UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

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

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

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

None

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Act).

     The number of shares outstanding of $2.50 par value Common Stock as of May 3, 2005 was 27,435,406.

Table of Contents

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

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

     The Company cautions readers that the assumptions that form the basis for forward-looking statements regarding customer growth, financial results, capital requirements and other matters for fiscal 2005 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. Among the factors that could cause actual results to differ materially from NJR’s expectations include, but are not limited to, such things as weather and economic conditions, demographic changes in the New Jersey Natural Gas (NJNG) service territory, rate of NJNG customer growth, volatility of natural gas commodity prices, the impact of the Company’s risk management efforts, including commercial and wholesale credit risks, conversion activity and other marketing efforts, the actual energy usage patterns of NJNG’s customers, the pace of deregulation of retail gas markets, access to adequate supplies of natural gas, the regulatory and pricing policies of federal and state regulatory agencies, changes due to legislation at the federal and state level, the outcome of the Stagecoach and other litigation, the disallowance of recovery of environmental remediation expenditures, other regulatory changes and changes in and levels of interest rates.

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

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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

See Notes to Condensed Unaudited Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See Notes to Condensed Unaudited Consolidated Financial Statements

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CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

See Notes to Condensed Unaudited Consolidated Financial Statements

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CAPITALIZATION AND LIABILITIES

See Notes to Condensed Unaudited Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

See Notes to Condensed Unaudited Consolidated Financial Statements

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

     The condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The September 30, 2004, balance sheet data is derived from the audited financial statements of New Jersey Resources (NJR or the Company). These condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in NJR’s 2004 Annual Report on Form 10-K.

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

     Certain reclassifications have been made of previously reported amounts to conform to current year classifications.

2. PRINCIPLES OF CONSOLIDATION

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

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

3. NEW ACCOUNTING STANDARDS

     In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004) “Share-Based Payment” (SFAS 123 R). This statement requires companies to record compensation expense for all share-based awards granted subsequent to the adoption of SFAS 123 R. In addition, SFAS 123 R requires the recording of compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In October 2002, the Company adopted the prospective method of SFAS No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123), and as such has recognized compensation expense for grants issued subsequent to October 1, 2002. The Company will adopt SFAS 123 R, effective October 1, 2005, and does not expect the impact of previously issued, unvested options not currently being expensed to have a material impact on its financial condition, results of operations or cash flows.

     In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47), which is effective no later than the end of fiscal years ending after December 15, 2005. FIN 47 clarifies that the term conditional asset retirement obligation as used in SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS143). Conditional asset retirement obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of

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the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred–generally upon acquisition, construction, or development and (or) through the normal operation of the asset. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. SFAS 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company does not expect the adoption of FIN 47 to have any impact on its financial condition, results of operations or cash flows.

4. REGULATORY ASSETS AND LIABILITIES

     Regulatory assets on the Consolidated Balance Sheets include the following:

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

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     Regulatory liabilities on the Consolidated Balance Sheets include the following:

5. CAPITALIZED AND DEFERRED INTEREST

     The Company’s capitalized interest totaled $150,000 and $115,000 for the three months ended March 31, 2005 and 2004, respectively, and $271,000 and $206,000 for the six months ended March 31, 2005 and 2004, respectively, at average interest rates of 2.38 percent, 1.44 percent, 2.11 percent and 1.47 percent, respectively. These amounts are included in Utility plant and Real estate properties on the Consolidated Balance Sheets and are reflected on the Consolidated Statements of Income as a reduction to Interest charges, net. NJNG does not capitalize a cost of equity for its utility plant construction activities.

     Pursuant to a BPU order, NJNG is permitted to recover carrying costs on uncollected balances related to underrecovered natural gas costs incurred through October 31, 2001, and on its manufactured gas plant (MGP) remediation expenditures. (See Note 6.–Legal and Regulatory Proceedings.) Accordingly, Other income included $431,000 and $650,000 of interest related to underrecovered remediation and underrecovered gas costs for the three months ended March 31, 2005 and 2004, respectively, and $979,000 and $1.4 million for the six months ended March 31, 2005 and 2004, respectively.

6. LEGAL AND REGULATORY PROCEEDINGS

     a. Energy Deregulation Legislation

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

     Under EDECA, the BPU is required to audit the state’s energy utilities’ competitive services businesses every two years. The primary purpose of the audit is to ensure that utilities and their affiliates offering unregulated retail services do not have any unfair competitive advantage over nonaffiliated providers of similar retail services. In June 2004, the BPU approved the recommendations

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from the audit that was completed in March 2003 and was agreed to by both NJNG and the audit staff of the BPU, which had no financial impact on NJNG. The Company expects another competitive services and management audit to begin by the end of the current fiscal year.

     b. Basic Gas Supply Service

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

     On April 6, 2005, the BPU granted final approval for 5 percent increases that were effective on both February 1, and October 1, 2004. These increases were necessary due primarily to higher wholesale commodity costs.

     On November 15, 2004, NJNG filed supporting documentation for a 5 percent self-implementing price increase that became effective on December 1, 2004. The increase was necessary due primarily to higher wholesale commodity costs and is subject to refund with interest.

     NJNG is eligible to receive incentives for reducing BGSS costs through a series of gross margin-sharing programs that include off-system sales, capacity release, storage incentive and financial risk management programs. On October 22, 2003, the BPU approved an agreement whereby the existing gross margin sharing between customers and shareowners for off-system sales, capacity release and financial risk management transactions was extended through October 31, 2006.

     On October 23, 2003, the BPU approved a pilot for a new storage incentive program that shares gains and losses on an 80/20 percent basis between customers and shareowners, respectively. This program measures the difference between the actual cost of natural gas in storage and a benchmark applicable to the April-through-October injection season. Management believes that this program will be extended through October 31, 2006. This program also provided for the parties to evaluate the appropriateness of a new capacity reliability incentive for the BPU’s consideration by October 1, 2004. Included in the June 9, 2004, BGSS filing, NJNG indicated a desire to develop a capacity reliability incentive that would be discussed further during the initial review of the storage incentive program. This review began in January 2005.

     c. Other Adjustment Clauses

     On October 22, 2003, the BPU approved NJNG’s request to update factors used in its WNC, which is designed to stabilize year-to-year fluctuations that may result from changing weather patterns on both NJNG’s gross margin and customers’ bills. Consumption factors had not been adjusted to reflect NJNG’s growth and actual customer base since the settlement of its last base rate case in January 1994. Updating the consumption factors results in the WNC being more reflective of actual weather.

     In March 2003, the BPU approved a permanent statewide Universal Service Fund (USF) program, effective July 1, 2003, to be recovered through the SBC. The USF program was established for all natural gas and electric utilities in New Jersey for the benefit of limited-income customers. Eligible

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customers will receive a credit toward their utility bill. The credits applied to eligible customers will be recovered through a USF rider. NJNG will recover carrying costs on deferred USF balances. On April 1, 2004, NJNG and all of the other energy utilities in the state filed for a price increase to support estimated program expenditures for the statewide USF program. In response to the April 1, 2004 filing, all natural gas utilities in the state received an approximate one-half percent price increase on June 23, 2004. On April 1, 2005, NJNG and all of the other energy utilities in the state filed to maintain the existing prices for the recovery of the costs of the statewide USF program.

