10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2008

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

For the transition period from ____________to ______________.

Commission File Number: 000-22211

SOUTH JERSEY GAS COMPANY

(Exact name of registrant as specified in its charter)

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

1 South Jersey Plaza, Folsom, New Jersey 08037

(Address of principal executive offices, including zip code)

(609) 561-9000

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:     Yes [   ]      No [X]

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

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

Yes [X]      No [   ]

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

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

Large accelerated filer    [   ]                                                     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]

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

During the preceding 36 months (and any subsequent period of days) there has not been any default in (1) any of the indebtedness of the registrant or its subsidiaries, and (2) the payment of rentals under material long-term leases (of which there are none).

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

Documents Incorporated by Reference:   None

Forward Looking Statements

Certain statements contained in this Annual Report on form 10-K may qualify as “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report should be considered forward-looking statements made in good faith by the Company and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, or any other of the Company’s documents or oral presentations, words such as “anticipate”, “believe”, “expect”, “estimate”, “forecast”, “goal”, “intend”, “objective”, “plan”, “project”, “seek”, “strategy” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements. These risks and uncertainties include, but are not limited to the risks set forth under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K and elsewhere throughout this Report. These cautionary statements should not be construed by you to be exhaustive and they are made only as of the date of this Report. While South Jersey Gas Company, Inc. (SJG or the Company) believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, SJG undertakes no obligation to update or revise any of its forward-looking statements whether as a result of new information, future events or otherwise.

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

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PART I

Item 1. Business

Units of Measurement 

For Natural Gas:
1 dt	= One decatherm
1 MMdt	= One million decatherms
Dts/d	= Decatherms per day
MDWQ	= Maximum daily withdrawal quantity

Description of Business

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

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

Financial Information About Reportable Segments 

Not applicable.

Rates and Regulation

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

Sources and Availability of Raw Materials

Transportation and Storage Agreements

SJG has direct connections to two interstate pipeline companies, Transcontinental Gas Pipe Line Company, LLC (Transco) and Columbia Gas Transmission, LLC (Columbia). During 2008, SJG purchased and had delivered approximately 37.0 million decatherms (MMdts) of natural gas for distribution to both on-system and off-system customers. Of this total, 25.3 MMdts was transported on the Transco pipeline system while 11.7 MMdts was transported on the Columbia pipeline system. SJG also secures firm transportation and other long term services from two additional pipelines upstream of the Transco and Columbia systems. They include Columbia Gulf Transmission Company, LLC (Columbia Gulf) and Dominion Transmission, Inc. (Dominion). Services provided by these upstream pipelines are utilized to deliver gas into either the Transco or Columbia systems for ultimate delivery to SJG. Services provided by all of the above-mentioned pipelines are subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC).  Unless otherwise indicated, our intentions are to renew or extend these service agreements before they expire.

Transco:

Transco is SJG’s largest supplier of long-term gas transmission services which includes both year-round and seasonal firm transportation (FT) service arrangements. When combined, these services enable SJG to purchase gas from third parties and have delivered to its city gate stations by Transco a total of 280,525 dts per day (dts/d). Of this total, 133,917 dts/d is long-haul FT (where gas can be transported from the production areas of the Southwest to the market areas of the Northeast) while 146,608 dts/d is market area FT. The terms of the year-round agreements extend for various periods through 2025, while the term of the seasonal agreement extends to 2011.

Of the 280,525 dts/d of Transco services mentioned above, SJG has released a total of 89,800 dts/d of its long-haul FT and 25,565 dts/d of its market area FT service. These releases were made in association with SJG’s Conservation Incentive Program (CIP).

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SJG also has seven long-term gas storage service agreements with Transco that, when combined, are capable of storing approximately 6.4 MMdts. Through these services, SJG can inject gas into market area storage during periods of low demand and withdraw gas at a rate of up to 124,840 dts/d during periods of high demand. The terms of the storage service agreements extend for various periods from 2008 to 2013.  During 2008 SJG released 17,433 dts/d of Transco SS-1 storage demand and 1,353,159 dts of its SS-1 storage capacity (both represent 100 percent of this service) thereby reducing its Transco maximum daily storage withdrawal quantity daily to 107,407 dts/d, and its storage capacity to approximately 5.0 MMdts.  Also released was 17,433 dts/d of winter season firm transportation service associated with SS-1 storage service.

It should also be noted that effective May 1, 2006 SJG permanently released its Transco WSS Storage Service having a storage capacity of 4.4 MMdts and a maximum daily withdrawal quantity (MDWQ) of 51,837 dts to SJRG resulting in significant savings in gas related costs.  This action to release both WSS and SS-1 storages was also taken in concert with SJG’s CIP.

Dominion:

Entering 2008, SJG had two firm transportation services with Dominion which delivered gas to Transco’s Leidy Line for ultimate delivery to SJG city gate stations. One said services is associated with a storage service which SJG subscribes to with Transco (Transco SS-1).  Since SJG released its Transco SS-1 storage service in 2008, it also assigned 17,432 dts/d of this associated Dominion firm transportation service to SJRG.  SJG had previously had a third firm transportation service with Dominion which provided a link between SJG’s service on Texas Gas and Transco’s Leidy Line system in Pennsylvania.  However, as SJG opted to allow its Texas Gas service to expire in 2007, it also chose to allow its FT service on Dominion (unrelated to storage), with a maximum contract quantity of 24,874 dts/d, to expire under its terms effective October 31, 2007.  This decision resulted in significant cost savings.

SJG also subscribes to a storage service with Dominion which provides a MDWQ of 10,000 dts during the period between November 16 and March 31 of winter season with 423,000 dts of storage capacity. Gas from this storage is delivered through both the Dominion and Transco pipeline systems.

     Columbia:

SJG has two firm transportation agreements with Columbia which, when combined, provide for 45,022 dts/d of firm deliverability and extend through October 31, 2009.  In 2008, SJG released 14,714 dts/d of this amount to SJRG in conjunction with its CIP thereby reducing the availability of firm transportation on the Columbia system to 30,308 dts/d.

SJG also subscribes to a firm storage service (FSS) with Columbia under three separate agreements, the longest of which extends through March 31, 2014.  When combined, these three FSS storage agreements provide SJG with a winter season MDWQ of 52,891 dts with an associated 3,473,022 dts of storage capacity.  During 2008, SJG released to SJRG 17,500 dts of its FSS MDWQ along with 1,249,485 dts of its Columbia FSS storage capacity.  In addition, SJG also released to SJRG 17,500 dts of its Columbia SST MDWQ transportation service which is associated with FSS service.  Both of these releases were made by SJG in connection with its CIP.

Columbia Gulf

SJG has one firm transportation agreement with Columbia Gulf which provides up to 45,985 dts/d of firm deliverability in the winter season and 43,137dts/d during the summer season.  This service facilitates the movement of gas from the production area in southern Louisiana to an interconnect with the Columbia pipeline system at Leach, KY.

During 2008, SJG released 7,969 dts/d of its service on Columbia Gulf to a group of industrial end users on its system, with the remainder being released to SJRG.

 Gas Supplies

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

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 Supplemental Gas Supplies

During 2008, SJG entered into two seasonal Liquefied Natural Gas (LNG) sales agreements with two separate third party suppliers. The term of the first agreement which was used during the 2008 summer season to refill SJG’s storage tank, extended through November 30, 2008, and had an associated contract quantity of 400,000 dts. The second agreement was acquired to replenish LNG in storage during the 2008-2009 winter season.  This agreement extends through March 31, 2009 and provides SJG with up to 200,000 dts of LNG.

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

SJG also operates a high-pressure pipe storage field at its New Jersey LNG facility which is capable of storing 12,420 dts of gas and injecting up to 10,350 dts/d into SJG’s distribution system.

 Peak-Day Supply

SJG plans for a winter season peak-day demand on the basis of an average daily temperature of 2 degrees Fahrenheit (F). Gas demand on such a design day for the 2008-2009 winter season is estimated to be 451,418 dts. SJG projects that it has adequate supplies and interstate pipeline entitlements to meet its design requirements. SJG experienced its highest peak-day demand for calendar year 2008 of 374,902 dts on December 22nd while experiencing an average temperature of 21.85 degrees F that day.

 Natural Gas Prices

SJG’s average cost of natural gas purchased and delivered in 2008, 2007 and 2006, including demand charges, was $9.90 per dt, $9.07 per dt and $9.27 per dt, respectively.

Patents and Franchises

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

Seasonal Aspects

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

Working Capital Practices

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

Customers

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

Backlog

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

Government Contracts

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

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Competition

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

Research

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

Environmental Matters

Information on environmental matters can be found in Note 12 of the financial statements included under Item 8 of this report.

Employees

SJG had a total of 383 employees as of December 31, 2008. Of that total, 256 employees are unionized. There are 39 unionized employees represented by the International Brotherhood of Electrical Workers (“IBEW”) and they recently ratified a 4-year contract.  The remaining unionized employees are represented by the International Association of Machinists and Aerospace Workers (“IAM”).  The IAM is asserting that the labor agreement, which the Company believes expired on January 14, 2009, is evergreen for one year from that expiration date.  The Company has filed a charge with the National Labor Relations Board for a determination on the matter.  We await the Board’s decision, and consider relations with employees to be good.

Financial Information About Foreign and Domestic Operations and Export Sales

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

Item 1A. Risk Factors

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

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

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

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

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

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

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

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

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

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

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

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

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

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The principal property of SJG consists of its gas transmission and distribution systems that include mains, service connections and meters. The transmission facilities carry the gas from the connections with Transco and Columbia to SJG’s distribution systems for delivery to customers. As of December 31, 2008, there were approximately 107.3 miles of mains in the transmission systems and 5,765 miles of mains in the distribution systems.

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

As of December 31, 2008, SJG’s utility plant had a gross book value of $1,172.0 million and a net book value, after accumulated depreciation, of $876.6 million. In 2008, $52.6 million was spent on additions to utility plant and there were retirements of property having an aggregate gross book cost of $5.7 million.

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

Item 3. Legal Proceedings

SJG is subject to claims which arise in the ordinary course of business and other legal proceedings. We accrue liabilities related to these claims when we can determine the amount or range of amounts of probable settlement costs.  Management does not currently anticipate the disposition of any known claims to have a material adverse affect on SJG’s financial position, results of operations or liquidity.

Item 4. Submission Of Matters To A Vote of Security Holders

Not applicable.

PART II

Item 5. Market for the Registrant’s Common Equity

 Related Stockholder Matters, and Issuer Purchases of Equity Securities

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

SJG is restricted as to the amount of cash dividends or other distributions that may be paid on its common stock by an order issued by the New Jersey Board of Public Utilities in July 2004, that granted SJG an increase in base rates. Per the order, SJG is required to maintain Total Common Equity of no less than $289.2 million. SJG’s Total Common Equity balance was $401.7 million at December 31, 2008.

SJG is also restricted under its First Mortgage Indenture, as supplemented, as to the amount of cash dividends or other distributions that may be paid on its common stock. As of December 31, 2008, these restrictions did not affect the amount that may be distributed from SJG’s retained earnings. Dividends of $14.9 million were declared and paid on SJG’s common stock in 2008 and $18.7 million were declared and paid in 2007.

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Item 6. Selected Financial Data

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

(In Thousands of $’s)

	Year Ended December 31,
		2008			2007			2006			2005			2004
Operating Revenues		$	568,046		$	630,547		$	642,671		$	587,212		$	508,827
Operating Income		$	84,417		$	83,989		$	81,209		$	77,676		$	71,451
Income before Preferred Dividend Requirement		$	39,431		$	38,025		$	35,779		$	34,592		$	31,597
Preferred Dividend Requirements (1)			-			-			-			(45	)		(135	)
Net Income Applicable to Common Stock		$	39,431		$	38,025		$	35,779		$	34,547		$	31,462
Average Shares of Common Stock Outstanding			2,339,139			2,339,139			2,339,139			2,339,139			2,339,139
Ratio of Earnings to Fixed Charges (2)			4.4	x		4.1	x		3.7	x		4.0	x		3.9	x
	As of December 31,
		2008			2007			2006			2005			2004
Property, Plant and Equipment, Net		$	876,582		$	847,691		$	821,833		$	788,787		$	732,781
Total Assets		$	1,354,015		$	1,227,162		$	1,228,076		$	1,170,975		$	1,007,733
Capitalization:
Common Equity (3)		$	401,739		$	378,348		$	360,353		$	344,568		$	302,827
Preferred Stock (1)			-			-			-			-			1,690
Long-Term Debt			269,873			294,873			294,893			272,235			282,008
Total Capitalization		$	671,612		$	673,221		$	655,246		$	616,803		$	586,525
Total Customers			340,136			335,663			330,049			322,424			313,579
(1) On May 2, 2005, we redeemed all of our 8% Redeemable Cumulative Preferred Stock.
(2) The ratio of earnings to fixed charges represents, on a pre-tax basis, the number of times earnings cover fixed charges. Earnings consist of net income, to which has been added fixed charges and taxes based on income of the company. Fixed charges consist of interest charges and preferred securities dividend requirements.
(3) Included are SJI cash contributions to capital as follows: 2008, 2007 and 2006 - none; 2005 - $30.0 million; 2004 - $15.0 million.

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Item 7. Management’s Discussion and Analysis of Financial Condition

and Results of Operations

OVERVIEW:

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

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

As of December 31, 2008, we served 340,136 residential, commercial and industrial customers in southern New Jersey, compared with 335,663 customers at December 31, 2007. No material part of our business is dependent upon a single customer or a few customers. Gas sales, transportation and capacity release for 2008 amounted to 144.3 MMdts (million decatherms), of which 51.2 MMdts were firm sales and transportation, 2.8 MMdts were interruptible sales and transportation and 90.3 MMdts were off-system sales and capacity release. The breakdown of firm sales and transportation includes 45.9% residential, 23.0% commercial, 25.1% industrial, and 6.0% cogeneration and electric generation. At year-end 2008, we served 317,026 residential customers, 22,636 commercial customers and 474 industrial customers.  This includes 2008 net additions of 4,057 residential customers and 416 commercial customers.

 We make wholesale gas sales to gas marketers for resale and ultimate delivery to end users. These “off-system” sales are made possible through the issuance of the Federal Energy Regulatory Commission (FERC) Orders No. 547 and 636. Order No. 547 issued a blanket certificate of public convenience and necessity authorizing all parties, which are not interstate pipelines, to make FERC jurisdictional gas sales for resale at negotiated rates, while Order No. 636 allowed us to deliver gas at delivery points on the interstate pipeline system other than our own city gate stations and release excess pipeline capacity to third parties. During 2008, off-system sales amounted to 9.6 MMdts and capacity release amounted to 80.7 MMdts.

Supplies of natural gas available to us that are in excess of the quantity required by those customers who use gas as their sole source of fuel (firm customers) make possible the sale and transportation of gas on an interruptible basis to commercial and industrial customers whose equipment is capable of using natural gas or other fuels, such as fuel oil and propane. The term “interruptible” is used in the sense that deliveries of natural gas may be terminated by us at any time if this action is necessary to meet the needs of higher priority customers as described in our tariffs. In 2008 usage by interruptible customers, excluding off-system customers, amounted to 2.8 MMdts, approximately 1.9% of the total throughput.

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

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

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

Customer Growth — Southern New Jersey, our primary area of operations, has not been immune to the issues impacting the new housing market nationally.  However, net customers for SJG still grew 1.3% as we increased our focus on customer conversions.  Consumers converting from other heating fuels, such as electric, propane or oil have historically accounted for 20-25% of annual SJG customer growth.  In 2008, we increased our efforts to attract conversions in light of the very favorable relationship between natural gas and alternative fuel prices, obtaining 2,700 conversion customers compared with an average of 1,700 per year over the previous five years.  Customers in our service territory typically base their decisions to convert on comparisons of fuel costs and environmental considerations.

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

Weather Conditions and Customer Usage Patterns - Usage patterns can be affected by a number of factors, such as wind, precipitation, temperature extremes and customer conservation. Our earnings are largely protected from fluctuations in temperatures by the CIP, which superseded the Temperature Adjustment Clause (TAC), effective October 1, 2006. The CIP has a stabilizing effect on earnings as we adjust revenues when actual usage per customer experienced during an annual period varies from an established baseline usage per customer.

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

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

Labor and Benefit Costs - Labor and benefit costs have a significant impact on our profitability. Benefit costs, especially those related to health care, have risen in recent years. We sought to manage these costs by revising health care plans offered to existing employees, capping postretirement health care benefits, and changing health care and pension packages offered to new hires.  We expect savings from these changes to gradually increase as new hires replace retiring employees. In an effort to accelerate the realization of those benefits, we had offered a voluntary separation program at the end of 2007. Our workforce totaled 383 employees at the end of 2008, with 67% of that total covered under collective bargaining agreements.

Balance Sheet Strength - Our goal is to maintain a strong balance sheet with an average annual equity-to-capitalization ratio of 46% to 50%. Our equity-to-capitalization ratio, inclusive of short-term debt, was 49.5% and 50.3% at the end of 2008 and 2007, respectively. A strong balance sheet permits us the financial flexibility necessary to address volatile economic and commodity markets while maintaining a low-risk platform.

Critical Accounting Policies - Estimates and Assumptions - As described in the notes to our financial statements, management must make estimates and assumptions that affect the amounts reported in the financial statements and related disclosures. Actual results could differ from those estimates. Five types of transactions presented in our financial statements require a significant amount of judgment and estimation. These relate to regulatory accounting, derivatives, environmental remediation costs, pension and other postretirement benefit costs, and revenue recognition.

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Regulatory Accounting- We maintain our accounts according to the Uniform System of Accounts as prescribed by the New Jersey Board of Public Utilities (BPU). As a result of the ratemaking process, we are required to follow Financial Accounting Standards Board (FASB) Statement No. 71, “Accounting for the Effects of Certain Types of Regulation.” We are required under Statement No. 71 to recognize the impact of regulatory decisions on our financial statements. We are required under our Basic Gas Supply Service (BGSS) clause to forecast our natural gas costs and customer consumption in setting our rates. Subject to BPU approval, we are able to recover or return the difference between gas cost recoveries and the actual costs of gas through a BGSS charge to customers. We record any over/under recoveries as a regulatory asset or liability on the balance sheets and reflect it in the BGSS charge to customers in subsequent years. We also enter into derivatives that are used to hedge natural gas purchases. The offset of the resulting derivative assets or liabilities is also recorded as a regulatory asset or liability on the balance sheets.

The Conservation Incentive Program (CIP) is a BPU approved three-year pilot program that began October 1, 2006, and is designed to eliminate the link between our profits and the quantity of natural gas we sell, and foster conservation efforts.  With the CIP, our profits are tied to the number of customers we serve and how efficiently we serve them, thus allowing us to focus on encouraging conservation and energy efficiency among our customers without negatively impacting our net income.  The CIP tracking mechanism adjusts earnings based on weather and also adjusts our earnings where actual usage per customer experienced during an annual period varies from an established baseline usage per customer.  Utility earnings are recognized during current periods based upon the application of the CIP.  The cash impact of variations in customer usage will result in cash being collected from, or returned to, customers during the subsequent CIP year, which runs from October 1 to September 30.

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

Derivatives - We recognize assets or liabilities for contracts that qualify as derivatives when contracts are executed. We record contracts at their fair value in accordance with FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. We record changes in the fair value of the effective portion of derivatives qualifying as cash flow hedges, net of tax, in Accumulated Other Comprehensive Loss and recognize such changes in the income statement when the hedged item affects earnings. Changes in the fair value of derivatives not designated as hedges are recorded in earnings in the current period. In 2007, we changed our policy to no longer designate energy-related derivative instruments as cash flow hedges. Certain derivatives that result in the physical delivery of the commodity may meet the criteria to be accounted for as normal purchases and normal sales, if so designated, in which case the contract is not marked-to-market, but rather is accounted for when the commodity is delivered. Due to the application of regulatory accounting principles under FASB Statement No. 71, derivatives related to gas purchases that are marked-to-market are recorded through our BGSS.  We periodically enter into financial derivatives to hedge against forward price risk. These derivatives are recorded at fair value with an offset to regulatory assets and liabilities through our BGSS, subject to BPU approval (See Notes 2 and 3 to the financial statements). We adjust the fair value of the contracts each reporting period for changes in the market.

As discussed in Note 13 of the financial statements, energy-related derivative instruments are traded in both exchange-based and non-exchange-based markets. Exchange-based contracts are valued using unadjusted quoted market sources in active markets and are categorized in Level 1 in the fair value hierarchy established by FAS 157. Certain non-exchange-based contracts are valued using indicative non-binding price quotations available through brokers or from over-the-counter, on-line exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask mid-point prices and are obtained from sources that management believes provide the most liquid market.  Management reviews and corroborates the price quotations with at least one additional source to ensure the prices are observable market information, which includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration. Derivative instruments that are used to limit our exposure to changes in interest rates on variable-rate, long-term debt are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment, as a result, these instruments are categorized in Level 2. For non-exchange-based derivatives that trade in less liquid markets with limited pricing information, model inputs generally would include both observable and unobservable inputs.  In instances where observable data is unavailable, management considers the assumptions that market participants would use in valuing the asset or liability.  This includes assumptions about market risks such as liquidity, volatility and contract duration.  Such instruments are categorized in Level 3 as the model inputs generally are not observable.  Counterparty credit risk, and the credit risk of SJG, is incorporated and considered in the valuation of all derivative instruments as appropriate. The effect of counterparty credit risk and the credit risk of SJG on the derivative valuations is not significant.

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Environmental Remediation Costs - We estimate future costs based on projected investigation and work plans using existing technologies.  In preparing financial statements, we record liabilities for future costs using the lower end of the range because a single reliable estimation point is not feasible due to the amount of uncertainty involved in the nature of projected remediation efforts and the long period over which remediation efforts will continue. We update estimates each year to take into account past efforts, changes in work plans, remediation technologies, government regulations and site specific requirements (See Note 12 to the financial statements).

Pension and Other Postretirement Benefit Costs - The costs of providing pension and other postretirement employee benefits are impacted by actual plan experience as well as assumptions of future experience. Employee demographics, plan contributions, investment performance, and assumptions concerning mortality, return on plan assets, discount rates and health care cost trends all have a significant impact on determining our projected benefit obligations. We evaluate these assumptions annually and adjust them accordingly. These adjustments could result in significant changes to the net periodic benefit costs of providing such benefits and the related liabilities recognized by us.     In 2007, a 20 basis point increase in the discount rate and higher than expected returns on plan assets during 2006 resulted in a net decrease to benefit costs in 2007.  Further, an additional 32 basis point increase in the discount rate, higher than expected returns on plan assets during 2007, and a pension contribution in the first quarter of 2008 further reduced such benefit costs in 2008.  While the discount rate and expected return on plan assets are both decreasing slightly in the determination of the 2009 benefit costs, the primary cost driver in 2009 will be the erosion of plan assets during 2008.  As evidenced by the tables in Note 11, “Pension and Other Postretirement Benefits,” the declines in the equity markets during 2008 have resulted in significant losses in the assets of the plans.  Such losses are currently expected to increase the 2009 cost of providing such benefits two-to-three fold.

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

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

In October 2006, the BPU approved the Conservation Incentive Program (CIP) as a three-year pilot program.  Each CIP year begins October 1 and ends September 30 of the subsequent year.  On a monthly basis during the CIP year, we record adjustments to earnings based on weather and customer usage factors, as incurred.  Subsequent to each year, we make filings with the BPU to review and approve amounts recorded under the CIP.  BPU approved cash inflows or outflows generally will not begin until the next CIP year and have no impact on earnings at that time.

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

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

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

Temperature Adjustment Clause (TAC) - Through September 30, 2006, our tariff included a TAC to mitigate the effect of variations in heating season temperatures from historical norms. The TAC has since been replaced with the Conservation Incentive Program (discussed below). 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 could be either a regulatory asset or liability.

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 our profits and the quantity of natural gas we sell, and foster conservation efforts. With the CIP, our profits are tied to the number of customers we serve and how efficiently we serve them, thus allowing us to focus on encouraging conservation and energy efficiency among our customers without negatively impacting our net income.  The CIP tracking mechanism adjusts earnings based on weather, as did the TAC, and also adjusts our earnings when actual usage per customer experienced during an annual period varies from an established baseline usage per customer.  Under the terms of the settlement, the CIP may be extended for a one year period in the absence of a Board order taking any affirmative action to the contrary with regard to the pilot program.

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

	2008		2007		2006
Net Income Benefit:
TAC	$	-	$	-	$	5.1
CIP – Weather Related		1.6		1.6		2.9
CIP – Usage Related		9.2		5.9		1.7
Total Net Income Benefit	$	10.8	$	7.5	$	9.7
Weather Compared to 20-Year TAC Average	4.7% warmer		3.2% warmer		15.0 % warmer
Weather Compared to Prior Year	1.6% warmer		13.8% colder		17.5 % warmer

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

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

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

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

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Environmental Remediation - See detailed discussion concerning Environment Remediation in Note 12 to the financial statements.

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

Customer Choice Legislation - All residential natural gas customers in New Jersey can choose their natural gas commodity supplier under the terms of the “Electric Discount and Energy Competition Act of 1999.” This bill created the framework and necessary time schedules for the restructuring of the state’s electric and natural gas utilities. The Act established unbundling, where redesigned utility rate structures allow natural gas and electric consumers to choose their energy supplier. It also established time frames for instituting competitive services for customer account functions and for determining whether basic gas supply services should become competitive. Customers purchasing natural gas from a provider other than the local utility (marketer) are charged for the gas costs by the marketer and charged for the transportation costs by the utility.  The number of customers purchasing their natural gas from marketers averaged 28,637, 25,309, and 16,392 during 2008, 2007 and 2006, respectively.  

RESULTS OF OPERATIONS:

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

	2008				2007				2006
Utility Throughput – dth:
Firm Sales -
Residential		21,530	15	%		22,523	16	%		19,830	15	%
Commercial		6,127	4	%		6,339	4	%		6,958	5	%
Industrial		188	-			193	-			296	-
Cogeneration and electric generation		561	-			1,335	1	%		1,103	1	%
Firm Transportation -
Residential		1,988	1	%		1,870	1	%		956	1	%
Commercial		5,687	4	%		5,927	4	%		4,420	3	%
Industrial		12,661	9	%		12,107	9	%		11,970	9	%
Cogeneration and electric generation		2,536	2	%		3,088	2	%		2,625	2	%
Total Firm Throughput		51,278	35	%		53,382	37	%		48,158	36	%
Interruptible Sales		35	-			68	-			93	-
Interruptible Transportation		2,716	2	%		3,002	2	%		3,474	3	%
Off-System		9,632	7	%		17,686	13	%		18,221	13	%
Capacity Release		80,665	56	%		67,430	48	%		66,458	48	%
Total Throughput		144,326	100	%		141,568	100	%		136,404	100	%

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Utility Operating Revenues:
Firm Sales-
Residential	$	320,401	57	%	$	342,809	54	%	$	334,201	52	%
Commercial		81,914	15	%		80,237	13	%		99,578	15	%
Industrial		5,434	1	%		8,381	1	%		6,590	1	%
Cogeneration and electric generation		7,940	1	%		11,722	2	%		10,746	2	%
Firm Transportation -
Residential		10,408	2	%		8,982	1	%		4,768	1	%
Commercial		18,286	3	%		17,299	3	%		12,510	2	%
Industrial		12,504	2	%		12,229	2	%		11,351	2	%
Cogeneration and electric generation		1,682	-			1,847	-			1,552	-
Total Firm Revenues		458,569	81	%		483,506	76	%		481,296	75	%
Interruptible Sales		403	-			785	-			1,109	-
Interruptible Transportation		1,786	-			1,970	-			1,868	-
Off-System		90,430	16	%		131,586	22	%		147,180	23	%
Capacity Release		15,549	3	%		11,208	2	%		9,656	2	%
Other		1,309	-			1,492	-			1,562	-
Total Utility Operating Revenues		568,046	100	%		630,547	100	%		642,671	100	%
Less:
Cost of sales		383,403				453,034				472,286
Conservation recoveries *		7,741				4,458				6,862
RAC recoveries *		3,079				2,056				1,807
Revenue taxes		8,656				8,850				7,890
Utility Margin	$	165,167			$	162,149			$	153,826
Margin:
Residential	$	99,862	61	%	$	102,077	63	%	$	90,442	59	%
Commercial and industrial		38,995	24	%		40,036	25	%		38,129	25	%
Cogeneration and electric generation		1,997	1	%		2,212	1	%		2,189	1	%
Interruptible		143	-			195	-			226	-
Off-system & capacity release		3,349	2	%		2,994	2	%		4,711	3	%
Other revenues		2,440	1	%		1,952	1	%		1,871	1	%
Margin before weather normalization & decoupling		146,786	89	%		149,466	92	%		137,568	89	%
TAC mechanism		-	-			-	-			8,511	6
CIP mechanism		18,381	11	%		12,683	8	%		7,747	5
Utility Margin	$	165,167	100	%	$	162,149	100	%	$	153,826	100	%
Number of Customers at Year End:
Residential		317,026	93	%		312,969	93	%		307,919	93	%
Commercial		22,636	7	%		22,220	7	%		21,652	7	%
Industrial		474	-			474	-			478	-
Total Customers		340,136	100	%		335,663	100	%		330,049	100	%
Annual Degree Days:		4,417				4,488				3,943
* Represents expenses for which there is a corresponding credit in operating revenues. Therefore, such recoveries have no impact on our financial results.

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Throughput - - Total gas throughput increased 2.8 MMdts, or 1.9%, from 2007 to 2008.  This increase is driven by greater capacity release activity during 2008.  Firm throughput declined as a result of warmer weather, as reflected by the degree day data in the table above, and customer conservation. Off-System sales (OSS) volume decreased substantially as SJG’s portfolio of assets available for such activities has been reduced under the CIP, as discussed under “Rates and Regulation”. In 2007, total gas throughput increased 3.8% compared with 2006, to 141.6 MMdth.  While firm throughput accounted for the entire increase, the residential market reflected the greatest improvement by adding 3.6 MMdth over 2006 as a result of 23.3% colder weather and 5,050 additional residential customers in 2007.

Operating Revenues – Revenues decreased $62.5 million, or 9.9%, during 2008 compared with 2007.  Off-System sales (OSS) revenue decreased $41.2 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 2008 compared to the same period in the prior year primarily due to warmer weather and lower residential revenues resulting from a lower Basic Gas Supply Service (BGSS)  rate in effect during most of 2008.  For nearly the entire year, the 2008 BGSS rate was 12.7% lower than the rate in effect during the 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.  Partially offsetting these decreases, SJG added 4,473 customers during the 12-month period ended December 31 2008, which represents a 1.3% increase in total customers.

