10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended September 30, 2008

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, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	[   ]	Accelerated filer	[   ]
Non-accelerated filer	[X] (Do not check if a smaller reporting company)	Smaller reporting company	[   ]

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

As of November 3, 2008 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. 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements — See Pages 3 through 15

SJG - 2

SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)
	Three Months Ended
	September 30,
	2008			2007
Operating Revenues	$	64,563		$	84,420
Operating Expenses:
Cost of Sales (Excluding depreciation)		41,201			62,223
Operations		12,488			10,968
Maintenance		1,925			1,544
Depreciation		6,409			6,188
Energy and Other Taxes		1,356			1,307
Total Operating Expenses		63,379			82,230
Operating Income		1,184			2,190
Other Income and Expense		242			157
Interest Charges		(4,586	)		(5,371	)
Loss Before Income Taxes		(3,160	)		(3,024	)
Income Tax Benefit		1,306			1,278
Net Loss	$	(1,854	)	$	(1,746	)
The accompanying notes are an integral part of the unaudited condensed financial statements.

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SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)
	Nine Months Ended
	September 30,
	2008			2007
Operating Revenues	$	396,038		$	458,280
Operating Expenses:
Cost of Sales (Excluding depreciation)		264,381			331,615
Operations		41,144			36,423
Maintenance		5,412			4,446
Depreciation		19,064			18,356
Energy and Other Taxes		7,424			7,803
Total Operating Expenses		337,425			398,643
Operating Income		58,613			59,637
Other Income and Expense		869			613
Interest Charges		(14,179	)		(15,403	)
Income Before Income Taxes		45,303			44,847
Income Taxes		(18,706	)		(18,431	)
Net Income	$	26,597		$	26,416
The accompanying notes are an integral part of the unaudited condensed financial statements.

SJG - 4

SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
	Three Months Ended
	September 30,
	2008			2007
Net Loss	$	(1,854	)	$	(1,746	)
Other Comprehensive Loss - Net of Tax:
Unrealized (Loss) Gain on Equity Investments		(355	)		41
Unrealized Gain (Loss) on Derivatives - Other		7			(487	)
Other Comprehensive Loss - Net of Tax  *		(348	)		(446	)
Comprehensive Loss	$	(2,202	)	$	(2,192	)
	Nine Months Ended
	September 30,
	2008			2007
Net Income	$	26,597		$	26,416
Other Comprehensive (Loss) Income - Net of Tax:
Unrealized (Loss) Gain on Equity Investments		(635	)		221
Unrealized Gain on Derivatives - Other		385			192
Other Comprehensive (Loss) Income - Net of Tax  *		(250	)		413
Comprehensive Income	$	26,347		$	26,829
*  Determined using a combined statutory tax rate of 41.08%
The accompanying notes are an integral part of the unaudited condensed financial statements.

SJG - 5

SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
	Nine Months Ended
	September 30,
	2008			2007
Net Cash Provided by Operating Activities	$	35,773		$	67,544
Cash Flows from Investing Activities:
Capital Expenditures		(37,271	)		(34,386	)
Merchandise Loans		(2,857	)		(2,695	)
Proceeds from Merchandise Loans		2,923			2,975
Purchase of Restricted Investments with Escrowed Loan Proceeds		(36	)		(323	)
Proceeds from Sale of Restricted Investments from Escrowed Loan Proceeds		-			4,495
Net Cash Used in Investing Activities		(37,241	)		(29,934	)
Cash Flows from Financing Activities:
Net Borrowing (Repayments) of Lines of Credit		10,285			(25,700	)
Principal Repayments of Long-Term Debt		(25,000	)		(2,290	)
Proceeds from Issuance of Long-Term Debt		25,000			-
Payments for Issuance of Long-Term Debt		(247	)		-
Dividends on Common Stock		(9,866	)		(9,366	)
Excess Tax Benefit from Restricted Stock Plan		236			-
Net Cash Provided By (Used in) Financing Activities		408			(37,356	)
Net (Decrease) Increase in Cash and Cash Equivalents		(1,060	)		254
Cash and Cash Equivalents at Beginning of Period		3,230			1,967
Cash and Cash Equivalents at End of Period	$	2,170		$	2,221
The accompanying notes are an integral part of the unaudited condensed financial statements.

