SOUTH JERSEY GAS 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended September 30, 2007

OR

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

For the transition period from ________________ to ________________

Commission File Number 000-22211

SOUTH JERSEY GAS COMPANY

(Exact name of registrant as specified in its charter)

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

1 South Jersey Plaza, Folsom, NJ 08037

(Address of principal executive offices, including zip code)

(609) 561-9000

(Registrant's telephone number, including area code) 

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

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

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

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

(Check one):                Large accelerated filer   [  ]            Accelerated filer [  ]             Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [  ]      No  [X]

As of November 1, 2007 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.

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements – See Pages 3 through 15

SJG - 2

SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)
	Three Months Ended
	September 30,
	2007			2006
Operating Revenues	$	84,420		$	87,715
Operating Expenses:
Cost of Sales (Excluding depreciation)		62,223			65,014
Operations		10,968			11,088
Maintenance		1,544			1,454
Depreciation		6,188			5,916
Energy and Other Taxes		1,307			1,336
Total Operating Expenses		82,230			84,808
Operating Income		2,190			2,907
Other Income and Expense		157			232
Interest Charges		(5,371	)		(5,736	)
Loss Before Income Taxes		(3,024	)		(2,597	)
Income Tax Benefit		1,278			1,062
Net Loss	$	(1,746	)	$	(1,535	)
The accompanying notes are an integral part of the condensed financial statements.

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SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands)
	Nine Months Ended
	September 30,
	2007			2006
Operating Revenues	$	458,280		$	469,802
Operating Expenses:
Cost of Sales (Excluding depreciation)		331,615			349,675
Operations		36,423			35,439
Maintenance		4,446			4,224
Depreciation		18,356			17,522
Energy and Other Taxes		7,803			7,295
Total Operating Expenses		398,643			414,155
Operating Income		59,637			55,647
Other Income and Expense		613			370
Interest Charges		(15,403	)		(16,069	)
Income Before Income Taxes		44,847			39,948
Income Taxes		(18,431	)		(16,406	)
Net Income	$	26,416		$	23,542
The accompanying notes are an integral part of the financial statements.

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SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
	Three Months Ended
	September 30,
	2007			2006
Net Loss	$	(1,746	)	$	(1,535	)
Other Comprehensive Loss - Net of Tax:
Unrealized Gain on Equity Investments		41			110
Unrealized Loss on Derivatives - Other		(487	)		(674	)
Other Comprehensive Loss - Net of Tax		(446	)		(564	)
Comprehensive Loss	$	(2,192	)	$	(2,099	)
	Nine Months Ended
	September 30,
	2007			2006
Net Income	$	26,416		$	23,542
Other Comprehensive Income - Net of Tax:
Unrealized Gain on Equity Investments		221			199
Unrealized Gain on Derivatives - Other		192			279
Other Comprehensive Income - Net of Tax		413			478
Comprehensive Income	$	26,829		$	24,020
The accompanying notes are an integral part of the condensed financial statements.

SJG - 5

SOUTH JERSEY GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
	Nine Months Ended
	September 30,
	2007			2006
Net Cash Provided by Operating Activities	$	67,824		$	34,145
Cash Flows from Investing Activities:
Capital Expenditures		(34,386	)		(47,326	)
Net Proceeds from Sale of (Purchase of) Restricted Investments		4,172			(14,486	)
Net Cash Used in Investing Activities		(30,214	)		(61,812	)
Cash Flows from Financing Activities:
Net (Repayments of) Borrowings from Lines of Credit		(25,700	)		17,100
Proceeds from Issuance of Long-Term Debt		-			25,000
Principal Repayments of Long-Term Debt		(2,290	)		(2,335	)
Dividends on Common Stock		(9,366	)		(9,951	)
Payments for Issuance of Long-Term Debt		-			(971	)
Net Cash (Used in) Provided by Financing Activities		(37,356	)		28,843
Net Increase in Cash and Cash Equivalents		254			1,176
Cash and Cash Equivalents at Beginning of Period		1,967			2,551
Cash and Cash Equivalents at End of Period	$	2,221		$	3,727
Supplemental Disclosures of Noncash Investing Activities:
Capital Property and Equipment acquired on account but not
paid at quarter-end.	$	5,345		$	4,201
The accompanying notes are an integral part of the condensed financial statements.

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SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands)
	September 30,			December 31,
	2007			2006
Assets
Property, Plant and Equipment:
Utility Plant, at original cost	$	1,112,940		$	1,079,614
Accumulated Depreciation		(271,925	)		(257,781	)
Property, Plant and Equipment - Net		841,015			821,833
Investments:
Available-for-Sale Securities		6,779			6,342
Restricted Investments		4,414			8,586
Total Investments		11,193			14,928
Current Assets:
Cash and Cash Equivalents		2,221			1,967
Accounts Receivable		36,166			47,928
Accounts Receivable - Related Parties		1,375			3,939
Unbilled Revenues		8,101			34,502
Provision for Uncollectibles		(3,355	)		(2,741	)
Natural Gas in Storage, average cost		72,297			81,039
Materials and Supplies, average cost		1,590			1,685
Prepaid Taxes		14,592			7,774
Derivatives - Energy Related Assets		1,095			1,692
Other Prepayments and Current Assets		2,605			2,264
Total Current Assets		136,687			180,049
Regulatory and Other Noncurrent Assets:
Regulatory Assets		197,529			196,962
Unamortized Debt Issuance Costs		6,426			6,835
Accounts Receivable - Merchandise		5,746			5,950
Derivatives - Energy Related Assets		67			19
Derivatives - Other		438			148
Other		2,143			1,352
Total Regulatory and Other Noncurrent Assets		212,349			211,266
Total Assets	$	1,201,244		$	1,228,076
The accompanying notes are an integral part of the condensed financial statements.