Revenues decreased $12.1 million during 2007, compared with 2006, primarily due to lower Off-System sales revenue.  Despite comparable sales volume, Off-System sales revenue decreased substantially.  Sales revenue during the early part of 2006 was atypically high as it reflected unusually high commodity prices, which were driven by hurricane related production disruptions in fall 2005.  In addition, OSS recognized a $4.4 million gain on a financial derivative position in 2006 which did not re-occur in 2007 due to changing market conditions.  It should be noted that this $4.4 million gain only contributed $0.4 million to SJG’s bottom line after regulated sharing of 85% with ratepayers through the BGSS and taxes. 

While SJG added 5,614 customers during the 12-month period ended December 31, 2007, which represents a 1.7% increase in total customers, and weather was 23.3% colder than last year, firm sales revenue only experienced a modest increase of $2.2 million as a result of a decrease in the BGSS gas cost recovery rate and customer migration from firm sales to firm transportation service. The BGSS rate in 2007 was 10.8% lower than the prior year rate. The rate in 2006 was higher to address under recovery of gas costs stemming from substantial increases in wholesale gas prices across the country in 2005. In addition, the average number of transportation customers increased to 25,309 in 2007 as compared to 16,392 in 2006. 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.  

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

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

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

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Total margin in 2007 increased $8.3 million from 2006 primarily due to customer additions and the positive impact from a full year of the usage related component of the CIP. As previously discussed, the CIP mechanism replaced the TAC effective October 1, 2006 and takes into account variations in customer usage factors due to weather as well as all other variations.  The usage related component of the CIP added $10.1 million to margin in 2007 as compared to $2.8 million for 2006, as the CIP was only in effect during the fourth quarter of 2006. Customer additions and temperatures that were much closer to normal in 2007 versus 2006 increased margins in the both the Residential and Commercial classes. However, due to the colder weather in 2007, the weather related component of the CIP generated less of a contribution to margin, since SJG had already benefited from the higher sales volume as reflected in the margin table above. Partially offsetting the positive impacts noted above were lower margins from OSS and capacity release. 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):

	2008 vs. 2007			2007 vs. 2006
Operations	$	4,375		$	1,745
Maintenance		1,554			807
Depreciation		975			1,106
Energy and Other Taxes		(202	)		690

Operations – Operations expense increased $4.4 million during 2008, as compared with 2007.  The increases are primarily comprised of the following factors.

First, our spending under the New Jersey Clean Energy Program (NJCEP) increased $3.3 million during 2008 compared to last year.  Such costs are recovered on a dollar-for-dollar basis; therefore, SJG experienced an offsetting increase in revenues during the period.  The BPU-approved NJCEP allows for full recovery of costs, including carrying costs when applicable.  As a result, the increase in expense had no impact on our net income.  Second, corporate support, governance and compliance costs, primarily attributable to our parent, SJI, rose $0.9 million during 2008.  Finally the Company also experienced moderate increases in insurance and employee compensation costs; however, these were offset by lower pension and other cost reductions during the year 2008.

Operations expense increased $1.7 million during 2007, as compared with 2006.  The increase is primarily comprised of several factors. Expense associated with the Provision for Uncollectibles increased $1.2 million due to higher levels of customer account receivables in 2007 than in 2006.  In 2007 the Provision for Uncollectibles had increased $0.5 million in comparison with a decrease of $0.7 million in 2006 as a result of annual fluctuations in customer account receivable balances.  Corporate support, governance and compliance costs, primarily attributable to our parent, SJI, also rose $1.1 million as a result of various studies and initiatives undertaken by the Company.  Additional factors for the increase include $0.3 million for billing and collection costs including a federal postage rate increase;  $0.2 million in employee severance costs that were not incurred during 2006; $0.3 million in Conservation Incentive Program (CIP) expenses that did not begin to be incurred until the approval of the CIP in October 2006; $0.3 million increase in sales expense primarily related to a customer conversion program aimed at converting residential consumers to natural gas heating systems; and higher employee compensation costs.

Partially offsetting the increase above was a $2.4 million decrease in 2007 in our costs under the New Jersey Clean Energy Programs (NJCEP), which had decreased as the Company was transitioning the management of the plans to State agencies.  During this time of transition, a temporary slowdown in spending was experienced.  As previously noted, such costs are recovered on a dollar-for-dollar basis; therefore, SJG experienced an offsetting decrease in revenue during 2007.

Maintenance – Maintenance expense increased $1.6 million during 2008, compared with 2007, primarily due to a $1.2 million increase in Remediation Adjustment Clause (RAC) expense amortization.  As discussed in Notes 2 and 3 to the Financial Statements, these costs are recovered from ratepayers; therefore, SJG experienced an offsetting increase in revenue during 2008.  The remaining increase was the result of installing safety devices on certain residential meters aimed at preventing unauthorized usage and maintenance of company equipment.

SJG - 18

Maintenance expense increased $0.8 million during 2007, compared with 2006, primarily due to a $0.5 million increase in environmental remediations expense amortization.   An additional $0.3 million increase resulted from incremental maintenance requirements of our LNG and distribution plant, including BPU mandated meter protection surveys to ensure public safety.

Depreciation - Depreciation expense increased $1.0 million and $1.1 million in 2008 and 2007, respectively, due mainly to our continuing investment in utility plant. SJG’s investment in utility plant during 2008, 2007 and 2006 was $52.6 million, $48.1 million and $61.4 million, respectively.

Energy and Other Taxes – Energy and Other Taxes decreased $0.2 million during 2008, compared with 2007, primarily due to lower energy-related taxes.  Lower taxable firm throughput in 2008 resulted from warmer weather and conservation, as previously discussed.  These factors were partially offset by customer growth in 2008.

Energy and Other Taxes increased in 2007, compared with 2006, primarily due to higher energy-related taxes based on increased taxable firm throughput in 2007.  Higher taxable firm throughput in 2007 resulted from colder weather and customer growth in 2007.  

Other Income and Expense - Other income and expense decreased in 2008, compared with both 2007 and 2006, primarily as a result of the poor earnings performance of our available-for-sale securities over prior years. Due to the significant declines in the equity markets in 2008, income generated by our available-for-sale securities decreased $0.7 million and $0.6 million when compared to 2007 and 2006, respectively. In addition, the Company recognized an impairment loss of $0.7 million during 2008. No impairment losses were recognized in 2007 or 2006. These securities represent assets held in trusts for the payment of postretirement healthcare costs.  

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

Interest charges decreased by $1.1 million in 2007, compared with 2006, due primarily to lower average levels of short-term debt. Short-term debt levels declined primarily due to lower gas cost and inventory levels, which offset the impact of higher average short-term interest rates for the full 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 $30.3 million in 2008, $89.4 million in 2007 and $50.7 million in 2006.

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

Cash provided by operating activities increased in 2007, as compared with 2006, primarily as a result of the accounts payable pattern in 2007 not having a high carry-over balance from the prior year end.  Net cash provided by operating activities in 2006 was negatively impacted by higher unit gas costs following hurricane Katrina and the impact of those costs 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 similar supply arrangements during the 2006 or 2007 injection seasons.  Therefore, 2007 results do not reflect any payments related to 2006 storage injections or accounts payable at year-end related to 2007 storage injections.

SJG - 19

Cash Flows from Investing Activities - We have a continuing need for cash resources for capital purchases, primarily to invest in new and replacement facilities and equipment. Cash used for capital purchases was $52.6 million and $48.1 million in 2008 and 2007, respectively, primarily due to infrastructure improvements that continue to support SJG’s growth.  

Cash Flows from Financing Activities - We use short-term borrowings under lines of credit from commercial banks to supplement cash from operations, to support working capital needs and to finance capital expenditures as incurred. From time to time, we refinance short-term debt incurred to finance capital expenditures with long-term debt. Debt is incurred primarily to expand and upgrade our gas transmission and distribution system and to support seasonal working capital needs related to inventories and customer receivables.    In June 2008, SJG repurchased $25.0 million of its auction-rate securities at par by drawing under its lines of credit.  That action resulted in a $25.0 million reduction in long-term debt on SJG’s balance sheet.  SJG converted these auction-rate securities to variable-rate demand bonds and remarketed them to the public during the third quarter of 2008.  No other long-term debt was issued during 2008.

Bank credit available to SJG totaled $203.0 million at December 31, 2008, of which $114.6 million was used.  Those bank facilities consist of a $100.0 million revolving credit facility, a $40.0 million line of credit, a $10.0 million line of credit and $53.0 million of uncommitted bank lines.  The revolving credit facility expires in August 2011 and both lines of credit expire in 2009. All facilities contain one financial covenant regarding the ratio of total debt to total capitalization, measured on a quarterly basis.  SJG was in compliance with these covenants as of December 31, 2008.  Based upon the existing credit facilities and a regular dialogue with our banks, we believe that there will continue to be sufficient credit available to meet our business’ future liquidity needs.

We supplement our operating cash flow and credit lines with both debt and equity capital. Over the years, we have 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. We repaid long-term debt totaling $25.0 million, $2.3 million and $2.3 million in 2008, 2007 and 2006, respectively.  The $25.0 million repayment in 2008 reflects the conversion of auction-rate bonds to variable-rate demand bonds which are carried as current.

SJI contributed no capital to us in 2008, 2007 or 2006. 

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

	2008			2007
Common Equity		49.5	%		50.3	%
Long-Term Debt		36.4	%		39.3	%
Short-Term Debt		14.1	%		10.4	%
Total		100.0	%		100.0	%

Our long-term, senior secured debt was rated “A” and “Baa1” by Standard & Poor’s and Moody’s Investor Services, respectively. These ratings had not changed in at least the past five years until February 2009 when Moody’s Investor Services raised SJG’s senior secured rating to “A3” from “Baal”.

We are restricted as to the amount of cash dividends or other distributions that may be paid on our common stock by an order issued by the BPU in July 2004, that granted us an increase in base rates. Per the order, we are required to maintain total common equity of no less than $289.2 million. Our total common equity balance was $401.7 million at December 31, 2008.

COMMITMENTS AND CONTINGENCIES:

We have a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment and for environmental remediation costs. Net cash outflows for construction and remediation projects for 2008 amounted to $52.6 million and $26.2 million, respectively. We estimate total cash outflows for construction and remediation projects for 2009, 2010 and 2011, to be approximately $143.0 million, $104.4 million and $68.7 million, respectively.  As discussed in Notes 3 and 12 to the financial statements, certain environmental costs are subject to recovery from insurance carriers and ratepayers.

SJG - 20

STANDBY LETTER OF CREDIT - SJG provided a $25.3 million letter of credit, under a separate credit facility from those it borrows under to provide liquidity support for the remarketing of variable-rate demand bonds issued through the NJEDA. The bonds were used to finance the expansion of SJG’s natural gas distribution system as discussed in Note 7 to the financial statements.  This letter of credit expires in August 2009.

We have certain commitments for both pipeline capacity and gas supply for which we pay fees regardless of usage. Those commitments as of December 31, 2008, average $45.1 million annually and total $157.0 million over the contracts’ lives. Approximately 46% of the financial commitments under these contracts expire during the next five years. We expect to renew each of these contracts under renewal provisions as provided in each contract. We recover all prudently incurred fees through rates via the Basic Gas Supply Service clause.

The following table summarizes our contractual cash obligations and their applicable payment due dates as of December 31, 2008 (in thousands):

			Up to		Years		Years		More than
Contractual Cash Obligations	Total		1 Year		2 & 3		4 & 5		5 Years
Principal Payments on Long-Term Debt	$	294,873	$	25,000	$	35,000	$	29,375	$	205,498
Interest on Long-Term Debt		200,643		16,993		33,375		29,107		121,168
Operating Leases		141		70		71		-		-
Construction Obligations		872		872		-		-		-
Commodity Supply Purchase Obligations		156,986		43,869		39,758		18,642		54,717
New Jersey Clean Energy Program (Note 2)		41,760		8,643		20,139		12,978		-
Other Purchase Obligations		269		269		-		-		-
Total Contractual Cash Obligations	$	695,544	$	95,716	$	128,343	$	90,102	$	381,383

As discussed in Note 7 to the financial statements, SJG’s variable-rate debt of $25.0 million has been included in the current portion of long-term debt above.  However, interest on long-term debt in the table above includes the related interest obligations through maturity, as well as the impact of the related interest rate swap agreements on this variable-rate debt.

Expected environmental remediation costs and asset retirement obligations are not included in the table above as the total obligation cannot be calculated due to the subjective nature of these costs and timing of anticipated payments. While SJG has no obligation to make a contribution to its employee pension plans in 2009, we currently expect to make a contribution in order to improve the funded status of the plans and mitigate the expected increase in expense in 2009.  Furthermore, future pension contributions beyond 2009 cannot be determined at this time. Our regulatory obligation to contribute $3.6 million annually to our postretirement benefit plans’ trusts, as discussed in Note 11 to the financial statements, is also not included as its duration is indefinite.

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

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

Item 7a. Quantitative and Qualitative Disclosures about Market Risks

MARKET RISKS:

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

SJG - 21

We transact commodities on a physical basis and typically do not enter into financial derivative positions directly. South Jersey Resources Group, LLC, an affiliate by common ownership, manages our risk by entering into the types of transactions noted above. As part of our gas purchasing strategy, we use financial contracts to hedge against forward price risk. These contracts are recoverable through our BGSS, subject to BPU approval. It is management’s policy, to the extent practical, within predetermined risk management policy guidelines, to have limited unmatched positions on a deal or portfolio basis while conducting these activities. As a result of holding open positions to a minimal level, the economic impact of changes in value of a particular transaction is substantially offset by an opposite change in the related hedge transaction. The majority of our contracts are typically less than 12-months long. The fair value and maturity of all these energy trading and hedging contracts determined using mark-to-market accounting as of December 31, 2008 is as follows (in thousands):

Assets:		Maturity		Maturity
	Source of Fair Value	<1 Year		1 - 3 Years		Total
Prices Actively Quoted	NYMEX	$	345	$	15	$	360
Other External Sources	Basis		35		-		35
Total		$	380	$	15	$	395
Liabilities:		Maturity		Maturity
	Source of Fair Value	<1 Year		1 - 3 Years		Total
Prices Actively Quoted	NYMEX	$	26,178	$	2,667	$	28,845
Other External Sources	Basis		520		-		520
Total		$	26,698	$	2,667	$	29,365

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 13.6 MMdts with a weighted-average settlement price of $7.80 per dt.  Contracted volumes of our Basis contracts are 5.3 MMdts with a weighted-average settlement price of $1.42 per dt.

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

Net Derivatives — Energy Related Liability, January 1, 2008	$	(2,092	)
Contracts Settled During 2008, Net		2,224
Other Changes in Fair Value from Continuing and New Contracts, Net		(29,102	)
Net Derivatives — Energy Related Liability, December 31, 2008	$	(28,970	)

The change in our derivative position from a $2.1 million liability at December 31, 2007 to a $29.0 million liability at December 31, 2008 is primarily due to the change in value of our financial positions held with SJRG.  As of December 31, 2007 the average future price was approximately $7.68 per dt vs. $6.15 per dt as of December 31, 2008.  The decrease in prices has resulted in a decline in the market value of these financial contracts.  Further, SJG entered into additional contracts during 2008 which also experienced a similar decline in value during the year.  However, the ultimate risk management objective of locking in the price of a portion of our future gas purchases, regardless of future fluctuations in the market price, has been met.

Interest Rate Risk - Our exposure to interest rate risk relates primarily to short-term, variable-rate borrowings. Short-term, variable-rate debt outstanding at December 31, 2008, was $114.6 million and averaged $69.5 million during 2008. The months where average outstanding variable-rate debt was at its highest and lowest levels were December, at $116.6 million, and April, at $11.6 million. A hypothetical 100 basis point (1%) increase in interest rates on our average variable-rate debt outstanding would result in a $410,000 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: 2008 - 317 b.p. decrease; 2007 – 36 b.p. decrease; 2006 - 72 b.p. increase; 2005 - 191 b.p. increase; and 2004 - 115 b.p. increase. As of December 31, 2008, our average borrowing cost, which changes daily, was 1.06%.

SJG - 22

We issue long-term debt either at fixed rates or use interest rate derivatives to limit our exposure to changes in interest rates on variable-rate, long-term debt. As of December 31, 2008, the interest costs on all of our long-term debt was either at a fixed-rate or hedged via an interest rate derivative. Consequently, interest expense on existing long-term debt is not significantly impacted by changes in market interest rates. However, due to general market conditions during 2008, the demand for auction-rate securities was disrupted resulting in increased interest rate volatility for tax-exempt auction-rate debt.   As a result, the $25.0 million of tax-exempt auction-rate debt issued by the Company (and repurchased in June 2008) was exposed to changes in interest rates that were not completely mitigated by the related interest rate derivatives. The auction-rate debt was converted to another form of variable- rate debt and resold in the public market in August 2008. The original interest rate derivatives remain in place and are expected to substantially offset changes in interest rates on the security.

SJG - 23

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of

South Jersey Gas Company

Folsom, New Jersey

We have audited the accompanying balance sheets of South Jersey Gas Company (the "Company") as of December 31, 2008 and 2007, and the related statements of income, changes in common equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2008.  Our audits also included the financial statement schedule listed in the Index at Item 15(a)2.  These financial statements and financial statement schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

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

In our opinion, such financial statements present fairly, in all material respects, the financial position of South Jersey Gas Company as of December 31, 2008 and 2007, and the results of its operations and its  cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 6 to the financial statements, in 2007 the Company changed its method of accounting for income taxes to conform to FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.

/s/ DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania

March 2, 2009

SJG - 24

SOUTH JERSEY GAS COMPANY
STATEMENTS OF INCOME
(In Thousands)
	Year Ended December 31,
	2008			2007			2006
Operating Revenues	$	568,046		$	630,547		$	642,671
Operating Expenses:
Cost of Sales (Excluding depreciation)		383,403			453,034			472,286
Operations		56,111			51,736			49,991
Maintenance		7,899			6,345			5,538
Depreciation		25,589			24,614			23,508
Energy and Other Taxes		10,627			10,829			10,139
Total Operating Expenses		483,629			546,558			561,462
Operating Income		84,417			83,989			81,209
Other Income and Expense		459			1,673			1,480
Interest Charges		(18,937	)		(20,985	)		(22,099	)
Income Before Income Taxes		65,939			64,677			60,590
Income Taxes		(26,508	)		(26,652	)		(24,811	)
Net Income	$	39,431		$	38,025		$	35,779
The accompanying notes are an integral part of the financial statements.

SJG - 25

SOUTH JERSEY GAS COMPANY
STATEMENTS OF CASH FLOWS
(In Thousands)
	Year Ended December 31,
	2008			2007			2006
Cash Flows from Operating Activities:
Net Income	$	39,431		$	38,025		$	35,779
Provided by Operating Activities:
Depreciation and Amortization		31,506			29,317			28,140
Provision for Losses on Accounts Receivable		2,281			2,672			1,284
TAC/CIP Receivable		2,641			(7,946	)		(15,740	)
Deferred Gas Costs - Net of Recoveries		5,885			7,755			18,694
Deferred SBC Costs - Net of Recoveries		1,199			3,960			(4,221	)
Environmental Remediation Costs - Net of Recoveries		(26,177	)		(10,926	)		(10,840	)
Deferred and Noncurrent Income Taxes and Credits - Net		21,378			12,957			4,426
Gas Plant Cost of Removal		(1,463	)		(1,275	)		(1,369	)
Changes in:
Accounts Receivable		(4,531	)		(8,528	)		9,658
Inventories		(18,659	)		24,884			11,099
Prepaid and Accrued Taxes - Net		(1,657	)		(2,099	)		4,997
Other Prepayments and Current Assets		(138	)		(14	)		594
Gas Purchases Payable		1,717			(8,817	)		(40,270	)
Accounts Payable and Other Accrued Liabilities		(13,857	)		9,787			11,605
Other Assets		(375	)		(121	)		1,978
Other Liabilities		(8,920	)		(272	)		(5,120	)
Net Cash Provided by Operating Activities		30,261			89,359			50,694
Cash Flows from Investing Activities:
Capital Expenditures		(52,580	)		(48,070	)		(61,440	)
Investment in Long-Term Receivables		(5,558	)		(4,123	)		(3,342	)
Proceeds from Long-Term Receivables		3,399			3,877			3,707
Purchase of Restricted Investment with Escrowed Loan Proceeds		(39	)		(363	)		(14,661	)
Proceeds from Sale of Restricted Investment from Escrowed Loan Proceeds		2,146			6,710			6,075
Net Cash Used in Investing Activities		(52,632	)		(41,969	)		(69,661	)
Cash Flows from Financing Activities:
Net Borrowing from (Repayments of) Lines of Credit		36,210			(25,160	)		16,500
Proceeds from Issuance of Long-Term Debt		25,000			-			25,000
Principal Repayments of Long-Term Debt		(25,000	)		(2,290	)		(2,345	)
Dividends on Common Stock		(14,867	)		(18,732	)		(19,902	)
Payments for Issuance of Long-Term Debt		(320	)		-			(1,051	)
Excess Tax Benefit from Restricted Stock Plan		346			55			181
Net Cash Provided by (Used in)  Financing Activities		21,369			(46,127	)		18,383
Net (Decrease) Increase  in Cash and Cash Equivalents		(1,002	)		1,263			(584	)
Cash and Cash Equivalents at Beginning of Period		3,230			1,967			2,551
Cash and Cash Equivalents at End of Period	$	2,228		$	3,230		$	1,967
Supplemental Disclosures of Cash Flow Information:
Interest (Net of Amounts Applicable to Gas Cost
Overcollections and Amounts Capitalized)	$	19,550		$	20,863		$	21,832
Income Taxes (Net of Refunds)	$	7,315		$	15,684		$	11,309
Supplemental Disclosures of Noncash Investing Activities:
Capital property and equipment acquired on
account but not paid at year-end	$	7,590		$	4,182		$	2,819
The accompanying notes are an integral part of the financial statements.

SJG - 26

SOUTH JERSEY GAS COMPANY
BALANCE SHEETS
(In Thousands)
	December 31,
	2008			2007
Assets
Property, Plant and Equipment:
Utility Plant, at original cost	$	1,172,014		$	1,123,992
Accumulated Depreciation		(295,432	)		(276,301	)
Property, Plant and Equipment – Net		876,582			847,691
Investments:
Available-for-Sale Securities		4,841			6,714
Restricted Investments		132			2,239
Total Investments		4,973			8,953
Current Assets:
Cash and Cash Equivalents		2,228			3,230
Accounts Receivable		47,787			48,984
Accounts Receivable - Related Parties		624			2,267
Unbilled Revenues		48,225			41,576
Provision for Uncollectibles		(3,628	)		(3,265	)
Natural Gas in Storage, average cost		65,252			56,404
Materials and Supplies, average cost		11,247			1,436
Prepaid Taxes		11,860			10,849
Derivatives - Energy Related Assets		380			2,236
Other Prepayments and Current Assets		2,416			2,278
Total Current Assets		186,391			165,995
Regulatory and Other Noncurrent Assets:
Regulatory Assets		270,434			188,688
Unamortized Debt Issuance Costs		6,147			6,307
Prepaid Pension		-			1,472
Long-Term Receivables		7,081			6,118
Derivatives - Energy Related Assets		15			93
Other		2,392			1,845
Total Regulatory and Other Noncurrent Assets		286,069			204,523
Total Assets	$	1,354,015		$	1,227,162
The accompanying notes are an integral part of the financial statements.

SJG - 27

SOUTH JERSEY GAS COMPANY
BALANCE SHEETS
(In Thousands, except for share data)
	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		200,663			200,317
Accumulated Other Comprehensive Loss		(6,875	)		(5,356	)
Retained Earnings		202,103			177,539
Total Common Equity		401,739			378,348
Long-Term Debt		269,873			294,873
Total Capitalization		671,612			673,221
Current Liabilities:
Notes Payable		114,550			78,340
Current Portion of Long-Term Debt		25,000			-
Accounts Payable – Commodity		36,587			34,870
Accounts Payable – Other		12,051			13,650
Accounts Payable - Related Parties		16,744			22,417
Derivatives - Energy Related Liabilities		26,698			4,360
Deferred Income Taxes – Net		12,475			11,582
Customer Deposits and Credit Balances		14,219			18,067
Environmental Remediation Costs		13,117			25,447
Taxes Accrued		2,291			2,937
Pension Benefits		991			765
Interest Accrued		6,244			6,245
Other Current Liabilities		6,449			5,777
Total Current Liabilities		287,416			224,457
Regulatory and Other Noncurrent Liabilities:
Regulatory Liabilities		50,447			55,779
Deferred Income Taxes – Net		187,050			168,254
Environmental Remediation Costs		50,976			48,433
Asset Retirement Obligations		22,299			24,364
Pension and Other Postretirement Benefits		67,566			24,682
Investment Tax Credits		1,832			2,149
Derivatives - Energy Related Liabilities		2,667			61
Derivatives – Other		7,578			618
Other		4,572			5,144
Total Regulatory and Other Noncurrent Liabilities		394,987			329,484
Commitments and Contingencies (Note 12)
Total Capitalization and Liabilities	$	1,354,015		$	1,227,162
The accompanying notes are an integral part of the financial statements.

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SOUTH JERSEY GAS COMPANY
STATEMENTS OF CHANGES IN COMMON EQUITY AND COMPREHENSIVE INCOME
(In Thousands)
	Common Stock		Other Paid-In Capital and Premium on Common Stock			Accumulated Other Comprehensive Loss			Retained Earnings			Total
Balance at January 1, 2006	$	5,848	$	200,317		$	(4,337	)	$	142,740		$	344,568
Net Income										35,779			35,779
Other Comprehensive Income (Loss), Net of Tax: (a)
Minimum Pension Liability Adjustment							(442	)					(442	)
Unrealized Gain on Available-for-Sale Securities							54						54
Unrealized Gain on Derivatives							296						296
Other Comprehensive Loss, Net of Tax: (a)													(92	)
Comprehensive Income													35,687
Cash Dividends Declared - Common Stock										(19,902	)		(19,902	)
Balance at December 31, 2006		5,848		200,317			(4,429	)		158,617			360,353
Cumulative Effect Adjustment (b)		-		-			-			(371	)		(371	)
Balance at January 1, 2007, as adjusted		5,848		200,317			(4,429	)		158,246			359,982
Net Income										38,025			38,025
Other Comprehensive Loss, Net of Tax: (a)
Postretirement  Liability Adjustment							(307	)					(307	)
Unrealized Loss on Available-for-Sale Securities							(195	)					(195	)
Unrealized Loss on Derivatives							(425	)					(425	)
Other Comprehensive Loss, Net of Tax: (a)													(927	)
Comprehensive Income													37,098
Cash Dividends Declared - Common Stock										(18,732	)		(18,732	)
Balance at December 31, 2007		5,848		200,317			(5,356	)		177,539			378,348
Net Income										39,431			39,431
Other Comprehensive Income (Loss), Net of Tax (a)
Postretirement  Liability Adjustment							(1,181	)					(1,181	)
Unrealized Loss on Available-for-Sale Securities							(731	)					(731	)
Unrealized Gain on Derivatives							393						393
Other Comprehensive Loss, Net of Tax (a)													(1,519	)
Comprehensive Income													37,912
Cash Dividends Declared - Common Stock										(14,867	)		(14,867	)
Excess Tax Benefit from Restricted Stock Plan				346									346
Balance at December 31, 2008	$	5,848	$	200,663		$	(6,875	)	$	202,103		$	401,739
Disclosure of Changes in Accumulated Other Comprehensive Loss Balances (a)
(In Thousands)
			Postretirement Liability Adjustment			Unrealized (Loss) Gain on Available-for-Sale Securities			Unrealized Gain (Loss) on Derivatives			Accumulated Other Comprehensive Loss
Balance at January 1, 2006			$	(3,498	)	$	154		$	(993	)	$	(4,337	)
Changes During Year				(442	)		54			296			(92	)
Balance at December 31, 2006				(3,940	)		208			(697	)		(4,429	)
Changes During Year				(307	)		(195	)		(425	)		(927	)
Balance at December 31, 2007				(4,247	)		13			(1,122	)		(5,356	)
Changes During Year				(1,181	)		(731	)		393			(1,519	)
Balance at December 31, 2008			$	(5,428	)	$	(718	)	$	(729	)	$	(6,875	)
(a)  Determined using a combined statutory tax rate of 41.08%.
(b)  Due to the implementation of FIN 48.  See Note 1.
The accompanying notes are an integral part of the financial statements.

SJG - 29

NOTES TO FINANCIAL STATEMENTS

1.                 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The Entity - South Jersey Industries, Inc. (SJI) owns all of the outstanding common stock of South Jersey Gas Company (SJG). In our opinion, the financial statements reflect all normal and recurring adjustments needed to fairly present our financial position and operating results at the dates and for the periods presented. 

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

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

Regulation- We are subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU). See Note 2 for a detailed discussion of our rate structure and regulatory actions. We maintain our accounts according to the BPU’s prescribed Uniform System of Accounts. We follow the accounting for regulated enterprises prescribed by the Financial Accounting Standards Board (FASB) Statement No. 71, “Accounting for the Effects of Certain Types of Regulation.” In general, Statement No. 71 allows for the deferral of certain costs (regulatory assets) and creation of certain obligations (regulatory liabilities) when it is probable that such items will be recovered from or refunded to customers in future periods. See Note 3 for a detailed discussion of regulatory assets and liabilities.

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

We collect certain revenue-based energy taxes from our customers. Such taxes include New Jersey State Sales Tax, Transitional Energy Facility Assessment (TEFA) and Public Utilities Assessment (PUA). State sales tax is recorded as a liability when billed to customers and is not included in revenue or operating expenses. TEFA and PUA are included in both revenues and cost of sales and totaled $8.7 million, $8.8 million and $7.9 million in 2008, 2007 and 2006, respectively.