SJG - 6

SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)
	September 30,			December 31,
	2008			2007
Assets
Property, Plant and Equipment:
Utility Plant, at original cost	$	1,156,565		$	1,123,992
Accumulated Depreciation		(290,215	)		(276,301	)
Property, Plant and Equipment - Net		866,350			847,691
Investments:
Available-for-Sale Securities		5,633			6,714
Restricted Investments		2,275			2,239
Total Investments		7,908			8,953
Current Assets:
Cash and Cash Equivalents		2,170			3,230
Accounts Receivable		29,614			48,984
Accounts Receivable - Related Parties		675			2,267
Unbilled Revenues		7,692			41,576
Provision for Uncollectibles		(3,726	)		(3,265	)
Natural Gas in Storage, average cost		78,259			56,404
Materials and Supplies, average cost		2,022			1,436
Prepaid Taxes		21,030			10,849
Derivatives - Energy Related Assets		2,653			2,236
Other Prepayments and Current Assets		2,713			2,278
Total Current Assets		143,102			165,995
Regulatory and Other Noncurrent Assets:
Regulatory Assets		212,743			188,688
Unamortized Debt Issuance Costs		6,196			6,307
Prepaid Pension		5,756			1,472
Accounts Receivable - Merchandise		6,039			6,118
Derivatives - Energy Related Assets		20			93
Other		3,426			1,845
Total Regulatory and Other Noncurrent Assets		234,180			204,523
Total Assets	$	1,251,540		$	1,227,162
The accompanying notes are an integral part of the unaudited condensed financial statements.

SJG - 7

SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands, except per share amounts)
	September 30,			December 31,
	2008			2007
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		200,553			200,317
Accumulated Other Comprehensive Loss		(5,606	)		(5,356	)
Retained Earnings		191,770			177,539
Total Common Equity		392,565			378,348
Long-Term Debt		294,873			294,873
Total Capitalization		687,438			673,221
Current Liabilities:
Notes Payable		88,625			78,340
Accounts Payable - Commodity		20,800			34,870
Accounts Payable - Other		10,728			13,650
Accounts Payable - Related Parties		10,652			22,417
Derivatives - Energy Related Liabilities		15,010			4,360
Deferred Income Taxes - Net		10,819			11,582
Customer Deposits and Credit Balances		30,033			18,067
Environmental Remediation Costs		18,174			25,447
Taxes Accrued		1,714			2,937
Pension Benefits		841			765
Interest Accrued		4,499			6,245
Dividends Declared		2,501			-
Other Current Liabilities		5,407			5,777
Total Current Liabilities		219,803			224,457
Deferred Credits and Other Noncurrent Liabilities:
Regulatory Liabilities		52,336			55,779
Deferred Income Taxes - Net		181,829			168,254
Environmental Remediation Costs		52,986			48,433
Asset Retirement Obligations		23,682			24,364
Pension and Other Postretirement Benefits		23,665			24,682
Investment Tax Credits		1,912			2,149
Derivatives - Energy Related Liabilities		1,570			61
Derivatives - Other		1,413			618
Other		4,906			5,144
Total Deferred Credits and Other Noncurrent Liabilities		344,299			329,484
Commitments and Contingencies (Note 9)
Total Capitalization and Liabilities	$	1,251,540		$	1,227,162
The accompanying notes are an integral part of the unaudited condensed financial statements.

SJG - 8

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

THE ENTITY - South Jersey Industries, Inc. (SJI) owns all of the outstanding common stock of South Jersey Gas Company (SJG), a regulated natural gas utility. SJG distributes natural gas in the seven southern most counties of New Jersey. In our opinion, the condensed financial statements reflect all normal and recurring adjustments needed to fairly present our financial position and operating results at the dates and for the periods presented. SJG’s business is subject to seasonal fluctuations and accordingly, this interim financial information should not be the basis for estimating the full year’s operating results. As permitted by the rules and regulations of the Securities and Exchange Commission, the accompanying condensed financial statements contain certain condensed financial information and exclude certain note disclosures normally included in annual audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These condensed financial statements should be read in conjunction with SJG’s 2007 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 $0.9 million for both the three months ended September 30, 2008 and 2007, and $5.9 million and $6.3 million for the nine months ended September 30, 2008 and 2007, 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 both of the three month periods ended September 30, 2008 and 2007, and $0.3 million for the nine months ended September 30, 2008 and 2007.

DERIVATIVE INSTRUMENTS - As part of its gas purchasing strategy, SJG uses physical and financial contracts (including forward contracts, swap agreements, option contracts and future contracts) to hedge against forward price risk. SJI structured its subsidiaries so that SJG transacts commodities on a physical basis and typically does not directly enter into positions that financially settle.  South Jersey Resources Group, LLC, (SJRG) an affiliate by common ownership, performs this risk management function for SJG and enters into the types of financial transactions noted above.  As part of its gas purchasing strategy, SJG uses financial contracts through SJRG 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 September 30, 2008 and December 31, 2007, SJG had $13.9 million and $2.1 million of costs, respectively, included in its BGSS related to open financial contracts.

SJG 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 condensed balance sheets.  There have been no significant changes to SJG’s active interest rate swaps since December 31, 2007 which are described in Note 1 to the Financial Statements in Item 8 of SJG’s Annual Report on Form 10-K as of December 31, 2007.

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 September 30, 2008 and December 31, 2007, the net unrealized loss on these swaps was $1.4 million and $0.6 million, respectively.  The market value represents the amount SJG would have to pay the counterparty to terminate these contracts as of those dates.  The market value of these interest rate derivatives upon termination can be recovered in rates and has therefore been included in Other Regulatory Assets in the condensed balance sheets in accordance with FASB Standard No. 71,“Accounting for the Effects of Certain Types of Regulation.”

