UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D. C. 20549





FORM
10-K





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


For the
fiscal year ended December 31,
2009





o
            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, New Jersey 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 if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act:     Yes o      No
x





Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities
Act:     Yes o      No
x





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
o




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 (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such
files).oYesoNo


Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
      accelerated filer    o
            
            Accelerated
      filer     oNon-accelerated
      filer      x (Do not check if
      a smaller reporting company)
            
            Smaller
      reporting company o







SJG-1





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





All of
the equity securities of the registrant are owned by South Jersey Industries,
Inc., its parent company, a 1934 Act reporting company named in the registrants
description of its business, which has itself fulfilled its 1934 Act filing
requirements.




The
registrant meets all of the conditions set forth in General Instruction I 1(a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.





Documents Incorporated by
Reference:   None





TABLEOF CONTENTS





Page
      No.Forward-Looking Statements
            3PART
      IItem
      1.
            Business
            4Item
      1A.
            Risk Factors
            10Item
      1B.
            Unresolved Staff Comments
            13Item
      2.
            Properties
            13Item
      3.
            Legal Proceedings
            14Item
      4.
            Reserved
            14PART
      IIItem
      5.
            Market for Registrants' Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            14Item
      6.
            Selected Financial Data
            15Item
      7.
            Management's Discussion and Analysis of Financial Condition and
      Results of Operations
            15Item
      7A.
            Quantitative and Qualitative Disclosures About Market
      Risk
            35Item
      8.
            Financial Statements and Supplementary Data
            38Item
      9.
            Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
            82Item
      9A.
            Controls and Procedures
            82Item
      9B.
            Other Information
            83PART
      IIIItem
      10.
            Directors, Executive Officers and Corporate
      Governance
            83Item
      11.
            Executive Compensation
            83Item
      12.
            Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
            84Item
      13.
            Certain Relationships and Related Transactions, and Director
      Independence
            84Item
      14.
            Principal Accounting Fees and Services
            84PART
      IVItem
      15.
            Exhibits, Financial Statement Schedules
            85Signatures
            90Financial Statement Schedules
            91


SJG-2
 Table of Contents


Forward
Looking Statements





Certain
statements contained in this Annual Report on form 10-K 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. When used
in this Report, or any other of the Company’s documents or oral presentations,
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
risks set forth under “Risk Factors” in Part I, Item 1A of this Annual Report on
Form 10-K and elsewhere throughout this Report. These cautionary statements
should not be construed by you to be exhaustive and they are made only as of the
date of this Report. While South Jersey Gas Company, Inc. (SJG or the Company)
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.





Available
Information-Information regarding SJG can be found at the South Jersey Industries,
Inc. (SJI) internet address, www.sjindustries.com.
We make available free of charge on or through our website SJG’s annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission (SEC). The SEC maintains an Internet site
that contains these reports at http://www.sec.gov.
The content on any web site referred to in this filing is not incorporated by
reference into this filing unless expressly noted otherwise.


SJG-3
 Table of Contents


PARTI





Item 1.
Business





Units of
Measurement





For
      Natural Gas:1
      dt
            =
      One decatherm1
      MMdt
            =
      One million decathermsDts/d
            =
      Decatherms per dayMDWQ
            =
      Maximum daily withdrawal quantity





Description
of Business





South
Jersey Gas Company (SJG) is a regulated natural gas utility. SJG distributes
natural gas in the seven southernmost counties of New Jersey.





Additional
information on the nature of our business is incorporated by reference to
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” “Market Risk” and Note 2, “Rates and Regulatory
Actions”.





Financial Information About
Reportable Segments





Not
applicable.





Rates
and Regulation





Information
on our rates and regulatory affairs is incorporated by reference to
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and Note 2, “Rates and Regulatory Actions”.


SJG-4
 Table of Contents


Sources
and Availability of Raw Materials





Transportation and Storage
Agreements





SJG has
direct connections to the interstate pipeline systems of both Transcontinental
Gas Pipe Line Company, LLC (Transco) and Columbia Gas Transmission, LLC
(Columbia). During 2009, SJG purchased and had delivered approximately 34.4
million decatherms (MMdts) of natural gas for distribution to both on-system and
off-system customers. Of this total, 22.5 MMdts were transported on the Transco
pipeline system while 11.9 MMdts were transported on the Columbia pipeline
system. SJG also secures firm transportation and other long term services from
two additional pipelines upstream of the Transco and Columbia systems. They
include Columbia Gulf Transmission Company, LLC (Columbia Gulf) and Dominion
Transmission, Inc. (Dominion). Services provided by these upstream pipelines are
utilized to deliver gas into either the Transco or Columbia systems for ultimate
delivery to SJG. Services provided by all of the above-mentioned pipelines are
subject to the jurisdiction of the Federal Energy Regulatory Commission
(FERC).  Unless otherwise indicated, our intentions are to renew or
extend these service agreements before they expire.





Transco:





Transco
is SJG’s largest supplier of long-term gas transmission services which includes
both year-round and seasonal firm transportation (FT) service arrangements. When
combined, these FT services enable SJG to purchase gas from third parties and
have delivered to its city gate stations by Transco a total of 280,525 dts per
day (dts/d). Of this total, 133,917 dts/d is long-haul FT (where gas can be
transported from the production areas of the Southwest to the market areas of
the Northeast) while 146,608 dts/d is market area FT. The terms of SJG’s
year-round agreements extend for various periods through 2025. The terms of its
seasonal agreements vary in length with the longest extending into
2013.





Of the
280,525 dts/d of Transco services mentioned above, SJG has released a total of
89,800 dts/d of its long-haul FT and 25,565 dts/d of its market area FT service.
These releases were made in association with SJG’s Conservation Incentive
Program (CIP) discussed further under Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations.





SJG
currently has six long-term gas storage service agreements with Transco that,
when combined, are capable of storing approximately 5.0 MMdts. Through these
agreements, SJG can inject gas into market and production area storages during
periods of low demand and extract gas at a Maximum Daily Withdrawal Quantity
(MDWQ) of up to 107,407 dts during periods of high demand. The terms of these
storage service agreements extend for various periods from 2009 to
2013.  During 2008 SJG released 17,433 dts/d of Transco SS-1 storage
demand and 1,353,159 dts of its SS-1 storage capacity (both represent 100
percent of this service) thereby reducing its Transco maximum daily storage
withdrawal quantity daily to 107,407 dts/d, and its storage capacity to
approximately 5.0 MMdts.  Also released was 17,433 dts/d of winter
season firm transportation service associated with SS-1 storage
service.


SJG-5
 Table of Contents


Dominion:





SJG
currently subscribes to a single firm transportation service from Dominion under
Rate Schedule FTNN.  This service facilitates the transportation of up
to 5,545 dts/d from various Appalachian aggregation points to Transco’s Leidy
Line for ultimate delivery to SJG city gate stations during the winter season
(November through March) each year.  The initial primary term of this
agreement extends through October 31, 2010.





SJG also
subscribes to a firm storage service from Dominion, under its Rate Schedule
GSS.  This storage has a MDWQ of 10,000 dts during the period between
November 16 and March 31 of each winter season, with an associated total storage
capacity of 423,000 dts.  Gas withdrawn from Dominion GSS storage is
delivered through both the Dominion and Transco (Leidy Line) pipeline systems
for delivery to SJG service territory.  The primary term of this
agreement extends through March 31, 2015.





Columbia:





SJG has
two firm transportation agreements with Columbia which, when combined, provide
for 45,022 dts/d of firm deliverability and extend through October 31,
2019.  In 2009, SJG released 14,714 dts/d of this amount to SJRG in
conjunction with its CIP thereby reducing the availability of firm
transportation on the Columbia system to 30,308 dts/d.





SJG also
subscribes to a firm storage service (FSS) with Columbia under three separate
agreements, the longest of which extends through October 31,
2019.  When combined, these three FSS storage agreements provide SJG
with a winter season MDWQ of 52,891 dts with an associated 3,473,022 dts of
storage capacity.  During 2009, SJG released to SJRG 17,500 dts of its
FSS MDWQ along with 1,249,485 dts of its Columbia FSS storage
capacity.  In addition, SJG also released to SJRG 17,500 dts of its
Columbia SST MDWQ transportation service which is associated with FSS
service.  Both of these releases were made by SJG in connection with
its CIP.


SJG-6
 Table of Contents


Columbia
Gulf





Entering
2009, SJG had one firm transportation agreement with Columbia Gulf which
provided up to 45,985 dts/d of firm deliverability in the winter season and
43,137dts/d during the summer season.  This service facilitates the
movement of gas from the production area in southern Louisiana to an
interconnect with the Columbia pipeline system at Leach, KY.  During
2009, SJG permanently released this capacity to SJRG.





Gas
Supplies





SJG no
longer has long-term gas supply agreements with third party
producer-suppliers.  In recent years, due to increased liquidity in
the market place, SJG has replaced its long-term gas supply agreements with
short-term agreements and uses financial contracts secured through SJRG to hedge
against forward price risk.  Short-term agreements typically extend
between one day and several months in duration.  As such, its
long-term contracts were allowed to expire under their terms.





Supplemental Gas
Supplies





During
2009, SJG entered into two seasonal Liquefied Natural Gas (LNG) sales agreements
with two separate third party suppliers. The term of the first agreement which
was used during the 2009 summer season to refill SJG’s storage tank, extended
through November 30, 2009, and had an associated contract quantity of 250,000
dts. The second agreement was acquired to replenish LNG in storage during the
2009-2010 winter season.  This agreement extends through March 31,
2010 and provides SJG with up to 250,000 dts of LNG.





SJG
operates peaking facilities which can store and vaporize LNG for injection into
its distribution system. SJG’s LNG facility has a storage capacity equivalent to
434,300 dts of natural gas and has an installed capacity to vaporize up to
96,750 dts of LNG per day for injection into its distribution
system.





Entering
2009, SJG operated a high-pressure pipe storage field at its New Jersey LNG
facility which was capable of storing 12,420 dts of gas and injecting up to
10,350 dts/d into SJG’s distribution system.  During 2009, SJG retired
this high-pressure storage field as it was no longer required for peaking
services.


SJG-7
 Table of Contents


Peak-Day
Supply





SJG plans
for a winter season peak-day demand on the basis of an average daily temperature
of 2 degrees Fahrenheit (F). Gas demand on such a design day for the
2009-2010 winter season is estimated to be 459,139 dts. SJG projects that
it has adequate supplies and interstate pipeline entitlements to meet its design
requirements. SJG experienced its highest peak-day demand for calendar year 2009
of 429,281 dts on January 16th
while experiencing an average temperature of 12.22 degrees F that
day.





Natural Gas
Prices





SJG’s
average cost of natural gas purchased and delivered in 2009, 2008 and 2007,
including demand charges, was $8.38 per dt, $9.90 per dt and $9.07 per dt,
respectively.





Patents
and Franchises





SJG holds
nonexclusive franchises granted by municipalities in the seven-county area of
southern New Jersey that it serves. No other natural gas public utility
presently serves the territory covered by SJG’s franchises. Otherwise, patents,
trademarks, licenses, franchises and concessions are not material to the
business of SJG.





Seasonal
Aspects





SJG
experiences seasonal fluctuations in sales when selling natural gas for heating
purposes. SJG meets this seasonal fluctuation in demand from its firm customers
by buying and storing gas during the summer months, and by drawing from storage
and purchasing supplemental supplies during the heating season. As a result of
this seasonality, SJG’s revenues and net income are significantly higher during
the first and fourth quarters than during the second and third quarters of the
year.





Working
Capital Practices





Reference
is made to “Liquidity and Capital Resources” included in Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, of
this report.


SJG-8
 Table of Contents


Customers





No
material part of SJG’s business is dependent upon a single customer or a few
customers, the loss of which would have a material adverse effect on SJG’s
business. See Item 1, “Description of Business.”





Backlog





Backlog
is not material to an understanding of SJG’s business.





Government
Contracts





No
material portion of SJG’s business is subject to renegotiation of profits or
termination of contracts or subcontracts at the election of any
government.





Competition





Information
on competition is incorporated by reference to “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”, of this
report.





Research





During
the last three fiscal years, SJG did not engage in research activities to any
material extent.





Environmental
Matters





Information
on environmental matters can be found in Note 11 of the financial statements
included under Item 8 of this report.


SJG-9
 Table of Contents


Employees





SJG had a
total of 396 employees as of December 31, 2009. Of that total, 255 employees are
unionized. There are 38 unionized employees represented by the International
Brotherhood of Electrical Workers (“IBEW”) that operate under a collective
bargaining agreement that runs through February 2013.  The remaining
unionized employees are represented by the International Association of
Machinists and Aerospace Workers (“IAM”).    Employees
represented by the IAM recently agreed to a new collective bargaining agreement
that expires in August 2014.





Financial
Information About Foreign and Domestic Operations and Export Sales





SJG has
no foreign operations and export sales are not a part of its
business.





Item1A. Risk
Factors





SJG
operates in an environment that involves risks, many of which are beyond our
control. The Company has identified the following risk factors that could cause
the Company’s operating results and financial condition to be materially
adversely affected. Security Holders should carefully consider these risk
factors and should also be aware that this list is not all-inclusive of existing
risks. In addition, new risks may emerge at any time, and the Company cannot
predict those risks or the extent to which they may affect the Company’s
businesses or financial performance.





•
            SJG’s business activities
      are concentrated in southern New Jersey. Changes in the economies
      of southern New Jersey and surrounding regions could negatively impact the
      growth opportunities available to SJG and the financial condition of
      customers and prospects of SJG.


•
            Changes in the regulatory
      environment or unfavorable rate regulation may have an unfavorable impact
      on SJG’s financial performance or condition.  SJG’s business
      is regulated by the New Jersey Board of Public Utilities which has
      authority over many of the activities of the business including, but not
      limited to, the rates it charges to its customers, the amount and type of
      securities it can issue, the nature of investments it can make, the nature
      and quality of services it provides, safety standards and other matters.
      The extent to which the actions of regulatory commissions restrict or
      delay SJG’s ability to earn a reasonable rate of return on invested
      capital and/or fully recover operating costs may adversely affect its
      results of operations, financial condition and cash
  flows.


SJG-10
 Table of Contents


•
            SJG may not be able to respond
      effectively to competition, which may negatively impact SJG’s financial
      performance or condition.Regulatory initiatives may provide or
      enhance opportunities for competitors that could reduce utility income
      obtained from existing or prospective customers. Also, competitors may be
      able to provide superior or less costly products or services based upon
      currently available or newly developed
  technologies.


•
            Warm weather, high commodity
      costs, or customer conservation initiatives could result in reduced demand
      for natural gas.While SJG currently has a conservation incentive
      program clause that protects its revenues and gross margin against usage
      that is lower than a set level, the clause is currently approved as a
      pilot program through 2013. Should this clause expire without replacement,
      lower customer energy utilization levels would likely reduce SJG’s net
      income.


•
            High natural gas prices could
      cause more of SJG’s receivables to be uncollectible.Higher levels
      of uncollectibles from utility customers would negatively impact SJG’s
      income and could result in higher working capital
      requirements.


•
            SJG’s net income could decrease
      if it is required to incur additional costs to comply with new
      governmental safety, health or environmental legislation.SJG is
      subject to extensive and changing federal and state laws and regulations
      that impact many aspects of its business; including the storage,
      transportation and distribution of natural gas, as well as the remediation
      of environmental contamination at former manufactured gas plant
      facilities.


•
            Increasing interest rates would
      negatively impact the net income of SJG. SJG is capital intensive,
      resulting in the incurrence of significant amounts of debt financing. SJG
      has issued all long-term debt either at fixed rates or has utilized
      interest rate swaps to mitigate changes in floating rates. However, new
      issues of long-term debt and all variable rate short-term debt are exposed
      to the impact of rising interest
rates.


•
            The inability to obtain
      capital, particularly short-term capital from commercial banks, could
      negatively impact the daily operations and financial performance of SJG.SJG uses short-term borrowings under committed and uncommitted
      credit facilities provided by commercial banks to supplement cash provided
      by operations, to support working capital needs, and to finance capital
      expenditures, as incurred.If the customary
      sources of short-term capital were no longer available due to market
      conditions, SJG may not be able to meet its working capital and capital
      expenditure requirements and borrowing costs could
    increase.


SJG-11
 Table of Contents


•
            A downgrade in SJG’s credit
      rating could negatively affect its ability to access adequate and cost
      effective capital.SJG’s ability to obtain adequate and cost
      effective capital depends largely on its credit ratings, which are greatly
      influenced by financial condition and results of operations. If the rating
      agencies downgrade SJG’s credit ratings, particularly below investment
      grade, SJG’s borrowing costs would increase. In addition, SJG would likely
      be required to pay higher interest rates in future financings and
      potential funding sources would likely
  decrease.


•
            The inability to obtain natural
      gas would negatively impact the financial performance of SJG. 
      SJG’s business is based upon the ability to deliver natural gas to
      customers. Disruption in the production of natural gas or transportation
      of that gas to SJG from its suppliers could prevent SJG from completing
      sales to its customers.


•
            Transporting and storing
      natural gas involves numerous risks that may result in accidents and other
      operating risks and costs.SJG’s gas distribution activities
      involve a variety of inherent hazards and operating risks, such as leaks,
      accidents and mechanical problems, which could cause substantial financial
      losses. In addition, these risks could result in loss of human life,
      significant damage to property, environmental pollution and impairment of
      operations, which in turn could lead to substantial losses. In accordance
      with customary industry practice, SJG maintains insurance against some,
      but not all, of these risks and losses. The occurrence of any of these
      events not fully covered by insurance could adversely affect SJG’s
      financial position, results of operations and cash
  flow.


•
            Adverse results in legal
      proceedings could be detrimental to the financial condition of SJG.
      The outcomes of legal proceedings can be unpredictable and can result in
      adverse judgments.


•
            Proposed climate change
      legislation could impact SJG’s financial performance and
      condition.  Climate change is receiving ever increasing
      attention from scientists and legislators alike.  The debate is
      ongoing as to the extent to which our climate is changing, the potential
      causes of this change and its potential impacts.  Some attribute
      global warming to increased levels of greenhouse gases, which has led to
      significant  legislative and regulatory efforts to limit
      greenhouse gas emissions.  The
      outcome of proposed federal and state actions to address global climate
      change could result in a variety of regulatory programs including
      additional charges to fund energy efficiency activities or other
      regulatory actions.  These actions could affect the demand for
      natural gas and electricity, result in increased costs to our business and
      impact the prices we charge our customers.  Because
      natural gas is a fossil fuel with low carbon content, it is possible that
      future carbon constraints could create additional demands for natural gas,
      both for production of electricity and direct use in homes and
      businesses.  Any adoption by federal or state governments
      mandating a substantial reduction in greenhouse gas emissions could have
      far-reaching and significant impacts on the energy industry.  We
      cannot predict the potential impact of such laws or regulations on our
      future consolidated financial condition, results of operations or cash
      flows.






SJG-12
 Table of Contents


Item1B.
Unresolved Staff Comments





None.





Item2.
Properties





The
principal property of SJG consists of its gas transmission and distribution
systems that include mains, service connections and meters. The transmission
facilities carry the gas from the connections with Transco and Columbia to SJG’s
distribution systems for delivery to customers. As of December 31, 2009, there
were approximately 107.3 miles of mains in the transmission systems and 5,867
miles of mains in the distribution systems.





SJG owns
154 acres of land in Folsom, New Jersey, which is the site of its corporate
headquarters. Approximately 140 acres of this property is deed
restricted.  SJG also has office and service buildings, at six other
locations in the territory. There is a liquefied natural gas storage and
vaporization facility at one of these locations.





As of
December 31, 2009, SJG’s utility plant had a gross book value of $1.3 billion
and a net book value, after accumulated depreciation, of $961.2 million. In
2009, $98.7 million was spent on additions to utility plant and there were
retirements of property having an aggregate gross book cost of $7.2
million.





Virtually
all of SJG’s transmission pipeline, distribution mains and service connections
are in streets or highways or on the property of others. The transmission and
distribution systems are maintained under franchises or permits or
rights-of-way, many of which are perpetual. SJG’s properties (other than
property specifically excluded) are subject to a lien of mortgage under which
its first mortgage bonds are outstanding. We believe these properties are well
maintained and in good operating condition.


SJG-13
 Table of Contents


Item3. Legal
Proceedings





SJG is
subject to claims which arise in the ordinary course of business and other legal
proceedings. We accrue liabilities related to these 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 affect on SJG’s financial position, results of operations or
liquidity.





Item 4. (Reserved)





PART
II





Item5.
Market for the Registrant’s Common Equity


Related Stockholder Matters,
and Issuer Purchases of Equity Securities





Common
equity securities of SJG, owned by its parent company, South Jersey Industries,
Inc., are not traded on any stock exchange. SJG no longer has any preferred
stock outstanding.





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 New Jersey Board of Public
Utilities 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 $431.5 million at December 31,
2009.





SJG is
also restricted under its First Mortgage Indenture, as supplemented, as to the
amount of cash dividends or other distributions that may be paid on its common
stock. As of December 31, 2009, these restrictions did not affect the amount
that may be distributed from SJG’s retained earnings. Dividends of $10.0 million
were declared and paid on SJG’s common stock in 2009 and $14.9 million were
declared and paid in 2008.


SJG-14
 Table of Contents


Item6.
Selected Financial Data





The
following financial data has been obtained from SJG’s audited financial
statements:





(In
Thousands of $’s)


Year
      Ended December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Operating
      Revenues
            
            $
            484,376
            
            
            $
            568,046
            
            
            $
            630,547
            
            
            $
            642,671
            
            
            $
            587,212Operating
      Income
            
            $
            81,439
            
            
            $
            84,417
            
            
            $
            83,989
            
            
            $
            81,209
            
            
            $
            77,676Income
      before Preferred Dividend Requirement
            
            $
            39,195
            
            
            $
            39,431
            
            
            $
            38,025
            
            
            $
            35,779
            
            
            $
            34,592Preferred
      Dividend Requirements (1)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (45
            )Net
      Income Applicable to Common Stock
            
            $
            39,195
            
            
            $
            39,431
            
            
            $
            38,025
            
            
            $
            35,779
            
            
            $
            34,547Average
      Shares of Common Stock Outstanding
            
            
            2,339,139
            
            
            
            2,339,139
            
            
            
            2,339,139
            
            
            
            2,339,139
            
            
            
            2,339,139Ratio
      of Earnings to Fixed Charges (2)
            
            
            4.9
            x
            
            
            4.4
            x
            
            
            4.1
            x
            
            
            3.7
            x
            
            
            4.0
            xAs
      of December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Property,
      Plant and Equipment, Net
            
            $
            961,165
            
            
            $
            876,582
            
            
            $
            847,691
            
            
            $
            821,833
            
            
            $
            788,787Total
      Assets
            
            $
            1,357,062
            
            
            $
            1,354,015
            
            
            $
            1,227,162
            
            
            $
            1,228,076
            
            
            $
            1,170,975Capitalization:Common
      Equity (3)
            
            $
            431,530
            
            
            $
            401,739
            
            
            $
            378,348
            
            
            $
            360,353
            
            
            $
            344,568Preferred
      Stock (1)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Long-Term
      Debt
            
            
            250,000
            
            
            
            269,873
            
            
            
            294,873
            
            
            
            294,893
            
            
            
            272,235Total
      Capitalization
            
            $
            681,530
            
            
            $
            671,612
            
            
            $
            673,221
            
            
            $
            655,246
            
            
            $
            616,803Total
      Customers
            
            
            343,566
            
            
            
            340,136
            
            
            
            335,663
            
            
            
            330,049
            
            
            
            322,424





(1) On
May 2, 2005, we redeemed all of our 8% Redeemable Cumulative
Preferred Stock.


(2) The
ratio of earnings to fixed charges represents, on a pre-tax basis, the number of
times earnings cover fixed charges. Earnings consist of net income, to which has
been added fixed charges and taxes based on income of the company. Fixed
charges consist of interest charges and preferred securities dividend
requirements.


