RATES AND REGULATORY ACTIONS:

Base Rates - SJG is subject to the rules and regulations of the BPU. In September 2010, the BPU granted SJG a base rate increase of $42.1 million, which was predicated, in part, upon an 8.21% rate of return on rate base that included a 10.3% return on common equity. The $42.1 million includes $16.6 million of revenue previously recovered through the Conservation Incentive Program (CIP) and $6.8 million of revenues previously recovered through the Capital Investment Recovery Tracker (CIRT), resulting in incremental revenue of $18.7 million. SJG was permitted to recover regulatory assets contained in its petition and defer certain federally mandated pipeline integrity management program costs for recovery in its next base rate case. In addition, annual depreciation expense will be reduced by $1.2 million as a result of the amortization of excess cost of removal recoveries. The BPU also authorized a Phase II of the base rate proceeding to review the costs of CIRT projects not rolled into rate base in the September 2010 settlement. A proceeding took place in 2013 to roll into base rates the remaining $22.5 million of CIRT I project costs that were not included in the 2010 rate increase, as well as CIRT II and III investments totaling $95.0 million that were made subsequent to the 2010 base rate case. These costs were rolled into rate base and reflected in base rates effective October 2013.

In November 2013, we filed a base rate case with the BPU to increase our base rates to obtain a certain level of return on our capital investments. We expect the base rate case to be concluded during 2014. Other than the CIRT items discussed above, we have not sought a base rate increase from the BPU since the implementation of our base rate case approved in September 2010.

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 utilized by the BPU to set rates in our last base rate proceeding.

Regulatory actions regarding the BGSS were as follows:


•	March 2011 - We credited the accounts of our periodic BGSS customers with refunds totaling $21.1 million due to gas costs that were lower than projected during the winter season.


•	June 2011 - We filed our annual BGSS filing with the BPU requesting a $10.6 million, or 2.9%, reduction in gas cost recoveries commencing on October 1, 2011.


•	September 2011 - The BPU issued an Order finalizing the 2010-2011 provisional BGSS rate and approved, on a provisional basis, SJG's request for a $10.6 million, or 2.9%, reduction in gas cost recoveries.


•	December 2011 - We credited the accounts of our periodic BGSS customers with refunds totaling $18.7 million due to gas costs that were lower than projections.


•	May 2012 - The BPU issued an Order finalizing the 2011-2012 provisional BGSS rates.


•	June 2012 - We filed our annual BGSS filing with the BPU requesting a $27.0 million, or 8.8%, reduction in gas cost recoveries commencing on October 1, 2012.


•	September 2012 - The BPU issued an Order approving, on a provisional basis, SJG's request for a $27.0 million, or 8.8%, reduction in gas cost recoveries.


•	January 2013 - We credited the accounts of our periodic BGSS customers with refunds totaling $9.4 million due to gas costs that were lower than projections.


•	May 2013 - We filed our annual BGSS filing with the BPU requesting a $0.6 million reduction in gas cost recoveries.


•	September 2013 - The BPU issued an Order approving, on a provisional basis, SJG’s request for a $0.6 million reduction in gas cost recoveries.


•	January 2014 - We credited the accounts of our periodic BGSS customer with refunds totaling $11.2 million due to gas costs that were lower than projected.

Conservation Incentive Program (CIP) - The primary purpose of the CIP is to promote conservation efforts, without negatively impacting financial stability, and to base our profit margin on the number of customers rather than the amount of natural gas distributed to customers. In October 2006, the BPU approved the CIP as a three-year pilot program. In January 2010, the BPU approved an extension of this program through September 2013, with an automatic one year extension through September 2014 if a request for an extension was filed by March 2013. A petition was filed in March 2013 to extend the CIP 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.

Regulatory actions regarding the CIP were as follows:


•	June 2011 - We made our annual CIP filing with the BPU requesting recovery of $2.5 million, which includes a $2.7 million credit to customers for the current 2011-2012 CIP year and prior year carryovers of $5.2 million. The CIP credit of $2.7 million includes $1.3 million non-weather related credits and $1.4 million weather related credits.


•	September 2011 - The BPU issued an Order finalizing the 2010-2011 provisional CIP rates and also approved, on a provisional basis, the 2011-2012 CIP rates filed in June 2011, effective October 1, 2011.


•	May 2012 - The BPU issued an Order finalizing the 2011-2012 provisional CIP rates.


•	June 2012 - We made our annual CIP filing with the BPU requesting recovery of $28.0 million, which includes a $8.4 million non-weather related recovery and a $19.6 million weather related recovery.


•	September 2012 - The BPU issued an Order approving, on a provisional basis, the 2012-2013 CIP rates filed in June 2012, effective October 1, 2012.


