PENSION AND OTHER POSTRETIREMENT BENEFITS:

We participate in the defined benefit pension plans and other postretirement benefit plans of SJI. The pension plans provide annuity payments to the majority of full-time, regular employees upon retirement. Participation in the SJI qualified defined benefit pension plans was closed to new employees beginning in 2003; however, employees who are not eligible for these pension plans are eligible to receive an enhanced version of SJI’s defined contribution plan. Certain officers of SJG also participate in the non-funded supplemental executive retirement plan (SERP) of SJI, a non-qualified defined benefit pension plan. The other postretirement benefit plans provide health care and life insurance benefits to some retirees.

Net periodic benefit cost related to the employee and officer pension and other postretirement benefit plans consisted of the following components (in thousands):



	Pension Benefits									Other Postretirement Benefits
	2013			2012			2011			2013			2012			2011
Service Cost	$	4,487		$	3,718		$	3,048		$	771		$	704		$	675
Interest Cost	7,886			8,008			7,828			2,221			2,443			2,621
Expected Return on Plan Assets	(9,435		)	(8,249		)	(7,415		)	(2,158		)	(1,910		)	(2,040		)
Amortization:
Prior Service Cost (Credits)	208			207			219			(195		)	(195		)	(254		)
Actuarial Loss	7,608			6,432			4,561			1,555			1,534			1,466
Net Periodic Benefit Cost	10,754			10,116			8,241			2,194			2,576			2,468
Capitalized Benefit Costs	(5,002		)	(4,684		)	(3,661		)	(1,172		)	(1,340		)	(1,222		)
Affiliate SERP Allocations	(1,389		)	(1,107		)	(845		)	—			—			—
Total Net Periodic Benefit Expense	$	4,363		$	4,325		$	3,735		$	1,022		$	1,236		$	1,246

Capitalized benefit costs reflected in the table above relate to our construction program.

Companies with publicly traded equity securities that sponsor a postretirement benefit plan are required to fully recognize, as an asset or liability, the overfunded or underfunded status of its benefit plans and recognize changes in the funded status in the year in which the changes occur. Changes in funded status are generally reported in Other Comprehensive Loss; however, since we recover all prudently incurred pension and postretirement benefit costs from our ratepayers, a significant portion of the charges resulting from the recording of additional liabilities under this statement are reported as regulatory assets (See Note 4).

Details of the activity within the Regulatory Asset and Accumulated Other Comprehensive Loss associated with Pension and Other Postretirement Benefits are as follows (in thousands):



	Regulatory Assets						Accumulated Other Comprehensive Loss (pre-tax)
	Pension Benefits			Other Postretirement Benefits			Pension Benefits			Other Postretirement Benefits
Balance at January 1, 2012	$	61,811		$	26,435		$	19,061		$	—
Amounts Arising during the Period:
Net Actuarial Loss	11,599			2,089			4,788			—
Amounts Amortized to Net Periodic Costs:
Net Actuarial Loss	(4,490		)	(1,535		)	(1,941		)	—
Prior Service (Cost) Credit	(207		)	195			—			—
Balance at December 31, 2012	68,713			27,184			21,908			—
Amounts Arising during the Period:
Net Actuarial Gain	(20,554		)	(9,171		)	(1,576		)	—
Amounts Amortized to Net Periodic Costs:
Net Actuarial Loss	(5,319		)	(1,555		)	(2,289		)	—
Prior Service (Cost) Credit	(208		)	194			—			—
Balance at December 31, 2013	$	42,632		$	16,652		$	18,043		$	—

The estimated costs that will be amortized from Regulatory Assets into net periodic benefit costs in 2014 are as follows (in thousands):



	Pension Benefits		Other Postretirement Benefits
Prior Service Costs	$	158	$	133
Net Actuarial Loss	$	2,856	$	790

The estimated costs that will be amortized from Accumulated Other Comprehensive Loss into net periodic benefit costs in 2014 are as follows (in thousands):