SJG - 9

STOCK-BASED COMPENSATION PLANS - The following table summarizes the SJI nonvested restricted stock awards pertaining to SJG outstanding at September 30, 2008, 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. 2006		8,234	$	27.950		16.9%		4.5%
Jan. 2007		9,045	$	29.210		18.5%		4.9%
Jan. 2008		9,238	$	34.030		21.7%		2.9%

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 during the three months ended September 30, 2008 and 2007 approximated $64,600 and $56,100, respectively.  The cost of restricted stock awards during the nine months ended September 30, 2008 and 2007 approximated $193,900 and $162,600, respectively.

As of September 30, 2008, there was $0.4 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the restricted stock plans. That cost is expected to be recognized over a weighted average period of 1.9 years.

The following table summarizes information regarding restricted stock award activity during the nine months ended September 30, 2008, excluding accrued dividend equivalents:

	Shares			Weighted Average Grant Date Fair Value
Nonvested Shares Outstanding, January 1, 2008		17,976		$	28.618
Granted		10,000			34.030
Vested		-			-
Forfeited		(1,459	)		31.541
Nonvested Shares Outstanding, September 30, 2008		26,517		$	30.498

During the nine months ended September 30, 2008, SJG awarded 12,299 shares that had vested at December 31, 2007, to its officers at a market value of $0.4 million. During the nine months ended September 30, 2007, SJG awarded 17,143 shares at a market value of $0.6 million. SJG has a policy of making cash payments to SJI to satisfy its obligations under this plan. Cash payments to SJI during the nine months ended September 30, 2008 and 2007 were approximately $0.6 million and $1.1 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 - In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements (FAS 157),” which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. In October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” to provide clarification of the application of Statement 157 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 statement 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, FAS 157 is effective in fiscal years beginning after November 15, 2008.  The adoption of the initial phase of this statement did not have a material effect on SJG’s condensed financial statements.  Management does not anticipate that the adoption of the remainder of this statement will have a material effect on SJG’s condensed financial statements (See Note 10).

SJG - 10

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.  The Company has not elected this fair value option and, as a result, the adoption of this statement did not have an effect on SJG’s condensed financial statements.

In April 2007, the FASB posted FASB Staff Position (FSP) 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.  The adoption of this position did not have a material effect on SJG’s condensed financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133” (FAS 161).  This statement 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.  FAS 161 is effective for fiscal years beginning after November 15, 2008.  Management is currently evaluating the impact that the adoption of this statement will have on SJG’s condensed financial statements.

In September 2008, the FASB issued FASB Staff Position (FSP) No. 133-1 and FIN 45-4 “Disclosures about Credit Derivatives and Certain Guarantees:  An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161.”  The FSP is intended to improve disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives.  The provisions of the FSP that amend Statement 133 and Interpretation 45 are effective for reporting periods (annual or interim) ending after November 15, 2008.  Management is currently evaluating the impact that the adoption of this position will have on the Company’s condensed financial statements.

CORRECTION IN THE PRESENTATION OF THE STATEMENT OF CASH FLOWS - The following item represents a correction made to the nine months ended September 30, 2007 on the statements of condensed cash flows:

· Cash flows related to merchandise loans to customers for the purpose of attracting conversions to natural gas heating systems should have been classified under the caption Cash Flows from Investing Activities on the statements of condensed cash flows. Accordingly, cash outflows for loans originated of $2.7 million and cash inflows from the principal collection on these loans of $3.0 million during the nine months ended September 30, 2007 are now included within Cash Flows from Investing Activities. The overall net impact resulted in $0.3 million of Cash Flows from Operating Activities for the nine months ended September 30, 2007 now being included within Cash Flows from Investing Activities.

This change did not impact previously reported revenue or net income and is considered immaterial to the overall presentation of the condensed financial statements.

2.              RATES AND REGULATORY ACTIONS:

SJG is subject to the rules and regulations of the BPU.  In August 2008 the BPU approved the statewide funding of the New Jersey Clean Energy Program (NJCEP) of $1.2 billion for the years 2009 through 2012.  Of this amount, we will be responsible for the collection and remittance of approximately $41.5 million over the four year period to the State.  This mechanism recovers costs associated with our energy efficiency and renewable energy programs.  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.

There have been no other significant regulatory actions or changes to SJG’s rate structure since December 31, 2007. See Note 2 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2007.

SJG - 11

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, 2007, which are described in Notes 2 and 3 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2007.

