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 JUNE 30, 2006

OR

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

FOR THE TRANSITION PERIOD FROM                      TO

Commission file number 1-8359

NEW JERSEY RESOURCES CORPORATION

(Exact name of registrant as specified in its charter)

New Jersey
(State or other jurisdiction of
incorporation or organization)
1415 Wyckoff Road, Wall, New Jersey - 07719
(Address of principal
executive offices) 22-2376465
(I.R.S. Employer
Identification Number)
732-938-1489
(Registrant’s telephone number,
including area code)

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

Common Stock — $2.50 Par Value
(Title of each class) New York Stock Exchange
(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 August 8, 2006 was 28,080,314.

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 FOR NINE MONTHS ENDED JUNE 30, 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 6. EXHIBITS
SIGNATURES
DIRECTORS DEFERRED COMPENSATION PLAN
DIRECTORS DEFERRED COMPENSATION PLAN-PRE-409A
OFFICERS' DEFERRED COMPENSATION PLAN
OFFICERS DEFERRED COMPENSATION PLAN-PRE 409A
FORM OF SUPPLEMENTAL RETIREMENT PLAN AGREEMENT
FORM OF EMPLOYMENT CONTINUATION AGREEMENT
CERTIFICATION
CERTIFICATION
CERTIFICATION
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 Corporation (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, the 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, the availability of 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.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEW JERSEY RESOURCES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended					Nine Months Ended
	June 30,					June 30,
(Thousands, except per share data)	2006			2005		2006		2005
OPERATING REVENUES	$	536,103		$	544,280	$	2,765,101	$	2,463,325
OPERATING EXPENSES
Gas purchases		489,677			492,036		2,410,840		2,133,386
Operation and maintenance		28,657			24,298		86,160		77,834
Regulatory rider expenses		4,005			4,793		25,868		28,707
Depreciation and amortization		8,735			8,424		25,923		25,135
Energy and other taxes		8,428			8,878		53,098		50,489
Total operating expenses		539,502			538,429		2,601,889		2,315,551
OPERATING (LOSS) INCOME		(3,399	)		5,851		163,212		147,774
Other income		1,769			1,659		4,031		4,823
Interest charges, net		5,358			4,897		18,014		14,968
(LOSS) INCOME BEFORE INCOME TAXES		(6,988	)		2,613		149,229		137,629
Income tax (benefit) provision		(3,013	)		778		58,739		53,927
NET (LOSS) INCOME	$	(3,975	)	$	1,835	$	90,490	$	83,702
(LOSS) EARNINGS PER COMMON SHARE
BASIC	$	(.14	)	$	0.07	$	3.25	$	3.03
DILUTED	$	(.14	)	$	0.07	$	3.22	$	2.97
DIVIDENDS PER COMMON SHARE	$	.36		$	.34	$	1.08	$	1.02
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC		28,055			27,468		27,809		27,616
DILUTED		28,396			28,079		28,139		28,198

See Notes to Condensed Unaudited Consolidated Financial Statements

2

NEW JERSEY RESOURCES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Thousands)
Nine Months Ended June 30,	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	90,490		$	83,702
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH FLOWS FROM OPERATING ACTIVITIES
Depreciation and amortization		25,923			25,135
Amortization of deferred charges		226			1,352
Unrealized (gain) loss on derivatives		(4,886	)		750
Deferred income taxes		11,605			1,442
Manufactured gas plant remediation costs		(17,991	)		(11,644	)
Gain on asset sales		(617	)		(10,450	)
Changes in:
Working capital		(64,307	)		51,104
Other noncurrent assets		18,996			8,187
Other noncurrent liabilities		(14,746	)		(8,269	)
Cash flows from operating activities		44,693			141,309
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock		15,215			9,651
Tax benefit from stock options exercised		4,700			1,855
Proceeds from long-term debt		35,800			—
Proceeds from sale-leaseback transaction		4,090			4,904
Purchases of treasury stock		(6,695	)		(23,835	)
Payments of long-term debt		(23,225	)		(27,145	)
Payments of common stock dividends		(29,381	)		(27,820	)
Net payments of short-term debt		(20,400	)		(66,050	)
Cash flows used in financing activities		(19,896	)		(128,440	)
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for
Utility plant		(28,992	)		(38,322	)
Real estate properties and other		(3,062	)		(1,192	)
Cost of removal		(4,043	)		(4,253	)
Equity investments		—			(8,764	)
(Investment in) withdrawal from restricted cash construction fund		(12,500	)		6,300
Proceeds from sale of investments available for sale		—			302
Proceeds from asset sales		3,531			31,184
Cash flows used in investing activities		(45,066	)		(14,745	)
Change in cash and temporary investments		(20,269	)		(1,876	)
Cash and temporary investments at beginning of period		25,008			5,043
Cash and temporary investments at end of period	$	4,739		$	3,167
CHANGES IN COMPONENTS OF WORKING CAPITAL
Receivables	$	44,324		$	(97,986	)
Inventories		(169,037	)		53,965
Underrecovered gas costs		67,357			52,663
Gas purchases payable		(417	)		(14,538	)
Prepaid and accrued taxes, net		(6,098	)		8,083
Accounts payable and other		(12,428	)		(6,634	)
Restricted broker margin accounts		13,440			41,323
Other current assets		(7,836	)		5,168
Other current liabilities		6,388			9,060
Total	$	(64,307	)	$	51,104
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for
Interest (net of amounts capitalized)	$	14,595		$	14,232
Income taxes	$	35,970		$	37,879

See Notes to Condensed Unaudited Consolidated Financial Statements

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NEW JERSEY RESOURCES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

ASSETS

	June 30,			September 30,			June 30,
(Thousands)	2006			2005			2005
PROPERTY, PLANT AND EQUIPMENT
Utility plant, at cost	$	1,222,522		$	1,197,418		$	1,183,566
Real estate properties and other, at cost		24,877			24,340			25,157
		1,247,399			1,221,758			1,208,723
Accumulated depreciation and amortization		(328,026	)		(316,628	)		(307,135	)
Property, plant and equipment, net		919,373			905,130			901,588
CURRENT ASSETS
Cash and temporary investments		4,739			25,008			3,167
Customer accounts receivable		190,705			235,338			245,495
Unbilled revenues		11,817			10,207			9,698
Allowance for doubtful accounts		(6,598	)		(5,297	)		(6,611	)
Regulatory assets		8,067			34,904			14,697
Gas in storage, at average cost		425,716			254,909			220,138
Materials and supplies, at average cost		3,587			3,857			4,283
Prepaid state taxes		31,059			24,020			15,760
Derivatives		134,590			359,540			78,018
Other		9,713			10,304			17,414
Total current assets		813,395			952,790			602,059
NONCURRENT ASSETS
Equity investments		26,453			27,649			29,579
Regulatory assets		288,470			231,366			232,532
Derivatives		51,347			70,777			65,852
Restricted cash construction fund		12,500			—			1,500
Other		26,534			22,116			25,913
Total noncurrent assets		405,304			351,908			355,376
Total assets	$	2,138,072		$	2,209,828		$	1,859,023

