**UNITED STATES SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

# FORM 10-Q

(Mark One)      

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

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

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, includingzip code)

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

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, 2003: Common Stock,No Par Value: 16,021,360 shares outstanding.

**Item1. Financial Statements**

**NUI Corporation andSubsidiariesConsolidated Statement of Income (Unaudited)(Dollars in thousands, except per shareamounts)**

**                                                                                                               **
| **                                                                                                  ** | **Three Months EndedMarch 31,** | **Six Months EndedMarch 31,**                        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------|------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | **2003**                        | **2002**                                             | **2003** | **2002** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                 | **(Restated- see Note 2)**                           |  | **(Restated- see Note 2)** |
| **Operating Margins**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                 |                                                      |  |  |
|    Operating revenues                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | $262,787                        | $185,271                                             | $447,205 | $346,490 |
|    Less - Purchased gas and fuel                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 155,907                         | 102,545                                              | 263,796 | 195,729 |
|               Cost of sales and services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 11,294                          | 7,291                                                | 22,434 | 13,492 |
|               Energy taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |    5,289              |    4,042                                   |    8,783 |      7,095 |
|     Total operating margins                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  90,297                    |  71,393                                         |  152,192 |  130,174 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                            |                                                 |   |   |
| **Other Operating  Expenses**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                            |                                                 |   |   |
|    Operations and maintenance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 42,267                          | 29,485                                               | 75,455 | 57,282 |
|    Restructuring costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ---                             | ---                                                  | --- | 1,203 |
|    Depreciation and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 9,430                           | 7,707                                                | 18,342 | 16,293 |
|    Taxes, other than income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   2,561                    |   2,020                                         |   4,740 |     4,079 |
|     Total other income and expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 54,258                          | 39,212                                               | 98,537 |   78,857 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                            |                                                 |   |   |
| **Operating Income**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 36,039                          | 32,181                                               | 53,655 | 51,317 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                 |                                                      |  |  |
| **Other Income and Expense,  net**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |      244    |   190                                           |      659 |        497 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                 |                                                      |  |  |
| **Income from Continuing  Operations before Interest and Taxes**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 36,283                          | 32,371                                               | 54,314 | 51,814 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                            |                                                 |   |   |
| ** **Interest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   4,821                    |  5,598                                          |   10,129 |   11,139 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                            |                                                 |   |   |
| **Income from  Continuing Operations Before Income Taxes**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 31,462                          | 26,773                                               | 44,185 | 40,675 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                            |                                                 |   |   |
| **  Income taxes**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   13,034                   |   11,353                                        |   18,141 |   17,263 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                            |                                                 |   |   |
| **Income from  Continuing Operations Before Effect of Change in Accounting**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  

  18,428           |  

  15,420                                |  

  26,044 |  

  23,412 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                            |                                                 |   |   |
| **Discontinued Operations**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                            |                                                 |   |   |
|    Loss from discontinued  operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |     (682)        | (2,600)                                              |     (1,455) | (2,226) |
|    Income tax benefit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |    (276)              | (1,016)                                              |    (588) |      (898) |
| **Loss from Discontinued  Operations**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |    (406)              | (1,584)                                              |    (867) |   (1,328) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                            |                                                 |   |   |
| **Income before Effect of  Change in Accounting**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 18,022                          | 13,836                                               | 25,177 | 22,084 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                            |                                                 |   |   |
|   Effect of change in accounting (net of tax    benefit of $4,080 in 2003 and $9,500 in 2002)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  (5,869)                   |          --- |  (5,869) |  (17,642) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                            |                                                 |   |   |
| **Net Income**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | $12,153                         | $13,836                                              | $19,308 | $   4,442 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                            |                                                 |   |   |
| **Income from Continuing  Operations Per Share of      Common Stock**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | $    1.15        | $    1.08                             | $    1.62 | $     1.66 |
| **Net Income Per Share of  Common Stock**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | $    0.76        | $    0.97                             | $    1.20 | $     0.32 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                            |                                                 |   |   |
| **Dividends Per  Share of Common Stock**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | $  0.245                   | $  0.245                                        | $  0.49 | $     0.49 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                            |                                                 |   |   |
| ** Weighted Average Number of Shares of Common  Stock Outstanding**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 16,072,702                      | 4,217,626                                            | 16,048,767 | 14,069,297 |

***See the notes to the consolidated financial statements.***
**NUI Corporationand SubsidiariesConsolidated Balance Sheet(Dollars in thousands)**

** **

**March 31,  2003(Unaudited)**

**September 30,  2002(*)            **

**ASSETS**

 

**Current  Assets**

   Cash and  cash equivalents

$89,517

$4,247

   Accounts  receivable (less allowance for doubtful accounts       of $9,668  and $5,192, respectively) 

                                182,695

  83,611

   Accounts  receivable from affiliated companies

7,210

---

   Fuel  inventories, at average cost

8,656

37,390

    Unrecovered purchased gas costs

35,545

26,756

   Derivative assets

22,531

22,540

   Federal income tax  receivable

---

7,819

    Prepayments and other 

      17,885

      33,738

 

    364,039

    216,101

**Property,  Plant and Equipment**

    Property, plant and equipment, at original cost

948,352

945,901

    Accumulated depreciation and amortization

(314,665)

(304,055)

    Unamortized plant acquisition adjustments, net

      13,950

       14,484

    647,637

     656,330

**Funds for  Construction Held by Trustee**

  2,056

3,884

**Investment in  Saltville Storage, LLC**

20,009

---

**Other  Investments**

    147

117

**Assets  Held For Sale**

---

15,879

**Other Assets**

    Regulatory assets

62,330

75,845

   Long-term portion of  derivative assets

4,602

7,901

   Goodwill

19,322

19,126

   Other  assets

       44,585

       46,109

     130,839

     148,981

$1,164,727

$1,041,292

**CAPITALIZATION  AND LIABILITIES**

**Current  Liabilities**

   Notes  payable to banks

$175,333

$128,690

   Notes  payable

3,000

3,000

   Current  portion of long term debt and capital lease obligations

2,327

2,351

   Accounts  payable, customer deposits and accrued liabilities

172,117

125,484

   Derivative liabilities

---

852

   Federal  income and other taxes

31,123

7,913

   Current  portion of deferred Federal income taxes

       9,852

        18,738

     393,752

    287,028

**Other Liabilities**

   Capital  lease obligations

10,312

10,743

   Deferred  federal income taxes

56,467

63,150

    Liabilities held for sale

---

951

    Unamortized investment tax credits

3,655

3,948

    Environmental remediation reserve

33,505

33,852

    Regulatory and other liabilities

      56,088

       44,351

    160,027

     156,995

**Capitalization**

   Common  shareholders' equity

301,913

288,252

    Long-term debt

     309,035

     309,017

     610,948

     597,269

$1,164,727

$1,041,292

****Derived from audited financial statements.See the notes to the consolidated financial statements.***
**NUI Corporation andSubsidiariesConsolidated Statement of Cash Flows (Unaudited)(Dollars in thousands)**

** **

**Six Months EndedMarch 31,**

**2003**

**2002**

**(Restated- see Note 2)**

**Operating Activities**

Net  income 

$19,308

$4,442

Adjustments  to reconcile net income to net cash used in 

    operating activities:

          Depreciation and amortization

18,358

16,812

          Deferred Federal income taxes

(15,569)

(15,681)

          Amortization of deferred  investment tax credits

(293)

(220)

          Non-cash adjustment to implement  new accounting standard

9,949

27,142

          Derivative assets and liabilities

817

(7,709)

          Regulatory assets and liabilities

23,181

9,660

          Other

4,974

(445)

          Effect of changes in:

             Accounts receivable, net

(99,084)

(71,234)

             Accounts receivable from  affiliates

(7,210)

---

             Fuel inventories

28,734

47,984

             Accounts payable, deposits and  accruals

46,633

(20,694)

             Under-recovered purchased gas costs

(7,863)

(7,724)

             Prepaids and other

15,853

31,157

             Regulatory assets and  liabilities

(8,809)

(3,259)

             Federal and state income taxes

31,029

18,055

             Other

  (2,209)

      339

     Net cash provided by operating  activities

  57,799

 28,625

**Financing Activities**

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

158

36,440

Dividends  to shareholders

(7,876)

(6,860)

Funds  for construction held by trustee, net

1,849

6,094

Principal  payments under capital lease obligations

(1,281)

(1,030)

Net  short-term borrowings (repayments)

 46,643

(39,759)

  Net cash provided by (used in) financing  activities

 39,493

  (5,115)

**Investing Activities**

Cash  expenditures for property, plant and equipment

(25,784)

(26,655)

Investment  in Saltville Storage, LLC

(3,688)

---

Acquisitions,  net of cash acquired

---

(666)

Changes  in assets and liabilities held for sale

14,928

7,796

Other

    2,522

   (1,029)

  Net cash used in investing activities

 (12,022)

 (20,524)

Net  increase in cash and cash equivalents

$85,270

$  2,986

**Cash and Cash Equivalents**

At  beginning of period

$  4,247

$  2,601

At end  of period

$89,517

$  5,587

**Supplemental Disclosures of Cash Flows**

Income  taxes paid (refunds received), net

$(2,992)

$  3,691

Interest  paid

$  8,520

$11,826

***See the notes to the consolidated 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 (collectively referredto as "NUI," the "company," "we," "our," or "us").  NUI is a diversified energy company that is primarily engaged in thesale and distribution of natural gas, wholesale energy portfolio and riskmanagement, retail energy sales and telecommunications.  NUI's local utility operations serve morethan 367,000 customers in four states along the eastern seaboard of the United Statesand comprise Elizabethtown Gas Company (New Jersey), City Gas Company ofFlorida, Elkton Gas (Maryland), and Virginia Gas Company (VGC).  The company sold its North Carolina Gas (NC)utility operation during September 2002, and sold its Valley Cities Gas andWaverly Gas (VCW) utility operations during November 2002. VGC is also engagedin other activities, such as pipeline operation and natural gas storage. Thecompany's non-regulated businesses include NUI Energy, Inc. (NUI Energy), anenergy retailer; NUI Energy Brokers, Inc. (NUI Energy Brokers), a wholesaleenergy portfolio and risk management subsidiary; NUI Environmental Group, Inc.(NUI Environmental), an environmental project development subsidiary; UtilityBusiness Services, Inc., (UBS), a geospatial, billing and customer informationsystems and services subsidiary; NUI Telecom, Inc. (NUI Telecom), anon-facilities-based telecommunications services subsidiary and TICEnterprises, LLC (TIC), a sales outsourcing subsidiary. All intercompanyaccounts and transactions have been eliminated in consolidation. 

As discussed in Note 8, for all periods presented,the company has classified the results of NC, VCW, NUI Environmental, andcertain product lines of TIC as Discontinued Operations in the ConsolidatedStatement of Income. The assets and liabilities of these entities have beenclassified as Assets Held for Sale and Liabilities Held for Sale in theConsolidated Balance Sheet.

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. With the exception of the adjustment to record the effectof a change in accounting discussed in Note 14, all adjustments made were of anormal recurring nature. The results of the three and six-month periods endedMarch 31, 2002 have been restated (see Note 2). 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. Actual results could differfrom those estimates. The consolidated financial statements should be read inconjunction with the consolidated financial statements and the notes theretothat are included in the company's Annual Report on Form 10-K for the fiscalyear ended September 30, 2002. 

NUI is a holding company and is exempt from registrationunder the Public Utility Holding Company Act of 1935. NUI's wholly owned subsidiary,NUI Utilities, Inc. (NUI Utilities), is subject to regulation as an operatingutility by the public utility commissions of the states in which it operates.NUI Utilities includes the natural gas distribution and appliance businessoperations of Elizabethtown Gas Company, City Gas of Florida, and Elkton Gas.Certain subsidiaries of VGC are regulated by the Virginia State CorporationCommission. Because of the seasonal nature of gas utility operations, theresults for interim periods are not necessarily indicative of the company'sresults for an entire year.

**2.     Restatement of Prior Year Results**

NUIhas restated its fiscal 2000 and 2001 consolidated financial statements, aswell as quarterly results for the first three quarters of fiscal 2002. Suchrestatements were reported in the company's Annual Report on Form 10-K for thefiscal year ended September 30, 2002. The consolidated financial statements forthe three and six month periods ended March 31, 2002 contained herein have beenupdated to reflect these restatements, as well as certain reclassificationsdescribed below. The restatement adjustments were required either to reflectthe use of appropriate accounting methods or to reflect the correct recordingof account balances. The following tables summarize the impact of theseadjustments on the company's consolidated financial statements, as restated.Amounts contained in the "Results As Reclassified for EITF 02-03 and SFAS 144"include the amounts as originally reported and the required reclassificationsdue to the adoption of SFAS 144 (see Note 8) and the netting provision of EITF02-03 (see Note 14).

**NUI Corporation and SubsidiariesConsolidated Statement of Income(Dollarsin thousands, except per share amounts)**

**Three  months ended March 31,  2002 Results  as Reclassified for EITF 02-03 and SFAS 144**

**Adjustments**

**Legend**

**Three months   ended  March 31, 2002  As Restated**

**Operating Margins**

  Operating revenues

$185,295

$(24)

a

$185,271

  Less- Purchased gas and fuel

 102,631

(86)

b

 102,545

            Cost of sales and services

              7,291

---

 

              7,291

            Energy taxes

   4,042

     ---

 

   4,042

      

 71,331

    62

 

 71,393

 

 

 

 

**Other Operating  Expenses**

 

 

 

 

  Operations and maintenance

28,869

616

c, d, e

29,485

  Depreciation and amortization

7,707

---

 

7,707

  Taxes, other than income taxes

  2,020

       ---

 

    2,020

     Total operating expenses

38,596

     616

 

39,212

 

 

 

 

**Operating Income**

 32,735

(554)

 

  32,181

 

 

 

 

 Other Income and Expense, net

     190

        --

 

    190

 

 

 

 

**Income  from Continuing Operations before Interest and Taxes**

 

32,925

 

(554)

 

 

32,371

 

 

 

 

  Interest expense

  5,598

       ---

 

 5,598

 

 

 

 

**Income from Continuing Operations before Income  Taxes**

                    27,327

        (554)

 

          26,773

 

 

 

  Income taxes

  11,257

    96

j

11,353

 

 

 

 

**Income (loss) from Continuing Operations before Effect of Change in  Accounting**

        16,070

 

(650)

 

15,420

 

 

 

 

**Discontinued Operations**

 

 

 

 

**  **Loss from discontinued  operations

(1,569)

(1,031)

 f, i

(2,600)

   Income tax benefit

    (593)

     (423)

j

 (1,016)

**Loss from Discontinued Operations**

    (976)

     (608)

 

(1,584)

 

 

 

 

**Net Income (loss)**

$15,094

$(1,258)

 

$13,836

**Net Income (loss) Per Share of Common Stock**

           $     1.06

      $  (0.09)

             $    0.97

SeeLegend descriptions that follow.
****
**NUI Corporation and SubsidiariesConsolidated Statement of Income**(Dollars in thousands, except pershare amounts)**

**Six months  ended   March 31,  2002 Results  as Reclassified for EITF 02-03 and SFAS 144**

**Adjustments**

**Legend**

**Six months ended  March 31, 2002  As Restated**

**Operating Margins**

  Operating revenues

$346,533

$(43)

a

$346,490

  Less- Purchased gas and fuel

 195,879

(150)

b

 195,729

            Cost of sales and services

              13,492

---

 

              13,492

            Energy taxes

    7,095

     ---

 

    7,095

      

 130,067

   107

 

 130,174

 

 

 

 

**Other Operating  Expenses**

 

 

 

 

  Operations and maintenance

56,224

1,058

c, d, e

57,282

  Restructuring charges

1,203

 

 

1,203

  Depreciation and amortization

16,293

---

 

16,293

  Taxes, other than income taxes

  4,079

       ---

 

    4,079

     Total operating expenses

77,799

  1,058

 

78,857

 

 

 

 

**Operating Income**

 52,268

(951)

 

  51,317

 

 

 

 

 Other Income and Expense, net

     497

        --

 

    497

 

 

 

 

**Income  from Continuing Operations before Interest and Taxes**

  52,765

  (951)

 

 

51,814

 

 

 

 

  Interest expense

  11,139

      ---

 

 11,139

 

 

 

 

**Income from Continuing Operations before Income  Taxes**

                     41,626

        (951)

 

          40,675

 

 

 

  Income taxes

  17,043

    220

j

17,263

 

 

 

 

**Income (loss) from Continuing Operations before Effect of Change in  Accounting**

 24,583

(1,171)

 

23,412

 

 

 

 

**Discontinued Operations**

 

 

 

 

**  **Loss from discontinued  operations

(1,955)

(271)

 f, g, i

(2,226)

   Income tax benefit

    (745)

     (153)

j

 (898)

**Loss from Discontinued Operations**

 (1,210)

     (118)

 

(1,328)

 

 

 

 

**Income (loss) before Effect  of Change in Accounting**

  23,373

  (1,289)

 

22,084

 

 

 

 

**Effect of Change in  Accounting**

(21,359)

  3,717

h

(17,642)

 

 

 

 

**Net Income**

$  2,014

$2,428

 

$   4,442

**Net Income Per Share of Common Stock**

           $     0.15

        $   0.17

             $     0.32

SeeLegend descriptions below.

