form10q.htm
 



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009

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
 
22-2376465
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
     
1415 Wyckoff Road, Wall, New Jersey 07719
 
732-938-1480
(Address of principal
executive offices)
 
(Registrant’s telephone number,
including area code)
 
Securities registered pursuant to Section 12 (b) of the Act:
Common Stock - $2.50 Par Value
 
New York Stock Exchange
(Title of each class)
 
(Name of each exchange on which registered)


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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes: o         No: o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer: x     Accelerated filer: o     Non-accelerated filer: o     Smaller reporting company: o
(Do not check if a smaller
reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes: o         No: x

The number of shares outstanding of $2.50 par value Common Stock as of May 06, 2009 was 42,139,988.
 




 

 


New Jersey Resources Corporation




 
TABLE OF CONTENTS
 
Page
Information Concerning Forward-Looking Statements                                                                                                                                
1
   
 
Financial Statements                                                                                                        
2
 
7
 
7
 
9
 
13
 
16
 
17
 
18
 
18
 
20
 
21
 
21
 
22
 
22
 
22
 
25
 
26
27
Quantitative and Qualitative Disclosures About Market Risk                                                                                                         
51
Controls and Procedures                                                                                                         
54
   
 
Legal Proceedings                                                                                                     
56
Risk Factors                                                                                                         
56
Unregistered Sale of Equity Securities and Use of Proceeds                                                                                                         
56
Submission of Matters to a Vote of Security Holders                                                                                                      
56
Exhibits                                                                                                    
57
 
Signatures                                                                                                     
58


 




 
i



New Jersey Resources Corporation
Part I



 

Certain statements contained in this report, including, without limitation, statements as to management expectations and beliefs presented in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part I, Item 3. “Quantitative and Qualitative Disclosures about Market Risk,” Part II, Item I. “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 2009 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, those discussed in Risk Factors in Item 1A, as well as the following:
 
Ÿ
weather and economic conditions;
Ÿ
demographic changes in the New Jersey Natural Gas (NJNG) service territory;
Ÿ
the rate of NJNG customer growth;
Ÿ
volatility of natural gas commodity prices and its impact on customer usage, cash flow, NJR Energy Services’ (NJRES) operations and on the Company’s risk management efforts;
Ÿ
changes in rating agency requirements and/or credit ratings and their effect on availability and cost of capital to the Company;
Ÿ
continued volatility or seizure of the credit markets that would result in the decreased availability and access to credit at NJR to fund and support physical gas inventory purchases and other working capital needs at NJRES, and all other non-regulated subsidiaries, as well as negatively affect access to the commercial paper market and other short-term financing markets at NJNG to allow it to fund its commodity purchases and meet its short-term obligations as they come due;
Ÿ
the impact to the asset values and funding obligations of NJR’s pension and postemployment benefit plans as a result of declines in the financial markets;
Ÿ
increases in borrowing costs associated with variable-rate debt;
Ÿ
commercial and wholesale credit risks, including creditworthiness of customers and counterparties;
Ÿ
the ability to obtain governmental approvals and/or financing for the construction, development and operation of certain non-regulated energy investments;
Ÿ
risks associated with the management of the Company’s joint ventures and partnerships;
Ÿ
the impact of governmental regulation (including the regulation of rates);
Ÿ
conversion activity and other marketing efforts;
Ÿ
actual energy usage of NJNG’s customers;
Ÿ
the pace of deregulation of retail gas markets;
Ÿ
access to adequate supplies of natural gas;
Ÿ
the regulatory and pricing policies of federal and state regulatory agencies;
Ÿ
the ultimate outcome of pending regulatory proceedings, including the possible expiration of the Conservation Incentive Program (CIP);
Ÿ
changes due to legislation at the federal and state level;
Ÿ
the availability of an adequate number of appropriate counterparties in the wholesale energy trading market;
Ÿ
sufficient liquidity in the wholesale energy trading market and continued access to the capital markets;
Ÿ
the disallowance of recovery of environmental-related expenditures and other regulatory changes;
Ÿ
environmental-related and other litigation and other uncertainties;
Ÿ
the effects and impacts of inflation on NJR and its subsidiaries operations;
Ÿ
change in accounting pronouncements issued by the appropriate standard setting bodies; and
Ÿ
terrorist attacks or threatened attacks on energy facilities or unrelated energy companies.

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.




Page 1



New Jersey Resources Corporation
Part I




CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 
Three Months Ended
March 31,
Six Months Ended
March 31,
(Thousands, except per share data)
2009
2008
2009                               
2008
                 
OPERATING REVENUES
$937,516
 
$1,177,545
 
$1,738,820
 
$1,988,683
 
                 
OPERATING EXPENSES
               
Gas purchases
782,130
 
1,065,925
 
1,480,275
 
1,750,619
 
Operation and maintenance
37,365
 
34,605
 
73,773
 
66,784
 
Regulatory rider expenses
20,744
 
17,789
 
34,305
 
29,954
 
Depreciation and amortization
7,508
 
9,517
 
14,869
 
18,920
 
Energy and other taxes
31,981
 
29,374
 
55,614
 
47,534
 
Total operating expenses
879,728
 
1,157,210
 
1,658,836
 
1,913,811
 
OPERATING INCOME
57,788
 
20,335
 
79,984
 
74,872
 
Other income
1,058
 
1,540
 
1,916
 
3,068
 
Interest expense, net
4,219
 
6,692
 
10,766
 
14,502
 
INCOME BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES
54,627
 
15,183
 
71,134
 
63,438
 
Income tax provision
19,897
 
3,394
 
25,142
 
21,888
 
Equity in earnings of affiliates, net of tax
787
 
746
 
1,301
 
1,170
 
NET INCOME
$  35,517
 
$     12,535
 
$     47,293
 
$    42,720
 
                 
EARNINGS PER COMMON SHARE
               
BASIC
$0.84
 
$0.30
 
$1.12
 
$1.02
 
DILUTED
$0.83
 
$0.30
 
$1.11
 
$1.02
 
                 
DIVIDENDS PER COMMON SHARE
$0.31
 
$0.28
 
$0.62
 
$0.55
 
                 
WEIGHTED AVERAGE SHARES OUTSTANDING
               
BASIC
42,305
 
41,840
 
42,238
 
41,758
 
DILUTED
42,693
 
42,099
 
42,598
 
42,018
 



See Notes to Condensed Unaudited Consolidated Financial Statements




Page 2



New Jersey Resources Corporation
Part I



ITEM 1. FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 
  Six Months Ended
    March 31,
(Thousands)
2009
 
                 2008
 
CASH FLOWS FROM OPERATING ACTIVITIES
       
Net income
$  47,293
 
$   42,720
 
Adjustments to reconcile net income to cash flows from operating activities:
       
Unrealized loss on derivative instruments
45,008
 
72,051
 
Depreciation and amortization
15,303
 
19,070
 
Allowance for funds (equity) used during construction
 
(755
)
Allowance for bad debt expense
3,801
 
2,544
 
Deferred income taxes
(22,428
)
(2,942
)
Manufactured gas plant remediation costs
(9,851
)
(7,958
)
Equity in earnings from investments, net of distributions
(1,301
)
766
 
Cost of removal – asset retirement obligations
(463
)
(355
)
Contributions to employee benefit plans
(563
)
(381
)
Changes in:
       
Components of working capital
284,371
 
27,852
 
Other noncurrent assets
(17,426
)
14,543
 
Other noncurrent liabilities
2,126
 
565
 
Cash flows from operating activities
345,870
 
167,720
 
CASH FLOWS FROM INVESTING ACTIVITIES
       
Expenditures for:
       
Utility plant
(37,802
)
(29,385
)
Real estate properties and other
(240
)
(588
)
Cost of removal
(3,583
)
(3,641
)
Investments in equity investees
(28,525
)
(5,259
)
Withdrawal from restricted cash construction fund
4,200
 
 
Cash flows used in investing activities
(65,950
)
(38,873
)
CASH FLOWS FROM FINANCING ACTIVITIES
       
Proceeds from issuance of common stock
6,959
 
9,915
 
Tax benefit from stock options exercised
993
 
568
 
Proceeds from sale-leaseback transaction
6,268
 
7,485
 
Payments of long-term debt
(57,594
)
(2,310
)
Purchases of treasury stock
(3,291
)
(11,040
)
Payments of common stock dividends
(24,384
)
(21,734
)
Net (payments) proceeds from short-term debt
(168,200
)
(107,579
)
Cash flows used in financing activities
(239,249
)
(124,695
)
Change in cash and temporary investments
40,671
 
4,152
 
Cash and temporary investments at beginning of period
42,626
 
5,140
 
Cash and temporary investments at end of period
$  83,297
 
$    9,292
 
CHANGES IN COMPONENTS OF WORKING CAPITAL
       
Receivables
$ (25,651
)
$(264,803
)
Inventories
415,082
 
193,659
 
Recovery of gas costs
41,865
 
1,352
 
Gas purchases payable
(150,386
)
116,692
 
Prepaid and accrued taxes, net
115,528
 
83,474
 
Accounts payable and other
(3,140
)
(24,322
)
Restricted broker margin accounts
(65,546
)
(72,426
)
Customers’ credit balances and deposits
(49,203
)
(7,062
)
Other current assets
5,822
 
1,288
 
Total
$284,371
 
$   27,852
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
       
Cash paid for:
       
Interest (net of amounts capitalized)
$12,277
 
$14,302
 
Income taxes
$  9,227
 
$21,977
 

See Notes to Condensed Unaudited Consolidated Financial Statements

Page 3



New Jersey Resources Corporation
Part I



ITEM 1.  FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

ASSETS

 
March 31,
September 30,
(Thousands)
2009
2008
   
PROPERTY, PLANT AND EQUIPMENT
       
Utility plant, at cost
$1,402,392
 
$1,366,237
 
Real estate properties and other, at cost
30,047
 
29,808
 
 
1,432,439
 
1,396,045
 
Accumulated depreciation and amortization
(393,912
)
(378,759
)
Property, plant and equipment, net
1,038,527
 
