REGULATORY ASSETS & REGULATORY LIABILITIES:

The discussion under Note 10, Rates and Regulatory Actions, is integral to the following explanations of specific regulatory assets and liabilities.

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



	December 31, 2017		December 31, 2016
Environmental Remediation Costs:
Expended - Net	$	100,327	$	71,997
Liability for Future Expenditures	171,696		153,047
Deferred Asset Retirement Obligation Costs	42,368		43,014
Deferred Pension and Other Postretirement Benefit Costs	78,211		85,693
Deferred Gas Costs - Net	16,838		—
Conservation Incentive Program Receivable	26,652		27,567
Societal Benefit Costs Receivable	2,484		—
Deferred Interest Rate Contracts	7,028		7,365
Energy Efficiency Tracker	2,094		219
Pipeline Supplier Service Charges	708		2,122
Pipeline Integrity Cost	5,280		4,810
AFUDC - Equity Related Deferrals	12,785		12,434
Other Regulatory Assets	2,753		2,478

Total Regulatory Assets	$	469,224	$	410,746

Except where noted below, all regulatory assets are or will be recovered through utility rate charges, as detailed in the following discussion. SJG is currently permitted to recover interest on Environmental Remediation Costs, Societal Benefit Costs Receivable, Energy Efficiency Tracker and Pipeline Integrity Costs, while the other assets are being recovered without a return on investment.

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 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 consolidated balance sheets under the captions "Current Liabilities" (SJI and SJG) and "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. The increase from December 31, 2016 is a result of expenditures made during 2017 and an increase in the expected future expenditures for remediation activities, primarily due to a change in the proposed type of remediation at two of the sites currently under remediation. The proposed change results in an increase in contractor costs.

Deferred Asset Retirement Obligation (ARO) Costs - This regulatory asset resulted from the recording of ARO and additional utility plant, primarily related to a legal obligation SJG has for certain safety requirements upon the retirement of its gas distribution and transmission system. SJG recovers asset retirement costs through rates charged to customers. All related accumulated accretion and depreciation amounts for these ARO represent timing differences in the recognition of retirement costs that SJG is currently recovering in rates and, as such, SJG is deferring such differences as regulatory assets.

Deferred Pension and Other Postretirement Benefit Costs - The BPU authorized SJG to recover costs related to postretirement benefits under the accrual method of accounting consistent with GAAP. SJG's regulatory asset represents the recognition of the underfunded positions of SJG's pension and other postretirement benefit plans. Subsequent adjustments to this balance occur annually to reflect changes in the funded positions of these benefit plans caused by changes in actual plan experience as well as assumptions of future experience (see Note 12).

Deferred Gas Costs - Net - Over/under collections of gas costs are monitored through SJG's BGSS mechanism. Net undercollected gas costs are classified as a regulatory asset and net overcollected gas costs are classified as a regulatory liability (see Note 10). Derivative contracts used to hedge natural gas purchases are also included in the BGSS, subject to BPU approval (see Note 16). The change in the BGSS from a $17.8 million regulatory liability at December 31, 2016 to a $16.8 million regulatory asset at December 31, 2017 was primarily due to an unfavorable court ruling related to a pricing dispute between SJG and a supplier (see Note 15) and 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 less than the established baseline during 2017, resulting in an increase in the receivable. This is primarily the result of warm weather experienced in the region.

Societal Benefits 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. The change from a liability at December 31, 2016 to an asset at December 31, 2017 is due to an increase in rates.

Deferred Interest Rate Contracts - These amounts represent the market value of interest rate derivatives as discussed further in Note 16.

Energy Efficiency Tracker - This regulatory asset represents cumulative investments less recoveries under the Energy Efficiency Program.

Pipeline Supplier Service Charges - This regulatory asset represents costs necessary to maintain adequate supply and system pressures, which are being recovered on a monthly basis through the BGSS over the term of the underlying supplier contracts (see Note 10).

Pipeline Integrity Cost - As part of SJG's September 2014 base rate increase, SJG was permitted to recover previously deferred pipeline integrity costs incurred through September 2014. In addition, SJG is authorized to defer future program costs, including related carrying costs, for recovery in SJG's next base rate proceeding, subject to review by the BPU (see Note 10).

AFUDC Equity Related Deferrals - This regulatory asset represents the future revenue to recover the future income taxes related to the deferred tax liability for the equity component of AFUDC. Included in the balance is $1.0 million which is being recovered over a period of three years as approved by the BPU in SJG’s 2014 rate case settlement. The remaining balance is being amortized over the life of the associated utility plant.

Other Regulatory Assets - Some of the assets included in Other Regulatory Assets are currently being recovered from ratepayers as approved by the BPU. Management believes the remaining deferred costs are probable of recovery from ratepayers through future utility rates.

Regulatory Liabilities consisted of the following items (in thousands):



	December 31, 2017		December 31, 2016
Excess Plant Removal Costs	$	23,295	$	28,226
Deferred Revenue - Net	—		17,800
Societal Benefit Costs Payable	—		3,095
Excess Deferred Taxes	263,810		—

Total Regulatory Liabilities	$	287,105	$	49,121

Excess Plant Removal Costs - SJG accrues and collects for cost of removal of its utility property. This regulatory liability represents customer collections in excess of actual expenditures, which the company will return to customers as a reduction to depreciation expense. The Excess Plant Removal Costs Liability decreased from $28.2 million at December 31, 2016 to $23.3 million at December 31, 2017 due to higher asset removal costs incurred related to the AIRP.

Deferred Revenue - Net - See discussion under "Deferred Gas Costs - Net" above.

Societal Benefit Costs Payable - See discussion under "Societal Benefit Costs Receivable" above.

Excess Deferred Taxes - This liability is recognized as a result of Tax Reform. See Note 4.