BUSINESS COMBINATION:

On July 1, 2018, the Company completed the previously announced acquisitions of ETG and ELK from Pivotal Utility Holdings, Inc., a subsidiary of Southern Company Gas (collectively, the "Acquisition"). The Company completed the Acquisition for total consideration of $1.74 billion in cash, inclusive of $40.4 million of certain net working capital adjustments. Of the total, $1.73 billion relates to the acquisition of ETG, while $11.0 million relates to the acquisition of the ELK. In the second quarter of 2018, the Company completed public equity offerings and issued long-term debt to help fund the Acquisition (see Notes 4 and 14, respectively). The Acquisition supports the Company’s strategy of earnings growth derived from high-quality, regulated utilities. Further, the Acquisition expands the Company’s customer base in the natural gas industry, which drives efficiencies by providing a greater operating scale.

Preliminary purchase price allocations

The Acquisition was accounted for as a business combination using the acquisition method of accounting in accordance with GAAP, which includes GAAP for regulated operations. Under the acquisition method of accounting, the total estimated purchase price of an acquisition is allocated to the net assets based on their estimated fair values. ETG's and ELK's regulated natural gas distribution operations are subject to rate-setting authorities of the BPU and the MPSC, respectively, which includes provisions in place that provide revenues to recover costs of service, including a carrying charge on most net assets and liabilities. Given the regulatory environment under which ETG and ELK operate, the historical book value of the assets acquired and liabilities assumed approximate fair value.

The Company has not finalized its valuation of certain assets and liabilities in connection with the Acquisition. As such, the estimated measurements recorded to date are subject to change and these changes, if any, could be material. Any changes will be recorded as adjustments to the fair value of those assets and liabilities and residual amounts will be allocated to goodwill. The final valuation adjustments may also require adjustment to the consolidated statements of operations and cash flows. The final determination of these fair values will be completed as soon as possible but no later than one year from the Acquisition date.

The preliminary purchase price for the Acquisition has been allocated to the assets acquired and liabilities assumed as of the acquisition date and is as follows:



(in thousands)	ETG and ELK
Property, Plant and Equipment	$	1,089,071
Accounts Receivable	39,023
Natural Gas in Storage	12,204
Materials and Supplies	345
Other Prepayments and Current Assets	200
Regulatory Assets	137,334
Goodwill	756,247
Total assets acquired	2,034,424
Accounts Payable	13,173
Other Current Liabilities	9,241
Environmental Remediation Costs - Current	7,100
Pension and Other Postretirement Benefits	7,183
Environmental Remediation Costs - Non Current	67,532
Regulatory Liabilities	188,510
Other	1,310
Total liabilities assumed	294,049
Total net assets acquired	$	1,740,375

Goodwill of $756.2 million arising from the Acquisition includes the potential synergies between ETG, ELK and the Company. The goodwill, which is deductible for income tax purposes, was assigned to the ETG and ELK Utility Operations segments.

Conditions of approval

The Acquisition was subject to regulatory approval from the BPU and the MPSC. Approvals were obtained from both commissions, subject to various conditions. As a requirement for approval of ETG, the BPU mandated that the Company pay $15.0 million to existing ETG customers in the form of a one-time credit. As a requirement for approval of ELK, the MPSC mandated that the Company pay $0.3 million to existing ELK customers in the form of a one-time payout. See Note 7 to the unaudited condensed consolidated financial statements. Other key conditions of approval related to the acquisition include but are not limited to ETG filing a base rate case no later than June 2020. Prior to its next base rate case, ETG will be required to maintain a capital structure that consists of no less than 46% common equity which excludes goodwill. In addition, the Company will need to complete a refinancing related to its $530.0 million 364-day term loan credit agreement to a long term permanent financing plan within 180 days of the close.

Financial information of the acquirees

The amount of ETG and ELK revenues included in the Company's unaudited condensed consolidated statement of income for both the three and nine months ended September 30, 2018 is $29.9 million. The amount of ETG and ELK earnings included in the Company's condensed unaudited consolidated statements of income for both the three and nine months ended September 30, 2018 is a net loss of $18.2 million.

During the three and nine months ended September 30, 2018, the Company recorded $19.8 million and $47.1 million of acquisition-related expenses directly related to the Acquisition. Included in both periods is $15.3 million payments to customers under "Conditions of approval" above.

Supplemental disclosure of pro forma information

The following supplemental unaudited pro forma information presents the combined results of SJI, ETG, and ELK as if the Acquisition occurred on January 1, 2017. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the Acquisition been made on January 1, 2017, nor is it indicative of any future results.

The pro forma results include adjustments for the financing impact of the Acquisition, along with the tax-related impacts. Other material non-recurring adjustments are reflected in the pro forma and described below:



(In thousands, except per share data)	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018		2017
Revenues	$	302,480		$	258,021		$	1,240,240	$	1,106,409
Net (loss) income	$	(25,116	)	$	(46,393	)	$	38,307	$	(33,008	)
Earnings (loss) per share	$	(0.29	)	$	(0.54	)	$	0.46	$	(0.39	)

The supplemental unaudited pro forma net income for the three and nine months ended September 30, 2018 were adjusted to exclude $18.9 million and $32.1 million, respectively, of acquisition-related costs, which includes one-time regulatory approval costs, but excludes financing adjustments and recurring charges.

The supplemental unaudited pro forma net income for the nine months ended September 30, 2017 were adjusted to include $46.5 million of acquisition-related costs, which excludes financing adjustments and recurring charges.