1,017,286
 
         
CURRENT ASSETS
       
    Cash and temporary investments
83,297
 
42,626
 
    Customer accounts receivable
       
        Billed
208,827
 
227,132
 
        Unbilled revenues
50,492
 
9,417
 
    Allowance for doubtful accounts
(5,501
)
(4,580
)
    Regulatory assets
7,795
 
51,376
 
    Gas in storage, at average cost
63,523
 
478,549
 
    Materials and supplies, at average cost
5,054
 
5,110
 
    Prepaid state taxes
 
37,271
 
    Derivatives, at fair value
242,814
 
208,703
 
    Restricted broker margin accounts
104,497
 
41,277
 
    Other
22,424
 
12,785
 
        Total current assets
783,222
 
1,109,666
 
         
NONCURRENT ASSETS
       
    Investments in equity investees and other
148,739
 
115,981
 
    Regulatory assets
411,211
 
340,670
 
    Derivatives, at fair value
22,891
 
24,497
 
    Restricted cash construction fund
 
 
4,200
 
    Other
12,001
 
13,092
 
        Total noncurrent assets
594,842
 
498,440
 
            Total assets
$2,416,591
 
$2,625,392
 


See Notes to Unaudited Condensed Consolidated Financial Statements


Page 4



New Jersey Resources Corporation
Part I




ITEM 1.  FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

CAPITALIZATION AND LIABILITIES

 
March 31,
September 30,
(Thousands)
2009
2008
   
CAPITALIZATION
       
Common stock equity
$   757,291
 
$ 726,958
 
Long-term debt
458,998
 
455,117
 
Total capitalization
1,216,289
 
1,182,075
 
         
CURRENT LIABILITIES
       
Current maturities of long-term debt
5,934
 
60,119
 
Short-term debt
10,000
 
178,200
 
Gas purchases payable
165,130
 
315,516
 
Accounts payable and other
48,009
 
61,735
 
Dividends payable
13,101
 
11,776
 
Deferred and accrued taxes
77,616
 
24,720
 
Regulatory liabilities
13,871
 
 
New Jersey clean energy program
9,777
 
3,056
 
Derivatives, at fair value
285,255
 
146,320
 
Restricted broker margin accounts
26,746
 
29,072
 
Customers’ credit balances and deposits
14,254
 
63,455
 
Total current liabilities
669,693
 
893,969
 
         
NONCURRENT LIABILITIES
       
Deferred income taxes
202,860
 
239,703
 
Deferred investment tax credits
7,031
 
7,192
 
Deferred revenue
8,729
 
9,090
 
Derivatives, at fair value
13,038
 
25,016
 
Manufactured gas plant remediation
120,230
 
120,730
 
Postemployment employee benefit liability
55,096
 
52,272
 
Regulatory liabilities
58,587
 
63,419
 
New Jersey clean energy program
31,062
 
 
Asset retirement obligation
24,695
 
24,416
 
Other
9,281
 
7,510
 
Total noncurrent liabilities
530,609
 
549,348
 
Commitments and contingent liabilities (Note 13)
       
Total capitalization and liabilities
$2,416,591
 
$2,625,392
 



See Notes to Unaudited Condensed Consolidated Financial Statements



Page 5



New Jersey Resources Corporation
Part I




ITEM 1.  FINANCIAL STATEMENTS (Continued)



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
     
                 
 
Three Months Ended
Six Months Ended
 
March 31,
March 31,
(Thousands)
2009
2008
2009
2008
Net income
$35,517
 
$12,535
 
$47,293
 
$42,720
 
Other comprehensive income
               
Unrealized (loss) gain on investments in equity investees, net of tax of $444, $90, $64 and $(28), respectively
(637
)
(129
)
(92
)
41
 
Net unrealized (loss) on derivatives, net of tax of $15, $34, $34 and $59, respectively
(22
)
(10
)
(48
)
(52
)
Other comprehensive income
(659
)
(139
)
(140
)
(11
)
Comprehensive income
$34,858
 
$12,396
 
$47,153
 
$42,709
 



See Notes to Unaudited Condensed Consolidated Financial Statements

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 


 
Page 6

 

1.  GENERAL

The accompanying unaudited condensed consolidated financial statements have been prepared by New Jersey Resources Corporation (NJR or the Company) in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The September 30, 2008 balance sheet data is derived from the audited financial statements of the Company. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in NJR’s 2008 Annual Report on Form 10-K.

The unaudited condensed consolidated financial statements include the accounts of NJR and its subsidiaries, New Jersey Natural Gas Company (NJNG), NJR Energy Services Company (NJRES), NJR Retail Holdings Corporation (Retail Holdings), NJR Energy Investment Corporation (NJREI) and NJR Service Company (NJR Service). Intercompany transactions and accounts have been eliminated. NJREI’s primary subsidiaries are NJR Energy Corporation (NJR Energy) and NJR Steckman Ridge Storage Company. NJR Energy invests primarily in energy-related ventures through its subsidiary, NJNR Pipeline Company (Pipeline), which holds the Company’s 5.53 percent ownership interest in Iroquois Gas and Transmission System, L.P. (Iroquois). NJR Steckman Ridge Storage Company holds the Company’s 50 percent combined interest in Steckman Ridge GP, LLC and Steckman Ridge, LP (collectively, Steckman Ridge), a natural gas storage facility that was acquired and is being developed with a partner in Pennsylvania. Retail Holdings’ two principal subsidiaries are NJR Home Services Company (NJRHS) and Commercial Realty & Resources Corporation (CR&R).

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the results of the interim periods presented. These adjustments are of a normal and recurring nature. 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 that are to be expected for the fiscal year ended September 30, 2009.

Customer Accounts Receivable

Customer accounts receivable include outstanding billings from the following subsidiaries as of:

 
March 31,
September 30,
(Thousands)
2009
2008
NJNG
$  94,007
 
45
%
$  21,398
 
9
%
 
NJRES
107,155
 
51
 
198,902
 
88
   
NJRHS and other
7,665
 
4
 
6,832
 
3
   
Total
$208,827
 
100
%
$227,132
 
100
%
 

Accounts receivable related to estimated unbilled revenues and allowance for doubtful accounts are associated with NJNG only.

Gas in Storage

The following table summarizes Gas in storage by company as of:

 
March 31,
September 30,
 
2009
2008
($ in thousands)
Assets
Bcf
Assets
Bcf
NJNG
$19,391
   1.9
$189,828
22.1
NJRES
44,132
13.1
288,721
27.6
Total
$63,523
15.0
$478,549
49.7



Page 7


 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

New Accounting Standards

Recently Adopted

Effective October 1, 2008 NJR adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157) for its financial assets and liabilities, with the exception of its pension assets. On October, 1, 2009, in accordance with SFAS 157-2, NJR will prospectively apply the provisions of SFAS 157 to its non-financial assets and liabilities that are not measured at least annually. In addition, the provisions of SFAS 157 will be applied to NJR’s annual pension disclosures in accordance with FASB Staff Position (FSP) No. FAS 132(R)-1 (FSP 132(R)-1), Employers’ disclosures about Pensions and Other Postretirement Benefits, beginning in fiscal 2010.

SFAS 157 defines fair value as the amount that would be exchanged to sell an asset or transfer a liability in an orderly transaction between market participants, and establishes a fair value hierarchy of market and unobservable data that is used to develop pricing assumptions. The adoption of SFAS 157 did not have a material impact on NJR’s financial position or results of operations. See Note 4, Fair Value Measurements, for more information on the adoption of SFAS 157, as well as the required disclosures.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, (SFAS 161). SFAS 161 requires enhanced qualitative and quantitative disclosures on the objectives and accounting for derivatives and related hedging activities, as well as their impacts on the financial statements. NJR adopted SFAS 161 effective January 1, 2009. As SFAS 161 provisions only require additional disclosures, there was no impact to NJR’s statement of financial position and results of operations upon adoption. See Note 3 Derivative Instruments for a description of NJR’s derivative activities, including the additional disclosures required by SFAS 161.

On April 10, 2007, the FASB issued FASB Staff Position No. FIN 39-1 (FSP FIN 39-1), Amendment of FASB Interpretation No. 39. FSP FIN 39-1 provides additional guidance for parties that are subject to master netting arrangements. Specifically, for transactions that are executed with the same counterparty, it permits companies to offset the fair values of amounts recognized for derivatives as well as the related fair value amounts of cash collateral receivables or payables, when certain conditions apply. FSP FIN 39-1 became effective for fiscal years beginning after November 15, 2007. As NJR’s policy has been to present its derivative positions and any receivables or payables with the same counterparty on a gross basis, FSP FIN 39-1 had no impact on its statement of financial position and results of operations.

Other Recently Issued Standards

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to elect to measure eligible items at fair value as an alternative to hedge accounting and to mitigate volatility in earnings. A company can either elect the fair value option according to a pre-existing policy, when the asset or liability is first recognized or when it enters into an eligible firm commitment. Changes in the fair value of assets and liabilities that the company chooses to apply the fair value option to, are reported in earnings at each reporting date. SFAS 159 also provides guidance on disclosures that are intended to provide comparability to other companies’ assets and liabilities that have different measurement attributes and to other companies with similar financial assets and liabilities. SFAS 159 became effective for NJR as of October 1, 2008; however, since the Company did not elect the fair value option for any items, the provisions of SFAS 159 do not impact our results of operations or financial condition.

On December 4, 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 is an amendment of Accounting Research Bulletin (ARB) No. 51 and was issued to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements. This Statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries. SFAS 160 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and that a parent company must recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 is effective for fiscal years beginning after December 15, 2008, and early adoption is prohibited. The Company has concluded that this statement will have no impact on its statement of financial position or results of operations.
 
Page 8


 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

On December 30, 2008, the FASB issued FSP 132(R)-1, which requires additional disclosures surrounding postretirement benefit plan assets. Specifically, the objective of FSP 132(R)-1 is to provide users of financial statements information related to a company’s plan assets, investment policies and strategies and significant concentrations of risk. In addition, certain disclosure provisions from FAS 157 will be applied, including those related to inputs and valuation techniques that are used to measure plan assets and the effect of level three measurements on changes in plan assets. FSP 132(R)-1 is effective for fiscal years ending after December 15, 2009. As it is a disclosure only standard, it will have no impact on the Company’s statement of financial position or results of operations.

On April 9, 2009 the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Values of Financial Instruments, which amends SFAS 107, Disclosures about Fair Values of Financial Instruments, and requires that companies also disclose the fair value of financial instruments during interim reporting similar to those that are currently provided annually. FSP No. FAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009 and it will have no impact on the Company’s statement of financial position or results of operations.

2.  REGULATION

October Base Rate Order

As a result of increases in NJNG’s operation, maintenance and capital costs, on November 20, 2007, NJNG petitioned the New Jersey Board of Public Utilities (BPU) to increase base rates for delivery service by approximately $58.4 million, which included a return on NJNG’s equity component of 11.375 percent. This request was consistent with NJNG’s objectives of providing safe and reliable service to its customers and earning a market-based return on its regulated investments.

On October 3, 2008, the BPU unanimously approved and made effective the settlement of NJNG’s base rate case. As a result, NJNG received a revenue increase in its base rates of $32.5 million, which is inclusive of an approximate $13 million impact of a change to the Conservation Incentive Program (CIP) baseline usage rate, received an allowed return on equity component of 10.3 percent, reduced its depreciation expense component from 3.0 percent to 2.34 percent and reduced its annual depreciation expense by $1.6 million as a result of the amortization of previously recovered asset retirement obligations.

Conservation Incentive Program (CIP)

The CIP allows NJNG to recover utility gross margin variations related to both weather and customer usage. Recovery of such utility gross margin variations (filed for annually and recovered one year following the end of the CIP usage year) is subject to additional conditions, including an earnings test and an evaluation of Basic Gas Supply Service (BGSS) related savings.

