e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006


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

FOR THE TRANSITION PERIOD FROM TO

Commission file number 1-8359

NEW JERSEY RESOURCES CORPORATION

(Exact name of registrant as specified in its charter)


New Jersey		22-2376465
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

1415 Wyckoff Road, Wall, New Jersey — 07719		732-938-1489
(Address of principal		(Registrant’s telephone number,
executive offices)		including area code)

Securities registered pursuant to Section 12 (b) of the Act:


Common Stock — $2.50 Par Value		New York Stock Exchange
(Title of each class)		(Name of each exchange on which registered)

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES: þ No: o

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

Large accelerated filer: þ Accelerated filer: o Non-accelerated filer: o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES: o No: þ

The number of shares outstanding of $2.50 par value Common Stock as of May 1, 2006 was 28,027,020.

TABLE OF CONTENTS


PART I-FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIX MONTHS ENDED MARCH 31, 2006
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 6. EXHIBITS
SIGNATURES
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements contained in this report, including, without limitation, statements as to management expectations and beliefs presented in Part 1, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part I, Item 3. “Quantative and Qualitative Disclosures about Market Risk,” Part II, Item 1. “Legal Proceedings” and in the notes to the financial statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can also be identified by the use of forward-looking terminology such as “may,” “intend,” “expect,” “believe” or “continue” or comparable terminology and are made based upon management’s expectations and beliefs concerning future developments and their potential effect upon New Jersey Resources (NJR or the Company). There can be no assurance that future developments will be in accordance with management’s expectations or that the effect of future developments on the Company will be those anticipated by management.

The Company cautions readers that the assumptions that form the basis for forward-looking statements regarding customer growth, customer usage, financial condition, results of operations, cash flows, capital requirements, market risk and other matters for fiscal 2006 and thereafter include many factors that are beyond the Company’s ability to control or estimate precisely, such as estimates of future market conditions, the behavior of other market participants and changes in the debt and equity capital markets. The factors that could cause actual results to differ materially from NJR’s expectations include, but are not limited to, such things as weather, economic conditions and demographic changes in the New Jersey Natural Gas (NJNG) service territory, rate of NJNG customer growth, volatility of natural gas commodity prices, its impact on customer usage and NJR Energy Service’s (NJRES) operations, the impact on the Company’s risk management efforts, including commercial and wholesale credit risks, the impact of regulation (including the regulation of rates), fluctuations in energy-related commodity prices, conversion activity, other marketing efforts, actual energy usage patterns of NJNG’s customers, the pace of deregulation of retail gas markets, access to adequate supplies of natural gas, the regulatory and pricing policies of federal and state regulatory agencies, changes due to legislation at the federal and state level, an adequate number of appropriate counterparties, sufficient liquidity in the energy trading market and continued access to the capital markets, the disallowance of recovery of environmental-related expenditures and other regulatory changes, environmental and other litigation and other uncertainties.

While the Company periodically reassesses material trends and uncertainties affecting the Company’s results of operations and financial condition in connection with its preparation of management’s discussion and analysis of results of operations and financial condition contained in its Quarterly and Annual Reports, the Company does not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events.

PART I-FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Three Months Ended				Six Months Ended
	March 31,				March 31,
(Thousands, except per share data)	2006		2005		2006		2005

OPERATING REVENUES	$	1,064,422	$	1,065,057	$	2,228,998	$	1,919,045


OPERATING EXPENSES
Gas purchases		882,688		902,924		1,921,163		1,641,350
Operation and maintenance		29,772		24,873		57,503		53,536
Regulatory rider expenses		12,405		14,786		21,863		23,914
Depreciation and amortization		8,612		8,352		17,188		16,711
Energy and other taxes		26,003		25,827		44,670		41,611

Total operating expenses		959,480		976,762		2,062,387		1,777,122

OPERATING INCOME		104,942		88,295		166,611		141,923
Other income and expense		620		1,480		2,262		3,164
Interest charges, net		6,173		4,721		12,656		10,071

INCOME BEFORE INCOME TAXES		99,389		85,054		156,217		135,016
Income tax provision		39,188		33,389		61,752		53,149

NET INCOME	$	60,201	$	51,665	$	94,465	$	81,867

EARNINGS PER COMMON SHARE
BASIC	$	2.16	$	1.87	$	3.41	$	2.96
DILUTED	$	2.14	$	1.84	$	3.37	$	2.90

DIVIDENDS PER COMMON SHARE	$	.36	$	.34	$	.72	$	.68


AVERAGE SHARES OUTSTANDING
BASIC		27,822		27,581		27,686		27,689
DILUTED		28,145		28,140		28,000		28,236

See Notes to Condensed Unaudited Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


(Thousands)
Six Months Ended March 31,	2006			2005

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	94,465		$	81,867
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH FLOWS
Depreciation and amortization		17,188			16,711
Amortization of deferred charges		152			901
Deferred income taxes		290			(555	)
Manufactured gas plant remediation costs		(16,457	)		(8,862	)
Gain on asset sale		(617	)		(10,096	)
Changes in:
Working capital		(8,833	)		123,147
Other noncurrent assets		25,509			3,456
Other noncurrent liabilities		(9,329	)		6,374

Cash flows from operating activities		102,368			212,943

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock		13,192			8,457
Proceeds from long-term debt		35,800			—
Proceeds from sale-leaseback transaction		4,090			4,904
Purchases of treasury stock		(9,109	)		(23,835	)
Payments of long-term debt		(22,483	)		(26,506	)
Payments of common stock dividends		(19,285	)		(18,487	)
Net payments of short-term debt		(85,600	)		(162,400	)

Cash flows used in financing activities		(83,395	)		(217,867	)

CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for
Utility plant		(21,913	)		(26,190	)
Real estate properties and other		(1,720	)		(303	)
Cost of removal		(2,154	)		(1,947	)
(Investment in)withdrawal from restricted cash construction fund		(12,500	)		6,300
Proceeds from asset sale		3,006			30,584

Cash flows (used in) from investing activities		(35,281	)		8,444

Change in cash and temporary investments		(16,308	)		3,520
Cash and temporary investments at September 30,		25,008			5,043

Cash and temporary investments at March 31,	$	8,700		$	8,563

CHANGES IN COMPONENTS OF WORKING CAPITAL
Receivables	$	(134,008	)	$	(252,457	)
Inventories		166			110,812
Underrecovered gas costs		67,315			65,309
Gas purchases payable		(24,190	)		108,703
Prepaid and accrued taxes, net		52,850			52,912
Accounts payable and other		(12,959	)		(8,050	)
Restricted broker margin accounts		57,902			40,981
Other current assets		(7,781	)		6,042
Other current liabilities		(8,128	)		(1,105	)

Total	$	(8,833	)	$	123,147

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for
Interest (net of amounts capitalized)	$	11,341		$	9,750
Income taxes	$	33,487		$	29,694

See Notes to Condensed Unaudited Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS


	March 31			September 30,			March 31,
(Thousands)	2006			2005			2005

PROPERTY, PLANT AND EQUIPMENT
Utility plant, at cost	$	1,215,828		$	1,197,418		$	1,171,479
Real estate properties and other, at cost		23,534			24,340			24,878

		1,239,362			1,221,758			1,196,357
Accumulated depreciation and amortization		(325,365	)		(316,628	)		(302,050	)

Property, plant and equipment, net		913,997			905,130			894,307


CURRENT ASSETS
Cash and temporary investments		8,700			25,008			8,563
Customer accounts receivable		323,241			235,338			383,662
Unbilled revenues		58,003			10,207			26,163
Allowance for doubtful accounts		(6,988	)		(5,297	)		(6,772	)
Regulatory assets		4,892			34,904			1,841
Gas in storage, at average cost		274,286			254,909			163,435
Materials and supplies, at average cost		3,614			3,857			4,139
Prepaid state taxes		—			24,020			—
Derivatives		155,431			359,540			97,826
Other		12,833			10,304			16,750

Total current assets		834,012			952,790			695,607


NONCURRENT ASSETS
Equity investments		27,526			27,649			20,273
Regulatory assets		268,542			231,366			198,225
Derivatives		57,139			70,777			60,885
Restricted cash construction fund		12,500			—			1,500
Other		23,341			22,116			41,421

Total noncurrent assets		389,048			351,908			322,304


Total assets	$	2,137,057		$	2,209,828		$	1,912,218

See Notes to Condensed Unaudited Consolidated Financial Statements

CAPITALIZATION AND LIABILITIES (unaudited)


	March 31,		September 30,		March 31,
(Thousands)	2006		2005		2005

CAPITALIZATION
Common stock equity	$	617,531	$	438,052	$	516,997
Long-term debt		334,459		317,204		318,678

Total capitalization		951,990		755,256		835,675


CURRENT LIABILITIES
Current maturities of long-term debt		3,405		3,253		3,343
Short-term debt		88,500		174,100		97,300
Gas purchases payable		276,796		300,986		319,571
Accounts payable and other		38,479		54,683		36,389
Dividends payable		10,064		9,366		9,333
Accrued taxes		28,966		25,429		38,458
Clean energy program		8,002		6,078		6,457
Regulatory liabilities		30,266		—		—
Derivatives		114,607		377,928		94,413
Restricted broker margin accounts		59,726		1,824		2,721
Customers’ credit balances and deposits		13,540		22,609		12,391

Total current liabilities		672,351		976,256		620,376


NONCURRENT LIABILITIES
Deferred income taxes		202,343		104,809		165,825
Deferred investment tax credits		8,039		8,157		8,318
Deferred revenue		10,552		10,898		11,243
Derivatives		81,645		107,883		47,625
Manufactured gas plant remediation		93,920		93,920		92,880
Clean energy program		13,092		18,612		20,110
Postretirement employee benefit liability		8,119		5,867		13,232
Regulatory liabilities		85,347		118,147		86,499
Other		9,659		10,023		10,435

Total noncurrent liabilities		512,716		478,316		456,167

Total capitalization and liabilities	$	2,137,057	$	2,209,828	$	1,912,218

See Notes to Condensed Unaudited Consolidated Financial Statements

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The September 30, 2005, balance sheet data is derived from the audited financial statements of New Jersey Resources (NJR or the Company). These condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in NJR’s 2005 Annual Report on Form 10-K.

In the opinion of management, the information furnished reflects all adjustments necessary for a fair presentation of the results of the interim periods. Because of the seasonal nature of NJR’s utility and wholesale energy services operations, in addition to other factors, the financial results for the interim periods presented are not indicative of the results to be expected for the entire year.

2. PRINCIPLES OF CONSOLIDATION

The condensed consolidated financial statements include the accounts of NJR and its subsidiaries, New Jersey Natural Gas (NJNG), NJR Energy Services (NJRES), NJR Retail Holdings (Retail Holdings), NJR Capital Services (Capital) and NJR Service. Significant intercompany transactions and accounts have been eliminated.

The Retail and Other segment includes Retail Holdings and its wholly owned subsidiary, NJR Home Services (NJRHS). Retail and Other also includes Capital and its wholly owned subsidiaries, Commercial Realty & Resources (CR&R), NJR Investment and NJR Energy.

3. NEW ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004) “Share-Based Payment” (SFAS 123R). This statement requires companies to record compensation expense for all share-based awards granted subsequent to the adoption of SFAS 123 R. In addition, SFAS 123 R requires the recording of compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In October 2002, the Company adopted the prospective method of SFAS No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123), and as such has recognized compensation expense for grants issued subsequent to October 1, 2002 at the fair value of the options at date of grant. The Company determines the fair value of the options using the Black Scholes method. Unvested awards granted previous to October 1, 2002 that will now be expensed under SFAS 123R are immaterial to the financial statements (See Note 8. Stock-Based Compensation for a reconciliation of the as reported and pro forma net income for the three months and six months ended March 31, 2005 for options granted prior to October 1, 2002, which were accounted for under Accounting Principles Board (APB) Opinion No. 25 “Accounting for Stock Issued to Employees” (APB25)). The Company adopted SFAS 123R effective October 1, 2005, and the adoption did not have a material impact on its financial condition, results of operations or cash flows.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47), which is effective no later than the end of fiscal years ending after December 15, 2005. FIN 47 clarifies the term “conditional asset retirement obligation”, as used in SFAS No. 143, “Accounting for Asset Retirement Obligations” and certain recognition and valuation issues associated with them. Conditional asset retirement obligations refer to a legal obligation to perform an asset retirement activity, in which the timing and/or method of settlement are conditional on a future event that may not be within the control of the entity. The Company is currently evaluating the impact that the adoption of FIN 47 will have on its financial statements.