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SOUTH JERSEY GAS COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
(In Thousands, except per share amounts)
	September 30,			December 31,
	2007			2006
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		200,317			200,317
Accumulated Other Comprehensive Loss		(4,016	)		(4,429	)
Retained Earnings		170,613			158,617
Total Common Equity		372,762			360,353
Long-Term Debt		294,873			294,893
Total Capitalization		667,635			655,246
Current Liabilities:
Notes Payable		77,800			103,500
Current Maturities of Long-Term Debt		-			2,270
Accounts Payable - Commodity		22,063			43,687
Accounts Payable - Other		7,993			8,786
Accounts Payable - Related Parties		11,063			12,134
Derivatives - Energy Related Liabilities		5,636			18,006
Deferred Income Taxes - Net		4,434			4,049
Customer Deposits and Credit Balances		30,426			23,016
Environmental Remediation Costs		24,800			26,048
Taxes Accrued		1,810			1,961
Pension and Other Postretirement Benefits		776			776
Dividends Declared		4,683			-
Interest Accrued		5,169			6,112
Other Current Liabilities		3,524			4,904
Total Current Liabilities		200,177			255,249
Regulatory and Other Noncurrent Liabilities:
Regulatory Liabilities		53,104			50,797
Deferred Income Taxes - Net		165,893			164,797
Environmental Remediation Costs		53,081			41,746
Asset Retirement Obligations		24,265			23,743
Pension and Other Postretirement Benefits		29,154			29,354
Investment Tax Credits		2,230			2,470
Derivatives - Energy Related Liabilities		183			374
Other		5,522			4,300
Total Deferred Credits and Other Noncurrent Liabilities		333,432			317,581
Commitments and Contingencies (Note 9)
Total Capitalization and Liabilities	$	1,201,244		$	1,228,076
The accompanying notes are an integral part of the condensed financial statements.

SJG - 8

NOTES TO 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 unaudited 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 2006 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 for each of the three month periods ended September 30, 2007 and 2006, and $6.3 million and $5.6 million for each of the nine month periods ended September 30, 2007 and 2006, 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). 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. SJG capitalized interest of $0.1 million for each of the three month periods ended September 30, 2007 and 2006, and $0.3 million for each of the nine month periods ended September 30, 2007 and 2006.

Derivative Instruments - As part of its gas purchasing strategy, SJG uses physical and financial contracts to hedge against forward price risk. 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 of September 30, 2007 and December 31, 2006, SJG had $4.7 million and $16.7 million of costs, respectively, included in its BGSS related to open financial contracts.

From time to time SJG enters into interest rate derivatives and similar agreements to hedge exposure to increasing interest rates, and the impact of those rates on our cash flows with respect to its variable-rate debt. SJG has designated and accounts for these interest rate derivatives as cash flow hedges which are included in Regulatory and Other Noncurrent Assets. There have been no significant changes to the Company’s active interest rate swaps since December 31, 2006 which are described in Note 1 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2006.

The differential to be paid or received as a result of these swap agreements is accrued as interest rates change and is recognized as an adjustment to interest expense. As of September 30, 2007 and December 31, 2006, the net market value of these swaps was $0.4 million and $0.1 million, respectively.

SJG - 9

Stock-Based Compensation Plans - The following table summarizes the SJI nonvested restricted stock awards pertaining to SJG outstanding at September 30, 2007, and the assumptions used to estimate the fair value of the awards:

Grant	Shares	Fair Value	Expected	Risk-Free
Date	Outstanding	Per Share	Volatility	Interest Rate
Jan. 2005	8,126	$ 25.155	15.5%	3.4%
Jan. 2006	8,450	$ 27.950	16.9%	4.5%
Jan. 2007	9,581	$ 29.210	18.5%	4.9%

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

 The cost of restricted stock awards approximates $50,000 per quarter in both 2007 and 2006.

As of September 30, 2007, there was $0.3 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the restricted stock plans. That cost is expected to be recognized over a weighted average period of 2.1 years.

The following table summarizes information regarding restricted stock award activity during the nine months ended September 30, 2007, excluding accrued dividend equivalents:

	Shares
Nonvested Shares Outstanding, January 1, 2007	26,738
Granted		9,628
Vested*		(10,352)
Forfeited		(1,679)
Transferred From Affiliate		1,822
Nonvested Shares Outstanding, September 30, 2007		26,157
* Actual shares awarded upon vesting, including dividend equivalents and adjustments for performance measures, totaled 17,143 shares.

During the nine months ended September 30, 2007, SJG awarded 17,143 shares to its officers at a market value of $0.6 million. During the nine months ended September 30, 2006, SJG awarded 44,575 shares at a market value of $1.3 million. As discussed earlier, SJG has a policy of purchasing shares from SJI to satisfy its obligations under this plan. Cash payments for shares of SJI common stock during the nine months ended September 30, 2007 and 2006 were approximately $1.1 million and $2.1 million, respectively, relating to stock awards and include obligations for services previously rendered by officers that are currently employed by affiliates as a result of a January 1, 2006 corporate restructuring by SJI. Additionally, a change in control could result in the nonvested shares becoming nonforfeitable or immediately payable in cash.

SJG - 10

New Accounting Pronouncements - On January 1, 2007, SJG adopted the provisions of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes." This interpretation provides guidance on the recognition and measurement of uncertain tax positions in the financial statements.

