STOCK-BASED COMPENSATION PLAN:

Under the Amended and Restated 1997 Stock-Based Compensation Plan, no more than 2,000,000 shares in the aggregate may be issued to SJI’s officers (Officers), non-employee directors (Directors) and other key employees. The plan will terminate on January 26, 2015, unless terminated earlier by the Board of Directors. No options were granted or outstanding during the years ended December 31, 2012, 2011 and 2010. No stock appreciation rights have been issued under the plan. During the years ended December 31, 2012, 2011 and 2010, SJI granted 40,955, 40,711 and 52,940 restricted shares to Officers and other key employees, respectively. These restricted shares vest over a three-year period and are subject to SJI achieving certain market and earnings based performance targets as compared to a peer group average, which can cause the actual amount of shares that ultimately vest to range from between 0% to 150% of the original share units granted.

Grants containing market-based performance targets have been issued in each of the last three years and 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 service 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.

Beginning with 2012, grants containing earnings-based targets have also been issued. These new grants are based on SJI's earnings per share (EPS) growth rate relative to a peer group to measure performance. As EPS-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 goals.

SJI granted 9,904, 12,220 and 16,700 restricted shares to Directors in 2012, 2011 and 2010, respectively. Shares issued to Directors in 2010 and 2011 vest over a three-year service period and contain no performance conditions. Shares issued to Directors in 2012 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 at December 31, 2012 and the assumptions used to estimate the fair value of the awards:



	Grant Date	Shares Outstanding	Fair Value Per Share		Expected Volatility		Risk-Free Interest Rate
Officers & Key Employees -	Jan. 2011 - TSR	40,227	$	50.940	27.5	%	1.01	%
	Jan. 2012 - TSR	20,389	$	51.230	22.5	%	0.43	%
	Jan. 2012 - EPS	20,389	$	56.930	N/A		N/A

Directors -	Jan. 2010	11,690	$	37.825	—		—
	Jan. 2011	7,332	$	52.940	—		—
	Jan. 2012	8,666	$	56.580	—		—

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, which are reinvested 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 for the years ended December 31, (in thousands):



	2012			2011			2010
Officers & Key Employees	$	2,096		$	1,852		$	1,628
Directors	896			658			394
Total Cost	2,992			2,510			2,022

Capitalized	(231		)	(218		)	(202		)
Net Expense	$	2,761		$	2,292		$	1,820

As of December 31, 2012, there was $2.3 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the restricted stock plans. That cost is expected to be recognized over a weighted average period of 1.6 years.

The following table summarizes information regarding restricted stock award activity during 2012, excluding accrued dividend equivalents:



	Officers & Other Key Employees		Directors		Weighted Average Fair Value
Nonvested Shares Outstanding, January 1, 2012	92,907		21,914		$	44.112
Granted	40,955		9,904		$	54.567
Vested*	(52,404	)	(4,130	)	$	39.670
Cancelled/Forfeited	(453	)	—		$	49.430
Nonvested Shares Outstanding, December 31, 2012	81,005		27,688		$	51.292

*Actual shares expected to be awarded to officers and other key employees during the first quarter of 2013, including dividend equivalents and adjustments for performance measures, total 66,077 shares.

During the years ended December 31, 2012, 2011 and 2010, SJI awarded 33,322 shares to its Officers and other key employees at a market value of $1.9 million, 69,271 shares at a market value of $3.7 million, and 59,893 shares at a market value of $2.3 million, respectively. Also, during the years ended December 31, 2012, 2011 and 2010, SJI awarded 9,904, 12,220 and 16,700 shares to its Directors at a market value of $0.6 million for each year. The Company has a policy of issuing new shares to satisfy its obligations under these plans; therefore, there are no cash payment requirements resulting from the normal operation of this 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 consolidated balance sheets.