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

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

Property, Plant & Equipment - For regulatory purposes, utility plant is stated at original cost, which may be different than our cost if the assets were acquired from another regulated entity. The cost of adding, replacing and renewing property is charged to the appropriate plant account. Utility Plant balances as of December 31, 2008 and 2007 were comprised of the following (in thousands):

	2008		2007
Utility Plant:
Production Plant	$	302	$	302
Storage Plant		11,543		11,582
Transmission Plant		151,546		149,542
Distribution Plant		959,807		919,205
General Plant		41,122		37,136
Other Plant		3,665		3,665
Utility Plant in Service		1,167,985		1,121,432
Construction Work in Progress		4,029		2,560
Total Utility Plant	$	1,172,014	$	1,123,992

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

ARO activity during 2008 and 2007 was as follows (in thousands):

	2008			2007
AROs as of January 1,	$	24,364		$	23,743
Accretion		427			498
Additions		136			174
Settlements		(37	)		(51	)
Revisions in Estimated Cash Flows *		(2,591	)		-
AROs as of December 31,	$	22,299		$	24,364
* A corresponding reduction was made to Regulatory Assets, thus having no impact on  Earnings.

Depreciation - We depreciate utility plant on a straight-line basis over the estimated remaining lives of the various property classes. These estimates are periodically reviewed and adjusted as required after BPU approval. The composite annual rate for all depreciable utility property was approximately 2.3% in 2008, 2007 and 2006. The actual composite rate may differ from the approved rate as the asset mix changes over time. Except for retirements outside of the normal course of business, accumulated depreciation is charged with the cost of depreciable utility property retired, less salvage.

Capitalized Interest - We capitalize interest on construction at the rate of return on rate base utilized by the BPU to set rates in our last base rate proceeding (See Note 2). Capitalized interest is included in Utility Plant on the balance sheets. Interest Charges are presented net of capitalized interest on the statements of income. We capitalized interest of $0.4 million in 2008, 2007 and 2006.

Impairment of Long-Lived Assets - We review the carrying amount of long-lived assets for possible impairment whenever events or changes in circumstances indicate that such amounts may not be recoverable. For the years ended 2008, 2007 and 2006, no significant impairments were identified.

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

We account for derivative instruments in accordance with FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. We record all derivatives, whether designated in hedging relationships or not, on the balance sheets at fair value unless the derivative contracts qualify for the normal purchase and sale exemption. In general, if the derivative is designated as a fair value hedge, we recognize the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk in earnings. We currently have no fair value hedges. If the derivative is designated as a cash flow hedge, we record the effective portion of the hedge in Accumulated Other Comprehensive Loss and recognize it in the income statement when the hedged item affects earnings. We recognize ineffective portions of cash flow hedges immediately in earnings. In 2007, we changed our policy to no longer designate energy-related derivative instruments as cash flow hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives, strategies for undertaking various hedge transactions and our methods for assessing and testing correlation and hedge ineffectiveness. All hedging instruments are linked to the hedged asset, liability, firm commitment or forecasted transaction.

SJG - 31

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

Due to the application of regulatory accounting principles under FASB Statement No. 71, the costs or benefits of derivative contracts related to gas purchases are recovered through our Basic Gas Supply Service (BGSS) Clause, subject to BPU approval (See Note 2). As of December 31, 2008 and 2007, we had $29.0 million and $2.1 million of costs, respectively, included in our BGSS related to open financial contracts (See Note 3).

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

We previously used derivative transactions known as “Treasury Locks” to hedge against the impact on our cash flows of possible interest rate increases on debt issued in September 2005.  The initial $1.4 million cost of the Treasury Locks has been included in Accumulated Other Comprehensive Loss and is being amortized over the 30 year life of the associated debt issue.  As of December 31, 2008, the unamortized balance is approximately $1.2 million.

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

As of December 31, 2008 and 2007, the fair value of these interest rate derivative agreements was $7.6 million and $0.6 million, respectively, and is included on the balance sheet under the caption Regulatory and Other Noncurrent Liabilities: Derivatives - Other. The fair value represents the amount we would have expected to pay to the counterparties if the contracts had been terminated on those dates. The fair value upon termination can be recovered in rates, and therefore, the unrealized loss has been included in Other Regulatory Assets in the balance sheets in accordance with FASB Statement No. 71 “Accounting for the Effects of Certain Types of Regulation.”

Stock-Based Compensation Plans - On January 1, 2006, SJI adopted FASB Statement No. 123(R), “Share-Based Payment,” which revised FASB Statement No. 123, and superseded Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” As the vesting requirements under the plan are contingent upon market and service conditions, Statement No. 123(R) requires SJI to measure and recognize stock-based compensation expense in its financial statements based on the fair value at the date of grant for share-based awards. Since Officers and other key employees of SJG participate in the Stock Option, Stock Appreciation Rights and Restricted Stock Award Plan (“Plan”) of SJI, changes in accounting for share-based payments also impact us. In accordance with Statement No. 123(R), SJI is recognizing compensation expense on a straight-line basis over the requisite service period of each award. In addition, SJI identifies specific forfeitures of share-based awards and compensation expense is adjusted accordingly over the requisite service period.  Compensation expense is not adjusted based on the actual achievement of performance goals. The fair value of Officers’ restricted stock awards on the date of grant is estimated using a Monte Carlo simulation model.

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

SJG - 32

The following table summarizes the SJI nonvested restricted stock awards pertaining to SJG outstanding at December 31, 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. 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.

For the years ended December 31, 2008, 2007 and 2006, the cost of restricted stock awards was $0.3 million, $0.2 million and $0.2 million, respectively. Of these costs, $0.1 million was capitalized to Utility Plant in each of those years.

As of December 31, 2008, there was $0.3 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the restricted stock plans. That cost is expected to be recognized over a weighted average period of 1.7 years.

The following table summarizes information regarding restricted stock award activity during 2008, excluding accrued dividend equivalents:

				Weighted Average
				Grant Date
	Shares			Fair Value
Nonvested Shares Outstanding, January 1, 2008		17,976		$	28.618
Granted		10,000			34.030
Vested*		(8,234	)		27.950
Forfeited		(1,459	)		31.541
Nonvested Shares Outstanding, December 31, 2008		18,283		$	31.645
* Actual shares expected to be awarded to officers during the first quarter of 2009, including dividend equivalents and   adjustments for performance measures, totaled 13,640 shares.

During 2008, SJI awarded 12,299 shares that had vested at December 31, 2007, to our officers at a market value of $0.4 million. During 2007, 17,143 shares were awarded to our officers at a market value of $0.6 million. As discussed earlier, we have a policy of making cash payments to SJI to satisfy our allocated obligations under this plan. Cash payments to SJI during 2008 and 2007, were approximately $0.6 million and $1.1 million, respectively relating to stock awards. These cash payments 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.

Income Taxes - Deferred income taxes are provided for all significant temporary differences between the book and taxable basis of assets and liabilities in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (See Note 6). A valuation allowance will be established when it is determined that it is more likely than not that a deferred tax asset will not be realized.

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

SJG - 33

New Accounting Pronouncements— In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (FAS 157), “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements. In October 2008, the FASB issued 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 FAS 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 the Company’s financial statements. Management does not anticipate that the adoption of the remainder of this statement will have a material effect on the Company’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.  The Company has not elected this fair value option and, as a result, the adoption of this statement did not have a material effect on the Company’s 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 the Company’s financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161(FAS 161), “Disclosures about Derivative Instruments and Hedging Activities - an amendment of SFAS No. 133.” 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 the Company’s 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. The adoption of this position did not have a material effect on the Company’s financial statements.

In December 2008, the FASB issued FASB Staff Position (FSP) No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” which amends Statement 132(R) to require more detailed disclosures about employers’ plan assets, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. The provisions of this FSP are effective for reporting periods ending after December 15, 2009. Management is currently evaluating the impact that the adoption of this position will have on the Company’s financial statements.

SJG - 34

In December 2008, the Emerging Issue Task Force issued EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement.”  The Task Force reached a consensus that an issuer of a liability with a third-party credit enhancement that is inseparable from the liability must treat the liability and the credit enhancement as two units of accounting. Under the consensus, the fair value measurement of the liability does not include the effect of the third-party credit enhancement; therefore, changes in the issuer’s credit standing without the support of the credit enhancement affect the fair value measurement of the issuer’s liability. Entities will need to disclose the existence of any third-party credit enhancements related to their liabilities that are within the scope of this Issue (i.e., that are measured at fair value). The consensus is effective in the first reporting period beginning on or after December 15, 2008. Management is currently evaluating the impact that the adoption of this consensus will have on the Company’s financial statements.

In December, 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures Related to Asset Transfers, VIEs, and QSPEs,” which requires public companies to provide disclosures similar to those proposed in the pending amendments to Statement 140 and Interpretation 46(R). The FSP requires additional disclosures about transfers of financial assets and an enterprise’s involvement with VIEs, including QSPEs. These disclosures should help improve transparency in the current market environment. The FSP is effective for the first reporting period (interim or annual) that ends after December 15, 2008. The adoption of this position did not have a material effect on the Company’s financial statements.

2.            RATES AND REGULATORY ACTIONS:

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

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

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

Regulatory actions regarding the BGSS were as follows:

· March 2006 - The BPU approved a global settlement, effective April 1, 2006, which among other items, fully resolved our 2004-2005 BGSS filing and certain issues in our 2005-2006 BGSS filing. The net impact of our global settlement was a $4.4 million reduction to annual revenues; however, this reduction had no impact on net income, as there was a corresponding reduction in expense. In addition, a pilot storage incentive program was approved. This program began during the second quarter of 2006 and continued through the 2008 summer injection period. Any party to this settlement may request that the BPU terminate this program after October 31, 2008. It is designed to provide us with the opportunity to achieve BGSS price reductions and additional price stability. It will also provide us with an opportunity to share in storage-related gains and losses, with 20% being retained by us, and 80% being credited to customers. Total storage-related gains for 2008, 2007 and 2006 were $5.7 million, $2.3 million and $1.6 million, respectively, under this storage incentive program.

SJG - 35

· June 2006 - We made our annual periodic BGSS filing with the BPU requesting a $19.7 million, or 4.4%, decrease in gas cost recoveries in response to decreasing wholesale gas costs, an $11.5 million benefit derived from the release of a storage facility and the liquidation of some low-cost base gas during the second quarter.

· September 2006 - The BPU approved on a provisional basis, a $38.7 million, or 8.6%, annual decrease in gas cost recoveries due to the continuing decrease in wholesale gas costs subsequent to our June 2006 filing, an agreement to utilize gas from a released storage facility for the upcoming winter, and a credit to gas costs for previously overcollected state taxes.

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

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

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

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

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

Temperature Adjustment Clause (TAC) - The TAC provided stability to our earnings by normalizing the impact of colder-than-normal and warmer-than-normal weather through September 30, 2006, when it was replaced by the Conservation Incentive Program. Each TAC year began October 1 and ended May 31 of the subsequent year. We recorded the earnings impact of TAC adjustments as incurred on a monthly basis during the TAC year. Subsequent to each TAC year, we made a filing with the BPU requesting the return or recovery of amounts recorded under the TAC. BPU-approved cash inflows or outflows generally did not begin until the next TAC year. TAC adjustments affected revenue, earnings and cash flows since colder-than-normal weather generated credits to customers, while warmer-than-normal weather resulted in additional charges to customers. As of December 31, 2008 and 2007, our balance sheets include a TAC receivable of $0 and $6.5 million, respectively, under the caption Regulatory Assets.

Regulatory actions regarding the TAC were as follows:

· March 2006 - The BPU approved a global settlement, effective April 1, 2006, fully resolving our 2003-2004 TAC filing.

· October 2006 - The TAC was replaced by the Conservation Incentive Program (CIP).

· October 2006 - We made our annual TAC filing, requesting recovery of an $8.3 million net deficiency associated with weather being 12.5% warmer-than-normal for the TAC year ended May 31, 2006.

· October 2007 – The BPU approved on a provisional basis, our 2005-2006 TAC filing, which superseded our 2004-2005 TAC filing.  The effect of this action resulted in an $8.0 million increase in annual revenues.

· December 2008 –The regulatory asset related to the TAC was completely recovered and as part of a global settlement, the BPU approved the suspension of the TAC rate which resulted in a decrease of $9.3 million in annual revenues.

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Conservation Incentive Program (CIP) - In December 2005, we made a filing to implement a Conservation and Usage Adjustment (CUA) Clause. The primary purpose of the CUA was to promote conservation efforts, without negatively impacting financial stability, and to base our profit margin on the number of customers rather than the amount of natural gas distributed to customers. In October 2006, the BPU approved the CUA as a three-year pilot program and renamed it the Conservation Incentive Program. Each CIP year begins October 1 and ends September 30 of the subsequent year. On a monthly basis during the CIP year, we record adjustments to earnings based on weather and customer usage factors, as incurred. Subsequent to each year, we will make filings with the BPU to review and approve amounts recorded under the CIP. BPU approved cash inflows or outflows generally will not begin until the next CIP year.

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

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

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

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

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

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

· March 2006 - As part of the global settlement discussed under BGSS above, our September 2004 SBC filing was fully resolved effective April 1, 2006.

· October 2006 - We made our annual SBC filing, superseding our 2005 SBC filing, requesting a $0.4 million reduction in annual SBC recoveries.

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

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

Remediation Adjustment Clause (RAC) - The RAC recovers environmental remediation costs of 12 former gas manufacturing plants (See Note 12). The BPU allows us to recover such costs over 7-year amortization periods. The net between the amounts actually spent and amounts recovered from customers is recorded as a regulatory asset, Environmental Remediation Cost Expended - Net. Note that RAC activity affects revenue and cash flows but does not directly affect earnings because of the cost recovery over 7-year amortization periods. As of December 31, 2008 and 2007, we reflected the unamortized remediation costs of $48.1 million and $26.0 million, respectively, on the balance sheet under Regulatory Assets (See Note 3). Since implementing the RAC in 1992, we have recovered $40.7 million through rates.

New Jersey Clean Energy Program (NJCEP) - This mechanism recovers costs associated with our energy efficiency and renewable energy programs. In August 2008, the BPU approved the statewide funding of the NJCEP of $1.2 billion for the years 2009 through 2012. Of this amount, we will be responsible for approximately $41.8 million over the 4-year period. NJCEP adjustments affect revenue and cash flows but do not directly affect earnings as related costs are deferred and recovered through rates on an on-going basis.

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

Separate regulatory actions regarding the USF were as follows:

· July 2006 - We made our annual USF filing, along with the state’s other electric and gas utilities, proposing to increase annual statewide gas revenues to $115.3 million, an increase of $68.5 million. This rate proposal was approved by the BPU in October 2006, on an interim basis, and was designed to increase our annual USF revenues by $7.7 million. The revised rates were effective from November 1, 2006 through September 30, 2007.

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

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

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

Consumer Education Program (CEP) - The CEP recovers costs associated with providing education to the public concerning customer choice. CEP adjustments affect revenue and cash flows but do not directly affect earnings as related costs are deferred and recovered on an ongoing basis. Note that our CEP recovery rate was reduced to zero in April 2006, and as a result of a previous BPU Order, it has been removed from our tariff as of December 2008.

Other Regulatory Matters -

Unbundling - Effective January 10, 2000, the BPU approved full unbundling of our system. This allows all natural gas consumers to select their natural gas commodity supplier. As of December 31, 2008, 24,968 of our residential customers were purchasing their gas commodity from someone other than us. Customers choosing to purchase natural gas from providers other than the utility are charged for the cost of gas by the marketer. The resulting decrease in our revenues is offset by a corresponding decrease in gas costs. While customer choice can reduce utility revenues, it does not negatively affect our net income or financial condition. The BPU continues to allow for full recovery of prudently incurred natural gas costs through the BGSS. Unbundling did not change the fact that we still recover cost of service, including certain deferred costs, through base rates.

Pipeline Integrity - In October 2005, we filed a petition with the BPU to implement a Pipeline Integrity Management Tracker (Tracker). The purpose of the Tracker is to recover incremental costs to be incurred by us as a result of new federal regulations, which are aimed at enhancing public safety and reliability. The regulations require that utilities use a comprehensive analysis to assess, evaluate, repair and validate the integrity of certain transmission lines in the event of a leak or failure. As of December 31, 2008 and 2007, costs incurred under this program totaled $1.1 million and $0.8 million, respectively, and are included in Other Regulatory Assets (See Note 3).  We continue to engage in settlement negotiations in which we are proposing to modify the original request and provide for deferred accounting treatment of Pipeline Integrity related operating expenses, with the ultimate recovery of these costs to be sought in our next base rate case.

Filings and petitions described above are still pending unless otherwise indicated.

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3.                 REGULATORY ASSETS AND LIABILITIES:

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

Regulatory Assets at December 31 consisted of the following items (in thousands):
	2008		2007
Environmental Remediation Costs: Expended – Net	$	48,143	$	25,960
Liability for Future Expenditures		64,093		73,880
Income Taxes - Flowthrough Depreciation		2,729		3,707
Deferred Asset Retirement Obligation Costs		21,901		21,572
Deferred Gas Costs – Net		18,406		-
Deferred Pension and Other Postretirement Benefit Costs		80,162		32,686
Temperature Adjustment Clause Receivable		-		6,516
Conservation Incentive Program Receivable		22,048		18,173
Societal Benefit Costs Receivable		1,753		2,952
Premium for Early Retirement of Debt		1,208		1,370
Other Regulatory Assets		9,991		1,872
	$	270,434	$	188,688

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

Environmental Remediation Costs - We have two regulatory assets associated with environmental costs related to the cleanup of 12 sites where we or our predecessors previously operated gas manufacturing plants. The first asset, Environmental Remediation Cost: Expended - Net, represents what was actually spent to clean up the sites, less recoveries through the RAC and insurance carriers. These costs meet the deferral requirements of FASB Statement No. 71, as the BPU allows us to recover such expenditures through the RAC. The other asset, Environmental Remediation Cost: Liability for Future Expenditures, relates to estimated future expenditures required to complete the remediation of these sites as determined under the guidance of FASB Statement No. 5, "Accounting for Contingencies." We recorded this estimated amount as a regulatory asset under Statement No. 71, with the corresponding current and noncurrent liabilities on the balance sheets under the captions Current Liabilities and Regulatory and Other Noncurrent Liabilities. The BPU allows us to recover the deferred costs over 7-year periods after they are spent.

Income Taxes - Flowthrough Depreciation - This regulatory asset was created upon the adoption of FASB Statement No. 109, "Accounting for Income Taxes,” in 1993. The amount represents unamortized excess tax depreciation over book depreciation on utility plant because of temporary differences for which, prior to Statement No. 109, deferred taxes previously were not provided. We previously passed these tax benefits through to ratepayers and are recovering the amortization of the regulatory asset through rates until 2011.

Deferred Asset Retirement Obligation Costs - This regulatory asset was created with the adoption of FASB Interpretation No. 47(FIN 47), “Accounting for Conditional Asset Retirements Obligations”, in 2005. FIN 47 resulted in the recording of asset retirement obligations (ARO’s) and additional utility plant, primarily related to a legal obligation we have for certain safety requirements upon the retirement of our gas distribution and transmission system. We recover asset retirement costs through rates charged to customers. All related accumulated accretion and depreciation amounts for these ARO’s represent timing differences in the recognition of retirement costs that we are currently recovering in rates and, as such, we are deferring such differences as regulatory assets under FASB Statement No. 71.

Deferred Gas Costs - Net- Over/under collections of gas costs are monitored through our BGSS mechanism. Net undercollected gas costs are classified as a regulatory asset and net overcollected gas costs are classified as a regulatory liability. Derivative contracts used to hedge our natural gas purchases are also included in the BGSS, subject to BPU approval. See detailed discussion under Derivative Instruments in Note 1.

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Deferred Pension and Other Postretirement Benefit Costs  - The BPU authorized us to recover costs related to postretirement benefits under the accrual method of accounting consistent with FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." We deferred amounts accrued prior to that authorization and are amortizing them as allowed by the BPU over 15 years through 2012. The unamortized balance was $1.5 million at December 31, 2008. Upon the adoption of FASB Statement No. 158 in 2006, our regulatory asset was increased by $37.1 million representing the recognition of the underfunded positions of our pension and other postretirement benefit plans.  Subsequent adjustments to this balance occur annually to reflect changes in the funded positions of these benefit plans caused by changes in actual plan experience as well as assumptions of future experience (See Note 11).

Temperature Adjustment Clause Receivable - As discussed in Note 2, the net income impact of the TAC was recorded as an adjustment to earnings as incurred. The recovery (or credit) generally did not begin until the next TAC year. As a result, there was a timing difference that resulted in a regulatory asset or liability.  As a result of a Global Settlement in December 2008, the BPU approved rolling in the remaining overrecovered TAC position into the weather portion of the CIP, and the suspension of the TAC rate.

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

Societal Benefit Costs Receivable - At both December 31, 2008 and 2007, this regulatory asset primarily represents cumulative costs less recoveries under the USF program. 

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

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

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

	2008		2007
Excess Plant Removal Costs	$	48,820	$	48,705
Liability for NJCEP		-		2,797
Deferred Revenues – Net		-		2,586
Other		1,627		1,691
Total Regulatory Liabilities	$	50,447	$	55,779

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

Liability for NJCEP – This represents revenues received in excess of actual expenditures, which we have an obligation to either expend or return to ratepayers in future periods.

Deferred Revenue – Net – See previous discussion under “Deferred Gas Costs – Net”.

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

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4.                 RELATED PARTY TRANSACTIONS:

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

SJI Services, LLC (SJIS) - a wholly owned subsidiary of SJI established on January 1, 2006, that provides services, such as information technology, human resources, government relations, corporate communications, materials purchasing, fleet management and insurance to SJI and all of its subsidiaries.

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

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

· South Jersey Resources Group, LLC (SJRG) - a wholly owned subsidiary of SJI and a wholesale gas and risk management business that supplies natural gas storage, commodity and transportation to retail marketers, utility businesses and electricity generators in the mid-Atlantic and southern regions. We sell natural gas for resale and capacity release to SJRG and also meet some of our gas purchasing requirements by purchasing natural gas from SJRG. Additionally, SJRG manages our market risk associated with fluctuations in the cost of natural gas by entering into financial derivative contracts on our behalf. The gain or loss associated with these derivative contracts is included in our BGSS and in the SJRG receivable and payable amounts shown below.   In addition to our normal gas purchases and sales with SJRG, during 2006, we sold 1,710,903 decatherms  of gas to SJRG for $13.1 million.  The proceeds from the sale were credited to the BGSS clause and did not impact earnings.

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

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

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

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

In addition to the above, we provide various administrative and professional services to SJI and each of the affiliates discussed above. Likewise, SJI provides substantial administrative services on our behalf. Beginning in January 2006, SJIS began to provide a majority of the aforementioned administrative services to SJI and its subsidiaries. For certain types of transactions, we served as central processing agents for the related parties discussed above. Amounts due to and due from these related parties for pass-through items are not considered material to the financial statements as a whole.

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

	2008		2007		2006
Operating Revenues/Affiliates:
SJRG	$	7,604	$	19,328	$	67,262
Other		402		386		2,302
Total Operating Revenues/Affiliates	$	8,006	$	19,714	$	69,564

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

	2008			2007		2006
Costs of Sales/Affiliates
(Excluding depreciation):
SJRG	$	28,565		$	24,601	$	23,083
Derivative Gains (Losses) (See Note 1):
SJRG	$	(6,215	)	$	19,169	$	30,113
Operations Expense/Affiliates
SJI	$	6,957		$	6,650	$	7,434
SJIS		4,154			4,550		5,373
Millennium		2,982			2,872		2,743
Other		(226	)		139		-
Total Operations Expense/Affiliates	$	13,867		$	14,211	$	15,550

6.                 INCOME TAXES AND CREDITS:

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

	2008			2007			2006
Tax at Statutory Rate	$	23,078		$	22,637		$	21,206
Increase (Decrease) Resulting from:
State Income Taxes		4,491			4,396			4,107
Amortization of Investment Tax Credits		(318	)		(320	)		(325	)
ESOP Dividend		(736	)		(610	)		(674	)
Amortization of Flowthrough Depreciation		664			664			664
Other - Net		(671	)		(115	)		(167	)
Net Income Taxes	$	26,508		$	26,652		$	24,811

The provision for Income Taxes is comprised of the following (in thousands):
	2008			2007			2006
Current:
Federal	$	1,042		$	9,951		$	16,556
State		4,088			3,744			3,829
Total Current		5,130			13,695			20,385
Deferred:
Federal		18,877			10,258			2,262
State		2,819			3,019			2,489
Total Deferred		21,696			13,277			4,751
Investment Tax Credits		(318	)		(320	)		(325	)
Net Income Taxes	$	26,508		$	26,652		$	24,811

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

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

	2008			2007
Current:
Deferred Fuel Costs - Net	$	4,121		$	4,121
Uncollectibles		(1,208	)		(976	)
Deferred Revenues		9,055			8,061
Section 461 Prepayments		514			866
Other		(7	)		(490	)
Current Deferred Tax Liability - Net	$	12,475		$	11,582
Noncurrent:
Book Versus Tax Basis of Property	$	174,208		$	156,634
Deferred Fuel Costs - Net		5,470			5,141
Environmental		20,608			11,068
Deferred Regulatory Costs		1,246			1,238
Deferred State Tax		(7,366	)		(6,331	)
Investment Tax Credit Basis Gross-Up		(944	)		(1,107	)
Deferred Pension & Other Post Retirement Benefits		32,311			15,239
Pension & Other Post Retirement Benefits		(27,063	)		(9,021	)
Deferred Revenues		(11,226	)		(3,726	)
Other		(194	)		(881	)
Noncurrent Deferred Tax Liability - Net	$	187,050		$	168,254

SJG is included in the consolidated federal income tax return filed by SJI. The actual taxes, including credits, are allocated by SJI to its subsidiaries, generally on a separate return basis. As of December 31, 2008 and 2007, income taxes due from SJI were approximately $5.8 million and $4.3 million, respectively, and are included in the balance sheets under the caption, Prepaid Taxes.

On January 1, 2007 SJG adopted the provisions of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” As a result of the implementation of FIN 48, SJG recognized a $0.4 million reduction to beginning retained earnings as a cumulative effect adjustment and a noncurrent deferred tax asset of $1.1 million.  A reconciliation of unrecognized tax benefits is as follows (in thousands):

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

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

The unrecognized tax benefits are primarily related to an uncertainty of state income tax issues and the timing of certain deductions taken on our income tax returns.  Federal income tax returns from 2005 forward and state income tax returns primarily from 2004 forward are open and subject to examination.

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7.                 LONG-TERM DEBT: (A)

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

				2008			2007
First Mortgage Bonds: (B)
	6.12	%	Series due 2010	$	10,000		$	10,000
	6.74	%	Series due 2011		10,000			10,000
	6.57	%	Series due 2011		15,000			15,000
	4.46	%	Series due 2013		10,500			10,500
	5.027	%	Series due 2013		14,500			14,500
	4.52	%	Series due 2014		11,000			11,000
	5.115	%	Series due 2014		10,000			10,000
	5.387	%	Series due 2015		10,000			10,000
	6.50	%	Series due 2016		9,873			9,873
	4.60	%	Series due 2016		17,000			17,000
	5.437	%	Series due 2016		10,000			10,000
	4.657	%	Series due 2017		15,000			15,000
	7.97	%	Series due 2018		10,000			10,000
	7.125	%	Series due 2018		20,000			20,000
	5.587	%	Series due 2019		10,000			10,000
	7.7	%	Series due 2027		35,000			35,000
	5.55	%	Series due 2033		32,000			32,000
	6.213	%	Series due 2034		10,000			10,000
	5.45	%	Series due 2035		10,000			10,000
Series A 2006 Tax-Exempt First Mortgage Bonds
Variable Rate, due 2036 (C)					25,000			25,000
Total Long-Term Debt Outstanding					294,873			294,873
Current Portion of Long-Term Debt (C)					(25,000	)		-
Long-Term Debt				$	269,873		$	294,873

(A) Long-term debt maturities and sinking funds requirements for the succeeding five years are as follows (in thousands): 2009, $0; 2010, $10,000; 2011, $25,000; 2012, $2,187; 2013, $25,000 (See Note (c) below).  Our long-term debt agreements contain no financial covenants.

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

(C) On April 20, 2006, SJG issued $25.0 million of tax-exempt, auction-rate debt through the New Jersey Economic Development Authority (NJEDA) under its $150.0 million MTN Program.  These bonds were repurchased by the Company in June 2008 and remarketed to the public in August 2008 as variable-rate demand bonds with liquidity support provided by a letter of credit from a commercial bank.  The letter of credit expires in August 2009, and as such, these bonds have been included in the current portion of long-term debt.  Material terms of the original bonds, such as the 2036 maturity date, floating rate interest that resets weekly, and a first mortgage collateral position, remain unchanged.

We estimated the fair values of our long-term debt, including current maturities, as of December 31, 2007 and 2006, to be $326.1 million and $318.4 million, respectively. Carrying amounts as of both December 31, 2008 and 2007 are $294.9 million. We base the estimates on interest rates available to us at the end of each year for debt with similar terms and maturities. We retire debt when it is cost effective as permitted by the debt agreements.

8.            FINANCIAL INSTRUMENTS:

Restricted Investments - In accordance with the terms of our tax-exempt first mortgage bonds, unused proceeds are required to be escrowed pending approved construction expenditures. As of December 31, 2008 and 2007, the escrowed proceeds, including interest earned, totaled $0.1 million and $2.2 million, respectively.

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Long-Term Receivables– SJG provides financing to customers for the purpose of attracting conversions to natural gas heating systems from competing fuel sources.  The terms of these loans call for customers to make monthly payments over a period of up to five years with no interest.  The carrying amounts of such loans were $10.1 million and $8.4 million as of December 31, 2008 and 2007, respectively.  The current portion of these receivables is reflected in Accounts Receivable and the non-current portion is reflected in Long-Term Receivables on the balance sheet.  The carrying amounts noted above are net of unamortized discounts resulting from imputed interest in the amounts of $1.2 million and $0.7 million as of December 31, 2008 and 2007, respectively.  The annual amortization to interest is not material to SJG’s financial statements.

Other Financial Instruments - The carrying amounts of our other financial instruments approximate their fair values at December 31, 2008 and 2007.

9.                 UNUSED LINES OF CREDIT:

Bank credit available to SJG totaled $203.0 million at December 31, 2008, of which $114.6 million was used.  Those bank facilities consist of a $100.0 million credit facility, a $40.0 million line of credit, a $10.0 million line of credit and $53.0 million of uncommitted bank lines.  The $100.0 million and $40.0 million revolving credit facilities expire in August 2011 and December 2009, respectively, and both contain one financial covenant regarding the ratio of total debt to total capitalization, measured on a quarterly basis.  SJG was in compliance with these covenants as of December 31, 2008.  Borrowings under these credit facilities are at market rates.  The weighted average borrowing cost, which changes daily, was 1.06%, 5.30% and 5.71% at December 31, 2008, 2007, and 2006, respectively.

