2017
Loss before Income Taxes:
Sand Mining	$	(40	)	$	(17	)
Fuel Oil	(42		)	(29		)
Income Tax Benefits	16			16
Loss from Discontinued Operations — Net	$	(66	)	$	(30	)
Earnings Per Common Share from
Discontinued Operations — Net:
Basic and Diluted	$	—		$	—

SJG RELATED-PARTY TRANSACTIONS - There have been no significant changes in the nature of SJG’s related-party transactions since December 31, 2017. See Note 3 to the Financial Statements in Item 8 of SJI's and SJG’s Form 10-K for the year ended December 31, 2017 for a detailed description of the related parties and their associated transactions.

A summary of related-party transactions involving SJG, excluding pass-through items, included in SJG's Operating Revenues were as follows (in thousands):



	Three Months Ended March 31,
	2018		2017
Operating Revenues/Affiliates:
SJRG	$	2,588	$	963
Marina	103		82
Other	23		21
Total Operating Revenue/Affiliates	$	2,714	$	1,066

Related-party transactions involving SJG, excluding pass-through items, included in SJG's Cost of Sales and Operating Expenses were as follows (in thousands):



	Three Months Ended March 31,
	2018			2017
Costs of Sales/Affiliates (Excluding depreciation)
SJRG*	$	25,338		$	10,450

Operations Expense/Affiliates:
SJI	$	7,043		$	6,050
Millennium	697			708
Other	(115		)	(39		)
Total Operations Expense/Affiliates	$	7,625		$	6,719

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*As discussed in Note 1 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2017, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues – Nonutility on the condensed consolidated income statement.


4.	COMMON STOCK:

The following shares were issued and outstanding for SJI:



	2018
Beginning Balance, January 1	79,549,080
New Issuances During the Period:
Stock-Based Compensation Plan	63,809
Ending Balance, March 31	79,612,889

The par value ($1.25 per share) of stock issued was recorded in Common Stock and the net excess over par value of approximately $0.1 million was recorded in Premium on Common Stock.

There were 2,339,139 shares of SJG's common stock (par value $2.50 per share) outstanding as of March 31, 2018. SJG did not issue any new shares during the period. SJI owns all of the outstanding common stock of SJG.

SJI's EARNINGS PER COMMON SHARE (EPS) - SJI's Basic EPS is based on the weighted-average number of common shares outstanding. The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 129,369 and 121,812 for the three months ended March 31, 2018 and 2017, respectively. These additional shares relate to SJI's restricted stock as discussed in Note 2.

DIVIDEND REINVESTMENT PLAN (DRP) — SJI offers a DRP which allows participating shareholders to purchase shares of SJI common stock by automatic reinvestment of dividends or optional purchases. SJI currently purchases shares on the open market to fund share purchases by DRP participants, and as a result SJI did not raise any equity capital through the DRP in 2017 or 2018. SJI does not intend to issue equity capital via the DRP in 2018.


5.	FINANCIAL INSTRUMENTS:

RESTRICTED INVESTMENTS — Marina is required to maintain escrow accounts related to ongoing capital projects. As of both March 31, 2018 and December 31, 2017, the escrowed funds, including interest earned, totaled $0.3 million which are recorded in Restricted Investments on the condensed consolidated balance sheets.

SJI and SJG maintain margin accounts with selected counterparties to support their risk management activities. The balances required to be held in these margin accounts increase as the net value of the outstanding energy-related contracts with the respective counterparties decrease. As of March 31, 2018 and December 31, 2017, SJI's balances (including SJG) in these accounts totaled $16.4 million and $31.6 million, respectively, held by the counterparty, which is recorded in Restricted Investments on the condensed consolidated balance sheets. As of March 31, 2018 and December 31, 2017, SJG's balance held by the counterparty totaled $2.3 million and $2.9 million and was recorded in Restricted Investments on the condensed balance sheets.

The carrying amounts of the Restricted Investments for both SJI and SJG approximate their fair values at March 31, 2018 and December 31, 2017, which would be included in Level 1 of the fair value hierarchy (see Note 13).

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows (in thousands):



	As of March 31, 2018
Balance Sheet Line Item	SJI		SJG
Cash and Cash Equivalents	$	6,312	$	3,398
Restricted Investments	16,713		2,322
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	23,025	$	5,720

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	As of December 31, 2017
Balance Sheet Line Item	SJI		SJG
Cash and Cash Equivalents	$	7,819	$	1,707
Restricted Investments	31,876		2,912
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	39,695	$	4,619

NOTES RECEIVABLE-AFFILIATES - As of March 31, 2018, SJI had approximately $13.6 million included in Notes Receivable - Affiliate on the condensed consolidated balance sheets, due from Energenic, which is secured by its cogeneration assets for energy service projects. This note is subject to a reimbursement agreement that secures reimbursement for SJI, from its joint venture partner, of a proportionate share of any amounts that are not repaid.

LONG-TERM RECEIVABLES - SJG provides financing to customers for the purpose of attracting conversions to natural gas heating systems from competing fuel sources. The terms of these loans call for customers to make monthly payments over periods ranging from five to ten years, with no interest. The carrying amounts of such loans were $6.6 million and $7.0 million as of March 31, 2018 and December 31, 2017, respectively. The current portion of these receivables is reflected in Accounts Receivable and the non-current portion is reflected in Contract Receivables on the condensed consolidated balance sheets. The carrying amounts noted above are net of unamortized discounts resulting from imputed interest in the amount of $0.7 million as of both March 31, 2018 and December 31, 2017. The annualized amortization to interest is not material to SJI’s or SJG's condensed consolidated financial statements. The carrying amounts of these receivables approximate their fair value at March 31, 2018 and December 31, 2017, which would be included in Level 2 of the fair value hierarchy (see Note 13).

CREDIT RISK - As of March 31, 2018, SJI had approximately $4.3 million, or 11.9%, of the current and noncurrent Derivatives – Energy Related Assets transacted with one counterparty. This counterparty has contracts with a large number of diverse customers which minimizes the concentration of this risk. A portion of these contracts may be assigned to SJI in the event of default by the counterparty.

FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE - The fair value of a financial instrument is the market price to sell an asset or transfer a liability at the measurement date. The carrying amounts of SJI's and SJG's financial instruments approximate their fair values at March 31, 2018 and December 31, 2017, except as noted below.


•	For Long-Term Debt, in estimating the fair value, SJI and SJG use the present value of remaining cash flows at the balance sheet date. SJI and SJG based the estimates on interest rates available at the end of each period for debt with similar terms and maturities (Level 2 in the fair value hierarchy, see Note 13).

•

The estimated fair values of SJI's long-term debt (which includes SJG and all consolidated subsidiaries), including current maturities, as of March 31, 2018 and December 31, 2017, were $1,257.1 million and $1,216.1 million, respectively. The carrying amounts of SJI's long-term debt, including current maturities, as of March 31, 2018 and December 31, 2017, were $1,238.6 million and $1,186.8 million, respectively. SJI's carrying amounts as of March 31, 2018 and December 31, 2017 are net of unamortized debt issuance costs of $15.6 million and $17.4 million, respectively.

•

The estimated fair values of SJG's long-term debt, including current maturities, as of March 31, 2018 and December 31, 2017, were $831.6 million and $838.5 million, respectively. The carrying amount of SJG's long-term debt, including current maturities, as of March 31, 2018 and December 31, 2017, was $822.0 million and $821.9 million, respectively. The carrying amounts as of March 31, 2018 and December 31, 2017 are net of unamortized debt issuance costs of $7.1 million and $7.3 million, respectively.

OTHER FINANCIAL INSTRUMENTS - The carrying amounts of SJI's and SJG's other financial instruments approximate their fair values at March 31, 2018 and December 31, 2017.

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6.	SEGMENTS OF BUSINESS:

SJI operates in several different reportable operating segments which reflect the financial information regularly evaluated by the chief operating decision maker (CODM). These segments are as follows:


•	Gas utility operations (SJG) consist primarily of natural gas distribution to residential, commercial and industrial customers. The result of SJG are only included in this operating segment.


•	Wholesale energy operations include the activities of SJRG and SJEX.


•	SJE is involved in both retail gas and retail electric activities.


◦	Retail gas and other operations include natural gas acquisition and transportation service business lines.


◦	Retail electric operations consist of electricity acquisition and transportation to commercial, industrial and residential customers.


•	On-site energy production consists of Marina's thermal energy facility and other energy-related projects. Also included in this segment are the activities of ACB, ACLE, BCLE, SCLE, SXLE, MCS, NBS and SBS.

•

Appliance service operations includes SJESP, which serviced residential and small commercial HVAC systems, installed small commercial HVAC systems, provided plumbing services and serviced appliances under warranty via a subcontractor arrangement as well as on a time and materials basis. On September 1, 2017, SJESP sold certain assets of its residential and small commercial HVAC and plumbing business to a third party. SJESP continues to receive commissions paid on service contracts from the third party and will do so on a go forward basis.


•	Midstream was formed to invest in infrastructure and other midstream projects, including a current project to build a natural gas pipeline in Pennsylvania and New Jersey.


•	Costs incurred related to the agreement to acquire Elizabethtown Gas and Elkton Gas are recorded in the Corporate & Services segment.

SJI groups its nonutility operations into two categories: Energy Group and Energy Services. Energy Group includes wholesale energy, retail gas and other, and retail electric operations. Energy Services includes on-site energy production and appliance service operations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are treated as if the sales or transfers were to third parties at current market prices.

Information about SJI’s operations in different reportable operating segments is presented below (in thousands):



	Three Months Ended March 31,
	2018			2017
Operating Revenues:
Gas Utility Operations	$	234,459		$	196,814
Energy Group:
Wholesale Energy Operations	190,343			127,517
Retail Gas and Other Operations	40,201			36,878
Retail Electric Operations	44,035			48,957
Subtotal Energy Group	274,579			213,352
Energy Services:
On-Site Energy Production	21,157			19,612
Appliance Service Operations	520			1,658
Subtotal Energy Services	21,677			21,270
Corporate and Services	13,000			11,596
Subtotal	543,715			443,032
Intersegment Sales	(21,770		)	(17,203		)
Total Operating Revenues	$	521,945		$	425,829

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	Three Months Ended March 31,
	2018			2017
Operating Income (See Note 1):
Gas Utility Operations	$	92,801		$	81,225
Energy Group:
Wholesale Energy Operations	75,657			(11,626		)
Retail Gas and Other Operations	(5,758		)	(1,667		)
Retail Electric Operations	(208		)	1,306
Subtotal Energy Group	69,691			(11,987		)
Energy Services:
On-Site Energy Production	(554		)	(1,969		)
Appliance Service Operations	503			(72		)
Subtotal Energy Services	(51		)	(2,041		)
Corporate and Services	(4,571		)	1,667
Total Operating Income	$	157,870		$	68,864

Depreciation and Amortization:
Gas Utility Operations	$	20,315		$	17,362
Energy Group:
Wholesale Energy Operations	23			28
Retail Gas and Other Operations	75			83
Subtotal Energy Group	98			111
Energy Services:
On-Site Energy Production	10,271			11,593
Appliance Service Operations	—			54
Subtotal Energy Services	10,271			11,647
Corporate and Services	3,214			401
Total Depreciation and Amortization	$	33,898		$	29,521

Interest Charges (See Note 1):
Gas Utility Operations	$	6,728		$	5,878
Energy Group:
Wholesale Energy Operations	—			3,059
Retail Gas and Other Operations	146			85
Subtotal Energy Group	146			3,144
Energy Services:
On-Site Energy Production	3,847			5,814
Midstream	426			510
Corporate and Services	7,470			4,731
Subtotal	18,617			20,077
Intersegment Borrowings	(4,645		)	(3,332		)
Total Interest Charges	$	13,972		$	16,745

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	Three Months Ended March 31,
	2018			2017
Income Taxes (See Note 1):
Gas Utility Operations	$	21,836		$	29,911
Energy Group:
Wholesale Energy Operations	19,127			(6,319		)
Retail Gas and Other Operations	(1,534		)	(447		)
Retail Electric Operations	(58		)	535
Subtotal Energy Group	17,535			(6,231		)
Energy Services:
On-Site Energy Production	(1,157		)	(3,069		)
Appliance Service Operations	131			(17		)
Subtotal Energy Services	(1,026		)	(3,086		)
Midstream	62			(84		)
Corporate and Services	(1,992		)	1,360
Total Income Taxes	$	36,415		$	21,870

Property Additions (See Note 1):
Gas Utility Operations	$	50,237		$	62,280
Energy Group:
Wholesale Energy Operations	5			3
Retail Gas and Other Operations	173			295
Subtotal Energy Group	178			298
Energy Services:
On-Site Energy Production	1,113			7,349
Appliance Service Operations	—			6
Subtotal Energy Services	1,113			7,355
Midstream	211			152
Corporate and Services	3,345			93
Total Property Additions	$	55,084		$	70,178



	March 31, 2018			December 31, 2017
Identifiable Assets:
Gas Utility Operations	$	2,930,127		$	2,865,974
Energy Group:
Wholesale Energy Operations	150,330			208,785
Retail Gas and Other Operations	57,497			56,935
Retail Electric Operations	32,149			34,923
Subtotal Energy Group	239,976			300,643
Energy Services:
On-Site Energy Production	584,349			582,587
Appliance Service Operations	491			1,338
Subtotal Energy Services	584,840			583,925
Midstream	64,831			63,112
Discontinued Operations	1,751			1,757
Corporate and Services	640,996			711,038
Intersegment Assets	(572,441		)	(661,363		)
Total Identifiable Assets	$	3,890,080		$	3,865,086

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7.	RATES AND REGULATORY ACTIONS:

SJG is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU).

In March 2018, SJG filed a petition with the BPU for a change in rates, customer refund and rider associated with the implementation of Tax Reform. The BPU subsequently approved an interim rate reduction, effective April 1, 2018, to reflect the change in the corporate tax rate within SJG’s base rates. This petition is currently pending.

Also in March 2018, SJG filed a petition with the BPU seeking to continue its existing Energy Efficiency Programs (EEP's), with modifications, and to implement new programs (the “EEP IV”) for a five-year period with a proposed budget of approximately $195.4 million and with the same rate recovery mechanism that exists for its current EEP's. Under its existing EEP's, SJG is permitted to recover incremental operating and maintenance expenses and earn a return of, and return on, program investments. The matter is currently pending BPU approval.

There have been no other significant regulatory actions or changes to SJG's rate structure since December 31, 2017. See Note 10 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2017.


8.	REGULATORY ASSETS AND REGULATORY LIABILITIES:

There have been no significant changes to the nature of SJG’s regulatory assets and liabilities since December 31, 2017, which are described in Note 11 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2017. SJI has no regulatory assets or regulatory liabilities other than those of SJG.

SJI's and SJG's Regulatory Assets consisted of the following items (in thousands):



	March 31, 2018		December 31, 2017
Environmental Remediation Costs:
Expended - Net	$	110,529	$	100,327
Liability for Future Expenditures	161,263		171,696
Deferred Asset Retirement Obligation Costs	42,622		42,368
Deferred Pension and Other Postretirement Benefit Costs	78,211		78,211
Deferred Gas Costs - Net	54,351		16,838
Conservation Incentive Program Receivable	12,118		26,652
Societal Benefit Costs Receivable	2,699		2,484
Deferred Interest Rate Contracts	6,006		7,028
Energy Efficiency Tracker	1,832		2,094
Pipeline Supplier Service Charges	686		708
Pipeline Integrity Cost	4,977		5,280
AFUDC - Equity Related Deferrals	12,899		12,785
Other Regulatory Assets	3,436		2,753

Total Regulatory Assets	$	491,629	$	469,224

ENVIRONMENTAL REMEDIATION COSTS - SJG has two regulatory assets associated with environmental costs related to the cleanup of 12 sites where SJG or its predecessors previously operated gas manufacturing plants. The first asset, "Environmental Remediation Cost: Expended - Net," represents what was actually spent to clean up the sites, less recoveries through the Remediation Adjustment Clause (RAC) and insurance carriers. These costs meet the deferral requirements of GAAP, as the BPU allows SJG to recover such expenditures through the RAC. The other asset, "Environmental Remediation Cost: Liability for Future Expenditures," relates to estimated future expenditures required to complete the remediation of these sites. SJG recorded this estimated amount as a regulatory asset with the corresponding current and noncurrent liabilities on the condensed consolidated balance sheets under the captions "Current Liabilities" (both SJI and SJG), "Deferred Credits and Other Noncurrent Liabilities" (SJI) and "Regulatory and Other Noncurrent Liabilities" (SJG). The BPU allows SJG to recover the deferred costs over seven-year periods after they are spent.

