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

 

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

(Mark One)      

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

**For the quarterly periodended March 31, 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 April 30, 2004: Common Stock,No Par Value: 15,968,345 shares outstanding.

**EXPLANATORYNOTE**

This Amendment No. 1 on Form 10-Q/A to the company'sForm 10-Q for the fiscal quarter ended March 31, 2004, as originally filed onMay 25, 2004, is being filed to revise the Consolidated Balance Sheet for aprepayment made under the company's gas procurement contract with CinergyMarketing & Trading, LP (Cinergy). A prepayment of $15 million was made atthe end of the second fiscal quarter which should have been reflectedon the Consolidated Balance Sheet as a credit (reduction) to cash and a debitto prepayments.  There is no change inour total assets, working capital or net income as of and for the fiscalquarter ended March 31, 2004 as a result of this restatement.

Accordingly, the company'sForm 10-Q for the fiscal quarter ended March 31, 2004 has been revised, asfollows:

--             The Consolidated Balance Sheet as of March 31, 2004 hasbeen restated such that Cash and cash equivalents has been decreased by $15million to $136.0 million, and Prepayments and other has been increased by $15million to $63.8 million. 

--             The company's Consolidated Statement of Cash Flows forthe six months ended March 31, 2004 has been restated to reflect the $15million prepayment to Cinergy, which reduced our cash flows from operatingactivities by that amount.

--             A new footnote number fifteen has been added, which istitled "Restatement".

--             In the Liquidity and Capital Resources section of Item2. Management's Discussion and Analysis of Financial Condition and Results ofOperations, we have revised our disclosure of the company's net cash providedby operating activities to make corresponding changes.

--             The company has updated Item 4. Disclosure Controls andProcedures, to include a discussion of a deficiency noted in the company's cashreconciliation process, which gave rise to this Amendment No. 1 on Form 10-Q/A,and implementation of a process change to address this issue.

As discussed in Note 2, the company has experiencedand expects to continue experiencing significant liquidity problems.  However, the $15 million prepayment toCinergy has no impact on statements the company previously made in its Form10-Q filed on May 25, 2004 regarding the company's anticipated cash flows, asthe prepayment obligations under the Cinergy contract were already factoredinto the company's anticipated cash flows.

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

**Item1. Financial Statements**

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

**                                                                                                               **
| **                                                                                                    ** | **Three Months EndedMarch 31,**                      | **Six Months EndedMarch 31,**                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------|------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | **2004**                                             | **2003**                                                         | **2004** | **2003** |
| **Operating Margins**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                      |                                                                  |  |  |
|    Operating revenues                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | $243,356                                             | $249,729                                                         | $409,859 | $421,546 |
|    Less - Purchased gas and fuel                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 164,256                                              | 157,926                                                          | 265,476 | 266,949 |
|               Cost of sales and services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 3,535                                                | 3,139                                                            | 7,171 | 6,641 |
|               Energy taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |     5,507                             |     5,289                                         |     9,414 |     8,783 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   70,058                                        |     83,375                                             | 127,798 | 139,173 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                 |                                                             |  |  |
| **Other Operating  Expenses**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                 |                                                                  |  |  |
|    Operations and maintenance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 42,075                                               | 35,737                                                           | 81,485 | 63,587 |
|    Restructuring costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 990                                                  | ---                                                              | 2,136 | --- |
|    Depreciation and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 8,798                                                | 9,052                                                            | 17,596 | 17,680 |
|    Taxes, other than income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |     2,391                             |    2,476                                               |     4,787 |    4,566 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   54,254                                        |  47,265                                                     | 106,004 |  85,833 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                 |                                                                  |  |  |
| **Operating Income**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 15,804                                               | 36,110                                                           | 21,794 | 53,340 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                      |                                                                  |  |  |
|   Equity in earnings of Saltville Gas  Storage Company,       LLC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 268                                                  | ---                                                              | 645 | --- |
|   Loss on extinguishment of debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ---                                                  | ---                                                              | 9,940 | --- |
|   Other income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |      638                         |      246                                     |   1,317 |       662 |
| ** **Interest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 11,120                                               | 7,133                                                            | 19,999 | 13,473 |
|   Other interest income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |      (532)                       |   (2,247)                                                   |   (1,263) |   (3,240) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                 |                                                                  |  |  |
| **Income (Loss)  from Continuing Operations Before Income Taxes**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 6,122                                                | 31,470                                                           | (4,920) | 43,769 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                 |                                                                  |  |  |
| **  Income tax expense (benefit)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |     2,025                             |    13,034                                              |   (1,619) |  17,972 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                 |                                                                  |  |  |
| **Income (Loss)  from Continuing Operations Before Effect of Change in Accounting**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |     4,097                             |  18,436                                                     |   (3,301) |  25,797 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                 |                                                                  |  |  |
| **Discontinued Operations**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                 |                                                                  |  |  |
|    Loss from discontinued  operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |     (448)                             | (690)                                                            |     (1,588) | (1,039) |
|    Income tax benefit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |      (148)                       |     (277)                                         |      (524) |      (420) |
| **Loss from Discontinued  Operations**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |      (300)                       |     (413)                                         |   (1,064) |      (619) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                 |                                                                  |  |  |
| **Income (Loss) before Effect  of Change in Accounting**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 3,797                                                | 18,023                                                           | (4,365) | 25,178 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                 |                                                                  |  |  |
|   Effect of change in accounting (net of tax    benefit of          $4,079  in 2003)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |          --- |             (5,870) |         --- |    (5,870) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                 |                                                                  |  |  |
| **Net Income (Loss)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | $  3,797                                        | $12,153                                                          | $(4,365) | $19,308 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                 |                                                             |   |   |
| **Basic and Diluted Income  (Loss) from Continuing Operations Per Share of Common Stock**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | $    0.26                             | $    1.15                                         | $ (0.21) | $    1.61 |
| **Basic and Diluted Net  Income (Loss) Per Share of Common Stock**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | $    0.24                             | $    0.76                                         | $ (0.27) | $    1.21 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                 |                                                                  |   |  |
| **Dividends Per  Share of Common Stock**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | $  0.130                                        | $  0.245                                                    | $ 0.375 | $  0.490 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                 |                                                             |   |   |
| ** Weighted Average Number of Shares of Common       Stock Outstanding**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 15,969,802                                           | 16,072,702                                                       |        15,979,826 | 16,048,767 |

** **

*See thenotes to the consolidated financial statements.*

** **

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

** **
|                                                                                                                                                    | **March 31, 2004  Restated(Unaudited)**                                      | **   September 30, 2003(*)**                                      |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------|------------------------------------------------------------------------|
| **ASSETS**                                                                                                                                         |                                                                              |                                                                   |
| **Current  Assets**                                                                                                                                |                                                                              |                                                                        |
|    Cash and  cash equivalents                                                                                                            | $136,046                                                                     | $25,209                                                                |
|    Accounts  receivable (less allowance for doubtful accounts         of $7,671  and $7,304, respectively) | 105,665                                                                      | 55,575                                                                 |
|    Fuel  inventories, at average cost                                                                                                    | 11,425                                                                       | 63,852                                                                 |
|     Unrecovered purchased gas costs                                                                                                      | 10,026                                                                       | 25,398                                                                 |
|    Derivative assets                                                                                                                     | 7,696                                                                        | 8,059                                                                  |
|    Federal income tax  receivable                                                                                                        | ---                                                                          | 3,333                                                                  |
|    Assets  held for sale                                                                                                                 | ---                                                                          | 7,976                                                                  |
|     Prepayments and other                                                                                                                |       63,786                                        |       31,120                                  |
|                                                                                                                                               |     334,644                                                   |     220,522                                             |
|                                                                                                                                                    |                                                                              |                                                                        |
| **Property,  Plant and Equipment**                                                                                                                 |                                                                              |                                                                        |
|     Property, plant and equipment, at original cost                                                                                      | 969,962                                                                      | 954,446                                                                |
|     Accumulated depreciation and amortization                                                                                            | (338,869)                                                                    | (323,370)                                                              |
|     Unamortized plant acquisition adjustments, net                                                                                       |       12,838                                        |        13,372                            |
|    Assets  held for sale                                                                                                                 |              --- |             147 |
|                                                                                                                                                    |     643,931                                                   |      644,595                                       |
|                                                                                                                                                    |                                                                              |                                                                        |
| **Funds for  Construction Held by Trustee**                                                                                                        |   2,066                                                                 | 2,058                                                                  |
| **Investment in  Saltville Gas Storage Company, LLC**                                                                                              | 17,101                                                                       | 16,456                                                                 |
| **Other  Investments**                                                                                                                             |     120                                                       | 210                                                                    |
|                                                                                                                                                    |                                                                              |                                                                        |
| **Other Assets**                                                                                                                                   |                                                                              |                                                                        |
|     Regulatory assets                                                                                                                    | 47,987                                                                       | 57,040                                                                 |
|    Notes receivable from  Saltville Gas Storage Company,        LLC                                             | 20,732                                                                       | 17,575                                                                 |
|    Other receivable from  Saltville Gas Storage Company,        LLC                                             | 5,303                                                                        | 8,010                                                                  |
|    Long-term portion of  derivative assets                                                                                               | 12,706                                                                       | 5,133                                                                  |
|    Goodwill                                                                                                                              | 8,056                                                                        | 8,056                                                                  |
|    Assets  held for sale                                                                                                                 | ---                                                                          | 1,002                                                                  |
|    Other  assets                                                                                                                         |        36,073                                  |        40,106                            |
|                                                                                                                                                    |      130,857                                             |      136,922                                       |
|                                                                                                                                                    | $1,128,719                                                                   | $1,020,763                                                             |
|                                                                                                                                                    |                                                                              |                                                                        |
| **CAPITALIZATION  AND LIABILITIES**                                                                                                                |                                                                              |                                                                        |
| **Current  Liabilities**                                                                                                                           |                                                                              |                                                                        |
|    Notes  payable to banks                                                                                                               | $355,000                                                                     | $164,100                                                               |
|    Notes  payable                                                                                                                        | 1,400                                                                        | 1,400                                                                  |
|    Current  portion of long term debt and capital lease       obligations                                            | 52,005                                                                       | 2,167                                                                  |
|    Accounts  payable, customer deposits and accrued       liabilities                                                | 101,297                                                                      | 125,353                                                                |
|     Liabilities held for sale                                                                                                            | ---                                                                          | 3,150                                                                  |
|    Federal  income and other taxes                                                                                                       | 20,053                                                                       | 5,166                                                                  |
|    Current  portion of deferred Federal income taxes                                                                                     |           599                   |         6,705                       |
|                                                                                                                                                    |    530,354                                                         |     308,041                                             |
| **Other  Liabilities**                                                                                                                             |                                                                              |                                                                        |
|    Capital  lease obligations                                                                                                            | 9,378                                                                        | 9,798                                                                  |
|    Deferred  Federal income taxes                                                                                                        | 61,695                                                                       | 61,608                                                                 |
|     Liabilities held for sale                                                                                                            | ---                                                                          | 19                                                                     |
|    Unamortized investment tax credits                                                                                                    | 3,159                                                                        | 3,375                                                                  |
|     Environmental remediation reserve                                                                                                    | 33,840                                                                       | 33,941                                                                 |
|     Regulatory and other liabilities                                                                                                     |       71,568                                        |        64,813                            |
|                                                                                                                                                    |     179,640                                                   |      173,554                                       |
| **Capitalization**                                                                                                                                 |                                                                              |                                                                        |
|    Common  shareholders' equity                                                                                                          | 219,654                                                                      | 230,115                                                                |
|     Long-term debt                                                                                                                       |      199,071                                             |      309,053                                       |
|                                                                                                                                                    |      418,725                                             |      539,168                                       |
|                                                                                                                                                    | $1,128,719                                                                   | $1,020,763                                                             |

