SOUTH JERSEY INDUSTRIES INC

INCOME TAXES:

SJI files a consolidated federal income tax return. State income tax returns are filed on a separate company basis in states where SJI has operations and/or a requirement to file.

Total income taxes applicable to operations differ from the tax that would have resulted by applying the statutory Federal income tax rate to pre-tax income for SJI and SJG for the following reasons (in thousands):



	2017			2016			2015
SJI (includes SJG and all other consolidated subsidiaries):
Tax at Statutory Rate	$	(9,915	)	$	60,624		$	37,440
Increase (Decrease) Resulting from:
State Income Taxes	2,778			6,438			3,985
ESOP Dividend	(1,314		)	(1,300		)	(1,298		)
Tax Reform Adjustments	(13,521		)	—			—
Amortization of Investment Tax Credits - Utility	—			—			(149		)
AFUDC	(3,094		)	(900		)	(1,109		)
Investment and Other Tax Credits	(666		)	(10,706		)	(37,503		)
Other - Net	795			(5		)	(6		)



Income Taxes:
Continuing Operations	(24,937		)	54,151			1,360
Discontinued Operations	(173		)	(133		)	(257		)
Total Income Tax (Benefit) Expense	$	(25,110	)	$	54,018		$	1,103

SJG:
Tax at Statutory Rate	41,390			37,944			36,233
Increase (Decrease) Resulting from:
State Income Taxes	5,955			4,096			4,584
Amortization of Investment Tax Credits	—			—			(149		)
ESOP Dividend	(1,182		)	(1,170		)	(1,168		)
AFUDC	(1,446		)	(900		)	(1,109		)
Research and Development Credits	—			(613		)	(1,400		)
Other - Net	983			9			(46		)
Total Income Tax Expense	45,700			39,366			36,945

The provision for Income Taxes is comprised of the following (in thousands):

SJI (includes SJG and all other consolidated subsidiaries):	2017			2016			2015
Current:
Federal	$	(34,971	)	$	—		$	—
State	(48		)	(1,638		)	(2,352		)
Total Current	(35,019		)	(1,638		)	(2,352		)
Deferred:
Federal	5,761			44,246			(4,622		)
State	4,321			11,543			8,483
Total Deferred	10,082			55,789			3,861
Investment Tax Credit - Utility	—			—			(149		)
Income Taxes:
Continuing Operations	(24,937		)	54,151			1,360
Discontinued Operations	(173		)	(133		)	(257		)
Total Income Tax (Benefit) Expense	$	(25,110	)	$	54,018		$	1,103

SJG:
Current:
Federal	(33,012		)	—			—
State	—			(1,614		)	(2,203		)
Total Current	$	(33,012	)	$	(1,614	)	$	(2,203	)
Deferred:
Federal	69,550			33,064			30,042
State	9,162			7,916			9,255
Total Deferred	$	78,712		$	40,980		$	39,297
Investment Tax Credits	—			—			(149		)
Total Income Tax Expense	$	45,700		$	39,366		$	36,945

For the year ended December 31, 2017, the Company's overall taxes went from an expense in 2016 to a benefit in 2017 primarily due to adjustments made as a result of the Tax Cuts and Jobs Act (discussed below) along with an overall loss before income taxes, as opposed to income in 2016, primarily due to several impairment charges taken (see Note 1), along with an unfavorable court ruling related to a pricing dispute between SJRG and a supplier (see Note 15). These were partially offset with the impact of recording no investment tax credits on renewable energy facilities in 2017 which is consistent with SJI's previously announced strategy of substantially reducing solar development.

Investment Tax Credits attributable to SJG are deferred and amortized at the annual rate of 3.0%, which approximates the life of related assets.

On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Reform") was enacted into law, which changes various corporate income tax provisions within the existing Internal Revenue Code. The law became effective January 1, 2018 but is required to be accounted for in the period of enactment, which for SJI and SJG is the fourth quarter of 2017. SJI and SJG were impacted in several ways as a result of Tax Reform, including provisions related to the permanent reduction in the U.S. federal corporate income tax rate from 35% to 21%, modification of bonus depreciation and changes to the deductibility of certain business related expenses. As a result of the change in the federal corporate income tax rate, SJI and SJG revalued deferred tax assets and liabilities to reflect the rates expected to be in effect as a result of Tax Reform. This resulted in SJI recording a $13.5 million income tax benefit for the decrease of its net deferred tax liabilities, which was recorded in Income Taxes on the consolidated statements of income for the year ended December 31, 2017. SJG also recorded a $263.8 million decrease in its net deferred tax liabilities, which resulted in an increase to SJG's regulatory liabilities as of December 31, 2017 as such amounts are probable of settlement or recovery through customer rates. The amount and timing of potential settlements of the established net regulatory liability will be determined by the BPU, subject to certain IRS "normalization" provisions. All adjustments related to Tax Reform were recorded in the Corporate & Services segment.

The SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of Tax Reform. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date of Tax Reform for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of Tax Reform for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of Tax Reform is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of Tax Reform.

The Company was able to make reasonable, good faith estimates of certain effects and, therefore, recorded provisional adjustments for the following: the tax rules regarding the appropriate bonus deprecation rate that should be applied to assets placed in service after September 27, 2017, including the information required to compute the applicable depreciable tax basis. Further, Tax Reform is unclear in certain respects and will require interpretations and implementing regulations by the Internal Revenue Service, as well as state tax authorities. Tax Reform could also be subject to potential amendments and technical corrections which could impact the Company’s financial statements.