(3)
Included are SJI cash contributions to capital as follows: 2009, 2008, 2007 and
2006 - none; 2005 - $30.0 million.





Item7.
Management’s Discussion and Analysis of Financial Condition


and Results of
Operations





OVERVIEW:





Organization - We are
an operating public utility company engaged in the purchase, transmission and
sale of natural gas for residential, commercial and industrial use. We also sell
natural gas and pipeline transportation capacity (off-system sales) on a
wholesale basis to various customers on the interstate pipeline system and
transport natural gas purchased directly from producers or suppliers to their
customers.


SJG-15
 Table of Contents


Our
service territory covers approximately 2,500 square miles in the southern part
of New Jersey. It includes 112 municipalities throughout Atlantic, Cape May,
Cumberland and Salem Counties and portions of Burlington, Camden and Gloucester
Counties, with an estimated permanent population of 1.2 million. We benefit from
our proximity to Philadelphia, PA and Wilmington, DE on the western side of our
service territory and Atlantic City, NJ and the popular shore communities on the
eastern side. Economic development and housing growth have been long driven by
the development of the Philadelphia metropolitan area.  In recent
years, housing growth in the eastern portion of our service territory has
increased substantially and accounted for approximately half of our annual
customer growth.  Economic growth in Atlantic City and the
surrounding region has been primarily driven by new gaming and
non-gaming investments that emphasize destination style attractions. While many
of these new projects were suspended or postponed due to the current economic
environment, the casino industry is expected to remain a significant source of
regional economic development going forward.  The ripple effect from
Atlantic City has produced new housing and commercial and industrial
construction.  Combining with the gaming industry catalyst is the
ongoing conversion of southern New Jersey’s oceanfront communities from seasonal
resorts to year round economies.  New and expanded hospitals, schools,
and large scale retail developments throughout the service territory have
contributed to our growth. Presently, we serve approximately 65% of households
within our territory with natural gas.   We also serve southern
New Jersey’s diversified industrial base that includes processors of petroleum
and agricultural products; chemical, glass and consumer goods manufacturers; and
high technology parks.





As of
December 31, 2009, we served 343,566 residential, commercial and industrial
customers in southern New Jersey, compared with 340,136 customers at December
31, 2008. No material part of our business is dependent upon a single customer
or a few customers. Gas sales, transportation and capacity release for 2009
amounted to 98.7 MMdts (million dekatherms), of which 51.7 MMdts were firm sales
and transportation, 2.3 MMdts were interruptible sales and transportation and
44.7 MMdts were off-system sales and capacity release. The breakdown of firm
sales and transportation includes 47.9% residential, 23.2% commercial, 23.9%
industrial, and 5.0% cogeneration and electric generation. At year-end 2009, we
served 320,290 residential customers, 22,802 commercial customers and 474
industrial customers.  This includes 2009 net additions of 3,264
residential customers and 166 commercial customers.


SJG-16
 Table of Contents


We make wholesale gas sales to gas
marketers for resale and ultimate delivery to end users. These “off-system”
sales are made possible through the issuance of the Federal Energy Regulatory
Commission (FERC) Orders No. 547 and 636. Order No. 547 issued a blanket
certificate of public convenience and necessity authorizing all parties, which
are not interstate pipelines, to make FERC jurisdictional gas sales for resale
at negotiated rates, while Order No. 636 allowed us to deliver gas at delivery
points on the interstate pipeline system other than our own city gate stations
and release excess pipeline capacity to third parties. During 2009, off-system
sales amounted to 6.3 MMdts and capacity release amounted to 38.4
MMdts.





Supplies
of natural gas available to us that are in excess of the quantity required by
those customers who use gas as their sole source of fuel (firm customers) make
possible the sale and transportation of gas on an interruptible basis to
commercial and industrial customers whose equipment is capable of using natural
gas or other fuels, such as fuel oil and propane. The term “interruptible” is
used in the sense that deliveries of natural gas may be terminated by us at any
time if this action is necessary to meet the needs of higher priority customers
as described in our tariffs. In 2009 usage by interruptible customers, excluding
off-system customers, amounted to 2.3 MMdts, approximately 2.4% of the total
throughput.





Our
primary goals are to: 1) provide safe, reliable natural gas service at the
lowest cost possible; 2) promote natural gas as the fuel of choice for
residential, commercial and industrial customers; and 3) aid our customers in
becoming more energy efficient.





The
following is a summary of the primary factors we expect to have the greatest
impact on our performance and our ability to achieve our goals going
forward:





Business
Model - We are the primary focus of our parent, SJI, and will continue to
account for the majority of SJI’s net income by maximizing the growth potential
of our service territory.





Customer
Growth —    Southern New Jersey, our primary area of
operations, has not been immune to the issues impacting the new housing market
nationally.  However, net customers for SJG still grew 1.0% as we
increased our focus on customer conversions.  In 2009, the 3,053
consumers converting their homes and businesses from other heating fuels, such
as electric, propane or oil represented over 50% of the total new customer
acquisitions for the year.  In comparison, conversions over the past
five years averaged 2,274 annually.  Customers in our service
territory typically base their decisions to convert on comparisons of fuel
costs, environmental considerations and efficiencies.  As such, SJG
began a comprehensive partnership with the State’s Office of Clean Energy to
educate consumers on energy efficiency and to promote the rebates and incentives
available to natural gas users.


SJG-17
 Table of Contents


Regulatory
Environment - We are primarily regulated by the New Jersey Board of
Public Utilities (BPU). The BPU sets the rates that we charge our rate-regulated
customers for services provided and establishes the terms of service under which
we operate. We expect the BPU to continue to set rates and establish terms of
service that will enable us to obtain a fair and reasonable return on capital
invested. The BPU approved a Conservation Incentive Program (CIP) effective
October 1, 2006, discussed in greater detail under Results of Operations, that
protects our net income from reductions in gas used by our residential,
commercial, and small industrial customers.





Weather
Conditions and Customer Usage Patterns - Usage patterns can be affected
by a number of factors, such as wind, precipitation, temperature extremes and
customer conservation. Our earnings are largely protected from fluctuations in
temperatures by the CIP. The CIP has a stabilizing effect on earnings as we
adjust revenues when actual usage per customer experienced during an annual
period varies from an established baseline usage per customer.





Changes
in Natural Gas Prices  -  In recent years, prices for natural
gas have become increasingly volatile. Gas costs are passed on directly to
customers without any profit margin added. For the vast majority of our
customers, the price for natural gas is set annually, with a regulatory
mechanism in place to make limited adjustments to that price during the course
of a year. In the event that gas cost increases would justify customer price
increases greater than those permitted under the regulatory mechanism, we can
petition the BPU for an incremental rate increase. High prices can make it more
difficult for our customers to pay their bills and may result in elevated levels
of bad-debt expense.





Changes
in Interest Rates-We have operated in a relatively low interest rate environment over the
past several years. Rising interest rates would raise the expense associated
with all issuances of new debt. We have sought to mitigate the impact of a
potential rising rate environment by directly issuing fixed-rate debt, or by
entering into derivative transactions to hedge against rising interest
rates.





Labor
and Benefit Costs - Labor and benefit costs have a significant impact on
our profitability. Benefit costs, especially those related to health care, have
risen in recent years. We sought to manage these costs by revising health care
plans offered to existing employees, capping postretirement health care
benefits, and changing health care and pension packages offered to new
hires.  We expect savings from these changes to gradually increase as
new hires replace retiring employees. In an effort to accelerate the realization
of those benefits, we had offered a voluntary separation program at the end
of 2007. Our workforce totaled 396 employees at the end of 2009, with 65%
of that total covered under collective bargaining agreements.


SJG-18
 Table of Contents


Balance
Sheet Strength - Our goal is to maintain a strong balance sheet with an
average annual equity-to-capitalization ratio of 46% to 50%. Our
equity-to-capitalization ratio, inclusive of short-term debt, was 52.2% and
49.5% at the end of 2009 and 2008, respectively. A strong balance sheet permits
us the financial flexibility necessary to address volatile economic and
commodity markets while maintaining a low-risk platform.





Critical
Accounting Policies-Estimates
and Assumptions - As described in the notes to our financial statements,
management must make estimates and assumptions that affect the amounts reported
in the financial statements and related disclosures. Actual results could differ
from those estimates. Five types of transactions presented in our 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.





Regulatory
Accounting- We maintain our accounts according to the Uniform System of
Accounts as prescribed by the New Jersey Board of Public Utilities (BPU). As a
result of the ratemaking process, we are required to follow Financial Accounting
Standards Board (FASB) ASC Topic 980 – “Regulated Operations.”  We are
required under Topic 980 to recognize the impact of regulatory decisions on our
financial statements. We are required under our Basic Gas Supply Service (BGSS)
clause to forecast our natural gas costs and customer consumption in setting our
rates. Subject to BPU approval, we are able to recover or return the difference
between gas cost recoveries and the actual costs of gas through a BGSS charge to
customers. We record any over/under recoveries as a regulatory asset or
liability on the balance sheets and reflect it in the BGSS charge to customers
in subsequent years. We also enter into derivatives that are used to hedge
natural gas purchases. The offset of the resulting derivative assets or
liabilities is also recorded as a regulatory asset or liability on the balance
sheets.





The
Conservation Incentive Program (CIP) is a BPU approved pilot program that is
designed to eliminate the link between our profits and the quantity of natural
gas we sell, and foster conservation efforts.  With the CIP, our
profits are tied to the number of customers we serve and how efficiently we
serve them, thus allowing us to focus on encouraging conservation and energy
efficiency among our customers without negatively impacting our net
income.  The CIP tracking mechanism adjusts earnings based on weather
and also adjusts our earnings where actual usage per customer experienced during
an annual period varies from an established baseline usage per
customer.  Utility earnings are recognized during current periods
based upon the application of the CIP.  The cash impact of variations
in customer usage will result in cash being collected from, or returned to,
customers during the subsequent CIP year, which runs from October 1 to September
30.


SJG-19
 Table of Contents


In
addition to the BGSS and the CIP, other regulatory assets consist primarily of
remediation costs associated with manufactured gas plant sites (discussed below
under Environmental Remediation Costs), deferred pension and other
postretirement benefit cost, and several other assets as detailed in Note 3 to
the financial statements. If there are changes in future regulatory positions
that indicate the recovery of such regulatory assets is not probable, we would
charge the related cost to earnings. Currently, there are no such anticipated
changes at the BPU.





Derivatives - We
recognize assets or liabilities for contracts that qualify as derivatives when
contracts are executed. We record contracts at their fair value in accordance
with FASB ASC Topic 815 – “Derivatives and Hedging.” We record changes in the
fair value of the effective portion of derivatives qualifying as cash flow
hedges, net of tax, in Accumulated Other Comprehensive Loss and recognize such
changes in the income statement when the hedged item affects earnings. Changes
in the fair value of derivatives not designated as hedges are recorded in
earnings in the current period. In 2007, we changed our policy to no longer
designate energy-related derivative instruments as cash flow hedges. Certain
derivatives that result in the physical delivery of the commodity may meet the
criteria to be accounted for as normal purchases and normal sales, if so
designated, in which case the contract is not marked-to-market, but rather is
accounted for when the commodity is delivered. Due to the application of
regulatory accounting principles under GAAP, derivatives related to gas
purchases that are marked-to-market are recorded through our BGSS.  We
periodically enter into financial derivatives to hedge against forward price
risk. These derivatives are recorded at fair value with an offset to regulatory
assets and liabilities through our BGSS, subject to BPU approval (See Notes 2
and 3 to the financial statements). We adjust the fair value of the contracts
each reporting period for changes in the market.


SJG-20
 Table of Contents


As
discussed in Note 12 of the financial statements, energy-related derivative
instruments 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
established by FASB ASC Topic 820 – “Fair Value Measurements and Disclosures.”
Certain non-exchange-based contracts are valued using indicative non-binding
price quotations available through brokers or from 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.  Management reviews and
corroborates the price quotations with at least one additional source to ensure
the prices are observable market information, which includes consideration of
actual transaction volumes, market delivery points, bid-ask spreads and contract
duration. Derivative instruments that are used to limit our exposure to changes
in interest rates on variable-rate, long-term debt 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, as a result, these instruments are categorized
in Level 2 in the fair value hierarchy.  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 in the fair value hierarchy as the model inputs generally
are not observable.  Counterparty credit risk, and the credit risk of SJG,
is incorporated and considered in the valuation of all derivative instruments as
appropriate. The effect of counterparty credit risk and the credit risk of SJG
on the derivative valuations is not significant.





Environmental Remediation
Costs - We estimate future costs based on projected investigation and
work plans using existing technologies.  In preparing financial statements,
we record liabilities for future costs using the lower end of the range because
a single reliable estimation point is not feasible due to the amount of
uncertainty involved in the nature of projected remediation efforts and the long
period over which remediation efforts will continue. We update estimates each
year to take into account past efforts, changes in work plans, remediation
technologies, government regulations and site specific requirements (See Note 11
to the financial statements).





Pension and Other
Postretirement Benefit Costs - The costs of providing pension and other
postretirement employee benefits are impacted by actual plan experience as well
as assumptions of future experience. Employee demographics, plan contributions,
investment performance, and assumptions concerning mortality, return on plan
assets, discount rates and health care cost trends all have a significant impact
on determining our projected benefit obligations. We evaluate these assumptions
annually and adjust them accordingly. These adjustments could result in
significant changes to the net periodic benefit costs of providing such benefits
and the related liabilities recognized by us.  In 2008, a 32 basis
point increase in the discount rate, higher than expected returns on plan assets
during 2007, and a pension contribution in the first quarter of 2008 reduced
such benefit costs in 2009.  While the discount rate and expected
return on plan assets both decreased slightly in the determination of the 2009
benefit costs, the primary cost driver in 2009 was the erosion of plan assets
during 2008.  As evidenced by the tables in Note 10, “Pension and
Other Postretirement Benefits,” the declines in the equity markets during 2008
resulted in significant unrealized losses in the assets of the
plans.  Such losses caused the 2009 cost of providing such benefits to
more than double.


SJG-21
 Table of Contents


The
recognition of the unrealized losses originating in 2008 over the average
remaining service period of active plan participants will continue to cause the
cost of providing such plans to remain relatively high in 2010.  While
additional pension contributions and improvements in equity markets during 2009
should partially offset this increase, a 50 basis point decrease in the expected
return on plan assets in 2010 will mitigate that benefit.





Revenue
Recognition - Gas revenues are recognized in the period the
commodity is delivered to customers. We bill customers monthly at rates approved
by the BPU. A majority of our customers have their meters read on a cycle basis
throughout the month. As a result, recognized revenues include estimates. For
customers that are not billed at the end of each month, we record an estimate to
recognize unbilled revenues for gas delivered from the date of the last meter
reading to the end of the month. Our unbilled revenue is estimated each month
based on natural gas delivered monthly into the system; unaccounted for natural
gas based on historical results; customer-specific use factors, when available;
actual temperatures during the period; and applicable customer
rates.





The BPU
allows us to recover gas costs in rates through the Basic Gas Supply Service
(BGSS) price structure. We defer over/under recoveries of gas costs and include
them in subsequent adjustments to the BGSS rate. These adjustments result in
over/under recoveries of gas costs being included in rates during future
periods. As a result of these deferrals, utility revenue recognition does not
directly translate to profitability. While we realize profits on gas sales
during the month of providing the utility service, significant shifts in revenue
recognition may result from the various recovery clauses approved by the BPU.
This revenue recognition process does not shift earnings between periods, as
these clauses only provide for cost recovery on a dollar-for-dollar basis (See
Notes 2 and 3 to the financial statements).


SJG-22
 Table of Contents


In
January 2010, the BPU approved an extension of the Conservation Incentive
Program (CIP) through 2013.  Each CIP year begins October 1 and ends
September 30 of the subsequent year.  On a monthly basis during the
CIP year, we record adjustments to earnings based on weather and customer usage
factors, as incurred.  Subsequent to each year, we make filings with
the BPU to review and approve amounts recorded under the CIP.  BPU
approved cash inflows or outflows generally will not begin until the next CIP
year and have no impact on earnings at that time.





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





Rates and Regulation -As a
public utility, we are subject to regulation by the New Jersey Board of Public
Utilities (BPU). Additionally, the Natural Gas Policy Act, which was enacted in
November 1978, contains provisions for Federal regulation of certain aspects of
our business. We are affected by Federal regulation with respect to
transportation and pricing policies applicable to pipeline capacity from
Transcontinental Gas Pipeline Corporation (our major supplier), Columbia Gas
Transmission Corporation, Columbia Gulf Transmission Company and Dominion
Transmission, Inc., since such services are provided under rates and terms
established under the jurisdiction of the FERC. Our retail sales are made under
rate schedules within a tariff filed with, and subject to the jurisdiction of,
the BPU. These rate schedules provide primarily for either block rates or
demand/commodity rate structures. Our primary rate mechanisms include base
rates, the Basic Gas Supply Service Clause, Capital Investment Recovery Tracker
(CIRT), Energy Efficiency Tracker (EET) and the Conservation Incentive
Program.





Basic Gas Supply Service
Clause (BGSS) - In December 2002, the BPU approved the BGSS price
structure which gave customers the ability to make more informed decisions
regarding their choices of an alternate supplier by having a utility price
structure that is more consistent with market conditions. The cost of gas
purchased from the utility by our periodic consumers is set annually by the BPU
through a BGSS clause within our tariff. When actual gas costs experienced are
less than those charged to customers under the BGSS, customer bills in the
subsequent BGSS period(s) are reduced by returning the overrecovery with
interest. When actual gas costs are more than is recovered through rates, we are
permitted to charge customers more for gas in future periods to recover the
shortfall.


SJG-23
 Table of Contents


Capital Investment Recovery Tracker
(CIRT)– In April 2009, the BPU
approved an accelerated infrastructure investment program and an associated rate
tracker, which allows SJG to accelerate $103.0 million of capital spending into
2009 and 2010.  The CIRT allows SJG to earn a return of, and return
on, investment as the capital is spent.





Energy Efficiency Tracker
(EET) – In July 2009, the BPU approved an energy efficiency program to
invest $17.0 million over two years in energy efficiency programs for
residential, commercial and industrial customers.  Under this program
SJG can recover incremental operating and maintenance expenses and earn a return
of, and return on, program investments.





Conservation Incentive
Program (CIP) - The CIP is a BPU approved pilot program that is designed
to eliminate the link between our profits and the quantity of natural gas we
sell, and foster conservation efforts. With the CIP, our profits are tied to the
number of customers we serve and how efficiently we serve them, thus allowing us
to focus on encouraging conservation and energy efficiency among our customers
without negatively impacting our net income.  The CIP tracking mechanism
adjusts earnings based on weather, and also adjusts our earnings when actual
usage per customer experienced during an annual period varies from an
established baseline usage per customer.  In January 2010, the BPU
approved an extension of the CIP through September 2013. Under the terms of the
settlement, the CIP may be extended for a one year period in the absence of a
Board order taking any affirmative action to the contrary with regard to
the pilot program.





Utility
earnings are recognized during current periods based upon the application of the
CIP. The cash impact of variations in customer usage will result in cash being
collected from, or returned to, customers during the subsequent CIP year, which
runs from October 1 to September 30.





The
effects of the CIP on our net income for the last three years and the associated
weather comparisons were as follows ($’s in millions):





2009
            
            
            2008
            
            
            2007Net
      Income Benefit:CIP
      – Weather Related
            
            
            0.8
            
            
            
            1.6
            
            
            
            1.6CIP
      – Usage Related
            
            
            8.5
            
            
            
            9.2
            
            
            
            5.9Total
      Net Income Benefit
            
            $
            9.3
            
            
            $
            10.8
            
            
            $
            7.5Weather
      Compared to 20-Year Average
            
            1.1%
      warmer
            
            
            4.7%
      warmer
            
            
            3.2%
      warmerWeather
      Compared to Prior Year
            
            3.9%
      colder
            
            
            1.6%
      warmer
            
            
            13.8%
      colder


SJG-24
 Table of Contents


As part
of the CIP, we are required to implement additional conservation programs
including customized customer communication and outreach efforts, targeted
upgrade furnace efficiency packages, financing offers, and an outreach program
to speak to local and state institutional constituents. We are also required to
reduce gas supply and storage assets and their associated fees. Note that
changes in fees associated with supply and storage assets have no effect on our
net income as these costs are passed through directly to customers on a
dollar-for-dollar basis.





Earnings
accrued and payments received under the CIP are limited to a level that will not
cause our return on equity to exceed 10% (excluding earnings from off-system gas
sales and certain other tariff clauses) and the annualized savings attained from
reducing gas supply and storage assets.





Other Rate Mechanisms
- Our tariff also contains provisions permitting the recovery of environmental
remediation costs associated with former manufactured gas plant sites, energy
efficiency and renewable energy program costs, consumer education program costs
and low-income program costs. These costs are recovered from customers through
our Societal Benefits Clause.





See
additional detailed discussions on Rates and Regulatory Actions in Note 2 to the
financial statements.





Environmental
Remediation - See detailed discussion concerning Environment Remediation
in Note 11 to the financial statements.





Competition-Our franchises are
non-exclusive. Currently, no other utility provides retail gas distribution
services within our territory. We do not expect any other utilities to do so in
the foreseeable future because of the extensive investment required for utility
plant and related costs. We compete with oil, propane and electricity suppliers
for residential, commercial and industrial users, with alternative fuel source
providers (wind, solar and fuel cells) based upon price, convenience and
environmental factors, and with other marketers/brokers in the selling of
wholesale natural gas services. The market for natural gas commodity sales is
subject to competition due to deregulation. We enhanced our competitive position
while maintaining margins by using an unbundled tariff. This tariff allows full
cost-of-service recovery, when transporting gas for our customers. Under this
tariff, we profit from transporting, rather than selling, the commodity. Our
residential, commercial and industrial customers can choose their supplier while
we recover the cost of service through transportation service (see Customer
Choice Legislation below).


SJG-25
 Table of Contents


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, where redesigned
utility rate structures allow natural gas and electric consumers to choose their
energy supplier. It also established time frames for instituting competitive
services for customer account functions and for determining whether basic gas
supply services should become competitive. 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 averaged 28,379, 28,637 and 25,309 during 2009, 2008 and 2007,
respectively.