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

	September 30,		December 31,
	2008		2007
Environmental Remediation Costs: Expended - Net	$	43,930	$	25,960
Liability for Future Expenditures		71,161		73,880
Income Taxes - Flowthrough Depreciation		2,974		3,707
Deferred Asset Retirement Obligation Costs		21,942		21,572
Deferred Pension and Other Postretirement Benefit Costs		32,422		32,686
Interest Rate Swaps		1,413		-
Deferred Gas Costs and Revenues - Net		10,913		-
Temperature Adjustment Clause Receivable		399		6,516
Conservation Incentive Program Receivable		23,543		18,173
Societal Benefit Costs Receivable		601		2,952
Premium for Early Retirement of Debt		1,248		1,370
Other Regulatory Assets		2,197		1,872
Total Regulatory Assets	$	212,743	$	188,688

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

	September 30,		December 31,
	2008		2007
Excess Plant Removal Costs	$	48,814	$	48,705
Liability for NJCEP		1,672		2,797
Deferred Gas Costs and  Revenues - Net		-		2,586
Other		1,850		1,691
Total Regulatory Liabilities	$	52,336	$	55,779

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. Deferred gas costs and revenues-net shifted from a $2.6 million regulatory  liability at December 31, 2007 to a $10.9 million regulatory  asset at September 30, 2008. A change in the fair value of energy related derivatives resulting from an increase in the average future prices accounted for $11.8 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, 2007. See Note 4 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2007 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 September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Operating Revenues/Affiliates:
SJRG	$	840	$	995	$	2,585	$	17,041
Other		81		87		315		289
Total Operating Revenues/Affiliates	$	921	$	1,082	$	2,900	$	17,330

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

	Three Months Ended  September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Costs of Sales/Affiliates (Excluding depreciation):
SJRG	$	2,624	$	562	$	18,396	$	14,423

Derivative Gains (Losses) (See Note 1):
SJRG	$	(5,375	)	$	6,835	$	(12,723	)	$	16,007

Operations Expense/Affiliates:
SJI	$	1,450		$	1,007		$	4,873		$	3,785
SJIS		1,073			1,020			3,183			3,175
Millennium		735			716			2,245			2,128
Other		(58	)		(42	)		(160	)		(231	)
Total Operations Expense/Affiliates	$	3,200		$	2,701		$	10,141		$	8,857

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 September 30, 2008 and December 31, 2007, the escrowed proceeds, including interest earned, totaled $2.3 million and $2.2 million, respectively.

6.           UNUSED LINES OF CREDIT:

Bank credit available to SJG totaled $163.0 million at September 30, 2008, of which $88.6 million was used. Those bank facilities consist of a $100.0 million credit facility, a $10.0 million line of credit and $53.0 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 September 30, 2008.  Borrowings under these credit facilities are at market rates. The weighted average borrowing cost, which changes daily, was 3.66% at  September 30, 2008 and  5.30% at December 31, 2007.

In June 2008, SJG used $25.0 million of the revolving credit facility to repurchase the outstanding auction-rate Series A 2006 Bonds, at par.  The bonds were 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 as discussed in Note 9.  The borrowings under the revolving credit facility were repaid at that time.  Material terms of the original bonds, such as the 2036 maturity date, floating rate interest reset weekly, and a first mortgage collateral position, remain unchanged.

SJG - 13

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 $392.6 million at September 30, 2008.

Various loan agreements also contain potential restrictions regarding the amount of cash dividends or other distributions that SJG may pay on its common stock. As of September 30, 2008, these loan restrictions did not affect the amount that may be distributed from SJG’s retained earnings.

8.            PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three and nine months ended  September 30, 2008 and 2007, 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 September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Service Cost	$	572		$	427		$	1,715		$	1,686
Interest Cost		1,488			1,028			4,462			3,982
Expected Return on Plan Assets		(1,863	)		(1,240	)		(5,587	)		(5,012	)
Amortizations:
Prior Service Cost		52			36			157			147
Actuarial Loss		288			296			862			1,044
Net Periodic Benefit Cost		537			547			1,609			1,847
Capitalized Benefit Costs		(263	)		(266	)		(788	)		(900	)
Total Net Periodic Benefit Expense	$	274		$	281		$	821		$	947

	Other Postretirement Benefits
	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Service Cost	$	175		$	160		$	524		$	575
Interest Cost		534			438			1,600			1,579
Expected Return on Plan Assets		(396	)		(342	)		(1,188	)		(1,232	)
Amortizations:
Prior Service Credits		(64	)		(58	)		(192	)		(209	)
Actuarial Loss		135			99			403			357
Net Periodic Benefit Cost		384			297			1,147			1,070
Capitalized Benefit Costs		(188	)		(145	)		(562	)		(525	)
Total Net Periodic Benefit Expense	$	196		$	152		$	585		$	545

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

During February 2008, SJG contributed $4.8 million to its pension plans.  SJG does not expect to make any additional contributions in 2008.   No contribution was made during the nine months ended September 30, 2007.

See Note 11 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2007, for additional information related to SJG’s pension and other postretirement benefits.

SJG - 14

9.           COMMITMENTS AND CONTINGENCIES:

STANDBY LETTER OF CREDIT -  SJG provided a $25.3 million letter of credit, outside of the revolving credit facility, to support variable-rate demand bonds issued through the NJEDA to finance the expansion of SJG's natural gas distribution system as discussed in Note 6.  This letter of credit expires in August 2009.