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DEFERRED GAS COSTS - NET - Over/Under collections of gas costs are monitored through SJG's Basic Gas Supply Service (BGSS) bill credit. Net undercollected gas costs are classified as a regulatory asset, and net overcollected gas costs are classified as a regulatory liability. Derivative contracts used to hedge natural gas purchases are also included in the BGSS, subject to BPU approval. The BGSS regulatory asset increased $37.5 million from December 31, 2017 to March 31, 2018, primarily due to the actual gas commodity costs exceeding recoveries from customers.

CONSERVATION INCENTIVE PROGRAM (CIP) RECEIVABLE – The CIP tracking mechanism adjusts earnings when actual usage per customer experienced during the period varies from an established baseline usage per customer. Actual usage per customer was more than the established baseline during the first three months of 2018, resulting in a decrease in the receivable. This is primarily the result of cold weather experienced in the region.

SOCIETAL BENEFIT COSTS (SBC) RECEIVABLE - This regulatory asset primarily represents the deferred expenses incurred under the New Jersey Clean Energy Program, which is a mechanism designed to recover costs associated with energy efficiency and renewable energy programs. Previous SBC rates produced recoveries greater than SBC costs, which resulted in the regulatory liability.

SJI's and SJG's Regulatory Liabilities consisted of the following items (in thousands):



	March 31, 2018		December 31, 2017
Excess Plant Removal Costs	$	23,527	$	23,295
Excess Deferred Taxes	276,831		263,810

Total Regulatory Liabilities	$	300,358	$	287,105

EXCESS DEFERRED TAXES - As disclosed in Note 11 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2017, the Excess Deferred Tax balance relates to Tax Reform enacted into law December 22, 2017 (see Note 1). The increase in this regulatory liability of $13.0 million during the first three months of 2018 is related to excess tax amounts that were billed to customers in the first quarter of 2018. Pending approval by the BPU of the refund methodology, amounts are expected to be returned to customers in May 2018.


9.	PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three months ended March 31, 2018 and 2017, net periodic benefit cost related to the employee and officer pension and other postretirement benefit plans for SJI consisted of the following components (in thousands):



	Pension Benefits
	Three Months Ended March 31,
	2018			2017
Service Cost	$	2,177		$	1,382
Interest Cost	5,108			2,955
Expected Return on Plan Assets	(7,633		)	(3,524		)
Amortizations:
Prior Service Cost	71			33
Actuarial Loss	4,132			2,613
Net Periodic Benefit Cost	3,855			3,459
Capitalized Benefit Cost	(483		)	(1,271		)
Deferred Benefit Cost	(751		)	(161		)
Total Net Periodic Benefit Expense	$	2,621		$	2,027

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	Other Postretirement Benefits
	Three Months Ended March 31,
	2018			2017
Service Cost	$	81		$	247
Interest Cost	217			601
Expected Return on Plan Assets	(305		)	(853		)
Amortizations:
Prior Service Cost	(31		)	(86		)
Actuarial Loss	111			312
Net Periodic Benefit Cost	73			221
Capitalized Benefit Cost	(5		)	(55		)
Total Net Periodic Benefit Expense	$	68		$	166

The Pension Benefits Net Periodic Benefit Cost incurred by SJG was approximately $2.5 million of the totals presented in the table above for both the three months ended March 31, 2018 and 2017.During the three months ended March 31, 2018, and 2017, the Other Postretirement Benefits Net Periodic Benefit Cost incurred by SJG was less than $0.1 million and approximately $0.1 million, respectively, of the totals presented in the table above.

Capitalized benefit costs reflected in the table above relate to SJG’s construction program. Effective January 1, 2018, SJI and SJG adopted FASB ASU 2017-07 which stipulates that only the service cost component of net benefit cost is eligible for capitalization. In SJG's rate case settlement in October 2017, The BPU allowed the deferral until the next base rate case of incremental expense associated with the adoption.

SJI contributed $10.0 million to the pension plans, of which SJG contributed $8.0 million, in January 2017. No contributions were made to the pension plans by either SJI or SJG during the three months ended March 31, 2018. SJI and SJG do not expect to make any additional contributions to the pension plans in 2018; however, changes in future investment performance and discount rates may ultimately result in a contribution. Payments related to the unfunded supplemental executive retirement plan (SERP) are expected to be approximately $2.4 million in 2018. Prior to the base rate case settlement in October 2017, SJG also had a regulatory obligation to contribute approximately $3.6 million annually to the other postretirement benefit plans’ trusts, less direct costs incurred. The recent rate case settlement allows SJG to modify the future funding requirement level up to a limit that represents full funding of its obligation and to the maximum tax deduction allowed.

See Note 12 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2017 for additional information related to SJI’s and SJG's pension and other postretirement benefits.

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10.	LINES OF CREDIT:

Credit facilities and available liquidity as of March 31, 2018 were as follows (in thousands):



Company	Total Facility		Usage			Available Liquidity		Expiration Date
SJI:

Syndicated Revolving Credit Facility	$	400,000	$	141,000	(A)	$	259,000	August 2022
Revolving Credit Facility	50,000		50,000			—		September 2019

Total SJI	450,000		191,000			259,000

SJG:
Commercial Paper Program/Revolving Credit Facility	200,000		64,000		(B)	136,000		August 2022
Uncommitted Bank Line	10,000					10,000		August 2018 (C)

Total SJG	210,000		64,000			146,000

Total	$	660,000	$	255,000		$	405,000

(A) Includes letters of credit outstanding in the amount of $6.0 million.

(B) Includes letters of credit outstanding in the amount of $0.9 million.

The SJG facilities are restricted as to use and availability specifically to SJG; however, if necessary, the SJI facilities can also be used to support SJG’s liquidity needs. Borrowings under these credit facilities are at market rates. SJI's weighted average interest rate on these borrowings, which changes daily, was 2.67% and 1.98% at March 31, 2018 and 2017, respectively. SJG did not have any outstanding borrowings at March 31, 2018 under the credit facility; however, SJG did have $64.0 million outstanding under the commercial paper program. SJG's weighted average interest rate on these borrowings, which changes daily, was 2.32% and 1.15% at March 31, 2018 and March 31, 2017, respectively.

SJI's average borrowings outstanding under these credit facilities (which includes SJG), not including letters of credit, during the three months ended March 31, 2018 and 2017 were $238.0 million and $287.9 million, respectively. The maximum amounts outstanding under these credit facilities, not including letters of credit, during the three months ended March 31, 2018 and 2017 were $431.0 million and $354.1 million, respectively.

SJG's average borrowings outstanding under its credit facilities during the three months ended March 31, 2018 and 2017 were $47.7 million and $34.7 million, respectively. The maximum amounts outstanding under its credit facilities during the three months ended March 31, 2018 and 2017 were $85.0 million and $110.1 million, respectively.

The SJI and SJG principal credit facilities are provided by a syndicate of banks. In January 2018, the Note Purchase Agreements (NPA) for Senior Unsecured Notes issued by SJI were amended to reflect a financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective NPA) to not more than 0.70 to 1, measured at the end of each fiscal quarter. SJI and SJG were in compliance with this covenant as of March 31, 2018. However, one SJG bank facility still contains a financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective credit agreement) to not more that 0.65 to 1 measured at the end of each fiscal quarter. As a result, SJG must ensure that the ratio of indebtedness to total capitalization (as defined in the respective credit agreement) does not exceed 0.65 to 1, as measured at the end of each fiscal quarter.

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SJG has a commercial paper program under which SJG may issue short-term, unsecured promissory notes to qualified investors up to a maximum aggregate amount outstanding at any time of $200.0 million. The notes have fixed maturities which vary by note, but may not exceed 270 days from the date of issue. Proceeds from the notes are used for general corporate purposes. SJG uses the commercial paper program in tandem with its $200.0 million revolving credit facility and does not expect the principal amount of borrowings outstanding under the commercial paper program and the credit facility at any time to exceed an aggregate of $200.0 million.


11.	COMMITMENTS AND CONTINGENCIES:

GUARANTEES — As of March 31, 2018, SJI had issued $6.1 million of parental guarantees on behalf of an unconsolidated subsidiary. These guarantees generally expire within the next two years and were issued to enable the subsidiary to market retail natural gas.

GAS SUPPLY CONTRACTS - In the normal course of business, SJG and SJRG have entered into long-term contracts for natural gas supplies, firm transportation and gas storage service. The transportation and storage service agreements with interstate pipeline suppliers were made under Federal Energy Regulatory Commission (FERC) approved tariffs. SJG's cumulative obligation for gas supply-related demand charges and reservation fees paid to suppliers for these services averages approximately $5.8 million per month and is recovered on a current basis through the BGSS. SJRG's cumulative obligation for demand charges and reservation fees paid to suppliers for these services is approximately $0.5 million per month. SJRG has also committed to purchase a minimum of 604,000 dts/d and up to 954,000 dts/d of natural gas, from various suppliers, for terms ranging from 3 to 10 years at index-based prices.

COLLECTIVE BARGAINING AGREEMENTS — Unionized personnel represent approximately 40% and 57% of SJI's and SJG's workforce at March 31, 2018, respectively. SJI has collective bargaining agreements with two unions that represent these employees: the International Brotherhood of Electrical Workers (IBEW) Local 1293 and the International Association of Machinists and Aerospace Workers (IAM) Local 76. SJG employees represented by the IBEW operate under a collective bargaining agreement that runs through February 2022. SJG's remaining unionized employees are represented by the IAM and operate under a collective bargaining agreement that runs through August 2021.

STANDBY LETTERS OF CREDIT — As of March 31, 2018, SJI provided $6.0 million of standby letters of credit through its revolving credit facility to enable SJE to market retail electricity and for various construction and operating activities. SJG provided a $0.9 million letter of credit under its revolving credit facility to support the remediation of environmental conditions at certain locations in SJG's service territory. SJG has provided $25.1 million of additional letters of credit under a separate facility outside of the revolving credit facility to support variable-rate demand bonds issued through the New Jersey Economic Development Authority (NJEDA) to finance the expansion of SJG’s natural gas distribution system.

PENDING LITIGATION — SJI and SJG are subject to claims arising in the ordinary course of business and other legal proceedings. SJI has been named in, among other actions, certain gas supply contract disputes and certain product liability claims related to our former sand mining subsidiary.

SJI is currently involved in a pricing dispute related to two long-term gas supply contracts. On May 8, 2017, a jury from the United States District Court for the District of Colorado returned a verdict in favor of the plaintiff supplier. On July 21, 2017, the Court entered Final Judgment against SJG and SJRG. As a result of this ruling, SJG and SJRG have accrued, including interest, $20.6 million and $53.9 million, respectively, from the first quarter of 2017 through March 31, 2018. We believe that the amount to be paid by SJG reflects a gas cost that ultimately will be recovered from SJG’s customers through adjusted rates. As such, this amount was recorded as both an Accounts Payable and a reduction of Regulatory Liabilities on the condensed consolidated balance sheets of both SJI and SJG as of March 31, 2018. The amount associated with SJRG was also recorded as an Accounts Payable on the condensed consolidated balance sheets of SJI as of March 31, 2018, with charges of $0.1 million to Cost of Sales - Nonutility on the condensed consolidated statements of income of SJI for the three months ended March 31, 2018. SJI also recorded $0.2 million to Interest Charges on the condensed consolidated statements of income for the three months ended March 31, 2018. In April 2018, SJI filed an appeal of this judgment. During the pendency of the appeal, SJI continues to dispute the supplier invoices received and has created a reserve to reflect the difference between the invoices and paid amounts.

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The plaintiff supplier filed a second related lawsuit against SJG and SJRG in the United States District Court for the District of Colorado on December 21, 2017, alleging that SJG and SJRG have continued to breach the gas supply contracts notwithstanding the judgment in the prior lawsuit. The plaintiff supplier is seeking recovery of the amounts disputed by SJI since the earlier judgment, and a declaration regarding the price under the disputed contracts going forward until the contracts terminate in October 2019. SJI moved to stay the second lawsuit pending resolution of the post-judgment motions in the first lawsuit and any appeal of that lawsuit. All legal reserves related to this second lawsuit are recorded as part of the accrued amounts disclosed above.

Liabilities related to claims are accrued when the amount or range of amounts of probable settlement costs or other charges for these claims can be reasonably estimated. For matters other than the pricing dispute noted above, SJI has accrued approximately $3.1 million and $3.0 million related to all claims in the aggregate as of March 31, 2018 and December 31, 2017, respectively, of which SJG has accrued approximately $0.8 million and $0.7 million as of March 31, 2018 and December 31, 2017, respectively. Although SJI and SJG do not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, SJI and SJG can provide no assurance regarding the outcome of litigation.

ENVIRONMENTAL REMEDIATION COSTS — SJG incurred and recorded costs for environmental cleanup of 12 sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s. SJI and some of its nonutility subsidiaries also recorded costs for environmental cleanup of sites where SJF previously operated a fuel oil business and Morie maintained equipment, fueling stations and storage. Other than the changes discussed in Note 8 to the condensed consolidated financial statements, there have been no changes to the status of SJI’s environmental remediation efforts since December 31, 2017, as described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2017.


12.	DERIVATIVE INSTRUMENTS:

Certain SJI subsidiaries, including SJG, are involved in buying, selling, transporting and storing natural gas and buying and selling retail electricity for their own accounts as well as managing these activities for third parties. These subsidiaries are subject to market risk on expected future purchases and sales due to commodity price fluctuations. SJI and SJG use a variety of derivative instruments to limit this exposure to market risk in accordance with strict corporate guidelines. These derivative instruments include forward contracts, swap agreements, options contracts and futures contracts.

As of March 31, 2018, SJI and SJG had outstanding derivative contracts as follows (1 MMdts = one million decatherms; 1 MMmWh = one million megawatt hours):



	SJI Consolidated	SJG
Derivative contracts intended to limit exposure to market risk to:
Expected future purchases of natural gas (in MMdts)	45.3	13.3
Expected future sales of natural gas (in MMdts)	53.8	0.3
Expected future purchases of electricity (in MMmWh)	2.4	—
Expected future sales of electricity (in MMmWh)	2.0	—

Basis and Index related net purchase (sale) contracts (in MMdts)	31.8	(3.1	)

These contracts, which have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives - Energy Related Assets or Derivatives - Energy Related Liabilities on the condensed consolidated balance sheets of SJI and SJG. For SJE and SJRG contracts, the net unrealized pre-tax gains (losses) for these energy-related commodity contracts are included with realized gains (losses) in Operating Revenues – Nonutility on the condensed consolidated statements of income for SJI. These pre-tax gains were $23.4 million and $14.7 million for the three months ended March 31, 2018 and 2017, respectively. For SJG's contracts, the costs or benefits are recoverable through the BGSS clause, subject to BPU approval. As a result, the net unrealized pre-tax gains and losses for these energy-related commodity contracts are included with realized gains and losses in Regulatory Assets or Regulatory Liabilities on the condensed consolidated balance sheets of both SJI and SJG. As of March 31, 2018 and December 31, 2017, SJG had $0.7 million and $2.1 million of unrealized losses, respectively, included in its BGSS related to energy-related commodity contracts.

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SJI, including SJG, has also entered into interest rate derivatives to hedge exposure to increasing interest rates and the impact of those rates on cash flows of variable-rate debt. These interest rate derivatives, some of which had been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives - Other on the condensed consolidated balance sheets. Hedge accounting has been discontinued prospectively for these derivatives. As a result, any unrealized gains and losses on these derivatives, that were previously included in Accumulated Other Comprehensive Loss (AOCL) on the condensed consolidated balance sheets, are being recorded in earnings over the remaining life of the derivative.

In March 2017, SJI entered into a new interest rate derivative and amended the existing interest rate derivative linked to unrealized losses previously recorded in AOCL. SJI reclassified $2.4 million of pre-tax unrealized loss in AOCL to Interest Charges on the condensed consolidated statements of income as a result of the prior hedged transactions being deemed probable of not occurring.

For SJG interest rate derivatives, the fair value represents the amount SJG would have to pay the counterparty to terminate these contracts as of those dates.

As of March 31, 2018, SJI’s active interest rate swaps were as follows:



Notional Amount		Fixed Interest Rate	Start Date	Maturity	Obligor
$	20,000,000	3.049%	3/15/2017	3/15/2027	SJI
$	20,000,000	3.049%	3/15/2017	3/15/2027	SJI
$	10,000,000	3.049%	3/15/2017	3/15/2027	SJI
$	12,500,000	3.530%	12/1/2006	2/1/2036	SJG
$	12,500,000	3.430%	12/1/2006	2/1/2036	SJG

The unrealized gains and losses on interest rate derivatives that are not designated as cash flow hedges are included in Interest Charges in the condensed consolidated statements of income. However, for selected interest rate derivatives at SJG, management believes that, subject to BPU approval, the market value upon termination can be recovered in rates and, therefore, these unrealized losses have been included in Other Regulatory Assets in the condensed consolidated balance sheets.

