South Jersey Industries (SJIIU) 10-Q 2005 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, 2005

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 1-6364

SOUTH JERSEY INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

New Jersey	22-1901645
(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) 

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

As of November 8, 2005, there were 28,703,549 shares of the registrant’s common stock outstanding.

SJI-1

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements — See Pages 3 through 30

SJI-2

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
	Three Months Ended
	September 30,
		2005			2004
Operating Revenues:
Utility	$	89,053		$	71,434
Nonutility		67,918			58,015
Total Operating Revenues		156,971			129,449
Operating Expenses:
Cost of Sales - Utility		66,428			48,139
Cost of Sales - Nonutility		56,002			51,309
Operations		15,332			15,730
Maintenance		1,456			1,465
Depreciation		6,052			5,753
Energy and Other Taxes		1,733			1,772
Total Operating Expenses		147,003			124,168
Operating Income		9,968			5,281
Other Income and Expense		(51	)		183
Interest Charges		(5,326	)		(5,143	)
Income Before Income Taxes		4,591			321
Income Taxes		(2,092	)		(152	)
Equity in Affiliated Companies		183			269
Income from Continuing Operations		2,682			438
Loss from Discontinued Operations - Net		(191	)		(184	)
Net Income	$	2,491		$	254
Basic Earnings Per Common Share:
Continuing Operations	$	0.095		$	0.016
Discontinued Operations - Net		(0.007	)		(0.007	)
Basic Earnings Per Common Share	$	0.088		$	0.009
Average Shares of Common Stock Outstanding - Basic		28,244			27,590
Diluted Earnings Per Common Share:
Continuing Operations	$	0.094		$	0.016
Discontinued Operations - Net		(0.007	)		(0.007	)
Diluted Earnings Per Common Share	$	0.087		$	0.009
Average Shares of Common Stock Outstanding - Diluted		28,459			27,829
Dividends Declared per Common Share	$	0.213		$	0.203
The accompanying notes are an integral part of the condensed consolidated financial statements.

SJI-3

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands Except for Per Share Data)
		Nine Months Ended
		September 30,
		2005			2004
Operating Revenues:
Utility	$	385,980		$	340,869
Nonutility		253,600			232,745
Total Operating Revenues		639,580			573,614
Operating Expenses:
Cost of Sales - Utility		262,189			223,503
Cost of Sales - Nonutility		216,258			208,240
Operations		51,661			47,969
Maintenance		4,460			4,249
Depreciation		17,895			19,111
Energy and Other Taxes		9,008			8,732
Total Operating Expenses		561,471			511,804
Operating Income		78,109			61,810
Other Income and Expense		278			1,042
Interest Charges		(15,553	)		(15,076	)
Income Before Income Taxes		62,834			47,776
Income Taxes		(26,297	)		(19,651	)
Equity in Affiliated Companies		593			692
Income from Continuing Operations		37,130			28,817
Loss from Discontinued Operations - Net		(517	)		(466	)
Net Income	$	36,613		$	28,351
Basic Earnings Per Common Share:
Continuing Operations	$	1.326		$	1.056
Discontinued Operations - Net		(0.018	)		(0.017	)
Basic Earnings Per Common Share	$	1.308		$	1.039
Average Shares of Common Stock Outstanding - Basic		27,999			27,278
Diluted Earnings Per Common Share:
Continuing Operations	$	1.315		$	1.049
Discontinued Operations - Net		(0.018	)		(0.017	)
Diluted Earnings Per Common Share	$	1.297		$	1.032
`		28,221			27,483
Dividends Declared per Common Share	$	0.639		$	0.609
The accompanying notes are an integral part of the condensed consolidated financial statements.

SJI-4

 

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
	Three Months Ended
	September 30,
		2005			2004
Net Income	$	2,491		$	254
Other Comprehensive (Loss) Income, Net of Tax:*
Change in Fair Value of Investments		100			(53	)
Change in Fair Value of Derivatives - Other		892			(279	)
Change in Fair Value of Derivatives - Energy Related		(8,503	)		1,152
Other Comprehensive (Loss) Income - Net of Tax*		(7,511	)		820
Comprehensive (Loss) Income	$	(5,020	)	$	1,074
	Nine Months Ended
	September 30,
		2005			2004
Net Income	$	36,613		$	28,351
Other Comprehensive (Loss) Income, Net of Tax:*
Change in Fair Value of Investments		178			(354	)
Change in Fair Value of Derivatives - Other		7			150
Change in Fair Value of Derivatives - Energy Related		(13,084	)		4,028
Other Comprehensive (Loss) Income - Net of Tax*		(12,899	)		3,824
Comprehensive Income	$	23,714		$	32,175
* Determined using a combined statutory tax rate of 40.85%.
The accompanying notes are an integral part of the condensed consolidated financial statements.

SJI-5

 

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
		Nine Months Ended
		September 30,
		2005			2004
Cash Flows from Operating Activities:
Net Income	$	36,613		$	28,351
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization		20,166			20,740
Unrealized Loss on Derivatives - Energy Related		1,361			1,870
Provision for Losses on Accounts Receivable		1,670			123
Revenues and Fuel Costs Deferred - Net		(8,003	)		8,048
Deferred and Non-Current Income Taxes and Credits - Net		19,282			10,185
Environmental Remediation Costs - Net		(2,096	)		(216	)
Gas Plant Cost of Removal		(679	)		(679	)
Changes in:
Accounts Receivable		58,610			69,976
Inventories		(42,508	)		(31,839	)
Other Prepayments and Current Assets		(1,420	)		1,529
Prepaid and Accrued Taxes - Net		(12,381	)		(19,786	)
Accounts Payable and Other Accrued Liabilities		23,079			(11,370	)
Other Assets		6,926			(5,999	)
Other Liabilities		3,624			(4,778	)
Net Cash Provided by Operating Activities		104,244			66,155
Cash Flows from Investing Activities:
Return of Investment in Affiliate		(42	)		(245	)
Affiliate Repayment of Loan		635			680
Purchase of Available-for-Sale Securities		-			(105	)
Proceeds from Minority Interest		119			-
Proceeds from Sale of Restricted Investments - Net		3,993			4,022
Capital Expenditures		(69,991	)		(47,382	)
Net Cash Used in Investing Activities		(65,286	)		(43,030	)
Cash Flows from Financing Activities:
Net Repayments of Lines of Credit		(20,800	)		(44,400	)
Proceeds from Issuance of Long-Term Debt		10,000			40,000
Principal Repayments of Long-Term Debt		(22,810	)		(21,773	)
Dividends on Common Stock		(18,164	)		(16,645	)
Proceeds from Sale of Common Stock		16,368			23,373
Payments for Issuance of Long-Term Debt		(289	)		(359	)
Premium for Early Retirement of Debt		(184	)		-
Redemption of Preferred Stock		(1,690	)		-
Net Cash Used in Financing Activities		(37,569	)		(19,804	)
Net Increase in Cash and Cash Equivalents		1,389			3,321
Cash and Cash Equivalents at Beginning of Period		5,272			4,364
Cash and Cash Equivalents at End of Period	$	6,661		$	7,685
The accompanying notes are an integral part of the condensed consolidated financial statements.

SJI-6

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
		September 30,			December 31,
		2005			2004
Assets
Property, Plant and Equipment:
Utility Plant, at original cost	$	1,004,515		$	957,287
Accumulated Depreciation		(233,986	)		(224,506	)
Nonutility Property and Equipment, at cost		90,140			71,129
Accumulated Depreciation		(5,552	)		(4,040	)
Property, Plant and Equipment - Net		855,117			799,870
Investments:
Available-for-Sale Securities		5,531			5,310
Restricted		9,604			13,597
Investment in Affiliates		1,984			1,942
Total Investments		17,119			20,849
Current Assets:
Cash and Cash Equivalents		6,661			5,272
Accounts Receivable		88,516			113,778
Unbilled Revenues		11,886			45,857
Provision for Uncollectibles		(4,542	)		(3,495	)
Natural Gas in Storage, average cost		122,147			79,281
Materials and Supplies, average cost		4,999			5,357
Prepaid Taxes		19,551			6,104
Derivatives - Energy Related Assets		39,367			27,226
Other Prepayments and Current Assets		5,911			4,491
Total Current Assets		294,496			283,871
Regulatory and Other Non-Current Assets:
Regulatory Assets		76,198			72,635
Prepaid Pension		26,351			28,589
Derivatives - Energy Related Assets		5,536			5,427
Unamortized Debt Discount and Expense		8,878			8,894
Contract Receivables		14,444			16,153
Other		6,758			7,046
Total Regulatory and Other Non-Current Assets		138,165			138,744
Total Assets	$	1,304,897		$	1,243,334
The accompanying notes are an integral part of the condensed consolidated financial statements.

SJI-7

SOUTH JERSEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
		September 30,			December 31,
		2005			2004
Capitalization and Liabilities
Common Equity:
Common Stock	$	35,517		$	34,700
Premium on Common Stock		212,305			194,862
Accumulated Other Comprehensive (Loss) Income		(9,446	)		3,453
Retained Earnings		129,845			111,397
Total Common Equity		368,221			344,412
Preferred Stock of Subsidiary		-			1,690
Long-Term Debt		319,104			328,914
Total Capitalization		687,325			675,016
Minority Interest		346			227
Current Liabilities:
Notes Payable		71,500			92,300
Current Maturities of Long-Term Debt		2,348			5,348
Accounts Payable		136,675			118,836
Customer Deposits		8,994			8,846
Environmental Remediation Costs		16,791			13,810
Taxes Accrued		6,485			5,419
Derivatives - Energy Related Liabilities		41,020			19,282
Derivatives - Other		-			344
Deferred Income Taxes - Net		12,653			7,082
Deferred Contract Revenues		5,223			4,795
Interest Accrued and Other Current Liabilities		22,258			14,052
Total Current Liabilities		323,947			290,114
Deferred Credits and Other Non-Current Liabilities:
Deferred Income Taxes - Net		148,744			143,068
Investment Tax Credits		2,878			3,129
Pension and Other Postretirement Benefits		12,059			13,103
Environmental Remediation Costs		43,464			41,181
Derivatives - Energy Related Liabilities		5,362			3,661
Derivatives - Other		464			1,516
Regulatory Liabilities		73,433			63,836
Other		6,875			8,483
Total Deferred Credits
and Other Non-Current Liabilities		293,279			277,977
Commitments and Contingencies (Note 11)
Total Capitalization and Liabilities	$	1,304,897		$	1,243,334
The accompanying notes are an integral part of the condensed consolidated financial statements.

SJI-8

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1.Summary of Significant Accounting Policies:

Consolidation— The condensed consolidated financial statements include the accounts of South Jersey Industries, Inc. (SJI), it’s wholly owned subsidiaries and two subsidiaries in which we have a controlling interest. We eliminated all significant intercompany accounts and transactions. In our opinion, the condensed consolidated financial statements reflect all adjustments needed to fairly present SJI’s financial position and operating results at the dates and for the periods presented. Our businesses are subject to seasonal fluctuations and, accordingly, this interim financial information should not be the basis for estimating the full year’s operating results. These financial statements should be read in conjunction with SJI’s 2004 Form 10K and annual report.

Equity Investments— We classify equity investments purchased as long-term investments as Available-for-Sale Securities on our condensed consolidated balance sheets and carry them at their fair value with any unrealized gains or losses included in Accumulated Other Comprehensive (Loss) Income. SJI, either directly or through its wholly owned subsidiaries, currently holds a 50% non-controlling interest in two affiliated companies and accounts for the investments under the equity method. We include the operations of these affiliated companies on a pre-tax basis in the statements of condensed consolidated income under Equity in Affiliated Companies.

Estimates and Assumptions— We prepare our condensed consolidated financial statements to conform with accounting principles generally accepted in the United States of America. Management makes estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. Therefore, actual results could differ from those estimates. Significant estimates include amounts related to regulatory accounting, energy derivatives, environmental remediation costs, pension and other postretirement benefit costs, and revenue recognition.