     In December 2004, the BPU approved regulations modifying main extension regulations and creating a Targeted Revitalization Infrastructure Program (TRIP). The TRIP provides a recovery mechanism for certain infrastructure investment made in approved redevelopment zones. As a result of the revisions to TRIP regulation, NJNG plans to withdraw its TRIP filing originally proposed in 2003, which sought approval to invest approximately $14 million for ongoing and planned redevelopment work in Asbury Park and Long Branch, New Jersey. The company is currently planning a revised TRIP filing for approximately $1 million investment limited to the redevelopment zone in Asbury Park, New Jersey, which is currently under construction.

     On October 5, 2004, the BPU approved a 2.6 percent price increase to cover a higher level of expenditures under the SBC. The largest component of this increase related to MGP expenditures incurred through June 30, 2002 (See Note 13.–Commitments and Contingent Liabilities in the accompanying Financial Statements.) NJNG is also involved in various proceedings associated with several other adjustment clauses and an audit of its BGSS, the outcome of which, in management’s opinion, will not have a material adverse impact on its financial condition or results of operations.

     On December 15, 2004, NJNG filed updated information regarding expenditures related to SBC programs and activities, including MGP expenditures through June 30, 2004. The filing, which is currently in discovery, proposed to maintain existing recovery rates.

     d. Manufactured Gas Plant Remediation

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

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

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

     In June 1992, the BPU approved a remediation rider through which NJNG may, subject to BPU approval, recover its remediation expenditures, including carrying costs, over rolling 7-year periods. On October 5, 2004, the BPU approved a settlement that increased NJNG’s remediation adjustment clause recovery from $1.5 million to $17.6 million annually, which recognizes remediation expenditures through June 30, 2002. On December 15, 2004, NJNG filed supporting documentation for recovery of remediation expenditures through June 30, 2004, and proposed to maintain the same recovery rate. As of March 31, 2005, $55.7 million of previously incurred remediation costs, net of recoveries from customers as well as received and anticipated insurance proceeds, are included in Regulatory assets on the Consolidated Balance Sheet. (See Note 4.–Regulatory Assets and Liabilities and Note 13.–Commitments and Contingent Liabilities.)

     In March 1995, NJNG instituted an action for declaratory relief against 24 separate insurance companies in the Superior Court of New Jersey, Docket No. OCN-L-859-95. These insurance carriers provided comprehensive general liability coverage to NJNG from 1951 through 1985. The complaint was amended in July 1996 to name Kaiser-Nelson Steel and Salvage Company (Kaiser-Nelson) and its successors as additional defendants. In September 2001, NJNG reached a favorable settlement with the insurance carrier that provided the majority of NJNG’s coverage. This settlement involved a significant cash payment to NJNG, which was credited to the remediation rider, and was received in four installments ending October 2004. NJNG has now dismissed or reached a settlement with all of its insurance carriers. NJNG continues to pursue its claim against Kaiser-Nelson for environmental damages caused by Kaiser-Nelson’s decommissioning of structures at several MGP sites. In May 2004, the court consolidated the defendant’s insurance coverage issues with NJNG’s claim for damages. In April 2005, the parties reached a settlement in principal of all claims by and between the parties. The settlement documents are in the review process and are expected to be executed by June 2005.

     NJNG is presently investigating the possible settlement of alleged Natural Resource Damage (NRD) claims that might be brought by the NJDEP concerning the three MGP sites. NJDEP has not made any specific demands for compensation for alleged injury to groundwater or other natural resources. NJNG’s evaluation of these potential claims is in the early stages, and it is not yet possible to quantify the amount of any compensation that may be payable through any agreement reached with the NJDEP. NJNG expects to meet with the NJDEP by the end of its fiscal year to discuss this matter. NJNG anticipates any costs associated with this matter will be recoverable through either insurance policies or the remediation rider.

     e. Other Regulatory Proceedings

     On November 2, 2004, NJNG filed a request with the BPU to eliminate a rate classification that provides a discount for pool heater usage. On April 20, 2005, the BPU approved the sharing of incremental margins that results from the elimination of this discount on an 85/15 percent basis between customers and shareowners, respectively. The exact impact cannot be quantified due to the uncertainty of customer behavior but is expected to be immaterial.

     On December 23, 2004, the BPU issued a decision establishing the Statewide NJ Clean Energy Funding for the period from 2005-2008. NJNG’s obligation, which is recoverable from customers through the SBC, gradually increases from $5.9 million in 2005 to $9.9 million in 2008. As a result, NJNG recorded a liability of $26.6 million and a corresponding Regulatory asset at March 31, 2005. Additionally, this decision reaffirmed the right and basis for utilities to collect lost revenue related

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to the implementation of NJ Clean Energy Programs for measures installed prior to December 31, 2003. As of March 31, 2005, NJNG recorded $741,000 of revenue related to this program. NJNG intends to amend its current SBC filing to seek recovery of that lost revenue.

     f. Long Branch MGP Site Litigation

     Since July 2003, a series of complaints have been filed in the New Jersey Superior Court against NJNG, NJR, JCP&L and FirstEnergy. The complaints were originally filed in Monmouth County, and, as of February 2004, were designated as a Mass Tort Litigation, Mass Tort case #268, Master Docket BER-L-8839-04, for centralized case management purposes and transferred to the Bergen County Law Division. There were originally 528 complaints filed. However, as a result of a number of motions and stipulations to dismiss, there are now 303 active cases in this matter.

     Among other things, the complaints allege personal injuries, wrongful death, survivorship actions, property damage and claims for medical monitoring stemming from the operation and remediation of the former MGP site in Long Branch, New Jersey. The relief sought, which has yet to be quantified by plaintiffs, includes compensatory damages, the establishment of a medical monitoring fund, disgorgement of alleged profits, cost of cleanup and remediation, natural resource damages, and punitive damages. Plaintiffs’ counsel have also filed “short form” complaints, which more clearly delineate the claims and relief sought by individual plaintiffs. At present, there are approximately 98 claims for personal injuries (for living plaintiffs and on behalf of deceased relatives), 27 claims for diminution of property damage, and 50 relocation claims, with all plaintiffs seeking medical monitoring and damages for loss of quality of life.

     JCP&L and FirstEnergy have made a demand upon NJNG and NJR for indemnification as a result of the September 2000 agreement between these entities and NJNG, whereby NJNG assumed responsibility for the Long Branch site. NJNG has agreed to honor the terms of the indemnity agreement.

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

     The current case schedule anticipates that at least one or more representative cases will be ready for trial by January 4, 2006. The parties have been working with the Court to select an initial set of representative plaintiffs for that purpose. Management believes that it is not liable under the allegations of the complaints, and further believes that any liability that could possibly be assessed against it, with the exception of liability for punitive damages, would be recoverable through insurance (subject to the outcome of the Kemper Insurance Company Litigation) or may be recoverable through the remediation rider. However, no assurance can be given as to the ultimate outcome of these matters or their impact on the Company’s financial condition, results of operations or cash flows.

