INCOME TAXES:

SJI files a consolidated federal income tax return. State income tax returns are filed on a separate company basis in states where SJI has operations and/or a requirement to file. Total income taxes applicable to operations differ from the tax that would have resulted by applying the statutory Federal income tax rate to pre-tax income for the following reasons (in thousands):



	2012			2011			2010

Tax at Statutory Rate	$	36,490		$	39,326		$	33,634
Increase (Decrease) Resulting from:
State Income Taxes	5,857			6,763			5,669
ESOP	(1,141		)	(1,063		)	(971		)
Amortization of Investment Tax Credits - Utility	(287		)	(302		)	(310		)
Amortization of Flowthrough Depreciation	—			526			664
AFUDC	(1,048		)	(729		)	—
Investment and Other Tax Credits	(26,574		)	(21,927		)	(10,107		)
Other - Net	(1,818		)	(92		)	232
Income Taxes:
Continuing Operations	11,479			22,502			28,811
Discontinued Operations	(629		)	(302		)	(337		)
Net Income Taxes	$	10,850		$	22,200		$	28,474

The provision for Income Taxes is comprised of the following (in thousands):

	2012			2011			2010
Current:
Federal	$	(8,761	)	$	(844	)	$	(7,527	)
State	221			345			7,753
Total Current	(8,540		)	(499		)	226
Deferred:
Federal	11,515			13,244			27,927
State	8,791			10,059			968
Total Deferred	20,306			23,303			28,895
Investment Tax Credit - Utility	(287		)	(302		)	(310		)
Income Taxes:
Continuing Operations	11,479			22,502			28,811
Discontinued Operations	(629		)	(302		)	(337		)
Net Income Taxes	$	10,850		$	22,200		$	28,474

Investment Tax Credits attributable to SJG are deferred and amortized at the annual rate of 3.0%, which approximates the life of related assets.

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



	2012			2011
Current:
Net Operating Loss Carryforward	$	(2,586	)	$	(14,900	)
Derivatives / Unrealized Gain	257			2,187
Conservation Incentive Program	13,942			5,975
Budget Billing - Customer Accounts	1,033			(4,261		)
Provision for Uncollectibles	(1,883		)	(1,554		)
Other	49			(226		)
Current Deferred Tax (Asset) Liability - Net	$	10,812		$	(12,779	)
Noncurrent:
Book versus Tax Basis of Property	$	395,322		$	338,472
Deferred Gas Costs - Net	3,325			12,005
Environmental	16,006			18,410
Deferred Regulatory Costs	15,374			7,397
Deferred State Tax	(17,924		)	(14,250		)
Investment Tax Credit Basis Gross-Up	(318		)	(466		)
Deferred Pension & Other Post Retirement Benefits	39,174			36,048
Pension & Other Post Retirement Benefits	(33,739		)	(30,664		)
Deferred Revenues	(9,367		)	(8,073		)
Derivatives / Unrealized Gain	(82		)	(2,051		)
Net Operating Loss Carryforward	(79,217		)	(65,594		)
Investment and Other Tax Credits	(71,547		)	(26,820		)
Equity In Loss Of Affiliated Companies	30,707			28,899
Other	1,775			2,121
Noncurrent Deferred Tax Liability - Net	$	289,489		$	295,434

As of December 31, 2012, SJI has total federal net operating loss carryforwards of $215.0 million and total state net operating loss carryforwards of $113.1 million. Of these totals, $170.6 million and $69.4 million of the federal and state net operating loss carryforwards, respectively, will expire in 2031, and $44.4 million and $43.7 million of the federal and state net operating loss carryforwards, respectively, will expire in 2032. SJI also has federal investment tax credit carryforwards of $70.3 million, of which $11.6 million will expire in 2030, $26.6 million will expire in 2031 and $32.1 million will expire in 2032. SJI has $1.2 million and $1.3 million of federal and state alternative minimum tax credits, respectively, which have no expiration date. A valuation allowance is established when it is determined that it is more likely than not that a deferred tax asset will not be realized.

The total unrecognized tax benefits as of December 31, 2012, 2011, and 2010 were $0.5 million, $0.7 million, and $0.8 million, respectively, which excludes $0.6 million, $0.7 million, and $0.7 million of accrued interest and penalties, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, is as follows (in thousands):



	2012			2011			2010
Balance at January 1,	$	736		$	793		$	1,098
Increase as a result of tax positions taken in prior years	108			119			—
Decrease due to a lapse in the statute of limitations	(341		)	(90		)	(85		)
Settlements	—			(86		)	(220		)
Balance at December 31,	$	503		$	736		$	793

The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is not significant. The Company's policy is to record interest and penalties related to unrecognized tax benefits as interest expense and other expense, respectively. These amounts were not significant in 2012, 2011 or 2010. There have been no significant changes to the unrecognized tax benefits during 2012, 2011 or 2010 and the Company does not anticipate any significant changes in the total unrecognized tax benefits within the next 12 months.

The unrecognized tax benefits are primarily related to an uncertainty of state income taxes. Federal income tax returns from 2009 forward and state income tax returns primarily from 2008 forward are open and subject to examination.