Regulation— South Jersey Gas Company (SJG) is subject to the rules and regulations of the New Jersey Board of Public Utilities (BPU). We maintain our accounts according to the BPU's prescribed Uniform System of Accounts. SJG follows the accounting for regulated enterprises prescribed by the Financial Accounting Standards Board (FASB) Statement No. 71, “Accounting for the Effects of Certain Types of Regulation.” In general, Statement No. 71 allows deferral of certain costs and creation of certain obligations when it is probable that these items will be recovered from or refunded to customers in future periods.

Revenues— Gas and electric revenues are recognized in the period the commodity is delivered and customers are billed monthly. For SJG and South Jersey Energy (SJE) retail customers not billed at the end of each month, we record an estimate to recognize unbilled revenues for gas and electricity delivered from the date of the last meter reading to the end of the month. We defer and recognize revenues related to South Jersey Energy Service Plus, LLC (SJESP) appliance service contracts seasonally over the full 12-month term of the contract.

SJI-9

Marina Energy LLC (Marina) recognizes revenue on a monthly basis as services are provided and for on-site energy production that is delivered to its customers.

The BPU allows SJG to recover all prudently incurred gas costs through the Basic Gas Supply Service (BGSS) clause. We collect these costs on a forecasted basis upon BPU order. SJG defers over/under-recoveries of gas costs and includes them in the following year's BGSS or other similar recovery mechanism. We pay interest on overcollected BGSS balances at the rate of return on rate base utilized by the BPU to set rates in its last base rate proceeding.

SJG's tariff also includes a Temperature Adjustment Clause (TAC), a Remediation Adjustment Clause (RAC), a New Jersey Clean Energy Program (NJCEP) and a Universal Service Fund (USF) program. Our TAC reduces the impact of temperature fluctuations on SJG and its customers. The RAC recovers environmental remediation costs of former gas manufacturing plants and the NJCEP recovers costs associated with our energy efficiency and renewable energy programs. The USF is a statewide customer assistance program that utilizes utilities as a collection agent. TAC adjustments affect revenue, income and cash flows since colder-than-normal weather can generate credits to customers, while warmer-than-normal weather can result in additional billings. RAC adjustments do not directly affect earnings because we defer and recover related costs through rates over 7-year amortization periods. NJCEP and USF adjustments are also deferred and do not affect earnings, as related costs and customer credits are recovered through rates on an ongoing basis.

Accounts Receivable and Provision for Uncollectible Accounts — Accounts receivable are carried at the amount owed by customers. A provision for uncollectible accounts was established based on our collection experience and an assessment of the collectibility of specific accounts.

Property, Plant and Equipment— For regulatory purposes, utility plant is stated at original cost, which may be different than SJG’s cost if the assets were acquired from another regulated entity. Nonutility plant is stated at cost. The cost of adding, replacing and renewing property is charged to the appropriate plant account.

Depreciation — We depreciate utility plant on a straight-line basis over the estimated remaining lives of the various property classes. These estimates are periodically reviewed and adjusted as required after BPU approval. As a result of the rate case settlement SJG’s composite depreciation rate was reduced from 2.9% to 2.4%, effective July 8, 2004. Except for extraordinary retirements, accumulated depreciation is charged with the cost of depreciable utility property retired less salvage (See Asset Retirement Costs). Nonutility property depreciation is computed on a straight-line basis over the estimated useful lives of the property, ranging up to 50 years. Gain or loss on the disposition of nonutility property is recognized in net income.

SJI-10

Capitalized Interest — SJG capitalizes interest on construction at the rate of return on rate base utilized by the BPU to set rates in its last base rate proceeding. Capitalized interest is included in Utility Plant on the condensed consolidated balance sheets. Marina capitalizes interest on construction projects in progress. All capitalized interest is reflected on the statements of condensed consolidated income as a reduction of Interest Charges. As of September 30, SJI capitalized interest as follows (in thousands):

		September 30, 2005		September 30, 2004
Quarter Ended:
SJG	$	258	$	200
Marina		143		-
Total	$	401	$	200
Nine Months Ended:
SJG	$	800	$	531
Marina		215		-
Total	$	1,015	$	531

Impairment of Long-Lived Assets — We review the carrying amount of an asset for possible impairment whenever events or changes in circumstances indicate that such amount may not be recoverable. For the nine months ended September 30, 2005 and the year ended December 31, 2004, we did not identify any significant impairments.

Energy Trading Activities and Derivative Instruments — Certain SJI subsidiaries are involved in buying, selling, transporting and storing natural gas and buying and selling retail electricity for their own accounts as well as managing these activities for others. These subsidiaries are subject to market risk due to price fluctuations. To manage this risk, our companies enter into a variety of physical and financial transactions including forward contracts, swap agreements, option contracts and futures contracts.

SJI structured its subsidiaries so that SJG and SJE transact commodities on a physical basis and typically do not enter into positions that financially settle. South Jersey Resources Group (SJRG) performs this risk management function for these entities and enters into the types of financial transactions noted above. As part of its gas purchasing strategy, SJG occasionally uses financial contracts to hedge against forward price risk. The costs or benefits of these short-term contracts are recoverable through SJG’s BGSS, subject to BPU approval. As of September 30, 2005 and December 31, 2004, SJG had $(15.6) million and $0.5 million of (benefits) costs, respectively, included in its BGSS related to open financial contracts (See caption Regulatory Assets & Regulatory Liabilities). Management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in identifying, assessing and controlling various risks. Management reviews any open positions in accordance with strict policies to limit exposure to market risk.

SJI-11

SJI accounts for derivative instruments in accordance with FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. We record all derivatives, whether designated in hedging relationships or not, on the condensed consolidated balance sheets at fair value unless the derivative contracts qualify for the normal purchase and sale exemption. If the derivative is designated as a fair value hedge, we recognize the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk in earnings. We currently have no fair value hedges. If the derivative is designated as a cash flow hedge, we record the effective portion of the hedge in Accumulated Other Comprehensive (Loss) Income and recognize it in the income statement when the hedged item affects earnings. We recognize ineffective portions of the cash flow hedges immediately in earnings. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives, strategies for undertaking various hedge transactions and our methods for assessing and testing correlation and hedge ineffectiveness. All hedging instruments are linked to the hedged asset, liability, firm commitment or forecasted transaction. We also assess whether these derivatives are highly effective in offsetting changes in cash flows or fair values of the hedged items. We discontinue hedge accounting prospectively if we decide to discontinue the hedging relationship; determine that the anticipated transaction is no longer likely to occur; or if we determine that a derivative is no longer highly effective as a hedge. In the event that hedge accounting is discontinued, we will continue to carry the derivative on the balance sheet at its current fair value and recognize subsequent changes in fair value in current period earnings. Unrealized gains and losses on the discontinued hedges that were previously included in Accumulated Other Comprehensive (Loss) Income will be reclassified into earnings. During 2005, $1.3 million of unrealized gain on derivatives previously designated as cash flow hedges was reclassified into Operating Revenues - Nonutility because we determined that the anticipated hedged transaction was no longer likely to occur. As permitted under Statement No. 133, SJI has elected to designate certain energy-related derivative instruments as cash flow hedges which protect against the price variability of our forecasted sales and purchases of natural gas. Based on the amount recorded in Accumulated Other Comprehensive (Loss) Income at September 30, 2005, we expect $14.3 million to be recorded as a decrease in revenues in the next twelve months. As of September 30, 2005, hedges for future forecasted transactions exist into 2006.

SJRG manages its portfolio of purchases and sales, as well as natural gas in storage, using a variety of instruments that include forward contracts, swap agreements, option contracts and futures contracts. SJI measures the fair value of the contracts and records these as Derivatives — Energy Related Assets or Derivatives — Energy Related Liabilities on our condensed consolidated balance sheets. For those derivatives not designated as hedges, we recorded the net unrealized pre-tax loss of $(3.5) million and $(1.4) million in earnings during the three months ended September 30, 2005 and 2004, respectively, which are included with realized gains and losses in Operating Revenues — Nonutility. For the nine months ended September 30, 2005 and 2004, we recorded the net unrealized pre-tax loss of $(1.4) and $(1.9) million, respectively.

SJI-12

SJI presents revenues and expenses related to its trading activities on a net basis in Operating Revenues — Nonutility in our condensed consolidated statements of income consistent with Emerging Issues Task Force (EITF) Issue No. 02-03, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.” There is no effect on operating income or net income from the above presentation.

From time to time we enter into interest rate swap and similar agreements to hedge exposure to increasing rates with respect to our variable rate debt. We account for these interest rate derivatives as cash flow hedges.

In November 2001, we entered into two interest rate swap contracts. The first swap effectively provides us with a fixed interest rate of 4.08% on Marina’s $20 million tax-exempt Series A variable rate bonds for a 10-year period. The second swap effectively fixed the interest rate on $9 million of Marina’s taxable Series B variable rate bonds at 4.55% for a 6-year period. The notional amount of this second swap decreases by $3.0 million per year beginning in December 2005.

In January 2002, Marina issued an additional $10.0 million of taxable Series B variable rate bonds through the New Jersey Economic Development Authority. In April 2002, we entered into an interest rate swap contract that effectively fixed the interest rate on these bonds at 4.62% for a 4-year period. The notional amount of this swap decreased to $3.9 million in December 2004, and terminates in December 2005.

In November 2004, we entered into two additional interest rate swap contracts against Marina’s taxable Series B variable rate bonds for a 10-year period. The swaps effectively provide us with a fixed interest rate of 4.80% on $3.9 million and 4.78% on $8.0 million of the bonds, respectively.

In June 2005, we entered into three forward starting swaps which effectively fixed the interest rate at 3.895% for 20 years on $15.3 million of tax-exempt debt which is expected to be issued in early 2006. These swaps were entered into in anticipation of Marina’s financing needs related to the thermal plant expansion to serve the Borgota Casino Hotel & Spa’s expansion.

SJI-13

In November 2004, SJG entered into a derivative transaction known as a “Treasury Lock” to hedge against the impact of possible interest rate increases on a $10.0 million, 30-year debt issuance by SJG originally planned for July 2005 (See Note 4 - Long-Term Debt). SJG terminated that Treasury Lock on its July 15, 2005 expiration date at a cost of $1.2 million. Subsequently, SJG entered into a second Treasury Lock in August 2005, related to the same debt, that SJG terminated on its expiration date of September 13, 2005 at a cost of $0.2 million. Because the replacement debt was issued on September 13, 2005, within sixty days of the original Treasury Lock expiration date, the cost of both Treasury Locks has been included in Accumulated Other Comprehensive (Loss) Income and is being amortized over the thirty-year life of the new debt issue. As of September 30, 2005, the after-tax unamortized cost of these treasury locks included in Accumulated Other Comprehensive (Loss) Income was $0.8 million. At December 31, 2004, the market value of the original Treasury Lock contract included in the condensed consolidated balance sheets under Derivatives-Other was $344,000, the after-tax amount included in Accumulated Other Comprehensive (Loss) Income was $203,400. SJG calculated the Treasury Locks to be highly effective as defined under Statement No. 133. As of September 30, 2005 and December 31, 2004, the market value of our swaps was $(0.5) million and $(1.9) million, respectively, which represents the amount we would have to pay the counterparties to terminate these contracts as of those dates. We include these balances on the condensed consolidated balance sheets under Derivatives — Other. As of September 30, 2005 and December 31, 2004, we calculated the swaps to be highly effective as defined under Statement No. 133, therefore; we record the changes in fair value of the swaps, net of taxes, in Accumulated Other Comprehensive (Loss) Income.

We determined the fair value of derivative instruments by reference to quoted market prices of listed contracts, published quotations or quotations from independent parties.

Stock Compensation — Prior to 2003, SJI valued stock options to employees using the intrinsic value method. Effective in 2003, SJI adopted the policy of accounting for this compensation using the fair value based method on a prospective basis. At this time, SJI has no stock options outstanding.