•	March 2013 - We filed a joint petition with another utility requesting modification to, and the continuation of, the CIP program effective October 1, 2013.


•	May 2013 - We made our annual CIP filing with the BPU requesting a reduction in revenue of $17.8 million, which includes a $2.3 million reduction in non-weather related recovery and a $15.5 million reduction in weather related recovery.


•	September 2013 - The BPU issued an Order approving, on a provisional basis, the 2013-2014 CIP rates filed in May 2013, effective October 1, 2013.

Capital Investment Recovery Tracker (CIRT) - In January 2009, we made a filing with the BPU requesting approval for an accelerated infrastructure investment program. The purpose of the CIRT was to accelerate $103.0 million of capital expenditures from five years to two years. The petition requested that we be allowed to earn a return of, and a return on, our investment. Under the CIRT, 2009 spending was projected to be $70.5 million and 2010 spending was projected to be $32.5 million. In September 2010, the BPU authorized $81.3 million of CIRT-related expenditures to be rolled into rate base and also authorized that the remaining balance of CIRT-related expenditures continue to be recovered. These remaining expenditures were reviewed and rolled into rate base during Phase II of the base rate case. On a monthly basis during the CIRT year, we recorded adjustments to earnings based on actual CIRT program expenditures, as incurred. Annually we made filings with the BPU for review and approval of expenditures recorded under the CIRT.

Regulatory actions regarding the CIRT were as follows:

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March 2011 - The BPU approved a CIRT II program allowing the Company to accelerate an additional $60.3 million of capital spending into 2011 and 2012. Under CIRT II, the Company continues to earn a return on investment as the capital is spent, as it did under the original CIRT. The return of investment begins when the investments are rolled into rate base. As such, the Company is permitted to earn a return on CIRT II investments until the roll in is approved and recovery commences.


•	June 2011 - The Company filed a petition with the BPU requesting the recovery of a portion of CIRT II investments via a roll-in to rate base, and requested to increase the base rates by 0.5%.


•	October 2011 - The Company filed a petition with the BPU requesting to modify and extend the CIRT II program. The petition requested an additional incremental investment of $40.0 million in 2012 and $50.0 million in 2013.


•	May 2012 - The BPU approved a modification and extension of the CIRT II program (CIRT III), allowing the Company to accelerate an incremental $35.0 million of capital spending through December 2012.


•	October 2012 - The Company filed a petition requesting a $13.2 million increase in annual revenues by rolling $110.6 million of CIRT I, II and III investments into base rates.


•	September 2013 - The BPU approved the base rate roll in of the CIRT I, II and III program investments effective October 2013, resulting in a $15.5 million increase in annual revenue. This approval also concluded Phase II of the 2010 base rate case.

All CIRT program investments have been rolled into rate base and the CIRT program is now concluded.

Accelerated Infrastructure Replacement Program (AIRP) - In July 2012, the company filed a petition to implement a five-year, $250.0 million Accelerated Infrastructure Replacement Program to replace the annual CIRT programs. In February 2013, the BPU issued a Board Order approving a $141.2 million program to replace cast iron and unprotected bare steel mains and services over a four year period, with annual investments of approximately $35.3 million. Pursuant to the Board Order, AIRP investments are to be reviewed and included in rate base in future base rate proceedings.

Storm Hardening and Reliability Program (SHARP) - In September 2013, we filed with the BPU an asset hardening program pursuant to which SJG will invest approximately $280.0 million over seven years to replace low pressure distribution mains and services with high pressure mains and services in coastal areas that are susceptible to flooding during major storm events. This petition is currently pending.

Energy Efficiency Tracker (EET) - In January 2009, we filed a petition with the BPU requesting approval of an Energy Efficiency Program (EEP I) for residential, commercial and industrial customers. The BPU approved this petition in July 2009. Under this program we were permitted to invest $17.0 million over two years in energy efficiency measures to be installed in customer homes and businesses. We also recover incremental operating and maintenance expenses and earn a return of, and return on, program investments.

Regulatory actions regarding the EET were as follows:


•	November 2010 - We filed a petition with the BPU requesting a one year extension of the program and a reallocation of investment dollars between the EET programs to fund the more popular programs. In January 2011, SJG’s request to reallocate investment dollars between the programs and a one year extension was approved by the BPU.


•	June 2011 - We filed our annual 2011-2012 petition requesting approval of a $4.7 million increase in EET recovery. This petition was approved in September 2012, with rates effective October 1, 2012.


•	October 2011 - We filed a petition requesting a modification of the EET with regards to the Combined Heat and Power (CHP) program. The BPU approved this petition in February 2012.

