GENERAL - South Jersey Industries, Inc. (SJI or the Company) currently provides a variety of energy-related products and services primarily through the following wholly-owned subsidiaries:

BASIS OF PRESENTATION — The- SJI's condensed consolidated financial statements include the accounts of SJI, its wholly-owned subsidiaries (including SJG) and subsidiaries in which SJI has a controlling interest. SJI eliminates all significant intercompany accounts and transactions. In management’s opinion, the unaudited condensed consolidated financial statements of SJI and SJG reflect all normal and recurring adjustments needed to fairly present SJI’stheir respective financial position, operating results and cash flows at the dates and for the periods presented. SJI’s and SJG's businesses are subject to seasonal fluctuations and, accordingly, this interim financial information should not be the basis for estimating the full year’s operating results. As permitted by the rules and regulations of the Securities and Exchange Commission (SEC), the accompanying unaudited condensed consolidated financial statements of SJI and SJG contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These financial statements should be read in conjunction with SJI’s 2015and SJG's Annual ReportReports on Form 10-K for the year ended December 31, 2016 for a more complete discussion of the Company’s accounting policies and certain other information.

Certain reclassifications have been made to theSJI's and SJG's prior period'speriod condensed consolidated balance sheets, as well as the prior period's long-term debt carrying value and prior period's segment disclosures in Notes 5 and 6, respectively,statements of cash flows to conform to the current period presentation. The unamortized debt issuance costs previously included in "RegulatoryRestricted cash is now combined with cash and Other Noncurrent Assets"cash equivalents when reconciling the beginning and end of period balances on the condensed consolidated balance sheets were reclassified to Long-Term Debtstatements of cash flows of SJI, as well as the condensed statements of cash flows for SJG, to conform to ASU 2015-03,2016-18, which is described below under "New Accounting Pronouncements." This reclassificationcombination of restricted cash and cash and cash equivalents caused the prior period long-term debt carrying value in Note 5Cash Flows from Investing Activities for both SJI and SJG to be adjusted along within order to remove items relating to capital expenditures and proceeds from restricted investments (SJI only), as well as the sale of restricted investments in a margin account (SJI and SJG).

Certain reclassifications have been made to SJI's prior period unamortized debt issuance costs recordedcondensed consolidated statements of cash flows to conform to the current period presentation. Cash paid by an employer when directly withholding shares for tax-withholding purposes is now classified as Identifiable Assetsa financing activity in the Gas Utility Operations, On-Site Energy Productioncondensed consolidated statements of cash flows to conform to ASU 2016-09, which is described below under "New Accounting Pronouncements." This caused SJI's prior period Cash Flows Provided by Operating Activities to increase by $0.4 million and Corporate and Services segments in Note 6Net Cash Flows from Financing Activities to be removed.

REVENUE-BASED TAXES —- SJG collects certain revenue-based energy taxes from its customers. Such taxes include the New Jersey State Sales Tax and Public Utilities Assessment (PUA). State sales tax is recorded as a liability when billed to customers and is not included in revenue or operating expenses. The PUA is included in both utility revenue and energy and other taxes and totaled $0.2$0.4 million for both the three months ended September 30, 2016March 31, 2017 and 2015, and $0.7 million and $1.0 million for the nine months ended September 30, 2016 and 2015, respectively.2016.

 

IMPAIRMENT OF LONG-LIVED ASSETS - SJI reviewsand SJG review the carrying amount of long-lived assets for possible impairment whenever events or changes in circumstances indicate that such amounts may not be recoverable. For the ninethree months ended September 30,March 31, 2017, SJI recorded an impairment charge of $0.3 million within Operating Expenses on the condensed consolidated statements of income due to a reduction in the expected cash flows to be received from a solar generating facility within the on-site energy production segment. No impairments were identified at SJG for the three months ended March 31, 2017. For the three months ended March 31, 2016, and 2015, no impairments were identified.identified at SJI or SJG.

GAS EXPLORATION AND DEVELOPMENT - The CompanySJI capitalizes all costs associated with gas property acquisition, exploration and development activities under the full cost method of accounting. Capitalized costs include costs related to unproved properties, which are not amortized until proved reserves are found or it is determined that the unproved properties are impaired. All costs related to unproved properties are reviewed quarterly to determine if impairment has occurred. No impairment charges were recorded during the ninethree months ended September 30, 2016March 31, 2017 or 2015.2016. As of September 30, 2016both March 31, 2017 and December 31, 2015,2016,

$8.8 million and $8.9 million, respectively, related to interests in proved and unproved properties in Pennsylvania, net of amortization, is included with Nonutility Property and Equipment and Other Noncurrent Assets on theSJI's condensed consolidated balance sheets.

