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EX-32.2 - EXHIBIT 32.2 - SOUTH JERSEY GAS Coex32_2.htm
EX-31.1 - EXHIBIT 31.1 - SOUTH JERSEY GAS Coex31_1.htm
EX-31.2 - EXHIBIT 31.2 - SOUTH JERSEY GAS Coex31_2.htm
EX-32.1 - EXHIBIT 32.1 - SOUTH JERSEY GAS Coex32_1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
(Mark one)
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

o
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 o

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 o      No o

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
o
Accelerated filer
o
Non-accelerated filer
x (Do not check if a smaller reporting company)
Smaller reporting company
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No x
 
As of November 1, 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.
 




   
Page No.
     
PART I
3
     
Item 1.
3
     
Item 2.
16
     
Item 3.
23
     
Item 4.
24
     
PART II
24
     
Item 1.
24
     
Item 1A.
24
     
Item 6.
24
     
25
 
 
SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)

   
Three Months Ended
September 30,
 
   
2010
   
2009
 
             
             
Operating Revenues
  $ 57,140     $ 56,305  
                 
Operating Expenses:
               
Cost of Sales (Excluding depreciation)
    28,834       31,726  
Operations
    15,071       13,839  
Maintenance
    2,847       2,301  
Depreciation
    7,676       6,791  
Energy and Other Taxes
    1,377       1,416  
                 
Total Operating Expenses
    55,805       56,073  
                 
Operating Income
    1,335       232  
                 
Other Income and Expense
    (671 )     107  
                 
Interest Charges
    (4,775 )     (4,085 )
                 
Loss Before Income Taxes
    (4,111 )     (3,746 )
                 
Income Taxes
    2,132       1,666  
                 
Net Loss
  $ (1,979 )   $ (2,080 )

The accompanying notes are an integral part of the unaudited condensed financial statements.
 
 
SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)

   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
             
             
Operating Revenues
  $ 315,200     $ 364,253  
                 
Operating Expenses:
               
Cost of Sales (Excluding depreciation)
    169,650       227,608  
Operations
    49,363       47,206  
Maintenance
    8,448       6,162  
Depreciation
    22,074       19,973  
Energy and Other Taxes
    7,315       7,783  
                 
Total Operating Expenses
    256,850       308,732  
                 
Operating Income
    58,350       55,521  
                 
Other Income and Expense
    (198 )     789  
                 
Interest Charges
    (12,953 )     (12,334 )
                 
Income Before Income Taxes
    45,199       43,976  
                 
Income Taxes
    (18,132 )     (18,051 )
                 
Net Income
  $ 27,067     $ 25,925  

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


 
SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)

   
Three Months Ended
September 30,
 
   
2010
   
2009
 
             
             
             
Net Loss
  $ (1,979 )   $ (2,080 )
                 
Other Comprehensive Income  - Net of Tax:
               
                 
  Unrealized Gain on Available-for-Sale Securities
    283       344  
  Unrealized Gain on Derivatives - Other
    7       7  
                 
     Other Comprehensive Income - Net of Tax *
    290       351  
                 
Comprehensive Loss
  $ (1,689 )   $ (1,729 )

 
   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
             
Net Income
  $ 27,067     $ 25,925  
                 
Other Comprehensive Income  - Net of Tax:
               
                 
Unrealized Gain on Available-for-Sale Securities
    163       441  
Unrealized Gain on Derivatives - Other
    20       20  
                 
Other Comprehensive Income - Net of Tax *
    183       461  
                 
Comprehensive Income
  $ 27,250     $ 26,386  

* Determined using a combined statutory tax rate of 41% .

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

 
SOUTH JERSEY GAS COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)

   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
             
             
Net Cash Provided by Operating Activities
  $ 73,839     $ 86,313  
                 
Cash Flows from Investing Activities:
               
                 
Capital Expenditures
    (88,992 )     (54,921 )
Purchase of Restricted Investments in Margin Accounts
    (4,466 )     -  
Investment in Long-Term Receivables
    (2,009 )     (3,486 )
Proceeds from Long-Term Receivables
    1,213       3,633  
                 
Net Cash Used in Investing Activities
    (94,254 )     (54,774 )
                 
Cash Flows from Financing Activities:
               
Net Repayments of Lines of Credit
    (4,100 )     (28,050 )
Principal Repayments of Long-Term Debt
    -       (17 )
Proceeds from Issuance of Long-Term Debt
    60,000       -  
Payments for Issuance of Long-Term Debt
    (1,016 )     (95 )
Dividend on Common Stock
    (35,001 )     (5,001 )
                 
Net Cash Provided by (Used in) Financing Activities
    19,883       (33,163 )
                 
Net Decrease in Cash and Cash Equivalents
    (532 )     (1,624 )
Cash and Cash Equivalents at Beginning of Period
    1,993       2,228  
                 