RESULTS
OF OPERATIONS:





The following table summarizes the
composition of selected gas utility data for the three years ended December
31 (in thousands, except for customer and degree day data):





2009
            
            
            2008
            
            
            2007Utility Throughput – dth:Firm
      Sales -Residential
            
            
            22,736
            
            
            
            23
            %
            
            
            21,530
            
            
            
            15
            %
            
            
            22,523
            
            
            
            16
            %Commercial
            
            
            6,063
            
            
            
            6
            %
            
            
            6,127
            
            
            
            4
            %
            
            
            6,339
            
            
            
            4
            %Industrial
            
            
            331
            
            
            
            1
            %
            
            
            188
            
            
            
            -
            
            
            
            193
            
            
            
            -Cogeneration
      and electric generation
            
            
            322
            
            
            
            -
            
            
            
            561
            
            
            
            -
            
            
            
            1,335
            
            
            
            1
            %Firm
      Transportation -Residential
            
            
            2,005
            
            
            
            2
            %
            
            
            1,988
            
            
            
            1
            %
            
            
            1,870
            
            
            
            1
            %Commercial
            
            
            5,930
            
            
            
            6
            %
            
            
            5,687
            
            
            
            4
            %
            
            
            5,927
            
            
            
            4
            %Industrial
            
            
            12,002
            
            
            
            12
            %
            
            
            12,661
            
            
            
            9
            %
            
            
            12,107
            
            
            
            9
            %Cogeneration
      and electric generation
            
            
            2,290
            
            
            
            2
            %
            
            
            2,536
            
            
            
            2
            %
            
            
            3,088
            
            
            
            2
            %Total
      Firm Throughput
            
            
            51,679
            
            
            
            52
            %
            
            
            51,278
            
            
            
            35
            %
            
            
            53,382
            
            
            
            37
            %Interruptible
      Sales
            
            
            5
            
            
            
            -
            
            
            
            35
            
            
            
            -
            
            
            
            68
            
            
            
            -Interruptible
      Transportation
            
            
            2,314
            
            
            
            2
            %
            
            
            2,716
            
            
            
            2
            %
            
            
            3,002
            
            
            
            2
            %Off-System
            
            
            6,282
            
            
            
            7
            %
            
            
            9,632
            
            
            
            7
            %
            
            
            17,686
            
            
            
            13
            %Capacity
      Release
            
            
            38,387
            
            
            
            39
            %
            
            
            80,665
            
            
            
            56
            %
            
            
            67,430
            
            
            
            48
            %Total
      Throughput
            
            
            98,667
            
            
            
            100
            %
            
            
            144,326
            
            
            
            100
            %
            
            
            141,568
            
            
            
            100
            %




SJG-26
 Table of Contents




Utility Operating Revenues:Firm
      Sales-Residential
            
            $
            318,143
            
            
            
            66
            %
            
            $
            320,401
            
            
            
            57
            %
            
            $
            342,809
            
            
            
            54
            %Commercial
            
            
            71,669
            
            
            
            15
            %
            
            
            81,914
            
            
            
            15
            %
            
            
            80,237
            
            
            
            13
            %Industrial
            
            
            3,824
            
            
            
            1
            %
            
            
            5,434
            
            
            
            1
            %
            
            
            8,381
            
            
            
            1
            %Cogeneration
      and electric generation
            
            
            2,709
            
            
            
            1
            %
            
            
            7,940
            
            
            
            1
            %
            
            
            11,722
            
            
            
            2
            %Firm
      Transportation -Residential
            
            
            10,491
            
            
            
            2
            %
            
            
            10,408
            
            
            
            2
            %
            
            
            8,982
            
            
            
            1
            %Commercial
            
            
            19,722
            
            
            
            4
            %
            
            
            18,286
            
            
            
            3
            %
            
            
            17,299
            
            
            
            3
            %Industrial
            
            
            14,751
            
            
            
            3
            %
            
            
            12,504
            
            
            
            2
            %
            
            
            12,229
            
            
            
            2
            %Cogeneration
      and electric generation
            
            
            2,272
            
            
            
            -
            
            
            
            1,682
            
            
            
            -
            
            
            
            1,847
            
            
            
            -Total
      Firm Revenues
            
            
            443,581
            
            
            
            92
            %
            
            
            458,569
            
            
            
            81
            %
            
            
            483,506
            
            
            
            76
            %Interruptible
      Sales
            
            
            89
            
            
            
            -
            
            
            
            403
            
            
            
            -
            
            
            
            785
            
            
            
            -Interruptible
      Transportation
            
            
            2,122
            
            
            
            -
            
            
            
            1,786
            
            
            
            -
            
            
            
            1,970
            
            
            
            -Off-System
            
            
            32,978
            
            
            
            7
            %
            
            
            90,430
            
            
            
            16
            %
            
            
            131,586
            
            
            
            22
            %Capacity
      Release
            
            
            4,282
            
            
            
            1
            %
            
            
            15,549
            
            
            
            3
            %
            
            
            11,208
            
            
            
            2
            %Other
            
            
            1,324
            
            
            
            -
            
            
            
            1,309
            
            
            
            -
            
            
            
            1,492
            
            
            
            -Total
      Utility Operating Revenues
            
            
            484,376
            
            
            
            100
            %
            
            
            568,046
            
            
            
            100
            %
            
            
            630,547
            
            
            
            100
            %Less:Cost
      of sales
            
            
            293,852
            
            
            
            
            
            
            
            383,403
            
            
            
            
            
            
            
            453,034Conservation
      recoveries *
            
            
            7,718
            
            
            
            
            
            
            
            7,741
            
            
            
            
            
            
            
            4,458RAC
      recoveries *
            
            
            5,189
            
            
            
            
            
            
            
            3,079
            
            
            
            
            
            
            
            2,056EET
      Recoveries *
            
            
            190
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            -Revenue
      taxes
            
            
            8,836
            
            
            
            
            
            
            
            8,656
            
            
            
            
            
            
            
            8,850Utility
      Margin
            
            $
            168,591
            
            
            
            
            
            
            $
            165,167
            
            
            
            
            
            
            $
            162,149Margin:Residential
            
            $
            104,373
            
            
            
            62
            %
            
            $
            99,862
            
            
            
            61
            %
            
            $
            102,077
            
            
            
            63
            %Commercial
      and industrial
            
            
            39,853
            
            
            
            24
            %
            
            
            38,995
            
            
            
            24
            %
            
            
            40,036
            
            
            
            25
            %Cogeneration
      and electric generation
            
            
            2,251
            
            
            
            1
            %
            
            
            1,997
            
            
            
            1
            %
            
            
            2,212
            
            
            
            1
            %Interruptible
            
            
            144
            
            
            
            -
            
            
            
            143
            
            
            
            -
            
            
            
            195
            
            
            
            -Off-system
      & capacity release
            
            
            1,416
            
            
            
            1
            %
            
            
            3,349
            
            
            
            2
            %
            
            
            2,994
            
            
            
            2
            %Other
      revenues
            
            
            2,511
            
            
            
            1
            %
            
            
            2,440
            
            
            
            1
            %
            
            
            1,952
            
            
            
            1
            %Margin
      before weather normalization & decoupling
            
            
            150,548
            
            
            
            89
            %
            
            
            146,786
            
            
            
            89
            %
            
            
            149,466
            
            
            
            92
            %CIRT
      mechanism
            
            
            2,198
            
            
            
            1
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -CIP
      mechanism
            
            
            15,809
            
            
            
            10
            %
            
            
            18,381
            
            
            
            11
            %
            
            
            12,683
            
            
            
            8EET
      mechanism
            
            
            36
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Utility
      Margin
            
            $
            168,591
            
            
            
            100
            %
            
            $
            165,167
            
            
            
            100
            %
            
            $
            162,149
            
            
            
            100
            %Number of Customers at Year
      End:Residential
            
            
            320,290
            
            
            
            93
            %
            
            
            317,026
            
            
            
            93
            %
            
            
            312,969
            
            
            
            93
            %Commercial
            
            
            22,802
            
            
            
            7
            %
            
            
            22,636
            
            
            
            7
            %
            
            
            22,220
            
            
            
            7
            %Industrial
            
            
            474
            
            
            
            -
            
            
            
            474
            
            
            
            -
            
            
            
            474
            
            
            
            -Total
      Customers
            
            
            343,566
            
            
            
            100
            %
            
            
            340,136
            
            
            
            100
            %
            
            
            335,663
            
            
            
            100
            %Annual
      Degree Days:
            
            
            4,588
            
            
            
            
            
            
            
            4,417
            
            
            
            
            
            
            
            4,488*
      Represents expenses for which there is a corresponding credit in operating
      revenues. Therefore, such recoveries have no impact on our financial
      results.


SJG-27
 Table of Contents


Throughput
- Total gas throughput decreased 45.7 MMdts, or 31.6%, from 2008 to 2009. 
Off-System sales (OSS) and capacity release volume decreased substantially as
SJG’s portfolio of assets available for such activities has been reduced in each
of the past 3 years under the Conservation Incentive Program, as discussed under
“Rates and Regulation.”  As the majority of profits from OSS and
capacity release are returned to the ratepayers via a BPU-approved sharing
formula, the resulting impact of such decreased activity on SJG earnings is
greatly mitigated, as reflected in the margin table above.  Firm
throughput increased in the residential market as a result of 3.9% colder
weather and the addition of 3,264 residential customers during 2009.  
Total gas throughput increased 2.8 MMdts, or 1.9%, from 2007 to
2008.  This increase was driven by greater capacity release activity
during 2008 as market demand for such capacity had increased.  Firm
throughput declined as a result of warmer weather and customer conservation. As
previously discussed, OSS volume decreased substantially as SJG’s portfolio of
assets available for such activities was reduced. Changes in throughput in other
customer categories were not significant.





Operating
Revenues – Revenues decreased $83.7 million, or 14.7%, during 2009
compared with 2008.  This was the result of a substantial decrease in
Off-System Sales (OSS) and Capacity Release revenue, which decreased by $57.5
million and $11.3 million, respectively, during 2009 compared with
2008.  These decreases were primarily related to continued reductions
in SJG’s portfolio of assets available for such activities under the provisions
of the CIP, as noted above under “Throughput”, and a significant decrease in the
average cost per unit sold during 2009.  The cost of natural gas had
declined so dramatically during 2009 that OSS unit sales prices declined from an
average of $9.39 per decatherm (Dt) during 2008 to only $5.25 per Dt during
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.  Firm sales revenue decreased approximately $15.0
million as a result of significantly lower natural gas prices during
2009.  The average cost of natural gas purchased during 2009 was $7.52
per Dt, representing a 27.5% decrease relative to the average cost of $10.38 per
Dt in 2008.  This decrease in natural gas costs precipitated a
customer refund of over recovered gas costs through the BPU-approved Basic Gas
Supply Service (BGSS) in October 2009 totaling approximately $20.4 million.
While changes in gas costs, BGSS recoveries and refunds, when applicable, 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 $62.5 million, or 9.9%, during 2008 compared with
2007.  Off-System sales  revenue decreased $41.2 million as
SJG’s portfolio of assets available for OSS had been reduced under the
CIP.  Total firm revenues decreased during 2008 compared to 2007
primarily due to warmer weather and lower residential revenues resulting from a
lower BGSS rate in effect during most of 2008.  For nearly the
entire year, the 2008 BGSS rate was 12.7% lower than the rate in effect during
the corresponding period in 2007.  SJG reduced its BGSS rate in
October 2007 primarily due to a combination of actual and forecasted decreases
in wholesale gas costs.  As previously stated, the Company does not
profit from the sale of the commodity; therefore, the BGSS rate decrease did not
have an impact on Company profitability.  Finally, the Company
experienced lower sales to the region’s electric utility, as their demand to
consume natural gas to generate electric during the summer months decreased
substantially.  Since the majority of the Company’s profits from
electric generation sales are contractually fixed, the decrease in volume and
revenue had little impact on profitability.  Partially offsetting
these decreases, SJG added 4,473 customers during the 12-month period ended
December 31 2008, which represents a 1.3% increase in total
customers.


SJG-28
 Table of Contents


Margin-Our margin is defined
as natural gas revenues less natural gas costs; volumetric and revenue based
energy taxes; and regulatory rider expenses. We believe 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, have no effect on our profitability. 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 our BGSS
tariff.





Total
margin in 2009 increased $3.4 million, or 2.1%, from 2008 primarily due to
customer additions of 3,430 and approval in 2009 of SJG’s Capital Investment
Recovery Tracker (CIRT), as discussed above under “Rates and
Regulation.”  The CIRT allows SJG to earn a return on approved
infrastructure investments made under this program.  Partially
offsetting these increases was a decrease in off-system sales and capacity
release margins due to continued reductions in SJG’s portfolio of assets
available for such activities as discussed above.





The CIP
protected $15.8 million of pre-tax margin that would have been lost due to lower
customer usage, compared with $18.4 million in 2008.  Of these
amounts, $1.4 million and $2.7 million were related to weather variations and
$14.4 million and $15.7 million were related to other customer usage variations
in 2009 and 2008, respectively.





Total
margin in 2008 increased $3.0 million, or 1.9%, from 2007 primarily due to
customer additions, as noted above, increased margins from OSS and capacity
release, and increased profits earned through the Company’s Storage Incentive
Mechanism (SIM).  The SIM allows the Company to retain 20% of
storage-related gains and losses as measured against an established
benchmark.  The balance of these gains and losses are passed through
to customers as part of the BGSS.


SJG-29
 Table of Contents


The CIP
protected $18.4 million of pre-tax margin in 2008 that would have been lost due
to lower customer usage, compared to $12.7 million in 2007.  Of these
amounts, $2.7 million and $2.6 million were related to weather variations and
$15.7 million and $10.1 million were related to other customer usage variations
in 2008 and 2007, respectively.





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





2009
      vs. 2008
            
            
            2008
      vs. 2007Operations
            
            $
            6,422
            
            
            $
            4,375Maintenance
            
            
            970
            
            
            
            1,554Depreciation
            
            
            1,267
            
            
            
            975Energy
      and Other Taxes
            
            
            200
            
            
            
            (202
            )





Operations –
Operations expense increased $6.4 million during 2009, as compared with
2008.  The increases are primarily comprised of the following
factors.





First,
the cost of providing pension and other postretirement benefit plans increased
by $2.9 million and $1.0 million, respectively, as compared with
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 10 of the Notes to Financial
Statements.  Second, corporate support, governance and compliance
costs, primarily attributable to our parent, SJI, also rose $1.1 million in 2009
as compared with 2008.  Third, our spending under the newly approved
Energy Efficiency Tracker (EET) was $0.2 million in 2009.  Such costs
are recovered on a dollar-for-dollar basis; therefore, SJG experienced an
offsetting increase in revenues during 2009.  The BPU-approved EET
allows for full recovery of costs, including carrying costs when
applicable.  As a result, this new item of expense had no impact on
our net income. 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.





Operations
expense increased $4.4 million during 2008, as compared with 2007, primarily due
to increased spending under the New Jersey Clean Energy Program (NJCEP), which
increased $3.3 million during 2008 compared with 2007.  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.  Second, corporate support, governance and compliance
costs, primarily attributable to our parent, SJI, rose $0.9 million during
2008.  Finally the Company also experienced moderate increases in
insurance and employee compensation costs; however, these were offset by lower
pension and other cost reductions during the year 2008.


SJG-30
 Table of Contents


Maintenance –
Maintenance expense increased $1.0 million during 2009, compared with 2008,
primarily due to an increase in Remediation Adjustment Clause (RAC) expense
amortization.   As discussed in Notes 2 and 3 to the Financial
Statements, these costs are recovered from ratepayers; therefore, SJG
experienced an offsetting increase in revenue during 2009.





Maintenance
expense increased $1.6 million during 2008, compared with 2007, primarily due to
a $1.2 million increase in RAC expense amortization.    The
remaining increase was the result of installing safety devices on certain
residential meters aimed at preventing unauthorized usage and maintenance of
company equipment.





Depreciation -
Depreciation expense increased $1.3 million and $1.0 million in 2009 and 2008,
respectively, due mainly to our continuing investment in utility plant. SJG’s
investment in utility plant during 2009, 2008 and 2007 was $98.7 million, $52.6
million and $48.1 million, respectively.  The increased spending in
2009 was a direct result of the State’s stimulus efforts which included the
approval of SJG’s Capital Investment Recovery Tracker, as discussed under “Rates
and Regulation.”





Energy and Other
Taxes – Energy and Other Taxes increased in 2009, compared with 2008,
primarily due to higher taxable firm throughput in 2009.  Higher
taxable firm throughput in 2009 resulted from colder weather and customer growth
in 2009.  This was partially offset by lower revenue-based taxes as
revenues decreased substantially during 2009.





Energy
and Other Taxes decreased $0.2 million during 2008, compared with 2007,
primarily due to lower taxable firm throughput in 2008, which resulted from
warmer weather and conservation.  These factors were partially offset
by customer growth in 2008.





Other
Income and Expense - Other income and expense was lower in 2008, when
compared with both 2009 and 2007.   This was primarily due to the
poor earnings performance of our available-for-sale securities as a result of
significant declines in the equity markets in 2008. In addition, the Company
recognized an impairment loss of $0.7 million during 2008. No impairment losses
were recognized in either 2009 or 2007. These securities represent assets held
in trusts for the payment of postretirement healthcare
costs.


SJG-31
 Table of Contents


Interest
Charges – Interest charges decreased by $2.5 million in 2009, compared
with 2008, due primarily to significantly lower average short-term interest
rates, partially offset by higher debt levels during 2009.





Interest
charges decreased by $2.0 million for 2008, compared with 2007.  The
decrease was the result of lower average short-term interest rates and debt
levels, partially offset by higher interest rates incurred on auction-rate
securities during the first half of 2008.





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 - Cash generated from operating activities constitutes our
primary source of liquidity and varies from year-to-year due to the impact of
weather on customer demand and related gas purchases, customer usage factors
related to conservation efforts and the price of the natural gas commodity,
inventory utilization and recoveries provided through our various rate
mechanisms. Net cash provided by operating activities was $122.9 million in
2009, $30.3 million in 2008 and $89.4 million in 2007.





Cash
provided from operating activities increased in 2009, as compared with 2008,
primarily as a result of lower unit gas costs and the impact of those costs on
natural gas inventory balances.  The Company also incurred lower
environmental remediation costs in 2009 as compared with 2008.  The
lower environmental remediation costs include a decrease in remediation
expenditures as well as increased insurance recoveries during 2009.





Cash
provided by operating activities decreased in 2008, as compared with 2007,
primarily as a result of higher unit gas costs and the impact of those costs on
natural gas inventory balances.  Further, in anticipation of a large
transmission pipeline project in 2009, SJG purchased and inventoried $9.3
million of pipe at the end of 2008.  SJG also incurred significantly
higher, planned environmental remediation costs in 2008 compared with the prior
year.  Finally, SJG made a $4.8 million pension contribution during
2008.  No such contribution was made in the prior year.





Cash Flows from Investing
Activities - We have a continuing need for cash resources for capital
purchases, primarily to invest in new and replacement facilities and equipment.
Cash used for capital expenditures was $98.7 million, $52.6 million and $48.1
million in 2009, 2008 and 2007, respectively, primarily due to infrastructure
improvements that continue to support SJG’s growth.  The increase in
the 2009 capital expenditures was the direct result of the Company’s CIRT
program which began in 2009.  See additional details under “Rates and
Regulation”.





Cash Flows from Financing
Activities - We use 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, we
refinance 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 December 31, 2009 were as follows (in
thousands):





Total
      Facility
            
            
            Usage
            
            
            Available
      Liquidity
            
            Expiration
      DateRevolving
      Credit Facility
            
            $
            100,000
            
            
            $
            85,000
            
            
            $
            15,000
            
            August
      2011Line
      of Credit
            
            
            40,000
            
            
            
            10,000
            
            
            
            30,000
            
            December
      2010 (A)Uncommitted
      Bank Lines
            
            
            55,000
            
            
            
            14,400
            
            
            
            40,600
            
            VariousTotal
            
            $
            195,000
            
            
            $
            109,400
            
            
            $
            85,600





(A)  SJG
anticipates extending this line of credit during the fourth quarter of
2010.  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-32
 Table of Contents


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 September 2009, SJG received approval from
the New Jersey Board of Public Utilities 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.  SJG intends to borrow $15.0
million in March 2010 and $45.0 million by June 2010 in a delayed funding under
a private placement.  In November 2009, SJG completed an early
redemption of $9.9 million of 6.5% bonds due in 2016.  We redeemed
this debt early to achieve significant interest expense savings due to the low
interest rates available to SJG.





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 repurchased 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.  We repaid long-term debt totaling $9.9 million, $25.0 million
and $2.3 million in 2009, 2008 and 2007, respectively.





SJI
contributed no capital to us in 2009, 2008 or 2007.





As of
December 31, our capital structure was as follows:





2009
            
            
            2008Common
      Equity
            
            
            52.2
            %
            
            
            49.5
            %Long-Term
      Debt
            
            
            30.3
            %
            
            
            36.4
            %Short-Term
      Debt
            
            
            17.5
            %
            
            
            14.1
            %Total
            
            
            100.0
            %
            
            
            100.0
            %





Our
long-term, senior secured debt is rated “A” and “A2” by Standard & Poor’s
and Moody’s Investor Services, respectively. These ratings had not changed in at
least the past five years until August 2009 when Moody’s Investor Services
raised SJG’s senior secured rating to “A2” from “Baal”.





We are
restricted as to the amount of cash dividends or other distributions that may be
paid on our common stock by an order issued by the BPU in July 2004, that
granted us an increase in base rates. Per the order, we are required to maintain
total common equity of no less than $289.2 million. Our total common equity
balance was $431.5 million at December 31, 2009.


SJG-33
 Table of Contents


COMMITMENTS
AND CONTINGENCIES:





We have a
continuing need for cash resources and capital, primarily to invest in new and
replacement facilities and equipment and for environmental remediation costs.
Net cash outflows for construction and remediation projects for 2009 amounted to
$98.7 million and $0.4 million, respectively. We estimate total cash outflows
for construction and remediation projects for 2010, 2011 and 2012, to be
approximately $153.9 million, $69.5 million and $65.5 million,
respectively.  As discussed in Notes 3 and 11 to the financial
statements, certain environmental costs are subject to recovery from insurance
carriers and ratepayers.





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 as discussed in Note 6 to the financial
statements.  This letter of credit expires in August
2010.





We have
certain commitments for both pipeline capacity and gas supply for which we pay
fees regardless of usage. Those commitments as of December 31, 2009, average
$44.3 million annually and total $177.2 million over the contracts’ lives.
Approximately 28% of the financial commitments under these contracts expire
during the next five years. We expect to renew each of these contracts under
renewal provisions as provided in each contract. We recover all prudently
incurred fees through rates via the Basic Gas Supply Service
clause.





The
following table summarizes our contractual cash obligations and their applicable
payment due dates as of December 31, 2009 (in thousands):





Up
      to
            
            
            Years
            
            
            Years
            
            
            More
      thanContractual Cash
Obligations
            
            Total
            
            
            1 Year
            
            
            2 & 3
            
            
            4 & 5
            
            
            5 YearsPrincipal
      Payments on Long-Term Debt
            
            $
            285,000
            
            
            $
            35,000
            
            
            $
            27,187
            
            
            $
            50,375
            
            
            $
            172,438Interest
      on Long-Term Debt
            
            
            179,317
            
            
            
            16,352
            
            
            
            29,735
            
            
            
            26,254
            
            
            
            106,976Operating
      Leases
            
            
            82
            
            
            
            63
            
            
            
            19
            
            
            
            -
            
            
            
            -Construction
      Obligations
            
            
            239
            
            
            
            239
            
            
            
            -
            
            
            
            -
            
            
            
            -Commodity
      Supply Purchase Obligations
            
            
            177,175
            
            
            
            39,403
            
            
            
            33,470
            
            
            
            24,364
            
            
            
            79,938New
      Jersey Clean Energy Program (Note 2)
            
            
            33,117
            
            
            
            9,205
            
            
            
            23,912
            
            
            
            -
            
            
            
            -Other
      Purchase Obligations
            
            
            418
            
            
            
            418
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      Contractual Cash Obligations
            
            $
            675,348
            
            
            $
            100,680
            
            
            $
            114,323
            
            
            $
            100,993
            
            
            $
            359,352





As
discussed in Note 6 to the financial statements, SJG’s variable-rate debt of
$25.0 million has been included in the current portion of long-term debt
above.  However, interest on long-term debt in the table above
includes the related interest obligations through maturity, as well as the
impact of the related interest rate swap agreements on this variable-rate
debt.


SJG-34
 Table of Contents


Expected
environmental remediation costs, asset retirement obligations and the liability
for unrecognized tax benefits are not included in the table above as the total
obligation cannot be calculated due to the subjective nature of these costs and
timing of anticipated payments. SJG has no obligation to make a contribution to
its employee pension plans in 2010.  Furthermore, future pension
contributions beyond 2010 cannot be determined at this time. Our regulatory
obligation to contribute $3.6 million annually to our postretirement benefit
plans’ trusts, as discussed in Note 10 to the financial statements, is also not
included as its duration is indefinite.





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





Item7a. 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.


