form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2010

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

For the transition period from ________________ to ________________

Commission File Number 000-22211

SOUTH JERSEY GAS COMPANY

(Exact name of registrant as specified in its charter)

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

1 South Jersey Plaza, Folsom, NJ 08037

(Address of principal executive offices, including zip code)

(609) 561-9000

(Registrant's telephone number, including area code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	£	Accelerated filer	£
Non-accelerated filer	S (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 £ NoS

As of May 3, 2010 there were 2,339,139 shares of the registrant’s common stock outstanding. All common shares are owned by South Jersey Industries, Inc., the parent company of South Jersey Gas Company.

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		Page No.

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	23

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 6.	Exhibits	24

Signatures		24

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

(In Thousands)

	Three Months Ended
	March 31,
	2010			2009


Operating Revenues	$	196,716		$	243,113

Operating Expenses:
Cost of Sales (Excluding depreciation)		116,875			165,977
Operations		17,807			17,360
Maintenance		2,816			2,156
Depreciation		7,079			6,633
Energy and Other Taxes		4,348			4,621

Total Operating Expenses		148,925			196,747

Operating Income		47,791			46,366

Other Income and Expense		233			324

Interest Charges		(4,015	)		(4,097	)

Income Before Income Taxes		44,009			42,593

Income Taxes		(18,139	)		(17,615	)

Net Income	$	25,870		$	24,978

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

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SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In Thousands)

	Three Months Ended
	March 31,
	2010		2009



Net Income	$	25,870	$	24,978

Other Comprehensive Gain (Loss) - Net of Tax:

Unrealized Gain (Loss) on Available-for-Sale Securities		144		(170	)
Unrealized Gain on Derivatives - Other		7		7

Other Comprehensive Gain (Loss) - Net of Tax *		151		(163	)

Comprehensive Income	$	26,021	$	24,815

* Determined using a combined statutory tax rate of 41.08%

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

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SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

	Three Months Ended
	March 31,
	2010			2009


Net Cash Provided by Operating Activities	$	72,204		$	51,274

Cash Flows from Investing Activities:
Capital Expenditures		(37,414	)		(15,676	)
Investment in Long-Term Receivables		(910	)		(2,044	)
Proceeds from Long-Term Receivables		609			2,869

Net Cash Used in Investing Activities		(37,715	)		(14,851	)

Cash Flows from Financing Activities:
Net Repayments of Lines of Credit		(47,400	)		(32,975	)
Principal Repayments of Long-Term Debt		-			(10	)
Proceeds from Issuance of Long-Term Debt		15,000			-
Payments for Issuance of Long-Term Debt		(559	)		-

Net Cash Used in Financing Activities		(32,959	)		(32,985	)

Net Increase in Cash and Cash Equivalents		1,530			3,438
Cash and Cash Equivalents at Beginning of Period		1,993			2,228

Cash and Cash Equivalents at End of Period	$	3,523		$	5,666

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

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SOUTH JERSEY GAS COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

(In Thousands)

	March 31,			December 31,
	2010			2009
Assets

Property, Plant and Equipment:
Utility Plant, at original cost	$	1,306,746		$	1,275,792
Accumulated Depreciation		(320,781	)		(314,627	)

Property, Plant and Equipment - Net		985,965			961,165

Investments:
Available-for-Sale Securities		6,195			5,941
Restricted Investments		132			132

Total Investments		6,327			6,073

Current Assets:
Cash and Cash Equivalents		3,523			1,993
Accounts Receivable		102,729			41,392
Accounts Receivable - Related Parties		732			974
Unbilled Revenues		25,587			47,333
Provision for Uncollectibles		(3,847	)		(3,915	)
Natural Gas in Storage, average cost		9,626			23,711
Materials and Supplies, average cost		2,867			4,854
Prepaid Taxes		-			13,796
Derivatives - Energy Related Assets		11			797
Other Prepayments and Current Assets		2,214			2,248

Total Current Assets		143,442			133,183

Regulatory and Other Noncurrent Assets:
Regulatory Assets		231,355			240,462
Unamortized Debt Issuance Costs		6,263			5,829
Long-Term Receivables		7,393			7,693
Derivatives - Energy Related Assets		108			333
Other		2,349			2,324

Total Regulatory and Other Noncurrent Assets		247,468			256,641

Total Assets	$	1,383,202		$	1,357,062

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

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SOUTH JERSEY GAS COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

(In Thousands, except per share amounts)

	March 31,			December 31,
	2010			2009

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		200,716			200,716
Accumulated Other Comprehensive Loss		(6,179	)		(6,330	)
Retained Earnings		254,665			231,296

Total Common Equity		455,050			431,530

Long-Term Debt		265,000			250,000

Total Capitalization		720,050			681,530

Current Liabilities:
Notes Payable		62,000			109,400
Current Portion of Long-Term Debt		35,000			35,000
Accounts Payable - Commodity		17,418			19,630
Accounts Payable - Other		21,948			21,947
Accounts Payable - Related Parties		11,736			12,120
Derivatives - Energy Related Liabilities		22,254			9,799
Deferred Income Taxes - Net		7,893			11,642
Customer Deposits and Credit Balances		15,197			13,542
Environmental Remediation Costs		25,160			22,499
Taxes Accrued		25,678			8,548
Pension Benefits		1,066			1,066
Interest Accrued		4,467			5,979
Dividends Declared		2,501			-
Other Current Liabilities		6,655			7,839