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     g. Kemper Insurance Company Litigation

     In October 2004, NJNG instituted suit for declaratory relief against Kemper Insurance Company (Kemper) in the Superior Court of New Jersey, Law Division, Ocean County, Docket #OCN-L-3100-4. The case is under active case management. The next Case Management conference is scheduled on August 8, 2005. Kemper provided Environmental Response, Compensation and Liability insurance together with cost containment coverage effective July 21, 2000. Prior to the institution of this suit, NJNG requested that Kemper defend and indemnify claims involving the Long Branch litigation (see Long Branch MGP Site Litigation above) together with reimbursement for remediation costs for the Long Branch site that exceed the self-insured retention. Kemper reserved its rights regarding various allegations in the litigation and agreed to participate in the defense of the Long Branch matter. Although Kemper has not denied coverage, it has not yet reimbursed NJNG for any costs incurred to date. In 2003, Kemper decided to substantially cease its underwriting operations and voluntarily enter into runoff. The Illinois Department of Insurance has approved Kemper’s runoff plan. However, Kemper’s ability to meet all of its future obligations is uncertain. Management believes that, with the exception of any liability of punitive damages, any costs associated with Kemper’s failure to meet its future obligations may be recovered through the remediation rider. There can be no assurance as to the ultimate resolution of this matter or the impact on the Company’s financial condition, results of operations or cash flows.

     h. Stagecoach Marketing Agreement

     During the quarter ended June 30, 2004, a dispute arose between the Company’s subsidiary, NJRES and eCORP Marketing, LLC (eCORP Marketing), the counter party to the Amended and Restated Natural Gas Storage Marketing and Management Agreement (Marketing Agreement) concerning the Stagecoach Natural Gas Storage Project (Stagecoach). Stagecoach is a high injection/high withdrawal natural gas storage facility in New York. Under the Marketing Agreement, NJRES was appointed as the exclusive marketing agent for Stagecoach, and NJRES is obligated to arrange contracts for, or purchase at fixed prices, sufficient services to provide Stagecoach with revenues of approximately $22 million annually from April 1, 2002 to March 31, 2012.

     Pursuant to the terms of the Marketing Agreement, in an attempt to resolve the dispute, the parties entered into a confidential mediation process. The mediation was unsuccessful and on September 8, 2004, NJRES filed a complaint in the United States District Court for the Southern District of New York (U.S. District Court), Docket #04CV07170 NRB, claiming that eCORP Marketing breached the existing Marketing Agreement, which remains in place. On September 15, 2004, eCORP Marketing moved to dismiss the complaint. On September 22, 2004, the Court denied eCORP Marketing’s motion to dismiss. On October 12, 2004, eCORP Marketing filed a motion to dismiss or, in the alternative, stay the complaint.

     On September 21, 2004, eCORP Marketing filed a third-party complaint in the New York State Supreme Court wherein it alleges breach of contract against NJRES and its affiliate, NJNG. The third-party complaint was joined with the existing litigation between AIG Highstar Capital, L.P., a creditor of Stagecoach and eCORP Marketing. eCORP Marketing’s third-party complaint was removed to the U.S. District Court on September 22, 2004. On October 22, 2004, eCORP Marketing filed a motion to remand the third-party complaint to the New York State Supreme Court.

     On December 28, 2004, NJRES filed an Amended Complaint in the U.S. District Court that set forth additional claims against eCORP Marketing and its affiliate, eCORP Energy Marketing, LLC.

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     On March 16, 2005, eCORP Marketing, AIG Highstar, and NJRES entered into a Confidential Release and Settlement Agreement (“Settlement Agreement”) that settles all claims by and between the parties, including recovery of existing working capital balances. At March 31, 2005, NJRES had a net receivable balance of $8.4 million. Pursuant to its terms, the Settlement Agreement is contingent upon the sale of Stagecoach to a third-party, presently anticipated to occur on or before July 31, 2005, as that date may be extended by the parties. The Settlement Agreement terminates the Marketing Agreement and all rights and obligations there under. However, NJRES is currently in discussions with the proposed purchaser of Stagecoach to provide some of the services provided under the Marketing Agreement, including inventory management and optimization services.

     On March 21, 2005, eCORP withdrew, without prejudice, both its motion to dismiss or stay the NJRES Complaint and its motion to remand the third-party complaint. The parties will file stipulations dismissing this matter with prejudice upon closing of the sale of Stagecoach to a third-party. Should the Project not be sold as anticipated, the parties will return to their pre-Settlement Agreement positions.

     i. Various

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

7. EARNINGS PER SHARE

     In accordance with SFAS No. 128, “Earnings Per Share,” which established standards for computing and presenting basic and diluted earnings per share (EPS), the incremental shares required for inclusion in the denominator for the diluted EPS calculation were 558,047 and 545,819 for the three months ended March 31, 2005 and 2004, respectively, and 546,450 and 536,427 for the six months ended March 31, 2005 and 2004, respectively. These shares relate to stock options and restricted stock and were calculated using the treasury stock method. The numerator for each applicable basic and diluted EPS calculation was net income.

     In October 2002, the Company adopted the fair value method of recording stock-based compensation under SFAS 123. The Company adopted the prospective application of SFAS 123 for options granted after October 1, 2002, the cost of which is expensed through the income statement based on the fair value of the award at the grant date. In December 2002, the FASB issued SFAS 148, which provides implementation guidance for the adoption of SFAS 123. The Company has complied with the guidelines of SFAS 148 with respect to the adoption and disclosure of SFAS 123.

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     The following is a reconciliation of the as reported and pro forma net income for options granted prior to October 1, 2002, which are accounted for under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”

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

     In December 2004, NJR entered into a $275 million committed credit facility with several banks, which replaced a $200 million credit facility. The new facility has a 3-year term, expiring in December 2007. In November 2004, NJR entered into a 1-year $20 million committed credit facility with a bank. These facilities provide liquidity to meet the working capital and external debt-financing requirements of NJR and its unregulated companies. Neither NJNG nor the results of its operations are obligated or pledged to support the NJR facilities.

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

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

     NJNG issued a $45 million letter of credit, which will expire in June 2005, in conjunction with a long-term swap agreement. This letter of credit reduces the amount available under NJNG’s committed credit facility by the same amount. NJNG does not anticipate that this letter of credit will be drawn upon by the counterparty.

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     Under an agreement entered into with a financing company in 2002, NJNG received $4.9 million and $3.9 million in December 2004 and 2003, in connection with the sale-leaseback of its vintage 2004 and 2003 meters, respectively. These leases are accounted for as capital leases. NJNG plans to continue the sale-leaseback meter program on an annual basis.

     NJNG enters into loan agreements with the New Jersey Economic Development Authority (EDA) under which the EDA issues tax-exempt bonds and the proceeds are loaned to NJNG. To secure its loans from the EDA, NJNG issues First Mortgage Bonds to the EDA with interest rates and maturity dates identical to the EDA Bonds. In July 2002, the EDA approved $12 million of funds to finance construction in NJNG’s northern division in Morris County over three years. In September 2003, the BPU approved NJNG’s petition to issue up to $112 million of First Mortgage Bonds, Private Placement Bonds, EDA loan agreements, or Medium-Term Notes over the next three years. In December 2003, NJNG entered into a loan agreement whereby the EDA loaned NJNG the proceeds from its $12 million, 5% Natural Gas Facilities Revenue Bonds, which NJNG deposited into a construction fund. NJNG issued and delivered to the EDA like amounts of its 5% Series HH First Mortgage Bonds, due December 2038, and immediately drew down $4.2 million from the construction fund. In December 2004, NJNG drew down $6.3 million from the construction fund.

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

9. BUSINESS SEGMENT DATA

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

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

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

10. EMPLOYEE BENEFIT PLANS

     Pension and Other Postretirement Benefit Plans

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

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

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

     In 2005, the Company has no minimum pension funding requirements but will make a discretionary contribution of $910,000 during the third quarter of fiscal 2005. If market performance is less than anticipated, additional funding may be required.

     The Company’s funding level to its Other Postretirement Benefits (OPEB) plans is expected to be approximately $700,000 annually over the next five years. Additional contributions may be made based on market conditions and various assumptions.