As a result of the implementation of FIN 48, SJG recognized a $0.4 million reduction to beginning retained earnings as a cumulative effect adjustment and a noncurrent deferred tax asset of $1.1 million. The total unrecognized tax benefits as of January 1, 2007 were $1.5 million including $0.3 million of accrued interest and penalties.  The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is not significant. SJG’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 for the three and nine months ended September 30, 2007. There have been no material changes to the unrecognized tax benefits for the three and nine months ended September 30, 2007, and SJG does not anticipate any material 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 tax issues and the timing of certain deductions taken on SJI’s consolidated income tax returns, related to SJG. Federal income tax returns from 2004 forward and state income tax returns primarily from 2003 forward are open and subject to examination.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement is effective for fiscal years beginning after November 15, 2007.  Management is currently evaluating the impact that the adoption of this statement will have on SJG’s financial statements.

In January 2007, the FASB posted Statement 133 Implementation Issue No. G26, “Cash Flow Hedges: Hedging Interest Cash Flows on Variable-Rate Assets and Liabilities That Are Not Based on a Benchmark Interest Rate.” This issue provides guidance on the designated risks that can be hedged in a cash flow hedge of a variable-rate financial asset or liability for which the interest rate is not based solely on an index, including situations in which an interest rate is reset through an auction process. This issue was effective April 1, 2007. The adoption of this issue did not have a material effect on SJG’s financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” The statement permits entities to choose to measure certain financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective for the first fiscal year beginning after November 15, 2007. Management is currently evaluating the impact that the adoption of this statement will have on SJG’s financial statements.

In April 2007, the FASB posted FASB Staff Position FIN 39-1, “Amendment of FASB Interpretation No. 39”, which addresses questions received by the FASB staff regarding Interpretation 39 relating to the offsetting of amounts recognized for forward, interest rate swap, currency swap, option, and other conditional or exchange contracts. The guidance in this FSP is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact that the adoption of this position will have on the Company’s financial statements.

2.RATES AND REGULATORY ACTIONS:

SJG is subject to the rules and regulations of the BPU. Other than the changes noted in Note 10, Subsequent Event, there have been no significant regulatory actions or changes to SJG’s rate structure since December 31, 2006. See Note 2 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2006.

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3.REGULATORY ASSETS AND LIABILITIES:

Other than the Deferred Gas Costs and Revenues - Net, discussed below, there have been no significant changes to the nature of SJG’s regulatory assets and liabilities since December 31, 2006, which are described in Note 3 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2006.

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

	September 30, 2007		December 31, 2006
Environmental Remediation Costs:
Expended - Net	$	20,972	$	17,743
Liability for Future Expenditures		77,881		67,905
Income Taxes-Flowthrough Depreciation		3,952		4,685
Deferred Asset Retirement Obligation Costs		21,482		21,009
Deferred Gas Costs - Net		5,581		19,698
Deferred Pension and Other Postretirement Benefit Costs		39,075		39,359
Temperature Adjustment Clause Receivable		7,958		8,996
Conservation Incentive Program Receivable		15,327		7,747
Societal Benefit Costs Receivable		2,414		6,912
Premium for Early Retirement of Debt		1,411		1,532
Other Regulatory Assets		1,476		1,376
Total Regulatory Assets	$	197,529	$	196,962

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

	September 30, 2007		December 31, 2006
Excess Plant Removal Costs	$	48,643	$	48,377
Other		4,461		2,420
Total Regulatory Liabilities	$	53,104	$	50,797

Deferred Gas Costs and Revenues - Net- Over/under collections of gas costs are monitored through SJG’s Basic Gas Supply Service Clause (BGSS) mechanism. Net undercollected gas costs are classified as a regulatory asset and net overcollected gas costs are classified as a regulatory liability. Derivative contracts used to hedge natural gas purchases are also included in the BGSS, subject to BPU approval. The BGSS decreased from a $19.7 million regulatory asset at December 31, 2006 to a $5.6 million regulatory asset at September 30, 2007 primarily as a result of a change in the fair value of energy related derivatives resulting from an increase in the average future prices accounted for $12.5 million of the fluctuation.

4.RELATED PARTY TRANSACTIONS:

There have been no significant changes in the nature of SJG’s related party transactions since December 31, 2006. See Note 4 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2006 for a detailed description of such transactions.

In addition to our normal gas purchases and sales with SJRG, during the second quarter of 2006, we sold 1,710,903 decatherms of gas to SJRG for $13.1 million.  This sale was conducted in compliance with all applicable regulatory requirements.  The proceeds from the sale were credited to the BGSS clause and did not impact earnings during the quarter.

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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,
		2007		2006		2007		2006
Operating Revenues / Affiliates:
SJRG	$	995	$	14,136	$	17,041	$	31,498
Other		87		70		289		209
Total Operating Revenues / Affiliates	$	1,082	$	14,206	$	17,330	$	31,707

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,
	2007		2006		2007		2006
Costs of Sales / Affiliates  (Excluding depreciation):
SJRG	$	7,397	$	11,521	$	30,430	$	40,809
Total Cost of Sales / Affiliates	$	7,397	$	11,521	$	30,430	$	40,809
Operations Expense / Affiliates:
SJI	$	1,007	$	1,135	$	3,785	$	5,180
SJIS		1,020		1,099		3,175		3,637
Millennium		716		690		2,128		2,046
Other		42		(89)		231		(20)
Total Operations Expense / Affiliates	$	2,785	$	2,835	$	9,319	$	10,843

5.           RESTRICTED INVESTMENTS:

In accordance with the terms of SJG’s tax-exempt first mortgage bonds, unused proceeds are required to be escrowed pending approved construction expenditures. As of September 30, 2007 and December 31, 2006, the escrowed proceeds, including interest earned, totaled $4.4 million and $8.6 million, respectively.