Asset Retirement Costs — SJG has certain easements and right-of-way agreements that qualify as legal obligations under FASB Statement No. 143, “Accounting for Asset Retirement Obligations.” However, as it is our intent to maintain these agreements in perpetuity, we have not recorded any liabilities associated with these agreements. SJG recovers certain asset retirement costs through rates charged to customers. As of September 30, 2005 and December 31, 2004, SJG had accrued amounts in excess of actual removal costs incurred totaling $47.9 million and $47.3 million, respectively, , which are recorded as Regulatory Liabilities on the condensed consolidated balance sheets in accordance with Statement No. 143.

New Accounting Pronouncements —In December 2004, the FASB issued Statement No. 123(R), “Share-Based Payment” which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This statement is not effective until reporting periods beginning after January 1, 2006. Management is currently evaluating the effect of this Statement, but does not anticipate the adoption of this Statement to have a material effect on our condensed consolidated financial statements.

SJI-14

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.” This interpretation clarifies the term “conditional asset retirement obligation” as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” and is effective for fiscal years ending after December 15, 2005. Management is currently evaluating the effect of this standard, but does not anticipate the adoption of this interpretation to have a material effect on our consolidated financial statements.

Regulatory Assets & Regulatory Liabilities —Regulatory Assets at September 30, 2005 and December 31, 2004 consisted of the following items (in thousands):

	Years Remaining
	As of		September 30,		December 31,
	September 30, 2005		2005		2004
Environmental Remediation Costs:
Expended - Net	Various	$	7,398	$	5,281
Liability for Future Expenditures	N/A		56,290		51,046
Income Taxes - Flow through Depreciation	6		5,908		6,641
Deferred Postretirement Benefit Costs	7		2,740		3,024
Gross Receipts and Franchise Taxes	1		591		924
Societal Benefit Costs	Various		2,107		4,562
Other	-		1,164		1,157
Total Regulatory Assets		$	76,198	$	72,635

Each item separately identified above is being recovered through utility rate charges. SJG is currently permitted to recover interest on its Environmental Remediation and Societal Benefit Costs while the other assets are being recovered without a return on investment over the period indicated. Some of the assets reflected within the above caption “Other” are currently being recovered from ratepayers as approved by the BPU. Management believes that the remaining deferred costs are probable of recovery from ratepayers through future utility rates, based on experience with previous BPU orders.

Regulatory Liabilities at September 30, 2005 and December 31, 2004 consisted of the following items (in thousands):

	September 30,		December 31,
		2005		2004
Deferred Gas Revenues - Net	$	20,447	$	12,334
Excess Plant Removal Costs		47,886		47,345
Overcollected State Taxes		3,987		3,871
Other		1,113		286
Total Regulatory Liabilities	$	73,433	$	63,836

SJI-15

Deferred Gas Revenues - Net represent SJG’s net overcollected gas costs and are monitored through SJG’s BGSS mechanism. Derivative contracts used to hedge SJG’s natural gas purchases are recoverable through its BGSS, subject to BPU approval. The offset to the change in fair value of these contracts is recorded as a Regulatory Asset or Regulatory Liability, accordingly. As of September 30, 2005 and December 31, 2004, amounts related to these contracts represent $15.6 million and $(0.5) million, respectively, of the Deferred Gas Revenues - Net disclosed in the table above.

Excess Plant Removal Costs represent amounts accrued in excess of actual utility plant removal costs incurred to date. All other amounts are subject to being returned to ratepayers in future rate proceedings.

Cash and Cash Equivalents— For purposes of reporting cash flows, highly liquid investments with original maturities of three months or less are considered cash equivalents.

Reclassifications— SJI reclassified some previously reported amounts to conform with current year classifications. Such reclassifications include the move of $1.2 and $5.4 million of certain operating expenses previously included in Utility Revenue to Cost of Sales - Utility and Operations Expense, respectively, for the three and nine months ended September 30, 2004.

We also reclassified $4.8 million of deferred contract revenues related to our appliance service contracts as of December 31, 2004 from Other Noncurrent Liabilities to Deferred Contract Revenues on our condensed consolidated balance sheet.

During the period ended September 30, 2005, SJI determined that acquisitions of property and equipment on account, which were previously reported as offsetting components of changes in operating liabilities and capital expenditures, should not have been reported in the statements of cash flows. The condensed statement of consolidated cash flows for the nine months ended September 30, 2004 has been revised to reflect a decrease in cash flows provided by operating activities with a corresponding decrease in cash flows used in investing activities of approximately $2.4 million.

The amounts noted above are considered immaterial to the overall presentation of SJIs condensed consolidated financial statements.

Note 2.Discontinued Operations and Affiliations:

Discontinued Operations — In 1996, Energy & Minerals, Inc. (EMI), an SJI subsidiary, sold the common stock of The Morie Company, Inc. (Morie), its sand mining and processing subsidiary.

SJI conducts tests annually to estimate the environmental remediation costs for properties owned by South Jersey Fuel, Inc. (SJF), an EMI subsidiary, from its previously operated fuel oil business. SJI reports the environmental remediation activity related to these properties as discontinued operations.

SJI-16

Summarized operating results of the discontinued operations for the three and nine months ended September 30, 2005 were (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
		2005			2004			2005			2004
Loss before Income Taxes:
Sand Mining	$	(237	)	$	(219	)	$	(708	)	$	(646	)
Fuel Oil		(58	)		(64	)		(88	)		(70	)
Income Tax Credits		104			99			279			250
Loss from Discontinued Operations - Net	$	(191	)	$	(184	)	$	(517	)	$	(466	)
Basic Earnings Per Common Share From
Discontinued Operations - Net	$	(0.007	)	$	(0.007	)	$	(0.018	)	$	(0.017	)
Diluted Earnings Per Common Share From
Discontinued Operations - Net	$	(0.007	)	$	(0.007	)	$	(0.018	)	$	(0.017	)

Losses from sand mining are mainly comprised of environmental remediation and product liability litigation associated with Morie’s prior activities.

Affiliations — SJI and Conectiv Solutions, LLC formed Millennium Account Services, LLC to provide meter reading services in southern New Jersey.

SJE and GZA GeoEnvironmental, Inc. formed AirLogics, LLC to market a jointly developed air monitoring system designed to assist companies involved in environmental cleanup activities.

In April 2004, Marina and DCO Energy, LLC (DCO) formed AC Landfill Energy, LLC (ACLE) to develop and install a 1,400 kilowatt methane-to-electric power generation system at a county-owned landfill in Egg Harbor Township, NJ. Marina owns a 51% interest in ACLE and consolidates ACLE’s balance sheet and results of operations accordingly. Commercial operation of the plant began in March 2005.

In March 2005, Marina and DCO formed WC Landfill Energy, LLC (WCLE) to develop and install a 3,800 kilowatt methane-to-electric power generation system at a county-owned landfill in White Township, NJ. Marina owns a 51% interest in WCLE and consolidates WCLE’s balance sheet and results of operations accordingly, as applicable. Commercial operation of the plant is targeted to begin in early 2006.

SJI-17

Note 3.Common Stock:

Amendment to the Certificate of Incorporation to Increase the Number of Authorized Shares —On March 3, 2005, the Board of Directors authorized an amendment to SJI’s Certificate of Incorporation to increase the authorized number of shares of Common Stock from 20,000,000 shares to 60,000,000 shares. This amendment was approved by a vote of SJI’s shareholders at SJI’s annual meeting of shareholders held on April 21, 2005. The principal purpose of the increase was to permit a two-for-one split of all the issued shares of SJI’s Common Stock, which was completed on June 30, 2005. Share-related information for prior periods is reported on a retroactive basis reflecting the stock split.

SJI has 60,000,000 shares of authorized Common Stock. The following shares were issued and outstanding:

	2005		2004
Beginning Balance, January 1	27,759,936	Beginning Balance, January 1	26,458,002
New Issues During Year:		New Issues During Year:
Dividend Reinvestment Plan	579,487	Dividend Reinvestment Plan	1,232,602
Stock-Based Compensation Plan	74,574	Stock-Based Compensation Plan	64,112
Directors’ Restricted Stock	-	Directors’ Restricted Stock	5,220
Ending Balance, September 30	28,413,997	Ending Balance, December 31	27,759,936

We credited the par value ($1.25 per share) of stock issued during the nine months ended September 30, 2005 and the year ended December 31, 2004 to Common Stock. We credited the net excess over par value of approximately $17.4 million for the nine months ended September 30, 2005 and $25.9 million for the year ended December 31, 2004 to Premium on Common Stock.

Earnings Per Common Share — We present basic EPS based on the weighted-average number of common shares outstanding. EPS is presented in accordance with FASB Statement No. 128, “Earnings Per Share,” which establishes standards for computing and presenting basic and diluted EPS. The incremental shares required for inclusion in the denominator for the diluted EPS calculation were 214,427 and 238,772 shares for the three months and 222,136 and 204,438 shares for the nine months ended September 30, 2005 and 2004, respectively. These shares relate to SJI’s restricted stock as discussed below.

Stock-Based Compensation Plan — Under the Amended and Restated 1997 Stock-Based Compensation Plan as recently amended and restated by our Board of Directors and approved by our shareholders on April 21, 2005, no more than 1,000,000 shares in the aggregate may be issued to SJI's officers, non-employee directors and other key employees. The plan will terminate on January 26, 2015 unless terminated earlier by the Board of Directors. No options were granted or outstanding during the nine months ended September 30, 2005 and 2004. No stock appreciation rights have been issued under the plan. In the first nine months of 2005 and 2004, we granted 38,316 and 43,798 restricted shares, respectively. These restricted shares vest over 3-year periods and are subject to SJI achieving certain performance targets.

SJI-18

Dividend Reinvestment Plan (DRP) — Newly issued shares of common stock offered through the DRP are issued directly by SJI. As of September 30, 2005, SJI reserved 2,411,189 shares of authorized, but unissued, common stock for future issuance under the DRP.

Note 4.Long-Term Debt:

On July 15, 2005 SJG redeemed a $10 million 7.9% medium term note at par with the intention of replacing the note within sixty days. On July 22, 2005, SJG filed a registration statement on Form S-3 with the Securities and Exchange Commission (SEC) to establish a $150 million Medium Term Note (MTN) program. The registration statement became effective on September 8, 2005 and on September 13, 2005 SJG subsequently issued a $10 million 5.45% medium term note with a maturity of thirty years to replace the one that had been redeemed in July 2005.

In anticipation of this debt replacement, SJG had previously entered into a derivative transaction known as a “Treasury Lock” in November, 2004, to hedge against an increase in long-term interest rates. When the 7.9% medium term note was redeemed, SJG terminated the Treasury Lock on its expiration date by paying $1.2 million to the counterparty. SJG subsequently entered into a second Treasury Lock in August, 2005, related to the same debt, which was terminated on its expiration date of September 13, 2005 by paying $0.2 million to the counterparty. (See Note 1 - Energy Trading and Derivative Instruments.)

Note 5.Financial Instruments:

Restricted Investments — SJRG maintains a margin account with a national investment firm to support its risk management activities. As of September 30, 2005 and December 31, 2004, SJRG had a balance of $9.6 million and $13.0 million in this account due to changes in the market value of outstanding contracts.

Note 6.Segments of Business:

SJI operates in several different operating segments. Gas Utility Operations (SJG) consist primarily of natural gas distribution to residential, commercial and industrial customers. Wholesale Gas Operations include SJRG’s activities. SJE is involved in both retail gas and retail electric activities. Retail Gas and Other Operations include natural gas acquisition and transportation service business lines. Retail Electric Operations consist of electricity acquisition and transportation to retail, commercial and industrial customers. On-Site Energy Production consists of Marina’s thermal energy facility and other energy-related projects. Appliance Service Operations (SJESP) include the servicing of appliances via the sale of appliance service programs as well as on a time and materials basis, and the installation of residential and small commercial HVAC systems. The appliance service business operated within SJG until September 1, 2004 - See Note 7.