Total Current Liabilities		258,973			279,011

Regulatory and Other Noncurrent Liabilities:
Regulatory Liabilities		54,824			50,193
Deferred Income Taxes - Net		214,020			210,925
Environmental Remediation Costs		43,361			46,557
Asset Retirement Obligations		23,115			22,960
Pension and Other Postretirement Benefits		59,078			57,699
Investment Tax Credits		1,440			1,517
Derivatives - Energy Related Liabilities		2,108			504
Derivatives - Other		2,017			1,956
Other		4,216			4,210

Total Regulatory and Other Noncurrent Liabilities		404,179			396,521

Commitments and Contingencies (Note 9)

Total Capitalization and Liabilities	$	1,383,202		$	1,357,062

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

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NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

THE ENTITY - South Jersey Industries, Inc. (SJI) owns all of the outstanding common stock of South Jersey Gas Company (SJG), a regulated natural gas utility. SJG distributes natural gas in the seven southern most counties of New Jersey. In our opinion, the condensed financial statements reflect all normal and recurring adjustments needed to fairly present our financial position and operating results at the dates and for the periods presented. SJG’s business is subject to seasonal fluctuations and accordingly, this interim financial information should not be the basis for estimating the full year’s operating results. As permitted by the rules and regulations of the Securities and Exchange Commission, the accompanying condensed financial statements contain certain condensed financial information and exclude certain note discl osures normally included in annual audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These condensed financial statements should be read in conjunction with SJG’s 2009 Form 10-K for a more complete discussion of our accounting policies and certain other information.

REVENUE BASED TAXES - SJG collects certain revenue-based energy taxes from its customers. Such taxes include New Jersey State Sales Tax, Transitional Energy Facility Assessment (TEFA) and Public Utilities Assessment (PUA). State sales tax is recorded as a liability when billed to customers and is not included in revenue or operating expenses. TEFA and PUA are included in both revenues and cost of sales, and totaled $3.8 million and $4.1 million for the three months ended March 31, 2010 and 2009, respectively.

CAPITALIZED INTEREST - SJG capitalizes interest on construction at the rate of return on rate base utilized by the New Jersey Board of Public Utilities (BPU) to set rates in our last base rate proceeding. See Note 2 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2009. Capitalized interest is included in Utility Plant on the condensed balance sheets. Interest Charges are presented net of capitalized interest on the condensed statements of income. The amount of interest capitalized by SJG for the three months ended March 31, 2010 and 2009 was not significant.

DERIVATIVE INSTRUMENTS — SJG is involved in buying, selling, transporting and storing natural gas and is subject to market risk on expected future purchases and sales due to commodity price fluctuations. The Company, through its affiliate South Jersey Resources Group (SJRG), uses a variety of derivative instruments to limit this exposure to market risk in accordance with strict corporate guidelines. These derivative instruments include forward contracts, futures contracts, swap agreements and options contracts. As of March 31, 2010, SJG had outstanding derivative contracts intended to limit the exposure to market risk on 28.6 MMdts of expected future purchases of natural gas. These contracts, which do not qualify for the normal purchase and sale exemption and have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives —Energy Related Assets or Derivatives — Energy Related Liabilities on the condensed balance sheets. The costs or benefits of these short-term contracts are recoverable through SJG’s Basic Gas Supply Service (BGSS) clause, subject to BPU approval. As a result, the net unrealized pre-tax gains and losses for these energy related commodity contracts are included with realized gains and losses in Regulatory Assets or Regulatory Liabilities on the condensed balance sheets. As of March 31, 2010 and December 31, 2009, SJG had $24.2 million and $9.2 million of unrealized losses, respectively, included in its BGSS related to open financial contracts.

The Company has also entered into interest rate derivatives to hedge exposure to increasing interest rates and the impact of those rates on cash flows of variable-rate debt. These interest rate derivatives, which have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives-Other on the condensed balance sheets. The fair value represents the amount SJG would have to pay the counterparty to terminate these contracts as of those dates. There have been no significant changes to the Company’s active interest rate swaps since December 31, 2009 which are described in Note 1 to the Financial Statements in Item 8 of SJG’s Annual Report on Form 10-K as of December 31, 2009. Management believes that, subject to BPU approval, the market value upon termination of these interest rate derivatives can be recovered in rates and therefore these unrealized losses have been included in Regulatory Assets on the condensed balance sheets.

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The fair values of all derivative instruments, as reflected in the condensed balance sheets as of March 31, 2010 and December 31, 2009, are as follows (in thousands):

Derivatives not designated as hedging instruments under GAAP	March 31, 2010				December 31, 2009
	Assets		Liabilities		Assets		Liabilities
Energy related commodity contracts:

Derivatives – Energy Related – Current	$	11	$	22,254	$	797	$	9,799

Derivatives – Energy Related – Non-Current		108		2,108		333		504

Interest rate contracts:

Derivatives – Other		-		2,017		-		1,956

Total derivatives not designated as hedging instruments under GAAP	$	119	$	26,379		1,130		12,259

The effect of derivative instruments on the condensed statements of income for the three months ended March 31, 2010, and 2009 are as follows (in thousands):

	Three months ended March 31,
Derivatives in Cash Flow Hedging Relationships	2010			2009
Interest Rate Contracts:
Losses reclassified from accumulated OCI into income (a)	$	(12	)	$	(12	)

(a) Included in Interest Charges

Net realized losses associated with SJG’s energy related financial commodity contracts of $4.0 million and $16.9 million for the three months ended March 31, 2010 and 2009 respectively, are not included in the above table. These contracts are part of SJG’s regulated risk management activities that serve to mitigate BGSS costs passed on to its customers. As these transactions are entered into pursuant to, and recoverable through, regulatory riders, any changes in the value of SJG’s energy related financial commodity contracts are deferred in Regulatory Assets or Liabilities and there is no impact to earnings.

