STOCK-BASED COMPENSATION PLAN:

On April 30, 2015, the shareholders of SJI approved the adoption of SJI'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 three months ended March 31, 2018 and 2017. No stock appreciation rights have been issued under the plans. During the three months ended March 31, 2018 and 2017, SJI granted 185,214 and 158,688 restricted shares, respectively, to Officers and other key employees under the Plan. 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 shares granted.

In 2015, SJI began granting time-based shares of restricted stock, one-third of which vest annually over a three-year period and which are limited to a 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. Beginning in 2018, the vesting and payout of time-based shares of restricted stock is only contingent upon the service requirement being met in years one, two, and three of the grant. During the three months ended March 31, 2018 and 2017, Officers and other key employees were granted 56,634 and 48,790 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 pre-defined 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.

During the three months ended March 31, 2018 and 2017, SJI granted 26,416 and 30,394 restricted shares, respectively, to Directors. 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 for SJI at March 31, 2018 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 -	2016 - TSR	58,205	$	22.53	18.1	%	1.31	%
	2016 - CEGR, Time	73,344	$	23.52	N/A		N/A
	2017 - TSR	49,981	$	32.17	20.8	%	1.47	%
	2017 - CEGR, Time	81,372	$	33.69	N/A		N/A
	2018 - TSR	64,290	$	31.05	21.9	%	2.00	%
	2018 - CEGR, Time	120,924	$	31.23	N/A		N/A

Directors -	2018	26,416	$	31.16	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 to SJI for the three months ended March 31, 2018 and 2017 (in thousands):



	Three Months Ended March 31,
	2018			2017
Officers & Key Employees	$	1,100		$	1,070
Directors	206			256
Total Cost	1,306			1,326

Capitalized	(101		)	(88		)
Net Expense	$	1,205		$	1,238

As of March 31, 2018, there was $9.3 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 2.1 years.

The following table summarizes information regarding restricted stock award activity for SJI during the three months ended March 31, 2018, excluding accrued dividend equivalents:



	Officers &Other Key Employees		Directors		Weighted Average Fair Value
Nonvested Shares Outstanding, January 1, 2018	342,793		30,394		$	28.60
Granted	185,214		26,416		$	31.17
Cancelled/Forfeited	(34,990	)	—		$	28.21
Vested	(44,901	)	(30,394	)	$	30.56
Nonvested Shares Outstanding, March 31, 2018	448,116		26,416		$	29.46

During the three months ended March 31, 2018 and 2017, SJI awarded 63,030 shares to its Officers and other key employees at a market value of $1.9 million, and 65,628 shares at a market value of $2.2 million, respectively. During the three months ended March 31, 2018 and 2017, SJI also granted 26,416 and 30,394 shares to its Directors at a market value of $0.8 million and $1.0 million, respectively.

SJI 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 condensed consolidated balance sheets.

South Jersey Gas Company - Officers and other key employees of SJG participate in the stock-based compensation plans of SJI. During the three months ended March 31, 2018 and 2017, SJG officers and other key employees were granted 26,652 and 21,061 shares of SJI restricted stock, respectively. The cost of outstanding stock awards for SJG during the three months ended March 31, 2018 and 2017 was $0.2 million and $0.1 million, respectively. Approximately 60% of these costs were capitalized on SJG's condensed balance sheets to Utility Plant.