4. REGULATORY ASSETS AND LIABILITIES

Regulatory assets on the Consolidated Balance Sheets include the following:


	March 31,		September 30,			March 31,
(Thousands)	2006		2005			2005			Recovery Period

Regulatory assets–current
Underrecovered gas costs		—	$	37,049		$	4,196		Less than one year (1)
Weather-normalization clause (WNC)	$	4,892		(2,145	)		(2,355	)	Less than one year (4)

Total	$	4,892	$	34,904		$	1,841


Regulatory assets–noncurrent
Remediation costs (Notes 6 and 14)
Expended, net	$	79,092	$	86,912		$	55,733		(2)
Liability for future expenditures		93,920		93,920			92,880		(3)
Deferred income taxes		12,736		12,901			13,319		Various
Derivatives (Note 10)		49,971		—			—		Through Oct. 2010 (5)
Postretirement benefit costs (Note 12)		2,267		2,418			2,569		Through Sept. 2013 (4)
Societal Benefits Charges (SBC)		30,556		35,215			33,724		Various (6)

Total	$	268,542	$	231,366		$	198,225

(1)		Recoverable, subject to New Jersey Board of Public Utilities (BPU) annual approval, without interest except for $6.4 million recoverable with interest through November 30, 2004.

(2)		Recoverable, subject to BPU approval, with interest over rolling 7-year periods. Also net of estimated future insurance proceeds of $10 million at March 31, 2006 and September 30, 2005 and $20.3 at March 31, 2005.

(3)		Estimated future expenditures. Recovery will be requested when actual expenditures are incurred. (See Note 14. Commitments and Contingent Liabilities.)

(4)		Recoverable/refundable, subject to BPU approval, without interest.

(5)		Recoverable, subject to BPU approval, through Basic Gas Supply Service (BGSS), without interest.

(6)		Recoverable with interest, subject to BPU approval.

If there are any changes in regulatory positions that indicate the recovery of any of the regulatory assets are not probable, the related cost would be charged to income in the period of such determination.

Regulatory liabilities on the Consolidated Balance Sheets include the following:


	March 31,		September 30,		March 31,
(Thousands)	2006		2005		2005

Regulatory liabilities–current
Overrecovered gas costs (1)	$	30,266		—		—

Total	$	30,266		—		—


Regulatory liabilities–noncurrent
Cost of removal obligation (2)	$	79,397	$	77,067	$	77,199
Market development fund (3)		5,950		5,945		5,848
Derivatives		—		35,135		3,452

Total	$	85,347	$	118,147	$	86,499

(1)		If overrecovered on average for the year, NJNG is required to credit interest to the BGSS based on the authorized rate of return. The overrecovered balance is expected to be returned to customers within one year.

(2)		NJNG accrues and collects for cost of removal in rates. This liability represents collections in excess of actual expenditures.

(3)		The Market Development Fund, created with funds available as a result of the implementation of the Energy Tax Reform Act of 1997, currently provides financial incentives to encourage customers to switch to third party suppliers and has supported other unbundling related initiatives. Balance earns interest at prevailing SBC rate.

5. CAPITALIZED AND DEFERRED INTEREST

The Company’s capitalized interest totaled $299,000 and $150,000 for the three months ended March 31, 2006 and 2005, respectively, and $560,000 and $271,000 for the six months ended March 31, 2006 and 2005, respectively, at average interest rates of 4.54 percent, 2.38 percent, 4.22 percent and 2.11 percent, respectively. These amounts are included in Utility plant on the Consolidated Balance Sheets and are reflected on the Consolidated Statements of Income as a reduction to Interest charges, net. NJNG does not capitalize a cost of equity for its utility plant construction activities.

Pursuant to a BPU order, NJNG is permitted to recover carrying costs on uncollected balances related to underrecovered natural gas costs incurred through October 31, 2001, and its manufactured gas plant (MGP) remediation expenditures. (See Note 6. Legal and Regulatory Proceedings.) Accordingly, Other income included $532,000 and $431,000 of interest for the three months ended March 31, 2006 and 2005, respectively, and $1 million and $979,000 for the six months ended March 31, 2006 and 2005, respectively.

6. LEGAL AND REGULATORY PROCEEDINGS

a. Energy Deregulation Legislation

In February 1999, the Electric Discount and Energy Competition Act (EDECA), which provided the framework for the restructuring of New Jersey’s energy market, became law. In March 2001, the BPU issued a written order that approved a stipulation among various parties to fully open NJNG’s residential markets to competition, restructure its prices and expand an incentive for residential and small commercial customers to switch to transportation service. As required by EDECA, NJNG restructured its prices to segregate its BGSS, the component of prices whereby NJNG provides the commodity and interstate pipeline capacity to the customer, and delivery (i.e., transportation) prices. NJNG earns no gross margin on the commodity portion of its natural gas sales. NJNG earns gross margin through the delivery of natural gas to its customers. Customers can choose the supplier of their natural gas commodity. In January 2002, the BPU issued an order which states that BGSS could be provided by suppliers other than the state’s natural gas utilities, but that BGSS should be provided by the state’s natural gas utilities until further BPU action.

Under EDECA, the BPU is required to audit the state’s energy utilities every two years. The primary purpose of the audit is to ensure those utilities and their affiliates offering unregulated retail services do not have any unfair competitive advantage over nonaffiliated providers of similar retail services. A combined competitive services and management audit will begin in late summer 2006.

b. Basic Gas Supply Service

On January 6, 2003, the BPU approved a statewide BGSS agreement requiring all New Jersey natural gas utilities to make an annual filing by each subsequent June 1 for review of BGSS and to request a potential price change to be effective the following October 1. The agreement also allows natural gas utilities to provisionally increase residential and small commercial customer BGSS prices up to 5 percent on December 1 and February 1 on a self-implementing basis, after proper notice and BPU action on the June filing. Such increases are subject to subsequent BPU review and final approval.

On January 25, 2006, NJNG filed to implement a $25 million BGSS-related credit that lowered customer’s bills over a two-month period. This credit was possible due primarily to a decline in wholesale commodity costs since NJNG’s November 10, 2005 BGSS filing. On March 15, 2006, NJNG filed to extend the BGSS-related bill credit for another month to lower customer’s bills by approximately another $6 million.

On November 10, 2005, NJNG filed for a 23.2 percent price increase, which was provisionally approved and became effective on December 14, 2005. This increase was necessary due to higher wholesale commodity costs and is subject to refund with interest.

On June 1, 2005, NJNG filed for a 4.2 percent price increase to be effective on October 1, 2005. On July 21, 2005, NJNG amended its filing, requesting an effective date of September 1, 2005. The BPU approved this increase on a provisional basis on August 19, 2005, and it became effective on September 1, 2005. This requested increase was necessary due to higher wholesale commodity costs and is subject to refund with interest.

c. Incentive Programs

NJNG is eligible to receive incentives for reducing BGSS costs through a series of gross margin-sharing programs that include off-system sales, capacity release, storage incentive and financial risk management programs. On April 12, 2006, the BPU approved an agreement whereby the existing gross margin-sharing programs between customers and shareowners were extended through October 31, 2007.

On October 22, 2003, the BPU approved a pilot for a storage incentive program that shares gains and losses on an 80/20 percent basis between customers and NJNG, respectively. This program measures the difference between the actual cost of natural gas in storage and a benchmark applicable to the April-through-October injection season. Program results of the initial year were reviewed with the BPU in January 2005, and no modifications were made to the program at that time. The April 12, 2006 BPU approval includes an extension of the storage incentive program through October 31, 2007.

d. Other Adjustment Clauses

On December 5, 2005, NJNG filed a Conservation and Usage Adjustment (CUA) proposal with the BPU. The intent of the proposal is to decouple the link between customer usage and NJNG’s gross margin to allow NJNG to aggressively encourage customers to use less energy. Under the proposal, the WNC would be replaced with a CUA mechanism, which is designed to recover gross margin variations related to both weather and usage. The CUA also includes programs designed to further customer conservation efforts. Discussions on the proposal are taking place with the BPU and the Ratepayer Advocate.

In March 2003, the BPU approved a permanent statewide Universal Service Fund (USF) program, the costs of which are to be recovered through the SBC. The USF program was established for all natural gas and electric utilities in New Jersey for the benefit of limited-income customers. Eligible customers will receive a credit toward their utility bill. The credits applied to eligible customers will be recovered through a USF rider in the SBC. NJNG will recover carrying costs on deferred USF balances. On April 1, 2005, NJNG and all the other energy utilities in the state filed to maintain the existing prices for the recovery of the costs of the statewide USF program. On June 30, 2005, the BPU approved the continuation of the current USF recovery rate.

In December 2004, the BPU approved regulations modifying main extension regulations and creating a Targeted Revitalization Infrastructure Program (TRIP). In an effort to promote the State’s Smart Growth initiative, the changes to the regulations require that natural gas service extensions for structures built after March 2005, in areas not designated for growth by the State, cannot be funded by the state’s utilities. There is an exemption for conversions to natural gas from alternate heating sources, as well as for construction or expansion deemed to be in the public interest. The TRIP provides a recovery mechanism for certain infrastructure investment made in approved redevelopment zones. On August 17, 2005, NJNG and the city of Asbury Park filed a joint TRIP proposal, seeking

BPU approval for a pilot program through which recovery will be sought for infrastructure investments made in the recently approved Waterfront Redevelopment area in Asbury Park.

On October 5, 2004, the BPU approved a 2.6 percent price increase to cover a higher level of expenditures under the SBC. The largest component of this increase related to Manufactured Gas Plant (MGP) expenditures incurred through June 30, 2002. On December 15, 2004, NJNG filed updated information regarding expenditures related to SBC programs and activities, including MGP expenditures through June 30, 2004 and proposed to maintain the same recovery rate. On April 12, 2006, the BPU approved a stipulation agreement that maintained the existing recovery rate. On September 30, 2005, NJNG filed updated information regarding expenditures related to MGP, incurred through June 30, 2005. (See Note 14. Commitments and Contingent Liabilities.)

On December 23, 2004, the BPU issued a decision establishing the statewide Clean Energy funding amount for the period from 2005 to 2008. NJNG’s obligation to the State of New Jersey, which is recoverable from customers through the SBC, gradually increases from $5.9 million in fiscal 2005 to $9.9 million in fiscal 2008. As a result, at March 31, 2006, NJNG has a remaining liability of $21.1 million and a corresponding Regulatory asset included in SBC at March 31, 2006. Additionally, this decision reaffirmed the right and basis for utilities to collect lost revenue related to the implementation of Clean Energy programs for measures installed prior to December 31, 2003. As of September 30, 2005, NJNG recorded $1 million of revenue related to this program and has sought recovery of such revenue in its September 30, 2005 SBC filing. NJNG also filed the results of the fiscal 2005 WNC, on September 30, 2005, which seeks to apply a $2.1 million refund to other clauses within the SBC that are currently underrecovered.

NJNG is also involved in various proceedings associated with several other adjustment clauses and an audit of its BGSS, the outcome of which, in management’s opinion, will not have a material adverse impact on its financial condition, results of operations or cash flows.

e. Manufactured Gas Plant Remediation

NJNG has identified 11 former MGP sites, dating back to the late 1800s and early 1900s, which contain contaminated residues from the former gas manufacturing operations. Ten of the 11 sites in question were acquired by NJNG in 1952. Gas manufacturing operations ceased at these sites at least by the mid-1950s and, in some cases, had been discontinued many years earlier. Since October 1989, NJNG has been operating under Administrative Consent Orders or Memoranda of Agreement with the New Jersey Department of Environmental Protection (NJDEP) covering all 11 sites. These orders and agreements establish the procedures to be followed in developing a final remedial cleanup plan for each site. NJNG is currently involved in administrative proceedings with the NJDEP with respect to the MGP sites in question, as well as participating in various studies and investigations by outside consultants to determine the nature and extent of any such contaminated residues and to develop appropriate programs of remedial action, where warranted. Until September 2000, most of the cost of such studies and investigations had been shared under an agreement with the former owner and operator of 10 of the MGP sites, Jersey Central Power & Light Company (JCP&L), a subsidiary of FirstEnergy Corporation (FirstEnergy).

In September 2000, a revised agreement was executed pursuant to which NJNG is responsible for two of the sites, while JCP&L is responsible for the remaining eight sites. Also in September 2000, NJNG purchased a 20-year cost-containment insurance policy for the two sites. (See Kemper Insurance Company Litigation below.) On September 14, 2004, the BPU approved a simultaneous transfer of properties whereby NJNG has ownership of two sites and JCP&L has ownership of eight

sites. NJNG continues to participate in the investigation and remedial action and bears the cost related to the one MGP site that was not subject to the original cost-sharing agreement.

In June 1992, the BPU approved a remediation rider through which NJNG may, subject to BPU approval, recover its remediation expenditures, including carrying costs, over rolling 7-year periods. On October 5, 2004, the BPU approved a settlement that increased NJNG’s remediation adjustment clause recovery from $1.5 million to $17.6 million annually, which recognizes remediation expenditures through June 30, 2002. On December 15, 2004, NJNG filed supporting documentation for recovery of remediation expenditures through June 30, 2004, and proposed to maintain the same recovery rate. On April 12, 2006, the BPU approved a stipulation that maintained the existing recovery rate. On September 30, 2005, as part of the SBC filing, NJNG filed updated information regarding expenditures to SBC programs and activities, including MGP expenditures through June 30, 2005. While the SBC filing maintained the same overall rate, the filing proposed to reduce the portion related to the remediation rider recovery to $11.6 million of annual expenditures to reflect actual spending levels. As of March 31, 2006, $79.1 million of previously incurred remediation costs, net of recoveries from customers as well as received and anticipated insurance proceeds, are included in Regulatory assets on the Consolidated Balance Sheet. (See Note 4. Regulatory Assets and Liabilities and Note 14. Commitments and Contingent Liabilities.)