Restatement Adjustment Legend (dollars inthousands): 

a.     Recorded an adjustment to revenues of $19 in the first quarterand $24 in the second quarter in order to adjust the unrecorded gas costsbalance to equal the underlying gas costs detail.

b.      Recordedan adjustment to purchased gas costs of $64 in the first quarter and $86 in thesecond quarter to record changes to mark-to-market transactions recorded by NUIEnergy Solutions.

c.     Recorded an adjustment of $118 in each of the first two quartersto record rental expense for an operating lease on a straight-line basis.Previously, the company had recognized rent expense as paid on an operatinglease.

d.     Recorded adjustments to the pension credit of $349 in the firstquarter and $394 in the second quarter to adjust the pension credit asdetermined by the company's actuaries.

e.     Recorded an adjustment to expense certain previously deferredstart-up costs related to various business projects of  $(25) in the first quarter and $104 in thesecond quarter.

f.      Recorded an adjustment to expense certain costs that hadpreviously been deferred related to pending utility asset sales of  $(191) in the first quarter and $(49) in thesecond quarter.

g.     Recorded an adjustment to revenue of $686 in the first quarter toappropriately recognize revenue on certain TIC equipment sales, which werepreviously recognized prior to the completion of required installationobligations.

h.     Recorded an adjustment to the cumulative effect of a change inaccounting for goodwill of $5,718 (net of taxes of $2,001) in the first quarteras a result of changes to TIC's goodwill recorded in fiscal 2001.

i.      Recorded an adjustment to expense previously deferred developmentcosts related to NUI Environmental projects of $117 in the first quarter and$1,080 in the second quarter.

j.      Represents the income tax effects of all adjustments
  
**3.     Common Shareholders' Equity**

The components of common shareholders' equity were asfollows (dollars in thousands):

** **

**March 31,  2003**

**September 30,  2002**

Common stock, no par value

$287,600

$286,783

Shares held in treasury

(4,854)

(4,384)

Retained earnings

23,357

11,925

Unearned employee compensation

(3,413)

(4,949)

Accumulated other comprehensive loss

      (777)

   (1,123)

Total  common shareholders' equity

$301,913

$288,252

**4.      ****Acquisitionof Norcom, Inc.**

** **On March 22, 2002, the companyentered into an agreement to acquire certain assets of Norcom, Inc. (Norcom),including approximately 4,000 customer accounts.  The agreement provided for NUI Telecom to assume managementcontrol of Norcom as of March 1, 2002. Norcom had operating revenues of $3.9million, and $7.6 million for the three and six months ended March 31, 2003,respectively, and $0.4 million and $0.8 million of operating income for thethree and six months ended March 31, 2003, respectively. Norcom is anon-facilities-based provider of telecommunications services in the Northeastand Southeast regions of the United States and its customer accounts have beencombined with the company's NUI Telecom subsidiary. 

On August 28, 2002, thecompany completed its acquisition of Norcom, subject to post-closingadjustments. The purchase price totaled approximately $4.3 million and includedthe issuance of 216,039 shares of NUI common stock.
The following table summarizesthe estimated fair values of the assets acquired and liabilities assumed at thedate of acquisition (amounts in thousands).
Cash

$    653

Accounts  receivable

1,166

Equipment

7

Intangible  assets

2,160

Goodwill

 2,403

  Total assets acquired

6,389

Current  liabilities

 2,048

  Total liabilities assumed

 2,048

  Net assets acquired

$4,341

The acquired intangible assets relate to customerrelationships, which will be amortized over a 7-year period (see Note 7).

** 5.     Acquisitionof Telcorp, Ltd.**

** **On May 31, 2002, the companyentered into an agreement to acquire certain assets of Telcorp, Ltd. (Telcorp),including approximately 700 customer accounts. In addition, the company entered into a letter agreement with Telcorp,which provided that NUI Telecom assumemanagement control of the business effective April 1, 2002.  Telcorp had operating revenues of $1.7million and $3.4 million for the three and six months ended March 31, 2003,respectively, and $0.4 million and $0.8 million of operating income for thethree and six months ended March 31, 2003, respectively. Telcorp is anon-facilities-based reseller that provides a suite of advanced voice and dataservices to large and small businesses and its customer accounts have beencombined with the company's NUI Telecom subsidiary.

On September 1, 2002, thecompany completed its acquisition of Telcorp, subject to post-closingadjustments. The initial payment of the purchase price totaled approximately$3.5 million, and the remaining purchase price of approximately $3.8 millionwas paid during April 2003.

The following table summarizesthe estimated fair values of the assets acquired and liabilities assumed at thedate of acquisition (amounts in thousands). 

Accounts  Receivable

$     832

Equipment

      10

Intangible  assets

3,060

Goodwill

    397

  Total assets acquired

4,299

Current liabilities

    832

  Total liabilities assumed

    832

  Net assets acquired

$3,467

The acquired intangible assets relate to customerrelationships, which will be amortized over a 10-year period (see Note 7).

**6.     Goodwill**

** **The excess of the cost overthe fair value of net assets of acquired businesses is recorded as goodwill. OnOctober 1, 2001, the company adoptedStatementof Financial Accounting Standards No. 142, "Goodwill and Intangible Assets"(SFAS 142). The carrying value of goodwill for each of the company'ssubsidiaries is no longer subject to amortization, but must be tested forimpairment annually or earlier under certain circumstances.
The changes in the carryingamount of goodwill (net of amortization) for the six months ended March 31,2003, are as follows (in thousands):
**NUI Telecom**

**NUI Virginia Gas**

**TIC Enterprises**

**Total**

Balance  as of September 30, 2002

$7,585

$8,056

$3,485

$19,126

Additions  to goodwill 

     196    

      ---

      ---

      196

Balance  as of March 31, 2003

$7,781

*   *$8,056

    $3,485

    $19,322 

Thefollowing table sets forth the effect of SFAS 142 for the three and six-monthperiods ended March 31 (in thousands, except per share amounts):

**Three Months Ended**

**Six Months Ended**

**March 31,**

**March 31,**

**2003**

**2002**

**2003**

**2002**

 
 

 

 

 

 
Reported net income 

$12,153

$13,836

$19,308

      $4,442

 
Add back: Transitional impairment loss (net of  tax) 

        ---

        ---

        ---

                                 17,642

 
Net income 

$12,153

$13,836

$19,308

     $22,084

 
 

 

 

 

 
**Basic Earnings per Share:**

 

 

 

 

 
Reported net income

       $0.76

       $0.97

       $1.20

       $0.32

 
Add back: Transitional impairment loss (net 

  of  tax)

                 ---

                   ---

           ---

         1.25

 
Net income 

$0.76

$0.97

$1.20

         $1.59

 
** ***- As restated (seeNote 2)

**7.     AcquiredIntangible Assets**

** **The company has acquiredintangible assets, which are included in Other Assets on the ConsolidatedBalance Sheet at March 31, 2003 (in thousands):

**Gross Carrying Amount**

**Accumulated Amortization**

Development  rights

$2,200

$   (110)

Customer  relationships

  5,220

  (307)

  Total

$7,420

$(417)

** **The aggregateamortizationfor the three and six months ended March 31, 2003, was approximately $172,000and $344,000, respectively. Estimated annual amortization is expected to be approximately$688,000 for each fiscal year through September 30, 2007.

**8.     DiscontinuedOperations**

The company has adopted the provisions of Statementof Financial Accounting Standards No. 144, "Accounting for the Impairment orDisposal of Long-Lived Assets" (SFAS 144). This statement excludes from thedefinition of long-lived assets goodwill and other intangibles that are notamortized in accordance with SFAS 142. SFAS 144 requires that long-lived assetsto be disposed of by sale be measured at the lower of their carrying amount orfair value less cost to sell, whether reported in continuing operations or indiscontinued operations. SFAS 144 also expands the reporting of discontinuedoperations to include components of an entity that have been or will bedisposed of rather than limiting such discontinuance to a segment of abusiness. Accordingly, the revenues, costs and expenses, assets, liabilities,and cash flows of VCW, NC, NUI Environmental, and certain product lines of TIChave been segregated and reported as discontinued operations for all periodspresented.

On May 15, 2002, the companyagreed to sell the assets of its NC utility operation to Piedmont Natural Gasof North Carolina for approximately $24 million after post-closing adjustments.The transaction closed on September 30, 2002, after all regulatory approvalshad been obtained. NC had operating revenues of $9.4 million, operating marginsof $4.3 million, and operating income of $1.8 million that have been includedin discontinued operations for the six months ended March 31, 2002.

OnJuly 16, 2002, the company ceased the operations of its telephone equipment andUnited States Postal Service product lines of TIC. These product lines had operating revenuesof $7.5 million, operating margins of $3.5 million, and operating losses of$3.9 million that have been included in discontinued operations for the sixmonths ended  March 31, 2002.

During September 2002, thecompany approved a plan to sell itsNUI Environmental subsidiary, at which time the company began to actively seeka buyer. NUI Environmental has not generated operating revenues as ofyet, and incurred operating losses of $0.6 million and $1.3 million that havebeen included in discontinued operations for the six months ended March 31, 2003and 2002, respectively.

**9.     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  March 31,****Six Months Ended  March 31,**
**2003**
**2002**
**2003**
**2002**
 
 
** **Income from continuing operations
  $18,428      $15,420      $26,044      $23,412    
 
** **Loss from discontinued operations
  (406)    (1,584)    (867)    (1,328)  
 
  Effect of change in accounting
 (5,869)     ---  (5,869)(17,642)
 
  Net income
$12,153 $13,836$19,308   $  4,442
 
 
** **Weighted average shares outstanding
16,07314,21816,04914,069
 
 
**  Earnings (loss) per share:**

 
   Income from continuing operations
$1.15$1.08$1.62$1.66
 
   Loss  from discontinued operations
  (0.02)    (0.11)    (0.05)    (0.09)  
 
   Effect  of change in accounting
(0.37)   ---$0.37)(1.25)
 
   Net income
$0.76$0.97$1.20$0.32
 
The company does nothave dilutive shares as of March 31, 2003. Basic and diluted earnings per sharefor the three and six-month periods ended March 31, 2002 were the same.

*- As restated(see Note 2)

**10.  Comprehensive Income**

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

** **

**Three Months Ended**

**Six Months Ended**

**March 31,**

**March 31,**

**2003**

**2002*******

**2003**

**2002*******

 
 
** **Net income

$12,153

$13,836

$19,308

$4,442

 
 
** **Other comprehensive income:

 
  Derivatives qualifying as hedges, net

       345

         ---

       345

       ---

 
  Total comprehensive income

$12,498

$13,836

$19,653

$4,442

 
*- As restated (see Note 2)

Accumulated other comprehensive income, included in CommonShareholders' Equity on the Consolidated Balance Sheet was ($777) at March 31,2003, and ($1,123) at September 30, 2002. Included in the balance at March 31,2003, was ($1,123) related to minimum pension liability (net of $780 in taxes)and $345 related to derivatives qualifying as hedges (net of $240 in taxes).

The derivativehedges described above cover various periods of time ranging from April 2003 toMarch 2004.

**11.  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 Accounting StandardsNo. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"which require disclosure of the pro forma effects on net earnings and earningsper share as if compensation cost had been recognized based upon the fairvalue-based method at the date of grant for options awarded.

Had employee compensation expense been recognizedbased on the fair value of the stock options on the grant date under themethodology prescribed by SFAS 123, the company's net income and dilutedearnings per share for the periods ended March 31 would have been as shown inthe following table (in thousands, except for per share amounts).

**Three Months Ended**

**Six Months Ended**

**March 31,**

**March 31,**

**2003**

**2002*******

**2003**

**2002*******

 
 

 

 

 

 
Net income as reported

$12,153

$13,836

$19,308

$4,442

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

   (482)

     (462)

  (964)

   (456)

 
Pro forma net income

$11,671

$13,374

$18,344

$3,986

 
 

 

 

 

 
**Earnings per Share:**

 

 

 

 

 
Basic & Diluted- as reported

           $0.76

          $0.97

        $1.20

           $0.32

 
 

 

 

 

 
Basic & Diluted- pro forma

$0.73

$0.94

        $1.14

          $0.28

 
*- As restated (see Note 2)

**12.  NotesPayable to Banks**

On February 12, 2003, thecompany and NUI Utilities each entered into a new revolving credit facilitythat replaced their respective previous credit facilities.  The company's new credit facility consistsof a credit agreement that allows it to borrow up to approximately $38.1million, and NUI Utilities' new credit facility consists of a credit agreementand a 364-day bridge loan, which allows NUI Utilities to borrow up to anaggregate of approximately $141.9 million. The new credit agreements and the bridge loan agreement mature onFebruary 11, 2004. The credit agreements may be extended in successive 364-dayincrements upon obtaining approval of all the respective lenders.  The company's credit agreement and NUIUtilities' credit agreement and bridge loan agreement require the company andNUI Utilities, respectively, to meet certain covenants and limitations as wellas maintain certain financial ratios. Included in these covenants are provisions that limit the ability ofeach of the company and NUI Utilities to incur future indebtedness, makecapital expenditures above certain levels, enter into sale-leasebacktransactions, pledge or sell assets, make acquisitions, merge and pay dividendson common stock, and prohibit the creation of guarantees (other than those inthe normal course of business).  Thecompany must maintain a fixed charge coverage ratio of not less than 1.50x andNUI Utilities must maintain a fixed charge coverage ratio of 1.75x. The companyand NUI Utilities each must maintain leverage ratios of not more than 0.65 fromMarch 1 through August 31 and not more than 0.70 from September 1 throughFebruary 28 (or 29, if applicable). In addition, if the amounts available underthe NUI Utilities' credit agreement are increased, any borrowings under suchincrease first must be used to repay any amounts outstanding under the bridgeloan agreement.  The NUI Utilities'credit agreement and bridge loan agreement also limit the payment of dividendsfrom NUI Utilities to the company to not more than $100 million.  The company and NUI Utilities repaid all ofthe borrowings outstanding under their prior credit facilities aggregating $195million from the borrowings under the company's and NUI Utilities' new creditagreements, NUI Utilities' bridge loan agreement and cash on hand.  

At March 31, 2003, aggregate outstanding borrowingsunder the company's credit agreements were $175.3 million with a combinedweighted average interest rate of 4.4 percent. Unused amounts under the creditagreements at March 31, 2003, were approximately $4.7 million.  Also, as of March 31, 2003, approximately$79.3 million of cash was held as short-term investments, a substantial portionof which was being held toward repayment of short-term borrowings under thecredit agreements.

The weighted average daily amounts of outstandingborrowings under the credit agreements and the weighted average interest rateson those borrowings were $156.5 million at 2.7 percent for the six-month periodended March 31, 2003, and $199.5 million at 1.5 percent for the six-monthperiod ended March 31, 2002.