10.                 RETAINED EARNINGS:

We are restricted as to the amount of cash dividends or other distributions that may be paid on our common stock by an order issued by the BPU in July 2004, that granted us an increase in base rates. Per the order, we are required to maintain total common equity of no less than $289.2 million. Our total common equity balance was $401.7 million at December 31, 2008.

Various loan agreements also contain potential restrictions regarding the amount of cash dividends or other distributions that we may pay on our common stock. As of December 31, 2008, these loan restrictions did not affect the amount that may be distributed from our retained earnings.

We received no equity infusions from SJI in 2008, 2007 or 2006.  Future equity contributions will occur on an as needed basis.

11.                 PENSION AND OTHER POSTRETIREMENT BENEFITS:

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

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

				Pension Benefits						Other Postretirement Benefits
	2008			2007			2006			2008			2007			2006
Service Cost	$	2,408		$	2,442		$	2,322		$	605		$	661		$	656
Interest Cost		6,843			6,376			5,988			2,497			2,295			2,279
Expected Return on Plan Assets		(8,394	)		(8,068	)		(7,518	)		(1,995	)		(1,895	)		(1,617	)
Amortizations:
Prior Service Cost (Credits)		239			239			389			(254	)		(254	)		(264	)
Actuarial Loss		1,365			1,624			2,032			677			560			789
Net Periodic Benefit Cost		2,461			2,613			3,213			1,530			1,367			1,843
Capitalized Benefit Costs		(1,073	)		(1,131	)		(1,574	)		(765	)		(648	)		(903	)
Affiliate SERP Allocations		(315	)		(232	)		(247	)		-			-			-
Total Net Periodic Benefit Expense	$	1,073		$	1,250		$	1,392		$	765		$	719		$	940

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

In 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (FAS 158). This statement requires companies with publicly traded equity securities that sponsors a postretirement benefit plan to fully recognize, as an asset or liability, the overfunded or underfunded status of its benefit plans and recognize changes in the funded status in the year in which the changes occur. Changes in funded status are generally reported in Other Comprehensive Loss; however, since we recover all prudently incurred pension and postretirement benefit costs from our ratepayers, a significant portion of the charges resulting from the recording of additional liabilities under this statement are reported as regulatory assets (See Note 3).

The estimated costs that will be amortized from Regulatory Assets into net periodic benefit costs in 2009 are as follows (in thousands):

	Pension Benefits		Other Postretirement Benefits
Prior Service Costs (Credits)	$	232	$	(254	)
Net Actuarial Loss	$	3,754	$	1,616

The estimated costs that will be amortized from Accumulated Other Comprehensive Loss into net periodic benefit costs in 2009 are as follows (in thousands):

	Pension Benefits		Other Postretirement Benefits
Net Actuarial Loss	$	824	$	-

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

							Other
	Pension Benefits						Postretirement Benefits
	2008			2007			2008			2007
Change in Benefit Obligations:
Benefit Obligation at Beginning of Year	$	109,301		$	109,735		$	39,499		$	41,272
Service Cost		2,408			2,442			605			661
Interest Cost		6,843			6,376			2,497			2,295
Actuarial Loss / (Gain)		5,071			(3,188	)		2,947			(1,910	)
Retiree Contributions		-			-			164			147
Benefits Paid		(6,302	)		(6,064	)		(3,224	)		(2,966	)
Benefit Obligation at End of Year	$	117,321		$	109,301		$	42,488		$	39,499
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Year	$	96,541		$	94,603		$	28,284		$	26,274
Actual Return on Plan Assets		(25,384	)		7,172			(8,094	)		1,273
Employer Contributions		5,733			830			3,535			3,556
Retiree Contributions		-			-			164			147
Benefits Paid		(6,302	)		(6,064	)		(3,224	)		(2,966	)
Fair Value of Plan Assets at End of Year	$	70,588		$	96,541		$	20,665		$	28,284

Funded Status at End of Year:
Accrued  Net Benefit Cost at End of Year	$	(46,733	)	$	(12,760	)	$	(21,823	)	$	(11,215	)
Amounts Recognized in the Statement
of Financial Position Consist of:
Noncurrent Asset	$	-		$	1,472		$	-		$	-
Current Liabilities		(991	)		(765	)		-			-
Noncurrent Liabilities		(45,742	)		(13,467	)		(21,823	)		(11,215	)
Net Amount Recognized at End of Year	$	(46,733	)	$	(12,760	)	$	(21,823	)	$	(11,215	)
Amounts Recognized in Regulatory Assets
Consist of:
Prior Service Costs (Credit)	$	1,381		$	1,620		$	(723	)	$	(977	)
Net Actuarial Loss		54,393			18,913			23,599			11,240
	$	55,774		$	20,533		$	22,876		$	10,263
Amounts Recognized in Accumulated Other
Comprehensive Loss Consist of:
Net Actuarial Loss	$	9,212		$	7,208		$	-		$	-

SJG - 47

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

							Accumulated Other
	Regulatory Assets						Comprehensive Loss  (pre-tax)
				Other						Other
	Pension			Postretirement			Pension			Postretirement
	Benefits			Benefits			Benefits			Benefits
Balance at December 31, 2006	$	25,235		$	11,856		$	6,661		$	-
Amounts Arising during the Period:
Net Actuarial (Gain) Loss		(3,495	)		(1,287	)		1,203			-
Amounts Amortized to Net Periodic Costs:
Net Actuarial Loss		(968	)		(560	)		(656	)		-
Prior Service (Cost) Credit		(239	)		254			-			-
Balance at December 31, 2007	$	20,533		$	10,263		$	7,208		$	-
Amounts Arising during the Period:
Net Actuarial Loss		36,171			13,036			2,678			-
Amounts Amortized to Net Periodic Costs:
Net Actuarial Loss		(691	)		(677	)		(674	)		-
Prior Service (Cost) Credit		(239	)		254			-			-
Balance at December 31, 2008	$	55,774		$	22,876		$	9,212		$	-

The projected benefit obligation (PBO) and accumulated benefit obligation (ABO) of our qualified employee pension plans were $100.2 million and $90.8 million, respectively, as of December 31, 2008, and $95.1 million and $85.7 million, respectively, as of December 31, 2007. The ABO of these plans exceeded the value of the plan assets as of December 31, 2008.  The value of these assets can be seen in the tables above. The PBO and ABO for our non-funded SERP, which had accumulated benefits in excess of plan assets, were $17.1 million and $16.7 million, respectively, as of December 31, 2008, and $14.2 million and $13.6 million, respectively, as of December 31, 2007. The SERP is reflected in the tables above and has no assets.

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

	Pension Benefits						Other Postretirement Benefits
	2008			2007			2008			2007
Discount Rate		6.24	%		6.36	%		6.24	%		6.36	%
Rate of Compensation Increase		3.60	%		3.60	%		-			-

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

	Pension Benefits									Other Postretirement Benefits
	2008			2007			2006			2008			2007			2006
Discount Rate		6.36	%		6.04	%		5.84	%		6.36	%		6.04	%		5.84	%
Expected Long-Term Return on Plan Assets		8.50	%		8.75	%		8.75	%		7.00	%		7.25	%		7.25	%
Rate of Compensation Increase		3.60	%		3.60	%		3.60	%		-			-			-

The discount rates used to determine the benefit obligations at December 31, 2008 and 2007, which are used to determine the net periodic benefit cost for the subsequent year, were based on a portfolio model of high-quality instruments with maturities that match the expected benefit payments under our pension and other postretirement benefit plans.

SJG - 48

The expected long-term return on plan assets was based on SJI’s current investment mix as described under Plan Assets below.

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

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

	2008			2007
Medical Care and Drug Cost Trend Rate Assumed for Next Year	9.0		%	10.0	%
Dental Care Cost Trend Rate Assumed for Next Year		6.33	%	6.33	%
Rate to which Cost Trend Rates are Assumed to Decline
(the Ultimate Trend Rate)		5.0	%	5.0	%
Year that the Rate Reaches the Ultimate Trend Rate		2012		2012

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

	1-Percentage-			1-Percentage-
	Point Increase			Point Decrease
Effect on the Total of Service and Interest Cost		$	66		$	(60	)
Effect on Postretirement Benefit Obligation			1,105			(986	)

Plan Assets - SJG’s weighted-average asset allocations at December 31, 2008 and 2007, by asset category are as follows:

							Other
	Pension Benefits						Postretirement Benefits
	2008			2007			2008			2007
Asset Category:
U.S. Equity Securities		47	%		50	%		39	%		47	%
International Equity Securities		12			15			12			15
Fixed Income		41			35			49			38
Total		100	%		100	%		100	%		100	%

Based on the investment objectives and risk tolerances stated in SJI’s current pension and other postretirement benefit plans’ investment policy and guidelines, the long-term asset mix target considered appropriate is within the range of 58% to 68% equity and 32% to 42% fixed-income investments. However, due to dramatic decline in the equity markets in the latter part of 2008, this allocation policy was suspended to prevent further transfer of fixed income assets into equities.  Upon indication that the equity markets are in recovery, this policy will be revisited. Historical performance results and future expectations suggest that equities will provide higher total investment returns than fixed-income securities over a long-term investment horizon.

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

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

			Other
	Pension Benefits		Postretirement Benefits
2009	$	6,475	$	3,694
2010	$	6,592	$	3,791
2011	$	6,767	$	3,671
2012	$	6,983	$	3,651
2013	$	7,325	$	3,617
2014 -2018	$	42,460	$	18,037

Contributions - We made a contribution of approximately $4.8 million to our employee pension plan in 2008.   While SJG has no obligation to make a contribution in 2009, we currently expect to make a contribution in order to improve the funded status of the plans and mitigate the expected increase in expense in 2009. Payments related to the unfunded SERP plan are expected to approximate $1.0 million in 2009. We also have a regulatory obligation to contribute approximately $3.6 million annually to our other postretirement benefit plans’ trusts, less costs incurred directly by us.

Defined Contribution Plan - We also offer an Employees’ Retirement Savings Plan (Savings Plan) to eligible employees. We match 50% of participants’ contributions up to 6% of base compensation. For employees who are not eligible for participation in SJI’s defined benefit plan, we match 50% of participants’ contributions up to 8% of base compensation. Employees not eligible for the pension plans also receive a year-end contribution of $500 if fewer than 10 years of service, or $1,000 if 10 or more years of service. The amount expensed and contributed for the matching provision of the Savings Plan approximated $0.7 million in each of the years 2008 and 2007, and 2006.

12.                 COMMITMENTS AND CONTINGENCIES:

Standby Letter Of Credit - SJG provided a $25.3 million letter of credit, under a separate credit facility from those it borrows under to provide liquidity support for the remarketing of variable-rate demand bonds issued through the NJEDA. The bonds were used to finance the expansion of SJG’s natural gas distribution system as discussed in Note 7.  This letter of credit expires in August 2009.

Gas Supply Related Contracts - In the normal course of conducting business, we have entered into long-term contracts for natural gas supplies, firm transportation and gas storage service. The earliest that any of these contracts expires is March 2009. However, discussions are taking place to extend the referenced agreement. The transportation and storage service agreements between us and our interstate pipeline suppliers were made under FERC approved tariffs. Our cumulative obligation for demand charges and reservation fees paid to suppliers for these services is approximately $4.0 million per month and is recovered on a current basis through the BGSS.

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

Collective Bargaining Agreements  - Unionized personnel represent 67% of our workforce at December 31, 2008. The Company has collective bargaining agreements with two unions who represent these employees: the International Brotherhood of Electrical Workers (“IBEW”) and the International Association of Machinists and Aerospace Workers (“IAM”).  The Company and the IBEW have recently agreed to a new 4-year contract.  The IAM is asserting that the labor agreement, which the Company believes expired on January 14, 2009, is evergreen for one year from that expiration date.  The Company has filed a charge with the National Labor Relations Board for a determination on the matter and we await the Board’s decision.

SJG - 50

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

We successfully entered into settlements with all of our historic comprehensive general liability carriers regarding the environmental remediation expenditures at our sites. Also, we have purchased a Cleanup Cost Cap Insurance Policy limiting the amount of remediation expenditures that we will be required to make at 11 of our sites. This policy will be in force until 2024 at 10 sites and until 2029 at one site. The future cost estimates discussed hereafter are not reduced by projected insurance recoveries from the Cleanup Cost Cap Insurance Policy. The policy is limited to an aggregate payment amount of $50.0 million, of which we have recovered $23.7 million through December 31, 2008.

Since the early 1980s, we accrued environmental remediation costs of $211.2 million, of which $148.1 million has been spent as of December 31, 2008. The following table details the amounts accrued and expended for environmental remediation at December 31 (in thousands):

	2008			2007
Beginning of Year	$	73,880		$	67,794
Accruals		14,622			18,666
Expenditures		(24,409	)		(12,580	)
End of Year	$	64,093		$	73,880

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

Management estimates that undiscounted future costs to clean up our sites will range from $64.1 million to $235.1 million. We recorded the lower end of this range, $64.1 million, as a liability because a single reliable estimation point is not feasible due to the amount of uncertainty involved in the nature of projected remediation efforts and the long period over which remediation efforts will continue. Six of our sites comprise the majority of these estimates, ranging from a low of $49.0 million to a high of $172.4 million. Recorded amounts include estimated costs based on projected investigation and remediation work plans using existing technologies. Actual costs could differ from the estimates due to the long-term nature of the projects, changing technology, government regulations and site-specific requirements. Significant risks surrounding these estimates include unforeseen market price increases for remedial services, property owner acceptance of remedy selection, regulatory approval of selected remedy and remedial investigative findings.

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

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

Site 2 - Various remedial investigation and action activities, such as completed and approved interim remedial measures and conceptual remedy selection, are ongoing at this site. Remaining steps to remediate include remedy selection, regulatory approval, and implementation for the remaining impacted soil, groundwater, and ongoing implementation of the approved remedy for stream sediments as well as acceptance of the selected remedy by affected property owners.

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

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

SJG - 51

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

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

13.            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 December 31, 2008 is as follows (in thousands):

	Total		Level 1		Level 2		Level 3
Assets -
Available-for-Sale Securities (A)	$	4,841	$	4,841	$	-	$	-
Derivatives – Energy Related Assets (B)		395		360		35		-
	$	5,236	$	5,201	$	35	$	-
Liabilities -
Derivatives – Energy Related Liabilities (B)	$	29,365	$	28,845	$	520	$	-
Derivatives – Other (C)		7,578		-		7,578		-
	$	36,943	$	28,845	$	8,098	$	-

(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 - 52

14. AVAILABLE–FOR–SALE SECURITIES:

The Company's portfolio of investments consists of five highly diversified funds which are not used for working capital purposes. These funds are in an unrealized loss position as of December 31, 2008. Due to the nature of the underlying securities, these funds as a whole are susceptible to changes in the economy and have been adversely affected by the economic slowdown, particularly during the fourth quarter of 2008 when the Company's investments became impaired. The Company has evaluated the near-term prospects of the overall funds in relation to the severity and duration of the impairment. Based on that evaluation, the Company recorded an insignificant impairment loss during the fourth quarter of 2008. Due to the Company's ability and intent to hold the remaining funds for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these remaining investments to be other-than-temporarily impaired at December 31, 2008.

The following table shows the gross unrealized losses and fair value of the Company's Available-for-Sale Securities with unrealized losses that are not deemed to be other-than-temporarily impaired (in thousands), aggregated by length of time that the individual funds have been in a continuous unrealized loss position at December 31, 2008.

	Less than 12 Months		Greater Than 12 Months		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Marketable Equity Securities	$3,609	$1,218	$0	$0	$3,609	$1,218

15. QUARTERLY RESULTS OF OPERATIONS - UNAUDITED:

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

	2008 Quarter Ended										2007 Quarter Ended
	March 31		June 30		Sept. 30			Dec. 31			March 31		June 30		Sept. 30			Dec. 31
Operating Revenues	$	237,904	$	93,571	$	64,563		$	172,008		$	277,864	$	95,996	$	84,420		$	172,267
Expenses:
Cost of Sales		162,917		60,263		41,201			119,022			205,544		63,848		62,223			121,419
Operation and Maintenance
Including Fixed Charges		28,257		26,134		25,408			28,737			26,667		23,890		24,071			29,052
Income Taxes (Benefit)		17,530		2,482		(1,306	)		7,802			16,870		2,839		(1,278	)		8,221
Energy and Other Taxes		4,357		1,711		1,356			3,203			4,624		1,872		1,307			3,026
Total Expenses		213,061		90,590		66,659			158,764			253,705		92,449		86,323			161,718
Other Income and Expense		170		457		242			(410	)		100		356		157			1,060
Net Income (Loss) Applicable
to Common Stock	$	25,013	$	3,438	$	(1,854	)	$	12,834		$	24,259	$	3,903	$	(1,746	)	$	11,609
NOTE: Because of the seasonal nature of our business, statements for the 3-month periods are not indicative of the results for a full year.

SJG - 53

Item 9. Changes in and Disagreements with Accountants on

Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2008. Based on that evaluation, the Company’s chief executive officer and chief financial officer concluded that the disclosure controls and procedures employed at the Company are effective.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Exchange Act Rules 13a-15(f). The Company’s internal control system is designed to provide reasonable assurance to its management and board of directors regarding the preparation and fair presentation of published financial statements.Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation under that framework, management concluded that our internal control over financial reporting was effective as of December 31, 2008.

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

Changes in Internal Control over Financial Reporting

There has not been any change in the Company's internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the fiscal quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 

Item 9B. Other Information

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

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

Item 11. Executive Compensation

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

Item 12. Security Ownership of Certain Beneficial Owners and Management

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

Item 13. Certain Relationships and Related Transactions

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

SJG - 54

Item 14. Principal Accounting Fees and Services

 Fees Paid to Auditors

Deloitte & Touche LLP served as the auditors of SJG and its parent, SJI, during 2008. In accordance with its charter, the Audit Committee pre-approved all services provided by Deloitte & Touche LLP. Audit services performed consisted of the audits of the financial statements and the preparation of various reports based on those audits and services related to filings with the United States Securities and Exchange Commission and New York Stock Exchange.

Audit Fees

The aggregate fees billed for the audit of SJG’s financial statements by Deloitte & Touche LLP totaled $356,000 and $320,000 in fiscal years 2008 and 2007, respectively.

Audit-Related Fees

None.

Tax Fees

None.

All Other Fees

None.

PART IV

Item 15. Exhibits and Financial Statement Schedule

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

1 - The financial statements and notes to financial statements together with the report thereon of Deloitte & Touche LLP, March 2, 2009. See Item 8.

            2  - Supplementary Financial Information

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

Schedule II - Valuation and Qualifying Accounts. See page 61.

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

SJG - 55

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

Exhibit Number	Description	Reference
(3)(a)	Certificate of Incorporation of South Jersey Gas Company.	Incorporated by reference from Exhibit (3)(a) of Form 10-K filed March 7, 1997.
(3)(b)	Bylaws of South Jersey Gas Company, as amended and restated through April 18, 2008 (filed herewith).
(4)(a)	Form of Stock Certificate for Common Stock.	Incorporated by reference from Exhibit (4)(a) of Form 10  filed March 7, 1997.
(4)(b)(i)	First Mortgage Indenture dated October 1, 1947.	Incorporated by reference from Exhibit (4)(b)(i) of  Form 10-K of SJI for 1987 (1-6364).
(4)(b)(ii)	Nineteenth Supplemental Indenture dated as of April 1, 1992.	Incorporated by reference from Exhibit (4)(b)(xvii) of Form 10-K of SJI for 1992 (1-6364).
(4)(b)(iii)	Twenty-First Supplemental Indenture dated as of March 1, 1997.	Incorporated by reference from Exhibit (4)(b)(xviv) of Form 10-K of SJI for 1997 (1-6364).
(4)(b)(iv)	Twenty-Second Supplemental Indenture dated as of October 1, 1998.	Incorporated by reference from Exhibit (4)(b)(ix) of  Form S-3 (333-62019).
(4)(b)(v)	Twenty-Third Supplemental Indenture dated as of September 1, 2002.	Incorporated by reference from Exhibit (4)(b)(x) of Form S-3 (333-98411).
(4)(b)(vi)	Twenty-Fourth Supplemental Indenture dated as of September 1, 2005.	Incorporated by reference from Exhibit (4)(b)(vi) of Form S-3 (333-126822).
(4)(b)(vii)	Amendment to Twenty-Fourth Supplemental Indenture dated as of March 31, 2006.	Incorporated by reference from Exhibit 4 of Form 8-K as filed April 26, 2006.
(4)(b)(viii)	Loan Agreement by and between New Jersey Economic Development Authority as SJG dated April 1, 2006.	Incorporated by reference from Exhibit 10 of Form 8-K of SJG as filed April 26, 2006.
(4)(c)(i)	Medium Term Note Indenture of Trust dated October 1, 1998.	Incorporated by reference from Exhibit (4)(e) of Form S-3 (333-62019).
(4)(c)(ii)	First Supplement to Indenture of Trust dated as of June 29, 2000.	Incorporated by reference from Exhibit 4.1 of Form 8-K of SJG dated July, 12, 2001.
(4)(c)(iii)	Second Supplement to Indenture of Trust dated as of July 5, 2000.	Incorporated by reference from Exhibit 4.2 of Form 8-K of SJG dated July, 12, 2001.
(4)(c)(iv)	Third Supplement to Indenture of Trust dated as of July 9, 2001.	Incorporated by reference from Exhibit 4.3 of Form 8-K of SJG dated July, 12, 2001.

SJG - 56

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

SJG - 57

Exhibit Number	Description	Reference
(10)(h)(i)*	Deferred Payment Plan for Directors of South Jersey Industries, Inc., South Jersey Gas Company, Energy & Minerals, Inc., R&T Group, Inc. and South Jersey Energy Company as amended and restated October 21, 1994.	Incorporated by reference from Exhibit (10)(l) of Form 10-K of SJI for 1994 (1-6364).
(10)(h)(ii)*	Schedule of Deferred Compensation Agreements.	Incorporated by reference from Exhibit (10)(l)(b)  of Form 10-K of SJI for 1997 (1-6364).
(10)(h)(iii)*	Supplemental Executive Retirement Program, as amended and restated effective July 1, 1997, and Form of Agreement between certain South Jersey Industries, Inc. or subsidiary Company officers.	Incorporated by reference from Exhibit (10)(l)(i)  of Form 10-K of SJI for 1997  (1-6364).
(10)(h)(iv)*	Form of Officer Employment Agreement between certain officers and either South Jersey Industries, Inc. or its subsidiaries.	Incorporated by reference from Exhibit (10)(e)(iii) of Form 10-K of SJI for 2008 (1-6364).
(10)(h)(v)*	Schedule of Officer Employment Agreements.	Incorporated by reference from Exhibit (10)(e)(iv) of Form 10-K of SJI for 2008.
(10)(h)(vi)*	Officer Severance Benefit Program for all officers.	Incorporated by reference from Exhibit (10)(l)(g) of Form 10-K of SJI for 1985 (1-6364).
(10)(i)(i)	Five-year Revolving Credit Agreement for SJG.	Incorporated by reference from Exhibit 10 of Form 8-K as filed on August 8, 2006.
(10)(i)(ii)	Loan Agreement between Toronto Dominion (New York) LLC and SJG dated December 15, 2008 ( filed herewith).
(12)	Calculation of Ratio of Earnings to Fixed Charges (Before Federal Income Taxes) (filed herewith).
(14)	Code of Ethics	Incorporated by reference from Exhibit (14) of Form 10-K of SJI as filed for 2007.
(21)	Subsidiaries of the Registrant (filed herewith).
(23)	Independent Registered Public Accounting Firm’s Consent  (filed herewith).

SJG - 58

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

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

SJG - 59

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SOUTH JERSEY GAS COMPANY

                                                                                 BY: /s/ David A. Kindlick                                   

                            David A. Kindlick, Senior Vice President &

                            Chief Financial Officer

                            Date: March 4, 2009

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

Signature		Title	Date
/s/ Edward J. Graham		Chairman of the Board, President & Chief Executive Officer	March 4, 2009
(Edward J. Graham)		(Principal Executive Officer)
/s/ David A. Kindlick		Senior Vice President & Chief Financial Officer	March 4, 2009
(David A. Kindlick)		(Principal Financial and Accounting Officer)
/s/ Richard H. Walker, Jr.		Senior Vice President, General Counsel & Secretary	March 4, 2009
(Richard H. Walker, Jr.)
/s/ Shirli M. Billings		Director	March 4, 2009
(Shirli M. Billings)
/s/ Thomas A. Bracken	Director			March 4, 2009
(Thomas A. Bracken)
/s/ Sheila Hartnett-Devlin	Director			March 4, 2009
(Sheila Hartnett-Devlin)
/s/ William J. Hughes	Director			March 4, 2009
(William J. Hughes)
/s/ Frederick R. Raring	Director			March 4, 2009
(Frederick R. Raring)

SJG - 60

SOUTH JERSEY GAS COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Col. A	Col. B		Col. C					Col. D		Col. E
			Additions
	Balance at		Charged to		Charged to					Balance at
	Beginning		Costs and		Other Accounts -			Deductions -		End
Classification	of Period		Expenses		Describe (a)			Describe (b)		of Period
Provision for Uncollectible
Accounts for the Year Ended
December 31, 2008	$	3,265	$	2,281	$	279		$	2,197	$	3,628
Provision for Uncollectible
Accounts for the Year Ended
December 31, 2007	$	2,741	$	2,672	$	725		$	2,873	$	3,265
Provision for Uncollectible
Accounts for the Year Ended
December 31, 2006	$	3,461	$	1,284	$	(428	)	$	1,576	$	2,741
(a) Recoveries of accounts previously written off and minor adjustments.
(b) Uncollectible accounts written off.

SJG - 61

EX-3

Exhibit (3)(b)

BYLAWS

(AMENDED AND RESTATED THROUGH APRIL 18, 2008)

SOUTH JERSEY GAS COMPANY

ARTICLE I

SHAREHOLDERS

Section 1.  Annual Meeting.  An annual meeting of the shareholders for the election of Directors and for other business shall be held on the next to the last Thursday in April of each year, if not a legal holiday, and if a legal holiday, then on the first day following which is not a legal holiday, or on such other day as may be designated by the Board of Directors.

Section 2.  Special Meetings.  At any time in the interval between annual meetings, special meetings of the shareholders may be called by the Chairman of the Board, the President or by a majority of the Board of Directors by vote at a meeting or in writing with or without a meeting, or may be called by three or more shareholders having voting powers as provided for under the Corporation Law of the State of New Jersey.

Section 3.  Notice of Meetings.  Written or printed notice of every meeting of the shareholders shall be given to each shareholder entitled to vote at such meeting, not less than ten days before such meeting, by the Chairman of the Board, the President or any Vice President, or by the Secretary or any Assistant Secretary, by leaving the same with him or at his residence or usual place of business, or by mailing it, postage prepaid and addressed to him at his address as it appears upon the books of the Company on the record date for such meeting, as provided in Section 3 of Article V of these Bylaws.  In the event of the transfer of stock after the giving of such notice and prior to the holding of the meeting, it shall not be necessary to give notice of the meeting to the transferee.  Notice of every special meeting shall state the place, day, and hour of such meeting and the general nature of the business proposed to be transacted thereat.  Failure to give notice of any annual meeting or any irregularity in such notice shall not affect the validity of such annual meeting or of any proceedings at such meeting (other than proceedings of which special notice is required by law, by the Charter, or by the Bylaws).  It shall not be requisite to the validity of any meeting of shareholders that notice thereof, whether prescribed by law, by the Charter or by the Bylaws, shall have been given to any shareholder who attends in person or by proxy, or to any shareholder who in writing, executed and filed with the records of the meeting either before or after the holding thereof, waives such notice.  No notice other than by oral announcement need be given of any adjourned meetings of shareholders.

Section 4.  Quorum.  At all meetings of shareholders, a majority of the outstanding shares of capital stock entitled to vote, represented by shareholders in person or by proxy, shall constitute a quorum for the transaction of business; but in the absence of a quorum the shareholders present in person or by proxy at the time and place fixed by Section 1 of this Article I for an annual meeting, or designated in the notice of a special meeting, or at the time and place of any adjournment thereof, by majority vote may adjourn the meeting from time to time without notice other than by oral announcement at the meeting, until a quorum shall attend.  At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the original meeting.

Section 5.  Judges of Election.  Judges of election, who need not be shareholders, shall be appointed by the Board of Directors for any meeting of shareholders for the election of directors and may be so appointed for any other meeting of shareholders.  In case any of the judges of election shall be absent or unable or unwilling to serve, all such vacancies may be filled by appointment made by the Board of Directors in advance of the convening of the meeting, or at the meeting by the person acting as chairman.  Every election of directors shall be conducted by ballot by two judges and, after the election, they shall file with the Secretary a certificate of the results thereof, with the names of the directors elected.  The judges of election, at the request of the chairman of the meeting, shall act as tellers of any other vote by ballot taken at the meeting and shall certify the result thereof.

Section 6.  Voting and Proxies.  Any shareholder having the right to vote at any meeting shall be entitled to one vote for each share of stock held by him, provided that, at all meetings for the election of directors, each shareholder entitled to vote thereat shall be entitled to as many votes as shall equal the number of shares held by him, multiplied by the number of directors to be elected, and each such shareholder may cast all of such votes for a single director or may distribute them among the total number of directors to be voted for, or among any two or more of such directors as such shareholder may see fit. Any shareholder entitled to vote at any meeting of shareholders may vote either in person or by proxy, but no proxy which is dated more than two months prior to the meeting at which it is offered shall confer the right to vote thereat.  Every proxy shall be in writing, subscribed by a shareholder or his duly authorized attorney in fact, and dated, but need not be sealed, witnessed, or acknowledged.

Section 7.  List of Shareholders.  A complete list of the shareholders entitled to vote at the annual meeting of the shareholders or at any special meeting of shareholders, arranged in alphabetical order, with the mailing address of each according to the records of the Company and the number of voting shares held by each, shall be prepared by the Secretary or any Assistant Secretary and filed in the office where the meeting is to be held, at least ten days before each meeting of shareholders, shall be subject to inspection by any shareholder during usual business hours, shall be produced and kept open at the time and place of meeting, and shall be subject to the inspection of any shareholder during the whole time of the meeting.