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May 2012 - We filed a petition requesting the approval of a new Energy Efficiency Program (“EEP II”) and to continue our existing EET to recover all costs associated with the EEP II through a $3.1 million increase in annual revenues. These programs provide customers with increased incentives to reduce their natural gas consumption. In June 2013, the BPU approved the EEP II program in the form of an extension of the existing EEP program, permitting SJG to invest $24.0 million in energy efficiency programs through June 2015. The BPU also approved in June 2013 an extension of the EET with a $2.1 million revenue increase effective July 2013.

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June 2012 - We filed a petition requesting a continuation of the original Energy Efficiency Program (“EEP I”) to bridge the gap between the expiration of the EEP I program on April 30, 2012, and the implementation of the proposed new EEP II program. This petition was approved by the BPU in August 2012. Also in June 2012, SJG filed its 2012 - 2013 annual EET rate adjustment petition requesting a $5.8 million increase in annual revenues to recover the costs associated with its EEP I program. This petition is still pending.


•	May 2013 - we filed our annual petition requesting an increase of $2.2 million for current EET programs. This petition is still pending.

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:


•	July 2011 - We made our annual 2011-2012 SBC filing requesting a $31.2 million increase in SBC recoveries. The BPU approved this filing in July 2013.


•	September 2011 - The BPU finalized rates for the 2008-2009 and 2009-2010 SBC petitions.


•	July 2012 - We made our annual 2012-2013 SBC filing requesting an $11.8 million increase in SBC recoveries. The BPU approved this filing in July 2013.


•	September 2012 - The BPU finalized rates for the 2010-2011 SBC petition effective October 1, 2012.


•	July 2013 - We made our annual 2013-2014 SBC filing requesting a $6.4 million decrease in SBC revenues. This petition is still pending.

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 seven-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 seven-year amortization periods. As of December 31, 2013 and 2012, we reflected the unamortized remediation costs of $29.9 million and $37.9 million, respectively, on the balance sheet under Regulatory Assets (See Note 4). Since implementing the RAC in 1992, we have recovered $92.6 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, SJG was responsible for expensing approximately $41.5 million over the four-year period. In November 2012, the BPU approved a six-month extension of the program through June 2013. Under this extension, SJG is responsible for $7.5 million of funding. NJCEP adjustments affect revenue and cash flows but do not directly affect earnings as related costs are deferred and recovered through rates on an on-going basis.

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

Separate regulatory actions regarding the USF were as follows:


•	June 2011 - We made our annual USF filing, along with the state's other electric and gas utilities, proposing to decrease annual statewide gas revenues by $9.3 million. This proposal was designed to decrease our annual USF revenue by $0.8 million.


•	October 2011 - The BPU approved the statewide budget of $57.4 million for all of the State's gas utilities. Our portion of the total is approximately $5.4 million, which decreased rates effective November 1, 2011, resulting in a $0.5 million decrease to our annual USF recoveries.


•	June 2012 - We made our annual USF filing, along with the state's other electric and gas utilities, proposing to decrease annual statewide gas revenues by $0.5 million. This proposal was designed to decrease our annual USF revenue by $0.1 million.


•	September 2012 - The BPU approved the statewide budget of $78.0 million for all of the State's gas utilities. Our portion of the total is approximately $8.2 million, which decreased rates effective October 1, 2012, resulting in a $0.1 million decrease to our annual USF recoveries.


•	June 2013 - We made our annual USF filing, along with the state’s other electric and gas utilities, proposing to decrease the statewide gas revenues by $29.4 million. This proposal was designed to decrease our annual USF revenue by $3.7 million.


•	September 2013 - The BPU approved the statewide USF budget of $54.4 million for all the State’s gas utilities. Our portion of the total is approximately $5.8 million, which decreased rates effective October 1, 2013, resulting in a $3.4 million decrease to our USF recoveries.

Other Regulatory Matters -

Unbundling - In 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, 2013, 47,074 of our 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 this Tracker was 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 part of our September 2010 base rate increase, we were permitted to recover previously deferred pipeline integrity costs incurred through September 2010. In addition, we are authorized to defer future program costs, including related carrying costs, for recovery in our next base rate proceeding, subject to review by the BPU. Accordingly, SJG withdrew its petition for the Pipeline Integrity Management Tracker. As of December 31, 2013 and 2012, deferred pipeline integrity costs totaled $2.8 million and $1.6 million, respectively, and are included in other regulatory assets (See Note 4).

Superstorm Sandy - In June 2013, we filed a petition requesting deferral of incremental operating and maintenance expenses incurred due to Superstorm Sandy. These costs totaled $0.7 million and are expected to be recovered in SJG’s next base rate case. This petition is currently pending.

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