REGULATION

NJNG is subject to cost-based regulation, therefore, it is permitted to recover authorized operating expenses and earn a reasonable return on its utility investment based on the BPU's approval, in accordance with accounting guidance applicable to regulated operations. Accordingly, NJNG capitalizes or defers certain costs that are expected to be recovered from its customers as regulatory assets and recognizes certain obligations representing amounts that are probable future expenditures as regulatory liabilities.

Regulatory assets and liabilities included on the Unaudited Condensed Consolidated Balance Sheets are comprised of the following:



(Thousands)	June 30, 2012		September 30, 2011
Regulatory assets-current
Conservation Incentive Program	$	26,240	$	9,178
Underrecovered gas costs	8,772		—
Derivatives, net	17,928		8,452
Total current	$	52,940	$	17,630
Regulatory assets-noncurrent
Environmental remediation costs
Expended, net of recoveries	$	59,683	$	75,646
Liability for future expenditures	182,900		182,900
Deferred income taxes	11,574		10,879
Energy Efficiency Program	21,944		11,906
New Jersey Clean Energy Program	7,434		20,144
Postemployment and other benefit costs	118,456		123,827
Other	9,537		8,883
Total noncurrent	$	411,528	$	434,185
Regulatory liability-current
Overrecovered gas costs	$	—	$	4,633
Total current	$	—	$	4,633
Regulatory liabilities-noncurrent
Cost of removal obligation	$	66,007	$	59,752
Other	93		85
Total noncurrent	$	66,100	$	59,837

NJNG's recovery of costs is facilitated through its base tariff rates, Basic Gas Supply Service (BGSS) and other regulatory riders. As recovery of regulatory assets is subject to BPU approval, if there are any changes in regulatory positions that indicate recovery is not probable, the related cost would be charged to income in the period of such determination.

Recent regulatory filings and/or actions include the following:

•

On November 17, 2011, NJNG notified the BPU that it would provide bill credits to NJNG's residential and small commercial customers during December 2011 and January 2012, as a result of the decline in the wholesale prices of natural gas and a change in the methodology used to develop estimates of unaccounted-for gas. On January 25, 2012 and March 9, 2012, NJNG notified the BPU that it would extend bill credits through February 2012 and March 2012, respectively. In total, customers received approximately $90.7 million in credits based on usage during the four-month period.


•	On January 18, 2012, the BPU approved an extension of NJNG's Energy Efficiency program (EE) for one year with an additional $10.4 million of investments in customer incentives and rebates, earning a weighted average cost of capital of 7.1 percent, including a cost of equity of 10.3 percent.

•

On January 18, 2012, the BPU approved NJNG's 2010 Societal Benefits Clause (SBC) filing, in which NJNG requested approval of its manufactured gas plant remediation expenditures incurred through June 30, 2009, which maintained the expected annual recovery at approximately $20 million. In February 2012, NJNG filed its 2011 SBC filing, requesting approval of its MGP expenditures incurred through June 30, 2011, which would continue its existing overall SBC rate and recovery.


•	On March 9, 2012, NJNG notified the BPU of a decrease to its BGSS rate, effective April 1, 2012, which will have an annual impact of approximately $19 million.

•

On March 20, 2012, NJNG filed a petition with the BPU seeking to implement a Safety Acceleration and Facility Enhancement (SAFE) program, whereby NJNG would invest up to $204 million over a five-year period to replace portions of NJNG's gas distribution unprotected steel and cast iron infrastructure. If approved as filed, commencing in 2013, NJNG would file a petition with the BPU annually in June to recover the costs associated with its investment in SAFE over a five-year period, earning an overall weighted average cost of capital of 7.76 percent, including a cost of equity of 10.3 percent.

•

On June 1, 2012, NJNG submitted its annual BGSS and CIP filings to the Board of Public Utilities. NJNG sought approval to maintain its current BGSS rate, decrease the CIP rate for residential non-heating customers and increase the CIP rates for residential heating and commercial customers, effective October 1, 2012. Pending BPU approval, an average residential heating customer bill would increase by 2.4 percent.

•

On June 18, 2012, the BPU approved a pilot program for NJNG to invest up to $10 million to build compressed natural gas vehicle refueling stations in Monmouth, Ocean and Morris counties. NJNG intends to begin construction of the stations within one year and submit a cost recovery filing to the BPU in the spring of 2013, requesting a base rate change to be effective in the summer of 2013, earning an overall weighted average cost of capital of 7.1 percent, including a cost of equity of 10.3 percent. A portion of the proceeds from the utilization of the CNG equipment, along with any available federal and state incentives, will be credited back to ratepayers to help offset the cost of this investment.

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On July 9, 2012, NJNG filed two petitions with the BPU related to The SAVEGREEN Project^® (SAVEGREEN) energy-efficiency programs. The petitions include the 2012 rate filing which represents a reconciliation of BPU approved actual costs for energy-efficiency programs and a petition related to the extension of NJNG's energy-efficiency programs over a four-year program, with modifications to include certain new programs. The Company's petition requests a BPU decision in early 2013. The rate impact will incorporate the existing Savegreen programs and the extension of the new Savegreen programs over four years.