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ARTICLE II

BOARD OF DIRECTORS

Section 1. Election and Powers.  The business and property of the Company shall be conducted and managed by its Board of Directors, consisting of (6) six directors, which Board may exercise all the powers of the Company except such as are by statute, by the Charter, or by these Bylaws conferred upon or reserved to the shareholders.  The members of the Board of Directors shall be elected by the shareholders at their annual meeting or at any meeting held in lieu thereof, except as provided in Section 8 of this Article II.  Each director shall hold office until the annual meeting held next after his or her election and until his or her successor shall have been duly chosen and qualified, or until he or she shall have resigned, or shall have been removed in the manner provided in Section 10 of this Article II.  The Board of Directors shall keep full and fair account of its transactions.

Section 2.  First Regular Meeting.  After each meeting of shareholders at which a Board of Directors shall have been elected, the Board of Directors so elected shall meet at the same place immediately following adjournment of the shareholders' meeting for the purpose of organization and the transaction of other business, unless some other time and place shall be designated by the shareholders at their meeting.

Section 3.  Additional Regular Meetings.  In addition to the first regular meeting, regular meetings of the Board of Directors shall be held on such dates as may be fixed, from time to time, by the Board of Directors, or by a majority of the directors in writing without a meeting.

Section 4.  Special Meetings.  Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, the President or by the Board of Directors or by a majority of the Board of Directors in writing, with or without a meeting.

Section 5.  Place of Meetings.  Subject to the provisions of Section 2 of this Article II, the Board of Directors may hold its regular and special meetings at such place or places within or without the State of New Jersey as it may, from time to time, determine.  In the absence of any such determination, such regular and special meetings of the Board of Directors shall be held at such places as may be designated in the calls therefor.

Section 6.  Notice of Meetings.  Notice of the place, day and hour of every meeting shall be given to each director at least two days before the meeting, by delivering the same to him personally, or by sending the same to him by telegraph, or by leaving the same at his residence or usual place of business, or, in the alternative, upon three days' notice, by mailing it, postage prepaid, and addressed to him at his last known mailing address, according to the records of the Company.  It shall not be requisite to the validity of any meetings of the Board of Directors, that notice thereof shall have been given to any director who attends, or to any director who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice.  No notice other than by oral announcement need be given of any adjourned meetings of the Board of Directors.  All regular meetings of the Board of Directors shall be general meetings, that is to say, open for the transaction of any business within the powers of the Company without special notice

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of such business, except in cases in which special notice is required by law, by the Charter, by these Bylaws, or by the call of such meeting.

Section 7. Quorum.  At all meetings of the Board of Directors, a majority of the total number of the directors shall constitute a quorum for the transaction of business. Except in cases in which it is by law, by the Charter, or by these Bylaws otherwise provided, a majority of such quorum shall decide any questions that may come before the meeting. In the absence of a quorum, the directors present by majority vote may adjourn the meeting from time to time without notice other than by oral announcement at the meeting until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified.

Section 8.  Vacancies.  Vacancies occurring in the Board of Directors, through any cause other than removal by the shareholders, including vacancies created by an increase in the number of directors, may be filled by the vote of a majority of the remaining directors.

Section 9.  Compensation.  The directors may be compensated for their services on an annual basis and/or they may receive a fixed sum for attendance at each regular or special meeting and every adjournment thereof; such compensation or fixed sum to be fixed from time to time by resolution by the Board of Directors.  The directors shall be reimbursed for all reasonable traveling expenses incurred in attending meetings.  Directors who are employees of the Company shall not receive compensation for their services as directors; but nothing in this Section shall preclude any director from serving the Company in any other capacity and receiving compensation therefor.

Section 10. Removal.  At any meeting of the shareholders called for the purpose, any director may, by vote of the shareholders entitled to cast a majority in number of all the votes, be removed from office, with or without cause, and another be elected in the place of the person so removed, to serve for the remainder of his term.

ARTICLE III

COMMITTEES

Section 1.  Executive Committee.  The Board of Directors, by resolution adopted by a majority of the whole Board of Directors, may designate an Executive Committee of three or more directors and shall appoint one of the directors so designated to be Chairman of the Executive Committee.  The Chief Executive Officer of the Company shall be ex officio a member of the Executive Committee.  The Executive Committee shall formulate policies to be followed in planning and conducting the business and affairs of the Company.  During the intervals between the meetings of the Board of Directors, the Executive Committee shall have and may exercise all the powers of the Board of Directors in the management of the business and affairs of the Company conferred by these Bylaws or otherwise.  The Executive Committee shall keep full and fair account of its transactions.  All action by the Executive Committee shall be reported to the Board of Directors at its meeting next succeeding such action, and shall be subject to revision and alteration by the Board of Directors;

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provided that no rights of third persons shall be affected by any such revision or alteration.  Vacancies in the Executive Committee shall be filled by the Board of Directors.

Section 2.  Compensation.  Members of the Executive Committee may be compensated for their services on an annual basis and/or they may receive a fixed sum for attendance at each meeting of the Executive Committee and every adjournment thereof; such compensation or fixed sum to be fixed from time to time by resolution of the Board of Directors.  The members of the Executive Committee shall be reimbursed for all reasonable traveling expenses incurred in attending meetings.  Members of the Executive Committee who are employees of the Company shall not receive compensation for their services as members of such Committee; but nothing in this Section shall preclude a member of the Executive Committee from serving the Company in any other capacity and receiving compensation therefor or shall preclude the Chairman of the Executive Committee from receiving compensation for his services as such Chairman.

Section 3.  Meetings of the Executive Committee.  The Executive Committee shall fix its own rules of procedure and shall meet as provided by such rules or by resolution of the Board of Directors, and it shall also meet at the call of the Chairman of the Executive Committee or any two members of the Committee.  Unless otherwise provided by such rules or by such resolutions, the provisions of Section 5 and Section 6 of Article II relating to the place of holding and notice required of meetings of the Board of Directors shall govern the Executive Committee.  A majority of the Executive Committee shall be necessary to constitute a quorum.

Section 4.  Other Committees.  The Board of Directors may by resolution designate such other standing or special committees as it deems desirable and discontinue the same at pleasure.  Each such committee shall have such powers and perform such duties, not inconsistent with law, as may be assigned to it by the Board of Directors.

ARTICLE IV

OFFICERS

Section 1.  Executive Officers. The Executive Officers of the Company shall be a President, one or more Vice Presidents (one or more of whom may be designated as Executive Vice President or Senior Vice President), a Secretary, a Treasurer, and a Controller.  The Board of Directors may also designate the Chairman of the Board as an Executive Officer, which designation may be cancelled by the Board at any time.  The Executive Officers shall be elected annually by the Board of Directors at its first meeting following the annual meeting of the shareholders and each such Officer shall hold office until the corresponding meeting in the next year and until his successor shall have been duly chosen and qualified, or until he shall have resigned or shall have been removed, in the manner provided in Section 12 of this Article IV.  Whether or nor the Chairman of the Board has been designated as an Executive Officer, he shall be elected and hold office as set forth in the preceding sentence.  Any vacancy in any of the above-mentioned offices may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting.

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Section 2. Chairman of the Board.  The Chairman of the Board shall have such powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors.  He may, from time to time, delegate to any other Officer such powers and such duties as he deems advisable.  The Chairman of the Board shall preside at all meetings of the Board of Directors and shareholders at which he is present (except as he may request the President to so preside).  If the Chairman of the Board is designated as the Chief Executive Officer, he shall have the powers and duties of the Chief Executive Officer referred to in the next section of these Bylaws.

Section 3.  President.  The President shall be the Chief Executive Officer, unless the Board of Directors designates the Chairman of the Board as the Chief Executive Officer.  As Chief Executive Officer, the President shall carry out policies adopted or approved by the Board of Directors and shall have general charge and supervision of the business of the Company, subject to the control of the Board of Directors.  The President, if not designated the Chief Executive Officer, shall have such powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors or by the Chief Executive Officer.

Section 4. Vice Presidents.  At the request of the President, or in his absence or disability, any Vice President shall perform all the duties of the President, and when so acting shall have the powers of the President, unless otherwise determined by the Board of Directors.  Each Vice President shall also have and exercise such powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors or the Chief Executive Officer.

Section 5.  Secretary.  The Secretary shall record the proceedings of the meetings of the Board of Directors and, if so directed, of the Executive Committee, in books provided for that purpose; he shall see that all notices of meetings of the Directors are duly given in accordance with the provisions of these Bylaws, or as required by law; he shall be custodian of the Directors' minutes and of the corporate seal or seals of the Company; he shall see that the corporate seal is affixed to all documents, the execution of which, on behalf of the Company, under its seal, is duly authorized, and when so affixed may attest the same; and, in general, he shall perform all duties incident to the office of a Secretary of a corporation, and such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer.

Section 6.  Treasurer.  The Treasurer shall serve as the chief financial officer and shall have charge of and be responsible for procuring capital and maintaining financial arrangements as shall from time to time, be selected by the Board of Directors; he shall manage the level of funds deposited in banks, trust companies, or other depositories so as to minimize the cost of borrowing such funds as shall be periodically required and to maximize the return on the investment of Company funds as shall from time to time, be available; and, in general, he shall perform all the duties incident to the office of a Treasurer of a corporation, and such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer.

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Section 7. Controller.  The Controller shall serve as the chief accounting officer and shall have charge of the accounting books and records of the Company; he shall render to the Chief Executive Officer and to the Board of Directors, whenever requested, an account of the financial condition of the Company; he shall have charge of and be responsible for the receipt and disbursement of all funds of the Company and shall deposit or cause to be deposited, in the name of the Company, all moneys or valuable effects in such banks, trust companies, or other depositories as shall from time to time be selected by the Board of Directors; and, in general, he shall perform all the duties incident to the duties of a Chief Accounting Officer of a corporation, and such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer.

Section 8.  Assistant Officers.  The Board of Directors may elect one or more Assistant Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers and one or more Assistant Controllers.  Each Assistant Vice President, if any, each Assistant Secretary, if any, each Assistant Treasurer, if any, and each Assistant Controller, if any, shall hold office for such period and shall have such authority and perform such duties as the Board of Directors or the Chief Executive Officer may prescribe.

Section 9.  Subordinate Officers.  The Board of Directors may select such subordinate Officers as it may deem desirable.  Each such Officer shall hold office for such period, have such authority, and perform such duties as the Board of Directors or the Chief Executive Officer may prescribe.  The Board of Directors may, from time to time, authorize any Officer to appoint and remove subordinate Officers and prescribe the powers and duties thereof.

Section 10. Certain Powers of Officers.  Certificates of Stock of the Company shall be signed by the President or any Vice President and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary or the Controller or any Assistant Controller of the Company.  The President may sign and execute in the name of the Company all authorized deeds, mortgages, bonds, contracts, or other instruments, except in cases in which the signing and execution thereof shall have been expressly delegated to some other Officer or Agent of the Company.

Section 11. Officers Holding Two or More Offices.  Any two of the above-mentioned offices, except those of President and Secretary or Assistant Secretary, may be held by the same person, but no officer shall execute, acknowledge, or verify any instrument in more than one capacity, if such instrument be required by Statute, by the Charter, or by these Bylaws, to be executed, acknowledged, or verified by any two or more Officers.

Section 12. Compensation.  The Board of Directors shall have power to fix the compensation of all Officers of the Company.  It may authorize any Officer, upon whom the power of appointing subordinate Officers may have been conferred, to fix the compensation of such subordinate Officers.

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Section 13. Removal.  Any Officer of the Company may be removed, with or without cause, by vote of a majority of the entire Board of Directors at a meeting called for that purpose, or (except in case of an Officer elected by the Board of Directors) by an Officer upon whom such power of  removal may have been conferred.

ARTICLE V

STOCK

Section 1.  Certificates.  Every shareholder shall be entitled to a certificate or certificates of stock of the Company in form prescribed by the Board of Directors, duly numbered and sealed with the corporate seal of the Company, and setting forth the number and kind of shares represented thereby to which each shareholder is entitled.  Such certificates shall be signed by the Chairman of the Board or the President or any Vice President and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary or the Controller or any Assistant Controller of the Company.  The Board of Directors may also appoint one or more Transfer Agents and/or Registrars for its stock of any class or classes and may require stock certificates to be countersigned and/or registered by one or more of such Transfer Agents and/or Registrars.  If certificates of capital stock of the Company are signed by a Transfer Agent and by a Registrar, the signature of the officers of the Company and the seal of the Company thereon may be facsimiles, engraved or printed.  Any provisions of these Bylaws with reference to the signing and sealing of stock certificates shall include, in cases above permitted, such facsimiles.  In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on any such certificate or certificates shall cease to be such officer or officers of the Company, whether because of death, resignation, or otherwise, before such certificate or certificates shall have been delivered by the Company, such certificate or certificates may nevertheless be adopted by the Board of Directors of the Company and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures shall have been used thereon had not ceased to be such officer or officers of the Company.

Section 2.  Transfer of Shares.  The Board of Directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, and registration of certificates of stock.

Section 3.  Record Dates.  The Board of Directors is hereby authorized to fix the time, not exceeding fifty (50) days preceding the date of any meeting of shareholders, or the date for payment of any dividend, or the date for the allotment of rights, or the date when any change, or conversion, or exchange of capital stock shall go into effect, during which the books of the Company shall be closed against transfers of stock; provided, however, that in case of any such closing of the stock transfer books, notice thereof shall be mailed to the shareholders at their last known address as the same appears upon the books of the Company, at least ten (10) days before the closing thereof. In lieu of providing for the closing of the books against transfers of stock as aforesaid, the Board of Directors shall have the authority to fix in advance a date, not exceeding fifty (50) days preceding (1) the date of any meeting

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of shareholders, (2) the date for the payment of any dividend, (3) the date for the allotment of rights, or (4) the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the determination of the shareholders entitled to notice of, or to vote at, any such meeting, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion, or exchange of capital stock, and in such case such shareholders and only such shareholders as shall be shareholders of record on the date so fixed, shall be entitled to such notice of, and to vote at such meeting, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any stock on the books of the Company after any such record date fixed as aforesaid.  In any case in which the Board of Directors does not provide for the closing of the Books against transfer of stock as aforesaid, or fix a record date as aforesaid, the twentieth day preceding the date of the meeting of shareholders, the dividend payment date or the date for the allotment of rights, shall be the record date for the determination of the shareholders entitled to notice of and to vote at such meeting, or to receive such dividends or rights, as the case may be.

Section 4.  Mutilated, Lost or Destroyed Certificates. The holder of any certificate representing shares of stock of the Company shall immediately notify the Company of any mutilation, loss, or destruction thereof, and the Board of Directors may, in its discretion, cause one or more new certificates, for the same number of shares in the aggregate, to be issued to such holder upon the surrender of the mutilated certificate, or in case of loss or destruction of the certificate, upon satisfactory proof of such loss or destruction, and the deposit of indemnity by way of bond or otherwise, in such form and amount and with such sureties or securities as the Board of Directors may require to indemnify the Company against loss or liability by reason of the issuance of such new certificate or certificates, and the failure of such holder to comply with the requirements of this Section 4 shall constitute a waiver by such holder of any right to receive such new certificate or certificates, provided however that no deposit of indemnity, other than personal bond, shall be required for the issuance of one or more new certificates where the value of the number of shares in the aggregate does not exceed $200.00.  The Board of Directors may, in its discretion, refuse to issue such new certificates, save upon the order of some Court having

jurisdiction in such matters.

ARTICLE VI

DIVIDENDS AND FINANCE

Section 1.  Dividends.  Subject to the provisions of the Charter, the Board of Directors may, in its discretion, declare what, if any, dividends shall be paid upon the stock of the Company, or upon any class of such stock.  Except as otherwise provided by the Charter, dividends shall be payable upon such dates as the Board of Directors may designate. Before payment of any dividend there may be set aside out of any funds of the Company available for dividends such sum or sums as the directors, from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Company, or for such other purposes as the directors shall think conducive to the interest of the Company, and the directors may abolish any such reserve in the manner in which it was created.

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Section 2.  Checks, Drafts, Etc.  All checks, drafts, or orders for the payment of money, notes, and other evidences of indebtedness, issued in the name of the Company, shall unless otherwise provided by the Board of Directors, be signed by the Treasurer or an Assistant Treasurer, or the Controller or an Assistant Controller and countersigned by the Chairman of the Board or the President or a Vice President or the Secretary.

Section 3.  Annual Reports.  A report on the affairs of the Company shall be submitted at the annual meeting of the shareholders.  Such statement shall be prepared by such executive officer of the Company as may be designated by the Board of Directors.  If no other executive officer is so designated, it shall be the duty of the Chairman of the Board to prepare such statement.

Section 4.  Fiscal Year.  The fiscal year of the Company shall be the calendar year, unless otherwise provided by the Board of Directors.

ARTICLE VII

INDEMNIFICATION

Section 1.  Right to Indemnification.  The Company shall indemnify any corporate agent against his expenses and liabilities in connection with any proceedings involving the corporate agent by reason of his being or having been such a corporate agent to the extent that (a) such corporate agent is not otherwise indemnified; and (b) the power to do so has been or may be granted by statute; and for this purpose the Board of Directors may, and on request of any such corporate agent shall be required to, determine in each case whether or not the applicable standards in any such statute have been met, or such determination shall be made by independent legal counsel if the Board so directs or if the Board is not empowered by statute to make such determination.

Section 2.  Prepayment of Expenses.  To the extent that the power to do so has been or may be granted by statute, the Company shall pay expenses incurred by a corporate agent in connection with a proceeding in advance of the final disposition of the proceeding upon receipt of an undertaking by or on behalf of such corporate agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified as provided by statute.

Section 3.  Indemnification Not Exclusive.  This indemnification shall not be exclusive of any other rights to which a corporate agent may be entitled, both as to any action in his official capacity or as to any action in another capacity while holding such office, and shall inure to the benefits of the heirs, executors, or administrators of any such corporate agent.

Section 4.  Insurance and Other Indemnification.  The Board of Directors shall have the power to (a) purchase and maintain, at the Company's expense, insurance on behalf of the Company and on behalf of others to the extent that power to do so has been or may be granted by statute and (b) give other indemnification to the extent permitted by law.

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Section 5.  Definitions. As used in this Article,

(a)  "corporate agent" means any person who is or was a Director, officer, employee or agent of the Company and any person who is or was a Director, officer, trustee, employee or agent of any other enterprise, serving as such at the request of the Company, or the legal representative of any such Director, officer, trustee, employee or agent;

(b)  "other enterprises" means any domestic or foreign corporation, other than the Company, and any partnership, joint venture, sole proprietorship, trust or other enterprise

whether or not for profit, served by a corporate agent;

(c)  "expenses" means reasonable costs, disbursements, and counsel fees;

(d)  "liabilities" means amounts paid or incurred in satisfaction of settlements, judgments, fines, and penalties;

(e)  "proceedings" means any pending, threatened or completed civil, criminal, administrative or arbitrative action, suit or proceeding, and any appeal therein and any inquiry or investigation which could lead to such action, suit or proceeding.

ARTICLE VIII

SUNDRY PROVISIONS

Section 1.  Seal.  The Corporate Seal of the Company shall contain within a circle the words "South Jersey Gas Company," and in an inner circle the word "SEAL."  If deemed advisable by the Board of Directors, a duplicate seal or duplicate seals may be provided and kept for the necessary purposes of the Company.

Section 2.  Books and Records.  The Board of Directors may determine from time to time whether and, if allowed, when and under what conditions and regulations, the books and records of the Company, or any of them, shall be open to the inspection of shareholders and the rights of shareholders in this respect are and shall be limited accordingly, except as otherwise provided by Statute.  Under no circumstances shall any shareholder have the right to inspect any book or record or receive any statement for an illegal or improper purpose.

Section 3.  Bonds.  The Board of Directors may require any officer, agent, or employee of the Company to give a bond to the Company, conditioned upon the faithful discharge of his duties, with one or more sureties and in such amount as may be satisfactory to the Board of Directors.

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Section 4.  Voting upon Stock in Other Corporations. Any Stock in other corporations, which may from time to time be held by the Company, may be represented and voted at any meeting of shareholders of such other corporations by the Chairman of the Board, the President or a Vice President of the Company or by proxy executed in the name of the Company by the Chairman of the Board, the President or a Vice President with the corporate seal affixed and attested by the Secretary or an Assistant Secretary.

Section 5.  Amendments.  These Bylaws may be altered or amended at any annual meeting of the shareholders or at any special meeting called for that purpose, by a majority vote of all the shareholders entitled to vote at such meeting, or at any meeting of the Board of Directors, by a majority vote of the directors, provided notice of any such proposed alteration or amendment shall be given in the notice of any such meeting.

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		AMENDMENTS
Article  II	Section 1	Amended February 19, 1959.
Article   I	Section 1	Amended February 19, 1960.
Article   I	Section 1	Amended February 21, 1963.
Article  IV	Section 8	Amended August 19, 1965.
Article   V	Section 1	Amended August 19, 1965.
Article   I	Section 1	Amended June 20, 1968.
Article   I	Section 1	Amended April 16, 1970.
Article  II	Section 1	Amended August 19, 1971.
Article  II	Section 1	Amended June 22, 1972.
Article  II	Section 1	Amended August 23, 1973.
Article  II	Section 1	Amended February 20, 1975.
Article  II	Section 11	Repealed August 21, 1975.
Article VII	Renum. Article VIII	August 21, 1975.
Article VII	Newly added	August 21, 1975.
Article   I	Section 1	Amended December 18, 1975.
Article  II	Section 1	Amended February 19, 1976.
Article  II	Section 1	Amended February 17, 1977.
Article  IV	Section 3-11 renum.	April 21, 1977.
Article  IV	Section 3	Newly added April 21, 1977.
Article  VI	Section 1	Amended April 21, 1977.
Bylaws restated in their entirety.
Article  II	Section 1	Amended February 16, 1978.
Article  II	Section 1	Amended February 15, 1979.
Article  II	Section 1	Amended August 23, 1979.
Article III	Section 1	Amended October 24, 1980.
Article  IV	Section 1, 2 & 3	Amended October 24, 1980.
Article  II	Section 1	Amended April 22, 1981.
Article  II	Section 1	Amended October 23, 1981.
Article  IV	Section 1-12	Amended October 23, 1981.
Article  II	Section 1	Amended January 21, 1983.
Article  II	Section 1	Amended May 22, 1985.
Article  II	Section 1	Amended April 17, 1986.
Article  IV	Section 1 & 6-13	Amended March 18, 1988, effective April 1, 1988.
Article   V	Section 1	Amended March 18, 1988, effective April 1, 1988.
Article  VI	Section 2	Amended March 18, 1988, effective April 1, 1988.
Article  II	Section 1	Amended April 18, 1989, effective April 19, 1989 (Spl. Mtg.)
Article  II	Section 1	Amended October 20, 1989.
Article  II	Section 1	Amended April 19, 1990.
Article  II	Section 1	Amended October 1, 1990.
Article  II	Section 1	Amended April 23, 1992.
Article  II	Section 1	Amended April 22, 1993.
Article  II	Section 1	Amended October 21, 1994.
Article  II	Section 1	Amended April 20, 1995.
Article  II	Section 1	Amended June 21, 1996.
Article  II	Section 1	Amended April 17, 1997.
Article  II	Section 1	Amended April 23, 1998.
Article  II	Section 1	Amended June 19, 1998.
Article  II	Section 1	Amended April 19, 2000.

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Article  II	Section 1	Amended November 16, 2001.
Article  II	Section 1	Amended November 22, 2002, effective January 1, 2003.
Article I	Section 1	Amended November 21, 2003
Article  II	Section 1	Amended April 29, 2004.
Article  II	Section 1	Amended May 25, 2006.
Article  II	Section 1	Amended April 18, 2008.

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EX-10.I.II

Exhibit (10)(i)(ii)

LOAN AGREEMENT

SOUTH JERSEY GAS COMPANY

and

TORONTO DOMINION (NEW YORK) LLC

Dated as of December 15, 2008

TABLE OF CONTENTS
			Page
SECTION I. DEFINITIONS AND INTERPRETATION			1
	1.1	Terms Defined	1
	1.2	Accounting Principles	12
	1.3	Construction	13
SECTION II. THE LOANS			13
	2.1	Revolving Credit – Description:	13
	2.2	[Intentionally Omitted]	13
	2.3	[Intentionally Omitted]	13
	2.4	Loans and Payments:	13
	2.5	Interest:	14
	2.6	Additional Interest Provisions:	15
	2.7	Fees and Charges:	16
	2.8	Prepayments	16
	2.9	[Intentionally Omitted]	16
	2.10	Capital Adequacy	16
	2.11	Funding Indemnity	17
	2.12	Inability to Determine Interest Rate	17
	2.13	Illegality	17
	2.14	Requirements of Law:	18
SECTION III. [INTENTIONALLY OMITTED]			18
SECTION IV. CLOSING AND CONDITIONS PRECEDENT TO LOANS			19
	4.1	Resolutions, Opinions, and Other Documents	19
	4.2	Absence of Certain Events	19
	4.3	Warranties and Representations at Closing	20
	4.4	Compliance with this Agreement	20
	4.5	Authorized Officers’ Certificate	20
	4.6	Closing	20
	4.7	Waiver of Rights	20
	4.8	Conditions for Future Loans	20

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SECTION V. REPRESENTATIONS AND WARRANTIES			21
	5.1	Organization and Validity	21
	5.2	Pending Litigation	22
	5.3	Financial Statements	22
	5.4	Investment Company Status	22
	5.5	No Default or Event of Default	22
	5.6	Liens	22
	5.7	Documentation	22
	5.8	Government Regulations, Etc.	23
	5.9	Taxes	23
	5.10	Solvency	23
	5.11	Capital Stock	24
	5.12	Title to Properties	24
	5.13	Anti-Terrorism Laws	24
SECTION VI. BORROWER’S AFFIRMATIVE COVENANTS			24
	6.1	Preservation of Existence, Etc.	24
	6.2	Maintenance of Properties, Etc.	24
	6.3	Ownership	24
	6.4	Compliance with Material Contractual Obligations, Laws, Etc.	24
	6.5	Insurance	25
	6.6	Visitation Rights; Keeping of Books	25
	6.7	Transactions with Affiliates	25
	6.8	Use of Proceeds	25
	6.9	Loan Documents	25
	6.10	Risk Management	25
	6.11	OFAC Compliance	25
	6.12	Further Assurances	25
	6.13	Reporting Requirements	26
	6.14	Financial Covenants	27
	6.15	Replacement Financing	27
SECTION VII. BORROWER’S NEGATIVE COVENANTS:			28
	7.1	Liens, Etc	28
	7.2	Indebtedness	28
	7.3	Obligation to Ratably Secure	28
	7.4	Mergers, Etc	28
	7.5	Sale of Assets, Etc	28

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	7.6	Restricted Investments	28
	7.7	New Business	28
	7.8	Distributions	28
	7.9	Compliance with ERISA	29
	7.10	Constituent Documents, Etc	29
	7.11	Fiscal Year	29
SECTION VIII. DEFAULT			29
	8.1	Events of Default	29
	8.2	Upon an Event of Default	31
	8.3	Nature of Remedies	31
	8.4	Set-Off:	31
SECTION IX. MISCELLANEOUS			32
	9.1	Governing Law	32
	9.2	Integrated Agreement	32
	9.3	Waiver	32
	9.4	Indemnity:	32
	9.5	Time	33
	9.6	Expenses of Lender	33
	9.7	Brokerage	33
	9.8	Notices:	34
	9.9	Headings	35
	9.10	Survival	35
	9.11	Successors and Assigns	35
	9.12	Duplicate Originals	35
	9.13	Modification	35
	9.14	Signatories	35
	9.15	Third Parties	35
	9.16	Discharge of Taxes, Borrower’s Obligations, Etc.	36
	9.17	Withholding and Other Tax Liabilities	36
	9.18	Consent to Jurisdiction	36
	9.19	Waiver of Jury Trial	36
	9.20	Consequential Damages	37
	9.21	Nonliability of Lender	37
		SCHEDULES
Schedule I		Ownership
Schedule II		First Mortgage Notes

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LOAN AGREEMENT

This Loan Agreement (“Agreement”) is dated this 15th day of December, 2008, by and betweenSouth Jersey Gas Company (“Borrower”), a New Jersey corporation and Toronto Dominion (New York) LLC (“Lender”).

BACKGROUND

A.           Borrower desires to establish financing arrangements with Lender and Lender is willing to make loans and extensions of credit to Borrower under the terms and provisions hereinafter set forth.

B.           The parties desire to define the terms and conditions of their relationship in writing.

NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:

SECTION I.  DEFINITIONS AND INTERPRETATION

1.1           Terms Defined: As used in this Agreement, the following terms have the following respective meanings:

Adjusted LIBOR Rate – For the LIBOR Interest Period for each LIBOR Rate Loan comprising part of the same borrowing (including conversions, extensions and renewals), a per annum interest rate determined pursuant to the following formula:

Adjusted LIBOR Rate     =    London Interbank Offered Rate

1 – LIBOR Reserve Percentage

Affiliate – With respect to any Person, (a) any Person which, directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such Person, or (b) any Person who is a director or officer (i) of such Person, (ii) of any Subsidiary of such Person, or (iii) of any person described in clause (a) above.  For purposes of this definition, control of a Person shall mean the power, direct or indirect, to direct or cause the direction of the management and policies of such Person whether by contract or otherwise.  Control may be by ownership, contract, or otherwise.

Applicable Margin – For any Loan made to Borrower on any date, the rate per annum as set forth below, determined by reference to the Corporate Credit Ratings:

Level	Corporate Credit Rating	Applicable Base Rate Margin	Applicable LIBOR Margin
I	Greater than BBB-/Baa3	0.000%	1.00%
II	Less than or equal to BBB-/Baa3 or no rating	0.000%	1.25%

Any change in the Applicable Margin will be effective as of the date on which the applicable Selected Rating Agency, as the case may be, announces the applicable change in the Corporate Credit Ratings.  Borrower shall notify Lender in writing promptly after becoming aware of any change in the Corporate Credit Ratings.

For purposes of the foregoing, (i) if the Corporate Credit Ratings established or deemed to have been established by the Selected Rating Agencies shall fall within different “Levels”, the lower rating will apply; (ii) if only one of the Selected Rating Agencies maintains Corporate Credit Ratings, then the rating of such single rating agency will apply; and (iii) if the rating system of Moody’s, S&P or Fitch shall change, or if Moody’s, S&P or Fitch shall cease to be in the business of providing Corporate Credit Ratings, Borrower and Lender shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from Moody’s, S&P or Fitch, and, pending the effectiveness of any such amendment, the Corporate Credit Ratings shall be determined by reference to the Corporate Credit Ratings most recently in effect prior to such change or cessation.