Any required changes to the provisional estimates would result in the recording of regulatory assets or liabilities to the extent such amounts are probable of settlement or recovery through customer rates and a net change to income tax expense for any other amounts. Final adjustments to the provisional amounts are expected to be recorded by the third quarter of 2018. The accounting for all other applicable provisions of Tax Reform is considered complete based on the current interpretation.

The net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes resulted in the following net deferred tax assets and liabilities for SJI and SJG at December 31 (in thousands):



SJI (includes SJG and all other consolidated subsidiaries):	2017		2016
Deferred Tax Assets:
Net Operating Loss Carryforward	$	152,541	$	211,004
Investment and Other Tax Credits	214,605		213,946
Derivatives / Unrealized Gain	2,068		—
Conservation Incentive Program	—		—
Deferred State Tax	16,905		28,833
Gross Up of Excess Deferred Taxes	76,426		—
Pension & Other Post Retirement Benefits	16,624		19,351
Deferred Revenues	5,726		7,669
Provision for Uncollectibles	3,854		5,231
Other	1,949		8,368
Total Deferred Tax Asset	$	490,698	$	494,402
Deferred Tax Liabilities:
Book versus Tax Basis of Property	$	486,854	$	732,535
Deferred Gas Costs - Net	10,254		2,052
Derivatives / Unrealized Loss	—		1,794
Environmental Remediation	31,393		32,885
Deferred Regulatory Costs	3,554		1,554
Budget Billing - Customer Accounts	4,043		3,347
Deferred Pension & Other Post Retirement Benefits	21,349		34,432
Conservation Incentive Program	7,721		11,846
Equity In Loss Of Affiliated Companies	1,377		3,092
Other	11,037		14,414
Total Deferred Tax Liability	$	577,582	$	837,951
Deferred Tax Liability - Net	$	86,884	$	343,549

SJG:
Deferred Tax Assets:
Net Operating Loss and Tax Credits	$	73,785	$	102,290
Deferred State tax	14,688		24,574
Provision for Uncollectibles	3,811		5,170
Gross Up of Excess Deferred Taxes	76,426		—
Pension & Other Post Retirement Benefits	15,031		17,264
Deferred Revenues	6,066		7,696
Other	2,413		3,573
Total Deferred Tax Assets	$	192,220	$	160,567

Deferred Tax Liabilities:
Book Versus Tax Basis of Property	$	386,642	$	532,330
Deferred Fuel Costs - Net	10,254		2,052
Environmental Remediation	31,637		33,573
Deferred Regulatory Costs	3,554		1,554
Deferred Pension & Other Post Retirement Benefits	21,349		34,432
Budget Billing - Customer Accounts	4,043		3,347
Section 461 Prepayments	866		1,147
Conservation Incentive Program	7,721		11,846
Other	6,900		9,694
Total Deferred Tax Liabilities	$	472,966	$	629,975

Deferred Tax Liability - Net	$	280,746	$	469,408

SJG is included in the consolidated federal income tax return filed by SJI. The actual taxes, including credits, are allocated by SJI to its subsidiaries, generally on a separate return basis except for net operating loss and credit carryforwards. As of December 31, 2017 and 2016, there were no income taxes due to or from SJI.

As of December 31, 2017, SJI has the following federal and state net operating loss carryforwards (in thousands):



	Net Operating Loss Carryforwards
Expire in:	Federal		State
2031	$	163,572	$	45,866
2032	42,988		19,356
2033	56,007		35,271
2034	105,763		28,853
2035	49,572		9,956
2036	72,199		181,189
2037	96,326		74,175
	$	586,427	$	394,666

As of December 31, 2017, SJI has the following investment tax credit carryforwards (in thousands):



Expire in:	Investment Tax Credit Carryforward
2030	$	11,628
2031	25,664
2032	32,031
2033	45,606
2034	37,699
2035	45,005
2036	11,744
2037	636
	$	210,013

SJI has $1.2 million of federal alternative minimum tax credits which have no expiration date. SJI also has research and development credits of $3.2 million that will expire between 2031 and 2035. As of December 31, 2017 and 2016, SJG has total federal net operating loss carryforwards of $261.1 million and $263.0 million, respectively, that will expire between 2031 and 2037. SJG has a state net operating loss carryforward of $208.8 million and $80.2 million that will expire between 2036 and 2037. SJG has research and development credits of $2.7 million which will expire between 2031 and 2035. A valuation allowance is recorded when it is more likely than not that any of SJI's or SJG's deferred tax assets will not be realized. SJI and SJG believe that they will generate sufficient future taxable income to realize the income tax benefits related to their net deferred tax assets.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, is as follows (in thousands):



SJI (includes SJG and all other consolidated subsidiaries):	2017		2016		2015
Balance at January 1,	$	1,445	$	559	$	552
Increase as a result of tax positions taken in prior years	—		886		7
Balance at December 31,	$	1,445	$	1,445	$	559

SJG:
Balance at January 1,	$	1,361	$	559	$	552
Increase as a result of tax position taken in prior years	—		802		7
Balance at December 31,	$	1,361	$	1,361	$	559

The total unrecognized tax benefits reflected in the table above exclude $0.8 million of accrued interest and penalties as of December 31, 2017 and $0.7 million as of December 31, 2016 and 2015 for both SJI and SJG. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is not significant. The Company's policy is to record interest and penalties related to unrecognized tax benefits as interest expense and other expense, respectively. These amounts were not significant in 2017, 2016 or 2015. The majority of the increased tax position in 2017 is attributable to research and development credits. The Company does not anticipate any significant changes in the total unrecognized tax benefits within the next 12 months.

The unrecognized tax benefits are primarily related to an uncertainty of state income tax issues relating to the Company's nexus in certain states and tax credits. Federal income tax returns from 2013 forward and state income tax returns from 2008 forward are open and subject to examination.