 

TREASURY STOCK –- SJI uses the par value method of accounting for treasury stock. As of September 30, 2016March 31, 2017 and December 31, 2015,2016, SJI held 209,296215,274 and 236,571212,617 shares of treasury stock, respectively. These shares are related to deferred compensation arrangements where the amounts earned are held in the stock of SJI.

INCOME TAXES —- Deferred income taxes are provided for all significant temporary differences between the book and taxable bases of assets and liabilities in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740 - “Income Taxes.” A valuation allowance is established when it is determined that it is more likely than not that a deferred tax asset will not be realized. Investment tax credits related to renewable energy facilities of Marina are recognized on the flow-through method, which may result in variations in the customary relationship between income taxes and pre-tax income for interim periods.

GOODWILL - Goodwill was acquired as part of the acquisition of Energenic projects discussed in Note 3 and is a part of the on-site energy production segment. Goodwill represents the excess of the consideration paid over the fair value of identifiable net assets acquired. Goodwill is not amortized, but instead is subject to impairment testing on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. No such events have occurred during the ninethree months ended September 30, 2016.March 31, 2017. Goodwill totaled $8.1 million and $8.9$4.8 million on the condensed consolidated balance sheets of SJI as of September 30, 2016both March 31, 2017 and December 31, 2015, respectively.

NEW ACCOUNTING PRONOUNCEMENTS —- Other than as described below, no new accounting pronouncement issued or effective during 20162017 or 20152016 had, or are expected to have, a material impact on the condensed consolidated financial statements.

The new guidance in ASU 2014-09, as well as all amendments discussed above, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Management has formed an implementation team that is currently inventorying the contracts with customers and evaluating the impact that adoption of this guidance will have on the Company's financial statement results as well asof SJI and SJG. We are in the process of assessing the impact of the guidance on our contracts in all our revenue streams by reviewing our current accounting policies and practices to identify potential differences that would result from applying the new requirements to our revenue contracts. We continue to make significant progress on our contract reviews and are also in the process of evaluating the impact, if any, on changes to our business processes, systems and controls to support recognition and disclosure under the new guidance. Based on the review of customer contracts to date, SJI is not anticipating this guidance to have a material impact to SJI's or SJG's statements of consolidated income, cash flows or consolidated balance sheets upon adoption. We are continuing with our implementation plan and expect to transition methodto the Company will elect to adopt the guidance.

Beginning inIn 2015, SJI grantsbegan granting time-based shares of restricted stock, one-third of which vest annually over a three-year period and iswhich 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. During the ninethree months ended September 30,March 31, 2017 and 2016, and 2015, Officers and other key employees were granted 58,10148,790 and 47,67857,828 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, earning-basedearnings-based performance targets included pre-defined EGR and return on equity (ROE)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 ninethree months ended September 30,March 31, 2017 and 2016, and 2015, SJI granted 35,19730,394 and 26,33832,882 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.

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.

As of September 30, 2016,March 31, 2017, there was $5.0$8.9 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 1.82.1 years.

Performance targets duringDuring the three-year vesting period were not attained for the 2012 or 2013 Officerthree months ended March 31, 2017 and other key employee grants that vested at December 31, 2014 and 2015, respectively. As a result, no2016, SJI awarded 65,628 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 its Officers and other key employees during the nine months ended September 30, 2016at a market value of $2.2 million, and 13,247 shares at a market value of $0.3 million.million, respectively. During the ninethree months ended September 30,March 31, 2017 and 2016, SJI also granted 30,394 and 2015, SJI granted 35,197 and 26,33832,882 shares to its Directors at a market value of $1.0 million and $0.8 million, in each of the periods. The Companyrespectively.

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.

AFFILIATIONS — The following affiliated entities are accounted for under the equity method:

Energenic – US, LLC (Energenic) - Marina and a joint venture partner formed Energenic, in which Marina has a 50% equity interest. Energenic developed and operated on-site, self-contained, energy-related projects.

On December 31, 2015, Energenic, MarinaMillennium Account Services, LLC (Millennium) - SJI and itsa joint venture partner entered into two Equity Distribution and Purchase Agreements (the "Transaction"), pursuant to which Marina became the sole owner of eight of the Energenic projects ("Marina Projects") and its joint venture partner became the sole owner of seven other Energenic projects ("Partner Projects"). The Transaction has been accounted for as a distribution of member interests by Energenic to its owners and a business combination through the exchange of member interests in various projects between Marina and its joint venture partner. In connection with the exchange, the joint venture partner provided a $19.5 million note payable to Marina. The note and other existing obligations of the joint venture partner to Marina are included in Notes Receivable on the condensed consolidated balance sheets, with approximately $1.8 million being included as a current asset as of September 30, 2016, as it is due within one year. This note is collateralized by security interests in various energy project assets owned by the joint venture partner, as well as personal guarantees from its principals.