In March 1995, NJNG instituted an action for declaratory relief against 24 separate insurance companies in the Superior Court of New Jersey, Docket No. OCN-L-859-95. These insurance carriers provided comprehensive general liability coverage to NJNG from 1951 through 1985. In July 1996, the complaint was amended to name Kaiser-Nelson Steel and Salvage Company (Kaiser-Nelson) and its successors for environmental damages caused by Kaiser-Nelson’s decommissioning of structures at several MGP sites. In September 2001, NJNG reached a favorable settlement with the insurance carrier that provided the majority of NJNG’s coverage. This settlement involved a significant cash payment to NJNG, which was credited to the remediation rider, and was received in four installments ending October 2004. In January 2006, NJNG reached a settlement of all claims with Kaiser-Nelson, which included a cash payment that has been received by NJNG and credited to the remediation rider. Consequently, NJNG has now dismissed or reached a settlement with all of its insurance carriers who provided comprehensive general liability coverage to NJNG in connection with the MGP sites.

NJNG is presently investigating the potential settlement of alleged Natural Resource Damage (NRD) claims that might be brought by the NJDEP concerning the three MGP sites. NJDEP has not made any specific demands for compensation for alleged injury to groundwater or other natural resources. NJNG’s evaluation of these potential claims is in the early stages, and it is not yet possible to quantify the amount of compensation that NJDEP might seek to recover. NJNG anticipates any costs associated with this matter would be recoverable through the remediation rider.

f. Long Branch MGP Site Litigation

Since July 2003, a series of complaints were filed in the New Jersey Superior Court against NJNG, NJR, JCP&L and FirstEnergy. The complaints were originally filed in Monmouth County and, as of February 2004, were designated as a Mass Tort Litigation, Mass Tort Case #268, Master Docket #BER-L-8839-04, for centralized case management purposes and transferred to the Bergen County Law Division. There were originally 528 complaints filed. However, as a result of a number of motions, consent orders and stipulations to dismiss, as of October 2005, there were 293 active cases in this matter (exclusive of the pro se matters discussed below).

Among other things, the complaints alleged personal injuries, wrongful death, survivorship actions, property damage and claims for medical monitoring stemming from the operation and remediation of the former MGP site in Long Branch, New Jersey. The relief sought included compensatory damages,

the establishment of a medical monitoring fund, disgorgement of alleged profits, cost of cleanup and remediation, natural resource damages and punitive damages. JCP&L and FirstEnergy made a demand upon NJNG and NJR for indemnification pursuant to the September 2000 agreement between these entities and NJNG, whereby NJNG assumed responsibility for the Long Branch site. NJNG has agreed to honor the terms of the indemnity agreement.

In October 2005, NJNG reached a confidential settlement with the plaintiffs, subject to court approval with respect to certain cases. The settlement agreement was finalized and approved by the court in December 2005.

NJNG’s insurance carriers were initially notified of the claims and Kemper Insurance Company (Kemper), under an Environmental Response Compensation and Liability Insurance Policy (ERCLIP), initially agreed to provide a defense and certain coverage, subject to a reservation of rights regarding various allegations in the complaints typically not covered by insurance. However, as Kemper’s defense and insurance obligations were not met, NJNG initiated litigation against Kemper (See Kemper Insurance Company Litigation below).

Management believes that litigation costs and the settlement amount are recoverable through insurance (subject to the outcome of the Kemper Insurance Company Litigation). Additionally, any liabilities not recoverable through insurance, except for punitive and personal injury damages, would be recoverable, subject to BPU approval, through the remediation rider.

Five pro se matters were filed in the Mass Tort Litigation, which restated the claims described above. These actions were filed much later than the cases noted above and were placed on separate case schedules for discovery and trial purposes. In November 2005, one of the five cases was dismissed. In January 2006, NJNG filed motions to dismiss the remaining cases. The court granted the motions and the cases were dismissed in March 2006.

In 2006, three additional pro se complaints were filed against the Company and NJNG: Denise Nichols, et al, v. New Jersey Natural Gas Company, et al., Docket # BER-L-871-06; Marlene Roddy, et al. v. New Jersey Natural Gas Company, Docket # BER-L-414-06; and Andrew Everett, et al v. New Jersey Natural Gas Company, et al. These complaints, which were filed in the Superior Court of New Jersey, Law Division, Bergen County, allege the same claims made in the Mass Tort Litigation. NJNG and the Company believe that the allegations in the complaints have no merit and are vigorously defending against them. Additionally, although more pro se complaints have been filed against NJNG and/or the Company, plaintiffs have not complied with the New Jersey Rules of Court by serving process upon either the Company or NJNG. Further, NJNG and the Company believe that the allegations in the complaints have no merit. Accordingly, if and when NJNG and/or the Company are properly served with these complaints, they will review them and vigorously defend them as well.

No assurance can be given as to the ultimate outcome of these matters or the impact on the Company’s financial condition, results of operations or cash flows.

g. Kemper Insurance Company Litigation

In October 2004, NJNG instituted suit for declaratory relief against Kemper in the Superior Court of New Jersey, Law Division, Ocean County (Court), and Docket #OCN-L-3100-4. The case is under active case management. Kemper provided insurance under an ERCLIP together with cost containment coverage effective July 21, 2000. Prior to the institution of this suit, NJNG requested that Kemper defend and indemnify claims involving the Long Branch litigation (see Long Branch MGP Site Litigation above) together with reimbursement for remediation costs for the Long Branch site that exceed the self-insured retention. Kemper reserved its rights regarding various allegations in the litigation and agreed to participate in the defense of the Long Branch matter. Although Kemper has not denied coverage, it has not yet reimbursed NJNG for any costs incurred to date. In fiscal 2003, Kemper decided to substantially cease its underwriting operations and voluntarily enter into runoff. The Illinois

Department of Insurance has approved Kemper’s runoff plan. NJNG applied to the Court for an order requiring Kemper to deposit the policy limits with the court in light of the uncertainty surrounding Kemper’s finances. In January 2006, the Court concluded that, for the time being, Kemper has the ability to pay NJNG up to the policy limits and accordingly, the Court denied NJNG’s application. Management believes that, with the exception of any liability for punitive and personal injury damages, any costs associated with Kemper’s failure to meet its future obligations will be recoverable, with BPU approval, through the remediation rider.

In December 2005, NJNG filed a complaint against Kemper, its current officers and directors and some of its former officers and directors for fraud in connection with the issuance of the cost containment and ERCLIP policies. That complaint was filed in Superior Court of New Jersey, Law Division, Ocean County, Docket # OCD-L-3100-4. On April 4, 2006, the court entered an order dismissing the case without prejudice to NJNG’s right to re-file its complaint.

There can be no assurance as to the ultimate resolution of this matter or the impact on the Company’s financial condition, results of operations or cash flows.

h. Various

The Company is a party to various other claims, legal actions, complaints and investigations arising in the ordinary course of business. In the Company’s opinion, the ultimate disposition of these matters will not have a material adverse effect on its financial condition, results of operations or cash flows.

7. EARNINGS PER SHARE

In accordance with SFAS No. 128, “Earnings Per Share,” which established standards for computing and presenting basic and diluted earnings per share (EPS), the incremental shares required for inclusion in the denominator for the diluted EPS calculation were 323,300 and 558,047 for the three months ended March 31, 2006 and 2005, respectively, and 314,190 and 546,450 for the six months ended March 31, 2006 and 2005, respectively. These shares relate to stock options and performance units and were calculated using the treasury stock method. The numerator for each applicable basic and diluted EPS calculation was net income.

8. STOCK BASED COMPENSATION

The Company adopted SFAS 123R effective October 1, 2005, and the adoption did not have a material impact on its financial condition, results of operations or cash flows. The cost of the share-based compensation charged to income, net of tax was $221,000 and $108,000 for the six months ended March 31, 2006 and 2005, respectively, and $134,000 and $41,000 for the three months ended March 31, 2006 and 2005, respectively. Cash received for options exercised under all share-based payment arrangements was $14 million and $4.3 million for the six months ended March 31, 2006 and 2005, respectively, and $9.3 million and $2.7 million for the three months ended March 31, 2006 and 2005, respectively. The tax-benefit associated with the options exercised under share-based payment arrangements was $4.2 million and $1.4 million for the six months ended March 31, 2006 and 2005, respectively, and $2.8 million and $1 million for the three months ended March 31, 2006 and 2005, respectively.

Following is a reconciliation of the as reported and pro forma net income for the three and six months ended March 31, 2005, for options granted prior to October 1, 2002, which are accounted for under APB 25, “Accounting for Stock Issued to Employees.” Beginning October 1, 2005, all options are being expensed under SFAS 123R (See Note 3).


	*Three months*			*Six months*
	*ended*			*ended*
	*March 31,*			*March 31,*
(Thousands)	2005			2005

Net income, as reported	$	51,665		$	81,867

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		41			108
Deduct: Total stock-based employee compensation expense determined under the fair value-based method for all awards, net of related tax effects		(69	)		(203	)


Pro forma net income	$	51,637		$	81,772


	*Three months*		*Six months*
	*ended*		*ended*
	*March 31,*		*March 31,*
	2005		2005

Earnings Per Share:

Basic—as reported	$	1.87	$	2.96
Basic—pro forma	$	1.87	$	2.95

Diluted—as reported	$	1.84	$	2.90
Diluted—pro forma	$	1.84	$	2.90

Stock Options

The following table summarizes the assumptions used in the Black-Scholes option-pricing model and the resulting weighted average fair value of the stock options issued during the three and six months ended as of March 31, 2006 and 2005:


	*Three months*						*Six months*
	*ended*						*ended*
	*March 31,*						*March 31,*
	2006			2005			2006			2005

Dividend yield		3.2	%		3.2	%		3.2	%		3.1	%
Volatility		13.1	%		13.8	%		13.2	%		14.2	%
Expected life (years)		7			7			7			7
Risk-free interest rate		4.6	%		4.1	%		4.6	%		4.0	%
Weighted average fair value	$	5.76		$	5.19		$	5.44		$	5.39

The following table summarizes the stock option activity for the three months ended December 31, 2005 and March 31, 2006:


				Weighted
				Average
	Shares			Exercise Price

Outstanding at September 30, 2005		1,545,657		$	29.29
Granted		22,200		$	42.26
Exercised		(199,232	)	$	24.07
Forfeited		—			—

Outstanding at December 31, 2005		1,368,625		$	30.26

Granted		6,000		$	44.95
Exercised		(378,378	)	$	26.41
Forfeited		—			—

Outstanding at March 31, 2006		996,247		$	31.82

Exercisable at March 31, 2006		748,172		$	28.42

The following table summarizes stock options outstanding and exercisable at March 31, 2006:


	Outstanding						Exercisable
					Average				Average
			Average		Exercise				Exercise
Exercise Price Range	Options		Life *(a)*		Price		Options		Price

$18.22 – $22.78		15,659		1.7	$	21.38		15,659	$	21.38
$22.78 – $27.33		111,683		3.5	$	25.77		111,683	$	25.77
$27.33 – $31.89		634,705		5.0	$	28.74		585,205	$	28.51
$31.89 – $36.44		10,500		7.0	$	33.71		10,500	$	33.71
$36.44 – $41.00		22,000		7.9	$	38.09		14,000	$	38.30
$41.00 – $45.55		201,700		9.1	$	44.83		11,125	$	42.51

Total		996,247		5.7	$	31.82		748,172	$	28.42

(a)

Average contractual life remaining in years.

Performance Units

The following table summarizes the Performance Unit activity under the Employee and Outside Director Long-Term Incentive Compensation Plan for the three months ended December 31, 2005 and March 31, 2006. There were no performance units granted in the six months ended March 31, 2005:


			Weighted
			Average
			Grant Date
	Units(1)		Fair Value

Non-vested and outstanding at September 30, 2005		36,750	$	29.36
Granted		6,000	$	27.31
Vested		—		—
Cancelled/forfeited		—		—

Non-vested and outstanding at December 31, 2005		42,750	$	29.07

Granted		1,200	$	28.97
Vested		—		—
Cancelled/forfeited		—		—

Non-vested and outstanding at March 31, 2006		43,950	$	29.07
Vested at March 31, 2006		—		—

(1)

The number of common shares issued related to performance units may range form zero to 150 percent of the number of units shown in the table above based on the Company’s achievement of performance goals associated with NJR total shareowner return relative to a selected peer group of companies.

The Company measures compensation expense related to performance units based on the fair value of these awards at their date of grant. Compensation expense for performance units is recognized for awards that ultimately vest, and is not adjusted based on actual achievement of the performance goals. The Company estimated the fair value of the performance units on the date of grant using a Lattice model.

