10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2007

OR

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

For the transition period from ________________ to ________________

Commission File Number 000-22211

SOUTH JERSEY GAS COMPANY

(Exact name of registrant as specified in its charter)

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

1 South Jersey Plaza, Folsom, NJ 08037

(Address of principal executive offices, including zip code)

(609) 561-9000

(Registrant's telephone number, including area code) 

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant 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                                                       [ ] Accelerated filer [ ]                                                       Non-accelerated filer [X]

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

As of August 1, 2007 there were 2,339,139 shares of the registrant’s common stock outstanding. All common shares are owned by South Jersey Industries, Inc., the parent company of South Jersey Gas Company.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements — See Pages 3 through 15

SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)
	Three Months Ended
	June 30,
	2007			2006
Operating Revenues	$	95,996		$	105,006
Operating Expenses:
Cost of Sales (Excluding depreciation)		63,848			76,040
Operations		11,554			10,520
Maintenance		1,430			1,365
Depreciation		6,115			5,848
Energy and Other Taxes		1,872			1,673
Total Operating Expenses		84,819			95,446
Operating Income		11,177			9,560
Other Income and Expense		356			158
Interest Charges		(4,791	)		(5,181	)
Income Before Income Taxes		6,742			4,537
Income Taxes		(2,839	)		(1,938	)
Net Income	$	3,903		$	2,599
The accompanying notes are an integral part of the condensed financial statements.

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SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)
	Six Months Ended
	June 30,
	2007			2006
Operating Revenues	$	373,860		$	382,087
Operating Expenses:
Cost of Sales		269,392			284,661
Operations		25,455			24,351
Maintenance		2,902			2,770
Depreciation		12,168			11,606
Energy and Other Taxes		6,496			5,959
Total Operating Expenses		316,413			329,347
Operating Income		57,447			52,740
Other Income and Expense		456			138
Interest Charges		(10,032	)		(10,333	)
Income Before Income Taxes		47,871			42,545
Income Taxes		(19,709	)		(17,468	)
Net Income	$	28,162		$	25,077
The accompanying notes are an integral part of the financial statements.

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SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
	Three Months Ended
	June 30,
	2007		2006
Net Income	$	3,903	$	2,599
Other Comprehensive Income - Net of Tax:
Unrealized Gain (Loss) on Equity Investments		114		(67	)
Unrealized Gain on Derivatives - Other		558		396
Other Comprehensive Income - Net of Tax		672		329
Comprehensive Income	$	4,575	$	2,928
	Six Months Ended
	June 30,
	2007		2006
Net Income	$	28,162	$	25,077
Other Comprehensive Income - Net of Tax:
Unrealized Gain on Equity Investments		180		90
Unrealized Gain on Derivatives - Other		679		953
Other Comprehensive Income - Net of Tax		859		1,043
Comprehensive Income	$	29,021	$	26,120
The accompanying notes are an integral part of the condensed financial statements.

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SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
	Six Months Ended
	June 30,
	2007			2006
Net Cash Provided by Operating Activities	$	75,731		$	30,019
Cash Flows from Investing Activities:
Capital Expenditures		(23,770	)		(34,062	)
Net Purchase of Restricted Investments		(226	)		(14,316	)
Net Cash Used in Investing Activities		(23,996	)		(48,378	)
Cash Flows from Financing Activities:
Net Borrowings from (Repayments of) Lines of Credit		(44,700	)		3,900
Proceeds from Issuance of Long-Term Debt		-			25,000
Principal Repayments of Long-Term Debt		(2,270	)		(2,288	)
Dividends on Common Stock		(4,683	)		(4,975	)
Payments for Issuance of Long-Term Debt		-			(956	)
Net Cash (Used in) Provided by in Financing Activities		(51,653	)		20,681
Net Increase in Cash and Cash Equivalents		82			2,322
Cash and Cash Equivalents at Beginning of Period		1,967			2,551
Cash and Cash Equivalents at End of Period	$	2,049		$	4,873
Supplemental Disclosures of Noncash Investing Activities:
Capital Property and Equipment Acquired on account but not
paid at quarter-end.	$	3,343		$	4,178
The accompanying notes are an integral part of the condensed financial statements.

 

SJG - 6

SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)
	June 30,			December 31,
	2007			2006
Assets
Property, Plant and Equipment:
Utility Plant, at original cost	$	1,101,543		$	1,079,614
Accumulated Depreciation		(267,173	)		(257,781	)
Property, Plant and Equipment - Net		834,370			821,833
Investments:
Available-for-Sale Securities		6,676			6,342
Restricted Investments		8,812			8,586
Total Investments		15,488			14,928
Current Assets:
Cash and Cash Equivalents		2,049			1,967
Accounts Receivable		56,033			47,928
Accounts Receivable - Related Parties		663			3,939
Unbilled Revenues		7,802			34,502
Provision for Uncollectibles		(3,127	)		(2,741	)
Natural Gas in Storage, average cost		49,855			81,039
Materials and Supplies, average cost		1,629			1,685
Prepaid Taxes		16,793			7,774
Derivatives - Energy Related Assets		1,331			1,692
Other Prepayments and Current Assets		2,900			2,264
Total Current Assets		135,928			180,049
Regulatory and Other Noncurrent Assets:
Regulatory Assets		182,230			196,962
Unamortized Debt Issuance Costs		6,546			6,835
Accounts Receivable - Merchandise		5,760			5,950
Derivatives - Energy Related Assets		28			19
Derivatives - Other		1,272			148
Other		2,020			1,352
Total Regulatory and Other Noncurrent Assets		197,856			211,266
Total Assets	$	1,183,642		$	1,228,076

