UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q




(Mark
one)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended September 30,
2009





OR





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from ________________ to ________________





Commission
File Number 000-22211





SOUTH
JERSEY GAS COMPANY


(Exact
name of registrant as specified in its charter)





New
      Jersey
            21-0398330(State
      of incorporation)
            (IRS
      employer identification no.)





1
South Jersey Plaza, Folsom, NJ 08037


(Address
of principal executive offices, including zip code)





(609)
561-9000


(Registrant's
telephone number, including area code)





Securities
registered pursuant to Section 12(b) of the Act: None





Securities
registered pursuant to Section 12(g) of the Act: None





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x       No
 ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes  ̈      No
 ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
      accelerated filer
            £
            Accelerated
      filer
            £Non-accelerated
      filer
            S (Do not
      check if a smaller reporting company)
            Smaller
      reporting company
            £





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes £      No
S





As of
November 2, 2009 there were 2,339,139 shares of the registrant’s common
stock outstanding. All common shares are owned by South Jersey Industries, Inc.,
the parent company of South Jersey Gas Company.







SJG-1




PART
I — FINANCIAL INFORMATION





Item
1. Financial Statements — See Pages 3 through 24





SJG-2





SOUTH
JERSEY GAS COMPANY





CONDENSED
STATEMENTS OF INCOME (UNAUDITED)


(In
Thousands)





Three
      Months EndedSeptember
      30,2009
            
            
            2008Operating
      Revenues
            
            $
            56,305
            
            
            $
            64,563Operating
      Expenses:Cost
      of Sales (Excluding depreciation)
            
            
            31,726
            
            
            
            41,201Operations
            
            
            13,839
            
            
            
            12,488Maintenance
            
            
            2,301
            
            
            
            1,925Depreciation
            
            
            6,791
            
            
            
            6,409Energy
      and Other Taxes
            
            
            1,416
            
            
            
            1,356Total
      Operating Expenses
            
            
            56,073
            
            
            
            63,379Operating
      Income
            
            
            232
            
            
            
            1,184Other
      Income and Expense
            
            
            107
            
            
            
            242Interest
      Charges
            
            
            (4,085
            )
            
            
            (4,586
            )Loss
      Before Income Taxes
            
            
            (3,746
            )
            
            
            (3,160
            )Income
      Taxes
            
            
            1,666
            
            
            
            1,306Net
      Loss
            
            $
            (2,080
            )
            
            $
            (1,854
            )





The
accompanying notes are an integral part of the unaudited condensed financial
statements.





SJG-3




SOUTH
JERSEY GAS COMPANY





CONDENSED
STATEMENTS OF INCOME (UNAUDITED)


(In
Thousands)





Nine
      Months EndedSeptember
      30,2009
            
            
            2008Operating
      Revenues
            
            $
            364,253
            
            
            $
            396,038Operating
      Expenses:Cost
      of Sales (Excluding depreciation)
            
            
            227,608
            
            
            
            264,381Operations
            
            
            47,206
            
            
            
            41,144Maintenance
            
            
            6,162
            
            
            
            5,412Depreciation
            
            
            19,973
            
            
            
            19,064Energy
      and Other Taxes
            
            
            7,783
            
            
            
            7,424Total
      Operating Expenses
            
            
            308,732
            
            
            
            337,425Operating
      Income
            
            
            55,521
            
            
            
            58,613Other
      Income and Expense
            
            
            789
            
            
            
            869Interest
      Charges
            
            
            (12,334
            )
            
            
            (14,179
            )Income
      Before Income Taxes
            
            
            43,976
            
            
            
            45,303Income
      Taxes
            
            
            (18,051
            )
            
            
            (18,706
            )Net
      Income
            
            $
            25,925
            
            
            $
            26,597




The
accompanying notes are an integral part of the unaudited condensed financial
statements.





SJG-4




SOUTH
JERSEY GAS COMPANY





CONDENSED
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


(In
Thousands)





Three
      Months EndedSeptember
      30,2009
            
            
            2008Net
      Loss
            
            $
            (2,080
            )
            
            $
            (1,854
            )Other
      Comprehensive Income  - Net of Tax:Unrealized
      Gain (Loss) on Available-for-Sale Securities
            
            
            344
            
            
            
            (355
            )Unrealized
      Gain on Derivatives - Other
            
            
            7
            
            
            
            7Other
      Comprehensive Gain (Loss) - Net of Tax *
            
            
            351
            
            
            
            (348
            )Comprehensive
      Loss
            
            $
            (1,729
            )
            
            $
            (2,202
            )





Nine
      Months EndedSeptember
      30,2009
            
            
            2008Net
      Income
            
            $
            25,925
            
            
            $
            26,597Other
      Comprehensive Income  - Net of Tax:Unrealized
      Gain (Loss) on Available-for-Sale Securities
            
            
            441
            
            
            
            (635
            )Unrealized
      Gain on Derivatives - Other
            
            
            20
            
            
            
            385Other
      Comprehensive Gain (Loss) - Net of Tax *
            
            
            461
            
            
            
            (250
            )Comprehensive
      Income
            
            $
            26,386
            
            
            $
            26,347





*
Determined using a combined statutory tax rate of 41.08%





The
accompanying notes are an integral part of the unaudited condensed financial
statements.





SJG-5




SOUTH
JERSEY GAS COMPANY





CONDENSED
STATEMENTS OF CASH FLOWS (UNAUDITED)


(In
Thousands)





Nine
      Months EndedSeptember
      30,2009
            
            
            2008Net
      Cash Provided by Operating Activities
            
            $
            86,313
            
            
            $
            35,773Cash
      Flows from Investing Activities:Capital
      Expenditures
            
            
            (54,921
            )
            
            
            (37,271
            )Investment
      in Long-Term Receivables
            
            
            (3,486
            )
            
            
            (2,857
            )Proceeds
      from Long-Term Receivables
            
            
            3,633
            
            
            
            2,923Purchase
      of Restricted Investments with Escrowed Loan Proceeds
            
            
            -
            
            
            
            (36
            )Net
      Cash Used in Investing Activities
            
            
            (54,774
            )
            
            
            (37,241
            )Cash
      Flows from Financing Activities:Net
      (Repayments) Borrowing of Lines of Credit
            
            
            (28,050
            )
            
            
            10,285Principal
      Repayments of Long-Term Debt
            
            
            (17
            )
            
            
            (25,000
            )Proceeds
      from Issuance of Long-Term Debt
            
            
            -
            
            
            
            25,000Payments
      for Issuance of Long-Term Debt
            
            
            (95
            )
            
            
            (247
            )Dividends
      on Common Stock
            
            
            (5,001
            )
            
            
            (9,866
            )Excess
      Tax Benefit from Restricted Stock Plan
            
            
            -
            
            
            
            236Net
      Cash (Used in) Provided by Financing Activities
            
            
            (33,163
            )
            
            
            408Net
      Decrease in Cash and Cash Equivalents
            
            
            (1,624
            )
            
            
            (1,060
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            2,228
            
            
            
            3,230Cash
      and Cash Equivalents at End of Period
            
            $
            604
            
            
            $
            2,170





The
accompanying notes are an integral part of the unaudited condensed financial
statements.





SJG-6




SOUTH
JERSEY GAS COMPANY


CONDENSED
BALANCE SHEETS (UNAUDITED)


(In
Thousands)





September
      30,
            
            
            December
      31,2009
            
            
            2008AssetsProperty,
      Plant and Equipment:Utility
      Plant, at original cost
            
            $
            1,224,350
            
            
            $
            1,172,014Accumulated
      Depreciation
            
            
            (309,473
            )
            
            
            (295,432
            )Property,
      Plant and Equipment - Net
            
            
            914,877
            
            
            
            876,582Investments:Available-for-Sale
      Securities
            
            
            5,695
            
            
            
            4,841Restricted
      Investments
            
            
            132
            
            
            
            132Total
      Investments
            
            
            5,827
            
            
            
            4,973Current
      Assets:Cash
      and Cash Equivalents
            
            
            604
            
            
            
            2,228Accounts
      Receivable
            
            
            51,005
            
            
            
            47,787Accounts
      Receivable - Related Parties
            
            
            1,019
            
            
            
            624Unbilled
      Revenues
            
            
            9,466
            
            
            
            48,225Provision
      for Uncollectibles
            
            
            (4,535
            )
            
            
            (3,628
            )Natural
      Gas in Storage, average cost
            
            
            34,615
            
            
            
            65,252Materials
      and Supplies, average cost
            
            
            12,255
            
            
            
            11,247Prepaid
      Taxes
            
            
            17,722
            
            
            
            11,860Derivatives
      - Energy Related Assets
            
            
            2,241
            
            
            
            380Other
      Prepayments and Current Assets
            
            
            2,623
            
            
            
            2,416Total
      Current Assets
            
            
            127,015
            
            
            
            186,391Regulatory
      and Other Noncurrent Assets:Regulatory
      Assets
            
            
            246,791
            
            
            
            270,434Unamortized
      Debt Issuance Costs
            
            
            5,870
            
            
            
            6,147Long-Term
      Receivables
            
            
            7,183
            
            
            
            7,081Derivatives
      - Energy Related Assets
            
            
            979
            
            
            
            15Other
            
            
            2,527
            
            
            
            2,392Total
      Regulatory and Other Noncurrent Assets
            
            
            263,350
            
            
            
            286,069Total
      Assets
            
            $
            1,311,069
            
            
            $
            1,354,015





The
accompanying notes are an integral part of the unaudited condensed financial
statements.





