PENSION AND OTHER POSTRETIREMENT BENEFITS:

SJI has several defined benefit pension plans and other postretirement benefit plans. Approximately 38.2% of the Company's current, full-time, regular employees will be entitled to annuity payments upon retirement. Participation in the Company's 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 SJI officers also participate in a non-funded supplemental executive retirement plan (SERP), 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
	2016			2015			2014
Service Cost	$	4,843		$	5,337		$	4,510
Interest Cost	12,125			11,168			10,735
Expected Return on Plan Assets	(13,508		)	(14,789		)	(13,491		)
Amortizations:
Prior Service Cost	212			212			175
Actuarial Loss	9,394			10,608			5,716
Net Periodic Benefit Cost	13,066			12,536			7,645
Capitalized Benefit Costs	(4,645		)	(4,805		)	(3,047		)
Deferred Benefit Costs	(645		)	(1,007		)	—
Total Net Periodic Benefit Expense	$	7,776		$	6,724		$	4,598



	Other Postretirement Benefits
	2016			2015			2014
Service Cost	$	851		$	1,116		$	891
Interest Cost	2,615			2,973			2,852
Expected Return on Plan Assets	(3,104		)	(2,993		)	(2,603		)
Amortizations:
Prior Service (Credits) Cost	(344		)	608			152
Actuarial Loss	1,109			1,342			974
Net Periodic Benefit Cost	1,127			3,046			2,266
Capitalized Benefit Costs	(277		)	(1,043		)	(722		)
Deferred Benefit Costs	—			(256		)	—
Total Net Periodic Benefit Expense	$	850		$	1,747		$	1,544

Capitalized benefit costs reflected in the table above relate to SJG’s construction program. Deferred benefit costs relate to the deferral of incremental expenses associated with the adoption of new mortality tables in 2015. Deferred benefit costs are expected to be recovered through rates as part of SJG's next base rate case.

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 SJG recovers all prudently incurred pension and postretirement benefit costs from its ratepayers, a significant portion of the charges resulting from the recording of additional liabilities under this requirement are reported as regulatory assets (see Note 11).

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, 2015	$	71,177		$	27,863		$	39,468		$	6,755

Amounts Arising during the Period:
Net Actuarial (Loss)/Gain	(463		)	(3,155		)	59			(2,285		)
Prior Service Cost				(499		)				(106		)
Amounts Amortized to Net Periodic Costs:
Net Actuarial Loss	(6,079		)	(1,107		)	(4,452		)	(221		)
Prior Service Cost	(203		)	(7,755		)	(9		)	(2,081		)

Balance at December 31, 2015	64,432			15,347			35,066			2,062

Amounts Arising during the Period:
Net Actuarial Gain	9,706			2,584			8,370			829
Prior Service Credit	—			257			—			84
Amounts Amortized to Net Periodic Costs:
Net Actuarial Loss	(5,485		)	(945		)	(3,838		)	(154		)
Prior Service Cost	(203		)	—			(8		)	—

Balance at December 31, 2016	$	68,450		$	17,243		$	39,590		$	2,821

The estimated costs that will be amortized from Regulatory Assets into net periodic benefit costs in 2017 are as follows (in thousands):



	Pension Benefits		Other Postretirement Benefits
Prior Service Cost/(Credit)	$	127	$	(257	)
Net Actuarial Loss	$	6,202	$	1,040

The estimated costs that will be amortized from Accumulated Other Comprehensive Loss into net periodic benefit costs in 2017 are as follows (in thousands):



	Pension Benefits		Other Postretirement Benefits
Prior Service Cost/(Credit)	$	5	$	(87	)
Net Actuarial Loss	$	3,943	$	207

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



	Pension Benefits						Other Postretirement Benefits
	Pension Benefits						Other Postretirement Benefits
	2016			2015			2016			2015
Change in Benefit Obligations:
Benefit Obligation at Beginning of Year	$	254,195		$	265,434		$	57,430		$	75,592
Service Cost	4,843			5,337			851			1,116
Interest Cost	12,125			11,168			2,615			2,973
Actuarial Loss (Gain)	18,254			(17,349		)	3,121			(8,591		)
Retiree Contributions	—			—			81			700
Plan Amendments	—			—			—			(9,899		)
Benefits Paid	(11,129		)	(10,395		)	(3,748		)	(4,461		)
Benefit Obligation at End of Year	$	278,288		$	254,195		$	60,350		$	57,430

Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Year	$	184,824		$	180,523		$	47,759		$	43,222
Actual Return on Plan Assets	13,569			(2,321		)	2,784			(423		)
Employer Contributions	2,278			17,017			3,656			8,721
Retiree Contributions	—			—			81			700
Benefits Paid	(11,129		)	(10,395		)	(3,748		)	(4,461		)
Fair Value of Plan Assets at End of Year	$	189,542		$	184,824		$	50,532		$	47,759


Funded Status at End of Year:	$	(88,746	)	$	(69,371	)	$	(9,818	)	$	(9,671	)
Amounts Related to Unconsolidated Affiliate	326			204			540			509
Accrued Net Benefit Cost at End of Year	$	(88,420	)	$	(69,167	)	$	(9,278	)	$	(9,162	)

Amounts Recognized in the Statement of Financial Position Consist of:
Current Liabilities	$	(2,463	)	$	(2,261	)	$	—		$	—
Noncurrent Liabilities	(85,957		)	(66,906		)	(9,278		)	(9,162		)
Net Amount Recognized at End of Year	$	(88,420	)	$	(69,167	)	$	(9,278	)	$	(9,162	)

Amounts Recognized in Regulatory Assets Consist of:
Prior Service Costs	$	538		$	741		$	(3,032	)	$	(3,289	)
Net Actuarial Loss	67,912			63,691			20,275			18,636
	$	68,450		$	64,432		$	17,243		$	15,347

Amounts Recognized in Accumulated Other Comprehensive Loss Consist of (pre-tax):
Prior Service Costs	$	69		$	77		$	(989	)	$	(1,074	)
Net Actuarial Loss	39,521			34,989			3,810			3,136
	$	39,590		$	35,066		$	2,821		$	2,062

The projected benefit obligation (PBO) and accumulated benefit obligation (ABO) of SJI's qualified employee pension plans were $224.3 million and $208.3 million, respectively, as of December 31, 2016; and $207.7 million and $191.9 million, respectively, as of December 31, 2015. The ABO of these plans exceeded the value of the plan assets as of December 31, 2016 and 2015. The value of these assets were $189.5 million and $184.8 million as of December 31, 2016 and 2015, respectively, and can be seen in the table above. The PBO and ABO for SJI's non-funded SERP were $53.9 million and $51.9 million, respectively, as of December 31, 2016; and $46.5 million and $45.0 million, respectively, as of December 31, 2015. 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
	2016		2015		2016		2015
Discount Rate	4.30	%	4.83	%	4.13	%	4.73	%
Rate of Compensation Increase	3.50	%	3.50	%	3.50	%	3.50	%

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



	Pension Benefits						Other Postretirement Benefits
	2016		2015		2014		2016		2015		2014
Discount Rate	4.83	%	4.25	%	5.09	%	4.73	%	4.20	%	4.91	%
Expected Long-Term Return on Plan Assets	7.50	%	7.75	%	7.75	%	6.50	%	6.25	%	6.25	%
Rate of Compensation Increase	3.50	%	3.50	%	3.50	%	3.50	%	3.50	%	3.50	%

In 2014, the Society of Actuaries (SOA) released new mortality tables (RP-2014 base table with MP-2014 generational projection scale), which indicated that the average life expectancy of both active and retired plan participants had increased. Obligations as of December 31, 2014, disclosed herein reflect the use of those new tables. In 2015, the SOA released an update to the RP-2014 tables (MP-2015 base tables), slightly reducing the average life expectancy previously released. The obligations as of December 31, 2016 and 2015, disclosed herein, reflect the use of the updated 2015 tables. While the adoption of the new tables impacts liabilities significantly as of December 31of the year of adoption, the impact on expense did not occur until the subsequent year.