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

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SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands, except per share amounts)
	June 30,			December 31,
	2007			2006
Capitalization and Liabilities
Common Equity:
Common Stock, Par Value $2.50 per share:
Authorized - 4,000,000 shares
Outstanding - 2,339,139 shares	$	5,848		$	5,848
Other Paid-In Capital and Premium on Common Stock		200,317			200,317
Accumulated Other Comprehensive Loss		(3,570	)		(4,429	)
Retained Earnings		177,042			158,617
Total Common Equity		379,637			360,353
Long-Term Debt		294,893			294,893
Total Capitalization		674,530			655,246
Current Liabilities:
Notes Payable		58,800			103,500
Current Maturities of Long-Term Debt		-			2,270
Accounts Payable - Commodity		30,539			43,687
Accounts Payable - Other		8,926			8,786
Accounts Payable - Related Parties		7,696			12,134
Derivatives - Energy Related Liabilities		8,010			18,006
Deferred Income Taxes - Net		4,631			4,049
Customer Deposits and Credit Balances		18,583			23,016
Environmental Remediation Costs		31,361			26,048
Taxes Accrued		5,083			1,961
Pension and Other Postretirement Benefits		776			776
Dividends Declared		4,683			-
Interest Accrued		6,029			6,112
Other Current Liabilities		3,221			4,904
Total Current Liabilities		188,338			255,249
Regulatory and Other Noncurrent Liabilities:
Regulatory Liabilities		56,777			50,797
Deferred Income Taxes - Net		165,287			164,797
Environmental Remediation Costs		37,490			41,746
Asset Retirement Obligations		24,280			23,743
Pension and Other Postretirement Benefits		29,413			29,354
Investment Tax Credits		2,310			2,470
Derivatives - Energy Related Liabilities		121			374
Other		5,096			4,300
Total Deferred Credits and Other Noncurrent Liabilities		320,774			317,581
Commitments and Contingencies (Note 9)
Total Capitalization and Liabilities	$	1,183,642		$	1,228,076
The accompanying notes are an integral part of the condensed financial statements.

SJG - 8

NOTES TO CONDENSED FINANCIAL STATEMENTS

1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The Entity - South Jersey Industries, Inc. (SJI) owns all of the outstanding common stock of South Jersey Gas Company (SJG), a regulated natural gas utility. SJG distributes natural gas in the seven southern most counties of New Jersey. In our opinion, the condensed financial statements reflect all normal and recurring adjustments needed to fairly present our financial position and operating results at the dates and for the periods presented. SJG’s business is subject to seasonal fluctuations and accordingly, this interim financial information should not be the basis for estimating the full year’s operating results. As permitted by the rules and regulations of the Securities and Exchange Commission, the accompanying unaudited condensed financial statements contain certain condensed financial information and exclude certain note disclosures normally included in annual audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These condensed financial statements should be read in conjunction with SJG’s 2006 Form 10-K for a more complete discussion of our accounting policies and certain other information.

Revenue Based Taxes - SJG collects certain revenue-based energy taxes from its customers. Such taxes include New Jersey State Sales Tax, Transitional Energy Facility Assessment (TEFA) and Public Utilities Assessment (PUA). State sales tax is recorded as a liability when billed to customers and is not included in revenue or operating expenses. TEFA and PUA are included in both revenues and cost of sales and totaled  $1.4 million and  $1.1 million for the three months ended June 30, 2007 and 2006, respectively, and $5.4 million and $4.8 million for the six months ended June 30, 2007 and 2006, respectively.

Capitalized Interest - SJG capitalizes interest on construction at the rate of return on rate base utilized by the New Jersey Board of Public Utilities (BPU) to set rates in our last base rate proceeding (See Note 2). Capitalized interest is included in Utility Plant on the condensed balance sheets. Interest Charges are presented net of capitalized interest on the condensed statements of income. SJG capitalized interest of $0.1 million for each of the three month periods ended June 30, 2007 and 2006, and $0.2 million for each of the six month periods ended June 30, 2007 and 2006.

Derivative Instruments - As part of its gas purchasing strategy, SJG uses physical and financial contracts to hedge against forward price risk. The costs or benefits of these short-term contracts are recoverable through SJG’s Basic Gas Supply Service (BGSS) clause, subject to BPU approval. As of June 30, 2007 and December 31, 2006, SJG had $6.8 million and $16.7 million of costs, respectively, included in its BGSS related to open financial contracts.

From time to time SJG enters into interest rate derivatives and similar agreements to hedge exposure to increasing interest rates, and the impact of those rates on our cash flows with respect to its variable-rate debt. SJG has designated and accounts for these interest rate derivatives as cash flow hedges which are included in Regulatory and Other Noncurrent Assets. There have been no significant changes to the Company’s active interest rate swaps since December 31, 2006 which are described in Note 1 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 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 June 30, 2007 and December 31, 2006, the net market value of these swaps was  $1.3 million and $0.1 million, respectively.

Stock-Based Compensation Plans - The following table summarizes the SJI nonvested restricted stock awards pertaining to SJG outstanding at June 30, 2007, and the assumptions used to estimate the fair value of the awards:

Grant	Shares	Fair Value	Expected	Risk-Free
Date	Outstanding	Per Share	Volatility	Interest Rate
Jan. 2005	8,126	$ 25.155	15.5%	3.4%
Jan. 2006	8,450	$ 27.950	16.9%	4.5%
Jan. 2007	9,810	$ 29.210	18.5%	4.9%

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Expected volatility is based on the actual daily volatility of SJI’s share price over the preceding 3-year period as of the valuation date. The risk-free interest rate is based on the zero-coupon U.S. Treasury Bond, with a term equal to the 3-year term of the restricted shares. As notional dividend equivalents are credited to the holders, which are reinvested during the 3-year service period, no reduction to the fair value of the award is required.

 The cost of restricted stock awards approximates $50,000 per quarter in both 2007 and 2006.

As of June 30, 2007, 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 2.1 years.