6.           UNUSED LINES OF CREDIT:

Bank credit available to SJG totaled $176.0 million at September 30, 2007, of which $77.8 million was used. Those bank facilities consist of a $100.0 million credit facility and $76.0 million of uncommitted bank lines. The revolving credit facility expires in August 2011 and contains one financial covenant regarding the ratio of total debt to total capitalization, measured on a quarterly basis. SJG was in compliance with this covenant as of September 30, 2007. Borrowings under these credit facilities are at market rates. The average borrowing cost, which changes daily, was 5.64% and 5.73% at September 30, 2007 and 2006, respectively.

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7.           RETAINED EARNINGS:

SJG is restricted as to the amount of cash dividends or other distributions that may be paid on its common stock by an order issued by the BPU in July 2004 that granted SJG an increase in base rates. Per the order, SJG is required to maintain total common equity of no less than $289.2 million. SJG’s total common equity balance was $372.8 million at September 30, 2007.

Various loan agreements also contain potential restrictions regarding the amount of cash dividends or other distributions that SJG may pay on its common stock. As of September 30, 2007, these loan restrictions did not affect the amount that may be distributed from SJG’s retained earnings.

8.PENSION AND OTHER POSTRETIREMENT BENEFITS:

For the three and nine months ended September 30, 2007 and 2006, 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,
	2007			2006			2007			2006
Service Cost	$	427		$	574		$	1,686		$	1,723
Interest Cost		1,028			1,471			3,982			4,411
Expected Return on Plan Assets		(1,240	)		(1,880	)		(5,012	)		(5,639	)
Amortizations:
Prior Service Cost		36			97			147			291
Actuarial Loss		296			479			1,044			1,437
Net Periodic Benefit Cost		547			741			1,847			2,223
Capitalized Benefit Costs		(266	)		(319	)		(900	)		(956	)
Total Net Periodic Benefit Expense	$	281		$	422		$	947		$	1,267

	Other Postretirement Benefits
	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Service Cost	$	160		$	234		$	575		$	492
Interest Cost		438			1,095			1,579			1,709
Expected Return on Plan Assets		(342	)		(757	)		(1,232	)		(1,213	)
Amortizations:
Prior Service Credits		(58	)		(66	)		(209	)		(198	)
Actuarial Loss		99			420			357			592
Net Periodic Benefit Cost		297			926			1,070			1,382
Capitalized Benefit Costs		(145	)		(398	)		(525	)		(594	)
Total Net Periodic Benefit Expense	$	152		$	528		$	545		$	788

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

See Note 11 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2006, for additional information related to SJG’s   pension and other postretirement benefits.

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9.COMMITMENTS AND CONTINGENCIES:

Contractual Cash Obligations - SJG has incurred various contractual obligations in the normal course of activities. These obligations primarily include future cash payments required under debt agreements, commodity supply purchase agreements, regulatory agreements and construction contracts. There were no significant changes to SJG’s contractual obligations described in Note 12 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2006, except for commodity supply purchase obligations which increased by approximately  $36.1 million in total since December 31, 2006. This was primarily due to an increase in rates effective March 1, 2007 with one of our major transportation suppliers with whom we have a multi-year purchase agreement, and the extension of several of our commodity supply purchase agreements.

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 two changes to report in the status of SJG’s environmental remediation efforts and the expected remediation costs since December 31, 2006, which are described in Note 12 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2006. First, the remedial action plan for Site 1 has been submitted to the New Jersey Department of Environmental Protection for approval.  Second, the lower end of the range of expected remediation costs, which is recorded as a liability on the Condensed Balance Sheet, has increased $10.1 million since December 31, 2006.  This increase is the result of revised forecasts of cash flows for all of its sites as additional information has become available.

10.SUBSEQUENT EVENT

In October 2007, we received provisional approval from the BPU to adjust rates in several recovery mechanisms.  These changes include a reduction in our BGSS rates which will reduce annual cost of gas recovery by approximately $36.7 million; an increase in our annual TAC rate to recover a deficiency of approximately $8.0 million; and the initial implementation of a CIP rate which is expected to recover approximately $15.5 million over the next twelve month period.  See Note 2 to the Financial Statements in Item 8 of SJG’s Form 10-K as of December 31, 2006 for additional discussions regarding each of these rate mechanisms.

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Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations (Unaudited)

OVERVIEW:

Organization - SJG is an operating public utility company engaged in the purchase, transmission and sale of natural gas for residential, commercial and industrial use. SJG also sells natural gas and pipeline transportation capacity (off-system sales) on a wholesale basis to various customers on the interstate pipeline system and transports natural gas purchased directly from producers or suppliers to their customers. SJG served 331,790 customers at September 30, 2007 compared with 325,589 customers at September 30, 2006.

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 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.

A discussion of these and other risks and uncertainties may be found in SJG’s Form 10-K for the year ended December 31, 2006 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 financial statements and related disclosures. Actual results could differ from those estimates. Five types of transactions presented in our financial statements require a significant amount of judgment and estimation. These relate to regulatory accounting, energy 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, 2006.

New Accounting Pronouncements - See detailed discussions concerning New Accounting Pronouncements and their impact in Note 1 to the condensed financial statements.

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Rates and Regulation:

Temperature Adjustment Clause (TAC) - Through September 30, 2006, SJG’s tariff included a TAC to mitigate the effect of variations in heating season temperatures from historical norms. Each TAC year ran from November 1 through May 31 of the following year. Once the TAC year ended, the net earnings impact was filed with the BPU for future recovery. As a result, the cash inflows or outflows generally would not begin until the next TAC year. Because of the timing delay between the earnings impact and the recovery, the net result can be either a regulatory asset or liability. The TAC increased net income by $0.1 million for the three months ended and $5.0 million for the nine months ended September 30, 2006, as weather was significantly warmer than the 20-year TAC average.