In May 2008, NJNG filed its Petition for the Annual Review of its CIP for recoverable CIP amounts for fiscal 2008, requesting an additional $6.8 million and approval to modify its CIP recovery rates effective October 1, 2008. The additional amount brought the total recovery requested to $22.4 million. The total recovery requested includes amounts accrued and estimated through September 30, 2008. On October 3, 2008, the BPU approved the CIP petition on a provisional basis, effective the date of the Board Order. As of March 31, 2009, NJNG has $7.6 million accrued in Regulatory Assets in the Unaudited Condensed Consolidated Balance Sheets. On April 1, 2009, NJNG filed a petition with the BPU requesting an extension of its CIP for an additional year through October 1, 2010. The extension was requested due to the continuing nature of energy efficiency programs at the state and federal levels in concert with the issuance of the economic stimulus programs. If accepted by the BPU, the CIP would remain in effect for an additional year or until a final Board Order is issued by the BPU.

In conjunction with the CIP, NJNG incurs costs related to its obligation to fund programs that promote customer conservation efforts during the three-year term of the CIP pilot program. As of March 31, 2009, NJNG had a remaining liability of $305,000 related to these programs.

Page 9

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

Basic Gas Supply Service

BGSS is a BPU approved rate mechanism designed to allow for the recovery of natural gas commodity costs. As necessary, NJNG adjusts its periodic BGSS rates for its residential and small commercial customers to reflect increases or decreases in the cost of natural gas sold to customers.

In May 2008, NJNG filed for an increase to the periodic BGSS factor to be effective October 1, 2008, that would have increased an average residential heating customer’s bill by approximately 18 percent due to an increase in the price of wholesale natural gas. Subsequent to the filing, wholesale natural gas prices moderated, and on September 22, 2008, NJNG, the Staff of the BPU and the Department of the Public Advocate, Division of Rate Counsel (Rate Counsel) signed an agreement for an increase to the periodic BGSS factor that would increase an average residential heating customer’s bill by approximately 8.9 percent. On October 3, 2008, the BPU approved the BGSS increase on a provisional basis, effective the date of the Board Order.

On December 17, 2008, NJNG provided notice that it would implement a $30 million BGSS-related temporary rate credit that would lower residential and small commercial sales customers’ bills in January and February 2009. This temporary rate credit was due primarily to a decline in wholesale commodity costs subsequent to the October 2008 BGSS price change. NJNG also extended and increased the per therm temporary rate credit to lower customer bills by an additional $15 million through March 31, 2009 due to continuing lower wholesale natural gas costs.

Other Incentive Programs

NJNG is eligible to receive financial 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 (FRM) programs. In October 2007, the BPU reduced the sharing percentage of the margin generated by the FRM program retained by NJNG from 20 percent to 15 percent effective November 1, 2007. In October 2008, the Board’s base rate order provided for the extension of the incentive programs through October 31, 2011, along with an expansion of the storage incentive and FRM programs.

Societal Benefits Clause (SBC) and Weather Normalization Clause (WNC)

The SBC is comprised of three primary components: a Universal Service Fund rider (USF), a Manufactured Gas Plant (MGP) Remediation Adjustment (RA), and the New Jersey Clean Energy Program (NJCEP). In February 2008, NJNG filed an application regarding its SBC proposing no change to the rates previously approved in October 2007 (February 2008 SBC filing). On January 27, 2009, NJNG filed an application regarding its SBC to increase its RA factor and its NJCEP factor while maintaining its effective rate on USF (January 2009 SBC filing). The January 2009 SBC filing is subject to BPU staff and Rate Counsel review and must be approved by the BPU prior to implementing the new SBC rates.

USF

Through the USF, eligible customers receive a credit toward their utility bill. The credits applied to eligible customers are recovered through the USF rider in the SBC. NJNG recovers carrying costs on deferred USF balances.

In June 2008, the natural gas utilities in the State of New Jersey collectively filed with the BPU to increase the statewide USF recovery rate effective October 1, 2008. In the BPU’s October 21, 2008 Order, the USF increase was approved on a provisional basis, effective October 24, 2008, and it also approved interest on USF deferred balances at the Treasury Constant Maturity 2-year rate, plus 60 basis points, net of tax, with the rate changing on a monthly basis. NJNG believes the increase has a negligible impact on customers.

MGP

In October 2007, the BPU approved $14.7 million in eligible costs to be recovered annually for MGP remediation expenditures incurred through June 30, 2006. The February 2008 SBC filing included MGP remediation expenditures incurred through June 30, 2007, resulting in an expected annual recovery of $17.7 million. The January 2009 SBC filing included MGP remediation expenditures incurred through June 30, 2008 resulting in an expected annual recovery of $20.7 million.
 
Page 10

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

NJCEP

In October 2008, the BPU released a final Order, updating state utilities’ funding obligations for NJCEP for the period from January 1, 2009 to December 31, 2012. NJNG’s share of the total funding requirement of $1.2 billion is $50.8 million. Accordingly, NJNG recorded the initial obligation and a corresponding regulatory asset at a present value of $44.3 in the Unaudited Condensed Consolidated Balance Sheets. NJNG’s annual obligation gradually increases from $10.3 million in fiscal 2009 to $15.9 million in fiscal 2012. As of March 31, 2009, NJNG had a $40.8 million obligation remaining.

The January 2009 SBC filing included an increase to the NJCEP factor. The proposed factor is expected to recover $12.9 million annually.

WNC

As of March 31, 2009, NJNG has a $243,000 unrecovered balance related to gross margin variations incurred during the fiscal 2006 winter period. On October 3, 2008, the BPU provisionally approved a decrease to NJNG’s WNC rate, effective the date of the Board Order, to fully recover its remaining WNC balance.

Economic Stimulus

On January 20, 2009, NJNG filed two petitions with the BPU seeking approval to implement programs designed to both stimulate the state and local economy through infrastructure investments and encourage energy efficiency. The Accelerated Infrastructure Program (AIP) would allow NJNG to accelerate $70.8 million of 14 previously planned infrastructure projects, maintaining safe and reliable service to NJNG’s customers while creating opportunity for approximately 75 to 100 new jobs. The AIP would be funded through an annual adjustment to customers’ base rates. The second filing, for an Energy Efficiency (EE) Program and associated cost recovery mechanism, requests BPU approval to implement various programs to encourage energy efficiency for residential and commercial customers. NJNG proposed to recover the EE costs of approximately $22.9 million over a 4-year period through a clause mechanism similar to the SBC. Both programs include the recovery of NJNG’s overall weighted average cost of capital.

On April 16, 2009, the BPU approved NJNG’s AIP allowing NJNG to commence construction on its 14 infrastructure projects. NJNG will make a filing for the recovery of infrastructure program investment costs in June 2010 to be effective October 1, 2010. The filing will allow the recovery of costs of the AIP construction activities for the period ending August 31, 2010, including the recovery of NJNG’s overall weighted average cost of capital.
 
Page 11

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

Regulatory Assets & Liabilities

The Company had the following regulatory assets, all related to NJNG, on the Unaudited Condensed Consolidated Balance Sheets:

(Thousands)
March 31,
2009
September 30,
2008
Recovery Period
Regulatory assets–current
         
Underrecovered gas costs
$         
 
$ 27,994
 
Less than one year (1)
WNC
243
 
919
 
Less than one year (2)
CIP
7,552
 
22,463
 
Less than one year (3)
Total current
$    7,795
 
$ 51,376
   
Regulatory assets–noncurrent
         
Remediation costs (Notes 2 and 13)
         
Expended, net of recoveries
$  84,826
 
$ 92,164
 
(4)
Liability for future expenditures
120,230
 
120,730
 
(5)
CIP
88
 
2,397
 
(6)
Deferred income and other taxes
12,574
 
12,726
 
Various (7)
Derivatives (Note 3)
99,055
 
49,610
 
(8)
Postemployment benefit costs (Note 10)
52,397
 
52,519
 
(9)
SBC/Clean Energy
42,041
 
10,524
 
Various (10)
Total noncurrent
$411,211
 
$340,670
   
(1)
Recoverable, subject to BPU approval, through BGSS, without interest.
(2)
Recoverable as a result of BPU approval in October 2008, without interest. This balance reflects the net results from winter period of fiscal 2006. No new WNC activity has been recorded since October 1, 2006 due to the existence of the CIP.
(3)
Recoverable or refundable, subject to BPU annual approval, without interest. Balance, as of March 31, 2009, includes approximately $3.0 million relating to the weather component of the calculation and approximately $4.6 million relating to the customer usage component of the calculation. Recovery from customers is designed to be one year from date of rate approval by the BPU.
(4)
Recoverable, subject to BPU approval, with interest over rolling 7-year periods.
(5)
Estimated future expenditures. Recovery will be requested when actual expenditures are incurred (see Note 13. Commitments and Contingent Liabilities – Legal Proceedings).
(6)
Recoverable or refundable, subject to BPU annual approval, without interest. Balance, as of March 31, 2009, includes approximately $88,000 relating to the customer usage component of the calculation.
(7)
Recoverable without interest, subject to BPU approval.
(8)
Recoverable, subject to BPU approval, through BGSS, without interest.
(9)
Recoverable or refundable, subject to BPU approval, without interest. Includes unrecognized service costs recorded in accordance with SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postemployment Plans that NJNG has determined are recoverable in base rates charged to customers (see Note 10. Employee Benefit Plans).
(10)
Recoverable with interest, subject to BPU approval.

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

The Company had the following regulatory liabilities, all related to NJNG, on the Unaudited Condensed Consolidated Balance Sheets:

(Thousands)
March 31, 2009
September 30, 2008
Regulatory liabilities–current
       
Overrecovered gas costs (1)
$13,871
 
 
Total current
$13,871
 
 
Regulatory liabilities–noncurrent
       
Cost of removal obligation (2)
$58,587
 
$63,419
 
Total noncurrent
$58,587
 
$63,419
 
(1)
Refundable, subject to BPU approval, through BGSS with interest.
(2)
NJNG accrues and collects for cost of removal in rates. This liability represents collections in excess of actual expenditures. Approximately $21.6 million, including accretion of $742,000 for the six months ended March 31, 2009, of regulatory assets relating to asset retirement obligations have been netted against the cost of removal obligation as of March 31, 2009 (see Note 11. Asset Retirement Obligations).

Page 12

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

3.  DERIVATIVE INSTRUMENTS

The Company and its subsidiaries are subject to commodity price risk due to fluctuations in the market price of natural gas. To manage this risk, the Company and its subsidiaries enter into a variety of derivative instruments including, but not limited to, futures contracts, physical forward contracts, financial options, and swaps to economically hedge the commodity price risk associated with its existing and anticipated commitments to purchase and sell natural gas. These contracts generally qualify as derivatives in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities. As a result, in accordance with the provisions of SFAS 133 all of the financial and certain of the Company’s physical derivative instruments are recorded at fair value in the Unaudited Condensed Consolidated Balance Sheets. The Company chooses not to designate its derivatives as hedging instruments pursuant to SFAS 133, and therefore changes in the fair value of the derivative instruments are recorded as a component of Gas purchases or Operating revenues, for NJRES and NJR Energy, respectively, in the Unaudited Condensed Consolidated Statements of Income as unrealized gains or losses. Changes in fair value of NJNG’s derivative instruments are recorded as a component of Regulatory assets or liabilities in the Unaudited Condensed Consolidated Balance Sheets, as these amounts will be recovered through future BGSS amounts as an increase or reduction to the cost of natural gas in NJNG’s tariff.