** **

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

* *

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

** **
|                                                                                                                   | **Six Months Ended March 31,**                       |
|-------------------------------------------------------------------------------------------------------------------|------------------------------------------------------|
|                                                                                                                   | **2004 Restated**                                    | **2003** |
| **Operating Activities**                                                                                          |                                                      |  |
| Net  income (loss)                                                                                                | $(4,365)                                             | $19,308 |
| Less:  Loss from discontinued operations, net of tax                                                              | (1,064)                                              | (619) |
|           Effect of change in accounting,  net of tax                |       ---                   |  (5,870) |
|    Net income (loss) from continuing  operations                                                        | (3,301)                                              | 25,797 |
|                                                                                                                   |                                                      |  |
| Adjustments  to reconcile net income to net cash used in operating activities:                                    |                                                      |  |
|           Depreciation and amortization                              | 17,596                                               | 17,680 |
|           Deferred Federal income taxes                              | (6,019)                                              | (9,179) |
|           Amortization of deferred  investment tax credits           | (216)                                                | (293) |
|           Derivative assets and liabilities                          | 4,347                                                | 817 |
|           Regulatory assets and liabilities                          | 13,434                                               | 14,355 |
|           Other                                                      | (1,019)                                              | 2,089 |
|           Effect of changes in:                                      |                                                      |  |
|              Accounts receivable, net                 | (50,090)                                             | (98,066) |
|              Fuel inventories                         | 52,427                                               | 28,734 |
|              Accounts payable, deposits and  accruals | (24,056)                                             | 46,971 |
|              Under-recovered purchased gas  costs     | 6,155                                                | (7,863) |
|              Prepaids and other                       | (32,666)                                             | 16,275 |
|              Federal and state income taxes           | 18,220                                               | 28,720 |
|              Other                                    |     3,834                             |    2,366 |
|      Net cash provided by (used in)  operating activities                                     | (1,354)                                              | 68,403 |
|      Net cash provided by (used in)  discontinued operations                                  |     4,941                             |   (1,838) |
|        Net cash provided by operating  activities                                   |     3,587                             |  66,565 |
|                                                                                                                   |                                                      |  |
| **Financing Activities**                                                                                          |                                                      |  |
| Proceeds  from sales of common stock                                                                              | 276                                                  | 158 |
| Dividends  to shareholders                                                                                        | (5,980)                                              | (7,876) |
| Payments  of long-term debt                                                                                       | (60,000)                                             | --- |
| Funds  for construction held by trustee, net                                                                      | ---                                                  | 1,849 |
| Principal  payments under capital lease obligations                                                               | (1,352)                                              | (1,281) |
| Net  short-term borrowings                                                                                        | 190,900                                              | 46,643 |
|   Net cash provided by continuing operations                                                                 | 123,844                                              | 39,493 |
|   Net cash used in discontinued operations                                                                   |          --- |          (3) |
|     Net cash provided by financing  activities                                                     | 123,844                                              |  39,490 |
|                                                                                                                   |                                                      |  |
| **Investing Activities**                                                                                          |                                                      |  |
| Cash  expenditures for property, plant and equipment                                                              | (16,760)                                             | (24,875) |
| Net  proceeds from sale of subsidiaries                                                                           | ---                                                  | 13,117 |
| Other                                                                                                             |       215                   |    (8,131) |
|   Net cash used in continuing operations                                                                     | (16,545)                                             | (19,889) |
|   Net cash used in discontinued operations                                                                   |       (49)                  |       (896) |
|     Net cash used in investing activities                                                          |  (16,594)                                       |  (20,785) |
|                                                                                                                   |                                                      |  |
| Net  increase in cash and cash equivalents from continuing  operations                                            | 105,945                                              | 88,007 |
| Net  increase (decrease) in cash and cash equivalents from  discontinued operations                               |       4,892                 |    (2,737) |
| Net  increase in cash and cash equivalents                                                                        | $110,837                                             | $85,270 |
|                                                                                                                   |                                                      |  |
| **Cash and Cash Equivalents**                                                                                     |                                                      |  |
| At  beginning of period                                                                                           | $  25,209                                       | $  4,247 |
| At end  of period                                                                                                 | $136,046                                             | $89,517 |
|                                                                                                                   |                                                      |  |

*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 alloperating divisions and subsidiaries of NUI Corporation (NUI and, together with itssubsidiaries, the company, we, our, orus).  NUI is a diversified energycompany that is primarily engaged in the sale and distribution of natural gasthrough its local utility companies. NUI's local utility operations are carried out by NUI's wholly-ownedsubsidiary, NUI Utilities, Inc. (NUI Utilities) and a subsidiary of VirginiaGas Company (VGC), and serve approximately 371,000 customers in four statesalong the eastern seaboard of the United States. NUI Utilities is comprised ofElizabethtown Gas Company (New Jersey), City Gas Company of Florida, and ElktonGas (Maryland). VGC is also engaged in other activities, such as pipelineoperation and natural gas storage. The company's non-regulated businesses arecarried out by NUI Capital Corp. and its subsidiaries. As of April 1, 2004, thecompany's only remaining non-regulated subsidiary with substantial continuingoperations is Utility Business Services, Inc. (UBS), a billing and customerinformation systems and services subsidiary. The company's other non-regulatedsubsidiaries have either been sold or are winding down their operations; thesesubsidiaries include: NUI Environmental,Inc. (NUI Environmental), an environmental project development subsidiary soldin September 2003; NUI Telecom, Inc. (NUI Telecom), a telecommunications servicessubsidiary sold in December 2003; NUI Energy, Inc. (NUI Energy), an energyretailer; NUI Energy Brokers, Inc. (NUI Energy Brokers), a wholesale energytrading and portfolio management subsidiary; OAS Group, Inc. (OAS), the company's digital mapping operation, whichprior to September 30, 2003, was part of UBS; and TIC Enterprises, LLC (TIC), a salesoutsourcing subsidiary which soldwireless and network telephone services. Thecompany's wholly-owned subsidiary, NUI Saltville Storage, Inc. (NUISS), is afifty-percent member of Saltville Gas Storage Company, LLC (SSLLC). SSLLC is ajoint venture with a unit of Duke Energy that is developing a natural gasstorage facility in Saltville, Virginia. All intercompany accounts andtransactions have been eliminated in consolidation. 

On September 26, 2003, the company's Board ofDirectors announced it was pursuing the sale of the company. The company hasengaged two investment banks to serve as financial advisors to the companywhile it seeks a buyer. As discussed in Note 4, for all periods presented, thecompany has classified the results of Valley Cities Gas and Waverly Gas, NUITelecom, and TIC as Discontinued Operations in the Consolidated Statements ofIncome. The assets and liabilities of NUI Telecom have been classified asAssets Held for Sale and Liabilities Held for Sale in the Consolidated BalanceSheet as of September 30, 2003.

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

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

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

NUI is a holding company and is exempt fromregistration under the Public Utility Holding Company Act of 1935. NUIUtilities is subject to regulation as an operating utility by the publicutility commissions of the states in which it operates. Certain subsidiaries ofVGC are regulated by the Virginia State Corporation Commission. SSLLC issubject to regulation by the Federal Energy Regulatory Commission. Because of theseasonal nature of gas utility operations, the results for interim periods arenot necessarily indicative of the company's results for an entire year.

**2.     LiquidityIssues**

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

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

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

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

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

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

As noted above, based upon current anticipated cashflows, the company believes it will have sufficient liquidity to meet itsfinancial obligations through the end of fiscal year ending September 30, 2004and the company also believes it will remain in compliance with all covenantsunder its various debt agreements for the remainder of the year endingSeptember 30, 2004 (see Notes 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; and obtainingadditional financing to ensure NUI Utilities' ability to, among other things,meet its gas purchase prepayment requirements under its natural gas assetmanagement contract with Cinergy. If the company is unsuccessful in its effortsto effectively resolve its liquidity concerns, it may need to reorganize itsoperations and restructure its credit and debt financing.**3.     Common Shareholders' Equity**

The components of common shareholders' equity were asfollows (dollars in thousands):
| ** **                                    | **March 31,  2004** | **September 30,  2003** |
|-----------------------------------------------|---------------------|-------------------------|
|                                               |                     |                         |
| Common stock, no par value                    | $287,552            | $288,620                |
| Shares held in treasury                       | (5,113)             | (5,320)                 |
| Retained deficit                              | (59,296)            | (48,951)                |
| Unearned employee compensation                | (2,085)             | (3,589)                 |
| Accumulated other comprehensive loss (Note 7) | (1,404)             | (645)                   |
| Total  common shareholders' equity            | $219,654            | $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 and six-monthperiods ended March 31 are, as follows, exclusive of affiliate transactions (inthousands):
|                                           | **Three Months Ended**                  | **Six Months Ended**                      |
|-------------------------------------------|-----------------------------------------|-------------------------------------------|
|                                           | **March 31,**                           | **March 31,**                             |
|                                           | **2004**                                | ** 2003**                            | **2004** | **2003** |
| **Revenues:**                             |                                         |                                           |  |  |
|    Distribution Services             | $    ---                 | $       --- | $     --- | $     553 |
|   Retail & Business  Services    |         1 |   13,058                             |  7,078 |  25,659 |
| Operating  Revenues                       |   $     1      | $13,058                                   | $7,078 | $26,212 |
|                                           |                                         |                                           |  |  |
| **Operating Margins:**                    |                                         |                                           |  |  |
|    Distribution Services             | $    ---                 | $      ---       | $     --- | $     250 |
|   Retail & Business  Services    |        1  |   4,903                              |   1,631 |    9,866 |
| Operating  Margins                        | $     1             | $ 4,903                                   | $1,631 | $10,116 |
|                                           |                                         |                                      |  |  |
| **Pre-Tax Operating Income  (Loss):**     |                                         |                                      |  |  |
|    Distribution Services             | $    ---                 | $     ---             | $     --- | $     120 |
|   Retail & Business  Services    |    (452)                           |   (436)                              | (2,945) |     (281) |
| Pre-Tax  Operating Income (Loss)          | (452)                                   | (436)                                     | (2,945) | (161) |
|   Other  Income (Expense)            | 4                                       | (254)                                     | 1,357 | (874) |
|   Net  Interest Charges              |        ---     |        ---  |          --- |           4 |
| Pre-Tax Loss from Discontinued Operations | $(448)                                  | $  (690)                             | $(1,588) | $(1,039) |

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 15, 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 six-month periods ended March 31 (amounts are inthousands, except per share amounts):**                                                                                               **
|  | **Three Months Ended** | **Six Months Ended** |
|--|------------------------|----------------------|
|  | **March 31,**          | **March 31,**        |
|  | **2004**               | **2003**             | **2004** | **2003** |   
 
** **Income (loss) from continuing operations

$4,097

$18,436

$(3,301)

$25,797

 
** **Loss from discontinued operations

(300)

(413)

(1,064)

(619)

 
  Effect of change in accounting

        ---

   (5,870)

        ---

 (5,870)

 
  Net income (loss)

$3,797

$12,153

$(4,365)

$19,308

 
 
** **Weighted average shares outstanding

15,970

16,073

15,980

16,049

 
 
**  Earnings (Loss) Per Share:**

 
   Basic and diluted income (loss) from         continuing operations 

    $0.26

    $1.15

    $(0.21)

    $1.61

 
   Basic  and diluted loss from discontinued         operations 

    (0.02)

    (0.03)

    (0.06)

    (0.04)

 
   Basic  and diluted effect of change in         accounting 

      --- 

           (0.36) 

      ---  

   (0.36)

 
   Basic and diluted net income (loss)

$0.24

$0.76

$(0.27)

$1.21

 
The company's weightedaverage diluted shares outstanding (not shown) includes shares which would beissuable upon the exercise of stock options outstanding under NUI's stockoption plan, which is added to weighted average shares outstanding.  As of March 31, 2004, unvested stock optionshaving an exercise price less than the market value of the company's shares forthe three month period on that date provided for an additional 380 shares ofcommon stock equivalents outstanding, which had no impact on the calculation ofthe company's diluted earnings per share. As of March 31, 2004, 773 shares ofcommon stock equivalents have been omitted from the calculation of the sixmonth diluted earnings per share, as they would have been antidilutive. Thenumber of shares that could potentially be dilutive to earnings per share inthe future that have been excluded in the computation of diluted earnings pershare, because to do so would have been antidilutive, are 88,200 and 1,006,500shares, respectively, as of March 31, 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 effected 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 NUIbusinesses. Additional workforce reductions were undertaken during January 2004and March 2004, primarily related to the company's decision to discontinue thetrading operations of NUI Energy Brokers. The company currently has no plansfor additional workforce reductions. In addition, none of the employeesterminated as a result of the reorganization efforts is required to provide anyfuture service to the company. The reorganization efforts resulted in aggregatecharges of approximately $2.1 million torestructuring costs for the six months ended March 31, 2004, primarilyrelating to severance costs for 41 individuals. A total of approximately $1.0million has been paid to former employees through March 31, 2004. The companyhas approximately $1.1 million of unpaid liabilities included in AccountsPayable, Customer Deposits, and Accrued Liabilities on the Consolidated BalanceSheet at March 31, 2004 and expects to pay this amount out over a two-yearperiod ending November 30, 2005.