11. INVESTMENTS

     In July 2001, the Company entered into a 5-year, zero-premium collar to hedge changes in the value of 100,000 shares of its investment in Capstone Turbine Corporation (Capstone). The collar consists of a purchased put option with a strike price of $9.97 per share and a sold call option with a strike price of $24.16 per share for 100,000 shares. The Company entered into this transaction to hedge its anticipated sale of 100,000 shares of Capstone at the settlement date in 2006 and, accordingly, accounts for the transaction as a cash flow hedge. Other comprehensive income for the six months ended March 31, 2005, included a $2,000 unrealized loss related to this collar. Through March 31, 2005, Accumulated other comprehensive income included a $792,000 unrealized gain related to this collar.

12. COMPREHENSIVE INCOME

     The amounts included in Other comprehensive income related to natural gas instruments, which have been designated cash flow hedges, will reduce or increase natural gas costs as the underlying physical transaction impacts earnings. Based on the amount recorded in Accumulated other comprehensive income at March 31, 2005, $3.2 million is expected to be recorded as a decrease to natural gas costs for the remainder of fiscal 2005. For the three months ended March 31, 2005 and 2004, $4 million and $26.7 million was credited to natural gas costs, respectively, and for the six months ended March 31, 2005 and 2004, $17.6 million was charged and $15.8 million was credited to natural gas costs, respectively. These cash flow hedges cover various periods of time ranging from May 2005 to October 2010.

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13. COMMITMENTS AND CONTINGENT LIABILITIES

     Manufactured Gas Plant Remediation

     NJNG is involved with environmental investigations and remedial actions at certain MGP sites. In September 2004, with the assistance of an outside consulting firm, NJNG updated an environmental review of the MGP sites, including a review of its potential liability for investigation and remedial action. Based on this review, NJNG estimated at the time of the review that, exclusive of any insurance recoveries, total future expenditures to remediate and monitor the three MGP sites for which it is responsible for will range from $92.9 million to $136.6 million. NJNG’s estimate of these liabilities is based upon known facts, existing technology and enacted laws and regulations existing when the review was completed. However, actual costs are expected to differ from these estimates. Where available information is sufficient to estimate the amount of the liability, it is NJNG’s policy to accrue the full amount of such estimate. Where the information is sufficient only to establish a range of probable liability and no point within the range is more likely than any other, it is NJNG’s policy to accrue the lower end of the range. Accordingly, NJNG has recorded an MGP remediation liability and a corresponding Regulatory asset of $92.9 million on the Consolidated Balance Sheet. The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations, the ultimate ability of other responsible parties to pay and any insurance recoveries. NJNG will continue to seek recovery of such costs through its remediation rider. If any future regulatory position indicates that the recovery of such costs is not probable, the related cost would be charged to income in the period of such determination.

     Stagecoach Marketing Agreement

     NJRES is the marketing agent for Stagecoach. Stagecoach is a high-injection/high-withdrawal facility in New York with 12 billion cubic feet (Bcf) of working natural gas capacity connected to the Tennessee Gas Pipeline. NJRES’ Stagecoach marketing and management agreement ends March 31, 2012, subject to termination rights. During this period, NJRES has agreed to arrange contracts for, or purchase at fixed prices, sufficient services to provide Stagecoach with revenues of approximately $22 million annually from April 1, 2002, to March 31, 2012. Stagecoach must notify NJRES of its intent to sell services under the aforementioned contract by November 30 of the prior annual period. Stagecoach did not notify NJRES of its intent to sell services for the annual period ending March 31, 2006. Therefore, NJRES has no purchase obligation related to this period. NJRES has reached 1- to 5-year agreements with Stagecoach customers with varying expiration dates, the last of which is March 31, 2009. The value of these services totals 80 percent, 73 percent, and 13 percent of NJR’s potential purchase obligations for the annual periods ended March 31, 2007 through 2009, respectively. Due to the price levels of the potential purchase obligations to NJRES, as compared with current market prices, and the current and expected level of contracts, NJR does not currently believe that the potential purchase obligation in the Stagecoach agreement will result in any future material losses.

     In August 2002, NJNG, in connection with its system requirements, entered into 2-year agreements for Stagecoach storage and transportation services ended July 31, 2004. In January 2004, NJNG extended its agreements with Stagecoach through March 31, 2008. These agreements were awarded pursuant to an open bid process.

     Under the Stagecoach agreement, NJRES is also required to provide and maintain 2 Bcf of firm base natural gas at the Stagecoach facility for the term of the agreement.

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     Commencing in September 2004, NJRES and eCORP Marketing, the counterparty to the Marketing Agreement, have filed claims asserting, among other things, that each has breached the Marketing Agreement. In March 2005, a contingent settlement agreement was entered into by all parties. If the proposed settlement is finalized, NJRES’ obligations under the marketing and management agreement will terminate. (See Note 6. –Legal and Regulatory Proceedings.)

14. OTHER

     At March 31, 2005, there were 27,435,406 shares of common stock outstanding, and the book value per share was $18.84.

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Management’s Overview

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

     Natural Gas Distribution operations have been managed with the goal of growing profitably without the need for traditional base rate increases. NJNG, working together with the BPU and the New Jersey Division of the Ratepayer Advocate, has been able to accomplish this goal for more than 11 years through several key initiatives including:

	•	Managing its customer growth, which is expected to total about 2.4 percent annually.
	•	Generating earnings from various BPU-authorized gross margin-sharing incentive programs, which have been extended through October 31, 2006.
	•	Reducing the impact of weather on NJNG’s earnings through an updated weather-normalization clause (WNC).
	•	Managing the volatility of wholesale natural gas prices through a hedging program to help keep customers’ prices as stable as possible.
	•	Improving its cost structure through various productivity initiatives, as well as lowering its cost of capital.

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

     The Energy Services segment focuses on providing wholesale energy services, including base load natural gas services, peaking services and balancing services, utilizing physical assets it controls, as well as natural gas management services to third parties. NJRES’ contribution to earnings has increased over the past several years due primarily to increases in its portfolio of pipeline and storage capacity, the volatile nature of wholesale natural gas prices and higher management fees. The volatile nature of wholesale natural gas prices over short periods of time can significantly impact NJRES’ revenue and gross margin. Furthermore, gross margin for NJRES is generally greater during the winter months, while the fixed costs of its capacity assets are generally spread throughout the year. Future growth is expected to come from opportunities that include the acquisition of additional storage and pipeline capacity assets and portfolio management services for third parties. (See Note 6.–Legal and Regulatory Proceedings–Stagecoach Marketing Agreement.)

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

     In the conduct of the Company’s business, management focuses on factors it believes may have significant influence on the Company’s future financial results. NJR’s policy is to work with all stakeholders, including customers, regulators and policymakers, to achieve favorable results. These factors include NJNG’s regulation by the BPU, 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. While the impact of weather on NJNG’s gross margin has been significantly mitigated due to the WNC, significant variations from normal weather, which affect customer usage patterns, can impact NJNG’s gross margin. NJNG’s operating expenses are heavily influenced by labor costs, a large component of which are covered by a recently negotiated collective bargaining agreement that expires in 2008. Labor-related fringe benefit costs, which are also subject to numerous factors, may also influence the Company’s results.