Effective October 1, 2007, the Company elected to discontinue the use of the “normal purchase normal sales” (normal) scope exception of SFAS 133 for all new physical commodity contracts entered into on or after October 1, 2007 by NJRES. For these contracts, the changes in fair value are included currently in earnings. Also, effective October 1, 2008, due to changes in the Company’s ability to assert physical delivery, the Company is no longer applying normal treatment to physical commodity contracts executed prior to October 1, 2007. Therefore, all NJRES physical commodity contracts are derivatives and are accounted for at fair value in the Unaudited Condensed Consolidated Balance Sheets, with changes in fair value included as a component of operating revenue or gas purchases, as appropriate, in the Unaudited Condensed Consolidated Statements of Income. The Company continues to apply the normal scope exception for all physical commodity contracts at NJNG and NJR Energy, and as a result the profit or loss on these contracts is not recorded until physical delivery occurs.

As described in Note 1, General, NJR adopted the provisions of SFAS 161, which requires enhanced disclosures surrounding derivative activities. The additional quantitative and qualitative disclosures are included throughout this note. For a more detailed discussion of the Company’s fair value policies and level disclosures please see Note 4, Fair Value Measurements.

The following table reflects the fair value of NJR's derivative assets and liabilities recognized in its Unaudited Condensed Consolidated Balance Sheets as of March 31, 2009:
 
   
Fair Value
(Thousands)
Balance Sheet Location
Asset Derivatives
Liability Derivatives
Derivatives not designated as hedging instruments under SFAS 133:
     
       
NJNG:
     
Financial derivative commodity contracts
Derivatives - Current
$  12,229
$108,207
 
Derivatives - Noncurrent
3,078
NJRES:
     
Physical forward commodity contracts
Derivatives - Current
18,848
16,071
 
Derivatives - Noncurrent
6,631
31
Financial derivative commodity contracts
Derivatives - Current
210,557
160,402
 
Derivatives - Noncurrent
14,309
9,697
NJR Energy:
     
Financial derivative commodity contracts
Derivatives - Current
1,180
575
 
Derivatives - Noncurrent
1,951
232
Total fair value of derivatives
 
$265,705
$298,293

Page 13

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

As discussed above, the Company no longer applies the normal scope exception at NJRES and chooses not to apply the hedge accounting provisions of SFAS 133 to any of NJR and subsidiaries’ derivatives. As a result, any unrealized gains (losses) related to NJRES’ open financial and physical commodity contracts and NJR Energy’s financial derivatives are recognized in the Unaudited Condensed Consolidated Statements of Income as a component of Operating revenue or Gas purchases, as appropriate. NJRES’ utilizes financial derivatives to hedge the margin associated with the purchase of physical gas for injection into storage and the subsequent sale of physical gas at a later date. The gains (losses) on these financial transactions are recognized upon settlement in Gas purchases. The gains (losses) on the financial transactions that are economic hedges of the cost of the purchased gas are recognized prior to the gains (losses) on the physical transaction that is recognized when the natural gas is sold. Therefore, mismatches between the timing of recognizing realized gains or losses on the financial derivative instruments and the timing of the actual sale of the natural gas that is being economically hedged creates volatility in the results of NJRES, although the Company’s intended economic results relating to the entire transaction are unaffected.

Gains (losses) at NJRES and NJR Energy included as a component of Gas purchases and Operating revenues, as noted below, for the three months ended March 31, 2009 are as follows:

(Thousands)
Location of Gain or (Loss) Recognized in Income on Derivative
Amount of Gain or (Loss) Recognized in Income on Derivative
Derivatives not designated as hedging instruments under SFAS 133:
     
       
NJRES:
     
Physical commodity contracts
Operating revenues
$  8,039
 
Physical commodity contracts
Gas purchases
(570
)
Financial derivatives
Gas purchases
32,157
 
Subtotal NJRES
 
39,626
 
NJR Energy:
     
Financial derivatives
Operating revenues
(10,010
)
Total NJRES and NJR Energy unrealized and realized gains
 
$29,616
 

NJNG’s financial derivatives are part of its regulated risk management activities that serve to mitigate BGSS costs passed on to its customers. As these transactions are entered into pursuant to and recoverable through regulatory riders, any changes in the value of NJNG’s financial derivatives are deferred in Regulatory Assets or Liabilities and there is no impact to earnings.

As of March 31, 2009, NJNG, NJRES and NJR Energy had the following outstanding long (short) derivatives:

   
Volume
(Bcf)
NJNG
Futures
16.8
 
 
Swaps
(0.3
)
 
Options
10.4
 
NJRES
Futures
(6.7
)
 
Swaps
(39.5
)
 
Options
3.6
 
 
Physical
65.8
 
NJR Energy
Swaps
3.8
 
 
 
Page 14

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

Generally, exchange-traded contracts require posted collateral, referred to as margin, usually in the form of cash. The amount of margin required is comprised of a fixed initial amount based on the contract and a variable amount based on market price movements from the initial trade price. The Company maintains broker margin accounts for NJNG and NJRES. The balances are as follows:

(Thousands)
Balance Sheet Location
March 31, 2009
September 30, 2008
NJNG broker margin deposit
Broker margin - Current Assets
$104,497
 
$  41,277
 
NJRES broker margin (liability)
Broker margin - Current Liabilities
$ (26,746
$(29,072
)

Wholesale Credit Risk

NJNG, NJRES and NJR Energy are exposed to credit risk as a result of their 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 current and prospective counterparties’ financial statements and/or credit ratings, daily monitoring of counterparties’ credit limits and exposure, daily communication with traders regarding credit status and the use of credit mitigation measures, such as collateral requirements and netting agreements. Examples of collateral include letters of credit and cash received for either prepayment or margin deposit. Collateral may be requested due to NJR’s election not to extend credit or because exposure exceeds defined thresholds. Most of NJR’s wholesale marketing contracts contain standard netting provisions. These contracts include those governed by the International Swaps and Derivatives Association (ISDA) and the North American Energy Standards Board (NAESB). The netting provisions refer to payment netting, whereby receivables and payables with the same counterparty are offset and the resulting net amount is paid to the party to which it is due.

As a result of 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.

The following is a summary of gross credit exposures grouped by investment and noninvestment grade counterparties, as of March 31, 2009. Internally-rated exposure applies to counterparties that are not rated by Standard & Poor’s (S&P) or Moody’s Investors Service, Inc (Moody’s). In these cases, the company’s or guarantor’s financial statements are reviewed, and similar methodologies and ratios used by S&P and/or Moody’s are applied to arrive at a substitute rating. Gross credit exposure is defined as the unrealized fair value of physical and financial derivative commodity contracts plus any outstanding receivable for the value of natural gas delivered for which payment has not yet been received. The amounts presented below have not been reduced by any collateral received or netting and exclude accounts receivable for retail natural gas sales and services.
(Thousands)
Gross Credit
Exposure
Investment grade
$163,664
 
Noninvestment grade
14,960
 
Internally rated investment grade
17,014
 
Internally rated noninvestment grade
1,897
 
Total
$197,535
 

Conversely, certain of NJRES’, NJNG’s and NJR Energy’s derivative instruments are tied to agreements containing provisions that would require cash collateral payments from the Company if certain events occur. These provisions vary based upon the terms in individual counterparty agreements and can result in cash payments if NJNG’s credit rating were to fall below its current level. NJNG’s credit rating, with respect to Standard and Poor’s, reflects the overall corporate credit profile. Specifically, most, but not all, of these additional payments will be triggered if NJNG’s debt is downgraded by the major credit agencies, regardless of investment grade status. As well, some of these agreements include threshold amounts that would result in additional collateral payments if the values of derivative liabilities were to exceed the maximum values provided for in relevant counterparty agreements. Other provisions include payment features that are not specifically tied to ratings, but are based on certain financial metrics.

Page 15

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

Collateral amounts associated with any of these conditions, are determined based on a sliding scale and are contingent upon the degree to which the Company’s credit rating and/or financial metrics deteriorate, and the extent to which liability amounts exceed applicable threshold limits. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position on March 31, 2009, is $43.2 million for which the Company has not posted any collateral. If all the thresholds related to the credit-risk-related contingent features underlying these agreements were invoked on March 31, 2009, the Company would be required to post a total of $14.1 million of collateral to its counterparties. This amount differs from the Company’s net derivative liability because the credit agreements also include clauses, commonly known as “Rights of Offset,” that would permit the Company to offset its derivative assets against its derivative liabilities for determining additional collateral to be posted.

4.  FAIR VALUE MEASUREMENTS

As noted in Note 1, General, NJR adopted SFAS 157 effective October 1, 2008 and has applied the provisions to its financial assets and liabilities, as appropriate, which include financial derivatives and physical commodity contracts qualifying as derivatives, available for sale securities and other financial assets and liabilities. SFAS 157 defines and establishes a framework for measuring fair value. SFAS 157 requires that companies consider assumptions market participants would make when pricing assets and liabilities that are required to be recognized at fair value in accordance with previously issued accounting pronouncements.

SFAS 157 also requires additional disclosures that are intended to convey the reliability of price inputs used to determine fair value. To facilitate this, SFAS 157 established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on the source of the data used to develop the price inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to inputs that are based on unobservable market data and include the following:

Level 1
Unadjusted quoted prices for identical assets or liabilities in active markets; NJR’s Level 1 assets and liabilities include primarily exchange traded financial derivative contracts and listed equities;
   
Level 2
Significant price data, other than Level 1 quotes, that is observed either directly or indirectly; NJR’s level 2 assets and liabilities include over-the-counter physical forward commodity contracts and swap contracts or derivatives that are initially valued using observable quotes and are subsequently adjusted to include time value, credit risk or estimated transport pricing components. These additional adjustments are not considered to be significant to the ultimate recognized values.
   
Level 3
Inputs derived from a significant amount of unobservable market data; these include NJR’s best estimate of fair value and are derived primarily through the use of internal valuation methodologies. Certain of NJR’s physical commodity contracts that are to be delivered to inactively traded points on a pipeline are included in this category.

NJNG’s, NJRES’ and NJR Energy’s financial derivatives portfolios consist mainly of futures, options and swaps. NJR primarily uses the market approach and its policy is to use actively quoted market prices when available. The principal market for its derivative transactions is the natural gas wholesale market, therefore, the primary source for its price inputs is the New York Mercantile (NYMEX) exchange. NJRES also uses Natural Gas Exchange (NGX) for Canadian delivery points and Platts and NYMEX ClearPort for certain over-the-counter physical forward commodity contracts. However, NJRES also engages in transactions that result in transporting natural gas to delivery points for which there is no actively quoted market price. In these cases, NJRES’ policy is to use the best information available to determine fair value based on internal pricing models, which include estimates extrapolated from broker quotes or pricing services. As of March 31, 2009, less than one percent of the total fair value of NJRES’ derivative assets and liabilities was derived using such inputs.