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.  Previously he served asSenior 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**

**Six Months Ended**

**March 31,**

**March 31,**

**2004**

**2003**

**2004**

**2003**

 
 
** **Net income (loss)

$3,797

$12,153

$(4,365)

$19,308

 
 
** **Other comprehensive income (loss):

 
   Derivatives qualifying as hedges, net

      813

        345

      (759)

       345

 
    Total comprehensive income (loss)

$4,610

$12,498

$(5,124)

$19,653

 
Accumulated other comprehensive income (loss), included in CommonShareholders' Equity on the Consolidated Balance Sheet was $(1,404) at March31, 2004, and $(645) at September 30, 2003. Included in the balance at March31, 2004, was $(1,404) related to minimum pension liability (net of $976 intaxes). There were 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 diluted earningsper share for the three and six-month periods ended March 31 would have been asshown in the following table (in thousands, except for per share amounts).**                                                                             **

**Three Months Ended**

**Six Months Ended**

**March 31,**

**  March 31,**

**2004**

**2003**

**2004**

**2003**

 

 

 

 

Net income (loss) as reported

$3,797

$12,153

$(4,365)

$19,308

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

      (91)

      (473)

     (270)

      (947)

Pro forma net income (loss)

$3,706

$11,680

$(4,635)

$18,361

 

 

 

 

**Earnings (Loss) Per Share:**

 

 

 

 

Basic and diluted- as reported

$0.24

$0.76

$(0.27)

$1.21

Basic and diluted- pro forma

$0.23

$0.73

$(0.29)

$1.14
 
**9.     Notes Payable to Banks**

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

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

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

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

NUI Utilities' current credit agreement provides for(i) a $50 million revolving credit facility, (ii) a $50 million term loanfacility and (iii) a $50 million delayed draw term loan facility. The proceedsfrom the revolving credit facility and the term loan facility combined with theproceeds from the repayment of the $85 million intercompany balance from NUIwere used (1) to repay outstanding loans under, and terminate, the NUIUtilities credit agreement which was entered into on February 12, 2003, (2) topay accrued and unpaid fees under the interim credit agreement entered into onOctober 10, 2003 and (3) for general corporate purposes. The proceeds from 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 March 31, 2004, NUI Utilities hasfully drawn under the $50 million revolver and the $50 million term loanfacility. As of May 14, 2004, NUI Utilities had overnight cash investments of$109.1 million.

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

NUI's delay in delivering audited financial statementsfor fiscal 2003 resulted in events of default under NUI's and NUI Utilities'respective credit agreements. On January 26, 2004, NUI and NUI Utilitiesobtained waivers of such defaults from the lenders under their respectivecredit agreements, and received an extension of the delivery date for NUI'saudited financial statements for fiscal 2003 and its 2004 first fiscal quarter unauditedfinancial statements through March 1, 2004, and amended the credit agreementsto clarify certain technical provisions. Further delays in the delivery ofthese financial statements beyond the date to which NUI and NUI Utilities hadreceived 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 approximately $350,000 worth of gas pipeline, 

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

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

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

At March 31, 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 8.0 percent and 7.5 percent. As of that date, NUI and NUI Utilitieshad no unused borrowing capacity under their respective credit facilities.Also, as of March 31, 2004, NUI and NUI Utilities had approximately $23.4million and $102.0 million, respectively, of cash held as short-terminvestments.

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 $40.8million at 8.1 percent and 2.8 percent for the three months ended March 31,2004 and 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 $191.7 million and $45.6 millionat 7.8 percent and 3.0 percent for the six months ended March 31, 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 $94.9 million and $132.8 millionat 7.2 percent and 2.6 percent for the three months ended March 31, 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 $105.0 million and $110.9million at 5.6 percent and 2.5 percent for the six months ended March 31, 2004and 2003, respectively.

*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. As a result of these restrictions, NUI is prohibitedfrom paying any dividends at this time or in the foreseeable future. UnderNUI's credit facility, NUI is also prohibited from paying dividends exceeding$20 million in the aggregate while the credit facility 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 March 31, 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.

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 towhich Brevard County, Florida (the County) has issued $20 million bonds at 6.40percent due October 1, 2024.  Inaccordance with the terms of these loan agreements, the funds received by theNJEDA or the County, as the case may be, upon the issuance of the applicablebonds have been loaned to NUI Utilities. The interest rates and maturity datesunder the loan agreements parallel the interest rates and maturity dates underthe bonds.  Interest payments by NUIUtilities on the loans are used to pay the interest on the bonds. During fiscal2003, NUI Utilities paid $9.9 million in interest payments on these loans. 

Approximately $2.1 million of interest earned on theoriginal net proceeds from the $20 million 6.4 percent revenue bonds due 2024is unexpended and accordingly has been classified as "Funds for ConstructionHeld by Trustee" on the Consolidated Balance Sheet at March 31, 2004 untildrawn upon.

The Variable Bonds contain a provision whereby theholder can "put" the bonds back to the issuer. In 1996, the company executed a long-term Standby Bond PurchaseAgreement (SBPA) with a syndicate of banks, which was amended and restated onJune 12, 2001. Under the terms of the SBPA, as further amended several times,The Bank of New York is obligated under certain circumstances to purchaseVariable Bonds that are tendered by the holders thereof and not remarketed bythe remarketing agent. Such obligation of the bank would remain in effect untilthe expiration of the SBPA, unless extended or earlier terminated. The terms ofthe SBPA also restrict the payment of dividends by NUI Utilities to NUI to anamount based, in part, on the earned surplus of NUI Utilities, which had beenreduced by the NJBPU Settlement recorded in September 2003. On May 19, 2004, NUI Utilities and The Bank ofNew York amended the SBPA. The amendment eliminates the effect of theNJBPU Settlement, as well as the estimated refunds to customers in Florida andcertain other related costs, on the earned surplus of NUI Utilities,thereby allowing for the payment of dividends by NUI Utilities to NUI atthis time. In addition, pursuant to the terms of the amendment, andeffective as of June 30, 2004, the expiration date of the SBPA will be extendedto June 29, 2005.

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

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

As of March 31,2004, 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 withdelivery of many of the Required Documents. The remaining breaches were curedby virtue of NUI Utilities' delivery of NUI's annual report datedSeptember 30, 2003 on Form 10-K, relatedofficers' certificates and other financial information.

Defaults may occur in the near future under the 5.70percent bonds if NUI Utilities does not provide audited financial statementsfor NUI Utilities for the fiscal year ended September 30, 2003 and unaudited financialstatements for NUI Utilities for the fiscal quarters ended December 31, 2003and March 31, 2004. To date, NUI Utilities has obtained all necessary waiversand extended the respective deadlines for delivery of all information required pursuant to suchbond facility to June30, 2004.  NUI and NUI Utilities areworking diligently to deliver the required documentation within this timeframe.

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

*DividendRestrictions Under Long-term Debt Agreements. *Thepayment of cash dividends by NUI Utilities to NUI is restricted pursuant to the SBPA to an amount based, in part, on the 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,thereby allowing for the payment of dividends by NUI Utilities to NUI atthis time. Inaddition, under the amendment to NUI Utilities' credit facility dated as of May10, 2004, NUI Utilities is prohibited from paying dividends exceeding $35million in the aggregate while the credit facility isoutstanding. 

**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**

**March 31,**

**March 31,**

**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

   
 
**Pension Benefits**

**Other Benefits**

**Six Months Ended**

**Six Months Ended**

**March 31,**

**March 31,**

**2004**

**2003**

**2004**

**2003**

 
 

 

 

 

 
Service cost

$2,426

$1,719

$206

$252

 
Interest cost

3,741

3,408

959

984

 
Return on plan assets

(4,170)

(4,135)

(297)

(232)

 
Net amortization and deferral

   1,379

  1,046

      205

    139

 
  Net Periodic  Benefit Costs

$3,376

$2,038

$1,073

$1,143

   
 
**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.  

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 the deliverydate for NUI's audited financial statements for fiscal 2003 and unauditedfinancial statements for the first fiscal quarter of 2004 and (ii) amended thecredit 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 financialinformation.

Defaultsmay occur in the near future under the 5.70 percent bonds if NUI Utilities doesnot provide audited financial statements for NUI Utilities for the fiscal yearended September 30, 2003 and unaudited financial statements for NUI Utilitiesfor the fiscal quarters ended December 31, 2003 and March 31, 2004. Todate, NUI Utilities has obtained all necessary waivers and extended therespective deadlines for delivery of all information required pursuant to suchbond facility to June 30, 2004.  NUI and NUI Utilities are working diligentlyto deliver the required documentation within this timeframe.

*Commitments.*On April 30, 2001, the company announced an agreement with a unit of DukeEnergy to develop a natural gas storage facility in Saltville, Virginia. NUISSand Duke Energy Saltville Gas Storage, LLC (DESGS) have created a limitedliability company, SSLLC. After receivingthe required regulatory approval, in February 2003 VGC contributedcertain storage assets valued at approximately $16.3 million to SSLLC. DESGShas contributed an equal amount (approximately $16.3 million) of capitalrequired to expand the facility for its intended purpose. To the extent SSLLCdetermines it needs additional funding (which decision can only be made jointlyby the company and DESGS), the company and DESGS are obligated to fund thedevelopment of SSLLC equally.

As of March 31, 2004, the company has loaned SSLLC anaggregate of approximately $26.0 million toward the development of theSaltville storage facility. The company currently estimates its share offunding to be zero in fiscal 2004, and $2.5 million in fiscal 2005. Subsequentyears are expected be funded with internally generated cash flows of the jointventure.

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

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

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.

*Guarantees.*The company has guarantees of approximately $161.4 million to 42 counterpartiesas of March 31, 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. As of March 31, 2004, theamount of purchases covered by outstanding guarantees was approximately $4.4million. 

*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 $34.6 million,inclusive of interest, as of March 31, 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 MGPremediation costs incurred in New Jersey from the company's insurance carriersand continues to pursue additional recovery. The company sold the net assets ofits North Carolina Gas utility division on September 30, 2002 and its ValleyCities Gas and Waverly Gas utility divisions on November 7, 2002. Included inthese asset sales were the environmental obligations for two of the company'sMGP sites: one in North Carolina and one in Pennsylvania. With respect to costsassociated with the MGP properties located outside New Jersey, the company iscurrently pursuing or intends to pursue recovery from ratepayers, former ownersand operators, and/or insurance carriers. Although the company has beensuccessful in recovering a portion of the remediation costs incurred outside ofNew Jersey from the company's insurance carriers, the company is not able toexpress a belief as to the success of additional recovery efforts. The companyis working with the regulatory agencies to prudently manage its MGP costs so asto mitigate the impact of such costs on both ratepayers and shareholders.

*Gas Procurement Contracts.* Certain of the company'slong-term contracts for the supply, storage and delivery of natural gas includefixed charges that amount to approximately $60.5 million for the next twelvemonth period (this amount includes thecompany's obligations under two twenty-year agreements to pay annual demandcharges for the firm transportation and storage of natural gas, discussedabove). The company 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 initially enteredinto an agreement with Cinergy effective March 31, 2004, which covered only aone-month period. That agreement was superceded by an agreement effective onApril 1, 2004, pursuant to which Cinergy will serve as NUI Utilities' assetmanager from April 1, 2004 until March 31, 2005, and will provide NUI Utilitieswith a full requirements gas supply service to enable NUI Utilities to meet itspublic utility obligations to supply gas to customers in New Jersey, Floridaand Maryland. The gas supply will 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.

*Employment Agreements.* The company has created anincentive plan designed to retain key personnel through the date the companywould be sold. Upon reaching an agreement to sell the company, the companywould begin accruing an aggregate of approximately $3.7 million in retentioncosts through the anticipated closing date for the sale of the company. Theseretention amounts would be payable thirty days following the closing date ofthe sale, or on a date before the closing date if the employee is released fromhis/her employment by the company. In connection with the possible sale of thecompany, NUI has established a discretionary severance plan for non-bargainingemployees. In addition, certain officers and directors have change in controlagreements with NUI, which define the amount of severance that would be payableupon the occurrence of certain events as defined within the agreements.

*Legal Matters. *BetweenOctober 28, 2002 and December 20, 2002, five substantially similar civilactions were commenced in the United States District Court for the District ofNew Jersey, in which the plaintiffs allege that the company and two of itsformer presidents violated federal securities laws by issuing false statements andfailing to disclose information regarding the company's financial condition andcurrent and future financial prospects in its earnings statements, pressreleases, and in statements to analysts and others.  By orders dated December 19, 2002, January 22, 2003, and February3, 2003, the five actions were consolidated into one action captioned In reNUI Securities Litigation. The five consolidated lawsuits include: (1) anaction captioned Jack Klebanow, on behalf of himself and all otherssimilarly situated v. NUI Corporation and John Kean, Jr., filed in theUnited States District Court for the District of New Jersey on October 28,2002;  (2) an action captioned GiselaFriedman, on behalf of herself and all others similarly situated v. NUICorporation and John Kean, Jr., filed in the United States District Courtfor the District of New Jersey on October 31, 2002; (3) an action captioned ThomasDavis, on behalf of himself and all others similarly situated v. NUICorporation and John Kean, Jr., filed in the United States District Courtfor the District of New Jersey on November 6, 2002; (4) an action captioned MarvinE. Russell, on behalf of himself and all others similarly situated v. NUICorporation and John Kean, Jr., filed in the United States District 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 (i)failed to disclose material facts that would impair the company's current andfuture earnings, including (a) the allegedly accurate amount and explanation ofthe company's bad debts, (b) a purportedly illegal practice by the company in"re-terminating" intrastate calls, (c) alleged accounting improprieties inconnection with purportedly unearned revenue, and (d) allegedly inaccurateearnings per share information, and (ii) inflated the company's earningsmaterially by (a) allegedly making misleading statements concerning, andfailing to properly record, bad debt costs, (b) allegedly attributing thecompany's rising costs to incorrect and immaterial factors, and (c) purportedlypursuing illegal telecommunications billing practices. The Second AmendedComplaint seeks unspecified monetary damages on behalf of the class, includingcosts and attorneys fees. On October 14, 2003, defendants moved to dismiss theSecond Amended Complaint under, inter alia, the Private Securities LitigationReform Act.  Opposition papers to themotion to dismiss were served on December 19, 2003, and reply papers were filedon February 23, 2004.  The motion washeard on March 15, 2004. By decision and order dated April 23, 2004, thedistrict court granted in part and denied in part defendants' motion todismiss.  The district court dismissedthe Section 10(b) claims against the individual defendants and dismissed allclaims against the company concerning the alleged "reterminating" scheme. Thedistrict court denied the motion to dismiss with respect to certain allegationsthat the company made misleading misstatements concerning the accurate level ofbad debt and earnings and denied the motion to dismiss the Section 20(a) claimsagainst the individual defendants. Defendants filed an Answer to the SecondAmended Complaint on May 10, 2004. No discovery has occurred yet.  Although the company intends to vigorouslydefend these lawsuits, it is not possible at this time to determine a likelyoutcome.