Information about these segments for the three and nine months ended September 30 is presented below (in thousands):

SJI-19

	Three Months Ended September 30,						Nine Months Ended September 30,
		2005			2004			2005			2004
Operating Revenues:
Gas Utility Operations	$	89,702		$	72,029		$	390,322		$	345,349
Wholesale Gas Operations		6,340			2,570			21,182			11,355
Retail Gas and Other Operations		33,445			30,491			150,041			155,701
Retail Electric Operations		19,099			18,054			58,643			52,227
On-Site Energy Production		7,964			4,883			18,530			15,997
Appliance Service Operations		3,457			4,126			10,650			9,037
Subtotal		160,007			132,153			649,368			589,666
Intersegment Sales		(3,036	)		(2,704	)		(9,788	)		(16,052	)
Total Operating Revenues	$	156,971		$	129,449		$	639,580		$	573,614
Operating Income:
Gas Utility Operations	$	3,602		$	2,625		$	56,896		$	46,982
Wholesale Gas Operations		2,866			877			9,707			3,280
Retail Gas and Other Operations		(234	)		420			2,056			5,475
Retail Electric Operations		253			44			1,114			1,059
On-Site Energy Production		3,104			1,426			6,617			4,627
Appliance Service Operations		688			258			2,476			1,184
General Corporate		(311	)		(369	)		(757	)		(797	)
Total Operating Income	$	9,968		$	5,281		$	78,109		$	61,810
Depreciation and Amortization:
Gas Utility Operations	$	6,339		$	5,745		$	18,577		$	19,377
Wholesale Gas Operations		4			4			11			11
Retail Gas and Other Operations		30			38			89			105
Retail Electric Operations		-			-			-			-
On-Site Energy Production		459			430			1,360			1,247
Appliance Service Operations		47			-			129			-
Discontinued Operations		-			-			-			-
Total Depreciation and Amortization	$	6,879		$	6,217		$	20,166		$	20,740
Property Additions:
Gas Utility Operations	$	23,385		$	15,316		$	53,838		$	47,392
Wholesale Gas Operations		2			-			2			15
Retail Gas and Other Operations		6			53			16			180
Retail Electric Operations		-			-			-			-
On-Site Energy Production		6,047			-			19,090			1,554
Appliance Service Operations		53			-			110			-
Total Property Additions	$	29,493		$	15,369		$	73,056		$	49,141

SJI-20

	September 30, 2005			December 31, 2004
Identifiable Assets:
Gas Utility Operations	$	1,066,182		$	1,007,586
Wholesale Gas Operations		83,418			103,689
Retail Gas and Other Operations		46,037			53,880
Retail Electric Operations		8,826			12,580
On-Site Energy Production		102,195			84,616
Appliance Service Operations		13,732			11,640
Discontinued Operations		406			414
Subtotal		1,320,796			1,274,405
Corporate Assets		47,493			46,674
Intersegment Assets		(63,392	)		(77,745	)
Total Identifiable Assets	$	1,304,897		$	1,243,334

SJI's interest expense relates primarily to SJG's and Marina’s borrowing and financing activities. Interest income is essentially derived from borrowings between the subsidiaries and is eliminated during consolidation.

Note 7.Regulatory Actions:

Base Rates — In January 1997, the BPU granted SJG rate relief, which was predicated in part upon a 9.62% rate of return on rate base that included an 11.25% return on common equity. This rate relief provided for cost-of-service recovery, including deferred costs, through base rates. Additionally, SJG’s threshold for sharing pre-tax margins generated by interruptible and off-system sales and transportation increased. As a result of this case, SJG kept 100% of pre-tax margins up to the threshold level of $7.8 million. The next $750,000 was credited to customers through the Basic Gas Supply Service (BGSS) clause. Thereafter, SJG kept 20% of the pre-tax margins as it had historically.

On July 7, 2004, the BPU granted SJG a base rate increase of $20.0 million, which was predicated in part upon a 7.97% rate of return on rate base that included a 10.0% return on common equity. The increase, effective July 8, 2004, was designed to provide an incremental $8.5 million on an annualized basis to net income. SJG was also permitted to recover regulatory assets contained in its petition and to reduce its composite depreciation rate from 2.9% to 2.4%.

Included in the base rate increase was a change to the sharing of pre-tax margins on interruptible and off-system sales and transportation. SJG now recovers through its base rates the $7.8 million that it had previously recovered through the sharing of pre-tax margins. As a result, the sharing of pre-tax margins now begins from dollar one, with SJG retaining 20%. Moreover, SJG now shares pre-tax margins from on-system capacity release sales, in addition to the interruptible and off-system sales and interruptible transportation. Effective July 1, 2006, the 20% retained by SJG will decrease to 15% of such margins.

SJI-21

As part of the overall settlement effective July 8, 2004, SJG reduced rates in several rate clauses that were no longer needed by SJG to recover costs. SJG was either no longer incurring or had already recovered the specific costs that these clauses were designed to recover. Since revenues raised under these clauses were for cost recovery only and had no profit margin built in, their elimination has no impact on SJG’s net income. However, SJG’s customers’ bills declined by an estimated $38.9 million annually due to the elimination of these clauses, more than offsetting the base rate increase awarded.

Pending Audits — The BPU issued an order under which it is performing a competitive services audit and a management audit that includes a focused review of SJG’s gas supply and purchasing practices. The audits, which commenced in October 2004, are mandated by statute to be conducted at predetermined intervals. Management does not currently anticipate the outcome of these audits, for which the fieldwork has been completed, to materially affect SJI’s financial position, results of operations or liquidity.

Appliance Service Business — On July 23, 2004, the BPU approved SJG’s petition and related agreements to transfer its appliance service business from the regulated utility. In anticipation of this transfer, SJI formed South Jersey Energy Service Plus, LLC (SJESP) to perform appliance repair services after BPU approval of the transfer. SJESP purchased certain assets and assumed certain liabilities required to perform these repair services from SJG for the net book value of $1.2 million on September 1, 2004. The agreements also called for SJESP to pay an additional $1.5 million to SJG. This $1.5 million was credited by SJG to customers through the Remediation Adjustment Clause (RAC) and had no earnings impact on SJG. The $1.5 million is considered an intangible asset by SJESP and is being amortized on a straight-line basis over a 12-year period, which commenced as of the transfer date. The amortization period was based on a study performed by an independent consultant. The study results indicate the benefit period is linked to residential homeowner moving rates based on U.S. Census Bureau and regional information.

Other Regulatory Matters — Effective January 10, 2000, the BPU approved full unbundling of SJG’s system. This allows all natural gas consumers to select their natural gas commodity supplier. As of September 30, 2005, 12,372 of SJG’s residential customers were purchasing their gas commodity from someone other than SJG. Customers choosing to purchase natural gas from providers other than the utility are charged for the cost of gas by the marketer, not the utility. The resulting decrease in SJG’s revenues is offset by a corresponding decrease in gas costs. While customer choice can reduce utility revenues, it does not negatively affect SJG’s net income or financial condition. Unbundling did not change the fact that SJG still recovers cost of service, including deferred costs, through base rates.

SJI-22

In March 2003, the BPU approved a statewide Universal Service Fund (USF) program through which funds for the USF and Lifeline Credit and Tenants Assistance (Lifeline) Programs would be collected from customers of all New Jersey electric and gas utilities. In June 2004, the BPU approved the statewide budget of $113.0 million for all the state’s electric and gas utilities and the increased rates were implemented effective July 1, 2004, resulting in a $3.9 million increase to SJG’s annual USF recoveries. In April 2005, SJG made its annual USF filing, along with the state’s other electric and gas utilities, proposing no rate change to the statewide program. The rate proposal was approved by the BPU in June 2005.

In February 2004, SJG filed notice with the BPU to reduce its gas cost revenues collected under the BGSS by approximately $5.0 million, via a rate reduction, in addition to a $20.8 million bill credit to customers. Both the rate reduction and bill credit were approved and implemented in March 2004.

In June 2004, SJG made its annual BGSS filing with the BPU requesting a $4.9 million increase in gas cost recoveries. In October 2004, the requested increase was approved on a provisional basis.

In February 2005, SJG filed notice with the BPU to provide for an $11.4 million bill credit to customers. The bill credit was implemented in March 2005. In June 2005, SJG made its annual BGSS filing with the BPU requesting a $17.1 million, or 6.3%, increase in gas cost recoveries in response to increasing wholesale gas costs. In August 2005, the BPU approved SJG’s requested increase, effective September 1, 2005.

In September 2004, SJG filed for a $2.6 million reduction to its annual Societal Benefits Clause (SBC) recovery level. The SBC recovers costs related to BPU-mandated programs, including environmental remediation costs that are recovered through SJG’s RAC; energy efficiency and renewable energy program costs that are recovered through SJG’s New Jersey Clean Energy Programs; consumer education program costs; and low income program costs recovered through the Universal Service Fund.

In December 2004, the BPU approved the statewide funding of the New Jersey Clean Energy Program of $745.0 million for the years 2005 through 2008. Of this amount, SJG will be responsible for approximately $25.4 million over the four-year period. Amounts not yet expended have been included in the Contractual Cash Obligations table included in Note 11.

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

Note 8.Pension & Other Postretirement Benefits:

SJI has several defined benefit pension plans and other postretirement benefit plans. The pension plans provide annuity payments to the majority of full-time, regular employees upon retirement. Newly hired employees do not qualify for participation in the defined benefit pension plans. New hires are eligible to receive an enhanced version of the Company’s defined contribution plan (401-K). The other postretirement benefit plans provide health care and life insurance benefits to some retirees.

SJI-23

Net periodic benefit cost for the three and nine months ended September 30, 2005 and 2004 related to the 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,
		2005			2004			2005			2004
Service Cost	$	780		$	734		$	2,342		$	2,204
Interest Cost		1,526			1,424			4,578			4,274
Expected Return on Plan Assets		(2,142	)		(1,773	)		(6,427	)		(5,321	)
Amortization of Loss and Other		550			443			1,650			1,331
Net Periodic Benefit Cost		714			829			2,143			2,489
Capitalized Benefit Costs		(219	)		(226	)		(658	)		(678	)
Net Periodic Benefit Expense	$	495		$	603		$	1,485		$	1,811

	Other Postretirement Benefits
	Three Months Ended September 30,						Nine Months Ended September 30,
		2005			2004			2005			2004
Service Cost	$	227		$	378		$	681		$	1,132
Interest Cost		539			630			1,616			1,888
Expected Return on Plan Assets		(399	)		(352	)		(1,198	)		(1,052	)
Amortization of Transition Obligation		-			193			-			579
Amortization of Loss and Other		34			44			103			132
Net Periodic Benefit Cost		401			893			1,202			2,679
Capitalized Benefit Costs		(124	)		(246	)		(373	)		(737	)
Net Periodic Benefit Expense	$	277		$	647		$	829		$	1,942

Capitalized benefit costs reflected in the table above relate to SJG’s construction program.

The decrease in pension costs is primarily related to the expected returns on the $13.0 million pension contribution made in December 2004.

As of November 2004, SJI implemented caps on the amount of the premium we pay for all employees eligible for postretirement health care. Employees are responsible for those costs which exceed the premium caps. As a result of these caps, we were able to reduce our postretirement benefit costs other than pension.

In addition, both pension and other postretirement benefit costs were reduced as a result of an early retirement plan offered in 2004.

SJI-24

Future Benefit Payments— The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the following years (in thousands):

				Other
	Pension Benefits		Postretirement Benefits
2005	$	4,209	$       1,522
2006		4,397	1,737
2007		4,621	1,970
2008		4,898	2,187
2009		5,205	2,386
2010-2014		32,748	13,837

Contributions — SJI currently expects our 2005 pension contribution to range from $0.3 million to $2.8 million, depending on changes in investment performance and the discount rate for the year. SJG also has a regulatory obligation to contribute $3.6 million annually to its other postretirement benefit plans, less costs incurred directly by the company.

Note 9.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 $289.0 million. SJG’s total common equity balance was $314.6 million at September 30, 2005.