Potato Creek, LLC (Potato Creek) - SJI and a joint venture partner formed Potato Creek, in which SJI has a 30% equity interest.  Potato Creek owns and manages the oil, gas and mineral rights of certain real estate in Pennsylvania.

PennEast Pipeline Company, LLC (PennEast) - Midstream has a 20% investment in PennEast, which is planning to construct an approximately 100-mile natural gas pipeline that will extend from Northeastern Pennsylvania into New Jersey, with a target completion of late 2018.

During the first ninethree months of 2017 and 2016, and 2015, the CompanySJI made net investments in unconsolidated affiliates of $2.2$3.7 million and $4.4$1.5 million, respectively.  As of September 30, 2016March 31, 2017 and December 31, 2015,2016, the outstanding balance of Notes Receivable – Affiliate was $15.0$13.5 million and $16.4$15.7 million, respectively. As of September 30, 2016, approximately $13.6 millionMarch 31, 2017, the total amount of these notes arewere secured by property, plant and equipment of the affiliates, accrue interest at 7.5% and are to be repaid through 2025. The remaining $1.4 million of these notes are unsecured and accrue interest at variable rates.

SJI holds significant variable interests in these entities but is not the primary beneficiary. Consequently, these entities are accounted for under the equity method because SJI does not have both (a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity. As of September 30, 2016, the CompanyMarch 31, 2017, SJI had a net asset of approximately $24.4$37.3 million included in Investment in Affiliates on the condensed consolidated balance sheets related to equity method investees, in addition to Notes Receivable – Affiliate as discussed above. SJI’s maximum exposure to loss from these entities as of September 30, 2016,March 31, 2017, is limited to its combined equity contributions and the Notes Receivable-Affiliate in the aggregate amount of $39.4$50.8 million.

DISCONTINUED OPERATIONS - Discontinued Operations consist of the environmental remediation activities related to the properties of South Jersey Fuel, Inc. (SJF) and the product liability litigation and environmental remediation activities related to the prior business of The Morie Company, Inc. (Morie). SJF is a subsidiary of Energy & Minerals, Inc. (EMI), an SJI subsidiary, which previously operated a fuel oil business. Morie is the former sand mining and processing subsidiary of EMI. EMI sold the common stock of Morie in 1996.

SJI conducts tests annually to estimate the environmental remediation costs for these properties.properties (see Note 11).

Summarized operating results of the discontinued operations for the three and nine months ended September 30,March 31, 2017 and 2016, and 2015, were (in thousands, except per share amounts):

The following shares were issued and outstanding:outstanding for SJI:

The par value ($1.25 per share) of stock issued was recorded in Common Stock and the net excess over par value of approximately $206.6$0.5 million was recorded in Premium on Common Stock.

In May 2016, the Company issued and sold 8,050,000 shares of its common stock, par value $1.25 per share atpursuant to a public offering, raising net proceeds of approximately $203.6 million. The net proceeds from this offering were or will be used for capital expenditures, primarily for regulated businesses, including infrastructure investments at its utility business.

SJI's EARNINGS PER COMMON SHARE (EPS) - SJI's Basic EPS is based on the weighted-average number of common shares outstanding.  The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 156,673121,812 and 288,502 for the three months ended September 30,March 31, 2017 and 2016, and 94,997 and 198,222 for the nine months ended September 30, 2016 and 2015, respectively. For the three months ended September 30, 2015, incremental shares of 187,758 were not included in the denominator for the diluted EPS calculation because they would have an antidilutive effect on EPS. These additional shares relate to SJI's restricted stock as discussed in Note 2.

DIVIDEND REINVESTMENT PLAN (DRP) - The CompanySJI offers a DRP which allows participating shareholders to purchase shares of SJI common stock by automatic reinvestment of dividends or optional purchases. SharesPrior to May 1, 2016 shares of common stock offered by the DRP havehad been issued directly by SJI from its authorized but unissued shares of common stock. The CompanySJI raised $10.8 million and $9.7$5.6 million of equity capital through the DRP during the ninethree months ended September 30, 2016 and 2015, respectively.March 31, 2016. Effective May 1, 2016, SJI switched to purchasing shares on the open market to fund share purchases by DRP participants. SJI does not intend to issue any more new equity capital via the DRP in 2016.2017.

RESTRICTED INVESTMENTS — Marina is required to maintain escrow accounts related to ongoing capital projects as well as unused loan proceeds pending approval of construction expenditures. As of September 30, 2016March 31, 2017 and December 31, 2015,2016, the escrowed funds, including interest earned, totaled $2.3$2.0 million and $3.4$1.9 million, respectively.respectively, which are recorded in Restricted Investments on the condensed consolidated balance sheets.