The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017, are as follows (in thousands):



SJI (includes SJG and all other consolidated subsidiaries):
Derivatives not designated as hedging instruments under GAAP	March 31, 2018				December 31, 2017
	Assets		Liabilities		Assets		Liabilities
Energy-related commodity contracts:
Derivatives - Energy Related - Current	$	24,386	$	12,486	$	42,139	$	46,938
Derivatives - Energy Related - Non-Current	12,268		4,153		5,988		6,025
Interest rate contracts:
Derivatives - Other - Current	—		526		—		748
Derivatives - Other - Noncurrent	—		7,194		—		9,622
Total derivatives not designated as hedging instruments under GAAP	$	36,654	$	24,359	$	48,127	$	63,333

Total Derivatives	$	36,654	$	24,359	$	48,127	$	63,333

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SJG:
Derivatives not designated as hedging instruments under GAAP	March 31, 2018				December 31, 2017
	Assets		Liabilities		Assets		Liabilities
Energy-related commodity contracts:
Derivatives – Energy Related – Current	$	404	$	784	$	7,327	$	9,270
Derivatives – Energy Related – Non-Current	—		328		5		170
Interest rate contracts:
Derivatives – Other Current	—		337		—		389
Derivatives – Other Noncurrent	—		5,669		—		6,639
Total derivatives not designated as hedging instruments under GAAP	$	404	$	7,118	$	7,332	$	16,468

Total Derivatives	$	404	$	7,118	$	7,332	$	16,468

SJI and SJG enter into derivative contracts with counterparties, some of which are subject to master netting arrangements, which allow net settlements under certain conditions. These derivatives are presented at gross fair values on the condensed consolidated balance sheets.

As of March 31, 2018 and December 31, 2017, information related to these offsetting arrangements were as follows (in thousands):



As of March 31, 2018
Description	Gross amounts of recognized assets/liabilities			Gross amount offset in the balance sheet		Net amounts of assets/liabilities in balance sheet			Gross amounts not offset in the balance sheet						Net amount
Description	Gross amounts of recognized assets/liabilities			Gross amount offset in the balance sheet		Net amounts of assets/liabilities in balance sheet			Financial Instruments				Cash Collateral Posted		Net amount
SJI (includes SJG and all other consolidated subsidiaries):
Derivatives - Energy Related Assets	$	36,654		$	—	$	36,654		$	(10,086	)	(A)	$	—	$	26,568
Derivatives - Energy Related Liabilities	$	(16,639	)	$	—	$	(16,639	)	$	10,086		(B)	$	755	$	(5,798	)
Derivatives - Other	$	(7,720	)	$	—	$	(7,720	)	$	—			$	—	$	(7,720	)
SJG:
Derivatives - Energy Related Assets	$	404		$	—	$	404		$	(342	)	(A)	$	—	$	62
Derivatives - Energy Related Liabilities	$	(1,112	)	$	—	$	(1,112	)	$	342		(B)	$	755	$	(15	)
Derivatives - Other	$	(6,006	)	$	—	$	(6,006	)	$	—			$	—	$	(6,006	)

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As of December 31, 2017
Description	Gross amounts of recognized assets/liabilities			Gross amount offset in the balance sheet		Net amounts of assets/liabilities in balance sheet			Gross amounts not offset in the balance sheet						Net amount
Description	Gross amounts of recognized assets/liabilities			Gross amount offset in the balance sheet		Net amounts of assets/liabilities in balance sheet			Financial Instruments				Cash Collateral Posted		Net amount
SJI (includes SJG and all other consolidated subsidiaries):
Derivatives - Energy Related Assets	$	48,127		$	—	$	48,127		$	(24,849	)	(A)	$	—	$	23,278
Derivatives - Energy Related Liabilities	$	(52,963	)	$	—	$	(52,963	)	$	24,849		(B)	$	8,832	$	(19,282	)
Derivatives - Other	$	(10,370	)	$	—	$	(10,370	)	$	—			$	—	$	(10,370	)
SJG:
Derivatives - Energy Related Assets	$	7,332		$	—	$	7,332		$	(208	)	(A)	$	—	$	7,124
Derivatives - Energy Related Liabilities	$	(9,440	)	$	—	$	(9,440	)	$	208		(B)	$	1,543	$	(7,689	)
Derivatives - Other	$	(7,028	)	$	—	$	(7,028	)	$	—			$	—	$	(7,028	)

(A) The balances at March 31, 2018 and December 31, 2017 were related to derivative liabilities which can be net settled against derivative assets.

(B) The balances at March 31, 2018 and December 31, 2017 were related to derivative assets which can be net settled against derivative liabilities.

The effect of derivative instruments on the condensed consolidated statements of income for the three months ended March 31, 2018 and 2017 are as follows (in thousands):



	Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships under GAAP	2018			2017
SJI (includes SJG and all other consolidated subsidiaries):
Interest Rate Contracts:
Losses reclassified from AOCL into income (a)	$	(12	)	$	(2,487	)

SJG:
Interest Rate Contracts:
Losses reclassified from AOCL into income (a)	$	(12	)	$	(12	)

(a) Included in Interest Charges



	Three Months Ended March 31,
Derivatives Not Designated as Hedging Instruments under GAAP	2018		2017
SJI (includes SJG and all other consolidated subsidiaries):
Gains on energy-related commodity contracts (a)	$	23,353	$	14,688
Gains (Losses) on interest rate contracts (b)	1,628		(1,005		)

Total	$	24,981	$	13,683

(a) Included in Operating Revenues - Nonutility

(b) Included in Interest Charges

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Certain of SJI’s derivative instruments contain provisions that require immediate payment or demand immediate and ongoing collateralization on derivative instruments in net liability positions in the event of a material adverse change in the credit standing of SJI. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on March 31, 2018, is $1.0 million. If the credit-risk-related contingent features underlying these agreements were triggered on March 31, 2018, SJI would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $0.2 million after offsetting asset positions with the same counterparties under master netting arrangements.


13.	FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:

GAAP establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques. The levels of the hierarchy are described below:


•	Level 1: Observable inputs, such as quoted prices in active markets for identical assets or liabilities.


•	Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.


•	Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy.

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For financial assets and financial liabilities measured at fair value on a recurring basis, information about the fair value measurements for each major category is as follows (in thousands):



As of March 31, 2018	Total		Level 1		Level 2		Level 3
SJI (includes SJG and all other consolidated subsidiaries):
Assets
Available-for-Sale Securities (A)	$	36	$	36	$	—	$	—
Derivatives – Energy Related Assets (B)	36,654		935		14,121		21,598
	$	36,690	$	971	$	14,121	$	21,598
SJG:
Assets
Derivatives – Energy Related Assets (B)	$	404	$	342	$	62	$	—
	$	404	$	342	$	62	$	—
SJI (includes SJG and all other consolidated subsidiaries):
Liabilities
Derivatives – Energy Related Liabilities (B)	$	16,639	$	3,947	$	7,680	$	5,012
Derivatives – Other (C)	7,720		—		7,720		—
	$	24,359	$	3,947	$	15,400	$	5,012
SJG:
Liabilities
Derivatives – Energy Related Liabilities (B)	$	1,112	$	1,097	$	9	$	6
Derivatives – Other (C)	6,006		—		6,006		—
	$	7,118	$	1,097	$	6,015	$	6



As of December 31, 2017	Total		Level 1		Level 2		Level 3
SJI (includes SJG and all other consolidated subsidiaries):
Assets
Available-for-Sale Securities (A)	$	36	$	36	$	—	$	—
Derivatives – Energy Related Assets (B)	48,127		5,155		21,869		21,103
	$	48,163	$	5,191	$	21,869	$	21,103
SJG:
Assets
Derivatives – Energy Related Assets (B)	$	7,332	$	208	$	230	$	6,894
	$	7,332	$	208	$	230	$	6,894

SJI (includes SJG and all other consolidated subsidiaries):
Liabilities
Derivatives – Energy Related Liabilities (B)	$	52,963	$	10,687	$	24,283	$	17,993
Derivatives – Other (C)	10,370		—		10,370		—
	$	63,333	$	10,687	$	34,653	$	17,993
SJG:
Liabilities
Derivatives – Energy Related Liabilities (B)	$	9,440	$	1,750	$	2,848	$	4,842
Derivatives – Other (C)	7,028		—		7,028		—
	$	16,468	$	1,750	$	9,876	$	4,842

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(A) Available-for-Sale Securities include securities that are traded in active markets and securities that are not traded publicly. The securities traded in active markets are valued using the quoted principal market close prices that are provided by the trustees and are categorized in Level 1 in the fair value hierarchy.

(B) Derivatives – Energy Related Assets and Liabilities are traded in both exchange-based and non-exchange-based markets. Exchange-based contracts are valued using unadjusted quoted market sources in active markets and are categorized in Level 1 in the fair value hierarchy. Certain non-exchange-based contracts are valued using indicative price quotations available through brokers or over-the-counter, on-line exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask mid-point prices and are obtained from sources that management believes provide the most liquid market. For non-exchange-based derivatives that trade in less liquid markets with limited pricing information, model inputs generally would include both observable and unobservable inputs. In instances where observable data is unavailable, management considers the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 as the model inputs generally are not observable.

Significant Unobservable Inputs - Management uses the discounted cash flow model to value Level 3 physical and financial forward contracts, which calculates mark-to-market valuations based on forward market prices, original transaction prices, volumes, risk-free rate of return and credit spreads. Inputs to the valuation model are reviewed and revised as needed, based on historical information, updated market data, market liquidity and relationships, and changes in third party pricing sources. The validity of the mark-to-market valuations and changes in mark-to-market valuations from period to period are examined and qualified against historical expectations by the risk management function. If any discrepancies are identified during this process, the mark-to-market valuations or the market pricing information is evaluated further and adjusted, if necessary.

Level 3 valuation methods for natural gas derivative contracts include utilizing another location in close proximity adjusted for certain pipeline charges to derive a basis value. The significant unobservable inputs used in the fair value measurement of certain natural gas contracts consist of forward prices developed based on industry-standard methodologies. Significant increases (decreases) in these forward prices for purchases of natural gas would result in a directionally similar impact to the fair value measurement and for sales of natural gas would result in a directionally opposite impact to the fair value measurement. Level 3 valuation methods for electric represent the value of the contract marked to the forward wholesale curve, as provided by daily exchange quotes for delivered electricity. The significant unobservable inputs used in the fair value measurement of electric contracts consist of fixed contracted electric load profiles; therefore, no change in unobservable inputs would occur. Unobservable inputs are updated daily using industry-standard techniques. Management reviews and corroborates the price quotations to ensure the prices are observable which includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration.

(C) Derivatives – Other are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.

The following table provides quantitative information regarding significant unobservable inputs in Level 3 fair value measurements (in thousands):

SJI (includes SJG and all other consolidated subsidiaries):



Type	Fair Value at March 31, 2018		Valuation Technique	Significant Unobservable Input	Range [Weighted Average]
	Assets	Liabilities
Forward Contract - Natural Gas	$14,669	$3,037	Discounted Cash Flow	Forward price (per dt)	$1.72 - $7.14 [$2.65]	(A)
Forward Contract - Electric	$6,929	$1,975	Discounted Cash Flow	Fixed electric load profile (on-peak)	37.45% - 100.00% [53.28%]	(B)
Forward Contract - Electric	$6,929	$1,975	Discounted Cash Flow	Fixed electric load profile (off-peak)	0.00% - 62.55% [46.72%]	(B)

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Type	Fair Value at December 31, 2017		Valuation Technique	Significant Unobservable Input	Range [Weighted Average]
	Assets	Liabilities
Forward Contract - Natural Gas	$13,519	$15,686	Discounted Cash Flow	Forward price (per dt)	$1.79 - $12.09 [$3.01]	(A)
Forward Contract - Electric	$7,584	$2,307	Discounted Cash Flow	Fixed electric load profile (on-peak)	36.36% - 100.00% [53.39%]	(B)
Forward Contract - Electric	$7,584	$2,307	Discounted Cash Flow	Fixed electric load profile (off-peak)	0.00% - 63.64% [46.61%]	(B)

SJG:



Type	Fair Value at March 31, 2018				Valuation Technique	Significant Unobservable Input	Range [Weighted Average]
	Assets		Liabilities
Forward Contract - Natural Gas	$	—	$	6	Discounted Cash Flow	Forward price (per dt)	$2.16- $2.61 [$2.28]	(A)



Type	Fair Value at December 31, 2017				Valuation Technique	Significant Unobservable Input	Range [Weighted Average]
	Assets		Liabilities
Forward Contract - Natural Gas	$	6,894	$	4,842	Discounted Cash Flow	Forward price (per dt)	$2.42 - $6.67 [$5.25]	(A)

(A) Represents the range, along with the weighted average, of forward prices for the sale and purchase of natural gas.

(B) Represents the range, along with the weighted average, of the percentage of contracted usage that is loaded during on-peak hours versus off-peak.

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The changes in fair value measurements of Derivatives – Energy Related Assets and Liabilities for the three months ended March 31, 2018 and 2017, using significant unobservable inputs (Level 3), are as follows (in thousands):



	Three Months Ended March 31, 2018
SJI (includes SJG and all other consolidated subsidiaries):
Balance at beginning of period	$	3,110
Other Changes in Fair Value from Continuing and New Contracts, Net	3,989
Settlements	9,487

Balance at end of period	$	16,586

SJG:
Balance at beginning of period	$	2,052
Other Changes in Fair Value from Continuing and New Contracts, Net	(6		)
Settlements	(2,052		)

Balance at end of period	$	(6	)



	Three Months Ended March 31, 2017
SJI (includes SJG and all other consolidated subsidiaries):
Balance at beginning of period	$	9,035
Other Changes in Fair Value from Continuing and New Contracts, Net	(988		)
Settlements	8,187

Balance at end of period	$	16,234

SJG:
Balance at beginning of period	$	926
Other Changes in Fair Value from Continuing and New Contracts, Net	511
Settlements	(926		)

Balance at end of period	$	511

Total gains included in earnings for SJI for the three months ended March 31, 2018 that are attributable to the change in unrealized gains relating to those assets and liabilities included in Level 3 still held as of March 31, 2018, are $4.0 million. These gains are included in Operating Revenues-Nonutility on the condensed consolidated statements of income.

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14.	LONG-TERM DEBT:

In January 2018, SJI issued the following Medium Term Notes (MTN's): (a) $25.0 million aggregate principal amount of 3.32% Senior Notes, Series 2017A-2, due January 2025 and (b) $25.0 million aggregate principal amount of 3.56% Senior Notes, Series 2017B-2, due January 2028.

SJI and SJG did not issue or retire any other long-term debt during the three months ended March 31, 2018.


15.	ACCUMULATED OTHER COMPREHENSIVE LOSS:

The following table summarizes the changes in SJI's accumulated other comprehensive loss (AOCL) for the three months ended March 31, 2018 (in thousands):




	Postretirement Liability Adjustment			Unrealized Gain (Loss) on Derivatives-Other			Unrealized Gain (Loss) on Available-for-Sale Securities			Other Comprehensive Income (Loss) of Affiliated Companies			Total
Balance at January 1, 2018 (a)	$	(36,262	)	$	(396	)	$	(10	)	$	(97	)	$	(36,765	)
Other comprehensive income before reclassifications	—			—			—			—			—
Amounts reclassified from AOCL (b)	—			9			—			—			9
Net current period other comprehensive income	—			9			—			—			9
Balance at March 31, 2018 (a)	$	(36,262	)	$	(387	)	$	(10	)	$	(97	)	$	(36,756	)

(a) Determined using a combined average statutory tax rate of 25%.

(b) See table below.

The following table provides details about reclassifications out of SJI's AOCL for the three months ended March 31, 2018 (in thousands):



Components of AOCL	Amounts Reclassified from AOCL			Affected Line Item in the Condensed Consolidated Statements of Income
Components of AOCL	Three Months Ended March 31, 2018
Unrealized Loss on Derivatives-Other - interest rate contracts designated as cash flow hedges	$	12		Interest Charges
Income Taxes	(3		)	Income Taxes (a)
Losses from reclassifications for the period net of tax	$	9

(a) Determined using a combined average statutory tax rate of 25%.

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The following table summarizes the changes in SJG's AOCL for the three months ended March 31, 2018 (in thousands):




	Postretirement Liability Adjustment			Unrealized Gain (Loss) on Derivatives-Other			Total
Balance at January 1, 2018 (a)	$	(25,507	)	$	(490	)	$	(25,997	)
Other comprehensive loss before reclassifications	—			—			—
Amounts reclassified from AOCL (b)	—			9			9
Net current period other comprehensive income	—			9			9
Balance at March 31, 2018 (a)	$	(25,507	)	$	(481	)	$	(25,988	)

(a) Determined using a combined average statutory tax rate of 25%.

(b) See table below.

