STOCK-BASED COMPENSATION PLAN

3 Months Ended

Mar. 31, 2020

Share-based Payment Arrangement [Abstract]

STOCK-BASED COMPENSATION PLAN:

Under SJI's 2015 Omnibus Equity Compensation Plan (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, 2020 and 2019. No stock appreciation rights have been issued under the Plan. No restricted shares were granted during the three months ended March 31, 2020 or 2019 to Officers and other key employees. Restricted shares to Officers and other key employees are expected to be granted in the second quarter of 2020. 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.

SJI grants 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. The vesting and payout of time-based shares of restricted stock is solely contingent upon the service requirement being met in years one, two, and three of the grant. No time-based restricted stock was granted during the three months ended March 31, 2020 or 2019. Time-based restricted shares to Officers and other key employees are expected to be granted in the second quarter of 2020.

Grants containing market-based performance targets use SJI's 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.

Earnings-based performance targets include pre-defined EGR and ROE goals to measure performance. Performance targets include pre-defined 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, 2020 and 2019, SJI granted 36,829 and 30,028 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, 2020 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 -	2018 - TSR	49,014	$	31.05	21.9	%	2.00	%
	2018 - CEGR, Time	64,430	$	31.23	N/A		N/A
	2019 - TSR	36,642	$	32.88	23.2	%	2.40	%
	2019 - CEGR, Time	104,712	$	31.38	N/A		N/A



Directors -	2020	36,829	$	32.42	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, 2020 and 2019 (in thousands):


	Three Months Ended March 31,
	2020		2019
Officers & Key Employees	$	1,212	$	750
Directors	299		202
Total Cost	1,511		952

Capitalized	(122)		(81)
Net Expense	$	1,389	$	871

The table above does not reflect the reversal of approximately $1.3 million in 2020 of previously recorded costs associated with TSR and CEGR-based grants for which performance goals were not met.

As of March 31, 2020, there was $4.9 million of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.4 years.

The following table summarizes information regarding restricted stock award activity for SJI during the three months ended March 31, 2020, excluding accrued dividend equivalents:


	Officers and Other Key Employees	Directors	Weighted Average Fair Value
Nonvested Shares Outstanding, January 1, 2020	402,146	30,961	$	31.50
Granted	—	36,829	$	32.42
Cancelled/Forfeited	(10,385)	—	$	31.59
Vested	(136,963)	(30,961)	$	31.49
Nonvested Shares Outstanding, March 31, 2020	254,798	36,829	$	31.61

Earnings and performance-based targets during the three-year vesting periods were not attained for the 2017 Officer and other key employee grants that vested in the first quarter of 2020. As a result, no shares were awarded in 2020 associated with the 2017 TSR and CEGR-based grants. However, the targets for the time-based grants were met. As a result, during the three months ended March 31, 2020, SJI awarded 47,617 shares to its Officers and other key employees at a market value of $1.4 million. During the three months ended March 31, 2019, SJI awarded 122,265 shares at a market value of $3.6 million. These awarded amounts for 2020 and 2019 include awards for previously deferred shares that were paid during the three month periods.

During the three months ended March 31, 2020 and 2019, SJI also awarded 30,961 and 26,416 shares to its Directors at a market value of $0.8 million for both periods.

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 non-forfeitable 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.

SJG - Officers and other key employees of SJG participate in the stock-based compensation plans of SJI. During the three months ended March 31, 2020 and 2019, no shares of restricted stock were granted to SJG officers and other key employees. Restricted shares to Officers and other key employees are expected to be granted in the second quarter of 2020. The cost of outstanding stock awards for SJG during both the three months ended March 31, 2020 and 2019 was $0.1 million. Approximately 70% of these costs were capitalized on SJG's condensed balance sheets to Utility Plant.