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

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

The plaintiffs, James Greiff and TIC Enterprises, Inc.,sued the company and three other company related entities, NUI SalesManagement, Inc. (NUI Sales), NUI Capital Corp. and TIC, for breach of contractand fraud arising out of the company's purchase of Greiff's interest in TICEnterprises, LLC. The plaintiffs allege they are entitled to payment on a $3million promissory note and have made claims arising from the defendants'alleged breach of a 2001 purchase agreement for $22 million in punitive damagesfor the defendants' alleged fraud and $3 million plus interest and punitivedamages for the defendants' alleged fraudulent transfers. The plaintiffs havealso alleged a tortious interference claim for $3 million, which the courtpreviously dismissed. The company and the remaining defendants are vigorouslydefending the lawsuit and deny any liability to the plaintiffs. NUI Sales anddefendant TIC have a four-count counterclaim against both plaintiffs for more than$3 million. They are for: (1) breach of the 2001 Purchase Agreement; (2) breachof the 1997 Amended and Restated Limited Liability Company Agreement; (3) fraudin the inducement; and (4) unjust enrichment. This case, originally filed inthe Northern District of Georgia, was recently transferred on defendants'motion to the District of Delaware. The parties are in the midst of discovery,and have exchanged written responses and objections to discovery requests alongwith numerous documents. The parties have also begun taking depositions of theparties and fact witnesses. On May 2, 2004, NUI proposed a settlement to theplaintiffs in which the company agreed to pay the plaintiffs $1.4 million tocompletely satisfy NUI's obligation under the note, as well as to resolve allother claims that the company and the plaintiffs had brought against eachother. On May 5, 2004, NUI received the plaintiffs' written acceptance of thecompany's settlement proposal, and the plaintiffs requested that NUI preparethe appropriate settlement documents for review. As a result, the companyreduced the amount payable under the note from $3.0 million to $1.4 million onthe September 30, 2003 Consolidated Balance Sheet, and recorded a gain of $1.6million in other income on the Consolidated Statement of Income for fiscal2003.

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

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

The Audit Committee of the Board of Directors of NUI hadpreviously retained independent counsel to conduct an internal investigationinto these transactions at NUI Energy Brokers. 

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

**13. New Accounting Standards**

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

-       The EITF rescinded EITF Issue 98-10, "Accounting for ContractsInvolved in Energy Trading and Risk Management Activities" (EITF 98-10), whichwas the authoritative accounting followed by NUI Energy Brokers and NUI Energy.Pursuant to EITF 98-10, an entity accounted for energy contracts at fair valuewith changes in fair value recognized in earnings if the energy contract wasdetermined to be part of an entity's trading activities. In contrast to EITF98-10, EITF 02-03 prohibits mark-to-market accounting for energy-relatedcontracts that do not meet the definition of a derivative under SFAS 133. 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 consensus requiredNUI to record a cumulative effect adjustment to convert any contracts that didnot meet the definition of a derivative under SFAS 133 to accrual accountingeffective 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 by companiesinvolved with variable interest entities. A variable interest entity is acorporation, partnership, trust or any other legal structure used for businesspurposes that either (a) does not have equity investors with voting rights, or(b) has equity investors that do not provide sufficient financial resources forthe entity to support its activities. Historically, entities generally were notconsolidated unless the entity was controlled through voting interests. FIN 46changes that, by requiring a variable interest entity to be consolidated by acompany if that company is subject to a majority of the risk of loss from thevariable interest entity's activities or entitled to receive a majority of theentity's residual returns or both. A company that consolidates a variableinterest entity is called the "primary beneficiary" of that entity. FIN 46 alsorequires disclosures about variable interest entities that a company is notrequired to consolidate but in which it has a significant variable interest. Theconsolidation requirements of FIN 46 apply immediately to variable interestentities created after January 31, 2003. The consolidation requirements of FIN46R apply to existing entities no later than the end of the first reportingperiod after March 15, 2004. Also, certain disclosure requirements apply to allfinancial statements issued after January 31, 2003, regardless of when thevariable interest entity was established. The company has determined that itdoes not meet the consolidation requirements with respect to its joint venturewith Duke Energy (see Note 12). In addition, the company has not created orobtained any variable interest entities after January 31, 2003. Therefore, theadoption of the consolidation requirements of FIN 46R in March 2004 did nothave an impact on the company's financial position or results 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 andsix-month periods ended March 31, 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 to prioryear segment data to conform with the current year's presentation.**                                                                       **

**Three Months Ended**

**Six Months Ended**

**March 31,**

**March 31,**

**(Dollars in thousands)**

**2004**

**2003**

**2004**

**2003**

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

$240,547

$232,257

$402,085

$398,443

 
** **Energy Asset Management

1,889

17,187

5,692

21,426

 
** **Retail and Business Services

2,412

1,527

4,746

4,386

 
  Intersegment Revenues

     (1,492)

     (1,242)

     (2,664)

     (2,709)

 
Total  Revenues

$243,356

$249,729

$409,859

$421,546

 
 
**Operating Margins:**

 
  Distribution Services

$67,904

$66,678

$121,515

$117,423

 
  Energy  Asset Management

1,343

16,622

4,794

20,567

 
  Retail  and Business Services

1,174

380

2,326

2,053

 
   Intersegment Operating Margins

      (363)

      (305)

        (837)

        (870)

 
Total  Operating Margins

$70,058

$83,375

$127,798

$139,173

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

 
** **Distribution Services

$29,093

$28,567

$45,614

$46,754

 
** **Energy Asset Management

(3,862)

13,188

(3,809)

14,015

 
  Retail and Business Services

        52

   (4,371)

         38

   (5,365)

 
Total  Pre-Tax Operating Income

$25,283

$37,384

$41,843

$55,404

 
 
**Three Months Ended**

**Six Months Ended**

**March 31,**

**March 31,**

**(Dollars in thousands)**

**2004**

**2003**

**2004**

**2003**

 
 

 

 

 

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

 
** **Distribution Services

$23,952

$25,953

$36,243

$40,879

 
** **Energy Asset Management

(4,453)

12,607

(4,762)

13,192

 
  Retail and Business Services

           3

   (4,731)

        (49)

   (5,880)

 
Total  Pre-Tax  Income (Loss) from   Continuing Operations 

  $19,502

  $33,829

  $31,432

  $48,191

 
 
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**

**Six Months Ended**

**March 31,**

**March 31,**

**(Dollars in thousands)**

**2004**

**2003**

**2004**

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

$25,283

$37,384

$41,843

$55,404

  Non-segment pre-tax operating loss

   (9,479)

   (1,274)

 (20,049)

   (2,064)

Pre-tax  Operating Income

$15,804

$36,110

$21,794

$53,340

 

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

    $19,502

  $33,829

  $31,432

  $48,191

  Non-segment pre-tax loss from     continuing operations 

    (13,380)

     (2,359)

  (36,352)

    (4,422)

Pre-Tax Income (Loss) from Continuing    Operations

  $ 6,122

  $31,470

  $(4,920)

  $43,769

The increase in non-segment pre-tax operating loss for the three and sixmonths ended March 31, 2004, as compared to the same periods in fiscal 2003, isprimarily due to increased corporate expenses for outside professional services(approximately $1.9 million and $6.4 million, for the three and six-monthperiods, respectively), bank fees (approximately $2.4 million and $5.7 million,for the three and six-month periods, respectively), and restructuring and otherseverance charges (approximately $3.1 million and $4.2 million, for the threeand six-month periods, respectively) (see Note 6), which costs have not beenallocated to the company's various business units. The increase in non-segmentpre-tax loss from continuing operations for the six months ended March 31,2004, as compared to the same period in fiscal 2003, is primarily due to thesesame factors, plus a pre-tax loss of approximately $9.9 million recorded forthe early retirement of debt (see Note 10).

**15.   Restatement**

This Amendment No. 1 on Form 10-Q/A to the company'sForm 10-Q for the fiscal quarter ended March 31, 2004, as originally filed onMay 25, 2004, is being filed to revise the Consolidated Balance Sheet for aprepayment made under the company's gas procurement contract with CinergyMarketing & Trading, LP (Cinergy). A prepayment of $15 million was made atthe end of the second fiscal quarter which should have been reflectedon the Consolidated Balance Sheet as a credit (reduction) to cash and a debitto prepayments.  There is no change inour total assets, working capital or net income as of and for the fiscalquarter ended March 31, 2004 as a result of thisrestatement.

Accordingly, the company'sForm 10-Q for the fiscal quarter ended March 31, 2004 has been revised, asfollows:

--             The Consolidated Balance Sheet as of March 31, 2004 hasbeen restated such that Cash and cash equivalents has been decreased by $15million to $136.0 million, and Prepayments and other has been increased by $15million to $63.8 million. 

--             The company's Consolidated Statement of Cash Flows forthe six months ended March 31, 2004 has been restated to reflect the $15million prepayment to Cinergy, which reduced our cash flows from operatingactivities by that amount.

As discussed in Note 2, the company has experiencedand expects to continue experiencing significant liquidity problems.  However, the $15 million prepayment toCinergy has no impact on statements the company previously made in its Form 10-Qfiled on May 25, 2004 regarding the company's anticipated cash flows, as theprepayment obligations under the Cinergy contract were already factored intothe company's anticipated cash flows.

**Item 2.  Management's Discussion and Analysis ofFinancial Condition and Results of Operations**

The followingdiscussion and analysis should be read in conjunction with the unauditedcondensed consolidated financial statements of NUI Corporation includedelsewhere herein and with the company's Annual Report on Form 10-K for thefiscal year ended September 30, 2003.

**Recent Developments**

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

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

-       the investigations of transactions at NUIEnergy Brokers;

-       new credit facilities at NUI and NUIUtilities;

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

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

-       the pursuit of the sale of the company;and

-       the sale of NUI Telecom. 

*Settlement Agreement with the NJBPU*

On April 14, 2004, the company announced that NUI, NUIUtilities and Elizabethtown Gas Company had entered into a settlement agreementwith the NJBPU on all issues related to the focused audit performed by LibertyConsulting Group on behalf of the NJBPU, and on April 26, 2004, the NJBPUissued a Final Order accepting and adopting that settlement agreement. Pursuantto the settlement agreement, NUI Utilities agreed to refund $28 million plusinterest to Elizabethtown Gas ratepayers and to pay a $2 million penalty to theState of New Jersey over five years. The $28 million will be credited toratepayers as follows:  $7 million inNUI's fiscal year 2004, $6 million in NUI's fiscal year 2005 and $5 million ineach of NUI's fiscal years 2006, 2007 and 2008. The $2 million penalty shall bepaid in $400,000 annual installments in each of NUI's fiscal years 2004 through2008.  The company has the option tomake a balloon payment of all outstanding amounts due under the terms of thesettlement agreement at any time. In addition, upon the close of a sale of thecompany, any outstanding balance is required to be paid in full by the companywithin a period to be determined by the NJBPU. The refund and penalty increasedthe company's net after-tax loss for fiscal year 2003 by approximately $18.6million, or $1.16 per share.