Applicable Rate :

a.           in the case of each Base Rate Loan, a rate per annum equal at all times to the sum of the Base Rate plus the Applicable Base Rate Margin in effect from time to time;

b.           in the case of each LIBOR Rate Loan comprising part of the same Loan, a rate per annum during each LIBOR Interest Period equal at all times to the sum of the Adjusted LIBOR Rate for such LIBOR Interest Period plus the Applicable LIBOR Margin in effect from time to time during such LIBOR Interest Period.

Authorized Officer – Any officer (or comparable equivalent) of Borrower authorized by specific resolution of Borrower to request Loans or execute Quarterly Compliance Certificates as set forth in the authorization certificate delivered to Lender substantially in the form of Exhibit “A” attached hereto.

Bank Affiliate – With respect to Lender, any Person which, directly or indirectly, is in control of, is controlled by, or is under common control with Lender.  For purposes of this definition, control of a Person shall mean the power, direct or indirect, (x) to vote 25% or more of any class of Capital Stock having ordinary voting power for the election of directors of such Person or other Persons performing similar functions for any such Person, or (y) to direct or cause the direction of the management and policies of such Person whether by ownership of Capital Stock, contract or otherwise.

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Bankruptcy Code – Title 11 of the United States Code entitled “Bankruptcy”, as now or hereinafter in effect, or any successor statute.

Base Rate – The highest of (a) the “Prime Rate” of interest as published in the “Money Rates” section of The Wall Street Journal on the applicable date (or the highest “Prime Rate” if more than one is published) as such rate may change from time to time; (b) the Federal Funds Rate plus fifty (50) basis points; or (c) the Daily LIBOR Rate plus one hundred (100) basis points.  If The Wall Street Journal ceases to be published or goes on strike or is otherwise not published, Lender may use a similar published prime or base rate.  The Base Rate is not necessarily the lowest or best rate of interest offered by Lender to any borrower or class of borrowers.

Base Rate Loans – That portion of the Loans accruing interest based on a rate determined by reference to the Base Rate.

Business Day – (i) A day other than Saturday or Sunday when Lender is open for business in New York, New York; or (ii) with respect to any LIBOR Rate Loan, any day which is a Business Day as described in clause (i) and which is also a day for trading by and between banks in dollar deposits in the London interbank market.

Capital Expenditures – For any period, the aggregate of all expenditures made in respect of the purchase, construction or other acquisition of fixed or capital assets, determined in accordance with GAAP.

Capital Stock – With respect to any Person, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any preferred interest, any limited or general partnership interest and any limited liability company membership interest.

Change in Control – (a) Parent ceasing at any time to own at least 100% of the Capital Stock having voting rights of Borrower, or (b) the occurrence of either of the following: (i) any entity, person (within the meaning of Section 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) which theretofore was beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of less than 20% of Parent’s then outstanding common stock either (x) acquires shares of common stock of Parent in a transaction or series of transactions that results in such entity, person or group directly or indirectly owning beneficially 20% or more of the outstanding common stock of Parent, or (y) acquires, by proxy or otherwise, the right to vote for the election of directors, for any merger, combination or consolidation of Parent or any of its direct or indirect Subsidiaries, or, for any other matter or question, more than 20% of the then outstanding voting securities of Parent; or (ii) 20% or more of the directors of the board of directors of Parent fail to consist of Continuing Directors.

Closing – Section 4.6.

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Closing Date – Section 4.6.

Consolidated – When used with reference to any accounting term, the amount described by such accounting term, determined on a consolidated basis in accordance with GAAP, after elimination of intercompany items.

Consolidated Total Capitalization – The sum of (i) Indebtedness of Borrower and its Consolidated Subsidiaries, plus (ii) the sum of the Capital Stock (excluding treasury stock and capital stock subscribed for and unissued) and surplus (including earned surplus, capital surplus, translation adjustment, the balance of the current profit and loss account not transferred to surplus and accumulated comprehensive other income) accounts of Borrower and its Consolidated Subsidiaries appearing on a consolidated balance sheet of Borrower and its Consolidated Subsidiaries, in each case prepared as of the date of determination in accordance with GAAP, after eliminating all intercompany transactions and all amounts properly attributable to minority interests, if any, in the stock and surplus of Subsidiaries.

Continuing Director – With respect to any Person as of any date of determination, any member of the board of directors of such Person who (a) was a member of such board of directors on the Closing Date, or (b) was nominated for election or elected to such board of directors with the approval of a majority of the Continuing Directors who were members of such board at the time of such nomination or election.

Corporate Credit Ratings – The ratings assigned to the corporate credit of Borrower by the Selected Rating Agencies.

Daily LIBOR Rate - For any day, the rate per annum determined by Lender by dividing (x) the Published Rate by (y) a number equal to 1.00 minus the percentage prescribed by the Federal Reserve for determining the maximum reserve requirements with respect to any eurocurrency funding by banks on such day.

Default – Any event, act, condition or occurrence which with notice, or lapse of time or both, would constitute an Event of Default hereunder.

Disclosure Documents – Collectively, Borrower’s Annual Report on Form 10-K for the year ended December 31, 2007, its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006, June 30, 2008 and September 30, 2008, and any Current Report on Form 8-K delivered to Lender at least three (3) Business Days prior to the date of this Agreement.

Environmental Laws – Any and all Federal, foreign, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees and any and all common law requirements, rules and bases of liability regulating, relating to or imposing liability or standards of conduct concerning pollution, protection of the environment, or the impact of pollutants, contaminants or toxic or hazardous substances on human health or the environment, as now or may at any time hereafter be in effect.

ERISA – The Employee Retirement Income Security Act of 1974, as the same may be amended, from time to time.

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ERISA Affiliate – Any Person which for purposes of Title IV of ERISA is a member of Borrower’s controlled group, or under common control with Borrower, within the meaning of Section 414 of the Code, and the regulations promulgated and rulings issued thereunder.

ERISA Event – (i) The occurrence of a reportable event, within the meaning of Section 4043 of ERISA, unless the 30-day notice requirement with respect thereto has been waived by the PBGC; (ii) the provision by the administrator of any Plan of a notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (iii) the cessation of operations at a facility in the circumstances described in Section 4062(e) of ERISA; (iv) the withdrawal by Borrower or an ERISA Affiliate from a Multiemployer Plan during a plan year for which it was a “substantial employer” as defined in Section 4001(a)(2) of ERISA; (v) the failure by Borrower or any ERISA Affiliate to make a payment to a Plan required under Section 302 of ERISA, which results in a lien pursuant to Section 302(f) of ERISA; (vi) the adoption of an amendment to a Plan requiring the provision of security to such Plan, pursuant to Section 307 of ERISA; or (vii) the institution by the PBGC of proceedings to terminate a Plan, pursuant to Section 4042 of ERISA, or the occurrence of any event or condition which might reasonably constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, a Plan by the PBGC.

Event of Default – Section 8.1.

Expenses – Section 9.6.

Federal Funds Rate – For any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Lender of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Lender from three Federal funds brokers of recognized standing selected by it.

First Mortgage Notes – Those First Mortgage Notes identified on Schedule IIattached hereto, and subsequent promissory notes or other evidences of indebtedness of Borrower in each case secured by first mortgages on real property owned by Borrower or its Subsidiaries.

Fiscal Year – The fiscal year of Borrower, January 1 to December 31.

Fitch – Fitch Ratings, Inc.

GAAP – Generally accepted accounting principles as in effect on the Closing Date applied in a manner consistent with the most recent audited financial statements of Borrower furnished to Lender and described in Section 5.3 herein.

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Governmental Action – All authorizations, consents, approvals, waivers, exceptions, variances, orders, licenses, exemptions, publications, filings, notices to and declarations of or with any Governmental Authority, other than routine reporting requirements the failure to comply with which will not affect the validity or enforceability of this Agreement or any other Loan Document or have a material adverse effect on the transactions contemplated by this Agreement or any other Loan Document.

Governmental Authority – Any federal, state or local government or political subdivision, or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury, or arbitration.

Hazardous Materials – Any petrochemical or petroleum products, any flammable materials, explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances, or related or similar materials, asbestos or any material containing asbestos, or any other substance or material as so defined and regulated by any Federal, state or local environmental law, ordinance, rule, or regulation including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C.  Sections 9601, et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C.  Sections 1801, et seq.), and the Resource Conservation and Recovery Act, as amended (42 U.S.C.  Sections 6901, et seq.), and the regulations adopted and publications promulgated pursuant thereto.

Hedging Obligations – With respect to any Person, the obligations of such Person under any interest rate or currency swap agreement, interest rate or currency future agreement, interest rate collar agreement, swap agreement (as defined in 11 U.S.C.  § 101), interest rate or currency hedge agreement, and any put, call or other agreement or arrangement designed to protect such Person against fluctuations in interest rates or currency exchange rates.

Indebtedness – For any Person, all obligations of such Person which in accordance with GAAP should be classified on a balance sheet of such Person as liabilities of such Person, and in any event shall include, without duplication, all (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations to pay the deferred purchase price of property or services, (iv) obligations as lessee under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases, (v) obligations as lessee under operating leases which have been recorded as off-balance sheet liabilities, (vi) obligations under Hedging Obligations, (vii) reimbursement obligations (contingent or otherwise) in respect of outstanding letters of credit, (viii) indebtedness of the type referred to in clauses (i) through (vi) above secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any lien or encumbrance on, or security interest in, property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness, and (ix) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (vii) above.  Notwithstanding anything to the contrary set forth above, Capital Stock, including Capital Stock having a preferred interest, shall not constitute Indebtedness for purposes of this Agreement.

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Interest Hedging Instrument – Any documentation evidencing any interest rate swap, interest “cap” or “collar” or any other interest rate hedging device or swap agreement (as defined in 11 U.S.C.  § 101 et.  seq.) between Borrower and Lender (or any Affiliate of Lender).

IRS – Internal Revenue Service.

LIBOR Interest Period – As to LIBOR Rate Loans, a period of fourteen days, one month, two months, three months or six months, as selected by Borrower pursuant to the terms of this Agreement (including continuations and conversions thereof); provided however, (i) if any LIBOR Interest Period would end on a day which is not a Business Day, such LIBOR Interest Period shall be extended to the next succeeding Business Day (except that where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day), (ii) no LIBOR Interest Period shall extend beyond the Revolving Credit Maturity Date, and (iii) any LIBOR Interest Period with respect to a LIBOR Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such LIBOR Interest Period) shall end on the last Business Day of the relevant calendar month at the end of such LIBOR Interest Period.

LIBOR Rate Loans – That portion(s) of the Loans accruing interest based on a rate determined by reference to the Adjusted LIBOR Rate.

LIBOR Reserve Percentage – For any day, that percentage (expressed as a decimal) which is in effect from time to time under Regulation D, as such regulation may be amended from time to time or any successor regulation, as the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency, special, or marginal reserves) applicable with respect to Eurocurrency liabilities as that term is defined in Regulation D (or against any other category of liabilities that includes deposits by reference to which the interest rate of LIBOR Rate Loans is determined), whether or not Lender has any Eurocurrency liabilities subject to such reserve requirement at that time.  LIBOR Rate Loans shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed subject to reserve requirements without benefits of credits for proration, exceptions or offsets that may be available from time to time to Lender.  The Adjusted LIBOR Rate shall be adjusted automatically on and as of the effective date of any change in the LIBOR Reserve Percentage.

Lien - Any interest of any kind or nature in property securing an obligation owed to, or a claim of any kind or nature in property by, a Person other than the owner of the Property, whether such interest is based on the common law, statute, regulation or contract, and including, but not limited to, a security interest or lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt, a lease, consignment or bailment for security purposes, a trust, or an assignment.  For the purposes of this Agreement, Borrower shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes.

Loan Request – Section 2.4(b)(ii).

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Loans – The unpaid balance of cash advances by Lender to Borrower under the Revolving Credit which may be Base Rate Loans or LIBOR Rate Loans.

Loan Documents – Collectively, this Agreement, the Note, and all agreements, instruments and documents executed and/or delivered in connection therewith, all as may be supplemented, restated, superseded, amended or replaced from time to time.

London Interbank Offered Rate – With respect to any LIBOR Rate Loan for the LIBOR Interest Period applicable thereto, the rate of interest per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the British Bankers Association LIBOR Rate (“BBA LIBOR”) as published by Bloomberg (or such other commercially available source providing quotations of BBA LIBOR as designated by Lender from time to time) at approximately 11:00 A.M. (London time) 2 Business Days prior to the first day of such LIBOR Interest Period for a term comparable to such LIBOR Interest Period; provided however, if more than one BBA LIBOR Rate is specified, the applicable rate shall be the arithmetic mean of all such rates.  If, for any reason, such rate is not available, the term London Interbank Offered Rate shall mean, with respect to any LIBOR Rate Loan for the LIBOR Interest Period applicable thereto, the rate of interest per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by Lender to be the average rates per annum at which deposits in dollars are offered for such LIBOR Interest Period to major banks in the London Interbank market in London, England at approximately 11:00 A.M. (London time) 2 Business Days prior to the first day of such LIBOR Interest Period for a term comparable to such LIBOR Interest Period.

Material Adverse Effect – A material adverse effect with respect to (a) the business, assets, condition (financial or otherwise), liabilities (actual or contingent), or prospects of (i) Borrower or (ii) Borrower and its Subsidiaries (taken as a whole), or (b) Borrower’s ability to pay the Obligations in accordance with the terms hereof, or (c) the validity or enforceability of this Agreement or any of the other Loan Documents or the rights and remedies of Lender hereunder or thereunder.

Maximum Revolving Credit Amount – The sum of Forty Million Dollars ($40,000,000), as such amount may be reduced from time to time pursuant to Section 2.9.

Moody’s – Moody’s Investors Service, Inc., or any successor thereto.

Multiemployer Plan – A multiemployer plan, as defined in Section 4001(a)(3) of ERISA, which is subject to Title IV of ERISA and to which Borrower or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions, such plan being maintained pursuant to one or more collective bargaining agreements.

Note – The Revolving Credit Note.

Notice of Conversion/Extension — A written notice of conversion of a LIBOR Rate Loan to a Base Rate Loan, or of a Base Rate Loan to a LIBOR Rate Loan or extension of a LIBOR Rate Loan, in each case substantially in the form of Exhibit “C” attached hereto.

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Obligations – All debts, liabilities and obligations of every kind or nature at any time owing by Borrower to Lender or any other subsidiary of Lender or Bank Affiliate, under this Agreement, or any other existing or future instrument, document or agreement, between Borrower or Lender or any other subsidiary of Lender or Bank Affiliate which is related to or permitted under this Agreement, and whether principal, interest, fees, indemnification obligations hereunder or Expenses (specifically including interest accruing after the commencement of any bankruptcy, insolvency or similar proceeding with respect to Borrower, whether or not a claim for such post-commencement interest is allowed), including, without limitation, debts, liabilities and obligations in respect of the Revolving Credit, and any extensions, modifications, substitutions, increases and renewals thereof; any amount payable by Borrower or any Subsidiary of Borrower pursuant to an Interest Hedging Instrument; the payment of all amounts advanced by Lender or any other subsidiary of Lender or Bank Affiliate to preserve, protect and enforce rights hereunder; and all Expenses incurred by Lender or any other subsidiary of Lender or Bank Affiliate.  Without limiting the generality of the foregoing, Obligations shall include any other debts, liabilities or obligations owing to Lender or any other subsidiary of Lender or Bank Affiliate in connection with any lockbox, cash management, or other services (including electronic funds transfers or automated clearing house transactions) provided by Lender or any other subsidiary of Lender or Bank Affiliate to Borrower.

OFAC – Section 5.13.

Parent – South Jersey Industries, Inc.

PBGC – The Pension Benefit Guaranty Corporation.

Permitted Indebtedness – Any of the following:

(1)           Indebtedness under this Agreement;

(2)           Indebtedness of Borrower under the First Mortgage Notes existing as of the Closing Date and as identified on Schedule II attached hereto, and subsequent First Mortgage Notes, so long as before and immediately after the incurrence of such Indebtedness, Borrower is in compliance with Section 6.14;

(3)           Any Indebtedness of Borrower so long as before and immediately after the incurrence of such Indebtedness, Borrower is in compliance with Section 6.14;

(4)           Indebtedness of Borrower under Hedging Obligations covering a notional amount not to exceed the face amount of outstanding Indebtedness.

Permitted Investments – (1) Noncallable, direct general obligations of, or obligations the payment of the principal of and interest on which are unconditionally guaranteed by, the United States of America; (2) bonds, participation certificates or other obligations of Federal National Mortgage Association, Government National Mortgage Association and Federal Home Loan Mortgage Corporation which are owned as of the Closing Date; (3) certificates of deposit, bankers’ acceptances or other obligations issued by commercial banks which are fully insured by the Federal Deposit Insurance Corporation or certificates of deposit, bankers’ acceptances or other deposit obligations issued by commercial banks whose unsecured obligations are rated in one of the two highest rating categories by Moody’s or S&P; (4) obligations issued or guaranteed by a state or political subdivision of a state rated in one of the two highest rating categories by Moody’s or S&P; or (5) any other investments permitted under this Agreement and which Lender has approved in writing.

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Permitted Lien – With respect to any Person, any of the following:

(1)           Liens for taxes, assessments or governmental charges not delinquent or being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with GAAP are maintained on such Person’s books;

(2)           Liens arising out of deposits in connection with workers’ compensation, unemployment insurance, old age pensions or other social security or retirement benefits legislation;

(3)           Deposits or pledges to secure bids, tenders, contracts (other than contracts for the payment of money), leases, statutory obligations, surety and appeal bonds, and other obligations of like nature arising in the ordinary course of such Person’s business;

(4)           Liens imposed by law, such as mechanics’, workers’, materialmen’s, carriers’ or other like liens arising in the ordinary course of such Person’s business which secure the payment of obligations which are not past due or which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP are maintained on such Person’s books;

(5)           Rights of way, zoning restrictions, easements and similar encumbrances affecting such Person’s real property which do not materially interfere with the use of such property;

(6)           Liens securing Permitted Indebtedness of the type described in clause (2) of “Permitted Indebtedness”;

(7)           Liens securing Permitted Indebtedness, described in clause (3) of the definition of “Permitted Indebtedness,” not in excess of $12,500,000 in the aggregate; and

(8)           Purchase money security interests for the purchase of equipment to be used in Borrower’s business, encumbering only the equipment so purchased, and which secures only the purchase-money Indebtedness incurred to acquire the equipment so purchased, which Indebtedness qualifies as Permitted Indebtedness.

Person – An individual, partnership, corporation, trust, limited liability company, limited liability partnership, unincorporated association or organization, joint venture or any other entity.

Plan – A Single Employer Plan or a Multiple Employer Plan.

Property – Any interest of Borrower in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.

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Published Rate - The rate of interest published each Business Day in The Wall Street Journal “Money Rates” listing under the caption “London Interbank Offered Rates” for a one month period (or, if no such rate is published therein for any reason, the Published Rate shall be the eurodollar rate for a one month period as published in another publication determined by Lender).

Quarterly Compliance Certificate – Section 6.13.

Regulation D – Regulation D of the Board of Governors of the Federal Reserve System comprising Part 204 of Title 12, Code of Federal Regulations, as amended, and any successor thereto.

Requirement of Law – As to any Person, each law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

Revolving Credit – Section 2.1(a).

Revolving Credit Closing Fee – Section 2.7(a).

Revolving Credit Exposure – At any time, the aggregate amount of all Revolving Credit Loans made by Lender then outstanding.

Revolving Credit Maturity Date – December 14, 2009.

Revolving Credit Note – Section 2.1(b).

S&P – Standard & Poor’s Ratings Services, a division of the McGraw-Hill Companies, Inc., or any successor thereto.

Selected Rating Agencies – Any two of Moody’s, S&P, Fitch or any other nationally recognized rating agency selected by Borrower from time to time; provided that for any such selection to be valid, Borrower shall have notified Lender of such selection prior to such selection taking effect and if Borrower has not notified Lender of any such selection, then Borrower shall be deemed to have selected Moody’s and S&P.

Significant Subsidiary – With respect to any Person, a Subsidiary which meets any of the following conditions:

(a)           such Person’s and its other Subsidiaries’ investments in and advances to the Subsidiary exceed 10% of the total assets of such Person and its Consolidated Subsidiaries as of the end of the most recently completed fiscal quarter;

(b)           such Person’s and its other Subsidiaries’ proportionate share (as determined by ownership interests) of the total assets (after intercompany eliminations) of the Subsidiary exceeds 10% of the total assets of such Person and its Consolidated Subsidiaries as of the end of the most recently completed fiscal quarter; or

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(c)           such Person’s and its other Subsidiaries’ proportionate share (as determined by ownership interests) in the income from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles of the Subsidiary exceeds 10% of such income of such Person and its Consolidated Subsidiaries for the most recently completed fiscal quarter.

Single Employer Plan – A single employer plan, as defined in Section 4001(a)(15) of ERISA, which is subject to Title IV of ERISA and which (i) is maintained for employees of Borrower or an ERISA Affiliate and no Person other than Borrower and its ERISA Affiliates or (ii) was so maintained and in respect of which Borrower or an ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated.

Solvent – With respect to any Person, that such Person (a) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage and is able to pay its debts as they mature, (b) owns property having a value, both at fair valuation and at present fair saleable value, greater than the amount required to pay its probable liabilities (including contingencies), and (c) does not believe that it will incur debts or liabilities beyond its ability to pay such debts or liabilities as they mature.

Subsidiary – With respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether at the time capital stock (or comparable interest) of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by said Person (whether directly or through one of more other Subsidiaries).  In the case of an unincorporated entity, a Person shall be deemed to have more than 50% of interests having ordinary voting power only if such Person’s vote in respect of such interests comprises more than 50% of the total voting power of all such interests in the unincorporated entity.

Total Common Equity – The sum of the Capital Stock (excluding treasury stock and capital stock subscribed for and unissued) and surplus (including earned surplus, capital surplus, translation adjustment, the balance of the current profit and loss account not transferred to surplus and accumulated comprehensive other income) accounts of Borrower and its Consolidated Subsidiaries appearing on a consolidated balance sheet of Borrower and its Consolidated Subsidiaries, in each case prepared as of the date of determination in accordance with GAAP, after eliminating all intercompany transactions and all amounts properly attributable to minority interests, if any, in the stock and surplus of Subsidiaries.

Unused Revolving Credit Commitment – At any particular time, an amount equal to the excess, if any, of the Maximum Revolving Credit Amount at such time over the Revolving Credit Exposure at such time.

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1.2           Accounting Principles: Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, this shall be done in accordance with GAAP as in effect on the Closing Date, to the extent applicable, except as otherwise expressly provided in this Agreement.  If there are any changes in GAAP after the Closing Date that would affect the computation of the financial covenants in Section 6.14, such changes shall only be followed, with respect to such financial covenants, from and after the date this Agreement shall have been amended to take into account any such changes.

1.3           Construction: No doctrine of construction of ambiguities in agreements or instruments against the interests of the party controlling the drafting shall apply to any Loan Documents.

SECTION II.  THE LOANS

2.1           Revolving Credit – Description:

a.           Subject to the terms and conditions of this Agreement, Lender hereby establishes for the benefit of Borrower a revolving credit facility (collectively, the “Revolving Credit”) which shall include cash Loans extended by Lender to Borrower from time to time hereunder.  The aggregate principal amount of Loans shall not at any time exceed the Maximum Revolving Credit Amount.  Subject to such limitation, the outstanding balance of Loans under the Revolving Credit may fluctuate from time to time, to be reduced by repayments made by Borrower, to be increased by future Loans which may be made by Lender, to Borrower, and, subject to the provisions of Section 8 below, shall be due and payable on the Revolving Credit Maturity Date.  The aggregate principal amount of Loans outstanding at any time cannot exceed the Maximum Revolving Credit Amount.

b.           At Closing, Borrower shall execute and deliver a promissory note to Lender for the Maximum Revolving Credit Amount (“Revolving Credit Note”).  The Revolving Credit Note shall evidence Borrower’s unconditional obligation to repay Lender for all Loans made under the Revolving Credit, with interest as herein provided.  Each Loan under the Revolving Credit shall be deemed evidenced by the Revolving Credit Note, which is deemed incorporated herein by reference and made part hereof.  The Revolving Credit Note shall be in form and substance satisfactory to Lender.

c.           The term of the Revolving Credit shall expire on the Revolving Credit Maturity Date.  On such date, unless having been sooner accelerated by Lender pursuant to the terms hereof (i) all principal, interest and other fees, Expenses and other Obligations owing under the Revolving Credit shall be due and payable in full, and (ii) Lender’s commitment to make Loans under the Revolving Credit shall terminate.  As of and after such date Borrower shall not request and Lender shall not make any further Loan under the Revolving Credit.

2.2           [Intentionally Omitted]

2.3           [Intentionally Omitted]

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2.4           Loans and Payments:

a.           Except to the extent otherwise set forth in this Agreement (or in the case of an Interest Hedging Instrument under the applicable agreements), all payments of principal and of interest on the Revolving Credit, and all Expenses, fees, indemnification obligations and all other charges and any other Obligations of Borrower, shall be made to Lender at such office or account as Lender may direct from time to time, in United States dollars, in immediately available funds.  Lender shall have the unconditional right and discretion and Borrower hereby authorizes Lender) to charge Borrower’s operating and/or deposit account(s) for all of Borrower’s Obligations as they become due from time to time under this Agreement including, without limitation, interest, principal, fees, indemnification obligations and reimbursement of Expenses.  Alternatively, Lender may in its sole and absolute discretion (and Borrower hereby authorizes Lender to) make a Loan under the Revolving Credit in a sum sufficient to pay all interest accrued and payable on the Obligations and to pay all costs, fees and Expenses owing hereunder.  Any payments received prior to 2:00 p.m.  Eastern time on any Business Day shall be deemed received on such Business Day.  Any payments (including any payment in full of the Obligations), received after 2:00 p.m.  Eastern time on any Business Day shall be deemed received on the immediately following Business Day.

b.           Loans which may be made by Lender from time to time under the Revolving Credit shall be made available by crediting such proceeds to Borrower’s operating account with Lender or such other account designated by Borrower to Lender in writing.

i.           All Loans requested by Borrower under the Revolving Credit that are (a) LIBOR Rate Loans must be in the minimum amount of One Million Dollars ($1,000,000) and integral multiples of Five Hundred Thousand Dollars ($500,000) in excess thereof and (b) Base Rate Loans must be in the minimum amount of Five Hundred Thousand Dollars ($500,000) and integrated multiples of One Hundred Thousand Dollars ($100,000) in excess thereof.

ii.           All Loans requested by Borrower under the Revolving Credit are to be in writing pursuant to a written request (“Loan Request”) executed by an Authorized Officer in the form of Exhibit ”B” attached hereto.  Requests for Base Rate Loans must be requested by 11:00 A.M., Eastern time, on the date such Loan is to be made.  Requests for LIBOR Rate Loans must be requested three (3) Business Days in advance and must specify the amount of the LIBOR Rate Loan and the LIBOR Interest Period.  If no LIBOR Interest Period is specified, the LIBOR Interest Period shall be deemed to be a one month period.

iii.           Upon receiving a request for a Loan in accordance with subparagraph (ii) above, and subject to the conditions set forth in this Agreement, Lender shall make the requested Loan available to Borrower as soon as is reasonably practicable thereafter on the day the requested Loan is to be made.

2.5           Interest:

a.           The unpaid principal balance of Loans under the Revolving Credit shall bear interest, subject to the terms hereof, at a per annum rate equal to the Applicable Rate.

b.           Interest on Base Rate Loans shall be payable quarterly, in arrears, on January 1, April 1, July 1 and October 1, and on the Revolving Credit Maturity Date.  Interest on LIBOR Rate Loans shall be payable on the last day of the applicable LIBOR Interest Period or, in the case of a LIBOR Interest Period which is six months, at the end of the three month period, and on the Revolving Credit Maturity Date.

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c.           Borrower may, in the case of Revolving Credit Loans, elect from time to time to convert Base Rate Loans to LIBOR Rate Loans, by delivering a Notice of Conversion/Extension to Lender at least three (3) Business Days prior to the proposed date of conversion.  In addition, Borrower may elect from time to time to convert all or any portion of a LIBOR Rate Loan to a Base Rate Loan by giving Lender irrevocable written notice thereof by 12:00 noon one (1) Business Day prior to the proposed date of conversion.  LIBOR Rate Loans may only be converted to Base Rate Loans on the last day of the applicable LIBOR Interest Period.  If the date upon which a LIBOR Rate Loan is to be converted to a Base Rate Loan is not a Business Day, then such conversion shall be made on the next succeeding Business Day and during the period from such last day of a LIBOR Interest Period to such succeeding Business Day such Loan shall bear interest as if it were a Base Rate Loan.  All or any part of outstanding Base Rate Loans may be converted as provided herein; provided that no Loan may be converted into a LIBOR Rate Loan when any Default or Event of Default has occurred and is continuing.

d.           Borrower may continue any LIBOR Rate Loans upon the expiration of a LIBOR Interest Period with respect thereto by delivering a Notice of Conversion/Extension to Lender at least three (3) Business Days prior to the proposed date of extension; provided that no LIBOR Rate Loan may be continued as such when any Default or Event of Default has occurred and is continuing, in which case such Loan shall be automatically converted to a Base Rate Loan at the end of the applicable LIBOR Interest Period with respect thereto.  If Borrower shall fail to give timely notice of an election to continue a LIBOR Rate Loan, or the continuation of LIBOR Rate Loans is not permitted hereunder, each such LIBOR Rate Loan shall be automatically converted to a Base Rate Loan at the end of the applicable LIBOR Interest Period with respect thereto.

e.           Borrower may not have more than four (4) LIBOR Rate Loans outstanding at any time.