Restrictions exist under various loan agreements regarding the amount of cash dividends or other distributions that SJG may pay on its common stock. As of September 30, 2005 and December 31, 2004, SJG’s loan restrictions did not affect the amount that may be distributed from either SJG’s or SJI’s retained earnings.

Note 10.  Unused Lines of Credit and Compensating Balances:

Bank credit lines available to SJI totaled $266.0 million at September 30, 2005, of which $72.7 million, inclusive of $1.2 million of letters of credit, was used. Those bank facilities consist of a $100.0 million revolving credit facility that expires in August 2006 and $76.0 million of uncommitted bank lines available to SJG; and a $60.0 million revolving credit facility that expires in August 2007, and $30.0 million of uncommitted bank lines available to SJI. The revolving credit facilities contain certain financial covenants measured on a quarterly basis. SJI and SJG were in compliance with these covenants as of September 30, 2005. Borrowings under these lines of credit are at market rates. The weighted borrowing cost, which changes daily, was 4.42% and 3.02% at September 30, 2005 and December 31, 2004, respectively. We maintain demand deposits with lending banks on an informal basis and they do not constitute compensating balances.

SJI-25

Note 11. Commitments and Contingencies:

Contractual Cash Obligations — The following table summarizes our contractual cash obligations and their applicable payment due dates as of September 30, 2005 (in thousands):

	Total		Up to 1 Year		Years 2 & 3		Years 4 & 5		More than 5 Years
Contractual Obligations
Long-Term Debt	$	321,452	$	2,348	$	2,464	$	10,220	$	306,420
Interest on Long-Term Debt		280,286		18,191		37,631		37,417		187,047
Operating Leases		901		204		521		160		16
Construction Obligations		23,523		23,461		62		-		-
Commodity Supply Purchase Obligations		398,209		133,379		31,314		114,978		118,538
New Jersey Clean Energy Program (Note 7)		21,394		4,994		14,400		2,000		-
Other Purchase Obligations		4,831		1,779		1,927		1,125		-
Total Contractual Cash Obligations	$	1,050,596	$	184,356	$	88,319	$	165,900	$	612,021

Expected environmental remediation costs are not included in the table above due to the subjective nature of such costs and the timing of anticipated payments. SJG’s regulatory obligation to contribute $3.6 million annually to its postretirement benefit plans other than pensions, less costs incurred directly by the company, is not included as the duration is indefinite. As a result, the total obligation cannot be calculated. As discussed in Note 8 - Contributions, SJI expects to make a pension contribution in 2005 ranging from $0.3 to $2.8 million depending on changes in investment performance and the discount rate for the year. Furthermore, future pension contributions beyond 2005 cannot be determined at this time.

Gas Supply Contracts— SJG, in the normal course of conducting business, has entered into long-term contracts for natural gas supplies, firm transportation and gas storage service. The earliest that any of these contracts expires is March 2006. The transportation and storage service agreements between SJG and its interstate pipeline suppliers were made under Federal Energy Regulatory Commission approved tariffs. SJG's cumulative obligation for demand charges and reservation fees paid to suppliers for these services is approximately $4.4 million per month, recovered on a current basis through the BGSS.

Pending Litigation— SJI is subject to claims arising in the ordinary course of business and other legal proceedings. We accrue liabilities related to these claims when we can determine the amount or range of amounts of likely settlement costs for those claims. SJI has been named in, among other actions, certain product liability claims related to our former sand mining subsidiary. Management does not currently anticipate the disposition of any known claims to have a material adverse effect on SJI’s financial position, results of operations or liquidity.

SJI-26

Parental Guarantees—As of September 30, 2005, SJI had issued $233.9 million of parental guarantees on behalf of its subsidiaries. Of this total, $163.0 million expire within one year, $14.0 million expire between one and two years and $56.9 million have no expiration date. The vast majority of these guarantees were issued to guarantee payment to third parties with whom our subsidiaries have commodity supply contracts. These contracts contain netting provisions which permit us to net the ultimate cash payment for monthly buys and sells from/to counterparties. As of September 30, 2005, these guarantees support future firm commitments and $46.5 million of the Accounts Payable recorded on our condensed consolidated balance sheet. As part of our risk management policy, we also require parental guarantees from trading counterparties as we deem necessary. These arrangements are typical in our industry.

Included in the above are five parental guarantees totaling $27.2 million related to Marina’s construction and operating activities.

Standby Letters of Credit— As of September 30, 2005, SJI provided $46.0 million of standby letters of credit from four commercial banks supporting the variable rate demand bonds issued through the New Jersey Economic Development Authority to finance Marina’s thermal plant project. The letter of credit agreement contains certain financial covenants measured on a quarterly basis. SJI was in compliance with these covenants as of September 30, 2005.

Also, as of September 30, 2005, SJI has issued four letters of credit totaling $1.2 million. Two of these letters were posted to different utilities to enable SJE to market retail electricity within the respective utilities’ service territories. The remaining letters were related to the construction activity of ACLE and WCLE.

Environmental Remediation Costs— SJI 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. SJI and some of its nonutility subsidiaries also recorded costs for environmental cleanup of sites where SJF previously operated a fuel oil business and Morie maintained equipment, fueling stations and storage.

SJI successfully entered into settlements with all of its historic comprehensive general liability carriers regarding the environmental remediation expenditures at the SJG sites. Also, SJG purchased a Cleanup Cost Cap Insurance Policy limiting the amount of remediation expenditures that SJG will be required to make at 11 of its sites. This Policy will be in force until 2024 at 10 sites and until 2029 at one site. The future cost estimates discussed hereafter are not reduced by projected insurance recoveries from the Cleanup Cost Cap Insurance Policy. The policy is limited to an aggregate payment amount of $50.0 million, of which SJG has recovered $7.5 million as of September 30, 2005.

SJI-27

Since the early 1980s, SJI accrued environmental remediation costs of $162.6 million, of which $102.3 million was spent as of September 30, 2005. With the assistance of a consulting firm, we estimate that undiscounted future costs to clean up SJG's sites will range from $56.3 million to $205.9 million. Four of SJG’s sites comprise a significant portion of these estimates, ranging from $33.1 million at the low end range and $124.7 million at the high end range. SJG recorded the lower end of the range, $56.3 million, as a liability because a single reliable estimation point is not feasible due to the amount of uncertainty involved in the nature of projected remediation efforts and the long period over which remediation efforts will continue. Recorded amounts include estimated costs based on projected investigation and remediation work plans using existing technologies. Actual costs could differ from the estimates due to the long-term nature of the projects, changing technology, government regulations and site-specific requirements. Significant risks surrounding these estimates include unforeseen market price increases for remedial services, property owner acceptance of remedy selection, regulatory approval of selected remedy and remedial investigative findings.

The following table details the amounts expended and accrued for SJG’s environmental remediation:

	Three Months Ended			Nine Months Ended
		September 30, 2005			September 30, 2005
Beginning Balance	$	52,700		$	51,046
Accruals		5,160			8,994
Expenditures		(1,570	)		(3,750	)
Ending Balance	$	56,290		$	56,290

The balances are segregated between current and non-current on the September 30, 2005 condensed consolidated balance sheets under the captions Current Liabilities and Deferred Credits and Other Non-Current Liabilities.

The remediation efforts at SJG’s four most significant sites include the following:

Site 1 - The remedial selection process is underway for this site. Once complete, a remedial action work plan will be submitted to the New Jersey Department of Environmental Protection (NJDEP) for approval. Remaining steps to remediate include remedy selection, regulatory approval and remedy implementation for impacted soil, groundwater, and river sediments as well as acceptance of the selected remedy by affected property owners.

Site 2 - Various remedial investigation and action activities, such as completed and approved interim remedial measures and conceptual remedy selection, are ongoing at this site. Remaining steps to remediate include remedy selection, regulatory approval, and implementation for the remaining impacted soil, groundwater, and stream sediments.

SJI-28

Site 3 - Remedial investigative activities are ongoing at this site. Remaining steps to remediate include completing the remedial investigation of impacted soil and groundwater in preparation for selecting the appropriate action and implementation gaining regulatory and property owner approval of the selected remedy.

Site 4 - The NJDEP has approved the selected remedy to address impacted soil and groundwater at this site. Remaining steps to remediate include bidding, implementation, and ongoing operation and maintenance of the selected remedy.

SJG has two regulatory assets associated with environmental costs. The first asset, Environmental Remediation Cost: Expended — Net, represents what was actually spent to clean up former gas manufacturing plant sites. These costs meet the requirements of FASB Statement No. 71. The BPU allows SJG to recover expenditures through the RAC.

The other asset, Environmental Remediation Cost: Liability for Future Expenditures, relates to estimated future expenditures determined under the guidance of FASB Statement No. 5, "Accounting for Contingencies." We recorded this amount, which relates to former manufactured gas plant sites, as a regulatory asset under Statement No. 71 with the corresponding amount reflected on the condensed consolidated balance sheets under Current Liabilities and Deferred Credits and Other Noncurrent Liabilities. The BPU's intent, evidenced by current practice, is to allow SJG to recover the deferred costs after they are spent over 7-year periods.

As of September 30, 2005, we reflected SJG's unamortized remediation costs of $7.4 million on the condensed consolidated balance sheets under the caption Regulatory Assets. Since implementing the RAC in 1992, SJG has recovered $45.2 million through rates.

With Morie’s sale, EMI assumed responsibility for environmental liabilities estimated between $2.8 million and $8.8 million. The information available on these sites is sufficient only to establish a range of probable liability and no point within the range is more likely than any other. Therefore, EMI has accrued the lower end of the range. Changes in the accrual are included in the statements of condensed consolidated income under Loss from Discontinued Operations — Net.

SJI and SJF estimated their potential exposure for the future remediation of four sites where fuel oil operations existed years ago. Estimates for these sites range from $1.2 million to $5.0 million. We recorded the lower ends of these ranges on the 2005 condensed consolidated balance sheet under Current Liabilities and Deferred Credits and Other Noncurrent Liabilities as of September 30, 2005.

SJI-29

Note 12.Subsequent Events:

 On October 21, 2005, SJG entered into two forward-starting interest rate swaps which effectively fixed the interest rate at 3.43% for 30 years on $25 million of tax-exempt debt which is expected to be issued in early 2006. The debt will be used to provide long-term financing for capital improvements made to SJG’s gas transmission and distribution system serving Atlantic and Cape May Counties in southern, New Jersey.

SJI-30

Item 2. Management's Discussion and Analysis of Financial

Condition and Results of Operations (Unaudited)

Overview

South Jersey Industries, Inc. (SJI) is an energy services holding company that provides a variety of products and services through the following wholly owned subsidiaries:

1)South Jersey Gas Company (SJG) is a regulated natural gas utility. SJG distributed natural gas in the seven southernmost counties of New Jersey to 317,273 customers at September 30, 2005 compared with 308,205customers at September 30, 2004. SJG also:

* sells natural gas and pipeline transportation capacity (off-system sales) on a wholesale basis to various customers on the interstate pipeline system;

* transports natural gas purchased directly from producers or suppliers for its own sales and for some of its customers; and

* serviced appliances via the sale of appliance service programs, as well as on a time and materials basis through September 1, 2004, at which time the business line was transferred out of SJG and into South Jersey Energy Service Plus, LLC.

2)South Jersey Energy Company (SJE) acquires and markets natural gas and electricity to retail end users and provides total energy management services to commercial and industrial customers. SJE also markets an air quality monitoring system through AirLogics, LLC. SJE and GZA GeoEnvironmental, Inc., an environmental consulting firm, each have a 50% equity interest in AirLogics.

3)South Jersey Resources Group, LLC (SJRG) markets wholesale natural gas storage, commodity and transportation in the mid-Atlantic and southern states. SJRG also conducts price-risk management activities by entering into a variety of physical and financial transactions including forward contracts, swap agreements, option contracts and futures contracts. SJRG performs this risk management function for SJG and SJE and enters into the types of financial transactions noted above.