STOCK-BASED COMPENSATION PLANS - The following table summarizes the SJI nonvested restricted stock awards pertaining to SJG outstanding at March 31, 2010, and the assumptions used to estimate the fair value of the awards:

Grant Date	Shares Outstanding		Fair Value Per Share		Expected Volatility			Risk-Free Interest Rate

Jan. 2008		9,238	$	34.030		21.7	%		2.9	%
Jan. 2009		8,318	$	39.350		28.6	%		1.2	%
Jan. 2010		10,024	$	39.020		29.0	%		1.65	%

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

The cost of restricted stock awards during the three months ended March 31, 2010 and 2009 approximated $85,900 and $74,200, respectively.

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As of March 31, 2010, there was $0.6 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the restricted stock plans. That cost is expected to be recognized over a weighted average period of 2.2 years.

The following table summarizes information regarding restricted stock award activity during the three months ended March 31, 2010, excluding accrued dividend equivalents:

	Shares		Weighted Average Grant Date Fair Value
Nonvested Shares Outstanding, January 1, 2010		17,556	$	36.551

Granted		10,024		39.020

Nonvested Shares Outstanding, March 31, 2010		27,580	$	37.448

During the three months ended March 31, 2010, SJG awarded 14,400 shares that had vested at December 31, 2008, to its officers at a market value of $0.5 million. During the three months ended March 2009, SJG awarded 13,640 shares at a market value of $0.5 million. SJG has a policy of making cash payments to SJI to satisfy its obligations under this plan. Cash payments to SJI during the three months ended March 31, 2010 and 2009 were approximately $0.3 million and $0.2 million, respectively, relating to stock awards. Additionally, a change in control could result in the nonvested shares becoming nonforfeitable or immediately payable in cash.

NEW ACCOUNTING PRONOUNCEMENTS — No new accounting pronouncement issued or effective during 2009 and 2010 had, or is expected to have, a material impact on the condensed financial statements.

HEALTH CARE LEGISLATION – In March 2010, the President of the United States signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (HR 3590) and the Health Care Education and Affordability Reconciliation Act (HR 4872) (the “Acts”). The Acts contain provisions which could impact our accounting for retiree medical benefits in future periods. However, the extent of that impact, if any, cannot be determined until regulations are promulgated under the Acts and additional interpretations of the Acts become available. Based on the analysis to date of the provisions in the Acts in which the impacts are reasonably determinable, a re-measurement of our Other Postretirement Benefits liability is not required at this time. See N ote 10 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2009 for additional information related to SJG’s pension and other postretirement benefits.

2.	RATES AND REGULATORY ACTIONS:

SJG is subject to the rules and regulations of the BPU. In November 2009, the Company filed its annual CIRT petition, seeking an increase in revenue of $9.9 million over 2009. The CIRT rate increase was provisionally approved by the BPU effective January 1, 2010. On January 15, 2010, SJG filed a petition for an increase in the Company’s base rates. As of SJG’s last base rate case, and through December 31, 2010, it is expected that $465.2 million will be invested in utility plant in service. The filing requested incremental revenue of $35.9 million, or a 7.1% increase. In addition, the petition seeks approval for a new tracker mechanism, the Reliability Tracker. This petition is still pending. The base rate petition also seeks various other modifications to SJ G’s tariff. There have been no other significant regulatory actions or changes to SJG’s rate structure since December 31, 2009. See Note 2 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2009.

3.	REGULATORY ASSETS AND LIABILITIES:

There have been no significant changes to the nature of SJG’s regulatory assets and liabilities since December 31, 2009, which are described in Notes 2 and 3 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2009.

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

	March 31,		December 31,
	2010		2009
Environmental Remediation Costs:
Expended - Net	$	40,788	$	42,924
Liability for Future Expenditures		68,521		69,056
Income Taxes - Flowthrough Depreciation		1,507		1,752
Deferred Asset Retirement Obligation Costs		22,562		22,438
Deferred Pension and Other Postretirement Benefit Costs		71,098		71,192
Deferred Gas Costs - Net		567		6,519
Conservation Incentive Program Receivable		15,378		16,672
Societal Benefit Costs Receivable		2,082		1,872
Premium for Early Retirement of Debt		1,005		1,046
Other Regulatory Assets		7,847		6,991

Total Regulatory Assets	$	231,355	$	240,462

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

	March 31,		December 31,
	2010		2009
Excess Plant Removal Costs	$	48,731	$	48,715
Other Regulatory Liabilities		6,093		1,478

Total Regulatory Liabilities	$	54,824	$	50,193

DEFERRED GAS COSTS – NET – Over/under collections of gas costs are monitored through SJG’s Basic Gas Supply Service Clause (BGSS) mechanism. Net undercollected gas costs are classified as a regulatory asset and net overcollected gas costs are classified as a regulatory liability. Derivative contracts used to hedge natural gas purchases are also included in the BGSS, subject to BPU approval. The BGSS decreased from a $6.5 million regulatory asset at December 31, 2009 to a $0.6 million regulatory asset at March 31, 2010 primarily as a result of gas costs recovered from customers exceeding the actual cost of the commodity incurred during the first quarter. Gas cost recoveries are typically very high in the first and fourth quarters of the year as customer consumption is at its highest point during the winter months. This was partially offset by a change in the fair value of energy related derivatives, resulting primarily from a decrease in the average future NYMEX prices which offset $15.1 million of the decrease.