SJG-7




SOUTH
JERSEY GAS COMPANY


CONDENSED
BALANCE SHEETS (UNAUDITED)


(In
Thousands, except per share amounts)





September
      30,
            
            
            December
      31,2009
            
            
            2008Capitalization and
    LiabilitiesCommon
      Equity:Common
      Stock, Par Value $2.50 per share:Authorized
      - 4,000,000 sharesOutstanding
      - 2,339,139 shares
            
            $
            5,848
            
            
            $
            5,848Other
      Paid-In Capital and Premium on Common Stock
            
            
            200,663
            
            
            
            200,663Accumulated
      Other Comprehensive Loss
            
            
            (6,414
            )
            
            
            (6,875
            )Retained
      Earnings
            
            
            220,527
            
            
            
            202,103Total
      Common Equity
            
            
            420,624
            
            
            
            401,739Long-Term
      Debt
            
            
            269,856
            
            
            
            269,873Total
      Capitalization
            
            
            690,480
            
            
            
            671,612Current
      Liabilities:Notes
      Payable
            
            
            86,500
            
            
            
            114,550Current
      Portion of Long-Term Debt
            
            
            25,000
            
            
            
            25,000Accounts
      Payable - Commodity
            
            
            7,449
            
            
            
            36,587Accounts
      Payable - Other
            
            
            12,952
            
            
            
            12,051Accounts
      Payable - Related Parties
            
            
            10,804
            
            
            
            16,744Derivatives
      - Energy Related Liabilities
            
            
            14,309
            
            
            
            26,698Deferred
      Income Taxes - Net
            
            
            10,167
            
            
            
            12,475Customer
      Deposits and Credit Balances
            
            
            19,572
            
            
            
            14,219Environmental
      Remediation Costs
            
            
            16,713
            
            
            
            13,117Taxes
      Accrued
            
            
            3,746
            
            
            
            2,291Pension
      Benefits
            
            
            991
            
            
            
            991Interest
      Accrued
            
            
            4,582
            
            
            
            6,244Dividends
      Declared
            
            
            2,501
            
            
            
            -Other
      Current Liabilities
            
            
            4,528
            
            
            
            6,449Total
      Current Liabilities
            
            
            219,814
            
            
            
            287,416Regulatory
      and Other Noncurrent Liabilities:Regulatory
      Liabilities
            
            
            50,950
            
            
            
            50,447Deferred
      Income Taxes - Net
            
            
            202,268
            
            
            
            187,050Environmental
      Remediation Costs
            
            
            48,966
            
            
            
            50,976Asset
      Retirement Obligations
            
            
            22,782
            
            
            
            22,299Pension
      and Other Postretirement Benefits
            
            
            64,766
            
            
            
            67,566Investment
      Tax Credits
            
            
            1,596
            
            
            
            1,832Derivatives
      - Energy Related Liabilities
            
            
            1,213
            
            
            
            2,667Derivatives
      - Other
            
            
            3,682
            
            
            
            7,578Other
            
            
            4,552
            
            
            
            4,572Total
      Regulatory and Other Noncurrent Liabilities
            
            
            400,775
            
            
            
            394,987Commitments
      and Contingencies (Note 9)Total
      Capitalization and Liabilities
            
            $
            1,311,069
            
            
            $
            1,354,015





The
accompanying notes are an integral part of the unaudited condensed financial
statements.





SJG-8




NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS





1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES:





THE
ENTITY - South Jersey Industries, Inc. (SJI) owns all of the outstanding common
stock of South Jersey Gas Company (SJG), a regulated natural gas utility. SJG
distributes natural gas in the seven southern most counties of New Jersey. In
our opinion, the condensed financial statements reflect all normal and recurring
adjustments needed to fairly present our financial position and operating
results at the dates and for the periods presented. SJG’s business is
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, the accompanying condensed financial statements contain
certain condensed financial information and exclude certain note disclosures
normally included in annual audited financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP). These condensed financial statements should be read in conjunction with
SJG’s 2008 Form 10-K for a more complete discussion of our accounting policies
and certain other information.





The
Company evaluated subsequent events through November 6, 2009, the date on which
this Quarterly Report on Form 10-Q was filed with the Securities and Exchange
Commission.





REVENUE
BASED TAXES-SJG
collects certain revenue-based energy taxes from its customers. Such taxes
include New Jersey State Sales Tax, Transitional Energy Facility Assessment
(TEFA) 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. TEFA and PUA are included in both revenues and cost of sales and
totaled $1.0 million and $0.9 million for the three months ended 
September 30, 2009 and 2008, respectively, and $6.3 million and $5.9
million for the nine months ended September 30, 2009 and 2008,
respectively.





CAPITALIZED
INTEREST - SJG capitalizes interest on construction at the rate of return on
rate base utilized by the New Jersey Board of Public Utilities (BPU) to set
rates in our last base rate proceeding.   See Note 2 to the
Financial Statements in Item 8 of SJG’s Form 10-K as of December 31,
2008.  Capitalized interest is included in Utility Plant on the
condensed balance sheets. Interest Charges are presented net of capitalized
interest on the condensed statements of income.   The amount of
interest capitalized by SJG for the three and nine months ended September 30,
2009 and 2008 was not significant.





SJG-9





DERIVATIVE
INSTRUMENTS — SJG is involved in buying, selling, transporting and storing
natural gas and is subject to market risk on expected future purchases and sales
due to commodity price fluctuations. The Company, through its affiliate South
Jersey Resources Group (SJRG), uses a variety of derivative instruments to limit
this exposure to market risk in accordance with strict corporate guidelines.
These derivative instruments include forward contracts, swap agreements, options
contracts and futures contracts. As of September 30, 2009, SJG had outstanding
derivative contracts intended to limit the exposure to market risk on 15.0
MMdts of expected future purchases of natural gas. These contracts, which do not
qualify for the normal purchase and sale exemption and have not been designated
as hedging instruments under GAAP, are measured at fair value and recorded in
Derivatives —Energy Related Assets or Derivatives — Energy Related Liabilities
on the condensed balance sheets. The costs or benefits of these short-term
contracts are recoverable through SJG’s Basic Gas Supply Service (BGSS) clause,
subject to BPU approval. As a result, the net unrealized pre-tax gains and
losses for these energy related commodity contracts are included with realized
gains and losses in Regulatory Assets or Regulatory Liabilities on the condensed
balance sheets. As of September 30, 2009 and December 31, 2008, SJG had $12.3
million and $29.0 million of unrealized losses, respectively, included in its
BGSS related to open financial contracts.





The
Company has also entered into interest rate derivatives to hedge exposure to
increasing interest rates and the impact of those rates on cash flows of
variable-rate debt. These interest rate derivatives, which have not been
designated as hedging instruments under GAAP, are measured at fair value and
recorded in Derivatives-Other on the condensed balance sheets. The fair value
represents the amount SJG would have to pay the counterparty to terminate these
contracts as of those dates. There have been no significant changes to the
Company’s active interest rate swaps since December 31, 2008 which are described
in Note 1 to the Financial Statements in Item 8 of SJG’s Annual Report on Form
10-K as of December 31, 2008. Management believes that, subject to BPU approval,
the market value upon termination of these interest rate derivatives can be
recovered in rates and therefore these unrealized losses have been included in
Regulatory Assets on the condensed balance sheets.




SJG-10








Fair
      Values of Derivative InstrumentsAsset
      DerivativesSeptember
      30, 2009
            
            December
      31, 2008Balance
      Sheet Location
            
            Fair
      Value
            
            Balance
      Sheet Location
            
            Fair
      ValueDerivatives
      not designated as hedging instruments under GAAPEnergy
      related commodity contracts
            Derivatives
      – Energy Related Assets-Current
            
            $
            2,241
            
            Derivatives
      - Energy Related Assets-Current
            
            $
            380Noncurrent
            
            
            979
            
            Noncurrent
            
            
            15Total
      asset derivatives
            
            
            $
            3,220
            
            
            
            $
            395





Liability
      DerivativesSeptember
      30, 2009
            
            December
      31, 2008Balance
      Sheet Location
            
            Fair
      Value
            
            Balance
      Sheet Location
            
            Fair
      ValueDerivatives
      not designated as hedging instruments under GAAPEnergy
      related commodity contracts
            Derivatives
      - Energy Related Liabilities-Current
            
            $
            14,309
            
            Derivatives
      - Energy Related Liabilities-Current
            
            $
            26,698Noncurrent
            
            
            1,213
            
            Noncurrent
            
            
            2,667Interest
      rate contracts
            Derivatives
      – Other
            
            
            3,682
            
            Derivatives
      - Other
            
            
            7,578Total
      liability derivatives
            
            
            $
            19,204
            
            
            
            $
            36,943





Net
realized losses associated with SJG’s energy related financial commodity
contracts were $12.5 million and $45.2 million for the three and nine months
ended September 30, 2009, respectively.  These contracts are part of
SJG’s regulated risk management activities that serve to mitigate BGSS costs
passed on to its customers. As these transactions are entered into pursuant to,
and recoverable through, regulatory riders, any changes in the value of SJG’s
energy related financial commodity contracts are deferred in Regulatory Assets
or Liabilities and there is no impact to earnings.





STOCK-BASED
COMPENSATION PLANS - The following table summarizes the SJI nonvested
restricted stock awards pertaining to SJG outstanding at September 30, 2009, and
the assumptions used to estimate the fair value of the awards:





Grant
      Date
            
            Shares
      Outstanding
            
            
            Fair
      Value Per Share
            
            
            Expected
      Volatility
            
            
            Risk-Free
      Interest RateJan.
      2007
            
            
            9,045
            
            
            $
            29.210
            
            
            
            18.5
            %
            
            
            4.9
            %Jan.
      2008
            
            
            9,238
            
            
            $
            34.030
            
            
            
            21.7
            %
            
            
            2.9
            %Jan.
      2009
            
            
            8,318
            
            
            $
            39.350
            
            
            
            28.6
            %
            
            
            1.2
            %




SJG-11




Expected
volatility is based on the actual daily volatility of SJI’s share price over the
preceding 3-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 3-year
term of the restricted shares. As notional dividend equivalents are credited to
the holders, which are reinvested during the 3-year service period, no reduction
to the fair value of the award is required.





The cost
per quarter for restricted stock awards during 2009 and 2008 is approximately
$74,200 and $64,600, respectively.





As of
September 30, 2009, there was $0.4 million of total unrecognized compensation
cost related to nonvested share-based compensation awards granted under the
restricted stock plans. That cost is expected to be recognized over a weighted
average period of 1.8 years.