4) Marina Energy LLC (Marina) develops and operates energy-related projects. Marina's largest project provides cooling, heating and hot water to the Borgata Hotel Casino & Spa in Atlantic City. Marina’s most recent projects include two landfill gas-fired electricity production facilities. Marina owns a 51% equity interest in AC Landfill Energy, LLC (ACLE). ACLE was formed with DCO Energy, LLC (DCO) to develop and install a 1,400 kilowatt methane-to-electric power generation system at a county-owned landfill in Egg Harbor Township, NJ. Commercial operation of the plant began in March 2005. Marina also owns a 51% equity interest in WC Landfill Energy, LLC (WCLE). WCLE was formed with DCO to develop and install a 3,800 kilowatt methane-to-electric power generation system at a county-owned landfill in White Township, NJ. Commercial operation of the plant is targeted to begin in early 2006.

SJI-31

5)South Jersey Energy Service Plus, LLC (SJESP) installs residential and small commercial HVAC systems and services appliances via the sale of appliance service programs as well as on a time and materials basis in southern New Jersey.

SJI also has a joint venture investment with Conectiv Solutions, LLC in Millennium Account Services, LLC (Millennium). Millennium provides meter reading services to SJG and Atlantic City Electric Company in southern New Jersey.

Forward-Looking Statement and Risk Factors:

Certain statements contained in this Quarterly Report on Form 10-Q 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. When used in this Report, or any other of the Company’s documents or oral presentations, 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; 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 the Company’s Form 10-K for the year ended December 31, 2004. 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, the date of such document. While the Company 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, the Company undertakes no obligation to update or revise any of its forward-looking statements whether as a result of new information, future events or otherwise.

SJI-32

Critical Accounting Policies

Estimates and Assumptions — As described in the notes to our condensed consolidated financial statements, 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. SJI’s Form 10-K for the year ended December 31, 2004 describes five critical policies within Management’s Discussion and Analysis that require a significant amount of judgment and estimation. These relate to regulatory accounting, energy derivatives, environmental remediation costs, pension and other postretirement employee benefit costs, and revenue recognition.

New Accounting Pronouncements — See detailed discussions concerning New Accounting Pronouncements and their impact on SJI in Note 1 to the condensed consolidated financial statements.

Temperature Adjustment Clause — A BPU-approved Temperature Adjustment Clause (TAC) decreased SJG’s net income by $(0.2) million for the nine months ended September 30, 2005 and increased SJG’s net income by $0.2 million for the nine months ended September 30, 2004. The clause is designed to mitigate the effect of variations in heating season temperatures from historical norms. While SJG records the revenue and income impacts of TAC adjustments as incurred, cash inflows or outflows directly attributable to TAC adjustments generally do not begin until the next clause year. Each TAC year begins October 1 and ends May 31 of the subsequent year.

Recent Regulatory Actions— See detailed discussions concerning Recent Regulatory Actions in Note 7 to the condensed consolidated financial statements.

Environmental Remediation— SJI incurred and recorded costs for environmental cleanup of 12 sites where SJG or its predecessors operated manufactured gas plants (MGP). SJG stopped manufacturing gas in the 1950s. SJI and some of its nonutility subsidiaries also recorded costs for environmental cleanup of sites where we previously operated a fuel oil business and also where we maintained equipment, fueling stations and storage. We successfully entered into settlements with all of SJG’s historic comprehensive general liability carriers regarding environmental remediation expenditures at former MGP sites. As part of these settlements, SJG purchased an insurance policy that caps its remediation expenditures at 11 of these sites. The insurance policy is in force until 2024 at 10 sites and until 2029 at one site. The policy is limited to an aggregate payment amount of $50 million, of which SJG has recovered $7.5 million as of September 30, 2005.

We believe that all costs incurred net of insurance recoveries relating to SJG’s MGP sites will be recovered through rates under SJG’s Remediation Adjustment Clause (RAC). The RAC currently permits SJG to recover incurred costs in equal installments over 7-year periods with carrying costs. As of September 30, 2005, SJG has $7.4 million of remediation costs not yet recovered through rates.

SJI-33

Other matters are discussed in Note 11 to the condensed consolidated financial statements included as part of this report.

Customer Choice — All residential natural gas customers in New Jersey can choose their gas supplier under the terms of the Electric Discount and Energy Competition Act of 1999. Customers purchasing natural gas from providers other than SJG are charged for gas costs by the marketer, not SJG. While customer choice can affect utility revenues and gas costs, it does not affect SJG’s net income or financial condition. 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. More recently, marketers have found it increasingly difficult to compete with the utility under changing market conditions, see caption Operating Revenues - Utility. As these difficult market conditions continue, SJE responded by returning all of their approximately 69,000 residential gas customers to the utility at the end of the third quarter. SJE expects to market a new residential offer that is more reflective of current market conditions at a later date.

Results of Operations

Operating Revenues— Utility— Revenues, net of intercompany transactions, increased $17.6 million and $45.1 million for the three and nine month periods ended September 30, 2005, respectively, compared with the same periods last year primarily due to four factors. First, SJG added nearly 9,100 customers during the 12-month period ended September 30, 2005, which represents a 2.9% increase in total customers. Second, 88% of the residential customers and 65% of the commercial customers purchasing their gas from a source other than SJG migrated back to utility sales service. The total number of transportation customers decreased from 108,453 at September 30, 2004, to 14,263 at September 30, 2005 as third party marketers are finding it difficult to compete with the utility’s BGSS rates under current market conditions. The majority of this migration occurred during the third quarter of 2005 as the number of transportation customers totaled 84,768 at June 30, 2005. The migration of customers from transportation service back to sales service has a direct impact on utility revenues as charges for gas costs are included in sales revenues and not in transportation revenues. However, since gas costs are passed on directly to customers without any profit margin added by SJG, the change in customer utilization of gas marketers did not impact SJG’s profitability.

Third, SJG experienced an increase in revenues from Off-System Sales (OSS) as a direct result of the higher per unit cost of natural gas. This was coupled with an increase in capacity release activity in 2005. Capacity release allows SJG to sell any unused capacity, but the revenues from such activities are much lower than those from OSS since no commodity is included in the sale.

SJI-34

Finally, sales to an electric generation customer increased substantially as it experienced a high demand for electric during an unusually hot summer season in 2005. Partially offsetting the positive factors noted above, were lower customer utilization rates experienced during 2005 compared with the same periods in 2004, the transfer of the appliance service business from the utility, and the impact of the July 2004 rate case settlement on year-to-date revenues (refer to the table that follows). This settlement increased SJG’s base rates but, at the same time, reduced rates in several clauses that were no longer needed to recover costs. SJG was either no longer incurring or had already recovered the specific costs that these clauses were designed to recover. Since revenues raised under these clauses were for cost recovery only and had no profit margin built in, their elimination has no impact on SJG’s net income.

The base rate increase discussed above and in greater detail in Note 7 to the condensed consolidated financial statements, had the impact of increasing utility margins (revenues less gas costs and associated energy taxes) by approximately $6.3 million during the nine months ended September 30, 2005 compared with the same period last year.

Total gas throughput increased 43.1% to 37.8 billion cubic feet (Bcf) for the three months ended September 30, 2005 compared with the same period in 2004. For the nine months ended, gas throughput increased 23.5% to 119.7 Bcf. The higher throughput was primarily due to a significant increase in capacity release activity during 2005. While revenues from such activities are not as high as when we sell the commodity, contributions to margins are still comparable.

The following is a comparison of utility operating revenue and throughput for the three and nine months ended September 30:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
		2005			2004			2005		2004
Operating Revenues (thousands):
Firm
Residential	$	22,307		$	23,052		$	148,724	$	122,160
Commercial		10,325			7,331			55,440		36,311
Industrial		1,279			787			3,383		3,819
Cogeneration & Electric Generation		10,901			5,503			16,040		7,926
Firm Transportation		8,258			10,921			45,335		57,331
Total Firm Operating Revenues		53,070			47,594			268,922		227,547
Interruptible		340			421			1,179		1,178
Interruptible Transportation		361			369			1,476		933
Off-System		32,909			20,934			108,148		107,310
Capacity Release & Storage		2,608			2,184			9,214		6,848
Appliance Service		-			1,451			-		6,360
Other		414			527			1,383		1,534
Intercompany Sales		(649	)		(2,046	)		4,342		(10,841	)
Total Operating Revenues	$	89,053		$	71,434		$	385,980	$	340,869

SJI-35

Throughput (MMcf):
Firm
Residential	1,176	1,051	11,767	10,340
Commercial	699	429	4,959	3,447
Industrial	12	15	138	131
Cogeneration & Electric Generation	1,114	701	1,601	944
Firm Transportation	5,304	5,794	21,457	24,568
Total Firm Throughput	8,305	7,990	39,922	39,430
Interruptible	16	40	95	128
Interruptible Transportation	523	581	2,119	1,746
Off-System	3,463	3,349	13,593	15,971
Capacity Release & Storage	25,512	14,462	64,016	39,657
Total Throughput	37,819	26,422	119,745	96,932

Operating Revenues — Nonutility— Revenues on a combined basis for SJI’s nonutility businesses, net of intercompany transactions, increased by $9.9million and $20.9 million for the third quarter and first nine months of 2005, respectively, compared with the same periods of 2004.

SJESP’s revenues increased $2.0 million and $8.0 million for the quarter and nine months ended September 30, 2005, respectively, compared with the same periods of 2004. Of these increases, $1.2 million and $5.4 million relate to the operations of the appliance service business that was formerly within SJG for the quarter and nine months ended September 30, 2004, respectively. SJESP continues to add service contract and installation customers. As of September 30, 2005, SJESP had 77,291 service customers compared to 75,355 as of September 30, 2004.

SJRG’s revenues increased by $3.6 million and $9.2 million for the quarter and nine months ended September 30, 2005 compared with the same periods of 2004 due mainly to sales volume growth, highlighted by additional storage capacity, and higher gas prices. For the first nine months of 2005, sales volumes grew by 14% to 62.5 million decatherms compared to 54.8 million decatherms for the first nine months of 2004 due primarily to volumes sold pursuant to our contract with a large customer.

SJE’s revenues from retail gas increased by $2.6 million for the quarter ended September 30, 2005 compared with the quarter ended September 30, 2004 due mainly to higher gas commodity prices. Revenues from retail gas decreased by $3.8 million for the nine months ended September 30, 2005 compared with the nine months ended September 30, 2004 due mainly to a decrease in the number of residential and commercial gas customers resulting from unfavorable market conditions experienced over the preceding twelve months. The market price for gas has been above the price charged by SJG to its customers, causing SJE to currently suspend its gas marketing efforts.

SJI-36

SJE’s revenues from retail electricity decreased by $0.3 million for the quarter ended September 30, 2005 compared to 2004 due mainly to the large school board bid not being renewed in May 2005. Revenues increased by $7.1 million for the nine months ended September 30, 2005, respectively, compared with the same period of 2004 due mainly to higher electric commodity prices and the addition of several industrial customers.

Marina’s revenues increased by $3.1 million and $2.5 million for the quarter and nine months ended September 30, 2005, respectively, compared with prior year periods due mainly to increased revenues from the Seneca and ACLE projects which began in 2005. Revenues from the thermal plant increased in the third quarter of 2005 compared to 2004 as sales of chilled water increased due to warmer weather experienced in 2005.

Cost of Sales — Utility— Cost of sales, net of intercompany transactions, increased $18.3 million and $38.7 million for the three and nine month periods ended September 30, 2005 compared with the same periods in 2004 due to the increase in SJG’s total customer base, the impact of the migration of customers from transportation service back to sales service, and increased Off-System Sales volume and Electric Generation Sales volume as discussed in detail under Operating Revenues - Utility. While changes in gas costs associated with OSS directly impact cost of sales, changes in the unit cost of gas sold to utility ratepayers do not always directly affect cost of sales. SJG defers fluctuations in gas costs to ratepayers not reflected in current rates to future periods under a BPU-approved Basic Gas Supply Service (BGSS) price structure. Finally, cost of sales experienced a partially offsetting decrease from the transfer of the appliance service business out of the utility effective September 1, 2004. Cost of sales related to the appliance service business are included in the results of SJG through September 1, 2004. Such costs totaled $0.3 million and $1.8 million for the three and nine months ended September 30, 2004, respectively.