The following table summarizes information regarding restricted stock award activity during the six months ended June 30, 2007, excluding accrued dividend equivalents:

	Shares
Nonvested Shares Outstanding, January 1, 2007	26,738
Granted		9,628
Vested*		(10,352)
Forfeited		(1,450)
Transferred From Affiliate		1,822
Nonvested Shares Outstanding, June 30, 2007		26,386
* Actual shares awarded upon vesting, including dividend equivalents and adjustments for performance measures, totaled 17,143 shares.

During the six months ended June 30, 2007, SJG awarded 17,143 shares to its officers at a market value of $0.6 million. During the six months ended June 30, 2006, SJG awarded 44,575 shares at a market value of $1.3 million. As discussed earlier, SJG has a policy of purchasing shares from SJI to satisfy its obligations under this plan. Cash payments for shares of SJI common stock during the  six months ended June 30, 2007 and 2006 were approximately $1.1 million and $2.1 million, respectively, relating to stock awards and include obligations for services previously rendered by officers that are currently employed by affiliates as a result of a January 1, 2006 corporate restructuring by SJI. Additionally, a change in control could result in the nonvested shares becoming nonforfeitable or immediately payable in cash.

New Accounting Pronouncements - On January 1, 2007, SJG adopted the provisions of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes." This interpretation provides guidance on the recognition and measurement of uncertain tax positions in the financial statements.

As a result of the implementation of FIN 48, SJG recognized a $371,000 reduction to beginning retained earnings as a cumulative effect adjustment and a noncurrent deferred tax asset of $281,000. The total unrecognized tax benefits as of January 1, 2007 were $652,000 including $345,000 of accrued interest and penalties. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is not significant. SJG’s policy is to record interest and penalties related to unrecognized tax benefits as interest expense and other expense, respectively. These amounts were not significant for the three and six months ended June 30, 2007. There have been no material changes to the unrecognized tax benefits for the three and six months ended June 30, 2007, and SJG does not anticipate any material changes in the total unrecognized tax benefits within the next 12 months.

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The unrecognized tax benefits are primarily related to an uncertainty of state income tax issues and the timing of certain deductions taken on SJI’s consolidated income tax returns, related to SJG. Federal income tax returns from 2003 forward and state income tax returns primarily from 2002 forward are open and subject to examination.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement is effective for fiscal years beginning after November 15, 2007.  Management is currently evaluating the impact that the adoption of this statement will have on SJG’s financial statements.

In January 2007, the FASB posted Statement 133 Implementation Issue No. G26, “Cash Flow Hedges: Hedging Interest Cash Flows on Variable-Rate Assets and Liabilities That Are Not Based on a Benchmark Interest Rate.” This issue provides guidance on the designated risks that can be hedged in a cash flow hedge of a variable-rate financial asset or liability for which the interest rate is not based solely on an index, including situations in which an interest rate is reset through an auction process. This issue was effective April 1, 2007. The adoption of this issue did not have a material effect on SJG’s financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” The statement permits entities to choose to measure certain financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective for the first fiscal year beginning after November 15, 2007. Management is currently evaluating the impact that the adoption of this statement will have on SJG’s financial statements.

In April 2007, the FASB posted FASB Staff Position FIN 39-1, “Amendment of FASB Interpretation No. 39”, which addresses questions received by the FASB staff regarding Interpretation 39 relating to the offsetting of amounts recognized for forward, interest rate swap, currency swap, option, and other conditional or exchange contracts. The guidance in this FSP is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact that the adoption of this position will have on the Company’s financial statements.

2.              RATES AND REGULATORY ACTIONS:

SJG is subject to the rules and regulations of the BPU. There have been no significant regulatory actions or changes to SJG’s rate structure since December 31, 2006. See Note 2 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2006.

3.           REGULATORY ASSETS AND LIABILITIES:

Other than the Deferred Gas Costs and Revenues - Net, discussed below, there have been no significant changes to the nature of SJG’s regulatory assets and liabilities since December 31, 2006, which are described in Note 3 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2006.

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

	June 30, 2007		December 31, 2006
Environmental Remediation Costs:
Expended - Net	$	20,915	$	17,743
Liability for Future Expenditures		68,851		67,905
Income Taxes-Flowthrough Depreciation		4,196		4,685
Deferred Asset Retirement Obligation Costs		21,509		21,009
Deferred Gas Costs - Net		-		19,698
Deferred Pension and Other Postretirement Benefit Costs		39,170		39,359
Temperature Adjustment Clause Receivable		8,068		8,996
Conservation Incentive Program Receivable		15,342		7,747
Societal Benefit Costs Receivable		1,234		6,912
Premium for Early Retirement of Debt		1,451		1,532
Other Regulatory Assets		1,494		1,376
	$	182,230	$	196,962

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

	June 30, 2007		December 31, 2006
Excess Plant Removal Costs	$	48,532	$	48,377
Deferred Gas Revenues - Net		4,233		-
Other		4,012		2,420
Total Regulatory Liabilities	$	56,777	$	50,797

Deferred Gas Costs and Revenues - Net- Over/under collections of gas costs are monitored through SJG’s Basic Gas Supply Service Clause (BGSS) mechanism. Net undercollected gas costs are classified as a regulatory asset and net overcollected gas costs are classified as a regulatory liability. Derivative contracts used to hedge natural gas purchases are also included in the BGSS, subject to BPU approval. The BGSS decreased from a $19.7 million regulatory asset at December 31, 2006 to a $4.2 million regulatory liability at June 30, 2007 primarily as a result of gas costs recovered from customers exceeding the actual cost of the commodity incurred during the first six months of 2007.  Gas costs recoveries are typically very high in the first and fourth quarters of the year as customer consumption is at its highest point during the winter months. In addition, a change in the fair value of energy related derivatives resulting from an increase in the average future prices accounted for $9.9 million of the fluctuation.