Conservation Incentive Program (CIP) - The CIP is a BPU approved three-year pilot program that began October 1, 2006, and is designed to eliminate the link between SJG’s profits and the quantity of natural gas sold per customer, and foster conservation efforts. With the CIP, SJG’s profits will be tied to the number of customers served and how efficiently we serve them, thus allowing us to focus on encouraging conservation and energy efficiency among our customers without negatively impacting SJG’s net income.  The CIP tracking mechanism adjusts earnings based on weather, as did the TAC, and also adjusts SJG’s earnings where the actual usage per customer experienced during an annual period varies from an established baseline usage per customer.

Similar to the TAC, utility earnings are recognized during current periods based upon the application of the CIP. The cash impact of variations in customer usage will result in cash being collected from, or returned to, customers during the subsequent CIP year, which runs from October 1 to September 30.

The CIP had no earnings impact for the three months ended and protected $4.4 million of earnings for the nine months ended September 30, 2007, which would have been lost due to warm weather and lower customer usage.  During the nine months ended September 30, 2007, $0.2 million was related to weather and $4.2 million was related to customer usage.

Regulatory Actions - Except for the rate changes discussed in Notes to the Condensed Financial Statements, Note 10 – Subsequent Event, there have been no significant regulatory actions since December 31, 2006. 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, 2006.

Environmental Remediation - 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, 2006. There have been two changes to report in the status of SJG’s environmental remediation efforts and the expected remediation costs since December 31, 2006, which are described in SJG’s Form 10-K as of December 31, 2006. First, the remediation action plan for Site 1 has been submitted to the New Jersey Department of Environmental Protection for approval.  Second, the lower end of the range of expected remediation costs, which is recorded as a liability on the Condensed Balance Sheet, has increased $10.1 million since December 31, 2006.  This increase is the result of revised forecasts of cash flows for all of its sites as additional information has become available.

Competition - See detailed discussion concerning competition in SJG’s Form 10-K for the year ended December 31, 2006.

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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. For a period of several years, marketers had successfully attracted gas commodity customers by offering natural gas at prices competitive with those available under regulated utility tariffs. However, during the third quarter of 2005, marketers found it increasingly difficult to compete with the local utility because of changing market conditions and rising gas costs. SJG’s affiliate, South Jersey Energy Company, responded by returning all of its approximately 69,000 residential gas customers to the utility during the third quarter of 2005. Beginning in the first quarter of 2006, marketers began to attract customers back through new offers. The total number of customers purchasing the gas commodity from a marketer increased from 19,434 as of September 30, 2006 to 27,019 as of September 30, 2007.

RESULTS OF OPERATIONS:

The following tables summarize the composition of gas utility volumes, revenues, margin and degree days 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,
	2007		2006		2007		2006
Throughput – dth:
Firm Sales -
Residential		1,556		1,414		16,069		14,140
Commercial		637		851		4,497		5,209
Industrial		17		14		138		148
Cogeneration & Electric Generation		791		810		953		1,064
Firm Transportation -
Residential		129		86		1,273		552
Commercial		607		567		4,271		3,005
Industrial		2,835		3,923		8,903		10,830
Cogeneration & Electric Generation		1,288		236		2,415		248
Total Firm Throughput		7,860		7,901		38,519		35,196
Interruptible Sales		1		6		39		72
Interruptible Transportation		722		774		2,101		2,633
Off-System		3,505		4,111		13,419		13,110
Capacity Release & Storage		23,738		20,736		55,217		53,241
Total Throughput		35,826		33,528		109,295		104,252

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	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Operating Revenues:
Firm Sales -
Residential	$	33,386	$	28,209	$	247,641	$	241,593
Commercial		10,113		11,496		57,760		75,749
Industrial		1,013		665		6,419		3,627
Cogeneration & Electric Generation		6,202		6,457		8,269		9,817
Firm Transportation -
Residential		1,136		647		5,924		2,790
Commercial		2,293		1,683		11,917		8,156
Industrial		3,497		3,027		9,230		9,289
Cogeneration & Electric Generation		657		175		1,603		186
Total Firm Revenues		58,297		52,359		348,763		351,207
Interruptible Sales		14		95		450		864
Interruptible Transportation		451		332		1,389		1,324
Off-System		22,008		32,816		98,304		107,560
Capacity Release & Storage		3,324		1,796		8,406		7,797
Other		326		317		968		1,050
Total Operating Revenues	$	84,420	$	87,715	$	458,280	$	469,802

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Net Operating Revenues:
Residential	$	34,522	$	28,856	$	253,565	$	244,383
Commercial and Industrial		16,916		16,871		85,326		96,821
Cogeneration and Electric Generation		6,859		6,632		9,872		10,003
Interruptible		465		427		1,839		2,188
Off-system, Capacity Release & Storage		25,332		34,612		106,710		115,357
Other Revenues		326		317		968		1,050
Total Utility Operating Revenues	$	84,420	$	87,715	$	458,280	$	469,802
Less:
Cost of Sales	$	62,223	$	65,014	$	331,615	$	349,675
Conservation Recoveries		633		1,075		2,888		5,043
RAC Recoveries		472		447		1,417		1,342
Revenue Taxes		883		851		6,316		5,612
Net Operating Revenues (Margin)	$	20,209	$	20,328	$	116,044	$	108,130
Margin (pre-tax):
Residential	$	11,841	$	11,319	$	73,593	$	65,113
Commercial and Industrial		6,360		6,440		29,345		27,360
Cogeneration and Electric Generation		793		686		1,772		1,731
Interruptible		31		32		129		174
Off-system, Capacity Release & Storage		596		1,125		2,186		3,882
Other Revenues		603		485		1,429		1,359
Margin Before Weather Normalization & Decoupling		20,224		20,087		108,454		99,619
TAC Mechanism		-		241		-		8,511
CIP Mechanism		(15)		-		7,590		-
Utility Net Operating Revenues (Margin)	$	20,209	$	20,328	$	116,044	$	108,130
Degree Days		21		35		2,986		2,599