The reclassifications out of SJG's AOCL during the three months ended March 31, 2018 are as follows (in thousands):



Components of AOCL	Amounts Reclassified from AOCL			Affected Line Item in the Condensed Statements of Income
Components of AOCL	Three Months Ended March 31, 2018			Affected Line Item in the Condensed Statements of Income
Unrealized Loss in on Derivatives - Other - Interest Rate Contracts designated as cash flow hedges	$	12		Interest Charges
Income Taxes	(3		)	Income Taxes (a)
Losses from reclassifications for the period net of tax	$	9

(a) Determined using a combined average statutory tax rate of 25%.


16.	REVENUE:

At contract inception, SJI and SJG assess the goods and services promised in all of its contracts with customers, and identifies a performance obligation for each promise to transfer to a customer a distinct good or service.

As applicable for each revenue stream and customer contract type, SJI and SJG follow two approaches:


•	SJI and SJG have elected the Practical Expedient in ASC 606 for recognizing revenue on contracts with customers on a portfolio of performance obligations with similar characteristics, as we reasonably expect the effects of applying the guidance to the portfolio would not differ materially from applying it to individual contracts.

•

SJI and SJG apply the accounting guidance for recognizing revenue on contracts with customers on a series of distinct goods and services as one performance obligation, as long as the distinct goods and services are part of a series that are substantially the same and satisfied over time, and the same method would be used to measure progress towards satisfaction of the performance obligation. All performance obligations noted below under "Revenue Recognized Over Time" apply this guidance.

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Below is a listing of all performance obligations that arise from contracts with customers, along with details on the satisfaction of each performance obligation, the significant payment terms, and the nature of the goods and services being transferred:



Revenue Recognized Over Time:
Reportable Segment	Performance Obligation	Description
Gas Utility Operations; Wholesale Energy Operations; Retail Gas and Other Operations	Natural Gas	SJG sells natural gas to residential, commercial and industrial customers, and price is based on regulated tariff rates which are established by the BPU. There is an implied contract between SJG and a customer for the purchase, delivery, and sale of gas, and the customer is billed monthly, with payment due within 30 days. SJRG sells natural gas to commercial customers at either a fixed quantity or at variable quantities based on a customer's needs. Payment is due on the 25th of each month for the previous month's deliveries. SJE sells natural gas to commercial, industrial and residential customers at fixed prices throughout the life of the contract, with the customer billed monthly and payment due within 30 days. For all three segments, revenue is currently being recognized over time based upon volumes delivered (i.e. unit of output) or through the passage of time ratably as the customer uses natural gas, which represents satisfaction of the performance obligation.
Gas Utility Operations; Wholesale Energy Operations	Pipeline transportation capacity	SJG and SJRG sell pipeline transportation capacity on a wholesale basis to various customers on the interstate pipeline system and transport natural gas purchased directly from producers or suppliers to their customers. These contracts to sell this capacity are at a price, quantity and time period agreed to by both parties determined on a contract by contract basis. Payment is due on the 25th of each month for the previous month's deliveries. Revenue is currently being recognized over time based upon volumes delivered (i.e. unit of output) or through the passage of time ratably coinciding with the delivery of gas and the customer obtaining control, which represents satisfaction of the performance obligation.
Wholesale Energy Operations	Fuel Management Services	SJRG currently has ten fuel supply management contracts where SJRG has acquired pipeline transportation capacity that allows SJRG to match end users, many of which are merchant generators, with producers looking to find a long-term solution for their supply. Natural gas is sold to the merchant generator daily based on their needs, with payment made either weekly or biweekly depending on the contract. Revenue is currently being recognized over time based upon volumes delivered (i.e. unit of output) coinciding with the delivery of gas and the customer obtaining control, which represents satisfaction of the performance obligation.
Retail Electric Operations	Electricity	SJE sells electricity to commercial, industrial and residential customers at fixed prices throughout the life of the contract, with the customer billed monthly and payment due within 30 days. Revenue is currently being recognized over time based upon volumes delivered (i.e. unit of output) or through the passage of time ratably coinciding with the delivery of electricity and the customer obtaining control, which represents satisfaction of the performance obligation.
On-Site Energy Production	Solar	Marina has several wholly-owned solar projects that earn revenue based on electricity generated. The customer pays monthly as electricity is being generated, with payment due within 30 days. The performance obligation is satisfied as kwh's of energy are generated (i.e. unit of output), which is when revenue is recognized.
On-Site Energy Production	Marina Thermal Facility	Marina has a contract with a casino and resort in Atlantic City, NJ to provide cooling, heating and emergency power. There are multiple performance obligations with this contract, including electric, chilled water and hot water, and each of these are considered distinct and separately identifiable, and they are all priced separately. These performance obligations are satisfied over time ratably as they are used by the customer, who is billed monthly. Payment is due within 30 days.

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Revenue Recognized at a Point in Time:
Reportable Segment	Performance Obligation	Description
On-Site Energy Production	SREC's	The customer is billed based on a contracted amount of SREC's to be sold, with the price based on the market price of the SRECs at the time of generation. This does not represent variable consideration as the price is known and established at the time of generation and delivery to the customer. The performance obligation is satisfied at the point in time the SREC is delivered to the customer, which is when revenue is recognized. Payment terms are approximately 10 days subsequent to delivery.

For all revenue streams listed above, revenue is recognized using the Practical Expedient in ASC 606 which allows an entity to recognize revenue in the amount that is invoiced, as long as that amount corresponds to the value to the customer ("Invoiced Practical Expedient"). SJI's and SJG's contracts with customers discussed above are at prices that are known to the customer at the time of delivery, either through a fixed contractual price or market prices that are established and tied to each delivery. These amounts match the value to the customer as they are purchasing and obtaining the good or service on the same day at the agreed-upon price. This eliminates any variable consideration in transaction price, and as a result revenue is recognized at this price at the time of delivery.

SJI and SJG have determined that the above methods provide a faithful depiction of the transfer of goods or services to the customer. For all above performance obligations, SJI's and SJG's efforts are expended throughout the contract based on seasonality and customer needs. Further, for various contracts among each performance obligation, SJI and SJG may have a stand ready obligation to provide goods or services on an as needed basis to the customer.

Because the Invoiced Practical Expedient is used for recognizing revenue, SJI and SJG further adopted the Practical Expedient in ASC 606 that allows both company's to not disclose additional information regarding remaining performance obligations.

Revenues from contracts with customers total $444.0 million and $193.9 million for SJI and SJG, respectively. The SJG balance is a part of the gas utility operating segment, and is before intercompany eliminations with other SJI entities. Revenues on the condensed consolidated statements of income that are not with contracts with customers consist of (a) revenues from alternative revenue programs at the gas utility operations at SJG, and (b) nonutility revenue from derivative contracts at the wholesale energy, retail gas and retail electric operating segments.

SJI and SJG disaggregate revenue from contracts with customers into customer type and product line. SJI and SJG have determined that disaggregating revenue into these categories achieves the disclosure objective in ASC 606 to depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors. Further, disaggregating revenue into these categories is consistent with information regularly reviewed by the CODM in evaluating the financial performance of SJI's operating segments. SJG only operates in the Gas Utility Operations segment. See Note 6 for further information regarding SJI's operating segments.

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Disaggregated revenues from contracts with customers, by both customer type and product line, are disclosed below, by operating segment, for the three months ended March 31, 2018 (in thousands):



Three Months Ended March 31, 2018
	Gas Utility Operations	Wholesale Energy Operations	Retail Gas and Other Operations	Retail Electric Operations	On-Site Energy Production	Appliance Service Operations	Corporate Services and Intersegment		Total
Customer Type:
Residential	147,262	—	—	8,096	—	520	—		155,878
Commercial & Industrial	40,805	173,846	33,246	21,950	21,157	—	(8,770	)	282,234
OSS & Capacity Release	5,204	—	—	—	—	—	—		5,204
Other	663	—	—	—	—	—	—		663
	193,934	173,846	33,246	30,046	21,157	520	(8,770	)	443,979
Product Line:
Gas	193,934	173,846	33,246	—	—	—	(4,574	)	396,452
Electric	—	—	—	30,046	—	—	(1,668	)	28,378
Solar	—	—	—	—	11,836	—	(2,528	)	9,308
CHP	—	—	—	—	7,853	—	—		7,853
Landfills	—	—	—	—	1,468	—	—		1,468
Other	—	—	—	—	—	520	—		520
	193,934	173,846	33,246	30,046	21,157	520	(8,770	)	443,979

The following table provides information about SJI's and SJG's receivables and unbilled revenue from contracts with customers (in thousands):



	Accounts Receivable (1)			Unbilled Revenue (2)
SJI (including SJG and all other consolidated subsidiaries):
Beginning balance as of 1/1/18	$	202,379		$	73,377
Ending balance as of 3/31/18	243,395			62,601
Increase (Decrease)	$	(41,016	)	$	10,776
SJG:
Beginning balance as of 1/1/18	$	78,571		$	54,980
Ending balance as of 3/31/18	128,583			44,287
Increase (Decrease)	$	(50,012	)	$	10,693

(1) Included in Accounts Receivable in the condensed consolidated balance sheets. A receivable is SJI's and SJG's right to consideration that is unconditional, as only the passage of time is required before payment is expected from the customer. All of SJI's and SJG's Accounts Receivable arise from contracts with customers.

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(2) Included in Unbilled Revenues in the condensed consolidated balance sheets. All unbilled revenue for SJI and SJG arises from contracts with customers. Unbilled revenue relates to SJI's and SJG's right to receive payment for commodity delivered but not yet billed. This represents contract assets that arise from contracts with customers, which is defined in ASC 606 as the right to payment in exchange for goods already transferred to a customer, excluding any amounts presented as a receivable. The unbilled revenue is transferred to accounts receivable when billing occurs and the rights to collection become unconditional. The change in unbilled revenues for the three months ended March 31, 2018 is due primarily to the timing difference between SJI and SJG delivering the commodity to the customer and the customer actually receiving the bill for payment.


17.	SUBSEQUENT EVENTS:

In April 2018, the Company completed the following public offerings, the net proceeds of which are expected to fund a portion of the consideration to be paid for the assets of Elizabethtown Gas and Elkton Gas (see Note 1):

•

SJI offered 12,669,491 shares of its common stock, par value $1.25 per share, at a public offering price of $29.50 per share. Of the offered shares, 5,889,830 shares were issued at closing, including 1,652,542 shares pursuant to the underwriters’ option. The gross proceeds from these shares was $173.7 million, with net proceeds after deducting underwriting discounts and commissions of $167.7 million. The remaining 6,779,661 shares of common stock ("Forward Shares") are to be sold by Bank of America, N.A., as forward seller, pursuant to a forward sale agreement. The Company received no proceeds from the sale of the Forward Shares at the closing. SJI has an option to settle the forward sale agreement by delivering newly issued shares of SJI common stock and receive proceeds, subject to certain adjustments, from the sale of those shares, assuming one or more future physical settlements of the forward sale agreement, no later than April 2019. SJI may also choose to settle the forward sale contract with a cash payment, or multiple cash payments, no later than April 2019. In the event SJI elects to settle all or a portion of the forward sale contract with a cash payment, no additional shares of SJI common stock would be issued under the forward sale contract for the portions that were cash settled.

•

SJI issued and sold 5,750,000 Equity Units, initially in the form of Corporate Units, which included 750,000 Corporate Units pursuant to the underwriters’ option. Each Corporate Unit has a stated amount of $50 and is comprised of (a) a purchase contract obligating the holder to purchase from the Company, and for the Company to sell to the holder for a price in cash of $50, on the purchase contract settlement date, or April 15, 2021, subject to earlier termination or settlement, a certain number of shares of common stock; and (b) a 1/20, or 5%, undivided beneficial ownership interest in $1,000 principal amount of SJI’s 2018 Series A 3.70% Remarketable Junior Subordinated Notes due 2031. This offering resulted in gross proceeds of approximately $287.5 million, with net proceeds after deducting underwriting discounts and commissions of $278.9 million.

In April 2018, SJI entered into a Note Purchase Agreement (NPA) that provides for the issuance by the Company of an aggregate of $250.0 million of senior unsecured notes. Pursuant to the NPA, the Company issued $90.0 million of 3.18% Senior Notes, Series 2018A, due April 2021. The NPA also provides for the issuance of (a) $80.0 million aggregate principal amount of the Company’s 3.78% Senior Notes, Series 2018B, due 2028, on the ten-year anniversary of the date of initial issuance; and (b) $80.0 million aggregate principal amount of the Company’s 3.88% Senior Notes, Series 2018C, due 2030, on the twelve-year anniversary of the date of initial issuance. The Company anticipates issuing the additional notes at future dates to be determined.

In April 2018, SJI paid down $116.0 million of its syndicated revolving credit facility, along with its $50.0 million revolving credit facility.

As a result of SJI's equity and debt issuances noted above, along with the successful amendment of SJI's Senior Unsecured Notes and bank credit facilities (see Note 10), the Bridge Facility has subsequently been reduced to $1.16 billion and is expected to be reduced by future issuances of long-term and short-term debt closer to the date of the closing of the acquisition.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Management's Discussion and Analysis of Financial Condition and Results of Operations (Management's Discussion) analyzes the financial condition, results of operations and cash flows of South Jersey Industries, Inc. (SJI) and its subsidiaries. It also includes management’s analysis of past financial results and potential factors that may affect future results, potential future risks and approaches that may be used to manage them. Except where the content clearly indicates otherwise, “SJI,” “we,” “us” or “our” refers to the holding company or the consolidated entity of SJI and all of its subsidiaries.

Management's Discussion is divided into the following two major sections:


•	SJI - This section describes the financial condition and results of operations of South Jersey Industries, Inc. and its subsidiaries on a consolidated basis. It includes discussions of our regulated operations, including South Jersey Gas Company (SJG), and our non-regulated operations.


•	SJG - This section describes the financial condition and results of operations of SJG, a subsidiary of SJI, which comprises the gas utility operations segment.

Both sections of Management's Discussion - SJI and SJG - are designed to provide an understanding of each company's respective operations and financial performance and should be read in conjunction with each other as well as in conjunction with the respective company's financial statements and the combined Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report as well as SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2017.

Unless otherwise noted, earnings per share amounts are presented on a diluted basis, and are based on weighted average common and common equivalent shares outstanding. SJI's and SJG's operations are seasonal and accordingly, operating results for the interim periods presented are not indicative of the results to be expected for the full fiscal year.

Forward-Looking Statements and Risk Factors — This Quarterly Report, including information incorporated by reference, contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position, expected sources of incremental margin, strategy, financing needs, future capital expenditures and the outcome or effect of ongoing litigation, are forward-looking. This Quarterly Report uses words such as "anticipate," "believe," "expect," "estimate," "forecast," "goal," "intend," "objective," "plan," "project," "seek," "strategy," "target," "will" and similar expressions to identify forward-looking statements. These forward-looking statements are based on the beliefs and assumptions of management at the time that these statements were prepared and are inherently uncertain. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These risks and uncertainties include, but are not limited to, general economic conditions on an international, national, state and local level; weather conditions in SJI’s marketing areas; changes in commodity costs; changes in the availability of natural gas; “non-routine” or “extraordinary” disruptions in SJI’s distribution system; regulatory, legislative and court decisions; competition; the availability and cost of capital; costs and effects of legal proceedings and environmental liabilities; the failure of customers, suppliers or business partners to fulfill their contractual obligations; and changes in business strategies.

These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ materially from those expressed in the forward-looking statements, are described in greater detail under the heading “Item 1A. Risk Factors” in this Quarterly Report, SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2017 and in any other SEC filings made by SJI or SJG during 2018 and prior to the filing of this Quarterly Report. No assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made. SJI and SJG undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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Critical Accounting Policies — Estimates and Assumptions — Management must make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. Actual results could differ from those estimates. Six types of transactions presented in our condensed consolidated financial statements require a significant amount of judgment and estimation. These relate to regulatory accounting, derivatives, environmental remediation costs, pension and other postretirement employee benefit costs, revenue recognition, and impairment of long-lived assets. A discussion of these estimates and assumptions may be found in SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2017.

New Accounting Pronouncements — See detailed discussions concerning New Accounting Pronouncements and their impact on SJI and SJG in Note 1 to the condensed consolidated financial statements.

Regulatory Actions — Other than the changes discussed in Note 7 to the condensed consolidated financial statements, there have been no significant regulatory actions since December 31, 2017. See detailed discussion concerning Regulatory Actions in Note 10 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2017.

Environmental Remediation — Other than the changes discussed in Note 8 to the condensed consolidated financial statements, there have been no significant changes to the status of SJI’s and SJG's environmental remediation efforts since December 31, 2017. See detailed discussion concerning Environmental Remediation Costs in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2017.