ENVIRONMENTAL REMEDIATION COSTS - SJG incurred and recorded costs for environmental cleanup of 12 sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s. There have been no changes to the status of SJG’s environmental remediation efforts since December 31, 2007,  as described in Note 12 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2007. However, the lower end of the range of expected remediation costs, which is recorded as a liability on the condensed balance sheet, has decreased $2.7 million since December 31, 2007.  This decrease is the result of expenditures of $20.8 million during the first nine months of 2008 and revised forecasts of expected remediation costs for all of  SJG’s sites as additional information has become available.

10.            FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:

Effective January 1, 2008, SJG adopted the provisions of FAS 157 that relate to financial assets and financial liabilities as discussed in Note 1.  FAS 157 establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques.  The levels of the hierarchy are described below:

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

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

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

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

For financial assets and financial liabilities measured at fair value on a recurring basis, information about the fair value measurements for each major category as of September 30, 2008 is as follows (in thousands):

	Total		Level 1		Level 2		Level 3
Assets -
Available-for-Sale Securities (A)	$	5,633	$	5,633	$	-	$	-
Derivatives – Energy Related Assets (B)		2,673		2,673		-		-
	$	8,306	$	8,306	$	-	$	-
Liabilities -
Derivatives – Energy Related Liabilities (B)	$	16,580	$	16,497	$	83	$	-
Derivatives – Other (C)		1,413		-		1,413		-
	$	17,993	$	16,497	$	1,496	$	-

(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 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 - 15

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 336,004 customers at September 30, 2008 compared with 331,790 customers at September 30, 2007.

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

A discussion of these and other risks and uncertainties may be found in SJG’s Form 10-K for the year ended December 31, 2007 and in other filings made by us with the Securities and Exchange Commission. These cautionary statements should not be construed by you to be exhaustive and they are made only as of the date of this Quarterly Report on Form 10-Q, or in any document incorporated by reference, at the date of such document. While SJG believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, SJG undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies - Estimates and Assumptions - Management must make estimates and assumptions that affect the amounts reported in the condensed financial statements and related disclosures. Actual results could differ from those estimates. Five types of transactions presented in our condensed financial statements require a significant amount of judgment and estimation. These relate to regulatory accounting, derivatives, environmental remediation costs, pension and other postretirement benefit costs, and revenue recognition. A discussion of these estimates and assumptions may be found in SJG’s Form 10-K for the year ended December 31, 2007.

In recent months, declines in the investment markets have negatively impacted the value of our pension and other postretirement benefit plan assets.  As a result, SJG anticipates an increase in the amount of pension and other postretirement benefit costs that will be required to be recognized in 2009 and beyond.  We are unable to determine these amounts at this time, as changes in the investment performance between now and the end of the year can significantly impact the ultimate determination of these future costs.

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

Regulatory Actions – Other than the changes discussed in Note 2 to the condensed Financial Statements, there have been no significant regulatory actions since December 31, 2007. 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, 2007.

Environmental Remediation – Other than the changes discussed in Note 9 to the condensed Financial Statements, there have been no significant changes to the status of SJG’s environmental remediation efforts since December 31, 2007. 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, 2007.

SJG - 16

Competition - See detailed discussion concerning competition in SJG’s Form 10-K for the year ended December 31, 2007.

Customer Choice Legislation - All residential natural gas customers in New Jersey can choose their natural gas commodity supplier under the terms of the “Electric Discount and Energy Competition Act of 1999.” This bill created the framework and necessary time schedules for the restructuring of the state’s electric and natural gas utilities. The Act established unbundling, under which redesigned utility rate structures allow natural gas and electric consumers to choose their energy supplier.  Customers purchasing natural gas from a provider other than the local utility (marketer) are charged for the gas costs by the marketer and charged for the transportation costs by the utility.   The number of customers purchasing their natural gas from marketers was 28,210 and 27,019 at September 30, 2008 and 2007, respectively.

RESULTS OF OPERATIONS:

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Throughput – dth:
Firm Sales -
Residential		1,559		1,556		14,490		16,069
Commercial		652		637		4,065		4,497
Industrial		13		17		103		138
Cogeneration & Electric Generation		156		791		528		953
Firm Transportation -
Residential		136		129		1,351		1,273
Commercial		598		607		3,927		4,271
Industrial		3,095		2,835		9,542		8,903
Cogeneration & Electric Generation		1,115		1,288		2,040		2,415
Total Firm Throughput		7,324		7,860		36,046		38,519
Interruptible Sales		1		1		28		39
Interruptible Transportation		509		722		2,034		2,101
Off-System		1,458		3,505		7,330		13,419
Capacity Release		20,196		23,738		47,253		55,217
Total Throughput		29,488		35,826		92,691		109,295