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Volumes - Total gas throughput increased 6.9% for the three months ended September 30, 2007, compared with the same period in 2006. Firm throughput remained relatively unchanged as would be expected during the third quarter, which has little demand for heating requirements.  However, opportunities for storage and capacity release increased during the third quarter of 2007 resulting in the overall increase in throughput.  Unfortunately the lower margin on capacity release and storage, coupled with our requirement to credit the Basic Gas Supply Service (BGSS) with 85% of these margins provides a minimal impact on SJG’s profitability.  For the nine months ended September 30, 2007, total gas throughput increased 4.8% compared to the same period in 2006.  Firm throughput increased 9.4% due to 14.9% colder weather and customer growth of 1.9% over the prior year.  In addition, year-to-date capacity release and storage has increased, as previously discussed.

Operating Revenues - Revenues decreased $3.3 million during the third quarter of 2007 compared with the same period in the prior year.  Off-System sales (OSS) volume decreased as activity during the period shifted from sales, which include the cost of commodity, to capacity release & storage activity, which does not include the transfer of commodity.  As a result, OSS revenues decreased;  however, the net contribution to the company’s earnings from these activities are not significant.  Finally, in the third quarter of 2006, OSS recognized a $4.4 million gain on a financial derivative position which did not re-occur in 2007 due to changing market conditions.  It should be noted that this $4.4 million gain only contributed $0.4 million to SJG’s bottom line after regulated sharing of 85% with ratepayers through the BGSS and taxes.  Total firm revenues increased as a result the operation of the BGSS gas cost recovery mechanism. This mechanism permitted the recognition of an additional $5.7 million in previously deferred revenue during the three months ended September 30, 2007 due to under-recoveries of commodity costs.  During the same period in 2006, SJG also under-recovered commodity costs but had no previously deferred revenue to recognize to cover this shortfall.  When this situation occurs, as it did last year, the BGSS mechanism prescribes deferral of commodity costs in order to maintain SJG’s BPU-approved sales margins.  As the Company does not profit from the sale of the commodity, neither BGSS rate changes nor the associated fluctuations in revenue and/or cost of sales have an impact on Company profitability.

Revenues decreased $11.5 million during the first nine months of 2007 compared with the same period in the prior year primarily due to lower Off-System sales revenue and lower firm revenues.  Despite comparable sales volume, Off-System sales revenue decreased substantially.  Sales revenue during the first quarter of 2006 were atypically high as it continued to reflect unusually high commodity prices, which were driven by hurricane related production disruptions in fall 2005.  In addition, 2006 also included a $4.4 million gain on a financial derivative position, as discussed above.

While SJG added 6,201 customers during the 12-month period ended September 30, 2007, which represents a 1.9% increase in total customers, and weather was 14.9% colder than last year during this nine month period, firm sales revenue decreased $2.4 million.  This decrease resulted from the decrease in the BGSS gas cost recovery rate and customer migration from firm sales to firm transportation service. The BGSS rate in 2007 was 10.8% lower than the prior year rate. Last year’s rate was higher to address under recovery of gas costs stemming from substantial increases in wholesale gas prices across the country in 2005. Transportation customers generate less revenue for the Company because they purchase the gas commodity from a third party marketer. However, as the Company does not profit from the sale of the commodity, neither BGSS rate changes nor customer migration between sales and transportation have an impact on Company profitability.  The number of transportation customers increased to 27,019 at September 30, 2007 as compared to 19,434 at September 30, 2006.

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

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Total margin remained relatively consistent for the three months ended September 30, 2007 compared with the same period in 2006.   Higher margin in the residential market, attributable to customer growth, was offset by lower Off-System Sales (OSS) margin in the third quarter of 2007 and a final Temperature Adjustment Clause (TAC) adjustment in the third quarter of 2006 (see Rates and Regulation for additional discussion on the TAC).  The higher OSS margin in the third quarter of 2006 resulted from a gain on a financial derivative position that was settled in that period, as discussed under Operating Revenues above.

Total margin increased $7.9 million, or 7.3%, for the nine months ended September 30, 2007 compared with the same period in 2006 primarily due to customer additions, as noted above, and the operation of the CIP.  The CIP protected $4.2 million of margin that would have been lost due to lower customer usage. Partially offsetting the positive impact of these increases were lower margins from OSS, capacity release and storage.  Margin declined in these markets due to less favorable market conditions, primarily in the first quarter of 2007, and a decrease in the percentage of earnings from these sales retained by the Company in accordance with a July 2004 base rate case stipulation.  Through July 1, 2006, the company retained 20% of margins generated by OSS and related activities.  Since then the company is only permitted to retain 15% of such margins.

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

	Three Months Ended September 30,			Nine Months Ended September 30,
	2007 vs. 2006			2007 vs. 2006
Operations	$	(120	)	$	984
Maintenance		90			222
Depreciation		272			834
Energy and Other Taxes		(29	)		508

Operations– Operations expense increased $1.0 million for the nine months ended September 30, 2007, as compared with the same periods in 2006.  The increase is primarily comprised of several factors.