The
following table summarizes information regarding restricted stock award activity
during the nine months ended September 30, 2009, excluding accrued
dividend equivalents:





Shares
            
            
            Weighted
      Average
              Grant
      Date
              Fair
      ValueNonvested
      Shares Outstanding, January 1, 2009
            
            
            18,283
            
            
            $
            31.645Granted
            
            
            8,318
            
            
            
            39.350Nonvested
      Shares Outstanding, September 30, 2009
            
            
            26,601
            
            
            $
            34.055





During
March 2009, SJG awarded 13,640 shares that had vested at December 31, 2008, to
its officers at a market value of $0.5 million. During March 2008, SJG awarded
12,299 shares at a market value of $0.4 million. SJG has a policy of making cash
payments to SJI to satisfy its obligations under this plan. Cash payments to SJI
during March 2009 and 2008 were approximately $0.2 million and $0.6
million, respectively, relating to stock awards and include obligations for
services previously rendered by officers that are currently employed by
affiliates as a result of a January 1, 2006 corporate restructuring by SJI.
Additionally, a change in control could result in the nonvested shares becoming
nonforfeitable or immediately payable in cash.





SJG-12




NEW
ACCOUNTING PRONOUNCEMENTS — In September 2006, the FASB issued new accounting
guidance which defines fair value, establishes a framework for measuring fair
value in accounting principles generally accepted in the United States of
America, and expands disclosures about fair value measurements. In October 2008,
the FASB issued additional guidance to provide clarification in a market that is
not active and to provide an example to illustrate key considerations in
determining the fair value of a financial asset in such a non-active market.
This guidance was effective in fiscal years beginning after November 15, 2007.
However, for nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis, this guidance was effective in fiscal years beginning after
November 15, 2008.  The adoption of this guidance did not have a material
effect on the Company’s condensed financial statements.





In March
2008, the FASB issued new accounting guidance on disclosures about derivative
instruments and hedging activities. This guidance requires disclosures of how
and why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for and how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows. This guidance was effective for fiscal years
beginning after November 15, 2008. The adoption of this guidance did not have a
material effect on the Company’s condensed financial statements.  See
disclosures in Note 1.





In
December 2008, the FASB issued new accounting guidance on employers’ disclosures
about postretirement benefit plan assets. This guidance requires more detailed
disclosures about employers’ plan assets, including employers’ investment
strategies, major categories of plan assets, concentrations of risk within plan
assets, and valuation techniques used to measure the fair value of plan assets.
This guidance is effective for reporting periods ending after December 15, 2009.
Management is currently evaluating the impact that the adoption of this guidance
will have on the Company’s condensed financial statements.





In
December 2008, the Emerging Issue Task Force issued new accounting guidance on
issuer’s accounting for liabilities measured at fair value with a third-party
credit enhancement.  The Task Force reached a consensus that an issuer
of a liability with a third-party credit enhancement that is inseparable from
the liability must treat the liability and the credit enhancement as two units
of accounting. Under the guidance, the fair value measurement of the liability
does not include the effect of the third-party credit enhancement; therefore,
changes in the issuer’s credit standing without the support of the credit
enhancement affect the fair value measurement of the issuer’s liability.
Entities will need to disclose the existence of any third-party credit
enhancements related to their liabilities that are within the scope of this
guidance (i.e., that are measured at fair value). This guidance was effective in
the first reporting period beginning on or after December 15, 2008. The adoption
of this guidance did not have a material effect on the Company’s condensed
financial statements.





SJG-13




In April
2009, the FASB issued new accounting guidance on interim disclosures about fair
value of financial instruments. This guidance requires disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. This guidance also requires
those disclosures in summarized financial information at interim reporting
periods. This guidance was effective for interim reporting periods ending after
June 15, 2009. The adoption of this guidance did not have a material effect on
the Company’s condensed financial statements.





In April
2009, the FASB issued new accounting guidance on the recognition and
presentation of other-than-temporary impairments. This guidance amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. This guidance requires management to assert (a) it
does not have the intent to sell the security; and (b) it is more likely than
not it will not have to sell the security before recovery of its cost
basis.  Declines in fair value of held-to-maturity and
available-for-sale securities below their cost that are deemed to be other than
temporary are to be reflected in earnings as realized losses to the extent the
impairment is related to credit losses.  This guidance does not amend
existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities. This new guidance was effective for interim
and annual reporting periods ending after June 15, 2009. The adoption of this
guidance did not have a material effect on the Company’s condensed financial
statements.





In April
2009, the FASB issued new accounting guidance on determining fair value when the
volume and level of activity for the asset or liability have significantly
decreased and identifying transactions that are not orderly. This guidance was
effective for interim and annual reporting periods ending after June 15, 2009,
and shall be applied prospectively. The adoption of this guidance did not have a
material effect on the Company’s condensed financial statements.





SJG-14




In May
2009, the FASB issued new accounting guidance on management’s assessment of
subsequent events. Historically, management had relied on U.S. auditing
literature for guidance on assessing and disclosing subsequent events. This new
guidance represents the inclusion of specific guidance on subsequent events in
U.S. GAAP and is directed specifically to management. The new guidance clarifies
that management must evaluate, as of each reporting period, events or
transactions that occur after the balance sheet date “through the date that the
financial statements are issued or are available to be issued.” The new guidance
was effective for interim or annual financial periods ending after June 15,
2009. Management must perform its assessment for both interim and annual
periods. The adoption of this guidance did not have a material effect on the
Company’s condensed financial statements.





In June
2009, the FASB issued new accounting guidance on The FASB Accounting Standards
CodificationTM (the “Codification”) which will become the single official source
of authoritative, nongovernmental U.S. generally accepted accounting principles.
The current GAAP hierarchy consists of four levels of authoritative accounting
and reporting guidance. The Codification eliminates this hierarchy and replaces
current GAAP (other than rules and interpretive releases of the SEC) as
used by all nongovernmental entities, with just two levels of literature: authoritativeand nonauthoritative. The
Codification was effective for interim and annual periods ending after September
15, 2009. Calendar year-end companies are required to initially apply the
Codification to their third-quarter interim financial statements. The
application of the Codification did not have a material effect on the Company’s
condensed financial statements.




In August
2009 the FASB issued new accounting guidance for measuring the fair value of a
liability in circumstances in which a quoted price in an active market for the
identical liability is not available. In such instances, a reporting entity is
required to measure fair value utilizing a valuation technique that uses
(i) the quoted price of the identical liability when traded as an asset,
(ii) quoted prices for similar liabilities or similar liabilities when
traded as assets, or (iii) another valuation technique that is consistent
with existing principles, such as an income approach or market approach. The new
accounting guidance also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability. This guidance will be effective for the
period ending December 31, 2009 and is not expected to have a significant impact
on the Company’s condensed financial statements.





SJG-15




2.
            RATES
      AND REGULATORY ACTIONS:





SJG is
subject to the rules and regulations of the BPU.  In January 2009, SJG
filed a petition with the BPU for approval of an accelerated infrastructure
investment program and an associated rate tracker, which will allow the Company
to accelerate $103.0 million of capital spending into 2009 and
2010.  The petition requested the Company earn a return of, and return
on, investment as the capital is spent. The petition was approved by the BPU in
April 2009 and also ordered SJG to file a base rate case with the BPU no later
than April 2011. Also in January 2009, SJG filed a petition requesting approval
of an energy efficiency program to invest $17.0 million over 2 years in energy
efficiency programs for residential, commercial and industrial customers. The
petition was approved by the BPU in July 2009. In June 2009, SJG filed its
annual BGSS petition with the BPU requesting a 13.3% reduction in rates, in
addition to proposing a $20.0 million refund to customers in October 2009. The
BGSS rate reduction was approved provisionally by the BPU in September 2009, and
the refund was credited to the accounts of BGSS customers in October. There have
been no other significant regulatory actions or changes to SJG’s rate structure
since December 31, 2008. See Note 2 to the Financial Statements in Item 8 of
SJG’s Form 10-K as of December 31, 2008.





3.
            REGULATORY
      ASSETS AND LIABILITIES:





There
have been no significant changes to the nature of SJG’s regulatory assets and
liabilities since December 31, 2008, which are described in Notes 2 and 3 to the
Financial Statements in Item 8 of SJG’s Form 10-K as of December 31,
2008.





Regulatory
Assets consisted of the following items (in thousands):





September
      30,
            
            
            December
      31,2009
            
            
            2008Environmental
      Remediation Costs:Expended
      - Net
            
            $
            48,944
            
            
            $
            48,143Liability
      for Future Expenditures
            
            
            65,679
            
            
            
            64,093Income
      Taxes - Flowthrough Depreciation
            
            
            1,996
            
            
            
            2,729Deferred
      Asset Retirement Obligation Costs
            
            
            22,299
            
            
            
            21,901Deferred
      Pension and Other Postretirement Benefit Costs
            
            
            79,879
            
            
            
            80,162Deferred
      Gas Costs - Net
            
            
            4,587
            
            
            
            18,406Conservation
      Incentive Program Receivable
            
            
            14,535
            
            
            
            22,048Societal
      Benefit Costs Receivable
            
            
            625
            
            
            
            1,753Premium
      for Early Retirement of Debt
            
            
            1,086
            
            
            
            1,208Other
      Regulatory Assets
            
            
            7,161
            
            
            
            9,991Total
      Regulatory Assets
            
            $
            246,791
            
            
            $
            270,434




SJG-16




Regulatory
Liabilities consisted of the following items (in thousands):





September
      30,
            
            
            December
      31,2009
            
            
            2008Excess
      Plant Removal Costs
            
            $
            48,689
            
            
            $
            48,820Other
      Regulatory Liabilities
            
            
            2,261
            
            
            
            1,627Total
      Regulatory Liabilities
            
            $
            50,950
            
            
            $
            50,447




DEFERRED
GAS COSTS – NET – Over/under collections of gas costs are monitored through
SJG’s Basic Gas Supply Service Clause (BGSS) mechanism.  Net
undercollected gas costs are classified as a regulatory asset and net
overcollected gas costs are classified as a regulatory
liability.  Derivative contracts used to hedge natural gas purchases
are also included in the BGSS, subject to BPU approval.  The BGSS
decreased from a $18.4 million regulatory asset at December 31, 2008 to a $4.6
million regulatory asset at September 30, 2009.  A change in the fair
value of energy related derivatives resulting primarily from a decrease in the
average future NYMEX prices accounted for $16.7 million of the
fluctuation.