SJG-35
 Table of Contents


We
transact commodities on a physical basis and typically do not enter into
financial derivative positions directly. South Jersey Resources Group, LLC, 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 December 31, 2009 is
as follows (in thousands):





Assets:
            
            
            Maturity
            
            
            MaturitySource
      of Fair Value
            
            <1
      Year
            
            
            1 -
      3 Years
            
            
            TotalPrices
      Actively Quoted
            NYMEX
            
            $
            797
            
            
            $
            192
            
            
            $
            989Other
      External Sources
            Basis
            
            
            -
            
            
            
            141
            
            
            
            141Total
            
            
            $
            797
            
            
            $
            333
            
            
            $
            1,130Liabilities:
            
            
            Maturity
            
            
            MaturitySource
      of Fair Value
            
            <1
      Year
            
            
            1 -
      3 Years
            
            
            TotalPrices
      Actively Quoted
            NYMEX
            
            $
            8,229
            
            
            $
            336
            
            
            $
            8,565Other
      External Sources
            Basis
            
            
            1,570
            
            
            
            168
            
            
            
            1,738Total
            
            
            $
            9,799
            
            
            $
            504
            
            
            $
            10,303





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 14.3 MMdts with
a weighted-average settlement price of $6.45 per dt.  Contracted
volumes of our Basis contracts are 6.3 MMdts with a weighted-average settlement
price of $1.23 per dt.





A
reconciliation of our estimated net fair value of energy-related derivatives,
including energy trading and hedging contracts follows (in
thousands):





Net
      Derivatives — Energy Related Liability, January 1, 2009
            
            $
            (28,970
            )Contracts
      Settled During 2009, Net
            
            
            26,318Other
      Changes in Fair Value from Continuing and New Contracts,
    Net
            
            
            (6,521
            )Net
      Derivatives — Energy Related Liability, December 31, 2009
            
            $
            (9,173
            )





The
change in our derivative position from a $29.0 million liability at December 31,
2008 to a $9.2 million liability at December 31, 2009 is primarily due to the
change in value of our financial positions held with SJRG.  As of December
31, 2008 the average future price was approximately $6.15 per dt vs. $5.80 per
dt as of December 31, 2009.


SJG-36
 Table of Contents


Interest
Rate Risk - Our exposure to interest rate risk relates primarily to
short-term, variable-rate borrowings. Short-term, variable-rate debt outstanding
at December 31, 2009, was $109.4 million and averaged $94.4 million during 2009.
The months where average outstanding variable-rate debt was at its highest and
lowest levels were December, at $109.4 million, and April, at $73.3 million. A
hypothetical 100 basis point (1%) increase in interest rates on our average
variable-rate debt outstanding would result in a $556,200 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 – 29
b.p. decrease; 2008 - 317 b.p. decrease; 2007 – 36 b.p. decrease; 2006 - 72 b.p.
increase; and 2005 - 191 b.p. increase. As of December 31, 2009, our average
borrowing cost, which changes daily, was 0.80%.





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 December 31, 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.


SJG-37
 Table of Contents


Item8.
Financial Statements and Supplementary Data





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholder of


South
Jersey Gas Company


Folsom,
New Jersey





We have
audited the accompanying balance sheets of South Jersey Gas Company (the
"Company") as of December 31, 2009 and 2008, and the related statements of
income, cash flows, and changes in common equity and comprehensive income for
each of the three years in the period ended December 31, 2009.  Our
audits also included the financial statement schedule listed in the Index at
Item 15(a)2.  These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.





In our
opinion, such financial statements present fairly, in all material respects, the
financial position of South Jersey Gas Company as of December 31, 2009 and 2008,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.





/s/
Deloitte & Touche LLP


Philadelphia,
Pennsylvania


February
26, 2010


SJG-38
 Table of Contents


SOUTH
JERSEY GAS COMPANY


STATEMENTS
      OF INCOME(In
      Thousands)Year
      Ended December 31,2009
            
            
            2008
            
            
            2007Operating
      Revenues
            
            $
            484,376
            
            
            $
            568,046
            
            
            $
            630,547Operating
      Expenses:Cost
      of Sales (Excluding depreciation)
            
            
            293,852
            
            
            
            383,403
            
            
            
            453,034Operations
            
            
            62,533
            
            
            
            56,111
            
            
            
            51,736Maintenance
            
            
            8,869
            
            
            
            7,899
            
            
            
            6,345Depreciation
            
            
            26,856
            
            
            
            25,589
            
            
            
            24,614Energy
      and Other Taxes
            
            
            10,827
            
            
            
            10,627
            
            
            
            10,829Total
      Operating Expenses
            
            
            402,937
            
            
            
            483,629
            
            
            
            546,558Operating
      Income
            
            
            81,439
            
            
            
            84,417
            
            
            
            83,989Other
      Income and Expense
            
            
            1,302
            
            
            
            459
            
            
            
            1,673Interest
      Charges
            
            
            (16,442
            )
            
            
            (18,937
            )
            
            
            (20,985
            )Income
      Before Income Taxes
            
            
            66,299
            
            
            
            65,939
            
            
            
            64,677Income
      Taxes
            
            
            (27,104
            )
            
            
            (26,508
            )
            
            
            (26,652
            )Net
      Income
            
            $
            39,195
            
            
            $
            39,431
            
            
            $
            38,025


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


SJG-39
 Table of Contents


SOUTH
JERSEY GAS COMPANY


STATEMENTS
      OF CASH FLOWS(In
      Thousands)Year
      Ended December 31,2009
            
            
            2008
            
            
            2007Cash
      Flows from Operating Activities:Net
      Income
            
            $
            39,195
            
            
            $
            39,431
            
            
            $
            38,025Provided
      by Operating Activities:Depreciation
      and Amortization
            
            
            34,507
            
            
            
            31,506
            
            
            
            29,317Provision
      for Losses on Accounts Receivable
            
            
            2,418
            
            
            
            2,281
            
            
            
            2,672TAC/CIP
      Receivable
            
            
            5,376
            
            
            
            2,641
            
            
            
            (7,946
            )Deferred
      Gas Costs - Net of Recoveries
            
            
            (7,910
            )
            
            
            5,885
            
            
            
            7,755Deferred
      SBC Costs - Net of Recoveries
            
            
            (119
            )
            
            
            1,199
            
            
            
            3,960Environmental
      Remediation Costs - Net of Recoveries
            
            
            (444
            )
            
            
            (26,177
            )
            
            
            (10,926
            )Deferred
      and Noncurrent Income Taxes and Credits - Net
            
            
            22,104
            
            
            
            21,378
            
            
            
            12,957Gas
      Plant Cost of Removal
            
            
            (1,678
            )
            
            
            (1,463
            )
            
            
            (1,275
            )Changes
      in:Accounts
      Receivable
            
            
            3,526
            
            
            
            (4,531
            )
            
            
            (8,528
            )Inventories
            
            
            47,934
            
            
            
            (18,659
            )
            
            
            24,884Prepaid
      and Accrued Taxes - Net
            
            
            4,321
            
            
            
            (1,657
            )
            
            
            (2,099
            )Other
      Prepayments and Current Assets
            
            
            168
            
            
            
            (138
            )
            
            
            (14
            )Gas
      Purchases Payable
            
            
            (16,957
            )
            
            
            1,717
            
            
            
            (8,817
            )Accounts
      Payable and Other Accrued Liabilities
            
            
            (5,856
            )
            
            
            (13,857
            )
            
            
            9,787Other
      Assets
            
            
            (2,132
            )
            
            
            (375
            )
            
            
            (121
            )Other
      Liabilities
            
            
            (1,534
            )
            
            
            (8,920
            )
            
            
            (272
            )Net
      Cash Provided by Operating Activities
            
            
            122,919
            
            
            
            30,261
            
            
            
            89,359Cash
      Flows from Investing Activities:Capital
      Expenditures
            
            
            (98,673
            )
            
            
            (52,580
            )
            
            
            (48,070
            )Investment
      in Long-Term Receivables
            
            
            (4,730
            )
            
            
            (5,558
            )
            
            
            (4,123
            )Proceeds
      from Long-Term Receivables
            
            
            5,399
            
            
            
            3,399
            
            
            
            3,877Purchase
      of Restricted Investment with Escrowed Loan Proceeds
            
            
            -
            
            
            
            (39
            )
            
            
            (363
            )Restricted
      Investment - Escrowed Loan Proceeds
            
            
            -
            
            
            
            2,146
            
            
            
            6,710Net
      Cash Used in Investing Activities
            
            
            (98,004
            )
            
            
            (52,632
            )
            
            
            (41,969
            )Cash
      Flows from Financing Activities:Net
      (Repayments of) Borrowing from Lines of Credit
            
            
            (5,150
            )
            
            
            36,210
            
            
            
            (25,160
            )Proceeds
      from Issuance of Long-Term Debt
            
            
            -
            
            
            
            25,000
            
            
            
            -Principal
      Repayments of Long-Term Debt
            
            
            (9,873
            )
            
            
            (25,000
            )
            
            
            (2,290
            )Dividends
      on Common Stock
            
            
            (10,002
            )
            
            
            (14,867
            )
            
            
            (18,732
            )Payments
      for Issuance of Long-Term Debt
            
            
            (178
            )
            
            
            (320
            )
            
            
            -Excess
      Tax Benefit from Restricted Stock Plan
            
            
            53
            
            
            
            346
            
            
            
            55Net
      Cash (Used in) Provided by Financing Activities
            
            
            (25,150
            )
            
            
            21,369
            
            
            
            (46,127
            )Net
      (Decrease) Increase  in Cash and Cash
      Equivalents
            
            
            (235
            )
            
            
            (1,002
            )
            
            
            1,263Cash
      and Cash Equivalents at Beginning of Period
            
            
            2,228
            
            
            
            3,230
            
            
            
            1,967Cash
      and Cash Equivalents at End of Period
            
            $
            1,993
            
            
            $
            2,228
            
            
            $
            3,230Supplemental
      Disclosures of Cash Flow Information:Interest
      (Net of Amounts Applicable to Gas Cost Overcollections and Amounts
      Capitalized)
            
            $
            17,926
            
            
            $
            19,550
            
            
            $
            20,863Income
      Taxes (Net of Refunds)
            
            $
            (4,308
            )
            
            $
            7,315
            
            
            $
            15,684Supplemental
      Disclosures of Noncash Investing Activities:Capital
      property and equipment acquired on account but not paid at
      year-end
            
            $
            19,166
            
            
            $
            7,590
            
            
            $
            4,182


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


SJG-40
 Table of Contents





SOUTH
      JERSEY GAS COMPANYBALANCE
      SHEETS(In
      Thousands)December
      31,2009
            
            
            2008AssetsProperty,
      Plant and Equipment:Utility
      Plant, at original cost
            
            $
            1,275,792
            
            
            $
            1,172,014Accumulated
      Depreciation
            
            
            (314,627
            )
            
            
            (295,432
            )Property,
      Plant and Equipment – Net
            
            
            961,165
            
            
            
            876,582Investments:Available-for-Sale
      Securities
            
            
            5,941
            
            
            
            4,841Restricted
      Investments
            
            
            132
            
            
            
            132Total
      Investments
            
            
            6,073
            
            
            
            4,973Current
      Assets:Cash
      and Cash Equivalents
            
            
            1,993
            
            
            
            2,228Accounts
      Receivable
            
            
            41,392
            
            
            
            47,787Accounts
      Receivable - Related Parties
            
            
            974
            
            
            
            624Unbilled
      Revenues
            
            
            47,333
            
            
            
            48,225Provision
      for Uncollectibles
            
            
            (3,915
            )
            
            
            (3,628
            )Natural
      Gas in Storage, average cost
            
            
            23,711
            
            
            
            65,252Materials
      and Supplies, average cost
            
            
            4,854
            
            
            
            11,247Prepaid
      Taxes
            
            
            13,796
            
            
            
            11,860Derivatives
      - Energy Related Assets
            
            
            797
            
            
            
            380Other
      Prepayments and Current Assets
            
            
            2,248
            
            
            
            2,416Total
      Current Assets
            
            
            133,183
            
            
            
            186,391Regulatory
      and Other Noncurrent Assets:Regulatory
      Assets
            
            
            240,462
            
            
            
            270,434Unamortized
      Debt Issuance Costs
            
            
            5,829
            
            
            
            6,147Long-Term
      Receivables
            
            
            7,693
            
            
            
            7,081Derivatives
      - Energy Related Assets
            
            
            333
            
            
            
            15Other
            
            
            2,324
            
            
            
            2,392Total
      Regulatory and Other Noncurrent Assets
            
            
            256,641
            
            
            
            286,069Total
      Assets
            
            $
            1,357,062
            
            
            $
            1,354,015


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


SJG-41
 Table of Contents


SOUTH
JERSEY GAS COMPANY


BALANCE
      SHEETS(In
      Thousands, except for share data)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
            
            
            200,716
            
            
            
            200,663Accumulated
      Other Comprehensive Loss
            
            
            (6,330
            )
            
            
            (6,875
            )Retained
      Earnings
            
            
            231,296
            
            
            
            202,103Total
      Common Equity
            
            
            431,530
            
            
            
            401,739Long-Term
      Debt
            
            
            250,000
            
            
            
            269,873Total
      Capitalization
            
            
            681,530
            
            
            
            671,612Current
      Liabilities:Notes
      Payable
            
            
            109,400
            
            
            
            114,550Current
      Portion of Long-Term Debt
            
            
            35,000
            
            
            
            25,000Accounts
      Payable – Commodity
            
            
            19,630
            
            
            
            36,587Accounts
      Payable – Other
            
            
            21,947
            
            
            
            12,051Accounts
      Payable - Related Parties
            
            
            12,120
            
            
            
            16,744Derivatives
      - Energy Related Liabilities
            
            
            9,799
            
            
            
            26,698Deferred
      Income Taxes – Net
            
            
            11,642
            
            
            
            12,475Customer
      Deposits and Credit Balances
            
            
            13,542
            
            
            
            14,219Environmental
      Remediation Costs
            
            
            22,499
            
            
            
            13,117Taxes
      Accrued
            
            
            8,548
            
            
            
            2,291Pension
      Benefits
            
            
            1,066
            
            
            
            991Interest
      Accrued
            
            
            5,979
            
            
            
            6,244Other
      Current Liabilities
            
            
            7,839
            
            
            
            6,449Total
      Current Liabilities
            
            
            279,011
            
            
            
            287,416Regulatory
      and Other Noncurrent Liabilities:Regulatory
      Liabilities
            
            
            50,193
            
            
            
            50,447Deferred
      Income Taxes – Net
            
            
            210,925
            
            
            
            187,050Environmental
      Remediation Costs
            
            
            46,557
            
            
            
            50,976Asset
      Retirement Obligations
            
            
            22,960
            
            
            
            22,299Pension
      and Other Postretirement Benefits
            
            
            57,699
            
            
            
            67,566Investment
      Tax Credits
            
            
            1,517
            
            
            
            1,832Derivatives
      - Energy Related Liabilities
            
            
            504
            
            
            
            2,667Derivatives
      – Other
            
            
            1,956
            
            
            
            7,578Other
            
            
            4,210
            
            
            
            4,572Total Regulatory
      and Other Noncurrent Liabilities
            
            
            396,521
            
            
            
            394,987Commitments
      and Contingencies (Note 11)Total
      Capitalization and Liabilities
            
            $
            1,357,062
            
            
            $
            1,354,015


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


SJG-42
 Table of Contents


SOUTH
JERSEY GAS COMPANY


STATEMENTS
      OF CHANGES IN COMMON EQUITY AND COMPREHENSIVE INCOME(In
      Thousands)Common
              Stock
            
            
            Other
              Paid-In
      Capital
              and
      Premium on Common Stock
            
            
            Accumulated
      Other Comprehensive Loss
            
            
            Retained
              Earnings
            
            
            TotalBalance
      at January 1, 2007
            
            $
            5,848
            
            
            $
            200,317
            
            
            $
            (4,429
            )
            
            $
            158,246
            
            
            $
            359,982Net
      Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            38,025
            
            
            
            38,025Other
      Comprehensive Income (Loss), Net of Tax: (a)Postretirement  Liability
      Adjustment
            
            
            
            
            
            
            
            
            
            
            (307
            )
            
            
            
            
            
            
            (307
            )Unrealized
      Loss on Available-for-Sale Securities
            
            
            
            
            
            
            
            
            
            
            (195
            )
            
            
            
            
            
            
            (195
            )Unrealized
      Loss on Derivatives
            
            
            
            
            
            
            
            
            
            
            (425
            )
            
            
            
            
            
            
            (425
            )Other
      Comprehensive Loss, Net of Tax: (a)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (927
            )Comprehensive
      Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            37,098Cash
      Dividends Declared - Common Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (18,732
            )
            
            
            (18,732
            )Balance
      at December 31, 2007
            
            
            5,848
            
            
            
            200,317
            
            
            
            (5,356
            )
            
            
            177,539
            
            
            
            378,348Net
      Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            39,431
            
            
            
            39,431Other
      Comprehensive Income (Loss), Net of Tax (a)Postretirement Liability
      Adjustment
            
            
            
            
            
            
            
            
            
            
            (1,181
            )
            
            
            
            
            
            
            (1,181
            )Unrealized
      Loss on Available-for-Sale Securities
            
            
            
            
            
            
            
            
            
            
            (731
            )
            
            
            
            
            
            
            (731
            )Unrealized
      Gain on Derivatives
            
            
            
            
            
            
            
            
            
            
            393
            
            
            
            
            
            
            
            393Other
      Comprehensive Loss, Net of Tax (a)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,519
            )Comprehensive
      Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            37,912Cash
      Dividends Declared - Common Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (14,867
            )
            
            
            (14,867
            )Excess
      Tax Benefit from Restricted Stock Plan
            
            
            
            
            
            
            346
            
            
            
            
            
            
            
            
            
            
            
            346Balance
      at December 31, 2008
            
            
            5,848
            
            
            
            200,663
            
            
            
            (6,875
            )
            
            
            202,103
            
            
            
            401,739Net
      Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            39,195
            
            
            
            39,195Other
      Comprehensive Income (Loss), Net of Tax: (a)Postretirement
      Liability Adjustment
            
            
            
            
            
            
            
            
            
            
            (15
            )
            
            
            
            
            
            
            (15
            )Unrealized
      Gain on Available-for-Sale Securities
            
            
            
            
            
            
            
            
            
            
            533
            
            
            
            
            
            
            
            533Unrealized
      Gain on Derivatives
            
            
            
            
            
            
            
            
            
            
            27
            
            
            
            
            
            
            
            27Other
      Comprehensive Gain, Net of Tax: (a)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            545Comprehensive
      Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            39,740Cash
      Dividends Declared – Common Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (10,002
            )
            
            
            (10,002
            )Excess
      Tax Benefit from Restricted Stock Plan
            
            
            
            
            
            
            53
            
            
            
            
            
            
            
            
            
            
            
            53Balance
      at December 31, 2009
            
            $
            5,848
            
            
            $
            200,716
            
            
            $
            (6,330
            )
            
            $
            231,296
            
            
            $
            431,530Disclosure of Changes in Accumulated Other
      Comprehensive Loss Balances (a)(In
      Thousands)Postretirement
              Liability
              Adjustment
            
            
            Unrealized
              Gain
      (Loss) on Available-for-Sale Securities
            
            
            Unrealized
      (Loss) Gain on Derivatives
            
            
            Accumulated
      Other Comprehensive LossBalance
      at January 1, 2007
            
            
            
            
            
            $
            (3,940
            )
            
            $
            208
            
            
            $
            (697
            )
            
            $
            (4,429
            )Changes
      During Year
            
            
            
            
            
            
            (307
            )
            
            
            (195
            )
            
            
            (425
            )
            
            
            (927
            )Balance
      at December 31, 2007
            
            
            
            
            
            
            (4,247
            )
            
            
            13
            
            
            
            (1,122
            )
            
            
            (5,356
            )Changes
      During Year
            
            
            
            
            
            
            (1,181
            )
            
            
            (731
            )
            
            
            393
            
            
            
            (1,519
            )Balance
      at December 31, 2008
            
            
            
            
            
            
            (5,428
            )
            
            
            (718
            )
            
            
            (729
            )
            
            
            (6,875
            )Changes
      During Year
            
            
            
            
            
            
            (15
            )
            
            
            533
            
            
            
            27
            
            
            
            545Balance
      at December 31, 2009
            
            
            
            
            
            $
            (5,443
            )
            
            $
            (185
            )
            
            $
            (702
            )
            
            $
            (6,330
            )(a) 
      Determined using a combined statutory tax rate of 41.08%.The
      accompanying notes are an integral part of the financial
      statements.


SJG-43
 Table of Contents


NOTES
TO 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). In our opinion, the 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.




Equity
Investments - Marketable equity securities that are purchased as
long-term investments are classified as Available-for-Sale Securities and
carried at their fair value on our balance sheets. Any unrealized gains or
losses are included in Accumulated Other Comprehensive Loss.





Estimates
and Assumptions - We prepare our financial statements to conform with
accounting principles generally accepted in the United States of America (GAAP).
Management makes estimates and assumptions that affect the amounts reported in
the financial statements and related disclosures. Therefore, actual results
could differ from those estimates. Significant estimates include amounts related
to regulatory accounting, energy derivatives, environmental remediation costs,
pension and other postretirement benefit costs, and revenue
recognition.





Regulation- We are subject to the
rules and regulations of the New Jersey Board of Public Utilities (BPU). See
Note 2 for a detailed discussion of our rate structure and regulatory actions.
We maintain our accounts according to the BPU’s prescribed Uniform System of
Accounts. We follow the accounting for regulated enterprises prescribed by the
FASB ASC Topic 980 – “Regulated Operations.”  In general, Topic 980
allows for the deferral of certain costs (regulatory assets) and creation of
certain obligations (regulatory liabilities) when it is probable that such items
will be recovered from or refunded to customers in future periods. See Note 3
for a detailed discussion of regulatory assets and liabilities.


SJG-44
 Table of Contents


Operating
Revenues - Gas revenues are recognized in the period the commodity is
delivered to customers. For retail customers that are not billed at the end of
the month, we record an estimate to recognize unbilled revenues for gas
delivered from the date of the last meter reading to the end of the
month.





Revenue Based Taxes
- We collect certain revenue-based energy taxes from our 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 $8.8 million, $8.7 million and $8.8 million in 2009, 2008 and 2007,
respectively.





Accounts
Receivable and Provision for Uncollectible Accounts - Accounts receivable
are carried at the amount owed by customers. A provision for uncollectible
accounts is established based on our collection experience and an assessment of
the collectability of specific accounts.





Natural
Gas in Storage – Natural Gas in Storage is reflected at average cost on
the balance sheets, and represents natural gas that will be utilized in the
ordinary course of business.





Property,
Plant & Equipment - For regulatory purposes, utility plant is stated
at original cost, which may be different than our cost if the assets were
acquired from another regulated entity. The cost of adding, replacing and
renewing property is charged to the appropriate plant account. Utility Plant
balances as of December 31, 2009 and 2008 were comprised of the following (in
thousands):





2009
            
            
            2008Utility
      Plant:Production
      Plant
            
            $
            302
            
            
            $
            302Storage
      Plant
            
            
            12,193
            
            
            
            11,543Transmission
      Plant
            
            
            153,393
            
            
            
            151,546Distribution
      Plant
            
            
            1,021,233
            
            
            
            959,807General
      Plant
            
            
            45,008
            
            
            
            41,122Other Plant
            
            
            3,665
            
            
            
            3,665Utility
      Plant in Service
            
            
            1,235,794
            
            
            
            1,167,985Construction
      Work in Progress
            
            
            39,998
            
            
            
            4,029Total
      Utility Plant
            
            $
            1,275,792
            
            
            $
            1,172,014


SJG-45
 Table of Contents


The
significant increase in Construction Work in Progress is related to a major
transmission project under construction as of December 31, 2009.  This
project is part of the Company’s Capital Investment Recovery Tracker (CIRT)
program, as discussed under Note 2.