	Pension Benefits		Other Postretirement Benefits
Net Actuarial Loss	$	2,007	$	—

A reconciliation of the plans’ benefit obligations, fair value of plan assets, funded status and amounts recognized in our balance sheets follows (in thousands):



							Other
	Pension Benefits						Postretirement Benefits
	2013			2012			2013			2012
Change in Benefit Obligations:
Benefit Obligation at Beginning of Year	$	186,899		$	160,319		$	55,615		$	51,656
Service Cost	4,487			3,718			771			704
Interest Cost	7,886			8,008			2,221			2,443
Actuarial (Gain) Loss	(11,514		)	21,990			(4,552		)	4,059
Retiree Contributions	—			—			335			313
Plan Amendments	—			—			—			—
Benefits Paid	(7,090		)	(7,136		)	(3,475		)	(3,560		)
Benefit Obligation at End of Year	$	180,668		$	186,899		$	50,915		$	55,615
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Year	$	119,391		$	91,738		$	32,694		$	28,942
Actual Return on Plan Assets	20,049			13,853			5,101			3,880
Employer Contributions	10,324			20,936			4,816			3,119
Retiree Contributions	—			—			335			313
Benefits Paid	(7,090		)	(7,136		)	(3,475		)	(3,560		)
Fair Value of Plan Assets at End of Year	$	142,674		$	119,391		$	39,471		$	32,694



Funded Status at End of Year:
Accrued Net Benefit Cost at End of Year	$	(37,994	)	$	(67,508	)	$	(11,444	)	$	(22,921	)
Amounts Recognized in the Statement of Financial Position Consist of:
Current Liabilities	$	(1,241	)	$	(1,236	)	$	—		$	—
Noncurrent Liabilities	(36,753		)	(66,272		)	(11,444		)	(22,921		)
Net Amount Recognized at End of Year	$	(37,994	)	$	(67,508	)	$	(11,444	)	$	(22,921	)
Amounts Recognized in Regulatory Assets Consist of:
Prior Service Costs	$	634		$	842		$	952		$	758
Net Actuarial Loss	41,998			67,871			15,700			26,426
Net Amount Recognized at End of Year	$	42,632		$	68,713		$	16,652		$	27,184
Amounts Recognized in Accumulated Other Comprehensive Loss Consist of:
Net Actuarial Loss	$	18,043		$	21,908		$	—		$	—

The projected benefit obligation (PBO) and accumulated benefit obligation (ABO) of our qualified employee pension plans were $143.5 million and $131.4 million, respectively, as of December 31, 2013; and $149.5 million and $135.6 million, respectively, as of December 31, 2012. The ABO of these plans exceeded the value of the plan assets as of December 31, 2012. The value of these assets can be seen in the tables above. The PBO and ABO for our non-funded SERP were $37.2 million and $36.2 million, respectively, as of December 31, 2013; and $37.4 million and $35.7 million, respectively, as of December 31, 2012. The SERP obligation is reflected in the tables above and has no assets.

The weighted-average assumptions used to determine benefit obligations at December 31 were:



	Pension Benefits				Other Postretirement Benefits
	2013		2012		2013		2012
Discount Rate	5.09	%	4.26	%	4.91	%	4.14	%
Rate of Compensation Increase	3.50	%	3.25	%	3.50	%	3.25	%

The weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 were:



	Pension Benefits						Other Postretirement Benefits
	2013		2012		2011		2013		2012		2011
Discount Rate	4.26	%	5.03	%	5.78	%	4.14	%	4.92	%	5.55	%
Expected Long-Term Return on Plan Assets	7.50	%	7.50	%	8.00	%	6.60	%	6.60	%	7.00	%
Rate of Compensation Increase	3.25	%	3.25	%	3.25	%	3.25	%	3.25	%	3.25	%

All obligations disclosed herein reflect the use of the RP 2000 mortality tables.

The discount rates used to determine the benefit obligations at December 31, 2013 and 2012, which are used to determine the net periodic benefit cost for the subsequent year, were based on a portfolio model of high-quality investments with maturities that match the expected benefit payments under our pension and other postretirement benefit plans.