Restricted Stock

In the six months ended March 31, 2006, the Company granted 2,755 shares of restricted stock pursuant to the Employee and Outside Director Long-Term Incentive Compensation Plan. The stock is restricted for a period of four years from grant date. The Company is recognizing expense based on the market value of the stock as of the grant date over the vesting period.

9. LONG- AND SHORT-TERM DEBT AND RESTRICTED CASH CONSTRUCTION FUND

In December 2004, NJR entered into a $275 million committed credit facility with several banks with a 3-year term expiring in December 2007, which replaced a $200 million credit facility. In November 2005, NJR amended the facility to increase it to $325 million. This facility provides liquidity to meet the working capital and external debt-financing requirements of NJR and its unregulated companies. Neither NJNG nor the results of its operations are obligated or pledged to support the NJR facilities.

In December 2004, NJNG entered into a $225 million committed credit facility with several banks with a 5-year term expiring in December 2009, which replaced a $225 million credit facility with a shorter term. In November 2005, NJNG amended this facility to increase it to $250 million. This facility is used to support NJNG’s commercial paper program.

On October 1, 2004, NJNG’s $25 million, 8.25% Series Z First Mortgage Bonds matured.

As of March 31, 2006, NJNG had a $72 million letter of credit outstanding, which will expire on June 30, 2006, in conjunction with a long-term gas swap agreement. The long-term gas swap agreement was entered into as a hedge related to an offsetting physical purchase of natural gas for the same period and volume. This letter of credit reduces the amount available under NJNG’s committed credit facility by the same amount. NJNG does not anticipate that this letter of credit will be drawn upon by the counterparty and it will be renewed as necessary.

Under an agreement that it entered into with a financing company in 2002, NJNG received $4.1 million and $4.9 million in December 2005 and 2004, respectively, in connection with the sale-leaseback of a portion of its meters. These leases are accounted for as capital leases. NJNG plans to continue the sale-leaseback meter program on an annual basis.

In October 2005, NJNG entered into a loan agreement under which the Economic Development Authority (EDA) loaned NJNG the proceeds from $35.8 million of tax-exempt EDA Bonds consisting of $10.3 million, 4.5% (Series 2005A) and $10.5 million, 4.6% (Series 2005B) Revenue Refunding Bonds, and $15 million, 4.9% (Series 2005C) Natural Gas Facilities Revenue Bonds. NJNG used the proceeds from the Series A and B bonds to refinance NJNG’s $10.3 million, 5.38% Series W First Mortgage Bonds and its $10.5 million, 6.25% Series Y First Mortgage Bonds, respectively. The proceeds from the Series 2005C bonds were deposited into a construction fund. NJNG immediately drew down $2.5 million from the construction fund and issued like amounts of its 4.9% Series KK bonds to the EDA with a maturity date of October 1, 2040.

In June 2004, NJNG purchased interest-rate caps with several banks to hedge interest rate exposure on its $97 million of tax-exempt, variable-rate long-term debt. The interest-rate caps expire in July 2006 and limit NJNG’s variable-rate debt exposure for the tax-exempt EDA Bonds at 3.5 percent. The interest-rate caps are treated as cash flow hedges with changes in fair value accounted for in Accumulated other comprehensive income.

10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The Company and its subsidiaries are subject to market risk due to fluctuations in the price of natural gas. To hedge against such fluctuations, the Company and its subsidiaries enter into futures contracts, option agreements and over-the-counter swap agreements. NJNG’s recovery of natural gas costs is governed by the BGSS, but to hedge against price fluctuations, NJNG utilizes futures, options and swaps through its corporate financial risk management program. NJRES uses futures, options and swaps to hedge purchases and sales of natural gas. NJR Energy has hedged a long-term fixed-price contract to sell natural gas. NJR Energy has entered into several swap agreements to hedge fixed-price gas sale contracts (Gas Sale Contracts) to an energy marketing company. To hedge its price risk, NJR Energy entered into two swap agreements effective November 1995. Under the terms of these swap agreements, NJR Energy will pay its swap counterparties the fixed price it receives from the natural gas marketing company in exchange for the payment by such swap counterparties of a floating price based on an index price plus a spread per Mmbtu for the total volumes under the Gas Sale Contracts. In order to hedge its physical delivery risk, NJR Energy entered into a purchase contract with a second natural gas company for the identical volumes it is obligated to sell under the Gas Sale Contracts and pays the identical floating price it receives under the swap agreements mentioned above. The amounts included in Other Comprehensive income related to natural gas instruments, which have been designated cash flow hedges, will reduce or increase gas costs as the underlying physical transaction occurs. These cash flow hedges cover various periods of time ranging from May 2006 to October 2010.

The following table reflects the changes in the net fair market value of commodity derivatives from September 30, 2005 to March 31, 2006:


	Balance			Increase			Less			Balance
	September 30,			(Decrease) in Fair			Amounts			March 31,
(Thousands)	2005			Market Value			Settled			2006

NJNG	$	35,135		$	(109,542	)	$	(24,436	)	$	(49,971	)
NJRES		(155,029	)		215,168			44,228			15,911
NJR Energy		63,745			(23,464	)		(9,450	)		49,731

Total	$	(56,149	)	$	82,162		$	10,342		$	15,671

There were no changes in methods of valuations during the quarter ended March 31, 2006.

The following is a summary of fair market value of commodity derivatives at March 31, 2006 by method of valuation and by maturity:


	Remaining								After			Total
(Thousands)	2006		2007			2008-2010			2010			Fair Value

Price based on NYMEX	$	31,287	$	(10,958	)	$	(57,960	)	$	(848	)	$	(38,479	)
Price based on over-the-counter published quotations		4,903		14,461			34,243			543			54,150

Total	$	36,190	$	3,503		$	(23,717	)	$	(305	)	$	15,671

The following is a summary of commodity derivatives by type as of March 31, 2006:


							Amounts
							Included
		Volume			Price per		in Derivatives
		(Bcf)			Mmbtu		(Thousands)
NJNG	Futures		(3.7	)	$	5.30-$11.30	$	59,671
	Options		3.2		$	8.00-$10.50	$	(1,991	)
	Swaps		3.3		$	(0.47)-$10.50	$	(107,651	)

NJRES	Futures		(13.1	)	$	6.07-$11.99	$	13,525
	Swaps		(28.7	)	$	(0.80)-$1.92	$	2,386

NJR Energy	Swaps		11.7		$	2.92-$4.41	$	49,731

Total							$	15,671

11. BUSINESS SEGMENT DATA

Information related to the Company’s various business segments, excluding capital expenditures, which are presented in the Consolidated Statements of Cash Flows, is detailed below.

The Natural Gas Distribution segment consists of regulated energy and off-system, capacity and storage management operations. The Energy Services segment consists of unregulated wholesale energy operations. The Retail and Other segment consists of appliance and installation services, commercial real estate development, investment and other corporate activities.


	Three Months Ended						Six Months Ended
	March 31,						March 31,
(Thousands)	2006			2005			2006			2005

Operating Revenues
Natural Gas Distribution	$	471,406		$	462,576		$	865,752		$	783,046
Energy Services		587,525			596,921			1,350,720			1,113,792
Retail and Other		5,560			5,585			12,663			22,256

Subtotal		1,064,491			1,065,082			2,229,135			1,919,094
Intersegment revenues (1)		(69	)		(25	)		(137	)		(49	)

Total	$	1,064,422		$	1,065,057		$	2,228,998		$	1,919,045


Operating Income
Natural Gas Distribution	$	57,493		$	60,353		$	90,940		$	92,149
Energy Services		48,062			26,581			75,163			38,743
Retail and Other		(613	)		1,361			508			11,031

Total	$	104,942		$	88,295		$	166,611		$	141,923

Net Income(Loss)
Natural Gas Distribution	$	33,509		$	35,258		$	52,192		$	53,091
Energy Services		26,999			15,446			41,896			22,006
Retail and Other		(307	)		961			377			6,770

Total	$	60,201		$	51,665		$	94,465		$	81,867

(1)

Consists of transactions between subsidiaries that are eliminated in consolidation.

The Company’s assets for the various business segments are detailed below:


	March 31,				March 31,
	2006		September 30,		2005
Thousands)	(unaudited)		2005		(unaudited)

Assets at Period-End
Natural Gas Distribution	$	1,552,803	$	1,581,758	$	1,412,848
Energy Services		473,838		501,051		401,263
Retail and Other		110,416		127,019		98,107

Total	$	2,137,057	$	2,209,828	$	1,912,218

12. EMPLOYEE BENEFIT PLANS

Pension and Other Postretirement Benefit (OPEB) Plans

The Company has two trusteed, noncontributory defined benefit retirement plans covering regular represented and nonrepresented employees with more than one year of service. All represented employees of NJRHS hired on or after October 1, 2000, are covered by an enhanced defined contribution plan instead of the defined benefit plan.

Defined benefit plan benefits are based on years of service and average compensation during the highest 60 consecutive months of employment.

The components of the qualified plans net pension cost were as follows:


	Pension												OPEB
	Three Months						Six Months						Three Months						Six Months
	Ended						Ended						Ended						Ended
	March 31,						March 31,						March 31,						March 31
(Thousands)	2006			2005			2006			2005			2006			2005			2006			2005

Service cost	$	751		$	677		$	1,502		$	1,354		$	380		$	324		$	760		$	648
Interest cost		1,408			1,324			2,816			2,648			615			545			1,230			1,090
Expected return on plan assets		(1,782	)		(1,596	)		(3,564	)		(3,192	)		(458	)		(425	)		(916	)		(850	)
Amortization of: Prior service cost		21			28			42			56			19			20			38			40
Transition obligation		—			—			—			—			89			89			178			178
Loss		433			257			866			514			206			171			412			342
Net initial obligation		(3	)		(28	)		(6	)		(56	)		—			—			—			—

Net periodic cost	$	828		$	662		$	1,656		$	1,324		$	851		$	724		$	1,702		$	1,448

In fiscal 2006, the Company has no minimum pension funding requirements. The Company’s funding level to its OPEB plans is expected to be approximately $600,000 annually over the next five years. Additional contributions may be made based on market conditions and various assumptions.

13. COMPREHENSIVE INCOME

The amounts included in other comprehensive income related to natural gas instruments, which have been designated cash flow hedges, will reduce or increase natural gas costs as the underlying physical transaction impacts earnings. Based on the amount recorded in Accumulated other comprehensive income at March 31, 2006, $16.2 million is expected to be recorded as a decrease to

natural gas costs for the remainder of fiscal 2006. For the three months ended March 31, 2006 and 2005, $14.2 million was charged and $4 million was credited to natural gas costs, respectively, and for the six months ended March 31, 2006 and 2005, $34.8 million and $17.6 million was charged to natural gas costs, respectively.

14. COMMITMENTS AND CONTINGENT LIABILITIES

Cash Commitments

NJNG has entered into long-term contracts, expiring at various dates through 2022, for the supply, storage and delivery of natural gas. These contracts include current annual fixed charges of approximately $103 million at current contract rates and volumes, which are recovered through the BGSS.

As of March 31, 2006, there were NJR guarantees covering approximately $239 million of future natural gas purchases and demand fee commitments of NJRES and NJNG not yet reflected in Accounts payable on the Consolidated Balance Sheet.

NJNG’s capital expenditures are estimated at $32 million for the remainder of fiscal 2006 and $64 million in fiscal 2007 and consist primarily of its construction program to support customer growth, maintenance of its distribution system and replacement needed under proposed pipeline safety rulemaking. The Company’s future minimum lease payments under various operating leases are less than $2.5 million annually for the next five years and $718,000 in the aggregate for all years thereafter.

Manufactured Gas Plant Remediation

NJNG is involved with environmental investigations and remedial actions at certain MGP sites. In September 2005, with the assistance of an outside consulting firm, NJNG updated an environmental review of the MGP sites, including a review of its potential liability for investigation and remedial action. Based on this review, NJNG estimated at the time of the review that, exclusive of any insurance recoveries, total future expenditures to remediate and monitor the three MGP sites for which it is responsible will range from $93.9 million to $162.3 million. NJNG’s estimate of these liabilities is based upon known facts, existing technology and enacted laws and regulations in place when the review was completed. However, actual costs are expected to differ from these estimates. Where available information is sufficient to estimate the amount of the liability, it is NJNG’s policy to accrue the full amount of such estimate. Where the information is sufficient only to establish a range of probable liability and no point within the range is more likely than any other, it is NJNG’s policy to accrue the lower end of the range. Accordingly, NJNG has recorded an MGP remediation liability and a corresponding Regulatory asset of $93.9 million on the Consolidated Balance Sheet. The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations, the ultimate ability of other responsible parties to pay and any insurance recoveries. NJNG will continue to seek recovery of such costs through its remediation rider. If any future regulatory position indicates that the recovery of such costs is not probable, the related cost would be charged to income.

15. OTHER

At March 31, 2006, there were 27,951,487 shares of common stock outstanding and the book value per share was $22.09.


