STOCK-BASED COMPENSATION PLAN:

On April 30, 2015, the shareholders of SJI approved the adoption of the Company'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 years ended December 31, 2016, 2015 and 2014. No stock appreciation rights have been issued under the plans. During the years ended December 31, 2016, 2015 and 2014, SJI granted 194,347, 158,929 and 136,526 restricted shares, respectively, to Officers and other key employees under the plans. 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 share units granted.

Beginning in 2015, SJI began granting time-based shares of restricted stock, one-third of which vests annually over a three-year period and is limited to 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. In 2016 and 2015, Officers and other key employees were granted 58,304 and 47,678 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 predefined 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.

SJI granted 35,197, 26,338 and 23,220 restricted shares to Directors in 2016, 2015 and 2014, respectively. 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 at December 31, 2016, 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 -	2015 - TSR	33,537	$	26.31	16.0	%	1.10	%
	2015 - EGR, ROE, Time	73,118	$	29.47	N/A		N/A
	2016 - TSR	66,101	$	22.53	18.1	%	1.31	%
	2016 - CEGR, Time	122,759	23.52		N/A		N/A

Directors -	2016	35,197	$	23.88	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 for the years ended December 31 (in thousands):



	2016			2015			2014
Officers & Key Employees	$	3,051		$	1,128		$	1,260
Directors	841			769			633
Total Cost	3,892			1,897			1,893

Capitalized	(385		)	(216		)	(147		)
Net Expense	$	3,507		$	1,681		$	1,746

The table above reflects the reversal of approximately $0.1 million, $1.2 million and $1.1 million of previously recorded costs in 2016, 2015 and 2014, respectively. These reversals are associated with EPS-based grants for which performance goals were not met.

As of December 31, 2016, there was $4.0 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 1.7 years.

The following table summarizes information regarding restricted stock award activity during 2016, excluding accrued dividend equivalents:



	Officers & Other Key Employees		Directors		Weighted Average Fair Value
Nonvested Shares Outstanding, January 1, 2016	226,191		26,338		$	26.89
Granted	194,347		35,197		$	23.28
Vested*	(113,917	)	(26,338	)	$	25.69
Cancelled/Forfeited**	(11,106	)	—		$	25.11
Nonvested Shares Outstanding, December 31, 2016	295,515		35,197		$	24.96

*Based on performance information available at the filing of this Report, management expects to award 29,044 shares associated with the 2014 grants to Officers and other key employees in 2017.

** Represents shares forfeited as a result of separation of employment prior to the satisfaction of service conditions.

Performance targets during the three-year vesting periods were not attained for the 2012 or 2013 Officer and other key employee grants that vested at December 31, 2014 and 2015, respectively. As a result, no shares were awarded in 2015 or 2016 associated with those grants. However, the initial performance hurdle for the 2015 time-based grant was met. As a result, 13,247 shares were awarded to Officers and other key employees in 2016 at a market value of $0.3 million. Also, during the years ended December 31, 2016, 2015 and 2014, SJI granted 35,197, 26,338 and 23,220 shares to its Directors at a market value of $0.8 million, $0.8 million and $0.6 million, respectively. The Company 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 consolidated balance sheets.