4.	RELATED PARTY TRANSACTIONS:

There have been no significant changes in the nature of SJG’s related party transactions since December 31, 2009. See Note 4 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2009 for a detailed description of such transactions.

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

	Three Months Ended March 31,
	2010		2009
Operating Revenues/Affiliates:
SJRG	$	563	$	2,892
Other		127		146
Total Operating Revenues/Affiliates	$	690	$	3,038

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

	Three Months Ended March 31,
	2010		2009
Costs of Sales/Affiliates (Excluding depreciation):
SJRG	$	14,582	$	26,726
Derivative Losses (See Note 1): *
SJRG	$	4,047	$	16,910

* Contracts used to hedge natural gas purchases. Included in Cost of Sales on the Condensed Statement of Income.

Operations Expense/Affiliates
SJI	$	1,928		$	1,772
SJIS		1,503			1,283
Millennium		688			713
Other		(54	)		(74	)
Total Operations Expense/Affiliates	$	4,065		$	3,694

5.	FINANCIAL INSTRUMENTS:

Restricted Investments - In accordance with the terms of our tax-exempt first mortgage bonds, unused proceeds are required to be escrowed pending approved construction expenditures. As of both March 31, 2010 and December 31, 2009, the escrowed proceeds, including interest earned, totaled $0.1 million. The carrying amounts of the Restricted Investments approximate their fair value at March 31, 2010 and December 31, 2009.

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 $10.4 million and $10.8 million as of March 31, 2010 and December 31, 2009, 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 resultin g from imputed interest in the amounts of $1.3 million and $1.2 million as of March 31, 2010 and December 31, 2009, respectively. The annual amortization to interest is not material to SJG’s financial statements. The carrying amounts of these receivables approximate their fair value at March 31, 2010 and December 31, 2009.

Long-Term Debt – In March 2010, SJG issued in a private placement, $15.0 million aggregate principal amount of its Medium Term Notes. These notes bear interest at 4.84%, are secured by a first mortgage lien on substantially all utility plant and are due in 2026. The estimated fair values of SJG’s long-term debt, including current maturities, as of March 31, 2010 and December 31, 2009, were $355.1 million and $331.5 million, respectively. We based the estimates on interest rates available to SJG at the end of each period for debt with similar terms and maturities. Carrying amounts as of March 31, 2010 and December 31, 2009, were $300.0 million and $285.0 million, respectively. We retire debt when it is cost effective as permitted by the debt agreements.

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6.	UNUSED LINES OF CREDIT:

Credit facilities and available liquidity as of March 31, 2010 were as follows (in thousands):

	Total Facility		Usage		Available Liquidity		Expiration Date

Revolving Credit Facility	$	100,000	$	40,000	$	60,000	August 2011
Line of Credit		40,000		—		40,000	December 2010 (A)
Uncommitted Bank Lines		55,000		22,000		33,000	Various

Total	$	195,000	$	62,000	$	133,000

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

All committed facilities contain one financial covenant regarding the ratio of total debt to total capitalization, measured on a quarterly basis. SJG was in compliance with these covenants as of March 31, 2010. Borrowings under these credit facilities are at market rates. The weighted average borrowing cost, which changes daily, was 0.87% and 1.12% at March 31, 2010 and 2009, respectively.

7.	RETAINED EARNINGS:

SJG is restricted as to the amount of cash dividends or other distributions that may be paid on its common stock by an order issued by the BPU in July 2004 that granted SJG an increase in base rates. Per the order, SJG is required to maintain total common equity of no less than $289.2 million. SJG’s total common equity balance was $455.1 million at March 31, 2010.

Various loan agreements also contain potential restrictions regarding the amount of cash dividends or other distributions that SJG may pay on its common stock. As of March 31, 2010, these loan restrictions did not affect the amount that may be distributed from SJG’s retained earnings.

8.	PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three months ended March 31, 2010 and 2009, 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
		Three Months Ended March 31,							Three Months Ended March 31,
		2010			2009				2010			2009
Service Cost		$	662		$	692			$	199		$	210
Interest Cost			1,744			1,707				686			599
Expected Return on Plan Assets			(1,498	)		(1,508	)			(338	)		(304	)
Amortizations:
Prior Service Cost (Credits)			47			55				(74	)		(69	)
Actuarial Loss			1,062			1,079				382			356
Net Periodic Benefit Cost			2,017			2,025				855			792
Capitalized Benefit Costs			(988	)		(992	)			(419	)		(388	)
Total Net Periodic Benefit Expense		$	1,029		$	1,033			$	436		$	404

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

No contributions were made to the pension plans during the three-month periods ended March 31, 2010 and 2009. However, SJG expects to make a contribution of approximately $6.4 million during the second quarter in order to improve the funded status of the plans and partially offset the increase in expense caused by the amortization of losses realized on plan assets during 2008.

See Note 10 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2009 for additional information related to SJG’s pension and other postretirement benefits.

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9.	COMMITMENTS AND CONTINGENCIES:

STANDBY LETTER OF CREDIT - SJG provided a $25.2 million letter of credit, under a separate credit facility from those it borrows under to provide liquidity support for the remarketing of variable-rate demand bonds issued through the NJEDA. The bonds were used to finance the expansion of SJG’s natural gas distribution system. This letter of credit expires in August 2010.

ENVIRONMENTAL REMEDIATION COSTS - SJG incurred and recorded costs for environmental cleanup of 12 sites where SJG or its predecessors operated gas manufacturing plants. SJG stopped manufacturing gas in the 1950s. There have been no changes to the status of SJG’s environmental remediation efforts since December 31, 2009, as described in Note 11 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 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. SJG expects to renew each of these contracts under renewal provisions as provided in each contract. 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 approximately 66% of our workforce at March 31, 2010. 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 operate under a collective bargaining agreement that runs through February 2013. Unionized employees represented by the IAM operate under a collective bargaining agreement that expires in August 2014.