** 13.  Contingencies**

*Joint Venture with Duke Energy*. OnApril 30, 2001, the company announced an agreement with a unit of Duke Energyto develop a natural gas storage facility in Saltville, Virginia. A subsidiaryof VGC and Duke Energy Gas Transmission (DEGT) have created a limited liabilitycompany, Saltville Gas Storage Company LLC (LLC).  VGC received final regulatory approvals during January 2003 andcontributed certain storage assets valued at approximately $16.3 million to theLLC. DEGT has contributed an equal amount (approximately $16.3 million) ofcapital required to expand the facility for its intended purpose.  To the extent the LLC determines it needsadditional funding (which decision can only be made jointly by the company andDEGT), the company and DEGT are obligated to fund the development of the LLCequally.

The company currentlyestimates its share of future funding needs to be approximately $18.3 millionin fiscal 2003, $7.3 million in fiscal 2004, $0.8 million in fiscal 2005, $0.7million in fiscal 2006, and $0.8 million in fiscal 2007. The company isexploring various options to satisfy its funding requirements for the jointventure during fiscal 2003, including a long-term (12 to 15 year) capital leasewith a bank for a compressor station.

*Guarantees*. Thecompany has guarantees of approximately $323 million to 76 counterparties as ofMarch 31, 2003, in support of NUI Energy Brokers' trading activities. Theseguarantees are necessary to facilitate trading with a broad group of potentialcounterparties, although typically NUI Energy Brokers uses only a fraction ofthe issued guarantees at any given time. Further, since NUI Energy Brokers hasnetting agreements in place with most of its counterparties, the guaranteeswould apply only to net balances owed to its respective counterparties withwhich it has such agreements. As of March 31, 2003, the amount covered byoutstanding guarantees was approximately $53.3 million and the net balance owedunder these guarantees was approximately $32.7 million.

NUI Telecom has a contractwith a service provider, which guarantees that NUI Telecom will purchase aminimum of $400,000 of services monthly through February 2004. The guaranteewas necessary to support NUI Telecom's purchase of capacity to use in theprovision of telecommunications services. The penalty for purchasing less thanthat amount is 25 percent of each dollar below $400,000. NUI Telecom hashistorically purchased services in excess of $400,000 from the serviceprovider, and accordingly has not recorded any additional amounts owed in orderto satisfy the guarantee at March 31, 2003.

* EnvironmentalMatters.*The company owns, or previously owned, certain properties located in the statesof New Jersey, North Carolina, South Carolina, Pennsylvania, New York andMaryland on which manufactured gas plants (MGP) were operated by the company orby other parties in the past. In New Jersey, the company is currentlyconducting remedial activities at such properties with oversight from the NewJersey Department of Environmental Protection and anticipates the initiation ofsuch activities in the state of North Carolina within the next five years.  Although the actual cost of futureenvironmental investigation and remediation efforts cannot be reasonably estimated,the company has recorded a total reserve forenvironmental investigation and remediationcosts of approximately $33.5 million, which the company believes is theprobable minimum amount that the company may expend over the next 30years.  Of this reserve, approximately$29.9 million relates to remediation of the New Jersey MGP properties andapproximately $3.6 million relates to MGP properties located outside the stateof New Jersey.

The company's prudently incurred remediation costsfor the New Jersey MGP properties have been authorized by the New Jersey Boardof Public Utilities (NJBPU) to be recoverable in rates through its MGPRemediation Adjustment Clause. As a result, the company has begun rate recoveryof approximately $8.2 million of environmental costs incurred through June 30,2000. Recovery of an additional $1.7 million in environmental costs incurredbetween July 1, 2000, and June 30, 2002, is currently pending NJBPU approval.Accordingly, the company has recorded a regulatory asset of approximately $36.0million as of March 31, 2003, reflectingthe future recovery of both incurred costs and future environmental remediationliabilities in the state of New Jersey. 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. With respect to costs associated with the MGP properties located outsideNew Jersey, the company is currently pursuing or intends to pursue recoveryfrom ratepayers, former owners and operators, and/or insurance carriers.Although the company has been successful in recovering a portion of MGPremediation costs incurred outside New Jersey from the company's insurancecarriers, the company is not able to express a belief as to the success of anyadditional recovery efforts. The company is working with the regulatoryagencies to prudently manage its MGP costs so as to mitigate the impact of suchcosts on both ratepayers and shareholders.

*Amendment of Note Purchase Agreement.* In January 2003, the company became aware that it wasin technical default under certain covenants contained in its Note PurchaseAgreement dated as of August 20, 2001. On January 24, 2003, the companyobtained a 30-day waiver of certain covenant violations contained in the NotePurchase Agreement from the holders of the notes (the noteholders). Thecovenants consisted of the minimum fixed charge coverage ratio, restrictions onthe ability to enter into sale and leaseback transactions, entering intoagreements imposing restrictions on subsidiaries' ability to pay dividends tothe company and make advances to and investments in the company, and therequirement that the company deliver certain financial information andstatements of cash flows to the noteholders. Prior to obtaining the waiver, thecompany was in technical default under the Note Purchase Agreement duringfiscal 2002. 

On February 20, 2003, the company and the noteholdersamended the Note Purchase Agreement for the purpose of curing all the technicaldefaults. The amended agreement contained certain provisions that were subjectto the approval of, or required action by, the banks participating in thecompany's $38.1 million 364-day credit facility. These provisions were: 1) theapproval by the banks of an increase in the interest rate under each of thesenior notes of 50 basis points (or 0.50 percent), 2) the approval by the banksof the execution by certain of the company's non-regulated subsidiaries (the"non-restricted subsidiaries" as defined in the company's bank credit facility)of guarantees (the senior note guarantees) of prompt payment when due of theindebtedness under the senior notes issued pursuant to the Note PurchaseAgreement, and 3) the execution by the banks of an Inter-creditor Agreement,reasonably satisfactory to the banks and noteholders, providing for thepro-rata sharing by the lenders and the noteholders of any proceeds received byany of the lenders under any of the bank guarantees or the senior noteguarantees. The amendment also provided for the establishment of a "PriorityIndebtedness" covenant requiring the company to maintain a ratio of "prioritydebt" (all indebtedness of the company secured by liens plus all indebtednessof the restricted subsidiaries, as defined in the agreement) to consolidatedassets of not more than 50 percent.

On March 31, 2003, thecompany and the banks amended the company's 364-day credit facility to approvethe interest rate change with respect to the senior notes, to approve theguarantee by the non-restricted subsidiaries of the prompt payment when due ofthe indebtedness under the senior notes, and to approve the execution of theInter-creditor Agreement referenced above. This amendment to the company'scredit facility also provided for a new pricing grid, which increased thecompany's cost of borrowing under the credit facility of 25 basis points (0.25percent).

In addition, on April 1,2003, the company and the noteholders amended the Note Purchase Agreement toreflect the above changes and to make certain clarifying language amendments. 

*Agreement to Acquire Assetsof Norcom Agency Sales, Inc.* On March 22, 2002, the company entered into anagreement to acquire certain assets of Norcom Agency Sales, Inc. (NAS). Theagreement provides for the company to pay the seller, Norcom, a purchase priceequal to a multiple of total sales to new customers obtained by NAS as agentfor NUI Telecom during the period April 1, 2002, through October 31, 2003. Themultiple to be paid will be determined based on the actual new customerrevenues generated by NAS for the month of October 2003, and is subject topost-closing adjustments. 

The purchase price will bepaid in NUI common stock. The number ofshares of NUI common stock to be issued will be determined by dividing thetotal purchase price by the average closing price of NUI's common stock for thefirst 20 of the 25 consecutive trading days immediately preceding October 31,2003. The company expects to close on this transaction in or aroundFebruary 2004.

*Gas ProcurementContracts.*Certain of the company's long-term contracts for the supply, storage anddelivery of natural gas include fixed charges that amount to approximately$53.3 million annually.  The companycurrently recovers, and expects to continue to recover, such fixed chargesthrough its purchased gas adjustment clauses. As a result of the unbundling of natural gas services in New Jersey,these contracts may result in the realization of stranded costs by thecompany.  Management believes theoutcome of these actions will not have a material adverse effect on thecompany's results.  The company also is committed to purchase frommultiple suppliers, at market-related prices, minimum quantities of gas that,in the aggregate, are approximately 2.1 billion cubic feet (Bcf) per year or topay certain costs in the event the minimum quantities are not taken. During thefiscal year ended September 30, 2002, the company's continuing utilityoperations purchased a total of 36.0 Bcf, and accordingly the company expectsthat minimum demand on its systems for the duration of these contracts willcontinue to exceed these minimum purchase obligations.

*Other.*Between October 28, 2002 and December 20, 2002, fivesubstantially similar civil actions were commenced in the United StatesDistrict Court for the District of New Jersey, in which the plaintiffs allegethat the company and its president and chief executive officer violated federalsecurities laws by issuing false statements and failing to disclose informationregarding the company's financial condition and current and future financialprospects in its earnings statements, press releases, and in statements toanalysts and others.  By orders datedDecember 19, 2002, January 22, 2003 and February 3, 2003, the five actions wereconsolidated into one action captioned In re NUI Securities Litigation.  The five consolidated lawsuits include: (1)an action captioned 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 Thomas Davis, on behalf of himself andall others similarly situated v. NUI Corporation and John Kean, Jr., filedin the United States District Court for the District of New Jersey on November6, 2002; (4) an action captioned Marvin E. Russell, on behalf of himself andall others similarly situated v. NUI Corporation and John Kean, Jr., filedin the United States District Court for the District of New Jersey on December10, 2002; and (5) an action captioned Phyllis Waltzer, on behalf of herselfand all others similarly situated v. NUI Corporation and John Kean, Jr.,filed in the United States District Court for the District of New Jersey onDecember 20, 2002. By order dated February 3, 2003, a Lead Plaintiff, LeadCounsel and Liaison Counsel were appointed in the consolidated action. Bystipulation of the parties, an Amended Consolidated Class Action Complaint wasfiled on May 12, 2003, and responsive pleadings are to be filed thirty daysthereafter. No discovery has yet occurred. The Amended Complaint, brought onbehalf of a putative class of purchasers of NUI's common stock between November8, 2001 and October 17, 2002, asserts claims under Section 10(b), including Rule10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act against thecompany, its president and chief executive officer, and its chief financialofficer. Specifically, the 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, and failingto properly record, bad debt costs, (b) allegedly attributing the company'srising costs to incorrect and immaterial factors, and (c) purportedly pursuingillegal telecommunications billing practices. The Amended Complaint seeksunspecified monetary damages on behalf of the class, including costs andattorneys fees. Furthermore, on December 23, 2002, a law firm made a publicannouncement with respect to a lawsuit purportedly filed in the SouthernDistrict of New York on behalf of a putative class of purchasers of NUI'scommon stock between November 8, 2001 and October 17, 2002 against NUICorporation and John Kean, Jr., alleging violations under Section 10(b),including Rule 10b-5 promulgated thereunder, and Section 20(a) of the ExchangeAct.  Specifically, the announcementalleges that the company knowingly or recklessly failed to properly recordfixed cost expenses, accrue necessary pension expenses and reserve adequateamounts for its self-insured medical benefits in its quarterly financialstatements.  At this time, the companyhas not been served with the purported complaint. Although the company intendsto vigorously defend these lawsuits, it is not possible at this time todetermine a likely outcome.

Thecompany is involved in other various 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.

**14. New Accounting Standards**

During fiscal 2002, thecompany adopted Statement of Financial Accounting Standards No. 144,"Accounting for Impairment and Disposal of Long-lived Assets" (SFAS 144). SFAS144 supersedes SFAS 121 and the provisions of APB Opinion No. 30, "Reportingthe Results of Operations- Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions" with regard to reporting the effects of a disposal of a segmentof a business. SFAS 144 establishes a single accounting model for assets to bedisposed of by sale and addresses several SFAS 121 implementation issues. As aresult of the adoption of this standard, the company has classified theoperating results of subsidiaries to be disposed of as "DiscontinuedOperations" in the Consolidated Statements of Income; assets and liabilities ofthese subsidiaries as "Held for Sale" in the Consolidated Balance Sheets; and"Changes in Assets and Liabilities Held for Sale" in the Consolidated Statementof Cash Flows. See further discussion of the subsidiaries being disposed of inNote 8.

In August 2001, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 143, "Accounting for Asset Retirement Obligations"(SFAS 143). This statement establishes accounting standards for recognition andmeasurement of liabilities for asset retirement obligations and the associatedasset retirement costs. The company adopted this statement on October 1, 2002,and recorded an asset retirement obligation of approximately $5.6 million withoffsetting amounts to property, plant and equipment and regulatory assets. 

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 the accountingfor certain energy contracts. The main provisions of EITF 02-03 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 applies 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, 2002(January 1, 2003 for NUI) and the cumulative effect of a change in accountingprinciple must be reported upon initial application.

-       The EITF minutes relating to EITF 02-03 indicate that anentity should not record unrealized gains or losses at the inception ofderivative contracts unless the fair value of each contract in its entirety isevidenced by quoted market prices or other current market transactions forcontracts with similar terms and counterparties.

-       The EITF reaffirmed that EITF 02-03 requires gains and losseson derivative energy trading contracts (whether realized or unrealized) to bereported as revenue on a net basis in the income statement.

The EITF deliberations and consensus on EITF 02-03will not affect the company's cash flows. Additionally, the company continuedto mark all existing energy-related contracts to market based on EITF 98-10during the first quarter of fiscal 2003 prior to applying the new consensus.However, the consensus required NUI to record a cumulative effect adjustment toconvert any contracts that did not meet the definition of a derivative underSFAS 133 to accrual accounting effective January 1, 2003.

The primary contracts that were affected as a resultof applying 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 continue to bemarked-to-market through earnings. The cumulative effect adjustment to convertthe contracts that did not meet the definition of a derivative under SFAS 133to accrual accounting effective on January 1, 2003, was $9.9 million beforetaxes.

Additionally, in accordance with one of theprovisions of EITF 02-03, the company has recorded the margins earned under the accounting guidance of EITF 98-10 by both NUIEnergy Brokers and NUI Energy on a net basis. In previous periods, both NUIEnergy Brokers and NUI Energy included both the cost of the purchased gas andthe operating margin earned for all physical transactions within operatingrevenues on the Consolidated Statement of Income. For financial trades such asfutures, options and swap transactions, NUI Energy Brokers and NUI Energy hadhistorically recorded only the operating margin component, but within thepurchased gas and fuel line item on the Consolidated Income Statement. Theadoption of net-basis reporting has no effect on these transactions or cashflows other than to reclassify and present total margins earned within theoperating revenues line item on the Consolidated Statement of Income. Inaccordance with the EITF, all prior periods have been reclassified to conformto this presentation. As a result of net-basis reporting, NUI reduced operatingrevenues and purchased gas and fuelline items by $89.3 million and $153.0 million forthe three and six months ended March 31, 2002, respectively, with no changes tototal operating margins.

In June 2002, the FASBissued Statement of Financial Accounting Standards No. 146, "Accounting forCosts Associated with Exit or Disposal Activities" (SFAS 146). This statementis effective for exit or disposal activities initiated after December 31, 2002.The adoption of this statement had no impact on the company's net income orfinancial position.

In November 2002, the FASB issued FASBInterpretation No. 45, "Guarantor's Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN45).  FIN 45 elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it has issued.It also requires a guarantor to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee. The initial recognition and measurement provisions of FIN 45 applyto guarantees issued or modified after December 31, 2002. The company hasincluded these disclosures under "Guarantees" in Note 13.

In December 2002, the FASB issued Statement ofFinancial Accounting Standards No. 148, "Accounting for Stock-BasedCompensation- Transition and Disclosure" (SFAS 148). This statement amendsStatement of Financial Accounting Standards No. 123, "Accounting forStock-Based Compensation," to provide alternative methods of transition for anentity that voluntarily changes to a fair value based method of accounting forstock-based employee compensation and amends disclosure provisions of thatStatement to require prominent disclosure about the effects on reported netincome of an entity's accounting policy decisions with respect to suchcompensation. The company expects to continue to account for stock-basedcompensation in accordance with Accounting Principles Board Opinion No. 25 andhas provided the prominent disclosures required in Note 11.