NJR Energy uses NYMEX settlement prices to value its long-dated swap contracts. NJR also has available for sale securities and other financial assets that include listed equities, mutual funds and money market funds for which there are active exchange quotes available.

When NJR determines fair values, measurements are adjusted, as needed, for credit risk associated with counterparties, as well as our own credit risk. NJR determines these adjustments by using historical default probabilities that correspond to the applicable Standard and Poor’s issuer ratings, while also taking into consideration collateral and netting arrangements that serve to mitigate risk. In addition, NJR further adjusts certain fair values, based on the change in a market index that tracks the credit default swaps of investment grade companies, to factor in the current instability in the credit markets.
 
Page 16

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

The adoption of SFAS 157 did not have any impact on NJR’s financial condition or results of operations. Assets and liabilities measured at fair value on a recurring basis as of March 31, 2009 are summarized as follows:

 
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant Unobservable Inputs
 
(Thousands)
(Level 1)
(Level 2)
(Level 3)
 Total    
ASSETS:
       
Physical forward commodity contracts
$          
 
$25,477
 
$2
    
$  25,479
Financial derivative contracts
195,837
 
44,389
 
     
240,226
Available for sale securities (1)
7,805
       
 —
        
     
7,805
Other assets
1,284
       
        
     
1,284
Total assets at fair value
$204,926
 
$69,866
 
$2
     
$274,794
 
 
     
LIABILITIES:
       
Physical forward commodity contracts
$          
 
$16,102
 
$
 
$16,102
Financial derivative contracts
240,245
  
 41,946
 
 
282,191
Other liabilities
1,284
      
    —
     
 
1,284
Total liabilities at fair value
$241,529
 
$58,048
 
$
 
$299,577
(1)
Included in Investments in equity investees and other in the Unaudited Condensed Consolidated Balance Sheets.

A reconciliation of the beginning and ending balances of NJRES’ derivatives measured at fair value based on significant unobservable inputs as of March 31, 2009, is as follows:

 
Fair Value Measurements Using
 
Significant Unobservable Inputs
 
(Level 3)
(Thousands)
Three Months Ended
Six Months Ended (1)
Beginning balance
$123
 
$937
 
Total gains realized and unrealized
79
 
320
 
Purchases, sales, issuances and settlements, net
(200
)
(772
)
Net transfers in and/or out of level 3
 
(483
)
Ending balance
$2
 
$2
 
 
 
 
 
 
 Net unrealized gains included in net income relating to
       
derivatives still held at March 31, 2009
$2
 
$2
 

(1)  
The amounts included in the Level 3 roll forward table for the six month period ended March 31, 2009  include corrections to amounts previously disclosed for the three month period ended December 31, 2008.  The net impact of these corrections (in 000’s) on the ending balance of the Level 3 roll forward table as of December 31, 2008 was a decrease of $8.  The net impact included the following corrections: a decrease in the beginning balance as of October 1, 2008 of $4,405, a net increase in unrealized gains (losses) of $105, a decrease in purchases, sales, issuances, settlements, net of $327, and a decrease in the net transfers out of level 3 of $3,965. Such corrections will be made to the Level 3 roll forward table for the three month period ended December 31, 2008 the next time such amounts are presented in a future filing. 

  NJR will prospectively apply the provisions of SFAS 157 to its pension assets and non-financial assets and liabilities during fiscal 2010.
 
5.  INVESTMENTS IN EQUITY INVESTEES

NJR’s Investments in equity investees and other include the following investments:

(Thousands)
March 31,
2009
September 30,
2008
Steckman Ridge
$115,085
 
$  84,285
 
Iroquois
25,849
 
23,604
 
Other
7,805
 
8,092
 
Total
$148,739
 
$115,981
 

NJR’s investment in Steckman Ridge increased $30.8 million during the six months ended March 31, 2009, including cash investments of $28.5 million and capitalized costs and interest of $2.3 million.
 
 
 
 
Page 17


 
 

New Jersey Resources Corporation
Part I

 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

  NJR uses the equity method of accounting for its investments in Steckman Ridge and Iroquois.

Other investments represent investments in equity securities of publicly traded energy companies, all of which are immaterial on an individual basis, and are accounted for as available for sale securities, with any change in the value of such investments recorded as Accumulated other comprehensive income, a component of Common stock equity.

The following tables are summarized financial information for Iroquois:

 
Three Months Ended
March 31,
Six Months Ended
March 31,
(Millions)
2009
2008
2009
2008
Operating revenues
$51.0
 
$44.7
 
$92.8
 
$83.5
 
Operating income
$30.3
 
$26.1
 
$52.0
 
$45.3
 
Net income
$14.4
 
$11.5
 
$23.9
 
$19.0
 

(Millions)
March 31,
2009
September 30,
2008
Current assets
$  65.1
 
$  64.2
 
Noncurrent assets
$775.1
 
$729.2
 
Current liabilities
$  62.5
 
$  39.3
 
Noncurrent liabilities
$335.3
 
$348.9
 

6.  EARNINGS PER SHARE

The following table sets forth the calculation of the Company’s basic and diluted earnings per share:

 
Three Months Ended
March 31,
Six Months Ended
March 31,
(Thousands, except per share amounts)
2009
2008
2009
2008
Net income, as reported
$35,517
 
$12,535
 
$47,293
 
$42,720
 
Basic earnings per share
               
Weighted average shares of common stock outstanding–basic
42,305
 
41,840
 
42,238
 
41,758
 
Basic earnings per common share
$0.84
 
$0.30
 
$1.12
 
$1.02
 
Diluted earnings per share
               
Weighted average shares of common stock outstanding–basic
42,305
 
41,840
 
42,238
 
41,758
 
Incremental shares (1)
388
 
259
 
360
 
260
 
Weighted average shares of common stock outstanding–diluted (2)
42,693
 
42,099
 
42,598
 
42,018
 
Diluted earnings per common share
$0.83
 
$0.30
 
$1.11
 
$1.02
 
(1) Incremental shares consist of stock options, stock awards and performance units.
(2) The Company has no securities that are antidilutive for the three and six months ended March 31, 2009

7.  DEBT

NJR

On March 15, 2009, NJR repaid its $25 million, 3.75 percent, Unsecured Senior notes at maturity.

On December 13, 2007, NJR entered into a $325 million unsecured committed credit facility expiring in December 2012. As of March 31, 2009, NJR had no borrowings outstanding under the facility.

Page 18

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
As of March 31, 2009, NJR has a $5 million letter of credit outstanding on behalf of NJRES, which is used for margin requirements for natural gas transactions and will expire on June 30, 2009.

NJR also has a $675,000 letter of credit outstanding on behalf of CR&R, which will expire on December 3, 2009. The letter of credit is in place to support development activities.

NJNG

On November 1, 2008, NJNG repaid its $30 million, 6.27 percent, Series X First Mortgage bonds at maturity.

In October 2007, NJNG entered into an agreement for standby letters of credit that may be drawn upon through December 15, 2009 for up to $50 million. As of March 31, 2009, no letters of credit have been issued under this agreement. These letters of credit would not reduce the amount available to be borrowed under NJNG’s credit facility.

As of March 31, 2009, NJNG has a $250 million committed credit facility with several banks, expiring in December 2009. This facility is used to support NJNG’s commercial paper program. NJNG had $10 million outstanding under this facility as of March 31, 2009.

NJNG received $6.3 million and $7.5 million in December 2008 and 2007, respectively, in connection with the sale-leaseback of its natural gas meters. This sale-leaseback program is expected to be continued on an annual basis.

NJNG is obligated with respect to loan agreements securing six series of variable rate bonds totaling approximately $97.0 million of variable-rate debt backed by securities issued by the New Jersey Economic Development Authority (EDA). The EDA bonds are commonly referred to as auction rate securities (ARS) and have an interest rate reset every 7 or 35 days, depending upon the applicable series. On those dates, an auction is held for the purposes of determining the interest rate of the securities. The interest rate associated with the NJNG variable-rate debt is based on the rates on the EDA ARS. For the six months ended March 31, 2009, all of the auctions surrounding the EDA ARS have failed, resulting in those bonds bearing interest at their maximum rates, defined as the lesser of (i) 175 percent of 30-day LIBOR or (ii) 10 to 12 percent per annum, as applicable to such series of ARS. As of March 31, 2009, the 30-day LIBOR rate was 0.5 percent. While the failure of the ARS auctions does not signify or constitute a default on NJNG, the EDA ARS does impact NJNG’s borrowing costs of the variable-rate debt. As such, NJNG currently has a weighted average interest rate of 0.9 percent as of March 31, 2009, compared with a weighted average interest rate of 4.6 percent as of September 30, 2008. There can be no assurance that the EDA ARS will have enough market liquidity to avoid failed auctions in the future.

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. NJNG deposited $15.0 million of the proceeds into a construction fund to finance subsequent construction in the northern division of NJNG’s territory. NJNG drew down $10.8 million from the construction fund prior to fiscal year 2008 and drew down the remaining $4.2 million during the first quarter of fiscal 2009.

Neither NJNG nor the results of its operations are obligated or pledged to support the NJR or NJRES credit facilities.

NJRES

As of March 31, 2009, NJRES had a 3-year, $30 million committed credit facility that expires in October 2009 with a multinational financial institution. There were no borrowings under this facility as of March 31, 2009.
 
Page 19

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

A summary of NJR’s and NJNG’s long-term debt, committed credit facilities which require annual commitment fees, and NJRES’ committed facility that does not require a commitment fee, are as follows:

 
March 31,
September 30,
(Thousands)
2009
2008
NJR
       
Long - term debt
$ 50,000
 
$ 75,000
 
Bank credit facilities
$325,000
 
$325,000
 
Amount outstanding at end of period
       
Notes payable to banks
 
$ 32,700
 
Weighted average interest rate at end of period
 
     
Notes payable to banks
 
2.46
%
NJNG
       
Long - term debt (1)
$349,800
 
$379,800
 
Bank credit facilities
$250,000
 
$250,000
 
Amount outstanding at end of period
 
     
Commercial paper
$ 10,000
 
$145,500
 
Weighted average interest rate at end of period
       
Commercial paper
0.34
%
2.31
%
NJRES
       
Bank credit facilities
$ 30,000
 
$ 30,000
 
Amount outstanding at end of period
       
Notes payable to banks
 
 
Weighted average interest rate at end of period
       
Notes payable to banks
 
 
(1) Long - term debt excludes lease obligations of $65.1 million and $60.4 million at March 31, 2009 and September 30, 2008, respectively.