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

Critical Accounting Policies

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

     Regulatory Assets and Liabilities

     NJR’s largest subsidiary, NJNG, maintains its accounts in accordance with the Uniform System of Accounts as prescribed by the BPU. As a result of the ratemaking process, NJNG is required to follow Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain

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Types of Regulation” (SFAS 71) and, consequently, the accounting principles applied by NJNG differ in certain respects from those applied by unregulated businesses. NJNG is required under SFAS 71 to recognize the impact of regulatory decisions on its financial statements. NJNG’s Basic Gas Supply Service (BGSS) requires NJNG to project its natural gas costs and provides the ability, subject to BPU approval, to recover or refund the difference, if any, of actual costs as compared with the projected costs included in prices through a BGSS charge to customers. Any underrecovery or overrecovery is recorded as a Regulatory asset or liability on the Consolidated Balance Sheets and reflected in the BGSS in subsequent years. NJNG also enters into derivatives that are used to hedge natural gas purchases, and the offset to the resulting fair value of derivative assets or liabilities is recorded as a Regulatory asset or liability on the Consolidated Balance Sheets.

     In addition to the BGSS, other regulatory assets consist primarily of remediation costs associated with MGP sites, which are discussed below under Environmental Costs, the WNC, which are also subject to BPU approval and Societal Benefit Charges (SBC). If there are changes in future regulatory positions that indicate the recovery of such regulatory assets is not probable, the related cost would be charged to income in the period of such determination.

     Derivatives

     Derivative activities are recorded in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS 133), under which NJR records the fair value of derivatives held as assets and liabilities. NJR’s unregulated subsidiaries record changes in the fair value of the effective portion of derivatives qualifying as cash flow hedges, net of tax, in Accumulated other comprehensive income, a component of Common stock equity. Under SFAS 133, NJR also has certain derivative instruments that do not qualify as hedges. The change in fair value of these derivatives is recorded in Gas purchases on the Consolidated Statements of Income. In addition, the changes in the fair value of the ineffective portion of derivatives qualifying for hedge accounting are recorded as increases or decreases in natural gas costs or interest expense, as applicable, based on the nature of the derivatives. NJNG’s derivatives that are used to hedge its natural gas purchasing activities are recoverable through its BGSS, subject to BPU approval. Accordingly, the offset to the change in fair value of these derivatives is recorded as a Regulatory asset or liability on the Consolidated Balance Sheets. NJR has not designated any derivatives as fair value hedges as of March 31, 2005.

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

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

     Environmental Costs

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

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     Where the information is sufficient to establish only a range of probable liability, and no point within the range is more likely than any other, it is NJNG’s policy to accrue the lower end of the range. Since management believes that recovery of these expenditures, as well as related litigation costs, is probable through the regulatory process, in accordance with SFAS 71, it has recorded a regulatory asset corresponding to the accrued liability. The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations, the ultimate ability of other responsible parties to pay, the impact of litigation and any insurance recoveries. If there are changes in future regulatory positions that indicate the recovery of all or a portion of such regulatory asset is not probable, the related cost would be charged to income in the period of such determination. As of March 31, 2005, $55.7 million of previously incurred remediation costs, net of recoveries from customers and insurance proceeds received and anticipated, are included in Regulatory assets on the Consolidated Balance Sheet. Also included in Regulatory assets at March 31, 2005, are $92.9 million of accrued estimated future remediation costs.

     Unbilled Revenue

     Revenues related to the sale of natural gas are generally recorded when natural gas is delivered to customers. However, determining natural gas sales to individual customers is based on reading their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of natural gas delivered to customers since the date of the last meter read are estimated, and the corresponding unbilled revenue is recorded. This unbilled revenue is estimated each month based on natural gas delivered monthly into the system, unaccounted for natural gas based on historical results and applicable customer rates.

     Postretirement Employee Benefits

     NJR’s costs of providing postretirement employee benefits are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience.

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

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

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Results of Operations

     Net income for the quarter ended March 31, 2005, increased 1.4 percent to $51.7 million, compared with $51 million for the same period last year. Basic earnings per share (EPS) increased to $1.87, compared with $1.86 last year. Diluted EPS increased to $1.84, compared with $1.82 last year.

     The earnings for the six months ended March 31, 2005, increased 8.6 percent to $81.9 million compared with $75.4 for the same period last year. The six months results include a gain of $.22 per basic share on the sale of a commercial office building and a charge of $.05 per basic share associated with an early retirement program for officers. Net of these items, NJR’s earnings were $77.4 million, or $2.79 per basic share and $2.74 per diluted share.

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

Natural Gas Distribution Operations

     NJNG is a local natural gas distribution company that provides regulated retail energy services to more than 459,000 residential and commercial customers in central and northern New Jersey and participates in the off-system sales and capacity release markets. NJNG’s goal is to manage its growth without filing traditional base rate cases in order to provide competitive prices to its customers.

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

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     NJNG’s financial results are summarized as follows:

Gross Margin

     NJNG’s gross margin is defined as natural gas revenues less natural gas purchases, sales tax, a Transitional Energy Facilities Assessment (TEFA), which is included in Energy and other taxes on the Consolidated Statements of Income, and regulatory rider expenses. Regulatory rider expenses consist of recovery of state-mandated programs and the remediation adjustment clause costs. These expenses are designed to be primarily offset by corresponding revenues. Management believes that gross margin provides a more meaningful basis for evaluating utility operations than revenue since natural gas costs, sales tax, TEFA and regulatory rider expenses are passed through to customers, and therefore, have no effect on gross margin. Natural gas costs are charged to operating expenses on the basis of therm sales at the prices in NJNG’s BGSS tariff, approved by the BPU. The BGSS price includes projected natural gas costs, net of supplier refunds, the impact of hedging activities and credits from nonfirm sales and transportation activities. Any underrecoveries or overrecoveries from the projected amounts are deferred and reflected in the BGSS in subsequent years. Sales tax is calculated at 6 percent of revenue and excludes sales to cogeneration facilities, other utilities, off-system sales and federal accounts. TEFA is calculated on a per-therm basis and excludes sales to cogeneration facilities, other utilities and off-system sales. Regulatory rider expenses are calculated on a per-therm basis. NJNG’s operating revenues increased 20 percent to $783 million, and gas purchases increased 24 percent to $571 million for the six months ended March 31, 2005, compared with the same period last year. The increases in operating revenues and gas purchases were the result of higher prices due primarily to the increase in wholesale commodity costs. Sales tax and TEFA, which are presented gross in the Consolidated Statements of Income, totaled $24.5 million and $22 million for the three months ended March 31, 2005 and 2004, respectively and $38.9 million and $34.9 million for the six months ended March 31, 2005 and 2004, respectively. The increase in sales tax and TEFA is due primarily to higher sales tax associated with the increase in revenues. Regulatory rider expenses totaled $14.8 million, and $4.3 million for the three months ended March 31, 2005 and 2004, respectively, and $23.9 million and $7 million for the six months ended March 31, 2005 and 2004, respectively. The increase in regulatory rider expenses is due primarily to higher rates associated with the remediation and Clean Energy riders.

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Firm Gross Margin

     Gross margin from residential and commercial customers is impacted by the WNC, which provides for a revenue adjustment if the weather varies by more than one-half percent from normal weather (i.e., 20-year average). On October 22, 2003, the BPU approved NJNG’s request to update factors used in the WNC. Several components of the calculation had not been adjusted to reflect NJNG’s growth since the conclusion of NJNG’s last traditional base rate case in January 1994. Updating the consumption factors has made the resulting calculations from the WNC more effective in mitigating the impact of weather. The accumulated adjustment from one heating season (i.e., October through May) is billed or credited to customers in subsequent periods. This mechanism reduces the variability of both customers’ bills and NJNG’s earnings due to weather fluctuations. The weather for the six months ended March 31, 2005, was 2.6 percent colder than normal, therefore, NJNG deferred $2.4 million in gross margin for future refunds to customers under the WNC.