In January 2003, the FASBissued FASB Interpretation No. 46, "Consolidation of Variable InterestEntities" (FIN 46). The objective of FIN 46 is to improve financial reportingby companies involved with variable interest entities.  A variable interest entity is a corporation,partnership, trust or any other legal structure used for business purposes thateither (a) does not have equity investors with voting rights, or (b) has equityinvestors that do not provide sufficient financial resources for the entity tosupport its activities. Historically, entities generally were not consolidatedunless the entity was controlled through voting interests. FIN 46 changes that,by requiring a variable interest entity to be consolidated by a company if thatcompany is subject to a majority of the risk of loss from the variable interestentity's activities or entitled to receive a majority of the entity's residualreturns or both. A company that consolidates a variable interest entity iscalled the "primary beneficiary" of that entity. FIN 46 also requiresdisclosures about variable interest entities that a company is not required toconsolidate 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 FIN46 apply to existing entities in the first fiscal year or interim periodbeginning after June 15, 2003. Also, certain disclosure requirements apply toall financial statements issued after January 31, 2003, regardless of when thevariable interest entity was established. The company is currently evaluatingthe consolidation requirements with respect to its joint venture with DukeEnergy (see Note 13).

In April 2003, the FASB issuedStatement of Financial Accounting Standards No. 149, "Amendment of Statement133 on Derivative Instruments and Hedging Activities" (SFAS 149). Thisstatement amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts and hedging activities under SFAS 133. This statement iseffective for contracts entered into or modified after June 30, 2003. Thecompany does not expect the adoption of this statement will have a materialimpact on the company's net income or financial position.
**15.   Business Segment Information**
Thecompany's operations are organized and managed as three primary segments:Distribution Services, Energy Asset Management (formerly Wholesale Energy Marketing and Trading), and Retail andBusiness Services. The Distribution Services segment distributes natural gas inthree states through the company's regulated utility operations, as well asengaging in appliance leasing, repair and maintenance operations and off-systemgas sales. The Energy Asset Management segment reflects the operations of thecompany's NUI Energy Brokers and all of the VGC subsidiaries. The Retail andBusiness Services segment reflects the operations of the company's NUI Energy,UBS, and NUI Telecom subsidiaries, the network and wireless product lines ofTIC, which are being managed by NUI Telecom. The company also has corporate operations that do not generate anyrevenues.

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

**Three Months Ended**

**Six Months Ended**

**March 31,**

**March 31,**

**(Dollars in thousands)**

**2003**

**2002*******

**2003**

**2002*******

 
**Revenues:**

 
** **Distribution Services

$231,827

$169,969

$397,448

$314,926

 
** **Energy Asset Management

17,187

5,778

21,426

15,547

 
** **Retail and Business Services

15,621

11,907

32,162

21,038

 
  Intersegment Revenues

     (1,848)

     (2,383)

     (3,831)

     (5,021)

 
Total  Revenues

$262,787

$185,271

$447,205

$346,490

 
 
**Operating Margins:**

 
  Distribution Services

$68,469

$60,981

$120,010

$106,561

 
  Energy  Asset Management

16,622

5,600
20,567
15,219

 
  Retail  and Business Services

5,511

6,098

12,484

11,089

 
   Intersegment Operating Margins

      (305)

   (1,286)

      (869)

  (2,695)

 
Total  Operating Margins

$90,297

$71,393

$152,192

$130,174

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

 
** **Distribution Services

$28,603

$31,415

$46,692

$46,773

 
** **Energy Asset Management

13,188

2,481

14,015

8,360

 
  Retail and Business Services

     (4,842)

      76

      (5,584)

        (52)

 
Total  Pre-Tax Operating Income

$36,949

$33,972

$55,123

$55,081

 
 
*-As restated (see Note 2)

A reconciliation of thecompany's segment pre-tax operating income to amounts reported on theconsolidated financial statements is as follows:

**Three Months Ended**

**Six Months Ended**

**March 31,**

**March 31,**

**(Dollars in thousands)**

**2003**

**2002*******

**2003**

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

$36,949

$33,972

$55,123

$55,081

Non-segment  pre-tax operating income (loss)

       (910)

      (1,791)

        (1,468)

      (3,764)

 Pre-Tax Operating Income

$36,039

$32,181

$53,655

$51,317
 *- As restated (see Note 2)
 
**NUI Corporation and  Subsidiaries Summary Consolidated Operating Data**

 
 

**Three Months EndedMarch 31,**

**Six Months Ended****March 31,**

 
 

**2003**

**2002*******

**2003**

**2002*******

**Operating Revenues  (Dollars in thousands)**

 

 

 

 

Firm Sales:

 

 

 

 

     Residential

$117,576

$94,809

$195,406

$168,904

     Commercial

43,608

33,157

74,445

62,643

     Industrial

2,561

2,531

5,330

5,084

Interruptible Sales

16,153

9,182

30,892

17,961

Unregulated Sales 

46,058

23,682

71,806

51,273

Transportation Services

15,513

14,718

27,740

26,086

Customer Service, Appliance Leasing and Other

   21,318

   18,700

   42,139

   37,498

Total Revenues

262,787

 196,779

447,758

 369,449

Revenues by Discontinued Operations

           ---

  (11,508)

      (553)

  (22,959)

Operating Revenues from Continuing Operations

$262,787

$185,271

$447,205

$346,490

 

 

 

 

**Gas Sold or Transported  (in MMcf)**

 

 

 

 

Firm Sales:

 

 

 

 

     Residential

12,106

9,560

19,813

15,955

     Commercial

4,590

3,719

7,895

6,573

     Industrial

423

382

656

687

Interruptible Sales

2,186

2,555

5,021

5,091

Unregulated Sales 

25,561

30,942

58,292

57,493

Transportation Services

 10,302

 11,515

  20,286

  21,022

Total Gas Sold or Transported

55,169

 58,672

111,964

 106,821

Gas Sold or Transported by Discontinued Operations

       ---

(2,393)

    (239)

  (4,026)

Gas Sold or Transported by Continuing Operations

55,169

56,279

111,725

102,795

 

 

 

 

**Average Utility Customers  Served**

 

 

 

 

Firm Sales:

 

 

 

 

    Residential

340,913

356,030

347,271

356,763

    Commercial

21,830

24,006

22,636

24,054

    Industrial

186

264

263

264

Interruptible Sales

25

41

29

41

Transportation

    4,122

    4,033

     4,199

     4,088

Total Average Utility Customers Served

367,076

384,373

374,398

385,210

Average Utility Customers Served by Discontinued   Operations

         ---

(20,573)

  (6,548)

(20,706)

Average Utility Customers Served by Continuing  Operations

367,076

363,800

367,850

364,504

 

 

 

 

**Degree Days in New Jersey**

 

 

 

 

Actual

2,860

2,116

4,688

3,423

Normal

2,529

2,715

4,242

4,527

Percentage variance from normal

           13%  colder

        22%  warmer

         11%  colder

        24%  warmer

 

 

 

 

**Employees (period end)**

1,114

1,420

 

 

*-As restated (see Note 2 of the Notes to the Consolidated Financial Statements)
**Item 2.  Management's Discussion and Analysis ofFinancial Condition and Results of Operations**
** **The following discussion and analysis should be read inconjunction with the unaudited condensed consolidated financial statements ofNUI Corporation included elsewhere herein and with the company's Annual Reporton Form 10-K for the fiscal year ended  September 30, 2002.
Overview
The following discussion and analysis refers to NUICorporation and its subsidiaries (collectively referred to as "NUI," the"company," "we," or "our"). The company is a diversified energy company that isprimarily engaged in the sale and distribution of natural gas, wholesale energyportfolio and risk management, retail energy sales and telecommunications. Itslocal distribution operations provide natural gas and related services duringfiscal 2003 to more than 367,000 customers in four states along the eastern seaboard of the United States and compriseElizabethtown Gas Company (New Jersey), City Gas Company of Florida, Elkton Gas(Maryland), and Virginia Gas (VGC). The company sold its North CarolinaGas (NC) utility operation during September 2002, and sold its Valley CitiesGas and Waverly Gas (VCW) utility operations during November 2002. VGC is alsoengaged in other activities, such as pipeline operation and natural gasstorage. The company's non-regulated subsidiaries include NUI Energy, Inc. (NUIEnergy), an energy retailer; NUI Energy Brokers, Inc. (NUI Energy Brokers), awholesale energy portfolio and risk management subsidiary; NUI EnvironmentalGroup, Inc. (NUI Environmental), an environmental project developmentsubsidiary; Utility Business Services, Inc. (UBS), a geospatial, billing andcustomer information systems and services subsidiary; NUI Telecom, Inc. (NUITelecom), a non-facilities based telecommunications services subsidiary; andTIC Enterprises, LLC (TIC), a sales outsourcing subsidiary. 

As of March 31, 2003, the company has classified NC,VCW, NUI Environmental, and certain product lines of TIC as discontinuedoperations (see Note 8 of the Notes to the Consolidated Financial Statements).

**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, 2003 and 2002. Theresults of operations for fiscal 2001 and 2000, as well as the first threequarters of fiscal 2002 have been restated (see Note 2 of the Notes to theConsolidated Financial Statements). Followingthis discussion is a more detailed overview of the results for NUI's threebusiness segments.

**Net Income.**  NUIhad net income of $12.2 million, or $0.76 per share, for the three months endedMarch 31, 2003, as compared to $13.8 million, or $0.97 per share, for the threemonths ended March 31, 2002.  Thedecrease in net income during the current three-month period was primarily dueto the company's adoption of the provisions of EITF 02-03, which required thecompany to record a cumulative effect adjustment related to certain energycontracts of approximately $5.9 million (after-tax), or $0.37 share (see Note14 of the Notes to the Consolidated Financial Statements). Partially offsettingthis decrease were increases in income from continuing operations ofapproximately $3.0 million and reduced losses from discontinued operations ofapproximately $1.2 million (see separate discussions below).

NUIhad net income of $19.3 million, or $1.20 per share, for the six months endedMarch 31, 2003, as compared to $4.4 million, or $0.32 per share, for the sixmonths ended March 31, 2002. The increase in income during the currentsix-month period was primarily due to the company's adoption of Statement ofFinancial Accounting Standards No. 142, "Goodwill and Intangible Assets,"during the first quarter of the prior fiscal year, which resulted in aone-time, transitional impairment charge during the three months ended December31, 2001, of $17.6 million (after-tax), or $1.25 per share (see Note 6 to the Notesto the Consolidated Financial Statements). As previously discussed, the company was required to record a cumulativeeffect adjustment of approximately $5.9 million (after-tax) during the currentfiscal year related to the adoption of EITF 02-03. During the six months endedMarch 31, 2003, the company had increased income from continuing operations ofapproximately $2.6 million and reduced losses from discontinued operations ofapproximately $0.5 million as compared to the same period during the prior fiscalyear. 

**Income from Continuing Operations.**  Income from continuing operations was $18.4 million, or $1.15 pershare, for the three-month period ended March 31, 2003, compared with $15.4million, or $1.08 per share, for the same period in fiscal 2002. The currentthree-month period increase is primarily due to higher operating margins at thecompany's Energy Asset Management segment as a result of unrealized margins byNUI Energy Brokers associated with gas supply procurement contracts related toforecasted sales by NUI Energy; increased margins due to weather that was 35percent colder than the three-month period ended March 31, 2002, and additionalmargins which resulted from the base rate increase by the company's natural gasdistribution company in New Jersey that went into effect on November 22, 2002;and increased margins by the company's telecommunications subsidiary.  These increases were partially offset byseverance and other costs associated with exiting the company's retail energymarketing business, as well as increases in bad debts, pension, insurance, bankfees, medical and other operating expenses during the three-month period endedMarch 31, 2003.  

The decrease in earnings pershare for the three months ended March 31, 2003, as compared with the sameperiod during the prior fiscal year, reflects the effect of dilution as aresult of increased shares outstanding. DuringMarch 2002, NUI issued 1.725 million shares of itscommon stock for net proceeds of approximately $37.0 million, and also issuedapproximately 0.5 million shares of common stock related to certainacquisitions and benefit plans during fiscal 2002.

Income from continuingoperations was $26.0 million, or $1.62 per share, for the six-month periodended March 31, 2003, compared with $23.4 million, or $1.66 per share, for thesame period in fiscal 2002. The current six-month period increase is primarilydue to increased operating margins due to weather that was 37 percent colderthan the six-month period ended March 31, 2002; a base rate increase by thecompany's natural gas distribution company in New Jersey previously noted;unrealized margins associated with gas supply procurement contracts related toforecasted sales by NUI Energy; and increased margins by the company's telecommunicationssubsidiary. These increases were partially offset by severance and other costsassociated with exiting the company's retail energy marketing business, as wellas increases in bad debt reserves, pension, insurance, bank fees, medical and otheroperating expenses during the six-month period ended March 31, 2003.  

**Discontinued Operations.**  After-taxlosses from discontinued operations for the three months ended March 31, 2003,were $0.4 million, or $0.02 per share, compared to $1.6 million, or $0.11 pershare during the prior fiscal year. The reduced losses during the fiscal 2003quarter were primarily due to the closure of two product lines of TIC prior tothe start of the current fiscal year. These product lines had losses ofapproximately $2.1 million for the three months ended March 31, 2002. Thelosses during the three-months ended March 31, 2003 relate to approximately$0.3 million of losses incurred by NUI Environmental and $0.1 million ofpost-closing adjustments related to the sale of Valley Cities Gas and WaverlyGas (see Note 8 of the Notes to the Consolidated Financial Statements).

After-taxlosses from discontinued operations for the six months ended March 31, 2003,were $0.9 million, or $0.05 per share, compared to $1.3 million, or $0.09 pershare during the prior fiscal year. The reduced losses during fiscal 2003 wereprimarily due to the closure of two product lines of TIC prior to the start ofthe current fiscal year. These product lines had losses of approximately $2.4million for the six months ended March 31, 2002. These losses during the priorfiscal year were partially offset by $1.9 million of income from the NC and VCWutility operations, which were sold during September 2002 and November 2002,respectively. These utility operations incurred losses (including post-closingadjustments) of approximately $0.5 million for the six months ended March 31,2003. NUI Environmental had losses of approximately $0.4 million and $0.8million for the six month periods ended March 31, 2003 and 2002, respectively.
***Business Segment Review ofResults of Operations***
The following is a discussion of the company'sbusiness segment results of operations and is presented based on Income fromContinuing Operations before Interest and Taxes. Included in operations andmaintenance expenses for each of NUI's business segments are allocations ofcorporate costs related to shared service functions such as human resources,accounting and information technology, which are allocated based on thecompany's cost allocation policy. In addition, the company has corporateoperations that incurred operations and maintenance expenses of $0.6 millionand $1.5 million for the three-month periods ended March 31, 2003 and 2002,respectively, and $0.9 million and $2.1 million for the six-month periods endedMarch 31, 2003 and 2002, respectively, principally related to the company'sinvestment in various business ventures, which have not yet earned revenues.These costs are not allocated to our business segment results.

**Distribution Services Segment**

The company's DistributionServices segment distributes natural gas in three states through the company'sregulated natural gas utility operations. These operations are Elizabethtown Gas Company (New Jersey), City GasCompany of Florida, and Elkton Gas (Maryland). This segment also includes thecompany's appliance leasing, repair, maintenance operations and servicebusiness as well as off-systemsales. Thecompany recently sold three of its natural gas utility operations: NC was soldin September 2002, and VCW (New York and Pennsylvania operations) was sold inNovember 2002 (see Note 8 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 Interest and Taxes results for the segment is as follows:

*(Dollars in thousands)*

**Three  Months Ended   March 31,   2003**

**Three Months Ended   March 31, 2002***

**Six  Months Ended   March 31,   2003**

**Six Months Ended March  31, 2002***

Operating Revenues

$231,827

$169,839

$397,448

$314,342

Purchased  Gas and Fuel

155,643

102,794

263,477

196,219

Cost  of sales and services

2,426

2,022

5,178

4,467

Energy  Taxes

5,289

4,042

8,783

7,095

Operating Margins

68,469

60,981

120,010

106,561

**Operating Expenses:**

 

 

 

 

Operations  & Maintenance Expenses

  29,914

  21,158

  54,160

  42,652

Depreciation  & Amortization

8,051

6,862

15,720

14,116

Taxes  Other than Income

1,901

1,546

3,438

3,020

Total Operating Expenses

39,866

29,566

73,318

59,788

Other Income & Expense

165

117

317

107

Income from Continuing Operations before    Interest and Taxes 

 

$28,768

 

$31,532

 

$47,009

 

$46,880

 

 

 

 

*** ****- As restated (seeNote 2 of the Notes to the Consolidated Financial Statements)

***Operating Revenues****.* Operating revenues includeamounts billed for the cost of purchased gas pursuant to purchased gasadjustment clauses utilized by the company's utility operations.  Such clauses enable the company to passthrough to its utility customers, via periodic adjustments during the year tocustomers' bills, changes in costs incurred by the company for purchased gaswithout affecting operating margins. These purchased gas adjustments areauthorized by regulatory authorities in the states in which the companyoperates. Since the company's utility operations do not earn a profit on thesale of the gas commodity, the company's level of regulated operating revenuesis not necessarily indicative of financial performance. 