Impairment of Long-Lived Assets — Long-lived assets that are held and used are reviewed for impairment whenever events or changes in circumstances, such as significant adverse changes in regulation, business climate or market conditions, indicate carrying values may not be recoverable. Such reviews are performed in accordance with ASC 360. An impairment loss is indicated if the total future estimated undiscounted cash flows expected from an asset are less than its carrying value. An impairment charge is measured by the difference between an asset's carrying amount and fair value with the difference recorded within Operating Expenses on the condensed consolidated statements of income. Fair values can be determined by a variety of valuation methods, including third-party appraisals, sales prices of similar assets, and present value techniques. SJI and SJG determine the fair values by using an income approach by applying a discounted cash flow methodology to the future estimated cash flows, and include key inputs such as forecasted revenues, operating expenses and discount rates. See Note 1 to the condensed consolidated financial statements.

Operating Segments:

SJI operates in several different reportable operating segments. These segments are as follows:


•	Gas utility operations (SJG) consist primarily of natural gas distribution to residential, commercial and industrial customers. The result of SJG are only included in this operating segment.


•	Wholesale energy operations include the activities of South Jersey Resources Group, LLC (SJRG) and South Jersey Exploration, LLC (SJEX).


•	South Jersey Energy Company (SJE) is involved in both retail gas and retail electric activities.


◦	Retail gas and other operations include natural gas acquisition and transportation service business lines.


◦	Retail electric operations consist of electricity acquisition and transportation to commercial, industrial and residential customers.

•

On-site energy production consists of the thermal energy facility of Marina Energy, LLC (Marina) and other energy-related projects. Also included in this segment are the activities of ACB Energy Partners, LLC (ACB), AC Landfill Energy, LLC (ACLE), BC Landfill Energy, LLC (BCLE), SC Landfill Energy, LLC (SCLE), SX Landfill Energy, LLC (SXLE), MCS Energy Partners, LLC (MCS), NBS Energy Partners, LLC (NBS) and SBS Energy Partners, LLC (SBS).

•

Appliance service operations includes South Jersey Energy Service Plus, LLC (SJESP), which serviced residential and small commercial HVAC systems, installed small commercial HVAC systems, provided plumbing services and serviced appliances under warranty via a subcontractor arrangement as well as on a time and materials basis. On September 1, 2017, SJESP sold certain assets of its residential and small commercial HVAC and plumbing business to a third party. SJESP continues to receive commissions paid on service contracts from the third party and will do so on a go forward basis.


•	SJI Midstream, LLC (Midstream) was formed to invest in infrastructure and other midstream projects, including a current project to build a natural gas pipeline in Pennsylvania and New Jersey.


•	Costs incurred related to the agreement to acquire Elizabethtown Gas and Elkton Gas are recorded in the Corporate & Services segment.

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SOUTH JERSEY INDUSTRIES, INC.

RESULTS OF OPERATIONS:

Summary:

SJI's net income for the three months ended March 31, 2018 increased $73.5 million to $111.2 million compared with the same period in 2017. The significant drivers for the overall increase were as follows:


•	The net income contribution from the wholesale energy operations at SJRG for the three months ended March 31, 2018 increased $65.0 million to $56.6 million compared with the same period in 2017, primarily due to the following:


◦	$26.9 million increase primarily due to higher margins on daily energy trading activities and an overall increase in sales due to cold weather experienced in the first quarter of 2018, as discussed under "Gross Margin - Energy Group" below. Also contributing was the impact of the Tax Cuts and Jobs Act ("Tax Reform"), as discussed in Note 1 to the condensed consolidated financial statements.


◦	$25.9 million increase due to lower legal fees, reserves and interest recorded on a pricing dispute between SJI and a gas supplier during the first quarter of 2018 versus 2017 (see Note 11 to the condensed consolidated financial statements).


◦	$12.2 million increase due to the change in unrealized gains and losses on derivatives used by the wholesale energy operations to mitigate natural gas commodity price risk, as discussed under "Operating Revenues - Energy Group" below.


•	The net income contribution from gas utility operations at SJG for the three months ended March 31, 2018 increased $20.3 million to $66.7 million compared with the same period in 2017, primarily due to the base rate case settlement, the roll-in of investments for infrastructure replacement and improvement, along with customer growth.

•

SJI recorded $6.9 million (after-tax) of expenses related to costs incurred in connection with the expected acquisition of the assets of Elizabethtown Gas and Elkton Gas (the "Acquisition"); see Note 1 to the condensed consolidated financial statements. These include consulting and legal charges, along with fees and interest on loans to fund the acquisition. These costs are recorded in the Corporate & Services segment.

•

The net income contribution from the retail gas and electric operations at SJE for the three months ended March 31, 2018 decreased $4.3 million to a net loss of $4.1 million compared with the same period in 2017, primarily due to the change in unrealized gains and losses on forward financial contracts used to mitigate price risk on retail gas as discussed under "Operating Revenues – Energy Group" below, along with the expiration in the second quarter of 2017 of a large electric sales contract with a group of school boards. Also contributing was a lower tax benefit on SJE's quarterly net loss as a result of Tax Reform.

A significant portion of the volatility in operating results is due to the impact of the accounting methods associated with SJI’s derivative activities. SJI uses derivatives to limit its exposure to market risk on transactions to buy, sell, transport and store natural gas and to buy and sell retail electricity. SJI also uses derivatives to limit its exposure to increasing interest rates on variable-rate debt.

The types of transactions that typically cause the most significant volatility in operating results are as follows:

•

The wholesale energy operations at SJRG purchases and holds natural gas in storage and maintains capacity on interstate pipelines to earn profit margins in the future. The wholesale energy operations utilize derivatives to mitigate commodity price risk in order to substantially lock-in the profit margin that will ultimately be realized. However, both gas stored in inventory and pipeline capacity are not considered derivatives and are not subject to fair value accounting. Conversely, the derivatives used to reduce the risk associated with a change in the value of inventory and pipeline capacity are accounted for at fair value, with changes in fair value recorded in operating results in the period of change. As a result, earnings are subject to volatility as the market price of derivatives change, even when the underlying hedged value of inventory and pipeline capacity are unchanged. Additionally,

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volatility in earnings is created when realized gains and losses on derivatives used to mitigate commodity price risk on expected future purchases of gas injected into storage are recognized in earnings when the derivatives settle, but the cost of the related gas in storage is not recognized in earnings until the period of withdrawal. This volatility can be significant from period to period. Over time, gains or losses on the sale of gas in storage, as well as use of capacity, will be offset by losses or gains on the derivatives, resulting in the realization of the profit margin expected when the transactions were initiated.

•

The retail electric operations at SJE use forward contracts to mitigate commodity price risk on fixed price electric contracts with customers. In accordance with GAAP, the forward contracts are recorded at fair value, with changes in fair value recorded in earnings in the period of change. Several related customer contracts are not considered derivatives and, therefore, are not recorded in earnings until the electricity is delivered. As a result, earnings are subject to volatility as the market price of the forward contracts change, even when the underlying hedged value of the customer contract is unchanged. Over time, gains or losses on the sale of the fixed price electric under contract will be offset by losses or gains on the forward contracts, resulting in the realization of the profit margin expected when the transactions were initiated.

As a result, management also uses the non-generally accepted accounting principles (non-GAAP) financial measures of Economic Earnings and Economic Earnings per share when evaluating its results of operations. These non-GAAP financial measures should not be considered as an alternative to GAAP measures, such as net income, operating income, earnings per share from continuing operations or any other GAAP measure of liquidity or financial performance.

We define Economic Earnings as: Income from continuing operations, (i) less the change in unrealized gains and plus the change in unrealized losses on all derivative transactions; (ii) less realized gains and plus realized losses on all commodity derivative transactions attributed to expected purchases of gas in storage to match the recognition of these gains and losses with the recognition of the related cost of the gas in storage in the period of withdrawal; (iii) less the impact of transactions or contractual arrangements where the true economic impact will be realized in a future period; (iv) as adjusted by the impact of a May 2017 jury verdict stemming from a pricing dispute with a gas supplier over costs, including interest charges and legal fees incurred, along with the realized difference in the market value of the commodity (including financial hedges); and (v) as adjusted for various costs related to the agreement to acquire the assets of Elizabethtown Gas and Elkton Gas. With respect to part (iii) of the definition of Economic Earnings:

•

For the three months ended March 31, 2017, Economic Earnings excludes an approximately $2.4 million pre-tax loss related to a new interest rate derivative and amendments made to an existing interest rate derivative linked to unrealized losses previously recorded in Accumulated Other Comprehensive Loss (AOCL). SJI reclassified this amount from AOCL to Interest Charges on the condensed consolidated statements of income as a result of the prior hedged transactions being deemed probable of not occurring. Since the economic impact will not be realized until future periods, this amount is excluded from Economic Earnings. See Note 12 to the condensed consolidated financial statements.

•

For the three months ended March 31, 2017, Economic Earnings excludes an approximately $0.3 million pre-tax charge incurred related to an impairment charge due to a reduction in the expected cash flows to be received from a solar generating facility, for which the economic impact will not be realized until a future period. See Note 1 to the condensed consolidated financial statements. An impairment charge was also recorded in 2012 within Income from Continuing Operations on a separate solar generating facility which reduced its depreciable basis and recurring depreciation expense, and this was also excluded from Economic Earnings.


•	For the three months ended March 31, 2018, there were no items that fit part (iii) of the definition of Economic Earnings.

Economic Earnings is a significant performance metric used by our management to indicate the amount and timing of income from continuing operations that we expect to earn after taking into account the impact of derivative instruments on the related transactions, those transactions or contractual arrangements where the true economic impact will be realized primarily in a future period or was realized in a previous period, and other events that management believes make period to period comparisons of SJI's operations difficult or potentially confusing. Specifically regarding derivatives, we believe that this financial measure indicates to investors the profitability of the entire derivative-related transaction and not just the portion that is subject to mark-to-market valuation under GAAP. We believe that considering only the change in market value on the derivative side of the transaction can produce a false sense as to the ultimate profitability of the total transaction as no change in value is reflected for the non-derivative portion of the transaction.

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Economic Earnings for the three months ended March 31, 2018 increased $42.9 million to $100.4 million compared with the same period in 2017. The significant drivers for the overall increase were as follows:

•

The income contribution from the wholesale energy operations at SJRG for the three months ended March 31, 2018 increased $26.9 million to $36.0 million compared with the same period in 2017, primarily due to higher margins on daily energy trading activities and an overall increase in sales due to cold weather experienced in the first quarter of 2018, as discussed under "Gross Margin - Energy Group" below. Also contributing was the impact of the Tax Cuts and Jobs Act ("Tax Reform"), as discussed in Note 1 to the condensed consolidated financial statements.


•	The income contribution from gas utility operations at SJG for the three months ended March 31, 2018 increased $20.3 million to $66.7 million compared with the same period in 2017, primarily due to the base rate case settlement, the roll-in of investments for infrastructure replacement and improvement, along with customer growth.

The following table presents a reconciliation of SJI's income from continuing operations and earnings per share from continuing operations to Economic Earnings and Economic Earnings per share for the three months ended March 31 (in thousands, except per share data):



	Three Months Ended March 31,
	2018			2017
Income from Continuing Operations	$	111,306		$	37,747
Minus/Plus:
Unrealized Mark-to-Market Gains on Derivatives	(25,190		)	(13,908		)
Realized Losses on Inventory Injection Hedges	—			332
Unrealized Loss on Property, Plant and Equipment (A)	—			256
Net Losses from a Legal Proceeding in a Pricing Dispute (B)	1,345			43,987
Acquisition Costs (C)	9,277			—
Other (D)	—			2,351
Income Taxes (E)	3,680			(13,207		)
Economic Earnings	$	100,418		$	57,558

Earnings per Share from Continuing Operations	$	1.40		$	0.47
Minus/Plus:
Unrealized Mark-to-Market Gains on Derivatives	(0.32		)	(0.18		)
Net Losses from a Legal Proceeding in a Pricing Dispute (B)	0.02			0.56
Acquisition Costs (C)	0.11			—
Other (D)	—			0.03
Income Taxes (E)	0.05			(0.16		)
Economic Earnings per Share	$	1.26		$	0.72

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The effect of derivative instruments not designated as hedging instruments under GAAP in the condensed consolidated statements of income (see Note 12 to the condensed consolidated financial statements), as compared to the Economic Earnings table above, is as follows (gains (losses) in thousands):



	Three Months Ended March 31,
	2018			2017
Gains on Energy Related Commodity Contracts	$	23,353		$	14,688
Gains (Losses) on Interest Rate Contracts	1,628			(1,005		)
Total before income taxes	24,981			13,683
Unrealized mark-to-market gains on derivatives held by affiliated companies, before taxes	209			225
Total unrealized mark-to-market gains on derivatives	25,190			13,908
Realized Losses on Inventory Injection Hedges	—			(332		)
Unrealized Loss on Property, Plant and Equipment (A)	—			(256		)
Net Losses from a Legal Proceeding in a Pricing Dispute (B)	(1,345		)	(43,987		)
Acquisition Costs (C)	(9,277		)	—
Other (D)	—			(2,351		)
Income Taxes (E)	(3,680		)	13,207
Total reconciling items between income (losses) from continuing operations and economic earnings	$	10,888		$	(19,811	)

(A) Represents impairment charges taken on solar generating facilities, which was primarily driven by declining market conditions, specifically market prices of solar renewable energy credits (SRECs), and for which the economic impact will not be realized until a future period. See Note 1 to the condensed consolidated financial statements.

(B) Represents net losses, including interest, legal fees, and the realized difference in the market value of the commodity (including financial hedges), resulting from a ruling in a legal proceeding related to a pricing dispute between SJI and a gas supplier that began in October 2014 (see Note 11 to the condensed consolidated financial statements). Since the net losses relate to purchase transactions that primarily occurred in prior periods, these amounts are excluded from Economic Earnings.

(C) Represents costs incurred in connection with the expected acquisition of the assets of Elizabethtown Gas and Elkton Gas (see Note 1 to the condensed consolidated financial statements).

(D) Included in this amount are amendments made to an existing interest rate derivative linked to unrealized losses previously recorded in AOCL. SJI reclassified this amount from AOCL to Interest Charges on the condensed consolidated statements of income as a result of the prior hedged transactions being deemed probable of not occurring. Since the economic impact will not be realized until future periods, this amount is excluded from Economic Earnings. Also included is additional depreciation expense within Economic Earnings on a solar generating facility where an impairment charge was recorded in the past, which reduced the depreciable basis and recurring depreciation expense, and the related reduction in depreciation expense was added back in the prior year.

(E) Determined using a combined average statutory tax rate of approximately 25% and 40% for the three months ended March 31, 2018 and 2017, respectively.

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Gas Utility Operations:

The following tables summarize the composition of gas utility operations operating revenues and margin for the three months ended March 31 (in thousands, except for degree day data):



	Three Months Ended March 31,
	2018			2017
Utility Operating Revenues:
Firm Sales -
Residential	$	140,754		$	114,592
Commercial	28,749			25,640
Industrial	2,157			1,820
Cogeneration & Electric Generation	1,299			787
Firm Transportation -
Residential	6,508			6,205
Commercial	16,472			12,785
Industrial	6,362			4,810
Cogeneration & Electric Generation	1,336			1,180

Total Firm Revenues	203,637			167,819

Interruptible Sales	115			—
Interruptible Transportation	322			239
Off-System Sales	27,585			26,778
Capacity Release	2,574			1,743
Other	226			235
	234,459			196,814
Less: Intercompany Sales	(2,691		)	(1,045		)
Total Utility Operating Revenues	231,768			195,769
Less:
Cost of Sales - Utility	89,808			72,424
Less: Intercompany Cost of Sales	(2,691		)	(1,045		)
Total Cost of Sales - Utility (Excluding depreciation)	87,117			71,379
Conservation Recoveries*	5,676			2,548
RAC Recoveries*	4,086			2,501
EET Recoveries*	512			384
Revenue Taxes	366			439
Utility Margin**	$	134,011		$	118,518

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	Three Months Ended March 31,
	2018			2017
Utility Margin:
Residential	$	96,063		$	73,446
Commercial and Industrial	35,643			26,832
Cogeneration and Electric Generation	995			1,128
Interruptible	129			4
Off-System Sales & Capacity Release	1,935			1,956
Other Revenues	226			234
Margin Before Weather Normalization & Decoupling	134,991			103,600
CIP Mechanism	(1,760		)	13,975
EET Mechanism	780			943
Utility Margin**	$	134,011		$	118,518

*Represents expenses for which there is a corresponding credit in operating revenues. Therefore, such recoveries have no impact on SJG's financial results.

