FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:

GAAP establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques. The levels of the hierarchy are described below:


•	Level 1: Observable inputs, such as quoted prices in active markets for identical assets or liabilities.


•	Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.


•	Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy.

For financial assets and financial liabilities measured at fair value on a recurring basis, information about the fair value measurements for each major category is as follows (in thousands):



As of September 30, 2017	Total		Level 1		Level 2		Level 3
SJI (includes SJG and all other consolidated subsidiaries):
Assets
Available-for-Sale Securities (A)	$	32	$	32	$	—	$	—
Derivatives – Energy Related Assets (B)	49,718		5,950		19,296		24,472
	$	49,750	$	5,982	$	19,296	$	24,472
SJG:
Assets
Derivatives – Energy Related Assets (B)	$	7,666	$	525	$	223	$	6,918
	$	7,666	$	525	$	223	$	6,918
SJI (includes SJG and all other consolidated subsidiaries):
Liabilities
Derivatives – Energy Related Liabilities (B)	$	31,269	$	2,690	$	17,873	$	10,706
Derivatives – Other (C)	11,277		—		11,277		—
	$	42,546	$	2,690	$	29,150	$	10,706
SJG:
Liabilities
Derivatives – Energy Related Liabilities (B)	$	4,536	$	475	$	2,267	$	1,794
Derivatives – Other (C)	7,279		—		7,279		—
	$	11,815	$	475	$	9,546	$	1,794



As of December 31, 2016	Total		Level 1		Level 2		Level 3
SJI (includes SJG and all other consolidated subsidiaries):
Assets
Available-for-Sale Securities (A)	$	32	$	32	$	—	$	—
Derivatives – Energy Related Assets (B)	80,893		33,994		11,814		35,085
	$	80,925	$	34,026	$	11,814	$	35,085
SJG:
Assets
Derivatives – Energy Related Assets (B)	$	5,807	$	4,767	$	—	$	1,040
	$	5,807	$	4,767	$	—	$	1,040

SJI (includes SJG and all other consolidated subsidiaries):
Liabilities
Derivatives – Energy Related Liabilities (B)	$	64,622	$	16,502	$	22,070	$	26,050
Derivatives – Other (C)	10,030		—		10,030		—
	$	74,652	$	16,502	$	32,100	$	26,050
SJG:
Liabilities
Derivatives – Energy Related Liabilities (B)	$	1,372	$	6	$	1,252	$	114
Derivatives – Other (C)	7,365		—		7,365		—
	$	8,737	$	6	$	8,617	$	114

(A) Available-for-Sale Securities include securities that are traded in active markets and securities that are not traded publicly. The securities traded in active markets are valued using the quoted principal market close prices that are provided by the trustees and are categorized in Level 1 in the fair value hierarchy.

(B) Derivatives – Energy Related Assets and Liabilities are traded in both exchange-based and non-exchange-based markets. Exchange-based contracts are valued using unadjusted quoted market sources in active markets and are categorized in Level 1 in the fair value hierarchy. Certain non-exchange-based contracts are valued using indicative price quotations available through brokers or over-the-counter, on-line exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask mid-point prices and are obtained from sources that management believes provide the most liquid market. For non-exchange-based derivatives that trade in less liquid markets with limited pricing information, model inputs generally would include both observable and unobservable inputs. In instances where observable data is unavailable, management considers the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 as the model inputs generally are not observable.

Significant Unobservable Inputs - Management uses the discounted cash flow model to value Level 3 physical and financial forward contracts, which calculates mark-to-market valuations based on forward market prices, original transaction prices, volumes, risk-free rate of return and credit spreads. Inputs to the valuation model are reviewed and revised as needed, based on historical information, updated market data, market liquidity and relationships, and changes in third party pricing sources. The validity of the mark-to-market valuations and changes in mark-to-market valuations from period to period are examined and qualified against historical expectations by the risk management function. If any discrepancies are identified during this process, the mark-to-market valuations or the market pricing information is evaluated further and adjusted, if necessary.

Level 3 valuation methods for natural gas derivative contracts include utilizing another location in close proximity adjusted for certain pipeline charges to derive a basis value. The significant unobservable inputs used in the fair value measurement of certain natural gas contracts consist of forward prices developed based on industry-standard methodologies. Significant increases (decreases) in these forward prices for purchases of natural gas would result in a directionally similar impact to the fair value measurement and for sales of natural gas would result in a directionally opposite impact to the fair value measurement. Level 3 valuation methods for electric represent the value of the contract marked to the forward wholesale curve, as provided by daily exchange quotes for delivered electricity. The significant unobservable inputs used in the fair value measurement of electric contracts consist of fixed contracted electric load profiles; therefore, no change in unobservable inputs would occur. Unobservable inputs are updated daily using industry-standard techniques. Management reviews and corroborates the price quotations to ensure the prices are observable which includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration.