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

     Total firm gross margin decreased $600,000, or less than 1 percent, and $876,000, or less than 1 percent, for the three and six months ended March 31, 2005, respectively, compared with the same period last year. The decrease was due primarily to a 2.4 percent and a 4 percent reduction in usage per degree day for the three and six months ended March 31, 2005, respectively. Management believes that the reduction in usage per degree day was the result of inconsistent weather patterns, which occurred predominantly in the first fiscal quarter.

     Gross margin from sales to residential and commercial customers increased $179,000, or less than 1 percent, and $418,000, or less than 1 percent, for the three and six months ended March 31, 2005, respectively, compared with the same periods last year. Sales to residential and commercial customers were 27.4 billion cubic feet (Bcf) and 43.3 Bcf for the three and six months ended March 31, 2005, respectively, compared with 27.8 Bcf and 43.9 Bcf for the same periods last year. The relatively stable gross margin and the decrease in sales were due primarily to the lower usage per degree day discussed above, which offset customer growth.

     Gross margin from transportation service decreased $779,000, or 8.7 percent, and $1.2 million, or 7.7 percent, for the three and six months ended March 31, 2005, compared with the same periods last year. NJNG transported 3.4 Bcf and 5.8 Bcf for the three and six months ended March 31, 2005, compared with 3.8 Bcf and 6.4 Bcf in the same periods last year. The decreases were due primarily to a reduction in customers utilizing the transportation service and the lower usage per degree day discussed above.

     NJNG had 11,639 and 12,245 residential customers and 3,508 and 3,892 commercial customers using its transportation service at March 31, 2005 and 2004, respectively. The decrease in transportation customers was due primarily to a decline in third-party marketing efforts in NJNG’s service territory.

     In fiscal 2005, NJNG currently expects to add approximately 10,800 new customers and convert an additional 950 existing customers to natural gas heat and other services. Achieving these expectations would represent an estimated annual customer growth rate of approximately 2.4 percent and result in an estimated sales increase of approximately 1.8 Bcf annually, assuming normal weather

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and average use. It is believed that this growth would increase gross margin under present base rates by approximately $5.6 million annually.

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

Incentive Programs

     To reduce the overall cost of its natural gas supply commitments, NJNG has entered into contracts to sell natural gas to wholesale customers outside its franchise territory when the natural gas is not needed for system requirements. These off-system sales enable NJNG to spread its fixed demand costs, which are charged by pipelines to access their supplies year round, over a larger and more diverse customer base. NJNG also participates in the capacity release market on the interstate pipeline network when the capacity is not needed for its firm system requirements. On October 22, 2003, the BPU approved the extension of an incentive related to these programs through October 31, 2006, whereby NJNG retains 15 percent of the gross margin from these sales, with 85 percent credited to firm customers through the BGSS. This BPU action also provided for the parties to evaluate the appropriateness of a new capacity reliability incentive for the BPU’s consideration by October 1, 2004. Included in the June 9, 2004, BGSS filing, NJNG indicated a desire to develop a capacity reliability incentive that would be discussed further during the initial review of the storage incentive program. This review began in January 2005.

     The financial risk management (FRM) program is designed to provide price stability to NJNG’s natural gas supply portfolio. The FRM program includes an incentive mechanism designed to encourage the use of financial instruments to hedge NJNG’s natural gas costs, with an 80/20 percent sharing of the costs and results between customers and shareowners, respectively. On October 22, 2003, this program was extended through October 31, 2006.

     The BPU also approved, on October 22, 2003, a pilot for a new storage incentive program that shares gains and losses on an 80/20 percent basis between customers and shareowners, respectively. This program, which was subject to review after one year of operation, measures the difference between the actual cost of natural gas in storage and a benchmark applicable to the April-through-October injection season. Management believes that this program will be extended through October 31, 2006.

     NJNG’s incentive programs totaled 14.1 Bcf and generated $2.4 million of gross margin and 28.6 Bcf and $4 million of gross margin for the three and six months ended March 31, 2005, respectively, compared with 13.2 Bcf and $2.2 million of gross margin, and 26.7 Bcf and $3.7 million of gross margin for the respective periods last year. The slight increase in gross margin was due primarily to higher off-system sales combined with the new storage incentive program.

Interruptible

     NJNG serves 51 customers through interruptible sales and/or transportation tariffs. Sales made under the interruptible sales tariff are priced on market-sensitive energy parity rates. Although therms sold and transported to interruptible customers represented approximately 5 percent and 3.1 percent of total throughput for the six months ended March 31, 2005 and 2004, respectively, they accounted for less than 1 percent of the total gross margin in both periods due to the sharing formulas that govern these sales. Under these formulas, NJNG retains 10 percent of the gross margin from interruptible

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sales and 5 percent of the gross margin from transportation sales, with 90 percent and 95 percent, respectively, credited to firm sales customers through the BGSS. Interruptible sales were .3 Bcf and .1 Bcf, for the six months ended March 31, 2005 and 2004, respectively. In addition, NJNG transported 3.8 Bcf and 2.4 Bcf for the six months ended March 31, 2005 and 2004, respectively, for its interruptible customers.

Operation and Maintenance Expense

     Operation and maintenance (O&M) expense decreased $1.2 million, or 5.9 percent, and $320,000, or 1 percent, for the three and six months ended March 31, 2005, respectively, compared with the same periods last year due primarily to a decrease of $400,000 in costs, which was recognized in the second fiscal quarter, associated with the Company’s long-term incentive program.

Operating Income

     Operating income increased $771,000, or 1.3 percent, and decreased $523,000, or less than 1 percent, for the three and six months ended March 31, 2005, compared with the same periods last year. The 3-month increase was due primarily to the lower O&M discussed above. The 6-month decrease was due primarily to the impact of lower-than-expected customer usage in gross margin and the charge associated with an early retirement program for officers.

Net Income

     NJNG’s net income decreased $60,000, or less than 1 percent, and decreased $1.3 million, or 2.4 percent, for the three and six months ended March 31, 2005, compared with the same periods last year due primarily to changes in operating income and higher interest expense.

Energy Services Operations

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

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

     NJRES also focuses on creating value from underutilized natural gas assets, which are typically amassed through contractual rights to natural gas transportation and storage capacity. NJRES has developed a portfolio of storage and transportation capacity in the Gulf Coast, Mid-Continent, Appalachia and Eastern Canada, which provide the opportunity to realize value when there are changing prices between these areas and when prices change between time periods. Gross margin is typically created by participating in transactions that maximize the economic differential between varying markets and time horizons. NJRES seeks to optimize this process on a daily basis as market conditions change by evaluating all the natural gas supplies, transportation and markets to which it has access to find the most profitable alternative to serve its various markets. This enables NJRES to capture geographic pricing differences across these various markets as delivered natural gas prices change. NJRES’ gross margin is defined as natural gas revenues and management fees less natural gas costs and fixed demand costs.