First, expense associated with the uncollectible customer account reserve increased $1.0 million due to higher levels of customer account receivables in 2007 than in 2006.  In addition, actual write-offs of uncollectible account balances were $0.5 million higher than last year for the nine months ended.   Corporate governance and compliance costs also rose $0.6 million year to date.  Additional reasons for the increase include $0.2 million for federal postage rate increase; $0.1 million higher sales expense as advertising promotions were run earlier during 2007 than during 2006; $0.3 million in Conservation Incentive Program (CIP) expenses that did not begin to be incurred until the approval of the CIP in October 2006; and higher salaries due to annual increases.

Partially offsetting the increase above was a $2.1 million decrease for the nine months ended September 30, 2007 in our costs under the New Jersey Clean Energy Programs (NJCEP), which have decreased as the Company is no longer managing as many plans as it had in 2006.  Such costs are recovered on a dollar-for-dollar basis; therefore, SJG experienced offsetting decreases in revenues during the periods. The BPU-approved NJCEP allows for full recovery of costs, including carrying costs when applicable.  As a result, the decrease in expense had no impact on our net income.

Depreciation - Depreciation expense increased for both the three and nine months ended September 30, 2007, as compared with the same period in 2006, due mainly to SJG’s continuing investment in utility plant.

Energy and Other Taxes - Energy and Other Taxes increased for the nine months ended September 30, 2007, compared with the same period in 2006, primarily due to higher energy-related taxes. Higher taxable firm throughput in 2007 resulted from colder weather, primarily during the first quarter.

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Interest Charges– Interest charges decreased by $0.4 million and $0.7 million for the three and nine months ended September 30, 2007, respectively, compared with the same periods in 2006.  For the third quarter the decrease was the result of lower short-term interest rates and debt levels, which offset higher interest rates long-term debt.   For the nine month period, the decline in interest charges was due to lower levels of short-term debt, partially offset by higher levels of long-term debt.

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 - Cash generated from operating activities constitutes our primary source of liquidity and varies from year-to-year due to the impact of weather on customer demand and related gas purchases, customer usage factors related to conservation efforts and the price of the natural gas commodity, inventory utilization and recoveries provided through our various rate mechanisms. Net cash provided by operating activities was $67.8 million for the nine months ended September 30, 2007, compared with $34.1 million for the same period in 2006. Net cash provided by operating activities in the first nine months of 2006 was negatively impacted by higher unit gas costs following hurricane Katrina and their effect on inventory and accounts payable balances at the end of 2005. In addition, SJG had deferred the payment of $16.0 million for gas delivered to storage during 2005 until the first quarter of 2006, further increasing the year-end 2005 accounts payable balance.  We did not enter into a similar supply arrangement during the 2006 injection season; therefore, 2007 has not reflected any payments related to 2006 storage injections.  

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 approximately $12.9 million less in the first nine months of 2007, compared with the same period in 2006. Accounts payable associated with SJG’s capital program were $2.8 million and $9.0 million as of December 31, 2006 and 2005, respectively.  Included in the December 31, 2005 accounts payable were costs associated with two large special projects for pipeline installation.  These balances are typically paid during the first quarter of the subsequent year.  Capital expenditures are required on an ongoing basis to support system growth and integrity in our territory.

In April 2006, SJG issued $25.0 million of secured, tax-exempt debt through the New Jersey Economic Development Authority.  Such funds can only be utilized for qualified construction activity as defined in our debt agreement.  Unused funds in the amount of $14.3 million were placed in a restricted investment account during the second quarter of 2006.  As of September 30, 2007 the restricted investment reduced to $4.4 million, with $4.5 million of the reduction having occurred in 2007.

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.

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Bank credit available to SJG totaled $176.0 million at September 30, 2007, of which  $77.8 million was used. Those bank facilities consist of a $100.0 million revolving credit facility and $76.0 million of uncommitted bank lines. The revolving credit facility expires in August 2011 and contains one financial covenant that limits SJG’s total debt to total capitalization ratio to no more than 65%, measured on a quarterly basis. The Company is in compliance with this covenant as of September 30, 2007. Based upon the existing credit facilities and a regular dialogue with the company’s banks, management believes that there will continue to be sufficient credit available to meet SJG’s future liquidity needs. 

The decrease in the net borrowings of short-term debt of  $25.7 million from December 31, 2006 to September 30, 2007, was the result of recovery of costs previously deferred under our various rate mechanisms, as well as the seasonal improvement in cash flows during the first half of the year as storage gas has been sold and customer receivables from high usage periods have been collected.  Typically, SJG’s gas storage facilities are refilled in increments between April and October in preparation for the upcoming winter season.

SJG supplements its operating cash flow and credit lines with both debt and equity capital. Over the years, the company 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 September 2005, SJG established a $150.0 million MTN program and $115.0 million remains available for issuance under that program.

SJG’s capital structure was as follows:

	As of September 30, 2007			As of December 31, 2006
Common Equity		50.0	%		47.4	%
Long-Term Debt		39.6			39.0
Short-Term Debt		10.4			13.6
Total		100.0	%		100.0	%

SJG’s long-term, senior secured debt is rated “A” and “Baa1” by Standard & Poor’s and Moody’s Investor Services, respectively. These ratings have not changed in the past five years.

SJG is restricted as to the amount of cash dividends or other distributions that may be paid on its common stock by an order issued by the BPU in July 2004 that granted SJG an increase in base rates. Per the order, SJG is required to maintain total common equity of no less than $289.2 million. SJG’s total common equity balance was $372.8 million at September 30, 2007.