Cash and Cash Equivalents at End of Period
  $ 1,461     $ 604  

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

 
SOUTH JERSEY GAS COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)

   
September 30,
2010
   
December 31,
2009
 
Assets
           
             
Property, Plant and Equipment:
           
Utility Plant, at original cost
  $ 1,352,935     $ 1,275,792  
Accumulated Depreciation
    (331,979 )     (314,627 )
                 
Property, Plant and Equipment - Net
    1,020,956       961,165  
                 
Investments:
               
Available-for-Sale Securities
    6,280       5,941  
Restricted Investments
    4,598       132  
                 
Total Investments
    10,878       6,073  
                 
Current Assets:
               
Cash and Cash Equivalents
    1,461       1,993  
Accounts Receivable
    37,641       41,392  
Accounts Receivable - Related Parties
    4,461       974  
Unbilled Revenues
    8,919       47,333  
Provision for Uncollectibles
    (5,149 )     (3,915 )
Natural Gas in Storage, average cost
    34,834       23,711  
Materials and Supplies, average cost
    3,170       4,854  
Prepaid Taxes
    34,739       13,796  
Derivatives - Energy Related Assets
    795       797  
Other Prepayments and Current Assets
    2,730       2,248  
                 
Total Current Assets
    123,601       133,183  
                 
Regulatory and Other Noncurrent Assets:
               
Regulatory Assets
    245,477       240,462  
Unamortized Debt Issuance Costs
    6,649       5,829  
Long-Term Receivables
    7,057       7,693  
Derivatives - Energy Related Assets
    256       333  
Other
    2,396       2,324  
                 
Total Regulatory and Other Noncurrent Assets
    261,835       256,641  
                 
Total Assets
  $ 1,417,270     $ 1,357,062  

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

 
SOUTH JERSEY GAS COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands, except per share amounts)

   
September 30,
2010
   
December 31,
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
    (6,147 )     (6,330 )
Retained Earnings
    218,237       231,296  
                 
Total Common Equity
    418,654       431,530  
                 
Long-Term Debt
    285,000       250,000  
                 
Total Capitalization
    703,654       681,530  
                 
Current Liabilities:
               
Notes Payable
    105,300       109,400  
Current Portion of Long-Term Debt
    60,000       35,000  
Accounts Payable - Commodity
    12,211       19,630  
Accounts Payable - Other
    16,811       21,947  
Accounts Payable - Related Parties
    9,593       12,120  
Derivatives - Energy Related Liabilities
    20,484       9,799  
Deferred Income Taxes - Net
    5,583       11,642  
Customer Deposits and Credit Balances
    20,787       13,542  
Environmental Remediation Costs
    21,959       22,499  
Taxes Accrued
    1,621       8,548  
Pension Benefits
    1,066       1,066  
Interest Accrued
    4,859       5,979  
Dividends Declared
    5,125       -  
Other Current Liabilities
    3,703       7,839  
                 
Total Current Liabilities
    289,102       279,011  
                 
Regulatory and Other Noncurrent Liabilities:
               
Regulatory Liabilities
    51,013       50,193  
Deferred Income Taxes - Net
    237,021       210,925  
Environmental Remediation Costs
    46,095       46,557  
Asset Retirement Obligations
    23,379       22,960  
Pension and Other Postretirement Benefits
    54,054       57,699  
Investment Tax Credits
    1,285       1,517  
Derivatives - Energy Related Liabilities
    1,583       504  
Derivatives - Other
    5,740       1,956  
Other
    4,344       4,210  
                 
Total Regulatory and Other Noncurrent Liabilities
    424,514       396,521  
                 
Commitments and Contingencies (Note 9)
               
                 
Total Capitalization and Liabilities
  $ 1,417,270     $ 1,357,062  

The accompanying notes are an integral part of the unaudited condensed financial statements.
 
 
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 disclosures 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 $0.9 million and $1.0 million for the three months ended September 30, 2010 and 2009, and $5.7 million and $6.3 million for the nine months ended September 30, 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 and nine months ended September 30, 2010 and 2009 was not significant.

DERIVATIVE INSTRUMENTS - SJG, through its affiliate, South Jersey Resources Group (SJRG), uses a variety of derivative instruments to limit its exposure to market risk in accordance with strict guidelines (See Note 12).  These contracts, which 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.

SJG 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.  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 Other Regulatory Assets in the condensed balance sheets.

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 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.



The following table summarizes the SJI nonvested restricted stock awards pertaining to SJG outstanding at September 30, 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
%
   
2.90
%
Jan. 2009
   
8,318
   
$
39.350
     
28.6
%
   
1.20
%
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 per quarter for restricted stock awards during 2010 and 2009 is approximately $84,000 and $74,200, respectively.

As of September 30, 2010, there was $0.4 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the restricted stock plans. That cost is expected to be recognized over a weighted average period of 1.8 years.

