RATES AND REGULATORY ACTIONS:

Base Rates - SJG is subject to the rules and regulations of the BPU. On September 17, 2010, the BPU granted SJG a base rate increase of $42.1 million, which was predicated, in part, upon a 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..

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:


•	June 2009 - We made our annual BGSS filing to the BPU requesting a $54.7 million reduction, or 17.5% decrease, in gas costs recoveries in response to projected decreases in wholesale gas costs.


•	August 2009 - The BPU issued an Order finalizing the 2008-2009 provisional BGSS costs.


•	September 2009 - The BPU approved, on a provisional basis, SJG’s request for a $54.7 million, or 17.5%, reduction in gas cost recoveries.


•	June 2010 – We made our annual BGSS filing to the BPU requesting a $38.0 million, or 13.9%, reduction in gas cost recoveries in response to projected decreases in wholesale gas costs.


•	September 2010 – The BPU approved, on a provisional basis, SJG’s request for a $38.0 million, or 13.9%, reduction in gas cost recoveries.


•	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 rates 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.

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. 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.

Regulatory actions regarding the CIP were as follows:


•	June 2009 - We made our annual CIP filing to the BPU requesting recovery of $13.4 million which included a $13.7 million non-weather related recovery, partially offset by a credit of $0.3 million which was weather related.


•	August 2009 - The BPU issued an Order finalizing the 2008-2009 provisional CIP rates.


•	September 2009 - The BPU approved, on a provisional basis, the recovery of CIP revenue of $13.4 million.


•	June 2010 – We made our annual CIP filing to the BPU requesting recovery of $20.0 million which included a $14.4 million non-weather related recovery and $5.6 million which was weather related. The BGSS savings to be applied as an offset to the non-weather related recovery totaled $8.9 million. As a result, SJG will carry forward $5.5 million to be recovered from customers in the next CIP year.


•	September 2010 – The BPU approved, on a provisional basis, the recovery of CIP revenue of $14.5 million.


•	June 2011 - We made our annual CIP filing to 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.

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. On a monthly basis during the CIRT year, we record adjustments to earnings based on actual CIRT program expenditures, as incurred. Annually we make a filing to the BPU for review and approval of expenditures recorded under the CIRT.

Regulatory actions regarding the CIRT were as follows:


•	January 2009 - We filed a petition with the BPU for approval of an accelerated infrastructure investment program and associated rate tracker as discussed above.


•	April 2009 – The BPU approved our petition for the CIRT, including a first year estimated capital expenditure level of $70.5 million, and estimated revenue of $3.2 million.


•	November 2009 - We made our annual CIRT filing, requesting $10.6 million in additional revenue.


•	December 2009 – The BPU approved, on a provisional basis, recovery of an additional $9.9 million in CIRT revenue.


•	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 will be reviewed and rolled into rate base during Phase II of the base rate case in 2011.


•	October 2010 – We made our annual CIRT filing requesting approval to earn a return of, and a return on, $150.0 million in additional CIRT-related expenditures during 2011, 2012 and 2013.


•	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 will continue to earn a return of, and return on, investment as the capital is spent, as it did under the original CIRT.


•	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% effective October 1, 2011. This petition is currently pending.


•	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. 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 for residential, commercial and industrial customers. Under this program we can invest $17.0 million over two years in energy efficiency measures to be installed in customer homes and businesses. We can 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:


•	January 2009 - Filed a petition with the BPU for approval of an energy efficiency program as noted above, with a projected 2009 revenue of $1.7 million.


•	July 2009 - The BPU approved our petition for the EET with a revenue recovery of $1.3 million.


•	July 2010 - Filed a petition with the BPU requesting a reallocation of investment dollars between the EET programs to fund the more popular programs.


•	November 2010 - Filed a petition with the BPU requesting a one year extension of the program.


•	January 2011 - SJG’s request to reallocate investment dollars between the programs and a one year extension was approved by the BPU.


•	June 2011 - The Company filed its annual 2011-2012 petition requesting approval of a $5.8 million increase in EET recovery. This petition is currently pending.


•	October 2011 - The Company 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.

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:


•	January 2009 - We made our annual 2008-2009 SBC filing requesting a $7.9 million increase in SBC recoveries.


•	August 2009 - We made our annual 2009-2010 SBC filing requesting a $15.5 million increase in SBC recoveries.


•	September 2010 – We made our annual 2010-2011 SBC filing requesting a $21.5 million increase in SBC recoveries. This petition is pending.


•	July 2011 - We made our annual 2011-2012 SBC filing requesting a $31.2 million increase in SBC recoveries. This petition is pending.


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

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, 2011 and 2010, we reflected the unamortized remediation costs of $45.8 million and $39.1 million, respectively, on the balance sheet under Regulatory Assets (See Note 4). Since implementing the RAC in 1992, we have recovered $58.6 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, we will be responsible for approximately $41.5 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.

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 2009 - We made our annual USF filing, along with the state’s other electric and gas utilities, proposing to decrease annual statewide gas revenues by $39.1 million. This proposal was designed to decrease our annual USF revenue by $4.9 million.


•	October 2009 – The BPU approved the statewide budget of $60.1 million for all of the State’s gas utilities. Our portion of this total is approximately $5.1 million and decreased rates were implemented effective October 12, 2009, resulting in a $4.1 million decrease to our annual USF recoveries.


•	July 2010 – We made our annual USF filing, along with the state’s other electric and gas utilities, proposing to increase annual statewide gas revenues by $3.4 million. This proposal was designed to increase our annual USF revenue by $0.4 million.


•	August 2010 – We updated our July 2010 filing to reflect actual data through June 2010.


•	October 2010 – The BPU approved the statewide budget of $64.8 million for all of the State’s gas utilities. Our portion of the total is approximately $6.6 million and increased rates were implemented effective November 1, 2010, resulting in a $0.4 million increase to our annual USF recoveries.


•	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.

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, 2011, 35,880 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, 2011 and 2010, deferred pipeline integrity costs totaled $1.2 million and $1.7 million, respectively, and are included in other regulatory assets (See Note 4).

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