4.
            RELATED
      PARTY TRANSACTIONS:





There
have been no significant changes in the nature of SJG’s related party
transactions since December 31, 2008. See Note 4 to the Financial Statements in
Item 8 of SJG’s Form 10-K as of December 31, 2008 for a detailed description of
such transactions.





A summary
of related party transactions, excluding pass-through items, included in
Operating Revenues were as follows, (in thousands):





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Operating
      Revenues/Affiliates:SJRG
            
            $
            285
            
            
            $
            840
            
            
            $
            3,490
            
            
            $
            2,585Other
            
            
            93
            
            
            
            81
            
            
            
            338
            
            
            
            315Total
      Operating Revenues/Affiliates
            
            $
            378
            
            
            $
            921
            
            
            $
            3,828
            
            
            $
            2,900




SJG-17




Related
party transactions, excluding pass-through items, included in Operating Expenses
were as follows, (in thousands):





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Costs
      of Sales/Affiliates:SJRG
            
            $
            1,860
            
            
            $
            2,624
            
            
            $
            33,321
            
            
            $
            18,396Total
      Cost of Sales/Affiliates
            
            $
            1,860
            
            
            $
            2,624
            
            
            $
            33,321
            
            
            $
            18,396Derivative
      Losses (Gains) (See Note 1): *SJRG
            
            $
            12,478
            
            
            $
            (5,375
            )
            
            $
            44,290
            
            
            $
            (12,723
            )




*
Contracts used to hedge natural gas purchases. Included in Cost of Sales on
the Condensed Statement of Income.





Operations
      Expense/AffiliatesSJI
            
            $
            1,655
            
            
            $
            1,450
            
            
            $
            5,832
            
            
            $
            4,873SJIS
            
            
            1,261
            
            
            
            1,073
            
            
            
            3,596
            
            
            
            3,183Millennium
            
            
            737
            
            
            
            735
            
            
            
            2,178
            
            
            
            2,245Other
            
            
            (70
            )
            
            
            (58
            )
            
            
            (228
            )
            
            
            (160
            )Total
      Operations Expense/Affiliates
            
            $
            3,583
            
            
            $
            3,200
            
            
            $
            11,378
            
            
            $
            10,141








5.
            FINANCIAL
      INSTRUMENTS:





Restricted
Investments - In accordance with the terms of our tax-exempt first
mortgage bonds, unused proceeds are required to be escrowed pending approved
construction expenditures. As of both September 30, 2009 and December 31, 2008,
the escrowed proceeds, including interest earned, totaled $0.1
million.





Long-Term
Receivables– SJG provides
financing to customers for the purpose of attracting conversions to natural gas
heating systems from competing fuel sources.  The terms of these loans
call for customers to make monthly payments over a period of up to five years
with no interest.  The carrying amounts of such loans were $10.2
million and $10.1 million as of September 30, 2009 and December 31, 2008,
respectively.  The current portion of these receivables is reflected
in Accounts Receivable and the non-current portion is reflected in Long-Term
Receivables on the balance sheet.  The carrying amounts noted above
are net of unamortized discounts resulting from imputed interest in the amounts
of $1.3 million and $1.2 million as of September 30, 2009 and December 31, 2008,
respectively.  The annual amortization to interest is not material to
SJG’s financial statements.





SJG-18




Other
Financial Instruments -   The estimated fair values of
SJG’s long-term debt, including current maturities, as of September 30, 2009 and
December 31, 2008, were $353.6 million and $326.1 million,
respectively.  Carrying amounts as of both September 30, 2009 and
December 31, 2008, were $294.9 million.  We based the estimates on
interest rates available to SJG at the end of each period for debt with similar
terms and maturities.  The carrying amounts of SJG’s other financial
instruments approximate their fair values at September 30, 2009 and December 31,
2008.





6.
            UNUSED
      LINES OF CREDIT:





Credit
facilities and available liquidity as of September 30, 2009 were as follows (in
thousands):





Total
      Facility
            
            
            Usage
      (A)
            
            
            Available
      Liquidity
            
            Expiration
      DateRevolving
      Credit Facility
            
            $
            100,000
            
            
            $
            80,100
            
            
            $
            19,900
            
            August
      2011Line
      of Credit
            
            
            40,000
            
            
            
            —
            
            
            
            40,000
            
            December
      2009 (B)Uncommitted
      Bank Lines
            
            
            45,000
            
            
            
            6,500
            
            
            
            38,500
            
            VariousTotal
            
            $
            185,000
            
            
            $
            86,600
            
            
            $
            98,400





(A)  Includes
letter of credit in the amount of $0.1 million.


(B)  SJG
anticipates extending this line of credit during the fourth quarter of
2009.





All
committed facilities contain one financial covenant regarding the ratio of total
debt to total capitalization, measured on a quarterly basis.  SJG was
in compliance with these covenants as of September 30,
2009.  Borrowings under these credit facilities are at market
rates.  The weighted average borrowing cost, which changes daily, was
0.64% and 3.66% at September 30, 2009 and 2008, respectively.





7.
            RETAINED
      EARNINGS:





SJG is
restricted as to the amount of cash dividends or other distributions that may be
paid on its common stock by an order issued by the BPU in July 2004 that granted
SJG an increase in base rates. Per the order, SJG is required to maintain total
common equity of no less than $289.2 million. SJG’s total common equity balance
was $420.6 million at September 30, 2009.





SJG-19




Various
loan agreements also contain potential restrictions regarding the amount of cash
dividends or other distributions that SJG may pay on its common stock. As of
September 30, 2009, these loan restrictions did not affect the amount that may
be distributed from SJG’s retained earnings.





8.
            PENSION
      AND OTHER POSTRETIREMENT BENEFITS:





For the
three and nine months ended  September 30, 2009 and 2008, net periodic
benefit cost related to the employee and officer pension and other
postretirement benefit plans consisted of the following components (in
thousands):





Pension
      BenefitsThree
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Service
      Cost
            
            $
            622
            
            
            $
            572
            
            
            $
            1,866
            
            
            $
            1,715Interest
      Cost
            
            
            1,676
            
            
            
            1,488
            
            
            
            5,029
            
            
            
            4,462Expected
      Return on Plan Assets
            
            
            (1,457
            )
            
            
            (1,863
            )
            
            
            (4,370
            )
            
            
            (5,587
            )Amortizations:Prior
      Service Cost
            
            
            54
            
            
            
            52
            
            
            
            161
            
            
            
            157Actuarial
      Loss
            
            
            1,043
            
            
            
            288
            
            
            
            3,127
            
            
            
            862Net
      Periodic Benefit Cost
            
            
            1,938
            
            
            
            537
            
            
            
            5,813
            
            
            
            1,609Capitalized
      Benefit Costs
            
            
            (949
            )
            
            
            (263
            )
            
            
            (2,848
            )
            
            
            (788
            )Total
      Net Periodic Benefit Expense
            
            $
            989
            
            
            $
            274
            
            
            $
            2,965
            
            
            $
            821





Other
      Postretirement BenefitsThree
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Service
      Cost
            
            $
            155
            
            
            $
            175
            
            
            $
            466
            
            
            $
            524Interest
      Cost
            
            
            678
            
            
            
            534
            
            
            
            2,034
            
            
            
            1,600Expected
      Return on Plan Assets
            
            
            (351
            )
            
            
            (396
            )
            
            
            (1,054
            )
            
            
            (1,188
            )Amortizations:Prior
      Service Credits
            
            
            (63
            )
            
            
            (64
            )
            
            
            (190
            )
            
            
            (192
            )Actuarial
      Loss
            
            
            562
            
            
            
            135
            
            
            
            1,310
            
            
            
            403Net
      Periodic Benefit Cost
            
            
            981
            
            
            
            384
            
            
            
            2,566
            
            
            
            1,147Capitalized
      Benefit Costs
            
            
            (480
            )
            
            
            (188
            )
            
            
            (1,257
            )
            
            
            (562
            )Total
      Net Periodic Benefit Expense
            
            $
            501
            
            
            $
            196
            
            
            $
            1,309
            
            
            $
            585





Capitalized
benefit costs reflected in the table above relate to our construction program.
Du ring the
nine months ended September 30, 2009 and 2008, SJG contributed $8.2 million and
$4.8 million to its pension plans,
respectively.     See Note 11 to the Financial
Statements in Item 8 of SJG’s Form 10-K as of December 31, 2008, for additional
information related to SJG’s pension and other postretirement
benefits.





SJG-20




9.
            COMMITMENTS
      AND CONTINGENCIES:





STANDBY
LETTER OF CREDIT -    SJG provided a $25.2 million letter of
credit, under a separate credit facility from those it borrows under to provide
liquidity support for the remarketing of variable-rate demand bonds issued
through the NJEDA. The bonds were used to finance the expansion of SJG’s natural
gas distribution system.  This letter of credit expires in August
2010.





ENVIRONMENTAL
REMEDIATION COSTS - SJG incurred and recorded costs for environmental cleanup of
12 sites where SJG or its predecessors operated gas manufacturing plants. SJG
stopped manufacturing gas in the 1950s. There have been no changes to the status
of SJG’s environmental remediation efforts since December 31,
2008,  as described in Note 12 to the Financial Statements in Item 8
of SJG’s Form 10-K as of December 31, 2008.





GAS
SUPPLY RELATED CONTRACTS - In the normal course of conducting business, we have
entered into long-term contracts for natural gas supplies, firm transportation
and gas storage service. SJG expects to renew each of these contracts under
renewal provisions as provided in each contract. The transportation and storage
service agreements between us and our interstate pipeline suppliers were made
under FERC approved tariffs. Our cumulative obligation for demand charges and
reservation fees paid to suppliers for these services is approximately $4.3
million per month and is recovered on a current basis through the
BGSS.





PENDING
LITIGATION - We are subject to claims arising in the ordinary course of business
and other legal proceedings. We accrue liabilities related to these claims when
we can reasonably estimate the amount or range of amounts of probable settlement
costs or other charges. Management does not currently anticipate the disposition
of any known claims to have a material adverse effect on our financial position,
results of operations or liquidity.