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Utility Operating Revenues:
Firm Sales -
Residential	$	26,587	$	33,386	$	214,098	$	247,641
Commercial		9,650		10,113		53,449		57,760
Industrial		874		1,013		6,051		6,419
Cogeneration & Electric Generation		2,166		6,202		7,453		8,269
Firm Transportation -
Residential		1,081		1,136		7,161		5,924
Commercial		2,124		2,293		12,532		11,917
Industrial		2,974		3,497		9,247		9,230
Cogeneration & Electric Generation		599		657		1,356		1,603
Total Firm Revenues		46,055		58,297		311,347		348,763
Interruptible Sales		22		14		304		450
Interruptible Transportation		334		451		1,301		1,389
Off-System		14,403		22,008		72,989		98,304
Capacity Release		3,512		3,324		9,265		8,406
Other		237		326		832		968
Total Utility Operating Revenues		64,563		84,420		396,038		458,280

SJG - 17

Less:
Cost of Sales	$	41,201	$	62,223		$	264,381	$	331,615
Conservation Recoveries*		1,116		633			6,149		2,888
RAC Recoveries*		695		472			2,084		1,417
Revenue Taxes		870		883			5,912		6,316
Utility Margin	$	20,681	$	20,209		$	117,512	$	116,044
Margin:
Residential	$	12,094	$	11,841		$	69,230	$	73,593
Commercial and Industrial		6,185		6,360			27,334		29,345
Cogeneration and Electric Generation		641		793			1,540		1,772
Interruptible		11		31			92		129
Off-system & Capacity Release		572		596			2,160		2,186
Other Revenues		1,085		603			1,868		1,429
Margin Before Weather Normalization & Decoupling		20,588		20,224			102,224		108,454
CIP Mechanism		93		(15	)		15,288		7,590
Utility Margin	$	20,681	$	20,209		$	117,512	$	116,044
Degree Days:		18		21			2,753		2,986

*Represents revenues for which there is a corresponding charge in operating expenses.  Therefore, such recoveries have no impact on our financial results.

Throughput - - Total gas throughput decreased 17.7% and 15.2% for the three and nine months ended September 30, 2008, respectively, compared with the same periods in 2007. Year-to-date firm throughput declined in both the residential and commercial markets as a result of warmer weather, as reflected by the degree day data in the table above, and customer conservation.  Off-System sales (OSS) and capacity release volume decreased substantially as SJG’s portfolio of assets available for such activities has been reduced under the Conservation Incentive Program, as discussed under “Rates and Regulation” in Item 7 of SJG’s Form 10-K for the year ended December 31, 2007.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Net Income Benefit:
CIP – Weather Related	$	-	$	-	$	1.6	$	0.2
CIP – Usage Related		0.1		-		7.4		4.2
Total Net Income Benefit	$	0.1	$	-	$	9.0	$	4.4
Weather Compared to 20-Year Average	62.5% warmer		56.2% warmer		9.0% warmer		1.3% warmer
Weather Compared to Prior Year	14.3% warmer		40.0% warmer		7.8% warmer		14.9% colder

Operating Revenues  Revenues decreased $19.9 million, or 23.5%, during the third quarter of 2008 compared with the same period in the prior year.  Off-System sales (OSS) revenue decreased $7.6 million in relation to the decrease in sales volume noted above under “Throughput”.  As previously discussed, SJG’s portfolio of assets available for OSS has been reduced under the CIP.  Total firm revenues decreased during the third quarter of 2008 compared to the same period in the prior year primarily due to lower residential revenues resulting from a lower Basic Gas Supply Service (BGSS) rate in effect during the first nine months of 2008.  The 2008 BGSS rate was 12.7% lower than the rate in effect during the same time last year.  SJG reduced its BGSS rate in October 2007 primarily due to a combination of actual and forecasted decreases in wholesale gas costs.  However, as the Company does not profit from the sale of the commodity 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.

SJG - 18

During the first nine months of 2008, revenues decreased $62.2 million, or 13.6%, compared with the same period in the prior year.   OSS revenue decreased $25.3 million in relation to the decrease in sales volume noted above under “Throughput”, as previously discussed.  Next, weather was 7.8% warmer than last year during this nine- month period which contributed significantly to a $37.4 million, or 10.7%, reduction in firm sales revenue.  Further, the Basic Gas Supply Service (BGSS) rate in effect during the first nine months of 2008 was 12.7% lower than the rate in effect during the same time last year.  As previously mentioned, SJG reduced its BGSS rate in October 2007; however, the rate decrease did not have an impact on Company profitability.  Partially offsetting these decreases, SJG added 4,214 customers during the 12-month period ended September 30, 2008, which represents a 1.3% increase in total customers. 

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 $0.5 million, or 2.3%, for the three months ended September 30, 2008 compared with the same period in 2007 due to customer additions, as noted above, 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. Partially offsetting these increases were lower margins from electric utility sales discussed above.   

Total margin increased $1.5 million, or 1.3%, for the nine months ended September 30, 2008 compared with the same period in 2007 primarily due to customer additions and higher SIM profits, as noted above.  Partially offsetting these increases were lower electric utility sales margins as noted above.    The CIP protected $15.3 million of pre-tax margin in the first nine months of 2008 that would have been lost due to lower customer usage, compared to $7.6 million in the same period last year.  Of these amounts, $2.7 million and $0.5 million were related to weather variations and $12.6 million and $7.1 million were related to other customer usage variations in 2008 and 2007, respectively.