See Notes to Condensed Unaudited Consolidated Financial Statements

4

NEW JERSEY RESOURCES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Continued)

CAPITALIZATION AND LIABILITIES

	June 30,		September 30,		June 30,
(Thousands)	2006		2005		2005
CAPITALIZATION
Common stock equity	$	595,471	$	438,052	$	518,134
Long-term debt		333,813		317,204		318,093
Total capitalization		929,284		755,256		836,227
CURRENT LIABILITIES
Current maturities of long-term debt		3,309		3,253		3,289
Short-term debt		153,700		174,100		193,650
Gas purchases payable		300,569		300,986		196,330
Accounts payable and other		37,983		54,070		36,282
Postretirement employee benefit liability		14,176		613		10,014
Dividends payable		10,106		9,366		9,345
Accrued taxes		1,077		25,429		10,820
Clean energy program		7,736		6,078		6,570
Regulatory liabilities		30,308		—		—
Derivatives		115,712		377,928		71,099
Restricted broker margin accounts		15,264		1,824		3,063
Customers’ credit balances and deposits		15,434		22,609		13,952
Total current liabilities		705,374		976,256		554,414
NONCURRENT LIABILITIES
Deferred income taxes		201,495		104,809		173,601
Deferred investment tax credits		7,916		8,157		8,238
Deferred revenue		10,379		10,898		11,071
Derivatives		82,939		107,883		64,929
Manufactured gas plant remediation		93,920		93,920		92,880
Clean energy program		11,793		18,612		19,062
Postretirement employee benefit liability		—		5,867		5,465
Regulatory liabilities		85,793		118,147		82,986
Other		9,179		10,023		10,150
Total noncurrent liabilities		503,414		478,316		468,382
Total capitalization and liabilities	$	2,138,072	$	2,209,828	$	1,859,023

See Notes to Condensed Unaudited Consolidated Financial Statements

5

NEW JERSEY RESOURCES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three Months Ended					Nine Months Ended
	June 30,					June 30,
(Thousands)	2006			2005		2006			2005
Net income	$	(3,975	)	$	1,835	$	90,490		$	83,702
Other comprehensive income:
Change in fair value of equity investments, net of tax of $43, $(194), $210 and $(668),		(62	)		281		(304	)		966
Change in fair value of derivatives, net of tax of $11,934, $(5,755), $(56,407), $(8,432)		(17,254	)		8,332		81,792			12,208
Other comprehensive income		(17,316	)		8,613		81,488			13,174
Comprehensive income	$	(21,291	)	$	10,448	$	171,978		$	96,876

See Notes to Condensed Unaudited Consolidated Financial Statements

6

NEW JERSEY RESOURCES CORPORATION AND SUBSIDIARIES

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 Corporation (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 fiscal year ending September 30, 2006.

2. PRINCIPLES OF CONSOLIDATION

     The 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 and its wholly owned subsidiary, NJNR Pipeline.

3. NEW ACCOUNTING STANDARDS

     In March 2005, the Financial Accounting Standards Board (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 Statement of Financial Accounting Standards (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.

     In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which alters the framework for recognizing income tax contingencies. Previously, under SFAS No. 5, “Accounting for Contingencies”, the focus was on the subsequent liability recognition for estimated losses from tax contingencies where such losses were probable and the related amounts could be reasonably estimated. Under this new interpretation, a contingent tax asset (i.e., an uncertain tax position) may only be recognized if it is more-likely-than-not that it will ultimately be sustained upon audit. The Company is required to adopt FIN 48 by the commencement of fiscal 2008. The Company is evaluating its tax positions for all jurisdictions and all years for which the statute of limitations remains open, as well as evaluating the impact that the adoption will have on its financial statements.

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4. REGULATORY ASSETS AND LIABILITIES

     Regulatory assets on the Consolidated Balance Sheets include the following:

	June 30,		September 30,			June 30,
(Thousands)	2006		2005			2005			Recovery Period
Regulatory assets—current
Underrecovered gas costs		—	$	37,049		$	16,842		Less than one year (1)
Weather-normalization clause (WNC)	$	8,067		(2,145	)		(2,145	)	Less than one year (4)
Total	$	8,067	$	34,904		$	14,697
Regulatory assets—noncurrent
Remediation costs (Notes 6 and 14)
Expended, net	$	79,590	$	86,912		$	71,755		(2)
Liability for future expenditures		93,920		93,920			92,880		(3)
Deferred income taxes		12,896		12,901			13,162		Various
Derivatives (Note 10)		67,157		—			17,908		Through Oct. 2010 (5)
Postretirement benefit costs (Note 12)		2,192		2,418			2,493		Through Sept. 2013 (4)
Societal Benefits Charges (SBC)		32,715		35,215			34,334		Various (6)
Total	$	288,470	$	231,366		$	232,532

(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 June 30, 2006 and September 30, 2005 and $20.3 million at June 30, 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:

	June 30,		September 30,		June 30,
(Thousands)	2006		2005		2005
Regulatory liabilities—current
Overrecovered gas costs (1)	$	30,308		—		—
Total	$	30,308		—		—
Regulatory liabilities—noncurrent
Cost of removal obligation (2)	$	79,785	$	77,067	$	77,099
Market development fund (MDF) (3)		6,008		5,945		5,887
Derivatives		—		35,135		—
Total	$	85,793	$	118,147	$	82,986

(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 MDF, 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. The MDF will terminate as of October 31, 2006.

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5. CAPITALIZED AND DEFERRED INTEREST

     Included in Utility plant on the Condensed Consolidated Balance Sheets and reflected in the Condensed Consolidated Statements of Income as a reduction to interest charges, net, are the following amounts recorded for capitalized interest:

	Three Months						Nine Months
	Ended						Ended
	June 30,						June 30,
	2006			2005			2006			2005
Capitalized interest	$	214,000		$	144,000		$	774,000		$	415,000
Weighted average interest rates		4.9	%		2.9	%		4.5	%		2.4	%

     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 $522,000 and $432,000 of interest for the three months ended June 30, 2006 and 2005, respectively, and $1.6 million and $1.4 million for the nine months ended June 30, 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 utility gross margin on the commodity portion of its natural gas sales. NJNG earns utility 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 is expected to begin in fiscal 2007.