8.  CAPITALIZED FINANCING COSTS AND DEFERRED INTEREST

Allowance for funds used during construction, (AFUDC) included in Utility plant, and capitalized interest included in Real estate properties and other and Investments in equity investees on the Unaudited Condensed Consolidated Balance Sheets, are as follows:
 
 
Three Months Ended
March 31,
Six Months Ended
March 31,
(Thousands)
2009
2008
2009
 
2008
 
AFUDC – Utility plant
$172
 
$549
 
$429
 
$1,085
 
Weighted average rate
2.00
%
8.31
%
3.00
%
8.31
%
                 
Capitalized interest – Real estate properties and other
$—
 
$28.6
 
$—
 
$65
 
Weighted average interest rates
%
3.86
%
%
4.46
%
                 
Capitalized interest – Investments in equity investees and other
$827
 
$832
 
$1,670
 
$1,686
 
Weighted average interest rates
5.34
%
5.63
%
5.44
%
5.81
%

The AFUDC amounts shown in the table above for the three and six months ended March 31, 2008 include an equity component based on NJNG’s prior return on equity rate of 11.5 percent. As a result of the BPU’s Base Rate Order issued in October 2008, NJNG implemented certain rate design changes, including a change to its AFUDC calculation and a return on equity rate of 10.3 percent (see Note 2. Regulation). Effective October 3, 2008, NJNG is allowed to recover an incremental cost of equity component during periods when its short-term debt balances are lower than its construction work in progress. For the three and six months ended March 31, 2009, AFUDC only includes a debt component.

Page 20

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

NJR, through its CR&R subsidiary, capitalizes interest associated with the development and construction of its commercial buildings. Interest is also capitalized associated with the acquisition, development and construction of a natural gas storage facility through NJR’s equity investment in Steckman Ridge (see Note 5. Investments in Equity Investees and other).

Pursuant to a BPU order, NJNG is permitted to recover carrying costs on uncollected balances related to SBC program costs, which include NJCEP, RAC and USF expenditures. Accordingly, Other income included $491,000 and $690,000 of interest related to these SBC program costs for the three months ended March 31, 2009 and 2008, respectively, and $1.1 million and $1.4 million for the six months ended March 31, 2009 and 2008, respectively.

9.  STOCK-BASED COMPENSATION

On November 11, 2008, the Company granted 106,730 restricted shares that vested immediately. On the same date, the Company also granted 8,481 shares that vested immediately and were issued on November 17, 2008. On January 21, 2009 the members of the Board of Directors were issued 12,000 shares for their annual retainer. On March 11, 2009, the Company granted 46,500 restricted shares two-thirds of which may vest on October 1, 2009 and one-third of which may vest on October 1, 2010, subsequent to meeting certain performance milestones.

As of March 31, 2009, 2,398,623 and 95,203 shares, respectively, remain available for future awards to employees and directors.

Included in Operation and maintenance expense is $1.2 million and $1.3 million for the six months ended March 31, 2009 and 2008, respectively, related to stock-based compensation. As of March 31, 2009, there remains $3.3 million of deferred compensation related to unvested shares and options, which is expected to be recognized over the next 2 years.

10.  EMPLOYEE BENEFIT PLANS

Pension and Other Postemployment Benefit Plans (OPEB)

The components of the net periodic cost for pension benefits, including NJR’s Pension Equalization Plan, and OPEB costs (principally health care and life insurance) for employees and covered dependents were as follows:

 
Pension
OPEB
 
Three Months
Ended
March 31,
Six Months
Ended
March 31,
Three Months
Ended
March 31,
Six Months
Ended
March 31,
(Thousands)
2009
2008
2009
2008
2009
2008
2009
2008
Service cost
$678
 
$   729
 
$1,356
 
$1,457
 
$   280
 
$436
 
$   864
 
$   924
 
Interest cost
1,937
 
1,649
 
3,874
 
3,297
 
1,023
 
810
 
2,029
 
1,631
 
Expected return on plan assets
(2,188
)
(2,182
)
(4,376
)
(4,365
)
(351
)
(627
)
(998
)
(1,210
)
Recognized actuarial loss
139
 
276
 
278
 
551
 
215
 
181
 
534
 
443
 
Prior service cost amortization
14
 
14
 
28
 
28
 
19
 
19
 
39
 
39
 
Transition obligation amortization
 —
 
 
 —
 
 
90
 
89
 
179
 
178
 
Net periodic cost
$580
 
$   486
 
$1,160
 
$  968
 
$1,276
 
$908
 
$2,647
 
$2,005
 

For fiscal 2009, the Company has no minimum pension funding requirements. However, funding requirements are uncertain and can depend significantly on changes in actuarial assumptions, returns on plan assets and changes in demographic factors. It is anticipated that the annual funding level to the OPEB plans will range from $1.2 million to $1.4 million over the next five years. Additional contributions may be made based on market conditions and various assumptions.


Page 21

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

11.  ASSET RETIREMENT OBLIGATIONS (ARO)

NJR recognizes AROs related to the costs associated with cutting and capping its main and service gas distribution pipelines of NJNG, which is required by New Jersey law when taking such gas distribution pipelines out of service.

The following is an analysis of the change in the ARO liability for the period ended March 31, 2009:

(Thousands)
Balance at October 1, 2008
$24,416
 
Accretion
742
 
Additions
 
Retirements
(463
)
Balance at March 31, 2009
$24,695
 

Accretion amounts are not reflected as an expense on NJR’s Unaudited Condensed Consolidated Statements of Income, but rather are deferred as a regulatory asset and netted against NJNG’s regulatory liabilities, for presentation purposes, on the Unaudited Condensed Consolidated Balance Sheet.

12.  INCOME TAXES

As of September 30, 2008, the Company had a FIN 48 (Reserve for Uncertain Tax Positions) balance of $6.5 million. During the first quarter of fiscal year 2009, the Company settled a tax court case with the State of New Jersey, which resulted in a $2.7 million decrease to the reserve balance.

During the second quarter of fiscal 2009, the Company settled the September 30, 2005 Internal Revenue Service (IRS) tax audit. The settlement resulted in an additional reduction to the remaining FIN 48 balance of $3.8 million bringing it to its current balance of zero. The prior balance of $3.8 million related to one issue which has been settled favorably and will result in no changes to the company’s tax liability related to the issue.

Currently the Company has no reason to believe that there will be any new additions to the FIN 48 reserve.

13.  COMMITMENTS AND CONTINGENT LIABILITIES

Cash Commitments

NJNG has entered into long-term contracts, expiring at various dates through 2023, for the supply, storage and delivery of natural gas. These contracts include current annual fixed charges of approximately $89.9 million at current contract rates and volumes, which are recoverable through the BGSS.

For the purpose of securing adequate storage and pipeline capacity, NJRES enters into storage and pipeline capacity contracts, which require the payment of certain demand charges by NJRES, in order to maintain the ability to access such natural gas storage or pipeline capacity, during a fixed time period, which generally range from one to five years. Demand charges are based on established rates as regulated by the Federal Energy Regulatory Commission (FERC). These demand charges represent commitments to pay storage providers or pipeline companies for the right to store and transport natural gas utilizing their respective assets. As of March 31, 2009, NJRES had contractual obligations for current annual demand charges related to storage contracts and pipeline capacity contracts of $37.5 million and $47.9 million, respectively.
 
Page 22

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

As of March 31, 2009, there were NJR guarantees covering approximately $394 million of natural gas purchases and demand fee commitments of NJRES and NJNG not yet reflected in Accounts payable on the Unaudited Condensed Consolidated Balance Sheet. Commitments as of March 31, 2009 for natural gas purchases and future demand fees, for the next five fiscal year periods, are as follows:

(Thousands)
2009  
2010  
2011  
2012  
 2013  
                      Thereafter
NJRES:
           
Natural gas purchases
$256,244
$247,995
$119,000
$123,566
$10,417
$      —
Pipeline demand fees
29,342
33,661
20,794
6,924
5,794
5,906
Storage demand fees
20,914
27,629
16,082
10,616
4,020
2,025
Sub-total NJRES
$306,500
$309,285
$155,876
$141,106
$20,231
$7,931
NJNG:
           
Natural gas purchases
$ 84,699
$ 31,218
$ 1,644
$         —
$         —
$         —
Pipeline demand fees
29,213
77,972
80,143
73,895
72,917
320,849
Storage demand fees
10,940
20,575
14,473
8,993
8,297
4,735
Sub-total NJNG
$124,852
$129,765
$ 96,260
$ 82,888
$ 81,214
$325,584
Total
$431,352
$439,050
$252,136
$223,994
$101,445
$333,515

Costs for storage and pipeline demand fees, included as a component of Gas purchases on the Unaudited Condensed Consolidated Statements of Income, are as follows:

 
Three Months Ended
March 31,
Six Months Ended
March 31,
(Thousands)
2009
 
2008
 
2009
 
2008
 
NJRES
$29.8
 
$31.5
 
$  58.3
 
$59.0
 
NJNG
22.3
 
19.5
 
42.8
 
38.2
 
Total
$52.1
 
$51.0
 
$101.1
 
$97.2
 

NJNG’s capital expenditures are estimated at $87.4 million for fiscal 2009, including $6 million related to AIP construction costs, of which approximately $39.0 million has been committed. Capital expenditures consist primarily of NJNG’s construction program to support customer growth, maintenance of its distribution system, replacement needed under pipeline safety regulations, an automated meter reading installation project and AIP.

The Company’s future minimum lease payments under various operating leases are less than $3.6 million annually for the next five years and $1.6 million in the aggregate for all years thereafter.

Legal Proceedings

Manufactured Gas Plant Remediation

NJNG is responsible for the remedial cleanup of three Manufactured Gas Plant (MGP) sites, dating back to gas operations in the late 1800s and early 1900s, which contain contaminated residues from former gas manufacturing operations. NJNG is currently involved in administrative proceedings with the New Jersey Department of Environmental Protection (NJDEP), 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, under Administrative Consent Orders or Memoranda of Agreement with the NJDEP.
 
Page 23

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

NJNG may, subject to BPU approval, recover its remediation expenditures, including carrying costs, over rolling 7-year periods pursuant to a Remediation Adjustment (RA) approved by the BPU. In October 2007, the BPU approved $14.7 million in eligible costs to be recovered annually for MGP remediation expenditures incurred through June 30, 2006. In February 2008, NJNG filed an application regarding its SBC which included MGP remediation expenditures incurred through June 30, 2007, resulting in an expected annual recovery of $17.7 million. On January 27, 2009, NJNG filed an application regarding its SBC including MGP remediation expenditures incurred through June 30, 2008 resulting in an expected annual recovery of $20.7 million. As of March 31, 2009, $84.8 million of previously incurred remediation costs, net of recoveries from customers and insurance proceeds, are included in Regulatory assets on the Unaudited Condensed Consolidated Balance Sheet.

In September 2008, NJNG updated an environmental review of the MGP sites, including a review of potential liability for investigation and remedial action. NJNG estimated at the time of the review that total future expenditures to remediate and monitor the three MGP sites for which it is responsible will range from approximately $120.2 million to $177.2 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, NJNG expects actual costs to differ from these estimates. Where it is probable that costs will be incurred, but the information is sufficient only to establish a range of possible 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 $120.2 million on the Unaudited Condensed 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 MGP-related costs through the RAC. If any future regulatory position indicates that the recovery of such costs is not probable, the related cost would be charged to income in the period of such determination. However, because recovery of such costs is subject to BPU approval, there can be no assurance as to the ultimate recovery through the RAC or the impact on the Company’s results of operations, financial position or cash flows, which could be material.