10.	FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:

GAAP establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques. The levels of the hierarchy are described below:

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

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

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

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

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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 March 31, 2010 is as follows (in thousands):

	Total		Level 1		Level 2		Level 3
Assets -

Available-for-Sale Securities (A)	$	6,195	$	6,195	$	-	$	-
Derivatives – Energy Related Assets (B)		119		70		49		-
	$	6,314	$	6,265	$	49	$	-

Liabilities -

Derivatives – Energy Related Liabilities (B)	$	24,362	$	21,005	$	3,357	$	-
Derivatives – Other (C)		2,017		-		2,017		-
	$	26,379	$	21,005	$	5,374	$	-

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

(B) Derivatives – Energy Related Assets and Liabilities are traded in both exchange-based and non-exchange-based markets. Exchange-based contracts are valued using unadjusted quoted market sources in active markets and are categorized in Level 1 in the fair value hierarchy. Certain non-exchange-based contracts are valued using indicative price quotations available through brokers or over-the-counter, on-line exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask mid-point prices and are obtained from sources that management believes provide the most liquid market. Management reviews and corroborates the price quotations to ensure the prices are observable which includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration.

(C) Derivatives – Other, include interest rate swaps that are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.

Item 2. Management’s Discussion and Analysis

of Financial Condition and Results of Operations (Unaudited)

OVERVIEW:

Organization - SJG is an operating public utility company engaged in the purchase, transmission and sale of natural gas for residential, commercial and industrial use. SJG also sells natural gas and pipeline transportation capacity (off-system sales) on a wholesale basis to various customers on the interstate pipeline system and transports natural gas purchased directly from producers or suppliers to their customers. SJG served 345,350 customers at March 31, 2010 compared with 341,896 customers at March 31, 2009.

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

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A discussion of these and other risks and uncertainties may be found in SJG’s Form 10-K for the year ended December 31, 2009 and in other filings made by us with the Securities and Exchange Commission. These cautionary statements should not be construed by you to be exhaustive and they are made only as of the date of this Quarterly Report on Form 10-Q, or in any document incorporated by reference, at the date of such document. While SJG believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, SJG undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies - Estimates and Assumptions - Management must make estimates and assumptions that affect the amounts reported in the condensed financial statements and related disclosures. Actual results could differ from those estimates. Five types of transactions presented in our condensed financial statements require a significant amount of judgment and estimation. These relate to regulatory accounting, derivatives, environmental remediation costs, pension and other postretirement benefit costs, and revenue recognition. A discussion of these estimates and assumptions may be found in SJG̵ 7;s Form 10-K for the year ended December 31, 2009.

New Accounting Pronouncements - No new accounting pronouncement issued or effective during 2009 and 2010 had, or is expected to have, a material impact on the condensed financial statements.

Regulatory Actions – Other than the changes discussed in Note 2 to the condensed financial statements, there have been no significant regulatory actions since December 31, 2009. See detailed discussions concerning Regulatory Actions in Note 2 to the Financial Statements in item 8 of SJG’s Form 10-K for the year ended December 31, 2009.

Environmental Remediation –There have been no significant changes to the status of SJG’s environmental remediation efforts since December 31, 2009. See detailed discussion concerning Environmental Remediation in Note 12 to the Financial Statements in Item 8 of SJG’s Form 10-K for the year ended December 31, 2009.

Competition - See detailed discussion concerning competition in SJG’s Form 10-K for the year ended December 31, 2009.

Customer Choice Legislation - All residential natural gas customers in New Jersey can choose their natural gas commodity supplier under the terms of the “Electric Discount and Energy Competition Act of 1999.” This bill created the framework and necessary time schedules for the restructuring of the state’s electric and natural gas utilities. The Act established unbundling, under which redesigned utility rate structures allow natural gas and electric consumers to choose their energy supplier. Customers purchasing natural gas from a provider other than the local utility ( marketer) are charged for the gas costs by the marketer and charged for the transportation costs by the utility. The number of customers purchasing their natural gas from marketers was 28,398 and 28,054 at March 31, 2010 and 2009, respectively.

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RESULTS OF OPERATIONS:

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

	Three Months Ended
	March 31,
	2010		2009
Throughput – dth:
Firm Sales -
Residential		11,431		11,517
Commercial		2,694		2,877
Industrial		148		149
Cogeneration & Electric Generation		44		14
Firm Transportation -
Residential		982		1,007
Commercial		2,641		2,571
Industrial		3,089		3,052
Cogeneration & Electric Generation		2,193		433
Total Firm Throughput		23,222		21,620

Interruptible Sales		3		2
Interruptible Transportation		586		636
Off-System		1,116		2,694
Capacity Release		10,189		8,449
Total Throughput		35,116		33,451

	Three Months Ended
	March 31,
	2010		2009
Utility Operating Revenues:
Firm Sales -
Residential	$	137,515	$	168,638
Commercial		29,623		36,526
Industrial		1,795		1,811
Cogeneration & Electric Generation		411		273
Firm Transportation -
Residential		4,454		4,695
Commercial		8,599		7,914
Industrial		3,976		3,587
Cogeneration & Electric Generation		2,009		459
Total Firm Revenues		188,382		223,903