COLLECTIVE
BARGAINING AGREEMENTS- Unionized personnel
represent 65% of our workforce at September 30, 2009. The Company has collective
bargaining agreements with two unions who represent these employees: the
International Brotherhood of Electrical Workers (“IBEW”) and the International
Association of Machinists and Aerospace Workers (“IAM”).  The Company and
the IBEW have recently agreed to a new 4-year contract that runs through
February 2013.    The Company and the IAM recently agreed to a
new contract that runs through August 2014.





SJG-21




10.
            FAIR
      VALUE OF FINANCIAL ASSETS AND FINANCIAL
  LIABILITIES:





GAAP
establishes a hierarchy that prioritizes fair value measurements based on the
types of inputs used for the various valuation techniques.  The levels
of the hierarchy are described below:





·
            Level
      1:  Observable inputs such as quoted prices in active markets
      for identical assets or
liabilities.





·
            Level
      2:  Inputs other than quoted prices that are observable for the
      asset or liability, either directly or indirectly; these include quoted
      prices for similar assets or liabilities in active markets and quoted
      prices for identical or similar assets or liabilities in markets that are
      not active.





·
            Level
      3:  Unobservable inputs that reflect the reporting entity’s own
      assumptions.





Assessment
of the significance of a particular input to the fair value measurement requires
judgment and may affect the valuation of financial assets and financial
liabilities and their placement within the fair value hierarchy.





For
financial assets and financial liabilities measured at fair value on a recurring
basis, information about the fair value measurements for each major category as
of September 30, 2009 is as follows (in thousands):





Total
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3Assets -Available-for-Sale
      Securities (A)
            
            $
            5,695
            
            
            $
            5,695
            
            
            $
            -
            
            
            $
            -Derivatives
      – Energy Related Assets (B)
            
            
            3,220
            
            
            
            2,579
            
            
            
            641
            
            
            
            -$
            8,915
            
            
            $
            8,274
            
            
            $
            641
            
            
            $
            -Liabilities -Derivatives
      – Energy Related Liabilities (B)
            
            $
            15,522
            
            
            $
            14,221
            
            
            $
            1,301
            
            
            $
            -Derivatives
      – Other (C)
            
            
            3,682
            
            
            
            -
            
            
            
            3,682
            
            
            
            -$
            19,204
            
            
            $
            14,221
            
            
            $
            4,983
            
            
            $
            -





(A) Available-for-Sale
Securities are valued using the quoted principal market close prices that are
provided by the trustees of these securities.





SJG-22




(B)
Derivatives – Energy Related Assets and Liabilities are traded in both
exchange-based and non-exchange-based markets. Exchange-based contracts are
valued using unadjusted quoted market sources in active markets and are
categorized in Level 1 in the fair value hierarchy. Certain non-exchange-based
contracts are valued using indicative price quotations available through brokers
or over-the-counter, on-line exchanges and are categorized in Level 2. These
price quotations reflect the average of the bid-ask mid-point prices and are
obtained from sources that management believes provide the most liquid market.
For non-exchange-based derivatives that trade in less liquid markets with
limited pricing information, model inputs generally would include both
observable and unobservable inputs. In instances where observable data is
unavailable, management considers the assumptions that market participants would
use in valuing the asset or liability. This includes assumptions about market
risks such as liquidity, volatility and contract duration. Such instruments are
categorized in Level 3 as the model inputs generally are not observable.
Management reviews and corroborates the price quotations to ensure the prices
are observable which includes consideration of actual transaction volumes,
market delivery points, bid-ask spreads and contract duration.





(C)
Derivatives – Other are valued using quoted prices on commonly quoted intervals,
which are interpolated for periods different than the quoted intervals, as
inputs to a market valuation model.  Market inputs can generally be
verified and model selection does not involve significant management
judgment.





11.
            AVAILABLE–FOR–SALE
      SECURITIES:





SJG's
portfolio of investments consists of five highly diversified funds which are not
used for working capital purposes. These funds are in an unrealized loss
position as of September 30, 2009. Due to the nature of the underlying
securities, these funds as a whole are susceptible to changes in the economy and
have been adversely affected by the economic slowdown, particularly during the
fourth quarter of 2008 when SJG’s investments became impaired. SJG has evaluated
the near-term prospects of the overall funds in relation to the severity and
duration of the impairment. Based on that evaluation, SJG recorded an
insignificant impairment loss during the fourth quarter of 2008. SJG does not
intend to sell the remaining funds, and it is more likely than not it will not
have to sell the remaining funds before recovery of its cost basis. SJG does not
consider these remaining investments to be other-than-temporarily impaired at
September 30, 2009.





SJG-23




The
following table shows the gross unrealized losses and fair value of the SJG's
Available-for-Sale Securities with unrealized losses that are not deemed to be
other-than-temporarily impaired (in thousands), aggregated by length of time
that the individual funds have been in a continuous unrealized loss position at
September 30, 2009.





Less
      than 12 Months
            
            
            Greater
      Than 12 Months
            
            
            TotalFair
      Value
            
            
            Unrealized
      Losses
            
            
            Fair
      Value
            
            
            Unrealized
      Losses
            
            
            Fair
      Value
            
            
            Unrealized
      LossesMarketable
      Equity Securities
            
            $
            -
            
            
            $
            -
            
            
            $
            4,245
            
            
            $
            655
            
            
            $
            4,245
            
            
            $
            655





As of
September 30, 2009 and December 31, 2008, the total losses for securities with
net losses included in Accumulated Other Comprehensive Loss was $0.4 million and
$0.7 million, respectively.  As of September 30, 2009 and December 31,
2008, securities with net gains included in Accumulated Other Comprehensive Loss
was $0.1 million and zero, respectively.





Item 2. Management’s
Discussion and Analysis


of Financial Condition
and Results of Operations (Unaudited)





OVERVIEW:





Organization
- SJG is an operating public utility company engaged in the purchase,
transmission and sale of natural gas for residential, commercial and industrial
use. SJG also sells natural gas and pipeline transportation capacity (off-system
sales) on a wholesale basis to various customers on the interstate pipeline
system and transports natural gas purchased directly from producers or suppliers
to their customers. SJG served 339,894 customers at September 30, 2009
compared with 336,004 customers at September 30, 2008.





Forward-Looking
Statements and Risk Factors- Certain statements
contained in this Quarterly Report may qualify as “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements other than statements of
historical fact included in this Report should be considered forward-looking
statements made in good faith by the Company and are intended to qualify for the
safe harbor from liability established by the Private Securities Litigation
Reform Act of 1995. Words such as “anticipate”, “believe”, “expect”, “estimate”,
“forecast”, “goal”, “intend”, “objective”, “plan”, “project”, “seek”, “strategy”
and similar expressions are intended to identify forward-looking statements.
Such forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed or implied
in the statements. These risks and uncertainties include, but are not limited
to, the following: general economic conditions on an international, national,
state and local level; weather conditions in our marketing areas; changes in
commodity costs; changes in the availability of natural gas; “non-routine” or
“extraordinary” disruptions in our distribution system; regulatory, legislative
and court decisions; competition; the availability and cost of capital; costs
and effects of legal proceedings and environmental liabilities; the failure of
customers or suppliers to fulfill their contractual obligations; and changes in
business strategies.





SJG-24




A
discussion of these and other risks and uncertainties may be found in SJG’s Form
10-K for the year ended December 31, 2008 and in other filings made by us with
the Securities and Exchange Commission. These cautionary statements should not
be construed by you to be exhaustive and they are made only as of the date of
this Quarterly Report on Form 10-Q, or in any document incorporated by
reference, at the date of such document. While SJG believes these
forward-looking statements to be reasonable, there can be no assurance that they
will approximate actual experience or that the expectations derived from them
will be realized. Further, SJG undertakes no obligation to update or revise any
of its forward-looking statements, whether as a result of new information,
future events or otherwise.





Critical
Accounting Policies-Estimates
and Assumptions - Management must make estimates and assumptions that
affect the amounts reported in the condensed financial statements and related
disclosures. Actual results could differ from those estimates. Five types of
transactions presented in our condensed financial statements require a
significant amount of judgment and estimation. These relate to regulatory
accounting, derivatives, environmental remediation costs, pension and other
postretirement benefit costs, and revenue recognition. A discussion of these
estimates and assumptions may be found in SJG’s Form 10-K for the year ended
December 31, 2008.





New
Accounting Pronouncements-See detailed discussions
concerning New Accounting Pronouncements and their impact in Note 1 to the
condensed financial statements.





SJG-25




Regulatory
Actions– Other than the changes discussed in Note 2 to the condensed
financial statements, there have been no significant regulatory actions since
December 31, 2008. See detailed discussions concerning Regulatory Actions in
Note 2 to the Financial Statements in item 8 of SJG’s Form 10-K for the year
ended December 31, 2008.





Environmental
Remediation –There have been no significant changes to the status of
SJG’s environmental remediation efforts since December 31, 2008. See detailed
discussion concerning Environmental Remediation in Note 12 to the Financial
Statements in item 8 of SJG’s Form 10-K for the year ended December 31,
2008.





Competition-See detailed discussion
concerning competition in SJG’s Form 10-K for the year ended December 31,
2008.





Customer
Choice Legislation-All residential natural gas customers in New Jersey can choose their
natural gas commodity supplier under the terms of the “Electric Discount and Energy
Competition Act of 1999.” This bill created the framework and necessary
time schedules for the restructuring of the state’s electric and natural gas
utilities. The Act established unbundling, under which
redesigned utility rate structures allow natural gas and electric consumers to
choose their energy supplier.  Customers purchasing natural gas from a
provider other than the local utility (marketer) are charged for the gas costs
by the marketer and charged for the transportation costs by the
utility.   The number of customers purchasing their natural gas
from marketers was 29,019 and 28,210 at September 30, 2009 and 2008,
respectively.