Distribution Servicesoperating revenues increased by $62.0 million, or 36 percent, to $231.8 millionduring the three months ended March 31, 2003, as compared to $169.8 million inthe same period in fiscal 2002. The increase in revenues was primarilyattributable to the result of weather in New Jersey that was 13 percent colderthan normal and 35 percent colder than the same period in fiscal 2002, theeffect of a base rate increase in New Jersey, which went into effect onNovember 22, 2002 (see Regulatory Matters), increased off-system sales as aresult of higher natural gas prices, and customer growth. 

Distribution Servicesoperating revenues increased by $83.1 million, or 26 percent, to $397.4 millionduring the six months ended March 31, 2003, as compared to $314.3 million inthe same period in fiscal 2002. The increase in revenues was primarilyattributable to the result of weather in New Jersey that was 11 percent colderthan normal and 37 percent colder than the same period in fiscal 2002, theeffect of a rate increase in New Jersey referred to above, increased off-systemsales, and customer growth, consistent with the quarterly changes previouslynoted.

***Operating Margins****.*Operating margins increased by $7.5 million, or 12 percent, to $68.5 millionfor the three months ended March 31, 2003, as compared to $61.0 million in thesame period in fiscal 2002. Of the factors previously discussed in operatingrevenues, the operating margin impact of the colder weather contributedapproximately $2.9 million, the rate increase contributed approximately $4.1million, and new customers contributed approximately $0.5 million. Totaloperating margins from off-system gas sales were $0.5 million for the threemonths ended March 31, 2003, compared to $0.4 million for the same period infiscal 2002. The company has a weather normalization clause in its New Jerseytariff, which is designed to help stabilize the company's results by increasingamounts charged to customers when weather has been warmer than normal and bydecreasing amounts charged when weather has been colder than normal. As aresult of weather normalization clauses, operating margins were approximately$4.0 million lower and $4.4 million higher in the fiscal 2003 and 2002 periods,respectively, than they otherwise would have been without such clauses.Historically, the company's weather normalization clause in New Jersey wasbased on a 30-year weather average and did not fully protect the company fromthe adverse impacts of warm weather. As a result of the new base rate increasereferred to above, the weather normalization clause was adjusted to a 20-yearweather average to better reflect current weather trends and should providemore stability of operating results and improved cash flows for NUI's NewJersey utility throughout fiscal 2003. 

Operating margins increased by$13.4 million, or 13 percent, to $120.0 million for the six months ended March31, 2003, as compared to $106.6 million in the same period in fiscal 2002. Ofthe factors previously discussed in operating revenues, the operating marginimpact of the colder weather contributed approximately $6.1 million, the rateincrease contributed approximately $5.8 million, and new customers contributedapproximately $1.5 million. Total operating margins from off-system gas saleswere $0.8 million for each of the six months ended March 31, 2003 and 2002. Asa result of weather normalization clauses, operating margins were approximately$4.8 million lower and $8.0 million higher in the fiscal 2003 and 2002 periods,respectively, than they otherwise would have been without such clauses. Withthe exception of demand caused by changes in weather, the company does notanticipate any significant improvement in the economic outlook for natural gassales in this segment for the remainder of fiscal 2003.

***Operating Expenses.*** Operations and maintenanceexpenses increased by $8.8 million, or 41 percent, to $29.9 million for thethree months ended March 31, 2003, as compared with $21.1 million in the sameperiod in fiscal 2002. This was mainly due to increases in bad debt expenses(approximately $2.0 million), pension expenses due to lower discount rate andasset return assumptions (approximately $0.6 million), labor costs related towage increases and additional personnel (approximately $1.0 million), costs forutility programs such as energy conservation and customer education(approximately $1.3 million), insurance costs for general liability(approximately $0.4 million), materials and supplies costs used by theappliance operations (approximately $0.3 million), as well as increasedallocated corporate expenses such as auditing, legal and bank fees(approximately $2.9 million).

Depreciation and amortization expense increased to $8.1 million for thethree months ended March 31, 2003, as compared to $6.9 million in the sameperiod in fiscal 2002, as a result of additional plant-in-service.

Operations and maintenanceexpenses increased by $11.5 million, or 27 percent, to $54.2 million for thesix months ended March 31, 2003, as compared with $42.7 million in the sameperiod in fiscal 2002. This was mainly due to increases in bad debt expenses(approximately $2.1 million), pension expenses due to lower discount rate andasset return assumptions (approximately $2.0 million), labor costs related tothe rate case, wage increases, and additional personnel (approximately $2.0million), costs for utility programs such as energy conservation and customereducation (approximately $1.3 million), insurance costs for general liability(approximately $0.4 million), materials and supplies costs used by theappliance operations (approximately $0.6 million), as well as increasedallocated corporate expenses (approximately $2.8 million).

Because of the increase inoperating revenues due to the colder than normal weather discussed earlier, thecompany has had increased exposure to bad debts during fiscal 2003. This couldhave an adverse effect on operating results for this segment for the remainderof the fiscal year. The company also anticipates increased costs related topension expense, insurance costs and allocated corporate expenses resultingfrom additional auditing, legal, and treasury expenses, as well and other costsincurred by the company associated with fulfilling the requirements of theSarbanes-Oxley Act of 2002 during the remainder of fiscal 2003.

Depreciation andamortization expense increased to $15.7 million for the six months ended March31, 2003, as compared to $14.1 million in the same period in fiscal 2002, as aresult of additional plant-in-service.

**Energy AssetManagement Segment**

The Energy Asset Managementsegment (formerly Wholesale Energy Marketing and Trading) includes theoperations of the company's NUI Energy Brokers subsidiary, and thedistribution, storage and pipeline operations of VGC. Off-system gas sales,which were previously included in this segment, have been included within theDistribution Services segment.

*(Dollars in thousands)*

**Three  Months Ended   March 31,   2003**

**Three Months Ended   March 31, 2002***

**Six  Months Ended   March 31, 2003**

**Six Months Ended   March 31, 2002***

Operating Revenues

$17,041

$5,350

$20,886

$14,729

Purchased  Gas and Fuel

264

(250)

319

(490)

Operating Margins

16,777

5,600

20,567

15,219

**Operating Expenses:**

 

 

 

 

Operations  & Maintenance Expenses

2,804

2,445

4,996

5,375

Depreciation  & Amortization

591

603

1,162

1,292

Taxes  Other than Income

194

71

394

192

Total Operating Expenses

3,589

3,119

6,552

6,859

Other Income & Expense

98

62

235

362

Income from Continuing Operations before Interest    and Taxes 

 

$13,286

 

$2,543

 

$14,250

 

$8,722

 

 

 

 

*-As restated (see Note 2 of the Notes to the Consolidated Financial Statements)

*** Operating Revenues***. Asfurther discussed in Note 14 of the Notes to the Consolidated FinancialStatements, operating revenues for NUI Energy Brokers and NUI Energy (seebelow) have been restated for fiscal years 2000-2002 as a result of adopting aprovision in the Emerging Issues Task Force (EITF) Opinion 02-03, "IssuesInvolved in Accounting for Contracts Under Issue 98-10,"which requires that all energy companies that follow the accounting under EITF98-10 reflect their operating revenues on a net basis. In previous periods,NUI Energy Brokers included both the cost of purchased gas and the operatingmargin earned on all of its physical energy transactions (physical volumes ofgas bought and sold to third parties) in operating revenues and classified thecost of that gas as a component of purchased gas and fuel on the ConsolidatedStatement of Income. Historically, NUI Energy Brokers had recorded only theoperating margin component for all of its financial trades (futures, options,swaps) and had classified these amounts as a component of purchased gas andfuel on the Consolidated Income Statement. Adopting the netting provision ofEITF 02-03 had no net effect on these transactions other than to reclassifythem and to present total margins earned as operating revenues rather thanpurchased gas and fuel. As a result of net-basis reporting, NUI reducedoperating revenues and purchased gas and fuel line items by $51.7 million and$87.3 million for the three and six month periods ended March 31, 2002,respectively, with no change to total operating margins.

Energy Asset Managementoperating revenues increased approximately $11.7 million, or 219 percent, to$17.0 million for the three months ended March 31, 2003, as compared to $5.3million in the same period in fiscal 2002. The increase was primarily due to unrealizedmargins recorded by NUI EnergyBrokers associated with gas supply procurement contracts related to forecastedsales by NUI Energy (approximately $6.3 million), increased operating margins from tradingactivities due to increased volatility during the current three month period ascompared to the prior fiscal year period (approximately $3.3 million), andrealized contracts during the current three-month period by NUI Energy Brokersthat had been reversed under the provisions of EITF 02-03 and recorded as theeffect of a change in accounting (approximately $1.4 million). The operatingrevenues of VGC increased approximately $0.3 million as a result of higheroperating revenues by its distribution company due to an increase in the costof natural gas during the three months ended March 31, 2003 as compared to thesame period in fiscal 2002. 

Operating revenues increasedapproximately $6.2 million, or 42 percent, to $20.9 million for the six monthsended March 31, 2003, as compared to $14.7 million in the same period in fiscal2002. The increase was due to the approximately $6.3 million of unrealizedmargins recorded by NUI Energy Brokers associated with gas supply procurementcontracts previously noted and improved margins from asset management opportunitiesfor the current six-month period, as compared to the same period in fiscal 2002(approximately $2.0 million).  Partiallyoffsetting these increases was a significant reduction in the mark-to-marketvaluation of a large storage contract in the NUI Energy Brokers portfolio(approximately $3.8 million).  Alsooffsetting the increase in the current fiscal year period was the effect ofadopting the provisions of EITF 02-03 on October 25, 2002, which required thecompany to account for energy contracts not falling under the provisions ofSFAS 133 on an accrual basis rather than mark-to-market accounting of suchnon-derivative contracts (see Note 14 of the Notes to the ConsolidatedFinancial Statements). The operating revenues of VGC increased approximately $0.5million as a result of higher operating revenues by its distribution companydue to an increase in the cost of natural gas during the six months ended March31, 2003, as compared to the same period in fiscal 2002. 

***Operating Margins.*** Operating margins increasedapproximately $11.2 million, or 200 percent, to $16.8 million for the threemonths ended March 31, 2003, as compared to $5.6 million in the same period infiscal 2002. Because operating revenues for NUI Energy Brokers are recorded netof gas costs, the increase in operating margins is primarily attributable tothe effects of the factors discussed above regarding operating revenues. Asfurther discussed in Note 14 of the Notes to the Consolidated FinancialStatements, the company adopted the full provisions of EITF 02-03 on January 1,2003. 

Operating margins increasedapproximately $5.4 million, or 35 percent, to $20.6 million for the six monthsended March 31, 2003, as compared to $15.2 million in the same period in fiscal2002. This increase was primarily attributable to the effects of the factorsdiscussed above regarding operating revenues. While natural gas prices havebegun to increase and volatility has increased, market conditions in the energytrading industry have been dampened due to fewer creditworthy trading partners.The company anticipates credit issues in the industry will continue throughoutfiscal 2003, which may decrease or limit the growth in operating margins forNUI Energy Brokers. Also, the recent downgrades of the company's credit ratings(see Liquidity and Capital Resources) could increase the collateralrequirements of NUI Energy Brokers, as well as adversely affect the willingnessof counterparties to enter into transactions, which may decrease operatingmargins for the remainder of fiscal 2003. The effect of EITF 02-03 on theaccounting for NUI Energy Brokers' operating margins for the fiscal year isestimated to be a decrease of approximately $1.0 million.  

***Operating Expenses.***Operating and maintenance expenses increased by approximately $0.4 millionduring the three months ended March 31, 2003, as compared to the same period infiscal 2002 due to increases in pension costs previously discussed(approximately $0.1 million), employee benefit expenses (approximately $0.3 million),insurance costs for general liability (approximately $0.1 million), as well asincreased allocated corporate expenses (approximately $0.2 million). Theseincreases were partially offset by reduced labor costs for commissions for NUIEnergy Brokers (approximately $0.1 million) and general cost reductionsundertaken by VGC (approximately $0.2 million).

Operating and maintenanceexpenses decreased by approximately $0.4 million during the six months endedMarch 31, 2003, as compared to the same period in fiscal 2002 due to reducedlabor and commissions for NUI Energy Brokers (approximately $0.4 million),general cost reductions related to subsidiaries disposed of by VGC(approximately $0.8 million), and reduced bank fees (approximately $0.2million).  These reductions werepartially offset by increases in pension costs (approximately $0.3 million),employee benefit expenses (approximately $0.3 million), insurance costs forgeneral liability (approximately $0.2 million), as well as increased allocatedcorporate expenses (approximately $0.2 million).

As previously noted, thecompany anticipates increased costs related to pension expense, insurance costsand allocated corporate expenses resulting from additional auditing, legal, andtreasury expenses, as well and other costs incurred by the company associatedwith fulfilling the requirements of the Sarbanes-Oxley Act of 2002 during theremainder of fiscal 2003.

**Retail andBusiness Services Segment**

The Retail and BusinessServices segment includes the operations of the company's NUI Telecom, UBS andNUI Energy subsidiaries, as well as the operations of the network services andwireless divisions of TIC. 

*(Dollars in thousands)*

**Three  Months Ended   March 31, 2003**

**Three Months Ended   March 31, 2002***

**Six  Months Ended March 31, 2003**

**Six  Months Ended   March 31, 2002***

Operating Revenues

$13,919

$10,082

$28,871

$17,419

Cost  of sales and services

8,868

5,269

17,256

9,025

Operating Margins

5,051

4,813

11,615

8,394

**Operating Expenses:**

 

 

 

 

Operations  & Maintenance Expenses

8,928

4,352

15,374

7,207

Depreciation  & Amortization

768

222

1,420

851

Taxes  Other than Income

197

163

405

388

Total Operating Expenses

9,893

4,737

17,199

8,446

Other Income & Expense

(1)

---

32

6

Income from Continuing Operations before    Interest and Taxes 

 

$(4,843)

 

$76

 

$(5,552)

 

$(46)

 

 

 

 

*-As restated (see Note 2 of the Notes to the Consolidated Financial Statements)

***Operating Revenues****.*Retail and Business Services operating revenuesincreased by approximately $3.8 million, or 38 percent, to $13.9 million forthe three months ended March 31, 2003 from $10.1 million in the same period infiscal 2002. This increase was primarily due to increased revenues by NUITelecom of approximately $5.5 million due to the acquisitions of Norcom inMarch 2002 (see Note 4 of the Notes to the Consolidated Financial Statements)and Telcorp in April 2002 (see Note 5 of the Notes to the ConsolidatedFinancial Statements), and customer growth. Norcom and Telcorp contributed $3.9million and $1.7 million of operating revenues, respectively, during thethree-months ended March 31, 2003, compared to $1.1 million for Norcom duringthe same period in fiscal 2002. Operating revenues of UBS during the threemonths ended March 31, 2003 were consistent with fiscal 2002. The operatingrevenues of NUI Energy decreased approximately $1.7 million for the threemonths ended March 31, 2003 as compared with the same period in the priorfiscal year due to reduced volume of new contracts as the company sought toreduce its exposure to the retail energy marketing business and the continuingeffects of adopting the provisions of EITF 02-03 on October 25, 2002. NUIEnergy's revenues have been reflected on a net basis for the three andsix-month periods ended March 31, 2002 due to the adoption of the nettingprovisions of EITF 02-03.