The expected long-term return on plan assets (“return”) has been determined by applying long-term capital market projections provided by our pension plan Trustee to the asset allocation guidelines, as defined in the Company’s investment policy, to arrive at a weighted average return. For certain other equity securities held by an investment manager outside of the control of the Trustee, the return has been determined based on historic performance in combination with long-term expectations. The return for the other postretirement benefits plan is determined in the same manner as discussed above; however, the expected return is reduced based on the taxable nature of the underlying trusts.

The assumed health care cost trend rates at December 31 were:



	2013		2012
Medical Care and Drug Cost Trend Rate Assumed for Next Year	7.00	%	7.00	%
Dental Care Cost Trend Rate Assumed for Next Year	4.75	%	4.75	%
Rate to which Cost Trend Rates are Assumed to Decline (the Ultimate Trend Rate)	4.75	%	4.75	%
Year that the Rate Reaches the Ultimate Trend Rate	2023		2019

Assumed health care cost trend rates have a significant effect on the amounts reported for our postretirement health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in thousands):



	1-Percentage- Point Increase		1-Percentage- Point Decrease
Effect on the Total of Service and Interest Cost	$	145	$	(115	)
Effect on Postretirement Benefit Obligation	$	2,406	$	(2,027	)

PLAN ASSETS — The Company’s overall investment strategy for pension plan assets is to achieve a diversification by asset class, style of manager, and sector and industry limits to achieve investment results that match the actuarially assumed rate of return, while preserving the inflation adjusted value of the plans. The Company has implemented this diversification strategy primarily with commingled common/collective trust funds. The target allocations for pension plan assets are 28-48 percent U.S. equity securities, 13-25 percent international equity securities, 32-42 percent fixed income investments, and 2-14 percent to all other types of investments. Equity securities include investments in commingled common/collective trust funds as well as large-cap, mid-cap and small-cap companies. Fixed income securities include commingled common/collective trust funds, group annuity contracts for pension payments, and hedge funds. Other types of investments include investments in private equity funds and real estate funds that follow several different strategies.

The strategy recognizes that risk and volatility are present to some degree with all types of investments. We seek to avoid high levels of risk at the total fund level through diversification by asset class, style of manager, and sector and industry limits. Specifically prohibited investments include, but are not limited to, venture capital, margin trading, commodities and securities of companies with less than $250.0 million capitalization (except in the small-cap portion of the fund where capitalization levels as low as $50.0 million are permissible). These restrictions are only applicable to individual investment managers with separately managed portfolios and do not apply to mutual funds or commingled trusts.

SJG evaluated its pension and other postretirement benefit plans’ asset portfolios for the existence of significant concentrations of credit risk as of December 31, 2013. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type of industry, foreign country, and individual fund. As of December 31, 2013, there were no significant concentrations (defined as greater than 10 percent of plan assets) of risk in SJG’s pension and other postretirement benefit plan assets.

GAAP establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques. This hierarchy groups assets into three (3) distinct levels as fully described in Note 13, that will serve as the basis for presentation throughout the remainder of this Note.

The fair values of SJG’s pension plan assets at December 31, 2013 and 2012 by asset category are as follows (in thousands):



Asset Category	Total		Level 1		Level 2		Level 3
As of December 31, 2013:
Cash / Cash Equivalents:
Common/Collective Trust Funds (a)	$	334	$	—	$	334	$	—
STIF-Type Instrument (b)	943		—		943		—
Equity securities:
Common/Collective Trust Funds – U.S. (a)	41,527		—		41,527		—
Common/Collective Trust Funds – International (a)	27,312		—		27,312		—
U.S. Large-Cap (c)	9,342		9,342		—		—
U.S. Mid-Cap (c)	3,313		3,313		—		—
International (c)	2,935		2,935		—		—
Fixed Income:
Common/Collective Trust Funds (a)	36,728		—		36,728		—
Guaranteed Insurance Contract (d)	9,071		—		—		9,071
Hedge Funds (e)	3,328		—		—		3,328
Other types of investments:
Private Equity Fund (f)	2,440		—		—		2,440
Common/Collective Trust Fund – Real Estate (g)	5,401		—		—		5,401
Total	$	142,674	$	15,590	$	106,844	$	20,240