Interruptible Sales		48		40
Interruptible Transportation		607		557
Off-System		6,924		16,902
Capacity Release		518		1,440
Other		237		271
Total Utility Operating Revenues		196,716		243,113

Less:
Cost of Sales		116,875		165,977
Conservation Recoveries*		3,119		3,265
RAC Recoveries*		1,741		1,209
EET Recoveries*		179		-
Revenue Taxes		3,752		4,071
Utility Margin	$	71,050	$	68,591

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Margin:
Residential	$	45,300	$	45,590
Commercial and Industrial		14,958		15,429
Cogeneration and Electric Generation		709		340
Interruptible		38		46
Off-system & Capacity Release		309		702
Other Revenues		236		270
Margin Before Weather Normalization & Decoupling		61,550		62,377
CIRT Mechanism		2,024		-
CIP Mechanism		7,442		6,214
EET Mechanism		34		-
Utility Margin	$	71,050	$	68,591

Degree Days:		2,433		2,518

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

Throughput - Total gas throughput increased 1.7 MMdts, or 5.0%, for the three months ended March 31, 2010, compared with the same period in 2009. This increase was realized in the cogeneration market as a single customer increased its contract significantly during the winter season to shift supply from its pipeline supplier to SJG. With the exception of cogeneration throughput, firm throughput in all other categories remained consistent between the two quarters. While the Company was successful in adding approximately 3,100 firm sales customers over the twelve month period ended March 31, 2010, representing a 1% increase, 3.4% warmer weather negated the impact on throughput from those customers.

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

	Three Months Ended March 31,
	2010		2009
Net Income Benefit:
CIP – Weather Related	$	0.4	$	(0.6	)
CIP – Usage Related		4.0		4.3
Total Net Income Benefit	$	4.4	$	3.7

Weather Compared to 20-Year Average	0.2% colder		3.7% colder
Weather Compared to Prior Year	3.4% warmer		11.2% colder

Operating Revenues - Revenues decreased $46.4 million during the three months ended March 31, 2010 compared with the same period in the prior year. Firm revenues decreased $35.5 million, or 15.9%, primarily as a result of a lower Basic Gas Supply Service (BGSS) rate in effect during the first quarter of 2010. The BGSS rate had been reduced 21% in October 2009 to address lower natural gas costs in 2009 and forecasted through 2010. While changes in gas costs and BGSS recoveries may fluctuate from period to period, SJG does not profit from the sale of the commodity. Therefore, corresponding fluctuations in Operating Revenue or Cost of Sales have no impact on Company profitability, as further discussed under “Margin.” There was also a $10.0 million decrease in off-system sales (OSS) during the first quarter of 2010 versus 2009. This decrease was primarily related to a reduction in SJG’s portfolio of assets available for such activities under the provisions of the CIP, as discussed under “Rates and Regulation” in Item 7 of SJG’s Form 10-K for the year ended December 31, 2009. As reflected in the Margin table above, the impact of lower OSS did not have a material impact on the earnings of the Company, as SJG is required to share 85% of the profits of such activity with the rate payers.

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

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Total margin increased $2.5 million, or 3.6%, for the three months ended March 31, 2010 compared with the same period in 2009 due to customer additions, as noted above, and profits earned through the Company’s Capital Investment Recovery Tracker (CIRT). The CIRT was approved by the BPU in April 2009 and allows the Company to accelerate certain capital spending and also earn a return of, and a return on, investment at the time the investment is made. The CIRT added $2.0 million of pre-tax margin in the first quarter of 2010.

The CIP protected $7.4 million of pre-tax margin in the first quarter of 2010 that would have been lost due to lower customer usage, compared to $6.2 million in the same period last year. Of these amounts, $0.7 million and $(1.1) million were related to weather variations and $6.7 million and $7.3 million were related to other customer usage variations in 2010 and 2009, respectively.

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

	Three Months Ended March 31,
	2010 vs. 2009

Operations	$	447
Maintenance		660
Depreciation		446
Energy and Other Taxes		(273	)

Operations – Operations expense increased $0.4 million for the three months ended March 31, 2010 as compared with the same period in 2009. The increase is primarily comprised of the following factors:

First, bank fees increased $0.4 million to support credit availability and the Company’s variable-rate debt. Second, insurance costs increased $0.2 million to address the changing value of claims outstanding. The Company also offered a voluntary separation program to its unionized workforce in an effort to reduce future labor costs. The cost of the program approximated $0.2 million for the three months ended March 31, 2010. Finally, the Company experienced increases in various other areas including general compensation increases and corporate support, governance and compliance costs, primarily attributable to our parent, SJI. Partially offsetting the expense increases noted above were lower expenses associated with the reserve for uncollectible customer accounts, which decreased $(0.5) million for the three months ended March 31, 2010 compared with the same period last year. Changes in the uncollectible reserve are the result of fluctuations in levels of customer account receivable balances, which were higher one year ago due to colder weather and a higher BGSS rate in effect, as discussed previously under “Operating Revenues.” A milder 2009-2010 winter, lower BGSS rates and an October 2009 customer refund of $20.4 million all contributed to a lower customer accounts receivable balance at March 31, 2010 versus March 31, 2009, which, in turn, resulted in a lower reserve requirement.

Maintenance - Maintenance expense increased during the three months ended March 31, 2010, compared with the same period in 2009, primarily due to higher levels of Remediation Adjustment Clause (RAC) amortization. RAC-related expenses do not affect earnings as we recognize an offsetting amount in revenues.

Depreciation - Depreciation expense increased during the three months ended March 31, 2010, as compared with the same period in 2009, due mainly to SJG’s continuing investment in utility plant.