4.              RELATED PARTY TRANSACTIONS:

There have been no significant changes in the nature of SJG’s related party transactions since December 31, 2006. See Note 4 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2006 for a detailed description of such transactions.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Operating Revenues:
SJRG	$	3,542	$	9,860	$	16,046	$	17,362
Other		93		55		201		138
Total Operating Revenues	$	3,635	$	9,915	$	16,247	$	17,500

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Costs of Sales (Excluding depreciation):
SJRG	$	4,946	$	10,732	$	23,033	$	29,288
Total Cost of Sales	$	4,946	$	10,732	$	23,033	$	29,288
Operations Expense
SJI	$	1,415	$	1,265	$	2,778	$	4,045
SJIS		1,073		1,170		2,155		2,538
Millennium		712		683		1,412		1,356
Other		74		(145)		188		98
Total Operations Expense	$	3,274	$	2,973	$	6,533	$	8,037

5.           RESTRICTED INVESTMENTS:

In accordance with the terms of SJG’s tax-exempt first mortgage bonds, unused proceeds are required to be escrowed pending approved construction expenditures. As of June 30, 2007 and December 31, 2006, the escrowed proceeds, including interest earned, totaled $8.8 million and $8.6 million, respectively.

6.           UNUSED LINES OF CREDIT:

Bank credit available to SJG totaled $176.0 million at June 30, 2007, of which $58.8 million was used. Those bank facilities consist of a $100.0 million credit facility and $76.0 million of uncommitted bank lines. The revolving credit facility expires in August 2011 and contains one financial covenant regarding the ratio of total debt to total capitalization, measured on a quarterly basis. SJG was in compliance with this covenant as of June 30, 2007. Borrowings under these credit facilities are at market rates. The average borrowing cost, which changes daily, was 5.70% and 5.90% at June 30, 2007 and 2006, respectively.

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7.           RETAINED EARNINGS:

SJG is restricted as to the amount of cash dividends or other distributions that may be paid on its common stock by an order issued by the BPU in July 2004 that granted SJG an increase in base rates. Per the order, SJG is required to maintain total common equity of no less than $289.2 million. SJG’s total common equity balance was $379.6 million at June 30, 2007.

Various loan agreements also contain potential restrictions regarding the amount of cash dividends or other distributions that SJG may pay on its common stock. As of June 30, 2007, these loan restrictions did not affect the amount that may be distributed from SJG’s retained earnings.

8.           PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three and six months ended June 30, 2007 and 2006, 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
	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Service Cost	$	427		$	471		$	1,260		$	1,149
Interest Cost		1,028			1,524			2,954			2,940
Expected Return on Plan Assets		(1,240	)		(1,964	)		(3,772	)		(3,759	)
Amortizations:
Prior Service Cost		36			97			110			194
Actuarial Loss		296			426			747			958
Net Periodic Benefit Cost		547			554			1,299			1,482
Capitalized Benefit Costs		(266	)		(238	)		(633	)		(637	)
Total Net Periodic Benefit Expense	$	281		$	316		$	666		$	845

	Other Postretirement Benefits
	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Service Cost	$	160		$	129		$	415		$	258
Interest Cost		438			307			1,140			614
Expected Return on Plan Assets		(342	)		(228	)		(889	)		(456	)
Amortizations:
Prior Service Credits		(58	)		(66	)		(151	)		(132	)
Actuarial Loss		99			866			257			172
Net Periodic Benefit Cost		297			228			772			456
Capitalized Benefit Costs		(145	)		(98	)		(378	)		(196	)
Total Net Periodic Benefit Expense	$	152		$	130		$	394		$	260

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

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See Note 11 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2006, for additional information related to SJG’s   pension and other postretirement benefits.

9.           COMMITMENTS AND CONTINGENCIES:

Contractual Cash Obligations - SJG has incurred various contractual obligations in the normal course of activities. These obligations primarily include future cash payments required under debt agreements, commodity supply purchase agreements, regulatory agreements and construction contracts. There were no significant changes to SJG’s contractual obligations described in Note 12 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2006, except for commodity supply purchase obligations which increased by approximately  $49.4 million in total since December 31, 2006. This was primarily due to an increase in rates effective March 1, 2007 with one of our major transportation suppliers with whom we have a multi-year purchase agreement, and the extension of several of our commodity supply purchase agreements.

Environmental Remediation Costs - SJG incurred and recorded costs for environmental cleanup of 12 sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s. There have been no significant changes to the status of SJG’s environmental remediation efforts or the expected remediation costs since December 31, 2006 which are described in Note 12 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2006, except that the remedial action plan for Site 1 has been submitted to the New Jersey Department of Environmental Protection for approval.

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Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations (Unaudited)

OVERVIEW:

Organization - SJG is an operating public utility company engaged in the purchase, transmission and sale of natural gas for residential, commercial and industrial use. SJG also sells natural gas and pipeline transportation capacity (off-system sales) on a wholesale basis to various customers on the interstate pipeline system and transports natural gas purchased directly from producers or suppliers to their customers. SJG served  331,837 customers at June 30, 2007 compared with  325,169 customers at June 30, 2006.

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

A discussion of these and other risks and uncertainties may be found in SJG’s Form 10-K for the year ended December 31, 2006 and in other filings made by us with the Securities and Exchange Commission. These cautionary statements should not be construed by you to be exhaustive and they are made only as of the date of this Quarterly Report on Form 10-Q, or in any document incorporated by reference, at the date of such document. While SJG believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, SJG undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies - Estimates and Assumptions - Management must make estimates and assumptions that affect the amounts reported in the 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, energy derivatives, environmental remediation costs, pension and other postretirement benefit costs, and revenue recognition. A discussion of these estimates and assumptions may be found in SJG’s Form 10-K for the year ended December 31, 2006.