The Company maintainsSJI and SJG maintain margin accounts with selected counterparties to support itstheir risk management activities. The balances required to be held in these margin accounts increase as the net value of the outstanding energy-related contracts with the respective counterparties decrease. As of September 30, 2016March 31, 2017 and December 31, 2015, the2016, SJI's balances in these accounts totaled $33.2$0.9 million and $43.7$11.7 million, respectively.

The carrying amounts of the Restricted Investments for both SJI and SJG approximate their fair values at September 30, 2016March 31, 2017 and December 31, 2015,2016, which would be included in Level 1 of the fair value hierarchy (see Note 13).

INVESTMENT IN AFFILIATES - During 2011, subsidiaries of Energenic, in which Marina has a 50% equity interest, entered into 20-year contracts to build, own and operate a central energy center and energy distribution system for a new hotel, casino and entertainment complex in Atlantic City, New Jersey. The complex commenced operations in April 2012, and as a result, Energenic subsidiaries began providing full energy services to the complex.

In June 2014, the parent company of the hotel, casino and entertainment complex filed petitions in U.S. Bankruptcy Court to facilitate a sale of substantially all of its assets. The complex ceased normal business operations in September 2014. Energenic subsidiaries continued to provide limited energy services to the complex during the shutdown period under a temporary agreement with the trustee. The hotel, casino and entertainment complex was sold in April 2015. As of December 31, 2015, the Energenic subsidiaries were providing limited services to the complex under a short-term agreement with the new owner. However, the Energenic subsidiaries had not been able to secure a permanent or long-term energy services agreement with the new owner.

The central energy center and energy distribution system owned by the Energenic subsidiaries was financed in part by the issuance of bonds during 2011. These bonds were collateralized primarily by certain assets of the central energy center and revenue from the energy services agreement with the hotel, casino and entertainment complex. During 2015, due to the cessation of normal business operations of the complex and the inability of the Energenic subsidiaries to meet its obligations under the bonds, the trustee for the bondholders filed suit to foreclose on certain assets of the central energy center. In November 2015 during settlement discussions, the bondholders alleged, among other things, that they were entitled to recover from Energenic itself, any amounts owed under the bonds that were not covered by the collateral, including principal, interest and attorney’s fees. The bondholders’ assertion was based on inconsistent language in the bond documents. In January 2016, Energenic and certain subsidiaries reached a multi-party settlement with the bondholders. This agreement resolves all outstanding litigation and transfers ownership of the bondholders’ collateral to the owners of the entertainment complex. The Company’sCompany's share of this settlement was $7.5 million, which was accrued by Energenic as of December 31, 2015 and paid in 2016. The Company entered into agreements with its insurance carrier and external legal advisors to recover, net of legal costs, approximately $7.0 million of costs associated with the bondholder settlement discussed above. The Company received $2.1 million in the second quarter of 2016, which is included in Other Income on the condensed consolidated statements of consolidated income for the nine monthsyear ended September 30,December 31, 2016, and $5.3 million was received in the third quarter of 2016 and is included in Equity in Earnings of Affiliated Companies on the condensed consolidated statements of consolidated income for the three and nine monthsyear ended September 30, 2016.December 31, 2016, as the loss recorded in the prior year was included in this line item on the statements of consolidated income for the year ended December 31, 2015.

As of September 30, 2016, the Company,March 31, 2017, SJI, through its investment in Energenic, had a remaining net asset of approximately $0.9$0.4 million included in Investment in Affiliates on the condensed consolidated balance sheets related to cogeneration assets for thisthe energy services project. In addition, the CompanySJI had approximately $13.9 million included in Notes Receivable - Affiliate on the condensed consolidated balance sheets, due from Energenic, which is secured by those cogeneration assets. This note is subject to a reimbursement agreement that secures reimbursement for the Company,SJI, from its joint venture partner, of a proportionate share of any amounts that are not repaid.

Management will continue to monitor the situation surrounding the complexcogeneration assets and will evaluate the carrying value of the investment and the note receivable as future events occur.

CREDIT RISK - As of September 30, 2016,March 31, 2017, SJI had approximately $9.1$5.8 million, or 13.9%8.8%, of the current and noncurrent Derivatives – Energy Related Assets are transacted with two counterparties. One counterparty has contracts with a large number of diverse customers which minimizes the concentration of this risk. A portion of these contracts may be assigned to SJI in the event of default by the counterparty. The second counterparty is investment-grade rated.

SJI operates in several different reportable operating segments which reflect the financial information regularly evaluated by the chief operating decision maker. These segments are as follows:

 

SJI groups its nonutility operations into two categories: Energy Group and Energy Services. Energy Group includes wholesale energy, retail gas and other, and retail electric operations. Energy Services includes on-site energy production and appliance service operations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are treated as if the sales or transfers were to third parties at current market prices.