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIX MONTHS ENDED MARCH 31, 2006

Management’s Overview

New Jersey Resources (NJR or the Company) is an energy services holding company providing retail natural gas service in New Jersey and wholesale natural gas and related energy services to customers in states from the Gulf Coast and Mid-Continent to New England, and Canada. Its principal subsidiary, New Jersey Natural Gas (NJNG), is a natural gas utility, which provides regulated retail natural gas service in central and northern New Jersey, and also participates in the off-system sales and capacity release markets. NJNG is regulated by the New Jersey Board of Public Utilities (BPU). NJR’s most significant unregulated subsidiary, NJR Energy Services (NJRES), provides unregulated wholesale energy services. The Retail and Other segment includes NJR Home Services (NJRHS), which provides service, sales and installation of appliances; NJR Energy, an investor in energy-related ventures; Commercial Realty and Resources (CR&R), which holds and develops commercial real estate; and NJR Investment, which makes energy-related equity investments. Net income and assets by business segment are as follows:


(Thousands) (unaudited)
Six Months Ended March 31,	2006				2005

Net Income
Natural Gas Distribution	$	52,192	55	%	$	53,091	65	%
Energy Services		41,896	44			22,006	27
Retail and Other		377	1			6,770	8

Total	$	94,465	100	%	$	81,867	100	%


(Thousands)
As of March 31,	2006				2005

Assets
Natural Gas Distribution	$	1,552,803	73	%	$	1,412,848	74	%
Energy Services		473,838	22			401,263	21
Retail and Other		110,416	5			98,107	5

Total	$	2,137,057	100	%	$	1,912,218	100	%

Natural Gas Distribution operations have been managed with the goal of growing profitably, while keeping customer prices as stable as possible. NJNG, working together with the New Jersey Board of Public Utilities (BPU) and the New Jersey Division of the Ratepayer Advocate, has been able to accomplish this goal through several key initiatives including:

•

Managing its customer growth, which is expected to total about 2.3 percent annually.

	•		Generating earnings and customer savings from various BPU-authorized gross margin-sharing incentive programs, which are currently approved through October 31, 2007.

	•		Reducing the impact of weather on NJNG’s earnings and customer bills through an updated weather-normalization clause (WNC).

	•		Managing the volatility of wholesale natural gas prices through a hedging program to help keep customers’ prices as stable as possible.

	•		Improving its cost structure through various productivity initiatives.

As a result of a decline in customer usage, which NJNG believes has been caused by increased wholesale commodity prices, NJNG filed with the BPU a conservation and usage adjustment (CUA),

that would replace the WNC, to decouple the link between customer usage and NJNG’s gross margin. If NJNG is not successful in receiving approval of the CUA proposal, NJNG will consider other regulatory strategies to address this issue, such as expanded incentive programs and/or the filing of a base rate case.

As a regulated company, NJNG is required to recognize the impact of regulatory decisions on its financial statements. As a result, significant costs are deferred and treated as regulatory assets, pending BPU decisions regarding their ultimate recovery from customers. The most significant costs incurred that are subject to this accounting treatment include manufactured gas plant (MGP) remediation costs and wholesale natural gas costs. Actual remediation costs may vary from management’s estimates due to the developing nature of remediation requirements and related litigation. (See Note 6.–Legal and Regulatory Proceedings–Manufactured Gas Plant Remediation and Long Branch MGP Site Litigation.) If there are changes in the regulatory position on the recovery of these costs, such costs would be charged to income.

The Energy Services segment focuses on providing wholesale energy services, including base load natural gas services, peaking services and balancing services, utilizing physical assets it controls, as well as natural gas management services to third parties. NJRES’ contribution to earnings has increased over the past several years due primarily to increases in its portfolio of pipeline and storage capacity and the volatile nature of wholesale natural gas prices. The volatile nature of wholesale natural gas prices over short periods of time can significantly impact NJRES’ revenue and gross margin. Furthermore, gross margin for NJRES is generally greater during the winter months, while the fixed costs of its capacity assets are generally spread throughout the year. Therefore, NJRES’ performance for the first two fiscal quarters is not indicative of its full year performance. Future growth is expected to come from opportunities that include the acquisition of additional storage and pipeline capacity assets and portfolio management services for third parties.

In the Retail and Other segment, NJRHS is focused on growing its installation business and expanding its service contract customer base. CR&R seeks additional opportunities to enhance the value of its undeveloped land.

In the conduct of the Company’s business, management focuses on factors it believes may have significant influence on the Company’s future financial results. NJR’s policy is to work with all stakeholders, including customers, regulators and policymakers, to achieve favorable results. These factors include the rate of NJNG’s customer growth in its service territory, which can be influenced by general economic conditions as well as political and regulatory policies that may impact the new housing market. A portion of NJNG’s customer growth comes from the conversion market, which is influenced by the delivered cost of natural gas compared with competing fuels, interest rates and other economic conditions. The impact of weather on NJNG’s gross margin has been significantly mitigated due to the WNC, however, lower customer usage per degree day is not captured by the WNC. NJNG has experienced lower customer usage per degree day, which it believes is due primarily to an increase in wholesale commodity costs. In order to reduce the impact of the reduction in customer usage, in December 2005, NJNG filed with the BPU, a CUA to replace the WNC and to decouple the link between customer usage and NJNG’s gross margin. The CUA also includes programs designed to further customer conservation efforts. If NJNG is not successful in receiving approval for of the CUA proposal, NJNG will consider other regulatory strategies to address this issue, such as expanded incentive programs, and/or the filing of a base rate case.

NJNG’s operating expenses are heavily influenced by labor costs, a large component of which are covered by a collective bargaining agreement that expires in 2008. Labor-related fringe benefit costs, which are also subject to numerous factors, may also influence the Company’s results.

Due to the capital-intensive nature of NJNG’s operations and the seasonal nature of NJR’s working capital requirements, significant changes in interest rates can also impact NJR’s results.

Critical Accounting Policies

Management believes that it exercises good judgment in selecting and applying accounting principles.

The consolidated financial statements of NJR include estimates, and actual results in the future may differ from such estimates. NJR’s critical accounting policies are described below.

Regulatory Assets and Liabilities

NJR’s largest subsidiary, NJNG, maintains its accounts in accordance with the Uniform System of Accounts as prescribed by the BPU. As a result of the ratemaking process, NJNG is required to follow Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation” (SFAS 71) and, consequently, the accounting principles applied by NJNG differ in certain respects from those applied by unregulated businesses. NJNG is required under SFAS 71 to recognize the impact of regulatory decisions on its financial statements. NJNG’s Basic Gas Supply Service (BGSS) requires NJNG to project its natural gas costs and provides the ability, subject to BPU approval, to recover or refund the difference, if any, of actual costs as compared with the projected costs included in prices through a BGSS charge to customers. Any underrecovery or overrecovery is recorded as a Regulatory asset or liability on the Consolidated Balance Sheets and reflected in the BGSS in subsequent years. NJNG also enters into derivatives that are used to hedge natural gas purchases, and the offset to the resulting fair value of derivative assets or liabilities is recorded as a Regulatory asset or liability on the Consolidated Balance Sheets.

In addition to the BGSS, other regulatory assets consist primarily of remediation costs associated with MGP sites, which are discussed below under Environmental Costs, the WNC and the New Jersey Clean Energy Program, which are subject to BPU approval. If there are changes in future regulatory positions that indicate the recovery of any such regulatory assets is not probable, the related cost and carrying costs would be charged to income in the period of such determination.

Derivatives

Derivative activities are recorded in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS 133), under which NJR records the fair value of derivatives held as assets and liabilities. NJR’s unregulated subsidiaries record changes in the fair value of the effective portion of derivatives qualifying as cash flow hedges, net of tax, in Accumulated other comprehensive income, a component of Common stock equity. Under SFAS 133, NJR also has certain derivative instruments that do not qualify as hedges. The change in fair value of these derivatives is recorded in Gas purchases on the Consolidated Statements of Income. In addition, the changes in the fair value of the ineffective portion of derivatives qualifying for hedge accounting are recorded as increases or decreases in natural gas costs or interest expense, as applicable, based on the nature of the derivatives. NJNG’s derivatives that are used to hedge its natural gas purchasing activities are recoverable through its BGSS, subject to BPU approval. Accordingly, the offset of the fair value of these derivatives is recorded as a Regulatory asset or liability on the Consolidated Balance Sheets. NJR has not designated any derivatives as fair value hedges as of March 31, 2006.

The fair value of derivative investments is determined by reference to quoted market prices of listed contracts, published quotations or quotations from independent parties.

In providing its regulated service and unregulated wholesale energy services, NJNG and NJRES, respectively, enter into physical contracts to buy and sell natural gas. These contracts qualify as normal purchases and sales under SFAS 133, in that they provide for the purchase or sale of natural gas that will be delivered in quantities expected to be used or sold by NJNG and NJRES over a reasonable period of time in the normal course of business. Accordingly, NJNG and NJRES account for these contracts under settlement accounting.

Environmental Costs

At the end of each fiscal year, NJNG updates the environmental review of its MGP sites, including a review of its potential liability for investigation and remedial action, based on assistance from an outside consulting firm. Based on the review, NJNG estimates expenditures to remediate and monitor these MGP sites, exclusive of any insurance recoveries. NJNG’s estimate of these liabilities is developed from then currently available facts, existing technology and presently enacted laws and regulations. Where available information is sufficient to estimate the amount of the liability, it is NJNG’s policy to accrue the full amount of such estimate.

Where the information is sufficient to establish only a range of probable liability, and no point within the range is more likely than any other, it is NJNG’s policy to accrue the lower end of the range. Since management believes that recovery of these expenditures, as well as related litigation costs, is probable through the regulatory process, in accordance with SFAS 71, it has recorded a regulatory asset corresponding to the accrued liability. The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations, the ultimate ability of other responsible parties to pay, the impact of litigation and any insurance recoveries. If there are changes in future regulatory positions that indicate the recovery of all or a portion of such regulatory asset is not probable, the related cost and carrying costs would be charged to income in the period of such determination. As of March 31, 2006, $79.1 million of previously incurred remediation costs, net of recoveries from customers and insurance proceeds received and anticipated, are included in Regulatory assets on the Consolidated Balance Sheet. Also included in Regulatory assets at March 31, 2006, are $93.9 million of accrued future remediation costs.

Unbilled Revenue

Revenues related to the sale of natural gas are generally recorded when natural gas is delivered to customers. However, determining natural gas sales to individual customers is based on actual or estimated meter reading, which occurs on a systematic basis throughout the month. At the end of each month, amounts of natural gas delivered to customers since the date of the last meter read are estimated, and the corresponding unbilled revenue is recorded.

Postretirement Employee Benefits

NJR’s costs of providing postretirement employee benefits are dependent upon numerous factors including actual plan experience and assumptions of future experience. Postretirement employee benefit costs, for example, are impacted by actual employee demographics including age, compensation levels and employment periods, the level of contributions made to the plans and the return on plan assets. Changes made to the provisions of the plans may also impact current and future postretirement employee benefit costs. Postretirement employee benefit costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets, health care cost trends and discount rates used in determining the projected benefit obligations (PBO). In determining the PBO and cost amounts, assumptions can change from period to period, which could result in material changes to net postretirement employee benefit periodic costs and the related liability recognized by NJR.

NJR’s postretirement employee benefit plan assets consist primarily of U.S. equity securities, international equity securities and fixed income investments, with a targeted allocation of 52 percent, 18 percent and 30 percent, respectively. Fluctuations in actual market returns as well as changes in interest rates may result in increased or decreased postretirement employee benefit costs in future periods. Postretirement employee benefit expenses are included in Operations and Maintenance expense on the Consolidated Statements of Income.

Results of Operations

Net income for the quarter ended March 31, 2006, increased by 16 percent to $60.2 million, compared with $51.7 million for the same period last year. Basic earnings per share (EPS) increased 16 percent to $2.16, compared with $1.87 last year. Diluted EPS increased 16 percent to $2.14, compared with $1.84 last year.

The earnings for the six months ended March 31, 2006 increased 15 percent to $94.5 million, compared with $81.9 million for the same period last year. Basic EPS increased 15 percent to $3.41, compared with $2.96 last year. The results for the six months ended March 31, 2005 included a gain of $.22 per basic share on the sale of a commercial office building and a charge of $.05 per basic share associated with an early retirement program for officers. Net of these items, NJR’s earnings in the six months ended March 31, 2005 were $2.79 per basic share and $2.74 per diluted share.