     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.

9

     On June 1, 2005, NJNG filed for a 4.2 percent price increase to an average residential customer, 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.

     On November 10, 2005, NJNG filed for a 23.2 percent price increase to an average residential customer, 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 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 that occurred subsequent to 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 customers bills by approximately another $6 million. Due to the lower than projected sales volumes, actual credits given to customers were $28.6 million.

     On June 1, 2006, NJNG filed for a reduction to the BGSS rate that would decrease an average residential customer’s bill by approximately 6.6 percent. Additionally, the Company notified the BPU and the New Jersey Division of the Ratepayer Advocate (RPA) of an intention to grant a refund to residential and small commercial sales customers of at least $20 million in September 2006. NJNG shall file supporting documentation regarding the exact amount of the refund in August 2006.

     c. Incentive Programs

     NJNG is eligible to receive incentives for reducing BGSS costs through a series of utility 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 utility 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) pilot proposal with the BPU. The intent of the proposal is to decouple the link between customer usage and NJNG’s utility gross margin to allow NJNG to encourage customers to use less energy. Under the proposal, the WNC would be replaced with a CUA mechanism. The CUA is designed to recover utility gross margin variations related to both weather and usage. The CUA also includes programs designed to further customer conservation efforts. Discussions on the CUA proposal are taking place with the BPU and RPA.

     In March 2003, the BPU approved a permanent statewide Universal Service Fund (USF) program, the costs of which are being 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.

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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. On July 1, 2006, the natural gas utilities filed to increase the statewide USF recovery rate as a result of higher USF benefits effective October 1, 2006. If approved, the increase would represent an approximate 1 percent increase to the total bill for a residential sales customer.

     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 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 June 30, 2006, NJNG has a remaining liability of $19.5 million and a corresponding Regulatory asset included in SBC at June 30, 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.

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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 and an Environmental Response Compensation and Liability Insurance Policy (ERCLIP) 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 recognized 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 June 30, 2006, $79.6 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 in October 2004. In January 2006, NJNG reached a settlement of all claims with Kaiser-Nelson, which included a cash payment that was 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.

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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 the 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, with 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, six additional pro se complaints were filed against the Company and NJNG: Denise Nichols v. New Jersey Natural Gas Company, et al., Docket # BER-L-871-06; Marlene Roddy v. New Jersey Natural Gas Company, Docket # BER-L-414-06; Andrew Everett v. New Jersey Natural Gas Company, et al., Docket # BER-L-286-06; Michele Nichols v. New Jersey Natural Gas Company, et al., Docket # BER-L-288-06; Denise Jordan v. New Jersey Natural Gas Company, et al., Docket # BER-L-413-06; and China Jones v. New Jersey Natural Gas Company, et al., Docket # BER-L-291-06. 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.

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     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.

     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.

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7. EARNINGS PER SHARE

     The following table presents the calculation of our basic and diluted EPS:

	Three Months					Nine Months
	Ended					Ended
	June 30,					June 30,
(Thousands)	2006			2005		2006		2005
Net (loss) income	$	(3,975	)	$	1,835	$	90,490	$	83,702
Basic EPS
Average shares of common stock outstanding — basic		28,055			27,468		27,809		27,616
Basic (Loss) Earnings per Common Share	$	(0.14	)	$	.07	$	3.25	$	3.03
Diluted EPS
Average shares of common stock outstanding — basic		28,055			27,468		27,809		27,616
Incremental shares (1)		341			611		330		582
Average shares of common stock outstanding — diluted		28,396			28,079		28,139		28,198
Diluted (Loss) Earnings per Common Share	$	(0.14	)	$	.07	$	3.22	$	2.97

(1) Incremental shares consist of stock options, stock awards and performance units.

8. STOCK BASED COMPENSATION

     In December 2004, the FASB issued 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 123R. In addition, SFAS 123R 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 are now being expensed under SFAS 123R are immaterial to the financial statements. 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.

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The following table summarizes stock-based compensation expense recognized during the three and nine month periods ended June 30, 2006 and 2005, respectively:

	Three Months						Nine Months
	Ended						Ended
	June 30,						June 30,
(Thousands)	2006			2005			2006			2005
Stock-based compensation expense:
Stock options	$	105		$	22		$	338		$	205
Performance units		77			53			213			53
Restricted stock		8			—			13			—
Compensation expense included in O&M expense		190			75			564			258
Income tax benefit		(78	)		(31	)		(230	)		(105	)
Total, net of tax	$	112		$	44		$	334		$	153

     Following is a reconciliation of the as reported and pro forma net income and earnings per share for the three and nine months ended June 30, 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.

	Three Months			Nine Months
	Ended			Ended
	June 30,			June 30,
(Thousands)	2005			2005
Net income, as reported	$	1,835		$	83,702
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		28			136
Deduct: Total stock-based employee compensation expense determined under the fair value-based method for all awards, net of related tax effects		(92	)		(329	)
Pro forma net income	$	1,771		$	83,509

	Three Months		Nine Months
	Ended		Ended
	June 30,		June 30,
	2005		2005
Basic earnings per share—as reported	$	0.07	$	3.03
Basic earnings per share—pro forma	$	0.06	$	3.02
Diluted earnings per share—as reported	$	0.07	$	2.97
Diluted earnings per share—pro forma	$	0.06	$	2.96

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  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 nine months ended as of June 30, 2006 and 2005:

	Three Months					Nine Months
	Ended					Ended
	June 30,					June 30,
	2006		2005			2006			2005
Dividend yield		—		3.0	%		3.2	%		3.0	%
Volatility		—		12.6	%		13.2	%		12.8	%
Expected life (years)		—		7			7			7
Risk-free interest rate		—		4.0	%		4.6	%		4.0	%
Weighted average fair value		—	$	5.36		$	5.44		$	5.36

     There were no stock options grants in the three months ended June 30, 2006.