The following table summarizes information regarding restricted stock award activity during the nine months ended September 30, 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, September 30, 2010
   
27,580
   
$
37.448
 

During March 2010, SJG awarded 14,400 shares that had vested at December 31, 2009, to its officers at a market value of $0.5 million. During 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 nine months ended September 30, 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.

3.
RATES AND REGULATORY ACTIONS:

SJG is subject to the rules and regulations of the BPU.  Effective 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 is allowed to 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 rate proceeding to address the recovery of investment in CIRT projects not rolled into rate base in this case.

Also effective September 17, 2010, the BPU approved, on a provisional basis, the Company’s request to reduce its BGSS rates by 10.6% and its request to increase the CIP rates by 0.3%. This net rate reduction will more than offset the increase in base rates resulting in a net reduction of $19.1 million to SJG customers. Residential customers will benefit from a 3.4% decrease to their natural gas bills during a typical winter month. In July, the Company filed its Energy Efficiency Tracker petition requesting a 0.4% increase.  This matter is still pending.  

 
SJG-10


4.
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.

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

   
September 30,
   
December 31,
 
   
2010
   
2009
 
Environmental Remediation Costs:
               
Expended - Net
 
$
39,142
   
$
42,924
 
Liability for Future Expenditures
   
68,054
     
69,056
 
Income Taxes - Flowthrough Depreciation
   
1,018
     
1,752
 
Deferred Asset Retirement Obligation Costs
   
22,715
     
22,438
 
Deferred Pension and Other Postretirement Benefit Costs
   
70,049
     
71,192
 
Deferred Gas Costs - Net
   
7,645
     
6,519
 
Conservation Incentive Program Receivable
   
19,557
     
16,672
 
Societal Benefit Costs Receivable
   
3,090
     
1,872
 
Premium for Early Retirement of Debt
   
740
     
1,046
 
Other Regulatory Assets
   
13,467
     
6,991
 
                 
Total Regulatory Assets
 
$
245,477
   
$
240,462
 

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

   
September 30,
   
December 31,
 
   
2010
   
2009
 
Excess Plant Removal Costs
 
$
48,758
   
$
48,715
 
Other Regulatory Liabilities
   
2,255
     
1,478
 
                 
Total Regulatory Liabilities
 
$
51,013
   
$
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 increased from a $6.5 million regulatory asset at December 31, 2009 to a $7.6 million regulatory asset at September 30, 2010 primarily due to a change of $11.8 million in the fair value of energy related derivatives, partially offset by gas costs recovered from customers exceeding the actual cost of the commodity incurred during 2010 as a result of natural gas prices remaining at very low levels.

5.
FINANCIAL INSTRUMENTS:
 
Restricted Investments Beginning in the third quarter of 2010, SJG maintains a margin account with SJRG in conjunction with SJG's risk management activities as detailed in Notes 1 and 12. The funds provided by SJG will increase as the number of outstanding energy related contracts held with SJRG increases. As of September 30, 2010 the balance held with SJRG totaled $4.5 million.

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 September 30, 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 September 30, 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 $10.0 million and $10.8 million as of September 30, 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 resulting from imputed interest in the amounts of $1.1 million and $1.2 million as of September 30, 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 September 30, 2010 and December 31, 2009.

 
SJG-11


Long-Term Debt – In March 2010, SJG issued $15.0 million aggregate principal amount of its Medium Term Notes in a private placement. These notes bear interest at 4.84%, are secured by a first mortgage lien on substantially all utility plant and are due in 2026.  In June 2010, SJG issued an additional $45.0 million aggregate principal of its Medium Term notes in a private placement.  These notes bear interest at 4.93%, are secured by a first mortgage lien on substantially all utility plant and are also due in 2026. The estimated fair values of SJG’s long-term debt, including current maturities, as of September 30, 2010 and December 31, 2009, were $430.6 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 September 30, 2010 and December 31, 2009, were $345.0 million and $285.0 million, respectively. We retire debt when it is cost effective as permitted by the debt agreements.  Certain long-term debt agreements contain one covenant which potentially restricts SJG’s ability to pay cash dividends and other distributions on its common stock.  As of September 30, 2010, SJG was in compliance with this covenant.