Gas supply sources include contract and open-market purchases. SJG secures and maintains its own gas supplies to serve its sales customers. We do not anticipate any difficulty renewing or replacing expiring contracts under substantially similar terms and conditions.

Cost of Sales — Nonutility— Cost of sales, on a combined basis for SJI’s nonutility businesses net of intercompany transactions, increased $4.7 million and $8.0 million for the quarter and nine months ended September 30, 2005, respectively, compared with the same periods of 2004.

SJESP’s cost of sales increased $0.6 million and $2.3 million for the quarter and nine months ended September 30, 2005 compared to prior year periods due mainly to the operation of the appliance service business that was formerly within SJG for the quarter and nine months ended September 30, 2004, respectively. Of these increases, $0.3 million and $1.8 million relate to operations within SJG, with the balance attributable to customer growth.

SJRG’s cost of sales increased $1.8 million and $3.4 million for the quarter and nine months ended September 30, 2005 compared to prior year periods due mainly to sales volume growth and higher gas prices.

SJI-37

SJE’s cost of retail gas sales increased by $2.7 million for the quarter ended September 30, 2005 compared to 2004 due mainly to higher gas commodity prices. Costs of retail gas decreased by $2.7 million for the nine months ended September 30, 2005 compared to 2004 due mainly to the loss of residential and commercial customers. This decrease was partially offset by higher gas commodity prices.

SJE’s cost of retail electricity sales remained relatively flat for comparative quarters and increased by $6.3 million for the nine months ended September 30, 2005 compared to the same period in 2004 due mainly to higher electric commodity prices.

Marina’s cost of sales increased marginally for the quarter and nine months ended September 30, 2005 compared to the same periods of 2004 due mainly to costs related to the Seneca and ACLE projects which began in 2005 and higher energy costs related to additional sales volumes in the third quarter of 2005.

Operations Expense— A summary of (decreases) increases in operations expense, net of intercompany transactions, for the three and nine months ended September 30, 2005 follows (in thousands):

	Three Months Ended September 30,			Nine Months Ended September 30,
		2005 vs. 2004			2005 vs. 2004
Utility	$	(1,667	)	$	(1,307	)
Nonutility:
Wholesale Gas		21			37
Retail Gas and Other		264			1,304
On-Site Energy Production		120			280
Appliance Service		622			2,735
Total Nonutility		1,027			4,356
Corporate		242			643
Total Operations	$	(398	)	$	3,692

Utility Operations expense decreased $1.7 million during the third quarter of 2005 compared to the same period in 2004 primarily as a result of the transfer of the appliance service business on September 1, 2004. Operating expenses in the third quarter of 2004 included $0.9 million directly related to the appliance service business. SJG also experienced higher healthcare costs in the third quarter of 2004 resulting in a $0.2 million increase to expense last year. Finally, a cyclical decrease in accrued vacation reduced expenses by an additional $0.4 million during the quarter.

SJI-38

For the nine months ended September 30, 2004, appliance service related operating expenses totaled $3.5 million. A corresponding decrease in operations expense from the absence of such costs in 2005 is not evident in the table above due to several offsetting increases in 2005. This includes a $0.3 million increase in uncollectible expense relating to an increase in the company’s reserve for uncollectibles to address higher balances in accounts receivable. Higher payroll and collection agency costs were also experienced in the customer service function. Expenses related to SJG’s mandatory involvement in the New Jersey Clean Energy Program increased by $0.3 million to comply with the new State spending requirement (See Contractual Obligations table in Note 11). As the BPU allows for full recovery of these costs through the Societal Benefits Clause, the increase in expense is offset by an increase in revenues and has no impact on SJG’s net income. Transmission and distribution expenses also increased approximately $0.4 million as a result of a shift in work from capital-related projects to expense-related projects. Finally, administrative and general expense increased during the nine months ended September 30, 2005 as a result of increased regulatory expenses resulting from amortizations approved in the July 2004 rate case settlement; a $0.7 million increase in accrued compensation tied to corporate performance; and a 2004 reduction of SJG’s reserve for outstanding claims in the amount of $0.4 million following a period of favorable claims settlements. It should be noted that the amortizations of approximately $0.4 million resulting from the rate case settlement were included in rate recovery from its customers and had no impact on net income.

Nonutility Retail Gas and Other Operations expenses increased for the three and nine months ended September 30, 2005 compared with the same periods of 2004 due mainly to a significant uncollectible reserve adjustment following a bankruptcy declaration by one of SJE’s industrial gas customers. Appliance Service Operations expenses increased as the business became fully independent from SJG in September 2004.

Other Operating Expenses— A summary of principal changes in other consolidated operating expenses for the three and nine months ended September 30 follows (in thousands):

	Three Months Ended September 30,			Nine Months Ended September 30,
		2005 vs. 2004			2005 vs. 2004
Maintenance	$	(9	)	$	211
Depreciation		299			(1,216	)
Energy and Other Taxes		(39	)		276

Depreciation increased for the three months ended September 30, 2005 compared with the same period of 2004 due mainly to SJG’s investment in plant. Depreciation decreased for the nine months ended September 30, 2005 compared with the nine months ended September 30, 2004 due mainly to a reduction in SJG’s depreciation expense resulting from lower depreciation rates approved by the BPU as part of its recent rate case settlement. SJG’s composite depreciation rate was reduced from 2.9% to 2.4% effective July 2004.

SJI-39

The increase in Energy and Other Taxes for the nine months ended September 30, 2005 compared with the nine months ended September 30, 2004 relates primarily to increases in taxable volumes of gas sold and transported by SJG and higher revenue-based taxes as reflected under the caption, “Operating Revenues — Utility.”

Other Income and Expense - Other income and expense was higher for the nine months ended September 30, 2004 compared with 2005 due to a pre-tax gain of $686,000 on SJG’s post-retirement healthcare plan trust. The movement of plan assets to a new investment manager triggered the recognition of gains on investments in 2004.

Interest Charges— Interest charges increased for the three and nine months ended September 30, 2005 compared to the same periods of 2004 primarily due to higher average interest rates on short-term bank debt and higher levels of long-term fixed rate debt. The impact of these factors was partially mitigated by lower interest rates on long-term debt and lower levels of short-term bank debt outstanding during the first nine months of 2005.

Debt is incurred primarily to expand and upgrade SJG’s gas transmission and distribution system, to support seasonal working capital needs related to inventories and customer receivables, and to develop energy projects.

Discontinued Operations— The losses are primarily comprised of environmental remediation and product liability litigation associated with previously disposed businesses.

Net Income— Net income increased $2.2 million to $2.5 million for the quarter ended September 30, 2005 as compared with $0.3 million for the quarter ended September 30, 2004. Net income increased $8.3 million, or 29.1%, to $36.9 million for the nine months ended September 30, 2005 as compared with $28.4 million for the nine months ended September 30, 2004. We discuss the reasons for the increases in net income in detail above.

Liquidity and Capital Resources — Liquidity needs at SJI 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; working capital needs of our energy trading and marketing activities; the timing of construction and remediation expenditures and related permanent financings; mandated tax payment dates; and both discretionary and required repayments of long-term debt.

Liquidity needs are first met with net cash provided by operating activities. 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, inventory utilization and gas cost recoveries.

SJI-40

In addition to annual fluctuations, SJI’s operations are also subject to seasonal fluctuations. Significant changes in the balances of current assets and current liabilities can occur from the end of one reporting period to another as evidenced by the changes on the condensed consolidated balance sheets. Cash inflows generally increase during the first and second quarters as a result of collections on winter season accounts receivable and the increased use of gas in storage to serve customers. Some of this cash is used to pay down short-term notes payable to banks and cover dividend requirements. During the second and third quarters of 2005, SJG refilled its gas storages. Much of this injection activity was purchased on credit and at significantly higher prices than in the prior year. As a result it appears as a cash inflow on the condensed consolidated statement of cash flows for the nine months ended September 30, 2005. SJI also ends each calendar year in a prepaid tax position due to mandatory prepayment requirements on all state taxes. Such prepayments are credited against amounts otherwise due during the first quarter; thus, further improving first quarter liquidity. During the second quarter SJG is required to make its mandatory tax prepayments; thus resulting in a significant use of capital.

Sales during the first quarter historically exceed any other quarter during the year. As a result, accounts receivable is generally at its highest as of March 31 as compared to any other quarter end. Receivable levels typically are considerably lower at the end of the second and third quarters as warmer weather reduces the heating needs of our customers. Unlike billed sales, customer receivables associated with unbilled revenue will track temperatures during the last month of the reporting period. As such, unbilled revenues will generally be highest at the end of the fourth quarter as weather is colder in the month of December compared with March, June, and September.

We use 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, we refinance short-term debt incurred to finance capital expenditures with long-term debt. Bank credit lines available to SJI totaled $266.0 million at September 30, 2005, of which $72.7 million, inclusive of $1.2 million of letters of credit, was used. Those bank facilities consist of a $100.0 million revolving credit facility that expires in August 2006, and $76.0 million of uncommitted bank lines available to SJG; a $60.0 million revolving credit facility that expires in August 2007, and $30.0 million of uncommitted bank lines available to SJI. The revolving credit facilities contain certain financial covenants measured on a quarterly basis. SJI and SJG were in compliance with these covenants as of September 30, 2005. 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 business’ future liquidity needs.

SJI-41

SJI 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 its long-term borrowing needs. These needs are primarily capital expenditures for property, plant and equipment. Under a $150.0 million MTN program established in December 2002, SJG issued $110.0 million of long-term debt in 2003. SJG issued the remaining $40.0 million of notes under the MTN program in August 2004. We used the proceeds of all of the issues to refinance short-term debt outstanding to commercial banks and to redeem certain high interest bearing securities. In July 2005, SJG redeemed $10.0 million of its 7.9% MTN, at par. SJG established a new $150.0 million MTN program that became effective September 8, 2005. On September 13, 2005, SJG issued a $10 million MTN under the new program with a coupon of 5.45% and a maturity of 30 years.

SJI has raised equity capital over the past several years through its Dividend Reinvestment Plan (DRP). Participants in SJI's DRP receive newly issued shares. We offer a 2% discount on DRP investments as it is the most cost-effective way to raise equity capital in the quantities we are seeking. Through the DRP, SJI raised $16.4 million of equity capital by issuing 579,487 shares for the nine months ended September 30, 2005 and $36.2 million of equity capital by issuing 1,232,602 shares for the twelve months ended December 31, 2004. We anticipate raising sufficient equity capital through the DRP in 2005, to maintain an equity to capitalization ratio close to 50%.

On March 3, 2005, the Board of Directors authorized an amendment to SJI’s Certificate of Incorporation to increase the authorized number of shares of Common Stock from 20,000,000 shares to 60,000,000 shares. This authorization was approved by a vote of SJI’s shareholders at our annual meeting of shareholders held on April 21, 2005. The principal purpose of the increase was to permit a two-for-one split of all the issued shares of SJI’s Common Stock, which was completed on June 30, 2005.

SJI’s capital structure, excluding an immaterial amount of preferred stock outstanding at the end of 2004, was as follows:

	September 30, 2005	December 31, 2004
Common Equity	48%	45%
Long-Term Debt	42%	42%
Short-Term Debt	10%	13%
Total	100%	100%

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.

SJI-42

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 $289.0 million. SJG’s total common equity balance was $314.6million at September 30, 2005.

Capital Expenditures, Commitments and Contingencies

Capital Expenditures— SJI has a continuing need for cash resources and capital, primarily to invest in new and replacement facilities and equipment and for environmental remediation costs. Net cash outflows for construction and remediation projects for the nine months ended September 30, 2005 amounted to $72.9 million and $2.1 million, respectively. We estimate net cash outflows for the remainder of 2005 to be $23.7 million. We estimate the net cash outflows for 2006 and 2007 to be approximately $58.3 million and $49.6 million, respectively. Included in these estimates are two large special projects totaling $12.1 million for SJG pipeline installation, of which $6.3 million and $5.8 million is expected to be paid in 2005 and 2006, respectively.