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

Rates and Regulation:

Temperature Adjustment Clause (TAC) - Through September 30, 2006, SJG’s tariff included a TAC to mitigate the effect of variations in heating season temperatures from historical norms. Each TAC year ran from November 1 through May 31 of the following year. Once the TAC year ended, the net earnings impact was filed with the BPU for future recovery. As a result, the cash inflows or outflows generally would not begin until the next TAC year. Because of the timing delay between the earnings impact and the recovery, the net result can be either a regulatory asset or liability. The TAC increased net income by  $1.3 million for the three months ended and $4.9 million for the six months ended June 30, 2006, as weather was  significantly warmer than the 20-year TAC average.

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Conservation Incentive Program (CIP) - The CIP is a BPU approved three-year pilot program that began October 1, 2006, and is designed to eliminate the link between SJG’s profits and the quantity of natural gas sold per customer, and foster conservation efforts. With the CIP, SJG’s profits will be tied to the number of customers served and how efficiently we serve them, thus allowing us to focus on encouraging conservation and energy efficiency among our customers without negatively impacting SJG’s net income.  The CIP tracking mechanism adjusts earnings based on weather, as did the TAC, and also adjusts SJG’s earnings where the actual usage per customer experienced during an annual period varies from an established baseline usage per customer.

Similar to the TAC, 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 CIP protected  $1.4 million in earnings for the three months ended and $4.4 million for the six months ended June 30, 2007, which would have been lost due to warm weather and lower customer usage. Of  those amounts, the full $1.4 million was related to customer usage during  the three months ended June 30, 2007.  During the six months ended June 30, 2007, $0.2 million was related to weather and $4.2 million was related to customer usage.

Regulatory Actions - There have been no significant regulatory actions since December 31, 2006. See detailed discussions concerning Regulatory Actions in Note 2 to the Financial Statements in item 8 of SJG’s Form 10-K for the year ended December 31, 2006.

Environmental Remediation - See detailed discussion concerning Environmental Remediation in Note 12 to the Financial Statements in item 8 of SJG’s Form 10-K for the year ended December 31, 2006. There have been no significant changes to the status of SJG’s environmental remediation efforts since December 31, 2006,except that the remedial action plan for Site 1, as described in SJG’s Form 10-K, has been submitted to the New Jersey Department of Environmental Protection for approval.

Competition - See detailed discussion concerning competition in SJG’s Form 10-K for the year ended December 31, 2006.

Customer Choice Legislation - All residential natural gas customers in New Jersey can choose their natural gas commodity supplier under the terms of the “Electric Discount and Energy Competition Act of 1999.” This bill created the framework and necessary time schedules for the restructuring of the state’s electric and natural gas utilities. The Act established unbundling, under which redesigned utility rate structures allow natural gas and electric consumers to choose their energy supplier.  Customers purchasing natural gas from a provider other than the local utility (marketer) are charged for the gas costs by the marketer and charged for the transportation costs by the utility. For a period of several years, marketers had successfully attracted gas commodity customers by offering natural gas at prices competitive with those available under regulated utility tariffs. However, during the third quarter of 2005, marketers found it increasingly difficult to compete with the local utility because of changing market conditions and rising gas costs. SJG’s affiliate, South Jersey Energy Company, responded by returning all of its approximately 69,000 residential gas customers to the utility during the third quarter of 2005. Beginning in the first quarter of 2006, marketers began to attract customers back through new offers. The total number of customers purchasing the gas commodity from a marketer increased from 18,789 as of June 30, 2006 to 26,661 as of June 30, 2007.

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RESULTS OF OPERATIONS:

The following tables summarize the composition of gas utility volumes, revenues, margin and degree days for the three and six months ended June 30 (in thousands, except for degree day data):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Throughput – dth:
Firm Sales -
Residential		3,232		2,542		14,513		12,726
Commercial		931		941		3,860		4,357
Industrial		15		29		121		134
Cogeneration & Electric Generation		131		224		162		254
Firm Transportation -
Residential		273		141		1,144		466
Commercial		1,054		777		3,664		2,438
Industrial		2,957		3,406		6,068		6,908
Cogeneration & Electric Generation		713		10		1,127		12
Total Firm Throughput		9,306		8,070		30,659		27,295
Interruptible Sales		28		34		38		66
Interruptible Transportation		728		846		1,379		1,860
Off-System		3,079		4,708		9,914		8,999
Capacity Release & Storage		22,665		16,765		31,479		32,504
Total Throughput		35,806		30,423		73,469		70,724

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Operating Revenues:
Firm Sales -
Residential	$	46,183	$	46,948	$	214,255	$	213,384
Commercial		11,069		12,844		47,647		64,253
Industrial		1,423		948		5,406		2,962
Cogeneration & Electric Generation		1,618		2,303		2,067		3,360
Firm Transportation -
Residential		1,214		781		4,788		2,143
Commercial		2,596		2,252		9,624		6,473
Industrial		2,643		2,992		5,733		6,262
Cogeneration & Electric Generation		552		11		946		11
Total Firm Revenues		67,298		69,079		290,466		298,848
Interruptible Sales		296		370		436		769
Interruptible Transportation		475		358		938		992
Off-System		24,230		33,101		76,296		74,744
Capacity Release & Storage		3,338		1,699		5,082		6,001
Other		359		399		642		733
Total Operating Revenues	$	95,996	$	105,006	$	373,860	$	382,087

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	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Net Operating Revenues:
Residential	$	47,397	$	47,729	$	219,043	$	215,527
Commercial and Industrial		17,731		19,036		68,410		79,950
Cogeneration and Electric Generation		2,170		2,314		3,013		3,371
Interruptible		771		728		1,374		1,761
Off-system, Capacity Release & Storage		27,568		34,800		81,378		80,745
Other Revenues		359		399		642		733
Total Utility Operating Revenues	$	95,996	$	105,006	$	373,860	$	382,087
Less:
Cost of Sales	$	63,848	$	76,040	$	269,392	$	284,661
Conservation Recoveries		1,042		1,751		2,255		3,968
RAC Recoveries		473		448		945		895
Revenue Taxes		1,398		1,082		5,433		4,761
Net Operating Revenues (Margin)	$	29,235	$	25,685	$	95,835	$	87,802
Margin:
Residential	$	17,490	$	14,929	$	61,752	$	53,794
Commercial and Industrial		7,625		6,753		22,985		20,920
Cogeneration and Electric Generation		620		526		979		1,045
Interruptible		41		72		98		142
Off-system, Capacity Release & Storage		599		600		1,590		2,757
Other Revenues		544		541		826		874
Margin Before Weather Normalization & Decoupling		26,919		23,421		88,230		79,532
TAC Mechanism		-		2,264		-		8,270
CIP Mechanism		2,316		-		7,605		-
Utility Net Operating Revenues (Margin)	$	29,235	$	25,685	$	95,835	$	87,802
Degree Days		547		401		2,965		2,564