6.
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
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Operating Revenues/Affiliates:
                       
SJRG
 
$
232
   
$
285
   
$
877
   
$
3,490
 
Other
   
103
     
93
     
338
     
338
 
Total Operating Revenue/Affiliates
 
$
335
   
$
378
   
$
1,215
   
$
3,828
 

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Costs of Sales/Affiliates:
                       
SJRG
 
$
20
   
$
1,860
   
$
14,602
   
$
33,321
 
Total Cost of Sales/Affiliates:
 
$
20
   
$
1,860
   
$
14,602
   
$
33,321
 

Derivative Losses (Gains) (See Note 1): *
               
SJRG
 
$
5,461
   
$
12,478
   
$
17,757
   
$
44,290
 

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

Operations Expense/Affiliates
                       
SJI
 
$
1,766
   
$
1,655
   
$
6,147
   
$
5,832
 
SJIS
   
1,258
     
1,261
     
3,720
     
3,596
 
Millennium
   
771
     
737
     
2,223
     
2,178
 
Other
   
(65
)
   
(70
)
   
(183
)
   
(228
)
Total Operations Expense/Affiliates
 
$
3,730
   
$
3,583
   
$
11,907
   
$
11,378
 

7.
UNUSED LINES OF CREDIT:

Credit facilities and available liquidity as of September 30, 2010 were as follows (in thousands):

   
Total Facility
   
Usage
   
Available Liquidity
 
Expiration Date
                     
Revolving Credit Facility
 
$
100,000
   
$
88,500
   
$
11,500
 
August 2011
Line of Credit
   
40,000
     
     
40,000
 
August 2011
Uncommitted Bank Lines
   
40,000
     
16,800
     
23,200
 
Various
                           
Total
 
$
180,000
   
$
105,300
   
$
74,700
   

 
SJG-12


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 September 30, 2010.  Borrowings under these credit facilities are at market rates.  The weighted average borrowing cost, which changes daily, was 0.72% and 0.64% at September 30, 2010 and 2009, respectively.

8.
PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three and nine months ended   September 30, 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
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Service Cost
 
$
663
   
$
622
   
$
1,989
   
$
1,866
 
Interest Cost
   
1,780
     
1,676
     
5,339
     
5,029
 
Expected Return on Plan Assets
   
(1,626
)
   
(1,457
)
   
(4,877
)
   
(4,370
)
Amortizations:
                               
Prior Service Cost
   
54
     
54
     
162
     
161
 
Actuarial Loss
   
919
     
1,043
     
2,757
     
3,127
 
Net Periodic Benefit Cost
   
1,790
     
1,938
     
5,370
     
5,813
 
Capitalized Benefit Costs
   
(877
)
   
(949
)
   
(2,631
)
   
(2,848
)
Total Net Periodic Benefit Expense
 
$
913
   
$
989
   
$
2,739
   
$
2,965
 

 
Other Postretirement Benefits
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Service Cost
 
$
183
   
$
155
   
$
548
   
$
466
 
Interest Cost
   
648
     
678
     
1,945
     
2,034
 
Expected Return on Plan Assets
   
(385
)
   
(351
)
   
(1,154
)
   
(1,054
)
Amortizations:
                               
Prior Service Credits
   
(70
)
   
(63
)
   
(211
)
   
(190
)
Actuarial Loss
   
297
     
562
     
890
     
1,310
 
Net Periodic Benefit Cost
   
673
     
981
     
2,018
     
2,566
 
Capitalized Benefit Costs
   
(330
)
   
(480
)
   
(989
)
   
(1,257
)
Total Net Periodic Benefit Expense
 
$
343
   
$
501
   
$
1,029
   
$
1,309
 

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

During May 2010 and 2009, SJG contributed $6.4 million and $8.2 million to its pension plans, respectively.  No additional contributions are anticipated for the remainder of the year.

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.

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 2011.

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.

 
SJG-13


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 September 30, 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.

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 September 30, 2010 is as follows (in thousands):

   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets -
                       
                                 
Available-for-Sale Securities (A)
 
$
6,280
   
$
6,280
   
$
-
   
$
-
 
Derivatives – Energy Related Assets (B)
   
1,051
     
462
     
589
     
-
 
   
$
7,331
   
$
6,742
   
$
589
   
$
-
 
                                 
Liabilities -
                               
                                 
Derivatives – Energy Related Liabilities (B)
 
$
22,067
   
$
18,459
   
$
3,608
   
$
-
 
Derivatives – Other (C)
   
5,740
     
-
     
5,740
     
-
 
   
$
27,807
   
$
18,459
   
$
9,348
   
$
-
 

(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.
 
SJG-14

 
11.
AVAILABLE–FOR–SALE SECURITIES:

SJG's portfolio of investments consists of five highly diversified funds which are not used for working capital purposes. These funds are in an unrealized loss position as of September 30, 2010. Due to the nature of the underlying securities, these funds as a whole are susceptible to changes in the economy and have been adversely affected by the economic slowdown, particularly during the fourth quarter of 2008 when certain investments became impaired. SJG has evaluated the near-term prospects of the overall funds in relation to the severity and duration of the impairment. Based on that evaluation, SJG recorded an insignificant impairment loss during the fourth quarter of 2008. SJG does not intend to sell the remaining funds, and it is more likely than not it will not have to sell the remaining funds before recovery of its cost basis. SJG does not consider these remaining investments to be other-than-temporarily impaired at September 30, 2010.