2.6           Additional Interest Provisions:

a.           Interest on the LIBOR Rate Loans shall be calculated on the basis of a year of three hundred sixty (360) days but charged for the actual number of days elapsed.  Interest on the Base Rate Loans shall be calculated on the basis of a year of three hundred sixty five (365) or three hundred sixty six (366) days, as the case may be, but charged for the actual number of days elapsed.

b.           After the occurrence and during the continuance of an Event of Default hereunder, the per annum effective rate of interest on all outstanding principal under the Loans, shall be increased by two hundred (200) basis points.  All such increases may be applied retroactively to the date of the occurrence of the Event of Default.  Borrower agrees that the default rate payable to Lender is a reasonable estimate of Lender’s damages and is not a penalty.

c.           All contractual rates of interest chargeable on outstanding principal under the Loans shall continue to accrue and be paid even after Default, an Event of Default, maturity, acceleration, judgment, bankruptcy, insolvency proceedings of any kind or the happening of any event or occurrence similar or dissimilar.

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d.           In no contingency or event whatsoever shall the aggregate of all amounts deemed interest hereunder and charged or collected pursuant to the terms of this Agreement exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto.  In the event that such court determines Lender has charged or received interest hereunder in excess of the highest applicable rate, Lender shall apply, in its sole discretion, and set off such excess interest received by Lender against other Obligations due or to become due and such rate shall automatically be reduced to the maximum rate permitted by such law.

e.           Borrower shall not request and Lender shall not make or continue, or convert any Loan to a LIBOR Rate Loan while a Default or an Event of Default exists.

    2.7           Fees and Charges:

a.           At Closing, Lender shall have fully earned and Borrower shall unconditionally pay to Lender, a non-refundable fee with respect to the Revolving Credit (“Revolving Credit Closing Fee”) of Forty Thousand Dollars ($40,000), less amounts previously paid thereon.

b.           Borrower hereby agrees to pay to Lender a facility fee (the “Facility Fee”), equal to the average daily amount of the Unused Revolving Credit Commitment during the preceding calendar quarter (or such shorter period commencing with the Closing Date or ending on the Revolving Credit Maturity Date) multiplied by a rate per annum equal to one eighth of one percent (0.125%), payable quarterly in arrears on January 1, April 1, July 1 and October 1, and on the Revolving Credit Maturity Date.  The Facility Fee due to Lender shall commence to accrue on the Closing Date and shall cease to accrue on the Revolving Credit Maturity Date.

2.8           Prepayments: Borrower may prepay the Revolving Credit in whole or in part at any time or from time to time, without penalty or premium except as provided in Section 2.11.  Any prepayment shall be accompanied by all accrued and unpaid interest, fees and Expenses, and shall first be applied to any Base Rate Loans and then to LIBOR Rate Loans.

2.9           Reduction of Revolving Credit: Upon at least five Business Days’ prior irrevocable written notice to Lender, Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Maximum Revolving Credit Amount; provided, however, that (i) each partial reduction of the Maximum Revolving Credit Amount shall be in a minimum principal amount of $1,000,000 or in integral multiples of $1,000,000 in excess thereof, and (ii) the Maximum Revolving Credit Amount may not be reduced or terminated if, after giving effect thereto and to any prepayments on the Loans made on the effective date thereof, the aggregate amount of all Loans at such time would exceed the Maximum Revolving Credit Amount at such time.

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2.10           Capital Adequacy: If any present or future law, governmental rule, regulation, policy, guideline, directive or similar requirement (whether or not having the force of law) imposes, modifies, or deems applicable any capital adequacy, capital maintenance or similar requirement which affects the manner in which Lender allocates capital resources to its commitments (including any commitments hereunder), and as a result thereof, in the opinion of Lender, the rate of return on Lender’s capital with regard to the Loans is reduced to a level below that which Lender could have achieved but for such circumstances, then in such case and upon notice from Lender to Borrower, from time to time, Borrower shall pay Lender such additional amount or amounts as shall compensate Lender for such reduction in Lender’s rate of return.  Such notice shall contain the statement of Lender with regard to any such amount or amounts which shall, in the absence of manifest error, be binding upon Borrower.  In determining such amount, Lender may use any reasonable method of averaging and attribution that it deems applicable.

   2.11           Funding Indemnity: Borrower shall indemnify Lender, and hold Lender harmless from any loss, damages, liability, or expense which Lender may sustain or incur as a consequence of the making of a prepayment of Loans on a day which is not the last day of a LIBOR Interest Period with respect thereto.  With respect to such Loans, such indemnification shall equal the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid for the period from the date of such prepayment at the applicable rate of interest for such Loans provided for herein over (ii) the amount of interest (as reasonably determined by Lender) which would have accrued to Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the London interbank Eurodollar market.  This covenant shall survive the termination of this Agreement, and the payment of the Obligations.

2.12           Inability to Determine Interest Rate: Notwithstanding any other provision of this Agreement, if Lender shall reasonably determine (which determination shall be conclusive and binding absent manifest error) that, (i) by reason of circumstances affecting the relevant market, reasonable and adequate means do not exist for ascertaining the Adjusted LIBOR Rate for a LIBOR Interest Period, or (ii) the Adjusted LIBOR Rate does not adequately and fairly reflect the cost to Lender of funding LIBOR Rate Loans that Borrower has requested be outstanding as a LIBOR Rate Loan during a LIBOR Interest Period, Lender shall forthwith give telephone notice of such determination, confirmed in writing, to Borrower at least two (2) Business Days prior to the first day of such LIBOR Interest Period.  Unless Borrower shall have notified Lender upon receipt of such telephone notice that it wishes to rescind or modify its request regarding such LIBOR Rate Loans, any Loans that were requested to be made as LIBOR Rate Loans shall be made as Base Rate Loans and any Loans that were requested to be converted into or continued as LIBOR Rate Loans shall remain as or be converted into Base Rate Loans.  Until any such notice has been withdrawn by Lender, no further Loans shall be made as, continued as, or converted into, LIBOR Rate Loans for the LIBOR Interest Periods so affected.

2.13           Illegality: Notwithstanding any other provision of this Agreement, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof to Lender by the relevant Governmental Authority shall make it unlawful for Lender to make or maintain LIBOR Rate Loans as contemplated by this Agreement, or to obtain in the interbank Eurodollar market, the funds with which to make such Loans, (a) Lender shall promptly notify Borrower thereof, (b) the commitment of Lender hereunder to make LIBOR Rate Loans or continue LIBOR Rate Loans as such shall forthwith be suspended until Lender shall give notice that the condition or situation which gave rise to the suspension shall no longer exist, and (c) Lender’s Loans then outstanding as LIBOR Rate Loans, if any, shall be converted on the last day of the LIBOR Interest Period for such Loans, or within such earlier period as required by law, to Base Rate Loans.  Borrower hereby agrees promptly to pay Lender, upon its demand, any additional amounts necessary to compensate Lender for actual and direct costs (but not including anticipated profits) reasonably incurred by Lender in connection with any repayment in accordance with this Section 2.13, including but not limited to, any interest or fees payable by Lender to lenders of funds obtained by it in order to make or maintain its LIBOR Rate Loans hereunder.  A certificate as to any additional amounts payable pursuant to this Section 2.13 submitted by Lender, to Borrower shall be presumptive evidence of such amounts owing.  Lender agrees to use reasonable efforts to avoid or to minimize any amounts which may otherwise be payable pursuant to this Section 2.13; provided however, that such efforts shall not cause the imposition on Lender of any additional costs or legal or regulatory burdens deemed by Lender in its reasonable discretion to be material.

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2.14           Requirements of Law:

a.           If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof:

i.           shall subject Lender to any tax of any kind whatsoever with respect to any LIBOR Rate Loan made by it, or change the basis of taxation of payments to Lender in respect thereof (except for changes in the rate of tax on the overall net income of Lender);

ii.           shall impose, modify, or hold applicable, any reserve, special deposit, compulsory loan, or similar requirement against assets held by, deposits or other liabilities in, or for the account of, advances, loans, or other extension of credit (including participations therein) by, or any other acquisition of funds by, any office of Lender which is not otherwise included in the determination of the LIBOR Rate hereunder; or

iii.           shall impose on such Lender any other condition;

iv.           and the result of any of the foregoing is to materially increase the cost to Lender of making or maintaining LIBOR Rate Loans, or to reduce any amount receivable hereunder, or under any Note, then, in any such case, Borrower shall promptly pay Lender, upon its demand, any additional amounts necessary to compensate Lender for such additional costs or reduced amount receivable which Lender reasonably deems to be material as determined by Lender, with respect to its LIBOR Rate Loans.  A certificate as to any additional amounts payable pursuant to this Section 2.14 submitted by Lender to Borrower shall be presumptive evidence of such amounts owing.  Lender agrees to use reasonable efforts to avoid, or to minimize, any amounts which might otherwise be payable pursuant to this Section 2.14; provided however, that such efforts shall not cause the imposition on Lender of any additional costs or legal regulatory burdens deemed by Lender in good faith to be material.

b.           The agreements in this Section 2.14 shall survive the termination of this Agreement and payment of the Obligations.

SECTION III.  [INTENTIONALLY OMITTED]

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SECTION IV.  CLOSING AND CONDITIONS PRECEDENT TO LOANS

Closing under this Agreement is subject to the following conditions precedent (all instruments, documents and agreements to be in form and substance satisfactory to Lender and Lender’s counsel):

4.1           Resolutions, Opinions, and Other Documents: Borrower shall have delivered, or caused to be delivered to Lender the following:

a.           this Agreement, the Note and each of the other Loan Documents all properly executed;

b.           each of the other documents to be executed and/or delivered by Borrower or any other Person pursuant to this Agreement;

c.           certified copies of (i) resolutions of Borrower’s board of directors or managing members (as applicable) authorizing the execution, delivery and performance of this Agreement, the Notes to be issued hereunder and each of the other Loan Documents required to be delivered by any Section hereof and (ii) Borrower’s articles or certificate of incorporation and by-laws;

d.           an incumbency certificate for Borrower identifying all Authorized Officers, with specimen signatures;

e.           a certificate of good standing for Borrower, dated on or immediately prior to the Closing Date, from the Secretary of State of the state of organization of Borrower and from all states in which Borrower is required to obtain a certificate of good standing or like certificate due to the nature of its operations in such state;

f.           a written opinion of Borrower’s independent counsel addressed to Lender and opinions of such other counsel as Lender deems reasonably necessary;

g.           such financial statements (including all Disclosure Documents), reports, certifications and other operational information as Lender may reasonably require, satisfactory in all respects to Lender;

h.           payment by Borrower of all fees including, without limitation, Revolving Credit Closing Fee, and Expenses associated with the Loans;

i.           Insurance certificates and policies as required under Section 6.5; and

j.           such other documents reasonably required by Lender.

4.2           Absence of Certain Events: At the Closing Date, no Default or Event of Default hereunder shall have occurred and be continuing, and no default or event of default shall have occurred and be continuing under any existing Indebtedness of Borrower.

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4.3           Warranties and Representations at Closing: The warranties and representations contained in Section 5 as well as any other Section of this Agreement shall be true and correct in all respects on the Closing Date with the same effect as though made on and as of that date.  Borrower shall not have taken any action or permitted any condition to exist which would have been prohibited by any Section hereof.

4.4           Compliance with this Agreement: Borrower shall have performed and complied with all agreements, covenants and conditions contained herein including, without limitation, the provisions of Sections 6 and 7 hereof, which are required to be performed or complied with by Borrower before or at the Closing Date.

4.5           Authorized Officers’ Certificate: Lender shall have received a certificate dated the Closing Date and signed by an Authorized Officer certifying that (i) all of the conditions specified in this Section have been fulfilled, (ii) no Material Adverse Effect has occurred since September 30, 2008, (iii) no action, proceeding, investigation, regulation or legislation has been instituted, or, to Borrower’s knowledge, threatened or proposed before any court, government agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement or any other Loan Documents or the consummation of the transactions contemplated hereby or thereby or which could reasonably be expected to have a Material Adverse Effect, and (iv) all governmental, shareholder, member, partner and third party consents and approvals necessary in connection with the transactions contemplated hereby have been received and are in full force and effect, and no condition or requirement of law exists which could reasonably be likely to restrain, prevent or impose any material adverse condition on the transactions contemplated hereby.

4.6           Closing: Subject to the conditions of this Section 4, the Loans shall be made available on such date (the “Closing Date”) and at such time as may be mutually agreeable to the parties contemporaneously with the execution hereof (“Closing”) at the Philadelphia, Pennsylvania offices of Ballard Spahr Andrews & Ingersoll, LLP.

4.7           Waiver of Rights: By completing the Closing hereunder, or by making Loans hereunder, Lender does not thereby waive a breach of any warranty or representation made by Borrower or any other requirement of Borrower hereunder or under any agreement, document, or instrument delivered to Lender or otherwise referred to herein, and any claims and rights of Lender resulting from any breach or misrepresentation by Borrower are specifically reserved by Lender.

4.8           Conditions for Future Loans: The making of Loans under the Revolving Credit in any form following the Closing Date and the conversion of any Base Rate Loan to a LIBOR Rate Loan or continuation of any LIBOR Rate Loan is subject to the following conditions precedent (all instruments, documents and agreements to be in form and substance satisfactory to Lender and its counsel) following the Closing Date:

        a.           This Agreement and each of the other Loan Documents shall be effective;

  

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  b.           No event or condition shall have occurred or become known to Borrower, or would result from the making of any requested Loan, which could have a Material Adverse Effect; provided, however, that such condition precedent shall apply only to new Loans and shall not apply to the conversion of any existing Base Rate Loan to a LIBOR Rate Loan or the continuation of any existing LIBOR Rate Loan;

c.           No Default or Event of Default then exists or after giving effect to the making of the Loan would exist;

d.           Each Loan is within and complies with the terms and conditions of this Agreement including, without limitation, the notice provisions contained in Section 2.4 hereof;

e.           No Lien (other than a Permitted Lien) has been imposed on Borrower; and

f.           Each representation and warranty set forth in Section 5 and any other Loan Document in effect at such time (as amended or modified from time to time) is then true and correct in all material respects as if made on and as of such date except to the extent such representations and warranties are made only as of a specific earlier date.

SECTION V.  REPRESENTATIONS AND WARRANTIES

To induce Lender to complete the Closing and make the Loans to Borrower under the Revolving Credit, Borrower warrants and represents to Lender that:

5.1           Organization and Validity:

a.           Each of Borrower and its Subsidiaries is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, as applicable and is duly qualified to do business in, and is in good standing in, all other jurisdictions where the nature of its business or the nature of property owned or used by it makes such qualification necessary, except where such failure would not have a Material Adverse Effect.  Each of Borrower and its Subsidiaries has all requisite corporate (or other applicable) powers and authority to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted.

b.           The execution, delivery and performance by Borrower of this Agreement and each Loan Document to which it is a party are within Borrower’s corporate (or other applicable) powers, have been duly authorized by all necessary corporate (or other applicable) action, do not contravene (i) Borrower’s certificate of incorporation, (ii) any law, rule or regulation applicable to Borrower or (iii) any contractual or legal restriction binding on or affecting Borrower, and will not result in or require the imposition of any Lien on any property (including, without limitation, accounts or contract rights) of Borrower, except as provided in this Agreement and any other the Loan Document.

c.           No Governmental Action is required for the execution or delivery by Borrower of this Agreement or any other Loan Document to which it is a party or for the performance by Borrower of its obligations under this Agreement or any other Loan Document other than those which have previously been duly obtained, are in full force and effect, are not subject to any pending or, to the knowledge of Borrower, threatened appeal or other proceeding seeking reconsideration and as to which all applicable periods of time for review, rehearing or appeal with respect thereto have expired.

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d.           This Agreement and each Loan Document to which Borrower is a party is a legal, valid and binding obligation of Borrower party thereto, enforceable against Borrower in accordance with its terms subject to the effect of bankruptcy, insolvency, reorganization,  fraudulent conveyance,  moratorium  and  other  similar  laws  of general application affecting rights and remedies of creditors generally.

5.2           Pending Litigation:  Except as disclosed in the Disclosure Documents, there is no pending or, to Borrower’s knowledge, threatened action or proceeding (including, without limitation, any proceeding relating to or arising out of Environmental Laws) affecting Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator that has a reasonable possibility of having a Material Adverse Effect.

5.3           Financial Statements:  The audited consolidated balance sheet of Borrower and its Consolidated Subsidiaries, as at December 31, 2007, and the related consolidated statements of income, retained earnings and cash flows of Borrower and its Consolidated Subsidiaries for the fiscal year then ended, and the unaudited consolidated balance sheet of Borrower and its Consolidated Subsidiaries as at September 30, 2008, and the related consolidated statements of income, retained earnings and cash flows of Borrower and its Consolidated Subsidiaries for the nine (9) months then ended, copies of which have been furnished to Lender, fairly present in all material respects the financial condition of Borrower and its Consolidated Subsidiaries as at such dates and the results of the operations of Borrower and its Consolidated Subsidiaries for the periods ended on such dates, all in accordance with GAAP consistently applied,  subject, solely in the case of unaudited consolidated balance sheets, to normal year end adjustments.  Since December 31, 2007, there has been no Material Adverse Effect, or material adverse change in the facts and information regarding such entities as represented to the Closing Date.

5.4           Investment Company Status:  Neither Borrower nor any Subsidiary of Borrower is an “investment company” or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended.

5.5           No Default or Event of Default:  No event has occurred or is continuing which constitutes a Default or an Event of Default, or which constitutes, or which with the passage of time or giving of notice or both would constitute, a default or event of default by Borrower or Subsidiary thereof under any material agreement or contract, judgment, decree or order by which Borrower or any of its respective properties may be bound or which would require Borrower or Subsidiary thereof to make any payment thereunder prior to the scheduled maturity date therefore, where such default could reasonably be expected to have a Material Adverse Effect.

5.6           Liens:  None of the properties or assets of Borrower is subject to any Lien, except Permitted Liens.

5.7           Documentation:  All written information, reports and other papers and data produced by or on behalf of Borrower and furnished to Lender were, at the time the same were so furnished, complete and correct in all material respects.  No document furnished or written statement made to Lender by Borrower in connection with the negotiation, preparation or execution of this Agreement or any other Loan Documents contains or will contain any untrue statement of a fact material to the creditworthiness of Borrower or its Subsidiaries or omits or will omit to state a fact necessary in order to make the statements contained therein not misleading.

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5.8           Government Regulations, Etc.:

a.           Neither Borrower nor its Subsidiaries is engaged in the business of extending credit for the purpose of buying or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Loan will be used to buy or carry any margin stock or to extend credit to others for the purpose of buying or carrying any margin stock.

b.           No ERISA Event has occurred or is reasonably expected to occur with respect to any Plan which reasonably could be expected to have a Material Adverse Effect.  Since the actuarial valuation date specified in the most recent Schedule B (Actuarial Information) to the annual report of Plans maintained by Borrower (Form 5500 Series), if any, (i) there has been no Material Adverse Effect to the funding status of the Plans referred to therein and (ii) no “prohibited transaction” has occurred with respect thereto.  Neither Borrower nor any of its respective ERISA Affiliates has incurred nor reasonably expects to incur any material withdrawal liability under ERISA to any Multiemployer Plan.

c.           Except as set forth in the Disclosure Documents, Borrower and its Subsidiaries are in compliance in all material respects with all applicable Federal, state and local statutes, rules, regulations, orders and other provisions of law relating to Hazardous Materials, air emissions, water discharge, noise emission and liquid disposal, and other environmental, health and safety matters, other than those the non-compliance with which would not have a Material Adverse Effect (taking into consideration all fines, penalties and sanctions that may be imposed because of such non-compliance) or on the ability of Borrower to perform its obligations under this Agreement or any other Loan Document to which Borrower is a party.  Except as set forth in the Disclosure Documents, neither Borrower nor any of its respective Subsidiaries has received from any Governmental Authority any notice of any material violation of any such statute, rule, regulation, order or provision.

d.           The issuance of, and the existence of, the Loans and the use of the proceeds thereof will comply with all provisions of applicable law and regulation in all material respects.

 5.9           Taxes:  Borrower and its Subsidiaries have filed all tax returns (Federal, state and local) required to be filed and paid all taxes shown thereon to be due, including interest and penalties, except to the extent that Borrower or any such Subsidiary is diligently contesting any such taxes in good faith and by appropriate proceedings, and for which adequate reserves for payment thereof have been established.

5.10           Solvency:  As of the Closing Date, Borrower and each of its Subsidiaries will be Solvent.

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5.11           Capital Stock:  The capitalization of Borrower and each Subsidiary of Borrower consists of the Capital Stock, authorized, issued and outstanding, of such classes and series, with or without par value, described on Schedule I hereto.  All such outstanding Capital Stock has been duly authorized and validly issued and are fully paid and nonassessable.  Except as set forth in the Disclosure Documents, there are no outstanding warrants, subscriptions, options, securities, instruments or other rights of any type or nature whatsoever, which are convertible into, exchangeable for or otherwise provide for or permit the issuance of, Capital Stock of Borrower or any Subsidiary of Borrower or are otherwise exercisable by any Person.

5.12           Title to Properties:  Borrower and each Subsidiary of Borrower has good and marketable title to all assets and other property purported to be owned by it.

5.13           Anti-Terrorism Laws:  Borrower is not listed on the specially Designated Nationals and Blocked Persons List maintained by the Office of Foreign Asset Control, Department of the Treasury (“OFAC” pursuant to Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001)), and/or any other list maintained pursuant to any of the rules and regulations of OFAC or pursuant to any other applicable Executive Orders or otherwise subject to sanction under an OFAC implemented regulation.

SECTION VI.  BORROWER’S AFFIRMATIVE COVENANTS

Until the Obligations have been finally and indefeasibly paid and satisfied in full, and the Revolving Credit has been terminated, Borrower will, and will cause each of its Subsidiaries, to:

6.1           Preservation of Existence, Etc.:  Preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its corporate or company, as applicable, existence, material rights (statutory and otherwise) and franchises, and take such other action as may be necessary or advisable to preserve and maintain its right to conduct its business in the states where it shall be conducting its business, except where failure to do so does not result in, or could not reasonably be expected to have, a Material Adverse Effect.

6.2           Maintenance of Properties, Etc.:  Maintain, and cause each of its Subsidiaries to maintain, good and marketable title to all of its properties which are used or useful in the conduct of its business, and preserve, maintain, develop and operate, and cause each of its Subsidiaries to preserve, maintain, develop and operate, in substantial conformity with all laws and material contractual obligations, all such properties in good working order and condition, ordinary wear and tear excepted, except where such failure would not have a Material Adverse Effect.

6.3           Ownership:  Cause Parent to own, at all times, 100% of the Capital Stock having voting rights of Borrower.

6.4           Compliance with Material Contractual Obligations, Laws, Etc.:  Comply, and cause each of its Subsidiaries to comply, with the requirements of all material contractual obligations and all applicable laws, rules, regulations and orders, the failure to comply with which could reasonably be expected to have a Material Adverse Effect, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property except to the extent diligently contested in good faith and by appropriate proceedings and for which adequate reserves for the payment thereof have been established, and complying with the requirements of all applicable Federal, state and local statutes, rules, regulations, orders and other provisions of law relating to Hazardous Materials, air emissions, water discharge, noise emission and liquid disposal, and other environmental, health and safety matters.

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6.5           Insurance:  Maintain, and cause each of its Subsidiaries to maintain, insurance with financially sound and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in the same or similar businesses and similarly situated.

6.6           Visitation Rights; Keeping of Books:  At any reasonable time and from time to time, upon reasonable advance notice, permit Lender or any agents or representatives thereof, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, Borrower and any of its Subsidiaries, and to discuss the affairs, finances and accounts of Borrower and any of its Subsidiaries with any of their respective officers or directors and with their respective independent certified public accountants and keep proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and liabilities of Borrower in accordance with GAAP.

6.7           Transactions with Affiliates:  Conduct, and cause each of its Subsidiaries to conduct, all transactions otherwise permitted under this Agreement with any of its Affiliates on terms that are fair and reasonable and no less favorable to Borrower or such Subsidiary than it would obtain in a comparable arm’s-length transaction with a Person not an Affiliate.

6.8           Use of Proceeds:  Use the proceeds of any Loan solely for funding Capital Expenditures and/or general corporate purposes.

6.9           Loan Documents:  Perform and comply in all material respects with each of the provisions of each Loan Document to which it is a party.

6.10           Risk Management:  Perform and comply in all material respects, and require its Subsidiaries to perform and comply in all material respects, with any risk management policies developed by Borrower, including such policies, if applicable, related to (i) the retail and wholesale inventory distribution and trading procedures and (ii) dollar and volume limits.

6.11           OFAC Compliance:  Comply with any obligations that it may have under the USA Patriot Act, all laws and executive orders administered by OFAC and all regulations promulgated and executive orders having the force of law issued pursuant thereto, as amended or supplemented from time to time (collectively, “AML and Anti-Terrorist Acts”).  In the event that Borrower becomes aware that it is not in compliance with any applicable AML and Anti-Terrorist Acts, Borrower shall notify Lender and diligently take all actions required thereunder to become compliant.

6.12           Further Assurances:  At the expense of Borrower, promptly execute and deliver, or cause to be promptly executed and delivered, all further instruments and documents, and take and cause to be taken all further actions, that may be reasonably necessary or that Lender may reasonably request, to enable Lender to enforce the terms and provisions of this Agreement and the Loan Documents and to exercise their rights and remedies hereunder.  In addition, Borrower will use all reasonable efforts to duly obtain Governmental Actions required from time to time on or prior to such date as the same may become legally required, and thereafter to maintain all such Governmental Actions in full force and effect, except where such failure would not have a Material Adverse Effect.

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6.13           Reporting Requirements: Provide to Lender:

a.           as soon as available and in any event within sixty (60) days after the end of each of the first three quarters of each fiscal year of Borrower, a consolidated and consolidating balance sheet of Borrower and its Consolidated Subsidiaries as at the end of such quarter and consolidated and consolidating statements of income, retained earnings and cash flows of Borrower and its Consolidated Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and duly certified by the chief financial officer or the treasurer of Borrower as fairly presenting in all material respects the financial condition of Borrower and its Consolidated Subsidiaries as at such date and the results of operations of Borrower and its Consolidated Subsidiaries for the periods ended on such date, except for normal year end adjustments, all in accordance with GAAP consistently applied (for purposes hereof delivery of Borrower’s appropriately completed Form 10-Q will be sufficient in lieu of delivery of such consolidated balance sheet and consolidated statements of income, retained earnings and cash flows), together with a quarterly compliance certificate in the form of Exhibit “D” (each, a “Quarterly Compliance Certificate”), of the chief financial officer or the treasurer of Borrower (A) demonstrating and certifying compliance by Borrower with the covenants set forth in Section 6.14 and (B) stating that no Event of Default or Default has occurred and is continuing or, if an Event of Default or Default has occurred and is continuing, a statement as to the nature thereof and the action which Borrower has taken and proposes to take with respect thereto;

b.           as soon as available and in any event within one hundred five (105) days after the end of each fiscal year of Borrower, a copy of the annual report for such year for Borrower and its Consolidated Subsidiaries, containing consolidated and consolidating financial statements for such year certified by, and accompanied by an unqualified opinion of, independent public accountants reasonably acceptable to Lender (for purposes hereof, delivery of Borrower’s appropriately completed Form 10-K will be sufficient in lieu of delivery of such financial statements), together with a Quarterly Compliance Certificate, in the form of Exhibit “D”, of the chief financial officer or the treasurer of Borrower (A) demonstrating and certifying compliance by Borrower with the covenants set forth in Section 6.14 and (B) stating that no Event of Default or Default has occurred and is continuing or, if an Event of Default or Default has occurred and is continuing, a statement as to the nature thereof and the action which Borrower has taken and proposes to take with respect thereto;

c.           as soon as possible and in any event within five (5) days after the occurrence of each Event of Default and each Default known to Borrower, a statement of the chief financial officer of Borrower setting forth details of such Event of Default or Default and the action which Borrower has taken and proposes to take with respect thereto;

d.           as soon as possible and in any event within five (5) days after receipt thereof by Borrower or any of its ERISA Affiliates from the PBGC copies of each notice received by Borrower or such ERISA Affiliate of the PBGC’s intention to terminate any Plan of Borrower or such ERISA Affiliate or to have a trustee appointed to administer any such Plan;

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e.           as soon as possible and in any event within five (5) days after receipt thereof by Borrower or any ERISA Affiliate from a Multiemployer Plan sponsor, a copy of each notice received by Borrower or such ERISA Affiliate concerning the imposition of withdrawal liability in the amount of at least $1,000,000 pursuant to Section 4202 of ERISA in respect of which Borrower or such ERISA Affiliate is reasonably expected to be liable;

f.           as soon as possible and in any event within five (5) days after Borrower becomes aware of the occurrence thereof, notice of all actions, suits, proceedings or other events (A) of the type described in Section 5.2 or (B) for which Lender will be entitled to indemnity under Section 9.4;

g.           as soon as possible and in any event within five (5) days after the sending or filing thereof, copies of all material reports that Borrower sends to any of its security holders, and copies of all reports and registration statements which Borrower or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange;

h.           as soon as possible and in any event within five (5) days after requested, such other information respecting the business, properties, assets, liabilities (actual or contingent), results of operations, prospects, condition or operations, financial or otherwise, of Borrower or any Subsidiary thereof as Lender may from time to time reasonably request; and

i.           as soon as possible and in any event within fifteen (15) days after the occurrence of each ERISA Event, a statement of the chief financial officer of Borrower setting forth details of such ERISA Event and the action which Borrower has taken and proposes to take with respect thereto.

Information required to be delivered pursuant to this Section 6.13 shall be deemed to have been delivered if such information shall be available on the website of the Securities and Exchange Commission at http://www.sec.gov and Borrower shall have notified Lender of the availability of all Form 10-Q and Form 10-K reports; provided that, if requested by Lender, Borrower shall deliver a paper copy of such information to Lender.  Information required to be delivered pursuant to this Section 6.13 may also be delivered by electronic communications pursuant to procedures reasonably approved by Lender.

6.14           Financial Covenants:

a.           Borrower will maintain at the end of each fiscal quarter a ratio of Indebtedness to Consolidated Total Capitalization of Borrower and its Consolidated Subsidiaries of not more than 0.65 to 1.0.

b.           Borrower will maintain at the end of each fiscal quarter, a minimum Total Common Equity of at least $289,200,000.

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6.15           Replacement Financing:  At least sixty (60) days prior to the Revolving Credit Maturity Date, Borrower shall have received the written approval of the New Jersey Board of Public Utilities regarding Borrower’s entry into long-term debt financing to refinance, in whole, this Revolving Credit.