     The following table summarizes the stock option activity for the three and nine months ended June 30, 2006:

				Weighted
				Average
	Shares			Exercise Price
Outstanding as of October 1, 2005		1,545,657		$	29.29
Granted		22,200		$	42.26
Exercised		(199,232	)	$	24.07
Forfeited		—			—
Outstanding as of December 31, 2005		1,368,625		$	30.26
Granted		6,000		$	44.95
Exercised		(378,378	)	$	26.41
Forfeited		—			—
Outstanding as of March 31, 2006		996,247		$	31.82
Granted		—			—
Exercised		(65,720	)	$	28.25
Forfeited		(7,498	)	$	31.49
Outstanding as of June 30, 2006		923,029		$	32.07
Exercisable as of June 30, 2006		726,254		$	29.44

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     The following table summarizes stock options outstanding and exercisable as of June 30, 2006:

	Outstanding								Exercisable
			Weighted
			Average
			Remaining
	Number		Contractual		Weighted		Aggregate		Number		Weighted		Aggregate
	of Stock		Term		Average		Intrinsic Value		of Stock		Average		Intrinsic Value
Exercise Price Range	Options		(in years)		Exercise Price		(in thousands)		Options		Exercise Price		(in thousands)
$18.22 – $22.78		14,845		1.5	$	21.48	$	376		14,845	$	21.48	$	376
$22.78 – $27.33		109,264		3.3	$	25.77		2,295		109,264	$	25.77		2,295
$27.33 – $31.89		564,720		4.8	$	28.74		10,190		522,720	$	28.51		9,548
$31.89 – $36.44		10,500		6.8	$	33.71		119		10,500	$	33.71		119
$36.44 – $41.00		22,000		7.6	$	38.09		203		14,000	$	38.30		131
$41.00 – $45.55		201,700		8.8	$	44.83		392		54,925	$	44.59		120
Total		923,029		5.5	$	32.07	$	13,575		726,254	$	29.44	$	12,589

     Performance Units

     The following table summarizes the Performance Unit activity under the Employee and Outside Director Long-Term Incentive Compensation Plan for the three and nine months ended June 30, 2006:

			Weighted
			Average
			Grant Date
	Units(1)		Fair Value
Non-vested and outstanding at October 1, 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
Granted		—		—
Vested		—		—
Cancelled/forfeited		—		—
Non-vested and outstanding at June 30, 2006		43,950	$	29.07

(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.

     36,750 performance units were granted during the nine month period ended June 30, 2005.

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     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 nine months ended June 30, 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.

     As of June 30, 2006, NJR had a $2.75 million letter of credit outstanding on behalf of NJRES, which expired on July 31, 2006, in conjunction with a short-term natural gas purchase agreement. The expiration of the letter of credit did not have a material impact on NJRES’ financial condition, results of operations or cash flows.

     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 June 30, 2006, NJNG had a $62 million letter of credit outstanding, which will expire on December 31, 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.

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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 expired in July 2006 and limited NJNG’s variable-rate debt exposure for the tax-exempt EDA Bonds at 3.5 percent. The interest-rate caps were treated as cash flow hedges with changes in fair value accounted for in Accumulated other comprehensive income.

     In July 2006, NJNG entered into new interest-rate cap agreements expiring in July 2009 that limit NJNG’s variable-rate debt exposure for the tax-exempt EDA bonds at 4.5 percent. These new interest-rate caps are expected to be 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 several 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 August 2006 to October 2010.

     The following table summarizes the ineffective portions of the Company’s cash flow hedges that are included as an (expense) benefit as part of Gas purchases in the Condensed Consolidated Statements of Income:

	Three Months					Nine Months
	Ended					Ended
	June 30,					June 30,
(Thousands)	2006			2005		2006		2005
NJRES	$	(444	)	$	189	$	8,323	$	(1,218	)
NJR Energy		28			18		63		51
Total Consolidated	$	(416	)	$	207	$	8,386	$	(1,167	)

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     The ineffective portions of the NJRES cash flow hedges relate to certain natural gas basis swap contracts, which conclude in October of 2006, that were deemed ineffective during the adoption of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities (as amended)”.

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						Nine Months Ended
	June 30,						June 30,
(Thousands)	2006			2005			2006			2005
Operating Revenues
Natural Gas Distribution	$	163,914		$	174,761		$	1,029,666		$	957,807
Energy Services		365,373			362,727			1,716,093			1,476,519
Retail and Other		6,884			6,816			19,547			29,072
Subtotal		536,171			544,304			2,765,306			2,463,398
Intersegment revenues (1)		(68	)		(24	)		(205	)		(73	)
Total	$	536,103		$	544,280		$	2,765,101		$	2,463,325
Operating Income (Loss)
Natural Gas Distribution	$	5,365		$	8,865		$	96,305		$	101,014
Energy Services		(9,906	)		(4,926	)		65,257			33,817
Retail and Other		1,142			1,912			1,650			12,943
Total	$	(3,399	)	$	5,851		$	163,212		$	147,774
Net Income(Loss)
Natural Gas Distribution	$	1,698		$	3,868		$	53,890		$	56,959
Energy Services		(6,397	)		(3,314	)		35,499			18,692
Retail and Other		724			1,281			1,101			8,051
Total	$	(3,975	)	$	1,835		$	90,490		$	83,702

(1) Consists of transactions between subsidiaries that are eliminated in consolidation.

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

	June 30,		September 30,		June 30,
(Thousands)	2006		2005		2005
Assets at Period-End
Natural Gas Distribution	$	1,506,319	$	1,581,758	$	1,398,931
Energy Services		533,401		501,051		347,607
Retail and Other		98,352		127,019		112,485
Total	$	2,138,072	$	2,209,828	$	1,859,023

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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 periodic cost were as follows:

	Pension												OPEB
	Three Months						Nine Months						Three Months						Nine Months
	Ended						Ended						Ended						Ended
	June 30,						June 30,						June 30,						June 30,
(Thousands)	2006			2005			2006			2005			2006			2005			2006			2005
Service cost	$	751		$	677		$	2,253		$	2,031		$	380		$	324		$	1,140		$	972
Interest cost		1,408			1,324			4,224			3,972			615			545			1,845			1,635
Expected return on plan assets		(1,782	)		(1,596	)		(5,346	)		(4,788	)		(458	)		(425	)		(1,374	)		(1,275	)
Amortization of:
Prior service cost		21			28			63			84			19			20			57			60
Transition obligation		—			—			—			—			89			89			267			267
Loss		433			257			1,299			771			206			171			618			513
Net initial obligation		(3	)		(28	)		(9	)		(84	)		—			—			—			—
Net periodic cost	$	828		$	662		$	2,484		$	1,986		$	851		$	724		$	2,553		$	2,172

     In fiscal 2006, the Company has no minimum pension funding requirements, however, in the fourth quarter of fiscal 2006, the Company currently expects to make discretionary contributions of $10 million to the Pension Plan and $3 million to the OPEB Plans. The Company’s funding level to its OPEB plans is expected to be approximately $600,000 annually over the next five years

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 June 30, 2006, $1.1 million is expected to be recorded as an increase to natural gas costs for the remainder of fiscal 2006. For the three months ended June 30, 2006 and 2005, $6.4 million and $5.7 million was credited to natural gas costs, respectively, and for the nine months ended June 30, 2006 and 2005, $28.4 million and $11.9 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.