The following table shows the gross unrealized losses and fair value of the SJG's Available-for-Sale Securities with unrealized losses that are not deemed to be other-than-temporarily impaired (in thousands), aggregated by length of time that the individual funds have been in a continuous unrealized loss position at September 30, 2010.

   
Less than 12 Months
   
Greater Than 12 Months
   
Total
 
                                     
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
Marketable Equity Securities
 
$
-
   
$
-
   
$
3,086
   
$
482
   
$
3,086
   
$
482
 
 
As of both September 30, 2010 and December 31, 2009, the total losses for securities with net losses included in Accumulated Other Comprehensive Loss was $0.3 million.  As of September 30, 2010 and December 31, 2009, securities with net gains included in Accumulated Other Comprehensive Loss was $0.3 million and $0.1 million, respectively.

12.
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 September 30, 2010, SJG had outstanding derivative contracts intended to limit the exposure to market risk on 26.4 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 September 30, 2010 and December 31, 2009, SJG had $21.0 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.

We previously used derivative transactions known as “Treasury Locks” to hedge against the impact on our cash flows of possible interest rate increases on debt issued in September 2005.  The initial $1.4 million cost of the Treasury Locks has been included in Accumulated Other Comprehensive Loss and is being amortized over the 30 year life of the associated debt issue.  As of September 30, 2010 and 2009, the unamortized balance was approximately $1.2 million.

 
SJG-15


The fair values of all derivative instruments, as reflected in the condensed balance sheets as of September 30, 2010 and December 31, 2009, are as follows (in thousands):

Derivatives not designated as hedging instruments under GAAP
 
September 30, 2010
   
December 31, 2009
 
   
Assets
   
Liabilities
   
Assets
   
Liabilities
 
Energy related commodity contracts:
                       
                         
Derivatives – Energy Related – Current
 
$
795
   
$
20,484
   
$
797
   
$
9,799
 
                                 
Derivatives – Energy Related – Non-Current
   
256
     
1,583
     
333
     
504
 
                                 
Interest rate contracts:
                               
                                 
Derivatives – Other
   
-
     
5,740
     
-
     
1,956
 
                                 
Total derivatives not designated as hedging instruments under GAAP
 
$
1,051
   
$
27,807
     
1,130
     
12,259
 
 
The effect of derivative instruments on the condensed statements of income for the three and nine months ended September 30, 2010, and 2009 are as follows (in thousands):

   
Three months ended
September 30,
 
Nine months ended
September 30,
 
Derivatives in Cash Flow Hedging Relationships Interest Rate Contracts:
 
2010
   
2009
 
2010
 
2009
 
                         
Losses reclassified from accumulated OCI into income (a)
 
$
(12
)
 
$
(12
)
 
$
(36
)
 
$
(36
)

(a) Included in Interest Charges

Net realized losses associated with SJG’s energy related financial commodity contracts of $5.5 million and $12.5 million for the three months ended September 30, 2010 and 2009 and $17.8 million and $44.3 million for the nine months ended September 30, 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.

of Financial Condition and Results of Operations

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 344,271 customers at September 30, 2010 compared with 339,894 customers at September 30, 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.

 
SJG-16


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 SJG’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 31,297 and 29,019 at September 30, 2010 and 2009, respectively.

RESULTS OF OPERATIONS:

The following table summarizes the composition of selected gas utility data for the three and nine months ended September 30,
(in thousands, except for degree day data):

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Utility Throughput – dth:
                       
Firm Sales -
                       
Residential
   
1,506
     
1,706
     
15,246
     
16,070
 
Commercial
   
627
     
673
     
3,955
     
4,319
 
Industrial
   
28
     
26
     
200
     
231
 
Cogeneration & Electric Generation
   
701
     
176
     
1,101
     
278
 
Firm Transportation -
                               
Residential
   
136
     
139
     
1,325
     
1,410
 
Commercial
   
617
     
647
     
4,067
     
4,132
 
Industrial
   
3,036
     
2,906
     
9,379
     
8,875
 
Cogeneration & Electric Generation
   
1,638
     
799
     
4,634
     
1,518
 
                                 
Total Firm Throughput
   
8,289
     
7,072
     
39,907
     
36,833
 
                                 
Interruptible Sales
   
8
     
-
     
51
     
4
 
Interruptible Transportation
   
402
     
492
     
1,256
     
1,700
 
Off-System
   
969
     
544
     
4,006
     
4,309
 
Capacity Release
   
12,337
     
10,560
     
31,729
     
28,023
 
                                 
Total Throughput - Utility
   
22,005
     
18,668
     
76,949
     
70,869
 
 
 
SJG-17


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Utility Operating Revenues:
                       