Asset
Retirement Obligations - The amounts included under Asset Retirement
Obligations (ARO) are primarily related to the legal obligations we have to cut
and cap our gas distribution pipelines when taking those pipelines out of
service in future years. These liabilities are generally recognized upon the
acquisition or construction of the asset. The related asset retirement cost is
capitalized concurrently by increasing the carrying amount of the related asset
by the same amount as the liability. Changes in the liability are recorded for
the passage of time (accretion) or for revisions to cash flows originally
estimated to settle the ARO.





ARO
activity during 2009 and 2008 was as follows (in thousands):





2009
            
            
            2008AROs
      as of January 1,
            
            $
            22,299
            
            
            $
            24,364Accretion
            
            
            492
            
            
            
            427Additions
            
            
            193
            
            
            
            136Settlements
            
            
            (24
            )
            
            
            (37
            )Revisions
      in Estimated Cash Flows *
            
            
            -
            
            
            
            (2,591
            )AROs
      as of December 31,
            
            $
            22,960
            
            
            $
            22,299* A
      corresponding reduction was made to Regulatory Assets, thus having no
      impact on Earnings.





Depreciation- We depreciate utility plant on a straight-line basis over the estimated
remaining lives of the various property classes. These estimates are
periodically reviewed and adjusted as required after BPU approval. The composite
annual rate for all depreciable utility property was approximately 2.3% in 2009,
2008 and 2007. The actual composite rate may differ from the approved rate as
the asset mix changes over time. Except for retirements outside of the normal
course of business, accumulated depreciation is charged with the cost of
depreciable utility property retired, less salvage.





Capitalized
Interest - We capitalize interest on construction at the rate of return
on rate base utilized by the BPU to set rates in our last base rate proceeding
(See Note 2). Capitalized interest is included in Utility Plant on the balance
sheets. Interest Charges are presented net of capitalized interest on the
statements of income.  The amount of interest capitalized by SJG for
the years ended December 31, 2009, 2008 and 2007 was not
significant.


SJG-46
 Table of Contents


Impairment
of Long-Lived Assets - We review the carrying amount of long-lived assets
for possible impairment whenever events or changes in circumstances indicate
that such amounts may not be recoverable. For the years ended 2009, 2008 and
2007, no significant impairments were identified.





Derivative
Instruments - We are involved in buying, selling, transporting and
storing natural gas and are subject to market risk due to commodity price
fluctuations. Our affiliate, South Jersey Resources Group (SJRG), manages this
risk for us by entering into a variety of physical and financial transactions
including forward contracts, swap agreements, options contracts and futures
contracts on our behalf.  Management takes an active role in the risk
management process and has developed policies and procedures that require
specific administrative and business functions to assist in identifying,
assessing and controlling various risks. Management reviews any open positions
in accordance with strict policies to limit exposure to market
risk.





We
account for derivative instruments in accordance with FASB ASC Topic 815 –
“Derivatives and Hedging.” We record all derivatives, whether designated in
hedging relationships or not, on the balance sheets at fair value unless the
derivative contracts qualify for the normal purchase and sale exemption. In
general, if the derivative is designated as a fair value hedge, we recognize the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk in earnings. We currently have no fair value hedges. If the
derivative is designated as a cash flow hedge, we record the effective portion
of the hedge in Accumulated Other Comprehensive Loss and recognize it in the
income statement when the hedged item affects earnings. We recognize ineffective
portions of cash flow hedges immediately in earnings. In 2007, we changed our
policy to no longer designate energy-related derivative instruments as cash flow
hedges. We formally document all relationships between hedging instruments and
hedged items, as well as our risk management objectives, strategies for
undertaking various hedge transactions and our methods for assessing and testing
correlation and hedge ineffectiveness. All hedging instruments are linked to the
hedged asset, liability, firm commitment or forecasted transaction.





Initially
and on an ongoing basis, we assess whether our derivatives are highly effective
in offsetting changes in cash flows or fair values of the hedged items. We
discontinue hedge accounting prospectively if we decide to discontinue the
hedging relationship; determine that the anticipated transaction is no longer
likely to occur; or determine that a derivative is no longer highly effective as
a hedge. In the event that hedge accounting is discontinued, we will continue to
carry the derivative on our balance sheet at its current fair value and
recognize subsequent changes in fair value in current period earnings.
Unrealized gains and losses on the discontinued hedges that were previously
included in Accumulated Other Comprehensive Loss are reclassified into earnings
when the forecasted transaction occurs, or when it is probable that it will not
occur.


SJG-47
 Table of Contents


Due to
the application of regulatory accounting principles under FASB ASC Topic 980,
the costs or benefits of derivative contracts related to gas purchases are
recovered through our Basic Gas Supply Service (BGSS) Clause, subject to BPU
approval (See Note 2). As of December 31, 2009 and 2008, we had $9.2 million and
$29.0 million of costs, respectively, included in our BGSS related to open
financial contracts (See Note 3).





The
Company has entered into interest rate derivatives and similar agreements to
hedge exposure to increasing interest rates, and the impact of those rates on
cash flows of variable-rate debt. These interest rate derivatives are
included in Derivatives-Other on the balance sheets.





We
previously used derivative transactions known as “Treasury Locks” to hedge
against the impact on our cash flows of possible interest rate increases on debt
issued in September 2005.  The initial $1.4 million cost of the
Treasury Locks has been included in Accumulated Other Comprehensive Loss and is
being amortized over the 30 year life of the associated debt
issue.  As of December 31, 2009, the unamortized balance is
approximately $1.2 million.





We
currently have two long-term interest rate swaps under which we pay a fixed
interest rate at 3.43% through January 2036 on $25.0 million of variable-rate,
tax-exempt debt which was issued in April 2006. The differential to be paid
or received as a result of these swap agreements is accrued as interest rates
change and is recognized as an adjustment to interest expense.





As of
December 31, 2009 and 2008, the fair value of these interest rate
derivative agreements was $2.0 million and $7.6 million, respectively, and is
included on the balance sheet under the caption Regulatory and Other Noncurrent
Liabilities: Derivatives - Other. The fair value represents the amount we
would have expected to pay to the counterparties if the contracts had been
terminated on those dates. Management believes that, subject to BPU approval,
the market value upon termination can be recovered in rates, and therefore, the
unrealized loss has been included in Other Regulatory Assets in the balance
sheets.


SJG-48
 Table of Contents


As of
December 31, 2009, SJG’s active interest rate swaps were as
follows:





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





The
fair values of all derivative instruments, as reflected in the balance sheets as
of December 31, 2009 and 2008, are as follows (in thousands):





Derivatives
      not designated as hedging instruments under GAAP
            
            2009
            
            
            2008Assets
            
            
            Liabilities
            
            
            Assets
            
            
            LiabilitiesEnergy
      related commodity contracts:Derivatives
      – Energy Related – Current
            
            $
            797
            
            
            $
            9,799
            
            
            $
            380
            
            
            $
            26,698Derivatives
      – Energy Related – Non-Current
            
            
            333
            
            
            
            504
            
            
            
            15
            
            
            
            2,667Interest
      rate contracts:Derivatives
      - Other
            
            
            -
            
            
            
            1,956
            
            
            
            -
            
            
            
            7,578Total
      derivatives not designated as hedging instruments under
    GAAP
            
            
            1,130
            
            
            
            12,259
            
            
            
            395
            
            
            
            36,943





The
effect of derivative instruments on the statements of income for 2009, 2008 and
2007 are as follows (in thousands):





Year
      ended December 31,Derivatives
      in Cash Flow Hedging Relationships
            
            2009
            
            
            2008
            
            
            2007Interest
      Rate Contracts:Gains
      recognized in OCI on effective portion
            
            $
            -
            
            
            $
            621
            
            
            $
            (768
            )Losses  reclassified
      from accumulated OCI into income (a)
            
            $
            (46
            )
            
            $
            (46
            )
            
            $
            (46
            )(a)
      Included in Interest Charges





Stock-Based
Compensation Plans   Officers and other key employees of
SJG participate in the Stock Option, Stock Appreciation Rights and Restricted
Stock Award Plan (“Plan”) of SJI. As the vesting requirements under the plan are
contingent upon market and service conditions, SJI is required to measure and
recognize stock-based compensation expense based on the fair value at the date
of grant for share-based awards on a straight-line basis over the requisite
service period of each award. In addition, SJI identifies specific forfeitures
of share-based awards and compensation expense is adjusted accordingly over the
requisite service period.  Compensation expense is not adjusted based
on the actual achievement of performance goals. The fair value of Officers’
restricted stock awards on the date of grant is estimated using a Monte Carlo
simulation model.


SJG-49
 Table of Contents


We are
allocated a portion of SJI's compensation cost during the vesting period. 
We accrue a liability and record compensation cost on a straight-line basis over
the requisite three-year service period based on the grant date fair value. Upon
vesting, we make a cash payment to SJI equal to the amounts accrued as
compensation cost during the vesting period. Since the inception of the
Plan, our expense recognition policy has been consistent with the expense
recognition policy at SJI.





The
following table summarizes the SJI nonvested restricted stock awards pertaining
to SJG outstanding at December 31, 2009, and the assumptions used to estimate
the fair value of the awards:





Grant
            
            Shares
            
            
            Fair
      Value
            
            
            Expected
            
            
            Risk-FreeDate
            
            Outstanding
            
            
            Per
      Share
            
            
            Volatility
            
            
            Interest
      RateJan.
      2008
            
            
            9,238
            
            
            $
            34.030
            
            
            
            21.7
            %
            
            
            2.9
            %Jan.
      2009
            
            
            8,318
            
            
            $
            39.350
            
            
            
            28.6
            %
            
            
            1.2
            %





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.





For the
years ended December 31, 2009, 2008 and 2007, the cost of restricted stock
awards was $0.3 million, $0.3 million and $0.2 million, respectively. Of these
costs, $0.2, $0.1 and $0.1 million was capitalized to Utility Plant in each of
those years, respectively.





As of
December 31, 2009, there was $0.3 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 1.7 years.





The
following table summarizes information regarding restricted stock award activity
during 2009, excluding accrued dividend equivalents:





Weighted
      AverageGrant
      DateShares
            
            
            Fair
      ValueNonvested
      Shares Outstanding, January 1, 2009
            
            
            18,283
            
            
            $
            31.645Granted
            
            
            8,318
            
            
            $
            39.350Vested*
            
            
            (9,045
            )
            
            $
            29.210Nonvested
      Shares Outstanding, December 31, 2009
            
            
            17,556
            
            
            $
            36.551* 
      Actual shares expected to be awarded to SJG officers and other key
      employees during the first quarter of 2010, including dividend equivalents
      and adjustments for performance measures, total 14,400
      shares.


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 Table of Contents


During
2009, SJI awarded 13,640 shares that had vested at December 31, 2008, to
SJG officers and other key employees at a market value of $0.5 million. During
2008, 12,299 shares were awarded to SJG officers and other key employees at
a market value of $0.4 million. As discussed earlier, we have a policy
of making cash payments to SJI to satisfy our allocated obligations
under this plan. Cash payments to SJI during 2009 and 2008, were
approximately $0.2 million and $0.6 million, respectively, relating to stock
awards.  Additionally, a change in control could result in the
nonvested shares becoming nonforfeitable or immediately payable in
cash.





Income
Taxes- Deferred income taxes are provided for all significant temporary
differences between the book and taxable basis of assets and liabilities in
accordance with FASB ASC Topic 740 – “Income Taxes” (See Note5). A valuation
allowance is established when it is determined that it is more likely than not
that a deferred tax asset will not be realized.





Cash and
Cash Equivalents - For purposes of reporting cash flows, highly liquid
investments with original maturities of three months or less are considered cash
equivalents.





NEW
ACCOUNTING PRONOUNCEMENTS — Other than as described below, no new
accounting pronouncement issued or effective during 2009 had, or is expected to
have, a material impact on the financial statements.





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 financial
statements.


SJG-51
 Table of Contents


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 financial statements.  See
disclosures above.





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.
The adoption of this guidance did not have a material effect on the Company’s
financial statements.  See disclosures in Note 10.





In June
2009, the FASB issued new accounting guidance on The FASB Accounting Standards
CodificationTM (the “Codification”) which has become the single official source
of authoritative, nongovernmental GAAP. 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 were 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
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 was effective for the
period ending December 31, 2009 and did not have a material effect on the
Company’s financial statements.


SJG-52
 Table of Contents


2.        
       RATES AND
REGULATORY ACTIONS:





Base
Rates - In July 2004 the BPU approved our current rate structure based on
a 7.97% rate of return on rate base that included a 10.0% return on common
equity.  We were also permitted to recover regulatory assets contained
in our petition and to reduce our composite depreciation rate from 2.9% to
2.4%.  Included in the base rate increase was also a change to the
sharing of pre-tax margins on interruptible, off system sales and
transportation.  The sharing of pre-tax margins begins from dollar
one, with our retaining 20% through June 30, 2006.  Effective July 1,
2006, the 20% retained by us decreased to 15% of such margins.





In
January 2010, we filed a base rate case with the BPU to increase our base rates
to obtain a certain level of return on our investment of capital. We expect the
rate case to be concluded during 2010. We have not sought a base rate increase
from the BPU since the implementation of our base rate case approved in July
2004.





Rate
Mechanisms - Our tariff, a schedule detailing the terms, conditions and
rate information applicable to our various types of natural gas service, as
approved by the BPU, has several primary rate mechanisms as discussed in detail
below:





Basic Gas Supply Service
(BGSS) Clause - The BGSS price structure was approved by the BPU in
January 2003, and allows us to recover all prudently incurred gas costs. BGSS
charges to customers can be either monthly or periodic (annual). Monthly BGSS
charges are applicable to large use customers and are referred to as monthly
because the rate changes on a monthly basis pursuant to a BPU-approved formula
based on commodity market prices. Periodic BGSS charges are applicable to lower
usage customers, which include all of our residential customers, and are
evaluated at least annually by the BPU. However, to some extent, more frequent
rate changes to the periodic BGSS are allowed. We collect gas costs from
customers on a forecasted basis and defer periodic over/under recoveries to the
following BGSS year, which runs from October 1 through September 30. If we are
in a net cumulative undercollected position, gas costs deferrals are reflected
on the balance sheet as a regulatory asset. If we are in a net cumulative
overcollected position, amounts due back to customers are reflected on the
balance sheet as a regulatory liability. We pay interest on net overcollected
BGSS balances at the rate of return on rate base of 7.97% utilized by the BPU to
set rates in our last base rate proceeding.


SJG-53
 Table of Contents


Regulatory
actions regarding the BGSS were as follows:





·
            June
      2007 – We made our annual periodic BGSS filing with the BPU requesting a
      $16.9 million, or 5.0%, decrease in gas cost recoveries in response to
      decreasing wholesale gas costs and a $5.4 million benefit derived from the
      Company electing not to extend the terms of two firm transportation
      contracts beyond their primary
terms.


·
            October
      2007 – The BPU approved on a provisional basis, a $36.7 million, or 11%,
      annual decrease in gas cost recoveries due to the continuing decrease in
      wholesale gas costs subsequent to our June 2007
  filing.


·
            May
      2008 - We made our annual periodic BGSS filing with the BPU requesting a
      $73.7 million, or 23%, increase in gas cost recoveries in response to
      increasing wholesale gas costs.


·
            November
      2008 – The BPU approved, on a provisional basis, a $38.0 million, or 12%
      increase in gas cost recoveries reflecting a lower increase in gas costs
      than originally projected in our May 2008
  filing.


·
            December
      2008 - As part of a global settlement, the BPU approved on a provisional
      basis, a decrease in gas cost recoveries of $9.0 million, or 3%, due to
      the continued decline in projections in the wholesale gas
      market.


·
            June
      2009 - We made our annual BGSS filing to the BPU requesting a $54.7
      million reduction, or 17.5% decrease, in gas cost recoveries in response
      to projected decreases in wholesale
gas.


·
            August
      2009 - The BPU issued an Order finalizing the 2008-2009 provisional BGSS
      rates.


·
            September
      2009 - The BPU approved, on a provisional basis, a $54.7 million, or
      17.5%, decrease in gas cost
recoveries.





Conservation Incentive
Program (CIP) - The primary purpose of the CIP is to promote conservation
efforts, without negatively impacting financial stability, and to base our
profit margin on the number of customers rather than the amount of natural gas
distributed to customers. In October 2006, the BPU approved the CIP as a
three-year pilot program. In January 2010, the BPU approved an extension of this
program through September 2013. Each CIP year begins October 1 and ends
September 30 of the subsequent year. On a monthly basis during the CIP year, we
record adjustments to earnings based on weather and customer usage factors, as
incurred. Subsequent to each year, we will make filings with the BPU to review
and approve amounts recorded under the CIP. BPU approved cash inflows or
outflows generally will not begin until the next CIP year.


SJG-54
 Table of Contents


Regulatory
actions regarding the CIP were as follows:





·
            June
      2007 – We made our first annual CIP filing, requesting recovery of $14.3
      million in deficiency, of which $9.6 million was non-weather
      related.


·
            October
      2007 – The BPU approved on a provisional basis, recovery of $15.5 million
      in deficiency, of which $9.1 million was non-weather
    related.


·
            May
      2008 - We made our annual CIP filing, requesting recovery of $19.1
      million, of which $14.1 million was non-weather
  related.


·
            December
      2008 - As part of a global settlement, the BPU approved, on a provisional
      basis, the recovery of CIP revenue of $20.4 million, of which $16.4
      million was non-weather related.


·
            June
      2009 - We made our annual CIP filing to the BPU requesting recovery of
      $13.4 million which included a $13.7 million non-weather related recovery,
      partially offset by a credit of $0.3 million which was weather
      related.


·
            August
      2009 - The BPU issued an Order finalizing the 2008-2009 provisional CIP
      rates.


·
            September
      2009 - The BPU approved, on a provisional basis, the recovery of CIP
      revenue of $13.4 million.





Capital Investment Recovery
Tracker (CIRT) - In January 2009, we made a filing with the BPU
requesting approval for an accelerated infrastructure investment
program.  The purpose of the CIRT was to accelerate $103.0 million of
capital expenditures from five years to two years.  The petition
requested that the Company be allowed to earn a return of, and a return on, our
investment.  Under the CIRT, 2009 spending was projected to be $70.5
million and 2010 spending was projected to be $32.5 million.  On a
monthly basis during the CIRT year, we record adjustments to earnings based on
actual CIRT program expenditures, as incurred.  Annually we make a
filing to the BPU for review and approval of expenditures recorded under the
CIRT.





·
            January
      2009 - We filed a petition with the BPU for approval of an accelerated
      infrastructure investment program and associated rate tracker as discussed
      above.


·
            April
      2009 – The BPU approved our petition for the CIRT, including a first year
      estimated capital expenditure level of $70.5 million, and estimated
      revenue of $3.2 million.


SJG-55
 Table of Contents


·
            November
      2009 - We made our annual CIRT filing, requesting $10.6 million in
      additional revenue.


·
            December
      2009 – The BPU approved, on a provisional basis, recovery of an additional
      $9.9 million in CIRT revenue.





Energy Efficiency Tracker(EET) - In January 2009 we filed a petition with the BPU requesting
approval of an energy efficiency program for residential, commercial and
industrial customers.  Under this program we will invest $17.0 million
over two years in energy efficiency measures to be installed in customer homes
and businesses. We can recover incremental operating and maintenance expenses
and earn a return of, and return on, program investments. 2009 revenue was
projected to be $1.7 million.





·
            January
      2009 - Filed a petition with the BPU for approval of an energy efficiency
      program as noted above.


·
            July
      2009 - The BPU approved our petition for the EET with a revenue recovery
      of $1.3 million.





Societal Benefits
Clause (SBC) - The SBC allows us to recover costs related to several
BPU-mandated programs. Within the SBC are a Remediation Adjustment Clause (RAC),
a New Jersey Clean Energy Program (NJCEP), a Universal Service Fund (USF)
program and a Consumer Education Program (CEP).





Regulatory
actions regarding the SBC, with the exception of USF which requires separate
regulatory filings, were as follows:





·
            December
      2007 – We made our annual SBC filing, superseding our 2005 and 2006 SBC
      filings, requesting a $7.4 million increase in annual SBC
      recoveries.


·
            December
      2008 – As part of the global settlement, the BPU approved an increase in
      the RAC portion of the SBC, resulting in an increase in revenue of $8.5
      million.  In addition, the BPU approved a reduction in the
      interest rate utilized to calculate deferred tax on the
    RAC.


·
            January
      2009 - We made our annual 2008-2009 SBC filing requesting $7.9 million
      increase in SBC recoveries, which includes a net increase in Remediation
      Adjustment Clause, Clean Energy Program Clause and Transportation
      Initiation Clause.


·
            August
      2009 - We made our annual 2009-2010 SBC filing, requesting a $15.5 million
      increase in SBC recoveries, which includes a net increase in Remediation
      Adjustment Clause, Clean Energy Program Clause and Transportation
      Initiation Clause.


SJG-56
 Table of Contents


Remediation Adjustment Clause
(RAC) - The RAC recovers environmental remediation costs of 12 former gas
manufacturing plants (See Note 11). The BPU allows us to recover such costs over
7-year amortization periods. The net between the amounts actually spent and
amounts recovered from customers is recorded as a regulatory asset,
Environmental Remediation Cost Expended - Net. Note that RAC activity affects
revenue and cash flows but does not directly affect earnings because of the cost
recovery over 7-year amortization periods. As of December 31, 2009 and 2008, we
reflected the unamortized remediation costs of $42.9 million and $48.1 million,
respectively, on the balance sheet under Regulatory Assets (See Note 3). Since
implementing the RAC in 1992, we have recovered $44.1 million through
rates.





New Jersey Clean Energy Program
(NJCEP) - This mechanism recovers costs associated with our energy
efficiency and renewable energy programs. In August 2008, the BPU approved the
statewide funding of the NJCEP of $1.2 billion for the years 2009 through 2012.
Of this amount, we will be responsible for approximately $41.5 million over the
4-year period. NJCEP adjustments affect revenue and cash flows but do not
directly affect earnings as related costs are deferred and recovered through
rates on an on-going basis.





Universal Service Fund (USF)
- The USF is a statewide program through which funds for the USF and Lifeline
Credit and Tenants Assistance Programs are collected from customers of all New
Jersey electric and gas utilities. USF adjustments affect revenue and cash flows
but do not directly affect earnings as related costs are deferred and recovered
through rates on an ongoing basis.





Separate
regulatory actions regarding the USF were as follows:





·
            July
      2007 – We made our annual USF filing, along with the state’s other
      electric and gas utilities, proposing to decrease annual statewide gas
      revenues to $78.1 million.  This rate proposal was approved by
      the BPU in October 2007, on an interim basis, and were designed to
      decrease our annual USF revenues by $3.4 million.  The revised
      rates were effective from October 5, 2007 through September 30,
      2008.


·
            June
      2008 – We made our annual USF filing, along with the state’s other
      electric and gas utilities, proposing to increase annual statewide gas
      revenues to $97.3 million.  This proposal was designed to
      increase our annual USF revenues by $ 2.6
  million.


SJG-57
 Table of Contents


·
            October
      2008 – The BPU approved the statewide budget of $96.7 million for all of
      the State’s gas utilities.  Our portion of this total is
      approximately $8.8 million and increased rates were implemented effective
      October 27, 2008 resulting in a $2.5 million increase to our annual USF
      recoveries.


·
            June
      2009 - We made our annual USF filing, along with the state’s other
      electric and gas utilities, proposing to decrease annual statewide gas
      revenues by $39.1 million.  This proposal was designed to
      decrease our annual USF revenue by $4.9
million.


·
            October
      2009 – The BPU approved the statewide budget of $60.1 million for all of
      the State’s gas utilities.  Our portion of this total is
      approximately $5.1 million and decreased rates were implemented effective
      October 12, 2009 resulting in a $4.1 million decrease to our annual USF
      recoveries.