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     As of June 30, 2006, there were NJR guarantees covering approximately $291 million of future natural gas purchases and demand fee commitments of NJRES and NJNG.

     NJNG’s capital expenditures are estimated at $28.2 million for the remainder of fiscal 2006 and $71.4 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 $3.7 million annually for the next five years and $791,000 in the aggregate for all years thereafter.

     MGP 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 June 30, 2006, there were 28,074,382 shares of common stock outstanding and the book value per share was $21.21.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR NINE MONTHS ENDED JUNE 30, 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 and comprises the Natural Gas Distribution segment. 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 and comprises the Energy Services segment. 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, except percentages)
Nine Months Ended June 30,	2006				2005
Net Income
Natural Gas Distribution	$	53,890	60	%	$	56,959	68	%
Energy Services		35,499	39			18,692	22
Retail and Other		1,101	1			8,051	10
Total	$	90,490	100	%	$	83,702	100	%

(Thousands, except percentages)
As of June 30,	2006				2005
Assets
Natural Gas Distribution	$	1,506,319	70	%	$	1,398,931	75	%
Energy Services		533,401	25			347,607	19
Retail and Other		98,352	5			112,485	6
Total	$	2,138,072	100	%	$	1,859,023	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 BPU and the New Jersey Division of the Ratepayer Advocate (RPA), has been able to accomplish this goal through several key initiatives including:

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

• Generating earnings and customer savings from various BPU-authorized utility 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.

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     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 three 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 utility 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 Conservation and Usage Adjustment (CUA) to replace the WNC and to decouple the link between customer usage and NJNG’s utility gross margin. The CUA also includes programs designed to further customer conservation efforts. Discussions on the CUA proposal are taking place with the BPU and RPA. 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.

     NJNG’s operating expenses are heavily influenced by labor costs, a large component of which is covered by a collective bargaining agreement that expires in December 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.

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     Critical Accounting Policies

     A summary of NJR’s critical accounting policies is included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the period ended September 30, 2005. NJR’s critical accounting policies have not changed materially from those reported in the 2005 Annual Report on Form 10-K.

     Results of Operations

     For the three months ended June 30, 2006, NJR incurred a net loss of $3.9 million compared with net income of $1.8 million for the same period last year. Basic earnings per share (EPS) decreased to a loss of $.14 compared with earnings of $.07 last year. Diluted EPS also decreased to a loss of $.14 compared with earnings of $.07 last year.

     Net income for the nine months ended June 30, 2006 increased 8 percent to $90.5 million, compared with $83.7 million for the same period last year. Basic EPS increased 7.3 percent to $3.25, compared with $3.03 last year. The results for the nine months ended June 30, 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 nine months ended June 30, 2005 were $2.87 per basic share and $2.81 per diluted share.

     A summary of NJR’s results by business segment for the three and nine months ended June 30, 2006 and 2005, respectively, is as follows:

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
(Thousands)	2006			2005			2006		2005
Net Income(Loss)
Natural Gas Distribution	$	1,698		$	3,868		$	53,890	$	56,959
Energy Services		(6,397	)		(3,314	)		35,499		18,692
Retail and Other		724			1,281			1,101		8,051
Total	$	(3,975	)	$	1,835		$	90,490	$	83,702

     NJR’s fiscal 2006 earnings have been driven by NJRES, the Company’s energy services business unit, which more than offset lower earnings at NJNG, the Company’s Natural Gas Distribution business unit. For the quarter ended June 30, 2006, NJRES reported a net loss of $6.4 million, compared with a net loss of $3.3 million for the same period last year. NJRES’ net income for the nine months ended June 30, 2006, grew to $35.5 million, a 90 percent increase over net income of $18.7 million for the same period last year. NJNG’s net income for the quarter ended June 30, 2006, decreased by 56 percent to $1.7 million from net income of $3.9 million for the same period last year. NJNG’s net income for the nine months ended June 30, 2006, decreased by 5.4 percent to $53.9 million from net income of $56.9 million for the same period last year.

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     Provided below is a reconciliation of as reported and as adjusted information for Net Income and basic and diluted earnings per share for the nine months ended June 30, 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 current year results.

(Thousands, except per share data)	Nine Months Ended June 30, 2005
					NJRHS
	NJNG		NJRES		and Other			Total
Net Income, as reported	$	56,959	$	18,692	$	8,051		$	83,702
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	$	57,874	$	18,700	$	2,648		$	79,222
Earnings per share basic, as reported								$	3.03
Exclude:
Gain on sale of commercial office building									(.22	)
Charge for early retirement program									.05
Earnings per share basic, as adjusted*								$	2.87
Earnings per share diluted, as reported								$	2.97
Exclude:
Gain on sale of commercial office building									(.21	)
Charge for early retirement program									.05
Earnings per share diluted, as adjusted								$	2.81

*  Amount does not foot due to rounding

Natural Gas Distribution Operations

     NJNG is a local natural gas distribution company that provides regulated retail energy services to more than 469,000 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 utility gross margin on the commodity portion of its natural gas sales. NJNG earns utility 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.

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     NJNG’s financial results are summarized as follows:

	Three Months Ended				Nine Months Ended
	June 30,				June 30,
(Thousands)	2006		2005		2006		2005
Utility Gross Margin
Operating revenues	$	163,914	$	174,761	$	1,029,666	$	957,807
Gas purchases		118,088		126,900		769,870		697,646
Energy and other taxes		7,024		7,359		48,790		46,220
Regulatory rider expense		4,005		4,793		25,868		28,707
Total Utility Gross Margin	$	34,797	$	35,709	$	185,138	$	185,234
Utility Gross Margin
Residential and commercial	$	28,571	$	29,986	$	159,477	$	160,131
Transportation		5,516		4,660		18,377		19,465
Total Utility Firm Gross Margin		34,087		34,646		177,854		179,596
Incentive programs		481		799		6,527		4,807
Interruptible		229		264		757		831
Total Utility Gross Margin		34,797		35,709		185,138		185,234
Operation and maintenance expense		20,199		17,964		61,170		57,461
Depreciation and amortization		8,580		8,243		25,480		24,547
Other taxes not reflected in utility gross margin		653		637		2,183		2,212
Operating income	$	5,365	$	8,865	$	96,305	$	101,014
Other income	$	980	$	787	$	2,541	$	2,271
Interest charges, net	$	3,719	$	3,397	$	11,493	$	10,707
Net income	$	1,698	$	3,868	$	53,890	$	56,959

Utility Gross Margin

     NJNG’s utility 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 utility 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, subject to BPU approval, passed through to customers, and therefore, should have no effect on utility gross margin. This definition of utility gross margin may not be comparable to the definition of gross margin used by others in the natural gas distribution business and other industries. 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. Effective July 15, 2006, the sales tax was increased to 7 percent. 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.