In addition to the required monetary refund andpenalty, NUI agreed to file a plan with the NJBPU for implementing 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-utilities affiliates of NUI;

-       The companyshall provide the NJBPU with various financial statements of NUI Utilities andElizabethtown 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'sagreement to the terms of the settlement is not an acknowledgement ofnon-compliance with any law, regulation or NJBPU Order or requirement.  The settlement agreement resolves all issuesidentified in the final Liberty audit report without acknowledgement or admissionby the company as to the correctness of any issue or that any specific issueforms the basis or any part of the basis for the payments described above.  The settlement provides that no furthercivil action shall be taken by the NJBPU. The NJBPU retains the authority toimpose any requirements or conditions on a purchaser upon a petition forapproval 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 employed FTI Consultants to manageits 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 assetmanagement plan, which was to be submitted to the NJBPU by January 2, 2004 forthe NJBPU to approve by January 8, 2004. Further, per the Order, NUI Utilitiesis prohibited from issuing special dividend payments (i.e., extraordinarydividends not in accordance with the historical practices of the Board ofDirectors of NUI Utilities); and Elizabethtown Gas shall not pay any allocatedcosts of any agreements, retainers or arrangements for professional servicesand other expenditures incurred in connection with, or as a result of, thefocused audit and/or financial difficulties of NUI unless approved by theNJBPU. 

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

NUI Utilities filed a procedure for competitiveprocurement of gas supply management services, which was approved by the NJBPUon February 11, 2004.  NUI Utilitiesinstituted a process for receiving bids for gas supply and capacity managementservices to the company's New Jersey, Florida and Maryland utility divisions.  The company requested bidders to providebids in one of three ways:  (1) on thebasis of a fixed payment to the company reflecting the value of the company'senergy assets, (2) on the basis of sharing credits and/or margins derived fromcapacity release and off-system sales activities, or (3) on the basis of a feetied to the volume of capacity in excess of the company's requirementsmultiplied by a measure of the market value tied to available publishedindices.  The company received multiplebids from nine third-party suppliers. As a result of this process, NUIUtilities selected Cinergy to provide a full requirements gas supply contractwith least cost dispatch rights.  Thecontract covers the period from April 1, 2004 through March 31, 2005 andprovides a fixed payment to NUI Utilities for the use of NUI Utilities' gas anddeliverability assets for the twelve months ended March 31, 2005.  The NJBPU approved the selection of Cinergyas the company's gas and capacity management services provider on April 14,2004.

*Investigations of Transactions at NUI Energy Brokers*

In connection with the focused audit described above,Liberty identified certain questionable transactions involving NUI EnergyBrokers.  The Audit Committee of theBoard of Directors retained independent counsel to conduct an investigation oftransactions involving NUI Energy Brokers. A report of the independentcounsel's investigation was provided to the company's Audit Committee on April13, 2004. 

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

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

*New Credit Facilities at NUI and NUI Utilities*

On November 24, 2003, NUI and NUI Utilities eachentered into a separate credit facility with a syndicate of banks. NUI obtaineda $255 million term loan facility and NUI Utilities obtained a $150 millioncredit facility comprised of a $50 million term loan facility, a $50 millionrevolving credit facility and a $50 million delayed draw term loan facility,which delayed 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 agreementswhich:

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

(ii)           consented to the NJBPU Settlement, 

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

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

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

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

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

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

*Gas Supply Contract with Cinergy*

NUI Utilities has selected Cinergy to provide a fullrequirements gas supply contract with least-cost dispatch rights.  The contract covers the period from April 1,2004 through March 31, 2005. The gas supply contract with Cinergy requires NUIUtilities to prepay, in varying amounts, for its gas requirements on a monthlybasis over the contract period. If NUI Utilities regains investment graderatings, the parties will negotiate other mutually agreeable payment termsbased on the improved creditworthiness of NUI Utilities.  Cinergy will pay NUI Utilities a fixedamount for the use of NUI Utilities' gas and deliverability assets for thetwelve months ended March 31, 2005, which is in lieu of NUI Utilities' opportunityto earn margins on off-system sales transactions. Regarding the fixed amountthat NUI Utilities will receive from Cinergy, approximately 80 percent willbenefit ratepayers and be credited to the over/under recovery of gas costs, and20 percent will be retained by NUI Utilities and reflected as an increase inoperating margins on the Consolidated Statements of Income. 

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

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

*NUI*

On January 28, 2004, the Board of Directors of NUIannounced that it had appointed Craig G. Matthews as the President and ChiefExecutive Officer of NUI and as a member of its Board of Directors and that ithad appointed Steven D. Overly as the Vice President, General Counsel andSecretary of NUI. Mr. Matthews replaced A. Mark Abramovic, who retired and whohad previously been appointed President of NUI after John Kean, Jr. steppeddown in September 2003.  Mr. Overlyreplaced James R. Van Horn, the former Chief Administrative Officer, GeneralCounsel and Secretary of NUI. In addition, on February 24, 2004, Robert P.Kenney was appointed to the Board of Directors of NUI. James J. Forese 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 employed in October 2003 to manage its financialoperations and develop new liquidity forecasts.  

*NUI Utilities*

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

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

*Sale of the Company*

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

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

*The Sale of NUI Telecom*

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

**Forward-Looking Statements**

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

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

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

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

-       statementsas to the company's possible settlement with the 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 entering into an agreement for the sale of the company;

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

-       statementsas to financial projections;

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

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

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

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

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

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

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

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

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

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

-       statementsas to trends;

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

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

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

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

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

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

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

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

-       the impactand outcome of ongoing investigations and lawsuits;

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

-       the effectsof general economic conditions;

-       increases incompetition in the markets served by the company;

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

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

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

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

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

-       the availabilityand 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 refinance theirexisting 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 a diversifiedenergy company that is primarily engaged in the sale and distribution ofnatural gas through its local utility companies. Its local utility operationsare carried out by NUI Utilities and its operating divisions, as well asthrough a subsidiary of Virginia Gas Company (VGC) and serve approximately 371,000 customers in fourstates along the eastern seaboard of the United States. NUI Utilities is comprised of Elizabethtown Gas Company (NewJersey), City Gas Company of Florida, and Elkton Gas (Maryland). VGC is also engaged in other activities, such aspipeline operation and natural gas storage. The company's non-regulatedbusinesses are carried out by NUI Capital and its subsidiaries. As of April 1,2004, however, the company's only remaining non-regulated subsidiary withsubstantial operations is Utility Business Services, Inc. (UBS), a billing andcustomer information systems and services subsidiary. The company's othernon-regulated subsidiaries have either been sold or are being discontinued.These subsidiaries include NUI Environmental, Inc. (NUI Environmental), anenvironmental project development subsidiary sold in September 2003; NUITelecom, Inc. (NUI Telecom), a telecommunications services subsidiary sold inDecember 2003; NUI Energy, Inc. (NUI Energy), an energy retailer; NUI EnergyBrokers, Inc. (NUI Energy Brokers); a wholesale energy trading and portfoliomanagement subsidiary; OAS Group, Inc. (OAS), the company's digital mappingoperation, which prior to September 30, 2003, was part of UBS; and TICEnterprises, LLC (TIC), a sales outsourcing subsidiary which sold wireless andnetwork telephone services. In addition, through NUI Saltville Storage, Inc.(NUISS), the company is a fifty-percent member of Saltville Gas StorageCompany, LLC (SSLLC), a joint venture with a unit of Duke Energy that isdeveloping a natural gas storage 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.The company has engaged two investment banks to serve as financial advisors tothe company while it seeks a buyer. 

On November 24, 2003, NUI and NUI Utilities obtained a$405 million 364-day credit facility financing package.  See Liquidity and Capital Resources for afurther discussion of the use of these proceeds and the terms of the creditagreements.

As described below in Liquidity and Capital 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 requiredto refinance 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 November 2005.

**Resultsof Operations**

*Consolidated Reviewof Results of Operations*

Thefollowing discussion is intended to provide an overview of consolidated resultsfor the three and six-month periods ended March 31, 2004 and 2003. Followingthis discussion is a more detailed overview of the results for NUI's threebusiness segments.

**Net Income (Loss).**  NUIhad net income of $3.8 million, or $0.24 per share, for the three months endedMarch 31, 2004, as compared to $12.2 million, or $0.76 per share, for the threemonths ended March 31, 2003. The decrease in net income of $8.4 million duringthe current three-month period was due to reduced income from continuingoperations of approximately $14.3 million, which was primarily due to (1)reduced operating margins of approximately $15.3 million by NUI Energy Brokers;(2) increased net interest charges of approximately $5.7 million, whichresulted from both higher weighted average indebtedness and increased interestrates during the current three-month period; (3) increased operation andmaintenance expenses of approximately $6.3 million (see discussion under Income(Loss) from Continuing Operations); and (4) additional restructuring expensesof approximately $1.0 million during the current three-month period. Lowercharges for changes in accounting of approximately $5.9 million partially offsetthe increased net loss. 

NUIhad net loss of $4.4 million, or $0.27 per share, for the six months endedMarch 31, 2004, as compared to net income of $19.3 million, or $1.21 per share,for the six months ended March 31, 2003. The decrease in net income of$23.7 million during the current six-month period was primarily due to reducedincome from continuing operations of approximately $29.1 million. This decreasewas a result of the following factors (which are more fully discussed belowunder Income (Loss) from Continuing Operations): (1) increased operatingexpenses; (2) reduced operating margins by NUI Energy Brokers; (3) a pre-taxloss recorded for the early extinguishment of debt (see Note 10 of the Notes tothe Consolidated Financial Statements); (4) increased net interest charges; and(5) restructuring charges related to the severance of employees. Losses fromdiscontinued operations increased by approximately $0.5 million during thecurrent six-month period. Lower charges for changes in accounting ofapproximately $5.9 million partially offset the increased net loss.  

**Income (Loss) from Continuing Operations.**  Income from continuing operations was $4.1million, or $0.26 per share, for the three-month period ended March 31, 2004,compared to $18.4 million, or $1.15 per share, for the same period in fiscal2003. The current three-month period decrease is primarily due to (1) reducedoperating margins of approximately $15.3 million by NUI Energy Brokers, whichresulted from the company scaling back its energy trading operation inconjunction with the focused audit being conducted by the NJBPU and aninvestigation of its trading practices; (2) increased interest expense ofapproximately $5.7 million, which resulted from both higher weighted averageindebtedness and increased interest rates during the current three-monthperiod; (3) increased operation and maintenance expenses of approximately $6.3million and (4) additional restructuring expenses related to severance paymentsto employees of approximately $1.0 million during the current three-monthperiod. These decreases in income from continuing operations were partiallyoffset by higher equity and other income (approximately $0.7 million) andreduced income tax expenses (approximately $11.0 million) during the currentthree-month period, as compared to the prior fiscal period. The increasedoperating expenses were due primarily to increased legal and professional feesin conjunction with the focused audit conducted by the NJBPU, the investigationconducted involving questionable transactions by NUI Energy Brokers, and costsassociated with finding a buyer for the company (approximately $4.7 million),bank fees (approximately $2.7 million), insurance (approximately $0.8 million),costs incurred to wind-down NUI Energy Brokers (approximately $0.7 million),labor and employee benefits, primarily due to severance paid to the company'sformer Chief Executive Officer and General Counsel (approximately $0.7million), and increased pension costs (approximately $0.6 million). Theseincreases were partially offset by reduced bad debts, mainly as a result of thewinding-down of NUI Energy during fiscal 2003 (approximately $3.6), and rentexpenses (approximately $0.3 million) during the three-month period ended March31, 2004.

Loss from continuingoperations was $3.3 million, or $0.21 per share, for the six-month period endedMarch 31, 2004, compared with income from continuing operations of $25.8million, or $1.61 per share, for the same period in fiscal 2003. The currentsix-month period decrease is primarily due to (1) increased operation andmaintenance expenses of approximately $17.9 million; (2) approximately $15.3million of reduced operating margins by NUI Energy Brokers as a result of thewinding-down of its trading operations following the focused audit conducted bythe NJBPU and the subsequent investigation of its transactions; (3) a pre-taxloss of approximately $9.9 million recorded for the early extinguishment ofdebt; (4) increased net interest charges of approximately $8.5 million as aresult of both higher weighted average indebtedness and increased interestrates during the current six-month period; and (5) restructuring charges ofapproximately $2.1 million related to the payment of employee severance costs.These decreases in income from continuing operations were partially offset byhigher equity and other income (approximately $1.3 million) and reduced incometax expenses (approximately $19.6 million) during the current six-month period,as compared to the prior fiscal period. The increased operating expenses weredue primarily to increased legal and professional fees in conjunction with thefocused audit conducted by the NJBPU, the investigation conducted involvingquestionable transactions by the company's NUI Energy Brokers subsidiary, andcosts associated with finding a buyer for the company (approximately $12.0million), bank fees (approximately $6.9 million), insurance (approximately $1.4million), increased pension costs (approximately $1.2 million), and costsincurred to wind-down NUI Energy Brokers (approximately $0.7 million). Theseincreases were partially offset by reduced bad debts, mainly as a result of thewinding-down of NUI Energy during the fiscal 2003 (approximately $3.1), rentexpenses (approximately $0.8 million), and labor and employee benefits(approximately $0.4 million) during the six-month period ended March 31, 2004.

Thecompany anticipates increased costs related to legal, professional, and bankfees while it completes the sale process and continues to address its liquidityneeds. Increases are also anticipated in pension and insurance expenses duringthe remainder of fiscal 2004. 