Other Regulatory
Matters -





Unbundling-
Effective January 10, 2000, the BPU approved full unbundling of our system. This
allows all natural gas consumers to select their natural gas commodity supplier.
As of December 31, 2009, 24,807 of our residential customers were purchasing
their gas commodity from someone other than us. Customers choosing to purchase
natural gas from providers other than the utility are charged for the cost of
gas by the marketer. The resulting decrease in our revenues is offset by a
corresponding decrease in gas costs. While customer choice can reduce utility
revenues, it does not negatively affect our net income or financial condition.
The BPU continues to allow for full recovery of prudently incurred natural gas
costs through the BGSS. Unbundling did not change the fact that we still recover
cost of service, including certain deferred costs, through base
rates.





Pipeline Integrity -
In October 2005, we filed a petition with the BPU to implement a Pipeline
Integrity Management Tracker (Tracker). The purpose of the Tracker is to recover
incremental costs to be incurred by us as a result of new federal regulations,
which are aimed at enhancing public safety and reliability. The regulations
require that utilities use a comprehensive analysis to assess, evaluate, repair
and validate the integrity of certain transmission lines in the event of a leak
or failure. As of December 31, 2009 and 2008, costs incurred under this program
totaled $1.2 million and $1.1 million, respectively, and are included in Other
Regulatory Assets (See Note 3).  We continue to engage in settlement
negotiations in which we are proposing to modify the original request and
provide for deferred accounting treatment of Pipeline Integrity related
operating expenses.   We have proposed recovery of these deferred
costs in our base rate case filed in January 2010.






SJG-58
 Table of Contents




3.           
      REGULATORY ASSETS AND
LIABILITIES:





The
discussion under Note 2, Rates and Regulatory Actions, is integral to the
following explanations of specific regulatory assets and
liabilities.





Regulatory
      Assets at December 31 consisted of the following items (in
      thousands):2009
            
            
            2008Environmental
      Remediation Costs:Expended
      – Net
            
            $
            42,924
            
            
            $
            48,143Liability
      for Future Expenditures
            
            
            69,056
            
            
            
            64,093Income
      Taxes - Flowthrough Depreciation
            
            
            1,752
            
            
            
            2,729Deferred
      Asset Retirement Obligation Costs
            
            
            22,438
            
            
            
            21,901Deferred
      Gas Costs – Net
            
            
            6,519
            
            
            
            18,406Deferred
      Pension and Other Postretirement Benefit Costs
            
            
            71,192
            
            
            
            80,162Conservation
      Incentive Program Receivable
            
            
            16,672
            
            
            
            22,048Societal
      Benefit Costs Receivable
            
            
            1,872
            
            
            
            1,753Premium
      for Early Retirement of Debt
            
            
            1,046
            
            
            
            1,208Other
      Regulatory Assets
            
            
            6,991
            
            
            
            9,991Total
      Regulatory Assets
            
            $
            240,462
            
            
            $
            270,434





Except
where noted below, all regulatory assets are or will be recovered through
utility rate charges, as detailed in the following discussion. We are currently
permitted to recover interest on our Environmental Remediation Costs and
Societal Benefit Costs Receivable while the other assets are being recovered
without a return on investment.





Environmental Remediation
Costs - We have two regulatory assets associated with environmental costs
related to the cleanup of 12 sites where we or our predecessors previously
operated gas manufacturing plants. The first asset, Environmental Remediation
Cost: Expended - Net, represents what was actually spent to clean up the sites,
less recoveries through the RAC and insurance carriers. These costs meet the
deferral requirements of GAAP, as the BPU allows us to recover such expenditures
through the RAC. The other asset, Environmental Remediation Cost: Liability for
Future Expenditures, relates to estimated future expenditures required to
complete the remediation of these sites. We recorded this estimated amount as a
regulatory asset with the corresponding current and noncurrent liabilities on
the balance sheets under the captions Current Liabilities and Regulatory and
Other Noncurrent Liabilities. The BPU allows us to recover the deferred costs
over seven-year periods after they are spent.


SJG-59
 Table of Contents


Income Taxes - Flowthrough
Depreciation - This regulatory asset represents unamortized excess tax
depreciation over book depreciation on utility plant because of temporary
differences for which, prior to 1993, deferred taxes previously were not
provided. We previously passed these tax benefits through to ratepayers and are
recovering the amortization of the regulatory asset through rates until
2011.





Deferred Asset Retirement
Obligation Costs - This regulatory asset  resulted from the
recording of asset retirement obligations (ARO’s) and additional utility plant,
primarily related to a legal obligation we have for certain safety requirements
upon the retirement of our gas distribution and transmission system. We recover
asset retirement costs through rates charged to customers. All related
accumulated accretion and depreciation amounts for these ARO’s represent timing
differences in the recognition of retirement costs that we are currently
recovering in rates and, as such, we are deferring such differences as
regulatory assets.





Deferred Gas Costs -
Net-
Over/under collections of gas costs are monitored through our 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 our natural gas purchases are also included in the BGSS,
subject to BPU approval. See detailed discussion under Derivative Instruments in
Note 1.





Deferred Pension and Other
Postretirement Benefit Costs - The BPU authorized us to recover
costs related to postretirement benefits under the accrual method of accounting
consistent with  GAAP.  We deferred amounts accrued prior to
that authorization and are amortizing them as allowed by the BPU over 15 years
through 2012. The unamortized balance was $1.1 million at December 31, 2009. In
2006, our regulatory asset was increased by $37.1 million representing the
recognition of the underfunded positions of our pension and other postretirement
benefit plans.  Subsequent adjustments to this balance occur annually
to reflect changes in the funded positions of these benefit plans caused by
changes in actual plan experience as well as assumptions of future experience
(See Note 10).





Conservation Incentive
Program Receivable - The impact of the CIP is recorded as an adjustment
to earnings as incurred. The first year of cash recovery under the CIP began
October 2007.





Societal Benefit Costs
Receivable - At both December 31, 2009 and 2008, this regulatory asset
primarily represents cumulative costs less recoveries under the USF
program.


SJG-60
 Table of Contents


Premium for Early Retirement
of Debt - This regulatory asset represents unamortized debt issuance
costs related to long-term debt refinancings and a call premium associated with
the retirement of debt, all occurring in 2005 and 2004. Unamortized debt
issuance costs are being amortized over the term of the new debt issue pursuant
to regulatory approval by the BPU. The call premium is expected to be approved
for recovery through future rate proceedings.





Other Regulatory
Assets - Some of the assets included in Other Regulatory Assets are
currently being recovered from ratepayers as approved by the BPU. Management
believes the remaining deferred costs are probable of recovery from ratepayers
through future utility rates.





Regulatory
Liabilities at December 31 consisted of the following items (in
thousands):





2009
            
            
            2008Excess
      Plant Removal Costs
            
            $
            48,715
            
            
            $
            48,820Other
            
            
            1,478
            
            
            
            1,627Total
      Regulatory Liabilities
            
            $
            50,193
            
            
            $
            50,447





Excess Plant Removal
Costs – Represents amounts accrued in excess of actual utility plant
removal costs incurred to date, which we have an obligation to either expend or
return to ratepayers in future periods.




Other Regulatory
Liabilities – All other regulatory liabilities are subject to being
returned to ratepayers in future rate proceedings.





4. RELATED
PARTY TRANSACTIONS:





We
conducted business with our parent, SJI, and several other related parties. A
description of each of these affiliates and related transactions is as
follows:





SJI
Services, LLC (SJIS) - a wholly owned subsidiary of SJI, provides
services, such as information technology, human resources, government relations,
corporate communications, materials purchasing, fleet management and insurance
to SJI and all of its subsidiaries.


SJG-61
 Table of Contents


South
Jersey Energy Solutions, LLC (SJES) - a wholly owned subsidiary of SJI
that serves as a holding company for all of SJI’s nonutility operating
businesses:





·
            South Jersey Energy
      Company (SJE) - a wholly owned subsidiary of SJI and a third party
      energy marketer that acquires and markets natural gas and electricity to
      retail end users and provides total energy management services to
      commercial and industrial customers. We previously sold natural gas for
      resale to SJE and also provide them with billing services. For SJE’s
      residential customers, for which we perform billing services, we purchase
      the related accounts receivable at book value less a factor for potential
      uncollectible accounts, and assume all risk associated with
      collection.





·
            South Jersey Resources
      Group, LLC (SJRG) - a wholly owned subsidiary of SJI and a
      wholesale gas and risk management business that supplies natural gas
      storage, commodity and transportation to retail marketers, utility
      businesses and electricity generators in the mid-Atlantic and southern
      regions. We sell natural gas for resale and capacity release to SJRG and
      also meet some of our gas purchasing requirements by purchasing natural
      gas from SJRG. Additionally, SJRG manages our market risk associated with
      fluctuations in the cost of natural gas by entering into financial
      derivative contracts on our behalf. The gain or loss associated with these
      derivative contracts is included in our BGSS and in the SJRG receivable
      and payable amounts shown below





·
            Marina Energy LLC
      (Marina) - a wholly owned subsidiary of SJI and developer, owner
      and operator of energy related projects. We provide natural gas
      transportation services to Marina under BPU-approved
    tariffs.





·
            South Jersey Energy
      Service Plus, LLC (SJESP) - a wholly owned subsidiary of SJI and an
      appliance service and installation of heating and cooling systems company.
      We lease vehicles and provide billing services to
  SJESP.





Millennium
Account Services, LLC (Millennium) - a partnership between SJI and
Conectiv Solutions, LLC, which reads our utility customers’ meters on a monthly
basis for a fee.





Sales of
gas to SJRG and SJE comply with Section 284.02 of the Regulations of the Federal
Energy Regulatory Commission (FERC).


SJG-62
 Table of Contents


In
addition to the above, we provide various administrative and professional
services to SJI and each of the affiliates discussed above. Likewise, SJI and
SJIS provide substantial administrative services on our behalf. For certain
types of transactions, we served as central processing agents for the related
parties discussed above. Amounts due to and due from these related parties for
pass-through items are not considered material to the financial statements as a
whole.





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





2009
            
            
            2008
            
            
            2007Operating
      Revenues/Affiliates:SJRG
            
            $
            3,782
            
            
            $
            7,604
            
            
            $
            19,328Other
            
            
            456
            
            
            
            402
            
            
            
            386Total
      Operating Revenues/Affiliates
            
            $
            4,238
            
            
            $
            8,006
            
            
            $
            19,714





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





2009
            
            
            2008
            
            
            2007Costs
      of Sales/Affiliates(Excluding
      depreciation):SJRG
            
            $
            38,643
            
            
            $
            28,565
            
            
            $
            24,601Derivative
      Gains (Losses) (See Note 1):SJRG
            
            $
            51,856
            
            
            $
            (6,215
            )
            
            $
            19,169Operations
      Expense/AffiliatesSJI
            
            $
            8,042
            
            
            $
            6,957
            
            
            $
            6,650SJIS
            
            
            4,768
            
            
            
            4,154
            
            
            
            4,550Millennium
            
            
            2,904
            
            
            
            2,982
            
            
            
            2,872Other
            
            
            (288
            )
            
            
            (226
            )
            
            
            139Total
      Operations Expense/Affiliates
            
            $
            15,426
            
            
            $
            13,867
            
            
            $
            14,211


SJG-63
 Table of Contents


5.               
  INCOME
TAXES AND CREDITS:





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





2009
            
            
            2008
            
            
            2007Tax
      at Statutory Rate
            
            $
            23,205
            
            
            $
            23,078
            
            
            $
            22,637Increase
      (Decrease) Resulting from:State
      Income Taxes
            
            
            4,471
            
            
            
            4,491
            
            
            
            4,396Amortization
      of Investment Tax Credits
            
            
            (314
            )
            
            
            (318
            )
            
            
            (320
            )ESOP
      Dividend
            
            
            (730
            )
            
            
            (736
            )
            
            
            (610
            )Amortization
      of Flowthrough Depreciation
            
            
            664
            
            
            
            664
            
            
            
            664Other
      - Net
            
            
            (192
            )
            
            
            (671
            )
            
            
            (115
            )Net
      Income Taxes
            
            $
            27,104
            
            
            $
            26,508
            
            
            $
            26,652





The
      provision for Income Taxes is comprised of the following (in
      thousands):2009
            
            
            2008
            
            
            2007Current:Federal
            
            $
            3,158
            
            
            $
            1,042
            
            
            $
            9,951State
            
            
            1,842
            
            
            
            4,088
            
            
            
            3,744Total
      Current
            
            
            5,000
            
            
            
            5,130
            
            
            
            13,695Deferred:Federal
            
            
            17,381
            
            
            
            18,877
            
            
            
            10,258State
            
            
            5,037
            
            
            
            2,819
            
            
            
            3,019Total
      Deferred
            
            
            22,418
            
            
            
            21,696
            
            
            
            13,277Investment
      Tax Credits
            
            
            (314
            )
            
            
            (318
            )
            
            
            (320
            )Net
      Income Taxes
            
            $
            27,104
            
            
            $
            26,508
            
            
            $
            26,652





Investment
Tax Credits are deferred and amortized at the annual rate of 3%, which
approximates the life of related assets.





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





2009
            
            
            2008Current:Deferred
      Fuel Costs - Net
            
            $
            4,121
            
            
            $
            4,121Uncollectibles
            
            
            (1,322
            )
            
            
            (1,208
            )Deferred
      Revenues
            
            
            7,396
            
            
            
            9,055Section
      461 Prepayments
            
            
            709
            
            
            
            514Other
            
            
            738
            
            
            
            (7
            )Current
      Deferred Tax Liability - Net
            
            $
            11,642
            
            
            $
            12,475Noncurrent:Book
      Versus Tax Basis of Property
            
            $
            201,546
            
            
            $
            174,208Deferred
      Fuel Costs - Net
            
            
            7,568
            
            
            
            5,470Environmental
            
            
            17,247
            
            
            
            20,608Deferred
      Regulatory Costs
            
            
            1,259
            
            
            
            1,246Deferred
      State Tax
            
            
            (9,075
            )
            
            
            (7,366
            )Investment
      Tax Credit Basis Gross-Up
            
            
            (782
            )
            
            
            (944
            )Deferred
      Pension & Other Post Retirement Benefits
            
            
            28,783
            
            
            
            32,311Pension
      & Other Post Retirement Benefits
            
            
            (20,882
            )
            
            
            (27,063
            )Deferred
      Revenues
            
            
            (14,455
            )
            
            
            (11,226
            )Other
            
            
            (284
            )
            
            
            (194
            )Noncurrent
      Deferred Tax Liability – Net
            
            $
            210,925
            
            
            $
            187,050


SJG-64
 Table of Contents


SJG is
included in the consolidated federal income tax return filed by SJI. The actual
taxes, including credits, are allocated by SJI to its subsidiaries, generally on
a separate return basis. As of December 31, 2009 and 2008, income taxes due to
and (from) SJI were approximately $6.0 million and $(5.8) million, respectively,
and are included in the balance sheets under the caption, Prepaid
Taxes.





On
January 1, 2007 SJG adopted new provisions of FASB ASC Topic 740 – “Income
Taxes.” As a result,  SJG recognized a $0.4 million reduction to
beginning retained earnings as a cumulative effect adjustment and a noncurrent
deferred tax asset of $1.1 million.  A reconciliation of unrecognized tax
benefits is as follows (in thousands):





2009
            
            
            2008
            
            
            2007Balance
      at January 1,
            
            $
            910
            
            
            $
            907
            
            
            $
            1,112Increase
      as a result of tax position taken in prior years
            
            
            42
            
            
            
            253
            
            
            
            28Decrease
      due to a lapse in the statue of limitations
            
            
            (376
            )
            
            
            (250
            )
            
            
            (233
            )Balance
      at December 31,
            
            $
            576
            
            
            $
            910
            
            
            $
            907





The total
unrecognized tax benefits as of December 31, 2009 were $0.6
million, not including $0.5 million of accrued interest and
penalties.  The total unrecognized tax benefits as of December 31,
2008 were $0.9 million, not including $0.6 million of accrued interest and
penalties. The amount of unrecognized tax benefits that, if recognized, would
affect the effective tax rate is not significant.  Our policy is to record
interest and penalties related to unrecognized tax benefits as interest expense
and other expense respectively. These amounts were not significant in 2009, 2008
or 2007. There have been no material changes to the unrecognized tax benefits
during 2009, 2008 or 2007 and we do not anticipate any significant changes
in the total unrecognized tax benefits within the next 12 months.





The
unrecognized tax benefits are primarily related to an uncertainty of state
income tax issues and the timing of certain deductions taken on our income tax
returns.  Federal income tax returns from 2006 forward and state income tax
returns primarily from 2005 forward are open and subject to
examination.


SJG-65
 Table of Contents


6.            
     LONG-TERM
DEBT:(A)





A
schedule of our long-term debt as of December 31, including current maturities,
is as follows (in thousands):





2009
            
            
            2008First
      Mortgage Bonds: (B)6.12
            %
            
            Series
      due 2010
            
            $
            10,000
            
            
            $
            10,0006.74
            %
            
            Series
      due 2011
            
            
            10,000
            
            
            
            10,0006.57
            %
            
            Series
      due 2011
            
            
            15,000
            
            
            
            15,0004.46
            %
            
            Series
      due 2013
            
            
            10,500
            
            
            
            10,5005.027
            %
            
            Series
      due 2013
            
            
            14,500
            
            
            
            14,5004.52
            %
            
            Series
      due 2014
            
            
            11,000
            
            
            
            11,0005.115
            %
            
            Series
      due 2014
            
            
            10,000
            
            
            
            10,0005.387
            %
            
            Series
      due 2015
            
            
            10,000
            
            
            
            10,0006.50
            %
            
            Series
      due 2016 (C)
            
            
            -
            
            
            
            9,8734.60
            %
            
            Series
      due 2016
            
            
            17,000
            
            
            
            17,0005.437
            %
            
            Series
      due 2016
            
            
            10,000
            
            
            
            10,0004.657
            %
            
            Series
      due 2017
            
            
            15,000
            
            
            
            15,0007.97
            %
            
            Series
      due 2018
            
            
            10,000
            
            
            
            10,0007.125
            %
            
            Series
      due 2018
            
            
            20,000
            
            
            
            20,0005.587
            %
            
            Series
      due 2019
            
            
            10,000
            
            
            
            10,0007.7
            %
            
            Series
      due 2027
            
            
            35,000
            
            
            
            35,0005.55
            %
            
            Series
      due 2033
            
            
            32,000
            
            
            
            32,0006.213
            %
            
            Series
      due 2034
            
            
            10,000
            
            
            
            10,0005.45
            %
            
            Series
      due 2035
            
            
            10,000
            
            
            
            10,000Series
      A 2006 Tax-Exempt First Mortgage BondsVariable
      Rate, due 2036 (D)
            
            
            25,000
            
            
            
            25,000Total
      Long-Term Debt Outstanding
            
            
            285,000
            
            
            
            294,873Current
      Portion of Long-Term Debt (D)
            
            
            (35,000
            )
            
            
            (25,000
            )Long-Term
      Debt
            
            $
            250,000
            
            
            $
            269,873





(A)
            Long-term
      debt maturities and sinking funds requirements for the succeeding five
      years are as follows (in thousands): 2010, $10,000; 2011, $25,000; 2012,
      $2,187; 2013, $27,187; 2014, $23,188 (See Note (D) below).  Our
      long-term debt agreements contain no financial
  covenants.


(B)
            Our
      First Mortgage dated October 1, 1947, as supplemented, securing the First
      Mortgage Bonds constitutes a direct first mortgage lien on substantially
      all utility plant.


(C)
            On
      November 19, 2009, SJG retired its 6.5% Medium Term Notes, at
      par.


(D)
            On
      April 20, 2006, SJG issued $25.0 million of tax-exempt, auction-rate debt
      through the New Jersey Economic Development Authority (NJEDA) under its
      $150.0 million MTN Program.  These bonds were repurchased by the
      Company in June 2008 and remarketed to the public in August 2008 as
      variable-rate demand bonds with liquidity support provided by a letter of
      credit from a commercial bank.  The current letter of credit
      expires in August 2010, and as such, these bonds have been included in the
      current portion of long-term debt.  Material terms of the
      original bonds, such as the 2036 maturity date, floating rate interest
      that resets weekly, and a first mortgage collateral position, remain
      unchanged.


SJG-66
 Table of Contents


We
estimated the fair values of our long-term debt, including current maturities,
as of December 31, 2009 and 2008, to be $331.5 million and $381.4 million,
respectively. Carrying amounts as of both December 31, 2009 and 2008 are $285.0
million and $294.9 million, respectively.  We base the estimates on
interest rates available to us at the end of each year for debt with similar
terms and maturities. We retire debt when it is cost effective as permitted by
the debt agreements.





7.              
   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 December 31, 2009 and 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 $10.8
million and $10.1 million as of December 31, 2009 and 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 amount
of $1.2 million as of both December 31, 2009 and 2008.  The annual
amortization to interest is not material to SJG’s financial
statements.  The carrying amounts of these receivables approximate
their fair value at December 31, 2009 and 2008.





Other
Financial Instruments - The carrying amounts of our other financial
instruments approximate their fair values at December 31, 2009 and
2008.





8.            
     UNUSED LINES OF
CREDIT:


Credit
facilities and available liquidity as of December 31, 2009 were as follows (in
thousands):
 
 Total
      Facility
              
              
              Usage
              
              
              Available
      Liquidity
              
              Expiration
      DateRevolving
      Credit Facility
              
              $
              100,000
              
              
              $
              85,000
              
              
              $
              15,000
              
              August
      2011Line
      of Credit
              
              
              40,000
              
              
              
              10,000
              
              
              
              30,000
              
              December
      2010 (A)Uncommitted
      Bank Lines
              
              
              55,000
              
              
              
              14,400
              
              
              
              40,600
              
              VariousTotal
              
              $
              195,000
              
              
              $
              109,400
              
              
              $
              85,600
 
 (A)  SJG
anticipates extending this line of credit during the fourth quarter of
2010.  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.





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 December 31,
2009.  Borrowings under these credit facilities are at market
rates.  The weighted average borrowing cost, which changes daily, was
0.80%, 1.06%, and 5.30% at December 31, 2009, 2008, and 2007,
respectively.


SJG-67
 Table of Contents


9.         
        RETAINED
EARNINGS:





We are
restricted as to the amount of cash dividends or other distributions that may be
paid on our common stock by an order issued by the BPU in July 2004, that
granted us an increase in base rates. Per the order, we are required to maintain
total common equity of no less than $289.2 million. Our total common equity
balance was $431.5 million at December 31, 2009.





Various
loan agreements also contain potential restrictions regarding the amount of cash
dividends or other distributions that we may pay on our common stock. As of
December 31, 2009, these loan restrictions did not affect the amount that may be
distributed from our retained earnings.





We
received no equity infusions from SJI in 2009, 2008 or 2007.  Future equity
contributions will occur on an as needed basis.





10.        
       PENSION
AND OTHER POSTRETIREMENT BENEFITS:





We
participate in the defined benefit pension plans and other postretirement
benefit plans of SJI. The pension plans provide annuity payments to the majority
of full-time, regular employees upon retirement. Participation in the SJI
qualified defined benefit pension plans was closed to new employees beginning in
2003; however, employees who are not eligible for these pension plans are
eligible to receive an enhanced version of SJI’s defined contribution plan.
Certain officers of SJG also participate in the non-funded supplemental
executive retirement plan (SERP) of SJI, a non-qualified defined benefit pension
plan. The other postretirement benefit plans provide health care and life
insurance benefits to some retirees.