SECTION VII.  BORROWER’S NEGATIVE COVENANTS:

Borrower covenants that until all of the Obligations are paid and satisfied in full and the Revolving Credit has been terminated, that Borrower shall not:

7.1           Liens, Etc:  Except as permitted in Section 7.3, create, incur, assume, or suffer to exist, or permit any of its Subsidiaries to create, incur, assume, or suffer to exist, any Lien other than Permitted Liens.

7.2           Indebtedness:  Create or suffer, or permit any Subsidiary to create or suffer, to exist any Indebtedness except for Permitted Indebtedness.

7.3           Obligation to Ratably Secure:  Except as permitted by Section 7.1, create or suffer to exist, or permit any of its Subsidiaries to create or suffer to exist, any Lien other than a Permitted Lien, in each case to secure or provide for the payment of Indebtedness, unless, on or prior to the date thereof, Borrower shall have (i) pursuant to documentation reasonably satisfactory to Lender, equally and ratably secured the Obligations of Borrower under this Agreement by a Lien acceptable to Lender, and (ii) caused the creditor or creditors, as the case may be, in respect of such Indebtedness to have entered into an intercreditor agreement in form, scope and substance reasonably satisfactory to Lender.

7.4           Mergers, Etc:  Merge or consolidate with or into any Person, or permit any of its Subsidiaries to do so, except that (i) any Subsidiary of Borrower may merge or consolidate with or into, any other Subsidiary of Borrower and (ii) any Subsidiary of Borrower may merge or consolidate with and into Borrower; provided, that Borrower is the surviving corporation; provided, further, that in each case, immediately after giving effect to such proposed transaction, no Event of Default or Default would exist.

7.5           Sale of Assets, Etc:  Sell, transfer, lease, assign or otherwise convey or dispose, or permit any Subsidiary to sell, transfer, lease, assign or otherwise convey or dispose, of assets (whether now owned or hereafter acquired), in any single transaction or series of transactions, whether or not related having an aggregate book value in excess of 10% of the Consolidated assets of Borrower and its Consolidated Subsidiaries, except for dispositions of capital assets in the ordinary course of business as presently conducted.

7.6           Restricted Investments:  Other than in the ordinary course of business (i) make or permit to exist any loans or advances to, or any other investment in, any Person except for investments in Permitted Investments, or (ii) acquire any assets or property of any other Person.

7.7           New Business:  Permit Borrower or any of its Subsidiaries to enter into any business which is not substantially similar to that existing on the Closing Date.

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7.8           Distributions:  Pay any dividends on or make any other distributions in respect of any Capital Stock or redeem or otherwise acquire any such Capital Stock without in each instance obtaining the prior written consent of Lender; provided, that (i) any Subsidiary of Borrower may pay regularly scheduled dividends or make other distributions to Borrower; (ii) if no Default or Event of Default exists or would result therefrom, Borrower may pay distributions or dividends in either cash or Capital Stock or may redeem or otherwise acquire Capital Stock, and (iii) Borrower may cause the redemption or acquisition of Capital Stock having a preferred interest only if (a) such redemption or acquisition is effected by the proceeds of Capital Stock issued by Parent, or (b) such redemption or acquisition is effected with proceeds from Permitted Indebtedness; provided, that before and after such redemption or acquisition as described in (a) and (b) above, no Default or Event of Default has occurred and is continuing.

7.9           Compliance with ERISA:  (i) Permit to exist any “accumulated funding deficiency” (as defined in Section 412(a) of the Code), unless such deficiency exists with respect to a Multiple Employer Plan or Multiemployer Plan and Borrower has no control over the reduction or elimination of such deficiency, (ii) terminate, or permit any ERISA Affiliate to terminate, any Plan of Borrower or such ERISA Affiliate so as to result in any material liability of Borrower or ERISA Affiliate to the PBGC, or (iii) permit to exist any occurrence of any reportable event (within the meaning of Section 4043 of ERISA), or any other event or condition, which presents a material risk of a termination by the PBGC of any Plan of Borrower or such ERISA Affiliate and such a material liability of Borrower or ERISA Affiliate to the PBGC.

    7.10           Constituent Documents, Etc:  Change in any material respect the nature of its certificate of incorporation, by-laws, or other similar documents, or accounting policies or accounting practices (except as required or permitted by the Financial Accounting Standards Board or GAAP).

7.11           Fiscal Year:  Change its Fiscal Year.

SECTION VIII.  DEFAULT

8.1           Events of Default: Each of the following events shall constitute an event of default (“Event of Default”):

a.           Borrower shall fail to pay (i) any amount of principal when the same becomes due and payable or (ii) any interest, fees, Expenses or any other amount payable hereunder within five (5) Business Days of when the same becomes due and payable; or

b.           Any representation or warranty made by or on behalf of Borrower in this Agreement or any Loan Document or by or on behalf of Borrower (or any of its officers) in connection with this Agreement or any Loan Document shall prove to have been incorrect in any material respect when made or deemed made; or

c.           (i) Borrower shall fail to perform or observe any term, covenant or agreement contained in Sections 6.1, 6.3, 6.5, 6.7, 6.8, 6.9, 6.10, 6.13, 6.14, 6.15, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7, or 7.8, or (ii) Borrower shall fail to perform or observe any other term, covenant or agreement contained in this Agreement (other than obligations specifically set forth elsewhere in this Section 8.1) on its part to be performed or observed if the failure to perform or observe such other term, covenant or agreement, shall remain unremedied for thirty (30) days after written notice thereof shall have been given to Borrower by Lender; or

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d.           Borrower or any Significant Subsidiary thereof shall fail to pay any principal of or premium or interest on any Indebtedness (other than Indebtedness incurred under this Agreement) thereof in the aggregate (for all such Persons) in excess of $15,000,000, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Indebtedness and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or

e.           Borrower or any Significant Subsidiary thereof shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against Borrower or a Significant Subsidiary thereof seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), such proceeding shall remain undismissed or unstayed for a period of forty-five (45) days, any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur or Borrower or a Significant Subsidiary thereof shall consent to or acquiesce in any such proceeding; or Borrower or a Significant Subsidiary thereof shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or

f.           Any judgment or order for the payment of money in excess of $15,000,000 (in the aggregate) shall be rendered against Borrower or any Significant Subsidiary thereof and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of ten (10) consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or

g.           The obligations of Borrower under this Agreement or any other Loan Document shall become unenforceable, or Borrower, or any court or governmental or regulatory body having jurisdiction over Borrower, shall so assert in writing or Borrower or any of its Affiliates shall contest in any manner the validity or enforceability thereof; or

h.           Any ERISA Event shall have occurred with respect to a Plan and, thirty (30) days after notice thereof shall have been given to Borrower by Lender, (i) such ERISA Event shall still exist and (ii) such ERISA Event is reasonably likely to result in a liability or lien in excess of $15,000,000 against Borrower or any ERISA Affiliate; or

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i.           Borrower or any Affiliate thereof as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount exceeding $5,000,000; or

j.           Any Governmental Action shall be rescinded, revoked, otherwise terminated, or amended or modified in any manner which is materially adverse to the interests of Lender; or

k.           A Change in Control shall occur.

8.2           Upon an Event of Default.  Upon the occurrence of an Event of Default, Lender may, by notice to Borrower:

a.           Acceleration; Termination of Credit Facility.  Declare the principal of and interest on the Revolving Credit, the Note and the Obligations (except for Hedging Obligations, which shall be governed by the terms and conditions of the documents controlling such obligations) at the time outstanding, and all other amounts owed to Lender under this Agreement, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement to the contrary notwithstanding, and terminate the Revolving Credit and any right of Borrower to request Loans thereunder; provided, that upon the occurrence of an Event of Default specified in Section 8.1(e), the Revolving Credit shall be automatically terminated and all Obligations (except for Hedging Obligations, which shall be governed by the terms and conditions of the documents controlling such obligations) shall automatically become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or in any other Loan Document to the contrary notwithstanding.

8.3           Nature of Remedies: All rights and remedies granted Lender hereunder and under the Loan Documents, or otherwise available at law or in equity, shall be deemed concurrent and cumulative, and not alternative remedies, and Lender may proceed with any number of remedies at the same time until all Obligations are satisfied in full.  The exercise of any one right or remedy shall not be deemed a waiver or release of any other right or remedy, and Lender, upon or at any time after the occurrence of an Event of Default, may proceed against Borrower, at any time, under any agreement, with any available remedy and in any order.

8.4           Set-Off:  In addition to all other rights, options and remedies granted or available to Lender under this Agreement or the Loan Documents (each of which is also then exercisable by Lender), upon or at any time after the occurrence and during the continuance of an Event of Default, Lender (and any participant) shall have and be deemed to have, without notice to Borrower, the immediate right of set-off against any bank account of Borrower with Lender, or of Borrower with any other subsidiary of Lender or Bank Affiliate or any participant and may apply the funds or amount thus set-off against any of Borrower’s Obligations hereunder.

If any bank account of Borrower with Lender, any other subsidiary of Lender or Bank Affiliate or any participant is attached or otherwise liened or levied upon by any third party, Lender (and such participant) shall have and be deemed to have, without notice to Borrower, the immediate right of set-off and may apply the funds or amount thus set-off against any of Borrower’s Obligations hereunder.

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SECTION IX.  MISCELLANEOUS

9.1           Governing Law: THIS AGREEMENT, AND ALL MATERS ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND ALL RELATED AGREEMENTS AND DOCUMENTS, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK.  THE PROVISIONS OF THIS AGREEMENT AND ALL OTHER AGREEMENTS AND DOCUMENTS REFERRED TO HEREIN ARE TO BE DEEMED SEVERABLE, AND THE INVALIDITY OR UNENFORCEABILITY OF ANY PROVISION SHALL NOT AFFECT OR IMPAIR THE REMAINING PROVISIONS WHICH SHALL CONTINUE IN FULL FORCE AND EFFECT.

9.2           Integrated Agreement: The Note, the other Loan Documents, all related agreements, and this Agreement shall be construed as integrated and complementary of each other, and as augmenting and not restricting Lender’s rights and remedies.  If, after applying the foregoing, an inconsistency still exists, the provisions of this Agreement shall constitute an amendment thereto and shall control.

9.3           Waiver: No omission or delay by Lender in exercising any right or power under this Agreement or any related agreements and documents will impair such right or power or be construed to be a waiver of any Default, or Event of Default or an acquiescence therein, and any single or partial exercise of any such right or power will not preclude other or further exercise thereof or the exercise of any other right, and as to Borrower no waiver will be valid unless in writing and signed by Lender and then only to the extent specified.

9.4           Indemnity:

a.           Borrower releases and shall indemnify, defend and hold harmless Lender and its respective officers, employees and agents, of and from any claims, demands, liabilities, obligations, judgments, injuries, losses, damages and costs and expenses (including, without limitation, reasonable legal fees) resulting from (i) acts or conduct of Borrower under, pursuant or related to this Agreement and the other Loan Documents, (ii) Borrower’s breach or violation of any representation, warranty, covenant or undertaking contained in this Agreement or the other Loan Documents, (iii) Borrower’s failure to comply with any or all laws, statutes, ordinances, governmental rules, regulations or standards, whether federal, state or local, or court or administrative orders or decrees, (including without limitation Environmental Laws, etc.), and (iv) any claim by any other creditor of Borrower against Lender arising out of any transaction whether hereunder or in any way related to the Loan Documents and all costs, expenses, fines, penalties or other damages resulting therefrom, unless resulting solely from acts or conduct of Lender constituting willful misconduct or gross negligence.

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b.           Promptly after receipt by an indemnified party under subsection (a) above of notice of the commencement of any action by a third party, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof.  The omission to so notify the indemnifying party shall relieve the indemnifying party from any liability which it may have to any indemnified party under such subsection only if the indemnifying party is unable to defend such actions as a result of such failure to so notify.  In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnified party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation.

9.5           Time: Whenever Borrower shall be required to make any payment, or perform any act, on a day which is not a Business Day, such payment may be made, or such act may be performed, on the next succeeding Business Day.  Time is of the essence in Borrower’s performance under all provisions of this Agreement and all related agreements and documents.

9.6           Expenses of Lender: At Closing and from time to time thereafter, Borrower will pay upon demand of Lender all reasonable costs, fees and expenses of Lender in connection with (i) the analysis, negotiation, preparation, execution, administration, delivery and termination of this Agreement, and other Loan Documents and the documents and instruments referred to herein and therein, and any amendment, amendment and restatement, supplement, waiver or consent relating hereto or thereto, whether or not any such amendment, amendment and restatement, supplement, waiver or consent is executed or becomes effective, search costs, the reasonable fees, expenses and disbursements of counsel for Lender, any fees or expenses incurred by Lender under Section 6.6 for which Borrower is obligated thereunder, and reasonable charges of any expert consultant to Lender, (ii) the enforcement of Lender’s rights hereunder, or the collection of any payments owing from, Borrower under this Agreement and/or the other Loan Documents or the protection, preservation or defense of the rights of Lender hereunder and under the other Loan Documents, and (iii) any refinancing or restructuring of the credit arrangements provided under this Agreement and other Loan Documents in the nature of a “work-out” or of any insolvency or bankruptcy proceedings, or otherwise (including the reasonable fees and disbursements of counsel for Lender and, with respect to clauses (ii) and (iii), reasonable allocated costs of internal counsel) (collectively, the “Expenses”);

9.7           Brokerage: This transaction was brought about and entered into by Lender and Borrower acting as principals and without any brokers, agents or finders being the effective procuring cause hereof.  Borrower represents that it has not committed Lender to the payment of any brokerage fee, commission or charge in connection with this transaction.  If any such claim is made on Lender by any broker, finder or agent or other person, Borrower hereby indemnifies, defends and saves such party harmless against such claim and further will defend, with counsel satisfactory to Lender, any action or actions to recover on such claim, at Borrower’s own cost and expense, including such party’s reasonable counsel fees.  Borrower further agrees that until any such claim or demand is adjudicated in such party’s favor, the amount demanded shall be deemed an Obligation of Borrower under this Agreement.

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    9.8           Notices:

a.           Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed given if delivered in person to the person listed below or if sent by telecopy or by nationally recognized overnight courier, as follows, unless such address is changed by written notice hereunder:

If to Lender to:                                                             Toronto Dominion (New York) LLC

77 King Street West

Toronto, ON M5K 1A2

Attention: Ruth Bengo

Telecopy No.:  (416) 590-4335

With copies to :                                                           TD Securities

31 West 52nd Street

New York, NY 10019

Attention:  Director, Credit Management

Telecopy No.:  (212) 827-7232

TD Bank, NA

2005 Market Street

Philadelphia, PA 19103

Attention: Credit Management

Telecopy No.:  (215) 282-4032

Ballard Spahr Andrews & Ingersoll, LLP

1735 Market Street, 51st Floor

Philadelphia, PA 19103

Attention: Steven M. Miller, Esq.

        Telecopy No.:  (215) 993-3970

If to Borrower to:                                                        South Jersey Gas Company

1 South Jersey Plaza

Folsom, NJ 08037

Attention: Stephen H. Clark

Telecopy No.:  (609) 561-8225

      With copies to Borrower’s Counsel:       Cozen O'Connor

                                             457 Haddonfield Road, Suite 300

                Cherry Hill, NJ 08002

Attention: Liza L. Wolf, Esq.

Telecopy No.:  (877) 526-3072

b.           Any notice sent by Lender or Borrower by any of the above methods shall be deemed to be given when so received.

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c.           Lender shall be fully entitled to rely upon any telecopy transmission or other writing purported to be sent by any Authorized Officer (whether requesting a Loan or otherwise) as being genuine and authorized.

9.9           Headings: The headings of any paragraph or Section of this Agreement are for convenience only and shall not be used to interpret any provision of this Agreement.

9.10           Survival: All warranties, representations, and covenants made by Borrower herein, or in any agreement referred to herein or on any certificate, document or other instrument delivered by it or on its behalf under this Agreement, shall be considered to have been relied upon by Lender, and shall survive the delivery to Lender of the Notes, regardless of any investigation made by Lender or on its behalf.  All statements in any such certificate or other instrument prepared and/or delivered for the benefit of Lender shall constitute warranties and representations by Borrower hereunder.  Except as otherwise expressly provided herein, all covenants made by Borrower hereunder or under any other agreement or instrument shall be deemed continuing until all Obligations are satisfied in full.  All indemnification obligations under this Agreement, including under Section 9.4 and 9.7, shall survive the termination of this Agreement and payment of the Obligations for a period of two (2) years.

9.11           Successors and Assigns: This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties.  Borrower may not transfer, assign or delegate any of its duties or obligations hereunder.  Borrower acknowledges and agrees that Lender may at any time, and from time to time, (a) sell participating interests in the Loans, and Lender’s rights hereunder to other financial institutions, (b) sell, transfer, or assign the Loans and Lender’s rights hereunder to any Bank Affiliate, and (c) sell, transfer, or assign the Loans and Lender’s rights hereunder, to any one or more additional banks or financial institutions, subject (as to Lender’s rights under this clause (c)) to Borrower’s written consent, which consent shall not be unreasonably withheld; provided that, no consent under this clause (c) shall be required if an Event of Default exists at the time of such sale, transfer or assignment.

9.12           Duplicate Originals: Two or more duplicate originals of this Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument.

9.13           Modification: No modification hereof or any agreement referred to herein shall be binding or enforceable unless in writing and signed by Borrower and Lender.

9.14           Signatories: Each individual signatory hereto represents and warrants that he is duly authorized to execute this Agreement on behalf of his principal and that he executes the Agreement in such capacity and not as a party.

9.15           Third Parties: No rights are intended to be created hereunder, or under any related agreements or documents for the benefit of any third party donee, creditor or incidental beneficiary of Borrower.  Nothing contained in this Agreement shall be construed as a delegation to Lender of Borrower’s duty of performance, including, without limitation, Borrower’s duties under any account or contract with any other Person.

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9.16           Discharge of Taxes, Borrower’s Obligations, Etc.: Lender, in its sole discretion, shall have the right at any time, and from time to time, with at least ten (10) days prior notice to Borrower if Borrower fail to do so, to: (a) pay for the performance of any of Borrower’s obligations hereunder, and (b) discharge taxes or Liens, at any time levied or placed on Borrower’s Property in violation of this Agreement unless Borrower is in good faith with due diligence by appropriate proceedings contesting such taxes or Liens and maintaining proper reserves therefor in accordance with GAAP.  Expenses and advances shall be added to the Revolving Credit Loans, and bear interest at the rate applicable to the Revolving Credit Loans, until reimbursed to Lender.  Such payments and advances made by Lender shall not be construed as a waiver by Lender of a Default or Event of Default under this Agreement.

9.17           Withholding and Other Tax Liabilities: Lender shall have the right to refuse to make any Loan from time to time unless Borrower shall, at Lender’s request, have given to Lender evidence, reasonably satisfactory to Lender, that Borrower has properly deposited or paid, as required by law, all withholding taxes and all federal, state, city, county or other taxes due up to and including the date of the requested Loan.  Copies of deposit slips showing payment shall constitute satisfactory evidence for such purpose.  In the event that any Lien, assessment or tax liability against Borrower shall arise in favor of any taxing authority, whether or not notice thereof shall be filed or recorded as may be required by law, Lender shall have the right (but shall not be obligated, nor shall Lender hereby assume the duty) to pay any such Lien, assessment or tax liability by virtue of which such charge shall have arisen; provided, however, that Lender shall not pay any such tax, assessment or Lien if the amount, applicability or validity thereof is being contested in good faith and by appropriate proceedings by Borrower.  In order to pay any such Lien, assessment or tax liability, Lender shall not be obliged to wait until such lien, assessment or tax liability is filed before taking such action as hereinabove set forth.  Any sum or sums which Lender shall have paid for the discharge of any such Lien shall be added to the Revolving Credit and shall be paid by Borrower to Lender with interest thereon at the rate applicable to the Revolving Credit, upon demand, and Lender shall be subrogated to all rights of such taxing authority against Borrower.

9.18           Consent to Jurisdiction: Borrower and Lender each hereby irrevocably consent to the non-exclusive jurisdiction of the Courts of the State of New York or the United States District Court for the Southern District of New York in any and all actions and proceedings whether arising hereunder or under any other agreement or undertaking.  Borrower waives any objection which Borrower may have based upon lack of personal jurisdiction, improper venue or forum non conveniens.  Borrower irrevocably agrees to service of process by certified mail, return receipt requested to the address of the appropriate party set forth herein.

9.19           Waiver of Jury Trial: BORROWER AND LENDER EACH HEREBY WAIVE ANY AND ALL RIGHTS IT MAY HAVE TO A JURY TRIAL IN CONNECTION WITH ANY LITIGATION, PROCEEDING OR COUNTERCLAIM ARISING WITH RESPECT TO RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO OR UNDER THE LOAN DOCUMENTS OR WITH RESPECT TO ANY CLAIMS ARISING OUT OF ANY DISCUSSIONS, NEGOTIATIONS OR COMMUNICATIONS INVOLVING OR RELATED TO ANY PROPOSED RENEWAL, EXTENSION, AMENDMENT, MODIFICATION, RESTRUCTURE, FORBEARANCE, WORKOUT, OR ENFORCEMENT OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS.

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9.20           Consequential Damages: Neither Lender nor agent or attorney of Lender, shall be liable for any consequential damages arising from any breach of contract, tort or other wrong relating to the establishment, administration or collection of the Obligations.

9.21           Nonliability of Lender: The relationship between Borrower and Lender shall be solely that of borrower and lender.  Lender shall not have any fiduciary responsibility to Borrower.

[SIGNATURES TO FOLLOW ON SEPARATE PAGE]

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WITNESS the due execution of this Agreement as a document under seal as of the date first written above.

SOUTH JERSEY GAS COMPANY

By:    

Name:

Title:

TORONTO DOMINION (NEW YORK) LLC

By:     

Name:

Title:

(Signature Page to Loan Agreement)

EXHIBIT “A”

FORM OF AUTHORIZATION CERTIFICATE

(Borrower Letterhead)

Date: _______________

Toronto Dominion (New York) LLC                                           TD Securities

77 King Street West                                                                     31 West 52nd Street

Toronto, ON M5K 1A2                                                                 New York, NY 10019

Attention: Ruth Bengo                                                                 Attention:  Director, Credit Management

Dear _____________:

The following individuals are authorized to request loan advances against South Jersey Gas Company (“Borrower”) revolving credit facility and transfer funds from any of Borrower’s accounts per written instructions received via fax:

Authorized Person	Title	Signature
1. ____________________	_____________________	_______________________
2. ____________________	_____________________	_______________________
3. ____________________	_____________________	_______________________

Acknowledged and approved:

By:    

Name:       

Title:        

A-1

EXHIBIT “B”

FORM OF REVOLVING CREDIT LOAN REQUEST

South Jersey Gas Company

1 South Jersey Plaza

Folsom, NJ 08037

Attention: Stephen H. Clark

Telecopy No.:  (609) 561-8225

(“Borrower”)

To: Toronto Dominion (New York) LLC                                   TD Securities

77 King Street West                                                                     31 West 52nd Street

Toronto, ON M5K 1A2                                                                New York, NY 10019

Attention: Ruth Bengo                                                                Attention:  Director, Credit Management

(“Lender”)

Borrower hereby requests a Loan in the amount of $___________ pursuant to Section 2.4 of that certain Loan Agreement by and between Borrower and Lender dated December 15_, 2008 (as amended, restated or otherwise modified from time to time, the “Loan Agreement”).  Borrower hereby requests that such Loan be a (select one) Base Rate Loan or LIBOR Rate Loan.  If a LIBOR Rate Loan, the LIBOR Interest Period for such Loan is ____.  The proposed date of the Loan is _______________.

Borrower hereby represents and warrants to Lender as follows:

a.           All conditions in Section 4.8 have been satisfied as of the date hereof.

b.           The aggregate principal amount of all Loans outstanding under the Revolving Credit are $_____________.

c.           The number of LIBOR Rate Loans after giving effect to this Loan are ____ (cannot exceed 4).

SOUTH JERSEY GAS COMPANY

By:   

Name:          

Date: ____________, 200__                                             Title:          

B-1

EXHIBIT “C”

FORM OF NOTICE OF EXTENSION/CONVERSION

Dated as of: ______________

Toronto Dominion (New York) LLC                                           TD Securities

77 King Street West                                                                     31 West 52nd Street

Toronto, ON M5K 1A2                                                                New York, NY 10019

Attention: Ruth Bengo                                                                Attention:  Director, Credit Management

Ladies and Gentlemen:

This irrevocable Notice of Conversion/Continuation (the “Notice”) is delivered to you under Section 2.5 of the Loan Agreement dated as of December 15, 2008 (as amended, restated or otherwise modified from time to time, the “Loan Agreement”), by and among South Jersey Gas Company (“Borrower”) and Toronto Dominion (New York) LLC, as lender (“Lender”).

1.           This Notice is submitted for the purpose of:

(Check one and complete applicable information in accordance with the Loan Agreement.)

o           Converting all or a portion of a Base Rate Loan into a LIBOR Rate Loan

(a) The aggregate outstanding principal balance of such Loan is $__________.

(b) The principal amount of such Loan to be converted is $___________.

(c) The requested effective date of the conversion of such Loan is _________.

(d) The requested LIBOR Interest Period applicable to the converted Loan is ______.

o Converting a portion of LIBOR Rate Loan into a Base Rate Loan

(a) The aggregate outstanding principal balance of such Loan is $__________.

(b) The last day of the current LIBOR Interest Period for such Loan is ___________.

(c) The principal amount of such Loan to be converted is $____________.

(d) The requested effective date of the conversion of such Loan is _________.

C-1

o  Continuing all or a portion of a LIBOR Rate Loan as a LIBOR Rate Loan

(a) The aggregate outstanding principal balance of such LIBOR Rate Loan is $__________.

(b) The last day of the current LIBOR Interest Period for such Loan is ____________.

(c) The principal amount of such LIBOR Rate Loan to be continued is $_____________.

(d) The requested effective date of the continuation of such LIBOR Rate Loan is ________.

(e) The requested LIBOR Interest Period applicable to the continued LIBOR Rate Loan is ______.

2.           All of the conditions applicable to the conversion or continuation of the Loan requested herein as set forth in the Loan Agreement have been satisfied or waived as of the date hereof and will remain satisfied or waived to the date of such Loan.

3.           No Default or Event of Default Exists

4.           Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Loan Agreement.

IN WITNESS WHEREOF, the undersigned, on behalf of Borrower, has executed this Notice of Conversion/Continuation this ____ day of __________, 200__.

SOUTH JERSEY GAS COMPANY

By:    

Name:        

Title:        

C-2

EXHIBIT “D”

QUARTERLY COMPLIANCE CERTIFICATE

_____________, 200_

Toronto Dominion (New York) LLC                                          TD Securities

77 King Street West                                                                     31 West 52nd Street

Toronto, ON M5K 1A2                                                                New York, NY 10019

Attention: Ruth Bengo                                                                Attention:  Director, Credit Management

The undersigned Authorized Officer of South Jersey Gas Company (“Borrower”), gives this certificate to Toronto Dominion (New York) LLC (“Lender”), in accordance with the requirements of Section 6.13 of that certain Loan Agreement dated December 15, 2008, by and between Borrower and Lender (“Loan Agreement”).  Capitalized terms used in this Certificate, unless otherwise defined herein, shall have the meanings ascribed to them in the Loan Agreement.

1.           Based upon my review of the consolidated balance sheets and statements of income of Borrower for the fiscal period ending __________________, 200_, copies of which are attached hereto, I hereby certify that:

(a) The ratio of Indebtedness to Consolidated Total Capitalization of Borrower and its Consolidated Subsidiaries is _________________; and

(b) The Total Common Equity of Borrower is ___________________.

Attached as Schedule “A” are the details underlying such financial covenant calculations.

2.           No Default exists on the date hereof, other than: ____________________ [if none, so state]; and

3.           No Event of Default exists on the date hereof, other than: __________________ [if none, so state].

4.           Borrower is currently in compliance with all of its obligations under the Loan Agreement and all documents related thereto.

Very truly yours,

By:     

Name:      

Title:      

D-1

EX-12

													Exhibit 12
SOUTH JERSEY GAS COMPANY
Calculation of Ratio of Earnings to Fixed Charges
(IN THOUSANDS)
	Fiscal Year Ended December 31,
	2008			2007			2006			2005				2004
Net Income	$	39,431		$	38,025		$	35,779		$	34,547			$	31,462
Income Taxes, Net		26,508			26,652			24,811			25,185				22,969
Fixed Charges*		19,089			20,928			22,274			19,317				18,639
Capitalized Interest		(152	)		(151	)		(175	)		(1,161	)			(733	)
Total Available for Coverage	$	84,876		$	85,454		$	82,689		$	77,888			$	72,337
Total Available		4.4	x		4.1	x		3.7	x		4.0	x			3.9	x
Fixed Charges
* Fixed charges consist of interest charges and preferred dividend requirement amounting to $45,000 in 2005 and $135,000 in 2004 (rentals are not material).

EX-21

			Exhibit 21
SOUTH JERSEY GAS COMPANY
SUBSIDIARIES OF REGISTRANT
AS OF DECEMBER 31, 2008
	Percentage of
	Voting Securities		State of
	Owned by Parent	Relationship	Incorporation
South Jersey Gas Company	Registrant	Parent	New Jersey
SJG Capital Trust	100	Subsidiary	Delaware
(inactive as of November 5, 2003)

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-126822 on Form S-3 of our report dated March 2, 2009, relating to the financial statements and financial statement schedule of South Jersey Gas Company (which report expressed an unqualified opinion and included an explanatory paragraph as to change in accounting principles related to the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109), appearing in this Annual Report on Form 10-K of South Jersey Gas Company for the year ended December 31, 2008.

/s/ DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania

March 2, 2009

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Edward J. Graham, certify that:

1. I have reviewed this report on Form 10-K for the period ended December 31, 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 is made known to us by others within the organization, 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.

	South Jersey Gas Company
Date:  March 4, 2009	By:	/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-K for the period ended December 31, 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 is made known to us by others within the organization, 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.

	South Jersey Gas Company
Date:  March 4, 2009	By:	/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 Annual Report on Form 10-K of South Jersey Gas Company (the “Company”) for the period ended December 31, 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.

	South Jersey Gas Company
Date:  March 4, 2009	By:	/s/ Edward J. Graham
		Edward J. Graham
		Chief Executive Officer

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 Annual Report on Form 10-K of South Jersey Gas Company (the “Company”) for the period ended December 31, 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.

	South Jersey Gas Company
Date:  March 4, 2009	By:	/s/ David A. Kindlick
		David A. Kindlick
		Chief Financial Officer