SJG-26


RESULTS
OF OPERATIONS:
 
 The
following table summarizes the composition of selected gas utility data for
the three and nine months ended September 30, (in thousands, except for
degree day data):


Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Throughput – dth:Firm
      Sales -Residential
            
            
            1,706
            
            
            
            1,559
            
            
            
            16,070
            
            
            
            14,490Commercial
            
            
            673
            
            
            
            652
            
            
            
            4,319
            
            
            
            4,065Industrial
            
            
            26
            
            
            
            13
            
            
            
            231
            
            
            
            103Cogeneration
      & Electric Generation
            
            
            176
            
            
            
            156
            
            
            
            278
            
            
            
            528Firm
      Transportation -Residential
            
            
            139
            
            
            
            136
            
            
            
            1,410
            
            
            
            1,351Commercial
            
            
            647
            
            
            
            598
            
            
            
            4,132
            
            
            
            3,927Industrial
            
            
            2,906
            
            
            
            3,095
            
            
            
            8,875
            
            
            
            9,542Cogeneration
      & Electric Generation
            
            
            799
            
            
            
            1,115
            
            
            
            1,518
            
            
            
            2,040Total
      Firm Throughput
            
            
            7,072
            
            
            
            7,324
            
            
            
            36,833
            
            
            
            36,046Interruptible
      Sales
            
            
            -
            
            
            
            1
            
            
            
            4
            
            
            
            28Interruptible
      Transportation
            
            
            492
            
            
            
            509
            
            
            
            1,700
            
            
            
            2,034Off-System
            
            
            544
            
            
            
            1,458
            
            
            
            4,309
            
            
            
            7,330Capacity
      Release
            
            
            10,560
            
            
            
            20,196
            
            
            
            28,023
            
            
            
            47,253Total
      Throughput
            
            
            18,668
            
            
            
            29,488
            
            
            
            70,869
            
            
            
            92,691





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Utility Operating Revenues:Firm
      Sales -Residential
            
            $
            33,929
            
            
            $
            26,587
            
            
            $
            243,212
            
            
            $
            214,098Commercial
            
            
            9,129
            
            
            
            9,650
            
            
            
            53,663
            
            
            
            53,449Industrial
            
            
            309
            
            
            
            874
            
            
            
            2,637
            
            
            
            6,051Cogeneration
      & Electric Generation
            
            
            1,267
            
            
            
            2,166
            
            
            
            2,312
            
            
            
            7,453Firm
      Transportation -Residential
            
            
            1,090
            
            
            
            1,081
            
            
            
            7,413
            
            
            
            7,161Commercial
            
            
            2,449
            
            
            
            2,124
            
            
            
            13,435
            
            
            
            12,532Industrial
            
            
            3,638
            
            
            
            2,974
            
            
            
            10,841
            
            
            
            9,247Cogeneration
      & Electric Generation
            
            
            681
            
            
            
            599
            
            
            
            1,474
            
            
            
            1,356Total
      Firm Revenues
            
            
            52,492
            
            
            
            46,055
            
            
            
            334,987
            
            
            
            311,347Interruptible
      Sales
            
            
            (16
            )
            
            
            22
            
            
            
            79
            
            
            
            304Interruptible
      Transportation
            
            
            465
            
            
            
            334
            
            
            
            1,551
            
            
            
            1,301Off-System
            
            
            1,904
            
            
            
            14,403
            
            
            
            23,154
            
            
            
            72,989Capacity
      Release
            
            
            1,171
            
            
            
            3,512
            
            
            
            3,594
            
            
            
            9,265Other
            
            
            289
            
            
            
            237
            
            
            
            888
            
            
            
            832Total
      Utility Operating Revenues
            
            
            56,305
            
            
            
            64,563
            
            
            
            364,253
            
            
            
            396,038Less:Cost
      of Sales
            
            
            31,726
            
            
            
            41,201
            
            
            
            227,608
            
            
            
            264,381Conservation
      Recoveries*
            
            
            1,247
            
            
            
            1,116
            
            
            
            6,636
            
            
            
            6,149RAC
      Recoveries*
            
            
            1,210
            
            
            
            695
            
            
            
            3,627
            
            
            
            2,084EET
      Recoveries*
            
            
            81
            
            
            
            -
            
            
            
            81
            
            
            
            -Revenue
      Taxes
            
            
            921
            
            
            
            870
            
            
            
            6,263
            
            
            
            5,912Utility
      Margin
            
            $
            21,120
            
            
            $
            20,681
            
            
            $
            120,038
            
            
            $
            117,512Margin:Residential
            
            $
            12,699
            
            
            $
            12,094
            
            
            $
            74,836
            
            
            $
            69,230Commercial
      and Industrial
            
            
            6,325
            
            
            
            6,185
            
            
            
            28,779
            
            
            
            27,334Cogeneration
      and Electric Generation
            
            
            875
            
            
            
            641
            
            
            
            1,750
            
            
            
            1,540Interruptible
            
            
            8
            
            
            
            11
            
            
            
            96
            
            
            
            92Off-system
      & Capacity Release
            
            
            208
            
            
            
            572
            
            
            
            1,108
            
            
            
            2,160Other
      Revenues
            
            
            859
            
            
            
            1,085
            
            
            
            2,075
            
            
            
            1,868Margin
      Before Weather Normalization & Decoupling
            
            
            20,974
            
            
            
            20,588
            
            
            
            108,644
            
            
            
            102,224CIRT
      Mechanism
            
            
            551
            
            
            
            -
            
            
            
            926
            
            
            
            -CIP
      Mechanism
            
            
            (409
            )
            
            
            93
            
            
            
            10,464
            
            
            
            15,288EET
      Mechanism
            
            
            4
            
            
            
            -
            
            
            
            4
            
            
            
            -Utility
      Margin
            
            $
            21,120
            
            
            $
            20,681
            
            
            $
            120,038
            
            
            $
            117,512Degree Days:
            
            
            34
            
            
            
            18
            
            
            
            3,033
            
            
            
            2,753








SJG-27





Throughput
- Total gas throughput decreased 10.8 MMdts or 36.7%, and 21.8 MMdts, or 23.5%,
for the three and nine months ended September 30, 2009, compared with the same
periods in 2008, respectively.  Off-System sales (OSS) and capacity release
volume decreased substantially as SJG’s portfolio of assets available for such
activities has been reduced under the Conservation Incentive Program, as
discussed under “Rates and Regulation” in Item 7 of SJG’s Form 10-K for the year
ended December 31, 2008.  As the majority of profits from OSS and
capacity release are returned to the ratepayers via a BPU-approved sharing
formula, the decrease in such activities had a negligible impact on SJG earnings
as reflected in the margin table above.  Firm
throughput increased in the residential market, primarily on a year-to-date
basis, as a result of 10.2% colder weather, as reflected by the degree day
data in the table above, and the addition of 3,672 residential customers during
the 12-month period ended September 30, 2009.  Changes in throughput in
other customer categories were not significant.





Conservation
Incentive Program (CIP) - The effects of the CIP on our net income and
the associated weather comparisons were as follows ($’s in
millions):





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      Income Benefit:CIP
      – Weather Related
            
            $
            -
            
            
            $
            -
            
            
            $
            (0.1
            )
            
            $
            1.6CIP
      – Usage Related
            
            
            (0.2
            )
            
            
            0.1
            
            
            
            6.3
            
            
            
            7.4Total
      Net Income Benefit
            
            $
            (0.2
            )
            
            $
            0.1
            
            
            $
            6.2
            
            
            $
            9.0Weather
      Compared to 20-Year Average
            
            30.5%
      warmer
            
            
            62.5%
      warmer
            
            
            0.2%
      colder
            
            
            9.0%
      warmerWeather
      Compared to Prior Year
            
            85.3%
      colder
            
            
            14.3%
      warmer
            
            
            10.2%
      colder
            
            
            7.8%
      warmer




SJG-28




Operating
Revenues  - Revenues decreased $8.3 million during the three months
ended September 30, 2009 compared to the same period in the prior
year.  This was the result of a substantial decrease in off-system
sales (OSS) and capacity release revenue, which decreased by $12.5 million and
$2.3 million, respectively, during the third quarter of 2009 versus
2008.  These decreases were primarily related to a reduction in SJG’s
portfolio of assets available for such activities under the provisions of the
CIP during 2008, as noted above under “Throughput,” and a significant decrease
in the average cost per unit sold during 2009.  As a result of steady
declines in the cost on natural gas prices during 2009, OSS unit sales prices
had dropped from an average of $9.88 per decatherm (Dt) during the third quarter
of 2008 to only $3.50 per Dt during the third quarter of 2009.  As
reflected in the Margin table above, the impact of lower OSS and Capacity
Release did not have a material impact on the earnings of the Company, as SJG is
required to share 85% of the profits of such activity with the rate
payers.  The decreases noted above were partially offset by higher
revenue from firm customers in the third quarter of 2009 as a result of colder
weather during the month of September 2009, compared with last September, and
the addition of 3,890 customers over the last twelve
months.    Further adding to revenue during the third
quarter of 2009 was the recognition of $5.7 million of revenue under the Basic
Gas Supply Service (BGSS) clause that had previously been
deferred.  While changes in gas costs and BGSS recoveries may
fluctuate from period to period, SJG does not profit from the sale of the
commodity.  Therefore, corresponding fluctuations in Operating Revenue
or Cost of Sales have no impact on Company profitability, as further discussed
under “Margin.”





Revenues
decreased $31.8 million during the nine months ended September 30, 2009 compared
to the same period in the prior year.  This decrease was the result of
a substantial decrease in off-system sales (OSS) and capacity release revenue,
which decreased by $49.8 million and $5.7 million, respectively, during the
first nine months of 2009 versus 2008.  These decreases were partially
offset by several factors including higher firm sales resulting from 10.2%
colder weather during the first nine months of 2009, the addition of 3,890
customers over the last twelve months, and a higher Basic Gas Supply Service
(BGSS) rate in effect during the period.  During the nine months ended
September 30, 2009, the BGSS rate was 11.1% higher than the rate in effect
during the same time last year and resulted in an additional $25.3 million of
revenue over the prior year.   This increase was necessary to fully
recover higher gas costs incurred through most of 2008.  However, as
SJG does not profit from the sale of the commodity, the BGSS rate increase did
not have an impact on Company profitability.





Margin
(pre-tax)-SJG’s
margin is defined as natural gas revenues less natural gas costs; volumetric and
revenue based energy taxes; and regulatory rider expenses. SJG believes that
margin provides a more meaningful basis for evaluating utility operations than
revenues since natural gas costs, energy taxes and regulatory rider expenses are
passed through to customers, and therefore, they have no effect on margin.
Natural gas costs are charged to operating expenses on the basis of therm sales
at the prices approved by the New Jersey Board of Public Utilities through SJG’s
BGSS tariff.