Firm Sales -
                       
Residential
 
$
28,745
   
$
33,929
   
$
198,105
   
$
243,212
 
Commercial
   
8,743
     
9,129
     
45,228
     
53,663
 
Industrial
   
435
     
309
     
2,436
     
2,637
 
Cogeneration & Electric Generation
   
4,480
     
1,267
     
7,164
     
2,312
 
Firm Transportation -
                               
Residential
   
1,212
     
1,090
     
7,168
     
7,413
 
Commercial
   
2,662
     
2,449
     
14,505
     
13,435
 
Industrial
   
4,155
     
3,638
     
12,806
     
10,841
 
Cogeneration & Electric Generation
   
1,098
     
681
     
3,816
     
1,474
 
                                 
Total Firm Revenues
   
51,530
     
52,492
     
291,228
     
334,987
 
                                 
Interruptible Sales
   
118
     
(16
)
   
756
     
79
 
Interruptible Transportation
   
410
     
465
     
1,308
     
1,551
 
Off-System
   
4,525
     
1,904
     
20,071
     
23,154
 
Capacity Release
   
358
     
1,171
     
1,088
     
3,594
 
Other
   
199
     
289
     
749
     
888
 
                                 
Total Utility Operating Revenues
   
57,140
     
56,305
     
315,200
     
364,253
 
                         
Less:
                       
Cost of Sales
   
28,834
     
31,726
     
169,650
     
227,608
 
Conservation Recoveries*
   
1,025
     
1,247
     
5,398
     
6,636
 
RAC Recoveries*
   
1,741
     
1,210
     
5,222
     
3,627
 
EET Recoveries*
   
426
     
81
     
964
     
81
 
Revenue Taxes
   
863
     
921
     
5,709
     
6,263
 
Utility Margin
 
$
24,251
   
$
21,120
   
$
128,257
   
$
120,038
 

                                 
Margin:
                               
Residential
 
$
12,806
   
$
12,699
   
$
72,889
   
$
74,836
 
Commercial and Industrial
   
6,673
     
6,325
     
28,395
     
28,779
 
Cogeneration and Electric Generation
   
916
     
875
     
2,304
     
1,750
 
Interruptible
   
25
     
8
     
139
     
96
 
Off-system & Capacity Release
   
85
     
208
     
462
     
1,108
 
Other Revenues
   
467
     
859
     
1,458
     
2,075
 
Margin Before Weather Normalization & Decoupling
   
20,972
     
20,974
     
105,647
     
108,644
 
CIRT Mechanism
   
2,505
     
551
     
7,067
     
926
 
CIP Mechanism
   
733
     
(409
)
   
15,425
     
10,464
 
EET Mechanism
   
41
     
4
     
118
     
4
 
Utility Margin
 
$
24,251
   
$
21,120
   
$
128,257
   
$
120,038
 
                                 
Degree Days:
   
3
     
34
     
2,782
     
3,033
 

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

ThroughputTotal gas throughput increased 3.3 MMdts, or 17.9%, for the three months ended September 30, 2010, compared to the same period in 2009. Total gas throughput increased 6.1 MMdts, or 8.6%, for the nine months ended September 30, 2010, compared with the same period in 2009.  The majority of the increase is attributable to higher capacity release, which increased by 1.8 MMdts and 3.7 MMdts during the three and nine months ended September 30, 2010, as reflected in the table above.  Higher capacity release throughput was the result of capacity made available during 2010 when the weather was 8.3% warmer than in 2009. In addition, cogeneration and electric generation sales and transportation throughput increased on a year-to-date basis.  As the summer of 2010 was one of the  hottest on record, higher electric consumption for air conditioning drove the demand for greater natural gas consumption by the region’s electric utility.  In the cogeneration market, a significant increase in transportation throughput was realized as a single customer increased its contract significantly to shift supply from its pipeline supplier to SJG.

 
SJG-18

 
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
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net Income Benefit:
                       
CIP – Weather Related
 
$
-
   
$
-
   
$
2.3
   
$
(0.1
)
CIP – Usage Related
   
0.4
     
(0.2
)
   
6.8
     
6.3
 
Total Net Income Benefit
 
$
0.4
   
$
(0.2
)
 
$
9.1
   
$
6.2
 
                                 
Weather Compared to 20-Year Average
 
93.8% warmer
   
30.5% warmer
   
8.1% warmer
   
0.2% colder
 
Weather Compared to Prior Year
 
91.2% warmer
   
85.3% colder
   
8.3% warmer
   
10.2% colder
 

Operating Revenues – Revenues increased $0.8 million during the three months ended September 30, 2010 compared with the same period in the prior year.  While firm sales revenue to residential and commercial markets decreased substantially during the third quarter of 2010 versus the third quarter of 2009, higher electric generation and Off-System Sales (OSS) more than offset this decrease. The residential and commercial sales revenue decrease was primarily the result of a lower Basic Gas Supply Service (BGSS) rate in effect during 2010 and lower sales volume as reflected in the “Throughput” table above.  The BGSS rate had been reduced 21% in October 2009 to address lower natural gas costs experienced in 2009 and forecasted through 2010.  The BGSS rate was further reduced in September 2010 in Note 2, “Rates and Regulatory Actions”.