The discount rates used to determine the benefit obligations at December 31, 2016 and 2015, 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 retiree medical plan changed effective January 1, 2016. Retirees are provided a fixed contribution to a health reimbursement account, allowing them to obtain coverage from health-care exchanges, rather than utilizing the Company provided health-care plan. Since the health-care benefits are now a fixed dollar amount under the new plan and will not increase in the future, the plan no longer has health care trend assumptions as of December 31, 2015. As a result, assumed health care cost trend rates no longer have a significant effect on the amounts reported for SJI's postretirement health care plans.

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 0-7 percent to all other types of investments. Equity securities include investments in commingled common/collective trust funds as well as large-cap and mid-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.

SJI evaluated its pension and other postretirement benefit plans' asset portfolios for the existence of significant concentrations of credit risk as of December 31, 2016. 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, 2016, there were no significant concentrations (defined as greater than 10 percent of plan assets) of risk in SJI'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 distinct levels, as fully described in Note 17, which will serve as the basis for presentation throughout the remainder of this Note.

The fair values of SJI's pension plan assets at December 31, 2016 and 2015 by asset category are as follows (in thousands):



Asset Category	Total		Level 1		Level 2		Level 3
As of December 31, 2016
Cash / Cash Equivalents:
Cash	$	63	$	63	$	—	$	—
Common/Collective Trust Funds (a)	460		—		460		—
STIF-Type Instrument (b)	1,431		—		1,431		—
Equity securities:
Common/Collective Trust Funds - U.S. (a)	51,902		—		51,902		—
Common/Collective Trust Funds - International (a)	33,096		—		33,096		—
U.S. Large-Cap (c)	17,792		17,792		—		—
U.S. Mid-Cap (c)	2,479		2,479		—		—
International (c)	3,340		3,340		—		—
Fixed Income:
Common/Collective Trust Funds (a)	54,970		—		54,970		—
Guaranteed Insurance Contract (d)	9,714		—		—		9,714
Other types of investments:
Private Equity Fund (f)	5,100		—		—		5,100
Common/Collective Trust Fund - Real Estate (g)	9,195		—		—		9,195
Total	$	189,542	$	23,674	$	141,859	$	24,009



Asset Category	Total		Level 1		Level 2		Level 3
As of December 31, 2015
Cash / Cash Equivalents:
Cash	$	35	$	35	$	—	$	—
Common/Collective Trust Funds (a)	858		—		858		—
STIF-Type Instrument (b)	1,360		—		1,360		—
Equity securities:
Common/Collective Trust Funds - U.S. (a)	52,058		—		52,058		—
Common/Collective Trust Funds - International (a)	33,236		—		33,236		—
U.S. Large-Cap (c)	14,305		14,305		—		—
U.S. Mid-Cap (c)	3,407		3,407		—		—
U.S. Small-Cap (c)	260		260		—		—
International (c)	1,695		1,695		—		—
Fixed Income:
Common/Collective Trust Funds (a)	50,664		—		50,664		—
Guaranteed Insurance Contract (d)	9,960		—		—		9,960
Hedge Funds (e)	4,159		—		—		4,159
Other types of investments:
Private Equity Fund (f)	4,312		—		—		4,312
Common/Collective Trust Fund - Real Estate (g)	8,515		—		—		8,515
Total	$	184,824	$	19,702	$	138,176	$	26,946

(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 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/commingled trust which includes several investments in U.S. leveraged buyout, venture capital, and special situation funds. Fund valuations are reported on a 90 to 120 day lag and, therefore, the value reported herein represents the market value as of June 30 or September 30, 2015 and 2014, respectively, with cash flow changes through December applied. 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 3 investments.