SJG-29




Total
margin increased $0.4 million, or 2.1%, for the three months ended September 30,
2009 compared with the same period in 2008 due to customer additions, as noted
above, and profits earned through the Company’s Capital Investment Recovery
Tracker (CIRT).   As discussed in Note 2 to the Financial Statements,
the CIRT was approved by the BPU in April 2009. The CIRT allows the Company to
accelerate certain capital spending and also earn a return of, and a return on,
investment at the time the investment is made. The CIRT added $0.6 million of
pre-tax margin in the third quarter of 2009. Partially offsetting these
increases were lower margins from OSS and capacity release resulting from
decreased volumes as discussed above under “Throughput” and “Operating
Revenues”.





Total
margin increased $2.5 million, or 2.1%, for the nine months ended September 30,
2009 compared with the same period in 2008 primarily due to customer additions,
and increased earnings from the CIRT as noted above.  Partially
offsetting these increases were lower margins from OSS and capacity release as
noted above.  The CIP protected $10.5 million of pre-tax margin in the
first nine months of 2009 that would have been lost due to lower customer usage,
compared to $15.3 million in the same period last year.  Of these
amounts, $(0.2) million and $2.7 million were related to weather variations and
$10.7 million and $12.6 million were related to other customer usage variations
in 2009 and 2008, respectively.





Operating
Expenses - A summary of changes in operating expenses (in
thousands):





Three
      Months
              Ended
      September 30,
            
            
            Nine
      Months
              Ended
      September 30,2009
      vs. 2008
            
            
            2009
      vs. 2008Operations
            
            $
            1,351
            
            
            $
            6,062Maintenance
            
            
            376
            
            
            
            750Depreciation
            
            
            382
            
            
            
            909Energy
      and Other Taxes
            
            
            60
            
            
            
            359





Operations– Operations expense
increased $1.3 million and $6.1 million for the three and nine months ended
September 30, 2009, respectively, as compared with the same periods in
2008.  The increase is primarily comprised of the following
factors.





SJG-30




First,
the cost of providing employee benefits, including pension and other
postretirement benefit plans, increased by $1.0 million and $3.0 million for the
three and nine months ended September 30, 2009, respectively, as compared to the
same periods in 2008.  This was the result of significant losses in
the assets of those plans during 2008. Additional information regarding these
benefit plans can be found in Note 8 of the Notes to the Condensed Financial
Statements.  Second, our spending under the New Jersey Clean Energy
Programs (NJCEP) increased $0.2 million per quarter compared to the same periods
last year.  Such costs are recovered on a dollar-for-dollar basis;
therefore, SJG experienced an offsetting increase in revenues during the period.
The BPU-approved NJCEP allows for full recovery of costs, including carrying
costs when applicable.  As a result, the increase in expense had no
impact on our net income.  Third, corporate support, governance and
compliance costs, primarily attributable to our parent, SJI, also rose $0.4
million and $0.9 million for the three and nine months ended September 30, 2009,
respectively, as compared to the same periods in 2008.  Fourth,
expenses associated with the reserve for uncollectible customer accounts
(decreased) increased $(0.3) million for the three months and $0.3 million
for the nine months ended September 30, 2009 compared with the same periods
last year.   Changes in the uncollectible reserve are the result of
fluctuations in levels of customer account receivable balances, which were
higher than one year ago due to colder weather, more customers and a higher BGSS
rate in effect, as discussed previously under “Operating Revenues.” Finally, SJG
experienced increases in various other areas including general compensation
increases; higher bank fees to support higher lines of credit available to the
Company; and higher insurance costs.





Maintenance
- Maintenance expense increased during the three and nine months ended September
30, 2009, compared with the same periods in 2008, primarily due to higher levels
of Remediation Adjustment Clause (RAC) amortization.  RAC-related
expenses do not affect earnings as we recognize an offsetting amount in
revenues.





Depreciation
- Depreciation expense increased during the three and nine months ended
September 30, 2009, as compared with the same periods in 2008, due mainly to
SJG’s continuing investment in utility plant.





SJG-31




Energy
and Other Taxes - Energy and Other Taxes increased during the three and
nine months ended September 30, 2009, compared with the same periods in 2008,
primarily due to higher energy-related taxes. Higher taxable firm throughput in
2009 resulted from colder weather and more customers, as previously
discussed.





Interest
Charges–
Interest Charges decreased by $0.5 million and $1.8 million during the three and
nine months ended September 30, 2009, compared with the same periods in
2008.   The decreases were the result of significantly lower
average short-term interest rates, partially offset by higher debt levels during
2009.





LIQUIDITY AND CAPITAL
RESOURCES:





Liquidity
needs are driven by factors that include natural gas commodity prices; the
impact of weather on customer bills; lags in fully collecting gas costs from
customers under the Basic Gas Supply Service charge; the timing of construction
and remediation expenditures and related permanent financings; mandated tax
payment dates; both discretionary and required repayments of long-term debt; and
the amounts and timing of dividend payments.





Cash
Flows from Operating Activities -    Liquidity needs
are first met with net cash provided by operating activities.  Net
cash provided by operating activities totaled $86.3 million and $35.8 million in
the first nine months of 2009 and 2008, respectively.  Net cash
provided by operating activities varies from year-to-year primarily due to the
impact of weather on customer demand and related gas purchases, customer usage
factors related to conversion efforts and the price of the natural gas
commodity, inventory utilization, and gas cost recoveries.  Net cash
provided by operating activities in the first nine months of 2009 compared
favorably to the same period in 2008 as the price of natural gas in storage at
the end of 2008 was much higher than at the prior year end.  The
withdrawal of that high priced gas from inventory and the subsequent
replenishment of those inventories with low priced gas, coupled with higher
weather related customer demand, significantly increased cash inflows in the
first nine months of 2009.  The higher weather related demand also
increased collections from customers under regulatory clauses.  The
Company has also incurred lower environmental remediation costs in 2009 compared
to 2008.  The lower environmental remediation costs include a decrease
in remediation expenditures, as well as increased insurance recoveries in the
first nine months of 2009, compared to the same period in
2008.





SJG-32




Cash
Flows from Investing Activities - SJG has a continuing need for cash
resources for capital purchases, primarily to invest in new and replacement
facilities and equipment. Cash used for capital purchases was $54.9 million and
$37.3 million during the first nine months of 2009 and 2008,
respectively.  The increase is primarily due to the accelerated
infrastructure investment program which was approved by the BPU in April 2009
and allows the Company to accelerate $103.0 million of capital spending into
2009 and 2010.  We estimate the net cash outflows for construction
projects for fiscal years 2009, 2010 and 2011 to be approximately $129.1
million, $101.2 million and $57.1 million, respectively.





Cash
Flows from Financing Activities - SJG uses short-term borrowings under
lines of credit from commercial banks to supplement cash from operations, to
support working capital needs and to finance capital expenditures as incurred.
From time to time, the Company refinances short-term debt incurred to finance
capital expenditures with long-term debt. Debt is incurred primarily to expand
and upgrade our gas transmission and distribution system and to support seasonal
working capital needs related to inventories and customer
receivables.





Credit
facilities and available liquidity as of September 30, 2009 were as follows (in
thousands):





Total
      Facility
            
            
            Usage
      (A)
            
            
            Available
      Liquidity
            
            Expiration
      DateRevolving
      Credit Facility
            
            $
            100,000
            
            
            $
            80,100
            
            
            $
            19,900
            
            August
      2011Line
      of Credit
            
            
            40,000
            
            
            
            —
            
            
            
            40,000
            
            December
      2009 (B)Uncommitted
      Bank Lines
            
            
            45,000
            
            
            
            6,500
            
            
            
            38,500
            
            VariousTotal
            
            $
            185,000
            
            
            $
            86,600
            
            
            $
            98,400





(A)  Includes
letter of credit in the amount of $0.1 million.


(B)  SJG
anticipates extending this line of credit during the fourth quarter of
2009.





Based
upon the existing credit facilities and a regular dialogue with our banks, we
believe there will continue to be sufficient credit available to meet our future
liquidity needs.





SJG
supplements its operating cash flow and credit lines with both debt and equity
capital. Over the years, the company has used long-term debt, primarily in the
form of First Mortgage Bonds and Medium Term Notes (MTN), secured by the same
pool of utility assets, to finance our long-term borrowing needs. These needs
are primarily capital expenditures for property, plant and equipment. In July
2009, SJG filed a petition with the New Jersey Board of Public Utilities
requesting approval to issue up to $150.0 million in long-term debt by September
2011. The timing, terms and amount will vary depending on market conditions. In
June 2008, SJG repurchased $25.0 million of its auction-rate securities at par
by drawing under its lines of credit. That action resulted in a $25.0 million
reduction in long-term debt on SJG's balance sheet. SJG converted these
auction-rate securities to variable-rate demand bonds and remarketed them to the
public during the third quarter of 2008. No other long-term debt was issued
during 2008 or 2009.





SJG-33




SJG’s
capital structure was as follows:





As
      of
              September 30,
      2009
            
            
            As
      of
              December 31,
      2008Common Equity
            
            
            52.4
            %
            
            
            49.5
            %Long-Term
      Debt
            
            
            36.8
            
            
            
            36.4Short-Term
      Debt
            
            
            10.8
            
            
            
            14.1Total
            
            
            100.0
            %
            
            
            100.0
            %





SJG’s
long-term, senior secured debt is rated “A” and “A2” by Standard & Poor’s
and Moody’s Investor Services, respectively. Moody’s Investor Service raised
SJG’s senior secured rating to “A3” from “Baal” in February of 2009, and then
raised it again to “A2” in August 2009.  Moody’s also assigned an
Issuer Rating of “Baa1” to SJG in August 2009.





SJG is
restricted as to the amount of cash dividends or other distributions that may be
paid on its common stock by an order issued by the BPU in July 2004 that granted
SJG an increase in base rates. Per the order, SJG is required to maintain total
common equity of no less than $289.2 million. SJG’s total common equity balance
was $420.6 million at September 30, 2009.