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.” OSS revenue increased $2.6 million during the third quarter of 2010 versus the third quarter of 2009, as both sales volume and unit sales prices increased.    As reflected in the Margin table above, the impact of the higher 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 ratepayers.  As discussed under “Throughput” above, electric generation sales rose due to the extremely hot summer weather and contributed an additional $3.2 million to revenue during the third quarter of 2010.

Revenues decreased $49.1 million during the nine months ended September 30, 2010 compared with the same period in the prior year.  Firm revenues decreased $43.8 million, or 13.1%, primarily as a result of a lower BGSS rate in effect during 2010. As discussed above, such changes in gas costs and BGSS recoveries have no impact on Company profitability. There was also a $3.1 million decrease in OSS during the first nine months 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, which significantly impacted sales during the first quarter of 2010.  See discussion under “Rates and Regulation” in Item 7 of SJG’s Form 10-K for the year ended December 31, 2009 for additional discussion regarding the CIP.  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 ratepayers.

Margin (pre-tax) - SJG’s margin is defined as natural gas revenues less natural gas costs, regulatory rider expenses and related volumetric and revenue based energy taxes. SJG believes that margin provides a more meaningful basis for evaluating utility operations than revenues since natural gas costs, regulatory rider expenses and related energy 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.

Total margin increased $3.1 million, or 14.8%, for the three months ended September 30, 2010, compared with the same period in 2009 due to customer additions 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 $2.5 million of pre-tax margin in the third quarter of 2010, compared with $0.6 million in the same period of 2009.

Total margin increased $8.2 million, or 6.8% for the nine  months ended September  30, 2010 compared with the same period in 2009 primarily due to customer additions and profits earned through the Company’s CIRT, as noted above.  The CIRT added $7.1 million of pre-tax margin in the first nine months of 2010, compared with $0.9 million in the same period last year.  Partially offsetting these increases were lower margins from OSS and capacity release, primarily in the first quarter of 2010.

The CIP protected $15.4 million of pre-tax margin in the first nine months of 2010 that would have been lost due to lower customer usage, compared with $10.5 million in the same period last year.  Of these amounts, $3.9 million and $(0.2) million were related to weather variations and $11.5 million and $10.7 million were related to other customer usage variations in 2010 and 2009, respectively.

 
SJG-19


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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010 vs. 2009
   
2010 vs. 2009
 
             
Operations
 
$
1,232
   
$
2,157
 
Maintenance
   
546
     
2,286
 
Depreciation
   
885
     
2,101
 
Energy and Other Taxes
   
(39
)
   
(468
)

Operations – Operations expense increased $1.2 million and $2.2 million for the three and nine months ended September 30, 2010, respectively, as compared with the same periods in 2009.  The increases are due to several factors as follows:

 
·
Bank fees increased $0.1 million and $0.7 million for the three and nine month periods ended September 30, 2010, respectively, as compared with 2009, to support credit availability and the Company’s variable-rate debt.

 
·
Expenses associated with increasing SJG’s reserve for uncollectible accounts increased $0.6 million and $0.4 million for the three and nine month periods ended September 30, 2010, respectively, compared to the same periods last year.  Changes in the uncollectible reserve are the result of fluctuations in levels of customer accounts receivable balances.

 
·
Expense associated with the write-off of uncollectible customer accounts receivable increased $0.5 million for the nine month period ended September 30, 2010, as compared with 2009.  This increase in write-offs resulted from a post-winter season evaluation of delinquent accounts.

 
·
Payroll expense increased $0.1 million and $0.6 million for the three and nine month periods ended September 30, 2010, respectively, as compared with 2009, as a result of annual compensation increases and additional overtime required to address the impact of unusually inclement weather on the Company’s distribution system, primarily in the first quarter of 2010.

 
·
Expenses related to a voluntary separation program offered in the early part of 2010 to its unionized workforce in an effort to reduce future labor costs resulted in an additional expense of $0.2 million for the nine month period ended September 30, 2010, as compared with 2009.

 
·
Spending under the New Jersey Clean Energy Program and Energy Efficiency Programs experienced a net increase (decrease) of $0.1 million and $(0.4) million for the three and nine months periods ended September 30, 2010 as compared to 2009.  Such costs are recovered on a dollar-for-dollar basis; therefore, SJG experienced offsetting changes in revenues during the periods.

Maintenance - Maintenance expense increased during the three and nine months ended September 30, 2010, compared with the same periods 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 and nine months ended September 30, 2010, as compared with the same periods in 2009, due mainly to SJG’s continuing investment in utility plant.

Energy and Other Taxes - Energy and Other Taxes decreased during the three and nine months ended September 30, 2010, compared with the same periods in 2009, primarily due to lower taxable firm throughput in 2010 resulting from warmer weather.    Further contributing to the year-to-date reduction was a $0.2 million credit realized during the first quarter of 2010 for a revenue tax rate decrease.