Volumes - Total gas throughput increased 17.7% for the three months ended June 30, 2007, compared with the same period in 2006. Firm throughput increased 15.3% due to 36.4% colder weather and the addition of 6,668 customers.  In addition, opportunities for storage and capacity release increased substantially during the second quarter of 2007. However, due to the lower margin on capacity release and storage, coupled with our requirement to credit the BGSS with 85% of these margins, such increase in throughput had a minimal impact on SJG’s profitability.  For the six months ended June 30, 2007, total gas throughput increased 3.9% compared to the same period in 2006.  Firm throughput increased 12.3% due to 15.6% colder weather and customer growth of 2.1% over the prior year.

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Operating Revenues - Revenues decreased $9.0 million during the second quarter of 2007 compared with the same period in the prior year primarily due to two factors.  First, Off-System sales volume decreased as activity during the period shifted from sales, which include the cost of commodity, to Capacity Release & Storage activity, which does not include the transfer of commodity.  As a result, revenues decreased substantially; however, as indicated by the Margin table above, the net contribution to the company’s earnings were not negatively impacted by this shift in activity.Contributing to lower firm revenues was a decrease in the Basic Gas Supply Service (BGSS) gas cost recovery rate and an increase in the number of residential and commercial customers purchasing gas from third party marketers. The BGSS rate in the second quarter of 2007 was 10.8% lower than the prior year rate. Last year’s rate was higher to address under recovery of gas costs stemming from substantial increases in wholesale gas prices across the country in 2005. Transportation customers generate less revenue for the Company because they purchase the gas commodity from a third party marketer. However, as the Company does not profit from the sale of the commodity, neither BGSS rate changes nor customer migration between sales and transportation have an impact on Company profitability.

Revenues decreased $8.2 million during the first six months of 2007 compared with the same period in the prior year primarily due to lower firm revenues.  While SJG added 6,668 customers during the 12-month period ended June 30, 2007, which represents a 2.1% increase in total customers, and weather was 15.6% colder than last year during this six month period, firm sales revenue decreased notably.  This decrease resulted from the decrease in the BGSS gas cost recovery rate, as discussed above, in addition to customer migration from firm sales to firm transportation service.  The number of transportation customers increased to 26,661 at June 30, 2007 as compared to 18,789 the prior year.

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

Total margin increased $3.6 million, or 13.8%, for the three months ended June 30, 2007 compared with the same period in 2006 primarily due to customer additions, as noted above under “Operating Revenues”, and the operation of the CIP which protected $1.4 million that would have been lost due to lower customer usage.  The impact of these two factors was primarily noted in the residential and commercial markets which recognized an additional $3.4 million in margin in the second quarter of 2007 compared to the second quarter of 2006.

Total margin increased $8.0 million, or 9.1%, for the six months ended June 30, 2007 compared with the same period in 2006 primarily due to customer additions, as noted above, and the operation of the CIP.  The CIP protected $4.2 million of margin that would have been lost due to lower customer usage. Partially offsetting the positive impact of these increases were lower margins from Off-system sales (OSS), capacity release and storage.  Margin declined in these markets due to less favorable market conditions, primarily in the first quarter of 2007, and a decrease in the percentage of earnings from these sales retained by the Company in accordance with a July 2004 base rate case stipulation.  Through July 1, 2006, the company retained 20% of margins generated by OSS and related activities.  Since then the company is only permitted to retain 15% of such margins.

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

	Three Months Ended June 30,		Six Months Ended June 30,
	2007 vs. 2006		2007 vs. 2006
Operations	$	1,034	$	1,104
Maintenance		65		132
Depreciation		267		562
Energy and Other Taxes		199		537

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Operations– Operations expense increased $1.0 million and $1.1 million for the three and six months ended June 30, 2007, respectively, as compared with the same periods in 2007.  The increase is primarily comprised of several factors.

For the second quarter, expense associated with the uncollectible customer account reserve increased $0.7 million due to higher levels of customer account receivables in 2007 than in 2006 as a result of higher sales late in the winter season.  Insurance expense was $0.1 million higher in 2007, as last year benefited from a refund from one of our primary insurance carriers.  Corporate governance and compliance costs also rose $0.3 million for the quarter.   Additional reasons for the increase include $0.1 million higher sales expense as promotions were run earlier during 2007 than during 2006; $0.2 million higher distribution costs during the quarter; and higher salaries due to annual increases.

For the first six months, expense associated with the uncollectible customer account reserve increased $1.0 million due to higher levels of customer account receivables in 2007 than in 2006 as a result of higher sales late in the winter season.  In addition, actual write-offs of uncollectible account balances were $0.4 million higher than last year for the six months ended.  Insurance expense was $0.2 million higher in 2007, as last year benefited from a refund from one of our primary insurance carriers. Corporate governance and compliance costs also rose $0.5 million year to date.  Additional reasons for the increase include $0.1 million higher sales expense as promotions were run earlier during 2007 than during 2006; $0.1 million in Conservation Incentive Program (CIP) expenses that did not begin to be incurred until the approval of the CIP in October 2006; and higher salaries due to annual increases.