SJG-68
 Table of Contents


Net
periodic benefit cost related to the employee and officer pension and other
postretirement benefit plans consisted of the following components (in
thousands):





Pension
      Benefits
            
            
            Other
              Postretirement
      Benefits2009
            
            
            2008
            
            
            2007
            
            
            2009
            
            
            2008
            
            
            2007Service
      Cost
            
            $
            2,412
            
            
            $
            2,408
            
            
            $
            2,442
            
            
            $
            622
            
            
            $
            605
            
            
            $
            661Interest
      Cost
            
            
            7,125
            
            
            
            6,843
            
            
            
            6,376
            
            
            
            2,712
            
            
            
            2,497
            
            
            
            2,295Expected
      Return on Plan Assets
            
            
            (6,035
            )
            
            
            (8,394
            )
            
            
            (8,068
            )
            
            
            (1,405
            )
            
            
            (1,995
            )
            
            
            (1,895
            )Amortization:Prior
      Service Cost (Credits)
            
            
            227
            
            
            
            239
            
            
            
            239
            
            
            
            (254
            )
            
            
            (254
            )
            
            
            (254
            )Actuarial
      Loss
            
            
            4,421
            
            
            
            1,365
            
            
            
            1,624
            
            
            
            1,746
            
            
            
            677
            
            
            
            560Net
      Periodic Benefit Cost
            
            
            8,150
            
            
            
            2,461
            
            
            
            2,613
            
            
            
            3,421
            
            
            
            1,530
            
            
            
            1,367Capitalized
      Benefit Costs
            
            
            (3,798
            )
            
            
            (1,073
            )
            
            
            (1,131
            )
            
            
            (1,676
            )
            
            
            (765
            )
            
            
            (648
            )Affiliate
      SERP Allocations
            
            
            (399
            )
            
            
            (315
            )
            
            
            (232
            )
            
            
            -
            
            
            
            -
            
            
            
            -Total
      Net Periodic Benefit Expense
            
            $
            3,953
            
            
            $
            1,073
            
            
            $
            1,250
            
            
            $
            1,745
            
            
            $
            765
            
            
            $
            719





Capitalized
benefit costs reflected in the table above relate to our construction
program.





Companies
with publicly traded equity securities that sponsor a postretirement benefit
plan are required to fully recognize, as an asset or liability, the overfunded
or underfunded status of its benefit plans and recognize changes in the funded
status in the year in which the changes occur. Changes in funded status are
generally reported in Other Comprehensive Loss; however, since we recover all
prudently incurred pension and postretirement benefit costs from our ratepayers,
a significant portion of the charges resulting from the recording of additional
liabilities under this statement are reported as regulatory assets (See Note
3).





Details
of the activity within the Regulatory Asset and Accumulated Other Comprehensive
Loss associated with Pension and Other Postretirement Benefits are as follows
(in thousands):





Accumulated
      OtherRegulatory
      Assets
            
            
            Comprehensive
      Loss
              (pre-tax)Other
            
            
            
            
            
            OtherPension
            
            
            Postretirement
            
            
            Pension
            
            
            PostretirementBenefits
            
            
            Benefits
            
            
            Benefits
            
            
            BenefitsBalance
      at January 1, 2008
            
            $
            20,533
            
            
            $
            10,263
            
            
            $
            7,208
            
            
            $
            -Amounts
      Arising during the Period:Net
      Actuarial Loss
            
            
            36,171
            
            
            
            13,036
            
            
            
            2,678
            
            
            
            -Amounts
      Amortized to Net Periodic Costs:Net
      Actuarial Loss
            
            
            (691
            )
            
            
            (677
            )
            
            
            (674
            )
            
            
            -Prior
      Service (Cost) Credit
            
            
            (239
            )
            
            
            254
            
            
            
            -
            
            
            
            -Balance
      at December 31, 2008
            
            $
            55,774
            
            
            $
            22,876
            
            
            $
            9,212
            
            
            $
            -Amounts
      Arising during the Period:Net
      Actuarial (Gain) Loss
            
            
            (4,188
            )
            
            
            610
            
            
            
            804
            
            
            
            -Prior
      Service Cost
            
            
            347
            
            
            
            -
            
            
            
            -
            
            
            
            -Amounts
      Amortized to Net Periodic Costs:Net
      Actuarial Loss
            
            
            (3,642
            )
            
            
            (1,746
            )
            
            
            (779
            )
            
            
            -Prior
      Service (Cost) Credit
            
            
            (227
            )
            
            
            254
            
            
            
            -
            
            
            
            -Balance
      at December 31, 2009
            
            $
            48,064
            
            
            $
            21,994
            
            
            $
            9,237
            
            
            $
            -


SJG-69
 Table of Contents


The
estimated costs that will be amortized from Regulatory Assets into net periodic
benefit costs in 2010 are as follows (in thousands):





Pension
              Benefits
            
            
            Other
              Postretirement
              BenefitsPrior
      Service Costs (Credits)
            
            $
            237
            
            
            $
            (254
            )Net
      Actuarial Loss
            
            $
            3,137
            
            
            $
            1,409





The
estimated costs that will be amortized from Accumulated Other Comprehensive Loss
into net periodic benefit costs in 2010 are as follows (in
thousands):





Pension
              Benefits
            
            
            Other
              Postretirement
              BenefitsNet
      Actuarial Loss
            
            $
            891
            
            
            $
            -





A
reconciliation of the plans’ benefit obligations, fair value of plan assets,
funded status and amounts recognized in our balance sheets follows (in
thousands):





OtherPension
      Benefits
            
            
            Postretirement
      Benefits2009
            
            
            2008
            
            
            2009
            
            
            2008Change in Benefit
      Obligations:Benefit
      Obligation at Beginning of Year
            
            $
            117,321
            
            
            $
            109,301
            
            
            $
            42,488
            
            
            $
            39,499Service
      Cost
            
            
            2,412
            
            
            
            2,408
            
            
            
            622
            
            
            
            605Interest
      Cost
            
            
            7,125
            
            
            
            6,843
            
            
            
            2,712
            
            
            
            2,497Actuarial
      Loss
            
            
            2,213
            
            
            
            5,071
            
            
            
            3,889
            
            
            
            2,947Retiree
      Contributions
            
            
            -
            
            
            
            -
            
            
            
            192
            
            
            
            164Plan
      Amendments
            
            
            347
            
            
            
            -
            
            
            
            -
            
            
            
            -Benefits
      Paid
            
            
            (6,876
            )
            
            
            (6,302
            )
            
            
            (3,149
            )
            
            
            (3,224
            )Benefit
      Obligation at End of Year
            
            $
            122,542
            
            
            $
            117,321
            
            
            $
            46,754
            
            
            $
            42,488Change
      in Plan Assets:Fair
      Value of Plan Assets at Beginning of Year
            
            $
            70,588
            
            
            $
            96,541
            
            
            $
            20,665
            
            
            $
            28,284Actual
      Return on Plan Assets
            
            
            11,631
            
            
            
            (25,384
            )
            
            
            4,684
            
            
            
            (8,094
            )Employer
      Contributions
            
            
            9,338
            
            
            
            5,733
            
            
            
            3,458
            
            
            
            3,535Retiree
      Contributions
            
            
            -
            
            
            
            -
            
            
            
            192
            
            
            
            164Benefits
      Paid
            
            
            (6,876
            )
            
            
            (6,302
            )
            
            
            (3,149
            )
            
            
            (3,224
            )Fair
      Value of Plan Assets at End of Year
            
            $
            84,681
            
            
            $
            70,588
            
            
            $
            25,850
            
            
            $
            20,665





Funded Status at End of
      Year:Accrued 
      Net Benefit Cost at End of Year
            
            $
            (37,861
            )
            
            $
            (46,733
            )
            
            $
            (20,904
            )
            
            $
            (21,823
            )Amounts
      Recognized in the Statement of Financial Position Consist
      of:Current
      Liabilities
            
            $
            (1,066
            )
            
            $
            (991
            )
            
            $
            -
            
            
            $
            -Noncurrent
      Liabilities
            
            
            (36,795
            )
            
            
            (45,742
            )
            
            
            (20,904
            )
            
            
            (21,823
            )Net
      Amount Recognized at End of Year
            
            $
            (37,861
            )
            
            $
            (46,733
            )
            
            $
            (20,904
            )
            
            $
            (21,823
            )Amounts
      Recognized in Regulatory Assets Consist
      of:Prior
      Service Costs (Credit)
            
            $
            1,500
            
            
            $
            1,381
            
            
            $
            (469
            )
            
            $
            (723
            )Net
      Actuarial Loss
            
            
            46,564
            
            
            
            54,393
            
            
            
            22,463
            
            
            
            23,599$
            48,064
            
            
            $
            55,774
            
            
            $
            21,994
            
            
            $
            22,876Amounts
      Recognized in Accumulated OtherComprehensive Loss Consist
      of:Net
      Actuarial Loss
            
            $
            9,237
            
            
            $
            9,212
            
            
            $
            -
            
            
            $
            -


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The
projected benefit obligation (PBO) and accumulated benefit obligation (ABO) of
our qualified employee pension plans were $104.6 million and $95.0 million,
respectively, as of December 31, 2009, and $100.2 million and $90.8 million,
respectively, as of December 31, 2008. The ABO of these plans exceeded the value
of the plan assets as of December 31, 2009 and December 31, 2008.  The
value of these assets can be seen in the tables above. The PBO and ABO for our
non-funded SERP were $18.0 million and $17.8 million, respectively, as of
December 31, 2009, and $17.1 million and $16.7 million, respectively, as of
December 31, 2008. The SERP is reflected in the tables above and has no
assets.





The
weighted-average assumptions used to determine benefit obligations at December
31 were:





Pension
      Benefits
            
            
            Other
              Postretirement
      Benefits2009
            
            
            2008
            
            
            2009
            
            
            2008Discount
      Rate
            
            
            6.22
            %
            
            
            6.24
            %
            
            
            6.22
            %
            
            
            6.24
            %Rate
      of Compensation Increase
            
            
            3.60
            %
            
            
            3.60
            %
            
            
            -
            
            
            
            -





The
weighted-average assumptions used to determine net periodic benefit cost for
years ended December 31 were:





Pension
      Benefits
            
            
            Other
              Postretirement
      Benefits2009
            
            
            2008
            
            
            2007
            
            
            2009
            
            
            2008
            
            
            2007Discount
      Rate
            
            
            6.24
            %
            
            
            6.36
            %
            
            
            6.04
            %
            
            
            6.24
            %
            
            
            6.36
            %
            
            
            6.04
            %Expected
      Long-Term Return on Plan Assets
            
            
            8.25
            %
            
            
            8.50
            %
            
            
            8.75
            %
            
            
            6.80
            %
            
            
            7.00
            %
            
            
            7.25
            %Rate
      of Compensation Increase
            
            
            3.60
            %
            
            
            3.60
            %
            
            
            3.60
            %
            
            
            -
            
            
            
            -
            
            
            
            -





All
obligations disclosed herein reflect the use of the RP 2000 mortality
tables.





The
discount rates used to determine the benefit obligations at December 31, 2009
and 2008, which are used to determine the net periodic benefit cost for the
subsequent year, were based on a portfolio model of high-quality instruments
with maturities that match the expected benefit payments under our pension and
other postretirement benefit plans.


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 Table of Contents


The
expected long-term return on plan assets (“return”) has been determined by
applying long-term capital market projections provided by our pension plan
Trustee to the asset allocation guidelines, as defined in the Company’s
investment policy, to arrive at a weighted average return.  For
certain other equity securities held by an investment manager outside of the
control of the Trustee, the return has been determined based on historic
performance in combination with long-term expectations.  The return
for the other postretirement benefits plan is determined in the same manner as
discussed above; however, the expected return is reduced based on the taxable
nature of the underlying trusts.





The
assumed health care cost trend rates at December 31 were:





2009
            
            
            
            2008Medical
      Care and Drug Cost Trend Rate Assumed for Next Year
            
            9.00
            %
            
            
            9.00
            %Dental
      Care Cost Trend Rate Assumed for Next Year
            
            
            4.75
            %
            
            
            6.33
            %Rate
      to which Cost Trend Rates are Assumed to Decline (the Ultimate Trend
      Rate)
            
            
            4.75
            %
            
            
            5.00
            %Year
      that the Rate Reaches the Ultimate Trend Rate
            
            
            2019
            
            
            
            2012





Assumed
health care cost trend rates have a significant effect on the amounts reported
for our postretirement health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects (in
thousands):





1-Percentage-
            
            1-Percentage-Point
      Increase
            
            Point
      DecreaseEffect
      on the Total of Service and Interest Cost
            
            $
            77
            
            
            $
            (64
            )Effect
      on Postretirement Benefit Obligation
            
            
            1,602
            
            
            
            (1,439
            )





PLAN
ASSETS — The Company’s overall investment strategy for pension plan assets is to
achieve a diversification by asset class, style of manager, and sector and
industry limits to achieve investment results that match the actuarially assumed
rate of return, while preserving the inflation adjusted value of the
plans.  The Company has implemented this diversification strategy
primarily with commingled common/collective trust funds.  The target
allocations for pension plan assets are 38 percent U.S. equity securities, 15
percent international equity securities, 27 percent fixed income investments,
and 20 percent to all other types of investments.  Equity securities
include investments in large-cap, mid-cap and small-cap
companies.  Fixed income securities include commingled
common/collective trust funds and group annuity contracts for pension
payments.  Other types of investments include investments in hedge
funds, private equity funds, and real estate funds that follow several different
strategies.


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 Table of Contents


The
strategy recognizes that risk and volatility are present to some degree with all
types of investments.  We seek to avoid high levels of risk at the
total fund level through diversification by asset class, style of manager, and
sector and industry limits.  Specifically prohibited investments
include, but are not limited to, venture capital, margin trading, commodities
and securities of companies with less than $250.0 million capitalization (except
in the small-cap portion of the fund where capitalization levels as low as $50.0
million are permissible).  These restrictions are only applicable to
individual investment managers with separately managed portfolios and do not
apply to mutual funds or commingled trusts.





We
evaluated its pension and other postretirement benefit plans’ asset portfolios
for the existence of significant concentrations of credit risk as of December
31, 2009.  Types of concentrations that were evaluated include, but
are not limited to, investment concentrations in a single entity, type of
industry, foreign country, and individual fund.  As of December 31,
2009, there were no significant concentrations (defined as greater than 10
percent of plan assets) of risk in SJI’s pension and other postretirement
benefit plan assets.





GAAP
establishes a hierarchy that prioritizes fair value measurements based on the
types of inputs used for the various valuation techniques.  This
hierarchy groups assets into three (3) distinct levels as fully described in
Note 12, that will serve as the basis for presentation throughout the remainder
of this Note.





The fair
values of SJG’s pension plan assets at December 31, 2009 by asset category are
as follows (in thousands):





Asset
      Category
            
            Total
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3Cash
      / Cash Equivalents:Common/Collective
      Trust Funds (a)
            
            $
            420
            
            
            $
            -
            
            
            $
            420
            
            
            $
            -STIF-Type
      Instrument (b)
            
            
            852
            
            
            
            -
            
            
            
            852
            
            
            
            -Equity
      securities:Common/Collective
      Trust Funds (a)
            
            
            39,572
            
            
            
            -
            
            
            
            39,572
            
            
            
            -U.S.
      Large-Cap (c)
            
            
            5,205
            
            
            
            5,205
            
            
            
            -
            
            
            
            -U.S.
      Mid-Cap (c)
            
            
            4,177
            
            
            
            4,177
            
            
            
            -
            
            
            
            -U.S.
      Small-Cap (c)
            
            
            46
            
            
            
            46
            
            
            
            -
            
            
            
            -International
      (c)
            
            
            408
            
            
            
            408
            
            
            
            -
            
            
            
            -Fixed
      Income:Common/Collective
      Trust Funds (a)
            
            
            18,095
            
            
            
            -
            
            
            
            18,095
            
            
            
            -Guaranteed
      Insurance Contract (d)
            
            
            9,338
            
            
            
            -
            
            
            
            -
            
            
            
            9,338Other
      types of investments:Hedge
      Funds (e)
            
            
            881
            
            
            
            -
            
            
            
            -
            
            
            
            881Private
      Equity Fund (f)
            
            
            2,163
            
            
            
            -
            
            
            
            -
            
            
            
            2,163Real
      Estate:Common/Collective
      Trust Fund (g)
            
            
            3,524
            
            
            
            -
            
            
            
            -
            
            
            
            3,524Total
            
            $
            84,681
            
            
            $
            9,836
            
            
            $
            58,939
            
            
            $
            15,906


SJG-73
 Table of Contents


(a)
            This
      category represents common/collective trust fund investments through a
      commingled employee benefit trust (excluding real
      estate).  These commingled funds are not traded publicly;
      however, the underlying assets (stocks and bonds) held in these funds are
      traded on active markets and prices for these assets are readily
      observable.  Holdings in these commingled funds are classified
      as Level 2 investments.


(b)
            This
      category represents short-term investment funds held for the purpose of
      funding disbursement payment arrangements.  Underlying
      assets are based on quoted prices in active markets, or where quoted
      prices are not available, based on models using observable market
      information.Since
      not all values can be obtained from quoted prices in active markets,these funds are classified as Level 2
  investments.


(c)
            This
      category of equity investments represents a managed portfolio of common
      stock investments in five sectors: telecommunications, electric utilities,
      gas utilities, water and energy.  These common stocks are
      actively traded on exchanges and price quotes for these shares are readily
      available.  These common stocks are classified as Level 1
      investments.


(d)
            This
      category represents SJI’s Group Annuity contracts with a nationally
      recognized life insurance company.  The contracts are the assets
      of the plan, while the underlying assets of the contracts are owned by the
      contract holder.  Valuation is based on a formula and
      calculation specified within the contract.  Since
      the valuation is based on the reporting entity’s own assumptions,
      these contracts are classified as Level 3
  investments.


(e)
            This
      category represents a collection of underlying funds which are all
      domiciled outside of the United States.  Most of the underlying
      fund managers are based in the U.S.; however, they do not necessarily
      trade only in U.S. markets.   It is important to note that
      the SJI Pension Funds are in the process of divesting investments from
      this fund of funds.  The fair value of these funds is determined
      by the underlying fund’s general partner or manager. These funds are
      classified as Level 3 investments.


(f)
            This
      category represents a limited partnership which includes several
      investments in U.S. leveraged buyout, venture capital, and special
      situation funds.  Fund valuations are reported on a 90 day lag
      and, therefore, the value reported herein represents the market value as
      of September 30, 2009.  The fund’s investments are stated at
      fair value, which is generally based on the valuations provided by the
      general partners or managers of such investments.  Fund
      investments are illiquid and resale is restricted.  These funds
      are classified as Level 3
investments.


(g)
            This
      category represents real estate common/collective trust fund investments
      through a commingled employee benefit trust.  These commingled
      funds are part of a direct investment in a pool of real estate
      properties.  These funds are valued by investment managers on a
      periodic basis using pricing models that use independent appraisals from
      sources with professional qualifications.  Since these valuation
      inputs are not highly observable, the real estate funds are classified as
      Level 3 investments.


SJG-74
 Table of Contents




Fair
      Value Measurement Using SignificantUnobservable
      Inputs (Level 3)(In
      thousands)Guaranteed
            
            
            
            
            
            PrivateInsurance
            
            
            Hedge
            
            
            Equity
            
            
            RealContract
            
            
            Funds
            
            
            Funds
            
            
            Estate
            
            
            TotalBalance
      at December 31, 2008
            
            $
            9,875
            
            
            $
            2,454
            
            
            $
            2,268
            
            
            $
            5,188
            
            
            $
            19,785Actual
      return on plan assets:Relating
      to assets still held at the reporting date
            
            
            568
            
            
            
            (103
            )
            
            
            (220
            )
            
            
            (1,664
            )
            
            
            (1,419
            )Relating
      to assets sold during the period
            
            
            18
            
            
            
            (352
            )
            
            
            -
            
            
            
            -
            
            
            
            (334
            )Purchases,
      Sales and Settlements
            
            
            (1,123
            )
            
            
            (1,118
            )
            
            
            115
            
            
            
            -
            
            
            
            (2,126
            )Balance
      at December 31, 2009
            
            $
            9,338
            
            
            $
            881
            
            
            $
            2,163
            
            
            $
            3,524
            
            
            $
            15,906





As with
the pension plan assets, the Company’s overall investment strategy for
post-retirement benefit plan assets is to achieve a diversification by asset
class, style of manager, and sector and industry limits to achieve investment
results that match the actuarially assumed rate of return, while preserving the
inflation adjusted value of the plans.  The Company has implemented
this diversification strategy entirely with mutual funds.  The target
allocations for post-retirement benefit plan assets are 48 percent U.S. equity
securities, 15 percent international equity securities, and 37 percent fixed
income investments.  Equity securities include investments in
large-cap, mid-cap and small-cap companies.  Fixed income securities
include both investment grade and strategic bond mutual funds.





The fair
values of SJG’s other postretirement benefit plan assets at December 31, 2009 by
asset category are as follows (in thousands):





Asset
      Category
            
            Total
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3Equity
      Securities:U.S.
      Large-Cap
            
            $
            9,341
            
            
            $
            9,341
            
            
            $
            -
            
            
            $
            -U.S.
      Mid & Small-Cap
            
            
            3,231
            
            
            
            3,231
            
            
            
            -
            
            
            
            -International
            
            
            3,882
            
            
            
            3,882
            
            
            
            -
            
            
            
            -Fixed
      Income:Corporate
      Bonds
            
            
            9,396
            
            
            
            9,396
            
            
            
            -
            
            
            
            -Total
            
            $
            25,850
            
            
            $
            25,850
            
            
            $
            -
            
            
            $
            -All
      investments above are holdings in mutual funds and actively traded on
      major stock exchanges.


SJG-75
 Table of Contents


Future Benefit
Payments - The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid during the following years (in
thousands):





OtherPension
      Benefits
            
            
            Postretirement
      Benefits2010
            
            $
            6,691
            
            
            $
            3,4432011
            
            $
            6,800
            
            
            $
            3,6562012
            
            $
            6,915
            
            
            $
            3,5802013
            
            $
            7,105
            
            
            $
            3,6032014
            
            $
            7,342
            
            
            $
            3,6202015
      -2019
            
            $
            42,357
            
            
            $
            18,671





Contributions -
We made a contribution of $8.2 million to our qualified employee pension
plans in 2009.    SJG has no obligation to make a contribution in
2010. Payments related to the unfunded SERP plan are expected to approximate
$1.0 million in 2010. We also have a regulatory obligation to contribute
approximately $3.6 million annually to our other postretirement benefit plans’
trusts, less costs incurred directly by us.





Defined Contribution
Plan - We also offer an Employees’ Retirement Savings Plan (Savings Plan)
to eligible employees. We match 50% of participants’ contributions up to 6% of
base compensation. For employees who are not eligible for participation in SJI’s
defined benefit plan, we match 50% of participants’ contributions up to 8% of
base compensation. Employees not eligible for the pension plans also receive a
year-end contribution of $1,000 if 10 or fewer years of service, or $1,500 if
more than 10 years of service. The amount expensed and contributed for the
matching provision of the Savings Plan approximated $0.7 million in each of the
years ended December 31, 2009 and 2008, and 2007.





11.           
    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 as discussed in Note6.  This letter of credit
expires in August 2010.





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. The earliest that any of these contracts
expires is March 2010. However, discussions are taking place to extend the
referenced agreement. 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 $4.0 million per month and is
recovered on a current basis through the BGSS.


SJG-76
 Table of Contents


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 64% of our workforce at December 31, 2009. The Company has collective
bargaining agreements with two unions who represent these employees: the
International Brotherhood of Electrical Workers (“IBEW”) that operates under a
collective bargaining agreement that runs through February 2013 and the
International Association of Machinists and Aerospace Workers (“IAM”) that
operates under a collective bargaining agreement that runs through August
2014.





Environmental
Remediation Costs - We incurred and recorded costs for environmental
cleanup of 12 sites where we or our predecessors operated gas manufacturing
plants. We stopped manufacturing gas in the 1950s.





We
successfully entered into settlements with all of our historic comprehensive
general liability carriers regarding the environmental remediation expenditures
at our sites. Also, we have purchased a Cleanup Cost Cap Insurance Policy
limiting the amount of remediation expenditures that we will be required to make
at 11 of our sites. This policy will be in force until 2024 at 10 sites and
until 2029 at one site. The future cost estimates discussed hereafter are not
reduced by projected insurance recoveries from the Cleanup Cost Cap Insurance
Policy. The policy is limited to an aggregate payment amount of $50.0 million,
of which we have recovered $36.6 million through December 31,
2009.  As discussed in Note 2, the BPU allows SJG to recover
environmental remediation costs through the RAC.