A summary of NJR’s results by business segment for the three and six months ended March 31, 2006 and 2005, respectively, is as follows:


	Three Months Ended					Six Months Ended
	March 31,					March 31,
(Thousands)	2006			2005		2006		2005

Net Income(Loss)
Natural Gas Distribution	$	33,509		$	35,258	$	52,192	$	53,091
Energy Services		26,999			15,446		41,896		22,006
Retail and Other		(307	)		961		377		6,770

Total	$	60,201		$	51,665	$	94,465	$	81,867

NJR’s fiscal 2006 earnings have been driven by NJRES, the Company’s wholesale energy services business unit, which more than offset lower earnings at NJNG, the Company’s Natural Gas Distribution unit. NJRES’ earnings, for the quarter ended March 31, 2006, grew to $27 million, a 75 percent increase over $15.4 million for the same period last year. NJRES earnings for the six months ended March 31, 2006, grew to $41.9 million, a 90 percent increase over $22 million for the same period last year. NJNG’s earnings for the quarter ended March 31, 2006, decreased by 5 percent to $33.5 million from $35.3 million for the same period last year. NJNG’s earnings for the six months ended, March 31, 2006, decreased by 1.7 percent to $52.2 million from $53.1 million for the same period last year.

Provided below is a reconciliation of as reported and as adjusted information for Net Income and basic and diluted earnings per share for the six months ended March 31, 2005. This reconciliation reflects the impact of the gain on sale of a commercial office building and a charge related to an early retirement program for officers. Management believes that this reconciliation is needed due to the unusual nature of these two items and that they were not indicative of core results. It also provides for a more consistent comparison with this years results.


(Unaudited)
(Thousands, except per share data)	For Six Months Ended March 31, 2005
					NJRHS
	NJNG		NJRES		and Other			Total

Net Income, as reported	$	53,091	$	22,006	$	6,770		$	81,867
Exclude:
Gain on sale of commercial office building						(5,972	)		(5,972	)
Charge for early retirement program		915		8		569			1,492

Net Income, as adjusted	$	54,006	$	22,014	$	1,367		$	77,387

Earnings per share basic, as reported								$	2.96
Exclude:
Gain on sale of commercial office building									(.22	)
Charge for early retirement program									.05

Earnings per share basic, as adjusted								$	2.79

Earnings per share diluted, as reported								$	2.90
Exclude:
Gain on sale of commercial office building									(.21	)
Charge for early retirement program									.05

Earnings per share diluted, as adjusted								$	2.74

Natural Gas Distribution Operations

NJNG is a local natural gas distribution company that provides regulated retail energy services to more than 468,000 residential and commercial customers in central and northern New Jersey and participates in the off-system sales and capacity release markets. NJNG’s goal is to grow profitably while keeping customer prices as stable as possible.

In February 1999, the Electric Discount and Energy Competition Act (EDECA), which provides the framework for the restructuring of New Jersey’s energy markets, became law. In March 2001, the BPU issued an order to fully open NJNG’s residential markets to competition, restructure its rates to segregate its BGSS and delivery (i.e., transportation) service prices as required by EDECA and expand an incentive for residential and small commercial customers to switch to transportation service. NJNG earns no gross margin on the commodity portion of its natural gas sales. NJNG earns gross margin through the delivery of natural gas to its customers. In January 2002, the BPU ordered that BGSS could be provided by suppliers other than the state’s natural gas utilities, but BGSS should be provided by the state’s natural gas utilities until further BPU action.

NJNG’s financial results are summarized as follows:


	Three Months Ended				Six Months Ended
	March 31,				March 31,
(Thousands)	2006		2005		2006		2005

Operating revenues	$	471,406	$	462,576	$	865,752	$	783,046

Gross margin	$	78,237	$	77,689	$	130,906	$	130,145
Residential and commercial Transportation		6,479		8,160		12,861		14,805

Total firm gross margin		84,716		85,849		143,767		144,950
Incentive programs		2,932		2,438		6,046		4,008
Interruptible		222		260		528		567

Total gross margin		87,870		88,547		150,341		149,525
Operation and maintenance expense		21,104		19,268		40,971		39,497
Depreciation and amortization		8,477		8,187		16,900		16,304
Other taxes not reflected in gross margin		796		739		1,530		1,575

Operating income	$	57,493	$	60,353	$	90,940	$	92,149

Other income and expense	$	736	$	658	$	1,561	$	1,484

Interest charges, net	$	3,990	$	3,678	$	7,774	$	7,310

Net income	$	33,509	$	35,258	$	52,192	$	53,091

Gross Margin

NJNG’s gross margin is defined as natural gas revenues less natural gas purchases, sales tax, a Transitional Energy Facilities Assessment (TEFA), which is included in Energy and other taxes on the Consolidated Statements of Income, and regulatory rider expenses. Regulatory rider expenses consist of recovery of state-mandated programs and the remediation adjustment clause costs. These expenses are designed to be primarily offset by corresponding revenues. Management believes that gross margin provides a more meaningful basis than revenue for evaluating utility operations since natural gas costs, sales tax, TEFA and regulatory rider expenses are passed through to customers, and therefore, have no effect on gross margin. Natural gas costs are charged to operating expenses on the basis of therm sales at the prices in NJNG’s BGSS tariff, approved by the BPU. The BGSS price includes projected natural gas costs, net of supplier refunds, the impact of hedging activities and credits from nonfirm sales and transportation activities. Any underrecoveries or overrecoveries from the projected amounts are deferred and, subject to BPU approval, reflected in the BGSS in subsequent periods. Sales tax is calculated at 6 percent of revenue and excludes sales to cogeneration facilities, other utilities, off-system sales and federal accounts. TEFA is calculated on a per-therm basis and excludes sales to cogeneration facilities, other utilities and off-system sales. Regulatory rider expenses are calculated on a per-therm basis.

NJNG’s operating revenues increased by 11 percent to $866 million, and gas purchases increased by 14 percent to $652 million for the six months ended March 31, 2006, compared with the same period last year. The increases in operating revenues and gas purchases were the result of higher prices due primarily to the increase in wholesale commodity costs. Sales tax and TEFA, which are presented gross in the Consolidated Statements of Income, totaled $24.5 million for the three months ended in both March 31, 2006 and 2005, and $41.8 million and $38.9 million for the six months ended March 31, 2006 and 2005, respectively. For the three months ended March 31, 2006, the increase in sales tax was due to the increase in revenues, which was offset by a decrease in TEFA due to the lower firm throughput. For the six months ended March 31, 2006, the increase in sales tax and TEFA was due primarily to the corresponding increase in revenues. Regulatory rider expenses totaled $12.4 million and $14.8 million for the three months ended March 31, 2006 and 2005, respectively, and

$21.9 million and $23.9 million for the six months ended March 31, 2006 and 2005, respectively. The decrease in regulatory rider expenses is due primarily to a decrease in firm throughput.

Firm Gross Margin

Gross margin from residential and commercial customers is impacted by the WNC, which provides for a revenue adjustment if the weather varies by more than one-half percent from normal weather (i.e., 20-year average). The accumulated adjustment from one heating season (i.e., October through May) is billed or credited to customers in subsequent periods. This mechanism reduces the variability of both customers’ bills and NJNG’s earnings due to weather fluctuations. The WNC does not, however, capture changes in customers’ usage per degree day from the assumed levels in the WNC. The weather for the six months ended March 31, 2006, was 7.4 percent warmer than normal, which resulted in a $7.1 million accrual of gross margin under the WNC.

Customers switching between sales service and transportation service affect the components of gross margin from firm customers. NJNG’s total gross margin is not negatively affected by customers who use its transportation service and purchase natural gas from another supplier because its tariff is designed so that no profit is earned on the commodity portion of sales to firm customers. All customers who purchase natural gas from another supplier continue to use NJNG for transportation service.

Total firm gross margin decreased by $1.1 million, or 1.3 percent, for the three months and $1.2 million, or less than 1 percent for the six months ended March 31, 2006, compared with the same period last year. This decrease was due primarily to a reduction in customer usage per degree day, which offset customer growth. Management believes that the reduction in usage per degree day was due primarily to an increase in wholesale commodity costs, which resulted in increased customer conservation.

Gross margin from sales to residential and commercial customers increased by $548,000 and $761,000 or less than 1 percent, for the three months and six months ended March 31, 2006, respectively, compared with the same period last year. Sales to residential and commercial customers were 23.7 billion cubic feet (Bcf) and 40.1 Bcf for the three months and six months ended March 31, 2006, respectively, compared with 27.4 Bcf and 43.3 Bcf respectively in the same periods last year. The relatively small change in gross margin and sales was due primarily to the lower usage per degree day, offsetting customer growth, as discussed above.

Gross margin from transportation service decreased $1.7 million, or 21 percent, and $1.9 million, or 13 percent, for the three and six months ended March 31, 2006, respectively, compared with the same period last year. NJNG transported 2.3 Bcf and 4.9 Bcf for the three and six months ended March 31, 2006, respectively compared with 3.4 Bcf and 5.8 Bcf, respectively in the same period last year. The decrease in transportation margin was primarily due to lower usage per degree day discussed above.

NJNG had 9,129 and 11,639 residential customers and 3,602 and 3,508 commercial customers using its transportation service at March 31, 2006 and 2005, respectively. The decrease in total transportation customers was due primarily to a decrease in third-party marketing efforts in NJNG’s service territory.

During the first six months of fiscal 2006, NJNG added 5,804 new customers, 34 percent of which converted from other fuels. In addition, 151 existing customers added natural gas heat to their existing service. In fiscal 2006, NJNG currently expects to add approximately 10,600 new customers and convert an additional 950 existing customers to natural gas heat and other services. Achieving these expectations would represent an estimated annual customer growth rate of approximately 2.3 percent.

These growth expectations are based upon management’s review of local planning board data, recent market research performed by third parties, builder surveys and studies of population growth rates in NJNG’s service territory. However, future sales will be affected by the weather, actual energy usage patterns of NJNG’s customers, economic conditions in NJNG’s service territory, conversion and conservation activity, the impact of changing from a regulated to a competitive environment, changes in state regulation and other marketing efforts, as has been the case in prior years.

Incentive Programs

To reduce the overall cost of its natural gas supply commitments, NJNG has entered into contracts to sell natural gas to wholesale customers outside its franchise territory when the natural gas is not needed for system requirements. These off-system sales enable NJNG to spread its fixed demand costs, which are charged by pipelines to access their supplies year round, over a larger and more diverse customer base. NJNG also participates in the capacity release market on the interstate pipeline network when the capacity is not needed for its firm system requirements. NJNG retains 15 percent of the gross margin from these sales, with 85 percent credited to firm customers through the BGSS.

The financial risk management (FRM) program is designed to provide price stability to NJNG’s natural gas supply portfolio. The FRM program includes an incentive mechanism designed to encourage the use of financial instruments to hedge NJNG’s natural gas costs, with an 80/20 percent sharing of the costs and results between customers and shareowners, respectively.

The storage incentive program shares gains and losses on an 80/20 percent basis between customers and shareowners, respectively. This program measures the difference between the actual cost of natural gas in storage and a benchmark applicable to the April-through-October injection season.

On April 12, 2006, the BPU approved the extension of all the BGSS-related incentive programs through October 31, 2007.

NJNG’s incentive programs totaled 11.5 Bcf and generated $2.9 million of gross margin and 21.7 Bcf and $6 million of gross margin for the three and six months ended March 31, 2006, respectively, compared with 14.1 Bcf and $2.4 million of gross margin and 28.6 Bcf and $4 million of gross margin, for the same period last year. The increase in gross margin in both periods was due primarily to the FRM and the storage incentive programs, which both benefited from additional volatility in the wholesale energy market.

Interruptible

NJNG serves 48 customers through interruptible sales and/or transportation tariffs. Sales made under the interruptible sales tariff are priced on market-sensitive energy parity rates. Although therms sold and transported to interruptible customers represented approximately 4 percent and 5 percent of total throughput for the six months ended March 31, 2006 and 2005, respectively, they accounted for less than 1 percent of the total gross margin in both periods due to the sharing formulas that govern these sales. Under these formulas, NJNG retains 10 percent of the gross margin from interruptible sales and 5 percent of the gross margin from transportation sales, with 90 percent and 95 percent, respectively, credited to firm sales customers through the BGSS. Interruptible sales were .2 Bcf and .3 Bcf, for the six months ended March 31, 2006 and 2005, respectively. In addition, NJNG transported 2.6 Bcf and 3.8 Bcf for the six months ended March 31, 2006 and 2005, respectively, for its interruptible customers.

Operation and Maintenance Expense

Operation and maintenance (O&M) expense increased by $1.8 million, or 9.5 percent, and $1.5 million, or 3.7 percent, for the three and six months ended March 31, 2006, respectively. The increase in both periods was due primarily to higher bad debt, labor, fringe benefits and regulatory assessments.

Operating Income

Operating income decreased by $2.8 million, or 4.7 percent, and $1.2 million, or 1.3 percent, for the three and six months ended March 31, 2006, respectively. The decrease, in both periods, was due primarily to the lower firm gross margin and higher O&M expense, partially offset by higher incentive program margins described above.

Net Income

Net income decreased $1.8 million, or 5 percent, and $900,000, or 1.7 percent, for the three and six months ended March 31, 2006, respectively, due primarily to lower operating income as described above and higher interest expense due primarily to higher interest rates.

Energy Services Operations

NJRES provides unregulated wholesale energy services, including base load natural gas, peaking and balancing services, utilizing physical assets it controls, as well as providing asset management services to customers in states from the Gulf Coast and Mid-Continent to New England and Canada.