Partially offsetting the increases above were $0.7 million and $1.7 million decreases for the three and six month periods ended June 30, 2007, respectively, in our costs under the New Jersey Clean Energy Programs (NJCEP), which have decreased as the Company is no longer managing as many plans as it had in 2006.  Such costs are recovered on a dollar-for-dollar basis; therefore, SJG experienced offsetting decreases in revenues during the periods. The BPU-approved NJCEP allows for full recovery of costs, including carrying costs when applicable.  As a result, the decrease in expense had no impact on our net income.

Depreciation - Depreciation expense increased for both the three and six months ended June 30, 2007, as compared with the same period in 2006, due mainly to SJG’s continuing investment in utility plant.

Energy and Other Taxes - Energy and Other Taxes increased for both the three and six months ended June 30, 2007, compared with the same period in 2006, primarily due to higher energy-related taxes. Higher taxable firm throughput in 2007 resulted from colder weather, primarily during the first quarter.

Interest Charges– Interest charges decreased by $0.4 million and $0.3 million for the three and six months ended June 30, 2007, respectively, compared with the same periods in 2006.  These decreases are the result of lower short-term debt levels, which offset higher interest rates on such debt incurred during both periods and higher levels of long-term debt.  However, by the end of the second quarter, short-term interest rates available to SJG were below the level experienced at the same point in 2006.

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.

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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  $75.7 million for the  six months ended June 30, 2007, compared with  $30.0 million for the same period in 2006. Net cash provided by operating activities in the first  half of 2006 was  negatively impacted by higher unit gas costs following hurricane Katrina and their effect on inventory and accounts payable  balances at the end of 2005. In addition, SJG had deferred the payment of $16.0 million for gas delivered to storage during 2005 until the first quarter of 2006, further increasing the year-end 2005 accounts payable balance.  We did not enter into a similar supply arrangement during the 2006 injection season; therefore, the first half of 2007 did not contain any payments related to 2006 storage injections.  Finally, recoveries of previously deferred gas costs under SJG’s Basic Gas Supply Service increased $13.6 million as a result of higher sales volume, the basis for such recoveries.

Cash Flows from Investing Activities - SJG has a continuing need for cash resources for capital purchases, primarily to invest in new and replacement facilities and equipment. Cash used for capital purchases was approximately $10.3 million less in the first half of 2007, compared with the same period in 2006. Accounts payable associated with SJG’s capital program were $9.0 million and $2.8 million as of December 31, 2006 and 2005, respectively.  Included in the December 31, 2005 accounts payable were costs associated with two large special projects for pipeline installation.  These balances are typically paid during the first quarter of the subsequent year.  Capital expenditures are required on an ongoing basis to support system growth and integrity in our territory.

In April 2006, SJG issued $25.0 million of secured, tax-exempt debt through the New Jersey Economic Development Authority.  Such funds can only be utilized for qualified construction activity as defined in our debt agreement.  Unused funds in the amount of $14.3 million were placed in a restricted investment account during the second quarter of 2006.

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

Bank credit available to SJG totaled $176.0 million at June 30, 2007, of which  $58.8 million was used. Those bank facilities consist of a $100.0 million revolving credit facility and $76.0 million of uncommitted bank lines. The revolving credit facility expires in August 2011 and contains one financial covenant that limits SJG’s total debt to total capitalization ratio to no more than 65%, measured on a quarterly basis. The Company is in compliance with this covenant as of June 30, 2007. Based upon the existing credit facilities and a regular dialogue with the company’s banks, management believes that there will continue to be sufficient credit available to meet SJG’s future liquidity needs. 

The decrease in the net borrowings of short-term debt of  $44.7 million from December 31, 2006 to June 30, 2007, was the result of recovery of costs previously deferred under our various rate mechanisms, as well as the seasonal  improvement in cash flows during the first  half of the year as storage gas  has been sold and customer receivables from high usage periods have been collected.  Typically, SJG’s gas storage facilities are refilled in increments between April and October in preparation for the upcoming winter season.

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 2005, SJG established a $150.0 million MTN program.  In April 2006, SJG issued $25.0 million of secured, tax-exempt debt under that program and an additional $115.0 million remains available for issuance under that program.

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SJG’s capital structure was as follows:

	As of June 30, 2007			As of December 31, 2006
Common Equity		51.8	%		47.4	%
Long-Term Debt		40.2			39.0
Short-Term Debt		8.0			13.6
Total		100.0	%		100.0	%

SJG’s long-term, senior secured debt is rated “A” and “Baa1” by Standard & Poor’s and Moody’s Investor Services, respectively. These ratings have not changed in the past five years.

SJG is restricted as to the amount of cash dividends or other distributions that may be paid on its common stock by an order issued by the BPU in July 2004 that granted SJG an increase in base rates. Per the order, SJG is required to maintain total common equity of no less than $289.2 million. SJG’s total common equity balance was $379.6 million at June 30, 2007.

COMMITMENTS AND CONTINGENCIES:

SJG has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment, working capital, and for environmental remediation costs. Net cash outflows for construction and remediation projects for the six months ended June 30, 2007 amounted to $23.8 million and $3.2 million, respectively. Management estimates total cash outflows for construction projects for 2007, 2008 and 2009, to be approximately $49.0 million, $46.7 million and $46.8 million, respectively. Total cash outflows for remediation projects are expected to be $22.1 million, $17.9 million and $7.7 million for 2007, 2008 and 2009, respectively.

SJG has certain commitments for both pipeline capacity and gas supply for which it pays fees regardless of usage. Those commitments as of June 30, 2007, average $55.2 million annually and total $245.7 million over the contracts’ lives. Approximately 46% of the financial commitments under these contracts expire during the next five years. SJG expects to renew each of these contracts under renewal provisions as provided in each contract. SJG recovers all prudently incurred fees through rates via the Basic Gas Supply Service clause.