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. Net cash outflows for construction and remediation projects for the nine months ended September 30, 2007 amounted to $34.4 million and $3.2 million, respectively. Management estimates total cash outflows for construction projects for 2007, 2008 and 2009, to be approximately $52.8 million, $52.8 million and $52.0 million, respectively. Total cash outflows for remediation projects are expected to be $15.5 million, $21.3 million and $12.7 million for 2007, 2008 and 2009, respectively.  As discussed in Notes 2 and 12 to the Financial Statements in Item 8 of SJG’s 10-K as of December 31, 2006, environmental remediation costs are subject to recovery from insurance carriers and ratepayers.

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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, 2007, average $50.4 million annually and total $232.4 million over the contracts’ lives. Approximately 46% 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, 2006. There were no significant changes to SJG’s contractual cash obligations as described therein except for commodity supply purchase obligations which increased by approximately $36.1 million in total since December 31, 2006. This was primarily due to an increase in rates effective March 1, 2007 with one of our major gas commodity suppliers with whom we have a multi-year purchase agreement. The additional commodity supply obligation is expected to be incurred as follows: 2007 - $6.4 million; 2008-2009 - $8.3 million; 2010-2011 - $9.4 million; thereafter - $12.0 million.

Off-Balance Sheet Arrangements - We have no off-balance sheet financing 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 September 30,		Year Ended December 31,
2007		2006		2005		2004		2003		2002
	4.1x		3.8x		4.0x		3.9x		3.3x		2.9x

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 based on income before discontinued operations. Fixed charges consist of interest charges and preferred securities dividend requirements and an interest factor in rentals.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

MARKET RISKS:

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

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We transact commodities on a physical basis and typically do not enter into financial derivative positions directly. South Jersey Resources Group, LLC (SJRG), an affiliate by common ownership, manages our risk by entering into the types of transactions noted above. As part of our gas purchasing strategy, we use financial contracts to hedge against forward price risk. These contracts are recoverable through our BGSS, subject to BPU approval. It is management’s policy, to the extent practical, within predetermined risk management policy guidelines, to have limited unmatched positions on a deal or portfolio basis while conducting these activities. As a result of holding open positions to a minimal level, the economic impact of changes in value of a particular transaction is substantially offset by an opposite change in the related 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, 2007 is as follows (in thousands):

Assets:		Maturity		Maturity
	Source of Fair Value	<1 Year		1 - 3 Years		Total
Prices Actively Quoted	NYMEX	$	1,095	$	67	$	1,162
Liabilities:		Maturity		Maturity
	Source of Fair Value	<1 Year		1 - 3 Years		Total
Prices Actively Quoted	NYMEX	$	5,636	$	183	$	5,819

NYMEX (New York Mercantile Exchange) is the primary national commodities exchange on which natural gas is traded. Contracted volumes of our NYMEX contracts are 6.1 MMDth with a weighted-average settlement price of $8.19 per dth.

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

Net Derivatives — Energy Related Liability, January 1, 2007	$	(16,669	)
Contracts Settled During the Nine Months ended September 30, 2007, Net		12,871
Other Changes in Fair Value from Continuing and New Contracts, Net		(859	)
Net Derivatives — Energy Related Liability, September 30, 2007	$	(4,657	)

The change in our derivative position from a $16.7 million liability at January 1, 2007, to a $4.7 million liability at September 30, 2007, is primarily due to the change in value of our financial positions held with SJRG.    This change in value is primarily due to the settlement of contracts during the nine months ended September 30, 2007.

Interest Rate Risk - Our exposure to interest rate risk relates primarily to short-term, variable-rate borrowings. Short-term, variable-rate debt outstanding at September 30, 2007, was $77.8 million and averaged $60.8 million during the first nine months of 2007. A hypothetical 100 basis point (1%) increase in interest rates on our average variable-rate debt outstanding would result in a $359,000 increase in our annual interest expense, net of tax. The 100 basis point increase was chosen for illustrative purposes, as it provides a simple basis for calculating the impact of interest rate changes under a variety of interest rate scenarios. Over the past five years, the change in basis points (b.p.) of our average monthly interest rates from the beginning to end of each year was as follows: 2006 - 72 b.p. increase; 2005 - 191 b.p. increase; 2004 - 115 b.p. increase; 2003 - 31 b.p. decrease; and 2002 - 74 b.p. decrease. As of September 30, 2007, our average borrowing cost, which changes daily, was 5.64%.

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We issue long-term debt either at fixed rates or use interest rate derivatives to fix interest rates on variable-rate, long-term debt. Consequently, interest expense on existing long-term debt is not significantly impacted by changes in market interest rates.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Management has established controls and procedures to ensure that material information relating to SJG is made known to the officers who certify its financial reports and to other members of senior management and the Board of Directors. 

Based upon their evaluation as of the end of the period of this report, the principal executive officer and the principal financial officer of SJG have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) employed at SJG are effective to ensure that the information required to be disclosed by SJG in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Changes in Internal Control Over Financial Reporting

There has not been any change in SJG’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the fiscal quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, SJG’s internal control over financial reporting. 

PART II — OTHER INFORMATION

Item l. Legal Proceedings

Information required by this Item is incorporated by reference to Part I, Item 2, Pending Litigation, beginning on page 24.

Item 6. Exhibits

(a)          Exhibits

Exhibit No.	Description
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
32.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).
32.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

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SIGNATURES

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

SOUTH JERSEY GAS COMPANY

(Registrant)

Dated: November 9, 2007	By: /s/ Edward J. Graham
	Edward J. Graham
	President & Chief Executive Officer
Dated: November 9, 2007	By: /s/ David A. Kindlick
	David A. Kindlick
	Senior Vice President & Chief Financial Officer

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