**Discontinued Operations.**  After-taxlosses from discontinued operations for the three months ended March 31, 2004,were $0.3 million, or $0.02 per share, compared to $0.4 million, or $0.03 pershare during the prior fiscal year. 

After-taxlosses from discontinued operations for the six months ended March 31, 2004,were $1.1 million, or $0.06 per share, compared to $0.6 million, or $0.04 pershare during the prior fiscal year. The increased losses during fiscal 2004were primarily due to losses of NUI Telecom prior to the sale on December 15,2003, as well as the costs of winding-down 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 $9.5 million and $1.3 million for thethree-month periods ended March 31, 2004 and 2003, respectively, and $20.1million and $2.1 million for the six-month periods ended March 31, 2004 and2003, respectively. The increasesduring the fiscal 2004 periods relate to increased costs related to outsideprofessional services, bank fees, and restructuring charges. These costs arenot 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 operationsand service business 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). The results for these operations are reflected in DiscontinuedOperations in the Consolidated Financial Statements for the three and six-monthperiods ended March 31, 2003 and 2002. The Income from Continuing Operationsbefore Taxes for the segment is as follows:

*(Dollars in thousands)*

**Three   Months  Ended  March 31,   2004**

**Three   Months   Ended  March  31,   2003**

**Six   Months   Ended  March 31,   2004**

**Six  Months   Ended  March  31,   2003**

**Operating Revenues**

$240,341

$231,967

$401,567

$397,863

Purchased  Gas and Fuel

164,134

157,662

265,033

266,630

Cost  of sales and services

2,876

2,516

5,877

5,393

Energy  Taxes

5,507

5,289

9,414

8,783

**Operating Margins**

67,824

66,500

121,243

117,057

**Operating Expenses:**

 

 

 

 

Operations  & Maintenance    Expenses

  28,745

  27,959

  55,789

  51,100

Depreciation  & Amortization

7,935

8,054

15,877

15,727

Taxes  Other than Income

2,051

1,920

3,963

3,476

**Total Operating Expenses**

38,731

37,933

75,629

70,303

**Pre-Tax Operating Income**

29,093

28,567

45,614

46,754

Other Income & (Expense)

367

165

838

317

Net Interest Charges

5,508

2,778

10,211

6,191

**Pre-Tax Income from      Continuing Operations  **

  $23,952

  $25,954

$36,241

  $40,880

***Operating Revenues****.*  Operating revenues include amounts billedfor the cost of purchased gas pursuant to purchased gas adjustment clauses (BGSS in New Jerseyand PGA in Florida) utilized by the company's utility operations.  Such clauses enable the company to pass throughto its utility customers, via periodic adjustments to customers' bills, changesin costs incurred by the company for purchased gas without affecting operatingmargins. 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 Servicesoperating revenues increased by $8.3 million, or 4 percent, to $240.3 millionduring the three months ended March 31, 2004, as compared to $232.0 million inthe same period in fiscal 2003. The increase in operating revenues wasprimarily attributable to an increase in BGSS and PGA rates charged to customersin New Jersey and Florida, respectively, (approximately $24.5 million) and anincrease in Elizabethtown Gas' SBC (approximately $3.0 million).  A base rate increase in Florida(approximately $1.2 million) also contributed to the increase in operatingrevenues. (See Regulatory Matters for a further discussion of rate increases.)These increases were partially offset by reduced off-system sales(approximately $22.6 million).

Distribution Servicesoperating revenues increased by $3.7 million, or 1 percent, to $401.5 millionduring the six months ended March 31, 2004, as compared to $397.8 million inthe same period in fiscal 2003. The increase in operating revenues wasprimarily attributable to an increase in the BGSS and PGA rates charged tocustomers in New Jersey and Florida, respectively, (approximately $33.9million) and an increase in Elizabethtown Gas' SBC (approximately $4.5million). Base rate increases in New Jersey (approximately $3.1 million) andFlorida (approximately $1.6 million) also contributed to the increase inoperating revenues. These increases were partially offset by reduced off-systemsales (approximately $42.0 million).

***Operating Margins****.*Operating margins increased by $1.3 million, or 2 percent, to $67.8 million forthe three months ended March 31, 2004, as compared to $66.5 million in the sameperiod in fiscal 2003. Of the factors previously discussed in operatingrevenues, the operating margin impact of the rate increases contributedapproximately $1.1 million, and the colder weather contributed approximately$1.5 million. Total operating margins from off-system gas sales were $0.5million less for the three months ended March 31, 2004, compared to the sameperiod in fiscal 2003. The company has a weather normalization clause in itsNew Jersey tariff, which is designed to help stabilize the company's results byincreasing amounts charged to customers when weather has been warmer thannormal and by decreasing amounts charged when weather has been colder thannormal. As a result of weather normalization clauses, operating margins wereapproximately $3.0 million and $4.0 million lower in the fiscal 2004 and 2003periods, respectively, than they otherwise would have been without suchclauses. Operating margins for the appliance services businesses decreasedapproximately $0.7 million lower for the current three-month period as a resultof increased costs of providing services. Operating margins for OAS during thethree-months ended March 31, 2004, were consistent with the prior fiscal year.

Operating margins increased by$4.2 million, or 4 percent, to $121.2 million for the six months ended March31, 2004, as compared to $117.0 million in the same period in fiscal 2003. Ofthe factors previously discussed in operating revenues, the rate increasescontributed approximately $4.7 million, the operating margin impact of thecolder weather contributed approximately $0.6 million, and new customerscontributed approximately $0.4 million. Total operating margins from off-systemgas sales were approximately $0.6 million lower during the six months endedMarch 31, 2004 as compared to the same period in fiscal 2003. As a result ofweather normalization clauses, operating margins were approximately $2.1million and $4.8 million lower in the fiscal 2004 and 2003 periods,respectively, than they otherwise would have been without such clauses.Operating margins for the appliance services businesses decreased approximately$0.8 million lower for the current six-month period as a result of increased costsof providing services. Operating margins for OAS during the six-months endedMarch 31, 2004, were consistent with the prior fiscal year.

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

***Operating Expenses.*** Operations and maintenanceexpenses increased by $0.8 million, or 3 percent, to $28.7 million for thethree months ended March 31, 2004, as compared with $27.9 million in the sameperiod in fiscal 2003. This was mainly due to increases in legal andprofessional fees (approximately $2.4 million), insurance costs for generalliability (approximately $1.5 million), pension expenses due to lower discountrate and asset return assumptions (approximately $0.5 million), materials andsupplies costs used by the appliance operations (approximately $0.3 million),telephone (approximately $0.3 million), and bank fees (approximately $0.3million). These increases were partially offset by reduced labor and employeebenefits (approximately $3.4 million), bad debts (approximately $0.9 million),and rent expense (approximately $0.1 million).

Operations and maintenanceexpenses increased by $4.7 million, or 9 percent, to $55.8 million for the sixmonths ended March 31, 2004, as compared with $51.1 million in the same periodin fiscal 2003. This was mainly due to increases in legal and professional fees(approximately $5.6 million), insurance costs for general liability(approximately $2.4 million), bank fees (approximately $1.2 million), pensionexpenses due to lower discount rate and asset return assumptions (approximately$1.1 million), and telephone (approximately $0.8 million). These increases werepartially offset by reduced labor and employee benefit costs (approximately$5.2 million), rent expense (approximately $0.5 million), and bad debts(approximately $0.1 million).

The company anticipatesincreased costs related to legal, professional, and bank fees while itcompletes the process of finding a buyer and continues to address its liquidityneeds. Increases are also anticipated in pension and insurance expenses duringthe remainder of fiscal 2004.

***Other Income andExpense***. Other income increased by approximately $0.2 million,for the three months ended March 31, 2004, as compared to the same period infiscal 2003. The increase in the current three-month period was due toadditional interest income earned on the cash held as overnight investmentsduring the current fiscal period.

Other income increased byapproximately $0.5 million, for the six months ended March 31, 2004, ascompared to the same period in fiscal 2003. The increase in the currentsix-month period was primarily due to the effect of the factor discussed aboveregarding the current three-month fiscal period.

***Net Interest Charges.***  Net interest charges increased byapproximately $2.7 million, or 98 percent, to $5.5 million for the three monthsended March 31, 2004 from $2.8 million in the same period in fiscal 2003. Theincrease during the current three-month period is primarily a result of higherweighted average indebtedness and increased interest rates of NUI Utilitiesduring the current three-month period (see additional discussion under Liquidityand Capital Resources- Sources of Liquidity- Short-term Debt).

Net interest charges increasedby approximately $4.0 million, or 65 percent, to $10.2 million for the sixmonths ended March 31, 2004 from $6.2 million in the same period in fiscal 2003.The increase during the current six-month period was primarily due to theeffect of the factor discussed above regarding the current three-month fiscalperiod.

The company expects the higheramount of weighted average indebtedness and interest rates to continue for theremainder of fiscal 2004. See Liquidity and Capital Resources for furtherdiscussion.

**Energy AssetManagement Segment**

The Energy Asset Managementsegment includes the operations of the company's NUI Energy Brokers subsidiary,and the distribution, storage and pipeline operations of VGC. This segment alsoincludes the company's 50 percent share of equity income and losses of SSLLC.The Income from Continuing Operations before Taxes for the segment is asfollows:

*(Dollars in thousands)*

**Three   Months   Ended  March 31,   2004**

**Three   Months   Ended  March  31,   2003**

**Six   Months   Ended  March 31,   2004**

**Six  Months  Ended  March  31,   2003**

**Operating Revenues**

$1,465

$17,041

$5,237

$20,886

Purchased  Gas and Fuel

122

264

443

319

**Operating Margins**

1,343

16,777

4,794

20,567

**Operating Expenses:**

 

 

 

 

Operations & Maintenance     Expenses

  4,501

  2,804

  7,077

  4,997

Depreciation  & Amortization

513

591

1,027

1,162

Taxes  Other than Income

191

194

499

393

**Total Operating Expenses**

5,205

3,589

8,603

6,552

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

(3,862)

13,188

(3,809)

14,015

Other Income & (Expense)

453

98

1,030

235

Net Interest Charges

1,044

679

1,983

1,058

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

  $(4,453)

  $12,607

   $(4,762)

  $13,192

***OperatingRevenues***. Energy Asset Managementoperating revenues decreased approximately $15.5 million, or 91 percent, to$1.5 million for the three months ended March 31, 2004, as compared to $17.0million in the same period in fiscal 2003. The decrease was primarily due toreduced operating revenues of approximately $15.3 million by NUI Energy Brokersas the company began to wind down its trading operations following theinvestigation of the certain transactions during earlier years. The operatingrevenues of VGC were down approximately $0.2 million primarily as a result ofreduced storage revenues due to fewer contracts during the current fiscalperiod.

Operating revenues decreasedapproximately $15.7 million, or 75 percent, to $5.2 million for the six monthsended March 31, 2004, as compared to $20.9 million in the same period in fiscal2003. The decrease was due to the approximately $15.3 million of reducedoperating margins recorded by NUI Energy Brokers as a result of the companywinding down its trading operations during the current fiscal period. Theoperating revenues of VGC decreased approximately $0.4 million as a result ofreduced storage revenues due to fewer contracts during the six-month periodended March 31, 2004, as compared to the same period in fiscal 2003. 

The company's decision todiscontinue the trading operations of NUI Energy Brokers will result in asubstantial reduction in operating revenues and operating margins for theEnergy Asset Management segment during fiscal 2004.

***Operating Margins.*** Operating margins decreasedapproximately $15.5 million, or 92 percent, to $1.3 million for the threemonths ended March 31, 2004, as compared to $16.8 million in the same period infiscal 2003. Of this decrease, approximately $15.3 million was attributable toNUI Energy Brokers and approximately $0.2 million was attributable to VGC, andwas primarily due to the effect of the factors discussed above regardingoperating revenues. 

Operating margins decreasedapproximately $15.8 million, or 77 percent, to $4.8 million for the six monthsended March 31, 2004, as compared to $20.6 million in the same period in fiscal2003. Of this decrease, approximately $15.3 million was attributable to NUIEnergy Brokers and approximately $0.5 million was attributable to VGC, and wasprimarily due to the effect of the factors discussed above regarding operatingrevenues. 

***Operating Expenses.***Operating and maintenance expenses increased by approximately $1.7 millionduring the three months ended March 31, 2004, as compared to the same period infiscal 2003 due to increases in labor and benefit costs, including severancepaid to former employees of NUI Energy Brokers (approximately $0.8 million),costs to expense abandoned assets of NUI Energy Brokers (approximately $0.8million), legal and professional costs (approximately $0.4 million) and pensioncosts (approximately $0.1 million). These increases were partially offset byreduced bad debts (approximately $0.1 million) and allocated corporate expenses(approximately $0.1 million).