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     NJNG’s operating revenues decreased by $10.8 million, or 6.2%, and gas purchases decreased by $8.8 million, or 6.9%, for the three months ended June 30, 2006, compared with the same period in the prior year. These decreases were the result of weather being 27.6% warmer for the three months ended June 30, 2006 than the same period in the prior year, coupled with a reduction in customer usage per degree day, partially offset by customer growth. NJNG’s operating revenues increased by 7.5 percent to $1.0 billion, and gas purchases increased by 10.4 percent to $769.9 million for the nine months ended June 30, 2006, compared with the same period last year. For the nine months, 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 $7.0 million and $7.4 million for the three months ended June 30, 2006 and 2005, respectively, and $48.8 million and $46.2 million for the nine months ended June 30, 2006 and 2005, respectively. For the three months ended June 30, 2006, the sales tax and TEFA decreased due to lower revenue and therm sales, respectively. For the nine months ended June 30, 2006, the increase in sales tax due to higher revenue more than offset the decrease in TEFA due to lower therm sales. Regulatory rider expenses totaled $4.0 million and $4.8 million for the three months ended June 30, 2006 and 2005, respectively, and $25.9 million and $28.7 million for the nine months ended June 30, 2006 and 2005, respectively. The decrease in regulatory rider expenses is due primarily to a decrease in firm throughput.

     Utility gross margin is described in three major categories: 1) Utility Firm Gross Margin from residential and commercial customers who receive natural gas service from NJNG through either sales or transportation tariffs; 2) incentive programs, where revenues generated or savings achieved from BPU-approved off-system sales, capacity release, FRM or storage incentive programs are shared between customers and NJNG; and 3) utility gross margin from interruptible customers who have the ability to switch to alternative fuels and are subject to BPU-approved incentives.

Utility Firm Gross Margin

     Utility 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 three months ended June 30, 2006 was 26.3 percent warmer than normal and for the nine months ended June 30, 2006 it was 9.8 percent warmer than normal, which resulted in an accrual of utility gross margin under the WNC of $2.5 million and $10.2 million for the three and nine months ended June 30, 2006, respectively.

     Customers switching between sales service and transportation service affect the components of utility gross margin from firm customers. NJNG’s total utility firm 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 utility firm gross margin decreased by $559,000, or 1.6 percent, for the three months, and $1.7 million, or 1.0 percent, for the nine months ended June 30, 2006, compared with the same periods last year. These decreases were due 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.

     Utility firm gross margin from sales to residential and commercial customers decreased by $1.4 million, or 4.7 percent, and $654,000, or less than 1 percent, for the three months and nine months ended June 30, 2006, respectively, compared with the same periods last year.

29

Sales to residential and commercial customers were 5.9 billion cubic feet (Bcf) and 46.0 Bcf for the three and nine months ended June 30, 2006, respectively, compared with 7.7 Bcf and 51.0 Bcf, respectively, in the same periods last year. The relatively small change in utility gross margin and sales was due to the lower usage per degree day, offsetting customer growth, as discussed above.

     Utility firm gross margin from transportation service increased $856,000, or 18.4 percent, and decreased $1.1 million, or 5.6 percent, for the three and nine months ended June 30, 2006, respectively, compared with the same periods last year. NJNG transported 1.7 Bcf and 6.6 Bcf for the three and nine months ended June 30, 2006, respectively, compared with 1.2 Bcf and 7 Bcf, respectively, in the same periods last year. The decrease in transportation utility firm gross margin for the nine months was primarily due to lower usage per degree day discussed above. The increase for the three months was due primarily to a large customer shifting from interruptible to transportation services.

     NJNG had 8,491 and 11,105 residential customers and 3,695 and 3,517 commercial customers using its transportation service at June 30, 2006 and 2005, respectively. The decrease in residential transportation customers was due primarily to a decrease in third-party marketing efforts in NJNG’s service territory.

     During the first nine months of fiscal 2006, NJNG added 7,871 new customers, 34 percent of which converted from other fuels. In addition, 175 existing customers added natural gas heat to their existing service. In fiscal 2006, NJNG currently expects to add approximately 10,628 new customers and convert an additional 700 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 utility 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.

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     NJNG’s incentive programs totaled 8.3 Bcf and generated $481,000 of utility gross margin and 30 Bcf and $6.5 million of utility gross margin for the three and nine months ended June 30, 2006, respectively, compared with 10.1 Bcf and $799,000 of utility gross margin and 38.7 Bcf and $4.8 million of utility gross margin, for the same periods last year. For the nine months, the increase in utility gross margin was due primarily to the FRM and the storage incentive programs, which both benefited from additional volatility in the wholesale energy market. The decrease in the three months was due primarily to timing differences in the storage incentive program.

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 8.6 percent and 4.8 percent of total throughput for the nine months ended June 30, 2006 and 2005, respectively, they accounted for less than 1 percent of the total utility gross margin in both periods due to the sharing formulas that govern these sales. Under these formulas, NJNG retains 10 percent of the utility gross margin from interruptible sales and 5 percent of the utility 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 .5 Bcf, for the nine months ended June 30, 2006 and 2005, respectively. In addition, NJNG transported 4 Bcf and 5.8 Bcf for the nine months ended June 30, 2006 and 2005, respectively, for its interruptible customers.

Operation and Maintenance Expense

     Operation and maintenance (O&M) expense increased by $2.2 million, or 12.4 percent, and $3.7 million, or 6.5 percent, for the three and nine months ended June 30, 2006, respectively. The increase in both periods was due primarily to higher bad debt, labor costs and BPU assessments. Higher bad debt costs are due primarily to increased commodity prices. Higher labor costs are due primarily to annual wage increases and the absence of certain credits associated with incentive compensation in the prior year that did not recur in the current year.

Operating Income

     Operating income decreased by $3.5 million, 39.5 percent, and $4.7 million, or 4.7 percent, for the three and nine months ended June 30, 2006, respectively compared with the same period last year. 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 gross margins described above.