Asset Category	Total		Level 1		Level 2		Level 3
As of December 31, 2012:
Cash / Cash Equivalents:
Common/Collective Trust Funds (a)	$	477	$	—	$	477	$	—
STIF-Type Instrument (b)	840		—		840		—
Equity securities:
Common/Collective Trust Funds – U.S. (a)	33,690		—		33,690		—
Common/Collective Trust Funds – International (a)	23,448		—		23,448		—
U.S. Large-Cap (c)	7,126		7,126		—		—
U.S. Mid-Cap (c)	4,194		4,194		—		—
U.S. Small-Cap (c)	8		8		—		—
International (c)	1,462		1,462		—		—
Fixed Income:
Common/Collective Trust Funds (a)	30,913		—		30,913		—
Guaranteed Insurance Contract (d)	9,898		—		—		9,898
Other types of investments:
Private Equity Fund (f)	2,557		—		—		2,557
Common/Collective Trust Fund – Real Estate (g)	4,778		—		—		4,778
Total	$	119,391	$	12,790	$	89,368	$	17,233

(a)

This category represents common/collective trust fund investments through a commingled employee benefit trust (excluding real estate). These commingled funds are not traded publicly; however, the majority of the underlying assets held in these funds are stocks and bonds that are traded on active markets and prices for these assets are readily observable. Also included in these funds are interest rate swaps, asset backed securities, mortgage backed securities and other investments with observable market values. Holdings in these commingled funds are classified as Level 2 investments.

(b)

This category represents short-term investment funds held for the purpose of funding disbursement payment arrangements. Underlying assets are valued based on quoted prices in active markets, or where quoted prices are not available, based on models using observable market information. Since not all values can be obtained from quoted prices in active markets, these funds are classified as Level 2 investments.


(c)	This category of equity investments represents a managed portfolio of common stock investments in five sectors: telecommunications, electric utilities, gas utilities, water and energy. These common stocks are actively traded on exchanges and price quotes for these shares are readily available. These common stocks are classified as Level 1 investments.

(d)

This category represents SJI’s Group Annuity contracts with a nationally recognized life insurance company. The contracts are the assets of the plan, while the underlying assets of the contracts are owned by the contract holder. Valuation is based on a formula and calculation specified within the contract. Since the valuation is based on the reporting entity’s own assumptions, these contracts are classified as Level 3 investments.


(e)	This category represents a collection of underlying funds which are all domiciled outside of the United States. All of the underlying fund managers are based in the U.S.; however, they do not necessarily trade only in the U.S. markets. The fair value of these funds is determined by the underlying fund's general partner or manager. These funds are classified as Level 3 investments.

(f)

This category represents a limited partnership which includes several investments in U.S. leveraged buyout, venture capital, and special situation funds. Fund valuations are reported on a 90 day lag and, therefore, the value reported herein represents the market value as of September 30, 2013 and 2012, respectively. The fund’s investments are stated at fair value, which is generally based on the valuations provided by the general partners or managers of such investments. Fund investments are illiquid and resale is restricted. These funds are classified as Level 3 investments.

(g)

This category represents real estate common/collective trust fund investments through a commingled employee benefit trust. These commingled funds are part of a direct investment in a pool of real estate properties. These funds are valued by investment managers on a periodic basis using pricing models that use independent appraisals from sources with professional qualifications. Since these valuation inputs are not highly observable, the real estate funds are classified as Level 2 investments.