Energy and Other Taxes - Energy and Other Taxes decreased during the three months ended March 31, 2010, compared with the same period in 2009, primarily due to a $0.2 million credit against a prior year’s energy-related taxes. Lower taxable firm throughput in 2010 resulting from warmer weather in the first quarter of 2010 also contributed to the decrease.

Interest Charges – Interest Charges decreased by $0.1 million during the three months ended March 31, 2010, compared with the same period in 2009. The decrease was the result of significantly lower average short-term interest rates and lower average debt levels during the first three months of 2010.

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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 - Liquidity needs are first met with net cash provided by operating activities. Net cash provided by operating activities totaled $72.2 million and $51.3 million in the first quarter of 2010 and 2009, respectively. Net cash provided by operating activities varies from year-to-year primarily due to the impact of weather on customer demand and related gas purchases, customer usage factors related to conversion efforts and the price of the natural gas commodity, inventory utilization, and gas cost recoveries. Net cash provided by operating activities in the first quarter of 2010 was positively impacted by lower unit gas costs which resulted in lower natural gas inv entory balances and customer receivable balances. SJG also ends each calendar year in a prepaid tax position due to mandatory prepayment requirements on certain state taxes. Such prepayments are credited against amounts otherwise due during the first quarter of the subsequent year; improving first quarter liquidity.

Cash Flows from Investing Activities - SJG has a continuing need for cash resources for capital purchases, primarily to invest in new and replacement facilities and equipment. Cash used for capital purchases was $31.7 million and $15.7 million during the first quarter of 2010 and 2009, respectively. We estimate the net cash outflows for construction projects for fiscal years 2010, 2011 and 2012 to be approximately $131.4 million, $57.1 million and $57.5 million, respectively.

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

Credit facilities and available liquidity as of March 31, 2010 were as follows (in thousands):

	Total Facility		Usage		Available Liquidity		Expiration Date

Revolving Credit Facility	$	100,000	$	40,000	$	60,000	August 2011
Line of Credit		40,000		—		40,000	December 2010 (A)
Uncommitted Bank Lines		55,000		22,000		33,000	Various

Total	$	195,000	$	62,000	$	133,000

(A) SJG anticipates extending this line of credit during the fourth quarter of 2009.

Based upon the existing credit facilities and a regular dialogue with our banks, we believe there will continue to be sufficient credit available to meet our future liquidity needs.

SJG supplements its operating cash flow and credit lines with both debt and equity capital. Over the years, SJG has used long-term debt, primarily in the form of First Mortgage Bonds and Medium Term Notes (MTN), secured by the same pool of utility assets, to finance our long-term borrowing needs. These needs are primarily capital expenditures for property, plant and equipment. In July 2009, SJG filed a petition with the New Jersey Board of Public Utilities requesting approval to issue up to $150.0 million of MTN's through September 2011. In March 2010 SJG issued in a private placement, $15.0 million aggregate principal amount of its MTN's. SJG has also committed to issue an additional $45.0 million of MTN’s, also under a private placement, by June 30, 2010. No other long-term debt was issued during 2009 or 20 10.

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SJG’s capital structure was as follows:

	As of March 31, 2010			As of December 31, 2009

Common Equity		55.7	%		52.2	%
Long-Term Debt		36.7			30.3
Short-Term Debt		7.6			17.5

Total		100.0	%		100.0	%

SJG’s long-term, senior secured debt is rated “A” and “A2” by Standard & Poor’s and Moody’s Investor Services, respectively. Moody’s Investor Service raised SJG’s senior secured rating to “A3” from “Baal” in February of 2009, and then raised it again to “A2” in August 2009. Moody’s also assigned an Issuer Rating of “Baa1” to SJG in August 2009.

COMMITMENTS AND CONTINGENCIES:

SJG has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment, working capital, and for environmental remediation costs. Cash outflows for capital expenditures for the first three months of 2010 amounted to $37.4 million. Management estimates net cash outflows for construction projects for 2010, 2011 and 2012, to be approximately $131.4 million, $57.1 million and $57.5 million, respectively. Costs for remediation projects, net of insurance reimbursements, for the first three months of 2010 amounted to net cash inflows of $0.2 million. Total cash outflows for remediation projects are expected to be $15.6 million, $16.9 million and $7.6 million for 2010, 2011, and 2012, respectively. As discussed in Notes 2 and 12 to the Financial Statements in Item 8 of SJG’s 10-K as of December 31, 2009, environmental remediation costs are subject to recovery from insurance carriers and ratepayers.

SJG provided a $25.2 million letter of credit, outside of the revolving credit facility, to support variable-rate demand bonds issued through the NJEDA to finance the expansion of SJG's natural gas distribution system. This letter of credit expires in August 2010.

SJG has certain commitments for both pipeline capacity and gas supply for which it pays fees regardless of usage. Those commitments as of March 31, 2010, average $44.1 million annually and total $172.2 million over the contracts’ lives. Approximately 28% of the financial commitments under these contracts expire during the next five years. SJG expects to renew each of these contracts under renewal provisions as provided in each contract. SJG recovers all prudently incurred fees through rates via the Basic Gas Supply Service clause.

Contractual Cash Obligations – Details concerning contractual cash obligations may be found in SJG’s Form 10-K for the year ended December 31, 2009. There were no significant changes to SJG’s contractual cash obligations except for the principal and interest obligations related to the $15.0 million of long-term debt issued in March 2010 (Note 5).