**Utility Margin is a non-GAAP financial measure and is further defined under the caption "Utility Margin" below.

Operating Revenues - Gas Utility Operations - Revenues increased $37.6 million, or 19.1%, for the three months ended March 31, 2018 compared with the same period in 2017. Excluding intercompany transactions, revenues increased $36.0 million, or 18.4%, for the three months ended March 31, 2018 compared with the same period in 2017. The main driver for the increased revenue is higher firm sales and Off-System Sales (OSS). Total firm revenue increased $35.8 million, or 21.3%, for the three months ended March 31,2018 compared with the same period in 2017 as a result of colder weather and 6,044 additional customers. Additionally, firm sales increased due to base rate increases related to the settlement of SJG's base rate case, effective November 1, 2017, as discussed in Note 7 to the condensed consolidated financial statements. While changes in gas costs and Basic Gas Supply Service (BGSS) recoveries/refunds fluctuate from period to period, SJG does not profit from the sale of the commodity. Therefore, corresponding fluctuations in Operating Revenue or Cost of Sales have no impact on profitability, as further discussed below under the caption "Utility Margin."

Utility Margin - Management uses Utility Margin, a non-GAAP financial measure, when evaluating the operating results of SJG. Utility Margin is defined as natural gas revenues less natural gas costs, regulatory rider expenses and related volumetric and revenue-based energy taxes. Management believes that Utility Margin provides a more meaningful basis for evaluating utility operations than revenues since natural gas costs, regulatory rider expenses and related energy taxes are passed through to customers. Natural gas costs are charged to operating expenses on the basis of therm sales at the prices approved by the New Jersey Board of Public Utilities (BPU) through SJG’s BGSS clause. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measure.

Total Utility Margin increased $15.5 million, or 13.1%, for the three months ended March 31, 2018 compared with the same period in 2017 primarily due to the base rate case settlement and the roll-in of Storm Hardening and Reliability Program (SHARP) and Accelerated Infrastructure Replacement Program II (AIRP II) investments, partially offset by the deferral of excess taxes billed which will be returned to ratepayers (see Note 7). The rolling into base rates of infrastructure and system improvements and the related expenses, effective November 1, 2017, contributed approximately $22.8 million of additional Utility Margin in 2018 and the rolling into base rates of SHARP and AIRP II investments contributed approximately $4.5 million of additional Utility Margin in 2018. Margin was reduced by $12.8 million due to the deferral of the excess taxes, with a corresponding decrease in tax expense.

The Conservation Incentive Program (CIP) tracking mechanism adjusts earnings when actual usage per customer experienced during the period varies from an established baseline usage per customer. As reflected in the Utility Margin table above and the CIP table in SJG's Management Discussion section, the CIP mechanism reduced Utility Margin by $1.8 million, or $1.3 million after taxes, for the three months ended March 31, 2018, primarily due to variation in customer usage and weather that was 12.5% colder than the same period in 2017. For the three months ended March 31, 2017, the CIP mechanism protected Utility Margin by $13.9 million, or $8.4 million after taxes, primarily due to weather that was 13.2% warmer than normal and lower customer usage.

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Nonutility:

Operating Revenues - Energy Group - Combined revenues for Energy Group, net of intercompany transactions, increased $60.0 million, or 28.4%, to $271.4 million, for the three months ended March 31, 2018 compared with the same period in 2017.

Revenues from wholesale energy operations at SJRG, net of intercompany transactions, increased $62.8 million to $190.0 million for the three months ended March 31, 2018 compared with the same period in 2017. This increase was primarily due to revenues earned on gas supply contracts with electric generation facilities, which represented a total increase of $30.0 million, along with an overall increase in sales due to cold weather experienced in the first quarter of 2018. Also contributing to this increase was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total increase of $13.6 million for the three months ended March 31, 2018 compared with the same period in 2017.

Revenues from retail gas operations at SJE, net of intercompany transactions, increased $2.5 million, or 7.1%, to $38.7 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to an 11.8% increase in sales volumes due to cold weather experienced during the first quarter of 2018. This was partially offset with the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings, as defined above, and represented a total decrease of $4.1 million compared to the prior year period.

Revenues from retail electric operations at SJE, net of intercompany transactions, decreased $5.1 million, or 10.7%, to $42.8 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to lower sales volumes resulting from the expiration in the second quarter of 2017 of a large electric sales contract with a group of school boards. Also contributing to the decrease was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total decrease of $0.9 million compared to the prior year period.

SJE uses forward financial contracts to mitigate commodity price risk on fixed price electric contracts. In accordance with GAAP, the forward financial contracts are recorded at fair value, with changes in fair value recorded in earnings in the period of change. The related customer contracts are not considered derivatives and, therefore, are not recorded in earnings until the electricity is delivered. As a result, earnings are subject to volatility as the market price of the forward financial contracts change, even when the underlying hedged value of the customer contract is unchanged. Over time, gains or losses on the sale of the fixed price electric under contract will be offset by losses or gains on the forward financial contracts, resulting in the realization of the profit margin expected when the transactions were initiated. The retail electric operations at SJE serve both fixed and market-priced customers.

As discussed in Note 1 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2017, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues – Nonutility on the condensed consolidated income statement.

Operating Revenues - Energy Services - Combined revenues for Energy Services, net of intercompany transactions, remained relatively flat at $18.7 million for the three months ended March 31, 2018 compared with the same period in 2017.

Revenues from on-site energy production at Marina, net of intercompany transactions, increased $1.2 million, or 6.8%, to $18.2 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to increased production at the thermal facility along with favorable prices on SRECs compared with the prior year period. Solar revenues, net of intercompany transactions, which is included in revenues from on-site energy production above, increased $0.3 million, or 2.9%, to $8.8million for the three months ended March 31, 2018 compared with the same period in 2017.

SRECs represent the renewable energy attribute of the solar electricity generated that can be sold to customers. Marina does not recognize revenue, or the related margin, until the SREC is certified and transferred to the customer’s electronic account. Customers may purchase SRECs to comply with solar requirements under various state renewable energy regulations. Approximately 74% of Marina’s 2018 solar production is in New Jersey, 8% is in Massachusetts, 15% is in Maryland, and 3% is in Vermont.

Marina hedges a portion of its anticipated SREC production through the use of forward sales contracts. The hedged percentage of projected SREC production related to in-service assets in New Jersey is 98% and 88% for energy years ending May 31, 2018 and 2019, respectively, and in Massachusetts is 57% and 43% for energy years ending December 31, 2018 and 2019, respectively. SREC production related to in-service assets in Maryland and Vermont is currently unhedged.

Installed capacity was 201 MW at both March 31, 2018 and 2017.

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Revenues from appliance service operations at SJESP, net of intercompany transactions, decreased $1.1 million for the three months ended March 31, 2018 compared with the same period in 2017 primarily due to the sale of certain assets of SJESP's residential and small commercial HVAC and plumbing business to a third party, which was completed on September 1, 2017 (see Note 1 to the condensed consolidated financial statements).

Gross Margin - Nonutility - Gross margin for the nonutility businesses is defined as revenue less all costs that are directly related to the production, sale and delivery of SJI’s products and services. These costs primarily include natural gas and electric commodity costs as well as certain payroll and related benefits. On the condensed consolidated statements of income, revenue is reflected in Operating Revenues - Nonutility and the costs are reflected in Cost of Sales - Nonutility. As discussed in Note 16 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2017, revenues and expenses related to the energy trading activities of the wholesale energy operations at SJRG are presented on a net basis in Operating Revenues - Nonutility on the condensed consolidated statements of income.

Gross Margin - Energy Group - Combined gross margins for Energy Group increased $80.4 million to $76.2 million for the three months ended March 31, 2018 compared with the same period in 2017. These changes were primarily due to the following:


•	Gross margin from the wholesale energy operations at SJRG increased $86.2 million to $79.0 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to:


◦	$40.6 million change from prior year recorded on a pricing dispute between SJI and a gas supplier during the first quarter of 2018 versus 2017 (see Note 11 to the condensed consolidated financial statements).


◦	$13.6 million increase resulting from the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings.


◦	The remaining $32.0 million increase is primarily due to higher margins on daily energy trading activities and an overall increase in sales due to cold weather experienced in the first quarter of 2018.

The wholesale energy operations at SJRG expect to continue to add incremental margin from marketing and related opportunities in the Marcellus region, capitalizing on its established presence in the area. Future margins could fluctuate significantly due to the volatile nature of wholesale gas prices. As of March 31, 2018, the wholesale energy operations had 8.7 Bcf of storage and 471,254 dts/day of transportation under contract.

•

Gross margin from SJE’s retail gas and other operations decreased $4.1 million to a loss of $3.4 million for the three months ended March 31, 2018 compared with the same period in 2017. This was primarily due to the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total decrease of $4.1 million.

•

Gross margin from SJE’s retail electric operations decreased $1.6 million to $0.6 million for the three months ended March 31, 2018 compared with the same period in 2017. The three month comparative period decrease was primarily due to lower sales volumes resulting from the expiration in the second quarter of 2017 of a large electric sales contract with a group of school boards. Also contributing to the decrease was the change in unrealized gains and losses recorded on forward financial contracts due to price volatility, which is excluded for Economic Earnings and represented a total decrease of $0.9 million.

Gross Margin - Energy Services - Combined gross margins for Energy Services decreased $0.5 million to $17.9 million for the three months ended March 31, 2018 compared with the same period in 2017. These changes were primarily due to the following:


•	Gross margin from on-site energy production at Marina decreased $0.2 million to $17.5 million for the three months ended March 31, 2018 compared with the same period in 2017. The three month comparative period increase does not represent a significant change.


•	Gross margin from appliance service operations at SJESP decreased $0.3 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to the sale of certain assets of SJESP's residential and small commercial HVAC and plumbing business to a third party, which was completed on September 1, 2017 (see Note 1 to the condensed consolidated financial statements).

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Operating Expenses - All Segments:

A summary of net changes in operations expense for the three months ended March 31, follows (in thousands):



	Three Months Ended March 31, 2018 vs. 2017
Gas Utility Operations	$	5,195
Nonutility:
Energy Group:
Wholesale Energy Operations	(795		)
Retail Gas and Other Operations	237
Retail Electric Operations	(134		)
Subtotal Energy Group	(692		)
Energy Services:
On-Site Energy Production	(121		)
Appliance Service Operations	(765		)
Subtotal Energy Services	(886		)
Total Nonutility	(1,578		)
Corporate & Services and Intercompany Eliminations	4,979
Total Operations Expense	$	8,596

Operations - Gas utility operations expense increased $5.2 million for the three months ended March 31, 2018 compared with the same period in 2017. The increase primarily resulted from the operation of SJG’s New Jersey Clean Energy Program and Energy Efficiency Programs which experienced an aggregate net increase of $3.1 million. Such costs are recovered on a dollar-for-dollar basis; therefore, SJG experienced an offsetting increase in revenue during the three months ended March 31, 2018, compared with the same period in the prior year. This was due to higher recoveries resulting from colder weather in the first quarter of 2018. In addition, the increase in operations expense was due to higher expenses in various areas, including those associated with corporate support, governance and compliance costs, along with increases in the reserve for uncollectibles as a result of higher customer accounts receivable balances.

Nonutility operations expense decreased $1.6 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to lower legal fees incurred at the wholesale operations at SJRG from an unfavorable court ruling related to a pricing dispute between SJRG and a supplier (see Note 11 to the condensed consolidated financial statements), along with a reduction at the appliance service operations at SJESP due to the sale of certain assets of SJESP's residential and small commercial HVAC and plumbing business to a third party, which was completed on September 1, 2017.

The Corporate & Services segment had a $5.0 million increase in total operations expense primarily due to consulting and legal charges incurred on the agreement to acquire the assets of Elizabethtown Gas and Elkton Gas (see Note 1 to the condensed consolidated financial statements). This is partially offset by intercompany eliminations.

Maintenance - Maintenance expense increased $1.9 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to increased maintenance of services activity and higher levels of Remediation Adjustment Clause (RAC) amortization. This increase in RAC-related expenses does not affect earnings, as SJG recognizes an offsetting amount in revenues.

Depreciation - Depreciation increased $0.3 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to increased investment in property, plant and equipment by the gas utility operations of SJG, partially offset by reduced depreciation expense at Marina due to impairment charges taken on several long-lived assets in the second half of 2017 as disclosed in Note 1 to the Consolidated Financial Statements in Item 8 of SJI's and SJG's Annual Report on Form 10-K for the year ended December 31, 2017.

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Energy and Other Taxes - The change in energy and other taxes for the three months ended March 31, 2018 compared with the same period in 2017, was not significant.

Other Income and Expense - Other income decreased $1.7 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to a gain recorded on a sale of real estate during the first quarter of 2017 that did not recur in 2018.

Interest Charges – Interest charges decreased $2.8 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to interest incurred in the first quarter of 2017 from an unfavorable court ruling related to a pricing dispute between SJRG and a supplier (see Note 11 to the condensed consolidated financial statements), along with a reduction to interest at Marina due to outstanding debt that was paid off in the second quarter of 2017. Partially offsetting these were interest incurred on higher amounts of long-term debt outstanding at SJI and SJG, including financing for the acquisitions of Elizabethtown Gas and Elkton Gas (see Note 1 to the condensed consolidated financial statements).

Income Taxes – Income tax expense increased $14.5 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to higher income before income taxes during the first quarter of 2018 compared to the prior year period. This was partially offset by the benefit received from Tax Reform, which became effective January 1, 2018.

Equity in Earnings of Affiliated Companies – Equity in earnings of affiliated companies decreased $1.9 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to an adjustment recorded in 2017 to capitalize AFUDC at PennEast.

Discontinued Operations — The results are primarily comprised of environmental remediation and product liability litigation associated with previously disposed of businesses.

LIQUIDITY AND CAPITAL RESOURCES:

Liquidity needs are driven by factors that include natural gas commodity prices; the impact of weather on customer bills; lags in fully collecting gas costs from customers under the BGSS charge and other regulatory clauses, and environmental remediation expenditures through the Remediation Adjustment Clause (RAC); working capital needs of SJI's energy trading and marketing activities; the timing of construction and remediation expenditures and related permanent financings; the timing of equity contributions to unconsolidated affiliates; mandated tax payment dates; both discretionary and required repayments of long-term debt; and the amounts and timing of dividend payments.

Cash Flows from Operating Activities — Liquidity needs are first met with net cash provided by operating activities. Net cash provided by operating activities totaled $95.2 million and $79.5 million in the first three months of 2018 and 2017, respectively. Net cash provided by operating activities varies from year-to-year primarily due to the impact of weather on customer demand and related gas purchases, customer usage factors related to conservation efforts and the price of the natural gas commodity, inventory utilization, and gas cost recoveries. Operating activities in the first three months of 2018 produced more net cash than the same period in 2017, primarily due to increased collections from customers as a result of strong results at SJRG. In addition, SJI did not make a pension payment in 2018, but did make a $10.0 million contribution in the first quarter of 2017. These benefits were partially offset by the impacts of Tax Reform at SJG which resulted in lower collections from customers as well as higher costs experienced for environmental remediation, compared to prior year.

Cash Flows from Investing Activities — SJI has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment. Net cash outflows from investing activities, which are primarily construction projects, for the first three months of 2018 and 2017 amounted to $61.5 million and $72.8 million, respectively. We estimate the net cash outflows for investing activities for fiscal years 2018, 2019 and 2020 at SJI to be approximately $302.2 million, $413.8 million and $235.6 million, respectively. The high level of investing activities for 2018, 2019 and 2020 is due to a combination of the accelerated infrastructure investment programs and a major pipeline project to support an electric generation facility, both at SJG. Also contributing to the high level of investing activities are potential SJI Midstream investments, net of potential returns, in 2018 through 2020. SJI expects to use short-term borrowings under lines of credit from commercial banks and the commercial paper program to finance these investing activities as incurred. From time to time, SJI may refinance the short-term debt with long-term debt. Expected future expenditures related to the acquisition of Elizabethtown Gas and Elkton Gas are not included in the future investing activities noted above as those costs are still being evaluated, and the acquisition is still pending approvals. See Note 1 to the condensed consolidated financial statements.

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During the first three months of 2018 and 2017, SJI made net investments in unconsolidated affiliates of $2.9 million and $3.7 million, respectively.

During the first three months of 2017, SJI received approximately $3.1 million related to the sale of real estate. SJI recognized an after-tax gain on this sale of approximately $1.7 million.

During the first three months of 2017, SJI received $3.0 million of proceeds from a third party to pay down a portion of its outstanding note balance.

During the first three months of 2017, SJI made an incremental $7.5 million payment above the prior year to fund company-owned life insurance.

Cash Flows from Financing Activities — Short-term borrowings from the commercial paper program and lines of credit from commercial banks are used to supplement cash flows from operations, to support working capital needs and to finance capital expenditures as incurred. From time to time, short-term debt incurred to finance capital expenditures is refinanced with long-term debt.

Credit facilities and available liquidity as of March 31, 2018 were as follows (in thousands):



Company	Total Facility		Usage			Available Liquidity		Expiration Date
SJI:

Syndicated Revolving Credit Facility	$	400,000	$	141,000	(A)	$	259,000	August 2022
Revolving Credit Facility	50,000		50,000			—		September 2019

Total SJI	450,000		191,000			259,000

SJG:

Commercial Paper Program/Revolving Credit Facility	200,000		64,000		(B)	136,000		August 2022
Uncommitted Bank Line	10,000					10,000		August 2018 (C)

Total SJG	210,000		64,000			146,000

Total	$	660,000	$	255,000		$	405,000

(A) Includes letters of credit outstanding in the amount of $6.0 million.