NJRES has built a portfolio of customers including local distribution companies, industrial companies, electric generators and retail aggregators. Sales to these customers have allowed NJRES to leverage its transportation and storage capacity and manage sales to these customers in an aggregate fashion. This provides customers with better pricing and allows NJRES to extract more value from its portfolio of storage and transportation capacity. In addition, these customers have come to rely on NJRES’ reliability, which is, in part, due to the ability to deliver from a firm supply source.

NJRES also focuses on creating value from underutilized natural gas assets, which are typically amassed through contractual rights to natural gas transportation and storage capacity. NJRES has developed a portfolio of storage and transportation capacity in the Northeast Gulf Coast, Mid-Continent, Appalachia and Eastern Canada. These assets become more valuable when prices change between these areas and across time periods. NJRES seeks to optimize this process on a daily basis as market conditions change by evaluating all the natural gas supplies, transportation and opportunities to which it has access to find the most profitable alternative to serve its various commitments. This enables NJRES to capture geographic pricing differences across these various regions as delivered natural gas prices change. NJRES’ gross margin is defined as natural gas revenues and management fees less natural gas costs and fixed demand costs.

In a similar manner, NJRES participates in natural gas storage transactions where it seeks to identify pricing differences that occur over time, as prices for future delivery periods at many locations are readily available. NJRES generates gross margin by locking in the differential between purchasing natural gas at the lowest current or future price and, in a related transaction, selling that natural gas at the highest current or future price, all within the constraints of its contracts credit policies. Through the use of transportation and storage services, NJRES is able to generate gross margin through pricing differences that occur over the duration of time the assets are held.

NJRES’ portfolio management customers include nonaffiliated utilities and electric generation plants. Services provided by NJRES include optimization of underutilized natural gas assets and basic

gas supply functions. Revenue is customarily derived by a combination of a base service fee and incentive-based arrangements.

NJRES’ financial results are summarized as follows:


	Three Months Ended				Six Months Ended
	March 31,				March 31,
(Thousands)	2006		2005		2006		2005

Operating revenues	$	587,525	$	596,921	$	1,350,720	$	1,113,792
Gas purchases		536,038		568,155		1,269,381		1,070,604

Gross margin		51,487		28,766		81,339		43,188
Operation and maintenance expense		3,224		1,966		5,742		4,118
Depreciation and amortization		51		58		103		112
Other taxes		150		161		331		215

Operating income	$	48,062	$	26,581	$	75,163	$	38,743

Net income	$	26,999	$	15,446	$	41,896	$	22,006

NJRES’ portfolio of transportation capacity provides the ability to extract value from price differentials in different regions. Depending on market pricing conditions, it can be more advantageous to engage in one transaction over the entire transportation path, as opposed to multiple transactions along the same transportation path. These market pricing conditions can then affect the transacted volume as well as revenue. Market conditions resulted in higher gross margin in both the three and six month periods, despite a decline in the volume of natural gas sold and managed.

NJRES’ operating revenues and gas purchases decreased by $9.4 million, or 1.6 percent, and by $32.1 million, or 5.7 percent, for the three months ended March 31, 2006, respectively, compared with the same period last year. Natural gas sold and managed by NJRES totaled 62.1 Bcf for the three months ended March 31, 2006, compared with 82.9 Bcf in the same period last year.

NJRES’ operating revenues and gas purchases increased by $236.9 million, or 21 percent, and by $198.8 million, or 19 percent, for the six months ended March 31, 2006, respectively, compared with the same period last year. The increases were due primarily to higher natural gas prices, offset by lower volume. Natural gas sold and managed by NJRES, totaled 119.6 Bcf, for the six months ended, March 31, 2006, compared with 152.6 Bcf in the same period last year. This decrease is due to market price condition that influenced the use of transportation capacity.

NJRES’ gross margin is defined as natural gas revenues and management fees less natural gas costs and fixed demand costs. NJRES’ gross margin increased $22.7 million, or 79 percent, operating income increased by $21.5 million, or 81 percent and net income increased by $11.6 million, or 75 percent, for the three months ended March 31, 2006, compared with the same period last year, due primarily to NJRES’ ability to take advantage of an increased transportation portfolio and pricing differentials between geographic regions. NJRES’ gross margin increased $38.2 million, or 88 percent, operating income increased by $36.4 million, or 94 percent and net income increased by $19.9 million or 90 percent for the six months ended March 31, 2006, compared with the same period last year, due primarily to favorable time spreads on larger storage asset positions, as well as securing positive locational spreads on transportation capacity.

Operation and maintenance expense increased by $1.3 million, or 64 percent, for the three months ended March 31, 2006 and $1.6 million, or 40 percent, for the six months ended March 31, 2006, compared with the same periods last year, due primarily to higher labor and fringe benefits.

Future results are subject to NJRES’ ability to maintain and expand its wholesale marketing activities and are contingent upon many other factors, including an adequate number of appropriate

counterparties, sufficient liquidity in the energy trading market and continued access to the capital markets. In addition, NJRES’ gross margin from its portfolio of capacity assets is generally greater in the winter months, while the fixed costs of these assets are spread throughout the year. Accordingly, the results for the three and six months ended March 31, 2006 are not expected to be an indication of the results for the fiscal year.

Retail and Other Operations

The financial results of Retail and Other consists primarily of NJRHS, which provides service, sales and installation of appliances to over 143,000 customers; CR&R, which holds and develops commercial real estate and NJR Energy, an investor in energy-related ventures through its operating subsidiary, Pipeline, which consists primarily of its equity investment in the Iroquois Gas Transmission System, L.P. (Iroquois).

The consolidated financial results of Retail and Other are summarized as follows:


	Three Months Ended					Six Months Ended
	March 31,					March 31,
(Thousands)	2006			2005		2006		2005

Operating revenues	$	5,560		$	5,585	$	12,663	$	22,256

Other income	$	712		$	677	$	1,366	$	1,369

Net income (loss)	$	( 307	)	$	961	$	377	$	6,770

Retail and Other Operating revenue decreased by $25,000, or less than 1 percent, and $9.6 million, or 43 percent, for the three and six months ended March 31, 2006, compared with the same periods last year. Net income decreased by $1.3 million for the three months ended March 31, 2006, compared with the same period last year, due primarily to lower service contract revenue at NJRHS and higher corporate expenses at NJR. Net income decreased by $6.4 million for the six months ended March 31, 2006, compared with the same period last year, due primarily to the inclusion in fiscal 2005 of a $10.1 million pre-tax ($6 million after-tax) gain on the sale of a commercial office building.

Other income includes the amortization of a gain related to the sale-leaseback of a building, discussed below, and earnings generated from NJR Energy’s equity investment in Iroquois.

In fiscal 1996, CR&R entered into a sale-leaseback transaction that generated a pre-tax gain of $17.8 million, which is included in deferred revenue and is being amortized to other income over the 25-year term of the lease. The primary tenant of the facility, NJNG, is leasing the building under a long-term master lease agreement approved by the BPU and continues to occupy a majority of the space in the building.

Liquidity and Capital Resources

Consolidated

NJR’s objective is to maintain a consolidated capital structure that reflects the different characteristics of each business segment and provides adequate financial flexibility for accessing capital markets as required.

NJR’s consolidated capital structure was as follows:


	March 31,			September 30,			March 31,
(Thousands)	2006			2005			2005

Common stock equity		59	%		47	%		55	%
Long-term debt		32			34			34
Short-term debt		9			19			11

Total		100	%		100	%		100	%

NJR satisfies its external common equity requirements, if any, through issuances of its common stock, including the proceeds from stock issuances under its Automatic Dividend Reinvestment Plan (DRP) and proceeds from the exercise of options issued under the Company’s long-term incentive program. The DRP allows NJR, at its option, to use shares purchased on the open market or newly issued shares. NJR also has a share repurchase plan that allows NJR to purchase shares on the open market or negotiate transactions based on market and other conditions. In January 2006, the NJR Board of Directors authorized an increase in the share repurchase plan from 2.5 million to 3.5 million shares.

In December 2004, NJR entered into a $275 million committed credit facility with several banks, which replaced a $200 million credit facility. This facility has a 3-year term, expiring in December 2007. In November 2005, NJR amended the facility to increase it to $325 million. This facility provides liquidity to meet working capital and external debt-financing requirements of NJR and its nonregulated companies. Neither NJNG nor its assets are obligated or pledged to support the NJR facilities.

In December 2004, NJNG entered into a $225 million committed credit facility with several banks with a 5-year term, expiring in December 2009, which replaced a $225 million credit facility with a shorter term. This facility is used to support NJNG’s commercial paper program. In November 2005, NJNG amended this facility to increase it to $250 million.

NJNG satisfies its debt needs by issuing short- and long-term debt based upon its own financial profile. NJNG does not guarantee or otherwise directly support the debt of NJR. The seasonal nature of NJNG’s operations creates large short-term cash requirements, primarily to finance natural gas purchases and customer accounts receivable. NJNG obtains working capital for these requirements, and for the temporary financing of construction and MGP remediation expenditures and energy tax payments, through the issuance of commercial paper and short-term bank loans. To support the issuance of commercial paper, NJNG maintains the committed credit facility, discussed earlier, totaling $250 million.

NJR had borrowings of $73.5 million, $174.1 million and $95.1 million at March 31, 2006, September 30, 2005 and March 31, 2005, respectively, under NJR’s committed credit facilities. NJNG had $15 million, zero and $2.2 million of commercial paper borrowings supported by NJNG’s committed credit facilities at March 31, 2006, September 30, 2005 and March 31, 2005, respectively.

The following table is a summary of contractual cash obligations and their applicable payment due dates:


(Thousands)
						Payments Due by Period
			Up to		2-3		4-5		After
Contractual Obligations	Total		1 Year		Years		Years		5 Years

Long-term debt *	$	452,442	$	12,451	$	79,081	$	38,578	$	322,332
Capital lease obligations *		87,906		7,375		14,750		15,140		50,641
Operating leases *		8,240		2,541		3,686		1,295		718
Short-term debt		88,500		88,500		—		—		—
Clean energy program *		22,239		7,741		14,498		—		—
Construction obligations		7,433		7,433		—		—		—
Natural gas supply purchase obligations		845,616		479,184		179,932		117,526		68,974

Total contractual cash obligations	$	1,512,376	$	605,225	$	291,947	$	172,539	$	442,665


*		These obligations include interest.

As of March 31, 2006, there were NJR guarantees covering approximately $239 million of natural gas purchases and demand fee commitments of NJRES and NJNG, included in natural gas supply purchase obligations, not yet reflected in Accounts payable on the Consolidated Balance Sheet.

As of March 31, 2006, NJNG had a $72 million letter of credit outstanding, which will expire on June 30, 2006, in conjunction with a long-term gas swap agreement. The long-term gas swap agreement was entered into as a hedge related to an offsetting physical purchase of natural gas for the same time period and volume. This letter of credit reduces the amount available under NJNG’s committed credit facility by the same amount. NJNG does not anticipate that this letter of credit will be drawn upon by the counterparty and it will be renewed as necessary.

The Company is not currently required to make minimum pension funding contributions during fiscal 2006. The Company’s funding level to its OPEB plans is expected to be approximately $600,000 annually over the next five years. Additional contributions may be made based on market conditions and various assumptions.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet financing arrangements.

Cash Flows

Operating Activities

Cash flow from operating activities totaled $102.4 million for the six months ended March 31, 2006, compared with $212.9 million in the same period last year. The decrease in operating cash flow was due primarily to changes in working capital and higher MGP expenditures, which were partially offset by higher net income and a lower gain on asset sale. The reduction in cash flow from working capital was due primarily to the increase in gas in storage and a decrease in gas purchases payable partially offset by the change in receivables, all of which were caused by higher wholesale gas commodity costs.

NJNG’s MGP expenditures, exclusive of insurance recoveries, are currently expected to total $26.5 million in fiscal 2006. (See Note 14.Commitments and Contingent Liabilities.)

Financing Activities

Cash flow used in financing activities totaled $83.4 million for the six months ended March 31, 2006, compared with $217.9 million in the same period last year. The change was due primarily to the decrease in the reduction of short-term debt, increased issuance of long term debt and lower common stock repurchases.

In October 2005, NJNG entered into a loan agreement under which the EDA loaned NJNG the proceeds from $35.8 million of tax-exempt EDA Bonds consisting of $10.3 million, 4.5% (Series 2005A) and $10.5 million, 4.6% (Series 2005B) Revenue Refunding Bonds; and $15 million, 4.9% (Series 2005C) Natural Gas Facilities Revenue Bonds. NJNG used the proceeds from the Series A and B bonds to refinance NJNG’s $10.3 million, 5.38% Series W First Mortgage Bonds and its $10.5 million, 6.25% Series Y First Mortgage Bonds, respectively. The proceeds from the Series 2005C bonds were deposited into a construction fund. NJNG immediately drew down $2.5 million from the construction fund and issued like amounts of its 4.9% Series KK bonds to the EDA with a maturity date of October 1, 2040. (See Note 9.–Long-and Short-Term Debt and Restricted Cash-Construction Fund.) In December 2005 and 2004, NJNG received $4.1 million and $4.9 million in connection with the sale-leaseback of its vintage 2005 and 2004 meters, respectively. NJNG plans to continue the sale-leaseback meter program on an annual basis.