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

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

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

Twelve Months Ended Mar. 31,		Year Ended December 31,
2010		2009		2008		2007		2006		2005

	5.1x		4.9x		4.4x		4.1x		3.7x		4.0x

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

Item 3. Quantitative and Qualitative Disclosures about Market Risks

MARKET RISKS:

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

We transact commodities on a physical basis and typically do not enter into financial derivative positions directly. South Jersey Resources Group, LLC (SJRG), an affiliate by common ownership, manages our risk by entering into the types of transactions noted above. As part of our gas purchasing strategy, we use financial contracts to hedge against forward price risk. These contracts are recoverable through our BGSS, subject to BPU approval. It is management’s policy, to the extent practical, within predetermined risk management policy guidelines, to have limited unmatched positions on a deal or portfolio basis while conducting these activities. As a result of holding open positions to a minimal level, the economic impact of changes in value of a particular transaction is substantially offset by an opposite change in the related h edge 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 March 31, 2010 is as follows (in thousands):

Assets
Source of Fair Value	Maturity < 1 Year		Maturity 1 - 3 Years		Total

Prices Actively Quoted (NYMEX)	$	-	$	70	$	70

Prices Provided by Other		11		38		49

Total	$	11	$	108	$	119

Liabilities
	Maturity		Maturity
Source of Fair Value	< 1 Year		1 - 3 Years		Total

Prices Actively Quoted (NYMEX)	$	19,063	$	1,942	$	21,005

Prices Provided by Other External Sources (Basis)		3,191		166		3,357

Total	$	22,254	$	2,108	$	24,362

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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 12.9 MMDth with a weighted-average settlement price of $6.24 per dth. Contracted volumes of our Basis contracts are 15.6 MMDth with a weighted average settlement price of $0.79 per dth.

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

Net Derivatives — Energy Related Liability, January 1, 2010	$	(9,173	)
Contracts Settled During the Three Months ended March 31, 2010, Net		8,949
Other Changes in Fair Value from Continuing and New Contracts, Net		(24,019	)
Net Derivatives — Energy Related Liability, March 31, 2010	$	(24,243	)

Interest Rate Risk - Our exposure to interest rate risk relates primarily to short-term, variable-rate borrowings. Short-term, variable-rate debt outstanding at March 31, 2010, was $62.0 million and averaged $87.8 million during the first three months of 2010. A hypothetical 100 basis point (1%) increase in interest rates on our average variable-rate debt outstanding would result in a $0.5 million 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: 2010 – 7 b.p. increase (year-to-date); 2009 – 29 b.p. decrease; 2008 - 317 b.p. decrease; 2007 - 36 b.p. decrease; 2006 - 72 b.p. increase; and 2005 - 191 b.p. increase. As of March 31, 2010, our average borrowing cost, which changes daily, was 0.87%.

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 March 31, 2010, 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.

As of March 31, 2010, SJG’s active interest rate swaps were as follows:

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

SJG’s management, with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of SJG’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2010. Based on that evaluation, SJG’s chief executive officer and chief financial officer concluded that the disclosure controls and procedures employed at SJG are effective.

Changes in Internal Control Over Financial Reporting

There has not been any change in SJG’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the fiscal quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, SJG’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item l. Legal Proceedings

Information required by this Item is incorporated by reference to Part I, Item 2, Pending Litigation, beginning on page 21.

Item 1A. Risk Factors

There have been no material changes to our risk factors from those disclosed in Part I, Item 1A of SJG’s Annual Report on Form 10-K for the year ended December 31, 2009:

Item 6. Exhibits

(a) Exhibits

Exhibit No.		Description

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.

32.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

32.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

SIGNATURES

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

SOUTH JERSEY GAS COMPANY

(Registrant)

Dated: May 7, 2010	By:	/s/ Edward J. Graham
		Edward J. Graham
		President & Chief Executive Officer


Dated: May 7, 2010	By:	/s/ David A. Kindlick
		David A. Kindlick
		Senior Vice President & Chief Financial Officer

SJG-24

EX-31.1 2 ex31_1.htm EXHIBIT 31.1 ex31_1.htm

Exhibit 31.1

CERTIFICATION

I, Edward J. Graham, certify that:

1. I have reviewed this report on Form 10-Q for the period ended March 31, 2010 of South Jersey Gas Company;

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

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

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

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

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

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

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

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

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

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

	South Jersey Gas Company

Date: May 7, 2010	By:	/s/ Edward J. Graham
		Edward J. Graham
		President & Chief Executive Officer

EX-31.2 3 ex31_2.htm EXHIBIT 31.2 ex31_2.htm

Exhibit 31.2

CERTIFICATION

I, David A. Kindlick, certify that:

1. I have reviewed this report on Form 10-Q for the period ended March 31, 2010, of South Jersey Gas Company;

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: May 7, 2010	By:	/s/ David A. Kindlick
		David A. Kindlick
		Senior Vice President & Chief Financial Officer

EX-32.1 4 ex32_1.htm EXHIBIT 32.1 ex32_1.htm

Exhibit 32.1

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

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

In connection with the filing of the Quarterly Report on Form 10-Q of South Jersey Gas Company (the “Company”) for the period ended March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Edward J. Graham, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

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

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

/s/ Edward J. Graham
Name: Edward J. Graham
Title: Chief Executive Officer
May 7, 2010

EX-32.2 5 ex32_2.htm EXHIBIT 32.2 ex32_2.htm

Exhibit 32.2

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

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

In connection with the filing of the Quarterly Report on Form 10-Q of South Jersey Gas Company (the “Company”) for the period ended March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David A. Kindlick, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

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

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

/s/ David A. Kindlick
Name: David A. Kindlick
Title: Chief Financial Officer
May 7, 2010

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