Net Income

     Net income decreased $2.1 million, or 56.1 percent, and $3.1 million, or 5.4 percent, for the three and nine months ended June 30, 2006, respectively, due primarily to lower operating income as described above and higher interest expense due primarily to an increase in interest rates over the same periods in the prior year.

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.

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This strategy 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						Nine Months Ended
	June 30,						June 30,
(Thousands)	2006			2005			2006		2005
Operating revenues	$	365,373		$	362,727		$	1,716,093	$	1,476,519
Gas purchases		371,589			365,136			1,640,970		1,435,740
Gross margin		(6,216	)		(2,409	)		75,123		40,779
Operation and maintenance expense		3,472			2,103			9,214		6,221
Depreciation and amortization		53			70			156		182
Other taxes		165			344			496		559
Operating (loss) income	$	(9,906	)	$	(4,926	)	$	65,257	$	33,817
Net (loss) income	$	(6,397	)	$	(3,314	)	$	35,499	$	18,692

     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 lower gross margin in the three month period ended June 30, 2006, as compared with the same period in the prior year and higher gross margin for the nine months ended June 30, 2006, as compared with the same period in the prior year.

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     NJRES’ operating revenues and gas purchases increased by $2.6 million, or 0.7 percent, and by $6.5 million, or 1.8 percent, for the three months ended June 30, 2006, respectively, compared with the same periods last year. Natural gas sold and managed by NJRES totaled 50.7 Bcf for the three months ended June 30, 2006, compared with 49.6 Bcf in the same period last year.

     NJRES’ operating revenues and gas purchases increased by $239.6 million, or 16.2 percent, and by $205.2 million, or 14.3 percent, for the nine months ended June 30, 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 170.3 Bcf, for the nine months ended, June 30, 2006, compared with 202.2 Bcf in the same period last year. This decrease is due to market price conditions that influenced the use of transportation capacity.

     NJRES’ gross margin decreased by $3.8 million in the three months ended June 30, 2006, compared with the same period last year, due primarily to increased fixed demand costs. NJRES’ gross margin increased $34.3 million, or 84.2 percent, for the nine months ended June 30, 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 and the benefit in market price changes from certain natural gas basis swaps, which conclude in October 2006, that were not deemed effective cash flow hedges upon the adoption of SFAS 133.

     Operation and maintenance expense increased by $1.4 million, or 65.1 percent, and $3.0 million, or 48.1 percent, for the three and nine months ended June 30, 2006, respectively, compared with the same periods last year, due primarily to higher labor and fringe benefits as a result of the operational growth of NJRES.

     Operating income decreased by $5.0 million and net income decreased by $3.1 million for the three months ended June 30, 2006, as compared to the same period last year primarily due to the increased fixed demand costs and higher labor costs noted above.

     Operating income increased by $31.4 million and net income increased by $16.8 million for the nine months ended June 30, 2006, as compared to the same period last year, due primarily to favorable time spreads, storage positions and the ineffective portion of the natural gas basis swaps that conclude in October of 2006, partially offset by higher labor costs.

     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 nine months ended June 30, 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 nearly 147,000 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); NJR Investment, which makes certain energy-related equity investments; and Service Corp., which provides shared administrative services to the company and all its subsidiaries.

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

	Three Months Ended				Nine Months Ended
	June 30,				June 30,
(Thousands)	2006		2005		2006		2005
Operating revenues	$	6,884	$	6,816	$	19,547	$	29,072
Other income	$	528	$	580	$	1,894	$	1,949
Net income	$	724	$	1,281	$	1,101	$	8,051

     Retail and Other Operating revenue increased by $68,000 for the three months ended June 30, 2006, compared with the same period last year. Operating revenue decreased by $9.5 million, or approximately 33 percent for the nine months ended June 30, 2006. Net income decreased by $557,000  for the three months ended June 30, 2006, compared with the same period last year, due primarily to lower service contract revenue at NJRHS and higher corporate expenses. Net income decreased by $6.9 million for the nine months ended June 30, 2006, compared with the same period last year, due primarily to a $10.1 million pre-tax ($6 million after-tax) gain on the sale of a commercial office building in fiscal 2005.

     Other income includes the amortization of a gain related to the sale-leaseback of a building, discussed below, and earnings generated from NJNR Pipeline’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:

	June 30,			September 30,			June 30,
	2006			2005			2005
Common stock equity		55	%		47	%		50	%
Long-term debt		31			34			31
Short-term debt		14			19			19
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.

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Through June 30, 2006, NJR has repurchased 2,461,853 shares under this share repurchase plan.

     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 $120.1 million, $174.1 million and $157.4 million at June 30, 2006, September 30, 2005 and June 30, 2005, respectively, under NJR’s committed credit facilities. NJNG had $33.6 million, zero and $36.3 million of commercial paper borrowings supported by NJNG’s committed credit facilities at June 30, 2006, September 30, 2005 and June 30, 2005, respectively.

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

	NJR and NJNG Contractual Cash Obligations
	Payments Due by Period
			Up to		2-3		4-5		After
(Thousands)	Total		1 Year		Years		Years		5 Years
Long-term debt *	$	464,113	$	13,077	$	24,705	$	74,486	$	351,845
Capital lease obligations *		86,793		7,375		14,750		15,140		49,528
Operating leases *		8,914		2,967		3,788		1,368		791
Short-term debt		153,700		153,700		—		—		—
Clean energy program *		21,065		2,524		18,541		—		—
Construction obligations		8,383		8,383		—		—		—
Natural gas supply purchase obligations		1,385,959		298,348		387,917		342,154		357,540
Total NJR and NJNG contractual cash obligations	$	2,128,927	$	486,374	$	449,701	$	433,148	$	759,704

* These obligations include an interest component.

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      The following table summarizes of NJRES’s total contractual cash obligations, all of which relate to natural gas supply purchase obligations, and their applicable payment due dates:

	NJRES Contractual Cash Obligations
	Payments Due by Period
			Up to		2-3		4-5		After
(Thousands)	Total		1 Year		Years		Years		5 Years
Natural gas supply purchase obligations	$	343,393	$	243,588	$	53,695	$	28,534	$	17,576

     As of June 30, 2006, there were NJR guarantees covering approximately $291 million of future natural gas purchases and demand fee commitments of NJRES and NJNG.

     As of June 30, 2006, NJR had a $2.75 million letter of credit outstanding, on behalf of NJRES, which expired on July 31, 2006, in conjunction with a short-term natural gas purchase agreement. The expiration of this letter of credit did not have a material impact on NJRES’ financial position, income or cash flow.