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

     NJRES’ portfolio management customers include unaffiliated utilities, electric generation plants and Stagecoach. (See Note 6.–Legal and Regulatory Proceedings–Stagecoach Marketing Agreement.) Services provided by NJRES to the nonaffiliated utilities and electric generators include optimization of underutilized natural gas assets and basic gas supply functions. Revenue is customarily derived by a combination of a base service fee and incentive-based revenue-sharing arrangements. Services provided to Stagecoach include the marketing of firm storage and transportation capacity to third-party customers, optimization of unused storage and/or pipeline capacity, the supply of base gas to the facility, monthly billing and back-office functions, in addition to other services. NJRES receives compensation for these services through a combination of fixed fees and revenue-sharing mechanisms. NJRES estimates that its management fees represent approximately 15-20 percent of its annual gross margin.

     NJRES’ financial results are summarized as follows:

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     NJRES’ operating revenues and gas purchases decreased $36.2 million, or 5.7 percent, and $35.5 million, or 5.9 percent, for the three months ended March 31, 2005, respectively, compared with the same period last year. The decreases for the three months were due primarily to lower volatility. Volatility is defined as the change in prices, at a particular pricing point, over time. NJRES’ operating revenues and gas purchases increased $95.2 million, or 9.3 percent, and $91.5 million, or 9.3 percent, for the six months ended March 31, 2005, respectively, compared with the same period last year. The increases for the six months were due primarily to higher natural gas prices. Natural gas sold and managed by NJRES totaled 82.9 Bcf and 152.6 Bcf for the three and six months ended March 31, 2005, compared with 95.6 Bcf and 170.2 Bcf in the same periods last year. The decrease in natural gas sold and managed was due primarily to lower volatility.

     NJRES’ gross margin is defined as natural gas revenues and management fees less natural gas costs and fixed demand costs. The volatile nature of wholesale natural gas prices over short periods of time can significantly impact NJRES’ revenue and gross margin. Furthermore, gross margin for NJRES is generally greater during the winter months, while the fixed costs of its capacity assets are generally spread throughout the year. NJRES’ gross margin and operating income decreased for the three months ended March 31, 2005, compared with the same period last year, due primarily to fewer market pricing opportunities and decreased volatility, coupled with additional fixed costs associated with a larger portfolio of assets. NJRES’ gross margin, operating income and net income increased for the six months ended March 31, 2005, compared with the same period last year, due primarily to favorable time spreads on storage asset positions, as well as securing positive locational spreads on transportation capacity.

     Future results are subject to NJRES’ ability to maintain and expand its wholesale marketing activities and are contingent upon many other factors including an adequate number of appropriate counterparties, sufficient liquidity in the energy trading market, continued access to the capital markets and NJRES’ successful resolution of the Stagecoach Marketing Agreement litigation and the ability to maintain asset management agreements. (See Note 6.–Legal and Regulatory Proceedings–Stagecoach Marketing Agreement.)

Retail and Other Operations

     The financial results of Retail and Other consists primarily of NJRHS, which provides service, sales and installation of appliances to over 138,000 customers; CR&R, which develops commercial real estate; NJR Energy, an investor in energy-related ventures through its operating subsidiary, Pipeline, which consists primarily of its equity investment in the Iroquois Gas Transmission System, L.P. (Iroquois); NJR Investment, which makes certain energy-related equity investments; and NJR Service, which provides shared administrative services to the Company and its subsidiaries.

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

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     Retail and Other operating revenues increased $602,000, or 12 percent, and $11.9 million, or 116 percent, for the three and six months ended March 31, 2005, compared with the same periods last year. The 3-month increase was due primarily to increased appliance service and installation business at NJRHS. The 6-month increase was due primarily to a $10.1 million pretax gain on the sale of a commercial office building and increased appliance service and installation business at NJRHS.

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

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

     Net income increased for the three and six months ended March 31, 2005, compared with the same periods last year, due primarily to the $6 million after tax gain on the sale of the commercial office building. Excluding the gain, net income increased by $568,000 and $365,000 for the three and six months ended March 31, 2005, respectively. The increases were due primarily to improved results at NJRHS and $1 million of lower costs associated with the Company’s Long-Term Incentive Plan.

Liquidity and Capital Resources

     Consolidated

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

     NJR’s consolidated capital structure was as follows:

     NJR satisfies its external common equity requirements, if any, through issuances of its common stock, including the proceeds from stock issuances under its Automatic Dividend Reinvestment Plan (DRP) and proceeds from the exercise of options issued under the Company’s long-term incentive program. The DRP allows NJR, at its option, to use shares purchased on the open market or newly issued shares.

     In December 2004, NJR entered into a $275 million committed credit facility with several banks, which replaced a $200 million credit facility. The new facility has a 3-year term, expiring in December 2007. In November 2004, NJR entered into a 1-year $20 million committed credit facility with a bank. These facilities provide liquidity to meet working capital and external debt-financing requirements of NJR and its unregulated companies. Neither NJNG nor the results of its operations are obligated or pledged to support the NJR facilities.

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

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

     NJR had borrowings of $95.1 million, $152.1 million and none at March 31, 2005, September 30, 2004, and March 31, 2004, respectively, under NJR’s committed credit facilities. NJNG had $2.2 million, $107.6 million and $16 million of commercial paper borrowings supported by NJNG’s committed credit facilities at March 31, 2005, September 30, 2004, and March 31, 2004, respectively.

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

     As of March 31, 2005, there were NJR guarantees covering approximately $188 million of natural gas purchases and demand fee commitments of NJRES, included in natural gas supply purchase obligations, not yet reflected in Accounts payable on the Consolidated Balance Sheet.

     NJNG issued a $45 million letter of credit, which will expire in June 2005, in conjunction with a long-term swap agreement. This letter of credit reduces the amount available under NJNG’s committed credit facility by the same amount. NJNG does not anticipate that this letter of credit will be drawn upon by the counterparty.

     The Company is not currently required to make minimum pension funding contributions during fiscal 2005. If market performance is less than anticipated, additional funding may be required.

     In fiscal 2004, the Company made $12.6 million of tax-deductible contributions to the Other Postretirement Benefit (OPEB) plans, of which $10 million was optional. The Company’s funding level to its OPEB plans is expected to be approximately $700,000 annually over the next five years. Additional contributions may be made based on market conditions and various assumptions.

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     Off-Balance Sheet Arrangements

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

Cash Flows

     Operating Activities

     Cash flow used in operating activities totaled $212.9 million for the six months ended March 31, 2005, compared with $162 million in the same period last year. The improvement in operating cash flow was due primarily to higher net income and improved working capital. The improvement in working capital was due primarily to the reduction in broker margin requirements and underrecovered gas costs which was partially offset by an increase in accounts receivable.

     NJNG’s MGP expenditures, net of insurance recoveries, are currently expected to total $5.5 million and $17.6 million in 2005 and 2006, respectively. (See Note 13.–Commitments and Contingent Liabilities.)

     Financing Activities

     Cash flow used in financing activities totaled $217.9 million for the six months ended March 31, 2005, compared with $94.9 million in the same periods last year. This increase was due primarily to a greater decrease in net short- and long-term debt, which resulted from higher operating cash flow and proceeds from asset sales, and higher share repurchases.

     In December 2003, NJNG entered into a loan agreement under which the New Jersey Economic Development Authority (EDA) loaned NJNG the proceeds from its $12 million, 5% Natural Gas Facilities Revenue Bonds, which NJNG deposited into a construction fund. NJNG drew down $6.3 and $4.2 million in December 2004 and 2003, respectively, from the construction fund and issued like amounts of its 5% Series HH Bonds to the EDA. (See Note 8.–Long- and Short-Term Debt and Restricted Cash-Construction Fund.)