Operating revenues increased by approximately $11.5 million, or 66percent, to $28.9 million for the six months ended March 31, 2003 from $17.4million in the same period in fiscal 2002. This increase was primarily due toincreased revenues by NUI Telecom of approximately $12.5 million due to theacquisitions previously noted of Norcom and Telcorp, and customer growth.Norcom and Telcorp contributed $7.6 million and $3.4 million of operatingrevenues, respectively, during the six-months ended March 31, 2003, compared to$1.1 million for Norcom during the same period in fiscal 2002. Operatingrevenues for UBS increased by approximately $0.6 million primarily as a resultof the benefit of additional billings related to customer accounts that wereconverted during the latter portion of fiscal 2002. As a result of the abilityto provide billing services to a larger population of customers as compared tothe prior year and conversion income to be recognized during the fiscal year,the results of UBS are anticipated to improve in fiscal 2003 and beyond. Theoperating revenues of NUI Energy for the six months ended March 31, 2003,decreased approximately $1.6 million compared with the same period in the priorfiscal year, for the reasons discussed previously. The company has announcedits intention to exit the retail energy marketing business and is attempting tolocate a buyer for assets of NUI Energy. 

***Operating Margins***.Retail and Business Services operating margins increased by approximately $0.2million, or 5 percent, during the three months ended March 31, 2003, to $5.0million, as compared with $4.8 million in the same period in fiscal 2002 dueprimarily to an increase in margins from NUI Telecom of $2.4 million. Thisincrease reflects the continued growth in customers and product offerings forNUI Telecom as a result of the acquisitions during the prior fiscal yeardiscussed earlier.  Operating marginsfor UBS decreased $0.5 million due to the timing of conversion revenues duringthe three months ended March 31, 2002, which did not recur in the currentfiscal year period. As NUI Energy records its revenues net of gas costs,operating margins decreased by $1.7 million for the reasons discussed inoperating revenues. As further discussed in Note 14 of the Notes to theConsolidated Financial Statements, the company adopted the full provisions ofEITF 02-03 on January 1, 2003. 

Operating margins increased byapproximately $3.2 million, or 38 percent, during the six months ended March31, 2003, to $11.6 million as compared with $8.4 million in the same period infiscal 2002 due primarily to an increase in margins from NUI Telecom of $5.1million. This increase reflects the continued growth in customers and productofferings for NUI Telecom as a result of the acquisitions during the priorfiscal year discussed above. Operating margins for UBS decreased $0.3 milliondue to the operating margins related to conversion income noted above, whichwere partially offset by additional operating revenues discussed above.Operating margins for NUI Energy decreased by $1.6 million during the sixmonths ended March 31, 2003, as compared to the same period in the prior fiscalyear for the reasons discussed in operating revenues. 

***Operating Expenses****.*  Operations and maintenance expenses,depreciation and amortization, and taxes other than income for the Retail andBusiness Services segment increased in total by $5.2 million, or 109 percent,to $9.9 million during the three months ended March 31, 2003, as compared with$4.7 million in the same period in fiscal 2002. This was mainly a result oflabor costs from additional personnel and temporary employees ($1.1 million),and increases in bad debt reserves (approximately $2.8 million), rent expense(approximately $0.2 million), pension costs (approximately $0.2 million), aswell as increased allocated corporate expenses (approximately $0.3 million).The growth of NUI Telecom resulting from acquisitions and customer growth overthe past several years resulted in increases in additional personnel, temporaryemployees and bad debt reserves. During the three months ended March 31, 2003,NUI Energy recorded additional reserves for bad debts of $1.3 million for alarge customer and to provide for additional losses in conjunction with exitingthe retail energy marketing business. Depreciation and amortization expensesincreased approximately $0.5 million due to additional assets placed in serviceand amortization of intangible assets related to the acquisitions of Norcom andTelcorp.

Operations and maintenanceexpenses, depreciation and amortization, and taxes other than income increasedin total by $8.8 million, or 104 percent, to $17.2 million during the sixmonths ended March 31, 2003, as compared with $8.4 million in the same periodin fiscal 2002. This was a result of increased labor costs from additionalpersonnel and temporary employees ($3.7 million), bad debt reserves(approximately $3.0 million), rent expense (approximately $0.4 million),pension costs (approximately $0.5 million), as well as increased allocatedcorporate expenses (approximately $0.3 million). These increases were mainlydue to growth experienced by NUI Telecom as a result of the acquisitions duringthe prior fiscal year previously discussed. Depreciation and amortizationexpenses increased approximately $0.6 million due to additional assets placedin service and amortization of intangible assets related to the acquisitions ofNorcom and Telcorp.

NUI Telecom's recentacquisitions of new businesses have increased expenses associated with backoffice functions such as customer service, provisioning and finance that havebeen required to support these customer additions. During the second half offiscal 2002 and into fiscal 2003, NUI Telecom has continued to implementvarious information systems improvements and to integrate its new businesses tostreamline functions in order to improve its operating performance. 

As previously noted, thecompany anticipates increased costs related to pension expense, insurance costsand allocated corporate expenses resulting from additional auditing, legal, andtreasury expenses, as well as other costs incurred by the company associatedwith fulfilling the requirements of the Sarbanes-Oxley Act of 2002 during theremainder of fiscal 2003.
**Regulatory Matters  **
On November 22, 2002, Elizabethtown Gas Companyreceived approval from the New JerseyBoard of Public Utilities (NJBPU) to increase its base rates by anannual amount of $14.2 million, or approximately 5 percent.  The increase was effective immediately andcovered a portion of the costs of plant investments and higher operatingexpenses incurred since the company's last base rate increase twelve yearsago.  The new rates are based on areturn on equity of 10.0 percent and an overall rate of return on rate base of7.95 percent.  The rate order alsorevised the normal weather pattern upon which base rates and Elizabethtown'sWeather Normalization Clause were reset from a 30-year to a 20-year weatheraverage to better reflect current weather trends.  In addition, the company was allowed to increase service chargesto various rate classes of customers to better reflect the cost of providingservice to these customers. 

On March 30, 2001 the NJPBU issued an order allowingthe company to establish a new Gas Cost Under-recovery Adjustment (GCUA) torecover the gas cost under-recovery balance as of October, 31, 2001, withassociated interest at a fixed rate of 5.5 percent per annum over a three-yearperiod from December 1, 2001 through November 30, 2004. In addition, pursuantto the order, the company was required to make a filing on November 15, 2001,to establish a new purchased gas adjustment (PGA) clause rate designed to recoverpurchased gas costs for the period November 1, 2001, through September 30,2002. In that filing, the company requested approval to decrease its PGA rateand implement its GCUA rate, with a net effect representing a decrease of 12.7percent in residential customer bills. The NJBPU approved the company's request on an interim basis and thesechanges became effective on December 1, 2001.

In response to the Electric Discount and EnergyCompetition Act which was signed into law in February 1999, on March 30, 2001,the NJBPU approved a stipulation which enabled all retail customers in NewJersey to choose a natural gas supplier, provided an incentive for thesecustomers to choose an alternate natural gas supplier and allowed the companyto continue offering basic gas supply service through December 2002. On January17, 2002, the NJBPU issued an order that continued the obligation of all NewJersey gas utilities to provide basic gas supplyservice until it has had an opportunity tofully investigate major policy issues relating to pricing structure and gassupply reliability.  No timetable hasbeen established for completion of such a review.  As of March 31, 2003, no residential customers in the company'sNew Jersey service territory have switched to an alternative gas supplier.

On March 20, 2003, the NJBPU announced theinitiation of a focused audit of NUI Corporation, NUI Utilities, Inc. andElizabethtown Gas Company. The NJBPU has expressed the belief that recentdowngrades of the senior unsecured debt of NUI Corporation and NUI Utilities,Inc., as well as negative credit rating agency comments, and concerns raisedduring a recent competitive services audit, substantiated the need for anin-depth review of the financial practices of the company and its affiliates.The NJBPU has issued a Request for Proposal (RFP) for consulting firms to bidto perform the focused audit on behalf of the Board. According to the RFP, thefocused audit will cover the following areas: corporate governance; strategicplanning; financial interactions; accounting and property records; andaffiliate relations.  The RFPanticipates having the NJBPU select a firm to perform the focused audit duringthe first week in June 2003, and anticipates the audit report being filed withthe NJBPU in late October 2003. The company is not able to express a belief atthis time as to the outcome of the focused audit.

**Liquidity and CapitalResources**

The company's cash provided byoperating activities was $57.8 million and $28.6 million for the six-monthperiods ended March 31, 2003 and 2002, respectively.  The improvement of $29.2 million in operating cash flows for thecurrent period was due in part to the timing of payments to the company's gassuppliers and collections in the current period of a portion of under-recoveredgas costs as a result of the company's ability to collect the largeunder-recovered gas balance that existed at September 30, 2001 over a period ofthree years. As noted in Regulatory Matters, these under-recovered gas costsare now a component of regulatory assets and will be recovered with associatedinterest over a three-year period. This increase in operating cash flows waspartially offset by higher accounts receivable at March 31, 2003 than duringthe same period a year ago due primarily to higher natural gas prices in thecurrent six-month period than the same period in fiscal 2002.

Because the company's business is highly seasonal,short-term debt is used to meet seasonal working capital requirements. Thecompany also borrows under its bank lines of credit to finance portions of itscapital expenditures, pending refinancing through the issuance of equity orlong-term indebtedness at a later date, depending upon prevailing marketconditions. As of March 31, 2003, the company had drawn approximately $175.3million under its short-term credit facilities and had overnight cashinvestments of approximately $79.3 million. As of May 13, 2003, approximately$60 million of this cash had been used to reduce the outstanding borrowings toapproximately $115 million. Also on that date, the company had approximately$26 million of cash on hand. The company will continue to focus on reducingshort-term indebtedness during fiscal 2003 through the collection ofunder-recovered gas costs discussed above, additional asset sales, andconsideration of opportunistic longer-term debt or equity financing. 

The company sold 1.725 million shares of common stockfor net proceeds of approximately $37.0 million during March 2002 under theshelf registration statement. The proceeds from the sale were used to pay downshort-term debt. 

The company completed the sale of its VCW subsidiarieson November 7, 2002, for approximately $15 million (see Note 8 of the Notes tothe Consolidated Financial Statements). The proceeds of the transaction wereused to further reduce short-term debt.

The company does not have anyoff-balance sheet financing; however, the company is a 50 percent member of ajoint venture that is developing natural gas storage assets and is required toprovide funding toward the development of these assets for their intendedpurpose (see Capital Expenditures and Commitments- Joint Venture with Duke Energy for further discussion).

On February 3, 2003, Moody'sInvestors' Service (Moody's) downgraded the company's debt rating from Baa-2 toBaa-3. Moody's also downgraded the debt rating of NUI Utilities from Baa-1 toBaa-2. NUI Utilities is a wholly-owned subsidiary of NUI that owns three of thecompany's four utility operations. Moody's cited the impact of unfavorableresults from most of the company's unregulated businesses (i.e. those in thecompany's Retail and Business Services segment) during fiscal 2002 and theirconcerns regarding these operations' potential adverse impact on the company's futureperformance as factors influencing their rating action. As a result of thesedowngrades, the company's cost of borrowing under its short-term facilitiesincreased 37.5 basis points or 0.375 percent and the cost of borrowing for NUIUtilities increased 25 basis points or 0.25 percent. 

On March 10, 2003, Moody'sfurther downgraded the company's debt rating from Baa-3 to Ba-2. Moody's alsodowngraded the debt rating of NUI Utilities from Baa-2 to Baa-3. Moody's citedthe impact of unfavorable results from most of the company's unregulatedbusinesses during fiscal 2002, the company's disclosure of technical defaultsunder the Note Purchase Agreement dated August 20, 2001, and the quality of thecompany's internal financial controls as factors influencing their ratingaction. As a result of these downgrades, the company's cost of borrowing underits short-term facilities increased an additional 62.5 basis points or 0.625percent and the cost of borrowing for NUI Utilities was unchanged. Moody's alsoindicated that the company and NUI Utilities would remain under review forfurther possible downgrade. Moody's cited that, in its continuing review, itwill assess the progress being made by management to 1) procure the continuedsupport of its bank lenders and senior noteholders; 2) either demonstrateunequivocal turn-around in the under-performing unregulated businesses (i.e.those in the company's Retail and Business Services segment), accomplishsubstantial cost reductions or exit them altogether; and 3) further improveinternal accounting, legal and financial controls. 

On May 7, 2003, Moody'sfurther downgraded the NUI Corporation's debt rating from Ba-2 to B-1. Moody'salso downgraded the debt rating of NUI Utilities from Baa-3 to Ba-1. Moody'scited reduced financial flexibility of the company due to under-performance ofsome of its unregulated businesses, as well as the effective subordination ofthe company's debtholders to those of NUI Utilities. Moody's also cited thecompany's continued use of a centrally managed cash process at the corporatelevel, which effectively ties NUI's Utilities credit more closely to that ofthe NUI Corporation. As a result of these downgrades, NUI Utilities' cost ofborrowing under its short-term facilities increased an additional 37.5 basispoints or 0.375 percent and the cost of borrowing for NUI Corporation wasunchanged. Should NUI Utilities' current debt ratings be downgraded further,this would adversely affect NUI Utilities' cost of borrowing under itsshort-term credit facility.  Should NUICorporation's or NUI Utilities' current debt rating be further downgraded, itcould potentially increase the collateral requirements of the NUI Corporation'senergy portfolio and risk management business and distribution services business,as the case may be, and could adversely affect the willingness of counterparties to enter intotransactions with the company.

Moody'sindicated that the downgrades on May 7, 2003, concluded its reviews of both thecompany and NUI Utilities. Even though the company is no longer on creditwatch,as a result of the rating actions taken by Moody's in recent months, thecompany is studying various options and strategic alternatives to improve itscapital structure in order to improve its credit ratings to investment grade, whichmay include additional asset sales and/or the issuance of additional equity. 

Ifassets are held for sale, impairment losses could occur if market values areless than carrying values. Such amounts could be material to the company'sresults of operations and financial position.

The company believes it hasmade significant progress in addressing the factors cited by Moody's, includingentering into the new credit agreements discussed below, commencing thesegregation of the cash management functions of its NUI Utilities subsidiary ona stand-alone basis, which is expected to be completed by the fourth quarter offiscal 2003, and conducting a review of the company's internal controls that isexpected to be completed in June 2003. 

In connection with segregatingthe cash management functions of NUI Utilities, which is required to becompleted by November 12, 2003, in accordance with the NUI Utilities creditagreement, NUI Corporation is evaluating the impact of this segregation on thecash requirements of each of the company's businesses. The company is alsoevaluating options with respect to amounts held by NUI Corporation for thebenefit of its subsidiaries, including NUI Utilities, as a result of the cashmanagement functions conducted by NUI Corporation. 

On February 4, 2003,Standard & Poor's Rating Services (S&P) reaffirmed its BBB investmentgrade rating, and reiterated their stable outlook, for NUI Utilities. 

***Outlook for Fiscal 2003***. As a result of the factors discussed above, thecompany believes that the cash provided by operations during fiscal 2003,combined with the cash provided from the already completed sale of VCW and cashto be raised from the sale of the assets of NUI Energy, and availability underthe new credit and bridge loan agreements discussed below will enable thecompany to meet its obligations for the current fiscal year. Additionaldiscussion of certain items noted above follows.

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

***Short-Term Debt*.**  OnFebruary 12, 2003, the company and NUI Utilities each entered into a newrevolving credit facility that replaced their respective previous creditfacilities.  The company's new creditfacility consists of a credit agreement that allows it to borrow up toapproximately $38.1 million, and NUI Utilities' new credit facility consists ofa credit agreement and a 364-day bridge loan, which allows NUI Utilities toborrow up to an aggregate of approximately $141.9 million.  NUI Corporation's previous credit facilityallowed it to borrow up to $50 million, and NUI Utilities' previous creditfacility allowed it to borrow up to $145 million. The new credit agreements andthe bridge loan agreement mature on February 11, 2004. The credit agreementsmay be extended in successive 364-day increments upon obtaining approval of allthe respective lenders.  The company'scredit agreement and NUI Utilities' credit agreement and bridge loan agreementrequire the company and NUI Utilities, respectively, to meet certain covenantsand limitations as well as maintain certain financial ratios.  Included in these covenants are provisionsthat limit the ability of each of the company and NUI Utilities to incur futureindebtedness, make capital expenditures above certain levels, enter intosale-leaseback transactions, pledge or sell assets, make acquisitions, mergeand pay dividends on common stock, and prohibit the creation of guarantees(other than those in the normal course of business).  The company must maintain a fixed charge coverage ratio of notless than 1.50x and NUI Utilities must maintain a fixed charge coverage ratioof 1.75x. The company and NUI Utilities each must maintain leverage ratios ofnot more than 0.65 from March 1 through August 31 and not more than 0.70 fromSeptember 1 through February 28 (or 29, if applicable). In addition, if theamounts available under the NUI Utilities' credit agreement are increased, anyborrowings under such increase first must be used to repay any amountsoutstanding under the bridge loan agreement. The NUI Utilities' credit agreement and bridge loan agreement also limitthe payment of dividends from NUI Utilities to the company to not more than$100 million.  The company and NUIUtilities repaid all of the $195 million of borrowings outstanding under theirprior credit agreements from the borrowings under the company's and NUIUtilities' new credit agreements, the bridge loan agreement and cash onhand.  