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

	Three Months Ended September 30,		Nine Months Ended September 30,
	2008 vs. 2007		2008 vs. 2007
Operations	$	1,520	$	4,721
Maintenance		381		966
Depreciation		221		708
Energy and Other Taxes		49		(379	)

Operations– Operations expense increased $1.5 million and $4.7 million for the three and nine months ended September 30, 2008, respectively, as compared with the same periods in 2007.  The increases are primarily comprised of the following factors.

First, our spending under the New Jersey Clean Energy Programs (NJCEP) increased $0.5 million and $3.3 million during the three and nine months ended September 30, 2008 compared to the same periods last year, respectively.  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, also rose $0.2 million and $1.0 million during the three and nine months ended September 30, 2008, compared to the same periods last year, respectively.  Third, expenses associated with the reserve for uncollectible customer accounts increased (decreased) $0.3 million and ($0.1) million during the three and nine months ended September 30, 2008 compared with the same periods last year, respectively.  Such changes are the result of normal fluctuations in levels of customer account receivable balances.  Finally, the Company experienced higher healthcare and insurance costs during both the three and nine months ended September 30, 2008.

SJG - 19

Maintenance - - Maintenance expense increased during both the three and nine months ended September 30, 2008, compared with the same periods in 2007, primarily due to higher levels of Remediation Adjustment Clause (RAC) amortization.  RAC-related expenses do not affect earnings as we recognize an offsetting amount in revenues.

Depreciation - - Depreciation expense increased during both the three and nine months ended September 30, 2008, as compared with the same periods in 2007, due mainly to SJG’s continuing investment in utility plant.

Energy and Other Taxes - Energy and Other Taxes decreased during the nine months ended September 30, 2008, compared with the same period in 2007, primarily due to lower energy-related taxes. Lower taxable firm throughput in 2008 resulted from warmer weather, as previously discussed.

Interest Charges– Interest Charges decreased by $0.8 million and $1.2 million for the three and nine months ended September 30, 2008, compared with the same periods in 2007.   The decreases were 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 the year.

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 $35.8 million for the nine months ended September 30, 2008, compared with $67.5 million for the same period in 2007.   The decrease is primarily the result of rising natural gas prices during the first half of 2008 which resulted in higher inventory balances.  In addition, SJG incurred an additional $14.7 in planned environmental remediation costs during the first nine months of 2008 compared to the same period in 2007.  Partially offsetting these decreases were lower accounts receivable balances and increased recoveries of previously deferred CIP and TAC balances.

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 $37.3 million and $34.4 million during the first nine months of 2008 and 2007, respectively.

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

Bank credit available to SJG totaled $163.0 million at September 30, 2008, of which $88.6 million was used. Those bank facilities consist of a $100.0 million revolving credit facility, a $10.0 million line of credit and $53.0 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 was in compliance with this covenant as of September 30, 2008. 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 increase in the net borrowings of short-term debt of $10.3 million from December 31, 2007 to September 30, 2008, was partially the result of higher cost gas placed in inventory.  Typically, SJG’s gas storage facilities are refilled in increments between April and October in preparation for the upcoming winter season, and gas costs were substantially above the level at which storage gas was purchased in 2007.

SJG - 20

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.   SJG’s most recent MTN program expired in June 2008, and the Company will continue to review the need to establish a replacement program.  Other than the conversion of the auction-rate bonds into variable rate demand bonds discussed in Note 6 to the condensed financial statements, no long-term debt has been issued since 2006.

SJG’s capital structure was as follows:

	As of September 30, 2008			As of December 31, 2007
Common Equity		50.6	%		50.3	%
Long-Term Debt		38.0			39.3
Short-Term Debt		11.4			10.4
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 $392.6 million at September 30, 2008.

COMMITMENTS AND CONTINGENCIES:

SJG has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment, working capital, and for environmental remediation costs. Net cash outflows for capital expenditures and remediation projects for the nine months ended September 30, 2008 amounted to $37.3 million and $20.8 million, respectively. Management estimates net cash outflows for construction projects for 2008, 2009 and 2010, to be approximately $75.8 million, $71.0 million and $51.3 million, respectively.  Total cash outflows for remediation projects are expected to be $27.8 million, $12.8 million and $14.7 million for 2008, 2009, and 2010, respectively.  As discussed in Notes 2 and 12 to the Financial Statements in Item 8 of SJG’s 10-K as of December 31, 2007, environmental remediation costs are subject to recovery from insurance carriers and ratepayers.

SJG provided a $25.3 million letter of credit, outside of the revolving credit facility, to support variable-rate demand bonds issued through the NJEDA to finance the expansion of SJG's natural gas distribution system as discussed in Note 6 to the condensed financial statements.  This letter of credit expires in August 2009.