COMMITMENTS
AND CONTINGENCIES:





SJG has a
continuing need for cash resources and capital, primarily to invest in new and
replacement facilities and equipment, working capital, and for environmental
remediation costs. Net cash outflows for capital expenditures and
remediation projects for the nine months ended September 30, 2009 amounted to
$54.9 million and $3.4 million, respectively. Management estimates net cash
outflows for construction projects for 2009, 2010 and 2011, to be
approximately $129.1 million, $101.2 million and $57.1 million,
respectively.  Total cash outflows for remediation projects are
expected to be $4.8 million, $19.4 million and $10.4 million for 2009, 2010, and
2011, respectively.  As discussed in Notes 2 and 12 to the Financial
Statements in Item 8 of SJG’s 10-K as of December 31, 2008, environmental
remediation costs are subject to recovery from insurance carriers and
ratepayers.





SJG-34




SJG
provided a $25.2 million letter of credit, outside of the revolving credit
facility, to support variable-rate demand bonds issued through the NJEDA to
finance the expansion of SJG's natural gas distribution system.  This
letter of credit expires in August 2010.





SJG has
certain commitments for both pipeline capacity and gas supply for which it pays
fees regardless of usage. Those commitments as of September 30, 2009, average
$44.7 million annually and total $186.1 million over the contracts’ lives.
Approximately 26% of the financial commitments under these contracts expire
during the next five years. SJG expects to renew each of these contracts under
renewal provisions as provided in each contract. SJG recovers all prudently
incurred fees through rates via the Basic Gas Supply Service
clause.





Contractual
Cash Obligations –   Details concerning contractual cash
obligations may be found in SJG’s Form 10-K for the year ended December 31,
2008.  There were no significant changes to SJG’s contractual cash
obligations except for commodity supply purchase obligations which increased by
approximately $29.1 million.  This was primarily due to agreements
made to extend several services for an additional 10-year period, partially
offset by the expiration of obligations during the first nine months of
2009.





Off-Balance
Sheet Arrangements-We have no off-balance sheet arrangements.





Pending
Litigation - We are subject to claims arising in the ordinary course of
business and other legal proceedings. We accrue liabilities related to claims
when we can determine the amount or range of amounts of probable settlement
costs. Management does not currently anticipate the disposition of any known
claims to have a material adverse effect on our financial position, results of
operations or liquidity.





SJG-35




Ratio of
Earnings to Fixed Charges-Our ratio of earnings to
fixed charges for each of the periods indicated is as follows:





Twelve
      Months
              Ended
      Sept. 30,
            
            
            Year
      Ended December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            20044.7
            x
            
            
            4.4
            x
            
            
            4.1
            x
            
            
            3.8
            x
            
            
            4.0
            x
            
            
            3.9
            x





The ratio
of earnings to fixed charges represents, on a pre-tax basis, the number of times
earnings covers fixed charges. Earnings consist of net income, to which has been
added fixed charges and taxes. Fixed charges consist of interest charges,
preferred securities dividend requirements that existed through 2005, and an
interest factor in rentals.





Item
3. Quantitative and Qualitative Disclosures about Market Risks





MARKET
RISKS:





Commodity
Market Risks - We are involved in buying, selling, transporting and
storing natural gas and are subject to market risk due to price fluctuations. To
hedge against this risk, we enter into a variety of physical and financial
transactions including forward contracts, futures and options agreements. To
manage these transactions, we have a well-defined risk management policy
approved by our Board of Directors that includes volumetric and monetary limits.
Management reviews reports detailing activity daily. Generally, the derivative
activities described above are entered into for risk management
purposes.





We
transact commodities on a physical basis and typically do not enter into
financial derivative positions directly. South Jersey Resources Group, LLC
(SJRG), an affiliate by common ownership, manages our risk by entering into the
types of transactions noted above. As part of our gas purchasing strategy, we
use financial contracts to hedge against forward price risk. These contracts are
recoverable through our BGSS, subject to BPU approval. It is management’s
policy, to the extent practical, within predetermined risk management policy
guidelines, to have limited unmatched positions on a deal or portfolio basis
while conducting these activities. As a result of holding open positions to a
minimal level, the economic impact of changes in value of a particular
transaction is substantially offset by an opposite change in the related hedge
transaction. The majority of our contracts are typically less than 12-months
long. The fair value and maturity of all these energy trading and hedging
contracts determined using mark-to-market accounting as of September 30, 2009 is
as follows (in thousands):





SJG-36




AssetsSource
      of Fair Value
            
            Maturity
              <
      1 Year
            
            
            Maturity
              1 -
      3 Years
            
            
            TotalPrices
      Actively Quoted (NYMEX)
            
            $
            1,932
            
            
            $
            647
            
            
            $
            2,579Prices
      Provided by Other External Sources (Basis)
            
            
            309
            
            
            
            332
            
            
            
            641Total
            
            $
            2,241
            
            
            $
            979
            
            
            $
            3,220





LiabilitiesMaturity
            
            
            MaturitySource
      of Fair Value
            
            <
      1 Year
            
            
            1 -
      3 Years
            
            
            TotalPrices
      Actively Quoted (NYMEX)
            
            $
            13,445
            
            
            $
            776
            
            
            $
            14,221Prices
      Provided by Other External Sources (Basis)
            
            
            864
            
            
            
            437
            
            
            
            1,301Total
            
            $
            14,309
            
            
            $
            1,213
            
            
            $
            15,522





NYMEX
(New York Mercantile Exchange) is the primary national commodities exchange on
which natural gas is traded. Basis represents the price of a NYMEX natural gas
futures contract adjusted for the difference in price for delivering the gas at
another location.  Contracted volumes of our NYMEX contracts
are 15.0 MMDth with a weighted-average settlement price of $6.49 per
dth.  Contracted volumes of our Basis contracts are 5.5 MMDth with a
weighted average settlement price of $1.06 per dth.





A
reconciliation of our estimated net fair value of energy-related derivatives
follows (in thousands):





Net
      Derivatives — Energy Related Liability, January 1, 2009
            
            $
            (28,970
            )Contracts
      Settled During the Nine Months ended September 30, 2009,
    Net
            
            
            24,145Other
      Changes in Fair Value from Continuing and New Contracts,
    Net
            
            
            (7,477
            )Net
      Derivatives — Energy Related Liability, September 30, 2009
            
            $
            (12,302
            )





Interest
Rate Risk - Our exposure to interest rate risk relates primarily to
short-term, variable-rate borrowings. Short-term, variable-rate debt outstanding
at September 30, 2009, was $86.5 million and averaged $95.3 million
during the first nine months of 2009. A hypothetical 100 basis point (1%)
increase in interest rates on our average variable-rate debt outstanding would
result in a $0.6 million increase in our annual interest expense, net of tax.
The 100 basis point increase was chosen for illustrative purposes, as it
provides a simple basis for calculating the impact of interest rate changes
under a variety of interest rate scenarios. Over the past five years, the change
in basis points (b.p.) of our average monthly interest rates from the beginning
to end of each year was as follows: 2009 –32 b.p. decrease (year-to-date); 2008
- 317 b.p. decrease; 2007 - 36 b.p. decrease; 2006 - 72 b.p. increase; and 2005
- 191 b.p. increase.  As of September 30, 2009, our average borrowing cost,
which changes daily, was 0.64%.





SJG-37




We issue
long-term debt either at fixed rates or use interest rate derivatives to limit
our exposure to changes in interest rates on variable-rate, long-term debt. As
of September 30, 2009, the interest costs on all of our long-term debt was
either at a fixed-rate or hedged via an interest rate
derivative.  Consequently, interest expense on existing long-term debt
is not significantly impacted by changes in market interest
rates.  However, due to general market conditions during 2008, the
demand for auction-rate securities was disrupted resulting in increased
interest rate volatility for tax-exempt auction-rate debt.  As a result,
the $25.0 million of tax-exempt auction-rate debt issued by the Company (and
repurchased in June 2008) was exposed to changes in interest rates that were not
completely mitigated by the related interest rate derivatives.  The
auction-rate debt was converted to another form of variable-rate debt and resold
in the public market in August 2008.  The original interest rate
derivatives remain in place and are expected to substantially offset changes in
interest rates on the security.





As of
September 30, 2009, SJG’s active interest rate swaps were as
follows:





Amount
            
            
            Fixed
              Interest
      Rate
            
            Start
      Date
            
            Maturity
            
            Type$
            12,500,000
            
            
            
            3.430
            %
            12/01/2006
            
            02/01/2036
            
            Tax-exempt$
            12,500,000
            
            
            
            3.430
            %
            12/01/2006
            
            02/01/2036
            
            Tax-exempt





Item
4. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





SJG’s
management, with the participation of its chief executive officer and chief
financial officer, evaluated the effectiveness of the design and operation of
SJG’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of September 30, 2009. Based on that
evaluation, SJG’s chief executive officer and chief financial officer
concluded   that the disclosure controls and procedures employed
at SJG are effective.





SJG-38




Changes
in Internal Control Over Financial Reporting





There has
not been any change in SJG’s internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the
fiscal quarter ended   September 30, 2009 that has materially
affected, or is reasonably likely to materially affect, SJG’s internal control
over financial reporting.





PART
II — OTHER INFORMATION




Item
l. Legal Proceedings





Information
required by this Item is incorporated by reference to Part I, Item 2, Pending
Litigation, beginning on page 35.




Item
1A. Risk Factors





There
have been no material changes to our risk factors from those disclosed in Part
I, Item 1A of SJG’s Annual Report on Form 10-K for the year ended December 31,
2008:





Item
6. Exhibits


(a)          Exhibits





Exhibit
      No.
            
            Description31.1
            
            Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange
      Act.31.2
            
            Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange
      Act.32.1
            
            Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(b) of the Exchange Act
      as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United
      States Code).32.2
            
            Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act
      as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United
      States Code).




SJG-39




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




SOUTH
JERSEY GAS COMPANY




(Registrant)





Dated:
      November 6, 2009
            By:
            /s/
      Edward J. GrahamEdward
      J. GrahamPresident
      & Chief Executive OfficerDated:
      November 6, 2009
            By:
            /s/
      David A. KindlickDavid
      A. KindlickSenior
      Vice President & Chief Financial
Officer








SJG-40