General

The Company is party to various other claims, legal actions and complaints arising in the ordinary course of business. In the Company’s opinion, other than as disclosed in Part II Item 1 of this Form 10-Q, the ultimate disposition of these matters will not have a material adverse effect on its financial condition, results of operations or cash flows.
 
Page 24

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

14.  BUSINESS SEGMENT DATA AND OTHER OPERATIONS DATA

Information related to the Company’s various business segments and other operations, excluding capital expenditures, which are presented in the Unaudited Condensed 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 operations consist of appliance and installation services, commercial real estate development, investments and other corporate activities.
 
Three Months Ended
March 31,
Six Months Ended
March 31,
(Thousands)
2009
2008
2009
2008
Operating Revenues
               
Natural Gas Distribution
$469,261
 
$476,818
 
$810,169
 
$761,178
 
Energy Services
472,763
 
687,912
 
935,857
 
1,208,123
 
Segment subtotal
942,024
 
1,164,730
 
1,746,026
 
1,969,301
 
Retail and Other
(2,350
)
12,859
 
(5,004
)
19,490
 
Intersegment revenues (1)
(2,158
)
(44
)
(2,202
)
(108
)
Total
$937,516
 
$1,177,545
 
$1,738,820
 
$1,988,683
 
Depreciation and Amortization
               
Natural Gas Distribution
$7,291
 
$9,332
 
$14,452
 
$18,565
 
Energy Services
51
 
53
 
102
 
106
 
Segment subtotal
7,342
 
9,385
 
14,554
 
18,671
 
Retail and Other
166
 
132
 
315
 
249
 
Total
$7,508
 
$9,517
 
$14,869
 
$18,920
 
Interest Income (2)
               
Natural Gas Distribution
$504
 
$1,408
 
$1,162
 
$2,610
 
Energy Services
1
 
64
 
18
 
171
 
Segment subtotal
505
 
1,472
 
1,180
 
2,781
 
Retail and Other
13
 
71
 
19
 
126
 
Total
$518
 
$1,543
 
$1,199
 
$2,907
 
Interest Expense, net
               
Natural Gas Distribution
$4,204
 
$5,376
 
$10,664
 
$11,495
 
Energy Services
(124
)
887
 
(148
)
1,764
 
Segment subtotal
4,080
 
6,263
 
10,516
 
13,259
 
Retail and Other
139
 
429
 
250
 
1,243
 
Total
$4,219
 
$6,692
 
$10,766
 
$14,502
 
Income Tax Provision (Benefit)
               
Natural Gas Distribution
$24,767
 
$21,115
 
$38,103
 
$31,160
 
Energy Services
(813
)
(20,221
)
(4,540
)
(11,555
)
Segment subtotal
23,954
 
894
 
33,563
 
19,605
 
Retail and Other
(4,057
)
2,500
 
(8,421
)
2,283
 
Total
$19,897
 
$3,394
 
$25,142
 
$21,888
 
Net Financial Earnings
               
Natural Gas Distribution
$41,588
 
$34,170
 
$  64,662
 
$ 50,840
 
Energy Services
31,078
 
43,517
 
40,461
 
62,609
 
Segment subtotal
72,666
 
77,687
 
105,123
 
113,449
 
Retail and Other
(238
)
311
 
(217
)
856
 
Total
$72,428
 
$77,998
 
$104,906
 
$114,305
 
(1)  
Consists of transactions between subsidiaries that are eliminated and reclassified in consolidation
(2) Included in Other income in the Unaudited Condensed Consolidated Statement of Income
 
 
Page 25

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 

The chief operating decision maker of the Company is the Chief Executive Officer (CEO). The CEO uses net financial earnings as a measure of profit or loss in measuring the results of the Company’s segments and operations. A reconciliation of consolidated net financial earnings to consolidated net income, for the three and six months ended March 31, 2009 and 2008, respectively, is as follows:

 
Three Months Ended
      Six Months Ended
 
March 31,
     March 31,
(Thousands)
2009
2008
        2009
       2008
Consolidated Net Financial Earnings
$72,428
 
$77,998
 
$104,906
 
$114,305
 
Less:
               
Unrealized loss from derivative instruments, net of taxes
22,952
 
69,012
 
27,074
 
73,802
 
Realized loss from derivative instruments related to natural gas inventory, net of taxes
13,959
 
(3,549
)
30,539
 
(2,217
)
Consolidated Net Income
$35,517
 
$12,535
 
$  47,293
 
$  42,720
 

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

 
March 31,
September 30,
(Thousands)
2009
        2008
Assets at end of period:
       
Natural Gas Distribution
$1,743,326
 
$1,761,964
 
Energy Services
415,503
 
689,992
 
Segment Subtotal
2,158,829
 
2,451,956
 
Retail and Other
275,847
 
231,551
 
Intercompany Assets (1)
(18,085
)
(58,115
)
Total
$2,416,591
 
$2,625,392
 
(1) Consists of transactions between subsidiaries that are eliminated and reclassified in consolidation

NJRES’ assets decreased 40 percent from September 30, 2008 to March 31, 2009 due primarily to lower inventory values as resulting from a decline in commodity prices. Retail and Other’s assets increased 19 percent during the current fiscal period largely as a result of higher cash balances at NJR as well as an increase in NJR’s investment in Steckman Ridge.

For the six months ended March 31, 2009, NJRES had one customer who represented more than 10 percent of its total revenue. Management believes that the loss of this customer would not have a material effect on its financial position, results of operations or cash flows as an adequate number of alternative counterparties exist.

15.  OTHER

At March 31, 2009, there were 42,313,293 shares of common stock outstanding and the book value per share was $17.90.






 
 
Page 26



New Jersey Resources Corporation
Part I



 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

Management’s Overview

New Jersey Resources Corporation (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 regions to the New England region and Canada through its two principal subsidiaries, New Jersey Natural Gas Company (NJNG) and NJR Energy Services Company (NJRES).

Comprising the Natural Gas Distribution segment, NJNG is a natural gas utility that provides regulated retail natural gas service in central and northern New Jersey and also participates in the off-system sales and capacity release markets. NJNG is regulated by the New Jersey Board of Public Utilities (BPU).

NJRES comprises the Energy Services segment. NJRES maintains and transacts around a portfolio of physical assets consisting of natural gas storage and transportation contracts. In addition, NJRES provides wholesale energy services to non-affiliated utility and energy companies.

The retail and other business operations (Retail and Other) includes NJR Energy, an investor in energy-related ventures, most significantly through NJNR Pipeline Company, which holds the Company’s 5.53 percent interest in Iroquois Gas and Transmission System, LP (Iroquois), a 412-mile natural gas pipeline from the New York-Canadian border to Long Island, New York, and NJR Steckman Ridge Storage Company, which has a 50 percent equity ownership interest in Steckman Ridge GP, LLC and Steckman Ridge, LP (collectively, Steckman Ridge), a planned 17.7 billion cubic foot (Bcf) natural gas storage facility, with up to 12 Bcf working capacity, which is being jointly developed and constructed with a partner in Pennsylvania; NJR Investment Company, which makes energy-related equity investments; NJR Home Services Company (NJRHS), which provides service, sales and installation of appliances; Commercial Realty and Resources Corporation (CR&R), which holds and develops commercial real estate; and NJR Service Corporation (NJR Service), which provides support services to the various NJR businesses.

Net income by business segment and business operations for the three and six months ended March 31, 2009 and 2008, respectively, are as follows:

 
Three Months Ended
Six Months Ended
 
March 31,
March 31,
(Thousands)
       2009
             2008
           2009
             2008
Net income (loss)
                               
Natural Gas Distribution
$41,588
 
117
%
$34,170
 
273
%
$64,662
 
137
%
$50,840
 
119
%
Energy Services
(1,011
)
(3
)
(25,947
)
(207
)
(6,625
)
(14
)
(12,797
)
(30
)
Retail and Other
(5,060
)
(14
)
4,312
 
34
 
(10,744
)
(23
)
4,677
 
11
 
Total
$35,517
 
100
%
$12,535
 
100
%
$47,293
 
100
%
$42,720
 
100
%

Assets by business segment and business operations are as follows:

(Thousands)
March 31,
2009
September 30,
2008
 
Assets
                 
Natural Gas Distribution
$1,743,326
 
72
%
$1,761,964
 
67
%
 
Energy Services
415,503
 
17
 
689,992
 
26
   
Retail and Other
275,847
 
12
 
231,551
 
9
   
Intercompany Assets (1)
(18,085
)
(1
)
(58,115
)
(2
)
 
Total
$2,416,591
 
100
%
$2,625,392
 
100
%
 
(1) Consists of transactions between subsidiaries that are eliminated and reclassified in consolidation

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)

NJRES and NJR Energy account for certain of their derivative instruments used to economically hedge the forecasted purchase, sale and transportation of natural gas at fair value, as required under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (as amended and interpreted, SFAS 133). Effective October 1, 2007, the Company changed the treatment of its physical commodity contracts at NJRES, such that the changes in fair value of new contracts are included in earnings, and are not accounted for using the “normal purchase normal sales” (normal) scope exception of SFAS 133. In addition, effective October 1, 2008, due to changes in the Company’s ability to assert physical delivery, the Company is no longer treating physical commodity contracts executed prior to October 1, 2007 as normal. Therefore, all NJRES physical commodity contracts are accounted for at fair value on the Unaudited Condensed Consolidated Balance Sheets, with changes in fair value included as a component of operating revenue and gas purchases, as appropriate, on the Unaudited Condensed Consolidated Statements of Income. All physical commodity contracts at NJNG and NJR Energy continue to be designated as normal and accounted for under accrual accounting.

The change in fair value of these derivative instruments at NJRES and NJR Energy over periods of time, referred to as unrealized gains or losses, can result in substantial volatility in reported net income under generally accepted accounting principles of the United States of America (GAAP). When a financial instrument settles the result is the realization of these gains or losses. NJRES utilizes certain financial instruments to economically hedge natural gas inventory placed into storage that will be sold at a later date, all of which were contemplated as part of an entire forecasted transaction. GAAP requires that when a financial instrument that is economically hedging natural gas that has been placed into inventory, but not yet sold, has been settled, the realized gain or loss associated with that settlement must be reflected currently in the income statement. While NJRES will recognize the same economic impact from the entire planned transaction, this also leads to additional volatility in NJRES’ reported earnings.

Unrealized losses and gains at NJRES and NJR Energy are the result of changes in the fair value of derivative instruments, used to economically hedge future natural gas purchases, sales and transportation. Realized gains and losses at NJRES include the settlement of natural gas futures instruments used to economically hedge natural gas purchases in inventory that have not been sold.

Included in Net income in the table on the previous page for the six-month period ended March 31, 2009 and 2008 are unrealized (losses) in the Energy Services segment of $(16.6) million and $(77.6) million, after taxes, respectively and realized (losses)/gains of $(30.5) and $2.2 million, after taxes, respectively, which are related to derivative instruments that have settled and are designed to economically hedge natural gas that is in storage inventory.