SJG has certain commitments for both pipeline capacity and gas supply for which it pays fees regardless of usage. Those commitments as of September 30, 2008, average $45.8 million annually and total $166.8 million over the contracts’ lives. Approximately 47% 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, 2007.  There have been two significant changes to SJG’s contractual cash obligations in 2008. Commodity supply purchase obligations decreased by approximately $52.3 million primarily due to the expiration of $32.3 million of obligations during the first nine months of 2008 and a reduction of $20.0 million resulting from a rate case settlement by one of SJG’s suppliers.

In addition, as discussed in Note 2, SJG’s contractual cash obligation under the NJCEP increased by $32.8 million for the years 2009 through 2012.  Expenditures made for this program are recoverable through rates and do not directly affect earnings.

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

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

SJG - 21

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

Twelve Months Ended Sept. 30,		Year Ended December 31,
2008		2007		2006		2005		2004		2003
	4.3x		4.1x		3.8x		4.0x		3.9x		3.3x

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

Item 3. Quantitative and Qualitative Disclosures about Market Risks

MARKET RISKS:

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

We transact commodities on a physical basis and typically do not enter into financial derivative positions directly. South Jersey Resources Group, LLC (SJRG), an affiliate by common ownership, manages our risk by entering into the types of transactions noted above. As part of our gas purchasing strategy, we use financial contracts to hedge against forward price risk. These contracts are recoverable through our BGSS, subject to BPU approval. It is management’s policy, to the extent practical, within predetermined risk management policy guidelines, to have limited unmatched positions on a deal or portfolio basis while conducting these activities. As a result of holding open positions to a minimal level, the economic impact of changes in value of a particular transaction is substantially offset by an opposite change in the related hedge transaction. The majority of our contracts are typically less than 12-months long. The fair value and maturity of all these energy trading and hedging contracts determined using mark-to-market accounting as of September 30, 2008 is as follows (in thousands):

Assets
	Source of Fair Value	Maturity < 1 Year		Maturity 1 - 3 Years		Total
Prices Actively Quoted	NYMEX	$	2,521	$	20	$	2,541
Other External Sources	Basis		132		-		132
Total		$	2,653	$	20	$	2,673

Liabilities	Source of	Maturity		Maturity
	Fair Value	< 1 Year		1 - 3 Years		Total
Prices Actively Quoted	NYMEX	$	14,927	$	1,570	$	16,497
Other External Sources	Basis		83		-		83
Total		$	15,010	$	1,570	$	16,580

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 4.2 MMDth with a weighted-average settlement price of $9.67 per dth.  Contracted volumes of our Basis contracts are 2.1 MMDth with a weighted average settlement price of $1.91 per dth.

SJG - 22

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

Net Derivatives — Energy Related Liability, January 1, 2008	$	(2,092	)
Contracts Settled During the Nine Months ended September 30, 2008, Net		2,205
Other Changes in Fair Value from Continuing and New Contracts, Net		(14,020	)
Net Derivatives — Energy Related Liability, September 30, 2008	$	(13,907	)

The change in our derivative position from a $2.1 million liability at January 1, 2008, to a $13.9 million liability at September 30, 2008, is primarily due to the change in value of our financial positions held with SJRG.    This change in value is primarily due to the decrease in futures prices resulting in a decrease in the value of these financial contracts.  However, the purchase price of a portion of our future gas purchases is fixed, regardless of future fluctuations in the market price.

Interest Rate Risk - Our exposure to interest rate risk relates primarily to short-term, variable-rate borrowings. Short-term, variable-rate debt outstanding at September 30, 2008, was $88.6 million and averaged $58.0 million during the first nine months of 2008. A hypothetical 100 basis point (1%) increase in interest rates on our average variable-rate debt outstanding would result in a $342,000 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: 2007 – 36 b.p. decrease; 2006 - 72 b.p. increase; 2005 - 191 b.p. increase; 2004 - 115 b.p. increase; and 2003 - 31 b.p. decrease. As of September 30, 2008, our average borrowing cost, which changes daily, was 3.66%.

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

As of September 30, 2008, SJG’s active interest rate swaps were as follows:

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

SJG’s management, with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of SJG’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2008. Based on that evaluation, SJG’s chief executive officer and chief financial officer concluded   that the disclosure controls and procedures employed at SJG are effective.

Changes in Internal Control Over Financial Reporting

There has not been any change in SJG’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the fiscal quarter ended   September 30, 2008 that has materially affected, or is reasonably likely to materially affect, SJG’s internal control over financial reporting. 

SJG - 23

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 21.

Item 1A. Risk Factors

The following paragraph should be read in conjunction with the risk factors included in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007: 

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.  

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).

SIGNATURES

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

SOUTH JERSEY GAS COMPANY

(Registrant)

Dated: November 10, 2008	By: /s/ Edward J. Graham
	Edward J. Graham
	President & Chief Executive Officer
Dated: November 10, 2008	By: /s/ David A. Kindlick
	David A. Kindlick
	Senior Vice President & Chief Financial Officer

SJG - 24

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 September 30, 2008 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: November 10, 2008	/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 September 30, 2008, 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: November 10, 2008	/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 September 30, 2008, 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

November 10, 2008

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 September 30, 2008, 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

November 10, 2008