**UNITED STATES SECURITIESAND EXCHANGE COMMISSIONWASHINGTON, DC 20549**

** **

**FORM 10-Q/AAmendment No. 1**

(Mark One)      

      X              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                       SECURITIESEXCHANGE ACT OF 1934

**For the quarterly periodended December 31, 2003**

OR

 

                       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                        SECURITIESEXCHANGE ACT OF 1934

Forthe transition period from _________________ to______________________

CommissionFile Number     001-16385

**NUI CORPORATION**(Exact name of registrant asspecified in its charter)

 
| **New Jersey**(State of incorporation) | **22-3708029**(IRS employer  identification no.) |
|----------------------------------------|--------------------------------------------------|

 

**550Route 202-206, PO Box 760, Bedminster, New Jersey 07921-0760**(Address of principalexecutive offices, including zip code)

**(908) 781-0500**(Registrant's telephonenumber, including area code)

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

 Yes  X      No   

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act):

 Yes  X      No 

 

The number ofshares outstanding of each of the registrant's classes of common stock, as ofApril 30, 2004: Common Stock, No Par Value: 15,968,345 shares outstanding.

**EXPLANATORYNOTE**

This Amendment No. 1 onForm 10-Q/A to the company's Form 10-Q for the fiscal quarter ended December31, 2003, as originally filed on May 20, 2004, is being filed to revise theConsolidated Balance Sheet to properly reflect certain prepayments related togas supply made at the end of the first fiscal quarter which should have beenreflected on the Consolidated Balance Sheet as a credit (reduction) to cash anda debit to prepayments.  There is nochange in our total assets, working capital or net income as of and for thefiscal quarter ended December 31, 2003 as a result of this restatement.

Accordingly, the company'sForm 10-Q for the fiscal quarter ended December 31, 2003 has been revised, as follows:

--    The company's Consolidated Statement of Cash Flows for the three     months ended December 31, 2003 has been restated to reflect the $6.1     million of prepayments, which reduced our cash flows from operating     activities by that amount.
--    A new footnote number sixteen has been added, which is titled     "Restatement".
--    In the Liquidity and Capital Resources section of Item 2.     Management's Discussion and Analysis of Financial Condition and Results of     Operations, we have revised our disclosure of the company's net cash     provided by operating activities to make corresponding changes.
--    The company has updated Item 4. Disclosure Controls and     Procedures, to include a discussion of a deficiency noted in the company's     cash reconciliation process, which gave rise to this Amendment No. 1 on     Form 10-Q/A, and implementation of a process change to address this issue.
As discussed in Note 2, the company has experiencedand expects to continue experiencing significant liquidity problems.  However, the $6.1 million of prepayments forgas supply has no impact on statements the company previously made in its Form10-Q filed on May 20, 2004 regarding the company's anticipated cash flows, asthe prepayment obligations were already factored into the company's anticipatedcash flows.

Except as described above, no other changes havebeen made to this report.  ThisAmendment No. 1 does not purport to provide a general update or discussion ofany other developments at the company subsequent to the original filing date.The filing of this Amendment No. 1 shall not be deemed an admission that theoriginal filing, when made, included any known untrue statement of materialfact or knowingly omitted to state a material fact necessary to make astatement not misleading.
 
**Item1. Financial Statements**

**NUICorporation and SubsidiariesConsolidatedStatement of Income (Unaudited)(Dollars inthousands, except per share amounts)**

**                                                                                                               **

**Three Months EndedDecember 31,**

**2003**

**2002**

**Operating Margins**

   Operating revenues

$166,503

$171,817

   Less - Purchased gas and fuel

101,220

109,023

              Cost of sales and services

3,636

3,502

              Energy taxes

   3,906

   3,494

 57,741

 55,798

 

**Other Operating Expenses**

 

   Operations and maintenance

39,411

27,850

   Restructuring costs

1,146

---

   Depreciation and amortization

8,799

8,627

   Taxes, other than income taxes

   2,396

   2,091

 51,752

 38,568
 
 

 

**Operating Income**

5,989

17,230

 

 

   Equity in earnings of Saltville Gas  Storage Company, LLC

377

---

   Loss on extinguishment of debt

9,940

---

   Other income

679

416

   Interest expense

8,879

6,340

   Other interest (income)

     (731)

    (993)

 

 

**Income (Loss) from Continuing Operations Before Income    Taxes**

(11,043)

12,299

 

 

**  Income  tax expense (benefit)**

  (3,645)

  4,938

 

 

**Income (Loss) from Continuing Operations**

  (7,398)

  7,361

 

 

**Discontinued Operations**

 

 

   Loss from discontinued  operations

(1,140)

(349)

   Income tax benefit

    (376)

    (143)

**Loss from Discontinued  Operations**

    (764)

    (206)

 

 

**Net Income (Loss)**

$(8,162)

$7,155

 

 

**Basic and Diluted Income  (Loss) from Continuing Operations  Per Share of Common Stock**

$  (0.46)

$  0.46

**Basic and Diluted Net  Income (Loss) Per Share of Common  Stock**

$  (0.51)

$  0.45

 

 

**Dividends Per Share of Common Stock**

$0.245

$0.245

 

 

**Weighted  Average Number of Shares of Common Stock  Outstanding**

15,989,740

16,025,353
 
*See the notes to the consolidated financial statements.*****

**NUI Corporationand SubsidiariesConsolidated Balance Sheet(Dollars in thousands)**

** **

**December 31,   2003  Restated(Unaudited)**

**   September 30,  2003          (*)       **

**ASSETS**

 

**Current  Assets**

   Cash and cash equivalents

$54,145

$25,209

   Accounts  receivable (less allowance for doubtful accounts of        $6,079  and $7,304, respectively) 

  91,443

  55,575

   Fuel  inventories, at average cost

57,492

63,852

    Unrecovered purchased gas costs

38,635

25,398

   Derivative assets

8,855

8,059

   Federal income tax  receivable

---

3,333

   Assets  held for sale

---

7,976

    Prepayments and other 

      65,736

      31,120

 

    316,306

    220,522

 

 

**Property,  Plant and Equipment**

 

 

    Property, plant and equipment, at original cost

966,197

954,446

    Accumulated depreciation and amortization

(330,899)

(323,370)

    Unamortized plant acquisition adjustments, net

      13,104

       13,372

   Assets  held for sale

             ---

            147

    648,402

     644,595

 

 

**Funds for  Construction Held by Trustee**

  2,061

2,058

**Investment in  Saltville Gas Storage Company, LLC**

16,834

16,456

**Other  Investments**

    195

210

 

 

**Other Assets**

 

 

    Regulatory assets

50,329

57,040

   Notes receivable from  Saltville Gas Storage Company, LLC

18,120

17,575

   Other receivable from Saltville Gas  Storage Company, LLC

6,661

8,010

   Long-term portion of  derivative assets

7,416

5,133

   Goodwill

8,056

8,056

   Assets  held for sale

---

1,002

   Other  assets

       37,890

       40,106

     128,472

     136,922

$1,112,270

$1,020,763

 

 

**CAPITALIZATION  AND LIABILITIES**

 

 

**Current  Liabilities**

 

 

   Notes  payable to banks

$335,000

$164,100

   Notes  payable

1,400

1,400

   Current  portion of long term debt and capital lease obligations

1,904

2,167

   Accounts  payable, customer deposits and accrued liabilities

117,955

125,353

    Liabilities held for sale

---

3,150

   Federal  income and other taxes

8,969

5,166

   Current  portion of deferred Federal income taxes

         7,875

        6,705

     473,103

    308,041

 

 

 

**Other Liabilities**

 

 

   Capital  lease obligations

9,721

9,798

   Deferred  Federal income taxes

54,461

61,608

    Liabilities held for sale

---

19

    Unamortized investment tax credits

3,267

3,375

    Environmental remediation reserve

33,938

33,941

    Regulatory and other liabilities

      71,822

       64,813

    173,209

     173,554

 

**Capitalization**

   Common  shareholders' equity

216,896

230,115

    Long-term debt

     249,062

      309,053

     465,958

     539,168

$1,112,270

$1,020,763
 
**Derived from audited financial statementsSee the notes to the consolidated financial statements*****

**NUI Corporation andSubsidiariesConsolidated Statement ofCash Flows (Unaudited)(Dollars in thousands)**

** **

**Three Months EndedDecember  31,**

**2003   Restated**

**2002**

**Operating Activities**

Net income  (loss)

$(8,162)

$7,155

Less: Loss from discontinued  operations, net of tax

    (764)

   (206)

Net income (loss) from  continuing operations

(7,398)

 7,361

Adjustments  to reconcile net income to net cash used in operating    activities:

 

 

          Depreciation and amortization

8,799

8,627

          Deferred Federal income taxes

(5,977)

(1,162)

          Amortization of deferred  investment tax credits

(108)

(188)

          Derivative assets and liabilities

4,648

3,457

          Regulatory assets and liabilities

4,544

1,914

          Other

(1,612)

1,456

          Effect of changes in:

 

 

             Accounts receivable, net

(35,868)

(81,368)

             Fuel inventories

6,360

323

             Accounts payable, deposits and  accruals

(7,398)

49,286

             Under-recovered purchased gas  costs

(11,805)

(6,793)

             Prepaids and other

(34,616)

10,099

             Federal and state income taxes

7,136

4,982

             Other

    2,174

   1,105

  Net cash used in continuing operations

(71,121)

(901)

  Net cash provided by (used in) discontinued operations

    5,537

  (5,239)

    Net cash used in operating activities

 (65,584)

  (6,140)

 

 

**Financing Activities**

 

 

Proceeds  from sales of common stock, net of treasury stock    purchased 

  138

  287

Dividends  to shareholders

(3,904)

(3,937)

Payments  of long-term debt

(60,000)

---

Principal  payments under capital lease obligations

(704)

(670)

Net  short-term borrowings

 170,900

 16,310

  Net cash provided by continuing operations

106,430

11,990

  Net cash used in discontinued operations

          ---

         (3)

    Net cash provided by financing activities

 106,430

 11,987

 

 

**Investing Activities**

 

 

Cash  expenditures for property, plant and equipment

(12,150)

(12,672)

Net  proceeds from sale of subsidiaries

---

15,309

Other

      585

     (173)

  Net cash provided by (used in) continuing operations

(11,565)

2,464

  Net cash used in discontinued operations

      (345)

  (2,805)

    Net cash used in investing activities

 (11,910)

     (341)

 

 

Net  increase in cash and cash equivalents from continuing    operations

  23,744

  13,553

Net  increase (decrease) in cash and cash equivalents from    discontinued operations

      5,192

    (8,047)

**Net Increase in Cash and Cash Equivalents**

$28,936

$ 5,506

 

 

**Cash and Cash Equivalents**

 

 

At  beginning of period

$25,209

$ 4,247

At end  of period

$54,145

$ 9,753
 
*See the notes to the consolidated financial statements*****

**NUI Corporation and SubsidiariesNotes to the Consolidated Financial Statements**

**1.     Basis of Presentation**

The consolidated financialstatements include all operating divisions and subsidiaries of NUI Corporation(NUI and, together with its subsidiaries, the company, we, our, or us).  NUI is a diversified energy company that isprimarily engaged in the sale and distribution of natural gas through its localutility companies.  NUI's local utilityoperations are carried out by NUI's wholly-owned subsidiary, NUI Utilities,Inc. (NUI Utilities) and a subsidiary of Virginia Gas Company (VGC), and serveapproximately 369,000 customers in four states along the eastern seaboard ofthe United States. NUI Utilities is comprised of Elizabethtown Gas Company (NewJersey), City Gas Company of Florida, and Elkton Gas (Maryland). VGC is alsoengaged in other activities, such as pipeline operation and natural gasstorage. The company's non-regulated businesses are carried out by NUICapital Corp. and its subsidiaries.  Asof April 1, 2004, however, the company's only remaining non-regulated subsidiary with substantialcontinuing operations is Utility Business Services, Inc. (UBS), a billing andcustomer information systems and services subsidiary. The company's othernon-regulated subsidiaries have either been sold or are winding down theiroperations; these subsidiaries include: NUI Environmental, Inc. (NUIEnvironmental), an environmental project development subsidiary sold inSeptember 2003; NUITelecom, Inc. (NUI Telecom), a telecommunications services subsidiary sold inDecember 2003 (see Note 4); NUI Energy, Inc. (NUI Energy), an energy retailer;NUI Energy Brokers, Inc. (NUI Energy Brokers), a wholesale energy trading andportfolio management subsidiary; OAS Group, Inc. (OAS), the company'sdigital mapping operation, which prior to September 30, 2003, was part of UBS; and TIC Enterprises, LLC(TIC), a sales outsourcing subsidiary which sold wireless and networktelephone services.The company's wholly-owned subsidiary, NUI Saltville Storage, Inc. (NUISS), isa fifty-percent member of Saltville Gas Storage Company, LLC (SSLLC). SSLLC isa joint venture with a unit of Duke Energy that is developing a natural gasstorage facility in Saltville, Virginia. All intercompany accounts and transactions have been eliminated inconsolidation. 

On September 26, 2003, the company's Board ofDirectors announced it was pursuing the sale of the company. The company hasengaged two investment banks to serve as financial advisors to the companywhile it seeks a buyer. As discussed in Note 5, for all periods presented, thecompany has classified the results of Valley Cities Gas and Waverly Gas, NUITelecom, and TIC as Discontinued Operations in the Consolidated Statements ofIncome. The assets and liabilities of NUI Telecom have been classified asAssets Held for Sale and Liabilities Held for Sale in the Consolidated BalanceSheet as of September 30, 2003.

During fiscal2003, the company discontinued the operations of NUI Energy and TIC. DuringJanuary 2004, the company began to wind down the trading operations of NUIEnergy Brokers and discontinued trading operations altogether at NUI EnergyBrokers in March 2004, although NUI Energy Brokers continues to manage itsprior contractual obligations under a long-term sales agreement in addition totwo long-term gas storage and transportation agreements discussed in Note 12.Effective April 1, 2004, OAS has subcontracted all of its existing services toa third party engineering firm. OAS has notified its customers that uponexpiration of their current contracts, their relationship with OAS willterminate.

Certain reclassifications have been made to theprior year financial statements to conform with the current year presentation.

The consolidated financial statements contained hereinhave been prepared without audit in accordance with the rules and regulationsof the Securities and Exchange Commission and reflect all adjustments which, inthe opinion of management, are necessary for a fair statement of the resultsfor interim periods. The preparation of financial statements in accordance withgenerally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. Theconsolidated financial statements should be read in conjunction with theconsolidated financial statements and the notes thereto that are included inthe company's Annual Report on Form 10-K for the fiscal year ended September30, 2003. 

NUI is a holding company and is exempt fromregistration under the Public Utility Holding Company Act of 1935. NUIUtilities is subject to regulation as an operating utility by the publicutility commissions of the states in which it operates. Certain subsidiaries ofVGC are regulated by the Virginia State Corporation Commission. SSLLC issubject to regulation by the Federal Energy Regulatory Commission. Because ofthe seasonal nature of gas utility operations, the results for interim periodsare not necessarily indicative of the company's results for an entire year.

**2.     Liquidity Issues**

As a result of various factors, NUI and NUI Utilities haveexperienced and expect to continue experiencing significant liquidity problems.Liquidity needs for NUI Utilities generally are driven by factors that include:prepayment for its natural gas requirements; natural gas commodity prices; theimpact of weather on customer bills; lags in fully collecting gas costs fromcustomers under the purchased gas adjustment clauses; both discretionary andrequired repayments of short- and long-term debt; capital spending; and workingcapital requirements, such as administrative expenses and taxes.  Liquidity needs at NUI's non-utilityoperations generally are driven by required repayments of short-term debt andworking capital requirements.

Based upon the factorsnoted above and current anticipated cash flows, both NUI and NUI Utilitiesbelieve that they have sufficient liquidity to meet their financial obligationsthrough the remainder of the fiscal year ending September 30, 2004.  However, subsequent to September 30, 2004,NUI and NUI Utilities believe they may not have sufficient liquidity to meettheir continuing obligations based upon the following:

-       NUI and NUI Utilities each have separate revolving creditfacilities aggregating $405 million, which expire on November 22, 2004, andeach may only be extended for a successive 364-day increment if certainconditions are met. If these facilities are not extended or satisfactorilyrefinanced, the companies would need to seek alternative solutions to satisfytheir liquidity requirements.

-       Uponrenewal of NUI's revolving credit facility, NUI would be required to prepay, onor about November 22, 2004, an interest reserve account for the benefit of thelenders under NUI's credit agreement in the amount of approximately $20million.

-       Underthe terms of NUI Utilities' natural gas asset management contract with CinergyMarketing & Trading LP (Cinergy), NUI Utilities is required to pay inadvance, in varying amounts, for its gas requirements on a monthly basis overthe contract period. As a result of the prepayment obligations, in addition tothe renewal of its credit facility, NUI Utilities may require additional fundsin early fiscal 2005 in order to meet its continuing obligations. Further, inorder for NUI Utilities to obtain such additional funds, it is required toobtain the approval of its lenders and the NJBPU.

-       OnSeptember 26, 2003, the Board of Directors of NUI announced its intention tosell the company.  If we are unable tosell the company, or if a sale is not completed in a timely manner, this couldmaterially adversely affect NUI's and NUI Utilities' financial condition,results of operations and liquidity.

As noted above, based upon current anticipated cashflows, the company believes it will have sufficient liquidity to meet itsfinancial obligations through the end of fiscal year ending September 30, 2004and the company also believes it will remain in compliance with all covenantsunder its various debt agreements for the remainder of the year endingSeptember 30, 2004 (see Notes 10 and 11 for further discussion on debtcovenants). The company plans to address its liquidity concerns by:successfully completing the sale of the company; extending its existing creditfacilities beyond the current termination date of November 22, 2004; andobtaining additional financing to ensure NUI Utilities' ability to, among otherthings, meet its gas purchase prepayment requirements under its natural gasasset management contract with Cinergy. If the company is unsuccessful in itsefforts to effectively resolve its liquidity concerns, it may need toreorganize its operations and restructure its credit and debt financing.

**3.     Common Shareholders' Equity**

The components of common shareholders' equity were asfollows (dollars in thousands):                                                                                              **December 31,    September 30,                                                                                                      2003                  2003**

Common stock, no par value

$287,453

$288,620

Shares held in treasury

(5,013)

(5,320)

Retained deficit

(61,017)

(48,951)

Unearned employee compensation

(2,310)

(3,589)

Accumulated other comprehensive loss (Note 8)

(2,217)

(645)

Total  common shareholders' equity

$216,896

$230,115

**4.      ****Sale of NUITelecom**

On October 30, 2003, the company agreed to sell itsNUI Telecom subsidiary for $2.0 million. The transaction closed on December 15,2003. The operating results of NUITelecom have been classified as discontinued operations in the ConsolidatedStatements of Income for all periods presented (see Note 5).

**5.     DiscontinuedOperations and Assets and Liabilities Held for Sale**

The revenues, margins and operating income (losses)of the company's discontinued operations that have been reported asdiscontinued operations on the Consolidated Statements of Income for thethree-month periods ended December 31 are as follows, exclusive of affiliatetransactions (in thousands):

**   2003**

**    2002**

**Revenues:**

   Distribution Services

$     ---

$     553

   Retail & Business Services

 7,077

 12,601

Operating Revenues

$7,077

$13,154

**Operating  Margins:**

   Distribution Services

 $     ---

$   250

   Retail & Business Services

  1,630

  4,963

Operating Margins

$1,630

$5,213

** **

**Pre-Tax  Operating Income (Loss):**

   Distribution Services

 $      ---

$ 120

   Retail & Business Services

(2,492)

154

Pre-Tax Operating Income (Loss)

(2,492)

274

   Other Income (Expense)

1,352

(619)

   Net Interest Charges

       ---

       4

Pre-Tax Loss from  Discontinued Operations

$(1,140)

$(349)

The amounts includedabove within Distribution Services are for Valley Cities Gas and Waverly Gas,which were sold collectively on November 7, 2002 for approximately $15million.  The amounts included abovewithin Retail and Business Services are for NUI Telecom, which was sold onDecember 15, 2003 for $2 million, and TIC, whose operations have beendiscontinued. Both sales were immaterial to the company's results in therespective periods. In addition, the assets and liabilities held for sale onthe Consolidated Balance Sheet at September 30, 2003 (not shown here) relate toNUI Telecom.

**6.     Earnings Per Share**

Thefollowing table summarizes the company's basic and diluted earnings per sharecalculations for the three-month periods ended December 31 (amounts are inthousands, except per share amounts):                                                                                                                                                                      

**2003**

**  2002**

  Income (loss) from continuing operations

  $(7,398)

  $7,361

Loss from discontinued operations

     (764)

   (206)

Net income (loss)

$(8,162)

$7,155

 

Weighted Average Shares  Outstanding

15,990

16,025

 

**Earnings (Loss) Per Share:**

 

Basic and diluted income (loss) from continuing    operations

  $(0.46)

  $0.46

Basic and diluted loss from discontinued    operations

   (0.05)

   (0.01)

Basic and diluted net income (loss)

$(0.51)

$0.45

The company's weightedaverage diluted shares outstanding (not shown) includes shares which would beissuable upon the exercise of stock options outstanding under NUI's stockoption plan, which is added to weighted average shares outstanding.  As of December 31, 2003, unvested stockoptions having an exercise price less than the market value of the company'sshares for the three-month period provided for an additional 393 shares ofcommon stock equivalents outstanding, which had no impact on the calculation ofcompany's diluted earnings per share.  The number of shares that could potentially bedilutive to earnings per share in the future that have been excluded in thecomputation of diluted earnings per share, because to do so would have beenantidilutive, are 328,200 and 1,006,500, respectively, as of December 31, 2003and December 31, 2002.  

**7.     Restructuring Charges and Other EmployeeSeverance Costs**

DuringNovember 2003, the company commenced a reorganization effort that resulted inworkforce reductions. The reorganization efforts resulted in charges ofapproximately $1.1 million to restructuring costs in the first quarter offiscal 2004, primarily relating to severance costs for 17 individuals. Thecompany has approximately $1.0 million of unpaid liabilities included inAccounts Payable, Customer Deposits, and Accrued Liabilities on theConsolidated Balance Sheet at December 31, 2003 and expects to pay this amountout over a two-year period.

Furtherworkforce reductions were undertaken during January 2004 and March 2004resulting in additional charges to restructuring costs of approximately $2.6million in the second quarter of fiscal 2004, primarily relating to severancecosts for 24 individuals.

InJanuary 2004, two executive officers ended their employment with thecompany.  A. Mark Abramovic served asPresident of the company since September 26, 2003, until his retirement inJanuary 2005.  Previously he served asSenior Vice President and Chief Financial Officer since September 1997, andChief Operating Officer since May 1998. Until his resignation in January 2005, James R. Van Horn served as ChiefAdministrative Officer since May 1998, and General Counsel and Secretary since1995.  With respect to the departure ofthese two executives, the company recorded a $2.1 million charge in operationsand maintenance expense in the second quarter of fiscal 2004, primarilyrelating to severance costs.

**8.     Comprehensive Income**The components of Comprehensive Income for the three-month periods ended December 31 areas follows (amounts in thousands):

**2003**

**2002**

**   **Net income (loss)

  $(8,162)

  $7,155

Other comprehensive income (loss):

  Derivatives qualifying as hedges, net

     (1,572)

         ---

  Total comprehensive income (loss)

$(9,734)

$7,155

Accumulated other comprehensive income (loss), included in CommonShareholders' Equity on the Consolidated Balance Sheets was $(2,217) atDecember 31, 2003, and $(645) at September 30, 2003. Included in the balance atDecember 31, 2003, was $(1,404) related to minimum pension liability (net of$976 in taxes) and $(813) related to derivatives qualifying as hedges (net of$565 in taxes).

The $(813) included in other comprehensive income(loss) at December 31, 2003 for derivative hedges is expected to bereclassified into earnings over the next twelve months.  However, the actual amount reclassified intoearnings could differ based on fluctuations in market prices.  At December 31, 2003 there was no hedgeineffectiveness recognized in earnings.

The derivative hedges described above cover various time periodsranging from January 2004 to January 2005.

**9.     Stock Options**

The company measures compensation cost for stock-basedcompensation plans using the intrinsic value method of accounting as prescribedin Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued toEmployees," and related interpretations. The company has adopted thoseprovisions of Statement of Financial Accounting Standards No. 123, "Accountingfor Stock-Based Compensation" (SFAS 123) and Statement of Financial AccountingStandards No. 148, "Accounting for Stock-Based Compensation - Transition andDisclosure," which require disclosure of the pro forma effects on net earningsand earnings per share as if compensation cost had been recognized based uponthe fair value-based method at the date of grant for options awarded. 

Had employee compensation expense been recognizedbased on the fair value of the stock options on the grant date under themethodology prescribed by SFAS 123, the company's net income and dilutedearnings per share for the three-month periods ended December 31 would havebeen as shown in the following table (in thousands, except for per shareamounts):

**        2003**

**   2002**

  Net income (loss) as reported

    $(8,162)

    $7,155

Deduct: Total  stock-based employee   compensation  expense determined  under fair value based method for all   awards, net  of related tax effects 

     (179)

  (473)

Pro forma net income (loss)

$(8,341)

$6,682

 

 

**Earnings Per Share:**

 

 

Basic and diluted- as reported

        $(0.51)

       $0.45

Basic and diluted- pro forma

$(0.52)

       $0.42  

**10. ****Notes Payable to Banks**

On November 24, 2003, NUI and NUI Utilities eachentered into new separate revolving credit facilities aggregating $405 million.Both NUI's and NUI Utilities' current credit agreements expire on November 22,2004, and each may be extended for one 364-day term, subject tocertain conditions.

NUI'sfacility may be extended if (i) NUI Utilities' facility is simultaneouslyextended, (ii) the maturity of NUI Utilities' 8.35 percent medium term notes,due February 1, 2005, have been extended to a date no earlier than June 30,2006 or have been repaid with the proceeds of the delayed draw term loan, (iii)NUI deposits cash into escrow with the administrative agent to cover interestthat would accrue on outstanding amounts under the credit facility until theextended maturity date, in an amount of approximately $20 million, and (iv) nodefault exists under such facility at the time of such extension.

NUIUtilities' facility may be extended if (i) all applicable regulatory approvalsrequired for such extensions have been obtained, (ii) the maturity of NUIUtilities' 8.35 percent medium term notes, due February 1, 2005, have beenextended to a date no earlier than June 30, 2006 or have been repaid with theproceeds of the delayed draw term loan and (iii) no default exists under suchfacility at the time of such extension.

NUI's new credit agreement provides for a $255 millionterm loan facility. The proceeds of the term loan facility were used (1) torepay and terminate NUI's credit agreement which was entered into on February12, 2003, (2) to repay NUI's outstanding $60 million senior notes and pay a$9.4 million prepayment premium relating thereto, (3) to repay approximately$85 million of an intercompany balance owed by NUI to NUI Utilities, (4) tofund a $20.4 million interest reserve account for the benefit of the lendersunder NUI's credit agreement, and (5) for other general corporate purposes.NUI's credit agreement bears interest at a rate, at NUI's option, equal toeither (i) LIBOR (subject to a 2 percent floor) plus 6 percent, or (ii) theBase Rate (subject to a 3 percent floor) plus 5 percent. The obligations underNUI's credit agreement are guaranteed on a senior unsecured basis by certain ofNUI's direct and indirect wholly-owned subsidiaries.  NUI Utilities and VGC do not guarantee NUI's obligations underthis credit agreement. As of December 31, 2003, NUI has fully drawn all amountsavailable under its credit agreement. As of May 14, 2004, NUI had overnightcash investments of $28.8 million.

NUI Utilities' current credit agreement provides for(i) a $50 million revolving credit facility, (ii) a $50 million term loanfacility and (iii) a $50 million delayed draw term loan facility. The proceedsfrom the revolving credit facility and the term loan facility combined with theproceeds from the repayment of the $85 million intercompany balance from NUIwere used (1) to repay outstanding loans under, and terminate, the NUIUtilities credit agreement which was entered into on February 12, 2003, (2) topay accrued and unpaid fees under the interim credit agreement entered into onOctober 10, 2003 and (3) for general corporate purposes.  The proceeds from the delayed draw term loanfacility, which can be drawn at the option of the company, can be used solelyfor the purpose of repaying NUI Utilities' 8.35 percent medium term notes,which are due on February 1, 2005.  NUIUtilities' credit agreement bears interest at a rate, at NUI Utilities' option,equal to either (i) LIBOR (subject to a 2 percent floor) plus 5 percent, or(ii) the Base Rate (subject to a 3 percent floor) plus 4 percent. As of December31, 2003, NUI Utilities had drawn an aggregate of $80.0 million under the $50million revolver and the $50 million term loan facility. Subsequent to thatdate, NUI Utilities became fully drawn under the $50 million revolver and the$50 million term loan facility. As of May 14, 2004, NUI Utilities had overnightcash investments of $109.1 million.

Both credit agreements contain various covenants that(i) restrict NUI and NUI Utilities from taking various actions and (ii) requireNUI and NUI Utilities, respectively, to each achieve and maintain certainfinancial covenants. Under the terms of NUI's credit agreement, amended as ofMay 10, 2004, NUI is required to maintain a maximum leverage ratio of no morethan 0.80x and a minimum interest coverage ratio of at least 1.50x (for thefour consecutive fiscal quarters ending on December 31, 2003 and March 31,2004) and 1.25x (thereafter). Under the terms of the NUI Utilities creditagreement, NUI Utilities is required to maintain a maximum leverage ratio of nomore than 0.70x and a minimum interest coverage ratio of at least 2.25x.Additionally, both credit agreements contain limitations on capitalexpenditures, indebtedness, payment of dividends, guarantees, liens, mergers,acquisitions, dispositions of assets, transactions with affiliates, loans andinvestments, prepayment of indebtedness, sale-leaseback transactions, change inbusiness activities and corporate activities. 

NUI's delay in delivering audited financial statementsfor fiscal 2003 resulted in events of default under NUI's and NUI Utilities'respective credit agreements. On January 26, 2004, NUI and NUI Utilitiesobtained waivers of such defaults from the lenders under their respectivecredit agreements, and received an extension of the delivery date for NUI'saudited financial statements for fiscal 2003 and its 2004 first fiscal quarterunaudited financial statements through March 1, 2004, and amended the creditagreements to clarify certain technical provisions. Further delays in thedelivery of these financial statements beyond the date to which NUI and NUIUtilities had received waivers resulted in another event of default.  On March 12, 2004, NUI and NUIUtilities received a further waiver of such defaults from the lenders and suchlenders otherwise deferred their rights to exercise remedies in respectthereof. NUI and NUI Utilities subsequently entered into amendments dated May10, 2004 to their respective credit agreements which:

(i)       extended the delivery date for theaforementioned financial statements (as well as for the financial statementsfor the fiscal quarter ended March 31, 2004) until June 15, 2004, 

(ii)       consented to the NJBPU settlement (NJBPUSettlement), 

(iii)     modified financial covenantscontained in the credit agreements to take into account the NJBPU Settlementand the recent and expected future performance of the company, 

(iv)      permitted the acquisition by NUI Utilitiesof approximately $350,000 worth of gas pipeline, 

(v)      regarding the payment of dividendsby NUI Utilities to NUI, provided for a $35 million limit on dividend paymentsand eliminated a provision limiting such dividend payments to the aggregatemaximum of NUI Utilities' retained earnings,

(vi)     added a condition which requires NUIto maintain a maximum leverage ratio of no more than 0.60x in order to paydividends, and

 (vii)    increasedthe interest rate on NUI Utilities' delayed draw term loan (if drawn) by onepercent until a purchase agreement is executed to sell NUI or NUI Utilities toan unaffiliated third party.

At December 31, 2003, theoutstanding borrowings under NUI's and NUI Utilities' credit facilities were$255.0 million and $80.0 million, respectively, at weighted average interestrates of 8.0 percent and 7.1 percent. As of that date, NUI had no unused borrowingcapacity under its credit facility and NUI Utilities had $20 million unusedborrowing capacity under its credit facility (this amount does not include theavailable $50 million delayed draw term loan facility). Also, as of December31, 2003, NUI and NUI Utilities had approximately $33.8 million and $18.9million, respectively, of cash held as short-term investments, a substantialportion of which may be used toward the repayment of short-term borrowingsunder the company's credit agreements.

The weighted average daily amounts of borrowingsoutstanding under NUI's previous and current credit facilities and the weightedaverage interest rates on those amounts were $145.0 million and $46.9 millionat 6.5 percent and 3.4 percent for the three-months ended December 31, 2003 and2002, respectively. The weighted average daily amounts outstanding ofborrowings under NUI Utilities' previous and current credit facilities and theweighted average interest rates on those amounts were $108.6 million and $88.8million at 4.5 percent and 3.2 percent for the three-months ended December 31,2003 and 2002, respectively. 

*Dividend Restrictions UnderShort-term Credit Facilities.* Under thedividend restriction described above, NUI is prohibited from paying any cashdividends during any fiscal quarter in which NUI's consolidated total debtrepresents more than 60 percent of its total capitalization,measured (i) at the last day of the immediately preceding fiscalquarter and (ii) pro forma at the time such dividend is made. As a resultof these restrictions, NUI is prohibited from paying any dividends at this timeor in the foreseeable future. Under NUI's credit facility, NUI is alsoprohibited from paying dividends exceeding $20 million in the aggregate whilethe credit facility is outstanding.

**11. ****Long-term Debt**

NUI has outstanding $50 million 8.35 percent mediumterm notes, which mature on February 1, 2005. As discussed in Note 10, includedin NUI Utilities' current credit facility is a $50 million delayed draw term loanthat can be drawn at the option of the company and used, subject tosatisfaction of the terms and conditions contained therein, to repay thesemedium term notes.

On November 24, 2003, NUI repaid its $60 millionsenior notes with the proceeds of its new credit facility entered into on thatdate. In conjunction with the repayment of this indebtedness, NUI paid aprepayment premium of approximately $9.4 million to the noteholders, which wasrecorded as a charge during the first quarter of fiscal 2004.

NUI Utilities is party to a series of loan agreementswith the New Jersey Economic Development Authority (NJEDA) pursuant to whichthe NJEDA has issued four series of gas facilities revenue bonds: (i) $46.5million bonds at 6.35 percent due October 1, 2022, (ii) $39 million bonds atvariable rates due June 1, 2026 (Variable Bonds), (iii) $54.6 million bonds at5.7 percent due June 1, 2032 and (iv) $40 million bonds at 5.25 percent dueNovember 1, 2033. NUI Utilities is also party to a loan agreement pursuant to whichBrevard County, Florida (the County) has issued $20 million bonds at 6.40percent due October 1, 2024.  Inaccordance with the terms of these loan agreements, the funds received by theNJEDA or the County, as the case may be, upon the issuance of the applicablebonds have been loaned to NUI Utilities. The interest rates and maturity datesunder the loan agreements parallel the interest rates and maturity dates underthe bonds.  Interest payments by NUIUtilities on the loans are used to pay the interest on the bonds. During fiscal2003, NUI Utilities paid $9.9 million in interest payments on these loans. 

Approximately $2.1 million of interest earned on theoriginal net proceeds from the $20 million 6.4 percent revenue bonds due 2024is unexpended and accordingly has been classified as "Funds for ConstructionHeld by Trustee" on the Consolidated Balance Sheet at December 31, 2003 untildrawn upon.

The Variable Bonds contain a provision whereby theholder can "put" the bonds back to the issuer. In 1996, the company executed a long-term Standby Bond PurchaseAgreement (SBPA) with a syndicate of banks, which was amended and restated onJune 12, 2001. Under the terms of the SBPA, as further amended several times,The Bank of New York is obligated under certain circumstances to purchaseVariable Bonds that are tendered by the holders thereof and not remarketed bythe remarketing agent. Such obligation of the bank would remain in effect untilthe expiration of the SBPA, unless extended or earlier terminated. The terms ofthe SBPA also restrict the payment of dividends by NUI Utilities to NUI to anamount based, in part, on the earned surplus of NUI Utilities, which had beenreduced by the NJBPU Settlement recorded in September 2003.  On May19, 2004, NUI Utilities and The Bank of New York amended theSBPA.  The amendment eliminates theeffect of the NJBPU Settlement, as well as the estimated refunds to customersin Florida and certain other related costs, on the earned surplus of NUIUtilities, thereby allowing for the payment of dividends by NUI Utilitiesto NUI at this time.  In addition, pursuant to the terms of the amendment,and effective as of June 30, 2004, the expiration date of the SBPA will beextended to June 29, 2005.

If the SBPA is not further extended beyond June 29,2005, in accordance with the terms of the Variable Bonds, all of the VariableBonds would be subject to mandatory tender at a purchase price of 100 percentof the principal amount, plus accrued interest, to the date of tender. In suchcase, any Variable Bonds that are not remarketable by the remarketing agentwill be purchased by The Bank of New York.

Beginning six months after the expiration ortermination of the SBPA, any Variable Bonds still held by the bank must beredeemed or purchased by the company in ten equal, semi-annual installments. Inaddition, while the SBPA is in effect, any tendered Variable Bonds that arepurchased by the bank and not remarketed within one year must be redeemed orpurchased by the company at such time, and every six months thereafter, in tenequal, semi-annual installments.

As of December31, 2003, the aggregate principal and accrued interest on the outstandingVariable Bonds totaled approximately $39.0 million.  Principal and any unpaid interest on the outstanding VariableBonds are due on June 1, 2026, unless the put option is exercised before thattime.

The delay in delivering certain officers' certificates,SEC filings and quarterly financial information throughout the fiscal year2003, as well as audited fiscal 2003 financial statements and related documents(Required Documents), resulted in breaches under certain loan agreements, trustindentures, and related documents underlying NUI Utilities' gas revenue bondfacilities, as well as under the 8.35 percent medium term notes.

Many of these breaches were cured on May 10, 2004 withdelivery of many of the Required Documents. The remaining breaches were curedby virtue of NUI Utilities' delivery of NUI's annual report, related officers'certificates and other financial information.

Defaults may occur in the near future under the VariableBonds, the 5.25 percent bonds and the 8.35 percent medium term notes if NUIUtilities does not provide unaudited financial statements for NUI for thefiscal quarter ended March 31, 2004 and related documentation and officers'certificates. Defaults may occur in the near future under the 5.70 percentbonds if NUI Utilities does not provide audited financial statements for NUIUtilities for the fiscal year ended September 30, 2003 and unaudited financialstatements for NUI Utilities for the fiscal quarters ended December 31, 2003and March 31, 2004. To date, NUI has obtained all necessary waivers andextended the respective deadlines for delivery of all information required pursuant to suchbond facilities toJune 30, 2004.  NUI and NUI Utilitiesare working diligently to deliver the required documentation within thistimeframe.

Thecompany's long-term debt maturities for each of the next five fiscal years areas follows: zero in 2004; $50 million in 2005; $5 million in 2006; zero in2007; and $15 million in 2008.

*DividendRestrictions Under Long-term Debt Agreements.*Thepayment of cash dividends by NUI Utilities to NUI is restricted pursuant to the SBPA to an amount based, in part,on the earned surplus of NUI Utilities, which had been reduced by the NJBPUSettlement.  On May 19, 2004, NUI Utilities and The Bank ofNew York amended the SBPA. The amendment eliminates the effect of theNJBPU Settlement, as well as the estimated refunds to customers in Florida andcertain other related costs, on the earned surplus of NUI Utilities,thereby allowing for the payment of dividends by NUI Utilities to NUI atthis time.  Inaddition, under the amendment to NUI Utilities' credit facility dated as of May10, 2004, NUI Utilities is prohibited from paying dividends exceeding $35million in the aggregate while the credit facility isoutstanding. 

**12.  Commitments and Contingencies**

*Focused Audit.*On March 20, 2003, the New Jersey Board of Public Utilities (NJBPU) announcedthe initiation of a focused audit of NUI Corporation, NUI Utilities, andElizabethtown Gas.  The NJBPU hadexpressed the belief that recent downgrades of the senior unsecured debt of NUIand NUI Utilities, as well as negative credit rating agency comments, andconcerns raised during a recent competitive services audit, substantiated theneed for an in-depth review of the financial practices of the company and itssubsidiaries.  On June 4, 2003, theNJBPU chose The Liberty Consulting Group to perform the audit.  The focused audit covered the followingareas: corporate governance; strategic planning; financial structure andinteraction; accounting and property records; executive compensation andaffiliate transactions.  An interimaudit report was released by the NJBPU on December 17, 2003 and the final auditreport was issued on March 1, 2004 and was accepted and released by the NJBPUon March 17, 2004, at the NJBPU's public agenda meeting.  Among other things, the report criticizesNUI for the energy management practices on behalf of NUI Utilities, itsfinancing and cash pooling arrangements, the impact of unprofitable non-utilityoperations on NUI Utilities, the method used to allocate shared services costsamong its business units, and the propriety of rates established in the 2002Elizabethtown base rate case. NUI filed responsive comments on March 26,2004 and a settlement was reached with the NJBPU on April 14, 2004. OnApril 26, 2004, the NJBPU issued a Final Order accepting and adopting thesettlement agreement. The company recorded a pre-tax charge of $30 million infiscal 2003 to reflect the final settlement of the focused audit. Of thisamount, $28 million was recorded as the amount to be refunded to customers inNew Jersey. The company has also agreed to pay interest at 7.95 percentannually on the unpaid balance. 

In addition, the company established a pre-tax reserveof $2.6 million in fiscal 2003 in anticipation of providing refunds tocustomers in Florida as a result of transactions by the company's NUI EnergyBrokers subsidiary.

*Default under Credit Agreements.*In February 2003, NUI and NUI Utilities eachreplaced their respective previous credit agreements with new revolvingagreements. In November 2003, each of NUI and NUI Utilities refinanced theFebruary 2003 facilities and entered into credit agreements for new 364-daycredit facilities.  NUI's delay indelivering audited financial statements for fiscal 2003 resulted in defaultsunder such credit agreements. On January 26, 2004, NUI and NUI Utilities bothobtained waivers of such defaults from the lenders under their respectivecredit agreements and (i) received an extension to March 1, 2004 of thedelivery date for NUI's audited financial statements for fiscal 2003 andunaudited financial statements for the first fiscal quarter of 2004 and (ii)amended the credit agreements to clarify certain technical provisions.  Subsequently, on March 12, 2004, NUI and NUIUtilities obtained a limited waiver from the lenders under their respectivecredit agreements further waiving the defaults described above.  These credit facilities were amended on May10, 2004 to further extend these deadlines.

The delay in deliveringcertain officers' certificates, SEC filings and quarterly financial informationthroughout the fiscal year 2003, as well as audited fiscal 2003 financialstatements and related documents (Required Documents), resulted in breachesunder certain loan agreements, trust indentures, and related documents underlyingNUI Utilities' gas revenue bond facilities, namely (i) $20 million of 6.40percent bonds due October 1, 2024, (ii) $46.5 million of 6.35 percent bonds dueOctober 1, 2022, (iii) the Variable Bonds, (iv) $54.6 million of 5.70 percentbonds due June 1, 2032 and (v) $40 million of 5.25 percent bonds due November1, 2033, as well as under the 8.35 percent medium term notes.

Many of these breaches werecured on May 10, 2004 with delivery of many of the Required Documents.  The remaining breaches were cured by virtueof NUI Utilities' delivery of the company's annual report dated September 30,2003 on Form 10-K, related officers' certificates and other financialinformation.

Defaults may occur in the nearfuture under the Variable Bonds, the 5.25 percent bonds and the 8.35 percentmedium term notes if NUI Utilities does not provide unaudited financialstatements for NUI for the fiscal quarter ended March 31, 2004, and relateddocumentation and officers' certificates. Defaults may occur in the near futureunder the 5.70 percent bonds if NUI Utilities does not provide auditedfinancial statements for NUI Utilities for the fiscal year ended September 30,2003 and unaudited financial statements for NUI Utilities for the fiscalquarters ended December 31, 2003 and March 31, 2004. To date, NUI hasobtained all necessary waivers and extended the respective deadlines fordelivery of all information required pursuant to such bond facilities to June 30, 2004.  NUI and NUIUtilities are working diligently to deliver the required documentation withinthis timeframe.

*Commitments.*On April 30, 2001, the company announced anagreement with a unit of Duke Energy to develop a natural gas storage facilityin Saltville, Virginia. NUISS and Duke Energy Saltville Gas Storage, LLC (DESGS)have created a limited liability company, SSLLC. After receiving the requiredregulatory approval in February 2003, VGC contributed certain storage assetsvalued at approximately $16.3 million to SSLLC. DESGS has contributed an equalamount (approximately $16.3 million) of capital required to expand the facilityfor its intended purpose. To the extent SSLLC determines it needs additionalfunding (which decision can only be made jointly by the company and DESGS), thecompany and DESGS are obligated to fund the development of SSLLC equally.

As of December 31, 2003, thecompany has loaned SSLLC an aggregate of approximately $24.8 million toward thedevelopment of the Saltville storage facility. The company currently estimatesits share of funding to be zero in fiscal 2004, and $2.5 million in fiscal2005. Subsequent years are expected to be funded with internally generated cashflows of the joint venture.

In conjunction with the development of the Saltvillefacility, during December 2002, the company entered into a twenty-yearagreement with Duke Energy Gas Transmission (DEGT) for the firm transportationof natural gas on the planned Patriot pipeline. Upon completion of the pipelinein November 2003, the company became obligated to pay annual demand charges ofapproximately $4.7 million over the life of the transportation agreement.

In August 2003, the company entered into a twenty-yearagreement with SSLLC for the firm storage of natural gas. Upon completion ofDEGT's Patriot pipeline in November 2003, the company became obligated to payannual demand charges of $0.3 million over the life of the storage agreement.

Regarding thetransportation and storage agreements discussed above, the company is notutilizing the Patriot pipeline in its operations at this time since it hasdiscontinued its trading operations. However, the company is currently evaluating how to obtain the maximumbenefit from its rights under these agreements.

*Guarantees*. Thecompany has guarantees of approximately $193.9 million to 44 counterparties asof December 31, 2003, in support of NUI Energy Brokers' trading activities.These guarantees are necessary to facilitate trading with a broad group ofpotential counterparties, although typically NUI Energy Brokers uses only afraction of the issued guarantees at any given time. Further, since NUI EnergyBrokers has netting agreements in place with most of its counterparties, theguarantees would apply only to net balances owed to its respectivecounterparties with which it has such agreements. As of December 31, 2003, theamount of purchases covered by outstanding guarantees was approximately $2.5million. 

*EnvironmentalMatters.*The company owns, orpreviously owned, certain properties located in the states of New Jersey, NorthCarolina, South Carolina, Pennsylvania, New York and Maryland on whichmanufactured gas plants (MGP) were operated by the company or by other partiesin the past. In New Jersey, the company is currently conducting remedialactivities at such properties with oversight from the New Jersey Department ofEnvironmental Protection and anticipates initiation of such activities in thestate of North Carolina within the next five years.  Although the actual total cost of future environmentalinvestigation and remediation efforts cannot be reasonably estimated, thecompany has recorded on an undiscounted basis a total reserve of approximately$33.9 million which the company believes represents the probable minimum amountthe company may expend over the next 30 years. Of this reserve, approximately$30.1 million relates to remediation of the New Jersey MGP properties andapproximately $3.8 million relates to remediation of the MGP properties locatedoutside the state of New Jersey. 

The company's prudently incurred remediation costs for theNew Jersey MGP properties have been authorized by the NJBPU to be recoverablein rates through its MGP Remediation Adjustment Clause. As a result, thecompany has recorded a regulatory asset of approximately $35.8million,inclusive of interest, as of December 31, 2003, reflecting the future recoveryof both incurred costs and future remediation liabilities in the state of NewJersey. The company has also been successful in recovering a portion of MGPremediation costs incurred in New Jersey from the company's insurance carriersand continues to pursue additional recovery. The company sold the net assets ofits North Carolina Gas utility division on September 30, 2002 and its ValleyCities Gas and Waverly Gas utility divisions on November 7, 2002. Included inthese asset sales were the environmental obligations for two of the company'sMGP sites: one in North Carolina and one in Pennsylvania. With respect to costsassociated with the MGP properties located outside New Jersey, the company iscurrently pursuing or intends to pursue recovery from ratepayers, former ownersand operators, and/or insurance carriers. Although the company has beensuccessful in recovering a portion of the remediation costs incurred outside ofNew Jersey from the company's insurance carriers, the company is not able toexpress a belief as to the success of additional recovery efforts. The companyis working with the regulatory agencies to prudently manage its MGP costs so asto mitigate the impact of such costs on both ratepayers and shareholders.

*Gas Procurement Contracts.*Certain of the company's long-term contracts for the supply, storage anddelivery of natural gas include fixed charges that amount to approximately$59.5 million for the next twelve-month period (this amount includes thecompany's obligations under two twenty-year agreements to pay annual demandcharges for the firm transportation and storage of natural gas, discussedabove). The company currently recovers, and expects to continue to recover, themajority of such fixed charges through its purchased gas adjustment clauses.The company also is committed to purchase from a single supplier, atmarket-related prices, minimum quantities of gas that, in the aggregate, areapproximately 2.1 billion cubic feet per year. In the event that the companydoes not purchase the minimum quantity in a given year, the company has untilthe next contract year to make up the difference or risk reduction in thecontracted daily delivery quantity. The company expects that minimum demand onits systems for the duration of these contracts will continue to exceed theseminimum purchase obligations.

*Legal Matters. *BetweenOctober 28, 2002 and December 20, 2002, five substantially similar civilactions were commenced in the United States District Court for the District ofNew Jersey, in which the plaintiffs allege that the company and two of itsformer presidents violated federal securities laws by issuing false statementsand failing to disclose information regarding the company's financial conditionand current and future financial prospects in its earnings statements, pressreleases, and in statements to analysts and others.  By orders dated December 19, 2002, January 22, 2003, and February3, 2003, the five actions were consolidated into one action captioned In reNUI Securities Litigation. The five consolidated lawsuits include: (1) anaction captioned Jack Klebanow, on behalf of himself and all otherssimilarly situated v. NUI Corporation and John Kean, Jr., filed in theUnited States District Court for the District of New Jersey on October 28,2002;  (2) an action captioned GiselaFriedman, on behalf of herself and all others similarly situated v. NUICorporation and John Kean, Jr., filed in the United States District Courtfor the District of New Jersey on October 31, 2002; (3) an action captioned ThomasDavis, on behalf of himself and all others similarly situated v. NUICorporation and John Kean, Jr., filed in the United States District Courtfor the District of New Jersey on November 6, 2002; (4) an action captioned MarvinE. Russell, on behalf of himself and all others similarly situated v. NUICorporation and John Kean, Jr., filed in the United States District Courtfor the District of New Jersey on December 10, 2002; and (5) an actioncaptioned Phyllis Waltzer, on behalf of herself and all others similarlysituated v. NUI Corporation and John Kean, Jr., filed in the United StatesDistrict Court for the District of New Jersey on December 20, 2002. By orderdated February 3, 2003, a Lead Plaintiff, Lead Counsel and Liaison Counsel wereappointed in the consolidated action. By stipulation of the parties, an AmendedConsolidated Class Action Complaint was filed on May 12, 2003, andsubsequently plaintiffs were granted leave to file a Second AmendedConsolidated Class Action Complaint, which was filed on July 17, 2003. TheSecond Amended Complaint, brought on behalf of a putative class of purchasersof NUI's common stock between November 8, 2001 and October 17, 2002, assertsclaims under Section 10(b), including Rule 10b-5 promulgated thereunder, andSection 20(a) of the Exchange Act against the company, and two of its formerpresidents. Specifically, the Second Amended Complaint alleges that thedefendants (i) failed to disclose material facts that would impair thecompany's current and future earnings, including (a) the allegedly accurateamount and explanation of the company's bad debts, (b) a purportedly illegalpractice by the company in "re-terminating" intrastate calls, (c) allegedaccounting improprieties in connection with purportedly unearned revenue, and(d) allegedly inaccurate earnings per share information, and (ii) inflated thecompany's earnings materially by (a) allegedly making misleading statementsconcerning, and failing to properly record, bad debt costs, (b) allegedlyattributing the company's rising costs to incorrect and immaterial factors, and(c) purportedly pursuing illegal telecommunications billing practices. TheSecond Amended Complaint seeks unspecified monetary damages on behalf of theclass, including costs and attorneys fees. On October 14, 2003, defendantsmoved to dismiss the Second Amended Complaint under, inter alia, the PrivateSecurities Litigation Reform Act. Opposition papers to the motion to dismiss were served on December 19,2003, and reply papers were filed on February 23, 2004.  The motion was heard on March 15, 2004.By decision and order dated April 23, 2004, the district court granted in part anddenied in part defendants' motion to dismiss. The district court dismissed the Section 10(b) claims against theindividual defendants and dismissed all claims against the company concerningthe alleged "reterminating" scheme. The district court denied the motion todismiss with respect to certain allegations that the company made misleadingmisstatements concerning the accurate level of bad debt and earnings and deniedthe motion to dismiss the Section 20(a) claims against the individualdefendants. Defendants filed an Answer to the Second Amended Complaint on May10, 2004. No discovery has occurred yet. Although the company intends to vigorously defend these lawsuits, it isnot possible at this time to determine a likely outcome.

FlintEnergy Construction Co., Inc. sued Virginia Gas Pipeline Company (VGPC) on acontract claim for amounts billed to VGPC for work performed by Flint Energy asgeneral contractor on the extension of VGPC's P-25 pipeline. VGPC iscounter-suing Flint for breach of contract. The case has moved to thedeposition phase and is expected to be brought to trial in June of 2004. Flintoriginally billed VGPC $2.2 million, which represents the disputed amount.  At this time, the company is unable todetermine the likely outcome.

Plaintiffs,Specific Cruise Systems, Inc. and Frigette, Inc. d/b/a SCS/Frigette, Inc.,filed a Petition in Texas state court against TIC, one of TIC's formeremployees, Sherry Walton, and Nortel Networks, Inc. on November 5, 2002 foralleged damages relating to lost profits and replacement services arising outof their claims for breach of contract, fraudulent inducement, and breach ofwarranty, as well as for an offset/credit in connection with the sale by TIC oftelephone equipment. TIC denies that it made such representations and isrelying upon the contracts entered into between the parties.  TIC seeks payment for the balance duerelating to the sale in the amount of $83,331.00.  If the provisions of the contract are not enforceable, theplaintiffs may be entitled to lost profits resulting from the alleged delay inthe installation of the system and the alleged interference with their businessresulting from defects in the system. If the contract is deemed enforceable, a provision in the contractproviding a limitation on liability may preclude recovery by plaintiff oncertain issues. On June 11, 2003, TIC filed a Motion to Compel Arbitration; nodecision has been rendered on the motion. Discovery is continuing.  At this time, the company is unable todetermine the likelihood of an outcome.

The plaintiffs, James Greiff and TIC Enterprises,Inc., sued the company and three other company related entities, NUI SalesManagement, Inc. (NUI Sales), NUI Capital Corp. and TIC, for breach of contractand fraud arising out of the company's purchase of Greiff's interest in TICEnterprises, LLC. The plaintiffs allege they are entitled to payment on a $3million promissory note and have made claims arising from the defendants'alleged breach of a 2001 purchase agreement for $22 million in punitive damagesfor the defendants' alleged fraud and $3 million plus interest and punitivedamages for the defendants' alleged fraudulent transfers. The plaintiffs havealso alleged a tortious interference claim for $3 million, which the courtpreviously dismissed. The company and the remaining defendants are vigorouslydefending the lawsuit and deny any liability to the plaintiffs. NUI Sales anddefendant TIC have a four-count counterclaim against both plaintiffs for morethan $3 million.  They are for: (1)breach of the 2001 Purchase Agreement; (2) breach of the 1997 Amended andRestated Limited Liability Company Agreement; (3) fraud in the inducement; and(4) unjust enrichment. This case, originally filed in the Northern District ofGeorgia, was recently transferred on defendants' motion to the District ofDelaware. The parties are in the midst of discovery, and have exchanged writtenresponses and objections to discovery requests along with numerous documents.The parties have also begun taking depositions of the parties and fact witnesses.On May 2, 2004, NUI proposed a settlement to the plaintiffs in which thecompany agreed to pay the plaintiffs $1.4 million to completely satisfy NUI'sobligation under the note, as well as to resolve all other claims that thecompany and the plaintiffs had brought against each other. On May 5, 2004, NUIreceived the plaintiffs' written acceptance of the company's settlementproposal, and the plaintiffs requested that NUI prepare the appropriatesettlement documents for review. As a result, the company reduced the amountpayable under the note from $3.0 million to $1.4 million on the September 30,2003 Consolidated Balance Sheet, and recorded a gain of $1.6 million in otherincome on the Consolidated Statement of Income for fiscal 2003.

*Other*. OnNovember 19, 2003, the company announced that in connection with the focusedaudit of NUI Corporation, NUI Utilities, and Elizabethtown Gas initiated by theNJBPU, certain questionable transactions within NUI Energy Brokers wereidentified. The Attorney General of the State of New Jersey also is conductinga criminal investigation relating to NUI Energy Brokers. In connection withthis investigation, NUI received subpoenas issued by the New Jersey StateAttorney General's Office. NUI is cooperating fully with the New JerseyAttorney General's Office.  

In November 2003, the SEC advised the company that itis conducting an informal inquiry with respect to the investigation of NUIEnergy Brokers by the New Jersey Attorney General's Office. On March 1, 2004,the SEC requested the company to voluntarily produce certain documents infurtherance of its informal inquiry. In particular, the SEC is requestinginformation regarding allegations of inappropriate conduct by employees of NUIEnergy Brokers. NUI is fully cooperating with the SEC. At this point, thecompany cannot predict whether or not the SEC will initiate a formalinvestigation into this matter.  

The Audit Committee of the Board of Directors of NUIhad previously retained independent counsel to conduct an internalinvestigation into these transactions at NUI Energy Brokers. 

Thecompany is involved in various other claims and litigation incidental to itsbusiness. In the opinion of management, none of these other claims andlitigation will have a material adverse effect on the company's results ofoperations or its financial condition.

**13. New Accounting Standards**

In June 2002, the Emerging Issues Task Force (EITF)issued EITF 02-03, "Issues Involved in Accounting for Contracts Under Issue 98-10," (EITF 02-03). The purpose of EITF 02-03is to address certain issues related to energy trading activities, including(a) gross versus net presentation in the income statement, (b) whether theinitial fair value of an energy trading contract can be other than the price atwhich it was exchanged (i.e., whether there is any profit at inception), and(c) additional disclosure requirements for energy trading activities. OnOctober 25, 2002, the EITF reached a consensus on EITF 02-03 that changes theaccounting for certain energy contracts. The provisions of EITF 02-03 becameeffective at certain times, and the provisions that were adopted during fiscal2003 are as follows:

-       The EITF rescinded EITF Issue 98-10, "Accounting for ContractsInvolved in Energy Trading and Risk Management Activities" (EITF 98-10), whichwas the authoritative accounting followed by NUI Energy Brokers and NUI Energy.Pursuant to EITF 98-10, an entity accounted for energy contracts at fair valuewith changes in fair value recognized in earnings if the energy contract wasdetermined to be part of an entity's trading activities. In contrast to EITF98-10, EITF 02-03 prohibits mark-to-market accounting for energy-relatedcontracts that do not meet the definition of a derivative under SFAS 133. Any contractsnot meeting the definition of a derivative under SFAS 133 must be accounted foron the accrual basis. 

-       The consensus applied immediately to non-derivativeenergy-related contracts executed after October 25, 2002.

-       The consensus applies to existing non-derivativeenergy-related contracts for fiscal periods beginning after December 15, 2002and the cumulative effect of a change in accounting principle must be reportedupon initial application.

-       The EITF indicated that an entity should not record unrealizedgains or losses at the inception of derivative contracts unless the fair valueof each contract in its entirety is evidenced by quoted market prices or othercurrent market transactions for contracts with similar terms andcounterparties.

The company continued to mark all existingenergy-related contracts to market based on EITF 98-10 during the first quarterof fiscal 2003 prior to applying the new consensus. However, the consensusrequired NUI to record a cumulative effect adjustment to convert any contractsthat did not meet the definition of a derivative under SFAS 133 to accrualaccounting effective January 1, 2003. 

The primary contracts affected as a result ofapplying the new consensus are the full requirements natural gas salescontracts associated with NUI Energy and a large natural gas storage contractwithin NUI Energy Brokers. However, the majority of NUI Energy Brokers'contracts are considered derivatives under SFAS 133 and are marked-to-marketthrough earnings. The cumulative effect adjustment to convert the contractsthat did not meet the definition of a derivative under SFAS 133 to accrualaccounting effective on January 1, 2003 was a loss of approximately $9.9million before taxes.

In January 2003, the FASBissued FASB Interpretation No. 46, "Consolidation of Variable InterestEntities" (FIN 46) and in December 2003, issued a revised FIN 46R. Theobjective of both FIN 46 and FIN 46R is to improve financial reporting bycompanies involved with variable interest entities. A variable interest entityis a corporation, partnership, trust or any other legal structure used forbusiness purposes that either (a) does not have equity investors with votingrights, or (b) has equity investors that do not provide sufficient financialresources for the entity to support its activities. Historically, entitiesgenerally were not consolidated unless the entity was controlled through votinginterests. FIN 46 changes that, by requiring a variable interest entity to beconsolidated by a company if that company is subject to a majority of the riskof loss from the variable interest entity's activities or entitled to receive amajority of the entity's residual returns or both. A company that consolidatesa variable interest entity is called the "primary beneficiary" of that entity.FIN 46 also requires disclosures about variable interest entities that acompany is not required to consolidate but in which it has a significantvariable interest. The consolidation requirements of FIN 46 apply immediately tovariable interest entities created after January 31, 2003. The consolidationrequirements of FIN 46R apply to existing entities no later than the end of thefirst reporting period after March 15, 2004. Also, certain disclosurerequirements apply to all financial statements issued after January 31, 2003,regardless of when the variable interest entity was established. The companyhas determined that it does not meet the consolidation requirements withrespect to its joint venture with Duke Energy (see Note 12). In addition, thecompany has not created or obtained any variable interest entities afterJanuary 31, 2003. Therefore, the adoption of the consolidation requirements ofFIN 46R in March 2004 did not have an impact on the company's financialposition or results of operations.

**14.   Subsequent Events**

InJanuary 2004, two executive officers ended their employment with the company.A. Mark Abramovic served as President of the company since September 26, 2003,until his retirement in January 2004. Previously he served as Senior Vice President and Chief FinancialOfficer since September 1997 and as Chief Operating Officer since May 1998.Until his resignation in January 2004, James R. Van Horn served as ChiefAdministrative Officer since May 1998 and as General Counsel and Secretarysince 1995. With respect to the departure of these two executives, the companyrecorded a $2.1 million charge in operations and maintenance expense in thesecond quarter of fiscal 2004 primarily relating to severance costs. 

**15.   Business Segment Information**

Thecompany's operations are organized and managed as three primary segments:Distribution Services, Energy Asset Management, and Retail and BusinessServices. The Distribution Services segment currently distributes natural gasin three states through the company's regulated utility operations, and engagesin appliance leasing, repair and maintenance operations, and off-system gassales. The Energy Asset Management segment reflects the operations of NUIEnergy Brokers and all of the VGC subsidiaries. The Retail and BusinessServices segment reflects the operations of the company's UBS operations andNUI Energy subsidiary.  The company alsohas corporate operations that do not generate any revenues. 

Duringfiscal 2003, the company realigned its reportable business segments asfollows:  the appliance servicebusinesses in New Jersey and Florida, previously reported within the Retail andBusiness Services segment, are now included within the Distribution Servicessegment; off-system sales made by NUI Energy Brokers on behalf of the utilityoperations, previously reported within the Energy Asset Management segment, arenow included within the Distribution Services segment; NUI Telecom, previouslyreported within the Retail and Business Services segment, was being held forsale at September 30, 2003, and is now reported within discontinued operations;the operations of TIC are being wound down by the company and have also beenreported as discontinued operations; and the operating results of NUIEnvironmental, previously reported within discontinued operations, are nowincluded as part of the Retail and Business Services segment.  The change for NUI Environmental, which wassold in September 2003, was due to the company's potential future involvementin this business under certain ancillary agreements entered into by the companyon the date of the sale.

The following table providesinformation concerning the major segments of the company for the three-monthperiods ended December 31, 2003 and 2002. Revenues include intersegment salesto affiliated entities, which are eliminated in consolidation.  All of the company's operations are in theUnited States and therefore do not need separate disclosure by geographicregion. Certain reclassifications have been made to prior year segment data toconform with the current year's presentation.

**                  Three Months Ended                           December 31,**
**(Dollars in thousands)**

**2003**

**2002**

**Revenues:**

** **Distribution Services

$161,538

$166,186

** **Energy Asset Management

3,803

4,239

** **Retail and Business Services

2,334

2,859

  Intersegment Revenues

     (1,172)

     (1,467)

Total  Revenues

$166,503

$171,817

**Operating Margins:**

  Distribution Services

$53,612

$50,745

  Energy  Asset Management

3,451

3,945

  Retail  and Business Services

1,152

1,673

   Intersegment Operating Margins

      (474)

      (565)

Total  Operating Margins

$57,741

$55,798

**Pre-Tax Operating Income:**

** **Distribution Services

$16,522

$18,187

** **Energy Asset Management

53

827

  Retail and Business Services

      (14)

      (994)

Total  Pre-Tax Operating Income

$16,561

$18,020

**Pre-Tax Income (Loss) from   Continuing Operations:**

** **Distribution Services

$12,291

$14,926

** **Energy Asset Management

(309)

585

  Retail and Business Services

        (53)

   (1,148)

Total  Pre-Tax Income (Loss) from   Continuing Operations 

  $11,929

  $14,363

A reconciliation of the company's segment pre-taxoperating income and income (loss) from continuing operations, to amountsreported on the consolidated financial statements, is as follows:
**                Three Months Ended                           December 31,**
**(Dollars in thousands)**

**2003**

**2002**
 
**Segment Pre-Tax Operating Income**

$16,561

$18,020

  Non-segment pre-tax operating income  (loss)

 (10,572)

      (790)

Pre-Tax  Operating Income

$   5,989

$17,230

**Segment Pre-Tax Income (Loss) from   Continuing Operations**

  $ 11,929

  $14,363

  Non-segment pre-tax income (loss) from     continuing operations

     (22,972)

      (2,064)

Pre-Tax  Income (Loss) from   Continuing Operations 

  $(11,043)

  $12,299

The increase in non-segment pre-tax operating loss for the three monthsended December 31, 2003, as compared to the same period in fiscal 2003, isprimarily due to increased corporate expenses for outside professionalservices, bank fees and restructuring charges (see Note 7), which costs havenot been allocated to the company's various business units.  The increase in non-segment pre-tax lossfrom continuing operations for the three months ended December 31, 2003, ascompared to the same period in fiscal 2003, is primarily due these samefactors, plus a pre-tax loss of approximately $9.9 million recorded for theearly retirement of debt (see Note 10).

**16.   Restatement**

This Amendment No. 1 onForm 10-Q/A to the company's Form 10-Q for the fiscal quarter ended December31, 2003, as originally filed on May 20, 2004, is being filed to revise theConsolidated Balance Sheet to properly reflect certain prepayments related togas supply made at the end of the first fiscal quarter which should have beenreflected on the Consolidated Balance Sheet as a credit (reduction) to cash anda debit to prepayments.  There is nochange in our total assets, working capital or net income as of and for thefiscal quarter ended December 31, 2003 as a result of this restatement.

Accordingly, the company'sForm 10-Q for the fiscal quarter ended December 31, 2003 has been revised, as follows:

--     The Consolidated Balance Sheet as of December 31, 2003 has beenrestated such that Cash and cash equivalents has been decreased by $6.1 millionto $54.1 million, and Prepayments and other has been increased by $6.1 millionto $65.7 million. 

--     The company's Consolidated Statement of Cash Flows for the threemonths ended December 31, 2003 has been restated to reflect the $6.1 million ofprepayments, which reduced our cash flows from operating activities by thatamount.

As discussed in Note 2, the company has experiencedand expects to continue experiencing significant liquidity problems.  However, the $6.1 million of prepayments forgas supply has no impact on statements the company previously made in its Form10-Q filed on May 20, 2004 regarding the company's anticipated cash flows, asthe prepayment obligations were already factored into the company's anticipatedcash flows.
**Item 2.  Management's Discussionand Analysis of Financial Condition and Results of Operations**
The followingdiscussion and analysis should be read in conjunction with the unauditedcondensed consolidated financial statements of NUI Corporation includedelsewhere herein and with the company's Annual Report on Form 10-K for thefiscal year ended September 30, 2003.

**Recent Developments**

The company recently has faced a number of challengesand experienced significant events, including:

-       the settlement agreement with the NewJersey Board of Public Utilities (NJBPU) and other regulatory orders issued bythe NJBPU; 

-       the investigations of transactions at NUIEnergy Brokers;

-       new credit facilities at NUI and NUIUtilities;

-       the gas supply contract with CinergyMarketing and Trading, LP (Cinergy);

-       changes in the Boards of Directors of NUIand NUI Utilities and changes in management; 

-       the pursuit of the sale of the company;and

-       the sale of NUI Telecom. 

*Settlement Agreement with the NJBPU*

On April 14, 2004, the company announced that NUI, NUIUtilities and Elizabethtown Gas Company had entered into a settlement agreementwith the NJBPU on all issues related to the focused audit performed by LibertyConsulting Group on behalf of the NJBPU, and on April 26, 2004, the NJBPUissued a Final Order accepting and adopting that settlement agreement.  Pursuant to the settlement agreement, NUIUtilities agreed to refund $28 million plus interest to Elizabethtown Gasratepayers and to pay a $2 million penalty to the State of New Jersey over fiveyears.  The $28 million will be creditedto ratepayers as follows:  $7 million inNUI's fiscal year 2004, $6 million in NUI's fiscal year 2005 and $5 million ineach of NUI's fiscal years 2006, 2007 and 2008.  The $2 million penalty shall be paid in $400,000 annualinstallments in each of NUI's fiscal years 2004 through 2008.  The company has the option to make a balloonpayment of all outstanding amounts due under the terms of the settlementagreement at any time.  In addition,upon the close of a sale of the company, any outstanding balance is required tobe paid in full by the company within a period to be determined by theNJBPU.  The refund and penalty increasedthe company's net after-tax loss for fiscal year 2003 by approximately $18.6million, or $1.16 per share.

In addition to the required monetary refund andpenalty, NUI agreed to file a plan with the NJBPU for implementing the recommendationsof the Liberty report, as modified by the settlement.  The settlement agreement also contains a number of otherprovisions, including, without limitation:

-       Thecompany shall continue to use its existing cost allocation policy until theearlier of the sale of the company or 18 months from the date the settlementagreement was adopted as final;

-       Thecompany and the NJBPU agree that an appropriate target equity percentage forElizabethtown Gas shall be 45 percent and if the average equity percentage forthe preceding twelve months falls below 45 percent, the company shall providethe NJBPU with a written plan on how the 45 percent equity capital will bereinstated;

-       Thecompany agrees to maintain a separate cash management system for NUI Utilitiesand is prohibited from commingling cash of Elizabethtown Gas or of NUIUtilities with the cash of NUI or of non-utilities affiliates of NUI;

-       Thecompany shall provide the NJBPU with various financial statements of NUIUtilities and Elizabethtown Gas;

-       Thepre-approval by the NJBPU is required for various intercompany arrangements andfor certain financing arrangements and certain other transactions that couldimpact the assets or operations of Elizabethtown Gas or NUI Utilities;

-       NUIUtilities shall have different management and a separate Board of Directorsfrom NUI responsible for utility operations although NUI and NUI Utilities mayhave up to three common directors; and

-       Thecompany agrees to settle all receivables and payables for allowed intercompanytransactions on a monthly basis in accordance with a matrix developed by thecompany and the NJBPU.

The terms of the settlement agreement (1) do notprohibit the transfer of cash between NUI Utilities and NUI for the purpose ofthe payment of dividends to NUI or the settlement of monthly intercompanybalances, (2) do not waive or alter the requirements of any existing Order ofthe NJBPU and (3) are not binding on any purchaser of the company, except that,upon closing of the sale, any outstanding refund and penalty balance arerequired to be paid in full by the company within a period of time to bedetermined by the NJBPU.  The company'sagreement to the terms of the settlement is not an acknowledgement of non-compliancewith any law, regulation or NJBPU Order or requirement.  The settlement agreement resolves all issuesidentified in the final Liberty audit report without acknowledgement oradmission by the company as to the correctness of any issue or that anyspecific issue forms the basis or any part of the basis for the paymentsdescribed above.  The settlementprovides that no further civil action shall be taken by the NJBPU.  The NJBPU retains the authority to imposeany requirements or conditions on a purchaser upon a petition for approval of asale of the company.  

*Other Regulatory Orders*

On September 16, 2003, the NJBPU, in connection withits approval of a provisional increase in Elizabethtown Gas' Basic Gas SupplyService (BGSS) rate, ordered NUI to provide (1) written assurances that the approvedrevenues would be used solely for Elizabethtown Gas and (2) an acceptable planwhereby NUI and any other subsidiaries would repay Elizabethtown Gas for anymoney owed to it. In addition, NUI and NUI Utilities were ordered to continueto cooperate with the focused audit, participate in weekly meetings to reviewtheir financial integrity and comply with existing NJBPU Orders, and NUIUtilities was ordered to refrain from issuing any special dividends (i.e.,extraordinary dividends not in accordance with the historical practices of theBoard of Directors of NUI Utilities) without the prior approval of the NJBPU.After the September 26, 2003 announcement by NUI of its intention to sell thecompany, the NJBPU issued an Order dated October 30, 2003, ordering NUI to: (1)provide information to the NJBPU concerning its compensation packages; (2)provide assurances that Elizabethtown Gas' immediate and short-term liquidityneeds would be met; (3) provide the NJBPU with all information necessary toassess the sufficiency of funding of NUI's pension and other post-retirementplans; and (4) present a detailed plan and schedule for preparing the companyfor sale, for operating during the sale process and for conducting saleactivities in order to assure the NJBPU that the process of selling NUI wouldbe transparent, independent, and timely. In addition, the NJBPU ordered NUI toprotect the utility employees of Elizabethtown Gas during the sale process,inform the NJBPU of the progress of the 2003 fiscal year-end audit of thecompany's financial statements being conducted by PricewaterhouseCoopers LLP(PwC) and amend its consulting agreement with FTI Consultants. In October 2003,the company employed FTI Consultants to manage its financial operations anddevelop new liquidity forecasts.  

Pending its review of the interim focused auditreport, on December 11, 2003, the NJBPU issued an Order in which NUI Utilitiesand Elizabethtown Gas were directed to cease purchasing gas from NUI EnergyBrokers upon approval of a new gas supply procurement and energy assetmanagement plan, which was to be submitted to the NJBPU by January 2, 2004 forthe NJBPU to approve by January 8, 2004. Further, per the Order, NUI Utilitiesis prohibited from issuing special dividend payments (i.e., extraordinarydividends not in accordance with the historical practices of the Board ofDirectors of NUI Utilities); and Elizabethtown Gas shall not pay any allocatedcosts of any agreements, retainers or arrangements for professional servicesand other expenditures incurred in connection with, or as a result of, thefocused audit and/or financial difficulties of NUI unless approved by theNJBPU. 

In its Order dated January 14, 2004, the NJBPUaccepted the plan submitted by NUI Utilities and Elizabethtown Gas whichtransferred the management of NUI Utilities' and Elizabethtown Gas' gas supplyassets to New Jersey Resources, Inc. (NJRES) through March 31, 2004. The NJBPUfurther directed NUI Utilities to file a procedure with the NJBPU for thecompetitive procurement of gas supply management services for the periodcommencing April 1, 2004 through March 31, 2005. In the event NJRES was notselected to continue to provide services to NUI Utilities as a result of thebid process, the NJBPU directed NUI Utilities to pay an early termination fee. 

NUI Utilities filed a procedure for competitiveprocurement of gas supply management services, which was approved by the NJBPUon February 11, 2004.  NUI Utilitiesinstituted a process for receiving bids for gas supply and capacity managementservices to the company's New Jersey, Florida and Maryland utilitydivisions.  The company requestedbidders to provide bids in one of three ways: (1) on the basis of a fixed payment to the company reflecting the valueof the company's energy assets, (2) on the basis of sharing credits and/ormargins derived from capacity release and off-system sales activities, or (3)on the basis of a fee tied to the volume of capacity in excess of the company'srequirements multiplied by a measure of the market value tied to availablepublished indices.  The company receivedmultiple bids from nine third-party suppliers. As a result of this process, NUI Utilities selected Cinergy to provide afull requirements gas supply contract with least cost dispatch rights.  The contract covers the period from April 1,2004 through March 31, 2005 and provides a fixed payment to NUI Utilities forthe use of NUI Utilities gas and deliverability assets for the twelve monthsended March 31, 2005.  The NJBPU approvedthe selection of Cinergy as the company's gas and capacity management servicesprovider on April 14, 2004.

*Investigations of Transactions at NUI Energy Brokers*

In connection with the focused audit described above,Liberty identified certain questionable transactions involving NUI EnergyBrokers.  The Audit Committee of theBoard of Directors retained independent counsel to conduct an investigation oftransactions involving NUI Energy Brokers. A report of the independent counsel's investigation was provided to thecompany's Audit Committee on April 13, 2004. 

The Attorney General of the State of New Jersey isconducting a criminal investigation relating to NUI Energy Brokers.  In connection with this investigation, NUIreceived subpoenas issued by the New Jersey State Attorney General's Office. Inaddition, the U.S. Securities and Exchange Commission (SEC) has commenced aninformal inquiry relating to NUI Energy Brokers. NUI is fully cooperating withthese investigations.

For a description of the investigations of NUI EnergyBrokers, see Part II ‐ Other Information- Item 1.  Legal Proceedings-Investigations of NUI Energy Brokers.  

*New Credit Facilities at NUI and NUI Utilities*

On November 24, 2003, NUI and NUI Utilities eachentered into a separate credit facility with a syndicate of banks. NUI obtaineda $255 million term loan facility and NUI Utilities obtained a $150 millioncredit facility comprised of a $50 million term loan facility, a $50 millionrevolving credit facility and a $50 million delayed draw term loan facility,which delayed term loan facility may only be used to repay NUI Utilities' 8.35percent medium term notes. Both the NUI and NUI Utilities credit facilitiesexpire on November 22, 2004, and each may be extended for one 364-day term,subject to certain conditions. 

The delayin delivering audited financial statements for fiscal 2003 and unauditedfinancial statements for the fiscal quarter ended December 31, 2003, resulted in events of default underNUI's and NUI Utilities' credit agreements. On January 26, 2004, NUI and NUI Utilities obtained waivers of suchdefaults from the lenders under their respective credit agreements.

Pursuant tothese waivers, the deadline for the delivery of NUI's annual report andfinancial statements for its fiscal quarter ended December 31, 2003 wasextended until March 1, 2004. On March 12, 2004, NUI and NUI Utilities receiveda further waiver of such defaults from the lenders and such lenders otherwisedeferred their rights to exercise remedies in respect thereof.  NUI and NUI Utilities subsequently enteredinto amendments on May 10, 2004 to their respective credit agreementswhich:

 (i)           extendedthe delivery date for the aforementioned financial statements (as well as forthe financial statements for the fiscal quarter ended March 31, 2004) untilJune 15, 2004, 

(ii)           consented to the NJBPU Settlement, 

(iii)          modified financial covenants containedin the credit agreements to take into account the NJBPU Settlement and therecent and expected future performance of the company, 

(iv)          permitted the acquisition by NUIUtilities of approximately $350,000 worth of gas pipeline, 

(v)           regarding the payment of dividends byNUI Utilities to NUI, provided for a $35 million limit on dividend payments andeliminated a provision limiting such dividend payments to the aggregate maximumof NUI Utilities' retained earnings,

(vi)          added a condition which requires NUI tomaintain a maximum leverage ratio of no more than 0.60x in order to paydividends, and

(vii)         increased the interest rate on NUIUtilities' delayed draw term loan (if drawn) by one percent until a purchaseagreement is executed to sell NUI or NUI Utilities to an unaffiliated thirdparty.

For a description of NUI's and NUI Utilities' creditagreements, including the amendment referred to above and other debtinstruments and defaults thereunder, see Liquidity and Capital Resources.

*Gas Supply Contract with Cinergy*

NUI Utilities has selected Cinergy to provide a fullrequirements gas supply contract with least-cost dispatch rights.  The contract covers the period from April 1,2004 through March 31, 2005. The gas supply contract with Cinergy requires NUIUtilities to prepay, in varying amounts, for its gas requirements on a monthlybasis over the contract period. If NUI Utilities regains investment graderatings, the parties will negotiate other mutually agreeable payment termsbased on the improved creditworthiness of NUI Utilities.  Cinergy will pay NUI Utilities a fixedamount for the use of NUI Utilities' gas and deliverability assets for thetwelve months ended March 31, 2005, which is in lieu of NUI Utilities'opportunity to earn margins on off-system sales transactions.  Regarding the fixed amount that NUIUtilities will receive from Cinergy, approximately 80 percent will benefitratepayers and be credited to the over/under recovery of gas costs, and 20percent will be retained by NUI Utilities and reflected as an increase inoperating margins on the Consolidated Statements of Income.

For a description of the gas supply contract withCinergy, see Liquidity and Capital Resources.

*Changes in Boards of Directors of NUI and NUI Utilitiesand Changes in Management*

*NUI*

On January 28, 2004, the Board of Directors of NUIannounced that it had appointed Craig G. Matthews as the President and ChiefExecutive Officer of NUI and as a member of its Board of Directors and that ithad appointed Steven D. Overly as the Vice President, General Counsel andSecretary of NUI. Mr. Matthews replaced A. Mark Abramovic, who retired and whohad previously been appointed President of NUI after John Kean, Jr. steppeddown in September 2003.  Mr. Overlyreplaced James R. Van Horn, the former Chief Administrative Officer, GeneralCounsel and Secretary of NUI. In addition, on February 24, 2004, Robert P.Kenney was appointed to the Board of Directors of NUI.  James J. Forese was appointed Chairman ofthe Board of Directors of NUI on April 1, 2004, replacing John Kean, whoremains as a director of NUI until his retirement later in 2004.  

In October 2003, NUI announced the appointment of DanScouler as Chief Financial Officer on an interim basis.  Mr. Scouler replaced Mr. Abramovic as ChiefFinancial Officer upon Mr. Abramovic's appointment in September 2003 asPresident of NUI. Mr. Scouler is the managing member of Scouler AndrewsInternational, LLC and was previously a Senior Managing Director of FTIConsultants, which the company employed in October 2003 to manage its financialoperations and develop new liquidity forecasts.

*NUI Utilities*

In October 2003, NUI Utilities expanded its existingBoard of Directors to include Robert P. Kenney, Barbara Harding, DuncanEllsworth, Stephen Schachman and Victor A. Fortkiewicz. In February 2004, CraigG. Matthews was appointed to the Board of Directors of NUI Utilities. Mr. Keanis the current Chairman of the Board of Directors of NUI Utilities.

In September 2003, VictorFortkiewicz was appointed President of NUI Utilities and Mary Patricia Keefewas appointed Vice President, General Counsel and Secretary of NUI Utilities,replacing James R. Van Horn.  Nancy J.Sobelson was appointed Vice President, Business and Technical Services inNovember 2003. Peter E. Maricondo was named Chief Financial Officer of NUIUtilities in December 2003, and replacing him as Controller of NUI Utilitieswas Donald R. Guarriello. In addition, Elaine A. Kloss was appointed Treasurerof NUI Utilities in January 2004, replacing Charles N. Garber who left thecompany in November 2003. Mr. Abramovic retired as Vice President of NUI Utilitiesin January 2004.

*Sale of the Company*

On September 26, 2003, the company announced that itsBoard of Directors had decided to pursue the sale of the company.  The Board of Directors established a SpecialCommittee to assess the company's options and concluded that pursuing a sale ofthe company was in the best interests of the company's stakeholders.  The decision was made as a result of anumber of factors, including the negative impact on the company arising frommultiple downgrades of the company's credit ratings during fiscal 2003 andadverse business conditions in general.

The company is continuing to work with its financialadvisors on the sale process for the company and hopes to enter into adefinitive agreement with a purchaser during the third quarter of calendar2004.  For a discussion of factors thatcould prevent or delay the sale of the company, see Item 1. Business-RiskFactors-The sale of NUI may not be consummated as discussed in the company's AnnualReport on Form 10-K for the fiscal year ended September 30, 2003.

*The Sale of NUI Telecom *

On December 15, 2003, the company completed the saleof NUI Telecom for approximately $2 million. 

Forward-Looking Statements 

Certain statements contained in this quarterly reportare "forward-looking statements" within the meaning of federal securities laws.The company intends that these statements be covered by the safe harborscreated under those laws.  Thesestatements include, but are not limited to:

-       statementsas to NUI's and NUI Utilities' requirements for additional financing and theability of NUI and NUI Utilities to extend and refinance certain of theiroutstanding indebtedness, including the credit facilities entered into inNovember 2003;

-       statementsas to NUI's and NUI Utilities' expected liquidity needs during fiscal 2004,fiscal 2005 and beyond and statements as to the sources and availability offunds to meet the liquidity needs of NUI and NUI Utilities;

-       statementsas to expected financial condition, performance, prospects and earnings of thecompany; and expected liquidity needs and sources of funds;

-       statementsas to the company's possible settlement with the FPSC;

-       estimates asto the amount to be refunded to customers in Florida as a result of theinvestigation of NUI Energy Brokers;

-       statementsas to expected rates, gas volumes, gas sales, revenues, margins, expenses andoperating results;

-       statementsas to industry forecasts in markets in which the company has operations;

-       statementsas to the amount and sources of funding for future capital expenditures andinvestments of the company, including the company's estimated share of itsfunding commitments to its joint venture with Duke Energy;

-       statementsas to the intended operations of the Saltville facility and the company's otherstorage and pipeline projects, including the timing of the completion andcommencement of operations thereof;

-       statementsas to the timing for seeking regulatory approval for its Florida East-WestPipeline project;

-       statementsas to the company's compliance with environmental laws and regulations andestimations of the materiality of any related costs;

-       statementsas to the safety and reliability of the company's equipment, facilities andoperations;

-       statementsas to the sales process for the company, including with respect to the timeframe for entering into an agreement for the sale of the company;

-       expectationsas to the impact of and anticipated settlement of lawsuits filed against thecompany and the impact of ongoing legal investigations and proceedings,including those described under Part II- Other Information- Item 1. LegalProceedings;

-       statementsas to financial projections;

-       statementsas to the company's plans to pursue recovery of costs associated with theenvironmental remediation of manufactured gas plants from ratepayers, formerowners and operators and/or insurance carriers;

-       statementsas to expected level of demand on the company's systems for natural gas duringthe term of the company's gas procurement contracts;

-       estimates asto the expected future cash flows for hedges of forecasted transactions;

-       statementsas to the ability of NUI and NUI Utilities to pay dividends;

-       statementsas to the company's plans to renew municipal franchises and consents in theterritories it serves;

-       expectationsas to the cost of cash contributions to fund the company's pension plan,including statements as to anticipated rates of return on plan assets;

-       statementsas to whether the company's internal control weaknesses were addressed bymanagement;

-       expectationsas to the amount to be paid for professional fees in fiscal 2004;

-       expectationsas to the expected rate of increase in interest expense as a result of the newcredit facilities entered into by NUI and NUI Utilities;

-       expectationsas to the level of competition that NUI Utilities will face;

-       statementsas to trends;

-       statementsas to whether the company's accrued tax liabilities are adequate and as towhether any settlement related to the examination of NUI's Federal income taxreturns for 2000 and 2001 by the Internal Revenue Service will have a materialimpact on NUI's consolidated statement of operations, financial position orcash flow;

-       statementsas to the amount of the over-recovery balance under City Gas' purchased gasadjustment recovery clause;

-       statementsas to the company's ability to recover fixed charges under its purchased gasadjustment clauses;

-       expectationsas to relations between the company and its employees, including relationshipswith labor unions; and

-       expectationsas to the company's growth, cash flows and capital expenditures.

These forward-looking statements are subject to risks,uncertainties and other factors that could cause actual results to differmaterially from future results expressed or implied by the forward-lookingstatements. Important factors that could cause actual results to differmaterially from anticipated results and outcomes include, but are not limitedto:

-       the abilityof the company to obtain necessary waivers from its lenders;

-       the abilityof the company to obtain additional financing for the winter heating season;

-       the impactand outcome of ongoing investigations and lawsuits;

-       the abilityof the company to prepay its natural gas obligations;

-       the effectsof general economic conditions;

-       increases incompetition in the markets served by the company;

-       the effectsof deregulation of the energy markets, including industry restructuring andunbundling of services;

-       the abilityof the company to implement successfully its strategy, including the plannedsale of the company;

-       the abilityof the company to control operating expenses and to achieve efficiencies in itsoperations;

-       the abilityof the company to continue to modernize its distribution infrastructure asscheduled and budgeted;

-       thewillingness of lenders and suppliers to continue to do business with thecompany;

-       theavailability and price of insurance;

-       theavailability of adequate supplies of natural gas;

-       the abilityof NUI and NUI Utilities to extend their existing credit facilities for anadditional 364 days, and the ability of NUI and NUI Utilities to refinancetheir existing credit facilities upon termination;

-       actionstaken by government regulators, including decisions on base rate increaserequests;

-       actionstaken by credit rating agencies;

-       the abilityof the company to recover environmental remediation costs through rates orinsurance;

-       the abilityof the company to attract and retain key executives and employees;

-       fluctuationsin energy commodity prices;

-       weathervariations and other natural phenomena;

-       acts of waror terrorism; and

-       other factorsdiscussed elsewhere in this quarterly report.

Many of these factors are beyond the company's abilityto control or predict. Given these uncertainties, readers are cautioned not toplace undue reliance on any forward-looking statements, which only speak as ofthe date of this quarterly report. The company does not undertake anyobligation to release publicly any revisions to these forward-looking statementsto reflect events or circumstances after the date of this quarterly report orto reflect the occurrence of unanticipated events, except as may be requiredunder applicable securities laws.

Foran additional discussion of factors that may affect the company's business andresults of operations, see Item 1. Business-Risk Factors inour Annual Report filed on Form 10-K for the fiscal year ended September 30,2003.

**Overview**

The company is a diversifiedenergy company that is primarily engaged in the sale and distribution ofnatural gas through its local utility companies. Its local utility operationsare carried out by NUI Utilities and its operating divisions, as well asthrough a subsidiary of Virginia Gas Company (VGC). NUI Utilities is comprisedof Elizabethtown Gas Company (New Jersey), City Gas Company of Florida, andElkton Gas (Maryland). VGC is also engaged in other activities, such aspipeline operation and natural gas storage. The company's non-regulatedbusinesses are carried out by NUI Capital Corp. and its subsidiaries.  As of April 1, 2004, however, the company'sonly remaining non-regulated subsidiary with substantial operations is UtilityBusiness Services, Inc. (UBS), a billing and customer information systems andservices subsidiary. The company's other non-regulated subsidiaries have eitherbeen sold or are being discontinued. These subsidiaries include NUIEnvironmental, Inc. (NUI Environmental), an environmental project developmentsubsidiary sold in September 2003; NUI Telecom, Inc. (NUI Telecom), atelecommunications services subsidiary sold in December 2003 (see Note 4 of theNotes to the Consolidated Financial Statements); NUI Energy, Inc. (NUI Energy),an energy retailer; NUI Energy Brokers, Inc. (NUI Energy Brokers), a wholesale energytrading and portfolio management subsidiary; OAS Group, Inc. (OAS), thecompany's digital mapping operation, which prior to September 30, 2003, waspart of UBS; and TIC Enterprises, LLC (TIC), a sales outsourcing subsidiarywhich sold wireless and network telephone services. In addition, through NUI Saltville Storage, Inc.(NUISS), the companyis a fifty-percent member of Saltville Gas Storage Company, LLC (SSLLC), a joint venture with aunit of Duke Energy that is developing a natural gas storage facility inSaltville, Virginia.

The company's growth strategy hasnot produced the results the company had anticipated and, as a result, thecompany experienced significant losses and write-offs in its non-utilitybusinesses during fiscal years 2001, 2002 and 2003. 

During fiscal 2003, the company considered severalalternate financing plans aimed at restoring the credit worthiness of thecompany, but none of these plans were deemed viable. The company also sold orannounced its intention to sell most of its non-core businesses in an attemptto raise capital and reduce losses. Finally, on September 26, 2003, thecompany's Board of Directors announced it was pursuing the sale of the company.The company has engaged two investment banks to serve as financial advisors tothe company while it seeks a buyer. 

On November 24, 2003, NUI and NUI Utilities obtained a$405 million 364-day credit facility financing package.  See Liquidity and Capital Resources for afurther discussion of the use of these proceeds and the terms of the creditagreements. As described below in Liquidity and Capital Resources and in Note 2of the Notes to the Consolidated Financial Statements, NUI and NUI Utilitiesare likely to have additional liquidity needs beginning in the 2004-2005 winterseason, as a result of, among other things, the prepayment requirements of NUIUtilities' gas supply, delivery and storage requirements and the NJBPUSettlement. In addition, NUI and NUI Utilities will be required to refinance orextend their respective existing bank indebtedness in November 2004. Even ifNUI and NUI Utilities are able to extend their respective existing bankindebtedness in November 2004, NUI and NUI Utilities would still have torefinance their respective existing bank indebtedness in November 2005. 

**Resultsof Operations**

*Consolidated Reviewof Results of Operations*

Thefollowing discussion is intended to provide an overview of consolidated resultsfor the three-month periods ended December 31, 2003 and 2002. Following thisdiscussion is a more detailed overview of the results for NUI's three businesssegments.

**Net Income (Loss).**  NUIhad a net loss of $8.2 million, or $0.51 per share, for the three months endedDecember 31, 2003, as compared with a net income for the three months endedDecember 31, 2002, of $7.2 million, or $0.45 per share. The decrease innet income during the current three-month period was primarily due to adecrease in income from continuing operations of approximately $14.8 million.This decrease was a result of the following factors (which are more fullydiscussed below under Income (Loss) from Continuing Operations): (1) increasedoperating expenses; (2) a pre-tax loss recorded for the early extinguishment ofdebt of approximately $9.9 million (see Note 10 of the Notes to theConsolidated Financial Statements); (3) increased interest expense; and (4)restructuring charges related to the severance of employees during the threemonths ended December 31, 2003.

**Income (Loss) from Continuing Operations.** Thecompany's loss from continuing operations was $7.4 million, or $0.46 per share,for the three-month period ended December 31, 2003, compared with income fromcontinuing operations of $7.4 million, or $0.46 per share, for the same periodin fiscal 2003. The current three-month period decrease is due in part toincreased operation and maintenance expenses of approximately $11.6 million,which resulted from increased legal and professional fees in conjunction withthe focused audit being conducted by the NJBPU, the investigation beingconducted involving questionable transactions of the company's NUI EnergyBrokers subsidiary, and costs associated with finding a buyer for the company(approximately $7.2 million), and bank fees (approximately $4.2 million). Inaddition, the company recorded a pre-tax loss of approximately $9.9 millionrelated to the early extinguishment of its $60 million senior notes, which wereoriginally due in varying amounts from August 20, 2006 through August 2011.During the three-month period ended December 31, 2003, interest expenseincreased approximately $2.8 million as a result of higher average outstandingindebtedness and higher interest rates. The company also recorded restructuring charges of approximately $1.1million for the severance of employees during the three months ended December31, 2003. These increases were partially offset by increased operating marginsof approximately $1.9 million primarily from base rate increases in the companyDistribution Services segment (see discussion which follows), and reducedincome tax expenses of approximately $8.6 million during the three-months endedDecember 31, 2003, as compared to the same period in fiscal 2003, due to thereductions in income previously discussed.

The company anticipates increasedcosts related to legal, professional, and bank fees while it completes the saleprocess and continues to address its liquidity needs. Increases are alsoanticipated in pension and insurance expenses during the remainder of fiscal2004. The company has created an incentive plan designed to retain keypersonnel through the date the company would be sold. The company expects toaccrue approximately $2.3 million in retention costs during fiscal 2004. Duringthe three-month period ended December 31, 2003, the company has expensedapproximately $0.3 million of this amount, which is included in the increasedlabor and benefit amounts discussed above.

**Discontinued Operations.**  After-taxlosses from discontinued operations for the three-months ended December 31,2003, were $0.8 million, or $0.05 per share, compared to $0.2 million, or $0.01per share during the prior fiscal year. The higher losses during fiscal 2004were due to reduced operating margins of NUI Telecom prior its sale on December15, 2003 (see Note 4 of the Notes to the Consolidated Financial Statements).

*Business Segment Review ofResults of Operations*

The following is a discussion of the company'sbusiness segment results of operations and is presented based on Income fromContinuing Operations before Interest and Taxes. Included in operations andmaintenance expenses for each of NUI's business segments are allocations ofcorporate costs related to shared service functions such as human resources,legal, accounting and information technology, which are allocated based on thecompany's cost allocation policy. In addition, the company's corporateand non-segment operations incurred pre-tax operating expenses of $10.6 million and $0.8 million for the three-monthperiods ended December 31, 2003 and 2002, respectively, which increasedcosts relate to outside professional services, bank fees and restructuringcharges. These costs are not allocated to ourbusiness segment results.

**Distribution Services Segment**

The company's DistributionServices segment distributes natural gas in three states through the company'sregulated natural gas utility operations. These operations are Elizabethtown Gas Company (New Jersey), City GasCompany of Florida, and Elkton Gas (Maryland). This segment also includes thecompany's OAS subsidiary, its appliance leasing, repair, maintenance operationsand service business as well asoff-system sales. Thecompany sold its Valley Cities Gas and Waverly Gas natural gas utilities inNovember 2002 (see Note 5 of the Notes to the Consolidated FinancialStatements). The results for these operations are reflected in DiscontinuedOperations in the Consolidated Financial Statements for the three months endedDecember 31, 2002. The Income from Continuing Operations before Taxes for the segmentis as follows:

*(Dollars in thousands)*

**Three  Months   Ended  December 31,   2003**

**Three  Months   Ended   December 31,   2002**

**Operating Revenues**

  $161,226

  $165,896

Purchased  Gas and Fuel

100,899

108,968

Cost  of Sales & Services

3,001

2,877

Energy  Taxes

3,906

3,494

**Operating Margins**

53,420

50,557

**Operating Expenses:**

 

 

Operations  & Maintenance Expenses

27,044

23,141

Depreciation  & Amortization

7,942

7,673

Taxes  Other than Income

1,912

1,556

**Total Operating Expenses**

36,898

32,370

**Pre-Tax Operating Income**

16,522

18,187

Other Income & (Expense)

471

152

Net Interest Charges

4,702

3,413

**Pre-Tax Income from Continuing Operations**

$12,291

$14,926

 

 

***Operating Revenues****.* Operating revenues includeamounts billed for the cost of purchased gas pursuant to purchased gasadjustment clauses utilized by the company's utility operations.  Such clauses enable the company to passthrough to its utility customers, via periodic adjustments to customers' bills,changes in costs incurred by the company for purchased gas without affectingoperating margins. These purchased gas adjustments are authorized by regulatoryauthorities in the states in which the company operates. Since the company'sutility operations do not earn a profit on the sale of the gas commodity, thecompany's level of regulated operating revenues is not necessarily indicativeof financial performance. 

Distribution Servicesoperating revenues decreased by $4.7 million, or 3 percent, to $161.2 millionduring the three months ended December 31, 2003, as compared to $165.9 millionin the same period in fiscal 2003. The decrease in operating revenues wasprimarily attributable to reduced off-system sales of approximately $19.4million during the current three-month period, as compared to the fiscal 2003period.  This decrease is partially offset by the favorable effect of the base rate increase inNew Jersey and an increase related to the pass-through of higher gas costs tocustomers in New Jersey (approximately $11.3 million).  Also offsetting the decrease is higherdelivered gas volumes in Florida (approximately $1.8 million) and the effect ofa rate increase in Florida (approximately $0.4 million).

***Operating Margins****.*Operating margins increased by $2.8 million, or 6 percent, to $53.4 million forthe three months ended December 31, 2003, as compared to $50.6 million in thesame period in fiscal 2003. As discussed above in operating revenues, theoperating margin impact of the base rate increases in New Jersey and Floridacontributed approximately $3.5 million, and new customers contributedapproximately $0.8 million. This increase was partially offset by approximately$1.1 million, for the adverse impact of weather that was 5 percent warmer thannormal, and 11 percent warmer than the same period in fiscal 2002. The companyhas a weather normalization clause in its New Jersey tariff, which is designedto help stabilize the company's results by increasing amounts charged tocustomers when weather has been warmer than normal and by decreasing amounts chargedwhen weather has been colder than normal. As a result of weather normalizationclauses, operating margins were approximately $0.9 million higher and $0.8million lower in the fiscal 2004 and 2003 periods, respectively, than theyotherwise would have been without such clauses. Operating margins wereapproximately $0.2 million lower due to the reduced volume of off-system salesduring the three months ended December 31, 2003, as compared to the same periodin fiscal 2003. Operating margins for OAS and the appliance operationsdecreased approximately $0.2 million in total, as a result of reduced customerbillings for the current three-month period, as compared to same period infiscal 2003.

With the exception of demandcaused by changes in weather, the company does not anticipate any significantchange in the economic outlook for natural gas sales in this segment for theremainder of fiscal 2004. 

***Operating Expenses.*** Operations and maintenanceexpenses increased by approximately $3.9 million, or 17 percent, to $27.0million for the three months ended December 31, 2003, as compared with $23.1million in the same period in fiscal 2003. The expense increase was mostly dueto increases for legal and professional fees (approximately $3.2 million), bankfees (approximately $0.9 million), insurance (approximately $0.9 million) andbad debts (approximately $0.8 million). These increases were partially offsetby reduced labor and employee benefits costs (approximately $1.6 million) andrent expense (approximately $0.3 million).

Depreciation andamortization expense increased to $7.9 million for the three months endedDecember 31, 2003, as compared to $7.7 million in the same period in fiscal2003, mainly as a result of additional plant-in-service.

**Energy AssetManagement Segment**

TheEnergy Asset Management segment includes the operations of the company's NUIEnergy Brokers subsidiary, and the distribution, storage and pipelineoperations of VGC. This segment alsoincludes the company's 50 share of the equity income and losses of SSLLC. The Income from ContinuingOperations before Taxes for the segment is as follows:

*(Dollars in thousands)*

**Three  Months   Ended   December 31,   2003**

**Three  Months   Ended   December 31,   2002**

**Operating Revenues**

  $3,772

  $3,845

Purchased  Gas and Fuel

321

55

**Operating Margins**

3,451

3,790

**Operating Expenses:**

 

 

Operations  & Maintenance Expenses

2,576

2,193

Depreciation  & Amortization

514

570

Taxes  Other than Income

308

200

Total Operating Expenses

3,398

2,963

**Pre-Tax Operating Income**

53

827

Other Income & (Expense)

577

137

Net Interest Charges

939

379

**Pre-Tax Income from Continuing Operations**

$(309)

$585

 

 

***Operating Revenues***.Energy Asset Management operating revenues decreased by $0.1 million, or 2percent, for the three months ended December 31, 2003, as compared the sameperiod in fiscal 2003. The decrease was primarily due to reduced storagerevenues of VGC as a result fewer contracts during the current fiscal yearperiod. The operating revenues of NUI Energy Brokers were comparable to thesame period a year ago.

***Operating Margins.*** Operating margins decreasedapproximately $0.3 million, or 9 percent, to $3.5 million for the three monthsended December 31, 2003, as compared to $3.8 million in the same period infiscal 2003. This decrease was primarily attributable to effects of the factorsdiscussed above. 

Despite increased volatility of natural gasprices, market conditions in the energy trading industry have been dampened dueto fewer creditworthy trading partners. Also, the downgrades of the company'scredit ratings during fiscal years 2003 and 2002 (see Liquidity and CapitalResources) had increased the collateral requirements of NUI Energy Brokers, aswell as adversely affected the willingness of counterparties to enter intotransactions. The company expected that these factors would continue throughoutfiscal 2004, and subsequent to the December 11, 2003 NJBPU Order discussed inRegulatory Matters, the company decided to discontinue the trading operationsof NUI Energy Brokers. This will result in a substantial reduction of operatingmargins for this segment for the remainder of fiscal 2004. 

***Operating Expenses.***Operating and maintenance expenses increased by approximately $0.4 millionduring the three months ended December 31, 2003, as compared to the same periodin fiscal 2003, due to increased labor and benefits costs (approximately $0.3million) and corporate allocations (approximately $0.1 million).

***Other Income andExpense***. Other income and expense increased by approximately$0.4 million during the three months ended December 31, 2003, as compared tothe same period in fiscal 2003, due to the inclusion of approximately $0.4million of equity income from the company's 50 percent investment in SSLLC.SSLLC's storage operations commenced during August 2003.

**Retail andBusiness Services Segment**

The Retail and BusinessServices segment includes the operations of the company's NUI Energy and UBSsubsidiaries. In order to exit the retail and business services segment, thecompany began winding down the operations of NUI Energy during May 2003 and TICduring June 2003, and sold NUI Telecom on December 15, 2003 (see Note 4 of theNotes to the Consolidated Financial Statements). NUI Telecom, as well as theoperations of TIC previously reported in this segment, have been reclassifiedto discontinued operations. The Income from Continuing Operations before Taxesfor the segment is as follows: 
 
*(Dollars in thousands)*

**Three  Months   Ended  December 31,   2003**

**Three  Months   Ended  December 31,   2002**

**Operating Revenues**

  $1,505

  $2,076

Cost  of Sales and Services

635

625

**Operating Margins**

870

1,451

**Operating Expenses:**

 

 

Operations  & Maintenance Expenses

485

1,986

Depreciation  & Amortization

327

362

Taxes  Other than Income

72

97

**Total Operating Expenses**

884

2,445

Pre-Tax Operating Loss

(14)

(994)

Other Income & (Expense)

---

34

Net Interest Charges

39

(188)

**Pre-Tax Loss from Continuing Operations**

$(53)

$(1,148)

 

 

***Operating Revenues****.*Retail and Business Services operating revenuesdecreased by approximately $0.6 million, or 28 percent, to $1.5 million for thethree months ended December 31, 2003 from $2.1 million in the same period infiscal 2003. This decrease was primarily due to reduced revenues by NUI Energyas a result of the company's efforts to wind down its retail energy business.The operating revenues of UBS for the current three-month period werecomparable with those of the previous fiscal year.

Thecompany has wound down most of the operations of NUI Energy and does not expectmaterial activity during fiscal 2004, which will result in reduced operatingrevenues as compared to fiscal 2003. 

***Operating Margins***.Retail and Business Services operating margins decreased by approximately $0.6million, or 40 percent, during the three months ended December 31, 2003, to$0.9 million as compared with $1.5 million in the same period in fiscal 2003.This decrease was primarily attributable to effects of the factors discussedabove.

***Operating Expenses****.*Operations and maintenance expenses, depreciation and amortization, and taxesother than income for the Retail and Business Services segment decreased intotal by $1.5 million, or 64 percent, to $0.9 million during the three monthsended December 31, 2003, as compared with $2.4 million in the same period infiscal 2003. The decrease was primarily a result of reduced operating costs ofNUI Energy including labor and benefit costs ($0.6 million), legal andprofessional fees (approximately $0.4 million), bad debt provisions(approximately $0.3 million), rents (approximately $0.1 million), and corporateallocations (approximately $0.1 million). 

Thecompany's exiting of the retail energy business is expected to reduce theoperating expenses of this segment significantly during fiscal 2004.

**Regulatory Matters**

On November 22, 2002,Elizabethtown Gas received approval from the NJBPU to increase its base ratesby an annual amount of $14.2 million, or approximately 5 percent. The increasewas effective immediately and covers a portion of the costs of plantinvestments and higher operating expenses incurred since the company's lastbase rate increase twelve years ago. The new rates are based on a return on equity of 10.0 percent and anoverall rate of return on rate base of 7.95 percent. The rate order alsorevised the normal weather pattern upon which base rates and Elizabethtown Gas'Weather Normalization Clause are set from a 30-year to a 20-year weatheraverage to better reflect current weather trends.  In addition, the company was allowed to increase service chargesto various rate classes of customers to better reflect the cost of providingservice to these customers.  In itsDecember 11, 2003 Order, the NJBPU stated that it was re-examining thissettlement in light of the events surrounding NUI's use of proceeds received inits 2002 equity offering.  The company'ssettlement with the NJBPU on April 14, 2004 resolved all issues related to the2002 rate case.

On September 16, 2003, Elizabethtown Gas receivedapproval from the NJBPU to increase its BGSS rates on a provisional basis by$28.8 million and on October 10, 2003, Elizabethtown Gas was granted approvalto increase its Societal Benefits Charge (SBC) by approximately $8.0 million.The BGSS charge covers the cost of natural gas supplies that Elizabethtown Gaspurchases for its customers, while the SBC allows Elizabethtown Gas to recoverthe cost of mandated energy efficiency, low-income assistance, energy educationand environmental remediation programs. Both of these charges representpass-through of costs on which the company does not earn a profit. In itsDecember 11, 2003 Order, the NJBPU stated that it would reconsider theprovisional rates approved by the NJBPU pursuant to Elizabethtown Gas' petitionfor an increase in BGSS rates. The company's settlement with the NJBPU on April14, 2004 resolved all issues related to this BGSS proceeding.

For a discussion of the Orders issued by the NJBPUrelating to the focused audit and related matters, see Settlement of IssuesRelating to NJBPU Focused Audit and Regulatory Orders Issued by the NJBPU,above.

In response to the Federal Electric Discount andEnergy Competition Act, which was signed into law in February 1999, on March30, 2001, the NJBPU approved a stipulation which enabled all retail customersin New Jersey to choose a natural gas supplier, provided an incentive for thesecustomers to choose an alternate natural gas supplier and required New Jerseygas utilities to continue offering basic gas supply service through December2002 for those customers not choosing an alternate supplier. On January 17,2002, the NJBPU issued an Order that continued the obligation of all New Jerseygas utilities to provide basic gas supply service until the NJBPU has had anopportunity to fully investigate major policy issues relating to pricingstructure and gas supply reliability. No timetable has been established forcompletion of such a review. As of December 31, 2003, only a small number ofresidential customers in Elizabethtown Gas' service territories were receivinggas from an alternative gas supplier.

OnJanuary 20, 2004, City Gas received approval from the FPSC to increase its baserates by $6.7 million, effective February 23, 2004. The increase represents aportion of the company's request for a total rate increase of $10.5 million tocover the costs of investments in its customer service and system maintenanceand growth, increases in operating expenses, and the impact of the continuingsluggish economy. This new rate level provides for an allowed return on equityof 11.25 percent and an overall allowed rate of return of 7.36 percent. 

**Liquidity and CapitalResources**

***Overview***

As a result of the various factors discussed in thisquarterly report, NUI and NUI Utilities have experienced and expect to continueexperiencing significant liquidity problems. Liquidity needs for NUI Utilitiesgenerally are driven by factors that include: prepayments for its natural gasrequirements; natural gas commodity prices; the impact of weather on customerbills; lags in fully collecting gas costs from customers under purchased gasadjustment charges; both discretionary and required repayments of short- andlong-term debt; capital spending; and working capital requirements, such asadministrative expenses and taxes. Liquidity needs at NUI and NUI's non-utility operations generally aredriven by required repayments of short-term debt and working capitalrequirements.

The company first seeks to meet its capitalrequirements through cash provided by operating activities and externalfinancings.  External financing,depending on the particular company, as discussed below, may consist of publicand private capital market debt and equity transactions, bank revolving creditand term loans, and/or project financings. The availability and cost ofexternal capital is affected by many factors, including, but not limited to,the performance of NUI and its subsidiaries, their respective credit ratingsand conditions in the company's industry in general. In addition, the NJBPU'sholding company order requiring NUI to maintain a certain degree of separationbetween its utility and non-utility subsidiaries could impact affiliate ratingson consolidated and unconsolidated credit quality. Compliance with applicable financialcovenants will depend upon future financial position and levels of earnings andcash flows, as to which no assurances can be given. 

In addition, at times NUI utilizes intercompanydividends from NUI Utilities and amounts realized from the settlement ofintercompany balances to satisfy various subsidiary needs and to manageshort-term cash needs. Historically, NUI Utilities has paid dividends of up to75 percent of its annual net income to NUI. The Standby Bond Purchase Agreement (SBPA) entered into in connectionwith the Variable Bonds, which, as described below, are a series of gasfacility revenue bonds issued by the New Jersey Economic Development Authority(NJEDA), restricts the payment of dividends by NUI Utilities to NUI to anamount based, in part, on the earned surplus of NUI Utilities, which had beenreduced by the NJBPU Settlement.  On May19, 2004, NUI Utilities and The Bank of New York amended the SBPA.The amendment eliminates the effect of the NJBPU Settlement, as well asthe estimated refunds to customers in Florida and certain other relatedcosts, on the earned surplus of NUI Utilities, thereby allowing for thepayment of dividends by NUI Utilities to NUI at this time.   In addition, under the amendment to NUIUtilities' credit facility dated May 10, 2004, NUI Utilities is prohibited frompaying dividends exceeding $35 million in the aggregate while the creditfacility is outstanding. There are no contractual restrictions on thesettlement of intercompany balances in NUI's or NUI Utilities' financingagreements.

On a consolidated basis, the company's net use ofcash in operating activities was $65.6 million (as restated- see Note 16 to the Consolidated FinancialStatements) and $6.1 million for thethree-month periods ended December 31, 2003 and 2002, respectively. Thereduction of $59.4 million in operating cash flows for the current period wasdue in part to the timing of payments to the company's gas suppliers andamounts paid in advance for interest costs on the company's and NUI Utilities'new credit facilities and as collateral for the company's gas procurementneeds. The decrease in operating cash flows was partially offset by reductionsin accounts receivable for the company's non-regulated businesses during thethree-month period ended December 31, 2003, as compared to the same period infiscal 2003.

In February2003, NUI and NUI Utilities each replaced their respective previous creditagreements with new revolving agreements. In November 2003, each of NUI and NUI Utilities refinanced the February2003 facilities and entered into credit agreements for new 364-day creditfacilities. NUI's delay in delivering audited financial statements for fiscal2003 resulted in defaults under such credit agreements.  On January 26, 2004, NUI and NUI Utilitiesboth obtained waivers of such defaults from the lenders under their respectivecredit agreements and (i) received an extension to March 1, 2004 of thedelivery date for NUI's audited financial statements for fiscal 2003 andunaudited financial statements for the first fiscal quarter of 2004 and (ii)amended the credit agreements to clarify certain technical provisions.  Subsequently, on March 12, 2004, NUI and NUIUtilities obtained a limited waiver from the lenders under their respective creditagreements further waiving the defaults described above.  These credit facilities were amended as ofMay 10, 2004 to further extend these deadlines. See Sources of Liquidity -Short Term Debt below for a further description of the November 2003 creditfacilities.

Based upon the factors noted above and currentanticipated cash flows, both NUI and NUI Utilities believe that they havesufficient liquidity to meet their financial obligations through the remainderof the fiscal year ending September 30, 2004. However, subsequent to September 30, 2004, NUI and NUI Utilities believethey may not have sufficient liquidity to meet their continuing obligations,based upon the following:

-       NUI and NUI Utilities each have separate revolving creditfacilities aggregating $405 million, which expire on November 22, 2004, andeach may only be extended for a successive 364-day increment if certainconditions are met. If these facilities are not extended or satisfactorilyrefinanced, the companies would need to seek alternative solutions to satisfytheir liquidity requirements. 

-       Uponrenewal of NUI's revolving credit facility, NUI is required to prepay, on orabout November 22, 2004, an interest reserve account for the benefit of thelenders under NUI's credit agreement in the amount of approximately $20million.

-       Under the terms of NUI Utilities' natural gas asset managementcontract with Cinergy, NUI Utilities is required to pay in advance, in varyingamounts, for its gas requirements on a monthly basis over the contract period.As a result of the prepayment obligations, in addition to the renewal of itscredit facility, NUI Utilities may require additional funds in early fiscal2005 in order to meet its continuing obligations. Further, in order for NUIUtilities to obtain such additional funds, it is required to obtain theapproval of its lenders and the NJBPU.

-       On September 26, 2003, the Board of Directors of NUI announcedits intention to sell the company.  Ifwe are unable to sell the company, or if a sale is not completed in a timelymanner, this could materially adversely affect NUI's and NUI Utilities'financial condition, results of operations and liquidity.

As noted above, based upon current anticipated cashflows, the company believes it will have sufficient liquidity to meet itsfinancial obligations through the end of fiscal year ending September 30, 2004and the company also believes it will remain in compliance with all covenantsunder its various debt agreements for the remainder of the year ending September30, 2004. The company plans to address its liquidity concerns by: successfullycompleting the sale of the company; extending its existing credit facilitiesbeyond the current termination date of November 22, 2004; and obtainingadditional financing to ensure NUI Utilities' ability to, among other things,meet its gas purchase prepayment requirements under its natural gas assetmanagement contract with Cinergy.  Ifthe company is unsuccessful in its efforts to effectively resolve its liquidityconcerns, it may need to reorganize its operations and restructure its debtfinancing.  For a further discussionabout risks relating to NUI Utilities' liquidity, see Item 1. Business-RiskFactors in the company's annual report on Form 10-K for the fiscal year endedSeptember 30, 2003.

Because the company's business is highly seasonal,short-term debt is used to meet seasonal working capital requirements. NUI alsoborrows under its bank lines of credit to finance portions of its capitalexpenditures. As of December 31, 2003, NUI had drawn $255.0 million and NUIUtilities had drawn $80.0 million under their respective short-term creditfacilities. On that date, the NUI and NUI Utilities had overnight cashinvestments of approximately $33.8 million and $18.9 million, respectively. 

NUI's and NUI Utilities' debt agreements also containa number of covenants that significantly limit their respective ability to,among other things, borrow additional money, pay dividends, transfer or sellassets, create liens and enter into a merger or consolidation. In particular,under the amendment to NUI's credit facility as of May 10, 2004, NUI isprohibited from paying any cash dividends during any fiscal quarter in whichNUI's consolidated total debt represents more than 60 percent of its totalcapitalization, measured (i) at the last day of the immediatelypreceding fiscal quarter and (ii) pro forma at the time such dividend ismade. As a result of these restrictions, NUI is prohibited from paying anydividends at this time and is also not likely to be able to pay any dividendsin the foreseeable future.  Thecovenants also require both NUI and NUI Utilities to meet certain additionalfinancial tests. If either NUI or NUI Utilities were unable to meet its debtservice obligations or to comply with these covenants, there would be a defaultunder one or more of the agreements. Such a default, if not waived by ourlenders, could result in acceleration of the repayment of either NUI's or NUIUtilities' debt and have a material adverse effect on each company's financialconditions, results of operations and liquidity.

The company completed the sale of its NUI Telecomsubsidiary on December 15, 2003, for approximately $2 million (see Note 4 ofthe Notes to the Consolidated Financial Statements). 

NUI repaid an approximately $85 million outstandingintercompany balance owed to NUI Utilities on November 24, 2003, with theproceeds of a new credit facility entered into on that date (see Short-termDebt discussion which follows).  

***CreditRating Actions***

During fiscalyears 2002, 2003, and 2004, Moody's Investors' Service (Moody's) downgradedNUI's credit rating from Baa-1 to Caa-1 and downgraded NUI Utilities' creditrating from A-3 to B-1. The credit rating downgrades that have occurred infiscal 2004 are described below.

OnOctober 6, 2003, Moody's downgraded NUI's debt rating from B-1 to B-3.  Moody's also downgraded the debt rating ofNUI Utilities from Ba-1 to Ba-3. Moody's cited the company's announcement thatthe company's Board of Directors had placed the entire company up for sale. Inaddition, Moody's indicated that their action reflects the difficult businessconditions affecting the company as well as the limited progress in sellingnon-core assets, citing that this limited the company's financial flexibility.Moody's also cited the continuing financial relationship between NUI and NUIUtilities, liquidity concerns, and the costs associated with finding a suitablebuyer for the company. As a result of these downgrades, NUI Utilities' cost ofborrowing under its short-term facilities increased an additional 62.5 basispoints or 0.625 percent and the cost of borrowing for NUI was unchanged.  In conjunction with the downgrades onOctober 6, 2003, Moody's indicated they would monitor the company's liquidityposition as well as its progress in selling non-core assets.

OnApril 6, 2004, Moody's further downgraded NUI's debt rating from B-3 to Caa-1.Moody's also downgraded the debt rating of NUI Utilities from Ba-3 to B-1.Moody's cited (1) the company's recent announcements that it expects lowerearnings in the first quarter of fiscal 2004, resulting from severance costsand expenses related to the debt refinancings concluded during November 2003 atsubstantially higher rates of interest and fees; (2) the continued delay inproducing audited financial statements for the fiscal year ended September 30,2003 and its unaudited first quarter Form 10-Q, because of continuinginvestigations by the company's Audit Committee of certain questionabletransactions of NUI Energy Brokers, the company's wholesale energy tradingsubsidiary, which required additional waivers from lenders of both NUI and NUIUtilities; (3) the expectation of having to incur a meaningful settlementcharge as a result of the focused audit conducted by the NJBPU, which wouldreduce the company's income and equity for fiscal 2003; (4) the ongoinginvestigation of the New Jersey Attorney General's Office into NUI EnergyBrokers; and (5) the delays in realizing the sale of the company, which is thesource of repayment of NUI's $255 million rated debt and a portion of the debtof NUI Utilities. Moody's also cited the financial relationship between NUI andNUI Utilities and that any penalties that may be assessed to the company by theNJBPU may have to be funded from the earnings and cash flows of NUI Utilities.In addition, NUI and NUI Utilities have overlapping lenders that require debtto be serviced by each entity. To the extent NUI does not have the means todischarge its own debt obligations, these lenders may seek dividends from NUIUtilities to help service NUI's debt. The lower rating Moody's assigned to NUIreflects the structural subordination of its debt relative to that of NUIUtilities. 

Inconjunction with the downgrades on April 6, 2004, Moody's indicated that itsoutlook for both NUI and NUI Utilities was negative. The negative outlookreflects Moody's belief that it will take time to close on the sale of thecompany as its assets are diverse and located in various states necessitatingmultiple regulatory approvals in the states in which the company's regulatedentities operate. In the meantime, Moody's expects the company to continue toincur extraordinary operations and maintenance expenses as it employs an array ofoutside advisors and consultants to help manage its day to day operations,incur additional legal, accounting and financial advisory fees as it seeks torespond to regulatory investigations, and attempts to negotiate settlementswith its regulators and searches for a suitable buyer.

On November 21, 2003,Standard & Poor's Rating Services (S&P) lowered its corporate creditrating for NUI Utilities from BBB- to BB and its rating remains on CreditWatchwith developing implications. S&P's rating action cited the business andfinancial challenges the company faces, including an investigation of energytrading transactions by the company's NUI Energy Brokers subsidiary, and thepotential for greater regulatory scrutiny in New Jersey, which could impact thesale of NUI. S&P did note the company had addressed its anticipatedliquidity needs on an interim basis prior to the sale of the company withseparate credit agreements for NUI and NUI Utilities aggregating $405 million,each of which can be extended for another 364 days at the option of therespective borrower (under certain conditions); see discussion of Short-TermDebt for further details.  S&P alsonoted that any negative outcome of the investigation of the tradingtransactions or possible regulatory action in New Jersey could inhibit thecompany's ability for a successful sale.

There can be no assurancethat additional downgrades by Moody's and/or S&P can be avoided. 

***Sources of Liquidity***

***Short-Term Debt*.**  OnOctober 10, 2003, NUI Utilities entered into a bridge loan agreement with alender for a credit agreement that allowed it to borrow up to $50 million tofund near-term natural gas purchases and to fund other general working capitalneeds. This credit agreement was scheduled to mature on February 11, 2004, andwas terminated upon receipt of the new credit facilities entered into onNovember 24, 2003. No amounts were ever drawn on this bridge loan agreement.

On November 24, 2003, NUI andNUI Utilities each entered into new separate revolving credit facilitiesaggregating $405 million. Both NUI's and NUI Utilities' current creditagreements expire on November 22, 2004, and each may be extended for one364-day term, subject to certain conditions. 

NUI's facility may be extended if (i) NUI Utilities'facility is simultaneously extended, (ii) the maturity of NUI Utilities' 8.35percent medium term notes, due February 1, 2005, have been extended to a dateno earlier than June 30, 2006 or have been repaid with the proceeds of thedelayed draw term loan, (iii) NUI deposits cash with the administrative agentto cover interest that would accrue on outstanding amounts under the creditfacility until the extended maturity date, in the amount of approximately $20million, and (iv) no default exists under such facility at the time of suchextension.

NUI Utilities' facility may be extended if (i) allapplicable regulatory approvals required for such extensions have beenobtained, (ii) the maturity of NUI Utilities' 8.35 percent medium term notes,due February 1, 2005, have been extended to a date no earlier than June 30,2006 or have been repaid with the proceeds of the delayed draw term loan and(iii) no default exists under such facility at the time of such extension.

NUI's current credit agreement provides for a $255 millionterm loan facility. The proceeds of the term loan facility were used (1) torepay and terminate NUI's credit agreement which was entered into on February12, 2003, (2) to repay NUI's outstanding $60 million senior notes and pay a$9.4 million prepayment premium relating thereto, (3) to repay approximately$85 million of an intercompany balance owed by NUI to NUI Utilities, (4) tofund a $20.4 million interest reserve account for the benefit of the lendersunder NUI's credit agreement, and (5) for other general corporate purposes.NUI's credit agreement bears interest at a rate, at NUI's option, equal toeither (i) LIBOR (subject to a 2 percent floor) plus 6 percent, or (ii) theBase Rate (subject to a 3 percent floor) plus 5 percent. The obligations underNUI's credit agreement are guaranteed on a senior unsecured basis by certain ofNUI's direct and indirect wholly-owned subsidiaries. NUI Utilities and VGC donot guarantee NUI's obligations under this credit agreement. As of December 31,2003, NUI had fully drawn all amounts available under its credit agreement. Asof May 14, 2004, NUI had overnight cash investments of $28.8 million.

NUI Utilities' current credit agreement provides for(i) a $50 million revolving credit facility, (ii) a $50 million term loanfacility and (iii) a $50 million delayed draw term loan facility. The proceedsfrom the revolving credit facility and the term loan facility combined with theproceeds from the repayment of the $85 million intercompany balance from NUIwere used (1) to repay outstanding loans under, and terminate, the NUIUtilities credit agreement which was entered into on February 12, 2003, (2) topay accrued and unpaid fees under the interim credit agreement entered into onOctober 10, 2003 and (3) for general corporate purposes. The proceeds from thedelayed draw term loan facility, which can be drawn at the option of thecompany, can be used solely for the purpose of repaying NUI Utilities' 8.35percent medium term notes, which are due on February 1, 2005. NUI Utilities'credit agreement bears interest at a rate, at NUI Utilities' option, equal toeither (i) LIBOR (subject to a 2 percent floor) plus 5 percent, or (ii) theBase Rate (subject to a 3 percent floor) plus 4 percent. As of December 31,2003, NUI Utilities had drawn an aggregate of $80.0 million under the $50million revolver and the $50 million term loan facility. Subsequent to thatdate, NUI Utilities became fully drawn under the $50 million revolver and the$50 million term loan facility. As of May 14, 2004, NUI Utilities had overnightcash investments of $109.1 million.

Both credit agreements contain various covenants that(i) restrict NUI and NUI Utilities from taking various actions and (ii) requireNUI and NUI Utilities, respectively, to each achieve and maintain certainfinancial covenants.  Under the terms ofNUI's credit agreement, NUI is required to maintain a maximum leverage ratio ofno more than 0.80x and a minimum interest coverage ratio of at least 1.50x (forthe four consecutive fiscal quarters ending on December 31, 2003 and March 31,2004) and 1.25x (thereafter). Under the terms of the NUI Utilities creditagreement amended as of May 10, 2004, NUI Utilities is required to maintain amaximum leverage ratio of no more than 0.70x and a minimum interest coverageratio of at least 2.25x. Additionally, both credit agreements containlimitations on capital expenditures, indebtedness, payment of dividends,guarantees, liens, mergers, acquisitions, dispositions of assets, transactionswith affiliates, loans and investments, prepayment of indebtedness,sale-leaseback transactions, change in business activities and corporateactivities.  

The company's delay in delivering audited financialstatements for fiscal 2003 resulted in events of default under NUI's and NUIUtilities' respective credit agreements. On January 26, 2004, NUI and NUIUtilities obtained waivers of such defaults from the lenders under theirrespective credit agreements, and received an extension of the delivery datefor NUI's audited financial statements for fiscal 2003 and its 2004 firstfiscal quarter unaudited financial statements through March 1, 2004, andamended the credit agreements to clarify certain technical provisions. Furtherdelays in the delivery of these financial statements beyond the date to whichNUI and NUI Utilities had received waivers resulted in another event ofdefault. On March 12, 2004, NUI and NUI Utilities received a further waiver ofsuch defaults from the lenders and such lenders otherwise deferred their rightsto exercise remedies in respect thereof. NUI and NUI Utilities subsequentlyentered into amendments dated as of May 10, 2004 to their respective creditagreements which:

(i)        extendedthe delivery date for the aforementioned financial statements (as well as forthe financial statements for the fiscal quarter ended March 31, 2004) untilJune 15, 2004, 

(ii)       consentedto the NJBPU Settlement, 

(iii)      modifiedfinancial covenants contained in the credit agreements to take into account theNJBPU Settlement and the recent and expected future performance of the company,

(iv)      permittedthe acquisition by NUI Utilities of approximately $350,000 worth of gaspipeline, 

(v)       regardingthe payment of dividends by NUI Utilities to NUI, provided for a $35 millionlimit on dividend payments and eliminated a provision limiting such dividendpayments to the aggregate maximum of NUI Utilities' retained earnings,

(vi)      added acondition which requires NUI to maintain a maximum leverage ratio of no morethan 0.60x in order to pay dividends, and

(vii)     increasedthe interest rate on NUI Utilities' delayed draw term loan (if drawn) by onepercent until a purchase agreement is executed to sell NUI or NUI Utilities toan unaffiliated third party.

Under the dividend restriction described above, NUI isprohibited from paying any cash dividends during any fiscal quarter in whichNUI's consolidated total debt represents more than 60 percent of its totalcapitalization, measured (i) at the last day of the immediately precedingfiscal quarter and (ii) pro forma at the time such dividend is made. As aresult of these restrictions, NUI is prohibited from paying any dividends atthis time or in the foreseeable future. Under NUI's credit facility, NUI alsois prohibited from paying dividends exceeding $20 million in the aggregatewhile the credit facility is outstanding.

At December 31, 2003, theoutstanding borrowings under NUI's and NUI Utilities' credit facilities were$255.0 million and $80.0 million, respectively, at weighted average interestrates of 8.0 percent and 7.1 percent, respectively. As of that date, NUI had nounused borrowing capacity and NUI Utilities had $20 million of unused borrowingcapacity under their respective credit facilities. Also, as of December 31,2003, NUI and NUI Utilities had approximately $33.8 million and $18.9 million,respectively, of cash held as short-term investments, a substantial portion ofwhich may be used toward the repayment of short-term borrowings under thecompany's credit agreements.

The weighted average daily amounts of borrowingsoutstanding under NUI's credit facility and the weighted average interest rateson those amounts were $145.0 million and $46.9 million at 6.5 percent and 3.4percent for the three-months ended December 31, 2003 and 2002, respectively.The weighted average daily amounts outstanding of borrowings under NUIUtilities' credit facility and the weighted average interest rates on thoseamounts were $108.6 million and $88.8 million at 4.5 percent and 3.2 percentfor the three-months ended December 31, 2003 and 2002, respectively. 

***Long-Term Debt*****.**  NUI has outstanding $50 million 8.35 percent medium term notes,which mature on February 1, 2005. As noted under Short-Term Debt above,included in NUI Utilities' current credit facility is a $50 million delayeddraw term loan that can be drawn at the option of the company and used, subjectto the satisfaction of the terms and conditions contained therein, to repaythese medium term notes.

On November 24, 2003, NUIrepaid its $60 million senior notes with the proceeds of its new creditfacility entered into on that date. Inconjunction with the repayment of this indebtedness, NUI paid a prepaymentpremium of approximately $9.4 million to the noteholders, which was recorded during the first quarter offiscal 2004.

NUI Utilities is party to a series of loan agreementswith the New Jersey Economic Development Authority (NJEDA) pursuant to whichthe NJEDA has issued four series of gas facilities revenue bonds: (i) $46.5million bonds at 6.35 percent due October 1, 2022, (ii) $39 million bonds atvariable rates due June 1, 2026 (Variable Bonds), (iii) $54.6 million bonds at5.7 percent due June 1, 2032 and (iv) $40 million bonds at 5.25 percent dueNovember 1, 2033. NUI Utilities is also party to a loan agreement pursuant towhich Brevard County, Florida (the County) has issued $20 million bonds at 6.40percent due October 1, 2024. In accordance with the terms of these loanagreements, the funds received by the NJEDA or the County, as the case may be,upon the issuance of the applicable bonds have been loaned to NUI Utilities.The interest rates and maturity dates under the loan agreements parallel theinterest rates and maturity dates under the bonds.  Interest payments by NUI Utilities on the loans are used to paythe interest on the bonds. During fiscal 2003, NUI Utilities paid $9.9 millionin interest payments on these loans.  

Approximately $2.1 million of interest earned on theoriginal net proceeds from the $20 million 6.4 percent revenue bonds due 2024is unexpended and accordingly has been classified as "Funds for ConstructionHeld by Trustee" on the Consolidated Balance Sheet at December 31, 2003 untildrawn upon.

The Variable Bonds contain a provision whereby theholder can "put" the bonds back to the issuer. In 1996, the company executed a long-term SBPA with a syndicate ofbanks, which was amended and restated on June 12, 2001. Under the terms of theSBPA, as further amended several times, The Bank of New York is obligated undercertain circumstances to purchase Variable Bonds that are tendered by theholders thereof and not remarketed by the remarketing agent. Such obligation ofthe bank would remain in effect until the expiration of the SBPA, unlessextended or earlier terminated. The terms of the SBPA also restrict the paymentof dividends by NUI Utilities to NUI to an amount based, in part, on the earnedsurplus of NUI Utilities, which had been reduced by the NJBPU Settlementrecorded in September 2003. On May 19,2004, NUI Utilities and The Bank of New York amended the SBPA.  The amendment eliminates the effect ofthe NJBPU Settlement, as well as the estimated refunds to customers in Floridaand certain other related costs, on the earned surplus of NUI Utilities,thereby allowing for the payment of dividends by NUI Utilities to NUI atthis time.  In addition, pursuant to the terms of the amendment, andeffective as of June 30, 2004, the expiration date of the SBPA will be extendedto June 29, 2005.

If the SBPA is not further extended beyond June 29,2005, in accordance with the terms of the Variable Bonds, all of the VariableBonds would be subject to mandatory tender at a purchase price of 100 percentof the principal amount, plus accrued interest, to the date of tender. In suchcase, any Variable Bonds that are not remarketable by the remarketing agentwill be purchased by The Bank of New York.

Beginning six months after the expiration ortermination of the SBPA, any Variable Bonds still held by the bank must beredeemed or purchased by the company in ten equal, semi-annual installments. Inaddition, while the SBPA is in effect, any tendered Variable Bonds that arepurchased by the bank and not remarketed within one year must beredeemed or purchased by the company at such time, and every six monthsthereafter, in ten equal, semi-annual installments.

As ofDecember 31, 2003, the aggregate principal and accrued interest on theoutstanding Variable Bonds totaled approximately $39.0 million. Principal and any unpaidinterest on the outstanding Variable Bonds are due on June 1, 2026, unless theput option is exercised before that time.

The delay in delivering certain officers'certificates, SEC filings and quarterly financial information throughout thefiscal year 2003, as well as audited fiscal 2003 financial statements andrelated documents (Required Documents), resulted in breaches under certain loanagreements, trust indentures, and related documents underlying NUI Utilities'gas revenue bond facilities, namely (i) $20 million of 6.40 percent bonds dueOctober 1, 2024, (ii) $46.5 million of 6.35 percent bonds due October 1, 2022,(iii) the Variable Bonds, (iv) $54.6 million of 5.70 percent bonds due June 1,2032 and (v) $40 million of 5.25 percent bonds due November 1, 2033, as well asunder the 8.35 percent medium term notes.

Many of these breaches were cured on May 10, 2004 withdelivery of many of the Required Documents. The remaining breaches were cured by virtue of NUI Utilities' deliveryof the company's annual report on Form 10-K, related officers' certificates andother financial information.

Defaults may occur in the near future under the VariableBonds, the 5.25 percent bonds and the 8.35 percent medium term notes if NUIUtilities does not provide unaudited financial statements for NUI for thefiscal quarter ended March 31, 2004, and related documentation and officers'certificates. Defaults may occur in the near future under the 5.70 percentbonds if NUI Utilities does not provide audited financial statements for NUIUtilities for the fiscal year ended September 30, 2003 and unaudited financialstatements for NUI Utilities for the fiscal quarters ended December 31, 2003and March 31, 2004. To date, NUI has obtained all necessary waivers andextended the respective deadlines for delivery of all information required pursuant to suchbond facilities toJune 30, 2004.  NUI and NUI Utilitiesare working diligently to deliver the required documentation within thistimeframe.

***Common Stock*****. **The company periodically issues shares of common stockin connection with NUI Direct, the company's dividend reinvestment and stockpurchase plan, and various employee benefit plans. 

**Capital Expenditures and Commitments**

***Capital Expenditures***. Capital expenditures,which consist primarily of expenditures to expand and upgrade the company's gasdistribution systems, were $12.5 million for the three months ended December31, 2003, and $13.4 million for the three months ended December 31, 2002. The decreased capitalspending during the current fiscal period was due to the company's reduction ofcapital projects at the corporate level and reduced spending for operationsbeing held for sale.

Capitalexpenditures are expected to be approximately $51 million in fiscal 2004, whichwill be used primarily for the continued expansion and upkeep of the company'snatural gas distribution system and certain information technology projects.

***JointVenture with Duke Energy***. OnApril 30, 2001, the company announced an agreement with a subsidiary of DukeEnergy to develop a natural gas storage facility in Saltville, Virginia. NUISSand Duke Energy Saltville Gas Storage, LLC (DESGS) have created a limitedliability company, SSLLC. After receiving the required regulatory approvalin February 2003, VGC contributed certain storage assets valued atapproximately $16.3 million to SSLLC. DESGS has contributed an equal amount(approximately $16.3 million) of capital required to expand the facility forits intended purpose.  To the extentSSLLC determines it needs additional funding (which decision can only be madejointly by the company and DESGS), the company and DESGS are obligated to fundthe development of SSLLC equally. 

As of December 31, 2003, thecompany has loaned SSLLC an aggregate of approximately $24.8 million toward thedevelopment of the Saltville storage facility. The company currently estimatesits share of funding to be zero in fiscal 2004, and $2.5 million in fiscal2005. Subsequent years are expected to be funded with internally generated cashflows of the joint venture.

SSLLC plans to expand the present Saltvillestorage facility from its current capacity of 1 billion cubic feet (Bcf) toapproximately 12 Bcf and connect it to Duke Energy Gas Transmission's (DEGT)East Tennessee Natural Gas interstate system and DEGT's Patriot pipeline. Atfull capacity, the Saltville storage field will be able to deliver up to 500million cubic feet per day of natural gas to area markets. The Saltvillefacility features fast-injection and fast-withdrawal capabilities offered bysalt cavern storage. The expansion will be completed in phases which began infiscal 2003, with the Phase I total of 5.3 Bcf of working natural gas storagecapacity to be completed by fiscal 2008. The market demand for additionalstorage will dictate the timing of the other phases of the expansion.

Development of the Saltville facility is intended tocreate a strategically located energy-trading hub, and enable the company tocapitalize on the energy supply and wholesale energy portfolio and riskmanagement opportunities in the rapidly developing Mid-Atlantic region. Theadditional storage capacity is expected to allow the company to meet thesignificant demand from local distribution companies as well as power plantdevelopment that is underway in the region.

In conjunction with the development of the Saltvillefacility, during December 2002, the company entered into a twenty-yearagreement with DEGT for the firm transportation of natural gas on the Patriotpipeline, which was under construction at that time. Upon completion of the pipeline in November2003, the company became obligated to pay annual demand charges ofapproximately $4.7 million over the life of the transportation agreement.

In August 2003, the company entered into a twenty-yearagreement with SSLLC for the firm storage of natural gas. Upon completion ofDEGT's Patriot pipeline in November 2003, the company became obligated to payannual demand charges of $0.3 million over the life of the storage agreement.

Regarding the transportation and storage agreementsdiscussed above, the company is not utilizing the Patriot pipeline in itsoperations at this time since it has discontinued its trading operations.However, the company is currently evaluating how to obtain the maximum benefitfrom its rights under these agreements.

***OtherStorage and Pipeline Projects***. Thecompany has acquired options on the land and mineral rights for propertylocated in Richton, Perry County, Mississippi, that the company plans todevelop into a natural gas storage facility to help serve the Southeast UnitedStates. The land option has a purchase price of approximately $0.5 million andthe mineral rights option has a purchase price of $0.9 million. Both optionsexpire on February 15, 2005. Should the options not be exercised, the company'sright to make such purchases would expire. 

NUI plans to develop a salt dome natural gasstorage facility near Richton, Perry County, Mississippi.  Like its companion storage facility inSaltville, Richton is expected to offer the high-deliverability capabilities ofsalt dome storage for natural gas and will have access to a number of majorinterstate pipelines, including Destin Pipeline and its connections to GulfSouth, Gulfstream, FGT, SONAT, Tennessee Natural Gas and Transco. Through itsconnection to Destin Pipeline, Richton will have direct access to the gassupplies in the Gulf of Mexico, as well to supplies from the interconnectedinterstate pipelines previously listed. Richton can also serve as a potential storage facility for the variousproposed liquefied natural gas (LNG) projects in the Gulf Coast.

The preliminary plan is to develop two caverns withapproximately 3.8 Bcf of working gas capacity each.  The total gas capacity of both caverns is expected to beapproximately 11.6 Bcf.  The gashandling facilities are expected to provide an average injection rate of250,000 thousand cubic feet (Mcf) per day and a maximum withdrawal rate of600,000 Mcf per day.  The facilitieswill include approximately 18,000 HP of compression and a 14.6 kilometer, 24inch pipeline connecting the facility to the Destin pipeline.  It is anticipated that Richton will be aFERC regulated facility.  The preliminaryengineering study, conceptual design for the facility and pipeline, waterresource analysis, and a successful "open season" have been completed.  The total cost of the project is expected tobe approximately $85 million over a period of three years, which NUI will seekto fund through project finance debt. 

This project is not expected to have any materialcapital requirements in fiscal 2004 and, if the project proves feasible, willprimarily impact the company's capital expenditure program in fiscal years 2005and 2006 after the funding needs of Phase I of the Saltville facility(discussed above) are essentially satisfied.

During 2001, the company began building a planned gaspipeline intended to cross the state of Florida from West Palm Beach to FortMyers (the Florida East-West Pipeline Project). Phase I of the pipeline hasbeen completed and is currently in service beginning with a connection to theFlorida Gas Transmission Company's pipeline in West Palm Beach and terminatingin South Bay. The remaining portions of the project are intended to include aninterconnection with the Florida Gas Transmission Company's pipeline in FortMyers and the Gulfstream Natural Gas System pipeline in Martin County. DuringOctober 2003, the company retained a company to provide engineering-relatedservices in support of the expansion of its Florida East-West Pipeline project.The company anticipates a twenty-eight (28) month schedule to complete thepipeline systems inclusive of a state regulatory approval process andconstruction activities.  The companyintends to begin the regulatory approval process once suitable customercommitments are obtained. When completed, the pipeline is expected to becapable of transporting up to 300,000 Mcf per day of natural gas. The pipelineis also intended to include direct connection to any of the three LNG pipelinesproposed to come onshore in southeast Florida at the ports of Palm Beach and/orPort Everglades.  Once completed, thecompany's pipeline will serve as a transportation hub linking the east and westsides of the Florida Gas Transmission system to the proposed LNG pipelines andthe Gulfstream Natural Gas System as well as the company's proposed West FeldaGas Storage facility.

In conjunction with the expansion of the FloridaEast-West Pipeline, the company entered into agreements with Plains ResourcesInc. (Plains), under which the parties have been validating technical andcommercial viability of developing up to 15 Bcf of working gas capacity ofnatural gas storage in the West Felda Field, located in South Florida. The WestFelda Field represents one of five oil-producing properties currently operatedby Plains in the oil-producing "Sunniland Trench" in South Florida. The WestFelda Field is expected to be serviced by the Florida East-West Pipeline, withan approximate 12-mile pipeline connection to the storage field south of thepipeline. Upon entering into final agreements, the parties intend to beginoffering storage services in conjunction with the initiation of service of thepipeline.

Together these projects are expected to provideincreased reliability for Florida's natural gas supply and distributioninfrastructure and support Florida's rapidly growing demand for natural gasutilized for electricity generation.

***Gas Procurement Contracts****.* Certain of the company's long-termcontracts for the supply, storage and delivery of natural gas include fixedcharges that amount to approximately $59.5 million for the next twelve-monthperiod (this amount includes the company's obligations under two twenty-yearagreements related to the Patriot pipeline discussed above). The company alsois committed to purchase, at market-related prices, minimum quantities of gasthat, in the aggregate, are approximately 2.1 Bcf per year or to pay certaincosts in the event the minimum quantities are not taken. The company expectsthat minimum demand on its systems for the duration of these contracts willcontinue to exceed these minimum purchase obligations. 

NUI Utilities has entered into an agreement withCinergy to manage all of its interstate pipeline assets.  NUI Utilities initially entered into anagreement with Cinergy effective March 31, 2004, which covered only a one-monthperiod.  That agreement was supersededby an agreement effective on April 1, 2004, pursuant to which Cinergy willserve as the NUI Utilities asset manager from April 1, 2004 until March 31,2005, and will provide NUI Utilities with a full requirements gas supplyservice to enable NUI Utilities to meet its public utility obligations tosupply gas to customers in New Jersey, Florida and Maryland. The gas supplywill be provided at market-based prices. 

NUI Utilities has assigned to Cinergy or, in the caseof non-assignable assets, granted Cinergy agency authority to control, NUIUtilities' gas supply and deliverability assets, and Cinergy will pay NUIUtilities a fixed amount for the right to act as NUI Utilities' asset managerfor the twelve months ended March 31, 2005. The obligations of NUI Utilities,including all commodity and demand charges, will be secured by a prepaymentobligation unless NUI Utilities' credit rating improves to investment grade, atwhich time the parties will negotiate other mutually agreeable payment termsbased on the improved creditworthiness of NUI Utilities. The agreement providesNUI Utilities the option to terminate the agreement in the event of a change incontrol of NUI Utilities or NUI. In light of, among other factors, therequirement that NUI Utilities must prepay its gas requirements under itsagreement with Cinergy and its other gas supply, distribution and storageagreements, and the obligation to make payments pursuant to its settlement withthe NJBPU, management of the company believes it will need additional financingin order to assure that the company's liquidity needs can be met during theupcoming winter heating season. There is no assurance that any necessaryadditional financing can be obtained or that the approval of the NJBPU, whichis necessary to obtain such financing, will be forthcoming.  In addition, the financing, if obtained,could have terms which have a material adverse effect on the company.

***Environmental*.**  The company owns or previously ownedproperties on which former manufactured gas plants (MGP) were operated in thestates of New Jersey, North Carolina, South Carolina, Pennsylvania, New Yorkand Maryland.  Although theactual total cost of future environmentalinvestigation and remediation efforts cannot be reasonably estimated, the company has recorded on an undiscounted basisa total reserve of approximately $33.9million, which the company believes represents the probable minimum amount thecompany may expend over the next 30 years. Of this reserve, approximately $30.1 million relates to the New Jersey MGP properties and approximately $3.8 million relates to the MGP properties located outsidethe state of New Jersey. The company believes that all costs associated withremediation of the New Jersey MGP properties will be recoverable in rates orfrom insurance carriers. The company's prudently incurred remediation costs forthe New Jersey MGP properties have been authorized by the NJBPU to berecoverable in rates through its MGP Remediation Adjustment Clause. As aresult, the company has recorded a regulatory asset of approximately $35.8million, inclusive of interest, as of December 31, 2003. With respect to coststhat may be associated with the MGP properties located outside the state of NewJersey, the company is currently pursuing or intends to pursue recovery fromratepayers, former owners and operators, and/or insurance carriers. However,the company is not able, at this time, to express a belief as to whether any orall of these recovery efforts will ultimately be successful.

***Contractual Obligations.*** In the course of its business activities, the companyenters into a variety of contractual obligations and commercial commitments.Some of these items result in direct obligations on NUI's balance sheet whileothers are commitments, some firm and some based on uncertainties, that aredisclosed in the company's underlying consolidated financial statements. Therehave been no material changes in the company's contractual obligations fromthose disclosed in the company's annual report on Form 10-K for the year endedSeptember 30, 2003, except fortheCinergy agreement previously discussed.

***Off-Balance Sheet Arrangements***. The company's off-balancesheet arrangements include commitments under operating leases, guarantees,letters of credit and gas procurement contracts, all of which are normal to thecompany's operations. See Note 12 of the Notes to the Consolidated FinancialStatements for a discussion of the company's guarantees. In addition, thecompany is a 50 percent member of a joint venture that is developing naturalgas storage assets and is required to provide funding toward the development ofthese assets for their intended purpose. See Capital Expenditures and Commitments-Joint Venture with Duke Energyabove for further discussion. NUI is also party to two Standby Letters ofCredit secured by cash collateral, as follows:

-       a secured Standby Letter of Credit issued on January 16, 2004by Fleet Bank in the amount of $750,000, in favor of PNC Bank. The letter ofcredit is intended to support the company's Procurement Card program with PNCBank. The letter of credit was originally scheduled to expire on May 3, 2004;however, it has since been extended to July 23, 2004.

-       a secured Standby Letter of Credit issued on February 1, 2004by Fleet Bank, originally in the amount of $1,000,000, in favor of NationalUnion Fire Insurance Company and several other insurance companies underwritingthe company's workmen's compensation policy. As of April 23, 2004, the amount of the letter of credit has beenreduced to $948,000. The letter of credit expires on February 1, 2005.

**Application of Critical AccountingPolicies**

The preparation of financialstatements in accordance with generally accepted accounting principles (GAAP)requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Management considersCritical Accounting Policies to be those that could result in materially differentfinancial statement results if the assumptions regarding application ofaccounting principles were different. A description of the company's CriticalAccounting Policies can be found in the company's Annual Report filed on Form10-K for the year ended September 30, 2003. Other significant accountingpolicies are discussed in Note 1 of the Notes to the Consolidated FinancialStatements-Summaryof Significant Accounting Policies of the company's Form 10-K. Recently issuedaccounting standards are also discussed in Note 13 of the Notes to theConsolidated Financial Statements.

**Item 4. DisclosureControls and Procedures**

In connection with their audit of the company's fiscal2002 financial statements, our independent external auditors,PricewaterhouseCoopers LLC (PwC), identified and reported on materialweaknesses within our systems of internal control.  In a report dated November 22, 2002 to the Audit Committee of theBoard of Directors and management of NUI, PwC identified certain conditionsthat created a material weakness relating to internal control over financialreporting that resulted in the need to restate prior financial statements.  The weaknesses identified included, but werenot limited to, the following:

--      Generalledger cash account balances were not being reconciled to the bank statements.

--      Generalledger account analyses were not being consistently performed.

--       A listingof debt covenants was not being maintained.

--       Comprehensiveand formalized accounting and financial reporting policies and procedures didnot exist.

--       Instanceswere noted where management lacked certain technical accounting and taxexpertise that resulted in accounting errors.

--       The flowof accounting information between business units and corporate accounting wasnot timely or formalized.

--      Accountspayable invoice processing procedures needed to be improved.

--       A formalplan and implementation timetable needed to be developed to address compliancewith the certification requirements of Section 404 of the Sarbanes-Oxley Act of2002.

The company believes that these internal controlweaknesses were addressed by management during fiscal 2003. However, inconnection with the fiscal 2003 financial statement audit, PwC communicatedadditional material control weaknesses, which included:

--       Thecontract review process was not formally documented, and appropriate procedureshad not been developed to ensure timely review of contracts for accountingimplications.

--       There wasa lack of adherence to policies and procedures for travel and entertainmentexpense reimbursements and procurement card expenditures.

--       Thepayroll timekeeping and tracking process was manual in nature and prone toerrors.

--       Informationtechnology had a number of areas where formal, documented policies andprocedures had not been developed.

As further discussed in Note 16 to the ConsolidatedFinancial Statements, the company is filing this Amendment No. 1 on Form 10-Q/Afor the quarter ending December 31, 2003 because of a deficiency noted in itscash reconciliation process which gave rise to an overstatement of thecompany's cash balance and an understatement of its prepayment account as ofDecember 31, 2003. This deficiency was related to the company not timelyclearing certain identified reconciling items in a cash wire transfer accountresulting from end of the quarter cash payments.  The cash wire transfer account is included in Cash and cashequivalents  on the Consolidated BalanceSheet. As of the date of this filing, the company has implemented a processchange in its cash reconciliation process which addresses this issue.

During fiscal 2003, our internal auditors performedinternal audits which indicated material weaknesses in internal controlssimilar to those noted above. We have developed and implemented action plans toaddress their recommendations, and follow-up audits are being conducted.   

Additional internal control issues have been raisedand deficiencies have been noted in the March 2004 final audit report relatingto the focused audit conducted at the request of the NJBPU.

We have taken specific, immediate steps to address theinternal control weaknesses discussed above. In addition, we have undertaken a broader, long-term effort to assessour systems of internal control and to comply with the requirements of Section404 of the Sarbanes-Oxley Act.  Theseactions include:

--       Performinga comprehensive evaluation and developing a remediation plan with respect tointernal controls over financial reporting and related processes; 

--       Hiringadditional qualified and experienced employees, specifically in the finance andaccounting areas, and increasing technical training in these areas;

--       Implementinga redesigned cash management process and adopting more stringent cashmanagement practices and procedures;

--       Developingand implementing comprehensive accounting and financial reporting policies andprocedures;

--       Implementingprocedures for performance of account analyses and reconciliations;

--       Improvingand monitoring controls to increase the reliability of information generated byour information technology processes;

--       Educatingemployees throughout the company as to the importance of compliance withpolicies and procedures and the significance of a system of sound internalcontrols; and

--       Ensuringexecutive management's involvement in the oversight and review of thedisclosure and reporting process. 

The effectiveness of our, or any, systems ofdisclosure controls and procedures and internal controls is subject to certainlimitations, including the exercise of judgment in designing, implementing andevaluating the controls and procedures, the assumptions used in identifying thelikelihood of future events and the inability to eliminate misconductcompletely.  Further, the design ofsystems of control must reflect the fact that there are resource constraintsthat affect the operation of any such system, and that the benefits of controlsmust be considered relative to their risks. As a result, there can be no assurance that our systems of disclosurecontrols, procedures and internal controls will prevent all errors or fraud, orensure that all material information will be made known to management in atimely fashion.

As required by Rule 13a-15(b) of the Exchange Act, thecompany has carried out an evaluation, under the supervision and with theparticipation of its management, including its President and Chief ExecutiveOfficer and its interim Chief Financial Officer, of the effectiveness of thedesign and operation of its disclosure controls and procedures. The evaluation examinedthose disclosure controls and procedures as of December 31, 2003, the end ofthe period covered by this report. Based upon the evaluation, the company'smanagement, including its President and Chief Executive Officer and its interimChief Financial Officer, concluded that, as of December 31, 2003, NUI'sdisclosure controls and procedures were effective, except as described above,at the reasonable assurance level to ensure that information required to bedisclosed in NUI's reports filed or submitted under the Exchange Act wasaccumulated and communicated to NUI's management, including its President andChief Executive Officer and its interim Chief Financial Officer, as appropriateto allow timely decisions regarding required disclosure. 

**SIGNATURE**

Pursuant to the requirements of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
 
**NUI CORPORATION**

/s/ DAN SCOULER

  June 17, 2004

    DAN SCOULER      Interim Chief Financial Officer