(B) Includes letters of credit outstanding in the amount of $0.9 million.

The SJG facilities are restricted as to use and availability specifically to SJG; however, if necessary the SJI facilities can also be used to support SJG’s liquidity needs. All committed facilities contain one financial covenant limiting the ratio of indebtedness to total capitalization (as defined in the respective credit agreements), measured on a quarterly basis. SJI and SJG were in compliance with these covenants as of March 31, 2018. Borrowings under these credit facilities are at market rates. SJI's weighted average interest rate on these borrowings, which changes daily, was 2.67% and 1.98% at March 31, 2018 and 2017, respectively. SJG did not have any outstanding borrowings at March 31, 2018 under the credit facility; however, SJG did have $64.0 million outstanding under the commercial paper program. SJG's weighted average interest rate on these borrowings, which changes daily, was 2.32% and 1.15% at March 31, 2018 and March 31, 2017, respectively.

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SJG's average borrowings outstanding under these credit facilities during the three months ended March 31, 2018 and 2017 were $47.7 million and $34.7 million, respectively. The maximum amount outstanding under its credit facilities during the three months ended March 31, 2018 and 2017 were $85.0 million and $110.1 million, respectively. Based upon the existing credit facilities and a regular dialogue with our banks, we believe there will continue to be sufficient credit available to meet our business’ future liquidity needs.

SJI supplements its operating cash flow, commercial paper program and credit lines with both debt and equity capital. Over the years, SJG has used long-term debt, primarily in the form of First Mortgage Bonds and Medium Term Notes (MTNs), secured by the same pool of utility assets, to finance its long-term borrowing needs. These needs are primarily capital expenditures for property, plant and equipment.

In January 2018, SJI issued the following MTN's: (a) $25.0 million aggregate principal amount of 3.32% Senior Notes, Series 2017A-2, due January 2025 and (b) $25.0 million aggregate principal amount of 3.56% Senior Notes, Series 2017B-2, due January 2028.

In April 2018, SJI paid down $116.0 million of its syndicated revolving credit facility, along with its $50.0 million revolving credit facility.

•

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termination or settlement, a certain number of shares of common stock; and (b) a 1/20, or 5%, undivided beneficial ownership interest in $1,000 principal amount of SJI’s 2018 Series A 3.70% Remarketable Junior Subordinated Notes due 2031. This offering resulted in gross proceeds of approximately $287.5 million, with net proceeds after deducting underwriting discounts and commissions of $278.9 million.

In the fourth quarter of 2017, SJI entered into a $2.6 billion syndicated, committed Bridge Facility to support its $1.7 billion bid for the assets of the Elizabethtown Gas Company and Elkton Gas Company. The Bridge Facility was upsized to accommodate the aggregate amount of SJI's bank credit facilities and Senior Unsecured Notes pending the amendment of the one financial covenant of the amount of debt-to-capitalization from 0.65 to 1 to 0.70 to 1. In April 2018, the Bridge Facility was subsequently reduced by the amount of net proceeds raised by SJI's equity offerings and the receipt of proceeds from the first tranche of Senior Unsecured Notes issued as discussed above. The amount of the Bridge Facility is approximately $1.16 billion and is expected to be reduced by future issuances of long-term and short-term debt closer to the date of the closing of the acquisition.

SJI’s capital structure was as follows:



	As of March 31, 2018		As of December 31, 2017
Equity	46.3	%	43.7	%
Long-Term Debt	44.7	%	43.6	%
Short-Term Debt	9.0	%	12.7	%
Total	100.0	%	100.0	%

SJI has paid dividends on its common stock for 67 consecutive years and has increased that dividend each year for the last 19 years. SJI currently seeks to grow that dividend consistent with earnings growth while targeting a payout ratio of between 55% and 70% of Economic Earnings. In setting the dividend rate, the Board of Directors of SJI considers future earnings expectations, payout ratio, and dividend yield relative to those at peer companies, as well as returns available on other income-oriented investments. However, there can be no assurance that SJI will be able to continue to increase the dividend, meet the targeted payout ratio or pay a dividend at all in the future.

COMMITMENTS AND CONTINGENCIES:

Environmental Remediation - Costs for remediation projects, net of recoveries from ratepayers, for the first three months of 2018 and 2017 amounted to net cash outflows of $14.4 million and $10.5 million, respectively. Total net cash outflows for remediation projects are expected to be $48.4 million, $27.2 million and $31.8 million for 2018, 2019 and 2020, respectively. As discussed in Notes 10 and 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's 10-K for the year ended December 31, 2017, certain environmental costs are subject to recovery from ratepayers. Expected future expenditures related to the acquisition of Elizabethtown Gas and Elkton Gas are not included in the future investing activities noted above as those costs are still being evaluated, and the acquisition is still pending approvals. See Note 1 to the condensed consolidated financial statements.

Standby Letters of Credit - As of March 31, 2018, SJI provided $6.0 million of standby letters of credit through its revolving credit facility to enable SJE to market retail electricity and for various construction and operating activities. SJG provided a $0.9 million letter of credit under its revolving credit facility to support the remediation of environmental conditions at certain locations in SJG's service territory. SJG has provided $25.1 million of additional letters of credit under a separate facility outside of the revolving credit facility to support variable-rate demand bonds issued through the New Jersey Economic Development Authority (NJEDA) to finance the expansion of SJG’s natural gas distribution system.

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Contractual Obligations - There were no significant changes to SJI’s contractual obligations described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2017, except for (a) an approximately $149.5 million increase in construction obligations primarily due to vendor agreements at the gas utility operations at SJG due to new construction and environmental projects for 2018; and (b) long-term debt (excluding unamortized debt issuance costs), which increased due to SJI borrowing $50.0 million of MTN's (see Note 14 to the condensed consolidated financial statements);

The total potential consideration related to the agreements to acquire the assets of Elizabethtown Gas and Elkton Gas, along with expected future costs to complete the acquisition, are not included above due to pending approvals as discussed earlier in Management's Discussion. Also see Note 1 to the condensed consolidated financial statements.

Off-Balance Sheet Arrangements – An off-balance sheet arrangement is any contractual arrangement involving an unconsolidated entity under which SJI has either made guarantees, or has certain other interests or obligations.

As of March 31, 2018, SJI had issued $6.1 million of parental guarantees on behalf of an unconsolidated subsidiary. These guarantees generally expire within the next two years and were issued to enable the subsidiary to market retail natural gas.

In April 2018, SJI entered into various agreements relating to public offerings. See "Liquidity and Capital Resources."

Notes Receivable-Affiliates - As of March 31, 2018, SJI had approximately $13.6 million included in Notes Receivable - Affiliate on the condensed consolidated balance sheets, due from Energenic, which is secured by its cogeneration assets for energy services projects. This note is subject to a reimbursement agreement that secures reimbursement for SJI, from its joint venture partner, of a proportionate share of any amounts that are not repaid.

Pending Litigation — SJI and SJG are subject to claims arising in the ordinary course of business and other legal proceedings. SJI has been named in, among other actions, certain gas supply contract disputes and certain product liability claims related to our former sand mining subsidiary.

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SOUTH JERSEY GAS COMPANY

This section of Management’s Discussion focuses on South Jersey Gas Company (SJG) for the reported periods. In many cases, explanations and disclosures for both SJI and SJG are substantially the same or specific disclosures for SJG are included in the Management's Discussion for SJI.

RESULTS OF OPERATIONS:

The results of operations for the gas utility operations at SJG are described in detail above; therefore, this section primarily focuses on statistical information and other information that is not discussed in the results of operations under South Jersey Industries, Inc. Refer to the section entitled “Results of Operations - Gas Utility Operations” for a detailed discussion of the results of operations for SJG.

The following table summarizes the composition of selected gas utility throughput for the three month periods ended March 31, (in thousands, except for degree day data):



	Three Months Ended March 31,
	2018	2017
Utility Throughput – decatherms(dt):
Firm Sales -
Residential	12,730	10,828
Commercial	2,709	2,508
Industrial	215	201
Cogeneration & Electric Generation	255	133
Firm Transportation -
Residential	829	843
Commercial	3,141	2,598
Industrial	2,975	3,054
Cogeneration & Electric Generation	1,021	1,162

Total Firm Throughput	23,875	21,327

Interruptible Sales	9	—
Interruptible Transportation	301	391
Off-System Sales	6,747	5,981
Capacity Release	18,029	21,098

Total Throughput - Utility	48,961	48,797

Throughput – Gas Utility Operations - Total gas throughput was relatively flat for the three months ended March 31, 2018 compared to the same period in 2017. Total firm throughput increased 2.5 MMdts, or 12%, compared with the same period in 2017, as a result of 12.5% colder than normal weather and 6,044 additional customers. The increase in firm throughput was offset by 3.1 MMdts decrease in capacity release for the three months ended March 31, 2018 compared to the prior year period. SJG had acquired incremental upstream pipeline capacity during the fourth quarter 2017, thereby enabling the release of a lower volume of capacity at a higher per unit rate during the three months ended March 31, 2018.

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Conservation Incentive Program (CIP) - The effects of the CIP on SJG's net income and the associated weather comparisons are as follows (dollars in millions):



	Three Months Ended March 31,
	2018			2017
Net Income Impact:
CIP – Weather Related	$	0.9		$	5.9
CIP – Usage Related	(2.2		)	2.5
Total Net Income Impact	$	(1.3	)	$	8.4

Weather Compared to 20-Year Average	1.4% Warmer			13.2% Warmer
Weather Compared to Prior Year	12.5% Colder			2.6% Warmer

Operating Revenues & Margin - See SJI's Management Discussion section above.

Operating Expenses - A summary of changes in operating expenses for SJG is as follows (in thousands):



	Three Months Ended March 31, 2018 vs. 2017
Operations	5,195
Maintenance	1,881
Depreciation	1,649
Energy and Other Taxes	(40	)

Operations - See SJI's Management Discussion section above.

Maintenance - See SJI's Management Discussion section above.

Depreciation - Depreciation expense increased $1.6 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to continuing investment in property, plant and equipment.

Energy and Other Taxes -The change in Energy and Other Taxes for the three months ended March 31, 2018 compared with the same period in 2017 was not significant.

Other Income and Expense - Other Income and Expense increased $1.5 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to proceeds from a corporate-owned life insurance policy and increases in the cash surrender value of policies.

Interest Charges – Interest charges increased $0.9 million for the three months ended March 31, 2018 compared with the same period in 2017, primarily due to higher amounts of long-term debt outstanding.

Income Taxes – Income tax expense generally fluctuates as income before taxes changes. Minor variations will occur period to period as a result of effective tax rate adjustments.

LIQUIDITY AND CAPITAL RESOURCES:

Liquidity and capital resources for SJG are substantially covered in the Management’s Discussion of SJI (except for the items and transactions that relate to SJI and its nonutility subsidiaries). Those explanations are incorporated by reference into this discussion.

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Liquidity needs for SJG are driven by factors that include natural gas commodity prices; the impact of weather on customer bills; lags in fully collecting gas costs from customers under the BGSS charge and environmental remediation expenditures through the RAC; the timing of construction and remediation expenditures and related permanent financings; mandated tax payment dates; both discretionary and required repayments of long-term debt; and the amounts and timing of dividend payments.

Cash Flows from Operating Activities - Liquidity needs are first met with net cash provided by operating activities. Net cash provided by operating activities totaled $44.5 million and $57.0 million in the first three months of 2018 and 2017, respectively. Net cash provided by operating activities varies from year-to-year primarily due to the impact of weather on customer demand and related gas purchases, customer usage factors related to conversion efforts and the price of the natural gas commodity, inventory utilization, and gas cost recoveries. Operating activities in the first three months of 2018 produced less net cash than the same period in 2017, primarily due to increased working capital used as a result of the impacts of Tax Reform, unusually cold temperatures during the quarter causing an increase in the price of gas and the corresponding accounts receivable. In addition, SJG experienced higher spending for environmental remediation. This was partially offset by the lack of a pension payment in 2018; in the first quarter of 2017, SJG made an $8.0 million payment to fund its pension plans.

Cash Flows from Investing Activities - SJG has a continuing need for cash resources for capital expenditures, primarily to invest in new and replacement facilities and equipment. SJG estimates the net cash outflows for capital expenditures for fiscal years 2018, 2019 and 2020 to be approximately $271.8 million, $257.1 million and $271.6 million, respectively. For capital expenditures, including those under the AIRP and SHARP, SJG expects to use short-term borrowings under both its commercial paper program and lines of credit from commercial banks to finance capital expenditures as incurred. From time to time, SJG may refinance the short-term debt incurred to support capital expenditures with long-term debt.

During the first three months of 2017, SJG made a $4.9 million payment to fund company-owned life insurance.

Cash Flows from Financing Activities - SJG supplements its operating cash flow and credit lines with both debt and equity capital. Over the years, SJG has used long-term debt, primarily in the form of First Mortgage Bonds and MTN's, secured by the same pool of utility assets, to finance its long-term borrowing needs. These needs are primarily capital expenditures for property, plant and equipment.

SJI did not contribute any equity to SJG during the three months ended March 31, 2018. SJI contributed an equity infusion of $40.0 million to SJG during the three months ended March 31, 2017.

SJG’s capital structure was as follows:



	As of March 31, 2018		As of December 31, 2017
Common Equity	52.8	%	51.3	%
Long-Term Debt	43.8	%	45.8	%
Short-Term Debt	3.4	%	2.9	%

Total	100.0	%	100.0	%

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COMMITMENTS AND CONTINGENCIES:

Costs for remediation projects, net of recoveries from ratepayers, for the first three months of 2018 and 2017 amounted to net cash outflows of $14.4 million and $9.8 million, respectively. Total net cash outflows for remediation projects are expected to be $48.1 million, $27.0 million and $31.7 million for 2018, 2019 and 2020, respectively. As discussed in Notes 10 and 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's 10-K for the year ended December 31, 2017, certain environmental costs are subject to recovery from ratepayers.

SJG has certain commitments for both pipeline capacity and gas supply for which SJG pays fees regardless of usage. Those commitments, as of March 31, 2018, averaged $70.1 million annually and totaled $449.8 million over the contracts’ lives. Approximately 22% of the financial commitments under these contracts expire during the next five years. SJG expects to renew each of these contracts under renewal provisions as provided in each contract. SJG recovers all such prudently incurred fees through rates via the BGSS.

Pending Litigation - See SJG's disclosure in the Commitments and Contingencies section of SJI's Management Discussion above.

Contractual Cash Obligations – There were no significant changes to SJG's contractual obligations described in Note 15 to the Consolidated Financial Statements in Item 8 of SJI’s and SJG's Annual Report on Form 10-K for the year ended December 31, 2017, except for an approximately $149.5 million increase in construction obligations primarily due to vendor agreements due to new construction and environmental projects for 2018.

Off-Balance Sheet Arrangements - SJG has no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

South Jersey Industries, Inc.

Commodity Market Risks — Certain SJI subsidiaries, including SJG, are involved in buying, selling, transporting and storing natural gas, and buying and selling retail electricity and SRECs, for their own accounts as well as managing these activities for third parties. These subsidiaries are subject to market risk due to price fluctuations. To hedge against this risk, SJI enters into a variety of physical and financial transactions including forward contracts, swaps, futures and options agreements. To manage these transactions, SJI has a well-defined risk management policy approved by SJI's Board of Directors that includes volumetric and monetary limits. Management reviews reports detailing activity daily. Generally, the derivative activities described above are entered into for risk management purposes.

As part of its gas purchasing strategy, SJG uses financial contracts to hedge against forward price risk. These contracts are recoverable through SJG’s BGSS, subject to BPU approval.

The retail gas operations of SJE transact commodities on a physical basis, and SJE typically does not enter into financial derivative positions directly. SJRG manages risk in the natural gas markets for SJE as well as for its own portfolio by entering into the types of transactions noted above. The retail electric operations of SJE use forward physical and financial contracts to mitigate commodity price risk on fixed price electric contracts. It is management's policy, to the extent practical, within predetermined risk management policy guidelines, to have limited unmatched positions on a deal or portfolio basis while conducting these activities. As a result of holding open positions to a minimal level, the economic impact of changes in value of a particular transaction is substantially offset by an opposite change in the related hedge transaction.

SJI has entered into certain contracts to buy, sell, and transport natural gas and to buy and sell retail electricity. SJI recorded a net pre-tax unrealized gain of $23.4 million and $14.7 million for the three months ended March 31, 2018 and 2017, respectively, which are included with realized gains in Operating Revenues — Nonutility on the condensed consolidated statements of income.

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The fair value and maturity of these energy-related contracts determined under the mark-to-market method as of March 31, 2018 is as follows (in thousands):



Assets
Source of Fair Value	Maturity < 1 Year		Maturity 1 -3 Years		Maturity Beyond 3 Years		Total
Prices actively quoted	$	935	$	—	$	—	$	935
Prices provided by other external sources	11,753		2,355		13		14,121
Prices based on internal models or other valuation methods	11,698		9,657		243		21,598

Total	$	24,386	$	12,012	$	256	$	36,654

Liabilities
Source of Fair Value	Maturity <1 Year		Maturity 1 -3 Years		Maturity Beyond 3 Years		Total
Prices actively quoted	$	2,551	$	1,370	$	26	$	3,947
Prices provided by other external sources	6,135		1,545		—		7,680
Prices based on internal models or other valuation methods	3,800		1,029		183		5,012

Total	$	12,486	$	3,944	$	209	$	16,639


•	NYMEX (New York Mercantile Exchange) is the primary national commodities exchange on which natural gas is traded. Volumes of our NYMEX contracts included in the table above under "Prices actively quoted" are 25.6 million decatherms (dts) with a weighted average settlement price of $3.29 per dt.

•

Basis represents the differential to the NYMEX natural gas futures contract for delivering gas to a specific location. Volumes of our basis contracts, along with volumes of our discounted index related purchase and sales contracts, included in the table above under "Prices provided by other external sources" and "Prices based on internal models or other valuation methods" are 31.8 million dts with a weighted average settlement price of $(0.97) per dt.


•	Fixed Price Gas Daily represents the price of a NYMEX natural gas futures contract adjusted for the difference in price for delivering the gas at another location. Volumes of our Fixed Price Gas Daily contracts included in the table above under "Prices provided by other external sources" are 34.1 million dts with a weighted average settlement price of $2.32 per dt.


•	Volumes of electric included in the table above under "Prices based on internal models or other valuation methods" are 0.4 million megawatt hours (mwh) with a weighted average settlement price of $32.91 per mwh.

A reconciliation of SJI’s estimated net fair value of energy-related derivatives follows (in thousands):



Net Derivatives — Energy Related Liabilities, January 1, 2018	$	(4,836	)
Contracts Settled During the Three Months Ended March 31, 2018, Net	15,511
Other Changes in Fair Value from Continuing and New Contracts, Net	9,340

Net Derivatives — Energy Related Assets, March 31, 2018	$	20,015

Marina’s solar energy projects rely on returns from electricity and SRECs. A decrease in the value of electricity and SRECs impacted by market conditions and/or legislative changes may negatively impact Marina's return on its investments as well as lead to impairment of the respective assets. To hedge against this risk, Marina hedges a portion of its anticipated SREC production through the use of forward sales contracts. The hedged percentage of projected SREC production related to in-service assets in New Jersey is 98% and 88% for energy years ending May 31, 2018 and 2019, respectively, and in Massachusetts is 57% and 43% for energy years ending December 31, 2018 and 2019, respectively. SREC production related to in-service assets in Maryland and Vermont is currently unhedged. As of March 31, 2018, Marina had total net solar assets of $425.1 million, of which $356.8 million are located in New Jersey, $42.1 million are located in Massachusetts, $9.9 million are located in Maryland, and $16.3 million are located in Vermont.

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Interest Rate Risk — Our exposure to interest-rate risk relates to short-term and long-term variable-rate borrowings. Variable-rate debt outstanding, including short-term and long-term debt, at March 31, 2018 was $548.1 million and averaged $567.2 million during the first three months of 2018. A hypothetical 100 basis point (1%) increase in interest rates on our average variable-rate debt outstanding would result in a $4.3 million increase in our annual interest expense, net of tax. The 100 basis point increase was chosen for illustrative purposes, as it provides a simple basis for calculating the impact of interest rate changes under a variety of interest rate scenarios. Over the past five years, the change in basis points (b.p.) of our average monthly interest rates from the beginning to end of each year was as follows: 2017 - 82 b.p. increase; 2016 - 47 b.p. increase; 2015 - 14 b.p. increase; 2014 - 1 b.p. decrease; and 2013 - 16 b.p. decrease. At March 31, 2018, our average interest rate on variable-rate debt was 2.61%.

We typically issue long-term debt either at fixed rates or use interest rate derivatives to limit our exposure to changes in interest rates on variable rate, long-term debt. As of March 31, 2018, the interest costs on $919.2 million of our long-term debt was either at a fixed rate or hedged via an interest rate derivative.

As of March 31, 2018, SJI’s active interest rate swaps were as follows:



Notional Amount		Fixed Interest Rate	Start Date	Maturity	Obligor
$	20,000,000	3.049%	3/15/2017	3/15/2027	SJI
$	20,000,000	3.049%	3/15/2017	3/15/2027	SJI
$	10,000,000	3.049%	3/15/2017	3/15/2027	SJI
$	12,500,000	3.530%	12/1/2006	2/1/2036	SJG
$	12,500,000	3.430%	12/1/2006	2/1/2036	SJG

Credit Risk - As of March 31, 2018, SJI had approximately $4.3 million, or 11.9%, of the current and noncurrent Derivatives – Energy Related Assets transacted with one counterparty. This counterparty has contracts with a large number of diverse customers which minimizes the concentration of this risk. A portion of these contracts may be assigned to SJI in the event of default by the counterparty.

As of March 31, 2018, SJRG had $60.6 million of Accounts Receivable under sales contracts. Of that total, 42% were with regulated utilities or companies rated investment-grade or guaranteed by an investment-grade-rated parent or were with companies where we have a collateral arrangement or insurance coverage. The remainder of the Accounts Receivable were within approved credit limits.

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South Jersey Gas Company:

The fair value and maturity of SJG's energy trading and hedging contracts determined using mark-to-market accounting as of March 31, 2018 are as follows (in thousands):



Assets
Source of Fair Value	Maturity < 1 Year		Maturity 1 - 3 Years		Total
Prices Actively Quoted (NYMEX)	$	342	$	—	$	342
Prices Provided by Other External Sources (Basis)	62		—		62
Prices based on internal models or other valuable methods	—		—		—

Total	$	404	$	—	$	404



Liabilities
	Maturity		Maturity
Source of Fair Value	< 1 Year		1 - 3 Years		Total
Prices Actively Quoted (NYMEX)	$	769	$	328	$	1,097
Prices Provided by Other External Sources (Basis)	9		—		9
Prices based on internal models or other valuable methods	6		—		6

Total	$	784	$	328	$	1,112

Contracted volumes of SJG's NYMEX contracts are 13.0 MMdt with a weighted-average settlement price of $2.87 per dt. Contracted volumes of SJG's Basis contracts are 3.1 million dts with a weighted-average settlement price of $0.39 per dt.

A reconciliation of SJG's estimated net fair value of energy-related derivatives follows (in thousands):



Net Derivatives — Energy Related Liabilities, January 1, 2018	$	(2,108	)
Contracts Settled During the Three Months ended March 31, 2018, Net	1,202
Other Changes in Fair Value from Continuing and New Contracts, Net	198
Net Derivatives — Energy Related Liabilities, March 31, 2018	$	(708	)

Interest Rate Risk - SJG's exposure to interest rate risk relates primarily to variable-rate borrowings. Variable-rate debt, including both short-term and long-term debt outstanding at March 31, 2018, was $263.1 million and averaged $247.4 million during the first three months of 2018. A hypothetical 100 basis point (1%) increase in interest rates on SJG's average variable-rate debt outstanding would result in a $1.9 million increase in SJG's annual interest expense, net of tax. The 100 basis point increase was chosen for illustrative purposes, as it provides a simple basis for calculating the impact of interest rate changes under a variety of interest rate scenarios. Over the past five years, the change in basis points (b.p.) of SJG's average monthly interest rates from the beginning to end of each year was as follows: 2017 - 91 b.p. increase; 2016 - 19 b.p. increase; 2015 - 20 b.p. increase; 2014 - 32 b.p. increase; and 2013 - 14 b.p. decrease. As of March 31, 2018, SJG's average interest rate on variable-rate debt was 2.44%.

SJG typically issues long-term debt either at fixed rates or uses interest rate derivatives to limit exposure to changes in interest rates on variable-rate, long-term debt. As of March 31, 2018, the interest costs on $629.2 million of long-term debt was either at a fixed-rate or hedged via an interest rate derivative.

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Item 4. Controls and Procedures

South Jersey Industries, Inc.

Evaluation of Disclosure Controls and Procedures

SJI's management, with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of SJI’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of March 31, 2018. Based on that evaluation, SJI’s chief executive officer and chief financial officer concluded that the disclosure controls and procedures employed at SJI are effective.

Changes in Internal Control Over Financial Reporting

There has not been any change in SJI’s internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act, during the fiscal quarter ended March 31, 2018 that has materially affected, or is reasonably likely to materially affect, SJI’s internal control over financial reporting.

South Jersey Gas Company

Evaluation of Disclosure Controls and Procedures

SJG’s management, with the participation of its president (principal executive officer) and chief financial officer (principal financial officer), evaluated the effectiveness of the design and operation of SJG’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act) as of March 31, 2018. Based on that evaluation, SJG’s president and chief financial officer concluded that the disclosure controls and procedures employed at SJG are effective.

Changes in Internal Control Over Financial Reporting

There has not been any change in SJG’s internal control over financial reporting, as defined in Rules 13a-15(f) under the Securities Exchange Act, during the fiscal quarter ended March 31, 2018 that has materially affected, or is reasonably likely to materially affect, SJG’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item l. Legal Proceedings

Information required by this Item for SJI and SJG is incorporated by reference to Part I, Item 2, Pending Litigation, beginning on page 60.

Item 1A. Risk Factors

Other than as set forth below, there have been no material changes in the risk factors for SJI or SJG from those disclosed in Item 1A of SJI’s and SJG's Annual Reports on Form 10-K for the year ended December 31, 2017, respectively.

Our expected acquisition of Elizabethtown Gas and Elkton Gas (the "Acquisition") involves risks associated with acquisitions and integrated acquired assets, including the potential exposure to significant liabilities, and the intended benefits of the Acquisition may not be realized.

The Acquisition involves risks associated with acquisitions and integrating acquired assets into existing operations, including that:


•	our senior management’s attention may be diverted from the management of daily operations to the integration of the assets acquired in the Acquisition;


•	we could incur significant unknown and contingent liabilities for which we have limited or no contractual remedies or insurance coverage;


•	the assets to be acquired may not perform as well as we anticipate; and


•	unexpected costs, delays and challenges may arise in integrating the assets acquired in the Acquisition into our existing operations.

Even if we successfully integrate the assets acquired in the Acquisition into our operations, it may not be possible to realize the full benefits we anticipate or we may not realize these benefits within the expected time frame. If we fail to realize the benefits we anticipate from the Acquisition, our business, results of operations and financial condition may be adversely affected.

We issued additional securities to provide permanent financing for the Acquisition, and, as a result, we are subject to market risks including market demand for our debt and equity securities. We are also seeking to consummate certain asset sales.

In connection with the Acquisition, we have obtained a commitment from the underwriters for a bridge loan facility, which may be used to fund a portion of the cash consideration payable in connection with the Acquisition and pay related fees and expenses in the event that permanent financing for all costs related to the Acquisition are not completed at the time of the closing of the Acquisition. The permanent financing includes common stock and Equity Units, Senior Unsecured Notes and the Term Facility.

Although we and our advisers believe we have taken prudent steps to position SJI and its subsidiaries for successful capital raises, we cannot assure you as to the ultimate cost or availability of funds to complete the permanent financing.

Among other risks, the planned increase in our indebtedness may:


•	make it more difficult for us to repay or refinance our debts as they become due during adverse economic and industry conditions;


•	limit our flexibility to pursue other strategic opportunities or react to changes in our business and the industry in which we operate and, consequently, place us at a competitive disadvantage to competitors with less debt;


•	require an increased portion of our cash flows from operations to be used for debt service payments, thereby reducing the availability of cash flows to fund working capital, capital expenditures, dividend payments and other general corporate purposes;


•	result in a downgrade in the credit rating of our indebtedness, which could limit our ability to borrow additional funds or increase the interest rates applicable to our indebtedness;


•	result in higher interest expense in the event of increases in market interest rates for both long-term debt as well as short-term commercial paper, bank loans or borrowings under our line of credit at variable rates;


•	reduce the amount of credit available to support hedging activities; and


•	require that additional terms, conditions or covenants be placed on us.

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Among other risks, the issuance of additional equity by SJI may:


•	be dilutive to our existing shareholders and earnings per share;


•	impact our capital structure and cost of the capital;


•	be adversely impacted by movements in the overall equity markets or the utility or natural gas utility industry sectors of that market, which could impact the offering price of our new equity or necessitate the use of other equity or equity-like instruments such as preferred stock, convertible preferred shares, or convertible debt; and


•	impact our ability to make our current and future dividend payments.

In addition to securities offerings, we are also seeking to sell certain non-core assets of the Company. We are not party to definitive documentation with respect to any asset sales and cannot assure you that we will be able to consummate such sales or achieve the prices we are anticipating. If we raise less proceeds from the asset sales, we would need to incur additional debt under our bridge facility to finance the acquisition, which would increase our indebtedness and interest expense.

We will be subject to business uncertainties while the Acquisition is pending.

The preparation required to complete the Acquisition may place a significant burden on management and internal resources. The additional demands on management and any difficulties encountered in completing the Acquisition, including the transition and integration process, could adversely affect our financial results.

Failure to complete the Acquisition could negatively affect our stock price as well as our future business and financial results.

If the Acquisition is not completed, we will be subject to a number of risks, including:


•	we must pay costs related to the Acquisition, including legal, accounting, financial advisory, filing and printing costs, whether the Acquisition is completed or not;


•	we could be subject to litigation related to the failure to complete the Acquisition or other factors, which litigation may adversely affect our business, financial results and stock price; and


•	as a result of our recent issuance of common stock in anticipation of the Acquisition, we could be subject to significant earnings per share dilution if we do not find other attractive investment opportunities or undertake other means reduce our overall shares outstanding.

The Acquisition may not achieve its intended results, including anticipated investment opportunities and earnings growth.

Although we expect that the Acquisition will result in various benefits, including expanding our gas utility rate and customer bases, providing investment opportunities through infrastructure development and enhancing our regulatory relationships within the local communities served, we cannot assure you regarding when or the extent to which we will be able to realize these or other benefits. Achieving the anticipated benefits, is subject to a number of uncertainties, including whether the businesses acquired can be operated in the manner we intend and whether our costs to finance the Acquisition will be consistent with our expectations. Events outside of our control, including but not limited to regulatory changes or developments, could also adversely affect our ability to realize the anticipated benefits from the Acquisition. Thus the integration of the Elizabethtown Gas and Elkton Gas businesses, respectively, may be unpredictable, subject to delays or changed circumstances, and we cannot assure you that the acquired businesses will perform in accordance with our expectations or that our expectations with respect to improving our business risk profile, leveraging existing regulatory relationships or achieving earnings growth as a result of the Acquisition will be achieved. In addition, our anticipated costs to achieve the integration of the acquired businesses may differ significantly from our current estimates. The integration may place an additional burden on our management and internal resources, and the diversion of management’s attention during the integration process could have an adverse effect on our business, financial condition and expected operating results.

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Item 6. Exhibits

(a) Exhibits



Exhibit No.		Description

31.1		Certification of SJI's Principal Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.

31.2		Certification of SJI's Principal Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.

31.3		Certification of SJG's Principal Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.

31.4		Certification of SJG's Principal Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.

32.1		Certification of SJI's Principal Executive Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

32.2		Certification of SJI's Principal Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

32.3		Certification of SJG's Principal Executive Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

32.4		Certification of SJG's Principal Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

101		The following financial statements from South Jersey Industries, Inc.’s Quarterly Report on Form 10-Q for the three months ended March 31, 2018, filed with the Securities and Exchange Commission on May 7, 2018 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income; (ii) the Condensed Consolidated Statements of Comprehensive Income; (iii) the Condensed Consolidated Statements of Cash Flows; (iv) the Condensed Consolidated Balance Sheets and (v) the Notes to Condensed Consolidated Financial Statements. The following financial statements from South Jersey Gas’ Quarterly Report on Form 10-Q for the three months ended March 31, 2018, filed with the Securities and Exchange Commission on May 7, 2018 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Statements of Income; (ii) the Condensed Statements of Comprehensive Income; (iii) the Condensed Statements of Cash Flows; and (iv) the Condensed Balance Sheets.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		SOUTH JERSEY INDUSTRIES, INC.
		and
		SOUTH JERSEY GAS COMPANY
		(Co-Registrants)

Dated:	May 7, 2018	By:	/s/ Stephen H. Clark
			Stephen H. Clark
			Executive Vice President & Chief Financial Officer - SJI
			Chief Financial Officer - SJG
			(Principal Financial Officer for both Registrants)