Also, included in Net income above are unrealized (losses)/gains in the Retail and Other segment of $(10.5) million and $3.8 million, after taxes, for the six-month period ended March 31, 2009 and 2008, respectively.

Natural Gas Distribution Segment

Natural Gas Distribution operations have been managed with the goal of growing profitably through several key initiatives including:

Ÿ
Earning a reasonable rate of return on the investments in its natural gas distribution system, as well as recovery of all prudently incurred costs in order to provide safe and reliable service throughout NJNG’s service territory.

Ÿ
Working with the BPU and the Department of the Public Advocate, Division of Rate Counsel (Rate Counsel), on the implementation and continuing review of the Conservation Incentive Program (CIP). The CIP allows NJNG to promote conservation programs to its customers while maintaining protection of its utility gross margin associated with reduced customer usage. CIP usage differences are calculated annually and are recovered one year following the end of the CIP usage year;



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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)

Ÿ
Managing the new customer growth rate, which is expected to be approximately 1.3 percent over the next two years. In fiscal 2009 and 2010, NJNG currently expects to add, in total, approximately 12,000 to 14,000 new customers. The Company believes that this growth would increase utility gross margin under its base rates as provided by approximately $3.6 million annually, as calculated under NJNG’s CIP tariff;
   
Ÿ
Generating earnings from various BPU-authorized gross margin-sharing incentive programs; and
   
Ÿ
Managing the volatility of wholesale natural gas prices through a hedging program designed to keep customers’ Basic Gas Supply Service (BGSS) rates as stable as possible.

Based upon increases in NJNG’s operation, maintenance and capital costs, NJNG petitioned the BPU, on November 20, 2007, to increase base rates for its natural gas delivery service. This base rate filing was consistent with NJNG’s objectives of providing safe and reliable service to its customers and earning a market-based return.

On October 3, 2008, the BPU unanimously approved and made effective the settlement of NJNG’s base rate case. As a result, NJNG received a revenue increase in its base rates of $32.5 million, which is inclusive of an approximate $13 million impact of a change to the CIP baseline usage rate, received an allowed return on equity component of 10.3 percent, reduced its depreciation expense component from 3.0 percent to 2.34 percent and reduced its annual depreciation expense of $1.6 million as a result of the amortization of previously recovered asset retirement obligations.

The CIP allows NJNG to recover utility gross margin variations related to both weather and customer usage. Recovery of such margin variations is subject to additional conditions including an earnings test, which includes a return on equity component of 10.3 percent, and an evaluation of Basic Gas Supply Service (BGSS)-related savings achieved. An annual review of the CIP must be filed in June of each year, coincident with NJNG’s annual BGSS filing. In October 2007, the BPU provisionally approved NJNG’s initial CIP recovery rates, which are designed to recover approximately $15.6 million of accrued margin. In October 2008, the BPU provisionally approved recovery of an additional $6.8 million of accrued margin for the CIP. The total recovery requested of $22.4 million includes amounts accrued and estimated through September 30, 2008. As of March 31, 2009, NJNG has $7.6 million accrued in Regulatory Assets in the Unaudited Condensed Consolidated Balance Sheets. On April 1, 2009, NJNG filed a letter with the BPU requesting a 1-year extension to its CIP through October 1, 2010.

In conjunction with the CIP, NJNG is required to administer programs that promote customer conservation efforts. As of March 31, 2009 and September 30, 2008, the obligation to fund these conservation programs was reflected at its present value of $305,000 and $864,000, respectively in the Unaudited Condensed Consolidated Balance Sheets.

In conducting NJNG’s business, management focuses on factors it believes may have significant influence on its future financial results. NJNG’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.

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, regulatory decisions by the New Jersey Department of Environmental Protection (NJDEP) and related litigation. If there are changes in the regulatory position on the recovery of these costs, such costs would be charged to income in the period of such determination.


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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)

On April 16, 2009, the BPU approved NJNG’s AIP Program allowing NJNG to commence construction on its 14 infrastructure projects. NJNG will make a filing for the recovery of infrastructure program investment costs in June 2010 to be effective October 1, 2010. The filing will allow the recovery of costs of the AIP construction activities for the period ending August 31, 2010, including the recovery of NJNG’s overall weighted cost of capital.

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

Energy Services Segment

NJRES provides unregulated wholesale energy services, including base load natural gas, peaking and balancing services, utilizing physical assets it controls through natural gas pipeline transportation and storage contracts, as well as providing asset management services to customers in states from the Gulf Coast and Mid-continent regions to the Appalachian and Northeast regions and Canada.

NJRES incorporates the following elements to provide for growth, while focusing on maintaining a low-risk operating and counterparty credit profile:

Ÿ
Providing natural gas portfolio management services to nonaffiliated utilities and electric generation facilities;
   
Ÿ
Leveraging transactions for the delivery of natural gas to customers by aggregating the natural gas commodity costs and transportation costs in order to minimize the total cost required to provide and deliver natural gas to NJRES’ customers by identifying the lowest cost alternative with the natural gas supply, transportation availability and markets to which NJRES is able to access through its business footprint and contractual asset portfolio;
   
Ÿ
Identifying and benefiting from variations in pricing of natural gas transportation and storage assets due to location or timing differences of natural gas prices to generate gross margin; and
   
Ÿ
Managing economic hedging programs that are designed to mitigate adverse market price fluctuations in natural gas transportation and storage commitments.

NJRES views “financial margin” as a financial measurement metric. NJRES’ financial margin, which is a non-GAAP financial measure, represents revenues earned from the sale of natural gas less costs of natural gas sold, transportation and storage, and excludes any accounting impact from the change in fair value of derivative instruments designed to hedge the economic impact of its transactions that have not been settled, which represent unrealized gains and losses, and realized gains and losses associated with financial instruments economically hedging natural gas in storage and not yet sold as part of a planned transaction. NJRES uses financial margin to gauge operating results against established benchmarks and earnings targets as it eliminates the impact of volatility in GAAP earnings that can occur prior to settlement of the physical commodity portion of the transactions and therefore is more representative of the overall expected economic result.

NJRES has a portfolio of customers including local distribution companies, industrial companies, electric generators and retail aggregators. Sales to these customers have allowed NJRES to leverage its transportation and storage capacity and manage sales to these customers in an aggregate fashion. This strategy allows NJRES to extract more value from its portfolio of natural gas storage and pipeline transportation capacity through the arbitrage of pricing differences as a result of locational differences or over different periods of time.

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 natural gas storage and transportation capacity in states in the Northeast, Gulf Coast, Mid-continent and Appalachian regions of the United States 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 as a result of market conditions. NJRES focuses on earning a financial margin on a single original transaction and then utilizing that transaction, and the changes in prices across the regions or across time periods, as the basis to further improve the initial result.

 
Page 30

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)

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 different delivery points, are readily available. For example, NJRES generates financial margin by locking in the differential between purchasing natural gas at a low current or future price and, in a related transaction, selling that natural gas at a higher current or future price, all within the constraints of its credit and contracts policies. Through the use of transportation and storage services, NJRES is able to generate financial 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.

NJRES also participates in park-and-loan transactions with pipeline counterparties, where NJRES will borrow natural gas when there is an opportunity to capture arbitrage value. In these cases, NJRES evaluates the economics of the transaction to determine if it can capture pricing differentials in the marketplace in order to be able to generate financial margin. In evaluating these transactions NJRES will compare the fixed fee it will pay and the resulting spread it can generate when considering the amount it will receive to sell the borrowed gas to another counterparty in relation to the cost it will incur to purchase the gas at a later date for return back to the pipeline. When the transaction allows NJRES to generate a financial margin, NJRES will fix the financial margin by economically hedging the transaction with natural gas futures.

In conducting its business, NJRES mitigates risk by following formal risk management guidelines, including trading limits, approval processes, segregation of duties, and formal contract and credit review and approval procedures. NJRES continuously monitors and seeks to reduce the risk associated with various counterparties credit exposure. The Risk Management Committee (RMC) of NJR oversees compliance with these established guidelines.

Retail and Other Operations

As part of the Retail and Other operations NJR utilizes a subsidiary, NJR Energy Holdings, to develop its investments in natural gas “mid-stream” assets. Mid-stream assets are natural gas transportation and storage facilities. NJR believes that acquiring, owning and developing these mid-stream assets, which operate under a tariff structure that has either a regulated or market-based rate, can provide a significant growth opportunity for the Company. To that end, NJR has ownership interests in Iroquois (regulated rate) and Steckman Ridge (market-based rate), and is actively pursuing other potential opportunities that meet its investment and development criteria. Other businesses included as part of Retail and Other include NJRHS, which provides service, sales and installation of appliances to over 145,000 customers and is focused on growing its installation business and expanding its service contract customer base, and CR&R, which seeks additional opportunities to enhance the value of its undeveloped land.

The financial results of Retail and Other consist primarily of the operating results of NJRHS and equity in earnings attributable to the Company’s equity investment in Iroquois, as well as to investments made by NJR Energy, an investor in other energy-related ventures through its operating subsidiaries. Also included within Retail and Other operations is interest income and organizational expenses recorded at NJR.

On June 5, 2008, the Federal Energy Regulatory Commission (FERC) issued Steckman Ridge a certificate of public convenience and necessity authorizing the ownership, construction and operation of its natural gas storage facility and associated facilities. On April 1, 2009, Steckman Ridge received authorization to place certain injection related facilities into commercial operation. Customers have begun to inject natural gas inventory in preparation for the initial withdrawal season. Construction will continue through the summer of 2009 as more facilities are made ready to support the initial winter season. As of March 31, 2009, NJR has invested $107 million in Steckman Ridge, excluding capitalized interest and other direct costs. Total project costs related to the development of the storage facility are currently estimated at approximately $265 million, of which NJR is obligated to fund 50 percent or approximately $132.5 million. NJR anticipates that Steckman Ridge will seek non-recourse financing upon full completion of the construction and development of its facilities, thereby potentially reducing the final expected recourse obligation of NJR. There can be no assurances that such non-recourse project financing will be secured or available for Steckman Ridge.
 
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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)


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 its Annual Report on Form 10-K for the period ended September 30, 2008. NJR’s critical accounting policies have not changed materially from those reported in the 2008 Annual Report on Form 10-K with the exception of the following:

Derivative Instruments

Derivative activities are recorded in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted, (SFAS 133) under which NJR records the fair value of derivatives held as assets and liabilities. In addition, NJRES also treats contracts for the purchase or sale of natural gas as derivatives and, therefore, records them at fair value in the Unaudited Condensed Consolidated Balance Sheet, with changes in fair value being recorded as a component of Gas purchases in the Unaudited Condensed Consolidated Statements of Income.

NJRES previously applied the “normal purchase normal sale” (normal) scope exception for certain physical commodity contracts that were executed prior to October 1, 2007 which otherwise qualified as derivatives. Based on current conditions in the cred