Borrowings under the new credit facilities and thebridge loan agreement bear interest at a rate based on either the LondonInterbank Offering Rate (LIBOR) or the Prime Rate as of the date of theadvance.  Pricing grids have beenprovided to the company and NUI Utilities by the bank syndication agent, whichtier pricing to higher and lower credit ratings should a debt rating changeoccur. As of March 31, 2003, the total aggregate outstanding borrowings underthe company's new credit facilities were $175.3 million. On that date, thecompany had outstanding borrowings under its credit facility amounting to $35.0million and unused borrowing capacity amounting to $3.1 million, and NUIUtilities had outstanding borrowings under its credit facility amounting to$140.3 million and unused borrowing capacity amounting to $1.6 million.  Also on that date, the company had availablecash in the form of overnight investments of approximately $79.3 million. Theweighted average daily amounts outstanding of borrowings under the company'scredit facility and the weighted average interest rates on those amounts were$40.8 million and $45.6 million at 2.8 percent and 3.0 percent for the threeand six-month periods ended March 31, 2003, respectively, and $74.3 million and$127.9 million at 3.7 percent and 3.9 percent for the three and six-month periodsended March 31, 2002, respectively. The weighted average daily amountsoutstanding of borrowings under NUI Utilities' credit facility and the weightedaverage interest rates on those amounts were $132.8 million and $110.9 millionat 2.6 percent and 2.5 percent for the three and six-month periods ended March31, 2003, respectively, and $125.5 million and $121.9 million at 2.6 percentand 2.8 percent for the three and six-month periods ended March 31, 2002,respectively.

The company expects improved cash flow from operationsduring fiscal 2003 as a result of the following factors: the collection ofapproximately $20 million of under-recovered gas costs; the collection ofweather normalization recoveries of approximately $8 million related to thewarmer than normal weather experienced during fiscal 2002; improvedprofitability as a result of the outcome of the Elizabethtown Gas rate case;and reduced losses from discontinued operations related to the company's TICand NUI Environmental subsidiaries.  InNovember 2002, the company raised approximately $15 million from the sale ofits Valley Cities Gas and Waverly Gas subsidiaries. Because of the abovefactors that are expected to have a positive impact upon the company's cashflows, financial position and debt-servicing capabilities, the company believesthat it has sufficient amounts available under its new credit agreement, andthat NUI Utilities has sufficient amounts available under the new NUI Utilitiescredit agreement and bridge loan agreement, to cover their respective projectedcash needs for fiscal 2003, as well as to provide a contingent cash reserve forpotential unforeseen events.

***Long-Term Debt and Funds forConstruction Held by Trustee*****.**  The company is scheduled to repay $50million of medium-term notes on February 1, 2005.

In January 2003, the company became aware that it wasin technical default under certain covenants contained in its Note PurchaseAgreement dated as of August 20, 2001. On January 24, 2003, the companyobtained a 30-day waiver of certain covenant violations contained in the NotePurchase Agreement from the holders of the notes (the noteholders) issued underthe agreement.  The covenants consistedof the minimum fixed charge coverage ratio, restrictions on the ability toenter into sale and leaseback transactions, entering agreements providing forrestrictions on subsidiaries' ability to pay dividends to the company and makeadvances to and investments in the company, and the requirement that thecompany deliver certain financial information and statements of cash flows tothe noteholders. Prior to obtaining the waiver, the company was in technicaldefault under the Note Purchase Agreement during fiscal 2002. 

On February 20, 2003, the company and the noteholdersamended the Note Purchase Agreement for the purpose of curing all the technicaldefaults. The amended agreement contained certain provisions that were subjectto the approval of, or required action by, the banks participating in thecompany's $38 million 364-day credit facility. These provisions were: 1) theapproval by the banks of an increase in the interest rate under each of thesenior notes of 50 basis points (or 0.50 percent), 2) the approval by the banksof the execution by certain of the company's non-regulated subsidiaries (the"non-restricted subsidiaries" as defined in the company's bank credit facility)of guarantees (the senior guarantees) of prompt payment when due of theindebtedness under the senior notes issued pursuant to the Note PurchaseAgreement, and 3) the execution by the banks of an Inter-creditor Agreement,reasonably satisfactory to the banks and noteholders, providing for thepro-rata sharing of any proceeds received by the lenders under either the bankcredit facility or the noteholders of any proceeds received by any of thelenders under any of the bank guarantees or the senior note guarantees. Theamendment also provided for the establishment of a "Priority Indebtedness"covenant requiring the company to maintain a ratio of "priority debt" (allindebtedness of the company secured by liens plus all indebtedness of therestricted subsidiaries, as defined in the agreement) to consolidated assets ofnot more than 50 percent.

On April 1, 2003, the company and the banks amendedthe company's 364-day credit facility to approve the interest rate change withrespect to the senior notes, to approve the guarantee by the non-restrictedsubsidiaries of the prompt payment when due of the indebtedness under thesenior notes, and to approve the execution of the Inter-creditor Agreementreferenced above. This amendment to the company's credit facility also providedfor a new pricing grid, which increased the company's cost of borrowing underthe credit facility of 25 basis points (0.25 percent).

Also on April 1, 2003, the company and the noteholdersamended the Note Purchase Agreement to reflect the above changes. The companyis now, and expects to continue to be, in full compliance with all the terms ofboth the Note Purchase Agreement and its bank credit facilities.

The company's long-term debtagreements include, among other things, restrictions as to the payment of cashdividends. Under the most restrictive of these provisions, the company ispermitted to pay approximately $13.9 million of cash dividends at March 31,2003.

The company depositedin trust the unexpended portion of the net proceeds from its Gas FacilitiesRevenue Bonds until drawn upon for eligible expenditures. As of June 30, 2002,all of the original net proceeds from the bonds had been expended. Theremaining $2.1 million classified as Funds for Construction Held by Trustee onthe company's Consolidated Balance Sheet at March 31, 2003, represents theunexpended portion of interest earned on the original net proceeds of thebonds.

***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. Fromtime to time, the company may issue additional equity to reduce short-termindebtedness and for other general corporate purposes.  As previously noted, the company sold 1.725million shares of its common stock for net proceeds of approximately $37.0million in March 2002. 

The company issued stock in conjunction with severalacquisitions during fiscal 2002. This included 144,648 shares worthapproximately $3.1 million to acquire VGSC and VGDC (see Commitments andContingencies- Acquisition of Virginia Gas Storage Company (VGSC) and VirginiaGas Distribution Company (VGDC)), and 216,039 shares worth approximately $4.2million to acquire Norcom (see Note 4 of the Notes to the ConsolidatedFinancial Statements). In addition, the company issued 47,136 shares to theformer owners of NUI Telecom as payment of an incentive of $1.0 million under aprovision of the Agreement and Plan of Merger.

***Assets and Liabilities Held for Sale***.  The companycompleted the sale of its NC utility operation on September 30, 2002, andcompleted the sale of its VCW utility operations on November 7, 2002 (seeCapital Expenditures and Commitments- Sale of North Carolina Gas and Sale ofValley Cites Gas and Waverly Gas). In accordance with the provisions ofStatement of Financial Accounting Standards No. 144, "Accounting for Impairmentor Disposal of Long-lived Assets," the company has reclassified the assets andliabilities of NC and VCW as Held for Sale on the Consolidated Balance Sheet atSeptember 30, 2002 (see Note 8 to the Notes to the Consolidated FinancialStatements).  

**Capital Expenditures and Commitments**

***Capital Expenditures***. Capital expenditures,which consist primarily of expenditures to expand and upgrade the company's gasdistribution systems, were $26.6 million for the six months ended March 31,2003, and $27.3 million for the six months ended March 31, 2002. Capitalexpenditures are expected to be approximately $54 million in fiscal 2003, whichwill be used primarily for the company's contribution toward the developmentand expansion of the Saltville Storage project (see additional discussionbelow), continued expansion and upkeep of the company's natural gasdistribution system and certain information technology projects.

***JointVenture with Duke Energy***. OnApril 30, 2001, the company announced an agreement with a unit of Duke Energyto develop a natural gas storage facility in Saltville, Virginia. A subsidiaryof VGC and Duke Energy Gas Transmission (DEGT) have created a limited liabilitycompany, Saltville Gas Storage Company LLC (the LLC).  VGC received final regulatory approvals during January2003 and contributed certain storage assets valued at approximately $16.3million to the LLC. DEGT has contributed an equal amount (approximately $16.3million) of capital required to expand the facility for its intended purpose.  To the extent the LLC determines it needsadditional funding (which decision can only be made jointly by the company andDEGT), the company and DEGT are obligated to fund the development of the LLCequally. As of March 31, 2003, the company has contributed an additional $3.7million toward the development of the LLC.

 The company currentlyestimates its share of future funding needs to be approximately $18.3 million in fiscal 2003,$7.3 million in fiscal 2004, $0.8 million in fiscal 2005, $0.7 million infiscal 2006, and $0.8 million in fiscal 2007. The company is exploring variousoptions to satisfy its funding requirements for the joint venture during fiscal2003, including a long-term (12 to 15 year) capital lease with a bank for acompressor station.

The LLC plans to expand the present Saltvillestorage facility from its current capacity of 1 Bcf to approximately 12 Bcf andconnect it to DEGT's East Tennessee Natural Gas interstate system and DEGT'sPatriot pipeline, which is under construction. At full capacity, the Saltvillestorage field will be able to deliver up to 500 million cubic feet per day ofnatural gas to area markets. The Saltville facility features fast-injection andfast-withdrawal capabilities offered by salt cavern storage. The expansion willbe completed in phases starting in fiscal 2003, with the Phase I total of 6.1Bcf of working natural gas storage capacity to be completed by fiscal 2008. Themarket demand for additional storage will dictate the timing of the otherphases of the expansion.

Development of the Saltville facility is intended tocreate a strategically located energy-trading hub for Energy Brokers, and enablethe company to capitalize on the energy supply, wholesale energy portfolio andrisk management opportunities in the rapidly developing Mid-Atlantic region.The additional storage capacitywould allow the company tomeet the significant demand from local distribution companies as well as powerplant development that is underway in the region.

On October 26, 2001, the LLC filed a certificationapplication with the Virginia State Corporation Commission (VSCC). A publichearing was held on this matter on February 20, 2002 and the Hearing Examiner'sreport was issued on May 31, 2002. On August 6, 2002, the VSCC issued an ordergranting a Certificate of Public Convenience and Necessity (CPCN) for thestorage facilities and attendant pipeline. Those conditions included a finaltechnical analysis to be performed by VSCC staff. The CPCN authorizes the LLCto construct, develop and maintain Phase I of the project, and specifiescertain other information, including allowed returns on this regulated storageasset. The VSCC staff completed their technical analysis in January 2003 andthe VSCC issued the LLC a final CPCN on January 22, 2003.

On August 23, 2002, the LLC filed an application withthe Federal Energy Regulatory Commission requesting a limited jurisdictioncertificate that would allow the LLC to serve interstate customers. Thatcertificate was granted to the LLC on January 29, 2003.

***Developmentof Trading Hubs***. The company'swholesale energy portfolio and risk management subsidiary, Energy Brokers, has acquiredoptions on the land and mineral rights for property located in Richton, PerryCounty, Mississippi, that the company plans to develop into a natural gasstorage facility to help serve the Southeast United States. Energy Brokersplans to develop a two-well salt dome storage facility in Richton that wouldhave a working gas capacity of approximately 7.8 billion cubic feet. 

The first well and a 14-mile pipeline to bedeveloped by the company that will connect with the Destin Pipeline aretentatively scheduled to be operational in fiscal 2005. Implementation of thisdevelopment plan is dependent on favorable results from testing and otheroperational issues that are currently under consideration by the company aswell as obtaining sufficient financing to fund the development. Accordingly,there can be no assurance that this project will be implemented. This projectis not expected to have any material capital requirements in fiscal 2003 and,if the project proves feasible, will primarily impact the company's capitalexpenditure program in fiscal years 2004 and 2005 after the funding needs ofPhase I of the Saltville facility (discussed above) are essentially satisfied.

The benefits of the Richton site to customers andEnergy Brokers are: (1) its proximity to a number of major interstatepipelines, including Destin Pipeline and its connections to Williams GasPipeline-Transco, Florida Gas Transmission, Gulf South Pipeline, TennesseeNatural Gas, Southern Natural Gas and Gulfstream Pipeline; and (2) the quick-fill,quick-withdrawal capabilities offered by salt dome storage. 

***Gas Procurement Contracts****.*Certain of the company's long-term contracts for the supply, storage anddelivery of natural gas include fixed charges that amount to approximately$53.3 million annually. The company also is committed to purchase from multiplesuppliers, at market-related prices, minimum quantities of gas that, in theaggregate, are approximately 2.1 Bcf per year or to pay certain costs in theevent the minimum quantities are not taken. During fiscal year ended September 30, 2002, thecompany's continuing utility operations purchased a total of 36.0 Bcf, andaccordingly the company expects that minimum demand on its systems for theduration of these contracts will continue to exceed these minimum purchaseobligations. As discussed earlier, the company's utility operations donot earn a profit on the sale of the gas commodity; changes to gas commodityprices have no effect on operating margins.

***Environmental*.**  Thecompany owns or previously owned properties on which former manufactured gasplants (MGP) were operated in the states of New Jersey, North Carolina, SouthCarolina, Pennsylvania, New York and Maryland. Although theactual total cost of future environmental investigation and remediation efforts cannot bereasonably estimated, thecompany has recorded a total reserve of approximately $33.5 million, which thecompany believes represents the probable minimum amount the company may expendover the next 30 years.  Of this reserve,approximately $29.9 million relates to the New Jersey MGP properties and approximately $3.6 million relates to the MGPproperties located outside the state of New Jersey. The company believes thatall costs associated with remediation of the New Jersey MGP properties will berecoverable in rates or from insurance carriers. In New Jersey, the company has begun rate recovery ofapproximately $8.2 million of such costs and recovery of an additional $1.7million is currently pending NJBPU approval. With respect to costs that may be associated with the MGP propertieslocated outside the state of New Jersey, the company is currently pursuing orintends to pursue recovery from ratepayers, former owners and operators, and/orinsurance carriers. Although the company has been successful in recovering aportion of MGP remediation costs incurred outside New Jersey from the company'sinsurance carriers, the company is not able, at this time, to express a beliefas to the success of additional recovery efforts.

***Agreement to Acquire Assets of NorcomAgency Sales, Inc.*** On March 22, 2002, the company entered into anagreement to acquire certain assets of Norcom Agency Sales, Inc. (NAS). Theagreement provides for the company to pay the seller, Norcom, a purchase priceequal to a multiple of total sales to new customers obtained by NAS as agentfor NUI Telecom during the period April 1, 2002, through October 31, 2003. Themultiple to be paid will be determined based on the actual new customerrevenues generated by NAS for the month of October 2003, and is subject topost-closing adjustments. 

Thepurchase price will be paid in NUI common stock. The number of shares of NUI common stock to be issued will be determinedby dividing the total purchase price by the average closing price of NUI'scommon stock for the first 20 of the 25 consecutive trading days immediatelypreceding October 31, 2003. The company expects to close on this transaction in or around February 2004.