Contractual Cash Obligations - Details concerning contractual cash obligations may be found in SJG’s Form 10-K for the year ended December 31, 2006. There were no significant changes to SJG’s contractual cash obligations as described therein except for commodity supply purchase obligations which increased by approximately $35.6 million in total since December 31, 2006. This was primarily due to an increase in rates effective March 1, 2007 with one of our major gas commodity suppliers with whom we have a multi-year purchase agreement. The additional commodity supply obligation is expected to be incurred as follows: 2007 - $7.2 million; 2008-2009 - $9.4 million; 2010-2011 - $3.3 million; thereafter - $15.7 million.

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.

SJG - 23

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

Twelve Months Ended June 30,		Year Ended December 31,
2007		2006		2005		2004		2003		2002
	4.0x		3.8x		4.0x		3.9x		3.3x		2.9x

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

Item 3. Quantitative and Qualitative Disclosures about Market Risks

MARKET RISKS:

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

We transact commodities on a physical basis and typically do not enter into financial derivative positions directly. South Jersey Resources Group, LLC (SJRG), an affiliate by common ownership, manages our risk by entering into the types of transactions noted above. As part of our gas purchasing strategy, we use financial contracts to hedge against forward price risk. These contracts are recoverable through our BGSS, subject to BPU approval. It is management’s policy, to the extent practical, within predetermined risk management policy guidelines, to have limited unmatched positions on a deal or portfolio basis while conducting these activities. As a result of holding open positions to a minimal level, the economic impact of changes in value of a particular transaction is substantially offset by an opposite change in the related hedge transaction. The majority of our contracts are typically less than 12-months long. The fair value and maturity of all these energy trading and hedging contracts determined using mark-to-market accounting as of June 30, 2007 is as follows (in thousands):

Assets:		Maturity		Maturity
	Source of Fair Value	<1 Year		1 - 3 Years		Total
Prices Actively Quoted	NYMEX	$	1,331	$	27	$	1,358
Liabilities:		Maturity		Maturity
	Source of Fair Value	<1 Year		1 - 3 Years		Total
Prices Actively Quoted	NYMEX	$	8,010	$	121	$	8,131

SJG - 24

NYMEX (New York Mercantile Exchange) is the primary national commodities exchange on which natural gas is traded. Contracted volumes of our NYMEX contracts are 9.0 MMDth with a weighted-average settlement price of $7.83 per dth.

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

Net Derivatives — Energy Related Liability, January 1, 2007	$	(16,669	)
Contracts Settled During the Six Months ended June 30, 2007, Net		9,470
Other Changes in Fair Value from Continuing and New Contracts, Net		426
Net Derivatives — Energy Related Liability, June 30, 2007	$	(6,773	)

The change in our derivative position from a $16.7 million liability at January 1, 2007, to a  $6.8 million liability at June 30, 2007, is primarily due to the change in value of our financial positions held with SJRG.    This change in value is primarily due to the settlement of contracts during the six months ended June 30, 2007.

Interest Rate Risk - Our exposure to interest rate risk relates primarily to short-term, variable-rate borrowings. Short-term, variable-rate debt outstanding at June 30, 2007, was  $58.8 million and averaged  $57.0 million during the first  six months of 2007. A hypothetical 100 basis point (1%) increase in interest rates on our average variable-rate debt outstanding would result in a $336,000 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: 2006 - 72 b.p. increase; 2005 - 191 b.p. increase; 2004 - 115 b.p. increase; 2003 - 31 b.p. decrease; and 2002 - 74 b.p. decrease. As of June 30, 2007, our average borrowing cost, which changes daily, was 5.70%.

We issue long-term debt either at fixed rates or use interest rate derivatives to fix interest rates on variable-rate, long-term debt. Consequently, interest expense on existing long-term debt is not significantly impacted by changes in market interest rates.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Management has established controls and procedures to ensure that material information relating to SJG is made known to the officers who certify its financial reports and to other members of senior management and the Board of Directors. 

Based upon their evaluation as of the end of the period of this report, the principal executive officer and the principal financial officer of SJG have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) employed at SJG are effective to ensure that the information required to be disclosed by SJG in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Changes in Internal Control Over Financial Reporting

There has not been any change in SJG’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the fiscal quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, SJG’s internal control over financial reporting. 

SJG - 25

PART II — OTHER INFORMATION

Item l. Legal Proceedings

Information required by this Item is incorporated by reference to Part I, Item 2, Pending Litigation, beginning on page 23.

Item 6. Exhibits

(a)          Exhibits

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

SJG - 26

SIGNATURES

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

SOUTH JERSEY GAS COMPANY

(Registrant)

Dated: August 9, 2007	By: /s/ Edward J. Graham
	Edward J. Graham
	President & Chief Executive Officer
Dated: August 9, 2007	By: /s/ David A. Kindlick
	David A. Kindlick
	Senior Vice President & Chief Financial Officer

SJG - 27

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Edward J. Graham, certify that:

1.  I have reviewed this report on Form 10-Q for the period ended June 30, 2007, of South Jersey Gas Company;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15 d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2007	/s/ Edward J. Graham
	Edward J. Graham
	President & Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, David A. Kindlick, certify that:

1.  I have reviewed this report on Form 10-Q for the period ended June 30, 2007, of South Jersey Gas Company;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15 d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2007	/s/   David A. Kindlick
	David A. Kindlick
	Senior Vice President & Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

In connection with the filing of the Quarterly Report on Form 10-Q of South Jersey Gas Company (the “Company”) for the period ended June 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Edward J. Graham, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)           The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Edward J. Graham

-----------------------------------------------------

Name:  Edward J. Graham

Title:  Chief Executive Officer

August 9, 2007

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

In connection with the filing of the Quarterly Report on Form 10-Q of South Jersey Gas Company (the “Company”) for the period ended June 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David A. Kindlick, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)           The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ David A. Kindlick

-------------------------------------------------------

Name: David A. Kindlick

Title: Chief Financial Officer

August 9, 2007