In December 2003, NJNG entered into a loan agreement under which the New Jersey Economic Development Authority (EDA) loaned NJNG the proceeds from its $12 million, 5% Natural Gas Facilities Revenue Bonds, which NJNG deposited into a construction fund. NJNG drew down $1.5, $6.3 and 4.2 million in September 2005, December 2004 and December 2003, respectively, from the construction fund and issued like amounts of its 5% Series HH Bonds to the EDA.

NJNG currently anticipates that its financing requirements in fiscal 2006 will be met through internally generated cash and the issuance of short-term debt.

NJRES’ use of high-injection /high-withdrawal storage facilities and anticipated pipeline park-and-loan arrangements, combined with related hedging activities in the volatile wholesale natural gas market, may create significant short-term cash requirements, which would be funded by NJR.

The timing and mix of any external financings will target a common equity ratio that is consistent with maintaining the Company’s current short- and long-term credit ratings.

Investing Activities

Cash flow used in investing activities totaled $35.3 million for the six months ended March 31, 2006, compared with cash flows from investing activities of $8.4 million for the same period last year. The increase in cash used was due primarily to the inclusion in December 2004 of $30.6 million in cash proceeds generated from the sale of a commercial office building and the draw down of $6.3 million from the construction fund. In addition, cash used in the six months ended March 2006, included the $12.5 million deposit into a construction fund created under the above mentioned EDA financing arrangement.

NJNG’s capital expenditures result primarily from the need for services, mains and meters to support its continued customer growth, pipeline safety rulemaking and general system improvements. NJNG’s capital expenditures are expected to increase in fiscal 2006 and 2007, compared to last year, due primarily to system integrity and expected replacement needed under pending pipeline safety rulemaking.

NJRES does not currently anticipate any significant capital expenditures in fiscal 2006 and 2007.

Retail and Other capital expenditures each year are primarily made in connection with investments made to preserve the value of real estate holdings.

Credit Ratings

The table below summarizes NJNG’s credit ratings issued by two rating entities, Standard and Poor’s (S&P), and Moody’s Investors Service, Inc. (Moody’s).


	Standard &
	Poor’s	Moody’s
Corporate Rating	A+	N/A
Commercial Paper	A-1	P-1
Senior Secured	AA-	Aa3
Ratings Outlook	Stable	Stable

NJNG’s S&P and Moody’s Senior Secured ratings are investment grade ratings and represent the sixth highest rating within the investment grade category. Moody’s and S&P give NJNG’s commercial paper the highest rating within the Commercial Paper investment grade category. Investment grade

Financial Risk Management

Commodity Market Risks

Natural gas is a nationally traded commodity, and its prices are determined by the New York Mercantile Exchange (NYMEX) and over-the-counter markets. The prices on the NYMEX and over-the-counter markets generally reflect the notional balance of natural gas supply and demand, but are also influenced significantly from time to time by other events.

The regulated and unregulated natural gas businesses of the Company and its subsidiaries are subject to market risk due to fluctuations in the price of natural gas. To hedge against such fluctuations, the Company and its subsidiaries have entered into futures contracts, options agreements and over-the-counter swap agreements. To manage these instruments, the Company has well-defined risk management policies and procedures that include daily monitoring of volumetric limits and monetary guidelines. The Company’s natural gas businesses are conducted through three of its operating subsidiaries. First, NJNG is a regulated utility that uses futures, options and swaps to hedge against price fluctuations, and its recovery of natural gas costs is governed by the BPU. Second, NJRES uses futures options and swaps to hedge purchases and sales of natural gas. Finally, NJR Energy has entered into several swap transactions to hedge 18-year fixed-price contracts to sell approximately 19.4 Bcf of natural gas (Gas Sale Contracts) to an energy marketing company. NJR Energy has hedged both the price and physical delivery risks associated with the Gas Sale Contracts. To hedge its price risk, NJR Energy entered into two swap agreements effective November 1995. Under the terms of these swap agreements, NJR Energy will pay its swap counterparties the identical fixed price it receives from the natural gas marketing company in exchange for the payment by such swap counterparties of a floating price based on an index price plus a spread per Mmbtu for the total volumes under the Gas Sales Contracts. In order to hedge its physical delivery risk, NJR Energy entered into a purchase contract with a second natural gas marketing company for the identical volumes it is obligated to sell under the Gas Sale Contracts and pays the identical floating price it receives under the swap agreements mentioned above.

There were no changes in methods of valuations during the quarter ended March 31, 2006.

The following is a summary of fair market value of commodity derivatives at March 31, 2006, by method of valuation and by maturity:


	Remaining								After			Total
(Thousands)	2006		2007			2008-2010			2010			Fair Value

Price based on NYMEX	$	31,287	$	(10,958	)	$	(57,960	)	$	(848	)	$	(38,479	)
Price based on over-the-counter published quotations		4,903		14,461			34,243			543			54,150

Total	$	36,190	$	3,503		$	(23,717	)	$	(305	)	$	15,671

The following is a summary of commodity derivatives by type as of March 31, 2006:


							Amounts
							Included
		Volume			Price per		in Derivatives
		(Bcf)			Mmbtu		(Thousands)

NJNG	Futures		(3.7	)	$	5.30-$11.30	$	59,671
	Options		3.2		$	8.00-$10.50	$	(1,991	)
	Swaps		3.3		$	(0.47)-$10.50	$	(107,651	)

NJRES	Futures		(13.1	)	$	6.07-$11.99	$	13,525
	Swaps		(28.7	)	$	(0.80)-$1.92	$	2,386

NJR Energy	Swaps		11.7		$	2.92-$4.41	$	49,731

Total							$	15,671

The Company uses a value-at-risk (VAR) model to assess the market risk of its net futures, swaps and options positions. The VAR at March 31, 2006, using the variance-covariance method with a 95 percent confidence level and a 1-day holding period, was $1.6 million. The VAR with a 99 percent confidence level and a 10-day holding period was $7.3 million. The calculated VAR represents an estimate of the potential change in the value of the net positions. These estimates may not be indicative of actual results because actual market fluctuations may differ from forecasted fluctuations.

Wholesale Credit Risk

NJNG, NJRES and NJR Energy engage in wholesale marketing activities. NJR monitors and manages the credit risk of its wholesale marketing operations through credit policies and procedures that management believes reduce overall credit risk. These policies include a review and evaluation of prospective counterparties’ financial statements and/or credit ratings, daily monitoring of counterparties’ credit limits, daily communication with traders regarding credit status, and the use of credit mitigation measures such as minimum margin requirements, collateral requirements and netting agreements. Examples of collateral include letters of credit and cash received for either prepayment or margin deposit.

The Company’s Risk Management Committee (RMC) continuously monitors NJR’s credit risk management policies and procedures. The RMC is a group of senior officers from NJR-affiliated companies that meets twice a month and, among other things, evaluates the effectiveness of existing credit policies and procedures, reviews material transactions and discusses emerging issues.

Following is a summary of gross and net credit exposures, grouped by investment and noninvestment grade counterparties, as of March 31, 2006. Gross credit exposure is defined as the unrealized fair value of derivative and energy trading contracts plus any outstanding receivable for the value of natural gas delivered for which payment has not yet been received. Net credit exposure is defined as gross credit exposure reduced by collateral received from counterparties and/or payables, where netting agreements exist. The amounts presented below exclude accounts receivable for retail natural gas sales and services.

Unregulated counterparty credit exposure as of March 31, 2006, is as follows:


	Gross Credit		Net Credit
(Thousands)	Exposure		Exposure

Investment grade	$	197,546	$	142,295
Noninvestment grade		5,149		729
Internally rated investment grade		11,839		8,033
Internally rated noninvestment grade		7,584		—

Total	$	222,118	$	151,057

NJNG’s counterparty credit exposure as of March 31, 2006, is as follows:


	Gross Credit		Net Credit
(Thousands)	Exposure		Exposure

Investment grade	$	34,708	$	30,822
Noninvestment grade		168		—
Internally rated investment grade		2,246		677
Internally rated noninvestment grade		3,616		—

Total	$	40,738	$	31,499

Due to the inherent volatility in the prices of natural gas commodities and derivatives, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If a counterparty failed to perform the obligations under its contract (for example, failed to deliver or pay for natural gas), then the Company could sustain a loss. This loss would comprise the loss on natural gas delivered but not paid for, and/or the cost of replacing natural gas not delivered at a price higher than the price in the original contract. Any such loss could have a material impact on the Company’s financial condition, results of operations or cash flows.

Interest Rate Risk–Long-Term Debt

At March 31, 2006, the Company (excluding NJNG) had no variable-rate, long-term debt.

At March 31, 2006, NJNG had total variable-rate, tax-exempt long-term debt outstanding of $97 million, which is hedged by 3.5 percent interest-rate caps, expiring in July 2006. If interest rates were to change by 1 percent on the $97 million of variable-rate debt at March 31, 2006, NJNG’s annual interest expense, net of tax, would change by $574,000.

Management intends to continue hedging its tax-exempt, variable-rate debt with an interest-rate cap.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period reported on in this report, NJR has undertaken an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities and Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that NJR’s disclosure controls and procedures were effective, in all material respects, with respect to the recording, processing, summarizing and reporting, within the time periods specified in the SEC’s rules and forms, of information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

During the quarter ended March 31, 2006, there were no changes to the Registrant’s internal control over financial reporting that have materially affected, or that are reasonably likely to materially effect, the Registrant’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information required by this Item is set forth in Part I, Item 1, Note 6. Legal and Regulatory Proceedings.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS.

In 1996, the NJR Board of Directors authorized the repurchase of up to 1 million of the Company’s common shares. Since 1996, the repurchase plan has been expanded several times, most recently in January, 2006, to permit the repurchase of up to 3.5 million shares. As of March 31, 2006, the Company has repurchased 2,461,853 shares of its common stock.

The following table sets forth NJR’s repurchase activity for the quarter ended March 31, 2006:

Maximum Number

(or Approximate

Total Number of

Dollar Value) of

Shares (or Units)

Purchased as Part

That May Yet Be

Total Number of

Average Price

of Publicly

Purchased Under

Shares (or Units)

Paid per Share

Announced Plans

the Plans or

Purchased

(or Unit)

or Programs

Programs

Period

(a)

(b)

(c)

(d)

01/1/06 – 01/31/06

—

1,089,847

02/1/06 – 02/28/06

9,900

43.37

9,900

1,079,947

03/1/06 – 03/31/06

41,800

43.57

41,800

1,038,147

Total

51,700

43.53

51,700

1,038,147

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

	(a)		An annual meeting of shareholders was held on January 25, 2006

	(b)		The shareholders voted upon the following matters at the January 25, 2006 annual shareholders meeting:

	(i)		The election of Four (4) directors for terms expiring in 2009. The results of the voting were as follows:


Director	For		Withheld
M. William Howard, Jr.		21,823,283		226,403
J. Terry Strange		21,791,113		258,573
Gary W. Wolf		21,855,600		194,086
George R. Zoffinger		21,838,961		210,725

In addition to the directors elected at the annual meeting, the terms of the following members of NJR’s Board of Directors continued after the meeting: Nina Aversano, Lawrence R. Codey, Laurence M. Downes, Alfred C. Koeppe, Dorothy K. Light, David A. Trice and William H. Turner.

(ii) The approval of the Outside Director Compensation Plan and the ratification of the grants and stock made under the plan in 2005. The results of the voting were as follows:


For	Against		Abstain		No Vote
14,826,869		1,314,514		309,500		5,598,803

(iii) The approval of the Annual Officer Incentive Plan. The results of the voting were as
follows:


For	Against		Abstain
20,492,847		1,271,858		284,981

(iv) The approval of the action to retain Deloitte & Touche LLP as auditors for the fiscal year ending September 30, 2006. The results of the voting were as follows:


For	Against		Abstain
21,685,899		264,432		99,355


	Three Months Ended					Six Months Ended
	March 31,					March 31,
(Thousands)	2006			2005		2006			2005

Net income	$	60,201		$	51,665	$	94,465		$	81,867


Other comprehensive income:

Change in fair value of equity investments, net of tax of $144 , $(197), $167 and $(474),		(208	)		285		(241	)		686

Change in fair value of derivatives, net of tax of $(20,972), $(2,287), $(68,341), $(2,676)		30,456			3,312		99,046			3,876


Other comprehensive income		30,248			3,597		98,805			4,562

Comprehensive income	$	90,449		$	55,262	$	193,270		$	86,429


		NEW JERSEY RESOURCES


Date: May 4, 2006		/s/Glenn C. Lockwood
		Glenn C. Lockwood
		Senior Vice President
		and Chief Financial Officer