Operating and maintenanceexpenses increased by approximately $2.1 million during the six months endedMarch 31, 2004, as compared to the same period in fiscal 2003 due to increasedlabor and benefit costs, including severance paid to former employees of NUIEnergy Brokers (approximately $1.0 million), costs to expense abandoned assetsof NUI Energy Brokers (approximately $0.8 million), legal and professionalcosts (approximately $0.4 million), and pension costs (approximately $0.3million). These increases were partially offset by reduced bad debts(approximately $0.1 million).

Aspreviously noted, the company anticipates increased costs during fiscal 2004related to the winding down the trading operations of NUI Energy Brokers.

***Other Income andExpense***. Other income increased by approximately $0.4 million,for the three months ended March 31, 2004, as compared to the same period infiscal 2003. The increase in the current three-month period was due toapproximately $0.4 million of equity income of SSLLC, which began operationsduring August 2003.

Other income increased byapproximately $0.8 million, for the six months ended March 31, 2004, ascompared to the same period in fiscal 2003. The increase in the currentsix-month period was due to approximately $0.6 million of equity income ofSSLLC, and increased interest income during the current fiscal period.

***Net Interest Charges.***  Net interest charges increased byapproximately $0.3 million, to $1.0 million for the three months ended March31, 2004 from $0.7 million in the same period in fiscal 2003. The increaseduring the current three-month period is primarily due to increased allocatedinterest costs of NUI, which resulted in higher weighted average indebtednessand increased interest rates during the current three-month period (seeadditional discussion under Liquidity and Capital Resources- Sources ofLiquidity- Short-term Debt).

Net interest charges increasedby approximately $0.9 million, to $2.0 million for the six months ended March31, 2004 from $1.1 million in the same period in fiscal 2003. The increaseduring the current six-month period was primarily due to the effect of thefactors discussed above regarding the current three-month fiscal period.

**Retail andBusiness Services Segment**

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

*(Dollars in thousands)*

**Three   Months  Ended  March 31,   2004**

**Three   Months   Ended  March  31,   2003**

**Six   Months  Ended  March 31,   2004**

**Six  Months   Ended  March 31,  2003**

**Operating Revenues**

$1,550

$721

$3,055

$2,797

Cost  of sales and services

   659

  623

1,294

1,248

**Operating Margins**

   891

    98

1,761

1,549

**Operating Expenses:**

 

 

 

 

Operations  & Maintenance    Expenses

  449

  3,995

  934

  5,981

Depreciation  & Amortization

334

384

661

746

Taxes  Other than Income

     56

90

   128

   187

**Total Operating Expenses**

   839

4,469

1,723

6,914

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

52

(4,371)

38

(5,365)

Other Income & (Expense)

---

---

---

34

Net Interest Charges

    48

   360

    87

    549

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

   $     4

  $(4,731)

  $   (49)

  $(5,880)

***Operating Revenues****.*Retailand Business Services operating revenues increased by approximately $0.8million, or 115 percent, to $1.5 million for the three months ended March 31,2004 from $0.7 million in the same period in fiscal 2003. This increase wasprimarily due to negative operating revenues of approximately $0.9 million thatwere recorded during the three-month period ended March 31, 2003, which did notrecur during the same period in fiscal 2004. The negative margins recordedduring the fiscal 2003 period were a result of the company's efforts to winddown its retail energy business. Operating revenues for UBS during thethree-months ended March 31, 2004, were consistent with the prior fiscal year.

Operating revenues increasedby approximately $0.3 million, or 9 percent, to $3.1 million for the six monthsended March 31, 2004 from $2.8 million in the same period in fiscal 2003. Thisincrease was primarily due to negative operating revenues of approximately $0.3million that were recorded during the six-month period ended March 31, 2003,which did not recur during the same period in fiscal 2004. Operating revenuesfor UBS during the six-months ended March 31, 2004, were consistent with theprior fiscal year.

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

***Operating Margins***.Retail and Business Services operating margins increased by approximately $0.8million during the three months ended March 31, 2004, to $0.9 million, ascompared with $0.1 million in the same period in fiscal 2003. This increase wasprimarily attributable to the effects of the factors previously discussed inoperating revenues. 

Operating margins increased byapproximately $0.2 million during the six months ended March 31, 2004, to $1.7million as compared with $1.5 million in the same period in fiscal 2003, whichwas primarily attributable to the effects of the reasons previously discussedin operating revenues. 

***Operating Expenses****.*Operations and maintenance expenses, depreciation and amortization, and taxesother than income for the Retail and Business Services segment decreased intotal by $3.6 million, or 81 percent, to $0.8 million during the three monthsended March 31, 2004, as compared with $4.4 million in the same period infiscal 2003. This was mainly due to reduced expenses of NUI Energy during thecurrent fiscal year period, which was a result of the company's efforts to winddown the its retail energy business during the previous fiscal year.  The operating expenses of UBS for the threemonths ended March 31, 2004 were consistent with those of the prior fiscal yearperiod.

Operations and maintenanceexpenses, depreciation and amortization, and taxes other than income decreasedin total by $5.2 million, or 75 percent, to $1.7 million during the six monthsended March 31, 2004, as compared with $6.9 million in the same period infiscal 2003.  The decrease wasconsistent with effects of the reasons previously discussed for the three-monthperiod ended March 31, 2004. The operating expenses of UBS for the six monthsended March 31, 2004 were consistent with those of the prior fiscal yearperiod.

The company's exiting of theretail energy business is expected to reduce the operating expenses of thissegment significantly during fiscal 2004.

***Net Interest Charges.***  Net interest charges decreased byapproximately $0.3 million, to $0.1 million for the three months ended March31, 2004 from $0.4 million in the same period in fiscal 2003. The decreaseduring the current three-month period is primarily due to decreased allocatedinterest costs of NUI as a result of the company's decision to wind down theoperations of its retail energy business during the prior fiscal year.

Net interest charges decreasedby approximately $0.4 million, to $0.1 million for the six months ended March31, 2004 from $0.5 million in the same period in fiscal 2003. The decreaseduring the current six-month period was primarily due to the effect of thefactors discussed above regarding the current three-month fiscal period.

**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 operating expensesincurred since the company's last base rate increase twelve years ago.  The new rates are based on a return onequity of 10.0 percent and an overall rate of return on rate base of 7.95percent. The rate order also revised the normal weather pattern upon which baserates and Elizabethtown Gas' Weather Normalization Clause are set from a30-year to a 20-year weather average to better reflect current weathertrends.  In addition, the company wasallowed to increase service charges to various rate classes of customers tobetter reflect the cost of providing service to these customers. In itsDecember 11, 2003 Order, the NJBPU stated that it was re-examining thissettlement in light of the events surrounding NUI's use of proceeds received inits 2002 equity offering.  The company'ssettlement with the NJBPU on April 14, 2004 resolved all issues related to the2002 rate case.

On September 16, 2003, Elizabethtown Gas receivedapproval from the NJBPU to increase its BGSS rates on a provisional basis by$28.8 million and on October 10, 2003, Elizabethtown Gas was granted approvalto increase its 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 representpass-through of costs on which the company does not earn a profit. In its December11, 2003 Order, the NJBPU stated that it would reconsider the provisional ratesapproved by the NJBPU pursuant to Elizabethtown Gas' petition for an increasein BGSS rates. The company's settlement with the NJBPU on April 14, 2004resolved all issues related to this BGSS proceeding.

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

In response to the Federal Electric Discount andEnergy Competition Act which was signed into law in February 1999, on March 30,2001, the NJBPU approved a stipulation which enabled all retail customers inNew Jersey to choose a natural gas supplier, provided an incentive for thesecustomers to choose an alternate natural gas supplier and required New Jerseygas utilities to continue offering basic gas supply service through December2002 for those customers not choosing an alternate supplier. On January 17,2002, the NJBPU issued an Order that continued the obligation of all New Jerseygas utilities to provide basic gas supply service until the NJBPU has had anopportunity to fully investigate major policy issues relating to pricingstructure and gas supply reliability. No timetable has been established forcompletion of such a review. As of March 31, 2004, only a small number ofresidential customers in Elizabethtown Gas' service territories were receivinggas from an alternative gas supplier.

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 and 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. 

**Liquidity and CapitalResources**

***Overview***

As a result of the various factors discussed in thisquarterly report, NUI and NUI Utilities have experienced and expect to continueexperiencing significant liquidity problems. Liquidity needs for NUI Utilitiesgenerally are driven by factors that include: prepayments for its natural gasrequirements; natural gas commodity prices; the impact of weather on customerbills; lags in fully collecting gas costs from customers under purchased gasadjustment clauses; both discretionary and required repayments of short- andlong-term debt; capital spending; and working capital requirements, such asadministrative expenses and taxes. Liquidity needs at NUI and NUI's non-utilityoperations generally are driven by required repayments of short-term debt andworking capital 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 performance of NUI and its subsidiaries, their respective credit ratingsand conditions in the company's industry in general. In addition, the NJBPU'sholding company order requiring NUI to maintain a certain degree of separationbetween its utility and non-utility subsidiaries could impact affiliate ratingson consolidated and unconsolidated credit quality. Compliance with applicablefinancial covenants will depend upon future financial position and levels ofearnings and cash flows, as to which no assurances can be given. 

In addition, at times NUI utilizes intercompanydividends from NUI Utilities and amounts realized from the settlement ofintercompany balances to satisfy various subsidiary needs and to manageshort-term cash needs. Historically, NUI Utilities has paid dividends of up to75 percent of its annual net income to NUI. The Standby Bond Purchase Agreement (SBPA) entered into in connectionwith the Variable Bonds, which, as described below, are a series of gasfacility revenue bonds issued by the New Jersey Economic Development Authority(NJEDA), restricts the payment of dividends by NUI Utilities to NUI to anamount based, in part, on the earned surplus of NUI Utilities, which had beenreduced by the NJBPU Settlement.  On May19, 2004, NUI Utilities and The Bank of New York amended the SBPA.The amendment eliminates the effect of the NJBPU Settlement, as well asthe estimated refunds to customers in Florida and certain other relatedcosts, on the earned surplus of NUI Utilities, thereby allowing for thepayment of dividends by NUI Utilities to NUI at this time. Inaddition, under the amendment to NUI Utilities' credit facility dated May 10,2004, NUI Utilities is prohibited from paying dividends exceeding $35 million inthe aggregate while the credit facility is outstanding. There are nocontractual restrictions on the settlement of intercompany balances in NUI's orNUI Utilities' financing agreements.

On a consolidated basis, thecompany's net cash provided by operating activities was $3.6 million (asrestated - see Note 15 to the Consolidated Financial Statements) and $66.6million for the six-month periods ended March 31, 2004 and 2003, respectively.The decrease of $63.0 million in operating cash flows for the current periodwas due in part to the timing ofpayments to the company's gas suppliers, including a $15 million prepayment forgas on March 31, 2004 under the company's new gas supply contract with Cinergy,and amounts paid in advance for interest costs on NUI's and NUI Utilities' newcredit facilities and as collateral for the company's gas procurement needs.The decrease in operating cash flows was partially offset by reductions inaccounts receivable for the company's non-regulated businesses during thesix-month period ended March 31, 2004, as compared to the same period in fiscal2003.

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. However, subsequent to September 30, 2004, NUI and NUI Utilities believethey may not have sufficient liquidity to meet their continuing obligations,based upon the following:

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

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

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

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

As noted above, based upon current anticipated cashflows, the company believes it will have sufficient liquidity to meet itsfinancial obligations through the end of fiscal year ending September 30, 2004and the company also believes it will remain in compliance with all covenantsunder its various debt agreements for the remainder of the year endingSeptember 30, 2004. The company plans to address its liquidity concerns by:successfully completing the sale of the company; extending its existing creditfacilities beyond the current termination date of November 22, 2004; andobtaining additional financing to ensure NUI Utilities' ability to, among otherthings, meet its gas purchase prepayment requirements under its natural gasasset management contract with Cinergy. If the company is unsuccessful in its efforts to effectively resolve itsliquidity concerns, it may need to reorganize its operations and restructureits debt financing.  For a furtherdiscussion about risks relating to NUI Utilities' liquidity, see Item 1.Business-Risk Factors in the company's annual report on Form 10-K for thefiscal 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 March 31, 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 $23.4 million and $102.0 million, respectively. 

NUI's and NUI Utilities' debt agreements also 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) at the last day of the immediately preceding fiscalquarter and (ii) pro forma at the time such dividend is made. As a resultof these restrictions, NUI is prohibited from paying any dividends at this timeand is also not likely to be able to pay any dividends in the foreseeable future.  The covenants also require both NUI and NUIUtilities to meet certain additional financial tests. If either NUI or NUIUtilities were unable to meet its debt service obligations or to comply withthese covenants, there would be a default under one or more of the agreements.Such a default, if not waived by our lenders, could result in acceleration ofthe repayment of either NUI's or NUI Utilities' debt and have a materialadverse effect on each company's financial conditions, results of operations andliquidity.

The company completed the sale of its NUI Telecomsubsidiary on December 15, 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 Baa-1 to Caa-1 and downgraded NUI Utilities' creditrating from A-3 to B-1. The credit rating downgrades that have occurred infiscal 2004 are described below.