Fair Value Measurement Using Significant

Unobservable Inputs (Level 3)

(In thousands)



	Guaranteed						Private
	Insurance			Hedge			Equity			Real
	Contract			Funds			Funds			Estate		Total

Balance at January 1, 2015	$	10,912		$	4,331		$	3,616		$	7,476	$	26,335
Actual return on plan assets:
Relating to assets still held at the reporting date	(106		)	(172		)	(302		)	1,039		459
Relating to assets sold during the period	25			—			429			—		454
Purchases, Sales and Settlements	(871		)	—			569			—		(302		)
Balance at December 31, 2015	9,960			4,159			4,312			8,515		26,946
Actual return on plan assets:
Relating to assets still held at the reporting date	541			(67		)	(140		)	680		1,014
Relating to assets sold during the period	14			—			245			—		259
Purchases, Sales and Settlements	(801		)	(4,092		)	683			—		(4,210		)
Balance at December 31, 2016	$	9,714		$	—		$	5,100		$	9,195	$	24,009

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, mutual funds and Company-owned life insurance policies. The target allocations for post-retirement benefit plan assets are 30-43 percent U.S. equity securities, 20-30 percent international equity securities, and 32-42 percent fixed income investments and 0-7 percent to all other types of 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 insurance policies are backed by a series of commingled trust investments held by the insurance carrier.

The fair values of SJI's other postretirement benefit plan assets at December 31, 2016 and 2015 by asset category are as follows (in thousands):



Asset Category	Total		Level 1		Level 2		Level 3
As of December 31, 2016:
Cash	$	—	$	—	$	—	$	—
Equity Securities:
Common/Collective Trust Funds - U.S. (a)	$	14,878	$	—	$	14,878	$	—
Common/Collective Trust Funds - International (a)	8,674		—		8,674		—
Fixed Income:
Common/Collective Trust Funds - Bonds (a)	13,537		—		13,537		—
Other Types of Investments:
Company Owned Life Insurance (c)	13,443		—		13,443		—
Total	$	50,532	$	—	$	50,532	$	—

Asset Category	Total		Level 1		Level 2		Level 3
As of December 31, 2015:
Cash	$	26	$	26	$	—	$	—
Equity Securities:
Common/Collective Trust Funds - U.S. (a)	$	13,522	$	—	$	13,522	$	—
Common/Collective Trust Funds - International (a)	8,313		—		8,313		—
Mutual Fund - U.S. (b)	1,309		1,309		—		—
Mutual Funds - International (b)	983		983		—		—
Fixed Income:
Common/Collective Trust Funds - Bonds (a)	13,187		—		13,187		—
Mutual Funds - Bonds (b)	1,441		1,441		—		—
Other Types of Investments:
Mutual Funds - REITS (b)	152		152		—		—
Company Owned Life Insurance (c)	8,826		—		8,826		—
Total	$	47,759	$	3,911	$	43,848	$	—

(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.


(c)	This category represents Company-owned life insurance policies with a nationally known life insurance company. The value of these policies is backed by a series of common/collective trust funds held by the insurance carrier similar to category (a) above. Holdings in these insurance policies are classified as Level 2 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
2017	$	12,141	$	4,399
2018	$	12,583	$	4,316
2019	$	13,529	$	4,403
2020	$	14,056	$	4,514
2021	$	14,757	$	4,511
2022 - 2025	$	86,727	$	21,308

CONTRIBUTIONS - SJI contributed $15.0 million to the pension plans in 2015, with no pension contribution made in 2016 or 2014. Payments related to the unfunded SERP plan in 2016, 2015 and 2014 were $2.3 million, $2.0 million and $1.5 million, respectively. SERP payments are expected to approximate $2.5 million in 2017. SJG also has a regulatory obligation to contribute approximately $3.6 million annually to its other postretirement benefit plans’ trusts, less costs incurred directly by SJG.

DEFINED CONTRIBUTION PLAN - SJI offers an Employees' Retirement Savings Plan (Savings Plan) to eligible employees. For employees eligible for participation in SJI's defined benefit pension plan, SJI matches 50% of participants' contributions up to 6% of base compensation. For employees who are not eligible for participation in SJI's defined benefit pension plans, SJI matches 50% of participants' contributions up to 8% of base compensation. Employees not eligible for the pension plans also receive a year-end contribution of $1,500, if 10 or fewer years of service, or $2,000, if more than 10 years of service. The amount expensed and contributed for the matching provision of the Savings Plan approximated $2.3 million, $2.1 million and $2.0 million for the years ended December 31, 2016, 2015 and 2014, respectively.