     In December 2004 and 2003, NJNG received $4.9 million and $3.9 million in connection with the sale-leaseback of its vintage 2004 and 2003 meters, respectively. NJNG has the ability to continue the sale-leaseback meter program on an annual basis.

     In 2005, NJR expects to finance its unregulated operations through bank credit facilities and internally generated cash.

     NJNG currently anticipates that its financing requirements in 2005 will be met through internally generated cash and the issuance of short- and long-term debt. NJNG also plans to continue its meter sale-leaseback program at approximately $5 million annually.

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

     Investing Activities

     Cash flow from investing activities totaled $8.4 million for the six months ended March 31, 2005, compared with the use of $43.8 million for the same periods last year. The improvement in cash flow was due primarily to the $30.6 million in cash proceeds generated from the sale of a commercial office building and the draw down of $6.3 million from the construction fund created under the EDA financing arrangement.

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     NJNG’s capital expenditures result primarily from the need for services, mains and meters to support its continued customer growth, pipeline safety rulemaking and general system improvements. NJNG’s remaining fiscal 2005 capital expenditures are estimated at $35.8 million.

     NJRES does not currently anticipate any significant capital expenditures in 2005 and 2006. However, the use of high-injection/high-withdrawal storage facilities and anticipated pipeline park-and-loan arrangements, combined with the related hedging activities in the volatile wholesale natural gas market, may create significant short-term cash requirements, which would be funded by NJR.

     Retail and Other capital expenditures in 2004 were primarily related to the construction of a commercial office building, which was subsequently sold in December 2004. CR&R currently expects capital expenditures of $5.6 million in 2005 and $3.2 million in 2006 in connection with the construction of two office buildings.

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

     Credit Ratings

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

     NJNG’s S&P and Moody’s Senior Secured ratings are investment grade ratings and represent the sixth highest rating within the investment grade category. Moody’s and S&P give NJNG’s commercial paper the highest rating within the Commercial Paper investment grade category. Investment grade ratings are generally divided into three groups: high, upper medium and medium. NJNG’s senior secured ratings and the commercial paper ratings fall into the high group. NJR is not a rated entity.

     NJNG is not party to any lending agreements that would accelerate the maturity date of any obligation due to a failure to maintain any specific credit rating.

     A rating set forth above is not a recommendation to buy, sell or hold the Company’s or NJNG’s securities and may be subject to revision or withdrawal at any time. Each rating set forth above should be evaluated independently of any other rating.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial Risk Management

     Commodity Market Risks

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

     The regulated and unregulated natural gas businesses of the Company and its subsidiaries are subject to market risk due to fluctuations in the price of natural gas. To hedge against such fluctuations, the Company and its subsidiaries have entered into futures contracts, options agreements and over-the-counter swap agreements. To manage these instruments, the Company has well-defined risk management policies and procedures that include daily monitoring of volumetric limits and monetary guidelines. The Company’s natural gas businesses are conducted through three of its operating subsidiaries. First, NJNG is a regulated utility that uses futures, options and swaps to hedge against price fluctuations, and its recovery of natural gas costs is governed by the BGSS. Second, NJRES uses futures and swaps to hedge purchases and sales of natural gas in storage and transactions with wholesale customers. Finally, NJR Energy has entered into several swap transactions to hedge 18-year fixed-price contracts to sell approximately 19.4 Bcf of natural gas (Gas Sale Contracts) to an energy marketing company.

     NJR Energy has hedged both the price and physical delivery risks associated with the Gas Sale Contracts. To hedge its price risk, NJR Energy entered into two swap agreements effective November 1995. Under the terms of these swap agreements, NJR Energy will pay its swap counterparties the identical fixed price it receives from the natural gas marketing company in exchange for the payment by such swap counterparties of a floating price based on an index price plus a spread per Mmbtu for the total volumes under the Gas Sale Contracts. In order to hedge its physical delivery risk, NJR Energy entered into a purchase contract with a second natural gas marketing company for the identical volumes it is obligated to sell under the Gas Sale Contracts and pays the identical floating price it receives under the swap agreements mentioned above.

     The following table reflects the changes in the fair market value of commodity derivatives from September 30, 2004, to March 31, 2005:

     There were no changes in methods of valuations during the quarter ended March 31, 2005.

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     The following is a summary of fair market value of commodity derivatives at March 31, 2005, by method of valuation and by maturity:

     The following is a summary of commodity derivatives by type as of March 31, 2005:

     The Company uses a value-at-risk (VAR) model to assess the market risk of its net futures, swaps and options positions. The VAR at March 31, 2005, using the variance-covariance method with a 95 percent confidence level and a 1-day holding period, was $2.1 million. The VAR with a 99 percent confidence level and a 10-day holding period was $9.6 million. The calculated VAR represents an estimate of the potential change in the value of the net positions. These estimates may not be indicative of actual results because actual market fluctuations may differ from forecasted fluctuations.

     Wholesale Credit Risk

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

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

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     Presented below is a summary of gross and net credit exposures, grouped by investment and noninvestment grade counterparties, as of March 31, 2005. Gross credit exposure is defined as the unrealized fair value of derivative and energy trading contracts plus any outstanding receivable for the value of natural gas delivered for which payment has not yet been received. Net credit exposure is defined as gross credit exposure reduced by collateral received from counterparties and payables, where netting agreements exist. The amounts presented below exclude accounts receivable for retail natural gas sales and services.

     Unregulated counterparty credit exposure as of March 31, 2005, is as follows:

     NJNG’s counterparty credit exposure as of March 31, 2005, is as follows:

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

     Interest Rate Risk–Long-Term Debt

     At March 31, 2005, the Company (excluding NJNG) had no variable-rate, long-term debt.

     At March 31, 2005, NJNG had total variable-rate, tax-exempt long-term debt outstanding of $97 million, which is hedged by 3.5 percent interest-rate caps with several banks expiring in July 2006. If interest rates were to change by 1 percent on the $97 million of variable-rate debt at March 31, 2005, NJNG’s annual interest expense, net of tax, would change by $574,000.

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

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ITEM 4. CONTROLS AND PROCEDURES

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

     There have been no significant changes in NJR’s internal controls, or in other factors that could significantly affect internal controls subsequent to the date of the evaluation described above.

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PART II – OTHER INFORMATION

     Information required by this Item is incorporated herein by reference to Part I, Item 1, Note 6.–Legal and Regulatory Proceedings.

Legal Proceeding:

Petco Litigation

     On March 18, 2005, a complaint was filed in the New Jersey Superior Court, Law Division, Monmouth County against NJNG and three other parties. On March 24, 2005, the complaint was amended to add a fifth defendant. The plaintiff alleges, among other things, that NJNG negligently installed and maintained an underground gas line that was damaged by a co-defendant contractor, which resulted in the destruction of the building where plaintiff was an employee and causing plaintiff severe and permanent personal injury. The Company has also received notice of two other personal injury claims and a claim for property damage. The Company’s insurance carrier has been notified of all the above. The Company believes this litigation will not have a material effect on its financial condition, results of operations or cash flows.

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER REPURCHASES OF EQUITY SECURITIES

     In 1996, the NJR Board of Directors authorized the repurchase of up to 1 million of the Company’s common shares. In 1999 and 2002, the repurchase plan was expanded to 1.5 million shares and 2 million shares, respectively. In January 2005, the repurchase plan was expanded to 2.5 million shares. As of March 31, 2005, the Company has repurchased 2,156,753 shares of its common stock.

     The following table sets forth NJR’s repurchase activity for the quarter ended March 31, 2005: