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

 

# FORM 10-Q

(Mark One)      

       X              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                       SECURITIES EXCHANGE ACT OF 1934

**For the quarterly periodended June 30, 2004**

OR

 

                       TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE                      SECURITIES EXCHANGE ACT OF 1934

For the transition period from_________________ to______________________

Commission FileNumber     001-16385

##  

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

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

 

**550 Route 202-206, PO Box 760, Bedminster, NewJersey 07921-0760**(Address of principal executive offices, including zipcode)

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

Indicateby check mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.        

Yes X     No 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Yes X     No 

 

The number of shares outstanding of each of theregistrant's classes of common stock, as of July 31, 2004: Common Stock,No Par Value: 15,969,113 shares outstanding.

**Item1. Financial Statements**

**NUI Corporation andSubsidiariesConsolidatedStatement of Income (Unaudited)(Dollars inthousands, except per share amounts)**

**                                                                                                               **
| **                                                                                                  ** | **Three Months EndedJune 30,**                       | **Nine Months EndedJune 30,**                              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------|------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | **2004**                                             | **2003**                                                   | **2004** | **2003** |
| **Operating Margins**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                      |                                                            |  |  |
|    Operating revenues                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | $98,944                                              | $135,293                                                   | $508,803 | $556,839 |
|    Less - Purchased gas and fuel                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 51,297                                               | 85,987                                                     | 316,773 | 352,936 |
|               Cost of sales and services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  3,374                                          | 2,977                                                      | 10,545 | 9,618 |
|               Energy taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |     2,558                             |      2,426                             |   11,972 |   11,209 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   41,715                                        |      43,903                                 | 169,513 | 183,076 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                 |                                                       |   |   |
| **Other Operating  Expenses**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                 |                                                       |   |   |
|    Operations and maintenance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 36,328                                               | 35,032                                                     | 117,813 | 98,618 |
|    Restructuring costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 587                                                  | ---                                                        | 2,723 | --- |
|    Depreciation and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 9,125                                                | 7,844                                                      | 26,721 | 25,524 |
|    Taxes, other than income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |     1,778                             |        933                   |     6,565 |     5,500 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   47,818                                        |   43,809                                              | 153,822 | 129,642 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                 |                                                       |   |   |
| **Operating Income (Loss)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | (6,103)                                              | 94                                                         | 15,691 | 53,434 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                 |                                                       |   |   |
|   Equity in earnings of Saltville Gas  Storage Company, LLC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 156                                                  | ---                                                        | 801 | --- |
|   Loss on extinguishment of debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ---                                                  | ---                                                        | (9,940) | --- |
|   Other income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 1,238                                                |      200                               | 2,555 |       862 |
| ** **Interest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 11,336                                               | 6,260                                                      | 30,368 | 17,755 |
|   Other  interest income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       (101)                 |      (281)                             |     (397) |   (1,543) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                 |                                                       |   |   |
| **Income (Loss)  from Continuing Operations Before Income Taxes**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | (15,944)                                             | (5,685)                                                    | (20,864) | 38,084 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                 |                                                       |   |   |
| **  Income tax expense (benefit)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |     (4,395)                           |      (2,036)                           |    (6,014) |   15,936 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                 |                                                       |   |   |
| **Income (Loss)  from Continuing Operations **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   (11,549)                                      |   (3,649)                                             |   (14,850) |   22,148 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                 |                                                       |   |   |
| **Discontinued Operations**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                 |                                                       |   |   |
|    Pre-Tax  Income (loss) from  discontinued operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |     492                               | (26,032)                                                   |     (1,095) | (27,071) |
|    Income  tax expense (benefit)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |      1,704             |    (4,611)                                       |      1,181 |    (5,031) |
| **Loss from Discontinued  Operations**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |     (1,212)                 |  (21,421)                                             |     (2,276) |  (22,040) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                 |                                                       |   |   |
| **Income (Loss) before Effect  of Change in Accounting**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  (12,761)                                       | (25,070)                                                   |  (17,126) | 108 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                 |                                                       |   |   |
|   Effect of change in    accounting (net of tax benefit of $4,079         in 2003)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |          --- |           --- |         --- |    (5,870) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                 |                                                            |   |   |
| **Net Loss**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | $(12,761)                                            | $(25,070)                                                  | $(17,126) | $(5,762) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                 |                                                       |   |   |
| **Basic and Diluted Income  (Loss) from Continuing     Operations Per Share of Common Stock**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | $  (0.72)                                       | $ (0.23)                                                   | $  (0.93) | $   1.38 |
| **Basic and Diluted Net Loss  Per Share of Common Stock**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | $ ( 0.80)                                            | $ (1.57)                                                   | $ (1.07) | $(0.36) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                 |                                                       |   |   |
| **Dividends Per  Share of Common Stock**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | $        ---      | $  0.245                                              | $ 0.375 | $0.735 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                 |                                                       |   |   |
| **Weighted Average Number of Shares of Common      Stock Outstanding**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 15,968,692                                           | 16,021,477                                                 | 15,976,128 | 16,039,573 |

 *See thenotes to the consolidated financial statements.*

** **

**NUICorporation and SubsidiariesConsolidated Balance Sheet(Dollars in thousands)**

** **
|                                                                                                                                                   | **June 30, 2004(Unaudited)**                                                                                                                                                                      | **     September 30, 2003                (*)         ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ASSETS**                                                                                                                                        |                                                                                                                                                                                                   |                                                                                                                                                                                 |
| **Current  Assets**                                                                                                                               |                                                                                                                                                                                                   |                                                                                                                                                                                      |
|    Cash and  cash equivalents                                                                                                           | $111,426                                                                                                                                                                                          | $25,209                                                                                                                                                                              |
|    Accounts  receivable (less allowance for doubtful        accounts of $6,022  and $7,304, respectively) |                                 50,233 | 55,575                                                                                                                                                                               |
|    Fuel inventories,  at average cost                                                                                                   | 31,812                                                                                                                                                                                            | 63,852                                                                                                                                                                               |
|     Under-recovered purchased gas costs                                                                                                 | ---                                                                                                                                                                                               | 25,398                                                                                                                                                                               |
|    Derivative assets                                                                                                                    | 14,038                                                                                                                                                                                            | 8,059                                                                                                                                                                                |
|    Federal income tax  receivable                                                                                                       | ---                                                                                                                                                                                               | 3,333                                                                                                                                                                                |
|    Assets  held for sale                                                                                                                | ---                                                                                                                                                                                               | 7,976                                                                                                                                                                                |
|     Prepayments and other                                                                                                               |       71,931                                                                                                                                                             |       31,120                                                                                                                                                |
|                                                                                                                                              |     279,440                                                                                                                                                                        |     220,522                                                                                                                                                           |
| **Property,  Plant and Equipment**                                                                                                                |                                                                                                                                                                                              |                                                                                                                                                                                 |
|     Property, plant and equipment, at original cost                                                                                     | 978,820                                                                                                                                                                                           | 954,446                                                                                                                                                                              |
|     Accumulated depreciation and amortization                                                                                           | (344,485)                                                                                                                                                                                         | (323,370)                                                                                                                                                                            |
|     Unamortized plant acquisition adjustments, net                                                                                      |       12,570                                                                                                                                                             |        13,372                                                                                                                                          |
|    Assets  held for sale                                                                                                                |              ---                                                                                                                      |             147                                                                                                               |
|                                                                                                                                                   |     646,905                                                                                                                                                                        |      644,595                                                                                                                                                     |
|                                                                                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                 |
| **Funds for  Construction Held by Trustee**                                                                                                       | ---                                                                                                                                                                                               | 2,058                                                                                                                                                                                |
| **Investment in  Saltville Gas Storage Company, LLC**                                                                                             | 17,257                                                                                                                                                                                            | 16,456                                                                                                                                                                               |
| **Other  Investments**                                                                                                                            |     ---                                                                                                                                                                            | 210                                                                                                                                                                                  |
|                                                                                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                 |
| **Other Assets**                                                                                                                                  |                                                                                                                                                                                              |                                                                                                                                                                                 |
|     Regulatory assets                                                                                                                   | 57,625                                                                                                                                                                                            | 57,040                                                                                                                                                                               |
|    Notes receivable from  Saltville Gas Storage Company,       LLC                                                  | 23,509                                                                                                                                                                                            | 17,575                                                                                                                                                                               |
|    Other receivable from  Saltville Gas Storage Company,       LLC                                                  | 3,869                                                                                                                                                                                             | 8,010                                                                                                                                                                                |
|    Long-term portion of  derivative assets                                                                                              | 5,477                                                                                                                                                                                             | 5,133                                                                                                                                                                                |
|    Goodwill                                                                                                                             | 8,056                                                                                                                                                                                             | 8,056                                                                                                                                                                                |
|    Assets  held for sale                                                                                                                | ---                                                                                                                                                                                               | 1,002                                                                                                                                                                                |
|    Other  assets                                                                                                                        |        34,286                                                                                                                                                       |        40,106                                                                                                                                          |
|                                                                                                                                                   |      132,822                                                                                                                                                                  |      136,922                                                                                                                                                     |
|                                                                                                                                                   | $1,076,424                                                                                                                                                                                        | $1,020,763                                                                                                                                                                           |
|                                                                                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                 |
| **CAPITALIZATION  AND LIABILITIES**                                                                                                               |                                                                                                                                                                                              |                                                                                                                                                                                 |
| **Current  Liabilities**                                                                                                                          |                                                                                                                                                                                              |                                                                                                                                                                                 |
|    Notes  payable to banks                                                                                                              | $355,000                                                                                                                                                                                          | $164,100                                                                                                                                                                             |
|    Notes  payable                                                                                                                       | ---                                                                                                                                                                                               | 1,400                                                                                                                                                                                |
|    Current  portion of long-term debt and capital lease       obligations                                           | 51,593                                                                                                                                                                                            | 2,167                                                                                                                                                                                |
|    Accounts  payable, customer deposits and accrued       liabilities                                               | 62,018                                                                                                                                                                                            | 125,353                                                                                                                                                                              |
|     Over-recovered purchased gas costs                                                                                                  | 9,620                                                                                                                                                                                             | ---                                                                                                                                                                                  |
|     Liabilities held for sale                                                                                                           | ---                                                                                                                                                                                               | 3,150                                                                                                                                                                                |
|    Federal  income and other taxes                                                                                                      | 13,048                                                                                                                                                                                            | 5,166                                                                                                                                                                                |
|    Current  portion of deferred Federal income taxes                                                                                    |        1,263                                                                                                                                                        |         6,705                                                                                                                                     |
|                                                                                                                                                   |    492,542                                                                                                                                                                              |     308,041                                                                                                                                                           |
| **Other Liabilities**                                                                                                                             |                                                                                                                                                                                              |                                                                                                                                                                                 |
|    Capital  lease obligations                                                                                                           | 9,182                                                                                                                                                                                             | 9,798                                                                                                                                                                                |
|    Deferred  Federal income taxes                                                                                                       | 57,579                                                                                                                                                                                            | 61,608                                                                                                                                                                               |
|     Liabilities held for sale                                                                                                           | ---                                                                                                                                                                                               | 19                                                                                                                                                                                   |
|     Unamortized investment tax credits                                                                                                  | 3,051                                                                                                                                                                                             | 3,375                                                                                                                                                                                |
|     Environmental remediation reserve                                                                                                   | 33,815                                                                                                                                                                                            | 33,941                                                                                                                                                                               |
|     Regulatory and other liabilities                                                                                                    |       74,105                                                                                                                                                             |        64,813                                                                                                                                          |
|                                                                                                                                                   |     177,732                                                                                                                                                                        |      173,554                                                                                                                                                     |
| **Capitalization**                                                                                                                                |                                                                                                                                                                                              |                                                                                                                                                                                 |
|    Common  shareholders' equity                                                                                                         | 207,070                                                                                                                                                                                           | 230,115                                                                                                                                                                              |
|     Long-term debt                                                                                                                      |      199,080                                                                                                                                                                  |      309,053                                                                                                                                                     |
|                                                                                                                                                   |      406,150                                                                                                                                                                  |      539,168                                                                                                                                                     |
|                                                                                                                                                   | $1,076,424                                                                                                                                                                                        | $1,020,763                                                                                                                                                                           |

** **

**Derived from auditedfinancial statements.See the notes to theconsolidated financial statements.*

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

** **
|                                                                                                                        | **  Nine  Months Ended June 30,**                |
|------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------|
|                                                                                                                        | **2004**                                              | **2003** |
| **Operating Activities**                                                                                               |                                                       |  |
| Net  income (loss)                                                                                                     | $(17,126)                                             | $  (5,762) |
| Less:  Loss from discontinued operations, net of tax                                                                   | (2,276)                                               | (22,040) |
|           Effect of change in accounting,  net of tax                     |       ---                    |  (5,870) |
|    Net income (loss) from continuing  operations                                                             | (14,850)                                              | 22,148 |
|                                                                                                                        |                                                  |   |
| Adjustments  to reconcile net income to net cash used in operating       activities:               |                                                  |   |
|           Depreciation and amortization                                   | 26,721                                                | 25,524 |
|           Deferred Federal income taxes                                   | (9,471)                                               | (12,283) |
|           Amortization of deferred  investment tax credits                | (324)                                                 | (398) |
|           Derivative assets and liabilities                               | 5,018                                                 | 3,084 |
|           Regulatory assets and liabilities                               | 10,213                                                | 16,058 |
|           Other                                                           | (1,038)                                               | 1,557 |
|           Effect of changes in:                                           |                                                  |   |
|              Accounts receivable, net                      | 5,342                                                 | (22,905) |
|              Fuel inventories                              | 32,040                                                | 2,228 |
|              Accounts payable, deposits and  accruals      | (63,336)                                              | (14,234) |
|              Under- or Over-recovered  purchased gas costs | 22,151                                                | 6,711 |
|              Prepaids and other                            | (40,810)                                              | (5,194) |
|              Federal and state income taxes                | 11,215                                                | 20,525 |
|              Other                                         |     3,768                              |    2,600 |
|      Net cash provided by (used in)  operating activities                                          | (13,361)                                              | 45,421 |
|      Net cash provided by (used in)  discontinued operations                                       |     3,729                              |      (355) |
|        Net cash provided by (used in)  operating activities                              |   (9,632)                                        |  45,066 |
|                                                                                                                        |                                                  |   |
| **Financing Activities**                                                                                               |                                                  |   |
| Proceeds  from sales of common stock                                                                                   | 325                                                   | 633 |
| Dividends  to shareholders                                                                                             | (5,980)                                               | (11,801) |
| Payments  of long-term debt                                                                                            | (60,000)                                              | --- |
| Funds  for construction held by trustee, net                                                                           | 2,068                                                 | 1,852 |
| Principal  payments under capital lease obligations                                                                    | (2,122)                                               | (1,948) |
| Net  short-term borrowings                                                                                             | 190,900                                               | 20,910 |
|   Net cash provided by continuing operations                                                                      | 125,191                                               | 9,646 |
|   Net cash used in discontinued operations                                                                        |          ---  |          (3) |
|     Net cash provided by financing  activities                                                          | 125,191                                               |  9,643 |
|                                                                                                                        |                                                  |   |
| **Investing Activities**                                                                                               |                                                  |   |
| Cash  expenditures for property, plant and equipment                                                                   | (27,273)                                              | (31,919) |
| Investment  in Saltville Gas Storage Company, LLC                                                                      | ---                                                   | (9,180) |
| Net  proceeds from sale of subsidiaries                                                                                | ---                                                   | 13,117 |
| Other                                                                                                                  |    (2,020)                                  |    (2,377) |
|   Net cash used in continuing operations                                                                          | (29,293)                                              | (30,359) |
|   Net cash used in discontinued operations                                                                        |          (49) |    (1,801) |
|     Net cash used in investing activities                                                               |  (29,342)                                        |  (32,160) |
|                                                                                                                        |                                                  |   |
| Net  increase in cash and cash equivalents from continuing     operations                                    | 82,537                                                | 24,708 |
| Net increase  (decrease) in cash and cash equivalents from     discontinued operations                       |     3,680                              |    (2,159) |
| Net  increase in cash and cash equivalents                                                                             | $86,217                                               | $22,549 |
|                                                                                                                        |                                                  |   |
| **Cash and Cash Equivalents**                                                                                          |                                                  |   |
| At  beginning of period                                                                                                | $  25,209                                        | $  4,247 |
| At end  of period                                                                                                      | $111,426                                              | $26,796 |
|                                                                                                                        |                                                       |  |

*See the notes to theconsolidated financial statements.*

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

**1.     Basis of Presentation**

The consolidated financial statements include all operating divisionsand subsidiaries of NUI Corporation (NUI and, together with its subsidiaries, the company, we, our, or us).  NUI is an energy company that primarilyoperates natural gas utilities and businesses involved in natural gas storageand pipeline activities.  NUI's localutility operations are carried out by NUI's wholly-owned subsidiary, NUIUtilities, Inc. (NUI Utilities) and a subsidiary of Virginia Gas Company (VGC),and serve approximately 371,000 customers in four states along the easternseaboard of the United States. NUI Utilities is comprised of Elizabethtown GasCompany (New Jersey), City Gas Company of Florida, and Elkton Gas (Maryland).VGC is also engaged in other activities, such as pipeline operation and naturalgas storage. The company's non-regulated businesses are carried out by NUICapital Corp. and its subsidiaries. As of April 1, 2004, the company's only remainingnon-regulated subsidiary with substantial continuing 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 winding down their operations. These subsidiaries include: NUI Environmental, Inc. (NUI Environmental), anenvironmental project development subsidiary sold in September 2003; NUI Telecom, Inc. (NUITelecom), a telecommunications subsidiary sold in December 2003; NUI Energy,Inc. (NUI Energy), an energy retailer which is being wound down; NUI EnergyBrokers, Inc. (NUI Energy Brokers), a wholesale energy trading and portfoliomanagement subsidiary which is being wound down; OAS Group, Inc. (OAS), the company's digital mapping operation which is being wound down; and TIC Enterprises, LLC (TIC), a sales outsourcing subsidiary which is being wound down. The company's wholly-owned subsidiary, NUI SaltvilleStorage, Inc. (NUISS), is a fifty-percent member of Saltville Gas StorageCompany, LLC (SSLLC). SSLLC is a joint venture with a subsidiary of Duke Energythat is developing a natural gas storage facility in Saltville, Virginia. Allintercompany accounts and transactions have been eliminated in consolidation. 

On September 26, 2003, the company's Board ofDirectors announced it was pursuing the sale of the company, and the companyengaged two investment banks to serve as financial advisors to the companyduring the sales process. On July 15, 2004, NUI announced that it had enteredinto an Agreement and Plan of Merger (Merger Agreement) with AGL Resources Inc.(AGL) which provides for AGL to acquire all of the outstanding shares of commonstock of NUI for $13.70 per share in cash, or $220 million in the aggregate,based on approximately 16 million shares of outstanding NUI common stock, andthe assumption of NUI's outstanding debt at closing (see Note 15 for a furtherdiscussion of the merger). 

In addition, NUI and NUI Utilities received acommitment from a lender for an aggregate of $95 million in additional creditfacilities intended to provide NUI and NUI Utilities with additional liquiditythrough the close of the sale of the company (see Notes 2, 9 and 15). If theproposed new financing is not completed by September 30, 2004, or upon theoccurrence of certain other events, AGL has the right to terminate the MergerAgreement. 

As discussed in Note 4, for all periods presented,the company has classified the results of Valley Cities Gas and Waverly Gas(which were sold collectively on November 7, 2002), NUI Telecom, and TIC asDiscontinued Operations in the Consolidated Statements of Income. The assetsand liabilities of NUI Telecom have been classified as Assets Held for Sale andLiabilities Held for Sale in the Consolidated Balance Sheet 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 the prioryear financial statements to conform with the current year presentation.Because of the seasonal nature of gas utility operations, the results forinterim periods are not necessarily indicative of the company's results for anentire year.

The consolidated financial statements contained hereinhave been prepared without audit in accordance with the rules and regulationsof the Securities and Exchange Commission (SEC) and reflect all adjustmentswhich, in the opinion of management, are necessary for a fair statement of theresults for interim periods. The preparation of financial statements in accordancewith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.The consolidated 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. 

**2.     LiquidityIssues**

As a result of various factors, NUI and NUI Utilities haveexperienced and, in the event the merger does not occur or the anticipated $95million of senior credit facilities are not obtained, expect to continueexperiencing significant liquidity problems. Liquidity needs for NUI Utilitiesgenerally are driven by factors that include prepayment for its natural gasrequirements; natural gas commodity prices; the impact of weather on customerbills; lags in fully collecting gas costs from customers under the purchasedgas adjustment clauses; both discretionary and required repayments of short-and long-term debt; capital spending; and working capital requirements, such asadministrative expenses and taxes. Liquidity needs at NUI and 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.  In the event the company is successful insecuring an aggregate of $95 million in senior credit facilities, as describedin Note 15, both NUI and NUI Utilities believe that they will have sufficientliquidity to meet their financial obligations through the fiscal year endingSeptember 30, 2005.  These additionalcredit facilities require the approval of the lenders and the New Jersey Boardof Public Utilities (NJBPU).  However,in the event the company is not successful in securing these additional creditfacilities, NUI and NUI Utilities believe that, subsequent to September 30,2004, they may not have sufficient liquidity to meet their continuingobligations 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 aninterest reserve account for the benefit of the lenders under NUI's creditagreement in the amount of approximately $20.4 million.

-       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. 

-       On July15, 2004, NUI announced that it had entered into the Merger Agreement with AGLwhich provides for AGL to acquire all of the outstanding shares of common stockof NUI. If we are unable to sell the company, or if a sale is not completed ina timely manner, NUI's and NUI Utilities' financial condition, results ofoperations and liquidity could be materially adversely affected (see Note 15for further information on the sale of the company).

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 9 and 10 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 an aggregate of $95 million in additional financing.  

On July 14, 2004, NUI and NUI Utilities received acommitment from a lender for an aggregate of $95 million in senior creditfacilities (the Bridge Facilities), which are intended to provide NUI and NUIUtilities with additional liquidity fiscal year 2005 and can be utilized topurchase gas for the upcoming winter heating season and for working capital andgeneral corporate purposes. This commitment is comprised of a $75 millionsenior secured credit facility to be made available to NUI Utilities andsecured by NUI Utilities' (i) accounts receivable, (ii) contracts and (iii)cash proceeds of the foregoing, and a $20 million senior unsecured creditfacility to be made available to NUI (see Note 15 for further discussion of theBridge Facilities). 

If the company is unsuccessful in its efforts toeffectively resolve its liquidity concerns, it may need to reorganize itsoperations and restructure its credit and debt financing. In the event theBridge Facilities are not obtained and/or the merger with AGL is notconsummated, the company would be unable to meet its maturing debt obligations,and would be forced to seek strategic alternatives, which may include areorganization and/or bankruptcy filing.

**3.     Common Shareholders' Equity**

The components of common shareholders' equity were asfollows (dollars in thousands):
| ** **                                    | **June 30,2004** | **September 30,2003** |
|-----------------------------------------------|------------------|-----------------------|
|                                               |                  |                       |
| Common stock, no par value                    | $287,513         | $288,620              |
| Shares held in treasury                       | (5,121)          | (5,320)               |
| Retained deficit                              | (72,057)         | (48,951)              |
| Unearned employee compensation                | (1,861)          | (3,589)               |
| Accumulated other comprehensive loss (Note 7) | (1,404)          | (645)                 |
| Total  common shareholders' equity            | $207,070         | $230,115              |

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

**       **The revenues, margins and operating income (losses) ofthe company's discontinued operations that have been reported as discontinuedoperations on the Consolidated Statements of Income for the three andnine-month periods ended June 30 are, as follows, exclusive of affiliatetransactions (in thousands):
|                                        | **Three Months Ended**            | **Nine Months Ended**                           |
|----------------------------------------|-----------------------------------|-------------------------------------------------|
|                                        | **June 30,**                      | **June 30,**                                    |
|                                        | **2004**                          | ** 2003**                                  | **2004** | **2003** |
| **Revenues:**                          |                                   |                                                 |  |  |
|    Distribution Services          | $    ---           | $        --- | $     --- | $      553 |
|   Retail & Business  Services |       48 |    12,923                             |   7,126 |    38,583 |
| Operating  Revenues                    |   $    48     | $ 12,923                                        | $7,126 | $ 39,136 |
|                                        |                              |                                            |   |   |
| **Operating Margins:**                 |                              |                                            |   |   |
|    Distribution Services          | $    ---           | $        --- | $     --- | $      250 |
|   Retail & Business  Services |       48 |      3,806                  |   1,679 |    13,672 |
| Operating  Margins                     | $    48            | $   3,806                             | $1,679 | $ 13,922 |
|                                        |                                   |                                            |  |  |
|                                                    | **Three Months Ended**             | **Nine Months Ended**                                      |
|----------------------------------------------------|------------------------------------|------------------------------------------------------------|
|                                                    | **June 30,**                       | **June 30,**                                               |
|                                                    | **2004**                           | ** 2003**                                             | **2004** | **2003** |
| **Pre-Tax Income (Loss):**                         |                                    |                                                       |  |  |
|    Distribution Services                      | $    ---            | $        ---            | $     --- | $      120 |
|   Retail & Business  Services             |  (108)                        |  (26,031)                                             |  (3,053) |  (26,312) |
| Operating  Income (Loss)                           | (108)                              | (26,031)                                                   | (3,053) | (26,192) |
|   Other  Income (Expense)                     | 600                                | (1)                                                        | 1,958 | (875) |
|   Net  Interest Charges                       |       --- |           --- |         --- |             4 |
| Pre-Tax Income (Loss) from Discontinued Operations | $  492                        | $(26,032)                                                  | $(1,095) | $(27,071) |

The amounts includedabove within Distribution Services are for Valley Cities Gas and Waverly Gas,which were sold collectively on November 7, 2002 for approximately $15 million.The amounts included above within Retail and Business Services are for NUITelecom, which was sold on December 12, 2003 for $2 million, and TIC, whoseoperations have been discontinued. Both sales were immaterial to the company'sresults in the respective periods.  Inaddition, the assets and liabilities held for sale on the Consolidated BalanceSheet at September 30, 2003 (not shown here) relate to NUI Telecom.

**5.     Earnings Per Share**

Thefollowing table summarizes the company's basic and diluted earnings per sharecalculations for the three and nine-month periods ended June 30 (amounts are inthousands, except per share amounts):**                                                                                              **
|  | **Three Months Ended** | **Nine Months Ended** |
|--|------------------------|-----------------------|
|  | **June 30,**           | **June 30,**          |
|  | **2004**               | **2003**              | **2004** | **2003** |   
 
** **Income (loss) from continuing operations

$(11,549)

$ (3,649)

$(14,850)

$22,148

 
  Loss from discontinued  operations

(1,212)

(21,421)

(2,276)

(22,040)

 
  Effect of change in accounting

          ---

          ---

          ---

   (5,870)

 
  Net loss

$(12,761)

$(25,070)

$(17,126)

$(5,762)

 
 

 

 

 

 
** **Weighted average shares outstanding

   15,969

   16,021

   15,976

  16,040

 ** Earnings (Loss) Per Share:** Basic and diluted net income (loss) from       continuing operations
    $(0.72)
    $(0.23)
    $(0.93)
    $1.38 Basic and diluted net income (loss) from       discontinued operations    (0.08)    (1.34)    (0.14)    (1.38) Basic and diluted effect of change in       accounting     ---     ---     --- (0.36)
** **Basic and diluted net loss
$(0.80)$(1.57)$(1.07)$(0.36)
The company's weightedaverage diluted shares outstanding (not shown) includes shares which would be issuableupon the exercise of stock options outstanding under NUI's stock option plan,which is added to weighted average shares outstanding.  As of June 30, 2004, unvested stock optionshaving an exercise price less than the market value of the company's shares forthe three- and nine-month periods ended on that date provided for an additional621 shares and 596 shares of common stock equivalents outstanding,respectively; however, these shares of common stock equivalents have beenomitted from the calculation of the three- and nine-month diluted earnings pershare as they would have been antidilutive, since the company had a loss inboth periods. The number of shares that could potentially be dilutive toearnings per share in the future that have been excluded in the computation ofdiluted earnings per share, because to do so would have been antidilutive, is88,200 and 492,600 shares, respectively, as of June 30, 2004 and 2003. 

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

During November 2003, thecompany commenced a reorganization effort that resulted in workforcereductions. These workforce reductions primarily affected the corporate sharedservices functions and were undertaken to reflect the overall reduction in thesize of the company due to the sale or winding down of certain NUI businesses.Additional workforce reductions were undertaken during the 2004 calendar year,primarily related to the company's decision to discontinue the tradingoperations of NUI Energy Brokers. One employee was requested to provideadditional services for a limited period subsequent to his termination date;the remainder of the employees terminated as a result of the reorganizationefforts are not required to provide any future service to the company. The reorganizationefforts resulted in aggregate charges of approximately $2.7 million to restructuring costs for the nine months endedJune 30, 2004, primarily relating to severance costs for 47 individuals.A total of approximately $1.7 million has been paid to former employees throughJune 30, 2004. The company has approximately $1.0 million of unpaid liabilitiesincluded in Accounts Payable, Customer Deposits, and Accrued Liabilities on theConsolidated Balance Sheet at June 30, 2004 relating to these severance costs. 

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 2004.  He previously had servedas Senior Vice President and Chief Financial Officer since September 1997, andChief Operating Officer since May 1998. Until his resignation in January 2004,James R. Van Horn served as Chief Administrative Officer since May 1998, andGeneral Counsel and Secretary since 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. 

**7.     Comprehensive Income**

The components of Comprehensive Income are as follows(amounts in thousands):

** **

**Three Months Ended**

**Nine Months Ended**

**June 30,**

**June 30,**

**2004**

**2003**

**2004**

**2003**

 
 
** **Net loss

$(12,761)

$(25,070)

$(17,126)

$(5,762)

 
 

 

 

 

 
** **Other comprehensive income (loss):

 

 

 

 

 
    Derivatives qualifying as hedges, net

          ---

       (274)

       (759)

       106

 
      Total comprehensive loss

$(12,761)

$(25,344)

$(17,885)

$(5,656)

 
Accumulated other comprehensive loss, included in Common Shareholders'Equity on the Consolidated Balance Sheet was $(1,404,000) at June 30, 2004, and$(645,000) at September 30, 2003. Included in the balance at June 30, 2004, was$(1,404,000) related to minimum pension liability (net of $976,000 in taxes). Therewere no derivatives qualifying as hedges on that date.

**8.     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 and nine-month periods ended June 30 wouldhave been as shown in the following table (in thousands, except for per shareamounts).

**                                                                               **

**Three Months Ended**

**Nine Months Ended**

**June 30,**

**  June 30,**

**2004**

**2003**

**2004**

**2003**

 

 

 

 

Net loss as reported

$(12,761)

$(25,070)

$(17,126)

$(5,762)

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

       (39)

       (436)

     (309)

        (1,383)

Pro forma net loss

$(12,800)

$(25,506)

$(17,435)

$(7,145)

 

 

 

 

**Loss Per Share:**

 

 

 

 

Basic and diluted- as reported

$(0.80)

$(1.57)

$(1.07)

$(0.36)

Basic and diluted- pro forma

$(0.80)

$(1.59)

$(1.09)

$(0.45)

**9.     NotesPayable to Banks**

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

NUI's current credit agreement provides for a $255million term loan facility. The proceeds of the term loan facility were used(1) to repay and terminate NUI's credit agreement which was entered into onFebruary 12, 2003, (2) to repay NUI's outstanding $60 million senior notes andpay a $9.4 million prepayment premium relating thereto, (3) to repayapproximately $85 million of an intercompany balance owed by NUI to NUIUtilities, (4) to fund a $20.4 million interest reserve account for the benefitof the lenders under NUI's credit agreement, and (5) for other generalcorporate purposes. NUI's credit agreement bears interest at a rate, at NUI'soption, equal to either (i) LIBOR (subject to a 2 percent floor) plus 6percent, or (ii) the Base Rate (subject to a 3 percent floor) plus 5 percent.The obligations under NUI's credit agreement are guaranteed on a seniorunsecured basis by certain of NUI's direct and indirect wholly-ownedsubsidiaries.  NUI Utilities and VGC donot guarantee NUI's obligations under this credit agreement. As of June 30,2004, NUI has fully drawn all amounts available under its credit agreement. Asof August 9, 2004, NUI had overnight cash investments of $42.7 million.

NUI's facility may be extended for one 364-day periodif (i) NUI Utilities' facility is simultaneously extended, (ii) the maturity ofNUI Utilities' 8.35 percent medium term notes, due February 1, 2005, has beenextended to a date no earlier than June 30, 2006 or the notes have been repaidwith the proceeds of the delayed draw term loan, (iii) NUI deposits cash intoescrow with the administrative agent to cover interest that would accrue onoutstanding amounts under the credit facility until the extended maturity date,in an amount of approximately $20.4 million, (iv) no default exists under suchfacility at the time of such extension and (v) all applicable regulatoryapprovals required for such extension have been obtained.

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 bearsinterest 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 (subjectto a 3 percent floor) plus 4 percent. As of June 30, 2004, NUI Utilities hasfully drawn under the $50 million revolver and the $50 million term loanfacility. As of August 9, 2004, NUI Utilities had overnight cash investments of$57.9 million.

NUI Utilities' facility may be extended for one364-day term if (i) all applicable regulatory approvals required for suchextension have been obtained, (ii) the maturity of NUI Utilities' 8.35 percentmedium term notes, due February 1, 2005, has been extended to a date no earlierthan June 30, 2006 or the notes have been repaid with the proceeds of thedelayed draw term loan and (iii) no default exists under such facility at thetime of such extension.

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. The terms of NUI's and NUIUtilities' credit facilities would have to be further amended in connectionwith the anticipated $95 million of Bridge Facilities. 

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  (NJBPU Settlement), 

(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 certain gas pipeline assets (see Note 12 for further information on theasset purchase), 

(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 June 30, 2004, theoutstanding borrowings under NUI's and NUI Utilities' credit facilities were$255.0 million and $100.0 million, respectively, at weighted average interestrates of 8.1 percent and 7.1 percent. As of that date, NUI and NUI Utilitieshad no unused borrowing capacity under their respective credit facilities(except for NUI Utilities' delayed draw term loan). Also, as of June 30, 2004,NUI and NUI Utilities had approximately $42.2 million and $66.6 million,respectively, of cash held as short-term investments.

The weighted average dailyamounts of borrowings outstanding under NUI's current credit facility and theweighted average interest rates on those amounts were $255.0 million and $18.6million at 8.1 percent and 2.8 percent for the three months ended June 30, 2004and 2003, respectively. The weighted average daily amounts of borrowingsoutstanding under NUI's previous and current credit facilities and the weightedaverage interest rates on those amounts were $210.7 million and $35.8 millionat 8.0 percent and 3.0 percent for the nine months ended June 30, 2004 and2003, respectively. The weighted average daily amounts of borrowingsoutstanding under NUI Utilities' current credit facility and the weightedaverage interest rates on those amounts were $100.0 million and $126.8 millionat 7.3 percent and 2.8 percent for the three months ended June 30, 2004 and2003, 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 $103.5 million and $114.2million at 6.1 percent and 2.7 percent for the nine months ended June 30, 2004and 2003, respectively.

On July 14, 2004, NUI and NUI Utilities received acommitment from a lender for an aggregate of $95 million in senior creditfacilities (also referred to as the Bridge Facilities), which are intended toprovide NUI and NUI Utilities with additional liquidity through fiscal year2005 and can be utilized to purchase gas for the upcoming winter heating seasonand for working capital and general corporate purposes. This commitment iscomprised of a $75 million senior secured credit facility to be made availableto NUI Utilities and secured by NUI Utilities' (i) accounts receivable, (ii)contracts and (iii) cash proceeds of the foregoing, and a $20 million seniorunsecured credit facility to be made available to NUI. The NUI Utilitiesfacility would mature on May 15, 2005, and the NUI facility would mature onNovember 21, 2005 (see Note 15 for further discussion of the BridgeFacilities). 

*Dividend Restrictions Under Short-term CreditFacilities.* Under the dividend restriction describedabove, NUI is prohibited from paying any cash dividends during any fiscalquarter in which NUI's consolidated total debt represents more than 60 percentof its total capitalization, measured (i) at the last day of theimmediately preceding fiscal quarter and (ii) pro forma at the time suchdividend is made.  In addition, theterms of the Merger Agreement prevent NUI from paying any cash dividends,regardless of financial results. Therefore, NUI is unable to pay any dividends at this time or in theforeseeable future. Under NUI's credit facility, NUI is also prohibited frompaying dividends exceeding $20 million in the aggregate while the creditfacility is outstanding.  

Under the amendment to NUIUtilities' credit facility dated as of May 10, 2004, NUI Utilities isprohibited from paying dividends to NUI Corporation exceeding $35 million inthe aggregate while the NUIUtilities creditfacility is outstanding. 

**10. ****Long-term Debt**

NUI Utilities has outstanding $50 million 8.35 percentmedium term notes, which mature on February 1, 2005. As of June 30, 2004, thisamount has been reclassified to current liabilities on the Consolidated BalanceSheet. As discussed in Note 9, included in NUI Utilities' current creditfacility is a $50 million delayed draw term loan that can be drawn at theoption of the company and used, subject to satisfaction of the terms andconditions contained therein, to repay these medium term notes.  The draw down of the $50 million delayeddraw term loan to finance the medium term notes is a condition precedent toobtaining the new aggregate $95 million Bridge Facilities (as discussed in Note15).

On November 24, 2003, NUI repaid its $60 millionsenior notes with the proceeds of its new credit facility entered into on thatdate. In connection 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. During the firstquarter of fiscal 2004, the company also recorded a charge of approximately$0.5 million for unamortized debt expenses related to the senior notes.

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. 

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 May 19, 2004, NUI Utilities and The Bank ofNew York further amended the SBPA. 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. In addition, pursuant to the terms of the amendment, andeffective as of June 30, 2004, the expiration date of the SBPA was extended toJune 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 or purchasedby the company at such time, and every six months thereafter, in ten equal,semi-annual installments.

The SBPA would have to be further amended to permitthe proposed $75 million NUI Utilities' senior secured credit facility.

As of June 30,2004, the aggregate principal and accrued interest on the outstanding VariableBonds totaled approximately $39.0 million. Principal and any unpaid interest on the outstanding Variable Bonds aredue on June 1, 2026, unless the put option is exercised before that time.

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 withthe delivery of many of the Required Documents. The remaining breaches werecured by virtue of NUI Utilities' delivery of NUI's annual report datedSeptember 30, 2003 on Form 10-K, relatedofficers' certificates and other financial information.

In addition, defaults would have occurred under NUIUtilities' 5.70 percent bonds if the company did not provide audited financialstatements for NUI Utilities for the fiscal year ended September 30, 2003 (byno later than 120 days after the fiscal year end) and unaudited financialstatements for NUI Utilities for the fiscal quarters ended December 31, 2003and March 31, 2004 (by no later than 60 days after the fiscal quarter ends).However, NUI Utilities obtained all necessary waivers and extended therespective deadlines for delivery of all information required pursuant to suchbond facility to June 30, 2004.  Nodefaults ever occurred under NUI Utilities' 5.70 percent bond facility sinceNUI Utilities was able to provide all of the required information by theextended deadline of June 30, 2004.

Thecompany's long-term debt maturities for each of the next five fiscal years areas follows: $50 million in fiscal year 2005 and zero in fiscal years 2006through 2009. 

*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 earnedsurplus of NUI Utilities, which had been reduced by the NJBPU Settlement. 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. As ofJune 30, 2004, NUI Utilities was permitted to pay up to $39.3 million individends pursuant to the SBPA. However, the amendment to NUI Utilities' short-term creditfacility dated May 10, 2004, limits the dividends that NUI Utilities may pay toNUI Corporation to $35 million in the aggregate while NUI Utilities' credit facility is outstanding.  

**11.   Pension and Post-Retirement Benefits**

The company sponsors several qualified andnonqualified pension plans and other post-retirement benefit plans covering thecompany's current and former employees who meet certain eligibility criteria.

The following table provides the Components of NetPeriodic Benefit Costs relating to all qualified and nonqualified pension planand other post-retirement plans on an aggregate basis.

**Pension Benefits**

**Other Benefits**

 

 

**Three Months Ended**

**Three Months Ended**

**June 30,**

**June 30,**

**  2004**

**  2003**

**     2004**

**      2003**

 
 

 

 

 

 
Service cost

$1,213

$  860

$103

$126

 
Interest cost

1,870

1,704

479

492

 
Return on plan assets

(2,085)

(2,068)

(148)

(116)

 
Net amortization and deferral

    690

     523

  103

    70

 
  Net Periodic  Benefit Costs

$1,688

$1,019

$537

$572

   
 
**Nine Months Ended**

**Nine Months Ended**

**June 30,**

**June 30,**

**2004**

**2003**

**   2004**

**     2003**

 
 

 

 

 

 
Service cost

$3,638

$2,579

$309

$378

 
Interest cost

5,611

5,111

1,438

1,476

 
Return on plan assets

(6,254)

(6,203)

(445)

(347)

 
Net amortization and deferral

  2,069

  1,570

     308

    208

 
  Net Periodic  Benefit Costs

$5,064

$3,057

$1,610

$1,715

 
 

 

 
The company has a retirement plan for eligiblemembers of its board of directors, including both active and retiredmembers.  As of June 30, 2004, thecompany has a liability of approximately $1.5 million recorded on itsConsolidated Balance Sheet related to this retirement plan. Upon a change incontrol of the company, each participant in the plan is entitled to receive alump sum payment from the plan equal to the present value of the future annualretirement benefits they would be paid or would be eligible to be paid shouldthey have retired on such a date.  As ofJune 30, 2004, the total lump sum amount that would payable to planparticipants under the plan's change of control provision is approximately $2.0million.

**12.  Commitments and Contingencies**

*Focused Audit.*On March 20, 2003, the NJBPU announced the initiation of a focused audit of NUICorporation, NUI Utilities, and Elizabethtown Gas. The NJBPU had expressed thebelief that recent downgrades of the senior unsecured debt of NUI and NUIUtilities, as well as negative credit rating agency comments, and concernsraised during a recent competitive services audit, substantiated the need foran in-depth review of the financial practices of the company and itssubsidiaries. On June 4, 2003, the NJBPU chose The Liberty Consulting Group toperform the audit.  The focused auditcovered the following areas: corporate governance; strategic planning;financial structure and interaction; accounting and property records; executivecompensation and affiliate transactions. An interim audit report was releasedby the NJBPU on December 17, 2003 and the final audit report was issued onMarch 1, 2004 and was accepted and released by the NJBPU on March 17, 2004, atthe 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, 2004and a settlement was reached with the NJBPU on April 14, 2004. On April26, 2004, the NJBPU issued a Final Order accepting and adopting the settlementagreement. The company recorded a pre-tax charge of $30 million in the fourthquarter of fiscal 2003 to reflect the final settlement of the focused audit. Ofthis amount, $28 million was recorded as the amount to be refunded to customersin New Jersey. The company has also agreed to pay interest at 7.95 percentannually on the unpaid balance. The $28 million will be credited to ratepayersas follows:  $7 million in NUI's fiscalyear 2004, $6 million in NUI's fiscal year 2005 and $5 million in each of NUI'sfiscal years 2006, 2007 and 2008.  OnJuly 8, 2004, the NJBPU approved the company's request to refund the firstinstallment of $7 million plus accrued interest as bill credits to customers inSeptember 2004.

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 documentsunderlying NUI Utilities' gas revenue bond facilities, namely (i) $20 millionof 6.40 percent bonds due October 1, 2024, (ii) $46.5 million of 6.35 percentbonds due October 1, 2022, (iii) the Variable Bonds, (iv) $54.6 million of 5.70percent bonds due June 1, 2032 and (v) $40 million of 5.25 percent bonds dueNovember 1, 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 financial information.

In addition, defaults would have occurred under NUIUtilities' 5.70 percent bonds if the company did not provide audited financialstatements for NUI Utilities for the fiscal year ended September 30, 2003 (byno later than 120 days after the fiscal year end) and unaudited financialstatements for NUI Utilities for the fiscal quarters ended December 31, 2003and March 31, 2004 (by no later than 60 days after the fiscal quarter ends).However, NUI Utilities obtained all necessary waivers and extended therespective deadlines for delivery of all information required pursuant to suchbond facility to June 30, 2004.  Nodefaults ever occurred under NUI Utilities' 5.70 percent bond facility sinceNUI Utilities was able to provide all of the required information by theextended deadline of June 30, 2004.

*Commitments.*On April 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. In February 2003, afterreceiving the required regulatory approval, VGC contributed certainstorage assets valued at approximately $16.3 million to SSLLC. DESGS hascontributed an equal amount (approximately $16.3 million) of capital requiredto expand the facility for its intended purpose. To the extent SSLLC determinesit needs additional funding (which decision can only be made jointly by thecompany and DESGS), the company and DESGS are obligated to fund the developmentof SSLLC equally.

As of June 30, 2004, the company has loaned SSLLC anaggregate of approximately $27 million toward the development of the Saltvillestorage facility. The company currently estimates its share of funding to bezero in fiscal 2004, and $2.5 million in fiscal 2005. Subsequent years areexpected be funded with internally generated cash flows of the joint venture.

In conjunction with the development of an energy hubaround the Saltville facility, during December 2002, the company entered into atwenty-year agreement with Duke Energy Gas Transmission (DEGT) for the firmtransportation of natural gas on the planned Patriot pipeline. Upon completionof the pipeline in November 2003, the company became obligated to pay annualdemand charges of approximately $4.7 million over the life of thetransportation 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.

Regardingthe transportation 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.

OnJuly 22, 2004, NUI Utilities and Penn-Jersey Pipeline Company (Penn-Jersey)entered into an Asset Purchase Agreement (APA) pursuant to which NUI Utilitieswill purchase, among other things, the pipeline facilities of Penn-Jersey,subject to the satisfaction of certain conditions contained in the APA, includingthe receipt of necessary authorizations from the Federal Energy RegulatoryCommission (FERC). The purchase price is $315,000 plus the depreciated cost ofany necessary capital expenditures made by Penn-Jersey subsequent to January31, 2003. Penn-Jersey is a small interstate natural gas pipeline that deliversnatural gas from an interconnection with Columbia Gas Transmission Corp. inPennsylvania to NUI Utilities' distribution system in New Jersey.

*Guarantees.*The company has guarantees of approximately $74.3 million to 16 counterpartiesas of June 30, 2004, in support of NUI Energy Brokers' trading activities.These guarantees were necessary to facilitate trading with a broad group ofpotential counterparties, although typically NUI Energy Brokers used 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. Due to the winding down ofNUI Energy Brokers' trading operations, as of June 30, 2004, there were nopurchases covered by outstanding guarantees. 

*Environmental Matters.* The company owns, or previously owned, certainproperties located in the states of New Jersey, North Carolina, South Carolina,Pennsylvania, New York and Maryland on which manufactured gas plants (MGP) wereoperated by the company or by other parties in the past. In New Jersey, thecompany is currently conducting remedial activities at such properties withoversight from the New Jersey Department of Environmental Protection andanticipates initiation of such activities in the state of North Carolina withinthe 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$33.8 million which the company believes represents the probable minimum amountthe company may expend over the next 30 years. Of this reserve, approximately$29.9 million relates to remediation of the New Jersey MGP properties andapproximately $3.9 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 $34.1 million,inclusive of interest, as of June 30, 2004, reflecting the future recovery ofboth incurred costs and future remediation liabilities in the state of NewJersey. The company has also been successful in recovering a portion of MGP remediationcosts incurred in New Jersey from the company's insurance carriers andcontinues to pursue additional recovery. The company sold the net assets of itsNorth Carolina Gas utility division on September 30, 2002 and its Valley CitiesGas and Waverly Gas utility divisions on November 7, 2002. Included in theseasset sales were the environmental obligations for two of the company's MGPsites: 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.

*Gas Procurement Contracts.* Certain of the company'slong-term contracts for the supply, storage and delivery of natural gas includefixed charges that amount to approximately $62.3 million for the nexttwelve-month period (this amount includesthe company's obligations under two twenty-year agreements to pay annual demandcharges for the firm transportation and storage of natural gas, discussedabove). The company currentlyrecovers, and expects to continue to recover, the majority of such fixedcharges through its purchased gas adjustment clauses.  The company also is committed to purchase from a single supplier,at market-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.

NUI Utilities has entered into an agreement withCinergy to manage its interstate pipeline assets. NUI Utilities initiallyentered into an agreement with Cinergy effective March 31, 2004, which coveredonly a one-month period. That agreement was superceded by an agreementeffective on April 1, 2004, pursuant to which Cinergy will serve as NUIUtilities' asset manager from April 1, 2004 until March 31, 2005, and willprovide NUI Utilities with a full requirements gas supply service to enable NUIUtilities to meet its public utility obligations to supply gas to customers inNew Jersey, Florida and Maryland. The gas supply will be provided atmarket-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, are 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.

*Employment Agreements.* The company has created anincentive plan designed to retain key personnel through the date the companywould be sold. The estimated liability for employee retention costs isapproximately $3.8 million; however, no liability has been recorded as of June30, 2004, since the payment of retention amounts is dependent upon thesuccessful sale of the company.  Theseretention amounts would be payable at certain dates within the sixty day periodfollowing the closing date of the sale (pursuant to individual employmentagreements), or on a date before the closing date if the employee is releasedfrom his/her employment by the company. In connection with the possible sale ofthe company, NUI has established a discretionary severance plan fornon-bargaining employees. In addition, certain officers and directors havechange in control agreements with NUI, which define the amount of severancethat would be payable upon the occurrence of certain events as defined withinthe agreements.

*Legal Matters.*

*Securities Litigation*.  Between October 28, 2002 andDecember 20, 2002, five substantially similar civil actions were commenced inthe United States District Court for the District of New Jersey, in which theplaintiffs allege that the company and two of its former presidents violatedfederal securities laws by issuing false statements and failing to discloseinformation regarding the company's financial condition and current and futurefinancial prospects in its earnings statements, press releases, and instatements to analysts and others.  Byorders dated December 19, 2002, January 22, 2003, and February 3, 2003, thefive actions were consolidated into one action captioned In re NUISecurities 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 Court forthe District of New Jersey on December 10, 2002; and (5) an action captioned PhyllisWaltzer, 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 December 20, 2002. By order dated February 3,2003, a Lead Plaintiff, Lead Counsel and Liaison Counsel were appointed in theconsolidated action. By stipulation of the parties, an Amended ConsolidatedClass Action Complaint was filed on May 12, 2003, and subsequentlyplaintiffs were granted leave to file a Second Amended Consolidated ClassAction Complaint, which was filed on July 17, 2003. The Second AmendedComplaint, brought on behalf of a putative class of purchasers of NUI's commonstock between November 8, 2001 and October 17, 2002, asserts claims underSection 10(b), including Rule 10b-5 promulgated thereunder, and Section 20(a)of the Exchange Act against the company and two of its former presidents.Specifically, the Second Amended Complaint alleges that the defendants failedto disclose material facts and materially inflated the company's earnings by(i) allegedly making misleading statements concerning, and failing to properlyrecord, bad debt costs, and (ii) recording revenues from a purportedly illegal"reterminating" billing practice allegedly engaged in by its former subsidiary.The Second Amended Complaint seeks unspecified monetary damages on behalf ofthe class, including costs and attorneys fees. On October 14, 2003, defendantsmoved to dismiss the Second Amended Complaint under, inter alia, the PrivateSecurities Litigation Reform Act.    Themotion was heard on March 15, 2004. By decision and order dated April 23,2004, the district court granted in part and denied in part defendants' motionto dismiss.  The district courtdismissed the Section 10(b) claims against the individual defendants anddismissed all claims against the company concerning the alleged "reterminating"scheme. The district court denied the motion to dismiss with respect to certainallegations that the company made misleading misstatements concerning theaccurate level of bad debt and earnings and denied the motion to dismiss theSection 20(a) claims against the individual defendants. Defendants filed anAnswer to the Second Amended Complaint on May 10, 2004 denying any wrong doingand asserting affirmative defenses. Discovery has recently commenced. Althoughthe company intends to vigorously defend these lawsuits, it is not possible atthis time to determine a likely outcome.

*Joseph Pietrangelo, onbehalf of himself and a class of persons similarly situated v. NUI Corporation,John Kean, John Kean Jr., Mark Abramovic, James R. Van Horn, Thomas W.Williams, Charles N. Garber, James J. Forese, Dr. Vera King Farris, J. RussellHawkins, Bernard S. Lee, R. V. Whisnand, and John Winthrop*.  On or about July 8, 2004, a complaint for breach of fiduciaryduty under the Employee Retirement Income Security Act (ERISA) was filed in theUnited States District Court for the District of New Jersey, in which Plaintiffalleges that the company and twelve current or former officers and/or directorsbreached alleged fiduciary duties owed to the employee participants of the NUICorporation Savings and Investment Plan for Collective Bargaining Employees andthe NUI Corporation Savings and Investment Plan for other company employees(collectively, the Plans). Specifically, Plaintiff alleges that Defendants failed to disclose, andmade false and misleading statements concerning, the true level of thecompany's bad debt, the true level of the company's earnings per share, theaccurate status and contribution of the company's energy trading business andother allegedly material operating and accounting issues, all of whichallegedly caused the company's stock to trade at artificially inflatedprices.  As a result, Plaintiff alleges,Defendants breached various fiduciary duties allegedly owed to participants ofthe Plans under ERISA, and engaged in a prohibited transaction under Section404 of ERISA, by purportedly: (i) selecting and maintaining a stock fundconsisting of company shares (the NUI Stock Fund) as an investment alternativein the Plans when it allegedly was no longer suitable and prudent, (ii)encouraging employees to invest in the NUI Stock Fund, (iii) continuing toinvest in, and failing to divest the Plans from, the NUI Stock Fund when itallegedly became an imprudent investment, (iv) abdicating a purported duty toreview, evaluate and monitor the suitability of the Plans' investment in theNUI Stock Fund and (v) failing to provide accurate, material information to thePlans' participants concerning the NUI Stock Fund.  Plaintiff purports to bring a putative class action on behalf ofall participants or beneficiaries of the Plans from November 11, 2001 throughand including September 26, 2003.  Thecompany has not yet been served formally with the complaint.  Although the company intends to vigorouslydefend the lawsuit, it is not possible at this time to determine a likely outcome.  

*FlintEnergy Construction Co., Inc. v. Virginia Gas Pipeline Company*.  Flint Energy Construction Co., Inc. sued Virginia Gas PipelineCompany (VGPC) on a contract claim for amounts billed to VGPC for workperformed by Flint Energy as general contractor on the extension of VGPC's P-25pipeline. VGPC is counter-suing Flint for breach of contract. The case hasmoved to the deposition phase and is expected to be brought to trial inSeptember 2004. Flint originally billed VGPC $2.2 million, which represents thedisputed amount.  At this time, thecompany is unable to determine the likely outcome.

*SpecificCruise Systems, Inc. and Frigette, Inc. d/b/a SCS/Frigette, Inc. v. TICEnterprises, LLC, Nortel Networks, Inc. and Sherry Hutto Walton*.  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 former employees, Sherry Walton, and Nortel Networks, Inc. onNovember 5, 2002 for alleged damages relating to lost profits and replacementservices arising out of their claims for breach of contract, fraudulentinducement, and breach of warranty, as well as for an offset/credit inconnection with the sale by TIC of telephone equipment. TIC denies that it madesuch representations and is relying upon the contracts entered into between theparties.  TIC seeks payment for thebalance due relating to the sale in the amount of $83,331.00.  If the provisions of the contract are notenforceable, the plaintiffs may be entitled to lost profits resulting from thealleged delay in the installation of the system and the alleged interferencewith their business resulting from defects in the system.  If the contract is deemed enforceable, aprovision in the contract providing a limitation on liability may precluderecovery by plaintiff on certain issues. On July 2, 2004, plaintiffs filed anAmended Petition that adds a claim for conspiracy to fraudulently induce andseeks exemplary damages in connection with the fraud claim.  Also on July 2, 2004, plaintiffs filedAmended Responses to Defendant Nortel Network's Request for Disclosure thatincludes damage estimates ranging from approximately $2.12 million to $2.32million (of which approximately $1.46 million to $1.66 million is for lost profits)plus exemplary damages.  

Amediation was held in 2003 and settlement discussions ensued. On June 11, 2003,TIC filed a Motion to Compel Arbitration; no decision has been rendered on themotion. Discovery is continuing and pursuant to a Second Amended Order SettingSchedule signed on August 4, 2004, trial has been set for February 28,2005.  At this time, the company isunable to determine the likelihood of an outcome.

*James Greiff and TIC Enterprises, Inc. v. TICEnterprises, LLC, NUI Capital Corp., NUI Sales and NUI Corporation*.  This case, originally filed in Georgia StateCourt, then removed by defendants to the United States District Court for theNorthern District of Georgia, was transferred on the defendants' motion to theDistrict of Delaware.  The plaintiffs,James Greiff and TIC Enterprises, Inc. sued the company and three other companyrelated entities, NUI Sales Management, Inc., NUI Capital Corp. and TIC, forbreach of contract and fraud.  Theplaintiffs alleged they were entitled to (i) $3 million arising from thedefendants' alleged breach of contract; (ii) an amount to be proven at trialarising from the defendants' alleged breach of a 2001 Purchase Agreement; (iii)$22 million and punitive damages for the defendants' alleged fraud; and (iv) $3million plus interest and punitive damages for the defendants' allegedfraudulent transfers.  The plaintiffsalso alleged a tortious interference claim for $3 million.  On May 5, 2004, NUI received the plaintiffs'written acceptance of the company's settlement proposal, and the plaintiffsrequested that NUI prepare the appropriate settlement documents for review. Asa result, the company reduced the amount payable under a promissory note heldby the plaintiffs from $3.0 million to $1.4 million on the September 30, 2003Consolidated Balance Sheet, and recorded a gain of $1.6 million in other incomeon the Consolidated Statement of Income for fiscal 2003. The final SettlementAgreement was executed on June 4, 2004, general releases were exchanged and thecompany paid the plaintiffs $1.4 million to fully and finally settle all claimsbetween the parties.  On June 15, 2004,the court ordered dismissal of the case pursuant to a Stipulation of VoluntaryDismissal With Prejudice filed by the parties.

*United States Postal Service Investigation andClaims. *TIC entered into a contractwith the United States Postal Service (USPS) relating to TIC's promotion ofcertain USPS products.  In January 2003,TIC filed with the USPS contracting officer a claim for "breakaway fees" thatwere provided for in the contract.  Inthe near future, TIC intends to file its remaining claims against USPS forunpaid commissions and accounts and lost profits.  The USPS Office of the Inspector General has been conducting aninvestigation of TIC, and it appears that the Inspector General's investigationrelates to allegedly false claims submitted by TIC to USPS for the payment ofcommissions under the contract, which could result in civil and criminalliability for TIC.  TIC has been fullycooperating with the Inspector General's investigation and has provideddocuments, data, and technical assistance to the Inspector General.  Although the investigation has been openedfor more than a year, the Inspector General has not produced any evidenceshowing any civil or criminal wrongdoing by TIC, and counsel for TIC hasadvised that no evidence of false claims by TIC has surfaced.  To date, USPS has only mentioned falseclaims for amounts totaling less than $800,000, plus fines and penalties, butTIC has since shown USPS that such false claims have no merit. Atthis time, the company is unable to determine the likely outcome.

*Other*.

*Investigations of NUI Energy Brokers*.  On November19, 2003, the company announced that in connection with the focused audit ofNUI Corporation, NUI Utilities, and Elizabethtown Gas initiated by the NJBPU,certain questionable transactions within NUI Energy Brokers were identified. Inconnection with this matter, since November 2003, the company, NUI EnergyBrokers and Elizabethtown Gas Company have been the subjects of subpoenasissued by the New Jersey State Grand Jury. The Grand Jury was seeking diverse operational, structural, financialand personnel records relative to such entities together with documentationrelating to the purchase and sale of gas on behalf of either NUI Energy Brokersor Elizabethtown Gas for the period of October 1, 1998 through the end of2003.  Documents in the latter categorywere also requested by the NJBPU.

On June 30, 2004, NUI Energy Brokers entered into aplea agreement (the Plea Agreement) with the New Jersey Attorney General'sOffice (NJAG) relating to these questionable transactions at NUI EnergyBrokers. Pursuant to the Plea Agreement, NUI Energy Brokers will pay a $500,000fine, of which $200,000 has been paid as of June 30, 2004, and the remainingamount is expected to be paid in the first quarter of fiscal 2005.  On June 30, 2004, the company entered into aletter agreement with the NJAG pursuant to which the company has agreed todevelop, fund and operate certain community service programs.  This concludes the investigation by the NJAGof NUI and its subsidiaries with respect to these matters.   

In November 2003, the SEC advised the company that itis conducting an informal inquiry with respect to the investigation of NUIEnergy Brokers by the NJAG. On March 1, 2004, the SEC requested the company tovoluntarily produce certain documents in furtherance of its informal inquiry.NUI is fully cooperating with the SEC. At this point, the company cannotpredict whether or not the SEC will initiate a formal investigation into thismatter.

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. Anycontracts not meeting the definition of a derivative under SFAS 133 must beaccounted for on 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 consolidates avariable 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 immediatelyto variable 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 with respectto its joint venture with Duke Energy (see Note 12). In addition, the companyhas not created or obtained any variable interest entities after January 31,2003. Therefore, the adoption of the consolidation requirements of FIN 46R inMarch 2004 did not have an impact on the company's financial position orresults of operations.

**14.   Business Segment Information**

** **The company's operations areorganized and managed as three primary segments: Distribution Services, EnergyAsset Management, and Retail and Business Services. The Distribution Servicessegment currently distributes natural gas in three states through the company'sregulated utility operations, and engages in appliance leasing, repair andmaintenance operations and off-system gas sales. The Energy Asset Managementsegment reflects the operations of NUI Energy Brokers and all of the VGCsubsidiaries. The Retail and Business Services segment reflects the operationsof the company's UBS operations and NUI Energy subsidiary. The company also hascorporate 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 andnine-month periods ended June 30, 2004 and 2003. The company's managementevaluates its segment profit and loss on the basis of pre-tax income (losses)from continuing operations. Revenues include intersegment sales to affiliatedentities, which are eliminated in consolidation. All of the company'soperations are in the United States and therefore do not need separatedisclosure by geographic region. Certain reclassifications have been made toprior year segment data to conform with the current year's presentation.

**Three Months Ended**

**Nine Months Ended**

**June 30,**

**June 30,**

**(Dollars in thousands)**

**2004**

**2003**

**2004**

**2003**

  
 
**Revenues:**
 
 
** **Distribution Services

$95,284

$127,770

$497,369

$526,212

 
** **Energy Asset Management

2,519

3,245

8,211

24,671

 
** **Retail and Business Services

2,377

5,423

7,123

9,809

 
  Intersegment Revenues

    (1,236)

    (1,145)

    (3,900)

    (3,853)

 
Total  Revenues

$98,944

$135,293

$508,803

$556,839

 
 
 
**Operating Margins:**

  Distribution Services

$38,612

$37,245

$160,127

$154,666

  Energy  Asset Management

2,220

2,871

7,014

23,438

  Retail  and Business Services

1,199

4,280

3,525

6,332

   Intersegment Operating Margins

     (316)

     (493)

       (1,153)

    (1,360)

Total  Operating Margins

$41,715

$43,903

$169,513

$183,076

 

 

 

 

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

 

 

 

 

** **Distribution Services

$3,627

$2,749

$49,241

$49,502

** **Energy Asset Management

(743)

(612)

(4,552)

13,405

  Retail and Business Services

       (86)

 (1,607)

        (48)

  (6,971)

Total  Pre-Tax Operating Income

$2,798

$   530

$44,641

$55,936

 

 

 

 

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

 

 

 

 

** **Distribution Services

$(1,488)

$  (947)

$34,753

$39,933

** **Energy Asset Management

(1,254)

(778)

(6,016)

12,415

  Retail and Business Services

 (122) 

 (1,863)

       (171)

  (7,741)

Total  Pre-Tax Income (Loss) from   Continuing Operations 

  $(2,864)

  $(3,588)

  $28,566

  $44,607

A reconciliation of thecompany's segment pre-tax operating income and income (loss) from continuingoperations, to amounts reported on the consolidated financial statements, is asfollows:
                                                                                                                           **               **
**Three Months Ended**

**Nine Months Ended**

**June 30,**

**June 30,**

**(Dollars in thousands)**

**2004**

**2003**

**2004**

**2003**
  
**Segment Pre-Tax Operating Income**

$2,798

$  530

$44,641

$55,936

  Non-segment pre-tax operating loss

  (8,901)

  (436)

 (28,950)

  (2,502)

Pre-tax  Operating Income

$(6,103)

$   94

$15,691

$53,434
 
 

 

 

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

     $(2,864)

  $(3,588)

  $28,566

  $44,607

  Non-segment pre-tax loss from      continuing operations 

    (13,080)

    (2,097)

  (49,430)

     (6,523)

Pre-Tax Income (Loss) from Continuing    Operations

  $(15,944)

  $(5,685)

  $(20,864)

  $38,084

The increase in non-segment pre-tax operating loss for the three and ninemonths ended June 30, 2004, as compared to the same periods in fiscal 2003, isprimarily due to increased corporate expenses for outside professional services(approximately $2.2 million and $12.4 million, for the three and nine-monthperiods, respectively), bank fees (approximately $5.3 million and $12.2million, for the three and nine-month periods, respectively), and restructuringand other severance charges (approximately $2.5 million for the nine-monthperiod), which costs have not been allocated to the company's various businessunits. The increase in non-segment pre-tax loss from continuing operations forthe three and nine months ended June 30, 2004, as compared to the same periodin fiscal 2003, is primarily due to these same factors, plus increased interestexpense (approximately $2.5 million and $6.5 million, for the three andnine-month periods, respectively) and, in the nine-month period, a pre-tax lossof approximately $9.9 million recorded for the early retirement of debt (seeNote 10).

**15.   Recent Developments**

On July 15, 2004, NUI announced that it had enteredinto the Merger Agreement with AGL, which provides for AGL to acquire all ofthe outstanding shares of common stock of NUI for $13.70 per share in cash, or$220 million in the aggregate based on approximately 16 million shares ofoutstanding NUI common stock. The Boards of Directors of both companies have unanimously approvedthe Merger Agreement. The merger is subject to the approval of NUIshareholders, regulatory agencies in the states of New Jersey, Maryland andVirginia and the SEC, the expiration of the Hart-Scott-Rodino (Federal TradeCommission) waiting period, and various other closing conditions.  In addition, the Merger Agreement grantsfinancing-related termination rights, including AGL's right to terminate theMerger Agreement upon the acceleration of the company's or NUI Utilities'existing indebtedness or in the event of payment defaults under suchindebtedness, or if, by September 30, 2004, the company fails to obtain $95million in senior credit facilities (referred to below), extend and amend NUI'sand NUI Utilities' existing $405 million credit facilities or finance NUIUtilities' $50 million medium term notes.  The conditions to AGL'sobligations to complete the merger generally include, among others, that neitherNUI nor any of its subsidiaries have been indicted or criminally charged for afelony criminal offense relating to certain specified matters; that, subject tocertain qualifications, neither NUI nor any of its subsidiaries are the subjectof an active investigation by a governmental entity relating to the matters thatare the subject of the NJBPU settlement order; and that the final approvals fromthe applicable regulatory bodies include certain agreed upon terms, except tothe extent that the failure to include any such agreed upon terms, or theinclusion of other terms, would not reasonably be expected to have a materialadverse effect, individually or in the aggregate, on any of NUI, NUI Utilitiesor AGL, after taking into account any of the agreed upon terms that are actuallyincluded in the final approvals.  In accordance with the MergerAgreement, the Merger Agreement is terminable if the merger has not beencompleted on or prior to April 13, 2005, subject to an automatic 90-dayextension for obtaining the required regulatory approvals. Upon closing, whichis currently anticipated in the December 2004 to March 2005 timeframe, NUI willbecome a wholly-owned subsidiary of AGL.

On July 14, 2004, NUI and NUI Utilities received acommitment from a lender for an aggregate of $95 million in senior creditfacilities (the Bridge Facilities). This commitment is comprised of a $75million senior secured credit facility to be made available to NUI Utilitiesand secured by NUI Utilities' (i) accounts receivable, (ii) contracts and (iii)cash proceeds of the foregoing, and a $20 million senior unsecured creditfacility to be made available to NUI. The NUI Utilities facility would matureon May 15, 2005, and the NUI facility would mature on November 21, 2005. TheBridge Facilities are intended to provide NUI and NUI Utilities with additionalliquidity through fiscal 2005 and can be utilized to purchase gas for theupcoming winter heating season and for working capital and general corporatepurposes. The loan commitment is subject to various conditions, including theextension of the existing credit facilities of NUI and NUI Utilities toNovember 21, 2005, the amendment of certain terms of such facilities to allowthe new financing and the draw down by NUI Utilities of its $50 million delayeddraw term loan to repay its $50 million medium term notes. Approval from theNJBPU and from the lenders under NUI's and NUI Utilities' existing creditfacilities will be required to consummate the proposed financing.  

On June 30, 2004, NUI Energy Brokers entered into aplea agreement (the Plea Agreement) with the NJAG relating to certainquestionable transactions at NUI Energy Brokers. Pursuant to the PleaAgreement, NUI Energy Brokers will pay a $500,000 fine, of which $200,000 hasbeen paid as of June 30, 2004, and the remaining amount is expected to be paidin the first quarter of fiscal 2005.  OnJune 30, 2004, the company entered into a letter agreement with the NJAGpursuant to which the company has agreed to develop, fund and operate certaincommunity service programs.  Thisconcludes the investigation by the NJAG of NUI and its subsidiaries withrespect to these matters.
**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 pending sale of the company to AGLResources Inc. (AGL);

-       the settlement agreement with the New Jersey Board of PublicUtilities (NJBPU) and other regulatory orders issued by the NJBPU; 

-       the investigations of transactions at NUIEnergy Brokers and the settlement agreements with the New Jersey AttorneyGeneral's Office (NJAG);

-       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; and

-       the sale of NUI Telecom. 

*The Pending Sale of the Company to AGL*

On September 26, 2003, the company announced that itsBoard of Directors had decided to pursue the sale of the company and thecompany engaged two investment banks to serve as financial advisors to thecompany during the sales process.  TheBoard of Directors established a Special Committee to assess the company'soptions and concluded that pursuing a sale of the company was in the bestinterests of the company's stakeholders. The decision was made as a result of a number of factors, including thenegative impact on the company arising from multiple downgrades of thecompany's credit ratings during fiscal 2003 and adverse business conditions ingeneral.

On July 15, 2004, NUI announced thatit had entered into an Agreement and Plan of Merger (Merger Agreement) withAGL, which provides for AGL to acquire all of the outstanding shares of commonstock of NUI for $13.70 per share in cash, or $220 million in the aggregatebased on approximately 16 million shares of outstanding NUI common stock.  The Boards of Directors ofboth companies have unanimously approved the Merger Agreement. The merger issubject to the approval of NUI shareholders, regulatory agencies in the statesof New Jersey, Maryland and Virginia and the Securities and Exchange Commission(SEC), the expiration of the Hart-Scott-Rodino (Federal Trade Commission)waiting period, and various other closing conditions.  In addition, the Merger Agreement grants financing-relatedtermination rights, including AGL's right to terminate the Merger Agreementupon the acceleration of the company's or NUI Utilities' existing indebtednessor in the event of payment defaults under such indebtedness, or if, bySeptember 30, 2004, the company fails to obtain $95 million in senior creditfacilities (referred to below), extend and amend NUI's and NUI Utilities'existing $405 million credit facilities or finance NUI Utilities' $50 millionmedium term notes.  The conditions to AGL's obligations to complete themerger generally include, among others, that neither NUI nor any of itssubsidiaries have been indicted or criminally charged for a felony criminaloffense relating to certain specified matters; that, subject to certainqualifications, neither NUI nor any of its subsidiaries are the subject of anactive investigation by a governmental entity relating to the matters that arethe subject of the NJBPU settlement order; and that the final approvals from theapplicable regulatory bodies include certain agreed upon terms, except to theextent that the failure to include any such agreed upon terms, or the inclusionof other terms, would not reasonably be expected to have a material adverseeffect, individually or in the aggregate, on any of NUI, NUI Utilities or AGL,after taking into account any of the agreed upon terms that are actuallyincluded in the final approvals.  In accordance with the Merger Agreement, the Merger Agreement isterminable if the merger has not been completed on or prior to April 13, 2005,subject to an automatic 90-day extension for obtaining the required regulatoryapprovals. Upon closing, which is currently anticipated in the December 2004 toMarch 2005 timeframe, NUI will become a wholly-owned subsidiary of AGL.

In addition, in July 2004NUI and NUI Utilities received a commitment from a lender for an aggregate of$95 million in senior credit facilities intended to provide NUI and NUIUtilities with additional liquidity through the close of the sale of thecompany (see Liquidity and Capital Resources). If the proposed new financing isnot completed by September 30, 2004, AGL has the right to terminate the MergerAgreement.

For a discussion of factors that could prevent ordelay the sale of the company, see Item 1. Business-Risk Factors-The sale ofNUI may not be consummated, as discussed in the company's Annual Report on Form10-K for the fiscal year ended September 30, 2003.

*Settlement Agreement with the NJBPU*

On April 14, 2004, the company announced that NUI, NUIUtilities and Elizabethtown Gas Company (Elizabethtown Gas) had entered into asettlement agreement with the NJBPU on all issues related to the focused auditperformed by Liberty Consulting Group on behalf of the NJBPU, and on April 26,2004, the NJBPU issued a Final Order accepting and adopting that settlementagreement. Pursuant to the settlement agreement, NUI Utilities agreed to refund$28 million plus interest to Elizabethtown Gas ratepayers and to pay a $2million penalty to the State of New Jersey over five years. The $28 millionwill be credited to ratepayers as follows: $7 million in NUI's fiscal year 2004, $6 million in NUI's fiscal year2005 and $5 million in each of NUI's fiscal years 2006, 2007 and 2008. The $2million penalty shall be paid in $400,000 annual installments in each of NUI'sfiscal years 2004 through 2008.  On July8, 2004, the NJBPU approved the company's request to refund the firstinstallment of $7 million plus accrued interest as bill credits to customers inSeptember 2004.  The company has theoption to make a balloon payment of all outstanding amounts due under the termsof the settlement agreement at any time. In addition, upon the close of a saleof the company, any outstanding balance is required to be paid in full by thecompany within a period to be determined by the NJBPU. The refund and penaltyincreased the company's net after-tax loss for fiscal year 2003 byapproximately $18.6 million, or $1.16 per share.

In addition to the required monetary refund andpenalty, NUI agreed to file a plan with the NJBPU for implementing therecommendations of the Liberty report, as modified by the settlement. Thesettlement agreement also contains a number of other provisions, 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-utility 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 the 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's agreement to the terms of the settlementis not an acknowledgement of non-compliance with any law, regulation or NJBPUOrder or requirement. The settlement agreement resolves all issues identifiedin the final Liberty audit report without acknowledgement or admission by thecompany as to the correctness of any issue or that any specific issue forms thebasis or any part of the basis for the payments described above. The settlementprovides that no further civil action shall be taken by the NJBPU. The NJBPUretains the authority to impose any requirements or conditions on a purchaserupon a petition for approval of a sale 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 theapproved revenues would be used solely for Elizabethtown Gas and (2) anacceptable plan whereby NUI and any other subsidiaries would repayElizabethtown Gas for any money owed to it. In addition, NUI and NUI Utilitieswere ordered to continue to cooperate with the focused audit, participate inweekly meetings to review their financial integrity and comply with existingNJBPU Orders, and NUI Utilities was ordered to refrain from issuing any specialdividends (i.e., extraordinary dividends not in accordance with the historicalpractices of the Board of Directors of NUI Utilities) without the priorapproval of the NJBPU. After the September 26, 2003 announcement by NUI of itsintention to sell the company, the NJBPU issued an Order dated October 30,2003, ordering NUI to: (1) provide information to the NJBPU concerning itscompensation packages; (2) provide assurances that Elizabethtown Gas' immediateand short-term liquidity needs would be met; (3) provide the NJBPU with allinformation necessary to assess the sufficiency of funding of NUI's pension andother post-retirement plans; and (4) present a detailed plan and schedule forpreparing the company for sale, for operating during the sale process and forconducting sale activities in order to assure the NJBPU that the process ofselling NUI would be transparent, independent, and timely. In addition, theNJBPU ordered NUI to protect the utility employees of Elizabethtown Gas duringthe sale process, inform the NJBPU of the progress of the 2003 fiscal year-endaudit of the company's financial statements being conducted byPricewaterhouseCoopers LLP (PwC) and amend its consulting agreement with FTIConsultants. In October 2003, the company had employed FTI Consultants tomanage its financial operations and develop 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 asset managementplan, which was to be submitted to the NJBPU by January 2, 2004 for the NJBPUto approve by January 8, 2004. Further, per the Order, NUI Utilities isprohibited 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 utility divisions.As a result of this process, NUI Utilities selected Cinergy to provide a fullrequirements gas supply contract with least cost dispatch rights. The contractcovers the period from April 1, 2004 through March 31, 2005 and provides afixed payment to NUI Utilities for the use of NUI Utilities' gas anddeliverability assets for the twelve months ended March 31, 2005. The NJBPUapproved the selection of Cinergy as the company's gas and capacity managementservices provider on April 14, 2004.

*Investigations of Transactions at NUI Energy Brokers andSettlement Agreements with the NJAG*

Regarding the focused audit described above, Libertyidentified certain questionable transactions involving NUI Energy Brokers. TheAudit Committee of the Board of Directors retained independent counsel toconduct an investigation of transactions involving NUI Energy Brokers. A reportof the independent counsel's investigation was provided to the company's AuditCommittee on April 13, 2004. 

In connection with this matter, since November 2003,the company, NUI Energy Brokers and Elizabethtown Gas have been the subjects ofsubpoenas issued by the New Jersey State Grand Jury.  On June 30, 2004, NUI Energy Brokers entered into a pleaagreement (the Plea Agreement) with the NJAG relating to certain questionabletransactions at NUI Energy Brokers. Pursuant to the Plea Agreement, NUI EnergyBrokers will pay a $500,000 fine, of which $200,000 has been paid as of June30, 2004, and the remaining amount is expected to be paid in the first quarterof fiscal 2005.  On June 30, 2004, thecompany entered into a letter agreement with the NJAG pursuant to which thecompany has agreed to develop, fund and operate certain community service programs.  This concludes the investigation by the NJAGof NUI and its subsidiaries relating to these matters.

In addition, the SEC has commenced an informal inquiryrelating to NUI Energy Brokers. NUI is fully cooperating with the SECinvestigation.

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 draw term loan facility may only be used to repay NUI Utilities'8.35 percent medium term notes. Both the NUI and NUI Utilities creditfacilities expire on November 22, 2004, and each may be extended for one364-day term, subject to certain conditions. 

The delay in delivering audited financial statementsfor fiscal 2003 and unaudited financial statements for the fiscal quarter endedDecember 31, 2003, resulted in events of default under NUI's and NUI Utilities'credit agreements.  On January 26, 2004,NUI and NUI Utilities obtained waivers of such defaults from the lenders undertheirrespective 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 agreements. For a description of NUI's and NUI Utilities' creditagreements, including the May 10, 2004 amendments and other debt instrumentsand 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 the twelvemonths ended March 31, 2005, which is in lieu of NUI Utilities' opportunity toearn margins on off-system sales transactions. The agreement provides NUIUtilities the option to terminate the agreement in the event of a change incontrol of NUI Utilities or NUI.

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 wasappointed Chairman of the Board of Directors of NUI on April 1, 2004, replacingJohn Kean, who remains as a director of NUI until his retirement later in2004.  

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 had employed in October 2003 to manage itsfinancial operations and develop new liquidity forecasts.  In June 2004, Steven D. Overly was appointedChief Financial Officer, replacing Mr. Scouler. In addition to holding thetitle of Chief Financial Officer, Mr. Overly maintains his other positions inthe organization.

*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, Victor Fortkiewicz was appointedPresident of NUI Utilities and Mary Patricia Keefe was appointed VicePresident, General Counsel and Secretary of NUI Utilities, replacing James R.Van Horn.  Nancy J. Sobelson wasappointed Vice President, Business and Technical Services in November 2003.Peter E. Maricondo was named Chief Financial Officer of NUI Utilities inDecember 2003, and replacing him as Controller of NUI Utilities was Donald R.Guarriello. In addition, Elaine A. Kloss was appointed Treasurer of NUIUtilities in January 2004, replacing Charles N. Garber who left the company inNovember 2003. Mr. Abramovic retired as Vice President of NUI Utilities inJanuary 2004.

*The Sale of NUI Telecom*

On December 12, 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 ability to satisfy the conditions in the Merger Agreement;

-       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 the ability of NUI and NUI Utilities to satisfy the conditions precedentto obtaining the Bridge Facilities;

-       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 Florida Public ServiceCommission (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 obtaining the necessary consents and approvals and closing thetransaction;

-       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;

-       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 differ materiallyfrom anticipated results and outcomes include, but are not limited to:

-       the abilityof the company to obtain necessary waivers and/or amendments from its lenders; 

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

-       the abilityof the company to maintain its exemption from regulation under the SEC PublicUtility Holding Company Act of 1935; 

-       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-lookingstatements to reflect events or circumstances after the date of this quarterlyreport or to reflect the occurrence of unanticipated events, except as may berequired under 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 an energy companythat primarily operates natural gas utilities and businesses involved innatural gas storage and pipeline activities. Its local utility operations are carried out by NUIUtilities and its operating divisions, as well as through a subsidiary ofVirginia Gas Company (VGC) and serveapproximately 371,000 customers in four states along the eastern seaboard ofthe United States. NUI Utilities is comprisedof Elizabethtown Gas Company (New Jersey), City Gas Company of Florida, andElkton 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 NUI Capitaland its subsidiaries. As of April 1, 2004, the company's only remainingnon-regulated subsidiary with substantial operations is Utility BusinessServices, Inc. (UBS), a billing and customer information systems and servicessubsidiary. The company's other non-regulated subsidiaries have either beensold or are being discontinued. These subsidiaries include NUI Environmental,Inc. (NUI Environmental), an environmental project development subsidiary soldin September 2003; NUI Telecom, Inc. (NUI Telecom), a telecommunicationssubsidiary sold in December 2003; NUI Energy, Inc. (NUI Energy), an energyretailer which is being wound down; NUI Energy Brokers, Inc. (NUI Energy Brokers), awholesale energy trading and portfolio management subsidiary which isbeing wound down; OASGroup, Inc. (OAS), the company's digital mapping operation which isbeing wound down; and TICEnterprises, LLC (TIC), a sales outsourcing subsidiary which is being wounddown. In addition, through NUI Saltville Storage, Inc. (NUISS), the company isa fifty-percent member of Saltville Gas Storage Company, LLC (SSLLC), a jointventure with a subsidiary of Duke Energy that is developing a natural gasstorage facility in Saltville, 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 creditworthiness 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.  For further information on the pending saleof the company to AGL, see Recent Developments.

On November 24, 2003, NUI and NUI Utilities obtained a$405 million 364-day credit facility financing package.  In addition, in July 2004, NUI and NUIUtilities received a commitment from a lender for an aggregate of $95 millionin senior credit facilities intended to provide NUI and NUI Utilities withadditional liquidity through the close of the sale of the company. SeeLiquidity and Capital Resources for a further discussion of the use of theseproceeds and the terms of the credit agreements.

As described below in Liquidity and Capital Resourcesand in Note 2 of the Notes to the Consolidated Financial Statements, NUI andNUI Utilities are likely to have additional liquidity needs beginning in the2004-2005 winter season, as a result of, among other things, the prepaymentrequirements of NUI Utilities' gas supply, delivery and storage requirementsand the NJBPU Settlement. In addition, NUI and NUI Utilities will be required torefinance or extend their respective existing bank indebtedness in November2004. Even if NUI and NUI Utilities are able to extend their respectiveexisting bank indebtedness in November 2004, NUI and NUI Utilities would stillhave to refinance their respective existing bank indebtedness in November2005.  In the event the merger with AGLis not consummated, the company may be unable to meet its maturing debtobligations, and may be forced to seek strategic alternatives, which mayinclude a reorganization and/or bankruptcy filing.

**Resultsof Operations**

***Consolidated Reviewof Results of Operations***

Thefollowing discussion is intended to provide an overview of consolidated resultsfor the three and nine-month periods ended June 30, 2004 and 2003. Followingthis discussion is a more detailed overview of the results for NUI's threebusiness segments.

NUI recorded a $12.3 million reduction in net loss for the thirdquarter of fiscal 2004, as compared to the third quarter of last year.  The company's net loss for the third quarterended June 30, 2004, was $12.8 million, or $0.80 per share, compared to a netloss of $25.1 million, or $1.57 per share, for the third quarter last year.  

 Thenet loss from continuing operations was $11.6 million, or $0.72 per share, comparedto a net loss of $3.7 million, $0.23 per share, in the third quarter of fiscal2003.  The $7.9 million increasedloss from continuing operations was primarily the result of (1) reducedoperating margins of approximately $2.2 million, primarily due to exiting theretail energy marketing and wholesale energy trading businesses; (2) increasedoperating expenses of approximately $4.0 million for the reasons describedbelow; and (3) increased net interest expense of approximately $5.3 million,which resulted from both higher weighted average indebtedness and increasedinterest rates during the third quarter of fiscal 2004.  The $4.0 million increase in operatingexpenses was due primarily to higher operation and maintenance expense of $1.3million; higher restructuring costs of $0.6 million; higher depreciation andamortization of $1.3 million; and higher general taxes of $0.8 million.  The decrease in income from continuingoperations was partially offset by higher other income of $1.0 million and areduction in income taxes of $2.4 million as compared to the same period lastyear.   

Net loss from discontinued operations decreased byapproximately $20.2 million to $1.2 million, or $0.08 per share, in the thirdquarter of fiscal 2004, compared to a net loss of $21.4 million, or $1.34 pershare, in the third quarter of fiscal 2003. The fiscal 2003 quarterly results included the $20.3million impairment charge related to the company's decision to seek a buyer forits NUI Telecom unit in June 2003. The pre-tax income from discontinuedoperations of $0.5 million for the three months ended June 30, 2004 resultedfrom revised estimated reserves for legal claims filed against TIC.  Income tax expense for the same period reflectsthe reversal of deferred tax benefits for TIC, which are not expected to berealized.

For the nine months ended June 30, 2004, NUI recorded anet loss of $17.1 million, or $1.07 per share, compared to a net loss of $5.8million, or $0.36 per share for the nine months ended June 30, 2003.  Thefiscal 2003 third quarter lossincludes a $5.9 million after-tax charge for the effect of a change inaccounting.  The net loss fromcontinuing operations was $14.8 million, or $0.93 per share, for the ninemonths ended June 30, 2004, compared to net income of $22.1 million, $1.38 pershare, in the same period of fiscal 2003.

The $36.9 million reduction in income from continuingoperations was primarily the result of (1) reduced operating margins ofapproximately $13.6 million, primarily due to the winding down of the company'swholesale energy trading subsidiary; (2) increased operation and maintenanceexpense of $19.2 million for the reasons described below; (3) restructuringcharges of approximately $2.7 million related to employee severance costs; (4)a prepayment penalty of approximately $9.9 million for the early extinguishmentof debt; and (5) increased net interest charges of approximately $13.8 million,which resulted from both higher weighted average indebtedness and increasedinterest rates during the nine month period of fiscal 2004.  A reduction in income tax expense of $22.0million partially offset the increase in the year-to-date loss as compared tolast year.

The $19.2 million increase in operation and maintenanceexpense in the nine-month period was due primarily to (1) increased legal andprofessional fees of $13.7 million related to the Focused Audit conducted bythe New Jersey Board of Public Utilities (which has concluded), the cost of aninternal investigation into the company's wholesale energy trading subsidiary,and costs associated with finding a buyer for the company and (2) bank fees ofapproximately $11.2 million.  Theseincreases were partially offset by reduced bad debt expense of approximately$6.0 million, mainly as a result of winding down the company's retail energymarketing business during fiscal 2003.

Net loss from discontinuedoperations decreased by approximately $19.7 million during the currentnine-month period to $2.3 million, or $0.14 per share, as compared to the $22.0million net loss, or $1.38 per share, for same period of fiscal 2003.  As discussed above, the NUI Telecomimpairment charge in June 2003 was the major factor for the change incomparative loss from discontinued operations, as well as the costs of windingdown the operations of TIC.

***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 Taxes. Included in operations and maintenanceexpenses for each of NUI's business segments are allocations of corporate costsrelated to shared service functions such as human resources, legal, accountingand information technology, which are allocated based on the company's costallocation policy. In addition, the company has corporate operations thatincurred operating expenses of $8.9 million and $0.4 million for thethree-month periods ended June 30, 2004 and 2003, respectively, and $29.0million and $2.5 million for the nine-month periods ended June 30, 2004 and2003, respectively. The increasesduring the fiscal 2004 periods are primarilydue to increased corporate expenses for outside professional services(approximately $2.2 million and $12.4 million, for the three and nine-monthperiods, respectively), bank fees (approximately $5.3 million and $12.2million, for the three and nine-month periods, respectively), and restructuringand other severance charges (approximately $2.5 million for the nine-monthperiod).  These costs are not allocated to our business 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 andservice businesses, as well asoff-system sales. Thecompany sold its Valley Cities Gas and Waverly Gas natural gas utilities inNovember 2002 (see Note 4 of the Notes to the Consolidated FinancialStatements) and reflects the results for these operations in DiscontinuedOperations in the Consolidated Financial Statements for the nine-month periodended June 30, 2003. The Income from Continuing Operations before Taxes for thesegment is as follows:

*(Dollars in thousands)*

**Three  Months Ended  June 30, 2004**

**Three Months Ended   June 30, 2003**

**Nine  Months Ended  June 30,  2004**

**Nine Months   Ended    June 30,  2003**

**Operating Revenues**

$94,933

$127,480

$496,500

$525,343

Purchased  Gas and Fuel

50,998

85,624

316,031

352,255

Cost  of sales and services

2,765

2,382

8,642

7,775

Energy  Taxes

2,558

2,426

11,972

11,209

**Operating Margins**

38,612

37,048

159,855

154,104

**Operating Expenses:**

 

 

 

 

Operations  & Maintenance Expense

25,202

26,766

80,991

77,867

Depreciation  & Amortization

8,262

7,155

24,139

22,881

Taxes  Other than Income

1,521

378

5,484

3,854

**Total Operating Expenses**

34,985

34,299

110,614

104,602

**Pre-Tax Operating Income**

3,627

2,749

49,241

49,502

Other Income & (Expense)

984

82

1,822

399

Net Interest Charges

6,099

3,778

16,310

9,968

**Pre-Tax Income from Continuing      Operations**  

  $(1,488)

  $ (947)

  $34,753

  $39,933

 

 

 

 

***Operating Revenues****.*  Operating revenues include amounts billed for the costof purchased gas pursuant to purchased gas adjustment clauses (BGSS in New Jersey and PGA in Florida andMaryland) 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. Similarly, theSocietal Benefits Charge (SBC) is a clause which enables Elizabethtown Gas topass through to its customers the costs of certain NJBPU-mandated programs andenvironmental remediation programs.

Distribution Services operating revenues decreased by$32.6 million, or 26 percent, to $94.9 million during the three months endedJune 30, 2004, as compared to $127.5 million in the same period in fiscal 2003.The decrease in operating revenues was primarily attributable to reducedoff-system sales (approximately $27.6 million) and warmer New Jersey weather(approximately $9.0 million).  Thesedecreases were partially offset by an increase in Elizabethtown Gas' SBCrevenues (approximately $2.1 million) and a base rate increase in Florida(approximately $1.9 million). (See Regulatory Matters for a further discussionof rate increases.)

Distribution Services operating revenues decreased by$28.8 million, or 5 percent, to $496.5 million during the nine months endedJune 30, 2004, as compared to $525.3 million in the same period in fiscal 2003.The decrease in operating revenues was primarily attributable to reducedoff-system sales (approximately $67.5 million) and warmer New Jersey weather(approximately $36.1 million). These decreases were partially offset by anincrease in gas cost recovery and SBC charges to customers in New Jersey(approximately $51.9 million). Base rate increases and growth in New Jersey(approximately $16.1 million) and Florida (approximately $5.0 million) alsooffset the decrease in operating revenues.

***Operating Margins****.*Operating margins increased by$1.6 million, or 4 percent, to $38.6 million for the three months ended June30, 2004, as compared to $37.0 million in the same period in fiscal 2003. Of thefactors previously discussed in operating revenues, the operating margin impactof the City Gas base rate increase contributed approximately $1.9 million.  The company has a weather normalizationclause in its New Jersey tariff, which is designed to help stabilize thecompany's results by increasing amounts charged to customers when weather hasbeen warmer than normal and by decreasing amounts charged when weather has beencolder than normal. As a result of the weather normalization clause, operatingmargins were approximately $0.8 million higher in the fiscal 2004 quarter and$1.2 million lower in the fiscal 2003 quarter than they otherwise would havebeen without the clause. Operating margins for the appliance servicesbusinesses decreased approximately $0.5 million for the current three-monthperiod as a result of increased costs of providing services.

Operating margins increased by $5.8 million, or 4percent, to $159.9 million for the nine months ended June 30, 2004, as comparedto $154.1 million in the same period in fiscal 2003. Of the factors previouslydiscussed in operating revenues, the primary drivers were the base rateincreases (approximately $6.6 million) and customer growth (approximately $2.0million).  These increases werepartially offset by reduced off-system gas sales (approximately $0.9 million)and warmer New Jersey weather (approximately $0.8 million).  As a result of the weather normalizationclause, operating margins were approximately $1.3 million and $6.1 millionlower in the fiscal 2004 and 2003 periods, respectively, than they otherwisewould have been without the clause. Operating margins for the applianceservices businesses decreased approximately $1.2 million for the currentnine-month period as a result of increased costs of providing services.

The company does not anticipate any significant changein the economic outlook for natural gas sales in this segment for the remainderof fiscal 2004.
***Operating Expenses.Operations and maintenance expense decreased by $1.6 million, or 6 percent, to$25.2 million for the three months ended June 30, 2004, as compared with $26.8million in the same period in fiscal 2003, primarily due to a reduction in baddebt expense (approximately $1.6 million).Operations and maintenance expense increased by $3.1 million, or 4 percent, to$81.0 million for the nine months ended June 30, 2004, as compared with $77.9million in the same period in fiscal 2003. This was mainly due to increases inlegal and professional fees (approximately $2.1 million) and insurance costs forgeneral liability (approximately $2.7 million), partially offset by a reductionin bad debt expense (approximately $1.7 million).

The $1.1 million, or 15%, increase in depreciation andamortization expense to $8.3 million for the quarter ended June 30, 2004, ascompared to $7.2 million for the same period in 2003, reflects an adjustment todepreciation expense in the third quarter of 2003 due to a change in estimates.

Taxes, other than income taxes,increased to $1.5 million for the three months ended June 30, 2004, as comparedto $0.4 million in the same period in fiscal 2003, as a result of a revision toa regulatory assessment in the third quarter of 2003.

***Other Income andExpense***. Other income increased by approximately $0.9 million and approximately$1.4 million for the three- and nine-month periods ended June 30, 2004,respectively, as compared to the same periods in fiscal 2003. The increase inboth periods was primarily due to additional interest income earned on cashheld as overnight investments during the current fiscal period.

***Net Interest Charges.***  Net interest charges increased by approximately $2.3million, or 61 percent, to $6.1 million for the three months ended June 30,2004 from $3.8 million in the same period in fiscal 2003.  Net interest charges increased by approximately$6.3 million, or 64 percent, to $16.3 million for the nine months ended June30, 2004 from $10.0 million in the same period in fiscal 2003. The increaseduring both periods is primarily a result of higher weighted averageindebtedness and increased interest rates of NUI Utilities during the currentthree-month period (see additional discussion under Liquidity and CapitalResources- Sources of Liquidity- Short-term Debt).

The company expects the higher amount of weightedaverage indebtedness and interest rates to continue for the remainder of fiscal2004. See Liquidity and Capital Resources for further discussion.

**Energy AssetManagement Segment**

The Energy Asset Management segment includes theoperations of NUI Energy Brokers, and the distribution, storage and pipelineoperations of VGC. This segment also includes the company's 50 percent share ofequity income and losses of SSLLC. The Income from Continuing Operations beforeTaxes for the segment is as follows:

*(Dollars in thousands)*

**Three  Months   Ended  June 30, 2004**
Three Months   Ended   June 30, 2003
**Nine  Months   Ended  June 30, 2004**
Nine Months   Ended    June 30, 2003
**Operating Revenues**

$2,519

$3,234

$7,756

$24,119

Purchased  Gas and Fuel

299

363

742

681

**Operating Margins**

2,220

2,871

7,014

23,438

**Operating Expenses:**

 

 

 

 

Operations & Maintenance Expense

2,289

2,998

9,366

7,994

Depreciation  & Amortization

511

268

1,538

1,429

Taxes  Other than Income

163

217

662

610

**Total Operating Expenses**

2,963

3,483

11,566

10,033

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

(743)

(612)

(4,552)

13,405

Other Income & (Expense)

432

121

1,462

356

Net Interest Charges

943

287

2,926

1,346

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

  $(1,254)

  $(778)

  $(6,016)

  $12,415

 

 

 

 

***OperatingRevenues***. Energy Asset Managementoperating revenues decreased approximately $0.7 million, or 22 percent, to $2.5million for the three months ended June 30, 2004, as compared to $3.2 millionin the same period in fiscal 2003. The decrease was primarily due to reducedoperating revenues of approximately $0.5 million by NUI Energy Brokers as thecompany began to wind down its trading operations following the investigationof the certain transactions during earlier years. The operating revenues of VGCwere down approximately $0.2 million primarily as a result of reduced storagerevenues due to fewer contracts during the current fiscal period.

Operating revenues decreasedapproximately $16.4 million, or 68 percent, to $7.7 million for the nine monthsended June 30, 2004, as compared to $24.1 million in the same period in fiscal2003. The decrease was due to approximately $15.8 million of reduced operatingmargins recorded by NUI Energy Brokers as a result of the company winding downits trading operations during the current fiscal period. The operating revenuesof VGC decreased approximately $0.6 million as a result of reduced storagerevenues due to fewer contracts during the nine-month period ended June 30,2004, as compared to the same period in fiscal 2003. 

The company's decision to discontinue the tradingoperations of NUI Energy Brokers will result in a substantial reduction inoperating revenues and operating margins for the Energy Asset Managementsegment during fiscal 2004.

***Operating Margins.***Operating margins decreasedapproximately $0.7 million, or 23 percent, to $2.2 million for the three monthsended June 30, 2004, as compared to $2.9 million in the same period in fiscal2003. Of this decrease, approximately $0.6 million was attributable to NUI EnergyBrokers and approximately $0.1 million was attributable to VGC, and wasprimarily due to the effect of the factors discussed above regarding operatingrevenues. 

Operating margins decreased approximately $16.4 million,or 70 percent, to $7.0 million for the nine months ended June 30, 2004, ascompared to $23.4 million in the same period in fiscal 2003. Of this decrease,approximately $15.8 million was attributable to NUI Energy Brokers andapproximately $0.6 million was attributable to VGC, and was primarily due tothe effect of the factors discussed above regarding operating revenues. 

***Operating Expenses.***Operations and maintenanceexpense decreased by approximately $0.7 million during the three months endedJune 30, 2004, primarily due to a reduction of bad debt expense.

Operations and maintenance expense increased byapproximately $1.4 million during the nine months ended June 30, 2004, ascompared to the same period in fiscal 2003 due to increased labor and benefitcosts, including severance paid to former employees of NUI Energy Brokers(approximately $0.8 million), costs to expense abandoned assets of NUI EnergyBrokers (approximately $0.8 million), and a fine pursuant to NUI EnergyBrokers' plea agreement with the New Jersey Attorney General's Office ($0.5million; see Note 12 of the Notes to the Consolidated Financial Statements).These increases were partially offset by reduced bad debt expense(approximately $0.7 million).  

As previously noted, thecompany anticipates increased costs during fiscal 2004 related to winding downthe trading operations of NUI Energy Brokers.

***Other Income andExpense***. Other income increased by approximately $0.3 million for the three monthsended June 30, 2004, as compared to the same period in fiscal 2003. The increasein the current three-month period was due to approximately $0.4 million ofequity income of SSLLC, which began operations during August 2003.

Other income increased by approximately $1.1 million forthe nine months ended June 30, 2004, as compared to the same period in fiscal2003. The increase in the current nine-month period was due to approximately$1.4 million of equity income of SSLLC, partially offset by a decrease ininterest income during the current fiscal period (approximately $0.3 million).

***Net Interest Charges.***  Net interest charges increased by approximately $0.6million, to $0.9 million for the three months ended June 30, 2004 from $0.3million in the same period in fiscal 2003. Net interest charges increased byapproximately $1.6 million, to $2.9 million for the nine months ended June 30,2004 from $1.3 million in the same period in fiscal 2003. The increase duringboth periods is primarily due to increased allocated interest costs of NUI,which resulted in higher weighted average indebtedness and increased interestrates during the current three-month period (see additional discussion underLiquidity and Capital Resources- Sources of Liquidity- Short-term Debt).

**Retail andBusiness Services Segment**

The Retail and Business Services segment includesthe operations of the company's UBS and NUI Energy subsidiaries. In order toexit the retail and business services segment, the company began winding downthe operations of NUI Energy during May 2003 and TIC during June 2003, and soldNUI Telecom on December 12, 2003 (see Note 4 of the Notes to the ConsolidatedFinancial Statements). As a result, NUI Telecom, as well as the operations ofTIC previously reported in this segment, have been reclassified to discontinuedoperations. The Income from Continuing Operations before Taxes for the segmentis as follows:
 
*(Dollars in thousands)*

**Three  Months   Ended  June 30, 2004**

**Three Months   Ended   June 30, 2003**

**Nine  Months   Ended   June 30, 2004**

**Nine Months   Ended  June 30, 2003**

**Operating Revenues**

$1,491

$4,579

$4,546

$7,377

Cost  of sales and services

609

595

1,903

1,843

**Operating Margins**

882

3,984

2,643

5,534

**Operating Expenses:**

 

 

 

 

Operations  & Maintenance Expense

582

5,119

1,516

11,100

Depreciation  & Amortization

332

400

993

1,147

Taxes  Other than Income

54

72

182

258

**Total Operating Expenses**

968

5,591

2,691

12,505

Pre-Tax Operating Income (Loss)

  (86)

(1,607)

(48)

(6,971)

Other Income & (Expense)

(5)

15

(5)

49

Net Interest Charges

31

271

118

819

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

  $(122)

  $(1,863)

  $(171)

  $(7,741)

 

 

 

 

***Operating Revenues****.*Retail and Business Servicesoperating revenues decreased by approximately $3.1 million, or 67 percent, to$1.5 million for the three months ended June 30, 2004 from $4.6 million in thesame period in fiscal 2003. This decrease was primarily due to the company'sexit from its retail energy business. Operating revenues for UBS during thethree-months ended June 30, 2004, were consistent with the prior fiscal year.

Operating revenues decreasedby approximately $2.8 million, or 38 percent, to $4.5 million for the ninemonths ended June 30, 2004 from $7.3 million in the same period in fiscal 2003.This decrease was primarily due to the company's exit from its retail energybusiness.  Operating revenues for UBSduring the nine-months ended June 30, 2004, were consistent with the priorfiscal year.

The company has wound downmost of the operations of NUI Energy and does not expect material activityduring the remainder of fiscal 2004, which will result in reduced operatingrevenues as compared to fiscal 2003.

***Operating Margins***. Retail and Business Servicesoperating margins decreased by approximately $3.1 million during the threemonths ended June 30, 2004, to $0.9 million, as compared to $4.0 million in thesame period in fiscal 2003. This decrease was primarily attributable to theeffects of the factors previously discussed in operating revenues. 

Operating margins decreased by approximately $2.9million during the nine months ended June 30, 2004, to $2.6 million, ascompared to $5.5 million in the same period in fiscal 2003, which was primarilyattributable to the effects of the factors previously discussed in operatingrevenues. 

***Operating Expenses****.*Operations and maintenanceexpense, depreciation and amortization, and taxes other than income for theRetail and Business Services segment decreased in total by $4.6 million, or 83percent, to $1.0 million during the three months ended June 30, 2004, ascompared to $5.6 million in the same period in fiscal 2003. This was mainly dueto reduced expenses of NUI Energy during the current fiscal year period, whichwas a result of the company's efforts to wind down its retail energy businessduring the previous fiscal year (approximately $4.9 million), partially offsetby increased operating expenses at UBS.

Operations and maintenance expense, depreciation andamortization, and taxes other than income decreased in total by $9.8 million,or 78 percent, to $2.7 million during the nine months ended June 30, 2004, ascompared to $12.5 million in the same period in fiscal 2003.  This was mainly due to reduced expenses ofNUI Energy during the current fiscal year period, which was a result of thecompany's efforts to wind down its retail energy business during the previousfiscal year (approximately $10.3 million), partially offset by increasedoperating expenses at UBS. 

The company's exiting of the retail energy business isexpected to reduce the operating expenses of this segment significantly duringthe remainder of fiscal 2004.

***Net Interest Charges.***  Net interest charges decreased by approximately $0.2million, to $0.1 million for the three months ended June 30, 2004 from $0.3million in the same period in fiscal 2003. Net interest charges decreased byapproximately $0.7 million, to $0.1 million for the nine months ended June 30,2004 from $0.8 million in the same period in fiscal 2003. The decrease duringboth periods is primarily due to decreased allocated interest costs of NUI as aresult of the company's decision to wind down the operations of its retailenergy business during the prior fiscal year.

**Regulatory Matters**

On November 22, 2002, Elizabethtown Gas receivedapproval from the NJBPU to increase its base rates by an annual amount of $14.2million, or approximately 5 percent. The increase was effective immediately andcovers a portion of the costs of plant investments and higher operatingexpenses incurred since the company's last base rate increase twelve years ago.The new rates are based on a return on equity of 10.0 percent and an overallrate of return on rate base of 7.95 percent. The rate order also revised thenormal weather pattern upon which base rates and Elizabethtown Gas' WeatherNormalization Clause are set from a 30-year to a 20-year weather average tobetter reflect current weather trends. In addition, the company was allowed to increase service charges tovarious rate classes of customers to better reflect the cost of providingservice to these customers. In its December 11, 2003 Order, the NJBPU statedthat it was re-examining this settlement in light of the events surroundingNUI's use of proceeds received in its 2002 equity offering.  The company's settlement of its focusedaudit with the NJBPU on April 14, 2004 resolved all issues related to the 2002rate 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 SBC by approximately $8.0 million. The BGSS charge covers thecost of natural gas supplies that Elizabethtown Gas purchases for itscustomers, while the SBC allows Elizabethtown Gas to recover the cost ofmandated energy efficiency, low-income assistance, energy education andenvironmental remediation programs. Both of these charges represent thepass-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 of its focused auditwith the NJBPU on April 14, 2004 resolved all issues related to this BGSSproceeding.

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 Electric Discount and EnergyCompetition Act, which was signed into law in February 1999, the NJBPU approveda stipulation in March 2001 which enabled all retail customers in New Jersey tochoose a natural gas supplier, provided an incentive for these customers tochoose an alternate natural gas supplier and required New Jersey gas utilitiesto continue offering basic gas supply service through December 2002 for thosecustomers not choosing an alternate supplier. On January 17, 2002, the NJBPUissued an Order that continued the obligation of all New Jersey gas utilitiesto provide basic gas supply service until the NJBPU has had an opportunity tofully investigate major policy issues relating to pricing structure and gassupply reliability. No timetable has been established for completion of such areview. As of June 30, 2004, only a small number of residential customers inElizabethtown Gas' service territories were receiving gas from an alternate gassupplier.

On January 20, 2004, City Gasreceived approval from the FPSC to increase its base rates by $6.7 million,effective February 23, 2004. The increase represents a portion of the company'srequest for a total rate increase of $10.5 million to cover the costs ofinvestments in its customer service assets, system maintenance and growth,increases in operating expenses, and the impact of the continuing sluggisheconomy. This new rate level provides for an allowed return on equity of 11.25percent and an overall allowed rate of return of 7.36 percent. 

On June 1, 2004, Elizabethtown Gas filed a petitionwith the NJBPU requesting an increase in its BGSS rates to recoverapproximately $18.8 million of higher gas costs.  The increase equates to approximately 4.2 percent of an averageresidential customer's bill.  Thecompany proposed that this rate increase become effective October 1, 2004.  The company also renewed its proposal thatthe GCUA, approved by the NJBPU in its March 30, 2001 Order, be authorized toremain in effect beyond November 30, 2004 to ensure full recovery of thecompany's GCUA balance.

**Liquidity and CapitalResources**

***Overview***

As a result of the various factors discussed in thisquarterly report, NUI and NUI Utilities have experienced significant liquidityproblems. Liquidity needs for NUI Utilities generally are driven by factorsthat include: prepayments for its natural gas requirements; natural gascommodity prices; the impact of weather on customer bills; lags in fullycollecting gas costs from customers under purchased gas adjustment clauses;both discretionary and required repayments of short- and long-term debt;capital spending; and working capital requirements, such as administrativeexpenses and taxes. Liquidity needs at NUI and NUI's non-utility operationsgenerally are driven by required repayments of short-term debt and workingcapital requirements.

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 risks associated with the sale of the company, the performance of NUI andits subsidiaries, their respective credit ratings and conditions in thecompany's industry in general. In addition, the NJBPU's holding company orderrequiring NUI to maintain a certain degree of separation between its utilityand non-utility subsidiaries could impact affiliate ratings on consolidated andunconsolidated credit quality. Compliance with applicable financial covenantswill depend upon future financial position and levels of earnings and cashflows, 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 manage short-termcash needs. Historically, NUI Utilities has paid dividends of up to 75 percentof its annual net income to NUI.  TheStandby Bond Purchase Agreement (SBPA) entered into in connection with theVariable Bonds, which, as described below, are a series of gas facility revenuebonds issued by the New Jersey Economic Development Authority (NJEDA),restricts the payment of dividends by NUI Utilities to NUI to an amount based,in part, on the earned surplus of NUI Utilities, which had been reduced by theNJBPU Settlement.  On May 19, 2004, NUIUtilities and The Bank of New York amended the SBPA. The amendmenteliminates the effect of the NJBPU Settlement, as well as the estimatedrefunds to customers in Florida and certain other related costs, on theearned surplus of NUI Utilities.   As of June 30, 2004, NUI Utilities waspermitted to pay up to $39.3 million in dividends pursuant to the SBPA.However, the amendment to NUI Utilities' short-term credit facility dated May10, 2004, limits the dividends that NUI Utilities may pay to NUI Corporation to$35 million in the aggregate while NUI Utilities' credit facility isoutstanding. There are no contractual restrictions on the settlement ofintercompany balances in NUI's or NUI Utilities' financing agreements.

On a consolidated basis, thecompany's net cash used in operating activities was $9.6 million for thenine-month period ended June 30, 2004, and net cash provided by operatingactivities was $45.1 million for the nine-month period ended June 30, 2003. Thedecrease of $54.7 million in operating cash flows for the current period wasdue in part to the timing ofpayments to the company's gas suppliers and amounts paid in advance forinterest costs on NUI's and NUI Utilities' existing credit facilities and ascollateral for the company's gas procurement needs. The decrease in operatingcash flows was partially offset by reductions in fuel inventories and accountsreceivable for the company's non-regulated businesses during the nine-monthperiod ended June 30, 2004, as compared to the same period in fiscal 2003. 

In February2003, NUI and NUI Utilities each replaced their respective previous creditagreements with new revolving agreements. In November 2003, each of NUI and NUIUtilities refinanced the February 2003 facilities and entered into creditagreements for new 364-day credit facilities. NUI's delay in delivering auditedfinancial statements for fiscal 2003 resulted in defaults under such creditagreements.  On January 26, 2004, NUIand NUI Utilities both obtained waivers of such defaults from the lenders undertheir respective credit agreements and (i) received an extension to March 1,2004 of the delivery date for NUI's audited financial statements for fiscal2003 and unaudited financial statements for the first fiscal quarter of 2004and (ii) amended the credit agreements to clarify certain technicalprovisions.  Subsequently, on March 12,2004, NUI and NUI Utilities obtained a limited waiver from the lenders undertheir respective credit agreements further waiving the defaults describedabove. These credit facilities were amended as of May 10, 2004 to furtherextend these deadlines. See Sources of Liquidity - Short Term Debt below for afurther description of the November 2003 credit facilities.

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. In the event the company is successful in securing an aggregate of $95million in senior credit facilities described below, both NUI and NUI Utilitiesbelieve that they will have sufficient liquidity to meet their financialobligations through the fiscal year ending September 30, 2005.  These additional credit facilities requirethe approval of the lenders and the NJBPU. However, in the event the company is not successful in securing theadditional credit facilities, NUI and NUI Utilities believe that, subsequent toSeptember 30, 2004, they may not have sufficient liquidity to meet theircontinuing 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. 

-       Upon renewalof NUI's revolving credit facility, NUI would be required to prepay an interestreserve account for the benefit of the lenders under NUI's credit agreement inthe amount of approximately $20.4 million.

-       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 its creditfacility, NUI Utilities may require additional funds in early fiscal 2005 inorder to meet its continuing obligations. 

-       On July 15, 2004, NUI announced that it had entered into theMerger Agreement with AGL which provides for AGL to acquire all of theoutstanding shares of common stock of NUI. If we are unable to sell the company, or if a saleis not completed in a timely manner, NUI's and NUI Utilities' financialcondition, results of operations and liquidity could be materially adverselyaffected.

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. The company plans to address its liquidity concerns by:successfully completing the sale of the company; extending its existing credit facilitiesbeyond the current termination date of November 22, 2004; and obtaining anaggregate of $95 million in additional financing.   

On July 14, 2004, NUI and NUI Utilities received acommitment from a lender for an aggregate of $95 million in senior creditfacilities (the Bridge Facilities). This commitment is comprised of a $75million senior secured credit facility to be made available to NUI Utilitiesand secured by NUI Utilities' (i) accounts receivable, (ii) contracts and (iii)cash proceeds of the foregoing, and a $20 million senior unsecured creditfacility to be made available to NUI. The NUI Utilities facility would matureon May 15, 2005, and the NUI facility would mature on November 21, 2005. TheBridge Facilities are intended to provide NUI and NUI Utilities with additionalliquidity through fiscal year 2005 and can be utilized to purchase gas for theupcoming winter heating season and for working capital and general corporatepurposes. The loan commitment is subject to various conditions, including theextension of the existing credit facilities of NUI and NUI Utilities toNovember 21, 2005, the amendment of certain terms of such facilities to allowthe new financing and the draw down by NUI Utilities of its $50 million delayeddraw term loan to repay its $50 million medium term notes. Approval from theNJBPU and from the lenders under NUI's and NUI Utilities' existing creditfacilities will be required to consummate the proposed financing. If theproposed new financing and the related financing matters described above arenot completed by September 30, 2004, AGL has the right to terminate the MergerAgreement. 

If the company is unsuccessful in its efforts toeffectively resolve its liquidity concerns, it may need to reorganize itsoperations and restructure its debt financing. In the event the Bridge Facilities are not obtained and/or the mergerwith AGL is not consummated, the company may be unable to meet its maturingdebt obligations, and may be forced to seek strategic alternatives, which mayinclude a reorganization and/or bankruptcy filing.  For a further discussion about risks relating to NUI Utilities'liquidity, see Item 1. Business-Risk Factors in the company's annual report onForm 10-K for the fiscal year ended September 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 June 30, 2004, NUI had drawn $255.0 million and NUIUtilities had drawn $100.0 million under their respective short-term creditfacilities. On that date, NUI and NUI Utilities had overnight cash investmentsof approximately $42.2 million and $66.6 million, respectively. 

NUI's and NUI Utilities' debt agreements contain anumber of covenants that significantly limit their respective ability to, amongother things, borrow additional money, pay dividends, transfer or sell assets,create liens and enter into a merger or consolidation. In particular, under theamendment to NUI's credit facility as of May 10, 2004, NUI is prohibited frompaying any cash dividends during any fiscal quarter in which NUI's consolidatedtotal debt represents more than 60 percent of its total capitalization, measured (i) atthe last day of the immediately preceding fiscal quarter and (ii) pro forma atthe time such dividend is made.  Inaddition, the terms of the Merger Agreement prevent NUI from paying any cashdividends, regardless of financial results. Therefore, NUI is unable to pay any dividends at this time or in theforeseeable future.  The covenants alsorequire both NUI and NUI Utilities to meet certain additional financial tests.If either NUI or NUI Utilities were unable to meet its debt service obligationsor to comply with these covenants, there would be a default under one or moreof the agreements. Such a default, if not waived by our lenders, could resultin acceleration of the repayment of either NUI's or NUI Utilities' debt andhave a material adverse effect on each company's financial conditions, resultsof operations and liquidity. The anticipated $95 million of Bridge Facilitieswhich the company received a commitment from a lender would further amend theterms of NUI's and NUI Utilities' credit facilities. 

The company completed the sale of its NUI Telecomsubsidiary on December 12, 2003, for approximately $2 million.

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

***CreditRating Actions***

During fiscalyears 2002, 2003 and 2004, Moody's Investors' Service (Moody's) downgradedNUI's credit rating from Baa1 to Caa1 and downgraded NUI Utilities' creditrating from A3 to B1. The credit rating downgrades that have occurred in fiscal2004 are described below.

OnOctober 6, 2003, Moody's downgraded NUI's debt rating from B1 to B3. Moody'salso downgraded the debt rating of NUI Utilities from Ba1 to Ba3. Moody's citedthe company's announcement that the company's Board of Directors had placed theentire company up for sale. In addition, Moody's indicated that their actionreflects the difficult business conditions affecting the company as well as thelimited progress in selling non-core assets, citing that this limited thecompany's financial flexibility. Moody's also cited the continuing financialrelationship between NUI and NUI Utilities, liquidity concerns, and the costsassociated with finding a suitable buyer for the company. As a result of thesedowngrades, NUI Utilities' cost of borrowing under its short-term facilitiesincreased an additional 62.5 basis points or 0.625 percent and the cost ofborrowing for NUI was unchanged.  Inconjunction with the downgrades on October 6, 2003, Moody's indicated theywould monitor the company's liquidity position as well as its progress inselling non-core assets. 

OnApril 6, 2004, Moody's further downgraded NUI's debt rating from B3 to Caa1.Moody's also downgraded the debt rating of NUI Utilities from Ba3 to B1.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 then ongoinginvestigation of the NJAG into NUI Energy Brokers; and (5) the delays inrealizing the sale of the company, which is the source of repayment of NUI's$255 million rated debt and a portion of the debt of NUI Utilities. Moody'salso cited the financial relationship between NUI and NUI Utilities and thatany penalties that may be assessed to the company by the NJBPU may have to befunded from the earnings and cash flows of NUI Utilities. In addition, NUI andNUI Utilities have overlapping lenders that require debt to be serviced by eachentity. Moody's further cited that 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.  On July 15, 2004, following the announcement of the MergerAgreement with AGL, Moody's changed its outlook for both NUI and NUI Utilitiesfrom negative to developing.  Thedeveloping outlook reflects Moody's belief that while the news of the sale is apositive development, the uncertainties surrounding the timing and theconditions that may be imposed on the sale by regulators, as well as materialadverse events that could lead AGL to abandon its purchase of NUI, requirecontinued monitoring of the credit rating. In the meantime, Moody's expects thecompany to continue to incur higher than historical operations and maintenanceexpenses as it employs an array of outside advisors and consultants to helpmanage its day to day operations; incurs additional legal, accounting andfinancial advisory fees as it seeks to respond to regulatory investigations;deals with its shareholder lawsuits; attempts to execute settlements with itsregulators; and seeks financial and legal advice on the implementation of theMerger Agreement.

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 anticipated liquidityneeds on an interim basis prior to the sale of the company with separate creditagreements for NUI and NUI Utilities aggregating $405 million, each of whichcan be extended for another 364 days at the option of the respective borrower(under certain conditions); see discussion of Short-Term Debt for furtherdetails.  S&P also noted that anynegative outcome of the investigation of the trading transactions or possibleregulatory action in New Jersey could inhibit the company's ability for asuccessful sale.

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

***Sources of Liquidity***

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

NUI's current credit agreement provides for a $255million term loan facility. The proceeds of the term loan facility were used(1) to repay and terminate NUI's credit agreement which was entered into onFebruary 12, 2003, (2) to repay NUI's outstanding $60 million senior notes andpay a $9.4 million prepayment premium relating thereto, (3) to repayapproximately $85 million of an intercompany balance owed by NUI to NUIUtilities, (4) to fund a $20.4 million interest reserve account for the benefitof the lenders under NUI's credit agreement, and (5) for other general corporatepurposes. NUI's credit agreement bears interest at a rate, at NUI's option,equal to either (i) LIBOR (subject to a 2 percent floor) plus 6 percent, or(ii) the Base Rate (subject to a 3 percent floor) plus 5 percent. Theobligations under NUI's credit agreement are guaranteed on a senior unsecuredbasis by certain of NUI's direct and indirect wholly-owned subsidiaries. NUIUtilities and VGC do not guarantee NUI's obligations under this creditagreement. As of June 30, 2004, NUI had fully drawn all amounts available underits credit agreement. As of August 9, 2004, NUI had overnight cash investmentsof $42.7 million.

NUI's facility may be extended for one 364-day term if(i) NUI Utilities' facility is simultaneously extended, (ii) the maturity ofNUI Utilities' 8.35 percent medium term notes, due February 1, 2005, has beenextended to a date no earlier than June 30, 2006 or the notes have been repaidwith the proceeds of the delayed draw term loan, (iii) NUI deposits cash withthe administrative agent to cover interest that would accrue on outstandingamounts under the credit facility until the extended maturity date, in theamount of approximately $20.4 million, (iv) no default exists under suchfacility at the time of such extension and (v) all applicable regulatoryapprovals required for such extension have been obtained.

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 NUI Utilitiescredit agreement which was entered into on February 12, 2003, (2) to payaccrued 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 June 30, 2004,NUI Utilities had fully drawn all amounts available under the $50 million revolverand the $50 million term loan facility. As of August 9, 2004, NUI Utilities hadovernight cash investments of $57.9 million.

NUI Utilities' facility may be extended for one364-day term if (i) all applicable regulatory approvals required for suchextension have been obtained, (ii) the maturity of NUI Utilities' 8.35 percentmedium term notes, due February 1, 2005, has been extended to a date no earlierthan June 30, 2006 or the notes have been repaid with the proceeds of thedelayed draw term loan and (iii) no default exists under such facility at thetime of such extension.

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 terms of NUI's and NUIUtilities' credit facilities would have to be further amended in connectionwith the anticipated $95 million of Bridge Facilities. 

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 March12, 2004, NUI and NUI Utilities received a further waiver of such defaults fromthe lenders and such lenders otherwise deferred their rights to exerciseremedies in respect thereof. NUI and NUI Utilities subsequently entered intoamendments dated May 10, 2004, to their respective credit agreements 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 certain gas pipeline assets (see Note 12 ofthe Notes to the Consolidated Financial Statements for further information onthe asset purchase),  

(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 immediatelypreceding fiscal quarter and (ii) pro forma at the time such dividend ismade. In addition, the terms of the Merger Agreement prevent NUI from payingany cash dividends, regardless of financial results.  Therefore, NUI is unable to pay any dividends at this time or inthe foreseeable future. Under NUI's credit facility, NUI also is prohibitedfrom paying dividends exceeding $20 million in the aggregate while the creditfacility is outstanding. 

Under the amendment to NUI Utilities' credit facilitydated as of May 10, 2004, NUI Utilities is prohibited from paying dividends toNUI Corporation exceeding $35 million in the aggregate while the creditfacility is outstanding.

At June 30, 2004, theoutstanding borrowings under NUI's and NUI Utilities' credit facilities were$255.0 million and $100.0 million, respectively, at weighted average interestrates of 8.1 percent and 7.1 percent. As of that date, NUI and NUI Utilitieshad no unused borrowing capacity under their credit facilities (except for NUIUtilities' delayed draw term loan). Also, as of June 30, 2004, NUI and NUIUtilities had approximately $42.2 million and $66.6 million, respectively, ofcash held as short-term investments.

The weighted average dailyamounts of borrowings outstanding under NUI's credit facility and the weightedaverage interest rates on those amounts were $255.0 million and $18.6 millionat 8.1 percent and 2.8 percent for the three months ended June 30, 2004 and2003, respectively. The weighted average daily amounts of borrowingsoutstanding under NUI's previous and current credit facilities and the weightedaverage interest rates on those amounts were $210.7 million and $35.8 millionat 8.0 percent and 3.0 percent for the nine months ended June 30, 2004 and2003, respectively. The weighted average daily amounts of borrowingsoutstanding under NUI Utilities' credit facility and the weighted averageinterest rates on those amounts were $100.0 million and $126.8 million at 7.3percent and 2.8 percent for the three months ended June 30, 2004 and 2003,respectively. The weighted average daily amounts of borrowings outstandingunder NUI Utilities' previous and current credit facilities and the weightedaverage interest rates on those amounts were $103.5 million and $114.2 millionat 6.1 percent and 2.7 percent for the nine months ended June 30, 2004 and2003, respectively.  

***Long-Term Debt*****.**  NUI Utilities has outstanding $50 million 8.35 percent mediumterm notes, which mature on February 1, 2005. As of June 30, 2004, this amount has beenreclassified to current liabilities on the Consolidated Balance Sheet. As noted under Short-Term Debt above, included inNUI Utilities' current credit facility is a $50 million delayed draw term loanthat can be drawn at the option of the company and used, subject to thesatisfaction of the terms and conditions contained therein, to repay thesemedium term notes. The anticipated $95 million of Bridge Facilities forwhich the company received a commitment from a lender requires that the delayed draw term loan be fully drawn by September30, 2004.

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 ofthis indebtedness, NUI paid a prepayment premium of approximately $9.4 millionto the noteholders, which wasrecorded as a charge during the first quarter of fiscal 2004. During thefirst quarter of fiscal 2004, the company also recorded a charge ofapproximately $0.5 million for unamortized debt expenses related to the senior notes.

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.  

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 further amended theSBPA. The amendment eliminates the effect of the NJBPU Settlement, as wellas the estimated refunds to customers in Florida and certain other relatedcosts, on the earned surplus of NUI Utilities. In addition, pursuant tothe terms of the amendment, and effective as of June 30, 2004, the expirationdate of the SBPA will be extended 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.

Beginningsix months after the expiration or termination of the SBPA, any Variable Bondsstill held by the bank must be redeemed or purchased by the company in tenequal, semi-annual installments. In addition, while the SBPA is in effect, anytendered Variable Bonds that are purchased by the bank and not remarketedwithin one year must be redeemed or purchased by the company at such time, andevery six months thereafter, in ten equal, semi-annual installments.

TheSBPA would have to be further amended to permit the proposed $75 million NUIUtilities' senior secured credit facility.

As ofJune 30, 2004, the aggregate principal and accrued interest on the outstandingVariable 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 due October1, 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, 2032and (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 dated September 30, 2003 on Form 10-K, relatedofficers' certificates and other financial information.

In addition, defaults would have occurred under NUIUtilities' 5.70 percent bonds if the company did not provide audited financialstatements for NUI Utilities for the fiscal year ended September 30, 2003 (byno later than 120 days after the fiscal year end) and unaudited financialstatements for NUI Utilities for the fiscal quarters ended December 31, 2003and March 31, 2004 (by no later than 60 days after the fiscal quarter ends). However,NUI Utilities obtained all necessary waivers and extended the respectivedeadlines for delivery of all information required pursuant to such bondfacility to June 30, 2004.  No defaultsever occurred under NUI Utilities' 5.70 percent bond facility since NUIUtilities was able to provide all of the required information by the extendeddeadline of June 30, 2004.

***Common Stock*****. **The company has periodically issued shares of commonstock in connection with its various stock and employee benefit plans.  However, in accordance with the terms of theMerger Agreement, the company is not issuing any new shares of common stock atthis time or in the foreseeable future.

**Capital Expenditures and Commitments**

***Capital Expenditures***. Capital expenditures,which consist primarily of expenditures to expand and upgrade the company's gasdistribution systems, were $28.2 million for the nine months ended June 30,2004, and $33.2 million for the nine months ended June 30, 2003. The decreased capitalspending during the current fiscal period was due to the company's reduction ofcapital projects at the corporate level.

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.  InFebruary 2003, after receiving the required regulatory approval, VGCcontributed certain storage assets valued at approximately $16.3 million toSSLLC. DESGS has contributed an equal amount (approximately $16.3 million) ofcapital required to expand the facility for its intended purpose.  To the extent SSLLC determines it needsadditional funding (which decision can only be made jointly by the company andDESGS), the company and DESGS are obligated to fund the development of SSLLCequally. 

As of June 30, 2004, thecompany has loaned SSLLC an aggregate of approximately $27 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. TheSaltville facility features fast-injection and fast-withdrawal capabilitiesoffered by salt cavern storage. The expansion will be completed in phasesstarting in fiscal 2003, with the Phase I total of 5.3 Bcf of working naturalgas storage capacity to be completed by fiscal 2007. Phase I, at full capacity,will be able to deliver up to 500 million cubic feet per day of natural gas toarea markets. The market demand for additional storage will dictate the timingof 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 an energy hubaround the Saltville facility, during December 2002, the company entered into atwenty-year agreement with DEGT for the firm transportation of natural gas onthe Patriot pipeline, 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. 

NUIplans to develop a salt dome natural gas storage facility near Richton, PerryCounty, Mississippi.  Like its companionstorage facility in Saltville, Richton is expected to offer thehigh-deliverability capabilities of salt dome storage for natural gas and willhave access to a number of major interstate pipelines, including DestinPipeline and its connections to Gulf South, Gulfstream, FGT, SONAT, TennesseeNatural Gas and Transco. Through its connection to Destin Pipeline, Richtonwill have direct access to the gas supplies in the Gulf of Mexico, as well asto supplies from the interconnected interstate pipelines previouslylisted.  Richton can also serve as apotential storage facility for the various proposed liquefied natural gas (LNG)projects in the Gulf Coast. 

The preliminary plan is to develop two cavernswith approximately 3.8 Bcf of working gas capacity each.  The total gas capacity of both caverns isexpected to be approximately 11.6 Bcf. The gas handling facilities are expected to provide an average injectionrate of 250,000 thousand cubic feet (Mcf) per day and a maximum withdrawal rateof 600,000 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 anticipatedthat Richton facility will be regulated by the Federal EnergyRegulatory Commission (FERC). Thepreliminary engineering study, conceptual design for the facility and pipeline,water resource analysis, and a successful "open season" have beencompleted.  The total cost of theproject is expected to be approximately $85 million over a period of threeyears, which NUI will seek to fund through project finance debt.  This project is not expected to have anymaterial capital requirements in fiscal 2004 and, if the project provesfeasible, will primarily impact the company's capital expenditure program infiscal years 2005 and 2006 after the funding needs of Phase I of the Saltvillefacility (discussed above) are essentially satisfied.

During 2001, the company began building a plannedgas pipeline intended to cross the state of Florida from West Palm Beach toFort Myers (the Florida East-West Pipeline Project). Phase I of the pipelinehas been completed and is currently in service beginning with a connection tothe Florida Gas Transmission Company's pipeline in West Palm Beach andterminating in South Bay. The remaining portions of the project are intended toinclude an interconnection with the Florida Gas Transmission Company's pipelinein Fort Myers and the Gulfstream Natural Gas System pipeline in Martin County.During October 2003, the company retained a company to provideengineering-related services in support of the expansion of its Florida East-WestPipeline project. The company anticipates a twenty-eight (28) monthschedule to complete the pipeline systems inclusive of a state regulatoryapproval process and construction activities. 

The company intends to begin the regulatory approvalprocess once suitable customer commitments are obtained. When completed, thepipeline is expected to be capable of transporting up to 300,000 Mcf per day ofnatural gas. The pipeline is also intended to include direct connection to anyof the three LNG pipelines proposed to come onshore in southeast Florida at theports of Palm Beach and/or Port Everglades. Once completed, the company's pipeline will serve as a transportationhub linking the east and west sides of the Florida Gas Transmission system tothe proposed LNG pipelines and the Gulfstream Natural Gas System as well as thecompany's proposed West Felda Gas 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.

OnJuly 22, 2004, NUI Utilities and Penn-Jersey Pipeline Company (Penn-Jersey)entered into an Asset Purchase Agreement (APA), pursuant to which NUI Utilitieswill purchase, among other things, the pipeline facilities of Penn-Jersey,subject to the satisfaction of certain conditions contained in the APA,including the receipt of necessary authorizations from the FERC. The purchaseprice is $315,000 plus the depreciated cost of any necessary capitalexpenditures made by Penn-Jersey subsequent to January 31, 2003. Penn-Jersey isa small interstate natural gas pipeline that delivers natural gas from aninterconnection with Columbia Gas Transmission Corp. in Pennsylvania to NUIUtilities' distribution system in New Jersey.

***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 $62.3 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 its interstate pipeline assets. NUI Utilities initiallyentered into an agreement with Cinergy effective March 31, 2004, which coveredonly a one-month period.  That agreementwas superseded by an agreement effective on April 1, 2004, pursuant to whichCinergy will serve as NUI Utilities' asset manager from April 1, 2004 untilMarch 31, 2005, and will provide NUI Utilities with a full requirements gassupply service to enable NUI Utilities to meet its public utility obligationsto supply 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. Management hopes to meet its liquidity needs asa result of the new Bridge Facilities; however, there is no assurance that thisadditional financing can be obtained or that the approval of the NJBPU, whichis necessary to obtain such financing, will be forthcoming. In addition, thefinancing, if obtained, could have terms which have a material adverse effecton the company.

Demand on our Elizabethtown Gas system in New Jerseyfluctuates due to weather variations because of the many seasonal heatingcustomers that are served by that system. As a result, we are subject toseasonal variations in working capital because we purchase and store naturalgas supplies in the summer months for the upcoming winter heating season;however, we do not generate significant cash flows from the sale of this gasuntil the winter months when demand for natural gas is at its peak.

***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 the actual total cost of future environmental investigation and remediationefforts cannot be reasonably estimated, the company has recorded on an undiscounted basis a total reserve ofapproximately $33.8 million, which thecompany believes represents the probable minimum amount the company may expendover the next 30 years.  Of thisreserve, approximately $29.9 millionrelates to the New Jersey MGP properties and approximately $3.9 million relates to the MGP properties locatedoutside the state of New Jersey. The company believes that all costs associatedwith remediation of the New Jersey MGP properties will be recoverable in ratesor from insurance carriers. The company's prudently incurred remediation costsfor the 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 $34.1million, inclusive of interest, as of June 30, 2004. With respect to costs thatmay 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.  Although the company has been successful inrecovering a portion of the remediation costs incurred outside of New Jerseyfrom the company's insurance carriers, the company is not able, at this time,to express a belief as to the success of additional recovery efforts. 

***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 SheetArrangements***. The company's off-balancesheet arrangements include commitments under operating leases, guarantees, letters ofcredit and gas procurement contracts, all of which are normal to the company'soperations. See Note 12 of the Notes to the Consolidated Financial Statementsfor a discussion of the company's guarantees. In addition, the company is a 50percent member of a joint venture that is developing natural gas storage assetsand is required to provide funding toward the development of these assets fortheir intended purpose.  See CapitalExpenditures and Commitments-Joint Venture with Duke Energy above for furtherdiscussion. NUI is also party to a Standby Letter of Credit secured by cashcollateral, as follows: a secured Standby Letter of Credit issued on February1, 2004 by Fleet Bank, originally in the amount of $1,000,000, in favor ofNational Union Fire Insurance Company and several other insurance companiesunderwriting the company's workmen's compensation policy.  As of April 23, 2004, the amount of theletter of credit has been reduced to $948,000. The letter of credit expires onFebruary 1, 2005.

**Application of CriticalAccounting Policies**

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 materiallydifferent financial statement results if the assumptions regarding applicationof accounting principles were different. A description of the company'sCritical Accounting Policies can be found in the company's Annual Report filedon Form 10-K for the year ended September 30, 2003.  Other significant accounting policies are discussed in Note 1 ofthe Notes to the Consolidated Financial Statements- Summary of SignificantAccounting Policies of the company's Form 10-K. Recently issued accountingstandards are also discussed in Note 13 of the Notes to the ConsolidatedFinancial Statements.

 
**NUI Corporation and  Subsidiaries   Summary Consolidated Operating Data**

 
**      Three Months Ended                   June 30,**

**    Nine Months Ended                June 30,**

 
 

**2004**

**2003**

**2004**

**2003**

**Operating Revenues  (Dollars in thousands)**

 

 

 

 

Firm Sales:

 

 

 

 

   Residential

$45,435

$46,261

$273,201

$241,666

   Commercial and Industrial

21,700

20,364

122,344

100,139

Interruptible Sales

11,883

18,330

33,811

49,222

Unregulated Sales 

(11)

29,713

14,851

101,519

Transportation Services

11,977

11,427

40,716

39,168

Customer Service, Appliance Leasing and Other

    8,009

    22,121

    31,006

    64,260

Total Revenues

98,993

 148,216

515,929

 595,974

Revenues by Discontinued Operations

         (49)

  (12,923)

     (7,126)

  (39,135)

Operating Revenues from Continuing Operations

$98,944

$135,293

$508,803

$556,839

 

 

 

 

**Gas Sold or Transported  (MMcf)**

 

 

 

 

Firm Sales:

 

 

 

 

   Residential

3,156

3,625

21,988

23,438

   Commercial and Industrial

1,737

1,721

10,743

10,272

Interruptible Sales

1,755

2,608

4,914

7,629

Unregulated Sales 

1,891

17,287

9,555

75,579

Transportation Services

  7,365

 7,749

 26,291

  28,036

Total Gas Sold or Transported

15,904

 32,990

73,491

 144,954

Gas Sold or Transported by Discontinued     Operations

         ---

             --- 

         ---

       (239)

Gas Sold or Transported by Continuing Operations

15,904

32,990

73,491

144,715

 

 

 

 

**Average Utility Customers  Served**

 

 

 

 

Firm Sales:

 

 

 

 

   Residential

344,277

341,551

344,347

347,175

   Commercial and Industrial

22,804

22,123

22,783

22,961

Interruptible Sales

26

24

25

30

Transportation Services

    3,728

    4,120

     3,745

    4,137

Total Average Utility Customers Served

370,835

367,818

370,900

374,303

Average Utility Customers Served by Discontinued     Operations

         ---

           ---

         ---

  (6,548)

Average Utility Customers Served by Continuing  Operations

370,835

367,818

370,900

367,755

 

 

 

 

**Degree Days in New Jersey**

 

 

 

 

Actual

436

712

4,858

5,400

Normal

553

553

4,795

4,795

Percentage variance from normal

           21% warmer

        29%  colder

         1%  colder

        13%  colder

 

 

 

 

**Employees (period end)**

936

1,095

 

 
**Item 3. Quantitative and Qualitative Disclosure About Market Risk**
** **In March 2004, the company discontinued the tradingoperations of its NUI Energy Brokers business, although NUI Energy Brokerscontinues to manage its prior contractual obligations under a long-term gassales agreement in addition to two long-term gas storage and transportationagreements. Prior to that date, NUI Energy Brokers used derivatives formultiple purposes: i) to hedge price commitments and minimize the risk offluctuating gas prices, ii) to fulfill its trading strategies and, therefore,ensure favorable prices and margins, and iii) to take advantage of market informationand opportunities in the marketplace. These derivative instruments includedforwards, futures, options and swaps. The majority of NUI Energy Brokers'positions were short-term in nature (up to 2 years) and could be readily valuedusing New York Mercantile Exchange settlement prices and those from severalother well-established, third-party organizations. 

NUIEnergy Brokers was also responsible for administration of the NUI Utilitieshedge program. This program was established in December 2000 in accordance withthe Gas Procurement Strategy and Plan (GPS&P) to help NUI Utilities fulfillits mission to operate its gas distribution system in a safe, reliable and costeffective manner.  The focus of the GPS&Pwas to manage the purchased costs of gas for firm sales customers of NUIUtilities. To meet its objectives of managing gas price risk, NUI Utilitiesengages in financial hedging activities that include the use of New YorkMercantile Exchange traded natural gas futures contracts and options.  In April 2004, NUI Utilities adopted ahedging risk management policy that established guidelines and controls togovern its hedge program.  In June 2004,Cargill Investor Services (CIS) approved the NUI Utilities' hedging account,and the NJBPU granted the necessary authorizations for NUI Utilities tocomplete the opening of the hedge account. As of June 30, 2004, all of the NUI Utilities open positions weretransferred to the new account, and the GPS&P is now managed by NUIUtilities. 

NUI accounts for its hedging and remainingtrading activities in accordance with the provisions of SFAS 133, "Accountingfor Derivative Instruments and Hedging Activities."  SFAS 133 requires that all derivatives be recognized on the balancesheet at fair value with changes in the value of derivatives that are nothedges recorded in earnings. 

Further,consistent with the regulatory accounting treatment for NUI Utilities' gasprocurement activities and pursuant to the provisions of SFAS 71 "Accountingfor the Effects of Certain Types of Regulation," NUI Utilities defers both therealized and unrealized gains/(losses) attributable to the derivativeinstruments covered by this policy. Realized gains or losses are recorded asadjustments to gas purchase costs and are recovered from customers through thepurchased gas adjustment clauses. Unrealized gains or losses are recorded onthe balance sheet as a regulatory asset or liability, as applicable.

At June 30, 2004, NUI Energy Brokers had nofutures contracts or physical forwards associated with the delivery and sale ofnatural gas into and from storage designated as cash flow hedges with theobjective of fixing an acceptable return. Under SFAS 133, the changes in the value of derivatives designated ashedges that were effective in offsetting the variability in cash flows of aforecasted transaction were recognized in other comprehensive income until theforecasted transactions occur.  Theineffective portion of changes in the fair value of derivatives is recognizedimmediately in earnings. 

At June 30, 2004, there was no hedgeineffectiveness recognized in earnings.

Presently, NUIEnergy Brokers' only open trading positions are related to a long-term gassales agreement referred to above. Prior to the company discontinuing the trading operations of NUI EnergyBrokers, the risk associated with open positions was closely monitored on adaily basis, and controlled in accordance with NUI Energy Brokers' RiskManagement Policy.  Utilizing the variance/covarianceVaR (value at risk) methodology to measure the risk associated with openpositions, NUI Energy Brokers' VaR was $267 and $45,000 at June 30, 2004 and2003, respectively, using a 95 percent confidence interval and a one-day timehorizon. The following schedule summarizes the changes in derivative assets andliabilities for the nine-month period ended June 30, 2004 (in thousands). 

Derivative  assets at September 30, 2003

$13,192

 

Derivative  liabilities at September 30, 2003

         ---

 

   Fair value of contracts outstanding at September  30, 2003

 

$13,192

 

 

Contracts  realized or settled during the period

 

(17,264)

Changes  in fair value attributable to market pricing

 

  23,587

 

 

Derivative  assets at June 30, 2004

$19,515

 

Derivative  liabilities at June 30, 2004

         ---

 

   Fair value of contracts outstanding at  June 30, 2004

 

$19,515

Changesin the fair value attributable to market pricing represents the changes invalue of the company's unrealized mark-to-market net assets that relate tochanges in commodity pricing, volatility of options on commodities, and othermarket related changes.

Thefollowing table summarizes the fair value of the contracts comprising thecompany's net derivative assets by maturity date (amounts in thousands):

**Fair Value of Contracts at Period-End**

**Source of Fair Value**

**Less than 1 Year**

**1-3 Years**

**4-5 Years**

**In Excess of 5 Years**

**Total**

Prices  actively quoted

$13,600

$1,962

$     ---

$     ---

$15,562

Prices  based on models and other valuation methods 

         438

    2,239

    1,276

         ---

      3,953

Total  Fair Value of Contracts

$14,038

$4,201

$1,276

$     ---

$19,515

Changesin the fair value attributable to market pricing represents the changes invalue of the company's unrealized mark-to-market net assets that relate to changesin commodity pricing, volatility of options on commodities, and other marketrelated changes.
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.

In connection with the fiscal 2003 financial statementaudit, PwC communicated additional 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.

In June 2004, the company filed Amendments on Form10-Q/A for each of the first and second fiscal quarters ending March 31, 2004and December 31, 2003, because of a deficiency noted in its cash reconciliationprocess which gave rise to an overstatement of the company's cash balance andan understatement of its prepayment account as of March 31, 2004 and December31, 2003. This deficiency was related to the company not clearing identifiedreconciling items timely in a cash wire transfer account resulting from certainend of the quarter cash payments.  Thecash wire transfer account is included in Cash and cash equivalents on theConsolidated Balance Sheet. In June 2004, the company implemented a change inits 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. During fiscal 2004, our internal auditorsperformed additional audits which indicated continuing material weaknesses inour internal controls. 

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.

The company has undertaken a long-term effort toassess our systems of internal control and to comply with the requirements ofSection 404 of the Sarbanes-Oxley Act. These actions include:

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

-       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. In addition, the pending sale of the company has resulted in the loss ofexperienced financial and accounting employees, which has negatively impactedmanagement's implementation of effective disclosure controls, procedures andinternal controls.  As a result, therecan be no assurance that our systems of disclosure controls, procedures andinternal controls will prevent all errors or fraud, or ensure that all materialinformation will be made known to management in a timely 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 Vice President, Chief Financial Officer, General Counsel andSecretary, of the effectiveness of the design and operation of its disclosurecontrols and procedures. The evaluation examined those disclosure controls andprocedures as of June 30, 2004, the end of the period covered by this report.Based upon the evaluation, the company's management, including its Presidentand Chief Executive Officer and its Vice President, Chief Financial Officer,General Counsel and Secretary, concluded that, as of June 30, 2004, NUI's disclosurecontrols and procedures were effective, except as described above, at thereasonable assurance level to ensure that information required to be disclosedin NUI's reports filed or submitted under the Exchange Act was accumulated andcommunicated to NUI's management, including its President and Chief ExecutiveOfficer and its Vice President, Chief Financial Officer, General Counsel andSecretary, as appropriate to allow timely decisions regarding requireddisclosure.
**PART II - OTHER INFORMATION**
**Item1.    Legal Proceedings**

***Class Action Litigation***

Between October 28, 2002 and December 20, 2002, fivesubstantially similar civil actions were commenced in the United StatesDistrict Court for the District of New Jersey, in which the plaintiffs allegethat the company and two of its former presidents violated federal securitieslaws by issuing false statements and failing to disclose information regardingthe company's financial condition and current and future financial prospects inits earnings statements, press releases, and in statements to analysts andothers.  By orders dated December 19,2002, January 22, 2003, and February 3, 2003, the five actions wereconsolidated into one action captioned In re NUI Securities Litigation.The five consolidated lawsuits include: (1) an action captioned JackKlebanow, 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 October 28, 2002;  (2) an action captioned Gisela Friedman, on behalf of herselfand all others similarly situated v. NUI Corporation and John Kean, Jr.,filed in the United States District Court for the District of New Jersey onOctober 31, 2002;  (3) an actioncaptioned Thomas Davis, on behalf of himself and all others similarlysituated v. NUI Corporation and John Kean, Jr., filed in the United StatesDistrict Court for the District of New Jersey on November 6, 2002; (4) anaction captioned Marvin E. Russell, 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 December 10,2002; and (5) an action captioned Phyllis Waltzer, on behalf of herself andall others similarly situated v. NUI Corporation and John Kean, Jr., filedin the United States District Court for the District of New Jersey on December20, 2002. By order dated February 3, 2003, a Lead Plaintiff, Lead Counsel andLiaison Counsel were appointed in the consolidated action. By stipulation ofthe parties, an Amended Consolidated Class Action Complaint was filed on May12, 2003, and subsequently plaintiffs were granted leave to file a SecondAmended Consolidated Class Action Complaint, which was filed on July 17, 2003.The Second Amended Complaint, brought on behalf of a putative class ofpurchasers of NUI's common stock between November 8, 2001 and October 17, 2002,asserts claims under Section 10(b), including Rule 10b-5 promulgatedthereunder, and Section 20(a) of the Exchange Act against the company and twoof its former presidents.  Specifically,the Second Amended Complaint alleges that the defendants failed to disclosematerial facts and materially inflated the company's earnings by (i) allegedlymaking misleading statements concerning, and failing to properly record, baddebt costs, and (ii) recording revenues from a purportedly illegal"reterminating" billing practice allegedly engaged in by its former subsidiary.The Second Amended Complaint seeks unspecified monetary damages on behalf ofthe class, including costs and attorneys fees. On October 14, 2003, defendantsmoved to dismiss the Second Amended Complaint under, inter alia, the PrivateSecurities Litigation Reform Act. The motion was heard on March 15, 2004.  By decision and order dated April 23, 2004,the district court granted in part and denied in part defendants' motion todismiss. 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 denying any wrong doing and asserting affirmative defenses. Discoveryhas recently commenced. Although the company intends to vigorously defend theselawsuits, it is not possible at this time to determine a likely outcome.

***James Greiff and TIC Enterprises, Inc. Litigation***

This case, originally filed in Georgia State Court, thenremoved by defendants to the United States District Court for the NorthernDistrict of Georgia, was transferred on the defendants' motion to the Districtof Delaware.  The plaintiffs, JamesGreiff and TIC Enterprises, Inc. sued the company and three other companyrelated entities, NUI Sales Management, Inc., NUI Capital Corp. and TIC, forbreach of contract and fraud.  Theplaintiffs alleged they were entitled to (i) $3 million arising from thedefendants' alleged breach of contract; (ii) an amount to be proven at trialarising from the defendants' alleged breach of a 2001 Purchase Agreement; (iii)$22 million and punitive damages for the defendants' alleged fraud; and (iv) $3million plus interest and punitive damages for the defendants' allegedfraudulent transfers.  The plaintiffsalso alleged a tortious interference claim for $3 million.  On May 5, 2004, NUI received the plaintiffs'written acceptance of the company's settlement proposal, and the plaintiffsrequested that NUI prepare the appropriate settlement documents for review. Asa result, the company reduced the amount payable under a promissory note heldby the plaintiffs from $3.0 million to $1.4 million on the September 30, 2003Consolidated Balance Sheet, and recorded a gain of $1.6 million in other incomeon the Consolidated Statement of Income for fiscal 2003. The  final Settlement Agreement was executed onJune 4, 2004, general releases were exchanged and the company paid theplaintiffs $1.4 million to fully and finally settle all claims between theparties.  On June 15, 2004, the courtordered dismissal of the case pursuant to a Stipulation of Voluntary DismissalWith Prejudice filed by the parties.

***Joseph Pietrangelo, on behalf of himself and a class of personssimilarly situated v. NUI Corporation, John Kean, John Kean Jr., MarkAbramovic, James R. Van Horn, Thomas W. Williams, Charles N. Garber, James J.Forese, Dr. Vera King Farris, J. Russell Hawkins, Bernard S. Lee, R. V.Whisnand, and John Winthrop. ***

On or about July 8, 2004, acomplaint for breach of fiduciary duty under the Employee Retirement IncomeSecurity Act (ERISA) was filed in the United States District Court for theDistrict of New Jersey, in which Plaintiff alleges that the company and twelvecurrent or former officers and/or directors breached alleged fiduciary dutiesowed to the employee participants of the NUI Corporation Savings and InvestmentPlan for Collective Bargaining Employees and the NUI Corporation Savings andInvestment Plan for other company employees (collectively, the Plans).  Specifically, Plaintiff alleges thatDefendants failed to disclose, and made false and misleading statementsconcerning, the true level of the company's bad debt, the true level of thecompany's earnings per share, the accurate status and contribution of the company'senergy trading business and other allegedly material operating and accountingissues, all of which allegedly caused the company's stock to trade atartificially inflated prices.  As aresult, Plaintiff alleges, Defendants breached various fiduciary dutiesallegedly owed to participants of the Plans under ERISA, and engaged in aprohibited transaction under Section 404 of ERISA, by purportedly: (i)selecting and maintaining a stock fund consisting of company shares (the NUIStock Fund) as an investment alternative in the Plans when it allegedly was nolonger suitable and prudent, (ii) encouraging employees to invest in the NUIStock Fund, (iii) continuing to invest in, and failing to divest the Plansfrom, the NUI Stock Fund when it allegedly became an imprudent investment, (iv)abdicating a purported duty to review, evaluate and monitor the suitability ofthe Plans' investment in the NUI Stock Fund and (v) failing to provideaccurate, material information to the Plans' participants concerning the NUI StockFund.  Plaintiff purports to bring aputative class action on behalf of all participants or beneficiaries of thePlans from November 11, 2001 through and including September 26, 2003.  The company has not yet been served formallywith the complaint.  Although thecompany intends to vigorously defend the lawsuit, it is not possible at thistime to determine a likely outcome.  

***Flint Energy Construction Co., Inc. and Virginia Gas Pipeline CompanyLitigation***

Flint Energy Construction Co., Inc. sued Virginia GasPipeline Company (VGPC) on a contract claim for amounts billed to VGPC for workperformed by Flint Energy as general contractor on the extension of VGPC's P-25pipeline. VGPC is counter-suing Flint for breach of contract. The case hasmoved to the deposition phase and is expected to be brought to trial inSeptember 2004. Flint originally billed VGPC $2.2 million, which represents thedisputed amount.  At this time, thecompany is unable to determine the likely outcome.

***Specific Cruise Systems, Inc. and Frigette, Inc. d/b/a SCS/Frigette,Inc. v. TIC, Nortel Networks, Inc. and Sherry Hutto Walton***

Plaintiffs, Specific Cruise Systems, Inc. and Frigette, Inc.d/b/a SCS/Frigette, Inc., filed a Petition in Texas state court against TIC, oneof TIC's former employees, Sherry Walton, and Nortel Networks, Inc. on November5, 2002 for alleged damages relating to lost profits and replacement servicesarising out of their claims for breach of contract, fraudulent inducement, andbreach of warranty, as well as for an offset/credit in connection with the saleby TIC of telephone equipment. TIC denies that it made such representations andis relying upon the contracts entered into between the parties. TIC seekspayment for the balance due relating to the sale in the amount of $83,331.00. Ifthe provisions of the contract are not enforceable, the plaintiffs may beentitled to lost profits resulting from the alleged delay in the installation ofthe system and the alleged interference with their business resulting fromdefects in the system. If the contract is deemed enforceable, a provision in thecontract providing a limitation on liability may preclude recovery by plaintiffon certain issues. On July 2, 2004, plaintiffs filed an Amended Petition thatadds a claim for conspiracy to fraudulently induce and seeks exemplary damagesin connection with the fraud claim. Also on July 2, 2004, plaintiffs filedAmended Responses to Defendant Nortel Network's Request for Disclosure thatincludes damage estimates ranging from approximately $2.12 million to $2.32million (of which approximately $1.46 million to $1.66 million is for lostprofits) plus exemplary damages.

A mediation was heldin 2003 and settlement discussions ensued. On June 11, 2003, TIC filed a Motionto Compel Arbitration; no decision has been rendered on the motion. Discoveryis continuing and pursuant to a Second Amended Order Setting Schedule signed onAugust 4, 2004, trial has been set for February 28, 2005.  At this time, the company is unable todetermine the likelihood of an outcome.

***United StatesPostal Service Investigation and Claims ***

TIC entered into acontract with the United States Postal Service (USPS) relating to TIC'spromotion of certain USPS products.  InJanuary 2003, TIC filed with the USPS contracting officer a claim for"breakaway fees" that were provided for in the contract.  In the near future, TIC intends to file itsremaining claims against USPS for unpaid commissions and accounts and lostprofits.  The USPS Office of theInspector General has been conducting an investigation of TIC, and it appearsthat the Inspector General's investigation relates to allegedly false claimssubmitted by TIC to USPS for the payment of commissions under the contract,which could result in civil and criminal liability for TIC.  TIC has been fully cooperating with theInspector General's investigation and has provided documents, data, andtechnical assistance to the Inspector General. Although the investigation has been opened for more than a year, theInspector General has not produced any evidence showing any civil or criminalwrongdoing by TIC, and counsel for TIC has advised that no evidence of falseclaims by TIC has surfaced.  To date,USPS has only mentioned false claims for amounts totaling less than $800,000,plus fines and penalties, but TIC has since shown USPS that such false claimshave no merit. At this time, the company is unable to determine thelikely outcome.

***Investigations of NUI Energy Brokers***

Through January 2004, NUI Energy Brokers served as NUIUtilities' and Elizabethtown Gas' agent for purchasing gas and managing theirutilization of their pipeline, storage and peaking contracts and assets. NUIEnergy Brokers and Elizabethtown Gas were also parties to a contract pursuantto which Elizabethtown Gas purchased certain firm gas supplies from NUI EnergyBrokers. NUI Energy Brokers also arranged financial transactions on behalf ofElizabethtown Gas relating to its gas procurement needs.  

In early November 2003, as the result of the focusedaudit conducted by Liberty, the Board of Directors of the company became awareof allegations of inappropriate conduct by employees of NUI EnergyBrokers.  Some employees of NUI EnergyBrokers allegedly had engaged in activities that improperly benefited NUIEnergy Brokers at the expense of Elizabethtown Gas. The Audit Committee of theBoard of Directors retained an independent outside counsel to assist it inconducting an independent investigation into the allegations and report thefindings and conclusions to the Audit Committee.

As a result of its investigation, the independentcounsel concluded that while NUI had established NUI Energy Brokers withinternal controls designed to protect Elizabethtown Gas' assets, NUI EnergyBrokers traders often ignored or circumvented these controls. The NUI EnergyBrokers bonus/commission plan created an incentive for NUI Energy Brokerstraders and other NUI employees who participated in the bonus/commission planto engage in conduct that favored NUI Energy Brokers over Elizabethtown Gas orto remain silent if they observed conduct that allowed NUI Energy Brokers tobenefit at Elizabethtown Gas' expense. The independent counsel concluded thatthe maximum amount of lost margin to Elizabethtown Gas as a result of NUIEnergy Brokers' failure to obtain for Elizabethtown Gas NUI Energy Brokers'best or weighted average price of the day for comparable transactions wasapproximately $6.5 million over a five year period. The independent counselalso concluded that NUI Energy Brokers recorded as income a discount of $1.3million that a counterparty gave for an early settlement of a deferred paymenttransaction. In addition, the independent counsel concluded that the maximumamount of lost margin to City Gas as a result of NUI Energy Brokers' failure toobtain for City Gas the best or weighted average price of the day forcomparable transactions was approximately $2.6 million, for which amount thecompany recorded a pre‐tax reserve in September 2003. The independentcounsel also reached conclusions with respect to the conduct of variousemployees. Based upon these conclusions, the Audit Committee recommended thatthe Board of Directors of NUI take certain personnel actions, whichrecommendation the NUI Board of Directors effected. 

Since November 2003, the company, NUI Energy Brokersand Elizabethtown Gas have been the subjects of subpoenas issued by the NewJersey State Grand Jury.  The Grand Jurywas seeking diverse operational, structural, financial and personnel recordsrelative to such entities together with documentation relating to the purchaseand sale of gas on behalf of either NUI Energy Brokers or Elizabethtown Gas forthe period of October 1, 1998 through the end of 2003.  Documents in the latter category were alsorequested by the New Jersey Board of Public Utilities (NJBPU).  On June 30, 2004, NUI Energy Brokers enteredinto a plea agreement (the Plea Agreement) with the New Jersey AttorneyGeneral's Office (NJAG) relating to these questionable transactions at NUIEnergy Brokers.  Pursuant to the PleaAgreement, NUI Energy Brokers will pay a $500,000 fine, of which $200,000 hasbeen paid as of June 30, 2004, and the remaining amount is expected to be paidin the first quarter of fiscal 2005.  OnJune 30, 2004, the company entered into a letter agreement with the NJAGpursuant to which the company has agreed to develop, fund and operate certaincommunity service programs.  Thisconcludes the investigation by the NJAG of NUI and its subsidiaries withrespect to these matters.

In November 2003, the SEC advised the company that itis conducting an informal inquiry with respect to the investigation of NUIEnergy Brokers by the NJAG. On March 1, 2004, the SEC requested the company tovoluntarily produce certain documents in furtherance of its informal inquiry.NUI is fully cooperating with the SEC. At this point, the company cannotpredict whether or not the SEC will initiate a formal investigation into this matter.

Thecompany is involved in various other claims and litigation incidental to itsbusiness.  In the opinion of management,none of these other claims and litigation will have a material adverse effecton the company's results of operations or its financial condition.
**Item 6.    Exhibits and Reports on Form 8-K**
**(a)           Exhibits**

31.1         Certification of the Chief ExecutiveOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302of the Sarbanes-Oxley Act of 2002.

31.2         Certificationof Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1         Certificationsof the Chief Executive Officer and Chief Financial Officer pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.

**(b)    ****       Reports onForm 8-K**

         (1)                On June 29, 2004, the company filed a Current Report on Form 8-K datedJune 29, 2004, under Items 5 and 7, furnishing a press release announcing thatthe company had appointed Steven D. Overly as Chief Financial Officer. 

(2)                On June 30, 2004, the company filed a Current Report on Form 8-K datedJune 30, 2004, under Items 5 and 7, furnishing a press release announcing thatits wholesale energy trading subsidiary, NUI Energy Brokers, Inc. (NUIEB), hadentered into a plea agreement with the New Jersey Attorney General's Officerelating to certain transactions at NUIEB. 

(3)                On July 15, 2004, the company filed a Current Report on Form 8-K datedJuly 15, 2004, under Items 5 and 7, furnishing a press release announcing thatthe company had entered into an Agreement and Plan of Merger with AGL ResourcesInc. (AGL) which provides for AGL to acquire all of the outstanding shares ofcommon stock of NUI Corporation for $13.70 per share in cash.

(4)                On August 12, 2004, the company filed a Current Report on Form 8-K datedAugust 12, 2004, under Items 7 and 9, furnishing a press release announcingthat it had deferred its fiscal 2004 third quarter earnings conference call,and that the company needed to perform a review of its accounting for deferredtaxes before it could announce earnings or file its Form 10-Q for the thirdquarter of fiscal 2004.

**SIGNATURES**
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**

 

August 16, 2004

 

CRAIG G. MATTHEWS  President and Chief Executive Officer

 

August 16, 2004

 

STEVEN D. OVERLY  Vice President, Chief Financial Officer,  General Counsel and Secretary*** |