Other Income and Expense - Other Income and Expense reflects a decrease during the three and nine months ended September 30, 2010, compared with the same periods in 2009, primarily due to an agreement reached with the FERC to resolve an outstanding dispute.  SJG’s portion of this settlement approximated $0.7 million, which was accrued during the third quarter of 2010.  Additional details concerning this settlement can be found in Item 8.01, Other Events, of SJI’s Form 8-K filed on September 28, 2010.

 
SJG-20


Interest Charges – Interest Charges increased $0.7 million and $0.6 million, respectively, during the three and nine months ended September 30, 2010, compared with the same period in 2009.  The effect of lower average levels of short-term debt and lower average short-term debt interest rates was offset by the issuance of $60 million aggregate principal long-term debt issued during the first nine months of 2010 as compared to 2009.

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 $73.8 million and $86.3 million in the first nine months 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 nine months of 2010 was impacted by lower customer receivable balances which were offset by higher natural gas inventory balances, and lower collections under regulatory clauses.

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 $89.0 million and $54.9 million during the first nine months of 2010 and 2009, respectively.   We estimate the net cash outflows for construction projects for fiscal years 2010, 2011 and 2012 to be approximately $134.9 million, $57.1 million and $57.5 million, respectively.  For capital expenditures, including those under the CIRT, SJG will use short-term borrowings under lines of credit from commercial banks to finance capital expenditures as incurred.  From time to time, the Company will refinance the short-term debt incurred to support capital expenditures with long-term debt.

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 September 30, 2010 were as follows (in thousands):

   
Total Facility
   
Usage
   
Available Liquidity
 
Expiration Date
                     
Revolving Credit Facility
 
$
100,000
   
$
88,500
   
$
11,500
 
August 2011
Line of Credit
   
40,000
     
     
40,000
 
August 2011
Uncommitted Bank Lines
   
40,000
     
16,800
     
23,200
 
Various
                           
Total
 
$
180,000
   
$
105,300
   
$
74,700
   

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 and June 2010, SJG issued $15.0 million and $45.0 million aggregate principal amounts, respectively, of its MTNs under private placements. In September 2010, SJG entered into an arrangement to issue Medium Term Notes under a private placement in an aggregate principal amount of $55.0 million.  SJG expects to issue the debt by the end of the fourth quarter of 2010.  No other long-term debt was issued during the first nine months of 2010 or 2009.

 
SJG-21


SJG’s capital structure was as follows:

   
As of September 30, 2010
   
As of December 31, 2009
 
             
Common Equity
   
48.2
%
   
52.2
%
Long-Term Debt
   
39.7
     
30.3
 
Short-Term Debt
   
12.1
     
17.5
 
                 
Total
   
100.0
%
   
100.0
%

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 nine months of 2010 amounted to $89.0 million. Management estimates net cash outflows for construction projects for 2010, 2011 and 2012, to be approximately $134.9 million, $57.1 million and $57.5 million, respectively.  Costs for remediation projects, net of insurance reimbursements, for the first nine months of 2010 amounted to net cash outflows of $1.9 million.  Total cash outflows for remediation projects are expected to be $6.2 million, $18.2 million and $11.9 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 2011.

SJG has certain commitments for both pipeline capacity and gas supply for which it pays fees regardless of usage. Those commitments as of September 30, 2010, average $44.5 million annually and total $185.9 million over the contracts’ lives. The increase of approximately $8.7 million since December 31, 2009 was primarily due to agreements made to extend several services, partially offset by the expiration of obligations during the first nine months of 2010.  Approximately 21% 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.  In addition to increased gas supply commitments noted above, SJG’s contractual cash obligations increased for principal and interest related to the $60.0 million of long-term debt issued during 2010, along with $10.9 million in construction related obligations.

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.

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 Sept. 30,
 
Year Ended December 31,
 
2010
 
2009
   
2008
   
2007
   
2006
   
2005
 
                               
4.9x    
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.

 
SJG-22

 

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 through SJRG to hedge against forward price risk. These contracts are recoverable through our BGSS, subject to BPU approval. It is management’s policy, to the extent practical, within predetermined risk management policy guidelines, to have limited unmatched positions on a deal or portfolio basis while conducting these activities. As a result of holding open positions to a minimal level, the economic impact of changes in value of a particular transaction is substantially offset by an opposite change in the related hedge transaction. The majority of our contracts are typically less than 12-months long. The fair value and maturity of all these energy trading and hedging contracts determined using mark-to-market accounting as of September 30, 2010 is as follows (in thousands):

Assets
                 
Source of Fair Value
 
Maturity
< 1 Year
   
Maturity
1 - 3 Years
   
Total
 
                   
Prices Actively Quoted (NYMEX)
 
$
441
   
$
21
   
$
462
 
                         
Prices Provided by Other