Commitments and Contingencies— SJI is obligated on the letters of credit supporting the Variable Rate Demand Bonds issued through the New Jersey Economic Development Authority by Marina. A syndicate of four commercial banks has issued $46.0 million of letters of credit to provide credit support for those bonds, the proceeds of which were used for the development of Marina’s thermal plant project. The letter of credit agreement contains certain financial covenants measured on a quarterly basis. SJI was in compliance with these covenants as of September 30, 2005.

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, 2005 average $47.4 million annually and total $251.6 million over the contracts’ lives. Approximately 53% of the financial commitment under these contracts expires during the next five years. We expect 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.

Also, as of September 30, 2005, SJI has issued four letters of credit totaling $1.2 million. Two of these letters were posted to different utilities to enable SJE to market retail electricity within the respective utilities’ service territories. The remaining letters were related to the construction activity of AC Landfill Energy, LLC and WC Landfill Energy, LLC.

Contractual Cash Obligations — The following table summarizes our contractual cash obligations and their applicable payment due dates as of September 30, 2005 (in thousands):

SJI-43

	Total		Up to 1 Year		Years 2 & 3		Years 4 & 5		More than 5 Years
Contractual Obligations
Long-Term Debt	$	321,452	$	2,348	$	2,464	$	10,220	$	306,420
Interest on Long-Term Debt		280,286		18,191		37,631		37,417		187,047
Operating Leases		901		204		521		160		16
Construction Obligations		23,523		23,461		62		-		-
Commodity Supply Purchase Obligations		398,209		133,379		31,314		114,978		118,538
New Jersey Clean Energy Program (Note 7)		21,394		4,994		14,400		2,000		-
Other Purchase Obligations		4,831		1,779		1,927		1,125		-
Total Contractual Cash Obligations	$	1,050,596	$	184,356	$	88,319	$	165,900	$	612,021

Expected environmental remediation costs are not included in the table above due to the subjective nature of such costs and the timing of anticipated payments. SJG’s regulatory obligation to contribute $3.6 million annually to its postretirement benefit plans other than pensions, less costs incurred directly by the company, is not included as the duration is indefinite. As a result, the total obligation cannot be calculated. As discussed in Note 8 - Contributions, SJI expects to make a pension contribution ranging from $0.3 to $2.8 million depending on changes in investment performance and the discount rate for the year in 2005. Furthermore, future pension contributions beyond 2005 cannot be determined at this time.

Off-Balance Sheet Arrangements— SJI has no off-balance sheet financing arrangements.

Parental Guarantees— As of September 30, 2005, SJI had issued $233.9 million of parental guarantees on behalf of its subsidiaries. Of this total, $163.0 million expire within one year, $14.0 million expire between one and two years and $56.9 million have no expiration date. The vast majority of these guarantees were issued as guarantees of payment to third parties with whom our subsidiaries have commodity supply contracts. These contracts contain netting provisions which permit us to net the ultimate cash payment for monthly buys and sells from/to counterparties. As of September 30, 2005, these guarantees support future firm commitments and $46.5 million of the Accounts Payable recorded on our condensed consolidated balance sheet. As part of our risk management policy, we also require parental guarantees from trading counterparties as we deem necessary. These arrangements are typical in our industry. Included in the above are five parental guarantees totaling $27.2 million related to Marina’s construction and operating activities.

Pending Litigation— SJI is 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 likely settlement costs for those claims. SJI has been named in, among other actions, certain product liability claims related to our former sand mining subsidiary. Management does not currently anticipate the disposition of any known claims to have a material adverse effect on SJI’s financial position, results of operations or liquidity.

SJI-44

Item 3. Quantitative and Qualitative Disclosures About Market

Risks of the Company (Unaudited)

Commodity Market Risks— Certain regulated and unregulated SJI subsidiaries are involved in buying, selling, transporting and storing natural gas and buying and selling retail electricity for their own accounts as well as managing these activities for others. These subsidiaries 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, swaps, futures and options agreements. To manage these transactions, SJI has 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.

SJG and SJE transact commodities on a physical basis and typically do not enter into financial derivative positions directly. SJRG manages risk for these entities as well as for its own portfolio by entering into the types of transactions noted above. As part of its gas purchasing strategy, SJG occasionally uses financial contracts to hedge against forward price risk. These contracts are recoverable through SJG’s 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 financial impact to SJRG of changes in value of a particular transaction is substantially offset by an opposite change in the related hedge transaction. As of September 30, 2005, SJRG had $42.9 million of Accounts Receivable under sales contracts. Of that total, 62% were with companies rated investment-grade, were guaranteed by an investment-grade-rated parent or were with companies where we have a collateral arrangement. The remainder of the accounts receivable were within approved credit limits.

SJRG and SJE entered into certain contracts to purchase, sell, and transport natural gas. For those derivatives not designated as hedges, we recorded the net unrealized pre-tax loss of $(3.5) million and $(1.4) million in earnings during the three months ended September 30, 2005 and 2004, respectively, which are included with realized gains and losses in Operating Revenues — Nonutility. For the nine months ended September 30, 2005 and 2004, we recorded the net unrealized pre-tax loss of $(1.4) and $(1.9) million, respectively. SJRG's and SJE's contracts are typically less than 12 months long. SJE entered into two longer-term gas supply contracts with two of its larger customers. These contracts were reviewed and approved by SJI’s Risk Management Committee after being satisfied that our exposure to price and credit risk had been sufficiently mitigated. The fair value and maturity of all these energy trading and hedging contracts determined under the mark-to-market method as of September 30, 2005 is as follows (in thousands):

SJI-45

Assets		Maturity < 1 Year		Maturity 1 - 3 Years		Beyond 3 Years		Total
Source of Fair Value
Prices Actively Quoted	NYMEX:
Trading		$	8,773	$	3,672	$	958	$	13,403
Hedging			17,008		287		-		17,295
Subtotal			25,781		3,959		958		30,698
Other External Sources	Basis:
Trading			12,144		563		56		12,763
Hedging			1,442		-		-		1,442
Subtotal			13,586		563		56		14,205
Total		$	39,367	$	4,522	$	1,014	$	44,903
Liabilities			Maturity < 1 Year		Maturity 1 - 3 Years		Beyond 3 Years		Total
Source of Fair Value
Prices Actively Quoted	NYMEX:
Trading		$	1,761	$	2,902	$	937	$	5,600
Hedging			28,687		142		-		28,829
Subtotal			30,448		3,044		937		34,429
Other External Sources	Basis:
Trading			10,328		1,309		72		11,709
Hedging			244		-		-		244
Subtotal			10,572		1,309		72		11,953
Total		$	41,020	$	4,353	$	1,009	$	46,382

NYMEX (New York Mercantile Exchange) is the primary national commodities exchange on which natural gas is traded. Basis represents the price of a NYMEX natural gas futures contract adjusted for the difference in price for delivering the gas at another location. Contracted volumes of our NYMEX and Basis Contracts are 3.9 bcf with a weighted average settlement price of $4.58 per Mmbtu.

A reconciliation of SJI's estimated net fair value of energy-related derivatives, including hedging contracts, follows (in thousands):

Net Derivatives - Energy Related Assets, January 1, 2005	$	9,710
Contracts Settled During Nine Months Ended September 30, 2005, Net		(6,535	)
Other Changes in Fair Value from Continuing and New Contracts, Net		(4,654	)
Net Derivatives — Energy Related Liabilities, September 30, 2005	$	(1,479	)

SJI-46

Interest Rate Risk— Our exposure to interest-rate risk relates primarily to short-term, variable rate borrowings. Short-term, variable rate debt outstanding at September30, 2005 was $71.5 million and averaged $51.7 million during the first nine months of 2005. A hypothetical 100 basis point (1%) increase in interest rates on our average variable rate debt outstanding would result in a $305,000 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: 2004 — 115 b.p. increase; 2003 — 28 b.p. decrease; 2002 — 74 b.p. decrease; 2001 — 383 b.p. decrease; and 2000 — 83 b.p. increase. For September 2005, our average interest rate on variable rate debt was 4.25%

SJG primarily issues long-term debt at fixed rates and, consequently, interest expense on existing debt is not significantly impacted by changes in market interest rates. In November 2004, SJG entered into a derivative transaction known as a “Treasury Lock” to hedge against the impact of possible interest rate increases on a $10.0 million, 30-year debt issuance by SJG planned for July 2005. SJG terminated that Treasury Lock on its July 15, 2005 expiration date at a cost of $1.2 million. In August, 2005 SJG entered into a new Treasury Lock in anticipation of the debt issuance and terminated it on September 13, 2005 at a cost of $0.2 million. SJG issued a $10.0 million MTN with a thirty-year maturity on that same day. Because SJG issued the debt within two months of the termination of both Treasury Locks, SJG deferred the costs of the Treasury Locks and will amortize them over the life of that debt.

On October 21, 2005, SJG entered into two forward-starting interest rate swaps which effectively fixed the interest rate at 3.43% for 30 years on $25 million of tax-exempt debt which is expected to be issued in early 2006. The debt will be used to provide long-term financing for capital improvements made to SJG’s gas transmission and distribution system serving Atlantic and Cape May Counties in southern New Jersey.

The only other long-term debt outstanding, exclusive of that issued by the utility, consists of long-term bank loans used to finance the construction of a landfill gas cogeneration project and the New Jersey Economic Development Authority bonds used to finance the construction of Marina’s thermal energy plant. The long-term debt for the landfill gas cogeneration project totaled $2.0 million and amortizes over 15 years at fixed rates. The bonds for the thermal plant were issued at floating rates that reset weekly. Subsequent to issuance, we entered into interest rate swap contracts that, as of September 30, 2005, effectively fixed the rate on $20.0 million of tax-exempt debt and $24.8 million of taxable rate debt. In June 2005, we entered into three forward starting swaps which effectively fixed the interest rate at 3.895% on $15.3 million of tax-exempt debt which is expected to be issued in early 2006. These swaps were entered into in anticipation of Marina’s financing needs related to an expansion of the thermal plant to serve the Borgota Casino Hotel & Spa’s expansion. Details on SJI’s active interest rate swaps are as follows:

SJI-47

Amount	Interest Rate		Start Date		Maturity		Type		Amortization
$           3,900,000		4.615%		4/1/2002		12/1/2005		Taxable		Non
9,000,000		4.550%		11/19/2001		12/1/2007		Taxable		Yes *
3,900,000		4.795%		12/1/2004		12/1/2014		Taxable		No
8,000,000		4.775%		11/12/2004		11/12/2014		Taxable		No
20,000,000		4.080%		11/19/2001		12/1/2011		Tax-exempt		No
14,500,000		3.895%		1/17/2006		1/15/2026		Tax-exempt		No
500,000		3.895%		1/17/2006		1/15/2026		Tax-exempt		No
330,000		3.895%		1/17/2006		1/15/2026		Tax-exempt		No
12,500,000		3.430%		12/1/2006		2/1/2036		Tax-exempt		No **
12,500,000		3.430%		12/1/2006		2/1/2036		Tax-exempt		No **

* Amount reduces to $6mm on 12/1/05, and further reduces to $3mm on 12/1/06.

** Entered into during October 2005.

Item 4. Controls and Procedures

SJI management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion.

No change in SJI’s internal control over financial reporting occurred during SJI’s third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

SJI-48

PART II — OTHER INFORMATION

Item l. Legal Proceedings

Information required by this Item is incorporated by reference to Part I, Item 1, Note 11, beginning on page 26.

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).

SJI-49

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 INDUSTRIES, INC.

(Registrant)

Dated: November 9, 2005	By: /s/ Edward J. Graham
	Edward J. Graham
	Chairman, President & Chief Executive Officer
Dated: November 9, 2005	By: /s/ David A. Kindlick
	David A. Kindlick
	Vice President & Chief Financial Officer

SJI-50