(C) Derivatives – Other are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.

The following table provides quantitative information regarding significant unobservable inputs in Level 3 fair value measurements (in thousands):

SJI (includes SJG and all other consolidated subsidiaries):



Type	Fair Value at September 30, 2017		Valuation Technique	Significant Unobservable Input	Range [Weighted Average]
	Assets	Liabilities
Forward Contract - Natural Gas	$17,545	$7,587	Discounted Cash Flow	Forward price (per dt)	$1.05 - $8.37 [$2.87]	(A)
Forward Contract - Electric	$6,927	$3,119	Discounted Cash Flow	Fixed electric load profile (on-peak)	36.36% - 100.00% [52.98%]	(B)
Forward Contract - Electric	$6,927	$3,119	Discounted Cash Flow	Fixed electric load profile (off-peak)	0.00% - 63.64% [47.02%]	(B)



Type	Fair Value at December 31, 2016		Valuation Technique	Significant Unobservable Input	Range [Weighted Average]
	Assets	Liabilities
Forward Contract - Natural Gas	$23,301	$18,109	Discounted Cash Flow	Forward price (per dt)	$1.03 - $11.33 [$2.71]	(A)
Forward Contract - Electric	$11,784	$7,941	Discounted Cash Flow	Fixed electric load profile (on-peak)	21.43% - 100.00% [55.14%]	(B)
Forward Contract - Electric	$11,784	$7,941	Discounted Cash Flow	Fixed electric load profile (off-peak)	0.00% - 78.57% [44.86%]	(B)

SJG:



Type	Fair Value at September 30, 2017				Valuation Technique	Significant Unobservable Input	Range [Weighted Average]
	Assets		Liabilities
Forward Contract - Natural Gas	$	6,918	$	1,794	Discounted Cash Flow	Forward price (per dt)	$2.37- $6.42 [$4.60]	(A)



Type	Fair Value at December 31, 2016				Valuation Technique	Significant Unobservable Input	Range [Weighted Average]
	Assets		Liabilities
Forward Contract - Natural Gas	$	1,040	$	114	Discounted Cash Flow	Forward price (per dt)	$3.25 - $6.33 [$5.09]	(A)

(A) Represents the range, along with the weighted average, of forward prices for the sale and purchase of natural gas.

(B) Represents the range, along with the weighted average, of the percentage of contracted usage that is loaded during on-peak hours versus off-peak.

The changes in fair value measurements of Derivatives – Energy Related Assets and Liabilities for the three and nine months ended September 30, 2017 and 2016, using significant unobservable inputs (Level 3), are as follows (in thousands):



	Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017
SJI (includes SJG and all other consolidated subsidiaries):
Balance at beginning of period	$	17,401		$	9,035
Other Changes in Fair Value from Continuing and New Contracts, Net	1,352			8,346
Transfers out of Level 3 (A)	(206		)	(954		)
Settlements	(4,781		)	(2,661		)

Balance at end of period	$	13,766		$	13,766

SJG:
Balance at beginning of period	$	6,933		$	926
Other Changes in Fair Value from Continuing and New Contracts, Net	(1,603		)	5,330
Transfers out of Level 3 (A)	(206		)	(206		)
Settlements	—			(926		)

Balance at end of period	$	5,124		$	5,124



	Three Months Ended September 30, 2016			Nine Months Ended September 30, 2016
SJI (includes SJG and all other consolidated subsidiaries):
Balance at beginning of period	$	(2,096	)	$	(632	)
Other Changes in Fair Value from Continuing and New Contracts, Net	10,404			8,346
Settlements	(423		)	171

Balance at end of period	$	7,885		$	7,885

SJG:
Balance at beginning of period	$	(224	)	$	183
Other Changes in Fair Value from Continuing and New Contracts, Net	730			506
Settlements	—			(183		)

Balance at end of period	$	506		$	506

(A) Transfers between different levels of the fair value hierarchy may occur based on the level of observable inputs used to value the instruments from period to period. During the three and nine months ended September 30, 2017, $0.2 million and $1.0 million of SJI's, and $0.2 million (for both periods) of SJG's, net derivative assets were transferred from Level 3 to Level 2, due to increased observability of market data.

Total gains included in earnings for SJI for the three and nine months ended September 30, 2017 that are attributable to the change in unrealized gains relating to those assets and liabilities included in Level 3 still held as of September 30, 2017, are $1.4 million and $8.3 million, respectively. These gains are included in Operating Revenues-Nonutility on the condensed consolidated statements of income.