Fair Value Measurement Using Significant

Unobservable Inputs (Level 3)

(In thousands)



	Guaranteed Insurance Contract			Hedge Funds		Private Equity Funds			Real Estate		Total
Balance at January 1, 2012	$	9,647		$	—	$	2,525		$	4,291	$	16,463
Actual return on plan assets:
Relating to assets still held at the reporting date	1,082			—		(122		)	487		1,447
Relating to assets sold during the period	(10		)	—		480			—		470
Purchases, Sales and Settlements	(821		)	—		(326		)	—		(1,147		)
Balance at December 31, 2012	$	9,898		$	—	$	2,557		$	4,778	$	17,233
Actual return on plan assets:
Relating to assets still held at the reporting date	(68		)	124		80			623		759
Relating to assets sold during the period	14			—		345			—		359
Purchases, Sales and Settlements	(773		)	3,204		(542		)	—		1,889
Balance at December 31, 2013	$	9,071		$	3,328	$	2,440		$	5,401	$	20,240

As with the pension plan assets, the Company’s overall investment strategy for post-retirement benefit plan assets is to achieve a diversification by asset class, style of manager, and sector and industry limits to achieve investment results that match the actuarially assumed rate of return, while preserving the inflation adjusted value of the plans. The Company has implemented this diversification strategy with a mix of common/collective trust funds and mutual funds. The target allocations for post-retirement benefit plan assets are 33-43 percent U.S. equity securities, 20-30 percent international equity securities, and 32-42 percent fixed income investments. Equity securities include investments in large-cap, mid-cap and small-cap companies within mutual funds or common/collective trust funds. Fixed income securities within the common/collective trust fund include primarily investment grade, U.S. Government and mortgage-backed financial instruments.

The fair values of SJG’s other postretirement benefit plan assets at December 31, 2013 and 2012 by asset category are as follows (in thousands):



Asset Category	Total		Level 1		Level 2		Level 3
As of December 31, 2013:
Equity Securities:
Common/Collective Trust Funds - U.S. (a)	$	12,412	$	—	$	12,412	$	—
Common/Collective Trust Funds - International (a)	10,031		—		10,031		—
Mutual Fund - U.S. Large-Cap (b)	2,814		2,814		—		—
Fixed Income:
Common/Collective Trust (a)	14,214		—		14,214		—
Total	$	39,471	$	2,814	$	36,657	$	—

Asset Category	Total		Level 1		Level 2		Level 3
As of December 31, 2012:
Equity Securities:
Common/Collective Trust Funds - U.S. (a)	$	9,972	$	—	$	9,972	$	—
Common/Collective Trust Funds - International (a)	8,475		—		8,475		—
Mutual Fund - U.S. Large-Cap (b)	2,326		2,326		—		—
Fixed Income:
Common/Collective Trust (a)	11,921		—		11,921		—
Total	$	32,694	$	2,326	$	30,368	$	—

(a)


(b)	This category represents mutual fund investments. The mutual funds are actively traded on exchanges and price quotes for the shares are readily available. These mutual funds are classified as Level 1 investments.

Future Benefit Payments - The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the following years (in thousands):



	Pension Benefits		Other Postretirement Benefits
2014	$	7,770	$	3,725
2015	$	8,303	$	3,825
2016	$	8,646	$	3,906
2017	$	9,021	$	3,955
2018	$	10,316	$	3,997
2019 - 2023	$	61,659	$	21,093

Contributions - SJG contributed $9.1 million and $19.8 million to our qualified employee pension plans during the years ended December 31, 2013 and 2012, respectively. No pension plan contributions are planned for 2014. Payments related to the unfunded SERP plan are expected to approximate $1.2 million in 2014 and have been consistent over the past few years. We also have a regulatory obligation to contribute approximately $3.6 million annually to our other postretirement benefit plans’ trusts, less costs incurred directly by us.

Defined Contribution Plan - We also offer an Employees’ Retirement Savings Plan (Savings Plan) to eligible employees. For employees eligible for participation in SJI's defined benefit pension plans, SJG matches 50% of participants’ contributions up to 6% of base compensation. For employees who are not eligible for participation in SJI’s defined benefit plans, we match 50% of participants’ contributions up to 8% of base compensation. Employees not eligible for the pension plans also receive a year-end contribution of $1,000 if 10 or fewer years of service, or $1,500 if more than 10 years of service. The amount expensed and contributed for the matching provision of the Savings Plan approximated $1.0 million, $0.9 million and $0.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.