OnOctober 6, 2003, Moody's downgraded NUI's debt rating from B-1 to B-3. Moody'salso downgraded the debt rating of NUI Utilities from Ba-1 to Ba-3. Moody'scited the company's announcement that the company's Board of Directors hadplaced the entire company up for sale. In addition, Moody's indicated thattheir action reflects the difficult business conditions affecting the companyas well as the limited progress in selling non-core assets, citing that thislimited the company's financial flexibility. Moody's also cited the continuingfinancial relationship between NUI and NUI Utilities, liquidity concerns, andthe costs associated with finding a suitable buyer for the company. As a resultof these downgrades, NUI Utilities' cost of borrowing under its short-termfacilities increased an additional 62.5 basis points or 0.625 percent and thecost of borrowing for NUI was unchanged. In conjunction with the downgrades on October 6, 2003, Moody's indicatedthey would 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 B-3 to Caa-1.Moody's also downgraded the debt rating of NUI Utilities from Ba-3 to B-1.Moody's cited (1) the company's recent announcements that it expects lowerearnings in the first quarter of fiscal 2004, resulting from severance costs andexpenses related to the debt refinancings concluded during November 2003 atsubstantially higher rates of interest and fees; (2) the continued delay inproducing audited financial statements for the fiscal year ended September 30,2003 and its unaudited first quarter Form 10-Q, because of continuinginvestigations by the company's Audit Committee of certain questionabletransactions of NUI Energy Brokers, the company's wholesale energy tradingsubsidiary, which required additional waivers from lenders of both NUI and NUIUtilities; (3) the expectation of having to incur a meaningful settlementcharge as a result of the focused audit conducted by the NJBPU, which wouldreduce the company's income and equity for fiscal 2003; (4) the ongoinginvestigation of the New Jersey Attorney General's Office into NUI EnergyBrokers; and (5) the delays in realizing the sale of the company, which is thesource of repayment of NUI's $255 million rated debt and a portion of the debtof NUI Utilities. Moody's also cited the financial relationship between NUI andNUI Utilities and that any penalties that may be assessed to the company by theNJBPU may have to be funded from the earnings and cash flows of NUI Utilities.In addition, NUI and NUI Utilities have overlapping lenders that require debtto be serviced by each entity. Moody's further cited that to the extent NUIdoes not have the means to discharge its own debt obligations, these lendersmay seek dividends from NUI Utilities to help service NUI's debt. The lowerrating Moody's assigned to NUI reflects the structural subordination of itsdebt relative to that of NUI Utilities. 

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

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

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

***Sources of Liquidity***

***Short-Term Debt*.** On November 24, 2003, NUI and NUI Utilitieseach entered into new separate 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 facility may be extended if (i) NUI Utilities'facility is simultaneously extended, (ii) the maturity of NUI Utilities' 8.35percent medium term notes, due February 1, 2005, have been extended to a dateno earlier than June 30, 2006 or have been repaid with the proceeds of thedelayed draw term loan, (iii) NUI deposits cash with the administrative agentto cover interest that would accrue on outstanding amounts under the creditfacility until the extended maturity date, in the amount of approximately $20million, and (iv) no default exists under such facility at the time of suchextension.

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

NUI's current credit agreement provides for a $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 do not guarantee NUI's obligations underthis credit agreement. As of March 31, 2004, NUI had fully drawn all amountsavailable under its credit agreement. As of May 14, 2004, NUI had overnightcash investments of $28.8 million.

NUI Utilities' current credit agreement provides for(i) a $50 million revolving credit facility, (ii) a $50 million term loanfacility and (iii) a $50 million delayed draw term loan facility. The proceedsfrom the revolving credit facility and the term loan facility combined with theproceeds from the repayment of the $85 million intercompany balance from NUIwere used (1) to repay outstanding loans under, and terminate, the NUIUtilities credit agreement which was entered into on February 12, 2003, (2) topay accrued and unpaid fees under the interim credit agreement entered into onOctober 10, 2003 and (3) for general corporate purposes. The proceeds from 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 March 31, 2004,NUI Utilities had fully drawn all amounts available under the $50 millionrevolver and the $50 million term loan facility. As of May 14, 2004, NUIUtilities had overnight cash investments of $109.1 million.

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

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 approximately $350,000 worth of gaspipeline, 

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

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

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

Under the dividend restriction described above, NUI isprohibited from paying any cash dividends during any fiscal quarter in whichNUI's consolidated total debt represents more than 60 percent of its totalcapitalization, measured (i) at the last day of the immediatelypreceding fiscal quarter and (ii) pro forma at the time such dividend ismade. As a result of these restrictions, NUI is prohibited from paying anydividends at this time or in the foreseeable future. Under NUI's credit facility,NUI also is prohibited from paying dividends exceeding $20 million in theaggregate while the credit facility is outstanding.

At March 31, 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 8.0 percent and 7.5 percent. As of that date, NUI and NUI Utilitieshad no unused borrowing capacity under their credit facilities. Also, as ofMarch 31, 2004, NUI and NUI Utilities had approximately $23.4 million and$102.0 million, respectively, of cash 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 $40.8 millionat 8.1 percent and 2.8 percent for the three months ended March 31, 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 $191.7 million and $45.6 millionat 7.8 percent and 3.0 percent for the six months ended March 31, 2004 and2003, respectively. The weighted average daily amounts of borrowingsoutstanding under NUI Utilities' credit facility and the weighted averageinterest rates on those amounts were $94.9 million and $132.8 million at 7.2percent and 2.6 percent for the three months ended March 31, 2004 and 2003,respectively. The weighted average daily amounts of borrowings outstanding underNUI Utilities' previous and current credit facilities and the weighted averageinterest rates on those amounts were $105.0 million and $110.9 million at 5.6percent and 2.5 percent for the six months ended March 31, 2004 and 2003,respectively.  

***Long-Term Debt*****.**  NUI Utilities has outstanding $50 million 8.35 percent mediumterm notes, which mature on February 1, 2005. As of March 31, 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 these mediumterm notes.

On November 24, 2003, NUI repaid its $60 millionsenior notes with the proceeds of its new credit facility entered into on thatdate. In conjunction with the repayment 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 seniornotes.

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

Approximately $2.1 million of interest earned on theoriginal net proceeds from the $20 million 6.4 percent revenue bonds due 2024is unexpended and accordingly has been classified as "Funds for ConstructionHeld by Trustee" on the Consolidated Balance Sheet at March 31, 2004 untildrawn upon.

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

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

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.

As ofMarch 31, 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.

Defaults may occur in the near future under the 5.70percent bonds if NUI Utilities does not provide audited financial statementsfor NUI Utilities for the fiscal year ended September 30, 2003 and unauditedfinancial statements for NUI Utilities for the fiscal quarters ended December31, 2003 and March 31, 2004. To date, NUI Utilities has obtained all necessarywaivers and extended the respective deadlines for delivery of all information required pursuant to suchbond facility to June30, 2004.  NUI and NUI Utilities areworking diligently to deliver the required documentation within this timeframe.

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

**Capital Expenditures and Commitments**

***Capital Expenditures***. Capital expenditures,which consist primarily of expenditures to expand and upgrade the company's gasdistribution systems, were $17.6 million for the six months ended March 31,2004, and $26.6 million for the six months ended March 31, 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. After receiving the required regulatoryapproval, in February 2003 VGC contributed certain storage assets valued atapproximately $16.3 million to SSLLC. DESGS has contributed an equal amount(approximately $16.3 million) of capital required to expand the facility forits intended purpose.  To the extentSSLLC determines it needs additional funding (which decision can only be madejointly by the company and DESGS), the company and DESGS are obligated to fundthe development of SSLLC equally. 

As of March 31, 2004, thecompany has loaned SSLLC an aggregate of approximately $26.0 million toward thedevelopment of the Saltville storage facility. The company currently estimatesits share of funding to be zero in fiscal 2004, and $2.5 million in fiscal2005. Subsequent years are expected to be funded with internally generated cashflows of the joint venture.

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

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

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

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

Regarding the transportation and storage agreementsdiscussed above, the company is not utilizing the Patriot pipeline in its operationsat this time since it has discontinued its trading operations. However, thecompany is currently evaluating how to obtain the maximum benefit from itsrights 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 will be a FERC regulated facility. The preliminary engineeringstudy, conceptual design for the facility and pipeline, water resourceanalysis, and a successful "open season" have been completed.  The total cost of the project is expected tobe approximately $85 million over a period of three years, which NUI will seekto fund through project finance debt. 

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

During 2001, the company began building a 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 FloridaEast-West Pipeline project. The company anticipates a twenty-eight (28)month schedule 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.

***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 $60.5 million for the next twelve-monthperiod (this amount includes the company's obligations under two twenty-yearagreements related to the Patriot pipeline discussed above). The company alsois committed to purchase, at market-related prices, minimum quantities of gasthat, in the aggregate, are approximately 2.1 Bcf per year or to pay certaincosts in the event the minimum quantities are not taken. The company expectsthat minimum demand on its systems for the duration of these contracts willcontinue to exceed these minimum purchase obligations. 

NUI Utilities has entered into an agreement withCinergy to manage 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 gas supplyservice to enable NUI Utilities to meet its public utility obligations tosupply gas to customers in New Jersey, Florida and Maryland. The gas supplywill be provided at market-based prices. 

NUI Utilities has assigned to Cinergy or, in the caseof non-assignable assets, granted Cinergy agency authority to control, NUIUtilities' gas supply and deliverability assets, and Cinergy will pay NUIUtilities a fixed amount for the right to act as NUI Utilities' asset managerfor the twelve months ended March 31, 2005. The obligations of NUI Utilities,including all commodity and demand charges, will be secured by a prepaymentobligation unless NUI Utilities' credit rating improves to investment grade, atwhich time the parties will negotiate other mutually agreeable payment termsbased on the improved creditworthiness of NUI Utilities. The agreement providesNUI Utilities the option to terminate the agreement in the event of a change incontrol of NUI Utilities or NUI. In light of, among other factors, the requirementthat NUI Utilities must prepay its gas requirements under its agreement withCinergy and its other gas supply, distribution and storage agreements, and theobligation to make payments pursuant to its settlement with the NJBPU,management of the company believes it will need additional financing in orderto assure that the company's liquidity needs can be met during the upcomingwinter heating season. There is no assurance that any necessary additionalfinancing can be obtained or that the approval of the NJBPU, which is necessaryto obtain such financing, will be forthcoming. In addition, the financing, ifobtained, could have terms which have a material adverse effect on 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, whichthe company believes represents the probable minimum amount the company mayexpend over 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 a result,the company has recorded a regulatory asset of approximately $34.6 million,inclusive of interest, as of March 31, 2004. With respect to costs that may beassociated with the MGP properties located outside the state of New Jersey, thecompany is currently pursuing or intends to pursue recovery from ratepayers,former owners and operators, and/or insurance carriers. However, the company isnot able, at this time, to express a belief as to whether any or all of theserecovery efforts will ultimately be successful.

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

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

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

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

**Application of 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.

**Item 4.  Disclosure Controls and Procedures**

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

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

--     Generalledger account analyses were not being consistently performed.

--     A listingof debt covenants was not being maintained.

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

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

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

--     Accountspayable invoice processing procedures needed to be improved.

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

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

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

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

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

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

As further discussed in Note 15 to the ConsolidatedFinancial Statements, the company is filing this Amendment No. 1 on Form 10-Q/Afor the quarter ending March 31, 2004 because of a deficiency noted in its cashreconciliation process which gave rise to an overstatement of the company'scash balance and an understatement of its prepayment account as of March 31,2004.  This deficiency was related to the company not timely clearing anidentified reconciling item in a cash wire transfer account resulting from anend of the quarter cash payment.  The cash wire transfer account isincluded in Cash and cash equivalents on the Consolidated Balance Sheet.  As of the date of this filing,the company has implemented a process change in its cash reconciliation processwhich addresses this issue.  

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

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

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

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

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

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

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

--     Implementingprocedures for performance of account analyses and reconciliations;

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

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

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

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

As required by Rule 13a-15(b) of the Exchange Act, thecompany has carried out an evaluation, under the supervision and with theparticipation of its management, including its President and Chief ExecutiveOfficer and its interim Chief Financial Officer, of the effectiveness of thedesign and operation of its disclosure controls and procedures. The evaluationexamined those disclosure controls and procedures as of March 31, 2004, the endof the period covered by this report. Based upon the evaluation, the company'smanagement, including its President and Chief Executive Officer and its interimChief Financial Officer, concluded that, as of March 31, 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 interim Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure.
 
**SIGNATURE**

Pursuant to the requirements of the Securities ExchangeAct of 1934, the Registrant has duly caused this Amendment No. 1 to be signedon its behalf by the undersigned thereunto duly authorized.

    June 17, 2004

NUI CORPORATION

/s/ DAN SCOULER     DAN SCOULER     Interim Chief Financial Officer |