**Applicationof Critical Accounting 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 and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Management considers CriticalAccounting Policies to be those that could result in materially differentfinancial statement results if the assumptions regarding application ofaccounting principles were different.  Adescription of the company's Critical Accounting Policies can be found in thecompany's Annual Report filed on Form 10-K for the year ended September 30,2002. Other significant accounting policies are discussed in Note 1 of theNotes to the Consolidated Financial Statements-  "Summary of Significant Accounting Policies" of the company'sAnnual Report on Form 10-K for its fiscal year ended September 30, 2002.Recently issued accounting standards are also discussed in Note 14 of the Notesto the Consolidated Financial Statements- "New Accounting Standards."

**Forward-Looking Statements**

This document contains forward-looking statements.These statements are based on management's current expectations and informationcurrently available, are believed to be reasonable and are made in good faith.However, the forward-looking statements are subject to risks and uncertaintiesthat could cause actual results to differ materially from those projected inthe statements. Factors that may make the actual results differ fromanticipated results include, but are not limited to, the company's ability tocontrol operating expenses; the level of uncollectible receivables; thevolatility of natural gas prices; the impact of transactions relating to thecompany's exit of the retail energy marketing business; economic conditions;weather fluctuations; regulatory changes; competition from other providers ofsimilar products; counterparty credit risk; access to capital markets; theresults of the focused audit being conducted by the NJBPU; interest ratechanges; future actions by ratings agencies; the company's ability to extendits credit facilities; the willingness of counterparties to continue to tradewith, and supply energy to the company and such counterparties willingness todo so on terms similar to those currently in place; and other uncertainties,all of which are difficult to predict and many of which are beyond our control.For these reasons, you should not rely on these forward-looking statements whenmaking investment decisions. The words "expect," "believe," "project,""anticipate," "intend," "should," "could," "will," "might," "estimate" andvariations of such words and similar expressions, are intended to identifyforward-looking statements. We do not undertake any obligation to updatepublicly any forward-looking statement, either as a result of new information,future events or otherwise, except as required by securities laws.

For an additional discussion of factors that may affectthe company's business and results of operations, see "Risk Factors" in ourAnnual Report filed on Form 10-K for the fiscal year ended September 30, 2002.

**Item 3. Quantitative and Qualitative Disclosure About****Market Risk**

Energy Brokers uses derivatives for multiplepurposes: i) to hedge price commitments and minimize the risk of fluctuatinggas prices, ii) to fulfill its trading strategies and, therefore, ensurefavorable prices and margins, and iii) to take advantage of market informationand opportunities in the marketplace. These derivative instruments includeforwards, futures, options and swaps.The majority of Energy Brokers' positions are short-term in nature (up to 2years) and can be readily valued using New York Mercantile Exchange settlementprices and those from several otherwell-established, third-party organizations.

Energy Brokers accounts for its tradingactivities in accordance with provisions of SFAS 133, Accounting for DerivativeInstruments and Hedging Activities. SFAS 133 requires that all derivatives be recognized on the balancesheet at fair value with changes in the value of derivatives that are nothedges recorded in earnings. 

At March 31, 2003 Energy Brokershad designated certain futures contracts and physical forwards associated withthe delivery and sale of natural gas into and from storage as cash flow hedgeswith the objective of fixing an acceptable return.  Under SFAS 133, the changes in the value of derivatives designatedas hedges that are effective in offsetting the variability in cash flows of aforecasted transaction are recognized in other comprehensive income until theforecasted transactions occur and the ineffective portion of changes in fairvalue of derivatives is recognized immediately in earnings. 

At March 31, 2003 the value inother comprehensive income associated with these positions is $0.3 million, netof tax, which will be reclassified into earnings over the next twelvemonths.  However, the actual amountreclassified into earnings could differ based on fluctuations in marketprices.  At March 31, 2003 there was nohedge ineffectiveness recognized in earnings

The risk associated with openpositions is closely monitored on a daily basis, and controlled in accordancewith NUI Energy Brokers' Risk Management Policy. This policy has been preparedby senior management and approved by the company's Board of Directors, anddictates policies and procedures for all trading activities. The policy definesboth value-at-risk (VaR) and loss limits, and all traders are required to read,sign, and follow this policy. At the end of each day, all trading positions aremarked-to-market and a VaR is calculated. This information, as well as thestatus of all limits, is disseminated to senior management daily. In addition,the Risk Management Policy is regularly reviewed by senior management to assurethat it is current and responsive to all marketplace risks, with any changesapproved by the Board of Directors.

The following schedule summarizes the changes inderivative assets and liabilities for the six-month period ended March 31, 2003(in thousands). Amounts are shown net of valuation reserves. 

Derivative  assets at September 30, 2002

$30,441

Derivative  liabilities at September 30, 2002

   (852)

   Fair value of contracts outstanding at  September 30,       2002

$29,589

Contracts  realized or settled during the period

(33,588)

Change  in accounting 

(9,949)

Changes  in fair value attributable to market pricing

41,081

Derivative  assets at March 31, 2003

$27,133

Derivative  liabilities at March 31, 2003

        ---

   Fair value of contracts outstanding at  March 31,       2003

$27,133

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

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

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

 
**Source of Fair Value**

**Less than 1 Year**

**1-3 Years**

**4-5 Years**

**In Excess of 5 Years**

**Total**

Prices  actively quoted

$19,864

$1,402

$---

$---

$21,266

Prices  provided by other external sources

1,489

---

---

---

1,489

Prices  based on models and other valuation methods, net of valuation reserves

 

   1,178

 

 1,724

 

 1,476

 

 ---

 

   4,378

Total  Fair Value of Contracts

$22,531

$3,126

$1,476

$---

$27,133

Energy Brokers utilizes the variance/covariance VaRmethodology. Using a 95 percent confidence interval and a one-day time horizon,Energy Brokers' VaR was $76,000 and $98,000 at March 31, 2003 and 2002,respectively. The average, high, and low value at risk for the six months endedMarch 31, 2003 was $180,000, $743,000, and $14,000, respectively.
**Item 4. Controls andProcedures**
(a)          Evaluation of Disclosure Controls and Procedures

Thecompany's Chief Executive Officer and Chief Financial Officer have eachevaluated the effectiveness of NUI's disclosure controls and procedures as of adate within 90 days before the filing of this quarterly report (the "EvaluationDate"). Based on their evaluation as of the Evaluation Date, the ChiefExecutive and Chief Financial Officer have concluded that the company'sdisclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)of the Securities Exchange Act) are effective to ensure that informationrequired to be disclosed by the company in reports that it files or submitsunder the Securities Exchange Act is recorded, processed, summarized andreported within required time periods.

(b)        Changes in Internal Controls

The companymaintains a system of internal accounting controls that are designed to providereasonable assurance that the company's books and records accurately reflectthe company's transactions and that the company's established policies andprocedures are followed. Subsequent to the Evaluation Date, there were nosignificant changes to the company's internal controls or other factors thatcould significantly affect our internal controls.

**PART II - OTHER INFORMATION**

**Item 1.    Legal Proceedings**

Between October 28, 2002 and December 20, 2002, fivesubstantially similar civil actions were commenced in the United StatesDistrict Court for the District of New Jersey, in which the plaintiffs allegethat the company and its president and chief executive officer violated federalsecurities laws by issuing false statements and failing to disclose informationregarding the company's financial condition and current and future financialprospects in its earnings statements, press releases, and in statements toanalysts and others.  By orders datedDecember 19, 2002, January 22, 2003 and February 3, 2003, the five actions wereconsolidated into one action captioned In re NUI Securities Litigation.  The five consolidated lawsuits include: (1)an action captioned 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 Thomas Davis, on behalf of himself andall others similarly situated v. NUI Corporation and John Kean, Jr., filedin the United States District Court for the District of New Jersey on November6, 2002; (4) an action captioned Marvin E. Russell, on behalf of himself andall others similarly situated v. NUI Corporation and John Kean, Jr., filedin the United States District Court for the District of New Jersey on December10, 2002; and (5) an action captioned Phyllis Waltzer, on behalf of herselfand all others similarly situated v. NUI Corporation and John Kean, Jr.,filed in the United States District Court for the District of New Jersey onDecember 20, 2002. By order dated February 3, 2003, a Lead Plaintiff, LeadCounsel and Liaison Counsel were appointed in the consolidated action. Bystipulation of the parties, an Amended Consolidated Class Action Complaint wasfiled on May 7, 2003, and responsive pleadings are to be filed thirty daysthereafter. No discovery has yet occurred. The Amended Complaint, brought onbehalf of a putative class of purchasers of NUI's common stock between November8, 2001 and October 17, 2002, asserts claims under Section 10(b), includingRule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Actagainst the company, its president and chief executive officer, and its chieffinancial officer. Specifically, the Amended Complaint alleges that thedefendants (i) failed to disclose material facts that would impair thecompany's current and future earnings, including (a) the allegedly accurateamount and explanation of the company's bad debts, (b) a purportedly illegalpractice by the company in "re-terminating" intrastate calls, (c) allegedaccounting improprieties in connection with purportedly unearned revenue, and(d) allegedly inaccurate earnings per share information, and (ii) inflated thecompany's earnings materially by (a) allegedly making misleading statementsconcerning, and failing to properly record, bad debt costs, (b) allegedlyattributing the company's rising costs to incorrect and immaterial factors, and(c) purportedly pursuing illegal telecommunications billing practices. TheAmended Complaint seeks unspecified monetary damages on behalf of the class,including costs and attorneys fees. Furthermore, on December 23, 2002, a lawfirm made a public announcement with respect to a lawsuit purportedly filed inthe Southern District of New York on behalf of a putative class of purchasersof NUI's common stock between November 8, 2001 and October 17, 2002 against NUICorporation and John Kean, Jr., alleging violations under Section 10(b),including Rule 10b-5 promulgated thereunder, and Section 20(a) of the ExchangeAct.  Specifically, the announcementalleges that the company knowingly or recklessly failed to properly recordfixed cost expenses, accrue necessary pension expenses and reserve adequateamounts for its self-insured medical benefits in its quarterly financialstatements.  At this time, the companyhas not been served with the purported complaint. Although the company intendsto vigorously defend these lawsuits, it is not possible at this time todetermine a likely outcome.

The company is also involvedin various other claims and litigation incidental to its business. In theopinion of management, none of these other claims and litigation will have amaterial adverse effect on the company's results of operations or its financialcondition.

**Item 4. Submission ofMatters to a vote of Security Holders**

The following matters were presented forsubmission to a vote of security holders through the solicitation of proxies orotherwise during the second quarter of fiscal 2003.

The Annual Meeting of Shareholders of NUI Corporationwas held on March 11, 2003.  Proxies forthe Annual Meeting were solicited pursuant to Regulation 14A and there was nosolicitation in opposition to management's nominees.  At the meeting, the shareholders approved an amendment to the NUICorporation employee stock purchase plan; elected directors; and ratified theappointment of independent public accountants.

The total votes were as follows:

Against or

For

Withheld

Abstain

 

(1)

Election of directors to serve for three year  Terms:

 

James J. Forese

12,538,784

724,132

 

R. Van Whisnand

12,595,648

667,269

 

 

 

 

(2)

Approval of an amendment to the NUI Corporation  employee stock purchase plan

 

12,752,146

 

342,138

 

168,632

 

 

 

(3)

Ratification of the appointment of Pricewaterhouse Coopers LLP as independent public  accountants

 

12,634,775

 

599,549

 

28,592

** **

**Item 6.    Exhibits and Reports on Form 8-K**

**(a)           Exhibits**

10.1             Credit Agreement dated as of February 12, 2003, by and amongNUI Corporation and Fleet National Bank, Citizens Bank of Massachusetts, CIBC,Inc., PNC Bank, NA, and Mellon Bank, NA.

10.2             Credit Agreement dated as of February 12, 2003, by and amongNUI Utilities, Inc. and Fleet National Bank, Citizens Bank of Massachusetts,CIBC, Inc., PNC Bank, NA, and Mellon Bank, NA.

10.3             Credit Agreement dated as of February 12, 2003, by and amongNUI Utilities, Inc. and Fleet National Bank and Fleet Securities.

10.4             First amendment dated as of March 31, 2003, to the CreditAgreement dated as of February 12, 2003, by and among NUI Corporation and FleetNational Bank, Citizens Bank of Massachusetts, CIBC, Inc., PNC Bank, NA, andMellon Bank, NA.

10.5             Inter-creditor Agreement dated as of April 1, 2003, amongFleet National Bank, Citizens Bank of Massachusetts, CIBC, Inc., PNC Bank, NA,and Mellon Bank, NA and AIG Life Insurance Company, Sunamerica Life InsuranceCompany, United of Omaha Life Insurance Company, Pacific Life and AnnuityCompany and Nationwide Life Insurance Company of America (formerly ProvidentMutual Life Insurance Company) filed pursuant to the Note Purchase Agreementdated as of August 20, 2001, between NUI Corporation and AIG Life InsuranceCompany, Sunamerica Life Insurance Company, United of Omaha Life InsuranceCompany, Pacific Life and Annuity Company and Mutual Life Insurance Company.

10.6             First Amendment and Waiver dated as of February 20, 2003, tothe Note Purchase Agreement dated August 20, 2001, between NUI Corporation andAIG Life Insurance Company, Sunamerica Life Insurance Company, United of OmahaLife Insurance Company, Pacific Life and Annuity Company and Mutual LifeInsurance Company.

10.7             Second Amendment dated April 1, 2003, to the Note PurchaseAgreement dated August 20, 2001, between NUI Corporation and AIG Life InsuranceCompany, Sunamerica Life Insurance Company, United of Omaha Life InsuranceCompany, Pacific Life and Annuity Company and Mutual Life Insurance Company.

99.1         Certification of the Chief ExecutiveOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

99.2         Certificationof the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

(1)                On March 14, 2003, the companyfiled a Current Report on Form 8-K dated March 14, 2003, under Item 5,announcing Robert F. Lurie, Vice President, Corporate Development and Planningof the company, had left the company.

(2)           On April 3, 2003, the company filed aCurrent Report on Form 8-K dated April 1, 2003, under Item 5, announcing theamendment of the Note Purchase Agreement between the company and the SeniorNote Holders party thereto and an amendment to the Credit Purchase Agreementbetween the company and its bank group. 

(3)           On April 30, 2003, the company filed a Current Report onForm 8-K dated April 30, 2003, under Items 7 and 9, announcing results ofoperations for the period ending March 31, 2003.
****
**SIGNATURES**

 Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

**NUI CORPORATION**

May 15, 2003

JOHN KEAN, JR.  President and Chief Executive Officer

May 15, 2003

A. MARK ABRAMOVIC  Sr. Vice President, Chief Operating Officer & Chief Financial Officer

** **

** **

**CERTIFICATION PURSUANT TO 18U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

I, John Kean, Jr.,certify that:

1. I have reviewedthis quarterly report on Form 10-Q of NUI Corporation;

2.Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport; 

3.Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report; 

4.The registrant's other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

b)evaluated the effectiveness of the registrant's disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the "Evaluation Date"); and

c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

5.The registrant's other certifying officers and I have disclosed, based on ourmost recent evaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalentfunction):

a)all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant's ability to record, process,summarize and report financial data and have identified for the registrant'sauditors any material weaknesses in internal controls; and

b)any fraud, whether or not material, that involves management or other employeeswho have a significant role in the registrant's internal controls; and

6.The registrant's other certifying officers and I have indicated in thisquarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003

/s/ John Kean, Jr.President and Chief Executive Officer

** **

** **

**CERTIFICATION PURSUANT TO 18U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

** **

I, A. MarkAbramovic, certify that:

1. I have reviewedthis quarterly report on Form 10-Q of NUI Corporation;

2.Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport; 

3.Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report; 

4.The registrant's other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

b)evaluated the effectiveness of the registrant's disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the "Evaluation Date"); and

c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

5.The registrant's other certifying officers and I have disclosed, based on ourmost recent evaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalentfunction):

a)all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant's ability to record, process,summarize and report financial data and have identified for the registrant'sauditors any material weaknesses in internal controls; and

b)any fraud, whether or not material, that involves management or other employeeswho have a significant role in the registrant's internal controls; and

6.The registrant's other certifying officers and I have indicated in thisquarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003

/s/ A. MarkAbramovic Sr. Vice President, Chief Operating Officer & Chief Financial Officer