     As of June 30, 2006, NJNG had a $62 million letter of credit outstanding, which will expire on December 31, 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. NJNG expects to renew this letter of credit agreement upon its expiration.

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

     The Company is not currently required to make minimum pension funding contributions during fiscal 2006. However, in the fourth quarter of fiscal 2006, the Company currently expects to make discretionary contributions of $10 million to the Pension Plans and $3 million to the OPEB Plans. The Company’s funding level to its OPEB plans is expected to be approximately $600,000 annually over the next five years.

     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 $44.7 million for the nine months ended June 30, 2006, compared with $141.3 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 storage volumes and wholesale gas commodity costs.

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     NJNG’s MGP expenditures, exclusive of insurance recoveries, are currently expected to total $22.3 million in fiscal 2006. (See Note 14.Commitments and Contingent Liabilities.)

     Financing Activities

     Cash flow used in financing activities totaled $19.9 million for the nine months ended June 30, 2006, compared with $128.4 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.

     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, create significant short-term cash requirements, which are funded by NJR.

     Investing Activities

     Cash flow used in investing activities totaled $45 million for the nine months ended June 30, 2006, compared with $14.7 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 nine months ended June 30, 2006, included the $12.5 million deposit into a construction fund created under the EDA financing arrangement described above.

     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 with last year, due primarily to system integrity and expected replacement needed under pending pipeline safety rulemaking.

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     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	Negative	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 ratings are generally divided into three groups: high, upper medium and medium. NJNG’s senior secured ratings and the commercial paper ratings fall into the high group. NJR is not a rated entity.

     NJNG is not party to any lending agreements that would accelerate the maturity date of any obligation caused by a failure to maintain any specific credit rating. A rating set forth above is not a recommendation to buy, sell or hold the Company’s or NJNG’s securities and may be subject to revision or withdrawal at any time. Each rating set forth above should be evaluated independently of any other rating.

     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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 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 remaining volumes of approximately 10.3 Bcf of natural gas (Gas Sale Contracts) to an energy marketing company.

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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 several 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.

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

	Balance			Increase			Less			Balance
	September 30,			(Decrease) in Fair			Amounts			June 30,
(Thousands)	2005			Market Value			Settled			2006
NJNG	$	35,135		$	(152,517	)	$	(50,225	)	$	(67,157	)
NJRES		(155,029	)		204,170			39,904			9,237
NJR Energy		63,745			(30,824	)		(11,521	)		44,442
Total	$	(56,149	)	$	20,829		$	(21,842	)	$	(13,478	)

     There were no changes in methods of valuations during the quarter ended June 30, 2006.

     The following is a summary of fair market value of commodity derivatives at June 30, 2006, by method of valuation and by maturity:

	Remaining								After			Total
(Thousands)	2006			2007		2008-2010			2010			Fair Value
Price based on NYMEX	$	(2,246	)	$	7,543	$	(62,036	)	$	(907	)	$	(57,646	)
Price based on over-the-counter published quotations		1,041			10,432		32,120			575			44,168
Total	$	(1,205	)	$	17,975	$	(29,916	)	$	(332	)	$	(13,478	)

     The following is a summary of commodity derivatives by type as of June 30, 2006:

							Amounts
							Included
		Volume			Price per		in Derivatives
		(Bcf)			Mmbtu		(Thousands)
NJNG	Futures		(0.3	)	$	5.31-$11.08	$	39,489
	Options		1.9		$	8.00-$10.50	$	(1,172	)
	Swaps		(7.0	)	$	3.80-$10.10	$	(105,474	)
NJRES	Futures		(25.5	)	$	5.97-$11.99	$	11,961
	Swaps		(40.2	)	$	(0.80)-$5.94	$	(2,724	)
NJR Energy	Swaps		11.0		$	2.92-$4.41	$	44,442
Total							$	(13,478	)

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     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 June 30, 2006, using the variance-covariance method with a 95 percent confidence level and a 1-day holding period, was $1.2 million. The VAR with a 99 percent confidence level and a 10-day holding period was $5.2 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 June 30, 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 June 30, 2006, is as follows:

	Gross Credit		Net Credit
(Thousands)	Exposure		Exposure
Investment grade	$	142,813	$	124,829
Noninvestment grade		14,668		705
Internally rated investment grade		10,095		7,347
Internally rated noninvestment grade		5,804		—
Total	$	173,380	$	132,881

     NJNG’s counterparty credit exposure as of June 30, 2006, is as follows:

	Gross Credit		Net Credit
(Thousands)	Exposure		Exposure
Investment grade	$	11,719	$	8,119
Noninvestment grade		1,459		—
Internally rated investment grade		595		493
Internally rated noninvestment grade		1,362		—
Total	$	15,135	$	8,612

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     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 June 30, 2006, the Company (excluding NJNG) had no variable-rate, long-term debt.

     At June 30, 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 June 30, 2006, NJNG’s annual interest expense, net of tax, would change by $574,000.

     In July 2006, NJNG entered into new interest-rate cap agreements expiring in July 2009 that limit NJNG’s variable-rate debt exposure from the tax-exempt EDA bonds at 4.5 percent.

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 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 June 30, 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 and is incorporated herein.

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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 June 30, 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 June 30, 2006:

							Maximum Number
							(or Approximate
					Total Number of		Dollar Value) of
					Shares (or Units)		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)
04/1/06 – 04/30/06		—		—		—		1,038,147
05/1/06 – 05/31/06		—		—		—		1,038,147
06/1/06 – 06/30/06		—		—		—		1,038,147
Total		—		—		—		1,038,147

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ITEM 6. EXHIBITS

     (a) Exhibits

10-1	Directors’ Deferred Compensation Plan
10-2	Directors’ Deferred Compensation Plan – Pre-409A
10-3	Officers’ Deferred Compensation Plan
10-4	Officers’ Deferred Compensation Plan – Pre 409A
10-5	Form of Supplemental Retirement Plan Agreement
10-6	Form of Employment Continuation Agreement
31-1	Certification of the Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act
31-2	Certification of the Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act
32-1	Certification of the Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act*
32-2	Certification of the Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act*

* This certificate accompanies this report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by NJR for purposes of Section 18 or any other provision of the Securities Exchange Act of 1934, as amended.

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SIGNATURES

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

	NEW JERSEY RESOURCES
Date: August 9, 2006	/s/ Glenn C. Lockwood
	Glenn C. Lockwood
	Senior Vice President and Chief Financial Officer

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