SJG-77
 Table of Contents


Since the
early 1980s, we accrued environmental remediation costs of $228.7 million, of
which $159.6 million has been spent as of December 31, 2009. The following table
details the amounts accrued and expended for environmental remediation at
December 31 (in thousands):





2009
            
            
            2008Beginning
      of Year
            
            $
            64,093
            
            
            $
            73,880Accruals
            
            
            16,501
            
            
            
            14,622Expenditures
            
            
            (11,538
            )
            
            
            (24,409
            )End
      of Year
            
            $
            69,056
            
            
            $
            64,093





The
balances are segregated between current and noncurrent on the balance sheets
under the captions Current Liabilities and Regulatory and Other Noncurrent
Liabilities.





Management
estimates that undiscounted future costs to clean up our sites will range from
$69.1 million to $248.6 million. We recorded the lower end of this range, $69.1
million, as a liability because a single reliable estimation point is not
feasible due to the amount of uncertainty involved in the nature of projected
remediation efforts and the long period over which remediation efforts will
continue. Six of our sites comprise the majority of these estimates, ranging
from a low of $57.3 million to a high of $202.3 million. Recorded amounts
include estimated costs based on projected investigation and remediation work
plans using existing technologies. Actual costs could differ from the estimates
due to the long-term nature of the projects, changing technology, government
regulations and site-specific requirements. Significant risks surrounding these
estimates include unforeseen market price increases for remedial services,
property owner acceptance of remedy selection, regulatory approval of selected
remedy and remedial investigative findings.





The
remediation efforts at our six most significant sites include the
following:





Site 1 -
A remedial action work plan has been approved by the New Jersey Department of
Environmental Protection (NJDEP). Remaining steps to remediate include
regulatory permitting and approval and remedy implementation for impacted soil,
groundwater, and river sediments as well as acceptance of access agreements by
affected property owners.





Site 2 -
Various remedial investigation and action activities, such as completed and
approved interim remedial measures and conceptual remedy selection, are ongoing
at this site. Remaining steps to remediate include remedy selection, regulatory
approval, and implementation for the remaining impacted soil and
groundwater.





Site 3 -
Remedial investigative activities are ongoing at this site. Remaining steps to
remediate include completing the remedial investigation of impacted soil and
groundwater in preparation for selecting the appropriate action and
implementation and gaining regulatory and property owner approval of the
selected remedy.


SJG-78
 Table of Contents


Site 4 -
Remedial action activities associated with groundwater are planned at this site.
Remaining steps to remediate include continuing implementation of the NJDEP
approved Remedial Action Work Plan of
impacted  groundwater.





Site 5 –
Various remedial investigation and action activities are ongoing at this
site.  An interim remedial measure has been implemented and a remedial
action work plan has been prepared and submitted to the NJDEP for an off site
interim remedial measure.  Remaining steps to implement the off site
interim remedial measure include regulatory approval, remedial investigation of
bay sediments, as well as acceptance of the selected remedy by affected property
owners.  Remaining steps to remediate soil and groundwater include
completing the remedial investigation of impacted soil and groundwater in
preparation for selecting the appropriate action and implementation and gaining
regulatory and property owner approval of the selected remedy.





Site 6 –
Remedial investigative activities are ongoing at this site.  Remaining
steps to remediate include completing the remedial investigation of impacted
soil and groundwater in preparation for selecting the appropriate action and
implementation and gaining regulatory and property owner approval of the
selected remedy.





12. 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.


SJG-79
 Table of Contents


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 December 31, 2009 is as follows (in thousands):





Total
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3Assets -Available-for-Sale
      Securities (A)
            
            $
            5,941
            
            
            $
            5,941
            
            
            $
            -
            
            
            $
            -Derivatives
      – Energy Related Assets (B)
            
            
            1,130
            
            
            
            989
            
            
            
            141
            
            
            
            -$
            7,071
            
            
            $
            6,930
            
            
            $
            141
            
            
            $
            -Liabilities -Derivatives
      – Energy Related Liabilities (B)
            
            $
            10,303
            
            
            $
            8,565
            
            
            $
            1,738
            
            
            $
            -Derivatives
      – Other (C)
            
            
            1,956
            
            
            
            -
            
            
            
            1,956
            
            
            
            -$
            12,259
            
            
            $
            8,565
            
            
            $
            3,694
            
            
            $
            -





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





(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.
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, include interest rate swaps that 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.


SJG-80
 Table of Contents


13. AVAILABLE–FOR–SALE
SECURITIES:





The
Company'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 December 31, 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 the Company's investments became
impaired. The Company has evaluated the near-term prospects of the overall funds
in relation to the severity and duration of the impairment. Based on that
evaluation, the Company recorded an insignificant impairment loss during the
fourth quarter of 2008. The Company 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.  The Company does not consider
these remaining investments to be other-than-temporarily impaired at December
31, 2009.





The
following table shows the gross unrealized losses and fair value of the
Company'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 December 31, 2009 and 2008:





Less
      than 12 Months
            
            
            Greater
      Than 12 Months
            
            
            TotalMarketable
      Equity Securities
            
            Fair
      Value
            
            
            Unrealized
      Losses
            
            
            Fair
      Value
            
            
            Unrealized
      Losses
            
            
            Fair
      Value
            
            
            Unrealized
      LossesDecember
      31, 2009
            
            $
            -
            
            
            $
            -
            
            
            $
            4,493
            
            
            $
            534
            
            
            $
            4,493
            
            
            $
            534December
      31, 2008
            
            $
            3,609
            
            
            $
            1,218
            
            
            $
            -
            
            
            $
            -
            
            
            $
            3,609
            
            
            $
            1,218





As of
December 31, 2009 and 2008, the total losses for securities with net losses
included in Accumulated Other Comprehensive Loss was $0.3 million and $0.7
million, respectively.  As of December 31, 2009, securities with net
gains of $0.1 million were included in Accumulated Other Comprehensive
Loss.  As of December 31, 2008, there were no securities with net
gains included in Accumulated Other Comprehensive Loss.


SJG-81
 Table of Contents


14. QUARTERLY RESULTS OF
OPERATIONS - UNAUDITED:





The
summarized quarterly results of our operations are as follows (in thousands):





2009
      Quarter Ended
            
            
            2008
      Quarter EndedMarch
      31
            
            
            June
      30
            
            
            Sept.
      30
            
            
            Dec.
      31
            
            
            March
      31
            
            
            June
      30
            
            
            Sept.
      30
            
            
            Dec.
      31Operating
      Revenues
            
            $
            243,113
            
            
            $
            64,835
            
            
            $
            56,305
            
            
            $
            120,123
            
            
            $
            237,904
            
            
            $
            93,571
            
            
            $
            64,563
            
            
            $
            172,008Expenses:Cost
      of Sales
            
            
            165,977
            
            
            
            29,905
            
            
            
            31,726
            
            
            
            66,244
            
            
            
            162,917
            
            
            
            60,263
            
            
            
            41,201
            
            
            
            119,022Operation
      and MaintenanceIncluding
      Fixed Charges
            
            
            30,246
            
            
            
            28,413
            
            
            
            27,016
            
            
            
            29,025
            
            
            
            28,257
            
            
            
            26,134
            
            
            
            25,408
            
            
            
            28,737Income
      Taxes (Benefit)
            
            
            17,615
            
            
            
            2,102
            
            
            
            (1,666
            )
            
            
            9,053
            
            
            
            17,530
            
            
            
            2,482
            
            
            
            (1,306
            )
            
            
            7,802Energy
      and Other Taxes
            
            
            4,621
            
            
            
            1,746
            
            
            
            1,416
            
            
            
            3,044
            
            
            
            4,357
            
            
            
            1,711
            
            
            
            1,356
            
            
            
            3,203Total
      Expenses
            
            
            218,459
            
            
            
            62,166
            
            
            
            58,492
            
            
            
            107,366
            
            
            
            213,061
            
            
            
            90,590
            
            
            
            66,659
            
            
            
            158,764Other
      Income and Expense
            
            
            324
            
            
            
            358
            
            
            
            107
            
            
            
            513
            
            
            
            170
            
            
            
            457
            
            
            
            242
            
            
            
            (410
            )Net
      Income (Loss) Applicable to Common Stock
            
            $
            24,978
            
            
            $
            3,027
            
            
            $
            (2,080
            )
            
            $
            13,270
            
            
            $
            25,013
            
            
            $
            3,438
            
            
            $
            (1,854
            )
            
            $
            12,834NOTE:
      Because of the seasonal nature of our business, statements for the 3-month
      periods are not indicative of the results for a full year.





Item9.
Changes in and Disagreements with Accountants on


Accounting and Financial
Disclosure





None.





Item9A.
Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





The
Company’s management, with the participation of its chief executive officer and
chief financial officer, evaluated the effectiveness of the design and operation
of the Company’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2009. Based
on that evaluation, the Company’s chief executive officer and chief financial
officer concluded that the disclosure controls and procedures employed at the
Company are effective.





Management’s
Report on Internal Control over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined under Exchange Act Rules 13a-15(f).
The Company’s internal control system is designed to provide reasonable
assurance to its management and board of directors regarding the preparation and
fair presentation of published financial statements.Under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control
- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.  Based on our evaluation
under that framework, management concluded that our internal control over
financial reporting was effective as of December 31, 2009.


SJG-82
 Table of Contents


This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  The Company's internal control over financial reporting
was not subject to attestation by the Company’s registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.





Changes
in Internal Control over Financial Reporting





There has
not been any change in the Company'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 December 31, 2009 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.





Item9B. Other
Information





None.





PART
III





Item10.
Directors, Executive Officers and Corporate Governance





Omitted
in accordance with General Instruction I 1(a) and (b) of Form 10-K.





Item11.
Executive Compensation





Omitted
in accordance with General Instruction I 1(a) and (b) of Form
10-K.


SJG-83
 Table of Contents


Item12.
Security Ownership of Certain Beneficial Owners and
Management


and Related Stockholder
Matters





Omitted
in accordance with General Instruction I 1(a) and (b) of Form 10-K.





Item13.
Certain Relationships and Related Transactions,


and Director
Independence





Omitted
in accordance with General Instruction I 1(a) and (b) of Form 10-K.





Item14.
Principal Accounting Fees and Services





Fees Paid to
Auditors





Deloitte
& Touche LLP served as the auditors of SJG and its parent, SJI, during 2009.
In accordance with its charter, the Audit Committee pre-approved all services
provided by Deloitte & Touche LLP. Audit services performed consisted of the
audits of the financial statements and the preparation of various reports based
on those audits and services related to filings with the United States
Securities and Exchange Commission and New York Stock Exchange.





Audit
Fees





The
aggregate fees billed for the audit of SJG’s financial statements by Deloitte
& Touche LLP totaled $366,000 and $356,000 in fiscal years 2009 and
2008, respectively.





Audit-Related
Fees





None.





Tax Fees


None.





All Other
Fees





None.


SJG-84
 Table of Contents


PART
IV





Item15.
Exhibits and Financial Statement Schedule





(a)           Listed
below are all financial statements and schedules filed as part of this
report:





1 - The
financial statements and notes to financial statements together with the report
thereon of Deloitte & Touche LLP, February 26, 2010. See Item
8.





2  -
Supplementary Financial Information





Report of
the Independent Registered Public Accounting Firm on financial statement
schedule. See Item 8.





Schedule
II - Valuation and Qualifying Accounts. See page 91.





All
schedules, other than that listed above, are omitted because the information
called for is included in the financial statements filed or because they are not
applicable or are not required.





(b)           List
of Exhibits (Exhibit Number is in Accordance with the Exhibit Table in Item 601
of Regulation S-K).


SJG-85
 Table of Contents





Exhibit
              Number
            Description
            
            Reference(3)(a)
            Certificate
      of Incorporation of South Jersey Gas Company.
            
            Incorporated
      by reference from Exhibit (3)(a) of Form 10-K filed March 7,
      1997.(3)(b)
            Bylaws
      of South Jersey Gas Company, as amended and restated through April
      23, 2009 (filed herewith).(4)(a)
            Form
      of Stock Certificate for Common Stock.
            
            Incorporated
      by reference from Exhibit (4)(a) of Form 10  filed March 7,
      1997.(4)(b)(i)
            First
      Mortgage Indenture dated October 1, 1947.
            
            Incorporated
      by reference from Exhibit (4)(b)(i) of Form 10-K of SJI for 1987
      (1-6364).(4)(b)(ii)
            Nineteenth
      Supplemental Indenture dated as of April 1, 1992.
            
            Incorporated
      by reference from Exhibit (4)(b)(xvii) of Form 10-K of SJI for 1992
      (1-6364).(4)(b)(iii)
            Twenty-First
      Supplemental Indenture dated as of March 1, 1997.
            
            Incorporated
      by reference from Exhibit (4)(b)(xviv) of Form 10-K of SJI for 1997
      (1-6364).(4)(b)(iv)
            Twenty-Second
      Supplemental Indenture dated as of October 1, 1998.
            
            Incorporated
      by reference from Exhibit (4)(b)(ix) of  Form S-3
      (333-62019).(4)(b)(v)
            Twenty-Third
      Supplemental Indenture dated as of September 1, 2002.
            
            Incorporated
      by reference from Exhibit (4)(b)(x) of Form S-3
    (333-98411).(4)(b)(vi)
            Twenty-Fourth
      Supplemental Indenture dated as of September 1, 2005.
            
            Incorporated
      by reference from Exhibit (4)(b)(vi) of Form S-3
    (333-126822).(4)(b)(vii)
            Amendment
      to Twenty-Fourth Supplemental Indenture dated as of March 31,
      2006.
            
            Incorporated
      by reference from Exhibit 4 of Form 8-K as filed April 26,
      2006.(4)(b)(viii)
            Loan
      Agreement by and between New Jersey Economic Development Authority as
      SJGdated April 1, 2006.
            
            Incorporated
      by reference from Exhibit 10 of Form 8-K of SJG as filed April 26,
      2006.(4)(c)(i)
            Medium
      Term Note Indenture of Trust dated October 1, 1998.
            
            Incorporated
      by reference from Exhibit (4)(e) of Form S-3
  (333-62019).(4)(c)(ii)
            First
      Supplement to Indenture of Trust dated as of June 29,
2000.
            
            Incorporated
      by reference from Exhibit 4.1 of Form 8-K of SJG dated July, 12,
      2001.(4)(c)(iii)
            Second
      Supplement to Indenture of Trust dated as of July 5, 2000.
            
            Incorporated
      by reference from Exhibit 4.2 of Form 8-K of SJG dated July, 12,
      2001.(4)(c)(iv)
            Third
      Supplement to Indenture of Trust dated as of July 9, 2001.
            
            Incorporated
      by reference from Exhibit 4.3 of Form 8-K of SJG dated July, 12,
      2001.


SJG-86
 Table of Contents




Exhibit
              Number
            Description
            
            Reference(10)(a)(i)
            Gas
      storage agreement (GSS) between South Jersey Gas Company and Transco dated
      October 1, 1993.
            
            Incorporated
      by reference from Exhibit (10)(d) of Form 10-K of SJI for 1993
      (1-6364).(10)(a)(ii)
            Gas
      storage agreement (LG-A) between South Jersey Gas Company and Transco
      dated June 3, 1974.
            
            Incorporated
      by reference from Exhibit (5)(f) of Form S-&
  (2-56233).(10)(a)(iii)
            Gas
      storage agreement (LSS) between South Jersey Gas Company and Transco dated
      October 1, 1993.
            
            Incorporated
      by reference from Exhibit (10)(i) of Form 10-K for 1993
      (1-6364).(10)(a)(iv)
            Gas
      storage agreement (SS-1) between South Jersey Gas Company and Transco
      dated May 10, 1987 (effective April 1, 1988).
            
            Incorporated
      by reference from Exhibit (10)(i)(a) of Form 10-K for 1988
      (1-6364).(10)(b)(i)
            Gas
      storage agreement (SS-2) between South Jersey Gas Company and Transco
      dated July 25, 1990.
            
            Incorporated
      by reference from Exhibit (10)(i)(i) of Form 10-K for
      1991 (1-6364).(10)(b)(ii)
            Amendment
      to gas transportation agreement dated December 20,
      1991 between South Jersey Gas Company and Transco
      dated  October 5, 1993.
            
            Incorporated
      by reference from Exhibit (10)(i)(k) of Form 10-K for 1993
      (1-6364).(10)(b)(iii)
            CNJEP
      Service agreement between South Jersey Gas Company and Transco dated June
      27, 2005.
            
            Incorporated
      by reference from Exhibit (10)(i)(l) of  Form 10-K for 2005
      (1-6364).(10)(c)(i)
            Gas
      transportation service agreement (FTS-1) between South Jersey Gas Company
      and Columbia Gulf Transmission Company dated November 1,
      1993.
            
            Incorporated
      by reference from Exhibit (10)(k)(k)  of Form 10-K for 1993
      (1-6364).(10)(c)(ii)
            FTS
      Service Agreement No. 38099 between South Jersey Gas Company and Columbia
      Gas Transmission Corporation dated November 1, 1993.
            
            Incorporated
      by reference from Exhibit (10)(k)(n) of Form 10-K for
      1993 (1-6364).(10)(c)(iii)
            NTS
      Service Agreement No. 39305 between South Jersey Gas Company and Columbia
      Gas Transmission Corporation dated November 1, 1993.
            
            Incorporated
      by reference from Exhibit (10)(k)(o) of Form 10-K for
      1993 (1-6364).(10)(c)(iv)
            FSS
      Service Agreement No. 38130 between South Jersey Gas Company and Columbia
      Gas Transmission Corporation dated November 1, 1993.
            
            Incorporated
      by reference from Exhibit (10)(k)(p) of Form 10-K for
      1993 (1-6364).(10)(d)(i)
            SST
      Service Agreement No. 38086 between South Jersey Gas Company and Columbia
      Gas Transmission Corporation dated November 1, 1993.
            
            Incorporated
      by reference from Exhibit (10)(k)(q) of Form 10-K for
      1993 (1-6364).


SJG-87
 Table of Contents





Exhibit
              Number
            Description
            
            Reference(10)(h)(i)*
            Deferred
      Payment Plan for Directors of South Jersey Industries, Inc., South Jersey
      Gas Company, Energy & Minerals, Inc., R&T Group, Inc. and South
      Jersey Energy Company as amended and restated October 21,
      1994.
            
            Incorporated
      by reference from Exhibit (10)(l) of Form 10-K of SJI for 1994
      (1-6364).(10)(h)(ii)*
            Schedule
      of Deferred Compensation Agreements.
            
            Incorporated
      by reference from Exhibit (10)(l)(b)  of Form 10-K of SJI for 1997
      (1-6364).(10)(h)(iii)*
            Supplemental
      Executive Retirement Program, as amended and restated effective January 1,
      2009, and Form of Agreement between certain South Jersey Industries, Inc.
      or subsidiary Company officers.
            
            Incorporated
      by reference from Exhibit (10)(f)(ii)  of Form 10-K of SJI
      for 2009  (1-6364).(10)(h)(iv)*
            Form
      of Officer Employment Agreement between certain officers and either South
      Jersey Industries, Inc. or its subsidiaries.
            
            Incorporated
      by reference from Exhibit (10)(e)(iii) of Form 10-K of SJI for 2008
      (1-6364).(10)(h)(v)*
            Schedule
      of Officer Employment Agreements.
            
            Incorporated
      by reference from Exhibit (10)(e)(iv) of Form 10-K of SJI for
      2008.(10)(h)(vi)*
            Officer
      Severance Benefit Program for all officers.
            
            Incorporated
      by reference from Exhibit (10)(l)(g) of Form 10-K of SJI for 1985
      (1-6364).(10)(i)(i)
            Five-year
      Revolving Credit Agreement for SJG.
            
            Incorporated
      by reference from Exhibit 10 of Form 8-K as filed on August 8,
      2006.(10)(i)(ii)
            Loan
      Agreement between Toronto Dominion (New York) LLC and SJG dated December
      15, 2008.
            
            Incorporated
      by reference from Exhibit (10)(i)(ii)of Form 10-K for
  2008.(10)(i)(iii)
            Amendment
      No. 1 dated December 14, 2009 to the Loan Agreement between Toronto
      Dominion (New York) LLC and SJG.
            
            Incorporated
      by reference from Exhibit (10)(g)(v)of Form 10K of SJI for
      2009.(12)
            Calculation
      of Ratio of Earnings to Fixed Charges (Before Federal Income Taxes) (filed
      herewith).(14)
            Code
      of Ethics
            
            Incorporated
      by reference from Exhibit (14) of Form 10-K of SJI as filed for
      2007.(21)
            Subsidiaries
      of the Registrant (filed herewith).(23)
            Independent
      Registered Public Accounting Firm’s Consent(filed
    herewith).


SJG-88
 Table of Contents




Exhibit
              Number
            Description
            
            Reference(31.1)
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (filed herewith).(31.2)
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (filed herewith).(32.1)
            Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002 (filed herewith).(32.2)
            Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002 (filed herewith).





*
Constitutes a management contract or a compensatory plan or
arrangement.





SJG-89
 Table of Contents





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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 COMPANYBY:
            /s/ David A. KindlickDavid
      A. Kindlick, Senior Vice President &Chief
      Financial OfficerDate: March
      1, 2010





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Signature
            Title
            Date/s/
      Edward J. Graham
            Chairman
      of the Board, President & Chief Executive Officer
            March
      1, 2010(Edward
      J. Graham)
            (Principal
      Executive Officer)/s/
      David A. Kindlick
            Senior
      Vice President & Chief Financial Officer
            March
      1, 2010(David
      A. Kindlick)
            (Principal
      Financial and Accounting Officer)/s/
      Gina Merritt-Epps
            Corporate
      Counsel & Secretary
            March
      1, 2010(Gina
      Merritt-Epps)/s/
      Shirli M. Billings
            Director
            March
      1, 2010(Shirli
      M. Billings)/s/
      Thomas A. Bracken
            Director
            March
      1, 2010(Thomas
      A. Bracken)/s/
      Sheila Hartnett-Devlin
            Director
            March
      1, 2010(Sheila
      Hartnett-Devlin)/s/
      William J. Hughes
            Director
            March
      1, 2010(William
      J. Hughes)


SJG-90
 Table of Contents




SOUTHJERSEY GAS COMPANYSCHEDULE
      II - VALUATION AND QUALIFYING ACCOUNTS(In
      Thousands)Col.
      A
            
            Col.
      B
            
            
            Col.
      C
            
            
            Col.
      D
            
            
            Col.
      EAdditionsBalance
      at
            
            
            Charged
      to
            
            
            Charged
      toBeginning
            
            
            Costs
      and
            
            
            Other
      Accounts -
            
            
            Deductions
      -
            
            
            Balance
      at EndClassification
            
            of
      Period
            
            
            Expenses
            
            
            Describe
      (a)
            
            
            Describe
      (b)
            
            
            of
      PeriodProvision
      for UncollectibleAccounts
      for the Year EndedDecember
      31, 2009
            
            $
            3,628
            
            
            $
            2,418
            
            
            $
            594
            
            
            $
            2,725
            
            
            $
            3,915Provision
      for UncollectibleAccounts
      for the Year EndedDecember
      31, 2008
            
            $
            3,265
            
            
            $
            2,281
            
            
            $
            279
            
            
            $
            2,197
            
            
            $
            3,628Provision
      for UncollectibleAccounts
      for the Year EndedDecember
      31, 2007
            
            $
            2,741
            
            
            $
            2,672
            
            
            $
            725
            
            
            $
            2,873
            
            
            $
            3,265(a)
      Recoveries of accounts previously written off and minor
      adjustments.(b)
      Uncollectible accounts written off.





SJG - 91